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^^3d Sessfon^^} SENATE COMMITTEE PRINT

INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER

TEMPOKAEY NATIONAL ECONOMIC
COMMITTEE

A STUDY MADE UNDER THE AUSPICES OF THE BUREAU
OP LABOR STATISTICS FOR THE TEMPORARY NATIONAL
ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS,
THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION
NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING
AND DIRECTING A SELECT C0MMITri5:E TO MAKE A
FULL AND COMPLETE STUDY aND lilVESTIGATION

With respect to the concentration qf economic

POWER IN, AND FINANCIAL fcONTROlt OVER,

PRODUCTION AND DISTRIBUTION

OF GOODS AND SERyrCES

MONOGRAPH 1^0.$?

ECONOMIC STANDARDS 0|F GOVERNMENT

PRICE CONTROL

Printed for the use of the ^

Temporary National Economic Committed!^

UNITED ST^ES

-GOVERNMENT PRINTING^^OFFICE

TiVASHINGTOjfT:1941 ~

TEMPORARY NATIONAL ECONOMIC COMMITTEE

(Created pursuant to Public Res. 113, 75th Cong.)

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman

HATTON W. SUMNERS, Representative from Texas, Vice Chairman •

WILLIAM H. KING, Senator from Utah

WALLACE H. WHITE, Jr., Senator from Maine

CLYDE WILLIAMS, Representative from Missouri

B. CARROLL REECE, Representative from Tennessee

THURMAN W. ARNOLD, Assistant Attorney General

•WENDELL BERGE, Special Assistant to the Attorney General

Representing the Department of Justice

JEROME- N. FRANK, Chairman

•SUMNER T. PIKE, Commissioner

Representing the Securities and Exchange Commission

GARLAND S. FERGUSON, Commissioner

•EWIN L. DAVIS, Chairman

Representing the Federal Trade Commission

ISADOR LUBIN, Commissioner of Labor Statistics

•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics

Representing the Department of Labor

JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel

•CHARLES L. KADES, Special Assistant to the General Counsel

Representing the Department of the Treasury

Representing the Department of Commerce

LEON HENDERSQN, Economic Coordinator
DEWEY ANDERSON, Executive Secretary
THEODOBE J. KREPS, Economic Adviser

MoNor.RAPH No. 32
ECONOMIC STANDARDS OF GOVERNMENT PRICE CONTROL

DONALD H. WALLACE

BEN W. LEWIS

WARREN C. WAITE

DON S. ANDERSON

R. K. FROKER
ELLERY B. GORDON
WILLIAM Y. WEBB

ACKNOWLEDGMENT

This monograph was edited by

DONALD H. WALLACE
Associate Professor oj Economics, Williams College

and written by

BEN W.LEWIS

Professor of Economics, Oh'erlin College

WARREN C. WAITE

Professor of Agricultural Economics, University of Minnesota

DON S. ANDERSON

Associaie Profe§§or of Agricultural Economics, University of Wisconsin

R. K. FROKER

Associate Professor of Agricultural Economics, University- of Wisconsin

ELLERY B. GORDON

Formerly Chief of Economics Division Consumers Counsel, Bituminous
Coal Commission

WILLIAIVI Y. WEBB

Formerly assistant economist, Consumers Counsel Bituminous Coal
Commission

PART IV

DONALD H. WALLACE

Associate Professor of Economics, Williams College

under the supervision of

ARYNESS JOY

Chief sf T. N. E. C. Studies Section, Bureau of Labor Statistics

EDWARD S. MASON

Professor of Economics, Harvard University

The Temporary National Economic Committee is greatly indehted
to these authors for their contribution to the literature of the subject
under review.

Ill

IV ACKNOWLEDGMENT

The status of the materials in this volume is precisely the same as that
of other carefully prepared testimony when given by individual witnesses;
it is information submitted for Committee deliberation. No matter what
the official capacity of the witness or author may be, the publication of
his testimony, report, or monograph by the Committee in no way signifies
nor implies assent to, or approval of, any of the facts, opinions, or recom-
mendations, nor acceptance thereof in whole or in part by the members
of the Temporary National Economic Committee individually or collec-
tively. Sole and undivided responsibility for every statement in such tes-
timony, reports, or monographs rests entirely upon the respective authors.
(Signed) Joseph C. O'Mahoney,
Chairman, Temporary National Economic Committee.

TABLE OF CONTENTS

Page

. Letter of transmittal xm

Summary xix

PART I

Preface ^: 3

CHAPTER I

The Wisconsin Public Service Commission 11

The level of rates.. , 1 12

The rate structure, ... . 16

Adjustment to cyclical price level 18

APPENDIX TO CHAPTER 1

Typical letter from the Wisconsin commission to an electric utility, insti-
tuting rate reduction negotiations I 22

CHAPTER II

The Illinois Commerce Commission 25

The level of rates ^ 25

The rate structure . ^9

Adjustment to cyclical price level ^ 31

CHAPTER III

The New York Public Service Commission 33

The level of rates : 34

The rate structure • 40

Adjustment to cyclical price level 44

CHAPTER IV

The Tennessee Valley Authority , .. 47

The level of rates. . 48

The rate structure 52

Adjustment to cyclical price level . 54

PART II

Preface - 57

CHAPTER I

Federal price fixing in milk markets...^ 65

Introduction , 65

The 15 marketing agreements 66

The license program in the milk markets 71

Milk markets under orders 75

Th6 present status and administrative problems of the fluid milk pro-
gram "i . 82

Objectives and standards in setting prices 84

Influence of the Federal program on the level of milk prices 87

The position of various groups under the program . 91

APPENDIX TO CHAPTER I

History of milk markets which have been under Federal control, giving type

of instrument in efifect 95

VI TABDE OF CONTENTS

CHAPTER II

Page

Regulation of fluid milk marketing in Oregon j. 99

The background of public regulation 101

The market structure 102

The objectives of regulation^ 103

The control agency 105

Control devices 106

Licensing of milk dealers ,_^ 106

Establishment of mtrk^ 'vng areas 1.' 106

Establishment of mij cs' ds 106

Allocation of quotas 107

Establishment and regulation of market pools 108

Fixing of minimum prices. 113

Standards 114

Licensing of dealers 114

Establishment of market areas . 114

Allocation of quotas to producers 115

Allotment of producer quotas 115

Minimum prices 116

Results 119

APPENDIX TO CHAPTER II

Tables giving data on milk prices in Portland, Oreg., and Seattle, Wash 120

CHAPTER III

Regulation of fluid milk marketing in California 123

The background of public , regulation 124

The development of State regulation 125

The market situation 126

The objectives of regulation 127

The control agency 128

Control devices 128

Standards 129

Establishment of market areas 129

Establishment of minimum prices paid producers 130

Establishment of minimum retail and wholesale prices 132

Summary 134

APPENDIX A

Provisions for prohibiting distributors from engaging in unfair practices. . 136

T"
APPENDIX B

Basis for price determination 137

APPENDIX TO CHAPTER III

Tables giving data on milk prices in San Francisco and Los Angeles, Calif- - 138

CHAPTER IV

State control of milk prices in Indiana 141

Historical development 141

Declaration of findings and policy. _ -.- 142

Extent of State control 143

Administration : 144

Milk control board -- 144

Powers.---i 144

Employees 145

Democratic control 145

Financing 145

Relationship to labor. -.: 147

Legal problems. <r- 147

TABDE OF CONTENTS VII

State control of milk prices in Indiana — Continued. ^^se

Control devices , ^ 148

Licensing of milk distributors --- 148

Establishment of market areas 148

Establishment of local committees 148

Classification of milk and prices 149

Price equalization and base surplus 149

Bonding 149

Emergency orders 150

Standards of operation 150

Legislative 150

General board policy 151

Production policies 151

Price policies 152

Results of State milk control in Indiana . 153

Effect on producer prices and production.- 153

Effect on competition 156

Effect on distribution 157

Summary 159

APPENDIX TO CHAPTER IV

Tables giving data on milk prices in Indianapolis and Evansville, Ind 160

CHAPTER V

State control of milk prices in Wisconsin 163

Historical development 163

Purpose and objectives 164

Extent of State control . 165

Standards of operation . 167

Fluid milk prices. 167

Price of milk used for cream _. 169

Method of arriving at prices for surplus milk 169

Prices at grocery stores and milk stands _■ ^ 171

Pooling--- 1 173

Admission of new producers . 173

Base surplus ' .. 174

Labor . _ — • 17

Legal standards and enforcement 17>

Effects of price control in Wisconsin l7o

Producer prices and production 176

Resale prices and consumption 179

Dealer margins ,- 180

Market organization and market practices .. 181

APPENDIX A

Standard of fair practices in selling of milk by distributors*.* 182

APPENDIX B

Excerpts from findings of fact as stated in Wisconsin milk orders and

amendments 184

APPENDIX TO CHAPTER V

Tables giving data on milk prices in Milwaukee, Wis 190

CHAPTER VI

Governmental control of milk prices in New York State 195

Historical development 196

. Wicks report . ^ 196

Pitcher report ' 197

The 19331aw...: 197

The 19341aw : 199

Rogers-AUen law ^ 200

Milk strike and "LaGuardia" agreement ' 202

VIII TABDE OF CO!NTiBJ«JTS

Governmental control of milk prices in New York State — Continued. Page

Extent of State control : 202

Declaration of findings and policy ^- 202

Administration 203

Standards of operation _•_ 204

Legislative standards 204

Administrative standards 205

Control devices 208

Public hearings ^ . 208

Official orders .j.-. t 208

Establishment of market areas 209

Milk classification . . 209

Price equalization -_^-- 210

Resale prices 210

Licensing and bonding . 211

Inspection and auditing 211

Results of milk control : 212

Effect on dealers' buying prices , 212

Effect on producer prices and production 213

Interstate character of supply 214-

Effect on producer cooperatives , 215

Resale prices and consumption . 216

Dealers' margins - * 217

Bondings : 218

Other results . 219

APPENDIX TO CHAPTER VI

Tables giving data on milk prices in New York City and Buffalo, N. Y 220

PART III

Summary and Acknowledgments ^ -- 229

CHAPTER I

Economics of the bituminous coal industry in review 235

General conditions . : .-_ 235

Overcapacity in the industry ^ , 237

History of the coal industry __. 242

Growth of industry prior to the World War of 1914__. 242

War period — rapid expansion 244

United States Fuel Administration 245

Chaotic post-war years through 1922 250

1 923— a bench mark - 251

The long depression in the bituminous coal industry, 1924-33-- 252

CHAPTER II

Legislative history of bituminous coal - 255

Fropa the wartime Fuel Administration to the National Recovery

Administration 255

Comparative stability under the National Recovery Administration

code --- u.--- 256

First Guffey biU, 1935 -.. .257

Bitumin6u& Coal Conservation Act of 1935 ^ 260

Difficulties of operation- - 262

Initial prices proposed but declared unconstitutional 262

Bituminous Coal Act of 1937 L-. 263

CHAPTER III

Regulation of bituminous coil under the 1937 act--. .- 265

Introduction ; The situation in 1936 265

Channels of distribution . , 266

The flow of coal to markets -_-. 267

Geographical consumption , 270

Objectives of the coal acts •-. 270

Administrative machinery of the 1937 act ; 272

TABDE OP CONTENTS IX

Regulation of bituminous coal under the 1937 act — Continued. Page

General procedure and standards provided for price establishment 274

Steps in price establishment 274

The 1937 price determination 277

The second price determination, 1938-40 278

Standards for price determination in actual operation 279

The cost standard and its determination 279

Selling costs 286

Other standards for the initial proposal of minimum prices 291

Technique of proposing minimum prices 293

Classification of coals 293

Variations for seasonal demand 296

Special classifications by use 296

Summary of price proceedings 298

Coordination of proposed prices in common consuming market areas. 299
Basic considerations in determination of common consuming

market areas --_ 300

Considerations and procedure in coordinating prices 303

Special problems: Comparative cost levels for strip mining . 306

Determination of maximum prices 308

CHAPTER IV

Conclusions and recommendations — a preliminary vievi^ 311

Summary of recent regulation 311

Effects of the application of cost standard 313

Deficiencies in the present acf, -. 316

Alternative methods of bituminous coal regulation 319

Free competition 320

Marketing agencies _- 321

Interstate compacts 324

Public ownership or control 324

Other types of control » 325

Recommendations on Federal regulation of prices and production 326

APPENDIX A

Capacity and production of* bituminous coal 332

APPENDIX B

Fuel economy and energy supplied by competing sources of fuel power,

1909-38 -. 333

APPENDIX C

Price indicators in the bituminous coal industry . 334

APPENDIX D

Labor statistics in bituminous coal mining 335

APPENDIX E

Bituminous Coal Act of 1937 336

APPENDIX P

The problem of conservation 360

< Wasted resources. _• 360

Reserves of mineral fuels . 361

The conservation movement 365

Conservation measures so far provided . 365

APPENDIX G

Excerpts from general findings of fact of the Director of the Bituminous
Coal Division, establishing minimum prices and marketing rules and

regulations . 367

X TABUE OF CONTENTS

PART IV

CHAPTER I

Page

The background of public control 401

The changing American philosophy of public coBtroI of industry 401

The major economic problems — 406

CHAPTER II

The level of prices and incomes — objectives and standards 411

CHAPTER III

The level of prices and incomes in electric utilities 417

Legislative objectives and standards 418

Administrative objectives and standards 418

Legal limitations 423

Results 426

Tennessee Valley Authority 427

CHAPTER IV

The level of prices and incomes under Federal milk control 433

Cooperation, class prices, and public control i 433

Federal milk control 437

Legislative objectives and standards , 437

Administrative standards. . 438

Results , 441

CHAPTER V

The level of prices and incomes under milk control in five States 445

Objectives and control devices -_ 445

Standards and results — ^ 451

Producer prices -' 451

Resale prices 456

CHAPTER VI

?rhe level of prices and incomes under the Bituminous Coal Act of 1937.. 461

CHAPTER VII

The structure of prices — objectives and standards 475

CHAPTER VIII

The structure of prices in electricity, milk, and bituminous coal 479

Electricity 479

Milk 1-. 483

Federal control i 484

State milk control .- 485

Bituminous coal i- 487

CHAPTER IX

Prices in relation to general depression and recovery— objectives and

standards. ^ 493

CHAPTER X

Price control in relation to depression and recovery in milk and electricity. 499

Milk - - 499

Electricity 502

CHAPTER XI

Price control under the Bituminous Coal Act of 1937 in relation to de-
pression and recovery -.. 505

SCHEDULE OF TABLES AND CHARTS

PART II

TABLES

Page

1. Comparison of resale milk prices and dealers' margins during interval

preceding agreement and while resale price fixing agreements were

in force 67

2. Fixed minimum prices, prices paid, and price estimates for class I milk

per hundredweight in various markets, July 1939 86

3. Dealers' buying prices for fluid milk before and following adoption of

Federal milk' program in certain markets in 1933 and 1934 88

4. Average annual buying price per quart by groups of cities, 1 920-37 _•_ 88

5. Average annual spread per quart of milk between dealers' buying price

, and selling price to family trade, by groups of cities, 1920-37 89

6. Average annual retail price per quart of milk to family trade, by groups

of cities, 1920-37 " 90

7. Summary of changes in producer prices, in retail prices, and in dealers'

margins 90

8. Excess in retail price of a quart of fluid milk over a li% ounce can of

evaporated rnUk on October 15 91

9. Average monthly receipts of 4 percent milk and percentage used for

fluid milk and cream and for manufacture, 19 markets, Indiana,
. January-November 1939 143

10. Annual plant license fees of fluid milk distributors operating in State

controlled markets in Indiana, 1939 j... 146

11. Check-offs from payments to producers in Indiana State controlled

mflk markefts, August 1939. _. 146

12. Average premiums paid producers in fluid milk markets under Indiana

State control over average prices paid at condenseries in the State
during 8 months, April-November 1939 154

13. Total receipts of milk and class I sales by months for the Indianapolis

market, August 1935-October 1939 - 155

14. Markets under State control, date of first orders, average daily receipts

of milk and percentage used for fluid nailk and. cream and for manu-
factured products, Wisconsin, 1939_..l 166

15. Price of surplus milk in 32 Wisconsin fluid milk markets under State

regulation, July 1939 171

16. Average July price of class I milk in 14 fluid milk markets under State

control and the price under the evaporated milk formula, 1 934-39— 176

17. Average daily receipts of milk by years in 30 Wisconsin markets, 1936-

39j :. L^ 178

18. Average daily milk receipts per farm, for two Wisconsin markets, 1927-

39 ^ 179

19. Number and percentage of families using regular milk and canned milk

and per family consumption per month, greater Milwaukee market,
1934^39....- - -.. . . 180

20. Dairy companies in default, producer claims, and amounts recovered

from bonds and other security, 1934-37 v 218

CHARTS

I. History of milk markets under Federal control faces 66

II. Fluid milk prices in Portland, Oreg., 1920-39 faces 102

III, Fluid milk prices in San Francisco, Calif., 1920-39 faces 134

IV. Fluid milk prices in Los Angeles, Calif., 1920-39 faces 134

V. Total milk receipts and amount lised as fluid milk and cream,

Indianapolis, Ind., August 1935 to October 1939 faces 154

VI. Fluid milk prices in ♦Indianapolis, Ind., 1920-39 -'.--• faces 158

XII SCHEDULE OF TABLES AND CHARTS

Page

VII. Fluid milk prices in Evansville, Ind., 1920-39 faces 158

VIII. Milk prices to dealers, by classes, Milwaukee, Wis., 1922-39-.. faces 177
IX. Retail price and consumption of fluid milk and factory pay rolls,

Milwaukee, Wis., 1927-39 faces 179

X. Retail prices of fluid milk, evaporated milk, and all food products,

Milwaukee, Wis., 1923-39 - .__-._ faces 179

XI. Fluid milk prices in Milwaukee, Wis., 1920-39 faces 180

XII. Fluid milk prices in New York City, 1922-39-.. faces 205

XIII. Fluid milk prices in Buffalo, N. Y., 1920-39----'- faces 213

■ XIV. Prices paid to farmers in New York milkshed for milk by Sheffield

Farms, Inc., and by Dairymen's League faces 213

XV. Milk production and number of milk cows, New York State,

1925-39 faces 214

XVI. Percentage of fluid milk receipts ih the New York metropolitan
area, by State of origin, and percentage of total transported by

truck, 1927-38 faces 215

XVII. Monthly receipts of fluid milk, retail home delivery price per quart
of fluid milk, and index of factory pay ro)ls, New York market,
1921-39 - faces 217

PART III

TABLES

1. Monthly production of coal in 1937, by districts as defined in the

Bituminous Coal Act of 1937 (in thousands of net tons):

(Exclusive of wagon and truck mines producing less than 1,000
tonsayear) .. 239-240

2. Production, capacity, average realization, and net income of the

bituminous coal industry, 1890-1914 243

3. Production, capacity, average realization, and net income of the

bituminous coal industry, 1916-18 244

4. Wage increases under the Washington agreement 249

5. Production, capacity, average realization, and net income of the

bituminous coal industry, 1919-23 251

6. Production, capacity, average realization, and net income of the

bituminous coal industry, 1924-33 254

7. Distribution of bituminous coal from the Appalachian fields, 1937 268

8. Average freight revenue and average value per ton of bitumiiibus

coal 269

9. Consumption of bituminous coal, by consuming groups, 1937 269

10. Strip mine production by price areas in 1936 and 1937 305

Washington, D. C, December 28, 1940.
Senator Joseph C. O'Mahoney,

Chairman, Temporary National Economic Con .nhtee,

United States Senate, Washington, D. C.

Sir: I have the honor to submit a report on Economic Standards of
Government Price Control, edited by Dr. Donald Wallace; Associate
Professor of Economics at Williams CoUege. It is composed, first,
of three independent monographs, illustrative of the standards in-
volved in State and Federal regulation of prices in electric power, milk,
and bituminous coal, each prepared by an expert or group of experts
in the field, and, second, of a systematic examination by Dr. Wallace
of these standards and the alternatives from an economist's point of
view. Unfortunately, limitations of time made it impossible to in-
clude either a study of the railroads, the oldest and most outstanding
example of governmental price regulation in the United States, or of
emergency price fixing during the World War.

I regard this monograph as merely a beginning of the study of one
of the most complex and difficult questions which confronts this com-
mittee: Should the scope of Government regulation of industry be
extended, and if it is to be extended, by what means and to what
specific social and economic ends? Although this particular report
centers around Government regulation of prices, all of our investiga-
tions clearly indicate that to regulate prices effectively and with hon-
est concern for the welfare of the public and of any particular industry
necessarily involves the assumption of a large measure of responsi-
bility for all phases of the life of that industry. It is the failure to
recognize this all-important fact that has led to many of the difficulties
of Government price regulation.

When this inquiry into Government regulation of pricing was
initially proposed, it had been our hope not only to consider in detail
the question "To what specific economic and social ends has public
price regulation been directed?" as this report now does, but also to
evaluate the administrative teclmiques emplo3^ed by regulatory bodies,
and if possible to arrive at some conclusions regarding the efficacy of
the typical American form of comn^ission regulation.

Before, the completion of the analysis originally planned, several
members of the staff, and in particular Dr. Wallace, joined the staft' of
the Advisory Commission to the Council of National Defense or were
otherwise engaged in emergency work. The report as it now stands
was completed only with great personal sacrifice on their part. More-
over it was impossible for me or for the other members of the Bureau's
staff to wreigh the analysis presented by these experts and to synthesize
it into recommendations for this committee. In consequence, the
scope of the final analysis was necessarily narrov/f d and many of the
jyactical questions concerning techniques of regi'ation and adminis-
tration are not presented in definitive form. .

XIV LETTER OF TRANSMITTAL

Nevertheless, there are a number of general observations which are
clear. From an economic point of view public price regulation as
practiced in the United States has revealed serious shortcomings.
The reasons for this lack of success have been many, but the foremost
of these has been the failure to direct regulation toward the achieve-
ment oiE sufficiently broad and, at the same time, sufficiently exploita-
social and economic goals. In practice the objectives of regulation
have been at once too uncertain and too detailed, too broad and too
precise. In all cases, regulation has been undertaken for the specific
purpose of deai'n[ with immediate conditions in a single industry.
The regulation jf railroads ana public utilities was undertaken in
order to protect the users of their services from monopolies tic exploita-
tion, while regulation of milk and coal was adopted in order to alle-
viate distress among those producing these commodities. In none of
these cases has there been an adequate realization of the relation of
these particular industries to the general economy. Thus, it is
evident that railroad and utility rates involve far broader questions
than merely the protection of a particular consumer or class of con-
sumers from being overcharged. The key position of these industries
in the economy is such that any change in rates has far-reaching
repercussions upon industrial and agricultural production, upon the
distribution of goods, upon the flow of investment, and upon the use
of purchasing power. Similarly, the prices of milk and coal affect
not only producere in these industries but also many other industries ;
an increase in coal priced may increase costs of production in industries
using coal as well as the ability of the consumers of coal to buy other
products.

Not only has regulation generally failed to take due account of the
relation of regulated industries to the economy as a whole, but it has
also given undue emphasis to immediate rather than long-range
problems. Rates have almost invariably been fixed with an eye to
conditions prevailing at the moment without adequate regard for the
long term welfare of the industry it was designed to benefit. An
outstanding illustration of this narrow approach is the increase in
raili»ad freight rates during the early thirties. This attempt to bolster
railroad revenues during a period of severe depression has apparently
had the long-range effect of permanently diverting traffic to other
means of transportation.

In practice, rates have often been fixed even without a clear view
to the immediate avowed objectives of regulation. Instead rate
making has resolved itself into the observance of narrow rules of
procedure based upon an unfortunate effort to tie rates closely to a
standard of accounting costs. This standard of production costs,
whether specific or merely implied, is the one concrete guide which
seems to pervade the thinking of most regulatory bodies. Thus in the
case of public utilities, the usual practice has been to try to keep rates
at the lowest levejs which will return full cost of production including
an adequate profit for invested cpital. In bituminous coal the effort
has been to raise prices to a level which wiU at least return production
costs as defined m the act. The complexities of milk marketing and
production make it more difficult to relate prices to cost with any
semblance of accuracy, but the effort to approach this relation is
evident in both legal and administrative action.

L'ETTER OP TRANSMITTAL XV

The reasons for this emphasis upon cost are fairly clear. It affords
the only commonly available measure of the fairness of any rate
schedule to producers and is an essential consideration in the light of
the Supreme Court's interpretation of the fourteenth amendment to
the Constitution, emphasizing the Court's conviction that any rate
schedule which does not cover costs of production is confiscatory.

In the eyes of the administrator and the economist, however, there
are shortcomings in the regulation of prices on the basis of production
costs. One of these is the general difficulty — in fact the near im-
possibility— of measuring costs accurately, and particularly of allo-
cating total production costs to individual products and services —
e. g., various grades of coal, or kinds of electric service. The second
is the faqt that the determination of costs, particularly when attended
by valuation proceedings, is such a long and laborious process that
rates or prices so determined are almost inevitably out of date by
the time they are arrived at.

A third and even more serious difficulty with the cost standard is
the general emphasis upon past costs and past operations, and the '
general failure to make any allowance for the possible effect of rate
or price changes upon future consumption. Thus, if electric rates
were lowered would consumption increase enough to yield not merely
the same, but perhaps a greater profit to producers, at the same time
serving a wider public? Granted the diflSculty, if not the impossibility
of predicting in advance precisely how sales will be affected by a given
change in price, is it not a proper matter of public concern that public-
determined prices be so set that they give a maximum possible use
of the service or commodity to consumers? Yet the cost standard
as generally interpreted and applied rules out any such a constructive
approach.

This failure of the cost standard to look toward the future rather
than the past becomes particularly acute during periods of rapid
change in the general rate of business activity. By its very nature
it operates in opposition to the natural downward trend of prices in
depression and the upward trend in recovery. Thus, during 'a de-
pression, producers' income is necessarily reduced and may fail to
cover all costs including overhead; at such a time an increase in price
is indicated if the cost yardstick is to be followed, strictly. But
higher prices often mean still lower consumption and further reduc-
tions in sales and in profit, not only of the commodity or service
directly affected but also of other commodities.

Nor is the cost standard well adapted toward achieving the most
desirable relation between the prices charged for different products of
the same industry or to different users of the same products. Even if
it were possible to allocate costs accurately for different grades of coal,
different users of milk, and different consumers of electric power, it by
no means follows that prices for these different grades or to these
different users should be« adjusted accordingly. In practice, this
problem Jhas been handled by regulatory commissions largely on a
rule-of-thumb basis, but it does not seem to have been handled ade-
quately. The difficulty seems to lie not with the lack\)f any objec-
tive measures, where such measures are largely impracticable, but
rather with the lack of a broad approach to the issues involved.

To illustrate : The relation between electric rates charged domestic
users and those charged commercial and industrial users has many

XVI LETTER OF TRANSMITTAL

ramifications. It should not be assumed too readily that consumers
would benefit by having domestic rates reduced at the expense of
commercial and industrial rates if such reductions involve an increase
in the costs and prices of the commodities produced and sold by these
commercial and industrial users of power. A great deal of study on
the part of regulatory commissions would be necessary to explore ques-
tions of this kind, but it is entirely possible that such a study would
be repaid by the development of an economically more satisfactory
basis of rate making.

Finally, regardless of the standard used, any form of regulation by
an administrative body necessarily involves a certain amount of delay
in adjustment to changing conditions. Price changes cannot be
ordered on the spur of the moment ; they must usually be based upon
the assembly and consideration of all pertinent evidence. In addi-
tion, there may be other delays due to the substantive or procedural
requirements of the law, to dilatory tactics on the part of the groups
regulated, or simply to the failure of the regulating. agency to move
promptly. There can be no question that all these delays- — whether
or not inherent in the process — introduce certain elements of rigidity
into the price structure of the economy, rigidity which, in private
enterprise, has been frequently deplored by governmental agencies.
The seriousness of these delays depends upon the circumstances, but
the issue is one with which there should be very real concern. It
may, of course, be said that regulation has been largely apphed in
the past to industries such as railroads and electric utilities, which
are monopolistic by nature, and that monopoly prices have always
been relatively unresponsive to changing economic conditions. This
argument overlooks the fact that regulation implies an eft'ort to con-
trol such monopoly power for the public well-being, and that it may
well be a part of this effort to increase the rapidity and flexibility
of price or rate changes to the forces of the market.

The report also suggests that legislatures and regulatory commis-
sions may have too readily accepted apparent constitutional limita-
tions upon their powers and have failed to explore the possibilities
afforded by new approaches to their desired objectives. Thus the
doctrine of fair return on fair value constitutes a limitation upon the
manner in which past investment may be treated. On the other
hand, if a clear policy were laid down by the legislative body regarding
the treatment of new investment in an industry, and potential in-
vestors were made aware of such a change in policy, an entirely new
situation might be created. Under a program of this kind existing
limits would apply only to past investment for the life of that invest-
ment, and as new capital is gradually introduced, virtually the entire
industry would eventually be subject to the new rules of the game.
It might then be possible to fix rates, not in accordance with an ar-
bitrary cost formula, but with due consideration for the economic
well-being of the industry, its customers and the economy as a whole.
In particular, it would become possible to take account of the effect of
rate reductions upon consumption in formulating price pohcy.

In summary, it seems evident that public regulation of prices in
the United States has suffered from many handicaps. Some of these
handicaps may be traced to an inadequate grasp of the issues by regula-
tory commissions, by courts, and by legislatures. In many cases
legislatures have abdicated their function by failing to lay down goals
and programs with sufficient clarity and precision. As regards com-

DETTBR OF TRANSMITTAL XVII

missions there has been a noticeable improvement in procedural
efficiency on the part of at least some. There has been much less
progress as regards the substantive aspects of their programs. " What
improvement there has been, moreover, has concentrated largely
upon issues involved in relating rates to immediate conditions upon
the basis of a fairly rigid cost formula. The broader questions, such
as the development of a consistent policy of seeking to stimulate
consumption through adjustments in prices, or upon the still broader
basis of the effect of a particular regulation upon the economy as a
whole, have been conspicuously neglected.

All this does not augur well for a present extension of direct price
regulation into new fields. Until we have shown a greater ability to
master the techniques of regulation than heretofore, it is clear that we
should b6 cautious about broadening its application in normal times.
However, in a serious national emergency, conditions may make direct
price control imperative in some industries.

* * * * * * *

This study was under the immediate direction of Dr. Donald
Wallace, Associate Professor of Economics at Williams College,
formerly of Harvard University, who served as editor of the series of
independent monographs, and prepared the summary and the exam-
ination of economic standards of price regulation which forms Part IV.
In the early stages of this work he was assisted by John M. Blair.

The study of Government regulation of electric utilities which forms
Part I of this report was made by Ben W. Lewis, Ph.D., LL.D.,
Professor of Economics at Oberlin College, an expert in the field of
public utilities.

. Part II, Public Pricing of Milk, was prepared by three experts
in, the field of regulation of fluid-milk markets, who jointly wrote the
introduction. The chapter on Federal Price Fixing in Milk Markets
was written by Dr. Warren C. Waite, Professor of Agricultural Eco-
nomics at the University of Minnesota. The chapter on Price Fixing
in Five States was prepared by Professors Don S. Anderson and R. K.
Froker of the University of Wisconsin. Mr. Anderson is Associate
Professor of Agricultural Economics at the University of Wisconsin,
and is engaged primarily in research and extension work in agricultural
economics. Mr. Froker is Associate Professor of Agricultural Eco-
nomics at the University of Wisconsin and is engaged in research,
teaching, and extension, principally in the field of marketing.

Part III, Price Fixing in the Bituminous Coal Industry, the study
of cost and other standards prescribed for price regulation by the
Bituminous Coal Act of 1937, was prepared by Ellery B. Gordon, a
former member of the staff of the National Bituminous Coal Com-
mission, and William Y. Webb, formerly of the office of the Consumers'
Counsel of the Bituminous Coal Commission.

The Bureau of Labor Statistics is greatly indebted to the authors of
this volume, and in particular to Dr. Wallace. The facts presented in
the three independent monographs which form Parts I-III and the
analysis in Part IV have been assembled by the authors, and the an-
alyses, conclusions, and recommendations contained therfein represent
their considered personal opinions, not the opinions of the Bureau of
Labor Statistics,

Respectfully submitted.

ISADOR LUBIN,

Commissioner of Labor Statistics.

SUMMARY

In the past two decades proposals have multiplied for extension of
Government price control into more and more industries hitherto
without public regulation of prices. At this midpoint in the passage
to a new public policy toward industry it is advisable to survey and
appraise the objectives, control devices, economic standards, and
results of Government price control in the past and the present. This
report on The Economic Standards of Government Price Control
presents such a survey and appraisal for selected instances of public
control in electricity, milk, and bituminous coal. The report is one
of a series of price studies prepared for the Temporary National
Economic Committee by the Bureau of Labor Statistics.

Important developments ip Government price control in the
United States began in the latter part of the nineteenth century with
the regulation of railroad rates. During the first 15 years of the
present century the move toward regulation of other public utilities
such as electricity, gas, water, and telephone service swept through the
States. In the same years the antitrust policy, which had received
statutory pronouncement in the Sherman Act of 1890, was clarified by
judicial interpretation and, in 1914, it was elaborated in the Clayton
and the Federal Trade Commission Acts.

This crystaUization of American public poUcy to meet the great
changes occurring in industrial structure over the preceding half-
century envisioned two classes of industry, ^'natural monopolies," or
public utilities, versus competitive industries, and a two-sided policy
of control, pubHc regulation of price and some other matters for the
monopolistic utilities and preservation of the freedom to compete in
the other industries through antitrust laws.

Experience during the first World War probably strengthened the
trend toward private cooperative controls and the extension of public
controls, but its influence does not seem to have been decisive.

In the past 15 years increasing dissatisfaction on the part of various
groups has been manifested with this general standard of public
policy. Many businessmen and farmers have pressed for relaxation
of the antitrust laws to permit private cooperative or associative con-
trol devices to "stabilize disorderly markets" and prevent "ruinous
competition." The depression of the thirties intensified these demands
and led to more requests for Government assistance in "stabilizing" or
raising producer incomes through price control. Labor desired that
employers be obligated to bargain collectively. The N. R. A. and
the A. A. A. were both designed to meet these demands in some
measure.

At the same time there was a growing appreciation of the inadequacy
of Government regulation of public utilities as it had been practiced
under legislative and judicial handicaps. In part this led to advocacy
of removal of statutory and judicial limitations upon regulatory
commissions, in part to greater interest in public enterprise.

XX SUMMARY

Out of all these criticisms of the old public policy have come many
proposals for extension of Government price control into industries
heretofore unregulated. The virile ghost of N. R. A. lives on in
Federal regulation in bituminous coal. Direct or indirect price con-
trol has now obtained for several years in the case of many agricultural
commodities. Public utility regulation has been resuscitated in
several' States and by the Federal Government in the area of interstate
commerce. The Federal Government has also embarked upon public
enterprise in electricity.

Tliis report presents a survey and appraisal of selected instances of
public price control with the purpose of increasing" the knowledge on
this subject available to help in shaping future public policy. Fart I
contains a study of State regulation of electric rates in three States,
representing a sample of "^the most effective State control, and Federal
pricing of electricity in the Tennessee Valley. In part II the Federal
milk control program and five instances of State milk control, which
exhibit marked differences, are examined. Part III presents an
analysis of the price-control provisions of the Bituminous Coal Act of
1937. In part IV the editor of the report has undertaken a summary
and analysis of the material in the underlying monographs.

Each of the four monographs treats the objectives, standards, and
results of public price control in relation to three major economic
problems:

(1) The general level of all the prices of a firm or industry; that is,
the relation of its general level of prices to such elements as income,
investment, costs, or employment.

(2) The structure or pattern of the different prices charged to
different groups of consumers; that is, the relation of individual prices
tQ each other and to costs and demands.

■ (3) The relation between prices, or price changes, in a firm or
industry to the volume of employment of labor, equipment, and funds
in the economy as a whole.

The third problem — that of the relation of objectives and standards
of Government price control to depression and recovery — may be dealt
with very briefly. Paramount though it may be in relation to the
general economic well-being, it has been accorded very little attention
either in the legislative prescription of standards of price control or in
their administrative interpretation. Thus, it seems to have been
almost completely ignored in the case of coal regulation. Although
public utility commissions endeavored to reduce rates in the depres-
sion years of the thirties, partly with the evident purpose of helping
to promote recovery, they developed no incisive analysis of how this
result might be achieved nor any standards clearly related to it.
Neither the Tennessee Valley Authority Act and its amendments nor
the rate policies of the Authority set forth any standards related to
this problem. '

Alone of the three cases of control here examined, milk control by
the Federal Government and by some of the State governments was
adopted partly, at least, on the ground that it would promote recovery.
However, none of the standards developed by the A. A. A. and by
State milk control agencies (in the five States studied) are related in
convincing fashion to attainment of this objective.

Hence, it must be concluded that in the cases of public control
studied in this report neither legislatures nor control agencies have

SUMMARY XXI

developed economic standards for pricing which would promote a
higher level of use of economic resources in the whole economy. Where
the problem has not been entirely ignored the policies used in treating
it have been based on vague or general assumptions about the relations
between prices in a given industry or firm and the level of use of
resources in the whole economy that are either demonstrably false or
highly questionable.

This leaves the first two problems enumerated ; that related to the
general level of prices and that pertaining to the structure or pattern
of prices. In the cases described in this report, prima,ry attention has
been devoted to the former — the general price level— both by legis-
latures and by regulatory commissions. In dealing with this problem,
however, the results of this study show marked differences in objec-
tives and standards, not only between the three industries examined
but also between different instances of control in the same industry.

In regulation of the general level of rates of an electric utility the
principal aim has been as a rule to insure that consumers are not
forced to pay extortionate rates. Regulatory commissions have been
severely handicapped by both court decisions and by statutes. Forty
years ago the Supreme Court laid down the rule that rates must yield
a "fair retm-n on the fair value" of the property of a public utility
company, and has since consistently refused to set forth a clearer
standard. This rule of "fair return on fair value" is really applicable
only as a standard of fairness in treatment of past investments at the
time regulation is first imposed or whenever subsequent alteration in
the regulatory statute substantially changes the "rules of the game."
It is not suited to developing economic standards for rates that will
result in the maximimi possible consumption of electricity consistent
with insuring sufficient income from the investment to attract capital
as demand expands and additional equipment is needed.

In refraining from amending utihty statutes — which typically pro-
vide that rates shall be "just and reasonable" — so as to distinguish
between the problem of fairness to past investments made upon past
expectations and to lay down explicitly for the future the principle
that rate levels shall be such as to encourage maximum economic con-
sumption, legislatures have abdicated their function. Nor have the
commissions themselves attempted this desirable analysis of the prob-
lem, perhaps partly because of the fear of court reversal.

The resiilt has been that commissions have not developed definite
economic standards for the promotion of maximum economic con-
sumption. The three commissions studied — Wisconsin, New York,
and Illinois — which are among the most effective in the country, have
evidently endeavored to set rates so as to yield an ordinary or normal
return on actual prudent dollar investment. In this the commissions
of Wisconsin and New York have made great progress in the past
decade through the development of accounting records and the proc-
ess of routine checking of rates of return and by the ordering of rate
reductions whenever the results for a given year show returns above
the rate (usually 6 percent) considered normal. In Wisconsin and
Illinois the commissions have made use of the so-called "objective
Yate" as a device to test out the elasticity of consumption at lower
rates arid thws provide an indication of the profitability or unprofit-
ability of a reducfcjj&n in the general level of rates.

XX SUMMARY

Out of all these criticisms of the old public poUcy have come many
proposals for extension of Government price control into industries
heretofore unregulated. The virile ghost of N. R. A. lives on in
Federal regulation in bituminous coal. Direct or indirect price con-
trol has now obtained for several years in the case of many agricultural
commodities. Public utility regulation has been resuscitated in
several States and by the Federal Government in the area of interstate
commerce. The Federal Government has also embarked upon public
enterprise in electricity.

This report presents a survey and appraisal of selected instances of
public price control with the purpose of increasing" the knowledge on
this subject available to help in shaping future public policy. Fart I
contains a study of State regulation of electric rates in three States,
representing a sample of the most effective State control, and Federal
pricing of electricity in the Tennessee Valley. In part II the Federal
milk control program and five instances of State milk control, which
exhibit marked diflferences, are examined. Part III presents an
analysis of the price-control provisions of the Bituminous Coal Act of
1937. In part IV the editor of the report has undertaken a summary
and analysis of the material in the underlying monographs.

Each of the four monographs treats the objectives, standards, and
results of public price control in relation to three major economic
problems:

(1) The general level of all the prices of a firm or industry; that is,
the relation of its general level of prices to such elements as income,
investment, costs, or employment.

(2) The structure or pattern of the different prices charged to
different groups of consumers; that is, the relation of individual prices
tQ each other and to costs and demands.

• (3) The relation between prices, or price changes, in a firm or
industry to the volume of employment of labor, equipment, and funds
in the economy as a whole.

Hence, it must be concluded that in the cases of public control
studied in this report neither legislatures nor control agencies have

SUMMARY XXI

This leaves the first two problems enumerated; that related to the
general level of prices and that pertaining to the structure or pattern
of prices. In the cases described in this report, primary attention has
been devoted to the former — the general price level — both by legis-
latures and by regulatory commissions. In dealing with this problem,
however, the residts of this study show marked differences in objec-
tives and standards, not only between the three industries examined
but also between different instances of control in the same industry.

In regulation of the general level of rates of an electric utility the
principal aim has been as a rule to insure that consumers are not
forced to pay extortionate rates. Regulatory commissions have been
severely handicapped by both court decisions and by statutes. Forty
years ago the Supreme Court laid down the rule that rates must yield
a "fair retm-n on the fair value" of the property of a public utility
company, and has since consistently refused to set forth a clearer
standard. This rule of "fair return on fair value" is really applicable
only as a standard of fairness in treatment of past investments at the
time regulation is first imposed or whenever subsequent alteration in
the "regulatory statute substantially changes the "rules of the game."
It is not suited to developing economic standards for rates that will
result in the maximum possible consumption of electricity consistent
with insuring sufficient income from the investment to attract capital
as demand expands and additional equipment is needed.

In refraining from amending utility statutes — which typically pro-
vide that rates shall be "just and reasonable" — so as to distinguish
between the problem of fairness to past investments made upon past
expectations and to lay down explicitly for the future the principle
that rate levels shall be such as to encourage maximum economic con-
sumption, legislatures have abdicated their function. Nor have the
commissions themselves attempted this desirable analysis of the prob-
lem, perhaps partly because of the fear of court reversal.

The result has been that commissions have not developed definite
economic standards for the promotion of maximum economic con-
sumption. The three commissions studied — Wisconsin, New York,
and Illinois — which are among the most (effective in the country, have
evidently endeavored to set rates so as to yield an ordinary or normal
return on actual prudent dollar investment. In this the commissions
of Wisconsin and New York have made great progress in the past
decade through the development of accounting records and the proc-
ess of routine checking of rates of return and by the ordering of rate
reductions whenever the results for a given year show returns above
the rate (usually 6 percent) considered normal. In Wisconsin and
Illinois the commissions have made use of the so-called "objective
rate" as a device to test out the elasticity of consumption at lower
rates and thws provide an indication of the profitability or unprofit-
ability of a reduction in the general level of rates.

XXII SUMMARY

Two aspects of the process of rate reduction by these commissions
suggest, however, that as a rule rates are not at the lowest level which
would barely yield ordhiary returns on actual investment. First,
rates are not reduced until after excess annual earnings have appeared.
Second, in estimating the amount of reduction that will remove the
excess increment of earnings, the commissions typically base their
calculations on the existing or past volume of consumption. They
evidently believe that estimates of probable consumption at lowei
rate levels would not be regarded by the courts as conforming to law.

The standard which these commissions have come to implement
quite effectively contains, however, some confusion between the prob-
lem of fairness to past investments and the problem of obtaining
maximum economic" consumption. It cannot satisfactorily solve both
problems together, and it is not well suited to treatment of the second
problem in a dynamic economy characterized by progress and obso-
lescense, shifts in population and industrial location, and broad
changes in price levels.

In the Tennessee Valley Authority Act Congress appears to have
laid down a standard for the level of electric rates that accords closely
with that used by the three State commissions studied — a level of
rates that covers the full costs of production and marketing including
an ordinary return on actual dollar investment. To this there appears
to be one qualification. The language of the act seems capable of
interpretation to require that electric revenues should yield, over and
above an ordinary return, sums sufficient to retire gradually the bonds
issued to finance the investment. The T. V. A. is not, however,
subject to what the State regulatory commissions believe to be a legal
bar against consideration of the probable elasticity of consumption at
lower rates. Studies of expected consumption have constituted an
important part of the process of setting T. V. A. rates, and the large
per capita consumption in the valley at rate levels much below those
in most other sections of the country has influenced the rate policies
both of private electric companies and of State commissions.

With respect to the general level of prices in milk and in coal,
public control has sought to raise or maintain incomes above levels
that would prevail without Government control.

THE LEVEL OF MILK PRICES

During the post-war decade cooperatives organized by milk pro-
ducers achieved appreciable gains for their members by raising the
prices of fluid milk and cream relative to the prices of milk going into
butter, cheese, ice cream, and other manufactured dairy products.
Under the severe strain of the depression in the early thirties they were
unable to maintain these margins, and milk producers began to urge
a.program of public control to assist the cooperatives in holding fluid
milk prices at a profitable level.

Federal milk control has operated under the general price standard
of agricultural legislation; that is, the return to "parity prices." At
first this meant prices which would give agricultural commodities a
purchasing power. in terms of industrial goods equivalent to that
prevailing in a base pre-war or post-\^ar period. By the terms of the
Agricultural Marketing Agreement Act of 1937, however, the Secretary
of Agriculture is empowered to adjust these parity prices upward if

SUMMARY XXIII

he finds that they "are not reasonable in view of the price of feeds
* * * and other economic conditions which affect market supply
and demand for milk and its products."

In practice it has proved impossible to attain parity prices ia most
markets under Federal milk control. Competition of fluid milk from
other markets, unregulated by Federal authorities because interstate
commerce was not involved, and competition from producers whose
milk was formerly sold largely for manufacture of butter, cream, and
other manufactured products have imposed practical limits on the
level of fluid milk prices that kept them below parity. Consequently
the objective seems to have been to fix the highest milk and cream
prices in each market that could be maintained successfully. The
authorities compute two guiding standards. The "historical" stand-
ard, which is ordinarily considered the highest attainable price, is
based on the current price of butter plus the average differential
between milk and butter prices in the late twenties, with adjustments
for changes in quahty and costs. The "competitive" standard repre-
sents the current price of milk for manufactured products at the edg&
of the milkshed plus transport expense and the extra costs of producing
fluid milk. The price seems to be fijced between these two limits, but
as close to the upper limit as is deemed possible.

Of the five cases of State milk control studied in this report —
California, Wisconsin, Oregon, New York, and Indiana — California
alone exhibits a definite standard for minimum producer prices of
fluid milk. In that State the control agency is directed to set minimum
producer prices so as to cover the average full extra costs of producing
fluid milk for beverage consumption as compared with producing milk
for manufactured dairy products including ordinary return on invest-
ment. In Wisconsin the statutory directives are vague. The control
agency moved in the direction of a standard of full cost of production,
including ordinary return on investment and reasonable wages for
farmers and their families. But in the absence of any control of
entry to fluid milk markets it proved impossible to apply this standard.
The authorities have apparently set prices as high in relation to this
goal as they thought could practicably be maintained with whatever-
control of sales volume the local cooperatives were able to achieve.

In Oregon neither objectives nor standards are definite in avowal.
In practice prices of fluid milk are apparently set at the most profitable
level, given rigid control of entry to the market and a scheme of pay-
ments to producers of fluid milk according to sales quotas that dis-
courages expansion of production for the fluid milk market. Of the
five cases of milk control studied here, Oregon exhibits the strongest
monopoly control.

In Indiana both legislative and administrative objectives and stand-
ards relative to the level of milk prices are vague and indefinite. Here
the reason seems to lie in the adoption of the principle that, within
broad limits at least, collectively bargained prices are desirable prices.
Apparently the administrative ageijcy follows in large measure a policy
of enforcing the prices determined by bargaining between cooperatives
and distributors, limiting entry to fluid milk produoftiou whenever
there is a danger that new entrants would render these prices difficult
to maintain.

Between 1933 and 1937 New York followed a policy of control of
producer prices of fluid milk which was somewhat similar to Indiana in

XXIV SUMMARY

its emphasis on participation of producers and distributors in price
making and in moderate control of entry, although one gains the im-
pression that the New York board took a large part in the determina-
tion of prices. In 1937 New York adopted the general principle of
encouraging machinery for collective bargaining of prices and super-
vising this process rather than participating in it in substantive
fashion. The control agency is now empowered to fix prices itself
only on petition of producers. No standards were laid down limiting
the lawful range of prices determined by collective bargaining. For
State price fixing, when that is requested, vague standards are pro-
vided as in earlier laws.

In all five States and in markets under Federal control it seems
unquestionable that public control has raised fluid milk prices, during
part of the time at least, abOve levels which they would otherwise have
attained. Whether this has increased producer incomes depends, of
course, upon the effect of these higher prices upon the volume of sales,
but it appears that there has been some increase. Producer incomes
have also probably been enlarged through inauguration of better
auditing of distributor accounts which has minimized incorrect pay-
ments to producers.

All five States have fixed wholesale and retail prices, although this
feature was abandoned by New York in 1937. Here again California
alone provides definite standards. In this State an attempt has been
made to apply a rather complex standard calling for prices that will
return the full costs, including return on investment, of such a number
of efficient distributors in each market as is needed to meet the de-
mands of consumers. New York has also made some endeavor to
encourage efficiency in distribution. In the other States standards
are vague and the aim seems to have been merely to ensure adequate
margins so as tS discourage cutting of producer i)rices. In order to
protect the existing system of house delivery the differentials between
home delivery and store or milk-stand sales have been largely abolished
in some of these States.

THE LEVEL OF PRICES IN BITUMINOUS COAL

The Bituminous Coal Act of 1937 provides for minimum price fixing
in this industry characterized by large excess capacity, a great nmnber
of firms, and liighly specialized, immobile labor. The evident aim
is to prevent price cutting in order to enable maintenance of col-
lectively bargained wages and better returns to operators than would
otherwise be obtained. The principal standard for the general level
of coal prices in a price-fixing area (of which the law specifies about 10)
is equality between the average realization per ton and the weighted
average cost per ton in that area in 1936 adjusted for subsequent
changes in cost per ton. Cost as defined in the law includes no return
on investment. The coal price level is to be adjusted upward or
downward after changes in weighted average cost of 2 cents per ton
have been demonstrated. This means, of course, that prices must be
fixed on the basis of past or current consumption and estimates of
increased sales through lower prices cannot be introduced into the
calculation.

Consequently the same conclusion obtains in the case of minimum
price fixing in coal as in the case of maximum price fixing in electricity —
maximum economic consumption can be approximated only if prices

. SUMMARY XXV

are fixed according to the best- estimates of future consumption and
future costs, and for this the act fails to provide.

There seems Uttle question that it will be very difficult to adjust
minimum prices rapidly to meet short-time changes in demand, both
because of the requirement that determinations must be based upon
past costs, and because of the inevitable delays inherent in almost any
form of commission regulation. Moreover, during periods of de-
pressed business conditions and falling sales, higher unit overhead
costs may prevent price reductions for the purpose of restoring de-
mand, or may even make it necessary to establish higher prices,
although the contrary policy is clearly indicated.

With respect to the process of relating the prices of different com-
panies and districts, the emphasis of the law seems to be on "just and
equitable" price relations and the preservation of "existing fair com-
petitive opportunities." No definite standards of economic efficiency
relative to this problem are contained in the law.

The Coal Act of 1937 provides for fixing of maximum prices when
necessary to protect consumers against unreasonably high prices, such-
as might occur in wartime. Maximum prices are to be fixed at a
uniform margin above the minimum prices within each district so as to
y'i;ld a reasonable return above weighted average cost. However, a
proviso that "no maximum price shall be established for any mine
which shall not yield a fair return on the fair value of the property"
makes this provision virtually unworkable.

Legislatures and controJ»agencies have paid much less attention to
problems of the patteiu o^f structure of prices to different groups of
consumers than they have devoted to problems of the general level of
prices of a firm or industry.

The three State utility commissions studied, for example, have
achieved much in the way of simplification and standardization of
rate forms and in designing forms which facilitate assessment against
each customer of those costs for which he is specifically responsible.
However, when it comes to the substantive problem of how the total
costs including return on investment are to be spread over the several
groups of consumers, e. g., industrial, commercial, and domestic, the
three commissions do not seem to have developed, any clear crifc'eria.
They have, indeed, endeavored to set rates such that no consumers are
served at rates below ascertainable increment costs; that is, below the
added direct costs involved in gerving them. But in deciding how
much of the oveincad is to be contributed "by each of the different
classes of consumers the commissions seem to act upon general ideas of
fairness, taking into account the relative .volume and nature of pro-
tests, and the desire to improve consumption and utilization of
capacity, without any particular definable principles. The evident
influence of the reietive volume of protests from different groups and
the typical procedure of estimating the effect of rate reductions on
income by applying the re4uction per unit to the volume of consump-
tion in a previous period, without allowance for elasticity of consump-
tion— these two factor suggest that rate patterns are not those which
would, in fact, promote -maximum economic consumption. Pursuit of
this objective would require standards whereby consumers with the
greatest elasticity of consumption (at lower rates) were given the
lowest rates. Concretely excess income would be removed by
reduction of rates to t^fiSe consumers whose consumption would

XXVI SUMMARY

increase most per unit of reduction in company income, instead of
lowering rates to those groups which have protested most vigorously,
or lowering rates equally to all consumers. '

In the design of the rate structure T. V. A. seems, in general, to have
followed the policies of the leading State commissions. There is little to
indicate that it has given any greater attention to the problem of the
best pattern of apportioning overhead among the different classes of
customers. However, the intensive consumption studies carried on
by T. V. A. and its evident emphasis on the relation between rates and
consumption encourage belief that it may make advances in the
pattern of rates as well as in the level of rates.

In the control of milk, also, different class prices exist in all the
States treated in this report and in milk markets under Federal
control. The milk control programs require at least 2 class prices —
one for fluid milk and one for milk going into manufactured products,
but the actual number of class prices in use varies from 2 to 10 in
different markets. Given the objective of increasing producer
incomes and given the impossibility of raising the price of mUk for
manufactured products significantly, it follows that the control
programs must center directly on the raising of the price of fluid milk.

Of the six instances of public control of milk prices, California
alone has set up a clear-cut statutory standard for the relation of class
prices. As explained above, the minimum price of fluid milk in
California is to cover the full extra costs of milk for fluid consumption
above the cost of manufacturing milk. In Oregon the milk control
board fixes only one price, that of fluid milk. Since the markets for
fluid milk and manufacturing milk seem to have been quite effectively
separated in Oregon, the price of fluid milk is evidently set in no
particular relation to the price of manufacturing milk.

In Wisconsin, Indiana, and New York prices for one or more classes
of manufactiu^ing milk have been fixed according to formulas based
on the wholesale prices of manufactured dairy products, with the
evident purpose of ensuring payment to producers of the best obtain-
able price for surplus fluid milk that must enter manufacturing outlets.
For a time in 1938 and 1939 all nine price classes in the New York
metropolitan area (under a joint State and Federal order) were deter-
mined by formulas. In general, however, no clear-cut criteria have
been involved for the relations between prices of fluid milk and prices
of manufacturing milk in the control programs of these three States.

The A. A. A. has come closer to development of a definite standard
for the relationship of fluid milk prices and manufacturing milk prices.
Fluid milk prices seem to be set at the highest practicable figure above
the price of manufacturing milk at the edge of the milkshed with
appropriate adjustments for transportation expense and other extra
costs. The price relationship aimed at is evidently the widest spread
that tfan be maintained — that is, the widest spread that will not
encourage diversion of manufacturing milk into the fluid milk mar-
kets— given whatever control of volume of fluid milk the coopci'atives
are able to establish.

Experiments with low prices for milk sold to relief recipients seem
to indicate an elasticity of consumption in this group of consumers.
It is not clear whether this elasticity is great enough to enable main-
tenance of producer incomes without raising milk prices to other

SUMMARY XXVII

groups. In a number of instances this question has been rendered
irrelevant through the use of Government subsidy.

Turning to the Bituminous Coal Act, one finds more legislative
attention to the problem of the price structure. Several considera-
tions governing price differentials are laid down in the act, but these
are couched in language which conveys no definite measurable content.
Instead, the control agency is furnished with a set of considerations
which seem to be reducible to two general criteria: (1) Prices shall
reflect the relative market value of different kinds, qualities, and sizes
of coal and (2) prices shall be fair to all producers and all consumers.
Evidently the law, as worded, would permit either the continuance of
essentially the same pattern of prices as previously existed or inaugura-
tion of appreciable changes in pattern. Although the law permits
differences in prices of the same coal in the same geographical market
when it is consumed in different uses, no criteria for such price differ-
ences are specified. Everything plainly depends on the nature of the
concrete standards which the control agency develops and applies.

■ CONCLUSION

In conclusion, legislatures, administrative agencies, and courts have
given most attention to objectives and standards related to the general
level of the prices of a firm or industry. Although distinct advances
have been made in treating this problem, especially in the field of
electric utilities and in milk control in Cahfomia, it still remains true
that adequate, workable standards to promote maximum economic
consumption have not been developed. This is partly ascribable to
pursuit of other objectives.

Less attention has been devoted to the problem of the pattern or
structure of prices to different groups of consumers. Few note-
worthy advances in this area have been discovered in the present study.

When it comes to the problem of greatest importance in the past
decade — the relation of price behavior in a particular firm or industry
to depression and recovery in the economy as a whole — it appears in
large measure that the problem has simply been neglected. In the
case of mUk, where an avowed aim of price control was promotion of
general recovery, it appears that the measures adopted were more
.likely to work against recovery .than to promote it. But the. most
important conclusion of this report is that the major problem of the
three has been largely neglected or treated without adequate imder-
standing of its nature.

One other conclusion should be emphasized. Both legislatures and
administrative agencies have often failed to state standards in clear-
cut, definite fashion. With regard to certain problems of long stand-
ing on which there is abundant accumulated experience, it would
seem that legislatures could and should specify standards more
definitely. With regard to newer problems, this is probably either
impossible or undesirable. Here the function of the legislature should
be merely to prescribe the general objectives. Administrative au-
thorities sLould, however, develop definite standards and make them
expUcitly clear so that the groups affected know the rules of the game
and so that legislatures may have a sure basis for further study of
the problem, assessment of the present method of treating it, and
consideration of improvement in objectives and standards.

PART I

PUBLIC PRICING OF ELECTRIC POWER

By
BEN W. LEWIS

PREFACE

The electric power industry, in common with other pubUc utihties
(gas, .telephone, telegraph, and water), has been involved in unusual
relations with the Government and has been the subject of increasingly
hitensive controLby govemigs .it^i-agencies, almost since its mception.
Indeed, governmental activity has been accepted for so long as an
integral part of the set-up whereby electric power is produced and
distributed to consumers that any large-scale withdrawal of the Gov-
ernment is scarcely conceivable; and any inadequacies in the system
of control serve almost universally to suggest only an increase or
intensification of Govemment-Sstivity rather than a lessening.

The key to the regulation of eIectriir-po\\^er is to be found in the
tremendous importance of the industry to the social and economic hfe
of the country, together with the fact that for physical and economic
reasons electric power must be sold generally under such conditions
that competition cannot be depended upon to insure adequate, con-
tinuous service at satisfactory prices. Electric power companies must
secure permission to occupy and cross public highways with their poles
and cables; rendition of their service requires a physical connection
between the properties of producers and users, with the result that as
a practical matter only one seller is avaDable immediately to any
buyer; and the teclmical characteristics of the production of electric
power are such that there is a strong tendency for any competition
in the industry to develop along unusually tvigorous lines, with a
consequent elimination of all competitors -Bave one. Public policy
and the law have long regarded the supptying of electric power as a
"natural" monopoly, and, almost as a matter of course, have substi-
tuted positive governmental action for the ineffective process of com-
petition in the control of price and service.

Over the years, regulation of electric power has been undertaken
through various means — by judicial decisions in private" suits to en-
force common law obligations of "public callings," by special provi-
sions in State charters and municipal franchises, by State statutes
and municipal ordinances, and by regulations 'and orders issued by
administrative commissions acting under authority conferred by legis-
lative enactments. Contemporary regulation of the electric power
industry is very largely commission regulation, which is undertaken
by every State (with one exception) and by the Federal Government.
Typical regulation seeks to control the quality, extent, and adequacy
•of service and its price, and, as ancillary to these principal functions,
to control utility accounts, capitalization, and intercorporate relations.

Under those provisions of the Federal Constitution which forbid the
State and Federal Governments to take private property withoHt due
process of law, electric utilities might conceivably seek to forestall by
judicial action the entire institution of Government regulation of their
prices and service. It is noteworthy, however, that although regula-
tion of prices has been held by the courts to be beyond the power of
legislatures in the case of many industries, the right of the Government

4 CONCENTRATION OF ECONOMIC POWER

to regulate electric utility prices has never been seriously questioned.
On the other hand, the methods, standards, and procedures of electric
utility regulation have been subjected to the closest scrutiny and super-
vision by the courts. It is not too much to say that the present system
of utility prices under regulation, with whatever maj^ characterize it
in the way of rigidity,. excessive expense, delay, and controversy, is in
a large measure the product of judicial limitation upon legislative and
administrative processes.

Traditionally, largely as a result of judicial decisions and influence,
utility rate regulation has been built around the core of a "trial-at-
law.." Rates are set, after due notice and full hearing — the presenta-
tion and cross-examination of witnesses, the filing of exhibits, and ad-
versary arguments. 'Rate cases typically drag on for months, involve
the expenditure of large sums for the services of engineering and ac-
counting experts and for legal talent, and assume generally the aspect
of public causes rather than proceedings for the essential business of
setting prices. In recent years, rates have come increasingly to be
fixed by compromise negotiations conducted by commissions and
utilities.

The main approach to rates is with reference to their level; that is,
the total amount of money which the utility shall be allowed to re-
ceive for all of the services which it renders to its entire group of
customers. It is generally considered that rates in the aggregate are
satisfactory if they produce a total income sufficient to cover the
utility's total cost — its operating expenses, taxes, depreciation, and a
return to those who have furnished- capital for the enterprise. Tradi-
tionally, the return to capital has been the focal point of regulatory
action; and the standard set by courts, and followed without question
by regulatory commissions, has been a "fair return upon the fair value
of the utility property used and useful in the public interest." The
Supreme Court has held from the very outset that utility rates must
provide such a "fair return upon fair value" in order to meet the con-
stitutional prohibition against depriving the utility of its property
without due process of law; and commissions have generally adopted
the same standard as a positive measure of rates which will be fair
and which will attract sufficient capital into the industry. Neither
the courts nor the commissions, however, have been clear, as to how
fair return and fair value should be constituted. It is realized, for-
mally at least, that fair value for rate-making purposes cannot be
measured by "market value" or "worth"; since market value depends
upon income, it cannot properly be employed as a basis fo,r determina-
tion of what the income should be. The Supreme Court has listed
several factors that must be weighed in determining the fair value of a
utility property, but it has never indicated what weight should be ac-
corded to each in the final judgment.

Over the years since the first important decision {Smyth v. Ames,
169 U. S, 4G6, 1898), two conflicting standards of fair value have taken
precedence over all others: One is the actual (prudent) investment
in the property; that is, the number of dollars invested and still re-
maining in the property. The other is the reproduction cost of the
property; that is, the amount which would nowiiave to be expended
if the property were to be reproduced under existing conditions and at
present prices. Each of these standards presents an array of sub-
sidiary questions, such as those relating to the existence and measure-

CONCENTRATION OF ECONOMIC POWER 5

ment of depreciation and intangibles. But the main battle has raged
(and still rages) over actual investment versus reproduction cost. It
is clear that consumers would benefit and utilitj'" owners would be dis-
advantaged if an actual investment standard were employed during a
period of generally rising prices, that the opposite results would obtain
if reproduction cost were used during such a period, and_ that this
situation would be reversed during a period when prices in general
were falling. The issue became really important in the yoare follow-
ing the great increase in prices during the first World War, and it was
during this period that the Supreme Court approached most closelj'' to
identifying fair value with reproduction cost. However, it refused to
take this step definitely and completely, and even today, after 40 years
of rate making, the law of the land still reciuires that both actual in-
vestment and reproduction cost be taken into account — in undeter-
mined proportions to be reconciled by the processes of judgment — in
the determination of the rate base upon which a fair return must be
allowed. There is a growing body of opinion which has come to recog-
nize that neither actual investment nor reproduction cost has a clear
advantage either in the matter of equity to consumers and investors,
or in considerations of pricing principles, and also that the interests of
precision, economy, and speed in rate making can best be served by
placing full reliance upon actual investment as the measure of fair
value. Persons of this view are convinced that the purposes of rate
regulation can be attained only by the complete abandonment of at-
tempts to determine fair value by the process of considering divergent
and mutually inconsistent evidence and opinion, and then naming a
figure which bears no ascertainable relation to any of the lines of evid-
ence and is supported only by somewhat vague phraseology. The use
of judgment in rate making is necessary, of cQurse, but the processes
of judgment operating without definite principle or purpose are no
proper substitute for a meaningful, efficient standard in the highly
purposive fixing of prices in a price-guided economy.

Little need be said of the composition of the fair return element
of the rate-making formula. Compared with fair value, it has
received little attention from regulatory commissions, although it is
clear that variations in the rate of return are fully as significant as
variations in the value based in the determination of income to in-
vestors and rates to consumers. Typically, a ^compromise figure is
named within a range of from 5^ to 8 percent return upon fair value.

The "fair return on fair value" formula is a rate-making tool; it
is not in itself the statement of a basic objective. Indeed, it is
employed in specific rate-fixing situations to reflect quite different
objectives. It may be used, either quite conscientiously or as a
"front," by a commission whose sole objective is to escape court
reversal, or by a commission which seeks more positively to set utility
prices in harmony with pricps generally in the economic system.
The same formula may serve where the purpose is merely to prevent
rate levels that are clearly extortionate, or where the commission's
aim is to promote increased consumption by naming the lowest level
of rates that will yield the minimum income required for adequate,
continuous service. Indeed, the formula need not stand as a barrier
to the establishment of utility prices designed to encourage and
facilitate the fuller employment of economic resources in general.
In short, "fair return on fair value" is neither a. definite objective
nor a definite standard; it is an invitation to controversy on both.

279348— 41— No. 32 3

6 OONCENTRATIOJ^ OF ECONOMIC POWER

It will be appreciated that to decide upon the total income which
the utility is entitled to receive leaves unsolved the problem of naming
the exact rates which, in light of the consumption of electricity
that they will attract, will produce the desired income. Commissions
generally have displayed slight initiative in this field. The need to
synchronize individual rates with other related prices worked out by
competition in unregulated markets (or otherwise purposively to
adjust them) has" gone largely unrecognized, and the effect of the
rate level upon consumption has been accorded only slight considera-
tion in rate computations. Mechanical division of desired total
income by the volume of units of past consumption has been the
basic procedure, and rate experimentation to see whether even lower
rates, by inducing greater demand for the service, might equally
result in the desired income, has been rare. In fact, one of the most
serious charges to be brought against prevailing rate practices and
standards is that of complacency — the absence of that drive for the
lowest level of remunerative prices which, in theory at least, is char-
acteristic of competition, and for which regulation has as yet made
no effective provision. Under the law as presently interpreted, a
utility may not be forced to lower its rates if its earnings are not in
excess of a "fair return," even though lower rates might reasonably
be expected to bring increased demand, greater output, lower unit
costs, and an equally "fair" return. It is quite unlikely that regula-
tion has achieved the lowest level of rates consistent with the minimum
returns to investors and management sufficient to induce continuous
provision of adequate and efficient service.

Sometimes "promotional rates" are offered, affording lower rates
to additional blocks of consumption, without disturbing prevailing
rates for such assured demands for electricity as that for domestic
lighting purposes. A few companies have introduced (some utility
commissions have required) "objective" rates, which offer an attrac-
tively low rate for all electricity consumed beyond the customer's
consumption in a designated base period (some earlier month or
year) , or^ as a variation, new lower rates if consumption is increased
suflBciently to equal or exceed, at these rates, the amount of a desig-
nated base bill.

In devising the pattern of electric rates, commissions have recog-
nized the existence of three separate markets for the ouiput of any
company (domestic or household, commercial," and industrial) . The
task of distributing the total burden of rates, i. e., the total dollars
of revenue to be obtained from all users of the service, among the
three classes "of usisrs has been difficult in the extreme and, for the
most part, lias elicited no standards more exact than a rather vague
"value of service." There is in this area no formula as definite even
as the "fair return on fair value" phrase in the field of total income.
Filll cost of service is not a feasible standard. Determination of the
"actual" full costs of serving each of the different classes of users
would n'ecessarily involve allocation of the general body of overhead
expense between these different classes on some arbitrary basis. The
allocation must be arbitrary because this body of cost is incurred in
common for serving ail customers and there is no way of ascertaining
exactly what part of it is to be a Uributed to any one class In general,
commissions endeavor to see that the r^tes for each class cover at
least the direct costs for which its service is responsible. The com-

CONCENTRATION OF ECONOMIC POWER 7.

mon overhead is then spread among the classes by a process of recon-
ciling such non-cost considerations as custom, "balance," "what
traffic will bear," protests and pressure, full utilization of capacity,
and the like.

So, too, within each general class of users, difficult questions of
differential pricing (for small and large, and regular and irregular
users) are raised, for which there are no simple or "correct" answers.
An analysis of the costs of serving an individual consumer shows that
the utility incurs an expense for being "ready to serve" (a "demand"
or "customer" cost) as well as for service actually rendered (an
"energy" or "follow on" cost), but it is fruitless to attempt to fix exact
responsibility, either individual or class, for these outlays. Rate forms
are devised to represent, in some measure and with varying emphasis,
considerations of cost and of value of service. Efforts are made to
attract various groups of users, and to induce uses of varying degrees
of importance. Simple meter rates are classified into "straight line"
(a uniform charge per unit), "step" (a single rate applied to the total
number of units coneumed, the rate varying with the total quantity
consumed), and "block" (a named rate for all of the units taken in
specified blocks, for example, the first 30 units at 7 cents per unit, the
next 30 at 6 cents, etc.). A minimum charge may be provided with
any of these forms. More elaborate rate forms embo 1y separately
billed charges, the first based on the cost to the utility, however de-
termined, of readiness-to-serve, and the second reflecting the actual
consumption of fenergy. Sometimes the readiness-to-serve charge is
concealed by setting a relatively high energy rate for the first few units
of service, beyond which lower "follow on" rates apply. Demand or
customer charges may be estimated and made uniform for each cus-
tomer, may be found by meter measurement of the customer's maxi-
mum demand during a stated period, or may be estimated for each
customer by some indicator of his possible maximum demand ("load-
count" or "room-count"). In the control of rate structures, as in the
setting of rate levels, it seems unlikely that regulation has approached
closely to the attainment of fullest use of facilities at minimum cost.'

It will appear later in this report that the most effective of the
country's regulatory commissions have gone far beyond the objective
merely of protecting "rights" of investors and preventing "extortion"
of consumers; that, wliile they have kept sufficiently within objectives
acceptable to the courts to make their orders effective, they have
sought consciously to establish rate levels and patterns conducive to a
more complete use of electric facilities. Their efforts have been under-
taken with a practical eye to the demands of the competitive situa-
tion, even though they have not always talked in such terms as "syn-
chronization," and "allocation of economic resources." It would
have been possible, as suggested above, for these coromissions to have

' The writer has said, in another conpeotion; "It may be suggested that, insofar as possible, electric rates
should be so arranged as to cover the ascertainable costs in the case of each user, spread the burden of non-
imputable costs equitably, and conduce to maximum use of facilities. It seems probable that these ends
could be satisfactorily approached by a pattern of two-part rates, the second par^ of which would be consti-
tuted by an energy charge, uniform to all consumers, equal to short-run marginal cost of producing the serv-
ice, and the first an initial or demand charge covering all other costs. The demand charge would be adjusted
as between consumers (or classes of consumers) so as to cover as a minimium for each the ascertainable
fixed and constant costs for which his (its) presence on the system is directly responsible, and in addition such
proportion of the remaining burden of cost as seems just and expedient in light of equitable and market con-
-siderations. Such rates would cover total costs, and would be as fair as rates constructed on any other
pattern. Further, the relatively high charge for availability of the service (or for very early brackets of con-
sumption) would coincide with thp relatively high value to the oonsumerof early uses, and the sharp drop In
rates for all or most of the energy taken should greatly stimulate consumption." See Qovernment and
Economic Life, the Brookings Institution, Washington, 1940, vol. II, pp. 713-714.

g CONCENTRATION OF ECONOMIC POWER

directed their rate policies to the attainment of even more remote ob-
jectives, specifically, to have attempted through control of utility
prices to influence the rate of utihzation of general economic resources.
This possibility, of course, is of particular significance during such
periods of economic Repression as tliis country has known in the past
decade. It may be pointed out here, however, in anticipation of the
fuller report in succeeding pages, that, while utility commissions have
made some effort to revise the rates of electric utilities in keeping with
what they have felt to be the pressures of economic depression, they
have not dreamed of exercising their powers in the establishment of
rates designed to relate the incomes of customers, the incomes of pro-
ducers, or the capital demands of producers to a desired increase in the
use of the country's total economic resources. They haive not been
particularly conscious of the problem, and they have not been aware
of any power vested in them to proceed along these lines. Further,
they are not aware of the existence of any well developed principles or
any convincing set of standards that would make feasible any such
action on their part.

The following chapters undertake a brief, intensive survey of the
pricing policies of three of the country's leading State public utilities
commissions — Wisconsin, Illinois, and New York, in order — together
with the pricing policies of the Tennessee Valley Authority, to date
Uie Nation's leading experiment in the employment of public owner-
ship of electric utilities a^ a rival of or adjunct to private ownership
under regulation. A stiidy of such well-established public pricing
agencies should throw light upon the possibilities inherent in wider
extension of positive pubhc control over industries hitherto unregu-
lated. Two observations are in point in this connection: (1) Such
existing inadequacies of public utility regulation as may be disclosed
are by no means completely inherent in the regulatory task itself —
they grow largely out of features of our governmental institutions
which are quite capable of correction withiri the existing framework;
and, (2) lessons derived from the regulation of prices of local monopo-
lies, although significant for their broader implications, are not to be
apphed bodily without modification to the task of regulating pr'ces of
competitive goods in Nation-wide markets.

A final word seems called for in light of comments made by com-
mission representatives to whom an early draft of this manuscript
was submitted. Any inquiry into commission policies must rely to a
very considerable extent upon the commission's written record.
There are other sources of information, but they cannot be cited in
support of statements and their chief value must reside in the aid
which they lend to realistic interpretation. It is clear that commis-
sion opinions do not afford a record of all the considerations that have
crossed the minds of the commissioners^ during their deliberations.
For many reasons the commission may abbreviate its discussion or
guide it quite consciously away from points which, while both pertinent
and of great interest for certain purposes, are not essential to the de-
termination of immediate issues. The commission may hesitate to
use "fifty dollar words'^ when it can avoid controversy by offering an
explanation in simpler, more "orthodox" terms. Nonetheless, a
careful analysis of commission policy on the basis of the only com-
pletely usable record cannot properly fail to note the fact that the
record offers no evidence that certain principles or considerations were

CONCENTRATION OF ECONOMIC POWER Q

given weight in the determination of policy. The discussion that fol-
lows is concerned with an analysis of such facts relating to commission
policies as are known to the writer; conclusions and final judgments
on the facts are not the task of this paper. It is often true that the
opuiions of a commission, which of necessity cannot be complete in
all details, fail to disclose any interest in a certain doctrine. Allien
such a comment is made in this report, there is no intention to indicate
approval or disapproval, either of the lack of interest, or if the interest
is really present, of the lack of disclos re This report merely states
the situation as it is disclosed by the reiords and by officials of the
commission. 2

' All of the matters discussed briefly in this introduction are dealt with by the present writer at greater
length, in a more complete setting- See Government and Economic Life, the Brookiilgs Institution,
Washington, 1940. ch. XXI.

CHAPTER I
THE WISCONSIN PUBLIC SERVICE COMMISSION

The standards of pricmg employed by the Wisconsin Public Sennce
Commission in controlling and setting the rates charged by private
companies for electric power and other selected public utility services
have developed over a period of many years. Wisconsin has been a
pioneer and leader in the field of administrative commission regula-
tion of public utilities. Since 1930 it has consolidated its position in
this • field by statutory changes and administrative action. I'he
Wisconsin Public Service Commission at the present time stands
easily witliin the topmost group of State utility commissions, in terms
of continuous expert regulation. Here, if anywhere among the
agencies of public price control, will be found an effective combina-
tion of public purpose, insight and technical competence. The Wis-
consin commission is unique among its companion agencies in the
United States in either the fact or degree of (1) the consideration it
gives to general economic conditions in setting rates, (2) the positive
control it asserts over utility rate structures, (3) the examination it
makes of, and the revision it frequently introduces in, utility esti-
mates of operating expenses, (4) its supervision and the use which it
makes of utility accounting records, and (5) the continuing day-to-day
supervision which it asserts over the rates and returns of the utilities
within its juridsiction, and its employment of negotiation rather than
formal rate proceedings in the frequent adjustment of rates.

It should be noted at the outset that there is little that is unusual
in Wisconsin statutes governing utility regulation. The role of the
Wisconsin Legislature has been to provide statutes that facilitate
(but do not insure) effective regulation, and funds to permit an
effective program to be carried out. The positive direction of regu-
lation and the determination of regulatory policies within the general
framework of "reasonable rates" and "adequate service" has been in
the hands of the Public Service Commission and its relatively large
and competent staff. Electric utilities are retfuired by statute to
"furnish reasonably adequate services and facilities," at "reasonable
and just" charges,' and the conomission is "vested with power and
jurisdiction to supervise and regulate" every such utility.^ The
statutes present no standards of reasonableness or adequacy. All
utilities must file schedules of rates with the conunission, no changes
Jn schedules may be made except upon 10 days' notice to the com-
mission; and no increases in rates may be made without the com-
mission's written approval following investigation and hearing.'
Rate investigations may be made by the commission, either upon
complaint, or on the 'Commission's own motioni* Provision is made
for frJl notice and hearings prior to the issuance of a rate order;* but

' Wisconsin Statutes, 196.03.

» Ibid, 196.02,

2 Ibid, 196.19 and 196.20.

* Ibid, 196.26 and 196.28.

» Ibid, 196.20, 196.21, 196.26, and 196.29.

[2 CONCENTRATION OF ECONOMIC POWER

the commission may temporarily alter any existing rates at any time
and for such a period as the commission may prescribe, "when deemed
by it necessary to prevent injury to the business or interests of the
people or any public utility in case of any emergency to be judged of
by the commission." ® The commission has, in support of its rate-
making powers, very substantial powers over utility accounts,^ de-
preciation,* finance,* and intercorporate relations. ^^ The commission
IS compose^ of three commissioners. appointed by the Governor, and
a staff of approximately 230 members.

The following discussion of its activities in determining pricing
standards will proceed within three areas of price policy, each of
which, although inextricably interrelated with the othei-s, may
properly be isolated for purposes of analysis— the level of rates, their
pattern, and their relation to cyclical fluctuations in business activity,
that is, the "moving level" of rates.

THE LEVEL OF RATES

In all formal proceedings the Wisconsin commission employs the
orthodox appro6,6h of setting (or confirming) rates at levels which are
designed, when applied to the amount of consumption in past periods
at rates then prevailing, to produce an annual income sufficiently
high to cover estimated operating expenses (including annual depre-
ciation and taxes), and to afford a "fair return upon the fair value"
of the utility property "used and useful in the public service." The
commission is concerned with returns from year to year, and attempts
no program rff averaging returns over a longer period. Frequent
rate adjustments in light of actual operating experience constitutes
the commission's approacti to this problem." The commission is
eclectic and opportunistic in its choice of a base or "fair value" upon
which to calculate a "fair r6turn." "Fair value" is whatever seems
feasible to the commission in a particular proceeding.

The starting point of a commission inquiry into the reasonableness
of a utility's rates is the book value of the property — the cost of used
and useful t'xed capital less the depreciation reserve, plus allowances
for working capital and materials and supplies.. If a preliminary
analysis of a utility's annual report indicates a net operating income
above 6 percent on such bo6k value, aind no countervailing circum-
stances appear, negotiations are begun by the conamission looking
toward an uncontested reduction in rates calculated to eliminate
the excess above 6 percent.^^ If the negotiations fail and a formal

• Ibid, 196.70.

' Ibid, lS<3.06-.08.

! Ibid, 19S.09.

» Ibid, 184.ei-.U. ,^

i« Ibid, 196.52 and 1*8.525. . . ..u .v

" It L<? iKttrestinp to note that in the lirst -.ears following its inception, the commission pioneered with the
so-called "Wisconsin" or "early defSciv" p^thod of calciilatine poing value. The essential feature of the
method was that the amount by which a utility failed to re<ei\ e annual earnings covering all costs includ-
ing depreciation and a "fair return on fair value," during a reasonable development period, was added to
the ratp'base upon which returns wero calculated in succeeding years. Surplus earnings in any year were
permitted to offset deficits. Going value so calculated was considered by he commission in arriving at
fair value; it was never employed as an exjict measure. The method went out of use in Wisconsin during
the twenties. See Ben W. Lewis, "Qoing Value and Kate Valuation," 26 Michigan Law Review, 713

On the early theories and policies of the Wisconsin Comm'-'sion, see R. L. Hale, Valuation and Rate-
making, The Conflicting Theories of .the Wisconsin Railroat' ' * mmission, 1905-17 (New York, 1918).

' •iee Lake Superior District Power Co. case, 16 Wis. P. S. u ., 266 (1937). .

F-r a typical letter from the commission to a utility, instituting rate reduction negotiations on the basis
of an analysis of the utility's -annual report, see appendix I. Negotiated rate adjustments with or without
formal hearings and orders, account for the preponderant proportion of rate reductions, and most nego-
tiations result in uncontested reductions.

CONCENTRATION OF ECONOMIC POWER |3

proceeding ensues (or if such a proceeding develops from a consumer
complaint) it is fair to sa^ that the commission will prefer to use book
value or original cost as its measure of fair value if it has reason to
believe that the utility will be satisfied with the resulting order and
that no court test of the value finding will follow. ^^ If, from nego-
tiations, however, there appears a substantial likehhood that the
utihty will appeal to the judiciary from the commission's finding, and
that a "full-dress" caurt proceeding will ensue, the commission, in
deference to the rule of the Wisconsin courts, will lapse into a finding
of a ''fair value" which reflects consideration, in indeterminate propor-
tions, of original cost and reproduction cost at current prices. ^^ Wliat-
ever its finding in specific cases the Wisconsin commission has
evideaced no deep concern over theoretical doctrine in the matter of
th-?. ra^o hose. Its restrained tendency to employ book value or
original cost as a rate base probably expresses no feeling or economic
ideology otb-er than "fairness" and "workability"; its forced use of
reproduction cost and its reluctant acceptance of a hybrid fair value
probably reflects no desire other than to keep within a law which,
however much it may contribute to ineffective and clumsy rate mak-
ing, is deemed nonetheless to be controlling. The literature of rate
valuation contains many elaborate defenses of the reproduction cost
method, all of them revolving about the proposition that utdity prices
based on reproduction cost valuations will be in harmony with the
price structure of unregulated competitive industry generally, and will
conduce, thus, to sucli an allocation of capital and labor between
regulated utilities and other industries as will best meet consumer
demands.'^ There is much reason to believe, on the other hand, that
tliis proposition is quite incorrect, that is that utility prices based on,
reproduction cost are not the exact economic counterpart of market-
determined prices in the unregulated area; and that utihty prices
derived from an original cost rate base coupled with a variable rate of
return are as likely as those based on reproduction cost to be in
harmony with the market prices worked out in unregulated industry.^"
Again, from an administrative point of view, in terms of economy,
speed, and certainty, the original cost method of setting a rate value
or base is much to be preferred over the clumsier reproduction cost
method.

13 See 3 Wis. P. S. C. 109, 114 (1932); 3 Ibid.. 63, 75 (1932): 4 ibid., 160, 172 (1933); 15 ibid.. 300, 313 (1937);
and 15 ibid., 315, 317 (1937); as well as a whole series of cases in volumes 6,«7,«and 9 of Wis. P. S. C. (See
volume indexes, under "Valuation.") Book values were adjusted in 10 Wis. P. S. C. 373, 377 (1935); 10
ibid., 3 • : , 349 (1935); and 8 ibid., 358. 366-367 (1935).

No formal test of the difference between book value aud original cost to the first utility user of the property,
uor of the disoosition of, or allowance to be made for any excess of the former over the latter, has yet been
made. See Wisconsin Valley Power Co. case, 3 Wis. P. S. C. 160 (1932).

The commission has undertaken to develop a set of continuous property records, covering every utility
in the State, which will serve as a factual basis for the development of original cost (or reproduction cost,
or any combination of the two) figures in any case. The program, for electric properties, is now about 40
percent completed. The commission has been one of the leaders in the institution of original cost account-
ing. See 1932-34 Biennial Report of the Wisconsin Public Service Commission, pp. 18 ff .

n See Waukesha O. & E. Co. v. Railroad Comm. of Wisconsin, 191 Wis. 565 (1927), setting aside the order
ill In re Investigation ofOas Rates of Waukesha O. .. E. Co., 26 Wise. R. C. R. 791 (1922), on the authority of
McCardle v. Indianapolis Water Co., 272 U. S. 4J30 (1926), and reversing Waukesha O. & E. Co. v. Railroad
Comm. of Wisconsin, 181 Wis. 281 (1923).

For a typical "fair value" valuation see the Wisconsin Telephone Co. case, 12 Wis. P. S. C. 1, 81-139 (1936);
and on a much smaller scale, the Farmers New Era Telephone Co. case, 12 ibid., 277, 291-292 (1936). Note
that the elaborate long drawn out "fair value" ritual employed in the Wisconsin Telephone case resulted in
a rate base corresponding closely to straight book value.

" See F. Q. Dorety, "The Function of Reproduction Cost in Public Utility Valuation and Rate Mak-
ing/' 37 Harvard Law Review, 173 (1923); H. Q. Brown, "Railroad Valuation and Rate Regulation," 33
Journal of Political Economy, 505 (192.5), and "Rate Base for Railroad and Utility Regulation" 34 ibid., 479
(1926): and W. J. Graham, PuWic Utilitv Valuation (Chicago, 1934).

'« See M. G. de Chaz.eau, "The Nature of the 'Rate Base' in the Regulation of Public Utilities," 51 Quar-
terly Journal of Econopiics. 298 (1937), and Government and Economic Life, vol. 2, pp. 684 ff.

J 4 CONCENTRATION OF ECONOMIC POWER

A survey of Wisconsin commission opinions on rate valuation and
rate of return indicates that while the commission has no misgivings
about the use of original cost on the score of economics, its employ-
ment of original cost is grounded positively in considerations of
administrative. expediency rather than in elaborate economic analysis.
The commission is certaiiiy aware that both fairness to utility investors
and the need of evoking sufficient service dictate the fixing of rates
which will produce returns comparable to those which may be had in
.similar unregulated industries. However, nothing in its expressed
opinions suggests that the commission has ever felt that the reproduc-
tion cost-original, cost controversy has any significant bearing on the
problem. Nor has the commission ever an^iounced any exact measure
of- "sufficient service" or "enough investment." It may be assumed
that the coinmission is concerned with allowing rates liigh enough to
evoke a^ much utility investmient as it deems desirable from a com-
petitive capital market; and it is clear that, if legally possible, it would
profer to use a rat^ermaking standard and method tha.t would permit
rapid, noncontroversiai, and economical adjustment of utility prices to
uawly developed and changing conditions. There is no reason, how-
ever, to believe that the commission has more than a casual academic
interest in those refinem^ts of rate valuation theory which deal with
the synchronization of rates based on "fair return on fair value" with
the prices evolved in other markets." This is not to suggest that the
commission is at fault;, there is plenty of reason to believe that
economics is an^ uncertain guide^ at this point.

^ In ''emergency " or ''temporary" cases (of' which more will be said
k4^r) the •commissiori has employed both "value of ser^ace" and.
'/return on securities" as its criterion of a. fair level of rates.^^ In the
matter of deductions to reflect property depreciation, the Wisconsin
commission has gone further than any other commission in the country
iji the development and explicit statement o^ its position. '^ It has
long sought, both in rate cases and accouiitmg regulations, to har-
monize iinnuai depreciation allowances with depreciation deductions
from "cost new" in the determination of '-fair value"; and it has
consistently advocated a|id has employed the depreciation-reserve
balance as the measure of deductible accrued depreciation, wherever
annual depreciation rates and reserve accounting in the past have
been sufficiently sound to' permit such action.^**

Allowances in the rate base for "going value" have presented a
difficult problem to the commission, principally because of its desire
to avoid entanglement with the- courts. Left to its own policies,
however, the cormnission in recent years has regularly riiled that no
separate fighre representing going value should be named, and has,

" As %vill be developed later, the commission has been more active than most of its contemporaries in the
matter of moving the level of utility rates in accord with general price movements, at least during the cyclical
.downswing. But this does not bear on the question of the relationship between the level of utility rates and
the fevcl of general prices at any given stage of the business cycle.

»s See 2 Wise. P. S. C. 106, 108, 239 (1932); 4 ibid., 431, 433 (ie33)r 5 ibid., 1. 30 ft. (1933); and 3 ibsd., 366,
369(1933). ■ . ,

' ." See the report, Oeoreciation, A Revie^ of Legal and Accounting Problems, submitted by the Wisconsin
commissibn to the National Association of Railroad and Utilities Commissioners (New York, 1933).

2» See.3 Wise. P. S. C. 63, 77 (1932); 4 ibid., 16fr, 176, (1933); 4 ibid., 691/ 604 (1933); 7 ibid., 1, 3 (1934); 12
ibld.,-277, 285 (1935); and 15 ibW-.,'316, 318 (ly."??).

■ The reader will anderstand that in Valuation lor rate making the property is being valued in its "present
condition"; that rates have been calculated to cover annual depreeiatiftn as an operating expense, and thus
to reimburse the owners for capital used up in operation, and hence, that a figure representing the existing
depreciation (whether due to physical or fufictional causes) is properly to be deducted from, "cost new" to
f.rrlve at a rate base.

CONCENTRATION OF ECONOMIC POWER 15

thus, made a very real contribution toward the elimination of one of
the most persistent methods of rate base inflations.^'

The commission's policy with reference to allowable operating
expenses is well illustrated by its action in the Wisconsin Telephono
case in which it called into question items of maintenance, deprecia-
tion, reUef and pensions, costs of rate litigation, services of parent
company, and income tax, on the grounds that ''it is elementary that
the expenses of a public utility, from the standpoint of rate regulation,
xnust be reasonable." ^^ The commission did not spell out its standard
of operating efficiency in explicit terms, but the suggestion is conveyed,
nonetheless, that utilities are entitled to recover only such operating
expenses as would be incurred if vigorous competition were present.-'

The commission's opinion in the same case contains a full statement
of the position it has consistently maintained with reference to the
determination of "fair rate of return." The commission summarized
the apph cable principles as follows:

(1) A fair return is a flexible concept, not a static, unchanging rule.

(2) What .return is "fair" calls for the exercise of judgment in the light of the
particular circumstances of each ca.«e.

(3) Present-day conditions are controlling.

(t)" General conditions affecting all business should be given consideration in
the application of each of the ipeasures of "fairness."

(.5) To be fair, the '•eturn should equal the returns earned at the time of the rate
order by other busincbs enterprises with comparable risks, in the same part of the
country.

(6) The utility's needs for new capital should be considered, since the relirn
should be such as, under present-day conditions, will enable ifc to raise whatever
capital it requirep, .

(7) The return should be such as will maintain the credit of the utility, in the
light of presently existing business conditions and opportunities for capital in
other enterprises.^*

Consideration was given to the company's structure in the final
report in this case, as in an earlier report and in other cases,'*' but here
as elsewhere it is impossible finally to identify the effect of the con-
sideration. The commission has never defined the phrase "maintain
the credit of the utility" with exactness. The fullest discussion occurs
in the first report in the State-Wide Telephone case ?^ in 1932, but

« Sec 12 Wise. P. S. C. 277. 289 (1930); and 7 Ibid., 27, 48 (1934). And see B. W. Lewis, "Going Value and
Rate Valuation," 26 Michigan Law Review, 713 (1928).

« 12 Wise. P. S. 0. 1, 21-74 (1936), reppating 2 Wise. P. S. C. 106. .253 (1932).

" "During years of deoression, when competitive industries are bending every effort to reduce costs and
market services and commodities at prices commensurate with reduced purchasini? power, this company
takes the position that rates cannot be reduced. It depends on justifying its rates on the basis of company-
controlled expenditures, and relics on the fact that no other more cntorprisiag concern can take over its
marlvPt by finding a way to reduce posts and the charge-s for 'ervice. In fact, during ttie period of retrench-
ment in other industries, the company's unit cost of maintenance labor Increased by more than 25 percent."
(Ibid., p. 23.) The commis.sion was unwilling to measure normal maintenance requirements for the future
by reference to maintenance-labor expenses for the years Just past when an abnormal plant stafT of highly
paid, long-tiftie employees was retained after a substantial reduction in the total force. However, "It goes
without saying that we are not criticizing the company for the amount of wages paid to any employee nor
do wc desire to leave the impression that this amount is one penny more than it should be," (Ibid., p. 30.)
As a matter of fact, although the specific issue has not arisen for determination, there is every reason to
believe that the commission would willingly recognize high (or increased) wages which were likely to be
paid in fact in a high (or increased) operating expense allowance and, correspondingly, in high (or increased)
rates. The writer has reason to believe that in at least one rate negotiation Involving a major company, the
commission virtually required the payment of increased wages to certain underpaid employees.

" Ibid., pp. 140 ff. The commission gave detailed considerat'ou to elaborate and searching exhibits
relating to current trends in costs of capital, and found that S'/j percent was a fairreturn on the reproduction
cost rate base. _ ..„.-,„

» Ibid., pp. 145 ff.; 6 Wis. P. S. C, 315. 390 fl. (1934); and Re Barron County Telephone Co., 4 Wis. P. 3. C.
160, 186 fT. (1933). In all of the.se instances the commission was particularly concerned about the relationship
between capital structure, income tax, operating expenses and rate of return, rather than about the more
general bearing of capital structure on rate of return and credit stability. The matter of an ideal or standard
capital structure for a public utility, and any question of the effect on the allowable rate of return of any
deviation of the actual capital structure from the ideal, were not discussed In any written opinions, however
much the commission may have taken them into account, In fact.

»5 2 Wis. P. S. C. 106, 265.

IQ CONCENTRATION OF ECONOMIC POWER

whether "to mamtain credit" means the ability to sell securities at
par, or at all, or on particular relative yield expectancies, is not dis-
closed. Since the company's needs for capital were found to be neg-
Hgibie, while its earnings placed it in a position "far above that of
the other competitors for capital and credit," the commission felt no
need, apparently, to be precise in its analysis.

THE RATE STRUCTURE

The Wisconsin commission has been actively concerned with the
pattern of electric rates. In a series of recent decisions it has sought
the establishment of a uniform type of domestic rate form for the
entire State.^^ Both the form and the substantive pattern of electric
rates in Wisconsin are made to re.lect a combination of cost and
demand considerations. The^ commission has adopted the fixed
"customer charge" rate form for residential and small commercial
users, contending that customer charge. , at least, can be isolated and
should be covered by each user, and that a fixed charge followed by
low "follow-on" rates will conduce to a more extensive use of facilities.^*
Large power users, the cost of whose maximum demands for power
(which the utilities stand in readiness to serve) can be measured, and
required to pay for electricity under "demand-energy" schedules;
that is, a fixed "demand charge" according to the size of maximum
demand and a charge for energy depending on the amount taken.^^
The commission has reacted strongly against "load-count" and "room-
count" rates for domestic service, however, arguing that they are
inaccurate measures of cost, discrmiinatiiig in piactice, difficult to
administer, irritating to customers, and that they militote against full
use of facilities.^" Indeed, upon occasion, the commissi! n lias favored
the "minimmn bill" type of rate because of its promotio lal effect.

The commission's interest in promoting full use of elec trie facilities
has manifested itself both in its constant and continuing adjustment

" See 1934-36 Biennial Report of the Public Service Commission of Wisconsin, pp. 17-18.

" See 5 Wis. P. S. O. 1,10(1933); 8 ibid.. 108, 111 (1934); and 15 ibid.. 60n. 664 (1937). In the last of these
cases, the commission said, on pp. 664-665:

"The fixed-charge type of rate has been installed in over 90 percent of Wisconsin's cities and villages, and
has therefore become a largely standard type of rate for residential- and comr' rcial-lighting service in

"The commission recognizes the fact that in rendering electric set vice there are t ertain costs which va' -■ but
little among customers of a given class, and have little or no relatii -iship to the amount of enemy consumed.
When these costs incidental to the maintenance of the utility's i'.-. estment on the customer's premises are
segrega ed and paid for by the fixed charge, the energy consume l,ti'' cr.st of which varies with the cus-
tomer's use of electricity, can be quoted at a much lower rate -ler k'lowatt-b.our. Accordingly, this rale
makes it possible for the customer to make an increased use of hi;, electrical -I'aipment at a lower additional
cost.

"The standard fixed charge adopted inmost commission rate investigatio-sis 60 cents net for residential
service and 75 cents net for commercial service. This charge is designed to cc v.^r m.iintenano,e, taves, depre-
ciation, and return on the utility's investment on the customer's premises, ana cost.' of meter reading, test-
ing, billing, collecting, and customer acGounting."

» 10 Wis. P. S. C. 265, 273 (1935); and 10 ibid., 341, 3)8 (1935). In the former ca=e the c .mraission said, on
p. 273:

"It is generally accepted that utility rate schedules should apportion the total reasonabU cost of service
among the several classes of service and individual customers in ea-rh class as equitably as i: practicable, i'
order to avoid discrimination.

"Applying this general principle to the facts in this case, it is reasonable that power custonnrs whc plac^. t
substartial oomand on the utility system and require a large portion of the capacity of the plant and equip-
ment should hear their fair share of the fixed charges on the additional plant and equipment they require,
in addition to the cost of energy used.

"The proposed large-power rate, therefore, is a demand and energy rate under which the customer's bill is
based both r r the maximum demand he places on the svstem and the amount of energy he uses."

" See 16 Vh p. S. C. 1, 3 (1937); and 16 ibid., 266. 275 (1937). Rates of this type provide for a demand
charge base urion the number of rooms, or the number of electric outlets or appliances.

CONCENTRATION OF ECONOMIC POWER J7

of rate levels to the lowest point consistent with necessary revenues ^*
(discussed above), and in its orders requiring electric utilities to insti-
tute so-called "objective" rates, according to which a customer may
buy at a lower rate energy beyond the amount of his consumption in
a previous period. Such rates are desi,_:neil to make increased use
attractive to consumers and, at the same time, to protect the utilities
in their previous legitimate earnings. ^^ A major purpose of objective
rates is to break the log jam arising from customers' refusal to in-
crease their use unless rates are reduced, and u lilies' refusal to re-
duce rates unless use increases. At the same time, it must be noted
that in calculating rates the commission bases its estimates upon past
consumption at higher rates.^^ This practice is followed despite the
commission's awareness that during the whole period of the thirties
electric rate reductions have been followed so swiftly and completely
by increased consumption that revenues, although diminished at first,
have been recovered almost ovemight.^^ ' Unwillingness to allow for
"elasticity of demand" has been due to lack of factual data,. realiza-
tion that demand elasticity is only one of many "unpredictables," arid
the belief that the f^ourts would be reluctant to accept even the best
estimates which the commission's staff could furnish. The commis-
sion has chosen to meet the problem by the process of frequent rate
adjustments rather than by attempts at exact prediction of the
probable reaction of demand to price reductions.^*

The sub'=it-"Titive pattern of rates — the rates ■s\ hich one group,, for
example, ir ^idoritial users, is required to pay in relation to rates which
other gro" s, for example, commercial and industrial users, are
charged — is determined very largely bv the trial-and-error "judgment"
process. Out-of-pocket costs, and fixed costs to the extent that they
are ascertainable, are borne in mind. For instance, it is accepted that
commercial users in the main involve greater costs than residential
users because their demand is almost entirel}^ "on peak." ^^ On the

'1 The comnjission has estiiTiated that t !,>ctnc rate reductions fmm Ji;np S, '031, to Octobrr ?'. 1936. re-
sulted in reduction in electric util'ty annual revenues of $4,68(),.'>Si), r.^H.i!:;::;; 1,019.913 cr.?: .'acts. ;:ee
1934-36 Biennial Report, p. 35. The most recent estimate plwos thv amount of electric ica ..Moas from
April 1, 1931, to the end of 1939 at $7,718,162.

Reductions from July 1, 1936, to June 30, 1938, were estimated at $2,2S6,256, benefiting SVi.vHC. customers.
See 1936-38 Biennial Report, p. 17.

The amount of revenue reduction resulting from reduced rntd? is calculated by applying t'.c new reduced
rates to the amount of service taken at the old rates. Smce the new rates are liVoly to stimulate new con-
sumption, it does not follow that the utility's operating revenues will oftually f.-)!I in the ensuing period.

32 See 9 Wis. P. S. C. 25 (1935); 10 ibid., 36 (1935); and 10.34-36 Biennial Report, p. ;8:

"In 1935 the commission initiated as an experiment what has come to be known .is the 'objective rate plan.'
Under this plan a lower rate schedule was established toward which eligible customers might progress by
means of a 'cross-over' rate applied to increased kilowatt-hours used above the corresponding month of the
previous year. When the objective rate was reached, that rate schedule was applied. Under this plan some
irnmeciiatojate reductions were made for larger users of energy; additional monthly reductions, compared
with the standard rates, were made during operation of the plan, to those eligible customers whose use of
electricity increased; and a third rate reduction comes with application of the objective rate to all customers
who would benefit thereby. This third reduction is in process of negotiation in connection with considera-
tion of the future status of the experiment or a modification of it, although some utilities have already placed
the objective rates in effect. The aim of this plan was to quicken a general lowering of rate levels for resi-
dential and commercial users by affording an opportunity for more abundant use at lower rates.

"We believe that Wisconsin was the first State in which the commission required the experiment on prac-
tically a State-wide basis involving the several major as well as smaller utilities."

33 This is the commission's standard practice. But see 5 Wis. P. S. C. 1, 31^132 (1933).

3* See, e. g., 1934-36 Biennial Report, p. 19: "The latest available summary covering the first 9 months of
1936 for 10 Df the larger gas and electric utilities indicates that operatini; revenues and operating income
have increased 6.4 and 12.6 percent respectively ove.- the corresponding 9-month period of 1935. This
improvement has occurred despite rate reiiuctions."

" In the 1934-:3G bionnium, tiie rat( s, engineering and accounting dcriartments of the utihtics division
cooperated in 429 formal rate investigations, and it was estimated that /c the same period 819 utility rate
"rc-iuctious wv'rc negotiated informally. Ibid., p. 17.

3' This is an "accepted" conclusion in commission circles. See 5 Wis I . S. C. 1, 22 (1933).

18 CONCENTRATION OF ECONOMIC POWER

other hand, industrial users very frequently enjoy competitive sources
of supply (at least potentially) and hence the task of the commission
frequently is to force the utility to charge "enough" for industrial
power. The commission is realistic in its unwillingness either to de-
pend or to appear to depend upon detailed, arbitrary cost allocations
in spreading the burden of rates. Ascertainable, incremental costs of
each class of service are covered by the rates charged users within each
group, and other common costs are spread very largely on a "value of
service" basis. The effect on consumption is carefully watched in
each case; features of rate schedules which are "out of line" with the
"customary" pt^^.te'o are corrected and brought back "into balance"
at the earliest op >c unity. To lo slight extent the commission takes
into account the volume of protests against the previous schedule
("which group has felt itself the most offended against?") in deter-
mining which groups are to be granted the greatest benefit in pending
reductions. In the main, it may be said that the commission has ex-
plored the possibihties of cost bases for group rates as far as existing
information and Imowledge will permit, and from this point of depar-
ture has guided its inquiries and its final price decisions principally in
the direction of extended service and greatest use of facilities. It is
fair to say, although documentary proof is lacking, that the commis-
sion is consciously and actively directing its efforts to the continuous
readjustment of rate levels and schedules to achieve increased use
consistent with payment by each class of consumers of short-run
incremental cost and payrnent by all classes of total costs. The facts
that the commission's opinions arc not couched in these terms and
that tests of achievement are not available, do not militate against
the validity of this conclusion.

ADJUSTMENT TO CYCLICAL PRICE LEVEL

The commission's efforts to adapt utility rates to the cyclical fluc-
tuations of prices, employment, and earnings of business and industry
in general may be studied in greatest detail in connection with the
State-Wide Telephone case: A series of three temporary orders, fol-
lowed by a final order, five years after the opening of the case; all of
which were nullified by court decisions culminating in the order by
the Wisconsin Supreme Court in July 1939, invalidating the commis-
sion's rulings from start to finish.''^ In the hearings preceding, and
in the decision and opinion rendered in the first of the temporary
orders, the commission made its pioneering contribution. After find-
ing that the company's probable earnings following the reduction
would be more than sufl^icient to pay operating expenses, fixed charges,
preferred-stock dividends, and 6 percent common-stock dividends, the
commission ordered a temporary reduction in local telephone rates of
12^ percent, involving a decrease in revenues of $1,566,450, based on
1931 business. The reduction, in itself, was not peculiar, but the
action was substantially influenced by and to some extent was based
upon testimony relating to the prevailing' depression, submitted, at
the request of the commission, by several departments of .the State
government and by a group of nationally known economists. In this
respect the commission's procedure was novel in the extreme.

" 2 Wis. P. S.C. 106 (1932); 4 ibid., 201 ri933); 6 ibid.. 315 (1934); 12 ibid., 1 (1936); and Wisconsin Tele-
phone Co. V. P. S. C. o' Wisconsin (287 N. W. 122 (1939)). The decision and opinion of the court were devf
astating in their sweep, cutting down the commission's economic approach, its procedure, and most o
its important substantive rulings. An appeal from the State supreme court to the United States Supreme
Court was sought, and, on grounds unrelated to the substantive merits of the commission's order, denigdr-

iP'

CONCENTRATION OF ECONOMIC POWER 19

The evidence relating to prevailing economic conditions in Wisconsin
portrayed the effect of the current business depression upon labor,
agriculture, corporate business, financial institutions and utilities, and
personal incomes. It disclosed that the number of employees on
factory pay rolls had declined steadily from 1929 to March 1932 and
that in the latter month it was from one-fourth to one-third less than
in 1929. In March 1932, weekly pay rolls of reporting manufacturing
firms were 48.5 percent of the level of wage disbursements in 1925 to
1927 inclusive, and from March 1930 to March 1932, the decline of
pay rolls was 48 percent. The number of hours worked declined from
51.8 hours per week in September 1928- to 39.7 hours per week in
November 1931. Figures on outdoor poor relief showed local govern-
mental expenditures totaling $1,236,837 in 1928 and $8,010,215 in
1932. The commission concluded that wage earners in Wisconsin
had undergone a loss of employment and a loss of income greater in
amount and duration than m the major depression of 1920-21.

Gross farm income of the State was shown to have declined 44
percent in 2 years; the price index of 30 Wisconsin farm products
had declined 28 percent during the year ending February 1932 (54
percent below the 1929 level), reachmg the lowest point since 1910;
the average price of milk was the lowest since 1901; and, smce the
prices paid by farmers for commodities bought were still over 20
percent above pre-war levels, the Commission concluded that the
average farmer as a businessman was in the most serious plight of
this century.

In 1929 Wisconsin manufacturing corporations reported aggregate
taxable incomes less loss of $109,631,400; in 1931 the losses exceeded
the incomes by an estimated $29,018,100; and the situation was even
worse in the case of retail trade corporations. Disbursements of
salaries and wages had declined materially. While the annual number
of commercial failures had remained almost constant for the preceding
years, the total liabilities involved had risen over 60 percent. Bank
suspensions (together with the amount of deposits involved) had
increased many-fold, and data submitted by the Wisconsin Insurance
Department showed a sharp increase in policy loans. Evidence
indicated that the 1932 normal income tax assessment for Wisconsin
would be approximately 25 percent less than the assessment for 1931,
34 percent less than for 1930, and 33 percent less than for 1929.

On the other hand, statistics covering Wisconsin class A and B
utilities showed that the total operating revenue of electric, gas,
telephone, water, and electric railway and bus utilities reached its
highest 4-year point in 1930 and declined by less than 4 percent in
1931. Electric utilities showed a slight increase in operating income
in 1931 compared with 1930. While the dividend rates of these utili-
ties, including those which paid no dividend, declined in 1931 com-
pared with 1928, they were still able in 1931 to pay on the average
8 percent dividends, equivalent to more than 6 percent on average
common stock equity, and to add $1,500,000 to surplus. The com-
mission concluded that the effects . of ..the depression on the larger
Wisconsin utilities had been slight compared with the effects on all
other economic groups in the State.

Economists testifying on the general economic situation included
Dr. F. C. Mills (Columbia), Dr. E. R. A. Seligman (Columbia), Dr.
F. A. Fetter (Princeton), Dr. Jacob Viner, (Chicago), Dr. W. A. Paton
(Michigan), and Dr. J. C. Bonbright (Columbia). The testimony

20 CONCENTRATION OF ECONOMIC POWER

introduced by these witnesses relating to the course of prices and
economic activity indicated, of course, subnormal levels with respect
to both items. Industrial production was shown to have declined
sharply, and unemployment relief expenditures had increased in
startling measure. The "resistance to price adjustment" was showTi
to have been stouter than in earlier depressions, representing the exist-
ence of forces defo Ting price adjustment and widening price differ-
entials. A mass oi evidence bf-aring on the matter of price disparities
was introduced, designed to show that the price structure of 1929
which had been built up over a period of years had been torn open by
the price revolution since 1929.

The economists were in substantial agreement that the unevenness
of price adjustments was a major factor prolonging and intensifying
the depression.

The effects of relatively rapid and uneven price clianges upon the volume of
business come about through the effects of these changes upon the so-called profit
margins of producers and upon the expenditures of consumers. The present
situation was described as having such wide variations in prices that the margins
for profit are either nonexistent or so sins 11 that businessmen feel impelled to
curtail or cease their activities. With the lengthening of the depression, con-
sumers' spendable fimds have become so reduced by unemployment and fallen
incomes that there is a marked deficiency in the demand for goods and services
which might operate as a stimulus to a recovery in business.

The unusually wide discrepancy between the prices of different commodities
and services in the present depression was attributed largely to the fact that the
number of rigid prices was much larger in the present depression than in previous
depressions. It was stated that if the price of some commodity in common use
remains rigid when all other prices have been drastically cut and if the incomes
of consumers have likewise been severely curtailed, then a larger proportion of the
available spending power is used for those commodities whose prices have not
changed. This, at the same time, lessens the proportion of the spending power
available for those commodities and services which have been cut in price. This
situation causes cumulative damage in a time of depression for it accentuates the
effects of depression upon freely-priced commodities and services.'^s

Utility prices were shown to have been extremely rigid. Wisconsin
telephone rates, indeed, had increased steadily since 1917; any move-
ment in these rates since the beginning of the depression had taken
them to levels even above those of 1929. The commission examined
evidence bearing on the comparative earnings of utilities and un-
regulated industries during periods of prosperity and concluded that
serious doubt was thrown upon the assumption that utilities do not
enjoy large returns in prosperous times. The evidence was clear that
regulated utilities in Wisconsin received generous rates of return in
prosperity, comparing favorably with the returns received by success-
ful unregulated corporations, and that in times of depression, utilities
fared much better than other corporations.^^

The commission concluded that —

The existence of an economic crisis which has paralyzed business and im-
poverished individuals, is relevant in this proceeding in the following respects:
(1) It constitutes an added reason for putting into effect an interlocutory tem-
porary order without waiting upon the final results of the investigation; (2) it

38 2 p. S. C. W. 106, 227-228 (1932).

3» Answering the company's contention that "since utility companies were not permitted to share in the
feast, they should not now be compelled to share in the famine," the commission pointed to testimony
derived from Federal income tax returns indicating that rates of return on net worth for all corporations
were from 2.8 percent in 193n to 7.0 percent in 192G, whereas corresponding figures for transportation and
public utility companies wen; 4.5 percent (1030) and 7,3 percent (192C). In 1928 the average rate of return
on common stock equity of four large, prosperous Wisconsin uti'!*;^^ wi>.. '" « oercent, whereas successful
unregulated Wisconsin corporations earned 13.1 percent in 1928. The commission recognized the limita-
tions of these and other data— all pointing in the same direction— but accepted them as the best available,
and as casting "serious doubt" on the company's ?laim (,Ibid., pp. 232 ft.).

CONCENTRATION OF ECONOMIC POWER 21

constitutes autho.".ty for a summarj' procedure under the LaCicss case, sitpra;
(3) it affects and me-^afures the value of service rendered by the company, one of
the essential factors in determining the reasonablen. ss of rates; (4) it establishes
the great inciease in the purchasing power of the subscriber's dollar and of the
dollar which thr. ?ompany pays its parent corporation in dividends; (5) it affects
the reasonablenttis of the return to which the company is entitled.*"

It will be seen that in this most elaborate attom7)t by any regulatory
commission during depression years to adjust utility rates in response
to cyclical factors, no elaborate theory of rates in depression and
recovery was advanced, nor was there any effort at an exact syn-
chronization of utility prices with prices in general. Certainly no
attempt was made to manipulate utility rate.- so as to achieve any
consciously sought flow of purchasing power from hoarding into
spending hands and thus to contribute to L^conomic recovery and a
fuller use of resources generally throughout the economy.^'

The Wisconsin Commission permitted the existence of a general
depression to influence its rate policy only in the matters of (1) ex-
pediting procedure, (2) reducing rates to reflect the lowered "value of
service" (thus conducing to fuller use of existing facilities), and (3)-
adopting a lower rate of return in the calculation of fair earnings.
Its philosophy of utility rates and the business cycle was the simple
conviction that utility rates should move in the same direction as
prices in general during major downswings in cyclical activity. This
interpretation is reinforced by a survey of electric rate cases during
the entire period of the thirties; despite upward movements in business
and prices, there have been no electric rate increases (other than
"technical," for certain groups within a schedule) during the decade.
The commission's opinions contain frequent references to "value of
service" and "rate of return" as affected by depressed business
activity; but there was no discussion of factors affecting depression
and recovery, such as elasticity of demand, cash balances, short-term
loans, notes payable, and the like — the stuff of which cycle theory is
made. T^» commission's research staff, although unusually active
and prolific ,j issuing reports and charts, has done no work along this
line, and members of the rate department explicitly disavow, in
private convcrsatioTi, any attempt to fit utility rates to any pattern
of the business cj cly more elaborate or involved than that of the
State-wide Tclcphont' case.

"2 p. S. C. W. if).-, r.C: (1932).

" J.D. Sumner, "Publio X'tility Prices and the Business Cycle," 21 Review of Economic Statistics, 97 (1939).

Ij \ inw of the cold reecpfion given by the Wisconsin supreme court to notions about the business cycle
as simple as those advanced by the commission, it does not appear probable that a rate ruling based on a
nvjre elaborate set of idfas would be worth attempting. It does not require an active imagination to foresee
t lie effect upon the Wisconsin court of a rate order constructed out of such ingredients as Sumner suggests,
il, with reference to the commission's innocuous ideas in the State-wide Telephone case, it could say:

"Nor do we find that the statute confers upon the commission any power to relieve the economic con-
dition of consumers by talcing property away from the utility and a".'arding it to its patrons. What the
statute authorizes the commission to do after it has found that existing rates are unjust and unreasonable
is to establish a just and reasonable rate which has been defined over and over again. If the commission
were empowered to review the whole internal economy of the State, its postulates and arguments might
sustain the conclusion that it reached. Within the limitsof itsstatutory authority, however, it had no right
to cive dominant weight to economic theory in the face of the statutory command. Recent years seem to
have pretty thoroughly demonstrated that economic theory is vague, uncertain, and undependable and
that predictions based upon it are not reliable. It seems to be in constant need of repair and readjustment."

279348— 41— No. 32-

APPENDIX TO CHAPTER I

TYPICAL LETTER FROM THE WISCONSIN COMMISSION TO
AN ELECTRIC UTILITY, INSTITUTING RATE REDUCTION
NEGOTIATIONS

Dear Sir: A preliminary analysis of your 1938 report indicates that
your electric utility had a net operating income of $21,646 in 1938.
This was equivalent to a 13.19% return on the 1938 rate base of
$164,053 determined by deducting the depreciation reserve from the
cost of fixed capital and adding allowances for working capital and
materials and supplies. Your 1938 operating income was $11,803
in excess of a 6% retiirn. It appears desirable, therefore, for you to
consider a reduction in your rates at this time.

We understand that your utility is now carrying out an extensive
construction program. Your letter of March 27 regarding this con-
struction program indicates the contracts totaling $48,580 have
already been let for this program, that these and certain other im-
provements will probably be completed during 1939, and that the
cost of these improvements can be financed out of available utility
funds "without depending on more than a 6% return in 1939."
Our preliminary examination of your utility's financial report for
1938 verifies the fact that you will be able to finance this program
oiit of your present utility funds.

Your present construction program will greatly increase the utility's
total cost of fixed capital. For purposes of determining new rates,
therefore, we feel it will be reasonable to increase your rate base
approximately $50,000 to reflect the proposed improvements.

In 1938 we proposed that lower commercial lighting, and commercial
power rates be adopted to eliminate the excess return of $3,278
earned by the utility in 1937. That reduction was postponed at your
request in view of your contemplated construction progil^m.

Consideration of your excess return of $11,803 for 1938 indicates
that a reduction in your commercial lighting and commercial power
rates should be made at this time and should be supplemented by
reductions in your residential, water pumping and pumping sewage
rates. We are accordingly submitting for your consideration the
enclosed residential, commercial lighting, commercial power, water
pumping, and pumping sewage rates.

The proposed commercial lighting rates are identical to those sug-
gested.jn 1938. The proposed commercial power rates are similar to
those proposed in 1938 but go one step farther in simplifying the power
rote by providing identical blocks for regular and ofl-peak power
service. The proposed reduction in the second block of the residential
rate from 2.25(^ to 2.0^ per kilowatt-hour will bring that rate in balance
with the commercial and power rates and should stimulate consump-
tion by your residential customers. We estimate that the reduction
22

CONCENTRATION OF ECONOMIC POWER 23

to your customers resulting from adoption of these three proposed
schedules would be as follows :

Residential : SI, 170

Commercial 2, 859

Commercial power 1, 044

Total 5,073

In reviewing your rate files, we noted that your present water
pumping rate of 3j^ per kilowatt-hour, and your present sewage pump-
ing rate of 4^ per kilowatt-hour, have not been changed since July,
1928. These rates appear out of line with your rates for power service
to large commercial and industrial customers. It appears reasonable
to provide these services to the water utilitj' and the city on rates
identical to the commercial power rate. The estimated reduction
from billing these services on the cormnercial power rates would be :

Water pumping $1, 674

Pumping sewage 1 1, 935

Total ^ 3,609

It is estimated that the total reduction in the utility's revenues due
to adoption of the proposed rate changes would be $8,682.

We would appreciate receiving your conmients regarding the pro-
posed rate reductions.

Very truly yours,

CHARTER II
THE ILLINOIS COMMERCE COMMISSION

The Illinois Commerce Commission operates under a modern
regulatory statute, thoroughly renovated in 1933 and revised again
in 1935. The commission has authority, with reference to the usual
range of public utilities, to proceed in rate matters either on complaint
or on its own motion,^ to fix temporary rates pending a final determin-
ation;^ and, to facilitate and make effective its control over rates, it
has extensive powers over accounts and depreciation ,'• and securities,
financial practices, and intercorporate relations.* As bearing par-
ticularly upon the subject of this report it may be noted that the
commission's organization includes separate departments of investi-
gation, research, rates and tariffs, and engineering. Its annual
expenditures are in the neighborhood of $500,000.^

Upon its reorganization in 1933, the commission undertook to
discharge its function as "an aggressive, investigating, fact-j&nding
body" ;^ and there can be no doubt that it has attained a place well up
on the list of effective regulatory agencies.

The character of the commission's activity is suggested by its actions
taken on its own motion, by the interest it has displayed in rate
structures and patterns, by the support which it has given to the cause
of rural electrification, by its resort to frequent and rapid negotiation
instead of extended formal proceedings, and, finally, by the very
considerable reductions in electric rates which it has been able to
report. Each of these matters will be considered in its appropriate
place in the sections that follow.

THE LEVEL OF RATES

In its official pronouncements, the Illinois commission is an un-
regenerate "fair value" commission; i. e., it pm-ports to relate the level
of utility rates to a fair return on a value base determined by giving
"due consideration and proper weight" to all relevant elements and
factors. Probably the clearest statement of its formal position is to
be found in the final report in a proceeding brought by the commission
on its own motion against the Public Service Company of Northern
Illinois.^ After noting that it was tempted to give dominant weight
to original cost,^ despite the company's contention that consideration
should be given only to reproduction cost, the commission concluded:

As between the figures submitted by witnesses for the company, approximating
$150,000,000, and exhibits showing original cost and reproduction cost obtained

I niinois Public Utilities Act, par. 41, 84.

> Ibid., par. 36.

» Ibid., Article II.

* Ibid., Article III.

» 18 Annual Report, p. 81.

« 17 Annual Report, p. 1.

' Docket No. 2235.3, decided May 2, 1934.

'"* • * the original cost hasbeen established in a formal rate case at a comparatively recent date (1923)

(2) the books and records of the company since that date have been under the supervision of this commission,

(3) the greatest growth and development of the property has taken place since tnat date, and (4) a high level
of prices for materials and labor has obtained over the greater part of the period since that date, and par-
ticularly over that part of the period during which the bulk of the company's property was constructed."
(Ibid., pp. 59-60).

26 CONCENTRATION OF ECONOMIC POWER

bv the use of national indexes, submitted by conamission witnesses, approximating
$120,000,000 to $122,000,000, respectively, the commission is satisfied that the
figures submitted by its witnesses more nearly approximate the fair value of the
company's property than do the figures submitted by witnesses for the company.
In any event the commission is convinced that the fair value of the company's
property used and useful in its electric utility operations, including the leased
property in Chicago, and including working capital, materials and supplies and all
intangible elements of value such as going concern value, is not in excess of
$134,500,000, which sum is adopted as the rate base in this order.^

In most of its proceedings the commission has not found it neces-
sary to commit itself definitely on the- composition of "fair value,"
since it has been able to negotiate rate reductions without formal
action ; ^° and it is to be noted that even in the Public Service Company
case the value finding was couched in the ambiguous phrase "not in
excess of * * *." Where, as in the Public Service Company case,
the commission has proffered a full discussion, it is apparent that
practically all of the constituent items or considerations which the
commission finally merges into a final single-sum value figure by the
exercise of reasonable judgment are, themselves, not measured by the
commission in identifiable terms. Thus, reproduction cost is pre-
sented both as determined by an engineering appraisal made under
certain assumptions as to conditions and prices, and as estimated by
the application of price indexes to earlier valuations; accrued depre-
ciation appears to be judged by a consideration of the observed con-
dition of the plant, life tables, the depreciation reserve, and the claimed
allowance for annual depreciation; and going value is declared to be
an element of value to which the commission must accord due weight,
and yet, with reference to which the commission regularly rejects
every proffered proof of exact measurement — and, just as regularly
leaves enough margin in its over-ail finding to forestall any claim,
■upon review, that going value has not been considered."

Indeed, it is difficult to escape the impression that the commission's
valuation activities are designed to serve only as a general guide to
its rate level orders, and that such formal and detailed reports as it
offers are designed very largely to indicate the conformity of the com-
mission's processes to the standards laid down by the courts. It is
certainly true that the commission embraces no doctrine of valuation
which seeks the synchronization of regulated with competitive prices
and the exactly correct allocation of economic resources into and
within the utility field through the employment of a value base for
utility prices appropriate thereto. With reference to valuation and

» Ibid., p. 64. And note thu following calculations from In re Peoples Oas Light & Coke Co. Docket No.
24792, decided May 21, 1937, and now in litigation:

Reproduction cost new of property excruding l^nd, including overheads, as of Jan. 1,

1936. -.- -,— - $127,869,677

Add 8 percent to reflect price levels of Mar. 16, 1937 -. - 138,099,251

Original cost of property, excluding land. 109,750,000

Fair value of land - 4,732,822

Commission finding of property value before depfeciation, nflt more than 135, 000, 000

Property in 78 percent condition j 105,300,000

Working capital, materials and supplies 7,600,000

Fair value for rate making.. , 120,000,000

'1 In the CommonweaUh Edison case (cited and discussed below), after an exhausting array of witnesses
and exhibits, the commission negotiated a settlement without benefit of exact findings on "fair value."

" The arguments of the commission rejecting specific claims made for going value in the Public Service
Company case are amon^ the most effective that nave come to the writer's attention.

CONCENTRATION OF ECONOMIC POWER 27

rate of return/^ the commission's opinions evince no interest in the
mechanics, merits or import of controversies on matters of rate
principle which have so greatly occupied writers on this subject in
recent years. Its inclination toward original cost seems to be grounded
as much on its belief that an original cost rate base is "fair" in light
of recent trends of costs, prices, and earnings generally, as on con-
sideration of speed and economy. ^^ The commission is fully aware
that prospective earnings must be such that "enough" capital will be
drawn into the utility field, and that rates must be established accord-
ingly. But its measure of "enough," like its measures of value, and
of each of the items entering into value, is a product solely of "judg-
ment" in each proceeding rather than application of announced
definite standards.

In setting rates the commission has followed the orthodox pro-
cedure of adjusting various rates within the total schedules so that if
future consumption at the new prices is equal to consumption at the
old prices the utility will receive the requisite total income as deter-
mined by the operating expense-fair return on fair value formula.
No explicit allowance is made in sate calculations for "elasticity of
demand," although the commission is well aware of the phenomenon
and, indeed, has hinted at it as an added factor of safety in certain
determinations.'" In this connection the commission has had doubts
as to the willingness of courts to permit any departure from "present
facts" in rate calculations.

Despite its apparent lack of concern for considerations which it
probably believes to be too remote to be either practical or permissible
under existing legal doctrine, the commission has certainly conducted
an active campaign on its own initiative in recent years for electric
power rate reductions. In April 1933 '^ the commission cited the 27
major electric companies of the State to show cause why their rates

u The commission's discussion of rate of return in the Public Service Company and Peoples Gas Light &
Coke Company cases (cited above), on pages 80-87 and 120-129, respectively, was extremely thorough and
pointed; otherwise its formal attention to th'S item has been slight. In these two cases its allowances ("not
more than 6.3 percent " in the first, and 5.95 percent in the latter) were reached after consideration of cost of
capital, past earninRS, degree of market development, present money market conditions, company's risk
position, and company's capital structure and financial history. Just how the, figures expressirjg these
considerations were developed into precise rate of return findings is, of course, not clear. It is significant,
perhaps, that the finding in the Peoples Gas case was that existing rates which produced a return of 5.95
percent were fair, and, hence, that the company's proposed schedule of increases should be rejected.

That the commission is alert in the control both of the character and amount of operating expenses to be
allowed in calculating rates is evidenced by its action in rejecting company claims of $100,217 in the Pvhlic
Service Company case and $1,784,785 in the Peoples Gas case. The claims and rejections, for the most part,
were not related in any way to standards of operating etficiency.

i» This is suggested by the fact that in formal cases full attention is still given to elaborate, expensive,
and time consuming presentations of evidence on reproduction cost. It is true that the commission feels
required by law to give full consideration to reproduction cost, but it is also true that its critical comments
are directed primarily to the substantive merits of the method.

It is probably correct to say that the commission's staff is more sympathetic to an original cost than a
reproduction cost value base, principally on grounds of expediency. There is no evidence that the staff,
any more than the commission itself, has pressed its formal analysis of valuation beyond the point of recog-
nizing that rate value, rate of return, and resulting rates for service must be "fair" in relation to earning
pos.sibilities in the competitive field in order to attract "enough" capital into the utilities industries.

'< Thus: "Furthermore, the witness failed to recognize that • • • lowered rates designed to produce a
return of 6.3 percent under present conditions will show a greater return under the increased use of the
service." Public Service Company case, cited above, p. 83.

The commission's advocacy of objective rate plans, discussed below, is further evidence of its awareness
of the very great likelihood that increased demand will flow from lowered rates. The commissioii has com-
mented frequently, too, upon the increased consumption which has accompanied (if, indeed, it has not
resulted from) rate reductions and vigorous appUance selling campaigns during the thirties. See 19 Annual
Report, p. 5; and 20 Annual Report, pp. 5-6.

" 17 AnnuarReport, p. 14.

28 CONCENTRATION OF ECONOMIC POWER

should not be reduced. Setting about its task with vigor, the com-
mission added to its o^\^l staff and engaged a force of consulting
experts. In the majority of cases "the commission's complete prepa-
ration convinced the companies that relief was due with the result
that rate reductions were agreed to and promptly placed in effect," ^^
but formal cases were instituted against throe companies serving the
area in and around Chicago. ^^ The case against the Public Service
Company of Northern Illinois, discussed above, resulted in an order
which reduced residential electric rates by approximately 1 1 percent,
and total rates in the annual amount, on the basis of previous con-
sumption, of $1,300,000; ^® the case against the Western United Gas &
Electric Co. eventuated, after the company's testimony had been com-
pleted, in a negotiated order reducing residential rates by 20 percent,
with a total annual reduction amounting to $325,000;'^ and the
Commonwealth Edison Company case, after hearings which lasted
almost without interruption from October 11, 1934, to July 2, 1936,
and which produced some 20,742 pages of testimony together with
264 exhibits, concluded with a fair value in terms of "not in excess

of ", and an order which the company did not contest reducing

total rates in the annual amount of $3,000,000, of which $2,500,000
was ordered for residential customers.^"

This initial action has been • followed by proceedings and nego-
tiations instituted on the motion of the commission in every subse-
quent year,2^ and in its annual report for 1937-38" the commission
recorded a total estimated decrease in operating revenues resulting
from ordered and voluntary rate reductions (calculated in each case
on the basis of consumption during the 12 months immediately
preceding the date of change) in the amount of $13,282,087 for the
period January 1, 1933, to June 30, 1938. In the same report, ^^ the
commission noted that the average annual consumption per residential
customer had increased from 626 kilowatt-hours in 1932 to 777
kilowatt-hours in 1937.

It should be noted that the commission's internal procedure in the
matter of instituting rate reductions on its own motion is somewhat
less routine in character than that of the Wisconsin commission. The
Illinois commission's rate reduction program has been vigorous and
extensive, but it is not completely systematized. The commission
does not attempt regular complete audits of annual reports submitted
by utilities. Such reports are inspected for errors, and much informa-
tion is discovered by the Department of Investigation which may
serve as a starting point for negotiations or citation in particular
instances, but there is no routine report from the auditing to the
rates division along the line developed in Wisconsin. In this connec-
tion it is suggested by the commission's staff that the "book value"
figures which serve as a basis for the Wisconsin procedure are, in

"' "It simild be noted that the commission has seemed rate reductions to electric consumers in practically
every city in the State except Chicago." Ibid., p. 16. As noted below, rate reductions for Chicago were
secured.

i« Reductions in the electric rates of this company since 1934 amount to $2,702,000.

i» Ibid., p. 16.

2«Ihid.; iSIbid., p. 100;19ibid.. p. 8. .. ^ ^ ^, „, >, , j ,

2' Discussion of the commission's rate reduction activities undertaken on its own motion will be found in
17 Annual Report, p. 14; 19 ibid., pp. 6, 10; 20 ibid., pp. 9, 12, 13; and 21 ibid., p. 8. Data on the amount of
reductions both in total amounts and by classes of service, together, in some instances, with a classification
of the reductions as "ordered" or "voluntary," will be found in appendices at the close of the Commission s
Annual Reports since 1933.

« No. 21, p. 144.

" Ibid., p. 8.

CONCENTRATION OF ECONOMIC POWER 29

Illinois, still too incomplete and "too recently reliable" to be so em-
ployed.^^ Another consequence of the fact that usable book value
figures are not available is that rate reduction negotiations must pro-
ceed in the dark (in the dusk, at best) and that the public is required
to place a very great degree of confidence in the "judgment" of the
commission. Commission action on its own initiative is eminently
desirable, and, in the present state of formal rate case procedure, it
is equally desirable that negotiations should be substituted for formal
citations, hearings, and findings. But the effectiveness of such action
would be greatly enhanced if the negotiations were fortified with
dependable data collected and used as a matter of routine. ^^

THE RATE STRUCTURE

Even a casual acquaintance with the Illinois commission's annual
reports for the past few years will convince the reader of the com-
mission's active interest in the problem of rate strjictures. ■ Again
differing from the Wisconsin conmiission, the Illinois commission has
promulgated no State-wide order relative to rate patterns; nor has it
adopted the service-charge form which has been introduced generally
in Wisconsin. A great deal of the commission's work in this field
has been done informally, but in all recent formal cases as well as in
connection with a large number of negotiated rate reductions, and
also in several property merger proceedings, the commission has seized
the opportunity to force a revision of rate patterns. ^ As a result,
electric rate schedules throughout the State are beginning to assume
a common, simpler appearance.

The commission is on record in favor of "uniformity and simplicity
of rate structures," as reflected in the "simple block form of rate for
residential consumption;" ^^ and it has approved (at least to the extent
of permitting, if not encouraging) the so-called "objective rate" plan
as a device to effect an orderly transition to simple rate forms ^^ and
as an answer to the utilities' contention that "prices should and would
come down only when and after the use of electricity increased,^' and
to the contention of customers and commissions that "the increased
use should and will come after the prices are reduced." ^^ Room-
count rates have been under special attack by the commission, and,
as suggested above, they have been eliminated or modified in favor

« It should be noted that the building up of "continuous inventory" figures which has been in process
in Wisconsin for some time has not been undertaken in Illinois.

" In dealing with the commission's rate level and rat« structure activities, attention should be called
to the great support which the commission has given to the program of rural electrification in Illinois.
Since the total program goes far beyond rate policies, and since many agencies other than the commission
are involved, it will suffice for the purposes of this report to refer the interested reader to 18 Annual Report,
p. 24; 19 ibid., p. 24; 20 ibid., p. 64; and 21 ibid., p. 6.

" 18 Annual Report, pp. 13-14.

To refresh the reader's memory, the following typical block rate form, taken from the commission's
order in Central Illinois Electric and Oas Co. fNo. 26006), 20 Annual Report, p. 10, is given:

First 8 kilowatt-hours per month for 50.0 cents.

Next 18 kilowatt-hours per month at 5.5 cents per Mlowatt-hour.

Next 54 kilowatt-hours per month at 3.0 cents per kilowatt-hour.

Next 120 kilowatt-hours per month at 2.0 cents per kilowatt-hour.

Over 200 kilowatt-hours per month at L5 cents per kilowatt-hour.

The commission has felt that the .service-charge is politically inexpedient in Illinois, and that misunder-
standing will be avoided and the Interests of equity in tale making satisfactorily preserved by the employ-
ment of an initial flat charge as in the above schedule. ■•

" 18 Annual Report, p. 14.

"Under the objective rate plan residential castomers are simultaneously offered two rate schedules, one
known as the immediate rate and one as the objective rate. The first of these rates involves a reduction in
charges, and the .second or objective rate offers additional reductions to those customers who increase their
use by stated amounts over their u.se in a base period, which is usually the same month of the preceding
year, or the average of the 12 months preceding the^eflective date of the plan. Such base uses are computed
for each customer." Ibid.

"Ibid., p. 17.

30 CONCENTRATION OF ECONOMIC POWER

of block rates with a minimum charge. '^^ Objective rates were intro-
duced in the cases of the Illinois Northern Utilities Company '" and the
Central Illinois Light Company '^ in 1935; and in succeeding years the
commission was able to announce extremely satisfactory results in
these, as well as in other instances.^^

In applications of the objective rate plan it was frequently provided
that, after a stated period of a few years, the named objective rate
would go into effect for all customers irrespective of their individual
increases in the use of energy. In 1937 and 1938 the immediate rates
were cancelled and the objective rates were put into effect for all
customers of certain divisions of the two companies referred to just
above. In all instances the Commission explicitly retains a continuing
jurisdiction over the objective rate plan, with power to modify its
terms in the light of experience.

There is little to be said relative to the handling by the Illinois com-
mission of the extremely important problem of the substantive pattern
of rates, i. e., the content of the rate structure — how the burden of
total charges is to be distributed among all the various classes of cus-
tomers. The commission's reports throw a minimum of light on the
matter, and observations by members of the staff go little beyond the
proposition that the commission seeks to maintain a "proper balance"
as between classes of users. The author has reached the conviction —
although it is impossible to support it by formal references and cita-
tions— that (1) the commission relies very considerably upon the judg-
ment of the utility, and exerts its own influence largely around the
conference table rather than in formal orders; (2) an attempt is made
to ascertain the specific costs for which each class of users is directly
responsible and to cover these, at least, in setting the rates for each
class; (3) the commission is largely content to allow rates for industrial
customers to seek their own level, on the assumption that competition
is sufficiently active in this area, and (4) the commission is inclined to
favor domestic over commercial customers on the theory that the latter
are "on-peak" users, and on the ground that the former are politically
more influential. Within the range of domestic consumption, it would
seem that the commission's schedule of minimum bills with gradually
falling rates for additional use are likely to induce a somewhat smaller
total demand for service than would probably be stimulated by a rate
form consisting of a service or demand charge followed by a sharply
breaking charge for energy.

It is clear that the commission, both In its rate level and rate struc-
ture activities, is conscious of the desirability of increased utilization
of electric plant and facilities, and that its efforts conduce generally
to that end. But it is also true that the commission has not felt the
need of articulating its general rate making philosophy beyond the
broad propositions that lower levels of rates will stimulate consump-
tion, th,at ihe service as a whole must be paid for, and that the balance
of rates between classes must be "fair" in the mind of the commission,
and so adjusted as to result in a minimum of public discontent. Any
fuller implications of these propositions seem not t© have been pursued.

" Spe partinularly 19 ibid., pp. 7, 9; 20 ibid., pp. 12, 14, 15; and 21 ibid., p. 8.
■ 30 No. 22344.
'■ Mo. 223.S5.
" See 19 Annual Rcprrt, p. U.C..: and 21 ibid., p. 9 ff.

CONCENTRATION OF ECONOMIC POWER 31

ADJUSTMENT TO CYCLICAL PRICE LEVEL

The Illinois commission's efforts to adapt electric utility rates to
cyclical fluctuations have been confined to the general movement
toward rate reductions in the period 1933-38 detailed above. The
commission has permitted companies to introduce "economic" testi-
mony of the sort offe -ed by the Wisconsin commission and its corps
of experts in the Wisconsin Telephone case, but it has introduced little
on its own responsibility. It has voiced no opinion on rate changes as
affected by the business cycle, other than that rates of return and
earnings may properly be somewhat lower during periods of depres-
sion than in periods of prosperity, in the interest of "fairness and
equity." ^^ The commission has not spelled out any causal relation-
ship between utility rates and recovery; and neither the commission
nor its staff have evidenced active interest in proposals which look to
the use of utility rates as a positive instrument to promote greater
employment of resources in the whole economic system, through the
intermediate effect of these rates upon spending, saving, and investing.
The feeling is undoubtedly present that in the existing state of the
law and practice of utility regulation, any commission action based
on speculation in this field would be not only useless but harmful.

33 The commission's complete position on the relation of utility rates to industrial depression would seem
to be expressed in the following from its discussion of rate of return in the Public Service Company case (cited
above), pp. 83-85. It may be noted that although this case was undertaken under the Commission's power
to set temporary rates, the proceeding was in no substantial respect different from an Ordinary case.

"The company claims a rate base in this case as high as, or higher than, at any other period in its history
hut apparently fails to recognize that a fair rate of return on such a rate base today represents a return of
much greater purchasing power than would the same return in periods of high prices. If the same rate of
return were allowed during periods of economic distress and low prices as during periods of prosperity and
high prices, and with relatively little decline in the price level of the rate base, then the stockholders would
actually profit by the world-wide depression. Such a policy would be unfair to the rate payers who have
sutlered drastic reductions in their incomes, but for the stockholders it would mean that their real return in
bad times would be greater than the return in good times. • • • We believe • • • that public utili-
ties, subject to regulation of maximum charges, should not be subjected to the shocks of an economic depres-
sion to the same degree as unregulated corporations but we also believe that public utilities are not to be
completely insulated from such shocks by permitting a rate of return in periods of depression equal to that
in periods of prosperity. • • • We believe that fairness and equity require this company to make reduc-
tions to its rate payers and accept a rate of return which is lower than that enjoyed by it during prosperous
times, provided the rate is fair and reasonable during periods of economic distress."

The commission hinted at the possibility of adjusting rates so as to produce a fair average return over a
period of years rather than solely with reference to successive annual returns, but the idea was not developed
either then or later. (See p. 84.)

CHAPTER III

THE NEW YORK PUBLIC SERVICE COMMISSION

New York, like Wisconsin and Illinois, has subjected her statutes
governing the regulation of public utilities to a thorough revision
during the present decade. As a result, the State has had m operation
for the past 6 years, at least, one of the country's more effective
utilities laws.^ The New York Public Service Commission, con-
stituted by 5 members and a regular staff of some 350 employees
and occasionally augmented by as many as 200 additional employees
engaged for special work,^ possesses full power over rates and service,
and over complementary phases of utility operation — securities, ac-
counts, intercorporate relations, etc. — which bear on rates and serv-
ice.^ The policies of the New York commission for the past 10 years
have been those of its chairman, Milo R. Maltbie, who has come
through long experience to be the leading authoritative exponent of
the negotiation method in rate making, and the severest critic of the
employment of "scientific formulas" in the setting of rates and of
resort to entangling and costly litigation. In the thirties the com-
mission was vigorous and productive in its campaign for utility rate
reductions. During the years 1931-38 total savings to consumers
from rate reductions secured by the commission amounted to nearly
$50,000,000.^ The commission has also worked energetically and

' The major revision which took place in 1934 gave Ihe Commission authority to assess the cost of investi-
gations against affected companies; empowered the Commission to set temporary rates upon the basis of
5 percent upon original cost of physical property less depreciation, subject to later adjustment, and to re-
quire utilities to maintain contmuing property inventories and currently available records of original cost;
and gave the Commission far-reaching control over intercorporate structures, relations, and practices.
See 1934 Annual Report, New York Public Service Commission, pp. 5 B.

2 For details see particularly 1937 Annual Report, pp. 155-156. Annual disbursements since 1929 have
ranged from $890,471 to $1,147,384 (1936-37). See 1938 Annual Report, pp. 154 flf.

' See Consolidated Laws, C. 48. Article 4. The only important recommendation for additional legisla-
tion which the commission has made in recent years consists of a request for statutory authority to "re-
quire'companies to set up on their books the amount of depreciation which the commission finds in a rate
case and to continue the account so that there will be available at any time a statement on their books
which can be used promptly for determining rates." 1938 Annual Report, pp. 14-16.

* The following table from 1938 Annual Report, p. 20, covers the record of rate reductions for all ufUities
under the commission's jurisdiction, 1931-38:

Year

Negotia-
tions-
no formal
case

Negotia-
tions in
formal
cases

Ordered in
a formal
rate case

Voluntary

To reli-
gious insti-
tutions to

comply
with statute

Total

1931

$382,000
1, 371, 000
1,571,000
849,000
26,000
165,000
601,000
368,000

$9, 516, 000

346, 000

1,917,000

860,000

10, 723. 000

173,000

7,308,000

1,178,000

1,820,000
2, 177, 000
inc. 703, 000
6, 707, 000
1,310,000
937,000

$118, 000

461,000

610,000

614,000

4,414,000

1,023,000

1,647,000

850,000

$10,055,000
2 215 000

1932

1933. ..

5,918 000

1934.

$266,000

4, 766, 000

1935

1936

7,' 068; 000
10,866,000
3 333 000

1937.

1938

Total -

5, 333, 000

32, 021, 000

11,324,000

9, 737, 000

266,000

58, 681, 000

The commission publishes no separate compilation of electric rate reductions, although in each of its an-
nual reports an analysis of rate reductions during the preceding year lists each community and company
affected, together with an indication of the type and class of service involved and the amount of the reduc-
tion. With reference to the total of $58,681,000 shown in the above table, the commission noted that the

34 CONCENTRATION OF ECONOMIC POWER

effectively in this period for the attainment of uniformity and sim-
pKcity in rate structures, and it has had a hand in introducing, de-
veloping, and testing most of the newer devices designed to facilitate
the making of rates. Like the Wisconsin commission, although pos-
sibly slightly less "routine" in its method, the New York commission
through its research and valuation department conducts a check of
current operating reports, and undertakes at least preliminary in-
quiries (which may ripen into negotiations "or even formal proceed-
ings) upon finding returns in excess of 6 percent upon original cost
less straight-line accrued depreciation. In light of the range of the
commission's authority and the extent of its resources, together with
the direction of its attitude, a study of its processes and policies dur-
ing this period reveals something of the potentialities of administra-
tive rate control over other industrial areas.

THE LEVEL OF RATES

The New York commission's approach to the problem of the level
of rates is essentially orthodox, although the commission is much
more thorough and scrupulous in its treatment and analysis of evidence
than are many of its contemporaries in other States. The commission
determines, with great care, the amount of income which rates must
produce in order to cover operating expenses, depreciation, and taxes,
together with a fair return on "fair value," "rate base," or "base
cost," and then sets rates at a level designed, on the basis of past
consumption, to bring such a return. Although the commission is
more than usually aware of the expansion of consumption as a result
of rate reductions, it makes no formal use of this in setting rates.
.In this respect it is willing at most to take into account some loose
■ forecast of general business prospects. One may gather that the
reluctance to bring this demand elasticity more directly into considera-
tion grows out of the commission's belief that, after all, the rate of
return which it allows is not high, and that it may be well to permit
rates to be set which may produce more than the required return, as a
cushion.^

amount is based "on computations which reflect the amount of business done prior to the date that each
reduction was made, in some cases some time prior thereto. It is clear that, using the business done during
1938 and comparing the amount that would be charged for such business at rates in effect Dec. 31, 1938, as
compared with those in effect Jan. 1, 1931, there would be shown savings to consumers of approximately
$65,000,000 per year. The cumulative effect of the savings to customers over the 8-year period 1932 to 1939,
will be approximately $260,000,000 disregarding the increased consumption due to reduced rates and the sav-
ings thereon." Ibid., 19. Details of rate reductions may be found in 1931 Annual Report, p. 9; 1932 ibid.,
p. 18; 1933 ibid., pp. 18, 20; 1934 ibid., pp. 15,. 16, 17; 1935 ibid., pp. 15, 18; 1936 ibid., pp. 25, 28; 1937 ibid., pp.
23, 28; and 1938 ibid., pp. 19, 22.

Mention might be made at this point of the commission's active interest in, and program for the develop-
ment of, rural electrification. See the discussions beginning on the following pages of the commission's
annual reports, as indicated: 1931, p. 11; 1932, p. 27;,1933, p. 32; 1934, p. 23; 1935, p. 25; 1936, p. 35; 1937, p.
81; and 1938, p. 78.

» As indicating the commission's awareness of demand elasticity, note the following from its 1932 Annual
Heport, p. 16:

"As an effective means of increasing the use of utility services, rate reductions are most important. In-
creases in rates do not always produce larger net income, and convetsely rate reductions often do not produce
decreased net income. The latter often stimulate increased use, which use does not increase expenses in
fixed charges proportionally, with the result that the net income is increased rather than decreased • • •

"We confidently believe that if the utilities in the State of New York were to make immediately sub-
stantial reductions in their rates, the amount of electricity, gas, and telephone service used would very
greatly increase. Generally speaking, utilities have at present surplus plant, and as the increased service
could be supplied at relatively low costs, the net income could be maintained or improved. Of course,
reductions are not always followed instantly by increased ase; there is usually some lag; but where sub-
stantial cuts are made, the response usually comes so promptly that the interval between rate reductions
and increased consumption Is short and can easily be bridged by any sound company."

And note the following from In re Rates and Rate Structures (Electricity) in City of New York and
Suburban Territory, 1933 Annual Report, pp 391, 420: "* • * the companies here being considered may
reasonably be required to reduce all electric bills for metered sales to general consumers by $15,000,000
• * *. When considering the probable effects under a schedule of rates reduced 10 percent, two very
important factors should be remembered — that reduced rates stimulate consumption and that increased
sales do not Involve a proportionate increase in costs."

OO^fCENTRATION OF ECONOMIC POWER 35

"Fair value," to the New York commission is, more often than not,
a hybrid original cost-reproduction cost figure, but the commission
has been aggressive in its criticism of reproduction cost, and has
demonstrated a definite leaning toward the use of an original cost
rate base. The fact that the commission has not abandoned reproduc-
tion cost more completely is probably due to its fear of court reversal,
and, even more, to its distrust of formulas. The commission prefers
to be free to exercise its "judgment" in the light of factors surrounding
each case. Its support of original cost is groimded in considerations
of fairness and effectiveness; although the commission has written at
length upon the valuation problem, it has not goae deeply into the
economics of the subject. A rate base and a rate of return which
can be arrived at readily, at little expense and with certainty, and
which will be fair and wall induce the flow of "enough" capital into the
industry — these are the significant criteria. The commission finds
that original cost measures well against these tests, but it realizes
that courts may think differently and, besides, it sees nothing to be
gained from tying its hands by sweeping commitments to use original
cost under all circiunstances.

In Re Electric Rates, New York City & Suburban Territory, 1933
Annual Report, page 391, the commission by a bare majority ordered a
rate reduction in a temporary proceeding in the amount of $15,000,000,
on a showing that such a reduction would still enable a payment of
7.7 percent on the stated value of common stock, without drawing
upon surpluses which averaged, in the cases of the seven companies
involved, 19.53 percent of fixed capital. The commission had deter-
mined that adjusted excess income for 1932 had been $23,023,703
in excess of 6 percent on stated value of common stock, and $8,871,681
in excess of 6 percent on "rate base" (book value plus working capital,
less depreciation reserves and public contributions). In a related
case, involving the Queens Borough Gas & Electric Co., 1933 Annual
Report, page 423, the commission used the same basic criteria — st.'ted
value of conmion stock, and a rate base computed by^educting retire-
ment reserves and public contributions for extensions from "fLxed
capital" as reported by the company. In an earlier case, eifter
elaborate investigation and detailed findings, the commission reported
a rate base for the electric property of the Utica Gas & Electric Co.,
1931 Annual Report, pages 208, 259-260, in the amount of $19,789,267,
after a determination of the company's book cost at $20,510,366,
reproduction cost new at $20,216,861, depreciation at $1,440,327,
working capital at $512,733, and gomg value at $500,000.^

'The company preseoted a claim of $3,2.50,000 for goin? value, based on the usual opinion testimony.
The commission reviewed the evidence with its customary incLsiveness, disapproved of all lines of support,
and then, amazingly, wrote $500,000 into the valuation on the ground that "although we cannot find in the
evidence offered by the company any proper measure of going value aside from that allowed by us as con-
struction overheads, we believe that there is an element, including the value of trained personnel not other-
wise set forth and to which we should give consideration and a value" (pp. 235-240).

This position on going value is in strange variance with the Commission's clear handling of most valuation
items and problems; it must be attributed, it seems to the writer, to the Commission's determination to
stay well within even the more remote bounds of constitutionality. For instance, after a review of court
pronouncements and a devastating analysis of the Company's claims in Investigation Rates of Long Island
Lighting Co., 1935 Annual Report, p. 788, the commission concluded: "hence, every element of cost which has
been named by any witness for the company as the cause or the basis of going value has beer icluded in the
amounts already allowed or will be included in operating expenses dealt with later in this memorandum.
In order, therefore, to add something for going value, one must make an allowance for that which required
no capital or operating expenditure; one must create something out of nothing; one mi.i make an outright
gift to the utility. Although the testimony in this case furnishes no adequate or propei i^dsis for an allowance
for going value in view of our determinations upon other points, a separate amount will be allowed, but it
is believed that it is not required by the decisions of the highest courts in view of the character of the testi-
mony. We find, therefore, that the going value of the electric property of the Long Island Co. as of January
1, 1930, does not exceed $600,000 • • •" f pp. 941-953'). In its most recent njajor decision, however, the
Commission refused a separate named allowance for going value, relying upon the decision of the United
States Supreme Court in the Denver Union Stockyards ca^e, — U. S. — (1938). See Electric Rates, New York
4 Suburban Territory (Queens Borough Oas & Electric Co.), 1938 Annual Report, pp. 454, 549-554.

36 CONCENTRATION OF ECONOMIC POWEB

The Commission refused to receive in evidence a proffered index-
number calculation of valuation derived from the United States Bu-
reau of Labor Statistics index number of wholesale prices for general
commodities, excluding farm products and food, as having no bear-
ing on the reproduction cost of utility properties, in Complaint,
Washington- Heights Taxpayers Association, 1932 Annual Report, pp.
341, 352 ff. In reducing rates temporarily pending final determina-
tion,'in''Bronx Gas & Electric Co., 1934 Annual Report, p. 621 (fol-
lowing the permissive statute of 1934), the commission relied entirely
upon adjusted investment cost as its rate base measure; and in an-
other temporary rate case — Rates Yonkers Electric Light & Power
Co., 1934 Annual Report, p. 644 — original cost was again employed.
In a subsequent proceeding involving theYotilters company, although
no definite finding of value was made, the commission determined
that the rate base used in the earlier case was in excess of the fair
value of the property. (1.936 Annual Report, pp. 599, 616.) But,
in an extremely elaborate proceeding, culminating in a 259 page re-
port supporting an electric rate reduction of $1,225,000 ^ in 1935, the
commission made a detailed investigation and definite finding of re-
production cost ($25,159,862) as well as of origmal cost ($28,801,621),
in a,rriving at a "base cost" of fixed capital exclusive of land ($27,-
598,358).^ It was pointed out that "in determining the base cost
new the relative weight given to original cost and reproduction cost
is not always the same. The various facts which have been pointed
out in the previous pages regarding the way in which the figures were
prepared have been considered in determining the weight to be given
to each. But generally the original cost (the higher figure) has been
given the greater weight."^ Needless to say, the "various facts"
alluded to do nou illuminate the process by which the commission's
judgment transmuted the original cost and. reproduction cost figures
on each of some 30 accounts into 30 separate "base cost" figures and
affinal total "base cost." However, in the Queens Borough case,^°
the commission found its earlier temporary rate reduction order to
have been justified, and ordered a refund to customers, on the basis
of a base cost determination made without the benefit of any repro-
duction cost testimony whatever (save with reference to market value
of land); and in a subsequent proceeding to set rates for the future
for the Queens Borough company," modifications of base cost were
made omj to allow for subsequent additions at actual cost and re-
tirements and depreciation. There seems little reason to doubt that
if judicial determination will permit, the commission will rely increas-
ingly upon original- cost as the measure of "i&it value," although a
complete, explicit exclusion of reproduction cost need not be antici-
pated in the noar future.'

The commission's support of original cost is outlined in its discus-
sion of original cost accounting and continuing property inventories
in 1938 Annual Report, p. 33 ff. The system of accounts enforced
by the* commission provides that a continuing property record be set
up and maintained by all of the larger electric (and other) utilities

' Investigation, Rates of Long Island Lighting Co., 1935 Annual Report, pp. 78&, 1026. Note: "The
natural growth of the business, which even during the depression ha.<! averaged 6 percent per annum and
the increased use due to reduced rates Should materially reduce this assumed loss in revenues."

' Ibid., pp. 905-906. Land was taken at original cost, since testimony on other bases was inadequate
.(p. 907).

• Idem.

i» 1938 ibid., p. 464.

11 Ibid., p. 6Q6.

C50NCENTRATI0N OF ECONOMIC POWER 37

in the State, and that original cost be shown not only in this record,
but in the property accounts themselves. "Inventories and deter-
minations of the original cost of the property included therein have
already been completed by most of the larger utilities in the State
with properties aggregating $1,500,000,000," and the cormnission is
engaged in checking the utilities' figures. After pointing out that
original cost is essential for proper accountiug, but "perhaps even
more useful in the determination of just and reasonable rates," and
extolling its "continuing and permanent" character as contrasted
with the variability of reproduction cost in rate making, the com-
mission concludes, "recognizing the fluctuating standard which the
reproduction cost theory would produce, certain utilities in recent
years have ignored any attempt to determine value upon this basis
and have restricted their efforts to original cost as a basis. * * *"

It would be a mistake to suppose that the commission accepts un-
challenged the original cost figures which appear on utilities' books.
Both in its accounting supervision and in rate cases the commission
LrtS directed its critical attention to "write-ups'," prices paid by pur-
onasing companies in excess of original cost of construction (less de-
preciation) to the first utility owner of the property, and incorrect
xcounting for retirements.^^

The commission has been a stickler for straight thinking and con-
sistency in the treatment of depreciation. It is on record in favor
of estimating accrued depreciation by the straight-line method,
checked by detailed inspection and study; the ponsideration of obso-
lescence, inadequacy, and changes in the arts (as well as physical
deterioration); and the adjustment of the operating allowance for
annual depreciation to tJie facts and the allowance for accrued depre-
ciation.''

With regard to "fair 'return" the New York commission has evi-
denced a strong preference for 6 percent as the return to be allowed
on the rate base, however measured, and the considerations to which
it customarily gives attention are identical with those usually taken
into account by all utilities commissions. In a case early in the
decade '* the commission found, after considering the stability of the
investment, returns in comparable enterprises, and present and antici-
pated money rates, that "a 7 percent rate of return is jiist, adequate
and equitable to both the company and the pubjic." '^ In the New
York City case,^^ which sought the first establishment of temporary
rates, 6 percent was accepted, without discussion of principle, as the
rate of return by which excess return under existing charges was
tested. In the Bronx case, shortly thereafter, proceeding under
the 1934 temporary rate statute, the commission again based its
computations upon 6 percent — "Since 6 percent is more than business
epterprises which are not regulated have obtained upon the average

" 1938 Annual Report, p. 33.

'» See 1938 Annual Report, p. 36; Electric E vtes. New York & Suburban Territory, 1938 Annual Report,
pp. 454, 509-546; and Investigation Rates of Long Island Lighting Co., 1935 Annual Report, pp. 788, 909-
931. In the latter proceeding, the commission lost its patience (p. 917): "When engineers of standing in
their profession and corporation oflacials contend for such absurdities in order to bolster up the values of
the properties owned by those whb employ them, is it because they think that commissions and courts
are so dumb, so unfamiliar with facts of common knowledge or so willing to be misled that they would
adopt their views?"

" Re Utica Gas & Electric Co. See 1931 Annual Report, p. 208.

" Ibid., pp. 240-242. "With an average cost of money of less than 6 percent, and a cost of slightly mc
than 6 percent for more than one-half of Its capital such a return should permit of dividends considerab
in excess of this 7 percent rate of return upon actual common stock investment as well as provide a sut"!
and for contingencies" (p. 242). ■ *■

'• 1933 Annual Report, p. 391.

. 279348 — 41 — No. 32 5

. 38 CONCENTRATION OF ECONOMIC POWER

during this depression, it is apparent that it is the maximum amount
which should be allowed." ^^

Turning from the temporary rate reduction cases to those involving
the positive setting of rates for the future, after full deliberation by
the Commission no change in its position is to be found. In the Long
Island case '^ the utility offered opinion evidence directed to the
problem of the rate of return sujficient to attract investors — citing
actual cash earnings, character of the territory served, character of
the capital structure, ratio of debt to property, and operating efficiency
as matters to be taken into account. The commission's answer is
typical :

A witness who testifies that the average rate of return on the fair value of the
property for ail classes of securities (bonds, preferred stock and common stock)
is or has been during the depression in excess of 8 percent shows? either a lack of
familiarity with the facts or a lack of proportion. A witness that admits that
even 6 percent is far in excess of the return generally obtained by business corpo-
rations, which he said obtained "little if any" return, and yet declares 8 to 8J^
percent is fair for utilities deserves little credence. His conclusions are at variance
with all of the facts of corhmon knowledge under the conditions that have existed
since 1929 and particularly_at present. Six percent is an ample return in view of
determinations made upon other points in this opinion and particularly in view of
the fact that the Federal income tax has been included as an operating charge."

And in the final Queens Borough case,"^^ the commission brushed aside
what it seemed to regard as excessive claims supported by loose
testimony offered by the company and substituted its own compu-
tations and judgment:

Rate of return is particularly a matter upon which the members of the com-
mission accumulate day by day personal knowledge. The commission is con-
tinually passing upon the issuance of securities and thereby has direct and personal
knowledge of the current cost of money and the cost over a long period of time.
Within the last 3^^ years, the commission has passed upon over $1,000,000,000
in securities of all kinds and descriptions * * * for 3 years any gas and
electric company conservatively financed and soundly conceived and engineered
'..as been able to issue first mortgage bonds at an interest rate not in excess of
S}4 percent when allowance is made for commissions and expenses in connection
therewith. If the Queens Borough Gas «fe Electric Co. hjld limited its activities
to the supply of gas and electricity, had managed its finances in a conservative
fashion and had made adequate provisions for depreciation, it could have issued
first mortgage bonds at a rate not to exceed 334 percent. Likewise, it could have
issued preferred stock in order to raise part of its capital at 5 or 5)^ percent as a
maximum. Its capital stock at a dividend rale of 7 percent would be selling at
a premium.*' x

Computations made on the basis of a conservative capital structure
showed the commission that —

on the basis of the current market rates for utility securities, which have prevailed
for several years, a 6 percent return is ample and even generous. It exceeds the
actual cost oif raising funds for a public utility in this State which' is soundly
finariced and properly conducted. Any utility corporation which cannot earn
for its stockholders an adequate return upon the basis of a 6 percent return has
neglected to conduct its affairs upon the basis of sound finance and engineering."

The fact that the Queens Borough Co. had so conducted its affairs
for some time that a prospective return of i* percent was not likely

" 1934 ibid., pp. 621, 626.

18 1935 ibid., pp. 788, 1012-1014.

i« Ibid., pp. 1013-1014.

" 1938 ibid., pp. 696, 698-704,

» Ibid., p. 700.

" Ibid., p. 702.

CONCENTRATION OF ECONOMIC POWER 39

to meet fully the demands of its bondholders and stockholders did
not deter the commission :" * * * the conclusion is inevitable that
if the commission allows the company 6 percent return upon the value
of its electric property as determined by the 'law of the land,' any
deficiency in income to meet interest and dividends will not be due
to the inadequacy of the return allowed by the commission." ^^

The commission's rate level calculations have been made upon an
annual basis — a fair rate of return upon fair al'ie in each income year.
It is true, however, that the commission hat paid more attention than
other commissions, formally, to the possible use of surpluses to eke
out income deficiencies in depression years. In this the commission
has had the supporl of the rate-making statute under which its actions
are taken. Section 72 of the pubUc service law provides that the
commission shall give "due regard among other things to a reasonable
average return upon capital actually expended and to the necessity
of making reservations out of income for surplus and contingencies."
Thus, in the temporary rate reduction case involving the city of
New York,2* the commission found added support for its reduction
order in the fact that the seven companies under consideration had
accumulated surpluses in .the amount of $160,000,000 (19.53 percent
of their fixed capital).

If these companftes may not fairly be required to contribute substantial sums
from the surpluses which they have built up through rates charged consumers
principally in the past 10 years, one may ask what are surpluses for? Are they
not for the purppje of maintaining the financial status of the company during
such years as those through which we have passed? If they are entitled to build
up large surpluses and to go through four depression years, probably the worst in
the history of the country, while declaring larger dividends than in 1929 without
impairment to their surpluses, upon what grounds of fairness or equity should
utilities be allowed to accumulate any surplus? Why should they not be held
down to a minimum fair return in fiach and every year? The law requires the
commission to consider in fixing rates allowances for surplus and contingencies.
This is the very time when surplus earnings so created ought to be used for the
Isenefit of the public. They do not belong in equity solely to the companies."

And later, upon rehearing,^® after noting that the surpluses referred to
in the original opinion ($167,000,000) were augmented by some
$38,000,000 in contingency reserves:

If surplus and contingency reserves may not be used in the present crisis, and
if this commission may not even consider the amount of surplus and contingency
reserves when fixing rates, not for the purpose of reducing rates but for the purpose
of permitting the company to maintain pre-depression dividend rates, three
questions must be answered by those who maintain this position:

(1> Why were these companies allowedi to charge such rates that their surpluses
increased* from about $75,000,000 at the end of 1923 to $150,000,000 at the end
of 1929?

(2) What is the purpose of a surplus or contingency reseive unless it is for use
in emergency cases such as the present? •

(3) Why should not all companies be required so to reduce their rates as to
prevent the accumulation of huge surpluses and contingency reserves? "

Nonetheless, it remains true that seven years a^ter the foregoing
expressions the commission has still undertaken no formal program of
averaging returns over stated periods of 7 jars, and that, with the

"n>id..p. 704.
-« 1933 ibid., p. 391.
" Ibid., p. 4ie.
M Ibid., p. 490.
« ftld., p. 523.

40 CONCENTRATION OF ECONOMIC POWER

exception of giving vague "consideration" to surpluses, the commission
deals with the return problem almost exclusively on an annual basis.^^

THE RATE STRUCTURE

The period of the 1930's has witnessed great activity on the part
of the New York commission directed to a general revamping of the
pattern of electric rates. Acting in individual cases rather than by
general orders the commission has sought to achieve over wide areas (1)
simplicity and uniforn^ity of rate forms, (2) elimination of demand and
customer charges for d^v stic customtrs, and for all commercial and
industrial customers \/hose demands are not measured by demand
meters, (3) the institution of block rates combined with minimum
charges, (4) the elimination of optional rates, and (5) the discourage-
ment of objective rates.

The commission has steadily contended that —

it is not sufficient that a rate schedule be scientifically sound (if there be such a
thing) ; if possible, the rate schedule should be of such a character that it will be
readily understood by the average consumer and that its fairness and economic
justification be readily apparent. It may be that certain forms of rates are
justifiable upon the basis of technical analysis, but if they cannot be understood
and if their basis cannot be appreciated, popular suspicion and distrust often
produces situations which are not beneficial either to the company or to the
consumers.^'

And on the matter of uniformity, the commission has pointed out
that—

* * * adjacent localities now served by a single company were previously
served by many different ones. The different rates established in the early days
have been continued, although there is no jusHiification for any difference either in
cost or value of service. These differences are being eliminated in most cases by
reducing the higher rates to the level of the lower; but in some cases, it is necessary
to increase rates in certain localities or to certain classes of customers to eliminate
discrimination. In a number of cases, a dozen or so different rates have been
combined into one or, at most, into one rate for residential customers, one for
commercial customers, and one or two for power customers.^"

The commission has been persistent in its opposition to the pres-
ence of fixed demand and service charges in domestic rate schedules.
In an early annual report the commission, while conceding that the
demand made by a customer is an element both in the cost of serving
him and in the value of service to him, pointed out that "certain rates
still put too great emphasis upon demand, ignoring the fact that the
diversity between demand of different customers is caused by cus-
tomers with low load factors rather than by those with high load

" Discussion of the commission's rate level policies would be incomplete without brief reference to the com-
mis.sion's Arm stana against the allowance of inflated claims for operating expenses in rate cases. The com-
mission has been particularly caustic in its reaction to huge claims for leija! and rate ca.ses expenses and
officers' salaries. See especially Investigation Rates of Long Island Lighting Co., 1935 Annual Report,
pp. 788, 979, 986.

With regard to the relation between wages and rates it may be noted that in 1933, upon reheanngs per-
mitted to consider the changes, if any, which should be made in the earlier determinations on rates in the
New York City area on account of increased taxes and increased expenses due to the newly instituted Na-
tional Industrial Recovery Act. the commission allowed increased operating expenses in the amount nec-
essary to cover wage inc/pases which the companies were required to meet because of the minimum wage
levels established under N. R. A. codes. See Electric Rates, New York City and Suburban Territory,
1938 Annual Report, 490, 495-514; and ibid., 646, 649 ft.

!» 1931 Annual Report, p. 10.

M 1932 ibid . , p. 21 . The commission's annual report for 193G contains the following interesting summary of
re.sults achieved by the commission In the matter of rate simplification and improvement, 1930-36 (p. 28)

Number schedules eliminated - 102

Number classifications eliminated - - 951

Minimum charges reduced I -- 581

Minimum charges increased •. 196

Service charges eliminated.. 1"

CJONCENTRATION OF' ECONOMIC POWER 4^

factors." ^^ And even earlier, in a long opinion from which the fol-
lowing quotation is taken, the commission spelled out the substance
of its objections to service charges, and set forth the position on
minimum charge-block rates from which it has not since departed:

The basis of the service charge is that certain costs are incurred by companies
regardless of the amount of energy consumed, and that even if a customer uses
no electricity, he imposes upon the company certain expenses which he ought
to bear and which should not be shifted to other customers.

There is no doubt but that many facts and figures can be marshalled to support
the service charge. There are costs incurred by every gas (electric) company
which do not vary with the amount of gas (electricity) supplied. But there is
great variety of opinion and little agreement as to what items should be con-
sidered in computing a proper service charge, and there is ample room for fantastic
assumptions. One person includes in a proper service charge only such items
as return, maintenance, and repair of meters, reading meters, preparation of
bills, and expenses of collecting. Another person includes all of these items and
adds administration expense, return and maintenance of services, and certain
charges upon the distribution system. Another person includes all of these items
and adds part of the cost for a transmission system and for a small initial generating
plant.

Of course the amount of the service charge depends upon the items of cost that
are to be included, and the results generally range from 50 cents to $2 per
customer * * *.

The fundamental difficulty" with aU service charge estimates arises from two
main considerations. In the first place, no plant was ever designed or constructed
merely to supply a few kilowatt-hours per customer. Hence, any attempt to
estimate customer costs requires certain assumptions. Conditions are pictured
that have never been realized in actual experience.

The other main consideration is that rate making, whether for utilities or for
competitive and private business, is never a mathematical application of a
theoretical principle. In every business, there is always a large percentage of
customers, who are served at less than cost, for the reason that it has been found
impracticable to devise and apply a system of cost accounting and computation
which would carry out the principle literally; and if it were done, it would result
in such an elaborate and comphcated schedule of rates that the public could
not understand it and few could apply it. Customers would be irritated, and
where possible, would use alternative services or buy of competitors * * *.
■ Whatever may be said regarding the accounting or theoretical justification of
a service charge, the important fact to be consixiered, after all else has been said
is that the service charge often arouses great opposition. Regardless of facts and
figures, the consumer is apt to consider the service charge, for which he is allowed
to use no substantial amount of gas (electricity), as a charge for which the company
renders no service or such small amount as to be negligible. It is frequently said
to be "something for nothing." This viewpoint may be wrong, but the opposition
to the service charge has led many utilities to abandon it, and it was the reason
for the enactment of the present law as to gas service charges. In other words,
the fundamental objection to the service charge is not so much economic or
accounting as it is psychological.

On the-other hand —

To hold that customers who have services and unlocked meters ready for use
should pay nothing if they use no electricity, and if they, use 1 or 2 kilowatt-hours
in a month, should pay only a few cents for all of the service which they receive,
seems unreasonable. Such a form of raite might be justified if there were such
great social or public advantages that the cost of rendering service to small
consumers should be shifted to other consumers, or if there were substantial
equality ;upon the average among customers throughout the year. But if there
is no such equality, someone must bear the burden; if small consumers are served
at less than cost, other customers must be charged more than cost, in order that
the company may obtain a fair net amount * * *

And hence —

* * * we are of the opinion that' the minimum charge block form of rate
should be adopted.'^

" 1932 ibid., p. 22.

»« See Rates, New York & Suburban Territory, 1931 ibid., pp. 433-435.

42 CONCENTRATION OF ECONOMIC POWER

In this instance, the mimmum charge set was $1 per meter per month,
for which the company was to furnish 10 kUo watt-hours. In the
same case, the commission rejected a company proposal for the
insertion of customer charges in commercial schedules, but acquiesced
in demand charge of $1 per kilowatt of maximum demand per meter
per month, to be measured by rated capacity or by meter.

It is undoubtedly true that certain costs vary generally with the maximum
demand. They do pot all vary in direct ratio to tn©, demand; but as demand
increases, certain costs are increased; and tnis element snould be recognized in a
properly constructed rate schedule where the demand cost is such an important
factor as in commercial and industrial service * * * the only accurate
method of determination is to make a test by allowing the plan to take effect, and
to adjust the method of charge as experience shows that it should be adjusted."

The commission has become even more set in its policy as indicated,
and more vigorous in putting it into effect in the years succeeding
1931. In 1933 it reported that "the elimination of service charges
and the reduction of high minimum charges has resulted in relief to
small users of both gas and electricity"; and went on to poiut out
that "much progress has been made in the last few years in elimi-
nating residential rates based upon number of sockets, area of house,
or number of rooms in house." ^* In 1936 the commission reported
that "by statute, neither scheduled rates nor minimum charges for
residential customers shaU, after July 1, 1937, be based in any manner
on the number of outlets, number of rooms, cubic or square foot
area or other such standards." ^^

By 1938 the commission had enlarged its field of rate structure
reform: "Attention is now being given to improvement in the struc-
ture of rates for commercial and industrial customers." During the
year the commission issued an order requiring that "in all cases where
demand is considered in charging for electric service, the demands of
all customers over 5 kilowatts be determined by meter." ^^

The commission's objections to optional rates were voiced early
and effectively:

The fundamental objection to * * * [optional rates] * * * is that
in a given month two persons consuming the same amount of electricity, gas, or
water, and under the same conditions of load and use, will pay diflferent amounts,
because one of the consumers may have made a better guess as to his total yearly
consumption than the other, or because in other months during the year one
consumer may use a larger amount of service or under different conditions.
There are also instances where the different rates charged are attributable to the
fact that one consumer does not know of the optional rates and the advantages
of such rates have not been called to his attention.

The commission has attempted to eliminate the so-called optional rates as
rapidly as possible * * *."

Customers must choose in advance which rate they desire to be served under;
if they choose wrongly, they suffer the consequences and the company benefits
at their expense. The utilities refuse emphatically to assume the responsibility
of placing each customer on the most favorable rate. If they, with staffs of
trained experts, cannot do so, how can the customer, with little or no knowledge
of rate structure, be expected to choose for himself? '*

M Ibid, pp. 437-438. 1;

M 1933, ibid., pp. 25-26. - •

W4936,ibid., p. 27. ^ ^ ^ ^

M 1938, ibid., p. 21. For an interesting discussion of the theory of demand charges, demand charges and
promotional rates, the relation of demand charges to system peaks, etc., without, however, reaching a
decision and order, see Petition of New York Edison Co., et al., 1935, ibid., pp. 571, 582-585. And see the
discussion of minimum charges in Complaint, Washington Heights Taxpayers Asso., 1932, ibid., pp. 341,
346 fl , and of demaiiri charges for "brealidown" ^"rviee in Re New York Edison Company, 1936, Ibid., pp.
639, 648 i.

» 1931, ibid., p. 11.

« 1932, ibid., pp. 21-22.

CX)NCENTRATION OF ECONOMIC POWER 43

By 1937, the commission was able to report that —

with a few minor exceptions such optional rates have been eliminated for resi-
dential service. For commercial service, the number has been materially
reduced * * *.*'

Unequal treatment of consumers is the feature of objective rates
which has prompted 'the commission's unwillingness to endorse
programs of this kind which have foimd high favor elsewhere in
the country. The commission has not been overvigorous in its
opposition, and it has not discussed the issues involved at length,*"
but its attitude is far from one of encouragement. One gathers,
without the benefit of formal statement, that the commission believes
that the promotional purposes of objective rates can be served by
block rate forms and constant attention by the commission, through
negotiation and temporary orders, to possible rate level reductions;
and that the discrimination inevitably attendant upon the use of
objective rates can thus be avoided. But it should be pointed out
that, in principle and without regard to the content of particular
schedules, rate schedules made up of fixed demand chaises followed
by sharply breaking energy charges are more likely than minimum-
charge block rates to be promotional — that, is, to increase consump-
tion. Even the New York commission with its vigorous rate reduc-
tion policy is unable to force rates through ordinary processes to a
level lower than can be justified by existing costs and existing con-
sumption, whereas it is the merit of objective rates that they seek
to promote the lowering of costs by inducing the increased consump-
tion which will make such cost reductions possible.

In making up the substantive content of its rate schedules it seems
probable that the New York commission is as much concerned with
cost analyses and the dpsirability of inducing increased consumption
as either of the other commissions included in this study; and its
decisions and rulings — perhaps inevitably, in Hght of the character of
the problem — seem to reflect very much the same traditional con-
siderations of "fairness and balance." The commission will not
knowiagly set rates for any class of service which fail to cover the
direct incremental cost of that service; beyond this point, however,
costs do not appear to play a determinative part in t^e setting of
individual rates. The commission does not favor setting different
rates for different uses (for example — cooking, water heating, etc.),
preferring to work out its rate pattern on the ba^s of quantities con-
sumed and time of consumption. Nor does it appear that the com-
mission seeks to achieve "social" ends through mampulation of relative
rates (e. g., particularly low industial rates in order to stimulate
"recovery," etc.). It is possible, however, that the> minimum charge
set by the commission in the case of rural service, although higher than
fer urban service, is not sufficiently higher to reflect fufly the greater
cost. The commission ia fully conscious of the usual factors influenc-
ing the distribution of the rate burden between domestic, commercial

" 1937, ibid., p. 25.

*" The strongest expression which has come to the writer's attention is the following:
"If it were not necessary to decide whether the rates in this form were to be continued, there would be
several questions calling for careful consideration and final determination. One feature may be pointed
out. This is the arbitrary limitation prior to January i, 1938, the 'inducement' rates to those consumers
who increase their consumption while excluding from its benefits those consumers who have already in-
creased their consumption and who have assisted the company by so doing. The result is to charge different
amounts for identical use under identical conditions of use to the disadvantage of the customer who had -
previously been the more profitable to the company." The Yonkers Electric Light & Power Co., 1936,
ibid., pp. 699. 602.

44 CONCENTRATION OF ECONOMIC POWER

and industrial consumers — "peak demand," "value of service,"
competition, etc. — but the record is not clear as to their relative weights
in commission determinations. In distributing the benefits of a
general reduction in rates, the commission finds it more than usually-
appropriate to discard "scientific" formulas, and, with confidence born
of an able staff and the long experience of its chairman, to rely upon
judgment in the midst of such a labyrinth of considerations and factors
as "local conditions," "relative size of classes," "rate comparison,"
"customary balance," "who has been protesting?", and "who benefited
most from previous reductions?" It is not likely that the relative
response of consumption by different classes of users to rate reduc-
tions— a consideration of some importance if maximum utiUzation of
facilities is the goal — is ever taken expHcitly into account.

A-DJUSTMENT TO CYCLiCAL PRICE LEVEL

The attitude of the commission toward the adjustment of utility
rates to the trend of prices in general and to other cyclical phenomena,
during periods of depression, at least, is rather fully disclosed by the
commission's rate orders over the first half of the decade of the thirties,
and by its conduct of and expressions in its major temporary rate
reduction proceeding. The commission was extremely active in the
matter of rate reductions during the first and middle years of the
depression. During this period it asserted its power to set temporary
emergency rates wherever the facts relating to a company as set forth
in its reports to the commission appeared to call for a downward
revision of charges, and adopted as its basic policy the use of nego-
tiations and conclusion of rate-reduction settlements without the
delay attending formal cases. *V

In Electric Rates, New York City & Suburban Territory, the
commission sat the scope of its inquiry in the following terms:

The commission intends in tliiK investigation to ascertain to what extent the
various companies have been affected by the depression, their dividends curtailed
and surplus earnings used up. We shall consider to what extent utilities may
fairly be required, through reduced rates, to assist in escaping from the present
depression, unequalled in the history of this country .^^

The commission asked two economists to prepare statistical data and
to testify relative to the character and extent of the depression, and
the companies offered testimony bearing on the same general topic.
An examination of evidence relating to the course of wholesale prices,
manufacturing production, freight car loadings, employment, pay rolls,
farm incomes, relief expenditures, and profits and dividend rates of
business corporations convinced the commission that the country was
experiencing a "financial hurricane" of such proportions as to call for
radical remedial measures. Turning to the effect of the depression
upon the utilities, however, the commission found that the New York
electric companies had been left practically unscathed. The nine

*' The facts relating to rate reductions are set forth above.
■ The comjnission's.temporary r^te orders have had a varied career: Those involved In proceedings prior to
revision of the temporary rate section of the Public Service Law (art. 4, sec. 72), in 1934, were held invalid in
Matter of New Yorl^Edison Co. v. Maltbie, 244 App. Div. 436 (1935); but the temporary rate orders taken
under the revised statute were affirmed in Bronx Oaa <t Electric Co. v. Maltbie, 271 N. Y. 364 (1936).

The commission has been particularly conscious of its policy of rate negotiations. Its Annual Reports
(1931, p. 6; 1932,pp. 16, 17; 1933, p. 18; 1934, p. 15; 1936, p. 17; 1936, p. 27; and 1937, p. 25) undertake at con-
siderable length to defend the practice against charges of looseness and arbitrary action, on grounds of speed,
fconomy and essential fairness. See also Complaint, Washington Heigktt Taxpayera Asso., 1932 Annual
Iteport, p. 341.

,« 1934 ^nual Report, p. 391.

CX)NCENTRATION OF ECONOMIC POWER 45

companies involved were paying dividends as a group in 1932 at a
rate of 16.5 percent higher than the group rate for June 1929. No
company had earned less than 5% percent on "rate base" during the
depression, and one company had earned 16K percent in 1 year. From
1923 to 1929 the surplus of the group had doubled, and between 1929
and 1932 it had increased by $17,000,000 (over 11 percent). These
returns were in marked contrast to those experienced in other indus-
tries. The commission paid particular attention to the measure of
6 percent return on common stock, in arriving at its estimate of excess
earnings :

* * * when considering what a company can reasonably be required to con-
tribute to assist in ending the depression and to aid the financial recovery of the
country, the excess of income over 6 percent on the stated value of the common
stock is more important that the relation which its income bears to the book
value of its property."

The statement just quoted constitutes as full an expression as the
reports contain of the commission's philosophy of the relation of
utility rates to recovery. Utilities should be required to institute
rates designed to enable them to pay not greatly in excess of 6 per-
cent on common stock, in the interests of fairness to consumers, equity
as between industries, and the achievement of industrial recovery —
and, incidentally, such rates are likely to stimulate increased consump-
tion (and greater earnings). The commission's ideas have never ex-
phcitly gone beyond the proposition that lower utihty rates in periods
of depression will probably help in "getting tilings started." They
have never embraced a positive position based on analysis of, and
conclusions with reference to, any of the more elaborate explanations
of the business cycle. Certainly considerations and speculations relat-
ing to the effect of lower (or higher) utility rates upon spending, sav-
ing, and investing generally thu-oughout the economic system would
receive rough treatment at the hands of Chairman Maltbie.

" Ibid., p. 411.

CHAPTER IV
THE TENNESSEE VALLEY AUTHORITY

The institution ar d the policies of the Tennessee Valley Authority
refiect, in some slight measure at least, a condition of growing public
dissatisfaction with current procedures and policies in the public reg-
ulation of privately owned utilities. Whether this dissatisfaction is
warranted to any great degree, and whether Government ownership is
the most feasible alternative to the typical regulatory situation, are
no concern of this report. It will serve -present purposes merely to
point out the ways in which the rate level and rate structure policies
of the Tennessee Valley Authority differ from those of the more ef
fective regulatory commissions, and the possibihties for a positive
public policy on the relation of utility rates to full use of electric
facilities and full employment of economic resources in general that
are opened by the adoption of public ownership and operation.

Set up by the Tennessee Valley Authority Act of 1933, and amended
in 1935, the Tennessee Valley Authority, a Government corporation
is directed to undertake a program of flood control, improvement o:i
navigation, reforestation, provision of proper use of marginal lands
and agricultural and industrial development in the Tennessee VaUey,
the manufacture of fertihzer, provision for the national defense; and
so far as may be consistent with the purposes of promoting navigation
and controlling floods, to provide and operate facilities for the genera-
tion of electric energy for the use of itself or the United States, and to
generate, transmit and market electric power, within stated hmits,
"to assist in Hquidating the cost or aid in the maintenance of the
projects of the Authority." ^ Power is sold by the Authority directly
for use to industries, and for resale to municipalities, cooperatives, and
private utilities. The rate policies of the Authority come into play
both in the prices which it charges for energy and in the rate standards
for resale of energy which it writes into its contracts with distributors.

The key to Tennessee Valley Authority rate policy in general is to
be found in the provisions of sections 10 and 11 of the act that "the
projects herein provided for shaU be considered primarily as for the
benefit of the people of the section as a whole and particularly the
domestic and rural consumers to whom the power can economically
be made available., and accordingly that sale lo and use by industry
shail be a secondary purpose, to be utilized principally to secure as
sufficiently high load factor and revenue returns ^which will permit
domestic and rural use at th:- lowest possible rates and in such manner
as to ericourage increased domestic and rural ui< of electricity," andj
further, that the Authority shall "make studie /, experiments, and de-
terminations to promote the widei and better ■ :? i of electric power for
agricultural and domt"*tic use, or for small j) local industries, and
it may cooperate with State government?! or t' e r subdivisions or agen-

1 Sec. 9a.

48 CONCENTRATION OF ECONOMIC POWER

cies, with educational or research institutions, and with cooperative
or other organizations, in the application of electric power to the fuller
and better balanced development of the resources of the region."

THE LEVEL OF RATES

The most notable diflFerence between the, rate policies of typical
regulatory cominissions and those of the Tei^iie.ssee Valley Authority
exist with reference to the level of rates (rather than the rate struc-
ture), and in terms of approach rather than formal standards. Con-
gress has stipuiitv ■. that the le^enues derived from the sale of power
shall "as soon ^s practicable" be sujfficiently great to cover the total
cost of power production — a standard essentially identical to that
under which rate levels of privately owned utilities are typically deter-
mined.

It is hereby declared to be the policy of this act that, in order, as soon as practi-
cable, to make the power projects self-supporting and self-liquidating, the surplus
power shall be sold at rates which, in the opinion of the board, when applied to
the normal capacity of the Authority's power facilities, will produce gross revenues
in excess of the cost of production of said power * * *.2

Indeed, to the extent to which the provision quoted relating to "liqui-
dation" may be interpreted by the Authority to require the collection
of revenues to repay capital costs in addition to depreciation, the rate
level etandards are evep. more stringent in the earlier years of the
enterprise than those epiployed in the case of regulated private utilities.
The conclusion that the standards are much the same is reinforced by
the congressional requirement that the Authority shall, in its deter-
mination of costs, find the "present value" of such properties as were
turned over to the Authority, and shall report the amount of the value
of these and subsequently acquired or constructed properties which
it shall allocate to "the development of power." ^ The Authority
is. required further to operate under such a system of accounts and
records "as may be helpful in determining the actual cost and value
of services, and the practices, methods, facilities, equipment, appli-
ances, and standards ^nd sizes, types, location, and geographical and
'' economic integration of plants and systems best suited to promote
the public interest, efiiciency, and the wider and more economical use
of electric energy." *

The significant differences between commission and Authority rate
level policies become immediately apparent when two things are
realized:

First, because of the inherently "purposive" character of any allo-
cation of common costs as between the navigation, flood control, and
power activities jointly served by these costs, any final statement of
power cost will depend largely upon the purpose which the statement
is intended to serve. Much of the T. V. A. investment serves other
uses in addition to the production of power. T. V. A. power costs
can be increased dr reduced within very wide limits of reasonableness
merely by including therein a larger or smaller proportion of the com-
mon investment. The allocation actually employed by the Authority,
although one of several allocations easily permissible under the terms

' Sec. 14.

' Idem.

* Idem. This Is.not to suggest, of course, that the amount of the various items of cost are necessarily the
same in the case of privately owned &nd Government owned utilities. For example, their available rates
of interest may be quite different.

CONCENTRATION OF ECONOMIC POWER 49

of the T. V. A. Act (sec. 14) ^ is, nonetheless, quite different from any
allocation urged by the advocates of private power.

Second, from the outset it has been the Authority's policy to set
rates which ought to be paid for electricity in the Tennessee Valley
in light of experience elsewhere — in the belief that such rates will
induce consumption and consequent production of power in quantities
that will lead to a lowering of unit costs to a level that will be covered
by revenues. The issue to which this policy is directed is an old one.
Regulatory commissions have felt and still feel themselves bound by
the engineering-cost approach; consumption and production must
increase before'costs will decline, and costs must be lower before rate
reductions may lawfully be ordered. The most that even the more
advanced commissions have felt was permissible under the law is to
require the establishment of "objective" rates (with their attendant
discriminatory effects) which would provide the utilities with full
revenue protection while they explore the possibility of attracting
completely remunerative increases in demand by offering promotional
rates. The Authority, on the other hand, has adopted a commercial
pricing policy familiar to every large-scale business enterprise which
has had to find its markets in the face of vigorous competition.*
If it may be conceived that it is possible to set rates on different levels,
aU of which, with the corresponding amoimts of consumption which
they will induce, will produce returns approximating full costs, it
would seem to be the positive purpose of the Tennessee Valley Author-
ity to work stekdily toward the establishment of the lowest of these
remunerative levels.

As suggested above, the rates set originally by the Authority were
not based upon T. V. A. costs, and, of course, they had to be amiounced
before T. V, A. began to operate. In the spring of 1933, inquiries from
prospective municipal purchasers made necessary the establishment
of a schedule of rates at the earliest possible moment; Mr. Lilienthal
was placed in charge of power policies, and the first drafting of rates
was assigned to Mr. Llewellyn Evans, chief electrical engineer of the
Authority and former manager of the Tacoma, Wash., mimicipal
plant. Mr. Evans' rates, based largely on his own experience and
on the record of experience under Canadian hydro-electric rates, were
revised after extensive conferences with rate experts employed by and
associated with the Wisconsin Public Service Commission and the
New York Power Authority, and, after further study by the technical
staff of the Authority, were tentatively promulgated in September

' '9

« Sec. 14 provides, In part, "The board shall make a thorough in restlgation as to the present value of
Dam Numbered 2, and the steam plants at nitrate plant numbered 1, and nitrate plant numbered 2, and
, as to the cost of Cove Creek Dam, (or the purpose of ascertaining how much of the value or the cost of said
properties shall be allocated and charged up to (1) flood control, (2) navigation, (3) fertilizer, (4) national
defense, and (5) the development of power. The findings thus made by the board, when approved by the
President of the United States, shall be final, and such findings shall thereafter be used in all allocations
of value for the purpose of keeping the book value of said properties. In like manner, the cost and book
value of any dams, steam plants, or other similar improvements hereafter constructed and turned over to
said board for the purpose of control and management shall be ascertained andallocated.

• Note the following from the Report of the Joint Conmiittee Investigating the Tennessee Valley Author-
ity, 76th Cong.. 1st sess., 8. Doc. No. 56 (referred to hereinafter as Joint Committee Report), p. 190:

"(1) Before the establishment oT the Authority, there was suflacient experience to prove that drastically
reduced rates would not be confiscatory in relation to economical or prudent investment values, but would
yield substantial returns to private capital representing actual investment.

"(2) The major part of this prior experience was foimd In Canada, the facts about which were not widely
"known in the United States.

" (3) The theory of fair return on value, which could not be defined in practice in the absence of competitive
standards, made it Impossible for regulatory commissions to impose promotional rates.

"(4) The power industry, where it was not faced with public competition, refused to take the attiui'le
common in mass-production industries, of voluntarily setting low prices and looking for profits from a large
volume of sales."

50 OONCENTRATION OF ECONQMIC POWER

1933 and ofl&cially adopted 2 months later.^ The rates were designed
to be fully remunerative, but they were grounded upon anticipated
consumption and income, and the lower costs which it was anticipated
such consumption would make possible — and the anticipations had
their basis in relevant experience outside the Tennessee Valley, as well
as in elaborate studies by the Authority of demand possibilities within
the valley — studies, incidentally, which have ibeen established on a
continuing basis.- The rates as set were drastically below those pre-
viously in effect in the valley — as much as 50 percent below, in some
cases — and were intended to make possible the economies of mass
production, by mass consumption.*

The Authority's power policy was outlined by Director, Lilienthal in
a statement issued in August 1933, the principal points of which were:

The blisinesa of generating and distributing electric power is a public business.
Private and public interests in the business of power are different in kind and qual-
ity. The right of a community to own and operate its own electric plant is un-
deniable.

The interest of the public in the widest possible use of power i<: superior to any
private interest. Where these interests conflict the private interest must yield to
the public. But when reconciliation may be made to protect the private interest
without injury to the public, such reconciliation should be made.

The fact that action by T. V. A. may have adverse effect upon privately owned
utilities should be a matter for serious consideration by the board in fiaming power
policy, but should not be determining. T. V. A. should seek to avoid construction
of duplicate facilities or was^teful competition with existing utilities; but the su-
preme consideration is makipg available power to the public at the cheapest rate
consistent with sound finaeciai policy.

T. V. A. accounts should show costs of power, and should be open to the public.

T. V. A. should begin operations by serving an integrated economic area around
its plants and main transmission lines; it should serve outside such an area only if
high rates or inadequate public regulation make such service necessary to protect
the public interest.

And this policy, translated into rate level and structure principles, was
given expression by Mr. Evans, in the following interview as reported
in the Joint Committee Report:

Lowest rates occur where largest possible volume is delivered at each meter.

Even small customers should be given a chance to buy some low-cost power
within their requirements.

After all other uses in a residence have been supplied, house heating is a market
for low-cost energy, and a customer who has already taken his other requirements
should get energy for this purpose at increment cost comparable to the low unit
costs at the end of power schedules.

Large customers should benefit only to the extent that the larger apparatus
needed is cheaper per unit than small equipment. ;

Where surplus power is available and there is a market for it, the price should
be made low enough to get the business.

A publii?. plant should provide for thg, payment of a fair tax.

Rate schedules that are low enough can be simple in statement, uniform in ap-
plication, and few in number. High rates breed special schedules.'

It will serve no useful purpose here to review the long standing con-
troversy as to whether or not T. V. A. rates are actually set at a level
which will return, Tv venue equal to full co&t; in dealing with poHcy it
is sufficient to not? that it is the Authority's a^c^owed objective to estab-
lish rates on a cc pletely remunerative plane, and it is a matter only
of secondary inte est that the majority of the joint congressional in-

' See Joint Committee Report, p. 162; and appendix B. p. 245.

' See address by David E. Lilienthal, "T. V. A. and the Widening of Economic Opportunity," January
16, 1940. And see, also, the report "Economic Analysis of the Tennessee Valley Authority Power Yard-
stick," by Leland Olds, Joint Committee Report, appendix A, pp. 197-234.

• Ibid., appendix B, pp. 244-245.

OONCENTRATION OF ECONOMIC POWER 52

vestigating, committee accepted as "reasonably conservative" esti-
mates of its engineering staff that "on this basis the estimated revenues
would pay for all power costs and also would cover the annual expenses
of navigation and flood control and return the total investment in these
programs in about 50 years," whereas the minority members of the
committee found that "the electric power operations as now planned
and as planned for the future, and at the rates now prevailing, in-
evitably must result in a loss which must be made up by the Govern-
ment."'" Differences in anticipated results are due, of course, to
differences in predicted markets and revenues, and divergent views
on interest rates, depreciation, and allocation of common costs." It
may be noted in passing that in its most recent pubHshed annual re-
port, thq Authority announces, with supporting data, that its power
operatiohs are on a completely paying basis. '^

Regardless of one's opinion on the self-supporting character of the
Authority's power program, however, there can be no reasonable
denial of the fact that the rate program adopted by T. V. A. has
achieved a phenomenal increase in the use of electric power throughout •
the Tennessee Valley.*^ The Authority's annual reports, its special
studies, and evidence presented to the joint comimittee all confirm
the Authority's statement in its most recent annual report that

A most vital element in the increased demand for power, setting the Tennessee
Valley area apart from the country in general, was the low-rate policy initiated
by the Authority through its power contracts with municipalities and cooperative
associations and followed through, although to a lesser exte"nt, by privately

10 Joint Committee Report, pp. 252 and 303.

" The majority of the committee accepted the Authority's allocation— a "judgment" figure, as It was
bound to be, closely related to the so-called "alternative justifiable expenditure" theory— which resulted in
allocating the cost o( the 3 completed dams in the percentages of 35 to navigation, 25 to flood control, and 40 to.
power; a combination of amortization and depreciation to provide a total annual retirement at t^e rate of
1.775 percent; and average taxes "almost identical with the average paid by the private companies." For
full discussion of allocation, the reader is referred to the allocation report of the T. V. A. Committee on
Financial Policy, dated June 6, 1938; and the tmsigned comments on the T. V. A. allocation, dated August
18, 1938, distributed by the Edison Electric Institute.

With respect to the distributors of T. V. A. power, the majority concluded that "the Authority rate sched-
ules have produced sufficient revenues to cover costs and fixed charges, and to return a substantial profit to
small towns and cities. Their application to cooperatives is still somewhat uncertain" (Joint Committee
Report, 253). And the statement continues: "With regard to the Authority distributors the committee
concludes that their success is due to the adoption of a djTiamic policy by the Authority, as contemplated
by the act, of mass production and mass sales under drastically reduced rates, which is opposed to the
static high rate policy of the private power industry" (ibid., p. 254).

1' 1939 Annual Report, pp. 58-59: "T. V. A. power revenue for the fiscal year 1939 totaled $5,507,000, an in-
crease of 135 percent over those of the preceding year. Energy sales for 1939 totaled 1,618,287,000 kilowatt-
hours.

"These revenues provided a net income of more than $1,478,000 after all expenses, including direct power
expenses (management, operation of powerhouses, substations, and transmission system, promotion, etc.)
and allocated expenses incurred jointly in the operation of the multipurpose dams for navigation, flood con-
trol, and power. The net income is also after provision of approximately $1,736,000 for depreciation calcu-
lated on a straight-line basis (2.1 percent of the electric property) • • •

"Net income on the 1939 power operations exceeded by a margin of nearly $900,000 the net expense of the
power program incurred during the previous 5 years. These 5 years represented a developmental period,
conunon to most forms of business in their opening stages, in which a market for T. V. A. power had to be
acquired and developed, and in which barriers of litigation hampered normal development. Over this pe-
riod, up to the end of the 1938 fiscal year, the power operations of the Authority had resulted in a net expense
of approximately $584,000. Henceforth, there will continue to be a substantial margin of income over ex-
penses which may be used to assist in the liquidation of the investment in other phases of the Authority's
program."

A statement of income of T. V. A. power program for the year ended June 30, 1940 (made available by the
Authority in a letter dated September 24, 1940), shows that the Authority's revenues from power sales were
sufficient to cover 100 percent of the expenses of power, navigation, and flood control, both direct and com-
mon, and leave a net income of $2,798,50«. The expenses include provision of $3,555,000 for straight-line de-
preciation on power properties; depreciation of $719,400 on properties used jointly for power, navigation, and
flood control;.and depreciation of $209,000 on properties used^^irectly for navigation and flood control. With
an average investment in power facilities for the fiscal year of $173,000,000, the Authority's power revenues
were sufficient to cover all of the expenses of the electricity operations, including allocated common expense
but exclusive of interest on bonds, and leave a net income from the power program onl^- of $4,531,000. This
amounts to a return of slightly more than 2.6 percent on the average power investment. <,

" The Authority is the first to admit, of course, that some portion (exact extent unascertainable) of the
increased demand for electricity is to be attributed to general improvement in economic conditions through-
out the valley, and to intensive and highly successful electrical appliance selling campaigns. On this latter
point, the Authority reported in 1939 (Annual Report, p. 77) that during the two preceding fiscal years
$5,300,000 worth of appliances had been sold to domestic users of T. V. A. power.

CONCENTRATION OF ECONOMIC POWER

owned utiiitJ^s. The experience of these agencies, both public and private, has
demonstrated that the availability of power at low cost taps a vast demand for
eiectsricity in homes, on farms, in commercial establishments, and in industry'. -•

The supporting figures, on pages 76-77 of the same report, are
thoroiighly convincing:

* * * with a few exceptions, the experience of the agencies distributing
T. ¥. A. power has clearly demonstrated the relationship between low cost and
high use, a principle which has been generally applied in American business but
only to a somewhat limited extent in the electrical industry, prior to the announce-
ment of T. V. A. rate principles in September of 1933.

The average use of 1,179 kilowatt-hours for these agencies was well above the
residential average of about 850 kilowatt-hours for the Nation. The average
cost, 2.14 cents per kilowatt-hour was approximately half of the average of 4.21
ee"tg per kilowatt-hour for similar service in the United States in the calendar
year lyaS. During the 1938 fiscal year, the T. V. A. average cost was 1.99 cents.

That the objective of maximum use of facihties is being approached
is suggested by the Authority's statement that

* * * it now appears that the demands of the Tennessee Valley region will
rftQiiire new generating capacity in addition to that which has been supplied
by' the Authority plus that which is planned in the 10-dam system for the control
of the Tennessee River.

The past few years have seen the demand for power in the V alley States mcrease
at a rate more than double that for the United States as a whole. During the
12 months ending June 30, 1939, there was generated in the United States
123,034,000,000 kilowatt-hours of electricity, an increase of 29 percent over the
95,925,000,000 kilowatt-hours produced in the year 1929. In the seven Tennessee
Valley States, power production has increased from 7,376,000,000 kilowatt-hours
to 12,060,000,000, or more than 63 percent.'*

THE RATE STRUCTURE

The rate structure pohcies of the Tennessee Valley Authority are
manifested in several types of situations: In contracts for the sale of
power directly to large industrial and utility users, in contracts for the
sale of power to cooperatives a^id municipalities for resale, and, in
connection with the latter contracts, the provisions inserted by the
T. V. A. governing the rates at which power may be resold to resi-
dential, commercial, and industrial consumers.

The forms of rate schedules employed in direct sales to industries
include a combination of demand charge and block energy charge in
the case of firm power (alwa;ys available) and interruptible power
(subject to specified interruption by the Authority), and a demand
charge alone (including energy up to 100 percent load factor on the
demand) in the case of secondary power (available generally 75 per-
cent of specified periods). Wholesale rates to municipalities are con-
structed on the demand charge, block energy charge plan. They contam
a monthly demand charge followed by an energy chaj-ge arranged m
four blocks, and are designed to reward large users and good load-
factoi*^ users. Resale rates to domestic users contain a minimum
charge rather than the (probably) more promotional demand charge,
and begin with extremely low energy rates, followed by even lower
blocks designed to tap demand for all residential uses of power.
Resale commercial rates are similarly constructed, except that the
size of the blocks and the minimum bill are larger. Certain com-
mercial customers are given a Wright demand (or "load-factor")

n ibid.tp"^^ ^Tabo'r^V. A. Statistical Bulletin No. VI "DlspMitipn of Consumers' Savings under
T. V. A. Rates" (May 1935); and No. VUI, "Economics of Electric Distribution" (May 1936).

CONCENTRATION OF ECONOMIC POWER 53

rate schedule. The resale rate for mdustries is a combmation demand
charge energy charge schedule.

In the matter of the substantive content of the rate structure, the
T. V. A. would seem to have made its most unique contribution in its
treatment of domestic consumers under its resale contracts. The
rates estabhshed on direct sales of power to industries and public
utilities ^^ reflect a number of considerations: The Authority's bargain-
ing power, general industrial conditions, the desire on the part of the
Authority to attract a substantial industrial load — that is, to encourage
the growth of industrial customers — and the fact that industrial cus-
tomers have been willing to take power that would otherwise have been
wasted. This latter factor has a dual aspect: important industries
who were potential users of T. V. A. power were present in the valley
at a time when T, V. A. sales to municipalities had scarcely begun,
and it seemed desirable to offer rates which would induce them to
take up some of the slack during the Authority's developmental years;
in addition, industries were willing to contract for a type of power
(secondary, interruptible) which municipalities could not use. The*
Authority's pricing at this point seems both understandable and com-
mercially sound, and in no sense unusual.

The Authority's wholesale rates are designed to tie in with its resale
rates in the development of its over-all poUcy; they must encourage
purchase for resale, and to that end must represent a price at which
municipalities which undertake to resell under T. V. A. schedules can
afford to buy — and they must, at least in time, be fully remunerative.

Resale rates as a group are intended to cover the full costs of the
contracting municipalities, including operating costs, tax equivalents,
and a return on investment, or interest on and amortization of debt.
In striking the balance between domestic, commercial, and industrial
consumers served by T. V. A. distributors, however, the scales seem
to be weighted substantially in favor of the'' householder." As sug-
gested above, the act is specific in its direction that domestic consumers
be given particular consideration; and Authority pricing pohcy from
the beguming has been built around the rates to be paid by the small
(even low income) residential user. The top rate in the typical resi-
dential schedule set up by the T. V. A. is 3 cents per kilowatt-hour for
the first 50 kilowatt-hours; and while there is a 75 cent minimum bill,
there is no demand charge.*^ It is difficult to resist the conviction
that these rates, while intended, of course, to be so low as to attract
increases in "paying" consumption, were designed to make some
electricity available even to the very small, ''unprofitable" customer
who otherwise would have no electric service whatever in his home.'^*

" The principal industrial concerns are the Aluminum Co. of America, the Electro- Metallurgical Co.,
Monsanto Chemical Co , and Victor Chemical Works. The contracts with these concerns are analyzed,
at ersat length in joint committee report, appendix B.

" This does not mean that the other groups are treated at all badly; indeed, industrial rates are offered
at levels at which it is expected that industrial customers will be attracted, ahd commercial rates are not
conspicuously higher than their relative position under the better regulatory commissions.
I' The complete basic residential schedule is:

First 50 kilowatt-hours, at 3 cents per kilowatt-hour.
Next L50 kilowatt-hours, at 2 cents per kilowatt-lioui^,!
Next 200 kilowatt-hours, at 1 cent per kilowatt-hour
Next 1,000 kilowatt-hours, at 0.4 cent per kilowatt-hour.
Excess, 0.75 cent per kilowatt-hour.
Minimum monthly bill, $0.75.

The increase to a 7.5 mil rate for consumption over 1,400 kilowatt-hours (7.6 mils being the average

of the cost of the first 1.400 kilowatt-hours) is characterized in the joint committee report, appendix B,

p. 248, as "a fair charge for extended use by unusually large farm residenpes or by special beating installa

tions."

•• Exhaustive testimony concerning T. V. A. power policy will be found in the evidence given by J. A.

Krug, chief power engineer, before the joint investigating committee. See Hearings, part 12, pp. 6189 fl.,

and part 13, pp. 6611 fl.

279348 — 41— No. 32 -6

54 CONCENTRATION OF ECONOMIC POWER

ADJUSTMENT TO CYCLICAL PRICE LEVEL

There are two points to be made with reference to T. V. A. rate
policy and the alleviation of industrial depression and underemploy-
ment (^f resources. First, the Tennessee Valley Authority has given
no attention whatever to the relation of the prices of electricity and
the rate of use of resources in industries generally; second, the Author-
ity is almost completely free from the restrictions which apply to and
prevent State utilities commissions from developing activities in this
area of pohcy. The Authority's low-cost rate program has been quite
unrelated to the depression prevailing in the thirties, and has contained
no features not explainable in terms of the thesis that low rates will
induce a great increase in profitable consumption of electricity, and
that it is the task of the Authority to spread the use of electricity, par-
ticidarly by domestic and rural consumers, as widely as possible — so
long as total costs are covered — throughout the valley. On the other
hand, if suitable standards for treating this problem should be forth-
coming, and if the T. V. A. should develop an active interest in the
problem, there are no necessary legal barriers to a positive rate program
under which the Authority might rework its rate levels and structures
in terms of the effects of electric rates upon investment, saving, spend-
ing, and employment in the economy at large. Administratively, the
Authority is well constituted to handle such a program. This is to
express no opinion on the desirability of directing rate policies to the
ends here suggested if those ends should demand policies inconsistent
with the goal of low rates and fall use of electric resources; the point
is, simply, that the development of any program which seeks ends and
employs criteria drawn from outside the field of electric power would be
more feasible in the hands of such an agency as T. V. A., than under
the direction of any regulatory commission. The freedom with which
the Authority has been able to launch its vigorously promotional level
of domestic rates, in contrast to the legal difficulties typically encoun-
tered by regulatory agencies, suggests that regulation is no match
for Government ownership in the inaugm*ation of policies that break
sharply with the past.

PART II

PUBLIC PRICING OF MILK

WARREN C. WAITE, DON S. ANDERSON
AND R. K. FROKER

PREfACE

This study of price fixing by governmental authorities in markets
for fluid milk is an analysis of the objectives which public price control
is intended to serve, the standards set by law or administration to
serve those ends, and the way in which public regulation has, in
fact, operated. Five States — Oregon, California, Indiana, Wisconsin,
and New York — have been chosen to illustrate the operation of vState
regulation of milk prices imder different types of laws and different
local situations. The operation of Federal milk regulation is also
discussed.

PubHc regulation of milk markets in the early 1930's had its incep-
tion in attempts by various organized groups in each market to main-
tain their previously established positions. The period of expansion
culminating in the late 1920's had stimulated efforts of the various
groups in each market to organize to insure for themselves a share in
this expansion. The principal groups were the large ^distributors,
with their informal trade associations and milk bottle exchanges;
the employees of the distributors with their unions, especially the
drivers; and the producers, with their cooperative organizations.
The various control devices served their intended purpose fairly well
during the period of expanding business activity in the 1920's, and
there were probably some monopoly gains that were shared by all
three groups. Then the depression brought business expansion to a
close and markets began to contract. This left a smaller total quan-
tity of receipts to be distributed among the various market groups,
and imder pressure of the changed economic situation the previous
arrangements for adjustment in the market failed as each group sought
to maintain its old position. Eventually a general collapse in markets
ensued. The farmers were in the more exposed position. Prices paid
farmers for milk fell more rapidly than distributor margins and wage
rates. Some new method of adjustment was desired and producers,
in particular, began to press for public regulation of the markets.

The farmers had for many years endeavo • cd to improve their
position by the formation of cooperative orgari -nations. r>;ot much
progress had been made prior to 1918, but the leaderb l^-ti a quired a
broad backgToimd of experience. The price difficulties oT Lv? \V rid
War period led to rapid expansion inorganization, and by the i>e:2ir;ning
of the depression in the early 1930's a considerable portion oi tbe milk
in the larger markets was handled through cooperative marketing
organizations.

The most important service of the cooperative for its members is in
selling milk to the distributors. The member of the cooperative
agrees to sell his milk to the cooperative or to appoint the cooperative
the sole sales agent for his milk. The cooperative generally agrees to
sell the milk of the member and to return to him the proceeds less a
charge for the services performed. This organization for marketing
placed the producers in a better bargaining position than they would
have occupied as individuals.

53 CONCENTRATION OF ECONOMIC POWER

The primary aim of these organized farm groups is to obtain as large
a total income as possible for their member milk producers. The
attainment of this aim has led to the development, in most markets,
of a series of rather complex pricing arrangements. Although most
markets developed some special features to meet their individual
requirements, the general plan was essentially similar in a broad way
for the ma,iority of them. In the determination of the price to be
paid by the distributors for the milk purchased by them the principal
device which has developed is the so-called "classified-price" plan.
This was adopted in many of the larger markets in the middle 1920's
and by 1933 more than 70 markets were known to be operating under
some variant of this plan.

The classified-price plan, first developed by the producer cooper-
atives, is a scheme by which different prices are paid for identical units
of milk, depending upon the use to which the milk is put. Actually
the milk received by the dealer is usually produced under the same
health regulations and could aU be used for sale in bottles as fluid
milk if the market permitted. For excess milk, which cannot be
marketed in this way, however, several different prices are paid, the
number ranging from two to nine depending upon the particular
market. Such a pricing arrangement is similar to the use-classifica-
tion price differentials found in the sale of electricity, coal, and rail-
road services. It is supported by the contention that milk is not one
commodity but several, the difference arising from the use which is
made of it. The retail and wholesale price structure, utilizing "class
prices" for different uses of milk, is determined in part by the compe-
tition which various types of milk products meet ip various markets —
e. g., butter versus margarine — and the prices at which these products
c^n be marketed in volume. Thus, different returns result from the
utilization of milk in different form.

The most widely used classification of milk and milk prices involves
three classes: Class 1, constituting all the milk sold for fluid purposes;
class 2, the milk sold in the form of fluid cream; and class 3, the milk
manufactured into any of the variety of products made- from milk,
chief among which are butter, cheese, and evaporated mUk. There
are, of course, many variations among classified price plans. Spring-
field, Mass., for example, has had only two classes.

Class I milk — all milk sold or distributed by handlers as whole milk, chocolate
milk, or flavored milk, and all milk, the sale or use of which is not established as
class II milk.

Class II milk — aU milk specifically accounted for (a) as being sold, distributed,
or disposed of other than as milk, chocolate milk, or flavored milk, and (b) as
actual plant shrinkage within reasonable limits.*

In contrast, the Pennsylvania Milt Control Board has established
eight classes of milk for the Philadelphia market : *

Class I, fluid milk (grade A) , fluid milk ferade B) .
Class II, fluid cream:

Class II-A, milk chocolate, candy, etc.
Class II-B, ice cream, and ice cream mix.
Class II-C, farmers' pressed cheese and cream cheese.
Class III, buVter:

Class III-A, American cheese.

I Economic Brief with Respect to the Proposed Milk Marketing Agreement and Proposed Order for the
Springfield, Massachusetts Marketing Area, March 30, 1936, p. 20.
« Aprli 2, VJU, Official Order No. 6.

OONCEl^RATION OF ECONOMIC POWER 59

In the New York metropolitan area there were 9 classes in 1939.
The number was later increased to 10 classes.

The prices to be paid for the various classes, in the absence of regu
lation, have been the subject of negotiation between the producers-
cooperative organization and the distributors.

The problem of allocating the proceeds received from distributors
for milk among the producers was met by the development of sales-
returns pools. These pooling or averaging procedures were neces-
sary because it would be impracticable to record the exact class use of
the milk of each individual producer and to pay him accordingly.
Moreover, efficiency in assembling and marketing has required that
all of the milk of some producers must be sold in uses returning rela-
tively low prices. In consequence, pooling was necessary to prevent
discrimination in the allocation of milk in the lower price uses, and to
permit all to share in the returns from milk used in the higher priced
uses. Three general types of pools have been used: Individual-dis-
tributor, association, and market-wide pools.

In the individual-distributor pool, the producer receives the weighted
average of the class prices paid by the distributor to whom his milk
was sold. Different distributors will pay different average prices,
but all the producers delivering to a particular distributor will receive
the same price except for special premiums or discounts. With an
association pool, the producers' price represents a weighted average
of the class prices received by the association for all the milk of its
members. With a market-wide pool the producers' price represents a
weighted average of the class prices paid by handlers for all milk in
the market.

In addition to these pooling devices there has developed a base-
ratiug plan in many markets. Producers differ markedly in the
seasonality of their production. Some are fairly even suppliers, but
others supply large quantities at one period and small quantities at
others. The quantity of milk which can be sold as class I milk,
however, does not vary greatly. In consequence the quantity of
milk to h" disposed of in the lower priced uses or the "surplus" ,varies
greatly throughout the year. If nulk is paid for on a classified price
basis, there is a considerable variation in the average price received.
Not all producers are held to be responsible for this "surplus," how-
ever. The even producer is producing milk approximately in accord-
ance with the requirements of the fluid milk trade, while the imeven
producer may be considered as producing a considerable surplus at
times. The base-rating plan consists in allocating to each producer
in the market a particular share of the higher priced market as a
base, and for which base milk he receives a high price, with any milk
in excess of this base paid for at a "surplus" or lower price. The even
producer with a large base under such a plan will receive, therefore,
a uniformly high price throughout the year, while the uneven producer
or one with a small base relative to his production will receive a
fluctuating price for his milk.

HISTORY OF PUBLIC REGULATION OF MILK MARKET

The powers of a State agency were first used to establish milk prices
in early 1932. In January of that year the producers and distributors
of market milk in the San Francisco market requested the director of

go CONCENTRATION OF ECONOMIC POWER

agriculture of California to aid them in the stabilization of resale
prices in that market. The director acted under an act of the Cali-
fornia Legislature passed in 1916. This law gave the director power
to act as adviser in assisting producers and distributors to improve
the efficiency of marketing farm products. It also provided that the
director might act as an arbitrator in cases of controversy between
producers and distributors. A milk trade board, composed of pro-
ducer and distributor representatives, was formed in San Francisco
in early 1932. This board immediately put uniform purchasing and
resale price schedules into effect and these were maintained during the
remainder of the year. Similar boards were organized in several other
California markets.

In November 1932, the Wisconsin Department of Agriculture and
Markets issued' an order covering the marketing of jfluid nulk in the
Milwaukee market. This action was taken under broad powers for
the regulation of unfair competition and unfair trade practices, not
under specific legislation for the regulation of milk markets. Under
this authority, the department ruled that the bargaining of producers
and dealers set standards of fair competition and fair practices.
When producers and dealers handling 90 percent of the milk in a
market agreed upon a marketing plan and upon prices, it was declared
to be unfair competition for others to operate under any other plan
or to buy and sell milk and its products at lower prices. In Wisconsin,
as in California, early attempts by State agencies to aid producers of
fluid milk were made under legislation not passed specifically for this
purpose.

During 1933 other States enacted legislation specifically providing
for State regulation of fluid mUk marketing. The New York law,
the first of these to become effective, was approved April 10, 1933.
States as widely separated as New York, Oregon, and Florida enacted
such legislation during 1933. The Federal Agricultural Adjustment
Act, approved by the President on May 12, 1933, provided legislative
authority for Federal regulation of fluid milk markets in which there
is interstate commerce. This authority was continued in the Agri-
cultural Marketing Agreement Act of 1937.

Smce 1933 other States have provided for State regrdation of fluid
milk marketing. At some time in the past 7 years half of the States
have had such legislation on their statute books. In several of the
States the operation of these laws has been terminated through expira-
tion of time limitations, as in Ohio, or because they have been declared
unconstitutional, as in Washington, Maryland, and, recently, in Utah.
About four-fifths of the States which have ever established State regu-
lation of fluid milk marketing still retain it in some form, and in the
summer of 1940 regulation was in force in 20 States.

OBJECTIVES OF MILK CONTROL

The chief objective of public regulation of the marketing of fluid
milk has been to increase the income of certain groups of producers
over what it would have been without such regulation. This purpose
is the opposite of the objective of regulation of public utilities, which
is designed to protect consumers. It must be recognized, however,
that the situation with respect to the production and sale of fluid milk
is very diflFeront from that which prevails in markets served by public

OONCEJNTRATION OF ECONOMIC POWER Qf

utilities. A principal feature of this contrast is that fluid milk is pro-
duced by a large number of independent producers, while in the public
utility industries a single producer ordinarily supplies the entire market.

In public utilities the producer distributes his product to the con-
sumer, and the typical situation is sale of the service by one firm to a
multitude of consumers. In milk a large number of producers sell to
a few distributors, who, in turn, sell to a great number of consumers.
Or, on the producers' side of the market, there may be one or more
cooperatives plus a number of nonmember producers. In the absence
of Government limitations or a strong cooperative organization of
producers having cordial relations with the distributors, entry into
milk production is easy, while entry into pubUc utilities is much more
difficult because of the very large capital requirements. In most in-
stances'of pubUc control of milk markets, the major aim has been to
keep up the prices paid to producers by distributors. Where minimum
retail and wholesale prices have been fixed, this has usually been done
in order to protect minimum prices for producers by preventing retail
price cutting, which has often led to producer price cutting. Producer
groups have at times supported minimum wholesale and retail prices
as a means of assuring that distributors will receive the income neces-
sary to pay producers established prices. Maintenance of an adequate
differential, or even a high margin, between retail prices and producer
prices may also be an end in itself where large distributors can exercise
sufficient influence on legislation and its administration.

It should be noted that consumers are rarely represented directly
on the agencies engaged in the State regulation of fluid milk markets.
In the Federal regulation of milk markets, the Consumers' Counsel of
the Department of Agriculture does participate in pubUc hearings, at
which evidence from all parties concerned is heard, and advises the
Federal administrator on the merits of each case as it affects
consumers.

Two secondary objectives of price control should be noted. One
is equalization among producers of the higher returns from the sale of
fluid milk as compared with returns from milk used for manufactured
dairy products. Milk control authorities would doubtless raise the
price of milk regardless of the use to which it was put, if means of
accomplishing this could be devised. Raising the prices of milk for
all uses would require regulation beyond the boundaries of local milk-
sheds from which fluid milk is now provided. Near most fluid milk
markets there are producers who are selling milk for manufacturing
purposes who could shift to the fluid milk market. Consequently, in
the absence of Nation-wide control, methods of sharing the higher
prices for fluid milk with these producers must be devised or means of
excluding them from the fluid market must be invoked. Various
means have been used to limit entrance of new producers into a given
milk market.

Another secondary ob>ective is improvement in the efficiency of
milk distribution, although unfortunately this has not always been
realized! Reduction in the costs of distribution may be a byproduct
of regulation — as some of those charged with the admiuistration of
the Federal program have hoped — or it may be incorporated as a part
of the program, as in State regulation of imlk markets in California.
The removal of price competition by setting minimum retail and whole-
sale prices sometimes stimulates increased expenditures for selliae ef-

62 CONCENTRATION OF ECONOMIC POWER

forts, such as advertising, special milks, and distribution containers.
In both the Federal program and the programs of most States, in-
creased efficiency of distribution appears to be either distinctly a
secondary objective or an activity with which the program is not
concerned .

MECHANISMS AND STANDAEDS OF REGULATION

The principal mechanism for regulating fluid milk markets has been
the fixing of minimum prices which can legally be paid producers for
mUk. As already indicated, these prices vary with the use to which
the milk is put, the highest prices being established for milk used as
bottled milk and lower prices for mUk used for manufactured dairy
products. There are two bases for these so-called classified prices.
One is the fact that in most markets at most times there is more
milk available than can be sold as bottled milk and bottled cream,
the other is the belief that a reduction in the price of bottled milk
does not result in a sufficient increase in the volume of sales to offset
reduced income from lower prices. Thus, it is contended, income can
be maintained only by continuing existing prices and differentials
between bottled milk and milk for other uses. Effective prices for
mUk for use as dairy products are influenced by the market situation
for these products, which, in contrast to bottled milk, are priced at
a level that will result in the sale of the total production, often in
highly competitive markets.

Since all milk available for use as bottled milk cannot be sold as
such at the prices established, means must be provided either for
limiting the number of producers permitted to sell milk for use as
bottled mUk or for distributing the income from the sale of bottled
mUk among all producers able and anxious to produce such milk.
Limitation of the number of producers allowed to sell milk for fluid
use is approached imder the quota system, such as is used in the
Portland, Oreg., market. At the other extreme, free entry to the
market is permitted under certain recent Federal orders. (Local
health regulations may, however, limit entry.) Where free entry is
permitted, and even where entry is restricted, some method of dis-
tributing the receipts from the sale of the higher priced bottled milk
must be invoked, since perfect balance of consumption and produc-
tion of bottled milk is never attained. This usually takes the form
of "pooling," either with or without a' base-ratinsr nlan, as described
above.

Other market control mechanisms which may become increasingly
important are checking and auditing the books and records of coop-
erative organizations and of distributors and the supplying to pro-
ducers of information relating to the operation of the market.

Sinc^e public regulation results largely from attempts of the various
groups' in the market to maintain positions previously established, it
would be expected that past conditions would largely provide the
standards used in fixing prices and market conditions under regida-
tion. This concept is written into the Federal legislation, which
declares it to be the policy of Congress to reestablish prices to farmers
at a level that will give agricultural commodities a purchasing power
equivalent to that which prevailed in the base period. State milk
control legislation is generally less specific in setting standards than

CONCENTRATION OF ECONOMIC POWER 63

is this provision of the Federal law. The fixing of retail and whole-
sale prices by the State agencies and especially the fixing of retail
prices for stores sales at the same level as for home delivery suggests
that regulation is based upon standards which tend to maintaiu past
positions of producers and distributors. An examination of regulation
in several States, however, reveals marked differences in standards
and mechalnisms used.

RESULTS OF REGULATION

Although the Federal Government and several of the States have
regulated the marketing of fluid milk for over 7 years, it appears
that neither the objectives, the mechanisms, nor the standards of
regulation have become fixed. The Federal program is still evolving,
and recent developments in the Chicago and New York markets may
result in a considerable reorientation of emphasis.

To date the chief result of regulation, both State and Federal,
appears to have been somewhat higher prices for fluid milk and
probably somewhat higher incomes for a selected group of producers
who were able, under the regulations established, to sell milk for use
as fluid milk and cream on the regulated markets. This was the chief
objective of the legislation. The higher income to farmer-producers
of fluid milk has come primarily from the consumers, who have
paid higher prices.

In supporting the position of the producers of milk -for fluid use,
regulation has apparently had a tendency to maintain the position of
established distributors. This is especially true where resale prices
have been fixed and differentials between store and home delivery
have been eliminated.

WhUe these have been the chief results of regulation to date, it
may later be possible that regulation of fluid milk markets can be
used to improve greatly the efficiency of operation of the milk markets.
Indifference of consumers as compared with the activity of producers
and distributors adds to the difficulties of administrative agencies in
accomplishing this objective of greater efficiency and reduced costs
of nulk production and distribution.

CHAPTER I
FEDERAL PRICE FIXING IN MILK MARKETS '

INTRODUCTION

The Federal program of price fixing is best understood in a his-
torical perspective. It has evolved from a series of experiments and
trials in market operation and from these certain limitations and
possibilities have become fairly well crystallized. The evolutionary
process continues and will undoubtedly result in additional changes
but the path followed in arriving at the present position is worthy
of emphasis.

The stated purpose of the original Agricultural Adjustment Act
and its subsequent versions has been to raise the prices to the pro-
ducers of agricultural products. The original act declared it to be
the policy of Congress —

(1) To establish and maintain such balance between the production and con-
sumption of agricultural commodities, and such marketing conditions therefor,
as will reestablish prices to farmers at a level that will give agricultural com-
modities a purchasing power with respect to articles that farmers buy, equivalent
to the purchasing power of agricultural commodities in the base period.

The price-raising featm-es of the act have naturally occupied a
dominant position in the minds of the administrators of the provisions
of the act. However, there has always been a considerable group
in the Administration who have felt that not only such obvious devices
as decreed prices and various direct actions such as production con-
trols might be employed, but also, in the case of the marketing agree-
ments, licenses, and orders at least, the opportunity of making im-
provements in the marketing machinery might be grasped. The
balance between the groups in the fluid-milk field who have viewed
the problem solely in terms of price-raising measures and those who
have viewed the situation as an opportunity for market reform have
varied, but groups holding each view have been present in the Admin-
istration at all times. The program is thus to be viewed not only
in its accomplishment in the direct raising o^ establishment of prices
by the various devices employed, but also in the extent to which it
appears to have improved the operation of the various markets.

The first vehicle for entrance of the Federal Government into the
field of price fixing in milk was provided by the original Agricultural
Adjustment Act of 1933. The Secretary of Agriculture was given
two procedures, the marketing agreement with the handlers of the
producu and the licensing of handlers of products, when these handlers
were engaged in handling products of interstate commerce. The
provisions were as follows;

Sec. 8b. (2). After due notice and opportunity for hearing, to enter into market-
ing agreements with processors, producers, associations of producers, and others
engaged in the handling of any agricultural commodity or product thereof, in

> This chapter was prepared by Warren C. Waite.

66 CONCENTRATION OF ECONOMIC POWER

the current of or in competition with, or so as to burden, obstruct, or in any way
afTect interstate or foreign commerce * * *. (3) To issue licenses permitting
processors, associations of processors, and others to engage in the handling, in
the current of interstate or foreign commerce, of any agricultural commodity
or product thereof, or any competing commodity or product thereof * * *.^

There have been subsequent changes in the legal framework which
was provided the administrators of the program. The changes have
been largely" for purposes of clarification of the acceptable means of
operation and improvement in legal status of the program, and the
essential philosophy and general mode of operation has been influ-
enced only slightly by these changes.

The general historical features of the Federal participation in the
fluid milk marketing field are shown in chart 1 and are given in detail
in the appendix. Several fairly distinct periods appear at once. The
first is that of the origuial 15 marketing agreements terminated on"*
February 1, 1934. In time this is' a relatively short period but one
of great importance in experience for the Dairy Section- and in the
formulation of a general policy with respect to mUk markets. The
termination of the agreements marked an abrupt change from the
previous policy. The following period was one of rapid expansion
with licenses and the number of markets involved reached a peak
toward the close of 1934. Thereafter there was a gradual contraction
in the number of markets already under license and a period of in-
activity occasioned largely by^n uncertain legal status. Subsequently
the legal position was improved by changes involving a shift to mar-
keting agreements and orders, and some legal decisions have recently
clarified the status of the program, with the result that lately another
period of expansion appears to have begun.

THE FIFTEEN MARKETING AGREEMENTS

Requests for the utilization of the provisions of the Agricultural
Adjustment Act in the fluid milk markets was immediate. The same
day that the act was signed by the President, May 12, 1933, groups
appeared in Washington from the Chicago milkshed and presented
the Secretary of Agriculture with a definite proposal for a marketing
agreement for that market. It was not possible to put the Chicago
agreement into effect until August 1, nearly 2K months later. Many
decisions regarding policy and legality had to be decided, and the pro-
posed agreement was redrafted many times. In the meantime groups
from many other markets were pressing for agreements. It is estimated
that there were more than 100 proposals from markets in 30 States
by the middle of September and that by December there were fully
200.

The Chicago agreement as finally worked out was not long, approxi-
mately four printed pages, but it was supplemented with four detailed
exhibits specifying prices to be paid producei's, rules for the control
of basic production, a schedule of fair trade practices, and an extensive
schedule of prices to be charged by distributors for wholesale, store,
and retail trade. The agreement bound the signatories to observe
the marketing plan and to observe the schedule of prices provided in
the agreement and* the exhibits. The license issued at the time of the
beginning of the operation of the agreement was a blanket license
covering all dealers in the market whether parties to the agreement

••Agricultural Adjustment Act, Public, No. 10, 73d Cong., 48 Stat. L. 31 (1933).

(X)NCENTRATION OF ECONOMIC POWER Q'J

or not. It was designed to impose tlie provisions of the agreement
upon those who were not parties to it and who would not become such
voluntarily.

The Chicago agreement embodied principally the ideas of Dr. Clyde
L. King, the first Chief of the Dairy Section. Dr. King was a man of
wide and long experience in the problems of milk marketing and had
had an elxtensive experience in settling disputes arising in these mar-
kets. He was keenly aware of the groups who had occupied dominant
positions and who could be brought to a general agreement and like-
wise of the smaller recalcitrant groups who made it difficult to carry
through the a,greed programs. He saw in the agreements. a device
to force this troublesome minority into line with the wishes of the
majority of the market.

The Chicago agreement served as a model for the 14 subsequent
agreements, appearing at fairly regular intervals during the remainder
of 1933. The general policies embodied in the agreements are diffi-
cult to determine but appear to have included the following:

1. It was the avowed policy of the agreements to raise the prices
received by producers. The early press releases stress these advances.
For example, the press release of October 13, 1933, annoimcing the
Alameda County agreement, states that "under the agreement the
price to the producers is advanced from 51 cents to 58 cents per pound
butterfat." Similarly the New Orleans press release of October 27,
1933, states: "The general result of the price schedule is to advance
the price to consumers 93 cents per hundredweight and give the pro-
ducers an increase of $1.15." The extent to which these increases
took place is indicated in table 1, which was prepared by the Dairy
Section as a part of one of their briefs. It will be noted that a con-
siderable increase in producer prices is claimed for all markets in which
agreements were instituted.

Table 1. — Comparison of resale milk prices and dealers' margins during
preceding agreement and while resale price fixing agreements were in

interval
force '

Interval preceding

November to December, l^S.''

Dealers'
sale price
per quart

Produc-
ers' share
f. 0. b.

Dealers'

margin

Dealers'
sale price
per quart

Produc-
ers^ share

f. 0. b.

Dealers'
margin

Chicago-

8
8

3.9

2.1
4.7
3.1
5.4
4.9
4.3
3.0
3.1
4.2
3.4
3.0
2.5

5.1
4.6
6.9
3.9
5.3
5.9
6.&
5.1
6.7
7.0
6.9
5.8
6.6
5.0
6.6

11
11
10
9
11
11
13
12
11
11
12
11
10
10
11

5.3
6.0
4.0
3.7
5.6
5.2
6.8
6.5
4.9
4.3
6.2
5.2
3.8
4.2
4.4

5.7

Philadelphia

6.0

De™ "'""

6.0

Twin Cities

5.3

Baltimore

6.4

6.8

6.2

5.5

Oakland

6.1

St. Louis ...:.

6.7

New Orleans

6.8

San Diego

.■i.S

Evans"i!le

6.2

5.8

6.6

> Brief by A. A. A. concerning H. S. 8988, signed by A. H. Lauterbach, May 18. 1034.

There was some recognition that these higher producer prices, es-
pecially if distributor margins were sustained, would mean larger ex-
penditures by consumers. This was not considered especially serious
by a considerable group who believed at this time that the accompany-

58 CONCENTRATION OF ECONOMIC POWER

ing measures instituted as a part of the program of the New Deal
would shortly lead to a recovery in which the consumers would hot
only be able but also willing to pay parity prices to the farmer.

2. The agreements in general followed the pattern of the Chicago
agreement in specifying single retail prices for the various commodities.
There were some modifications; in KJuoxville, New Orleans, Boston,
and Des Moiues both maximum and minimum retail prices were
specified with a range of 1 cent, while in Baltimore a maximum but
not a minimum price was provided. " The notion appears to have been
that in order, to insure success of the agreements and thus improve
returns to producers it was necessary to start with the maintenance of
prices to distributors sufficiently high to yield them reasonable returns.
The immediate problem was felt to be the raising of farm income by
&nj available means and hearty cooperation of dealers was sought by
maintaining or improving their situation. If the margins should sub-
sequently turn out to be excessive there would later be plenty of time
to secure a narrowing of them. The resale price provisions were also
looked upon as a means of eliminating the small fly-by-night dis-
tributor who maintained himself by selling below the prevailing mar-
ket, even though he were not a low cost or efficient distributor but be-
cause he bought milk from producers at prices below those customarily
paid by the large distributors. Such an operator had always been
looked upon as a disturbing element by the majority of the market.
Examination of table 1 indicates that the A. A. A. widened or main-
tained margins in 9 of the 15 markets^, and in the other 6 the margins
decreased.

3^. The market was to have a large degree of local control. The
mechanisfai for the execution of the provisions of the agreement and
license were not especially clear. The idea seemed to be that the
markets would run themselves as they had done previously but with
the Federal Government now to force any comparatively small minor-
ity to the will of the majority. Tlie Chicago agreement, for example,
contained the following provision :

(11) The contracting producers and contracting distributors shall use their
best efforts to assure the observance of the terms and conditions of this agreement
by such producers and distributors. Subject to such regulations as the Secretary
may prescribe, the contracting producers and the contracting distributors shall
establish such agency or agencies as are necessary to (a) receive complaints as to
violations by any contracting producer or contracting distributor of the terms or
conditions of this agreement, (6) adjust disputes arising under this agreement
between cdntracting producers and/or contracting distributors, (c) make findings
of fact which may be published, (d) issue warnings to such persons, and (e) take
such lav^ul measures as may be appropriate; and such agency or agencies if it or
they deem it necessary, shall report its findings and action with respect thereto to
the Secretary for appropriate proceedings under the act. .

/. Prbvisioil was made in several markets for a board representing
producers, distributors and the public, but in only one market, Detroit,
was such a board ever actually formed. George N. Peek, then Ad-
ministrator, announced as late as November 1933 that "Local self-
government and regulation of metropolitan milk shed areas under the
power of the Agricultural Adjustment Act as long planned by the
Dairy Section of the Agricultural Adjustment Administration is now
coming into use."' Moreover, at. one time there was a skeleton out-
line of a plan for regional as well as national bodies to function in
control.

Press release of November 7, 1033.

CONCENTRATION OF ECONOMIC POWER QQ

4. The cooperative in the market was to be supported. Despite
the belief in the permanence of the Federal program on the part of
its administrators, the risk was always present that it might sometime
be withdrawn. Hence it was thought essential that the existing
producer organizations be supported, otherwise the producers would
find themselves in a worse position than if the Federal Government
had never entered the market. The difficulty was that the Federal
Government now performed through its operations some of the
previous functions of the cooperative, especially with respect to price.
The cooperatives had supported themselves with deductions from
the milk checks of their members. If now all in the market were on a
similar basis, whether member of the cooperative or not, actual
disadvantage would accrue to the cooperative membership because of
its additional charge and the cooperatives were f earf id of loss of
membership and prestige. There was in consequence included in
the plan a check-off or deduction from the milk of the noncooperative
member producer as well as the cooperative member producer, and the
deduction for the nonmember of the cooperative paid to the governing
body or some other designated agency of the market under the assump-
tion that that body would perform services for this producer which
he would have received as a member of the cooperative.

5. All producers in the market were to have equal access to it.
This led first to a geographic specification of what constituted the
producing area of the market and only milk from this designated
area was eligible for sale. In establishing these areas the boundaries
of the existing milkshed were considered and there is no evidence
that any important group of producers were cut off and in many cases
the designated area exceeded the then existing^ mUkshed. Secondly, .
it was recognized that high prices would lead to expanded production
and there was provision for some form of the base-surplus plan in all
the markets except the Twin Cities and Des Moines. New producers
in. the designated area could enter the market under the handicaps
usually incorporated in markets with base-surplus plans. Finally, to
insure equal prices to producers in most of the early agreements there
was provision for an equalization fund. This was a scheme for distrib-
uting the returns to producers so that all of those with the same base
ratings received the class I price for the same percentage of their base
ratings regardless of the dealer to whom they sold their mUk. All
producers similarly situated were thus to receive the same price for
their milk, except for transportation differentials.

. 6. The same price for milk was to be charged in stores as for wagon
dehvery. The problem of whether it was desirable to have a different
price for the milk delivered consumers from the wagon and from the
store has long been a moot question in the dairy industry. The
large distributors, their labor force and the cooperative were generally
in favor of no differential since the same wagon-store price served to
maintain their status in the market and, incidentally, to give stores a
wider profit margin. There had been an extensive growth of wagon-
store differentials throughout the country during the depression
period,* and in several of the markets where agreements were instituted
the differential was so firmly fixed it could not be eliminated at once.
In these markets it was retained or lowered whenever possible.

* It Is stated by mUk distributors' organizations that milk was use.d as a "loss leader" in some States in
some areas.

279348 — il— No.32 7

70 CONCENTRATION OF ECONOMIC POWEK

From the very beginning there were violations of the provisions of
the hcenses. Most of these violation's related to the resale price
provisions. The legal section displayed great hesitancy in bringing
these cases to court, evidently feeling that they were on uncertain
ground and that a loss of cases in this field might jeopardize other
programs. The signatories to the agreement were without doubt
bound by its provisions, but whether the same conditions could be
imposed on the non-signers simply through the provisions of a license
was a different question. Much legal opinion held that the provisions
could not be the same. To hold that the licenses and the agreement
could be the same was to maintain that Congress could give an
anticipatory approval on an action yet to be decided upon by a
local group and force nonagreeing parties, to its acceptance. Much
of the subsequent change in the procedure followed has been to avoid
this legal difficulty.

The desirability of establishing both minimum prices to producers
and resale prices by distributors soon became a point over which
there was a sharp division of opinion. An increasing group held that
by so doing the administration became a party to the maintenance
of margins by distributors that were excessive, and that the con-
sumers' interests were not sufficiently protected. Some of the pro-
ducer groups apparently felt that high prices could not be maintained
without the active support of the distributor groups, which was to be
purchased only by adequate protection of their margins. The issue
became acrimonious as evidenced by Secretary Wallace's statement
of December 31, 1933. "The issue seems clear, I have publicly
stated my position that we should use the powers of Government
under our act to lift farm prices, not distributofs' prices. Mr,
Holman for the first time has publicly stated his position, which is
that we should enforce distributors' resale prices,

"To our knowledge the profits of some milk companies, including
lubsidiaries of b^ holding companies are exorbitant to say the
least." «

Formal recognition of the difficulties came with the calling of a
group of outsiders into consultation in January 1934 and the an-
nouncement of a change in policy was made in the following telegram
sent to all markets in which agreements were in effect on January 8,
1934:

The Agricultural Adjustment Administration advsea you that clianges in
policy respecting milk shed marketing agreements announced today will not
di-sturb your present situation until informal conferences with your representa-
tives and other parties to the contract or local public hearings are held relating
• to proposed changes desired to make your agreement conform to, the newly
adopted plan. Meanwhile the administration will exert every effort to sustain
the present nmrketing agreement prices to producers on your market. Concen-

' Press release, December 21, 1933.

The Milk Industry Foundation, in a memorandum of November 29, 1940, to the Bureau of Labor Sta- .
, tistlcs, has submitted reports for subsequent years on the net profits of milk distributors, which, it 18
stated, sbow compaiatlvely small returns in certain areas, as follows:

"State of Connecticut, Federal Trade Commission, January 8, 1936, H. Doc. No. 387, p. 62: Not profit
from operations, 1.9 percent.

"Baltimore, Cincinnati, St. Louis, Boston, Federal Trade Commission, June 4, 1936; Net profit from
operations, 2.6 percent.

"Wisconsin, Wisconsin Department of Agriculture, October 21, 1939, Journal of Assembly, p. 3166:
?roflt 2.33 percent. - , ,

"Philadelphia, Federal Trade Commission, January 8, 1936, H. Doc. No. 387, p. 68: Net profit from
operations, 4:8 percent.

"West Coast, Lybrand, Ross Bros, and >tontgomery, C. P. A., November 18, 1937, The Distributors'
Milk 'Dollar, Pacific Slope Dairy Annual, p. 4: Profit, 1.3 percent.

"New York City, N. Y., Department of Agriculture, January 24, 1938, Legislative Document No. iOO,
1938, p. 6: Profit, 2.98 percent." ,

CONCENTRATION OF ECONOMIC POWER 71

tration of future efforts will be upon establishment and maintenance of proper
prices to producers as each market warrants without attempting hereafter to
establish or enforce complete schedules of distributors' prices to consumers. In
doing this, proper balance will be kept in mind between fluid milk prices and the
prices of butter, cheese, and other competing dairy products so that the final
price to producers will be easier to maintain on an equitable and lasting basis.
However, steps will be taken to protect the market against unfair competitive
practices and in some oases definite r 'airaum price levels will be established
below which resale by distributing age .cic.-; will not be permitted in order that
the whole market structure wiU not be endangered. Greater local responsibility
and wider local representation than heretofore will be sought in drafting future
agreements and in proposals to modify existing ones. Now that you are ad-
vised of the proposed new policy and our desire to modify your agreement by
degrees to conform to that change we welcome suggestions from you and other
parties to your agreement as to your desires respecting informal conferences or
hearings in light of conditions now obtaining on your market.

The agreements were fonnally terminated on February 1, 1934,
but the licenses were allowed to remain in effect until subsequent
replacement by new licenses could be undertaken.

This new position was bitterly assailed by the National Coopera-
tive Milk Producers' Federation and certain of the distributor
interests. The Federation at its March meeting drew up resolutions
demanding:

The immediate reinstatement of the old marketing agreements and supporting
licenses in every market in which such agreements and licenses were canceled by
the Secretary of Agriculture, if a majority of the milk industry in the market so
desire. We also demand the right to have marketing agreements and licenses
of the old type f)Iaced in effect on every other market where a majority of the
industry request such a marketing agreement and license.

(Removal) of those * * * in the Department of Agriculture and in the
A. A. A. who have so unequivocally demonstrated their inexperience, inability,
ineflSciency, and ineptitude in dealing with the fundamental problems facing our
dairy farmers and who have attempted, and are attempting to impose upon the
dairy cooperatives of this country arbitrary controls and alien principles which,
if Jong continued, will. obstruct the cooperative marketing movement in the dairy
field and hinder the recovery of agriculture.*

There was also introduced the Feisinger bill (H. R. 8988) which
would have required the Secretary of Agriculture to fix retail prices,
and to delegate large powers to local control committees. The
A. A. A. actively opposed its passage and after a series of conferences
between its supporters and administrative officials pressure for its
passage was relieved.

THE LICENSE, PROGRAM IN THE MILK MARKETS

The licenses in the markets under agreement which had been
retained in their old form were replaced by licenses embod^^ing the
new procedures as quickly as possible. There was also a rapid exten-
sion of activity to additional markets and by the end of 1934 there
were some 50 markets under license. This marked the peak of
governmental activity in the milk field with respeCt to total number
of marlrets included in the program. With the change in the character
of the program there also caDif a change in the leadership of the
Dairy Section. Mr. J. H. Mi on of the Des Moines Cooperative
iDairy Marketing Association Veimme Chief for a few months and was
followed by Mr. A. H. Lauter sjh who had been head of the National
Cheese Producers Federation, Both of these were men of long
experience with producer orgj.n zation and favored an extension of the

• John D. Blftck, The Dairy Industry an^ tl-) A. A. A., p. 131.

72 CONCENTRATION OF ECONOMIC POWER

expected benefits of the licenses to producers as rapidly as possible.
Tb.e bitterness with which the change in policy had been attacked also
probably resulted in a desire to extend activities and demonstrate that
the new policy might be of benefit to a wide group of milk producers.
The principles as outlined in the telegram of January 8, 1934, to the
markets then under agreement were followed in general, but later
some modifications developed. Certain changes in general pohcy
from that followed in the agreements may be n^ted.

1 . There were no resale prices specified in the licenses except in care
cases. The single price specifications related to the prices to be paid
producers for their milk, usually class II as well as class I prices and
sometimes class III prices. In some markets where special circum-
stances prevailed, as for example sale of a larnje amoimt of milk by
producer-distributors, minimmr rtoale prices were introduced for their
protection. The view now adopted seemed to be that the distributors
were able to look after their own interests adequately and that a price
war or intensified dealer competition would be beneficial provided
producer prices were maintained.

2. The level of prices aimed at in the license was distinctly lower
than that sought imder the agreements. Prices now were to be kept
more closely in line with those of butter and other dairy products.
The parity prices of milk designated by the act were now to be sought
through development qf^ a production control program designed to
raise the prices of all <iairy products together with a concomitant
rise in fluid milk prices; rather than through the mere raising of fluid
milk prices with the expectation that prices of butter and other dairy
products would subsequently rise, which had been the earlier policy.
Until the production control program could be established fluid milk
prices were to be set close to their competitive relations with prices of
butter and other dairy products. This policy was at first scrupulously
adhered to. Proposed prices were tested by computations on the
past relationships of class I milk to the prices of butter and other
processed dairy products and to past relationships of class prices in the
market. Computations were also made by adding to the value of
milk for manufacturing purposes at the edge of the milk shed various
estimates of additional requirements for sanitation, transportation and
so on. The press releases for the licenses early in 1934 stress that the
new prices are at competitive levels. For example, the press release
of February 10, 1934, states for Des Moines, "the price is declared to
be substantially in line with competitive conditions." Similar
announcements were made for other markets.

Two factors operated to modify the strict application of this policy
to an extent the exact amount of which is incalculable. In the first
place the general production control program for all dairy products
failed to develop and the expected consequent rise in fluid nulk prices
likewise failed to take place, There was also a considerable drought
which developed jn the summer of 1934 necessitating amendments
to the licenses in the way of price increases. Producers, of course,
were not interested simply in competitive prices and there was con-
stant pressure for higher prices and undoubtedly there was a drift
from the ideal of purely competitive prices, although the administra-
tors have kept a constant eye on this level and have endeavored to
keep close to it.'' Pretty generally it has proven impossible to keep

' The nietho*of computation for the soK»lled "competitive prices" is indicated on p. 86.

CONCENTRATION OF ECONOMIC POWER 73

a milk producer out of a market when he can sell milk at a lower
price than those already there and mUk production is his most profit-
able alternative. If high prices are established in a market, forces
are put in motion tending to expand supplies in that market either by
the entrance of new producers or expansion of production of old pro-
ducers with subsequent pricing difficulties and lowered returns to
producers. In short, the prices cannot be maintained for any con-
siderable period. The competitive price envisaged was, however, a
sort of long-run normal competitive price. If a temporary situation
drove prices to a low level, then there was no hesitancy in raising
prices to a level which was thought would be more usual in the long
run. The price now sought was thus one which it was felt could be
maintained and it was felt that, in the absence of limitations on pro-
duction, any price departing far from a competitive level, that is, a
price that would normally prevail without Government interference,
would be impossible to maintain, even under Government regulation,
without strong legal and police backing. Black concludes on a
review of this period —

As a matter of fact, of course, the prices written into the new licenses were not
put upon a competitive basis even before the production control plan was dropped.
Too much opposition to the policy arose from producer interests, and the price
finally agreed upon was usually definitely above the competitive level. * * *

* * * A review of prices in 42 licenses in September, 1934 had showed that
nearly all were above a competitive level, although some only by small amounts.
The average for the 42 markets was at least 30 cents above and possibly as, much
as 45 cents.* ' '

It is safe to say, however, that the prices were much closer to com-
petitive levels than they had been under the agreements.

3. With the appearance of the new hcenses there was an imp6rtant
revision of the control incorporated over the operation of the market.
A market administrator became an integral, part of the market
operating it for the Secretary, rather than having the Secretary give a
blanket approval to anticipated actions of a local governing, group.
The new license provided that —

Section E. The Secretary shall designate the market Administrator who shall
perform such duties as may be provided for him in the License. The Market
Administrator as designated shall be subject to removal, at any time, by the
Secretary.

The market administrator was to be paid by deductions from dis-
tributor payments due producers. The controls thus took on a more
frankly Federal administrative asp^ect.

The fiaarket administrator made calculations regarding the prices
to be paid for the lower classes of milk, managed the equalization
pool where there was one, and generally was charged with admitting
new producers to the market in cases of emergency. A representative
of the Licensing and Enforcement Division was also present in the
market to deal with violations of the terms of the license. The task
of finding competent administrators for such a large number of
markets in a short time proved impossible, and it remains somewhat
of a problem even at the present time.

- 4. There was no longer a delimitation of the milk shed in the old
geographic sense. If prices were to be kept at or close to competitive
levels there would be httle reason, of course, for new producers to
enter the market and then no need to set up strong walls to keep them

< John D. Black, The Dairy Industry and the A. A. A. pp. 123 and 144 .

74 CONCENTRATION OF ECONOMIC POWER

out. New producers were now generally permitted to enter the mar-
ket after some probationary period. The probation arrangement in
general use in 1934 required each new producer to sell his imlk at the
lowest class price for several months and was intended to keep pro-
ducers from shifting in and out of the market rather than as a perma-
nent bar to entry.

5. There was an effort to secure a complete apcountLag and auditing
of all transactions in the market and an increased attempt to insure
the fulfillment of obligations and contractual agreements in the mar-
ket. An attempt was made to bond dealers to insure payment to
producers for milk bought. The books and records of operation of
the distributors were also open to scrutiny by the administration.
This has constituted an important contribution to equity in the mar-
ket, siuce one of the faults in an unregulated market is the prevalence
of much under payment to producers through mis-reporting of utiliza-
tion and other incorrect reporting. An example of the extent to which
this may occur simply through mistakes in a market under regulation
where such practices, if intentional, could hardly be expected to escape
notice is found in the summary of the audit adjustments in the Boston
market found necessary during the period from March 16, 1934, to
July 31, 1936.

As indicated * * * audit adjustments, arising from failure ot handlers to
report correctly their class utilization of milk, are very important, from the stand-
point of insuring that handleVs pay the total use value of their milk in accordance
with the classified price plan specified in the order. * * * during the entire
period studied, debit adjustments of this type amounted to $155,607.52, and the
net balance of debits amounted to $82,674.86, the net amount which handlers
would have underpaid producers in the absences of audit of their records.'

6. The protection extended to the cooperatives under the agree-
ments was continued in the licenses. Two deductions were made
from the price paid producers for milk. The first was a deduction
for market administration to cover the costs of the market adminis-
trator's office and was paid to the market administrator. The second
was a deduction for market services. Where there was a cooperative
in the market the deduction from the price paid for the milk of mem-
bers was remitted to the cooperative, .while the deductions from the
price paid for the milk of nonmembers of the cooperative was paid to
the market administrator. In return for this latter sum the market
administrator was to provide the nonmember with services comparable
to those supplied by the cooperative to its members.

As the expansion in the number of markets under license continued
increasing difficulties developed through violations. The Legal Sec-
tion and the Department of Justice proceeded with considerable cau-
tion and there were a number of adverse court decisions, especially of
the interpretations of interstate character of the mUk. The trend of
judicial decisions on mterstate commerce has been a serious limitation
to the ability of the A. A. A. to carry through its program. If the
markets were limited to only those having a considerable volume of
actual interstate-milk then the extent of the program was limited and
pr6bably only large markets near the borders of States could be in-
cluded. Markets within States would be outside the program even
though they differed from an included market by the accident of where
^a State line may have fallen. The Dairy Section tried to extend its

• E. S. Harris and O. M. Reed, "The Audit of Handlers' Records in Connection witli Federal Regulation
of Milk Marketing," U. S. D. A., Agricultural Adjustment Administration, Mimeo., December 1937, p. 5.

CONCENTRATION OF ECONOMIC POWER 75

claim to jurisdiction by the argument that even though no milk was
received in the market it is nevertheless influenced by and influences
the price-making forces which are Nation-wide. It is well known, of
course, that the fluid milk consumption in a market influences the
amount of cream separated and the milk used for manufacturing pur-
poses and thus has effects upon the national markets for these prod-
ucts. The lower courts have rejected this argument.

The failure of legal action and adverse court decisions had important
repercussions on enforcement in the markets. Complaints of violations
were reported from 27 of the 50 licensed markets and orders were
issued to "show cause" why the license of violators should not be
revoked. There were 243 reported in Chicago alone and Boston, Los
Angeles, Philade"iphia, and St. Louis also reported many. Court
litigation had involved 10 markets up to June 1, 1935, and there were
pending 14 cases of which 7 involved the Boston market. The A. A. A.
was forced more and more to depend upon the collaboration of the
local groups in operating the market and securing compliance with
the provisions of the license and less and less upon legal action. There
naturally resulted a decline in activity in extending the licenses to
new markets and a withdrawal from some of the old markets in which
the situation was untenable. At the peak, from December 1934 to
February 1935, there were some 50 markets under license, but a series
of cancellations removed 16 licenses from the active list by July 1,
1935. Many of these involved places where the interstate character
of the milk was mider serious question such as Los Angeles, Fort
Worth, Oklahoma City, Indianapolis and Baltimore. It was hardly
worth while to expand activities under such circumstances and the
Dairy Section chose to await clarification of the legal issues by the
court and enactment of legislation strengthening its position.

MILK MARKETS UNDER ORDERS

The decision to secure clarification in the l^al status of the program
resulted in the amendments to the Agricultural Adjustment Act
passed August 26, 1935. These were a compromise worked out in part
with the milk producer association group, although they did not go as
far as the latter had outlined in its own list of proposed amendments.
These amendments specifically state the way in which the orders are
to be issued, the procedures to be followed, and pi;^Cisely the elernents
to be contained. This was to strengthen the legal position. The issue
as visualized by the legal profession has been well stated by Prof.
R. A. Maurer, and had occupied the attention of the, Legal Section
from the time of the first agreements:

Fixing of prices for the future is a legislative function, often described as quasi-
legislative, and may be delegated to administrative agencies only subject to
stJ&tutory limitations wKich the legislature itself prescribes. Therefore, it may be
truthfully said that it is the legislative will which the administrative agency is
actually carrying out, and not the will of the administrators. However, if a
discretionary authority were vested in the public authority under defined stat-
utory general rules, there would be no objection to an arrangement under which
the producers and dealers submit facts and recommendations in an advisory
capacity. The conclusions and requirements as to price would have to emanate
from public authority in order to have the force of law and be taken as the legal
basis for enforcement proceedings.'"

'• J. D. Black, The Dairy Industry and the A, A. A., p. 281.

76 CONCENTRATION OF ECONOMIC POWER

The procedures worked out followed this line of reasoning. Thus the
act states:

(3) Whenever the Secretary of Agriculture has reason to believe that the
issuance of an order will tend to effectuate the declared policy with respect to any
conamodity or product thereof specified in subsection (2) of this section, he shall
give due notice of and an opportunity for a hearing upon a proposed order.

(4) After such notice and opportunity for hearing the Secretary of Agriculture
shall issue an order if he finds, and sets forth in such order, upon the evidence
introduced at such hearing ,(in addition to such other findings as may be specifi-
cally required by this section) that the issuance of such order and all the terms and
conditions thereof will tend to effectuate the declared policy of this title with
respect to such commodity.

The local groups involved exercise a considerable control over the
issuance of an order and the form which it will take. If the handlers
of 50 percent of the volume of product have signed a marketing agree-
ment which regulates the handling of the product in the manner
specified for the issuance of orders, and if the Secretary finds two-
thirds of the producers either by number or volume are in favor of the
issuance of such an order, he may issue one. If two-thirds of the pro-
ducers are in favor oi-a. proposed order, and the Secretary and the
President after a hearing conclude that an order is necessary to effectu-
ate the purpose of the act, such an order may be issued. The Secretary
is powerless to impose an order upon a market unless the producers
supplying that market are in favor of it.

The provisions of the act as to the terms, market procedures, and
practices which are to be included in the orders are essentially those
customarily found in the large markets and already •previously incor-
porated in most of the licenses. Milk is. to be paid for on use-class
basis by distributors. There is authorization for the equalization of aU
sales of milk within the market unless the producers of three-fourths
of the volume coming to the market favor individual dealer pools.
The Secretary is authorized to select an agency for the administration
^f the order and provide for the funds necessary for operation.

These legal specifications simply make formal the practices pre-
viously followed in providing a milk marketing p],an for a specific
market. Preliminary conferences are first held with the agencies
involved in the milkshed to determine the nature of the plan proposed
and whether it is a plan of the character to which the Government
might become a party. The most important group in this considera-
tion is the local producers' cooperative. At least since August 1935,
and probably from the beginning, the A. A. A. has not gone into
markets without urging from the dominant producers' cooperative in
that market.

If ]bhe pl^an appears reasonable then a public hearing is called some
place in the milkshed at which the proposal is discussed, parties are
allowed to state publicly their views on this or any other plan and
any additional information considered essential to the success of the
proposal is secured. For this hearing an economic brief is prepared
by tfie Dairy Section. This brief discusses the underlying economic
factors leading to the belief that the proposed plan is equitable and
desirable for the market. The brief is mimeographed and widely
distributed before the .meeting. The contents have now become
pretty well standardized and usually contain the following:

Part I : A^xUseussion of the economic Conditions with respect to the
milk pro3ucers in the market, which is designed to demonstrate that

CONCENTRATION OF ECONOMIC POWER 77

these producers do not have a purchasing power equivalent to that
which they had in the base period, August 1919 to July 1929, or that
local conditions warrant a further price increase."

Part II: The character of the cominerce in milk in the particular
marketing area, disclosing the extent of the interstate movement of
milk and cream to the market.

Part III : The supply conditions in the area furnishing milk to the
market are presented.. Such factual data as are available are assem-
bled relative to such things as the location and boundaries of the area,
the types of farming, the character of the herds, production and dis-
position of milk, feed prices, seasonal variations, and the organization
of the supply.

Part IV: This section considers the demand situation. It is usually
short and contains a discussion of the probable abihty of the con-
smners to sustain the proposed prices without curtailing their pur-
chases of milk.

Part V: A historical study of the past prices in the market.

Part VI : An explanation of the classification of milk and the prices
of milk provided in the proposed plan.

Part VII : A statement of the conclusions relative to tne minimum
price set for payraent to the producers in the new plan. It constitutes
a short justification of the proposed prices.

Part VIII: A description of the provisions for an equitable appor-
tionment of the proceeds from the sale of milk among all the pro-
ducers of the market.

Part IX: Discussion of other incidental provisions of the proposed
plan, such as the reports to be required^ the provisions relating to the
market administrator, the expenses of administration, and so on.

These briefs are quite voluminous, running from around 100 to
150 typewritten pages, "with perhaps 35 or 40 tables of factual data.

Anned with the facts gathered at the hearing, the data of the
economic brief and the discussions with important groups within the
market, if it is then deemed desirable, the Dairy Section prepares a
marketing agreement or order as the case may be. If the Secretary
gives a tentative approval to this it is then sent to the field for accept-
ance or rejection by the producers. A referendum is then held among
the producers and an acceptance or rejection of the proposal secured.
If the producers signify acceptance of the order the Secretary issues
the final order.

The general policies underiymg the issuance of prders for the fluid
milk markets remain essentially the same as those during the period
of licenses (1934-35). The following features may, however, be
noted : r

(1) The primary purpose of the orders remains that of raising prices
to producers. The amendments added in the Agricultural Marketing
Agreement Act of 1937 as approved June 3, 1937, eliminate certain
restrictions to these increases that had appeared in previous acts.
Thus, the act of 1935 states:

Sec. 2. It is hereby declared to be the policy of Congress — (1) Through the
exercise of the powers conferred upon the Secretary of Agriculture under this
title, to establish and maintain such balance between the production and con-
sumption of agricultural commodities, and such marketing conditions thereof, as

" Through the amendments of 193'^, August 1919 to July 1929, or some portion of it, became thfl base period
where satisfactory data were not available to the Secretary for the earlier base period.

7g CX)NCENTRATION OF ECONOMIC POWER

will reeBtablish prices to farmers at a level that will give agricultural commodities
a purchSiSing power with respect to articles that farmers buy, equivalent to the
purchasing power of agricultural commodities in the base period; * *, *•
^ (2) To protect the interest of the consumer by * * * (b) authorizing no
action under thig title which has for its purpose the maintenance of prices above
the level which it is declared to be the policy of Confess to establish in subsection
(1) of this section.

This specific limitation to the level of prices to be established in the
orders has been eliminated and th? Secretary granted much greater
discretionaiy power by the 1937 amendment. The latter reads in
pa,rt as follows:

(18) * * * The level of prices which it is declared to be the policy of
Congress to establish in Section 2 and Section 8e shall, for the purpose of such
agreement, order, or amendment, be such level as will reflect the price of feeds,
the available supply of feeds, and other economic conditions which affect market
supply and denjand for mUk or its products in the marketing area to which the
contemplated marketing agreement, order, or amendment relates. Whenever the
Secretary finds, upon the basis of the evidence adduced at the hearing required by
Section 7b or 8c, as the case may be, that the prices that will give such Commodities
a purchasing power during the base period as determined pursuant to section 2
and section 8e are not reasonable in view of the price of feeds, the available supply
of feeds, and other economic conditions which affect market supply and demand
for milk and its products in the market area to which the contemplated agreement,
order, or amendraent relates, he shall fix such prices as he finds will reflect such
factors, insure a suflBcient quantity of pure and wholesome milk, and be in the
public interest.

This latter amendment pretty largety removes what little protection
the consumer had from high prices as a result of the Government
programs. The criterion becomes more largely a matter of adminis-
trative judgment and not one of a definitely calculable limit. Without
doubt circmnstances arise in which higher than parity prices might
bo desirable for short periods because of special circumstances, but
more than b.fefore the limitation on the price granted depends upon the
fortitude and judgment of the administrators.

(2) The position of the producers' cooperative has actually been
Strengthened by the new legislation. In accordance with previous
practice provision is made for deducting from the proceeds of producers
not members of the cooperative, deductions (presutilably equal to
those of the cooperative) for marketing services as was the previous
.policy. Thus, section 5e reads:

Providirig (i) except as to producers for whom such services are being rendered
by a cooperative marketing association * * * for marketing information to
producers and for the verification • of weight, sampling, and testing milk pur-
chased from producers; and (11) for assurance of, and security for, the payment by
handlers for milk purchased.

Much more important is the provision that in the referendum among
the producers now necessary biefore the Secretary issues an order the
cooperative is^mpowered to cast the entire vote of the membership,
thus :

(12) Whenever, pursuant to the-, provision of this section, the Secretary is
reciuirad to determine the approval or disapproval of producers with respect of the
issuance of any order, or any term or condition thereof, or the termina.tion thereof,
the Secretary shall consider the approval or disapproval by any cooperative asso-
ciation of producers, bona fide engaged in marketing the commodity or product
•-hereof covered by such orders or in rendering services for or advancing the
interests of the producers of such commodity, as the approval or disapproval of
the producers who are members of, stockholders in, or- under contract with, such
cooperative association of producers.

CONCENTRATION OF ECONOMIC POWER 79

in most milk markets there will be a considerable proportion of thp
producers who are members of a dominant cooperative. Gaunmitz
and Reed report from a study of the reports of the market administra-
tors for all milk except producer-distributor milk: \

In two markets for which data are available the percentage of total milk pur-
chased from cooperatives was less than 50 percent; in four markets it was from
60 to 60 percent; in five markets 60' to 70 percent; in one market 70 to 80 percent;
in nine markets 80 to 90 percent; and in five markets above 90 percent. It is-
rather well recognized that the cooperatives seU s significant portion of the total
volume of milk sold to distributors in many markets not included in the figured
given above, such as NeW- York City, Philadelphia, Pittsburgh, Chicago, and
Milwaukee."

These proportions are thus sufficient in the majority of milk markets
to give the cooperative veto power over any order which the Secretary
may propose to issue. Tms is a pirincipal reason why the Dairy
Section so carefully canvasses the cooperative opinion before proposing
a tentative order for the market.

(3) Entrar je to the market is available under the orders to any milk
producer who can find a dealer to whom to sdl. The law specifically
states:

(G) No marketing agreement or order applicable to milk and its products in
any marketing area shall prohibit or in any manner limit, in the ca-se of the
products of milk, the marketing in that area of any milk or product thereof
produced in any production area in the United States.

New produces, however, enter the market at some temporary price
disadvantage, intended to restrict the market to regular suppliers :

5, (d) Providing that, in the case of all milk purchased by handlers from any
producer who did not regularly sell milk during a period of 30 days next preceding
the effective dare of such order for consumption in the area covered thereby,
P9,yment to such producer, for the period beginning with the first iaW regular
delivery by such producer and continuing until the end of 2 full calendar months
following the first day of the next succeeding calendar month, shall be made at
the price for the lowest use classification specified in such order, subject to the
adjustments specified in paragri&ph (B) of this subsection (5).

This appears to mean that any restriction to the entry of producers
into a market must be found in the older form of control by the
cooperative or refusal of the health authorities to inspect farms or to
qualify milk for sale in the market, except insofar as the payment
only of low-class milk prices for long periods in itself constitutes a bar
to market entry.

The revision of the legal procedure to that of orders did not at once
clarify the situation and it was il^essary to await court actions to
determine whether the administration was on secure grounds before
expansion in activities took place.

These uncertainties in the mind of the administration are indicated
by the statement of F. R. Wilcox, Director, Division of Marketing
and Marketing Agreements of the Agricultural Adjustment Adminis-
tration, to the American Institute of Cooperation as^late as July 1938.

The story of Federal milk marketing agreement programs in the Boston market
is one of a series of appyeals, motions, answers, decrees, petitions, and citations in
which the court machinery has ground on and on for nearly 5 years. The present
phase of the struggle has been continuous since October 1937, when the Govern-
ment filed suit and was successful in obtaining temporary injunctions requiring
the dealers to comply with the Boston milk order, and pay money due since last
August under the equalization pool.

i« E. W. QaumnlU and O. M. Reed. "Some Problems Involved in Establisfiing Milk Prices," DM-2»
Marketing Information Seri*, U. S. D. A.

§Q CONCENTRATION OF ECONOMIC POWER

When dairy farmers face an economic crisis, they must act swiftly. Long-
drawn-out legal processes which fail to keep pace with modern economic needs
are a threat to the individual dairyman's existence. Cows must be milked every
day and cows must be fed every day. The ordinary dairyman cannot afford to
wait 5 years to find whether or not his daily labor is going to be justified by a
court decision. Until both the Government's position and the farmer's position
are put on more solid ground, uncertainty and insecurity will remain in the
operation of Federal milk marketing programs."

The dairy cooperatives since they were necesftpiily instrumental ip.
securing Federal regulation in the market were hesitant to have it
attempted, since they felt that a failure to operate successfully weak-
ened their position. The following viewpoint expressed by B. B.
Derrick, secretary-treasurer of the Maryland and Virginia Milk Pro-
ducers Association, Inc., illustrates the view held by many cboperatives:

We triftd a Federal order in 1936. It operated for 15 days only to be stopped
by an injunction instigated by 11 independent producers who had been inspired
by independent distributors. The injunction put the association in a very em-
barrassing position. But we took the bull by the horns, signed up the distrib-
utors on a new contract, and went on vrithout public control.

The United States Department of Agriculture appealed the injunction and
litigation started. Exactly 16 months after the original injunction had been
granted against the order, the A. A. A. received a decision from the Federal court
of appeals that the order was all right and everybody should abide by it. By
that time the dairy industry had forgotten all about public controL We were
back where we started."

The situation changed.vith considerable rapidity about the middle
of 1939. Several favoraWe decisions by the Supreme Court upheld
the powers of the Secretary to issue orders and the law as it related
to milk. This resulted in strengthening the position of the Government
in the markets where plans were already in operai ion and increased
interest by producer groups in markets not then under a Federal plan.
It now appears that the Dairy Section mav again be entering a period
of expanding activity. There is less tenaencj, however, to consider
Federal participation as a panacea for the difficulties of the market
and more recognition of its fimction ia facilitating the adjustment and
operation of the market.

In the last few years there has been some attempt at supplying milk
free or at lower than prevailing market prices to the low-income group
or relief clients. The experiment appears to have begun with sales of
relief milk in Boston in October 1937, In this plan the Federal Surplus
Commodities Corporation bought milk from farmers in the Boston
milkshed and gave it to the department of public welfare which paid
for the pror fussing and bottling of milk and its delivery to the families
on relief. This entry into the relief milk field was not entirely from
altruistic motives. The Boston market was at that time involved in
a problem in which several large distributors were refusing to abide
by the terms of the order and buying their nailk at other than the
specified prices. One of the farmers' cooperatives found itself faced
with the loss of a considerable portion of its market as a result and
had difficulty in selling its milk for class I purposes. This resulted in
a low net price to its members with a threatened loss of membership.
The- purchase by the Federal Surplus Commodities Corporation of
relief milk from it enabled it to maintain a relatively large portion of
its sales as class I milk and in consequence to pay a high price to its

>» F. R. Wilcox, "The Federal Marketing Agreement ProCTam," in American Cooperation, 1938, p. 193.
"« B. B. Derri' k, "Advantages and Disadvantages of Public Milk Control," In American Cooperation,
1938, p. 282.

CONCENTRATION OF ECONOMIC POWER 3 J

producer members. The cooperative, was thus enabled to maintain its
existence and the Federal program in the market supported.

In addition to the defensive tactics which were provided the Secre-
tary in the support of his order in the market, the actual operation of
the plan turned out to be desirable from the viewpoint of the disposal
of a larger quantity of milk at class I prices than would otherwise
have been possible. A preliminary survey had shewn that 45 percent
of the relief families were buying no milk at £ 1, md a considerable
number of the remaining 55 percent were buying la very small quan-
tities only. Familes on W. P. A. were permitted to participate in the
plan by paying the 2-cent cost of handling the milk. A' surprising
amount of milk was absorbed in the market without apparent influ-
ence upon the sales or price in the regular distributive channels. All
told it is estimated that as many as 75,000 Boston families received
free or 2-cent milk at some time under the plan.

The results of the original relief milk plan have led to the formation
of plans in which milk is sold to a limited clientele at prices below the
market level, with the major portion of the cost borne by the pur-
chasers themselves. The present Boston plan was begun on August 7,
1939. The farmers are paid the standard class I fluid price for their
milk of about 6.8 cents per' quart. The milk is processed and bottled
and delivered to milk depots by Boston dairies who are under con-
tract. These contracts are bid for by the* dairies and the cost per
quart, which must be under 2 cents, has ranged from 1.4 cents to 2.0
cents per quart* These processing costs are paid by the relief agencies
in Boston. The "Relief milk" is sold to designated relief families at
5 cents per quart. The difference between the 5 cents received from
the consumer and the 6.8 cents paid the farmer is paid by the Federal
Surplus Commodities Corporation. Families on W. P. A. are per-
mitted to buy milk at 7 cents per quart. Of this 7 cents, 5 cents goes
to the farmer, plus the amount from the Department of Agriculture
necessary to make up the 6.8 cents for the farmer, and the 2 cents
goes for covering the processing, bottling and delivery to the milk
depots. This plan has likewise met with considerable success, and a
week after its establishment operations had reached a reported
volume of 72,000 quarts daily.

In Chicago a somewhat similar relief milk program has been in
operation since November 13, 1939. The milk producers have agreed
to a special classification of milk as relief milk priced at about 70 cents
a hundredweight below the regular class I price. Milk is distributed
through* home deliveries, by handlers and at stations. Relief clients
receive the milk without expense to them. The actual cost of the
milk is 7.4 cents per quart for home-delivered milk and 5.4 cents per
quart for station milk. In the home deliveries the Chicago relief
authorities pay 5 cents per quart and the Department of Agriculture
contributes an additional 2.4 cents per quart. At the stations the
relief administration contributed 4 cents per quart and the Depart-
ment of Agriculture adds 1.47 cents per quart. The gross margin
for the handler making home deliveries is 4.42 cents per quart, while
tiie gross margin of handlers delivering at s ptions is 2.47 cents per
quart. The program has been set up to pro i ie a maximum delivery
of 183,300 quarts per day in 75"home-der ered areas and 24,000
quarts a day at 21 distributing stations. I' 5 not expected that this

g2 CONCENTRATION OF ECONOMIC POWER

maximum will be reached, but it has been estimated that 100,000
relief clients will be reached.

The experiments with relief milk and with sales at low prices through
subsidization have not been extensive but do contain some important
implications. It appears that there may be a considerable market
among the low income groups that is now excluded by the present
levels of prices which could be tapped by lower prices and more
restricted delivery services without materiallj?'' influencing the sales
at the going level prevailing in the market. Such a finding is im-
portant in that it indicates a possibility of expanding producer sales
and at the same tinae bringing milk within the range of the low income
groups. Itmayal.o vdicate a met. ns of lowering present distributive
costs. A demonstration of the prices at which milk might be sold
under more r'^stricted services might awaken the general market to a
demand for the provision of milk to all in the market on a similar
basis. ^^

THE PRESENT STATUS AND ADMINISTRATIVE PROBLEMS OF THE FLUID
MILK PROGRAM

The present position of the Federal Government's fluid milk program
may now be summarized in the light of the previously traced develop-
ment. It has become apparent that the number of markets in which a
program may be institurted is seriously limited by several factors.
The pfogram is not nearly as extensive as originally supposed. The
first limitation is the definition of interstate commerce adopted by
the courts. The precise position that will finally be adopted by the
court is by no means clear, but the administration has been unable to
persuade the court that the intricacy of price relationships produces
market influences extending beyond State borders even though the
actual product itself does not cross the border. The court appears to
hold instead that milk involved in the market must actually move
across State lines. The precise amount of such milk necessary to
give the market an interstate character is also undefined. A safe
supposition seems to be that it is probably considerable, for example,
a fourth or more, and it might reasonably be held that this fourth
should not readily be replaceable by milk within the border of the
State, that is, that a real reason exists for the interstate shipment.
This viewpoint, of course, restricts the operation of the Federal con-
trol program to markets lying near the borders of States and excludes
marked essentially similar except for the accidental location of the
State boundaries. The larger northeastern markets have such ex-
tended milksheds that they include several of these smaller States,
but as the States become larger and cities generally smaller toward the
West and South a considerable number jare excluded.

A second limitation is that entrance to the market and even con-
tinuance of a Fed^al program in the market is dependent upon the
favor of the do^unant hfcal cooperative. The provisions of the act
requiring a referendum by the producers before the introduction of a
program and permitting the oflBcers of the cooperative to cast a unani-
mous vote for their members gives the cooperative nearly complete
control of the plan adopted. This does not mean that the cooperative

IS Later incomplete reports from city and State officials connected with the programs in Boston, New
York, and New Orleans indicate some falling off in relief milk sales, particularly In the first two of these
markets, and some doubt as to the eflects upon total consumption.

CONCEJiTRATION OF ECONOMIC POWER g3

can force the Government to institute a plan or to provide a plan
deemed inadvisable to the Government but does give the cooperative
a veto power over any plan proposed. This means that the Govern-
ment could not institute a plan in a market, regardless of how desirable
it might be from the viewpoint of the general pubhc or of the other
groups involved, if the group in the producers' cooperative should deem
it undesirable from their viewpoint. These provisions make it essen-
tial for the administration to secure approval of the cooperative and an
expression of cooperation, together with an expressed desire for a
Government program even before the hearings on the proposed plan
are held. There appears to have been no market at any stage of the
program in which a plan has been instituted without the approval of
the local cooperative, but formalization of this policy into a legal
position of dominance by a single group appears unwarranted.

Finally, there are 20 States" in which there are State milk control
boards, and in these States it is necessary for some sort of a joint pro-
gram with the State control board to be worked out. In some cases
the State programs and personnel do not subscribe to the ideas held
by those in the Department of Agriculture and development of coop^
erative programs has been difficult if not impossible in these cases.
Moreover, in most cases in which the Federal program is called upon
to contribute, several States are likely to be involved, and the division
of responsibility and character of the market plan require difficult
negotiations.

In the markets in which the Federal milk programs have been in-
stituted there is evidence of certain features which have resulted in
cumbersome administration. The difficulty of instituting changes
in prices has raised the problem of securing sufficient flexibility for a
continuing program. As at present required by the law, under proper
procedure, it is necessary to hold a hearing whenever any important
change is made in the order. This requires considerable time and
preparation and tends to result in the postponement of changes as
long as possible, to make sure that the conditions necessitating the
change are of a continuing nature. Milk markets are constantly
changing in supphes of milk and in their demand situation which
means that any price structure must be amenable to change if it is
through its variations to serve a proper operating function in the mar-
ket. The required procedures tend to produce fixity in the market.
Some endeavor toward flexibility has been attempted by the incor-
poration of formula prices for class I milk in several markets. These
are frankly experimental, and while they probably possess distinct
advantages over an unchanging price, it is unlikely that circumstances
can be weU enough foreseen to permit development of a formula price
adequate to solve the problem completely. Moreover, considerable
difficulty is likely to be experienced in securing acceptance by the
market of such a program.

The chief difficulties of ^he present position would appear to be in
the lowering of prices. It is difficult to imagine the whole group of
milk producers supplying a market ueing sufficiently aware of a
market situation to vote a decrease in the price of their own milk.
Such a vote could probably only be secured when the market situa-
tion became so bad as to be obvious to nearly all. One of the func-
tions of a changing price, however, is to reflect early the necessity of

'• A§ of the summer of 1940

34 CONCENTRATION OF ECONOMIC POWER

change so as to permit the change to be made gradually. It would
appear that downward changes would be postponed under this pro-
cedure well past the time when they should have taken place. This
is one of the reasons for a drift toward a formula price, and for the
inclusion of some provision, where possible, in the original order
providing for a subsequent decrease in price at a specified time or
under the development of specified conditions. The only time when
ready acceptance of a provision for price lowering in a market appears
possible is at the time of the original imposition of the order or when
an upward change in price is to be instituted. At that time the
thought of the producers in the market is on the immediate gain and
the subsequent lowering is viewed as a necessary concomitant of these
gains. The real issue of a general decrease in price in a number of
markets is yet to be faced, but it would be unwise not to recognize
that difficulties in doing so exist.

A minor administrative difficulty arises from the bias of the market
administrators. These men are selected by the Secretary and repre-
sent him in the market. They are, however, actively in contact with the
various groups in the market and must constantly work with them.
The market administrator is likely to drift into a position where he
tends to think of himself as a representative of the market and adopt
a view that it is his function to endeavor to "put across" with the
Dairy Section and the Secretary the things desired by the specific
groups in the market. In short, they tend to become imbued with
an entrepreneurial attitude of secm"ing every possible concession for
their particular market, rather than discouraging at the outset
demands contrary to the general policy or undesirable from the
viewpoint of general market operation.

OBJECTIVES AND STANDARDS IN SETTING PRICES

The general objective of the Fpderal fluid milk program has been
to raise prices to milk producers as high as possible. The level to
be attained was stated in the original act as the level which "will
give agricultural commodities a purchasing power with respect to
articles that farmers buy, equivalent to the purchasing power of
agricultural commodities in the base period." This was subsequently
modified in the amendment of 1937 by which, when the Secretary
finds that such parity prices "are not reasonable in view of the price
of feeds, the available supply of feeds, and other economic conditions
which affect market supply and demand for milk, and its products in
the market area to which the contemplated market agreement, order,
or amendment relates, he shall fix such prices as he finds will reflect
such factors, insure a sufficient quantity of pure and wholesome
milk, and be in the public interest." These parity prices have been
constaiptly computed and observed by the Dairy Section but have
probably had little to do with the actual prices filially arrived at and
established in the markets. The actual objective, which has been
substantially unchanged since 1934, appears to have been to establish
the highest producer prices in the market that could be sustained for
any considerable period of time. In the early stages of the program
to have set prices at the prescribed parity levels would have resulted
in such a flow of milk as to have flooded the market and expanded its
area beyond a territory reasonably to be expected to be a continuous
source of supply. These larger supplies would have resulted in

CONCENTRATION OF ECONOMIC POWEB 85

subsequent lower prices and a difficult process of supply contraction.
In the few cases where higher than parity prices were possible, various
qualifications such as recomputation of parity on a more favorable
basis or designating the situation as a temporary emergency have
been followed.

The control devices utilized to maintain these prices have been to
establish legal minimum purchase prices for milk bought from pro-
ducers and to provide for a complete accoimting for all the milk in the
market to insure that these prices were actually paid to the farmers.
In order to insure the successful operation of these control devices
the Federal program has centered a considerable supervision of the
market operation in the hands of a market administrator appointed
by the Secretary. The other institutional procedures of the market
have been left largely unchanged. The general policy has been to
utilize the customs and units in the market unchanged, but to examine
and study the market with a view of strengthening those groups
whose strengthening would tend to improve the operation of the
market. In this respect the Dairy Section has a unique and enviable
record among administrative l)odies.

No definite standards have been developed as a basis of estabhshing
the exact price to be set for milk in a given market. Instead an
individual examination of the special circumstances of each market
has been made and a considerable degree of judgment is exercised by
the Dairy Section in each case. A number of considerations, however,
enter into this judgment, although they hardly justify the designation
of the term standards. The first of these is the historical record of
prices in the md,rket. In this the average differential between butter
prices and the class I price prevailing in the market during the pre-
depression period is added to the current butter prices to arrive at a
current hypothetical class I price. In some cases adjustments for
changes in transportation charges and quality changes in the milk
between the two periods are included. Prices arrived at in this way
tend to indicate an upper limit to prices to be considered for the
market. The predepression period was one of relatively favorable
class I prices m most markets. The final prices adopted are lisually
somewhat lower than the hypothetical price arrived at on this basis.

Another computation with respect to prices is built up to indicate
the competitive price or lowest reasonable level to be expected. In
this calculation the price of mOk for manufacturing purposes in its
utilization at the edge of the milkshed at the time is taken as a base.
To this base price is added transportation charges to the city, a
premium for quality, a cost of meeting the sanitation requirements and
chaises for the special care in handling the nulk. In addition an
allowance has been made in the way of a premium for convenience in
the location of the nulk. This is thought to be considerable in the
eastern milksheds and negligible in the surplus producing areas of the
West. A great deal of estimation has been necessary in arriving at
the additions to be made in a particular market. The price arrived
at on this basis has goneraUy been substantially lower than that secured
on the historical basis. It represents an estimate of k price which
might be expected in a market in the entire absence of a monopoly
element. It generally constitutes the low of the range of prices to
be considered in the establishment of prices for the market. Table 2
gives exajmples of these computed prices and indicates their relations
to the ijimmum prices fixed and the prices actually paid.

. r. 18— 41— No. 32 8

CX)NCENTRATiON OF ECONOMIC POWER

Table 2.— Fixed minimum prices, prices paid, and price estimates f
per hundredweight in various markets, July 19S9 '

or class I milh

Butter-
fat
content

Fixed
prices

Prices
paid

Parity
prices

Estimated prices >

Devia-
tion of

Market

H«ort.

"?iTi^^-

YiLT

i»rices

Under Federal control:

LoweU-Lawrence, Mass.
Boston Mass

Percent
3.7
3.7
3.7
3.7
4.0
, 3.6
4.0
3.8
3.6
3.9
3,6
3.5
3.8
3.5
3.5
3.8
3.8

B. F.

li:

3.7
3.7

'■'
11

B.¥
3.8
3.5
3.6
4.0

B. F.
4.0
4.0
4.0
4.0

B.F.

DoUara
3.06
3.06
3.35
3.40
2.35
2.35
2.16
2.42
1.85
2.00
1.90
1.75
1.95
1.46
2.20
2.40
2.06

.50

.4925

.63
2.18

.66

.64

DoUaTs
3.06
3.06
3.62
'3.715
2.36
2.36
2.15
*2.42
2.45
2.46
2.10
<1.75
«1.95
1.85
2.20
2.40
2.06
.650
.496
.516
2.10
.600
*.640

3.31
3.66
3.18

DoUarg
3.24
2.96
3.34
3.49
2.66
2.44
2.29
2.23
2.46
2.72
2.17
2.08
Z12
2.38
2.22
2.37
2.32
.612
.489
.681
2.36
.608
.922

3.22

2.86
3.31

2.36
2.77

2.10
2.71
2.26
2.29
.582
•2.89
•3.98
3.02
2.77
.708

DollaTS
3.64
3.22
3.61
3.78
2.64
2.46
2.23
2.15
2.54
2.88
2.15
2.05
1.88
2.11
2.08
2.44
2.06
.681
.433
.530
2.0O
.524
.920

3.47

DoUau
2.30
2.30
2.38
2.38
2.06
1.89
1.98
1.86
1.74
1.83
1.68
1.64
.1.65
i.68
1.92
1.88
1.68
.465
.488
.606
1.86

:SI

2.30

DoHan
3.64
3.22
3.61
3.78
2.54
2.46
2.38
2.26
2.64
2.88
2.15
2.06
2.05
2.11
2.32
2.44
2.08
.581
.543
.615
2.26
.607
.920

3.47

Dollars
-0.48
— 16

FaU River, Mass

New Bedford, Mass

Cincinnati, Ohio

Toledo, Ohio

-.09
-.065
-.19

Fort Wayne, "ind.—
La Porte Connty, Ind...

Battle Creek, Mich

Kalamazoo, Mich

Quad Cities, Ill.-Iowa-..
Twin Cities, Minn

-.23

-.43
-.05
-.30
-.10

Sioux City, Iowa

-.26
-.12

Kansas City, Mo

Omaha, Nebr

Leavenworth, Kans.«..-

-.04
-.03
-.031
-.047

Wichita, Kans.»-

T^mkvillfi Ev

-.100
—.16

Denver Colo."

-.007

San Diego, Calif.' -

^^^Bpringfleld.Mas-

-.280
-.16

M.Z.)

Philadelphia. Pa

3,60

2.41
2.93

2.38

1.88
2.16

3.60

2.41
2.93

-.32

2.78

2.ia.

-■rar-

1.90

-.16

Terre Haute, Ind.«

Chicago, 111

.663
2.51
3.07
2.27
2.10
.472
• 3.00
•4.43
3.13

.495
1.61
1.89
1.61
1.76

.465
2.39
2.39
2.44

.605
2.61
3.07
2.27
2.15

.575
3.00
4.43
3.13

-1.04
-1.17

Des Moines, Iowa

St Joseph Mo

2.30

.3:^9*'

•3.62

+.15

T.iii«iln Nfthr '

-.126

District of Columbia

+.49

-.81

Greensboro, N. 0 -

New Orleans, La...

San Francisco, Calif.*—.

2.66
.649

.682

.554

.682

-.033

> Data supplied by Dairy Section of the Agricultural Adjustment Administration.
« Farm price of butterfat hi Mtanesota on July 15 was 24 cwits; farm price of com for the United States
was 47.8 cents.

• July 1-16.

t June price.

» Expressed as price per pound butterfet.

• Included premiums.

lu addition to these computed prices the principals concerned
in the market plan have pretty definite ideas of what a desirable
price would be. Thus the distributors will have a pretty definite
notion of the price which will facilitate their operations and main-
tain retail sales. Likewise, the producers, generally the ofl&cials of
the producers' cooperative, will have a price considered proper by
them for the market. Naturally the price favored by the producer
CTOup tends to be higher than that thought proper by the distributors.
These prices are in some cases merely statements for bargaining pur-
poses, but more generally represent a seasoned judgment resulting
from a long experience in the market, and in the latter case there
tends to be a quite fair agreement on the price.

OONCENTRATION OF ECONOMIC POWER §7

There remains for consideraticm the current situation in the market.
The way in which the market has been operating is an indication of
how it may be expected to operate in the future. The growth of the
amount of surplus milk, the change in the number of producer dis-
tributors and small distributors, as weU as the general temper of the
producer feelings are all to be considered. Usually Federal supervision
will be more satisfactorily received by producers when their prices
are raised above previous levels, and this is often selected as a favor-
able time for entering a market. Rarely, however, has the Dairy
Section been able to meet the full desires of the producers as to the
level of the new price.

There is thus no precise standard by which the price in the market
is arrived at. There are mechanical computations which tend to
designate a considerable range within which the price may be expected
to i&il, but these provide only the rough outlines. The final decision
rests upon a judgment of many factors as observed in the operating
market, and the judgment of the group actively engaged in operations
in the market.

INFLUENCE OF THE FEDERAL PHOGRAM ON THE LEVEL OF MILK PRICES

It is impossible to demonstrate exactly the influence which the
Federal program may have exercised upon the level of prices in the
markets in which programs were instituted. The limitations are in
the scarcity and ambiguity of the quotations of prices and the special
circumstances characterizing the individual markets. The price
structure of a market is complex and can rarely be completely rep-
resented or compared on the basis of a quotation for a single class of
milk or individual product at retail. Moreover, many special factors
may influence the price in a market, and a rise or fall cannot always
with certainty be attributed to a single factor. With these limitations
in mind two types of comparison foUow. The first compares monthly
prices in markets adopting Federal progiams, before and after the
adoption of the program. The second compares the annual averages
for markets with Federal programs and without Federal programs.

Table 3 shows the average monthly prices for 3 months prior and 3
months following the entry of m^irkets into a Federal progranS in
the years 1933 and 1934. The monthly prices are those reported in
the Fluid Milk Price Report of the Agricultural Marketing Service.
The program was begun at different dates in the month in the markets
and price in the month of entry means httle, but a proper comparison
may be made between the prices 1 month prior to entry and 1
month following entry. Examination of the table shows that prices
in the 12 markets adopting a program in 1933 were higher than in the
15 markets included in 1934. The change in price in 1933 averaged
2jf cents while in 1934 it averaged 22 cents. The lower level of price
in the 1934 markets can hardly be taken as evidence of a more con-
servative pohcy since it might equally as well have arisen from the
differences in size and location as compared witK fhe markets included
in 1933. The increiase in price is, however, nearly as large as in 1933
and indicates that the Federal ' rogram was adopted largely in cases
in which a price increase could be secured from its. adoption.

g3 CONCENTRATION OF ECONOMIC POWER

Table 3. — Dealers' buying prices for fluid milk before and following adoption of
Federal milk program tn certain markets in 1933 and 1934

Average price for the month

12 markets
entering Gov-
ernment pro-
gram in 1933

IS markets
entering Qov-
ermnent pro-
gram in 1934

3 montns prior to entry. ,
2 months prior to entry..
1 month prior to entry...
Month of market entry..

1 month following entry.

2 months following entry

3 months following entry

Dol. per cwt.

1.93

2! 20
2.24
2.26

Dol. per cwt.
1.64
1.63
1.64
1.75
1.86
1.86
1.86

The Fluid Milk Price Report of the Agricultural Marketing Service
also must be relied upon for the longer time comparison among types
of markets. The report now carries prices for some 125 markets, not
all of which unfortunately are available for any considerable period.
Among these markets there were foimd 45 for which monthly data
were available on dealers' buying prices from 1920 to 1937. For
each of these markets an average annual price has been computed for
each year as a simple average of the monthly prices. The markets
then have been compared over the period from 1920 to 1937 on the
basis of these annual averages. The annual averages are shown in
table 4.

' Table 4. — Average annual buying price per quart by groups of cities, 1920-37 '

Year

14 cities
under
Federal
control

6 cities
under
Federal
control
for short
period

15 cities
under
no con-
trol

9 Cities
with
State

control

CeiUs
7.79
6.94
6.07
5.96
6.5
6.67
6.63
6.72
5.8
6.87
6.4
4.74
3.75
3.55
4.32
4.63
4.88
6.27

Genu
9.08
6.96
5.88
6.63
6.63
6.28
6.45
6.38
6.40
6.33
6.15
5.36
4.62
4.12
4.48
4.60
5.08
5.68

Centi
• 7.94
6.73
5.72
6.34
6.38
6.48
6.4
6.3
6.26
6.32
6.17
4.88
4.02
3.84
4.47
4.7
4.34
4.94

Cmtt

1921

6.93
6 17

1922

1923 . - - .

7 09

1924

6 92

1925 . .

6 99

1930 -

1931 .- .

6 12

1932

4 41

1936

6 43

1937

1 Prices from the Fluid Milk Price Report of the Agricultural Marketing Service. These prices appear
to be class I prices except in a few instances where they may be blended prices. The following cities are
included under Federal control: Sioux City, Louisville. Boston, Kalamazoo, Minneapolis, St. Paul, Kansas
City, St. Louis, Richmond, Omaha, Des Moines, Lincoln, Topeka, and Denver; under short Federal
control: Lexington, New Orleans, Washington, San Francisco, Indianapolis, and Baltimore; under no
control: Dallas, Memphis, Cumberland, Md., Clarksburg, Wheeling, Cleveland, Buffalo, Butte, Roches-
ter, N. Y., South Bend, Sioux Falls, Seattle, Winona, Colorado Springs, El Paso; and under State control:
Hartford, New Haven, Jacksonville, Portland, Oreg., Philadelphia, Pittsburgh, Springfield, Mass., MU-
waukee, and Belolt.

The cities have been grouped in four classes : Those with a Federal
program for most of the period between 1934 and 1937, those with a
Federal program fcMrojily a short period, those imder no known con-
trols, and those under State milk control boards. The groupings
cannot be exact because of the varying periods of Federal and State
programs. Simple averages have been computed by years for each
cJassification.

CONCENTRATION OF ECONOMIC POWER gQ

It appears that prices in the markets under Federal control have .
risen relative to the prices in other markets. The difference in the
absolute levels of prices is probably of no significance because of the
differences in prices depending upon the location and size of the par-
ticular markets, but it appears probable that the relatively higher
position of the markets under Federal marketing plans in the period
from 1933 to 1937 is a result of the Federal program. When 1937 is
compared with the period 10 years earUer the change appears to have
been close to a cent a quart or perhaps 40 cents per hundredweight.
An unknown portion of this may have been due to changes in the
methods of pricing milk in these markets during the period, such as a
shift from a fiat price to a classified price plan in the market.

Dealers' margins when computed on the basis of the difference in
retail price per quart of milk and the dealers' buying price for fluid
milk are not representative of the average margins of dealers. Milk
and cream are sold in containers of many sizes with different margins
and at wholesale and retail with different margins and the proportions
of these sales differ among pities. The retail quart margin for family
trade is the only one readily available for any reasonable number of
cities and is probably fairly reliable as an index where the comparison
is between groups of identical cities over a period of time. These
margins as computed from the data in the Fluid Milk Price Reports of
the Agricultural Marketing Service are shown in table 5. The uni-
formity of these margins over the period considered is marked and
there is likewise considerable uniformity among the groups. Dealers
appear to have had their margins close to 1929 levels in 1937 in contrast
to their buying prices which were lower. There appears to have been
no appreciable difference in the behavior of these margins in the cities
under Federal programs than in cities elsewhere.

Table 6. — Average annual spread per quart of milk between dealers' buying price
and selling price to family trade, by groups of cities, 1920-37 '

Year

14 cities

F^efal
control

8 cities
under
Federal
control
for short
period

13 cities

under

no control

8 cities
with
State

control

1920

CetiU
7.3
6.3
6.0
6.3
6.6
6.3
6.2
6.2
6.4
6.5
6.6
6.0
5.7
5.6
5.7
5.9
6.2
6.4

Cmts
6.7
6.6
5.9
6.1
6.2
6.1
6.2
6.4
6.4
6.6
6.6
6.0
5.7
5.7
5.6-
5.9
6.0
6.5

Cents
7.5
7.3
6.7
6.1
6.9
7.0
6.9
6.8
6.8
7.0
6.8
6.5
6.0
5.9
6.1
6.1
6.3
6.6

Cen's
6 8

1921.

6 7

1922

1923...

1924.... ,

192? :.. : ..:

1926 .

6
6
6
6
6
6
5
6
6
6

i927

1928... ,

1929

1930 ,

1931

1932

1933 _..._

1934

1935

1936

1937

< Prices from the Fluid Milk Price Report of the Agricultural Marketing Service. The following cities are
included under Federal controls: Sioux City, Louisville, Boston, Kalamazoo, Minneapolis, St. Paul,
Kansas City, St. Louis, Richmond, Omaha, Des Moines, Lincoln, Tooeka, and Denver; under short
Federal control: Lexington, New Orleans, Washington, Los Angeles, San Francisco, Grand Rapids, Indian-
apolis, and Baltimore; under no control: Dallas, Cumberland, Clarksburg, Albany, Cleveland, Buffalo,
Butte, Rocuester, N. Y., South Bend, Sioux Falls, Seattle, Colorado Springs, and El Paso; and under State
control: Hartford, New Haven, Portland, Oreg., JacksonvUle, Philadelphia, Pittsburgh, Beloit, Wis.,
and Milwaukee.

CONCENTRATION OF ECONOMIC POWER

Since the margins of dealers do not appear to have varied materially
among the groups of cities the changes in retail prices to consumers are
essentially those found for the dealers' buying prices. These are
given as averages for 57 cities in table 6. Retail prices, although at a
lower level in the cities under Federal controls in the twenties, were
fully as high as the prices in the cities without Federal or State con-
trols in 1937. The relative increase appears to have been something
less than a cent a quart.

The comparative levels of producers' prices, retail prices, and dealers*
margins in the latter part of the 1920's and in the period 1934-36 is
shown in table 8 for cities under Federal control, under State control,
and without any control. The table also shows changes in the levels
of these prices in 1937 in comparison with 1929.

Table ^.—At^rage annual retail price per quart of milk to family irade,^
of cities,"^ 1920-37

hy groups

Year

17 cities
under Fed-
eral control

9 cities
under Fed-
eral control
for short

period

17 cities
under no
control

14 cities

with Stat6

control

1920

Cents
15.08
12.58
11.11
12.33
12.17
12.04
11.98
12.08
12.24
12.51
12.12
10.80
9.35
9.05
10.08
10.64
11.12
11.74

CenU
16.40
14.23
12.61
13.35
12.63
13.13
13.35
13.47
13.55
13.67
13.46
11.97
10.62
10.21
10.61
10.97
11.71
12.38

Cents
15.73
14.06
12.26
13.00
13.06
13.30
13.21
13.02
13.02
13.15
13.00
11.29
9.82
9.38
10.30
10.67
10.89
11. 72

Cents

15 35

M21

13 36

1922

12 12

1923

13 17

1924

13 35

1926

13 31

1927... :..•

1928 •.

13.83

1920.. :.....:.. .:

1930

13.82

1931.

1I32

0 33

1933

10 46

1934

11 57

1935

11 71

1936

12 00

1937 . .

> Prices from the Fluid Milk Price Report of the Agricultural Marketing Service.

» The following cities are Included under Federal license: Sioux City, Wichita, Louisville, Boston, Kala-
mazoo, Minneapolis, St. Paul, Kansas City, St. Louis, Toledo, Richmond, Detroit, Omaha, Des Moines,
Lincoln, Topeka, and Denver; under short Federal control: Lexin^iton, New Orleans, Washington, Los
Angeles, San Francisco, Evansville, Ind., Grand Rapids, Indianapolis, and Baltimore; never under license:
Dallas, Memphis, Cumberland, Md., Clarksburg, Wheeling, Albany, Cleveland, Buflalo, Butte, Rochester,
N. Y., Davenport, South Bend, Sioux Falls, Seattle, Winona, Minn., El Paso, and Colorado Springs;
and under State license: Birmingham, Bridgeport, Hartford, Jacksonville, Portland, Oreg., Philadelphia,
Springfield, Mass., Pittsburgh, Salt Lake City, Milwaukee, Wausau, Wis., Beloit, Wis., and Kenosha.

Table 7.

-Summary of changes in producer prices, in retail prices, and in dealers'
margins

Changes in producer
prices

Changes In dealers'
margins

Changes in retail price
to consumers

Cities under-

Average
1926-29 to
average
1934-36

1929 to 1937

Average
1926-29 to
average
1034-36

1929 to 1937

Average
1926-29 to
average
1934-36

1929 to 1937

Federal control:
Long period

Cts.
1.17

1.82

Pet.
20.2
26.1
27.0
28.8

Cts.
0.60
.65
1.38
1.56

Pet.
10.2
10.3
21.8
20.6

Cts.

0.40
.57
.45
.71

Pet.
6.3
8.9
6.6

10.3

Cts.
0.10
.10

Pet.
1.5
1.5

'Cts.
1.59
2.41
1.95
2.48

Pet.
13.0
17.8
14.2
18.9

Cts.
0.77
1.29
1.06
1.43

Pet.

6.2

Short period

9.4

No control

.50

7.1

10 9

Source: Tables 4, 5, and 6. Note that the number of cities for which changes are presented varies for
producer prices, retail prices, and dealers' margins, as in the tables from which the data are summarized.

CONCENTRATION OF ECONOMIC POWER

Table 8. — Excess in retail price of a quart of fluid milk over a 14}i ounce can of
eva-porated milk on Oct. 15 '

Year

23 cities J
under
Federal

program

28 cities 2
with no
Federal

program

Year

23 cities 2
under
Foderal

program

28 Cities '
with no
Federal
program

1920

Cents
3.22
1. 53
2.78
3.00
3.74
3.44
3.46
3.51
3.70
4.66

Cents
3.92
2.75
3.79
3.45
4.32
4.13
3.99
4.27
4.50
5.34

1930

Cents
4.67
4.13
4.56
3.99
4.74
4.65
4.31
4.99
5.26

Cents

1921

1931 ..

1922

1932

4 56

1923

1933

4 29

1924

1934

4 92

1925

1935

4 78

1926

1936

4 37

1927

1937

4 79

1928

1938

6 31

1929 •

» Prices as reported by the Bureau 01 Labor Statistics.

» 23 citifts with Federal programs are: Atlanta, Baltimore, Boston, Chicago, Cincinnati, Denver, Detroit,
Fall River, Indianapolis, Kansas City, Los Angeles, Louisville, Minneapolis, New Orleans, Omaha,
Philadelphia, Providence, Richmond, St. Louis, St. Paul, San Francisco, Savannah, and Washington, D. C.
The 28 cities without Federal programs were: Birmingham, Bridgeport, Buffalo, Butte, Charleston, Cleve-,
land, Columbus, Dallas, Houston, Jacksonville, Little Rock, Manchester, Memphis, Milwaukee, Mobile,
NewarJc, New Haven, New York, Norfolk, Peoria, Pittsburgh, Portland, Maine, Portland, Oreg., Roches-
ter, N. Y., Salt Lake City, Scranton, Seattle, and Springfield, 111.

Another comparison is possible on the basis of the quotations of
the Bureau of Labor Statistics. Even though this is limited to retail
prices it is nevertheless worth examining since the 51 cities included
in the Bureau of Labor Statistics quotations differ considerably from
the cities available for the Fluid Milk Price Report comparisons.
Prices have been taken for the 15th of October rather than yearly
averages. The comparison is on the basis of the margin between the
price of a, quart of fluid milk at retail and the price of 14K ounce
can of evaporated milk at retail. These margins have been computed
for each city for October 15 of each year and then the cities grouped
into 23 cities in which there has been a Federal milk program and
28 cities in which there has been no Federal milk program. The
results are essentially those previously secured. In both groups of
cities fluid milk has risen in price relative to evaporated milk afad the
extent of the rise in the cities under Federal control appears to have
been greater than in cities not under Federal control during the
period from 1934 to 1938.

It thus appears that^roducer prices have been raised in the markets
under Federal programs, that dealers' margins have thus far been
uninfluenced by the program and that retail prices to consumers are
somewhat higher. The amount as estimated from such data as
available here appears to have been on the average in the neighborhood
of 20 to 40 cents to producers and an increased price to consumers of
less than a cent per quart.

THE POSITION OF VARIOUS GROUPS UNDER THE PROGRAM

The principal groups involved in -a gfiilk market are the producers,
the distributive group, including the "labor union, and the general
public or consumers. Each group has certain special ihterests often
in conflict with the other groups, and generalizations regarding even
these groups are difiicult since even within a group the circumstances
differentiating individuals are often substantial.

92 CONCENTRATION OF ECONOMIC POWER

The producers as a whole appear to have secured a substantial
advantage from the Federal milk program. As has just been shown,
it is probable that prices were given a considerable upward impetus
in the early period of operation under the agreements. Prices
advanced considerably beyond theii' inmiediately preceding level in
the markets with agreements. Moreover, it is likely that the- in-
fluence of the program extended beyond these markets. The mere
possibility of an agreement and the preliminary negotiation by the
producers' organization or threat of request probably raised prices
in certain markets in which programs never were instituted. The
higher prices in these markets also probably stiffened the resistance
to declines in other markets. Beyond this first period the data also
support the conclusion that the Federal program has tended to raise
and support producer prices. It is also unfortunately true that there
are some markets in which the administration has been maneuvered
by the local groups into supporting a price level that appears high
relative to other markets and to the level that can be sustained over
any considerable period.

As has previously been emphasized, the producer cooperative has
gained in its power to dominate the market. No order can be placed
in effect in the market without its approval. It has been suggested
by some, however, that the hold of the cooperative upon its individual
membership has been lessened. Certain functions are now performed
for all in the market by the market administrator and the advantages
of membership in the cooperative may be felt by producers to be less
essential than previously. In such a case the cooperative may have
difficulty, in maintaining its membership. It may be pointed out,
however, that in a number of markets the producers cooperative has
gained in membership following the adoption of a Federal program.

The more complete and accurate accounting for milk in the market
under the market administrator has been beneficial to the producers
and probably also to the market as a whole. There is now provided a
compulsory reporting and a legality to the policing of the designated
terms of transactions in the market that was formerly absent. Many
producers' cooperatives were not sufficiently strong to force a proper
accounting for the milk sold by them and were dependent upon
voluntary reports by dealers. These reports are now certified and
audited. This compulsory reporting has resulted in much more
information relating to the operation of 'the market becoming available
than ever before. This increased knowledge should result in a better
understanding of the market problems by all concerned and facilitate
better market operation.

In many markets there has also been an improvement in the
situation with respect to the equity of the various deductions from the
specified class prices to be paid producers for their milk. The cooper-
ative generally bargained with the distributors for the various prices to
be paid their members for milk. These were, however, gross prices
and the net prices included deductions for transportation and often
station chaises. Markets varied enormously in these charges but
there was a large element of custom present which often retained the
charges at levels extremely profitable to the distributor, although far
less expensive methods than the original were employed in handling
the mifis. The cooperative was usually aware of where these chaises
were unreasonable but generally powerless to force an adjustment.

CONCENTRATION OF ECONOMIC POWER 93

The Federal programs have in many markets lowered these charges
and in general resulted in a more uniform airangenxent of charges
throughout the market. The examination of the market practices by
an unbiased outsider is likely to disclose hidden practices im justified
from the viewpoint of the market as a whole and the Federal milk
program has undoubtedly made a marked improvement in these
respects.

The position of the distributors as a group imder the Federal
program appears to have been unchanged. Such data as are available
indicate little change in margins. Among the distributors the larger
distributors have probably'^ained at the expense of the smaller dis-
tributors. The most effective weapon of the smaller distributor in
securing.new business is ordinarily price cutting. He can no longer as
readily Secure special supplies of low-priced milk from producers to
support and in part bear the costs of this retail operation. In forcing
distributors t6 pay the prescribed producer prices a considerable re-
straint is thus placed on retail price cutting. The larger distributor
with somewhat better service and more prestige than the ordinary
small distributor probably gains.

It is a weakness of the Federal program that no general attack has
been made upon the problem of the costs of mUk distribution.
Insofar as the purpose is solely that of raising prices to farmers only
slight emphasis need necessarily be given to a reduction of these costs,
but for a general public program including the interests of the con-
sumers as well as the producers considerable emphasis upon a reduc-
tion in these costs would be desirable.

The interests of the consumer have been poorly represented in the
Federal mUk programs. \ The statistical data indicate that he has been
called upon to pay the major share of the gains that the producers
seem to have derived. Consumer groups have had their opportunity
to present their case at the various hearings preceding the issuance of
orders for the market. Few among the consumers have had, or are
likely to have, sufficient information to present a conclusive case in
support of their interests. Theii" argument has usually beien an
unsupported statement that prices are already too high in the market.
Examination of the hearing records will disclose in the majority of
cases little in the way of actual information provided by consumers
upon which the Secretary or the-Dairy Section may draw in reaching a
decision. The data in the economic brief supplied for the hearing
by the Dairy Section have thus far been simply a demonstration that
changes in the incomes of consumers have probably been such as to
sustain takings even at higher retail prices, or that incomes are at such
a level that a given retail price may be sustained.

The Consumers' Counsel in the Agricultural Adjustment Adminis-
tration is the organization designed to participate actively in guarding
the consumers' interests ia the program. It should be pointed out,
however, that the Consumers' Counsel occupies an anamolous position.
He is charged with protecting the interests of the consumer under the
terms of an act which is clearly monopolistic in character. This sets
him in opposition to the operating unit which is endeavbring to carry-
out the provisions of the act in raising prices. Naturally the Con-
sumers' Counsel comes to be regarded la,rgely as an obstructionist by
the Dairy Section and other groups (iesiring higher prices. The
Consumers' Counsel must also operate on inany fronts. There is a

94 CONCENTRATION OF ECONOMIC POWER

considerable group concerned with milk as a sole activity, while the
smaller staff of the Consumers' Counsel must deal with numerous other
commodities as well. Moreover, the amount of information available
to the Consumers' Counsel is more limited and there is difficulty in
presenting a conclusive case against the larger evidence assembled
elsewhere. The number of cases in which the Secretary has sustained
the objections of the Consumers' Counsel over the recommendations
of the Dairy Section is extremely small.

As noted earlier the experiments with sales of milk at low prices to
relief recipients and W. P. A. workers suggests that there exists a
substantial market in the low income groups that could be cultivated
by lower prices and more limited delivery services without much
diminishing the volume of sales at regular prices;

The Federal milk program has probably had little influence on the
general economic recovery of the country as a whole. The fluid
milk producers are only a comparatively small sector even of agri-
culture. They already occupied a preferential position through
their strong cooperative organizations and in a number of markets
had developed a considerable monopolistic position. The gains in
their income were largely at the expense of increased expenditures of
consumers and probably resulted in decreased expenditures elsewhere.
Since there were no advance payments to them as was the case with
certain other agricultural groups it is impossible to claim an expansion
of total purchasing power. What appears to have taken place was a
transfer of income to milk producers from consumers and there is no
good reason to suppose that this transfer in itself would stimulate
economic activity.

APPENDIX TO CHAPTER I

HISTORY OF MILK MARKETS WHICH HAVE BEEN UNDER
FEDERAL CONTROL, GIVING TYPE OF INSTRUMENT IN
EFFECT

Market

Type of instrument

Date effec-
tive

Date sus-
pended

Date termi-
nated

Alameda Countj' Calif

Nov. 7,1933
Nov. 14, 1933
July i, 1934
Sept. 1,1934
Jan. 14,1935
Jan. 20,1935
May 4,1935
July 1, 1934
Dec. 20,1934
May 1,1935
Dec. 1,1934
Aug. 13,1935
Sept. 29, 1933
do

Feb. 1, 1934

License

July 1, 1934

do .

Amendment

Amended license

Aug. .31, 1935

Nov. 30, 1935

Amended license

:...-do

License ■

Feb. 15,1936

Aflfintn Oa

Baltimore Md

Amended license

Jan. 27,1936

July 1, 1936
Feb. 1, 1934

License

Amendment

Oct. 31,1933
Nov. 16, 1933
Aug. 1, 1934
Sept. 24, 1934
July 1, 1934
Dec. 20,1934
July 1, 1934
Nov. 3,1933
do

do.-- -..

License

Feb. 1, 1934

Feb. 26,1935

Battle Creek, Migh:-. .;

Amended license

July 26,1935

Feb. 1, 1934

Mar. 16, 1934

do.

AiriRTidmprit

Mar. 16, 1934
May 1, 1934
June 1, 1934
July 17,1934
Aug. 22,1934
Oct. 1, 1934
Feb. 24,1936
May 1,1935
May 18,1935
June 1,1935
July 16,1935
Feb. 9, 1936
July 1, 1937
Aug. 1, 1937
Jan. 16,1939

Aug. 1,1933

do.- -...

.—do.-- -

Amended license

- do.-- -■

do.-- -

Amended license

Order

Feb. 9. 1936

Aug. 1,1936

Reinstated

Amendment

-:...do.-- -

Agreement ^.,

'Ui^Dse'.'.'.".'.'.'.'."/'".'

Dec. 20,1933

Nov. 3,1933
do -.

do -

do..-

License

Nov. 21, 1933
Feb. 5,1934
June 1, 1934
July 1, 1934
July 18,1934
Aug. 22,1934
Nov. 1,1934
Dec. 2.1934
Jan. 17,1935
Sept. 1.1939
May 1, 1938
do

Jan. S, 1934

Amended license

Amendment

do.-- -

do..- -

Amended license

Mar. 2,1935

Order

Cincinnati, Ohio

Agreement

May 14, 1939

Order

Amendment

May 14,1939
Sept. 1,1934
Oct. 1, 1934
Apr. 3,1935
July 1, 1935
Oct. 25,1933
Oct. 28.1933
Feb. 14,1934
May 5,1934
June 16,1934
Dec. 5, 1934

Amended license

Des Moines, Iowa

Agreement

Feb. 1, 1934

License

Feb. 14,1934

do.. — ,—

Amended license

. Amended license

July 1, 1938

CONCENTRATION OF ECONOMIC POWER

Market

Type of instrument

. DateeSec-
tive

Date sus-
pended

Date termi-
nated

Detroit Mich

Aereement

Aug. 27,1933
do . -

Feb. 1, 1934

L^nS

Apr. 1, 1934

AmftnrlTnftTit

Nov. 20, 1933

Apr. 1, 1934
June 17,1934
Nov. 6,1934
Dec. 6,1934
Jan. 10,1935
May 6,1935
Sept. 21, 1936
Dec. 1,19.36
Dec. 6,1934
Oct. 1, 1936
Mar. 1,1937
June 16,1939
Oct. 23,1933
do^

License

Amendment

Amended license

Amendm^in;

District of Columbia

Amended license

Order.

"iJecr2i'i937"

Feb. 8,1937
Sept. 30, 1936

License

Order

Order as amended

Agreement

Evansville Ind

Feb. 1, 1934

License.-

Feb. 26,1934

Amended li'oense " " "
Amendment

Feb. 26,1934
Nov. 25, 1«34
July 24,1935
Aug. 17,1935
Apr. 1, 1934
May 1,1934
June 1,1934
Sept. 1,1934
Mar. 16, 1935
Apr. 9,1935
July 14,1935
May 1,1936
Apr. 1. 1937
July 1, 1934

June 19,1935
Aug. 16,1935
Feb. 1,1937
Oct. 15,1938
Sept. 1,1939
Sept. 1,1934
Oct. 1, 1934
Oct. 17,1934
Nov. 5,1934
Jan. 11,1935
May 22, 1935
July 1, 1934
Nov. 5,1934
Dec. 6, 1934
May 1,1935
Apr. 1, 1934
July 1, 1934
Dec. 16,1934
May 1,1935
June 1. 1935
Mar. 17, 1934
Apr. 1, 1934
May 16, 1934
July 17,1934
July 1, 1936
Aug. 1,1935
Dec. 1,1936
Sept. 1,1939
Oct. 9, 1933
Oct. 28,1933
July 1, 1934
Nov. 5,1934
Nov. 13, 1937
Aug. 20,1938
Aug 3,1939
May 16, 1934
Aug. 18,1934
Dec. 16,M934
June 20, 1935
July 6,1936
May 2,1934

Mar. 17^ 1934
May 16,1934
July 17,1934
Aug. 18,1934
Nov. 16, 1934
June 19,1935

Feb. 1, 1936

Fall River, Mass

License

Amendment

do.

Amended license

Amendment

Amended license

Amendment

Order

Apr. 30,1936

Flint, Mich

License

Sept. 14, 1935

Fort Wayne, Ind

-...-do „.

Amended license

Amendment

Agreement

Oct. 15, 1938

Order

Order as amended

License

Fort Worth, Tex

..--.do..

Amended license

Amendment..

Amended license ^

License. _.

July 1, 1935

Gifend Rapid.s, Mich

Amended license

Amendment

Indianapolis, Ind

Amended license

License

Sept. 1.1936

Apr. 1, 1937
Feb. 28,1936

Kalamazoo, Mich

Amended license

License

Amended license

"ir.do:::::::;::::::::

Dec. 1,1936

Order

Amended order

Feb. 1, 1934

License.-

June 24,1934

Lansing, Mich...

Amended license

Order .,j...

Amendment

July 26,1936

La Porte County, Ind.

Order as amended

Amended license

do-.

Amendment

•

Lexinpton, Ky

License ^

Amended license ].

License.....

Amended license

July 16,1936

Lincoln, Nebr

Amended license

Apr 30,1939

CONCENTRATION OF ECONOMIC POWER

Market

Type of instrument

Date effec-
tive

Date sus-
pended

Date termi-
nated

Los Angeles, Hftiif

Nov. 17, 1933
Nov. 20, 1933
June 1, 1934
Aug. 22, 1934
Oct. 1, 1934
Dec. 16,1934
Feb. 28.1935
Mar. 28, 1935
Feb. 12,1939
June 1,1934
Aug. 17,1935
July 1, 1934
Nov. 5,1934
Jan. 11,1935
Apr. 1, 1934
May 1,1934
June 1,1934
Sept. 1,1934
Mar. 16, 1935
Apr. 6,1935
July 14.1935
Sept. 1.193^
July 1, 19391
Oct. 28,1933
Oct. 31,1933
Mar. 17, 1934
Apr. 1. 1934
May 1.1934
June 1.1934
Sept. 1.1934
Mar. 16, 1935
Aug. 16,1935
June 16.1934
July 18.1934
Sept. 4.1934
Feb. 23,1934
June 1. 1934
June 16,1934
Nov. 16, 1934
Apr. 6,1939
Aug. 25,1933

License

June 1 1934

Amendment

Amended license

do -

Amendment..

Order and agreement. .

July 1, 1935

Lowell-Lawrence, Mass

Louisville, Ky

Amendedlicen.se

License..

Amended license

Amendment

July 26.1935

New Bedford Mass

License"

Amendment . .

Amended license

Amendment.

Amended license

New York, N. Y

Agreement and order..
Reinstatement order..

Feb. 1. 1939
Mar. 18,1939

Feb. 1,1934

License

AmfiiwlTTipnt

Mar. 14, 1935

Newport, R. L

Amended license

Amendment

Amended license

License

Mar. 1. 1936

Oklahoma City, Okla

do ..::.:.:.:::

License

Mar. 15. 1935

Omaha-Council Bluffs, Nebr.-Iowa.

Amended license

Amendment .. . .

Amended license

Order...

Apr. 4.1939

PhUadelphla, Pa

License...".:::::::::::

July 1, 1935

Phoenix, Ariz .

Nov. 10. 1934
Nov. 21.4934
Aug. 16,1935
July 1, 1934
Aug. 18,1934
Oct. 22,1934
Apr. 1,1934
May 1,1934
June 1,1934
Sept. 1,1934
Oct. 1, 1934
Mar. 16, 1935
June .1,1934
Sept. 1,1934
Oct. 22,1934
Feb. 26,1936
Dec. 20,1933

Port Suron, Mich

Amended license

License

Apr. 1,1936

Sept. 30,1936

Amendment

do :......

License

Mar. 2,1935

Providence, R. I . .. .

do... ...:::::::::

Amended license-:..-.
do

AmnnrlTppnt

. ■

Apr. 4. 1936

Nov. 30, 1935

Quad Cities, Iowa-Ill

License .

Amended liceil«9

AmfindTnont.

Amended license

Richmond, Va....

License

M^y 1.1934

do.- ..

Amended license

May 1.1934
Apr. 16,1935
July 1. 1934
Nov. 22, 1933
Nov. 25, 1933
Mar. 2,1934
June 1.1934
'Aug. 14.1934
Oct. 10,i934
■Nov. 16,1934
Feb. 22.1935
Mar. 4.1935
July. 25. 1936
Feb." 1,1936
Apr. 17,1936
Apr. 1, 1937
Apr. 6 1939
Dec. 16.1933
Dec. 18,1933
Feb. 1,1936
June 19,1936
July 14,1935

Saginaw. Mich .........

Nov. 1.1937

Oct. 1, 1938
July 26.1935
Feb. 1, 1934

St. Louis, Mo:

Agreement .-

License

Mar. 2,1934

Amended license: : : : : :
Amendment

Amended license

Amendment..;

Amended license

Amendment

Order

AmpmlniBnt

.:!T.d^. ..:::::::::

Su Qiego, Calif ....^

Feb. 1,1934

Lfoense.. .:::::::::::.

Amended license

Amendment

CONCENTRATION OF ECONOMIC POWER

Market

Type of instrument

Date effec-
tive

Date sus-
pended

Date termi-
nated

License

Oct. 2, 1934
Jan. 14,1935
May 4,1935
Aug. 16,1934
Oct. 15,1934
Mar. 1,1935
Mar. 17, 1934
May 16,1934
Nov. 5,1934
Dec. 22,1934
July 18,1935
Nov. 1,1934
Sept. 16, 1938
Nov. 10, 1934
June 14,1935
July 16,1935
Aug. 16,1936
Apr. 16,1935
Aug. 11,1935
Aug. 21,1934
Sept. 16, 1934
Nov. 5,1934
Jan. 16,1935
Apr. 16,1935
July 1, 1935
Aug. 16,1935
Sept. 2,1933
do

Amendment

License

Au?. 31,1935

Nov. 30, 1935

Amended license

License

Sioux City, Iowa

Aug. 31,1935

Nov. 30, 1935

Amended license

June 25,1935

Order..

License

Amended license

Agreement

Aug. 15,1936

Tucson Ariz

License

Amendment

Apr. 1, 1936

Oct. 1, 1936

Tulsa, Okla

License

Amended license

Oct. 16,1935

Dec. 31,1935
Feb. 1, 1934

License

Feb. 16, 1934

AmftTidmRTit

Feb. 16,1934
Aug. 17,1934
-Oct. 25,1934
Dec. 23,1934
Jan. 9, 1935
June 5,1935
Mar. 17, 1934
May 16,1934
Aug. 18,1934
Jan. 21,1935
June 1, 1935
Aug. 15,1935

:::::do^'iii.::-:ii::i:

License. -

Wichita, Kans

Amended license

AmendmeTlt

Amended license

Date signed.

CHAPTER IP
REGULATION OF FLUID MILK MARKETING IN OREGON

"Milk" under the Oregon Milk Control Act of 1933 "means fluid
milk and sweet cream sold for human consumption in fluid form." ^
While the stated purpose of the bill is "to provide for the supervision
and control of the milk industry of the State of Oregon," the regulation
provided by the Milk Control Act covers probably not over 25 percent
of the total milk produced in Oregon. It also covers some milk sold
in Oregon but produced in the State of Washington. Of the IH billion
pounds of milk produced on farms in Oregon ia 1936, about 56 percent
was used for manufactured dairy products and about 17 percent was
used on farms where produced as whole milk and cream, for making
farm butter and for feeding calves.^ Furthermore, the law states
that "the board may by official order exempt from the license require-
ments, provided by this act, milk dealers selling milk in any quantities
in markets of 15,000 population or less." * Only a relatively small
portion of the total milk produced on Oregon farms is affected directly
by the Oregon Milk Control Act.

Two factors are probably largely responsible for this differentiation
of milk into "milk" as defined by the Oregon Milk Control, Act and
milk used for other than fluid milk and sweet cream for human con-
sumption in fluid form. One factor is the fact that in large cities the
marketing of much of the fluid milk supply is done by others than the
producers, and the other is the more rigid sanitary requirements
imposed by city health authorities on m-lk used as fluid milk and
cream as compared with the sanitary requirements for milk used for
manufactured dairy products. The significance of the first of these
is increased by the fact that a unique and specialized marketing system
was developed for fluid milk, rather than using the usual marketing
system for food products. The marketing of milk is imique, because
milk is about the only food product for which daily door^ep delivery
is a common method of marketing and because of the emphasis which
some milk distributors and some associations of *producers of fluid
milk place upon the advantage of daily doorstep delivery. How
important this specialized delivery system is considered to be by some
distributors is indicated by the testimony of Thomas H. Mclnnerney,
president of the National Dairy Products Corporation, before the
Temporary National Economic Committee:

No other food industry renders a comparable service to the public. And it is
largely because of this service that milk consumption in the United States ranks
far ahead of practipally all the leading nations of the world. Daily doorstep
delivery keeps milk constantly before the public in a fashion not equaled by any
other system of distribution. This daily delivery service has been the most
important single factor in making milk the largest, most dependable and reliable
source of farm income in the United States.'

' This chapter was prepared by Don S. Anderson.

>Now known as title XLI, Oregon Code, 1935 supplement, as amended by cbs. 67 and 69, special session,
and by oh. 197, Laws of 1939.

• Calcialated from reports of the Bureau of Agricultural Economics, U. S. Department ot Agriculture.

' Oregon Milk Control Act, sec. 4.

» Statement by Thomas H. Mclnnerney, president. National Dairy Products Corporation, before the
Temporary National Economic Committee, May 3, 1939, p. 3.

IQQ CONCENTRATION OF ECONOMIC POWER

In the past it has been rather common for producers' associations
as well as distributors' organizations to oppose the sale of milk through
stores. The argument has been that such sales tend to reduce con-
sumption below what it w(5uld be without store sales — for, say those
who support the argument that if milk is left on the doorstep regularly
the housewife will use it, while if she must go to the store for it fre-
quently she will not bother to. get milk. Insofar as producers' asso-
ciations have felt the need of distributor cooperation if they were to
maintain such monopoly advantage as they might have, it is natural
that producers' associations would be willing to support the distrib-
utors in opposing store sales. As milk wagon drivers have become
unioriized, producer associations have, apparently lessened their
opposition to store sales.

About one-third of the total population of Oregon lives m Portland.
In 1930 Portland had a population of 301,815, while the next largest
city in Oregon had a population less than one-tenth of that of Port-
land. Portland has adopted the United States Bureau of Public
Health standard milk ordinance, with some mmor changes. The
effect of this appears ta have been to have appreciably increased the
cost of producing milk for the city market as compared with pro-
ducing milk for manufactured dairy products. The inspections
required under this ordinance apparently have been the source of
some irritation to dairy farmers, and the question has been raised as
to whether all parts of the regulation are necessary for the production
of safe milk. The sanitary requirements appear 'to have had the
effect of differentiating milk producers into two groups, those supply-
ing the city riiarket and those producing prunarily for manufactured
dairy products. This differentiation is illustrated by events of the
summer of 1936 when a milk shortage developed in the Portland
market.

.jAdministrator Adams (of the Oregon Milk Control Board) says that this crisis
ijesulted chiefly from a sharp price lift for milk on part of nearby condenseries.
Numerous producers were lured from the Portland market and its very stringent
sanitary code — administered by the city health department. There was a sharp
drop in the number of producers on the milk board's list, and most of the deserters
never have returned to this mfairket.*

The average price paid producers by condenseries in the North-
western States rose from $1.11 per hundredweight in August 1935 to
$1.66 per hundredweight in August 1936, an increase of 55 cents, or
50 percent. This increase was part of a general increase in dairy
prices resulting from reduced supplies due to drought. The average
price paid producers by condenseries for the United States increased
from $1.18 in August 1935 to $1.74 in August 1936, or 5^ cents, as
compared Vith 55 cents for Northwestern States. During this
period the average price paid by mUk dealers in the Pacific Coast
States for ifulk used for city distribution as milk and cream rose
from $1.68 to $1.95, an increase of 27 cents, or 16 percent. By
August 1938 the price paid by condenseries had fallen to $1.07 per

'Oregon Voter, Nov. 26, 1938, p. 20. The. Oregon Voter is a weekly publication published in Portland
devoted largely to public affairs. The editors have no apparent special interests in milk control, and an
attorney for the milk control board agreed that this article gave a fair description of the situation.

CONCENTRATION OF ECONOMIC POWER IQl

hundredweight J and this decline in price increased the difficulty of the
control board in maintaining the price of milk used for fluid uses.
This partial differentiation of the total mUk production of an area
because of different sanitary requirements must be considered,
especially in an area Xvhere.only a small portion of the total production
is used as fluid milk and cream by city consumers.

First among seven requirements for the ideal and equitable method
of handling surplus on a fluid milk market, W. H. Henry, secretary-
manager of the Dairy Cooperative Association, an association of milk
producers supplying the Portland market, places "comprehensive city
ordinance governing the production of milk." Such an ordinance, he
says, "is essential in controlling surpluses and making reasonable
returns to the producer." He elaborates this by adding: "In order
to curb the 'in and outers' on a fluid milk market it is necessary to
have a stringent city health ordinance governing the production of
market milk This helps to curb overproduction, especially in the
flush season, and practically elmiinales those who are not primarily
market milk shippers."'' The reference to curbing overproduction,
especially in the flush season, suggests a characteristic of certain
Oregon markets that must be considered in evaluating public regu-
lation, namely, the great seasonal variation in the production of milk.
The county agent of one county testified that the variation in normal
production from the low month to the high month for his county was
about 1 to 8.*

THE BACKGROUND OF PUBLIC REGULATION

Low prices paid producers supplying milk for^ fluid use to the Port-
land market were the immediate cause of public regulation in Oregon.
These prices feU sharply daring 1932 and reached a low point during
1&33. Efforts were made to organize nulk producers supplying the
Portland market into a cooperative during the early 1930's, and the
Dairy Cooperative Association was organized and started to operate
in August 1931. Higher prices were depianded of the distributors,
and it was reported that one large distributor bought as much of his
milk as possible from nomnember producers and bought only what he
had to from the Dairy Cooperative Association. In order to enforce
their demands for higher prices, farmers withheld milk from the mar-
ket, and during the nulk strike there was some vi(5lfence and violation
of law. The situation has been described as foUov^s:

Oregon's Milk Control Act was adopted primarily to stabilize! and strengthen
our great dairy industry, said to represent an aggregate investment totaling
$200,000,000." It followed some years of demoralization and vigorous attempts
at quasi- voluntary control, which culminated with the unsuccessful reign of a
milk czar. The public, much more passively interested, has quite forgotten the
nulk wars and milk dumpiing. Conditions of 1 93 1-33 are called to mind by reference
to the Milk Control Act, passed by the second special session of 1933. Price

W. R. Henry, Equalizing Surplus Burdens Through Public Control, American Cooperation, 1938, pp.

' Public hearing, Tillamook County, Greg., April 25, 1939.

• There Is no inaication mat me writer was aware of the fact that the act directly affected only a fraction of
the total industry. '

li79348 — 41 — No. 32-

102

CONCENTRATION OF ECONOMIC POWfiR

disparity, it stated, has broken down the orderly production "> and marketing
of milk and cream and has seriously impaired the agricultural assets supporting
the credit structure of the State and the local political subdivision thereof.

Now note the entrance of the envisioned need for policing of the dairy industry,
"Whereas unhealthful, unfair * * * demoralizing economic trade practices
have grown up. * * * which impair the industry in the State and the constant
supply of pure wholesome milk to the inhabitants thereof and constitute a menace
to the health and welfare of the inhabitants of the State; and whereas, in order to
protect the well-being of the people of the State of Oregon and promote the public
welfare, the production, transportation, manufacture, storage, distribution and
sale, of milk and cream in the State hereby is declared a business affecting the
public health and kiterest- which should be supervised and controlled in the man-
ner herein provided. - "^

Any attempt at this late date to ascribe the milk law's origin to scheming dis-
tributors or wholesalers or other "big interests"' is wide of the truth. The law
actually was the legislators' response to woeful plaints of the bedeviled dairymen,
whose industry was demoralized and whose investments were evaporating in

The price paid producers f(|f milk used as fliud milk and cream in
Porlbland is shown in chart JI, and appendix to chapter II, comparative
prices for Seattle, Wash., the nearest large city, are also shown in
appendix to chapter H. Prices paid producers fell sharply during
1932 and reached the lowest point since 1920 in 1933. Prices were
advanced from the low point with the introduction of public regula-
tion late in 1933 and have been relatively stable since then.

The "milk czar" referred to in the above quotation was designated
as arbitrator when some threat of milk shortage developed in the
Portland «iarket as a result of the milk strike. Hi§ legal advisor is
now -one sf i-he attorneys for the control board and was undoubtedly
instruB*^roal a drafting the Oregon Milk Control Act.

THE MARKET STRUCTURE

The Dairy Cooperative Association was not organized until mid-
1931. It appears that prior to this time the producers on the market
Rad been unorganized and were dealing largely as individuals directly
with the several distributors. In addition to the producers selling to
distributors there was apparently an appreciable number of. producer-
distributors — that is producers who were marketing their milk directly
to consimiers. During 1937 about 7 percent of aU the milk produced
in Oregon was retailed by the farmers who produced it.

In the fall of 1938 practically all of the producers selling to distri-
butors on the Portland market were members of one of the three
producer associations supplying the Portland niarket. The number of
nonmembers supplying the market was reduced diuing the period of

1° Total production of all milk on farms in Oregon for the past 10 years has been—

Year

Million
pounds

Year

MiUlon
pounds

1920

1,199-
1,265

1934 J

1 364

IflSO

1935... , -

1, 365

1931..

1932 ... . ..

1.291
1,284
1,290

1936

1*336

1933-

lisso

Froin reports of the Bureau of Agricultural Economics, U. S. Department of Agriculture.

In July 1938 the secretary-manager of the Dairy Cooperative Association of Portland read a paper at the
American Institute of Cooperation on "Equalizing Surplus Burdens Through Public Control." This
paper gave no indication that there was danger of not having enough milk; rather, the problem was posed as
one of distributing the burden of the surplus equitably among all producers. '

" Oregon Voter, November 28, 1936, p. 14-16.

Chart II
Fluid Milk Prices in Portland, Oreg., 1920-39

CENTS PER
QUART

I 8

I 6

I 4

I 2

I 0

■

\r\

vlAa

A ,/

./•^^-

l^ RETAIL

PRICE

- House Deliveries

\a,

,'V''

^V.

[

1 L

\''

1 A

?*«

u i

1 \

^i'

^/^

>••'

*~^ GROSS MARGIN

...../■

> •

^ y-

x-v

-.X-A.

1. —

\/ 1 '

r-J

p. K

.-^/

%--' ~

^~— .

"A 1 -

\-j

KI'

I^^PRIGE PAID

! 1 ■

PRODUCERS

. .... Prices not listed
*At forms

■

_<no I I9KI I /9Z2. I ,9Z3 I ,9^^ I ,9;^5 | . m6 [ ^7 | <9;te | /9iC9 | /930 | 1^31 \ <93^ | ,933 | Wt | /'>35 ] J936 ' | /937 " /938 |~>93^

CONCENTRATION OF ECONOMIC POWER ]^Q3

control by producers withdrawing from the market or by joining a
producers' association. In addition to the producers who sell to
distributors there are about 90 producers distributing their own milk
on the Portland market.

The Dairy Cooperative Association adopted the base-surplus plan
of paying producers in October 1931, 2 months after the organizaltion
started to operate. During the first year the average of each pro-
ducer's shipments in August and September was used as his base.
Later the average of the 5 low months was used as the base, regardless
of which months those were.'^ The fact that the Dairy Cooperative
Association adopted the base-surplus plan suggests that, at l^ast during
certain seasons there was more milk produced imder conditions ap-
proved by the city health department than could be sold as fluid milk
and cream, and that the "surplus" problem was a serious one on the
Portland market. The secretary-treasurer of the association stresses
that, "uncontrolled surplus in the hands of. distributors is a threat to
the stability of that market and always results in a decrease in price
to the producers." ^^ Another diflElculty caused by the "surplus" was
that some producers would receive the price paid for milk used as
fluid milk and cream for a larger proportion of their total millc sales
than would other produce^. As a result these farmers received a
higher average price for their mUk. Since the proportion of the total
milk of the cooperative used as fluid milk and cream was smaller than
that of producers selling directly to distributors, it was especially
interested in some way of "equalizing surplus burdens,"

THE OBJECTIVES OF REGULATI0^

In evaluating the objectives of the Oregon Milk Control Act it must
be remembered that the regulation provided for ifl this law applies
to only a portion of the total milk produced in Oregon. The law
apphes only to mUk and cream used for human consumption in fluid
form and one of the board members emphasized that the board had
no control over milk for the manufacture of dairy products. Never-
theless the law states that —

the present economic emergency is in large part the result of the disparity between
the prices of milk- and cream and other commodities, which disparity has dimin-
ished the power of milk producers to purchase industrial products, has broken
down the orderly production and marketing of milk and cream and has seriously
impaired the agricultural assets supporting the credit structure of the State and
local political subdivisions thereof."

As already mentioned under the' discussion of the situation which
led to the legislation, the Milk Control Act states that conditions had
developed "which impair the dairy industry in the State and the con-
stant supply of pure, wholesome milk to the inhabitants thereof.'"*
Thus the aUeged objectives of the Milk Control Act were—

1 . To promote industrial recovery. '■

2. To support the credit structure of the State and its local

political subdivisions (apparently the tax base).

3. To assure a continuous adequate supply of pure, wholesome

milk.

'> W. H. Henry, Equalizing Surplus Burdens Through Public Control, American Cooperation 1838,
p. 300.
>« Ibid., p. 299.

" Oregon Milk Control Act, par. 2.
" Ibid, par. 3.

104 CONCENTRATION OF ECONOMIC POWER

In commenting upon the first of these the Oregon Voter remarked:

It is readily recognized that prosperity for our lumber industry energizes and
benefits our entire economy. • In a lesser degree the same thing is true of the
dairy industry."

But no attempt was made to explain how causing city consumers in
Oregon to pay higher prices for fluid milk and cream in order to
increase the income of those Oregon dairy farmers who produced that
milk and cream would increase industrial production.

With respect to the third object the "Oregon Voter" argued that as
the price goes down "dairymen lose money, disperse their herds and
quit: no new adventurers undertake the dairy business. Result: in
the course of 2 years there is likely to be only enough milk to supply
the community's needs during the flush production and in the off
season a serious shortage develops." ^^

The experience of the depression suggests that dairying is one of
the last alternatives of the farmer. Except for severe drought years
milk production has increased during the dep^ssion. There may be,
however, an alternative for the dairy farmer producing for a city fluid
milk market with costly sanitary requirements. That alternative is
production for manufactured dairy products. Thus the danger, if
any, is of a shortage of milk produced under the specified sanitary
regulations, not of a shortage of total milk supply, which again empha-
sizes the importance of .considering sanitary requirements in a study
of milk regulation.

A different objectiv^' is stressed by the secretary-manager of the
producers' association. He says:

Section 13 is the heart of the law. It states in part "that to stabilize and
promote the milk industry it is necessary that uniform prices be paid to all pro-
ducers, who, either djrectly or through any cooperative or cooperative association,
furnish milk to any specified market" —

and further —

to provide for the pooling and averaging of all returns from the sales of fluid milk
produced in the geographical area from which fluid milk shaU be produced for a
designated market or sales area, and the payment to all producers of a uniform
pool price for all milk so produced * * * "

To the cooperative assocation of milk producers the problem is one
of being able to pay as high a price as received by the producer selling
directly to a distributor who would buy only about as much milk as
he can sell as fluid milk and cream. The cooperative, on the other
hand, must accept all milk produced by its members and if it cannot
dispose of all this milk as fluid milk and cream must dispose of the
balance iii manufactured dairy products usually at a lower price.
Sanitar;^ regulations which differentiate milk for fluid milk and cream
from milk for manufactured dairy products or effective bargaining
by a producers' apsociatioFi may raise the price of milk for fluid uses
above the price for manufactured uses. In either ca9e the amount
of milk suitable foij fluid uses will usually exceed the amount that can
be sold as fluid irrilk and cream during part or all of the year and this
necessitates selling the balance for manufactured uses. If, when this

i« Oregon Voter, November 26, 1938, p. 16.
" Ibid. pp. 15-16. .

>• W. H. Henry, Equalizing Sorplns Burdens Through Public Control, American Cooperation, 1938, p.
303.

CONCENTRATION OF ECONOMIC POWER 105

occurred, the price of the total supply fell to the price milk would
bring in manufactured dairy products there would be no problem of
"surplus" although the income of milk producers supplying the city
market would probably be reduced. Attempts are made, therefore,
to segregate the "surplus" and to sell this alone at a lower price, while
at the same time holding up the price of fluid milk and cream. This
makes it to the advantage of each producer to get as large a portion
as possible of his milk used as fluid milk and cream and raises the
problem of "equalizing surplus burdens."

THE CONTROL A E' CY

Responsibility for carryLag out the provisions of the Milk Control
Act rests with a rnilk control board of three members. This board
was created by the Milk Control Act and administering the milk con-
trol legislation is the sole governmental function of the board. It is
provided that the director of the department of agriculture shall act
as executive secretary of the board, but he is given authority to desig-
nate some member of his staff to act in his place. The members of
the board are appointed by the Governor and may be removed at any
time. One member shall, be from each of the tjiree congressioDal
districts of Oregon. No member of the board shall be a milk dealer
or producer as defined by the milk control bill nor shall any member
have any financial interest in any enterprise carrying on business as
a milk dealer or producer. Members of the board are not full-time
employees of the State, but are paid for each day actually spent in the
performance of official duties. The detailed work of administering
the Milk Control Act is carried on by a full-time staff of office and
field workers under the direction of an "administrator."

There has been one complete change in the membership of the
board since the law was passed in late 1933. The tenure of the first
board was from late 1933 to the middle of 1935. The board was given
the duty of initiating what was probably one of the most complete
systems of milk regulation ever attempted upon a market which
until rather recently had not had even the discipline of a producers'
cooperative association, and in which some distributors at least had
apparently attempted to hamper the organization of a producers'
cooperative. One evaluation of this board's work is that "its main
fault seemed to be an ineptness in dealing with the chiseler, so catnmon
in the business." ^*

In addition to the one complete' change in board membership there
has been an additional change in the chairmanship of the board, and
also a change in administration. With this change in the chairman-
ship early in 1939 an examination of the standards used in the
administration of the milk control legislation was begun. An
agricultural economist was employed by the boar4, to work inde-
pendently of the administrative office, to make studies of production
and distribution costs in various markets in Oregon. This work is being
continued and may considerably modify the standards used by the
board.

•♦ Oregon Voter, November 20, 19.18, p. 18.

106 OONCEIS^TBATION OF ECONOMIC POWER

CONTROL DEVICES

The control devices* available to and used by the Oregon milk
control board are —

1. The licensing of milk dealers.

2. The establishment of marketing areas.

3. The establishment of "milk-sheds" or territorial areas within

which milk may be produced for sale i^any given marketing
area.

4. The allocation of qujtas to producers and the regulation of

the sale or transfer of these quotas.

5. The estabhshment and regulation of market pools.

6. The fixing of minimum prices.

Licensing of Milk Dealers.

In section 4 of the Milk C'^ntrol Act it is provided that, "no dealer
shall buy milk from producers or others for sale within the State,
or sell or distribute milk within the State, unless such dealer is duly
licensed so to do as provided in this act." It is provided further
(sec. 9) that the board may classify licenses and issue licenses to dealers
to store or manufacture or aell mUk limited to a particular city or
village or to a particular market or markets within the State. Licensees
are required (sec. 10) to keep adequate books and records and all
information that the hoard may deem necessary for the proper
enforcement of the act.

Establishment of Marketing A n?,.

The board may define what shall constitute a natural market area.
"A market area shall include no more than one city or town. Together
with the contiguous territory within a reasQiiable distance around the
same, where marketing conoitions are the same, unless two or more
towns or cities are so closely adjacent to one another that they
comprise but one natural market area and are subject to the same
marketing conditions, in which event, such two or more adjacent
towns or cities together v.ath the contiguous territory around the
same as heretofore defined, may be included in one marketing area.
Each market area, and production area from which the same is
supplied, shall include ptdy that territory in which the conditions
involved in the production, processing, and. distribution of milk are
similar. A separate order of the board in the estabhshment of
minimimi prices * * * shall be made for each sales and produc-
tion area."

Establishment of Mill -sheds.

This is perhaps tl j most nearly unique feature of the Oregon plan
of milk regulation. In section 13 of the Oregon Milk Control Act the
board is given power "to define and limit the geographical area from
which the fluid milk shall be produced for any given market or sales
area as fixed and designated by the board. "^'^

The "market"' and "production areas" can be illustrated by the
order covering the Portland market.

"The 'Portland sales area' means the area within the corporate
limits of the eyty of Portland and the area within lines paralleling
the boimdary <iines^ of the city of Portland drawn 3 miles distant

M Oreg'ii Milk OowtTol Act, sees. 9 and 13.

CONCENTRATION OF ECONOMIC POWER JQT

outside therefrom and the extension of such lines necessary to enclose
the area, excluding, however, any territory in the State of Wash-
ington."

" 'Production area' me^ns the territory lying within the area en-
closed within lines paralleling the Portland sales area drawn 30 miles
distant outside therefrom and the extension of such lines necessary to
enclose the area together with the premises maintaining herds, the
milk or cream from which was being lawfully offered for sale within
the sales area as herein defined on December 15, 1933, or 60 days prior
thereto." 21

Only milk produced within the "production area" can lawfully be
offered for sale within the corresponding "market" or "sales" area.
Furthermore, all milk produced within the production area cannot be
lawfully offered for sale within the market area even though it is
produced under conditions that fully satisfy all sanitary requirements
of the market. In addition to being produced within the sales area,
it must be produced by a producer who has been allocated a pro-
ducer's individual quota by the milk control board.

Allocation of Quotas.

"The term quotas means the total number of daUy pounds butterfat
which, in the judgment of the board, is required to meet the bottle
and can sales in the market together with an additional amount of
butterfat pounds of approximately 10 percent above said total, to
take care of the fluctuating demands of said market. A producer's
individual quota is the privilege allotted to said producer to share in
the proceeds of the bottle and can sales in the market and his cor-
relative duty to supply the demands of such -bottle and can sales
and the reasonably necessary surplus, under the regulations, contained
in this order." 22

The establishment of production areas and the allocation of quotas
are the core of the Oregon plan of milk regulation. In essence, certain
milk producers were given the exclusive right to supply a given market
with fluid milk and cream. They are protected from competition
from other producers and a minimum price must be paid to them for
that portion of their total mUk production that is used for fluid milk
and cream. They are not assured, however, that any given amount
of their mUk and cream will be used as fluid milk and cream. Further-
more, the producer is required to supply his sha^'e'of the total milk
and cream supply or his quota wUl be reduced. Any producer having
a quota in the Portland production area, whose output during the 4
months of lowest production does not equal his allotted quota will
have his quota reduced in the following year. Producers who fail to
meet the sanitary requirements of the market for a period of over 30
days also lose their quotas.

'The quotas are ffxed from 'time to time as conditions seem to
warrant. For example. Official' Order No. 105 of the Oregon Milk
Control Board, dated March 1, 1936, sets quotas "for the year 1936
or until this order is amended, modified, or changed." Official Order
No. 105 was repealed by Official Order No. 121, which became effective
June 1, 1939. This order continued the then existing quotas of old
producers until May 31, 1940, and provided rules for the annual

" Officiar Order No. 121, Oregon Milk Control Board, p. 3.
"Ibid., p. 4.

, 108 CONCENTRATION OF ECONOMIC POWER

adjustment of quotas if during the year the quantity of total sales
of fluid mUk and cream was substantially different from the total
quotas of aU producers. The board feels that it is important that
total quotas be kept substantially equal to total sales of fluid milk
and cream. If total sales are either 10 percent above or below total
quotas, adjustment in total quotas is made. In general, the regula-
tions covering adjustment of quotas provided for equal percentage
reduction in the quotas of each individual producer, if a reduction in
total quotas is necessary. If sales exceed quotas by more than 10
percent, each producer is given an additional quota based upon the
amount of milk he produced the previous year in excess of his quota.
This provision for allotting additional qu6tas on the basis of produc-
tion in excess of quotas suggests that the Oregon plan makes no effort
to control total production of milk.

Quotas of old producers can be increased and quotas can be allotted
to new producers only if quotas are available because some producers
have lost their quotas or if the total quota for the market has been
increased because of an increase in the total sales of fluid milk and
cream on the market. "tJp to about mid-1939 the individual producer
who was allotted a quota owned that quota in about the same way
that he owned other real or personal property. He was free to transfer
his quota to another producer who could meet the requirements of the
health department of the city of Portland and the regulations of the
milk control board. Recent orders of the milk control board place
rather rigid limitations upon the right of the individual producer to
sell or transfer his quota. These regulations were the result of
criticism of the board which arose from the fact that producers were
selling their quotas to other producers. This was taken to be an
indie's, tion that the board was creating valuable property rights by
granting certain producers monopoly privileges.

In general the regulations covering the transfer of quotas provide
^at such transfer can be made only when there is a bona fide sale
of the farm or of the equipment, herd, and license, or of both. The
quota under the new regulation is, in general, attached to the farm
or to the herd and equipment rather than to the man. In each
transfer the purchaser must agree to continue to serve the market if
he is to retain the quota.

Cooperatives are protected by a provision in the Portland order
which provides that any member of a cooperative association who
desires to transfer his quota shall first obtain written consent of such
cooperative association to such transfer before such transfer may be
approved by the board.

EstablishmeHi and Regulation oj Market Pools.

Obviously the quantity of milk and cream purchased by consumers"
will not be constant from day to day. This is recognized by the
Oregon Milk Board when it determines the total quotas for the market,
for it "allows an additional amount of butterfat of approximately 10
percent above what it considers sufficient to meet the requirements of
the fluid milk and cream trade. This additional 10 percent is to
"take care of the fluctuating demand of said market." ^' This means
that imder most conditions the total of the "quotas" will exceed the
total of the sales o£ fluid milk and cream.

" Ibid., p. 4, par. (p).

CONCENTRATION OF ECONOMIC POWER IQQ

Even though this excess of total quota over what is actually pur-
chased by coi^sumers is necessary because of unpredictable fluctuation
in consumer purchases, distributors are not charged for such surplus
at the price charged for milk used as fluid milk and cream but rather
at the lower price charged for milk used for manufactured dairy
products. This appears to be common practice in fluid milk markets
and is justified on the ground that the distributor realizes less on milk
sold as manufactured dairy products than he does for milk sold as
fluid milk and cream. This view is held despite the fact that this
extra milk is necessary to meet the fluctuating demands of consumers
and that the products made from this milk might therefore be con-
sidered by-products of the fluid milk business and the raw material
going into these by-products should be paid for at the same price as the
raw rnaterials going into the main products-fluid consumption. This
situation, of course, arises from the difl'erentiation, by sanitary or
other requirements, of the total milk supply into milk used for fluid
milk and cream and milk used for other purposes.

Because of this practice of paying for milk actually used as fluid
milk and cream at one price and for milk used for other purposes at
another price the average price received by a producer will depend
upon the proportion of his total milk deliveries going to each of these
two uses. Since this proportion usually varies from distributor to
distributor and especially between producer-distributors and dis-
tributors, a method of equalizing returns among all producers having
quotas is a part of the Oregan plan of public milk regulation. In this
connection, it should be recalled that the secretary -manager of the
largest producers' cooperative on the Portland market has caUed
section 13 of the Oregon law, which provides for "the payinent.to all
producers of a uniform pool price" the heart of the law.

To assure that every producer supplying a given market area
receives the same average price for all milk delivered up to the limit
of his quota, the Oregon Milk Control Board has established and
regulates two pools for each market — a "basic pool" and a "surplus
pool." The basic pool covers aU milk delivered by producers up to
the limits of their quotas, whether sold as fluid milk or as milk used
for manuifactured products. The surplus pool covers all milk de-
livered by farmers in excess of their quotas. The basic pool is credited
with all sales of milk for fluid milk and cream at the price fixed by the
board, unless the total sales exceed the total quotas', in which case the
excess is credited to the surplus pool. The basic pool is also credited
with any milk under the quota which is sold for manufacturing uses.
This credit to the basic pool is at a lower price. The sum of these
two credits divided by the total number of pounds delivered under
quotas gives the average price to be paid each producer for his de-
liveries up to the limits of his quota.

If the sales of fluid milk and 'cream equal or exceed the amount of
the quotas of all producers, the average price for the basic pool would
be the price fixed bv the board for milk used for fluid milk and cream.
Ordinarily, sales will be less than the total quota and the average price
for the basic pool will be less than the price set by the board for milk
used as fluid milk and cream. Furthermore, some distributors, and
especially producer-distributors, will sell a larger proportion of their
rnilk under quota as fluid milk and cream than will other distributors.
Since such distributors are required to pay their producers only the •

CONCENTRATION OF ECONOMIC POWER

average basic pool price, there will be an excess of receipts over pay-
ments.' This excess must be paid into an equalization account of the
board. Then the board makes payments out of this excess to dis-
tributors who have a deficit of receipts over payments to producers
because the proportion of milk under quota which they sold as fluid
milk and cream was less than the average proportion for the whole
market.

All milk delivered by producers in excess of their quota is credited
to the surplus popl at the price for which it is sold, whether as fluid
milk and cream or for manufactured uses. Total credits to the sur-
plus pool are divided by total pounds of butterfat in the surplus pool
to determine the average price paid to producers for milk delivered in
excessxtf their quotas.

Total sales of fluid milk and cream could exceed the total quotas
if there were an appreciable increase in sales of fluid milk and cream.
Receipts from sales of fluid milk and cream in excess of total quotas
would be credited to the surplus pool. There is no limit upon the
amount of milk that can be sold as fluid milk and cream provided the
established resale prises are charged. The individual's quota is
merely the extent of the privilege allotted to each producer to share
in ,the proceeds of the bottle and can sales of fluid milk and cream.
The Oregon Board does not distinguish between butterfat sold as
fluid milk and butterfat sold as fluid cream, so there is no class I and
class II milk, and it insists that it has authority only over butterfat
in milk sold as either fluid milk or fluid cream.

For the year 1938 the total allotted quotas amounted to 12,900
daily butterfat pounds on the Portland market. This was about 10
percent in excess of the average daily sales. Had consumers been
willing to buy more milk at the established prices, production in excess
of quotas could have been sold as fluid milk and cream. But pro-
ducers with quotas would "share" in these sales only to the extent of
J-heii" quotas. The receipts from the excess sales would have been
credited to the "surplus pool" rather than to the "basic pool" and the
proceeds to the "surplus pool" are distributed in proportion to total
production in excess of "quota" rather than in proportion to "quota."
The following year this situation would have been changed by
increasing the "quotas."

The following example furnished by the pooling agent of the
Oregon Milk Control Board, illustrates the way in which prices paid
to producers are determined under the Oregon plan of "basic" and
"surplus" pools. The illustration assumes four producers with
different quotas, but each of whose production for the month happens
to be the same — 100 pounds of butterfat. Production and quotas
for each of the four producers were:

Producers

Total

P<yiinds
100
100

Pounds
100
96

Pounds
100
86

Pounds
100
80

Pounds
400

^uota

360

Excess . . . .

CONCENTRATION OF ECONOMIC POWER

111

Total sales of fluid milk and cream for the month were equivalent
to 350 pounds of butterfat or 10 pounds less than the total quota.
The distribution of these sales among the four groups and receipts
from these sales were:

Producers

Sales

Price

Receipts

Pounds
100
90
90
70

$0.67
.67
.67
-.67

$67.00

C .

60.30

—

350

.67

Producer A's sales were equal to his quota. But total sales were
less than total quotas and hence this distributor has to share a part
of his total receipts with other producers where ^ales were less than
their quotas. This producer represents the usual producer-distributor.
Producer-distributors have resented this sharing of their receipts and
the Board by amendment to Official Order 121 hmited the equaliza-
tion payments of producer-distributors as follows:

Provided, however, When accounting to producers participating in the basic and
surplus pools as herein established, that when the surplus within the basic pool
as herein defined, exceeds by 5 percent or more all delivered quotas on the market,
*he producer-distributors participating in said pools shall only make equaliza-
tion payments, if the accounting so requires, up to 5 percent of such surplus and
no more. For example, should there be an average surplus within the quotas in
any one period of 10 percent, the equalization payments required to be paid by
the producer-distributors in said pooling period shall be computed as if the said
surplus within the said quotas is only 5 percent and no more.

Producer D with a relatively large surplus probably is representative
of the position of the largest producers' organization on the Portland
market.

Receipts from the sale of milk sold for other than fluid milk or
fluid cream and total receipts were:

Producer

Sales

Price

Receipts

Total re-
ceipts

Pounds

$0.45
.45
.45
.45

$67.00

10
10
30

$4.50
4.50
13.50

64.80

C • u

64.80

d:::::::::*:::::: :: ::: : ::::::::::::::::::.:::::^:::

60.40

Total

.45

22.50

257.00

Thus there is a total of $257, less a deduction of one-fourth cent per
pound of butterfat which is $1', or a net of $256 to bexiistributed among
the producers. The "basic" pool is credited with all receipts from the
sale of fluid milk and fluid cream since the total of such sales were
not in excess of total quotas. This pool is also credited with receipts
from the sale of an amount of milk for manufa^'turiag uses equal to

112 CONCENTRATION OF ECONOMIC POWER

the amount by which sales of fluid milk and cream are less than total
quotas. The basic pool is —

Sales of fluid milk and cream, 350, at $0.67 -. . $234, 50

Sales of milk for manufacturing uses, 10, at $0.45 4. 60

Total- . 239.00

Less .)^ cent on 360 .90

Total _ . ^ _: 238. 10

This results m i n average price of 66.139 cents for all milk delivered
within the Hl it of the quotao.
The "surplus" pool is —

Sales of milk delivered in excess of quotas, 40, at $0.45 . $18. 00

Less }i cent on 40 . 10

Total J_. 17. 90

This results in an average price for milk delivered in excess of quotas
by $44.75.

The amounts due each producer are —

Producer A:

For quota, 100, at $0.66139. ~. ,... $66. 14

For surplus . ^.__

Total . 66. 14

This is 86 cents less than'his receipts so he must pay 86 cents into the
equalization account.

Producer B:

For quota, 95, at $0.66139 ... $62. 83

For surplus, 5, at $0.4475 . 2. 24

Total 65.07

This is 27 cents more than his receipts so he will receive 27 cents
from the equalization account.

Producer C:

For quota, 85, at $0.66139 . $56. 22

For surplus, 15, at $0.4475 6. 71

Total . 62. 93

This is $1.87 more than his receipts so he will pay $1.87 to the equaU-
zation account.

Producer D:

For quota, 80, at $0.66139 ^ $52. 91

For surplus, 20, at $0.4475 8. 95

Total . . i. 61.86

This is $1.46 more than his receipts so he will receive $1.46 from the
equahzation account.

The effect of this pooling arrangement is to distribute the receipts
from the sale of milk as fluid mUk and cream among producers in
proportion to their quotas. To receive a large share of these receipts
a producer must secure a large quota. Each producer receives the
same average^ ^price for all milk delivered within the limits of his
quota, regardless of -how much of the milk is actually sold as fluid
milk and cream, except for the limitation placed upon the extent to
which producer-distributors must pay into the equalization account.

CONCENTRATION OF ECONOMIC POWER, H^

Likewise the surplus pool assures a unifoim price per pound to each
producer for all milk sold in excess of quota.

Fixing oj Minimum Prices.

The Oregon Milk Control Board is directed to —

fix minimum wholesale and retail prices to be charged for milk handled and sold
within the State for human consumption in fluid form, and including the follow-
ing classes:

(6) By milk dealers to stores for consumption on the premises, or for resale
to consumers or to others.

{d) By producer-distributor and distributor for deliveries to homes of con-
sumers."

These six control devices available to and used by the Oregon Milk
Control Board give the board rather complete control over the produc-
tion and distribution of milk in Oregon markets. The board's control
over the production of milk seems to be about as great as the control
of other regulatory agencies over public utilities. There may be
one important difference in that the Oregon Milk Control Board has
the right to fix only minimum prices to be charged by producers and
distributors. It apparently is not the intent of the law to give the
board power to establish maximum prices, and the orders of the board
establish minimum prices. One paragraph of section 12 of the law,
however, does declare that "it shall be unlawful to buy .or ojffer to buy,
or to sell or offer to sell, any milk at prices other than the prices fixed
by order of the board." So far, the effect of fixing minimum prices
to producers has been to establish the price actually paid although it
appears that the board recently has been inclined to set minimum
retail prices which will be somewhat below the retail prices actually
in force.

By establishing production areas and by granting to or witliholding
quotas from producers, the board can determine what producers shall
supply a given sales area with fluid milk and creani. This is very
similar to granting a franchise to a company giving that company
the sole privilege and duty of supplying a given area with some public
utility service. The Oregon Milk Board grants to certain producers
the exclusive privilege of supplymg a given sales area with fluid milk
and cream and establishes the minimum price which the distributors
must pay producers for such fluid milk and cream.

Appaxently the board has simflai" jurisdiction over the distribution
of milk, but it is not evident that it has exercised the same control over
the entrance of distributors into the market that it has exercised over
the entrance of new producers. A new producer is allotted a quota
only if there is an expansion in total sales of fluid milk and cream on the
market or if certain old prod'ucers have lost or surrendered their quotas.
New producers are not permitted to compete against old producers for
a part of the market. ^^ While the board has instituted very rigid
restrictions upon the entrance of new producers into the market, it is
not clear that any such restrictions have been placed upon the entrance

•sOregonMilkControl Act, sec. 12. ^ „ ■ , ^ . '

M "It is further ordered as to any increase of quotas to old producers, and any allocation of quotas to new
producers shall only be made if there is available either lapsed quots^s or that the sales in the bottle and can
trade on the market have substantially increased. If there is neither lapsed quotas nor increased spies, there
shall be no allocation or increases of quotas to the respective producers on the market.' Official Order No.
121 Oregon Milk Control Board, p. 7.

114 CONCENTRATION OF ECONOMIC POWER

of distributors even though the power to license distributors might
give the board as much power as it derives through allocation of
quotas to producers.

In discussing the advantages of restriction upon the number of
producers as contrasted with restriction upon the number of dis-
tributors, a member of the Oregon board has said with respect to
restriction on the number of producers:

Another benefit that accrues to a cooperative operating in a completely regulated
market is that the number of shippers is restricted, as well as the area from which
they may ship. It is needless to point out the experience of many markets in
which a cooperative has signed up all or nearly all of the producers only to find at
a later date that some distributor has gone out and brought in new shippers from
a different area. These new shippers were not needed in the market but were
brought in for the purpose of creating a diflScult situation. This has resulted in an
ever increasing accumulation of surplus milk in the hands of the cooperative.
As the surplus increased, the pay-out to the members decreased, and this has
resulted in dissatisfaction among the membership.^'

And with respect to limitation on the number of distributors :

Of direct interest to the bargaining cooperatives are the distributors' spreads
that are allowed by the control board. As the spread is narrowed down, the
number of processors that can survive continually decreases. If the spread is too
narrow, a large number of distributing organizations eventually pass out of the
picture. When this occurs, there are bound to be losses arising out of bad debts
which will reduce the pay-out to the producers. A reduction in the distributor's
spread wiU tend toward monopoly which is frowned upon by the consumers.

Many economists are of tae opinion that as the distributing units decrease
efficiency should increase, thereby permitting the consumer to secure his product
cheaper, or the producer to receive more for his production, or the distributor to
make a greater return on his investment. This may or may not be true depending
upon a number of conditions, not the least of which is the attitude of labor.
Labor is going to be a factor of great importance over the next few years and
one that is going to require study and understanding on the part of both coopera-
tive organizations and control agencies. As the number of distributors decrease
and the market becomes more monopolistic, labor generally becomes more
exacting in its demands.^^

STANDARDS

Licensing oj Dealers.

While the Oregon Milk Control lists seven reasons for which the
board may decline to grant, or may suspend or revoke a dealer's
license, it sets- up no standards for the granting of a license. The
seven reasons mentioned seemed to apply to dealers already in the
market, and they have no reference at all to capacity, prices or efficiency
in distribution. Nor is there any evidence that the board has used its
power to license dealers as a control measure to any such extent as
it has used its power to allot quotas to producers for the control of
mUk sales by producers. Orders of the Oregon MUk Control Board
provide "that no distributor who is now duly licensed as a milk dealer
in saidmarketing area shall be permitted, without the consent of the
board first obtained, and without showing just cause and necessity,
to divert or change serving the markets now being served b^ him to
any other market; outside of said marketing area." This ruling
pfobably would not prevent new dealers from obtaining licenses.

Establishment oj Market Areas.

It is provided in section 9 of the Oregon mUk control act that
"each market area, and production area from which the same is

" A. E . Engbretson, The future outlets and outlook for fluid milk under public control, American Coopera-
tion, 1938, pp. 278-279.
>• Idem.

CONCENTRATION OF ECONOMIC POWER H^

supplied shall include only that territory in which conditions involved
in the production, processing and distribution of milk are similar."
This provision was added in 1939 to the original legislation of 1933 as
amended in 1935. Originally the entire State, except for certain
specified markets, was included in one market area. In practice this
provision will apparently result in whole counties or parts of counties
being designated as production areas.

Allocation of Quotas to Producers.

The power to "define and fix the limits of the milkshed or territorial
area within which milk shall be produced to supply any such market-
ing area" is one of the most important of the powers of the Oregon
Milk Control Board. By defining the production and sales area as
"the territory lying within the marketing area, the milk and/or cream
from which was being lawfully offered for sale within the marketing
area" on some specified date the Board has limited the production of
milk to certain producers, and the standard for selecting these pro-
ducers becomes the historical fact of whether or not these producers,
were selling fluid milk on the market as of a given date. This is the
only standard suggested by the law which provides (sec. 9) "that
producers, producer-distributors, or their successors shipping to any
market on December 15, 1933, may continue so to do until thpy
voluntarily discontinue shipping to designated milkshed." ^*

Another standard for granting a producer the right to sell fluid
milk on a given market is the distance his farm is from that market.
For example, the "production area" for the Portland market is
defined as —

the territory lying within the area enclosed within lines paralleling the Portland
sales area drawn 30 miles distant outside therefrom and the extension of such
lines necessary to enclose the area together with the premises maintaining herds,
the milk or cream from which was being lawfully offered for sale within the sales
area as herein defined on December 15, 1933, or 60 days prior thereto.^"

A producer outside this area can continue on the market so long as
he remains on the same farm. If he moves, he must move within
the area if he is to retain his right to sell fluid milk on the m'^rket.
If the demand for milk increases so that new producers are required,
only producers hving within the market area receive consideration.

Allotment of Producer Quotas.

The first standard for allotting quotas is that the producer's farm
is within the "production'area."^* The second is that the producer
has been selling fluid milk or cream on the market.

A recent order of the Oregon Milk Control Board contains the
following paragraph:

All producers and producer-distributors who have maintained herds upon
premises located within said Benton County market area, the milk and/or cream
from which was being lawfully offered for sale in the bottle and can trade within
the said area on January 1, 19^38, and who have not since' said time voluntarily
ceased to serve said market with fluid milk and «ream suitable for human con-
sumption, shall be considered as rightfully entitled to be upon said market."

« Official Order No. 124, p. 5, Oregon Milk Control Board.
»» Official Order No. 121, p. 3. Oregon Milk Control Board.

" The only exceptions are producers without the market area who on some specified date have been selling
fluid milk or cream on this market.
32 Official Order No. 128, p. 6. Oregon Milk Control Board.

116 CONCENTRATION OF ECONOMIC POWER

The producers are further protected by the followmg paragraph :

It is ordered that no distributor shall, without the consent of the board first
obtained, and after a hearing has been duly held before said board, discontinue
purchasing any part of his requirements in the bottle and can trade from producers
who have been lawfully authorized to supply said distributors with his require-
ments, unless such producer has voluntarily ceased to ship his fluid milk and/or
cream fo^" a period of 10 days or that such producer has been degraded more than
twice within a period of 60 days; likewise no distributor shall obtain any portion
of his requirements in the bottle and can trade from any other producer not
lawfully authorized by the board to sell his fluid milk and cream in said marketing
area, unless due cause is shown therefor, and upon hearing held by the board.^'

A third standard is that the producer continue to serve the market :

A producer's individual quota is the privilege allocated to said producer to share
in the proceeds of the bottle and can sales in the market and of his correlative
duty to supply the demands of such bottle and can sales and the reasonably
necessary surplus, under the regulations contained in this order.^*

Producers having quotas who voluntarily cease to market their
milk as fluid milk or cream on their assigned market lose their quotas,
and producers who fail by appreciable amounts to deliver their full
quotas have their quotas reduced.

The chief standard for allowing new producers to enter the market
is need either because of increased sales or withdrawal of old producers
from the market.

If there is neither lapsed nor increased sales there shall be no allocation or increase
of quotas to the respective producers on the market.^*

But even when increase in sales or withdrawal of old producers
makes a new allotment of quotas necessary, the historical standard
of having sold fluid milk or cream on the market is of first consider-
ation. When the total basic quotas were increased 10 percent for
the Salem market, it was ordered that:

Each producer and producer-distributor shall be entitled to increase his proper
proportion of said 10 percent increase.^^

Minimum Prices.

The board shall ascertain what prices for milk in each locality ana market area
of the State will best protect the milk industry and insure a sufficient quantity
of pure and wholesome milk in the public interest. The board shall take into
consideration all conditions affecting the milk industry, including the price neces-
sary to produce a reasonable return to the producers and to the milk dealers."

The standards used by the Oregon Milk Control Board in setting
minimum prices are reasonable return to both producer and distrib-
utor, not unreasonable prices to the consumer, and costs of produc-
tion and distribution. Two sections of the law specifically direct the
board to consider costs. One section directs that:

In fixing minimum prices and the standards or grades to which they apply the
board shall in each market area and production area take into consideration costs
of production and distribution and the market conditions in the particular sales
and pr(^uction area to be affected by the order applying to such sales and pro-
duction area.38

Another section provides —

that based upon differences in cost of various services if any, the board, upon
facts found by it, may establish differentials in prices between house-to-house

" Ibid., p. 6.

" Official Order No. 121, p. 4. Oregon Milk Control Board.

M Ibid., p. 7.

»• Official Order No. 119, p. 6. Oregon Milk Control Board.

«' Oregon milk control bill, section 12, p. 5.

M Idem.

oonce;s'tration of economic power ll'J

sales by dealers, house-to-house deliveries by stores, and sales on credit and over-
the-counter sales by stores for cash.^*

The orders of the board indicate that the board has used "cost-of-
production" and "reasonable-return" in a very general way in fixing
minimum prices. One of the orders of the board states with reference
to the hearing held before the order was issued:

Documentary evidence was introduced by the staff employed by the board, in
which information as to the cost of production and distribution of market milk
and cream in said sales area was set forth. Auditors employed by the board pre-
sented studies relating to cost of distribution of various distributing plants in the
said sales area, and other data and information bearing on the cost of producing
fluid milk and cream for human consumption in said area.*"

A number of orders issued by the board during September and October
1939 contain a paragraph substantially as follows:

That the factors and conditions involved in this production, prociessing, and
distribution of fluid milk and cream suitable for human consumption are similar
in every part of the territory included within the boundaries of what is how- desig-
nated as Tillamook County, Greg. The factors considered and found to be
similar throughout the cities, towns, and villages included within the boundaries,
of said Tillamook County, Greg., are the cost of land devoted to the production
of fluid milk and cream suitable for human consumption; the price of cattle com-
prising the herds; the wages of hired help required on the farm; the cost of pastur-
age and feed; the cost of maintenance of distributing plants for the processing and
bottling of fluid milk and cream; the method and character of distribution of fluid
milk and cream to the consumer by the distributors and producer-distributors.*'

These same orders state that the board finds that the minimum
prices established —

will insure an adequate quantity of pure and wholesome milk to meet the require-
ments of the public in said market; that it will afford a reasonable return to said
producers in said market, and likewise will afford a reasonable return to the dis-
tributors for the distribution and processing of said milk in said market; that the
minimum prices hereinafter required to be paid by the consumer are reasonable in ,
light of the evidence and testimony bearing upon the cost of production and dis-
tribution of fluid milk and cream in said marketing area.*^

While the board has apparently used costs of production in some
general way in arriving at minimum prices the specific method by
which it applied costs to arrive at the actual prices established' is not
clear. In some instances, the board has apparently used other stand-
ards. An example is afforded by the store differential which was
eliminated shortly after the second board came into office.'*^ This
differential was eliminated even though the law specifically provides
that such differences in price may be established if based on differ-
ences in costs.

A member of the board in discussing this matter pointed out that
if different prices were to be allowed for every difference in cost, there
might be different prices for each individual producer, and that such
an arrangement was obviously impossible. It could also be pointed
out that the quota system adopted by the Oregon board might influ-
ence the accounting costs of producuig fluid milk and cream. This
quota system gives certaki producers the exclusive right to supply
certain markets with fluid milk and caream. Thus the costs of pro-
ducing fluid mUk and cream for that market are the costs of these

M Idem.

" Official Order No. 116, pp. 2-3. Oregon MUk Control Board.
<i Official Order No. 124, pp. 3-4. Oregon Milk Control Board.
« Official Order No. 126, p. 7. Oregon Milk Control Board.

<' The future outlets and outlooks for fluid milk under public control. A. E. Engbretson. American
Cooperation, 1938, p. 279.

279348— 41— No. 32 10

118 CONCENTRATION OF ECONOMIC POWER

particular producers and since other producers are prevented from
entering the market the costs of such other producers apparently can-
not affect the cost of producing milk and cream on that market.
Furthermore this right to produce fluid mUk and cream for a market
may acquire economic value, and if this right becomes attached to a
farm it may increase the cost of that land and if this additional land
cost is permitted in calculating cost of producing mUk, such cost of
production will be enhanced. Thus, if the board errs in setting the
price of mUk too high, the error may result in increasing the accounting
costs of producing milk.

The quotas have acquired monetary value and in the past were
being bought and sold. In 1939 the board found-
That a practice has developed in the said production and sales area whereby
producers have engaged in the bartering and transferring of quotas for a monetary
consideration which tends towards the creation of inequalities to producers and
permits producers at times to avoid the duty to supply the market with a required
quantity of wholesome fluid milk and cream for human consuraption."

This finding resulted in extensive regulations covering the transfer
of quotas which are in contrast to the earlier rule that "A producer
with a quota may sell all or any portion thereof with or without the
transfer of his herd * * *." This ruling was due in part to
criticisms by the public arising from the sale of quotas and based
upon the belief that the board had given monopoly privileges to
certain milk producers. Thus public opinion, is given consideration
by the board.

The result might, of course, be to reduce cos^s if the board used
its power of allotting quotas to restrict the number of producers, in
such a way that the producers remaming on the market<d<id i^ have
to purchase' additional quotas and thus add to their costs. This, of
course, is based upon the assumption that the smaller number of
producers could produce the given quantity at a lower per unit cost —
an assumption which is probably -correct.

Finally, producer pressure has apparently been a standard some-
times used by the board, as indicated by the following:

The board found with respect to one county,

That in said areas there has been a general lack of cooperation and observance
of the price orders issued and in effect in said areas

and

That, in the judgment of the board, to exempt said areas from the price orders
and regulations of the board and the milk control law would for the present
benefit the consuming pubhc, the producer and distributor.*'

Upon careful consideration of all factors pertaining to the advisability of
establishing quotas and pools and particularly after due consideration of the
petition filed by producers, producer-distributors and distributors, the Board
finds * * *."

Because of threats of litigation from the producer-distributor group, the
equalization from producer-distributors in the basic pool applies only to a 5
percent surplus. If there is any surplus in the basic pool above the 5 percent,
these producer-distributors pay no equalization on it.*'

" Official Order No. 121. Oregon Milk Control Board, p. 2.
" Official Order No. 123, p. 2. Oregon MUk Control Board.
« Official Order No. 128, p. 9. Oregon MOk Control Board.
" Equalizing surplus burdens through public control. W. H. Henry, American Cooperation, 1938, p. 302.

CONCENTRATION OF ECONOMIC POWER HQ

The secretary-manager of one of the producer-cooperatives in the
Portland market reports that:

Milk control as administered in Oregon has resulted in better prices to all
producers than could possibly be hoped for without it.

The milk control law also sets up a goal of equitable treatment of all producers
on any particular market. Progress has been made toward this goal. We are
still idealists enough to believe that further progress will be made toward that
goal in Oregon. ■'8

This estimate of results is probably correct, if applied only to those
producers who have been permitted to share in the fluid milk and
cream sales of regulated markets. But this privilege has been rigidly
restricted by the quota system used in Oregon. The producers who
received quotas have undoubtedly been protected from the com-
petition of other producers who might have been willing to supply
milk and cream at lower prices than those established by the board.
The number of producers supplying the Portland market has de-
creased since public regulation has been effective in that market,
probably because certain producers found producing mUk for the
Portland market sufficiently profitable to make it worthwhile to
purchase quotas from other producers. This suggests that the pro-
ducers purchasing the quotas had lower costs of production, but this
reduction in number of producers has not been accompanied by a
reduction in price paid producers.

Thus far public regulation has had little apparent effect upon
distribution except that the differential between the price of mUk
sold by stores as compared with the house delivered price has been
eliminated. This has undoubtedly strengthened the competitive
position of the retail route distributor. The fixing of resale prices
also prevents price competition among distributors and may tend to
maintain the gross margins between prices paid to farmers and prices
paid by consumers. In the Portland market the margin appears to
be slightly larger than it was just before regulation became effective,
but about the same as it was during the early 1920's.^^

It is not evident that mUk regulation in Oregon could have an
appreciable effect upon general economic conditions in that State.
It affects only a part of the tot.al milk produced in the State and its
principal effect is to transfer purchasing power from city consumers
of fluid milk and cream to rural producers of these commodities.
Since the number of consumers affected is considerably greater than
the number of producers, it is possible for individual producer incomes
to be appreciably increased without greatly affecting the individual
consumer. This may explain why producers are actively interested
in milk regulation while consumers show little interest, but it does
not demonstrate how, if at all, the general economic situation will be
modified by this transfer of purchasing power.

« T>-M., p. 303.
' <) flg. 1.

APPENDIX TO CHAPTER II

TABLES GIVING DATA ON MILK PRICES IN PORTLAND,
OREG., AND SEATTLE, WASH.

Table I.

-Monthly average retail price of fluid milk {house deliveries) Portland,
Oreg., 1920-39 i

[Cents per quart]

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1920 -.

13-14

14-14K

143^

14^

1921

14
12

14
11

12
11

12-13
12

12-13

12
12

1922

1923

12-13

12-13H

12-13

1924

11-12

11-12H

11-12

10-11

1925

10-12

11-12

1926

12-13

12-12M

11-12

12-13

1927

11-12
11-12

12
12

12
12
12

12-13'"
12

1928 ....

1929

1930

12-15

11-15

10-12

1931

11-12

10-12

10-11

9-11

1932

9-10

1933

8-9

1934

1935

1936

11.

1937

1938

1939

• U. S. Department of Agriculture, Bureau of Agricultural Economics and Agricultural Marketing Service:
Monthly Fluid Milk Market Report.

Table II. — Monthly average -price paid producers for milk {3.5 percent) used in
fluid form for city distribution, Portland, Oreg., 1920-39 '

[Cents per quart =]

1920..
1921..
1922..
1923..
1924--
1925-

1927-
1928.,
1929.

Apr.

May June July Aug

Npv.

1931...-
1932....
1933....
1934....

1937..
1938..
1939.

5.2

3.6

3.3

2.9

3.7

4.2 I

4.4 ;

6.1

4.4

2.8
«2.5
4.2
4.0
4.4
5.1
4.4
4.4

1 U. 8. Department of Agriculture, Bureau of Agricultural Economics and Aericultural Marketing Ser-
vice: Monthly Fluid Milk Market report.
' Price per cwt. divided by 46.5.
» Price at farms.

• 120

CONCENTRATION OF ECONOMIC POWER

121

Table III. — Gross margin between retail price of fluid milk {house deliveries) and'
price paid producers, Portland, Or eg., 1920-S9 ^

[Cents per quart]

Janu-
uary

FeTa-
ruary

April

May

July

Au-
gust

Octo-
ber

De-
cem-

1920.
1921.
1922.

1925.
1926.
1927.
1928.
1929.
1930.
1931.
1932.
1933.
1934-
1935-
1936-
1937-

> Computed from tables I and II.

Table IV. — Monthly average retail price of fluid milk {house deliveries) ^ Seattle,
Wash., 1920-39 i

[Cents per quart]

Janu-
ary

Feb-
ruary

April

May

July

Au-
gust

No-
vem-

1920

1921 ...

1922

1923

1924

1925

1926,

1927 .

1928 ...

i929

1930. -

1931—

1932

1933

8-9

1934. — ..

1935

1^"

1936

1937

1938

1939

14-15
10-12
13
13
13
12
13

10-12
11
10
8-9
10
11
10
11

10-12
11
10
10
10
11
10
11
11

10-11

9-10

12
12
12
10
10-11
10
9^10
10
10
10
11
11
10

12
12
11
12
13
12
11-12
12

10-11
10
9-10
10
10
10
11
10
10

12
12
11
12
13
12

11-12
12
12

10-11
10
9-10
10
9
10
11
10
10

14
12
13
12
11
12
13
12

10-12

9-11

10-11
9-10

10-11
10
9
10
11
10
10

13
13
11
13
13
12
12
12
11

10-11
9-10

10-11
10
9
11
11
10
11

11-12

10-12

12-13

10-11

8-9

10-11

12
13
13
9
13
11
12
12
13
10-11
10-11
8-9
10
11
9
11
11
10

13
10-12

'U.S. Department of Agriculture, Bureau of Agricultural Economics and Agricultural Marketing Service;
Monthly Fluid Milk Market Report.

122

CONCENTRATION OF ECONOMIC POWER

Table V. — Monthly average price paid producers for milk {3.5 percent) used in fluid
form for city distribution, Seattle, Wash., 1920-39 '

[Cents per quart ']

1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1936
1936
1937

Jan-
uary

Feb-
ruary

April

May

July

Au-
gust

Octo-
ber

No-
vem-
ber

De-
cem-
ber

4.3
3.7
3.6
4.2
4.0
4.3
4.5
3.9
4.3

> U. S. Department of Agriculture, Bureau of Agricultural Economics and Agricultural Marketine
Service: Monthly Fluid MUk Market Report.
» Price per hundredweight divided by 46.5.

Table VI. — Gross margin between retail price of fluid milk {house deliveries) and
price paid producers, Seattle, Wash., 1920-39 '

[Cents per quart]

1920

5.9

1921.

7.1

1922

1923

1924

1925-

7.1
6.6

"6.1'
5.9

1927

1928

6.0

1929

6.0

1930

6 6

1931

6.8

1932

6.0

1933

1934

6.3
6.4

1935

1936

1937.

6.8
6.0

1938

1939.

6.2

Jan-
uary

Feb-
ruary

April

July

Au-
gust

Octo-
ber

No-
vem-
ber

> Computed from tables IVJand V.

CHAPTER III ^

REGULATION OF FLUID MILK MARKETING IN
CALIFORNIA

Public regulation of fluid milk marketing in California is prin-
cipally a matter of fixing the prices at which "fluid milk" may be
purchasejl from producers and the price at which it can be sold to
consumers. While "pooling" is permitted by the California law if
"producers who supply distributors with not less than 65 percent of
the total volume of fluid milk used for pasteurization purposes and
who represent not less than 65 percent of the total number of such
producers desire the establishment of such pool," ^ no pools have been
established. Thus, what was considered by many in Oregon to be the
heart of the Oregon plan of milk regulation finds little if any place in
the California plan. The reason for this is probably found in the
requirement that 65 percent of the producers must desire a pool and
the fact that most producers who consider that they have firm and
satisfactory contacts with their distributors seem unwilling to agree
to a market pool which may tend to lower their net returns, at least
temporarily.^ Classification is also provided for by the California
legislation but is used much less than Iri seme Stales, although it is
not used at aii in Oregon.

"Fluid milk" is differentiated from manufacturing milk and is
defined as any and all milk produced in conformity 'with the quality
standards prescribed by the Agricultural Code for "market milk."

The constitutionality of the legislation was attacked because of this
differentiation on the ground that such differentiation was discrimina-
tory. The court in ruling against this contention noted that — '

It is apparent, therefore, that the legislature has divided the milk industry into
two classes, one class including all those engaged in producing, distributing, and
consuming market or fluid milk and those dealing in manufacturing milk *

The court justified this division on the grouiid that —

Fluid milk must be produced fairly close to the locality where it is consumed.
The time intervening between its production and consumption must, necessarily,
from its very nature be of extremely short duration. Unless it meets these stand-
ards of quality, or others equally necessary, in many cases it would be unfit for
human consumption. The same injurious result would follow if its delivery from
the producer through the distributor to the consumer was not made promptly and
at regular intervals. These standards of quality and marketing requirements
which are applicable, or which apply to the marketing of fluid milk, are neither
required nor from its nature should be required of manufacturing milk. The divi-
sion of the milk industry into tl^e two classifications, one governing the marketing
of fluid milk and the other applying to manufacturing milk, is therefore founded
upon a natural distinction existing between'the^wo branches of the same industry.*

1 This chapter was prepared by Don S. Anderson.
» Sec. 738.3 (5) (e), Agricultural Code.

» John S. Watson, The Status of Milk Marketing and Stabilization in California. Bulletin, Department
of Agriculture, California, vol. XX VIII, No. 1, January 1939, p. 48.
* Jersey Maid Milk ProdtieU Co., Inc. v. A. A. Stock.

124 (X)NCENTRATION OF ECONOMIC POWER

This distinction is the basis of milk regulation in California, for
manufacturing milk prices are taken as a base, and to this base is
•added the necessary additional cost of producing "fluid milk" to
arrive at minimum prices for fluid milk. To these minimum prices
are ad(|£d the necessary costs of distribution to arrive at minimum
wholesale and retail prices.

THE BACKGROUND OF PUBLIC REGULATION

Several factors have apparently been responsible for the develop-
ment of public regulation of fluid milk marketing in CaUfomia.
Among those which have been mentioned are the efforts of cooperative
marketing associations to secure higher prices for producers of fluid
milk, the entrance i^f chain stores into milk distribution, and the
sharp decline in the price of manufacturing milk during the years
1929-32.

The cooperative marketing association has been called the progen-
itor ,9f public regulation of milk marketing in California:

To understand this type of regulation (by public authority) we must analyze
its progenitor, the cooperative marketing association, for producers early turned
to cooperative marketing associations to meet the evils of milk marketing dis-
cussed above. These organizations sought to merge the bargaining power of
single producers and to sell their milk as a unit, thereby overcoming' the inequality
between the small producer and the huge distributor. But these associations
could never secure 100 percent of the suppfly of milk, and it was the unregulated
10 percent that, as is so often the case, compelled further control.*

A dairyman of Petaluma, Calif., has described the situation as
follows:

•The problem of stabilization is not a question that has arisen in the last few
years. Many of us can recall that our first efforts toward stabilizing the dairy
industry began about 1915 or 1917. In those days we did not call it "stabiliza-
tion," but we really were striving to establish some program of stabilization. The
California cooperative law came into existence about that time. Numerous co-
operative milk associations were organized throughout the State of California. I
will say this for these associations — I am only bringing this up as a matter of history
to point out the weakness and the lessons we have learned. These associations,
like most others of similar type and character, obligated producers to market
through central agencies, and we turned our product over to the control of certain
boards of directors, or certain men, to sell for us. We found the collective bargaining
that the California law gave us, which was supported by national legislation,
would aid in stabilization. In those days we progressed a long way toward stabili-
zation of producer prices, and when you stabilize the producer price you stabilize
half of the price of market milk.

As time progressed those distributors who wished to buy milk for less than their
competitors, in order to undersell, found that they could beat the cooperative
marketing association. They have demonstrated that by buymg from unorgan-
ized producers they could throw back a portion of the normal supply of milk upon
the particular cooperative involved, and if they increased the amount, those pro-
ducers who were members of cooperatives would have to bear the load, -while pro-
ducers who received money direct got more money. The result was that such
methodtS brought in more producers, increasing the load of milk on these particular
cooperatives. Now, the surplus of milk created in this manner necessarily had
to be salvaged at prices lower than the regular price of market milk, entailing a
direct loss to producers. In San Francisco we had an association controlling 95
percent of the milk; they had a 51 percent interest in one of the largest distributing
.firms in San Francisco, with a well paid up capital stock. This association, with
95 percent control, was able, at that time, to dictate prices, which caused over-
production to the extent of 8,000 to 10,000 gallons of milk in excess of market re-
quirements. This caused a loss to members of approximately 9 cents a gallon on
this surplus not sold as market milk.

« Matthew Tobriner, Bulletin, Department of Agriculture, Callfomia, vol. XXVI, No. 1, January,
February, Mwch, 1937, p. 81.

CONCENTRATION OF ECONOMIC POWER 125

The way we figure milk these days, 9 cents a gallon is approximately 27 cents a
pound butterfat, or equivalent, almost to recent butter prices. If the farmer was
able to take 27 cents a pound less for his surplus milk, either he was getting too
much for his milk or less than it cost him to produce it. That is the particular
story of San Francisco.'

This dairyman concluded that "Cooperative marketing programs
were carried out over a period of years and that an accumulation of
surplus would occur in any market."^

Another factor alleged to have led to public regulation of fluid milk
marketing in California is the entrance of chain stores into milk dis-
tribution. In some of the larger markets the chains owned their
creameries and processing and bottling plants, and sold only to their
own stores. The regular distributor, because independent retail stores
handled ^veral brands of milk and therefore tooji only relatively small
amounts of milk from each distributor, had higher costs than the chain.
Furthermore, the chain widened the spread between cash and carry
and home delivered prices for milk, and the independents wanted to
meet the chain store without cutting their margin per quart of milk.
All these difficulties caused the distributor to resist more vigorously
the efforts of cooperative marketing associations to increase or main-
tain the price paid producers for fluid milk. One way to resist was to
develop sources of supply from nonmembers of the association.

The development of sources of fluid Inilk from nonmembers of fluid
milk cooperative marketing associations was made easier by the break-
down of prices of dairy products after 1929. During the 1920's in
most California markets apparently board of health regulations were
such that a differential of 22 to 26 cents per pound butterfat did not
induce producers of manufacturing milk to attempt to enter the fluid
milk markets. The decline in butter and cheese prices after 1929,
however, resulted in many producers of manufacturing milk seeking
to improve their incomes by attempting to enter the fluid milk mar-
kets.

THE DEVELOPMENT OF STATE REGULATION *

An act of the California Legislature, passed in 1916, gives the direc-
tor of agriculture the power to act as adviser in assisting producers
and distributors to improve the efficiency of marketing farm products.
This act also provides that the director may act as an arbitrator
in cases of controversy between producers and distributors. The
assistance of the director must be requested by the producers and
distributors.

In January 1932 the producers and distributors of market milk in
the San Francisco market requested the director to aid them in the
stabilization of resale prices in that market. In August 1932 the pro-
ducers and distributors of- the Los Angeles market petitioned the
Governor for assistance in that market. A milk trade board, com-
posed of producer and distributor representatives, was formed in the
San Francisco market in fearly 1932. This board immediately put
uniform purchasing and resale pric6 schedules into effect, and these
were maintained during the remainder of the year. Similar boards
were organized in Los Angeles, Stockton, Santa Clara, Oakland, and
other milk markets.

' John Watson, Fluid. Milk Stabilization for the Bay Region. Bulletin, Department of Agriculture
California, vol. XXV, No. 1, January, February, March, 1936, pp. 101-102.
•Ibid., p. 104.
• J. M. Tinley, Public Regulation of Milk Marketing in Caji/oraia, Berkeley, Calif., 1938, pp. 32-46.

126 CONCENTRATION OF ECONOMIC POWER

In late 1933 Federal milk marketing agreements were introduced
into several California markets. These agreements were replaced by-
Federal licenses early in 1934. Dm-ing 1934 it became questionable
whether the Federal Government had authority in the California
markets, because all their milk came from withiin the State. This
resulted in agitation for State regulation.

The CaUfornia Legislature during its 1935 session passed two laws
affecting the marketing of fluid milk. The Thorpe Fair Practices Act
required the hcensing of all distributors and producers of fluid milk
and specified 14 practices which were regarded as unfair. The Young
Act provided that producers who supply 65 percent or more of the
fluid milk in a given area might apply to the director of agriculture
for the appointment of a local control board. This local board would
have power to establish, with the approval of the director, minimum
prices to be paid to producers by distributors. Minimum resale prices
were not authorized. Late in 1936 a decision of the superior court in
San Francisco raised a question as to the constitutionality of the Young
Act on the ground that it provided for an undue delegation of legisla-
tive powers to the local control boards.

Because of the doubtful constitutionality of the Young Act, a new
bill was introduced into the 1937 session of the California Legislature
and passed both houses unanimously in January 1937. This bill was
amended twice by the session which passed it; and another act, the
Desmond Act, providing for minimum resale prices, was also enacted
by the 1937 session. '

THE MARKET SITUATION

Of the 4,000,000,000 or more pounds of milk produced annually in
California, probably less than 40 percent is sold as fluid milk and
cream to city and village people. Approximately 25 percent of this
is retailed chiefly by producers, the balance being sold through dis-
tributors. Thus, the potential supply of fluid milk and cream is greatly
in excess of that required for consumption as whole milk. Furthcr-
Etiore, the producers of manufacturing milk are situated vithin the
regions where fluid milk is produced. These f°ct-s have caused those
charged with administering^ the Calif orn:.i law to conclude that —

• The price of butter basioaiij' dclv^xmines the value of milk and all of its products,
as a definite relationship exists between the price of butter and milk and milk
products. 1'

This viewpoint is in sharp contrast to that held in Oregon, where
the producers of fluid milk are protected from competition of others
by regulations which rigidly limit the entrance of new producers into
the market. In California the only restraint upon the entrance of
new producers into the fluid milk market is the higher cost of producing
milk under the sanitary requirements for fluid milk production. It
is appfifently thought that shifting from the production of manufac-
turing milk to the production of fluid milk can be prevented if the
difference between the prices of these two kinds of milk is kept about
equal to the extra cost of producing fluid milk.

The maintenance of such relations between the price of fluid milk and manu-
facturing milk, moreover, obviates the necessity for erecting special economic
barriers around individual milk markets."

i« E L. Vehlow, Report on Costs of ProduclnB Fluid Milk for the Alameda County Marketing Area
raiineogTaphed), Department of Agriculture, California, p. 3. . .

" J. M. Tinley, Economic Considerations in Fluid Mi& Stabilization. Bulletin, Department of Agn-
culture, California, vol. XXVII. No. 1, January, February, March, 1938. p. 114.

CX)NCENTRATION OF ECONOMIC POWER 127

Two sections of the California law seem to prohibit the type of
restrictions placed upon the sale of fluid milk in Oregon.

Nothing in this chapter shall be construed as permitting or authorizing the
development of conditions of monopoly, in the production or distribution of fluid
milk or fluid cream."

No such plan (stabilization and marketing plan) shall involve a limitation
upon the production of fluid milk or fluid cream."

THE OBJECTIVES OF REGULATION

In passing the legislation providing for public regulation of fluid
milk marketing in California, the legislature declared —

that unfair, unjust, destructive, and demoralizing trade practices have been
carried on and are "now being carried on in the production, marketing, sale, pro-
cessing, and distribution of fluid milk and fluid cream, which constitute a constant
menace to the health and welfare of the inhabitants of this State ahd tend to
undermine sanitary regulations and standards of content and purity, however
effectually such sanitary regulations may be enforced; that health regulations are
insufficient to prevent disturbances in the milk industry which threaten to destroy
and seriously impair the future supply of fluid milk, and to safeguard the con-
suming public from future inadequacy of the supply of this necessary com-
modity; that it is the policy of this State to promote, foster, and encourage the
intelligent production and orderly marketing of commodities necessary to its
citizens, including milk, and to eliminate speculation, waste, improper marketing,
unfair and destructive trade practices, and improper accounting for milk pur-
chased from producers."

It was also declared that it was the intent of the legislature that the
terms and conditions estabhshed for purchasing fluid milk and cream
from producers and of distribution to consumers shall be those which
"will insure an adequate and continuous supply of pure, fresh, whole-
some fluid milk and fluid cream to consmners thereof at fair and
reasonable prices." **

In an amendment to the legislation passed m 1937 the legislature
gave more attention to the economic condition of fluid milk producers.
The following was included in the statement of urgency included in
these amendments.

The economic conditions of fluid milk producers throughout the State are such
as to require immediate relief if their purchasing power and taxpaying abihty
are to continue and their morale and standard of living are not to be undermined.
Such. relief can be afforded only by the Orderly production and marketing of fluid
milk and fluid cream. The provisions herein . ntai^ied are necessary in order
to prevent the further demoralization of the fluid i. ilk and fluid CK^nm industries."

The 1937 legislature also amended the law providing for public
control of milk regulation by making it mandatory that minimum
wholesale and retail prices be estabhshed whenever minimum prices
to producers were in force. ^^ The legislation passed in 1935 provided
only for minimum producer prices. At a hearing called in connection
with the setting of minimum retail and wholesale prices the author of
these 1937 amendments testified- substantially as follows: Despite the
fact that prices to producers were fixed under the 1935 legislation,
distributors throughout the State were having milk wars; competition
was keen among them and was becoming ruinous. For this reason
the legislature deemed it imperative to pass a statute which would

n California Agricultural Code, sec. 735.1.

" Ibid., sec. 736.4.

i« Ibid., 735 (bh

IS Ibid., 735.1 (d).

'• Sec. 2 of ch. 57, Stots., 1937, California.

" Article 2a, Agricultural Code.

128 CONCENTRATION OF ECONOMIC POWER

stabilize the distribution of milk. The producers themselves came to
the legislature and said they felt that in order to continue the stabiliza-
tion and marketing plan for producers it was essential to carry 'it
further and stabilize minimum wholesale and retad prices for the
benefit of the distributor in order to prevent milk wars. The purpose
of such legislation would be to protect the prices fixed for dairymen
as producers. When asked whether he felt that the legislation was
taking care of the interests of the pubhc and of the consumers by
minimum wholesale and retail prices he replied that he did not think
that was entirely true. Rather, the legislation providing for minimum
wholesale and retail prices, at the instance of producers, was to help
maintain their position in the market and to eliminate milk wars.
The interest of the legislature was to establish prices charged by dis-
tributors sufficiently high to permit the distributor to operate his
business at a profit and to protect the producer in the price established
for him.

THE CONTROL AGENCY

The director of agriculture of the State of California is charged
with the administration and enforcement of the legislation providing
for public regulation of the sale of fluid milk in* California. . The
work of administration and enforcement is carried on by the appro-
priate units of the department of agriculture. A fluid market milk
assistant in the division of markets of the department of agriculture
is responsible for making the cost studies upon which the director
relies in determining what minimum prices shall be established.

When the Young and Desmond laws were first passed the director
of agriculture depended, to a considerable extent, upon work that had
been done by the Giannini Foundation of Agricultural Economics,
Uijiv^sity of California College of Agriculture.** In setting minimum
prices to producers imder the Young act, use was made of work pre-
viously done by the foundation. When the director was required,
by the Desmond act, to establish minimum resale prices he arranged
with the college of agriculture to have the college conduct the audits
and surveys provided for by the Desmond act. Lai^e use was made
of mail questionnaires in the survey made by the college, with some
accountants being sent into the field to gather additional information.

During 1939 the fluid market milk assistant supervised studies of
the cost of producing fluid milk and of the cost of distributing fluid
milk in a number of marketing areas. In these studies no use was
made of questionnaires; rather, the books and records of the dis-
tributors w ;re analyzed by auditors of the department of agriculture.

CONTROL DEVICES

Xhe method of effectuating regulation of fluid milk marketing in
California is the "stabilization and marketing plan." Every stabili-
zation and marketing plan must contain;*®

1. Provisions for prohibiting distributors from engaging in the" unfair practices
hereinafter set forth. (See Apppendix A.)

2. Provisions whereby the director designates and prescribes or provides methods
°for designating or prescribing minimum prices to be paid by the distributors to
producers for fluid milk in one or more of the various classes.

'» J. M. Tinley, Public Regulation of Milk Marketing in California, Berkeley, CaUf., 1938, pp. 71 and 83.
i« Agrifeultural code, California, sec. 736.3.

CONCENTRATION OF ECONOMIC POWER i29

Sllization and marketing plans may contain the following:

1. Provision that the distributor make certain reports to each

producer.

2. Provisions whereby the director designates and prescribes or

provides methods for designating or prescribmg prices to
be paid by distributors to producers for fluid cream.

3. Pravisions for prescribing methods to provide uniforrn prices

to be paid to all producers supplying fluid nulk to distribu-
tors for pasteurization purposes in the market area by
pooling the retuHis of all such fluid milk. This provision
may be included only if 65 percent of the producers desire it.

Whenever a stabilization and marketing plan is in effect it is re-
quired that minimum wholesale and retail prices be estabUshed or
that methods for designating and prescribing such prices be provided.

The first step in the regulation of fluid milk marketing is the
establishment of "marketing areas." ^° A marketing area is an area
in which milk is sold to consumers; it has nothing to do with pro-
duction. The stabilization and marketing plans provide that each
distributor who receives or otherwise handles fluid milk, which fluid
milk is distributed within the marketing area covered by the plan,
shall pay not less than the prescribed prices per pound of milk fat to
producers. Orders covering minimum retail and wholesale prices pre-
scribe what these minimum prices shall be for each marketing area.
After a marketing area has been established, before a stabihzation
and marketing plan can become effective the director must determine
that not less than 65 percent of the total number of producers supply-
ing fluid milk used in the area and producers of not less than 65 per-
cent of the total volume of fluid milk desire that the plan become
effective. .

After the marketing area has been established, studies are mad*e
under the supervision of the fluid market milk assistant to determine
the costs of producing and of distributing fluid milk of producers and
distributors who are supplying the area. These studies and additional
hearings are used as a basis for determining what. minimum prices shall
be estabUshed for the marketing area. In the main^ the stabilization
and marketing plans made effective in California have included only
the unfair trade practices specified in the laws and the minimum
prices that distributors are required to pay to produceis. Many of
the plans provided minimum prices only for fluid mflk, although the
plan for the Sacramento marketing area contains methods for prescrib-
ing minimum prices for four classes of milk. If a stabilization and
marketing plan is in effect it is also required that minimum resale
prices be established.

STANDARDS

Establishment of Market Areas'.

Uniformity is the standard for the estabUshment of marketing

areas. By law the director is ordered to designate marketing areas

"wherein he finds the conditions affecting the production, distribution

and sale of fluid milk, fluid cream, or both, reasonably imifdrm." ^^

• The State supreme court has held that "uniformity of conditions

" Ibid., sec. 736.

'■ Sec. 736, agricultural code.

1-30 CONCENTRATION OF ECONOMIC POWER

under which milk and cream are produced and sold would seem to be
a sufficient standard to guide the director in designating market areas
for the sale of these products." "

Establishment of Minimum Prices Paid Producers.

The principal standard used in establishing minimum prices paid
producers is indicated by the following provision of the legislation:

provided that the prices so prescribed shall be based upon the economic relation-
ship of the price of fluid milk for the market area involved to the price of manu-
facturing milk, taking into consideration the additional costs incurred in producing
and marketing fluid milk over and above such costs incurred in producing and
marketing manufacturing milk.^s

In upholding this standard as sufficient the court characterized it
as similar in principle to the so-called "flexible tariff provision of the
Tariff Act of 1922 by which the President was authorized to change the
tariff rate to equalize differences in cost of production between articles
manufactured in this country and those manufactured abroad." ^*

This standard is depended upon to maintain a balance between the
production of fluid milk and the production of manufacturing milk.
It is used in lieu of the system of quotas and restrictions upon entrance
into the fluid milk market which are so important a part of the Oregon
plan of fluid milk marketing regulations.

In the application of this standard the department of agriculture
makes studies of the costs of producing fluid milk of producers who are
supplying such milk to the market under consideration. It also
studies the costs of producing manufacturing milk in the areas in which
the producers of fluid milk supplying the marketing area are located.
The costs of producing fluid milk have been found to be higher due to
more stringent health regulations, the need for more uniform produc-
tion throughout the ye^r, and other factors, These additional costs
arrived at by determining the difference between the cost of producing
fluid milk and the cost of producing manufacturing milk are used in
determining the minimum prices to be paid producers.

In recent orders the only varyihg factor in this differential which
has been considered is the cost of feed. The average daily price of
92-score butter at San Francisco or at Los Angeles has been taken as a
base from which to calculate the minimum prices to be paid producers
for fluid milk. The amount by which the minimmn price paid pro-
ducers for fluid milk exceeds this average daily price of 92-score
butter depends upon the average daily price of a specified basic dairy-
ration. Thus the minimum price paid producers for fluid milk is not
a fixed price but rather a price that varies with the price of 92-score
butter and with the price of dairy fegds.

In applying the standard of "additional costs incm-red in producing
and marketing fluid milk over and above such costs incurred in pro-
ducing and marketing manufacturing milk,"- the California Depart-
ment of Agriculture in its cost studies ^^ divides these costs into two
general categories: (1) Costs which do not vary with the seasons, and
(2) costs which do vary with the seasons. The first category includes
such items as rent, depreciation, taxes, intereest, transportation, labor,
and herd replacement costs. Feed cost, which represents approxi-

".nfertey Maid Milk Products Co. v. A. A. Brock.
M Sec. 735.4 (b) (4), agricultural code, California.
" Jersey Maid Milk Products Co.v.A.A. Brock.

» E. L. Vehlow. Report of the Division of Markets Pertaining to the Costs of producing Fluid Milk for the
Imperial County Marketing Area (mimeographed).

CONCENTRATION OF ECONOMIC POWER 131

mately one-half of the total cost of producing milk, is the principal
item in the second categoiy.^*

On the basis of its cost studies the department arrives at the
"added costs" of producing market milk as compared with producing
manufacturing milk. These added costs are then used in the "producer
price formula" which begins with the price of 92-score butter in one
of the California markets as a base. Since all costs except feed costs
are considered to be constant, the only variables used in arriving at
the minimum price to be paid producers for market milk are the price
of butter and the price of feed. The method of using these two
variables in arriving at minimum prices paid to producers for market
milk is indicated in appendix B.

The fact that only the price of butter and the price of feed are
considered as variables does not mean that other aditional costs of
producing market milk are ignored . These other costs are held con-
stant in the "producer price formula." In the example given in
appendix B, which is the formula for the Imperial County marketing
area, these other additional costs are estimated at 8.3 cents per pound
of milk fat.

When the price of 92-score butter is 34 cents per pound it is esti-
mated that the over-run value of the butter will be 3.5 cents and the
value of the skim milk 3 cents. These values added to 34 cents
gives 40.5 cents as the price per pound of, butterfat in manufactur-
ing milk. With the price of the basic dairy ration between 24 cents
and 30 cents the added feed costs are estimated as 8.7 cents per
pound of fat. These added feed costs and the other additional costs
mentioned in the previous paragraph, when added to the price per
pornid of butterfat in manufacturing milk, gives the minimmfi price '
for fat in market milk for this butter price and this feed price (40.5
+ 8.7+8.3 = 57.5). Thfe minimum price established was 58 cents
(line 3 in sec. (a) of appendix' B).

How well the differential between prices of manufactured milk and
of market milk established by this method reflects the actual costs to
which the farm responds depends upon the effectiveness of the cost
accounting methods used, the data available, and the extent of the
variation in these costs between farms. All farm managernent work
suggests that the farm to farm variation will be great.

One check on how close the established differential is to the actual
difference in costs which influence the farmers might be the extent
to which the production of market milk increases or decreases after
the minimum prices are established.

The effectiveness of this check is limited by the fact that most
producers in the market at the time the pric6 becomes effective will
have connections with some distributor. Other producers wishing to
enter the market wjll have difficulty in finding distributors to take
tneir milk. Under the minimum price schedifle they cannot tempt
distributors by offering to supply milk at lower prices, and there are
few other inducements which they can offer. Thus even though other
farmers may wish to t^ake advantage of the established prices they
naay find it impossible to do so. The situation would be different
if market-wide pools were established with free entry of new pro-
ducers, but under the California law this requires the approval of at
least 65 percent of. the producers, by number and by volume, supply-

*' Feed costs probably vary more from year to year than from season to season within the year.

CONCENTRiiTlON OF ECONOMIC POWER

ing the market. There is httle reason for producers with estabhshed
distributor connections to approve a program that would facihtate
the entrance of nsw producers into the market, and distributors
■probably have little incentive for encouraging new producers to
enter the market since they would have to pay new producers ihe
established minimmn prices.

Several stabilization and marketin-g- plans providing that minimum
prices to producers of market milk would fluctuate with changes in
butter prices and feed prices, became eJffective in March and April,
1939. In the fall of 1939 it was impossisJe to determine how suc-
cessful this price would be in maintaining me total production of
market milk about equal to the quantity consumed. Indications
were that in relation to consumption the quantity produced would
be abundant.

Other standards for setting minimum prices to producers are —

that the director finds that such prices will tend to effectuate the purposes and
policy of this chapter and will insure consumers a sufficient quantity of pure
and wholesome milk.^^

and that they will —

insure an adequate and continuous supply of pure fresh wholesome fluid milk
and cream to consumers thereof at fair and reasonable prices. ^^

Establishment of Minimum Retail and Wholesale Prices.

In establishing minimum wholesale and minimum retail prices the
director is required to find with respect to such prices : ^^

(1) That such prices are not more than reasonably sufficient to cover all ne(
essary costs, according to the method o'- type of distribution, including a rea-
sonable return upon necessary capital invested, of reasonably efficient distributors
and retail stores engaged in the distribution of fluid milk, fluid cream, or both,
in such marketing area as such necessary costs of reasonably efficient distributors
and retail stores are shown to the director by the facts available to the director
from investigations, surveys, audits, and hearings required in this section.

(2) That such prices will tend to maintain in the business of distributing fluid
milk and fluid cream, or both, such number of reasonably efficient retail stores
and distributors of fluid milk and fluid cream, or both, in sUch marketing area
as the director finds necessary to insure to consumers in such marketing area
sufficient .distribution facilities of the several types or methods commonly used
by consumers.

" (3) That such prices will protect the interests of consumers of fluid milk, fluid
cream, or both, in such marketing area by insuring to them adequate and efficient
distribution facilities of the several type^ or methods commonly used by them
without requiring such consumers to pay more for their supplies of such fluid
milk, fluid cream, or both, than is necessary to maintain such adequate and
efficient distribution facilities in such marketing area.

These standards emphasize "necessary costs" of reasonably efficient
distributors and also different types and methods of distribution. _ The
latter is in contrast to Oregon regulation which eliminated the differ-
ential between prices of milk sold over the counter for cash and prices
of milk delivered at homes.

In applying the standard of "reasonably efficient distributors" the
Cahfomia Department of Agriculture has attempted to apply what
has't)een called the "supply-hne" theory.^^ This theory assumes that
in each marketing area th«re are a number of distributors with varying
costs of distribution. It also assumes that the total capacity of all

• 'Sec. 736.3 (b), agricultural code, California.

"Sec. 735.1, agricultural code, California.

»» Sec. 736.12, agricultural code, California.

30 J. M. Tinley, Public Regulation of Milk Marketing in California, Berkeley, 1938, p. 124.

CX)NCENTRATION OF ECONOMIC POWER 133

the distributors in the market is in excess of the total sales in the
market — that some or all "of the distributors are using only a part of
the capacity of their plants. These assmnptions appear to be in
accord with the situation in most California markets.

If the coc' 3 of aU the distributors were known it would be possible
to rank them in ascending order of costs. Then, if the total sales of
the market were known and also the capacity of each distributor's
plant, it could be deterinined how many of the distributors, beginning
with the distributor whose costs were lowest, would be necessary to
supply the market if every distributor operated his plant at capacity.
If the distributor with lowest costs had sufl&cient capacity to supply
the whole market, his plant would be the "supply-line" plant and he
would be considered the "reasonably eflBcient" distributor. If the
plants of several of the low-cost distributors were required to supply
the market, then the last plant required would be the "supply-hne"
plant and presumably would be considered the "reasonably efficient"
distributor. Thus the distributor with lowest cost need not neces-
sarily be the one who determines reasonable efficiency.

This method of determining "reasonable efficiency" is based upon
a section of the Cahfomia law which directs that along with other
"economic factors" the following shall be considered in determining
minimum wholesale and minimum retail prices:

The amount of the available capacity for processing and distributing fluid milk,
or fluid cream, or both, of aU distributors in such marketing area and the estimated
extent to which such available capacity is being used by such distributors."

In practice it has been impossible to make all the determinations
required by the "supply-line" theory. Lack of personnel makes it
impossible to make cost studies of all the distributors in a marketing
area. Many distributons, especially producer-distributors, would not
have the records necessary for a study of their costs. In ohe marketing
area 49 distributors were Ucensed to market fluid milk. Of these, 32
were producer-distributors. In this marketing area it was possible
to make cost studies of the operations of Jour distributors. These
four handled 50 percent of the total fluid mUk marketed in the area
and 80 percent of the pasteurized milk. In this nlarket the proposed
prices were based on the operations of the plant with the* lowest oper-
ating cost of any of the plants studied, after ishe elimination of
expenses considered imnecessary by the department.^^

Not only is the director of the department of agriculture to consider
the costs of reasonably efficient producers but he is also to consider
the "necessary costs." The department has interpreted this to mean
that only necessary costs are to be considered and have eliminated
what they consider to be unnecessary costs. Costs which have been
eliminated include excessive depreciation, corporate expense, member-
ships and dues, donations, -entertainment and sales promotion,
soHcitors, and excessive route expense. No standards as tb what are
necessary- costs are set up in this legislation. The trade has objected
to the emnuiation of certain costs, especially cost of solicitors. The
trade argues that the fact that such costs are generally incurred 'y
distributors is sufficient indication that they are necessary. The
department is attempting to develop efficiency standards by studying

»■ Sec. 736.12 (6), Agricultural Code, California.

» E. I/. Vehlow, Report of Division of Markets Pertaining to the Cost of Distributing Fluid MUk for the
San Joaquin County Marketing Area (mimeographed), p. 11.

"9»48 — 41— No. 32 H

154. CONCENTRATION OF ECONOMIC POWER

the various operations necessary in the processing and delivering of
fluid milk, and has given particular attention to the effect of the
number of units carried by wholesale and retail routes on the eo^t per
unit. The effects of the demands, especially of retail stores, for
special services have also been studied and the costs of some of these
services have been classed as unnecessary.

Prices for fluid milk in effect in San Francisco and in Los Angeles
are shown in charts III and IV and in tables I to VI in appendix to
chapter III; In San Francisco, it is clear that prices paid producers
in recent years have been substantially higher than in. 1933 and 1934,
notwithstanding, some decline in 1939, and that until mid-1939 retail
prices were also higher. The gross margin between the two sets of
prices has been at about the same levels as in 1932 and 1933, except for
brief periods in 1934 and 1936. In the Los Angeles market there has
been much greater variation in prices, both at the wholesale and retail
levels, with producer prices in 1936-1939 generally above those pre-
vailing in 1933 with the exception of a period in 1938.

Milk regulation in California has been confined largely to setting
miriimum prices of fluid milk on the basis of certain costs. Minimum
prices to producers are determined by the price of manufacturing milk
and the additional costs of producing market milk. Minimum prices
to consumers are determined by the cost of milk and the necessary
costs of reasonably, efficient producers.

Thus far no use has been made of quotas as in Oregon or of base-
surplus plans; in fact, no provision for quotas or rating plans is
included in the law. A section of the law which provided that no
plan "shall involve a limitation upon the production of fluid milk
or fluid cream" may prohibit their -use. The California plan is to fix
t^e differential be.tween manufacturing milk prices and fluid milk
prices at such a level as will induce the production of only as much
milk under the sanitary requirements for market milk as can be sold
as market milk. Thus far it appears that the supplies of market milk
have been ample. Since distributors are required to pay the minimum
price there is no inducement for them to seek new producers even
though there might be producers willing to sell market milk for less
than the fixed price. As long as the stabilization and marketing
plans do not provide for market-wide pools the provision for minimum
prices may be an appreciable check on the expansion of the production
of market milk.

Wiile the principal objective of minimum wholesale and retail
prices was to protect the minimum prices to producers, it is' the hope
of tliose -administering the act that the efficiency of distribution can
be increased at the same time. Without regulation, distributors have
tended to seek new business by offering additional services rather than
by price reduction. Under the minimum price schedule distributors
will be prevented from reduciftg prices. If "unnecessary" costs are
not considered in the determination of minimum costs, the services
which cause these costs may be eliminated by distributors; but so long
as they are permitted to compete only on a service basis it seems
unlikely that many services will be eliminated. More positive action

Chart 1

Fluid Milk Prices in San Francisco, Calif., 1920-39

CENTS PER
QUART

" r

1 4

\ 1 1
\ ^ RETAIL PRICE -House Deliveries

1 2

1 0
8

L. .A_'

T '

\ /

GROSS MARGIN

,-wV^-.^

/N.

1 <
-'

/_/ »^

..'-V

--'— ^--— '\^-wV

t V 'j *V4=*r-.y—

-^^'^-V^ V--

■

. 1 A -' • I 1 1 • 1 1

L--v_./

« .'

1 \'

— — ^

■^^^?^-

1 ^

RICE PA

-^^

D PRODUCERS

Price not

listed

■; 1 1

192.0 I 192.1 I l9tJl. I /QA3 I >9Z4 | >9<S- | /^6 | 19x1 \ /9z£ \ I9i.9 \ /9SO | /?3) | /93Z. | N33 | I^Si- | 1935- | ^936 j /937 | /93e | /93C

Chart IV
Fluid Milk Prices in Los Angeles, Calif.,

[ijlilli.^ M i H u ^ M H I y g I u u u H ri n H H H'g M i g M I ^ I n g rl H H H I U qUi^Uitii

LJ?^ I I9Z.I I I91Z I ,9U I 191.4 I l9tS I /9i6 | J9A7 | ;9i^8 | /.9g9 | <930 | 193 i | 1931!. \ J933 | /931- | /93i- | /936' | 1937" | ^938 | <939 |

OONCENTrlATION OF ECONOMIC POWER 135

than merely setting minimum prices will be required of the regulating
agency to assure more efficient distribution, less duplication of routes,
and less multiplication of services.

There are marked differences between regulation in Oregon and in
California. In Oregon, regulation includes definite plans for adjusting
the amount of fluid milk available on the market to the amount that
can be sold at the prices established. In California the plan is to fix
the prices that will attract only as much milk as can be sold. While
studies of the cost of distribution are made in both States, California
places more emphasis on cost studies and especially upon studies oi
efficiency of distribution.

APPENDIX A

PROVISIONS FOR PROHIBITING |MSTRIBUTORS
FROM ENGAGING IN UNFAIR PRACTICES

Provisions for prohibiting distributors from engaging in the follow-
ing unfair practices must be included in every stabilization and mar-
keting plan :

(1) The payment, allowance or acceptance of secret rebates, secret refunds, or
unearned discounts by any person whether in the form of money or otherwise.

(2) The giving of any milk, cream, dairy products, services or articles of any
kind, except to bona fide charities, for the purpose of securing the fluid milk or
fluid cream business of any customer.

(3) The extension to certain customers of special prices or services not made
available to all customers who purchase fluid milk or fluid cream of like quantity

/under like terms and conditions.
,, (4) The false or misleading advertising of fluid milk or fluid cream as defined
in section 654a of the penal code.

(5) The purchase of any fluid milk in excess of one hundred gallons monthly
from any producer or association of producers unless a written contract has been
entered into with such producer or association of producers stating the amount of
fluid milk to be purchased. for any period; the quantity of such milk to be paid for
as Class 1, and Class 2, and the price to be paid for each of the several classes, but
in any marketing plan where an equalization pool is in operation such contract
need not specify the quantity of the several classes. The contract shall also state
the. date and method of payment, the charges for transportation if hauled by the
distributor, and may contain such other provisions as are not in conflict with this
chapter. A signed copy of such contract shall be filed by the distributor with
the director within five days from the date of its execution.*

> Sec. 736.3, agricultural code, California.
136

APPENDIX B
BASIS FOR PRICE DEJERMINATION

When the average price of the basic dairy
ration for the month is—

(a) 24 cents and less than 30 cents .

. (6) 30 cents and less than 36 cents .

(d) 42 cents and less than 48 cents .

When the average price of 92-score
butter per pound at Los Angeles for
the month is—

cents and
cents and
cents and
cents and
cents and
cents and
cents and
cents and
cents and
cents and
cents and
cents and
cents and
cents a; id
cents and
cents and
cents and
coats and
cents and
cents and
cents and
cents and
cents and
cents and

less than 25 cents
less than 31 cents
less than 37 cents
less than 43 cents
less than 49 cents
less than 55 cents
less than 22 cents
less than 28 cents,
less than 34 cents
less than 40 cents
less than 46 cents
less than 52 cents,
less than 25 cents
less than 31 cents,
less than 37 cents
less than 3 cents.
less than 49 cents
less than 5.^ cents,
less than 22 cents,
less than IS cents
less than 34 ccuts
less than 40 cents,
less than 46 cents,
less than 52 cents.

Column 3

Then the price of
class 1 fluid milk
per pound milk
fat beginning the
first day of the
second month
thereafter shall
be-

46 cents:
52 cents.
68 cents.
64 cents.
70 cents.
76 cents.
46 cents.
52 cents.
58 cents.
64 cents.
70 cents.
70 cents.
52 cents.
58 cents.
G4 cents.
70.ccnts.
76 cents.
■82 cents.
52 cents.
58 cents.
64 cents.
70 cents.
76 cents.
82 cents..

Sec. 2. Basic Dairy Ration. — The average price for the month of
the total quantity of ingredients hsted below, or similar ingredients
containing an equivalent amount of crude protein and digestible
nutrients at comparable prices, as said prices are quoted by the Fed-
eral-State Market News Service, delivered at Los Angeles, car lot
equivalents, shall determine the cost of the basic dairy ration as
applied to subdivisions (a), (b), (c) and (d), of tuble I of this article.

Ingredftnts or their equivalents: Quantity

Alfalfa hay, U. S. No. 1, or equal. ^ pounds. _ 25

Barley, No. 1 feed . _ . ^;- do 3

Bran, northern standard mill run . ..do--.. -2

Beet pulp ^ ,.-, - - do 2

Cottonseed meal (43% protein),, ^ .■„—-_ J pound. _ 1

'137

APPENDIX TO CHAPTER III

TABLES GIVING DATA ON MILK PRICilS IN SAN FRAN-
CISCO, AND LOS ANGELES, CALIFORNIA

Table L-

- Monthly average retail pr . .e of fluid milk {house deliveries) ,
Francisco, Calif., 1920-t:9 ^

San

[Cents per quart]

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1920..-

1921

16-16

13-14

12-13

13-14

16-16

12-13

16-16

12-13

16,

1,%

12^13

12-13

16
15

i2-13

it
12
11
12
12
13
13
13
12

14-15

12-13

14-

"is""

12
12
13
13
13
12

15-16

13-14

12-13

17
14
12-13

17
13-14

13-14

12-13

17
13-14

1922

1923

1924

14
14
14
14
14
14
14
10
12
11
12
12
13
13
13
12

14
14
14
14
14
14'
14
10
12
11
12
12
13
13
13
12

1925 - -

1926 :.

1927

1928

1929 ' •

1930

13 \

12'

12-13

14
13
12

12
13
13
13
12-13

1931

1932

1933

1934

1935

1936 - -

1937

1938

12-13

1939

12H

' U. S. Department of Agriculture, Bureau
Service: Monthly Fluid Milk Market Report.

Agxicultural Economics and Agricultural Marketing

Table II. — Monthly average price paid producers for milk (3.5 percent) used in
fluid form for city distribution, San Francisco, Calif. 1920-39 '

[Cents per quart] '

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Nov.

Dec.

1920

8.8
8.8
6.8
6.8
6.9
6.9
6.9
6.9
6.9
6.8
6.8
6.3
5.0
4.8
4.2

5.6
5.7
5.3

8.8
8.8
•6.8
6.8
6.8
6.9
6.9
6.9
6.8

"e.'s"

6.1
4.8
4.8
4.4
4.7
4.9
6.6
6.7
6.3

8.8
7.8
6.8
6.8
6.9
6.9
6.9
6.9
6.8

""6."8"
6.1
4.8
3.9
4.4
4.7
4.9
5.6
5.7
5.3

8.8
. 7.8
6.8
6.8
6.6
6.9
6.9
6.9.
6.8
6.8
6.8
6.1
4.8
3.9
4.0
4.4
4.9
6.6
6.7
4.9

8.8
7.8

""6."8"
6.9
6.9
6.9
6.9
6.8
6.8
6.8
5.1
4.8
3.9
4.0
4.4
4.9
5.6
5.3
4.9

8.8.
7.8
6.6
6.8
6.6
6.9
6.9
6.9
6.8
6.8

1\
3.9
4.0
4.4.
4.9
5.6
6.3
4.9

8.8
6.8
6.8
6.8
6.8
6.9
6.9
6.9
6.8
6.8
6.8
6.1
4.8
3.9
4.0
4.4
4.9
5.5
5.7
4.9

9.8
6.8
6:8
6.»
6.8
6.9
6.9
6.9
6.8
6.8
6.8

""4."8"
3.9

4.9
6.5
6.7
4.9

9.8

6.8

9.8
6.8

9.8

9.3

1921

1922

6
6
6
6
6
6
6
6
6
6
4
4
4
4
4
5
6
5
4

8
8
8
9
9
9
9
8
8
8
6
8
6
7
2
6
7
6
9

6.8
6.8

1923

6.8

1924 •

6.9
6.9
6.9
6.9
6.8
6.8
6.6
4.4'
4.8
3.9
4.0
4.2
4.9
6.5
6.7
4.9

7.0
6.9
6.9
6.9
6.8
6.8
6.8
4.2
4.8
3.9
4.7
4.7
6.6
6.7
6.5
4.9

6.9

1925.

1926.

1927

1928

1929

1930

6.9
6.9
6.9
6.8
6.8

1931 -.

4.8

1932 :

1933.... _--.

4.8
4.6

1934

4.7

1935

1936

4.9
6.6

1937..... *:

1938 ---- -.

5.7
5.6

1939 _

5.3

> U. S. Department of Agriculture, Bureau of Agricultural Economics and Agricultural Marketing
Service: Monthly Fluid Milk Market Report.
' Price per hundredweight divided by 46.5.

138

CONCENTRATION OF ECONOMIC POWER J 39

Table III. — Gross margin between retail price of fluid milk (house deliveries) and
prices paid producers, San Francisco, Calif., 1929-S9 •

[Cents per quart]

Computed from tables I and II.

Table IV. — Monthly average retail price of fluid milk (house deliveries) Los Angeles,
Calif., 1920-39 »

[Cents per quart]

Jan. Feb. Mar.' Apr. May June July Aug,

Oct. Nov. Dec

1920.
1921.
1922.
1923.
1924.

14-15
15
IS
14
15
15
15
15

16
16
14
15
P5
14-15
15
15
15

13
12
11
8-10
12
11
12
11-12
11

15
13
12

8-10
12
10
12
11-12
11

16
16
14
15

■ 16
15
15
15
15
15
15
13
10
9
10

10-11
10
12

11-12
9-U

10
8

10
10-11

12
11-12
10-11

13
10
10
II
11
10
12
11-12
10-11

10-

, 11

11-12

14-15
14
15
15
15
15
15
15
15
14
13
7

12
11
11
11,
12

n-n
U

14-15
14
15
17
15
15

12
11
12
11
11
12
12
10-U
11-12

12
12
11
12
12
10-12
10-12

12
U
12
12

10-11

10-12

14
15
15
14-15
15
15
15
15

12
11
11
12
11
12
12
10-11
10-12

' U. S. Department of Agriculture, Bureau of Agricultural Economics and Agricultural Marketing Serv •
ice: Monthly Fluid Mills Market Report.

140

CONCENTRATION OF ECONOMIC POWER

Table V. — Monthly average price paid producers for milk {3.5 percent) used in fluid
form for city distribution, Los Angeles, Calif. ,^ 1920-39

[Cents per quart ']

1921-.
1922.
1923.
1924..

1929..
1930..
1931..
1932..
1933..
1934..
1935..
1936.
1937.

Jan.- Feb. Mar. Apr. May June July Aug^ Sept. Oct. Nov. Dec

1 U. S .Department of Agriculture, Bureau of Agricultural Economics and AgriculturalMarketing Service:
Monthly Fluid Milk Market Report.
'Trice per hundredweight divided by 46.5.

Table VI. — Gross margin between retail price of fluid milk {house deliveries) and
price paid producers, Los Angeles, Calif., 1920-39^

[Cents per quart]

Yea)

Jan.

Feb.

Mar.

.Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

B..

1920

7.8
8.1
7.7
7.4

7.8
8.5
7.2
7.4

7.6

8.4
7.2
7.4

,7.2

''8.4

7.2

7.4

7.2

'"7.'2'

7.4

7.2
8.4
6.2

7.4

8.1
8.2
7.2
7.4

8.1

7.7

7.2

.7.4

"7^7'
7.2
7.6

8.1
7.2

"7.' 6'

8.1
7.2

7.4
7.4

8.1

1921

7.2

1922

7.4

1923... ..:

6.9

1924

7.4
7.2

7,8

7.4
7.3

7.8

":7."4'
7.8

8.0

7.4
7.8

6.8

7.8
7.8

"'8.'9"

7.8

9.0
8.9
8.0

6.6

8!2

8.6
8.5
8.2

8.6
8.4
8.2

7.2
8.1
7.8

7.8

'l925

7.8

1926

8.0

1927 .

8.0
8.3
8.6

8.0
8.3

■8.0
8.3

8.2
8.3
8.3
8.5

7.7

"'6:6'

8.2
8.3
8.2

8.0~

8.2

8.0
8.4
8.2
8.3

7.7
4.'7
7.8

"8.'2"
8.2

"Y.\
6.8
7.8

8.2
8.2

"i'.h'

7.1
"7.'8'

8.3
8.4
8.2

8.4

1928

8.6

1929

8.3

8.2
9.3
7.7
6.2
6.6

8.6

7.7
7.4
6.8

7.5
7.4
R,8

7.7
6.6
5.6

7.7

"h'.K

7.1
6.8
7.8

7.1

1932

7.1
fi,8

6.8

1933

7.1

1934...

7.1

5.1

6.1

6.8

6.4

6.9

1935

6.9

7.3

5.8

7.0

6.8

1936 . ,.

• 6.8

7.0

6.0

6.5

6.7

1937

6.7

6.5

6.6

1938 _.■-

6.5

6.2

6.1

7.0

6.7

1939

6.9

5.9

6.1

5.1

6.1

•6.6

6.1

6.6

6.1

' Computed from tables IV and V.

CHAPTER IV »
STATE CONTROL OF MILK PRICES IN INDIANA

HISTORICAL DEVELOPMENT

Legislation authorizing State control of the purchase and distri-
bution of fluid milk and cream in Indiana was enacted in 1935. The
law was reenacted with some amendments in 1937 and again extended
for a 2-year period in 1939.

Prior to enactment of State legislation in Indiana three markets in
this State — Indianapolis, Evansville, and Fort Wayne — had been
under Federal control. An adverse decision in a lower Federal
Court made the future of Federal regulation highly uncertain in these
markets, principally on the question of interstate versus intrastate
commerce. This condition stimulated an interest in State control,
although the latter might have developed in time quite independently
of the Federal program.

Several of the provisions and much of the language in the Indiana
law, and in the first orders written under that law, were nearly an
exact reproduction of certain provisions of the Federal program. This
is not surprising since the State intended to develop a program in
some of its markets jointly with the Federal Government.

One of the importanj: characteristics of fluid milk marketing in
Indiana is that the flow of fluid milk and cream from bordering States
into Indiana has been negligible compared with the total distributed
in the State. Imports into Indiana would, of course, grow substan-
tially if prices became favorable to such commerce. Considerable
amounts of milk and cream are shipped to Chicago and some cream
is shipped to other out-of-State markets.

The first fluid milk market in the United States for wjiich Federal
and State orders were issued concurrently was the Fort Wayne market
in 1935. Joint control of the La Porte, Ind., market was similarly
developed in 1936. As already indicated the interstate shipments
of milk to these markets have never constituted more than a small
percentage of the total. Thus it may be said that Federal orders are
used to complement State orders in these markets. Federal control
was withdrawn completely from the Indianapolis and Evansville
markets early in 1936.^

•Production conditions in Indiana differ somewhat from those in
other markets studied in that this State is in the eastern part of the
Com Belt where dairying is ordinarily not the main source of farm
income. The production of com, hogs, and beef cattle is the main
farm enterprise here. It should be not inferred from this that prices

' This chapter was written by Mr. R. K. Froker. The writer gratefully acknowledges the most helpful
information was received from C. W. Humrickhouse, executive secretary of the Indiana Milk Control
Board, Quy L. Roberts, member of the board; Leon C.Coller and his associates of the market adminis-
trator's ofiBce, Indianapolis, and from Dr. T. W. Cowden, Purdue University, La Fayette, Ind.

' The Federal order for the Indianapolis market was reported as nonoperative after September 1934 and
that no reports were received from handlers after that date. Cancelation of the order did not take place
intil February 28, 1936.

141

J42 CONCKNTRATION OF ECONOMIC POWER

for milk have.beeu regarded as satisfactory to farmers in Indiana, but
merely that their financial interests are not so completely centered in
dairying.

Organized fluid milk producers in Indiana have generally favored
State milk control legislation. In fact, the extension of the act in
1939 can very largely be attributed to the efforts of the Indiana
Cooperative Milk Producers Federation. The enactment of the
first law in 1935 can probably be credited largely to this group and to
Lt. Gov. Clifford M. Townsend (now Governor) who had interested
himself in this program as a way of aiding dairy farmers.

The mUk control legislation received some opposition from a con-
sumers' group in Indianapolis, but this never reached serious pro-
portions. Distributors were generally believed to be in favor of this
legislation, yet they took very little active part in promoting it.
A few opposed it. Organized labor in the State expressed itself in
opposition to State milk control.

DECLARATION OF FINDINGS AND POLICY

The State of Indiana made the following declarations of findings in
its milk control law of 1935 : ^

(1) That milk is a necessary article of human food.

(2) That the procurement and maintenance of an adequate and satisfactory
supply of milk is vital to public health.

' (3) That the production, transportation, processing, storage, distribution, and
sale of milk in Indiana is a business affecting the public health and interest.

(4) That unfair, unjust, destructive, and demoralizing trade practices have been
and now are being carried on and constitute a constant menace to the health and
welfare of the people and threaten the economic integrity of the milk industry.

There is no evidence accompanying these declarations of aq. im-
pending shortage of milk and the legislation itself does little with re-
spect to such things as transportation, processing, storage, and imfair
|)ractices. Likewise, the sanitary and health qualities of milk are
directly affected in only one or two markets, principally Indianapolis.*
It was declared to be the policy of the State ".to promote, foster,
and encourage the intelligent and orderly maAeting of mUk through
producer-cooperative associations." In the next sentence it was
stated that "the normal process of producing and marketing milk has
become a cooperative enterprise of vast economic importance to the
State and of very vital interest to the consuming public, which ought
to be safeguarded and protected in the public interest." Obviously
the term "cooperative" as here used carries two different meanings.
Otherwise, the State would be declaring as its policy to promote a
thing which at the same time it declares to be in full existence.

The economic depression and the disparity in farmers' selling and
buying prices were stated as having "seriously impaired the.agricul-
,-^tural assets supporting the tredit structure of the State." General
reference is also made to the Federal legislation which grants the
/Secretary of Agriculture certain powers relative to the production,
sale, and distribution of milk but which have not .been fully effective
in Indiana.

The immediate conditions giving rise to this legislation are prob-
ably more correctly stated in the following declaration: "The malad-

s Ch. 281, sec. 1. The declarations of findings and policy are abbreviated here and are reproduced In
exact form only to the extent that such parts are set off in quotation marks. '

« Marked improvement in the quality of milk was reported for tlje Fort Wayne market, but it was not
clear to what extent, If any, the price control program had been a factor.

CX)NCENTRATION OF ECONOMIC POWER

143

justment of prices of farm commodities with prices which farmers are
compelled to pay, and the inability of Federal legislation to function
LQ this economic emergency, without the cooperation of the State
agencies, has created an emergency in the State of Indiana which re-
quired immediate correction." It seems apparent that the objective
of this legislation is basically to raise and maintain fluid milk prices
to farmers and to fix wholesale and retail prices to dealers at levels
higher than competitive economic conditions would alone develop or
support. , That this legislation was also intended to complement
Federal legislation is at once apparent.

EXTENT OF STATE CONTROL

State control over the marketing of fluid milk extended to 19 market
areas in Indiana in 1939. Each area was designated by a county and
large town or city and confined largely to urban territory. The
orders, of course, specify precise boundaries.

Approximately a million consumers are affected directly by these
19 orders. Between 35 and 40 percent of these persons are in the
Indianapolis market area. This market and the Fort Wayne and
South Bend market account for roughly 60 percent of the total
population within the 19 control areas in the State.

Seventy percent of the total class I sales (milk used for fluid milk
and cream) and. 75 percent of the total market receipts under State
control are in these same three markets. (See table 9.) These per-
centages are soMewhat higher than the preceding figure on percentage
of consumers affected. The difference is to be expected since large
markets tend to receive a somewhat higher percentage of their total
milk supply through specialized distributors than do small markets
and a correspondingly smaller percentage of the milk from producer-
distributors.

The receipts and sales of milk as reported for each of the 19 markets
for 11 months in 1939 are shown in table 9. On a yearly basis these
figures would indicate a total of about 236,000,000 pounds of class I
milk for the 19 markets and 170,000,000 pounds of milk diverted
into manufacturing channels. Total deliveries of milk would there-
fore be about 406,000,000 pounds annually. For a comparison of
these figures with State totals a general picture is also desirable.

Table 9. — Average monthly receipts of 4 percent milk and percentage used for fluid
milk and cream and for manufacture, 19 markets, Indiana, January- November 1939

Average
monthly
receipts
(1,000
pounds)

Percentage used for—

monthly

receipts

(1,000

pounds)

Percent age used for—

Fluid
mi lie and
cream,
percent

Manu-
facture,
percent

Fluid
milk and

cream,
percent

Manu-
facture,
percent

Fort Wayne,

Columbus •

3,687
346
192
618
223
105

1,261
702
899
339
205

67
80
78
86
71
68
78
74
75

44
18
43
20
22
14
29
32
22.
26
25

LaPorte..-

Indianapolis

Peru

1,166
18,391

479

224
3,700

217
1,164

151

74
50
61
64
67
78
72
76

26
60

Hartford City

Logansport

Brazil

Oreencastia

Rnnth Bend -

Wabash

36
33

Greensburg

-«khart

Richmond

Winchester 1

Total, 19 mar-
kets

Marion

Hontington

33,818

Average of 6 months, June-November 1939

144 CONCENTRATION OF ECONOMIC POWER

Indiana produces about 3,000,000,000 pounds of milk annually.
Approximately 56.3 percent of this amount goes into manufactured
products and 21.3 percent is used on farms. The remaining 22.4
percent is probably sold mostly as fluid milk and cream of which
nearly a third is retailed by producers.^

These figures would indicate that 35 percent of the milk sold for
fluid consumption is under State control. On the other hand, prob-
ably not over 20 percent of the milk going into commercial channels
for all purposes iS under State control either as fluid milk and cream
or as surplus in fluid milk markets.

ADMINISTRATION

Milk Control Board.

The Indiana Milk Control Act provides for the creation of a milk
control' board to consist of five members and to be placed in the
division of agriculture. This board is charged with the administra-
tion of the act. The commissioner of agriculture, two representatives
of producers, and two representatives of -distributors make up the
personnel of the board. The producer representatives must be chosen
by the Governor from nominees selected by organized producers and
the other two from nominees named by organized distributors in the
State. Members of the board, except the commissioner, serve on a
per diem basis.

Powers.

The milk control law lists and describes broad powers which are
vested in the board. The following are among the more important
ones:

1 . To supervise and regulate the production, processing, furnish-

ing, distribution, and sale of milk intended for fluid
consumption.

2. To investigate all matters pertaining to the production,

transportation, storage, distribution, and sale of milk.

3. To arbitrate disputes between producers and distributors.

4. To designate or establish marketing or sales areas in the State.

5. To cooperate with health authorities in enforcement of

sanitary regulations in these market areas.

6. To appoint local milk committees of producers and distributors,

mostly for advisory purposes.

7. To adopt and enforce rules and regulations necessary to carry

out the provisions of the act, but more specificafly governing
-the following for each market area :

(a) Determination of the proportion of milk of each

producer which shall be accepted and paid for
pursuant to prices established,

(b) Classification of milk sold by producers.

(d) Pricing of milk at wholesale and retail.

(e) Determination of prices to be paid producers.

» Data in this paragraph are taken from Bureau of Agricultural Economics mimeographed reports on
Milk Utllitizatlon. The Indiana Cooperative Milk Producers Federation claimed In a mimeographed state-
ment in 1039 that (1) fluid milk and cream used in villages and cities in Indiana represented 43 percent of
the total milk in the State, and (2) that the total milk handled through fluid milk distributors represents
51 percent of the total milk produced.

CONCENTRATION OF ECONOMIC POWER J45

8. To equalize prices among producers on a distributor or market

area basis.

9. To order payment by milk dealers of check-off for (1) checking

the quality, butterfat content, and quantity of milk pur-
chased from producers; (2) providing a market and payment
for milk to producers; and (3) increasing the quantity and
quality of milk consumed by the public.

Other provisions under this sec on of the law deal largely with the
legal phases of the problem such as the procedure, complaints, notices,
appeals, etc.

Employees.

The board employs an executive secretary from outside the boatd
itself, and, in addition, a very limited number of legal, accounting, at'd
office personnel. In addition it appoints market administrators ior
each market area under its control. This type of market adminis-
tration follows the general pattern of the Federal milk control program.
Each market administrator establishes his office in the area to be served
and employs accountants and other personnel as needed.

Democratic Control.

The Indiana Milk Board and its executive secretary place a great
deal of emphasis upon the democratic features of their administration.
Most of the action of the State board is done only upon the initiative or
approval of the local milk committee which is looked upon as an inte-
gral part of the administrative set-up. Actually, however, the admin-
istrative authority is vested in the State board rather than in the local
committees.

Financing.

The expenses of the board, mcluding salaries of employees, per diem
and expenses of members of the board, and general office expense are
covered by State funds. A sizable annual license fee based upon
volume of business per plant is charged each distributor operating in
a market under State control. This money goes directly to the
State treasury and in turn is available to the milk control board as
directed by the act. The schedule of such annual fees is shown in
table 10.

The local admmistration of the respective orders is financed by a
check-off divided in equal amounts between producers and distribu-
tors. The rate of all deductions from payments to producers in 19
markets in August 1939 is shown in table 3. The market service
deduction is made primarily for the purpose of checking the butterfat
content and quality of milk delivered by each producer. The act
provides "that whenever in any marketing area a producer cooperative
is furnishing more than 50 percent pf the milk sold or consumed in
such marketing area, the check-off authorized by the members of
such cooperative and purposes for which the same may be used, the
quotas assigned to each member's herd, shall be prima facie evidence
of the reasonableness of such an-^unt and the uses made thereof." It
will be noted from table 3 that t nose market areas having the highest
administration charge have nr : eparate marketing service deduction!

146

CONCENTRATION OE^ ECONOMIC POWER

Table 10. — Annual plant license fees of fluid milk distributors operating in State
controlled markets in Indiana, 1939 ^

Plant's daily average volume, pounds

License
fee

Plant's daily average volume, pounds

License
fee

1 000 or less

$35
45
55
65
85
110
165

15,000 to 20,000

$200

20,000 to 25,000 -.

275

25,000 to 30,000

330

30,000 to 40,000-.;-..

40,000 to 50,000.-1.

440

550

50,000 to 60,000

660

825

' License for distributing-broker (one who buya loi^ d milk and peddU ■ it at retail or wholesale), $5
regardless of volume. License for producer-distri' ato. is $2 for not Liore than 3 dairy animals owned,
managed, or controlled by him plus $1 for each multiple of 3.of such additional animals.

The -act permits compulsory payments from producers and like
amounts from distributors for advertising milk. Deductions were
made for this purpose in 8 of the 19 markets. (See table 11.) The
expenditure of such funds in each market is placed in the hands of a
local advertising committee appointed by the local milk committee
subject to the approval of the State board.

While the act permits a check-off from producers' payments and a
like charge for distributors for the improvement of the quality of
mUk, only one market area, Indianapolis, has availed itself of this
provision. The expendjl^ure of the funds for quality improvement is
directed by a local production committee appomted in the same man-
ner as the advertising committee. It was the general opinion of those
interviewed in this study that substantial progress had been made in
improving the quality of milk in. the Indianapolis market, largely due
to the finances provided under the order for that market. Milk
orders issued by other States covered in this studv and by orders
issued by the Federal Government have left the financing of the
quality program entirely to the municipalities covered by such orders.

Tabl.'s II.— Check-offs from payments to producers in Indiana State controlled milk
markets, August 1QS9

[Cents per 100 pounds of milk]

Market area

Deduction for—

Coimty

Principal city

Adminis-
tration

Market-
ing serv-
ice

Adver-
tising

Quality
produc-
tion

Allen -

2
5
2
3

Blackford -

Hartford City

Logansport

Brazil

Clay

Oreenshnrg

Elkhart -..

Elkhart.-

Marion

2
2

2
1
5
2
1 1
2
6

---2-

1
1

Grant

Kokomo

H'lnting*""

Kosciusko K

Warsaw

Miami "^ ~'

Peru

PntnftTn

Oreencastle

St Joseph

South Bend

Wabash ...

RinhmnTid

Winchaster

Marlon

TnfH.#;SpnJis

3^
2

Per potmd of buttsrfat.

CONCENTRATION OF ECONOMIC POWER 147

Relationship to Lahoi .

Organized labor in Indiana expressed itself in opposition to State
mUk control legislation and to its administration.^ Labor's chief
objection seemed to be that the control program allegedly brought
distributors together to the extent that they adopted mutuaUy helpful
policies and thus prevented organized labor from being as effective
in bargaining as it might otherwise have been. Efforts to obtain a
closed-shop-union contract from certain fluid mUk distributors in
Indianapolis were unsuccessful and failure in these efforts was blamed
on State control.

It is difficult to see where any of the provisions of the orders issued
by the Board could be construed as "anti-labor." On the other hand,
some fe^^ provisions might be interpreted as distinctly favorable to
labor. In several orders the hours during which mUk might be deliv-
ered at wholesale and retail were specified and limited to "daylight"
hours. Furthermore, store sales of milk in all markets with one excep-
tion, were priced the same as milk delivered to homes. This provision
is generally looked upon as favorable both to distributors and labor
since it tends to keep the delivery service intact and at its maximum.
In one order a provision was made for a check-off of one-third cent
per bottle of milk sold in any industrial plant where employees had an
organized group or association operating a canteen. Such money
was ordered paid to the market administrator who, in turn, was re-
quired to pay it to the em.ployees' group.''

Organized labor probably viewed the personnel of the State milk
control board and of local conmiittees with concern because appoint-
ments to these bodies were made from producer and distributor
groups. This procedure was in accordance with the Milk Control Act.
The legislature probably reasoned that the milk price control would
deal with prices and issues which pertained for the most part to rela-
tionships between producers and distributors.

While the official acts of the Board and its appointees can probably
not be considered as detrimental to labor, there nevertheless appears
to have been a feeling prevalent among some of the administ'rative
personnel that the interests of organized labor and of farmers were in
conflict. This attitude is evidenced in certain issues of the Milk
Market Bulletin covering the Indianapolis market.^

Legal Problems.

One of the early administrative problems in milk price control in
Indiana was the determination of the legal status of the act and of its
various provisions. This question was decided in the affirmative by
the State Supreme Court on March 26, 1936.*. Equalization of market
proceeds among producers was specifically attacked in this case.
Still other issues involved in litigation dealt with the issuance of
licenses, non-compliance, and methods of evading the provisions- of
the orders issued by the Board,

• The Indiana State Federation of Labor voted on SeptemB»r 25, 1939, to petition tne Governor to reorgan-
ize the personnel of the State milk control board, and also adopted resolutions seeking eventual repeal of the
Milk Cfontrol Act. The resolutions were sponsored by the Teamsters' Union. The Dairy Record, Sept.
27. 1939.

' Order for Fort Wayne market, Aug. 16, 1938, art. VIII, entitled "Check-off Industrial Employees
Association."

• Publication of the Marion County Milk Administration, 446 Illinois Bldg., Indianapolis, Ind. Hoe
issues for October and November 1939.

» Albertg etalvs. Milk Control Board of Indiana, 200 N. E. 688.

148 CONCENTRATION OF ECONOMIC POWER

CONTROL DEVICES

Powers granted the Milk Control Board are outlined earlier in this
report. These powers are also indicative of the devices which are
likely to be used by the Board to effectuate the purposes of the act.
Some ot the more important devices are the following:

1. Licensing of. milk distributors.

2. Establishment of market areas.

3. Establishment of local committees.

4. Classification of milk and specification of prices to be paid by

handlers.

5. Price equalization among producers.

6. Base-surplus plan of paying producers.

7. Bonds.

8. "Emergency orders" specifying wholesale and retail prices.

Licensing of Milk Distributors.

Each distributor whether or not he is a producer-distributor or a
distributing-broker is required by the Milk Control Act to obtain a
license to operate in Indiana. The act lists the type of information
that must accompany each application and the conditions under
which the Board may refuse a license or suspend or revoke one.
Such conditions include (1) failure to account and make proper pay-
ments for milk, (2) violation of any sanitary regulation, and (3) viola-
tion of any provision of the Milk Control Act or any rules, regulations
or orders of the Board,

It is at once apparent that the licensing of milk distributors is an
important and effective device for raising funds and for putting the
milk control program into operation. During the first fiscal year the
a^t was in force (July 1, 1935, to June 20, 1936) there were hcensed
2,535 producer-distributors, 235 distributing brokers, and 525 dis-
tributors. The licensing fees totaled $39,087.75 for this period.

Establishment of Market Areas.

This device becomes important because it defines and limits the
territory to which specific orders of the board shall apply. The market
area boundaries are usually extended well beyond the corporate limits
of the urban market that is to be regulated. For example, the market
area for the Indianapolis market is defined as including all of Marion
County. This practice tends to curb or eliminate competition from
roadside stands and retail sales at farms since such sales can usually
be made only at a considerable discount in price.

Establishment of Local Committees.

In every market under State control, as indicated in the section on
admin^tration, the Board appointed a local milk committee to serve
largely in an advisory capacity. Subcommittees on advertising and
production (quality improvement) were also provided for in some
orders. These were appointed by the local milk committee, but
always subject to the approval of the Board.

The appointment of local committees of producers and distributors
has two important advantages in the administration of a milk control
law. First it tends to acquaint the Board with local conditions and
local viewpoints, and second, rules and regulations are likely to be
more readUy acceptable if they first have been sanctioned by such a

CONCENTRATION OF ECONOMIC POWER X49

committee. The members serve without compensation and are
selected from producer and distributor groups. Were these com-
mittees to include reasonable representation from the consuming
public it is probable that their recommendations would have broader
pubhc acceptance.

Classification of Milk and Prices.

The classification of milk under Indiana milk orders has much
similarity with that in other State milk control plans. Milk sold or
distributed as fluid milk and fluid cream is included in class I in all
controlled markets in the State, although sub-classes as lA and IB
are sometimes used to indicate separate uses within this class as for
rehef and schools.

Class II milk is usually defined to include that used for flavored
drinks, cottage cheese, ice cream, evaporated and condensed milk,
although there is less uniformity than in the case of class I.

Class III milk includes other manufactured products, and prin-
cipally butter.

Prices are specified for each of these classes of milk or the basis is '
named by which they shall be determined. Class I price is in all cases
specified in exact amounts. The prices for class II and III milk are
determined by formulas and are based on the prices of manufactured
milk products.

Price Equalization and Base Surplus.

Only two of the markets imder State control operated on a market
pool basis in 1939. The others operated on a dealer pool under which
uniform prices are paid to all producers delivering to any one distribu-
tor, but are not necessarily uniform among producers dehvering to
different distributors. This comes about from the fact that distribu-
tors have varying proportions of their total milk supply going into
different classifications. These proportions are seldom identical
among distributors.

In 1939 seven of the markets used a base-surplus plan in paying
producers. Under this provision each producer is given an allotment.
For dehveries up to his allotment he receives one price, usually a
blended price, and for additional production and deliveries he receives
a lower price, usually the equivalent of the class III price. It should
be kept in mind that the base-surplus plan as used in these markets
does not for any one period raise or lower the amounts distributors
must pay for milk. It is rather a device for distributing marketing
proceeds amoi^ producers so that those with uniform seasonal pro-
duction receive somewhat more money than if they had uneven pro-
duction. The base-surplus plan limits total production, only in so far
as the lower price for excess milk (dehveries over allotments) tends to
discom-age production or only Xxi the extent that base allotments are
not adjusted from year to year with changes in production on in-
dividual farms. In Indiana the base-surplus plan does not appear to
have been used so as to effect any subs:tantial limitation of total pro-
duction. In the Indianapolis market, the largest in the State, the
base-surplus plan has probably had little, if any, effect oh production.

Bonding.

Among the requirements of a distributor in hi^ application for a
license under the Indiana milk control law is the following regulation

279348 — 41— No. 32 12

150 CONCENTRATION OF ECONOMIC POWER

which is designed to assure prompt and proper payment for milk to
producers:

Either a bond in such form and amount as the board may prescribe, with surety
satisfactory to the board, conditioned for the prompt payment of all obligations
to producers when due; or a financial statement showing evidence satisfactory
to the board to the effect that the applicant is of sufficient financial responsibility
to insure prompt payment for 60 days' supply of milk.*"

This study did not determine the degree to which this provision
has been carried out nor the extent to which it has been successful in
assuring full payments to producers. It is probable that the effec-
tiveness of this provision has not been subjected to a real test such
as a price war among distributors or a prolonged period of operation
in which distributors' margins were not sufficient to meet the expenses
of all the distributors. It is to be remembered in this connection
that in all fluid milk markets where the State has fixed the prices to
be paid for milk to producers, it has also issued and put into effect
an "emergency order" fixing the retail and wholesale prices that
distributors must charge.

Emergency Orders.

Orders regulating the prices to be charged by distributors at whole-
sale and retail are called "emergency orders." Those orders specify-
ing the conditions and manner in which milk shall be purchased from
producers are known as "official orders." The two types of orders
are issued separately.

The board has the power, after investigation, to declare the exist-
ence of an emergency in any mark-t orea if it finds "that there is
imminent danger that the applicatjob yad enforcement of the other
provisions of this act are endanr.'':ed * * *." When an emer-
gency is determined, immediate steps are taken to issue an "emer-
gency order" regulating the wholesale and retaU prices.

For each market area for which an official order has been issued
an emergency order has also been issued to run concurrently. This
would seem to indicate the board has deemed it essential to fix whole-
sale and retail prices in order to apply and enforce the other provisions
of the act that are designed to improve prices to producers."

The health regulations for the Indianapolis market prohibit the
distribution of unpastemized milk within the corporate limits of the
city. Only two producer-distributors are equipped to meet this
requirement. All other distributors m the market must pay the
same prices for milk on a use basis. Under these conditions and with
the licensing and bonding provisions of the act, it is difficult to under-
stand the "emergency" condition which would force resale prices so
low as to endanger the maintenance of prices to producers.

j>^ STANDARDS OF OPERATION

Legislative.

The milk control legislation in Indiana gives only very broad
general standards for the guidance of the board in the administration
of the act.

In granting the board the power to fix the prices wliich distributors
must pay for milk the law provides that "all prices to be paid pro-

i» Section 7 (B) (a).

" The board is reported to be of the opinion that the fixing of wholesale and retail milk prices is not sound
for long periods and th&t emergency orders may be discontinued in several markets. Nevertheless, the
board has followed a policy of fixing resale prices as well as producer prices for a period of over 4 years.

CONCENTRATION OF ECONOMIC POWER 151

ducers fixed and determined by the board shall be just and reason-
able." '^ In determining such prices in any marketing area the law
provides in another section ^^ that the board shall be guided by —

1. The cost of production including compliance with all sanitary

requirements in force in such market.

2. The value of milk in terms of its basic products — butter,

cheese, and evaporated milk.

3. The supply of milk in such market.

4. The welfare of the general public.

This section goes on to state that "any prices fixed pursuant to this
act and approved by the board as herein required shall be deemed to
be prima facie reasonable." In the same section of the act another
standard is set forth which is more easily followed. It is that "the
board shall require that the same (prices for milk) shall be uniform as
among the several licensees in any market for each grade, quantity,
and class of milk."

The act states the conditions under which an emergency order shall
be issued and outlmes in some detail the procedure to be followed.
Beyond this it gives little guidance to the board in the establishment
of wholesale and retail prices. Perhaps the legislative body felt that
the procedure which it set forth and which called for investigation
and public hearing would serve as suflEicient guide. The only standard
set forth at this point is one requiring that wholesale and retail prices
so established must be "fair and equitable."

General Board Policy.

In the administration of the act, "the board consistently follows
the plan of consulting local interested parties in each area and giving
them what they ask, provided it is reasonable and fair." " The
same report states that "the board has never established rules and
regulations in a market except upon a request from a substantial
part of the local industry." Such "interested, parties" and "the
industry" would appear to mean primarily producers' associations
and distributors, although other groups may be given opportunity
to be heard at public hearings and otherwise to make known their
wishes direct to the board. They, are not, however, represented on
cominittees.

Production Policies.

On the production side it has apparently been the policy of the
board to "stabilize" production as much as possible. In working
out this policy the board has operated through its local milk com-
mittee. Distributors are not permitted to discontinue the purchase
of a producer's milk, except for violation of sanitary requirements,
without the^ consent of the local milk committee. If any producer is
dropped for the violation of sanitary requirements and such violation
was not determined by proper health authorities then this action is
subject to review by the local committee.

Similarly, distributors are not permitted to "purchase milk from
new producers without first securing written consent of the local

"860.5(12).

'"Sec. 10.

" Report of the Activities of the Milfc Control Board of Indiana, April 1938, mimeographed.

152 CONCENTRATION OF ECONOMIC POWER

milk committee, subjecu to the terms and conditions of these rules
and regulations and the approval of the board." ^^

While a distributor may not drop a producer or take on a new one
without the approval of the local committee the initiative for any
change in the source of supply is left with the individual distributor.

The board's policy with respect to such things as base-surplus and
market or distributor pools, appears to have been one of following
the wishes of producers and distributors in the respective markets.
No uniform arrangement exists throughout the State. Seven of the
markets operated on a base-surplus plan in 1939 while the remainder
did not. Only two of the markets operated a market pool at that
time; the others operated on a distributor pool.

Price Policies.

In estabUshing minimum wholesale and resale prices for milk the
board followed a policy of surveying the operations of distributors in
each market as required by the Milk Control Act. An accountant
was einployed to study the book? and records of each company to
determine what margins were needed to cover its overhead and operat-
ing costs. This information served as a guide or basis of consideration
rather than as a definite standard. Apparently no formula or rigid
standard was applied at this point in deciding what costs should be
used, such as the "most efficient firm," "representative firm," or
"marginal firm," nor v/as any standard of capacity or of general
operating efficiency specified.

The standards used in arriving at the dealer's buying price for class '
I milk (that used for fluid milk and cream) are not clear. It appears
that the legislative standards outlined earfier in this section were
taken into account at least to some degree. Consideration was also
given to the particular requests of producers and distributors in each
market. Beyond these broad considerations the judgment of the
board apf)ears to have been the determining factor. For example, in
July 1939, the price of class I milk varied from $1.85 per hundred-
weight of 4 percent milk in one market to $2.36 in another. Certainly
production conditions alone could not account for this range in price.
At four markets the price was $1.94, at five it was $2. Prices at the
other markets were scattered. The simple average for the entire 19
markets was $2.08 for class I milk or 80 to 85 cents above the evap-
orated milk agreement price.

The price charged for class II milk — that used for flavored drinks,
creamed cottage cheese, ice cream, and evaporated milk averaged
about $1.20 per hundredweight of 4 percent milk in July 1939,
although the range was from $1.11^ to $1.30. The usual price per
pound of butterfat was equivalent to the price of 92 score butter at
wholesale in Chicago plus 30 percent thereof.

■ Milk received in these markets and used -in the manufacture of
butter and cheese was considered class III milk. The usual price
charged for this class during July was $1.02 per hundredweight which,

" From Official Order No. 15, Art. II, Vanderburgh County Area, eflective March 8, 1938. A simUar
provision Is known to have been in orders for some of the other markets.

CONCENTRATION OF ECONO: ^ POWER 153

in terms of butterfat, was equivalent to the price ot 92 score butter at
wholesale in Chicago, plus 10 percent thereof.

The formulas for determining the price of class II milk produce
roughly the same price as the formula used In the national evaporated
milk agreement. The class III price is clearly a competitive price at
which distributors are willing to purchase excess milk (that not used
for classes I and II purposes) and manufacture it into butter or
cheese.

The prices were nearly always quoted f. o. b. distributor's plant.
An important exception was noted in the official order for St. Joseph
County (South Bend). In this order classes I and IB were priced
f. o. b. plant. On the other hand, classes lA, II, and III were priced
f. o. b. farm.^^ Unless hauliug charges are uniform to all producers
receiving a blended price, which is unlikely, this pricing arrangement
is cumbersome and does not permit "clean" accounting of market
proceeds.

RESULTS OF STATE MILK CONTROL IN INDIANA

During the remainder of this report an effort will be made to
appraise the operations of the Indiana milk control law up to the
Iktter part of 1939.

Effect on Producer Prices and Production.

The average blended price to producers for all milk delivered to
State control markets was 42 cents per hundredweight over the
average condensery price during the 8 months April to November 1939.
(See table 12.) This premium varied considerably from market to
market. The lowest prices were paid in the Indianapolis market which
is not only the largest in the State, but in which only approximately
50 percent of the total supply is used for fluid milk and cream sales.
The prices at Fort Wayne averaged 41 cents above condenseries for
this period. At South Bend tHs premium was 52 cents. These
3 markets had about 65 percent of the total supply of railk imder
State control. Prices to producers in the other 16 regulated markets
averaged 54 cents over condensery prices for the 8 months for which
these data were compiled. Unfortunately comparable data for
earlier periods were not readUy obtainable. These data, neverthe-
less, indicate a considerable premium iu fluid milk markets over prices
paid at condenseries in Indiana. The smallest premiums were paid
in the two markets where the most stress was placed on quahty
improvement during this period. These two markets were in the
same general sections of the State as were most of the other markets
under State control. It, therefore, seems unlikely that the differences
in prices between markets can be explained on the basis of quality or
on cost of production. Moreover, it is not possible to say to what
extent these premiums represent a net increase to producers over what
would have prevailed without State control.

'« Class lA is all milk sold to any public institution purchasing in excess of 4,500 gallons per month. Class
IB is all milk us6d or sold as fluid cream. Amendment No. 2, Oflacial Order No. 6, St. Joseph County
Market Area, efiective May 16, 1939.

154

CONCENTRATION OF ECONOMIC POWER

Table 12. — Average premiums paid producers in fluid milk markets under Indiana
State control over average prices paid at condenseries in the State during 8 months,
April- November 1939 »

[Cents per hundred pounds of milk]

April

May -

June

July

August

September

October

November

Average, 8 months.

Indian-
apolis

Fort
Wayne

South
Bend

Average
other 16
markets '

Average

19
markets '

' Monthly Milk Market Report (mimeographed) issued by Indiana Milk Control Board.
' Average prices weighted by volume of receipts.
' 1 less market included.

Some of the markets have a close adjustment between market
receipts and sales of milk,, while others do not. The amount of
"surplus milk," i. e., milk used for classes II and III purposes, is
shown by markets in table 1 for 11 months in 1939. It wiU be noted
that the two markets with a high proportion of surplus milk are the
IndianapbUs and Fort Wayne markets. Most of the others have a
moderate proportion of surplus which would probably all but disappear
during the short production season;

The trend in total receipts of milk is shown in chart V and table 13
for the Indianapolis market. Available data for this market cover a
lo|iger period than for any other market under State control. It wiU
be noted that there has been a decided upward trend in total market
receipts with a leveling off in 1939. There was an increase from
166,623,000 pounds in 1936, the first year for which complete data
were available, to 201,011,000 pounds in 1938. Deliveries in 1939
were slightly lower.

The number of producers selling milk to the Indianapolis* market
was 6,367 in 1935 and 6,325 in 1936. ^^ The number did not change
materially during the next year and a half. However, from July 1938
to August 1939 the number of producers dropped from 6,287 to 5,842,
a decline of 445. This would indicate a considerably more rapid
increase in average production per farm than in total markp+ receipts
of milk.

" Report of the Activities of the Milk Control Board of Indiana, mimeographed, April 1938, p. 17. Later
figures on number of producers are from the Market Admijiistrator's office.

Chart V
Total Milk Receipts and Amount Used as Fluid Milk and Cream. Indianapolis, Ind., August 1935 to October 1939

. TOTAL

RECEIPTS

- \

N \

-^/^

USED FOR FLUID MILK AND CREAM

iitiiitiiHiiitiitliii^iiiniiXiiiniiiiitiiiiiiUlUitliiiti

i225_

1936

1937

1938

1939

CONCENTRATION OF ECONOMIC POWER

155

?ISsi

2'22:2:"S

10,230
12, 55S
11, 876
13, 427
13,010

12,003
14,725
13, 514
15, 164
14, 130

13,733
13,909
14,190
16,740
16, 578

15,244
14, 215
16,284
19, 198
19, 111

:2g[?f

««■■>* to"

sill

ssss

i^lig

■«<oooo

i§S§gS

00 00 00 00 o>-

cooco«o>

00 00 00 00 o»

00 00 00 00 00

g^gg

?!S§£

8SS§3

>or~>ooo

ooooooe

156 CONCENTRATION OF ECONOMIC POWER

It should be remembered at this point that considerable control is
exercised over the entrance of new producers into markets under State
control. For a time it was apparently the policy of the local milk
committee and the milk board to permit new producers to enter the
market in the same numbers as those dropping out of the market.
This has been particularly important since with the development of
higher quality standards iu Indianapolis there has naturally been more
than the usual turn-over. With the entrance of new producers under
these conditions there undoubtedly has been a tendency for producers
entering the market to have larger volume than those dropping out.
To meet this situation the board further restricted the entrance of new
producers to the end that the total receipts of milk remained about
the same. This combination of circumstances, makes it difRcult, if
not impossible, to determine the net effect of the price control program
upon production.

The amount of milk used monthly for class I purposes in the In-
dianapolis market is also shown in table 13 and chart V. No material
change occurred in these figures until 1939. Sales have recently run
consistently higher than in corresponding months of 1936-38. This is
probably due in part to improved business conditions making it pos-
sible for more people to buy milk or for the same number to increase
their daily purchases. Improvement in the quality of milk and in-
dustry advertising may also have been factors contributing to this
increase in consumption.

Effect on Competition.

A few operators of dairy manufacturing plants have actively op-
posed the continuation of the Indiana mUk control law on the ground
that it made for unfair competition. These persons are largely evap-
orated mUk manufacturers who themselves have a national agreement
and order under the Federal Government.

The alleged unfair competition rests on two points. The first of
these is that surplus mUk in the fluid milk markets is purchased on a
classified basis and at prices b6low the normal competitive level. The
surplus milk bought at these low prices is mostly made into manufac-
tured products such as butter and evaporated milk. This, it is averred,
makes for a lower cost of milk, and, in turn, makes possible price
cutting in disposing of the finished product. The other argument is
that producers are attracted to the fluid milk markets because of the
high average prices paid in these markets as a result of the high price
for class I mUk. This, in turn, makes it difficult for the straight manu-
facturing plants to keep their producers satisfied and to prevent them
from shifting to fluid mUk markets. As a result of these two forces the
manufacturers claim that they have unfair competition in the sale of
manufactured products and unfair competition in paying producers.

Insofar as these arguments are important and are based on facts
they would apply mainly to the Indianapolis and Fort Wayne markets.
These two markets have over 70 precent of the surplus milk under
State control. In the Indianapolis market the mUk used for condensed
and evaporated milk purposes is paid for at "butter plus 30 percent"
which is substantially the same as the minimum prices prescribed in the
national evaporated milk agreement. In the Fort Wayne market the
same situation holds true for all surplus milk, except an amount equiv-
alent to 15 percent of the fluid milk and fluid cream sales. This latter

CX)NCENTRATION OF ECONOMIC POWER 157

amount is priced at "butter plus 10 percent." Fluid milk distributors
usually claim that their manufacturing costs are higher than similar
costs in specialized creameries and condenseries.

In view of these conditions it would appear that evaporated milk
manufacturers near these markets have not been greatly burdened
because competitors have had cheaper sources of supply under the
State milk control. Such differences as exist have been due largely
to premiums paid by evaporated milk manufacturers above their
minimum national agreement price.

To claim that here has been severe competition from high average
prices paid producers in fluid milk markets is at the same time to
say that State milk control has been instrumental in raising producer
prices — an avowed objective of the program.

That ithere has been more than the usual shifting of milk from
manufacturing plants to the fluid milk markets has undoubtedly been
true in the case of the Indianapolis and Fort Wayne markets. Part
of this has resulted from a more than normal turn-over of producers
due to the development of more exacting health standards in these ^
markets. There has also been some shifting in the other direction
since those leaving the fluid markets and continuing in dairying have,
of course, gone to manufacturing outlets. For these latter producers
the State control program has not been beneficial. It seems certain
that if there were no artificial restriction barring the entrance of new
producers into fluid milk markets under State control any sizable
price inducement would cause considerably more shifting of producers
toward these markets than away from them. So far the shift does
not appear to have been alarming.

Effect on Distribution.

The manner in which the fixing of resale prices has worked in
Indiana is indicated, at least in part, by developments in Indianapolis
— the largest market in the State and one which accounts for about
45 percent of the fluid milk sales under State control. It is to be
remembered in this connection that distribution costs as reflected in
distributors' books are used as the original basis of fixing resale
prices and distributors' margins.

On April 16, 1939, the price of class I milk to distributors was
lowered 28 cents per hundredweight in the Indianapolis market or
about three-fifths cent per quart. At the same time minimum whole-
sale prices were dropped 1^ cents per quart and minimum retail
prices were dropped 1 cent per quart. The net effect on distributors'
margins was that at wholesale the minimum prices were narrowed
nine-tenths cent per quart and at retail two-fifths cent per quart.
On this date quotations for prices to be charged distributing-brokers
were eliminated from the order, presumably, because these prices
could not be enforced effectively. Interdealer sales of this type are
always difficult to regulate. The omission of these prices from the
order does not appear, however, to have influenced materially other

provisions

The reason given for the general reduction in prices was -'that an
emergency exists in said area due to a very large amoilnt of surplus

" Distributing-brokers in this market might more properly be called distributing jobbers or peddlers.
They operate only delivery routes and have no plant or plant facilities. They buy their daily requirements
of pasteurized and bottled milk from distributors having plant facilities. Title is passed at this point, but
milk is usually sold under the brand of the pasteurizing distributor. The distributing-brokers are subject
to milk control regulations with respect to resale prices. They do not belong to the bottle exchange.

158 CONCENTRATION OF ECONOMIC POWER

milk in said market, and due also to the low price of butterfat which
has placed the present prices for milk and its products out of proper
proportion to butterfat prices. "^^ The point with respect to dis-
tribution margins is simply that in this market accounting costs
alone djd not prove an adequate basis for fixing resale prices or that
the prices thus established could not be enforced. In other words,
general competitive conditions are also a factor to be taken into
consideration in naming minimum resale prices.

The reduction in resale prices in Indianapolis would seem to have
even more importance when two other conditions are noted. The
first is that all milk sold within the corporate limits of Indianapolis
must be pasteurized, thus practically eliminating producer-distributor
competition in the main part of this marketing area. The second is
the influence of the mUk bottle exchange in Indianapolis. The
exchange is reported to have as one of its requirements for membership
the adherence to all laws and regulations pertaining to the distribution
of milk in that city. Since the milk order comes within that sphere
the bottle exchange has used its power to command compliance with
the specified wholesale and retail prices among its membership.

The general trend in retail milk prices and in the prices paid by
distributors for fluid milk in the Indianapolis market is shown m
appendix to chapter IV, tables I and II, and in chart VI. Buying and
selling prices have been brought to .approximately the same level as
they were prior to the depression. The dealers' buying prices for
class I milk have apparently been raised somewhat under State
control, but distribution margins do not appear to have changed much
from what they were just prior thereto. Too close an interpretation,
however, should not be made from chart I, since it is not at all clear
that the dealers' buying prices are quoted on a comparable basis
throughout the period. The practice of classifying milk and specify-
ing prices on a use basis has applied to the whole market only during
the period of public regulation. •

Similar prices are shown for the Evansville market in appendix to
chapter IV, tables III and IV and in chart VII. Under the State
control the distribution margins in this market were increased by 1 to 2
cents or more per quart above the margins prevailing during the
previous year or so. Dealers' buying prices showed relatively little
rise and, in fact, dropped somewhat during the first few months under
State control.

Distribution margins in these two markets were relatively smaller
under Federal regulation in 1934 than for any other similar period
covered in charts 2 and 3. The causal relationships between price
regulation and distribution margins during this period are none too
clear. However, one might note that it was in January 1934, that
resale price fixing for milk was largely abandoned under the Federal
program, although "low" minimum resale prices were specified for
some months thereafter. It should also be remembered that the Fed-
eral program in Indianapolis was reported ineffective after September
1934.

In July 1939 9 out of 19 markets under control had a retail home
delivery price of 10 cents per quart of standard milk. The other 10
markets had a retail price of 11 cents per quart. In only 1 market,
Indianapolis, was there a differential in price between the store price

" Amendment No. 5 to emergency order No. 5 for Marion County (Indianapolis) marketing area.

Chart VI
Fluid Milk Prices in Indianapolis, Ind., 1920-39

ISZO [ /9AI )9;tz 1923 l^jl-i I9ts 191.6 ,^xi »926 '"i/f^ I'J^c ;93| lijya }^*A ;9J4 ."JiJ- /9i)b ./-^j? <9j6 ^^-^ J

Chart VII
Fluid Milk Prices in Evansville, Ind., 1920-39

l,9H 1 191-2. I /9t3 I. .9Z4 I 19-15 I ,91,6 I y9i,7 I /9ZB \ rHi9 \ I930 I /93/ I /^U I /95J I '^3^ I /93^ I /W6 1 / ?37 | 7956

l<)ZO

CONCENTRATION OF ECONOMIC POWER 159

and retail delivery price. This differential applied only to cash and.
carry sales and was 1 cent per quart.

The retail store margin (difference between wholesale price and retail
store price) was 2 cents per quart in 17 markets and IJi^ cents in 2
markets, namely, Fort Wayne an'd Indianapolis.

It seems likely from these data that State control has been a stand-
ardizing influence on retail prices and has tended to prevent any differ-
entials in price developing between home delivery and sales through
retail stores. This conclusion is based only on the unlikelihood of so
much uniformity in retail practices and prices existing without some
central controlling force.

The number of licensed producer-distributors in these markets
dropped from 2,535 in 1936 to an estimate of less than 1,500 in 1939.
The reasons for this change are not entirely clear. One explanation
given is that producers have found more satisfactory and profitable
market outlets as regular producers under State control and have
therefore given up the distribution end of their business. It is pos-
sible that changes in health regulatory standards or in their enforce-
ment have been a factor. Moreover, it is not known whether there
was as complete licensing of producer-distributors in 1939 as in 1936.
This in itself might be a considerable factor in territories outside
the principal cities. Comparatively little change was reported in the
number of regular distributors.

Summary.

Producer prices and producer incomes appear to have been enhanced
at least to some small extent in a score of markets as a result of State
control of milk prices in Indiana. This added farm income has prob-
ably come from higher resale prices than would otherwise have pre-
vailed. Perhaps milk production has been increased somewhat
because of favorable prices for a limited number of producers. The
sanitary conditions under which milk is produced and distributed
appear to have been unproved in one or more markets. Distribution
margins do not appear to have been reduced under State control. In
fact some of the evidence, such as for Evansville, indicates that the
program has worked in the opposite direction. Milk sold through
retail stores has been priced the same as for home delivery in every
market but one. No doubt this policy has tended to favor a retail
delivery system of distribution.

APPENDIX TO CHAPTER IV

TABLES GIVING DATA ON MILK PRICES IN INDIANAPOLIS
AND EVANSVILLE, IND.

Table I. — Monthly average retail price of flicid milk {house deliveries), Indian-
apolis, Ind., 1920-39 i

[Cents per quart]

Year

Jan-
nary

Feb-
ruary

March

April

May

June

July

Au-
gust

Sep-
tem-
ber

Octo-
ber

No-
vem-
ber

De-
cem-
ber

1920

14
14

U-12
10
12
12
12
12

■ 12
13
12
11
10
9
9
10
11
12
12
12

14
11
12
12
10-12
12
12
12

14
13

12
9-11
12
12
12

.......

10-11

9-11
12
12
12
12
12
10
10
■ 7-8
9
10
11
12
12
12

• 13

10-11

10-12

9-11

. 12

9-10

14
12
10
12
12
9-11
12
12
12
12-13
12
10
10
8
9
10
11
12
12
11

14
12
10
12
12
. 9-11
12
12
12
12
12
10
10
8
9
10
11
12
12
11

14
12
10
12
12
11
12
12
12
12
12
10
10
9
9
10
12
12
12
11

.......

12
12
12
12
12
12
10
8
9
9
10
12
12
12
11

14
12

.......

10-12
12
12
12
12
12
12
10
9
9
9
10
12
12
12
11

14
11-12
10
12
12
12
12

.^^

12
12
10
9
9
7-9
10
12
12
12
11

1921..

1922

11
10

1923

1924

1925

W26

1927 -

1928.

1929

1930

12
11
10
6-9
9
10
11
12
12
12

lo^

7.10
9
9
10
11
12
12
12

1931

1932

1933

1934

1935

1936

1937

1^""

19S9

' U. S. Department of Agrioulture, Bureau of Agricultural Economics and Agricultural Marketing Service:
Monthly Fluid MBk Market Report.

Table II. — Dealers' monthly average buying price for basic milk (4.0 percent),
Indianapolis, Ind., 1920-39 •

[Cents per quart] '

Year

Jan-
uary

Feb-
ruary

March

April

May

June

July

.Au-
gust

Sep-
tember

Octo-
ber

No-
vem-
ber

De-
cember

1920

7.8
6.6
4.6
6.4
6.6
4.7
6.1
5.4
6.1-
.......

4.6
4.1
. 3.4
3.3
3.8
6.0

t:|-

6.7

7.6
5.8
4.6
5.6
6.6
4.3
4.9
6.1
6.1
.......

4.1
3.2
3.2
3.3
3.8
5.0
5.8.
6.8
6.7

7.3
6.6
4.2
6.6
5.1
4.3
4.7
5.1
. 6.1
6.6
4.7-
4.1
3.2
2.9
4.2
3.8
6.0
6.8
6.7
6.7

7.1
6.1
4.0
6.6
5.1
4.3
4.6
5.1
6.1
5.1
. 4.7
4.1
3.4
2.4
4.2
3.8
6.0
6.8
6.7
6.7

""Cz

4.0
6.4

4.5
4.9
6.1
6.1

""3.T
3.4
2.3
4.2

"'I'.Q
6.8
5.7
6.0

7.1
4.3
4.1
6.4
4.1
4.5
4.5
4.9
6.1
6.1

3.5

11
4.3
6.0
5.8
5.7
6.0

7.8
4.8
4.1
6.6
4.1
4.7
4.7
6.1
5.1
•4.9
4.3
4.1
3.7
3.4
4.2
4.3
6.8
6.8
5.7
6.0

7.2
4.8
4.2
5.6
4.3
4.7
4.7
5.1
5.1
6.1
4.7
4.1
3.0
3.4
4.2
4.3'
6.8
6.8
6.7
'6.0

7.7
4.9

""b'.K
4.5
4.7
4.7
5.1
5.6
5.1
4.7
4.1

7.3
4.9
4.9
5.6
4.5
6.1
5.1
5.1
5.6
5.1
4.3
4.1

7.1

1921

6.6
4.8
6.6
6.6

6.4
6.1
6.7
6.3
4.3
3.4
3.3
3.3
3.8
6.0
6.8
6.8
6.7

4.6

1922...

5.6

1923...

1924

1926

5.6
4.7
5.1
6.4

1927.

1928

5.1
5.8

1^:::::::::::

6.3

1931

4.1

1933

1934

3.4
3.7
4.2
6.8
5.8
6.7
6.0

3.3
3.5
4.2
6.8
5.8
6.7
6.0

3.3
4.0

iMs:::::::::::

1936

1937

4.2
6.8
6,8

1938

6.7

1939

6.0

» Computed from prices of 3.5 percent basic milk published in Monthly Fluid Milk Market Reports of
Bureau of Agricultural Economics and Agricultural Marketing Service, U. 8. Department of Agriculture.
•"Price per Mndredwelght divided by 46.6.

160

CONCENTRATION OF ECONOMIC POWER

161

Table III. — Monthly average retail price of fluid milk (house deliveries), Evansvillei
Ind., 1920-39 i

[Cents per quart]

Janu-
ary

Feb-
ruary

March

April

May

July

Sep-
tem-
ber

Octo-
ber

No-
vem-
ber

De-
cam-
ber

1920

141^

1921

1922

1923

1924

12 ^

10
10

1925

1926

1927

1930 - ..

1931 .. . .

1932 ..

1933

1934

1935

1936 '

1937 - -. -

1938

1939

14J^

13^

12H

i2y2

16
14
11
12

12^

12H
11-12

12H
11
9-10

12H
12H
11
9-10

12^

12H
1234

12H

10
11
11
11

12H

12M

12H

12
12^
12H
12H
12H
12M
12M
12H
11
8-10

12J^

12H

12M

12^

12H

12>^

10
11
12
11
11

13M

12H

12^

12H

1234

11
9-10
10
9H
10
U
12

" XJ. S. Department of Agriculture, Bureau of Agricultural Economics and Agricultural Marketing
Service: Monthly Fluid Milk Market Report.

^ABLE IV.- — Dealers' monthly average buying price for basic milk {4 percent) ,
Evansville, Ind., 1920-39 i

[Cents per quart]

Year

Janu-
ary

Feb-
ruary

March

April

May

June

July

Au-
gust

Sep-

Octo-
ber

No-
vem-
ber

De-
cem-
ber

1920 ...

8.9
6.4
6.4
5.8
«6.2
5.8
5.8
6.8
6.8

8.2

5.8
4.7
5.7
5.8
6.6

5.7
5.7

8.2
5.8
5.4
5.6
5.5
6.4
6.4

8.2

5.4

""6."i'
5.1

'"I'J

7.9

5.4

""6^6"
6.3

8.6
6.8

'"5."6'

■""6.T

6.4
5.4

5.6

8.5
6.5
4.9
6.6
6.6
6.5
5.5
6.5
6.5

8.5
6.6

8.2
6.2

7.8

1921.... -

6.9
6.4

6.5
5.9
6.8
6.4
6.1
6.1
6.1
6.9

6.3

1922

5.6

6.1
5.5
6.6
5.6
6.6
6.9
5,6
.. 5.6
4.5
3.8

6.1
6.7
6.8
6.7
6.8
5.9
5.7
5.3
4.3
3.8
3.7
4.6
4.2
5.0
5.1
4.3
4.5

6.4

19M

6.4
5.8
6.1
6.1
6.1
5.9

5.7

1925

6.1

1926

6.1

1928....

5.4
6.6

5.1

6.4

5.0

1930

6.1
4.3
3.7

6.1.
4.6
3.7

""Cb

3.8

1931

1932 .■

5.6
4.3
3.7
4.0
4.6
4.3
5.0
5.1
4.3

5.4
4.2

5.i
4.0

5.1

3.8

4.7
.3.8

■.. 4.3
3.7

4.3
3.7

1933

4.0

1934

4.0
4.6
4.3
5.0
5.1
4.3

4.1
4.6
4.3
5.0
5.1
4.3

4.1
4.6
4.3
5.0
5.1
4.5

4.1
4.6
4.3
6.0
4.2
4.5

4.1
4.6
4.5
6.0
4.2
4.6

4.1
4.6
4.9
6.0
4.2
4.5

'4.1
4.2
6.0
5.1
4.2
4.6

4.1
4.2
5.0
5.1
4.2
4.5

4.6

1935

1936

4.3
5.0

X937

193S

5.1
4.3

1939

. 4.6

1 Computed from prices of 3.6 percent basic milk published in Monthly Fluid Milt Market Reports of
Bureau of Agri'-ultural Econonflcs and Agricultural Marketing Service, U. S. Department of Agriculture.
« Price per hundredweight divided by 46.6.

CHAPTER V '
STATE CONTROL OF MILK PRICES IN WISCONSIN

HISTORICAL DEVELOPMENT

State control over the purchase and distribution of fluid milk and
cream was probably undertaken earlier -in Wisconsin than in any
other State. It began in November 1932 when the State department
of agriculture and markets ^issued an order for the Milwaukee market.
This action was taken imder the broad powers for the regulation of
unfair competition and imfair trade practices.' Under this authority
the department ruled that the bargaining of producers and dealers
set the standards of fair competition and fair practices, that is, when
producers and dealers handling 90 percent of the milk in a market
agreed upon a marketing plan and upon prices it was declared to be
unfair competition for the remaining small minority to operate under
any other plan or to buy and sell milk and its products at lower
prices. Thus the price at which a dealer bolight or sold milk was con-
sidered as much a question of trade practice as was the manner in
which he solicited business or operated his plant.

Special control legislation was enacted in April 1933 (sec. 99.65)
giving the department of agriculture and markets power to fix both
producer prices and resale prices of milk. Only minimum prices were
fixed. No separate administrative body was set up. In June 1933
further legislation (sec. ■99.43) was enacted requiring the department
to license milk distributors in regulated areas. This licensing was
mainly for the purpose of effectuating the price control program. This
latter legislation also prescribed license fees and penalties and granted
the department the power to suspend the license of any dealer not
complying with the provisions of the act. Procedure that should be
followed in the suspension of licenses and procedure for appeal by an
aggrieved party were outlined in some detail and were taken for the
most part from other statutes. The findings of fact by the depart-
ment acting within its powers were declared to l?e' conclusive in the
absence of fraud. The act further prescribed that the court might
confirm or set aside any order by the department, but the same should
be set aside only upon the following grounds :

1. That the department acted without or in excess of its powers.

2. That the order was procured by fraud.

3. That the findings of fact by the department did not support

the order.

The above legislation was regarded as emergency legislation and
was of temporary character to expire in 1935. However, it was reen-
acted with some changed in 1935 for another 2-year period. In 1937 the

' This chapter was written by Mr. R. K. Froker. Much helpful information was obtained from W. L.
Witte, L. G. Kuenning, and Elmo Eke of the Wisconsin State Department of Agriculture.

' The name of this department was changed by the 1939 legislature to the Wisconsin State Department
of Agriculture.

« Wisconsin Statutes for 1931, cb. 99, sec. 99.14.

163

J 54 CONCENTRATION OE^ ECONOMIC POWER

milk control legislation was further extended to expire on or before
December 31, 1939.* Again during the legislative session of 1939, the
milk price control provisions were extended for another 2-year period
until December 31, 1941/ In the latter extension the act was declared
to be applicable only to counties having a population of 70,000 or more
and to cities outside such areas having a population of not less than
10,000.

Organized producers supplying fluid milk markets in the State were
generally back of the milk control legislation, particularly in 1933 and
1935. There was some difference of opinion among- these producer
groups as to the desirability of milk control in 1937 and again in 1939,
although most of them were decidedly in favor of its continuance. The
Wisconsin Council of Agriculture, composed of both fluid milk pro-
ducers' associations and other farm organizations in the State, gave
this legislation its support.

There has been a certain amount of opposition among patrons
and operators of cheese factories and creameries to the State control
program for fluid milk markets. This opposition was based largely
on the ground that the State was raising prices .in fluid mUk markets
which tended to curtail consumption, increase production and throw
additional supplies of milk into manufactured channels. This op-
position was never great enough seriously to hamper the administra-
tion of the program, but was largely responsible for delaj^ing the
passage of the milk control bill in 1939 and for the modifications
that were made in the law before it was finally extended.

Fluid mUk distributors have been generally favorable to the milk
control legislation and to its continuance. They were particularly
favorable during the earlier period of the program. Tb^e State
association of fluid milk distributors actively supported the legislation
even in 1939. While distributors were generally favorable to the
program it is a known fact that a number of them, particularly large
<&nes, were critical of the administration of the program, feeling that
violators were not inunediately and vigorously prosecuted and that
this lax enforcement tended to work against the reputable distributor
and in favor of those who sought to take advantage of the program.

Organized labor has not been particularly active in the promotion
of this type of legislation, although it has generally been regarded as
favorabk) to it. The support of labor was, however, a factor of
considerable importance in the renewal of the milk control law 'in 1939.

PURPOSE AND OBJECTIVES

The legislative purpose of the nulk Qontrol laws of Wisconsin was
probably more fully stated at the time of extension of this legislation
in 1935 than previouslv. The introductory part of the 1935 law was
as follows:

100.03. Emergency regulation of the distribution of milk in certain
MUNICIPALITIES. (1) (a) It is declared that the provisions of this section are,
made necessary by a public emergency existing since November 1, 1932, growing
out of the present economic depression, the present financial condition of the
farmer delivering milk to certain municipal markets, unfair methods of c<ym-

« In 1935 sections 99.165 and 99.43 were renumbered as sections 100.03 and 100.04, respectively. In JIBS?
ection 100.04 was repealed and the licensing provisions incorporated in section 100.03.

» Unless the department shall determine earlier "that economic unbalance or unemployment no longer
so materially interferes with the ability to produce, to consume, to bargain, or to deal in the production or
distribution of flujd milk in Wiscoiisln. • • •."

CONCENTRATION OF ECONOMIC POWER 165

petition of certain dealers purchasing, receiving or handling milk in such markets,
a condition seriously affecting and endangering the public welfare, health and
morals, which continues to exist and has been aggravated by the great drought
of 1934.

In renewing the milk control legislation in 1937 the legislfetiire tied
its control program more definitely to the idea of mifair competition
and mifair trade practices than was apparent even in 1935. Emer-
gency and temporary featm-es were continued. The following is an
introductory paragraph of the 1937 law:

100.03 (1) It is declared: In the economic depression, much of the business of
fluid milk distribution in Wisconsin was becoming affected with unfair methods
of competition and unfair trade practices that threatened the financial demorali-
zation of producers and dealers, the continued ability of producers to produce an
adequate supply of milk of a sanitary and safe quaUty and of dealers to distribute
i\ in a sanitary and safe manner, and the pubhc health and welfare; and that
created a great and pressing public need for special regulation to eliminate and
prevent such methods and practices. Such regulation under the milk control
statutes of 1933 and 1935 measurably stabilized the business and prevented much
of the threatened results. Such need measurably continues, however, and will
continue with the same threatened results, if regulation is relaxed, so long as
economic unbalance or unemployment materially interferes with the abihty to
produce, to consume, to bargain, or to deal in the production or distribution of
fluid milk in Wisconsin.

No precise definition of "unfair trade practices" is given in the law
and there would probably be wide differendes of opinion even among
men familiar with the dairy industry as to exactly what is included
in "unfair" practices. Moreover, the manner in which such practices
affect the incomes and welfare of producers, distributors and con-
sumers is not clear. The reason for tying the milk control program
to the regulation of unfair competition and unfair trade practices
would appear to be that the Department of Agriculture and Markets
has had functipns of this type for several years. With this milk
control legislation tied to trade practices and competition it might
be looked upon as merely extending a type of control already existing
rather than as developing an entirely new type of regulation. It
would also be consistent with the early efforts of the department to
regulate milk prices as a trade practice before special milk control
legislation was enacted.

The primary piu-poses of the legislation are undoubtedly to aid
producers in the fluid milksheds in the State and to stabilize fluid
milk markets as far as possible. Any benefits .to distributors and
employees have come imder the second objective. Stabihty has
probably been thought of in terms of conditions existing prior to the
depression rathei than stability in terms of more recent economic
c/)nditions.

EXTENT of STATE CONTROL

State control Over the marketing of fluid milk included 33 market
areas in Wiscon in in July 1939.* (See table 14.) Most of these
markets were confined to single cities with the market boundaries
extending well beyond the corporate limits of the respective cities.
Some market areas such as Milwaukee and Appleton include not
only the principal cities from which they derive their names, but also
nearby cities and villages. The Milwaukee County and the adjoining
tier of townships on the north and on the west with the exception of

• One of these areas, namely Manltowoc-Two Rivers was divided into two separate control areas in Sep- ,
tember 1939, making a total of 34 market areas.

279348 — 41— No. 32- 13

166 CONCENTRATION OF ECONOMIC POWER

the village of Menominee Falls. Oneida and Vilas Counties, in
northern Wisconsin are included in one market with the exception of
the city of Rhinelander for which a separate order was issued.^

Table 14. — Markets under State control, date of first orders, average daily receipts
of milk and percentage used for fluid milk and cream and for manufactured products,
Wisconsin, 1939

Date of first '
order

Average
daily re-
ceipts
(pounds)

Utilization

Milk and

cream
(percent)

fact&ed
(percent)

Appleton

Aug. 21, 1933
Mar. 22, 1934
Aug. 9, 1934
Aug. 15,1933
Oct. 1, 1936
Sept. 1,1936
July 12,1935
Sept. 6,1933
Jan. 24,1934
Nov. 1,1933
June 19,193a
June 30,1933
May 31, 1933
Aug. 21, 1933
Mar. 24, 1934
Jvrty 1, 1935
Aug. 9,;934
Nov. 26, 1932
Oct. 24,1933
June 17,1936
Sept. 16, 1936
July 1, 1935
Sept. 1,1933
Oct. 1, 1934
Oct. 3, 1934
Oct. 1, 1936
July 31,1935
Aug. 21, 1933
June 5, 1934
Sept. 16, 1933
Sept. 16, 1933
July 1, 1935

107, 291

11,536

10,190

53,958

3,318

> 14, 890

J 2, 149

41,014

33, 415

64,697

23,641

67,764

133,870

}5i020

20,961

7,774

6,265

919,006

101, 425

3,323

3,602

17, 731

46, 115

.6,593

129,100

4,047

5,390

107, 971

15,828

17, 984

10, 615

6,103

31
68
79
42
71
59
97
68
70
67
65
51
65
49

64
17
86
81
81
73
89
44

83
77
84
83

AKd : :

Wpftvftr Dam

Beloit ,

Berlin : -

Chippewa Falls ' — - •-.

Eau Claire

Green Bay-DePere'

ranesvUle 1

Madison

Marshfleld' .

Merrill" - —

MUwaukee 1 I'. :..

12
36.

Neenah and Menasha. - -

Oconto '

Oneida and Vilas i » '

Oshkosh

Portage '

Racine ...

Ripon ' 1

Shawano ' . . . . . .

13
19

Stevens Point

Waukesha

• 23

Watertown

>^est Bend '

1 Discontinued Oct. 17, 1939, because of change in law excluding counties of less than 70,000 population and
cities outside such counties having less than 10,000 persons.

» 1937 figures.

• DePere was included in the Green Bay market except for a period from June 21, 1935, until Dec. 1, 1937.

< Two Rivers was given a .separate order, Sept. 1, 1939.

» Data on receipts and utilization include Rhinelander for which a separate order was issued on May 1,
1938.

Approximately 1,400,000 Qonsumers are affected directly by these 33
orders. Over half of this number, or 725,000 .persons, are in the Mil-
waukee market. Other areas range from about 70,000 at Racine down
to 3,000 at Columbus. The jBuid cream and fluid milk under State
control in 1938 averaged about 1,000,000 pounds per day or 365,-
000,000 pounds per year. The total including surplus milk was about
twice these amounts.

State control is relatively less important in Wisconsin than in many
other States, Although Wisconsin produces about 11 percent of the
Nation's milk supply — a lai'ger percentage than any other State-;—
only 6.5 percent of the State's production is sold as fluid milk and fluid
cream for use within the State. Another 7.9 percent is shipped out of
the State as milk and cream.

' Orders for 13 market areas were discontinued on October 17, 1939 because of the change in the la-v restrict-
ing such regulation to counties of not less than 70,000 persons and to cities of 10,000 or more located outside
such counties. These 13 markets have only about 6 percent of the persons and roughly the same percentage
of milk under control. -Some of the other markets may also be affected through a restriction ■of market
boundaries to comply with the new law.

CONCENTRATION OF ECONOMIC POWER IQ'J

Of the 740,000,000 pounds of milk distributed annually as fluid
milk and cream within the State about 50 percent was under State
control in 1938. On the other hand, of the total milk produced in
the State for aU purposes only about 6 percent is imder State control.
This latter percentage includes surplus milk under State control.

Of nearly 900,000,000 pounds of milk shipped as milk and cream
outside the State practically none was under Federal control in 1938.
However, with the instigation of the Federal order for the Chicago
market on September 1, 1939, probably half of these out-of-State
shipments came under .Federal control. This is because Chicago is
practically theDnly out-of-State market to which fluid milk is shipped
and one of the most important for fluid cream. Federal control is
also in effect in the Twin City market (Minneapolis and St. Paul),
and in the Dubuque (Iowa) market but neither of these two receive
any appreciable percentage of their milk and cream from Wisconsin
farms.

STANDARDS OF OPERATION

Under the 1935 and 1937 laws the Department of Agriculture and
Markets had jurisdiction upon its own initiative or upon petition to
inquire into and determine what markets should be regulated in the
State and practically to prescribe the terms and conditions of such
regulation. The 1937 legislation specifically granted the department
the pQwer—

to prescribe such terms and conditions for the purchasing, receiving, handling or
selling of regulated nailk in any such market as it shall find necessary to eliminate
unfair methods of competition or unfair trade practices, which terms and condi-
tions may include schedules of prices for producers, dealers, arid consumers, or
either, and labeling. The department may include in its orders provisions reason-
ably necessary to prevent circumvejition of such terms and conditions. In pre-
scribing such terms and conditions the department shall consider among other
things the terms of any collective bargaining agreement arrived at between pro-
ducers and dealers. ((5) (a) of section 100.03.)

It is obvious from the foregoing that the department was given broad
general powers but that the legislation itself did not go far in specifying
the limits under which it might operate. For the standards or criteria
which the Department used in its regulatory program one must look
to the series of orders and amendments which were issued for the var-
ious markets in the State. The remainder of this section takes up
several phases of the program to show as far as possible the policies
and standards used with respect to each of them.

Fluid Milk Prices. -

Apparently the department in its earlier orders relied largely upon
the ability of the producer associations and most of the distributors in
the respective inarkets to agree upon prices to producers. Customer
and prevailing prices were undoubtedly also factors that were con-
sidered. Several of the first orders specified that *the various prices
would be "bargained" prices effective on the whole market when
producers and distributors handling 90 percent of the milk in the
market agreed upon such prices.

Cost of production and cost of distribution soon became items that
were given considerable attention. At several hearings a mass of
testimony was developed with r6s'pect to the cost of producing and
distributing milk and in at least one market (Beloi^) the department
arrived at what it considered was the average production cost in that

IQg CONCENTRATION OF ECONOMIC POWER

market.* A rise of 40 cents per hundredweight in the price of class I
mUk in the Milwaukee and Waukesha markets on August 1, 1936,
after a similar rise 2 weeks earlier, was justified entirely on the basis of
a rise in the average cost of producing milk as evidenced by a sharp
rise in the price of feeds. Moreover, the department ordered all
dealers in these markets to deliver a copy of its findings to each home
since resale prices were raised 1 cent per qu^rt on each occasion,
equivalent to 46.5 cents per hundredweight of ""^tilk. Prices were not
fixed at a level which woiild bring the full cost of production including
reasonable wages to the fanner and his f amdy and interest on invest-
ment. Rather the cost data were used to justify a rise in price since
after the rise the average price was still under the average full cost of
producing the milk. Cost of production was a goal to be sought, but
not considered possible of immediate attainment.

Later in the control program it appears that competitive conditions
within the fluid markets, including competition from milk going into
other uses and competition from other food products, were important
factors in gliding the department. Arguments along this line were
presented to justify the substantial lowering of the class I milk price
in several maTlJ^^ets (but not all) in April-May 1939. That competi-
tion was the determining factor in adjusting prices downward is
further evidenced by the fact that where the pressure was greatest
such as in Milwaukee and Waukesha the drop was from 2.71 to 2.10
per hundredweight of rcptk or 61 cents per hundredweight and resale
prices of milk were lowered from 12 to 10 cents per quart at retail.
These prices were increased to $2.40 per hundredweight and 11 cents
retail on August 7, 1939. In Kenosha and Racine the price was
dropped from $2.75 and $2.70 respectively to $2.40 per hundredweight,
with an accompanying 1 cent per quart decrease in retail and wholesale
prices.

At Madison, on the other hand, the price was permitted to remain
at $2.60 throughout tijs period. In Two Rivers there was a great
deal of agitation with rej(»fect to the high price of milk in the summer
of 1939. As a result the tlass I price was dropped on September 1
from 56 to 42 cents per pftqnd of butterfat or a drop of 56 cents per
hundredweight and at the same time the retail price was dropped from
10 to 8 cents per quart. These chailges in prices were made in Two
Rivers but not in Manitowoc^ -although both markets previousl^y ha<i
uniform prices throughout. As a result, separate orders were issued
for these two markets from that date on.

It is probably correct to say that (1) custom and bargaining power,
(2) cost of production and cost of distribution, and (3) competition
have been the three main standards in estabhshing dealers' buying
prices of milk and in fixing resale prices at wholesale and retail.
Each of these standards has had first importance over a period of
time in about the order named.

It should also b? pointed out that there have been wide variations
in Ae fluid milkr prices among the various markets. The range in
price per pound of butterfat in September 1939 was from 42 cents in
the Two Rivers market to nearly 75 cents in the Madison market.
This is a range of $1.05 per hundred pounds of milk. The highest
priced market incidentally was one of those showing no change in price
in the summer of 1939. The retail price of standard milk in Sep-

« The average cost was stated to be $1.71 per bnndiedweight in Janoary 1933.

CONCENTRATION OF ECONOMIC POWER I59

tember 1939 ranged from 8 cents to 12 cents with most of the markets
coming within the range of 9 to 11 cents per quart. This wide range
in both producer and resale prices supports the view that local com-
petition was an important factor in the adjustments of prices down-
ward during this period as cost of production and cost of distribution
had been the chief arguments for the general rise in price at an earUer
date.

Price oj Milk Used jor Cream.

Up until 1939 the buying price estabhshcd for milk used for sale
as fluid cream -(class II milk) was generally the same as for milk used
for fluid milk purposes, although a few important exceptions were
noted. This policy was apparently based on the premise that the
milk for cream purposes had to meet the same inspection require-
ments as milk for sale as fluid mUk, and also that the cost of producing
the two was identical.

In the sumrner of 1939 it appears that the competitive conaitions
between different uses of milk became a more important factor in
arriving at prices for class II milk. With this change in policy the
price for mUk used as cream was lowered to roughly half way between
the price of class I milk and the price of surplus milk. At the same
time the resale price of cream at wholesale and retail was also lowered
accordingly. The lines of reasoning back of these changes were
evidenced in the findings of fact accompanying the orders for many
of these markets, of which the following is typical:

The effect of present consumer prices of fluid cream in this market has been to
decrease and retard fluid cream consumption during the cheapened cost of other
foods and the lessened consumer buying power during the economic recession,
with the attendant lessening of fluid volume and decreased producer average
price, with the same consumer prices. The high producer price for fluid cream
and cream milk are especially inducive to the bringing in of cream from outside
the regular fluid market supply, further reducing the fluid percentage and average
producer price and presenting added problems of enforcement.

An important exception to the general policies followed in pricing
milk for cream purposes has been in the Milwaukee' market. . Milk
for class II purposes has ruled uniformly 25 cents per hundredweight
over the manufactured or surplus price during most of the period that
this market has been under State control. In the Madison market
there is also an exception, although this market has had several
changes in its formula for pricing milk for cream purposes. In 1939
this market priced class II milk at the evaporated milk code price for
the area plus 25 cents per 100 i!>6unds milk. Tliis was somewhat
higher than in Milwaukee due to the lower surplus price in the latter'
city. In the Kenosha and Racine markets part of the rnilk for fluid
cream was priced the same as for fluid milk, but that which was used
for light cream, 18 to 19 percent butterfat, was purchased at surpb'S
milk prices. This was done for competitive purposes.

'Method oj Arriving at Prices for Surplus Milk.

Twelve different formulas were used to arrive at the price of surplus
milk in 33 market areas under State contioi in July 1939. Some of
-these showed only minor differences whiJ.3 others exhibited marked
variations. In most cases the price was 1 a jed on butter or cheese or
on the price paid at evaporated milk plai, t .. In 7 of the 33 markets
the price of surplus milk was based enti e y on the average monthly
price of cheese as reported for "daisif >' and "lo-ighorns" on the

170 CONCENTRATION OF ECONOMIC POWER

Plymouth market. In 5 markets the price was based primarily on
butter. In 11 markets the price was based on the combination of
butter and cheese. In the 10 remaining markets the price was based
mainly on the evaporated milk formula as set forth in the Federal
evaporated milk agreement or on the price actually paid for milk at
nearby evaporated milk plants, including premiums, if any. .

The most important of these formulas for surplus milk are about as
follows:

1. Take 1.2 times the average price of 92 score butter at wholesale
in Chicago and 2.4 times the average price of longhorns at Plymouth;
add together thet°. t mounts and divide the resulting sum by 2 to
arrive at the price tc be paid per pound of butterfat. This formula
was in use in 10 markets through an area across the central part of
the state from Eau Claire to Green Bay.

2. Take 2.5 times the average price of daisies and 2.4 times the
average price of longhorns; add together these amounts and divide
the resulting sum by 2 to give the price to be paid per pound of butter-
fat. This formula was in use in 7 markets in the cheese-producing
areas of the State.

3. Take 3.5 times the average price of 92 score butter at wholesale
in Chicago and add the value of skim milk determined from the
current prices of skim milk powder, cottage cheese, and condensed
skim milk and an allowance for processing and marketing costs. The
resulting figure (86 cents in July 1939) is the price per hundredweight
of milk testing 3.5 percent butterfat. This formula is important
since it is used in Milwaukee, by far the largest market in the State,
and is also used in Waukesha. A good deal of criticism has been
made of this formula because of the low price it produces and the size
of market to which it applies. Outsiders have claimed that this low
price results in Milwaukee and Waukesha markets "dmnping" their
surplus mUk in manufacturing' channels.

4. The price of milk at evaporated milk plants is determined as
follows: Six times the average price of 92 score butter at wholesale
in Chicago plus 2.4 times the price of twins at Plymouth and the sum
of these divided by 7. Multiply the resulting figure by 3.5 and add
30 percent to give the price per hundredweight of mUk testing 3.5
percent fat. Frequently premiums have been paid over this formula
price.

The price per hundredweight of surplus milk in controlled markets
in Wisconsin ranged from 81 cents to $1.26 in July 1939, or a range
of 45 cents. Fourteen of the markets, however, were within the
range of 6 cents, namely, $1.01 to $1.07. One reason for the wide
variation in price of surplus milk is found in the differences in oppor-
tunities for the sale of such milk. The highest prices T)revailed in
those markets where one or more manufacturing plants were in
position to handle all of the surplus milk for the fluid milk market.
The lowest prices seemed to prevail in those markets where all fluid
milk distributors were expected to handle -their owii surplus receipts
of milk. Naturally some of these fluid milk distributors are not in
the best position to dispose of surplus milk in the most efficient and
satisfactory manner. Surplus milk up to 10 or 15 percent of the fluid
milk and cream sales was priced lower than the remainder of the
surplus in four markets. Certauily it would seem to be a sound
marketing practice to sell surplus milk at the best possible price.

CONCENTRATION OF ECONOMIC POWER

171

This can probably be done when the bulk of it is sold only to those
well equipped to handle it and only to one or two buyers in a market.
The prices prevailing for surplus milk in the 32 market areas for July
1939 are shown in table 15.

Table 15. — Price of surplus milk in 32 Wisconsin fluid milk markets under State
regulation, July 1939

Price of surplus
milk per—

Number of markets

Price of surplus
milk per—

Number of markets

Pound
butter-
fat

100
pounds
of milk
testing
3.5 per-
cent fat

Pound
butter-
fat

lOO
pounds
of milk
testing
3.5 per-
cent fat

Cents
28.9
30.6
/ 23. 23
\ 31. 2 -
25.6
33.0
24.9

$1.01
1.07

.81
1.09

.99
1.16

.87

Cents

24.6

f 27.9

\ 29.7

35:7
26.9

$0.86

.98

3 '

1 »

n?^

1 26

1 Surplus equivalent to 10 per cent of milk and cream sales at lower price; remainder at higher price.
' Surplus equivalent to 15 percent of milk and cream sales at lo^^er price; remainder at higher price.
3 $1.12 average.

Prices at Grocery Stores and Milk Stands.

Apparently the department has followed a policy of preventing an
expansion in sales of milk and cream through grocery stores and milk
stands and there is some evidence that the objective has been to reduce '
these sales to a minimum by eliminating any retail price advantage
at grocery stores and in 'most oases also at milk stands or milk depots.
Milk consumption is claimed to be largest under a home-delivery
system gf distribution — a point on which there is wide difference of
opinion. The attempt .to promote in this manner the maximum
consumption of fluid milk was nevertheless looked upon as a desirable
public policy for both the producer and consumer. The Madison,
Kenosha, and Janesville markets offer illustrations X)f this policy since
milk stands had a considerable volume of sale? 'n these'markets and
since there were also differentials in price betw§^n store and home
dehvery sales prior to State control.

In January 1935 the department issued an order for the Madison
market which permitted milk stands, but not grocery stores, to sell
milk at 1 cent per quart and 1 cent per pint below the home delivery
price. Milk stands were also permitted to sell coffee cream at 2 cents
per one-half pint and 5 cents per quart below the regular retail price.
For whipping cream, this differential was 3 cents and 10 cents respec-
tively. Milk stands, however, were required to make a bottle chd!rge
on all sales. An amendment to this order on August 1 , 1937, contained
the following provision:

b. Bulk sales of milk and' cream at retail are prohibited. The retail prices above
prescribed shall apply to all sales and deliveries at retail regardless of quantity. All
discounts including those heretofore allowed for quantity sales and for sales at
milk stands and including discounts to employees and others are prohibited.

Somewhat similar store and milk-stand price differentials were
permitted in the Kenosha market up untU May 1, 1939, when the.

172 CONCENTRATION OF ECONOMIC POWER

department specified in its order that milk-stand prices should carry
the regular retail price, plus a bottle charge, for both milk and cream.
To the extent that this bottle charge represented an additional cost
or mconvenience to consumers in buying from mUkstands, it meant a
higher charge for less service than they would have had to pay for
milk delivered to their own doorsteps. In the Kenosha market a
quantity discount of 1 cent per quart was permitted to continue
for a family buying for its own use .85 or more quarts of milk in one
calendar nionth. Store differentials were eliminated immediately
under State control.

In the Janesville market somewhat comparable milkstand differ-
entials were permitted until May 1, 1939, when these differentials
were* eliminated by the department. No store differentials had been
permitted in this raarket since 1933. Apparently one of the factors
in reducing both the producer and dealer prices in May 1939, was
the milk-stand competition, particularly from outside the market
area. Along with the reduction in prices, milk-stand differentials
were eliminated and the raarket area was extended from 1 mile to 5
miles beyond the city Mmits. The new order noted particularly that
four milk stands had been established just beyond one mile of the city
limjts and that these stands were having sizable sales.

Prior to State control there was no uniformity in prices charged by
milk stands in these markets. Their supplies of milk were obtained
directly from individual farms and not through producers' organiza-
tions. When the stands were located outside of the city limits, the
cities themselves had no control with respect to quality and general
sanitation. Under the State control, authority over these milk
stands was obtained by extending the market area to incVide the
territory in which they were located. Under this program quality
standards as well as prices were specified.

It should not be implied from the foregoing that milk stands have
^een completely eliminated from markets under State control or that
price differentials have been abolished in all markets. A few excep-
tions remain. At Green Bay and Fond du Lac milk stands are still
permitted differentials in price. At West Bend a differential of
l}^-cents per quart is allowed all cash and carry customers having
their own containers at the milk stands. In the Shawano market
milk was permitted to be sold where produced to purchasers furnishing
their own containers at 2 cents per quart less than the regular sale
price, but otherwise no store or stand differentials were permitted in
this market.* In the Sheboygan market a 4-cent discount per gaUon
of milk was allowed for sales in bulk, except where local ordinances
prohibited the retailing of milk in this manner.

With only, one exception the markets under State contri)! permit
no store differentials in price compared with home deliveries. In a
number of the markets a bottle charge is required on sales through
grocery stores and milk stands. A few orders specify that a uniform
store bottle shall be used, which is interchangeable among the various
dealers.

The handling margin for retail grocery stores was rather generally
1 cent per quart of milk ^nd one-half pint of cream until 1939 when it
was increased to IK cents. A statement such as the following was
included in the findings of fact by the department to justify a change
in the store margin in about 20 markets in April and May 1939:

CONCENTRATION OF ECONOMIC POWER ^73

The margin between wholesale and retail dealer prices on the basis of 1 cent
per quart is not sufficient to give either a comparable or adequate gross profit to
stores, especially in view of the bulk of the article, danger of breakage, necessity
of refrigeration, and the margins and comparably small handling costs of canned
milk. This narrow grocer margin reflects in lessened volume of fluid milk sold
and in more substitution of canned for fluid milk.

Pooling.

The only market in Wisconsin operating on a market-wide pool has
been the Ma4ison marliet. Others have operated on what is known
as a dealer pool or producer association pool. Under the dealer pool
all producers selling a particular grade of milk to any one dealer re-
ceive the same price. Under a producer association pool the milk of
all members is priced as though it were gomg to p. single dealer. The
only modification to this general explanation is in the case of those
markets operating on base-surplus plans under which producers within
a pool receive one price for the delivered bases and a lower price for
all excess deliveries above their base allotments. In the Madison
market special milk such as golden Guernsey, certified, and vitamin D
milk were not included in the market pool.

Admission of New Producers.

The department of agriculture and markets has generally taken the
position that in administering the mUk control law it has had no par-
ticular responsibility with respect to the entrance of new producers
into fluid milk markets, since the determination of whose milk was
to be taken on a market was 9, bargaining factor entirely between the
producers or their associations and the dealers handling the milk.
New producers, as the term is used here, means producers who are
new in a particular market and not necessarily new in the dairy busi-
ness. Apparently there were no provisions in any of the orders or
amendments issued during 1938 and 1939 that applied directly to new
producers. However, some exceptions to this rule were noted in
earlier orders issued by the department as the following illustrates:

A lO-cent differential on the plant price wiU be allowed if the dealer consents
to take on no new shippers without the consent of the Milwaukee Cooperative
Milk Producers Association. (Contained in amendment No. 1 to General Order
No. 44, December 29, 1933, Waukesha market.) , ' •

The above provision was included in subsequent orders *and amend-
ments for the Waukesha market untU October 1, ip?6, when this pro-
vision was terminated. Restraining factors of another type were
found in one of the early orders for the Madison market as the following
provisions show:

A grievance committee consisting of five producers, to be appointed by the
commission (department), shall be set up to adjust diff'erences between dealers,
producers and dealers, and between producers, and no new producers can be
added to the Madison market without the written consent of this committee.
Afiy person aggrieved by the action of this committee may appeal from the com-
mittee's decision to this commission; and the decision of the commission shall
be final and binding on all parties. (Contained in amendment No. 3 to General
Order No. 35, April 6, 1934, Madison market.)

No dealer in this market will be allowed to take on new shippers unless the
arrangement is approved bjr this -commission; written request for the admission
of a new shipper can only be made by a committee appointed by the producers
of the dealer wishing to take on the new shipper. All fluid milk and fluid cream
requirements shall be taken from each dealer's regular plant receipts or the sur-
plus market milk. (Amendment No. 4 to General Order No. 35, April 19, 1934,
Madison market.)

174 CONCENTRATION OF ECONOMIC POWER

Base Surplus.

The Wisconsin orders have generally pern^itted the use of a base-
surplus plan of paying producers for milk but have not, with the ex-
ception of one market, required that any such plan be adopted. The
use of a base rating system has thus "been left to each dealer and the
producers from whom he purchased milk. It should be remembered
in this connection that in these markets producers are paid on the
basis of an individual dealer pool or on the basis of a pool operated
by a producers' association. Each base rating system, however, had
to meet with the approval of the department before it could be used
in any market under a State order.

In the case af the Madison market after it was placed on a market-
wide j)ool, the allotment of bases was made compulsory and the
manner in which such bases were to be allotted was specified in the
order. However, no provision was included in the order for allot-
ment of bases to new producers. The following provision was in-
cluded in the Madison order as amendment No. 4 to General Order
No. 35, April 19, 1934j_

That bases for producers on this market must be just and equitable, each pro-
ducer delivering milk to this market shall be given a base, and bases given pro-
ducers shall be an average of the past 6 years' bases (average monthly production
in September, October, and November) ; if the producer has not been on this
market 6 years, then his average base. for the years prior to 1933 that he has been
on the market shall be multiplied by five and the 1933-base added to the product,
and the product divided by six, which shall be his theoretical 6-year average.'
Bas^ effective March 1, 1934, under the above plan will be on a 100-percent basis.

Further exception to the general rule that the handling of base
rating plans be left to the dealers and producers is contained in the
following provision added in an amendment to the Milwaukee and
Waukesha orders effective August 7, 1939:

(6) No producer shall be required, directly or indirectly, to deliver his over-
,^ase milk as a condition of the receipt of his milk within base by the dealer, but
•each producer shall be left tree to market his overbase milk in any manner that
does not bring it into the Milwaukee or Waukesha fluid market, and no dealer
shall do anything that tends tp hinder or impede such free marketing by a pro-
ducer of his overbase milk.

Labor.

While the milk control legislation in this State has not dealt di-
rectly with wages and other matters pertaining thereto, nevertheless,
these orders contain provisions which undoubtedly are factors in the
working hours and possibly also in the maintenance of wages in some
of these markets.

A provision governing the time at which deliveries of milk may be
started in the morning is contained in the orders for several markets
and has been in use almost since the beginning of the control work in
the State. A typical example is the following taken from an amend-
ment to the order governing the Racine market :

b. Beginning September 27, 1936, no vehicle will be allowed to leave or deliver
milk or other dairy products before 6:30 o'clock in the morning.

The time of delivery was, of course, changed in subsequent orders
and amendments and governed in part by the season of the year.

In reading the standq^rds of fair practices, which is attached hereto,
it will be noted that some of the provisions pertain directly to labor.
One of these forbids an expansion of the peddler or vendor system of
distribution. This is a standard provision -in most of the markets.
Furtherj it would seem that the elimination of differentials in prices

CJONCENTRATION OF ECONOMIC POWER J 75

at stores has tended to favor retail drivers as well as the distributors
engaged in retail delivery service. Another "fair practice" regula-
tion prohibits the employment of a person over any route where he
has been employed by another distributor within 1 year previously.
This provision tends to maintain established delivery routes and is
designed to regulate competition among distributors and to prevent
an employee in one company from selling his "good wiU" to another
company.

While the department has not concerned itself directly with wages,
nevertheless, the level of wages in a market has undoubtedly been a
considerable factor in arriving at the minimum resale prices to be
established in such market. For example, in the Madison market in
the spring of 1937, organized labor obtained a general raise" in their
wages. The department immediately prohibited all discounts both
for credit, quantity sales, employee purchases, store sales, etc., in order
to help the dealers to meet this wage increase. This action w as taken
even though the earlier wholesale and retail prices prescribed in" the
order were minimum prices.

Legal Standards and Enforcement.

Legal standards and legal procedure were outlined more explicitly
in Wisconsin legislation than' were economic standards. The milk
control legislation prescribes that investigations and public hearings
shall be made before an order is issued for any ni arket. The procedure
for a dealer ob^taining a license, procedure for revocation of license,
and conditions and procedure for appeals to the circuit court and
supreme court are prescribed in considerable detail. The legislation
also specifies the conditions under which the court may examine or
set aside any order of the department. (See above, p. 163.)

In general it appears that the milk regulatory program has had a
. favorable legal environment under which to operate. The Depart-
ment of Agriculture and Markets has had on its staff an assistant
attorney general and special counsel tb handle the legal end of its mUk
control administration. The courts have given favorable decisions
with respect to the general legislation, although the department re-
ceived adverse decisions in some cases dealing with technical phases
of the administration. There has been no important problem with
respect to interstate commerce in the regulated markets in Wisconsin
The only exceptions are in two of the smaller markets, Beloit and
Marinette, which are near the border of the States of Illinois and
Michigan, respectively. Wisconsin at no time entered into a regula-
tory prcJgram for Superior, since the Duluth and Superior cities are
regarded as one market and since there is considerable flow of inter-
state commerce at this point. Likewise, the State never issued any
orders for the La Crosse market on the western border of the State
but sought to assist the producers and distributors in this market
through conferences and voluntary agreements. ^

The temporary character of the legislation has no doubt been a
factor handicapping to some extent the enforcement of the orders
issued by the department, since with temporary legislation there ig
-naturally a tendency on the part of all persons concerned to delay
action prompted by the feeling that the program is probably of a tem-
porary character and that the rulings might, therefore, be of minor
importance and effective only for a relatively short time. Other
difficulties in enforcement unaoubtedly arose because of the newness

176 CONCENTRATION OF ECONOMIC POWER

of this type of legislation, because policies were not clearly defined
and because many angles of the program have yet to be tested in the
courts. Further, the time required (approximately a year) to carry
litigation through for decision by the State supreme court is undoubt-
edly also a handicap in the administration of this program.

Another administrative and legal difficulty is in establishing facts
with respect to violations, particularly in the wholesale trade between
the dealer and wholesale customers. It is possible for considerable
secrecy to exist "in some of the '.many wholesale transactions. No
doubt another factor in enforcement, although less tangible, is the
lack of popularity of this type of legislation among customers and the
public generally, since they look upon such legislation as a program
which increases prices to them and therefore increases the cost of liv-
ing. However, this feeling is probably tempered somewhat by the
general sympathy for dairy farmers in their economic distress. Still
another difficulty of enforcement is that of obtaining a good law, clear
in purpose, carefully adapted to the needs of the industry and subject
to precise interpretation. In enacting legislation there is also a
natural tendency to compromise on questions of policy, and mUk
control acts are usually drafted without proper consideration of the
technical phases of the problems involved in fluid mUk distribution.
These conditions make for legal problems and hamper effective
administration.

EFFECTS QF PRICE CONTROL IN WISCONSIN

There follows an endeavor to appraise the regulation of fluid milk
prices by the State, froin such information as is available. The factual
data are by no means as complete as one might wish for this purpose.
Conclusions are drawn only on those points where the evidence
seems reasonably clear, although not conclusive.

The regulatory program will be considered as it has influenced (1)
producer prices and production, (2) wholesale and retail prices and
consumption, and (3) market organization and market practices.

Producer Prices and. Production.

The evidence seems reasonably clear that the price control pro-
gram in Wisconsin has raised or maintained prices to producers
supplying controlled markets above the level that would otherwise
have prevailed during most of the time from 1933 to 1939. This has
been done mainly through control of class I and class II prices. The
trend in prices during the period of control may be shown by an
average (imweighted) of the prices of class I milk in 14 markets in
each July from 1934 to 1939, inclusive. (See table 16.) The aver-
age class I price for these markets was raised from $1.58 in 1934 to
$2.14 in 1937 and 1938, from which it was lowered to $1.92 in 1939.

Table 16. — Average July price of class I milk in 14 fluid milk markets under State
control and the price under the evaporated milk formula, 19S4-S9

■

1934

1935

1936

.1937

1938

1939

Vverage class I price

$1.58
1.00

$1.75
1.12

$1.78
1.56

$2.14
1.44

$2.14
1.18

$1.92

1.03

Difference

.49

.63

.22

.70

.96

.89

Chart VIU
Milk Prices to Dealers, by Classes, Milwaukee, Wis., 1922-39

L29A;1 I 1913 I 1^1.4 I I9J^S I /9^6 | »9/.7 | '9^6 | )9A9 | 1930 \ )93l \ <93& | »933 | )934- | I93S \ 193^ \ ^^37 | 1938 \ 1939 \

CONCENTRATION OF ECONOMIC POWER 177

For comparative purposes the formula price which is applicable to
this region, and which is used in the Federal evaporated milk agree-
ment, is also shown in table 16 for July of each of these years. It
will be noted that the class I prices averaged 49 cents over the formula
price in July 1934, that this margin was only 22 cents in July 1936,
and that it rose to a high of 96 cents in July 1938. The compara-
tively small premium in 1936 occurred just after a substantial rise in
butter and just preceding the rise in the average. class I price from
$1.78 to S2.14 per hundredweight.

The figures for the 14 markets are bel' vrd to be typical of all of
those under State control, since they cov'er markets having 75 per-
cent of the total urban population affected directly by this program.
Moreover, a simple average of the price for class I -milk in all 33
markets was identically the same as for the 14 in 1938 and showed
only a 7 cent difference in 1939. The range of prices for the 33
markets was also substantially similar to the range for the 14 markets.

Classified milk prices for the Milwaukee market are shown for a
number of years in appendix to chapter V, table I, and in chart VIII.
This market, it will be remembered, handles about 50 percent of the
milk under State control in Wisconsin. Since 1932 there have been
four milk buying prices in Milwaukee. These cover fluid milk sold
in ordinary commercial trade; milk sold for relief purposes; milk
used for cream ; .and the remainder, which is made into manufactured
products. Prior to 1933 only two buying prices prevailed. One
was for milk sOid as fluid milk, and the other price was for all other
milk, including that sold as fluid cream.

The premium for fluid milk over manufactured milk has varied
from month to month throughout the 18 years covered in appendix
to chapter V, table I. However, this premium was unusually nigh
during two periods. The first of these was from late 192'9 through
1931, when prices were declining. The class I price (fluid milk),
even in the absence of State control, dropped more slowly than the
price of milk for manufactured products. The second period of high
premiums was from the latter part of 1936 until early in 1939. The
premium was made smaller during the summer and fall of 1939 by a
lower fluid milk price and by rising prices for manufactured nulk.
There can be little doubt that State control was a real factor in the
maintenance of the relatively high fluid milk price in this market
from 1936 to 1939.

Class II milk, namely, milk used for cream purposes, was priced
in most. markets at the same level as class I milk until April and May
1939, when there was a general lowering of the class II price through-
out the State, to reflect competitive conditions. Evidently the price
of class II milk had been higher than competitive conditions war-
ranted, even under the stabilizing influence of a control program.

Receipts of milk for each of 30 markets are shown in table 17 for
a 4-year period, 1936-39. These data do not indicate any pronounced
or consistent rise for the various markets. However, these data alone
are not believed to be a complete measurement of the influence of
..price upon production. While the State orders do not regulate the
entrance of new producers in these nr-arkets, it is undoubtedly cor-
rect to say that the private agencifs themselves, particularly the
producer associations, have generally -n ught to exercise some control
of this nature. There is normally scr i turnover of producers in the

178

CONCENTRATION OF ECONOMIC POWER

market, probably from 5 to 10 percent per year, and unless those
dropping out are replaced by new producers the actual number of
producers on the market will tend to decrease. Thus the per farm
production may increase without showing an increase in total receipts
of milk.

Table 17. — Average daily receipts of milk by

years in SO Wisconsin markett

, 1938-S9

1936

'■: 1937

1938

1939

Appleton ., -

Pounds '
87,057
12,573

9,582
69.464

3,247
13,045

2,503
37,490
33.080
66.950
23,472
70, 217
17,805
129, 610
47, 210

8,751

6:361
913, 847
81,027

3,586
42,277

7 201
129, 177

3,200

5.131
80,255
15,544

9,618
18, 879

6.041

Pounds
111,809
11,239
10,468
52, 677

3,261
14,890

2,149
37, 615
31,646
62,655
23,931
64,782
18, 753
128,238
62, 120

8,096

6,100
885,225
83, 470

3; 556
42,696

6,680
123,842

3,996

5,051
82,040
15,922

9,748
17,234

6,103

Pounds

107, 291

11,536

10, 190

63, 958

3,318

16,880

2,225

41, 014

33,461

64,699

23,641

67,764

20,961

133,870

65,020

7 774

6 265

919,006

101,426

3,323

46,115

6,593

129,100

4,047

5,390

107, 971

10! 615
17,984
6,340

Pounds
94, 366
13 649

Beaver Dam

10, 192

Bebit

64,718

•Berlin

3,400

Chippewa Falls

17,428

P.nlnmhns-

2,130

Eau Claire

46, 117

Fond du Lac

33,279

Green Bay-De Pere

75,884

22, 321

73, 491

20,578

142, 123

Manitowoc-Two Rivers -

66,098

Marshfleld .■ --

9; 256

Merrill _

Milwaukee . — ...

913, 317

115,320

New London ■

Oshkosh .....

44,699

POTtage. ..-.^.^.

Racine i.L

6,857
142, 225

Ripon ...L......

3,893

Shawano ' '

5 796

114,725
16,548

Stevens Point

Watertown.

10,480

Waukesha-- ^

West Bend

16.630
6,661

In an attempt to measure such possible developments data were
obtained showing the average production per farm by months for a
number of years on two of the more important markets in the State.
These data are shown in table 18. It will be noted that in the Madison
market production per farm showed a substantial increase from 1933
to 1'938. It is believed that part of this increase is due to factors other
than State control. Demands for higher quality and more uniform
production probably tend to make dairying a more specialized business
and tend toward the elimination of small farms. Similar develop-
ments in t£e Kenosha market took place earlier and changes in produc-
tion in this market since 1933 are believed to be due primarily to factors
other than State control. This is evidenced by the decrease in pro-
duction from 1932 to 1935 and the corresponding increase from 1936
to 1939.

Although some qualifications of this character are no doubt neces-
sary it appears obvious that were these markets as readily accessible
to producers as are creameries and cheese factories the flow of milk to
the fluid milk markets under State control would have shown sub-
stantial increases. The Department itself stated in its findings of
fact that the prices prevailing early in 1939 were tending to stimulate
production arid therefore the class I price should be lowered in several
of theiBe^aaarkets.

Chart X
Retail Prices of Fluid Milk, Kvapoiated Milk, and All Food Frodiicls, Milwaukee, Wis., 1923-39

PERCENT

I I 0

100

8 0

192

23-25

= 100

••••**'**
•;^^^^^^^\

. \

-•■^""

^^^"^^^,

\ \

\ _

,.'*

\ \
\ \

S \
\

..'*

ALL FOOD^X^

., 1 ~

[

—

■ 1 1

1923 r2U 125 126 '27 «28 '29 '30 '31 '32 '33 '3^ '35 '36 '37 '3S '39

Chart IX
Retail Price and Consumption of Fluid Milk and Factory Pay Rolls, Milwaukee, Wis., 1927-39

MILK RETAIL

CONSUMPTION PRICE

THOUSAND CENTS PER

POUNDS QUART

^RETAIL PRICE OF MILK

/•A .

■/ ■■'.

.-— 7 ^T

/■

I ,

MILK CONSUMPTION
/-^INCLUDING RELIEF MILK

1 / \

\ t

vv ^ r^ kP

/^.-^aw^j^

;-U^^

\ 1
1 1

MILK CONSUMPTION

EXCLUDING RELIEF MILK

'Ua

N^i/^

(\A

V^ Y

5Lr\y^

M
\

.-•

/' V,

/'^'

INDEX NUMBERS OF

FACTORY PAYROLLS

1925-1927 = 100

I 40

i i il i t ii u I I s t \ u 1 1 u 1 1 u i 1 1 i i U i i 1 1 & t U n i i i t U it M

193+

1935

CONCENTRATION OF ECONOMIC POWER 179

Table 18. — Average daily milk receipts per farm, for 2 Wisconsin markets, 1927-39 '

Market

Year

1927

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

Madison

188

179

218

239

234

218

241

247

259

257

267

263

281

308

317

308

296

262

276

289

' Data obtained from producer cooperative associations in the respective markets.

Resale Prices and Consum'ption.

The effect of the price control program upon wholesale and retail
prices is ^less clear than the effect upon producer prices. The move-
ment of the retail dehvery price per quart of milk in the Milwaukee
market, which is approximately as large as the other 32 markets
combined, is shown in appendix to chapter V, table II, and in chart IX.
The retail price per quart of milk remained at 1 1 cents in Milwaukee
from May 1926 to August 1929. For a period of 8 months following
this the price was 12 cents after which it dropped to a low of 7 cents
in January 1933. Following this there was a general upward trend to
12 cents, aj)rice that was maintained from August 1936 to March 1939.
From this point it was dropped to 10 cents for about 5 months and
then was raised to 11 cents.

The retail price of milk, the quantity consumed, and the index of
pay rolls are shown in chart IX for Alilwaukee from 1927 to 1939.
The price of milk did not drop as much from 1929 to 1933 as did pay
rolls, and the price decline that did take place was not sufficient to
maintain milk consumption at its previous level in this market.
Even with the distribution of relief milk consumption was still below
the 1929 level. It appears from chart IX that change in pay rolls
alone are not a full explanation of the changes in consumption of milk
in Milwaukee since 1929, In fact the per capita consumption is rela-
tively lower in recent years than the chart alone would indicate,
since it takes no account of changes in population.

The department of agriculture and markets in its findings of fact
stated early in 1939 that the differential in price between canned milk
(evaporated milk) and fluid milk was so great as to "produce a large
and steady increase in canned milk consumption and largely at the
expense of fluid milk consumption." To test this finding we need to
inquire into both consumption and retail prices of these products.

Data on consumption of both fluid milk and canned milk in the
greater Milwaukee market since 1934 are shown in table 19. It will
be noted that there was a slight decline in both the percentage of
famihes using fluid milk and in the average amount purchased by
these families. This decrease in per capita consumption since 1934
appears to have been more than offset by the increase in the number
of famihes. (See also charl IX.)

The percentage of famihes using e^porated milk has increased
considerably in Milwaukee from 1934 to 1939 according to table 19.
The average purchases per family using this product have also risen.
This increase m the use of evaporated milk is a continuation of a trend
that had been under way for many years.

180

CONCENTRATION OF ECONOMIC POWER

A condition which probably accounts for some of the shift from
fluid milk to evaporated milk and to other food products in Milwaukee
is found in the retail prices of these products. (See chart X.) Fluid
milk prices have been relatively higher in recent years than either
evaporated milk or other food products in general when compared
with thfe price relations of the twenties. Under these conditions it is
to be expected that there would also be some adjustment in retail
purchases.

Table 19. — Number and percentage of families using regular milk and canned milk
and per family consumption per month, Greater Milwaukee market, 1934~39

Total
number

Families using-

Fliiid

milk

(percent)

Canned

milk
(percent)

Family consumption
per month i

Fluid

milk

(quarts)

Canned
milk

1934
1935
1936
1937

184,000
184, 877
186, 735

63.0

97.2
96.6
96.0

47.4
48.0
48.0

8.8
10.5
9.6
9.4

1 Includes only families using each product.

Source: Based on an annual survey of about 6,000 consumers, by the Milwaukee Journal, Milwaukee,
Wis. The Greater Milwaukee market as used here includes Milwaukee, Shorewood, Whitefish Bay,
Wauwatosa, West Allis, Cudahy, and South Milwaukee.

Dealer Margins.

A comparison of the retail price of fluid milk and the price paid
producers for that portion of the milk used for class I purposes is
shown in chart XI for the Milwaukee market. Home delivery prices
and cash and carry store prices for milk have been the same in this
market under State control. The. price paid by dealers for fluid milk
is figured on the basis of milk testing 3.5 percent fat. While the actual
test of the milk is slightly higher than this it is belived that the chart
reflects correctly the general trend in dealers' operating margins for
milk. Although there is a considerable variation in the margin from
one period to another it nevertheless appears that the margin 1935-39
has been about 1 cent higher than it was prior to State control and even
prior to the depression. The figures do not, of course, prove that this
increase in the spread between producer and consumer was due to
State control. During the latter period wages were increased sub-
stantially to employees engaged in milk plants and in distribution of
milk in Milwaukee. This undoubtedly was an important factor in
distribution costs. Certainly not all of the increase in spread between
producer and consumer, or even the major portion of it, has gone to
the distributors in the form of profits. But it is probable that there
would have been much more price competition among distributors
had there been no State control. Organized labor might also have
foimd it more difficult to maintain its scale of wages if retail and whole-
sale prices had been left to find their competitive levels.

This study does not include an analysis of distribution margins in
other markets in the State. It is probable that they have not shown
as much increase, since Milwaukee was generally known as a low
margin city for fluid milk prior to State control.

Chart XI
Fluid Milk Prices in Milwaukee, Wis.,

CENTS PER
QUART

1 8

1 2

RETAIL f

>RICE -
1

House Deliveries

1
1

1 0

-1

52. :

^ /

-i*

f ,

T GROSS

4.5

' t \

! ,1

5.8

4.9

RGIN

.aH"

J-

5:6

■^-/

PRICE

S PAID PRODUC

.3^

i :'

^/^

— ^x

-7

'c ±_

JTATE C

nwTDm —

-*- GROSS MARGIN

NO INFORMATIOr

4-^

1
i

■

iiUiiu

MCliMIHifiniSHS,

JH ^

iill nUft^iiii UtliitntUi

iMiiWiWiiWl iWM

I910

1 /9il

»9« 1 >Vi3 1 >9i4 yftiS 1 /9A6

;9A7

>9ift ;9t*) 1 /930 1 /95( 1 /932. | /933 | <9^

/935- 1 1936 1 /937 1 /936 | /939 j

CONCENTRATION OF ECONOMIC POWER IgJ

Market Organization and Market Practices.

Probably as significant as any are the results of State control over
the actual methods employed in distribution. Retail sales of milk
and cream have been "kept on the wagons" and grocery store sales
have been kept at a minimum. This has been done by the simple
but effective device of a single retail price regardless of method of
sales, cash or credit, or of type of service. Under such a price policy
the business tends to go to those offering the most service. The pur-
pose of this policy was ostensibly to promote the greatest consump-
tion of milk by favoring a house delivery system of distribution. It
is probable, however, that the stimulus to consumption from lower
prices thi'ough stores would more than offset the convenience of house
delivery. There is nothing inherent in the product to prevent both
types of distribution developing simultaneously and leaving the
choice of partonage to the consumers.

The competition from outside sources of fluid milk and cream has
been cm-bed to some extent by extending sales areas into the open
country, frequently several miles beyond the city limits, and by ,
restricting sales from road-side stands and direct sales from farms to
consumers. Part of this action may have been for the purpose of
maintaining sanitation and quality standards. The methods used,
however, have had more the appearance of economic control than
protection of consumers.

There is no clear-cut evidence that the control program has favored
the largest distributors at the expense of smaller ones. Fragmentary
data seem to indicate that in a few of the larger markets the largest
distributors have shown a decline in business while some of the
smaller ones have shown increases. It is probable that the very
smallest, such as producer-distributors, have found difficulty in
expanding or maintaining sales under such a program since they are
handicapped' in competing entirely on a service basis-
One of the general effects of the milk price control program in Wis-
consin has undoubtedly been a tendency to standardize prices and
practices in a number of the fluid milk markets in the State. While
this report has at times emphasized the wide range in prices and the
variation in practices from market to market, it is undoubtedly
correct to say that there is more uniformity on some points among
many of the markets because of regulation than would have existed
without it. The standard of fair practices is quite uniformly appli-
cable to all markets. The fact that 10 markets use identically the.
sanie provision for arriving at the price of surplus milk is in itself an
indication of the standardizing effect of the program. Likewise, it
is not to be expected that grocery stores would sell at retail delivery
prices in all of the 33 markets under ordinary competitive conditions.
This, however, is not to say that the standardization of practices has
been in the right direction. Many would feel that to discriminate
against one type of distribution in favor of another should be beyond
the scope of an impartial control agenpy having for its purpose the
promotioii of fair competition* and fair practices. Certainly there is
nothing in the legislation itself to indicate the type of ^retail service
that is to be favored.

279348 — 41— No. .32

APPENDIX A

STANDARD OF FAIR PRACTICES IN SELLING OF MILK BY
DISTRIBUTORS

After public hearings, the following standard of fair practices in
selling of milk by distributors has been adopted by the department of
agriculture and markets under the provisions of section 100.20 Wis-
consin statutes, and

It is ordered that the provisions thereof shall be considered a part of all
general orders issued for municipalities under the provisions of section 100.03,
Wisconsin statutes, to become effective upon publication of such general orders.

1. It shall be considered an unfair practice for any dealer "to give away any
products or distribute any products as samples, but this section is not intended to
prevent the giving of a sample at the plant to be consumed on the premises.

2. It shall be considered an unfair practice to sell fluid milk or other products
under false descriptions, advertising or trade names.

3. It shall be considered an unfair practice to give or pay to any hotel, apart-
ment, or factory owner, manager, janitor, receiving clerk, maid,- housekeeper,
linen room attendant, or any other person, money compensation, gratuity, free
milk, cream or derivatives of milk, or discounts, for either business or information
or assistance in procuring business; and each distributor shall discharge any
employee guilty of such unfair practice.

4. It shall be considered an unfair practice to pay premiums or allow discounts
of any sort to new customers.

5. It shall be considered an unfair practice to give, loan, sell or furnish to cus-
tomers under any circumstances, ice boxes, ice or other devices or means for
refrigeration or insulation

6. It shall be considered an unfair practice for any distributor to use in the
course of his business any bottle, can, or case, the title to which is vested in
another person, firm, or corporation, or which bears the trade name, trade mark or
designation of any other distributor. It shall be considered an unfair practice
for any distributor to sell fluid milk in bottles except in those on which there shall
be blown or otherwise noted M'^ords appropriately identifying the distributor, and
which bottles are sealed with caps bearing words appropriately identifying the
distributor. This paragraph shall not apply to milk sold in bottles bearing a
trade mark or designation registeted in the name of a local milk bottle exchange.

7. Solicitors. It shall be considered unfair practice to use any person as a
solicitor unless he is a regular employee of the company.

8. It shall be considered an unfair practice for a distributor to place a salesman
or driver on a route which within one year previously he had covered in whole or
in part for another distributor.

9. It shall be considered an unfair practice: for any distributor to sohcit or sell
milk or other dairy products either for himself or as agent for another, on any
route which within one year previously he had covered in any capacity for another
distributor.

10. It shall be considered an unfair practice for any distributor to sell milk or
cream o^^er the counter to the retail trade, other than at the retail prices provided
for in thfe order.

11. Except as otherwise provided in any general order of which this Standard of
Fair Practices may be a part, it shall be considered an unfair practice for any
distributor to sell whole milk to the retail trade in containers other than quarts
and pints, or to sell cream to the retail trade in containers other than quarts, pints
and half pints; but this does not affect bulk sales where not prohibited by local
ordinance.

12. Every distributor shall pay for all milk received by him during the month not
later than the 20th day of the following month. -

182

CONCENTRATION OF ECONOMIC POWER 183

13. Every distributor shall pay for all milk received by him by actual weight
and actual test.

14. No distributor receiving milk from a producer through an independent
milk hauler shall charge such producer a greater sum for hauling than that actually
paid by such distributor to such independent hauler.

15. No distributor shall sell milk to a peddler, whether the peddler is a person,
firm or corporation, if the peddler does not own or maintain a plant holding a
board of health permit for processing and bottling milk for distribution. This
paragraph shall not be construed to prevent a storekeeper from making delivery of
milk purchased at his store to the homes of the purchasers. This paragraph shall
not pertain to any peddler that was holding the necessary licenses on February 7,
1934.

APPENDIX B

EXCERPTS FROM FINDINGS OF FACT AS STATED IN
WISCONSIN MILK ORDERS AND AMENDMENTS '

Milwaukee Order, April 1, 1939

(Consumer prices)

The present schedules of consumer prices in these markets, not
having changed with a falling general market, are too far out of line
with the price levels in other and particularly competing foods.
This, together with a decreased consumer purchasing power, due to a
general economic recession, has reduced the volume of total and per
capita sales of fluid milk and cream. Meanwhile, the decreasing price
of canned milk, and a marked increase in the differential between the
price of canned milk and the price of fluid milk, together with the fore-
going factors, and larger margins to handlers on canned milk than on
fluid milk, has produced a large and steady increase in canned milk
consumption, largely at the expense of fluid milk consumption.

(Bootlegging)

.; These factors have produced also a growing volume of "bootlegging"
sales, below the ordered price schedules, particularly by producers in
outlying territory, and by producers and others in the downtown
wholesale trade, decreasing the effectiveness of enforcement and
threatening the stabilization of the market.

(Wholesale prices)

In addition to the foregoing, the present wholesale prices of the
higher test fluid cream have not met outside competition of certain
manufactured bakery products using considerable quantities of such
cream, and have resulted in the loss of a considerable potential volume
of sales by dealers in these markets.

(Prices to producers)

The differentials between the prices to producers resulting from the
orders in these markets, both fluid and composite, and prices to pro-
ducers in the condensery, creamery, and butter markets are too great.
These two large differentials are in part responsible for an increased
per farm production by the producers on the market and an increasing
pressure from other farmers to get onto the market, all tenduig to
increase the percejitage of surplus or manufactured milk and tending
to depress the average or composite price actually received by the

1 Public heatings are held under sec=. 93.18, 100.03, and 100.20 of the statutes of Wisconsin and from these
hearings the Commission makes its findings. Most of the excerpts reproduced here are also typical of other
market orders. The paragraph headings are not part of the orders.

184

CONCENTRATION OF ECONOMIC POWER lg5

producers under these two market orders, and to increase slightly the'
total supply of milk going into butter, cheese, condensery, and other
general milk markets, where the supply of milk and surpluses of manu-
factured products have a continual tendency to depress prices to
producers.

To in some measure meet and correct the foregoing, it is neces-
sary to make a basic reduction in the retail quart price of regular
milk from 12 to 10 cents, with similar reductions in other items of the
ordered price schedules in these two markets.

Beloit Order, May 1, 1939
(Consumer prices)

The present schedule of fluid milk prices to consumers in this
market, not having gone down with falling prices of most foods, is too
far Out of line with price levels in other and particularly competing
foods. This, together with decreased consumer purchasing power
due to economic recession, has had a depressing effect upon total and
per capita volume of sales. Meanwhile, a decreasing price of canned
milk, and a marked increase in the differential between the price of
canned milk and the price of fluid milk has resulted in canned milk
displacing consumption of fluid miilk.

The effect of present consumer prices of fluid cream in this market
has been to decrease and retard fluid cream consimiption during the
cheapened cost of other foods and the lessened consumer buying power
during the economic recession, with the attendant lessening of fluid
volume and decreased producer average price, with the same consumer
prices. The high producer price for fluid cream and cream milk are
especially inducive to the bringing in of cream from outside the
regular fluid market supply, further reducing the fluid percentage and
average producer price and presenting added problems of enforcement.

(Producer prices)

The differentials between the prices to producers resulting from the
orders in these markets, both for fluid and composite, and prices to
producers in the condensery, cream, and butter markets, are too
great. These two large differentials tend to encourage increased per
farm production and increased pressure of other farmers to get onto
the fluid market, all tending to increase the ratio of surplus to fluid
on the fluid market and to increase correspondingly the average price
to fluid market producers without reduction of the consumer price of
fluid milk. The encouragement to increased production necessarily
is reflected slightly in the volume of milk going into surplus or manu-
factured products, principaUy butter, cheese, and condensery, where
the supply of milk and surpluses of manufactured products have a
continual depressing effect upon prices to milk producers.

(Competition)

The conditions herein found tend to induce "bootlegging" sales by
nondealers at such low prices that a false consumer belief in the value
and needful price for fluid milk is created. This reduces the volume
of regular market sales of fluid milk and depresses the composite

186 CONCENTRATION OF ECONOMIC POWER

producer price. It also makes it increasingly difficult for licensed
fluid milk dealers to maintain in all instances the scheduled prices to
consumers, and cr3ates added enforcement problems, both as to
consumer price and producer prices. It is necessary to establish the
schedules of producer and dealer prices in the attached amendment of
the order for this market, to eliminate the unfair methods and prac-
tices recited in this paragraph.

(Assured dealer margins)

Assured dealer margin tends to attract additional capital into dis-
tribution and to protect its continuance there, and thus to increase
the ratio of investment and operations to volume and to increase the
per unit cost of distribution. Further so to cause increase in the per
unit cost of distribution, at this time as to further depress the price to
the producer would be an unfair method and practice. To eliminate
such method and practice, it is necessary to fix the dealer margin at
this time as it is established in the attached amendment to the order
for this market.

(Continuation of order necessary)

It has not been shown that the order can he revoked without an
immediate recurrence of the unfair and demoralizing methods and
practices that preceded the order. A revocation of the order would
be followed by an immediate recurrence of those conditions. It is
necessary to make the changes that are incorporated in the following
amendments of the order, to eliminate unfair methods of competition
and imfair trade practices in this market. It is necessary to retain
the order as so amended to eliminate unfair methods of competition
aiid unfair trade practices in this market.

Appleton Order, May 1, 1939

(Retail store margin)

The margin between wholesale and retail dealer prices on the basis
of 1 cent per quart is not sufficient to give either a comparable or an
adequate gross profit to stores, especially in view of the bulk of the
article, danger of breakage, necessity of refrigeration, and the margins
and comparably smaU handling costs of canned milk. This narrow
grocer margin reflects in lessened volume of fluid milk sold and in
more substitution of canned for fluid milk. It is not an unfair
method or practice to sell at wholesale on the basis of 1}^ cents per
quart below retail prices, as established in the attached amendment
of the order for this market.

Janesville Order. May 1, 1939

(Milk stands)

The present mgtrket area of the city of Janesville and territory
within a mile of the city has not been sufficient to prevent, under the
conditions herein found, a substantial volume of fluid milk purchases
by residents of JanesviUe from milk stands and farms outside the

CONCENTRATION OF ECONOMIC POWER ^gy

area, at prices based more upon the low price of milk for manufac-
turing purposes than upon fluid market prices, from uninspected
farms, and by unsanitary handling. These sales are unfair trade
practices in the Janesville market and the prices and practices are
unfair methods of competition. To prevent these unfair methods
and practices it is necessary to extend the market to include all terri-
tory within 5 miles of the boundaries of the city of Janesville. By
reason of the facts'^ recited in this paragraph, and the reduction in
consumer prices made in the attached amendment to the order for
this market, for both milk and cream, it is not necessary to retain a
special stand price to eliminate unfair methods and practices in this
market, but is necessary to establish in this market the same schedules
of retail and wholesale prices for all dealers to eliminate the unfair
methodsrand practices recited in this paragraph. To afford a reason-
able notice to the operators of these stands, this change should not
take effect until June 1, 1939.

Manitowoc-Two Rivers Order, September 1, 1939

(Outside competition)

An emergency exists in the Two Rivers area of the Manitowoc-Two
Rivers regulated market by reason of the unlicensed and ihegal selling
of fluid nulk in the area, just outside the city limits of Two Rivers, at
half order prices, the customers bringing their own containers. This
has been accompanied by much publicity of misinformation upon the
basis of fluid market prices, that has created considerable belief among
Two Rivers consumers that ©rder fluid prices are unreasonably high.
This has caused a large volume of purchases to go to the cut-rater
and has treated a condition damaging to the total volume of fluid
milk consumption. Pendency of legislation and other causes have
prevented early elimination of the illegal selling. To protect the
fluid market, and prevent unfair methods and practices that inevi-
tably will flow from the conditions described, it is necessary to lower
the resale prices of fluid milk in the Two Rivers area of the m'arket
for the time being to the basis of 8 cents a quart retail. This can
best be done by creating in that area a separate regulated market.
Reduction of the resale prices will necessitate a reduction of the pro-
ducer price for milk resold as fluid. The reduction made in the follow-
ing order absorbs a little more than half the resale reduction. Both
producers and dealers have indicated their acquiescence in the loss
this will entail upon them as a necessity in meeting the emergency and
protecting the fluid market.

Milwaukee- Waukesha Orders, August 16, 1936
(Feed costs make higher milk prices)

Beginning August 16, 1936, at 2 a. jn., the price of milk in Mil-
waukee and Waukesha will be 12 cent^ per quart, 8 cents per pint.

The current raise in the price of milk is made necessary by a con-
dition of emergency among the fanner-producers caused by the severe
drought this summer.

The cost of the feed necessary to the production of milk has doubled
in price during the last 6 weeks.

188 CONCENTRATION OF ECONOMIC POWER

The farmers in the Milwaukee and Waukesha area are receiving
all the benefit of this increase.

All Milwaukee and Waukesha milk dealers have been ordered to
make the raise in milk price and to deliver this statement to each home.

Columbus Order, June 1, 1938
(Outside cream at lower prices)

Comparatively little fluid cream is sold in this market. Very few
if any consumers in this market area are in the high income group.
Cream is not so much of a necessity as milk, and therefore they are
not willing to pay as high a price for butterfat in cream as for butterfat
in milk.

Some consumers go outside the market territory and buy cream of
comparatively high butterfat test, but of inferior quality, at prices
considerably below ordered minimum prices in this market, using it
in some cases for churning into butter for their own use, and in some
cases for restaurant and confectionery store purposes.

The price of butter for a number of months has been and still is
considerably lower than it was when the present cream prices in the
market order were established.

Reasonable minimum prices are: For coffee cream at retail, 40
cents a quart, and corresponding minimum prices for other classes,
other quantities, and at wholesale.

These reductions will make necessary corresponding reduction in
the producer price for butterfat sold as fluid cream. A separate price
should be estabhshed for this, and a reasonable minimum price is
52 cents a pound butterfat.

Racine Market, March 1, 1937
(Market conditions abnormal)

After due consideration of all the evidence submitted' at the recent
hearing and the information submitted by the auditor who made the
investigation of the market and the results of operations, the com-
missioners are of the opinion that the conditions and the results of
operations for the latter part of the year 1936 are not normal, due to
the unsettled conditions caused by the labor strikes. With men out
of employment for a considerable length of time, the entire market
area was affected. It is believed that the purchasing ability of the
many families involved directly or indirectly was such during that
period that sales were decidedly below normal. The unfavorable
results of operations resulting in many cases for the latter half of the
year 1936, it is contended, will not continue in the year 1937 because
the la'Bor disputes have now been settled and sales will accordingly
come back to normal or better.

The testimony at the hearing clearly showed that there has been
no reduction in the cost of producing milk since last summer. For
these and other good reasons the price arrangements of the order will
therefore be continued in effect until conditions warrant an amend-
ment.

CONCENTRATION OF ECONOMIC POWER 289

Beloit Order, January 13, 1933

1. That the people living in the city of Beloit and surrounding
community are concerned over the source and condition of their milk
supply. That through the agency of impure milk many diseases are
disseminated.

2. That the people living in the city of Beloit and surrounding com-
munity should be assured of a wholesome supply of milk.

3. That the producer supplying milk for a city market is put to
additional expcDse to put his premises in a sanitary condition. He
must use extra care in the handhng of the milk to keep it free from
contamination.

4. That the farmers who are producing milk for the Beloit market
are in such condition financially that they are finding it very difficult
to p&j their taxes and interest. That they are unable to repair their
premises or make needed improvem.ents about the farm.

5. That the cost of producing milk for the Beloit market is approxi-
mately $1.71 per hundred pounds and varies slightly up and down
from that figure on different farms.

6. That the producers furnishing milk for the Beloit market find it
necessary to regulate their dairy herds in such a way as to insure a
steady flow of milk into the market. That this, in turn, increases the
cost of production.

7. That the dealers selling milk on the Beloit market, because of
their financial condition, cannot sell milk at retail delivered for less
than 8 cents per quart without lowering the price paid to the farmers.

8. That there are too many dealers selling milk on the Beloit mar-
ket which, in turn, gives to each a small volume of business, duplica-
tion of routes, and a distribution charge of between 4 and 5 cents per
quart.

9. That the dealers buying at least 90 percent of the milk sold on
the Beloit market buy their milk from the Beloit local of the Pure
Milk Association at a price agreed upon at a bargaining conference
between the dealers and the directors of the local association. Until
recently there has been a market pool agreement. The producers
have now consented to an individual dealer pool agreement which is
more acceptable to the dealers than the market pool.

10. That a few dealers have refused to buy according to the agreed
plan and have purchased their milk supply in such a way and at a
price that will enable them to undersell the other dealers and disturb
the stability of the market. That this is particularly true in the
present depression.

11. That there seems to be no demand on the part of the consuming
public in Beloit for a lower retail price on milk. That 8 cents per
quart is a reasonable price to the consumer.

12. That under existing conditions the practice indulged in by the
dealers referred to in parag-aph 10 is an unfair method of competition
and an unfair trade practice, unde^ tl\e provisions of section 99.14,
Wisconsin Statutes. That under existing conditions, for all dealers to
buy their milk supply on the same plan and at the pricemot less than
that a^eed upon between the directors of the association and dealers
handling not less than 90 percent of the milk sold on the Beloit market
is a fair trade practice.

APPENDIX TO CHAPTER V

TABLES GIVING DATA ON MILK PRICES IN MILWAUKEE,

WIS. ^

Table I. — Classified milk prices to dealers, Milwaukee, Wis., by months, 1922-S9
[Dollars per 100 pounds]

MUk used for-

.an.

Feb.

Mar.

Apr.

May

Jime

July

Aug.

Sept.

Oct.

Nov.

Dec.

A. Fluid mUk:

1922

2.16
2.70

2.15
2.70

2.20
2.65

2.20
2.60

2.20
3.00

2.30
3.00

2.65
3.00

2 75

1923

"2."75'

3.00

1924

2.90
2.45

2.85
2.45

2.85
2.60

2.85
2.50

2.85-
2.59

2.85
2.50

2.45
2.50

2.46

1925 1

2.60

1926

2.60
2.90
3.00
3.00
3.15

2.6C
2.90
2.90
2.90
3.10

2.60
2.90
3.00
2.95
3.10

2.85
2.90
2.95
2.90
3.10

2.85
2.85
2.95
2.90
2.85

2.85
2.85
2.95
2.95
2.85

2.85
2.90
3.00
2.95
2.85

2.90
3.00
3.00
3.10
2.85

2.90
3.00
3.00
3.15
2.85

2.90

1927

3.00

1928

3.00

1929

3 15

1930

2.85

1931

2.50

2.60

2.50

2.50-

2.50

2.60

2.50

2,50

2.50

2.20

1932..

2.10

1.70

1.75

1.75.

1.75

1.60

1933

1.60

1.65

1.76

2.00

2. GO

2.00

1634....

2.00

1.90

1.85

1,85

1.85

2.08

2.30

2.15

1935

2.15
2.05

2.10
2.05

2.10
2.00

2.05
2.00

2.05
2.20

2.05
2.40

2.05
2.75

2.05
2.80

2 05

1936 .,

2.80

1937

2.71
2.71
2.71

2.71
2.71
2.10

2.71
2.71
2.34

2.71
2.71
2.40

2.71

1938

2.71

1939 --..

2.40

B. Manufactured prod-

ucts:

1922....

1.40

1.43

1.38,

1.26

1.33

1 38

1.43

1.76

2.09

2.44

2.65

• 1923.... -

'2.43"

2.24

2.11

1.90

1.73

1.69

i;79

2.00

2.19

2.25

1924....

2.14

1.99

1.79

1.41

1.36

1.49

1.45

1.38

1.39

1.43

1.67

1.69

1925 -

1.55

1.66

1.97

1.78

1.64

1.76

1.86

1. 88

2.09

2.29

2.31

2.25

1926 ---

1.97

1.91

1.84

1.68

1.70

1.69

1.65

1.71

1.83

1.94

2.09

2.26

1927... _

2.09

2.16

2.11

2.06

1.76

1.70

1.66

1.76

1.91

1.99

2.11

2.24

1928

2.04
2.00
1.39

1.97
2.09
1.39

2.04
2.03
1.45

1.84
1.86
1.44

1.80
1.76
1.29

1.79
1.76
1.24

1.84
1.71
1.33

1.94
1.75
1.53

2.01
1.85
1.55

1.98
1.82
1.52

2.09
1.70
1.33

2.11

1929

1.62

1930 -

1.17

1931 -

1.02

1.01

1.08

.89

.81

.80

.86

1.00

1.15

1.25

1.14

1932 -

.91
1.00

.81
.64

.81
.63

.69
.84

.60

.89

.55
.89

.56
1.00

.71
1.00

.73
1.00

.72
1.00

.82
1,00

1.00

1933

.75

1934

.77

.96

.88

.91

.95

.94

1.06

1.01

1.04

1.17

1.18

1935 -

1.32

1.44

1.27

1.33

1.04

.93

.96

1.00

1.08

1.31

1.44

1936 ..-.:..

1.49

1.57

1.38

1.31

1.16

1.27

1.46

1.60

1.57

1.46

1.48

1937

1.48

1..52

1.31

1.26

1.24

1.25

1.32

1.42

1.47

1.58

1938...

1.39

1.26

1.22

1.11

.99

.92

.93

.97

1.00

1939....

.93

.85

.77

.81

.86

.93

I.IS

1.28

1.40

C. Cream:!

1933 ---

1.00

1934 -.

■i.'62"

'i."2i'

"i.'2l'

'Uis'

'i."26"

"i.30'

'V.19

"i.'ii"

"i'se"

'i."39'

'i."62'

1.43

1935

1.57

1.69

1.62

1.58

1.29

1.18

1.21

1.26

1.33

1.56

1.69

1936

1.74

1.82

1.63

1.66

1.41

1.52

1.71

1.85

1.84

1.70

1.73

1937

1.73

1.77

1.56

1.51

1.49

1.50

1.57

1.67

1.72

1.83

1938

1.64
1.18

1.51
1.18

1.47
1.10

1.36
1.02

1.24
1.06

1.17
1.11

1.18
1.18

1.18
1.40

1.18
1.63

1.22
1.65

1.26

1939.-..,

1.65

D. Outdoor relief (fluid

milk):!

1932

1.37

1933

i.'37'

1.37'

'i.42'

"i.63'

"i.63"

"i."77"

"i."77'

"i.'77"

'i."77"

"i."77'

1.77

1934i>.

1.77

1.67

1.62

1.85

2.07

1.92

1935....

1.92

1.87

1.82

1936...

1.82

a. 77

1.77

1.97

2.32

2.62

2.57

2.67

2.57

1937

2.48
2.48
2.48

2.48
2.48
Z48

2.48
2.48
1.87

2.48
2.48
2.11

2.48
2.48
2,17

2.48
2.48
2.17

2.48

1938....

2.48

1939

2.17

S. All purpose weighted

ave^ra|e:

2.01
2.69

1.88
2.61

1.91

2.59

1.93
2.48

1.89
2.36

1.93
2.30

2.08
2.72

2.30
2.88

2.30
2.85

2.30
2.86

2.65
2.85

2.74

1923

2.78

Wisconsin State Department of Agriculture.
' Prior to December 1933. price same as for manufacttired milk.
I Purchases for this purpose began in December 1932.

190

CONCENTRATION OF ECONOMIC POWER JQl

Table I. — Classified milk prices to dealers, Milwaukee, Wis., hy months, 1922-89 —
Continued

[Dollars per 100 pounds]

Milk used for—

!. All purpose weighted
average —Continued.

1924.

1925

1926

1937

1928

1929

1930

1931............

1932

1933....

1934

1935

1936 ..:.

1937

1938

1939

Jan. Feb. Mar,

2.69i
2.17
2.41
2.66
2.74
2.744
2.53
1.88
1.55
1.27
1.47
1.80
1.83
2.19
2.26
1.88

Vpr.

May

2.19
2.20
2.38
2.41
2.49
2.435
2.11
1.68
1.25
1.27
1.42
1.60
1.64
1.99
1.85
1.45

July

2.265
2.28
2.455
2.464
2.62
2.505
2.25
1.85
1.23
1.46
1.40
1.58
1.83
1.95
1.76
1.48

2.445
2.33
2.595
2.636
2.80
2.631

l!95
1.23
1.45
1.59
1.59
2.10
2.08
1.82
1.64

Sept.

2.405
2.10
2.747
2.846
2.78
2.82
2.41
2.00
1.23
1.47

2.155
2.45
2.785
2.852
2.84
2.85
2.40

2.245
2.40
2.73
2.82
2.78
2.64
2.13
1.72
1.27
1.38
1.74
1.82
2.28
2.36
1.97
1.95

Table II. — Monthly average retail price of fluid milk (house deliveries), Milwauke
Wis., 1920-39 1

' [Cents per quart]

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Deo.

1920.....

13
10
9
10
11
10
10
11
11

12
10
9
10
11
10
10
11
11

12
10
9
10

10
11
11
U
11
12
10
9

9-
10
10
12
12
10

12
10
8
8
9
10
10
12
12
10

12
9
9
10
U
10
11
11
11
11
11
10
8
8
9
10
10
12
12
10

13
9
9
10
11
10
11
11
11
11
11
10
8
9
9
10
10
12
12
10

13
10
9
11
11
10
11
11
11

11
10
8
9
9-10
10
11
12
12

10
12
12
12
11

......

10-11
10
11
11

12
11
10
8
9
10
10
12
12
12
11

11
9
10
11
10
10
11
11
11
12
11
10
8
9
10
10
12
12
12'
11

1921

1922... -..

9
10
11
10
10
11
11
11
12
10
9
7
9
10
10
12
12
12

1923

1924

1925 ,

}926

1927

1928

1929

1930

12
10
9
8
9
10
10
12
12
12

12
10
9
8
9
10
10

12
12

1931.. . .

1932..

1933....

1934-...

1935.....

1936

1937

1938

1939

' U. S. Department o( Agriculture, Bureau of Agricultural Economics and Agricultural Marketing Serv-
ice: Monthly Fluid Milk Market Report.

Table III. — Daily average fluid milk consumption {including relief milk) , Milwaukee
Wis., by months, 1927-39 i

[Thousand pounds]

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

1927.,
1928.
1929-
1930.
1931.
1932.
1933.
1934.
1935.
1936.
1937.

I Wisconsin State Department of Agriculture.

192

CONCENTRATION OF ECONOMIC POWER

Table IV. — Daily average fluid milk consumption {excluding relief milk),
Milwaukee, Wis., by months, 1929-39 '

[Thousand pounds]

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1929

518
512
489
444
415
443
408
445
451
450
434

532
520
502
462
408
445
413
452
457
454
436

532
522
495
451
405
445
420
455
459
462
434

535

518
4S3
455
410
427
420
458
460
454
446

538
510
488
438
400
425
421
456
453
440
448

524
499
478
431
399
417
404
451
448
432
439

511
475
470
401
389
413
396
444
430
407
426

531

482
462
410
404
418
404
431
441
417
430

503
479
423
418
423
414
438
461
431
440

521
501
479
427
427
432
421
451
465
445
443

519
500
465
411
419
438
422
447
464
443
447

498

1930 - --

484

1931 .

419

412

407

413

1935

426

1936

449

1937

453

1938 -

441

1939... —

441

1 Wisconsin State Department of Agriculture.

Table V. — Index numbers of weekly pay rolls in manufacturing industries in the
city of Milwaukee, Wis., August 1929-December 1939 *

[Average 1925-27=100]

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1929

107.6
73.0
57.0
30.1
52.0
61.1
77.5
89.5

118.6
84.3
98.1

104.4
74.1
52.3
32.2
51.8
56.7
82.6
90.3

117.7
81.1
96.4

108.3
74.8
48.6
34.1
53.4
58.8
82.7

103.1

121.8
84.7

103.4

102.2
67.8
50.4
34.3
51.5
60.7
84.5

103.6

113.9
89.9

109.4

92.9

1930

88.7
59.6
44.8
30.2
49.8
67.7
84.5
104.6
87.6
. 88.8

93.1
62.5
46.8
30.3
53.6
73.4
81.2
108.2
87.2
95.4

96.6
66.1
45.6
27.7
58.6
75.2
87.0
118.1

97:0

94.9
67.7
40.7
34.8
59.7
78.5

123:0
84.6
94.7

90.7
66.5
36.4
38.7
64.8
77.2

120! 5
81.6
92.8

84.6
64.3
32.7
45.8
65.8
76.3
91.5
123.7
82.0
96.5

74.4
58.3
27.7
47.7
61.8
77.9
87.6
118.8
79.0
92.4

63.7

1931 ■-,-.

50.0

1932

31.6

1933.

1934

1935

1936.

1937

51.7

103.9
100.2

1938.

1939 -.

92.8
110.6

^'Published in month'v Survey of Current Business. Compiled by Statistical Department of Industrial
Commission of Wisconsin (not adjusted to the U. S. Bureau of Census data or for seasonal variation).

Table VI. — Index numbers of annual average retail prices of fluid milk, evaporated
milk, and of all food products, Milwaukee, Wis., 1923-39 »

[1923-25=100]

Year

All
food

Fresh
milk

Evapo-
rated
milk

Year .

All
food

Fresh
mUk

Evapo-
rated
milk

Percent
97.8
98.9
103.5
109.0
104.8
103.9
106.9
102.0
83.5

Percent
100.6
103.5

95.9
103.5
105.4
105.4
108.3
109.3

94.9

Percent
103
99
98
99
99
98
96
90
81

1932 1.—

Percent
70.4
68.3
76.2
81. t
84.9
89.4
82.8
79.3

Percent
79.6
81.5
90.1
95.9
103.6
115.0
116.0
104.6

Percent
70

1933...

1926

1934

1926

1935 --

1927

1936 -

1937 .,.

1938

19f6

1931

tJ. S. Department of Labor, Bureau of Labor Statistics Bulletins: -Retail Food Prices.

CONCENTRATION OF ECONOMIC POWER

193

Table VII.' — Dealers^ monthly average buying price for basic milk {3.5 percent)-
Milwaukee, Wis., 1920-39 ^

[Cents per quart M

Jan. Feb. Mar. Apr.' May June July Aug. Sept. Oct. Nov. Dec

1921.
1922.
1923.
1924.
1925
1926
1927
1928
1929
1930
1931
1932

' Computed from hundredweight prices obtained from Wisconsin State Department of Agriculture except
data for 1920 and 1921 from prices published in Fluid Milk Market Reports of Bureau of Agricultural
Economics, U.S. Department of Agriculture.

2 See table VIII for retail price of fluid milk (house deliveries).

' Hundredweight price divided by 46.5.

CHAPTER VI '

GOVERNMENTAL CONTROL OF MILK PRICES IN NEW
YORK STATE

In New York State, as in man}- other areas in the United States, the
governing body has in recent years attempted to regulate certain
phases of the purchase and distribution of fluid milk and cream. The
reason for this action lies in the economic distress of farmers and in
the vital importance of the dairy industry to the people of the State.

Milk prices are of tremendous importance in determining the
prosperity of farmers and of many rural communities in New York
State. Dairying is the major agricultural enterprise, normally
accounting for approximately one-half of the farm income. Seventy-
five percent of the milk sold from farms in this State was utilized as
fluid milk and cream in 1936. The remaining 25 percent, mostly
surplus from fluid mUk markets, was used for the manufacture of such
products as cheese, butter, ice cream, and evaporated milk.' On the
consumers' side the importance of milk as a food product, and as a
sizable item in the family budget, is generally recognized. Recent
public regulation of milk prices has, however, been promoted by farm-
ers and distributors rather than by groups interested chiefly in direct
protection of the consumer.

When the following conditions are observed it is not at all sur-
prising that there developed a strong interest in governmental con-
trol of milk prices. The farm price of milk dropped approximately
60 percent in New York State from 1929 to 1932. This decline was
much more precipitous than the drop in prices of most things farmers
buy. It was also more pronounced than the drop in an index of 30
basic commodities at wholesale for the same > period. Farm milk
prices in this State were as much as 30 to 40 percent higher than this
index from 1926 to 1931 (using 1910 to 1914 as a base period). By
early 1933 the milk prices had dropped below t^^ average of the 30
commodities, but they recovered sharply with the instigation of
milk control. From 1933 to 1938 milk prices in this State fluctuated
irregularly compared with the index of these other prices.^

The main market for milk producers in New York State is of cours-;
the New York metropolitan area. Other important markets such uf
Buffalo, Syracuse, and Rochester are known as up-State markets
Their main supply of milk comes from nearby producers located withiii
tlie State.

In 1930 the New York metropolitan area had a population of over
10,000,000 people, 78 percent of whom were Located in New York

J This chapter was written by MV. R. K. Froker: Helpful Information and suggestions were received from
Dr. R. L. Qillett, New York State agricultural statistician, from Director Kenneth F. Fee, and his asso
:iates of the State milk control division and from Dr. M. C. Bond and Dr. Leland Spencer of Cornell Uni-
v-ersity. Grateful acknowledgment is also made to H. Ralph Hitchner, graduate assistant, University of
Wisconsin for valuable aid in preparation of this report.

' Agricultural Statistician, New York Department of Agriculture and Markets.

' Bond. M. C, The Milk Marketing Situation in New York, (mimeographed) Cornell University, March
1938, 7 pp.

195

196 CONCENTRATION OF ECONOMIC POWER

State and the remaining 22 percent in New Jersey. The people in
this market area consume approximately 8,500,000 pounds of mi]k
daily as fluid milk, plus half again as much in the form of cream.
The fluid milk supply is obtained from an area that extends 500 miles
to the west and north. The production area includes primarily the
State of New York and parts of New Jersey, Pennsylvania, and
Vermont. Small amounts of milk come from other States and at
times some from the Provinces of Ontario and Quebec. In 1938
about 67 percent of the rail and truck receipts of milk in the New
York metropolitan area originated in New York State, 15 percent in
Pennsylvania, 12 percent in New Jersey, 4 percent in Vermont, and
th^emainder in other areas.

Or« of the basic features of fluid milk marketing in New York
Stat^ is this interstate character of the main market. This, as we
shall see, has had an important bearing upon the operations of the
State milk control laws and upon their course of development.

HISTORICAL DEVELOPMENT

Wicks Report.

The State's interest in the economic phases of dairv marketing goes
back nearly a quarter of a century. A joint legislative committee
was..-n.p pointed in 1916 to study alleged combinations and monopoly
of cealers and manipulations of prices of dairy products, poultry,
and livestock. The findings of this committee, which was headed by
Senator Charles W. Wicks, became known as the Wicks report.''
While no legislation on control of price or supply resulted from this
study it was, nevertheless, a forerunner to the development of more
comprehensive market information than had previously been afVailable.

About this same time the New York Legislature passed a law re-
quiring the purchasers of milk to furnish a bond to the State to
ip,ssure full and proper payments to farmers for milk. This measure
iias remained on the statute books ever since and is believed to have
been helpful in protecting payments to farmers.

Pitcher Report.

The dairy situation in New York State was again made the subject
of. investigation by a joint legislative committee in March 1932.
This committee was charged with the duty of investigating the
causes of the decline in the price of mUk to producers, the I'esultant
effect on the industry, and the future supply of milk. It was also
instructed to study the cost of distributing rnilk and the relationship
of such cost to prices paid to producers. The entire investigation
was to be made "to the end that the consumer may be assured of an
adequate supply of milk at a reasonable price both to producer and
consumer."

Tbe committee presented its findings and recommendations in a
473 p,age printed report which became known as the Pitcher report.*
The findings and recommendations of this committee were the fore-

* Preliminary Report of the Joiflt Legislative Committee on Dairy Products, Livestock, and Poultry,
State of New York, S. Doc. 35, February 15, 1917. A number of economic studies of milk marketing were
made during subsequent years by the New York State Agricultural Experiment Station, Cornell Uni-
versity, Ithaca, N. Y. The reports .of these studies include bulletins 445, 459, 473, 486, 518, and 527. In
addition, the experiment station has issued large amounts of mimeographed material dealing with milk
marketing.

• New York State Legislative Document (1933) No. 114, Report of the Joint Legislative Committee to
Investigate the MUk Industry. The committee was headed by Hon. Perley A. Pitcher, chairman. Dr.
Leland Spencer served as research director and editor.

CONCENTRATION OF ECONOMIC POWER 197

runner of ^Jresent day milk control in New York State and as such
deserves brief discussion here.

The committee concluded that the financial situation of farmers
in the State was desperate, and that the principal causes of extremely
[<>w prices to producers were (1) an unprecedented decline in the
^emral level of prices; (2) a periodic increase in the number of cows
. ,id in milk production; (3) unfair and destructive trade practices in
the distribution of milk; and (4) failure of transportation and dis-
tribution charges to be reduced in proportion to the reduction in
retail prices of milk and cream.® Of even more importance here is
the fiu-ther conclusion that "the fluid milk industry is affected by
factors of instability peculiar to itself which call for special methods
of control."^

To "mitigate the evd of price-cutting" three suggestions were made:
(1) universal application of the classified price plan with uniform
prices to all mdk dealers; (2) fixing of minimum resale prices; and (3)
tli(! imposition of a graduated tax on milk dealers at "t "ding to the
I»t r- (>utage of their entire supply disposed of as fluid mill and cream.*
Til. ;Taduated tax was intended not only to aid in eliminating price-
cuLtiug. but also to equalize the burden of surplus milk among dealers
and producers. No mention was made as to what use should be made
of the proceeds from this tax or as to what agency should levy it.

As an emergency measure the committee advised that "a temporary

milk control board be created with broad powers to regulate and

still )ilizG the milk industry as well as may be done under the circum-

staj I! (^s " ^ The implication seems clear that such action was intended

as a tuiiiporary measure and that only partial success was anticipated.

For permanent stability of the dairy industry the committee '
believed that universal^ application should be made of the classified
price plan and that surplus irdlk should be controlled by the pro-
ducers through effective cooperative organization. This was to be
done through a federation of existing cooperatives or by one large cen-
tralized organization.'" While cooperative organization was given
as the way to obtain stability, it was at the same time claimed "that
the dairy industry of the State cannot be placed> upon a. profitable
basis without a decided rise in the general level of commodity prices." "

Still other recommendations included (1) licensing milk dealers and
requiring regular reports from them; (2) securing ^drastic reduction
in basic freight rates on milk and cream; (3) enlarging appropriations
for completion of the program of bovine tuberculosis eradication; (4)
extending research and education; and (5) coordinating interstate
laws, rules, and regulations in the New York milkshed. The com-
mittee sponsored three legislative bills. The most important one
from the standpoint of this report is described in the next section.
The 1933 Law.

The first legislation for the control of milk prices in New York
State was enacted in April 1933, Its passage was the direct outcome
of the Pitcher report and efforts of the Joint Legislative Committee.
The bill also had the 'backing of several farm organizations and of
some milk distributors.

• Ibid. pp. 14-16.
' Ibid. p. 15.
» Ibid., p. 17.
» Ibid. p. 18.
"Ibid., p. 17.
» Ibid., p. 19.
; , 279348 — 41— No. 32 J5

198 CONCENTRATION OF ECONOMIC POWER

Under thi§ act a milk control board was created and given broad
powers to Supervise and regulate the entire milk industry of the
State.^^ The board was to consist of the Commissioner of Agriculture
and Markets, the Commissioner of Health and a director who was to
be appointed by the Governor. The board was to function as a part
of the State Department of Agriculture and Markets.

Specific powers granted the board include the following:

1. Power to investigate all matters pertaining to the dairy

industry as the emergency requires.

2. Power to subpena,

3. Right of entry and inspection.

4. Right to act as mediator and arbitrator,

5. Authority to institute legal action against violators.

6. Licensing of milk dealers including right of suspension and

revocation.

7. Requiring milk dealers to keep certain records and make

reports.

8. Fixing of minimum and maximum prices to be charged by

dealers at resale, i. e., at wholesale and retail.

9. Classification of milk_and fixing. of minimum buying prices to

dealers.
Of particular interest is the right to fix both minimum and maximum
resale prices, although in practice only minimum prices were fixed.
S^rtified milk and sales upon bids to the State, municipality, and
Federal Government were exempt from the act. Any dealer handling
only imadvertised milk in a city of over one million inhabitants was
permitted to sell fluid milk in bottles through stores at 1 cent dis-
count under advertised brands. This provision received wide pub-
licity and it caused no small amount of administrative and legal
difficulty since it tended to reduce' the sales of milk under nationally
advertised brands. ^^ Of further interest is the authority granted the
board to act as mediator and arbitrator in milk disputes among
producers and among dealers, or between these groups.

Immediately upon passage of the act the board was faced with the
problem of severe price competition among distributors in several of
the larger markets. Apparently some distributors were seeking, tOy
enlarge their sales in anticipation of State orders which would fix
the resale price of milk and thus protect their expanded operations.
Producers were also extremely dissatisfied with the low prices they
we rereceiving. In an effort to cope with the first of these problems,
the board established minimum prices to be charged for milk and cream
by distributors .to consumers, by distributors to stores, by. stores to
consumers, by distributors to other agencies, and by distributors to
other distributors. To cope with the second problem, the board
adopted a classified price plan as a basis for establishing minimum
prices to producers.

The first serious opposition encountered by the Milk Control Board
ii; the hew program came from a group of producers selling milk to
the New York metropolitan a,rea. A drought during the latter part
of Jim e, July, and August impaired pastures and reduced milk pro-
duction. On July 24, a group of producers headed by the Dairy

'■■ "Incluf'tog the productk.n, transportation, manufacture, storage, distribution, delivery and sale of
jnilk Bold milk products in the State" article 25, sec. 303, laws of 1933. .>

" The Horden Co. stated that it suffered a loss in sales of not less than 25,000 quarts of milk daily. Bor
den's Farm Products Co., Inc: v. Baldwin, ei ah, 293 U. 8. 194 (1934).

CONCENTRATION OF ECONOMIC POWER IQQ

Farmers Union (a producers' cooperative association in New York
State), demanded that the classified price plan be abolished and that
a flat rate of 45 percent of prices charged by dealers to consumers
'be paid for all milk produced. The board held hearings on the prices
paid producers but made no change in its classified price plan. Its
refusal to accept the proposed scheme resulted in a milk strike in
certain areas in the State which lasted from August 1 to August 15.
.Other difficulties encountered came from the complex nature of
the New York metropolitan market. Certf.in dealers purchased milk
from other States at prices below the :■ in'mum established by the
board. Evideirce was also found which indicated that in some in-
stances the board's price orders were evaded within the State by secret
rebates and elaborate schemes for falsifying records. The board also
encountered numerous jurisdictional disputes sinc^ its authority had
not been tested in the courts. In fact, this legal friction continued to
be a serious hurdle and definitely hampered effective administration,
at least until the summer of 1939.'*

The 1934 Law.

Just prior to the termination of the first milk control law a revised
law was adopted and made effective April 1, 1934. The price-regulat-
ing features of this law were to last for a period of 1 year. They
were, however, extended in 1935 and again in 1936 with only minor

The principal change in the 1934 law was in administration.
Another change of interest was the provision authorizing the estab-
lishment of production quotas to individual producers or classes of
producers providing such quotas were made applicable, pursuant to
Federal or State statutes, throughout all the States comprising the
New York milkshed. However, this provision was never used.
Market-wide pooling was also authorized for the first time in this
State by the 1934 law.

Under the' new law, a separate division of milk control was
created within the State Department of Agriculture and Markets.
Powers formerly granted to the Milk Control Board were now placed
with the commissioner of this department. It was further provided
that there should be in the division a milk advisory committee of from
11 to 15 members, a number of whom should be named from nominees
of specific producer and dealer organizations in the State.

The Division of Milk Control was given the task of administering
the provisions of the statute that dealt with the licensing and bonding
of milk purchasers which had been in effect for several ye&vs, as well
as the price-fixing features of the 1934 milk control law. It was felt
that the centering of these activities in one division would eliminate
some duplication and give a stronger and more unified administrative
organization to cope with the many problems encountered in attempt-
ing to control the rnilk industry. The personnel of this division was
made up of the stafip of the former Milk Control Board combined with
part of the staff of the former Dairy and Food Bureau of the Department

'* Among the issues to be tested in court were: (1) The fixiuf of retail milk prices by the State; (2) right
to Investigate the business of a dealer; (3) revocation of a dea'e; 's license under certain conditions; (4) fixing
of minimum prices to producers; (5) classification of milk; ( 1) fixing of prices at certain levels; (7) fixing of
differentials between 'Advertised" and "unadvertised" mi'.:; (8) limitations of "intra" and "inter" state
commerce as applied to milk; and (9) procedure, ju'dgmen' 8 id delegation of power In the administration
of the act. For a listing of the earlier cases and points con as ed under th6 New York milk control law see
appendix A, Report of Division of Milk Control for Year i9.;l, New York Depa;;tment of Agriculture and
Markets.

200 CONCENTRATION OF ECONOAT^n POWEB

of Agriculture and Markets. These combirind forces were divided
rougfly into three sections as follows: onf^. responsible for auditing
made necessary by price control activities; another responsible for
licensing activities; and the remainin?: section responsible for general
inspection and enforcement.

The general plan of price control which wn'^ ^^stituted dm-ing 1933
was continued by the ue^v division until "1937. During this

period a certain amount of oppositi^ .. .. (JyAlcrs ^v;^s encountered
in the form of evasion of ">fli. ial orders. There was also dissatisfaction
among certain producer ^ ips because )f the differences in prices.
These difficulties had already begun in 1023, but were accentuated as
the law was extended. Some producers were fortunate enough to
get the major part of their product in class I, whereas other producers
received lower prices because all or a large part of their milk fell into
classes where prices were considerably lower than the class I price.
Sales were not pooled on a market basis. In some cases, producers
formed cooperatives in order to evade the mUk orders by giving
rebates to dealers. The problem of out-of-State sales and out-of-State
purchases was also ever present.

Rogers-Allen Law.

On April 1,1937, the milk price control features of the State laws
were permitted to lapse. However, a new law commonly known as
the Rogers-Allen law b? . :;rrie effective on May 18, 1937. The unique
featui-es of this legislation are the provisions for the estabhshment of
bargaining agencies of producers and of distributors. This act
authorized incorporated cooperative associations of producers in. the
production area of a market to join 1^7 "ther and fotm a producers'
bargaining agency. It also permittei^ iiist,nb>.f -"s to form a distribu-
tors' bargaining agency in any marketing ufca.

The voting power in a producers' bargaining agency was made pro-
portionate to the nuuibcr of producers under contract in the respective
member associations aiu. approved by the board of health to sell milk
for consumption in the markot. In the distributors' bargaining
agency voting is in proportion to volume of mUk distributed in the
marketing area by the reci, :?tive member distributors in the form of
milk or cream.

The purposes of a producers' bargaining agency are briefly as follows :

(1) To negotiate agreements or the basis of orders for presenta-

tion to the commissioner for his consideration and approval.

(2) To appear before and negotiate with the commissioner in

regard to marketing agreements or orders.

(3) To serve as a common marketing agency for member asso-

ciations.
The first two purposes are also granted to a distributors, aining

agency. The third is not. Producers' and distributors' agencies
have the right "to meet and negotiate in order to carry out the piu*-
poses of the act alad subject to the approval of the commissioner."
It is also lawful for a producers' bargaining agency and a distributors'
bargaining agency operating in a given market to enter into n arketing
af'-eements as to prices to be paid by distributors to producers for
miik sold or otherwise utilized in the area. Such agreement n^ay
cover conditions affecting such sales and payments, including, reason-
able trade practices affecting the relations between producers and dis-

CONCENTRATION OF ECONOMIC POWER 201

tributors. The agreement is effective only upon the signing of all
persons who are parties thereto and upon filing a copy of the agree-
ment with the commissioner, who, in turn, may serve a complaint
on the parties if he believes the agreement results in monopoly, or
restraint of trade, to such an extent that the price of milk is unduly
enhanced by reason thereof.

Upon the recommendation of a producers' bargaining agency,
• representing not less than 35 percent of the producers in an area, the
Commissioner of Agriculture and Markets may hold a hearing and
promulgate an order fixing prices to producers on a market-wide basis.
Its issuance depends on the findings of the Commissioner and upon a
favorable vote of 75 percent of the producers.

If both the producers' and distributors' bargaining agencies request
the Commissioner ^^ he may hold a hearing to consider the advisa-
bility of making effective as an order for the whole market any appro-
priate marketing agreement made between the two agencies. Such
an agreement may include producers' prices, production quotas and
terms and conditions of sale. No provision is made in the Rogers-
Allen law for the fixing of resale prices at either wholesale or retail,
apparently because there was much opposition to resale price fixing
among consumers and handlers.

The bargaining agencies' formed under the Rogers-Allen law have
agreed on prices to producers on several occasions. It was not until
September 1, 1938, that a State order was issued under this act. The
order was for blie regulation of prices in the New York mistropolitan
area/^ and was issued concurrently with and was complementary to a
similar order made effective by the Secretary of Agriculture of the
United States." Under the provisions of these Federal-State orders a
classified price plan and a pooling plan were put into operation.
Producers receive a blended price for all milk sold to handlers in the
area irrespective of the use to which the milk from any one or any
group of producers is put. Differentials are, of course, made in the
blended price to producers to adjust for the location of the plant and
the butterfat content of the milk. Premiums over and above the
blended price are provided for grade A milk. These vary with
bacteria count and with the test of milk.

The combination of Federal and State orders eliminated sonie of the
problems encountered under the earlier State control legislation, but
the new arrangement was soon to face enforcement difficulties. The
Federal order covering the New York metropolitan area was suspended
as of ^Eebruary 1, 1939, pendiri^ judicial decisions involving its
validity. The Federal order was reinstated on July 1, 1939, shortly
after the United States Supreme Court had upheld the ordef.'^
Although the State order was not withdrawn during the period, no
attempt was made to enforce compliance.

The Rogers-Allen law was amended at several points in the spring
of 1939 by the "Nunan-Allen" law. This legislation broadened the
provisions for the equalization of market proceeds among producers
and authorized payments to milk dealers and cooperative associations
for services during periods of surplus or of shoifage of milk.

'• Ch. 126, Laws of 1934, art. 21, sec. 258-M, par. 5.

'• New York City, and the counties of Nassau, Suffolk, and Westchester, all in thcState of New York.

" Order No. 27 issued under authority of the Agrfcultural Marketing Agreement Act of 1937.

>• U. S. V. Bock Royal Co-operative Inc., et al., 307 U. S. 533 (1939).

202 COMCENTRATIOiN QF ECONOMIC POWER

Milk Strike and "LaQuarditt'' Agreement.

Still another distarbJ-ng- element in the troublesome New York
market i-as the calling of s. milk strike by the Dau-y Farmers' Union
in August 1939. The strike began on August 15 and lasted until
Aug t 23. At its height about 40 percent of the normal supply of
milk -was reported to have been withheld from the market. The
Dairy Farmers' Union was known to be opposed to governmental
price-fixing, and particularly to the classified system of pricing. This
association and the strike leaders demanded a fiat price of $2.35 per
hundredweight for all milk and several changes in the Federal and
State ordeJ« for the metropolitan area.

A conference was called by Mayor La Guardia of New York City
for August 21. After a 2-day session distributors agreed to raise the
prices for the main classes of milk by 15 to 40 cents per hundredweight,
bat the blended price was still under $2.15 and considerably short of
the flat price demanded by the strikers. The agreement was to last
untn October 31 unless superseded by higher prices under JFederal and
State orders for this market.

At the time of the strike, arrangements were already under way for
amendments to the Federal and State orders to increase the price of
milk. Joint hearings on Federal and State orders were held August
24 at Syracuse and August 25 at New York City. Amendments to
the orders were made effective October 1, 1939. The class I price
(fluid milk) was increased to $2.82 effective until May 1, 1940. This
price was 22 cents above the LaGuardia agreement price. Classes
II-A, II-B, and III-B were increased 15 to 20 cen-fs each and in line
with the LaGuardia agreement. ^^ No other important changes were
made in the orders by these amendments. The increases in price
were granted because of an alleged emergency due to a severe summer
and autumn drought over much of the production area.

EXTENT OF STATE CONTROL

Governmental control of milk prices in New York State in Septem-
ber 1939 was confined to the Niagara frontier area (E^uffalo) and that
part of the New York metropolitan area lying within the State of
New York. The New York market was under joint control of Federal
and State orders. The Buffalo market was under State control only.
Thtse orders deal only with the purchase of milk from farmers and
with the distribution of market proceeds among farmers. The ord^^rs
do not specify resale prices. State control over a few other marlets
was in various stages of development from the formation of producer
bargaining agencies and distributor, bargainmg agencies under the
Rogers-Allen law to the actual application for State orders.

It is to be remembered in this connection that for a time under
earlier control laws the production and distribution of milk throughout
the Stete was placed under State control. .

DECLARATION OP FINDINGS AND .'OLICY

In extending the regulatory power of the Stf te in 1933 to the field
of control of milk prices, the legislature made the following declaration
of findings and policy: ^°

" For definition of classes and formulas for determining the respective prices, see pi". 25 and 26.
'° Sea. 300, art. 25, ch. 158 of the Laws of 1933.

CONCENTRATION OF ECONOMIC POWER . 203

1. "This article (25) is enacted in the exercise of the police power of the State
and its purposes generally are to protect the public health and public welfare."

2 «* * * unhealthful, unfair, unjust, destructive, demoralizing, and
uneconomic trade practices have been and are now carried on in the production,
sale, and distribution of milk." These conditions were declared to "constitute
a menace to the health, welfare, and reasonable comfort of the inhabitants of the
State."

3. "In order to protect the well-being of our citizens and promote the public
welfare, and in order to preserve the strength and vigor of the race," the milk
industry in the State was declared "to be a business affecting the pubUc health
and interest." - .

4. "* * * the prodiicft-ion and distribution of milk is a paramount industry
upon which the prosperity of the State in large measure depends."

5. The disparity between the prices of milk and of other commodities was
looked upon as having "largely destroyed the purchasing power of milk pro-
ducers for industrial products, broken down the orderly production and marketing
of milk, and seriously inipaired the agricultural assets supporting the credit
structure of the State and its local governmental subdivisions."

In its declarations the legislature not only recognized the serious
economic condition of many farmers, but also made a bid for city
and public support for the control legislation which was to follow.
The danger to the public welfare was declared to be "immediate and
impending" and the need for public supervision and control to be
"urgent."

When the 1934 law was passed and whpn it was extended in 1935
and 1936, the legislative body declared that an emergency still existed.
However, by 1937 the emergency character of the statement of find-
ings had disappeared and the Rogers-Allen law was looked upon as
permanent control legislation!

ADMINISTRATION ^^

There have been three stages of development in the administration
of milk price control legislation in New York State. The 1933 law
was administered by a State Milk Control Board made up of the
Commissioner of Agriculture and Markets and the Commissioner of
Department of Health. A third member was, appointed by the
Governor and also made director. ,

In 1934 this set-up was abolished and a division of milk control
was established within the department of agriculture and markets.
This division was charged with the administration of the emergency
milk control law and, in addition, with the administration of other
dairy laws of State such as standards for milk and milk products,
licensing of plant managers and testers, and the bonding of milk
dealers.

Since the enactment of the Rogers- Allen law in 1938 two other
changes have taken place in the administration. One is in the func-
tions delegated to producers' and distributors' bargaining agencies for
the development of "conditions preliminary to the issuance of orders.
The other change is that the actual administration of orders for specific
market areas is carried on largely through the medium of local market
administrators who are appointed by the Commissioner of the Depart-
ment of Agriculture a'nd Markets. The administrator of the State

" See also section on "Historical Development," pp. 199-201.

204 ' CONCENTRATION OF ECONOMIC POWER

order for the New York market was given the following powers in the
order for that area.^^

1. To administer the terms and provisions of the order.

2.. To receive, investigate, and report to the Commissioner complaints of
violations of the order.

These conform to powers granted the market administrator under
the Federal order for this market. In fact, the Federal and State
agencies have appointed the same person to serve under both orders.
In addition to the duties prescribed in the State order for the market
administrator, he is required to comply with rules and regulations
designed to assure faithful performance of his duties.

Throughout the period of State price control the Department of
Agriculture and Markets has been closely identified with the adminis-
tration of this legislation and Kenneth ^. Fee of the Department has
served as director. This has given a degree of uniformity to policies
and practices in the administration that probably would not have
prevailed with a changing personnel.

STANDARDS OF OPERATION-

liegislatim Standards.

The State legislature in passing milk price control legislation set
forth a few broad standards for the guidance- of the administrative
body and others. These standards provide that^^ —

1. Prices shall be reasonable when compared with costs and charges for

producing, hauling, handling, processing and/or other services perfprmed
in respect to milk.

2. Prices when established for milk in the several localities and jUarkets of

the State, and under varying conditions are to be at a level that will best
protect the milk industry.

3. Prices shall tend to insure a sufficient quantity of pure and wholesome

milk to adults and minors in the State.

4. Prices shall be at a level which will be most in the public interest.

5. The Commissioner shall take into consideration (a) "the balance between

production and consumption of milk"; (6) "the costs of production and
• distribution"; (c) "and the purchasing power of the public."

These' concepts and instructions are necessarily subject to differ-
ences in judgment when applied to specific cases. It appears that
the^ have been looked upon as general guides by the administrative
body'rather than standards requiring careful interpretation and use.

The legislature set forth two standards for guidance in establishing
resale prices. The first was stated as the intent of the legislature
that the benefits of any increase of prices to dealers by virtue of the
minimum price provisions of the act should go to producers.^* The
second of these provided that "a minimuin wholesale or retail price
to be charged shall not be fixed higher than is necessary to cover the
costs of the ordinarily efficient and economic mUk dealers, including
a reasonable return upon necessary investment." ^* The first of these
was included in the 1933 law, but not thereafter, while the latter first
appeared in the' 1934 law. The general distribution margin (retail
price less class I price) was relatively narrow during the period of
retail-price fixing as compared with the margin existing prior thereto.

" Of^eial Order 126. art. 2, sec. 3, issued by tTie New York State Department of Agriculture and Markets.
2' Ch. 126, art. 21-A, sec. 258-m of the Laws of 1934. Legal standards were essentiaUy the same In milk
control laws of other years.
" Art.' 25, sec. 312, par. (c) ot the Laws of 1933.
" Art. 21-A, sec. 25»-m, par. (b) of the Laws of 1934. .

Fluid Milk Pri<

Chart XII
IS in New York City, 1922-39

■■.-■- T---Tn-T--1--.--TiTl-.-Ty^-T-f

>^13 I J9Z4 I ;»zf I ;9g6 I /92.7 I /9Z» I /9Z9

HOH8rHilliiilliHS>;lliini?t;illHUO

) ;93S-

/939

CONCENTRATION OF ECK)NOMIC POWER 205

(See chart XII.) Beyond this it is not clear how precisely these
standards were interpreted or followed.

It was required in all instances that public hearings should be held
at which any one could, present information and arguments for or
against an order or amendment before it was made effective. This
requirement is iiot only a method of procedure, but tends to serve
as a standard as well. The 1934 law provided for the establishment
of a milk advisory committee to be made up of representatives of
the main organized groups and others. The law required the Com-
missioner to confer with this conjmittee on proposed changes and no
order should be issued without an aflirmative vote of a majority
thereof.

The Rogers-Allen law contains essentially the same general stand-
ards of the earlier milk control laws, and is more exphcit in the pro-
cedure that shall be followed in developing an order. This procedure
involves certain standards. The initial action for an order under this
law must come in the form of a petition from a producers.' bargaining
agency representing not less than 35 percent of the producers in an
area or in the form of a request from both the producers' agency and
the distributors' agency asking that an agreement already made
between the two groups shall be extended into an order for the whole
market. Any such request or petition must allege the existence of
conditions necessitating regulation in the public interest and must be
necessary to the orderly marketing of milk.

, The Commissioner is required by law to hold a public hearing and
if ^he finds the alleged conditions to exist he may issue a price-fixing
order upon the approval of 75 percent of the producers supplying
milk to the market. Before extending a marketing agreement intO'
an order the Commissioner must find that the terms and conditions
of the agreement are fair, equitable, and in the public interest, and that
the agreement was fairly entered into without fraud.

Administrative Standards.

In practice, the administrators of the control laws in New York
State appear to have been guided not only by the broad legislative
standards, but also by information gathered at hearings, information
supplied by interested persons or groups, by custom, by costs, and by
the wishes of interested parties, particularly producers.

Consideration of the welfare of producers supplying milk to par-
ticular markets seems to have been' a major consideration. This has
has been exemplified in the level at which the prices have been set
from time to time in other ways. For example, poor pastures and
local feed conditions were given as cause for rise in the price of class
I milk in July 1933. Similarly, drought conditions and increased
cost of producing milk were advanced as reasons for increases in the
^rice of milk in the fall of 1936 and again in 1939. When railroad
rates were reduced in July 1983 by the equivalent of 7}'2 cents per
hundredweight of mdk from the 200-210 mile zone, the board ruled
that this saving in transportation costs should go to producers.
Transportation allowances to dealers were, however, already liberal
since they were based upon less than carload lot rail rates and much
of the milk was transported in carlots and in tank trucks, no doubt
at lower cost.

Competitive conditions were, of course, the principal standard i^ped
in determining prices for milk used for products such as butter

206 CONCENTRATION OF ECONOMIC POWER

cheese, and evaporated milk. Distributors had to sell these products
in competition with similar products from other areas. The cost of
receiving and manufacturing milk into these products was a necessary
coroUary for consideration in determining prices to producers-.

Distribution costs came in for much discussion during the period
in which resale prices were established by order. Just how much
weight was given to this standard is not easily determined. How-
ever, it was recorded ^^ that increased costs of supplies in the summer
of 1933 and an anticipated wage increase under the N. R. A. program
were presented as necessitating a rise in distributors' margins. On
July 21 the board increased the resale price of milk by an amount
equivalent to about 47 cents per hundredweight (1 cent per quart or
46.5 cents per hundredweight). The board allowed distributors 12
cents of this increase, the other 35 cents went to producers.

In determining the number of classes into which milk should be
divided the board was faced with many possible standards. ^^ From
the standpoint of ease of accounting the fewest possible number of
classes is obviously desirable. From the standpoint of the greatest
possible return to producers it is probable that one class of milk for
each use would be preferable to almost any' other number. This
naturally would permit maximum adaptation to the competitive con-
ditions and to the elasticity of demand in pricing the milk. Legis-
lative-standards did not establish the basis for determining the num-
ber of classes or for determining the price for any particular class of
milk. The board appears to have been guided to a considerable
extent by the practices in the market, in the metropolitan area
especially by the sales practices of the Dairymen's League Coopera-
tive Association, Inc. This association, with a membership of
35,000 farmers, is the largest producers' milk marketing agency in
New York State. It is not only a large operator of country plants
and a bargaining agency, but it is also a large distributor of milk and
Scream.

^ It is, of course, possible to classify milk in other ways for pricing
purposes. The place in which a product is sold may be a basis for
classification as well as the form in which it is sold. This method was
followed to some degree in the orders for the New York market.
Milk sold in fluid form was called class I milk if it was sold in the
metropolitaii area, but was unpriced when sold outside this area.
Milk used in the manufacture of ice cream was placed in one class if
sold in New York City and another if the ice cream was sold outside
this area. ^ The same practice prevailed with respect to fluid cream
sales outside of the sales and production areas.

The explanation' usually given in justification of thpse 'double
standards of classification is that other markets do not have as rigid
quality requirements and that competitive conditions necessitate a
lower scale of prices if sales are to be made in these markets. On the
other hand, this type of pricing is sometimes looked upon as a form of
"dufiiping" since the same grade and form of product is accoilnted for
by the same company at lower prices when sold in outside markets
than when sold in the controlled area. Moreover,. the Federal-State
orders for the metropolitan area take no accoimt of the varying condi-
tions which may exist with respect to quality or price among these

MUeport of Milk ControrSoard 1933, p. 5.

« The first and second of these are presented in the Annual Report of the Division of Milk Control for
theyearl936, p. 13. '

CONCENTRATION OF ECONOMIC POWER 207

"outside" markets. The presence of unpriced milk among handlers
operating under these orders makes for cumbersome administration.
Difficulties arise because it is impossible to enforce the payment of
specific prices to producers unless such prices cover all milk handled
or miless the unpriced milk is purchased and handled entirely sepa-
rately from that which is regulated.

In determining transportation allowances to distributors shipping
milk' and cream to the metropolitan area two sets. of standards have
apparently been used. Earlier allowances for class I milk (1933-34)
were based on less than carload lot rates of^ 40-quart cans, ^yhile
these allowances under, the Federal-State orHers in 1938-39 were
based on carlot rates. It is not clear to what extent the transportation
allowances for different classes of milk represent the actual costs to
distributors under either of these standards. In the case of fluid
milk (class I) it is Imown that from 1933 on over a third of the total
has been transported in tank trucks rather than by rail, and very
likely at lower costs.

In establishing differentials in payments for milk to producers the
class I differentials (freight allowances for class I milk) were" applied
to all milk. This is in line with the custom in the market prior to
State control.

Payments of from 1 to 5 cents per hundredweight of mUk are made
to certain cooperative associations out of the producer settlement
fund under the Federal-State orders for the metropolitan area.
Likewise, mark'et service payments are made from this fund to
handlers under certain conditions when milk is diverted from fluid,
milk to manufacturing chamiels, and also when milk ordinarily used
for manufacturing purposes is diverted into fluid milk. Payments
from the producer settlement fund for either of these purposes has
no precedent in .other State or Federal orders. It has, however,
since been used in the State order for the Niagara frontier market
(Buffalo) and is permitted under the recently enacted Nunan-Allen
law in New York State. The market service claims were the equiv-
alent of 5 to 11 cents per hundredweight on all milk coming under
the Federal-State Orders from the metropolitan area. On that mjlk
for which these payments were made it has averaged about 33 cents
per hundredweight. These payments are deductions from the speci-
fied prices which handlers are obligated to pay. Consequently they
are also deductions from total payments to producers.

In the earlier orders market prq^eeds were distributed among pro-
ducers on a distributor pool bafeis. Producers delivering to each
distributor received a blended price which was determined by the
receipts and uses of milk of that particular distributor. In the case
of cooperative associations producers were paid a blended price
based on all receipts and sales of the cooperative. The control law
permitted pooling to the extent that it was found sto be practicable
in its application.

In the orders for the metropoJita,n area, and for the Niagara frontier
area (Buffalo) which was issued in 1938 and continued in 1939, pro-
-ducers were paid on a market-wide pool basis. In this way each
producer recei'^ed a blended price for his -milk based on the total
receipts and uses of mUk for the entire market.

The standard us^d in issuiijg or denying permits to new producers ,
seems to have been one- based on the supply of milk in the market.

208 CONCENTRATION OF ECONOMIC POWER

If additional supplies were needed for fluid milk purposes, new pro-
ducers were admitted— otherwise permits were denied. Actually
the department of health issued the permits, but before issuing any
to new producers it was required in practice, and first authorized by
the State act of 1935 to prove to the commissioner that there was a
need for such milk. ^^ The volume of milk on the market was a condi-
tion for denying permits to new producers even in the autumn of 1939,
but it did not keep the commissioner from raiding the price due to
drought and to the demand of producers already on the market.

Licenses to persons wishing to engage in the distribution of mUk
have been denied in a number of instances on the basis that more
distributors would duplicate facilities for the processing and distribu-
ting of milk and thus tend to increase distribution costs and margins. ^^
For example, during 1934 there were 55 hearings given to prospective
new distributors on their applications for licenses. Forty-one of
these applications were denied outright and licenses were issued to
the remaining 14 cases. Most of these newly granted licenses were
issued to persons taking over the business of some established dealer
who at the same time was retiring from the field.^° The granting of
these new licenses was therefore looked upon as not increasing the
number of distributors and not adding to the duplication in the dis-
tribution of milk.

CONTROL DEVICES

Price control of milk Was adopted as a means of accomplishing the
broad objectives of the milk control laws discussed earlier in this
report. In order to control prices to these ends, it was necessary to
utilize some of the control devices permitted by the acts. Federal
and State. The most important of these, as used in New York State,
are described briefly in this "section.

Public Hearings.

Public hearings have been used throughout the entire control
program as a means of securing pertinent information as well as for
the purpose of permitting interested parties an opportunity to be
heard. These hearings have enabled the control authorities to keep
in close touch with the reactions of these groups to the program and
to obtain a considerable volume of helpful information. Eighteen
public hearings were held during the first 10 months of the control
program.^^ From April 1 to Decemlser 31, 1934, a total of 151 formal
hearings were held. In addition, hundreds of inforrtial hearings were
held in which individuals were subpenaed for questioning. Other
hearings involved orders or amendments thereto, and violations of
orders.^^

Official Orders.

Official orders issued by the control authorities have been the
device used to inform distributors and others of the prices specified
by the control autliorities and the rules and regulations pertaining to
such prices. During the first stages of control, April 1933 through

» It is to be remembwed in this connection that a new producer means any person wishing to sell milk
on a regulated fluid milk market whether such person is Just beginning in the dairy business or whether
he has been In the business for some time and selling to some other market.

» Report of the Dlvisfon of Milk Control for 1934, p. 110.

«>0p.clt.

" Reports of the Milk Control Board for 1933, appendix A.

M Report of Division of MUK Control for 1934, p. 109.-

CONCENTRATION OF ECONOMIC POWER

209

March 1937, these orders fell into five general classes, namely, (1)-
orders fixing prices to producers, (2) orders fixing prices to consumers
in the metropolitan areas, (3) orders fixing prices to consumers in the
up-State areas, (4) orders fixing dealer- to-dealer prices, and (5)
miscellaneous orders, requiring the keeping of records, the filing of
reports, etc. All told, 121 oflBcial orders were promulgated up to the
end of the fiscal year 1936.^^

When milk control in the metropolitan area c .nr under both State
and Federal jurisdiction in 1938, both govemnxental agencies issu^
orders concurrently and each order covered all phases coming under
control rather "than having different orders for different phases. This
same practice was then adopted by the State as a policy for other
markets.

Establishment of Market Areas.

By means of this device, areas in which different conditions exist
can be designated as separate marketing areas. Orders are then
issued which apply specifically to individual areas.

When milk control was first adopted in New York, the State was
divided into two basic areas, namely, the metropolitan ai-ea and
another covering the other incorporated cities and villages of the
State having a population of 1,000 inhabitants or more. The latter
area was gradually redivided into smaller areas such as cities and
counties. Individual orders were at times made to apply to several
of these smaller .areas on the basis of their proximity and an the basis
of the similarities of their marketins: conditions.

Milk Classification.

Another device used for the purpose of increasing returns to pro-
ducers was that of milk classification according to uses. In the metro-
politan market fiine classes of milk were recognized, except for the
brief period from September 25, 1936, to March 31, 1937. During
this period the number was reduced to six. Although nine classes of
milk were specified for most of both control periods, the definition of
certain classes was not identical throughout. The number of classes
applicable in up-State markets was somewhat smaller than for the
metropolitan area. The classification used in the metropolitan area
in 1939 and the products covered are briefly as follows:

Class use

Price per

100 pounds

milk. July

1939 »

Products covered

$2.00
l.fiO
1.355

1.265

1.631
.931

.906

.831
.937

Fluid milk.

II-A _:.:

n-B

Fluid cream.

Plain condensed milk, also frozen desserts or homogenized

m-A

mixtures sold in New York City.

m-B ,;

chocolate milk, milk powder, ^malted milk powder, and
cheeses.
Cream for storage

m-o ""

Frozen desserts or homogenized mixtures sold outside of

ra-D .

New York City.
Cream cheese and fluid cr -Bin sold outside the marketing and

JV-A ....

production areas.

IV-B

** Dealers' buying price for 3.6 percent milk delivered from produ jr; at plants in the 201-210 mile rone.
The average price of 92-score butter at whdesale in New York Cif v s 23.8 cents per pound during this
month. I .

» Report of Division of Mjlk Control for 1934, p. 11.

210 CONCENTRATION OF ECONOMIC POWER

The orders specify the price for each class of milk or give a formula
for determining the price. In the first period of milk control prices
for five of the nine classes of milk in the metropolitan market were
arrived at on the basis of formulas. These were built around the
prices of the milk products at wholesale in the open market. Thus
the formula prices were fixed only in their relationship to the prices
of '' ich products as butter and cheese and went, up and down with the
^ ices of these products. Prices of milk used^in the four remaining
classes were fixed in amount by the control authorities and were
changed only by amendments or new orders.

In the second p».ir ' of milk control, 1938-39, prices on all nine
classes were based >o ^ome extent upon formulas,^^ except that an
amendment effective November 1, 1939, specified that the class I
price should be not less than $2.82 per hundredweight and that the
class II-A price should be not less than $1.90 until May 1, 1940.
This change in method of arriving at prices was made to meet an
alleged emergency condition among producers and is presumably of a
temporary character. It may be noted that the prices for the respec-
tive classes of milk in July, 1939, ranged from $2 for class I to 83 cents
for class IV-A. These are prices at country plants within the 201-210
mile zone for mUk as delivered from producers.

Price Equalization.

Price equalization amei^g producers on a market-wide basis was not
used in the milk control program in New York State until 1938.
Under provisions of earlier orders, prices were equalized on a dis-
tributor or cooperative association basis. That is, all producers
delivering to a single distributor or cooperative were paid uniform
prices. But such prices were not uniform among producers delivering
to different distributors unless such sales were pooled by a cooperative
such as the Dairymen's League.

Pooling of market proceeds is a useful device for equalizing market
opportunities and market burdens among producers. It is par-
ticularly necessary where milk is sold on a classified price basis and
sales are not uniformly distributed. Without such a device there is
likely to be considerable dissatisfaction among producers as would
be the case where neighbors sell the same quality of milk on the same
market but receive different prices.

Resale Prices.

Resale prices were established in the first period of milk control,
1933-37, for the stated purpose of maintaining orderly marketing and
protecting prices to producers.

Through this device resale prices were fixed for fluid milk and
cream in different size containers and somewhat according to service
rendered. Since these dairy products are^ commonly sold either by
direct delivery to consumers or through stores to consumers, it Was
considered necessary lot only to fix wholesale prices for each kind,
size, and grade of product, but also to fix two sets of retaU prices
depending on whether the sales were made direct to homes or through
stores,'^ Certain exemptions and special provisions were made on

3s When the wholesale price of butter in New York City averaged between 20 and 24.9 cents per pound,
the class I milk was priced at $2 per hundredweight from April through July and $2.25 from August through
March. In general, for each 5 cents variation in the butter price, the class I price changed 20 cents per
hundredweight. The price of class II milk was usually from 35 to 75 cents under the class I price.

8« The toual differential between home delivery and store sales was 1 cent per quart of milk and 1 cent per
half pint of cream. Unbottled milk was sold for a time through stores at 1 to 3 cents per quart below the
price of bottled milk. . .

CONCENTRATION OF ECONOMIC POWER 211

sales to charitable organizations, relief and Government agencies.
The important point to note here is that the setting of these prices
was intended as a means of helping producers. The general standards
used in arriving at these prices have been described earlier in this
report under "Operating Standards." The fixing of resale prices for
milk products was abandoned with the expiration of the milk control
law on April 1, 1937. Later legislation of this type did not include
provisions for fixing wholesale and retad milk prices.

Licensing and Bonding.

The licensing and bonding of persons m the dairy industry, is not
new in the State of New York, However, with the developnaent of
milk price control legislation these devices took on new significance.

The licensing power was extended with the mdk control program to
embody all imlk dealers. It became a device for bringing about
compliance with orders issued under this and subsequent control
laws. It was also a means of raising revenue.

Direct appropriations were made annually by the State for the ad-,
ministration of the mUk control law. Annual license fees .were, how-
ever, designed to reimburse the State for these expenditures. The
license fee for regular milk dealers was graduated in amount from
$25 for a dealer receiving not over 4,000 pounds of milk per day to
$5,000 for one receiving over a million pounds per day. The fee per re-
tail store handling mUk was $3. These were the most important fees
from the standpoint of revenue. The .store license 'and store fees
were not made applicable at the beginning and were discontinued in
1937 when the fixing of resale prices was abandoned.

The revenue from regular milk dealer license fees totaled $155,000-
and from store license fees $107,000 during the fiscal year 1935-36.
These sums together with receipts from miscellaneous sources include
Lng penalties practically offset the expense of admiuistering the milk,
control law."

Under th^ program inaugurated in 1938 the local administration is
financed by a charge per hundredweight of milk and is paid directly
to the market administrator. In the New York area tins amount is
paid by distributors and is in addition to the prices specified in the
order. In the Niagara frontier area (Buffalo and Niagara) this pay-
ment is made out of deduction from payments to producers.

The bonding of milk dealers was broadened in the 1934 law to per-
mit the commissioner to require that dealers furnish bond for protec-
tion of cooperative associations and other mUk dealers from whom
mUk was purchased. This device has not been used as a means of
enforcing nulk control orders, but rather as a means of insuring pay-
ment to producers for milk dehvered and payment to producers' co-
operatives. With a few modifications the bonding requirements have
continued in force. Securities totaling well over $2,000,000 are fur-
nished annually. These ^re in the form of surety bonds, treasury
bonds, and depository agreements.

Inspection and Auditing.

When reports are made having so much financial iinportance as
those required of milk distributors it is essential that some system be
developed to check their accuracy periodically. This is done imder
the milk control program largely by means of inspection and audit-

»' Report of the Division of Milk Control for 1936, p. 22.

212 CONCENTRATION OF ECONOMIC POWER

ing of dealers' operations, records, and accounts. Auditing is clearly
important for effective control and even for assuring equitable price
relations between distributors themselves. During 1935 the number
of milk control investigators was increased from 33 to 41 and the
number of milk account exammers (auditors) from 9 to 17.'*

With the discontinuance of resale price fixing in 1938 the work of
investigators has been greatly lessened. Auditing, however, will con-
tinue to be important as long as milk is sold on a classified basis.

RESULTS OF MILK CONTROL

One cannot appraise the milk control program in the State of New-
York without bearing in mind the conditions under which the program
developed, the changes in the law, its administration, interruptions,
legal uncertainties, etc. Certainly a uniform program continued over
a 6-year period might produce quite different results than those
which have occurred under the ever-changing program that has been
described for the period of 1933 to 1939.
Effect on Dealers' Buying Prices.

In the initial stages of milk control the program was clearly instru-
mental in raising dealers' buying prices and, in turn, prices to pro-
ducers. The first order pertaining to dealers' buying prices became
effective May 16, 1933. Minimum prices for class I milk were fixed
at $1.88 per hundredweight of milk testing 3.5 percent butterfat,
purchased in the 200-210 mile zone. This was an increase of 60
cents over the price prevailing just prior thereto.'* The class I price
was increased by another 7K cents on July 1, 1933. The occasion was
a decrease in railroad rates on milk shipped to New York City.
Drought conditions in the latter part of June and during July were
alleged to have seriously impaired pastures and reduced milk pro-
duction. Primarily because of this condition the class I price was
again increased by 35 cents on July 21. This brought the total price
rise up to $1.02^ per hundredweight in a period of a little over 2
months. Prices were also raised on some of the other classes of milk,
such as milk for fluid cream and for ice cream. Some of the increase
in prices was to be expected because of the abnormally low prices
prevailing at the time the program started and might have come
about without the aid of price control. , However, it is safe to sav that
much of it was due directly to official orders issued under authority
of the milk control law.

After 1933, the effect of the control program upon dealers' buying
prices is not as clear. The improvement in general business, and
changes in other conditions as well, make it impossible to give a
satisfactory estimate of the net effect of milk control. Moreover,
consid^able violation was reported in dealers' buying prices and no
accurate measurement could be made of this factor.

The trends in dealers' reported buying prices for class I mUk in
the metropohtan and Buffalo markets are shown in appendix to
chapter VI, tables I and III, and in charts XII and XIII. These
reported prices may contain considerable error, particularly during
the latter half of 1936 and the first part of 1937.*° Aside from this

«> Report of Division of MUk Control for 1936, p. 119.
- I gffi ffinTxiTlTow SaL^ersn-uying prices in September 1936. The class I price was
increased in the orders for those markets, but there was apparently httle compliance.

Chart XIV
Prices Paid to Farmers ii Jew York Milkshed for Milk by Sheffield Farms, Inc., and by Dairymen's League

I I I I I I I I I I I t I ■ I U \ LL__J

CENTS PER
QUART

I 8

I 2

I 0

Chart XIII
FFuid Milk Prices in Buffalo, N. Y.,

tlUliiitUitiiiiU^tUtUiniiiUittiittUiUUiiittiUt^itnifUit

/<>AO [^ /5Z.I [ )9t.z. I 79Z.3 [ f»;t^ I ;9Ji,5 [ )9;;6 [ /»i.7 [ I'9i9 | 19x9 \ i»30

/93i '933 /9J+

J93* '9J6

iniiiMf ii

937 '938 '939

CONCEl^TRATION OF ECONOMIC POWER 213

period the charts are believed to represent the general movements of
these prices. After State control had gotten well under way there
was little change in the reported price of class I milk to dealers for
nearly 3 years. This represented more stability in buying prices than
in any other period of equal length in the past 25 years or more.
However, it is to be noted that while this price was being maintained
at a given level, dairy prices generally were rising.

Wlien price control ended early in 1937 the class I price in the
metropolitan area is shown to have turned very irregular, first dropping
sharply then recovering only to be followed by another drop.

The issuance of the State and Federal orders for the metropolitan
area on September 1, 1938, again resulted in substantial increase in the
dealers' buying prices as evidenced in chart XII. The prices are
reported'' to have declined precipitously when the Federal order was
suspended early in 1939, although exact prices are not available..
With the reinstatement of this order, after the favorable United
States Supreme Court decision,*^ the buying prices again rose. Still
further rises occurred as a result of the LaGuardia agreement and,
amendments to the State and Federal orders.

In the Buffalo market (chart XIII) the class I price followed much
the same course as that described for the metropolitan area. The
principal difference is that it dropped less in 1937, but more in the
summer of 1938.

Effect on Producer Prices and Production.

The dealers' buying price for fluid milk is, of course, only one of
several factors influencing the average price to producers. The
proportion of milk used for each class and the price thereof, combine,
to make up this average price. Thus not only price but also produc-
tion and sales are important in determining average prices to producers.

The prices paid producers monthly for all milk by the Sheffield
Farms Co., Inc.,*^ and by the Dairymen's League are shown for a 19-
year period in appendix to chapter VI, tables V and VI, and in chart
XIV. These two firms receive milk from the majority of producers
supplying the market and are believed to be a fair indication of the
usual prices paid in the area. The average prices paid for milk at
condenseries in the United States are also indicated in appendix to
chapter VI, table VII, and in chart XIV. This series was chosen as
a basis of comparison since it was available for the entire period and
since class II-B and class III-A prices in present orders for the metro-
politan area are based directly on average prices paid at nearly a
score of condenseries in the Midwest. It is not intended that this
series of prices will indicate what the price relationship ought to be,
but will merely show what the trend has been over a period of years.

It will be noted that the premiums over the condensery price
(shown in table VIII and chart XIV) have been very irregular in size
and have a considerable seasonal factor. It will also be noted that
under the first period of St?ate control, 1933-37, there was less seasonal
variation in these premiums and thfere^vas a general downward trend
in premiums by t^e league over condensery prices. ^^ During this
period condensery prices were tending upward. There was a sharp
rise in the premiums paid during the latter part of 1937, apparently

« V. 8. V. Rock Royal Cooperative. Inc., et al., 307 U. S. 533, 1939.

« The SheflSeld Farms Co., Inc., is the largest fluid milk distributor in the New York metropolitan area
and is a subsidiary of the National Dairy Products Corporation.

279348 — 41— No. 32- 16

214 CONCENTRATION OF ECONOMIC POWER

due in "part to agreements between producer agencies and distributor
agencies under the Rogers-Allen law. This premium disappeared by
the middle of 1938. Shortly thereafter, September 1, 1938, the
Federal-State orders were issued for the metropolitan market. It
will be; noted again that the premiums completely disappeared in
early summer of 1939 — in fact the average prices of the league were
as much as 20 cents under condensery prices in 1 month. Still another
change which may be observed is that the Sheffield and league prices
have been brought together since the inauguration of the market-wide
pool of Federal-State orders, while formerly there was considerable
difference in these prices.

The effect of price control on the production of mUk in New York
State is difficult to determine. Total milk production in the State
decreased from 1931 to 1935. (See appendix to chapter VI, table IX,
and in chart XV.) This decrease was particularly apparent from
1933 to 1934. It should be noted that the change in production was
roughly proportional to the change in the number of cows and heifers
of milking age. The causes for this decrease in cow numbers and in
production and their subsequent rise are probably numerous." The
probable effect of milk control upon production is more apparent when
production data are confined to producers supplying the metropolitan
area.^ Such data indicate a rise in production per dairy (farm) per
day of fully 30 pounds or about 15 percent from 1934 to 1939. But
here again mUk control may be only one of several factors. However,
relatively high milk prices would appear to have been a very important
factor in the increase in milk production per dau-y during the fall and
winter months of 1939 following a severe drought in much of the pro-
duction area supplying the metropolitan market.

Interstate Character of Supply.

The four States — New York, Pennsylvania, New Jersey, and Ver-
mont (in order of importance) — 's^hich furnish nearly all of the supply
of milk to the metropolitan area have all had State milk control pro-
grams during most of the time since 1933. At no time have these
State programs been coordiaated on a market-wide basis. It is
natural then to expect that they might tend to affect in different ways
the sources of supply for this market.

The percentage of the total milk shipped into the metropolitan area
from 1927 to 1938 by each of these four States is shown in appendix
to chapter VI, table X, and in chart XVI. It will be noted that there
was a relatively steady downward trend in the percentage of milk
supplied by New York producers from 79 percent m 1927 to 63 percent
in 1935. Since 1935, there has been some increase in the percentage
of milk supplied by New York farmers. The trend in Pennsylvania
has been in the opposite direction to that in New York. The percent-
age of«nilk supplied by this State increased from 10.5 to 19 percen^
from 1927 to 1935 and then dropped to 15.6 percent in 1938. The
proportion coming from New Jersey increased from about 6 percent
in 1931 to nearly 12 percent in 1935 and then appears to have leveled
off. Vermont's supply increased from 2 percent m 1927" to a peak of

«« During the period prior to 1936 an intensive bovine tuberculosis eradication program was being carried
on. Many herds were found to be contaminated by the disease and as a result there were many replawment
problems. This was probably the largest single factor In the decline in milk production m the State during
this period. It was afio to be expected that there would be some rise in production m the years immediately

"a compilation of statistical material— Metropolitan Milk Marketing Area, Dairy Section, Division of
Marketing and Marketing Agreeipents, U. 8. Department of Agriculture, February 1940, table 49.

MILK PRODUCTION

MILLION POUNDS

8000

7000

Chart XV

Milk Production and Number of Milk Cows, New York State, 1925-39

6000

5000

4000

3000

NUMBER OF COWS
THOUSAND HEAD
2000

1750

NUMBER OF MILK COWS-

1500

1250

1000

750

(lace p. 214)

I9A1 I9V.9

'»3I

/93J 1935 |<J37 »939

o^l

( /

-3 i

- t^ _

"'■••1

H
3)
>

*•.,

•••...,

•..

TO H
O 33
33 C

-<
o

V-V

H O

•^

0) /

'••.^

*•.,

•<
r
<
>

If
If

ai-^S 3-2'^2/^-i

CONCENTRATION OF ECONOMIC POWER 215

5 percent in 1936 and then declined. All other areas have not fur-
nished more than 2 percent of the total in any year since 1927.

These shifts in proportions of milk coming from different States are
probably due largely to the increased use of the truck as a means of
transporting milk." Dairy pHnts and rural communities not having
direct rail connections to New York City were made accessible as a
source of daily supplies of m^ilk by this new form of transportation.
It may be noted from figure 5 that the percentage of milk hauled by
trucks has increased from less than 5 percent prior to 1930 to over 50
percent in 1938. This change from rail to truck has been most pro-
nounced in areas nearest the market.^* With the improvement of
both highwavs and trucks in recent years this type of transportation
has extended its influence to a distance of more than 200 miles. The
truck is, of course, also important in assembling milk from farms to
railway loading stations. It is, however, the shift from rail to truck
transportation that we are more interested in here since this new mode
of transportation has made available new supplies of milk;

It is not clear to what extent milk control programs in these four
States may also have been a factor in the shifts in supply noted above,
and» in turn, to what extent the flexibilitv in supply has been a factor
limiting the effectiveness of State control. It appears that the latter
is more important than the former. The complex nature of the New
York market and consequently the possibility of losing part of the
market if prices in any one State were seriously out-of-line with prices
in other States has undoubtedly been a restraining influence in the
administration of the State milk control programs.

At this point it is of importance to note the difference in the New
York State and New Jersey control programs with respect to out-of-
State milk. In New York State an attempt was made to price out-
of-State milk substantially the same as milk coming from farms within
the State. ■'^ In New Jersey no attempt was made to regulate the
purchase price of out-of -State milk, but only to regulate its use.
Under this plan dealers were required to pay New Jersey producers
the "norm" or fluid price for all of their milk so long as their deliveries
did not exceed fluid sales. Resale prices (wholesale and retail) were
regulated by the State regardless of the original source of supply.
This procedure seemed to work more effectively than the one at-
tempted in New York State, but nevertheless the flow of interstate
milk has apparently become an increasingly difficult problem for tlie
State control agency in New Jersey. Moreover, the fact that this
State's production of milk: has been less than the fluid consumption
within the State tended to favor its program.

Effect on Producer Cooperatives.

The New York State milk control program, while probably not
designed to give producer cooperatives special advantages, was
certainly not intended to harm them. Actually the control program
brought the State and the cooperative movement into peculiar rela-
tionships at several points. The formation of several small "dealer-
encouraged" cooperatives was used as a means of evading certain
provisions of . the earlier orders. This was harmful to the control
program and not helpful to the cooperative movement.

" For a discussion of the development of truck transportation see Vamey, H. R., "Transportation of Milk
an^ Cream to the New York Market." Cornell University Agricultural Experiment Station, Bulletin 666.

" Baldwin et 'al. v. Seelig, Inc. (294 U. S. 511 (1936)).

216 CONCENTRATION OF ECONOMIC POWER

The distribution of market proceeds on a dealer basis from 1933 to
1937 put certain cooperatives, such as the Dairymen's League, at a
distinct disadvantage as compared with some other groups of producers.
This was because the League carried a large proportion of the "sur-
plus" mUk which fell in the lower price classes.

On the other side of the picture one finds that the dealer-bonding law
was broadened to protect producer cooperatives as well as individual
producers because their interests were so nearly identical. Under the
two orders issued in 193S for the metropolitan area and for the Niagara
Frontier area (Buffalo) market proceeds are pooled and producers
are paid uniform blended prices. Payments are made from the
producer settlement fund for the usual cooperative services and special
payments are made for certain marketing services in the transporta-
tion and processing of mUk. These latter payments are independent
of the usual price differentials for location and use of product. While
the payments for market services are available to all firms actually they
favor those firms with a large amount of country plant operations.
The Dairymen's League is in this group. Likewise the distribution of
"cooperative payments" from the producer settlement fund 'to
certain types of producer cooperative associations operating under
recent Federal and State orders effective in New York must also be
looked upon as distinctly favorable to cooperatives and particularly to
"operating" cooperatives. In fact one might question if these
cooperative payments do not represent a serious form of price dis-.
crimination between cooperative and proprietary types of handlers of
milk.

Resale Prices and Consumption.

One of the first official acts of the New York Milk Control Board
in ,1933 was the fixiifg of resale milk and cream prices th^-oughout the
State. This was done even prior to the fixing of dealer buying prices.
Resale price fixing was continued as part of the milk control program
of this State untU March 31, 1937.

That the setting of resale prices alone would not suffice as a means of
improving farm prices for milk was soon apparent to the Milk Control
Board. The Board further expressed itself as of the opinion that the
fixing of resale prices had brought stability into the market but that
all the benefits accuring therefrom to distributors had not been passed
on to producers.** It continued to support the view that resale price
fixing was desirable under certain conditions, but that this should not
be mandatory. The fixing of resale prices was regarded as virtually
mandatory under the law if prices for mUk from producers were to be
fixed.

From the beginning in 1933, the enforcing of resale prices became
an acute problem. The enforcement of prices to stores, restaurants,
hotels, hospitals, and other institutions, at wholesale was reported
as far more difficult than the enforcement pf retail prices since in-
dividual transactions at wholesale usually involve much larger sums
and are difficult to check. Innumerable schemes were devised to
avoid compliance. Observance of specified prices waS better in the
up-State markets tUan in the metropolitan area, but even here viola-
tions were frequent.** The differential of 1 cent per quart in resale

<s Report of the Milk Control Board for 1933, p. 4.

« Report of the Division of Milk Control fot 1934, p. 109.

3,500 2

3,000 I 6

2,500 I 5

2,000 1 2

CONCENTRATION OF ECONOMIC POWER 217

prices between "advertised" and "unadvertised" milk was at one time
regarded as the most serious obstacle to market stability.*^

It was predicted that if resale prices were to be discontinued a
destructive price war would be certain to follow.*' A real test of this
prediction has not been made since the fixing of dealers' buying prices
was discontinued the same day that the fixmg of resale prices was
dropped. An interesting observation is possible from charts XII and
XIII. These charts show that when the price control program
stopped at the end of March 1937 dealers' buying prices dropped more
than retail prices in both the New York and Buffalo markets. In fact,
in the latter market there was no serious retail price decline until about
a year later.

An indication of the trend of consumption of fluid milk in the
metropolitan area in its relation to pay rolls and to the retail home
delivery price of milk may be observed from chart XVII, based on the
data in appendix to chapter VI, tables II, XI, and XII. Receipts of
milk in the New York market were upward from 1921 until 1932."
The retail price of milk and the index of pay rolls remained fairly con-
stant during the first 9 years of this period. From October 1929
until March 1933, the index of pay rolls declined over 60 percent, the
retail price of milk dropped 37.5 percent, whereas the receipts of milk
dropped less than 10 percent. Milk receipts continued downward
until early 1935. Following this the receipts increased gradually
until 1937. At least in the past decade the consumption of milk in
this market appears to have been influenced more by changes in pay
rolls than changes in retail prices of milk.

Although total milk consumption in the metropolitan area did not
decrease to a very great extent from 1931 to the spring of 1935, the
per capita consumption probably decreased somewhat more. Like-
wise, the total receipts in 1937 and 1938 are shown to be substantially
the same as in these latter years because of the increase in population.

During this period other changes were taking place which may have
had some effect upon total consumption. Among these was the shift
from home delivery to store sales. From December 1929 to Decem-
ber 1938 lome delivery sales dropped from approximately 57 to 47
percei.fr During the same period store sales increased from 43 to
52 percent.*' Since June 1933 the sale of loose or dipped milk has been
prohibited at retail stores in New York City, while prior thereto it had
been permitted. Smce 1935 the sale of milk in paper containers has
developed extensively through retail stores. In recent years the State
of New York has carried on an extensive advertising program intended
to increase the consumption of milk.

Dealers^ Margins.

In both the metropolitan and Buffalo markets ther spread between
dealers' buying prices and the retail delivery price of milk, fts reflected
in charts XII and XIII,, averaged less during the period of resale price
fixing than it did in, the previous and subsequent periods. This is
contrary to the general opinion that distribution margins are always
wider under public regulation.

"Ibid., p. 115.
«> Ibid., p. 112.

»' Receipts of whole milk in the metropolitan area are Qonsidered a good measurement of amounts con-
sumed as-fluid milk. These figures are at least an accurate Indication of changes in consumption.
" Spencer, L. Journal of Farm Economics, February 1939, p. 291

218

CONCENTRATION OF ECONOMIC POWER

In considering resale prices and margins it. should be noted that the
prices referred to are the prevailing prices reported for these markets.
They do not show to what extent there are variations from these
prices by any particular dealers. While the margins indicated in
charts XII and XIII apply to only one type of sale, the trend is be-,
lieved to be indicative of changes in other types of sales as well. It
should not, however, be taken as a measurement of dealers' average
margins on all sales for any particular time.

Bonding.

Although the requirement that dealers furnish bond to assure full
payment to producers appears to be firmly established from a legal
standpoint, it has many practical difficulties in its application. This
seems to have been the experience of administrative authorities in
New York State since this feature was put into practice in 1915.

Since its inauguration many thousands of dollars have been recov-
ered from bonds and other security of defaulting dealers and paid to
producer creditors. Part of the experience record of the bonding
program is reflected in the data in table 20. Approximately 60 per-
cent was paid on the claims of 768 producers against 27 dealer^ in
default during this period.

The bonding of milk dealers has undoubtedly been of more benefit
to producers than these figures alone would indicate. It has probably
prevented some persons of questionable financial standing from en-
tering the business at all, and has very likely caused others to make
more prompt and complete payments than otherwise. The obtaining
of bonds of sufficient size is reported as increasingly difficult due to
the hesitancy of surety companies to assume this type of risk without
full collateral of a type that is easily liquidated.

Qther Results. , '

Milk control in New York State has had other effects. The value
of some of these are not subject to measurement but they a^re, never-
theless, real. Probably no other State handling milk control legis-
lation presents such a combination of economic forces as has prevailed
in this State.

Table 20.

-Dairy companies in default, producer claims, and amounts recovered
from bonds and other security, 1934-38

Year

Number
dairy com-
panies in
default

Number
producer
claims

Amount of
claims

Amount re-
covered

1934

12
4
6
6
5

452
42
209
65
•200

$41, 840. 32
5, 869. 95
59, 568. 68
30,406.82
60,794.78

$33, 736. 98

1935 .

5, 051. 62

1936

26, 828. 29

1937 -

17, 261. 14

lp38 V . .. — ---

18, 041. 70

' 2 of these were cooperatives.

Source: Data compiled from annual reports of New York State Department of Agriculture and Markets.

One of the intangible effects of this program is the progress that has
been made toward clarifying the legal issues involved in State mOk
control, including a defining of division lines between "intra" and
"inter" State commerce as applied to fiuid milk marketing. Several

CONCEJ^TRATION OF ECONOMIC POWER 219

of these issues were outlined in a footnote on page 199. Certainly
more cases in New York have been carried through the State and
Federal courts than in any other State. More fluid milk control cases
have gone from this State to the United States Supreme Court for
decision than from all other States combined. This extensive legal
development has resulted in clearing away some of the legal haze that
has surrounded public price control in fluid milk marketing.

Experience with administration of the milk control laws in New
York has demonstrated the difficulties involved in such things a»
resale price fixing, licensing, bonding, and the regulating of dealers'
buying prices. The magnitude of the industry in New York State
tends to make administrative problems more acute and to put them
in sharper focus than in other States. For example, the State licensed
over 4,000 regular distributors and 33,000 stores. ^^ It made over
60,000 inspections, 40,000 price investigations, and nearly 12,000
license, audit, and "report" investigations within a single year.^^ No
special analysis has been made of these phases of the work, but this
extensive experience in a new type of public control should be of value
in the future.

" Report of Division of Milk Control for 1934, p.
«5 Ibid. p. 118.

APPENDIX TO CHAPTER VI

TABLES GIVING DATA ON MILK PRICES IN NEW YORK CITY
AND BUFFALO, N. Y.

Table I. — Dealers' monthly average buying price for class I milk (3.5 -percent)
New York City, 1922-39 »

[Cents per quart =]

1922..
1923..
1924..
1925..
1926..
1927..
1928..
1929-
1930..
1931_.

Jan. Feb. Mar. Apr. May June July Aug

. Oct. Nov. Dec,

1 Data for 1922 to July 1939: Prices paid by New York Dairymen's League, table 26, Bulletin of Statistical
Material Covering Order No. 27 and the New York Metropolitan Milk Marketing Area, prepared by
Dairy Section, Division of Marketing and Marketing Agreements, U. S. Department of Agriculture.

Data August to December 1939: Table 2 of February 1940 issue of the above described bulletin.

« Price per hundredweight divided by 46.5.

Table II.

-Monthly average retail price of fluid milk (house deliveries), New York
City, 1920-39 '

[Cents per quart]

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1920

16
16
15
15

'is'

15
15
16

16
15
15
16
14
15
15
15
15

16
15
14
15
14
15
15
15
IS
16
16
15
12
10
12
13
13
12

16
........

14
13
15
15
15
16
16
15
15
12
10-11
12
13
13
11

.181

15
'14
13
14
13
14
15
15
15
16
15
15
12
11
13
13
13
11

16
14
14
14
13
14
15

16
15
16
12
11
13
13
13
12

17
15
15
14
13
15
15
15
16
16
15-16
15
12
12
13
13
13
12

18
15
15
15
14
15
15
16

16
15
12
12
13
13
13-14

iln

18
15

"il"

14
16
15

"ie '

16
16
15
12
12
13
13
13

18
15
15
16
16
15
15
16
16
16
16
14
12
12
13
13
13

1921

17
15
16
15
15
15
15
16
16
16
15
12
11
12
13
13
13

llfl

1922

1923

1924

1925

1926

1927

1928

1929

1^ : . . .::

16
15
12
10
12
13
13
13
13
13^

16
15
12
10
12
13
13
13
13
13>^

15-16

1931

1932..£2

1933

11
12

1934

1935

1036

1937

1838 ...

1M9 :;:::.:

' U. S. Departmentof Agriculture, Bureau of Agricultural Economics and Agricultural Marketing Service:
Monthly Fluid Milk Market Report.
220

CONCENTRATION OF ECONOMIC POWER

221

Table III. — Dealers' monthly average buying price for basic milk {3.5 percent),
Buffalo, N. Y., 1920-39 i

[Cents per quart']

Apr.

May

Aug. Sept.

1920.
1921.
1922.

S.4
7.1
6.2
6.2
6.2
7.1
6.9
5.2
4.3
3.4
4.5
6.3
5.3
6.2
4.1
3.9

> Source: Computed from hundredweight prices published in Fluid Milk Market Reports of Bureau of
Agricultural Economics and Agricultural Marketing Service, U. S. Department of Agriculture.
' Hundredweight price divided by 46. 5.

/Iablb IV. — Monthly average retail price of fluid milk {house deliveries) Buffalo
N. Y., 1920-39^

I [Cents per quart]

Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1920

13
12
14-15
13
13
13

........

13-14

- 13

\l
14
12
11
10
11
12
12
12
11
11
.

15
13
11

12-13
12
13

13-14
13
13
14
14
12
10
10
11
12
12
12

16
12
11
12
12
13
13
13
13
14

""i2

JO
10
12
12
12
12
8
11

15
13
12
12
12
13
13

""n

14
14
12
10
10
12
12
12
12
9
12

16
14
13-14
12
12
14
13
13
13
14
14
12
10
11
12
12
12
12
9
13

17
13
13
13
13
14

\l
14

■!

12
12
12

9-10

16
14

"'13
13
13
13
13
14
14
14
12
10
11
12
12
12
12
13
13

16
14
13
14
14
13
13
13
14
14
14
12
10
11
12
12
12
12
13
13

1921

15
14
13
13
14
13
13
13
14
14
12
6-7
10
11
12
12
12
13
13

1922

1925

1926..

1927

1928

1929

1930—.:

13
13

14
12
6-7
10
11
12
12
12
11
13

1931

6-7
10
11

1932

1933

1934

1935

1936

1937...

13
13

1938 .

1939... .

» Source: U. S. Department of Agriculture, Bureau of Agricultural Economics and Agricultural Market-
ing Service: Monthly Fluid Milk Market Report.

222

CONCENTRATION OF ECONOMIC POWER

Table V. — Net prices paid producers by Sheffield Farms Co. for 3.5 percent milk,
201-210 mile freight zone, 1910-39 i

Jan. Feb. Mar. Apr. May June July Aug

Oct. Nov. Dec.

1910.
1911.
1912.
1913.
1914.
1915.
1916.
1917.
1918.
1919-
1920.
1921.
1922.
1923.
1924.
1925.
1926.
1927.
1928.
1929.
1930-
1931.
1932.
1933.
1934.
1935.
1936-
1937.

3.90
3.39
2.805
3.35
2.685
2.93
2.845
2.84
3.05
3.045
2.84
2.245
1.54
1.11
1.83
1.92
1.96

1.82
1.87
1.72
1.67
1.67
1.67
1.63
2.18
3.52
3.72
3.69
2.79
2.62
2.705
2.55
2.90
2.80
2.74
2.875
3.025
2. 715
2.205

1.62
1.67
1.57
1.62
1.62
1.62
1.53
2.13
3.40
3.48
3.57
2.30
2.10
2.70i
2.405
2.775
2.615

Z53
2.95
2.60
2.05
1.49
1.02
1. 60.^
1.85
1.84
1.78

1.42
1.32
1.42
1.47
1.32
1.30
1.43
2.105
2.68
3.01
2.76
2.30
1.95
2.705
2.405
2.575
2.545
2.595
2.385
2.80
2.40
1.86
1.295
1.05
1.50;
1.78

1.12

1.07

1.17

1.22

1.07

1.05

1.33

2.07

2.64

3.27

2.76

2.135

2.315

1.905

2.365

2.40

2.50

2.345

2.565

2.145

1.675

1.12

1.205

1.485

1.58

1.55

1.50

1.85
2.315
1.95
2.205
2.325
2.42
2.325
2.50
2.04
1.63
1.08
1.38

1.27
1.17
1.15
1.23
2.17
2.42
3.22
3.16
2.265
2.30
2.40
1.98
2.385
2. 415
2. 505
2.575
2.575
2.12
1.745
1.14
1.595
1.62
1.50

1.42
1.37
1.52
1.47
1.32
1.30
1.38
2.62
2.87
3.34
3.56
2.93
2.75
2.575
2.31
2.66
2.57
2.64
2.80
2.76
2.44

1.72
1.52
1.62
1.62
1.42
1.40
1.43
2.02
3.07
3.42
3.86
3.015
2.75
2.95
2.495
2.64
2.735
2.93
2.94
2.94
2.76
2.02
1.27
1.795
1.77

1.82
1.67
1.72
1.82
1.72
1.68
2.12
3.26
3.76
3.32
3.86
3.365
2. 775
3.05
2.52
2.78
2.80
3.01
3.025
3.035
2.73
2.03
1.29
1.75
1.76
1.78
1.90
2.20

1.82

L82
1.82
1.78
2.22
3.50

3! 54
3.86
2.42
2.925
2.952

2! 835
2.87
3.18
3.13
3.10
2.75
1. 925
1.34
1.92
1.92
2.01
2.02
2.42
2.05
2.27

1.92
1.82
1.92
1.87
1.82
1.78
2.22
3.26
4.23

3! 39
2.99
3.30
2.78
2.96
2.875
2.94
3.20
3.15
2.92
2.38
1.47
1.20
1.87
1.96
2.00
1.94
2.44

' Source: L. Spencer, Cornell University, Ithaca, N. Y. (Prices for 3.7 percent milk converted to 3.5 per-
cent basis.) Data for 1910-20 not used in graph.

Table VI.— Dairymen's League net pool prices for 3.5 percent milk, 201-210 mile
freight zone, 1921-39 1

[Dollars per 100 pounds]

Year Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1921

- 3.38

2 78

2.29

2.30

1.91

1.62

1.90

2.35

2.44

2.67

2.62

2.59

1922

2.31

2.17
2.51
2.02

1.80
2.33

2.00

1.535
2.275
1.95

1.50
2.02
1.60

1.545
2.115
1.54

1.82
2.185
1.62

1.955
2. 285
1.835

2.20
2.40
2.045

2.41
2.52
2.06

2:53
2.46

2.95

1923

2.41

2.35

1924

2.12

2.61

.. . 2.615

2.50
2.51
2.67

2.46
2.42
2.60

2.335
2.315
2.44

2.09
2.135
2.22

2.00
2.01
2.13

2.05
2.15
2.24

2.30
2.36
2.42

2.415
2.56
2.75

2.51
2.58

2.61
2.72
3.02

2.63

19?fi

2.59

2.80

iq?7

2.67

2.99

19W

2.90

2.80

2.48

2.25

2.16

2.06

2.28

2.78

2.89

3.08

3.04

1929

3.01

2.97
2.51
2.00

2.83
2.42
1.84

2.61
2.26
1 68

2.39
1.97
1.48

2.27

1.84

, 1.34

2.36
1.98
1.532

2.57
2.34
1.67

2.78
2.64
1.75

2.56
1.74

2.97
2.54
1.71

2.74

1930

-. 2.62

2.14

1931

-. 2.08

1.42

1932

1.43

1 44

1 32

1,17

1.05

. 98

1.07

1.11

1.12

1.18

1.08

1933

.85

.87

1.03

1.17

1.33

1.56

1.51

1.41

1.52

1.46

1934

1.44

1,43

1,.S5

1.30

1.28

1.33

1.42

1.51

1.40

1.44

1.64

1. 69

193.'i

1.66

1.67

1.44

1.32

1.33

1.40

1.42

1.52

1.78

1.79

1936

... 1.76

1.76

1.62

1.50

1. 39

1.40

1.57

1.87

1.80

1.75

1.96

1.79

1937

1.74

1.73

1.57

1.43

1.29

1.25

1.46

1.61

1.75

1.85

2.27

2.25

193R

. 2.01

1.85
1.70

1.65
1.24

1.36
.99

L19
.92

L13
1.01

1.16
1.42

L20
1.88

1.73
2.00

1.81
2.21

J. 15
2.22

1.95

1939

1.82

1 Source: L. Spencer, Cornell University, Ithaca, N. Y. (Prices for 3.7-percent milk converted to 3.5-
percent b*ls.)

CONCENTRATION OF ECONOMIC POWER

223

Table VII. — Monthly average prices paid by condenseries for 3.5-perceni milk
(/. 0. b. factory), United States, 1921-39 '

[Dollars per 100 pounds]

1921.
1922.
1923.
1924.
1925.
1926
1927.

1931.
1932.
1933.
1934.
1935.
1936.
1937.

Jan. Feb. Mar. Apr. May June July Aug. Sept.

2.31
2.21
1.85
2.15
2.22
2.25
2.28
2.02

1.00
1.35
1.57
1.62
1.71
1.26

' Source: U. S. Department of Agriculture. Statistical Bulletin 25, p. 174; Handbook of Dairy Statistics'
1933, p. 50; Agricultural Statistics, 1939, p. 386.

Table VIII. — Premium of dairymen' s league price over United States condensery
price, 1921-39 i

[Cents per 100 pounds]

Jan. Feb. Mar

Apr. May June July Aug.

1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937

Computed from tables VI and VII.

224

CONCENTRATION OF ECONOMIC POWER

Table IX. — Total milk production and number of milk cows, New York State,

1925-89 »

Year

Milk
produced
during

year
(million
pounds) .

Number of
milk cows
on Jan. 1
(thousand
head)

Year

MUk

produced

during

year

(million

pounds)

Number of
milk cows
on Jan. 1
(thousand
head)

J925 -

6,995
7! 082
7,146
7,216
6,973
7,068
. 7,367
7,340

i;349
1,300
1,306
1,306
1,330
1,370
1,411

1933

7,297
6,983
6.956
7,188
7,392
7,424
7,465

1,438

1926

1934

1,416

1927

1935......

1,321

1928

1936

1937

1,347

1929

1,374

1930

1938 -

1,395

1931

1939

1,423

1932....

' Source: United States Department of Agriculture, Bureau of Agricultural Economics and Agricultural
Marketing Service, Annual Livestock Reports.

Table. X. — Percentage of milk receipts in New York metropolitan area originating
in each of 4 States ^ and percentage of milk received at the New York market by
truck 2 1927-38

Percentage of milk receipts (truck and raU) originating in-

Percentage
received
by truck

Year

New York

Pennsyl-
vania

New Jersey

Vermont

Other

States

Total

1927

PtTcent
78.8
77.3
75.6
75.5
72.6
69.4

Percent
10.5
12.6
13.8
13.9
15.6
15.8
16 3

Percent
7.2
6.3
, 5.8
5.9
6.5
8.5
10.1
10.9
11.7
11.4
10.9

n.5

Percent
2.5
3.0
3.7
3.4
3.7
4.5
4.2
3.9
4.6
5.0
4.9
3.7

Percent
1.0
.8
i.l
1.3
1.6

1:?

L7
1.8

1.6

Percent
100..0
100.0
100.0
100.0
100.0
100.0
100.0
.100.0
100.0
100.0
100.0
100 0

Percent
2.1

1928

2.6

1929

3.S

1930

5.9

1931

9.5

1932

17.4

32.2

19m

66. 1 17. 4
63. 1 18. 8

36.5

193^

45.8

1936..

63.4
65.8
67.6

18.2
16.8
15.6

3 45.5

1937

>49.1

1938

»53.3

1 state of New York, Department of Agriculture and Markets Circular 584, table 8, p. 147.

2 Cornell University, Agricultural Experiment Station Bulletin 655, table 19, p. 22.
» Estimated.

CONCENTRATION OF ECONOMIC POWER

Table XI.— Receipts » of milk at New York City market, 1921-39
[Thousands of 40-quart units]

225

Year

Jan.

Feb.

Mar.

Apr.

May.

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1,978
2,051
2,170
2,363
2,412
2,522
2,714
2,811
2,881
3,072
2,942
2,879
2,826
2,614
2,577
2,797
2,890
2,992
3.097

1,857
1,908
2,002
2,237
2,281
2,320
2,531
2,677
2,654
2,802
2.692
2,742
2,563
2,411
2,304
2,611
2,674
2,730
2,813

2.143
2,209
2,295
2,470
2,603
2,639
2,891
2,926
2,995
3,067
2,966
2,944
2,795
2,692
2,642
2,863

3,' 031
3,139

2,111
2,156
2,297
2,396
2,500
2,629
2,780
2,809
2,876
2,953
2,864
2,809
2,735
2,585
2,632
2,766
2,954
2,876
3,042

2,289
2,479
2,550
2,577
2,676
2,778
2,926
3,010
3,056
3,247
3,059
3,007
2,933
^780
2,788
3,003
3,202
2,984
3,317

2,414
2,475
2,746
2,637
2,902
2,776
2,965

3^175
3,110
3,090
2,943
2,876
2,773
2,760
2,866
3,225
3,041
3.368

2.427
2.412

2! 684
2.761
2.851
3.031
3,125
3,104
3.124
3,232
3,021
2,767
2,762
2,764
2,928
3,111
3.010
3.246

2.230
2.303
2.479
2.646
2,673
2.773
2.833
3.002
2,979
2,928
3,034
2,905
2,793
2,595
2,691
2,876
3,077
3,184
3,179

2,262
2,233
2,411
2,501
2,647
2,681
2,854
2,914
3,019
3,126
3,013
2,910
2,694
2,583
2,682
2,826
3,003
2,899
3,068

2,155
2,285
2,403
2,550
2,587
2,712
2,941
3,001
3,032
3,106
2,984
2,812
2,783
2,653
2,741
2,874
3,132
3,019
3,217

1,853
2,133
2,282
2,403
2,496
2,547
2,780
2,798
2,925
2,965
2,805
2,697
2,623
2,573
2,648
2,789
2,989
2,965
3,046

2,012

2,154

2,335

2; 434

2,546

1»26

2,631

1927- -

2,774

1928

2,847

1929.—

2,914

1930

2,980

1931

2,854

1932

2.762

1933

2.654

1934

2,542

1935

2,734

1936

2,848

1937

2.979

1938 -

2,957

1939

3,079

1 Total truck and rail receipts.

2 Source, 1921-33: Cornell University, Agricultural Experiment Station Bulletin 655, p. 49. 1934-36:
New York State Department of Agriculture and Markets. Circular 534, 1936, p. 34. 1937: New York
State Department of Agriculture and Markets Circular84, 1938, p. 149. 1938-39: United States Department
of Agriculture, Bureau of Agricultural Economics and Agricultural Marketing Service, Annual Sum-
mary of Dairy and Poultry Statistics, 1938, p. 20, and 1939, p. 21.

Note. — For retail price data see table III, accompanying figure 1.

Table XII.

-Index numbers of factory pay rolls, State of New York, 1923-39
[1925-27=100]

Year

Jan.

Fob.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

1923..

1924

1925

1926

100.6
104.2
98.4
104.2
100.4
93.6
97.6
94.7
70.4
64.6
40.0
51.8
58.3
.64.4
78.8

74.' 4

100.4
104.9
99.0
103.2
101.3
94.4
101.3
93.2
72.6
53.9
40.7
64.7
60.9
64.6
81.1
70.6
76.8

106.9
106.9
101.8
105.1
103.1
96.4
104.4
94.4
75.1
53.8
38.4

63:1
67.2
86.1
70.6
79.4

107.0

101.8
97.1

102.9
99.6
92.4

■102. 9
91.4
72.9
50.1
40.1
59.0
62.9
66.4
86,6
67.4
76.4

108.4
97.1
97.3

100.2
98.1
92.8

101.9
88.7
70.4
44.9
42.4
58.2
61.2
66.6

•86.4
64.2
74.4

108.3
93.3
96.1

ioa8

97:9
94.0
101.9
86.7
66.7
42.6
46.1
57.0
60.2
66.3
86.4
63.7
75.9

106.4

95:2
97.8
95.5
92.1
•100.9
82.1
65.5
39.4
47.9
55.7
59.5
67.5
84.9
64.9
75.8

103.8-
90.4
96.2
98.8
97.4
94.0

102.3
81.6
65.0
41.1
51.0
66.9
62.6
71.0
87.2
70.0
80.2

106.4
96.1
99.2

102.7

100,3
97.1

105.6
84.6
66.5
44.9
55.0
57.3
65.9
72.3
86.5
75.3
82.4

ia8.o
95.6
102.0

104.1
99.4
99.3

104.7
80.4
62.3
48.4
64.1
57.2
66.3
75.2
84.8
75.0
87.4

106.1
96.0

103.0

102,0
95,8
98,6

100,4
76.3
69.4
44.2
5L8
56.1
64.3
75.1
76.7
72.9
87.8

106.1
98.8
105.0
102.2

1927.

1928...

Ia29

96,8
99,6
97 1

1930

1931

1932

73.7
57.8
42.6

1933

1934..

1935

51,3
58,0
65 9

1936...:

1937

1938

79.1
74.2
76 8

1939

89.3

Monthly syrvey of current business,
ited for seasonal variation.)

Compiled by New York State Department of Labor. (Unad-

PART m

PRICE FIXING IN THE BITUMINOUS COAL INDUSTRY

ELLERY B. GORDON AND WILLIAM Y. WEBB

227

SUMMARY

Peacetime public control of prices in the bituminous coal indnstry
is of recent origin and is related to the depression which has charac-
terized this industry since about 1923. Prior to the first World War
the bituminous coal industry enjoyed continuous and prosperous ex-
pansion in step with the industrial growth of the country. Protective
tariffs, beginning in 1789, and regulations governing the leasing of
public lands containing coal deposits represented the principal types
of Government intervention in this industry.

During the years 1917-20 the Federal Government fixed maximum
prices of coal in order to protect itself and other consumers from ex-
cessive price increases under war influences. Chaotic post-war con-
ditions in the early twenties, marked by falling prices, transportation
difficulties, labor disputes, and strikes led to creation of the office of
the Federal Fuel Distributor to gather information on production and
needs, and cooperate with the Interstate. XI!ommerce Commission in
priority control. Conditions in these years also produced several bills
in Congress providing for coal embargoes, seasonal freight rates. Gov-
ernment storage piles, Government purchase and sale of coal, Govern-
ment price fixing, and Government operation of the mines in an.
emergency.

When the transportation and labor difficulties of the first post-war ■
years disappeared, it became evident that expansion of mine capacity
under the influence of Var demand had left the bituminous coal in-
dustry with large overcapacity relative to the normal demands of the
middle twenties. During the ensuing period of general business pros-
perity overcapacity in bituminous coal was not substantially reduced,
owing to increasing fuel efficiency and the growing; competition from
oil and gas. As a result, even before the advent of the depression of
the early 1930's, the coal industry had begun to suffer a severe depres-
sion of its own, characterized by a cumulative process of price cutting
and wage cutting which became more intense as the^ years went on.

Whereas most bills introduced prior to 1928 had' t*Ke general purpose
of protection of consumers, bills began to appear in 1928 which were
designed to protect coal labor and operators against the results of
imrestricted competition by such devices as consolidation, marketing
agencies, and Government establishment of minimum prices.

The depression in the coal industry was, of course, intensified by the
general business depression. Wage rates, employment, and working
tune declined to very low levels during the early 1930's, while operators'
losses multiplied. Annual deficits ranging from seven to fifty million
dollars have occurred in each year since 1927. Government control
was urged more strongly than before, both by labor and by coal
operators.

The N. R. A. code for bituminous coal contained stipulated mini-
mum wages and maximum hours which had previously been deter-
mined through collective bargaining for inclusion in the code. The

229

279348— 41— No. 32 17

230 CONCENTRATION OF ECONOMIC POWER

code authorities for the five producing areas into which the country-
was divided fixed minimum prices for coal.

After the N. I. R. A. was declared unconstitutional Congress passed
the Bituminous Coal Conservation Act of 1935. Minimum wages and
maximum hours negotiated by collective bargaining were made bind-
ing on all producers in a district when approved by producers of more
than two-thirds of the annual tonnage of the district and by repre-
sentatives of a majority of the mine workers. Minimum prices niight
be fixed by district boards of producers when approved by the National
Bituminous Coal Commission created by this act. The Commission
was empowered to fix maximum prices when necessary for protection
of consumers.

In May 1936, before fixed prices became effective under this law,
it was declared unconstitutional on the basis of its provisions for
minimum wages and maximum hours. Thereupon Congress passed
the Bituminous Coal Act of 1937, empowering the Coal Commission
to prescribe minimum and maximum prices for coal and marketing
rules and regulations, and to penalize certain unfair methods of com-
petition. This law contains no provisions relative to fixing of wages
and hours of labor. Its purposes are stated by Congress to be as
follows :

That regulation of the sale and distribution in interstate commerce of bituminous
coal is imi "^rative for the protection of such commerce; that there exist practices
and metho ■ of distribution and marketing of such coal that waste the coal
resourceE the Nation and disorganize, burden, and obstruct interstate com-
merce in^ aminous coal, with the result that regulation of the prices thereof and
of unfai' 'methods of competition therein is necessary to proriiote interstate
commerce in bituminous coal and to remove burdens and obstructions therefrom.

Although not specifically mentioned here or elsewhere in the law,
the history of this act, and on earlier legislation to regulate coal prices,
indicates that the primary purpose of the Bituminous Coal Act of
1937 was the establishment of minimum prices in order to insure the
ability of the coal operators' 1» pay wage schedules negotiated by collec-
tive bargaining. Other purposes were to remove or diminish operators'
losses and to prevent practices that had a tendency to intensify de-
pression in this industry. The interest of consumers is recognized in
the act by the creation of the office of the Consumers' Counsel m the
Department of the Interior to represent them.

The standards for minimum price fixing provided by the act to
attain thpse ends may be divided into two classes — fii'-st, the cost
standard, which is quite specific and definite, and second, a set of
standards which are expressed in general terms.

The cost standard is as follows: In each of the 10 price areas desig-
nated by the act the general level of minimum coal prices is to be set
so that the average realization per ton will be equal to the weighted
average cost of production of ajl the coal produced in that area.
The items to be included in cost, which are spetifi»d by the act, cover
most elements of operating expense, but no return on capital invest-f
ment.

Tlie other factors to be considered in setting, minimum prices are
stated in general terms. These considerations apply particularly to
the structure of relative prices for different kinds, qualities, and sizes
of coal and prices of ti>e same coal for different uses; they also apply
to intercompany and interdistrict price relations. Minimum -prices
must be "just and equitable" between producers and between pro-

CONCENTRATION OF ECONOMIC POWER ^St

ducing districts; "shall have due regard to the interests of the con-
suming public"; "shall reflect, as nearly as possible, the relative mar-
ket values" of difierent coals, "taking into account values as to uses,
seasonal demand, transportation methods and charges and their
effect upon a reasonable opportunity to compete on a fair basis, and
the competitive relationships/between coal and other forms of fuel
and energy"; and are to "preserve as nearly as mtiv be existing fair
competitive opportunities." It is evident that the specitic content of
these standards will be developed and be made evident to the public
only through administration by the regulatory agency iw.d niterpre-
tation by the courts. From the price hearings already helci. it i> Aear*^
that these standards have been given different content hi. iii:..neut
areas and different competitive situations. The way in whi 'u these
standards are interpreted will have great influence in the loiig run on
the economic position of the industry and various factors \\>ithm the
industry.

As the national defense program gets under way in the summer ot
1940, another provision of the Coal Act, that for fixing maximum
prices, assumes potential importance that was hitherto ■ lacking.
According to the act, the regulatory agency may establish maxi-
mum prices in order to protect consumers "against unreasonably high .
prices." Maximum prices may be —

established at a uniform increase above the minimum prices in effect * * *
so that in the aggregate the maximum prices shall yield a reasonable return above
the weighted average total cost of the district: Provided, That no maximum price
shall be established for any mine which shall not yield a fair return on the fair
value of the property.

It will be noted that no criteria are given in the act for the amount
of the "uniform increase above the minimum prices in eft'ect."^ Sec-
ondly, it is evident that the proviso concerning a "fair return on the
fair value of' the property" renders effective regulation of maximum,
prices in this industry practically impossible even in an emergency.
In order to comply with the law' the Coal Division would have to
make valuations of tlie properties of all the operating coal mines, a
tremendous and lengthy task. Until Congress and the courts find a
less cumbersome and time-consuming method of affording the coal
companies their constitutional protection against deprivation of prop-
erty, effective maximum price fixing in the coal industry will be im-
possible.

The Coal Act of 1937 created the ' National Bituminous Coal
Commission in the Department of the Interior to administer the
provisions of the act. On July 1, 1939, the President's Reorganiza-
tion Plan No. II abolished the Commission and transferred its func-
tions to the Bituminous Coal Division of the Department of the
Interior. The Coal Division operated under a single executive, the
Director, who is responsible to the Secretary of thq Interior. In this
report the term "Commission" is often used in a general sense to
refer to* the administrative agency — that is, to the Coal Commission
prior to July 1, 1939, and to. the Coal Division thereafter.

In the winter of 1937-38 the Coal Commission established>miiiimum
"prices without having conducted public hearings. Legal difl&cultics
ensued and the Commission withdrew the minimum prices within a
few weeks. Thereafter it embarked upon an exhaustive process of
study and lengthy public hearings which lasted until Januarv 1 940.

«:?32 CONCENTRATION OF ECONOMIC POWER

limmn prices recommended by the trial examiners for establish-

.<3iit were announced in the spring of 1940. After oral arguments

on these prices the Division began preparation of its final findings

which, it was expected, would be issued in July, whereupon minimum

prices would be promulgated.

In common with the other reports on governmental price control
presented in this monograph, this report on coal is addressed to the
nature of the economic standards for price fix^ in their relation to
three problems: (1) The general level of prices in the industry; (2)
the pattern or structure of relative prices in the industry, i. e., the
prices of the various kinds, qualities, and sizes of coal and prices of
the same coal for different uses; (3) the relation between prices in this
industry and the level of use of resources in the economic system.
The present report treats the following topics:

(1) A short history of the development of the bituminous coal
industry in the United States, the economic problems of this industry,
and the course of governmental control prior to the act of 1937.

(2) A description of the provisions of the act of 1937 with special
reference to the economic standards and the procedures for price
fixing laid down by the act.

(3) A discussion of and appraisal of the cost standard for the level
of minimum prices in each price area, including some of the possible
results of the application of this standard. Unlike most of the other
provisions of this act reiating to price fixing, the cost standard is set
forth in such definite, terms that some appraisal is possible. With
regard to the other provisions for price fixing, everything seems to
depend on interpretations by the regulatory agency and the courts.
With respect to the cost standard, the range of interpretation open
to the regulatory agency is sufficiently limited that some possible
eflFects of the application of this standard can be analyzed even before
minimum prices are finally established. According to the Coal
Division the minimum prices to be . established in the summer of
1940 will be about the same in some price areas and for some coals
and somewhat higher in other price areas and for some coals than the
unregulated market prices prevailing in recent years.

In each area where the level of minimum prices must be raised
above previously prevailing prices in order to satisfy the cost standard
required by the act the Coal Division has endeavored, as far as feasi-
ble, to raise prices on those particular coals and in those particular
markets where substitution of competing fuels would not ensue or
would be kept at a minimum. As a result, price increases in some
aroas may not be followed by any decline in coal consumption, whereas
declines may occur in other areas unless the tendency to substitution
of other energy resources is offset by repercussions of the national
defense program on the demand for coal and on the demands for and
prices of oil and gas.

Price fixing according to the cost standard should have a tendency
to minimize ruinous price and wage cutting for a time at least. It is
likely that the prohibition of price competition will lead to increased
competitive expeiulitures cw marketing and various services An
increase in mechanization may occur as a result of the greater oppor-
tunity for profits afforded' by this standard.

The act requires readjustment of minimum prices to accord with
established changes in average cost, other than those of a seasonal

CONCENTRATION OF ECONOMIC POWER 233

nature. Average costs, however,' usually increase as demand and
production decline, and, at a time when other prices are likely to be
falling, minimum coal prices, under this act, would probably have to
be adjusted upward. Further, a change in prices, foUowmg a change
in average cost, may cause a change in consumption and hence in
production, which in turn produces another change in average cost
requiring a further change in the level of minimum prices. If not
counterbalanced by other factors, such changes might operate for
some time in the same direction — e. g., an inr-rease in cost, an in-
crease in prices, a drop in consumption ai.d production, a further
increase in costs, a further increase in prices, and so on. • It is quite
possible that application of the rigid cost standard set by this act
through depression and recovery may result in a tendency for coal
prices to rise in depression and fall in recovery, with a consequent
loss of markets (not always to be regained) in depression periods.
Moreover, owing to the length of time required to demonstrate cost
changes under this act, readjustment in the level of minimum prices
will follow changes in cost only after a considerable lag.

(4) An explanation of the other considerations which are to be
taken into account in fixing minimum prices and of the difficult
economic and administrative problems facing the regulatory agency
in the task of giving specific content to them.

(5) A sketch. of some proposals regarding Government control of
bituminous coal which, in the judgment of the authors, would produce
a more desiralSle balance of interests of all connected with thig in-
dustry than is possible with the present act as it now stands. The
authors conclude that control of the general type embodied in this
law is desirable, but that the process of price nxing should be made
more flexible and less lengthy and that the powers of the regulatory
agency should be extended, especially to include control of production.

It should be emphasized that the present report does not attempt
a full appraisal of the probably results of this act and its administra-
tion. For several reasons this was impossible. As has already been
pointed out, most of the considerations for price fixing, other than
the cost standard, are stated in such general terms that specific
content can be given to them only through the work of the regulatory
agency, and the courts. Study of the record of the hearings for price
area 1 (in which 70 percent of the bituminous coal output in the
United States is produced) and of the examiners' findmgs for all price
areas does not indicate that the regulatory agency has yet announced
its complete interpretations of these generally worded provisions of
the act. The final findings of the Coal Division were not completed
at the tinie of completion of this report. Again, no prices had been
formally estabhshed by the Coal Division at the time of completion
of this report. The period of more than 3 years elapsing between
enactment of the law and actual establishment of minimum prices is
at once; a reflection of the difficulties of administering this law, an
expression of the great interest in coal price fixing under this law on
the part of aU persons connected with the industry — the hearings
-covered about 130 volumes — and of the opportunities for legal delay,
and a tribute to the painstaking care sho\ n by the present adminis-
trative agency. Thirdly, since no pric s had been fixed, it was
impossible to attempt any study of actual n.inimum prices fixed under
♦his law as compared with prevailing pri* 3; in any previous period.

234 CONCENTRATION OF ECONOMIC POWER

Finally, the bulk of this report was originally finished in the early
winter of 1939 before completion of the whole record of hearings and
examiners' findings — in sb.ort while the process of price fixing was, in
the words of the Coal Division, in "midstream." The report is based
principally on the record for districts 1 through 8, comprising price
area, 1. Study of this district gives a picture of the general problems
of regulation as well as the particular problems in these producing
districts. Study, of the record for the other districts is, of course,
necessary for understanding of problems peculiar to them. Additions
to and revisions of ti e ^.port have been made after study of the
examiners' findings w'uca became available subsequent to original
completion of the report.

In the light of the foregoing it will be readily understood that this
report jnakes no attempt to constitute a complete guide to public
policy %\-ith respect to control of the bituminous coal industry. For
judgment of this important question, which will face the Congress on
expiration of the present Coal Act in April 1941, a study of the forth-
oming final findings of the Coal Division is obviously indispensable.
There is being submitted with this report that portion of the final
findings of the Director of the Bituminous Coal Division wliich relates
to the general problems of fixing minimum prices under the act.
The present report attempts mainly to supply a brief description of
the economic problems of the bituminous coal industry and of earlier
experience with governmental control in this industry, an exposition
of the chief provisions of the act of 1937 and of some of the principal
problems encountered in its administration, an appraisal of the one
standard set forth in specific terms by the act — the cost standard for
the general level of minimum prices — and some suggestions looking
toward an improved "way of order" for this distressed industry.
A comprehensite study of all the facets of public regulation of bitu-
minous coal prices would require not only the experience which only
the lapse of several years can provide, but also more time for study
than was available for the preparation of this report.

The authors wish to acknowledge with gratitude the invaluable
assistance and advice extended by Charles F. Hosford, Jr., former
Chairman of the Bituminous Coal Commission; Sidney Hale, editor-
in-chief, and Walter Dake, managing editor of Coal Age; and by
members of the staff of the Consumers Counsel Division who have
given access to analytical data prepared by them. All public records
of the National Bituminous Coal Commission, before and since its
reorganization as the Bituminous Coal Division of the Interior De-
partment, have been made available by the Division, including tran-
scripts of hearings, "findings of fact," statistical and other data.
Without this generous assistance, tliis report could not have been
prepared.

CHAPTER I

ECONOMICS OF THE BITUMINOUS COAL INDUSTRY
IN REVIEW 1

GENERAL CONDITIONS

About one-half of the known coal resources in the world lie within
the boundaries of the United States, and practically all are privately
owned. These reserves are sufficient to supply the annual needs of
our country for hundreds of years, measured by the present demand.
The present problem is largely due to the efforts of private owners
to turn into current assets investments made burdensome by taxes
and carrying charges on investments in the coal lands. The result
has been the development of excess capacity for production, bitter
intersectional competition, degradation of labor, large annual losses,
and many other uneconomic practices. ,

Before reviewing the industry's history during this century, we
should like to point to certain conditions typical of this industry,
and different from most other industries:

1. The cost of producing coal is very largely dictated by the geologic
and other physical conditions within the mine. Unlike manufactured
products, the cost of producing the coal is not directly related to the ,
quality of the coal produced.

2. The number of working days available in a year is limited in
coal mines by several factors. Production is more immediately
responsive to consumer demand than in many industries. There is
very little storage space at mines, and as a rule when ordejs for ship-
ment are not available, the mine faces a shut-down. Ordinarily
consumers and dealers do not stock more than 30 lo 40 days' supply
of coal. (One exception is the upper Great Lakes docks, which
stock important tonnages during the lake shipping season, to be
drawn upon while the lakes are frozen over.) The business is seasonal
at best.^ The periods of seasonality are not tjld'same in all pro-
ducing districts.^ In only one district is operating time likely to
run . fairly uniform throughout the months of the year. This is
in the so-called smokeless coal fields of West Virginia, known under
the act as district No. 7.^ Mining hazards are also responsible for
lost operating days, since any accidental fatality will close the mine
down for at least the balance of the day. A break-down in the venti-
lating system or the 'power supply necessitates shutting down. Days
of working time are thus lost fevery year due either to "no market"
or a break-down or accidents. Then, too, hardly a year goes by

• For a comprehensive review in considerable detail, see F. E. Berquist & Associates, Economic Survey
of the Bituminous Coal Industry Under Free Competition and Code Regulation (Works Material No. 69,
N. R. A. Division of Review) . A more condensed version can be found in pt. II of the brief of the National
Bituminous Coal Commission in Ex Parte US before the Interstate Commerce Commission, beginning at
p. 2; an annual review in great statistical detail will be found in the Minerals Year Book of the United
States Bureau of Mines.

• See table on pp. 239-240.

235

236 CONCENTRATION OF ECONOMIC POWER

without either a number of local strikes or sometimes a serious
sectional or Nation-wide strike. The latter usually occur at the
termination of a wage agreement.

3. Mine labor is in an economic and social position quite different
from that in the general run of manufacturing, transportation, and
distribution industries. Not only are the earnings of the miners
limited by.tlie available number of working days and therefore of the
possible output in a year (they are paid on a time and piece work basis),
but miners and their families very largely live in isolated mining
towns or very small to^vns principally dependent upon the mmes
operating. When their opportunity for earning is suspended for
either a short or an extended period, there is practically no other avail-
able work to which they can turn. This is not so true for those who
live near large cities, but they do not represent the larger proportion
of the total number. Thus, a large number of mine employees, varying
from 100,000 to 300,000 during the ups and downs of the long depres-
sion of the coal industry, which began in 1924, f«ce, and many of
them have faced for some years, insufficient employment or permanent
unemployment so far as the mines are concerned. Without assistance
in locating and rehabilitating themselves, they probably face some
sort of permanent dole. The first Guffey bill, as originally introduced
early in 1935, made specific provision for the rehabilita'tion of miners
with no hope ol future reemployment in the coal industry. This
provision was stricken by the Senate committee.

The bituminous coal industry occupies a strategic position in the
economic life of the Nation.

The families of over one-half million workers represent well over^ 2,000,000
people who depend upon this industry for a livelihood; transportation and distri-
bution services raise this number very materially. Millions of our population
rely upon an unfailing supply for heat, both in homes and offices; railroads con-
sume around 20 percent of "the total; industry operates very largely upon the
energy derived from coal.^

'•. Consequently, the conservation of our coal resources, along with
oil, natural gas, and other sources of energy, has long been recognized
^s a matter for national policy. About 2 percent of the original
bituminous coal reserve, and 25. percent of the anthracite, has been
exhausted. About one-seventh of these reserves lie in the superior
eastern coal regions, but one-half of the total American reserve is in
inferior subbituminous and lignite fuels, located in the western part
of the country far from present centers of population. The bulk of
the coal reserve consists of relatively thin or inaccessible seams which
are more difficult to mine. Exhaustion ,of only 25 percent of the
anthracite beds of Pennsylvania, for example, has considerably
increased the cost of mining. The same situation will develop in the
relatively near future with respect to the bituminous seams which per-
mit low cost mining. Thus the problem becomes one of increasing
costs.

If tlie annual consumption of energy in the United States were to
continue at the 1929 rate, and if it were assumed that coal will carry
the load after the exhaustion of oil, gas, and oil shale, the coal reserves,
after allowing for a loss of 30 percent in mining, preparation, and trans-
portation (less than at present), might last 2,100 years.

Undoubtedly there will be an increase in the demand for energy.
An increase at the'rate which prevailed during the 1920's would cut

> F. E. Berqulst & Associates, op. cit., p. 13.

CONCENTRATION OF ECONOMIC POWER , 237

the period to some 500 years, and a shortage of supply would be felt
in the Appalachian field within 100 years.

In these circumstances, it becomes important to con-prve coal
resources and to keep waste at a minimum. It is estiiLated that
about 35 percent of the potentially marketable supply is lost in the
process of mining, of which perhaps 20 percent is avoidable. Principal
losses are in the structure of the room, entry, and pillars. Thus, any
national policy with regard to coal must attempt to reduce these and
other losses and encourage means of conservation, which, as defined by
the National Resources Committee, is an —

orderly and efficient use in the interest of national welfare, both in war and peace,
without unnecessary waste either of the physical resources themselves or of
human elements involved in their extraction.* The problem of conservation,
therefore, is not one of absolute exhaustion centuries hence but of increasing
cost at a relatively early date. In practical terms, it is to maintain the life of
the good beds as long as reasonably possible by prevention of needless waste,
thereby postponing the resort to thinner and less accessible beds. As exhaustion
of the best beds is already a fact in some districts, the problem is immediate and
urgent. 5

It must be recognized, of course, that a complicating difiiculty in
this problem is the unavoidable fact that any comprehensive program
of conservation "'^11 be attended by a substantial increase in basic
costs.

The Board further defines the objectives of conservation in its
report on National Planning and Public Works in Relation to Natural
Resources :

The task before the Nation is to help these (natural resource) industries to
prevent competitive waste, bring supply in balance with requirements, stabilize
employment, limit cutthroat competition, and by achieving some measure of
stability, permit the savings in the underlying resource which technology has
already shown to be possible. It involves considering the control of production,
of capacity, of stocks, and often of price by methods which traditionally have been
thought forbidden by the antitrust laws. It involves recognition of the competi-
tion between mineral industries, as in the fuel and power group, as well as within
them.

So far the attempt to meet this test has gone as far as production
quotas in the petroleum industry,^ rate setting in the natural gas
industry,^ and minimum prices in the bituminous coal indystry.*

The attempt to further conservation is one of the declared purposes
of the Bituminous Coal Act of 1937, and the Commi^fjion is specifically
directed by this law to study this problem. It is doubtful whether
the fixing of minimum prices according to the provisions of this act
can, in itself, effectively promote conservation. This effort to fix
prices, and to regulate various other aspects of the industry's opera-'
tion, should, of course, be appraised in the light of the long-run
objective of conservation of national resources, as well as with regard
to its immediate effects.^

OVERCAPACITY IN THE INDUSTRY

In addition to the problems of national policy associated with the
need for conservation of' the coal supply, there is the basic difficulty

< National Resources Board, A Report on National Planning and Public Works in Relation to Natural
Resources (Government Printing Office, Washington, 1935), p. 392.

» Rice, Fieldner, and Tryon, "Conservation of Coal Resources," paper No. 11, sec. 4, Third World Power
Conference, 1936, Washington.

« PetroleQro Act, 49 Stat. 33 (Feb. 22, 1935); 50 Stat. 257 (June 14, 1937).

' Natural Gas Act, Public, No. 688, 75th Cong. (June 21, 1938).

« Public, No. 48, 75th Cong. (Apr. 26, 1937).

' A mpre detailed discussion of the conservation of national resources is given in appendix G.

238 CONCENTRATION OF ECONOMIC POWER

of present overcapacity of existing mines. This has led to price cut-
ting, wasteful mining and marketing, pressure upon labor costs, and a
degree of disorganizalion of the industry, which gave impetus to the
Bituminous Coal Acts of 1935 and 1937, embodying the principle of
minimum price regulation by the Federal Government.

At present, largely on a single shift basis, it is conservatively esti-
mated that the mines can produce one- third to one-half again as much
coal as was produced and sold in 1937, the recent peak year of opera-
tions, without adding extra shifts beyond those scheduled in 1937 or
'>jinging new or abandoned mines mto use. This assumes a working
year of 261 days, estimated on the basis of operations for 5 days a
week in each of 52 weeks, with a maximum workday of 7 hours, as
required by the wage agreement of April 1934. Using this basis, the
mines which m 1937 produced 445,000,000 tons could have produced
in 261 days, at the same daily rate, with existing labor forces, and all
other factors bemg unchanged, 601,000,000 tons, or 156,000,000 tons
more than the actual production. This is an excess of almost one-
third over the actual demand. To produce this 601,000,000 tons
would have required generally only one shift per day, although some
of the mechanized mines in 1937 operated two or even three shifts.

If in producing this tonnage there had been none of the usual
seasonal fluctuation, the monthly production would have been about
50,000,000 tons. As a matter of fact, March, the peak month of
1937, saw a production of 51,935,000 tons, indicating the ready ca-
pacity to produce at that rate: The seasonal nature of the demand for
coal and the absence of storage facilities to permit more regular opera-
tions mean that there will always be added seasonal loads. More-
over, the peaks in all districts do not occur in the same months, as
illustrated by the following table which shows that — -

(1) March was the peak mon.th in price areas 1, 2, and 3;

(2) in all price areas a summer slump is observable, except that,

in price area 1, districts 2, 7, and 8 show peaks during some of
the summer months, due largely to heavy shipments over the
Great Lakes in the open shipping season. In district 2, where
over 30 percent of total production is by captive mines largely
owned by steel companies, and there is a heavy concentration
ofsteel plants, the rateof operation by these steel plants
exerts a decided influence on the monthly rate o£ produc-
tion, apart from the influence of lake shipments; .

(3) .district 7 enjoys whet is for this industry a fairly even

monthly production.

Thus, when the capacity necessary to meet the year's peak demand
is considered, the estimated single shift capacity on the 1937 operating
basis does not appear so excessive or so far beyond reasonable stand-by
capacity. The probability of continued excess capacity for some time
to come derives then from three conditions: First, the fact that current
demand is not great enough even to utilize operating mines at capacity,
with most mines operating on a single shift basis; second, the growing
mechanization and the use of two or three shift operations in better
'.ituated mines; and third, the potentialities of widespread multiple
shift operations and the" more remote possibility of abandoned mines
being brought into production.

CONCEXTRATirjX OF ECONOMIC POWER

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CONCENTRATION OF ECONOMIC POWER

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CONCENTRATION OF ECONOMIC POWER 241

The only limitation upon mines generally operating two shifts and
three shifts, thereby almost doubling and tripling capacity at 1937
rates, running production up to the fantastic figure of 1,800,000,000
tons, is, first, the inability of the present market to absorb even single
shift capacity (601,000,000 tons), and secondly, the undoubted
inability of present transportation equipment and railroad facilities
to transport any such tonnage. In fact, when in the war years of
1917 and 1918 the production was pushed up to 550,000,000 and then
to 580,000,000 tons, while just prior to that time the tonnage produced
had been about that of 1936 and 1937 (445,000,000 tons), car shortages
resulted. Wliile a great improvement in the basis of car assignment
to mines eliminated the- recurrence of car shortages after 1922, it is
still true that the ability of transportation agencies to handle a huge
addition to tonnage, as produced, would be a limiting factor upon
production. Just where it would begin to operate, whether at
500,000,000 tons or possibly nearer 700,000,000 tons, is not known.
Much would depend on the extent of diversion of open-top cars to
other uses. It is not unlikely that, even with new cars now in pros-j
pect, an annual production of somewhat over 500,000,000 tons, with
peak weeks of 11,300,000 tons, might produce a shortage.

The capacity of present, operating mines to produce for a full 261
day year on a daily three-shift basis is only theoretical; in fact, a full
rate of production for two shifts would probably be impossible with
present transportation facilities, even if sufficient labor were available.

Although it "is not possible to indicate precisely the share of the
annual output in 1937 which was due to extra shifts, it may be assumed
for estimating purposes that the entire 20 percent of deep-mine out-r
put produced with mechanical loading was on a double-shift basis. ^°
On this assumption, a little over 80,000,000 tons were involved, oi
about 40,000,000 in each shift. Thus, of the stated 261-day capacity
of 601,000,000 tons, representing about one-third over IP''^ demand,
about 40,000,000 tons may have been produced in extra-s«iift opera-
tion of deep mines. It is already known that strip mining is to a
large extent an extra-shift operation. Thus the percentage of actual
"excess" capacity is still further contracted.

No record is available to provide a dependable estimate of the
additional capacity represented by hundreds of mines which have been

1" Coal Age (February 1939, p. 28) estimated that "25 percent of the deep-mined output was handled by
some type of loading, equipment" in 1938. In 1936 the proportion was 16 percent, and in 1937, 20 percent.
See Bituminous Coal Tables 1937-38, Bituminous Coal Division (July 1939). An Iniormation Circular
of the Bureau of Mines points out that the use of njeehanical equipment gives impetus to working two or
three shifts jn order to spread machine costs. Each shift in turn necessitates closer supervision and enhances
the dangers associated with night shifts. Pee Multiple-Shift IVfechanical Mining in Some Bituminous Coal
Mines, Progress Report No. 1, by Albert I,. Toenges and Robert L. Anderson (May 1938, pp. 47-48). This
report states:

"The advent of mechanized minir .}} < brought to the foreground, among many pro nlems. the matter
of return of the increased investment i.. equipment. A mine is designed for a certain daily output, and If
this is large, the investment in equipment and development will be large also. If, however, the daily out-
put can be produced over a period of two or three shifts, the amount of equipment required will be reduced
proportionately, which should result in a small capital charge per ton.

"There are other advantages of multiple shifting that have an influence ononining costs. The concen-
tration of working places in a relatively small area lends itself to closer supervision. Satisfactory results
with every iype of mechanization, not only with reference to output per man but also in regard to safety of
operation, are in proportion to the amount of supervision.

"The advisability of working a mine two or three shifts per day for obtai ■ -Siaximum results is recog-
nized, and this practice should be followed where possible. For safety of eration, however, the same
supervision should be given on all shifts. It is the opinion of the authors that the same efficiency can be
-obtained from workers on the second shift as on the first or day shift if the same amount of supervision is
given in both cases. However, there is a question in regard to a worker's efficiency on the third or 'grave-
yard' shift. The worker is in a much better condition phychologically and physically and is believed to be
less susceptible to injury during the more natural working hours. Aside from the humanitarian standpoint,
it is believed that this shift should be set aside for inspection and maintenance of machinery. If this is done
there is less likelihood of serious break-downs on working shifts with resultant loss in tonnage and increase
in cost."

242 CONCENTRATION OF ECONOMIC POWER

closed down for perhaps several years butliave been kept in readiness
to operate whenever prices were such as to make operation ad-
vantageous.

This brief review of the meaning of excess production capacity
brings out, first, that the physical ability to produce, with present
equipment and labor working three shifts a day in all operating mines,
is so far beyond the range of possible demand in the immediate future
as to reduce its mere mention almost to the point of absurdity.

Xeverthcless, subject to the need, and to the ability to transport,
the mines do possess this capacity. For all practic.al purposes,
however, we believe it fair to consider that the excess capacity is from
one-third to one-half of the 1937 production, and apparently this is
not so radically beyond the reasonable standby capacity. Neverthe-
less, it serves to exert pressure upon minimum prices.

HISTORY OF THE COAL INDUSTRY

The course by which the coal industry has reached its present rather
disorganized condition is indicated in the historical review which
follows. The history of the industry may be divided into five periods^
The period prior to the World War of 1914, in which the industry
grew rapidly; the war period— which laid the basis for later depres-
sion— a period marked 63^ rapid expansion of capacity and output and
employment, high pricesy Government regulation by the U. S. Fuel
Administration, and transportation difficulties; the chaotic post-war
years through 1922, marked by rapidly falling prices, transportation
difficulties, and labor disputes; 1923, a turning point; and the long
depression, 1924-1933. With the year 1933 a new period of Federal
regulation begins, by codes under N. R. A., and by direct Act of
Congress with the so-called Bituminous Coal Acts of 1936 and 1937.
This recent period of regulation is the principal subject of this study.

Growth of Industry Prior to the World War of 1914.

The bituminous coal industiy kept pace with the gradual industrial
expansion of this country, beginning about 1890. The Nation found
its chief source of energy in bituminous coal. Annual production
approximately doubled in each decade. In only 2 years, 1908 and
1914 was there any interruption to a steady upw^ard climb of produc-
tion and consumption, During the years 1900 to 1914 operating
time held fairly constant, and the characteristic over-capacity held
at about 50 percent of the production.

During the flush times of the decade preceding 1908, history in one important
particular repeated itself. * * * The impulse to exploit new territory and
to open new mines was rampant, notwithstanding the fact that there has not
been a time during that period when, with a full complement of men, and with
Biifficient transportation facilities, the mines already developed have not been
able to furnish from 50 to 75 percent more than the production. The opening of
every new mine has, with rare exceptions, meant the further spreading out of an
already inadequate supply of railroad cars, the laws prohibiting any favoritism
in tiMs respect.'!

Table 2 is a summary table of the prewar years showing production
and average, price data:

" Mlueral Resources of the Umted States (Government Printing Office, 1908); Chapter on "Coal," pp. 6, 6.

CONCENTRATION 05^ ECONOMIC POWER

243

Table 2. — Production, capacity, average realization, and net income of the bituminous
coal industry, 1890-1914

Period

Production

(millions

of net

tons)

Average
number of
days mines

operated

Capacity
in working
year of 308
days (mil-
lions of net
tons)i

Percent

production

was of

capacity

Average

value f.o. b.

mine

(dollars

per ton)

Net in-
come or
deficit
(millions
of dollars)

1890-94

121
156
252
353
435

208
205
221
212
215

181

350
513
622

66.85
66.91
72.00
68.81
69.94

$0.97
.83
1.11
1.10
1.14

1895-99 - -

1900-1904 .-

1905-9

(»)

1910-14

1 In the previous discussion of capacity in 1937, a 261 -day year was used, based on a wage agreement of
April 1934. I^ this table and all others in this chapter which relate to the period prior to 1934, a working
year of 308 days is used. Thus, single-shift capacity figures for the periods up to and incftjding 1933 and 1934
to date are not comparable.

2 Data not available.

Source: Mineral Resojirces of the United States (United States Geological Survey).

It will be noted that operating mines worked an average of more
than 200 days per year throughout the prewar period. The average
number of days worked in a month or a year is perhaps the most im-
portant single factor directly affecting coot of production.

Growth of capacity during these prewar years cannot be attributed
definitely to attractive profits. No definite figures of the aggregate
profits in the industry are available, but some reflection of their trend
may be had from the average sales reahzation and trend of wages.
There was no appreciable upward trend in prices. Price realization
per ton at the mine remained relatively constant from 1900 to 1914.
It averaged $1.11 in the first 5 years, $1.10 in the second 5 years, and
$1.14 in the third 5 years. The maxima during this 15-year period
were $1.24 in 1903 and $1.17 m 1914.

In this industry wages represent from 60 to 65 percent of the cost.
Changes in wage rates are significant, therefore, as indicating the
trend of labor costs, and hence of total costs. In 1900-1902, the union
base scale for skilled labor in Illinois was $2.28 per day; in 1903 it
was $2.56; in 1904-05 it was $2.42; in 1906-09 it was $2.56; in
1910-11 it rose to $2.70; and in 1912-15 it reached $2.85. With
minor variations tLiS schedule prevailed throughout the central
competitive field (Illinois, Indiana, Ohio, and western Pennsylvania),
which during this period accounted for about one-third of the national
output. These changes in scale were reflected in the labor costs per
ton, which increased from 70 cents to 78 cents on the total production
between 1902-09.^^ Thus between those 2 years costs rose 8 cents,
whereas average prices f. o. b. mines remained at practically the
same level.

It is apparent that the opportunity for and range of profits were
diminishiiig while capacity was growing apace. This condition of
over-capacity had come to be accepted as a natural, if not a necessary,
resultant under a "laissez faire" ecoiioi^iic policy. The development
was generally steady, and the industry was considered a profitable
one. Capital was readily available. It is likely that hope of future
profit was a potent motive. Railroads were glad to extend their
facilities to new fields which offered freight revenue.

Mine labor has a long history of struggle marked by recurring
suspensions, strikes, and lockouts incident to winning recognition

u Census of Mines and Quarries for 1902; same (or 1900.

244 CONCENTRATION OF ECONOMIC POWER

for collective bargaining and negotiation of wage agreements. Coal
miners were generally considered a depressed group until the war.
(During the war they received some increases, and by 1923 were work-
ing under very good rates of pay.) It must be borne in mind that
there a_re two factors affecting the actual earnings of the mine worker.
His eafnings are controlled by the scale of wages under which he if
employed and the number of days of work available to him in a
year. For example, 705,000 mme employees in the bituminous coal
industry worked 179 days in 1923; but while their average daily
earnings of $6.74 seems quite a fair daily wage, the average annual
earnings were $1,200. Similarly in 1929, 503,000 workers put in
219 days, and averaged $5.34 a day for an annual total of $1,168.
The industry's private depression had reduced the number of em-
ployees by 200,000 and the average daily earnings by $1.40. The
general depression reduced employment to 419,000, who worked
onlv 167 days, and made an average of only $3.36 per day in the year
193''3.^'
War Period— Rapid Expansion.

Production was stepped up rapidly in 1916. An all-time peak
of 579,000,000 tons was reached in 1918. New mines were opened,
railroads extended to serve them, companies formed to operate them,
and the foundation laid for the ruinous depression which followed
1923. In 1917 and 1918 the number of mines operating, the number
of men employed, and the number of days of operation reached a
high mark. During all the war years mines enjoyed very good work-
ing time. They operated 230 days m 1916, 243 in 1917, and 249 in 1918.

Under the stimulus of war activity and war prices, the number of
operating mines increased from 5,726 in 1916 to 8,319 in 1918.

Average prices at the mines went from $1.32 in 1916 to $2.26 in

1917 and $2.58 in 1918. Except for 1 year, they did not average over
$1.20 per ton before the war.

According to the Treasury Department, the aggregate net income
of the bituminous coal industry in 1917 was about $204,000,000. In

1918 it was almost $149,000,000. This was the first official record
of the aggregate net income of the industry.^*

Table 3 gives the production and average price data for the war
period.

Table 3. — Production, capacity, average realizdtion, and net income oj the bituminous
coal industry, 1916-18

Year

Production
(millions of
net tons)

Average
number of
days mines

operated

Capacity in
working
year of 308
days (mil-
lions of net
tons)

Percent

production

was (if

capacity

Average
value f.o.b.
Viine (dol-
lars per ton)

Net income
or deficit
(millions

of dollars)

1916

503
652
679

230
243
249

673
699
717

74.74
78.97
80.75

1.32
2.26

1917

+204

1918

1 Data not available.

Source: U. S. Geologiffll Survey, Mineral Resources of the United States. Net income data from Report
of the United States Coal Commission (1926).

" These figures of earnings and employment are from a statement prepared by F. Q. Tryon of the United
States Hureau of Mines, appearing In Gordon Exhibit 697 in Ex Parte 115 before the Interstate Commerce
Commission in 1936.

'< See Report of the United States Coal Commission (1925), p. 2528.

CONCENTRATION OF ECONOMIC POWER 245

During each of these years, difficulties in railroad transportation and
the supply of cars to the mines created actual shortages of coal among
consimfiers, and developed among them fears for the adequacy of their
supplies in the future. Consumer's demand could not be fully met in
the fall of 1916 due to a car shortage which developed in October.
In 1917, the rapid increase in production was at least partly responsible
for an acute car shortage and a coal shortage. It was this which
precipitated the formation of a committee on coal production within
the Council of National Defense, followed by the establishment of the
United States Fuel Administration under the Lever Act.^^ The car
shortage continued during the earlier months of 1918, and many will
remember cases of actual suffering caused by a fuel shortage during
one of the hardest winters on record.

United States Fuel Administration.

This war-time control of coal, extendmg to both bituminous coal and
anthracite, as well as to petroleum, was the first experience in the
country with governmental control of these industries.

Durmg the early stages of the World War the production of bitu- ^
minous coal had steadily increased, and the average realization f. o. b. '
mine remained relatively stable. . Tbere were rumors, however, of
shortages of both labor and cars. Chief among those causes wliich
led to the passing of the Food and Fuel Control Act,^^ was the rapid
rise in coal prices after the United States entered into the war in April
1917; the desire of the Government to buy its coal at moderate prices;
the necessity of stimulating production to meet war-time needs; and
the inability of transportation facilities to handle adequately the in-
creased production of various commodities.

In June 1917, Franklin S. Pcabody, chairman of the coal production
committee, Council of National Defense, called together a group of
bituminous coal operators to discuss voluntary maximum prices for
coal. As the result of these meetings between the operators, Mr.
Peabody, and the Secretary of the Interior, Mr. Franklin K. Lane, the
operators agreed to a maximum price of $3.50 for lump, egg, and nut
sizes, and $3 for mine run coal. These prices represented a consider-
able reduction inasmuch as prices at that time ranged from $4 to $6
per ton. Although the Government was permitted a reduction of 50
cents below these Peabody-Lane prices, Secretar}^ of War Baker
thought that the prices were much too high. The Secretary of the
Navy required that the price submitted for an order of 1,700,000 tons
for the Navy be reduced from the price of $2.95 to $2,335 a gross ton
f. o. b. mine, with the understanding that the final price for this Navy
order would be determined whenever the Federal Trade Commission
had completed its investigation of cost of production.

The PeUbody-Iyane prices were generally observed, however, until
the President's proikulgation of maximum prices under the Lever
Act. f ,

The Lefv^^r Act (Food acid Fuel Control Act of August 10, 1917)
granted broad powers to the President j^ subject to the standards pre-
scribed therein (and indicated herein by italics) , to license the impor-

u Public, No. 41, 65th Cong.; 40 Stat. 276 (Food and Fuel Control Act of Aug. 10, 1917).

18 Basic sources are the following reports of the U. S. Fuel Administration: Final Report of the U. S. Fuel
Administration; Report of the AdministrHtive Division; Report of the Distribution Division: Pt. I, "The
Distribution of Coal and Coke," and pt. II, "The Zone System." Report of the Engineers Committee;
Final Report of the Easiness Manager and the Custodian of Property; and General Orders, Regulations,
and Rulings of the U. S. Fuel Administration. See also Paul W., Garrett's Government Control Over
Prices (Government Printing OfRce, Washington, 1920).
279348 — 41— No. 32 18

246 CONCENTRATION OF ECONOMIC POWER

tation, manufacture, storage, mining, and distribution of any neces-
saries to effectuate the purposes of the act, to requisition fuels, and
to take over and operate any mine, plant, factory, packing house, or
oil pipe line necessary to any public use connected with the common
defense^ At the end of such use or operation, the mine, plant, factory,
or pipe Ime was to be returned to its owner, and just compensation
made by the President for the use thereof.

The act empowered and authorized the President to fix the price
of coal and coke, wherever and whenever sold by producer or dealer,
and to regulate the method of production, sale, shipment, distribu-
tion, apportionment, or storage of coal or coke, among dealers and
consumers, both domestic and foreign, whenever in his judgment
such action was necessary for the efficient prosecution of the wiw.
The President was also authorized to requisition, take over, operatf
or cause to be operated, the plant, business, and all the appurtenance-
belonging to such coal or coke producer or dealer, whenever such
dealer or producer failed to comply with prices or regulations, or
conducted his business in a manner prejudicial to the public interest.
While operating such plants or causing them to be operated, the
President was also authorized to make such regulations for the
employment, control, and compensation of the employees as to him
seemed essential.

As an alternative, the President was authorized and empowered
to establish a Government monopoly of the purchase, sale, and dis-
tribution of coal, whenever in his opinion such action was necessary
for the efficient prosecution of the war.

On August '21, 1917, the President promulgated for all mines
throughout the country a schedule of maximum f. o. b. mine prices.
The base price was $2.25 on prepared sizes, $2 for mine run, and $1.75
for slack and screenings in the eastern coal fields. The prices in the
Alid-west and West were somewhat higher.

/The President appointed Mr. Harry A. Garfield as United States
Fuer Administrator, and delegated to him the powers conferred upon
the President by the Lever Act. Mr. Garfield set up a large organiza-
tion to execute the provisions of the act, but the chief branches were the
administrative, distribution, and petroleum divisions. The distribu-
tion division had charge of the allocation of production quotas, the
distribution of coal and coke to various States in defined consumer
areas from particular producing districts, the diversion of coal, and
zoning.

The Fuel Administration established a schedule of maximum
prices for all sizes of coal f. o. b. mines throughout the country.
While there were numerous exceptions, most of the prices were within
the following ranges: Prepared sizes, $1.90 to $3,80; mine run, $1.90
to $3.55; and slack or screenings, $1.65 to $3. The jobbers' com-
missions were limited to 15 cents per ton, and the retailers' net margins
were limited to 30 percent of the gross average margin during the
year 1916. This met the required standard that maximum prices
for dealers should allow "the cost to the dealer and * * * a just
and reasonable sum for his profit in the transaction." '^

With the decline in coal prices after the signing of the Armistice
the maximum prices were suspended on February 1, 1919, and the
Fuel Administration was formally terminated on June 30, Congress
having failed to appropriate funds for its maintenance. However, the

CONCENTRATION OF ECONOMIC POWER 247

failure of consumers to accumulate during the summer stocks of coal
fox winter consumption, the strike of the coal miners in November,
and the delayed delivery of coal, due to the strain put upon the
railroads by the demand for winter coal at a time when railroad cars
were being used for transporting crops, forced coal prices above the
maxima previously fixed and subsequently suspended by the Govern-
mer^t. Maximum prices were reestablished and remained in effect
until April 1, 1920, when they were again suspended. The Food and
Fuel Control Act ceased to be in effect on and after March 3, 1921.

The effect of the work of the United States Fuel Administration
can easily be evaluated in terms of the purposes of tiiis study. The
prices established by the President were based upon cost studies
made by the Federal Trade Commission, covering the 18 months
ending July 1, 1917. In making this cost study the Federal Trade
Commission dismissed all investment claims and used instead the
producing cost, plus maintenance and depreciation cost. A study of
these records shows that the Peabody-Lane prices voluntarily agreed
upon were considerably above these costs, and the President's prices,
as established and subsequently modified by the Fuel Administration,
were approximiately 38.8 cents a net ton f. o. b. mine below the
Peabody-Lane prices. Multiplying this reduction by the 806,000,000
tons of coal produced during the Fuel Administration period, the
savings to consumers were approximately $312,728,000.

The Fuel Administration prices were based upon a bulk-line cost
of production which was believed would permit the mining of approxi-
mately 90 percent of the available coal, without financial loss. As
reported by the operators, the average cost of production for 84
percent of the total coal produced during the months of August and
September 1917 was $1,696. The Statistical adjustments made by
the Fuel Administration to correct minor mathematical errors in-
creased this reported cost to only $1,706. In effect this was an en-
dorsement of the accuracy of the reports made by the operators. The
average bulk line cost was fixed at $1,902 or 19.6 cents above the
average adjusted cost. This bulk line cost represented the price re-
quired to assure the mining of the necessary coal, as compared with the
average cost, which involved the mining of coal only up to, or below,
the a\ 3^age.

^e maximum prices were sufficient, upon the basis of the reported
co^s, to permit, without financial loss, the mining of 98.4 percent of
all the commercially available coal.^^ The weighted average of all
maximum prices was $2,162 per ton. This weighted average price
was but 26 cents above the bulkline cost, and was only 45.6 cents a
ton above the weighted average cost for the whole country. This
margin of 45.6 cents a ton show^ httle signs of profiteering, if any, in
the coal business as a whole. The average f. o. b. mine realization
per net ton of ^,000 pounds was $1.32 in 1916, $2.26 in 1917, $2.58
in 1918, and $2. '49 in 1919. The net income of the coal mining industry
in 1917 was $203,919,000, but in spite of the increased production of
1918, the net income m this year was only $148,847,000. In 1919,
still under Fuel AdminiBtration prices, the net income of the industry
was $62,260,000.i»

18 With respect to coal not generally available, i. e., unavoidably lost in mining, see appendix O.

i» Report of U. S. Coal Commission (1925) p. 2528. These figures represent net income (after interest)
as reported to the coal comm&ion. Apparently income taxes and excess profits taxes were deducted by some
companies, but not by others, in reaching the figures reported. The Commission did not eliminate this

248 CONCENTRATION OF ECONOMIC POWER

Data available and believed to be representative show the followmg
rates of return on investment:^

Period

Proportion
of total
tonnage

represented

Investment
per ton

Approxi-
mate rate
of return
(percent)

1916

) y

$2.78

{ ^

1917

1916-17

1918 . •-

3.12

f 18

1921 ..

1918-21

1916-21....

Fuel Administrator Garfield's price policy put the emphasis upon
production rather than price, giving the operators the benefit of doubt
to encourage increased output. The prices originally promulgated
by the President were based on 100,000,000 tons, representing chiefly
the larger and lower cost mines. The Fuel Administration increased
the President's prices from time to time to attract new capital to coal
mining by the hope of a return equal to or somewhat above that
afforded by Government bonds, and more accurately to reflect costs
of production. Effective October 29, 1917, each maximum price
already in effect was increased 45 cents a ton to take care of the higher
costs of production under the wage increases provided in the Wash-
ington Agreement (effective November 1, 1917).^^ Nevertheless, the
Fuel Administration did not lose sight of its basic policy — ^increased
production of coal for war-time uses, at a- reasonably low level of prices
to 'the consumer, which \yould be consistent with a reasonable profit to
thfe operator. This policy conformed to the standard prescribed in
the act; namely, allowing "the cost oj production, including the expense
of operation, maintenance, depreciation, and depletion, and . . . a just
and reasonable projit."^^ On May 25, 1918, the maximum prices of all
bituminous coal were reduced 10 cents a ton because of a supposed
decrease in cost of production.

At no time during the period of the Fuel Administration, in fact
at no time during the active period, did the mines as a group operate
at capacity. During th^ war years, when industries were running 24
hours a day, the failure of coal production to equal or to exceed the
demand was due to the inability of the railroads to move the coal from
the mines to the points of consumption. Had there been adequate
transportation facilities, the supply of coal would have been more than
sufficient. The production of coal Iras been, and is, a problem of
demand and of transportation facilities. The Fuel Administration met
this problem of inadequate transportation facilities by cooperating

" Federal Trade Commission, Investment and Profit in Soft-Coal Mining (Government Printing Office,
Washington, 1922), pp. 70-71.

Investment includes bonded indebtedness and other borrowed money. Rate of return is the relation
between investment and net operating income before interest and Federal taxes. In the years 1917-21
excess profits taxes absorbed a substantial part of the large income of this industry.

" This increase in prices did not apply (1) to any coal sold at the mine under an existing contract which
provided that the pi ice of coal sold thereunder would increase with any increase in wages paid to miners;
and (2) in any district in which the operators and miners failed to agree upon a penalty provision, satisfactory
to the Fuel Administrator, for the automatic collection of fines for loc^-outs and strikes, as provided in the
Washington Agreement.

Penalty provisions remained a part of wiBe contracts in the bituminous-coal inda'?try until April 1, 1939.

CONCENTRATION OF ECONOMIC POWER 249

with the United States Railroad Administration, by granting priority-
orders, and by zoning the distribution of coal.

The wages of mhiers were also subject to regulation under the
Lever Act. With the increasing cost of living during the period of the
World War, miners demanded wage increases. The Fuel Adminis-
tration was instrumental in negotiating the Washington agreement
(October 6, 1917). Table 4 shows the wage increases provided under
this agreement.

Negotiation of other wage agreements of like nature was facilitated
by the Fuel Administration for the States of Kansas, Missouri,
Arkansas, Oklahoma, central Pennsylvania, Michigan, and Iowa. In
these agreements the daily rate for inside skUled labor was the same
as that for Illinois and Indiana, namely $5. Agreements were also
effected in the other coal-producing States. The Washington agree-
ment became effective on November 1 , 1917, subsequent to the increase
of maximum prices by 45 cents a ton.

Table 4. — Wage increases under the Washington agreement *

Occupation and State

Apr. 16,
■ 1917

Nov. 1,
1917

Actual
increase

Percent of
Increase

Pick mining (run of^ne):
Illinois (Danville)

CeTUs per
tov.
74.00
74.00
77.64
77.64
Per day
$3.60
3.60
3.60
3.60

2.96
2.96
3.35
2.70

Cents per
ton
84.00
84.00
87.64
87.64
Per day
$5.00
6.00
6.00
5.00

4.36
4.36
4.75
4.10

Cents per
ton
10.00
10.00
10.00
10.00
Per day
$1.40
1.40
1.40
1.40

1.40
1.40
1.40
1.40

13.51

Indiana (except block)

13.51

13.01

Western Pennsylvania (thin vein)

13.01

Trackmen (inside skilled labor) :

38.89

Ohio -

38.89

3S.89

Outside common labor:
Illinois

47.30

Ohio .

59.57

Wftdtfirn PpTin^ylyftTiift

51.85

' F. E. Berquist and Associates, op. cit.,,p. 161.

The average number of days worked in 1916 was 230; in 1917, 243;
and in 1918, 249 — an all-time high. The average number of days the
mines were idle due to labor disputes was 4 in 1916, 4 in 1917, and I
in 1918. The number of days lost due to labor disputes increased to
25 in 1919 because of a strike over wage agreements.

The average number of men employed increased from 561,000 in
1916 to 603,000 in 1917, 615,000 in 1918, 622,000 in 1919, and 640,000
in r20. , ^ • _

In view of its objectives — increasing production and expediting
distribution at the lowest cost to the consumer consistent with a
reasonable profit to the operator and fair wages 'to labor, and pre-
venting local or general hoarding, speculation, and monopolization —
the Fu^ Administration must be given considerable credit as an
•emergency agency.

Although about 18,000 men and women worked for the Fuel Admin-
istration at some time during its existence, many of them servf^d
without compensation. The cost of- this agency was but $5,000,000.
It was estimated that its maximum prices resulted in savings to
consumers of more than $300,000,000.

250 CONCENTRATION OF ECONOMIC POWER

Chaotic Post-War Years Through 1922.

A miners' strike in 1919, lasting from November 1 to December 12,
tied up operations employing 415,000 men in 22 States, and precipi-
tated a coal shortage. As has already been noted, the Fuel Adminis-
tration's powers were reestablished to cope with problems of price
and distribution. At the end of 1919, stocks in the hands of consumers
were subnormal. Production in this year was 20 percent below that
of 1918. Notwithstanding this year-end disturbance, prices averaged
9 cents less in 1919 than in 1918.

With depleted stocks that had to be rebuilt, an industrial boom at
the beginning of 1920, accompanied by a sudden increase in export-
demand, accentuated the market situation. This boom, as well as a
car shortage which resulted from a railroad • switchmen's strike
beginning April 1, led to a runaway price situation in the spot market.

Mine prices of $9, $10, $12, and in some instances as fantastic as
$20 per ton, were noted. The average price per ton for the year rose
to the high figure of $3.75, an all-time peak. Toward the end of the
year prices broke back toward normal levels. The net income of the
industry also established an all-time peak of $250,000,000. The
number of men employed increased to nearly 640,000 in 1920, as
against 615,000 in 1918.

The following year 1921 witnessed a collapse of the post-war boom.
In the depression that followed, the price receded by 85 cents, averaging
$2.89 per ton; production was at its lowest point in 10 years, 416,-
000,000 tons. The industry's net income of $29,000,000 was only a
little more than 10 percent of the 1920 income. •

The succeeding year 1922 saw another strilve affecting 460,000
miners (73 percent of the productive capacity) and extending over
almost 5 months, with an average loss of 78 working days-. Mines
operated only 142 days and produced 422,000,000 tons. - Again prices
were driven upward and realization averaged $3.02 per ' ton. No
record is available to show whether 1922 was profitable for the
industry as a whole.

To alleviate the sl^ortage of coal which resulted from the strikes
of the bituminous-coal and anthracite miners and railroad shopmen.
Congress passed the Federal Fuel Distributor Act on September 22,
1922.^' This act authorized the Interstate Commerce Commission to
issue orders for priorities in railroad car service and for embargoes or
other measures suitable for the equitable distribution of fuels to meet
the emergency, promote the general welfare, and prevent unreasonably
high prices for coal. A Federal Fuel Distributor was authorized to
act as a fact-finding agent to recommend to the Interstate Commerce
Commission the classes of consumers which should receive priorities
in transportation and distribution.

This act expired a year after its enactment and is of minor impor-
tance in the history of Federal regulation. Another act," passed at
the same time, authorized the establisliment of the United States
Coal Commission, the reports of "which are stUl considered of great
historical value. The reports of this fact-finding body ("Hammond
Commission") constitute the most extended and unquestionably one
of the most valuable compendiums of engineering, economic, and

" Public, No. 348, 67th Cong.; 42 Stat. 1025.

" United States Coal Commission Act, Public, No. 347, 67th Cong.; 42 Stat. 1023 (Sept. 22, 1922), amended
by PubUc, No. 499, 67th Cong.; 42 Stat. 1446 (Mar. 4, 1923).

CONCEIN'TRATION OF ECONOMIC POWER

251

statistical studies of the bituminous-coal and anthracite industries
ever made.

In summary, during the war and the post-war years through 1922,
the industry was beset with events which greatly modified earlier
trends. The steady pre-war growth in production ceased after the
forward surge of 1916, 1917, and 1918. Normal productive activities
and adjustments at the mines were held in check by car shortages and
far-reaching strikes. Actual and threatened scarcity of the Nation's
coal supply characterized these years. Prices and net incomes reached
high levels. New investments in the industry, encouraged by liberal
profits in 1917, 1918, and 1920, expanded mine capacity. Generally
speaking, the peak of wage returns for the industry as a whole was
attaine4 in 1920, and continued in the union fields in 1923; in non-
union areas the rates dropped materially in 1921, but were either
entirely or substantially restored in 1922. The number of mines
rose from 5,700 in 1916 to 9,300 m 1922.25

Table 5 gives the production and average price data for the post-war
period.

Table 5. — Production, capacity, average realization, and net income of the bituminous
coal industry, 1919-23

Year

Production
(millions of
net tons)

Average

number of

days mines

• operated

Capacity in
working year
of 308 days
(millions of
net tons)

Percent pro-
duction was
of capacity

Average

value, f- 0. b.

mine, per

ton

Net income

or deficit
(in millions)

]919

466
569
416
422
565

195
220
149
142
179

736

796
860
916
970

63.32
71.48
48.37
46.07
58.25

$2.49
3.75
2.89
3.02
2.68

+$62
+249

1920 _

1921

1922

1923

1 Data not available.

Source: U. S. Geological Survey, Mineral Resources of the United States. Net income date from Report
of the United States Coal Commission (1925).

1923— A bench mark.

The year 1923 has special significance. It separates the previous
trends from the succeeding years of liquidation. The number of em-
ployees, the number of mines, and their productive capacity were at
all-time peaks; prices and wage rates were at high levels; car shortages
and other impediments of preceding years were removed. The forces
of competition were comparatively free to operate. No strikes of
consequence occurred. Prices were dropping, and some of the smaller
commercial operators were forced out of the market. Toward the end
of the year a break in wages in nonunion fields began to enter the
picture. "Overdevelopment was forcing intense competition and the
nonunion fields, free to reduce costs by cutting wages, were beginning
to press hard upon the union fields operating on a fixed wage scale." ^^

While it is not exactly accurate, to.^call competition of other fuels
and the development of fuel economy new factors, their measurable
effect upon the consumption of coal became most marked in the years
succeeding the war. Bituminous coal, at the opening of the century
and until the close of the war in 1918, was the source of about 70 per-

" For the number of mines operating in other years see Appendix A.
>« U. 8. Bureau of Mines, Mineral Resources of the United States, 1924.

252 CONCENTRATION OF ECONOMIC POWER

cent of the total energy supply of the country. The repeated strikes,
car shortages, the war, and other factors which increased coal prices
to several times their former value from 1917 through 1923, led con-
sumers to turn to other sources of energy. Competing fuels were
quick to take advantage of the opportunity and impressively entered
the market in competition with coal. Although coal is still the prin-
cipal source of energy, its share of the total energy has steadily receded
until in 1937 it had dropped to 45 percent. ^^ Not only did fuel oil,
natural gas, and water power competition contribute to this shrink-
age, but fuel economy was at least of equal importance. Losses sus-
tained on this account have not been as large as from some other
causes, but they are permanent. It is estimated that from the begin-
ning of the fuel economy movement in 1909 through the boom year
1929, the cumulative result represented about 33 percent for all indus-
tries and railroads together. ^^ In other words, these industries and
railroads were using in 1929 only tw^o-thirds as much coal to produce
the same results as would have been needed under the 1909 practices
of coal combustion. A break-down of this estimate shows that elec-
tric public utilities had effected fuel economies of 66 percent at that
time, steam railroads 40 percent, petroleum refiners 36 percent, iron
and steel plants 25 percent, cement mills and all other manufacturers
21 percent.^' Stated another way, "had there been no advance in
thermal efficiency during the 20 years, and had the efficiencies of 1909
continued without change, American business would have consumed
210,000,000 more tons of bituminous coal in 1929 than were in fact
required." This 210,000,000 tons would have required the operation
of the full mine capacity in that year.

. After 1929, the general slowing up of business, incident to the eco-
nomic depression, hastened the decline.

The Long Depression in the Bituminous-Coal Industry, 1924-33.

As already noted, the closing months of 1923 saw the beginning of a
period of intersectional competition. The leveling off of demand,
following the war expansion, precipitated a long struggle of individual
producers to obtain a greater share of the business. Some nonunion
mines, not bound by general wage agreements, reduced prices by the
device of wage cutting. Other mines were forced to follow suit in
an effort to retain their share of the business. Gradually this spiral
of wage cutting and price cutting spread to union mines, and contracts
were abrogated under pressure of price cuts by competitors. The
pressure of price-competition from nonunion fields caused the revision
of the basic scale in the central competitive field in 1928, when it was
reduced from $7.50 to $6.10 per day for inside skilled labor. By
August 1932, when it was again revised to $5, Ohio and western
Pennsylvania had become nonunion and were not parties to the wage
agreenj^nt. Central Pennsylvania had also gone nonunion.

»' U. 8. Bureau of Mines, Minerals Yearbook, 1938, p. 701-704.
'» U. 8. Bureau of Mines, Minerals Yearbook, 1933-33.
» Ibid., p. 400.

CONCEI^TRATION OF ECONOMIC POWER 253

All mines thus released from wage agreements were able to compete
on a purely price basis. The downward trend in the average value of
coal f. o. b. mines continued, dropping below $2 in 1927 for the first
time since 1916. The average for 1929 was $1.78. That year saw the
peak of the national industrial boom period, in which the coal industry
did not share.

Unemployment and distress among mine labor was widespread
during this period. Not only were wages greatly reduced in years
following 1923 (in many'cases being based on what could be paid out
of the price that could be obtained), but the number of men employed
dwindled from the 1923 peak of 705,000 until in 1929 the industry
employed only 503,000. The years of general depression which fol-
lowed 1929 and the rapid slump in the demand for coal created a
particularly deplorable condition among mine workers. The average
earnings of the 406,000 men who remained on the pay roUs in 1932,
and who had only 146 days of work on the average, fell to $662. In
1933, 419,000 men averaged only $550.

Although 1929 is not a year particularly significant for the bitu-,
minous-coal industry, except by way of contrast with general industry,
it may not be amiss to illustrate the extent of the contrast. In the
important year of 1923, 705,000 men received $851,000,000 in wages;
in 1929, 503,000 men received only $588,000,000— a reduction of about
31 percent. At the same time total wage payments in manufacturing
industries had increased from $11,000,000,000 to over $11,600,000,000,
or about 5.5 percent.

During these years of wage and price cuts the industry was not free
from strikes and suspensions. In 1925, because of loss of business to
southern rivals, western Pennsylvania operators demanded a revision ■
of the 1924 Jacksonville agreement. Failing to obtain this, operators
closed many mines in April, and reopened them in August on a nrm-
union basis with reduced wage scales. There was also some break-
down in Ohio and in northern West Virginia, resulting in all of Ohio
and Pennsylvania, with minor exceptions, becoming nonunion. Illinois
and Indiana continued their contracts until March 31, 1928, ,when
rates were reduced after another strike. A major suspension began
in April 1927 at the expiration of the Jacksonville agreement, and
175,000 men were involved in Illinois, Pennsylvania, Ohio, Indiana,
Kansas, Missouri, and Iowa. The renewal of the 3K-year agreement
in Illinois on a lower scale was negotiated in August 1932, after 19
weeks of suspension.

During this period industry losses were severe. Except for the
years 1924 and 1926, when aggregate net income data were not avail-
able,'the industry showed an uninterrupted chain of annual net losses
beginning in 1925 and continuing through the year 1933. In each of
the years 1931, 1932, and 1933, losses amounted to approximately
$50,000,000.

During this period prices steadily fell until the average in 1932
was only $1.31 per ton, the* lowest since 1915. Table 6 gives produc-
tion and average price data for the depl^ession years.

254

CONCENTRATION OF ECONOMIC POWER

Table 6. — Production, capacity, average realization, and net income of the bituminous
coal industry, 1924-33

Year

Produc-
tion (mil-
lions of
net tons)

Average
number
of days
mines
operated

Capacity
in work-

'°o?^8"
days (mil-
lions of
net tons)

Percent
produc-
tion was

of ca- .

pacity

Average
value

f. 0. b.

mine (per
ton)

Net incomo
or deficit
(in mil-
lions)

1924

484
520
673
518
501
535
463
382
310
334

171
195
215
191
203
219
187
160
146
167

871
822
821
835
760
752
770
736
653
615

55.57
63.26
69.79
62.04
65.92
71.14
60.78
51.90
47.47
54.31

$2.20
2.04
2.06
1.99
1.86
1.78
1.70
1.54
1.31
1.3.4

(')
-$22

1925 .

1926....

1927

('>

1928

1929

1930

±11

1931

1932

—51

1933 .

-48

' Data not available.

Source: U. S. Geological Survey, Mineral Resources of the United States, and U. S. Bureau of Mines,
Mineral Yearbook, 1932 and 1933. Net income data from Report of the U. S. Coal Commission (1925).

In summary, the bitter struggle for markets between the years 1924
an(i 1933 brought the industry into a state of complete disorganization,
to which of course the general economic depression of 1930 to 1933
added momentum. Wages had fallen from a $7.50 per-day base to a
very low level. In the early days of 1933, Western Pennsylvania
wage scales varied from less than $1.50 per day to a few instances of
as high as $4 and over. Typical workers, with often only 2, 3, and
4 days' work available per week, were working at a rate of earnings
as low as $500 per year, many for considerably less. The unions were
completely disrupted and barely alive. (It has been stated that not
over 15 percent of all coal labor supported unions just prior to the
N. R. A. in 1933. Shortly thereafter the industry was 90 to 95
percent organized.)

In 1919, 1920, and 1921, coal corporations paid an average m each
year of $33,000,000 in taxes, partly on war-time excess profits, to
the Federal Treasury-; by 1932 the tax paid had dropped to $3,000,000.
Competing fuels and the advance of fuel economy materially reduced
consumption of coal. After 1929, the general depression accelerated
the downward trend of pro<luction to a low point of 310,000,000 tons
in 1932, with mines working only 146 days, and prices averaging
$1.31 per ton — the lowest since 1915. Pitifully low earnings and
widespread unemployment had reduced labor to a mere subsistence
condition at best, and many miners depended upon local relief.

The intersectional struggle beginning in 1924, implemented by
price and wage cutting, had resulted in a substantial shift in the
proportion of toimage furnished by the principal southern States as
compared with the principal Northern States. The Appalachian,
Southern, and Middle Western producing States account for a little
more than 90 percent of the Nation's output. The major part of this
production comes from the -Northern States of Pennsylvania, Ohio,
Indiana, and Illmois, and the Southern States of Kentucky, West
Virginia, and Virginia. Of the total produced in 1923 by these seven
States, the northern group furnished approximately 64 percent, and
the southern group about 36 percent. In 1933 the northern group
furnished 49.8 percent, and the southern group 50.2 percent.

CHAPTER II
LEGISLATIVE HISTORY OF BITUMINOUS COAL

FROM THE WARTIME FUEL ADMINISTRATION TO THE NATIONAL RECOVERY
ADMINISTRATION

The Government has been concerned about this troubled industry
almost continually since the war-time control was finally relinquished
after its recall in 1919. .

From 1920 to 1922 there occurred the investigation of price increases
by the Senate Committee on Interstate Commerce, resulting in the
Frelinghuysen report. Senator Frelinghuysen introduced two bills
in 1920, two in 1921, and later two revisions, each attempting to
overcome some of the seasonal production difficulties by offering in-
ducements by way of decreased freight rates in the slack seasons.
The last two also provided for regulation. All branches of the coal
industry violently opposed the Frelinghuysen bills.

After the termination of the United States Fuel Administration in
June 1919, rapidly rising coal prices and a coal miners' strike in
November led to the recall of the Fuel Administrator and the reestab-
lishment of maximum prices. The United States Bituminous Coal
Commission, composed of Henry M. Robinson, Rembrandt Peale,
and John P. White, was appointed on December 19, 1919, to study
the situation tod to arbitrate. The majority award of this three-
man Commission'provided for wage increases in the central competitive
field and approved the 48-hour week. Recommendations were made
with respect to housing conditions in the coal fields; seasonal freight
rates, car supply and distribution; coals used as locomotive fuel; and
storage of coal by Federal and State agencies.

In 1921 Senator Calder of New York also introduced a bill calling
for an investigation, and for publicity, taxation, and emergency price
control. A second bill defined and punished profiteering.

In 1922 the Senate Committee on Education andl^abor investigated
conditions in the West Virginia coal fields, resulting in the Kenyon
report. In the same year, the House Committee on Labor produced
the Bland report on labor conditions in the coal industry. Repre-
sentative Bland introduced a bill setting up a coaLinvestigation agency.

Senator Borah and Representative Winslow in 1922 sponsored a bill
which, after enactment, set up the United States Coal Commission
to study the- entire industry in all aspects and to report to Congress.
This was the John Hayes Hammond Commission, whose fact-finding
labors of 1922 and 1923 were reported in five volumes, including an
atlas of statistical tables. These were published in 1925.

Representative Treadway's bill for emergency control in 1925;
Senator Copeland's for fact-finding and strike control in 1926, Senator
Watson's (drafted by counsel for the United Mine Workers) for per-
manent commission control-in 1928 and its reintroduction in 1930 — all
died.

255

256 CONCENTRATION OF ECONOMIC POWER

By 1932 the union strength had been greatly weakened. Labor
was in dire straits as to wage scales and earnings. Misery was wide-
spread because of unemployment. The general counsel of the United
Mine Workers of America, Henry Warrum, prepared a bill intended
to restore labor's influence and status by permanent commission con-
trol, Federal licensing of mines, and regulation of marketing pools or
associations. This became the Davis-Kelly bill. It drew heavily
from the British Coal Act and the Watson bill.

Representative Lewis in 1932 introduced another control bill, based
on his study of the previous proposals, plus the British Coal Act,
which provided for full commission control with tonnage allocation
and price fixing. An amendment by Senator Hayden introduced the
excise tax idea. Later in the session, the Lewis-Hayden bill was
reintroduced, combining the features of both prior bills.

With the approval of the National Industrial Recovery Act on
June 16, 1933, the industry became one of the Administration's first
concerns and its code was approved September 18, 1933. Thus bi-
tuminous coal prices (and indirectly its production and distribution)
were regulated for the first time since the Fuel Administration days
of 1917-19 and the Federal Fuel Distributors' actiNdty of 1922.

COMPARATIVE STABILITY UNDER THE NATIONAL RECOVERY ADMINIS-
TRATION CODE

The Bituminous Coal Code adopted by the industry under N. R. A.
provided a wage pattern for the industry on a national basis for the
first time, and the right of collective bargaining was guaranteed. The
wage schedule included in the code recognized a North-South com-
petitive relationship for the first time, in place of the old East- West
b^sis. Basic wages in the North were established at $4.60 per day,
■and in the South generally at $4.20, with the middle western fields
maintaining their existing contract scales at $4.57}^ in Indiana, $5 in
Illinois, and $4.70 in Iowa. Western Kentucky was put on a basis of
$4 per day. Wages in other fields throughout the country were related
to these rates.

Experience had amply demonstrated that a negotiated wage scale is
valueless without a price structure that will insure ability to pay the
scale. The N. R. A. Code therefore provided for minimmn price
fixing subject to the approval of the AdiAinistration. Neither the
l^ational Industrial Recovery Act nor the code provided standards for
the fixing of prices. It is important to remember that this price
fixing for bituminous coal had as one of its prime purposes the support
of the wage scale as well as the purpose of minimizing operators'
losses.^ The price lists were developed by subdivisional code authori-
ties (corresponding generally to the districts set up under the Bitu-
minous Coal Act of 1937), each subdivision preparing its own proposed
price list, which prices were by conference correlated in common
markets where the producers of two or more districts met in com-
petition.

The prices so correlated, upon approval by the National Recovery
Adrninistration, became effective as minimum prices. The aim of the
minimum price schedule was to approximate a total cost, excluding
capital charges.

CONCENTRATION OF ECONOMIC POWER 257

A , comprehensive detailed system of monthly reporting to the sub-'
divisional code authorities was instituted. These reports were later
carefully summarized by producing districts or subdivisions. The
reports covered monthly detailed costs, wage and emplojonent sta-
tistics, sales, and realization. This cost reporting continued from the
month of November 1933 to the month of January 1935. It is impor-
tant to remember that these cost reports were primarily intended for
use in wage conferences. The general recovery program had begun
to have some stimulating effect on industry in the latter part of 1933,
but the bituminous coal industry reahzed more significant results from
code operation in 1934.

After 5 months of the first wage scaie, a new wage contract, nego-
tiated in April 1934, established for the first time in any industry a
maximum work day of 7 hours and a 35-hour week, with the basic
daily wage scale advanced approximately 9 percent at the same time.

According to the N. R. A. tabulation of monthly reports (from
something less than 2,000 mines each with a daily production of 150
tons or over, representing from 65 percent to 80 percent of the total
production in various months), the total mine realization per ton
averaged $1.84 in 1934 against a cost of $1.79. Thus there was an
indicated margin of about 5 cents per ton above the costs before capital
charges. The Internal Revenue Bureau reports for the industry an
aggregate net loss for that year of $7,500,000 (which, of course, is
after the allowed capital charges). Under code operation, which
actually depended largely on the industry itself, the year 1934 undoubt-
edly provided for labor, operators, and consumers a remarkable
approach to balance, after the chaos which had existed for several
years past.

The limited scope of this report precludes a detailed review of this
experience. The minimum prices established in the fall of 1933 and
revised from time to time under authority of the Administrator were
very generally observed for nearly a year. Late in 1934, however,
code prices began to break under pressure of price cutting to increase
the tonnage of individual mines. Code enforcement was rendered
difficult by issuance of a nvunber of injunctions against code prices,
after which enfot-cement seems not to have been pressed vigorously.
In spite of several amendments to the code, designed to arrest price
cutting, the price structure was crumbling fast by the spring of 1935.
Prices broke all the way from 13 cents to 30 cents, 40 and 50 cents per
ton, in some cases more, below the code prices. The wage scale and
working hours were, however, universally maintained, and in October
1935 another wage increase of about 10 percent went into effect.

FIRST GUFFEY BILL 1935

Meantime," on January 24, 1935, Senator Guffey of Pennsylvania
introduced a bill in the Senate,^ which was entitled "A bill to stabilize
the bituminous coal mining industry and promote its interstate com-
merce; to provide for the competitive marketing of bituminous coal;
to levy a tax on bituminous coal and provide for a drawback under
certain conditions; to declare the production, distribution, and use of
bituminous coal to be affected with a national public interest; to
conserve the bituminous-coal resources of the United States and to
establish a national bituminous-coal reserve; to provide for the general

258 CONCENTRAXrON OF ECONOMIC POWER

welfare, and for other purposes." This bill was the subject of hearings
before the Senate Committee on Interstate Commerce, starting before
a subcommittee thereof on February 19, and running through March
7, 1935. The bill as introduced had been drafted by Henry Warrum,
general counsel of the United Mine Workers, after conferences with
leading coal producers. It embodied many of their ideas plus those
of labor, and drew much from the various proposals of the past. It
undenvent much revision in the Senate committee. It had the support
of a large and powerful group of producers, said to represent more than
60 percent of the production of the country. This represented a
change of attitude within the industry, which had almost solidly
opposed all previous proposals for regulation. The roster of opponents
was also impressive, including many of the largest producing com-
panies in the coal industry, the steel industry (fearing a spread of
regulation), the National Association of Manufacturers, and other
industrial consuming interests. The transcript of these hearings lias
been published, and to discuss the bill in any detail seems unnecessary
except as it leads to the main subject of this report — the operation of
the Bituminous Coal Act of 1937. - .

This 1935 bill as introduced provided for regulation by a Commis-
sion ; for a tax of 25 percent of the sales price, 90 percent of which would
be remitted to producers who held membership in the "code"; pro-
vided a "Bituminous Coal Code" incorporated in the body of the act;
provided a National Coal Producers Board and 24 district boards;
provided that this National Board should determine maximum ton-
nage allocation to the respective districts and that the district boards
would in turn allocate a maximum tonnage to each mine, with periodic
revisions (based on standards expressed in the act); and provided
for the assignment of quotas to new and reopened mines.

The bill also directed the Commission, to ascertain the cost of
production, including specified items, to determine and announce the
average cost for each district not later than March 1 of each year,
such average cost to become the fair minimum market price for that
district for 1 year beginning April 1. It directed each district board
to submit a list of maximum prices to the Commission for its approval.
The Commission was authorized, upon failure of the district board, to
fix same at "not less above the minimum prices as will provide a fair
return upon the investment, and with the view of permitting com-
petition within the bracket of minimum and maximum prices."

A Bituminous Coal Labor Board of three members assigned to the
Department of Labor was provided and authorized to determine the
nature of any organization of employees, yv^hether free of interference
by employer; to require an employer to meet with employee representa-
tives for collective bargaining; and to act as mediator in any labor
lisputes not determinable by local or district tribunals.

,The bill provided that an agreement upon hours of work, conditions
)f labor, and wages, by a majority of employees would also bind the
ninority.

In Title II the bill provided for a bituminous coal reserve, whereby
Aie Secretary of the Interior, on approval of the Coal Commission,
could purchase bituminous coal properties either by condemnation or
as a result of offer by the owner. Pro vision, was made for holding
such reserve and for operation under permit as needed. An appropri-
ation of $300,000,000 was authorized in the nature of bonds carrying

CONCENTRATION OF ECONOMIC POWER 259

3 percent interest, maturing in 50 years. An additional tax of 10
cents per ton was to be levied on all production. ' Forty percent of the
tax collected was to provide a sinking fund for interest and retirement
of bonds, and 60 percent was to be available for the rehabilitation of
miners dismissed from employment by reason of the purchase of these
coal properties by the United States.

The bUl, as it reached the House of Representatives^ for the
consideration by the Committee on Ways and Means, had been changed
by the Senate in some particulars, the tax drawback for code members
becoming 99 percent instead of 90 percent. The provision for the
allotment of tonnage to be produced was deleted, and the provision for
price estabUshment was changed so as to provide for the establishment
■ of minimum prices as the major basis except in an emergency, when the
Coal Commission would be authorized to establish a maximum sched-
ule. Thus price regulation would rest upon minimum prices aver-
aging as nearly as possible the average costs, with no allowance for
profit, except m times of emergency under maximum price schedules.
The labor provisions of the House bill, H. R. 8479, were changed so
that in the negotiation of wage and maximum hour agreements in any
one district or group of two or more districts the tonnage which must
be represented by producers was increased from one-half to two-thirds.
The House bill authorized the Commission to investigate the necessity
for the control of production of bituminous coal and the methods by
which such control might be exercised, and to hold hearings thereon.
It was to report its conclusions and recommendations to the Secretary
of the Interior for transmission by him to Congress not later than
January 6, 1936. The Commission was also authorized to make com-
plaint to the Interstate Commerce Commission with respect to tariffs,
rates, charges, and practices which related to the transportation of
bituminous coal, and to prosecute the same. The Interstate Commerce
Commission was to notify the Coal Commission of any proceeding
pertaining to the transportation of coal and to permit the Commission
to appear and be heard.

The House bill provided for only 22 district boards grouped under
9 minimum price areas.

The provision for the "miners' rehabilitation fund" was retained.
The amount of money to be paid into this fund was to equal 25 percent
of the first amount of bonds issued to acquire the national bituminous
coal reserve. After the termination of the National Bituminous Coal
Commission, all the powers, duties, and the authority of the Commis-
sion with respect to the bituminous coal reserve were to be transferred
to and exercised by the National Bituminous Coal Reserve Board, the
three members of which were to be appointed by the President, by
and with the advice and consent of the Senate.

The Ways and Means Committee hearing on this Guffey-Snyder
bHl * ended on June 28, 1935, and the next day the United Mine
Workers of America sent out a strike orider to all locals. On the same
day however, a conference between the Secretary and the Assistant
Secretary of Labor, the president of the United Mine Workers of •
America, and the chairrnan of the Coal Operators Wage Scale Commit- _
tee resulted in a wage truce until August 1, 1935, when in response to *

» H. R. 8479. Hearings on this bill were held on June 17-21, 25-28, 1935.
* H. R. 8479.

260 CONCENTRATION OF ECONOMIC POWER

the President's request the miners and operators extended the N. R. A.
wage contract until September 16.

The Guffey bill was again introduced to the House on August 12,®
and was passed by the House and Senate on August 19 and 22,
respectively. Many of its faults and inconsistencies were the result of
compromises necessary to satisfy opposing interests and to obtain
its enactment.

■ bituminous' coal conservation act of 1935

As signed by the President, August 30, 1935, the Bituminous Coal
Conservation Act of 1935* lacked certain fea,tur6s of the bill H. R.
8479 — namely, the provision that coal mining companies were to
accept the code as a prerequisite to engaging in interstate transactions ;
that the approval of the Commission was necessary for the issuance of
Interstate Commerce Commission certificates of convenience and ne-
cessity for raih'oad track extensions to coal mines, the bituminous coal
reserve, and the miners' rehabilitation fund.

The act gave certairrprivileges to farmers' cooperatives with respect
to discounts and pa£ronage dividends, reduced the membership of the
Commission from 9 to 5, and increased the number of district boards
from 22 to 23.

Unlike previoi\s bills, the act provided for the establishment in the
Interior Department of the office of the Consumers' Counsel, National
Jiituriiinous Coal Commission. The duty of the Consumers' Counsel
was to appear in the interest of the consuming public in any proceeding
before the Commission and to conduct such independent investigation
of matters pertaining to the bituminous coal industry ai^d to the
administration of this act as might be necessary to enable him to
represent properly the consuming public in any proceeding before the
Commission. The other provisions of the 1935 act were substantially
,the same as tjbose of the bill H. R. 8479.

V The Commission was authorized to obtain reports from producers
and require producers to maintain a uniform system of accounting of
wages, mine operations, sales, profits and losses, and to use such other
sources of information as it deemed advisable.

Members of the district boards were to establish and maintam
statistical bureaus which were to receive from alt code members reports
on spot orders, copies of all contracts for the sale of coal, copies of all
invoices and credit memoranda, and other information which the
Commission might authorize or require.

P^ach district board was to determine the weighted average of the
total cost of the ascertainable tonnage produced therein in the calendar
year 1934, to adjust such average costs to take account of any change
m wage rates, hours of employment, or other factors exclusive of sea-
sonal changes, wffich substantially affected cost, and to submit such
adjusted cost to the Commission. From such cost data and the
computations upon which they were based the Commission was to
determine the weighted average of the total cost of the tonnage pro-
duced in each minimum price area in the calendar yeai: 1934. Included
in total cost were the cost of-labor, supplies, power, taxes, insurance,
workmen's compensation, royalties, depreciation, depletion, and other

» H. R. 9100. : '

• Public, No. 402, 74th Cong. (H. R. 9100); 49 Stat. 991 (August 30, 1936).

CONCENTRATION OF ECONOMIC POWER 261

direct expenses of production, Coal Operators' Association dues, dis-
trict board assessments and board operating expenses, the reasonable
cost of selling, and the cost of administration. This weighted average
cost for a minimum price area was then to be submitted to each dis-
trict board therein and used as a basis for the establishment of
minimum prices, f' In order to sustain the stabilization of wages,
working conditions, and maximum hours of labor," such minimum
prices were to yield for each district a return per net ton equal as
nearly as might be to the weighted average of the total cost of such
minimum price area. After taking into account the various kinds,
quahties, and sizes of coal and transportation charges thereon, the
district boards were to coordinate such prices upon a fair competitive
basis in various consuming marketing areas. These prices were to
reflect at points of delivery in such consuming marketing areas the
relative market values of the various kinds, qualities, and sizes of coal
produced in the different districts. Such coordinated prices and rules,
regulations, and data upon which they were determined were subject
to approval, disapproval, or modification by the Commission.

The Commission was authorized to establish maximum prices for
coal in order to protect the consumer of coal against unreasonably
high prices. No maximum price which would not return cost, plus
a reasonable profit, was to be established fqr any mine.

The "unfair methods of competition" were similar to those of the
"N. R. A. Code of Fair Competition for the Bituminous Coal In-
dustry," the bill H. R. 8479, and of the later Bituminous Coal Act
of'1937.7

Marketing agencies were authorized for the purpose of marketing
the coal of their members, with due respect for the standards of
unfair competition listed in the act. Such a marketing agency wAs
to be truly representative of at leas< one-third of the tonnage of any
producing district or groups of producing districts.

The Bituminous Coal Labor Board of three members appointed by
the President was assigned to the Department of Labor. One mem-
ber was to be a representative of the producers, one a representative
of the organized employees, and the third, the Chairman, was to be
an impartial person with no financial interest in the industry and with
no connection with any organization of employees. Thfe board was
■ to hear evidence in labor disputes between employees and employers
and to report thereon to the Commission. It ,Vas authorized to
arbitrate disputes over collective bargaining and to hold elections to
determine the bargaining agent.

A wage agreement negotiated in any district or group of two or
more districts by collective bargaining between representatives of
producers of more than two-thirds of the annual tonnage of such
district, or group of districts, and representatives of the majority of
mfne workers therein, was to be filed with the Bituminous Coal
Labor Board and accepted by the code members &s the established
minimum wages.

Code members were to accept such maximum daily and weekly
hours of labor as might 'be negotiated in a contract between the pro-
ducers of more than two-thirds of the annual national tonnage in the
preceding year and the representatives of more than one-half of the
mine workers employed.

' See Appendix E, sec. 4 n (i).

279348— 41— NO. 32 19

262 CONCENTRATION OF ECONOMIC POWER

Employees were given the right of collective bargaining and were
entitled to select their own check -weighman. They were not to be
required to join a company union, live in company houses, or trade
at company stores, as a condition of employment. The act, in effect^
constituted minimum wage legislation.

Difficulties of Operation.

The labor situation previously described was settled before the
Commission began to function, but other difficulties were immediately
encountered. Sixteen KentucKy coal operators filed. suit on Septem-
ber 10, 1935, for an injunction against the enforcement of the act,
and other suits for injunctions followed. On September 28, the Com-
mission held its first organization meeting, and on October 9, 1935,
promulgated the Bituminous Coal Code.

At first the Commission was handicapped in its administration of
the act because there was no money available, but after obtaining
sufficient finances, the organization of its administrative machinery
and of the district boards proceeded more rapidly. On November
21, 1935, the Commission held its first public hearing to determine
the advisability of establishing price groups aiid coal classifications.
It was not, however, until January 1936 that the Commission ordered
each district board to adopt standards of coal classifications, rules of
procedure in making such classifications, and methods for applying
such standards.

Initial Prices Proposed — Act Declared Unconstitutional.

Districts 14, 16, 17, and 18 (Arkansas, Oklahoma, Colorado, and
New Mexico) were the first to propose minimum price<;. These
schedules were announced and made effective in December 1935,
although the weighted average cost of Minimum Price Areas No. 3
and 5 had not yet been determined by the Commission. Such costs
^for the price areas were announced by the Commission in February,
^arch, April, and May 1936, after having received cost and realiza-
tion data from the district boards. Several other districts proposed
schedules of minimum prices, but these were never put into effect
because of the uncertainty over the outcome of the Carter Coal case,
and finally because the Supreme Court declared the labor provisions
unconstitutional and the price provisions also, holding them insep-.
arable from the labor provisions.*

The purpose of the Bituminous Coal Conservation Act of 1935 was
the stabilization of coal prices to permit the maintenance of the wage
structure established by the wage agreement between coal operators
and the recognized unions. To do this it provided for the establish-
ment of collective bargaining, minimum prices, minimum wages, and
maximum hours gf, employment. In effect, as previously stated, it
was a minimum wage law.

In the act and its administration, no distinction was made between
pricefe to different classes of consumers, i. e., prices based on values
as to uses. No study was made on the necessity for, and the methods
of, production control. The main achievement of the National
Bituminous Coal Conservation Act of 1935 was the collection of
individual mine costs and realization data, and the formulation of a'

» Jomes WaUer Carter v. Carter Coal Company et al. 298 U. S. 238 (May 18. 1936).

CONCENTRATION OF ECONOMIC POWER 263

procedure for establishing minimum prices which, was of considerable
value in the regulation to follow.

The decision of the Supreme Court had been anticipated, and on
May 20, 2 days after the Supreme Court decision, a new bill^ was
introduced in the S6nate by Senator Guffey, and in the House by
Representative Vinson. This new bill was substantially the same as
the 1935 act, except that it lacked the labor provisions which the
•Supreme Court had declared unconstitutional. This bill was sup-
ported by the United Mine Workers of America and by the "special
legislative committee of the National Confere 3e of Bituminous Coal
Producers." Tt v/as opposed by the National Association- of Manu-
facturers.

Subject to Senate hearings on the Guffey-Vinson bill, the House
passed this bUl by a vote, of 161 to 90. There was considerable
opposition to the bill in the Senate, which finally failed to pass it, due
to filibuster, in spite of the fact that the Senate Interstate Commerce
Committee had approved an amended version.

BITUMINOUS COAL ACT OF 1937

After the reconvening of Congress in January 1937, Senator Guffey
again introduced a coal stabilization bill,"' the provisions of which
were very similar to those of the earher Guffey-Vinson bill." The
coal stabilization bill provided, however, for an excise tax of 1%
percent of the sales price of all coal at the mine. Code members '
were exempted from another excise tax of 13 K percent of the sales
price at the mine.

The statistical bureaus were to be established by the Coal Com-
mission, and the power to prescribe minimum and maximum prices
was very definitely given to it. With respect to maximum prices
the earlier bills provided that the maximum price should yield the
cost, plus a reasonable profit. S. 1 provided, however, that ajry
maximum price established should yield a fair return on the fair
value of the property.

Hearings were held before the Senate on S. 1 on March 1, 1937.
This Guffey-Vinson bill, as revised by the Senate Interstate Commerce
Committee, was passed by the House on March 12, and by the Senate
on April 6. The bill was signed by the President on April 26, 1937. '^

The Bituminous Coal Act of 1937 as it became law embodied
several changes over previously proposed legislation. An excise tax
of 1 cents ton was levied on all coalat the mine. Code members were
exempted from another excise tax of 19K percent of the sale price
or the fair market value at the mine. Of the seven members of the
Bituminous Coal Commission, two represented the operators, two the
miners, and three repr-esented the Government or public. Tht
powers of the Commission and of the Consumers' ^ounsel were con-
siderably strengthened and increased. The Consurfters' Counsel was
to report directly to Congress rather than to the Secretary of th(
Interior.

'8.4668.

J» S. 1.

" Publici No. 48, 75ih Cong., 1st sess. (H. R. 4985) ;-50 Stat. 90 (A iri' 26, 1937).

264 CONCENTRATION OF ECONOMIC POWER

The 23 producing districts were assigned to certain broader areas
for the purposes of extending weighted average costs of production
into 10 minimum price areas. Lignite was exempted from the act,
and no reference was made to the rehabilitation of unemployed coal
miners, or to maximum hours and minimum wa*ges.

The procedure for the proposal, coordination, and establishment of
minimum prices, and of holding public hearings thereon, was broad-
ened and clarified. Unlike its predecessor, this 1937 act provided
that proposed minimum prices should also take into account values
as to uses, seasonal ('ci and, transpcrtation methods, and the com-
petitive relationships between coal and other forms of fuel and energy.

CHAPTER III
REGULATION OF BITUMINOUS COAL UNDER THE 1937 ACT

introduction: the. situation in 1936

Before the Bituminous Coal Act of 1937 and its operation are de-
scribed in detail, it is desirable to have in mind the situation current
in the industry when the act went into effect, in addition to the gen-
eral history of the^ industry and of previous Federal regulatory legis-
lation described in the preceding chapters. The Bituminous Coal
Commission's methods of operation as prescribed in the act must be
appraised in this setting. For that purpose a brief resume of condi-
tions in the year 1936 is given below, with particular emphasis upon
volume of output, the competition of other fuels, the channels of
distribution, the direction of flow of coal to markets, the freight
charges involved, and the principal consumers and the areas in which
they are located. This resume indicates the importance of some of
the complex economic considerations which the 1937 law requires the
Commission to, , take into account during the 4 year period the act
is to be in effect. The year 1936 is important because it is the base
or standard year prescribed by the 1937 act; weighted average costs
for each minimum price area are to be determined for.! 936, and ad-
justed for any changes thereafter, as a basis for determining prices.

The wide producing area and the large number of operating mines
• increase the complexity of the Commission's task. Commercial mines
in operation in 1936 numbered 6,875.^ They were located in 33 States,
of which 5 are unimportant, and in Alaska. Only in North Carolina
has the Coal Commission, after hearings, determined that the produc-
tion does not affect interstate commerce and is not subject to price
regulations; the production of North and South Dakota was found to
be lignite and not subject to the act.

The 1936 production of 439,000,000 tons gave the mines an average
of 199 days of work, the best since 1930. Had these mines been able
to operate a full 261-day year they could have produced 576,000,000
tons.^ Their excess capacity was nearly 30 percent more than the
demand'in 1936.^ Mines with an output of over 100,000 tons pro-
duced 83.8 percent of the total; those of over 200,000 tons produced
69 percent of the total. There were 477,000 men employed.

Mechanization in deep mines had shown rapid advances during the
depression years — the percent of underground output loaded mechan-
ically more than doubled, having risen from 7.4 percent in 1929 to
16.3 percent ui 1936.

Cempetition from competing fuels was aggressive; the sale of oil
burners reached a peak of 196,877. Bituminous coal in 1936 con-

' Figures on commercial mines in operation are compiled by the Bureau of Mines. These figures exclude

operating mines producing less than 1,000 tons per year.
' For a discussion of capacity see ch. I, pp. 237-244; - <•

' Coal Age for September 1931 offered the interesting statistical comment that, if every commercial coal

company.^roducing less than 200,000 tons had been wiped out of existence in 1928, the companies producing

in excess of 200.000 tons and operating 1,269 mines, by working on a 280-day basi?, CQ<ild have supplied the

1929 coal demands and would have md 70,000,000 tons excess output.

265

266 CONCENTRATION OF ECONOMIC POWER

tributed 50.2 percent of the total energy supply, while oil and natural
gas together contributed 39.8 percent, water power 3.5 percent (pre-
vailing fuel equivalent, as shown in appendix B), and anthracite 6.5
percent. This was a temporary gain from 48.3 percent in 1935 for
bituminous coal, but in 1937 the percentage fell again to 48 percent.
In spite of a decided pick-up in business activity, resulting in an
increased market and a 19 percent larger coal production than in the
previous year, the industry in 1936 sold its coal generally below cost
and showed an aggregate loss of $6,524,000 on the year's operation.*
This was the industry's closest approach to an actual profit in at
least 10 years.

Channels of Distribution.

Bituminous coal is marketed through various channels, the most
important of which follow:

Percent of
_,, 1 , total ton-

Channel : * age told

Sales direct to consumers (including retailers) invoiced by main >n '9i9

office to the mining company 35. 6

Deliveries direct to consumers who ovm or control the mine through

direct ownership, and sales to affiliated consumers 21. 3

Sales through a separately incorporated sales agent owned by the

same interests as is the mining company.. 20. 0

Sales to independent wholesalers or jobbers, and sales through un-
affiliated agents on a commission basis 18. 2

Sales arranged and invoiced by branch offices of the coal company.. 4. 5

Other ^ - .4

' (Source: Census of Mines and Quarries 1929.)

It is probable that in recent years the proportion of coal marketed
through these channels has changed, a decrease having taken place in
that sold direct to consumers (either independent or affiliated with a
producer) and an increase in the proportion sold to independent whole-
salers or through unaffiliated sales agents on a commission basis.

Sales direct to consumers eliminate part or, in the case of consumers
who own or who are affiliated with the producing company, probably
all the cost of selling involved in other channels' of marketing. In
times of high industrial activity the mines which are owned or con-
trolled by the consumer, either directly, or indirectly through stock
ownership, operate more steadily than mines selling coal on the com-
mercial market. In a depression, however, the consumer often closes
the mine when he finds that he can buy coal on the market more
cheaply than he can produce it.

Generally speaking, only the larger companies maintain branch
offices or separately incorporated sales agencies. These are able to
study the special field requirements of various consumers, keep in
touch with competitive conditions, supply technical advice on com-
bustion equipment, and recommend the coal best suited for the most

' U. S. Bureau of Internal Revenue: Statistics of Income. Those figures may overstate the lossp.s hprnnw
of the method by which depletion is computed. See pp. 288-289 of this report.

CONCENTRATION OF ECONOMIC POWER 267

economical results in the consumers' equipment. Wlien sales are
handled through a wholesaler or jobber, the coal is shipped from the
mine directly to the retailer or to the consumer, the distributor
(wholesaler or jobber) taking title to but not physical possession of
the coal. A large wholesaler may render the services of a sales agent,
a combustion engineer, or even a banker, insofar as he advances to
the producer money to meet pay rolls and extends credit to the retailer
or consumer. Under the present act, distributors get a discount from
whatever minimum prices may be in effect and must resell such coal
at not Ifess than the minimum prices established for sales f. o. b.
mines. For the United States the average cost of selling bituminous
coal in cargo or in railroad carload lots in 1937 was 12.73 cents a ton.*

The independent sales agent performs functions similar to those of
the wholesaler, but does not necessarily take title to the coal. The
sales agent receives a fee, usually so much per ton, for his services
which, in the case of a marketing agency, may include classification
of coals, price fixing, proration of sales, advertising, research, and
technical advice.

In 1936, when the production was 439,000,000 tons, commissions
were reported to have been paid to sales agents on about 145,000,000
tons. The tonnage sold to wholesale distributors for resale is unknown ;
the best estimate is from 75,000,000 -to 90,000,000 tons. Thus,
probably 70 to 75 percent of commercial sales were made through
selling companies.

The services of the retailer are generally known. It is customary for
him to try to stimulate out-of-season sales by granting discounts
ranging perhaps from 25 cents to $1.00 per ton or more on coal pur-
chased during the summer months.

Bituminous coal moves, then, through these channels, sometimes
from one field through another (crosshauling), to vai'ious consuming
markets.
The Flow of Coal to Markets.

Bituminous coal from all the principal produciag States finds its
way outside the State of origin, about 90 percent of the tota,! produc-
tion moving into interstate commerce. Coal reaches the interstate
markets of the country by a maze of hauls and crosshauls. This
complex competitive picture cannot adequately be described, however,
in this brief study, and space is taken to enumerate only major
movements.

From the great Appalachian fields (Pennsylvania, Ohio, West
Virginia, Maryland, Virginia, Tennessee, eastern Kentucky, and
Alabama), which together accounted for about 73.38 percent of the
total production of the United States m 1937, table 7 shows a number
of definite movements.

» Average Cost of Selling Bituminous Coal In Cargo or Railroad Carload Lots, in cents per ton. in 1937,
by W. H. Young. National Bituminous Coal Commission, Exhibit No. 11, General Docket No. 15. April
25, 1938.

268 CONCENTRATION OF ECONOMIC POWER

Table 7. — DistribiUion of bituminous coal from the Appalachian fields,- 1937

Destination

Tons

Percent of
Appalach-
. ian pro-
duction

Tidewater .- -

31,688,907
17, 802, 000

9.60

Atlantic ports to which coal is shipped by rail, dumped, and loaded into
vessels for reshipment or use as bunker fuel.

New England (also included under "tidewater" and "all-rail other than railroad
fuel") .

5.45

12, 917, 000
4,885,000

27,478,515

44,111,898

•

85, 294, 000

59, 082, 687
52. 732, 939
18, 349, 135

6, 280, 652

1, 579, 747
332,052

8 41

Coal originated on the Ohio River and its tributaries, and on the Warrior
River in Alabama. Most of this coal moves only a short distance but part of
(known as ex-river coal) is unloaded from a barge at some river point and is
reshipped to another via rail.

. Lake ports to which coal is shipped via rail apd reshipped in vessels or
used as bunker fuel.
^Vest-bound rail to Mississippi Valley .

"26 09

Coal shipments to this region reflect not only tlie important competitive
situation between the different Appalachian fields in the large western
market but also that between the Appalachian fields and the middle west-
ern fields of Indiana, Illinois, and western Kentucky.

18 07

Includes coal reported as "shipped to distributors, destination unknown."
Railroad fuel, all-raii v^

States in which coal is consumec/Sre not known.

16.13

Shipments by truck move largely to markets adjacent to or near the
mines, although shipments to points 150 and 200 miles from the mines are
not uncommon.
Mine fuel - .

1.92

Coal used at the mine (includes coal made into beehive coke at the mine).
Used by mine employees ,---

.48

.10

■ To^al profluction of the Appalachian fields (includes change in inven-

326,920,532

100.00

Source; U. S. Department of the Interior, Bituininous Coal Division: Bituminous Coal Tables, 1937-38.

■ Concentrated movements of bituminous coal are not general for
fields other than the Appalachian. In other fields a smaller tonnage is
produced, and distributed to many markets over a wide area.

Pifferences in freight rates from mines which compete in common
consuming markets have been a major consideration in the establish-
ment- of coal prices. For several years the freight rates per ton on
coal from producing districts to destination points have in so many
cases exceeded the value per ton of coal at the mine that the average
freight revenue per ton from the applicable freight rates has repre-
sented over 52 percent of the average destination carload price of the
coal. Table 8 shows the average freight revenue per ton of bituminous
coal, the average value per ton f. o. b. mines, and the percent the
average freight rate is of the average value per ton delivered.

CONCENTRATION OF ECONOMIC POWER 269

Table 8. — Average freight revenue and average value per ton of bituminous coal J

Year

Average
freight
revenue
per ton,
originated
by class I
railroads '

Average
value
per ton

f. 0. b.

mines'

Average

destination

value

per ton «

Percent
average
freight
rate is of
average
value

delivered

$2.27
2.25
2.23
2.22
2.26
2.20
2.15
2.24
2.25
2.17

.»$1.86
« 1.78
»1.70
•1.54
»1.31
«1.34
5 1.75
il.77
5 1.76
«1.81

$4.13
4.03
3.93
3.76
3.57
3.54
3.90
4.01
4.01
3.98

54.96
55.83
56.74
59.04
63.31
62 15

1929 : -

1930

1931

1933

1934

55.13

1935 .--•.

1936

1937

54.52

Average, 1928-37..

2.22

1.66

3.88

57. 22

1936

2.25
2.17

M.83
M.94

'4.08
'4.11

55.16
52.80

1937.

1 Includes lignite, the data on which are compiled by the Bureau of Mines. The expense of selling
lignite is not included in these data.

2 Interstate Commerce Commission: Freight Commodity Statistics.

5 Average value per ton represents the total sales realization, including the value of coal not sold but
used by the producer, divided by the total ascertainable tonnage (except as modified by footnotes).

< Average value at mines, as shown, plus the average freight revenue per ton for the United States as a
whole. This total is merely the average car-load cost to all purchasers, wherever located, at rail destina-
tions, and has no significance as to any particular producer, producing field, or rail destination.

5 The data for 1928-36, collected by the Bureau of Mines on a voluntary basis, represent the "amount
received at the mines f. o. b. cars less the selling expense," including the value of coal not sold but used by
the producer, mine fuel, and coal made into coke at the mine, divided by the total number of tons produced.

0 Calculated by subtracting the selling cost of $0.1273 a ton from the Commission figure of $1.94.

' Data collected by the National Bituminous Coal Commission (now Bituminous Coal Division) in-
clude selling expense. Allowing for the inclusion of this item, and reports more numerous and detailed,
the two series of data may be considered approximately comparable.

Freight rates are inescapable as an element of consideration in the
establishment of prices of coal at the mine, for they bear du'ectly on
the market limitations of the individual producing mines and of dis-
trict groups. Prices on coal from the same mine may be lower on
an f. o. b. basis when the coal is shipped to a market to which
the freight rate is higher than to a nearby or hoYne market. This
absorption of the freight rate has become a fixture in the coal indus-
try. Otherwise, the coal could not compete in distant markets to
which other coals move on lower freight rates.

The principal consuming groups and their relative importance to
the coal-mining industry in 1937 are as follows: .' '

. Table 9. — Consumption

of bituminous coal,

by consuming groups,

1937

Consuming

group

Thousands
of net
tons

Percent of
total con-
sumption

General manufacturing . .' . .^. . . .

> 162. 961
82, 667
74,502
58.717
44,766
3,052
1,832

38.03

Domestic and miscellaneous

13 70

Electric power utilities

10 45

Colliery fuel

.71

Total coTisiimptinn

428,497
13, 145

100 00

Exports

441,642
3,889

445,531

I ^"'eau of the Census, Department of Commerce.
(Source: Minerals Yearbook, 1939, p. 773, f

270 CONCENTRATION OF ECONOMIC POWER

Geographical Consumption.

Detailed information on the geographical consumption of bitumi-
nous coal has not been compiled since 1929 but there is sufficient
data to permit generalizations about such consumption. Of the 162,-
961,000 tons consumed in 1937 in manufacturing, 38.23 percent was
'consumed in the Middle Atlantic States of Pennsylvania, New York,
and New Jersey; Pennsylvania alone accounted for 25.64 percent,
and, New York 10.01 percent. The East North Central States ^ ac-
counted for 36.26 percent, Ohio consuming 12.89 percent. The con-
sumption of bituminous coal for manufacturing in other geographical
divisions in 1937 follows: South Atlantic,^ 8.79 percent; East South
Central,^ 6.77 percent; New England,^ 4.85 percent; West Nortk
Central,^" 3.08 percent; Mountain," 1.59 percent; Pacific,^* 0.27
percent; and West South Central," 0.16 percent.

In the larger consuming areas the consumption of railroad locomo-
tive fuel follows the direction of general consumption. Because of
its nature, consumption for this purpose cannot be assigned to States.

The bulk of coal consimaed in making coke is used in ovens near
blast furnaces, foundries, and points of consumption of manu-
factured gas. Pennsylvania led in such consumption, followed by
Ohio, Indiana, New York, Alabama, and other States.

Coal for domestic purposes is consumed chiefly in the more popu-
lated of the colder regions, such as the New England,^* East North
Central,'* West,"* North Central, and. Middle Atlantic States.'''

The larger part of the coal used by electric power utilities is con-
sumed in the East North Central,'* Middle Atlantic,'^ and South
Atlantic '^ States. Of the important consuming States, Pennsylvania
is foremost, followed by Illinois, Ohio, New York, Michig'S,n, West
Virginia, Massachusetts, New Jersey, Wisconsin, and other States.'^

Colliery fuel is used at various coal mines for the generation of steam
and of electric power.

. Bituminous coal for foreign bunkers is sold chiefly to vessels at the
Atlantic ports of New York, Philadelphia, Baltimore, and Hampton
Roads.

OBJECTIVES OF THE COAL ACTS

Against this backgroimd, we can now proceed to an analysis of the
objectives of the coal acts. The N. R. A. Coal Code sought to
increase wages and employment through collective bargairiing and
through reductions in the number of hours of work per week. The
working hours of employees were first put at an average of a 5-day
or 40-hour week. Beginning April 1, 1934, a 35-hour week of five
7-hour days became effective. It was estimated by N. R. A. that
employment was increased between 8 and 13 percent as a result of the

• Ohio, Illinois, Indiana, Michigan, and Wisconsin.

' Delaware, Maryland, District of Columbia, West Virginia, Virginia, North Carolina, South Carolina,
Georgia, and Florida.

• Kentucky, Tennessee, Alabama, and Mississippi.

« MalBo, New Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut.
" Minnesota, Iowa, Missouri, North Dakota, South Dakota, Kansas, and Nebraska.
■ ' Montana, Idaho, Utah, Wyoming. Colorado, New Mexico, Nevada, and Arizona.
" Washington. Oregon, and Califoruia.
" Arkansas, Oklahoma, Louisiana, and Texas.

■« Maine, Now Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut.
" Ohio, Illinois, Indiana, MichlgSB, and Wisconsin.

" Minnesota, Iowa, Missouri, North Dakota, South Dakota, Kansas, and Nebraska.
" Pennsylvania, New York, and New Jersey.

" Delaware, Maryland, District of Columbia, West Virginia, Virginia, North Carolina, South Carolina.
Georgia, and Florida.
'• Federal Power Commission, Electric Power Statistics, 1937, pp. 1&-10.

CONCENTRATION OF ECONOMIC POWER 271

operation of the code. Average annual earnings per mine worker were
calculated to have risen by $419 for the April 1934 to March 1935
period, over the pre-N. R. A. period in May 1933. According to the
Bureau of Labor Statistics pay roll index (based on 1929 as 100) the
1934 pay rolls of the bituminous coal industry had risen to an index
number of 54.2 percent from the 1932 low of 35.6 percent and the
slightly better 37.8 percent of 1933. The 1934 "code" increase over
' the 1932 depression low amounted to about $107,000,000.

The code also sought to establish a minimum fair price structure that
would support the wage scales and return to the producers their costs
less capital charges. This it did to .a degree that has already been
shown.^

The 1935 act and the present 1937 act were designed to facilitate
continuance of wage determination by collective bargaining. Estab-
lishment of minimum prices based on costs exclusivejof capital charges
was to insure the producers' ability to pS.y'the negotiated wage scale.
To overcome the 1935 act's unconstitutionality as to provisions for
regulation of the machinery and methods of negotiation and employ-
ment, the 1937 act, section 9, merely declared it to be the public
policy of the United States that —

Employees of producers of coal shall have the right to organize and to bargain
collectively as to their hours of labor, wages, and working Conditions through
representatives of their own choosing, without restraint, coercion, or interference
on the part of the producers.

who shall not —

interfere with, restrain, or coerce employees in the exercise of their said rights,
nor discharge or discriminate against any employee for the exercise of such rights.

Neither should any employee or applicant for -employment be
required, as a condition of employment, to join any collective bar-
• gaining agency in which the employer has any share of direction or
control.

The Bituminous Coal Act of 1937 has as its main purpose the
establishing of minimum prices which rest upon a weighted average of
total costs. These minimum price provisions are provided in a code,^'

Producers subscribing to this code are designated as code members,
and all coal producers are subject to an excise tax of 1 cent per ton.
Nonsubscribing producers are subject to an additional tax of 19%
per cent of the sale price at the mine. Code members are forbidden
to sell coal at less than the properly established minimum prices, and
penalties are prescribed for violation of such prices and other provisions
of the code.

The prime interest of this study revolves around the standards
prescribed and the application of these standards or their expansion
and interpretation by the Coal Commission set up to administer the
act. It is necessary to keep in mind a picture of the administrative
machinery set up, the principal procedural steps Required, and the
Commission's struggles to date to establish prices. Such a picture
is drawn in the next few pages, in the course of which the act's pro-
vision of standards will be cited, and following which the meaning and
application of these standards will be taken up.

For the first time in Federal regulatory enactments (except as pro-
vided in the Bituminous Coal Conservation Act of 1935), a consumers'

M See p. 257.
" Sec. 4.

272 CONCENTRATION OF ECONOMIC POWER

counsel was provided with considerable power to appear in all pro-
ceedings before the Coal Commission for the purpose of representing
the interest of the coal consuming public. In such proceedings, the
Consumers' Counsel has the right to offer any relevant testimony,
examine and cross-examine witnesses and parties thereto, and to have
a subpena or other process of the Commission issued in his behalf.
The Counsel is to certify to the Commission a request for information
or for an investigation whenever he finds that the interests of the
consuming public so warrant. Thereupon the Commission is to
furnish the information or conduct the investigation promptly and
place the results thereof at the Counsel's disposal.

The Counsel is to conduct such independent investigation of
matters relative to the coal industry and the administration of the
act as 'he deems necessary to enable him properly to represent the
consuming public in any proceeding before the Commission.^^

Both the Commission and the Consumers' Counsel are authorized
to make and prosecute complaints to the Interstate Commerce Com-
mission with respect to "rates, charges, tariffs, and practices relating
"to the transportation of coal." The Interstate Commerce Commis-
sion is directed to notify the Coal Commission and the Consumers'
Counsel of complaints, filed by others, which involve the transporta-
tion of coal; and, upon their application, to permit them to appear
and be heard.^^

The Counsel is authorised "to appoint and fix the compensation and
duties of necessary ptofessional, clerical, and other assistants." All
employees (except a clerk to the Counsel", attorneys, special agents,
and experts) are to be appointed and their compensation fixed accord-
ing to the civil-service laws and the Classification Act of 1923, as
amended. The Counsel may make "such expenditures as may be
necessary for the performance of the duties vested in him." ^*

Neither the act nor the Reorganization Plan No. II, ordered by the
President in the summer of 1939, which abolished the Bituminous
Coal Commission and established the Bituminous Coal Division in the
Department of the Interior, provides specifically for the appearance of
individual consumers in proceedings before the Coal Commission or
Coal Division, such consumers being represented by the Consumers'
Counsel or the Consumers' Coimsel Division. Nevertheless, in prac-
tice the Coal Commission permitted and the Coal Division permits
consumers to appear in such proceedings.

The act established the Ofiice of Consumers' Counsel in the Depart-
ment of the Interior but directed the Consumers' Counsel, a Presiden-
tial appointee, to make his annual report directly to Congress. Under
the second reorganization plan (effective July 1, 1939), the Office of
Consumers' Counsel became the Consumers' Counsel Division in the
OflBce of the Solicitor, Department of the Interior. Otherwise, the
agency representing the coal consumer remains substantially the same.

. ADMINISTRATIVE MACHINERY OF THE 1937 ACT

The act sets up a commission of seven men, two with past experience
as mine workers, two with experience as producers, and three repre-
senting the public — none with any financial interest in the mining,

M Sec. 2(b).

"Sec. 16.

" Sec. 2 (b) (3).

CONCENTRATION OF ECONOMIC POWER 273

transportation, or sale of or in the nianufacture of equipment for, coal,
oil, or gas, or in the production, transmission, or sale of hydroelectric
power or power equipment.

The Commission shall not .engage in any other occupation. The
Commission is clothed with administrative and procedural authority
necessary to its functioning. This will not be detailed here. Under
the President's reorganization plan, the 'Commission was abolished
as of July 1, 1939, and its power, duties, staff, etc., were transferred
to the Bituminous Coal Division of the Department of the Interior.

It is important to note the establishment by the act of 23 producing
districts,^* 10 minimum price areas, ^^ and the direction that for each
district the Commission shall establish a statistical bureau to be
operated as an agency of the Commission. ^^ (Under the 1935 act, the
statistical bureaus were permissive adjuncts to the district boards.)

From a legislative point of view, the concept of producing districts
dates from 1932, when Representative Lewis, perhaps rnfluenced by
the British Coal Act of 1930, introduced his bill, H. R. 9924, which
provided for 27 bituminous coal districts and 3 anthracite districts.
A board for each district was to allocate production quotas to each
mine therein. The 27 districts for bituminous coal were based upon
geographical and competitive factors already recognized in the
industry — for example, wage districts of the United Mine Workers of
America, political boundaries, freight rates, and qualities of coal.
This division of the coal fields into districts, modified from time to
time with respect to district boundaries, was maintained in subsequent
regulatory bills, and was put into practice in the subdivisions under
the N. R. A. Code of Fair Competition for the Bituminous Coal
Industry. In later proposals the districts were numbered.

The concept of price areas seems to have originated under the
N. R. A. Code, which provided for 5 divisional code authorities,
the first 4 of which correspond roughly to Price Areas 1-5 in the
1937 act. Division 5 of the N. R. A.*^Code was the equivalent of
Price Areas 6-10. Under the N. R. A. Code each division consisted
of several somewhat similar competing subdivisions grouped together
primarily for purposes of administration. ^^ The first Guffey bill ^^
provided for 24 districts but price areas were not specifically included
until the introduction of Senator Neely's amendment of June 4, 1935,
to S. 2481, providing thereinf for grouping the proposed 21 producing
districts in "9 minimum price areas.

In each of the present 23 producing districts, the act provides that
there sUpll be organized a district board of code members, ^^ the boards
to consist of not fewer than 3 or more than 17 members. Producer
members shall be of an even number, and constitute all but one of
the board — the other one shall be selected by the predominant labor
organization of the district. One half the board's producer members
are chosen by a numerical majority of code members in the district,
the other half by votes proportioned to annual production of each
code metnber. The Commission is giveo power, on findings and after
due notice and hearing, to remove any " number for inefficiency, willful
neglect of duty or malfeasance. Tb i expenses of district boards
arising out of the duties imposed by ;l>e act are to be supported by

" Sec. 4-1 (a). - ■

» Sec. 4-II (a).

"Art. Vn of the N.R. A. Code of Fair Competition foi ih Bituminous Coal Industry.

» S. 1417. January 24. 1935. ' .

» Sec. 4-1 (a).

274 CONCENTRATION OF ECONOMIC POWER

assessments on code members, subject to approval by the Commission,
and collectible by the district board by an action in any court of
competent jurisdiction. Boards are given power to adopt by-laws
subject to the Commission's approval, to employ such ojBicers and
other persons as are necessary, and to fix the compensation of these
persons, but the board members themselves serve without compensa-
tion and are reimbursed only for reasonable expenses.

The 10 minimum price areas are for convenience in the establish-
ment of costs and prices. No administrative personnel is provided for
price area units, and none has been establisned. The Commission
has power to change, by its order, the boundaries of any district or
price area if it finds, after hearing, that present boundaries make
price establishment in tor 'liance with all the prescribed standards
"substantially impractii al.e," and fhat a change of boundary or
consolidation or division would make such price establishment more
practicable. The Commission, by order effective July 29, 1939, found
the coal produced in North and South Dakota (district 21, or mini-
mum price area 8) to be lignite as defined in section 17 (b) of the act,
and therefore excluded from its operation. Hence there are now 22
producing districts subject to the act.

Statistical bureaus were early established by the Commission, one
in each producing district. Thus there were 22 such bureaus operating
as agencies of the Commission, each wdth a headquarters office within
its district, each with a'rtianager (provided in the act), a director of
statistics, and a staff. They received, edited, tabulated, and forwarded
to the Washington headquarters the cost reports for 1936 and the
months of 1937 used as material for the determination of weighted
average costs. They also performed other routine and special
statistical duties, including the preparation for analysis of copies of all
contracts, credit memoranda, and invoices, the filing of which is
required under section 4-II (a). "All such records shall be held by
the statistical bureau as the confidential records of the code member
filing such information."

It should be noted that the act does not require the Commission to
establish a statistical bureau in each producing district. The act
prescribes the establishment of the bureau "for each district." Un-
questionably, economy would result from the maintenance of a smaller
number of bureaus, located at strategic points, each shouldered with a
volume of work that could employ a highly-geared staff and me-
chanical equipment with much less overhead expense and greater
efl5ciency. No doubt broader pohtical considerations, both within and
without the industry, have made the present set-up expedient, if not
economical.'"

GENERAL PROCEDURE AND STANDARDS PROVIDED FOR PRICE
ESTABLISHMENT

Steps in Price Establishment.

The act prescribes five major steps in price estabhshment:
1. Determination of the weighted average cost shall be made (a)
for each district, for 1936, adjusted to reflect "any change or changes
which may have been established since January 1, 1936," and (6)

" In 1939 the statistical bureaus for districts Ifi, 17, 18, and were consolidated. Several consolidations of
atatistical bureaus or field oflBces recently (1940) have been effected. The Coal Division announced in June
1940 that six more of Its field offices were to be closed and their work transferred to the five remaining sta-
tistical bureaus.

CONCEISTTRATION OF ECONOMIC POWER 275

for each minimum price area. "The weighted average figures of total
cost * * * shall be available to the pubhc. Said weighted
average of the total costs shall be taken as the basis, to be effective
until changed by the Commission, for the proposal and establishment
of minimum prices." Upon a showing of a, change thereafter in
weighted average cost in excess of 2 cents per ton in the minimum price
area, exclusive of seasonal changes, the Commission shall increase or
decrease the minimum prices accordmgly.

2. Each district board shall, from time to time on its own motion or
when directed by the Commission, propose minimum prices free on
board transportation facilities at the mines for kinds, qualities, and
sizes of coal produced in said district, and classification of coal and
price variations as to mines, consuming market areas, values as to
uses andi'seasonal demand. Such prices —

shall be proposed so as to yield a return per net ton for each district in a minimum
price area * * * equal as nearly as may be to the weighted average of the total
costs, per net ton, determined as hereinafter provided, of the tonnage of such mini-
mum price area.

These proposed prices shall —

Reflect, as nearly as possible, the relative market value of the various kinds, qualitie s
and sizes of coal.

Be just and equitable as between producers within the district.
Have due regard to the interests of the consuming public.^^

The Commission is to approve procedural rules and regulations for
these proposals.

Thus, fom- standards must be complied with in the initial proposal
of prices by district boards. These proposals are submitted with all
supporting data (including the factors used in determining the price
relationships) for approval, disapproval, or modification by the Com-
mission. Whereupon the schedule of prices approved b}'- the Com-
mission shall serve as the basis for coordination, provided that —

All minimum prices proposed for any kind, quality, or size of coal for shipment
into any consuming market area shall be just and equitable as between producers
within the district.^^ * * *

No minimum price shall be proposed that permits dumping.^^

Here the prices approved by the Commission for coordination are
required to comply with two standards.

3. Proposals shall be made by district boards for approval, dis-
approval or modification by the Commission, of reasonable rules and
regulations incidental to the sale and distribution of coal by code
members within the district. As approved, these proposed market-
ing rules and regulations are to be "coordinated" among the district
boards and resubmitted for final approval, disapproval, or modifica-
tion by the Commission.^^ These rules shall, —

Not be inconsistent with the requirements of this section (4-II (a)). * * *
Conform to the standards of fair competition hereinafter established (referring to

sec. 4-II (i) 1 to 13, inclusive, which specifically describe unfair methods of

competition that are violations Vjf the code).

4. Coordination of the previously pi-oposed prices and rules and
regulations shall be effected by the district boards (s^eps 2 and 3
above) in common consuming market areas upon a fair competitive
basis, taking into account, among other factors, "the various kinds,
qualities, and sizes of coal." Prices thus coordinated "for any kmd,

" Sec. 4-II (a). In this and the following citations, italics are the aiiithors'.
" Sec. 4-II (b).

276 CONCENTRATION OF ECONOMIC POWER

quality, or size of coal for shipment into any common consuming
market area shall —

Be just and equitable, and not unduly prejudicial or preferential, as between and
among districts.

Refleclj as nearly as possible, the relative market values, at points of delivery in
each common consuming market area, of the various kinds, qualities, and sizes
of coal produced in the various districts, taking into account values as to uses,
seasonal demand, transportation methods and charges and their effect upon a
reasonable opportunity to compete on a fair basis, and the competitive relation-
ships between coal and other forms of fuel and energy; * * *.

Preserve as nearly as may be existing fair competitive opportunities. * * *

Not, as to any district, reduce or increase the return per net ton upon all the coal
produced therein below or above the minimum return as provided in subsection
(a) of this section (refer to step 2 above) by an amount greater than necessary to
accomplish such coordination, to the end that the return per net ton upon the entire
tonnage of the minimum price area shall approximate the weighted average of the
total cost per net ton * * * of such minimum price area.^^

The coordinated prices must meet the requirements of these four
express standards.

5. After such coordination has taken place, the resulting prices
and rules and regulations are to be submitted to the Commission,
which shall —

thereupon establish, and from time to time, upon complaint or its own motion,
review and revise the effective minimum prices and rules and .regulations in
accordance with the standards set forth in subsections (a) and (6) .^*

All district board rules, regulations, determinations, and promulga-
tions are subject to review by the Commission upon appeal by any
producer, and on showing of cause are amenable to the order of the
Commission.

Should any district board "fail for any reason to take action
authorized or required by this act, then the Commission may take
such action in lieu of the district board." ="* This important provision
was invoked by the Commission in its first price proceedings in 1937,
when the district boards found.it impossible to coordinate many
price situations. The Commission performed the function of coordi-
nation for them, holding a series of closed hearings at which the re-
spective district boards involved in disputes over the coordination of
prices to a common consuming market offered facts, viewpoints, and
recommendations. The Commission again had to take over coordi-
nation in its second attempt at price establishment.^^

In summary, the five steps in the establishment of minimum prices
are —

(1) Determination by the Commission of weighted average costs

for each minimum price area.

(2) Proposal of initial prices by district boards.

(3) Proposal by district boards of marketing rules and regulations.

(4) On approval of initial price schedules and marketing rules by
•■' the Commission, coordination by district boards of both

prices and rules^ for common consuming market areas.

(5) Establislmient of minimum prices and marketing rules and

regulations by the Conomission.
The first prices established for all districts (except District 21,
North and South Dakota), effective December 16, 1937, were revoked

" Ibid.

" Sec. 4-n (o) and (6).

*• Sec. 6 (a).

" Orders No. 267 and No. 269 (March 20, 1939) and Order No. 272 (AprU 13, 1939).

CONCENTRATION OF ECONOMIC POWER 277

on February 25, 1938,^^ after court actions resulted in many injunc-
tions. In the following section the procedure followed by the Com-
mission in its abortive first establishment of prices is described
briefly. No endeavor is made here to discover or to appraise either
the standards used or the effects of the prices that were fixed for a
short time.

The 1937 Price Determination.

Immediately after the act of 1937 became law, the Commission pro-
ceeded to determine the weighted average of the total costs in each
minimum price area, publicly announcing the respective averages, as
required. No public hearings were held, and data underlying the
weighted average costs, upon which prices were to rest, were kept in
absolute; confidence by the Commission. District boards submitted
initially proposed prices which, after modification as a result of pro-
ducer protests, were returned to the respective district boards for
coordination. Such coordination was attempted and agreement
reached in some markets, but the Commission ultimately took over
the job upon the failure of district boards to complete it.

Obviously no public showing was made by the Commission as to the
degree of compliance with prescribed standards, and it is therefore
not possible to state whether the price schedules complied with the
standards prescribed by the act. The prices did represent increases
over those prevaihng just previously; in some cases such increases
ranged from 25 cents to over $1. Previously, the Commission had
announced in a formal statement on September 28, 1937, that it would
hold a public hearing which would permit examination and cross-ex-
amination of witnesses and basic data prior to the establishment of
minimum prices. Nevertheless, this agreement was renounced with-
out warning to interested parties, and prices were established without
public hearings or making public the basic data which the Commis-
sion was required to have in support of its price schedule. Accord-
ing to the Consumers' Counsel, the Commission, at the solicitation
of Consumers' Counsel, subsequently "agreed to hold a hearing on
December 21, 1937, at which time it would place on public record the
facts necessary to substantiate the minimum prices established by the
Commission," but no such hearing was held and the Commission
"refused to proceed to substantiate prices." ^^

Interested consumers appealed to the courts and nimierous injunc-
tions were granted. Ultimately the Commission revoked the entire
price schedule.^*

It is clear that the establishment of prices on a basic commodity
in such widespread use, without submitting them to the' interested
parties, particularly those who would be compelled to pay the mini-
mum prices representing a general increase over levels prevailing just
) previously, and without supporting them publicly with the under-
lying data to show they met all required standards, could not expect
public support. The ha^y procedure was doubtless a response to
great pressure from several directions,;^cluding producers and labor,
urging early price establishment.

This first experience was disappointing both to the industry and to
3onsumers who were put to great expense in following the procedure

«' Order No. 230 (February 24, 1938).

M Annual Report of Consumers' Counsel, 1938, p. 4.

»» Order No. 230 (Feb. 24, 1938).

279348 — 41— No. 32 20

278 CONCENTRATION OF ECONOMIC POWER

through successive stages, as well as to the Government. It was ex-
pensive to all concerned, and there was unfavorable comment in the
press.

The Second Price Determination, 1938-40.

With the revocation on February 25, 1938, of its first price schedules,
"the Commission has proceeded in accordance with the provisions of
the law as interpreted by it * * *. There may be legal questions
which wiU arise, * * * as there always will arise legal questions,"
says the 1938 Annual Report of Consumers' Counsel of the Commis-
sion, but in its opinion "there can be no question as to the sincerity
of purpose of the present (1938) Commission." After the first price
establishment failed, the Commission's chairman resigned and no
successor was appointed, the six remaining Commissioners electing a
new chairman and continuing their duties until the President's re-
organization plan abolished their offices and transferred the entire
administration of the act to the Secretary of the Interior as of July
1, 1939.

In brief retrospect, the second price procedure up to date (June 1940)
has gone through the following stages:

(1) The weighted average cost has been determined for each min-
imum price area. First', "legislative" or informative hearings were
held, where all data helpful to the Commission were introduced;
later, all individual cost reports for 1936 and those for 1937 used by
the respective district boards in adjusting 1936 costs (to reflect changes
through 1937) were made available for inspection by interested parties.
Final "judicial" hearings were scheduled by the Commission with the
previous record made a part of the record of these hearings, and with
rights of examination, cross-examination, motion to strike, and intro-
duction of affirmative evidence. "Findings of Fact and Conclusions"
were niade by the Comrhission in May and June 1939, determining
the weighted average cost for each minimum price area, which under
the act is the figure which the net return per ton, from minimum prices
later established, must approximate.

(2) Initial prices have been proposed by distnct boards, submitted
to the Commission, and retvuned to district boards after approval or
modification as a basis for coordination. This is step 2, as prescribed.

(3) Marketing rules and regulations proposed by district boards
have been submitted to the Commission for approval or modification
and returned to district boards for coordination. This is step 3, as
prescribed. (Steps 2 and 3 do not necessarily follow in numerical
sequence.)

(4) Coordination of minimum prices in common consuming markets
was attempted by the district boards, but they were unable to ac-
complish it; hence the Commission took over this fimction, as directed
by the act. Final public hearings were begun in May 1939, just
prior to ihe transfer of the Commission's functions to the Bituminous
Coal Division of the Department of the Interior, under which these
hearings were continued until their completion on January 20, 1-940.

The three Trial Examiners have made their report on the final
hearings ("Proposed Findings of Fact, Conclusions, and Recom-
mendations of Trial Examiners"), and have recommended to Director
Gray f. o. b. mine prices for all coal-producing districts (except
District 21, which produces lignite and has been held outside the
scope of the act).

CONCENTRATION OF ECONOMIC POWER 279

The prices recommended by the examiners will give an estimated
minimum national average price of $2,072 per ton, representing an
increase of about 1 1 cents a ton above the average of the unregulated
prices of 1937, the last period for. which figures are available.^" The
recommended prices for some areas are about the same as the levels
prevailing in these areas recently, and higher than recent prices in the
case of other areas. These recommended prices are in general lower
than the minimum prices temporarily in effect imder the Commission
in early 1938 and also below the mmima established under the N. R. A.
Code in 1933. It is understood that July 1940 is anticipated as the
month in which minimum prices will be established.*^

Since the establishment of minimum prices is the prime objective
under the act, no special note will be made here of the Commission's
duties apart from those bearing directly on prices. It should be
observed, however, that as part of its price-fixing function the Com-
mission is directed to prescribe "due and reasonable maximum dis-
counts or price allowances" permitted to be made by code members
to wholesale distributors "who purchase coal for resale and resell it
in not less than cargo or railroad carload lots," and that such dis-
tributors must maintain and observe the prices and marketing rules
established by the Commission.*^ In other words, distributors must
not, on resale, cut below effective minimum prices f. o. b. mines, nor
exceed maximum prices if any are in effect. The destination price
in any case must not be less than the. effective minimum price f. o. b.
mine, plus the effective freight rate applying from the point of ship-
ment to the destination. This report does not consider the matter
of standards for distributors' discoimts,

STANDARDS FOR PRICE DETERMINATION IN ACTUAL OPERATION

The. standards as prescribed in the act are already set forth and
emphasized in the foregoing outline of "procedure provided for price
establishment." Wctiow consider these standards, one by one. An
attempt will be made to explain their meaning, describe their purpose,
their application by the Commission, and major diflSculties encoun-
tered.

The Cost Standard and Its Determination.

The Commission is directed to establish minimum prices, by steps
already described, which will return to the producers within a given
price area an amount per ton approximating the weighted average
cost of that minimum price area. In other words, it may be said that
to comply with the act in this particular, the Commission must show,
for each price area, that —

(1) It has determined the weighted average cost per ton as pro-

vided in the act, and

(2) That minimum prices proposed to be established will return,

on the total production of each of the respecrtve price aieas,
an average per ton approximating its weighted average
cost per ton as determined.

The weighted average cost determined by findings dated June 14,
1939, for minimum price area 1 (districts 1 to 8, inclusive)*,- was $3-128

*i Department of the Interior Information Service, Press Release No. P. N. 9809 (April 16, 1940).

« Department of the Interior Information Service, Press Release No. P. N. 107,008, C. D. 80 (July 5, 1940).

« On June 20, 1940, the Coal Division issuea an order prescribing maximum discounts to distributors.

280 CONCENTRATION OF ECONOMig POWER

per ton. Minimum prices established for producing mines in price
area 1 must be shown to represent a return on all the coal produced
in that price area averaging approximately $2,128 per ton.

Thus, the act seeks to attain its prime objectives — prices that
insure —

(1) To labor: the employers' ability to pay contract wages.

(2) To the industry : an end to its heavy annual net losses, and

some assurance of greater economic stability.

(3) To the consumer: reasonable minimum prices which will

cover costs of production on a stable basis.

The approximation of average return to average cost presents some
practical difficulties. The term "approximate" must be interpreted
with some flexibility. Prices must also "preserve as nearly as may
be existing fair competitive opportunities," which means that the
coals from different districts customarily reaching a "comnaon con-
suming market" must be priced so as to retain, in the main, their
usual past relationships as modified by the word "fair." The act
recognizes this necessity by providing that the prices first proposed
by district boards for later "coordination" with other districts in
markets where they compete shall reflect as nearly as possible "the
relative market value" of the various kinds, qualities, and sizes of
coal.

One tangible measure of relative market value available to the
Commission is the record of past price relationships, but this is far
from satisfactory by itself. Moreover, in the process of coordination,
to meet the important provision that average return from prices must
approximate average cost in each minimum price area, many modi-
fipations and concessions from the established price relationships are
inevitable. After the adoption of the new schedule of minimum prices,
which represents increages generally over the existing below-cost
levels, many shifts will doubtless occur so that the present proportions
of the sales of the various coals and various sizes will not continue
to hold. Obviously the actual return over a period of months or a
year cannot be predicted with perfect accuracy. Should the prices
promise a return per ton in minimum price area 1 within five, six, or
seven cents of the weighted average cost, on the basis of past distribu-
tion, such return might be considered an approximation of cost, under
all the difficulties incident to setting up a schedule of hundreds of
thousands of prices. Where particular prices increase, the shifts of
consumers to different sources of supply, even to different districts
and to different sizes of coal as a matter of good business econorny,
to escape paying the full price increase represented by coi^tinuing
their old connections, may well -produce a change in the average
future return in a price area as compared with the return that would
have resulted had the old trade relationships remained entirely un-
disturbed. Although the Commission cannot accurately predict all
future shifts in demand from size to size, mine to mine, or district
to district, or their effect on the average, it can use the tonnage move-
ment of the past with judgment as to the effects of any probable
shift, as a test of the prices now proposed for establishment, to show
substantial compliance wit;,h the prescribed approximation of average
return and average cost."

«».See appendix H, for the actual procedure of the Coal Division on this matter.

CONCENTRATION OF ECONOMIC POWER 281

Recognizing the need in actual determination of prices for complete
data on distribution showing the tons of each size of coal moved by
every mine to each destination or market, the Commission, in the
spring of 1938, required the filing. of such data, and traced the move-
ment of coal transhipped over the lakes and coastwise, in river move-
ments, etc., to its final destination. On a special form it also ob-
tained a similar record of all railroad purchases for locomotive and
other use. For the first time in history, a record exists of the tonnage
distribution of all sizes of coal from all mines to all markets. The
period covered is the year 1937. Thus the Commission is able to
show the approximation of estimated return from' the price schedule
for a district to the weighted average cost in a minimum price area,
barring unpredictable shifts that may occur in the future.

As already indicated, the act does not prescribe the form in which
costs shall be assembled. It does prescribe ** that each distiict board
shall determine —

from cost data submitted by the p'-oi)er statistical bureau of the Commission,
the weighted average of the total costs of the ascertainable tonnage produced in
the district in the calendar year 1936.

It also prescribes, in the same section, that the computation of the
total costs shall include the cost of —

(1) Labor.

(2) Supplies.

(3) Power.

(4) Taxes, insurance, workmen's compensation, royalties, depre-

ciation and depletion (as determined by the Bureau of In-
ternal Revenue in the computation of the Federal income
tax), and all other direct expenses of production. Coal
Operators' Association dues, district board assessments for
board operating expenses only levied under the code.

(5) Reasonable costs of selling.

(6) Cost of administration.

These cost items are here grouped in the above manner because the
cost reports required by the Commission from all mines followed
generally such a grouping. (A special form was devised for use by
small mines with a daily capacity under 50 tons, the returns from
which were of slight influence in the total.)

The "Findings of Fact and Conclusions of the Commission" de-
termining the weighted average cost for price area 1 (June 14, 1939),
reviews in full detail the steps taken by the Commission. A short
sketch of the organization and technique employed wiU suffice for
present purposes.

Cost data were obtained on standard forms and handled under
rules and with directed technique that insured substantial uniformity
in aU districts, under the general supervision of the Commission's
Division of Research and Statistics, which directed the work of the
22 statistical bureaus. These cost forms were an outgrowth of
earlier cost forms, and closely resemble those prepared by the first
C6al Commission imder the 1935 act, which in .turn were very much
like the forms in use by the National Recovery Administration, 1933
to 1935. Expert knowledge and judgment of coal industry represent-
atives were very helpful: the N. R. A., the first Coal Commission, and

2g2 CONCENTRATION OF ECONOMIC POWER

the present Commission availed themselves of such counsel. Again
it is to be noted that the major groups of items used in the present
cost forms followed the previously quoted list provided in the act-
Some of the items on the cost form. were broken do^\Ti into detail
helpful to the producers in filling out the form. The mines had be-
come accustomed to filing substantially these same details since
November 1933 under the N. R. A., except for temporary periods of
nonregulation. We shall reserve until later a discussion of the criti-
cisms and attacks upon tlje cost form, and its possible weaknesses.

The Commission, through its Division of Statistics and statistical
bureaus, obtained sworn cost reports in detailed form on Cost Form
No. 1-A for the calendar year 1936, in response to its Order 15, July
15, 1937. Form No! 1 was for mines with a daily capacity of more than
50'tons; No. 1-A for those under 50 tons. These reports were filed
by producers with the statistical bureaus of their respective districts.
The bureaus examined each report as it came in ; secured from many
reporting mines corrections of inaccuracies or omissions discovered;
secured explanations of items which on their face seemed to them very
high or otherwise questionable; verified the reports for mathematical
accuracy; and tabulated the reports in two general classifications,
"commercial" and "captive," in accordance with pertinent subdistrict
arrangements, ready for the making of composite cost statements.

In its "Findings of Fact" as to the weighted average cost for price
area 1 the Commission *^ says, "We construe the phrase 'ascertainable
tonnage' to include the entire tonnage of both 'commercial mines'
and 'captive mines' of code members and noncode members, as these
terms are hereinafter defined." The latter definition** indicates
that mines were classified as captive whose report showed that
"e?cempt" coal plus "mine fuel" plus "controlled" sales constituted
40 percent o^- more of their output. Controlled sales are defined in
the cost form instructions as coal sold to a consumer (a) wholly or by
control a parent or subsidiary of the producer, (b) owned or controlled
by a third owner who stands in similar relationship to the producer,
or (c) where the sale is for any reason noncompetitive.

Mines which were idle the entire? period contributed no production
to the "ascertainable tonnage" under the Commission's construction,
and were therefore excluded from the cost tabulations. Having listed
all the mines determmed upon for inclusion, their tonnages and costs
were tabulated and totaled. The weighted average was computed
by dividing the total dollars of cost by the total tons produced.

An item calling for the net debit or credit from operation of company
houses "including fixed charges thereon, less income," appeared on the
1935 Commission form, but at a coQference in June 1937, between
members of the Commission staff and representatives of district boards,
it was "decided that company house expense less income should be
excluded," and this item does not appear on -the present cost. form.
In its "Findings and Conclusions" regarding weighted average cost,
the Commission found that Cost Forms No. 1 (1936) and No. 2 (1937)
are adequately designed for the purpose . of obtaining the costs of
producing and selling bituminous coal.

All correspondence of the statistical biu-eau with reporting mines
questioning items as reported, together with replies and such revised

«" Findings of Fact and Conclusions of the Commission for price area 1, p. 11,
«lbid., p. 20.

CONCEI>'TRATION OF ECONOMIC POWER 283

reports as resulted, were attached to the original reports which were
esiiibited for the inspection of interested parties.

The reports for the year 1936 and the last 9 months of 1937 were
later forwarded to Washington, together with the tabulations of these,
where they were subjected to a check for mathematical accuracy.
The Division of Research and Statistics also rechecked all individual
reports in what they called a "test audit." This resulted in some
changes and corrections which were read into the record, notably the
removal of development expenses of new mines. Such development
expenses are properly chargeable to capital account and "not properly
chargeable to the cost of production within the meaning of the act." ^^

The office of the Consumers' Counsel in this initial investigation
also made spot checks "to satisfy itself on behalf of the consumers
that ih& weighted average costs as computed" were "statistically
accurate and fairly represented average costs. The Consumers'
Counsel found that the posting and mathematical work of the statis-
tical bureaus was generally accurate. Such errors in posting or com-
putations as were found were comparatively few and of no consequence
in their effect on the district totals."

The Consumers' Counsel also questioned a number of items reported
which appeared to be high or of questionable application. The com-
mission investigated these items by inquiry to the reporting mines,
and as a result most of them were satisfactorily explained. Some
further revisions resulted, however, and were read into the record.
The changes were accepted by the district boards.

Such reported expenses as "interest" on bonds or other borrowed
capital (not listed as costs under the act), "bad debts," "trucking"
or other transportation charges not incident to production cost,' and
discounts allowed for cash, were ruled not proper charges to cost for
this pm-pose, and were excluded from the computations.

"In the case of two mines in district No. 2 which. were queried by
the Consumers' Counsel, the commission finds that the reduction of
these (administrative) items to the district average is proper." This
was the only case so handled in price area No. 1. 'The two .mines
belonged to the same company, which "stated that in view of surround-
ing circumstances, the cost' indicated was excessive and should not
be used in determining the weighted average of the district."

The 1936 summary costs for each district were submitted to the
district boards for their use in adjusting them to care for changes
established since January 1, 1936. The results of the "test audit"
and other recommended revisions which were read into the record
were given effect in connection with the adjustments made by dis-
trict boards.

It has been noted that the Commission also summarized and aver-
aged the costs for the last 9 months of 1937. This was done to help
the district boards "to adjust the weighted average of the total 1936
costs as may be necessary to give effect to * * * any changes
substantially affecting costs, exclusive^ of seasonal changes, so as to
reflect as accurately as possible any ^ange or changes which may
have become effective since January 1, 1936." Thu# actual cost
experience was made available for district boards to test their adjust-
ments of the 1936 costs. The first 3 months of 1937 were not included,

"Ibid., p. 21.

284 CONCENTRATION OF ECONOMIC POWER

since "the experience represented by these 3 months was essentially
like that of 1936 on the wage scale then in effect." The last 9 months
represented an experience under a higher wagejscale^effective on April
1, 1937. Constant reference to actual cost experience in this period
was deemed essential to intelligent adjustment of 1936 costs. Official
cost data for the first 3 months of 1938 were not available, but tests
showed they would for most districts make little difference in the costs
for the 9 months period, which the Commission concluded might be
"taken as reasonably representative of the full 12 months, on the
present wage scale, from April 1937 to March 1938 for all districts in
price area No. 1 except district No. 5." *^ As to that district, a con-
spicuously higher monthly production in the first quarter of 1938 than
in the last 9 months of 1937, a temporary variant rather than a per-
manent upswing, "points to the necessity of downward adjustment
of its 9 months average."

Preliminary composite reports of the available 1937 cost returns
were first sent to district boards in April 1938, and on May 30 complete
summaries were transmitted, incorporating late returns and the
results of the "test audit."

There was introduced in evidence a series of uniform reports re-
flecting additional adjustments to the 1937 costs resulting from (1)
the increase on January 1, 1938, of the Federal unemployment tax
from 2 to 3 percent, and (2) from the full incidence of the Coal Act tax.

In certain districts, additional adjustments were made by district
boards to cover changes resulting from their specific conditions.
Such an increase was one recommended by district No. 2 to cover
changes in the Pennsylvania State mining law, effective January 1,
1938. Because the estimated increase could not be measured with
any degree of accm-acy, without a more complete record of actual
experience, the commission decided "the evidence does not warrant
increasing the costs" on account of this change in the State law.

The Commission first set December 15, 1938, as the date "on and
after" which individual mine reports for price areas No. 1, No. 2,
No. 3, and No. 5 would be available for inspection by interested
parties. Litigation seeking to prevent public exhibition of individual
reports caused this inspection period to be delayed, and a second
notice set February 6, 1939. Hearings were actually resumed on
March 6, 1939, and adjourned. Final judicial hearings took place
shortly thereafter.

The foregoing description of the Commission's procedure applies
generally to all districts.

The details, figures involved, exceptional conditions applying to a
certain few districts, the adjustments proposed by the district boards,
and the considerations underlying them, may be found in the "Find-
ings of Fact and Conclusions" of the Commission for each price area.

ThefVeighted average costs for 1936, as adjusted and determined
by the Commission in its "Findings," are as follows:

Price area 1 $2,128

2_. 1.7622

3 2.4382

4 3.608

5 2.0392

••Ibid., p. 26.

Price area 6. $2.7389

7. -- 2.-^691

9 1.4851

10 ... 3.2247

CONCEI-tTRATION OF ECOTSTOMIC POWER 285

It is almost general knowledge that costs of production may vary
materially, not only between coal fields and mines within a field, but
even within the same mine as varying physical conditions are en-
countered.

Even more general is the knowledge that there are no standard
tolerances by which it may be determined whether a certain figure of
cost, or a certain item of cost, is on its face definitely high or low
in the sense of being questionable as to accuracy or propriety. All
this was brought out by expert testimony during the cost hearings
and in the Findings of Fact and Conclusions of the Commission for
price area 1.

The record contains certain conclusions of the Commission which
assume the importance of "standards" by interpretation or ruling.
Some of these should be borne in mind:

(1) Cost is to be determined on a strictly f. o. b. wholesale, cash
basis. Items shown in table 1 of the "Findings" for each ■ district
as having been excluded cover:

(a) Cost of trucking coal to customers.

(b) Cost of rail transportation to a point from which the selling

price is not on an f. o. b. mine basis.

sells in railroad carload lots, but also retails direct from
the mine).

(d) Cost of credit (bad debts and cash discounts). .

(2) Cost of "ascertainable tonnage" is construed to include the
"entire" tonnage of both "commercial mines" and "captive mines"
of code members and noncode members.

(3) Costs are to be exclusive of capital expense (deduction was
made of development expenses, interest, and dividends as not properly
chargeable to cost of production).

(4y Discounts to wholesalers should be included in' the cost.
With respect to (1) above, there has been little disagreement.
With respect to (2) there was considerable criticism, evidenced
through, cross-examination, of the Commission's position in (a) its
tentative cost findings that "the judgment of the marketing experts
that the actual costs of selling coal commercially, as reported, are the
best indication of the reasonable costs of selling such coal, is entitled
to great weight," and (6) the apparent intention to use the "tons
sold" as a divisor into the total cost of selling coal commercially,
then adding the result to the per ton cost of all other items obtained
by dividing total tons produced into the total dollars of such other
costs. Much argument occurred off the record, opposing schools of
thought contending that —

(1) average cost obtained with "total" tons produced as a divisor

could not represent the average cost of selling, but some-
thing less than that ;

(2) average cost of selling obt^in^d with only tons sold com-

■ mercially as a divisor, would' not produce a total weighted
average of the total cost of the "ascertainable tonnage,"
as required by the act.

The Commission held that the total ascertainable tonnage must be
used throughout as the divisor for total dollars of cost.

286 CONCENTRATION OF ECONOMIC POWER

Selling Costs.

Parties at the hearings attempted to bring out as an error the Com-
mission's acceptance of selling costs as reported, on the ground that
commissions reported paid by mines whicn sold through agencies or
distribiitors, where there was a mutual financial interest, would
include profits or some unknown element of profit. Testimony in
the record was to the effect that where such affiliations exist, the
commissions charged are "commonly substantially the same for affil-
iated and non-affiliated business and that they are comparable to the
commissions of independent distributors." No evidence was adduced
to show that the commission charged on affiliated business was
unreasonable or unduly large in relation to the services performed.
The Commission found "no cause to exclude them from the computa-
tion of the reasonable costs of selling coal."

With respect to (4) as it appears in the record, an attempt was
made to show that the inclusion of discounts allowed by producers to
wholesalers was an error on the groimd that discoimts" are a reduction
of income rather than a cost.

The "Cost Findings" state that "a large part of the national
supply (of coal) is sold through independent wholesalers or jobbers."
They go on to say that "if expenses attached to this method of selling
are excluded from consideration * * * the costs will be frag-
mentary and incomplete * * *. Such compensation to the
wholesaler is a legitimate charge to the producer's cost, accompanied
by a corresponding credit to his realization. The Commission, there-
fore, finds that discounts allowed by producers to wholesalers should
be included in, the cost wherever known." To do otherwise would
produce sellmg cost averages including the sales expenses of direct-
selling producers and the commissions paid by producers who sell
through sales agents, but inconsistently excluding allowances or dis-
counts made by producers to wholesale distributors who perform the
sales function and act as a sales department for them. The average
realization from sales is computed including all selling expenses.
This necessitates the inclusion of commissions paid agents and dis-
counts allowed to wholesalers.

The basis for determination of selling costs has been a particular
subject of attack. The act, when listing those items which were to
be included in cost ascertainment, modified only one item, and that
item was selling cost — "reasonable cost's of selling." Many expenses
have crept into selling cost through the years, some of which are
taken for granted as necessary, but many of which are not really
necessary — and others have not been proper "costs" at all. It
should be pointed out that contributions and donations to charity
are not a proper charge to costs upon which to rest prices regulated
by a public agency. Entertainment is another item in the same
categof^ — perhaps a necessity arising out of competition, but in the
opinion of the authors not a reasonable expense of selliag.

Affiliations between producers and their selling companies are
common. In many instances, the selling company is a child of the
producer's membership in a "marketing agency," which requires the
subagent to do the actual selling; while the marketing agency acts
more as a price-and-market-stabilizing and promoting agency for the
coals of its members. Undoubtedly, the commissions paid to affil-
iated selling companies often represent an element of profit. To that

CONCENTRATION OF ECONOMIC POWER 287

extent, the amount of which is at present unknown, the selling costs
reported by such producing affiliates represent not only costs, but
some profit. (On the other hand, the reported costs used by the
Commission in its present findings fail to represent the actual selling
costs by whatever amount of "discounts and allowances to whole-
salers" were omitted. This amount is known to be considerable, but
no acceptable evidence was presented to enable a finding as to the
amount. The custom of many producers treating such sales as net
transactions in their records accounts for their inability to include
such discounts to wholesalers in the reported costs.)

Maintenance of separate sales offices and salesmen by several
competitors in the same limited market, offering substantially the
same purpose coals from the same producing fields, is uneconomic in
the opinion of the authors. Distribution on the basis of getting all
the tonnage possible, over as wide a territory as possible, irrespective
of cross-hauls, is uneconomic.

Sales campaigns, including advertising "of all kinds, serve not to .
increase the total tons of coal consumed, but merely to increase the
sales — often temporarily — of the advertiser. Consumption of coal is
not increased beyond actual need by sales efforts — unless in the broad
nature of education and market promotion, for bituminous coal in
competition with other fuels, such as has at times been an activity
of the marketing agency, Appalachian Coals, Inc., and of the National
Coal Association.

Such educational and promotional work for coal as a competing
fuel can be at once more economical and more effective as a coopera-
tive effort by marketing agencies and associations than by individual
producing companies.

It seems reasonable to expect an increase in selling costs generally,
under minimum price regulation. With price as a sales argument
out of the picture, selling efforts can be expected to redouble in the
direction of more advertising, more service such as technical advice,
combustion engineering, etc. '

It is evident that in order to administer the cost standard effectively
the regulatory agency must determine, for different geographical
divisions and for different coals and perhaps for sales to types of cus-
tomers, the amount of reasonable selling costs, including distributors'
discounts.*^

The acceptance by the Commission of the "actual cost of selling"
as the best evidence of the reasonable selling cost has been criticized
by the office of Consumers' Counsel, which in its 1938 annual report

The ofl&ce has opposed that conclusion and will continue to oppose it. The
ofRce has submitted testimony to show that the "cost of selling" as reported by-
many producers exceeded the costs reported by and recommended by most effi-
cient produceifs. Also the office has recommended to the Commission that
distributors affihated with producers shall be required to make a report in greater
detail to the Com.mission so that if there is any hidden "profit" included in the
"cost" it will be exposed. Further study will be necessary before a decision can
be made as to how the problem can be attacked most successfully.

Opposing counsel at hearings have tried more than once to press
toward a showing that sworn cost reports are not acceptable, but
should have been audited back to the books and records. Books

<• On June 20, 1940, the Coal Division, acting under its statutory authority, issued an order prescrlbine
maximum discounte to distributors.

288 CONCENTRATION OF ECONOMIC POWER

reflect the policy of the reporting company and generally will accu-
rately reflect actual expenditures; that they necessarily reflect the
actual proper costs for the purposes of this act is another question.

It cannot be denied that such possibihties exist, not only in the
"selling commissions" paid, referred to above, but also in several
other items. Among th^e would be depletion, depreciation, royal-
ties, and salaries of officers.

To comply with the act depletion and 3epreciation must be reported
as approved by the Bureau of Internal Revenue. Under rulings of
this Bureau there are alternative methods allowed for taking each of
these cost charges for income tax purposes. The complexities at-
tached to a full discussion would require more space than is warranted
here. At the risk of mis-statement in a simplified generalization, the
possible alternatives are summarized in a general way below.

Depletion may be charged for income tax purposes either on the
basis of —

(1) 5 percent of gross income but not exceeding 50 percent of the

net income.

(2) tonnage produced; a per ton rate being agreed upon, based

on valuation of the coal owned and/or lease-hold as of
March 1, 1913, if acquired before that time, or cost if
acquired since that time.

The purpose of choice (1) is to permit a company to take its income
tax depletion in years of profit, making up for poor years at these
times when the charge for depletion has the effect of reducing the tax.
The only true cost of depletion in any one year would be the (2), the
tonnage basis. In view of the long record of losses in this industry, •
it is understandable that many companies have made the choice of
plan (1). The choice having been made and approved, the coal pro-
diicers must continue, under the Burejau's rules, to report consistently
in that way. More than one company maintains its depletion account
for income tax purposes one way and uses for its own cost purposes
the method of depleting actually mined tonnage at a rate based on
value or cost. Since the only sound basis is the latter 0{ie, it follows
that cost reports of such companies to the Coal Commission should
be so based, irrespective of the income tax requirements, but they
cannot be so reported under the act. It may well be that some com-
panies using the 5 percent of gross income basis took more depletion in
1936 than proper costing would otherwise permit.*" The depletion
cost reported to the Internal Revenue Bureau and consequently to,
the Coal Commission for that year may be in excess of actual proper
depletion in 1936, which is the basic year for cost determination.
Some similar cases may have also occiu-red in the 1937 cost reports,
on which" were based largely the "adjustments" of the 1936 costs to
cover changes since January 1, 1936. To the extent that such figures
ate in excess of the true cost of depletion on actual tons produced, an
element in excess of the actual cost appears in the cost averages upon
which prices rest. On the other hand, there may well be many com-
panies which, tinder plan (1), took no depletion in one or both of. these
years. Hence, the depletion cost§ used in determining weighted
average costs for 'price purposes are made inaccurate by the act
itself, but the extent and the direction of the inaccuracy are not known.

M In 1936 the best year since 1930, the deficit of the bituminous coal industry was only $8,524,000. Many
producers operated at a profit.

CONCENTRATION OF ECONOMIC POWER 289

Depreciation may also be somewhat out of line, since it may be
taken on an estimated tonnage rate approved by the Bm-eauof
Internal Kevenue, although such tonnage rate rests on the value of
the assets depreciated. A mine which for any reason suffers, in 1
year, a decided drop in output bfelow its usual rate, would perhaps
thus report a smaller depreciation than a strict costing, based on the
estimated hfe of the assets leing depreciated, would require. In a
particrlarly heavy production year, the reverse might occur.

There is no criticism involved here of the rules for reporting for
income tax purposes. It is rather a criticism of the Coal Act which
requires the income tax basis to be used in arriving at costs for price
fixing purposes. It is apparent that the result may be the inclusion
of an element beyond actual cost in many cases, and in others perhaps
an omission of some amounts that belong in cost. The degree of
inaccuracy in the cost averages now being used is unknown.

Royalties as reported on cost forms and included in the averages
are not in question, so far as their actual payment is concerned.
However, the producing company or its controlling interest or family
often owns, through a separate land-holding agency, the coal in
which the producing company operates. Royalties in such cases
represent a transfer from one pocket to another, a profit probably
beiug involved in this payment to the land or coal owner. Some of
these royalties may be on a fairly liberal basis, and in some instances
were questioned by the Consumers' Counsel during its examination
of individual cost reports as being apparently higher than the "going"
rates of royalty in the locality. To the extent that this device rep-
resents a transfer from the producing company to the related land
owner of a royalty beyond the locality's reasonable "going" rate,
profits may be included by the producing company as an item of
cost of production. Whether or not the aggregate of such profits is
substantial in relation to the aggregate costs in any district is not as
yet known.

Salaries, of officers: Many producing companies are closely held.
The officers of such companies may choose to withdraw some of the
profits by way of salaries. This is a matter of business policy for
which no criticism is offered. But when such salaries are reported
as costs and enter into weighted averages upon which prices to con-
sumers are based, the profit element in them defeats the purpose of
the minimum price requirements. The Commission has not as yet
declared a definite policy in thib matter, though many instances of
what seemed excessively high salaries were called to their attention
by the Consumers' Counsel. .

This reference to ' ' hidden profits" carries no imphcation of deliberate
padding of co^^s. It points rather to the necessity for a more precise
determination by the administrative agency, and especially does it
point to the necessity for a standard classffication of accounts.

The Complete elimination of profit elements or any inadmissible
element included in the costs now being used might, as to any pne
of the items discussed, affect the weighted average costs to a very
small degree only; such eHminations from all +he accounts, wherever
they may occur, might have a substantial mfluence. VHiether or
not this is so can only be determined after, an estimate of the amount
of such profit elements has been made.

290 CONCENTRATION OF ECJONOMIC POWER

A prime necessity is a standard classification of accounts. It is
beyond dispute that if an accurate accounting record of the costs of
production, selling, and administration is to be obtained from the
operating mines of tliis country, it is not enough that they all report
on a standard form on which various detailed items of cost appear,
even though the items called for are well conceived and properly
constitute all of the admissible expenses. There still remains the
fact that there is a wide variation in accounting practice in the treat-
ment of similar items, and in the general policies of the different
companies with respect to capital charges.

The cost blank used by the Commission was developed through
years of experience in which tne producing companies conferred with
agents of the Government and made recommendations. The pro-
ducing companies are, it is true, well accustomed to the forms now in
use, and have found it possible to recast their book accounts to the
requirements of the forms.

The Division recognizes the need for a sufficient acquaintance with
the cost systems and books of account in use in the industry to make
possible the development of a standard system, or, preferably, a
standard classification of accounts. Under such a standard classifica-
tion, all companies would charge into their respective cost accounts
the prescribed types of expenses. With this accomplished, all reports
submitted to the Government on standard forms would be comparable.
The doubt as to what kinds of items have appeared in the book
accounts of companies reporting the different items on the cost form
would be largely dispelled.

There would still remain an area of variance caused by the ap'plica-
tion of judgment and varying policies in drawing the line. between
"capital charges" and "expenses." This area would eventually be
njinimized through education^ N,o clear standard for drawing the
line between^the capital charge and the expense item is now universal.
The general accounting rule that the expenses which maintain the level
of costs and rate of production are chargeable to current costs appears
reasonable. There is, however, a realm of judgment capable of being
influenced by expediency which led to considerable cross-examination
in the final cost hearings.

An investigation ^' was made on this subject by one of the authors,
with the assistance of two accountants, occupying some weeks in the
fall of 1938. A bank examination type of audit was made. Typical
cost reports of a number of producers for early months of 1938 were
checked back to their books and records. It is fair to say that the
audit did not, in these cases, disclose careless inaccuracies in trans-
cription from the books, deliberate inclusion of inadmissible items', or
attempts to misrepresent. On the contrary, there was every evidence
of sincere eflFort to fill out the report accurately according to instruc-
tions, and in the case of these examinations the reports did agree \\'ith
the books in all substantial particulars. There, were enough trans-
positions of items into the wrong cost form item ; inadvertent inclusion
of certain expenses, sometimes taxes or insurance on company houses
or stores or other property) not properly chargeable to producing costs ;
and enough instances of other minor errors to point to the necessity'
for a definite standard classification of accounts. These field audits
were welcomed by the producing companies as a constructive servir-p

;• Unpublished study by E. B. Qordc"

CONCENTRATION OF ECONOMIC POWER 291

The cost-keeping officials of producing companies in some important
producing fields have for years been meeting in an effort to .develop
standard practices for the benefit of all. A prerequisite to the de-
termination of proper weighted average costs for this p "cpose is
uniform classification of accounts.

Other Standards j or the Initial Proposal oj Minimum Prices.

Under the act, each. district board is required "from time to time
on its own motion or when directed by the Commission," to propose
minimum prices free on board transportation facilities at the mines,
ck 5sifying the coals by kinds, qualities and sizes, and showiijig price
variations as to mines, consuming market areas, values as ,q uses,
and seasonal demand. These prices shall —

(1) yield a return per net ton for each district in a pric|e area,
. ' equal as nearly as may be to the weighted average of the

total costs as determined for such price area. This initial
price proposal is understood to aim at a set of price varia-
tions that will reflect the relationships of the different coals
and mines within each district, in such rnanner as—

(2) to reflect as nearly as possible the relative market values;

(3) to be just and equitable as between producers within the

district;

(4) to have due regard to the interests of the consuming public;

(5) to be just and equitable as between producers within the

district for any kind, quality, or size of coal for shipment
to any consuming market area, and

(6) shall not permit dumping.

The first standard, approximation of cost, has already been discussed.

To reflect relative market value of the various kinds, qualities and
sizes of coal does not seem a particularly complicated rcquiremlent.
In fact, however, it has presented problems of considerable difficulty.
The term "relative market value" obviously implies the existence of
markets, and hence the term refers to the relative value of coal in he
market, rather than at the point of production. So long as the m li-
mum prices established by the Commission are the market prices, \ le
average ^'market value" of all kinds, grades, and sizes of coal (ic a
price area) is to be equal to the cost of production, as defined in t e
ict.

"Relative market value," on the other hand,' is concerned wi )
differentials in price, rather than with price levels, and its relation )
the cost of production is only indirect. The interpretation of tl ■
term revolves around the problem of proposing price differences tha
wfll properly and equitably reflect the relative market values of diffei
ent kinds, grades, and sizes of coal. This does not mean necessaril
that the differences which existed under imrestricted competition wil
reflect relative market value when prices are fixed. As between coals
of the same size, but of different kinds and qualities, the averagf^
consumer probably enjoys greater freedom of selectivity than he does
between coals of the same kind and quality, but of different sizes.

It might be contended that the relative value of two kinds or qual-
ities of coal of the same size would be properly reflected if the difference
in prices proposed between any two kinds or qualities measure the
difference in the utilization value of the two coals under usual
conditions.

292 CONCENTRATION OF ECONOMIC POWER

It may also be contended that for the purpose of compliance with
these requirements of the act, the relative values proposed between
two kinds or qualities of coal need not constitute the measure of their,
relative consumer acceptance to any extent. It would follow, natu-
rally, that relative market values of different kinds or qualities of coal
of the same size would be the same for all consuming market areas
served by the district.

In the extremely complicated picture- presented by the multi-
plicity of mines classified in a"~consiclerable number of quality groups,
and with a number of coal size groups, all seeking n^arkets in many
consuming areas, the task placed on the district boards of showing
that the proposed prices reflect relative market values under any exact
interpretation of 4he term would be tremendous. It has been con-
tended that in consideration of the other standards in the act, the best
evidence of compliance v;ith the '^'relative market value" standard
would be a showing of the actual market relationships in a recent past
period, with an explanettion of any substantial departure from those
relationships.*^ Such departure in some cases might be occasioned
by a regard for the other standards imposed by the act, such as that
proposed prices shall "be just and equitable as between producers
* * * and shall have due regard to the interests of the consuming
public." However, it was found impractical to rest any conclusions
on the showing of past invoices and spot orders, analyses of both for
middle western district, having been made by the statistical and
research sections. It was apparent that such records were not reliable
or sound as a basis of judgment or criticism of coordinated prices.
Such records were available for only a few months' period. They
reflected not a pattern of generally existing spreads between >.Hzes and
qualities, but instead they showed the absence of any pattern, the
"bargaining power of particular consumers, the usual presence of
certain sizes, practices which might probably be called dumping,
attempts to raid teriitory by price cutting, and other factors and prac-
tices of the-same sort."" The "relative market value" standard,
in the present situation, rests very largely therefore on judgment and
experience. Although the authorities may be guided to some extent
by study of price relations in the recent past, it appears that they do
not regard these price relations as a necessarily correct measure of
quality relations. "

The purppse of the prohibition of prices which permit dumping is
obvious. Dumping ordinarily signifies prices (f . o. b. at the producing
point) that are so much lower than the usual prices that one producer
gain* an advantage over others wliich has no relation to relative cost.

No general formula can be given. Low prices which in one market
constitute dumping may, in another market taking the same freight
rate, be entirely explained by imterfuel competition. Under a market-
ing rule providing for appropriate procedure and approval by a district
board, "distress" sales may be made at less than the established
minimum prices. Each case must be examined individually and
determined on its merits. Criteria to define dumping will not be
easily and simply developed. The Coal Division has not, as yet,
d refined dumping.

" Transcript of Hearings, General Docket 15, The Establishment of Minimum Prices*, pp. 11682, 11692,
11,741, and elsewhere. ;

" Transcript of Hoarlnp, General Docket 15, p. 9,035; Proposed Findings of Fact, Conclusions, and Recom-
mendations of Trial Examiners (March 1940) pp. 35-39b, 831.

CONCENTRATION OF ECONOMIC POWER

293

TECHNIQUE OF PROPOSING MINIMUM PRICES

The Commission, in its orders Nos. 245, 247, 249, and 251 (July and
August 1938), set forth "Rules and Regulations for the Proposal of
(Uncoordiuated) Minimum Prices." Prices were to be proposed by
district boards within 25 days, together with "all the data upon which
they were computed, including, but without limitation, the factors
Considered in determining the price relationship." Each district
board was directed to transmit its proposed price schedule to each code
member in the district at least 15 days prior to its fUing with the
Commission. During the "interim" before filing with the Commis-
sion, such changes and corrections might be made as seemed proper
to the board, based on receipt and investigation of any protests, by
conference, hearings, etc. Any changes or corrections so made were
to be transmitted to code members not later than the date of filing the
proposed schedule of prices with the Commission. Copies of the
schedule filed with the Commission were to be sent to each of the other
district boards. The standards prescribed by the act were enumerated
in the Commission's orders.^*

Classification of Coals.

The scheme of the schedule to be proposed was made uniform by
these orders of the Commission. Each schedule must —

(1) List each code member alphabetically.

(2) Show opposite his name: (a) Name of the mine, (6) subdis-

trict in which mine is located, (c) seam or kind of coal
produced, and (d) price classification (A, B, C, D, etc.) in
each size group (represented by a number — 1, 2, 3, 4, etc.)
for all sizes applicable to such group that the mine is
equipped to liroduce.

(3) Show a table listing prices applicable to each classification.

(4) Include a clause (of standard wording set forth in the order)

to the effect that the prices in this schedule are not the
final prices to be established, but ard subject to such
increases or decreases as may be necessary in coordinating
to common conshming markets.

A sample of the schedule arrangement as called for by (1), (2), and
(3) above is given in the orders, and copied below for illustration. In
this schedule the letters represent quahties, A the highest, B the next,
C third quality, etc. The actual prices that apply to these various
letter designations are shown on the accompanying table, as required
by the Commission's order.

Alphabetical list of code members showing price classifications by sizes for all uses
except as separately shown

Company

Mine

Subdistrict

Seam

Size groups

B
C
D

C
B
C
G

D
A
E
O

Adams Coal Co

Black.

Coal

No. 8 ■

A
B
E
Q

Jones Coal Co

White

Coke- -.

No. 6

Sewickley

Pittsburgh

Smith Coal Co

Red.. -

Glass

"Seep. 275.

279348— 41— No. 32-

294

CONCEN rUATION OF ECONOMIC POWER
Prices applicable

Classification

Size groups

$2.75
2.65
2.55

$2.65
2.56
2.45

$2.55
2.45
2.35

$2.45
■2.35
2.25

$2.35

2.25

c . -

2.15

The proposal from district board No. 1 stated a general fact which
lends substance to the reasonableness of these coal classifications
generally, as submitted. It says:

Establishment of price classifications in district No. 1 has been an aUnost
continuoiis process since late in September 1933, when what '':as then the eastern
sul>district or what is now district No. 1 was called upon to propose price classi-
fications and prices under the National Industrial Recovery Act * * *. At
tiiat time they had no analytical data, or records of shipments available, and had
to be guided entirely by their judgihent and knowledge of the markets and the
various competitive coals. With the passage of the 1935 act, * * * district
No. 1, in common with allTJther districts, began the asstoibling and consideration
of data and information as to their coals which has been continued all the way
through to the present time."

This basic classification of the coals has a fundamental importance,
since it represents the opinion of the district board as to proper
price relationships among all the kinds, qualities, and sizes of coal
produced in their district, without considering differences in cost of
transportation to different markets. It is unpossible to treat fully
the entire process through whicL the board's classification committee
went, but, as a sample, the .considerations used by the xechnical
advisory committee of distiict board No. 1, as related in detail in
the Commission's findings when it resubmitted the proposed prices
to the boards for coordination, may be cited. Before these proposed
|)rices hnd been submitted to the Commission, the last step of the
district board had been to hear protests from various mines with
respect to the classifications prepared for submittal. As a result- of
these protests, coals involved were reconsidered, some protests allowed
and others denied. In fact, upon rechecking with more information
in hand, 239 classifications among "wagon mines''^® alone were revised.
In arriving at its classification of all the coals in the district, the tech-
nical advis6ry , committee used its latest experience in classifying
these sahie coals in the summer and fall of 1^37. Its quahty classifi-
cations were based on "logical seam classification," taking into account
all factors on which accurate data were available and recognizing
"that market experieneq must be relied on in the last instance to
arrive at pricq variations as between coals that would be just and
equitable to producers and have due regard for the interest of the
consuming public." The committee carefully consideried seam char-
acteristics, iii<'lu(iing the effect of faults and disturbances; compared
the coals rlassifu'd in one area with coals in other areas and all the
knowledge and (Experience available on the marketing- and general
' reputation of the different coals; and took into account, in classifying
the Jnine run size, the analyses of coals available in the files of the
Commission's statistical bureau or those accompanying protests, as

" Fndcral Register (Jan. 19, 1039), p.
■ ''■ Mines without facilities for shipplri(

279.
rig coal by i

I or yvater. Coal therefrom is shipped by truck'or wagon .

CONCENTRATION OF ECONOMIC POWER 295

well as some which the district board had obtained on individual mines.
This technical advisory committee then submitted these proposed
classifications to the district board's marketing committee, thoroughly
discussed them, considered changes recommended by the marketing
committee, and as a result made some revisions. In classifying, the
mine run size of grade "E" coals, which represents the predominant
tonnage, was priced at $2.15, the tentative weighted average cost of
the price area. A uniform spread of 5 cents per ton was applied for
all size groups between each classification inr '^x above and below
class "E." This spread between quality g oups represents the
difference in intrinsic ^'^ value of the coals and the needs of "the district
in order to market its coals in its principal markets, namely, east of
Pennsylvania and north of the Potomac River. The next step was to
submit the proposed schedule to the district board, which, after
thorough discussion, approved it and submitted it to the Commission.

There were variations in sequence of procedure, in the manner of
weighing the different factors, and in degree of thoroughness,, among
the various districts. District 1 is cited merely as a sample. This
brief description fails to suggest adequately the tremendous volume
of detailed factual data, the complexities of market experience and
use application involved in the preparation of these proposed price
classifications. The work consumed weeks, in many cases months,
and commanded in some districts considerable attention of experienced
executives and. technicians.

Under section 4-II (a) of the act, the district boards are to propose
minimum prices and classification of coal and price variations as to
(1) mines, (2) consuming market areas, (3) values as tonuses, and
(4) seasonal demand. The schedules proposed by the respective
boards which classified coals, using letters as quality designations,
(Vd set up size groups, and applied to each mine the letters determined
to represent their proper relative prices for each size group. They
also proposed separate lists for certain "use" applications and for
seasonal treatment of prices.

The size groups proposed were not uniform as to number or range
of sizes in all districts. District 1, for instance, proposed five size
groups, stating that —

the District Board believes that the five size groups it has proposed represent a
step toward the simplification of its price list which is much needed; that they
are all that are necessary; that by so limiting its size groups it will aid in eliminat-
ing requests for substitution of one size coal for another; and that said groups are
fair and equitable as to both producers' and consumers.

Other districts recommended different numbers of size gi"0ups to
suit the conditions of production and dei. ^nd.

The authors agree in principle with, disti zt board 1 that there is
room for simplification in grouping of sizes. Undoubtedly the number
of sizes and number of size groups may eventually he reduced in many^
districts mthout detracting from the value to the consumer or the
combustibility in specific use. It also appears that there exists a
general desire for a reduction in the number of sizes, when and as it
can be accomplished with least inconvenience to consumers.

District 2 proposed 16 size groups, 3 of ■wh'.ch represented prices
for coal sold for "retort and water gas plant? or the manufacture of
illuminating gas," and the 16th of which was if .other use classification

" "Intrinsic value" as used here is taken to mean the chemical ai i jhysical Characteristics of the coals.

296 CONCENTRATION OF ECONOMIC POWER

rather than a size group — "coal for by-product plants." District 3
proposed 7 size groups, district 4 proposed 11, and district 8 proposed
31. These variations are given to illustrate the difference in the con-
ditions as they have grown up and been recognized in the respective
districts.

In the process of coordination these proposals were altered in some
cases to meet situations encountered when different districts met in
"common consuming markets."

Variations for Seasonal Demand.

Seasonal dema ul vas recognized by providing, as in district 8,
"seasonal discounts on domesti? coal." In tliis district the coals used
for domestic purposes to which seasonal prices apply fall in size groups
1 to 11, inclusive. To arrive at a base for seasonal discounts an
estimate was made of the tonnage movin.g during April, May, June,
July, and August, the months when seasonal discounts were proposed
to be effective. The amount of the discount was applied to this ton-
nage and its effect upon the yield per ton ascertained; thus the board
was able to arrive at a total yield approximating the weighted average
cost. The average yield per ton durirag the discount period might fall
below the weighted average cost level, but for the year the desired
approximation would residt. Discounts were provided as follows:
On the first four size groups, 50 cents a ton in April with a discount
10 cents lower each succeeding month through August. On size
groups 5 to 9, an initial discount of 25 cents with a reduction of 5 cents
in each succeeding month through August; and on size groups 10 and
11, a discount of 10 cents until August, when a discount of 5 cents a
ton was proposed. This particular district's schedule is presented
merely as a sample. District board 7 also proposed seasonal prices.
Other boards in price area No. 1 made no seasonal price proposals.
The prices recommended by the examiners to Director Gray of the
Coal Divjs'on grant seasonal discounts to districts 7 and 8 in all
market areas other than market areas 1, 2, and 3.^^

Special Classifications by Use.

Use classifications were provided through the setting up of size
groups in some instances (as in district 2 mentioned above, and in
district 8). All districts provided a separate price schedule for rail-
road locomotive fuel, the price usually being the weighted average
cost as determined. Districts producing coal applicable to by-product
use (districts 2, 3, 7, and 8) proposed separate price schedules for
by-product coal. Districts 1, 6, and 8 also proposed a separate price
list for steamship bunker coal.

The reason for special use classifications differs in the case of rail-
road locomotive fuel, for instance, from that in the by-product class.

Railroads take their locomotive fuel from mines on their lines.
Those roads which do not have mines on their lines buy from off-line
producers, taking their locomotive fuel at the most convenient transfer
point. Locomotive fuel cannot be said to have a market area or
consuming market geographicall , as in the case of steam coal de-
livered to a manufacturing plant ' Therefore the scheme of the general
price list, whereby mine pnces are esWblished for delivery to a certain
market from certain mines, and another set of prices for delivery by
the snnie mines to other market areas, cannot be practically applied to

M Proposed Findings of Facts, Conclusions, and Recommendations of Trial Examiners, pp. 342-346.

OONCENTRATION OF ECONOMIC POWER 297

railroads. Their point of consumption is indeterminable. Under the
necessity, then, of setting up a "field price" for locomotive fuel, it
would seem that the figure to which the entire tonnage must conform
in yield per ton is the logical basis — in other words, the weighted
average cost figure. Besides,, originating railroads stand in a peculiar
relationship to the producing mines.

The "Findings" of the Commission for district 1 present this
relationship and the reason for the proposed price schedule for loco-
motive fuel with great clarity,** and it is quoted here as being repre-
sentative in ita general statements:

The district board proposes on page 47 of its proposed schedule that all coals
sold for use as railroad locomotive fuel shall take a minimum price of $2.15 per
net ton of 2,000 pounds, f. o. b. the mines, except when coal of size group No. 1
is specified for locomotive fuel, it shall take a price of $2.25 per net ton of 2,000
pounds, f.o.b. the mines.

This proposal is said to be entirely in accord -with past practices, both under
fixed prices and under open competition, because it is a field price applicable to
all mines and to all size groups of coal. The district board proposes the price on
this basis, not as a concession to the railroads, but to meet the needs of the district
by preserving to the producers therein this very important tonnage.

Railroads can use coals of varying sizes and qualities for railroad locomotive
fuel. The district board proposed a quality spread of 35 cents between its
highest and lowest quality coals, but if the same spread were made in the prices
established for coal used for railroad locomotive fuel, the natural tendency would
be for the failroads to buy their coal from the lowest price mines due to their
ability to satisfactorily use said types of coals.

Due to the grqv/th of the sizing of coal in district No. 1 and in all other districts,
there are times when every producer finds himself with sizes of coal on hand that
are not readily marketable', and if he is unable to dispose of such sizes, he is forced
to shut down his mine, as a result of which he loses production and his employees
lose work. The railroad locomotive fuel business is one of the outlets to which
the producers look to take care of their odd sizes, and the railroads have always
been willing to make their demands meet the necessity of the operators in this
respect so far as it is possible for them to do so. Their willingness to do this is one
of the factors that enables the operators to take care of their orders for other sizes
and thereby keep their mines in operation and their men employed.

Bunker coal is sold at ports under its own peculiar conditions. The
Commission's findings in the case of district 1 set forth the basis for a
separate price schedule proposed for bunker coal:

In the sale of bunker coal it has always been the custom to mix coals of different
grades, in order to give the operators of steamships the quality and size of coal
that they desire. The proposal of district board No. 1 is the result of an agree-
ment entered into by the bunker coal suppliers of the district as to a price set up
which would suit their marketing needs and was adopted by the Board upon the
recommendation of said bunker coal suppliers. In following the recommendations
of the bvmker coal suppliers in this respect, the district board pursued the same
practice it did in proposing minimum prices under the 1935 act and under the
1937 act in December of 1937. The bunker coal suppliers of the district are of
opinion that the size groupings and prices proposed for said coal will take care of
their requirements and the necessity of the trade and give due consideration to
their customer's interests. The proposals of the di^rict board in this respect
appear to be justified by the evidence and they are appro ve<i.

By-product coal represents a special use classification, with a price
schedule of its own. The various considerations of quality prepara-
tions and size groupings are clearly described in the Commission's
£ndings on the proposed prices for district 2,*° quoted here:

For this use the size of the coal is no factor as such plants pulverize all coal
before charging it into ovens, and slack', mine run, or double screened coals which
are sufficiently alike in quality, are of equal value. Consumers prefer the smaller

" Ibid, pp. V-l-17.
•» Ibid. pp. U-20ft-343.

29S CONCENTRATION OF ECONOMIC POWER

size coal as it is more easily pulverized. For this use coals of different sizes which
are substantially of the same quality, mine run, resultant mine run, nut and slack,
and slack are grouped under size group 16.

Hy proper reference there were also included in this size groups coals produced
at certain mines which are specially prepared and sized in order to make them
acceptable for this use. While mine run and resultant coal from certain mines
are not acceptable for this use, such mines can produce and ship other sizes of
coals, such as double screened or lump coal, which are acceptable for by-product
use and can move into the markets on che same basis as mine run and nut and
slack from other mines. In' still other cases nut and slack is not equal in value to
the mine run aoid resultant mine run from the same mine, but is still acceptable
at a price diff rential, which was established in the price schedule at page 48.
For such by-piJoduct purposes the producers of District No. 2 principally ship
nut and slack, mine run, and resultant mine run and the base price for this use,
$2.15, not only approximates the weighted average cost of Minimum Price Area
No. 1, but is also approximately the average of the lowest price nut and slack and
the highest prioe rtiine run which is generally acceptable for this application, that
is, $2 for«nut and 5|lack and $2.35 for mine run gives an average of $2,175.

The factors waifth enter into the evaluation of coals for retort and water-gas use
are primarily as jafid sulfur, the quantity of gas the coal will yield, and the struc-
ture of the coal. The sizes which are carried in separate size groupings for general
commercial appnca ion are grouped for this use under size groups 13, 14, and 15
as described oa page 5 of the price schedule as revised. The prices for by-
product coke plsimts are in column 16/which means mine run, resultant mine run,
nut and slack, &jid slack, unless otherwise indicated. The base price for retort
and water-gas ccal is the "A" price in size group 13 of $2.40.

District boa&ds 2 and 8 were the only ones to propose a special use
classification for by-product plants, so far as price area 1 is concerned.
Opposition to t^lie principle was voiced by Alfred M. Ogle (Indiana
Gas and Chemical Co.), Mr. Ogle contended that such special prices
are discruninatory; that there is no reason to consider that such coals
have greater value than they have had in the past; and that district 8
has not preserved old differentials between mine run and the resultant
sizes, on the basis of which the business was developed.

Summary of Price Proceedings.

In summary then, proceedings began in July 1938 with Orders 245,
247, 249, and 251,®' which caused each district board to prepare a
schedule of prices. These were submitted first to all code members
in the district, their protests heard, some granted, and others denied,
and the revised list was then submitted to the Commission. The
Commission held informative hearings on these first proposed prices,
and made "Findings of Fact" 6 months later.*^

It may be noted in passing that district boards 16, 17, and 18
proposed initial prices to market areas described in their schedules.
The number of such market areas was respectively 30, 49, and 10.
The Commission found that prices proposed did not take into con-
sideration the differences in cost of transportation, and therefore
accepted the market areas and prices, as modified, as a basis for
coordination.

The price schedules, after modification and adjustment as noted in
the Commission's findings, were returned to the respective district
boards late in 1938 and early in 1939 with direction to coordinate them
with competing districts in common consuming market areas.*^

These first price schedules, as they were modified and approved for
coordination, were found by the Commission to comply with express
standards and- requirements of the act, including a yield per ton

«| July 30, August n. and August ,20, 1938.

" December 1938, and Januarys ana February 1939.

" December 9, 193^. and JanuM^ H. February 20, and February 24,

CONCENTRATION OF ECONOMIC POWER 299

approximating the weighted average cost of the minimum price area
in each case, the figures being as follows:^*

Findings

Tenta-

of Janu-

Tenta-

of Janu-

tive

ary-Feb-

tive

ary-Feb-

findings

ruary

findings

ruary

of July-

1939,

of July-

1939,

August

estimated

August

Price area and district

1938,

yield

Price area and district

1938,

yield

weighted

per ton

weiglited

per ton

average

from

average

from

cost of

prices

cost of

prices

price

before

price

before

area

coordi-

area

coordi-

nation

2.157

District 1..

2. 1501

District 12

1.77

2. 1515

Price area 3, District 13..

2.474

2. 5435

2.1653

Price area 4, District 14 ..

3.617

3. 6296

2.167 .

Price area 5, District 15

2.049

2.0615

2. 1904
2.137

Price area 6

2.758

District 16

2.701

7.... -..

2. 1842

2. 7644

2 145

2.75

13 (part)

2.167

Price area 7

2 235

Price area 2

1.772

Distriffl; 19

2.225

District 9

1.7782

2.259

1.732

1. 7387

Price area 10, District'.*}

3.2656

COORDINATION OF PROPOSED PRICES IN COMMON CONSUMING MARKET

AREAS

The Commission directed district boards for districts 1, 2, 3, 4, 5,
6, 7, and 8 (price area 1)/* for districts 9, 10, 11, 12, and 13 (price
areas 2 and 3); ^^ and for districts 14, 15, 16, 17, 18, 19, 20, 22, and
23 (price areas 4, 5, 6, 7, 9, and 10) *^ to coordinate in common con-
suming market areas upon a fair competitive basis the minimum prices
approved by the Commission for the respective districts to serve as
a basis for coordination.

The standards provided for the coordination , are set forth in
Chapter III of this study, pp. 275-276.

The district boards failed to accomplish such coordination (with the
exception of the boards of districts 5, 14, 16, and 18) and the Com-
mission proceeded to perform that function in lieu of the district
boards.^* By order of June 20, 1939, the Commission announced the
schedules of coordinated prices for districts 1 to 8, inclusive, and set
July 24, 1939, for final hearings at which a description of the common
consuming market areas would be offered and evidenc^e would be
received to enable the establishment of minimum prices. All inter-
ested parties were to be afforded an opportunity to present evidence
as to the conformity or non-conformity of the proposed coordinated
minimum prices with the standards proposed by the act, and "such
other evidence as would enable the Commission to establish minimum
prices in conformity with, the procedure and standards set forth in
sections 4, II (a) and (b) Of the Bituminous Coal Act of 1937." The

" Federal Register: for Price Area 1, (Jan. 11. 12. 19, 1939); for Price Area 2, (Feb. 8, 1939); for Price Area 3,
(Jan, 12, 1939); for Price Areas 4 and 5, (Dec. 22, 1938); for Price Areas 6, 7, 9, 10, (Dec. 14, 1938).
" Orders No. 259, 261, and 266.
«« Orders No. 264 and 266.
«' Orders No. 253, 254, 255, 256. and 266.
08 Order No. 267 (March 20; 1939).

300 CONCENTRATION OF ECONOMIC POWER

proposals were to be subject to such modification as might be war-
ranted by the evidence adduced at the hearing.

The record of all prior proceedings in this General Docket 15 was
made a part of the record of this final hearing. At the same time the
reports of producers on 1937 tonnage distribution to all destinations
were made available (beginning June 26, 1939) to interested parties.
These distribution reports formed the basis for estimating the aver-
age yield per ton to test its compliance with the cost standard pre-
scribed, whereby the yield per ton must approximate the weighted
average cost of the minimum price area.

Basic Considerations in Determination oj Common Consuming Market
Areas.-

In 1939 the head of the Commission's TraflBc Section was instructed,
through the Director of the Marketing Division, to prepare a descrip-
tion of common consuming market areas for use by the Commission
in coordinating minimum prices in these areas.** This Traffic Section
had the benefit of consultations with the Commission's Legal, Market-
ing, and Statistics Seciions as well as with representatives of district
boards.

The market area is a subdivision of the entire country into a com-
petitive area where several districts ship coal on a competitive basis.™
Such areas are grouped on the basis of breaks in freight rates. In.
fact, all-rail freight rates were the most important factor in deter-
mining the boundaries of the areas. Also ^iven consideration were
the important influences of (1) truck competion, (2) competi ting fuels,
and (3) tonnage distributiorTof coal to various markets.^' The areas
are grouped in 4 general series. ' ,

(1) Market areas 1 to 99 represent that part of the country where
the principal competition is between districts 1 to 12, 14, and 15,"

(2) Market areas 98 and 99 embrace the receiving points on the
Great Lakes and the St. Lawrence River.^^

(3) Market areas 100 to 157 apply to the southern part of the
United States, where the principal competition is between districts 7,
8, 9, 13, 14, and 15."

(4) The entire country west of and including the States of North
Dakota, South Dakota, Nebraska, Kansas, Oklahoma, and Texas
has been assigned the ','200" series of numbei*s because of the principal
competitioi;! between'districts 15 to 23, both inclusive."

The determination of market areas is a complex process. It can
be sumrnarized as follows: To illustrate the basic considerations
upon which market areas rest, a brief recitation of the main considera-
tions for the first few areas may be used. Market areas ^1 to 4 are
practically the same as under tiie Commission's first price establish-
ment and as were used for price adjustments under the N. R. A.^*
Market area 1 is the eastern section of New England, including tide-
water ports, and has as its western boundary the approximate "limit
of ex-tidewater shipments west. This boundary is also approxi-

•• Transcript of Ucaring, General Docket No. l.S (July 24, 1939, and thereafter), pp. 2ldl-2297. See map,
ippcndix F hereof. • • . •-

'« Ibid., p. 2:85.

" Proposed Finding.^ of Facts, Conclusions, aad Recommendations of Trial Examiners, p. 62.

» Testimony of Charles H. Hayt.s; Chief of the TjafTic Section, Bituminous Coal Dtrision. tn the Tran-
script of Hearing, OencMl Docket 15 (July 24, 1939, and thereafter), p. 2113; Proposed Findings of Facts,
Conclusions, and Rccommcndations'of Trial Examiners, pp. 55-66.

" Ibid., pp. 5^50.

" T.'anscript of Hearing, General Docket 1'5, p. 2100.

CONCENTRATION OF ECONOMIC POWER 3OI

mately the limit of all-raU shipments northeast from districts 1, 2,
3, and 6." Prices for market areas 1 and 2. are the same, hence the
main purpose of this division is statistical.

Market area 2 (see map in appendix F) runs, roughly, west from
the west boundary of area 1 to Rochester, N. Y., the line then run-
ning south, taking in a small corner of northeastern West Virginia
and running eastward to the Chesapeake Bay. The boundary
of this area was established entirely on a freight rate adjustment.
The southern line of area 2 is drawn because the freight rates from the
southern West Virginia and eastern Kentucky fields (districts 7 and
8) are lower than those applicable from the Pennsylvania and northern
West Virginia fields. Therefore districts 7 and 8 control the freight
rate adjustment to the territory south of that line.^^

Market area 3 is metropolitan Washington, D. C. Northern
freight rates to this area are lower than southern rates, but the coals
meet on a competitive basis. ^^

Market area 4 also was established because of freight rate adjust-
ments. Rates to this area are on a "net ton" (2,000 pounds) basis,
whereas rates to areas -1 and 2 are on a "gross ton" (2,240 pounds)
basis.^^

Railroads publish rates on a group 'basis in eastern territorv.
Generally rates from the Reynoldsville group and from the Clearfield
group are the same for eastern movements. Other groups are related
to the Clearfield group.^^ Origin group numbers which do not appear
in any freight tariffs are used for Pocahontas and New River groups
in districts 7 and 8, in order to indicate properly the various freight
adjustments from the mines within each district,"

For eastern origins, the producing mines were assigned to appro-
priately numbered mine origin groups. The "mine "origin group"
is the number assigned by the commission's traffic section to mines
grouped together on the same freight basis in all directions. A
"freight origin group" is the general group in which the railroads
assign their mines for rate purposes. A "transportation group" is
that combination of mine origin groups which go to a particular
market area and take the same level of freight rates.^" These group-
ings make for convenience in assigning price schedules, to the same
market area from different freight rate bases within the same district.
For instance, for shipment into market area 4, the chief origin groups
in district 2 are divided into the Pittsburgh rate'group and the Con-
nellsville rate group.*' The chief origin groups in district 2 take a
25-cent differential per gross ton over the Clearfield rate on shipments
to market area 2.*'

The so-called "home market" area is the "market area in which the
mines of a particular district are located and where group freight rates
bo any great extent are not in effect." *^

The mines having the same group rate adjustment were placed in
the same origin group. Mines with two railroad connections were
given a different mine origin group number from other mines located

" Ibid., p. 2J01.
'« Ibid., p^ 2106.
" Ibid., p. 2107,
'« Ibid., pp. 2089-90.
'• Ibid., p. 2092.
w Ibid., p. 2167.
«' Ibid., p. 2108.
" Ibid., p. 2138.

302 CONCENTRATION OF ECONOMIC POWER

in the same freight rate origin grr-yp which had only one railroad
connection. These mines served by uwo roads were given an adjust-
ment based on the lower rate. "The assignment of mine origin
group numbers reflect the railroads on which the mines are located as
well as the freight origin group in which they are located. This makes
it possible for statistics and prices to reflect the proper adjustment as
to railroad fuel coal; that is, the number assigned clearly indicates
whether the coal originates on the purchasing railroad or on a connect- .
ing railroad." *^ Each district was assigned a separate set of origm
group numbers. Within each district, using district .1 as an example,
all mines in the Clearfield subdistrict were given the same series
number, then the mines were regrouped according to the railroad
serving 'each mine. Clearfield subdistrict had the Series 40 to 64.
Mines on the Cambria and Indiana Kailroad in that subdistrict were
given the origin group number 40, mines on the New York Central
were given the origin group number 44, mines oh the Pennsylvania
Railroad the origm group numlper 45, etc.^* In district 1 the Clearfield
rate is the base for rates to market area 1 .

. Because coal originfttes at times on a connecting railroad, thereby
involving the payment of transportation charges, prices for railroad
lopomotive use are established for on-line and off-line fuel.*'

The Chief of the Traffic Section of the Coal Division has testified
that this system is workable and accurate, subject to experience in
the immediate future.**

In establishing the boundaries for a proposed "common consuming
maiket area," the Commission's Traffic Section used the freight rate
. adjustments as bases and gave consideration to all the 4istricts which
have freight rates into the market area in question. No i^onsidera-
tion was given to whether mines in the districts concerned actually
have competing prices into that market area.*®

In some regions, certain areas \ireTe set aside from the main market
areas because of severe competition from coal transported by truck;
certain others wefe'^set apart because of the competition from natural
gas and other forms of energy.*' wSpecifically, in market areas 4
(southwestern New York), ^ (in the northwestern corner of Penn-
sylvania), 6 (the eastern Pennsylvania producing district No. 1,
generally), and 8 (northern West Virginia), truck shipments were a
consideration.** Competition with water shipments in certain
territories »is largely a matter of price and was not consi'4ered in
establishing market areas.*'

The -purpose of setting up these market areas was to furnish a
basis for coordinating prices into common consuming markets. *No
definite common formula could be uscd."*^

The proposed coordinated prices then were arranged on schedules
for each district, showing for each rail-shipping mine —

(1) The mine index nmnber.

i(2) The operating code member's name.

(3) The mine name,

"Ibl(i..p. 20<»7.

«M1)I(I., p. 2093-2094,2119.

" IhiJ., 1). 2129.

" Ibid., p. 21Hfi.

"Ibid., p. 2187-K.

«' Ibid., p. 21'.i:t.

>• Ihld., p. 2190.

' Ibid., p. 2201.

CONCENTRATION OF ECONOMIC POWER 3Q^

(4) The name of the seam in which the mine was opere,ted.

(5) The number of the "mine origin" or "freight origin" group.

(6) The price index letter applying for each size group in which

the particular mine has a classification.

Following this table of index letters appears the table of prices m
cents per ton which each letter represented in each size group. Several
such tables appear when necessary to provide a set of prices to some
market areas different from those applying to other market areas or
a set of prices from certain "origin groups" different from those of
other "origin ^oups," and to provide for railroad locomotive fuel
prices, tidewater vessel fuel prices, lake vessel fuel prices, etc. In
some districts, a table of price adjustments for movements to specific
destinations in the "home market" is provided to take care of freight
rate absorption on short hauls, These adjustments are permissive,
not compulsory. Price adjustments to offset freight rate differentials
to various market areas are also provided.

A separate set of price tables appears to take care of" truck shipment
only," the data shown being the same as above except that mine prices
are the same to all market areas, and no "origin group" numbers are
shown. The prices for coal shipped by truck were coordinated in a
manner similar to that of coals shipped by rail and were then coordi-
nated with prices of coal shipped by rail.*'

Considerations and Procedure in Coordinating Prices.

In its coordination of prices for the several market areas, the
Commission's work was in direct charge of C. J. Potter, the principal
examiner and assistant chief of the Marketing Section, Testimony
given in the final hearings by Dr. Potter and other witnesses for the
Bituminous Coal Division discloses the technique of coordination.'^

Considered by Dr. Potter and his associates in the process of coordi-
nation were the following :

(1) N. R. A. costs and market conditions.

(2) N. R. A. minimum prices, their effect on the distribution of

coals from producing districts, and the extent of their
success, if any, in maintaining fair competitive oppor-
tunities in various market areas.

(3) The Commission's 1937-38 prices.

(4) Pertinent changes in costs of production and distribution,

and in market conditions since the revocation of prices
(February 25, 1938).

(5) All distribution data introduced by F. G. Tryon.

(6) Coordination agreements of districts 5, 14, 16, and 18, and

partial agreements of all other districts.

(7) Letters and reports from district boards stating their failure

to achieve coordination.

(8) Invoices for some market areas.

(9) Comparative analyses (made at mines) of coals which were

shipped into various market areas.

(10) Comparable size and quality characteristics of each coal.

(11) Freight rates.

(12) Market history (excluding railroad and bunker fuel).

•' Proposed Finrling of Facts. Coni.nisions. and Recominendation.s of Trial Examiners, p. T-I-322.

»» Transcript of Ucariniis in General Docket No. 15 (July 24, 1939, and thereufttr) ad lib., but especially
pp. 2329-2457; Proposed Findings of Facts, Conclusions, and Recommendations of Trial Examiners, pp.
43-44.

304 CONCENTRATION OF ECONOMIC fOWER

(13) Seasonal demand.

(14) Uses.

(15) Competing fuels (in establishing market areas).

After the determination of consuming market areas, a break-down
of tonnage distribution from each district to each area was made by
size, quality, use, and . transportation methods. In explaining the
process of coordination, Dr. Potter said he selected a base coal for
delivery into a typical destination in the consuming market area and
determined the value of that coal in the market on a delivered basis,
taking into account the various factors just enumerated. He related
on a delivered price basis the various base coals of the other districts
shipping into that area, and then related the various other coals of
the same producing district to its base coal, deducting from those
delivered prices the freight rate differentials appHcable, or deducting
the freight rates applicable to those individual coals, and thereby
obtaining an f. o. b. mine price which reflected the coordinated value
in either that particular destination or in that particular area.^'

The base coal to Philadelphia, a representative destination ^* in
market area 2, was %-incb slack {%- by 0-inch). The "E" coals of
district 1 were related to "B" coals of district 2 and to "D" coals of
district 3. This size of coal from district 6 was related to that of
district 2; that from district 7 with that of districts 1, 2, and 3; and
the %-inch slacks of district 8 with those of districts 1 and 3.

In summary, coordinatibn of minimum prices involved the following
steps:

(1) Use of minimum prices approved by the Commission as the

basis for coordination,

(2) Determination of consuming market areas.

(3) Consideration of the 15 factors enumerated previously.

(4) Break-down of competing coals in each area by size, quality,

use, seasonal demand, and transportation methods.

(5) Selection of a base coal and the destination price thereon.

(6) Coordination of various competing coals on a destination

price basis, such coordination reflecting destination dif-
ferentials.

(7) Ascertainment of minimum prices f. o. b. mines, by sub-

tracting the applicable freight rates from the destination
prices, and checking estimated realization against the
weighted average cost of the price area by multiplying
such minimum prices by the tonnage distribution data.

In achieving coordination, departures were made from the original
prices proposed by the district boards and approved by the Com-
mission as the basis for coordination, such changes being necessary
to give effect to aU the standards of the act. It was testified that
such standards had been complied with. Obj ections by the Division's
legal counsel to questions as to interpretation and manner and extent
of compliance with such standards were sustained by the presiding
examiner, who held that the question whether or not the process of
coordination, and the prices themselves, conformed oto the standards
of the act will be answered first by the examiners, then by the director,
then by the Secretary of the Interior, and finally by the courts.

" Transcript o/ HearlnR. Oeneral Doc|:et No. 15, p. 2381.

« A representative destination la one that consanns practically all the sises and qualities of coal shipped
from various districts Into the market area.

CONCENTRATION OF ECONOMIC POWER 399

the possibility of a runaway coal market was apparently considered
so remote that much less attisntion was devoted to these prorisions,
and, in some respects they are ambiguous.

Proposals for the establishment of maximum prices of coal are not
new. As early as June 3 917, it was proposed that the Federal Govern-
ment should fix the prices of coal at the mines and at retail, or take
the mines and operate them during the period of the war. Maximum
' prices were first mentioned in the Food and Fuel Control Act (Lever
Act) ana were subsequently established by the TT. S. Fuel Adminis-
tration.^ The Lever Act ^ provided that such m; .dr.ium prices should
be based upon the cost of production, plus "a just and reasonable
profit."

BUls proposed after the termination of the Fuel Administration
contained proposals to fix the prices at which coal could be sold ami
also maximum prices, but not until 1928 were standards for the lattc
included. The Watson and Rathbone bills ^ provided for a Bituminc jll
Coal Commission v/hich could fix maximum prices "with due.regarJ
to fair wages paid for the production of coal and a fair return upon
the capital invested." Such prices could be changed from time to
time, upon a hearing by the proposed Bituminous Coal Commission.
From 1928 on, bills which, contained proposals for maximum pricei
provided either for a fair return upon the capital invested or upon the
property, or for cost plus a reasonable profit.

The first of the 1935 bills * provided that no maximum prices shouli'
be established for any mine which did not return costs plus a reasoi
able profit, and this standard was retained in the Bituminous Coal
Conservation Act of 1935.

The present Bituminous Coal Act of 1937 * provides that in the
public interest the Commission may establish maximum prices for
coal f. o. b. mines in any district to protect consumers against unreason-
ably high prices for coal:

Such maximum, prices shall be established at a uniform increase above the
minimum prices in effect within the district at the tim^i, so that in the aggregate
the maximum prices shall yield a reasonable return above the weighted average
total cost of the district: Provided, That no maximum price shall be estabhshed
for any mine which shall not yield a fair return on the fair value of the property.

A uniform increase in cents per ton over whatever minimum prices
might be in effect would have little, if any, effect upon the coordinated
relationships already established. A percentage increase would
definitely affect price relationships ^nd would also be more difficult to
execute -and use.

An important implication of this provision is that the Coal Commis-
sion (Coal Division) lacks authority to establish maximum prices in
the absence of minimum prices previously established. If any emer-
gency should so affect the United States as to necessitate the estab-
lishment of maximum prices for coal f . o. b. mines to protect consumers
thereof against unreasonably high prices, could such prices be estab-
lished when no minimum prices are in effect?

With respect to some mines it is quite possible that any price high
_^ough to yield a fair return on the fair value of the property, assuming
such fair value of the property is known, would be so high that the

> See oh. I, p. a«6

'Socsw.

« S. 44QQ and H. R. 13886. respectivelr, May 18, 1028.

♦ 8. M17 (Jan. 24) 1935.

•8eo.4.n(e).

27934&— 41— No. 32 22

310 CONCENTRATION OF ECONOMIC POWER

coal would not sell. It is doubtful whether any maximum price that
meets these standards of the act can be established on the coal from
such a mine. Without knowledge of a fair value of each coal mine
property, it will be difficult to ascertain whether a Cf^rtain maximum
price will yield a fair return upon that property. Ascertainment of a
fair valuation of all coal mines is a matter of years, and any attempt
to value them accurately in an emergency would be more of the nature
of an expert guess. Although the act does not so. provide, it is possible
that maximum pricf^s, with or without minimum prices, might be
established in an e n. gency, ard ai opportunity then granted to each
coal operator to liiake complaint that the maximum price upon his
coal would not yield a fair return on a fair valuation of his property.

With the individual cost data which the Coal Division has for nearly
every rnine in the country, establishment of maximum prices on a cost-
plus-a-reasonable-profit basis would certainly be a great deal more
expedient and practicable, especially so if such prices are based upon
the weighted average cost of each producing district. It is true that
higher cost operators could make less profit than lower cost ones, but
such has been the case under unregulated competition and under
minimum prices. Aside from legal considerations, it is probable that
establishment of maximum prices on the basis of a bulk line cost of
production sufficient to permit the mining, without financial loss, of
all coal demanded would prove quite feasible, as the experience of
the United States Fuel Administration indicates."

It may be that in some districts a uniform increase above minimum
prices which will yield a fair return on the fair value of each mine
property will yield in the aggregate an unreasonable return above the
weighted average cost of the district.^ On the other hand, a uniform
increase above minimum prices which will yield a fair return above the
weighted average cost of the district may not yield a fair return on the
fair value of the property. If this should prove true, the Coal Divi-
sion might hold hearings on the granting of price exceptions in such
cases. The establishment, by the method prescribed, of maximum
prices which conform to both the cost standard and the fair value
standard may prove extremely difficult.

The 1937 act also provides that the Commission (now Division)
shall prescribe "due and reasonable maximum discounts or price allow-
ances" which code members may grant to persons, whether or not
code members, called " 'distributors,' who purchase coal for resale
and resell it in not less than carload lots." The Bituminous Coal
Division must require such distributors in reselling such coal to comply
with and observe the prices and marketing rules and regulations estab-
lished under section 4 of the act. In effect this means that the Division
can also fix maximum prices for such wholesale quantities as carload
lots (about 50 tons). Perhaps as much q,s 85 percent of the total
tonnage pold would be subject either to maximum prices at the mine
or to maximum distributors' margins and thus to maximum prices.

There is no prp vision in the act for fixing maximum retail prices to
protect the consumer who buys in small quantities against such retail
prices as might result from an interrupted or an inadequate supply^
of coal.

I See ch. I, pp. 246-249.

' Note that mtnlmum prices are based upon the weighted average cost of the price area.

CHAPTER IV

CONCLUSIONS AND RECOMMENDATIONS— A
PRELIMINARY VIEW

SUMMARY OF RECENT REGULATION

The previous chapter has discussed in considerable detail the
Bitumirious Coal Act of 1937 and the problems encountered by the
Commission (now Division) in the calculation of costs and the work-
ing out of minimum prices. It has also indicated some of the delays
and difficulties encountered and some of the differing views on a num-
ber of issues with which the Commission has been concerned. Before
discussing some possible effects of price fixing according to the cost
standard of the act of 1937, the principal events in the recent history'
of Federal price regulation in this industry will be summarized briefly.

The Bituminous Coal Conservation Act of 1935 ' was passed about
3 months after the invalidation of the National Industrial Recovery
Act.^ Even before the five commissioners had been sworn into office
several bituminous coal operators had filed suits in Federal courts for
injunctions against enforcement of the act. The bituminous coal
code was promulgated in October 1935 under this act, and the work
of organizing the district boards and setting up administrative ma-
chinery continued. During this time, however, the industry's atten-
tion was focused on the Carter Coal case then before the Supreme Court
of the District of Columbia, testing the legality of the act.

The industry was divided over the feasibility of proceeding immedi-
ately to establish minimum prices, partly because of the uncertainty
concerning the constitutionality of the act, and partly because the
Commission had not ascertained the total of the weighted average costs
of the respective price areas, upon which minimum prices were to be
based. The classification of coals, the drafting of marketing rules and
regulations, the collection of data on costs of production, and the pro-
posal of minimum prices proceeded slowly. Weighted average costs
for the price areas were announced between Februairy and May 1936.
Minimum prices were not established except for certain western dis-
tricts. On May 18, 1936, the Supreme Court of the United States
declared the act unconstitutional because the price provisions could
not be separated from the wage and hour provisions which were held
invalid. The major accomplishment under the 1935 act was the col-
lection of data for individual mines on costs and realizations, and the
formulation of a procedure for establishing minimum prices which
proved useful in the administration -9f the 1937 act.

The Bituminous Coal Act of 1937 contains substantially the same
provisions as the act of 1935, except for the wage and hftur provisions,
which were eliminated. The 1937 act strengthens the Commission's
power to establish mmimum and maximum prices.

• Public, No. 402, 74th Cong. (H. R. 9100); 49 Stat. 991 (Aug. 30, 1935).

• May 27. 1935.

311

312 CONCENTRATION OF ECONOMIC POWER

After the promulgation of the code under this act on June 21, 1937,
the organization of the district boards for cost and price determination
followed rapidly. The Commission ordered the boards to propose
standards of classification (June 1937), to submit proposed rules and
marketyig regulations (July), to file proposed initial classifications
of coals (September), and to propose minimum prices (August and
September 1937). In October the district boards were directed to
determine the weighted average of total costs for the year 1936,
adjusted for changes since January 1, 1937. Because of the failure
of several boards to submit such proposed prices, the Commission
took over the task, establishing minimum price schedules in Novem-
ber and December, effective December 16, 1937.

Several injunctions were granted against these minimum prices
on the grounds that the Commission had held no public hearing at
• which interested parties could question and protest the price procedure
followed by the Commission and the prices it announced. Because it
was clearly unjust to make some producers observe the minimum
prices in the face of competition from others in districts in which
injunctions had been granted against the prices, the Commission
revoked all minimum prices, effective February 25, 1938. Litigation
during this period cleared up controversial points in the act, and the
law was upheld on a number of points by the United States Supreme
Court, on January 29, 1939, in the Utah Fuel Co. case.

At various times during 1938 the Commission held, after public
hearings, that interstate commerce in bituminous coal in the coal-
producing States (except North Carolina) came within the provisions
of the act. District boards were ordered (April 1938) to determine
the weighted average of total costs of the respective districts, such
costs to be adjusted for any changes, other than seasonal, since
January 1, 1936, and to propose minimum, prices, based on the
weighted average of the costs of the respective price areas, for the
various kinds, qualities, and sizes- of bituminous coal (August 19^8).
After the proposal of such prices the Commission directed the district
boards to coordinate them, together with the previously proposed
marketing rules and regulations (December 1938 and January 1939).
Lengthy public hearings were held on both the weighted average of
costs and upon the proposed coordinated minimum prices. Oppor-
tunity was afforded all interested parties to appear, to be heard,- and to
introduce evidence in support of or agdinst the proposed coordinated
minimum prices, in the final hearings which began in May 1939 and
continued until January 20, 1940. During these hearings the Bitumi-
nous Coal Division of the Department of the Interior (Bituminous
Coal Commission prior to July 1, 1939) went into great detail in
showing the procedure followed in proposing minimum prices, de-
termining consuming market areas, and feodrdinating the proposed
prices. During the following spring the Coal Division announced
minimum prices recommended by the trial examiners for establish-
ment in the various price areas. Oral arguments on these prices were
held and it was expected that the final findings of the Division would
be issued and the minimum pri(ie9 promulgated during July 1940.

CONCEMTRATION OF ECOKOMIC POWER 3][3

Thus, after 3 years of operations under the act of 1937 minimum
prices were not yet in effect. The history of the proceedings, however,
illustrates the great complexity of price fixing on the basis of costs as
defined by the act and the delays and difficulties involved. Since the
revocation in February 1938 of its first prematurely established prices,
the Commission and its successor, the Bituminous Coal Division, have
applied themselves diligently to the tremendous task of collecting,
tabulating, and interpreting data on costs, realization, prices, and dis-
tribution of coal necessary to determine prices. This includes data by
various market areas and by sizes of coal, and requires classifying and
pricing the many kinds, quahties, and sizes of coal and taking into ac-
count relative market values and values as to uses. The Commission
and the Division have also been required to give attention to freight
rates and' to competing fuels. Although not specifically required by
the act to do so, the Division has afforded opportunity to all interested
parties to present their case with respect to costs, realizations, and
marketing rules and regulations, distributors' discounts, and proposed
prices. The assembled data in connection with the operations of the
bituminous coal industry during the past 4 years are the most complete
and most reliable ever collected.

EFFECTS OF THE APPLICATION OF THE COST STANDARD

Since prices have not yet been established under the act of 1937,
there is, of course, no evidence of the actual effects upon the industry
of minimum prices established according to this standard. Since the
act expires on April 26, 1941, experience with prices established under
it will necessarily be short before the question of extension of the act
arises. The following discussion of some possible effects of the appli-
cation of the cost standard is presented, in order to emphasize some of
the features of the act which are not clear and which are important for
any discussion of pubHc regulation of prices.

For purposes of analysis it has been assumed that the Bituminous
Coal Division will provide adequate enforcement machinery, and that
producers and consumers generally will accept the prices about to be
established. In our opinion, the proposed schedule of prices will
be given a fair chance, although the problem of enforcement is clearly
a difficult one. If prices are to be successfully established under this
or any other act, they must have a large measure of voluntary com-
pliance from the industry, and general acceptance by the consuming
public. It is difficult to believe that an industry with over 6,000 mines
and 4,000 mining companies, serving practically the entire country
with the source of nearly half of all its heat, light, and power supply,
used by millions of separate consumers, large and small, and requiring
a price schedule of several hundred thousand prices), can be regulated
by a pohce organization and strict observance be compelled on an
enforcement basis. Rather, compliance must be sought from the
producing, distributing, and consuming elements.

The minimum prices recommended b^ the examiners are higher for
some, but not all, areas than recent market prices and, iof the country
as a whole, are about 1 1 cents higher than the national average of un-

314 COl^CENTRATION OF ECONO^ POWER

regulated prices in 1937, although it is estimated that they are still
slightly below cost.* Unless demand increases greatly, those minimum
prices will tend to become market prices, and to put a floor under 'the
market. On this basis, the following tentative judgment of some of
the possible results may be made.

1. Profits should be realized by the producing industry as a whole
even after capital charges. This is based on the apparently reason-
able expectatiofl of an annual production approximating or exceeding
that of the basic year 1936 (439,000,000 tons) and of the 1937 period
used for adjusting costs (445,000,000 tons were produced in 1937).
This expectation of profits rests largely on our belief that the mhio
costs reported to the Commission and used by the Bituminous Coal
Division as the measure of average price realization contain profit
elements or "extra-cost" elements wliich, in a strict sense, should not
appear in costs intended to be used as a standard for minimum prices.
The amount of these profit elements is unknown, but it might average
more per ton than the missing cost element of discounts which was
allowed wholesalers but which could not be reported because many
companies entered sales to wholesalers on their books as net sales.

2. Prices will be subject to opposing influences: (a) Barring the
possible offset of general wage increases or other increases in major
costs, continued mechanization and improved efficiency in miumg
over a period of time will reduce waste and have a tendency to reduce
costs. This influence has already been notably at work in recent
years; its momentum should receive a new impulse as producers
struggle for cost reductions to increase earnings. A direct result will
be a greater concentration of production in mines of larger capacity
and output, a movement also under way for several years. A natural
result of further mechanization vv'ill, of course, be an increase in the
output per man per day and a spread in the growing multiple-shift
operation of mechanized mines to cut the unit cost of investment
overhead. It is our belief that .the incentive to reduce producing
costs will be stronger under the minimum price regulation of this act
than under free competition. The incentive under free competition
was to minimize losses as far as possible while meeting destructive
price competition; there was little chance for profit. Under price
regulation, the incentive will be to increase the margin of individinit
mme realization above individual mine cost. It would seem tluit.
once this margin is established, it shoaild last longer than it would
under open competition. Under the act of 1937 the minimum prices
are to be reduced only after a showing of a reduction of weighted
average cost in a price area. Under open competition prices can be
reduced by the action of relatively few firms.

> Department of the Interior, Information Service, Press Release No. P. N. 9809 (April 16, 1940). Al-
thouRh no direct average price comparisons are dven because of the difficulty of averaging various areas and
markets, Iji is Indicated that the recommended minimum prices "would give the industry an pstimatod
minimum 'National avQrago return of S2.072 per ton." The expected average sales realization of $2,072 is l.ti
cents a ton below the a^jregc cost of $2,088. The statement further indicates "this income figure is approxi-
mately 11 cents a ton higher than the average income under unregulated prices in 1937— the last period for
which figures are available."

In the Rocky Mountain area, however, it is stated that recommended minimum prices are at about the
same level as present prices. On March %% 1940, the Bituminous Coal Division of the Department of the
Interior issued a press release on this subject in which they stated (with regard to the level of prices an-
nounced on that day for the Rocky Mountain areas): "The first schedules released by Bituminous Coal
Division trial examiners contain recommended minimum prices which generally approximate the same level
of prices at which the bituminous coal affected was sold during the past year. Although the examiners'
recommendations for prices in these districts generally approximate the previous levels, there are instances
in which the recommended prices on particular coals do not coincide with prices prevailing during the past
year because of peculiar circumstanoos."

CONCENTRATION OF ECONOMIC POWER 3^5

(6) Selling costs will have a tendency to increase. With minimum
prices in effect, price as a sales argument will strike a barrier, and
various forms of nonprice competition will become more prevalent.
Competitive efforts will not cease.;. they are likely to take the direction
of more advertising, publicity, technical and combustion engineering
service — individually and collectively. Concentration of sales effort
may be stimulated, and instead of, perhaps, 75 percent of the com-
mercial sales going through selling agents arfd wholesale distributors,
there may be a sharp rise to 85 or 90 percent. A trend toward a
separation of the two functions may be looked for — but accompanied
by producer-distributor affiliation of the same interests in separate
functional organizations. Since the act provides no authority to
regulate directly the commissions paid by producing companies to
their sales agents, the Coal Division may follow the lead of the former
Commission and require the filing of all sales-agency contracts, and
alsa require that commissions must be reasonable for the service per-
formed. This, however, will not prevent the percentage commissions
generally in effect and recognized as the going rates from increasing
the amount (in cents per ton) paid in commissions if the establish-
ment of minimum prices by the Commission should set a higher level
of prices than that prevailing in the past several years. Nor has the
Division yet made any open move to exclude from costs the profits
to affiliated sales companies from •<5ommissions paid them, m which
the producing interests share (though the producing company itself,.
it is true, may not receive any of the profit). Unless some way is
found to segregate these profit elements in commissions and to estab-
lish a definitely recognized line of reasonableness for sales agents'
commissions, the effect will be to increase selling costs of producers.

We look for the aggregate upward influences, including the general
upward trend of prices and wages, to outweigh the downward ones,
during the year or two immediately ahead.

3. High-cost producing mines whose operating conditions or man-
agerial ability preclude drastic downward adjustments in cost, and
whose coal is not of a quality to command compensatory price classi-
fication, will be severely handicapped and may be forced to retire or
close, pending better price levels. The ability to cut wages as 'a
means of cutting prices is no longer practicable. On the other hand,
^me recently idle mines, if favorably located, may renew operations.
It is impossible to predict to what extent this may occur.

4. Shifts of ^demand will probably occur. The extent to which
consumers may shift from one size of coal to another, from one mine
to anather,. and perhaps from one field or district to another, will be
largely influenced by the extent to which price relations are altered.
The extent of such shifts and their significance to any one district or
to the maintenance of present tonnage ratios is unpredictable at
present.

5. Employment: Wage scales and the collective bargaining system
wiU be protected. The act is, of course, minimum wage legislation as
well as minimum price regulation. With stimulated mechanization
and increased output per man per day, the average number of men
employed will have a tendency to decrease, unless or until a perma-
nent increase in demand brings about higher production levesls. We
anticipate future demands for higher wages. ' Their influence on costs,
and on minimum prices, is commanding.

316 CONCKNTKATION OF ECONOMIC POWER

6. Thus, in our opinion, the consumer faces an initial level of prices
equal to or higher, on an f. o. b. mine basis, than that prevailing for
several years past, and, in our judgment, a continuing upward trend.
This is his contribution to a more balanced economy in the bituminous
coal industry in order that producers may cover their average costs.
The q-uestion is: Will price regulation under this act, as it stands or
as it might be amended, bring sufficient improvement in the general
economics of the industry so that it will be worth the apparent cost
to the consumer? We believe that, with some changes, the act may
do so, if it can be so administered as to maintain a reasonably stable
price level and to avoid labor disputes and other stoppages in supply.

Protection of the consumer against so-called panic prices, or sky-
rocketing in emergencies, or a general wartime price boom is attempted
by the act's provisions for fixing maximum prices. As now worded
these provisions, including the requirement of a fair return on the fair
value of the property, will be difficult to apply. In order to make
maximum price fixing effective, it would probably be necessary to
amend the law. Even though the provisions of the act are ambiguous,
it is possible, of Qourse, that there would be general willingness to
accept, in a grave emergency, controls by the Division — which, in
other times, might be fought on technicalities.

DEFICIENCIES IN THE PRESENT ACT

In the light of these probable immediate consequences of the setting
of minimum prices let us examine some of the apparent deficiencies
in the price-fiixing provisions, of the act, as it now stands, before pro-
ceeding to a consideration of the broader problems of regulating the
bituminous coal ^industry in the interests of the workers, the pro-
d,ucers, and the consumers.

Some difficulties are to be expected in initiating any program such
as this. The establishment of a national price schedule is a tremen-
dous task, involving lengthy, cumbersome procedure. The Federal
Government has never before attempted the establishment of prices
for an industry such as bituminous coal on a national basis in times of
peace, although it has, of course, had long experience with railroad
rates, which are exceedingly complex. Bitummous coal prices are
sensitive to day-to-day changes, economic and political, national and
international. There are, moreover, certain standards and procedures
imposed by the act which seem to work contrarv to its purposes in
some circumstances.

There are major inconsistencies inherent in the Wording of the act
which make it difficult, if not almost ijnpossible, to expect unpontested
acceptance.

The most serious defect in the act — one which may affect the
industry adversely in times of slump and the consumer adversely in
times of definite increases in production levels — is the unresponsive lag
between changes in market conditions and the adjustment of prices to
meet them, which seems to be imposed by the cumbersome procedural
provisions of the act. This lag is only partly offset by the power of
the Commission to increase or decrease minimum prices whenever a
district board furnishes satisfactory proof of a change in excess of 2
cents per net ton in the weighted average •of the total costs in the
minimum price area, exclusive of seasonal changes. In a case of in-

CONCENTRATION OF ECONOMIC POWER 3^7

creased demand and higher production levels, as previously pointed
oul, this lag might cost the consiuner several millions of dollars before
new cost levels could be determined and a lower price schedule
established. In the opposite case of increased cost due to a definite
slump in consumption and production, no adequate means seem avail-
able, under the act, for the industry to cut prices promptly to hold
business. In fact, any change in price would probably have to follow
costs upward, thus intensifying the slump in demand and production.

The current year's prices, under the act, generally must rest on last
year's costs^except in the case of emergency maximum prices. To
illustrate, let us assume that weighted average costs have been deter-
mined and that prices will be established to yield a return of approx-
imately the average cost. Assume that production, responsive to
demand, falls off 25 percent this year as compared with last year
(which the average costs theoretically represent, although they are
actually weighted on the 1936 production). Volume of output —
the most important factor immediately affecting costs — is then at
work. A drop in number of days worked by the mines from, let us say,
18 a month to 14 a month would mean a substantial increase in pro-
duction cost per ton — unquestionably more than 2 cents.*

The act ^ requires the Commission to increase or decrease the
established prices "accordingly," upon satisfactory proof made
at any time by any district board" that a change in excess of 2 cents
per ton has occurred in the weighted average cost of a price area,
exclusive of seasonal changes.

This hypothetical case does not involve a seasonal change ; it might,
for example, extend over several seasons of recession. The questioij
now is: Should the district boards produce the proof of an increase in
cost exceeding 2 cents, thus forcing an increased level of prices at a
time when the demand should be stimulated? Such increases in price
will discourage sales of coal, while opening the door to incursions 6f
unregulated, competing fuels. Under ordinary circumstances, sound
business policy would dictate reduced prices to encourage all possible
sales and hold the consumers for the coal industry. This example,
although hypothetical, is well within the limits of practical possibilities
which may face the regulatory body sooner or later.

If, however, another increase in demand were anticipated shortly,
the industry might well take advantage of this provision and force
an increase in prices, on the basis of the increase in cost during the
slack period. This would work to the advantage of producers when
the upswing brought increased working time and reduced- costs.

* See F. E. Berquist and Associates, Economic Survey of the Bituminous Coal Industry Under Free
Competition and Code Regulation (National Recovery Administration, March 1936)'. On p. 245 (vol. II),
there is a projection of costs, showing the eflect of changes in number of days worked. This is hypothetical
because it merely reduces to a 1-day cost the actual reported costs for 19 days worked in January 1935, by the
group of 113 mines which reported from the eastern subdivision of division I (now district 1 of minimum
price area 1); and then projects the various items to the basis of 8, 10. 12, 14, 16, 18, 20, and 21 days of work.
Assuming that all factors affecting cost remain the same in any two periods, an actual comparison would
be better— but ilo two periods ever are alike in every cost factor. The hypothetical basis may be taken as
fairly indicative. It shows that this group of mines wofked 19 days in January 1935, with an average total
producing cost per ton of $1.8462. Had they worked an average of only 16 days, the projected cost would
have risen to .$1.9613, an increase of 11^4 cents per ton. These Qgures may not be applied to any other group
of mines nor to any other month of operation. They are quoted here as the best available indication of the
heavy, influence of working days on average cost per ton.

It is safe to assume that.if a sustained reduction of days worked per month were to persist over a period of
several months so as to overcome the influence of seasonal fluctuation alone, and if the days worked averaged
4 days monthly lower than in the comparable past period, this time factor alone (all other cost factors remain-
ing the samb) Would affect costs in probably every coal act district by much more than 2 cents per ton.

•Sec. WKA).

318 CONCENTRATION OF ECONOMIC l"OWER

Such a situation does not give promise of attaining the act's objec-
tive of "promoting interstate commerce in bituminous coal" or "to
promote the use of coal and its derivatives." Rather, this provision
for revising prices to follow costs laggingly could operate to accentuate
decreases in sales volume in depression, for example, and emphasize
the industry's troubles by trying to force its prices to swim against
the current of general business trends.

There are other circumstances in which the provisions of the act
may defeat its purpose during the period inmiediately following the
establishment of prices. The first prices to be established in 1940 will
be related to the costs of 1936 as adjusted to the actual costs of 1937,
and with regard to certain known tax and other changes effective since
then. By the time minimum prices have been established the work-
ing time of the mines, governed by the volume of orders then available, -
may be quite different from that of 1936-37 and costs may be affected
thereby. The year 1938 saw production 22 percent below that of 1937.
For the first 10 months of 1939, production was running about 13
percent ahead of 1938 but still considerably behind the 1937 and 1936
rate. The Bituminous Coal Division multiplied the proposed prices
by the tonnage distribution figures of 1937 to test the approximation
of the expected realization against the weighted average costs in each
price area. Now, should there be a much larger demand than in 1939,
due to greatly increased industrial consumption, sufficient to cause a
rate of production similar to that of 1936 (439,000,000 tons) or 1937
(445,000,000 tons), the working time of the mines might be sufficiently
like those years to cause the prices to return an average per ton ap-
proximating the weighted average costs as determined by the Com-
mission's "Finding of Fact." Should the rate of production, however,
exceed that of 1936 or 1937, it is probable that several months would
p^ss before a sufficient proof of an established reduction in cost
amounting to 2 cents per ton or more could be made.* Before the
necessary procedure could be completed, consumers might well have
paid for their coal an excess of several million dollars, even on a
"minimum price" basis, over and above the amount obviously in-
tended by the act to yield a return per ton approximating these
weighted average costs. ^ This hypothetical situation might occur in
any other period. This lag involves no violation of the act, but the
act's cumbersome procedure obviously is not suited to the industry's
extreme sensitivity to demand.

If the demand should increase so far as to bring about a strong
seller's market, it might require that maximum prices be established
as provided in section 4-II (c) . This section provides that maximum
prices must be established at a uniform increase above the minimum
prices effective at the time, and recognizes that in such circumstances
the maximum price "shall yiield a reasonable return above the weighted
average cost of the district." No maximum price can be established
for any mine which will not yield a fair return on the fair value of
the property. Thus the Bituminous Coal Division would be required
to determine what a "fair return" is, as well as the "fair value of the
property," both long and difficult procedures. It is likely that any

• As of March 1940, coal production was still running below the level of March 1937.

' Under present conditions of over-capacityand intense competition, minimum prices will become the
actual prices at which coal Is sold. On the other hand, it is quite possible that cooperation between mar-
ketlne agencies, a marlced increase in demand, severe weather, or some othef factor which -would interrupt
the distribution of coal, would force the actual prices above the established minima. The provision for
maximum prices reoognlres this possibility.

CONCENTRATION OF ECONOMIC POWER 3^9

maximum price schedule put into effect would, except under a grave
emergency situation, be subject to protests from individual mines on
the ground that the prices would not yield a fair return on the fair
value of the property. It must also be remembered, however, that,
unless the seller's market bids fair to extend over a considerable period
of time, it would be poor business for the extremely high cost mines
to secure by protest a series of exceptions entitling them to even
higher prices than the standard maxima, the results of such exceptions
being discriminatory prices against consumers who may find them-
selves under the necessity of looking to these mines for their supply,
and the consequent cessation of buying from mines by these consumers
as soon as the seller's market disappears. As a practical matter it is
probable that many mines entitled to exceptional maximum prices
would feel it disadvantageous to apply for thern. There apparently
would be a basis of legal acnon and injunction against certain maxi-
mum prices on the ground of noncompliance with this particular "fair
return on the fair value" provision. Section 4-II (c) is carelessly
drawn, and, to be .effective, requires amendment. The requirement
that maximum prices be accomplished by a uniform increase of mini-
mum prices appears to be contradictory, in practice, to the "fair return
on the fair value" standard. The possibility of a "cost plus" basis
alone would be a more workable arrangement.

In summary, it appears desirable that any price control provisions
should empower the administrative agency to change the effective
minimum prices with less cumbersome procedure, and ienable a more
prompt, practical response to definite general changes in market
demand. Further, it appears that the agency should be entrusted
with authority to act upon its judgment without the necessity for
going tlirough such a long, time-consuming legal procedure. The
authority might take the form of a declaration of belief and provision
that the minimum price schedule might be changed tentatively,
subject to the full proper procedure and final findings.

With this discussion of some of the possible effects of the fixing of
minimum prices for bituminous coal — anticipations which cann,ot be
verified until minimum prices have actually been effective for some
time— we turn to some of the broader problems of Federal regulation
of bituminous coal. Consideration is given to various possible
methods of handling the coal industry — free competition, marketing
agencies established by the industry, interstate compacts, complete
public ownership and control, and some variant of Federal regulation
of prices and production. Following the discussion of these alterna-
tives, the authors' conclusions and recommendations are presented.

ALTERNATIVE METHODS OF BITUMINOUS COAL REGULATION

Special public interest attache to natural resource industries.
There should, in the public interest, be provision for a reasonable
degree of conti-oUed develc?pment ; a minimum of avoidable waste in
production; decent and dependabief conditions of employment and
earnings for labor; stable financial status and opportunity for reason-
able profits from operation; a fair competitive opportunity among
producers and with other fuels; an economical distribution system;
and a stable price structure which can command consumer support.

320 CONCENTRATION OF ECONOMIC POWER

Free Competition.

Under the system of free competition which has generally prevailed
in the bituminous coal industry the situation has been far from satis-
factory. The number of commercial mines in operation has varied
from year to year, but capacity still considerably exceeds production. •
Production has varied widely as a result of fluctuating demand, sus-
pension of work, and other causes. The supply of coal to the con-
sumer has been frequently interrupted with disastrous results, and it
has been because of these interruptions that the Federal Government
in the past has intervened. The price of coal to consumers has at
times been too high and at other times too low, using cost of produc-
tion as a standard. A fair return upon the investment has often not
been obtained, and in every year since 1928 the industry has suffered
a total net loss of millions of dollars. The number of men employed
and the number of days worked have declined since 1923. Such
stability as has been obtained in wages has been due to unionization.
The workers' income from wages, however, has been relatively small
because of the limited number of days the mines have operated. In
short, free competition has failed to protect the consumer of coal from
widely, fluctuating prices, sometimes unreasonably high, and from in-
terruptions in supply; it has failed to equate capacity with demand
and production and to yield costs plus a reasonable profit; it has failed
to provide employment for many of those dependent upon the coal in-
dustry; and at various times it has given those employed not much
more than a'subsistence income.

Consumers have been able to do little to remedy these conditions.
Labor ha's pressed unionization. Cooperation of producers for con-
trol of prices and output was prohibited by the antitrust laws.

In the face of this history of the bituminous coal industry, it is
difficult to avoid the conclusion that the industry itself has failed to
accomplish any reasonable approach to a balanced economy. This is
not intended to condemn the entire industry. Groups in the industry
have tried earnestly to find practical machinery to promote reasonable
market stability, but they have often been stalemated by other more
shortsighted groups and by the very nature of the industry itself.
As already indicated, the existence of several thousand companies,
each concerned with its own individual property and its financial
situation, has made it difficult, if not impossible, for any individual
producer or group of producers to 'establish effective leadership.
Organized efforts of the various field associations of producers have
been ineffectual, by and large. Chain -mine operations have not
proven more successful, in the main, than single-mine operations.
Prior to the decision in the Appalachian Coals, Inc., case, cooperative
action was thought to be prohibited by the antitrust acts. A mar-
keting agency, as indicated elsewhere in this report, is weak unless
supported by Government regulations and enforced membership.

It appears that the very structure of the industry, particularly the
large number of operating companies and the greatly over-expanded
productive capacity, makes it practically impossible for the industry
to accomplish anything effective with respect to conservation, stability
of wages and prices, capacity and production control, eUmination of
waste, and adequate supplies to consumers at reasonable prices. For
these reasons it is our opinion that Government assistance in some
form is essential. The present legislation has substantial merits, but

CUJNCUNTRATION OF ECONOMIC POWER 32I

it is not wholly satisfactory owing to some inconsistencies and to its
lengthy procedural requirements.

Marketing Agencies.

As already indicated, cooperative action from within the industry
has not been particularly successful. Among the leading efforts in
this direction have been certain marketing agencies.

An attempt was made to afford coal producers some relief from the
restrictive effects of the antitrust acts by the bill, H. R. 8523.^ This
bill provided that individual operators might cooperate in mining and
marketing bituminous coal in interstate and foreign commerce. Such
trade associations and marketing agencies were to be exempt from
the provisions of the antitrust acts.

This 'bill, as well as several others introduced between the period
between 1928 and June 16, 1933, was not passed. The proposals
may have had some influence, however, in encouraging the formation,
in the fall of 1932, of the Appalachian Coals, Inc., the best known of
the several marketing agencies now existing. The "marketing
agency" idea was hailed by many as the industry's salvation. This
type of agency has had no reasonable opportunity to demonstrate its*^
effectiveness, since immediately following the Supreme Court decision
of March 13, 1933, in which the court held that the plan of Appalachian
Coals, Inc., did not violate the antitrust acts, the National Recovery
Administration imposed a code program. Following the National
Recovery Administration period came the first coal act of 1935.

The Supreme Court's decision held that the Government had failed
to show adequate grounds for an injunction against Appalachian
Coals, Inc., but recognized —

That the case has been tried in advance of the operation of defendants' plan,
and that it has been necessary to test that plan with reference to purposes and
anticipated consequences without the advantage of the demonstrations of ex-
perience. If in actuaJ operation it should prove to be an undue restraint upon
interstate commerce, if it should appear that the plan is used to the impairment
of fair competitive opportunities, the decision upon the present record should not
preclude the Government from seeking the remedy which would be suited -to such
a state of factp

In reversing the adverse decision of the lower court, the Supreme
Court instructed the District Court to —

Enter a decree dismissing the bill of complaint without prejudice and with the
provision that the court shall retain jurisdiction of the case and may set aside
the decree and take further proceedings if future developments justify that course
in the appropriate enforcement of the Anti-Trust Act.

There are now in existence several similar marketing agencies.

The decision in the recent Madison Oil case suggests that a market-
ing agency with the purpose and effect of price fixing would be illegal
unless exempted from the antitrust laws by special legislative measure,
such as the provision concerning marketing agencies in the act of 1937.

There are now in existence several similar marketing agencies.
Many factors in the industry still ^ee. this collective marketing plan

8 January 5, 1928.

322 CONCENTRATION OP ECONOMIC POWER

as tlie "American" way to restore balance to the industry. Let us
look at the main provisions of the operating plan of Appalachian
Coals, Inc.'o

Appalachian Coals, Inc., was an exclusive selling agency of 137
producers of bituminous coal in the "Southern High Volatile Field,"
now known as district 8 under the coal act." These producers mined
about 12 percent of the total production east of the Missi^ippi River,
and about 54 percent of the total production in their own fields (now
district 8). Eliminating the output of "captive" mines (producing
chiefly for the consumption of the owners), these 137 producers ac-
counted for about 74 percent of the output of their district and imme-
diate vicinity. The member producers owned all the capital stock of
Appalachian Coals, Inc., holdings being proportioned to the members'
production. One thousand shares of common stock were authorized,
with a par value of $1 per share; 9,000 shares of preferred stock were
authorized, the par value of which was $100 each. Dividends at 7
^percent were cumulative. Only the common stock carrifed voting
power, and a majority was held by 17 of the members, who were de-
fendants in the court action. In uniform contracts, to be separately
made, each member constituted Appalachian Coals, Inc., an exclusive
agent for the sale of all coal (with certain exceptions) produced by the
member in the stated field. The Appalachian Coals, Inc., agreed to
establish standard classifications, to sell aU the coal of its principals
at the best prices obtainable, and, if all could not be sold, to appor-
tion orders upon a stated basis. Prices were to be fixed by the officers
of Appalachian Coals, Inc., at its central office, but on contracts for
future deliveries beyond 60 days the producer's consent had to be
obtained. This marketing agency was to receive a commission
of 10 percent of the gross selling prices f. o. b. mines, and guarantee
accounts.'^ To preserve existing sales outlets, producer members were
to designate, according to an agreed fonn of contract, subagents who
were to sell on terms and prices established by Appalachian Coals, Inc.,
which allowed commissions of 8 percent by the subagents.

It was contended that a violation of the Sherman Act was in-
volved in that the plan would eliminate competition among the mem-
bers and effect a substantial control of prices in many markets. The
lower court found that "this elimination of competition and concerted
action will affect market conditions, and have a tendency to stabilize
prices and to raise prices to a higher level than would prevail under
conditions of free competition," adding, however, that the selling
agency would "not have monopoly control of any market nor the
power to fix monopoly prices." The defendants in the case insisted
that--
the primary purpose of the formation of the selling agency was —

To in/Bfease the sale, and thus the production, of Appalachian coal through —

(1) Better methods of distribution

(2) Intensive advertising and research

To achieve economies in marketing; and

To eliminate abnormal, deceptive, and destructlvejrade practices.

"« Sm the decision of Supreme Court in Appalachian Coalu, lnc„ et at. v. UnUed Sta/f.i (288 U. S. 344
(March 13, 1933)).

11 See the transcript of the hearing on the Application of Appalachian Coals, Inc.. for Provisional Approval
as a Marketing Agency, Docket No. 3-FD, National Bituminous Coal Commission (Wa-'hlngton, D. C,
July 26, 1937).

" By July 1937 the fee paid to Appalachian Coals, Inc., had been reduced to y> cent a ton.

CONCENTRATION OF ECONOMIC POWER 323

Whether the announced purposes of the Appalachian Coals, Inc.,'
would have been realized under operation, or might have been ex-
ceeded, with the result of further court action, as provided in the
Supreme Court's decision, cannot be known.

In the light of past history, the iG[uestion can be raised whether the
operation of Appalachian Coals, Inc., and other large marketing agen-
cies (of which several have been organized but have not had a decisive
practical test) would actually have succeeded, in the absence of the
Bituminous Coal Commission, in doing more than substitute for the
destructive cut-throat prices and practices of individual producers an
interagency struggle of the same nature. One weakness of the Appa-
lachian Coals, Inc., and the other similar agencies as an effective solu-
tion for the econofnic problems of the coal industry lies in the fact that
substantial tonnages remain outside their membership. These owners
are free, if they choose to do so, to offset with destructive practices
the stabilizing influence of the agencies. Of course, had the Appa-
lachian Coals, Inc., membership represented nearly 100 percent or even
nearly 90 percent of the Appalachian production, the Supreme Court
decision might have been adverse.

These agencies have, however, been recognized as potential in-
fluences for stability. The 1937 act empowers the Commission to
exempt a marketing agency from,, the antitrust laws, provided the
Commission finds that the agency's, operating agreement (1) will not
unreasonably .restrict the supply f coal in interstate commeroe,
(2) will not prevent the public from receiving coal at fair and reason-
able prices, (3) will not operate against the public interest, and (4)
that the agency and its members have agreed to observe the estab-
lished minimum and maximum prices, marketing rules, and other
regulations established by the Commission. Upon such approval,
the act says a marketing agency may as to its members, or marketing
agencies may, between arid among themselves, provide for the co-
operative marketing of their coal at prices not below the minimum
or above the maximum prices prescribed by the Commission under
the act-.^^ Obviously, under and during such approval by the Com-
mission, two or more marketing agencies might be able to agree on a
level of prices somewhat above the minima without necessarily
violating the code, or the act, or the objectives thereof..

Marketing agencies whose operating plans and agreements have
received approval of the Commission are —

Alabama Coals, Inc. (District 13).

Appalachian Coals, Inc. (District 8).

Arkansas-Oklahoma Smokeless Coals, Inc. (District 14).

Belleville Fuels, Inc. (District 10).

Brazil Block Fuels, Inc. (District 11).

Fairmont Coals, Inc. (District 3).

Kentucky Coal Agency, Inc. (District 9).

Middle States Fuels, Inc. (District 11),

Smokeless Coal Corporation (District 7)..

Southern Illinois Coals* Inc. (District 10).

Southwest Coal Co. (District 15).

Upper Buchanan Smokeless Coals (District 8) .

Western Pennsylvania Coal Corporation (District 2).

Additional marketing agencies are in process of organization.

324 CONCENTRATION OP ECONOMIC POWER

It is held by some, as already indicated, that marketing agencies
offer the solution to the problem of the coal industry. There remains,
however, the problem cf whether or not a marketing agency could
enforce its rules upon nonmember producers and could agree with
other marketing agencies upon prices at wliich their respective coals
should sell in common consuming market areas. Could they attain
more success than certain district boards, whose failure to coordinate
prices necessitated coordination by the Bituminous Coal Commission
in 1937 and again in 1939? Even if they could do this there remains
the question of enforcement of their orders and supervision of their
prices and practices to protect the consuming public. It seems beyond
doubt that some Federal agency would be necessary to supervise the
actions of these agencies and to approve or disapprove the prices
they would establish. As this would necessitate the collection of
detailed data on costs of production, distribution, realization, sizes,
and classification, it is probable that the establishment of prices for
the benefit of the industry, labor, and consumers could be accomplished
better'in this way by the Federal agency itself. Such is the present
arrangement under the Bituminous Coal Act of 1937.

Interstate Compacts.^*

Most of the coal-producing States have commendable statutes
providing for inspection of mines and safety measures, but no one
State can adequately restrict capacity or production and establish
prices for its coals without some protection from unrestricted compe-
tition from other coals moving in interstate commerce. The inability
of the individual State to solve its own coal problem is indicated in
the briefs filed by several States as amicus curiae in the Carter Coal
case. Because of this interstate competitive situation, the joint
action of several States by interstate compacts has been suggested
as' a way out of the coal dilemma.

Interstate compacts have been used for various purposes.'^ Al-
though they have been specifically proposed for the bituminous coal
industry,^® none has been ratified to date. The interstate compact
holds some promise as a regulatory device but the obstacles to getting
the major coal-producing States to agree upon its provisions, ratify
it, and then coordinate either production quotas or minimum prices,
or both, seem almost insurmountable. Furthermore, the enforcement
of the provisions of such a compact between the contracting States
would rest upon the Federal Government. It seems logical that the
Federal agency which would enforce the provisions of an interstate
compact should have an important role in the deterniinatioris of the
provisions to be enforced.

Public ownership or control.

Although legislative interest in Government ownership and opera-
tion of the bituminous coal industry was manifested as early as 1894,^^
there has been no such control exercised. Its nearest approach came
during the World War when the United States Fuel Administration

" Interstate compacts are authorized by the Constitution of the United States, Article I, Section 10, Clause
3; "No State shall, without the consent of Congress, • • • enter into any agreement or compact with
another State, or with a foreign power."

'» See "The Subject Mattpr of the Compacts Heretofore Undertaken," Oil Con.scrvation Through Inter-
state Agreement (Government Printing Ofrioe, Washington, D. C, 1933). pp. 174-20f.; "The Interstate Oil
Compact," Energy Resources and National Policy (Government Prmting OflQce, Washington, D. C, 1939)-
pp. 397-401.

'• H. R. 10980 (March 30. 1932); H. J. Res. 596 (May 25, 1936); H. J. Res. 6 (January 5, 1937).

" 8 Res . 53d Cong.. 2d sess. (May 31, 1894).

CONCENTRATION OF ECONOMIC POWER 325

assigned production quotas and established marketing zones in which'
certain coals had to be sold and in which others were prohibited.
The Fud Administration estabUshed maximum prices f. o. b. mines
and also limited jobbers' and retailers' margins, thus in effect control-
hng the bituminous coal industry at all stages without owTiership.

Proposals for Government ownership and operation of the coal mines
have usurlly been made during periods of temporarv emergency and
have come from all sources, including the United Mine Workers of
America.'* . Some bills have provided that the President, and others
that the Interstate Commerce Commission, should take over and op-
erate the mines. A recent bill, H". R. 3121,'^ provides for the creation
of a "National Natural Resources Corporation" which would buy and
operate coal mines, oil wells, water power plants, natural gas fields,
plants for the manufacture or distribution of the products thereof,
and plants for the manufac.ture of equipment and appliances needed
for the use thereof, to meet the domestic needs and supply farm
markets. The bill pro\ades that within 18 months after its passage
no private person or corporation can engage in the production or sale
of any of these four natural resources. This bill has not been passed.^"

It is possible that a Government-owned corporation similar to some
of the war-time agencies ^' and some of the existing Federal organiza-
tions created since 1933 might assure a more continuous supply of
coal and afford a higher income to coal miners, with a smaller financial
loss than has prevailed in the coal industry under private ownership,
but in view of -the pressure which might be exerted upon such a corpora-
tion by consumers, employees, and taxpayers, it remains a moot
question whether or not such a corporation would reduce capacity,
assure adequate supplies at reasonable prices, pay a living income
to miners, and operate efficiently at or near costs. Government own-
ership and operation would be further complicated by competition
from other fuels unless they were controlled by the same agency.
Such a task may be beyond the present ability of the Government.

Other Types of Control.

A council of perfection would involve a plan with the objective not
only of producing coals from the most economical operations, but also
coordinating their prices to various markets in such a manner as to
minimize the costly cross-hauls which typify our distribution system
as it has grown, not only for bituminous coal, but for practically all of
our widely distributed products. Such a plan would also contem-
plate an intelligent balance between capacity, output, and demand;
proper provision for wages and hours of labor; and, with consideration
for economic efficiency in the whole economy as well as regard for
human values, a reasonable policy of "rehabilitation of coal mining
labor which has become or may become unemployable in the coal
industry. Attainment of these objectives in very high degree would
require absolute control by one or more agencies of the number and
location of .operating mines; of capacity and investment; of total pro-
duction and of allocation of output and markets; of prices; of cer-
tain types of costs such as salaries, selling expenses, and the like;

" How to Run Coal (the "District No. 2" plan), United IVIine Workers of America (September 20. 1919).

" January 24, 1939.

2" With refpect to regulatory plans not mentioned herein sec L. E. You ns's "Proposals for Stabilization
of the Bituminous Coal Industry," Proceedings of the Third International Conference on Bituminous
Coal (Carnegie Institute of Technology, Pittsburgh, Pa., 1931), Vol. I, pp. 53-81.

" See H. A. Van Dorn, Government-owned Corporations (Alfred A. Knopf, New ^'ork, 1928).

279348— 41— No. 32— — 23 •

326 CONCENTRATION OF ECONOMIC POWER

and of rehabilitation and retraining of labor. Wages and hours of
labor might be left to the Fair Labor Standards Act and the process
of collective bargaining with Government supervision.

There seem to be four types of control, which may be regarded as
alternatives, that are in some degree practicable as methods of
achieving much better conditions in the bituminous coal industry:
(1) Complete Government ownership and operation, (2) extensive and
strict Government control, or Government operation, with private
ownership, (3) self-regulation by the industry under Government
supervision, and (4) regulation that stops far enough short of complete
Government control so that substantial elements of free enterprise
and private initiative remain.

Complete attainment of the ends set forth above through the
control devices listed would necessitate either nationalization of this
industry or Government control quite as extensive and rigorous as
that involved in nationalization. In the latter case, although private
ownership was not abolished, little, if any, freedom of enterprise could
remain. Such thorough control by Government, with or without
Government ownersliip, would be a;ttended by serious political,
administrative, constitutional, and economic difficulties, some of which
were noted in the preceding section. It is to be viewed as a last
resort, to be adopted only if schemes of less extensive and less drastic
control, such as that sketched below, should prove to be utterly
inadequate.

Another type of control, involving the least Government partici-
pation of the four alternatives here discussed, is self-government by
the industry under supervision of public authorities. This might take
the form of control through voluntary or compulsory marketing
agencies. We consider that the operation of marketing agencies,
without production control or Government price fixing, offers respec-
tively (1) merely a substitution of bitter competition among large
producing fields in place of competition among individual producers,
or, with interagency agreements, a substitution of giant sectional
competition, leading toward monopolistic practices; and (2) no
essential improvement over or difference from the present adminis-
trative organization scheme under the Coal Act of 1937. Although
marketing agencies have had no opportunity to prove their ability to
attain industrial stability and thus contribute to general stability, we
are unable to see a definite assurance that the destructive and wasteful,
competitive history of thp industry would be halted and reversed by
these means alone. The establishment of one huge marketing agency
for the whole country, with membership compulsory to all producers,
would obviously require extensive Government regulation, rather than
mere supervision, if consumer interests and minority producer interests
were to be effectively protected.

RECOMMENDATIONS ON FEDERAL REGULATION OF PRICES AND
PRODUCTION

There remains the alternative of regulation that is at once strong
enough and effective enough to accomplish desirable results and limited
sufficiently so that substantial scope remains for free enterprise and
private initiative. This means regulation similar to that now provided
by the Bituminous Coal Act of 1937 with some modifications and with
sofne additional controls.

CONCENTRATION OF ECONOMIC POWER 327

Let us examine the possibilities of this moderate form of regulation
with a view to arriving at a general description, first, of its objectives,
and secondly, of the main provisions to aCisomplish these goals.

We believe that the aim of the industry and of government, with
the sympathy of the public, is —

To establish stability of prices and markets ;

To eliminate waste in production and conserve our coal resources.

for our own benefit and that of the future;
To diminish waste in distribution-by minimizing the crosshauls and

other uneconomic distribution costs as far as possible without

dangerous disruption;
To reduce and minimize waste ui consumption by applying, so

far as practical, the most appropriate coals to the different

uses ; .
To overcome waste of human resources, through recognition and

protection of wage scales commensurate with standards of

respectable living; and
To do all these things and at the same time to preserve as much

free enterprise as possible, as well as a degree of participation

by the industry in the scheme of regulation.

It is our opinion that the least objectionable scheme is one which
puts in a floor for prices, below which coal cannot be sold, as a pro-
tection against a seemingly inherent weakness of destructive price-
cutting. This plan is in the interest of a strong industrial structure
without which coal will be out of balance with the general economy.
At the same time such a scheme should provide for the emergency
estabhshment of maximum prices to protect the consumers.

Fears have been expressed that the public has no protection, under
such a plan against excessive wage scales which under favorable
conditions might conceivably be forced through perfectly legal negotia-
tions. These authors can hardly picture labor forcing unreasonable
wage levels upon an industry whose prices would shoot upward, when
as a result the industry upon which tbey depend for their livelihood
would be faced with probable losses of tonnage and employment
because more consumers would be driven to lower-priced competing
fuels. The present act is undoubtedly a kind of minimum wage
legislation, but it does not have specific standards for wage determina-
tion. In tiew of the fact that labor costs generally are about 60
to 65 percent of total costs, regulatory legislation for the industry
might impose some restrictions concerning the extent of movement of
labor costs either up or down. In view of the present exceedingly
difficuli situation in the industry, it is impossible to conclude definitely
that price regulation, either in its present form or in any similar form,
will be permanently effective ond successful from the start.

In its present form the act of 1937 is implemented with hopelessly
lengthy procedural requirements and contains inconsistencies tending
to defeat its objectives, yet in our opinion it has some great merits.
With certain modifications and additions this scheme of regulation
should be satisfactory. The following tentative outline for regulation
which embodies the best compromises consistent with the desired ends,
is basically patterned after the main provisions of this act.

(1) Create a small and impartial commission, with no representa-
tion for labor or operators. A commission of three should
be more efiicient than a larger commission.

328 CONCENTRATION OF ECONOMIC POWER

(2) Givo the commission a voice in freight-rate regulation

applied to bituminous coal.

(3) Set up a simple production control plan, vesting wide latitude

in the commission (because of the tendency of a producer to
increase his unit production when he finds that regulation
is increasing his unit return). Require every new mine to
obtain a certificate of convenience and necessity before
development; thereafter to operate under production
control.

(4) Provide for the prompt adoption of a standard classification

of cost accounts.

(5) Provide a system of minimum ■ price regulation. Some

consideration might be given to the soundness of basing
minimum prices on out-of-pocket costs of production,
eliminating charges for depreciation and depletion with
their existing wide differences in basis and method of
computing." Provide also for fixing of maximum prices
when deemed necessary to protect consumers, with a pro-
viso of a sort that does not enfasculate the process of price
fixing to preserve the legal and constitutional rights of
operators.
(6), Provide, under commission supervision, compulsory mar-
keting organizations of producers, either by districts or
by producing fields. Their purpose would be to act as
giant sales agencies and thus to minimize general duplica-
tion of selling effort and selling expense. Their setup and
functioning would be under stricter regulation than con-
templated in the present act.

(7) Regulate fees and; charge's of all selling companies (directly

connected with point 6).

(8) Empower the commission to issue teniporary orders, pending

proceedings, for general increases or decreases in existing
minimum prices, so that prices may be more responsive
to market requirements.

(9) Put a definite limitation upon unduly high wage rates.

In its most practical form, this might involve an arrange-
ment under which wage rates would fluctuate with sales
realization in a manner similar to that prevailing in the
copper- and silver-mining industries. ^^

(10) Establish an impartial body to handle the problem of unem-

ployment, particularly rehabilitation or reallocation and
resettlement of mine labor permanently unemployable in
the industry, so that such labor may retain its value to
the general economy.

(11) Authorize the administrative body to conduct research to

develop new uses for coal, and further economies and
greater efficiencies in its utilization, and to encourage a
general coordination of all governmental, industrial, and
institutional research agencies.

(12) Provide for collateral regulation of oil and natural gas.

Under open competition, ciit-throat prices often ignored even "out-of-pocket" £o«s, and led to the

Monthly Labor Heview (U. S. Bureau

" under open competition, cut-throat prices often ignored evei
abrogation of wage agreements and a gradual degradation of labor.

" See "Development of Collective Bargainin!? in Metal Mining,'
of Labor Statistics, September 1938), vol. 47, No. 3, pp. 594-595,

CONCENTRATION OF ECONOMIC POWER 329

If regulation were to embrace the authority to allocate production
among the mines, under any allocation which provided an annual
tonnage sufficient for, say,, the 1937 deJtiand' of 445,000,000 tons,
some mines would be deprived of their opportunity* to operate at
their most economical or most profitable rate. Quite likely some
mines would be seriously injured if the allocation were to be based on
the least wasteful production, and not on a mere mathematical
recognition of each mine's recent production. Reduction of waste
in the interest of conservation, and in the interest of the present con-
suming public, requires the exercise of something more than a mere
mathematical formula. It was with this thought, and the belief that
the necessary authority should be provided, that a production-control
plan vesting, wide latitude for judgment in the commission, has been
suggested under point 3.

Excess capacity, responsible for so many of the ills of the industry,
would not necessarily be eliminated by a system of production control
combined with price regulation, but its destructive influence would
be largely removed.

The question will be raised: "Why control both production and
prices?" The answer, in our opinion, is that production control alone
will not preclude destructive price cutting in this industry by mines
which at some seasons are faced with the necessity of disposing of
their excess tonnage of certain sizes produced unavoidably while
orders for other sizes were being prepared. In filling orders for certain
sizes, a mine must produce a heavy percentage of, say, slack, for
which there may be little or no market at the time. It has the choice
of finding a market for slack under a drastic price inducement, or
closing down when this excess of slack accumulates in coal cars and
blocks loading and side tracks. The result is to break the market on
the "long" sizes— both as to the miiie's own pi-oducing district and
as to competing districts. At another season, when the market for
slack is active, the prices will substantially stiffen, causing a wide
seasonal fluctuation. A degree of instability and consumer dissatis-
faction results.

The control of minimum prices with reasonable regard for seasonal
variations is, in our opinion, absolutely necessary to year-round
stability and protection for the existing minimum wage agreernents.
The authorities acting under the present act establish minimum
prices to yield a return per ton approximating a past average cost
adjusted for changes so as to represent present cost. Theoreticall> ,
this appears sound. Practically, the lengthy procedure re(juired
drags through an intermediate period after the "closing date" for
cost adjustment. This intermediate period, in the present instance,
saw a change in production and demand — with its direct effect on
costs. Presumably, the authorities can avoid the problem of pre-
dicting how much coal will be demanded at the prices finally estab-
lished— or how much would be demanded at higher or at lower prices.
Lot us consider production control alone. The problems cited above
could not be avoided by authorities charged with production control
so as to bring about the same result (an average price rcnlizntion
approximately equal to average costs). In order to sot the output at
an approximate point to effect this result, they would have to predict
to a reasonable degree the volume of production and snlos wliich would

330 CONCENTRATION OF ECONOMIC POWER

bring prices that would average an amount equal to cost. Presum-
ably, they would not be able to predict it exactly. Hence the results
wouki be different under either price control or output control un-
supported by the other. Nevbrtheless, increasing experience with
the problem would reasonably be expected to provide authorities with
knowledge sufficient to minimize the differences.

The pattern of prices, volume, sales, profits, etc. — as between kinds,
qualities, and sizes; as between districts; and as between companies —
might be quite different under production control alone from that
which would result from price control alone.

In depressed periods, production would respond more promptly,
in fact automatically, to the decreased demand if there were estab-
lished minimum prices which remained unchanged. (Under the pres-
ent act, any lawful change would of course occur upward, due to the
upward effect on cost resulting from lowered output, and the change
could be made only after a considerable lag to allow for hearings and
showing of estabhshed increases in cost exceeding 2 cents per ton.)
With output control alone it would be very difficult to predict the
degree of restriction of production necessary to hold prices at a desired
level during a depression. On the upswing, unless the permissible
output were expanded with or before an increase in demand, prices
would probably increase.

With production control unsupported by price control, and assuming
demand to be unpredictable within limits necessary to control the
price movement effectively, producers might, and probably would, cut
prices lower than really necessary to sell their full quota. For the
same reason, wages might be in danger of reduction. Especially would
prices or wages, or both, be in line for cutting, perhaps to an unneces-
sary degree, if demand decreased considerably and output quotas were
not immediately reduced and to the right degree.

Minimum price control encourages increased expenditures on selling.
Perhaps production control would not provide this stimulus and total
profits might be larger under production control alone in periods of
good demand. Control of output by the assignment of production
quotas would probably not affect the distribution of sales volume in
the same way as would minimum price regulation alone. Production
control would probably be less easy to evade than minimum price
control.

It is probable that at any given time demand conditions may be
such that the volume of coal produced and sold would be approxi-
mately the same whatever the price level (i. e., average realization)
within a restricted range of several cents per ton. Clearly such a
range could not be very wide because of competing fuels. Within
such a range of prices in which the demand and production remain the
same regardless of price, production control alone could not. prevent
the cutting of prices to the bottom of this range. It is, of course, true-
that the fixing of minimum prices at the top of this range would result
in the same tonnage consumption as would the fixing of output at the
point appropriate for prices anywhere within this restricted range.

We believe it desirable to protect wage agreements, and henoe
producer costs, under all probable conditions of market fluctuation,
and that only a corr bination of production control and minimum price
regulation can provide firm protection in ull conditions.

CONCENTRATION OF ECONOMIC POWER 33 J

Only a few questions concerning excess capacity can be touched on
here. There is the question of how to accompUsh stable industrial
conditions as long as excess capacity continues, and the corollary of
this question: How to refuse such excess capacity the opportunity
to operate, without compensating the owner. Under regulation,
many marginal operators would find their production definitely
limited at a point not only below their capacity but below their normal
production. Should a system of subsidies, one which would benefit
the general economy and contribute to a balance between capacity
and 'demand without penalizing either producers or consumers, be
considered as a means of avoiding the perpetuation of financial weak-
ness of the coal companies and a poor economic condition of the mine
workers in this industry? Or would Government^urchase of marginal
mines for a coal reserve better accomplish both this purpose and that
of conservation of coal resources?

Thus, in summary, it is our belief that some form of Federal regu-
lation of both prices and production of bituminous coal and of com-
peting fuels is necessary and that the BitumiDous Coal Act of 1937 is
in a sense a half-way measure, providing unduly cumbersome pro-
cedures for cost determination and price fixing and allowing too little
latitude to the controlling agency. We believe the act (which expires
in April 1941) is in need of amendment. Further, it is clear that the
economic standards prescribed by the act, designed to aid labor and
producers, may set certain limitations to the effective competition of
coal with other fuels if prices, tied to costs, are too inflexible or rise
in periods of depression. Moreover, the degree to which consumers'
interests are protected by minimum prices is open to some question
when demand is slack. The provisions of this act for fixing maximum
prices are almost unworkable.

There is no clear way to satisfy these conflicting interests, but it
is plain that Federal price fixing is an exceedingly complex and
difficult procedure, which, in itself, by no means provides a solution
to the many problems of the depressed bituminous coal industry.
If price fixing is to contribute to the satisfactory solution of these
problems it must be made. more flexible, and it needs to be supple-
mented by other measures including output control, and perhaps
control to force retirement of capacity as well as control of new
capacity, and provisions for the rehabilitation of labor.

APPENDIX A

Capacity and production of bituminous coal
[Short tons of 2,000 pounds]

1900.
1901.
1902.
1903-
1904.
1905.
1906.
1S07.

1910.
1911.
1912.
1913.
1914.
1915.
1916.
1917.
1918.
1919.

1924.
1925.
1926.
1927.
1928.
1929.

Commer-
cial
mines

Calculated
capacity
308 days

279, 000, 000
309, 000, 000
348, 000, 000
387, 000, 000
425, 000. 000
460, 000, 000
496, 000, 000
520, 000, 000
531,000,000
560, 000. 000

592, 000, 000

593, 000, 000
622, 000, 000
635. 000. 000
668, 000, 000
672, 000, 000
673, 000, 000
699. 000. 000
717,000.000
736, 000, 000
796, 000, 000
860, 000, 000
916,000.000
970, 000, 000
871, 000, 000
822, 000, 000
821,000,000
835, 000, 000
760, 000, 000
7.';2. 000, 000
770. 000, 000
736, 000, 000
653, 000, 000
615,000,000
622, 000, 000
640, 000, 000
680, 000, 000
710, 000, 000
663, 000, 000

212,316,000
225, 828, 000
260, 217, 000
282, 749, 000
278, 660, 000
315, 063, 000
342, 875, 000
394, 759, 000
332, 574, 000
379, 744, 000
417,111,000
405, 907. 000
450, 105, 000
478, 435. 000
422, 704, 000
442, 624, 000
502, 520. 000
551,791,000
579, 386, 000
465, 860, 000
568, 607, 000
415, 922, 000
422,268,000
564, 565, 000
483, 687, 000
520. 053, 000
573, 367, 000
617, 763, 000
500, 745, 000
534. 989, 000
467. 526, 000
382. 089, 000
309, 710, 000
333,631,000
359. 368, 000
372, 373, 000
439, 088, 000
445, 531, 000
348, 545, 000

Capacity
operated

75.99
73.14
74.71
73.13
65.65
68.48
69.15
75. 96
62.71
67.86
70.44
68.47
72.35
75.28
63.32
65.92
74.74
78.97
80.75
63.32
71.48
48.37
46.07
58.25
55.57
63.26
69.79
62.04
65.92
71.14
60.78
51. 90,
47.47
54.31
57.72
58.13
64.56
62.82
52.57

Total
output
cut by

24.9
25.6
26*8
27.6
28.2
32.8
34.7
35.1
37.0
37.5
41.7
43.9
46.8
50.7
51.7
55.0
56.5
55.5
55.9

59! 8

65.6

63.2

66.9

69.5

70.6

71.7

72.2

73.8

75.4

77.5

79.1

78.8

80.0

79.2

78.9

79.3

(')

79.9

Under-
ground
tonnage
mechan-
ically

Produc-
tion
per man
per day

2.98
2.94
3.06
3.02
3.15
3.24
3.36
3.29
3.34

3.46
3.50

3^61
3.71
3.91
3.90
3.77
3.78
3.84
4.00
4.26
4.28
4.47
4.56
4.52
4.50
4.55
4.73
4.85
5.06
5.30
5.22
4.78
4.40
4.50
4.62
4.69

• (U. S. QeoloKlcal Survey) Mineral Resource.s of the United States and (U.
Mineral Yearbooks.

Excludes mines producing less than 1,000 tons per year.
'Not available.

332

Bureau of Mines) and

APPENDIX B

Fuel economy and energy supplied by competing sourc

of fuel and power, 1909-38 >

[Short tons of 2,000 pounds]

Consumption
of bituminous
coa). United
States (cal-
culated)

Railroads

Percent of total energy derived from—

Year

power
plants
(pounds
per
kilo-
watt-
hour)

Pounds

per
1,000
gross

ton
freight

car
miles

Pounds

per
passen-
ger car
miles

Bitumi-
nous
coal

Penn-

syl;

vania

ant.hra-

Total'
coal

Petro-
leum

Natural
gas

Water
power

va^g
ceptrd
station

1900

1901

"■

1902

1903 .

1904

1905

1906

1907

1908..

1909

69.7
70.2
68.4
70.8
70.3
67.0
67.6
69.4
69.1
69.9
65.3
67.0
59.6
61.1
61.6
58.4
61.3
61.4
56.9
55.6
55.1
53.9
51.3
48.2
48.4
49.0
48.3
50.2
2 48.0
(3)

15.4
14.8
15.8
13..8
13.9
15.0
14.1
12.5
13.0
12.4
12.8
11.0
13.5
8.2
10.6
11.0
7.6
9.4
9.1
8.7
7.9
8.3
8.3
8.1
7.4
8.1
7.0
6.5
S5.7
■ (0

85.1
85.0
84.2
84.6
84.2
82.0
81.7
81.9
82.1
82.3
78.1
78.0
73.1
69.3
72.2
69.4

7018
66.0
64.3
63.0
62.2
59.6
56.3
55.8
57.1
55.3
56.7
253.7
(3)

7.7
8.1
8.6
8.3
8.9
10.3
10i5
10.2
10.6
10.9
13.8
14.9
19.6
22.7
20.4
21.9
22.3
20.4
24.2
24.9
25.7
25.3
27.7
29.6
31.1
29.4
30.5
29.6
232.4
(?)

3.6
3.6
3.5
3.6
3.5
- 3.9
3.9
4.3
4.1.
3.6
4.3
3.8
3.9
4.5
4.5
5.7
5.8
■ 5.8
6.5
7.2
8.1
9.2
9.3
9.9
9.2
9.9
^ 10.2
10.2
S10.4

3 6

1910

407, 000, 000
392,000,000
436,000,000
460,000,000
409,000,000
426, 000, 000
494, 000, 000
529, 000, 000
531, 000, 000
482,000,000
• 509,000,000
392, 000, 000
427, 000, 000
519,000,000
484,000,000
499, 000, 000
533, 000, 000
500, 000, 000
499, 000, 000
520, 000, 000
455, 000, 000
372,000,000
306, 917, 000
321, 748, 000
347, 043, 000
360, 291, 563
422, 795, 741
428, 496, 767
344, 649, 800

1911

1912

1913. ..-.

3 4

1914

■

3 8

1915

3 9

1916

1917

'"3.I7'

""3.22'
3.04
2.73
2.51
2.41
2.22
2.07
1.95
1.84
1.76
1.69
1.62
1.55
1.50
1.47
1.47
1.50
1.44
1.43
1.41

169
176
174
164
174
162
163
161
149
140
137-
131.
127
125
121
119
123
121
122
120
119'
117
115

18.5
19.4
19.2
18.1
18.8
17.7
17.9
18.1
17.0
16.1
■15.8
15.4
15.0
14.8
14.7
14.5
14.9
15.2
15.2
15.5
15.3
15.1
14.9

3.6
3 3

1918.

1919

1920

1921

1922

3.2
3.8
3.3
3.4
3 5

1923

2 9

1924...

1925.. .

3.0

1926

3 0

1927.... -

1928

3.3
3 6

1929 ...

1930

1931

1932

4 2

1933

3 9

1^934

3 6

1935..

1936

4.0

1^38

(»)

■ (U. S. Geological Survey), Mineral Resources of the United States, and (U. S. Bureau of Mines), Mineral
Yearbooks.

2 Preliminary figure. '

3 Not available.

a33

APPENDIX C

Price indicators in the bituminous coal industry '
[Short tons of 2,000 pounds]

-i^ear

Net income or

deficit of the

industry

Value
f. 0. b.
mine

Cost Of
railroad
fuel ex-
cluding
freight
rate

Spot
price
f. 0. b.
mine

Railroad

freight

rate

Whole-
sale
mine run
com-
posite

Whole-
sale pre-
pared
sizes
com-
posite

Retail
com-
posite
38 cities

1900

$1.04
1.05
1.12
1.24
1.10
1.06
1.11
1.14
1.12
1.07
1.12
1.11
1.15
1.18
1.17
1.13
1.32
2.26
2.58
2.49
3.75
2.89
3.02

2^20
2.04
2.06
1.99
1.86
1.78
1.70
1.54
1.31
1.34
1.75
1.77
1.83
1.95

1901

1902

1903

1904

1905

1906

$1.21
1.18
1.05
1.04
1.23
1.07
1.21
1.23
1.14
1.12
1.85
3.25
2.- 58
2.59
5.64
2.55
3.64
2.77
2.08
2.06
2.21
• 1.99
1.80
1.79
1.75
1.64

1907

1908

1909

1910

1911

1912

1913 -

$5.44

1914 _.

5.72

1915

5.58

1916

5.61

1917. . .

+$203, 919,000
+148, 847, 000

+62, 260, 000
+249, 367, 000

+28, 889, 000

.7 09

1918

7 80

1919

■

8 00

1920

11.26

1921

10.68

1922

1923

$2.36

■ $4.83
4.21
4.12
4.31
4.26
4.03
3.95
3.91
3.74
3.64
3.67
4.13
4.24
4.27
4.29
4.33

$5.65
4.90
4.63
4.79
4.82
4.47
4.38
4.26
3.97
3.68
3.72
4.32
4.39
4.48
4.51

.4.53

1924

1926 -

-22,363,000

9 07

1926

9 33

1927

9 28

1928

-24, 508, 000
-11,822,000
-42,071,000
-47, 745. 000
-51.167,000
-47, 549, 000

-7, 584, 000
-15, 576, 000

-3, 310, 000

2.27
2.25
2.23
2.22
2.26
2.20
2.15
2.24
2.25
2.17
2.27

8 94

1929

$2.01

1930

1931

1932

1.66

1933. .

7 65

1934 ,

1.84

1.'79
1.89
1.92

8.26

1935

8 30

1936

1937

2.10
2.04

1938

' (U. S. Geological Survey), Miupral Resources of the United States, (U. S. Bureau of Minos), Mineral
Yearbooks, (U. S. Department of Commerce) Survey of Current Business.

334

APPENDIX D

Labor stalisiics in bituminous coal mining

Number of em-
ployees

Total

(in thou-
sands of
dollars)

Year

Number of em-
ployees

Total
wages '

Year

Average
for year '

Average
for active
mines 2

Average
for year '

Average
for active
mines •

(in thou-
sands of
dollars)

511,700
545,800
458, 700
440,800
407.800
350,000
366, 500

543,000
622, 000
503,000
493,000
450,000
406,000
419,000

5 294.200

3 682, 600

3 574, 810

477, 100

, 351,620

237,120

260,990

1934.. -._.

423,400
435, 300
447,200
455, 500
397, 700
360, 500

458,000
462,000
477. 204
491,864
441,333

367, 950

1919

1935 .

403,050

1930

1937

508, 510

1938.

390, 360

1939 . -

3 402, 010

1933 -

' U. 8. Bureau of Labor Statistics estimates. .Employment figures represent average monthly employ-
ment throughout the year whether mines were operating or not.
' U. S. Bureau of Mines.
3 U. S. Census of Mines and Quarries.

335

APPENDIX E

BITUMINOUS COAL ACT OF 1937

[Public — No. 48 — 75th Congress]

[Chapter 127 — 1st Session]

[H. R. 4985]

AN ACT

To regulate interstate commerce in bituminous coal, and for other purposes.

Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That regulation of
the sale and distribution in interstate commerce of bituminous coal
is imperative for the protection of such commerce; that there exist
practices and methods of distribution and marketing of such coal
that waste the coal resources of the Nation and disorganize, burden,
and obstruct interstate commerce in bituminous coal, with the result
that regulation of the prices thereof and of unfair methods of com-
petition therein is necessary to promote interstate commerce in
bituminous coal and to remove burdens and obstructions therefrom.

NATIONAL BITUMINOUS COAL COMMISSION

Sec. 2. (a) There is hereby established in the Department of the
Interior a National Bitumin'bus Coal Commission (herein" referred
to as Commission), which shall be composed of seven members
appointed by the President, by and with the advice and consent of
the Senate, for a term of four years. The Commission shall annually
designate its chairman, and shall have a seal which shall be judicially
recognized. Any person appointed to fill a vacancy shall be ap-
pointed only for the unexpired term of his predecessor in office.
The Commission shall have an office in the city of Washington, Dis-
trict of Columbia, and shall convene at such times and places as the
majority of the Commission shall determine. Two members of the
Commission shall have been experienced bituminous coal mine
workers, two shall have had previous experience as producers, but
none of the members shall have any financial interest, direct or indi-
rect, in the mining, transportation, or sale of, or manufacture of
equipment for, coal (whether or not bituminous coal), oil, or gas,
or in the generation, transmission, or sale of hj^dro-electric power,
or in the manufacture of equipment for the use thereof, and shall
not actively engage in any other business, vocation, or employment.
Not more than one commissioner shall be, a resident of any one State,
and not more than one commissioner shall be a resident of any one
of the districts hereinafter established, but a change in any of the
boundaries of the districts, made by the Commission as hereinafter
provided, shall not affect the tenure of oflOice of any commissioner
336

CONCENTRATION OF ECONOMIC POWER 337

then serving. Any commissioner may be removed by the President
for inefficiency, neglect of duty, or malfeasance in office. The Com-
mission is authorized to appoint and fix the compensation and duties
of a secretary and necessary professional, clerical, and other assist-
ants. With the exception of the secretary, a clerk to each commis-
sioner, the attorneys, the managers and employees of the statistical
bureaus hereinafter provided for, and such special agents, technical
experts, and examiners as the Commission may require, all employees
of the Commission shall be appointed and their compensation fixed
in accordance with the provisions of the civil-service laws and the
Classification Act of 1923, as amended. No person appointed with-
out regard to the provisions of the civil-service laws shall be related
to any member of the Commission by marriage or within the third
degree by blood. The Commission is authorized to accept and utilize
voluntary and uncompensated services of any person or of any official
of a State or political subdivision thereof. The members of the
Commission shall each receive compensation at the rate of $10,000
per year and necessary traveling expenses. Such Commission shall
have the power to make and promulgate all reasonable rules and regu-
lations for carrying out the provisions of this Act and shall annually
make full report of its activities to the Secretary of the Interior for
transmission to Congress. A majority of the Commission shall con-
stitute a quorum for the transaction of business, and a vacancy in the
Commission shall not impair the right of the remaining members to
exercise all the power of the Commission. No order which is sub-
ject to judicial review under section 6, and no rule or regulation
which has the force and effect of law, shall be made or prescribed by
the Commission, unless it has given reasonable public notice of a
hearing, and unless it has afforded to interested parties an oppor-
tunity to be heard, and unless it has made findings of fact. Such
findings, if supported by substantial evidence shall be conclusive upon
review thereof by any court of the United States. The Commission
may establish divisions, each of which divisions shall consist of not
less than three of its members, as it may deem necessary for the
proper dispatch of its business. Each such division shall exercise
all the powers and authority of the Commission in the premises:
Provided, That any person in interest may, upon written petition,
secure a review by the Commission of the report, finding, or order
of such division. The Commission may by its order assign or refer
any matter within its jurisdiction under this Act to an individual
Commissioner, to a board composed of employees of the Commission,
or to an examiner, to be designated by such order, for hearing and
the recommendation of an appropriate order in the premises. Each
individual Commissioner, board, or examiner, when so directed by
order of the Commission, shall have power to administer oaths and
affirmations, to examine witnesses, and receive evidence. The Com-
mission is authorized to make contracts for personal services in the
District of Columbia and elsewhere and to establish and maintain
such offices throughout the .United States as it deems necessary for
the effective administration of this Act, but shall maintain its prin-
cipal office in the District of Columbia.

The' Commission is hereby authorized to initiate, promote, and
conduct research designed to improve standards and methods used
in the mining, preparation, conservation, distribution, and utilization

33<S CONCENTUATIOX 01'^ ECONOMIC IY)WEri

of coal tind the discovery of additional uses for coal, and for such
])urposes shall have authority to assist educational, governmental,
;!nd other research institutions in conducting research in coal, and to
do such other acts and things as it deems necessary and proper to
promote the use of coal and its derivatives.

(b) (1) There is hereby established an ofRce in the Department
of the Interior to be known as the office of the consumers' counsel
of the National Bituminous Coal Commission. The office shall be
in charge of a counsel to be appointed by the President, by and with
the advice and consent of the Senate. The counsel shall have no
financial interest, direct or indirect, in the mining, transportation, or
sale of, or the manufacture of equipment for, coal (whether or not
bituminous coal), oil, or gas, or in the generation, transmission, or
sale of hydroelectric power, or in the manufacture of equipment for
the use thereof, and shall not actively engage in any other business,
vocation, or employment. The coiuisel shall receive compensation,
at th6 rate of $10,00p per year and necessary traveling expenses.

(2) It shall be the duty of the counsel to appear in the interest of
tlie consuming public in any proceeding before the Commission and
to conduct such independent investigation of matters relative to the
coal industry and the administration of this Act as he may deem
necessary to enable him properly to represent the consuming public
in any proceeding before the Commission. In any such proceeding
before the Commission, the counsel shall have the right to offer any
relevant testimony and argument, oral or written, and to examine
and cross-examine witnesses and parties to the proceeding, and shall
have the right to have subpena or other process of the Commission
issue in his behalf. Whenever the counsel finds that it is in the
interest of the consuming public to have the Commission furnish
any information at its command or conduct any investigation as to
any matter within its authority, the counsel shall so certify to the
Commission, specifying in the certificate the information or investi-
gation desired. Thereupon the Commission shall promptly furnish
to the counsel the information or promptly conduct the investigation
and place the results thereof at the disposal of the counsel.

(3) The counsel is authorized to appoint and fix the compensation
and duties of necessary professional, clerical, and other assistants.
With the exception of a clerk to the/counsel, the" attorneys, and such
special agents and experts as the counsel may from time to time find
necessary for the conduct of his work, all employees of the counsel
shall be appointed and their compensation fixed in accordance with
the civil-service laws and the Classification Act of 1923, as amended.
The counsel is authorized to malie such expenditures as may be neces-
sary for the performance of the duties vested in him.

(4) The counsel shall annually make a full report of the activities
of his office directly to the Congress.

TAX ON COAL

Sec. 3. (a) There is hereby imposed upon the sale or other dis-
posal of bituminous coal produced within the United States when
sold or otherwise disposed of by the producer thereof an excise
tax of 1 cent per ton of two thousand pounds.

CONCENTRATION OF ECONOMIC POWER 339

The term "disposal" as used in this section includes consumption
or use (whether in the production of coke or fuel, or otherwise) by a
producer, and any transfer of title by the producer other than by
sale.

(b) In addition to the tax imposed by subsection (a) of this sec-
tion, there is hereby impored upon the sale or other disposal of
bituminous coal produced within the United States, when sold or
otherwise disposed of by the producer thereof, which' would be subject
to the application of the conditions and provisions of the code pro-
vided for in section 4, or of the provisions of section 4-A, an excise
tax in an amount equal to 19K per centum of the sale price at the
mine in the case of coal disposed of by sale at the mine, or in the case
of coal disposed of otherwise than by sale at the mine, and coal sold
otherwise than through an arms' length transaction, 19J^ per centum of
the fair market value of such coal at the tinie of such disposal or sale.
In the case of any producer who is a code member as provided in
section 4 and is so certified to the Commissioner of Internal Revenue
by the Commission, the sale or disposal by such producer during the
continuance of his membership in the code of coal produced by him
shall be exempt froni the tax imposed by this subsection.

(c) The taxes imposed by this section shall be paid to the United
States by the producer, and shall be payable monthly for each calendar,
month on or before the first business day of the second succeed-
ing month, under such regulations and in such manner as shall be
prescribed by the Commissioner of Internal Revenue, with the ap-
proval of the Secretary of the Treasury.

(d) In the case of coal disposed of otherwise than by sale at the
mine, and coal sold otherwise than through an arms' length trans-
action, the Commissioner of Internal Revenue shall determine the
market value thereof. Such market value shall equal the current
market price at the mine of coal of a comparable kind, quality, and
size produced for market in the locality where the coal so disposed
of is produced

(e) The tax imposed by subsection (a) of this section shall not apply
in the case of a sale of coal for the exclusive use of the United States
or of any State or Territory of the United States or the District of
Columbia, or any political subdivision of any of them, for use in the
performance of governmental functions. Under regulations prescribed
by the Commissioner of Internal Revenue with the approval of the
Secretary of the Treasury, a, credit against the tax imposed by sub-
section (a) of this section or a refund may be allowed or made to any
producer of coal in the amount of such tax paid with respect to the
sale of coal to any vendee, if the producer has in his possession such
evidence as the regulations may prescribe' that such coal was resold
by any person for the exclusive use of the JJnited States or of any
State, Territory of the United States, or the District of Columbia,
or any political subdivision of any of them, for use in the perform-
ance of governmental functions.

(f) No producer shall, by reason of his acceptance of the cede
provided for in section 4, or of the exemption from the tax provided
in subsection (b) in this section, be held to be precluded or estopped
from contesting the constitutionality of any proyision of this Act
or of the code, or the validity or application of either to him or to
any part of the coal produced by him.

340 CONCENTRATION OF ECONOMIC POWER

BITUMINOUS COAL CODE

Sec. 4. The provisions of this section shall be promulgated by the
Commission as the "Bituminous Coal Code", and are herein referred
to as the code.

Producers accepting membership in the code as provided in sec-
tion 5 (a) shall be, and are herein referred to as, code members, and
the provisions of such code shall apply only to such code members,
except as otherwise provided by subsection (h) of part II of this
section.

For the purpose of carrying out the declared policy of this Act,
the code shall contain the following conditions and provisions, which
are intended to regulate interstate commerce in bituminous coal and
which shall be applicable only to matters and transactions in or
directly afiecting interstate commerce in bituminous coal:

Part I — Organization

(a) Twenty-three district boards of code members shall be organ-
ized. Each district board shall consist of not less than three nor
more than seventeen members. The number of members of the dis-
trict board shall, subject to the approval of the Commission, be
determined by the majority vote of the district tonnage during the
calendar year 1936 represented at a meeting of the code members of
the district called for the purpose of such determmation and for the
election of such district board ; and all code members within the dis-
trict shall be given notice of the time and place of the meeting. All
but one of the members of the district board shall be code members
or representatives of code members truly representative of all the
mines of the district. The number of such producer members shall
be an even number. One-half of such producer members shall be
elected by the majority in number of the code members of the dis-
trict represented at the aforesaid meeting. The other producer
members shall be elected by votes cast in the proportion of the annual
tonnage output of the code members in the district, for the calendar
year preceding the date of the election: Promded, That not more
than one officer or employee of any code member within a district
shall be a member of the district board at the same time. The
remaining member of each district board shall be selected by the
organization of employees representing the preponderant number of
employees in the industry of the district in question. The term of
district board members shall be two years and until their successors
are electetl. The Commission shall have power to remove any mem-
ber of any district board upon its finding, after due notice and
hearing, that said member is guilty of inefficiency, willful neglect of
duty, or. malfeasance in office.

The district boards shall have power to adopt bylaws and rules of
procedure, subject to approval of the Commission, and to appoint
officers from within or without their own membership, to fix their
terms and compensation, to provide for reports, and to employ such
committees, employees, arbitrators, and other persons necessary to
effectuate their purposes. Members of the district board shall serve,
as such, without compensation but may be reimbursed for their
reasonable expenses. , The territorial boundaries or limits of the

CONCENTRATION OF ECONOMIC POWER 34]^

twenty-three districts are set forth in the schedule entitled "Schedule
of Districts" and annexed to this Act.

Whenever the Commission upon investigation instituted upon its
own motion or upon petition of any code member,* district board,
State or political subdivision thereof, or the consumers' counsel, after
hearing finds that the territorial boundaries or limits of any district
or minimum-price area are such as to make it substantially imprac-
ticable to establish minimum prices in accordance with all the stand-
ards set forth in subsections (a) and (b) of part II of this section,
and that a change in such territorial boundaries or limits or a division
or consolidation of such districts or minimum-price areas would rendet
the establishment of minimum prices in accordance with all such
standards more practicable, it shall by order make such changes,
divisions, and consolidations as it finds will substantially aid in such
establishment of minimum prices.

(b) The expense of administering the code by the respective district
boards shall be borne by the code members in the respective districts,
each paying his proportionate share', as assessed, computed on a ton-
nage basis, in accordance with regulations prescribed by such boards
with the approval of the Commission. Such assessments may be
collected by the district board by action in any court of competent
jurisdiction.

(c) Nothing contained in this Act shall constitute the rriembers of
a district board partners for any purpose. Nor shall any member
of a district board or officer thereof be liable in any manner to any-
one for any act of any other member, oQicer, agent, or employee
of the district board. Nor shall any member or officer of a district
board, exercising reasonable diligence in the conduct of his duties
under this Act, be liable to anyone for any action or omission to act
under this Act except for his own willful misfeasance or for nonfeas-
ance involving moral turpitude.

(d) No action complying with the provisions of this section taken
while this Act is in effect, or within sixty days thereafter,, by any
code member or by any district board, or officer thereof, shall be con-
strued to be within the prohibitions of the antitrust laws of the United
States.

Part II — Marketing

The Commission shall have power to prescribe for code members,
minimum and maximum prices, and marketing rules and regulations,
as follows:

(a) All code members shall report all spot orders to such statistical
bureau hereinafter, provided for as may be designated by the Com-
mission and shaJl file with it copies of all contracts for the sale of
coal, copies of all invoices, copies of all credit memoranda, and such
other information concerning the preparation, cost, sale, and distribu-
tion of coal as the Commission may authorize or require. All such
records shall be held by the statistical bureau as the confidential
records of the code member filing such information.

For each district there shall be established by the Commission a
statistical bureau which shall be operated and maintained as an
agency of the Commission. Each statistical bureau shall be under
the direction of a manager, who shall be appointed by the Commis-
sion.- No producer, employee, or representative of a producer, and,

279348— 41— No. 32 24

342 CONCENTRATION OF ECONOMIC POWER

except as the Commission may specifically approve, no member of a
district board or employee or representative thereof shall be an
employee of any statistical bureau.

Each district board shall, from time to time on its own .motion or
when directed by the Commission, propose minimum prices free
on board transportation facilities at the mines for kinds, qualities,
and sizes of coal produced in said district, and classification of coal
and price variations as to mines, consuming market areas, values
as to. uses and seasonal demand. Said prices shall be proposed so as
to yield a return per net ton for each district in a minimum price
area, as such districts are identified and such area is defined in the
subjoined table designated "minimum-price-arca- table", equal as
nearly as may be to the weighted average of the total costs, per net
ton, detei-mined as hereinafter provided, of the tonnage of such
minimum price area. The computation of the total costs shall
include the cost of labor, supphes, power, taxes, insurance, work-
men's compensation, royalties, depreciation and depletion (as deter-
mined by the Bureau of Internal Revenue in the computation of the
Federal income tax) and all other direct expenses of production,
coal operators' association dues, district board assessments for Board
operating expenses only levied under the code, and reasonable costs
of selling and the cost of administration.

MINIMUM-PRICE-AREA TABLE

Area 1: Eastern Pennsjdvaniu, district 1; western Pennsylvania,
district 2; northern West Virginia, district 3; Ohio, district 4; Michi-
gan, district 5; Panhandle, district 6; Southern numbered 1, district
7; Southern numbered 2, district 8; that part of Southeastern dis-
trict 13, comprising Van Buren, Warren, and McMinn Counties in
Tennessee.

Area 2: West Kentucky, district 9; Illinois, district 10; Indiana,
district 11; Iowa, district 12.

Area 3: Southeastern, district 13, except Van Buren, Warren, and
McMinn Counties in Tennessee.

Area 4: Arkansas-Oklahoma, district 14.

Area 5: Southwestern, district 15.

Area 6: Northern Colorado, district IG; southern Colorado, dis-
trict 17; New Mexico, district 18.

Area'^7: Wyoming, district 19; Utah, district 20.

Area 8: North Dakota and South Dakota, district 21.

Area 9: Montana, district 22.

Area 10: Washington and Alaska, district 23.

The minimum prices so proposed shall reflect, as nearly as possible,
the relative market value of the various kinds, qualities, and sizes
of coal, shall be just and equitable as between producers within
the district, and shall have due regard to the interests of the con-
suming public. The procedure for proposal of minimum prices shall
be in accordance with rules and regulations to be approved by the
Commission.

A schedule of such proposed minimum prices, together with the
data upon which they are computed, including, but without limita-
tion, the factors considered in determining the price relationship,
shall be submitted by the district board to the Commission, which

CONCENTRATION OF ECONOMIC POWER 343

may approve, disapprove, or modify such proposed minimum prices
to conform to the requirements of this subsection, which shall serve
as the basis for the coordination provide(i for in the succeeding sub-
section (b) : Provided, That all minimum prices proposed for any
kind, quality, or size of coal for shipment into any consuming market
area shall be just and equitable, as between producers within the dis-
trict: And provided further, That no minimum price shall be pro-
posed that permits dumping.

As soon as possible after its creation, each district board shall de-
termine, from cost data submitted by the proper statistical bureau of
the Commission, the weighted average of the total costs of the ascer-
taiiuible tonnage produced in the district in the calendar year, 1936.
The district board shall adjust the average costs so determined, as
may be ncces^ar}^ to give effect to any changes in wage rates, hours
of employment, or other factors substantially affecting costs, exclusive
of seasonal changes, so as to reflect as accurately as possible any
change or changes which may have been established since January
1, 1936. Such determination and the computations upon which it is
based shall be promptly submitted to the Commission by each district
board in the respective minimum-price area. The Commission shall
thereupon determine the weighted average of the total costs of the
tonnage for each minimum-price area in the calendar year 1936,
adjusted as aforesaid, and transmit it to all the district boards within
such minimum-price area. Said weighted average of tlje total costs
shall be taken as the basis, to be effective until changed by the Com-
mission, for the proposal and establishment of minimum prices.
Thereafter, upon satisfactory proof made at any time by any district
board of a change in excess of 2 cents per net ton of two thousand
poilnds in the weighted average of the total costs in the minimum-
price area, exclusive of seasonal changes, the Commission shall
increase or decrease the minimum 'prices accordingly. The weighted
average figures of total cost detemiined as aforesaid shall be avail-
able to the public.

Each district board shall, on its own motion or when directed by
the Commission, propose reasonable rules and regulations incidental
to the sale and distribution, by code members within the district, of
coal. Such rules and regulations shall not be inconsistent with the
requirements of this section and shall conform to the standards of
fair competition hereinafter established. Such rules and regulations
shall be submitted by the district board to the Corilmission with -a
statement of the reasons therefor, and the Commission may approve,
disapprove, or modify the same, ifor the purpose of coordination.

(b) District boards shall, under rules and regulations established
by the Commission, coordinate in common consuming market areas
upon a fair competitive basis the minimum prices and the rules and
regulations proposed by them, respectively, under subsection (a)
hereof. Such coordination, among other factors, but without limi-
tation, shall take into account the various kinds, qualities, and sizes
of coal, and transportation charges upon coal. All minimum prices
proposed for any kind, quality, or size of coal for shipment into
any common consuming market area shall be just and equitable,
and not unduly prejudicial or' preferential, as between and among
districts, shall reflect, as nearly as possible, the relative market
values, at points of delivery in each common consuming market arcii,

344 CONCENTRATION OF ECONOMIC POWER

of the various kinds, qualities, and sizes of coal produced in the
various districts, taking into account values as to uses, seasonal
demaHd, transportation methods and charges and their effect upon
a reasonable opportunity to compete on a fair basis, and the com-
petitive relationships between coal and other forms of fuel and energy;
and shall preserve as nearly as may be existing fair competitive
opportunities. The minimum prices proposed as a result of such
coordination shall not, as to any district, reduce or hicrease tiie return
per net ton upon all the coal produced therein below or above the
minimum return as provided in subsection (a) of this section by an
amount greater than necessary to accomplish such coordination, to
the end that the return per net ton upon the entire tonnage of the
minimum prioe area shall approximate the weighted average of the
total cost per net ton of the tonnage of such . minimum price area.
Such coordinated prices and rules and regulations, together with the
data upon which they are predicated, shall be submitted to the
Commission. The Commission shall thereupon establish, and from
time to time, upon complaint or upon its own motion, review and
revise the effective minimum prices and rules and regulations in
accordance with the standards set forth in subsections (a) and (b)
of part II of this section.

(c) When, in the public iliter est, the Commission deems it neces-
sary to establish maximum prices for coal in order to protect the
consumer of coal against unreasonably high prices therefor, the
Commission shall have the power to estabhsh maximum prices free
on board transportation facilities for coal in any district. Such
maximum prices shall be estabUshed at a uniform increase above the
minimum prices in effect within the district at the time, so that
in the aggregate the maximum prices shall yield a reasonable return
above the weighted average total cost of the district: Provided,
That no maximum price shall be established for any mine which
shall not yield a fair return on the fair value of the property.

(d) If any code member or district board or member thereof, or
any State or political subdivision of a State, or the consumers' coun-
sel, shall be dissatisfied with such coordination of prices or rules and
regulations, or by a failure to establish such coordination of prices
or rules and regulations, or by any miuimum or maximum prices
established pursuant to subsections (b) or (c) of part II of this
section, he or it shall have the right, by petition, to make complaint
to the Commission, and the Commission shall, under rules and regu-
lations established by it, and after notice an.d hearing, make such
order as may be required to effectuate the purpose of subsections (b)
and (c) of part 11 of this section. Pending final disposition of
such petition, and upon reasonable showmg of necessity therefor,
the Commission may inake such preliminary or temporary order as
in its judgment may be appropriate, and not inconsistent with the-
provisions of this Act.

(o) No ct>al subject to the provisions of this section shall be sold
or delivered or offered for sale at a price below the mil imum or
above the maximum therefor established by the Commissio , and the
sale or delivery or offer for sale of coal at a price below s ich mini-
mum or above such maximum shall constitute a violation of the code:
Provided, That the provisions of this paragraph shall not apply to a
lawful and bona fide written contract entered into prior to June 16,
1933.

gONCENTKATION OF ECONOMIC POWER 345

The making of a contract for the sale of coal at a price below the
minimum or above the maximum theref.Qi' established by the Com-
mission at the time of the making of the contract shall constitute a
violation of the code, and such contract shall be inv^id and unen-
forceable.

From and after the date of approval of this Act, until prices shall
have been established pursuant to subsections (a) and (b) of part II
of this section, no contract for the sale of coal shall be made provid-.
ing for delivery for a period longer than thirty days from the date
of the contract.

No contract shall be made for the sale of coal for delivery after the
expiration date of this Act at a price below the minimum or above
the maximum therefor established by the Commission and in effect
at the time of makmg the contract.

The minimum prices established in accordance with the provisions
of this section shall not apply to coal sold and shipped outside the
domestic market. The domestic market shall include all poin'ts
within the continental United States and Canaaa, and car-ferry ship-
ments to the island of Cuba. Bunker coal delivered to steamships
for consumption thereon shall be regarded as shipped within tlie
domestic market. Maximum prices estabhshed in accordance , with
the provisions of this section shall not apply to coal sold and shipped
outside the continental United States.

(f) All data, reports, and other information in the .possession of
any agency of the United States in relation to coal shall be available
to the Commission and to the office of the consumers' counsel for the

' administration of this Act.

(g) The price provisions of this Act shall not be evaded or violated
by or through the use of docks or other storage facilities or trans-
portation facilities, or by or through the use of Subsidiaries, affiliated
sales or transportation companies or other intermediaries or instru-
mentalities, or by or through the absorption, directly or indirectly,
of any transportation or incidental charge of whatsoever kind or
character,-or any part thereof. The Commission is hereby authorized,
after investigation and hearing, and upon notice to the interested
parties, to make and issue rules and regulations to make - this sub-
section effective.

(h) The -Commission shall, by order, prescribe due and reasonable
maximum discounts or price allowances that may be made by code
members to persons (whether or not code members), herein referre'd
to as "distributors", who purchase coal for resale and resell it in not
less than cargo or railroad carload lots; and shall require the main-
tenance and observance by such persons, in the resale of such coal,
of the prices and marketing rules and regulations established under
this section.

UNFAIR METHODS OF COMPETITION

(i),The following practices with respect to coal shall be unfair
methods of competition and shall constitute violations of the code:

1. The consignment of unordered coal, or the forwarding of coal
which has not actually been sold, consigned to the producer or his-
agent: Provided, however,^ That coal which has not actually been sold
may be forwarded, consigned to the producer or his agent at rail or
track yards', tidewater ports, river ports, or lake ports, or docks
beyond such ports, when for application to any of the following

346 CONCENTRAIION OF ECONOMIC POWER

classes: Bunker coal, coal applicable against existing contracts, coal
for storage (other than in railroad cars) by the producer or his agent
in rail or track yards or on docks, wharves, or other yards for resale
by the producer or his agent.

2. The adjustment of claims with purchasers of coal in such manner
as to grant secret allowances, secret rebates, or secret concessions, or
other price discrimination.

3. The prepayment of freight charges with intent to or having the
effect of granting a discriminatory credit allowance.

4. The granting in any form of adjustments, allowances, discounts,
credits, or refunds to purchasers or sellers of coal, for the purposes
or with the effect of altering retroactively a price previously agreed
upon, in such manner as to create price discrimination.

5. The predating or postdating of any invoice or contract for the
purchase or sale of coal, except to conform to a bona-fide agreement
for the purchase or sale entered into on the predate.

6. The payment or allowance in any form or by any device of
leb^tes, refunds, credits, or unearned discounts, or the extension to
certain purchasers of services or privileges not extended to all pur-
chasers under hke terms and conditions, or under similar circum-
stances. • . '

7. Thq attempt to purchase business, or to obtain information con-
cerning a competitor's business by concession, gifts, or bribes.

8. The intentional misrepresentation of any analysis or of analyses,
or of sizes, or the intentional making, causing, or permitting to be
made, or publishing, of any false, untrue; misleading, or deceptive
statement by way of advertising, invoicing, or -otherwise concerning
the size, quality, character, nature, preparation, or origin of any coal
bought, sold, or consigned. -

9. The unauthorized use, whether in written or oral form, of trade-
marks, trade names, slogans, or advertising matter already adopted
by a competitor, or any deceptive approximation thereof.

10. Inducing or attempting to induce, by any means or device what-
soever, a breach of contract between a competitor and his customer
during the term of such contract.

11. Splitting or dividing commissions, brokers' fees, or brokerage
discounts, or otherwise in any manner directly or indirectly using
brokerage commissions or jobbers' arrangements or sales agencies for
making discounts, allowances, or rebates, or prices other than those
determined under this Act, to any industrial consumer or to any
retailers, or to others, whether of a like or different class.

12. Selling to, or through, any broker, jobber, commission account,
or sales agency, which is in fact or in effect an agency or an instru-
mentality of a retailer or an industrial consumer or of an organiza-
tion of retailers or industrial consumers, whereby they are ^ any of
them secure either directly or indirectly a discount, dividend, a low-
ance, or rebates, or a price other tjian that determined in the manner
prescribed by this Act.

• 13. Employing any person -or appointing any sales agent, at a
compensation obviously disproportionate to the ordinary value of
the service or services rendered, and "whose employment or appoint-
ment is made with the primary intention and purpose of securing
preferment with a purchaser or purchasers of coal.

1 So In original,

CONCENTRATION OF ECONOMIC POWER 347

It shall not be an unfair method of competition or a violation of
the code or any requirement of this Act (1) to sell to or through an}
bona-fide and legitimate farmers' cooperative organization duly
organized under the laws of any State, Territoiy, the District of
Columbia, or the United States whether or not such organization
grants rebates, discounts, patronage dividends, or other similar bene-
hts to its members; (2) to sell tlirough any intervening agency to
any such cooperative organization; or (3) ) ^5ay or allow to any
such cooperative organization or to any such iniervening agency any
discount, commission, rebate, or dividend ordinarily paid or allowed,
or permitted by the code to be paid or allowed, to other purchasers
for purchases in wholesale or middleman quantities.

(j) The Commission shall have jurisdiction to- hear and determine
written complaints made by any code member, district board, or
member thereof. State or political subdivision of a State, or the con-
sumers' counsel, which charge any violation of the code specified in
part II of this section. It shall make and publish rules and regula-
tions for the consideration and hearing of any such complaint, and
all interested parties shall be required to conform thereto. The Cpm-
jnission shall make due effort toward adjustment of such complaints
and shall endeavor to compose the differences of the parties, and
shall make such order or orders in the premises, from time to time,
as the facts and the circumstances warrant. Any such order shall
be subject to review as are other orders of the Comniissibn.

(k) In the investigation of any complaint or violation of the code,
or of any rule or regulation the observance of which is required
under the terms thereof, the Commission shall have power by order
to require such reports from, and shall be given access to inspect the
books and records of, code members to the extent deemed necessary
for the i)urpose of determining the complaint. Any such order shall
be subject to review as are other orders of the Commission.

(1) The provisions of this section shall not apply to coal consumed
by the producer or to coal transported by the producer to himself
for consumption by him.

Sec. 4-A. Whenever the -Commission upon investigation instituted
upon its own motion or upon petition of any code member, district
l)oard. State or politicaV subdivision thereof^ or the consumers'
counsel, after hearing finds that transactions in coal in intrastate
commerce by any person or in any locality cause any undue or un-
reasonable advantage, preference, or prejudice as between persons
and localities in such connnerce on the one hand and interstate com-
merce in coal on the other hand, or any imdue, unreasonable, or unjust
discrimination against interstate commerce in coal, or in any manner
directly affect interstate connnerce in coal, the Commission shall by
order so declare and thereafter coal sold, ilelivered or offered for 'sale
in such intrastate commerce shall be subject to the provisions of
section 4.

Any producer believing that any commerce in coal is not subject
to the provisions of section 4 or to the pio.isions of the first para-
graph of this section may file with the Conmission im application,
verified by oath or affirmation for cxcmp'ion, setting foith the facts
upoii which such claim is based. The fili ig of sucV application in
good faith shall exempt the applicant, b g nning wiun the third day
following the filing of the application, h .n.i any obligation, duty, or

348 CONCENTRATION OF ECONOMTC POWER

liability imposed by section 4 with respect to the commerce covered
by the application until such time"«,s the Commission shall act upon
the application. If the Commission has reason to believe that such
exemption during the period prior to action upon the application is
likely to permit evasion of the Act with respect to commerce in coal
properly subject to the provisions of section 4 or of the first para-
graph of this section, it may suspend the exemption for a period not
to exceed ten days. Within a reasonable time after the receipt of
any application for exemption the Commission shall enter an order
granting', or, after notice and opportunity for hearing, denying or
otherwise disposing* of such application. As a condition to the entry
of and as a part of m^ order granting such application, the Commis-
sion may require tlie applicant co apply periodically for renewals of
such order and to filg such periodic reports as the Commission may
find necessary or appropriate to enable it to determine whether the
conditions supporting the exemption continue to exist. Any appli-
cant aggrieved by an order denying or otherwise disposing of an
application for exemption by the Commission may obtain a review
of such order in the manner provided in subsection (b) of section 0.

ORGANIZATION OF THE CODE

Sec. 5 (a) Upon the appointment of the Commission it shall at
once promulgate said code and assist in the organization of the dis-
trict boards as -provided for in section 4, and shall prepare and supply
to all coal producers forms of acceptance for membership therein.
Such forms of acceptances, when executed, shall be acknowledged
before any official authorized to take acknowledgments.

(b) The membership of any such coal producer in such code and
his right to an exemption from the taxes imposed by section 3 (b) of.
this Act, may be revoked by the Commission upon written "complaint
by aiw code member or district board, or any State or political sub-
divisipn of a State, or the consumers' counsel, after a hearing, with
thirty days' written notice to the member, upon proof that such mem-
ber has willfully violated any provision of the code or any regulation
made thereunder; and in such a hearing any code member or district
board, or any State or political subdivision of a State, or the con-
sumers' counsel, or any consumer or employee, and the Commissioner
of Internal Revenue, shall be entitled to present evidence and be
heaM: Provided, That the Commission, in its discretion, may in such
case make an order directing the code member to cease and desist
from violations of the code and regulations made thereunder and
upon failure of the code member to comply. with such order the Com-
mission may apply to a circuit court of appeals to enforce such order
in accordance with the provisions of subsection (c) of section 6 or
may reopen the case upon ten days' notice to the code member affected
and proceed in the hearing thereof as above provided.

The Commission shall keep a record of the evidence heard by it in
any proceeding to cancel or revoke the membership of any code
member and its findings of fact, if supported by substantial evidence,
shall be conclusive upon any proceeding to review the action and
order of the Commission in any court of the United States,

In making an order revoking membership in the code as in this
subsection provided, the Commission shall specifically find (1) the
day or days on wliich the violations occurred; (2) the quantity of

CONCENTRATION OF ECONOMIC POWER 349

coal sold or otherwise disposed of in violation of the code or regula-
tions thereunder; (3) the sales price at the mine or the market value
at the mine if disposed of otherwise than by sale at the mine, or if
sold otherwise than through an arms' length transaction, of the coal
sold or otherwise disposed of by such code member in violation of
the code or regulations thereunder; (4) the minimum price estab-
lished by the Commission for such coal and in effect at the time of
such sale or other disposal; (5) the amount of tax required to be paid
by the code member as a condition to reinstatement to membership
in the code as in subsection (c) hereof provided.

(c) Any producer whose membership in the code and whose right
to an exemption from the tax imposed by section 3 (b) of this Act
shall have been revoked and canceled may apply to the Commission
and shall have the right to have his membersliip in the code restored
upon payment by him to the United States of double the amount
of the tax provided in section 3 (b) upon the sales price at the mine,
or the market value at the mine if disposed of otherwise than by
sale at the mine, or if sold otherwise than through an arms' length
transaction, of the coal sold or disposed of by the code member in
violation of the code or regulations thereunder (but in no case shall
such sales price or market value be taken to be less than the minimum
price established by the Commission for such coal and in effect at
the time of such sale or other disposal), as found by the Commission
under subsection (b) hereof. The Commission shall thereupon cer-
tify to the Commissioner of Internal Revenue and to the collector of
internal revenue for the internal revenue collection district in which
the producer resides the amount of the required payment as found
under clause (5) of subsection (b), and upon payment of such amount
to the Commissioner or the collector such officer shall notify the
Commission thereof.

(d) Any code member who shall be injured in liis business or'
property by any other code member by reason of the doing of any
act which is forbidden or the failure to do any act which is required
by thi^ Act or by the code or any regulation made thereunder, may
sue therefor in any court of competent jurisdiction where the defend-
ant resides, or is found or has an agent or a place of business, without
respect to the amount in controversy, and shall recover three'fold
damages by him sustained, and the cost of suit, including a reasonable
attorney's fee.

Sec. 6. (a) All rules, regulations, determinations, and promulga-
tions of any district board shall be subject to review by the Commis-
sion upon appeal by any producer and upon just cause shown shall
be amenable to the order of the Commission; and appeal to the Com-
mission shall be a matter of right in all cases to every producer and
to all parties in interest, including any State or any political subdivi-
sion thereof. In the event that a district board shall fail, for any
reason, to take action authorized or required by this Act, then the
Commission may take such action in lieu of the district board. The
Commission may "also provide rules for the determination of contro-
versies arising ^ under this Act by voluntary submission thereof to
arbitration, which determination shall be final and conclusive.

(b) Any person aggrieved by an order issued by the Commission
in a proceeding to which such person is a party may obtain a review
of sucl^ order in the Circuit Court of Appeals of the United States,^

35(1 ("(iN(i:.\l'KA'l'I(»X OK KCONOMIC I^OWKR

within any circuit wherein snch person resides or lias his principal
place of business, or in the I'^nited States Court of Appeals for the
District of Columbia, by filinjr in such court, within sixty days after
the entry of such order, a written i)etition praying that the order
of the Commission be modified or set aside in whole or in part. A
copy of such petition shall be fortiiwith served upon any member
of the Commission and thereupon the Commission shall certify and
file in the court a transcript of the record upon which the order
complained of was entered. Upon the filing of such transcript such
court shall have exclusive jurisdiction to affirm, modify, and enforce
or set aside such order, in whole or in part. No objection to the
order of the Commission shall be considered by the cotu't unless snch
objection shall have been urged below. The finding of the Com-
mission as to the facts, if supported by substantial evidence, siiall be
conclusive. If either party shall apply to the court for h>ave to
adduce additional evidence, and shall show to the satisfaction of the
court that such additional evidence is material and that there were
reasonable grounds for failure to adduce such evidence in the hearing
before the Commission, the court may order such' additional evi-
dence to be taken' before the Commission and to be adduced upon
the hearing in such manner and upon such terms and conditions as
to the court may seem proper. The Commission may modify its
findings as to the facts, by reason of the additionnl evidence so
taken, and it shall file such modified or new findings, which, if suj)-
ported by substantial evidence, shall be conclusive, and its recom-
mendation, if any, for the modification or setting aside of the original
order. The judgment and decree of the court, affirming, modifying,
and enforcing or setting aside, in whole or in part, any such order
of the Commission shall be final, subject to review by the Supreme
Court of the United States upon certiorari or certification as pro-
vided in sections 239 and 240 of the Judicial Code^ as amended
(U. S. C, title 28, sees. 346 and 347).

The commencement of proceedings under this subsection shall not,
unless specifically ordered by the court, operate as, a stay of the
Commission's order.

(c) If any code member fails or neglects to obey any order o*"
the C^ommission while the same is in effect, the Commission in its
discretion mny apply to the Circuit Court of App'eals of the l%ited
States within any circuit where such code member resides or carries
on business, for the enforcement of its order, and shall certify and
file with its application a transcript of the entire record in the pro-
ceeding, including all the testimony taken and the report and order
of the Commission. Upon such filing of the application and tran-
script the court shall cause notice thereof to be served upon such
code meniber and thereupon shall have jurisdiction of the proceed-
ing and of the question determined therein, and shall have ]iower to
make and enter upon the pleadings, testimony, and proceedings set
forth in such transcript a decree affirming, tnodifying, or setting
aside the order of the Commission. The findings of the Commis-
sion as to facts, if supported by substantial evidence, shall be con-
clusive. If either party shall apply to the court for leave to adduce
odditional evidence', and shall show to the satisfaction of the court
that .sucli\additional evidence is material and that there were rea-
sonable grounds for the failure to adduce such evidence in the pro-

CONCENTRATION OF ECONOMIC POWER 351

ceeding before the Commission, the court may order such o(l(Utional
evidence to be taken before the Commission and to be adduced upon
the hearing in such manner and upon such terms and conditions as
to the court may seem pj'oper.

The Commission may modify its findings as to the facts or make
new findings, by reason of the additional evidence so taken, and it
shall file such modified or new findings, which if supported by sub-
stantial evidence shall be conclusive, and its recommendation, if any,
for the modification or setting aside of its original order, with the
return of such additional evidence. The judgment and decree of
the court shall be final, except that the same shall be subject to
review by the Supreme Court upon certiorari or certification as
provided in sections 239 and 240 of the Judicial Code, as amended
(U. S. C, title 28, sees. 346 and 347).

(d) The jurisdiction of the Circuit Court of Appeals of the United
States or the United States Court of Appeals for the District of
Columbia, as the case may be, to enforce, set aside, or modify orders
of the Commission shall be exclusive.

Sec. 7. All provisions of law, including penalties and refunds,
applicable in respect of the taxes imposed by Title IV of the Rev-
enue Act of 1932, as amended', shall, insofar as applicable and not
inconsistent with the provisions of this Act, be applicable with
respect to taxes imposed under this Act.

Sec. 8. (a) The mehibers of the Commission are authorized to
administer oaths to witnesses appearing before the Commission and
to authorize the talcing of depositions in any proceedings; and, for
the purpose of conducting its mvestigations, said Commission shall
have full powder to issue subpenas and subpenas duces tecum, which
shall be as nearly as may be in the form of subpenas issued by district
courts of the United States. In case of contumacy by, or refusal to
obey a subpena issued to, any person, the Commission may invoke
the aid of any court of the United States within the jurisdiction of
which such investigation or proceeding is carried on, or where such
person resides or carries on business, in requiring the attendance and
testimony of witnesses and the production of books, papers, cor-
respondence, memoranda, and other records. Upon the filing of the
application for such aid with the clerk of the court the court shall,
either in term time or vacation, forthwith enter an order of record,
requiring such person to appear before such court at a time stated
in th« order not more than ten days from the entry of the order
(unless for good cause shown such time is extended), and show
cause why he should not be required to obey such subpena, and upon
his, failure to show cause it shall be the duty of the court to order
such witness to appear before the said Commission and give such
testimony or produce such evidence as may be lawfully required by
sai'' Commission. The district court, either in term time or vaca-
tion, shall have full power to punish for contempt as in other cases
of refusal to obey the process and order of such court. Witnesses
summoned before the Commission or when depositions are taken
upon order of the Commission, shall be paid the same fees and mile-
age as are paid witnesses in the courts of the United States, and
officers taking such depositions shall be paid the same fees as are
paid for like services in courts of the United States.

(b) No person shall be excused from attending and testifying or
from producing books, papers, contracts, agreements, and other

352

CONCKNTIlAriOX OF KCOXO.Mir POWER

records tuul docunicnts before the Commission, or in obedience to
the subpena of the Commission or any member thereof or any officer
designated by it, or in any cause or proceeding instituted by the
Commission, on the ground that the testimony or evidence, docu-
mentary or otherwise, required of liim may tend to incruninate him
or subject him to a penalty or forfeiture; but no individual shall be
prosecuted or subject to any penalty or forefeiturc for or on account
of any transaction, matter, or thing concerning which he is com-
pelled, after having claimed his privilege against self-incrimination,
to testify or produce evidence, documentar}' or otherwise, except that
such individual so testifying shall not be exempt from prosecution
and punishment for perjury committed in so testifying.

Sec. 9. (a) It is hereby declared to be the public policy of the
United States that —

(1) Employees of producers of coal shall have the right to organ-
ize and to bargain collectively with respect to their hours of labor,
wages, and working conditions through representatives of their own
choosing, without restraint, coercion, or interference on the part of
the producers.

(2) No producer shall interfere with, restrain, or coerce employees
in the exercise of their said rights, nor discharge or discriminate
against any employee for the exercise of such rights.

(3) No employee of any producer and no one seeking employment
with him or it shall be required as a condition of employment to
join any association of employees for collective bargaining in the
management of which the producer has any share of direction or
control.

(b) No coal (except coal with respect to which no bid is required
by law prior to purchase thereof) shall be purchased by the United
States, or by any department or agency thereof, produced at any
mine where the producer failed at the time of the production of such
coal to accord to his or its employees the rights set forth in subsection
(a) of this section.

(c) On the complaint of any efnployee of a producer of coal, or
other interested party, the Commission may hold a hearing to deter-
mine whether any producer supplying coal for the use of the United
States or any agency thereof, is compl5'ing with the provisions of
subsection (a) of this section. If the Commission shall find that such
producer is hot complying with such provisions, it shall certify its
findings to the department or agency concerned. Such department
or agency shall thereupon declare the contract for the supply of the
coal of such producer to be canceled and tcrmiiuited.

(d) Nothing contained in this Act or section shall be construed to
repeal or modify the provisions of the Act of March 23, 1932 (ch.
90, 47 Stat. 70), or of the Act of July 5, 1935 (ch. 372, 49 Stat. 449),
known as the National Labor Relations Act, or of any other Act of
Congress regarding labor relations or rights of employees to organize
or bargain collectively, or of the Act of June 30, 193G (ch. 881, 49
Stat. 2036).

Sec. 10. (a) The Commission may require reports from prochicers
and may use such other sources of information available as it deems
advisable, and may require producers to maintain a. uniform system
of accounting of costs, wages, operations, sales, profits, losses, and
such other matters as may be required in the administration of this

CONCENTRATION OF ECONOMIC POWER 353

Act. No information obtained from a producer disclosing costs of
production or sales realization shall be. made public without the con-
sent of the producer from whom the same shall have been obtained,
except where such disclosure is made in evidence in any hearing
before the Commission or any court and except that such information
may be compiled in composite form in such manner as shall not be
injurious to the interests of any producer and, as so compiled, may
be published by the Commission.

(b). Any officer or employee of the Commission or of any district
board who shall, in violation of the provisions of subsection (a),
make public any information obtained by the Commission or the
district board, without its authority, unless directed by a court, shall
be deemed guilty of a misdemeanor, and, upon conviction thereof,
shall be punished by a fine not exceeding $500, or by imprisonment
not exceeding six months, or by both fine and imprisonment, in the
discretion of the court.

(c) If any producer required by this Act or the code or regulation
made thereunder to file a report shall fail to do so within the time
fixed for filing the same, and such failure shall continue for fifteen
days after notice of such default, the producer shall forfeit to the
United States the sum of $50 for each and every day of the continu-
ance of such failure, which forfeiture shall be payable into the Treas-
ury of the United States, and shall be recoverable in a civil suit in the
name of the United States, brought in the district where the producer
has his principal office or in any cfistrict in which he shall do business.
It shall be the duty of the various district attorneys, under the direc-
tion of the Attorney General of the United States, to prosecute for
the recovery of forfeiture.

Sec. 11. State laws regulating the mining of coal not inconsistent
herewith are not affected by this Act.

Sec. 12. Any combination between producers creating a marketing
agency for the disposal of competitive coals in interstate commerce
or in intrastate commerce directly affecting interstate commerce in
coal at prices to be determined by such agency, or by the agreement
of the producers operating through such agency, shall, after promul-
gation of the code provided for in section 4, be unlawful as a restraint
of interstate trade and commerce within the provisions of the Act
of Congress of July 2, 1890, known as the Sherman Act, and Acts
amendatory and supplemental thereto, unless such producers have
accepted the code provided for in section 4 and shall comply with its
provisions.

Subject to the approval of the Commission, a marketing agency
may, as to its members, or such marketing agencies may, as between
and among themselves, provide for the cooperative marketing of
their coal, at prices not below the effective minimum prices nor above
the effective maximum prices prescribed in accordance with section 4:
Provided, That no such approval shall be granted by the Commission
unless it shall find that the agreement imder which such agency or
agencies propose to function (1) will not unreasonably restrict the
supply of coal in interstate commerce, (2) will not prevent the
public from receiving coal at fair and reasonable prices, ^3) will not
operate against the public interest, and (4) that eaph such agency
and its members have agreed to Observe the effective marketing regu-
lations and minimum and maximuin prices from time to time estab-

354 CONC'l^N'rRA'I'ION OF ECONOMIC POWER

lisluJ by the Commission ahcl otherwise to conduct the business and
operations of the agency in conformity with reasonal)]e regulations
for the protection of the public inter(>st, to be prescribed by the
Commission.

The Commission may, l)y order, upon complaint of any code
niend)er, district board, or member thereof, .any State or political
subdivision thereof, the consumers' counsel dif )iny other interested
|)t'rson, or on its own nu)tion, suspend or revoke its prior approval
of any such marketing agency agreement upon finding that the regu-
lations and orders of the Commission or the requirements of this
section have been violated. Unless and until the approval of the
Commission is suspended or revoked, neither the agreement creating
such nuirketing agency nor any agreenuMit between such agencies,
which has been approved by tlie Commission, nor any act done in
pursuance thereof, i)y sucli agency or agencies, or the members thereof,
and not in violation of the terms of the Commission's approval, shall
be construed to be within the prohibitions of the antiturst laws of
the United States.

Sec. 13. If any provision of this Act or the code provided herein,
or any section, subsection, paragraph, or proviso, or the application
thereof to any person or circumstancc^s, is held invalid, the remainder
of this Act or code, and the application thereof to other persons
or circumstances, shall not be affected thereby; aiul if either or any
of the provisions of this Act or code relating to i)rices or unfair
methods of competition shall be found to be invalid, they shall be
held separable from other provisions not in themselves foun<l to be
invalid.

OTHER DUTIES OF THE COMMISSION

Sec. 14. (a) The Commission shall study and mvestigate the
matter of increasing the uses of coal and the problems of its importa-
tion and exportation; and shall further investigate —

(1) The economic operations of mines with the view to the con-
servation of the national coal resources.

(2) The safe operation of mines for the purposes of minimizing
working hazards, and for such purpose shall be authorized to utilize
the services of the Bureau of Mines.

. (3) The problem of marketing to lower distributing costs for the
benefit of consumers.

(4) The Commission shall, as soon as reasonably possible after
its appointment, investigate the necessity for the control of produc-
tion of coal and methods of such control, including allotment of
output to districts and producers within such districts and shall hold
hearings thereon.

(b) The Commission shall annually report the results of its investi-
gations under this section, together with its recommendations, to
the Secretary of the Interior for transmission by him to Congress.

Sec. 15. Upon substantial complaint that coal prices arc excessive,
and oppressive of consumers, or that any district board, or producers'
marketing agency, is operating against the public interest, or in
violation of tliis Act, the Commission may hear such complaint, and
its findings shall be made public; and the Commission shall make
proper orders within the purview of this Act so as to correct such
abuses. The Commission may institute proceedings under this sec-

CONCENTRATION OF KCONOIMIC l-OWEK 355

tion, and complaints may be made by any State or political sub-
division of a State or by the consumers' counsel.

Sec. 16. To safeguard the interests of those concerned in the min-
ing, transportation, selling, and consumption of coal, the Commis-
sion or the ofhcc of consumers' counsel is hereby vested with autliority
to make complaint to the Interstate Commerce Commission with
respect to rates, charges, tariffs, and practices relating to the trans-
portation of coal, and to prosecute the same. Before proceeding to hear
and dispose of any complaint filed by another than the Commission,
involving the transportation of coal, the Interstate Commerce
Commission shall cause the Commission and the office of consum-
ers' counsel to be notified of the proceeding and, upon application
to the Interstate Commerce Commission, shall permit the Com-
mission and consumers' counsel to appear and be heard. The In-
terstate Commerce Commission is authorized to avail itself of the
cooperation, services, records, and facilities of the Commission.

Sec. 17. As used in this Act —

(a) The term "coal" means bituminous coal.

(b) The term "bituminous coal" includes all bituminous, semi-
bituminous, and subbituminous coal and shall exclude lignite, which
is defined as a lignitic coal having calorific value in British thermal
units of less than seven thousand six hundred per pound and having
a natural moisture content in place in the mine of 30 per centum
or more.

(c) The term "producer" includes all individuals, firms, associa-
tions, corporations, trustees, and receivers engaged in the business
of mining coal.

(d) The term "interstate commerce" means commerce among the
several States and Territories, with foreign nations, and with the
District of Columbia.

(e) The term "United States" when used in a geographical sense
includes only the States, the Territories of Alaska and Hawaii, and
the District of Columbia.

Sec. 18. Section 3 of this Act shall become effective on the first
day of the second calendar month after the enactment of this Act,
unless the Commission shall not at that tune have promulgated the
code and forms of acceptance for membership therein, in which event
section 3 of this Act shall become effective from and after the date
when the Commission shall have promulgated the code and such
forms of acceptances, Wiiich date shall be promulgated by Executive
order of the President of the United States. All other sections,
except section 20 (a), of this Act shall become effective on the day
of the approval of this Act.

Sec. 19. This Act shall cease to be in "effect (except as provided
in section 13 of the Revised Statutes) and .any agencies and offices
established thereunder shall cease to exist on and after four years
from the date of the ^approval of this Act.

Sec. 20. (a) The Bituminous Coal Conservation Act of 1935 is
hereby repealed, but such repeal shall not be effective until the con-
sumers' counsel and a majority of the members of the Commission
have been appointed.

(b) There is hereby authorized to be appropriated from time to
time such sums as may be nec(^ssary for the administration of this
Act. • All sums heretofore or hereafter appropriated or made avail-

3^5g CONCENTRATION OK ECONOMIC I'OWKK

able to the National Bituminous Coal Commission and to the con-
sumers' counsel of the National Bituminous Coal Commission estab-
lished under the Bituminous Coal Conservation Act of 1935 are
hereby transferred and made available for the uses and during the
periods for which appropriated, in the administration of this Act
by the National Bituminous Coal Commission and the office of the
consumers' counsel herein created.

(c) The records, property, and equipment of the National Bitu-
minous Coal Commission and the consumers' counsel, respectively,
established under the Bituminous Coal Conservation Act of 1935 are
hereby transferred to the Commission and the consumers' counsel,
respectively, established under this Act.

Sec. 21. This Act may be cited as the Bituminous Coal Act of 1937.

Annex to Act — Schedule of Districts
eastern pennsylvania

District!. The following counties in Pennsvlvania: Bedford,
Blair, Bradford, Cambria, Cameron, Centre, Clarion-, Clearfield,
Clinton, Elk, Forest, Fulton, Huntingdon, Jefferson, Lycoming,
McKean, Mifflin, Potter, Somerset, Tioga.

Armstrong Coimty, including mines served by the P. & S. R. R.
on the west bank of the Allegheny River, and north of the Cone-
maugh. division of the Pennsylvania Railroad.

Fayette Pounty, all mines on and east of the line of Indian Creek
Valley branch of the Baltimore and Ohio Railroad,

Indiana County, north of but excluding the Saltsburg branch of
the Pennsylvania Railroad between Edri and Blairsville, both
exclusive.

Westmoreland County, including all mines served by the Pennsyl-
vania Railroad, Torrance, and east.

All coal-producing counties in the State of Maryland.

The following counties in West Virginia: Grant, Mhieral, and
Tucker.

WESTERN PENNSYLVANIA

District 2. The following counties in Pennsylvania: Alleglicny,
Beaver, Butler. Greene, Lawrence, Mercer, Venango, Washington.

Armstrong County, west of the Allegheny River and exclusive of
mines served by the P. & S. R. R.

Indiana County, including all mines served on the Saltsburg branch
of the Pennsylvania Railroad north of Conemaugh River.

Fayette County, except all mines on and east of the line of Indian
Creek Valley branch of the Baltimore and Ohio Railroad.

Westmoreland County, including all mines except those served by
the Pennsylvania Railroad from Torrance, east.

NORTHERN WEST VIRGINI.\

District 3. The following counties in West Virginia: Barbour,
Braxton, Calhoun, Doddridge, Gilmer, Harrison, Jackson, Lewis,
Marion, Monongalia, Pleasants, Preston, Randolph, Ritchie, Roane,
Taylor, Tyler, Upshur, Webster, Wetzel, Wirt, Wood.

That part of Nicholas County including mines served by the Bal-
timore and Ohio Railroad and north.

CONCENTRATION OF ECONOMIC POWER 357

OHIO
District 4. All coal-producing counties in Ohio.

MICHIGAN

District 5. All coal-producing counties in Michigan.

PANHANDLE

District 6. The following t^ounties in West Virginia: Brooke,
Hancock, Marshall, and Ohio.

SOUTHERN NUMBERED 1

District 7. The following counties in West Virginia: Greenbrier,
Mercer, Monroe, Pocahontas, Summers.

Fayette County, east of Gauley -River and including the Gauley
River branch of the Chesapeake and Ohio Railroad and mines served
by the Virgittian Railway.

McDowell County, that portion served by the Dry Fork branch of
the Norfolk and Western Railroad and east thereof.

Raleigh County, excluding all mines on the Coal River branch of
the Chesapeake and Ohio Railroad.

Wyoming County, that portion served by the Gilbert branch of
the Virginian Railway lying east of the mouth of Skin Fork of
Guyandot River and that portion served by the main line and the
Glen Rogers branch of the Virginian Railway.

The following countie.s in Virginia: Montgomery, Pulaski, Wythe,
Giles, Craig.

Tazewell County, that portion served by the Dry Fork branch to
Cedar Bluff and from Bluestone Junction to Boissevain branch of
the Norfolk and Western Railroad and Richlands-Jewell Ridge
branch of the Norfolk and Western Railroad.

Buchanan County, that portion served by the Richlands-Jewell
Ridge branch of the Norfolk and Western Railroad and that portion
of said county on the headwaters of Dismal Creek, east of Lynn
Camp Creek (a tributary of Dismal Creek) .

SOUTHERN NUMBERED 2

District 8. The following counties in West Virginia: Boone, Clay,
Kanawha, Lincoln, Logan, Mason, Mingo, Putnam, Wayne, Cabell.

Fayette County, west of, but not including mines of the Gauley
River branch of the Chesapeake and Ohio Railroad.

McDowell County, that portion not served by and iyin,g west of
the Dry Fork branch of the Norfolk and Western Railroad.

Raleigh County, all mines on the Coal River branch of the Chesa-
peake and Ohio Railroad and north thereof.

Nicholas County, that part south of and not served by the Balti-
more and Ohio Railroad.

Wyoming County, that portion served by Gilbert branch of the
Virginian Railway lying west of the inouth of Skin Fork of Guyandot
River.

The following counties in Virginia: Dickinson, Lee, Russell, Scott,
Wise.

279348— 41— No. 32 25

358 CONCENTRATION OF ECONOMIC POWER

All of Buchanan County, except that portion on the headwaters
of Dismal Crook, east of Lynn Camp Creek (tributary of Dismal
Creek) and that portion served by the Richlands-Jewell Ridge branch
of the Norfolk and "Western Railroad.

Tazewell County, except portions served by the Dry Fork branch
of Norfolk and Western Railroad and branch from Bluestone Junc-
tion to Boissevam of Norfolk and Western Railroad and Richlands-
Jewell Ridge branch of the Norfolk and Western Railroad.

The following counties in Kentucky: Boll, Boyd, Breathitt, Carter,
Clay, Elliott, Floyd, Greenup, Harlan, Jackson, Jolmson, Knott,
linox, Laurel, Lawrence, Lee, Leslie, Letcher, McCrcary, Magoffin,
Martin, Morgan, Owsley, Perry, Pike, Rockcastle, Wayne r ^Vhitley.

The following counties in Tennessee: Anderson, Campbell, Clai-
borne, Cumberland, Fentress, Morgan, Overton, Roane, Scott.

The following counties in North Carolina: Lee, Chatham, Moore.

WEST KENTUCKY

District 9. The following counties in Kentucky: Butler, Christian,
Crittenden, Daviess, Hancock, Henderson, Hopkins, Logan, McLean,
Muhlenberg, Ohio, Simpson, Todd, Union, Warren, Webster.

ILLINOIS

District 10. All coal-producing counties in Illinois,

INDIANA

District 11. All coal-producing counties in Indiana.

IOWA

District 12. All coal-producing counties in Iowa.

SOUTHEASTERN

District 13. All coal-producing counties in Alabama,
The following counties in Georgia: Dade, Walker,
The following counties in Tennessee: Marion, Grundy, Hamilton,
Bledsoe^ Sequatchie, White, Van Bin-en, Warren, McMinn. Rhea.

ARKANSAS-OKLAHOMA

District 14. The following counties in Arkansas: All counties in the
State.

The following counties in Oklahoma: Haskell, Le Flore, Sequoyah.

SOUTHWESTERN

District 15. All coal-producing counties in Kansas. All coal-pro-
ducing counties in Texas. All coal-producing counties in Missouri.

The followmg counties in Oldahoma: Coal, Craig, Latimer, Musko-
gee, Okmulgee, Pittsburg, Rogers, Tulsa, Wagoner.

CONCENTRATION OF ECONOMIC l*OWEIl 359

NORTHERN COLORADO

District IG. The following counties in Cblorado: Adams, Arapahoe,
Boulder, Douglas, ]^]lf)ert, El Paso, Jackson, Jefferson, L/arinier, Weld.

SOUTHERN COLORADO

District 17. The following counties in Colorado: All counties not
included in northern Colorado district.

The following counties hi New Mexico: All coal-producing counties
in the State of New Mexico, except those included in the New Mexico
district.

NEW MEXICO

District 18." The following counties in New Mexico: Grant, Lincoln,
McKinley, Rio Arriba, Sandoval, San Juan, San Miguel, Santa Fe,
Socorro.

The following counties in Arizona: Pinal, Navajo, Graham, Apache,
Coconino.

All coal-producing counties in California.

District 19. All coal-producing counties in Wyomuig.

The following counties in Idaho: Fremont, Jefferson, Madison,
Teton, Bonneville, Bingham, Bannock, Power, Caribou, Oneida,
Franklin, Bear Lake.

UTAH

District 20. All coal-produchig counties in Utah.

NORTH DAKOTA-SOUTH DAKOTA

District 21 . All coal-producing counties in North Dakota. All coal-
roducing counties in South Dakota.

MONTANA

District 22. All coal-produchig counties in Montana.

WASHINGTON

District 23, All coal-producing counties in Washington, All coal-
oroducing counties in Oregon,
The Territory of Alaska.
Approved, April 26, 1937,

APPENDIX F
THE PROBLEM OF CONSERVATION

WASTED RESOURCES

The purpose of the conservation movement, in its inception, was
twofold — the protection of the public domain against exploitation by
private interests, and the prevention of phj'sical waste of natural
resources. The first has been accomplished. The latter purpose has
only in part been attained. Much oil has been left underground be-
cause of loss of pressure due to too rapid withdrawal from many wells
over a pool. In Texas alone, the losses and waste, of natural gas,
amounted to 380,141,000,000 cubic feet in 1935. i This was reduced
to a total of 91,300,000,000 cubic feet in 1937.^ In California 15,961,-
900,000 cubic feet or 4.5 percent of the total output in 1937,, was blown
into the air.' One well in Wyoming blew into the air an estimated
20,000,000,000 cubic feet of natural gas before it was brought under
control.*

For bituminous coal, fortunately. State regulation is leading to
reduced waste of this resource. The 10 major producing States cast
of the Mississippi River (Alabama, Illinois,. Indiana, Kentucky,
Maryland, Ohio, Penilsylvania, Tennessee, Virginia, and West Vir-
ginia) account for about 9.0 percent of the total production in the
tlnited States. Of the potentially marketable bituminous coal under-
ground in these States, about 35 percent is lost in the process of
mining. Approximately 20 percent of this loss is avoidable and 15
percent unavoidable. The United States Coal Commission, in its re-
port published in 1925,^ summarizes coal losses in the ten most im-
portant producing States in 1921 (the year of post-war depression,
when prices fell off 85 cents a ton on the average). This total loss,
reaching 35 percent in 1921, occurs in —

(1) coal left in the roof and floor;

(2) coal lost in the room, entry, and panel or rib pillars;

(3) coal pillars left to protect oil and gas wells and to support

the surface;

(4) coal left under railroads, buildings, and boundaries;

(5) coal lost in handling and preparation both underground and

on the surface;

(6) coal lost because of irregular operation of the mine; •

(7) coal left because of rolls, thin or dirty areas, partings and'

. streams;

(8) coal lost in overlying beds due to having mined the lower

beds first; and

(9) coal lost in mines abandoned prematurely.

1 U. S. Bureau of Mines. Minsrals Yearbook, 1937, p. 1060; "Gas Wastage Orgy Near End in Texas,"
the New York Times (May 12, 1935) sec. 4, p. 6, c. 3.
« U. S. Bureau of Mines. Minerals Yearbook, 1938, p. 926.

• Ibid. p. 914.

* Ibid. p. 929.

> Vol. I, p. 188.

360

CONCENTRATION OF ECONOMIC POWER 3g;[

The greatest loss in mining has occurred in (2) above, where the
loss varies from 5 to 45 percent, of which from 3 to 36 percent is avoid-
able, depending upon conditions in the mines. The other losses are
avoidable in varying degrees. For instance, the Coal Commission in
the same report commented upon the irregular operation of mines
(6) as a contributor to waste, as follows: "Storage of coal by consum-
ers is the balance wheel between fluctuating consiunption and varia-
ble production. Regular, systematic, large-scale storage of bitumi-
nous coal, then, is the public's largest-opportunity in helping solve the
coal problem, and the consumer's responsibility may be said to be
proportionate to his annual requirements." The problem of seasonal
operation is still a major one. The present Conmiission, in its pro-
posed price schedule, includes seasonal price variations to encourage
such storage. . It must not be forgotten, however, that large-scale
storage in heavy industrial centers is often limited by available space
or the excessive cost of space.

RESERVES OF MINERAL FUELS

The problem of conservation is not limited to resources the sup-
plies of which are nearing exhaustion. It is estimated that the orig-
inal coal resource amounted to more than 3 trillion (3,000,000,000^000)
tons.^ At the end of 1935 the total amount of coal produced in the
United States from the time of earliest record was 21,818,992,000
tons or 17,689,070,000 tons of bituminous coal only.'' At the rate of
recovery of about 69 percent, and production at the 1929 rate, the
reserves ^ of coal of all ranks might last for 2,890 years. Expressed
in terms of equivalent tons of bituminous coal with a heat value of
13,000 B. t. u. s, and at the 1929 rate of production, the remaining
life of the reserves of the mineral fuels at the end of 1935 would be
as follows: All ranks of coal, 2,890 years; anthracite, 145 years;
natural gas, 16 years; petroleum, 13 years; oil in oil shale, about
90 years ;» and the total of all fuels 2,130 years.'" The life for all
fuels will be lower than that for coal alone at the 1929 rate because,
after the exhaustion of natural gas and petroleum, coal will have to
carry the burden of supplying energy.

Thus, motor fuel is a very important factor in the outlook. Motor
fuel can be produced from bituminous coal but at a cost three times
as great as "at present, '^ hence the utilization of petroleum chiefly to
meet the needs which cannot readily be supplied by coal seems urgent.
Refineries produce from cruae oil charged to stills a yield of about 44
percent gasoline, 39 percent fuel oils, 3 percent lubricants, and 14
percent other products (wax, coke, asphalt, and road oil, etc.).'^
Available processes (for example, the Houdrey process) can yield 80
percent gasoline and have wide latitude for producing larger propor-
tions of other fractions to meet changing demands.

« Report or the U. S. Coal Commission, vol. 3, p. 1851; Arno C. Fieldner, "Fuels of Today and Tomorrow,"
Proceedings of the American Society for Testing Materials (Philadelphia, 1937), vol. 1, pt 1.

' U. S." Bureau of Mines, Minerals Yearbook, 1937, p. 814.

8 W. C. Trapnell and Ralph Ilsley, The Bituminous Coal Industry With a Survey of Competing Fuels
(Federal Emergency Relief Administration, Washington, December 1935), pp. 54-56.

» National Resources Committee. Energy Resources and National Policy, p. 294.

■n Fieldner, op. cit. pp. 17-18; Rice, Fieldner and Tryon, op. cit. p. 6.

" Energy Resources and National Policy, p. 230.

'2 Energy Resources and National Policy, pp. 12-13; Minerals Yearbook, 1939, chapter on "Crude Petro-
leum and Petroleum Products."

362 CONCKNTKATION OF ECONOMIC POWEH

The chief direct inroads into the market for coal are being made by the use of
fuel oil for space heating and large stationary installations for power production,
and the use of natural gas for heavy-duty industrial purposes —

uses that could be well served by coal. —

This utilization should be discouraged as much as possible by a ])rogram of
education, but it appears, also, that additional steps need to be takcni. * * *
A tax on luel oil, high enough to discourage further extension in consiiinr)tion hut
* * * not too liigh to cause severe hardsiiip to present consumers, would be a
step toward rational utilization.''

An authoritative discussion of the problems connected with the
mineral fuel reserves by Dr. Amo C. Fieldner is given betow.^*

Advances in fuel technology have contributed greatly to the conservation of coal,
but economic conxlitions in mining have worked against completeness of recovery.
The avoidable losses. of bituminous coal in time of business activity have been
placed at 150,000,000 tons per year. Coal left behind is lost forever, and the
prevention of the present wastes is a matter of concern.

Unlike coal, estimates of tiie total national reserves of petroleum cannot be made.
We can deal only with the proved reserves. In 1934 the United States Geological
Survey estimated the oil in the ground recoverable by the current methods of
prociuction at 13,000,000,000 barrels, and the -most recent estimate, that of
January 1, 1937, by a committee of the American Petroleum Institute, puts the
reserve at virtually the same figure. Thus in the last 3 years discovery of new
fields has kept pace with i)roduction. We cannot forecast future 'rates of dis-
covery, and opinions differ as to when a decline will begin. Regardless of whether
it may begin within one or several decades, it is evident that our oil and gas
reserves are small compared to coal.

The deposits of oil' shale, largely in the Rocky Mountain States, are estimated
to contain a potential supply of 92,000,000,000 barrels of crude oil, an amount
sufficient to maintain the present annual rate of oil production for nearly 100
years.

The ultimate reserves of- natural gas cannot be estimated. Fifty-five percent
of the natural gas is produced in association with oil; therefore, oil exliaustion
means the end of natural gas from these particular areas. Reliable estimates of
reserves of individual gas fields are being made, but this work has not covered the
country as a whole.

Conservative estimates of the proved reserves by individual authorities range
from 30 to 40 trillion cubic feet. Other estimates are placed at considerably
higher figures. At the present rate of 2 trillion cubic feet of production per year,
this amount would last 15 to 20 years. Here also new sources will be discovered
and the life of the fields, no doubt, will be extended greatly as growing social control
will prohibit waste and low-grade use of this ideal form of our national fuel supply.

No one can predict with certainty what the future trends of con-
sumption ynW be — what forces will bear upon and modify our pres-
ent economy. The picture presented by Dr. Fieldner is reasonably
within the limits of present Imowledge, assuming that nothing will
happen to interrupt the trends indicated by our present direction and
rate of economic advancement.

Coal will continue to be the principal fuel used for the generation of public-
utility and major industrial power. Technologic improvements and new hydro-
electric power will tend to reduce the consumption of coal; on the other hand, an
increasing demand for energy and a decreasing sup[)ly of cheap residual oil will
increase the amount of coal consumed for power purposes. No material change
is expected in either direction in the near future, but in 10 or 15 years the trend
will favor increased consumption of coal.

n EnerKy Resources and National Policy, p*. 121. See also the New York Times, "ShortnRe of Fuels
Feared by Expert," (June 29, 1937), p. 23, c. 8; "Oil Kesorves In United States Put at 15 Years," (June 2.3^
1936), p. 24, c. 2; and "Nation 'Geologized' on Oil," (June 19, 1935), p. 36, c. 6.

I* The authors know no better authority than Dr. Arno C. Fieldner, Chief of the Technological Branch of
the U. 8. Bureau of Mines, with respect to the extent of mineral fuel reserves, their degree of exhaustion, and
future. probabllitle.s. We are Indebted for the figures and estimates used herein to "Fuels of Today and
Tomorrow," a reprint from Proceedings of the American Society for Testing Materials (1937), vol. 37, pt. I.

CONCENTRATION OF ECONOMIC POWER 363

No substitute has appeared for metallurgical coke. The coke-oven industry
will expand and consume more coal in accordance with metallurgical needs, which
arc greatly affected by the supply of iron and stocl scrap, but relatively few new
installations for gas production can bo cxpecti^d in the near future on account of
the availability of natural gas. Regulations prohibiting the waste of natural gas
and the urge for additional markets will lead to the construction of more long-
distance pipe lines from the producing fields to centers of consumption. This gas
will find industrial and domestic use, and it will displace oil as well as coal. As
natural gas approaches exhaustion, gas from coal will take its place.

The convenience and uniformity of automatic heating of homes with gas or oil
will continue to atti-act more users, even at higher costs than those prevailing
today. The insulation of houses has been improved greatly, and future homes
will permit higher unit cost of fuel without increasing the total heating bill.

Stoker-fired domestic furnaces, now in their beginning, eventually will give
automatic service at a lower cost than that for oil or gas. High-and-low-tempera-
turo cokes will sui)plement antliracite as solid smokeless fuel. Smokeless fuels
and automatic furnaces will clear the atmosphere of smoke in the better residential
districts.

On the whole, coal, because it is the cheapoi^t fuel, will continue to contribute
the major portion of the fuel used for liouse-heating and miscellaneous manufac-^
turihg, althougli further displacement by oil and natural gas probably will follow
in the next few years.

In 1929, 8S percent of the railroad fuel was coal; since then Diesel locomotives
have been adopted l>y several railroads for light-weight, high-speed T)assengcr
trains; and increase in Diesels for such service is expected, but no general change in
freight luxulage from steam to Diesel power is likely to take place. Further
iniI)rovements in tlie over-all efficiency of the steam locomotive and a gradual
increase of electrification will retain the use of coal for freight traffic throughout
the age of oil and natural gas.

Marine transportation is energized by oil. Approximately three-fourths of the
marine fuel used in 193() was oil, and 40 percent of this oil was used in Diesel
engines. This tnuid will continue. Tlie convenience and economy of Diesel-
engine drive for ships and boats are such that its use will continue even after
declining production of petroleum requires tlie production of Diesel fuel from shale
or coal.

Finally, I come to the most interesting qu(>stion of all, our motor-fuel supply.
Snider and Brooks have predicted the probability of a considerable shortage of
domestic fjetroleum by 1945; "* and they state? that, "The prospect is apparently
for a contjiuiation or only a slight modification of the present situation until a
shortage of domestic petroleum inat(>riali/,es. Domest.ic petroleum will then
gradually be replaced by iinf)orts and substitutes in relative proportions and at
j)rice schedules not now pre(lictable bt:yoiid a practical certainty that the prices
will be appreciably higluir than in the present ones."

From the very beginning of tlie aniomobile industry, recurring threats of short-
age of gasoline were met — in the field, by finding new pools and improving pro-
duction technique, and in tlu/refinery, by increasing yields and making a moro
ellicient product. The end has not becMi reached. Wc; are just beginning to
use sci(Mit,ific methods iu extracting oil from- the sands, and polymerization and
hydrogcnation eventually will furnish the means for complete conversion of
volatile liquids and heavy ]ietroleum to gasoline.

Although such coniplett; conversion is possible, recent development of the
I)ies(d engine into a light mobile motor is likely to change this t,rend. The sales
of Diesel engin(Ns in terms of r.ated horse-power increased from 750,000 in 1934 to
1,830,000 in 193(». Sixty-four percent of the horscr-power sold in 1930 was applied
to portable or automotive (Kpiipment and consisted of units of less than 100 horse-
power. Due to the liigher tluiiinal efliciency of the Di<!.sel engine and to the fact
that it can use the heavier fractions now employtid as cracking stock for gasoline,
approximately three times the mileage should be obtained from a gallon of crude
oil utilized for Diest^l fui-l than is obtained by conversion to gasoline.

(Continuation of present trends toward ]5iesel power for other purposes also
will increase the detnand for the heavier oils, resulting in a material shift in
future r<>linery opc^rations. Oi)viously, economic considerations f,' vor the develop-
ment of that combination of motor and fuel wliicli converts the greatest portion of
the energy in the original petroleum into useful work from the finished fuel.

Icr ;iii(l n. T. Brooks, "l'rol)nI)l(! ri'lTolouiii StiorlaRO in the Unitc.il States and Methods for
," Jliillotin, American Association of I'ctroleuin (IcoloBists (]U3(i), vol. 20, p. 4<J.

364 CONCENTRATION OF ECONOMIC POWER

These improvements, and others yet to come, will add their bit to extending
our petroleum reserves. As demand excejeds supply, and prices rise, supplemental
fuels of similar characteristics from other sources will come in. These sources
are coal, oil shale, and vegetable materials.

Increasing demand for Diesel oil and cracking stock will foster coal carboniza-
tion, with maximum recovery of liquid by-products. Then as needs increase,
hydrogenation of low-temperature tar, shale oil, and coal itself and the synthesis of
hydrocarbons from water, gas, and alcohol from fermentation processes will
take over as much of the load as may be required.

It is possible also that producer gas from active forms of solid fuel, such as low-
temperature coke and lignite char, will find a place on heavy vehicles operating on
steady .service, such as trucks and busses. Gas-producer-operated vehicles are
being tried in Europe at present; while lacking in convenience and flexibility, the
fuel cost is very low.

Reliable information on the cost of making gasoline from coal in British and
German plants is not avail? ble, but it is believed that it is three or four times the
present cost of producing gasoline from petroleum in the United States. These
costs will be reduced by further research, but no other liquid motor fuel, whether it
be from coal, oil shale, or vegetable matter, can hope to be as cheap as our present
petroleum fuels.

*******

Robinson '' estimates that 10 to 12 million dollars is spent annually on research
and development in the. refining of petroleum. Even more sholild be expended on
the preparation and djrect utilization of coal. Marvelous strides have been made
in power generation in central stations. Little has been accomplished in com-
mercial utilization and domestic heating. Low cost is an important advantage
of coal. Research should find a way to obtain heat automatically from coal as
eff"ectively as from gas or petroleum. Even today, Diesel engines burning coal
dust give some promise of eventual use. Problems due to the ash-forming
materials in coal are difficult but not impossible to solve. Such engines, while
not suitable for automobiles, would be highly efficient in the generation of power
in small stationary plants.

Fortunately, the coal industry is beginning to appreciate the value of research,
and a comprehensive program may be expected. It should result in a more
rational utilization of the national fuel reserves. Our gas, oil, and coal have
energized an industrial civilization on a magnificent scale.' Scientists, engineers,
and an enterprising business organization have modified these materials to meet
our every need; and finally, we are awakening to the need of conserving these
resources wisely so that the generations of tomorrow will have better fuels than we
of today. Future scientists may unlock undreamed of powers, but we as engi-
neers should plan on the basis of the resources known today.

This extensive quotation from Dr. Fieldner is important because of
his prediction that coal will carry the major load after the exhaustion
of gas, oil, and oil shale. Any well-conceived policy of conservation
must anticipate this burden upon coal, and the Government should
encourage and extend present research looking to less waste in mining
and' greater efficiency in combustion. Whether this should be done
under a national program supported by industry and Government
cooperatively, or whether all present research efforts should be
synchronized under a central direction, might well be given considera-
tion. If, as Dr. Fieldner estimates, the oil and gas reserves, with
such supplements as are now in view, will possibly reach the point of
decline within 50 to 100 years, organized research might well develop
measures that will materially affect the life of the reserves of all mineral
fuels, as well as the cost of using them.

'« E. DeOolyer, Noel Robinson, Robert Hardwicke. and Myron W. Watkins, "Orpani/ation of Produc-
tion, Refininp and Distribution of Petroleum and Petroleum Products." Third World Power Conference,
Washington, D. C. (1936), sec. H, Paper 5, p. 10.

CONCENTRATION OF ECONOMIC POWER 3g5

THE CONSERVATION MOVEMENT

The conservation movement had its inception in protests against
the rapid depletion of the Nation's forests. Memorials presented in
1873 and 1890 by the American Association for the Advancement of
Science led to the movement for the establishment of a Forestry-
Bureau in the Department of Agriculture, and for the first National
Reserve in 1891. In 1888 an irrigation divisi-^n was established in
the Geological Survey, and the Secretary of t .e Interior was given
authority to withdraw from private entry such reservoir sites and other
areas which would be necessary for future irrigation. Nevertheless
there was no national movement for conservation of natural resources
until after 1900.^^

CONSERVATION MEASURES SO FAR PROVIDED

The Federal Government, by the establishment of a Forestry
Bureau in the Department of Agriculture and the first National
Forest Reserve in 1891, took its first step toward a policy for the con-
servation of natural resources. There was, however, no definite
national movement for conservation of all natural resources until the
present century. President Theodore Roosevelt in 1907 appointed
the Inland Waterways Commission, which pointed out the inter-
relationship of natural resources in the whole problem of conservation.
This conference met in May 1908 and included high officials of all
branches of the Federal Government, 34 governors and representatives
of the other States and Territories, delegates from 68 national societies,
and others. ^^ The result of this conference was a declaration of
principles recommending laws to prevent waste in the mining and
extraction of coal, oil, natural gas, and other minerals; promote their
wise conservation; and increase safety in the mines. Further con-
ferences were suggested. Following these conferences, 41 State
conservation commissions, and 51 similar agencies representing
national organizations, were created. The President appointed a
National Conservation Commission, with 49 members, organized in
four sections: Forests, waters, oils, and minerals. Tliis Commission
was without funds, but a^ its instigation an inventory of natural
resources was undertaken. In February 1909, President Roosevelt
called a North American Conservation Conference which went on
record in a declaration of broad principles. The National Con-
servation Commission came to an end when Congress refused to
appropriate funds and forbade all Government bureaus to do any work
for any agency appointed by the President.'^

Prior to this attem.pt toward a policy of conservation for all natural
resources. Congress had in 1873 displayed interest in coal conserva-
tion when it passed an act providing for the separation of public
lands containing coal from other public lands, and for their sale as
coal-bearing lands.^'' Before this time public 'ends had been sold for

" Loomis Havemever, Conservation of Our National Resources (Mr .jrdllan Co., New York, 1930), p. 5.
18 Ibid. Ch. I, and Appendix I.

i« Loornis Havemeyer, Conservation of Our Natural Resources (M .criiillan Co., New York, 19.30), Ch. I,
and Appendix I.
20 17 Stat. 007 (Mar. 3, 1873).

3GG

(;(»N( IONIZATION OF 10(X)NOI\HC l-OWKK

tlic surface without conr.idcration for undcrlyiii*!; coal. During
Theodore Roosevelt's adininistratioii, lar<i;o areas of coal-bearinj;: lands
were withdrawn from ])rivji(e entry for the purpose of classKication.
Protests against this withdrav/al ])olicy hnl to acts which i)crniitted
surface entry on such witluhawn or classiCicd hinds. In 1014, an act ^'
provided for the (Un^elopnient of coal fields in Alaska uucUm- Federal
leases. This was followed by the l.easing Act of 1920.^2 ^Miis 1920
act, amended in 1935, oj)ened coal, oil, gas, phosphate, and sodium
deposits in the pul He dojuain to prospecting and leasing. The Secre-
tary oi Interior wa, r thori/ed to ;.':rant permits for ])rosi)ecting, and
without requiring tlic paymcMit of royalties, to license or issue i)erjnits
for the extraction of coal (1) by an individual for his own (h)mestic
use without sale, (2) by a juunicipality iov sale to its residents for
domestic or household use. Other c()r])orate lessees must ])ay a
minimum royalty or five cents a net ton atid an jvnnual rental of not
less than one dollar i)cr acre after the fifth year. Of royalties paid on
production after February 2r>, 1920, 52% percent go to the reclamation
fund; 37}^ percent to the State in which the laiuls or (le])()sits leased are
located; and 10 i)er«cnt to the Treasury of the United States. ^^

The above legislation for the leasing of coal land applies only to
deposits within the public (h)main. Nearly all of the known coal
fields in this country are still privately owned.

"38 Stat. 741 (Oct. 20. 19H).
" 41 Stat. 437 (Fob. 2r,, 1U20).
" lioclamation Act. 32 Stat. 388 (Juiki 17, 1902).

APPENDIX (J

United States ])ei'aktment of the Interior

lutuminous coal division

Washington, D. C.

IN THE MATTER OF THE ESTABLISHMENT OF MINIMUM
PRICES AND MARKETING RULES AND REGULATIONS.
GENERAL DOCKET NO. 15.

Findings of Fact, Conclusions of Law, and Order of the Direc-
tor OF THE Bituminous Coal Division Estahlishing EIffec-
TivE Minimum Prices and Marketing Rules and Regulations
Under the Bituminous Coal Act of 1937

This is a proceeding instituted by the National Bituminous Coal
Commission and continued by its successor, the Bituminous Coal
Division of the United States Department of the Interior, pursuant
to the Bituminous Goal Act of 1937, to establish eifective minimum
prices and marketing rules for bituminous coal of producers who have
accepted membership in the Bituminous Coal Code, promulgated
by the Commission under the authority of said Act.^ By Order
dated May 25, 1938, the Commission instituted this proceeding for
the purposes of carrying out the provisions of subsections (a) and (b)
of Section 4, Part 11, of the Act,^ designating the ])roceeding as Gen-
eral Docket No. 15.

The matter is now before the Director upon exceptions to the Report
of the three Examiners who conducted the lu'aring in that phase of
this proceeding which related to minimum prices ns coordinated for
Districts 1-20, inclusive, 22 and 23,^ and upffii request for review of the
findings and conclusions of the Commission on prior phases of the
matters included in General Docket No. 15.

A detailed account of (he procedure followed in this proceeding is
set forth below. A brief outline; may be appropriate here by way of
g(^neral introduction. '

The price-fixing process contem])la(e(l by the Act has three aspects
of phases: the determination of (lie costs of each minimum price area;
the setting, as a basis for coordination, of minimum prices for each
district, classifying the various l^inds, c|ualities and siz(>s of the coal

1 The Natioiiivl nidiiiiinoiis Vo:,\ ('oiiiiiii.ssion will liorcituiflcr 1m- rcfcrrcil lo iis l.lio "roiiuiiission"- (lio
Miliitiiitioii.s t;o;il Division (i( tlio Hiiilcil SInlcs I )<'|>iirliii<'iit of llic. Inli-rior ms IImi "Division"; (lio Diicclor
of (,1m Divisionastli(>"l)ir('(lor"; Ilic liilnnii nous Coal Acl of )!i:',7 iis I lie " Acl"; lli(\ llllnininons Co.-ilCoilo
;is lliu "('oiU',"; and 1\h\ |>ni(lri((Ts who nciciplcd incnilicrshifi in I h(r Codo as "("odo Mcnihors".

' Ilcrcinaflor referred (o as "Seefion ^ U (a) aii>l (I.) of I he AcL"

' The Act )narl<s onl. fhe i.oiindaries of IwenI v-l hree dislricis, eons<)li<lale(! into len niiniMMini price areas.
Dislrict 21, and Minininni Trice Area H consisl of all coal-prodiicint; eonnlies in Nor( h Dakota and Soiilh

]>akol,a. Afleran invest iualioji pnrsiianl toils Order No,;tr), IlieCoi issi(jiMlet(>rrniiied, on .Intie 2,H, !!«!).

Ihat, (ho coal produced in those counties was not, hiliiiMinoiis within Section 17 of liie Act. Jlercafter
"Dislricis I 2:!" ami "Minimum l'ri<-e Area,s I 10" will, for convenience, he understood to e\clu(lc District
21 and Minimum I'rice AreaS.

307

368 OONCENTllAl'ION OF ECONOMK^ I'<^)WEIl

produced within the district; and the fixing of prices coordinated in
common consuming market areas.

Upon the basis of statistical data provided by the Commission, the
district boards determined the weighted average cost of production of
each district. Hearings were scheduled thereon. The Commission
announced that individual cost reports would be made available,
but was temporarily enjoined from making such disclosure. In June
and July, 1938, hearings were held, and in July and August, 1938, the
Commission made determinations of the cost of production of each
minimum price area. After the court injunction was lifted, on Jan-
uary 31, 1939, hearings were reopened in February, March, and April,
1939. The Commission made final cost determinations in May and
June, 1939. The transcript of the cost hearings consists of about
5,000 pages of testimony and 500 exhibits.

The Commission submitted the 1938 cost determinations to the
district boards which, under Section 4 II (a) of the Act, proposed
prices and price classifications of the coals and sizes produced in each
district. After hearings held during September-December, 1938, the
Commission, in orders issued in December, 1938, and January and
February, 1939, approved proposed minimum prices and price classi-
fications to serve as the basis for coordination under Section 4-II (b).
The transcript of the record of the 4-II (a) price hearings consists of
about 8,000 pages of testimony and 600 exhibits.

The process of coordinating the 4-II (a) prices in common consum-
ing market areas was begun by the district boards pursuant to orders
of the Commission issued when the 4-II (a) prices were announced.
A few district boards completed coordination. The remainder
reported their inability to effectuate coordination, and the Commission,
pursuant to orders issued during March and April 1939, proceeded
with the coordination process. Upon completion of the "coordinated
price schedules," notice of hearing before three designated Examiners
was given by the Commission in May and June 1939. The hearing
opened on May 19, 1939, was temporarily adjourned on June 1, 1939,
was resumed on July 24, 1939, and was adjourned on January 20, 1940.
Oral argument was heard in February 1940.

Appearances were entered at the hearing in behalf of each of the
twenty-two district boards and the Consumers' Counsel Division.
More than 300 producers and consumers and other interested persons
were represented at the hearing, and several hundred more filed pro-
tests. The proceedings before the Examiners contain over 26,000
pages of testimony and oral argument, about 2,000 exhibits, about 700
written protests, and 112 briefs. The Examiners filed part of their
report on March 21, 1940, and the remainder on April 13, 1940.

Pursuant to Orders dated July 19, 1939, April 23, 1940, and May
3, 1940, certain parties filed with me exceptions to the proposed findings
of fact and conclusions and recommendations of the Examiners,
requests for review of the findings and conclusions of the Commission
upon other phases of the matters included in General Docket No. 15,
supporting briefs, and requests for oral argument before me. Excep-
tions and briefs were filed on behalf of 581 parties, and requests for
review of the findings and conclusions of the Commission were filed
on behalf of 48 parties. Oral arguments on behalf of at least 289
parties were heard by me during the period of May 27 to June 6, 1940

CONCENTRATION OF ECONOMIC POWER 3gg

Reply briefs were filed on behalf of 105 parties. Subsequent to the
filing of the Examiners' Report, several parties have filed miscella-
neous motions and other moving papers relating to the proceedings
before me.

Part I. General Findings of Fact

A. GENERAL CONSIDERATIONS IN THE ESTABLISHMENT OF MINIMUM

PRICES

I. CHARACTERISTICS OF THE BITUMINOUS COAL INDUSTRY

The problems arising in the fixing of minimum prices for bituminous
coal must be viewed in the setting of the bituminous coal industry
and the nature of this industry must be appreciated.

*******

1. Excess oj Productive Capacity Over Demand.

The bituminous coal industry has not always or continually been
in need of minimum price regulation. During the first World War,
it was prosperous, and experienced governmental regulation in the
form of maximum prices. It experienced, some post-vv^ar windfalls.
Thereafter, it became again a great depressed industry. The circum-
stances and conditions of its depression is a complicated story with
many aspects to it. It can be simply stated, however, that the most
significant fundamental condition of the bituminous coal industry
which has led to the minimum price legislation of the last decade is
the fact that the industry's productive capacity has been far in excess
of the demand for bituminous coal. This was true even prior to 1914,
and was accentuated by the expansion of the productive capacity of
the coal industry during the war. The factor of decreasing demand
is attributable in large measure to the increased and increasing
eflBciency in the use of coal and also in part to the availability of com-
petitive forms of energy.

The excess productive capacity, coupled with constant or dimin-
ishing demand, sent prices down. For various reasons stated below
producers would sell coal below cost. However, such price declines
did not stimulate proportionate increases in demand. As one of
many raw materials, coal does not bulk large in most manufacturing
costs. Although demand is variable, its substantial variations are
not proportionate to changes in price, but are influenced primarily by
general business activity.

2. Decline of Prices Below Average Cost.

Under the conditions described above, producers cut prices in
order to dispose of their coals. Indeed, for long periods during the
past two decades, the industry realized less than its average cost
of production. And the bituminous coal industry is unlike some
industries, where production tends to adjust itself with some flexibility
to demand.

(a) Expense of temporary shut-down. — Coal producers commonly
continue to produce coal, though realizing less than the cost of pro-
duction, because of the high cost of temporarily shutting down a
mine — due to taxes and possibly royalties, and to the expensiveness of

370 CONCIONTKATION OF ECX^NOMIC I'OWRR

physical ropaiis in reopening a mine. Production l)olow cost, there-
fore, is the condition of many prodiK^ers who contimie as long as they
have thci resources to carry on in some fnshion and as lonpj a,s they
can conlirme to hope tllat tli(> coiuhtion of the coal in<lustry, or their
individual fortunes, may be ameliorated. In appraisiti<2; the force
of this aspiration, we should not overlook the homely truths that
man awakens slowly to adveisity and that hope sprin<]js eternal in
the human breast. Moreover, persons trained in one industry cannot
lifi^htly abandon it and take uj) another.

(b) ''Additional sales". — Mor(M)v(>r, overhead costs in the operation
of a min(^ are relatively constant and stay about the same regardless
of how much coal is produced. Accordingly, each producer places
emphasis upon incr(^asing production and will try to dispose of addi-
tional amounts of coal so long as ho can get more than the ac^tual
out-of-pocket costs of producing this additional coal even if he cannot
obtain the total cost of production of such coal. Tl(^ cuts prices to
try to keep his mine running at or near capacity. lie cannot afford
to let any particular ord(>r go by so long as it nets more than its direct
cost, even though it may altogether ignore the claims of overhead.
In the Jtggregate the producer wants to cover total cost; in the parties
idar instance he contents hiiioiif with out-of-pocket plus. Since he
must get and hold individual customers, the aggregate gets to be
the sum of the instances, with the result that tliere is an aggregate
loss and eating away of investment.

(c) Distress tonnape. — The cutt.ing of ])rices below costs was induced
in part by competitive factors ])eculi;ir to the coal iiulustry. These
factors are discussed below. Fi'eciuently ther(> is a demand for partic-
ular sizes of coal. The producer is unable to produce one size without
at the same time producing other sizes which nr(^ joint products, or
co-products, of the first size. Thus, a cold winter and a high price
for the large sizes sold to domestic consumers brings out not oidy those
sizes but also, at the same time, the smaller, industrial sizes, although
there is no important demiind for such sizes.

*******

The other sizes for which there is no demand cannot be discnrded
like by-products in the meat-packing industry. They clog the mines,
and the collieries. They cannot be stored; it is uneconomical to store
coal, and mines generally do not maintain storage facilities. They
cause congestion at the tracks and tie up the capacity of the miiu>,
thereby increasing the cost of prochiction. Moreover, under railroncl
rules occasionally imposed (100% rule) the pnxhicer can't receive
more cars before moving the cars with the joint product. In the i)ast
producers consigned these sizes to some consuming territory and faced
mounting dennirrage charg(»s tlu'eatening t.o wipe out any possible
realization from the unwanted sizes. 'I'he producer slashes price to
get rid of this "distress coal", of which there is a substantial (piantity.

Thus, a rising demand atul a rising pr-ice may act not as a stabilizing
control of the coal market as a, whole, but otdy of one part of the
market. 'It may act as a disturbing foicc in another part of the
market.

CONOWNTIIATION OF ECONOMIC I'OWEIt 37^

3. Factors Ajjecting Prices and Price Differences.

*******

Bituminous coal is a complex organic clicmical substance. Its
value to a consumer will depend upon factors of quality, size, and use,
all of which overlap. It is a variable rather than a standanHzed
article, and its range of utilities depends upon a technology of con-
sumption, an art still being developed. There are many diiferent
kinds of coal, varying from each other in intrinsic chemical and
physical characteristics, produced in many sizes, and used by many
different classes of consumers with varying degrees of consideration
for these characteristics.

(a) Desirability (quality) oj different coals. — Obviously, one of the
important matters alfecting the price, or price relationship, of a coal
is its desirability to the consumers. * * * Diiferent consumers
look for diiferent things in a coal, depending in part upon the use to
which it will be put, the perfonnance of the coal, an(l in part upon
intangibles such as custom. But in general the desirability of a coal
will depend upon its chemical properties, its physical properties, and
its reputation.

*******

(6) Size differences. — To some extent, the price paid for coal has
depended upon the size thereof, the larger coals generally being of
somewhat more value than the smaller, although changes in domestic
burning equipment have been narrowing the rivnge between them.
Certain sizes may have a greater value than others for particular uses
and a lower value for other uses. The type of burning cciuipmcjit nuiy
determine the relative utility of various sizes to the consumer. The
same coal may have diflerent "quality" in diiferent sizes — e. g. the
slack sizes may contain more ash than the egg sizes, etc. Price dif-
ferences between sizes are not always a rellection of real variation in
actual utility, but are sometiines dependent upon custom. Industrial
consmners may establish price dill'erentials in a given market on the
basis of variations in the utility of the diiferent sizes. Domestic con-
sumers may be willing to pay hirger sums for the larger sizes, because
of the ease (rather than the economic elliciency) of tending tlie lire,
because of impressions gained from . dvcrtising, salesmanship, etc.,
and sometimes because of custom.

(c) Differences between types oj consumers; use differences. — The
bituminous coal industry has long known the condition under which
the price of coal, and of diiferent coals relative to each other, has
varied with diiferent types of consumers. Under open competition
a pervasive characteristic of the industry is that of varying types of
dilferentiations between consumers.

To some extent coals n)ay vary in value from ])lant to plant, depend-
ing upon the use to which they are put, the type of burning equipment,
type of heating or steam load, etc. * * *

Factors alfecting "the value to consumers of coals for steam and
heating use have been considered. In selecting coals for use in the
manufacture of coke, by-products, water gas and retort gas, quality
requirements are extremely rigid. * * *

372 CON(JEN'l^KATK)N OF ECONOMIC POWER

Railroads purchase coal upon the basis of considerations different
from those guiding ordinary, commercial consumers. The mobile
locomotive boiler is relatively inefficient due to the loss of unburned
coal discharged through the stack. Low-volatile coals, more valuable
than high-volatile coals in the commercial markets, are not as satis-
factory for locomotive fuel use. The large lump sizes, more valuable
in the general commercial market, merely have to be crushed before
consumption in the locomotive boiler. Other sizes differ compara-
tively little in their value to railroads. This factor ties in with the
willingness of the railroads to accept substitutions by the producers of
surplus and excess sizes, permitting producers to balance demand and
retaining sources of traffic for the railroads. Moreover, the entire
pattern of railroad purchases is interwoven with reciprocal relation-
ships, and the desire to obtain a stabilized and continuous traffic in coal
freight. This factor, which is of especial importance as to sales by on-
line mines, represents a compromise with use value in an engineering
sense. Its significance is great.

As will be seen below, transportation charges have a considerable
effect upon t,he pricing of commercial coals. So far as railroads are
concerned, it is of comparatively little importance in safes by on-line
mines (mines on the lines of the railroads) since railroads do not reflect
haul charges except in operating cost. And railroads pay specially
agreed divisions, rather than commercial freight rates, for any trans-
portation prior to dehvery of the coal.

Price distinctions have been taken according to whether the coal is
destined for domestic or industrial consumers. As mentioned above,
the larger sizes have a better appearance which is desirable to the
domestic consumer out of proportion to the differences in heat value
which largely guide the purchases of the industrial consumer. Fur-
thermore, producers respond in terms of price to the advantages of
obtaining the large-quantity orders placed by the industrial concerns,
and some large consumers, by taking the larger sizes in seasons when
they clog the market, also help producers to balance production and
demand.

(d) Seasonal demand. — The factor of seasonal demand and its effect
upon prices and price relationships has been sufficiently mentioned
for present purposes. In some instances, an' attempt to offset the
effect of this factor has taken the form of granting seasonal discounts
on sonte domestic coals. The larger, so-called domestic sizes, particu-
larly in the liigher grade coals, are in greater demand during winter
months. In order to help stabilize year-round production, some pro-
ducers, especially of firm coals suitfible for storing, have allowed
seasonal discounts on domestic purchases during the summer months.
This practice has by no means characterized all districts, all producers,
or all domestic coals.

(e) Competitive forms ofjuel and energy. — The foregoing factors sup-
ply part of the background of bituminous coal markets. Another
important consideration in th ^ markets is that of competition.

One of the elements of comp aition is the competition of different
forms of energy and heat — electric power, gas, anthracite coal, oil, etc.
The presence of these competitive forms of energy tends to put a
ceiling on, and to limit the flexibility of the prices for bituminous
coal. * * *

CONCENTRATION OF ECONOMIC POWER 373

(/) Factors conditioning movement oj ^particular coals into markets. —
The Commission made a survey of the movement of coal during 1937,
which was a representative year for the study of the industry under
free competition. This survey showed all the salient facts about the
movements of biturninous coal during 1937 — the producers thereof,
the market distribution, the tonnages shipped, etc. As is clear from
elementary economic theory, and as is shown by the survey, in general
three economic factors influence the movement of coals and their com-
petition in markets — transportation charges ; the qualities of the coals ;
production costs.

(i) Transportation charges: Transportation charges have a tre-
mendous effect upon the ability of coals to reach out into markets.
The iniportance of freight rates as a determining factor in coal ship-
ments is easily understood in the light of the fact that freight rates
often account for a larger part of the delivered price of coal than the
producer's return.

A field wiib a great freight rate advantage will normally have the
dominant position in a market. * * * Qf course, this advantage
may be offset soniewhat by different advantages, such as superior
quality, possessed by the remote district. Even then, the freight rate
advantage will give the field at least a competitive position in its home
market. * * * Even where the coal dominates the market be-
cause of a freight rate advantage, the possibility of competition from
other fields always remains as a factor operating, in addition to com-
petitive forms of energy and competition between the home producers
themselves, as a brake upon price increases in such a market. Where
freight rates from two producing fields to a market are more equal, and
the coals can otherwise compete, the market is characterized by active
competition, between the two coals, which primarily takes the form of
vigorous price competition.

(ii) Quality: Producers of high quality coals are not only generally
able to obtain more than the producers of low quality coal in com-
petitive markets, but they also are able to stretch out their competitive
position into more distant markets. * * * It is generally not
worth the consumers' while to pay high freight charges upon low-grade
coals. Where there are substantial increases in levelof prices', lower
grade coals must increase the amount of the price differential under
higher-grade coals in order to maintain their relative price attractive-
ness. Moreover, certain consumers, such as domestic consumers,
desire higher quahty coals- even if they have to pay a considerably
higher price for them.

(iii) Production costs: The bituminous coal industiy, like all other
industries, has high-cost and low-cost producers, as well as those ap-
proximating the average. These are not confined to any one producing
field. The various districts differ markedly in their weighted average
production cost, as is clear from the weighted average cost determina-
tions for 1936, adjusted to April 1-December 31, 1937. * * *

Production costs, like freight rates, have had a substantial influence
upon the competitive position of producers. Where districts producing
coals of equivalent quality have similar transportation charges to a
market, the lower-cost district will generally enjoy a competitive advan-
tage reflected in wider distribution, with the higher-cost district im-
proving its competitive position in markets to which it has favorable

279348— 41— No. 32-

374 ooNc.ioN'niA rioN oi' economic i'owkii

ficij;lit rates. * * * Jiut ol' course a lii<jcli-c<>st district may cut
its prices to si)e('ific (Icsiinatioiis or even <j;eiierii.lly. It may thereby
iiiiiiiiljiiii its ])ro(lii(tioii and distribution, even over a period of ycai"s,
und even though its realization is below its cost of ])rodnction.

i'roduction costs have had an appreciable but not conclusive eflect
upon coal movcnuents under o])en coni])etition. Neither the distribu-
tion nor the piices of c-oals have nuucly buildcd upon a cost pattern.
Many factors o])eratin<^ upon i)ro(hicers led to sales below costs,
(lencrally, at least since shortly iifter the war, the industry failed to
i-eturn its avertige <'osts. Jiut althou<i:h actual prices in the markets
turned largely upon matters other than i)roduction cost, })ro(luction
costs were a hictor which oi)erated, in a general way, to inlluence the
markets which ])roduc(^rs tried to get or to hold.

((j) TiwnHjMriatiori cliarfjes and absorptions of such charges by the
producers. -The factor of traM.s])ortation charges, mentioned above
is extremely com|)lex. Coal is transported under rail freight rates
which are (1) precise, from point of oiigin to ])oint of d(>stination, (2)
published, and (:5) kept under surveillance by public agencies, pri-
marily, of course, the lnt(^rstate Conunerce Commission. Coal is also
tians})orte(l by truck and by water, where these three characteristics
aie (dther not present or are not ])resent to the same degree. What-
ever the method of transportation, however, the freight rate picture-
is not a shnple pattern. Even as to any single form of transportation
such as railroads, the rjites do not present a mathematical equivalence
with distance, nor :ue they built upon any single theory. Rather,
they are molded ad hoc to lit the com|)lexities of complex industrial
realities. And as they are c<)mi)licatefl by the facts of the industry,
so they, in turn, comjiiicate the business and pricing ])ractices of the
industry.

*******

(h) The cliarartcrisilcs of /xirticidar inarkds and price discrhninatums
and co7nj)ctition therein.'- '\\w. matters dcscribcul above outline certain
g(Mierid factors and trends a(l"(icting prices in the bitumhious coal
iadiistiy. The actual marketiiig of bituminous coal, liowcver, is far
from a mechanical ap|)lication of l)lu(>print principles. It is rather a
husiness (^IFort which turns on a.n unpredictable collection of circum-
stances making up a i)articular ])ric(^ situation. ()nly a part of tho
total situation can be gi'aspcd by the simple statements that the
in<lusti«y is disorganized; that consumers do not buy coal on purely
logical [)rinciples; Jind that there is no price pattern to which pro-
ducers have adh(U-ed.

'JMio nature of the bituminous icoal markets is in part responsible.
('Onl is not i)ric(ul or marketed like wheat, which is first produced and
then sold in an auction [)roc(^ss. In wheat tluM-e is a relatively central
market, which moves sympathetically with the world market. The
ninnbcr of both buy(>,rs niid sellers is so large that no oiui of them may,
by bringing individual powers or inllucnc(! into play, have an apprccia-
hle elfect on the i)rice, which is a national or world price. On tho other
hand, coal does not move freely, like wheat, to some great center for
national distribution. In large measure coal is sold before it is pro-
duced. It is coal, in-the-marking, inchoate coal, that goes to market.
However, such coal as is produced prior to sale has an unusually
emphatic effect upon the market price. There is no objective picture

C()N(^KNTRA^MON OF ECONOMIC POWER 375

of the "market" or the prices fetched on the market at the time when
the bargain is struck. Tlie market means concrete consumers or
retail storage yards with wliom the producer, or sales agent or distri-
butor, must make personal contact, through salesmen and advertising,
etc., at least in the first instance.

The status of the coal market is uncertain. Theoretically, at least,
the seller starts off in the market with a price in mind apart from a
vague desire to get the best price he can, which will cover total costs
and include a profit. Practically, the process of quotation includes a
thorough-going process of meeting competition. The seller cannot
adopt the policy of quoting prices so high that another producer, in
the same or a different field, can undercut him. He must consider
whether or not the competitor's price is as represented by the con-
sumer, or by the salesman reporting back to the home office. He
must consider the desirability to the consumer of his coal and his
competitor's, in terms of use and equipment. And he must consider
many intangible factors sucli as reciprocal arrangements, business
alliances, personalities, etc.

He must consider the relative competitive position of himself and
the competitor. It makes a difference whether the competitor's
price is on a particular distress shipment of a surplus size, represents
an attempt to make some "additional sales" for more than out-of-
pocket cost, or represents a price being set for the main bulk of
tonnage. The producer's own eagerness to make the salp may depend
on whether the reduced price comes close to actual unit production
cost or barely clears out-of-pocket cost, or whether there are other
sales prospects in more favorable markets, say, close to home where
realization is higher.

The seller's price and consideration of the above factors may be for
the purpose not of meeting competition, but o^ making competition
and attempting to reach out into new markets, although no fin(>.
distinction can be invariably drawn in the hurly-burly of making
sales. The producer must gauge the probable resiliency and tactics
of the producers he is attempting to displace, as well as of the pro-
ducers attempting to displace him.

Advertised prices for coals of a particular reputation may tend to
reduce such price-cutting, or at least to stabihze prices in the first
instance, hut it is a matter of everyday knowledge that such prices
are frequently ignored. In addition to the differentiations between
consumers in a broad sense, such as occur upon freight rate absorp-
tions as discussed above, there are more particularized discrimina-
tions. Obviously a producer who cuts prices below production cost
in order to extend sales in a particular market will not desire similarly
to cut his prices on the great bulk of his sales and wipe out realization.
Yet his effort to cut inay make producer after producer match offers
and have a depressing effect upon a total tonnage exceeding the
amount he threathens to, or physically can, supply upon the reduced
price.. Price-cutting to extend markets, or price quotation to hold
on to outlets, and discriminations between consi.'mers, are all affected
by the character of the consumers and the relationships between the
consumers and the producers. These relationships may reflect normal
business considerations, such as the character Oi" the producer's service
in the past, the producer's and the consumer's position on credit

376 CONCENTRATION OF ECONOMIC POWER

terms, or the relationships may turn, as stated above, on reciprocal
factors, personality factors, etc.

A low price on a particular piece of business may be influenced by
an unspoken commitment to give more business to the producer.
Low prices during a particular period may be influenced by the fact,
or even riunor, that the consumer is contemplating a long-term, or
huge-supply, contract.

These factors could be considered at greater length. It is enough
to observe the variety of them that may affect any sale or price. It
is perhaps, excessive understatement to conclude that bituminous
coal markets are hardly pure and perfect price markets, and that the
prices for bituminous coal are not derived from any one or several
factors.

It must be noted also that this highly complex network is interwoven
with our business, industrial and transportation economy. It cannot
be temade overnight without grave danger to our entire economy —
to the railroads which purchase more than 20 percent of the total
annual production of bituminous coal and receive about 17 percent
of their gross receipts from the bituminous coal industry; to other
transportation facilities; to the great industries that are built upon
suitable coal supplies; and to the thousands of coal producers, large
and sma^ll, and their workers. Three things are therefore clear: That
as Congress directed, the task of fixing minimum prices for the purpose
of returning generally the cost of production, must be accomplished
with as little disturbance to the existing situation as is possible with
fairness and justice; that -principles which might in theory bring about
a better order, but which will disrupt existing ways must be cautiously
viewed; and that no single theory or selection of factors can be me-
chanically applied if the purpose of Congress is to be fulfilled and if
the intricate network of the industry (and of other related industries)
is not to be broken with unforeseeable consequences.

ll. APPLICATION OF THE STANDARDS OF THE ACT

1. Establishment oj General Price Structure, Subject to Adjustments.

The complexity of the bituminous coal industry entails a corre-
sponding complexity of regulation, particularly since the Act prescribes
that the niinimum prices shall preserve existing fair competitive
opportunities. Unlike other price or rate proceedings conducted by
administrative agencies, which relate to particular companies or
particular regions, the coal minimum-price proceeding involves the
entire country, and entails keeping in balance various considerations
that operate in myriad ways throughout the country; the prices and
qualities of the different coals in different sizes, competing in numer-
ous geographical markets, and the attitudes of consumers toward
those coals; the transportation methods involved in the movement
of the coal from the mines to the markets, including rail, truck, and
water-shipinents, and the complicated freight rate structure governing
these movements; the competition of different forms of energy in the
various markets, etc.

The minimum prices are not set for an industry already governed
by prices, so that intensive scrutiny can be given to a particular portion
of the price structure which may be assailed or which is seen to be

CONCENTRATION OF ECONOMIC POWER 377

working badly. Indeed, far from being price-regulated, the bitumi-
nous coal industry is a relatively chaotic, fluctuating industry, which is
characterized not by settled, standard conditions, but at most by
general trends, including diverse and even contradictory specific
trends. Relatively sound estimates and judgments, rather than
indisputable factual determinations is the contribution of the experts
and the informed business men to the solution of the problems —
problems as to the intrinsic values of different coals and different
sizes; their market prices and price- relationships; the volume and
character of each of the competitive forces operating in a market, etc.
* * * * * * *

* * * testified as to various matters, and many of these were
experienced as to some phase of the coal industry, on the producing,
selling, or purchasing end, and offered valuable and useful information.
Moreover, the elaborate procedure followed has produced at each
stage of the three-year process, appraisals and judgments by qualified
persons which are of great assistance in evaluating the evidence
and analyzing the probable eflFect of alternative decisions. There
has been, in addition, the benefit of experience under similar price
fixing plans which were put into effect under the N. R. A., and the
benefit of consideration of the problems under the predecessor of
this Act (the 1935 Act), and the price regulation under this Act for
a few months in 1937-1938.

2. General Analysis of the Standards.

*******

(a) Relationship of sections 1^-11 (a) and 4-1 I (b). — * * *

* * * * * * :(c

(6) The standards of sections 4.-II (a) and 4~II Q>) . — Giving appropri-
ate consideration to both Section 4-II (a) and Section 4-II (b), it is
apparent that the statute provides that the effective minimum prices
shall conform, in general, to the following standards:

(i) The minimum prices are to be f. o. b. transportation facilities
at the mine for the various kinds, qualities, and sizes of
coal produced in the several districts, and shall be coor-
-dinated in common consuming market areas upon a fair
competitive basis.

(ii) The minimum prices shall be just and equitable and not
unduly prejudicial or preferential as between and among
districts.

(iii) The minimum prices shall reflect, as nearly as possible, the
relative market values, at points of delivery in each com-
mon consuming market area, of the various kinds, quali-
ties, and sizes of coal produced in the various districts,
taking into account values as to uses, seasonal demand,
transportation methods and charges and their eflfect upon
a reasonable opportunity to compete on a fair basis, and
the competitive relationships between coal and other forms
of fuel and energy.

(iv) The minimum prices shall have due regard to the interests
of the consuming public, and shall not permit dumping.

378 CONCENTRATION OF ECONOMIC POWER

(v; The minimum prices shall preserve as nearly as may be

existing fair competitive opportunities,
(vi) The minimum prices shall conform to realization standards,
to the ultimate end that the return per net ton for each
minimum price area shall approximate the weighted
average cost per net ton of that minimum price area,
(c) Relationship of the standards. — All of the standards set out above
must, of course, be applied; and they must be construed as a whole.
Many of them quite obviously overlap; all of them interlock. For
practical purposes and to simplify consideration of their meaning, the
standards may be divided into three groups.

First, the standards relating to realization , which serve the ultimate
end that the minimum prices yield a return per net ton approximating
the weighted average cost per ton of each minimum price area.- The
costs for the various minimum price areas were determined by the
Commission and have been reviewed and approved by the Director,
as set forth elsewhere in these findings. The realization from the
minimum prices determined by the Director is discussed elsewhere in
these findings.

Second, the standards requiring that the minimum prices must be
coordinated in common consuming market areas upon a fair com-
petitive basis, must be fair and equitable as among producers and
districts," must not permit dumping, must have due regard for the
interests of the consuming public, must preserve, as nearly as may
be, existing fair competitive opportunities, and must reflect, as nearly
as possible, the relative market value of the various kinds, qualities
and sizes of coal. These may be characterized as the general and
basic standards of fairness and reasonableness against which the
minimum prices must be judged. •

Third, the requirement that there be taken into accoimt values as
to usep; seasonal demand; transportation methods and charges "and
their effect upon a reasonable opportunity to compete on a fair basis" •
and competitive relationships between coal and other forms of fuel
and energy. All of these are specific factors wliich Congress set out,
without limitation, as matters to be weighed in fixing minimum prices
conforming to -the general standards.

~ A description of the manner in which the standards were considered
and taken into account is contained in the findings of the Examiners
and will be further discussed below. The mechanics of the interlock-
ing of standards may be illustrated, for example, with reference to the
coordination of competitive all-rail coals moving into a common con-
suming market area. Initially, as the Examiners explained, there was
selected a representative destination, reflecting the competitive factors
operating in the market area and typical in general of the competitive
situation in the market area. A "base" coal was selected,, one moving
in large tonnages and widely distributed and well-known, and base
coals were selected for the competing districts. The process is essen-
tially one of selecting f. o. b. mine prices for each coal which, when
added to the transportation charges applicable to that coal, will yield
such delivered prices that the various base coals were properly related,^
size for size and class for class, reflecting their fair existing competitive
opportunities, in the particular market. After the relation of the base
coals, the other coals for each district are then tied in with prices. In

CONCENTRATION OF ECONOMIC POWER 379

tliis way the prices are set f. o. b. the mines, and by (1) taking into
account transportation charges they (2) enable the competitive coals
to deliver at such prices as will permit them to continue their existing
fair competition. The results so obtained must be weighed and modi-
fied as necessary to take proper account of competition from competi-
tive fuels, special uses, the interests of the consuming public, etc.
*******

3. Basic General Standards.

This section and those following consider to ome extent the general
principles implicit in the Division's method ol ap plying the standards
of the Act. * * *

(a) The unifying principle. — Reference to the statute generally and
to the economics of the industry (described above) will illuminate the
meaning of the basic, general standards. The prices must be "just
and equitable" and "not unduly prejudicial or preferential" as be-
tween producers and as between and among districts; they must be
coordinated in .common consuming market areas "upon a fair com-
petitive basis;" they must "preserve as nearly as may be fair existing
competitive opportunities;" they must "reflect, as nearly as possible,
the relative market value of the various kinds, qualities, and sizes of
coal;" they must have "due regard to the interests of the consuming
public." The meaning of each of these and the other related stand-
ards of the Act has been debated before me and analyzed with much
wit and ingenuity and with many refmements, and tins process has
not been without benefit. But in the last analysis the judgments
which must be made turn upon the statute itself, without any gloss
supplied by counsel, and its direction that the prices must be fair and
just; that they must, so far as possible, maintain and reflect existing
relationsliips among the various coals unless those relationships are
not "fair." The established prices have been effected upon the basis
of methods which carry out this dominant, fundamental direction.

(6) Existing fair competitive opportunities. — (i) Purpose of provisions:
The provisions of Section 4-II (b) that the minimum prices "shall
preserve as nearly as may be existing fair competitive opportunities"
expresses a pervasive policy of the Act.

Congress was interested, in preserving for producers their existing
fair competitive opportunities. However, it did not intend to per-
petuate exactly the same state of affairs which existed under free and
open competition. The administratiye agency was not instructed,
and it has not attempted, to remake the industry anew, or to set
prices upon its conception of industry efficiency or the advantages of
a planned economy. Certain large inequalities in prices have char-
acterized the industry imder free competition as a general and fairly
constant matter- distinctions in f. o. b. mine prices according to use;
seasonal demand; remoteness of markets and meeting of additional
competition thcrehi; etc—and likewise characterize the pattern of
the established minimum prices.

However, the Act necessarily eliminates the competitive oppor-
tunity to attempt to make inroads on marke jF by price-cutting result-
ing in lowering realization per ton below /eighted average costs.
And the Act also eliminates the competi^r^ e opportunity to make
sales by means of destructive price-cutting,, lumping, the movement

380 CONCENTRATION OF I-X^ONOMIC POWRIl

of "distress" coal, manipulations resulting in discriminations between
individual consumers in the same market, and all the other chaotic
forces which were present in bituminous coal markets under free and
open competition. . . • .

(u) Means of preserving existing fair competitive opportunities: (A)
The mechanics of preserving as ne^irly as may be existing fair com-
petitive opportunities cannot be discussed as a separate item in the
price process. Such means arc utilized throughout the entire process.
The pricing of c.al so that thzy will deliver in markets at prices
wliich take into pjcount considerations of quality, attractiveness to
consumers and marl^et history, operates to preserve their existing
fair competitive opportunities. The reduction of the price at a mine
so that tiie producer may be able, notwithstanding the higher trans-
portation cost, to continue fairly to compete in certain markets,
operates to preserve existing fair competitive opportunities.

(B) The ability of coals to secure and maintain existing fair com-
petitive opportunities is determined, as the record shows and as
virtually all parties agree, primarily by three factors, referred to as
the "big three" — differences in transportation methods and charges,
comparative cost of production, and relative quality. Thus, coals of
similar quality, coming from districts of similar production costs, are
oxtremcily competitive and tend to share the markets to which their
transportation costs are the same, and to dominate the markets (such
as the home markets) where they have advantageous freight differ-
entials. A highly advantageous freight rate permits a low quality
coal from a high-cost district, to offset the competitive advantages of
coals operating upon a high freight rate, ^\^lere coals are of similar
quality and have comparable freight rates, the low-cost districts enjoy
a competitive advantage reflected in wilder distribution, and the
higher-cost coals compete more strongly where they have more
favorable freight rates. And finally, as has already been noted, coals
of high quality have a much more extensive distribution than lower-
quality coals, and are competitively sold notwithstanding the increased
freigfit charge burden.

* * * * * * *

(c) Relative market values. — (i) Purpose and method of applying
the provisions; consideration of both quality and market history:
(A) The statute provides that the 4-II (a) prices, proposed with
respect to shipment into any consuming market area, "shall reflect, as
nearly as possible, the relative market value of the various kinds,
qualities and sizes of coal." Section 4-II (b) provides that tlie4-II (a)
prices for each district shall be coordinated in common consuming
market areas and "shall reflect, as nearlj^ as possible, the relative
market values, at points of delivery in each common consuming market
area, of the various kinds, qualities and sizes of coal produced in the
various districts," taking into account various specified factors.

It is sigiiificant that in both these provisions Congress used the
words "as nearly as possible." Some parties apparently have a
concept of relative market value which reduces its ascertainment to
the level of simple arithmetic. Actually, its determination generally
calls for an exercise of sound judgment in the light of the circum-
stances of the particular situatioTi, and not for a simple "yes" or "no"
answer.

CONCENTRATION OF ECONOMIC POWER gg]^

(B) The parties are distinctly at variance as to the proper method
of determining "relative market value."

• * * * * * * *

(C) The standards of the Act require that all factors be weighed
to the end that the minimum prices be fair and equitable and afford
to all producers, so far as possible, opportunities to compete such as
they have fairly enjoyed. Both physical and analytical characteris-
tics, on the one hand, and price history of competing coal, on the other,
must be weighed, along with other factors hereinafter mentioned.

* * * Neither of these factors taken alone would lead to a proper
result. The provisions of the Act, and the perception of the conse-
quences of applying either method alone, including the difficulties
of application and the inequities and absurdities in the results, support
this conclusion.

* * * * * *.. *

Relative market value is not a phrase which can be distilled apart
from the Act in which it appears. The purpose of the Act, and the
other provisions of the Act, preclude the acceptance of a theory which,
calling for the preservation of existing market relationships, does not
comply with provisions that prices be coordinated "upon a fair com-
petitive basis," that the "prices preserve existing fair competitive
opportunities," that they be "just and equitable" as between pro-
ducers and as between districts, and that they "have due regard for
the interest of the consuming public."

That Congress did not intend to perpetuate existing price relation-
ships, regardless of other considerations, is clear not only from the
provisions of the Act, but from its legislative history.

* * * * * * *

In conclusion, it is plain that Congress intended that all factors
bearing upon relative market value be taken into account, and that the
application of this provision must harmonize with the other general
standards of the Act, including the preservation of existing fair com-
petitive opportunities. And in pricing different coals in a market so
as to reflect relative market- values and give neither an undue advan-
tage in the market, consideration must be given to the way in which
they have tended to sell in r'elation to each other in the past, disregard-
ing the price factors and variations more attributable to the demoral-
ized and chaotic nature of the industry *and its fierce, cut throat com-
petition than to a form of competitive relationships between the
coals; and consideration must be given to their relative quality,
desirability, and acceptability to consumers. After considering these
different factors, appraising them in relation to each other, applying
them in the light of the record and the various explanations and con-
tentions of the parties, judgments as to relative market values have
been cautiously made and rigorously scrutinized and reflected in the
effective price schedules.

(ii) Consideration of quality: (A) An adequate and comprehensive
basis for the comparison of different coals, is contained in the proxi-
mate analyses and reports of physical characteristics of coals, which
were submitted by the district boards or by individual producers,
piu-suant to the Commission's Orders No. 38 dated August 16, 1937,
No. 178 dated January 6, 1938, and No. 234, dated March 16, 1938,.

382 CONCIONTUATION OF ECONOMIC 1\)WI0U

niul, in a few instances, the analyses and reports furnished by the
Bureau of Mines.

These analyses and reports contained information as to the most
widely used and o^enerally accepted indicia of quality, includinfj B. t. u.
(British thermal unit) content; proximate^ analyses (reflecting; the pro-
portions of moisture, volatile matter, ash, and carbon); sulphur con-
tent; ash softening temperature.

(B) British thermal imit (B. t. u.) content measures the potential
heat value of the fuel, and the potential energy derived upon conver-
sion of the heat into steam. Large industrial consumers tend to be
guided in their purchases by B. t. n. content, subject to adjustment
with respect to the other factors indicated below.

(C) Proximate analyses of coals reflect the percentages of moisture,
volatile matter, ash, and carbon in the coal. These factors bear u])on
the c(ualily of a particular coal as a fuel, and upon its adaptability
for us(5 in tlifl'erent kinds of heating equipment, or under different
op(>rating conditions.

High moisture content tends to cause coal to degrade in transit or
storage and decreas(^ its value, especially for domesti(; purposes, since
it is less suitable for storage. Moreover, the amount of moisture may
affect ihe amount of heat recoverable, for some of the theoretical
B. t. u.'s will be used in transforming the moisture to steam and will
be lost when the steam escapes through the stack.

High volatile content, in addition to creating a smoke nuisance
rendering the Coal less valuable or even valueless to domestic con-
sumers, affects the ])otential heat energy of the fuel coal. The gase-
ous matter tends to ignite at lower temperatures than carbon and
unlike the latter, burns above the fuel bed, and thus, except in a
pulverizer installation, is more or less likely to pass out of the flue
as smoke, or to condense and adhere thereto as soot.

Ash, being noncombustible, naturally decreases the heat or fuel
value of the coal, and a higher ash content generally means greater
expense in connection with ash removal or disposal.

(D) High sulphur content bears upon the value of a coal. It may
increase maintenance costs because of its corrosive effect on metal work
when the flue gases condense and form acids. Sulphur may discolor
a coal standing in storage and affects its value to domestic consumers.
Its use may generate fumes which may become nuisancers and serious
detriments to neighborhood industries or residenees. AVhen (>m ployed
for by product use, an excess of sulphur content in the coals may result
in corrosive and malodorous gas( s and a poorer coke for steel manu-
facture.

(E) Ash-softening temperature (^sometimes referred to as ash fusion
temperature), if low, generally reduces the value of some coals. When
ash softens "clinkers" (vitreous mixtures of ash and other chemical
constituents of the coal) tend to form. In stok(<rs or hand-fircnl e(|uip-
mcnt, clinkers damage equipment and iuv-rease maintenance cosls,
and prevent utilization of the full potential heat value of the coal by
shutting off tl>e flow of air through the fuel bed and entraining or
enveloping the fixed carbon. Particularly does low ash-softening
temperature lessen value in plants which must operate at a liigh
boiler rating and carry heavy loads, unless they are specially e(|uipped
to burn low fusion coals.

CONCKNTUAl'lON OF ECONOMIC POWER 3§3

(F) Physical properties of coals are also important, particularly
with respect to coals sold to domestic consumers. Consideration was
<i;iven to appearance (color, luster, tendency to stain), structure and
the uniformity tiiereol', ch,'.anlii\ess, size, consist, friability, preparation
and ^rindjibilily index, tli(>, last factor being of importance in pulverizcK
installations.

(G) Analytical formulae play an important part in givhig a com-
posite judgment of the chemical quaiities of coals. Subsequent to
experiments and tests by (he United States Geological Survey in
1904, there was developed the Jiement formula for the mathematical
measureimuit of the; I'cdativc einciency of different coals in terms of
Ji. t. u. content and the percentages disclosed by proximate analyses.
This formula, or particular adaptations thereof, is used by many
industrial and governmental consunu'rs in calling for bids or settling
purchase price.

Sucli a formula is extrenu'ly useful iji making general jiulginents as
to the relative values of (Lilferent coals and its imi)orlance in this
respect should not be minimized. But neither this formula, nor any
other nuithenuitical formulae — which are usually directed toward the
determinal ion of the number of B. t. u. offered for one cent— can serve
as a simple lule for determining exact price relalionships between coals.
Such formulae emphasize B. t. u. and ash conlcnl , but do not take into
account general consumer acceptance, uniformity, burning character-
istics, size consist, clinkering tendencies, ash-softening temperature,
sulphur content. The record shows that different consumers have
different plant installations and different plant power needs, rec[uiring
some adjustment of the Bement formula forprecise forecasts of utility.
Even as to generalizations, tlu; formula which uses averages of analyses
and i)roceeds upon the assum])tio]i of re[)res(>ntative samplers, has nu)rc
utility in the case of higher-grade coals Hum the nu)re variable lower-
grade coals. Such formulae are more useful, in ascertaining precise
value relationships, where the coals under comparison are generally
interchangeable, at least in the i)articular plant, than where hiih-grade
coals are being com])ared against low-grade coals. Moreover, such
formulae, though indicating efliciency per penny nuiy not indicate the
value to the consumcir of a higher grade coal which diminishes <'xp(MiS(!
of boiler opei-ation, is less likely to clinker, and is more dependable and
eflicieiit under varying load conditions. Nor do they a(l(M]uately
ijulicate the value to the domestic consumer of the factors relating to
appearance, fracture, stocking ability, convenience, etc.

(11) In sumnuirizing, determination of quality depends upon a
judgment as to all the factors which make coals desirable to con-
sumers; typically, a fornmla such as the Bement formula based on
li. t. u.'s and ])roxin.iat(^ analyses; other chemical fa(;tors, including
sulphur content and asii-softening t(>mperature; i)hysi(!al character-
istics; and even ])restigt^ aiul rei)utation, a factor which nuiy involve
consumer judgnu-jit as (o dei)endabili(y or utility, and in any event
nuikes coal more desiiable to the consunu'r. Tlu; basis in tlui record
for tlie ('\(U'cise of such judgments includes the analyses and reports of
physicnl attributes already referred l-o, and the judgments of exi)erls
of the Division's experts; of coiisunu-rs actually buying eonls; and of
pi'rsons producing and selling coals, including ])ar(iculai'ly llii^ judg-
ments of the district boards reflected in tlue 4-1 1 (a) [)rices as to intra-
district relationshLi)s.

384 (^ONCENTllATIOX OF ECONOMIC POWER

(iii) Consideration of market history: (A) The determination of the
market history of different coals or sizes is not a mere arithmetical
computation. The record contams a wealth of evidence and testi-
mony with respect to such market histoiy. The Division presented
experts and the district boards, producers and others likewise presented
witnesses experienced in the coal industry. Tiiese witnesses outlined
their knowledge and amplified their judgments as to market history,
and were cross-examined extensively. Thousands of pages of the
transcript contain evidence of this nature.

* * * * * *

* * * Congress did not direct or permit us to fix minimum prices
at levels and relationships exactly equivalent with any portion or any
average- of past prices. In requiring that prices be fair and equitable,
maintain as nearly as may be fair existing competitive opportunities,
and reflect as nearly as possible relative market values, Congress
required that many factors (heretofore enumerated) be taken into
account, including, conspicuously, the qu^ality of coals. Evidence as
to price relationships, therefore, in order to be helpfully pertinent,
must be weighted by consideration of these other factors. In a general
proceeding involving hundreds of thousands of prices and price rela-
tionships, bare figures, as discussed above, tend to distort and not to
clarify.

Useful and helpful information as -to market history and price
relationships, taking into account stability, trends and economic
considerations, and eliminating from the judgment abnormal figures,
unusual transactions, short-time flurries, is to be obtained from
experts of experience and knowledge. The judgment of such men is
the product of intimate knowledge and correct perspective, and
subjected to the salutory process of cross-examination, it conveys
meaning wliich is illuminating, balanced, comprehensive and helpful.
*******

(iv) Determination of relative market values in a market: (A) Rel-
ative market values have been determined upon the basis of the desira-
bility, acceptability and normal price relationships of the different
coals moving into a market. The determination is somewdiat compli-
cated by the fact that the efficiency of a particular coal will vary
somewhat~with the type of fuel-burning installation and the power
plant's needs (in terms of loads, etc.). Fuel equipment may affect
the price a consumer will pay for a certain coal. Conversely the cheap
availability of the coal may affect the nature of the equipment, and,
e. g., induce consumers close to a low-grade field to accommodate
their equipment to use the low-grade coal.

*******

(d) Interests of the consuming jmblic. — Section 4-II (a) provides
that the minmium prices proposed by the district boards in the first
instance "shall have due regard to the interests of the consuming
public." This standard must, of course, be read and applied con-
sistently with the purpose and other standards of the Act.

* * * * * * *

The interest of the consuming public cannot be definitively ascer-
tained. Consumers express some conflicting desires. And the interest
of many consumers does not necessarily coincide with the interest of

CONCENTRATION OF ECONOMIC POWER 335

the entire public. Many consumers want lower prices, regardless of
the consequences to the coal industry, but Congress itself set a floor
on prices. Consumers may want prices to reach them in the cheapest
way possible, say, by truck, and to get the full benefit of the cheapness
of this form of transportation. Yet factors of expense may be cut
across by factors of availability of transportation facilities, stability
of movements and certainty of supply. And observance of the inter-
ests of the consuming public cannot be deemed to require prices which
do not preserve existing fair competitive opportunities.

*******

(e) Dumping.— Section 4-II (a) provides that "no minimum price
shall be proposed that permits dumping". The standard is not ex-
pressly repeated in Section 4 II (b), though it is obviously one phase
of the provision that the prices shall be just and equitable and shall
preserve, as nearly as may be, existing fan' competitive opportunities.
Dumping is the sale of surplus coal production in an abnormal and
unnatural consuming market, and without regard to cost. The
method of fixing minimum prices is such as to prevent dumping.
Any specific contentions to the contrary are dealt with elsewhere.

(/) "Just and equitable" provisions. — * * *

4. Provisions Outlining Specific Factors.

Congress, in addition to stating the broad aims governing the pat-
tern of minimum prices, — primarily the reflecting of relative market
values and the preservation of existing fair competitive opportunities —
indicated to some extent the method of achieving those ends by out-
lining for consideration certain specific factors.

(a) Transportation methods and charges. — Section 4-II (b) provides
that 4-II (a) prices shall be coordinated in common consuming market
areas, that sftch coordination shall take into account, among other
factors, transportation charges upon coal, and that the coordinated
prices "shall reflect, as nearly as possible, the relative market values,
at points of delivery in each common consuming market area, of the
various kinds, qualities, and sizes of coal produced in the various dis-
tricts, taking into account * * * transportation methods and
charges and their effect upon a reasonable opportunity to compete on
a fair bf»sis * * * "

*******

(i) All-rail coals : (A) The Act specifically indicates the importance
of transportation methods and charges as involved in both the reflect-
ing of relative market values, and the primary standard of preserving
existing fair competitive opportunities. The general ihethod of coor-
dination of coals from competing districts moving by rail into a com-
mon consuming market area has already been explained. Generally,
a representative destination, t3^pical of the competitive situation in
the market areas is chosen, and the f. o. b. mine prices of the base
\coals of each of the competing districts are adjusted so that the coals
deliver at such destination at prices reflecting their relative market
values, size for size, and class for class. The taking into account of
the transportation charge frequently requires that an f. o. b. mine
price for a coal be set which is lower than the f. o. b. mine price of the
same coal when shipped into a different market area, i. e., requires an
adjustment of the f. o. b. mine price. It has been generally true under

3g(j CONCIONTltATrON OF ECONOMIC POWEIl

free and 0()en competition that producers have charged a lower f. o. b.
mine price as their coal moved fartlier away from home and encoun-
tered, in addition to the usual competition between the producers in
the home; field, the competition of other districts shipping into the
more remote market area. And tliis general characteristic of the in-
dustry, rellecting its fair competitive opportunities, is preserved to a
considerable (ixtcMit in the effective minimum prices.

Although such special adjustments of the f. o. b. mine prices appear
frequently in the minimum price schedules, they are granted only in
order to preserve existing fair competitive opportunities and reflect
relative market values at consuming points. There has been prac-
tically no objection to the theory of providing for such adjust-
ments. * * *

*******

The minimum prices established f. o. b. the mines have been ad-
justed in cases where that was necessary to reflect existing fair com-
petitive opportunities, and actual competition betv/een producers and
districts at a market; the f. o. b. mine prices have been kept the same,
leaving the coals "free to ride on their freight rates", where that will
preserve existing fair competitive opportunities, as where the coals
have in essence so moved in the past, * * *

(ii) River coals: Section 4-II (b) provides that the agency shall take
into account not only transportation charges as such, but also "trans-
portation methods." Coal is transported other than by rail. It is
transported by truck and by water — by river, by the Great Lakes and
by tidewater. The competitive situation differs with respect to each
of these methods of transportation and in order to preserve the exist-
ing fair competitive situation, the prices have been established so as
to take account of these differences.

* * * * * * _ *

In general, coal moving by river to destinations on the river, that
is, for free alongside delivery, has been given the same minimum
f. o. b. mine price as for all-rail moV^ement from the same district to
important market areas served by such river coal. Accordingly,
where the diirerence between water transportation charges and all-rail
or truck transportation charges has been sufliciently great to confer a
dclinite competitive advantage on jiver coal, the same competitive
advantage will continue and river coal sold for minimum prices will
deliver at less than all-rajl or truck coal to such a destination or plant
on the river, just as it htfe in the past.

The pricing of "ex-river coal", i. e., coal moving via llie river and
Ihencu; to inhmd (l(>stinations, raises the serious problem of maintain-
ing the c()m|)etitive situation between rail coals and river coals.
In niiiny m.-irkets, :i11-rail coal has maintained a substantially competi-
tive position agiiinst ex-riv(u- coal aiul the assignment of the same
f. o. b. mitu> prices for conls moving by river as for coals moving all-
rail woidd })ermit the former coals to assume delivered prices lower
than thos(> of the rail coals and so broaden their fair competitive oppor-
tunities. This was demonstrated by the movements to a destination,
such as (Mevcland, Ohio, where there has been a very small movement
of ex-rivei- coal and a tremendous movement of all-rail coal. During
picn'ious periods of goveriunental price fixing, when ex-river coals

CONCJ^:NTllATiON OF ECONOMIC POWKll ^ 3^7

were not subject to tlic same price restrictions as all-rail coals, tlio ex-
river coals were able to move to Cleveland to an extent to wbicli tliey
had not done and apparently could not do, under free and open com-
petition. Accordingly, prices have be(Mi set up so as to accomplish
an equalization of the all-rail and ex-river delivered prices, taking into
account the actual rivej* transportation charges.

*******
(iii) Truck coals: (A) Coals move by truck primarily within the
home markets of the producing districts, or in regions adjacent thereto.
The minimum prices for truck coals have been established by relating
them to the minimum prices for rail coals, taking accoimt of the fact
that the coals arc similar, being generally mined in the same seam,
and often at the same mine. As explained by the Examiners, gen-
erally coals moving by truck have been given a single f. o. b. mine
price, rather than f. o. b. mine prices for different market areas,
because truck coals are purchased in substantial amounts by itinerant
truckers and their ultimate destination is uncertain; truck coals arc
customarily sold at the same price f. o. b. the mine; and a std:)stantial
percentage of truck tonnage moves into the home markets. * * *
*******

The typical honui market analysis has not been applied to certain
markets where truck and rail competition has been intensive, and
vigorous competitive opportunities have been maintained notwith-
standing the differences in trans])orta,tion charges for truck. movement
and for rail movement (e. g., Pittsburgh, St. Louis). In these in-
stances, the prices for the districts concerned have taken more care-
fully into account the tran'sportatioTi charges and effected adjustments
in the f.. o. b. mine prices so as to continue existing fair competitive
opportunities.

* * * * * * *
(iv) Tidewater coals ; * * *

*******

The same basic principles of coordination were involved in the
pricing of tidewater coal as were applied with respect to all-rail ship-
ments. However, there arc certain problems of coordination peculiar
to tidewater coal. These problems arise out of the numerous impor-
tant variables which enter into the competitive situation at tidewater,
particulaily in regard to boat rates and, at some destinations, dock-
handling and service charges and ex-tide trucking charges. Such
variables render impracticable coordination in the sense of precise,
equivalent delivered price relationships and necessitate coordination
on the basis of equalized delivered prices "at competitive destinations
predicated upon generally prevailing costs of transportation and
handling and calculated to preserve to Districts 1 and 7 their respec-
tive "spheres of influence" at tidewater.

*******

(v) Ijake cargo coals: * * *

* * * * * * *

The same general principles of coordination were applied in the
pricing of lake cargo as in the piicing of all rail shipments. The
application of principles necessarily took iato account the problems

388 CONCKNTUATION OF ECONOMIC POWER

peculiar to the lake markets. Since the great volume of the coal is
sold to purchasers at the Lake Erie dumping ports, competitive coals
were related to one another at the dumping ports and those competitive
relationships were reflected back into the minimum f. o. b. mine prices.
Competitive coals shipped to Lake Ontario dumping ports were simi-
larly related one to another. However, the propriety of these com-
petitive relationships was properly tested by taking into account the
charges for vessel transportation to various points of delivery in
Market Areas 98 and 99, to which such coals are shipped, dock handling
charges and ex-lake dock transportation charges to inland points of
competition, and the effect of such charges upon a reasonable oppor-
tunity to compete.

*******

(6) Common consuming market areas. — Section 4-II (b) provides that
the 4-II (a) prices shall be coordinated "in common consuming market
areas upon a fair competitive basis." This provision is not a sub-
stantive one so much as a matter of mechanics for the effectuation of
the other standards of Section 4-II (b). In general, these market
areas have been delineated upon the basis of factors tending to shape
the competitive situation in a particular region — the existence of a
fixed freight differential, the extent of the competitive influence of a
particular field, etc. There have been practically no objections on
grounds of principle to the general methods followed in establishing
such market areas. The questions as to boundaries are questions as
to judgment and detail.

*******

(c) Values as to uses. — Section 4-II (b) provides that the coordi-
nated minimum prices shall reflect the relative market values of the
various kinds, qualities and sizes of coal "taking into account values
as to uses * * *."

(i) Tliis provision recognizes a well-known characteristic of the
bituminous coal industry — that different coals, and different sizes of
coal, have different relative market values, both in terms of utility
and in terms of market history, depending upon the use to wdiich the
coal is put. The coal industry is not unique in this respect. Price
regulation of the milk industry, for example, has had to take account
of the fact that milk has a different value, and will fetch a different
price, (lepending upon whether it is to be used for domestic fluid
consumption, for cheese-making, for butter-making, etc.

Railroad fuel is a typical example of a "use" classification estab-
lished under the Act. Railroads, purchasing coal for use in mobile
locomotive boilers, are not interested in the same considerations which
prompt the purchases b}' industrial consumers for stationary boiler
use. IjOW volatile coals, generally more valuable than high-volatile
coals for general commercial use, are not as satisfactory for locomotive
fuel use. And as between high-volatile coals, differences in B. t. u.
content, etc. are not as important for locomotive boilers as for sta-
tionary boilers. The large lump sizes are not efficient in a locomotive
boiler, and the differences between other sizes are generallj'' not sig-
nificant insofar as railroad locomotive fuel is concerned.

Railroad fuel has not been marketed in the past in the same way as
commercial fuel, although relatively stable price relationships have
been built up. In the first place, the whole factor of transportation

CONCENTRATION OF ECONOMIC POWER 3g9

charges, which is interwoven in the pricing structure of commercial
coals, disappears to a large extent with respect to purchases by rail-
roads. The cost to a railroad of hauling coal on its own line, which
is markedly different from commercial freight rates, is not viewed
as a transportation charge, but as an operating cost of the railroad.
Even as to purchases from "off-line" mines, the railroad division
differences are not the same as he commercial freight rate differen-
tials. Reciprocal relationships, and the prospect of revenues derived
from coal shipped as^ commercial freight, have played an important
part in the market relationships and the price differentials which have
prevailed in purchases of railroad fuel. These factors have been given
due consideration and weight in establishing railroad fuel prices.
* * * * * * *

(iii) The established schedules also contain separate prices for the
sale of coal for various by-product purposes. This classification is
justified by custom and by the different considerations as to physical
characteristics, and the different emphasis upon such considerations,
which govern the purchases of coals for destructive distillation by
various methods rather than for combustion. * * *

(d) Seasonal demand. — Section 4-II (b) provides that the co-
ordinated minimum prices shall reflect relative market values ''taking
into account * * * seasonal demand."

Production of industrial sizes during the summer brings with it
production of the larger, so-called domestic sizes for which there is no
demand. Coals, including e. g. the high quality coals of Districts
7 and 8, which do not degrade easily, have been able to build up a
demand, by offering the larger sizes at a discount during the late
spring and the summer .months, and have built up fair competitive
opportunities upon this basis. The effective prices contain such
seasonal discounts for coals which have customarily been sold on
that basis.

(e) Competitive forms of fuel and energy. — Section 4-II (b) provides
that the minimum prices shall reflect the relative market values in
each common consuming market area of the various kinds, qualities
and sizes of coal, taking into account various specified factory "and
the competitive relationships between coal and other forms of energy".

There is little disagreement as to the principles involved in con-
sidering this factor. Where bituminous coal has maintained a com-
petitive position against gas, oil, electric power, anthracite coal, it is
important that the fixed minimum prices permit such competition to
continue. On the other hand, there are many markets which bitu-
minous coal has completely or virtually lost to competitive fuels. In
view of the realization and other standards of the Act, including the
preservation of existing fair competitive opportunities, it is plainly
not the function of the minimum prices td attempt to reach such
markets by artificially depressed levels and to average out cost levels
by fixing disproportionately high prices elsewhere. Moreover, it is
practically impossible to reverse the trend to competitive fuels in
markets where it has been effected.

5. /Realization Standards.

The Act provides standards with respect to the "realization" of the
industry under the Act. Certain questions have arisen as to the
application of these standards.

279348— 41— No. 32 27

390 CONCENTRATION OF ECONOMIC rOWPm

(A) Section 4-II (a) provides that the prices classifying; the coals
within the district shall he propositi hy the district hoards so as to
yield a return per net ton for each district in a minimum price area
equal to the weightcid averafjo cost per ton of the minimum price
area. It further provides that the Commission approve, disapprove,
or modify these prices as a hasis for coordination.

Section 4-II (h) provides for the coordination of the 4-II (a) prices
in common consuming market areas, subject to various standards
discussed above, and continues:

The minimum prices proposed as a result of such coordination shall not, as to
any district, reduce or increase the return per net ton upon all the coal produced
therein below or above the minimum Teturn as provided in -subsection (a) of this
Section by an amount greater than necessary to accomplish such coordination,
to the end Dial the return per net ton upon the. entire tonnage of the minimum price
area shall approximate the weighted average of the total cost per net ton of the tonnage
of such minimum price area.

The purpose of these provisions is clear. The dominant realization
standard of the Act, the "end" to which the prices are directed, is that
the realization per net ton for each minimum price area shall, con-
sistently with the requirements of coordination, approximate the
weio:hted average cost of the minimum price area.

Tlic other provisions are merely mechanical directions provided by
Congress in helping to reach that end. A few parties complain that
the realization of several of the districts differs from this cost of the
price .area. But Congress did not contemplate that finally the
realization for each district would really correspond to the cost of the
price area. The districts differ markedly in weighted average costs
both from each other and from the price area. In providing that the
4-II (a) prices, which were important primarily as setting up re-
lationships between coals, should have a realization to each district
corresponding to the cost of the price area, Congress was merely
outlining a mechanics of initiating the coordination process, with its
considerable changes from the 4-II (a) prices, at such a level as to
facilitate consummation of coordination with the realization of each
minimum price area approximating the cost of the price area.

That the dominant "realization" standard is that the return per
net ton for each minimum price area be equal to the weighted average
cost of the minimum price area is clear. * * *.

*******

Problems may develop as to the scope of the orders entered in
General Docket No. 15 and General Docket No. 12 and the transac-
tions to which they apply. The Division will endeavor to clarify
any such problems which are presented by actual and concrete
situations.

Certain comments as to the transactions covered by the orders
may appropriately bo made at this juncture.

1 . Territorial Application.

The territorial application of the price is indicated by Section 4
II (e) of the Act.

2. Coverage oj Code Members.

Section 4 is applicable to all Code Members. The intent of
Congress was, of course, that the Commission fix minimum prices

CONCENTRATION OF ECONOMIC POWER 39]^

governing all mines in operation by Code Members. This end has
been achieved by various procedures.

(a) Most of the mines in operation today were included within the
4-II (a) price schedules proposed by the district boards" and approved
or modified by the Commission as a basis for coordination.

(6) After the 4-II (a) price schedules had been prepared, additional
coals became subject to the Code, either through new acceptance of
Code membership or the opening of new mines. Pursuant to the
Commission's Order No. 270, dated March 20, 1939, the district
boards have proposed and submitted price classifications and mini-
mum prices for such coals. Code Members have been permitted to
file protests. Some of these classifications were received before the
Commission had finished the process of coordination, and were
included in the coordinated price schedules.

Other price classification proposals were received thereafter, some
with respect to coals which became subject to the Code after the
coordination hearing had started, and these were coordinated by the
Division in accordance with the Commission's coordinated prices.
The Division issued orders settmg forth the supplemental minimum
prices and classifications proposed for these coals, and providing for
a hearing thereon as a phase of the coordination hearing.

Prices for these coals were included within the recommended price
schedules and have been included in the effective price schedules. It
has been objected that the district boards did not attempt to coordi-
nate the prices for these coals in the consuming market areas. The
objection is not substantial. The Director fully agrees with and
accepts the findings of the Examiners that the procedure adopted for
the pricing of these coals is a fair and effective procedure conducive
to the proper formulation and proposal of coordinated, prices as a
subject for hearing, afforded adequate opportunity to all persons to
adduce relevant testimony, and was not in violation of tlie provisions
of the Act.

(c) Pursuant to Order dated June 24, 1940, as amended, providing
for an auxiliary proceeding, adjunct to General Docket No. 15 and
designated General Docket No. 15-A, minimum prices will be made
applicable to a number of mines not hitherto covered in General
Docket No. 15, accounting for relatively minor tonnages. Order No.
290 provides a means for tlie application of minimum prices to persons
who are not otherwise covered.

(d) The schedules of effective minimum prices for the various
districts are applicable to the mines listed therein and continue to be
applicable although such mines have been transferred or hereafter
are transferred to a person who is or thereafter becomes a Code
Member. The prices established for the coals produced at any mine
shall apply to the code member who currently controls the mine
regardless of whether or not such code member's name is listed in the
price schedule or the name of the mine has been changed. This
contijiuity is clearly contemplated by the Act and is necessary as a
practical matter in order that the effective minimum prices shall
have a measure of permanence and so that the competitive relation-
ships encompassed in the effective schedules shall not be disturbed b}^
changes to the title or operating interests in mines. Dissatisfactions
may be made the subject of petitions under Section 4-II (d).

392 CONCENTRATION OF ECONOMIC POWER

3. Sales by Distributors.

The minimum prices and marketing rules and regulations must
likewise be observed by all persons who are distributors within Sec-
tion 4-II (h) of the Act whether registered or not. Producers who are
Code Members may, of course^ sell to those distributors who have
registered as such with the Division and have complied and are com-
plying with the applicable provisions of the law and regulations, at
prices which are reduced by discounts not greater than the maximum
discounts prescribed by Order dated June 19, 1940, entered in General
Docket No. 12.

4. Coverage oj Future Deliveries.

The Order entered in General Docket No. 15, subject to the adjust-
ments provided in General Docket No. 12, is applicable to all coal
sold by Code Members after September 3, 1940, and is also applicable
to all coal delivered by Code Members aft.er that date whether or not
such coal has previously been sold or been the subject of a contract to
sell. This ruling is contemplated by Section 4-II (e) which provides
that no coal shall be sold or delivered or offered for sale at a price
below the minimum established by the Commission, and that such
sale or delivery or offer for sale shall constitute a violation of the Code.
And it is ipidispensable to a practicable administration of the Act,
since otherwise "title" might be passed to large amounts of coal to be
delivered and cousumed far in the future. Continuing deliveries of
such coal without regard to the price provisions of the Act would lead
to substantial unfairness, and derangement, of c:'. sting fair competitive
opportunities, not contemplated by Congress

5. Inapplicability to "Wage^' Coal.

The effective minimum prices do not apply to sales of bituminous
coal by employers to employees as part of a wage agreement. The
record in General Docket No. 15 refers to the letter which the Com-
mission issued on October- 17, 1938, to various members of the coal
industry, stating that sales of bituminous coal by Code Members to
their employees as part of their wage agreement would not be subject
to minimum- prices. The Director, in accordance with the general
spirit and purpose of the Act, finds that effective minimum prices are
not applicable to sales of coal made by a Code member-producer to
his mine-worker employees for household consumption, in situations
where such sales are made pursuant to an agreement between the
employer and employee pertaining to wages, hours of labor, or work-
ing conditions, since the price specified for such coal is part of the
consideration of the wage agreement.

IV. NATURE OF THE PROCEEDING IN GENERAL DOCKET NO. 15

1 . Legislative Character oj Proceeding.

Some of the participants or their attorneys in General Docket No.
15 regarded the proceedings as strictly judicial proceedings, like an
ordinary court case. Perhaps it would be more accurate to say that
they regarded General Docket No. 15 as equivalent to a vast numbet-
of cases, proceeding simultaneously.

This is a fundamental misconception. The proceeding is more
accurately "a legislative one. It is directed toward the estabhshment

CONCENTRATION OF ECONOMIC POWER 393

of orders governing the bituminous coal industry in tlie future. It
is not a question of resolving private rights so much as of stating,
pursuant to the standards of the Act, minimal conditions to be
observed by persons and corporations in the bituminous coal industry.
The application of statutory standards does not consist wholly of the
ascertainment of facts. It calls for the exercise of judgment in the
appraisal and consideration of the conditions of the bituminous coal
industry and the probable effect of particular prices on that industry
or on a segment of it. It calls for tlie consideration and keeping in
balance of a great number of different factors opei'ating throughout
the country in this gigantic, dynamic industry, and for predictions
as to possible disruptions in- the industry, etc,

*******

2. Position of the Division.

Some of the parties have envisaged General Docket No. 15 as an
adversary proceeding, with the Division on one side and the pro-
ducers, say, on the other. That is not a true picture. It derives
from the attitude which has been developed in some circles, whether
rightly or wrongly, with respect to agencies entrusted with the
regulation of one group in the interests of another group which the
public desires to protect and assist — regulating employers to protect
employees ; regulating commission men to protect livestock producers,
etc. The Act administered by the Division, however, regulates
bituminous coal producers in the interests of the bitiuninous coal
producers, among others, and lays down standards to that end.
The Division is concerned with fixing prices in accordance with the
standards of the Act upon the basis of the true situation and as much
evidence as can feasibly be collated and presented. It is not the
protagonist of any special group, nor does it haye any special regard
for any particular group.

*******

The Director's report is long, despite an attempt to keep its length
down to a minimum. The following considerations may be helpful
to an understanding of the intended scope and content of the Director's
report:

(a) Effort has been made to avoid unnecessary and useless repetition
of the Examiners' report. The Examiners' report and recommenda-
tions constituted an extraordinarily comprehensive document. If
only for its accomplishments in organizing the material and focussing
the issues contested, it is of great utility. Furthermore, it contains
a complete discussion of many of the issues contested before the
Director.

The Director has carefully considered and studied the Examiners'
report, in the light of the record and the objections of the parties.
Upon the whole it is sound and the recommendations are in accord-
ance with the evidence and with the Act. The Director therefore
accepts and adopts the findings of the Examiners, subject to such
modifications as are specifically indicated below.

Where the Director disagrees with the Examiners' findings or
recommendations, or both, that has been specifically indicated in the
appropriate place in the findings. More often, the Director agrees
with the recommendations of the Examiners, in whole or in large

394 CONCENTRATION OF ECONOMIC POWER

part, and also approves their findings, but deems it pertinent either
to add an observation, or briefly to summarize the considerations
adduced by the Examiners. The fact that the Director has discussed
a problem does not indicate that such discussion is intended to be
exclusive. In such instances the Director's findings are not intended
to replace the Examiners' findings but to be read in conjunction with
them, unless the Director's findings show that the Examiners' findings
have been rejected.

(6) The Director has attempted to discuss all substantial exceptions.
Such an approach was not necessary in this general price proceeding.
Indeed, it is often not used in judicial proceedings. But it often occurs
that a sense of injustice, or inadequate treatment, is felt by those whose
contentions are not specifically considered. All claims have been care-
fully considered and the Director felt it worth a slight amount of extra
time to outline their separate disposition. Of course, similar excep-
tions have been grouped in the Report. And in some instances, as in
the general considerations set out above, the decision of and findings
on. one exception have been deemed sufiicient to dispose of other
related exceptions without specifying the filing of such other excep-
tions and their individual differences.

The Director's Report, with its approval in large measure of the
Examiners' Report, is, however, a unified document. In rnany in-
stances a complete segment of findings, presented in connection with
one exception, necessarily underlies and must be integrated with the
findings on other exceptions. Obviously, continual repetition was
neither sensible nor practicable.

The determination tp give consideration to specific exceptions has
tended to give the findings a lop-sided appearance and one not suffi-
ciently indicative of the general approach to the price-fixing process.
As already stated, the more general evidence and findings are not
iterated and reiterated, while the very number of specific exceptions
makes their disposition loom disproportionately large in the Report.
This aspect of the Report should not obscure the fact that the prices
have been approached primarily and dominantly upon a general basis,
with particular consideration to specific situations left, for the most
part, to adjustments under Section 4-II (d).

The Director's findings are more elaborate as to some exceptions
than others. In part, as already stated, this is due to the avoidance
of repetition of findings. In part this is due to the fact that certain
issues discussed in the findings are more significant in the industry
and important to the parties than others. Examination, cross-exami-
nation and filing of exhibits have been much more intensive with
respect to such issues. And the Director has endeavored to include a
correspondingly extensive review of these issues.

(c) The consideration of separate exceptions has obvious liniitations
depending upon the exceptions. Exceptants have responsibilities."
An exception should be clear and precise, and should give reasonable
indication of exactly what objection is being urged upon the Division.
No such indication is afforded by blanket exceptions that the Ex-
aminers' findings on a problem do not conform to the standards of thfe
Act; that the findings are not supported by credible evidence; that
a particular pricing relationship is objectionable, in a way not further
detailed. Such exceptions cannot be answered except by arecapitu-

CONCENTRATION OF ECONOMIC POWER 395

lation of the entire problem in the record, or by a guess as to what it is
that the exceptant may have in mind. No such burden can possibly
be assumed by an administrative agency. The exceptant has a
dejfinite responsibility to "urge" his objection so that its purport and
significance can be grasped, and he cannot slough off this burden by
presenting certain points in meaningful fashion and cautioning the
Director also to give due consideration to all other exceptions.

(d) Certain parties have requested more detailed n dings than those
made by the Examiners. One party. Wheeling Township Coal
Company, has even excepted to the failure of the Examiners to rule
one way or the other on its requests for findings on certain points. The
Director has attempted to give fair indication of the factual basis of
his rulings, especially when a party has made- complaint on such
ground. But the Report is primarily an explanation of the Division's
prognosis as to the price structure which will be operative in the future
rather than a judicial pronouncement as to conditions in the past.
And a report covering the general price structure for the entire coal
industry is not a place for long stories. No attempt has been made
to cover all the details. And there has been no effort to assure that a
finding is made one way or another on facts which the Director
regards as irrelevant or overridden in significance by larger considera-
tions. As a practical matter, the interest of the industry as a whole
in reasonable expedition, and the obvious propriety of restricting this
report to matter which is meaningful and pertinent, preclude any
other course of action.

(e) The Director's findings are based solely upon material in the
record and fair inferences therefrom. Indeed, the Director has failed
to accede even to requests based upon matter not contained in the
record, alleged to call only for mechanical adjustments. The Director
believes it the course of wisdom and prudence to deny such requests,
especially since an expeditious and flexible remedy available for such
situations is at hand in Section 4 II (d). In this way no one can make
any possible claim of unfairness, and all issues can be disposed of in
orderly fashion. However, the Director sees no purpose that would
be served by granting motions which have been made by various
parties form^ally to expunge certain briefs as containing references
outside the record or otherwise not appropriate in this proceeding.
It is sufficient to reiterate that the findings are based solely upon the
record.

PART IV

A CRITICAL REVIEW OF SOME INSTANCES,
OF GOVERNMENT PRICE CONTROL

By
DONALD H. WALLACE

397

AUTHOR'S PREFACE

Part IV of this report oil Government Price Control is essentially
a summary and a comparative analysis of the material presented in
parts I-III treating selected instances of public control in electricity,
milk, and bituminous coal. Some additional material has been intro-
duced here and in some instances the analysis has been carried be-
yond that of the monographs forming parts I-III. Some of the con-
clusions differ from those of the authors of these monographs, although
in the main there is agreement with their conclusions.

Chapters II through XI present a summary description of the con-
trol agencies and control devices used in the instances of public control
treated in parts I-III, and an analysis of the objectives, standards,
and actual or possible results. This analysis is centered upon the
three major economic problems outlined in the fii'st chapter — (1) the
height of the general level of prices and incomes in a firm or industry ;
(2) the nature of the structure' of prices paid by different groups of
consumers of the products of a firm or industry; and (3) the relation
between the prices of a fom or an industry and the volume of employ-
ment of economic resources in the whole economy, in other words, the
relation between prices in a particular firm or industry and general
depression and recovery. In these chapters the treatment is by topics
rather than by industries and under each of these problems the ex-
.perience in all three industries is treated.

In order to put the problems in a realistic setting, there is presented
in chapter I a brief review of the changes in the American philosophy
on public control of industry which have attended the great changes
in the industrial and social structure of the United States in the last
six or seven decades.

Most of part IV was written before the defeat of France and the
inauguration of the defense program in the United States. The
necessity of national defense alters the objectives of public control in
some ways, and the defense program may go far to diminish unemploy-
ment of men, macliines, and money in the next few years. Whenever
spending on armament tapers off, however, depression problems may
again become acute. Furthermore, it is plain that there must be some
rhDrganizati9^n of our foreign trade and the industries participating
largely therein, although what will be needed in this respect is at pres-
ent far from clear. Under new conditions that represent drastic
changes from those preceding, some parts of the analysis and con-
clusions given in these chapters will need qualification and emenda-
tion if theyvare to be useful guides to policy.

CHAPTER I
THE BACKGROUND OF PUBLIC CONTROL

THE 'CHANGING AMERICAN PHILOSOPHY OF PUBLIC CONTROL OF
INDUSTRY

Until recently public policy toward industrial organization and
business policies in the United States has been based on a twofold
classification of industries — competitive industries and "natural"
monopolies — and two basic kinds of public control to fit these two
classes of industries — the antitrust laws and regulation of investment,
prices, and profits by administrative commissions. The antitrust
laws were to preserve freedom to compete, and hence indirectly to
produce socially desirable prices and profits and high efiiciency and
progressiveness. Regulation of a few industries, such as rail trans-
port, telephone, electricity, gas, and water, which had developed for
some time under substantially unregulated free enterprise, was inau-
gurated upon growing realization that in these particular necessary
services monopoly could not be prevented by antitrust laws and that
competition was in any event wasteful and ruinous owing to certain
technological and financial characteristics. Administrative commis-
sions were established to prevent monopoly profits, to insure reason-
able prices or rates, and to prevent the waste of capital and investors'
losses attending duplication of capacity or financial overcapitalization.

This view of the economic system, and the corresponding two-sided
public policy was the American answer to the radical changes in in-
dustrial structure which began to be significant soon after the Civil
War, especially the growth of big business. This public policy was
worked out over th^e half century 1870-1920, rather uncertainly and
haltingly in the first 30 or 40 years of that period. It became crystal-
lized in the decade 1910-20, in spite of the somewhat disturbing
influences of the war, first through definitive interpretation of the
Sherman Act as a statute prohibiting combinations or practices which
restrained or impaired free competition; second, through passage of
the Clayton Act and the Federal Trade Commission Act which were
intended better to define and implement this policy; and third,
through the spread of public utility regulation among the States and
the strengthening of Federal regulation of the railroads.

Although Government control of industry of the two kinds just
described was greatly extended during these five decades, this policy
represented no fundamental break with the traditional philosophy in
which freedom of private enterprise was regarded as a highly valued
thing in itself and private initiative and market stimuli were relied
on to pro'duce an ever larger national income, jobs for all, and a
desirable distribution of income.

The antitrust laws were essentially an endeavor to check a threaten-
ing trend toward destruction of the freedom to compete in many

401

402 CONCENTRATION OF ECONOMIC POWER

industries. To accomplish ttiis end it was believed that Government
must outlaw agreements between competitors, harassing or bludgeon-
ing competitive tactics, appropriation or imitation of innovations, and
fraudulent misrepresentation. Some thought that in addition to these
things, which came to be prohibited according to court interpretations
of the antitrust laws, it was necessary also to check or reverse the
increasing corporate concentration of control over capital and natural
resources — even where the methods used to increase concentration
were in themselves "fair"— in order to prevent elimination of great
numbers of small, independent businessmen who, it was held, con-
stituted the core of free democratic capitalism. Definitive interpre-
tation of the antitrust laws placed no restrictions, however, on cor-
porate concentration that did not contravene the particular prohibi-
tions rhentioned above. After the ambiguity of early Sherman Act
decisions, these laws were not interpreted as statutes prohibithig any
particular degree of concentration per se, but rather as laws prohibiting
methods that interfered with freedom to compete.

Nor did the inauguration and development of public utility regula-
tion represent any fundamental departure from the traditional philoso-
phy. Where State and Federal Governments assumed dhect respon-
sibility for determining or placing limits on prices, profits, investment,
and quality of service the objectives were essentially negative — to
prevent unnecessarily high prices and profits, unfair discrimination
between customers, waste of capital, and unsafe or very poor quality
of service. Reliance for positive creation of desirable results such as
improvements in efficiency and in quality, designing price structures
that increased consumption, and so on, was left mamly on private
initiative. Indeed, the major idea underlying pubhc regulation of
private enterprise was to obtain the advantages of private enterprise
while preventing the disadvantages of private monopoly. Pubhc
ownership was regarded as of doubtful foreign heritage, as an unjusti-
fiable invasion of private rights, and as woefully inefficient. Although
constitutional interpretation placed much less restriction on the power
of the States and municipalities to engage directly in production and
sale than to regulate private enterprise,^ Government o"\vnersliip
played, in fact, a small role.

The general theory of free enterprise expressed in the antitrust
laws applied, of course, to agriculture as well as to manufacture, min-
ing, and tratle. The position of labor under this system of law and
economic policy can be sketched briefly.

Labor imions were not m themselves illegal under the antitrust
laws, but tactics used by unions which physically obstructed the free
flow of commerce or interfered by coercion with the freedom of a
third party (e. g., the secondary boycott, a boycott of one who was
not a party to the dispute) were generally held illegal under the com-
mon law and, until recently, imder the antitrust laws. The power
of the unions was limited in many other ways by court interpretations
of the Constitution, of other statutes, and of the general system of law
and equity based on concepts of individual liberty and private property
rights. ISIinimum wage laws and some maximum hour statutes were
lield unconstitutional. Government gave little assistance to labor
organization or collective bargabiing. In short, wages, hours, and
working conditions were to be determined in free markets, containing

' D. M. Keczer and Stacy May, Public Control of Pnsiness, pp. 105-196.

CONCENTRATION OF ECONOMIC POWER 4Q3

only such labor organizations as the workmen themselves could mam-
tain. In practice this meant in most cases no effective organization.

Moreover, during the period 1870-1920 Government assistance to
free, private enterprise had been confined principally to provision of
cheap land to farmers and such natural resource industries as mining
and lumbering, subsidies for railroads, and protective tariff's for
manufacturing mdustries.

These were the main outlines of the "American system" as it was
conceived 20 or 25 years ago by most Americans. Even during the
time when this system was crystallizing in law and in policy, strong
objections to some features of it were emergmg; even before the
great depression of the tliir ties altered the views of many with r(>gard
to the responsibilities of government, objections had multiplied and
actual policy changes had begun. The simple classification of indus-
tries into "naturally competitive" and "naturally monopolistic"
showed signs of breaking down. The ineffectiveness of commission
regulation of the "naturally monopolistic" industries threw public
enterprise into higher relief as an alternative worthy of serious consid-
eration. There were increasing demands upon Government to permit
or assist in associative action to "stabilize" or increase prices and
incomes, and to assist labor During the past decade there have been
further criticisms and marked changes in public policy. Disregarding
the abortive N. R. A., it is enough to mention the new State and
Federal policies with regard to distribution ^ and agriculture, and
bituminous coal acts, public enterprise in electricity, the Wagner Act,
and the wages and hours legislation.

The principal objections raised by those who wanted to change the
"system" that crystallized a quarter century ago may be classified
into three groups.

First, prohibition by the antitrust laws of associative action results
in "ruinous competition" and "disorderly" markets in many industries.
Government should permit and, where necessary, assist producers to
stabilize prices and incomes at desirable levels. This is, of course,
essentially a request for maintenance of higher prices and larger earn-
ings for past investments than would exist in the absence of cooperative
market control or Government regulation of price or output. Before
the depression, Government had exempted agricultural cooperatives,
under certain circumstances, from the antitrust laws and had attempted
an indirect form of price control through the Farm Board. States were
attempting control of output in oil. The Department of Commerce
was aiding trade associations to develop activities which many thought
tended to increase private price control.

During the depression, pleas for relaxation of the antitrust laws and
Government assistance in control of prices, output, and incomes multi-
plied enormously. Unemployment led to more vehement requests
from labor for collective bargaining for minimum wages and for
minimum price fixing to prevent wage cutting. N. E,. A. tried to meet
all of these demands from business and labor in greater or lesser meas-
ure. After the demise of the National Recovery Administration, the
Wagner Act and the wages and hours law and the two bituminous coal
acts were enacted. But the antitrust laws have not as yet been modi-
fied in principle. Indeed, the recent trend has been toward much more

2 For example, the State price maintenance laws and the Federal Miller-Tydings Act, the unfair practice
• acts purporting to prohibit sales below cost, and antidiscrimin'ation laws such as the Robinson-Patman Act.

404 CONCENTRATION OF ECONOMIC POWER

effective enforcement of them. The agricultural program has en-
deavored to raise farai income from different crops by various devices —
control of prices, output, or acreage, or loans and carryover.

Public utility regulation has not been immune from the same sort
of criticism. There seems to have been an increasing disposition
particularly on the part of railroads and institutional investors, which
hold large amounts of utility securities, to maintain that a major object
of Government regulation should be preservation of the earning power
of past investments in utihties in the face of depression, or the growth
of competing substitutes.

The severity of depression in the thirties quite naturally intensified
all of these objections to the "system" characterized by antitrust laws
to preserve free competition in most markets, by public utility regula-
tion to prevent monopolistic exploitation in the few exempted from
the antitrust laws, and by the absence of Government assistance to
businessmen, farmers, and labor in maintaining or raising incomes or
improving working conditions of particular groups. But it would be
a serious mistake to ascribe these objections entirely to depression
conditions. With the disappearance of the frontier and the growth of
great corporate bureaucracies this has given way in ' considerable
measure to the idea that democracy means, aniong other things, a
rising standard of living, increased economic security, and a greater
share for all of the people in the determination of the conditions
under which they live and work. They also represent some change,
of a fundamental sort, in the notions of democracy or in the things that
people expect of Government. A democratic government should, it is
now much more widely believed, permit people to organize to obtain
desu'ed ends and should assist them with the power of Government
where private organization is itself inadequate. These demands and
attendant changes in public policy w^hicli have emerged in recent years
are but a part of a broad trend exemplified also in the social security
program, and the provision of more social services to low-income
groups.

Second, whereas the first set of objections has conie chiefly from
producers — businessmen, farmers, and labor — and those indentified
with their interests, the second set of criticisms has emerged largely
from students of these problems. • In many in'dustries, this school of
thought suggests the antitrust policy cannot, even though it is success-
ful in .eliminating collusion, maintain effective competition; for the
large corporation with only a few large rivals, or even with many small
competitors, possesses substantial power to control prices and output,
and this power is used to restrict output and maintain prices at high
levels. "Where the entrance of new investment is difficult, owing to
control of scarce materials, to the power of established advertising, or
to fear of destructive economic warfare against "interlopers," profits
may be much larger than necessary to induce the services of capital
and enterprise. Where establishment of new capacity is easy, profits
may be brought down or held down to a normally moderate level, but
only by the inflow of more investment than is needed, for all firms in
such a market operate almost continuously below capacity, striving
to use their power over prices and output to gain monopoly profits by
restriction. The general result is held to be too little investment in ,
some industries and waste of investment in others and prices that are
too high in both cases.

CONCENTIIATION OF ECONOMIC POWER 4Q5

According to some, dissolution of the great corporations to restore
effective competition is impracticable; according to others, it would
severely impair efficiency in production and marketing.^ Both
opinions lead to the view that industries containing a few large enter-
prises are not "naturally" competitive and cannot be made sufficiently
competitive to achieve desirable prices and profits and desirable
volumes of iavestment and output. It is held that in such industries,
desirable results are to be secured only by direct public control of one
sort or another.* Commission regulation is the instrument most
often advocated. Federal licensing of corporations engaged in inter-
state commerce has also been proposed.

Public regulation of maximum prices has also been advocated by
many businessmen and lawyers who have urged relaxation of the
antitrust laws to permit agreements to stabilize prices or to maintain
prices above a ruinous level. Judge Gary's early advocacy of such
a policy found an increasing number of adherents during the twenties.

It is clear that both economists and businessmen have come to fuid
it exceedingly difficult to draw any clear-cut line between "natural
monopolies" and industries that can be and should be highly competi-
tive. The class once considered "competitive" is now seen to include
a variety of mixtures of monopolistic controls and competitive forces,
and the force of substitute competition in the case of "natural mo-
nopolies" has attracted increasing attention. What once appeared
to be a line has become an expanding zone. And there is a growing
opinion that several different kinds of public control, rather than just
two, should be fitted to several different kinds of industry or market.

Although extension of commission regulation to several major in-
dustries is often advocated, there has been for several years a growing
realization among those' familiar with public utility regulation that
satisfactory and effective regulation is not nearly so easy to obtain
as was once assumed. Of these critics some hold that satisfactory
results would follow from changes in court interpretation of the due
process clause, strengthening of the powers of commissions, enlarge-
ment of their budgets, and improvement in personnel. Others believe
that commission regulation of private enterprise can never yield
results as satisfactory as those of public monopoly.

In brief, the second set of objections to the "system" denies the
realism and usefulness both of the twofold classification of industries
and of the two-sided public policy adopted to fit that classification.
The logic of this set of criticisms leads in the direction of extension
of public control to more industries and development of a variety
of different kinds of control to fit different kinds of industry or
market situation.

Third, it is to be expected that the first two sets of criticisms of the
earlier American policy would have grown substantially, if gradually,
had there been no long and severe depression in the thirties. The
third set of objections to that policy is peculiarly a product of the
continuous existence year after year, beginning in 1929, of great un-
employment of men, of equipment, and of savings. Policies of price
inflexibility by big business are held by one school to have intensified

3 A few eoDtend vigorously that restoration of effective competition and, in general, drastic diminution
of economic power possessed by minority groups constitute the only safeguards against drift to a doctatorial
totalitarian state. The most intelligent and forceful exposition of this view is contained in ilenry Simons'
pamphlet, A Positive Program for Laissez-Faire.

* The best exposition of this view is contained in Arthur R. Burns The Decline of Competition (New
York, 1936). ■

27'9348— 41— No. 32 28

406 CONCENTRATION OF ECONOMIC POWER

depression and prevented recovery to full use of economic resources.
Insofar as the power to control prices comes merely from the size of
the large corporation in relation to the markets in which it sells,
rather than from collusion with others, the antitrust laws as now in-
terpreted are impotent as sin instrument for attaining more price
flexibility. The policies of regulatory authorities under the judicial
rule of "fair return" on "fair value" resulted in a similar inflexibility
of public utility rates.

The increased attention during the twenties to problems of the
business cycle had not, indeed, entirely overlooked the possibility of
relations between corporate price policies and industrial fluctuations.
Theories of businessmen emphasized the beneficence of stabilization
of individual prices, those of economists stressed the desirability of
price flexibility. Neither set of ideas penetrated below a thin surface.
As depression deepened in the thirties and the spread widened between
rigid and flexible prices, discussion of this matter increased among
economists.^ Most of the discussion, however, centered around the
historical question whether prices are now less flexible than at some
time in the past and the question of the reasons for price mflexibility.
Unfortunately, there was little intensive, acute analysis of the con-
sequences of inflexible prices, or to put it the other way around, of the
question of what sorts of price policies would promote a larger use of
the community's manpower, equipment, and savings. Programs to
cure or overcome the assumed bad eft'ects of price inflexibility range
from proposals to restore eft'ective competition in industry by dis-
solution of the large corporations to schemes for cooperation between
industry and Government in bringing about expansion of output and
employment and appropriate price adjustments.

To recognize that these programs rest on no secure foundation of
acute analysis of the relations between price policies (or investment
policies) and the level of employment of economic resources in the
whole economy is not to deny the crucial importance of discovering
what such relations actually are. The possibility that investment
opportunities in the next generation will be substantially less than
those in the nineteenth century, owmg to the faUing rate of population
growth, the declining reccptiveness of foreign markets, and the dimin-
ishing need for extension of railwa3^s and highways; the apparent
impossibility of reaching the goal of full use of the country's economic
resourpes through monetary policy and pump priming alone; and the
attenuation of social and political attitudes consequent on the chang-
ing notion of democracy noted above, and on continuous unemploy-
ment here; as well as the effects of events abroad and our own domestic
defense program of 1940 — these things render it imperative to make a
searching investigation of all possible means to mcrease the employ-
ment of economic resources and the national income. The critical
question' in the field of public control of industries is now: How, if at
all, can public control of partici-lar industries increase the total em-
ployment of men, equipment, and savings in the whole economy?

THE MAJOR ECONOMIC PROBLEMS

The broad problem of designing public policy with respect to control
of industries consists of several parts. (1) A selection must be made
between broad objectives — whether to emphasize improvement of

•See Price Behavior and Business Policy, T. N. E. 0. Monograph No. 1, Part I, Chapter II.

CONCENTRATION OF ECONOMIC POWER 407

economic efficiency, (that is, the production of more goods more
cheaply), alteration of the distribution of wealth and income, or more
democracy in industrial ownership or control. (2) Criteria must be
developed for distinguishing industries in which results' under present
circumstances fall short of desired objectives, and these criteria must
be applied ia detailed studies of all important industries. Such studies
should ascertain actual results and compare them with desirable
results. Very few such studies of particular uidustries have been,
made. (3) It must be discovered which, if any, of the various possible
kinds of public control can be expected to bring results closer to the
desirable objectives.

The purpose of the present report is twofold; First, to examine
three instances of existing Government price control — those aflFecting
electric utilities, milk, and coal — with respect to objectives, standards,
control techniques, and actual or probable results; and, second, to
indicate in exploratory fashion some of the possibilities with regard to
the relative effectiveness of different kinds of control and different
sorts of economic standards in achieving particular objectives.

Apart from the three regulated industries here surveyed no attempt
can be made in this report to discover industries in which the situation
is quite unsatisfactory and could be improved by extension of public
control of one sort or another. That is, indeed, a task requiring the
gathering of a great fund of factual information, as well as the formu-
lation of more incisive and more concrete criteria for assessment of
results than have yet been designed.

In this respect attention will be confined mainly to the economic
aspects of objectives and standards. Although political and adminis-
trative aspects of control are of great significance, economic efficiency
in 'the broadest sense and distribution of income must always be of
considerable importance whatever broad public policy is embarked
upon. Hence, in considerable measure, every instance of public con-
trol can be assessed according to its objectives, standards, and results
in terms of efficiency and distribution of income.

In this report objectives, standards, and results are related to three
major questions :

(1) The height of the average price or average revenue and its

relation to investment, output, utilization of capacity,
Vionsumption, costs, profits, wages, and employment in a
particular industry;

(2) The structure or pattern of prices charged to different classes

of consumers and its relation to investment, output, utiHza-
tion, consumption, costs, profits, wages, and employment
in a particular industry; and

(3) The relation -of changes m prices and income in a particular

industry to changes in the level of employment of men,
equipment, and savings in the whole economy.

Objectives, if not always clear-cut standards, related to one or both
of the first two problems have typically characterized public control of
industry in this country. The antitrust laws were long supposed, at
least by those versed in technical economics, by promoting competi-
tion, to have the indirect results of keeping prices and incomes in
each industry down to the minimum levels required to evoke the
services of labor, capital, and management,- Thus, it was assumed

408 CONCENTRATION OF ECONOMIC POWER

that under these laws competition would yield the maximum produc-
tion of goods and services in each industry that were worth to con-
sumers what they cost to produce, At the same time, competition
would produce in the long run an allocation of labor and capital
between industries in such a way as to yield maximum satisfaction of
wants to consumers. Regulation of rates and earnings in railroads
and other public utilities was directed partly at least to the same
objectives. Price-fixing during the World War, on the other hand,
was intended primarily to prevent profiteering and onerous increases
in the cost of hving, at the same time insuring adequate supplies for
the armed forces. Some instances of Government control have had
the purpose of raising incomes or maintaining prices at some desired
level. Thus, the first set of objectives center around what may be
called the problem of "high or low prices and incomes."

Public utility regulation has also been concerned with prevention
or correction of "unfair" or uneconomic difl[erences in rates to different
consumers. This second problem always exists in every instance
of jprice-fixing, whether or not definite objectives and standards are
developed for it. It is obviously impossible to fix prices at all without
deciding whether to charge uniform prices to all consumers in the same
location, deciding what type of geographical price structure to set,
and, where different grades or products are involved, what price
differentials to adopt. The second problem may be referred to as
the problem of the structure of prices.

It can be said almost without any qualification that, during the
period 1870-1930, objectives and standards related to the first two
problems were developed with no regard at all io the third problem,
the relation between pHces in one industry and the general level of
use of economic resources in the whole economy. Although there
were severe depressions in the seventies and in the nineties, the Ameri-
can economy seems to have operated most of the time during those
60 years at a high rate of use of its manpower and savings, if its
equipment was not always so well utilized.^

Under present conditions the third problem — which may be called
the problem of "prices and employment of resources" — is obviously
by far the most important of the three. In many instances of public
control of industries, however, objectives and standards continue to be
related principally, if not always wholly, to the first two problems.
The significance of this will be appreciated when it is realized, as will
be shown later, that objectives and standards designed for the first
two problems may, in a period of depression, adversely affect recovery
to a higher level of use of economic resources in the whole economy.
Moreover, as we have noted earlier, there has been little acute study
of the third problem. Finally, there seems to exist much confusion
about the relation between the full use of economic resources and the
level of prices. Many persons seem to take it for granted that a
price reduction in one industry will necessarily promote recovery by
increasing production, employment, and consumption in that industry
and hence raising total production, employment, and consumption in
the whole economy by that much.* They assume that there is no
difference between the first problem, and the third problem. This
conclusion is rb(vched by neglecting to consider the possible effects of

• Various studies of cap'icity and its utilization in the twenties suggest that there was substantial under-
utillMtion of capacity ir that decade.

CONCENTRATION OF ECONOMIC POWER 4Q9

a price reduction in one industr}^ on employment of economic resources
in other industries. And this neglect is explained by the habit of
concentrating attention entirely upon what happens in one industry —
the balancing of producer and consumer interests in that industry —
regardless of the possible effects in other industries. This habit of
assuming tacitly that price changes in one industry would have no
effect on the level of employment of economic resources outside that
industry came into being in connection with the problem of the level
of prices.^

Although intensive analysis of each of the three problems is deferred
to later chapters, the differences between the questions associated
with the level and the structure of prices on the one hand and the
full use of economic resources on the other are important at the outset.
The first problem concerns the balance of interests in a given industry
between producers and consumers — or, more broadly, between man-
agement, investors, labor, and consumers — and also the allocation of
capital and labor between industries, and questions of overinvestment
and underinvestment. The second problem, the structure of prices,
concerns the balance of interests between different groups of consumers
of the products or services of a given industry; and also the degree of
utilization of capital and labor, since some patterns of prices will
result in larger consumption and production than other patterns.

Both the first and second problems are set, or conceived, on the
assumption either that there will be full use of men and savings in the
whole community, whatever is done in a given industry, or that what
is done in this industry will not in any case affect the amount of
employment of men, equipment, and savings in other industries. The
whole point of the third problem, on the other hand, is the effect of a
price change in one industry on the total employment of resources in
the whole economy. This effect on the total 'economy of a price
change in one industry is, of course, the algebraic sum of the effect on
employment of resources inside and outside that industry. It may
be positive, negative, or zero depending on the direction of price
change and on the particular conditions at hand, as will be explained
later.

The paramount importance of the problem of full use of resources
does not signify that examination of the problems of price level and
price structure can be dispensed with. The closer the approach to
full use, the more important become the other two problems. It is
imperative to appraise the objectives and standards used in treating
the first two problems according to their effects on the level of use of
economic resources. Finally, insofar as there exist or can be developed
desirable objectives and standards and kinds of control for these two
problems which exercise no adverse effect on recovery, it is important
to apply them.

In the chapters which follow, these three major problems are taken
up in order as they appear in Government price control in public
utilities, milk, and bituminous coal. In the case of each of these
problems there is presented, first, a sketch of the possible objectives

' Actually it is a poor habit to use even on this problem. As economists have always realized, if resources
are fully used, expansion of one industry would necessarily involve less use of resources in other industries.
In practice there has ordinarily been enough slack, owing to growth of population and savings and some
temporary unemployment, so that an industry might expand production substantially without making
large inroads on the supplies of labor and capital needed elsewhere.

410 CONCENTRATION OF ECONOMIC POWER

and standards for public control, a description of the actual objectives
and standards adopted in these particular industries and, finally, a
discussion of the results insofar as they could be rneasured. In the
case of coal, where no prices had been fixed at the time of completion
of the report of Messrs. Gordon and Webb,^ and in certain other cases
only probable results can be indicated.

« Prices became effective October 1, 1940. See footnote 5, p. 464.

CHAPTER II

THE LEVEL OF PRICES AND INCOMES— OBJECTIVES AND
STANDARDS

There are many possible objectives of public control of the level
of prices in a firm or industry ^ of which six, aijd the standards as-
sociated with them, will be discussed.

One possible objective is to maintain or raise profits or wages (or
both) by raising (or possibly, by lowering) the level of prices. Rais-
ing of income in a given industry, in turn, may be based on consider-
ations of fairness and decency, on the mere possession by an organized
group of sufficient power to compel Government aid in maintaining
or increasing its income, or on considerations of economic efficiency
from the standpoint of the whole community, as evidenced in the
allocation and pricing of economic resources. Considerations of
economic efficiency are discussed below; attention is directed here to
raising or maintaining income for purposes other than efficiency. Tn
passing, it may be noted that in a society where democratic repre-
sentation takes the form largely of response to pressure groups, co,n-
siderations of fairness to a particular group may command little
attention unless that group has sufficient power to compel it.

Standards for maintaining or raising income for purposes other
than economic efficiency are numerous. The top limit is, of course,
the maximum income that can be obtained with existing conditions
of demand. Other standards toward which policy is directed may
be he ;ibsolute amount of dollar income received in some previous
period; or the same relative amount of dollar income received in some
previous period, that is, relative to '.-come in some other industries —
or a "normal" income derived by adjusting the absolute or relative
income of a previous period for intervening changes, such as changes
in price. St.nidards may also be put in terms of some parity, based
on price relations and the purchasing power of goods in this industry
and goods in ^ vner indu 'ries in a previous pariod^ — -that is, the stand-
ard njay be ti. restore r^et of price relatic ls between this product
and other products, sucl that it enables the producer of this partic-
ular commodity to purchase the same quantity of some other things
for every unit of his product sold as he could purchase in an earlier
period. Again, the ralo of income per week, month, or year received
in some other industries might be made the standard.

Maintaining or raising the income in a given industry might be
accomplished not only by Government price fixing in the industry
in question, but also by fixing prices of competing substitutes at a
higher level than would otherwise obtain. Here, also, apart from

• The level of prices as^here used refers to the average price of all units or average gross sales revenue per
unit; "income" to income of producers, or particular parts of producer income such as business profits and
wages.

411

4] 2 CONCrONTIlATION OF ECONOMIC POWER

considerations of economic cfl&ciency, the standards adopted for in-
come in tlie industry to be benefited might be any of those mentioned
above or a great variety of other alternatives.

The range of levels of prices that accord with some sort of stand-
ard related to considerations of fairness or justice will be narrower
than the range of possible prices in the case of sheer use of power to
extract the maximum income possible.

Whereas, the first objective sketched concerns the interests of pro-
ducers alone, the five objectives which follow are all related in some
measure at least, to considerations of economic efficiency from the
standpoint of the consuming public. That is, they all represent var-
iants or difl'erent interpretations of the basic notion of a balance of
intei-ests of consumers and producers, which represents an efficient
use of existing capital and of the labor force, and an efficient distribu-
tion of new capital (and labor) between firms and industries.^ Often
also these objectives arc designed to give to labor, investors, and
management incomes no larger than sufficient to induce their services.
They are thus inconsistent with the first objective, which, in essence,
involves raising or maintaining income above the level appropriate
to high economic efficiency from the standpoint of the whole com-
munity by the use of devices that often impair economic efficiency.
They are, however, not incasistent with raising or maintaining income
of particular groups by devices that do not impair economic efficiency —
for example, some kinds of subsidies.

A second objective, is to prevent excessive income, and at the
same time indirectly to prevent under-in vestment and avoid encour-
agement of over-investment. In its simplest form this ma}^ be limited
merely to the relations between income and investment of capital,
ignoring the question whether the proper return to capital (or labor)
might be secured at any one of two.or more price levels. The extent to
which capital and labor already in the industr}^ are being fully utilized
is also ignored or regarded as immaterial. The prevention by regu-
latory authorities of excessive income consistent with investment,
taken by itself, is likely, in the absence of keen competition from
substitutes, to result in high prices rather than low prices, for if the
companies and labor can obtain good incomes without exploring the
potentialities of lower prices they have littk;, if any, incentive to do so.

Standards for the prevention of excessive profits may be formu-
lated in terms of percentage return on investment. The permissible
percentage return may, for example, be derived from returns currentl}^
received in unregulated industries w4th similar risks. Standards
for investment may be put in terms of actual dollars invested (or
actual prudent investment), or of various types of reproduction or
jieplacement cost of property, or of market vakie.

In the selection of a permissible rate of return and of the method of
calculating investment, and in the actual process of changing prices
or rates to eliminate or prevent excessive profits, the emphasis may
be on protection of property rights or on preventing excessive charges
to consumers. Where protection of property rights is a paramount

' The most efficient allocation of new capital and labor is that which most efTiciently meets the freely
expressed demands of consumers. The distribution of consumer purchases places valuations on capital and
labor in difTerent firms and in different industries. The most elhcicnt allocation would exist only when there
were no appreciable difTerenceS in what consumers pay for homogeneous units of labor and of capital in
different firms and industries. If return per dollar of investment an(i/or per unit of labor of the .sanie ponernl
ability is larfter in one industry than in another, that signifies that consumers would prefer to have inoreof
the product of the former industry and less of that of the latter.

CONCENTRATION OF ECONOMIC POWER 413

objective, the authorities will endeavor to be sure that profits are
equal to full returns permissible, and they will have a tendency to
think of cost (including permissible returns) as setting a minimum for
average price. They will also, no doubt, have a tendency to err in
the direction of favoring investors. Where the emphasis is on protec-
tion of consumers, authorities have a tendency to think of cost (includ-
ing permissible returns) as setting a maximum ""or average price,. and
they may err in favor of consumers. In practic ., iiithough the general
objectives quite sincerely professed are the same — that is, to prevent
excessive profits — there' might be significant difference in the actual
profits and prices according to the emphasis.

An alternative type of standard for this objective is the following:
After defining and setting up an appropriate financial (that is, security)
structure and rules for financial policy, prices would be regulated
so as to keep the value of equity securities close to par, or so as to
keep the earnings yield on the value of equity securities close to the
earnings yield on similar securities in other industries.

The objective of preventing excessive profits may or may not be
accompanied by the objective of preventing profits from falling much
below a "normal" or "fair" return. That is, the purpose may be
merely to forestall excessive profits by leaving the level of prices and
income free to fall below a legal maximum according to management
policies and competitive forces, or public control may also assume the
responsibility for preventing "ruinous" competition. In the latter
event the standards for minimum prices and profits may be the same
as those sketched above for maximum prices and profits; or they
may be the same kind of standards with lower rates of return if it is
thought that somewhat lower profits for a time will not impair service
and financial soundness and may be more effective in stimulating
elimination of over-investment.

In an industry in which many firms are operating, the standards
discussed above can be applied only with some further standard for
determining which firms, if any, are not to be allowed the permissible
profit. This involves distinguishing a marginal firm or firms and
relating the standard of pricing to it or to them. The marginal
firm may be conceived as one whose costs are about the average of
most of the firms in the industry. Or a "bulk line" standard may be
used, particularly where the costs of most of the firms differ but little
and a few exhibit much higher costs. In this case, the highest-cost
firm or group of firms among the bulk of the firms would be selected
as the marginal one whose returns would be used as a basis for setting
prices. Or. a more sophisticated standard might be employed,
according to which the marginal firm is the highest-cost firm whose
output is just needed to fill all the demand at an average price equal
to its cost including the permissible profits.

Standards relating to labor income may also be involved in public
control of prices. Here, also, the purpose migbo be merely to prevent
excessive income to labor, or, more frequentiv, to keeping income up
close to the permissible level. In determin'ri:^ the amount of labor
income standards could be formulated in tens of previous wages in
the industry, wages of similar kinds of 1 „1: Dr in other industries,
changes in the cost of living, etc., and be vtrted in terms of weekly,
monthly, or yearly earnings.

414 CONCENTRATION OF ECONOMIC POWER

A third objective is maximum production and consumption. At
any given time this mean? maximum possible utilization of existing
equipment and labor in the industry. It also means that there should
be invested in the industry the maximum amount of capital (and
labor) that will show expectations of income no less than they could
receive elsewhere. Under this standard, the appropriate basis for
pricing at any given time, or in any short period is the amount of
expense directly involved in production and sale of an additional
group of orders. Technically, this is called "marginal" or "incre-
mental'* cost.^

The maximum p >s^ )le output of a firm will be obtained under this
standard only wheii price is equal to incremental cost. At any higher
price, presumably somewhat less of the product will be taken by con-
sumers; at any lower price the firm will reduce its output because price
does not cover the amount of additional expense which it must incur
to produce the last additional run of production, with the result that
continuance of production at that level would mean smaller profits
than can be obtained by reducing output to the point where the price
once more covers the incremental cost.* Unless capacity is already
fully utilized incremental cost includes no overhead, because this ad-
ditional production does not add to the aggregate of overhead expense.

This objective of maximum output and consumption may be pur-
sued by making price equal to incremental cost at all times, without
regard for changes in the amount of investment or capacity in the
industry. But in an industry where demand is continuously growing,
rigid application of such a standard might, under certain conditions,
prevent maximum economic investment and output in the long run.
Regard for a coetinuing maximum output calls for short-run prices
that will maintain expectations of profit sufficient to attract additional
investment as demand grows. If prices equal at all times to incre-
mental costs will not provide such profits, then prices, by this standard,
should be higher by just enough to accomplish this end.

An important 'difference between the objective of maxinmm pro-
duction and consumption and the objec^^ive of merely preventing
excess profits and ensuring permissible profits is that the former calls
for the lowest level of prices consistent with continuous provision of
satisfactory service in the amounts demanded. If there are two or
three levels of price at which permissible profits (but no more) can
be earned, the objective of merely preventing excess profits is not
likely to lead to the lowest of these price levels. There may also be
another difference of great importance. In practice, those who
think merely of eliminating excess profits are likely to think of a
permissible return as receipt of a certain percentage on total past
investment in every year, or on the average through good years and
bad. On the other hand, those who aim at maximum output or utili-
zation of past investment are more likely to realize that in order to
obtain a continuous inflow of new capital it is only necessary to

• > The cost of an additional increment may be defined as the diflerence between the aggregate expense of
all kinds when that increment is produced and the aggregate expense when that increment is not produced.
In many c$ses incremental cost approximates out-of-pocket expense. Where equipment depreciates mainly
according to the amount of use, however, incremental cost includes depreciation expense whether or not it
is actually paid out.

* Since wages make up a part, often the larger part, of incremental cost, the question arises of a short-run
standard for wages. Maximum efficiency from the standpoint of consumers calls for wages low enough to
employ all the labor committed to this industry in the sense that it cannot get or will not take employment
elsewhere. In some cases such a wage would be so low as to conflict with other objectives desired by most
of the country, or so low as to impair the health and morale of the workmen and their fainilies.

CONCENTRATION OF ECONOMIC POWER 415

maintain satisfactory expectations of future profits on new invest-
ment. Thus, this does not necessarily mean that past dollar invest\-
ment needs to receive year after year, in depression and prosperity,
a "normal" return, even though there occur changes in technology,
bringing obsolescence, shifts in location, rise of new substitutes or
other fundamental changes. Pursuit of the objective of maximum
consumption requires changes in prices and in profits to adjust to
changing economic conditions. Only by continuous adjustment is
it possible to obtain maximum consumption consistent with main-
tenance of minimum profit expectations sufficient to attract additional
capital.

The fourth objective concerns maximum output and diminution of
investment. When excess capacity exists and demand is stationary
or contracting, the objective from the standpoint of efiiciency is
maximum output and gradual elimination of excess capacity as it
wears out. The standard for this objective is price equal to incre-
mental cost at all times. Since expansion of investment would
represent waste, there is no reason from the standpoint of efficiency
to keep price above increment cost imless that is necessary in order to
obtain capital for modernization of equipment in order to reduce cost.

As explained above ^ the amount of increment cost depends in con-
siderable degree on wage rates. In a stationary or declining industry
it is probable that there will be excess labor capacity as well as excess
equipment. Consumers as a whole will be benefited by transfer of
some workmen, if this is possible, and in any case transfer of their
children to other industries. One method facilitating such transfers
is the maintenance of wage differentials between the industry in
question and other industries in order to make transfer attractive.
Other means can, of course, be devised.

A fifth possible objective — althoiigh it is not illustrated in this
report — is maintenance of more investment and output than the
amounts required for maximum economic consumption (the third
objective described above). This means carrying investment beyond
the point where it is expected to yield ordinarily good earnings.
Examples are the maintenance of certain non-paying branch railroad
or electric lines in the interests of public service, low-cost housing
under certain circumstances, hospitals, and schools, etc. Standards
for the amount of investment related to this objective are usually
vague, or else they reflect merely the limitations on the sums that
can actually be obtained for such purposes. It is not, however,
impossible to work cut rough criteria for approximate limits.

The similarity in one respect between this objective and the first
objective described — maintaining or raising income— should not be
overlooked. Pleas for Government aid to raise income usually
signify the existence of o.ver-investment judged by current yields.
If this over-investment is perpetuated: by Government assistance to
private producers. Government is, in fact, doing essentially the same
thing as far as investment is concerned as it or private charities do
in the case of schools and hospitals. THe difference between the
two objectives is, of course, that in the former the aim is to benefit
producing groups, and in the latter case to benefit consumer groups;
as, for example, by low-cost housing.

« See footnote 4, p. 414.

415 CONCKNTUATIOX OF l^CONOMIC POWKll

The sixth and last objective is to increase the efficiency of tech-
nological methods and equipment, of administration, of labor, and
of marketing. This objective can be pursued in connection with
any of those already discussed. Standards may be of two sorts:
prices may be related to costs based on certain standards of efficiency
in performanre, or a sliding scale may be used according to which
the savings from improved efficiency are shared between producers
and consumers.

The use — or absence of use — of these objectives in the actual
regulation of electric utility rates and prices of milk and of bitu-
minous coal are discussed in that order in the following chapter.
This discussion is based upon the findings contained in the special
monographs presented in parts I, II, and III of this volume.

CHAPTER III

THE LEVEL OF PRICES AND INCOMES IN ELECTRIC
UTILITIES

In rog-ulation of the general level of rates of an electric utility the
principal aim has been, as a rule, to ensure that consumers are not
forced to i)ay extortionate rates and that there is a "fair return" on
invested capital. This is, then, broadly the second objective discussed
in the previous chapter. In carrying out their objectives, regulatory
commissions have been severely handicapped in their administration
both by court decisions and by statutes. Forty years ago the Supreme
Court laid down the broad rule that rates must yield a "fair return on
the fair value" of the property of a public utility company. This
rule does not seem to be suited to developing economic standards for
rates that will result in the ma!ximum possible consumption of elec-
tricity consistent with insuring sufficient income from the investment
to attract capital as demand expands and additional equipment is
needed. Legislatures have refrained from amending utility statutes
so as to permit and encourage development of such standards, and
commissions have not taken this task upon themselves, doubtless
partly because of the fear of court reversal.

Partly as a result of the need for adhering to this rule, commissions
have not developed definite economic standards for the promotion
of maximum economic consumption The three commissions studied
in part I — Wisconsin, New York, and Illinois — which are among the
most effective in the country,^ have evidently endeavored to set rates
so as to yield an ordinary or normal return on actual prudent dollar
investment. In this the commissions of Wisconsin and New York
have made great progress in the past decade through the development
of accounting records and the process of routine checking of rates of
return and by the ordering of rate reductions whenever the results
for a given year show returns above the rate (usually 6 percent) con-
sidered normal. In Wisconsin and Illinois the commissions have
made use of the so-called "objective rate" as a device to test out the
elasticity of consumption at lower rates and thus provide an indica-
tion of the profitability or unprofitability of a reduction in the general
level of rates.

Two aspects of the process of rate reduction by these commissions
suggest, however, that as a rule rates are not at the lowest level which
would barely yield ordinary returns on actual investment. First,
rates are not reduced until after excess annual earnings have ap-
peared. Second, in estimating the amount of reduction that will re-
move the excess increment of earnings, the commissions typically
base their calculations on the existing or past volume of consumption.

' This is not to imply that the work of certain other State commissions is of any lower order than that of
the 3 chosen as a sample of the few best.

417

418 CONCENTRATION OF ECONOMIC POWER

They evidently believe that estimates of probable consumption at
lower rate levels would not be regarded by the courts as conforming
to law.

The standard which these commissions have come to implement
quite effectively contains, however, some confusion between the prob-
lem of fairness to past investments and the problem of obtaining
maximum economic consumption. It cannot satisfactorily^ solve both
problems together, and it is not well suited to treatment of the second
problem in a dynamic economy characterized by progress and obso-
lescence, shifts in population and industrial location, and broad
changes in price levels.

LEGISLATIVE OBJECTIVES AND STANDARDS

The public utility statutes of Wisconsin, New York, and Illinois
have the general objectives of ensuring adequate service at -reason-
able and just charges. No definite standards are provided in the
laws, except with reference to temporary rates. Commissions are
empow^ered to disapprove rates filed and to set reasonable rates.
They are provided with powers to prescribe forms of accounts and to
control security issues, but no standards concerning the relation of
accounting practices and security structures to rates and earnings are
laid down in the laws.

ADMINISTRATIVE OBJECTIVES AND STANDARDS

It appears that all three commissions have pursued similar objec-
tives with regard to the general level of rates. In terms of the classi-
fication of objectives given above the major aim of these commissions
seems to have been elimination of excess profits. They have in-
deed, evidenced a desire to achieve increased consumption, especially
in the last few years, but it does not appear that they have attempted
to secure maximum consumption as that has been defined above.

All three commissions seem mainly concerned with securing rate
reductions that tend to ehminate profits in excess of an ordinary
return (about 6-7 percent in the last few years) on actual dollar invest-
ment, that is, original cost of property "used and useful" less depre-
ciation.^ No real attempt seems to have been made to reduce profits
below an ordinary or "fair" return in poor years with the assurance
of profits above an ordinary return in good years. In general the
endeavor is not to set rates that, given current costs and probable
consumption, will prevent receipt of excess profits, but rather to
obtain rate reductions tending to eliminate excess profits soon after
they appear. The typical recess is to reduce rates to a level at
which, assuming the same consumption as in recent years, profits
would be about equal to the ordinary return on actual dollar invest-
ment. The Wisconsin and New York Commissions have raised this
process to a high level of efficiency througli development of original-
cost accounting to make book values correspond to actual dollar
investment and through continuous checking of annual reports
accompanied by negotiation or mauguration of proceedings in instances
where reported earnings appreciably exceed the ordinary return in any

2 They do not, however, take the position that fair value and actual investment are always synonymous.

CONCENTRATION OF ECONOMIC POWER 4^9

year.^ It is obvious, however, that when costs are dechning, because
expanding demand gives fuller utihzation of equipment or because
wage rates or material prices are falling, this process enables the util-
ities to receive more than the ordinary return in each year. On the
one hand this gives utility managements (insofar as they wish to
make larger profits for their corporations) some incentive to raise
efficiency and to stimulate consumption. On the other hand the
failure of the commissions to study intensively the probable effect of
lower rates on volume of consumption and to allow for this in esti-
mating effects of rate reductions on income may prevent discovery
of the lowest rates which would yield the ordinary return (or the
ordinary return plus something more for 1 year) on actual dollar
investment. Rates may remain considerably above both of these
levels.

The Wisconsin commission in 1935 required most of the electric
utilities under its jiu-isdiction to institute objective rates.* This was
adopted as an experiment to test the effect of lower rates on consump-
tion and profits without any possibility of impairing the existing legal
earnings of the utilities. It was also regarded as a transitional device
to obtain lower regular rates. Since profits have remained "fair"
in the years subsequent to initiation of the scheme, the objective rates
are now being eliminated in favor of lower regular schedules. The
Illinois commission also favors the use of objective rates as a method
of transition to a lower regular level of rates. The New York com-
mission has been opposed to objective rates on the ground that they
involve discrimination between customers purchasing the same quan-
tity of electricity. It has, however, vigorously sought to obtain lower
levels of rates during the past several years, and in particular during
the course of the depression.

In general it appears that these commissions did not make energetic
attempts to discover the lowest level of rates at which ordinary profits,
according to their conception, could be obtained, untU after the advent
of depression influences. The striking effects of low T. V. A. rates
on consumption, manifested a few years later, were partly a result of
ideas contributed by those associated with the Wisconsin and New
York commissions on the one hand, and a cause of redoubled activity
on the part of the commissions to secure rate reductions on the other.
The efforts of all three commissions in this direction have been in-
tensified in the last 5 years, but they do not yet make extensive use,
in fixing rates, of data on potential consumption at lower rates. It is
their belief that courts would not regard such considerations as
permissible in fixing rates. There is, however, some reason to think
that the commissions may be wrong in this opinion. In the West
Ohio Gas Company case,^ the Supreme Court appears to have implied
that commissions are not debarred, in fixing rates, from giving weight
to data on the relation between lower rates and expansion of consump-
tion, provided the data are reliable.^

3 In the case of New York this is mainly a development of the last 10 years. During the twenties the
New York Commission tended to be merely a court to consider complaints rather than an administrative
agency engaged in energetic control on its own initiative. See Heport of the New York State Commission on
the Revision of the Public Service Commission Laws, I, p. 14.

* An objective rate, of which there are several types, is a charge below the standard rates which applies to
consumption in excess of that in a previous period taken as the base. Objective rates have been voluntarily
Inaugurated by some utilities in various parts of the country.

»294U. 8.79(1935).

« See Ben W. Lewis, p. 720, Government and Economic Life, Brookings Institution.

420 CONClONTKA'l'ION OF ECONOMIC POWEll

Altliougli the ideal of those three commissions is apparently to fix
rates so as to eliminate profits in excess of an ordinary return on actual
dollar investment, they can, of course, achieve this goal only if the
utilities are willins: to forego their legal right to a fair return on a fair
valuation in the determination of which some weight is given to re-
production cost (except when the latter is lower than original cost).
\Mierever court proceedings arc threatened the commissions must
make valuations which usually represent a hybrid of original cost and
i(>pro(luction cost. Moreover, it is probable that the commissions
must often be somewhat generous in order to avoid court appeals,
both when reductions are secured by informal negotiation and when
formal cases are settled without appeal to the courts."

In determining an ordinary or fair rate of return the three com-
missions take into account elements which have come to be typically
considered by most commissions in the light of Supreme Court
decisions. The return must be at least equal to the return being
currently received by other business enterprises with comparable
risks. It should be such as to maintain the utility's credit and to enable
the company to raise whatever new capital it needs. Factual studies
are often made of the rate of return in other enterprises. • Inasmuch as
the commissions do not often have figures of original cost of assets of
other enterprises comparable to their figures for the utilities, to say
nothing of "fair values" of the properties of other enterprises, it is
obviously diflicult to determine the appropriate rate of return. Rates
of return allowed may have averaged somewhat higher than the true
comparable rates. In general the commissions have not stated
whether maintaining the credit of utilities means maintenance of
ability to sell securities at all, to sell securities at par or at some other
particular price, or to sell them on certain yield expectancies. The
New York commission seems to favor sale at par. Nor bave these
commissions developed any definite standards by which to determine
whether too much or too little capital was entering utilities. Although
they have, of course, shown awareness of the general relations between
rates, earnings, credit, and security structures, it does not appear thai
they have developed standards for designing ideal security structures
from the standpoint of the broad aims of control of rates, earnings, and
service.

It is obvious that the level of rates may be substantially influenced
by the^level of operating expenses when a cost basis is used for estab-
lishing the rate level. The commissions have devoted some attention
to the problem of allowable operating expenses. In New York and
Wisconsin standards for proper depreciation have been carefully
worked out. With regard to depreciation, maintenance, service
charges paid to parent companies, and the like, the Wisconsin com-
mission seems to take the position that the utilities are entitled to

' This situation is well illustrated by the experience of the Massachusetts commission which has success-
fully avoided litigation although it has always fixed rates according to standards in terms of return on care-
fully controlled security structures, without making property valuations. It appears that the Massa-
chusetts utilities have been permitted to earn liberal returns. The California commission, which has been
one of the most vigorous advocates of the original cost rate base, has on the whole been quite successful in
avoiding litigation. This result may be partly ascribed to the fact that much of the equipment of many
California utilities was installed during or after the World War, with the result that the gap between original
cost and reproduction cost was not as large during the twenties as in many other cases. But it also appears
that the California commission has permitted rather generous returns. See D. F. Pegrum, Rate Theories
and the California Railroad Commission, Berkeley, 1931. That the New York commission has followed
the same policy seems indicated by several cases cited in Part I of this report. See, for example. Re Electric
Rates, New York City and Suburban Territory, 1933 Annual Report, p. 391; Utica Qas and Electric Co.,
1931 Annual Report, pp. 208, 235-240; Investigation, Rates of Long Island Lighting.Co., 1935 Annual Report,
p. 788,

concp:ntration of economic power 421

recover only such expenses as would be incurred if vigorous competi-
tion were present. WTiat this means concretely is none too clear.
Apparently it does not mean that allowable operating expenses are
defined as what the operating expenses would be with the use of the
most efficient known techniques, which would, of course, be the
standard for maximum efficiency. Evidently the general aim is to
disallow as operating expenses those expenditures that represent
betterments or extensions, rather than maintenance and depreciation,
and controlled service charges in excess of the costs of rendering the
services and increments of expenditure on other items whose only
explanation resides in monopolistic controls of one sort or another.

It appears that the commissions do not regard it as any part of their
function to pass on the validity of wage rates .^ There is every reason
to think that an increase in operating expenses resulting from an
increase in wage rates would be regarded as allowable and would lead
automatically to an increase in the rate level if this were necessary in
order to preserve receipt of the fair return.

The restrained advocacy and tendency to prudent use, in setting
the rate level, of the standard of ordinary or fair return on actual
dollar investment represents the belief common to these three com-
missions, among others, that this method is the most workable and
efficacious of the rate base methods, and is eminently fair to investors
since it gives them a return on their actual investment that is cur-
rently equal at least to what they would have received from investment
in comparable unregulated enterprises. Belief in the desirability of
this standard must also reflect the conviction that it provides adequate
protection of consumers, for these commissions undoubtedly consider
their main function to be protection of consumers from exploitation
through. high rates.

This standard does not, however, reflect adoption by the com-
missions of the objective of maximum economic consumption as that
is conceived in the classification of objectives given above. It is to
be doubted that the commissions have even discovered the lowest
rate levels that would yield an ordinary return on actual dollar
investment. Although they have recently devoted more attention
to this matter they have not set rates on the basis of intensive study
of the potentialities of increased consumption at lower rates; and the
law up to the present time probably prohibits them from requiring
utilities to experiment with lower rates, except by the device of the
objective rate.

However, even if the lowest rates consistent with the standard of
ordinary return on actual investment were in effect, in many circum-
stances they would not yield maximum economic consumption. It is
true indeed that a very sophisticated and skillful handling of this
standard might produce maximum consumption ; but the very essence
of the notion of ordinary return on actual dollar investment is such
as to preclude any likelihood of such employment of it. The idea of
an ordinary return in each year on past investment is taken from
simple static economics describing a situation in which there is no
appreciable technical progress, no marked shifts in demand, no
significant changes in price levels or in other important dynamic

s Under thn rulin;; in Wolff Packing Co. v. Court of Twiustrial Relations of the State of Kansas, (262 V. S. 522,
1923) it appears that the States have no constitutional power to fix wages even in public utility industries.
Whether commissions in setting rates have legal authority to disallow some part ot the wages bill as un-
necessarily high is not clear.

279348— 41— No. 32 29

422 CONCENTRATION OF ECONOMIC POWER

influences such as are constantly at work in the real world — a situation
in which price is always equ^l to cost including; an ordinary return
on actual dollar investment. Although it is repeatedly averred that
public utility regulation does not guarantee receipt of an ordinary
return, this standard implies Very strongly that commissions will not
knowingly set rates below the lowest level that will yield, in addition
to adequate depreciation, the ordinary return on original cost of
property or actual investment. The notion is well stated in the
following:

* * * the earnings of the public service property should be such that, within
the life of the property, there will be returned to the OM'ner of the property the
capital which he has properly invested in it, and, in addition thereto, interest at
a reasonable rate upon such amount of capital as from time to time actually and
properly remains as an investment in the property."

This tends strongly in the direction of removal of risks of obsolescence,
changing price levels, and shifts in demand, insofar as they can be
removed. And although the ordinary return is conceived as fluctuat-
ing from time to time,^° it is not usually thought of by advocates of
fair return on original cost as ever going do^^^l to zero on any part of
the capital that is not completely and obviously obsolescent. In
practice the fair return varies but little. Rates of return used most
frequently by conmiissions and courts were 6 to 7 percent in pre-war
years, 7 to 8 percent in the twenties with 7 percent most common,
and 5 to 7 percent in the depression of the thirties."

Now it is highly doubtful that all or nearly all of the actual dollar
investment in even the less risky unregulated industries, those that
may be comparable to public utilities, has in fact received such a
"fair" return over an extended period of years. Yet experience
indicates that these industries have been able to attract sufficient
capital to meet increasing demands.

In practice, use of the standard of ordinary return on actual dollar
investment in utility property is most likely to give rate levels higher
than would be necessary to maintain expectations of sufficient profit
on new investment to attract capital as demand expands. In depres-
sion periods the fair rate of return may not be reduced as much as the
actual rate or return in comparable unregulated industries, while in
prosperity the rate might not be held below that in unregulated enter-
prises; since otherwise difficulties would appear in the raising of new
capital, and company protests would be vigorous.

More'' important, perhaps, is the possibility that book values of
corporations in unregulated industries, even in the less risky ones,
undergo more downward revisions to reflect partial obsolescence '^
than are made by commissions in the Original cost rate bases of utili-
ties. If this is so it follows that when commissions select a rate of
return by examination of rates of return on book value of property of
unregulated enterprises and apply this rate of return to original cost
rate bases of utilities they may be giving the utilities a higher rate of

» Orunsky, C. E., Valuation, Depreciation and the Rate Base, New York, 1917. Quoted in G. L. Wilson,
J. M. HerrinR, and R. B. Eutsler, Public Utility ReKulation, New York, 1938, p. 164.

'" The rate is not always regarded as fluctuating. In the period of high Interest rates following the war
the Illinois and Indiana commissions continued to use the pre-war standard rate (7-7.5 percent in the case
of Illinois) as a "normal rete." Bernstein, op. cit., p. 93.

" Ibid., passim.

" This may occur through unnecessarily large charges to depreciation instead of write downs of fixed
assets. Unregulated companies do not have the same ipcentive a$ regulated utilities to m»ke accrued
depreciation as small as possible,

CONCENTRATION OF KCONOAIKJ POWEll 423

return than the other enterprises actually received on original dollar
investment.

Again, it is obvious that in a period during which general prices are
considerably lower than formerly, rates that give an ordinary return
on the whole dollar investment in a utility may be higher than neces-
sary to make new investment attractive and to maintain the com-
pany's credit. This does not mean that a cost of reproduction rate
base for the whole of the property would be more satisfactory.
Clearly it would not, for it would ruin the credit of all companies
which had substantial amounts of bonds. If bonds are to be used in
large amounts in utility financing, on the grounds that debt capital
is cheaper and that insurance companies and savings banks are thus
furnished with approved investments, the expectations so created
should not be drasticall}^ impaired throughout the whole industry just
because the price level drops substantially. Neither an ordinary
return on an original cost rate base nor on a reproduction cost rate
base, applied to the whole of the investment, will give maximum
economic consumption with changing price levels. And neither type
of rate base in itself takes account of technological improvements,
shifts in demand, or changes in investors' fashions in securities. In
other words, no simple formula of rate of return on an investment
rate base is capable of achieving thoroughly satisfactory results.

In summary, application of the notion of an ordinary return on
actual dollar investment in utility property "used and useful,"
which is espoused by the best of the State utility commissions and by
the majority of writers on this subject, is not likely to result in
maximum economic consumption of utility services. Except in
periods when the general price level has risen markedly it is likely to
giv6 larger returns to past investment in equity capital than are needed
to assure a flow of the net savings into utilities on yield expectancies
comparable to those exhibited by enterprises competing with the
utilities for capital. In periods when general prices have risen sub-
stantially it may keep returns below the level for unregulated indus-
tries, but this is not likely to be prolonged because inadequate returns
by this standard are quickly recognizable and the companies will
protest vigorously.

LEGAL LIMITATIONS

As already indicated, the administrative commissions in the pubhc
utility field have been hampered seriously by the attitude and de-
cisions of the courts and by the failure of the legislatures to define
policy clearly.

By its interpretation of the fourteenth amendment, which pro-
hibits the taking of property without "due process" of law, the
Supreme Court has ma'd« it impossible for State commissions to pursue
the objective of maximum economic consumption in either the case of
expanding or of declining demand. According to this interpretation,
public regulation may not deprive a utility of any part of a fair
return on the fair present value of its property investment.

The rule that the utility is entitled to a fair return on the present
or current value of its property emphasizes the Court's concern for
fair treatment of past investments. Fairness to vested interests
rather than economic efficiency is the heart of the legal doctrine of

424 CONCENTRATION OF ECONOMIC POWER

fair present value. The Court's rule requires determination at every
time of what is then currently fair to the whole of the past investment.

Since the doctrine wliich the Court has enunciated is a doctrine of
fair treatment of past investmeht which inevitably seems to involve
the idea that utihty investment is entitled under almost all circum-
stances to as much as it would have received in ordinarily flourishing
unregulated industries of similar risk, commissions are almost entirely
prevented from seeking the objective of maximum consumption.
Ehmination of excess profits above the "fair return" is not unfair to
past investors, but reduction of rates by commission order which at
any time brings earnings below a fair return on all existing invest-
ment is likely to be regarded as illegal even though demand has
dropped, obsolete equipment has not been modarnized, or locational
elements have changed.

As a result, the conmiissions encounter difficulties in lowering rates
to conform with changes in technology or declines in demand, when fair
return would be impaired thereby, unless changes have been very
striking. Moreover, the courts tend to view actual cost with existing
rate of operations, including the fair return, as the minimum basis for
the average rate. Inauguration of lower rates on the presumption
that sales volume will expand sufficiently to bring in the fair, return at a
lower average rate and lower average unit cost tends to be regarded as
the function of management rather than of regulatory authorities —
especially since the utility is entitled to the fair return in each year and
consumption may increase sufficiently only over 2 or 3 years.

The court seems to have taken the position that a public authority
may not deprive the utility of a fair return on fair value at any given
time or in any short period of time, such as the ordinary accounting
period of 1 year. The utility seems to be legally entitled in any
given year to whatever rates will give it a fair return in that year,
but not to higher rates; without regard to past deficits or surpluses in
relation to a fair return.'^ However, neither commissions nor legis-
latures ha^^e clearly and forcefully presented a program designed to
give an average fair return over a period of years, with less than this in
some years and more in others. Apparently the Court has not
definitely forbidden a legislature or commission to adopt a long-run
program of averaging returns; and the success of "temporary rate"
statutes in the courts suggests that such a progtam, if instituted, would
be sustained. .

Not only does the philosophy of the legal doctrine limit commis-
sions in the main to the objective of merely preventing excess profits;
the application of the rule of fair return on fair value requires such an
enormous expenditure of their resources in determining valuations that
they have little time and money to devote to study of demand, con-
sumption, incremental costs, and obsolescence — that is, to the elements
that would be important in developing standards for the objective of
maximum consumption."

" Attempts have been made to maintain that the rate level may not be higher than the "value of the ser-
vice" even though a fair return is not gained. Jn general the Court has not acceded to this request to regard
"value of service" as a superior standard. However, it will not, of course, insist on an amount of revenue
that patently cannot be earned with existing demand conditions. "

" Trenchant criticisms of courts, commissions and utility managements for preoccupation with legalistic
conceptions and unsound economics and for failure to develop rules, standards and policies for designing
rates that tend toward maximum consumption are contained in M. Q. de Chazeau "The Nature of the 'Rate
Base' in the Regulation of Public Utilities," Quarterly Journal of Economics, LI, 303 ff. February, 1637;
C. O. Ruggles, "The Role of Rate Making," Harvard Business Review, Winter, 1940; and Ben W. Lewis,
In Part I of this report and in Government and Economic Life, The Brookings Institution, 1940, ch. XXI.

CONCENTRATION OF ECONOMIC POWER 425

Two aspects of the courts' applications of the fair value doctrine
have greatly complicated the work of commissions in pursuing the
objective of preventing excess profits, have impaired the effectiveness
of their work and greatly, and possibly unnecessarily, augmented their
expenditures. The courts have persistently refused to lay down any
standard for determining present value, but have insisted that both
actual dollar investment and cost of reproduction of the property must
be obtained and given consideration along with other elements. And
they have maintained (quite logically, on their view of the matter)
that only the courts could determine in the last analysis whether a
given valuation was fair or not. Such a position has naturally pro-
voked a great deal of litigation and volumes of debate on the respective
merits of various standards of valuation. The "valuation" which the
court has had- in mind is neither value nor cost nor anything else which
has a definite existence in objective facts, but represents an ideal of
fair treatment of the owners of past investment which can be made
concrete in a given case only by examination of the facts and exercise
of judgment as to what is fair. Consequently, it is scarcely surprising
that the controversy about a formula for valuations has never been
settled.

In the second place the courts have held steadfastly to their, view
of utility investment as a homogeneous lump of property or assets.
This has resulted in failure to recognize the difference in claims to
income on the part of holders of different types of securities. With
an increase in the general price level in line with rising returns in other
industries, fair treatment of stockholders might require an increase in
earnmgs and dividends per share, but this is not the case with holders
of bonds or preferred stocks bearing a maximum income limitation.
Siniilarly, with a decline in the price level the actual terms on which
capital has been invested are of significance.^*

However, recognition of the fact that the present value doctrine
practically liniits the objective of regulation to prevention of excess
profits (that is, the first objective discussed above) is much more
important than appreciation of the difficulties concerning standards
of valuation which have confused the pursuit of this objective. It
will be impossible for public authority effectively to pursue the
objective of maximum consumption consistent with profit expectations
sufficient to attract needed capital until the whole notion of fair
return on present value is scrapped — except for its application during
a transition period to the old investment made prior to announcement
of the new rules. It should be repeated that legislatures have re-
frained from energetic attempts to convince the Court that this
doctrine represented bad economics and more protection for investors
than is necessary to sficurg capital.

}_' From time to time some commissions have used as a criterion for fixing rate levels the provision oi in-
come suflBcient to pay fixed charges and ordinary or fair dividends on stocks. The Massachusetts com-
mission, which has had continuous control over security structures of utUity companies, has employed
this standard for several decades. Other commissions adopted it, at least in part, for a time during the
price inflation of the years 1916-20. In the depression of the thirties the New York and Wisconsin com-
missions en deavored in some instances to set rates that would provide, after payment of fixed charges, meraly
enough income for ordinary dividends and reserves. But except in Massachusetts this seems to have been
regarded as an emergency device, and most commissions held to the method of fair return on fair value.
Although the Supreme Court veered in the Chicago Telephone case (Lindheimer v. Illinois Bell Telephone Co.,
292 U. S. 151) toward acceptance of criteria related to the financial needs as evidenced in actual or reasonable
capital structures, it seems since to have reverted to its traditional position. See Bernstein, op. cit., pp.
37 fl. and 116 S.; and J. M. Clark, Social Control of Business (New York, 1939), pp. 317-318; and Part I of
this report. Commissions frequently say that they take capital structures into account in fixing the fair
rate of.retum. It is obviously diflScult to determine how and to what extent this is done, unless the com-
mission explains clearly.

26 CONCENTRATION OF ECONOMIC POWER

However, it is by no means certain that the court would hold invalid
. program consisting of the following parts: (1) A fair valuation of
past investment made on expectations that will now be altered by
public authority, and assurance 'of a fair return on this valuation for
the life of that investment (provided it can be earned at some rate
level); and (2) announcement that henceforth the objective will be
maximum consumption consistent with receipt of profits on invest-
ment made subsequent to the date of announcement ^^ — merely
sufficient to maintain expectations that will attract capital if demand
expands.^^ Definite announcement of the objective and the relevant
standards would ordinarily constitute fair treatment of future in-
vestors. With a division of the problem to distinguish between fair
treatment of past investment made before public adoption of a new
objective and treatment of additional investment according to objec-
tives and standards related to economic efficiency, the present value
doctrine, as it has been enunciated, would be applicable only to the
first part of the problem.

Recognition that the Court has not on its own initiative divided
the problem in this way should be attended by recognition that the
Court would probably consider such action as no part of its judicial
function. Secondly, it does not appear that the Court has .been asked
by commissions to pass on such a program, clearly delineated and
forcefully presented. Finally, legislatures, by their failure to enact
statutes directing commissions to adopt such a program, have neglected
what is clearly their function, whether or not it be considered in part
the function of the court or of commissions.

Consequently, if they desire commissions to aim at maximum
consumption, legislatures should pass statutes providing for a final
valuation of past investments in utilities (a valuation to end all
valuations) and for a fair return on that valuation for the life of the
investment, and at the same time announce a new policy for the
treatment of future investment and standards appropriate thereto.
It is possible that the Court might regard legislative establishment of
new rules for treatment of future investment as constitutional.
Whether it would accept a final settlement of fairness to past invest-
ments is, perhaps, more questionable. In any event, such a program
does seem to afford a possible means of gradually approaching the
goal of maximum economic consumption.

There are no available factual studies summarizing the results of
public regulation of electricity in these three States in terms of the
relations between investment, rates, wages, and profits. It was
found impossible to make such studies within the limits of the present
inquiry. However, some general conclusions are evident.

During the twenties, there was a tendency to fix rates so as not. to
yield less than 7 to 8 percent on valuations reflecting in increasing

^ >• That Is, profits in addition to the amount necessary for a fair return to investment made prior to adop-
ion ot this new objective.

" Differentiation in treatment of investment made before and after imposition of regulation or funda-
mental change in the rules of regulation has been advooated by many writers. See, for example, M. Q.
Glaeser, Outlines of Public Utility Economics. Several proposals have been made that the States make
contracts with utilities according to which present valuation would be made at the time of the contract
and new rules for future rate making laid down. See, for example, Report of Nr'w York Commission on
Revision of the Public Service Commission Laws, I, pp. 16 ff. and 334 fl; and E. M. Bernstein, Public
Utility Rate Making.

CONCENTRATION OF ECONOMIC POWER 427

measure the current cost of production. It is scarcely to be doubted
that the profits of many electric, gas, and telephone utilities were
generous to a point of being appreciably above an ordinary return on
actual dollar investment and still further abov^e the minimum neces-
sary to attract capital for expansion.'^ Some evidence of this is
afforded by the scramble between utility managements, promoters,
and banking or engineering firms to acquire operating companies,
and the capitalizations of holding companies. The avid public
purchase of utility holding company securities maybe taken partly
as an indication that current levels of utility earnings attracted more
capital toward the utilities than they desired to use in actual expansion
of equipment, for it seems evident that a considerable amount of the
additional investment in holding company securities did not go into
equipment but found its way into higher prices paid owners of pre-
viously issued utility securities or into the pockets of the working
capital accounts of promoters and bankers. Data submitted in the
Wisconsin Statewide Telephone case suggested that Wisconsin public
utility companies had received in the latter twenties returns on net
worth or common stock equity v/hich compared quite favorably with
those received by Wisconsin industrial enterprises. The New York
commission found that several utility companies serving New York
City had accumulated large surpluses during the twenties, which,
together with their depression earnings, enabled them to maintain
very good dividends in the depression. Many unregulated enter-
prises must have en^^ied this record.

During the downswing of the early thirties utility rates fell much
less than the prices of most commodities and utility profits held up
better than those of most industrial enterprises. Beginning about
1932, rates seem to have been gradually reduced in such measure
as to bring earnings much closer to a return of about 6 percent on
actual investment than in the twenties.

This has come about under a variety of influences, chief among
which have been depression, new legislation, more extensive control
of accounting, and mqre vigorous and continuous procedures on the
part of commissions to secure rate reductions, the fall in cost of
reproduction, and the impact of T. V. A. policies and experience.
Some of the same tendericies have probably been present in some
measure in most of the States that have less effective regulation than
the three here studied.

THE TENNESSEE VALLEY AUTHORITY

The objective of Congress with regard to the level of prices of
electricity produced by T. V. A.^^ appears to be quite similar to that
considered advisable by the commissions in Wisconsin, Illinois, and
New York — a level of ra '.es yielding revenues that cover the full costs
of producing and marketing electricity, including an ordinary or fair
return on the actual dollar investment. In fact, the language of the

" Cf. Keczer aad May, Public Control of Business, p. 170.

" In the case of the Xennesspc Valley Authority the ordinary or fair return becomes, of course, the actual
interest charges. The Tennessee Valley Authority Act provided that in the case of property taken over the
Tennessee Valley Authority (e. ?., the Wilson Dam) the authority should find its "present value" as a
basis for determination of investment costs.

428 CONCENTRATION OF ECONOMIC POWER

T. V. A. Act seems capable of interpretation to mean that electric
rates should bring in revenues which, in addition to returning the
full power costs, including depreciation and interest, will provide
sums for gradual repayment of the bonds issued to finance the invest-
ment.^'"

To the extent that electric revenues of T. V. A. are in fact large
enough to provide, in addition to payment of full power costs, sums
for liquidation of any of the investment (whether investment in power
equipment or in other equipment or in facilities common to all three
services is immaterial), the rates charged will obviously be above the
lowest rates that would just yield'the full annual costs of the actual
dollar investment — the standard apparently deemed most desirable
by the three commissions whose policies have "been surveyed above.
In one respect, then, the standard apparently contemplated by Con-
gress and employed by T. V. A. calls for rates somewhat higher than
those appropriate either to the standard of the lowest rates that yield
an ordinary return on actual investment or to the standard of maxi-
mum economic consumption. However, since the interest rates paid
by the T. V. A. are- far lower than the measure of '"fair return" on
private capital allowed by the State commissions, this does not mean
that rates set by T. V. A. must be higher than those required for
equivalent investment by privately owned utilities; in fact, the reverse
is clearly true.

We have seen, moreover, that regulatory commissions seem to be
barred by the law from requiring electric companies to reduce rates
on the expectation that enlarged consumption will prevent income
from falling below the amount equivalent to a fair return; and that
the most effective cormnissions have thus been forced to resort to the
less satisfactory device of routine, periodic reductions designed to
eliminate excess income after it appears, and to calculate th-e effect
of rate reductions on income on the basis of past consumption alone
with no regard for probable increases in consumption on account of
the lower rates. It is scarcely to be doubted that this process, at its
best, and even when supplemented by objective rates, may never
bring rates very close to the lowest remunerative level, especially
when the matter is complicated from time to time by reductions in
cost owing to factors other than increasing volume.

A Government corporation not subject to legal restrictions of the
sort that have hampered the commissions in seeking lower rates can
simply put into effect the lowest level of rates which, on the basis of
demand and cost studies, show a good expectancy of covering full
costs. In large measure this seems to be what T. V. A. has done.
T. V. A. rates were fixed on the basis of study of experience with rates,
consumption, and costs elsewhere in this country and in Canada and
study of potential consumption in the Tennessee Valley area. The
rate level Set was much below that previously in effect in the valley —
in some instances as low as 50 percent of th^ former rates — and sub-

" In order "to make the power projects self-supporting and self-liquidatinR, the surplus power (i. e.,
power not used hy the Tennessee Valley Authority in its other activities) shall be sold at rates which
• * • will produce gross revenues in excess of the cost of production of said power • • *" (Tennessee
Valley Authority Act, sec. 14). The engineering staff of the Joint Congressionp.'. C )nimittee Invcstigatkig
the Tennessee Valley Authority estimated that with the present rates, electric revenues of the Tennessee
Valley Authority would, in addition to covering all power costs and the annual expenses for navigation and
flood control, enable liquidation of the entire investment for these three services in a period of about 50 years.
The Annual Report of the Tennessee Valley Authority forJ038-39 predicted that from then on the electric
revenues would be sufficient to "assist in the liquidation of the investment in other phases of the Authority's
program."

CONCENTRATION OF ECONOMIC POWER 429

stantially below rate levels in most other sections of the country.
The response of consumption, stimulated also by the sale of cheap
appliances, was phenomenal. Within a few years constmiption per
capita in the valley had risen to a point well above the national average
and appreciably above many sections in the country. The practical
demonstration of the potentialities of larger consumption at lower
rates has influenced the rate policies of private electric companies
and of regulatory commissions. The Annual Report of T. V. A. for
1938-39 seems to indicate that the rapid -expansion of consumption
has carried the Authority's power output clo j 1 3 full use of its present
facilities.

The policies of Congress and of the T. V. A. implicitly assume that
the full costs of power produced in a multiple purpose project such
as T. V. A. can be calculated, in a sense significant for rate making.
Congress has directed that rates are to cover these full power costs
and yield additional revenue for gradual liquidation of investment,
and T. V. A. has calculated the "fuU power costs." However, it is
difficult to compute these full costs in the case of one service provided
jointly with others by a multiple-purpose enterprise such as T. V. A.,
because the full cost of the one service, in the production of which
there are used facHities common to the production of other services,
cannot be ascertamed definitely.

Now the capital costs of all facilities used solely for electricity can,
of course, be calculated by ordinary methods. These include, in
addition to the costs of the capital investment in transmission and
distribution facilities, the costs of investment in generating equipment
itself. The capital costs on account of all these facihties plus the
operating costs incurred for the provision of electric energy may be
called the full separable costs of electricity; that is, the costs which
arise solely from production, transmission, distribution, and sale of
electricity, or, to put it another way, the expenses on account of labor,
supervision, materials, and equipment which yieW electricity and
electricity alone.

But the full separable costs of electricity, as thus defined, do not
include any part of the capital costs of the investment in dams, storage
basins, and appurtenances, which contril)ute jointly to provision of
the three services of nayigation, flood control, and power. An
attempt to calculate the full costs of electricity must allocate the joint
investment (and any joint operating • expenses) between the three
services. Techniques of allocation on one or another of several
possible bases are well known, and the T. V. A., following the mandate
of Congress, has made an allocation of the joint investment.^^ But
neither this particular allocation nor an allocation made on any other
basis can discover the full power cost. It is simply impossible to
ascertain what part of the joint investment cost is due to or caused
by the production of power and what part is caused by the production
of either of the other two services. Given the joint investment, the
total cost of it must be incurred in order to produce any amount of
any one of the services and when it is producing one of the services
it is necessarily or automatically producinr,' che others also.

" After considering several differen*. bases of allocation, the Te ir ;ssee Valley Authority chose the "alter-
native justifiable expenditure" method. An estimate was mad 0; the Investment required to produce each
of the three services as a single-purpose enterprise. The propor' io iS in which the total of these three figures
were divided were then appliti to the joint investment of th- 1 jnnessee Valley Authority. See Report .
of the Tennessee Valley Authority Committee on Financial !'c cy, June 6, 1938.

430 CilNCKNTUATrON OK EfONOAFIC I'OWFJl

In practice, this moans that the Authority must exercise consider-
able discretion in allocating joint costs. Thus, according to part I of
this report:

T. V. A. power costs can l)e increased or reduced within very wide limits of
reasonableness merely by including therein a larger or smaller proportion of the
common investment. The allocation actually employed by tlie Authority,
altiiough one of several allocations easily permissible under the terms of the
T. V. A. Act (sec. 14) ^^ i?^ nonetheless, quite different from any allocation urged
by the advocates of pn 'a' power.

From, a theoreticil point of new, in a multiple-purpose project
maximum economic consumption will exist when the largest joint
investment is made that will satisfy the follow^ing conditions: (1) The
annual benefit from the last increment of each service enabled by the
last increment of joint investment is equal to the annual full separable
cost of producing that increment of service, and (2) the total annual
benefits from all the services are equal to the total of the full separable
costs of all plus the annual joint investment cost incurred for all the
services. It is immaterial whether or not any one of the services yields
benefits (evidenced by prices paid by consumers in the case of com-
mercial sale or by estimates when the service is given to consumers
and paid for by taxes) larger than its full separable costs, provided
all together yield a sum of benefits which cover& the total joint costs
as well as the total of the separable costs.

The available evidence is not of a sort to tell us whether or not the
T. V. A. investment as a whole satisfies these conditions. It indicates
liowever, that the sale of electricity at the present rate level of T. V.A.
may ordinarily return considerably more than its full separable
costs, even after the contemplated 10 dam system is completed. ^^

There is a third condition for an economically justifiable multiple-
purpose project. Its expansion should not proceed so far that the
full separable cost of the last increment of any one service exceeds the
full cost of provision of that increment by a single-purpose enterprise.
With regard to electricity, this means tliat T. V. A. should not ex-
pand its capacity to serve any community where its full separable
costs of production, transmission, and distribution would exceed the
full costs of a local single-purpose electricity enterprise.^* It is this
third condition which gives rise to the view that rates for T. V. A.
energy in each locality should be set equal to the full costs of provid-
iiig electricity in that community by the most efficient alternative
method. ^^

It should be added that once the estimated right or desirable amount
of investment in a multiple-purpose project has been converted into

» Sec. 14 provides, in part, the board shall make a thorough investigation as to the present value of dam
No. 2, and the steam plants at nitrate plant No. 1, and nitrate plant No. 2, and as to the cost of Covo Creek
Dam. for the purpose of ascertaining how much of the value or the cost of said properties shall be allocated
and charged up to (1) flood control, (2) navigation, (3) fertilizer, (4) national defense, and (5) the develop-
ment of power. The findings thus made by the board, when approved by the President of the United
States, snail b« final, and such findings shall thereafter be used in all allocations of value for the purpose of
keeping the book value of said properties. In like manner, the cost and book value of any dams, steam
plants, or other similar improvements hereafter constructed ana turned over to said board for the purpose
of control and management shall be ascertained and allocated.

" See Annual Report of the Tennessee Valley Authority for 1938-39.

" In most Instances such a local enterprise would use a steam generating plant.

" For an elaboration of this view see the chapter on the Tennessee Valley Authority by M. Q. dfi Chazeau
in the forthcoming study of the Twentieth Century Fund, on Relations Between Qovernment and the
Electric Light and Power Industry. Rates set by the Tennessee Valley Authority according to this stand-
ard would constitute a real "yardstick" for the electric rates of private enterprise. The impossibility of
discovering the full costs of generating power in a multiple-purpose project render rates made on any cal-
culation of the full power costs of the Tennessee Valley Authority a meaningless yardstick for the rates of
single-purpose electricity enterprises.

CONCENTRATION OF ECONOMIC POWER 431

specialized operating equipment the same general principle of pricing
for maximimi economic consumption applies as in the case of a single-
j)iirpose project; the level of prices for each service that is sold com-
mercially should be made equal to the increment cost of providing
the service. If demand falls or technological advance reduces the
cost of operation with new and different equipment the old level of
prices will be too high for maximum economic consumption.

In such a situation, however, Government enterprise is at some dis-
advantage as compared with private enterprise. Experience demon-
strates that investors in private enterprise have borne, willingly if
not cheerfulh^, a large part of the burdens of obsolescence and decline
in demand through losses or lowered returns on their securities. On
the other hand, investors in Government securities in this country
expect to be paid, and ordinarily have been paid — in the case of the
Federal Government, at least — the full guaranteed return, whether
it is earned or not. This being so, with declining demand or advancing
obsolescence, the Government is presented bluntly with a choice
between maintaining or raising prices to maintain revenues, if pos-
sible, or recouping the deficits from taxation.

The foregoing discussion of the economic principles which should
govern the pricing of one service produced by a multiple-purpose
enterprise must not obscure the major achievement of the T. V. A.
in tbe pricing of electricity. AVliatever the amount of revenue which
ought to be obtained by the sale of a service, produced either by a
multiple-purpose or a single-purpose enterprise, there may be more
than one level of prices at which this amount of revenue can be
secured. The particular merit of T. V. A. pricing is that it has aimed
in the direction of the lowest level, rather than some higher level of
prices, and in so doing has graphically illustrated the elasticity of
consumption at lower rates which most other electricity enterprises
had failed to explore.

CHAPTER IV

THE LEVEL OF PRICES AND INCOMES UNDER FEDERAL
MILK CONTROL

COOPERATION, CLASS PRICES, AND PUBLIC CONTROL

Public control of milk prices by the Federal Government and by
several of the States, discussed in part II of this monograph, differs
markedly in two respects from commission regulation of utility rates
and of coal prices. In the first place, milk control exhibits a combina-
tion of two kinds of control, collective bargaining by private organiza-
tions and price fixing by a Government agency — the Secretary of
Agriculture and the A. A. A. in the case of Federal control and adminis-
trative departmBnts or boards in the case of State control.

Cooperatives of dairy farmers grew rapidly in the post-war years,
encouraged by the United States Food Administration during the war
and by the passage of the Capper- Volstead Act in 1922 exempting
associations of agricultural producers from the antitrust laws.^ In
many milk markets collective bargaining on producer prices by coop-
eratives and large distributors became. well established during the
twenties. Government price regulation was inaugurated only after
the cooperatives found it impossible during the depression of the thirties
to prevent drastic declines in producer prices. Many State govern-
ments and the Federal Government have provided for some form of
regulation of milk prices.

In general, regulation by most States and by the Federal Govern-
ment under the A. A. A. program, has had as its purpose the mainte-
nance of prices to milk producers at a higher level than could have been
continuously obtained otherwise; it has not been intended, nor has
it operated, to alter the existing structure of the milk markets. The
principle and the apparatus of collective bargaining between the pro-
ducer cooperatives and the large distributors have been accepted.
Regulation has strengthened and supplemented this machinery.

Federal regulation, for example, has not been instituted in any
market without approval of the local cooperative. In some measure
the A. A. A. has operated by marketing agreements voluntarily en-
tered into by cooperatives and dealers. In the case of Federal orders
the present law requires that before an order is imposed on a market,
or substantially changed, its provisions must be approved by two-
thirds of the producers selling in that market, or by producers furnish-
ing two-thirds of the milk entering that market. Since the law also
provides, in effect, that a cooperative casts the total of its members,
votes for or against a proposed order, the cooperative has in most
markets a practical veto power. The A. A. A. has encouraged the
strengthening of cooperatives in order to facilitate the work of fixing

' Power to prevent undue enhancement of prices by such associations was vested in the Secretary of
Agriculture. There has been no legal determination of what constitutes undue enhancement.

433

434 C^ONCIONTRAI'ION OK ECONOMIC IV)WER

prices and of allocating receipts and the enforcement of prices and
payments to producers; and in order to insure that the cooperatives
would be left in good condition in the event of withdrawal of Govern-
ment price fixing.

In the process of regulation the Federal Government and many of
the State governments have not in the main endeavored to raise the
prices of all the milk entering the regulated market for all uses, but
primarily prices of milk devoted to certain uses, especially fluid milk
and cream. In addition to these two uses milk is manufactured into
a variety of food products such as butter, cheese, condensed milk,
evaporated milk, ice cream, etc. The typical structure of milk prices
to producers, f. o. b. city market, is made up of different prices per
hundredweight for milk to be used as fluid milk, as cream, or as man-
ufactured milk products. In most areas, milk used as fluid milk is
known as class I, that sold as cream as class II, and that going into
manufactured products as class III.^

Even in the absence of price control, either by cooperatives,
distributors, or government; there would exist permanent price differ-
entials f. o. b. city markets between the different classes of milk.
The normal price diflPerentials would be attributable in part to differ-
ences in cost, especially transport cost and sanitation requirements
involved in production and delivery of milk for dift'crent uses. Health
authorities ordinarily require of producers whose milk is used for fluid
consumption standards with respect to equipment, care of herd, and
the like, that are not required of producers wdiose milk goes into man-
ufactured products. The extra costs would naturally appear in a
price differential. In the absence of market controls, differences in
cost of transporting an equivalent unit of milk in the forms of fluid
milk, cream, and butter or cheese are the most important reason for
price differentials. Freight rates per mile are much higher per unit
of milk contained for fluid milk than for cream and higher for cream
than for butter. Because of the differences in freight costs and the
corresponding price differentials in the city market dairy farmers
located near the city will find it more profitable to ship fluid milk,
those somewhat farther out will ship cream, and only butter and
cheese wmII be shipped from a third zone, still more distant. To
farmers near the border of the milk and cream zones it is, of course,
practically immaterial whether they ship milk or cream. But if the
l)rice of fluid milk in the city should go up relative to the cream price,
then the border of the milk zone would be pushed out farther, as former
cream shippers in the nearer part of the old cream zone would now
find it more profitable to ship milk. By decreasing cream shipments
(his would raise the price of cream so that some butter shippers in the
nearer part of the butter zone would ship cream instead of butter.

The liorders actu.ally are areas rather than lines. Moreover, some
plants making co!idensed milk, evaporated milk, cheese, or butter, or
other manufactured products are often established in the miUc and
cream zones around a city market, in order to dispose most economi-
cally of certain unavoidable surpluses of, fluid milk. For these rea-
sons some part of the milk of many farmers in the milk and cream

'In some markets thorp arc only two clas.so?. fluid milk and orpam ronstitutinp one, and all manufac-
turing milk the other. In a few markets a larpc number of classes have been distinguished. For example,
for several years past with exception of one short period, there have been nine classes in the New York
rity market.

CONCENTRATION OF EOONOMK! POWKK 435

zones will be used for manufactured products at all times, and espe-
cially in the summer months of greatest milk production.

Milk market regulation is centered around particular city milk
markets; but it should be remembered that the zones proper to one
city market often overlap zones proper to another city, and that a
large city often reaches several hundred miles over many smaller in-
tervening city markets for its butter and cheese and sometimes for
its cream and milk. For example, the New York and Boston milk
zones overlap in parts of eastern New York State and western Ver-
mont; and both cities draw most of their butter and cheese and some
cream from the Middle West.^

During the late twenties dairy cooperatives supplying a number of
cities were able to raise the. prices of class I milk relative to class III
prices. The differentials were widened substantially beyond differen-
tials which would merely have reflected differences in costs.* Evi-
dently this was possible because the cooperatives were able to exercise
some measure of control over the amount of milk entering fluid con-
sumption, thus retarding the expansion of supply as demand increased
and because city health authorities sometimes aided control of class 1
sales by refusal to inspect farms located outside a certain radius, thus
delimiting the milk zone.

In 1930 many of the cooperatives were able to maintain fluid milk
prices fairly well, so that there were only minor declines, whereas prices
of class III milk dropped rapidly, opening up a much wider gap than
had prevailed in the previous decade. The natural result ensued.
During 1931 and 1932 much milk that had formerly gone into manu-
factured products appeared on the fluid milk market and class I and
class II prices crumbled.* This was the occasion for the pleas from
producers for Government assistance which became embodied in the
A. A. A. and the various instances of State milk control.

Government control intended to raise milk prices received by pro-
ducers and to increase producer incomes, the general purpose of all
cases of milk control examined iii this study, has two alternatives that
can be effective. One is to raise all milk prices, which can obviously
be done only by curtailing total production of milk for all uses '^ — a
task which is beyond the power of most State governments and 'would
be a formidable job for the Federal Government. The other prac-
ticable alternative is to increase the price of class I milk (or the prices
of both class I and class II milk) leaving the price of milk for manu-
factured products untouched at its competitive level — in other words
to widen the class price differentials. This is what the cooperatives
were successful in accomplishing in the latter twenties but could not
maintain during the depression, and what government has since at-
tempted. Public control agencies have, with some exceptions, treated
the problem of price differentials (where they have treated it at all)
principally in relation to the objective of raising the average or
"blended" price of milk and the income of producers. For this reason,
and because some States have fixed only the price of fluid milk or one
price for fluid milk and cream, most of the discussion of milk price

3 John M. Casscls, A Study of Fluid Milk Prices, pp. 143 IT. and 192. Boston has rocoivi'd vi-ry consider-
able parts of its cream from the Middle West. The same might have been true of New Yorii if city author-
ities had been willing to inspect dairies west of Pennsylvania.
— d 18- ~

ibid., 166 Q. and 184 ff.
' John r>. Black, The Dairy Industry and the A. A. A., pp. 72 and 231.
• Unless, of course, demand for milk in some or all uses lia|)pens to be growing, in wl
ment assistance is needed to raise prices.

436 CONCENTRATION OF ECONOMIC POWER

fixing, wliich has widened the spread between the prices of fluid milk
and manufacturing milk, is presented here rather than in the later
section where the pattern of prices is treated.

There seems to be little doubt that government regulation with the
aid of cooperatives, can achieve this end in some measure. The total
gross revenue received for any given amount of milk can be increased
in this way, provided that diversion of sales from class III uses to
class I and class II uses can be restricted to a negligible amount.
Increases in class III production are prevented by leaving class III
prices to settle themselves at levels which do not attract additional
output. Provided the differentials are not widened too much, diver-
sion of sales from class III to higher classes can be- restricted in con-
siderable measure by the use of the "base-surplus" plan, which will
be described below, by the control of cooperatives over their members,
through enforcement proceedings against nonmembers who "chisel"
into the higher paying markets by price cutting, and by refusal to
admit any new producers into milk markets or by erection of obstacles
to entry that limit the number of new producers, such as imposition of
a probationary period during which the newcomer receives payment
for all of his tnilk at the lowest class price. It is generally believed by
distributors, producers and milk control authorities that little reduc-
tion in consumption will attend increases in the price of fluid milk
within a considerable price range with the result that gross receipts
will grow nearly in proportion to the price increases. Even if class III
prices are depressed a bit, by a slight increase in the quantity of milk
disposal in these channels, these prices are not likely to drop enough
to offset the gain on fluid milk. Unfortunately there have been no
adequate studies of the relation between fluid milk prices and con-
sumption, particularly over the longer term, and it is by no means
certain that market changes in price w^ill not have important ultimate
effects on the sales of fluid milk.

For most States, at least, it would be impossible to carry through
successfully a policy of markedlj^ raising all class prices through pro-
duction control. It could perhaps be done by a State (or cooperating
group of States) which imported from surrounding States negligible
quantities of milk or other dairy products and which was in fact
largely cut off by distance or exceptional freight rate barriers from
the chain of independent markets sketched above. In the case of a
State already importing from others or so situated relative to outside
producmg areas that substantial imports would be attracted by marked
increases in prices, the difficulties of enforcement would be enormous
even apart from constitutional obstacles. Moreover, in order to raise
class III prices along witli the other class prices, those States which
obtain large amounts of manufactured dairy products from outside
areas — as, for example, many Eastern States — would have to fix higher
minimum prices of butter, cheese, evaporated milk, and other manu-
factured milk products, or else abandon processors located within
their own borders, and hence subj-ect to the liigher class III prices, to
the ruinous competition of processors located outside. In the heavily
settled parts of the country, at least, it would seem that the raising of
all milk prices through control of production of all milk could be
accomplished only by the Federal Government.^

' According to present interpretation this would appear to be unconstitutional, for the Court has not yet
accepted the fact that the prices of milk which moves acrrfSs State lines are affected by the prices of nulk
which sojourns within one State. See Part II, p. 75. (

CONCENTRATION OF ECONOMIC POWER 437

Apart from constitutional obstacles it is obvious that the Federal
Government would also be in a stronger position than most State
governments to carry through successfully the second of the two effec-
tive policies — that of widening the differential between class I and
class III prices. The extent to which a State can raise class I prices
and sustain them is limited by potential imports, which will be boot-
legged, or recognized and permitted, according to the State's policy.
At present the A. A. A., restricted by constitutional interpretation to
markets receiving interstate milk, finds itself in somewhat the same
position. If it had''the power to raise class I prices simultaneously in
aU markets it could probably raise them higher than it can now do in
any one market subject to the influences of neighboring markets that
cannot be regulated by A. A. A.

Suppose, for example, that the price of class I milk in Boston were
boosted by 25 percent. Large amounts of milk produced in New York
and Vermont and now shipped as class I milk in New York, would
immediately receive a marked price advantage if they could be sold
in Boston. The same would be trueof some class I milk sold in other
New England cities. Producers of much cream hitherto shipped to
Boston from points beyond the previous boundary of the milk zone
would now have a very strong incentive to ship fluid milk instead of
cream. To sustain the high class I price in Boston for any consider-
able time would require prohibitions against additional receipts of
fluid milk and an army of inspectors, or else an advance of class I
prices in other New England cities and in New York and an advance
of class II prices both in Boston and in these other cities. To hold
the. much higher class I price in New York it might then be necessary
to raise the class I price in other markets. Maintenance of the high
class II prices in. New England and New York would require raising
the class III prices in these areas and also throughout the Middle
West, since middle Western farmers would otherwise find it profitable
to attempt to sell cream (class II) in the eastern markets. Substantial
increases in class III prices would encourage greater production of
milk for manufactured products so that it would become impossible
to enforce these prices. As they declined it would once again become
difficult to enforce the high class II and class I prices, etc. and' so the
chain would be completed.

Thus, although this hypothetical example may be somewhat exag-
gerated it should be clear that even where the local cooperative
includes all current shippers. of fluid milk and cream and can police
them successfully, there are definite limits to the amount by which
the class I price, or class I and class II prices, can be permanently
raised above the class III price — limits determined by the complex
of price relationships with "outside" areas and the ability to exclude
additional!, receipts of milk and cream by one. device or another.

In the light of this market situation, the discussion wiiich follows
concerns the objectiyes and standards first of Federal and second of
State milk control.

FEDERAL MILK CONTROL

Legislative Object ioes and Standards.

The purpose of the laws under which the Department of Agriculture
fixes minimum prices of milk is to raise the prices and the incomes of
milk producers. The original Agricultural Adjustment Act, which

279348 — 41— No. .S2 30

43J^ CONCKN'IMiAriON nl' KCONOMK; POWEIl

applied also to other important farm commodities, set as a standara
prices at which agricultm-al commodities would have the same purchas-
ing power in terms of articles bought by farmers as in the base period
190.9-14. Congress has also provided, however, that if satisfactory-
data are not available for the years 1909-14 the period August 1919-
July 1929 may be used as the base period or any portion of this post-
war period "for which the Secretary of Agriculture finds and proclaims
that the purchasing power of such commodity can be satisfactorily
determined from available statistics of the Department of Agri-
culture." It appears that the post-war period has been generally used
in computing purchasing power parity prices for milk.

Provisions contained in the Agricultural Marketing Agreement Act
of 1937 make the parity standard or goal elastic upward if the Secre-
tary of Agriculture finds that the parity prices "are not reasonable in
view of the price of feeds * * * and other economic conditions
which aft'ect market supply and demand for milk and its products."
No definite standards are given for the adjustment of prices above
])arity to make them reasonable. It is merely directed that they shall
"rellect such factors, insure a sufficient quantity of pure and whole-
some milk, and be in the pubhc interest." Such phrases Cover a great
variety of possible standards.

Congress has provided no standards for reduction of milk prices.
Prices of agricultural products are to be reestablished at a defined
parity, but maintenance of this parity, if there should be a marked
dechnc in the prices of goods bought by farmers, is not required. And,
in any case, prices are to be above parity when that is necessary to
make them reasonable. There is no provision for the fixing of maxi-
mum prices.

The law authorizes equalization of the average or "blended" price
per unit received by producers shipping fluid milk to distributors, on a
market-wide basis unless producers of three-fourths of the total
volume favor equalization only among those shipping to a given dealer.
In general under this system the total amount due to all producers
included in the pool is calculated on the usual class basis; this total is
then allocated to the individual participating producers in accordance
witli their total shipments. In other words each producer receives a
uniform "blended" price, based on the total amount of milk he ships,
and irrespective of the proportion of milk from his particular shipment
used fof each class.

Administrative Standards .

Although the DairySectionof the A. A. A.has continuously computed
parity prices it appears that this standard has not in fact been much
used in fixing prices. The principal explanation is to be found in a
realistic regard for the competitive market situation described above,
which in the absence of control of total milk production in important
producing areas has rendered it impossible to raise prices in most
markets to the parity levels and hold them there. Moreover, consti-
tutioiuil limitations anc the lack of power to institute Federal regula-
tion except where it is desiretl by cooperatives have restricted the num-
l)er of markets brought under Federal control. Hence, prices have had
to reflect competitive influences from nearby regions except where
coopei'ation between State control agencies and the A. A. A. have
enjd)letl a measure of integrated control for a considerable area.

CONCENTRATION OF ECONOMIC POWER 439

Prices in most markets under Federal regulation have apparently
remained well below parity levels. In July 1939, of 23 markets under
Federal order 18 markets had fixed pric^ below computed parity.
In 13 the prices actually paid were substantially below parity.

During 1933 the theory of the Dairy Section of the A. A. A. and of
the cooperatives seems to have been that large increases in the class
I and class II prices, if accompanied by partial production controls
for class I and class II milk and minimum resale prices that maintained
dealers' margins, would produce an automatic, if lagging, increase in
prices of milk entering manufactured products. The original 15
Federal marketing agreements and licenses set class I and class II
prices much above the previous levels in these markets. Producing
areas from which milk might enter the city market were delimited,
usually in accordance with the existing boundaries, often somewhat
extended, of the milkshed. Within the milkshed partial production
control was fostered by encouragement of base-surplus schemes in-
volving producer quotas for class I milk.

These schemes involve modification of the pooling arrangements
which have been described above. Each producer is allotted a quota
(in physical units) which is the maximum quantity for which he will
receive the established fluid milk price. An}^ excess of his sales over
this "base" is classed as "surplus" and is paid for at the lower rates
established for milk which is not destined for fluid use. The total
proceeds in the pool are then divided into two fractions, — that repre-
senting the total value of all fluid milk and the remainder representing
the value of milk for all other uses. The first fraction is then split
among producers in proportion to their respective base quotas; the
latter in accordance with the amounts of the surplus milk which each
delivered during the period. In case the total sales of fluid milk
exceed the total quotas, the division of the base^pool is adjusted cor-
respondingly, but this rarely happens because total quotas are ordi-
narily set 10 percent above estimated sales.

Under these agreements minimum retail prices were fixed, in most
cases at levels which would maintain or increase dealers' margins, in
order to gain the cooperation of dealers and to prevent price cutting
by dealers, which often resulted in or from price cutting on class I
milk by producers. With fixed prices observed by many, if not most
producers a^nd distributors, there is, of course, a strong inducement to
the individual producer whose milk is used and paid for largely as
class II or class III to sell his whole output to a dealer at something
below the fixed class I price but above his "blended" or average price.
Obviously the dealer also profits if he can shade the prevailing retail
price a little.

It is scarcely to be expected that in the hurly-burly of the initial
effort in 1933 any clear-cut standards would be developed. Reflection
should have shown that the theory was wrong. As it was, experience
soon demonstrated, partly through increasing violations, that class III
milk, instead of foUowing along up in price, was being diverted, again,
as in 1930-31 into higher-priced uses.

In the face of much opposition from producer organizations the
Department of Agriculture announced a new policy early in 1934.
The two effective alternatives were recognized — raising all class prices
through production control or merely widening the spread between
unregulated class III prices and the prices fixed on class I and class II.

440 CONCENTRATION OF ECONOMIC POWER

The latter objective was adopted temporarily pending the develop-
ment and acceptance of a general scheme of production control for all
dairy products. General production control never eventuated.
Hence, the temporary pohcy of fnaintaining as wide a spread between
the micontrolled class III prices and the regulated class I and II
prices as could be continuously sustained, without Serious threat to
the balance of fluid milk receipts and consumption in each market
and without numerous violations, became the regular policy.

The basic element in this pohcy is acceptance of the uncontrolled
class. Ill prices as the base of the pyramid. Consideration is also
given, of course, to class I and II prices in nearby markets not under
Federal control, for the endeavor is in general to fix the highest class I
and II prices in Federal orders which, given all the existing competi-
tive influences, can be successfully maintained. This does not mean,
of course, that the minimum prices fixed by the Secretary of Agricul-
ture" are the prices which would exist with effective competition in
milk markets which eliminated all differentials between class I, II,
and III prices except those which merely reflected differences in cost.
Rather, the endeavor is to maintain the widest differentials above
class III prices that are feasible under given circumstances.

With this policy there was less reason for delimitation of producing
areas foi; particular markets and all such restrictions were removed.
The amendment of 1937 specifically provides that no Federal market-
ing agreement or order shall restrict entry into any market of any
mflk or milk products produced anywhere in the United States. Since
adoption of this policy restrictions on production have been limited to
sanitary requirements and inspection policies of- local authorities, the
probationary period, and base-surplus schemes. Retail price fixing
was also abandoned with the neW policy, except where producer-
distributors were a large factor in the market and seemed to need
protection, and instead other measures, such as strengthening of
cooperatives, were relied upon.

Under this realistic policy something approaching the nature of
standards has been developed. These standards relate, of course, to
the margin that can be maintained between the class III prices — or
the prices of butter and cheese which are always closely related to
class III prices — and the class I and II prices. An upper a^nd a lower
limit for the class I price in a given market are estimated as follows.
The upper limit represents the current price of butter plus the average
differential between the class I price and the price of butter in the latter
half of the twenties, adjusted for any substantial changes in quality
or transport costs. This "historical" standard is regarded as the
highest possible price attainable in most markets, inasmuch as it is
recognized that the spread between butter prices and class I prices in
the latter twenties was unusually favorable and may have been higher
than could have been maintained for a longer period.

The lower limit represents an estimate of what the class I price
would be if there were no element of market control, if class price
differentials measured only differences in cost. This "competitive"
standard is computed by adding to the current price of milk for
manufactured products at the edge of the milkshed, transport charges,
cost of meeting sanitation requirements, a quality premium, special
handling costs, and a premium for convenience of location.

CONCENTRATION OF ECONOMIC POWER 441

Evidently the general policy is to fix the price somewhere between
these two limits after study of the peculiarities of the particular market
such as the proportion of the production in the milkshed controlled by
the cooperative, the strength of the cooperative and the past success
of base-surplus plans, the number of producer-distributors and the
number of small distributors, the general attitude of producers, the
volume of class III milk near the edge of the milkshed, the size of the
present surplus (above fluid requirements) being carried by the
market and whether it is increasing or declining, and the like. But it
must be borne in mind that selection of the actual price to be fixed will
be affected by the opinions of the officers of cooperatives, which have a
veto power, and of the distributors, whose cooperation is important.

Results.

The statistical analysis of price changes prepared by Mr. Waite
and presented in his report on Federal milk control, indicates that
producer prices have been substantially raised in the 20 markets
regulated by the A. A. A. for which continuous series of monthly
prices were available. In 14 cities under Federal control during most
of the period 1934-37 the annual average price paid producers in-
creased by 1,72 cents per quart between 1933 (when prices in markets
under Federal control, under State control, and uncler no control all
reached their low points of the last decade) and 1937. During the
same period the average price in 9 cities with State control increased
by 1.66 cents per quart and the average price in 15 cities with no public
control rose by 1.10 cents per quart. The rise in 6 cities under Federal
control for a smaller part of this period was 1.56 cents per quart.
In markets with Federal control the average 1937 producer prices
were closer to prices prevailing 10 years earlier in these rnarkets than
was the case in markets under State regulation gnd in markets under
no Government regulation. The average prices in the two sets of
markets under Federal control approached more; closely to the 1927
prices by a half a cent to a cent a quart, equivalent to 20 cents to
40 cents a hundredweight. Similarly the average prices in the
markets under Federal control were closer in 1937 to the highest
annual average prices in the twenties than was true in, the other
markets. It is probable that the Federal milk program exerted an
influence extending beyond the markets under direct Federal regula-
tion, by facilitating price increases obtained by cooperatives or by
State control boards.

In the middle of 1939 the fixed minimum prices were above the
computed "competitive" prices in all but one of the 23 markets under
Federal control and in most cases the margin was substantial. Actual
prices paid to farmers exceeded the "competitive" prices in all the
23 rnarkets, in nearly every case by a substantial margin. Evidently
the twin control of A. A. A. and cooperatives has been successful
in maintaining a spread between class I and class III prices which
appreciably exceeds the cost differential. The spread has not, how-
ever,"been restored to the width it attained during the latter twenties.
In only one market was the price paid to farmers in the middle of
1939 above the upper limit or "historical" price computed by adding
to the current price of butter the margin between butter prices and
class I prices in the predepression years. In most markets the price
remained considerably below this upper limit. Even so, there were

442 C0NCE^fTRATION OF ECONOMIC POWER

signs in a few markets that, as a result of producer pressure, price
had been fixed at a level too high to be maintained for any consider-
able period. There seem to be no data available on the effect of
Federal milk control on capacit}?- or number of producers.

Milk producers have gained in two ways from Federal milk regu-
lation. Prices have probably been maintained at higher levels than
could have been achieved without minimum price fixing by Govern-
ment. Secondly, regulation has insured payment by dealers of the
fixed minimum price for all milk actually used as class I, through
better accounting, independent auditing and checking procedures.
Along the same line the A. A. A. has modified many customary fixed
deductions for transport and handling charges long used by dealers
in computing net prices paid to farmers. In many instances these
customary deductions had been rendered quite arbitrary by the devel-
opment of cheaper methods of handling milk.

Owing to the highly complex and technical nature of devices for
making imiform and equalizing prices paid by dealers to producers,
it i^ impossible in a study of this scope to treat that matter adequately.
It may be said, however, that in three ways the work of the Dairy
Section of A. A. A. has probably had a tendency to diminish legitimate
causes of friction between different producers over differences in the
average,. or. "blended" price's received. The design, technique, and
processes of equalization schemes have been improved. Secondly, the
A. A. A. has endeavored to put into operation an equalization plan
applying to all producers in a market rather than one applying merely
to all producers selling to a particular dealer. This means that differ-
ences between dealers in proportionate sales of. milk in different use
classes are eliminated ' as a cause of differences in blended prices
received by different producers who, because of similar seasonal pro-
duction patterns and similar location relative to the market should
receive the same blended price. Finally, in assignment to producers
of base-ratings or quotas for class I deliveries the endeavor has been
made to make them reflect seasonal production patterns and, to some
extent at least, location.

Anniaal data on dealers' retail margins from sales to the family
trade suggest that distributors as a whole have been affected compara-
tively little by Federal milk control. The margin has increased some-
what since 1933, returning almost to the margin prevailing in the late
twenties. Changes in dealers' margins in markets under Federal con-
trol have been slightly more favorable than in markets with no con-
trol. The changes in markets with Federal and State control have
been nearly identical. It is probable that the reduction in price cut-
ting in producer prices has benefited large, well-established dealers at
the expense of small dealers, who often sought to expand their sales
by reducing their retail prices below the prevaiUng levels.

With little change in dealers' margins, the changes in retail prices
' have reflected principally the changes in producers' prices, which have
been borne by ultimate consumers. Evidence of the widening spread
between class I and class III pjr ices in the twenties is contained in the
increasing difference of the retail price of fresh milk over that of evap*
orated milk. Price statistics indicate that this trend has been con-
tinued and accentuated in markets under Federal control. It may be
significant, in this connection, that sales of canned milk have increased
sharply in relation to sales of fluid milk during the past decade.

CONCENTRATION OF ECONOMIC POWER 443

It should be recalled that consumers have no direct FepresentatJoB
in the process of collective bargaining between producers and distri-
butors; they affect the market primarily through their purchases.
Two provisions permit consumer influence on price fixing by the
A. A. A. Consumers or their representatives may appear at the pub-
lic hearings, and the office of Consumers' Counsel was established in
the Department of Agriculture to guard consumers' interests in the
A. A. A. program by providing the Secretary with critical reviews of
proposals. Participation of consumers in hearings has evidently exer-
cised a negligible effect on the program, largely because consumers or
their organizations do not have sufficient information or cannot do
the work necessary to put up a case that can compare with that of the
producer organization or the briefs of the A. A. A. staff, but there is
some evidence that consumer organizations are beginning to play a
somewhat more effective role.

Only in a very few instances have objections made by the Con-
sumers' Counsel been sustained by the Secretary over the recom-
mendations of the Dairy Section. The staff of the Consumers' Coimsel
is small relative to the combined staffs of all the commodity sections of
the A. A. A. ; yet the Consumers' Counsel is expected to review the whole
program.

There has always been a group in the A. A. A. which believes that
in addition to the program of raising producer prices an endeavor
should be made by the Federal Government to diminish the high costs
of distribution of milk. It appears, however,, that nothing of conse-
quence has been done along this line. Congressional intent and ad-
ministrative activities have remained essentially devoted to the single
purpose of raising prices and incomes of milk producers.

CHAPTER V

THE LEVEL OF PRICES AND INC JIVIES UNDER MILK
CONTROL IN FIVE STATES

OBJECTIVES AND CONTROL DEVICES

Part II of this study includes reports on State milk control in
Indiana, New York, Wisconsin, Oregon, and California. Minimum
price fixing and measures to protect producers from dishonesty in
payments by distributors have constituted the principal elements of
similarity in the programs of the five States, which otherwise exhibit
marked differences in objectives, in control devices, and in standards.
One of the purposes of this report is to indicate, at least in part, the
variety of State milk control programs and to compare their aims
and methods.

Wide differences exist between these States both in the relative
importance of milk and other farm products and in the proportionate
use of milk for fluid consumption and for manufactured products.
In Indiana dair3ang is much' less important than the production of
corn, hogs, and beef cattle, whereas in New York dairying is the major
farm enterprise, contributing about 50 percent of the State's farm
income. Wisconsin leads all States in milk production with a little
more than 10 percent of the total output in the country. About 75
percent of the milk produced in New York is consumed as fluid milk
and cream, while 85 percent of the Wisconsin milk production goes
into manufactured products, particularly cheese and butter. The
extent to which differences in State milk control programs reflect
differences in characteristics of the kind just noted is not, however,
clear.

On the other hand, the importance of actual or potential imports
of out-of-State milk as a Timiting factor on price increases is plain.
Of the States included in this survey New York alone imports sub-
stantial quantities of fluid milk under present price relations. It
would appear that the other States could raise prices somewhat
further than New York without attracting substantial imports,
unless out-of-State prices themselves should decline for some reason.

All of these five States fix minimum producer prices, in some
markets, of milk and cream for fluid consumption. None of them
provided for fixing maximum prices, with exception of the New York
law in effect from 1933 to 1937, which empowered the Board to fix
maximum wholesale and retail prices. This provision, however, was
not used. Minimum prices of manufar t iring milk are set in several
of these States, although these price? >ften seem to be fixed pri-
marily for the surplus of fluid milk proti cers. There is no indication
that any of these States has attempt 'h' to raise the price of manu-
facturing milk above the existing cor ipetitive level. For reasons

445

446 CONCENTRATION OF ECONOMIC POWER

explained above this would be ir^possible without control of unports
and of intrastate production of manufacturing milk and its products.
In four of these. States the endeavor to enlarge producer incomes
has taken the form, similar to that of Federal control, of raising the
prices of fluid milk, and sometimes the prices of fluid cream. In
these States the attendant widening of the spread between prices of
fluid milk and manufacturing milk may be viewed either as a method
or a result of the endeavor to increase producer incomes by raising
the only prices that could be raised with the devices at the disposal
of the "authorities. It h2=5 . -t represennd ideas of a "due" or "fair"
spread between prices g( nuid milk and manufacturing milk. In
California, on the other hand, this price spread has been regulated
with the purpose merely of ensuring a margin that adequately covers
the extra costs of providing milk for fluid consumption above the
costs of producing manufacturing milk.

At present four of the five States discussed here fix minimum
wholesale and retail prices, New York having abandoned this feature
of the control program in 1937. The primary ostensible purpose of
fixing minimum retail prices is to preclude the possibility that price-
cutting at retail may impair the producers' price structure, but this
contention has never been fully demonstrated. In three of these
States, Oregon, New York, and Indiana, producers must obtain
permits from the State authorities in order to sell in fluid milk mar-
kets. Wisconsin and California do not restrict entry into the market.
Oregon alone attempts to achieve effective restriction of production
for fluid consumption b}^ requiring a base-surplus plan of payment
to producers. All five States license dealers.

In all of these States except California the main purpose of milk
control appears to be the raising and maintenance of the income of
'uid milk producers. The principal objectives in Cahfornia are
laintenance of a differential between the prices of manufacturing
.nd fluid milk sufficient to cover the extra costs of producing the
latter and the achievement of high efficiency in the distribution of
fluid milk. The State laws frequently mention other objectives such
as preservation of an adequate supply of pure and wholesome milk,
elimination of unfair practices, arresting tb.e fall in values of farm
property which impaired tax collections, and promotion of recovery.
In most cases it is not clear that price control is needed for attain-
ment of the first of these secondary ends, and as we shall see, it is
doubtful that milk price increases, as such, can promote recovery.

The five State programs may be summarized as follows. Oregon
exercises the strongest control found in any of these five States. A
three-man board, composed of members having no connection with
the milk industry, fixes minimum prices at each stage — producer,
wholesale, and retail — of milk entering fluid consumption, determines
market areas and corresponding production areas (or milksheds),
licenses producers and distributors, fixes producer quotas for payment
at established minimum prices, and administers market-wide equaliza-
tion pools. Although total output by farmers producing for fluid
consumption is not fixed, rigid control of entry to the market and of
quotas for payment at fluid milk prices enables the prices of milk
and cream for fluid consumption to be effectively divorced from a
competitive relation to the price of manufacturing milk. A public
agency enforces an effective program of price raishig and price main-
tenance for the benefit of the producers.

CONCKNTRATION OF ECONOMIC I^WER 447

In Indiana a five-man board composed of two representatives of
producers, two representatives of distributors, and the commissioner
of agriculture acts, in the main, only after requests from local advisory
committees of producers and distributors. In large degree public
control in this State takes the form of promulgating and enforcing
orders, the terms of which have been worked out through collective
bargaining between producers and distributors, and of preventing the
entry of new producers into the fluid milk market in numbers sufficient
to increase substantially the fluid milk surplus. New producers must
obtain a permit from the board and distributors may neither discon-
tinue purchase from a producer, except for violation of sanitary
requirements, nor inaugurate purchase from a new producer without
consent of the local milk committee and approval of the board. No
base-surplus quota plan or equalization scheme is required, as in
Oregon. Such matters, like most others, are left to the wishes and
initiative of producers and dealers in the various markets. No uni-
form arrangement exists in these markets and it is Mr. Froker's con-
clusion that base-surplus schemes, of which several have been in
operation, have not been used in Indiana in such a way as to exercise
effective restriction of output. The board fixes minimuni producer
prices and wholesale and retail prices in markets where such action
is desired by the representatives of producers and distributors. Pro-
ducer prices are divided into three classes. The minimum price for
class III milk, surplus fluid milk to be used in the manufacture of
butter and cheese, is set according to the price of butter, and hence
represents approximately the price that would obtain without price
fixing for this class of milk.

The Indiana law is unique in one respect among the State laws
covered in this study. It permits a check-off from payments to
producers and a similar charge on distributors to finance measures for
betterment of the quality of milk. In only one market, Indianapolis,
has this provision been used, however. It appears that in this case
quality has been appreciably improved. Public control in Indiana
appears to have made no attempt to improve efficiency in distribution.

The lack of a base-surplus quota scheme that effectively restricts
production and the apparent fact that entry has not been so rigidly
restricted as in Oregon make it apparent that public control of price
and supply has not been as strong in Indiana, where matters are left
largely to collective bargaining, as in Oregon.

During the 4 years 1933-37, milk control in New York possessed
many features common to the programs of Oregon, and Indiana.
Since 1937 the emphasis has been on building effective machinery for
collective bargaining or self-government to replace direct exercise of
State control. The new law, however, makes provision for State
orders, and a joint Federal and State order was issued in 1938 for the
metropolitan market including New York City and neighboring areas
of New Jersey.

During all but the first year of the period 1933-37 the New York
program was administered by the division of milk control set up within
the department of agriculture and markets.^ In 1934 a milk advisory
committee, composed partly of representatives of producei-s and
distributors, was created within the division of milk control. The law

' During the first year adiuinistration was in tlie hands of a milk control board consisting of the commis-
sioner of agriculture and markets, the commissioner of health, and a director appointed by the Qovernor.

448 CONCENTRATION OF ECONOMIC POWER

provided that the commissioner must consult this committee and that
he could not issue an order without prior approval by majority vote of
tiiis committee. Through this administrative machinery the State
determined market areas, issued permits to fluid milk producers,
licensed distributors, and fixed minimum producer prices and minimum
wholesale and retail prices in markets throughout the State.

Inability on control imports of fluid milk from other States has
limited the degree of control of prices and supply of fluid milk, espe-
cially in the New York City market.^ In recent years the increasing
economy of tank-truck shipment from nearby areas has tended to
reduce the proportion of out-of-State milk entering the New York
City market; but it appears that actual and potential imports still
constitute a substantial limiting factor. Perhaps for this reason no
attempt was made in New York State to restrict production of fluid
milk producers through a rigid base-surplus scheme as in Oregon. The
1934 law authorized the establishment of producer quotas whenever a
quota scheme could be made applicable, under Federal or State
statutes, to all producers supplying the New York City market, but
this provision has never come into application.

New York has fixed minimum producer prices for several classes of
manufacturing milk — in New York this means very largely surplus
fluid milk disposed of in manufacturing outlets. These manufacturing
milk prices have been set according to the existing competitive rela-
tions with out-of-State manufacturing milk.

The minimum resale prices encountered great opposition in New
York State, making enforcement difficult and costly. In 1937 the
legislature decided that the emergency responsible for the original law
of 1933, and its annual extensions with amendments, no longer existed.
The change in program adopted at this time involved complete aboli-
tion of resale price fixing and the, endeavor to substitute collective
bargaining, with State assistance and supervision, for Government
orders as the method of determination of prices.

The laws of 1937 and 1938 authorize producers' cooperatives
supplying a common market area to form a producers' bargaining
agency, and authorize distributors operating in such a market area to
establish a distributor's bargaining agency. Producers' and dis-
tributors' bargaining agencies then have the right to conclude market-
ing-agreements covering such elements as prices to be paid producers
by dealers, terms, and conditions of sales and payments, production
quotas, and trade practices. A marketing agreement so established
is effective unless the commissioner of agriculture and markets finds
that the agreement will result in monopoly or restraint of trade.

Upon request from both producers' and distributors' bargaining
agencies the commissioner may, after hearings, make a marketing
agreement effective as an order binding all producers and distributors
in the market area if he finds that the agreement was properly reached,
that its terms are equitable and that its establishment as an order for
the whole market is required in the public interest.

According to a third provision the commissioner may, on recom-
mendation from a producers' bargaining agency representing at least
35 percent of the producers supplying a market area, issue an order
fixing pro(hicer prices on a market-wide basis, if he finds after hearings

•' In Baldwin v. Seelig (55 Sup. Ct. Rep. 497, 1935) it was ruled that a State had no power to require that no
milk from outside tlie Stale should be sold within its borders unless it had been purchased at prices not less
than the minimum producer prices in effect within the State.

CONCENTRATION OF ECONOMIC POWER 449

that a State order is required in the public interest and if the order is
approved by 75 percent of the producers supplying that area.

The present laws in New York may be summarized as follows.
The3^ endeavor to foster machinery for determination of producer
prices, supply, and terms of payment through collective bargaining;
to lend the assistance of the State in extending the terms of prop,er
agreements for a given market to non-participants engaged in business
in this market when that is necessary to make them effective, and to
provide for public price fixing, presumably in the absence of marketing
agreements, when that is desired by a large majority of producers and
seems necessary to maintain orderly marketing and desirable producer
incomes. Under these laws several bargaining agencies have been
set up. State orders have been issued for the New York City and
Buffalo markets and applications have been under consideration for
orders in a few other markets.

In the period 1933-37 in which wholesale and retail prices were
fixed by the State it appears that some attempt was made, through
control of dealer margins, to improve efficiency in distribution, but
this endeavor was evidently much less vigorous than in California.

It may seen! to be something of an anachronism that public
authorities in Wisconsin, a Stat^ long in the forefront of public utility
regulation, were among the first to adopt the new doctrine so popular
in the thirties that price cutting constituted unfair competition. In
1932 the Wisconsin Department of Agriculture and Markets, acting
under broad powers for the regulation of unfair competition and
unfair trade practices, ruled that when producers and distributors
handling 90 percent of the milk in a market agreed upon a marketing
plan and on prices, it was unfair competition for the other participants
in the market to depart from the provisions of the agreement including,
of course, the prices agreed upon.

In 1933 the department of agriculture and markets was empowered
by a special milk control law, passed as an emergency measure effective
for 2 years, to fix minimum producer prices and resale prices. Although
this law, which has been reenacted with slight changes at successive
2-year intervals ever since, was tied for legalistic reasons to unfair
trade practice regulation, its main purpose has been to "stabilize" the
fluid milk market, which evidently means to raise and maintain the
in?omes of fluid milk producers. The administrative agency had a
tendency, especially in the earlier years of the program, to base its
orders on agreements made by collective bargaining between producei's
and distributors.

The objective seems to have been pursued through the endeavor to
widen moderately the spread between the prices of manufacturing
milk and the prices of fluid milk and cream. Prices of surplus fluid
milk have been fixed by formulas expressing the competitive prices of
manufacturing milk. Control of production of fluid milk and cream
has not been attempted. With exception of the Madison market,
base-surplus schemes of payment have not been required, nor has the
State, except in the early years of the program, exercised any restric-
tions on entry of new producers into fluid milk markets. It is obvious
that in a State with such a large volume of production of manufacturing
milk, a strong restrictionist program designed to confer great benefits
on fluid milk producers would be difficult to enforce.

450 CONCENTRATION OF l^XX)NOMlC I-OWKIl

State milk control in Wisconsin has evidenced no interest in im-
proving efficiency of distribution. Store and milk-stand prices lower
than home delivery prices have been eliminated in most markets
with the result that milk has been "kept on the wagons."

A California statute passed in 191 G empowered the director of
agriculture, on request from producers and distributors of farm prod-
ucts, to assist them in improving efficiency in marketing and to
arbitrate controversies. In 1932, the director, acting under this law,
assisted producers and distributors of fluid milk in several cities to
attempt more effective price control through establishment of local
milk trade boards, composed of representatives of producers and
distributors, which announced producer prices and resale prices.
Federal control inaugurated in several California markets in 1933 and
1934 was soon withdrawn because of doubts of its constitutionality.
Fluid milk markets in California are served almost entirely by
California producers.

State control was initiated in 1935 and further developed by laws
passed in the ensuing 2 years. These laws are administered by the
director of agriculture and a special staff in this department. The
objectives and standards of milk control in California differ strikingly
from those of the other State control programs reviewed in this study.
The chief purposes in California are to maintain differentials between
producer prices of fluid milk and manufacturing milk that are merely
adequate to cover the extra costs of producing fluid milk of desirable
quality and to maintain wholesale and retail price differentials that
protect the minimum producer prices and at the same time coyer,
but no more than cover, what appear to be the costs of efficient
distribution. Emphasis on keeping the differentials no larger than
necessary seems to be as strong as that on making them adequate.

The aclministrative agency demarcates a market area and prepares
a "stabilization and marketing plan" for this area, which- becomes
effective upon approval of 65 percent of the producers serving that
marketing area. A stabilization and marketing plan includes prohi-
bition of a set of unfair practices by which dealers could evade the
minimum price requirements and contains minimum producer prices
of fluid milk, or methods by which thoy are to be designated. A plan
may also contain provisions for reports from distributors to producers,
minimum prices for fluid cream, and, if 65 percent of the producers
desire it, a market pool for making uniform payments to all producers.
Whenever a stabilization and marketing plan goes into effect the
administrative agency must also fix minimum wholesale and retail
prices or specify methods of deriving them.

The minimum prices are fixed on the basis of extensive cost studies.
In most markets only one producer price has been fixed, applying to
both milk and cream. Prices of surplus milk for disposal in manu-
facturing outlets have been fixed in a few markets only.

Since California does not try to maintain a differential between the
prices of manufacturing and fluid milk that exceeds the differ-
ence in cost of production, control of entry into fluid milk mar-
kets is, except for sanitary requirements, quite superfluous. Indeed,
the California law seems to prohibit both restrictions on entry and
Any limitation on the production of fluid milk or cream, other than
minimum price fixing itself. If market pools are adopted they must
evidently be of a form which merely cquali/.os or makes uniform pay-

CONCENTRATION OF ECONOMIC POWER 451

ments to producers without any base-surplus scheme which, Hke that
in Oregon, encourages restriction of output for the fluid market. It
should be understood, however, that minimum price fixing itself
hampers entry, in the absence of a market-wide pool, for distributors
have little incentive to take on new producers at the same price that
they are paying establishc i producers.

STANDARDS AND RESULTS

Producer Prices.

According to the milk control law of California the minimum price
to be paid producers of fluid milk —

shall be based upon the economic relationship of the price of fluid milk for the
market area involved to the price of manufacturing milk, taking into considera-
tion the additional costs incurred in producing and marketing fluid milk over and
above such costs incurred in producing and marketing manufacturing milk.

The Oregon law directs that in setting minimum prices —

the board shall ascertain what prices for inilk in each locality and market area
of the State will best protect the milk industry and insure a sufhcient quantity of
pure and wholesome rnilk in the public interest.

In carrying out this general mandate, the board is directed to consider
"all conditions affecting the milk industry" including "costs of pro-
duction" and "the price necessary to produce a reasonable return to
the producers."

Evidently the prices of fluid milk could bear the same relation to
the prices of manufacturing milk under the laws of these t-wo States.
The California law attempts to set a rather specific standard. The
vague standards of the Oregon law could probably be interpreted to
mean the same thing. It seems probable, however, that this has not
been the case, for if they had been so interpreted there would be little
point in the measures adopted in Oregon that control entry to the
fluid milk markets and discourage expansion of production by pro-
ducers already in.

The Oregon law provides that all producers who were supplying a
given market with fluid milk at the end of 1933 may continue to sell in
that market until they . voluntarily withdraw. For the rest, the
board is empowered to demarcate the production area from which a
given market may be supplied. Moreover, no new producer in this
area may sell fluid milk in the corresponding market without receiving
a permit and a quota from the board. Mr. Anderson was unable to
ascertain any specific standards used in demarcating production areas.
It appears that scarcely any new producers have been permitted to
enter any fluid milk markets, although transfers of quotas between
producers already legally in the market have been allowed.

The board does not specifically limit the production or sales of milk
by fluid milk producers. It does, however, allot quotas under the
required base-surplus pooling scheme of payments to producers.
As already indicated,-^ this is a scheme for equalizing or making uniform
payments among all producers serving a common market, irrespective
of the proportions in which their milk is sold by their particular dis-
tributors as fluid milk or surplus milk disposed of in manufacturing
outlets. But it is more than a pure equalization scheme, for each pro-
ducer is allotted a qaota (in physical units) which is the maximum

» See pp. 109 £f.

452 CONCENTRATION OF ECONOMIC POWER

quantity for which he will receive the established fluid-milk price
unless the total sales of fluid. milk exceed the total quotas. Such a
possibility is unlikely, inasmuch as the total quotas are ordinarily set
10 percent above the estimated sales. Under this arrangement the
individual- producer has little incentive to expand production much
beyond his quota, for it is most probable that all of his additional pro-
duction will return to him merely the low surplus price. In a pure
equalization scheme without quotas the whole output of the individual
producer is paid for according to the proportions in which the total
output is divided between fluid milk sales and surplus sales. With
this arrangement the individual may reason that o large addition to
his output will have no effect on these proportions in the whole market
and will thus bring him a much larger revenue from^ his enlarged fluid
milk payments.

From the control devices adopted in Oregon and the way they have
been applied one would infer that the endeavor has been made to hft
fluid milk prices to a height exceeding the price? of manufacturing
milk by more than the full extra costs of providing the former. Little
more than this can be said. Although the Oregon board has made
some studies of cost of production, Mr. Anderson was unable to ascer-
tain just how costs have been used as a standard. It does not appear
that the board has given any definite content to "reasonable return."
Whether prices have been set so as to maximize the profits of pro-
ducers in the field at the time when State control was established, or
have been fixed at a level considerably lower, is not clear.

In California extensive studies have been made in many markets to
determine the additional costs of producing fluid market milk over
and above the costs of producing manufacturing milk. Most items
in the extra costs the department regards as unvarying throughout
the seasons of the year. In this class belong wages, transportation,
rent, depreciation, lierd replacement, interest, and taxes. The only
important item that is held to vary seasonally is the cost of feed,
which constitutes approximately one-half of the total cost of produc-
ing fluid milk.

The minimum producer price for fluid market milk is built up as
follows. The current price of butter in a nearby market, after certain
adjustments,^ gives the base price of marmfacturing milk. To this is
added the extra feed cost at current feed prices and the extra cost on
accoun^ of the other, unvarying items. The minimum prices change,
then, in accordance with changes in the prices of butter and of feed.

It wiU be recafled thai, the minimum price of fluid milk is to be
based on the "economic relationship" of this price to the price of
manufacturing milk as evidenced by the "additional costs" of pro-
ducing the former. Evidently the department has interpreted
"additional costs" to mean something more than short-run increment
costs. Although no profit seems to be included, intei-est and rent are
included. Cost as computed by the department would not seem to be
above the increment cost of increasing production by adding new
producing units, but it may be substantially above the increment cost
of enlarging output from existing producers. If so, the minimum
prices are higher than those that would give maximum economic con-

' 'I'lu'sc fuljustmciits pcrlnin tn llii' c( si of iiiiikinv; biiitor. Ilic value of the romaining skim milk, and the
"<iV(T-riin" value of a pouiKi of liulloifat compan-il (<i a pouiiil of iMiUcr which rosnlts from the fact that a
jiiiuiiil of huttor is equivalent to only ciglit-leiillis of a jjouikI of butterfat.

CONCENTRATION OF ECONOMIC POWER 453

sumption as defined in an earlier section.^ Although the department
has used a "supply line" or "marginal producer" type of cost analysis
in setting distributors' margins, it appears that in fixing producer
prices the additional cost in a market represents an average of the
additional costs of producers for whom cost data are available to the
regulatory agency.

The milk control legislation in Wisconsin provides no definite
standards. Instead, broad general powers are conferred on the
department of agriculture and markets to prescribe terms of handling
and sale, including minimum prices, with the expressed purpose
of eliminating ; 'unfair competitive methods and practices. The
department was specifically directed to consider the terms of any col-
lective bargaining agreement in existence in a market. At first, the
administrative agency appears to have confined itself largely to
enforcement of the tenns of such agreements. After an interval it
began to obtain testimony on cost of production. Apparently prices
equal to full costs of production, including reasonable wages to the
farmers and their; families and interest on their investment, have been
regarded as the goal, but it has been recognized that up to the present
this goal has been impossible of achievement owing to the pressure
of potential fluid milk surpluses. It will be recalled that Wisconsin
does not limit entry to fluid milk markets nor attempt to restrict
production by those already in the market. In practice, cost infor-
mation seems to have been used chiefly as a basis for increases in price
when increases in cost, such as higher feed prices, occurred.

Reductions in prices of fluid mflk and cream in several markets in
the middle of 1939 reflected a twofold tendency toward increasing
production for fluid markets and growing substitution of other food
products for milk. Prices of manufacturing milk had declined in 1938
and 1939, and consumer incomes had been reduced by the industrial
recession. The former level of fluid prices could not be maintained
satisfactorily in the absence of limitations on shifting from production
of manufacturing milk to production of fluid milk and cream. The
unevenness of price reductions in the several markets in 1939 suggests
that varying local competitive relations to prices and supply of manu-
facturing milk were the principal consideration.

This evidence indicates that State control in Wisconsin has been
successful in appreciably raising prices of fluid milk and cream relative
to prices of manufacturing milk. Mr. Froker reports, however, that
prices have not been maintained at a level high enough to return to
most producers in most markets full average cost of production, includ-
ing reasonable wages for the farmers and their famflies and interest
on their investment.

Evidently the standard for fluid milk prices used by the authori-
ties in Wisconsin has been the most remunjerative prices — up to full
average cost of production — that could be successfully maintained
in the absence of control of entry to the market and limitations on
production, except such control as could be established by producers
themselves. Since most fluid milk producers have apparently not
received full average costs of production (as reckoned by the authori-
ties),, it may be inferred that manufacturing milk prices have ordinarily
been below the full average costs of producing manufacturing milk

> Insofar as the price of manufacturing milk itself is below full average cost, however, the price of fluid
market-milk will also be below full average cost.

270348— 41— No, 32 :U

454 CONCKNTRATIOX OF ECONOMIC POWER

or that the differential between the prices of fluid milk and manu-
facturing milk has not ordinarily covered the average full extra costs
of producing the former, owing to the presence of overcapacity in
fluid production or that both of these conditions have existed. If the
average full extra costs of producing fluid rather than manufacturing
milk have been covered in Wisconsin the result has been similar to that
aimed at in California. If these full extra costs have not been covered,
fluid milk prices have been closer in Wisconsin than in California to
short-run increment costs of expanding production without increasing
fluid capacity.

It will be recalled that in Indiana public control of fluid milk prices
consists mainly of enforcement of prices determined by collective
bargaining of producers and distributors and control of entry of new
fluid producers. The legislative standards for price fixing are vague.
Producer prices, fixed by the board, uniform to all licensed producers
in a given market, are to be "just and reasonable" — the typical
"standard" contained in public utility laws. The law provides that
in determining producer prices the board is to be guided by cost of
production, the value of milk in terms of its basic products — butter,
cheese, and evaported milk — the supply of milk in the -market, and
the welfare of the general public. The law announces further that
"any prices fixed pursuant to this act and approved by the board ag
herein required shall be deemed to be prima facie reasonable."

Mr. Froker was unable to discover that any definite content has
been given to these considerations through development of standards
by the board. Evidently the orders issued represent the judgment
of the board after taking account of the considerations mentioned in
the law and the requests of producers and distributors on the terms
of bargained agreements. This seems to be a process not of judg-
ment in the implementation and application of standards, but of
judgment without definite standards. The wide range of differences
in the prices of fluid milk and cream as between different markets in
July 1939 indicates that prices have been influenced by elements other
than those of quality, cost, and other production conditions.

Wliile it is unquestionable that public control in Indiana has en-
deavored to maintain levels of prices of fluid milk and cream above
those that would prevail in the absence of State control, it seems
doubtful that any one particular relation between- prices, costs, in-
comes, and production has been aimed at in all markets or in most
markeffe. Perhaps this fact, which seems exemplified in the lack of
standards, is to be explained by the policy of relying largely on col-
lective bargaining for determination of market results.

It is not clear whether it is true that the general policy of State
authorities acting in cooperation with local private interests has been
to maintain the most remunerative producer prices consistent with
control of entry and the absence of other limitations on production
of fluid milk and cream. Moreover, in exercising control of entry,
the board appears to have used no clear standards. Prior to 1939
the board licensed new entrants in the Indianapolis market in num-
bers corresponding, roughly, to the number of withdrawals. Since tlie
new producers evidently had more capacity than those withdrawing,
this policy was not sufficient to check a marked growth of surplus
milk in this market over the years 1936-38, during which fluid con-
sumption remained approximately stationary. In 1939 the board

CONCENTRATION OF ECONOMIC POWER 455

deemed it necessary to reduce fluid prices in this market and to relate
the issuance of permits to new producers to the effects on total pro-
duction rather than on number of producers. The increasing sur-
plus, spurred partly by falling butter prices, made it evident that the
level of fluid prices which had prevailed with little change in this
market for 3 years could no longer be maintained satisfactorily.

Evidence on the results of State milk control in Indiana is quite
meager. It is Mr. Froker's opinion that fluid prices to producers
and producer incomes have probably •been raised somewhat in a score
of markets, but there is no basis for conclusions on the extent of these
increases. Apparently the main effect has been to insure attainment
of the market results implicit in agreements reached by collective bar-
gaining supplemented by State control of entry of a rather indefinite,
none too rigorous, sort.

The New York legislation, under which minimum prices — for pro-
ducers, and to retailers and to consumers — were established by the
division of milk control in the department of agriculture and markets,
sets forth several general considerations to guide the authorities in
price fixing. Prices were to be reasonable when compared with costs
of production, hauling, processing, etc.; they were to be set at levels,
in the various local markets, that would best protect the milk indus-
try; they should tend to insure a sufficient quantity of pure and
wholesome milk to consumers; and they should be set at levels which
would be most in the public interest. The administrative agency was
directed to consider "the balance between production and consump-
tion, the costs of production and distribution, and the purchasing
power of the public." It will be remembered also that no order could
be issued without approval of a majority of the milk advisory com-
mittee, composed of representatives of producers and distributors and
some other interested groups.

Mr. Froker did not discover that any definite content was given
by the administrative agency to these legislative guides. Prices of
fluid milk and cream and milk for ice cream were raised materially
upon inauguration of control in 1933. Fluid prices in the New York
City and Buffalo markets were held stable between 1934 and 1937
when price control was dropped. After withdrawal of price control
fluid prices in these markets first dropped, then fluctuated unevenly.
The joint ^Federal and State order for the New York metropolitan
market issued in 1938 again raised fluid prices, which subsequently
declined with suspension of the Federal order early in 1939 (and non-
enforcement of the State order), to rise once more with reinstatement
of the Federal order after a favorable Supreme Court decision.^

There is no doubt that the State authorities in New York endeav-
ored to raise the incomes of fluid milk producers by raising the prices
of fluid milk and cream relative to the prices of manufacturing milk.
It appears that this was accomplished in some measure. But the level
of fluid prices aimed at is not at all clear, unless it was the most re-
mun^erative prices possible, given the ever-present threat of increasing
imports from other States, and the lack of State-enforced limitations
on production other than control of entry to fluid markets. Although
it appears that the volume of milk on the market has been a consider-
ation in approving or denying permits to new producers, Mr. Froker
discovered no standards relating the issuance of permits both to vol-

e United States v. Rock Royal Cooperative, Inc., et at. (307 U. S. 533 (1939)).

456 CONCENTRATION OF ECONOMIC POWER

ume of consumption and to some particular level of prices. For
example, new producers were denied permits in the fall of 1939 at the
same time that price increases were ascribed to drought and to the
demands of producers already on the market.

As noted earlier, the New York laws of 1937 and 1938 encourage
determination of market results "by collective bargaining with State
supervision. Although the commissioner of agriculture and markets
is empowered to render a bargained agreement ineffective by a finding
that it will result in monopoly or restraint of trade, these laws contain
no definite standards delineating the lawful range of prices. The
provisions in the laws for the issuance of price-fixing. orders by the
commissioner, under circumstances explained above, include much
the same set oi vague guides to price fixing that were included in the
earlier laws.

The problems of fixing milk prices in New York State are probably
more complex than those to be found in any of the other four States,
owing to the greater importance of out-of-State milk and the larger
variety of differences in local market conditions. Although greater
complexity makes the development of satisfactory standards more
difficult it does not render them any less desirable.

In summary, of these five instances of State control,, California
alone exhibits definite standards for the level of prices of fluid milk
and cream. The difference in this respect between California and
some, at least, of. the other States may be partly ascribed, however,
to differences in objectives. Where the purpose is to raise producer
incomes as much as possible under prevailing conditions of demand
and supply, including whatever kind of restrictions on supply the
State cares to establish" or to assist producers in maintaining, it is not
likely that this objective or standards appropriate to it will be clearly
and unequivocally stated in the law, for fear of the cry of "monopoly."
Thus references in most price fixing legislation are to "orderly mar-
keting," prevention of '.'unfair practices," advancement of public
health, promotion of recovery, and the like.

In the second place, the failure, of legislatures and administrative
agencies to develop definite standards is doubtless closely connected
with the policy of cooperation between a State agency and represent-
atives of producers and distributors in working out the terms of orders.
Where reliance for establishment of desirable market results is placed
mainly on collective bargaining with assistance of one or another sort
from the State, the provision of standards may seem unnecessary or
superfluous. It should be recognized, however, that a legislature
might lay down broad yet definite standards demarcating the limits
within which collectively bargained prices would be considered reason-
able and enforced by public authority, together with provisions either
prohibiting prices outside these limits or forbidding the use oi State
power in enforcing such prices. Such a policy would be more likely
to promote broad economic efficiency than the policies followed. in
most of these States.

Resale Prices.

We turn now to resale prices. All five of these States have fixed
minimum wholesale and retail prices, "although New York discontinued
fixing of the resale prices in 1937. All of these States require the
licensing of dealers.

CONCENTRATION OF ECONOMIC POWEit 457

As already mentioned, the reason most commonly advanced for
fixing resale prices is that price cutting at retail may imperil the
producer price structure. However, it is by no means clear that
retail price control is always a necessary element of programs designed
to protect the producer, and its more obvious effect is clearly to pre-
serve existing distributive margins and practices.

In Indiana, Oregon, and Wisconsin, the legislative and adminisr
trative standards for the levels of minimum wholesale and retail prices,
are no more definite or clear than those for the level of minimum
producer prices. In New York, the legislative standard for resale
prices was more explicit than the considerations specified by law for
the fixing of producer prices. In California the standards for resale
prices are quite as definite and more detailed and explicit than the
standards for .producer prices.

The Indiana statute provides merely that minimum wholesale and
retail prices must be "fair and equitable." The milk control board
has studied the costs of distributors in order to determine the margins
necessary to cover overhead and operating costs. Mr. Froker did
not, however, discover that any definite cost standard was used by
the board, as has been the case in Cahfornia. A reduction in the
distributors' margin in Indianapolis in 1939 was apparently made
because of the growth of surplus milk in that market rather than
because of any change in costs of distribution. Dealers' margins do
not appear to have been reduced under State control in .Indiana. In
one market, Evansville, they seem to have been increased.

In both Oregon and Wisconsin the standards used by the control
agencies in setting minimum resale prices seemed to have been approxi-
mately the same as the standards used in setting minimum producer
pribes. Hence, the discussion earlier in this chapter of the standards
used in these States in the fixing of minimum producer prices applies
here also. The Oregon board has fixed the dealers' margin in the
Portland market somewhat higher than the margin prevailing just
prior to the imposition of price control, and at about the same level
as the margin existing in the early twenties. Although the Oregon
board possesses strong powers to restrict the entry of new distributors,
as well as new producers, it does not appear that the board has placed
any substantial restriction on the entrance of new distributors; and
the standai'ds used by the board in granting or refusing licenses to
new distributors are not clear.

The dealers' margin in the Milwaukee market — the only market
for which data on dealers' margins in Wisconsin was obtamed— has
increased under State control. A substantial part of this increase,
however, has gone into higher wages. In the Madison, Wis., market
the Department of Agriculture granted what amounted to a retail
price increase in 1937 after an increase in the wages of labor engaged
in distribution.'

The New York law under which resale prices were fixed prior to ■
1937. provided that "a minimum wholesale or retail price to be
charged shall not be fixed higher than is necessary to cover the costs
of the orderly, efficient, and econornical milk dealers including a
reasonable return upon necessary investment." There is some
fragmentary evidence that the authorities in New York State gave

' The price increase was accomplished by abolishing several types of discount that had formerly prevailed.

458 CONCENTRATION OP ECONOMIC POWER

som,6 attention to the costs of distribution and improvement in the
efficiency of distribution. For example, in the summer of 1933 an
increase in distributors' margins was permitted because of a rise in
the cost of supplies and an anticipated wage increase under N. R. A.
In the New York and Buffalo markets, the data indicate that dealers'
margins averaged less during the period of resale price fixing than in
the preceding and succeedmg period. In a number of instances,
dealers' licenses have been denied to applicants on the ground that
entrance of new distributors would involve both the unneeded dupli-
cation of facilities and an increase in the costs of distribution. How-
ever, the amount of attention devoted to improvement of efficiency
in distribution in New York State has evidently been much less than
in California.

The statutory standards for establishment of minimum wholesale
and retail prices in California are more detailed and more specific
than any other statutory standards examined in this study of milk
control. The director must find that the "minimum prices fixed —

(1) Are not more than reasonably sufficient to cover all necessary costs * * ♦
including a reasonable return upon necessary -capital invested, of reasonably
efficient distributors and retail stores in a marketing area;

(2) Will tend to maintain * * * such number of reasonably efficient retail
stores and distributors * * * as nece.ssary to insure consumers * * *
sufficient distribution facilities of the several types or methods commonly used
by consurners;

(3) Will protect the interests of consumers * * *- by insuring to them
adequate and efficietit distribution facilities of the several types or methods
commonly used by them without requiring such consumers to pay more * * *
than is necessary to maintain such adequate and efficient distribution facilities
in such marketing area.

Moreover, the law states that in determining minimum wholesale
and retail prices the director shall consider —

the amount of the available capacity for processing and distributing fluid milk,
or fluid cream, or both, of all distributors in such marketing area and the estimated
extent to which such available capacity is being used by such distributors.

Evidenfly these provisions mean that prices in a given market area
are to cover the necessary costs, • including a reasonable return on
capital, of that number of efficient retail stores and distributors
which is required to give adequate and efficient service of the sorts
desired by consumers — no larger number and no smaller number.

The clause concerning capacity and its utilization, when taken in
conjun ction with the three other clauses, would seem to give the definite
implication that prices are so to be fixed as to maintain in a market
area only the number of efficient retail stores and distributors, the
facilities. of which can be utilized ordinarily at the highest practicable
rate.

In applying these standards the California Department of Agri-
culture has endeavored to use the "supply -line" method. According
to this method data are obtained to show the costs, when operating'
at capacity, of the firms in the market. These data are then compared
with consumption and price data, and the price fixed at the level at
which consumption will presumably equal the amount that can be
supplied by the more efficient firms when they are working at practi'^
cable capacity. This method should be sharply distinguished from
ihe bulk-line cost analysis as used in war price fixing in 1917-18. In
the latter method the cost data obtained represented costs at actual

CONCENTRATION OF ECONOMIC POWER 459

rates of operation. These were costs at capacity operation only if
the firms happened to be operating at capacity.

A minimum price fixed according to the "supplj^-line" method
would tend to maintain the minimum amount of most efficient
capacity required to meet demand, and (unless the actual market
price went higher) would tend to expel uneconomic capacity. For
the long run, at least, this is a standard that will promote maximum
economic consumption. When excess capacity exists,. however, this
standard is likely to result in prices above increment cost, unless the
terms "necessary costs" and "reasonable return upon necessary
capital invested" are so interpreted as to permit prices equal to
increment cost.

Moreover, it is by no means clear that the standard is flexible
enough to encourage major changes in methods of distribution which
would result in substantial reductions in costs and prices. It seems
to encourage greater efficiency along established lines, rather than the
exploration of new methods.

The law does not define "necessary costs." The Department of
Agriculture has undertaken studies of efficiency in distribution in
order to develoj. standards by which to distinguish between necessary
and unnecessary costs. It has not accepted the position of the
distributors that items of sales expense generally incurred by dis-
tributors are ipso facto "necessary."

In the application of these standards for minimum resale prices the
Department of Agriculture has been hampered by insufficient funds
to make extensive cost studies and by the failure of many producer-
distributors to keep adequate cost data. For this reason, as well as
the shortage of time for Mr. Anderson's study, it has been impossible
to discover the degree of success which may be expected in the use of
standards such as those contained in the California law.

One difficulty should be noted in closing. The law endeavors to
maintain in each marketing area "sufficient distribution facilities of
the several types or methods commonly used by consumers," but
apparently no more capacity than can be ordinarily used to a high
degree. The language of the law makes no attem.pt to treat the
difficult problem of the extent to which consumers prefer to pay some-
what higher prices in order to have a larger number of stores located
closer together (with added convenience for many consumers), each
of which operates at much less than capacity. Recognition that the
law ^;eems to neglect this problem, which has a very real relation to
consumer problems, must be attended by recognition that this statute
represents an endeavor, unique among the cases of milk control
studies in this report, to set forth standards related to high economic
efficiency.

CHAPTER VI

THE LEVEL OF PRICES AND INCOMES UNDER THE BITU-
MINOUS COAL ACT OF .9S7

The Bituminous Coal Act of 1937, discussed in Part III of this
report, provides for fixing of minimum and maximum f. o. b. mine
prices for bituminous coal by a Federal agency,'^ and for 'marketing
rules and regulations to prevent unfair competition. Until the
launching of the defense program in the early summer of 1940 interest
in price fixing under this act centered in minimum prices. In general
fixing of minimum prices may have one or both of two purposes — to
raise or maintain the income of one or more groups, or to promote
conservation by limiting consumption. Although the regulatory
agency was directed by the act of 1937 to study conservation, the priccr
fixing provisions of this law bear no direct relation to conservation
except as they may possibly diminish the amount of coal sold for nrices
below the costs of production.

The principal objectives of the act of 1937, as stated in the law
itself, are to "promote interstate commerce in bituminous coal" and
to conserve coal resources by preventing "practices and methods bf
distribution and marketing" which "disorganize, burden, and
obstruct" that commerce and make necessary the regulation of prices
and of unfair methods of competition. The history of this act and its
predecessors — the N. R. A. Coal Code and the Bituminous Coal Act
of 1935 — indicates, however, that the primary purpose was the
establishment of minimum prices in ordfer to insure sufficient income
to the mines to enable them to pay higher wage schedules negotiated"
by collective bargaining. Other purposes are the reduction of
operators' losses and the prevention of practices which have a tendency
to intensify depression in the industry

The Bituminous Coal Act attempts to diminish the pressure on
wage scales resulting from competitive price cutting. Experience
during the period of declining demand j which began in 1923 and was
intensified by the depression of the thirties, demonstrated that with
overcapacity in mines, equipment, and labor, uncontrolled competition
in this industry meant a downward spiral of prices and wages as well
as profits.

The act of 1937 provides that minimum prices are to be fixed so
that the average price received per ton in each designated minimum
price area is equal to the weighted average cost of the coal produced
in that area in 1936 adjusted from time to time for any appreciable
changes in cost. As defined in the act cost includes "the cost of labor,
supplies, power, taxes, insurance, workmen's ( ompensation, royalties,

' The act created a coinmission, reporting to the Secretary of the Ir ,e; ior. This commission was abolished
by the second President's Reorganization Order, effective July 1, 19 9, (vbioh transferred the powers, duties,
records, stafT, etc., of the Coil Commission to the Biti. iMnous Cot' Ihision of the Department of the
Interior.

461

462 CONCENTRATION OF ECONOMIC POWER

depreciation, and depletion (as determined by the Bureau of Internal
Revenue in the computation of the, Federal income tax) and all other
direct expenses of production, coal operators' association dues, district
board assessments for Board operating expenses only levied under the
code, and reasonable costs of selling, and the cost of administration."
In most of the industry wages constitute 60 to 65 percent of cost as
thus defined.

For two reasons it is difficult to discuss price fixing according to the
act of 1937 from th standpoin<^ of economic standards. Although
the act specifies ( nc definite t^.tai.dard — the cost standard — for the
general level of minimum prices, it includes also a number of consid-
erations which can be formulated as standards, if at all, only through
the work of the regulatory agency over a period of some years.

Secondly, and more important, although the minimum price fixing
of the Bituminous Coal Act is related indirectly to the maintenance of
wages, the act contains no standards relating to the substantive mat-
ter of the level of wages since wage fixing provisions in the Bituminous
Coal Act of 1935 were declared unconstitutional. ^ In reality the
standards of the law have to do with the mechanics of successfully
preserving, through price fixing, the wage levels resulting from col-
lective bargaining, without severely disrupting established competi-
tive relationships among the multitude of coal operators.

If the antitrust laws (to prevent monopoly prices) and the much
more recent Wagner Act (to promote collective bargaining) be con-
sidered together as a unified policy, their combined logic is as follows:
Competition will prevent extortionate prices and by the same token
make it impossible for labor, by a process of collective bargaining, to
obtain wages that are too high. Conversely (if, indeed, the converse
is ever considered) competition will allow prices sufficiently high so
that collective bargaining may secure desirable levels of wages. The
Coal Act evidences the fact that collective bargaining may be [ineffec-
tual in maintaining a decent living wage in an industry characterized
by large excess capacity wliich cannot be turned to any other use, by
very keen price competition, because of the great number of producers
selling in every market, a high proportion of labor cost to total cost,
and a highly specialized working population moving so slowly into
other occupations that a large reserve supply of labjr persists.

Thus the actual standards for minimum coal prices will, to an
important extent, be determined in the process of collective bargaining
between representatives of the miners and the operators, since labor
cost is such an important share of the total cost of mining coal.'

The act places no limits on the height of wages. If maximum prices
are set they must be fixed so as to yield a reasonable return to the
operators above the minimum prices in effect, which according to the
law must automatically reflect any increase in wage rates (or any other
element of cost specified in the act) which raises the weighted average
cost in a minimum price area by more than 2 cents per ton. Doubtless

>Se« Part HI, 55. 262.

'Wage rates prescribed in the Fair Labor Standards Act or in any orders of the Administrator of the
Wage and Hour Division of the Department of Labor are applicable to same extent in the coal industry.
The Bureau of Labor Statistics has estimated that of the 405 9O0 wage earners and salaried workers in this
industry that are subject to the Fair Labor Standards Act only about 1,100 were receiving less than 30 cents
per hour in April 1939 and only about 7,300 were working more than 42 hours a week. (See Estimated
Number of Workers in April 1939 Subject to the Fair Labor Standards Act Effective October 24. 1939.)
In other words, an insignificant proportion of the workers in this industry were affected by minimum wage
•nd maximum hour provisions that became effective in October 1939.

CONCENTRATION OF ECONOMIC POWER 463

the large number of unemployed miners, and the realities of competi-
tion with other sources of energy that have persistently made increas-
ing inroads on the consumption of coal in the past 15 to 20 years, will
lead labor officials and operators to agree on wage scales that do not
result in unduly high prices to consumers. It is obvious that the
actual level of coal prices will depend substantially on the objectives
of labor — whether they aim" at the highest level of wage rates that can
be obtained, or the level of wage rates that will maximize the total
wages bill, or the aggregate income of employed coal miners, or the
amount of employment — and their success in realizing their aims.

Coal price fixing is,' of course, by no means unique in this respect.
In some measure the same thing is true of regulation of railroad and
utility rates and all instances of price fixing where going wages are
accepted as a part of cost for price-fixing purposes. The difference
exemplified in the case of coal is one of degree. Direct labor expense
represents a higher proportion of cost in coal than in many industries.*

The observations made above must not be taken to imply the con-
clusion that both wages and prices should be fixed by government in
the coal industry or in any other industry. From many standpoints
in a democracy the case for leaying wage determination to' collective
bargaining is a strong one. By this process democracy is injected
directly into economic life and government does not assume the
difficult task of directly determining maximum wages, a task which,
if it is ever assumed on a large scale, will provide a severe test of
democratic government. It must be recognized, however, , that
when government buttresses by price-fixing the results of collective
bargaining, the question may arise of the desirabihty of maximum
limits on wages in order to preserve a satisfactory degree of efficiency
in the economy in terms of the utilization of equipment and labor.

The discussion which follows does not consider these broad issues
directly, but is principally concerned with the question: Will the stand-
ards for the general level of prices contained in this law be likely to
achieve the objectives of the law, and will they conduce to maximum
economic consumption possible with given wage rates?

The object of the law, as already stated, would seem to be to regu-
late minimum prices in such a way that the total sales revenue of the
mines as a whole in a minimum price area will not tend to fall b^low
their total costs as defined in the act, and hence threaten the mainte-
nance of wage rates; and at the same time to preserve existing com-
petitive relationships as between mines and districts, except where
these relationships are in some obvious sense inequitable.

The level of minimum prices is to be set so as to yield in each price
area an average price per ton equal to the weighted average of the total
cost of all coal produced in that area, and altered from time to time to
reflect any appreciable changes in costs. The components of cost listed
in the act have been noted above. With the exception of depreciation
and depletion, all are items which must be paid currently. Since
these elements of cost represent principally expenses which must be
recouped in order to continue in business without reducing wages (or
some other element of cost) this standard for the level of minimum
prices seems at first sight conducive both to attainment of the objec-

• In several public utilities labor expense is a much smaller proportion than this. For the railroads as a
whole labor expense has been between 50 and 55 percent of total operating expenses including taxes in the last
15 years.

464 CONCENTRATION OF ECONOMIC POWER

lives of the act and to promotion of maximum economic consumption.
But the question arises: Whose costs, what mines are to produce, and
how is total production to be divided between high and low-cost mines?

The only answer to this question afforded by the law comes in a
set of considerations which seem to call for preservation of existing
competitive relationships between mines and districts. The con-
siderations are set forth in such vague or general terms that they can
be reduced to definite criteria only through the work of the regulatory
agency.*

Minimum prices are to be "just and equitable as between pro-
ducers" in the same district and "no minimum price shall be proposed
(by the district boards) that permits dumping." No criteria of
dumping are given. Prices for different districts selling in a common
markefarca must be coordinated so that they are "just and equitable,
and not unduly prejudicial or preferential" between districts, so that
they reflect the relative market values of coals from the different
districts, so that they "preserve as nearly as may be existing fair
competitive opportunities," and so that they do not reduce or increase
the average price per ton in any district below or above the minimum
weighted average cost of the whole minimum price area "by an
amount greater than necessary to accomplish such coordination."

The act does not, of course, require that the prices for each mine
shall be ^uch as to give it a return per ton equal to its weighted
average cost, but applies rather to all in a district. And it permits
variations in average price between districts in the same price area,
insofar as they are necessary to accomplish the difficult task of
coordination. In practice such variations will doubtless reflect in
some measure the differences in costs between districts, and perhaps
between companies. Thus although by its very nature price fixing
does allocate business and profits- and wages and employment in
substantial degree, the regulatory agency is furnished by the law
with no specific principles to decide what mines shall be permitted to
operate, and how the business and profits and losses shall be divided
between those that are enabled to operate. Will prices be set in such
fashion that variations in production from time to time will be shared
proportionately among the mines now operating or wifl the number of
mines in operation contract and expand?

No definite standards of economic efficiency relative to this problem
are included in the act. The phrases quoted suggest a general man-
date to be fair to existing interests, and the Bituminous Coal Division
has stressed this point in its findings.^ It is possible that standards
of fairness might be developed in terms of relative efficiency of the
various mines as indicated by some measure of costs. Some prece-
dents for such an interpretation of fairness or equity are to be found
in the interpretation oi the laws relative to unfair methods of com-
petition and in the regulation of public utihty rates. Application of
the distance principle in railroad rates is an outstanding example. But
these precedents have been developed slowly and have almost always
been modified by other notions of fairness related to preservation of
existing or past relationships. On the whole, commissions and courts
have not conceived of equitable relations primarily in terms of relative
efficiency. Since the phrases "just and equitable," "not unduly

» For interpretations of these considerations by the Coal Division, in the fixing of prices effective October
1. 1940, yee Part III. appendix O.
• See appendix G to part HI.

CONCENTRATION OF ECONOMIC POWER 465

prejudicial or preferential," "preserve as nearly as may be existing
fair competitive opportunities" are given no definition of any kind
in the Coal Act, since the emphasis is on fixing the level of minimum
prices high enough to cover operating expenses, and since neither the
purpose nor the standards as expressed in the law are explicitly related
to efficiency, it seems most likely that the emphasis will be upon pres-
ervation of past relationships, for some time at least.^

It would appear that the language of the law is capable of interpre-
tation to mean either preservation of past price relationships between
mines and districts or preservation of past proportions of sales (except
as these prices or proportions of sales reflect dumping or "unfair"
competitive opportunities). With variations in total sales as, for
example, between depression and recovery, it might be impossible to
achieve the latter objective without altering past price relationships.
The former interpretation would render equation of average price and
average cost easier to obtain and would enable a closer approach to
maximum economic consumption.

Whichever interpretation is principally used, the tasks of main-
taining past relations will be exceedingly difficult, owing to the lack
of adequate and-reliable records of such relationships which,' typically,
have been in flux rather than' fixed. In the future, relationships
will certainly be affected by alterations in wage differentials, in
types of equipment, or in ether elements affectmg relative costs,
and by changes in demand between districts attending shifts in indus-
trial location as well as con\petition from other sources of energy.
The act provides no specihc standards with which to face future
changes of these kinds.

Let us now consider the application of these standards, the con-
siderations involved in adjusting the minimum price level at the
beginning, and those involved in subsequent changes in costs. It has
already been emphasized that in a dynamic, changing situation
standards are to be regarded as a goal toward which things should
move. The endeavor must be to prevent movement away from the
standard and to approximate it as closely as possible. In an industry
subject to as many changing influences as coal — chief among which
are variations in general industrial activity, substitute competition,
fuel economy, changes in freight rates, and internal changes in tech-
nology and wages — this desirable result cannot be attained unless
adjustments in prices are based, not solely upon the past, but upon
the best possible estimate of probable future results. Moreover,
readjustments to changed conditions must be made with celerity. In
fact, however, the Coal Act as now worded seems to call for adjustment
to past recorded costs and for preservation of past competitive rela-
tionships, without regard for future changes that will ensue as a direct
re&ult of such adjustments, to say nothing of adjustment to developing
trends and probable future conditions. Wliether this will be strictly
followed by the regulatory agency remains to be seen.

Mmimum prices are to be set so as to yield an average revenue per
ton equal to the weighted average cost of a past period, not to current
or future weighted average cost. The standard is the weighted aver-
age cost in the year 1936 — i. e., the cost of the particular volume of
coal produced in that year by the particular mines then operating

' That this has, in fact, been the case, is indicated in the "General Findings of Fact" by the Director of
the Coal Division. (See appendix Q to part III.)

466 CONCENTRATION OF ECONOMIC POWER

with the methods and under the conditions then obtaining — adjusted
for changes in cost since then. "Upon satisfactory proof made al
any time by any district board of a change in excess of 2 cents per net
ton of 2,000 pounds in the weighted average of the total costs in the
minimum price area, exchisive of seasonal changes, the Commission
shall increase or decrease the minimum prices accordingly." The
actual costs for the last 9 months of 1937 were used to demonstrate
the adjustment to the 1936 costs required by an increase in wages
effective April 1, 1937. In general it appears that adjustments for
changes since the end of 1937 have been limited to items of which
the effects on costs were definitely predictable, such as the increase
in the Federal unemployment tax from 2 to 3 percent of pay rolls.
It also appears that the effect on weighted average cost of a decline
in production in 1938 to a level substantially below the output of
the two preceding years has not been considered.*

The language of the act, quoted above, seems to call for a- change
in the level of minimum prices only after demonstration that there
has been a change, of a nonseasonal nature, in actual weighted average
cost, except for altered circumstances of which the effects on weighted
average cost are highly predictable. Since the first prices under this
act had not been fixed at the time this study was in preparation, we
can only await further experience to see the extent to which the Coal
Division will modify the minimum price level in accordance with
anticipated effects on weighted average cost of changes in volume of
production, in mine population, in methods used, in wage rates, or in
the proportions in which different kinds or grades of coal arc con-
sumed. It remains to be seen what kind of evidence will be regarded
as constituting "satisfactory proof"; and with what rapidity demon-
strated changes in cost will be followed by changes in the level of
minimum prices. It appears most likely that adjustments of the
minimum price level to changes in cost will often be made only after a
lag of at least several months, that the average minLmum price per
ton will often be equal to the cost in a previous year, and that it will
often differ appreciably from current weighted average cost.

It should be emphasized that in setting the minimum price level
the regulatory agency does not seem to be directed by the law to
consider the effect of the price level on consumption,^ rate of utiliza-
tion, or capacity, and the consequent repercussions on costs requiring
further changes in the level of minimum prices. Although the
objective of the Coal Act is evidently to prevent current total revenue
from falling below current total expenses, no criteria are provided
for the levels of consumption, production, operating capacity, and
prices at which the equalization of current total revenue and current
total expense are to be achieved.

« It may also be noted that average revenue per ton will not equal past weighted average cost when changes
occur in the relative consumption of different kinds, grades, and sizes of coal or of coal from different mines,
unless such changes are predicted and allowance for them made in setting the minimum prices. In esti-
mating the expected average revenue from the minimum prices that will be promulgated in 1940 it appears
that the relative distribution of tonnage in 1937 has been used.

» The law states that the minimum prices "shall have due regard to the interests of the consuming public,"
but it seems highly doubtful that this phrase in itself would be taken to mean that the Coal Division should
select the lowest level of minimum prices which would tend to equate average price and weighted average
cost in the near future. The injunction in the law to consider "the competitive relationships between
coal and other forms of fuel and energy" does not seem to be a criterion for the level of prices. It appears
to relate solely to the coordination of prices of coal sold from different producing districts in a common
market. On this point my interpretation may differ from that of the Coal Division, for it appears llmt
where a rise in the general level of prices in a given price area is necessary under the cost standard, the
Coal Division endeavors to some extent to raise chiefly those prices, increases of which will not result in
much decline of consumption through substitution of other sources of energy. (See Appendix E to P u'
III, pp. 34'>-344, and Appendix Q, pp. 376 ft.

CONCENTRATION OF ECONOMIC POWER 4g7

In considering the interactions of consumption, costs, and mini-
mum prices, variations occurring from year to year or over several
years will first be treated, the problems of month-to-month varia-
tions and price adjustments within the year being reserved for later
discussion.

Substantial yearly increases in consumption might for a year or so
diminish current average cost ''as interpreted in the act) below the
average m.mimum price based on past average cost because of fixed
overhead to a larger coal tonnage.^" It seems probable, however,
that only a small proportion of the total costs specified in the act
would remain constant with marked increases in production over a
few years and that the saving on overhead might be offset by higher
unit labor expense and other costs. When, as a result of higher labor
and other costs, weighted average cost began to rise with expanding
output, the lag in upward adjustment of minimum prices would
mean that these minimum prices might not yield total revenue equal
to current total expense. These are, however, minimum prices.
Actual prices could be higher — equal to or above current average
costs or increment costs — unless competition held them down to the
minim.um level. Indeed the lagging adjustment of minimum prices
upward might Jiave the beneficial effect of discouraging too rapid
reentry of idle high-cost mines. '^

Much more important are the possible results of a substantial de-
cline in consumption over a period of years. Such a decline might
grow out of the expanding use of competing fuels induced by higher
coal prices relative to prices of the other fuels or by changes in equip-
ment or service; or it might grow out of a prolonged industrial depres-
sion such as that of the early 1930's, which greatly reduced the con-
sumption of that large share of bituminous coal which is normally used
by industry and by the railroads.

If the r-eduction in consumption persists for a time, it is likely that
weighted average cost will tend to rise, first, because of overhead costs
that cannot be, or are not, adjusted from year to year as. output
changes; second, because of the slow rate at which economies in wages
or other direct costs will be made under fixed minimum prices; and,
third, because it is unlikely that high-cost mines will be shut down
at a sufficiently rapid rate to balance this tendency toward higher
average costs. The history of this industry in the past 15 years shows
that high-cost mines retire very slowly, even with marked reductions
in coal prices. Such mines will have leas reason to shut down if pros-
pects are for higher average costs and higher minimum prices. Thus
the very existence of a legal guaranty of minimum prices under the
act may retard further the process of closing these mines.

Consequently, it seems probable that minimum prices will have to
be raised somewhat as the consumption of coal drops and average
costs rise. This is certain to occur if the weighted average cost in-
creases by as much as 2 cents a ton. This is not unlikely, for if cost of
production were $2 a- ton, and overhead represented 10 percent of the
total, a drop of 10 percent in production would increase costs by 2
cents a ton. (In 1938 there was a drop of 20 percent in output.)

'0 The authors of Part III state that in years of large consumption like 1937, fixed overhead forms a fairly
small proportion (possibly 10 to 12 percent) of total cost; in years of small demand the proportion is, of
course, higher.

" Because of the constant danger that actual prices might fall below yearly increment or even average
costs.

46g CONCENTRATION OF ECONOMIC POWER

Then, unless some major reversal of the trend of coal consumption,
such as a rapid business recovery, took place, a vicious spiral might
begin. The increase in minimum prices, necessitated by a rise in
weighted average cost as a result of the initial decline in consumption,
might provoke a further drop in consumption, causing a further rise in
weighted average cost, a subsequent further increase in minimum
prices, and so on, through successive price advances.'^ In each year
the average price received, made equal to the average cost of the
preceding year, would be below the current average cost.'

The insidious effect of this "bootstrapping process" and its danger
to the competitive position of the industry might not be realized
quickly, because the immediate effect of the higher minimum prices
induced by higher average costs might well be to yield a larger total
gross sales revenue to coal operators. This is possible because the
mine price of coal is usually only a small fraction of its delivered
price, so that mine prices can be varied substantially with only a
slight percentage increase in the delivered price.

Thus, if an increase in mine prices of 5 percent and in consumer
prices of 2 percent were attended by a 3 percent decline in consumption
the total revenue received by operators would be aboiit 2 percent
larger, although the total amount spent on coal by consumers was 1
percent smaller. In these circumstances the total losses of operators
would be reduced by the price increase even if their total expenses
remained the same, with the 3 percent decline in production. In
proportion as expenses contracted, the reduction of losses would be
greater. In such circumstances, it seems clear that the prospect of
higher prices (and their subsequent estabhshment) will tend to reduce
the rate at which high-cost mines close. If both consumers and oper-
ators expect this bootstrapping process of increasing prices to continue
for some time, these expectations will enhance the rate of decline in
coal consumption and diminish the rate of abandonment of operations
by high-cost mines and may in the long run interfere with the basic
objectives of the act.

Although 'he immediate effect of higher prices upon consumption
might not be widespread, there might be instances in which important
consumers change to other fuels. '^ Over the longer term, however,
the ultimate effect of a consistent application' of the policy implicit
in the provisions of the act may be serious. If sales were to continue
to drop over a period of years, as minimum prices were raised succes-
sively, the consequence might well be to stimulate the use of alterna-
tive fuels and to contract the coal market permanently, unless coal
price advances were made on types of coal where the effect on con-
sumption would be slight.

It is plain that with a decline in consumption the cost standard for
prices is ill-adapted to achieve the evident objective of the act —
equality between current total sales revenue and current total costs
(as denned in the law). The cost standard of the act is even less

'• It is, of course, true that the efltfct on consumption of a rise in average cost and in prices would be mini-
raized if the Increase in the level of prices were brought about by ordering minimum price increases in markets
where the effect on consumption would be very slight. Experience alone can demonstrate whether it is
possible, in the various price areas, to meet the cost standard entirely by increases in particular prices which
affect consumption only slightly.

'• A rise in coal prices may, of course, result in immediateshift to other energy sources by some consumers.
For example, the president of the National Portland Cement Co. testified before the Coal Division in
January 1940 that some cement companies, in process of plant rehabilitation, were delaying installation of
heating equipment to ascertain whether, under the fixed minimum coal prices, coal or a substitute fuel would
be more economical. (See Journal of Commerce, January 12, 1940.)

CONCENTRATION OF ECONOMIC POWER 459

adapted to attainment of the objective of maximum economic con-
simnption. The standard for maximum economic consumption is tlie
lowest price which will return the average variable cost (wage rates,
prices of supplies, and so on, being given) the amount of coal required
to meet consumption at this price. ^* Clearly the bootstrapping price
increases represent movement away from this standard, rather than
toward it, with increasing disadvantage to consumers in the form of
higher prices and to labor in the form of less employment. Indeed the
bootstrapping process has exactly the same effect as monopolistic
cartel price increases designed to diminish losses or increase profits.

Given a decline in consumption bringing higher weighted average
costs of sufficient magnitude to require an advance in minimum
prices, it would seem to be impossible under the present Coal Act to
approximate maximum economic consumption. That could be
approximated only if there were no price increases on account of
reduced volume of production, and approximation to that result
would under some circumstances take place more quickly if there
were a reduction in prices to hasten the retirement of high-cost mines.
If the drop in consumption were regarded as due merely to an increase
in coal prices, it could be minimized by prompt restoration of the
former level of" prices as soon as it began to appear. A decline in
consumption resulting from reductions in prices of competing energy
sources would probably call for both lower coal prices and smaller
consumption of coal than theretofore. To attain the maximum
possible economic consumption of coal under these circumstances
coal prices should be reduced enough to hasten th6 retirement of high-
cost mines and to check somewhat the shift from coal to substitutes.
Diminishing consumption as a result of advances in fuel economy call
for abandonment of production by some high-cost mines, and perhaps
lower minimum coal prices.

The a,bove strictures must not be taken as implying any criticism
of minunum price fixing itself. Rather the point is that the technique
used in minimum price fixing should, be such as to keep conditions
moving always toward maximum economic consumption. For this it
would be necessary that the Coal Division be directed to consider the
effects of prices on consumption and to adjust minimum pricefs so as
to bring as soon as possible in the future an approximation of average
price to average cost at the lowest average price which would equate
production and consumption. The standard for minimum prices
should be in terms of probable future costs rather than past recorded
costs.

Several other influences on the trend of costs and hence of prices
and consumption should be noted briefly. Price increases under the
Coal Act may induce entry into production of sufficient additional
mines, formerly idle but not abandoned, to diminish the average sales
and average production of the mines already operating and increase
their average costs,, even though consumption does not fall. The
higher level of minimum prices then required would set off the same
vicious spiral of diminished consumption, higher costs, and increases
in minimum prices, unless consumption were expanding enough to
prevent the influx of new producers from causing an increase in
average cost.

" This statement is not true for the case of growing output attended by increasing average^nd increment
costs, for when increment cost is above average cost the former constitutes the standard "for price.

279348'— 41— No. Pi2 32

470 CONCENTRATION OF ECONOMIC POWER

The Coal Act specifies that reasonable selling expenses are to be
included in weighted average cost. The Coal Commission appears to
have taken the position that the amounts of sales expenditure actually
incurred represented the best criterion of reasonable selling costs. If
the illegality of price competition at prices below the fixed minima
results in enlarged selling expenditures, as it may well do, this will
tend to increase weighted average cost unless the Coal Division
forsakes the policy of the Commission and rules that no increase in
selling cost per ton is reasonable. If an increase in selling costs is
allowed to raise weighted average cost by more than 2 cents per ton a
rise in prices will be obligatory and this may initiate the vicious
boot-strapping process.

Moreover, weighted average cost may, in practice, appreciably
exceed the true average variable expense. Mr. Gordon and Mr,
Webb point out that although the Coal Commission correctly ex-
cluded various items of expense representing capital charges or
earnings, substantial elements of return on capital may be included in
the weighted average cost now or in the future. Hidden profits may
enter weighted average cost in the shape of large selling commissions
paid to affiliated selling companies, large royalties paid' to affiliated
land-owning companies, excessive depreciation or depletion, or
inflated salaries of officers. The cost reported by any one company
will in most cases exercise a negligible influence on tlie weighted
average cost of a whole district. Although no one company has any
incentive on this score to include any profits in its cost reports it may
do so for other reasons, and if many- companies do this the district
average cost will thus include some element of earnings on capital.
Moreover, a group of companies producing enough volume to affect
the district average appreciably would have an incentive to report
high costs if they desired higher prices, for the levels of prices will vary
somewhat as between districts even though each district in a minimum
price area is supposed to have an average minimum price as close as
possible to the average for the whole area. Marketing agencies
might conceivably exercise some influence on cost reporting.'** If
prices have to be raised at any time on account of the influences men-
tioned in this paragraph, again the ridiculous self-propelling price
elevator will start its climb.

Increasing purchase or leasing of coal mines by large consumers such
as electric companies, in order to avoid the anticipated higher prices,
will proilaably exercise little, if any, influence on weighted average cost
as long as the regulatory agency continues to interpret the act to call
for computation of the average cost of all coal produced by both
commercial and "captive mines." '^

Stability of prices and wages at levels higher than those prevailing
in the last decade may encourage increased mechanization. This
would bo- a force acting in the direction of lower weighted average
costs, but it would seem likely to act at too slow a rate to make im-
possible the bootstrapping process of price increases described above.

Within a year's period changes in demand or in costs may be of
three different sorts. They may conform to a typical, seasonal

" Subject to the approval of the Coal Division, marketing agencies and agreements between marketing
agencies are exempted by the act from the antitrust laws.

'• Removal of increasinn amounts of coal from the Jurisdiction of the coal act might render it more difficult
to enforce the minimum prices and hence endanger wage scalers. However, insofar as the corporations pur-
chasing "captive" minas are regulated public utilities or are- not in strenuous competition with companies
buying coal subject to the act, this result is not likely to follow.

CONCENTRATION OF ECONOMIC POWER 47]

pattern recurring every year; they may represent abnormal short
fluctuations departing from the typical seasonal behavior but un-
related to year-to-year changes; or they may constitute the beginning
of a change that takes place over a period longer thart a year. The
coal act provides that the district boards in proposing minimum
prices shall propose price variations related to "seasonal demand,"
but "seasonal changes" in weighted average cost are specifically
excluded as a factor justifying a change in minimum prices. The
phrases "seasonal demand" and "seasonal changes" are not defined.
The plain implication seems to be that they both relate to the clear
pattern of typical seasonal fluctuation in demand and production in
this industry in each year. Some districts which supply substantial
quantities of coal for domestic consumption, in which this seasonal
pattern is most marked, have proposed seasonal discounts during the
late spring and summer. This is, of course, desirable as a means of
diminishing fluctuations in output, costs, and employment. More-
over, seasonal discounts, i. e., different prices at different periods of the
year, may be necessary to obtain the maximum amount of consump-
tion consistent with approximate equality between average price
and average variable cost. The act gives no criteria for the number
or amplitude of seasonal price variations.-

The law seems iU-adapted for price changes within a year arising
from changes in demand of the other two sorts. If the phrase "sea-
sonal changes" in weighted average cost were interpreted to mean any
change in costs which occurred in the course of a few months rather
than from year to year, this would rule out fluctuations in minimum
prices within the year, other than those which reflected the existing
schedule of seasonal discounts. In any event the necessity of basing
changes in the level of minimum prices on proof of a change in weighted
average cost and the probability that' the slow process of hearings will
be used to establish such proof, render it likely that few, if any,
changes in the fixed level of minimum prices will be made at intervals
of less than a year.

With changes in demand that depart from the usual seasonal pattern
it is possible that fluctuations in minimum prices would enable equali-
zation of average price and average cost in the year with a somewhat
larger consumption than would exist with constant minimum prices.
There is na presumption that this would be so, and hence no presump-
tion, on this score, in favor of varying minimum prices during the
year. Only intensive study of demand behavior could answer the
question.

Much of the foregoing can be summarized by saying that minimum
price fixing in the coal industry can promote the objectives of decent
wages and maximum economic consumption if the economic standards
used in price fixing result in enough reduction in the number of work-
ing mines so that all of those remaining in operation receive in most
years revenues at least sufficient to recoup the variable operating ex-
penses, if the regulatory agency exhibits a high order of judgment and
of skill in applying the standards, and if the industry cooperates sai^is-
factorily. It is to be doubted that the cost standard of the present
act, the undefined considerations for designing intermine and inter-
district price relationships, and the lack of criteria and of machinery
for short-time price variations will enable attainment of these ob-
jectives.

472 CONCENTRATION OF ECONOMIC POWER

Up to this point in the discussion of coal price-fixing maximum
economic consumption has been conceived as the largest consumption
that will return to operating mines their average variable costs (or
increment costs if these are higher), given existing wages and tech-
niques of operation. The discussion has also proceeded without refer-
ence to conservation. If unemployed miners, whose maintenance
represents an overhead cost to the community, cannot be employed
in producing anything else that is worth while to the conmiunity, it is
clear that the true cost to the community of using them in producing
coal is less than the wag^rates paid by coal firms. On this reasoning
maximum economic production and consumption wopld exist only
with coal prices appreciably below those which would return the total
of wages paid . (at present wage rates) and other expenses that are
variable from the standpoint of private firms. Since discussion of
these matters and of conservation involve consideration of the level
of use of resources in the whole economy they will be deferred to a later
section.

The Coal Act of 1937 empowers the regulatory age^icy to fix maxi-
mifm prices for coal, f . o. b. mines, in any district when this is deemed
necessary to protect consumers against unreasonably high prices.
The standards prescribed are the foUowing:

Such maximum prices shall be established at a uniform increase above the
minimum prices in effect within the district at the time, so that in the aggregate
the maximum prices shall yield a reasonable return above the weighted average
total cost of the district: Provided, That no maximum price shall be established
for any mine which shall not yield a fair return on the fair value of the property."

The proviso seems to be controlling and it may conflict with the
reasonable return standard. For the standard the district is the unit;
for the proviso, the mine is the unit. If the whole section should be
taken to mean that no level of maximum prices could be fixed in a
district which would make it impossible to fix maximum prices for
any one operating mine in that district that would yield a fair return
on the fair, value of the property of that mine, then the fixing of maxi-
mum prices so as to give in the aggregate merely a reasonable return
above the weighted average cost of the district might be rendered
impossible. Without knowledge of the fair value of each coal mining
property, it would be difficult to ascertain whether a certain set of
niaximum prices would yield a fair return on that property, and the
ascertainment of fair value is a matter of years. ^* Protests would
give rise to almost endless litigation. Thus, high-cost mines, both
new ones that might have just entered production attracted by rising
prices, and old ones near exhaustion, might be unable to earn a fair
return except with a level of maximum prices that would give exorbi-
tant profits to most mines. The legal maxima might have to be much
higher than the mines would ever charge in practice.

In the absence of strong monopoly control or of a rapid, great in-
crease in demand for coal there would seem to be no need for maxi-
mum price fixing, because competition would prevent prices from
rising above the increment ct^.^"^ of additional output. It is conceivable
that the growth of marketing agencies and of agreements between
them might change a highly competitive situation into a monopolistic

" It will be noted that the proviso Is poorly worded. Literal interpretation of "no maximum price"
would be no maximum price for any individual size, grade, or kind of coal; but that would be ridiculous.

" It Is here assumed that "fair value" means fair present value according to the interpretations of the
Supreme Court to date.

CONCENTRATION OF ECONOMIC POWER 473

one for some markets. If this happened and maximum prices were
set so as to yield a fair return to higljrcost mines that had been
attracted into production, maximum price Regulation would be power-
less to prevent prices that were unnecessarily high and" production of
some quantities of coal by the new entrants that could be produced
more cheaply by mines previously in the field.

But the coal division has a more effective weapon than maximimi
prices to deal with this situation. Marketing agencies and agreements
between them are exempted from the antitrust laws only when they
are approved by the coal division. Such approval is conditioned
(among other things) upon a finding by the division that the agency
or agreement "will not prevent the pubKc from receiving coal at fair
and reasonable prices" and "have agreed to observe the * * *
maximum prices" set by the division. Approval may be revoked upon
a finding that these requirements have been violated. Evidently the
division could set maximum prices and require their observance as a
condition of original approval or nonrevocation of approval. More-
over, the possibility exists that the phrase "fair and reasonable prices"
might be interpreted to mean something different from the standard
and proviso for maximmn prices, noted above, when used merely as
a condition of exemption from the antitrust laws accorded to a mar-
keting agency or agreement that may voluntarily be entered or not,
as producers desire.

Maximum prices are to be set "at a uniform increase above the
minimum prices," and the latter must, of course, be raised with every
increase of more than 2 cents per ton in weighted average cost. Thus,
as indicated in part III, it appears that the maximum price fixing
provisions of the act would be difficult, if not impossible, to operate.

With a large, rapid increase in demand, such as may occur in a
period of rapidly expanding industrial activity And rising prices, the
provisions of this act for maximum price fixing might be ineffective,
because of the conflict between the standard and the proviso. This
would be so if new high-cost producers flocked in and prices were set
high enough to give them all a fair return even though a large part of
their output could, in fact, be produced more cheaply by others.

Finally, it. may be noted that the provisions for maximum price
fixing do not enable the regulatory agency to prevent increases in
prices that accord with increases in wage rates or other cost items.

CHAPTER VII

THE STRUCTURE OF PRICES— OBJECTIVES AND
STANDARDS

Questions concerning the structure or pattern of prices paid by
different consumers are closely linked to problems of the relations
between investment, incomes, and the average price or general level
of prices in a firm or industry, but there is a distinction between them.
The general level of prices, or average price, is built up from individual
prices, and changes in the level come about most frequently by changes
in particular prices which at the same time often alter the price struc-
ture. Of especial importance is the fact that the amount of consump-
tion and the amount of net income attending a given average price
or level of prices may differ substantially in accordance with different
patterns of individual prices to various groups or classes of consumers.

Prices for a particular commodity may be uniform t all consumers,
either at the point of consumption or at the point of production or at
some other point. Or prices may differ, either out of proportion to
or in exact correspondence with the ascertainable differences in costs
of serving various groups of consumers. Where different products or
varieties of a basic product are sold by the same firm, prices may
reflect differences in costs between the various items, on the one hand,
or the differentials may exceed or fall short of the cost differentials.^

Four broad objectives in designing a price or rate structure seem'
worth distinguishing: Some particular amount of income, some ideal
of fairness, maximum economic consumption, some benefit to a
particular group of consumers.

The first aim may be to achieve a particular level of profits or of
wages, or both. Thus it may be desired to attain maximum possible
profits, or an ordinary return on some measure of investment, or a
minimum living wage for a certain number of employees. It is well
known that in many instances the maximum gross sales revenue of a
firm or an industry can bo obtained oilly by charging different prices
to different groups of consumers. This is so wherever the maximum
revenue from one group of consumers is obtainable with a price that
dift"ers from the price which will yield the maximum revenue from a
second group of consumers. Under such circumstances either profits
or wages, or both, can be larger with difterential pricing than with
uniform prices to all, provided it is possible to separate the two or
more groups of consumers in such a way that those charged higher
prices cannot transfer themselves into a class charged lower prices and
that those charged lower prices cannot resell the product or service to
consumers in classes charged higher prices in such a way as to reduce
the seller's net return. Experience shows that transfer of consumers

1 Tlu' Uobinson-l'atirian Act, wliich applies to unri'sulated industries engaged in interstate commcrr j,
pr((hil)its price ditlerentials in exc-ess of ascertainable differences in cost when the effect of such differentfc "s
ni:iy he to injure coin|H'titioh.

475

476 CONCENTRATION OP ECONOMIC POWER

from one class to another can be minimized by classifying customers
according to use. of the product, byifunction (e. g., wholesalers versus
retailers), by place or time of consumption, or by size of purchase.
Barriers to resale occasionally exist in the sales contract and are also
present wherever transport equipment would be needed, as in the case
of gas or electricity.

Where differential prices can be maintained they will often yield
larger profits than uniform prices, if no units of the product are sold
at prices below the direct cost of producing them; that is, in technical
economic terminology, their respective increment costs.^ Conceiv-
ablv there may be more than one particular pattern of prices which
will yield the same maximum amount of profits.

In many instances profits representing an ordinary return on
dollar investment (or some other particular amount of profits) can
be secured either with uniform prices to all consumers or with one or
more sets of differential prices to different groups of customers. If
some purchas'ers, who would not pay more, are charged prices below
the average unit cost (including the ordinary or desired profit) but
above the increment cost of serving them, then the' prices to other
groups can be lower than they would need to be if uniform prices
were charged to all. In other words, low prices that induce some
consumption that would not otherwise occur, which contribute
something to the fixed aggregate overhead, enable some reduction of
the higher class prices. Some customers paying higher prices may
be benefited bjr sales to others at lower prices which contribute to
the overhead, if regulation is effective enough to ensure that the
former obtain price reductions.

Another possibility, however, is getting prices to one or more
groups below the actual added costs of serving them. In this case
their consumption not only contributes nothing to the particular
sum of profits aimed at, but other groups must pay higher prices, if
he desired profits are to be realized, than they would need to pay
if no customers were served at prices below these costs.

Thus in many cases it may be possible to secure a particular desired
sum of profits (short of maximum profits) by uniform prices to all,
by one or another pattern of differential prices no one of which fails
to cover increment cost, or by one or another pattern of differential
prices some of which are below the increment costs. To regulatory
authorities bent merely on assuring a given sum of profits it will be
imndaterial which of the various alternative price structures is put
into effect.

However, it may be impossible with uniform prices to obtain
ordinary profits on dollar investment, or even profits sufficient to
attract new capital. This situation exists when demand is not large
enough relative to the size of the existing investment. In this condi-
tion differential pricing will be required if the desired profits are to
be realized.

This discussion of the relations between price structures and in-
comes has been put in terms appropriate to the simple case in which
a company produces but one article or service at a cost which is the
same in serving all consumers; it also holds true for the more complex
cases where costs of serving different consumers differ somewhat or

' See P- 414. Editor's note: The term is used by economists to mean the direct cost ol adding one unit of
production, without regard to overhead. Increment cost la by no means simple to compute in practice.

CONCENTRATION OF ECONOMIC POWER 477

where several products are produced at differing costs. In such cases
the equivalent of uniform prices are prices that contribute uniformly
to earnings, for the essence of differential pricing is disproportionate
contribution to earnings on capital: ^

A second possible aim which regulatory agencies often consider in
shaping the price pattern is to make prices "fair" as between all con-
sumers or "fair" as between producers. Standards will vary, of course,
in accordance with different notions of fairnr "s. Fairness to all con-
sumers may be interpreted as one price to all even where costs of
serving them are different ; or it may be conceived as differences
which merely accord with differences in costs. Reductions in prices
to eliminate unnecessary earnings may be considered equitable as
between all consumers only if they are spread evenly among all classes.
The notion that fair treatment of different consumers require.^ preser-
vation of past price relations emerged especially when some of the
customers, at least, are competing businessmen. The same sort oV
idea is often advocated as a standard of the fairness of the price struc-
ture as between producers.

A third objective in designing price or rate structures is maximum
economic production and consumption, which is considered in this
report to mean the largest consumption which will return the incre-
ment costs, plus whatever additional revenue, if any, is necessary in
order to maintain expectations that will attract capital, in the. case of
an industry with growing demand. The basic standard here is that
the price of every unit of product or service must at least cover the
addition to expense occasioned by production and sale of that unit.
A price below this "increment Cost" signifies that the worth to the
customer is less than the direct outlay which must be incurred to pro-
duce and sell him a unit of product or serviee.

If new capital is not needed because demand shows no signs of
increasing, the prices of all units and products sold by the firm should
be equa) to their ascertainable increment costs. Where a flow of
new investment into the firm or industry is necessary from time to
time in order to meet most efficiently a growing demand, prices equal
at all times to these increment costs may provide profit expectations
sufficient to attract investment, and there would be no need for any
prices to exceed these co^ts. The only differences in prices to con-
sumers will reflect differences in increment costs of serving them, and
their contributions to earnings will be uniform.

In many instances, however, it is probable that prices equal to
increment costs will not provide expectations of profit sufficient to
attract new investment. Some prices, at least, must then exceed
such costs. It has been noted above that there may be several pat-
terns of prices that will yield a given sum of profits. Here the problem
is to find that particular pattern which in yielding the necessary
profits will at the same time give larger utilization of equipment and
consumption than any other. Maximum consumption will be attained
only if the higher prices are charged to consumers whose volume of
consumption will not be much less at the ligher prices than it would
be at prices closer to or equal to increme il costs. A desirable price
pattern is one which would insure maxim ii a possible consumption by

' The matter may be put more precisely as follows: Different ial )ricing is absent when every price yields,
in addition to increment cost (including capital charges or p- of: s on equipment usod only to serve the
particular customer or group of customers), an equal amount 3f evenue per unit of use of the equipment
used to serve all customers in common.

478 CUNCENTKA'J'ION ( »F ECONOMIC POWP^t

each group of consumers, consistent with the maintenance of the
necessary profits.

Such a price pattern could never be precisely attained because of
lack of knowledge of consumer reactions to price changes. Study of
the nature of demands from different groups of consumers, however,
and observation of results pf price changes should enable design of a
price structure that would approach the goal. Balance in prices to
different classes of consumers should also be aimed at when prices are
reduced to eliminate excess profits, as consumption expands or as costs
decline for other rea^o^ . To achieve maximum consumption, prices
should be reduced '.o consumers whose consumption will be most
increased thereby; and prices to any one group should never be
reduced when a reduction to some other group would give a larger
increase in volume of consumption per unit of diminution in profits.

A fourth possible end in fashioning a price structure is to benefit
one or more particular groups of consumers. An unprosperous indus-
try may be given lower prices for transportation or other utility
services than are paid by prosperous industries. Low-income groups
may receive special low prices while others pay the "regular" price.
Or prices may differ between several ineonic groups, as in the case of
medical services. Standards for this fourth class of objective will
run in terms of the kind and the amount of ben(>fit to be conferred
and the way in which any attendant deficits are to be recouped.

These four sets of objectives are in substantial measure incom-
patible, and the actual practice of Government price control has
usually exhibited a combination of two or more of them.

One freciuently encounters the stat(>m<>nt that as utilization of a
large fixed investment improves, the highest prices or rates should be
progressively reduced. If the aim is solely maximum economic
consumption jind utilization of equipment, this is by no means neces-
sarily so. Plainly it is not so if reduction of some of the intermediate
r;i(es v/ill give larger increases in consumption and utilization.*
Similarly, the contention that the existing spn'ads between el(Ttric
rates to residential consumers and rates to large power users should
be drnsticaliy reduced * probably represents at least in part either
a misconception of the standards for maximum economic consumption
or a preference for considerations of (equity over thos(> of maximum
consumption. If low rates to large power users (not below increment
costs) enlarg(> total consumption more than lower raters to domestic
consumers than those now in force, the objective of maximum eco-
nomic consumjition is obviously more clos(>ly approached. It often
seems to be overlooked that insofar as low rat(>s to industrial con-
sumers are reflected in lower prices of industrial products than would
otherwise exist, consumers as a whole may benefit.

• If, when full utilization is reached, increment ccsts become equal to full averape unit cost includinR the
neces-sary minimum earninps, then dilTerencas in rates should disapi>car exc-ept as they just mwisure dif-
ference-s in costs of servinp different consumers. This condition should be reached by a process of lowerinp
the hiRher rates and increasing the lower rates. Lack of knowledge of the behavior of increment costs in
public utilities and of the degree of "lumpiness" required, by technological conditions, in expanding invest-
ment as full utilization of existing plant is approache<i, render it impo.ssible to determine whether the con-
dition in which all prices or rates are equal to increment costs represents a practicable possibility in these
industries.

» See the Electric Power Industry, by John Bauer and Nathaniel Gold, Harjw Bros., 1939.

CHAPTER VIII

THE STRUCTURE OF PRICES IN ELECTRICITY, MILK, AND
BITUMINOUS COAL

ELECTRICITY

In the regulation of electric rates much less attention seems to have
been devoted by commissions and courts to the pattern of rates than
to problems of the general level of rat^s and the return on investment.'
Most of the books on public utility regulation while treating at some
length the standards developed by courts and commissions in regula-
tion of the general rate level have little to say about standards for the
pattern of rates. The most extensive treatise on the subject, Guiding
Principles of Public Service Regulation, written in 1924 by 'Henry C.
Spurr, editor of Public Utility' Reports, contains in its 700 pages
scarcely any treatment of rate patterns.

According to Ellsworth Nichols' study, Public Utility Service and
Discrimination, published in 1928, courts and commissions have
developed notions both of fairness and of economic efficiency insofar
as they have dealt with questions of differences in rates to different
consumers. In applying statutes prohibiting "unjust" discrimi-
nation or "undue" or "unreasonable" preference they have drawn
partly on common law precedents. The essence of the legal notion of
unfair discrimination in rates seems to be differences in rates to cus-
tomers purchasing the same service or product under substantially
the same circumstances. Such differences are held to constitute unfair
or undue discrimination either because they bestow an advantage on
particular individuals or groups not open to others, who may be
competing with the former, or because the low rates to favored con-
sumers necessitate higher rates to other customers than they would
otherwise iu>ed to pay.

The development of service classifications and differential pricing
according to classification, in order to increase profits and to eidarge
consumption, forced regulatory authorities to attempt a ilistinction
between low rates whicli throw an added burdrn on other custonu'rs
and low rates which enable reduction of the burden on other cus-
touKTS because they result in additional consumption, not attaiiuible
at higher rates, that contributes something to earnings.

It appears that most commissions liave failed to develof) any clear
prineij)les for designing tlie pattern of rates. The general position
that seems to be taken by mo=t commissions as well as by writers on
the subject is thnt both cost of service aiul vahie of service must be
given consideration and that the objective siiould be a mixture of
enlarged consumj)tion and equity between consumers. It is rejieatedly
averred that the fixing of iiuhvidual rates is a matter of judgment,

I See, for example, H. N'. Hclilirm. ("ompelition and .Monopoly in I'ulilii- Itilily Industries, p. l.')S.

470

480 CONCENTRATION OF ECONOMIC POWER

but it is rarely said that judgment should be guided by clear principles.

In the past two decades more attention has been given to measure-
ment of what is here called increment costs and to the development
of devices and theories of allocating the common capital costs between
the different classes of consumers. Many questions of methods of
allocation and of how much of the common costs should be allocated
to the different classes of service for purposes of rate making still
remain highly debatable. With enlargement in the uses of electricity
and gas and growth in inter-industry competition, these problems, as
well as problems of demand, have become more complex. Regulatory
authorities have not devoted much attention to modification of rate
structures on the basis of extensive studies of demand conditions.
Owing to preoccupation with the rate level problem and to inadequate
funds or lack of interest, most commissions seem to have been content
to regard the design of the rate structure mainly as a problem of
utility management.

There seems little doubt that utility managements have been slow
to develop rate patterns conducive to maxunum consumption. With
rates that yielded generous earnings, wliich were justified by the
prevailing court doctrine or went unchallenged because of the ineffec-
tiveness of regulation in many States, utilities have tended to wait
for consumption to increase before lowering rates, and to wait for
clear evidence that a change in rate structure would improve consump-
tion without impairing profits before making any such changes. As
noted earlier, the recently introduced objective rate represents a
method of experimenting with lower rates for one or another class of
service without impairing existing earnings.

Mr. Lewis' reports suggest that the commissions in Wisconsin,
New York, and lllmois have been more occupied with rate forms than
with the problems of how to apportion among the various classes of
customers the calculated overhead equal to a "fair return." All
three commissions have endeavored to simplify and standardize rate
forms and to put into practice forms which force each individual
consumer to pay the full costs of distributing equipment used solely
by him and the increment cost of the amount of energy that he
consumes. The Wisconsin commission has been working toward
a State-wide uniform two-part rate form for residential and com-
mercial lighting services. This rate form includes a fixed customer
charge, to cover the costs of the utility's equipment on the premises
and the costs of bilhng, collection, etc.; and a separate charge for en-
ergy consumed. The commissions in New York and Illinois do not
favor such customer charges for residential users. They attempt
to achieve the same end by a one-part block rate in which the total
bill for the first block of energy constitutes a minimum charge. All
tliree commissions have endeavored to eliminate from rate forms for
residential customers all types of demand charge— that is, a fixed
charge related to some measure (usually crude) of the customer's
maximum demand on the system at any time. This demand charge
is ordinarily used for the purpose of assessing the capital costs of gen-
erating and transmission equipment among consumers on the basis
of relative maximum demands.

For largo power users the Wisconsin and New York commissions
favor a two-part rate including a demand charge, according to the

CONCENTRATION OF ECONOMIC POWER 4gl

customer's maximum demand placed on the system as measured by a
demand meter, and, in addition, an energy charge.

The three commissions use block rates, which encourage additional
consumption at lower rates. They have not, however, adopted the
"objective" rate f orm ^ as a permanent device although it is evident
that the objective rate tends to produce larger consumption for a
given amount of net earnings. The block rate represents a method
of charging to an individual consumer a high rate for energy put to
one use, such as lighting, for which the amount consumed will not
vary much with the price, and lower rates for electricity used in other
ways in which consumption will expand with lower prices. Even if
several optional block rates are offered to the class of residential con-
sumers, it is obvious that they can reflect but a few of the actual
differences in demand patterns of these customers. The objective
rate has the merit of automatically creating a particular block adjust-
ment for each consumer adapted to his demand characteristics as
evidenced in the past. The amount which he has been consuming at
the ordinary block schedule constitutes a broad block for him in
particular. As. his consumption increases beyond this the rate breaks
sharply. In other words a marl^ed rate break occurs just ai the point
where he had stopped increasing his consumption. A simple block
rate can be adjusted only to broad averages of the demand behavior
of all consumers in a class. The objective rate is a neater instrument
for dissecting the pattern of rates into particular schedules to fit the
demands of particular consumers in such a way as to increase the
total volume of consumption that will return a given total of net
earnings. And there is no reason why additional objective rates
should not be added from time to time provided the intervals between
their announcement are not too short to induce consumers to wait,
before increasing consumption, until a new objective rate is put into
force.

It is obvious that the use of objective rates involves discrimination
in the sense that two individuals consuming the same amount of
energy may pay different average prices per kilowatt-hour. However,
this kind of discrimination is necessary if maximum economic con-
sumption is to be attained. The "value of service" to domestic users is
different for different uses, and for each use the value of particular
quantities of electricity varies somewhat between individual con-
sumers.^

The design of the rate form may facilitate both assessment against
each customer of those costs for which he is specifically responsible
and whatever particular allocation of the common costs among con-
sumers the commission desires. Plainly, however, it is the amount
of the rates themselves which determines both of these things. Each
of the commissions in these States attempts to make sure that no
consumers are served at rates below the ascertainable increment
costs of serving them. But none of these commissions seems to have
any clear criteria by which the overhead is distributed between the
several classes of consumers. Rates to commercial users are set
higher than rates for domestic users on the presumption, common to
most commissions, that the demand for the former service is very

» See p. 419 for fiirthor discussion of this rate form.
»Cf. C. O. Ruggles, op. cit., p. 221.

482 CONCENTRATION OF ECONOMIC POWER

largely "on peak" with the result that the total required capacity of
the utility is much more influenced by this demand than by others.

Rates to large industrial users of power are ordinarily much lower
than rates to the otlier two principal classes of consumers. These low
rates are usually held justifiable on the grounds that industrial con-
sumption is largely "ofl'-peak," that the added business increases total
consumption aiul permits lower rates to other classes of customers,
and that these rates have to be low in order to induce industrial enter-
prises to forego development of their own power or purchase of
by-product power from other industrial companies. Rates to large
industrial users are either left more or less unregulated, as in Illinois,
or are partially regulated with the purpose of ensuring that they are
not lower than they need be to get the biishiess.

In the case of these three commissions it does not appear that rates
are made on the basis of cost allocations by which all or nearly all of
the common costs are specifically allocated to particular services.
Such"a procedure would be likely to keep consumi)tion far below the
desirable maximum.^ The pattern of rates is not altered in any way
that would impair receipt of the fair return, and no rates are set so low
that they will presumably not cover increment costs. In main-
tahiing or altering the existing pattern of rates the commissions are
motivated by their ideas of equitable balance, by the relative volume
df protests from different classes of customers, and by the desire to
improve utilization and consumption, as well as by the necessary con-
dition of permitting an overall fair return. Regard for considerations
of "fairness," as evidenced by their own practices or by the voluine
and character of protests, and their failure to make aTul use intensive
studies of the probable relations between lower or higher rates and
volume of consumption in dift'erent classes, appears to indicate that
the commissions have not yet discovered aiul put into eft'ect rate
structures that would give m.aximum economic consumption..

The typical procedure in estimating the eft'ect of rate reductions on
income by applying the reduction per kilowatt-hour to the con-
sum|)tion of the previous period ineajis that excess hicome is not
removed by a process of lowerhig rates to those consumers whose con-
sumption will increase most per unit of income removed, unless this
I'esult is achieved l)y chaTice.

On the important nuitter of the content of i-ate structures — the
spreaiHng of- the fair-return overhead anu)ng the several classes of con-
sumers— little nuuv can be said of the policies of these three com-
missions than that they take into account ideas of fairness, volunic
and luituie of protests, and utilization of cai)acity, and apj)ly their
judgment -without any i)articular fixed guiding principles, as far as
can be ascertained.

In the design of the rate structure, T. V. A. (K)es not seem to have
ma(U> any special advance over the policies of the three conunissions
studied in this report. Its wholesale rates and rates for direct sale to
industrial users are com|)ose(l of fixed denumd charges and block
energy charges. Contracts with municipalities and cooperatives
wi\ich purchase energy from T. V. A. for resale contahi clauses hi
which the Authority prescribes the forms and amount of chai'ges at
retail. Retail rates both to domestic and commercial consumers are

• rnlis.f. iiiilcnl, cosls were allnciilcd cliii'dy l>.v ciimimlini; llic .st cnil cxiK-clcd aiiioiinls of ri'\('nii(j
ntiKvJ'iiicrriiiciil c'<»sts that wmilrl he nciiMil from tlir varioii.s classes when rale-- witc such as In u'lw iiiaxi-
iiuiiii ('iiiisiiiii|iiiiin.

CONCENTRATION OF ECONOMIC POWER 483

block rates with a minimum charge equal to part of the first block.
The fixed demand or customer charge used in Wisconsin, which is
probably more promotional than the minimum-bill block form, is
employed by T. V. A. only in rates to industrial consumers.

The general pattern in which the overhead is spread among the
three main classes of consumers is the conventional pattern of the
commissions — lowest rates to large industrial users in order to obtain
their business and highest rates to commercial users. The act directs
that particular consideration be given to the small domestic con-
sumer. Accordingly the charge for the first block of energy for
domestic consumption is exceptionally low. There seems to be
nothing to suggest that T. V. A. has given more attention than the
most effective State regulatory commissions to the problem of the
most desirable pattern of apportioning overhead among the different
classes of customers; although its intensive consumption studies and
its greater freedom for experimentation with the rate structure may
later lead to advances in this field, ^o far, there is no particular
reason to think that T. V. A. has hit upon the pattern of rates that
promotes maximurn economic consumption.

It will be recalled that the standards for the height of the prices
of fluid milk relative to the prices of manufacturing milk have been
treated in detail in an earlier chapter devoted to standards for the
general level of prices. In most of the instances of Government
control of milk examined in part II it appeared either that only one or
two class prices were fixed or that very little attention was paid to
the problem of standards for the relations between the different class
prices.

In none of the six instances of public pricing of milk studied here,
except California, were any standards discovered for the number of
different class prices paid to producers. The cost standard in Cali-
fornia seems to set automatically the number of class prices, usually
two — manufacturing milk and fluid milk and cream. In each of
these six cases at least two class prices exist, although in one instance,
Oregon, the State fixes only one price, that of fluid milk and cream.
The number of class prices varies from two in Oregon and in most
markets in California up to a maximum of nine in the New York
City market. Substantial variations in the number of class prices
often occur as between different markets in the same State.

Of these six cases of government control, California alone exhibits
a clear-cut statutory standard for the relation between class prices.
In the case of Federal control, the adrriinistrative agency has de-
veloped something approaching a definite standard for the relation
between class prices, and there is some indication that the Wisconsin
control agency has recently moved toward a definite standard. In
the other three States the picture is less clear. In general, it is
probably true that, in all the cases studied in this report except Cali-
fornia, the standards used are whatever the State authorities, or the
producer organizations, or both think will maintain the most profitable
price structure, given an uncontrollable price for manufacturing milk
and existing limitations on the amount of production of fluid milk.

484 CONCENTRATION OF ECONOMIC POWER

Federal Control.

In connection with FederaJ control of milk prices, Congress has
provided no objectives or standards relating particularly to the
pattern of milk prices. Presumably the general objective of raising
farm income may be pursued and the standard of purchasing power
parity may be applied either by varying the pattern of class prices
for milk or not changing it, as seems to the administrative agency
most effective and expedient. As was shown in an earlier section
the A. A. A. soon adopted the policy of widening the price spread
between class I milk and class III milk as the principal method of
raising the average or "blended" price paid to producers for milk
and, in consequence, raising producers' income. Apart from a few
schemes, operated jointly by the Department of Agriculture and local
relief authorities, by which milk is distributed free or at a low price
to families on relief or on W. P. A., it appears that the only purpose
for which the A. A. A. has altered the price structure has been to
increase the average prices and income to producers.

The result has been to raise the prices in those markets under
Federal control and probably to increase gross income of milk pro-
ducers. It is difficult to determine whether production and con-
sumption have been increased above what th6y would have been
with narrower class price differentials. If farmers have increased
their production to the point where the "blended" price is equal to
their increment costs, they have been selling milk for manufacturing
purposes at prices below the actual costs to them of getting it pro-
duced. This would mean that consumers of class I milk have been,
in effect, subsidizing consumers of manufactured milk products. It
is possible that those consumers who use larger quantities of manufac-
tured milk products relative to their consumption of fluid milk have
somewhat lower incomes than those who use larger amounts of fluid
milk relative to their consumption of manufactured milk products,
but it seems unlikely that the difference is great. Hence it does not
appear that this would represent in any considerable degree the kind
of price discrimination, such as that existing in the pricing of medical
services according to relative income, which raises the standard of
living of the lower income groups without much reducing that of the
higher income groups.

Such a result would attend the charging to higher income groups
of higher prices for milk and all milk products with correspondingly
lower prices on all milk and milk products to lower income groups.
It is possible that a price pattern of this sort might also enable both
disposal of full capacity output of dairy farmers and maintenance of
desirable producer incomes without Government subsidy .*

In Boston and Chicago the Department of Agriculture and local
relief authorities have cooperated in schemes by which relief recip-
ients receive fluid milk free or at a low price. In Boston the farmers
are paid the full class I price for this relief milk while in Chicago the
producers agreed to give relief milk a special class rating at 70 cents
per hundredweight below class I. In Boston the milk is processed
and delivered to milk depots by regular dairies who bid for low-cost
contracts. In Chicago dealers deliver the major portion of relief
milk to homes and a small part of it to milk stations. Relief families

' It might, however, tend to diminish total employment of men, equipment, and savings in the whole
community. (See below pp. 499 ff.)

CONCENTRATION OF ECONOMIC POWER 485

receive the milk free in Chicago whereas in Boston they pay 5 cents a
quart and W. P. A. families pay 7 cents a quart. The necessary
subsidy to producers and distributors has been paid by the Federal
Surplus Commodities Corporation or shared by this agency and the
local relief agencies.

Schemes of this sort seem to have demonstrated that class I sales
can be markedly increased by low retail prices, resting partly on sav-
ings in distribution resulting from restriction of services, without
diminishing existing class I consumption at the prevailing standard
prices. Although they involve two or three retail prices they do not
constitute an instance where low prices to the lower income group
are offset entirely by higher prices to higher income groups, for Gov-
ernment has made substantial payments to producers and distrib-
utors. These milk schemes and others such as free or low-price
distribution of milk to schools and hospitals are similar in essence to the
food stamp plan which is being applied to many other farm products
in an increasing number of cities and counties. All involve the sale of
designated farm products to low-indome groups at prices lower thap
those charged to others and payments by Government to producers
and distributors. The prices to higher-income groups have not been
raised high enough to dispense with Government subsidy.^

State Milk Control.

As explained in an earlier chapter, the California law provides that
minimum prices of fluid milk shall be based on the ''economic relation-
ship" of the price of fluid milk to the price of manufacturing milk.
The language of the statute implies that the "economic relationship"
means a price differential equal to the extra costs, such as those due
to sanitary regulations and to provision of a more even supply through-
out the year, of producing fluid milk as compared with manufacturing
milk. ,.

The California Department of Agriculture endeavors to fix such
a price differential in each market after making studies of the costs of
producing both fluid milk and manufacturing milk. In many "markets
the state has fixed only the price of milk used as fluid milk and cream.
In the Sacramento market, however, the stabilization and marketing
plan contains methods for prescribing minimum prices for four
classes of milk. Usually the price of milk is the same whether used
as fluid milk or fluid cream, evidently because the cost is the same.

The Oregon milk control board is endowed with no control over
the prices or quantities of manufactured milk. It fixes only one
price, that for fluid milk whether used in the forrn of milk or cream.
It is not clear whether, in fixing the minimum price to be paid pro-
ducers in a given market for their fluid -milk, the board considers
either the market price of milk entering manufactured products or
the amount of fluid "surplus" going into that outlet. Evidently the
limitations on entry and on production for the fluid market enable
the price of fluid milk to be divorced in substantial measure from the
price of manufacturing milk. Hence it is probably correct to con-
clude that State control in Oregon has avoided the problem of design
of a class price structure by imposing output controls which insulate
the fluid market from the manufacturing market. In the broad view
this may result in a price structure that maximizes the profits of exist-

This.does not imply the opinion that they should be. See above note, p. 481, and below, pp. 499 ff.
279348 — 41— No. 32 33

48g CONCENTRATION OF ECONOMIC POWER

ing fluid milk producers. The failure to differentiate the prices of
fluid milk and cream may mean, however, that maximum profits are
not, in any case, obtained. .

In Wisconsin the number of different class prices has varied be-
tween different market areas. Milwaukee has had four classes — fluid
milk, fluid cream, manufacturing milk, and relief milk — since the
inauguration of control in 1932. Until 1939 the typical situation in
most markets in this State was a uniform price for milk used as fluid
milk and milk used as cream. In that year the minimum prices for
milk used as cream were lowered in a number of markets due to a
growth in cream receipts in these markets from areas formerly mar-
keting manufacturing milk. Thus, in each of these markets a single
price for fluid milk was replaced by two class prices.

Minimum prices for surplus fluid milk entering manufacturing out-
lets are fixed in Wisconsin according to formulas based on the prices
of manufactured milk products, especially butter and cheese. The
differences in formulas as between markets reflect differences in op-
portunities for surplus disposal. Evidently the purpose is to insure
that distributors pay to farmers in each market area the best price
obtainable fof the surplus in manufacturing outlets.

During the years 1933-38 the retail price of fluid milk in Milwaukee
rose more than the price of evaporated milk, continuing a trend estab-
lished in the latter twenties, which tended to disappear in the ensuing
depression. There is some indication that the percentage of families
using fluid milk and the amount of family consumption of fluid milk
per month declined slightly in the ye'ars 1934-39, while the corre-
sponding percentages for consumption of canned milk increased
appreciably.

Insofar as the Wisconsin department of agriculture and markets
has been concerned with the design of the class price structure, it
appears that it has endeavored to put into effect class prices which
will increase producer indomes%to some unspecified level. It may be
that their goal is maximum profits possible without public control of
entry or production.

In Indiana the milk control board has ordinarily set up three classes
for producer prices. In all controlled markets in the State, class I
milk includes both fluid milk and fluid cream. Class II milk usually
includes milk used for flavored drinks, cottage cheese, ice cream, and
evaporated and condensed milk. Class III milk is miJk used in other
manufactured products, cliief of which are butter and cheese. Formu-
las based on the wholesale price of butter have been used to determine
the minimum class II and class III prices. In the case of class III
prices, at least, the formulas are evidently designed, as in Wisconsin,
to insui-e payment to farmers of tlie best obtainable competitive price
for surpUis fluid milk. The standards employed in determining the
relations between class I prices and class II and class III prices are
not revealed by study of the policies of the milk control board.

Milk control in New York State, like that in the other States here
studied, with the exception of California, is without legislative stand-
ards for determining the number of class prices or the class price
relations. In specifying the number of class prices in a market, the
division of milk control was apparently guided substantially by the
existing class arrangements in that market.

CONCENTRATION OF ECONOMIC POWER 4g7

During most of the time since public control was inaugurated lq
1933, nine classes have been used in the New York metropolitan
market, and a smaller number in up-State markets. Prior to 1937
five of these nine class prices were determined by formulas based on
the open market prices of manufactured milk products such as butter
and cheese. It does not appear what standards were used in deter-
miuing the other class prices.

With resumption in 1938 of control in the New York metropoh tail
market, under a joint State and Federal order, all nine class prices
were for a time determined by formulas. However, after the mUk
strike in the late summer of 1939, the class I price and three other
class prices — representing milk used as fluid cream, condensed milk
and frozen deserts, and cream for storage — ^^were aU increased appre-
ciably above the formula prices, apparently in response to producer
pressure for higher prices on these classes.

With the changes in the milk control laws in 1937 to encourage
market self-government by bargaining agencies of producers and
dealers, the legislature did not lay down standards for design of the
class price structure.

With regard to the structure of retail prices to different groups of
consumers there is little to be said. The underlying reports on State
milk control present little evidence on this matter. Evidently the
actions of control authorities in this sphere have concerned prihcipaiiy
the relations between prices for home delivery and prices- in stores and
in milk stands.

During, the period of retail price fixing in New York State, prior
to 1937, price differentials were fLxed between store sales and home
delivery. Minimum prices for store sales were usually set at 1 cent
per quart of milk and 1 cent per half-pint of cream below the minimum
prices for home delivery. Between l'930 and 1938 home delivery sales
dropped from 57 to 47 percent of total sales while store sales iucreased
from 43 to 52 percent of total sales.

In Oregon, Indiana, and Wisconsin price differentials between home
delivery and store sales have been abolished in large measure by the
control agencies. It appears that they have been entirely eliminated
in Oregon, although the Oregon statute specifically authorizes price
differentials wherever cost differentials obtain. Indianapolis seems
to be the only market in Indiana which still possesses such a differ-
ential, and there is similarly but one market in Wisconsin where this
differential has not been eliminated. Differentials between the prices
charged by milk stands in the environs of a city and town and the
prices charged for home delivery have also been abolished in most
markets in Wisconsin.

On the matter of price differentials between store sales and home"
delivery, California also provides a contrast with the policies of the
three States just mentioned. The language of the California statute
emphasizes that fixed miniinum wholesale and retail prices are to be
consistent with maintenance of "sufficient distribution facilities of the
several types or methods commonly used by consumers."

BITUMINOUS COAL

The bituminous coal price structure miist necessarily be complex,
with or without Government price control. There are several different
kinds of coal produced by mines with different seam characteristics.

488 CONCENTRATION OF ECONOMIC POWER

Each kind of coal is produced in various qualities or grades, according
to chemical and" physical attributes. Different qualities occur in
diiferent mines and often in the same mine. Further, each quality of
a particular kind of coal is proYiuced in various sizes. The various
kinds and qualities of coal occur in diiferent quantities, and the costs
of their mining frequently differ. The various sizes of coal emerge
from the process of mining in proportions which can be modified to
some extent, but the various sizes cannot be made available in all
possible proportions at the same cost.

Thus some differences in price per ton between various kinds,
qualities, and sizes of coal will "naturally" exist — whether pricing be
the result of keen competition or strong monopoly control — unless it
is entirely a matter of indifference to most consumers which kind,
quality, or size of coal they use.^

A particular quality of one kind of coal may have the same value
per ton to some consumers as some quality of another kind of coal.
Moreover, within broad limits, the size of coal may be of no signifi-
cance to some consumers, such as the railroads and by-product coke
plants. It is evident, however, that most consumers are not com-
pletely indifferent with respect to kind, quality, and size of coal, in the
sense that they will pay no more for one kind, quality, or size than
another. This is demonstrated by the price differentials existing at
times when the strong competitive forces in this industry have operated
uncontrolled.

The coal price structure ordinarily exhibits price differentials
explainable in considerable degree by these two conditions — the fixed
or semi-fLxed proportions in which various kinds^ qualities, and sizes of
coal can be produced, "and differences in the strength of demand for
these various kinds, qualities, and sizes. And price differentials
based on these two conditions will be required for maximum economic
consumption.

Since transport expense is large for coal — on total coal shipments by
rail the average freight rate paid has for many years exceeded the
average value of the coal f. o. b. .ipines — the prices received f. o. b.
mines are substantially affected by freight rate adjustments. The
railroads and the I. C. C. group the mines for purposes of setting
freight rates. Although rates to a given market are equalized for
mines in the same origin group and often equalized for several groups,
many markets are served by groups taking different rates. Hence the
prices received f. o. b. mine often differ between mines selling the
same or a comparable kind, quality, and size of coal in the same market.
Further, the same coal sold in different markets by one mine may
return different prices f. o. b. mine, reflecting varying amounts of
freight absorption.

The Coal Act provides that minimum f, o. b. mine prices phall be
set for all kinds, qualities, and sizes of coal for each mine in the-
country.^ When it is -considered that most mines sell several sizes
and several qualities, and often more than one kind of coal, and that
each mine sells each of its prod.ucts in several, perhaps many, markets,
it is readily appreciated that altogether several hundred thousand
prices must be fixed.

'In economists' vernacular there are substantial elements of joint supply in coal production, the capacities
In which the various kinds, qualities, and sizes can be produced being in considerable measure fixed by
unalterable elements.

' Except those few whose Sales exercise no substantial effect upon prices of coal sold in interstate commerce.

CONCENTRATION OF ECONOMIC POWER 489

The cost standard of the Coal Act for the general level of prices in
a minimum price area is a definite standard. The act contains, how-
ever, no definite, clear-cut standards for the pattern or structure of
individual prices. The individual prices fixed f. o. b.' mines "shall
reflect, as nearly as possible, the relative market value of the various
kinds, qualities, and sizes of coal, shall be just and equitable as
between producers within the district, and shall have due regard to the
interests of the consuming public." There is also provision for price
variations on account of different "values as to uses." Coordination
of prices of coals from different districts sold in a common market
must result in prices that are "just and equitable" between districts,
that preserve "existing fair competitive opportunities," and that
reflect "relative market values" of the various kinds, qualities, and
size^ of coal considering, among other things, "values as to uses" and
"the competitive relationships between coal and other forms of fuel
and energy."

Evidently the price structure must accord with two quite general
criteria which are not clearly defined: Relative market values and
fairness to all producers and to consumers. The manner of statement
in the law implies that these are criteria of coordinate importance,
but this is not made explicit. The results would probably differ
according as they were so regarded or as relative market values were
considered a test for fairness, or fairness was held to be a test for
relative market values. The phrase "relative market values," with-
out further criteria specifying which particular relative values, is no
standard at all. By itself alone it is merely a synonym for relative
prices. As often as relative prices change there is a change in relative
market values.

The vagueness and generality of statement of these ■ two sets of
considerations would seem to permit either maintenance of essentially
the same pattern of prices or introduction of appreciable changes in
the price structure. Changes could probably be justified on grounds
of changes in demand or in use values, or on grounds of fairness
between producers or between different groups of consumers. In
other words, the regulatory agency is directed to fix the pattern of
individual prices according to considerations so vaguely stated that it
must of necessity decide for itself among a range of alternative objec-
tives and standards.^ The only definite rule is that no pattern can
be set which will not equalize current average price and weighted
average cost of a past period adju^'te'^ ^'^r subsequent changes. Doubt-
less there are several different patterns of prices which will conform
to this rule.

Once the structure of minimum prices is originally fixed, the regula-
tory agency may "from time to time, upon complaint or upon its
own motion, review and revise the effective minimum prices * * *
in accordance with the standards" set forth to govern the original
establishment of prices. And whenever the general level of prices is
raised or lowered because of a change in weighted average cost, the
question of a change in the price structure can arise, unless the phrase
"increase or decrease the minimum prices accordingly" is held ^o mean
a uniform change in all prices, and this is unlilvely.

' See Appendix O to Part.IH for a statement of the wny in whicb ttic Bituminous Coal Division has
interpreted these standards.

490 CONCENTRATION OF ECONOMIC POWER

In the original establishment of minimum prices it might be con-
sidered that preservation of price relationships previously existing
would constitute the best method of reflecting relative market values
and making minimum prices just and equitable between producers.
In substantial measure this seems to be the position taken by the
Commission and its successor, the Bituminous Coal Division. But
when market conditions change appreciably as between different kinds,
qualities, or sizes of coal or as between different uses for the same coal,
the regulatory agency will be forced to develop more definite objectives
and criteria to implement the phrases, of the law that pertain to the
price structure.

As pointed out in an earlier section, one objective of the Coal Act
is to keep total revenue of operating mines from falling below total
variable expense. Both the original pattern of minimum prices and
subsequent changes in it must accord with the cost standard laid down
as a means to this end. But the act does no.t direct that the regulatory
agency shall put into effect the pattern of prices which will best pro-
mote equalization of revenue and expense with the lowest possible
average price — that is, the average price that gives maximum economic
consumption. To achieve this objective, prices would have to be set
in accordance with the conditions governing the proportions in which
the different kinds, qualities', and sizes of coal can be produced and
their respective demand conditions, and changed from time to time
as these conditions changed. This means that' the common joint
expense for different varieties of coal should be recouped by higher
prices for those varieties, consumption of .which is less sensitive to
price, and lower prices for those, consumption of which varies much
with price. It is possible that standards in these terms would be held
to be consistent with the requirements as worded in the present law,
but the evident emphasis on preservation of past relationships may
make this doubtful. It appears, however, that in raising minimum
prices to meet the cost standard the Coal Division has in some measure
put. the price increases on kinds, qualities, or sizes, or in particular
localities, where substitution of other energy sources will be mini-
mized.^" As pointed out earlier, the law does not seem to direct that
the effect of price changes on consumption be considered, except with
respect to the coordination of relative prices between districts selling
in a common market.

A change in the pattern of prices at any given time, without any
change in the relative demands for different varieties of coal, or con-
tinuance of the same price structure in the face of alterations in the
relative demands for different varieties, may result in a change in
total consumption and hence a change in weighted average cost. If
consumption is enlarged, there will be no serious problems; but if
consumption falls and average cost increases because of the altered
pattern of pvices, this will precipitate the spiral of price increases and
decreases in consumption described in an earlier section. Here, again,
it appears to be unfortunate that the law does not specifically call for
consideration of consumption and demand characteristics in setting
. and altering the structure of prices.

The law permits the same kind, quality, and size of coal to carry
different minimum prices for different consumers in the same geo-
graphical location when the use to which they put the coal differs.

" See appendix Q to Part III.

CONCENTRATION OF ECONOMIC POWER 491

For example, the same coal may be sold to domestic users and indus-
trial users in the same city at different prices. No specific criteria for
price differences according to use are given in tha law. This type of
price difference is a device to raise the total revenue received; it will
not promote full utilization of the mines and maximum economic
consumption which will at the same time at leas,t yield variable costs
of mining the coal. The group of consumers charged the higher prices
will presumably use somewhat less coal than they would at lower
prices, although in the case of domestic consumers a small difference
is not likely to be important in the short run. The total costs of a
given size of coal can be covered by uniform prices to all consumers
in the same location.

This case differs from the case of different prices for varieties of coal
that have to be produced in certain fixed proportions — for example,
lump and slack — and sold to different groups of consumers. In this
situation, to obtain the largest economic consumption prices must be
adjusted to take account of the differences in demand from these
various groups of consumers. These differentials ape necessary to
recoup the total of the joint common expense and at the same time
get the lowest average price for all such varieties. For aiiy one kind
of coal, however, the supply can be made available to different users
in any proportions. As already indicated, maximum economic con-
sumption of such coal will be attained when prices ai-e uniform to all
consumers in the same location and when they are no higher than
necessary to return its costs."

Non-seasonal differences in prices for the same coal to different
consumers in the same location seem desirable not as a regular thing
but only in the case of sporadic -surpluses that cannot otherwise be
disposed of.

The Coal Act affords no criteria for differences in price f. o. b. mine
for the same coal sold in different geographical markets nor for the
determination of "common consuming- market areas." Similarly,
seasonal discounts are permissible, but no standards for them are set
forth.

With regard, then, to thepattern of the price structure, everything
depends on the standards developed by the Coal Division and the
courts, smce there are no specific standards contained in the present
law.

I ' More precisely this means a uniform price that covers the special expenses of this variety of coal and the
proper contribution above that to the joint expense of producing and selling this variety and other varieties
that are produced with it in fixed proportions — the proper contribution being determined according to the
principle that the total joint expense is to be recovered in suqh proportions as will give the I
production and consumption.

CHAPTER IX

PRICES IN RELATION TO GEI ERAL DEPRESSION AND
RECOVERY— OBJECTIVES AND STANDARDS

When there are large quantities of unemployed men, equipment,
and savings in depression, whether of brief or long duration, such as
the past decade has witnessed, public price control should endeavor to
minimize depression and to promote recovery wherever that is possible.
Public policy in control of industries may in large measure neglect
depression problems and may continue to be related principally to
objectives framed without reference to problems of depression and
recovery. This was true in some instances in the, thirties. This does
not mean, of course, that policies of control actually have no effect on
the severity and duration of depression or on its relative impact on
different groups; the maintenance of traditional lines of control in a
rapidly changing economic situation may, in itself, have a pronounced
effect. .

There are a number of possible objectives of price control during
depression and recovery. The first two of these involve Inerely
adjustment to depression conditions, riot promotion - of recovery.
These two reflect considerations of fairness or equity rather than con-
cern'for the efficiency of the whole econoniic system. The other four
'' are related to promotion of recovery.

(1) The first objective is the maintainence or increase of incomes of
some selected groups within an industry — producers, labor, middle-
men— merely to ease the impact of depression on them, with no
regard for the effect on the generj^l severity of depression or on re-
covery. Possible standards are the absolute amount of income re-
ceived in some previous period, certain relations or parities existing in

, a former period between the aJiiount of income of one group and that
of others, or a "normal" /income derived by adjusting the absolute
income or the parity income of a previous period for intervening
fundamental changes of a non-depression character, in cost or demand
conditions. Or standards may run in ternjs of rates of income per
unit of investment or of work done, or in terms of purchasing power
parities as measured by price relations or by income and price
relations.

(2) Secon^, adjustment of prices in a given industry so that con-
sumers as .a whole spend on its product the same proportion of their
incomes in depression as in prosperity. If income data were available
a standard might be formulated in terms of reductions in price pro-
portionate to some average of the reductions in incomes of consumers.
Alternatively, price reductions migb j oe made proportionate to reduc-
tions in a cost of living index. Nii^her standard would necessarily
approximate the end in view, but Vj would be difficult to ascertain
directly the price reductions which \ ould achieve this objective.

493

494 CONCENTRATION OF ECONOMIC IX)WER

Mitigation of the impact of depression on particular groups through
pursuit of objectives such as theste two might retard or promote
recovery or exercise a neutral influence on it; there are no a priori
reasons favoring any one set of eff'ects upon recovery.

There are many ideas concerning the way in which to promote a
larger employment of economic resources in the whole community
during depression. This results in a variety of possible objectives
related to this general end, of which four seem most significant.

(3) The first of this type is maintaining or raising the money income
of one-or more groups in a particular industry to prevent a drop or
to bring an increase in the vt \v ^e of their 'pending on other things.
This has been one of the leadm^ objectives ci the A. A. A. program.
Standards might run in terms of those set forth under the first objective
above; or the standard might be maximization of the volume of spend-
ing by these groups on other products. This would mean prices that
secured the largest possible money income for these groups, unless
there was reason to believe that they would fail to spend some part of
this maximum income. It should be recognized at the outset that
general recovery wiU.not be promoted by raising the money income of
particular groups, through increase in the prices of the goods they sell,
unless tliis process somehow^ has the result of substantially enlarging
the total volume of spending within a given time in the whole com-
munity. This will be explained in the following section.

(4) The next objective is reduction of prices in a particular industry
or group of industries. The idea underlying this objective, as it is
usually expressed, is the simple one thau lower prices in a particular
industry will result in larger production, utilization of c"apacity, and
employment in this industry and will increase^ the total national
income and employment of men and equipment -by the amount of
the increase in this industry. This view must ]est on the tacit assump-
tion that the total volume of spending on other things and the employ-
ment of men and equipment in their production is not affected by
lower prices and larger production, consumption, and employment in
this particular industry. Plainly there are no a priori grounds to
validate this implicit assumption. In one instance it may be true, in
another it may not be. It is of the highest importance to ascertain
in each instance whether it is or is not true.

A price reduction on a given product, or group of products, will
have a tendency to promote greater employment of resources in the
whole community in the following cases :

(a) Consumers spend the same amount of dollars on this article
at the reduced price, with the result that larger consiunption, pro-
duction, and employment in this industry does not cause a reduction in
their expenditures on anything else. Hence output and employment
elsewhere are unaffected. For some classes of consumers house rents
might provide an example of this case.

(6) Consumers spend a smaller sum for the same or a somewhat
larger quantity of the product in question, for which prices have been
lowered, and increase their expenditure on other things, correspond-
ingly. This case may be illustrated by such things as matches, and
fuel for domestic heating, consumption of which does not increase
much with price reductions.

(c) Consumers spend a larger sum of money on the article the price
of which has been reduced. Although they spend correspondingly

CONCENTRATION OF ECONOMIC POWER 495

less on- other things, total output and employment will be enlarged,
provided the increase of output and employment in this industry is
greater than the decrease in other industries where expenditure is
reduced.

(d) A price reduction leads consumers to use their own or to borrow
other idle funds in order to increase their total expenditure on this
commodity while maintaining the same volume of expenditure on
everything else. Aside from business spending which is treated later,
this is, perhaps, most likely to occur in the case of expensive durable
goods such as houses and automobiles.

A price reduction on an article will not have a tendency to promote
greater use of resources in the whole economy in the following cases:

(a) Consumers buy the same quantity of this product and fail to
spend the full amount of their savings from the reduction in price.
This may occur with price reductions on goods, the consumption of
which increases but little with lowered prices.

(6) The reduced price leads consirii-.crs to transfer purchases in
large measure from other competing goods to this article, with the twin
result that they now spend less on This whole category of goods and
save the difference. In this case output and employment are merely
transferred in equivalent amount to this article from the competing
products. An example might be found in a price reduction on one kind
of meat which did not increase the total consumption of meat. Con-
sumption of this kind of meat might increase greatly, but only at the
expense of other kinds. Competing industrial materials furnish
another familiar example.

(c) Wlieii a price reduction on a given product leads to greater
expenditure on some other things output and emplo3mient will not be
enlarged in these other industries if price increases absorb the full
amount of the additional expenditure there.

(d) Although a price reduction may, for any of the reasons already
explained, promote a higher level of use of men, funds, and equipment,
this initial effect may be partially or wholly nullified by an increase
in the vi.moimt of funds witldield from active use as an indirect result
of the [)r cc reduction. The price reduction may have the effect of
transferring considerable amounts of income from producing groups
that were spending these sums to others who prefer not to spend them.
Those who have some income may save some part of that which they
contuiue to receive. In the end the result may even be a net reduc-
tion in use'o.f rcsoiirces.

Fmally, the ultimate ertect ot a price reduction may be smaller
employment of resources, even though the initial effect is the reverse,
whenever it causes unemployment of men and equipment that can
never he reemployed in any other industry. An immediate increase
in total employment may come about through a process that involves
reduction of employment in one or more industries which is more than
offset by the increase in employment in the indi^itjy mailing the price
reduction. If the labor and the funds added "^o 'the ktter industry
could ]al{>r have been employed clsewlieie, but by their employment
her<' have the effect of creating permanent unemployment of some
men and equipment in the competing inchistries whose markets have
suffered, then total employment may ultimately be ali'erted adveresly.

From what has been said it is clear that standards for the desirable
amount of price reduction in depression should run in t nras of effects

^g(j CONCENTRATION OF ECONOMIC POWER

on consumer expenditure both for the immediate product or services
and factors indirectly affected and in turn the (rffects on employment
of resources. Recognition of the difficulty of making factual estimates
of these effects should not obscure their importance for the functioning
of the whole economy.

In the absence of subsidy the attainable bottom limit to prices of
products of private firms is whatever the businessmen consider
increment costs to be. In short periods — say a few months up to a
few years — some, at least, of the overhead need not be covered.
However, in industries with rapidly expanding demand or industries
where there are opportunities for much modernization of equipment
bottom prices must give the prospect of covering the capital costs of
additional equipment, for with expansion of equipment increment
costs include capital costs. As a practical matter, then, standards
for price reductions must be related to costs except in the cases of
subsidy or public ownership and operation.

(5) The fifth objective is stimulation, through price changes, of
increased spending on equipment by business enterprises. The case
of iirereased business spending on equipment as a result of lower
equipment prices is covered under (4) above. Here w-fe have to do
with the effect of a change in the price of a particular product on the
equipment expenditures of the firms making that product. In cases
where lower prices of a product yield a large growth in its consumption
purchases of equipment by its producers may be substantially en-
larged, especially if profit expectations are also improved or sums
available for equipment purchases are increased. In other cases
price reductions may have the effect of diminishing equipment ex-
penditure by markedly low^ering profit expectations or reducing the
sums available for equipment buying.

In industries where profits are Very low and opportunities for
modernization are large, price increases might result in larger pur-
chases of equipment either by direct addition to funds available for
this use or by improvement of the credit of the firms in these in-
dustries.

Standards to achieve the objective of larger expenditure on equip-
ment would need to be formulated in terms of the relations of prices
to costs and revenues, to profit expectations, and to equipment
spending. Here as above, increnient cost would constitute the
lowest attainable price except in the (Jase of subsidy or public owner-
ship and operation.

In many instances reduction in prices in a given industry may
affect both the volume of consumer spending on its products and the
volume of spending on equipment by the firms in the industry.
Whenever that is so the full effect on the total employment of men
and equipment in the whole community can be estimated only by
attention to both kinds of effect. In other words objectives (3) and
(4) on the one hand and (5) on the other hand overlap to some extent
and must not be considered separately.

It is often maintained that recovery will be especially stimulated by
price reductions on things that are costs to business enterprises — raw
materials, equipment, pubhc utility services, labor, and the hke.
The validity of this generalization can be tested only by subjecting
it to the type of analysis indicated above.

CONCENTRATION OF ECONOMIC POWER 497

(6) The last objective represents a combination of raising income
and lowering prices in the same industry in order to increase spending
on other things both by income recipients in this industry and by
consumers of the products of this industry. This objective would be
applicable, of course, only in the case of an industry where lower prices
would lead to a reduction in the volume of expenditure on its products.
Government subsidy or Government purchase of some part of the
capacity of the industry (for example, acreage, animals, ore reserves,
or plant) would obviously be 'necessary in order to enlarge money
receipts of the industry at the same time that revenue from sales of its
products fell off with price reductions.

Under certain particular circumstances each of these various ob-
jectives may contribute to mitigation of depression and promotion of
recovery. In the case of each it is obviously of the highest importance
to distinguish its real effects from its supposed effects, in other words
to distinguish those situations in which it will promote a larger em-
ployment of resources in the whole economy from those circumstances
in which it will not do this or will have the opposite effect.

The six objectives just described all relate to changes or adjust-
ments in price Or incomes. Changes in incomes can be accomplished
through changes in prices, but price changes are not the only method
of altering income. Moreover, fixing of minimum or maximum
prices or both is not the only control device by which a public agency
can affect prices. Control of output and, in some circumstances, of
capacity Nvill usually influence prices indirectly. Taxes and subsidies
also represent devices to accomplish changes in prices or in incomes.

CHAPTER X

PRICE CONTROL IN RELATION TO DEPRESSION AND RE-
COVERY IN MILK AND ELECTRICITY

A principal purpose of milk control by the Federal Government
and by the five States whose milk programs were studied in this report
has been to raise or to maintain at a certain level the income of milk
producers.

Insofar as milk control programs have not reflected merely the power
of pressure groups they seem to have embodied two principal objec-
tives: (1) To achieve fair incomes for producers and in some instances
for distributors; and (2) to promote general economic recovery by
enlarging the purchasing power of milk producers or, as it is some-
times expressed, by attaining a better balance of purchasing power of
agriculture and industry.

Although promotion of recovery in the whole community has
frequently been an avowed objective, no legislative or administrative
standards relevant to this objective seem to have been set forth. The
standards for milk price control laid down by legislatures or developed
by control agencies have been described in earlier chapters. They
relate essentially to objectives concerning the amount and fairness of
producer incomes, the structure of prices, and the efficiency of the
organization and operation of the milk industry — in other words, to
matters connected with the problems discussed in earlier chapters
rather than with those of depression and recovery.

In these instances of milk price control there appear no standards
running in terms of the effects of milk prices on output, consumption,
and employment in the whole economy. It may be. contended that
the parity price standard is a standard directly related to recovery.
This contention can best be tested in connection with analysis of the
effect upon depression and recovery of milk price increases.

In most of the instances of milk control studied here it seems clear
that prices of fluid milk have been maintained som.ewhat higher than
they would have been in the absence of control. It seems altogether
unlikely that total consumption of fluid milk in a controlled market
was diminished greatly by the increase in prices. Evidently consum-
ers spent larger sums on fluid milk in these years than they would
have spent if milk prices had not been raised, and the money incomes
of milk producers were enlarged. The sim.plest possible effect of the
milk price increases Would be to diminish rather than to increase total
employment of economic resources in the whole community , If con-
sumers spend more dollars on milk because of the higher milk price
and,, having less -income left for other things, spend less on some other
things, there will be a tendency to less em.ploym.ent in the production
and sale -of those other goods than would exist if milk prices had not

499

500 CONCENTRATION OF ECONOMIC POWER

been increased. Plainly, if the milk price increase leaves the total
amount of money spent in the. community per month and per year un-
affected and if more, of it is spent for the same quantity or a smaller
quantity of milk, then less of it is spent on other things, and the con-
sumption of other things must decline if their prices are unaffected.

To put it another way, the milk price increases transfer money in-
come to milk producers from producers of other things, the consump-
tion of which is reduced because more is spent on milk and less on
them. Milk producers have larger incomes to spend, but producers
of some other things have correspondingly smaller incomes. Offhand
it might seem that the expenditure of additional incom.e by milk pro-
ducers would offset or replace the decline in spending by other income
receivers in such a way that there would be no reduction in total use of
resources. But this conclusion overlooks the fact that the very process
of transferring money income from one group to another by a price
increase on the product of the latter group dim.inishes the demand for
the product of the group which loses income. If it did not have this
result there would be no transfer of incom.e. Hence, although, on
these assumptions, expenditure by milk producers of the addition to
their incomes keeps total spending in the community the same as it
would be without the milk price increase, it does not keep total use of
resources at the same level. If more is spent for the same quantity or
a smaller quantity of milk, less is spent on some other things, and tlieir
production and consumption is less.

If the results arc simply those outlined above, milk price control
tends to mipede rather than to promote a liigher level of use of eco-
nomic resources in the whole economy. This tendency would be
magnified should milk producers fail to spend a larger part of the
income transferred to them than the previous recipients.

There are, however, several conditions in which milk price increases
would have no effect on the general level of use of economic resources,
other than some possible reduction in the milk industry itself. If
prices of goods on which consumer expenditure declines are reduced
enough to maintain the same volume of consumption and output of
these products, the general use of resources will not be diminished
except by the reduction, if any, in milk production. The same result
would follow if all of the additional consumer expenditure on milk
came out of otherwise idle funds. It seems rather unlikely, however,
that either of these two conditions would obtain to the full. Again
there would be no adverse effect on the level of use of resources if
price increases transferred to milk producers' income that would be
withheld from spending by those who would otherwise receive it.

Further, the general level of use of resources would remain unaf-
fected if milk producers, in addition to spending their increases in
incomes, also spent out of hoards or idle bank credit further sums equal
to the reduction in incomes of others occasioned by the transfer of
income following the milk price increases. For in this case, since total
spending in the economy was increased by the amount of the addition
to milk producers' inctane, the total expenditure on other goods and
total income received for them would not be diminished. However, if
the milk producers were in financial distress before the price increases it
is unlikely that they would have extensive funds upon which to draw.
With better credit as a result of larger incomes they might, indeed,
borrow considerable sums for extension and modernization of equip-

CONCENTRATION OF ECONOMIC POWER ' 501

inent and buildings. Some part of the added spending from idle funds
or borrowing, might, of course, be done by producers of goods pur-
chased by milk producers. The matter is complicated, however, by the
possibility of reduction of spending on equipment out of otherwise idle
funds by producers of the other gt)ods whose incom.es were reduced by
the original transfer of income — or by producers of goods purchased
by these.

In other words, if milk price increases are not to have a tendency to
diminish total employment of men, funds, and equipment in the
economy, these price increases must have the effect of increasing
expenditure by milk producers or others by an amount enough greater
than the addition to milk producers' income:3 to offset the total
reduction in spending on other goods which is a direct consequence
of the milk price increases.

Finally, it is difficult to see how milk price increases can promote a
higher general level of use of resources unless milk producers or others
are thereby led to increase their expenditures by more than the
amount just necessary to offset declines in spending elsewhere. The
amount of additional expenditure necessary to promote recovery
might be large if the drop in incomes of producers of some other
goods, consequent upon the transfer of income to milk producers via
higher milk prices, led to marked reductions in equipment spending by
those other producers and hence to declines in incomes of equipment
producers. Hence, although it is by no means impossible that milk
price increases should contribute to general recovery, it seems much
more likely that they would usually have the opposite effect, or at best
ej^ercise no appreciable effect upon the general level of use of resources.

To conclude that milk price control according to the standards used
in the past several years is more apt to impede than to promote
recovery is not, of course, to conclude that incomes of milk producers
should not have been raised for other reasons such as considerations of
equity in income distribution. If milk producers' incomes are to be
raised it is most probable that outright subsidy would have much
more of a tendency to promote general recovery than higher milk prices.

It is doubtless true that the amount of influence on total employ-
ment of resources in the whole country exerted by price increases on
milk has been relatively small. The same can be said for all but the
largest basic industries. Should the objectives and standards of milk
control, as evidenced in this report, be extended to many other in-
dustries, each in itself relatively unimportant, the effect on the whole
economy would obviously be substantial.

The sale of milk at low prices to relief recipients, which has been
mentioned in an earlier chapter, seems .to have resulted in larger
consumption of fluid milk by this group. It is not clear whether price
reductions of this sort tend to promote recovery, although other
desirable results are obvious. If fluid milk merely replaced consump-
tion of canned milk with no appreciable effect on total production
of milk in all forms or on total expenditure on milk, the level of use
of resources would be httle affected. Where the scheme involved
subsidy to farmers, however, producer incomes and presumably pro-
ducer expenditure would be enlarged without correlative reductions
elsewhere and the general level of use of resources would be improved
somewhat.' ' Secondly, if lower milk prices resulted, in a smaller total
experiditure for a larger volume of fluid milk in r.ll forms and of milk

279348— 41— No. 32 34

5Q2 CONCENTRATION OF ECONOMIC POWER

substitutes there would be a tendency to larger general employment.
Production of milk would be larger, and consumers woujd have more
of their incomes to spend on other things, with consequent increases
in production of some of these.

Finally,- lower milk prices to lower income groups might promote
recovery even if they resulted in larger expenditure on milk and
smaller consumption of other things with less employment of resources
in the industries producing the latter. For improvement in the
general level of use of resources it would be necessary that the ad-
dition to employment of resources in the milk industry be greater
than the reduction elsewhere. This would occur if a given number of
dollars would employ more labor, capital, and other resources in milk
than in the production of those things, the consumption of which
declined. It would not occur if the opposite were true.'

ELECTRICITY

In none of the four instances of public pricing of electricity studied
in this report has promotion of recovery appeared as a major objective
of legislatures or administrative agencies. During the thirties stand-
ards for prices of electricity continued to be related mainly to objec-
tives concerning the level and structure of rates in this industry
itself.

Under depression conditioijs the three commissions did indeed
intensify their efforts to reduce rates. Extensive investigations under-
taken in the early thirties in connection with rate proceedings in
Wisconsin and New York showed that electric companies were
enjoying good incomes in spite of the severe depression. All three
commissions felt that fairness to consumers, whose incomes had in
general suffered markedly, called for substantial rate reductions.
The Wisconsin and New York commissions also averred that rate
reductions would aid in promotion cf recovery, an opinion supported
by testimony of economists called by the Wisconsin commission in
the famous Statewide Telephone case. Moreover in these two States
special statutes had been passed to expedite emergency rate re-
ductions.

Nevertheless, there was no significant modification of the "fair
return on fair value" rule. The New York commission after hinting
at the desirability of averaging returns over a period including years
of prosperity and years of depression, stopped at reductions calculated
to remove income in excess of 6 percent on stated value of stock, a
lower standard than 6 percent on "fair value." The Wisconsin com-
mission justified rate reductions in depression on grounds that the
"value of service" to consumers was lower and that the "fair" rate
of return to owners was lower. In T\ullifying a series of emergency
orders and a final order in the Statewide Telephone case the Supreme
Court of Wisconsin indicated that the Wisconsin conunission had gone
too far in lowering returns on the basis of consideration of economic
conditions in depression. The court maintained that the commission
had no power "to relieve the economic condition of consumers by
taking property away from the utility and awarding it to its patrons"
and that "it had no right to give dominant weight to economic theory
in the face of the statutory command."

CONCENTRATION OF ECONOMIC POWER 5Q3

The electric rate policies of the Tennessee Valley evidence no
objectives or standards with regard to general depression and
recovery.

What effects upon the general level of use of economic resources in
the economy might be expected from changes in electric rates? It
is most probable that rate increases would have a tendency to diminish
the total use of resources. This is plain if consmners spend more on
electricity at higher rates and have less to spend on other things.
The reduction in total use of resources would be less in proportion as
consumers transferred expenditure from electricity to other things.
Such transfer does not seem very likely except in the case of a few
uses of electricity where substitutes are readily available, such as
domestic cooking, heating, and water heating and industrial consump-
tion, which can be replaced by a factory's generation of its own power.
A rate increase might promote general economic recovery if expendi-
ture on new equipment by an electric company was substantially
increased as a result of improved earnings and credit standing following
a moderate rise in rates.

Reductions in electric rates are likely to exert an influence toward
a higher general level of use of resources in some cases but not in all
cases. Consumption for ordinary lighting by commercial and indus-
trial users will probably be increased little if at all by rate reductions.
Nor will consumption by industrial firms already using utility power
be much enlarged by rate reductions unless power expense represents
a large part of the firm's total cost. In these cases reductions in
electric rates will mean that consumers spend less on electricity and
have more to disburse in other ways. It does not follow, however,
that spending on other goods will necessarily be increased. Lower
electric rates might simply transfer the saving of funds from electric
companies to their Commercial and industrial consumers. This result
would occur if the rate reductions deprived the electric companies of
a part of their income- which they would withhold from active use
(i. e., hoard) and if the consumers then retained this same sum from
the reduction of their electric bills.

To the extent, however, that consmners spent these savings on other
goods, emplo5rment of resources in other industries would be enlarged.
In depression this result seems more likely for residential customers
than for business customers. Although the , more well-to-do may
hoard cash in depression the great majority of the people would
probably spend the savings from their electric bills. Hence reductions
in residential rates might have a much greater tendency to raise
expenditure on other goods and to increase the general use of resources
than reductions in commercial and industrial rates.

The foregoing discussion has concerned those rate reductions which
result in a smaller doUar expenditure on electricity. Lower rates
quoted to business enterprises which have formerly generated their
own power or used power from other sources of energy may result
in enough increase in consumption to enlarge the expenditure on
electricity. This may also be true of markedly reduced rates to new
residential or farm users, or lower rates for various domestic uses,
especially if cheap appliances are made available.

In such cases the effect on the total use of resources in the whole
economy is the resultant of several influences. If the additional
expenditure on electricity comes out of otherwise idle funds the result

504 CONCENTRATION OF ECONOMIC POWER

would obviously be to increase activity. Expenditure for equipment
or appliances out of idle funds would tend to promote general recovery.
If, however, the additional expenditure on electricity and on equip-
ment or appliances represents diversion from expenditure on other
things the outcome is not so plain. The result could be adverse to
recovery if sufficient expenditure was diverted from industries where
the unemployment of men and equipment created by reduction of
expenditure in that industry, for a given outlay would exceed the
additional employment of resources in electrical industries occasioned
by expenditure of the same amount of money.

In summary, in several types of electric rate reductions, the probable
results on the level of use of men, equipment, and funds in the whole
community are not clear and would need intensive study of particular
cases. It seems quite likely, however, that two kinds of reductions
will tend to promote general recovery. These are reductions - to
business consumers or to residential or farm users which result in
considerable expenditure on new equipment or appliances out of
idle funds or borrowing ; and reductions to residential consumers which
have the result of diminishing their expenditure on electricity, leaving
them more of their incomes to spend on other things.

Both public enterprise such as T. V. A. and privately owned electric
companies can aid recovery by the former kind of rate reductions.
With regard to the latter sort of reductions good results might be
secured by t -change in the rules of regulation perinitting commissions
to move the ordinary residential rates up and down during prosperity
and depression, provided only that the companies obtained an average
"fair return" over a period including good years and bad. Or, it
might be provided that all earnings in each year above a certain
return (including a stipulated prudent provision for unfortunate
contingencies) should be impounded in a fund for use in recouping
any losses incurred by reducing rates in depression on commission
order. Existence of such a fund would also enable experimentation
with lower rates of other sorts when the commission thought recovery
would be promoted thereby, but when the effect on the company's
revenues was problematical. The impounding of excess income and
its use to permit rate reductions of general benefit seems quite reason-
able when commissions are unable to keep rates low enough to pre-
vent the reception of income over and above an ordinary return on
investment.

CHAPTER XI

PRICE CONTROL UNDER THE BITUMINOUS COAL ACT OF
1837 IN RELATION TO DEPRESSION AND RECOVERY

Neither the statement of purpose nor the provisions of the Coal Act
indicate that this law was regarded as an instrument for combating
general economic depression, -cyclical or secular, in the whole ec6nomy.
The provisions of the Coal Act are related remotely, if at all, to the
problem of increasing the use of manpower and equipment in the
community. Nor does it appear that some particular kind of adjust-
ment of the coal industry to general depression, cyclical or secular,
was a major objective. There is nothing in the law to suggest that
its purpose is anything other than improvement in conditions in the
long-depressed coal industry itself. Its measures could have been —
and probably were — written without any consideration of problems
of the general performance of the whole economy and the relation of
coal to this. If the question of the nature of desirable behavior of
coal prices through the business cycle was considered at ah, the answer-
was merely that the level of minimum prices should always yield a
return equal to adjusted past weighted average cost. Similarly there
are no specific provisions for variations in the price structure to reflect
cyclical influences.

Wni application of the standards for minimum prices set forth in
this law tend to accentuate or modify general cyclical depression?
As explained in an earlier section a rise in weighted average cost of a
certain specified amount resulting from a decline in consumption and
production must be followed, after a lag of several months or a year,
by an increase in the level of minimum prices. Thus it is probable
that minimum coal prices will rise in the course of an extended depres-
sion. Coal production, being quite sensitive to general industrial
activity, will decline further as business declines. Unless higher-cost
mines shut'down in sufficient number — and the experience of the past
15 years gives no indication that this result would ensue with prices
fixed according to the standards of the present law— average cost and
hence minimum prices will continue to increase. Because current
minimum prices are adjusted to cost influenced by the volume of
output of a preceding year, an increase in coal prices might occur in
the first year of general business revival.^

If the increases in coal prices do not result in much reduction of
coal consumption below the amounts that would be consumed with
coal prices unchanged or lowered, consumers as a whole will spend
larger sums per year on coal, and have less to spend on all other
thintgs, than if coal prices remained stable or were reduced. Since
the same kinds of considerations apply here that were outlined in
detaU in the preceding discussion, there is no need for a review of

' Although, with monthly cost data available, there should be adequate knowledge of the current situa-
tion, making adjustments possible.

606 CONCENTRATION OF ECONOMIC POWER

them at this pomt. Suffice it to say that if coal price increases result
in larger sums being spent on coal than would be spent at lower
prices, there will be a tendency to diminish the level of use of resources
in the whole economy; unless the additional sums spent on coal
come out of funds that would otherwise have been completely idle,
or imless people in the coal industry are led, because of the higher
coal prices, to spend out of idle funds sums equal to the additional
amounts spent on coal because of the higher coal prices. There is
little reason to think that the latter condition would ever be realized
in practice during cycHcal depression. With regard to the former
condition it is quite possible that the additional sums spent by
business enterprises on coal, because of the higher coal prices, might
come in considerable measure from funds that would not otherwise
be spent, at least during the downswing and trough of depression.
But it seems unlikely that this would be true of all or nearly "all
jBrms, and it seems quite unlikely that it would be tru6 of many
domestic consumers. Hence it appears that in substantial degree
higher coal prices would entail reduction in consumer spending on
other things.

For a year or two coal consumption might not be much affected
by price increases, owing to. inertia and the capital outlays required
for shifts to other sources of energy. Hence it is not unlikely that
the preceding analysis would apply during the whole of a short depres-
sion and during the first 2 or 3 years of a longer depression. Dming
the latter years of a long cyclical depression, and in a secular depression
of many years, consumption may become much more responsive to
current and previous price increases, with the result that total con-
sumer expenditure on coal would become smaller at higher prices
than it would be if coal prices had not been raised. Insofar as expendi-
ture is merely shifted from coal to oil or gas by coal price increases
there will be little adverse effect on the total employment, of resources
in the whole economy.^

Paradojdcally, the coal price increases may produce an increase in
total spending in the whole economy, because transfer to other energy
sources requires outlays for change-over of equipment. The ensuing
tendency to a higher level of use of resources in the whole community
may, however, be purchased at the cost of a permanent addition to
unemployment of men and machines; for the shift away from coal may
represent permanent loss in demand for coal, and in large degree the
coal miners as well as mining equipment can not or will not ever
transfer to other employments. This complicates the matter, as is
indicated in the subsequent discussion of secular influences on the
general level of use of resources.

Whether or not changes in the coal price structure will be made
during the different phases of a business cycle depends entirely upon
the pohcy of the Coal Division. Since the vagueness of the provisions
of the Coal Act relative to the price structure would probably enable
justification of various kinds of changes, it is impossible to determine
what sorts of changes may be made. If the price structure were
altered in depression by raising the 'prices of items the consumption of
which would not be much reduced by price increases, other coal prices
bemg left unchanged, this would result in larger expenditure on coal

.,L\ ^'®n ""° of dollars may give more employment to labor when It is spent on coal than when it is
spent on oil or gas, because of dlflering proportions of labor and capital in these industries.

CONCENTRATION OF ECONOMIC POWER 597

than would occur in the absence of the price increases and hence
tend to diminish spendmg and employment of resources elsewhere.
Increase in prices of kinds, quahties, or sizes of coal the consumption
of which would be greatly reduced thereby, because of transfer to
other energy resources, would exercise much less adverse effect upon
total employment of resources in the economy. Yet endeavor to
make the level of prices yield an average return or price equal to
weighted average cost might lead to price increases on coals whose
consumption would be least reduced thereby.

Apart from effects on the total volume of spending it would seem
that price reductions on any kinds, grades, or qualities of coal would
tend to promote general recovery. If consumption expanded but
little consumers would spend a smaller amount on coal and have more
to spend on other things. If consumption of coal increased greatly
because consumers shifted from other fuels to coal, total expenditure
on fuel would in all probability decrease and consumers would have'
more to spend on other things. The principal question would seem
to be whether consumers would or would not spend most of the
difference. On this matter there may be a considerable difference
between business consumers and domestic users, the former being
much more likely not to spend the saving on fuel expenditure, espe-
cially in the middle of depression. Since the largest part of bitumi-
nous coal consumption enters industrial use, even in depression, it
might be that lower coal prices would not exert much influence toward
general recovery. To the extent, however, that lower coal prices
induced shifting from use of other fuels to use of coal the expenditures
for changeover of equipment would automatically result in a net
addition to total spending.

With regard to cyclical depression, the probable effects of changes
in coal prices on the level of use of resources in the whole economy
may be summarized as follows. When increases m coal prices result
•in larger expenditure on coal in depression than would attend stable
or lowered prices, the probable effect is a tendency to increase total
unemployment of resources in the whole economy. However, if coal
price increases result mainly in shifting an increment of expenditure
/rom coal to other fuel and energy sources, there may be little effect
on total employment of resburccs,^ except for the results of expenditure
on cqliipment required for changeover. Reductions in coal prices
during depression msij result in little 'increase or a great increase in
coal consumption. In the latter case coal will merely replace othef
energy resources, and total fuel consumption will be increased little
if at all. Hence in both cases consumers will have savings on fuel.
If a large part of these savings is not spent there will be little stimulus
to general economic recovery. Where coal replaces other fuels in
large measure the expenditures on changeover might be larger than
the amount saved on fuel, with the result of a net stimulus to recovery.
It seems lilcely that the Coal Act will require price changes in cyclical
depression that will operate in the direction of. enhancing unemploy-
ment of men and machines in the whole economy; and it is doubtful
that price changes that would operate in the opposite direction will be
made under this law in its present form.

' The fact that consumers who do not shift to substitutes will spend more on coal than they would spend
at lower prices will probably mean that total expenditure on energy sources will be increased somewhat
by the increases in coal prices.

cng CONCENTRATION OF ECONOMIC POWER

Let US turn now to coal prices and secular trends in the level of use of
resources. Altered relations between the prices of coal and the prices
of oil and gas that remain in effect for several years will produce much
larger changes in the relative consumption of these fuels than short-
time alterations in prices. If minimum price fixing in coal results for
several years in coal prices Jiigher relative to prices of oil and gas than
those formerly prevailing, it is scarcely to be doubted that coal con-
sumption and employment of coal miners and equipment will suffer
substantially from transfer of demand to the other fuels. Although
this may not, for the time being, greatly diminish total employment
of resources in the whole economy, it may do just that in the long run.
Insofar as coal mining equipment is abandoned before it wears out,
and replaced by new equipment lor oil and gas purchased with funds
that would have been invested elsewhere, there will be a long-run loss.
More important, the "fixity" of coal miners seems to be nearly as
great as that of mining equipment. To the extent th^t unemploy-
ment of coal miners is increased by a process in which their place is
taken by adding labor in oil and gas production that would otherwise
be employed somewhere else, there is a loss to the coYnmunity mani-
fested in the group -of miners who produce little or nothing for the rest
of their lives. Both men and equipment will be allowed to "rust out".

Moreover, the matter is complicated by considerations of conserva-
tion of scarce natural resources. Although additions to reserves of
oil and gas by new discoveries have in recent years somewhat exceeded
production, it 'would require discoveries of incredible magnitude to
hoist the reserves of these two energy sources to a position comparable
to that of bituminous coal. Expressed in tons of equivalent high-
grade bituminous coal, the present known reserves in the United
States of these three energy sources are as follows: Bituminous coal,
2,500 billioti net tons; petroleum, 4 billion net tons; and natural gas.
3 or 4 biUion net tons.*

There is, then, the danger that unemployment of resources in the
coal industry may be increased by price fixing under the Coal Act in
its present form, and" that a large part of these men and the particular
equipment involved wiU be lost to the country forever, as far as
productive operations are concerned. Furthermore, the Coal Act
contains no provisions for attemps at rehabilitation and retraining of
unemployed miners for transfer to other employments; nor does it
include measures to encourage young men in the coal regions to move
elsewhere rather than to become miners while there is still a large
reserve of unemployed miners.

It is patent that the endeavor to secure fifll use of the country's man-
power will be impaired if men not 3'et employed in oil and gas produc-
tion and capable of other employment are put to work in those indus-
tries with the result of increasing the number of unemployed miners,
who can be transferred to other socially valuable work only with
difficulty, if at all. If labor already employed in oil and gas produc-
tion is mort easily transferable to other productive pursuits than coal
mine labor, considerations of full employment of manpower would
call for shifts in consumption from oil and gas to coal rather than shifts
in the opposite direction. Regard for conservation and national
defense would seem to make it wise to curtail consumption of oil in
uses for which coal is almost as satisfactory. The logic of these con-

• National Resources Committee, Energy Resources and National Policy, p. 10.

CONCENTRATION OF ECONOMIC POWER 509

siderations is that prices of coal should be lower relative to oil and gas,
rather than higher.

The general policy (with regard to fuels) best calculated to produce
an increase m the total use of economic resources in the economy
would seem to be reductions in the prices of all three fuels, so that
consumers spent less on fuels as a whole and more on other things;
and inauguration of differentials between the prices of coal and the
prices of oil and gas which would produce a gr*>dual increase in. the
proportion of total consumption going to coal jfTxient tg give sub-
stantial diminution in unemployment in coal. However, decision
on the question whether prices of oil and gas should be reduced at all,,
or should be raised, must depend in large measure on what is deemed
wise conservation policy: — a matter that lies beyond the scope of this
report.

To the extent that, lower coal prices merely shifted consumption
from other fuels to coal there would be no impetus to increased employ-'
ment of resources in the whole economy, apart from the initial equip-
ment expenditures required for changeover. But the lower coal
prices would create one condition necessary for full employment:
Unemployment would be shiftied from miners, whom it is exceedingly
difficult to transfer into other occupations, to workers (or those soon
to go to work) in other fuel industries, who can be more easily reem^
ployed elsewhere.^

Even if oil and gas prices are raised somewhat in the interests of
conservation, it is scarcely to be doubted that reduction of bituminous
coal prices to a low enough level would result in a reduction in total
consurner expenditure on fuels as a whole and hence act in the direction
of an impetus to larger employment of men, equipment, and funds in
the whole community. Moreover, drastic reductions in some coal
prices might lead directly to added business expenditures on equip-
ment, out of idle funds, which would tend to improve the general level
of use of resources by increasing total spending in the community.

It is quite possible, however, that coal prices low enough to produce
these desirable results would fail to cover the out-of-pocket expenses
of many, perhaps most, mines. If that were so, actual prices would
not go so low, or competitive wage-cutting would be resumed, or
many mines would shut down. It may well be that coal prices low
enough not only to reduce unemployment of mine labor and equip-
ment to a small minimum, but also to give an appreciable impetus to
larger spending and employment of resources in the rest of the economy
outside the fuel industries, could be satisfactorily maintained only
through Government subsidy to coal operators or by nationalization
of the bituminous coal industry.

To conclude that subsidy would probably be necessary to maintain
coal prices low enough to reduce total consumer expenditure on fuels
does not ii^ply that unemployment in coal might not be greatly
diminished without subsidy. Unemployment of coal miners could,
perhaps, be reduced to a tolerable minimum merely by mainteiiance
of differentials between the prices of coal and ether fuels sufficient to
increase consumption of coal markedly and -jy vigorous efforts to
retrain a part of the unemployed miners a n ■ get them into other

> With regard to labor already employed in other fuel industries th , , x )int r^sts, of course, on the presump-
tion that such labor is much more capable of reemployment elsewh re, should opportunities arise, than are '
coal miners.

5JQ CONCENTRATION OF ECONOMIC POWER

occupations. On the other hand some additional special subsidy-
might be required for this objective. It would depend on the levels
of oil and gas prices, the extent of substitition of coal for other fuels
that would occur with price differentials of different sizes, and the
nimiber of unemployed miners who could be reemployed only in the
coal industry.

It should be understood that subsidy, if necessary to eliminate
unemployment of miners who can never be employed elsewhere,
represents no los ■ o^ burden of sny kind to the community as a whole.
On th6 contrary, if xiiiners wlio would otherwise produce nothing are
reemployed in mining the community is richer by the amount of their
product of coal. If the subsidy is paid originally from deficit financing,
in such a way that total spending in the country is increased thereby,
it is obvious that there is no immediate charge on the community.
The total money income of the country would be imrnediately in-
creased by the amount of the subsidy, and the total real income would
be enlarged by the additional output of coal. If any subsidy at all is
required to give full employment of miners, the additional expense to
Government would not, in any case, be as large as might at first sight
appear. Relief payments constitute an overhead cost from the stand-
point of the community as a whole. The net additional expense for
subsidy to reemploy these miners would be merely the difference
between the relief pa3mients and the gross subsidy necessary to get the
miners employed at standard wages.

The wisdom' of additional subsidy for the purpose of reducing coal
prices, below the level necessary to eliminate unemployment in coal
to a level such that consumers would spend less on coal, and more on
other things, would depend on the relative effectiveness, in promoting
a higher general level of employment of resources, of this use and
alternative uses of public funds.

Wijth regard to conservation of coal and its relation to price fixing,
in general, it is true that the lower the prices the more coal is left in
the mines, because prices fail to cover the out-of-pocket costs of getting
it out. And ordinarily, when a mine is once abandoned, all the coal
that will pay for itself at current prices having been extracted, the
remaining coal is lost forever, or at least for decades. The present
coal law contains no price standards related to conservation, although
the regulatory agency is directed to study the problem. Indeed, it is
highly doubtful that price fixing alone can aid much in conservation of
coal. Prices set high enough to insure a very high extraction of coal in
each mine might increase the inroads of competing fuels, or give high
profits to low-cost mines, which should not be permitted to operate if
the object is to use up high-cost coal without subsidy to get it mined.
It is plain that prices high enough to increase the amount of extraction
from most mines would be above the level of prices appropriate to
maximum economic consumption, as that was conceived in an earlier
section, and much above prices that would eliminate unemployment
among coal' miners. It follows that conservation of coal can be made
compatible with pursuit of these other objectives only by application of
a particular kind of subsidy designed to encourage it without hamper-
mg attainment of the other objectives, or by allocation of output
among mines.

INDEX

ACCOUNTS, CONTROL OF: Page

Coal-industry 260, 290, 328, 352

Milk industry.-.: -- 74, 106, 211-212

Public utilities 11-12, 25, 28, 33, 36-37, 48

AGENCIES OF CONTROL:

Coal industry 231,

246, 258-261, 263, 271-274, 312, 327-328, 336-338, 340-348, 356-359

Milk industry 67, 71, 76.

83-84, 93-94, 105, 128, 144-146, 199-200, 203-204, 433, 447-448
ADMINISTRATION, ECONOMY IN:

Coal regulation 274

Milk regulation 83

Pubttc utility regulation .. 5, 13-14, 27, 35, 41, 44n, 472

ANTITRUST LEGISLATION XIII, 401-408, 462, 473

BASE-RATING PLANS: Milk industry (see also Quotas) '.... 59,-

69, 103, 174, 436, 439-440, 447, 451

BITUMINOUS COAL ACT OF 1937 XVIII-XXI,

230-232, 234, 265-310, 336-359, 461-473, 488-491, 505-510

BITUMINOUS COAL CONSERVATION ACT OF 1935 260-263

BITUMINOUS COAL INDUSTRY. (See Coal industry.)
BUSINESS CYCLES. (See Economic activity, level of.)

CALIFORNIA: Regulatio^i of milk 123-140, 450-454, 456-458, 483, 485

CAPACITY OF COAL INDUSTRY 237-244,250-251,254,320,332,369

COAL INDUSTRY, PRICE FIXING IN (for subtopics under this head-
ing, see name of subtopic) 229-395, 461-473, 487-491, 505-510

COMPETITION: Relation to regulation and price fixing 401-406, 408

Coal industry 231-232, 237, 258, 276, 280, 302, 314-

315, 317, 320, 327, 373-381, 384-392, 462-464, 466-472, 488-491

Milk industry 72-73, 168-169, 185-187, 205-206, 436-438, 440, 449, 453

Public utilities 15,26,421

CONSERVATION: Coal industrv 236-237, 329, 360-366, 472, 508-510

CONSUMERS AND REGULATION 412-416,475-478,493-497

Coal industry 230-231, 247, 260-261, 263. 271-272, 275, 277, 280,

283, 287, 310, 315-316, 331, 338, 384-385, 466, 488-491, 505-507

Milk industry 61,63,70,78,93-94, 114, 119, 127, 132, 142, 149, 176,

179-180, 184-,189, 195, 217, 443, 458-459, 483-487, 499-502
CONTROL. (See name of commodity or aspect of control.)

COOPERATIVES, PRODUCER: In milk industry.... xvi,

57-58, 69, 74, 76, 78-79, 82, 86, 92, 101, 103-104, 108, 114, 124,
142, 197-200, 207, 210, 215-216, 433-441, 448.

COST: As a standard of price-fixing 413-414, 476-478

Coal industry 230-233, 247-248, 256, 258-264, 271, 274-291,

303-319, 327-329, 343, 368, 390, 461-473, 487-491

Milk industry . 78,

84, 116-118, 128-129, 130-135, 137, 151, 157-158, 167-169, 173,
187-189, 204-206, 438, 440, 446, 450-454, 457-459, 483, 485, 487.
Public utility costs:

Allocation of xix-xx

6-7, 18, 30, 40-44, 48-51, 53, 429-430, 480-483

Allowance of .. . 15, 27n., 40n., 420

COORDINATION OF PRICES: Coal industrv. ._ 256,

261, 275-278, 299-304, 324-325, 380-390, 466, 48&-491

511

512

INDEX

COURTS AND REGULATION: Page

Coal industry 230, 257, 262-263, 311-312, 321

Milk industry 74-75,

79-80, 82, 123, 130, 147, 175-176, 199, 218-219, 436-437

Public utilities xv,

3-5, 13, 14, 17, 18, 21n., 27, 3.'^36, 44n., 417-420, 423-426, 479, 502

DEFICIENCIES IN COAL REGULATION 316-319,

464^473, 488-491, 505-510

DEMAND: Changes and elasticity of 475-478, 493-497

Coal industry xviii-xix,

232-233, 317, 329-330, 369, 372, 389, 466-472, 488, 490, 505-509

Milk industry ..-..:. xx, 62, 206, 436, 483-487

Public utilities - - - xv-xvi,

xix-xx, 6, 17, 27-29, 34, 43-44, 49-52, 417, 419, 424, 428-431,
479-483.
DEPRECIATION CHARGES. {See Costs.)
DEPRESSIONS. {See Economic activity, level of.)

DEVICES OF CONTROL 497

Coal industry--. . 3,319-326

Milk industry 62,65-66,68,85,

106-114, 128-129, 148-150, 208-212, 445-451

DISTRIBUTION OF MILK: Improvements in efficiency of 61-62,

68, 93, 133-135, 158-159, 185, 208, 450, 452-453, 459

ECONOMIC ACTIVITY: Level of, and regulation xiv-xv,

399, 403-406, 408-409, 493-497

Milk industry 94, 103-104, 119, 456, 499-502

Public utilities . 8, 18-23, 31, 44r-45, 54, 502-504

ELECTRICITY. {See Public utilities.)
FEDERAL REGULATION:

Coal industry. {See Coal industry.)

Milk industry 60, 62-63, 65-98, 141, 158, 167, 202, 436-438, 483-485

Public utilities. {See Tennessee Valley Authority.)

FUEL ADMINISTRATION. -- 245^249, 324-325

GUFFEY BILLS 257-260,263

HISTORY OF CONTROL MEASURES 401-406

Coal industrv---- - ..-- 229-232, 242-264, 311-313

Milk industry 57, 59-60, 65-76, 95-102, 123-128, 141-143, 196-202

ILLINOIS: Public utility regulation 25-31, 419-423, 480-482

INDIANA: Milk regulation 141-161, 447, 454-455, 457, 483, 486

INTERSTATE COMPACTS: As a method of regulation . 324

INVESTMENT, RETURN ON. (See Rate of return.)

LABOR: And government regulation 402-403, 414-415, 493-497

Coal industry.- 229-230,

232, 236, 241, 243-244, 249, 251-264, 270-271, 273, 280, 305-
306, 315, 320, 327-328, 331, 335, 352, 461-463, 472, 505-510.

Milk industrv - ... 114, 142. 147, 164, 174r-175, 180

Public utilities.-.: -.-.■. 15,40

LEGISLATION, ROLE OF:

Coal industry 463-465

Milk industry.-.: • 167, 175-176, 204-205, 437-438, 451

Public utilities... 11,25,33,417-418

LEVEL OF PRICES AND RATES:
Maximum" prices :

Coal industry , 229-231,245-248,255-

259, 261, 263, 308-310, 316, 318-319, 327-328, 341, 344, 472-473

Milk industry 438, 445

Public utilities : 4-5, 12-16, 22, 25-29, 34-40, 48-52, 417-431

Minimutn prices:

Coal industry 229-233,237,256-264,271,275-

280, 293-299, 319, 327-331, 341-345, 367-395, 461-473, 488-491

Milk industry 113-114, 116, 127-135, 150, 152-153, 163, 197-

199, 202, 212, 216, 439, 442, 44'5'4'±6. 448-459, 483-487. 499-501

LEVER ACT 245,249

LICENSING: Milk industry 71-75,

'95-98, 106, 114, 148, 163, 175, 198, 208, 211, 454-457
MARKET CONDITIONS:

Coal industry 229-231, 235, 238, 242-254, 265-270, 320, 369-376

Milk industry 57-61,

83-84, 80-87, 99-103, 120, 164, 181, 184-189, 195-197, 203

INDEX 513

Page
MARKETING AGENCIES: Coal industry... . 321-324,328,353-354,472-473
MARKETING AGREEMENTS: Milk industry. __ 65-71,95-98,200-201,449

MARKETING ORDERS: Milk industry 75-82,

95-98, 184-189, 201, 208-209, 433
MARKETING OF MILK. (See Distribution.)
METHODS OF CONTROL. (See Devices of control.)
MILK: Public pricing of (for sub-topic^. under this heading, see name of

sub-topic) L 57-225, 433-459, 483-487, 499-502

MILKSHEO DELIMITATION 69, 73-74, 106, 114-115, 129, 148, 209, 451

NATIONAL RECOVERY ACT: Coal industry and 256-257,270-271

NEW YORK STATE:

Milk regulation 60, 195-225, 447-449, 455-458, 483, 487

Public utility regulation . 33-45,419-423,480-482,502

OBJECTIVES OF REGULATION .406-407,411-416,475-478,493-497

Coal industry .... 230, 250, 256-257, 262, 270-272, 275, 279,

280, 325-327, 336, 390, 461-464, 488-491, 505-510

Milk industry 60-61, 65, 67, 77, 84, 103, 127, 143, 165, 204, 435,

437, 443, 445-446, 453, 456, 483-487, 499-502

Public utilities 7-8, 43, 49-50, 54, 417-423, 502-504

OBJEgTIVE RATES: Public utilities xv, 6, 17, 29-30, 43, 49, 417, 419, 481

OREGON: Milk regulation 60, 62, 99-122,

126-127, 135, 446, 451-452, 457, 483, 485

PHILOSOPHY: Of Government control ... 401-406

POOLS: Milk industry.... 59, 76, 104, 108-113, 118, 123,

149, 152, 173, 174, 199, 201, 207, 210, 438-439, 450-452

PRESSURE GROUPS 411

Milk industry (see also Cooperatives) 57-58, 142, 164, 195,499

PRICE DIFFERENTIALS, REGULATION OF: Milk industry (see

also Classified-price plans) 69, 72, 85, 117, 119, 134,

169-173, 180, 207, 434-435, 439-442, 446, 449-450
PRICES:

Ecotiomic activity, level of, and. (See Economic activity.)
Level of. (See Level of prices and rates.)
Structure of. (See Structure of prices and rates.)
PROCEDURES OF REGULATION:

Coal industry 258, 260-261, 264, 272-279, 293-295, 298, 303-304, 312,

316, 318-319, 327-328, 337-338, 340-345, 347-355, 367-369, 390-
393
PRODUCTION, COAL. (See Capacity of coal industry.)

PROFITS AND REGULATION (see aZso Rate of return)" 412-415

PUBLIC OWNERSHIP: Coal industry 324-325

PUBLIC UTILITIES (for sub-topics under this heading, see name of sub-
topic) 11-54, 417-431, 479-483, 502-504

1tAS: Milk industry (see also Base-rating plans).- xvii, 62, 107-

110, 113, 115-119, 149, 439, 446, 451-452
RATE OF RETURN:

Coal industry 231,248,253,256-258,263.

266, 275-276, 307, 309-310» 314-316, 318-320

Public utilities xv, 5, 15, 27 n., 34-35, 37-40, 417-428, 482, 502

RATES, PUBLIC UTILITY. (See Level of prices and rates; Structure

of prices and rates.)
RECOMMENDATIONS ON REGULATION:

Coal industry. ...... 233, 286-291, 295, 310, 319, 326-331, 488-491, 505-510

Public utilities . 426, 504

REGULATION. (»See name of commodity or aspect of regulation.)

RELIEF CLIENTS: Supply of milk to 80-82, 4,84-485, 501-502

RESULTS: Of regulation 407

Coal industry 313-319, 505-510

Milk industry 499-502

California . 132, 134, 452-453, 483

Federal . 63, 87-94, 441-443, 485

Indiana . 163-159,454-455,458

New York : 212-219,455-458

Oregon..: 119,451-452,458

Wisconsin 176-181,453-454,457

Public utilities . 426-427

topi
QUO!

514 INDEX

SALES, INCREASE OF. (See Demand, elasticity of.) Page

SANITARY REGULATIONS: And milk-price control 79,

99-101, 104, 107, 109, 126, 127, 435, 456

STANDARDS' OF" REGULATION 411-416, 475-478

Coal industry 230-233, 247-248, 258-263, 274-277, 279-298,

300-304, 313-316, 327-328, 354, 376-390, 461-473, 488-491

Milk industry xvi-xvii, 62-63, 77-78, 85-87, 114-118, 129-134

150-153, 167-176, 204-208, 438-441, 446-459, 483-487, 499

Public utilities xv-xvi,

XX, 4^8, 12, 15, 26-27, 34, 43, 418-426, 479-483, 502-504

STRIP MINING OF COAL 305-308

STRUCTURE OF PRICES AND RATES ' (see also Coordination of

prices) ---J^J.^l^J^

Coal industry.... 261-262,

275, 291-298, 311-313, 315, 343-344, 367-368, 380-389, 488-491

Milk industry: Classified-price plans 58,

61-62, 76, 103-105, 108-113, 123, 149, 156, 168-170, 177, 197-199,
206, 209-210, 434-441, 447-448, 483-487

Public utilities 6-7, 16-18, 29-30, 40-44, 52-53, 427-431, 479-483

SUPPLY, CONTROL OF:

Coal 258-259,328-331

Milk. (See Base-rating plans; Quotas.)

TENNESSEE VALLEY AUTHORITY xvi, xx,

47-54, 427-431, 482-483, 503-504
UNFAIR TRADE PRACTICES:

Coal industry 336,345-348

Milk industry 127,136,

142, 156, 163, 165, 182-183, 186-187, 189, 197, 203, 449-450, 456

VALUATION STANDARDS: Public utilities -.-. 4-5,

12-13, 25-27, 35, 36-37, 418, 420, 423-426

WARTIME CONTROL: Coal industry 244-249

WISCONSIN:

Milk regulation 60, 163-193, 449-450, 453-454, 4-57, 483, 480

Public-utility regulation . 1 1-23, 419-423, 480-482, 502

BOSTON PUBLIC LIBRARY

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