Full text of "Investigation of concentration of economic power; monograph no. 1[-43]"

^^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. -

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

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

■

\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 I 9KI I /9Z2. I ,9Z3 I ,9^^ I ,9;^5 | . m6 [ ^7 | <9;te | /9iC9 | /930 | 1^31 \ <93^ | ,933 | Wt | /'>35 ] J 936 ' | /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
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 | /93 C

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

100

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

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-- . --T i Tl- . -Ty^-T-f

>^13 I J9Z4 I ;»zf I ;9g6 I /92.7 I /9Z» I /9Z9

HOH8rHilliiilliH S>;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

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

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.

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.

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 t he 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 trem