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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 

V 



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 

XI 



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. 

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, 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). 

25 



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. 

47 



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. 



52 



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 

By 

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



55 



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. 

57 



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- 


10 

8 
8 


3.9 

t\ 

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. 

B. F. 

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. 



90 



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 


33 


1933 


10 46 


1934 


11 57 


1935 


11 71 


1936 


12 00 


1937 . . 









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

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



Table 7. 



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





Changes in producer 
prices 


Changes In dealers' 
margins 


Changes in retail price 
to consumers 


Cities under- 


Average 
1926-29 to 
average 
1934-36 


1929 to 1937 


Average 
1926-29 to 
average 
1034-36 


1929 to 1937 


Average 
1926-29 to 
average 
1934-36 


1929 to 1937 


Federal control: 
Long period 


Cts. 
1.17 

1.82 


Pet. 
20.2 
26.1 
27.0 
28.8 


Cts. 
0.60 
.65 
1.38 
1.56 


Pet. 
10.2 
10.3 
21.8 
20.6 


Cts. 

0.40 
.57 
.45 
.71 


Pet. 
6.3 
8.9 
6.6 

10.3 


Cts. 
0.10 
.10 


Pet. 
1.5 
1.5 


'Cts. 
1.59 
2.41 
1.95 
2.48 


Pet. 
13.0 
17.8 
14.2 
18.9 


Cts. 
0.77 
1.29 
1.06 
1.43 


Pet. 

6.2 


Short period 


9.4 


No control 


.50 


7.1 


10 9 







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



CONCENTRATION OF ECONOMIC POWER 



91 



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 

do 

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 

do 

Aug. 1,1933 














do 

do 

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 

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 








95 



96 



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 

do 

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^ 








do 

License 








Amendment 








Amended license 

Amendm^in; 












District of Columbia 


do 

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 

do 

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 


do 








Amended license 






















License 








Amended license 

do 














"ir.do:::::::;:::::::: 

















Dec. 1,1936 




Order 






Amended order 










Feb. 1, 1934 




License.- 




June 24,1934 


Lansing, Mich... 


do 








Amended license 

Order .,j... 

Amendment 




July 26,1936 


La Porte County, Ind. 














Order as amended 














Amended license 

do-. 

Amendment 












• 






do 






Lexinpton, Ky 


License ^ 








Amended license ]. 

License..... 

Amended license 


July 16,1936 


Lincoln, Nebr 




















Amended license 

do 

do 
















Apr 30,1939 



CONCENTRATION OF ECONOMIC POWER 



97 



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 




do 

Amendment 














do 

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 . . 








do 

Amended license 

Amendment. 




















Amended license 












New York, N. Y 


Agreement and order.. 
Reinstatement order.. 


Feb. 1. 1939 
Mar. 18,1939 






Feb. 1,1934 




License 




Do 




do 

do 

AmfiiwlTTipnt 




Mar. 14, 1935 


Newport, R. L 












do 

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 . 


do 


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^. ..::::::::: 

do 












Su Qiego, Calif ....^ 




Feb. 1,1934 




Lfoense.. .:::::::::::. 




do 

Amended license 

Amendment 


. 

















98 



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 

do 

License 








Au?. 31,1935 


Nov. 30, 1935 




Amended license 

do 

License 






Sioux City, Iowa 


Aug. 31,1935 


Nov. 30, 1935 




Amended license 

do 




















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 














Amended license 














do 


Oct. 16,1935 


Dec. 31,1935 
Feb. 1, 1934 




License 




Feb. 16, 1934 




do 

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 

do 














:::::do^'iii.::-:ii::i: 

License. - 












Wichita, Kans 








Amended license 

do 

do 

AmendmeTlt 


























Amended license 













Date signed. 



CHAPTER IP 
REGULATION OF FLUID MILK MARKETING IN OREGON 

"Milk" under the Oregon Milk Control Act of 1933 "means fluid 
milk and sweet cream sold for human consumption in fluid form." ^ 
While the stated purpose of the bill is "to provide for the supervision 
and control of the milk industry of the State of Oregon," the regulation 
provided by the Milk Control Act covers probably not over 25 percent 
of the total milk produced in Oregon. It also covers some milk sold 
in Oregon but produced in the State of Washington. Of the IH billion 
pounds of milk produced on farms in Oregon ia 1936, about 56 percent 
was used for manufactured dairy products and about 17 percent was 
used on farms where produced as whole milk and cream, for making 
farm butter and for feeding calves.^ Furthermore, the law states 
that "the board may by official order exempt from the license require- 
ments, provided by this act, milk dealers selling milk in any quantities 
in markets of 15,000 population or less." * Only a relatively small 
portion of the total milk produced on Oregon farms is affected directly 
by the Oregon Milk Control Act. 

Two factors are probably largely responsible for this differentiation 
of milk into "milk" as defined by the Oregon Milk Control, Act and 
milk used for other than fluid milk and sweet cream for human con- 
sumption in fluid form. One factor is the fact that in large cities the 
marketing of much of the fluid milk supply is done by others than the 
producers, and the other is the more rigid sanitary requirements 
imposed by city health authorities on m-lk used as fluid milk and 
cream as compared with the sanitary requirements for milk used for 
manufactured dairy products. The significance of the first of these 
is increased by the fact that a unique and specialized marketing system 
was developed for fluid milk, rather than using the usual marketing 
system for food products. The marketing of milk is imique, because 
milk is about the only food product for which daily door^ep delivery 
is a common method of marketing and because of the emphasis which 
some milk distributors and some associations of *producers of fluid 
milk place upon the advantage of daily doorstep delivery. How 
important this specialized delivery system is considered to be by some 
distributors is indicated by the testimony of Thomas H. Mclnnerney, 
president of the National Dairy Products Corporation, before the 
Temporary National Economic Committee: 

No other food industry renders a comparable service to the public. And it is 
largely because of this service that milk consumption in the United States ranks 
far ahead of practipally all the leading nations of the world. Daily doorstep 
delivery keeps milk constantly before the public in a fashion not equaled by any 
other system of distribution. This daily delivery service has been the most 
important single factor in making milk the largest, most dependable and reliable 
source of farm income in the United States.' 

' This chapter was prepared by Don S. Anderson. 

>Now known as title XLI, Oregon Code, 1935 supplement, as amended by cbs. 67 and 69, special session, 
and by oh. 197, Laws of 1939. 

• Calcialated from reports of the Bureau of Agricultural Economics, U. S. Department ot Agriculture. 

' Oregon Milk Control Act, sec. 4. 

» Statement by Thomas H. Mclnnerney, president. National Dairy Products Corporation, before the 
Temporary National Economic Committee, May 3, 1939, p. 3. 



IQQ CONCENTRATION OF ECONOMIC POWER 

In the past it has been rather common for producers' associations 
as well as distributors' organizations to oppose the sale of milk through 
stores. The argument has been that such sales tend to reduce con- 
sumption below what it w(5uld be without store sales — for, say those 
who support the argument that if milk is left on the doorstep regularly 
the housewife will use it, while if she must go to the store for it fre- 
quently she will not bother to. get milk. Insofar as producers' asso- 
ciations have felt the need of distributor cooperation if they were to 
maintain such monopoly advantage as they might have, it is natural 
that producers' associations would be willing to support the distrib- 
utors in opposing store sales. As milk wagon drivers have become 
unioriized, producer associations have, apparently lessened their 
opposition to store sales. 

About one-third of the total population of Oregon lives m Portland. 
In 1930 Portland had a population of 301,815, while the next largest 
city in Oregon had a population less than one-tenth of that of Port- 
land. Portland has adopted the United States Bureau of Public 
Health standard milk ordinance, with some mmor changes. The 
effect of this appears ta have been to have appreciably increased the 
cost of producing milk for the city market as compared with pro- 
ducing milk for manufactured dairy products. The inspections 
required under this ordinance apparently have been the source of 
some irritation to dairy farmers, and the question has been raised as 
to whether all parts of the regulation are necessary for the production 
of safe milk. The sanitary requirements appear 'to have had the 
effect of differentiating milk producers into two groups, those supply- 
ing the city riiarket and those producing prunarily for manufactured 
dairy products. This differentiation is illustrated by events of the 
summer of 1936 when a milk shortage developed in the Portland 
market. 

.jAdministrator Adams (of the Oregon Milk Control Board) says that this crisis 
ijesulted chiefly from a sharp price lift for milk on part of nearby condenseries. 
Numerous producers were lured from the Portland market and its very stringent 
sanitary code — administered by the city health department. There was a sharp 
drop in the number of producers on the milk board's list, and most of the deserters 
never have returned to this mfairket.* 

The average price paid producers by condenseries in the North- 
western States rose from $1.11 per hundredweight in August 1935 to 
$1.66 per hundredweight in August 1936, an increase of 55 cents, or 
50 percent. This increase was part of a general increase in dairy 
prices resulting from reduced supplies due to drought. The average 
price paid producers by condenseries for the United States increased 
from $1.18 in August 1935 to $1.74 in August 1936, or 5^ cents, as 
compared Vith 55 cents for Northwestern States. During this 
period the average price paid by mUk dealers in the Pacific Coast 
States for ifulk used for city distribution as milk and cream rose 
from $1.68 to $1.95, an increase of 27 cents, or 16 percent. By 
August 1938 the price paid by condenseries had fallen to $1.07 per 

'Oregon Voter, Nov. 26, 1938, p. 20. The. Oregon Voter is a weekly publication published in Portland 
devoted largely to public affairs. The editors have no apparent special interests in milk control, and an 
attorney for the milk control board agreed that this article gave a fair description of the situation. 



CONCENTRATION OF ECONOMIC POWER IQl 

hundredweight J and this decline in price increased the difficulty of the 
control board in maintaining the price of milk used for fluid uses. 
This partial differentiation of the total mUk production of an area 
because of different sanitary requirements must be considered, 
especially in an area Xvhere.only a small portion of the total production 
is used as fluid milk and cream by city consumers. 

First among seven requirements for the ideal and equitable method 
of handling surplus on a fluid milk market, W. H. Henry, secretary- 
manager of the Dairy Cooperative Association, an association of milk 
producers supplying the Portland market, places "comprehensive city 
ordinance governing the production of milk." Such an ordinance, he 
says, "is essential in controlling surpluses and making reasonable 
returns to the producer." He elaborates this by adding: "In order 
to curb the 'in and outers' on a fluid milk market it is necessary to 
have a stringent city health ordinance governing the production of 
market milk This helps to curb overproduction, especially in the 
flush season, and practically elmiinales those who are not primarily 
market milk shippers."'' The reference to curbing overproduction, 
especially in the flush season, suggests a characteristic of certain 
Oregon markets that must be considered in evaluating public regu- 
lation, namely, the great seasonal variation in the production of milk. 
The county agent of one county testified that the variation in normal 
production from the low month to the high month for his county was 
about 1 to 8.* 

THE BACKGROUND OF PUBLIC REGULATION 

Low prices paid producers supplying milk for^ fluid use to the Port- 
land market were the immediate cause of public regulation in Oregon. 
These prices feU sharply daring 1932 and reached a low point during 
1&33. Efforts were made to organize nulk producers supplying the 
Portland market into a cooperative during the early 1930's, and the 
Dairy Cooperative Association was organized and started to operate 
in August 1931. Higher prices were depianded of the distributors, 
and it was reported that one large distributor bought as much of his 
milk as possible from nomnember producers and bought only what he 
had to from the Dairy Cooperative Association. In order to enforce 
their demands for higher prices, farmers withheld milk from the mar- 
ket, and during the nulk strike there was some vi(5lfence and violation 
of law. The situation has been described as foUov^s: 

Oregon's Milk Control Act was adopted primarily to stabilize! and strengthen 
our great dairy industry, said to represent an aggregate investment totaling 
$200,000,000." It followed some years of demoralization and vigorous attempts 
at quasi- voluntary control, which culminated with the unsuccessful reign of a 
milk czar. The public, much more passively interested, has quite forgotten the 
nulk wars and milk dumpiing. Conditions of 1 93 1-33 are called to mind by reference 
to the Milk Control Act, passed by the second special session of 1933. Price 

W. R. Henry, Equalizing Surplus Burdens Through Public Control, American Cooperation, 1938, pp. 



' Public hearing, Tillamook County, Greg., April 25, 1939. 

• There Is no inaication mat me writer was aware of the fact that the act directly affected only a fraction of 
the total industry. ' 



li79348 — 41 — No. 32- 



102 



CONCENTRATION OF ECONOMIC POWfiR 



disparity, it stated, has broken down the orderly production "> and marketing 
of milk and cream and has seriously impaired the agricultural assets supporting 
the credit structure of the State and the local political subdivision thereof. 

Now note the entrance of the envisioned need for policing of the dairy industry, 
"Whereas unhealthful, unfair * * * demoralizing economic trade practices 
have grown up. * * * which impair the industry in the State and the constant 
supply of pure wholesome milk to the inhabitants thereof and constitute a menace 
to the health and welfare of the inhabitants of the State; and whereas, in order to 
protect the well-being of the people of the State of Oregon and promote the public 
welfare, the production, transportation, manufacture, storage, distribution and 
sale, of milk and cream in the State hereby is declared a business affecting the 
public health and kiterest- which should be supervised and controlled in the man- 
ner herein provided. - "^ 

Any attempt at this late date to ascribe the milk law's origin to scheming dis- 
tributors or wholesalers or other "big interests"' is wide of the truth. The law 
actually was the legislators' response to woeful plaints of the bedeviled dairymen, 
whose industry was demoralized and whose investments were evaporating in 



The price paid producers f(|f milk used as fliud milk and cream in 
Porlbland is shown in chart JI, and appendix to chapter II, comparative 
prices for Seattle, Wash., the nearest large city, are also shown in 
appendix to chapter H. Prices paid producers fell sharply during 
1932 and reached the lowest point since 1920 in 1933. Prices were 
advanced from the low point with the introduction of public regula- 
tion late in 1933 and have been relatively stable since then. 

The "milk czar" referred to in the above quotation was designated 
as arbitrator when some threat of milk shortage developed in the 
Portland «iarket as a result of the milk strike. Hi§ legal advisor is 
now -one sf i-he attorneys for the control board and was undoubtedly 
instruB*^roal a drafting the Oregon Milk Control Act. 

THE MARKET STRUCTURE 



The Dairy Cooperative Association was not organized until mid- 
1931. It appears that prior to this time the producers on the market 
Rad been unorganized and were dealing largely as individuals directly 
with the several distributors. In addition to the producers selling to 
distributors there was apparently an appreciable number of. producer- 
distributors — that is producers who were marketing their milk directly 
to consimiers. During 1937 about 7 percent of aU the milk produced 
in Oregon was retailed by the farmers who produced it. 

In the fall of 1938 practically all of the producers selling to distri- 
butors on the Portland market were members of one of the three 
producer associations supplying the Portland niarket. The number of 
nonmembers supplying the market was reduced diuing the period of 

1° Total production of all milk on farms in Oregon for the past 10 years has been— 



Year 


Million 
pounds 


Year 


MiUlon 
pounds 


1920 


1,199- 
1,265 


1934 J 


1 364 


IflSO 


1935... , - 


1, 365 


1931.. 

1932 ... . .. 


1.291 
1,284 
1,290 


1936 






1*336 


1933- 




lisso 









Froin reports of the Bureau of Agricultural Economics, U. S. Department of Agriculture. 

In July 1938 the secretary-manager of the Dairy Cooperative Association of Portland read a paper at the 
American Institute of Cooperation on "Equalizing Surplus Burdens Through Public Control." This 
paper gave no indication that there was danger of not having enough milk; rather, the problem was posed as 
one of distributing the burden of the surplus equitably among all producers. ' 

" Oregon Voter, November 28, 1936, p. 14-16. 



Chart II 
Fluid Milk Prices in Portland, Oreg., 1920-39 



CENTS PER 
QUART 



I 8 



I 6 



I 4 



I 2 



I 



" 






































- 


- 






























. 








- 


:V 










■ 




























- 


\r\ 


u- 


vlAa 






A ,/ 




./•^^- 


- 


l^ RETAIL 


PRICE 


- House Deliveries 

1 










- 


- 




\a, 


,'V'' 


V 


I 


^V. 




[ 


1 L 


H 




\ 




\'' 








1 A 


?*« 




















\ 


u i 








- 


1 

1 \ 




V 


^i' 




^/^ 


>••' 


A 


A 






1 

i; 


*~^ GROSS MARGIN 


...../■ 








-- 


- 


> • 


', 


^ y- 


^' 


A 


x-v 




-.X-A. 


1. — 


\/ 1 ' 






r-J 








p. K 


V 


.-^/ 




%--' ~ 


^~— . 


V 






"A 1 - 


- 


V 


\-j 
















KI' 


^M 


I^^PRIGE PAID 

! 1 ■ 


1 

PRODUCERS 






J 

. .... Prices not listed 
*At forms 














Bv 












■ 


, 






- 



_<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 • 



no 



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 




A 


B 


C 


D 




P<yiinds 
100 
100 


Pounds 
100 
96 


Pounds 
100 
86 


Pounds 
100 
80 


Pounds 
400 


^uota 


360 






Excess . . . . 




6 


15 


» 


40 









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 


B 


C . 


60.30 


r> 




— 












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 


B 


10 
10 
30 


$4.50 
4.50 
13.50 


64.80 


C • u 


64.80 


d:::::::::*:::::: :: ::: : ::::::::::::::::::.:::::^::: 


60.40 


Total 


50 


.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: 

(c) By producers or associations of producers to milk' dealers. 

(6) By milk dealers to stores for consumption on the premises, or for resale 
to consumers or to others. 

(c) By stores to consumers or to others except for consumption on the prem- 
ises where sold. 

{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 -. 


15 


15 




13 


13-14 


13 


13 


14 


14 


14-14K 


143^ 


14^ 


1921 


14 
12 


14 
11 








12 
11 


12 


12-13 
12 


12-13 
12 


12-13 


12 
12 


12 


1922 


11 


11 


12 


1923 


12-13 


12 


12-13 


12 


12 


12 


12-13H 


12 


12 


12-13 


12 


12 


1924 


12 


11-12 




11 


11 


11 




11-12H 


11-12 


11 


11 


10-11 


1925 








10-12 




11-12 


11 


11-12 


11-12 




12 


12 


1926 


12 


12 




12-13 


12-12M 


12 


12 


12 


12 


11-12 


12 


12-13 


1927 


11-12 
11-12 


12 
12 




12 
12 
12 


12 
12 
12 


12 
12 
12 


12 
12 
12 


12-13'" 
12 


12 


12 






1928 .... 






1929 


12 


12 


12 


12 


1930 








12-15 


12-15 




12-15 


12-15 


11-15 


11-15 


10-12 




1931 


11-12 


10-12 




10-11 


10 


10 


10 




9-11 




9-11 


10 


1932 


10 


9-10 




9 


9 


9 


9 


9 


9 


9 


9 


9 


1933 


9' 


9 




9 


9 


9 


9 


8-9 


9 


9 


9 


9 


1934 


10 


10 




10 


10 


10 


10 


10 


10 


11 


11 


11 


1935 


11 


11 




11 


11 




10 


10 


10 


10 


10 


10 


1936 


10 


11 




11 


11. 


11 




11 


11 


11 


12 


12 


1937 


12 


12 




12 


12 


12 


12 


12 


12 


12 


12 


12 


1938 


12 


12 




11 


11 


11 


11 


11 


11 


11 


11 


11 


1939 


11 


11 




11 


11 


11 


11 


11 


^^ 


11 


" 


11 



• 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 

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 


14 


1921 ... 


13 


1922 


13 


1923 


13 


1924 




1925 


10 


1926, 


12 


1927 . 


12 


1928 ... 




i929 


12 


1930. - 




1931— 




1932 


10 


1933 


8-9 


1934. — .. 


10 


1935 


1^" 


1936 


1937 


11 


1938 


11 


1939 


10 



14-15 
10-12 
13 
13 
13 
12 
13 



12 



13 



14 



10-12 
11 
10 
8-9 
10 
11 
10 
11 



10-12 
11 
10 
10 
10 
11 
10 
11 
11 



12 

10-11 

9-10 

9-10 

10 

10 

9 

11 



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 

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 

11 

10-11 

8-9 

10-11 

11 

9 

11 

11 

10 

11 



12 
13 
13 
9 
13 
11 
12 
12 
13 
10-11 
10-11 
8-9 
10 
11 
9 
11 
11 
10 

a 



13 
10-12 

13 
10-12 

10 

13 



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 


11 






















Fluid Milk Prices in San Francisco, Calif., 1920-39 


CENTS PER 
QUART 


- 






































- 




" r 






































- 




vv 








































1 4 




\ 




































- 




\ 


/ 














\ 1 1 
\ ^ RETAIL PRICE -House Deliveries 










1 2 

1 
8 




L. .A_' 




T ' 






A 
























1 




\ / 












- 


A 




















GROSS MARGIN 












- 






1 

,-wV^-.^ 


1 


/N. 


1 < 
-' 




/_/ »^ 


..'-V 


\ 


--'— ^--— '\^-wV 




t V 'j *V4=*r-.y— 


-^^'^-V^ V-- 


1 














■ 


6 






. 1 A -' • I 1 1 • 1 1 


I 


1 


















- 




L--v_./ 


« .' 
















1 \' 








r 


— — ^ 


■^^^?^- 


4 


V 




1 ^ 


RICE PA 


-^^ 


/ 










_ 


























M 


D PRODUCERS 






_ 


2 















































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 . 



(c) 36 cents and less than 42 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 

16-16 

13-14 

12-13 

14 

14 

14 

14 

14 

14 

14 

13-14 

12 

12 

12 

12 

13 

13 

13 

13 


16 

16-16 

12-13 

12-13 

14 

14 

14 

14 

14 


16-16 

15 

12-13 

12-13 

14 

14 

14 

14 

14 


16, 

1,% 

12^13 

12-13 

14 

14 

14 

14 

14 

14 

14 

13 

12 

U 

12 

12 

13 

13 

13 

12 


16 
15 

i2-13 

14 

14 

14 

14 

11 

it 
12 
11 
12 
12 
13 
13 
13 
12 


16 

14-15 

12-13 

12-13 

14 

14 

14 

14 

14- 

14 

"is"" 

12 

11 

12 
12 
13 
13 
13 
12 


15-16 

13-14 

12-13 

12-13 

14 

14 

14 

14 

14 

14 

14 

13 

12 

11 

12 

12 

13 

13 

13 

12 


17 

14 

12-13 

12-13 

14 

14 

14 

H 

14 

14 

14 

10 

12 

11 

12 

12 

13 

13 

13 

12 


17 
14 
12-13 


17 
13-14 


17 

13-14 

12-13 

14 

14 

14 

14 

14 

14 

14 

14 

10 

12 

12 

12 

12 

13 

13 

13 

12 


17 
13-14 


1922 


13 


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 :. 


14 


1927 


14 


1928 


14 


1929 ' • 


14 


1930 


14 

13 \ 

12' 

12 

12 

12 

13 

13 

13 

12-13 


14 
13 
12 

\i 

12 
13 
13 
13 
12-13 




1931 


10 


1932 


12 


1933 


12 


1934 


12 


1935 


13 


1936 - - 


13 


1937 


13 


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. 


L. 


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 

12 

4.9 
6.5 
6.7 
4.9 


9.8 

6.8 

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. 



16 



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 



15 



10 
8 

10 
10-11 

10 

12 
11-12 
10-11 



13 
10 
10 
II 
11 
10 
12 
11-12 
10-11 



15 

15 

13 

10- 

10 

, 11 

11 

10 

12 

11-12 

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 

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 


6.1 


6.1 


6.8 


6.8 


6.8 


6.4 


6.9 


6.9 


6.9 


1935 


6.9 


6.9 


7.3 


5.8 


5.8 


7.0 


7.0 


7.0 


7.0 


7.0 


6.8 


6.8 


1936 . ,. 


• 6.8 


7.0 


6.0 


6.0 


6.0 


6.0 


6.0 


6.5 


6.7 


6.7 


6.7 


6.7 


1937 


6.7 


6.7 


6.7 


6.7 


6.7 


6.7 


6.7 


6.7 


6.7 


6.7 


6.5 


6.6 


1938 _.■- 


6.5 


6.2 


6.2 


6.2 


6.2 


6.2 


6.2 


6.2 


6.1 


7.0 


6.7 


6.7 


1939 


6.9 


5.9 


6.1 


5.1 


6.1 


6.1 


•6.6 


6.1 


6.6 


6.1 


6.1 


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 


66 

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 


39 


Logansport 

Brazil 


Oreencastia 

Rnnth Bend - 

Wabash 


36 
33 


Greensburg 

-«khart 


22 


Richmond 

Winchester 1 

Total, 19 mar- 
kets 


28 


Marion 


24 






Hontington 


33,818 




42 









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. 

(c) Establishment of reasonable trade practices. 

(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 

5 


3 














Blackford - 


Hartford City 










Logansport 

Brazil 




1 




Clay 








Oreenshnrg 


5 








Elkhart -.. 


Elkhart.- 

Marion 


2 
2 

2 
1 
5 
2 
1 1 
2 
6 

3 


---2- 


1 

1 
1 




Grant 






Kokomo 


3 






H'lnting*"" 




Kosciusko K 


Warsaw 






Miami "^ ~' 


Peru 


1 


2 




PntnftTn 


Oreencastle 




St Joseph 


South Bend 


2 


1 






Wabash ... 






RinhmnTid 


1 


1 






Winchaster 




Marlon 


TnfH.#;SpnJis 


3^ 
2 


1 


Vi 

















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 


1 


1 


1 


1 

. TOTAL 


RECEIPTS 


t 








A 


- \ 








N \ 




-^/^ 




USED FOR FLUID MILK AND CREAM 


1 


1 


1 


1 


1 



iitiiitiiHiiitiitliii^iiiniiXiiiniiiiitiiiiiiUlUitliiiti 



i225_ 



1936 



1937 



1938 



1939 



CONCENTRATION OF ECONOMIC POWER 



155 



?ISsi 



h 


2'22:2:"S 




10,230 
12, 55S 
11, 876 
13, 427 
13,010 


1 

2 

6 


12,003 
14,725 
13, 514 
15, 164 
14, 130 


h 


13,733 
13,909 
14,190 
16,740 
16, 578 


1 


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 



18 



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 

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 


14 

• 13 

10-11 

12 

10-12 

9-11 

12 

12 

12 

12 

. 12 

10 

9-10 

8 

9 

10 

11 

12 

12 

11 


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 


14 

12 

10 

....... 

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 


14 


1921.. 

1922 


11 
10 


1923 


12 


1924 


12 


1925 


12 


W26 


12 


1927 - 


12 


1928. 


13 


1929 


12 


1930 


12 
11 
10 
6-9 
9 
10 
11 
12 
12 
12 


lo^ 

7.10 
9 
9 
10 
11 
12 
12 
12 


12 


1931 


10 


1932 


9 


1933 


9- 


1934 


10 


1935 


10 


1936 


12 


1937 


12 


1^"" 


12 


19S9 


11 







' 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 

n 

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 

w 

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 

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 


16 

141^ 

12 


1921 


1922 


1923 


1924 


12 ^ 

\f 

11 

10 
10 

n 

12 

11 


1925 


1926 


1927 






1930 - .. 


1931 .. . . 


1932 .. 


1933 


1934 


1935 


1936 ' 


1937 - -. - 


1938 


1939 



16 

14J^ 

12 

12 

13^ 

12H 

12H 

12H 

i2y2 



16 
14 
11 
12 

12^ 



12H 
11-12 



12H 
11 
9-10 



li 

12H 
12H 
11 
9-10 



12^ 



12H 
1234 



12H 



10 
11 
11 
11 



16 

13 

11 

12 

12H 

12H 

12H 

12H 

12M 

12H 



12 
12^ 
12H 
12H 
12H 
12M 
12M 
12H 
11 
8-10 



12J^ 

12H 

12H 

12M 

12^ 

12H 

12>^ 

11 

10 

10 

10 
11 
12 
11 
11 



16 

13 

12 

13M 

12H 

12H 

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] 


i 












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 
4.3 


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 

78 

64 
17 
86 
81 
81 
73 
89 
44 

I! 

34 

83 
77 
84 
83 


60 


AKd : : 


32 


Wpftvftr Dam 


21 


Beloit , 


58 


Berlin : - 


29 


Chippewa Falls ' — - •-. 


41 




3 


Eau Claire 


32 




30 


Green Bay-DePere' 


33 


ranesvUle 1 


35 

49 


Madison 


35 




51 




42 


Marshfleld' . 


22 


Merrill" - — 

MUwaukee 1 I'. :.. 


12 
36. 


Neenah and Menasha. - - 


83 




14 


Oconto ' 


19 


Oneida and Vilas i » ' 


19 


Oshkosh 


27 


Portage ' 


11 


Racine ... 


56 


Ripon ' 1 

Shawano ' . . . . . . 


13 
19 




66 


Stevens Point 


17 


Waukesha 


• 23 


Watertown 


16 


>^est Bend ' 


17 







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 


10 


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 


2 


Cents 

24.6 

f 27.9 

\ 29.7 

35:7 
26.9 


$0.86 


7 




.98 


3 ' 


1 » 


n?^ 


2 


1 


1 26 


2 


1 


94 


2 











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 



90 



8 



70 



60 



50 



192 


23-25 


= 100 




















/ 






>< 




y 




••••**'** 
•;^^^^^^^\ 


\ 

. \ 














\ 


-•■^"" 






^^^"^^^, 


\ \ 


\ _ 






,.'* 
























\ \ 
\ \ 

S \ 
\ 




..'* 


ALL FOOD^X^ 


\ 




















\\ 

VV 




/ 






., 1 ~ 


























































, 








^ 


[ 








— 











. 




^^ 




i 




■ 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 



14 



12 



10 



































^RETAIL PRICE OF MILK 








/•A . 










■/ ■■'. 


1 








.-— 7 ^T 


/■ 


I , 


MILK CONSUMPTION 
/-^INCLUDING RELIEF MILK 




1 / \ 


\ t 


vv ^ r^ kP 


/^.-^aw^j^ 


;-U^^ 


' 








\ 1 
1 1 


MILK CONSUMPTION 




"V 


y^ 

^ 




EXCLUDING RELIEF MILK 


\ 

\ 




'Ua 


N^i/^ 


(\A 




^ 


V^ Y 




5Lr\y^ 








M 
\ 






1 


















A 






A 


.-• 




















\ 






/' V, 




















V 


s 


/'^' 

































































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 



20 



00 



80 



60 



40 



20 



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 


218 


241 


247 


259 


257 


267 












263 


281 


308 


317 


308 


296 


296 


262 


276 


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 


1 

House Deliveries 

1 












\ 










/ 


t 


! 


J^ 




i 

1 
1 








/ 


t 




u 


1 


f! 


-1 


^ 


52. : 


u 


^ / 


-i* 






f , 

T GROSS 


^ 


4.5 

! 


&i 




' t \ 


1 

\ 

! ,1 




/ 


t 




6z 




5.8 


8 




\ 


h 


4.9 




MA 


RGIN 


.aH" 




6 




i- 


5 

1 


A 


^ 


u 


.4 


b 




: 


J- 


.J 


^ 


+6 


47 




5:6 




i 






4 




\^ 


■^-/ 


J 


^ 


v. 






PRICE 


S PAID PRODUC 

1 


.3^ 


^ 


i :' 


/ 


^/^ 


— ^x 


-7 


'c ±_ 




V 


2 




























JTATE C 


nwTDm — 










>- 





-*- GROSS MARGIN 

NO INFORMATIOr 

1 


1 


















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 
2.60 


2.20 
3.00 


2.30 
3.00 


2.30 
3.00 


2.30 
3.00 


2.65 
3.00 


2 75 


1923 


"2."75' 


3.00 


1924 


2.90 
2.45 


2.90 
2.45 


2.85 
2.45 


2.85 
2.60 


2.85 
2.50 


2.85 
2.50 


2.85 
2.50 


2.85- 
2.59 


2.85 
2.50 


2.45 
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 
2.90 
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 
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 


2.50 


2.60 


2.50 


2.50 


2,50 


2.50 


2.20 


1932.. 


2.10 


2.10 


2.10 


2.10 


1.70 


1.70 


1.75 


1.75 


1.75. 


1.75 


1.75 


1.60 


1933 


1.60 


1.60 


1.65 


1.76 


1.76 


1.76 


2.00 


2.00 


2. GO 


2.00 


2.00 


2.00 


1634.... 


2.00 


2.00 


1.90 


1.90 


1.85 


1,85 


1.85 


2.08 


2.30 


2.30 


2.15 


2.15 


1935 


2.15 
2.05 


2.15 
2.05 


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 
2.80 


2 05 


1936 ., 


2.80 


1937 


2.71 
2.71 
2.71 


2.71 
2.71 
2.71 


2.71 
2.71 
2.71 


2.71 
2.71 
2.10 


2.71 
2.71 
2.10 


2.71 
2.71 
2.10 


2.71 
2.71 
2.10 


2.71 
2.71 
2.34 


2.71 
2.71 
2.40 


2.71 
2.71 
2.40 


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 


2.00 


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 


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 


.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 


.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 


1.48 


1937 


1.48 


1.48 


1..52 


1.31 


1.26 


1.24 


1.25 


1.32 


1.42 


1.47 


1.47 


1.58 


1938... 


1.39 


1.26 


1.22 


1.11 


.99 


.92 


.92 


.93 


.93 


.93 


.97 


1.00 


1939.... 


.93 


.93 


.85 


.77 


.81 


.86 


.86 


.93 


I.IS 


1.28 


1.40 


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 


1.18 


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 


1.73 


1937 


1.73 


1.73 


1.77 


1.56 


1.51 


1.49 


1.50 


1.57 


1.67 


1.72 


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 


1.17 
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.63" 


"i."77" 


"i."77' 


"i.'77" 


'i."77" 


"i."77' 


1.77 


1934i>. 


1.77 


1.77 


1.67 


1.67 


1.62 


1.62 


1.62 


1.85 


2.07 


2.07 


1.92 


1.92 


1935.... 


1.92 


1.92 


1.92 


1.87 


1.87 


1.82 


1.82 


1.82 


1.82 


1.82 


1.82 


1.82 


1936... 


1.82 


1.82 


1.82 


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 
2.48 


2.48 
2.48 
Z48 


2.48 
2.48 
1.87 


2.48 
2.48 
1.87 


2.48 
2.48 
1.87 


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 
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 


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 

^^ 


13 

10 
12 
12 
12 
11 


13 

9 

...... 

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 


11 


1928 


11 


1929 


12 


1930 


12 
10 
9 
8 
9 
10 
10 
12 
12 
12 


12 
10 
9 
8 
9 
10 
10 

12 
12 


11 


1931.. . . 


g 


1932.. 


8 


1933.... 




1934-... 




1935..... 




1936 




1937 


12 


1938 


12 


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... 


67 


1926 


1934 


68 


1926 


1935 -- 


70 


1927 


1936 - 


76 




1937 .,. 


77 




1938 


74 




19f6 


71 


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 


J 


$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 



16 



I 2 



I 



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 



( / 

\ 

f 

-3 i 

- t^ _ 

/ 


\ 


1 










/ 






\ 












/ 






1 


















\ 












/ 






"'■••1 






H 
3) 
> 




/ 


6 






*•., 

•••..., 


•.. 


TO H 
O 33 
33 C 




/ 


-< 
o 






V-V 






H O 

H 

/5 




/ 


•^ 






0) / 

1- 


m 


'••.^ 


*•., 




/ 








•< 
r 
< 
> 




: 












> 




\ 




\ 












K 


\ 









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 

!i 

16 
15 
12 
12 
13 
13 
13-14 

iln 


18 
15 

"il" 

14 
16 
15 

"ie ' 

16 
16 
15 
12 
12 
13 
13 
13 

Ik 


18 
15 
15 
16 
16 
15 
15 
16 
16 
16 
16 
14 
12 
12 
13 
13 
13 

Ik 

16 


17 


1921 


17 
15 
16 
15 
15 
15 
15 
16 
16 
16 
15 
12 
11 
12 
13 
13 
13 

llfl 


15 


1922 


16 


1923 


15 


1924 


15 


1925 


15 


1926 


15 


1927 


16 


1928 


16 


1929 


16 


1^ : . . .:: 


16 
15 
12 
10 
12 
13 
13 
13 
13 
13^ 


16 
15 
12 
10 
12 
13 
13 
13 
13 
13>^ 


15-16 


1931 


12 


1932..£2 

1933 


11 
12 


1934 


13 


1935 


13 


1036 


13 


1937 


14 


1838 ... 


im 


1M9 :;:::.: 


16 







' 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 


13 
12 
14-15 
13 
13 
13 


........ 

13 

12 

14 

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 

11 


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 

It 

\l 
14 

■! 

12 
12 
12 

12 

9-10 

13 


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 


15 


1921 


15 
14 
13 
13 
14 
13 
13 
13 
14 
14 
12 
6-7 
10 
11 
12 
12 
12 
13 
13 


14 


1922 


13 










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 


12 


1935 


12 


1936 


12 


1937... 


13 

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 

1. 

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 


97 


95 


.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 

u 

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 

By 

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. 



If 



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 


19 


1918 . •- 


H 


3.12 


f 18 










1921 .. 


3 


1918-21 


13 


1916-21.... 






15 











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 




38.89 


Ohio - 


38.89 




3S.89 


Outside common labor: 
Illinois 


47.30 




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). 



I 



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. 

(c) Cost of retailing (particularly by a mine which not only 

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