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Full text of "Investigation of concentration of economic power. Hearings before the Temporary National Economic Committee, Congress of the United States, Seventy-fifth Congress, third Session [-Seventy-sixth Congress, third Session] pursuant to Public Resolution no. 113 (Seventy-fifth Congress) authorizing and directing a select committee to make a full and complete study and investigation with respect to the concentration of economic power in, and financial control over, production of goods and services .."

X INDEX 

Page 
Seaboard Insurance Co 1568 

Securities and Exchange Commission, report by, on voting practices of 

mutual life-insurance companies 1400-1407 

Securities Trust Co 1431 

Shelby Mutual Co' .._ 1478 

Silbiger, Bruno, agen-t. Metropolitan Life Insurance Co 1322-1328 

Sibley, Harper 1431 

Singleton, J. F., Co 1167 

Smith, Alfred E., correspondence of 1436-1437 

Smith, Herbert S., member of legal department. The Mutual Life Insurance 

Co. of New York . 1387-1396 

Spectator Publishing Co 1166 

Spectator Year Book 1167-1168, 1172, 1174, 1180, 1191, 1198, 1227 

Standard Oil Co. of New York 1437 

Star Insurance Co. of America 1568 

State Assurance Co., Ltd 1568 

Statistical abstract, Bureau of Census 1170, 1172, 1174, 1182 

Steele, Earl, agent. Metropolitan Life Insurance Co 1332-1337 

Stetson, Jennings & Russell 1539 

Stone, Edward, correspondence of 1475-1476, 1580 

Stuy vesant Insurance Co 1527 

Sun Life Assurance Co 1527 

Sun Insurance Office, Ltd 1568 

Taschereau, L. A 1268, 1279 

Corresp'ondence of 1 540 

Taylor, Myron C 1462 

Teachers Insurance & Annuity Association 1568 

Temporary National Economic Committee: 

Insurance, statement by the vice chairman regarding its study of life 

insurance companies and practices 1409-1411 

Life insurance, scope of its present inquiry 1161-1164 

Thames & Mersey Marine Insurance Co., Ltd • 1568 

Traphagan, Mr 1 1462 

Travelers Insurance Co., the 1192, 1514, 1520 

TuUy, Cletis E., assistant secretary, Metropolitan Life Insurance Co. 1294-1313 
Turner, George C, treasurer, the Mutual Life Insurance Co. of New York, 

correspondence of 1573, 1574 

Union Central Life Insurance Co...- 1192-1193, 1514 

LTnion Mutual Life Insurance Co 1406 

United States Guarantee Co 1480-1485, 1582 

Prudential Life Insurance Co. of America, business ^ relationship 

with 1480-1485 

Van Anden, Charles R., correspondence of 1562 

Vanderbilt, Cornelius 1462, 1464 

Watts, Mr _ --- 1429 

Way, Mr 1494-1495 

Weiss, Ernest, agent. Metropolitan Life Insurance Co 1352-1354 

Westchester Fire Insurance Co 1527 

Wisconsin State la w^ regulating election of officers of insurance companies. 1589 

Wrenn, Mr J . '-... I486 

Wright, Elizur 1406 

Wyatt, C. E 1318 

X 



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 

WILLIAM E. BORAH, Senator from Idaho 

B. CARROLL REECE, Representative from Tennessee 

CLYDE WILLIAMS, Representative from Missouri 

THURMAN W. ARNOLD, Assistant Attorney General 

•WENDELL BERGE, Special Assistant to the Attorney General 

Representing the Department of Justice 

WILLIAM O. DOUGLAS, Chairman 

•JEROME N. FRANK, Commissioner 

Representing the Securities and Exchange Commission 

GARLAND S. FERGU>^ON, Commissioner 

•EWIN L. DAVIS, Commissioner 

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 

•CHRISTIAN JOY PEOPLES, Director of Procurement 

Representing the Department of the Treasury 

RICHARD C. PATTERSON, Jr., Assistant Secretary 

Representing the Department of Commerce 

LEON HENDERSON, Executive Secretary 

'Alternates. 

u 



INVESTIGATION OF CONCENTRATION 
OF ECONOMIC POWER 



HEARINGS 

BEFORE THE 

TEMPORARY NATIONAL ECONOMIC COMMITTEE 
CONGRESS OF THE UNITED STATES 

SEVENTY-SIXTH CONGKESS 

FIRST SESSION 
PURSUANT TO 

Public Resolution No. 113 
(Seventy-fifth Congress) 

AUTHORIZING AND DIRECTING A SELECT COMMITTEE), 
MAJvE A FULL AND COMPLETE STUDY AND INVESTIGA- 
TION WITH RESPECT TO THE CONCENTRATION OF 
ECONOMIC POWER IN, AND FINANCIAL CONTROL 
OVER, PRODUCTION AND DISTRIBUTION 
OF GOODS AND SERVICES 



PART 5 



MONOPOLISTIC PRACTICES IN INDUSTRIES 



DEVELOPMENT OF THE BERYLLIUM INDUSTRY 



FEBRUARY 28, MARCH 1, 2, 3, 6, 7, 8, AND 14, MAY 8 AND 9, 1939 



Printed for the use of the Temporary National Economic Committee 




UNITED STATES 
GOVERNMENT PRINTING OFFICE 
124491 WASHINGTON : 1939 



CONTENTS 



Testimony of — Page 

Burr, Eugene W., attorney, Federal Trade Commission, Washington, 

D. C 1860-1903, 1947-1950 

Chantland, William T., attorney. Federal Trade Commission, Wash- 
ington, D. C 1828-1847, 1852-1859, 1983-1984 

Coe, John A. Jr., general sales manager, The American Brass Com- 
pany, Waterbury, Connecticut 2091-2101, 

2103-2110, 2114-2126, 2128, 2130, 2132-2135 

Dawkins, Robert B., member of chief examiner's staff. Federal Trade 

Commission, Washington, D. C 1820-1821 

England, William H., assistant chief economist. Federal Trade Com- 
mission, Washington, D. C 1816-1825, 1827-1828 

Fetter, Frank A., retired professor of economics, Princeton, New Jer- 
sey 1657-1680, 1903-1946, 1951-1982 

Flynn, John T., economist, New York City 1680-1713 

Gahagan, Andrew J., president. The Beryllium Corporation, New York 

City 2012-2025, 2037-2059, 2147-2163 

Hensel, Frank Robert, chief metallurgist, P. R. Mallory Company, 

Indianapolis, Indiana 2059-2067 

Hirschland, F. H., president. Metal & Thermit Corporation, New York 

City 2026-2037 

Judd, Clark S., vice president in charge of manufacturing, The. Amer- 
ican Brass Company, Waterbury, Connecticut 2093-2094, 

2102, 2117-2124, 2126-2132, 2135 

Kelley, William T., chief counsel. Federal Trade Commission, Wash- 
ington, D. C 1770-1788, 1793, 1807-1815 

Kertess, Ferdinand A., correspondent, Deutsche Gold-und-Silber 

Scheideanstalt, New York City 2068-2077 

Lundvall, Arthur E., economist and accountant, Federal Trade Com- 
mission, Baltimore, Maryland 1999-2000 

Montague, H. T., purchasing agent. The American Brass Company, 

Waterbury, Connecticut __ . 2092-2093, 

2101-2105, 2110-2113, 2121-2124, 2127 

Montgomery, R. H., professor of economics. University of Texas, 

Austin, Texas 1984-1998, 2000-2009 

Morehouse, Pgad B., director of Radio and Periodical Division, Fed- 
eral Trade Commission, Washington, D. C... 1770-1788, 1793, 1807-1815 

Randall, H. L., president. The Riverside Metal Company, Riverside, 

New Jersey 2084-2091, 2098-2101, 2104-2106, 2114 

Sawyer, Charles Baldwin, president. The Brush Beryllium Company, 

Cleveland, Ohio 207&-2083, 2135-2147 

Sheehy, Joseph, assistant chief examiner, Federal Trade Commission, 

Washington, D. C . 1795-1796 

Walker, Francis, chief economist. Federal Trade Commission, Wash- 
ington, D. C 1797-1804 

Statement of — 

Ballinger, Willis J., director of studies and economic advisor to the 

Federal Trade Commission, Washington, D. C 1650-1656, 1857 

Davis, Ewin L., member of the Committee, and Commissioner, Federal 

Trade Commission, Washington, D. C 1647-1649 

Monopolistic practices in industries: 

Presentation of Federal Trade Commission Study 1650 

History of monopoly 1657 

Meaning and applications of competition 1660 

Tendency toward monopolistic control of industry 1667 

Relation between monopoly and depression 1671 

Simplification of corporation set-up proposed 1677 



IV CONTENTS 

Monopolistic practices in industries — Continued. I*age 

Adequacy of anti-trust laws as legal implements 1678 

Need for improvement in function of economic system 1681 

Mechanism of the capitalist economy 1682 

Money on deposit not invested 1688 

Causes of failure of present economic system 1698 

Proposed economic reforms 1 709 

Organization and functions of Federal Trade Commission 1716 

Representative cases of monopolistic and restraint of trade prac- 
tices 1725, 1738, 1745 

Respondent's right of appeal under Wheeler-Lea A6t 1733 

Spction 7 of the Clayton Act 1771 

Section 6 of the Federal Trade Commission Act 1796 

Chain store study 1 797 

Section 8 of the Clayton Act 1813 

Result of Federal Trade Commission's report on agricultural income. _ 1816 

Principal farm products covered 1816 

Tobacco group's concentration of control 1817 

Conditions in terminal grain markets and recommendations of the 

Commission 1818 

Tobacco marketing 1819 

Potato marketing 1821 

Fresh fruits and vegetables and the Commission's conclusions and 

recommendations 1822 

Utility propaganda 1833 

Pinancial structure, practice, rates and returns of public utilities 1836 

Financial accounting practices of utility companies _ 1838 

Federal incorporation or licensing of corporations 1845 

The basing-point system as practiced in steel industry 1861 

Identical delivered price systems in industries other than steel ' 1894 

Effect of identical delivered price systems upon the public interest- _ 1899 

History of the basing-point practice in industry 1906 

Economic consequences of basing-point system 1947 

Economic problems confronting the Committee 1951 

Importance of sulfur and sulfuric acid 1986 

Sources, production and methods of producing sulfur 1987 

Sulfur prices and profits 1991 

Profits of sulfur companies 2001 

Cost of producing sulfur 2007 

Sulfur in fertilizers. .- 2009 

Development of the beryllium industry: 

Importance of beryllium _. 2011 

History and description of beryllium 2012 

Occurrence in abundance of the ore 2013 

Process used in converting ore into workable metal 2014 

Production and physical qualities of beryllium alloys 20 16 

The "master alloy" 2019 

Uses of the alloys 2020 

Production and use abroad 2022 

Siemens & Halske in the beryllium field ^. 2024 

Corporate structure of the Metal & Thermit Corporation 2026 

Assignment of patents by Siemens & Halske 2028 

Patent negotiations between Metal & Thermit Corporation and 

Siemens & Halske 2031 

Reason for patent arrangements between Metal & Thermit Corpora- 
tion and Siemens & Halske 2032 

Patent negotiations between Beryllium Corporation and Siemens & 

Halske 2038 

Negotiations result in cross-licensing agreements 204 1 

Interest in beryllium manifested in England 2042 

Royalty payments between Beryllium Corporation and Siemens & 

Halske 2044 

Patent control in the industry 2048 

Vickers Co., in England, undisclosed principal in stock purchase 2057 

Patent control over beryllium processing machines .. 2058 

Development for electrodes principal interest of Mallory Company in 

beryllium... 2060 



CONTENTS V 

Development of the beryllium industry — Continued. P&gt 
Arrangement with Beryllium Corporation necessary to complete 

negotiations abroad 2062 

Degussa's acquisition of beryllium interests 2069 

Combination of companies proposed 2080 

Reduction in price of beryllium sought to increase sales volume 2082 

Effect of patent situation on purchase of beryllium alloys 2085 

"Follow the leader" policy of pricing 2085 

Increase in sales volume predicted with reduction in price 2092 

Question of price leadership 2094 

Beryllium prices determined by "custom" _• 2098 

Cooperation between firms in price fixing of beryllium products 2099 

Factors in formulation of price policy 2118 

Improvement in pricing systems in American industries sought 2133 

Patent situation in the industry 2136 

Uncertainty as to amount of beryllium ore existing 2145 

Development of beryllium alloys 2149 

Patent licensing on royalty basis 2153 

Use of beryllium in aviation 2156 

Policy of exclusion from beryllium field 2158 

Schedule of exhibits — vii 

Tuesday, February 28, 1939 1647 

Wednesdav, March 1, 1939 1715 

Thursday, March 2, 1939 1745 

Friday, March 3, 1939 --- -- 1795 

Monday, March 6, 1939 -- 1857 

Tuesday, March 7, 1939 - 1603 

Wednesday, March 8, 1939 - - 1961 

Tuesday, March 14, 1939 1983 

Monday, May 8, 1939 i - 2011 

Tuesday, May 9, 1939 - 2079 

Appendix 21 65 

Supplemental data 2298 

Index I 



SCHEDULE OF EXHIBITS 



Number and summary of exhibits 



Intro- 
duced 
at page 



Appears 

on 

pai;e 



294. Chart: Production of money income, consumptive indus- 

tries 

295. Chart: Production of income, consumptive and invest- 

ment industries 

296. Chart: Total deposits, demand and time, all banks 

297. Chart: Time deposits, all banks 

298. Chart: Total deposits and total loans, all banks 

299. Chart: Security issues, 1923-1938 

300. Chart: Federal, state and private security financing, 

1934-1938 

301. Chart: Building construction cbntracts awarded, 1925- 

1938 -■ 

302. Appears in Hearings, Part II, appendix, p. 802 

303. Appears in Hearings, Part II, appendix, p. 804 

304. Appears in Hearings, Part IV, appendix, p. 1645 

305. Digest of Federal Trade Commission findings and 

order in 59 cases of unlawful monopolistic practices 
and restraints of rade 

306. Statement regarding resale price maintenance made in 

Federal Trade Commission report to Congress, January 
30, 1939 

307. Federal Trade Commission report on the American 

Flange & Manufacturing Co., Inc 

308. Federal Trade Commission report on monopolistic prac- 

tices in industries - 

309. The President's Message to Congress, January 20, 1914. 

310. List of Federal Trade Commission reports on chain store 

study transmitted to the Senate, 72d-74th Congresses _ 

311. Federal Trade Commission report on its chain store in- 

^uiry. Vol. I: Character and Extent of Chain and 
looperative Store Business 

312. Federal Trade Commission report on its chain store in- 

quiry. Vol. II: Operating Methods 

313. Federal Trade Commission report on its chain store in- 

quiry. Vol. Ill: Merchandising and Saies Policies of 
Chain Stores -- 

314. Federal Trade Commission report on its chain store in- 

quiry, Vol. IV: Prices, Margins and Special Discounts 
and Allowances of Chain and Independent Distributors 

315. Federal Trade Commission report on its chain store in- 

quiry, Vol. V: Financial and Operating Results of 
Chain Stores 

316. Federal. Trade Commission report on its agricultural 

income inquiry, Part I: Principal Farm Products 

317. Federal Trade Commission report on its agricultural 

income inquiry, Part II: Fruits, Vegetables and 
Grapes ^ - 

318. Federal Trade Commission report on its agricultural in- 

come inquiry, Part III: Supplementary Report _-. 

319. Federal Trade Commission summary report on utility 

corporations, Senate Document .92, No. 71 A: Efforts 
by Associations and Agencies of Electric and Gas 
Utilities to Influence Public Opinion 

• On file with the committee. 
' Printed as Hearings, Part 5-A. 



1682 

1683 
1688 
1689 
1689 
1692 

1695 

1697 
1713 
1713 
1713 



1726 

1761 

1768 

1769 
1792 

1798 



2165 

2165 
2166 
2166 
2167 
2168 

2168 

2169 



(0 

2170 
2172 

0) 
2174 

2177 



1804 




1804 




1804 




1804 




1804 




1828 




1828 




1828 





1833 



(') 



VIII 



CONTENTS 
SCHEDULE OF EXHIBITS— Continued 



Number and sununary of exhibits 



Intro- 
duced 
at page 



Appears 



page 



320. Federal Trade Commission report on utilitj' corporations, 

Senate Document 92, No. 81 A: Publicity and Propa- 
ganda Activities by Utilities Groups and Companies 
(indexed) 

321. Federal Trade Commission summary report on utility 

corporations. Senate Document 92, No. 73A: Holding 
and Operating Companies of Electric and Gas Utilities. _ 

322. Federal Trade Commission report, Senate Document 92, 

No. 69A: Compilation of Proposals and Views for and 
Against Federal Incorporation or Licensing of Cor- 
porations and Compilation of State Constitutional, 
Statutory, and Case Law Concerning Corporations, 
With Particular Attention to Public Utility Holding 
and Operating Companies 

323. Federal Trade Commission report on utility corporations. 

Senate Document 92, No. 72A: Economic, Financial, 
and Corporate Phases of Holding and Operating Com- 
panies of Electric and Gas Utilities 

324. Table showing sample of pyramiding in Associated Gas & 

Electric System, March 31, 1932 

325. Chart: Corporate ownership of Associated Gas & Electric 

System, as of March 31, 1932 

326. Chart: Insull System showing inter-corporate holdings 

of stock by principal companies in the system, as of 
December 31, 1930 

327. Corporate chart of Middle West Utilities Co., a subsidiary 

corporation of the Insull system, showing per cent of 
voting control in 262 companies, as of December 31, 
1930 

328. Federal Trade Commission final report on utility cor- 

porations, Senate Document-92, No. 84A: Economic, 
Corporate, Operating, and Financial Phases of the 
Natural-Gas-Producing, Pipe-Line and Utility Indus- 
tries, With Conclusions and Recommendations 

329. Table of Federal Trade Commission antitrust cases by 

type of commodity as classified by the 1935 biennial 
census of manufacturers 

330. Table of Federal Trade Commission antitrust cases from 

1932 to date by type of commodity as classified by the 
1935 biennial census of manufacturers 

331. Table of Federal Trade Commission antitrust cases from 

1932 to date by type of commodity as classified by the 
1935 census of business, retail and wholesale distri- 
bution 

332. Table of unfair trade practices involved in Federal Trade 

Commission antitrust cases from 1932 to date by type 
of commodity as classified by the 1935 biennial census 
of manufacturers 

333. Table of unfair trade practices in Federal Trade Com- 

mission antitrust cases from 1932 to date by type of 
commodity as classified by the 1935 census of business, 
retail and wholesale distribution 

334. List of types of unfair methods of competition condemned 

by the Federal Trade Commission, taken from annual 
reports of the Commission ; 

335. Chart: Federal Trade Commission cases as distributed 

among the 50 largest industries, showing value of prod- 
ucts; taken from the biennial census of manufacturers, 

1939 

• On file with the committee. 



1833 
1836 

1836 



0) 
0) 

(0 



1837 


0) 


1840 


2178 


1840 


0) 


1840 


0) 


1840 


(0 


1843 


0) 


1859 


2179 


1859 


2180 



1859 

1859 

1859 
1859 

1859 



2180 

2181 

2181 
2182 



Facing 
2184 



CONTENTS 

SCHEDULE OF EXHIBITS— Continued 



IX 



Number and summary of exhibits 



Intro- 
duced 
at page 



Appears 

on 

page 



336. Temporary National Economic Committee program of 

studies by the Federal Trade Commission 

337. Estimated scope of studies presented in Temporary Na- 

tional Economic Committee hearings under auspices of 
Federal Trade Commission 

338. Report to the Senate from the Chairman of the Federal 

Trade Commission on the steel industry and the "Code 
of Fair Competition" relating to that industry, Senate 
Document No. 159 

339. Report of the Federal Trade Commission to The President 

with respect to the basing-point system in the iron and 
steel industry, November 1934 

340. Report of the Federal Trade Commission to The President 

on steel sheet piling, June 10, 1936 

341. N. R. A. Code of Fair Competition for the iron and steel 

industry, as approved on August 19, 1933, by President 
Roosevelt 

342. N. R. A. Amendment to Code of Fair Competition for the 

iron and steel industry, as approved May 30, 1934, by 
President Roosevelt ' 

343. Federal Trade Commission findings as to the facts and 

conclusion and the order to cease and desist in the 
Pittsburgh Plus case 

344. Hearings before the Committee on Interstate Commerce, 

U. S. Senate, 74th Congress, 2d Sess. on S. 4055: To 

Prevent Uniform Delivered Prices 

34p, Federal Trade Commission report on its price bases 
inquiry, the basing-point formula and cement prices, 
March, 1932 

346. Federal Trade Commission report to the Senate relative to 

competitive conditions in the cement industry, Senate 
Document No. 71, 73d Congress, 1st Sess --. 

347. Federal Trade Commission report to Congress on its 

price bases inquiry, the zone price formula in the range 

boiler industry, March 30, 1936 

348- Manuscript: Federal Trade Commission Docket No. 3167, 
complaint against and answer of the Cement Institute as 
to violations of the Robinson-Patman Act and the 
Federal Trade Commission Act 

349. Manuscript: Federal Trade Commission Docket No. 3305, 

report on the findings as to facts and canclusions in the 
United Fence Manufacturers Association zone price 
case - 

350. Appendices to report of the Federal Trade Commission to 

The President with respect to allegedly collusive bids 
on steel sheet piling, June, 1936 

351. Chart: Intermarket competition with uniform market 

prices 

352. Chart: Market areas determined by competitive price 

differentials 

353. Chart: Normal" iiarket areas for multiple competing 

markets 

354. Chart: (Supplemental) Intermarket competition with 

uniform market prices 

355. Chart: Monopolistic versus competitive producers, results 

of discriminatory prices 

356. Chart: Identical (matched) delivered prices between two 

basing-points - 

357. Chart: Cross hauling in steel 

' On file with the committee. 



1859 
1860 

1864 



1896 



1896 



2185 
2185 



1864 


(') 


1864 


C) 


1864 


0) 


1864 


(0 


1864 


(0 


1864 


(') 


1895 


C) 


1895 


(0 


1895 


(') 



{') 



(0 



1903 


(0 


1911 


2186 


1915 


2187 


1915 


2188 


1916 


2189 


1918 


2189 


1925 
1940 


2190 
2191 



CONTENTS 
SCHEDULE OF EXHIBITS— Continued 



Number and summary of exhibits 



Intro- 
duced 
at page 



Appears 

on 

page 



358. Monopoly and Competition in Steel, an exposition of the 
basing-point system and its economic consequences on 
the capitalist system 

359-370. Appear in Hearings, Part VII 

371. Table: Sulphuric acid consumed in the United States, 

1933-1937, by industries 

372. Table: Quantities and percentages of sulphuric acid pro- 

duced in the United States from various raw materials 
for the years 1925, 1927, 1929, 1931, 1933 and 1934 

373. Table: Sulphur consumed in the United States, 1927- 

1937, by uses • 

374. Table: Sulphur produced, shipped, imported, exported 

and prices at the mine, 1903-1937 

375. Table: Pyrite prices, 1922-1929 

376. Table: Cost of production of sulphur, 1906-1937 

377. Officers and directors of the Texas Gulf Sulphur Company, 

1938 - 

378. Texas Gulf Sulphvir Company interlocking directorships, 

1937 - 

379. Officers and directors of the Freeport Sulphur Company, 

1938 

380. Freeport Sulphur Company interlocking directorships, 

1937 

381. Agreement, 1934, between Sulphur Export Corporation 

and Ufficio per la Vendita Dello Zolfo Italiano 

381-A. Agreement, 1923, between Sulphur Export Corporation and 
Consorzio Obbligatorio per I'lndustria Solfifera Siciliana. 
381-B. Letter, dated April 15, 1939, from Federal Trade Com- 
mission to Union Sulphur Co. requesting a copy of a 
1907 agreement between Union Sulphur and the 
Sicilian Co. 

Letter, dated Ttpril 20, 1989, from Union Sulphur Co. to 
Federal Trade Commission concciiiiiig the 1907 agree- 
ment. 

Letter, dated May 1, 1939, from Federal Trade Commis- 
sion to Union Sulphur Co. requesting that search be 
made for copies of 1907 agreement with the Hamburg 
Co. and its agreement with the Sicilian Co. 

Letter, dated May 3, 1939, from Union Sulphur Co. to 
Federal Trade Commission agreeing to search for 
copies of the 1907 agreement. 

Letter, dated May 11, 1939, from Union Sulphur Co. to 
Federal Trade Commission enclosing photostatic 
copies of translations of 1907 and 1908 agreements and 
cablegrams cancelling the agreements. 

Copies of translations of the agreements and cablegrams.. 

382. Copy of certificate of incorporation of Sulphur Export 

Corporation - 

383. Copy of agreement between Freeport Sulphur Co. and 

Texas Gulf Sulphur Co., dated OctobeV 26, 1928, to 
continue operation of Sulphur Export Corporation 

384. Copy of letter, dated October 9, 1934, from Sulphur 

Export Corp. to Duval Texas Sulphur Co. allocating 
orders for shipments of sulphur. 

Copy of letter, dated October 9, 1934, from Sulphur 
Export Corp. to Orkla Grube re preserving Scandi- 
navian and Finnish markets for brimstone 

Copy of letter, dated August 24, 1934, from Sulphur 
Export Corp. to Duval Texas Sulphur Co. allocating 
orders for shipments of sulphur to Scandinavian 
countries. 




2192 



1986 



2200 



1986 


2201 


1986 


2202 


1986 
1986 
1986 


2203 
2203 
2204 


1986 


2204 


1986 


2204 


1986 


2206 


1986 


2206 


1991 


2208 


1991 


2214 



1989 
1992 

1992 



1994 



2217 
2226 

2235 



2236 



CONTENTS 
SCHEDULE OF EXHIBITS— Continued 



XI 



Number and summary of exhibits 



Intro- 
duced 
at page 



Appears 

on 

page 



385. 



386. 



387. 



388. 



Letter, dated June 8, 1934, from Sulphur Export Corp. 
to Jefferson Lake Oil Co. agreeing on mutual coopera- 
tion in sulphur orders and shipments 

Letter, dated January 18, 1939, from Sulphur Export 
Corp. to Federal Trade Commission enclosing a copy 
of the agreement under which Union Sulphur Co.'s 
stock in Sulphur Export Corp. was sold to Freeport 

Sulphur Co. and the Texas Gulf Sulphur Co 

Copy of the agreement enclosed in the letter. 
Memorandum of agreement, made April 1, 1936, between 
Orkla Grupe A. B. of Lokkenverk, Norway and Sul- 
phur Export Corp., New York City ^ 

Financial report, including investroents, profits and rates 

of return for Texas Gulf Sulphur Co 

389. Financial report, including investments, profits and rates 

of return for Freeport Sulphur Co 

389-A. Letter, dated April 21, 1939, from Langbourne M. 
Williams, Jr., president, Freeport Sulphur Co., to Leon 
Henderson, Executive Secretary, Temporary National 
Economic Committee, commenting on parts of testi- 
mony before the Committee on the subject of sulphur. 
List of sources of statements made in Mr. Williams' 

letter. 

Copy of agreement between Sulphur Export Corporation 

and Consorzio Obbligatorio per I'lndustria Solfifera 

Siciliana, dated March 14, 1923. 

Letter, dated May 23, 1939, from R. H. Montgomery, 

Professor of Economics, University of Texas, a witness 

before the Committee on the subject of sulphur, to 

Willis J. Ballinger, director of studies and economic 

advisor to the Federal Trade Commission, containing 

comments on Mr. Williams' letter to the Committee. 

Memorandum concerning rates of return on invested 

capital lor Freeport Sulphur Co 

Memorandum of information on Texas Gulf Sulphur Co. 
containing: 

An itemized statement of sales for a p>eriod of one 

specific year (1938). 
A statement of total annual production and total 

annual shipments for the past ten years. 
A statement of all leases, purchases or contracts for 
lease of purchase on new deposits showing with 
whom the contracts of agreements were made and 
the consideration therefore from 1919 to date. 
A statement showing the number of workmen em- 
ployed in sulphur producing plants, total wages 
paid, number of officials, the amount of salaries 
paid for the period of one year, 1938. 
A statement of the number of stockholders present 

at the last annualmeeting. 
A statement of the number of tons of sulphur in stock 
as of December 31 for each of the past ten years.. 
Statement submitted to Federal Trade Commission by 
Freeport Sulphur Co. pursuant to the Commission's 

request dated February 7, 1939 

392. Correspondence relating to statement from Duval Sul- 
phur Co. pursuant to the request of the Federal Trade 

Commission 

Statement in reply to Federal Trade Commission's ques- 
tionnaire. 
' On file with the committee. 



390. 



391. 



1994 

1995 

1995 
2000 
2000 



2238 

2238 

2240 
2242 
2248 



2253 



2003 
2006 
2006 



(0 



XII 



CONTENTS 
SCHEDULE OF EXHIBITS— Continued 



Number and summary of exhibits 



Intro- 
duced 
at page 



Appears 

on 

page 



393. Correspondence relating to statement from Jefferson Lake 
Oil Co. pursuant to the request of the Federal Trade 
Commission 

Statement in reply to Federal Trade Commission's ques- 
tionnaire. 
434. Extract from the Agriculture Adjustment Adminis- 
trator's report of March 9, 1935 entitled "Agricul- 
tural Adjustment in 1934" 

476. Chart: Tensile strength of beryllium alloys in compari- 

son with other metals 

477. Letter, dated December 19, 1929, from Dr. V. Engle- 

hardt of Siemens & Halske, a German firm, to Dr. F. 
H. Hirschland, New York City, expressing a fear of 
discrimination against German applicants for patents 
•by the U. S. Patent Office 

478. Letter, dated November 21, 1930, from Dr. V. Engel- 

hardt, of Siemens & Halske, to Dr. F. H. Hirschland,' 
Metal & Thermit Corp. requesting that future patent 
applications in the United States be made in the name 
of the Metal & Thermit Corp 

479. Letter, dated January 15, 1935, from Dr. F. H. Hirschland, 

Metal & Thermit Corp. to Siemens & Halske A. G. re 
assignment of patents to The Beryllium Corp 

4^. Letter, dated December 3, 1930, from Dr. F. H. Hirsch- 
land, Metal & Thermit Corp. to Dr. V. Engelhardt, 
Siemens & Halske, in which Dr. Hirschland agrees to act 
for Siemens & Halske in their patent applications 

48L Agreement, from April 1, 1934 to March 31, 1944, between 
the Beryllium Corporation, New York City, and 
Siemens & Halske A. G., Berlin-Siemensstadt, Ger- 
many, together with Heraeus-Vacuumschmelze A. G., 
'Hanau, Germany, to cooperate with each other in the 
field of beryllium and allocating territory 

482. Chart: Price of beryllium from Brusli Beryllium Com- 

pany 

483. Table": Beryllium copper base prices of The Riverside 

Metal Company from March 1, 1933 to April 20, 1939. _ . 

484. Chart: Price of beryllium copper products from The 

Riverside Metal Co 

485. Statement of price policies of The Riverside Metal Co 

486. Letter, dated May 10, 1933, from H. T. Montague, pur- 

chasing agent. The American Brass Co., to^Brush Beryl- 
lium Company inviting bids on ton lots 'of beryllium 
master alloy 

487. Letter, dated November 2, 1934, from H. T. Montague, 

purchasing agent, The American Brass Co., to Brush 
Beryllium Co. requesting sample lot of 300 lobs of 
beryllium alloy and e.xpressing the desire of reducing the 
price in order to increase the sale of beryllium 

438. Letter, dated November 12, 1934, from H. T. Montague, 
purchasing agent, The American Brass Co., to C. B. 
Sawyer, Brush Beryllium Cb. again expressing the view 
that a reduction in price would increase the demand for 
beryllium 

489. TtiV)le: Price per pound of beryllium copper alloy from 
June 15, 1932 to April 20, 1939, prepared from data 
submitted bj" The American Brass Co 

4^)0. Ci'iart: Price of beryllium copper products from The 
American Brass Co 

(3 ifilii wiUi the committee. 




2019 

2030 

2030 
2030 

2032 

2042 

2083 

2085 

2085 
2089 

2092 
2093 

2093 

2093 
r093 



0) 

2276 
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2276 

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2287 
I 2289 



CONTENTS 
SCHEDULE OF EXHIBITS— Continued 



XIII 



Number and summary of exhibits 



Intro- Appears 
duced on 
at page page 



451. Letter, dated May 3, 1933, from The Riverside Metal Co. 
to The American Brass Co. requesting notice of any 
price changes of beryllium copper 

492. Letter, dated May 5, 1933, from The American Brass Co. 

to The Riverside Metal Co. announcing prices of beryl- 
lium copper ■ 

493. Letter, dated May 9, 1933, from The Riverside Metal Co. 

to The American Brass Co. acknowledging notice of 
price change in beryllium copper 

494. Letter, dated November 8, 1934, • from The Riverside 

Metal Co. to The American Brass Co. expressing agree- 
ment to await the action of American Brass Co. in price 
changes on ber3'Uium copper , 

495. Letter, dated October 4, 1935, from H. L. Randall, The 

Riverside Brass Co., to Clark Judd, The American Brass 
Co. re advancing the base price of beryllium copper 

496. Letter, dated March 1, 1939, from H. T. Montague, pur- 

chasing agent. The American Brass Co., to C. B. 
Sawyer, Brush Beryllium Co., advising Mr. Sawyer of 
losses incurred by The American Brass Co. on beryllium 
during the preceding year and about a sales promotion 
campaign to increase the demand for beryllium t;opper_ 

497. Letter, dated March 10, 1939, from H. T. Montague, 

purchasing agent for The American Brass Co., to 
C. B. Sawyer, Brush Beryllium Co. requesting secrecy 
on Dr. Sawj^er's part as to a reduction in the price of 

beryllium 

198. Letter, dated August 12, 1935, from H. L. Randall, 
president, The Riverside Metal Co., to Clark Judd, 
The American Brass Co. advising Mr! Judd of Mr. 
Randall's efforts to find out how much control The 
Beryllium Corporation has over the German patent 
situation 

499. Letter, dated October 26, 1937, from H. L. Kilborn, 

assistant manager, Torrington-Waterbury branches 
of The American Brass Co., to John A. Coe, Jr., sales 
manager. The American Brass Co., submitting a pro- 
posed price list suggested by H. L. Randall, president, 
The Riverside Metal Co . 

500. Letter, dated February 1, 1939, from Clark S. Judd, 

vice president. The American Brass Co., to J. F. 
Ackernian, Superintendent, Waterbury Branch, The 
American Brass Co., concerning the advisability of re- 
ducing the costs of producing beryllium alloys 

501. Chart: Price of beryllium from The Beryllium Corpora- 

tion 

502. Table: Proposed and known applications or uses for 

beryllium copper 

538. Letter, dated May 11, 1939, from F. H. Hirschland, 
president. Metal & Thermit Corporation, to Senator 
Joseph C. O'Mahoney, chairman. Temporary Na- 
tional Economic Committee, containing a statement 
showing the names and capital structures of the sub- 
sidiary corporations of Metal & Thermit Corp 

598. Memorandum, dated March 14, 1939, submitted by 
G. A. Stephens, chief statistician, Federal Trade Com- 
mission, at the request of Dr. A. Ford Hinrichs, mem- 
ber of the Committee representing the Department of 
Labor, on the relation of chain store gross margins to 
distribution costs and net profits 



2099 
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2100 

2100 
2101 

2104 
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2148 
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2298 

2299 



XIV 



CONTENTS 
SCHEDULE OF EXHIBITS— Continued 



Number and summary of exhibits 



Intro- Appears 
(liiccd on 
at page page 



760. Memorandum, dated December 28, 1937, of C. B. 
Sawyer, a witness before the Committee, of discus- 
sions, between himself and Dr. Merlub Sobel after 
Dr. Sawyer's presentation of his paper at the Ameri- 
can Chemical Society Meeting in Cleveland, Ohio, 
Tuesday, Dec. 28, 1937; submitted in connection 
with testimony before the Committee on the subject 

of beryllium 

Unnumbered. Memorandum, dated July 20, 1939, submitted by 
John T. Flynn, a witness before the Committee, 
in response to a request by Representative 
Hatton Sumners, vice chairman of the Com- 
mittee, containing a statement of the mort- 
gages on new home construction insured by 

the Federal Housing Administration 

Unnumbered. Statement of capital structure, stock ownership 
and board of directors of Siemens und Halske, 

A. 0., Berlin-Siemensstadt, Germany 

1171. Letter, dated September 19, 1939, from John A. Coe, Jr., 
general sales manager, The American Brass Co., to 
Thurman Arnold, member of the Committee, con- 
taining a list of instances in which that company has 
followed the published prices of competing companies.. 



2301 

2302 
2303 

2304 



INVESTIGATION OF CONCENTRATION OF ECONOMIC POWER 



TUESDAY, FEBRUARY 28, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:15 a. m., pursuant to adjournment on 
Friday, February 17, 1939, in the Caucus Room, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney presiding. 

Present: Senators O'Mahoney (chairman) and King; Representa- 
tives Sumners (vice chairman), Reece, and Wilhams; Messrs. Davis, 
Arnold, Thorp, Douglas, O'Connell, Patterson, Hinrichs, and Hender- 
son. 

Present also: Federal Trade Commissioners William Ayres and 
Charles H. March; Willis J. Ballinger, director of studies and economic 
adviser to Federal Trade Commission; William T. Kelley, chief 
counsel; Colonel Wllham Chantland, PGad B. Morehouse, and Mr. 
Walter Wooden, members of legal staff; Mr. Joseph Sheehy, Assist- 
ant Chief Examiner; Dr. Francis Walker, Chief Economist, and 
Colonel William England, Assistant Chief Economist, all of Federal 
Trade Commission. 

The Chairman. The committee will please come to order. 

The committee regrets that Commissioner Ferguson, of the Federal 
Trade Commission, who is a member of this committee, is confined 
at home with illness today. In his absence. Judge Davis, also a 
member of the Federal Trade Commission and alternate member 
of this committee, will have charge of the hearing which begins this 
morning. This is a presentation by the Federal Trade Commission. 

Judge Davis, do j^ou care to make an opening statement? 

Mr. Davis. A very brief one, Mr. Chairman. 

STATEMENT OF EWIN L. DAVIS, COMMISSIONER OF THE FEDERAL 
TRADE COMMISSION, WASHINGTON, D. C. 

Mr. Davis. Mr. Chairman and members of the committee: The 
Federal Trade Commission was organized soon after the approval, on 
September 26, 1914, of its enabling act. Under the statute, it took 
over the experienced staff of economic advisers and investigators of 
the antecedent Bureau of Corporations. 

Congress embodies in the act its expressed intention to preserve 
the Commission from political character and to maintain a consistent 
policy of administration. The fulfillment of this policy of detachment 
is of importance not only with respect to tjbe affiliations of the mem- 
bership of the Commission itself, not more than three of whom may 
be of one political party, but also with respect to its legal and economic 
staffs who have every 'opportunity, if they desire, to make the work 

1647 



1648 CONCENTRATION OF ECONOMIC POWER 

of the Commission their career without fear of partisan exigencies. 
Many of them have chosen to do so. 

In nearly a quarter of a century of study and endeavor to eliminate 
restraints of trade and monopolistic practices in interstate commerce 
the Commission has heard and decided a great body of cases, which 
are contained in its twenty-odd volumes of published decisions. 
These cases involved almost every field of industry. Many of the 
Commission's orders to cease and desist have been reviewed by the 
courts; and under a recent amendatory act each Federal Trade Com- 
mission decision is binding unless respondent shall within 60 days 
petition for judicial review. 

Moreover, the Commission has made more than 100 general or 
special investigations and studies. These have been conducted for 
the most part pursuant to congressional resolutions, or on request 
of the President or the Attorn ej^^ General. 

The Commission has thus studied and submitted one or more 
reports upon most American industries, including: Bread and flour, 
cement, coal — anthracite and bituminous, cotton and cotton prod- 
ucts, farm implements and machinery, fertilizer, news print and other 
paper products, petroleum products, lumber, milk, motor vehicles, 
textiles, tobacco, steel, copper, and meat packing. 

Many other investigations and reports may be accurately regarded 
as having a wider institutional character, including those upon 
agricultural income (5 reports); chain stores (33 reports, including an 
analysis of almost every phase of chain-store operation); commercial 
bribery; cooperative manufacture in foreign countries; cooperative 
marketing in the United States; cost of living; national wealth and 
income, industries having base price systems; resale price mainte- 
nance; electric and gas utilities (9-5 reports of the evidence and 6 
reports of the Commission's summarization and conclusions of fact 
and of law, together with its recommendations, were submitted to 
Congress). 

Practically all of the Commission's reports to the Congress were 
printed as public documents. 

The mere publicity of the facts developed in these inquiries gener- 
ally proved beneficial and often resulted in reforms forced by public 
sentiment or voluntarily adopted by those who were shown to have 
engaged in unlawful or unfair practices. Some of these investigations 
also resulted in prosecutions by the Department of Justice and a 
number of them resulted in the issuance of complaints by the Federal 
Trade Commission. 

Investigations by the Commission have several times resulted in 
the enactment of important congressional measures. 

The Commission's jurisdictional authority and experience have 
especially related to monopoly and the concentration of economic 
power and financial control over the production and distribution of 
goods; the causes of such concentration and control, and their effect 
upon competition; and the effect of the existing price policies of 
industry upon the general level of trade, long-term profits and 
consumption. 

Each of these topics is ex[)ressly made a matter of inquiry under 
Public Resolution 113, pursuant to which this committee is now 
workino:. 



CONCENTRATION OF ECONOMIC POWER 1649 

In the time allotted to the Commission we expect to show the 
situation in some detail as to competition in several industries. This 
will be done largely through the results of investigations heretofore 
made by the Conmiission into conditions in these industries, partly 
through documents from various sources on file with the Commis- 
sion and, to a limited extent, through expert and factual witnesses. 

The difficulties which would be entailed in a detailed presentation 
of the basic evidence before this committee are apparent from the 
fact that in a proceeding by the Commission against but one, though 
the leading, steel producer (the Pittsburgh Plus case of 1924), about 
18,000 pages of oral testimony and 23 large volumes of exhibits were 
received in evidence. In a case now being tried by the Commission 
against the Cement Institute and some 75 producers, about 2,800 
exhibits and 18,000 pages of oral evidence have been alreach'^ received 
before completion of the Commission's opening case. In some Com- 
mission cases hundreds of witnesses have been heard. 

To hear the case of a single industry of importance, to say nothing 
of the reception of proof as to many industries, w^ould doubtless con- 
sume more time than the busy members of this committee would be 
able to devote thereto. 

Therefore, it seems to us best to place at the disposal of the com- 
mittee the situation as we have found it to be in certain of the indus- 
tries impartially studied by the Commission. 

The Federal Trade Commission is unanimous in a desire to- aid the 
committee to the utmost of its ability, both in connection with the 
hearing of its representatives and in such other manner as the com- 
mittee may suggest. 

The Chairman. Now Judge Davis, who is to be your first witness? 

Mr. Davis. Mr. Chairman, Mr. Willis J. Ballinger, who has had 
general charge of the preparation of the material of the Commission 
for presentation to the committee, will be heard first. 

Representative Sumners. Judge Davis, I would like to ask you a 
question. In your preparation of this particular presentation, to 
what degree were you able to depend upon material already accumu- 
lated in your department? 

Mr. Davis. Well, as it will later be more definitely shown. Congress- 
man Sumners, to a very large extent. We have supplemented and 
brought down to date in some respects the material which had already 
been gathered in regular official investigations of the Commission or 
cases tried by the Commission. 

Representative Sumners. Mr. Chairman, may I say that the Com- 
mittee on the Judiciary is meeting on an important matter at 10:30 and 
I am going to have to go back over there now but I will get back over 
here as soon as possible. 

The Chairman. We will excuse you, but regretfully. 

All right. Judge Davis, will you be good enough to proceed? 

Mr. Davis. Mr. Ballinger, will you proceed in your own way, in 
making a statement as you desire in connection with the presentation 
of the Commission. 



124491— 39— pt. 5- 



1650 CONCENTRATION OF ECONOMIC POWER 

STATEMENT OF WILLIS J. BALLINGER, DIRECTOR OF STUDIES AND 
ECONOMIC ADVISOR TO THE FEDERAL TRADE COMMISSION, 
WASHINGTON. D. C. 

PRESENTATION OF FEDERAL TRADE COMMISSION STUDY 

Mr. Ballinger. Mr. Chairman and members of the Comimittee: 
The Federal Trade Commission has been requested by the Temporary 
National Economic Committee to assist in the study of monopoly 
and monopolistic practices found in American industry. 

The Chairman. May I interrupt you here merely to ask that it 
may be recorded in the record that you are Willis J. Ballinger, Director 
of Studies for the Federal Trade Commission, in pursuance of the 
work of this committee. 

Mr. Ballinger. For the purpose of a preliminary survey the Com- 
mission is presenting the following testimony. 

The presentation is in three parts, a prologue, a general summary 
of Federal Trade Commission experience over the past 7 years, and 
an account of monopolistic conditions existing in 13 industries at the 
present tim.e. 

In the prologue, the Commission offers its definition of the problem 
at hand, involving the sense in which it will use the terms "capitalism," 
"monopoly," and "competition." This section deals also with the 
relation of free capitalism to democracy as a background for the dis- 
cussion of actual restrictions to freedom as found in business prac- 
tices. Testimony will be introduced showing in addition the relation 
between monopoly and the failure of business to recover full pros- 
perity. 

Part 2 deals with the recent experience of the Commission in the 
enforcement of the antitrust laws. The testimony will indicate the 
kinds of monopolistic practices uncovered by the Commission in 
numerous cases and in its general investigations. Particular atten- 
tion will be given to the investigations covering public utilities, farm 
machinery, chain stores, and agricultural income. The obstacles 
encountered in attempting to protect competition will be indicated, 
and the reasons for the failure of section 7 of the Clayton Act to 
accomplish its purpose. Section 7 was designed to prevent the con- 
centration of the control of production in industry and to prohibit 
one of the principal methods by which m"bnopolistic practices are 
greatly facilitated. 

Part 3 presents a series of 13 examples of important industries, 
showing the existence of monopolistic practices at the present time. 
Our budget and the time available have not permitted us to give, at 
this time, as complete a picture of the extent of monopolistic condi- 
tions in American industry as exists. 

In selecting these examples we have tried first of all to obtain illus- 
trations of different varieties of monopoly. We have also endeavored 
to select industries that are of immediate interest to large groups of 
people. Some of them directly affect the consumer, others provide 
.materials to a multitude of small industries, and still others are of 
primary interest to the producers of raw materials who must sell in 
a market where monopolies are apparently the only buyers. Cases 
of double monopoly occur, where the industry controls both the raw 
material prices which it pays and the prices at which it sells its prod- 
uct. These examples will also indicate the fact that at times a raw 



CONCENTRATION OF ECONOMIC POWER 1^51 

material may pass through several layers of monopoly before reaching 
the final consumer who must pay the costs of all these interferences 
with competitive trade. Finallv, the Commission has selected 
examples of both largo and small industries, to illustrate the fact 
that bigness and monopoly, although often related, are not always 
found together. 

In this investigation, the Commission is not primarily interested 
in the legality or illegality of the practices or conditions described. 
In the Commission's opinion, one of the gravest problems before the 
Temporary National Economic Committee is one of recommending 
suitable changes in our present laws which will lead to an effective 
encouragement and protection to free initiative in business. Many 
of the present antitrust laws were aimed at the crude monopolistic 
practices of an earlier day, chiefly the acquisition of ownership of 
competitors, or collusion and conspiracy to refrain from competition. 
The proof of collusion and conspiracy has always been difficult. With 
the passing years, the difhculties have increased enormously. Today 
there are more subtle ways of restraining trade, where the difficulties 
of proving any conspiracy or collusion are frequently baffling. In 
law a monopolistic practice is one that can be proved to be a violation 
of existing law. To economic science, however, a monopolistic 
practice is one that interferes with the flow of free and fair competition 
in industry, even though the practice or condition may be unreach- 
able by existing law. 

When the economist sees prices stubbornly resisting the influence 
of falHng demand, holding steadily to a high level while production 
shrinks almost to nothing, he knows that competition has ceased to 
work at that point, though proof of any conspiracy to fix prices may 
be impossible or exceedingly precarious. When he sees technical 
improvements reducing costs in an industry, with no corresponding 
reduction in the price of the product, he knows that something is 
there that is not good for the health of the competitive system. 
When he finds the Government is confronted with a number of bids, 
presumed to be secret, aU identical to the last cent, it is clear to him 
that some obstruction is lodged in the arteries of trade. When he 
finds in industries excessive profits and inflexible prices, or excessive 
production and inflexible prices, or rising prices and falling costs of 
production over a long period of time, he knows that monopolistic 
conditions are present, even though the detection of any conspiracy 
to restrain th6 law of supply and demand may be hopeless or extremely 
difficult. 

It is the Commission's opinion that the disease which it character- 
izes as restraints of trade in sundry form is equally fatal to American 
capitalism, whether it originates in the overt act of an individual, in 
any encouragement offered by Government itself, or in a contagious 
virus that cannot be located by any existing microscope of the law. 

The first fact that must be recognized as the basic cause of the pres- 
ent investigation is that the laws against monopoly, beginning in 1890, 
as generally construed by the courts, have proved ineffective in pre- 
venting the steady growth of monopoHstic practices in American in- 
dustry. 

In the opinion of the Commission, the chief obstacle to a clear 
analysis of the problems of monopoly will be found in the confusion of 
terms, the use of such words as capitalism, monopoly, and competition, 
with two or more incompatible meanings at the same time. 



1652 CONCENTRATION OF ECONOMIC POWER 

This difficulty cannot be easily and quickly overcome by setting 
down a list of standard definitions. The acceptance of practical defi- 
nitions of the subject must be built up by detailed examination of 
many lines of industry, each ■w'ith its own peculiarities of circumstance 
and behavior. In advance we can only suggest the objective toward 
which the Commission believes the discussion should be aimed. 

Capitalism is often used to describe several different aspects of a 
business system, such as the fact that capital investment is employed 
in production, or that the means of production are privately owned. 
So far as the first of these definitions is concerned, it applies equally 
to Fascist, Communist, and monopolistic systems of industry, all of 
which use machinery and fixed capital. For the purposes of the pres- 
ent discussion such a definition leads nowhere. The Commission 
desires to make plain that the aspect of capitalism which is here under 
examination relates to the competitive relationship among producers 
and consumers operating for their own interest in the hope of economic 
gain. 

Capitalism and democracy, to the man in the street, appear to have 
been developments of the last 150 years. Sometimes he remembers 
vaguely that the Greeks had a word for democracy, but students are 
aware that for thousands of years capitahsm and democracy have 
been partners in a long and indecisive struggle for human liberty. Our 
own experience in America has been only one instance of the vicissi- 
tudes of the partners, capitalism and democracy. To realize that 
capitalistic systems have risen, flourished, and perished many times 
before the coming of modem capitahsm, it is necessary to laiow that 
capitalism can exist without automobiles, radios, or giant corporations 
utilizing costly and complex machinery for the production of goods. 
We must not confuse technology or variety of production with the capi- 
taUstic system itself and think that modem capitahsm is something 
brand new because it has introduced tremendous improvements in the 
production and distribution of goods. Stripped of its superior tech- 
nological equipment, modem capitalism is essentiallv the same as 
capitalistic systems which appeared and disappeared thousands of 
years ago — theoretically a system of free markets, where any man may 
sell his labor or his products according to the laws of supply and de- 
mand. Reasonable freedom of initiative and a fair chance to compete 
in the market are the essence of capitalism, and democracy is the 
traditional method by which people have tried to protect this freedom 
against the excessively predatory man. 

There are many examples of free markets developing and democracy 
organizing itself to ward off robber bands and hostile neighbors. 
With organization, however, came the opportunity for peaceful ex- 
ploitation from within. Almost at once we see the beginning of inter- 
ference with free trade by what we now call rackets, and soon by or- 
ganized controls operated by powerful private interests. Sometimes 
interference with the free market was vested in a rich merchant, or 
society of merchants, sometimes in a guild, sometimes in a feudal lord. 

In one way or another the system of free competition is broken ' 
down. Trade is limited and confined, sometimes for centuries that 
later historians will call "dark ages." For a time democracy prevailed 
and drove back predatory businessmen. In the end a few men found 
means of standing legally across the market and taking toll, democ- 
racy went under and the victors fattened on the market until they 



CONCENTRATION OF ECONOMIC POWER 1653 

(destroyed it, and through the concentration of wealth established 
^yranny. Frequently the burden of economic parasitism became too 
great for the industry of the people to carry; a war or revolution broke 
down the ruling class, or the discovery of new lands offered an escape 
for the downtrodden, and capitalism, the system of free market, 
appeared again to begin a new cycle. The long battle between trade 
and the tribute taking has gone in cycles of victory and defeat. 
Through the centuries the struggle of capitahsm and democracy 
against the ancient craft of toll taking has swung to and fro. Free 
enterprise has risen and perhaps for many generations had defended 
itself with the ballot box against the growth of concentrated economic 
power which devours capitalism by seizing markets through the power 
of money, destroys free enterprise, and takes tribute at every corner. 
Then in a day of weakness democracy has been seduced or conquered, 
and wealth has taken control of industry and trade. 

Sapped by the growth of plutocracy, civilization has burst into a 
feverish orgy of degeneracy and crime and has then sunk into a long 
dark age until there came a new birth of freedom and the beginning 
of a new struggle. 

Modern capitalism was the revolt of producers and consumers 
against the nighway robbery of the feudal lords. It was another flag 
of freedom appearing after a long night of concentrated economic 
power and political tyranny. Men would band together to work and 
trade with one another and to fight off the oppressor. But, as cap- 
itahsm developed, the old barons came back in new forms. In the 
towns where modern capitalism began its struggle with the feudal 
order, the new free market system eventually degenerated into a 
completely plutocratic and monopolistic guild system. Democracy 
and capitalism were trapped once more. Then capitalism escaped for 
a brief moment to the countryside — to country fairs and auctions 
where free enterprise began anew, and what a man made he could sell 
and put the profit in his pocket. But very quickly the spark of free 
enterprise was snuffed out by the King who embarked on the royal 
business of selling monopolies to favorites and insiders. Free trade 
vanished once more until the coming of the industrial revolution. 

Here on American soil another stretch of free enterprise has pre- 
cipitated the old historic struggle — the efforts of democracy to save 
its partner, capitalism, from its ancient foe, predatory business prac- 
tices which destroy free enterprise. 

Lest the people learn the lesson of history, the dark powers of 
concentrated wealth choose in each new struggle a new name for 
themselves, avoiding the old names that carry the historic smell of 
tyranny. Tyrant, satrap, pharaoh, khan, caesar, emperor, czar, and 
kaiser have left their sulphurous trail across the pages of history. 
Today in Europe they have new names. In America we call the lesser 
rulers "business leaders" and "corporation lawyers," the great ones 
are simply kings — oil kings, match kings, soap kings — hundreds of 
them. The great overlord who will draw them all together into a 
perfect plutocratic dictatorship has not yet appeared. But there are 
portents in the heavens which betoken his opportunity. 

History seems to indicate that in the end democracy has always 
been destroyed as the free competitive markets of capitalism have 
been overcome by predatory business practices. Each new capital- 
istic system has beeji like a man passing through life among the in- 



1654 CONCENTRATION OF ECONOMIC POWEB 

visible germs of fatal disease until at last one of the arrows of death 
gets him and he dies. Every time a democratic people succeeds in 
beating back, the powers of high finance, protecting fair competition^ 
and preventing the operation of special privilege, capitalism and free- 
dom are saved for the moment. The next moment the danger 
appears again from some new quarter and must be once more repelled 

There is no evidence, however, that capitalism and democracy are 
limited to a certain length of life by natural law. When they die, 
their deathbed is always laid in the midst of palatines and slums and 
concentrated economic power. The natural law appears to be that 
the price of freedom is eternal vigilance against the growth of such 
concentrated economic power. 

The question whether capitalism in the world at large has now 
reached another autumn, the beginning of a long winter of darkness 
and stagnation j is hardly an academic one. Some of the greatest 
industrial areas of the earth are already organized in dark-age forms. 
Freedom has been not merely lost, but repudiated and cast out. 
The future, abroad at least, so far as we can see, points toward 
destruction rather than toward new triumphs of progress and improve- 
ments in the standard of living. 

Our country has slipped down from a precarious peak of prosperity 
into a long plateau of depression. The question is a vital one, 
whether we are at the end of our growth as a free democracy. If the 
answer is that our dream of freedom is over, it will not be on account 
of the conquering power of distant enemies but because of the same 
internal disease that has destroyed capitalism in the past and in 
other parts of the world during the present century. Our duty here 
is to locate that aspect of capitalism that is vital to freedom, and to 
find the means by which that vital element may be preserved and 
cultivated. 

In examining the operation of our present system of trade, the 
Commission believes that competition must be regarded in the light 
of the effects that are desired. To avoid degeneration into totalitarian 
controls, something that we know as free initiative must be permitted 
and encouraged. The details of business enterprise, of risk and 
adventure, must in some substantial degree be the free action of 
individuals operating in a system of fair competition. To preserve 
a field of free action there must be safeguards that will prevent the 
growth of powers that are destructive of such freedom. 

Whatever the details of the obstructions to trade that will be found 
by the Economic Committee, for the present the Commission lumps 
them together in this discussion as being varieties of monopoly. 

The Commission believes that whatever may have been the im- 
mediate causes of the present depression, the effects have been 
aggravated by the lethargy of the capitalistic system, a lethargy due 
to a steady growth of monopolistic practices in American industry 
and trade. The failure of controlled prices to follow the falling 
market in 1930 was apparently a factor in prolonging and deepening 
the collapse of production and employment. 

Artifically high prices appear to have been a factor in the unwhole- 
some lack of buying power that has so long interferred with receoverj^. 
In 1936 and 1937, it seems that artificial and excessive increases m 
prices were in part responsible for limiting the growth of prosperity 
and turning the curve of production downward. 



CONCENTRATION OF ECONOMIC POWER ]655 

The fact appears to be establshed that price and production con- 
trols, set up in the hope of obtaining larger profits at the expense of 
the business system as a whole, have succeeded in so poisoning the 
whole sj'stem so as to defeat even theu' own purposes. A cancer may live 
successtully at the expense of the body of its victim only until it kills 
the body and dies with it. There appear to be symptoms indicating 
that monopoly has so far weakened the body of capitahsm that both 
are in danger of dissolution, to be followed, perhaps, as in other nations, 
by some kind of authoritarian social order which would be highly 
distasteful to the American people. 

The remarkable difficulty of economic recovery, and the ominous 
developments abroad, indicate the need for serious investigation and 
action to relieve capitalism of as much as possible of the deadfening 
effects of trade restraints. Other measures may also be necessary, 
but no program of recovery will restore a healthy capitalism if it fails 
to include a restoration of healthy competition in industry. 

The Commission desires to make clear its assumption that the 
resolution establishing the Temporary National Economic Committee 
directs the committee to seek for means of protecting free and fair 
competition, not for means of giving it a decent burial. The Federal 
Trade Commission, in the course of its work, has become familiar with 
the existence, of a sentiment favoring a relaxation of the laws against 
monopoly. Proposals are constantly made, and no doubt will be 
made again, for the organization of price and production controls under 
public sanction, wnth the purpose of creating monopolies in industries 
where they do not now exist, or of sanctioning them where they exist 
by evasion of the law. 

The Commission stands unalterably opposed to any general legisla- 
tion permitting the organized control of prices and production by 
private business. It subscribes fully to the viewpoint of a distin- 
guished American jurist and social philosopher. Justice Brandeis, 
when he said some years ago, 

You cannot have true American citizenship, you cannot preserve political 
liberty, vou cannot secure American standards of living unless some degree of 
industrial liberty accompanies it. And the United States Steel Corporation and 
these other trusts have stabbed industrial liberty in the back. They have crushed 
it out among large groups of our people so completely that it will require years to 
restore our industries to a condition of health. , 

The Commission recognizes that in some industries technological 
necessity or national defense may require the establishment of legal 
monopoly; but this development should be kept, in the Commission's 
opinion, to as narrow limits as possible. Public utilities do not 
belong, theoretically, in a free capitalistic system; they necessarily 
land in Government regulation, and some of them already have 
landed in public ownership. 

For the great bulk of American industry and business in which no" 
technical necessity or other unusual circumstance for monopoly 
exists, the Commission holds that free competition, protected against 
unfair practices, is essential. In order, to preserve capitalismand 
democracy, we do not have to keep absolutely every business in a free 
form, but we have to keep enough free business to make this in general 
a free ootintry. 

If, in an effort to prevent unfair practices, free business is permitted 
to organize and establish its own rules of action, the result will inevi- 
tably be to cover all business into a monopoly system. This road 



1656 CONCENTRATION OF ECONOMIC POWER . 

leads directly to-some form of authoritarian govenxment. The aban- 
donment of free capitaHsin here, as in other Da,tions, will require the 
abandonment of democracy. . The Commission suggests, therefore, 
that this committee will do well to oppose any attempt that may be 
made to obtain its sanction for laws looking to the organization of 
free industries for price and production control. 

Finally the Commission feels it to be vital to the success of this 
investigation to recognize that recovery at any price will not satisfy 
the needs -of the situation. We may be tempted to abandon all hope 
of restoring capitalism and to resort to a mere recovery of production 
and employment in the shelter of an authoritative governmental 
system of planned industry. The Commission does not regard such 
an outcome as one to be desired. On the contrary, the question is 
one of restoring a degree of flexibility and vitality to the capitaUstic 
system that will allow full prosperity with freedom. To kill the pa- 
tient and substitute someone else is not a satisfactory cure. Indeed, 
it feels that such a cure would be fraught with the greatest peril to 
the real economic progress of the American people in the years to come. 
It is in competitive markets that mankind has made his greatest prog- 
ress, and the words of Woodrow Wilson written many y^ars ago are 
a sound admonition to all civilizations that seek to rise to higher 
levels of economic achievement. 

American industry has always thriven, when it has thriven at all, on freedom; 
it has never thriven on monopoly. Limit individual opportunity, restrict the 
field of originative achievement, and you have cut out the heart and root of all 
prosperity. You cannot use monopoly in order to serve a free people. We pur- 
pose to prevent private monopoly by law, to see to it that the methods by which 
monopoly are built up are legally made impossible. We design that private 
limitations on individual enterprise shall be removed so that the next generation 
of youngsters, as they come along, will not have to become prot6g6es of trusts 
but will be free to go about making their own lives what they will. 

Mr. Davis. Mr. Chairman, I would like to ask permission to have 
Mr. Ballinger present the witnesses. 

Senator King. May I ask Mr. Ballinger one question? I gather 
from your exposition this morning that you would not think it would 
be inconsifetent to have planned economy, that planning being done 
by the Go'^ernment or by bureaucratic agencies. 

Mr. Ballinger. Yes. 

Senator King. In other words, you believe in the right of initiative 
of the indiiddual and desire that they should have a free field in which 
to operate' 

Mr. BAtLiNGER. I believe business decisions should be made by 
businessmen operating under a system of rules protecting fair com- 
petition. 

Senator King. You ure not advocating, as I interpret your address 
this morning, a revival of the N. R. A.' 

Mr. Ballinger. No. 

Senator King. Along with its wretchedness, irregularities, and 
oppression. 

Mr. Ballinger. That would be the end of American democracy. 

Professor Fetter, will you take the stand? Will you state your 
name for the/ record? 

Professor Fetter. Frank A. F<etter. 

(The witness was duly sworn by the Chairman.) 

> National Reccvery Administration. 



CONCENTRATION OF ECONOMIC POWER 1657 

TESTIMONY OF FRANK A. FETTER, RETIRED PROFESSOR OF 
ECONOMICS, PRINCETON, N. J. 

Mr. Ballinger. What is your present occupation? 
' Professor Fetter. Retired teacher. 

Mr. Ballinger. At what universities did you teach? 

Professor Fetter. I taught successively at Indiana University, 
Stanford University, Cornell, Princeton. 

Mr. Ballinger. How many years were you professor at Princeton? 

Professor Fetter. Twenty — 1911-1931. 

Senator King. I think we all know Professor Fetter. He has 
written one of the ablest books I have read in my life. 

Mr. Ballinger. All I want to say, Senator, is that I am presenting, 
as the first witness of the Federal Trade Commission, a man who has 
devoted a lifetime to the study of monopoly. 

The Chairman. Let's get the name of that book in the record. 

Mr. Ballinger. "The Masquerade of Monopoly." 

The Chairman. You may proceed, Professor Fetter. 

Professor Fetter. Gentlemen, I have been asked to open the pro- 
logue of this portion of the monopoly hearings, and the purpose of my 
comparatively brief discussion is to consider the fundamental nature 
of monopoly, and of competition in relation to our contemporary 
problems of business organization and price policy. I am quite 
conscio.us of the fact that in its general nature what I shall say is 
distinctly academic. Of course, as an old teacher I use that in a 
rather favorable sense of the term, and I expect some sympathy from 
several members of the committee here because they, too, have been 
tarred with that stick. There is another sense of the term "academic" 
which we shall abjure, I am sure. 

The service of anything I may say, if there is any service, is in the 
nature of a signpost. One cannot be said to be making much mileage 
when he stops to read the signpost ; he is losing time. But if he doesn 't 
stop to read the signpost and takes the wrong road, the faster he travels 
the .farther he is from home, and the whole history of the monopoly 
problem throughout the ages is full of lessons in that matter. 

Tremendous confusion is caused by different meanings of words. 
In law and in civil conversation a large part of our differences consists 
of word differences. The wCSyds "monopoly'' and "competition" are 
used in various seoses by the courts, by men in business, and by legis- 
lators discussing the matter as you are discussing it here. There is 
need to get some perspective on the subject, and I question whether 
we are, comparatively, losing time if we glance 'at the history and 
development of the forms of bphavior which we describe as monopo- 
listic or competitive. 

I freely admit that very taiuch of this sort of thing might become a 
waste of your time. It is like a pinch of salt which is of advantage 
only if it is used in great moderation. 

HISTORY OF MONOPOLY 

Professor Fetter. The thing "monopoly," if not the name, is doubt- 
less as old as human society, as economic organization, as the exchange 
of goods. It doubtless appears, certain phases of it, in the Code of 
Hammurabi. It was doubtless common in Babylon, and we have 



1658 CONCENTRATION OF ECONOMIC POWER 

direct evidence of it in ancient Egypt. But the first use of this word 
as it occurs in the Greek that has been discovered is found in Aristotle's 
'Politics, at the date of 347 B. C. It is a derivative of two Greek roots, 
'monos," alone, and "polei," to sell; and it occurs in the Greek in 
two forms, feminine and neuter, "monopolia" and "monopolion." 
The Romans took the neuter form of the term over into Latin, 

Now as it occurred among Greeks three or four centuries before 
Christ it meant one of three things, and, connected by a certain com- 
mon nature, the exclusive sale by a city or state, that is state monopoly, 
T. V. A., perhaps; second, the exclusive right granted to a private 
person, the exclusive legal right granted by a city to a private person 
to carry on trade; and, third, the exclusive power of an individual to 
control the supply of goods. That is the sense in which Aristotle 
first refers to it, as to a man who bought up all the oil presses and in 
a fruitful year was able to exact a great tribute. Thus there were 
monopolies of all kinds in the days of the Ptolemies in Egypt, and in 
Greece, and they began to appear rapidly in the Roman republic. 

We need only to add another variation to have about everything 
that we can think of today under monopoly, namely the union of a 
number of persons by combination or inclusion, and there you would 
have the four different varieties that pretty nearly cover the whole 
field of monopoly today. 

The Romans seem to have been largely free from monopoly until 
the days of the Empire. They had a pretty well developed system 
of free capitalism excepting, of course, as it was affected by the institu- 
tion of slavery. The use of the term "monopoly" in Latin was by the 
Emperor Tiberius who introduced the word with an apology, as being 
a new word unfamiliar tO the Roman ears. 

The naturalist Pliny, in the year A. D. 79, records the frequent 
complaints of the citizens against the exactions of monopoly and then 
increasingly as the Roman power in the west declined, in the third 
and fourth centuries, monopolies were created by grant of government 
and sold to private citizens as a means of replenishing the imperial 
treasury — very remindful of some of our political contributions today. 

In browsing through literature on the subject I came across this 
statement which seems to have been the original form of the Sherman 
Act: 

We command that no one may presume to exercise a monopoly of any kind 
of clothing or of fish or of any other things serving for food, or for any other use, 
whatever its nature may be, either of his own authority or under any rescript of 
an Emperor already procured or that may hereafter be procured, or under an 
imperial decree, or under a rescript signed by our Majesty; nor may any persons 
combine or agree in unlawful meetings that different kinds of merchandise may 
not be sold at a less price than they may have agreed upon among themselves; 
and if anyone shall presume to practice a monopoly, let his property be forfeited 
and himself condemned to perpetual exile. 

You see, we have softened the terms of the Sherman Act con- 
siderably. 

And, in regard to the principals of other professions, if they shall venture in the 
future to fix a price upon their merchandise and to bind themselves by agreement 
not to sell at a lower price, let them be condemned to pay 40 pounds of gold 

an enormous sum, of course, in that day. 

This sounds exceedingly modem, but it was an edict of the Emperor 
Zeno 1407 years before the Sherman Act, in the year A. D. 483. 
This was included just 50 years later in the Code of Justinian, 533, 



CONCENTRATION OF ECONOMIC POWER lg59 

revised and issued again in 534, and continued until the downfall of 
the Eastern Roman Empire, to be a part of Roman law. It had its 
influence more or less on all the civil codes of Europe. 

Everywhere that the exchange of goods occurs, monopoly appears 
there in some form and in some degree. One American writer said, in 
essence, "Monopolizing represents an effort to avoid taking chances," 
or we might say, in essence monopoly represents some form of specific 
power or privilege in the sale or purchase of goods. It is the effort of 
some traders to get more favorable terms and higher prices, or to* 
render less service by excluding or softening competition of other 
traders. It is universal, it is insidious, it is all pervasive, and tends 
always to become intermingled with political action and social 
privileges. 

The general moral, then, of all this, is that monopoly is both ancient 
and ubiquitous. There is nothing surprisingly original about this 
committee. It is not the first time that statesmen have gathered 
together to try to find some remedy for tliis problem, and it will not be 
the last time in human history. 

The Chairman. You are not very encouraging, Professor. 

Professor Fetter. I thought — a little modesty is always well, you 
know, at the beginning of a great task. 

Now a few words regarding the historical development in medieval 
and modem times. In feudal times — I mean by that from the year 
about 800 to 1000 as the depth of the Dark Ages — monopoly as a fact 
flourished in many forms, but the word monopoly had been lost even 
in the medieval Latin, and it did not recur until a renewed study of the 
Greek literature in the thirteenth century. DuCagne, the Latin 
lexicographer, records it as of 1268. 

Feudal monopolies consisted in exclusive rights granted usually by 
the crown to nobles, monasteries, corporations, important individuals, 
for fishing, salt mining, ferries, gristmills, and many other kinds of 
activities, and tliis is the source and basis undoubtedly of our laws 
of common carriers and of our laws regarding industries that are 
affected by a public interest. 

That was more or less the crucial test that the industry was monopo- 
listic, and therefore was subject to special kind of control. 

In England the word monopoly was first used by Sir Thomas 
Moore in the Latin in his Utopia in 1516, and again in English in a 
later work in 1534, and it was destined to have a very large part in 
th© discussions of England during the ensuing century, and until the 
time of the Puritan Revolution and Cromwell. Indeed, the issue, of 
monopoly between the years 1597 and 1640 was quite fundamental in 
the causes leading to the beheading of Charles I, and later was very 
fundamental undoubtedly in bringing on and accentuating the horrors, 
of the Frencn Revolution. 

Paraphrasing the words of Patrick Henry, let George III profit by 
their example. 

In 1597 the Parliament courageously opposed the granting by 
Queen Elizabeth of patent monopolies. In 1603 the famous case of 
Garcy v. Allen declared such a patent, for the making of such a simple 
tiling as playing cards, void as against the common law, and the reasons 
given by the court sound very modem indeed: first, that it makes^ 
prices dearer to the buyer; and, second, that it deprives workmen of 
their employment. . 



1660 CONCENTRATION OF ECONOMIC POWER 

In 1624 was passed the statute of monopolies forbidding granting 
by the Crown of exclusive right of trade, and this statute did not apply, 
however, to Crown patents for new inventions or to grants made by 
Parliament, and to certain other ancient grants and privileges. 

Particular significance attaches to these episodes between 1597 and 
1624, and for that I dwelt upon them somewhat, because they served 
to impress upon the Anglo-Saxon law and upon the minds of the 
judges and lawyers a somewhat narrow conception of monopoly as 
an exclusive political grant. The lawyers think of that as t*he primary 
meaning of monopoly from which the broader meanings have devel- 
oped. On the contrary, for thousands of years the word "mo- 
nopoly" had had the broader meaning; and the particular historical 
chance discussion in the time of Queen EUizabeth gave to the English 
law this narrower conception. The economic conception of monopoly 
has continued in the past 200 years to bear the broader meaning, 
not of an absolute, unlimited, exclusive power to sell, which is of 
a political nature, but also as a relative limited power to restrict 
supply, bounded on all sides by potential competition and substitution 
and a multitude of things. The concept of absolute monopoly is 
'hardly conceivable in the economic sense, but monopoly is essentially 
a policy of scarcity, of reducing supply, of decreasing the number of 
sellers, and decreasing their independent action in selling as opposed 
to competition as a policy of production and plenty. 

The Einstein doctrine of relativity applies very fully to the whole 
concept of monopoly. It is relative. It shades off by gradations and 
a great deal of the controversy comes from one person thinking of it 
as an absolute, 100 percent, quality, and the other thinking of it as a 
modified, limited quality, and undoubtedly some of the difficulties of 
the court — I say this as a layman who has industriously studied many 
of these decisions from an economic standpoint — seem to begin 
through conceiving of a monopoly as an absolute thing, and if they 
found 30 percent or 40 percent or 50 percent of the industry outside 
of monopoly, then there was no monopoly at all. It was not absolute. 

Now, competition is in a sense the counterpart of monopoly. The 
Supreme Court has said in th€ so-called Harriman case, (226 U. S. 61, 
Union Pacific Railroad), "To compete is to strive for something which 
another is actively seeking and wishes to gain." — Justice Day speaking 
for a unanimous court. 

MEANING AND APPLICATIONS OF COMPETITION 

Professor Fetter. From its derivation the word "competition" has 
a broad and general meaning and numerous applications. It is, to 
rephrase it, a rivalry to excel in some activity or to attain some specific 
end. As far as mere etymology goes, the word "cooperation" and the 
word "competition" are almost interchangeable, and they are fre- 
quently confused in discussion, but they have taken diametrically 
oppooxoe directions in their development. When you cooperate, you 
work along with a person, expecting to divide the results. When you 
compete, you work against that person, not necessarily in a hostile or 
mean or injurious sense, but you work against that person in order to 
get the result yourself. 

In the^ theory of biological evolution plants and animals compete 
both as individuals and as species for their place on the earth. In 



CONCENTRATION OF ECONOMIC POWER IgQl 

human society there may be competition on the physical plane, the 
mental plane, legal plane, economic plane, and other planes between 
individuals and groups of individuals. This competition may be 
friendly or unfriendly; it may be for pleasure, for sport, in games, or 
to injure or destroy. Consequently, the word "competition" must 
always be used with great circumspection, with Umitations and ex- 
planations. It is determined by its context, by the purposes for 
which it is being used. 

All competition in human society is more or less regulated and 
must be, the rules beiag adopted for the purpose designed in the com- 
petition. For example, in running as in other sports, there is need 
for referees, umpires and judges, who have to call fouls. Most 
criminal laws prohibit certain kinds of competition, preven,*t the 
stronger man from beating the other one on the head, and a large part 
of our civil law having to do with fraud and other methods of cal'rying 
on business are directed to the same end. 

Just a word regarding a misleading identification of economic com- 
petition with laissez faire, or noninterference, which has become very 
common. This is a result of a purely historical accident. In the 
eighteenth century the way toward better competition was the 
abolition of large numbers of existing medieval, and many of them, 
fuedal, privileges. Consequently, those favoring competition were 
always favoring the cessation of interference by government. But 
under other conditions competition can only be preserved by certain' 
kinds of interference; the rules of the game that I have been speaking 
of must be laid down, and through all the Middle Ages in the growttt 
of trade in towns of Western Europe there were many rules directed 
toward enforcing competition, making the sale of goods impossible 
outside of certain organized markets and- without following certain 
rules. 

And that brings us to the question, very fundamental certainly to 
the work of the Federal Trade Commission^ of fair and unfair com- 
petition. These terms are comparatively recent in our law and in 
popular speech, but the actions they denote have always been recog- 
nized in any concept of competition and must be. 

Fair competition, most simply defined it seems to me, means in* 
accord with the rules of the game, and unfair competition is outside 
of the rules of the game, breaking the rules of the game. Business 
competition has the purpose of any sociaUzed competition. It is to 
find who can do best sometliing which it is to the benefit of sbciety, 
that is, of one's fellowmen, to have done and to have done as well »9 
possible. Competition is fair when it is for a good purpose and, 
secondly, when it is done according to the rules of law and morality. 
Fair competition is competition that is channeled in the direction 
that is good for society. 

The Chairman. Doesn't that aU depend upon what the nature of 
the rule is? 

Professor Fetter. I am not sure just what you have in mind, 
Senator, but I admit that pressure groups and organized interests are 
often able to persuade society to make a rule and channel competitiop 
in wrong lines. 

The Chairman. That is exactly what I mean, so that the broad 
statement that the preservation of competition can be secured by 



1662 C0NCE^TRAT10N OF ECONOMIC POWER 

enforcing the rules of the game is perliaps just a little bit broader than 
we might want to make. 

Professor Fetter. I have made it subject to qualification which 
your question has brought out, Senator; yes. Differing judgments of 
competition result from differing meanings attached to the word; 
that is, whether competition means all kinds of competition, fair and 
unfair, or secondly, only fair competition. Those who praise com- 
petition usually are thinking of the good that is done by fair compe- 
tition, and those who damn competition, or who disparage it, are 
thinking of the evil that is done by unfair competition, and their 
minds are not meeting at all. They are just at cross-purposes. For 
instance, there is the odium that has lately attached to competition 
as summed up in the term "cutthroat competition." Now this term 
has undergone several changes of meaning. It originally meant, I 
think, selling goods not to make a profit on a particular sale but to 
ruin a competitor if possible, and more lately it's been transferred to 
desperate competition among veiy poor and weak competitors, but I 
still think that the original meaning is the sound one. 

It is as if Cunningham, for example, would say: "I am tired of com- 
peting with San Romani. He will beat me some day; he is crowding 
me pretty close. So some day when we are going around the corner 
of the track a good piece away from the judges I will hamstring him 
or I will jab him in the ribs and break a rib or two." That is not 
competition; that is not fair competition in the thing set for competi- 
tion, namely, to decide who is the better runner — far from suggesting 
Cunningham woujd ever even think of this; good sportsmanship 
prevents it. 

Any kind of discrimination in prices — here we come to something 
more vital— can easily run into unfair competition, very difficult to 
detect even when becoming some form of cutthroat competition. The 
complications of modern business have greatly enlarged the field of 
possibly unfair acts of competition and have called for much more 
careful policing of the highways of business than was necessary in 
simple business conditions where everybody knew each other and all 
were dealing with neighbors. This is what led, I believe, funda- 
mentally to the creation of the Federal Trade Commission in 1914. 

Now, as regards the definition of competition itself, it seems to me 
we are interested mainly in what we may call effective competition, 
competition that actually takes place or can take place. In order 
that competition shall be effective there are three conditions neces- 
sary: First, ability to compete. A man with one leg would hardly 
think of competing in a 100-yard dash; he would find something else 
that he could do of a different sort, and so for every kind of competition 
there is a fimdamental fitness which will determine whether the man 
is anywhere within striking distance of competition. That is an 
economic or physical or objective condition, not a legal condition 
at all. 

Secondly, there is the willingness to compete, and a person might 
be able to compete and yet not have the willingness to compete. 
There are many reasons for that; he likes something better, what the 
economist calls the comparative advantage; he can do tliis thing better 
thaii the other man, but he doesn't care to do it. He wants to do 
somethinfi; else which he nun posluiuE do still better. 



CONCENTRATION OF ECONOMIC POWER IQQ^ 

Tliirdly, there is the freedom to compete, and this is the political 
condition relating to the personal liberty of the individual who is able 
to compete "and who is udlling and desirous of competing, and right 
here lies by far the greater part of the problem that faces this com- 
mittee, in my judgment. It is the political aspect, and by "political 
aspect" I mean in the broadest sense .the liberty of the citizen which 
may be limited both by explicit political authority and by the illegal, 
illicit action of some of his fellowmen, the extralegal or illegal inter- 
ference which we have in so many rackets of one sort or another. 

Now most of the problems in the control of monopoly and regulation 
of competition relate to tliis political factor, the freedom to compete. 
In numerous ways political authorities interfere directly or indirectly 
with the freedom of the individual. It is to that, I think, the Senator 
was referring a few minutes ago in his question. In other ways private, 
voluntary organizations more or less aided by public action create areas 
of special privilege from wliich genuine competition is practically or 
wholly shut out. Government abets and creates monopoly whenever 
it fails to give full police protection to citizens who are being molested 
in their private rights. 

Senator King. May I interrupt you? The Government— has it 
not? — has not only encouraged but admitted monopoly among agricul- 
turists and laborers in the formation of the unions and organizations 
for the increase of wages and to secure certain betterments; in other 
words, they have been exempted in the antitrust law and in the other 
trade acts which have been passed by Congress? 

Professor Fetter. In fact, I think the answer must be "yes," but 
labor organizations have other purposes that aren't merely monopo- 
listic purposes, and up to a certain point a disinterested student may 
look upon the labor organization as merely redressing the balance, so 
to speak, where there has been a buying monopoly for labor, but cJl 
history proves that labor organization frequently goes beyond that, 
and then it is monopoly just as clearly as is capitalistic monopoly. 

Senator King. I am not complaining against the exemptions of 
certain industries and organizations from the applications of the anti- 
trust laws. In fact, I think the best interests of society would protect 
the agriculturist, the farmers, in some form of monopolistic control of 
their commodities, the same as labor. 

Professor Fetter. Willingness to compete is a part of the problem 
also in this respect, that men are also willing to monopolize, and when- 
ever they can make more by monopolizing than they can by competing, 
they are not willing to compete. 

The Chairman. Would it interrupt you if at this point — in order 
to illustrate the colloquy between yourself and Senator King — if I 
should read into the record section 6 of the Clayton Act, which is the 
act of October 15, 1914, and to wliich I tliink Senator King was refer- 
ring. It reads as follows: 

That the labor of a human being is not a commodity or article of commerce. 
Nothing contained in the antitrust laws shall be construed to forbid the existence 
and operation of labor, agricultural, or horticultural organizations instituted for 
the purpose of mutual help and not having capital stock, or conducted for profits, 
or to forbid or restrain individual members of such organizations from lawfully 
carrying out the legitimate objects thereof; nor shall such organizations or the 
members thereof be held or construed to be illegal combinations or conspiracies 
in restraint of trade under the antitrust laws. 



1664 CONCENTRATION OF ECONOMIC POWER 

I think that is the section — •- 



Senator King (interposing). Yes; in the Clayton Act, and the 
exemption or the relations which were therein set forth. 

The Chairman. And, of course, later on Congress passed the so- 
called Webb-Pomerene Act, the purpose of which was to grant an 
exemption from the antitrust law to all forms of export tr^de ; in other 
words, combinations in restraint of trade were to be permitted in 
respect to trading with foreign countries though forbidden with 
respect to trade within the United States. 

Senator King. To bring the matter down to date, Congress sub- 
sequently passed the so-called Miller-Tydings biU which specifically 
abrogates the antitrust laws in respect to certain transactions. 

The Chairman. In other words, an examination of tiie laws which 
have been passed by Congress during the last 50 years v/ith respect 
to interstate and foreign commerce reveals a tendency to switch from 
one side of the road to the other side of the road; as, for example, 
when the N. R. A. was passed, exemption from the antitrust law was 
granted to all forms of combinations among busin-essmen and indus- 
trial corporations. 

Professor Fetter. vSenator, it is not a highly original remark for 
me to make — that even Congress may play with words. 

The Chairman. I think it does. Even Members of the Senate 
and Members, of the House as well as professors. 

Professor Fetter. We all do. The statement that labor is not a 
-commodity^, is perhaps good politics, but it isn't good economics. 
Commodity means something that is useful and valuable, as the 
service performed by a man, which is labor. You see, we use the 
term "labor" in two senses; first, the man who does it; and second, 
the service he performs. The service a man performs is as much a 
commodity as anything a man can think of. It is one of the most 
valuable and varied kinds of commodity, but I would have, as an 
individual, full sympathy with the idea that when we are dealing 
with human relations we should deal with them on somewhat a 
diiTerent plane than if tiiey were pig iron. 

The Chairman. Of course, the purpose of this section of the 
Clayton Act, as I .understand it from reading the proceedings of that 
time, was to prevent large aggregations of capital to use the anti- 
trust laws for the purpose of preventing workers through the forma- 
tion of unions to maintain higher scales of wages and better working 
conditions, and it was the judgment of Congress that the antitrust 
law should not be permitted to secure such an end. 

Professor Fetter. Well, to the extent that the organization of 
labor enables labor to get more than what you would call a fair 
market value of its labor, it can and does become monopolistic. 

The Chairman. There can be no question about that; it can. Any 
power is subject to abuse. You will pardon the interruption, Pro- 
fessor. 

Professor Fetter. I am very glad to, indeed. 

Now just a few words regarding the relation of competition to 
modern capitalism. This prolonged period of depression has caused 
the American, people to do some fundamental thinking and to re- 
examine the grounds of our social institutions as they hadn't done 
when things seemed to be going better. There is a growing recognition 
of the relationship between economic and political freedom, A few 



CONCENTRATION OF ECONOMIC POWER 1665 

years ago this was a more novel thought; now it is quite bromidic, 
and I needn't elaborate upon it. 

What is this thing called capitalism? To the Socialist, capitalism 
is simply an organized system of exploitation, and to some radical 
reformers it is a system of abuses synonymous in their minds with 
either big business or with monopohstic business. It is very largely 
in their minds the development of the last 75 years of corporation 
growth and is well represented by the caricatures of the capitalist as a 
very corpulent and very repellent sort of individual. But to most of 
us Americans it is an ideal never fully attained. . It is a system of 
private property widely diffused, and free individual enterprise and 
initiative which grew up along with free political and social and 
rehgious institutions in the past thousand years in western Europe, 
and which is the greatest achievement of civilization. It cannot be 
separated, any more than a vital organ can from the living body, from 
the other forms of freedom and of civilization. The Socialists and 
some radical reformers woidd gladly see the whole thing swept away, 
and their number is to be reckoned with. A goodly part of the Ameri- 
can people would like to see it freed of its abuses. 

The Chairman. Do you mean by that that you think the number of 
those that would like to see the system swept away is increasing? 

Professor Fetter. Yes, I do. Senator. I am sorry to feel. that way, 
but if you take all these forms of opposition, which are, of course, 
inconsistent with. each other, they agree only on one thing, opposition 
to what they call capitalism. 

The Chairman. You find that increasing in the United States, 
according to your experience? 

Professor Fetter. According to my observation as a citizen I be- 
lieve it is. I think it has increased in the past 10 years. 

Senator King. Would you make a little qualification in your state- 
ment with. respect to Russia? When I was there a number of years 
ago the ideology of the Russian Communist was, of course, the 
dictatorship of the proletariat, but now we find an infiltration of the 
spirit of capitalism even in Russia. Little by little there is a de- 

Earture from that stem, relentless policy which was announced by 
lenin and Trotzky during the revolution, 

Mr. Davis. Senator King, do you not think that that relaxation is 
largely due to the fact that they have ascertained by actual experience 
that the original concept was simply not workable? 

Senator King. I think so. I think they are learning by experience 
the folly of communism, and the importance and necessity, if you 
have a civilized and progressive state, to found it on capitalism, in a 
proper interpretation of the word "capitalism." 

Representative Reece. But, Senator, do you feel that the tendency 
in Russia is to shift toward a system of free competition, or rather to 
shift toward a totalitarian government m some form? 

Senator King. Mo; I think it is a little hard to differentiate, I 
think there is a movement toward private ownership of property. 
Of course, private ownership of property means relaxation from that 
stern philosophy to which I have referred, but still there is the 
totalitarian state. 

The Chairman. Private ownership has not yet emerged in Russia. 
The only exchange, as far as I have been able to find out, has been 
this, that different gradations of ability of labor are being recognized 

124491— 39— pt. 5 3 



1666 CONCENTRATION OF ECONOMIC POWER 

and there is now a scale of wages, skill, and ability are recognized by 
higher pay. There are at least three grades of compensation, but the 
worker who receives his wages or the salaried employee who receives 
a salary, is permitted only to use that salary for purposes of consump- 
tion and not for the purpose of establishing capitalistic ownership 
of property. That is my understanding of the situation. 

Senator King. There has been some recognition of a limited owner- 
ship in property. AVhen I was there in 1924 there was no recogni- 
tion of the right of an individual to own anything. The clothes he 
wore belonged to the state, he owned no home, he owned no personal 
property. There has been a little relaxation so people now claim 
this article or that article, or this product, as their own, and title to 
it vests in the individual, a very slow pushing back of the philosophy 
upon which the communistic system was founded. 

The Chairman. I think as far as clothing is concerned, that is 
true, but my advice is that it hasn't reached real property. 

Senator King. Except they say you may rent property for a rea- 
sonable length of time to give you a little tenure. The ownership is 
still in the state, of the property, the mines, and the valuable things. 

The Chairman. All lands. 

Professor Fetter. We have pretty well outgrown the thought of 
the eigliteenth century that human institutions are determined by 
natural law and the present political philosophy considers all human 
institutions as a matter of trial and error, of working oiit expediently 
the best forms, and always the fundamental condition that has to be 
met is human nature, and it is lafe to say that 25 and 50 years from 
now the economic institutions of Russia will be very different from 
what they are, and if we follow the way of democracy in this country 
I am inclined to think that 25 or 50 years from now we might meet 
the Russian absolutism half way, both with much better forms of 
democratic society than either one has at the present time. 

That characteristic belief of what we might call American political 
philosophy regarding capitalism is deeply rooted in the history of our 
race for a thousand years. 

This story is much too long to recount here in detail. It begins 
with the chartering of the free towns in the eleventh century in western 
Europe, at the very climax of feudal institutions. Little democracies 
of free men and merchants in the midst of the world of feudal caste, 
serfdom, status, monopoly, and despotism developed. There was a 
steady and gradual growth of power and influence of towns. They 
got representation in Parliament, increasing in influence in the state, 
and they triumphed in the Puritan Revolution of the seventeenth 
century, and this was just the psychological moment, to use the 
modern phrase, when America was settled. 

Senator King. Professor, if you will excuse me, I have another 
committee and I regret very much not to be permitted to listen to 
your whole statement. 

Professor Fetter. It was a psychological moment for the settlement 
of America because America, as has been remarked by European 
studi^nts, was settled by burghers and not by peasants. There was 
an essential difference between the burgher psychology of western 
Europe — that is, the town psychology, private property, and private 
enterprise, and the rural psychology, which is essentially the feudal 
and peasant psychology — and there was the most abrupt and complete 



CONCENTRATION OP ECONOMIC POWER X667 

abandonment of feudal conditions in America as the result of this 
transfer to new conditions. Free enterprise, except for Negro slavery, 
with onty moderate restrictions was the rule increasingly down to the 
Civil War. I think the 150 years since the adoption of the Constitu- 
tion furnish a most remarkable example of cyclical change in this 
matter that can be found any time in history. The first 75 years up 
to the Civil War represented a steady increase of freedom, of enter- 
prise, diffusion of private property. 

TENDENCY TOWARD MONOPOLISTIC CONTROL OF INDUSTRY 

Professor Fetter. Then suddenly at the close of the Civil War 
and in the 70's and 80's, the tide turned and the last 75 years have 
been an 'almost uninterrupted movement, with occasional efforts of 
reform, with Theodore Roosevelt's regime, and under "the new free- 
dom" but on the whole a steady drift and tendency toward a greater 
monopolistic control of industry. 

Now this period since 1865 is the one that we are, of course, most 
interested in just now. The Civil War was a turning point in our 
history. We had somehow begun to get accustomed to enormous 
corporations through the development of the railroads. Anglo-Saxon 
law had always been exceedingly suspicious of industrial corpora- 
tions, had limited them m number, had limited them very strictly in 
their powers and functions. It always viewed them with suspicion, 
but soon following the Civil War the legislatures, both State and na- 
tional, began to let down the bars to easy incorporation and free and 
easy capitalism. Railroad rebates and special privileges favored many 
large corporations, monopoly grew and thrived, as we know, through 
the 70 's and 80's. In vain men looked for some sort of relief. Not 
until 1888, however, were holding companies organized by any general 
statutes, and that was unfortunately in my own present State of New 
Jersey. Industrial corporations had for centuries been limited to 
these specific purposes and stock of corporations could be held only 
by natural persons. 

That change which occurred in my boyhood, which was all unre- 
marked by most of our citizens, was not an evolution ; it was a revolu- 
tion; it was a tremendous revolution, with far-reaching consequences, 
occurring 50 years ago, during my own lifetime, and it is a good exam- 
ple of the misuse of the expression "evolution." This was a change 
made by human choice, by municipal statute. We changed the law. 
That is not evolution; that is a direct choice, social choice. It was 
not, however, a conscious social choice on the part of the majority of 
Dur people. It was introduced and put through without the great 
najority of people realizing what was being done, or if they did 
reahze what was being done they had no conception of what it was 
going to lead to. 

That must be always taken into account in the problem that this 
committee faces. It is not merely a matter of enforcing existing 
laws. It is a question of the whole economic set-up, so to speak, the 
whole conception of the corporation in the modern scene. 

The enactment of the Sherman Act in 1890 was to reverse this move- 
ment but for 15 years it has a scarcely noticeable effect. There were 
two great periods of merger movement, one of 15 years from 1890, 
the very year of the Sherman Act, until 1904 when a decision of the 



1668 CONCENTRATION OF ECONOMIC POWER 

Supreme Court seems to have put a temporary stop to that move- 
ment, and again from 1919 to 1929, a still greater movement of 
mergers and combinations. The percentages of the national produc- 
tion under one ownership was falsely taken as the test during much 
of this period, and I trust that this committee will not be misled by 
any such a false yardstick. 

The percentage of the national production is not a sound basis for 
the judgment of monopoly. Local concentration may give a very 
considerable local monopoly to a combination that has, say, not more 
than 10 percent of the national production. The enormous area of 
our country makes it possible for a local monopoly to extend over as 
great an area as the German Empire or the French Republic, and still 
have perhaps not more than 10 percent, or some meager percent of 
the total national production. It is a question of geographical limita- 
tion as well as of the total production. The misleading idea of 
monopoly as a single corporation versus the idea of monopolistic 
powers in various degrees, to which I have referred before, undoubtedly 
has greatly increased the difficulty we have had in dealing with this 
problem. The result has been a centraUzation of financial control and 
a unifying of price policies that pervades a verylarge part of the busi- 
ness field. That I can see no reason to doubt. I believe there is no 
division of sentiment on that point among economists. There is a 
very great division of sentiment, unfortunately, among professional 
or academic economists in regard to what is to be done about it, but 
the phrase "the dechne of competition" is one, the full significance of 
which I beHeve is accepted by economists unanimously. 

Now the burden imposed by this monopoly is a very unequaLone. 
The central principle of capitahsm is a business organization where 
there is universal fair and free competition. You see, each of those 
adjectives has a special meaning as I have tried to define it — fair com- 
petition and free competition. It is the right and duty of each in- 
dustry which has the privilege of engaging in the making of profits to 
compete according to the rules of the game. Now private monopoly 
is special privilege, the privilege to violate the rules of the game of 
capitaHstic business, and it is most successful when it is practiced by 
one or by a few in a business organization or society where other 
citizens continue to compete with each other. Th& advantages of 
monopoly decrease, even to the monopolist, as more and more other 
industries and occupations ce^se to compete actively and begin to 
practice monopoly. Monopoly is to a certain extent always scarcity, 
relative scarcity, and rela'tive high prices. It is no more possible for 
all of the industries of the country to be monopoUstic and profit by 
it than it is possible for both ends of the teeter-totter to stay up in 
the air. The privilege of monopoly and the gain of monopoly is 
necessarily the corresponding loss to the other members of society, 
and if we are pursuing a mirage greater than any other of the mirages 
that we are pursuing, the one which is greatest is the notion that we 
will bring peace and prosperity by universalizing monopoly', because 
as it persists in industry 'we are going to extend it and are extending 
it to agriculture, to labor, to one thing after another, with the con- 
ception that if one is admitted, everybody must be. That is the end 
of all fluidity and progress and enterprise. 

The growth of monopoly in the last 75 years has progressively 
burdened the other less centralized and less organized elements of the 



CONCENTRATION OF ECONOMIC POWER ld69 

community. A notable example is building materials and building 
trades. It happens that the evil is double there, and is a burden on 
all other industries and workers. As a matter of fact, the very men 
who build houses and the very sellers of materials who sell at monop- 
ohstic prices the building materials, have to pay back part of it in 
higher costs for their own houses, and all other laborers and all other 
people engaged in industry • are paying tribute to that particular 
mdustry. 

Mr. Davis. Professor Fetter, in that connection, that is with rela- 
tion to the effect upon other' industries of conduct of a monopoly 
in industry, has it not been your observation that, generally speaking, 
monopoly sufficiently strong to carry into effect its purposes gener- 
ally beats down the prices of all the products which the industry 
purchases for its purpose on the one hand, and increases the prices of 
products which it sells on the other? In other words, that it is a 
two-edged proposition. They make agreements, fix the prices at a 
low level if possible of the materials which they purchase at the same 
time that they are fixing the prices at which they sell their products? 

Professor Fetter. Probably this double nature of monopoly has 
always been present more or less but it has developed more particularly 
in the last few years, I think since the turn of the century. A very 
strong selling monopoly in turn acquires certain buying monopolistic 
powers. Some of the younger economists experimenting in termi- 
nology caU it "monopsonic." The Greeks never had a word for that. 

But it is bound to be so. A big aggregation of capital buying 
materials from other industries begins to have a monopolistic power, 
and I think that is a considerable part, I am sure it is a very, con- 
siderable part of the problems of trade associations — trade associations 
among comparatively smaller industries. 

1 had a contact a few years ago with the president of a small cor- 
poration — this is enough to make our grandfathers turn over in their 
graves: His corporation was worth only $6,000,000. It was a small 
corporation, and I couldn't understand what his grievance against 
the Sherman Act was until I found that he was thinking of the whole 
monopoly problem as the buying monopoly power which billion- 
doUar or half-billion-doUar corporations had with reference to his cor- 
poration which suppUed them with certain appliances. 

The Chairman. It was probably true that this particular corpora- 
tion found it much more difficult to borrow money for the essential 
needs of the corporation than any one of the biUion-doUar competitors 
would have found. 

Professor Fetter. Yes. 

The Chairman. As a matter of fact, it is a common experience that 
the large aggregations of capital are able to secure- money at a very 
much lower rate and for longer terms and on better conditions than 
the small business corporation may, and that in itself is an inherent 
difficulty which tends to magnify the big and reduce the little.^ 

Professor Fetter. The aspect that he was thinking most about 
was the monopolistic power they had in buying from him and from 
his corporation. He felt in the grip of a few corporations and that, 
of course, is a large part of the problem that led to the Robin son- 
Patman Act and things of that sort. It is a comparatively new aspect 
of the subject, but for that reason is a very burning issue. 

> See Hearings, Part IX, for testimony on this subject. 



.1670 CONCENTRATIOiM OF ECONOMIC POWER 

Of course, this applies particularly^ to agriculture, because, while 
this monopolistic power was increasing in the products that agri- 
culture purchases, it continued and still continues to sell very largely 
on a competitive basis. Therefore there are certain conclusions which 
can be briefly stated regarding this sort of historical survey. Capi- 
talism is becoming more un wielding and unworkable in geometric 
ratio as the field of competition is narrowed and as independent 
enterprises are merged into great monopolistic units, with resulting 
power of autocratic price fixing — limited, of course. 

The Sherman Act, reasonably interpreted and enforced, would put 
an end to most of the evils of which the critics of that act complain. 
The Sherman Act and the Clayton Act were designed to prevent 
the business practices which weaken and destroy regulated and effec- 
tive competition. Capitalism is working rather badly, pretty badly 
ijow, and its break-downs are becoming increasingly disastrous. 
Business leaders are vainly trying to operate a capitalistic system by 
methods and practices which are in conflict with its fundamental 
principles. The ultimate alternative to a regime of competitive 
prices is one of authoritarian prices. You can take your choice 
between private monopoly and public socialism. 

There has been a good deal of discussion lately of the relation be- 
tween monopoly and depressions, particularly the present depression. 
Recently there has been a renewed search for the causes of the periodic 
collapse of the capitalistic system and the ensuing periods of depres- 
sion . 

Mr. Davis. Just a moment, with respecu to your observation that 
you have a choice between private monopoly and public socialism. 
Do we understand that what you meant was that absolute private 
monopoly would inevitably lead to public socialism, or just what do 
you mean by that? Do* you mean that that Is the only alternative 
we have, either private monopoly or public sociaUsm? 

Professor Fetter. What I meant was that if we go on down this 
same road we- have been following for the last 75 years, it just has 
two forks. We either have to retrace our steps or find some bypass 
that will lead us in a different direction. That is the thought I have 
in mind. There is an alternative, of course. 

Mr. Davis. But at the same time, as you have expressed yourself, 
do you believe that the full functions of democracy and capitalism 
may be restored by a restoration of free and fair competition and a 
proper government regulation to insure that? Is that correct? 

Professor Fetter. It is conceivable, but I wish I had more faith 
in my prophetic vision. Judge. I am not sure whether we are going 
to succeed in saving it, and many people feel the same way. They 
feel that we are headed in the wrong direction, but they are not at 
all sure that we can save ourselves in time before we go over the 
precipice. 

Representative Reece. You think we should have stopped some- 
where down the road and looked at the signposts? 

Professor Fetter. I think we should have read the signposts 
several times in the past 75 years. 

The Chairman. Professor, I cannot allow that remark to pass 
without stating here my own profound faith that the people of 
America will find a way to stop before this movement has gone too 
far, and that we shall discover the way of making it possible to main- 



CONCENTRATION OF ECONOMIC POWER 1Q71 

tain opportunity for each new generation as it arises. That I conceive 
to be the real nubbin of the problem. 

Competition, naturally, tends toward monopoly, because the most 
efficient will naturally tend to become the most successful and to 
expand the area in wliich he or it will dominate. But when a success- 
ful competitor reaches such a point that he is able to shut out com- 
petition, there, I conceive, is the point of danger. 

I have been very much impressed in recent months with the fact 
that, wherever one goes, in whatever class of society one walks, 
whether one mixes with the so-called leaders of industry or with those 
who are cloistered in the schools, or with politicians or with workers, 
labor union men or with farmers, one finds an overwhelming desire 
in America to maintain democracy. I think it is exemplified on every 
hand, and that deep, abiding loyalty to the American ideals of govern- 
ment and of free opportunity is so great, in my judgment, that it 
will break down this tendency which you see. I am not at all as 
pessimistic as you are. 

I really wanted that to go into the record. 

Professor Fetter. Senator, you are the right man to be chairman 
of this committee. 

The Chairman. I thank you for that. 

Professor Fetter. It takes courage,- and there isn't any doubt on 
my part that that is what the American people want, but whether 
they will recognize the proper means to attain it, that is where my 
doubt comes. There are so many things that look alluring, super- 
ficially plausible, and I am as confident as you are of the fundamental 
desires of the American people being to maintain our institutions and 
to improve them. 

The Chairman. Perhaps one of our dangers arises from impatience. 
We want to settle this thing tomorrow, and it can't be settled to- 
morrow. 

One of the reasons why I have been particularly interested in the 
work of this committee has been because I feel most deeply that it is 
very necessary in the interest of government and in the interest of 
business to survey this whole problem from their possible point of 
view, and I feel that when the facts are known that the American 
people and their good judgment will assert itself in a successful, but 
by no means a perfect, result. 

Professor Fetter. It looks as if I might go away from this meeting 
more hopeful than I came. 

relation between monopoly and depression 

Professor Fetter. May I revert to this question of the relation 
between monopoly and depressions, which is closely related to the 
last topic we were discussing. I would read a few sentences, some- 
what revised, from the remarks I recently made in another connection: 

Two questions should be distinguished. What caused the collapse of 1929 or 
the recession of 1937, and how can such things be mitigated or ended? However 
rash it is to attempt to answer these questions, I venture the opinion that monopoly 
is not the sole or even the chief cause of financial depressions, although it has some 
part in causing them. 

As applied to the last depression setting in in 1929, I think that monopoly 
had rather a particular and peculiar connection as compared with former depres- 
Bions, and that is because of the great merger and combination movement which 
characterized the countrv from 1919 to 1929. That was a period of fiqtation of 



1672 CONCENTRATION OF ECONOMIC POWER 

enormous quantities of securities under the false hope that merger was the road 
to fortune. And in the sense of supplying tinder and fuel to the flames of specu- 
lation, I think the competition-merger movement of those 10 years contributed 
very largely to the excesses of our stock-market speculS.tion and in other ways, 
but as a general explanation of depressions throughout the centuries, especially 
the last hundred years or so, it does not seem to me to merit a very large emphasis. 

The chief evil of monopoly is the long-time, steady effect in limiting production 
and in increasing its prices. Monopoly distorts the normal equilibrium of 
the competitive price system, if you will pardon the word "normal." The chief 
evil of monopoly is lasting rather than catastrophic or temporary. A sudden 
shock to the whole price system, such as that of 1929 or 1937, is not a simple 
result of forces that have been steadily operating for over a half century during 
several business cycles. More probably the major fluctuations of the business 
cycle are mainlj^ due to general monetary causes,. including in that term the ex- 
cesses of credit and of speculative investment. 

So enormous has become the volume of outstanding dollar indebtedness which 
links together the banking system, public finance, and private business, the vast 
contractual fixed charges of corporation bonds and all forms of capitalized in- 
comes, that the whole business system has become a house of cards. Even nor- 
mal corporation financing has become highly speculative — the shift from preferred 
stocks to bonds and back again to common stocks. Monopoly's share of the guilt 
for aggravating and prolonging industrial depressions is probably greater than is 
that for their inception. 

The best economic opinion of the world, I believe, is agreed at least on this one 
point, that once a national or world organization has got into a st9,te of financial 
depression, the quickest way to get it out would be to give free play to the forces 
of demand and supply in the markets; artificially to stabilize prices in an industry 
with unused capital is further to unstabilize production and employment in that 
industry. If all businesses, not only our own but that of countries with which 
we trade, were on a cash basis, if there were no outstanding debts, no rigid wages 
and prices, and no fixed contractual obligations in terms of dollars, there seems 
reason to think that such a thing as a financial depression would be both mild 
and brief if indeed possible at all. Disturbances of trade due to such pclitical 
disasters as war or to great physical catastrophes might, of course, still occur. But 
all sorts of artificial price rigidities have multiplied in the last three-quarters of a 
century. Inflexible rates fixed by public-utility commissions, regardless of gen- 
eral price changes, are a large factor. The latest arrival, and in some ways the 
worst, is the stabilizing of certain prices and wages by private monopolistic action 
in disregard of other industries and occupations, and of the general welfare. 

Monopolistic industry is for itself and the devil take the hindmost, and the 
hindmost are those without monopoly power. 

There is a large subject here, and that could be discussed almost 
indefinitely. I will leave it with that. 

The Chairman. Without objection, the committee will stand in 
recess until 2 o'clock. 

(Whereupon, at 12; 10 p. m., a recess was taken until 2 p. m. of the 
same day.) 

AFTERNOON SESSION 

The committee resumed at 2:20 p. m., on the expiration of the recess. 

The Chairman. The committee will please come to order. 

Professor Fetter, are you ready to proceed? 

Professor Fetter. I am, thank you. 

We were speaking of the relation between monopoly and depres- 
sions, which of course brings up the great and burning issue of mass 
unemployment and the relief problem. Everyone must feel modest 
in approaching this question. No one can be sure that he has the so- 
lution complete and entire, but the stubborn persistence of mass un- 
employment for the past 10 years, 6 to 12 million chroni'' unemployed, 
is something that is giving us all great cause for anxiety. 

Now there is widespread acceptance of this fact as inevitable, and 
new theories have been invented to explain it as something inherent 



CONCENTRATION OF ECONOMIC POWER 1673 

in capitalism, or as the inevitable effect of a slower rate of population 
growth, so that we are doomed with a cessation of population growth 
to stagnation. Or again, as something which only a continual series 
of very revolutionary inventions, such as the automobile, which in- 
volves other great changes, like the building of highways, and so 
forth, could possibly prevent; otherwise chronic depression and chronic 
unemployment, according to these theories, is inevitable. 

I may be pessimistic on some things, but it seems to me that that 
is the extreme of pessimism. I must dissent from all those explana- 
tions. I tliink it is perfectly possible for us. to have a prosperous 
state with a stationary population. If we do not have, the trouble 
lies in our institutions and not in some movement of democracy. The 
truth, it seems to me, is nearer expressed by a statement signed by 
140 American economists in 1932, and there are several here present 
who signed that statement: 

There is growing doubt whether the capitalistic system, whose basic assumption 
is free markets and a free price system, can continue to work with an ever-widening 
range of prices fixed or manipulated by monopolies. 

That is, the capitalistic system postulates fluidity and adaptability 
and freedom and choice of goods and choice of occupations, freedom 
of markets and of prices, to bring about an equilibrium of labor, of 
occupations, and of resources with a tendency to full employment of 
all. Now this is the equilibrium wliicli is questioned more or less in 
some quarters, but which essentially I believe to be sound. Anything 
wliich checks the free flow and tends to crystalize prices or choice of 
occupations and employments or artificially to fix these factors creates 
frictions wliich cause the whole mechanism of business to work badly. 

A considerable degree of toleration of the system, of com'se, is possi- 
ble. A certain degree of interference may continue. Like the human 
body, there is a considerable toleration to germs and diseases, and we 
may still go on living, but there are many evidences that we have al- 
ready gone beyond the hmit of toleration in this matter. 

Finally, a system of bureaucratic control will become a necessity if 
we go on in thus same direction — that is the condition attached to it — 
and the national planners will realize their- ideal, if ideal it can be 
called. 

The Chairman. In other words, you imply that it should not be 
called an ideal? 

Professor Fetter. Well, I don't object to that inference. 

The Chairman. Perhaps you share the view of the Chairman that 
it is too much to expect of human capacity to. believe that any small 
group of persons has iutelligence enough to plan the development of 
the human race. 

Professor Fetter. Yes, Senator; but what I said must, of course, 
be taken in connection as a context with what I said about fair com- 
p'etition and about the necessity to regulate business from the outside, 
not from the inside, if we are to have competition. Competition is 
not a thing which automatically establishes itself in society and goes 
on without any effort on our part. It never has and never will. I 
spoke of the false notion that I thought had grown up of the connection 
between laissez faire and competition. 

The Chairman. Yes; I think you developed that very clearly this 
morning. 



1674 CONCENTRATION OF ECONOMIC POWER 

Professor Fetter. That, of course, is all context to this statement- 

The Chairman. In other words, your whole objective is that we 
should find a way to preserve a constant opportunity for new competi- 
tors to appear on the economic scene. 

Professor Fetter. Yes; and that this regulation that I speak of 
should not be a regulation in the inside of business, in men's private 
affairs, or to substitute the judgment regarding the constant details 
of business, to substitute the judgment of bureaucratic authority; that 
this regulation should be a regulation of laws, so to speak, and not of 
men; that is, we should lay down general prescriptions and enforce 
them through the proper regulative agencies, but there is a great 
difference. 

The Chairman. You are stating the position which, I may say, 
the Chairman has held for a long time. 

Professor Fetter. Yes; that is a real school of thinking on the 
subject, and there is a very wide difference between it and bureaucracy. 

The Chairman. It occurs to me that of appropriate interest at this 
point is this statement which was contained in an address of President 
Woodrow Wilson to a joint session of the two Houses of Congress on 
January 20, 1914.^ This was the message in which he recommended 
the creation of an Interstate Trade Commission, as it was then called, 
and resulted in. the creation of the Federal Trade Commission. He 
said: 

The opinion of the country would instantly approve of such a commission — 

Meaning an interstate trade commission. 

I would not wish to see it empowered to make terms with monopoly or in any 
Bort to assume control of business as if the Government made itself responsible. 

I take it that more or less expresses the thought that you have in 
mind. 

Professor Fetter. Indeed it does. Senator. 

Mr. Hinrichs. May I ask a question at that point? Professor 
Fetter, as I understand it, your statement really visuaUzes two alter- 
native forms of positive action. If intense restrictive measures are 
set up by private enterprise, you would visualize that as carrying 
with it a necessary development of public regulation that would lead 
to the type of national planning that you think is likely to be unsuccess- 
ful, as one alternative of development? 

Professor Fetter. Yes. 

Mr. Hinrichs. And the alternative is an equally positive program 
of regulation under which you create the institutions of true competi- 
tive enterprise; that is, you don't visuaUze standing in a situation 
where you have a mere absence of Government activity, allowing a 
field for private enterprise to estabUsh restrictive practices, do you? 

Professor Fetter. As I get your statement, I quite agree with it; 
yes. 

Well, the alternative to drifting or moving down in that direction 
is either to create opportunities for general employment in private 
industry or to accept the system of State sociaUsm or system of national 
planning in that direction, but we have the other alternative of moving 
either back toward or forward toward a system of freer industry. In 
that connection I found out during the recess that there were several 
who raised a question as to the interpretation of my answer to Senator 

> Introduced as "Exhibit No. 309", !nft-a, p. 1792; appendix, p. 2174. 



CONCENTRATION OF ECONOMIC POWER 1^75 

King this morning. The Senator was speaking of his impression that 
the Russian system was gradually moving toward some of the real 
essentials of capitalism, and I expressed a hope that that would be so 
and a belief that it probably would have to be so. The fundamental 
conditions of hum^in nature are such that they could not long continue 
to operate that dictatorial totaUtarian system as it was without dis- 
tinctions as to wages and rewards, and if the world is to be safe for 
democracy it should be the wish of every American that the Russians 
may speed in that direction ; we should hold forth good thoughts toward 
them. One hundred and sixty million people represent a tremendous 
factor in the world today, and we should hope that they would move 
in that direction, which means a movement toward the essentials of 
capitalism in its better sense, let us hope. On the other hand, we 
have to reform many of the abuses of capitalism, and if we set our 
hand to it and eliminate the excesses and excrescences that have grown 
up, we shall have, I trust, in the coutse of a generation or so, a better 
type of capitalism than we have now. There is where I am sharing 
with the Senator his views. 

The Chairman. In other words, you sense the desirabiUty at least 
of developing a democratic system of capitalism with as many as 
possible of the abuses removed. 

Professor Fetter. That is indeed the idea. 

Finally, I will just say a word regarding certain aspects of the 
monopoly problem that often are lost sight of. If you will permit me 
a final moment of sentimentalism, we have learned of recent years that 
ideologies are, after all, the most practical things in the world; they 
can accomplish the greatest changes and results for good or for evil. 

The restoration of free enterprise and free competition is necessary 
to create conditions of happy living. We are likely to take, iii the 
whole discussion — I am sure, we all are — of business organization, a 
too materialistic view, as if the question whether this method or that 
form of business organization were better than the other was to be 
decided solely on the grounds of physical measurements ; if a certain 
organization or business would produce more tons of pig iron we say 
it is better; more yards of cloth, it is better. I urge upon you, at the 
danger of being considered sentimental in this matter, that happiness 
does not consist of the things that we buy with our work as much as 
it consists of the feeling we have while we are at work. It is the whole 
24 hours a day that have to be considered, and it is the task of states- 
men not to consider the economic welfare in terms of tons and yards 
and bushels, but in terms of human happiness. 

It is the issue of price economics sole and simple, versus the issue or 
the policy of welfare economics. The view that we must take, then, 
is a much broader one than the narrow commercial conception of wel- 
fare and prosperity. 

Farming was so long the dominant occupation in America that it 
became the American tradition to look upon the settlement of land 
on the geographical margin, the frontier, as the one characteristic 
opportunity for independence open to young men. But even in the 
first half century of our existence as a nation the opportunities in busi- 
ness, in industry, in shops, in commerce, were even greater than the 
opportunities merely in the settlement of land. Farming is very fre- 
quently contrasted with other ways of making a living in this respect. 
It is said that while other ways of making a living are apart from life, 
farming is a mode of life. 



1676 CONCENTRATION OF ECONOMIC POWER 

This contrast is too extreme. Every method of making a living is 
also a mode of life, and I venture the opinion that a large part'of our 
problem today is the problem of creating the right attitude of mind 
while men are at work, and the opportunity for independence is so 
valued by men, so fundamental, that they will make many sacri- 
fices for it. It is partly responsible for the problem of the agricultural 
classes. They would rather have a much lower monetary income to 
have their independence on the farm, and they bid down their returns 
and there is an excess of agricultural population because of that. 

Now the disappearance of the frontier generally dated about 1890, 
with the exhaustion of free arable lands open to settlement, and it is 
rightly declared by students of American social and economic institu- 
tions to be a fact of tremendous importance. It signified the closing 
of one kind of opportunity open to the common man in America from 
the earliest colonial days, affording a field for individual initiative and 
enterprise, and an alternative of escape from economic subordination 
in the wage relationship. 

Three centuries of such conditions exercised a powerful influence in 
the shaping of those qualities of American national character which 
we deem most precious and whose disappearance we would most de- 
plore — mdeed we are already deploring. But it may be questioned 
whether we have not too much emphasized the effects of these frontier 
conditions and economic changes to the neglect of other accompanying 
factors in our national life. The closing of the frontier was primarily 
a mere geographical event which can dominate our national destiny 
only if we allow it to do so. To be sure, it narrowed for individual 
enterprise the sort of opportunity which depended on the physical 
fact of a sparse population and unsettled land, but the greater fron- 
tiers of opportunity to young men, even during that period, up to 1900 
or 1890, consisted in the multiplicity of small decentralized enterprises. 

We have watched this frontier being closed by subversive changes 
in our business law, permitting and compelling an excessive centraliza- 
tion of industrial control and the useless destruction of hundreds of 
thousands of independent enterprises. Opportunity for the comm m 
man in a free democracy depends more on right economic legislation 
and its faithful administration than it does on the presence of an 
institutional frontier of cheap land. We are not forced to bow in a spirit 
of fatalism to a mere physical fact. The hope of democracy lies in 
physical changes, in the enlargement of opportunity for the common 
man, and that means the decentralization of industrial control and 
the wide diffusion of private property. 

We have been witnessing the latest attempt of monopoly under the 
deceptive ^^logan of fair competition to restrict economic freedom 
and to further narrow the remaining frontier of industrial opportunity 
to young manhood. The Notion may open that frontier again and 
enlarge it and keep it open if only it is willing to pa}^ the price. 

That is my conclusion. 

The Chairman. Ifave vou concluded your statement, Professor 
Fefiei? 

]'rofc:-fr'()v Fetter. 1 have, thank you. 

The Okairman. Do any members of the committee desire to ad- 
dress any questions to the witness? 

Mr. T)oi;gi.as. 1 have a question, Mr. Chairman, that I would like 
t>> .ipJ, Tjiis; morning. Professor Fetter, you referred I believe to the 



CONCENTRATION OF ECONOMIC POWER 1677 

New Jersey law passed in 1888 which permitted one corporation to 
acquire and hold stock in another corporation,* and I believe that 
you used a word in characterizing that act as something unfortunate, 
or at least I got the implication that you felt that that was the begin- 
ning of a trend which facilitated the trend toward monopoly and 
against free enterprise. 

Professor Fetter. I doubtless did use that term. 

SIMPLIFICATION OF CORPORATION SET-UP PROPOSED 

Mr. Douglas. Did you wish to leave the thought with the com- 
mittee that you would be in favor of abolishing holding companies? 

Professor Fetter. If it is of importance, that is my personal 
opinion. 

Mr. Douglas. That they should be abolished? 

Professor Fetter. Yes; I think we need to return to a simplifica- 
tion of the corporation set-up, in a variety of ways. A corporation is 
a two-edged sword. It should be kept for its good uses. It is like 
a sharp tool. 

The Chairman. Don't you think that there is a possibility that the 
development of the corporation has gone to such an extent that dis- 
cretion should be used in any attempt to break down the entire con- 
cept of holding companies? Perhaps it would be perfectly proper and 
would have no bad effect upon our economy if subsidiaries which are 
necessary for the conduct of the primary business of the parent corpo- 
ration might be permitted to exist. You are aware, of course, that some 
States permit corporations to hold stock of other corporations when 
they are necessarily adjuncts of the parent corporation, but do not 
allow them to hold stock in corporations which have no relation with 
the primary business of the parent corporation. 

Professor Fetter. I judge that you refer there to what we would 
call vertical integration rather than horizontal. 

The Chairman. No; I am thinking of the acquisition by corpo- 
ration A of stock in corporation C which is engaged in ah utterly 
different business, which has no relation whatsoever to the business 
of corporation A. Perhaps the stock might be acquired in the first 
place merely as an investment and then later on would go over to con- 
trol and management, so that by the building up of the holding com- 
pany device the centralized control over the entire field of our economy 
could be built up. 

Professor Fetter. If a corporation needs a certain type of activity 
to accompUsh the purposes of its organizations, then it can organize 
that within its corporate charter, and I have yet to see any cases 
where the formation of a* separate subsidiary corporation would 
accomplish a good that could not be accomplished in other ways. 

The Chairman. Sometimes, of course, corporations find it necessary 
to create subsidiaries in order to comply with' individual State laws, 
or with the laws of foreign governments. For example, a corporation 
like the General Motors Corporation is engaged in business in every 
civilized coimtry on the face of the globe, and it creates a subsidiary 
corporation in those various countries for the purpose of enabling it to 
comply with the specific laws. Of course, that is all part of an inter- 
national economic development. 

> Suprn, p. 1667. 



1678 CONCENTRATION OF ECONOMIC POWER 

Professor Fetter. There of course you have mentioned the organi- 
zation of corporations under the laws of a country not our own. 

The Chairman. No; I mentioned first the creation of subsidiary 
corporations to comply with the laws of the respective States of 
the Union. 

Mr. DouGi^AS. I take it that part of your thought, Professor 
Fetter, was in outlawing of holding companies you would place a 
check or a restraint on the growth of bigness itself, bv reason of taking 
that step? 

Professor Fetter. Well, Mr, Douglas, I think one of the most 
essential distinctions to be made to clear up a very large amount of 
confusion on this subject is the confusion between physical or tech- 
nical bigness and financial bigness. Most of the discussion of the 
Bubjoct is tangled up in that terminology. We talk about a big 
business when we mean a big factory and then we talk about a big 
business when we mean a combination of a hundred identical factories 
distributed geographically all over the country. 

Mr. Douglas. Well, you were talking about bigness in a financial 
Bcnso? 

Professor Fetter. That is what my talk was directed toward. 

adequacy of anti-trust laws as legal implements 

Mr. Douglas. That is what I thought. That was one question I 
had, Mr. Chairman. The second is this. This morning you stated, 
I believe, that it was your opinion that the Sherman law and the 
Clayton Act, if reasonably interpreted or reasonably enforced, or I 
forget 

Professor Fetter (interposing). I think I said both probably — 
reasonably interpreted and enforced. 

Mr. Douglas. Would be adequate to do the job so far as legal 
implements were concerned. You left the impression in my mind 
that they had not been reasonably interpreted by the courts. 

Professor Fetter. I think they have not. My own study of the 
subject left me with astonishment at some of the turns that adjudica- 
tions have taken in the last 50 years but, of course, there is a chance of 
difference of opinion there. 

Mr. Douglas. Would it be asking too much, Mr. Chairman, to 
ask Professor Fetter to submit for the record a synopsis of an econom- 
ist's view of the legal decisions on this matter? 

The Chairman. Well, of course, if Professor Fetter wants to 
undertake that analysis. 

Mr. Douglas. I don't mean necessarily an exhaustive one, but one 
that will illustrate the point of view you have expressed in general. 

Professor Fetter. Well, if you will pardon me for speaking of it, 
my studies are pretty thoroughly recorded in the book that was 
mentioned before, The" ^Masquerade of Monopoly. It represents an 
economist's and layman's view of this field of law and the decisions of 
the Supreme Court. I have made a prolonged and intensive study of 
the Supreme Court's records in those matters, devoting weeks and 
months to the study of certain cases wliich an over-burdened court had 
had to settle in the course of a few days. Especially on the economic 
side I think thej'^ were very often misled and confused. You will find 
in there my verdict toward the court is extremely charitable and 



CONCENTRATION OF ECONOMIC l',9WER ^(379 

extremely sympathetic, but I do feel that the chief responsibility lies 
in the executive department; I mean, responsibility for the compara- 
tive failure, but please do not understand me to say that the antitrust 
laws have been complete failures ; I think that we owe a great deal to 
them. It is just that in a relative sense they have not accomplished 
anything like what was hoped for them or like what might be accom- 
plished with perhaps some further clarification and amendment. 

The Chairman. In connection with your statement that you be- 
Ueve that some responsibihty must be charged to the executive for 
failure properly to enforce the Sherman antitrust law, it might be 
appropriate to call attention to the fact that William Howard Taft, 
in a message to Congress while he was President and later on while 
he was a member of the faculty of the Law School of Yale University, 
which Chairman Douglas also graced at one time, declared that 
faulty pleadmgs by the Department of Justice in the famous Knight _ 
case was in his opinion responsible for that first fatal decision which 
ended the first eff'ort of the Government to enforce the Sherman anti- 
trust law against the so-called Sugar Trust. 

Professor Fetter. I believe that was a quite commonly held 
opinion among lawyers at the time, and there are other cases since in 
which I think an equally strong statement might be made. 

The Chairman. Are there any other questions to be addressed to 
the witness? 

Mr. O'CoNNELL. I should like to ask a question. Dr. Fetter, this 
morning while you were discussing what you termed the "rules of the 
game" you drew an analogy of a case, supposing two runners running 
a foot race, and suggested that a feeling of sportsmanship would be 
in some degree responsible for the fact that one runner would not 
take an unfair advantage of the other, say, to put him out of the 
race.^ Returning to the field of industry, what would you say as to 
the relative efficacy of sportsmanship or something comparable to 
that in the industrial field, and the presence of a referee to police or 
to see that the conduct of the participants in the contest was in 
accordance with the rules. Do you see what I am getting at? 

Professor Fetter. Well, that there is an analogy I do not doubt, 
but I would not put too much stress upon trusting to the spirit of 
sportsmansliip. We still have the umpires, the referees, and we have 
the rules, and if a mnn jabs the other with his elbow as he goes around 
the turn, he is disqualified. That is a rule that is laid down by those 
who are conducting the sports. 

Mr. O'CoNNELL. "WTiat I am getting at is, in the field of industry 
you wouldn't put too much reliance on the feeling of sportsmanship 
or its counterpart; you would probably put more reliaiice on the 
referee to enforce the rules. Is that correct? 

Professor Fetter. I have very little sympathy with the plea that 
is going around by professional advocates for self-government in 
industry. It is true we must try to frame our laws in such a way 
that the honest and social-minded members of industry will cooperate 
the fullest, as we do, in the enforceirient of other laws. 

The law-abiding citizen cooperates in the enforcement of the laws, 
so that there is a great need for treating honest business not as a 
criminal in advance but in soliciting its cooperation. But the idea 
that self-government in industry should apply to price poUcies and to 

' See supra, p. 1662. 



1680 CONCENTRATION OF ECONOMIC POWER 

determining the public policy of the industry is to make men the 
judges of their own cause. Adam Smith sufficiently replied to that 
150 years ago when he said, "Men in the same trade seldom meet 
together but the conversation ends in a conspiracy against the pubUc 
or in some contrivance to raise prices"^and that was the verdict 
pronounced 150 years ago, the wisdom of which never has been ques- 
tioned since, on the proposal for self-government of industry. 

The Chairman. Are there any other questions? 

Professor Fetter, we are very much indebted to you for a very lucid 
statement and we thank you indeed for your presentation. 

Professor Fetter. Thank you. Senator, because I feel you have 
been exceedingly patient in this academic development. 

The Chairman. It interests our patience to listen to you, Professor 
Fetter. 

Mr. Ballinger. May I present the next witness? State your name 
and occupation for the record. 

TESTIMONY OF JOHN T. FLYNN, ECONOMIST, NEW YORK CITY 

Mr. Flynn. John T. Flynn, New York City, economist. 

Mr. Ballinger. Senator O'Mahoney, Mr. Flynn is very well 
known; he has written extensively for a number of years on economic 
problems, in the press and numerous magazines, and he has also 
written a good many books, and I feel sure it is superfluous to tell the 
committee about Mr. Flynn, as most of them have heard about him. 

The Chairman. There is a possibility that the pubUcations oi this 
committee may reach some persons who haven't read Mr. Flynn's 
books or persons who have not read his newspaper articles which 
appear daily. I think perhaps it might be well just to make a more 
complete statement. 

Mr. Ballinger. All right, Mr. Flynn; will you tell us some of the 
books you have written? 

Mr. Flynn. Mr. Chairman, I have devoted myself many years to 
observing and writing about economic phenomena for various Ameri- 
can journals and newspapers and writing books on those subjects, 
the latest of which is one I think has been used here. Security 
Speculation, Its Economic Effects. I have acted here as an economic 
adviser for the Senate Banking and Currency Committee in the 
investigation and study of the New York Stock Exchange and writing 
a report on that subject, as well as for the Munitions Committee in 
the study of war profits and war taxes. I am employed by one 
maga^zine to write for them on the passing economic phenomena; 
that is Collier's Magazine. I contribute to most of the others. 

If there is any further statement I will be glad to make it. 

The Chairman. I think that is quite sufficient. 

May I ask, how long have you been engaged in this work? 

Mr. Flynn. About 25 years. 

Mr. Chairman, I assume that what you gentlemen are talking 
about is the present economic system. 

The Chairman. We are not talking, Mr. Flynn; we are Hstening. 

Mr. Flynn. I should think you have been listening. I observed 
today that this has been a magnificent job of listening, and what you 
have been listening to. But what you have been wanting to hear, 
I assume, is what can be done within the framework of the existing 



CONCENTRATION OF ECONOMIC POWER IggJ 

economic system. Nobody is seriously contemplating substituting 
another economic system for this one, at the present moment in the 
United States at least. No large number of people want to do that, 
and it could not be accomplished without great agitation over a long 
period and probably violence in the end. 

The Chairman. Let me say that I have not, nor has any member of 
this committee, suggested any change in tJie economic system. 

NEED FOR IMPROVEMENT IN FUNCTION OF ECONOMIC SYSTEM 

Mr. Flynn. I say this for another reason, because one hears con- 
tinually the statement that we are in a new era, we are in a new age, 
and in a sense, so far as the accidents are concerned, that is true; but 
essentially we are in the economic capitalist money economy, which 
operates according to the same laws now as it did in years gone by, 
although they may not have been so well understood in years gone by. 
New technological and organization factors have entered, so that 
these laws find themselves impinging on new conditions, but it is not 
about a new era with a new economic system that I understand we are 
concerned, but how the present economic system can be made to 
function, not perfectly but at least better than it has been functioning 
in the past. 

The Chairman. For the benefit of the rank and file. 

Mr. Flynn. For the benefit of the mass of the people; and I think 
we ought to be under no illusions as to how it has functioned, because 
if you go back over the last 25 years you will find that at least 15 of 
them have been years below the normal of economic activity, which 
is not a very good showing. 

Now I should like to state at the outset that the thesis I should 
like to present to the council is tliis: First, the investment goods indus- 
tries are essential to a continuous functioning of the capitalist system; 
second, that the investment goods industries are now very close to 
a state of complete collapse; third, that one of the major reasons 
for this collapse is the constrictions of monopoly and monopolistic 
practices; fourth, that the breaking of these monopoly practices is 
not only essential to recovery but essential to the functioning of the 
capitalist money economy. 

The Chairman. And the maintenance of a democracy? 

Mr. Flynn. I mean to touch on that, and if I overlook it I hope 
somebody will ask me about it. 

The Chairman. Would you accept that amendment? 

Mr. Flynn, I would indeed. 

Just to clear up a few things in the matter of terms. I have used 
the term "investment goods industries." In popular discussions one 
hears references to durable goods and heavy goods, and in a general 
sort of way everybody has an understanding that what is the matter 
with us is that these heavy goods industries, these durable goods 
industries, are more or less supine at the present time, and that all 
of the people who are ordin^arily employed in those industries are out 
of work, and that therefore these industries must be revived in some 
way. 

But the importance of these industries does not arise from the fact 
thfit they are durable goods industries or heavy goods industries, but 
from the fact that most of them are investment goods industries. 

124491—39 — pt. 5 4 



. 1682 -CONCENTRATION OF ECONOMIC POWER 

They are industries, the products of which are bought, not with what 
might be called the expendable income of people, but with their capital 
income, with their savings. 

They are the things which people buy with their savings rather 
than with the money which is usually regarded as their expendable 
income. 

MECHANISM OF THE CAPITALIST ECONOMY 

Mr. Flynn. Now, I want to point out some facts about the mech- 
anism of the system, and I hope that you will pardon me for doing 
this and supposing that you gentlemen are not familiar with these 
elementary economic factors, but I have come to learn over many 
years of experience and discussion that confusion comes not merely 
from a confusion about terms, but also from men not having in the 
front of their minds certain elementary principles which perhaps they 
have in the back of their minds and which are lost in the discussion, 
and my object is to focus attention upon the key part which these 
investment industries play in the functioning of the system. 

Now we know how goods are produced, all sorts of goods. We 
know how hats are made, how shoes are made. You could find in 
the United States thousands of men who, if all the shoe and hat 
factories in America were to be abolished, could promptly reproduce 
them all and. go to producing hats and shoes. And they don't do 
that now because when you produce hats and shoes, you must at the 
same time and some place or other produce the money income with 
which hats and shoes are purchased. Whenever you make a hat to 
sell for $5, some place $5 worth of money or income purchasing power 
must be produced to enable somebody to buy that $5 hat, and the 
trouble now arises out of the fact that while we know how to produce 
the goods, we apparently do not know how to produce the necessary 
purchasing power. We know how to produce the natural income, 
but we do not know how to produce or get started the necessary 
money income. 

It is for the purpose of clarifying that idea that I wish to refer to 
two very simple charts. I have used them not because it is not pos- 
sible to state this in terms of ordinary English, but because this en- 
ables me to say in one-fourth the time what I want to say if I did not 
use the charts. I would like to introduce for the record chart No. 1, 
entitled, "Production of money income. 

The Chaibman. The charts will all be received in their regular 
order as yon present them. 

(The chart referred to was marked "Exhibit No. 294" and is in- 
cluded in the appendix on p. 2165.) 

Mr. Flynn. Here is an enterpriser, a manufacturer of consumptive 
goods. He does two things, tliis man who is called A. He produces 
goods, shoes, shirts, clothes, or whatever it may be, and he sends 
them to the market to be sold, but at the same time there in that 
same factory where he is producing those goods he is producing the 
money income which is essential to buy those goods. In other words, 
he is expending costs of production, wages, rents, interest, all sorts 
of expenditures which can be lumped together and called the cost of 
producing these goods. And all of these sums are paid out to the 
people who participate in one way or another in the process of pro- 
ducing these goods, so that from that enterprise as planned you have 



CONCENTRATION OF ECONOMIC POWER lg§3 

going out continuously while he is in activity two streams, one a 
stream of goods which goes into the market place to be sold, and the 
other a stream of money income which is going into the pockets of 
the people. Let us put it that way for simplicity. Or we might call 
that a reservoir of purchasing power. But let us say it is going into 
the pockets of the people who have produced these goods. 

At the same time here is another enterpriser, B, who is doing the 
same thing. He is producing some other sort of goods. He is send- 
ing his goods to the market place to be sold, and he is paying out into 
the pockets of the people the costs of producing those goods which we 
will call income. So that when the process is finished, if you could 
break it off at any given point, you have a supply of goods in the 
market place and a supply of money income in the pockets of indi- 
viduals which they can use to buy the things in the market place. 

I am presenting this in the case of two, but I will extend it in a 
minute — just two enterprisers. 

Now what happens after this much has gone forward? A, as we 
say, wants to sell his goods. He wants to sell those goods for the 
amount he paid to produce them. That is to say, he wants to go over 
here to the pockets of these people and take back from tJQ.ejn every- 
thing that he expended to produce the goods, plus a profit. He wants 
to take back all he paid out plus an additional sum which we call 
profit. 

And B wishes to do the same thing. He wishes to go to the pockets 
of the people and draw therefrom in prices all that he paid out in 
costs of production, plus a profit, and it would be the same if instead 
of having A and B, you had 100,000 enterprisers all operating at the 
same time, all sending out into the market place a great stream of goods 
and into the hands of the people a great stream of inconie. Every 
one of these enterprisers would want to go back to that reservoir of 
income to which he had contributed a given sum and take that amount 
back as the price of the goods — take that amount back plus a profit 
which would be the pric& of the goods, and that is perfectly natural. 
This is a profit system. The men could not operate unless they could 
do that. But obviously they cannot if the set-up is as I have de- 
scribed it here and nothing else is added. They all cannot go to this 
reservoir and take back what they paid into it plus an additional sum 
which is called profit, and it cannot be done unless we can introduce 
another factor which will supply that additional sum which will 
enable them to take back that profit. 

The Chairman. In other words, the figure on the chart which is 
labeled "Market for goods" and the figure on the chart which is 
labeled "Money income", so far as this chart is concerned, represent 
only what has been put into it by Enterpriser A and B, so that there 
is nothing from which the profit may be drawn. 

Mr. Flynn. That is correct. 

Now we comphcate it a Uttle bit, and I now offer chart 2, called 
"Production of income, consumptive and investment industries." 

(The chart was marked "Exhibit No. 295", and is included in the 
appendix on p. 2165.) 

Mr. Flynn. Here you have another gentleman who is called C, 
and he is doing precisely what A and B are doing. He is producing 
goods, and he is producing money income because he is employing 
people and paying out sums of money for materials and paying out 
interest and all sorts of charges as the cost of producing his goods. 



1684 CONCENTRATION OF ECONOMIC POWER 

He is sending here into this money income market a large amount 
of income, so that while he is operating you have over here in the 
hands of the people the income which has been produced by A, by 
B,*and by C. But let us imagine, if we can, the apparently absurd 
notion that C sends no .goods into the market place, that is to say 
that he throws them all into the Atlantic Ocean. We do hava cases 
hke that; they don't throw them into the Atlantic Ocean, but we 
do have gentlemen who manufacture goods which they never sell 
because nobody would want to buy them. But he sends no goods 
to the market and as long as he will do that, as long as he will produce 
money income and put it here in the hands of the people, along with 
A and B, without asking any part of it back, why then A and B can 
sell their goods for the income produced by A, B, and C, and that is 
what makes profit possible for A and B. 

Now who is this person C? And I beg you to understand that I 
am giving you a very highly oversimplified explanation of a very 
complicated subject which could be complicated until the charts 
would flow iii a steady stream, too. He is a man who is willing to 
manufacture goods and sell them on long-term credit; he is willing 
to make a locomotive, let us say, and sell it for a note payable in 20 
years; he doesn't want any of this income back. I am taking the 
extreme case now. 

The Chairman. You mean he doesn't want it back immediately. 

Mr. Flynn. He doesn't want it back immediately. He wants it 
in 20 years, let us say. 

Senator King. He wants a negotiable note. 

Mr. Flynn. I will come to that, sir. He wants a negotiable note, 
but at the moment he doesn't want any of this income back; he 
doesn't take it out of that; he doesn't negotiate that note with this 
money income, as I will try to show you. He is the man, by the 
way, who builds houses and sells them for one-fourth down and three- 
fourths in 3 years or 5 years or 10 years, or builds locoftiotives and 
sells them on 20 years' time, or builds heavy machinery and builds 
any of these large-scale heavy goods which I call investment goods. 
As long as he does that A and B can operate at a profit and the mo- 
ment he stops A and B can no longer operate at a profit, and th& 
moment that A and B can no longer operate at a profit they stop 
operating. 

The point I am trying to bring home to you is that the condition 
of profit in the profit system is the continuous functioning of a man 
who is willing to pay out funds as cost of production but is willing 
to sell his goods on long-term credit. 

As Senator King has said, usually the man who makes locomotives 
does not want to sell them for notes which he cannot collect for 20 
years. He wants to sell them for negotiable notes or for cash which 
comes from somebody who has loaned that cash on bonds, let us 
say, to a railroad, but those bonds and that cash usually come out 
of a pool of money which I have not yet referred to. 

Now let me put it this way. A and B, A and B together — we will 
leave C out for the moment — put over here $3,000 aniece, which is 
$6,000. 

The Chairman. You say "over here." 

Mr. Flynn, The money income. The money-income reservoir is 
$6,000. They want to take back $6,000, let us say, plus 10 percent^ 



CONCENTRATION OF ECONOMIC POWER 1^85 

which would be $6,600. But the people who have received this money 
income do not want to spend $6,600; they haven't got $6,600; they 
have only got $6,000, because we have left C out for the moment, and 
they do not want to spend the $6,000 which they have received be- 
cause they wish to save some of it. They wish to put, let us say, 
$600 aside, so that you have a situation where A and B wish to get 
back $6,600 from people who have $0,000 but only want to spend 
$5,400. 

This savings money, instead of flowing over here to the market 
place to buy things, flows over to w^hat might be called a savings pool 
or a savings reservoir, and that tends to accumulate over the years, 
and it is out of that that C gets his money. In other words, when a 
railroad wishes to buy a locomotive from C, C wants cash, but the 
railroad borrows it over here out of this savings pool; it does not take 
it out of this stream of current money income. 

Now let me add one point to that. This, it seems to me, is crucial. 
As money is paid out in wages it tends to move on from the man who 
receives it to the merchant who has goods to sell, from the merchant 
to the producer, and to the merchant's wage earners, to the producer's 
wage earners, to the maker of raw materials; it circulates around, 
passing from hand to hand and creating business and activity as it 
goes. It might be called money income, which is moving funds. But 
at intervals in this stream certain people decide that they are not 
going to pass it on, they are going to save it; in other words, if you 
could imagine this stream of income flowing around in a pipe like 
water, but at certain points coming to little vents through which it 
drips into a pool, it ceases to go around in the pipe and comes into a 
static pool of savings until it is drawn back by some mechanism into 
that stream of income again. 

In other words, the man w^ho puts aside a dollar out of his current 
income and earmarks it as savings — I do not mean the money which 
he is saving up to spend in the summer for a holiday or which he has 
put into a Cliristmas account to be drawn out and spent at Christmas, 
I mean the money that is earmarked as true savings wliich he intends 
to keep as long as he can — never spends that money himself, and it 
will never g.t spent and never get back into the stream of saving 
until 

The Chairman (interposing). Never get back into the strearii of 
expenditure. 

Mr. Flynn. The stream of expenditure, until he or some agent to 
which he has committed it invests it or lends it to somebody, and 
when that agent or he invests it, then he puts it out in machinery, in 
lumber, in cement, in steel, to put up a plant, to fill the plant with 
machinery, or he lends it to somebody who is going to do that. In 
other words, these savings tend, not 100 percent, but generally and 
almost 100 percent, let us say a very large percentage, to be expended 
only for investment goods, so that the only way in which these savings 
can be drawn back into the stream of spending is to have soniebody 
invest them in some kind of an industry, either by lending or invest- 
ing directly, and when he does that the man who is putting up the 
house or who is manufacturing the locomotive, having borrowed it 
pays it out in wages to build the locomotive, and it is back again in 
this money-income reservoir and moving across to the market place 
and buying goods of A and B. 



1686 CONCENTRATION OF ECONOMIC POWER 

If I have been successful in putting over the idea I have in mind, 
I have shown that this is the sensitive part in the functioning of the 
capitalist money economy, and this is the mechanism over here which 
draws funds back from the savings pool and puts them into operation 
again. There is another element which I don't want to go into because 
I don't want to complicate this too much. This mechanism tends to 
draw into the stream of spending, funds which didn't exist before, 
through bank loans. I am sure you gentlemen understand that 
mechanism and I won't go into it, so that when this breaks down it is 
much more serious than when an industry here breaks down. 

Senator King. When C breaks down? 

Mr. Flynn. When C breaks down it is much more serious than 
when one of the B units breaks down, because this is the very bottle- 
neck, or point at which power is forced into the system to make it 
operate. 

Now, what are these investment goods industries? I do not speak 
now of investments, but of investment goods industries. A man 
may invest in all sorts of industries. 

The Chairman. Do you wish us to understand that it is your 
thesis that the only source of money from which the profit may be 
obtained, comes from the enterpriser who is willing to sell the goods 
for which he pays immediately the cost of production, either by way 
of purchase of materials or wages — is willing to sell those goods only 
upon long terms? 

Mr. Flynn. Either sell them on long terms or sell them to a 
purchaser who borrows the money on long term. 

The Chairman. You say that is the only source? 

Mr. Flynn. I do not say that is the only source. There is another 
source of profit. I do not like to introduce this. Let us suppose 
now that B is operating at a loss. B puts in $3,000 over here, and 
A puts $3,000 over here in this money income reservoir, but B doesn't 
manufacture a very alluring type of goods. So when these people 
go to spend their money they buy A's goods and not B's goods, so 
A gets back, instead of his $3,000, $3,500, which is a good profit, a 
profit of $500, and B gets back $2,500 and has a loss, and the loss 
that B has sustained enables A to have a profit. Now, I am not 
advocating that kind of a thing. I am pointing out another source 
of profit, not to the system but to A. 

The Chairman. So far as the system is concerned, Mr. Flynn, 
does it make any real difference whether the payment for the goods 
is made immediately or over a period of 10 or 15 or 20 years? In 
the terms of the entire system, what difference does it make whether 
I am paid today or a week hence, a month hence, or 6 months hence? 

Mr. Flynn. It makes this difference, that you have to have some- 
body in the system who is wUllng to manufacture these goods and 
defer payment on them, so that the income which he has produced 
in the production of those goods is available to be distributed among 
the other enterprisers who demand cash. 

The Chairman. You tell us that the source of profit is (a) deferred 
payment for goods immediately produced; and (b) the loss which an 
enterpriser sustains in the production of goods which he sells for too 
low money. 

Mr. Flynn. I am not sure how large a part loss plays in this 
profit. 



CONCENTRATION OF ECONOMIC TOWER 16g7 

The Chairman. Is there no other source of money? 

Mr. Flynn. Oh, yes; there are favorable balances from exports, 
favorable export balances. I should thijik that these are the three 
great sources of excess funds wliich enable those enterprisers who de- 
mand cash to operate at a profit. 

The Chairman. Does increased production play any part in creating 
a source of profit? 

Mr. Flynn. Well, Senator, production is the only source of income, 
whether it is little production or great production, so increased pro- 
duction produces more iincome, but it also produces more goods, and if 
you didn't have this man in C in here, but only had A and B produc- 
ing, then no matter whether they produced a little bit or a great deal 
they would only produce income sufficient to balance their costs, and 
couldn't get a profit out of it. In other words, whether the production 
be great or small, you must-have somebody who is producing the excess 
income in order to enable these two gentlemen, A and B, to get a profit. 

Now, I did not mean to give you the understanding that I believe 
that the profit comes out of the credit. The profit comes out of 
the expenditure of the cash now; the profit for A and B comes out of 
the expenditure of the cash by C now, and his wiUingness to operate 
without taking any part of it or all of it back now. Tliis means credit. 

The Chairman. Doesn't the estimate of value which the purchaser 
places upon goods play a very Important part (on goods and services) 
in the creation of the reservoir from which the profits are derived? 

Mr. Flynn. No I do not tliink so. Senator. 

The Chairman. Let me state what I mean. If enterpriser C is 
able to secure labor at a low cost, or material at a low cost, in each 
instance much lower than that at which enterpriser B secures it, is 
there not then >eated an excess which goes into profit, or would you 
say that that is merely the loss of the worker or the person who sold 
the goods? 

Mr. Flynn. I should say, of course, that when enterpriser C, who is 
this investment goods enterpriser, can obtain all the factors of pro- 
duction, which would include labor and materials, at a lower price, or 
at a reasonably low price compared with other markets, he would be 
disposed to produce more, and that as the cost of the factors of pro- 
duction go up for C, he is disposed to produce less, and that is one point 
I am coming to later, and therefore the extent to which C may be 
producing, to wliich C may be in the market, will depend undoubtedly 
upon the relative cost of the things which he has to produce, as com- 
pared with these other industries, but I do not think that that enters 
into this particular equation. 

The only point I am trying to make clear here is that unless he is 
operating and unless he is pouring money incor'^e down here which 
A and B can share between them, and unless he it operating on credit 
or the equivalent of credit — that is, selling to peopx > who get the pur- 
chasing power through credit — then A and B cannct possibly have a 
profit, and if they cannot have a profit, they will not operate, and they 
cannot have a profit out of thj income which *hey themselves produce 
in the production of their goods, ""hat is th. points I am trying to 
make cleap. 

Now Ir^said before, this is a very highly oversimpHfiid staternent of 
this thfetry because there are mi^ny other factors which enter into it, 
but I believe it to be a fair statement and if you understand it as a 



1688 CONCENTRATION OF ECONOMIC POWER 

mere general outline it is sound, and from this we may conclude that 
the indispensable condition for the functioning of the capitalist sys- 
tem is the functioning of the enterpriser C, the man who makes the 
investment goods, and that when be stops functioning for any reason- 
either because he does not want to produce or is on a strike or because 
nobody will buy bis goods because nobody wishes to invest, that when 
that takes place and he goes out of business, then these people stop, 
but they stop because they can no longer sell at a profit. 

Now, if there are any further questions to be asked about this I 
should like to answer them here. 

MONEY ON DEPOSIT NOT INVESTED 

Mr. Flynn. Very well, now then my next point is that this gentle- 
man C is now pretty much in collapse. Oh, he is operating, but he is 
operating at a very, very low level of activity, and this is so because 
investment has collapsed. Private investment in the United States 
for whatever reason is practically at a standstill. Now I want to offer 
just a few figures to illustrate that point, and I offer chart 3 entitled 
"Total Deposits (Demand and Time) of All Banks," and',1 think this 
chart illustrates a fact which is not very generally known. 

(Chart 3 referred to was marked "Exhibit No. 296" and is included 
in the appendix on p. 2166.) 

Mr. Flynn. Many people think that we do not invest our funds 
now because we just don't have the savings any more that we had 
in times of prosperity. Here I wish to offer in connection with this 
a table. 

Representative Sumners. Mr. Chairman, I don't think anybody 
thinks that. 

Mr. Flynn. Well, in the course of some lectures I have had that 
question asked me invariably — "Don't you think, after all, that the 
people have used up their savings now io the depression and that 
business hasn't got the surpluses any more and that people haven't 
got the money to invest?" Of course, there are other reasons offered. 
I simply say that a great many people do believe that, and I have 
certainly had the question asked me, and in the course of a rather 
abundant maU which coijies to my desk every morning I think a day 
doesn't go by that some one doesn't ask that question, and I don't 
offer the chart for the purpose of enlightening those people particu- 
larly, but I merely call attention to that fact, I offer in connection 
with chart 3 a table which contains the data on which it is based. 

The Chairman. That data was secured from? 

Mr. Flynn. From the Federal Reserve Board. These are based 
on reports of the Federal Reserve Board. 

The Chairman. The statement may be admitted to the record.* 

Mr. Flynn. Yes; I wish to use the figures for the moment. Here 
you have from 1923 to 1930 a period of the most extraordinary boom 
m industry that this country has ever had. We began with bank 
deposits of almost $40,000,000,000 in 1923, and by 1930 these had 
risen to $54,000,000,000, something over $54,000,000,000, so you see 
there is in round numbers an increase in bank deposits, both time and 
demand, in all banks, of $14,000,000,000. These are round numbers. 
The table which I have here gives the precise numbers. 

• The statement referred to Is Included as part of "Exhibit No. 296"; appendix, p. 2166. 



CONCENTRATION OF ECONOMIC POWER IQgQ 

Then, of course, we had this great deflation in the period from 
1930 to 1933, and then in 1933 there began another rise in deposits 
to 1937. Now that rise was from $37,000,000,000 to $53,000,000,000, 
or just about the same amount, $14,000,000,000 again. In other 
words, in this perio'd of distress and business lethargy, in a period of 
4)2 years we had as great an accumulation of funds in the banks as 
we had durmg the l)'i years of the period of most extraordinary business 
activity in the country. Of course, the rise in these deposits was due 
to different causes in both cases. In this case (referring to the period 
from 1923 to 1930) the rise in deposits was due to private loans, 
loans made by private business in the banks. " In this case (referring 
to the period from 1930) it was due to loans made by the Government, 
the sale of Government paper to the banks; but, the Government 
having made the loans to the banks, the deposits now belong to private 
individuals because the Government has paid out all these sums of 
money in relief and recovery and in other ways and the money has 
come into the hands of private industry, and the deposits now belong 
not to the Government but the individuals. 

The Chairman. Have you made any efforts to <;hart the increase 
of postal savings deposits during tha4; period? 

Mr. Flynn. I was going to mention them without giving figures; 
I was going to mention them in a general way later. I am merely 
pointing out this one factor here now. 

Here are time deposits or savings deposits in all banks, not only 
savings banks but commercial banks. Here again I offer chart No. 4, 
"Time Deposits All Banks," and a table of figures drawn from the 
American Bankers Association reports, which gives the data on which 
chart No. 4 is based. 

The Chairman. The table may be received. 

(Chart No. 4 referred to, together with attached figures, Was 
marked "Exhibit No. 297" and is included in the appendix on p. 2166.) 

Mr. Flynn. Here again you will see — I won't go into figures to take 
up your time — a great rise in savings during that period, and while 
there is not such a large rise, there is a rise of $4,500,000,000, something 
more than $4,500,000,000 in the last 4 years. Over here (referring 
to the period from 1923 to 1928) it is about $8,000,000,000, but it is a 
very large rise in savings on the savings accounts. 

Here, however, is the important point. During this period from 
1923 to 1930 you had the deposits rising as a result of loans, and this 
is revealed in chart No, 5, entitled -"Total Deposits and Total Loans 
of All Banks," which I offer for the record, and the table containing 
the data on which it is based drawn from the reports of the Federal 
Reserve Board. 

(Chart No, 5 referred -to, together with attached figures, was 
marked "Exhibit No, 298" and is included in the appendix on p. 2167.) 

Mr, Flynn. Then, of course, we had this great liquidation of loans 
from 1929 to 1933 and now, as deposits rose as a result not entirely of 
Government deposits, because we had a large flow of funds from abroad 
and these deposits came into the hands of private individuals and of 
the banks, the loans remained stationary so that between 1933 and 
1938 there has been no appreciable increase in bank loans. In other 
words, in spite of the fact that depositors in banks have today prac- 
tically as many billions as they had in 1928 and '29 and have in the 
g'^.vings banks almost as much as they had in 1928 and '29, during all 



1690 CONCENTRATION OF ECONOMIC POWER 

that time, from 1933 to 1938, there has been no appreciable increase 
in bank loans by the banks. In other words, in 1933 the banks had 
loans of $22,000,000,000. In 1938 they had loans of $21,000,000,000 
or a billion dollars less than at practically the low point of the depres- 
sion. 

Representative Sumners. Mr. Flynn, may I ask you a question? 
Have you anything to show the relationship between loans and 
indebtedness? 

Mr. Flynn. Between loans and private indebtedness? 

Representative Sumners. Yes. 

Mr. Flynn. No; there are figures on private indebtedness which 
appear currently from two or three different sources. I have always 
had some little doubt about the accuracy of these reports on indebted- 
ness. I do not know quite how they get them. 

Representative Sumners. What I am trying to find out, if I may 
ask, is whether or not there are any studies to indicate that when bank 
loans, for instance, decrease, private business may increase. In other 
words, whether or not at a given time there may be a larger percentage 
of indebtedness carried by private persons whose debts have not been 
paid to the bank. 

Mr. Flynn. I do not believe there are any reliable figures on that, 
and that is one of the reasons why I have great doubt about the 
accuracy of the data which we get from time to time on indebtedness. 
I do not think anybody knows how much A owes to B and B owes to 
C. But this is one figure on which we can rely and which accounts 
for a very large amount of indebtedness, and it is the kind of indebted- 
ness that grows out of the activity of business, because businessmen 
go to the banks very largely, and even more largely than ever now, 
for their money because they had been getting it by security operation. 
For instance, I believe that one of the large steel companies borrowed 
$20,000,000 from one of the banks to put up a mill. Ordinarily they 
would have done that by a security issue, but they went to the banks 
for it, and in spite of that fact, there- has been no increase in bank 
loans. On the contrary, there has been a decrease of bank loans. 
•So bank loans now, you will notice, are almost $20,000,000,000 less 
than they were in 1929, although the deposits are almost the same. 
And I offer those figures as an evidence of the complete breakdown in 
investment, in private investment in this country. 

Senator King. Banks are investing in Government bonde rather 
than private securities. 

Mr. Flynn. The banks, Senator, are- buying Government paper. I 
wouldn't say they are buying bonds ; they are buying Treasury notes 
and Treasury certificates as a part of the Government's financing of 
its deficits. But there are banks — I could furnish the committee with 
the names of banks but I don't think it is necessary to do that — where 
the cash in the bank's vaults or on its books, and the Government 
paper, is 100 percent of the bank's deposits, and I have seen some banks 
where it is even a little more than that, in other words where they have 
got all of the bank's deposits and -a part of its capital in investments 
and in cash, and I have seen some banks where the cash amounts to 
35 and 40 percent, and even 50 percent of the bank's deposits, which 
is a complete example of how far private investment has broken down. 

Now this brings up the question as to whose fault is this? Is it the 
fault of the bankers? Are the bankers on a lending strike? Are they 



CONCENTRATION OF ECONOMIC POWER 1591 

trying to discredit somebody or something or some set of principles? 
Or is it that the people who borrow money are on strike and won't 
borrow? Or what is the reason? Is it perhaps due to nobody's fault 
at all? Is it because bankers just are not offered good loans? It is 
very difficult to determine a question like this. I travel a great deal. 
1 have been m many banks all over the country. I have questioned 
many bankers. I can't believe that the large number of shall I say 
New Deal bankers whose portfolios show precisely the same condition 
as the banks of those on the other side, are on a capital strike, are 
refusing to lend for the purpose of discrediting anyone. I think we 
make a mistake, in trying to get at the cause of our troubles, to suppose 
that they come from any such notion as that. I do not think there is 
anything a banker likes better than a profit. I don't know anybody 
who likes a profit better than a banker does, who likes a good loan at 
interest. 

The Chairman. What explanaticms do these bankers whom you 
have approached give of the small volume of loans? 

Mr. Flynn. Most bankers say that the good risks are not offered, 
and I believe I have seen some evidences of the banlvs' even leaning 
over backwards a littJe bit and actually carrying on campaigns to try 
to get new kinds of loans. 

The Chairman. Why do they regard the risks as not good? 

Mr. Flynn. After all, there are certain tests of good banking creajt. 
I suppose a man's character would be one thing; also the man's col- 
lateral, the man's capacity to pay his loans, the extent of his business. 

The Chairman. It wouldn't be said that there has been any de- 
crease in character? _ , 

Mr. Flynn. No, I think there has been an increase in character the 
last 4 or 5 years. 

The Chairman. Then we will have to leave character out. 

Mr. Flynn. I am afraid we have hit the peak now and are going 
to begin to lose a little of our character as we get off the mourner's 
bench. 

Mr. Davis. Mr. Flynn, is it not a fact that the ordinary banker 
inquires into the purpose for which a proposed loan is to_ be used and 
gives consideration to whether he thinks it will be a losing or a suc- 
cessful venture, primarily resulting perhaps in a loss to the bank unless 
the security is so ample that he would not have to give consideratipn 
to that? 

Mr. Flynn. I do not think there is any question about that; par- 
ticularly in the smaller cities bankers like to know a good deal a,bout 
what the man is going to do viith the money. They are not satisfied 
to know he has good collateral, they want to know the loan is going 
to be paid without their having to sell the man out. 

I think that good loans on the whole are not being offered to bankers. 
I think perhaps that there is one other factor which cannot be over- 
looked. I do believe there is just a little uncertainty about things. 

Representative Sumners. Isn't there a lot of uncertainty about 
things? We are not afraid to talk in public. If a fellow has somfr 
money, he doesn't know where to put it with safetj^ We might as 
well put it out on the table. 

Mr. Flynn. That is where the trouble is, that is where it starts with 
the investor. The investor just doesn't want to borrow money to 
go into new ventures. ,, 



1692 CONCENTRATION OF ECONOMIC POWER 

RepreRentative Sumners. If he can't pay it back, he is afraid to 
borroAv the money. 

Mr. Flynn. I have said and I have written several times, as a result 
of talkina: with bankers, that T believed the trouble was not so much 
with bankers refusing to lend on perfectly good loans but the fact 
that good loans are not being offered to them because the better 
risks simply do not wish to go into any kind of adventures now for 
one reason or another, let us say uncertainty about the general situa- 
tion is one of them. T was going to talk about that a little later and 
I left that point out, but T think uncertainty is playing its role more 
with the investor than with the bank. 

The Chairman. Would it be proper to say that another cause might 
be the lack of confidence upon the part of the banker and of the 
entrepreneur, that he could successfully compete? 

Mr. Flynn. Let us put it that way, then, but I think it originates 
with the investor who just doesn't want to go into a new industry or 
doesn't want to expand his present industry, or doesn't want to open 
•a new kind of adventure or enterprise in an old industry, for a variety 
of reasons, one of which is uncertainty. 

The Chairman. But whatever the reason is, the fact exists. 

Mr. Flynn. The fact exists and there are the figures. 

Representative Sumners. No one with good sense, if he has money 
to invest, would let it he in the bank if he felt he could invest it prop- 
erly, and when you find it in the bank you know that something has 
scared him. You don't need charts to tell you that. 

Mr. Flynn. The only thing the chart does is show that it is lying 
there. 

Now here is one more with which I will inflict you. I want to show 
you the small extent to which private financing has been activating 
our system. 

The Chairman. Did you discuss chart No. 6? You just took it away. 

Mr. Fly'NN. No; I didn't want to go into that. 

The Chairman. Do you want it to go in the record? 

Mr. Flynn. I will offer chart No. 6 which is a chart showing security 
issues from 1923 to 1938, in bilHons of dollars, and shows the total of 
new security issues and the new security issues for new funds rather 
than for refunding. This is based on data which the Commercial 
and Financial Chronicle have been compiling for ages. 

(The chart referred to with accompanying figures was marked 
"Exhibit No. 299" and is included in the appendix on p. 2168.) 

Representative Sumners. Mr. Flynn, that is a very interesting 
chart. Would you mind giving us a little explanation of it? 

Mr. Flynn. Yes; I will do that, but I would like to caution you 
against this chart a little bit. 

The Chairman. Before you begin to discuss that may I venture to 
call your attention to the fact that Members of Congress for a number 
of years have been constantly besought by their constituents to aid 
the R. F. C, for example, by giving it authority to make new loans 
to small business, and that all sorts of demands are being made for 
Government credit to be extended to small business in order to pro- 
vide for this condition which you have described here on chart No. 6.^ 

Mr. Flynn. Well, I think the failure of the R. F. C— I will not say 
failure- but perhaps the inabiUty of the R. F, C. to put out any large 

' See heariugs on this subject, Hearings, Part IX. 



CONCENTRATION OF ECONOMIC POWER 1QQ3 

number of small loans to businessmen is an evidence of the fact that 
the demand for loans is not there, and may I add, and I hope tliis will 
not be taken as offered in any critical spirit at all, lot me say that the 
same thing is true of the bank which the head of the Reconstruction 
Finance Corporation controls in Texas, which I believe has the 
largest portfolio of cash and Government securities, the largest amount 
of cash, of any bank I have seen, and I am not criticizing him for that, 
because I think he has been doing precisely what other bankers have 
been doing. 

I want to caution you against this chart. The only important 
issues from the point of view of the thing we are talking about are 
issues which bring new money into the system. Therefore when one 
set of bonds is substituted for another set of bonds, although it is a 
new issue it is not important. But this chart shows the total, which 
is the black line, and the new issues, which supposedly are for new 
money, which is the dotted line. But I do not believe that the break- 
down is quite authentic or accurate, because here particularly you 
have a large number of stocks and bonds issued to brand-new corpora- 
tions and which are called new issues, but many of them were invest- 
ment trusts, a trust formed to sell stock to a large number of people, 
to create a pool of money which went out into the market and bought 
existing stock, so that it was not going into a new industry, whatever 
indirect effect it may have had. So that I thihk that this chart is 
subject to a very considerable factor of error on that basis, but at 
least the comparison can be made over a long period, because in all of 
these years the same method of break-down was used. 

You see the security issues in 1929 reached an enormous total — 
$11,000,000,000, of which $10,000,000,000 were so-called new issues. 
I think perhaps a fair estimate would take four or five billion off of 
those new issues. 

The Chairman. In 1929? 

Mr. Flynn. In 1929, because that was the year when a very large 
number of finance companies and investment trusts were floated and 
I, Mr, A, instead of going into the stock market and buying a United 
States Steel stock directly, gave my money to an investment trust 
which went into the market and bought United States Steel stock in- 
directly for me, so that it didn't bring new money into the steel in- 
<lustry or any other industry. It may have liberated some other 
fellow's mone^ that he had tied up in that stock, but it is not, strictly 
speaking, an issue for new money. 

Representative Sumners. Why is it that those two lines don't 
parallel all the way through? 

Mr. Flynn. You mean the black line and the dotted line? 

Representative Sumners. Take the points. How was that point 
pushed up except by a new issue? 

Mr. Flynn. If I understand the question you ask, as we approached 
1929 why is the divergence between total issues and new issues 
greater? 

Representative Sumners. Yes. Just before you get to the last 
peak you see quite a spread there. 

Mr. Flynn. Right here? 

Representative Sumners. Yes. 

Mr. Flynn. I am not prepared to say with any certainty why that 
is so. It simply means that for some reason or other there was a 



1694 CONCENTRATION OF ECONOMIC POWER 

large number of refunding issues. The difference between the dotted 
and black lines in this case is made up entirely of the difference be- 
tween refunding issues and new issues. 

The Chairman. Is there any logic^ reason why refunding and new 
issues should run parallel? 

Mr. Flynn. No, there is not any particular reason that I know of. 

The Chairman. It would be quite conceivable that in one par- 
ticular period of our financial history those who had old bonds out 
would refund and there would be no new issues at all. 

Mr. Flynn. There comes to my mind one reason wliich I do recall. 
There was a very considerable amount of reorganizations in this 
period, mergers, and the bondg of subsidiary companies being drawn 
in, and the bonds of the holding companies issued in their place. In 
other words, new companies X, Y, and Z were being reorganized into 
a single company and bonds, called company A, and the bonds of 
companies X, Y, and Z were being refunded with the bonds of company 
A. There was a great amount of promotional reorganization at that 
time and that would certainly accomit for some of it. 

The Chairman. During the years 1933 to 1936, was there not a 
good deal of refunding for the purpose of cutting down the interest 
rate? 

Mr. Flynn. Whatever the reason was, and that was one of the main 
reasons, you see that most of the financing since 1933 has been refund- 
ing as against new issues, and here : in these new issues are not all 
actually bringing new money into the system, for the same reason as 
applied over here. But there was a great deal of refunding in here, 
some of it to o;et lower interest rates. There was a very large number 
of bonds coming due in here, a lot of financing after the war on 20-year 
bonds that were coming due in here, and many of the bonds were 
refunded at this point. But it is inevitable that there would be a lot 
of refunding going on in here, but it was not inevitable that there 
would be a lot of new money coming into the market. 

Representative Sumners. May I ask you one question before you 
Rut that away? Take that high peak. Then you come on down. 
Was there any considerable reduction in the units, the manufacturing 
units and other business units, that corresponded with the amount of 
bonds en route? You come to the low peak and you arc low both in 
reissue and in new issues. Does that mean a considerable reduction 
in the outstanding obligations of corporations, corporations that issue 
securities? 

Mr. Flynn. No; because tt^is has nothing to do with the total 
outstanding, but only with the new securities coming on the market. 
This has nothing to do with the outstanding total. Undoubtedly the 
outstanding total had declined, because there had been quite a num- 
ber of Uquidations, as j^ou know, but what that amount is I do not 
know. It has no relation whatever to this chart. 

Mr. Douglas. Mr. Fljmn, may I ask a question. You were 
speaking a few minutes ago about the problems of the small business 
getting its credit or doing its financing on either short term, iriter- 
mediaf€ credit terms, or long-term basis. In your opinion, from your 
observation and study, do you think that has any relationship, or any 
material relationship, to the whole problem of monopoly? That is to 
say, suppose that you are a very powerful business organization, that 
you a,re in fair position of being called a monopoly, and I am a little fel- 



CONCENTRATION OF ECONOMIC POWER 1595 

low who is trying to get a start in the same field. It may be that in 
view of 3'our powerful position investors and banks and others would 
consider me a poor risk. Do you think that has any bearing upon this 
current problem of the inability of small business, the difficulty of 
small business, to get its financing done? 

Mr. Flynn. I am not prepared to answer that question, Mr. 
Douglas. I will say, however, that I recall rather distinctly an 
incident which occurred back in 1926 or 1927 maybe, when Mr. James 
Farrell was the president of the United States Steel Corporation, and 
in an address he made either at a chamber of commerce banquet or 
American Iron and Steel Institute banquet, some large function in 
New York, in which he blew off' steam. Although he was the head of 
one of the greatest American corporations he denounced the banks 
for their unwillmgness to lend to small men, and he said, "Now unless 
a man walks into a bank and wants a million dollars they have got no 
time to talk to him," or words to that effect, "and if this goes on at 
this rate presently there will be nobody left but a few big fellows like 
ourselves dealing with each other." 

1 think it woiild be very interesting if tliis committee were to direct 
someone to locate that speech and that part 9f it at least and put it 
somewhere in the record,' because it was the statement of one of the 
biggest of big-business men talking to big-business men and bankers 
in New York, and who I assume knew what he was talkhig about. 

Whether that is true now or not I do not know. I rather doubt that 
that is true now. I tldnk the banks would like to have hums now 
from little fellows or big fellows. 

This chart I believe is rather revealing. 

(The chart referred to was marked "Exhibit No. 300" and is included 
in the appendix on p. 21G8.) 

Mr. Flynn. Again I have to caution you against some inaccuracies; 
it is a chart which I have kept myself since 1934. It is an attempt to 
measure the ffow of new funds into our system. It consists of three 
items. Federal deficits, money coming from the Federal Government, 
fresh funds from the Federal Government; State and municipal 
financing, and private security financing. Now here the private 
security financing is more accurate because the Securities and Ex- 
change Commission issues every month a very valuable and impor- 
tant memorandum which breaks down all the security issues registered 
with them into their purposes, so that anything that is called a new 
issue is really a new issue, an issue that is gohig to bring money in, 
an issue to buy macliinery, to put up plants; it leaves out all sorts of 
refunding issues, issues wliich are put in the Treasury for future 
financing, issues which substitute stocks for bonds and bonds for 
stocks, and so on. 

The white line represents the Government deficits.' I did not take 
Government loans because Government loans are made at infrequent 
intervals, and it would constitute a rather unbecoming and not very 
illummating chart, but the deficits rather mdicate the manner in 
which the new funds flow out into the system. The shaded lines 
represent the new financing of States and localities, counties and cities, 
and the black lines or black sections indicate the new private security 
financmgr 

' A speech delivered by James A. Farrell, president, United States Steel Corporation, at the 37th gen- 
eral meeting of the American Iron and Steel Institute held at Hotel Commodore, New York City, 
May 9, 1930. 



]Q96 CONCENTRATION OF ECONOMIC POWER 

Now we needn't do any more than merely glance at that chart to 
see how small a part private security financing is playing in furnishing 
funds for the system. 

Here in 1936 is the period of the bonus. I have had to take liberties 
with the bonus because it was all done in 1 month, that is to say the 
issues all in 1 month, and it would have made a line so high, so I 
spread it over 3 months. The effect so far as the system is concerned 
is quite the same, and that would represent more nearly how the 
funds went out, but you see that there has been no important pick-up, 
smce 1935 or 1936, in private financing; the shares get a little bit 
larger here and there, but do not amount to very much. I think you 
will probably find that during 1938 the total is very much smaller than 
it was in 1937, and than m 1936. So it exhibits no recuperative 
energy whatever. 

Here you have this gentleman C — whom I was talking about before 
you came in, Congressman — who is manufacturing investment goods, 
in a state of collapse because nobody wants to buy his goods, nobody 
wants to absorb the savings of the society, and that is the point at 
which your capitalist system breaks down. Now if you want to 
make it recover and if you want it to continue to recover you have to 
repair it at that pomt. Whatever you do that will increase private 
investment will brmg about recovery, even though what you do is 
morally bad. I am not discussing that now. Whatever you do that 
impedes the purchase of investment goods, which means the flow of 
investment funds in the system, will impede recovery. 

I would like to get rid of those charts so we can get our minds oJ0F 
of them. 

Senator King. Before you leave that,^ may I ask a question? To 
what extent has there been a loss of capital to the investment during 
the boom and following the boom in large apartment houses and large 
buildings and the decline which has occurred? I was told in New 
York a few days ago that they could not sell a large part of the real 
estate, particularly the large buildings, for 25 percent of the assessed 
value, and that not only millions but hundreds of millions of dollars 
have been lost in the decline in the value of real estate, and to that 
extent capital had been impaired or wiped out in many companies. 

Mr. Flynn. Now you are talking about ponderable and real capital 
as distinguished from money capital. 
Senator King. Yes. 

Mr. Flynn. There is no doubt whatever tbat not only in New York 
City but in every city the losses of savings which were put into real- 
estate investments up to 1930 and even partly through 1930 have suf- 
fered the most appalling hnpairment. That was due to the fact that 
largely the investments in the first place were utterly indefensible; it 
was due to the fact that promoters had discovered a new way to_ ex- 
ploit the real-estate bond. It was one of the reasons why, I think, 
the collapse of our system did not come m 1928 rather than 19,29, or 
maybe even sooner than 1928. I naade a rather bad blunder. I 
wrote a piece in one of our magazines in 1927 predicting that it would 
come sometime in the fall of 1928; I have rather suffered a good deal 
of chafing at the hands of some of my friends because after 1928, you 
remember, it got even better and collapsed in 1929. I think what 
not only I but a great many other men who follow these figures did, 
was to fail to take note of the extraordinary development of the real- 



CONCENTRATION OF ECONOMIC POWER IQ97 

estate bond all over. Now in the past money for real-estate construc- 
tion has been obtamed from more or less sesisoned and cautious indi- 
vidual lenders. When a man wanted to put up -a building he had to 
go. to a lending agency of some kind which was using its own money 
or the money of some client who could supervise it, and that lender 
was able to determine when the time for lendhig on construction was 
at an end. 

In 1927, 1928, real-estate values in New York had gone all out of 
reason. The production of fine apartment houses, apartment hotels, 
commercial buildmgs of all kinds, had been overdone and any man 
using his own funds and experience in lending in the mortgage market 
would lend no more money, but unfortunately the lending was being 
done by promoting bankers whose interest was not so much in the 
security that they were getting for the mone}'', but m the large profits 
they were making out of selling the bonds to utterly inexperienced in- 
vestors. So we had a wave of corporations formed to put up individual 
buildings. If you look through the records you find the Fourth Ave- 
nue and Tenth Street Corporation, the Main Street and Twelfth Street 
Corporation, in small cities as well as big cities, and the bonds with 
which these buileiings were put up were sold to teachers and to small 
investors b}^ the billions, and tliej" were sold all during 1927, 1928, and 
a lot of them in 1929, and buildings were being put up, moving-picture 
theaters, skyscrapers, apartment hotels, and hotels, long after the market 
for these things had, measured against the demand of that day, been 
completely glutted and they should never have been put up. It was 
because those of us who were watching that situation at the time were 
not aware then of the virulence of this phenomenon. That is why 
these people lost their money. Obviously people who have lost their 
money like that are very cautious about putting in any more of it. 

Let me give you an instance. A gentleman came into my office in 
the beginning of last summer, a very able physician in up- State New 
York, and he said he was on his way to Europe. He said, "Back in 
1928 an endowment policy for $10,000 which I had been paying on 
for man}'^ j^ears came due, and I was doing very well so I took the 
$10,000 out and invested it in something" — I forget what he invested 
it in. He said, 'T lost the entire $10,000, and I had my 20 years of 
payments for nothing. Now," he said, "I have just had a $5,000 
endowment policy come due and I am taking my wife and daughter 
to Europe. We are going to get something out of this $5,000." He 
didn't want to invest it. He had been burned, as so many others 
were. 

Here, by the way, are some figures on building construction, which 
has almost completely gone by the boards. 

(The chart referred to was marked "Exhibit No. 301" and is in- 
cluded in the appendix on p. 2169.) 

Mr. Flynn. I have used the figures of the F, W. Dodge Corpora- 
tion. Here you see building at its peak in 1928. You see it began 
to slough off until there was almost nothing, idling along, but here is 
the important point. Now it has risen slightly, but this is the pri- 
vately financed building here, and the difference between this and 
this is the publicly financed building. In other words, if the Federal 
Government were not building and financing building in various ways, 
building in States and schools and so forth, this privately financed 
line would be the line of building. 

124491— 39— pt. 5 5 



1698 CONCENTRATION OF ECONOMIC POWE." 

The Chairman. Does the lower line include building which is car- 
ried on by reason of the Federal Housing Administration's short loans? 

Mr. Flynn. This includes everything. 

The Chairman. The lower line. 

Mr. Flynn. Oh, no; that is privately financed, and the Govern- 
ment merely guarantees the banks. 

The Chairman. So that is included in the lower line. 

Mr. Flynn. That is included in the lower line. 

I don't want to go on any further with these charts. 

Representative Sumners. On that lower line, has there been any 
break-down to show how much of that lower line is represented by 
investments that are entirely privately financed, and those which get 
some assistance from the Federal Government by guarantee or any 
other way? 

Mr. Flynn. That lower Une that is marked "privately financed" 
excludes all financing done by the Federal Government in part or in 
whole, but it includes the financing of houses which have been built 
with money which comes from banks and other institutions, but which 
are guaranteed by the Federal Government, that is not financed by 
the Federal Government, the Federal Government merely operates 
the guaranteeing agency. 

Representative Sumners. Has there been any break-down to show 
how much of that lower line is not at all dependent upon govern- 
mental guarantee or a guarantee of any governmental agency? 

Mr. Flynn. I am not in possession of that break-down, but I as- 
sume it could be very easily done because the Government has records 
of the amount of construction which it has guaranteed. The Federal 
Housing Administration can furnish figures to indicate how much of 
the privately financed business they have guaranteed. 

The Chairman. It has, of course, issued its reports from time to 
time showing the amount of guaranteed loans in every State in the 
Union. 

Mr. Flynn. If you wish. Congressman, I think that figure could be 
very easily obtained. I should be very glad to do it and offer it here 
in connection with this chart ' 

Representative Sumners. I hope my colleagues will be glad to 
have it. 

The Chairman. We will all be delighted to have it. 

CAUSES OF FAILURE OF PRESENT ECONOMIC SYSTEM 

Mr. Flynn. What I have been trying to make as clear as possible, 
not only for you but for those who are interested in this presentation, 
is that this investment goods industry is the central power station of 
capitalist money economy and that it has practically collapsed and 
that what we are interested in is the causes of its collapse. 

Now I assume that various causes could be assigned. One might 
say the general uncertainty surrounding business is one of the causes 
that men do not wish to invest, and certainly surrounding the value 
of money, for instance. Perhaps you will find a reason in taxes, local 
taxes as well as Federal taxes. I think that is a subject open to debate. 
I do not think it is open to debate on the subject of local taxes which 
are, I think, a great deterrent to the construction industry, but, I 

' Mr. Flynn subsequenUy furnished tfce data requested. It is included in the appendix on p. 2302. 



CONCENTRATION OF ECONOMIC POWER IgQQ 

believe, as I set out in the beginning of nrf thesis, that monopoly 
practices in the building industries play a large part in the inability 
of the construction industries to revive. In other words, if you could 
settle the uncertainties which surround the general economic situation 
and if you could improve the taxes somewhat — I doubt that you will — 
you still would see no revival or extensive revival in the building 
mdustries because of the conditions in the industries themselves, 

I should like at this point to call attention to the fact that invest- 
ment is not an abstract thing; men do not invest in abstract values, 
but in particular industries, and you have to look for the cause of the 
break-down of investment not only in the general economic scene but 
also in the conditions in the industries in which investments must be 
made. Thus investments would be made in the railroad industry, 
if they were made, in the utilities industries, in the manufacturing 
industries, in the building construction industries. 

But I also call your attention to tliisfact: that in whatever industry 
you invest, most of the long-term money that goes into that industry, 
whether it be utilities, railroads, manufacturing, or what not, goes 
into construction, it goes into two industries — in the construction 
industry and the heavy machinery industry; that is to say, when a 
man raises $100,000 or $200,000 or $1,000,000 to start a new factory 
he puts a large part of the investment, the capital money, into the 
plant itself and into the machinery with which he fills the plant, and 
keeps a reasonable amount for his current assets. So that the condi- 
tions in the construction industry affect all industries, affect invest- 
ment in all industries, but you must look in the paiLicular industries 
for the peculiar conditions which obstruct and destroy investment 
possibihties, and in the builduig industries one of the most important 
of them, I beUeve, is this business of monopoly practices, because 
there is probably no industry which is fouled with them, so bound up 
and constricted by monopoly practices, as the building industry, the 
construction industry. 

Senator King. Do you include in that labor? 

Mr. Flynn. I include most certainly labor in that. But in New 
York City in 1919 — in '18, '19, and '20 — we had a very severe hous- 
ing shortage. Construction had practically ceased; we were demol- 
ishing more houses than we were building, and we were building practi- 
cally none. The situation became an emergency one; the legislature 
was called in special session to stop riots among people because rents 
had been raised 100 percent and 200 percent, but in spite of the fact 
that rents had soared so high it was impossible to get houses built ; 
nobody would build them. The legislature ordered an investigation of 
the building industry, and that was conducted by Mr. Samuel Unter- 
meyer, a very great lawyer and a pecidiarly talented investigator. The 
results of that investigation are to be found in what is known as the 
Lockwood hearings, a joint committee of the House and Senate, and 
in the course of that investigation Mr. Untermeyer revealed a maze of 
monopoly practices covering every phase of the industry — the manu- 
facturers of building materials, the dealers in building materials, the 
subcontractors who bid on work, and labor themselves, labor rackets. 
He sent Mr. Brindell, the head of the building labor groups in New 
York City to the penitentiary; he put quite a few of the building 
material and building manufacturing and subcontractor people in 
jail; and indicted a great many more he didn't put in jail because I 



1700 CONCENTRATION OF ECONOMIC POWER 

suppose they became fatigued with the whole hunt after awhile and 
immediately following that investigation, which did successfully at 
that time and for a limited period break up the monopoly hold on 
building, in New York, there came into being a wave of building in 
New York City the like of which New York City has never known. 

Unfortunately, after a few years of that, along in 1925 or so, the 
agreements and combinations began to come back. Mr. Brindell was 
succeeded by Mr. Brandell, who was also convicted in his turn later, 
and Mr. Brandell, I think,- by Mr. Commeriord, in the labor field. 
The building subcontractor group began to get together again and are 
still operating; the building material dealers got together again and 
are still operating, and New York City is today constricted and bound 
by monopoly practices in the building industry whicli make it im- 
possible for any man to build for profit in New York City. 

The contractor can get nowhere; he can't make very much putting 
up a building. The man who puts up the building can't hope to 
make a profit out of it, and of course he does not build. 

This is true not only of New York, of course, but is true all over the 
country. Let me give you- an example taken from the records of 
the Federal Trade Commission, and here you have the thing you 
were talking about. Senator, this self-rule in industry. This, it 
seems to me, is the crux of the monopoly problem at the present time. 
I do not mean that large-scale, powerful corporations do not engage 
in monopoly practices, in some cases in perhaps what amounts to 
monopolies,' but the monopoly hunt has now turned in the direction 
of the little monopolies, the groups of small-scale operators who wish 
to organize into guilds for the purpose of monopolizing the industry 
for themselves. Now you hear a great deal about self-rule in in- 
dustry and the rules of the game and the adoption of codes for the 
purpose of ensuring fair trade practices. I have been watching the 
performances of businessmen in these groups for many years. 

I have gone to immense trouble to go to their meetings, their 
conventions, to examine their agreements, to follow their investiga- 
tions, and I have discovered that wliile they like to adopt codes 
announcing high moral platitudes governing their conduct, and pro- 
claiming forms of ethics to govern them, that what they are really 
interested in is not that kind of fair competition, but in controlling 
the economic factors in the province of industry in which they operate. 
They want to control production; they want to control prices; they 
want to limit the industry to themselves and keep out newcomers. 
They want to control competitive conditions, and all during the years 
from 1922 to 1929 the most extensive and energetic efforts were made 
to adopt codes of practice of aU kinds. 

Many of them came before the Federal Trade Commission in con- 
nection with their fair-trade-practice operations, and on the surface 
many of them were all right. The Bankers' Code, I remember, began 
with a very beautiful statement that "We, the bankeis of America, 
hold that our first duty is to guard the flag, and to the Golden Rule, 
to do unto others as you would have them do unto you." And in the 
Truck Drivers' Code the first article was, "Never argue with a 
policeman." 

But in fact what these gentlemen were interested in was in limiting 
production and controlling prices and regulating competitive practices, 
and while they didn't put those things into codes, they set up institutes 



CONCENTRATION OF ECONOMIC POWER lyQl 

and academies, and they became academicians, and they organized 
themselves "into code committees and these committees, under the 
apparent authorization of the code, got together and dealt with the 
prices. 

I remember at that time the wave of code making which swept over 
the country was so extensive that in one of our large cities — we will 
leave out its name — the mmistexs decided to have a code, and what do 
you think the ministers put in their code? Well, one of the first things 
was that they were entitled to 2 weeks' vacation, no matter what 
happened; and, secondly, they had a guaranty of territory, that is to 
saj^, they had an article which provided that no minister could prosely- 
tize in the congregation of another minister, who was a member of 
the association. 

The Chairman. Was this division of territory confined to the 
temporal world? 

^Ir. Flynn. It was in fact, because I believe the code died. But 
you couldn't, if you were a minister, snatch a brand from the burning 
if it was burning in the tree of a fellov/ member. 

That is what they are interested in in the codes and in self-govern- 
ment, and when you hear this talk about self-government in industry, 
that is what it is. 

Take this building industry down in Florida. Down there they set 
up what they called the Florida Building Material Institute, and they 
had an office in Orlando, Fla., and they had 280 retail dealers in this 
institute. Now, mind you, building materials flow to the contractor 
through the dealers. They represented about 75 percent of the build- 
ing-material-purchasing power of the State and they had 47 associate 
members who were m.anufacturers and wholesalers, and about 288 of 
what they called cooperating manufacturers. 

Now, what were they organized for? The Federal Trade Commis- 
sioQ investigated them thoroughly. They were organized to establish 
a class of recognized dealers, to have all building materials flow through 
those dealers, to compel manufacturers to sell only to those dealers; 
and to regulate prices, terms of competition, and the admission to the 
right to be a dealer. No man could be recognized as a dealer who 
was not authorized by this institute, and they sought to limit the 
number in the business in any given territory. 

The Chairman. That was a definite limitation upon opportunity, 
was it not? 

Mr. Flynn. It most certainly was, as we shall see. 

They set up a scale of prices for everything that was sold and they 
sent these lists of prices out to all dealers. They went out from a 
central ofl&ce. They compelled members to observe these prices. 
They fixed credit conditions and they parcelled out territory to 
dealers. They said, "You can operate in this district^ and you ill 
this district, and you, Mr. A, must not operate in the district of Mr. 
B." 

How did they effect compliance with this? First of all you had 
to put up a large sum of money to join. You had to pay $500 to 
$1,000 or more, depending on how large your business was. Here 
was a business called the Reliable Supply Co. of Florida, in Miami. 
It was one of these concerns that did a business of about $135,000 a 
vear. 



1702 CONCENTRATION OF ECONOMIC POW 11.R 

The institute secretary went to the district, or rather the president 
of the district — no; the institute's secretary, at Orlando, went to the 
president of the district. They were organized into 15 divisions and 
each division into 5 districts. They had a little federal government 
down there. And the secretary from' Orlando went to the president 
of the district in which the Reliable Supply Co. was located and told 
him that Mr. Blank, of th«iRehable Supply Co., would have to join 
the institute if he wanted to do business in Florida. So they went to 
him and told him that to join he would have to get the approval of 
the association in his district ; that is to say, of his rivals, and he would 
have to put up $1,000, and he refused. 

Now then, what did they do? They foimd out by a system of 
espionage the names of the concerns from whom he boUi,'ht his mate- 
rial — Bragg Lumber Co., Brightbrooks Lumber Co., McEwen Lumber 
Co., and a very large number of concerns that sold lumber, mill work, 
gypsum, plywood and a number of other things, in Florida and all 
over the South, and having got the names of all the people from whom 
he bought his goods they sent word to these dealers and said, "The 
Reliable Supply Co. is not a recognized dealer, and if you sell to him 
we won't buy from you. The trade of Florida will be closed to you." 

And so one by one these gentlemen informed him that they were 
sorry, but they couldn't sell him. They hked his business; his credit 
was good. They wished they could do something about it, but they 
just could not sell him — all of them. And during 18 months that 
company received orders for $100,000, of Georgia pine and couldn't, 
all over the South, fill more than five or six thousand dollars' worth. 
The president of the company testified before the Federal Trade Com- 
mission that the company had been destroyed by that concern. 

Now what was it? It was the ruthless activities, not of a big 
monopoly but of a whole group of little monopolies organized in a 
guild. 

The same thing in California. The Federal Trade Commission 
issued a cease and desist order. 

Mr. Davis. Mr. Flynn, before leaving the Florida case I suggest it 
might be noted in the record that the Federal Trade Commission issued 
a cease and desist order against those people directing them to cease 
and desist from those various practices. 

Mr. Flynn. I was going to give one other case and then say that 
the Federal Trade Commission had issued a cease and desist order. 
The Federal Trade Commission issues a cease and desist order; 
presently it breaks out in some other form, and the only way in which 
you can put an end to this kind of thing and stop it completely and 
keep it stopped is by ceaseless, relentless pursuit. It is like the 
rackets. You can break up rackets. Rackets are being broken u] 
in New York City. But they can be broken up, not by an occasional 
investigation, not by a commission which has not sufficient staff and 
sufficient funds to cover this immense land with all these innumerable 
rackets such as this, but only by an immense effort, commensurate 
with the efforts of the monopolies themselves. 

Representative Sumners. Mr. Flynn, you never can settle anything 
or stop anything. You just have to keep scratching at it, don't you, 
all the time? That is where we make the mistake. If one might be 
permitted to make an observation in this connection, we go ahead and 
do something and then go to sleep and think t/he thing will stay done. 



CONCENTRATION OF ECONOMIC POWER 1703 

Mr. Flynn. That is correct. I know one racket in this country 
called the free-lot racket that has been on the agenda and in the pro- 
gram of the crusading newspapermen for the last 30 years. Every 
crusading newspaperman in every town takes a crack at what is called 
the free-lot racket and breaks it up in his town, and the year following 
another newspaperman breaks it up. I broke it up once mysen 
when I was a newspaperman, and I see every year it is being broken 
up in New York City. But it just doesn't stay broken up. 

Representative Sumners. It is a good thing it doesn't stay broken 
up, because it is necessary for us to stay on the job, isn't it? 

Mr. Flynn. It is necessary to be vigilant to break it up. Perhaps 
if evil went out of the world. Congressman, we would all get flabby, 
particularly us investigators. We have to have some evil to charge at. 
I believe Mr. Thurman -timold once said that that was part of my 
stock in trade, chasing after the evils of the capitalist system. I am 
not prepared to admit that, but it does keep some people's muscles in 
shape. But a great many people suffer a great deal from it, and right 
now the whole country is suffering from it because of the collapse of 
our system, and I think this is one of the things that makes it collapse 
at this key point that I am talking about, this building industry. 

Here you have cement. The Federal Trade Commission, I believe, 
is investigating that now, and what I say to you I take merely from 
its complaint. They charge that the cement, industry has a central 
organization hke this Florida institute to Umit distribution to recog- 
nized dealers. One must be a member to get into the guild; I mean, 
one must get the support of members to get into this guild. It limits 
distribution by railroad transportation and excludes trucks because 
transportation by truck tends to break up the basing point system 
structure, price structure. It prevents the sale of building materials 
directly to the Government, so they have got to buy through little 
dealers all over the United States. It compels manufacturers to sell 
only to recognized dealers and prevent new dealers from getting into 
the business, and it apportions territory among the dealers. 

There is a case not far from my own town. New York, in New 
Jersey. A man there had a business where he sold cement and ready- 
mixed cement which is coming to be quite a business now, and he 
thought he could sell cheaper if he could go to the cement works in 
the Lehigh Valley where he buys his cement with his own trucks and 
haul it back to his place. There is a legitimate form of transportation, 
and he bought a hundred thousand or more dollars' worth of trucks. 
Well, when he went to get his cement from the Lehigh Valley people, 
they told him that there was a 15-cent a barrel extra charge on all 
cement that wap hauled away by a truck instead of by railroad 
transportation.^ 

The Chairman. Mr. Flynn, you have pointed out, I think, that this 
cement industry is now under investigation by the Federal Trade 
Commission, so that it is a matter that is in process, and perhaps in 
view of the fact that the Federal Trade Commission is supposed to be 
the sponsor of this particular hearing now, it might be well for us not 
to go into it. 

Mr. Flynn. Very good. I was doing this on my own responsibiUty 
and taking it from public records, the complaint which is a matter of 
pubUc records— maybe it isn't true; maybe it is just a rumor. 

' See testimony on basing-point practices in industry, infra, p. 1861 et seq. 



1704 CONCENTRATION OF ECONOMIC POWER 

The Chairman. I knew you were. 

Mr. Flynn. Well, now, gentlemen, what can you do about all this 
thing? You see, this is very closely related to the racket, the criminal 
racket I speak of. The rackets that we have in New York City and 
Chicago and Philadelpliia and Boston and other big cities arise out of 
this notion of dealers and businessmen thai they have got a right to 
organize among themselves for the purpose of limiting the business to 
themselves and regulating price structures. For instance, you read 
in the papers about the attack on the racket in Brooklyn, but when 
you get down to brass tacks you find the racket consists in the employ- 
ment of gangsters, a gangster group, to act as a compliance department 
of the bakers. If a baker joins the association, they give him a guar- 
anty that nobody is going to open in his block or across the street or 
within a limited territory from him, and they guarantee that none of 
his competitors are going to undersell him, and if they undersell him, 
why they get a brick through their windows or they have their counters 
and their machinery smashed up by the gangsters. 

Senator King. And they have their personal property destroyed 
by acids and explosives. 

Mr. Flynn. Yes; they'd throw stink bombs into a restaurant and 
promptly that empties the restaurant and keeps people out of there for 
a long time after that. 

Now, that is done as part of tliis principle of self-rule in industry 
Unfortunately, however, when you call the gangsters in to do a thirg 
like that you surrender yourself into their hands and presently the 
gangsters are running the whole business. But that is the racket. 
It is in the poultry business ; it is in the butcher trade ; it is in the fish 
business ; it is in the bakery business ; it is in the restaurant business ; 
it is in" the laundry business; it is in various businesses of that type all 
over the big cities of America. 

It is only a phase of this monopoly business 

The Chairman. Did you ever hear any intimation that it was in 
the newspaper business? 

Mr. Flynn. I never heard anything derogatory of the newspaper 
business in my life, Mr. Chairman. [Laughter.] 

So this demand for self-rule in business goes on continuously year 
after year. It is as old as the capitalistic system, and what are you 
going to do about it? There has been a demand which has flooded 
over into what might be caned the liberal ranks for some kind of 
regulation of business, sometimes it is called planning. I have no 
objection to planning, but I do not think you are planning when you 
call in the large manufacturers of steel and say, "Gentlemen, now 
write your own ticket." That is what the N. R. A. said to them. Mr. 
Donald Richberg testified to that, and they wrote a code which made 
the American Iron and Steel Institute the code authority for the steel 
industry, and thereafter the board of governors, I believe, of the Ameri- 
can Iron and Steel Institute sat as a legislative, executive, and judicial 
body, not elected by the people of the United States, but by the mem- 
bers of the Iron and Steel Institute, with a code authority, the mem- 
bers of which were the manufacturers of steel who had a vote in 
proportion to the amount of their steel volume, the dollar volume of 
the steel they produced, and they sat down and made laws for the steel 
industry, and I suggest that you gentlemen sometime just go get the 
record of their legislation. They dealt with all kinds of things. 



CONCENTRATION OF ECONOMIC TOWER 1705 

They passed laws as to what is a jobber and who is a jobber. It was 
decided by this institute, acting with the authority of the Govern- 
ment, that I. was a jobber and that you were not a jobber, that you 
could not be in the iron and steel industry unless you came within, 
the terms of their definition of a jobber. 

Now, this is called self-rule in industry, and I contend that not 
only is this not self-rule in industry, but in my lifetime this was the 
most appalling attack on democracy that I have ever encountered. 
By democracy I understand a form of government in which those who 
are governed do the governing and choose the instrumentalities and 
agents by which they are governed. 

Senator King. Mr. Flynn, you mentioned the iron and steel indus- 
try, and the rules and codes established by it under the N. R. A. 
Was not the same course adopted by more than five or six hundred of 
the industries of the United States, and their practices were just as 
pernicious as those in the iron and steel industry? 

Mr. Flynn. Senator, I don't remember the number of codes but I 
think it was over 600. 

Senator King. Yes. 

Mr. Flynn. I am not de ling with the fact whether they were 
pernicious or not. I am talking now about the democratic character 
of this Government. Let's assume that they made good rules and 
regulations, that they were benevolent. I don't think you have a 
right to assume that, because you are turning over the government of 
a pi evince of our economic Nation, our economic landscape, the prov- 
ince of steel — you are turning that over to the men whose interest is in 
profit. 

The Chairman. You are surrendering the power which the Con- 
stitution gave to Congress to regulate commerce among the States. 

Mr. Flynn. That is correct. But whether the Constitution gave 
it to them or not, the point I am trying to make is that what you did 
was attacking the democratic form of government. In other words, 
I would like at this point 

Representative Sumners (interposing). You are attacking the de- 
mocracy of opportunity. 

Mr. Flynn. . I wouldn't put it that way, Congressman; I might agree 
with yoii on that but I want to make this .point if I can. The Fascist 
principle of government has been a good deal confused in the minds 
of the American people because they see it in terms of its externals, 
the marching "black shirts," the "brown shirts," and the fellows salut- 
ing the fuehrer, and the fuehrer himself, and all of the impedimenta 
of the sales departrhent of the dictator who makes all kinds of emo- 
tional appeals to his people, incites them to war, and does all that 
sort ,of thing. But back of all that the central idea of these people 
in Italy, and in Germany, was an attempt to control the econoinic 
system. There is a kind of general understanding now among people 
of all kinds, liberals and progressives and conservatives,, that you must 
control the economic system. The progressives think that the Gov- 
ernment ought to do it, perhaps. The conservatives, the busmess 
community, thinks it ought to be left to the businessman. At all 
events, in Italy and in Germany there rose up from the middle classes 
and from big business a demand to control this econoxnlc system which 
was in collapse, and it is a very, natural thing because as I have told 
you at the outset, here is our own economic system wliich has been 



1706 CONCENTRATION OP ECONOMIC POWER 

on the downward side at least 15 out of the last 25 years, and it is 
natural that the millions of people who suffer from this should be very- 
fatigued with suffering. It is all right for those of us who if we don't 
make $5,000, make $3,000, or if we don't make $10,000 make $5,000, 
but for the 11,500,000 people who make nothing and depend upon 
the Government payments, and for the millions who are not on 
Government rehef, who do not make enough to live — they grow weary 
and tired and fatigued with all this thing, and the hundreds and hun- 
dreds of thousands of little-business men, with stores and shops and 
factories of all kinds, who year after year after year make no profit, 
get tired, and so they s&j, "We must control this system." 

In Italy Mr. Mussolini conceived the idea that the State must be 
divided into two compartments, the political and the economic state, 
and the political state should be ruled as the state has already been 
ruled, by representatives of the people, but that the economic state 
should be ruled by representatives of industry, and so Italy was or- 
ganized into corporatives. I think somewhere around 1933 and 1934 
the plan was put into effect, although this was his idea from the be- 
ginning, because Mussolini had been a sjnidicalist and it was very easy 
for him to introduce his idea of radical syndicalism in the field of em- 
ployment. The employers were organized into what he called cor- 
poratives, what we call trade associations. The labor people \^ere 
organized into labor associations, and federations of corporatives were 
formed. 

Now then, you had in theory two groups of lawmakers, one making 
Ibavs for economic society and one making laws for the political society. 
The old Chamber of Deputies still survived as the top law-making 
agencv for the poHtical society, but aU imder the dictator. 

Well, what happened in a society Uke that? Inevitably the eco- 
nomic concerns of the people are closer to them day after day than 
these ideas of political government, and httle by little you had these 
conflicts between the economic society and the economic lawmakers 
on one hand, and the political lawmakers and authorities on the other 
hand, and the political lawmakers being pushed off further and further 
and further, into the corner and the economic lawmakers assuming a 
larger and larger share until the end of it was that the Chamber of 
Deputies under the authority of the Duce met and declared its extinc- 
tion, and a new form of government was set up in which the economic 
provinces of the kingdom were represented through the corporatives, 
through the code authorities. 

Now, it seems to me that looks like a long, long journey for the 
United States to travel, but you always travel to an objective by 
taking the first step. You begin to develop your society in a certain 
direction, and you mUst either retrace your steps or go on develop- 
ing in that direction, and what happens? You set up these corpora- 
tives, you set up these trade associations^because we didn't provide 
for the labor unions having any paxt in this. They could come in 
and make a kick about their labor conditions but they had no part 
in the administration of the codes except in a few industries. Codes 
were administered, and the trade associations are administered by 
the employers and the employers make the rules and regulations and 
if we surrender that rule into the hands of the employers, we have 
something which is the very reverse of democracj^, because the people 
who are ruled by it, namely, the workers, all the innumerable entre- 



CONCENTRATION OF ECONOMIC POWER 1707 

preneurs who must buy from these top-ranking employers, and the 
people whose province that is — because after all the province of steel 
as such belongs to the people and not to the steel executives — are 
ruled by one of the groups, the employers, and that is not democracy. 

Now, that may be a good way to run our society. Maybe some 
man can prove that. I am hke the Irishman, I am open to convic- 
.tion on that point, but I would like to see the color of the man's hair 
who could convince me on that point. I am too much devoted to 
the democratic form of hfe, no matter how bungling it may be. But 
maybe somebody may be able to convince the people of the United 
States that there is a good way to do it. But it is not democracy. 
It is the reverse of democracy and inevitably leads away from de- 
mocracy, because having started that form of government you must 
go on perfecting it and developing it, and presently you begin to find 
evasions. Price Usts are fixed, forms of competition are fixed, produc- 
tion quotas are set, territory is assigned, but men refuse to comply 
with them. Then they find evasions as they did out in Cahfornia 
where one man was excluded from the institute, and so he had to 
literally bootleg his lumber. His foremeii had to get up at 3 o'clock 
in the morning and open the doors of the lumberyard to allow the 
bootleg truck to come in with a load of bootleg lumber, bought ;from 
a friendly member of the institute who was selling him because he 
was a friend but who was afraid of being put out of business for selhng 
him lumber; and another concern would dehver him lumber on a 
boat and the boat would land in the middle of the night at a dock and 
put the lumber on the dock without any marks or identifying labels 
of any sort, and then his truck would go to the dock at 3 or 4 o'clock 
in the morning and pick up the lumber and bring it to the yard. 

Of course, you have to do something about that, you have to meet 
that evasion, you have to have compliance machinery, espionage 
men, you have to have industrial police, commercial pohce, you have 
to make new rules and regulations, you have to give more coopera- 
tion to the corporatives. Now you are developing your system, and 
having ^one forward in the development of that system, you will 
develop it so far that you cannot possibly retrace it, and when you 
have gone to a certain point you cannot make it work unless you 
have a compliance macliinery which only a dictator can operate, and 
he can't do that in a democratic society. Once you start this thing, 
I don't know whether it will take 25 years or 50 years, but I know 
if you start it, you will wind up with your democratic society 
destroyed. 

Now, if you are not going to turn it over to the individual business- 
men under the pretense of self-government to run, then you have got 
to have the Government run it, and the Government can't run it. 
You gentlemen know that. You tried to run prohibition; you tried 
to run the liquor industry. You just cannot prevent a man from 
pressing a pair of pants for 35 cents if he is wilhng to do it for that, 
and put him in jail for charging 25 cents, as we tried to do. You 
cannot enforce it. You are trying to enforce rules of behavior, rules 
of conduct. 

They set out in these codes how a man's books should be kept, 
how a man's labor records should be kept, how a man's invoices 
should be made, what his t«rms of credit should grant. You can't 
supervise the enforcement of that without a vast machinery and 
without a dictatorial power in the hands of the enforcing machinery. 



1708 CONCENTRATION OF ECONOMIC POWER 

Government can't do it. Individual industry might do it, because 
they are all in favor of that. Government can't do it, and the Gov- 
ernment doesn't want to do it. Business doesn't want the Govern- 
ment to do it, and, therefore, it can't be done unless you turn it over 
to business itself, and then you have to kiss democracy good-bye. 

The Chaieman, But when business does it, eventually the result 
is that Government does it, as demonstrated in Italy and in Germany. 

Mr. Flynn. Gentlemen, as a matter of fact, this is not the first 
time tliis has occurred in the world. We had it in the guild system, 
which came along toward the end of the Middle Ages, and the guild 
system finally got the economic system of that day so tied up with 
rules and regulatiorjs, precisely hke the rules and regulations our code 
authorities made and our trade associations make now under the 
guise of self-rule in industry, and that are made by these lumber and 
building material institutes I tell you about — precisely the same, even 
to rules as to personnel rating, which is one of the favorites in some 
of these codes. 

They did all these things. They even had a rehgious concept back 
of it, the concept of the just price, brought up to date by Thomas 
Aquinas 300 years later. They said profit was unholy and interest 
was usury. They didn't glorify profit as we do now; and so they 
tried to keep profit down. 

Profit began to break up the guilds and began to operate on a large 
scale outside of the guilds. But even after the old guild system had 
been pretty much weakened and debauched and destroyed, it con- 
tinued to grow numerically in France, and at the time of Louis XIV, 
Louis XIV took over all the guilds one by one. The Government 
took them over and began to operate them in the interest of the 
Government, and when the Government took them over they began 
to disappear, because they didn't want to be regulated by the Gov- 
ernment. That is what you will have io do here. 

The Chairman. Don't make the prediction that we will do that 
here, because I don't think we will. Let us deal with the facts. 
That is what has been done in Germany. That is what has been 
done in Italy. But let's pray that it won't be done in America. 

Mr. Flynn. Let's not be sure what we may or may not do. I 
think perhaps I have become suspicious about this thing. I have 
been watching it so long and have been fooled so many times. In 
1922-29 we had a wave of these things and when Mr. Hoover 
came in he was full of doubt about them. I don't know why, but he 
put an end, or rather he tried to check the growth of, this self-rule 
in industry business. 

I don't know whether you gentlemen remember that or not, but 
there was quite a row between the Department of Commerce at one 
time and Mr. Daughtery about it. Mr. Hoover wanted them to 
permit their getting" together for the purpose of making certain 
harmless regulations and collecting data and statistics, and Mr. 
Daugherty said that was illegal because it was a means of fixing prices, 
but that is as far as Mr. Hoover went. 

I thought the thing died down. Then Mr. Hoover went out of 
power and I, having been an old-fashioned liberal, settled back into a 
kind of security. The last thing I thought could happen was that all 
the codes that" had been framed, mostly under Mr. CooUdge, and all 
the gentlemen who had framed those codes, would be- called into 



CONCENTRATION OF ECONOMIC POWER 1709 

"Washington and told to write their own ticket. In fact, when I saw 
that, I didn't beUeve it. I read it in the papers, but I was Uke the 
countryman who saw the giraffe in the zoo. I said, "It just ain't so. 
I don't beUeve it." And it took me a week or two to wake up to the 
fact that the thing I had hated most as a threat to democratic govern- 
ment was being brought in, I think for wholly innocent reasons, 
without realizing at least what it all meant — was being brought in 
by the liberals of America. 

So I would not be too sure as to whether we will do this or not, 
but I know that there is a widespread feeling for it among business. 
They say, and with some reason, "We are in trouble." 

The Chairman. I just want you not to be too sure that it will 
happen. 

Mr. Flynn. I hope and pray it will not, and I shall do all I can to 
stop it. 

Senator King. May I say to Mr. Flynn that there are some evi- 
dences of a very powerful trend toward State socialism which is just 
around the corner from communism?. 

Mr. Flynn. This is not State socialism, it is an entirely different 
thing. It is the first step in the direction of fascism. 

I would like to make one or two observations, and then, gentlemen, 
so far as I am concerned we will dismiss school. 

The men who want to do this, defeat their own purposes. Here is 
what they want to do. They want to cut down production because 
they believe that if they produce less they can get higher prices out 
of the income which is abroad in the land. In other words, they feel 
that if they produce 5,000 pairs of shoes instead of 7,000 pairs of shoes, 
that the income that is available to buy shoes will buy those 5,000 
shoes at a higher price. But if you recall that first chart which I 
brought here— and this is one of the reasons I brought it^when they 
cut down the production of goods they also cut down the production of 
money income. 

The Chairman. In other words, we cut dowTi the reservoir to which 
they must repair if they are going to make a profit. 

Mr. Flynn. Correct. In other words, there is not as much income 
as there was before they stopped cutting it down, and wfcile they 
produce fewer shoes, there are fewer dollars in money income to buy 
those shoes, and while one industry can do it, as some of the great 
organized corporations, and perhaps get away with it, if any consider- 
able number of industries do it they would promptly throw the whole 
system into reverse and collapse, so they don't succeed. 

PROPOSED ECONOMIC REFORMS 

Mr. Flynn. Wliat can we do about it? I don't think we should do 
nothing about it. I think there are some things we can do. I think 
we have got to have some kind of control. In the first place^ I do 
believe that it is the function of the Federal Trade Commission to 
prevent men from doing unfau- things. I think a man is entitled to a 
fair chance in his business and that that is perfectly proper and legiti- 
mate form of legislation. You can get a public sentiment on that. 
No man ought to be permitted to go out and intimidate another man's 
labor; no man ought to be permitted to use commercial bribery against 
the employees of his competitor or against the employees of the man 



1710 CONCENTRATION OF ECONOMIC POWER 

to whom he sells. Men ought not to be permitted to engage in falsi- 
fying. There is a whole group of things which men do, unscrupulous 
traders, do, which they ought not be permitted to do and which you 
can prevent them frotn doing if you make your preventing machinery 
sufficiently extensive, and you can get a public sentiment behind that 
kind of thing from business itself as well as from the public, and you 
can afford that kind of thing. But the trouble is that that is very 
different from permitting these men- to get together to regulate the 
economic factors in their industry — this matter of production and 
price and the number of competitors they shall have and competitive 
terms of credit and that sort of thing that ought not to be permitted. 

In the second place, I beheve that we ought to take out of the hands 
of certain men the weapons which we put in their hands. Some of the 
weapons they used are not natural weapons which they get from God 
Almighty, but they are weapons which they get from the Govern- 
ment, and one of them is the corporation. Now, I do not mean that 
the corporation is £f bad weapon. I am in favor of corporations. I 
do not believe in our modem technological civilization that you can 
operate without the corporation. It is a device to enable a number 
of men to unite their resources in pursuit of a conmion object. But 
I think when you have gone that far you have done enough. 

I should like to answer Commissioner Douglas' (juestion put to 
Professor Fetter, "Do you believe in holding compames"? 1 believe 
the holding companies should be barred. I would like to call atten- 
tion to the fact that not only did Woodrow Wilson speak against this 
thing, but some time back in 1911, I believe it was, the President of 
the American Bar Association, speaking to the American Bar As- 
sociation, himself a leading corporation lawyer in the United States 
representing the railroads and large corporations of all kinds, warned 
them the greatest mistake that the American people had ever made 
was to permit one corporation to own the sto^k of another corpora- 
tion, and that they would Uve to rue the day they had done that. 
That did not come from a radical; that came from a lawyer, not even 
a member of the Lawyers' Guild, but the president of the American 
Bar Association and a corporation lawyer. I believe that was a wise 
warning. I think you have to go back, in the language used by 
Professor Fetter, "You have got to reexamine this whole business of 
corporate activity." Give a' man a corporation charter, but do not 
give him an economic machine gun that he^an run wild with. You 
cannot do that unless the Federal Government does it. 

The Chairman. In other words, let us understand that the cor- 
poration is a creature of law, created by some government, and which 
arises out of a contract between natural persons and the Government, 
and that it is not endowed with the rights of natural persons but has 
only those rights which government gives it. . 

Mr. Fltnn. That is correct and, therefore, the corporation itself 
constitutes an interferende by the Government in natural affairs. It 
is an interference by the Government, but it is an interference which 
business likes because they like to have corporations but, therefore, 
to regulate that thing is not an interference. 

Now, if you give a man a corporation charter 

The Chairman (interposing). There is a good deal of misunder- 
standiiig, Mr. Flynn. with respect to what the word "regulation" 
means. Now, having joined with Senator Borah in the introduction 



CONCENTRATION OF ECONOMIC POWER 1711 

of a bill to provide a Federal system of franchises or licenses for cor- 
porations engaged in interstate commerce/ I am very well aware of 
the fact that a great many corporate executives have the impression 
that it was our intention to give the Federal Trade Commission, 
represented here, the power to control the internal affairs and activities 
of the corporation; whereas, as a matter of fact, that was never the 
intention of the authors of that bill. It was merely to exercise regula- 
tion in the sense which was meant by the fram^rs of the Constitution, 
of laying dowTi the rules which would be known by the incorporators 
so that they could manage their own business. 

Mr. Flynn. Well, I hope you succeed in passing that bill. Senator. 
I am sure you are going to have quite a battle on that bill. You 
should have introduced it in 1933 when we were very pious. 

The Chairman. I can't afford to let this opportunity slip, of course, 
to make mention of this and to say that under the concept which 
Senator Borah and I have had the Federal Trade Commission, or 
whatever agency which would be charged with the administration of 
this act, would have no more power to intervene in the internal 
affairs of such a corporation than the Secretary of State of Delaware 
has now to interfere in the internal affairs of the innumerable cor- 
porations which are created by that State. 

Mr. Davis. I wish to add, Senator O'Mahoney, that the Federal 
Trade Commission doesn't want any such authority as a right to 
interfere in their affaiis. 

The Chairman. That is a very welcome statement. 

Mr. Flynn. I have two brief observations. I won't take much 
more of your time. I hope that bill or some bill embodying that 
principle will pass. I am sure it will take a long struggle to pass it. 

I would like to leave this observation with you: That the necessity 
for regulation arises svhen individuals become powerful. You don't 
have to worry too much about the individual operating with his two 
bare hands; you have to worry about the fellow when you give him 
a machine gun. Then you have to make regulations about it; how 
he will get the machine gun; where he will keep it and how he buys 
his ammunition, and you will have to have policemen to be sure he 
abides by these regulations. The man with his bare hands is no 
problem because the only thing he can use is violence and because 
there is an ethic against that you will have no difficulty in enforcing 
that. But the moment you begin to create powerful persons, either 
by permitting him to combine with others in trade associations or 
groups, or permitting him to organize himself in a corporation with 
the resources of other people at his command, then you have on your 
hand an individual so powerful that the Government has to take note 
of him and prevent him from using these powerful weapons which 
you have put in his hands, to the hurt of the community. So the 
more powerful the individual you create the more necessary becomes 
the regulations. 

The other observation I would like to leave is this. It has to do 
with the matter of regulation. I personally believe the capitalistic 
system can be operated successfully only when operated on a functional 
basis. Let me put it crudely. I don't think you would have to worry 
much about regulating- banks if all banks were run by bankers and 
nothing but bankers. When a bank is run by a group of real-estate 

> 8. R«4. 33a 



1712 CONCENTRATION OP ECONOMIC POWER 

men or a group of real-estate men and builders who want to use the 
resources of the bank to put up houses to sell to people, or when it is, 
run by people who have some other idea in their mind than of running a 
bank and who are in two or three other kinds of business then you 
have trouble on your hands But when a bank is run only by just a 
banker, the only way he can wreck the bank is by openly, obviously 
criminal activities which you can enforce the law upon. But when a 
bank and a holding company and a security company and a railroad 
and a mortgage company and all kinds of companies are united under 
one holding company and he can move the assets of one around to 
another corporation and when he can use the funds of the bank legally 
and properly in all sorts of ways, then you have got trouble on your 
hands. You can't regulate him; you can't insure good banking; you 
can't insure that he is running the railroad he is running properly; 
j'-ou can't insure he is running the hotel along with the bank properly. 

If you could organize your economic system, I don't mean in a little 
tiry unit — I am not talking about horse-and-buggy units because we 
are past that — but if you could organize your economic system with 
producing and distributing and financing units which are limited to 
one function and one function only, then you wouldn't have to bother 
so much about the regulation. It is only when men are permitted to 
employ the corporate instrunientality you put in their hands, to unite 
a number of functions in one enterprise, that you have got to protect 
society against that enterprise. Therefore, I believe that if you are 
going to regulate capitalistic economy, you have got to do it by dealing 
with these central glandular functions, credit, profit— profit is. good 
but too much profit is not good— you can regulate that by taxes, all 
of the various central driving energies of the system have got to be 
regulated, not the conduct of the people who are running the system; 
you have got to keep them functioning in health, you have got to keep 
them functioning abnormally. That kind of control might keep the 
capitalist system running. 

Now, I don't know whether you can do it or not. I have only this 
feeling of confidence about it, that if you can't do these things the 
capitalist sj^stem is doomed, and it may very well be that the people 
who are now operating the capitalist system, those who may be properly 
called the executive capitalists, will never let you do the things that are 
necessary to make the capitalist system operate. I hope they will let 
you do it; I hope you will find a way to do it, because I honestly 
believe — and it fills me with terror — that if the capitalist system breaks 
down now it wdll be succeeded by a form of fascism. I think that is 
the next phase when capitalism in a democracy departs. 

The Chairman. Do any members of the committee desire to ask 
Mr. Flynn some questions? You have completed your statement? 

Mr. Flynn. I have. 

The Chairman. Mr. Ba) linger, what is yoiir plan for tomorrow? 
You will be ready tomorrow morning at 10 o'clock? 

Mr. Ballinger. Yes, sir. 

The Chairman. I may say that in approaching this study of 7 years 
of the experience of the Federal Trade Commission, it is my under- 
standing that the Trade Commission has made_ an effort to advise 
every corporation or industry which wiU appear in these proceedings. 

Mr. Ballinger. Yes, sir. 



CONCENTRATION OF ECONOMIC POWER IVIS 

The Chairman. I have here several matters to be inserted m the 
record. 

Mr. Flynn, may I say before I put these matters in the record and 
to be inserted in the record immediately after your talk, that the 
committee feels very much indebted to you for this very adndrable 
presentation. We are very grateful and it is our belief that you have 
contributed a great deal to the work of the committee by this state- 
ment. 

Mr. Flynn. Thank, you very much, Senator. It was a great 
pleasure and honor to come here. 

The Chairman. At one of the earlier hearings Mr. Douglas of the 
Securities and Exchange Commission addressed some questions to 
Mr. Alfred Reeves, vice president and general manager of the Auto- 
mobile Manufacturers' Association, and asked him to prepare a state- 
ment of income and expense for the year ended June 30, 1938. This 
memorandum has now been received by the committee, and without 
objection I now offer it for inclusion hi the printed record. 

(The memorandum referred to was marked "Exhibit No. 302" 
and is included in Hearings, Part II, appendix, p. 802.) 

The Chairman. At the conclusion of the hearing on the glass-con- 
tainer industry, representatives of the industry being present indicated 
a desire to submit a survey of the industry from the point of view of 
those who belong(d to the mdustry. It was indicated that such a 
memorandum would be received. That memorandum is now here 
and I offer it for printing in the record. 

(The memorandum referred to was marked "Exhibit No. 303" and 
is included in Hearings, Part II, appendix, p. 803.) 

The Chairman. In addition to these two, I have a memorandum 
received by the committee from Mr. George S. Van Schaick, vice 
president of the New York Life Insurance Co., a letter addressed to 
Mr. Gesell of the Securities and Exchange Commission, with reference 
to "Exhibit No. 263" in the hearings on life insurance before this 
committee, and this is also offered for printing in the record. 

(The letter referred to was marked "Exhibit No. 304" and is 
included in Hearings, Part IV, appendix, p. 1645.) 

The Chairman. The committee will stand in recess until 10 o'clock 
tomorrow morning. 

(Whereupon, at 5:15 p. m., a recess was taken until Wednesday,. 
March 1, 1939, at 10 a. m.) 



124491— ::!9—pt. 5- 



INVESTIGATION OF CONCENTRATION OF ECONOMIC POWER 



WEDNESDAY, MARCH 1, 1930 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:15 a. m., pursuant to adjournment on 
Tuesday, February 28, 1939, in the Caucus Room, Senate Office 
Building, Senator Joseph C. O'Mahoney presiding. 

Present: Senators O'Mahoney (chairman) and King; Representa- 
tives Sumners (vice chairman), and Reece; Messrs. Thorp, Davis, 
Berge, O'ConneU, Patterson, Frank and Henderson. 

Present also: Federal Trade Commissioners, William A. Ayers and 
Charles H. March; Wilhs J. Ballinger, director of studies and economic 
advisor to Federal Trade Commission; Wilham T. Kelley, chief coun- 
sel; Col. WiUiam Chantland, PGad B. Morehouse, and Walter 
Wooden, members of legal staff ; Joseph Sheehy , assistant chief 
examiner; Dr. Francis Walker, chief economist and Col. William 
England, assistant chief economist, Federal Trade Commission. 

The Chairman. The meeting will please come to order. Mr. 
Ballinger, are you ready to proceed? 

Mr. Ballinger. Yes, sir. I think Judge Davis is going to make 
the opening announcement on our program. 

The Chairman. Very good. 

Mr. Davis. Mr. Chairman and members of the committee: One ol 
the directions the committee gave to the Federal Trade Commission 
was to report upon the experience of the Federal Trade Commission 
with respect to restraint of trade and monopoUstic matters, and under 
that direction the Commission has had its staff prepare a synopsis of 
all of the restraint of trade cases which have been tried by the Com- 
mission within the past 7 years, and I wish to now present to the com- 
mittee Mr. PGad Morehouse, one of the experienced members of the 
Commission's legal staff who has played a large part in inany of these 
cases and who will present a general summary and outline the char- 
acter of these cases and what they show, and at the conclusion, in 
connection with his statement the members of the committee will of 
course feel free to ask him any questions they desire to with regard 
to the testimony. 

I wish to further state, Mr. Chairman, that we have copies of this 
presentation which will be furnished to each member of the committee, 
we trust, by not later than noon. Some of them are undergoing some 
sUght revisions which is delaying the presentation to the committee, 
but they will all be presented to you in index form so you can readily 
turn to any particular case or subject or topic. 

The Chairman. I am sure that will be very helpful. 

1715 



1716 CONCENTRATION OF ECONOMIC POWER 

Mr, Davis. We hope to have those ready for each member of the 
committee by noon. 

Now, Mr. Morehouse, will you proceed with your statement to the 
committee? 

TESTIMONY OF PGAD B. MOREHOUSE, DIRECTOR OF RADIO 
ATHD PERIODICAL DIVISION, FEDERAL TRADE COMMISSION, 
WASHINGTON, D. C. 

Mr. Morehouse. Mr. Chairman and members of the committee: 
It has been requested that at the outset 

Mr. Davis (interposing). I think it was the understanding of the 
committee that all witnesses, even government officials, should be 
sworn. Of course we desire to submit ourselves to the rules of the 
committee. 

The Chairman. Do you solemnly swear the testimony you are 
about to give in this matter shall be the truth, the whole truth, and 
nothing but the truth, so help you God? 

Mr. Morehouse. I do. 

At the outset it has been requested that I read into the record a 
brief resume of the powers and functions of the Federal Trade Com- 
mission, and with the committee's permission I will proceed briefly 
to do so. The Commission was 

The Chairman (interposing). Before you begin, Mr. Morehouse, 
would it not be a good plan for you to state to the committee how 
long you have been associated with the Federal Trade Commission? 

Mr. Morehouse. I came with the Federal Trade Commission in 
March, 1930, where I was assigned to the duty of trial counsel on 
the Commission's legal staff in the chief counsel's division. 

The Chairman. Where did you get your law? 

Mr. Morehouse. In George Washington University. 

The Chairman. How did you enter the employ of the Federal 
Trade Commission? 

Mr. Morehouse. By appointment upon my application, I having 
practiced law here in the District for some 14 years previously. 

The Chairman. Are you under the Civil Service? 

Mr. Morehouse. I am not. 

The Chairman. You are a lawyer outside of the Civil Service? 

Mr. Morehouse. Yes, sir. 

The Chairman, But you were appointed in 1930? 

Mr, Morehouse. Yes, sir. 

The Chairman. And you have been with the Federal Trade Com- 
mission ever since? 

Mr. Morehouse. That is correct. Senator. 

organization and functions of federal trade commission 

Mr. Morehouse. The Commission was organized in March of 1915 
under the Federal Trade Commission Act, approved September 26, 
1914, which was amended last March 21. 

The Commission was organized in March of 1915 under the Federal 
Trade Commission Act, approved September 26, 1914, which was 
amended last March 21. 



CONCENTRATION OF ECONOMIC POWER I717 

The Commission's functions chiefly are: 

To prevent methods of competition and unfair or deceptive acts or 
practices in interstate and foreign commerce; 

To make investigations at the direction of Congress, the President, 
the Attorney General, or upon its own initiative; 

To report facts in regard to alleged violations of the antitrust laws; 

To prevent unlawful price and other discriminations in violation of 
section 2 of the Clayton Act as amended by the Robinson-Pa tman 
Act; 

To prevent exclusive dealing contracts and illegal capital stock 
acquisitions, and interlocking directorates in violation of sections 3, 
7, and 8 respectively of the Clayton Act; 

To administer the Webb-Pomerene or Export Trade Act, aimed at 
the promotion of foreign trade by permitting the organizations of 
associations to engage exclusively in export trade and provides that 
nothing contained in the Sherman Act shall be construed as declaring 
to be illegal any combinations or "associations" entered into for that 
sole purpose and actually so engaged under certain safeguarding 
provisions set out in the law. 

In performing these functions the Commission's duties fall into 
two main categories, namely, legal activity and enforcement of the 
laws it administers, and second, general investigation of economic 
conditions in domestic industry and interstate and foreign commerce. 

The legal activities, as I have said, have to do with (he prevention 
and correction of unfair methods of competition, unfair and deceptive 
acts or practices; the administration of section 2 of the Clayton Act 
as amended by the Robinson Patman Act, dealing with price dis- 
criminations, and sections 3, 7, and 8 of the Clayton Act. 

In connection with the foreign trade act, the Commission has the 
power under section 6 (h) of the Federal Trade Commission Act, as 
amended, to investigate from time to time trade conditions in and 
with foreign countries where associations,- combinations or practices 
of manufacturers, merchants, or traders, or other conditions, may 
aflFect the foreign trade of the United States, and to report to Con- 
gress thereon, with such recommendations as it deenis advisable. 

A more detailed summary of the Commission's administration of 
the Export Trade Act will be found on pages 12'5 to 130, inclusive, of 
the Commission's 1938 annual report, and last June the Commission 
presented to Congress a Supplemental Report on Antidumping Legis- 
lation and Other Import Regulations in the United States and Foreign 
Countries which brought up to date material in a report on the same 
subject published in 1934 as Senate Document No. 112, Seventy- 
third Congress, second session. This work was done under the 
provisions of section 6 (h) of the Federal Trade Commission Act. 

The general investigational work of the Commission and its econo- 
mic work arises under that same section 6. The powers there con- 
ferred are stated to be: 

To gather and compile infor'mation concerning, and to investigate 
from time to time, the organization, business, conduct, practices, and 
management of any corporation engaged in commerce, except banks 
and common carriers, and its relation to other corporations and to 
individuals, associations and partnerships. 

Second, to require by general or special orders corporations engaged 
in commerce, except banks and common earners subject to the act 



1718 CONCENTRATION OF ECONOMIC POWER 

to regulate commerce * * * to file with the Commission amiual 
or special reports or answers in writing to specific questions furnish- 
ing such information as the Commission may require as to the organi- 
zation, business conduct, practices, management and relation to other 
corporations. 

Under section 6 (c) the Conamission, upon its own initiative, is to 
make investigation whenever a final decree has been entered against 
any defendant corporation in any suit brought by the United States 
to prevent and restrain any violation of the antitrust acts. The 
Commission investigates the manner in which the decree has been or 
is being carried out. Upon applic«(ftion of the Attorney General the 
Commission is required to make such investigation. The results are 
transmitted to the Attorney General with recommendations. The 
Commission naakes the report public in its discretion. 

Section 6 (d) provides upon the direction of the President or either 
House of Congress the Commission shall investigate and report the 
facts relating to any alleged violations of the antitrust law. 

An investigation under this section is undertaken when requested 
by Congress as a result of a concurrent resolution of both houses in 
conformity with the pertinent provisions of the United States Code 
(48 Stat. 291, 15 U. S. C. A., sec. 46a) and the Independent Offices 
Act of 1934 (Pub. Res. No. 78, 73d Cong.). 

Upon the appUcation of the Attorney General the Commission in- 
vestigates and makes reconmiendation for the readjustment of the 
business of any corporation alleged to be violating the antitrust acts, 
in order that the corporation may thereafter maintain its organiza- 
tion, management, and conduct of business in accordance with law. 

To make pubUc from time to time such portions of the information 
obtained by it hereunder, except trade secrets and names of customers, 
as it shall deem expedient in the pubhc interest ; and make annual and 
special reports to Congress with recommendations for additional legis- 
lation. 

From time to time to classify corporations and make rules and regu- 
lations for the purpose of carrying out the provisions of thi§ act — that 
is the Federal Trade Conmaission Act. 

To investigate trade conditions with foreign countries and, as I have 
already outliiied, make such recommendations as it deems advisable. 

Referring again briefly to the Wheeler-Lea amendment, I would 
like to state for the record that outside of amendments, minor in 
character and largely procedural and clarifying, the principal change 
made was that that act, in addition to unfair methods of competition, 
declared unfair or deceptive acts or practices unlawful, and provided 
that the Commission's cease-and-desist orders should become final 
within 60 days from date of service unless appealed from by .the 
respondents. 

Representative Rbece. Would it interrupt you to ask you a ques- 
tion with reference to (1)? To what extent does that give the Com- 
mission power, if not direction, to make investigation to determine 
whether unfair or deceptive practices might be engaged in by some 
particular business or interest? 

Mr. Morehouse. Why, the act itself gives the Commission that 
power in section 5 where it says: "The Commission is hereby em- 
powered and directed to prevent persons, partnerships, and corpora- 
tions from engaging in unfair methods of corporation," and, I think, 



CONCENTRATION OF ECONOMIC POWER I719 

the power to investigate to see whether they are so engaged in is the 
direct and necessary inference of that power, and the Commission in 
all cases either upon its own initiative or after complaint from an 
outside source does make such an investigation in order to determine 
whether or not in its opinion it is in the public interest to issue its 
formal complaint. 

Representative Reece. Without onj further resolution by Congress 
specifically authorizing and directing it. 

Mr. Morehouse. Exactly. 

The Chairman. What would you say with respect to the specific 
power granted in section 6 paragraph (a), page 35? 

Mr. Morehouse. Well, the Commission has made many of those 
investigations, hundreds of them. 

The Chairman. That is the answer to Congressman Reece. 

Mr. Morehouse. Maybe I misunderstood his inquiry. I thought 
it was directed at preventing unfair methods of competition. 

The Chairman. He wanted to know about your independent power 
of investigation. 

Mr. Morehouse. Oh, yes; section 6 (a) to (h) really gives the Com- 
mission that power. 

Mr. Davis. I think it is proper to state, however, Mr. Chairman, 
that the authority vested in the Commission in section 5 of the act 
and section 6 is somewhat different. The authority in section 6 is 
authority to conduct certain characters of investigation, particularly 
relating to monopoUstic or restraint matters, whereas in section 5 it 
deals with all unfair methods of competition or unfair and deceptive 
acts and practices, which, of course, would include commercial bribery, 
false advertising, espionage, and various other things which do not 
ordinariljr come under the category of the various restraint matters, 
monopohstic matters, that are dealt with particularly in section 6, and 
whereas unde^ section 6 we have authority to conduct those investiga- 
tions upon our own initiative, in actual practice practically all of our 
procedure under section 6 has been under direction of Congress or 
upon request of the President or the Attorney General, because we 
have, generally speaking, not had sufficient funds to conduct many 
general investigations upon the Commission's own initiative. Those 
are what we generally refer to as general investigations. 

Mr. Morehouse. I think, Senator, it might also be said that sec- 
tion 6 relates pecuharly and exclusively to corporations, whereas 
section 5 deals with both personal partnerships and corporations. 

The Chairman. If I remember the history of the development of the 
Federal Trade Commission Act correctly, section 6 was in contempla- 
tion from the very beginning and it was mentioned by President 
Wilson in his original message as being the desirable power to be 
granted to the Interstate Trade Commission which he envisioned, to 
become a sort of agency for gathering and making public facts having 
to do with interstate commerce, whereas section 5 was inserted after 
the bill was under consideration in the Congress and was the result 
largely of an attempt upon the part of the Congress to clothe the 
Trade Commission with the power to prevent what were deemed to 
be unfair trade practices. The desire m the beginning, I think, was 
to try to define clearly just what practices should be forbidden, but 
Congress was un'able to make up its mind exactly as to what those 
practices should be and compromised by granting this broad power 



1720 CONCENTRATION OF ECONOMIC POWER 

which resulted in giving a certain amount of discretion to the Trade 
Oonunission, which in turn resulted in a number of decisions by the 
courts which in effect withdrew from the Commission the discretionary 
power which was apparently intended by Congress. 

Mr. Kelley, do I state that right? 

Mr. Kelley. The Senator is correct in that statement. I may 
sum this up in a word, that section 5 of the Federal Trade Commission 
Act makes unlawful unfair methods of competition and unfair and 
deceptive acts. The power conferred on the Commission in section 5 
is complete in its authorizing the Commission to investigate and to 
prosecute and declare unlawful unfair methods of competition and 
unfair deceptive acts and practices. Section 6 is a sort of conditional 
power that the Commission shall also have power over corporations 
engaged in interstate commerce and inquisitorial power to require 
them to submit reports and special data and to require them to submit 
pertinent information specified in the act; also it empowers the Com- 
mission on request of the President or the Attorney General or the 
Congress to make an investigation concerning a corporation, but 
section 5 with respect to unlawful conduct is complete in and of itself, 
both with respect to investigation and trial and decision. 

Senator King. The language of section 6 is very clear, il is obvious 
to anyone that it is investigative character to be supplemented by 
authorized activities. 

The Chairman. Mr. Kelley, perhaps it would be well for me to ask 
you here how long you have been General Counsel of the Trade 
Commission. 

Mr. Kelley. I took my law-school work at the University of Wis- 
consin and the University of Washington in Seattle. I was admitted 
to the bar in Washington and Oregon, later in the Federal courts, and 
practiced law in Seattle 5 or 6 years, and in 1914 I came with the 
Federal Trade Commission as one of its attorneys and have been there 
ever since. For the last several years I have had the pleasure of 
serving the Commission as its chief counsel. 

The Chairman. When were you appointed chief counsel? 

Mr. Kelley. December 1914. 

The Chairman. Chief counsel? 

Mr. Kelley. Oh, chief counsel. I guess about 5 years ago. I just 
don't remember the 

Mr. Davis (interposing). It was the latter part of 1934 or the first 
part of 1935, I would say. 

The Chairman. But you had been with the Trade Commission 
since 1914. 

Mr. Kelley. Yes. 

Mr. Davis. Mr. Kelley, how long were you assistant chief counsel 
prior to being made chief counsel, approximately? 

Mr. Kelley. Oh, I would say approximately 8 years. 

The Chairman. I knew you had been with the Commission for a 
long time and I thought it well to have it clear in the record, Mr. 
Kelley. 

Mr. Patterson. Mr. Morehouse, it isn't quite clear to me, after 
listening to Congressman Reece, who is a member of the Interstate 
and Foreign Commerce Committee of the House, why, with section 5 
being complete as to unlawful conduct, and section 6 giving additional 
powers, resolutions are introduced from time to time by Members of 



CONCENTRATION OF ECONOMIC POWER 1721 

the House for members of the Commission for examinations or in- 
vestigations of certain subjects before the Federal Trade Commission. 

My point is, if section 5 is complete as to unlawful conduct, and 
section 6 is additional powers, are you going to develop at the proper 
time what other powers, if any, you need? I "hope so. It isn't quite 
clear to me why the Interstate and Foreign Commerce Committee of 
the House is called upon so often for assistance. 

Mr. MoRBHOUSE. Well, Mr. Secretary, I can only say that I don't 
feel competent to state what motivates a committee of the House or 
the Senate in exercising the powers given it by law to concurrently 
adopt a resolution authorizing us to do that. ' I just know that they 
do do it, and under section 6 we are directed to follow that resolution 
and submit that information. 

The Chairman. It isn't so much that a specific resolution by Con- 
gress deaUng w^ith a particular subject is a new authorization to the 
Federal Trade Commission .as it is that it is a direction or a request 
by Congress that the Federal Trade Commission should exercise its 
powers in a particular case. 

Mr. Morehouse. Exactly. 

The Chairman. You have the authority under section 6_ to use your 
own initiative, but you might not care to exercise that initiative and 
Congress, looking over the field, comes to the conclusion that a par- 
ticular subject ought to be studied, and so it passes a resolution and 
directs you to go to work on that particular subject, and ordinarily 
at the same time provides the Federal Trade Commission with the 
funds with which to carry on the investigation, and without which it 
would be impossible for you to do it. 

Mr. Morehouse. I know we make investigations both ways, on 
our own initiative 

Mr. Davis (interposmg). I believe I have in mind what the Secre- 
tary has, and I just want to state that as a practical proposition it is 
necessary for the Commission to be directed by joint congressional 
resolution before it can obtain the funds with which to make these 
investigations. The act itself provides that we have the authority to 
proceed upon our own initiative ; it also says that we shall conduct an 
investigation upon direction of either branch of Congress, but as a 
matter, of fact the Committee on Appropriations of the House has 
adopted a rule that they will not approve any appropriation unless 
it is directed by joint resolution. 

The Chairman. I suspect you will agree with me that Congress 
frequently gives you powers and then doesn't give you money to carry 
out the powers. 

Mr. Davis. That is the point exactly. We never get money to 
conduct those general investigations unless it is either pursuant to 
the direction of Congress, through joint resolution, or upon an Execu- 
tive order or request of the President or upon request of the Attorney 
General in a very few instances, and we don't always get an appro- 
priation under those conditions. 

The Chairman. If I remember correctly the Robinson-Patman Act 
extended greatly the powers and duties of the Commission, but you 
have not been able to enforce it particularly weU because you haven't 
had a sufiicient appropriation. 

Mr. Davis. That is true with our work generally, Mr. Chairman. 
We simply do what we can do with the means' we have to do it, and I 



1722 CONCENTRATION OF ECONOMIC POWER 

wish, if I may, to possibly clear up what Secretary Patterson has in 
mind with respect to the difference between sections 5 and 6. Section 
5, and certain other sections following it, relate to our case procedure. 
Section 6 relates to the general economic investigations, investigations 
of a whole subject, a whole industry, as distinguished from a pro- 
ceeding against an individual corporation or person. 

Mr. Patterson. My point is, Mr. Chariman, that the F. T. C. has 
been doing and is doing such a magnificent job that if its powers under 
sections 6 and 5 are not complete and satisfactory, I would like to have 
it developed as to what additional powers — maybe not now, a little 
later — might be suggested to complete the whole and give you what 
you want. 

Mr. Morehouse. I think that will be taken care of later in our 
presentation, in part by the chief counsel. 

The Chairman. That comes at a later time . in this proceeding. 
At the moment we are covering the review of the 7 years of your 
experience. 

Mr, Kelley. In that connection, later today I will make some 
observations on section 7 and section 6 of the Clayton Act. Now, 
with respect to other shortcomings, or inadequacies of the present 
antitrust laws to meet monopolistic practices, generally, there will be 
successively important hearings pertinent to the different aspects and 
phases of this whole question. 

Senator King. The antitrust law is pretty broad. The terms of 
the antitrust law, it seems to me, are quite ample to deal with monopo- 
Ustic practices and conspiracies in restraint of 1. ade. 

Mr. O'CoNNELL. On section 6 of the Clayton Act I was curious to 
know whether, under subdivision (b) of section 6, the Commission 
has power to require reports as to the organization of trade associa- 
tions. 

Mr. Morehouse. Mr. Kelley will probably correct me on that, but 
t would say not unless they were incorporated. 

Mr. O'CoNNELL. My impression is that they do. I wasn't sure. 

Mr. Kelley. The powers conferred on the Commission imder 
section 6 are limited to corporations engaged in interstate commerce. 

A(Ir. O'CoNNELL. It does not include trade associations even though 
they are engaged in interstate commerce? 

Mr. Kelley. Not unless it is a corporation. 

Mr. Morehouse. Shall I proceed, Senator? 

The Chairman. Yes.- 

Mr. Morehouse. Getting back to the principal changes made in 
the Organic Act, I have mentioned that the Commission's orders now 
become final after a period of 60 days unless appealed from. There is 
also a civil penalty provided for, for $5,000 in case of violations after 
they become final, and certain sections were added which specifically 
make unlawful the dissemination of false advertising with respect to 
food, drugs, devices, or cosmetics. The sections making that dis- 
semination unlawful also provide that it is an unfair act or practice to 
disseminate such false advertising by mail or in commerce by any 
other means, where the effect is l^ely to induce the purchase of the 
commodities advertised, whether that purchase be in interstate 
commerce or not. 

• 'Then if the sale is likely to be induced in interstate commerce, it 
makes no difference if the advertising were local ; either the advertising 



CONCENTRATION OF ECONOMIC POWER 1723 

or commodity being in commerce is sufficient, if a food, drug, device 
or cosmetic. 

If the use of the commodity advertised is injurious to health when 
used under the conditions prescribed in the advertisement or under 
customary or usual conditions, or if there be intent to defraud or 
mislead, it becomes a misdemeanor punishable by fine or imprison- 
ment, and finally the Commission when it deems advisable in the 
public interest in such class of cases may apply for and obtain in due 
course an injunction to prevent the further dissemination of the 
advertising pending its formal procedure by complaint and the final 
disposition thereof. 

With reference to this report which has been prepared at the request 
of this honorable committee, and amplifying what Judge Davis has 
said, this report contains a resume of the unlawful monopolistic 
practices and restraint of trade cases which the Commission has had. 
We go back a little further than 7 years in this report. We go back to 
July 1, 1930, and we have brought it down, we had to close it about 
February 1, 1939. During that time of the cases which we have tried, 
there are presented here in part I of this report a brief digest of 59 
such cases. They cover all the cases except the cases arising under 
section 7 of the Clayton Act and the Robinson-Patman Act. Section 
7 cases are taken care of in the second part of this compilation. Each 
digest and each part of it contains a brief statement of the facts, the 
commodity involved, and nature and extent of the monopohstic 
practices, and the effect as found by the Commission upon the eviden- 
tiary facts in the report. The description of each case is supported by 
complete findings as to the facts, conclusion, and order to cease and 
desist, identified by an appropriate exhibit number. The cases are 
arranged chronologically and indexed as to companies and commodi- 
ties. There will also be found therein a list of the pending complaints 
of the same type in which the Commission has not issued an order. 
They haven't reached that stage. 

Now part II of the report deals with the history of the Commission's 
reported cases under section 7 of the Clayton Act, which will be pre- 
sented later by Mr. KeUey. Part II of the report is in two parts. 
Part 1 deals with the court cases and the second part of part II deals 
with all investigations that the Commission has made in its efforts 
to enforce section 7 where those investigations did not result in any 
formal action for reasons which are stated in the report. 

Part III is a comprehensive summary of available economic material 
in the files of the Commission. That summary in the report which 
will be submitted to the committee consists of brief outlines covering 
the origin and the scope of these investigations. A list of these in- 
vestigations will be found indexed in a table of contents. The report 
shows the method used in conducting the investigations and gives an 
indication as to the principal conclusions and recommendations of 
the Commission, particularly in those instances where legislation has 
been recommended. 

Copies of reports of these investigations have been identified and 
marked as exliibits, and are fully described in the report. 

A discussion wiU be given of that part of the report later by Mr. 
Joseph Sheehy of the Commission staff, and some other members of 
the Commission staff. 



1724 CONCENTRATION OF ECONOMIC POWER 

Now these fifty-nine cases resulting in cease-and-desist orders since 
June 1, 1930, cover a wide range of commodities, including alcoholic 
beverages, automobile-testing devices, butter tubs, building materials, 
several kinds of clothing, concrete pipe, golf balls, groceries, heavy 
machine tools, magazines, sponges, turbine generators, glass, snow 
fence, tin plate, as well as many other commodities which will be found 
in the index. 

While there is naturally a wide variation in the kinds of practices 
involved, it may be said generally that all of the acts and practices 
involved in these cases were calculated to and did interfere with the 
natural play of competitive forces and the effect was an increased 
concentration of power in the hands of a restricted number of private 
or limited groups of persons or corporations, the possession of which 
power either did interfere or had the potentiality of interfering with 
trade and consequent injury to the public. 

More particularly, some of these practices were as follows: Tying 
contracts; combinations to fix and maintain uniform prices, terms, 
discounts, and charges; conspiracies to control bids and appraisals; 
parties combining to submit uniform bids and combining to refuse to 
bid; conspiracies to prevent sales of competitors' goods; discrimina- 
tions in price of commodities of the same grade and quality to com- 
peting customers ; fixing and maintaining uniform delivered prices and 
guaranties without regard to variety, costs, or true performance; 
parties in combination refusing to sell; parties in combination refusing 
to buy; and parties in combination refusing to sell manufacturers who 
sold mail-order houses enforced by use of so-called white lists ; policing 
bids through clearing houses; zoning, price basing; resale price mainte- 
nance; maintaining special lists of preferred customers for the purpose 
of price discrimination; threats of boycott; conspiracy to divert freight 
tonnage to shipper's own carrier; enforcement of agreements to fix 
prices by threats of litigation. 

Out of the 59 cases which are completely detailed in the report in 
brief, we have selected 16 as representative, which if the committee 
will permit I would like to go into at this time. 

Mr. Patterson. What is the difference between "white lists" and 
"blacklists"? 

Mr. Morehouse. In essential effect there is no difference. A 
"white list" as I understand it, Mr, Secretary, is a list of those cus- 
tomers who have been good and have complied with their agreements, 
whether it be to maintain resale prices or to fix prices or to carry on 
certain practices. Sometimes they make a list of the good boys and 
sometimes they make a list of the bad boys. When it is a list of the 
bad boys it is a "black list" and when it is a list of the good boys it 
is a "white list." 

The particular 16 cases which I wish to take up now deal with the 
following commodities: Alcoholic beverages; automobile carburetors 
and carburetor parts; bakery and packaged food products; building 
materials and building supplies; calcium chloride; canned and dried 
foods; closure parts for metal containers; com cribs and silos; draft 
gears ; ^ food — canned sirups and molasses ; glass ; metal windows ; 
tin plate; turbine generators; water-gate valves, hydrants, and 
fittings; zinc and copper plates. 



COXCENTRATIOX OF ECONOMIC POWER 1725 

REPRESENTATIVE CASES OF MONOPOLISTIC AND RESTRAINT OF TRADE 

PRACTICES 

Mr. Morehouse. The first case is that of the Commission v. Penick 
cfc Ford wliich was decided in November 1930. 

The Chairman. How was that case initiated? 

Mr. Morehouse. That case was initiated by the Commission 
pursuant to section 5 of the Federal Trade Commission Act and 
section 3 of the Clayton Act. 

The Chairman. Did the Commission act of its own initiative or 
was there some complaint? 

Mr. Morehouse. There probably was some complaint. If course, 
the actTnakes the identity of the complainant confidential, not to be 
disclosed except upon the authority of the Commission, and while 
I haven't the files here with me in this particular case, I am sure that 
the Commission's action was taken upon a complaint, presumably 
by a competitor. 

The Chairman. Obviously it would be significant with respect to 
all of these cases whether the complaint was the result of the initia- 
tive of the Commission or the result of the complaint of a competitor, 
because of course it will be recognized that in all discussion having to 
do with Federal regulation of any branch of commerce or industry, 
there is always a very pronounced tendency to ^criticize Government 
intervention. When, however, it appears from the records of the 
Federal Trade Commission that the action of the Commission is 
taken upon the complaint or at the request of business itself, we 
present an altogether different picture. Therefore, I think it would 
be very well for you in the development of your case to indicate 
whenever you can whether or not the particular hearing was initiated , 
by the Commission or initiated by some business house, person, or 
corporation. 

Mr. Kelley. If it please the committee, I happen to know, I recall 
distinctly, that that was on a written application from a competing 
party. I don't recall, but we can supply that information to the com- 
mittee. I will make this general observation: That the Commission 
at times of its own motion investigates matters concerning law viola- 
tions, but very infrequently; usually its matters are investigated on 
complaint of alleged injured parties. It is a rare case when the Com- 
mission makes an investigation that terminates in a proceeding in a 
violation of law that it is not on application, or applications, as some- 
times there are a great many of them, from persons or partnerships 
or corporations alleged to have been injured. 

The Chairman. In other words, the Federal Trade Commission 
doesn't act out of a desire to interfere with business or to meddle in 
business, but only as a result of the petition of business for protection 
against alleged violations of law. 

Mr. Kelley. That is right, Mr. Chairman. 

Mr. Morehouse. Mr. Chairman, if I may further answer the ques- 
tion, I beUeve I am safe in saying that eveiy one of the 59 cases that 
we have in this report were so initiated after complaint. If, after fur- 
ther investigation, I find out that the statement is not correct, I will 
see that it is corrected, but that is my impression, my best recollection, 
that every one of these cases was so started. 



1726 CONCENTRATION OF ECONOMIC POWER 

The Chairman. It was my understanding that that was the fact, 
and I therefore asked these questions to bring it out and to make it 
clear on the record that the Tra'de Commission on these cases was 
acting not on its own \\all or purpose or desire, but because it was 
asked to do so by responsible members of the business community. 

Mr. Morehouse, That is correct. 

Penick & Ford was a Delaware corporation owning and controlling 
the stock of a sales company of the same name. Certain of the officers 
and directors of the two companies were the same. The former cor- 
poration, the Delaware corporation, packed various canned sirups in 
plants located in Alabama, Louisiana, Iowa, and Vermont and sold 
its entire output to the sales company for resale to wholesale and retail 
groceries. During 1924 to 1927 this was the largest vendor of canned 
cane sirups in Mississippi, Louisiana, Arkansas, and Texas, and was 
the only seller in the Southern States that had a complete line of 
canned cane, corn, and blended sirups and molasses. 

The practice they engaged in was entering into a policy they called 
their 100-percent sales policy, consisting of entering into an agreement 
with wholesale grocer customers whereby they would deal in its 
canned sirups and molasses to the exclusion of the merchandise of 
competitors, in return for certain sales assistance and cooperation 
which was furnished by the sales company to its wholesale customers 
who would so agree. This sales assistance was refused or discontinued 
in the event they sold any competitive product. In furthepance of 
this sales policy wliicli the Commission found to be in violation of 
section 3 of the Clayton Act and section 5 of the Federal Trade Com- 
mission Act, the sales company in one instance purchased from a 
wholesale grocer 2,500 cases of a competitive sirup and repacked this 
siruf. and resold it at less than cost. 

The Commission found that by that practice the public was deprived 
of a substantial p>roportion of the competition previously existing in 
numerous southern markets by virtue of the closing of outlets of this 
class of merchandise to competitors, and this had a direct tendency 
toward monopoly in canned sirups and molasses, and it issued its 
order to cease and desist. 

Now, as an example of the way this report was compUed, there then 
follows a copy of the Commission's findings and order which is hereby 
submitted , marked Federal Trade Commission Exhibit 1 . That is tied 
in here and properly marked in the first volume of these exhibits. 

The Chairman. Well, you don't want that printed in the record, 
do you? 

Mr. Morehouse. No; but I thought I would submit the exhibits 
to the committee for its consideration in case it desired more detail 
than was in the report, the digest report. 

The Chairman. The exhibits may be received, but they will not be 
printed. 

(The exhibits referred to were marked "Exhibit No. 305" and are 
on file with the committee.) 

Mr. Morehouse. Yes; the same thing would properly apply to all 
these exhibits w^hich I will discuss. 

Mr, Davis. In that connection there has been prepared about a 
dozen volumes of all of the exhibits that are mentioned by the difi'erent 
witnesses, and we wish to file all of them in bound and indexed form, 



CONCENTRATION OF F.CONOMIC POWER 1727 

file all of them for the use of the committee, but unless it is especially 
indicated, we do not expect them to be printed in the printed record. 

The Chairman. They will be received in that manner. 

Senator King. Was there any appeal to the court from the findings 
and the decision of the Commission in that case? 

Mr. Morehouse. No, Senator. In any case where there has been, 
I will so state. 

Senator King. If there has been an appeal in any of the cases you 
are stating, I shall be glad to be advised and particularly if there has 
been modification of the findings on the decision of the Commission 
or a reversal of their decision. 

Mr. Morehouse. That has been taken care of and is in the written 
report, and I will mention it verbally. I don't think in any of these 
cases I am going to discuss there has been an appeal to the court. 

The next case is a case of the Waugh Equipment Co. and three 
individual respondents, decided September 21, 1932. That arose 
under section 5 of the Federal Trade Commission Act. 

Mr. Ballinger. Would you mind telling the committee whether 
these corporations are important, whether they are large or whether 
they are small? 

Mr. Morehouse. Certainly, I expect to do so. I have, as I said in 
Penick & Ford, I told the extent of its activities and the area it con- 
trolled, and I expect to do that in each case where the information is 
available. 

The Waugh Equipment Co. was a main corporation and made draft 
gears. A draft gear is a device for use on railway cars. It is a cushion- 
ing or shock-absorbing device that serves two purposes on a car, either 
freight or passenger. One of the purposes is to provide sufficient free 
movement or slack to permit the locomotive engineer to take it up, 
and also to serve as a shock absorber to prevent damage that might 
otherwise be occasioned by coupling and uncoupling of the cars. 

The Waugh Equipment Co. sold this product to railroads in com- 
petition with some eight principal com])etitors, and at the beginning 
of the time involved in this case it sold less than 1 percent of the total 
draft gears sold for new freight equipment. 

The individual respondents in this case were executive ofiicials of 
Armour & Co., who together with other officials and certain employees 
of this large packing concern owned or controlled a majority of the 
common stock of the Waugh Equipment Co. They were the president 
and vice president, respectively, of Armour, who in 1924 were given 
1,666 shares of the Waugh Co.'s stock as a consideration for them to 
use their influence with railroad officials in advancing the sale of the 
corporate respondent's draft gear, and pursuant to such agreement, 
the respondents succeeded in making substantial sales to some 
15 railroads during the period of 1924 to 1929. 

The Chairman. The officers of the packing company were the 
executive directors of a very large shipping concern. 

Mr. Morehouse. Oh, yes. I was just going to bring that out. 
Armour & Co., of course, as everyone knows, is one of the largest 
meat-packing concerns in the world and they have in connection 
with their shipping more than 500 distributing depots, that is, they 
had at that time, they have more now, or less, I don't know, but then 
they had 500 in the principal towns and cities of the United States, 



1728 CONCENTRATION OF ECONOMIC POWER 

and for the purpose of distributing their meats and other products 
they owned and utilized more than 7,000 refrigerator cars through 
themselves and their subsidiaries, and in the regular course of their 
business they had sometimes as much as 275,000 carloads of freight 
produce to be transported annually. This traffic was highly com- 
petitive and the business was eagerly and insistently sought by the 
railroad companies. 

These individual respondents in exchange for their stock so exer- 
cised their influence with the railroads by promise of increased patron- 
age or threats of withdrawal of patronage so as to coercively and 
oppressively, as the Commission found, use that large volume of 
Armour traffic to secure the sale of the Waugh Co.'s draft gears in 
preference to draft gears sold by companies who didn't have appreci- 
able traffic to offer as an inducement. So in spite of the fact that this 
Waugh Co. during those 5 years from August 1924 to August 1929 
were selling practically an unknown draft gear in competition with 
well-established competitors, the proportion of its sales to the total 
sales of this industry rose from 1 percent in 1924 to 25 percent in 
1929 and 35 percent m 1930. 

In the findings of the Commission, to make those figures perhaps 
mean more, if we will compare them with their largest competitor, 
the largest competitor in round figures in 1924 shows 79,000 sales, 
Waugh Equipment 2,000; in 1925, the largest comes down from 
79,000 to 33,000, Waugh still selling 2,000 and about 800 more. 
Then the next year the Minor comes do'WTi to 28,000, Waugh goes up 
to 4,000, just about double. The next vear the Alinor Co. came 
down to 15,000 and the Waugh up to 7,000, nearly 8,000. In 1928, 
we found their largest competitor down to 16,000, Waugh was up to 
10,000, and finally by 1930 the largest competitor now is selling 8,000 
and the Waugh Equipment Co. 17,000, so that they more than doubled 
their largest competitor in that period of time through the use of 
this practice. 

Senator King. Were prices reduced? Were the prices of this com- 
modity reduced? 

Mr. Morehouse. The findings of the Commission do not go into 
that. Senator. I can find that out and submit it later. I assume 
that the prices were reduced comparable as to all competitors, if 
they were reduced. 

Senator King. Then by reason of the Waugh's activities, prices 
were reduced. If I understand you, prices of the commodity were 
reduced. 

Mr. Morehouse. No; I didn't intend to so state. Due to these 
activities the volume of Waugh's sales was increased at the expense 
of its competitors. 

Senator King. Isn't it true anyway in a competitive system that 
some rise and some fall? Producers of some commodities increase 
their sales by legitimate, sometimes by deceptive methods, and that 
ought to apply to the reduction of the prices. I was wondering here 
whether or not by reason oi this competition the prices of this com- 
modity were reduced. 

Mr. Morehouse. That is not in the findings, Senator. I will have 
to find it. 



CONCENTRATION OF ECONOMIC POWER 1729 

Senator King. And do the findings show whether the Waugh device 
was superior? 

Mr. Morehouse. Yes. The Waugh device was not superior. 
There were two types of draft gears, a spring-plate type and a fric- 
tional type, and one was more durable than the other. The spring 
plate was more durable, I believe, and the frictional type was to be 
used on passenger cars where they didn't have such heavy loads, and 
the Westinghouse people had control of the patents on that frictional 
type for a tinie, but eyen after that patent expired the Waugh people 
continued to sell substantial quantities of the old spring-plate type 
gear to various railroads for use on passenger cars. They did im- 
prove their gear, the findings say, gradually from time to time until 
in the latter part of 1929 the Waugh was one of the three best draft 
gears on the market, according to laboratory tests of the American 
Railway Association, but it had not been in use on railways for suffi- 
cient length of time to determine its merits in actual service, and it 
had been found necessary to make changes and improvements to 
overcome defects which had been discovered as the gear had been put 
into use, and as I say it did continue to sell substantial quantities of 
this old spring-plate type, which it was enabled to do to a certain 
extent through the use of tliis tlireat of withdrawal and promise of 
traffic of Armour & Co. 

The Commission found that the factors that were ordinarily condu- 
cive to sales, such as quahty, price, and salesmanship, were replaced 
and overcome by these coercive and oppressive factors used by these 
respondents m cooperation with one another, to the injury of the pubHc 
and respondent's competitors, and unduly tended to suppress compe- 
tition between respondent corporation and competing manufacturers 
of draft gears, and to create a monopoly in respondent corporation 
in the sale and distribution of draft gears. Customers were prevented 
for exercising free will and judgment as to which competitive device 
was m.ost efficient in serving their needs at the lowest cost over a 
period of time. There was thus injected, the Commission found, 
into this competitive field, an unfair, abnormal, and uneconomic 
element, tending to give the concern controlling the largest volume 
of freight an unfair competitor advantage, which would more than 
offset the higher efficiency in the production and sales methods of 
competing concerns controlling no such traffic. The Commission 
ordered the respondents to cease and desist from these practices, and 
a copy of the findings and order are submitted as Commission's 
exhibit No. 3. 

The Chairman. There was no appeal. 

Mr. Morehouse. No appeal. The report of compliance, in accord- 
ance with the Commission's usual procedure, was received and filed 
and presumably they are still complying. 

Senator King. Did the Commission hold that 25 percent of the use 
of the commodity was a monopol.y? 

The Chairman. No ; that wasn't it. 

Mr. Morehouse. Did they hold what? 

Senator King. Did the Commission hold that a 25 percent use or 
that 25 percent of the commodity used or furnished by one company 
was monopolistic? 



124491— 39— pt. 5- 



1730 CONCENTRATION OF ECONOMIC POWER 

Mr. Morehouse. No, sir; not at all. The Commission's holding — 

Senator King (interposing). They simply condemned the unfair 
practice. 

Mr. Morehouse. They simply condemned the unfair practice as 
tending toward a monopoly. 

The next case involves zinc and copper plates, the Edes Manufac- 
turing Co., a case that arose under section 5 of the Federal Trade 
Commission Act and was decided in March 1936. There, 11 com- 
panies manufacturing more than 90 percent of the zinc and copper 
plate products in the United States, and which companies were in- 
corporated variously under the laws of Massachusetts, New Jersey, 
New York, Illinois, California, Indiana, Pennsylvania, and Con- 
necticut, formed a voluntary unincorporated association known as the 
Photo Engravers Copper, Zinc, and Grinders Association, organized in 
the city of Pittsburgh. This association 

Senator King (interposing). Did those organizations produce any 
of the raw material, for instance the zinc that went into the finished 
product, or were they merely the purchasers of all the commodities 
necessary to complete the product which they were putting in the 
market? I wondered if any of them had the advantage of being a 
producer of raw material. 

Mr. Morehouse. I don't think so. 

The findings simply say that thej' manufactured zinc and copper 
plates. If the Senator wishes that I would have to go to the more 
extensive files. 

Senator King. It may be developed later in the discussion. 

Mr. Morehouse. This association acted as a clearing house for the 
exchange of information among the various members as to reports of 
sales, prices, discounts, and terms, and from time to time the members 
met, discussed, agreed upon and established certain trade policies to 
be followed and prices to be charged in the interstate sale and dis- 
tribution of their products. 

The Commission found in this case that the m.onopolistic practices 
consisted of these manufacturers entering into agreements among 
themselves and with the association of which they were the principal 
members, to maintain uniform prices, terms, and discounts. They 
met at frequent intervals and exchanged the price information through 
the association. 

Senator King. Would not this organization in its practices fall 
within the spirit of if not the letter of the decision of the Supreme 
Court in the Hardwood J^umher case? 

Mr. Morehouse. I don't have that case m mind right now. Senator, 
so I am unable to answer you. 

Senator King. That is where the producers of hardwood lumber 
met and fixed prices or rather furnished information. 

Mr. Morehouse. It falls within or alon^ the same line as several 
cases that have been decided. 

Mr. Berge. "Was there any agreement here to abide by the prices 
that they fixed? 

Mr. Morehouse. The Commission so found. 

Mr. Berge. It wasn't just a case then of exchanging the informa- 
tion but it was a definite agreement. 



CONCENTRATION OF ECONOMIC POWER 1731 

Mr. Morehouse. The Conmiission specifically found, based upon 
the answer of the respondents, that they had entered into an agree- 
ment to fix and maintam uniform prices and to cooperate with each 
other in the enforcement and maintenance of those prices. The 
exchanguig of information was simply one of the incidental means used 
to accomplish and carry out that agreement. 

The eftect of this practice, the Commission found 

Mr, Davis (interposing). Is it not a fact that in this case as well 
as many of these other cases that have been tried by the Commission, 
the respondent admitted all the charges either in the answer or a 
stipulation as to the facts? 

^Ir. MoKEHOUSE. That is quite true, and that is why I mentioned 
the answer in this case. I have a note to call that to the attention 
of the Committee where that be the fact. 

The Commission found that the effect of this practice was to restrict 
and suppress competition particularly in the prices quoted and the 
discounts allowed and that that enhanced the prices of zinc and 
copper engravers' plates above the prices which would prevail imder 
natural, free, and open competition, and that this had a tendency to 
create a monopoly in these corporate respondents in the manufacture 
and sale of such products in interstate commerce, and a copy of the 
findings and order is marked as Commission's exliibit 13 and sub- 
mitted. 

In the case of the American Sheet & Tin Plate Co., decided in June 
1936, that was a case that was prosecuted by the Commission pur- 
suant to section 5. The facts were these: The American Sheet & Tin 
Plate Co. (merged in 1936 into Carnegie-IUinois Steel Corporation) 
and the Bethlehem Steel Co., the Canton Tin Plate Corporation, the 
Columbia Steel Co., the Trustees of Follansbee Bros. Co., Granite 
City Steel Co., Inland Steel Corporation, Jones & Laughlin Steel 
Corporation, McKeesport Tin Plate Co., Republic Steel Corporation, 
N. & G. Taylor Co., Washington Tm Plate Co., Weirton Steel Co., 
the Wheeling Steel Corporation, and the Youngstown Sheet & Tube 
Co., were severally engaged in the manufacture, among other prod- 
ucts, of tin plate which they sold to tin-plate jobbers and manufac- 
turers of tin cans and other metal containers located throughout the 
United States. The principal purchasers were the American and 
Continental Can Cos. 

The tin plate was in several grades, three specifically mentioned 
here: production plate, stock plate, and waste-waste. The produc- 
tion plate was a tin plate manufactured according to the customer's 
specification. The stock plate consisted of seconds or surpluses or 
warming-up sizes left over from the production plate. The waste- 
waste was tin plate which contained defects so great as to disqualify it 
for use as stock plate or seconds. 

Before 1935 these respondents had sold a substantial portion of their 
accumulation of stock plate to tin-plate jobbers who resold it to small 
can manufacturers and packers who had been unable to carry produc- 
tion plate in stock in various sizes and quantities required. 

In the latter part of 1934 these respondents conferred and agreed to 
cease the production and sale of stock plate after January 1, 1935, and 
further agreed to require the buyers of production plate to accept 



1732 CONCENTRATION OF ECONOMIC POWER 

seconds up to 25 percent of their orders. This constituted a com- 
bination and conspiracy not to cut prices on stock plate to jobbers and 
manufacturers which restricted and eliminated competition in the 
interstate sale and distribution in that particular kind of plate. 

After January 1, 1935, these corporations cooperated to carry out 
the terms of these agreements. They sold some of their accumulations 
of stock plate as production plate at prices higher than the prices 
theretofore received for stock plate and cut up some of their stock plate 
into such shapes and sizes as to make it unfit for use in the manufac- 
ture of tin cans or other metal containers so that it was classified as 
waste-waste. 

One defense presented for the consideration of the Commission by 
these respondents was that in 1933 they had been under the National 
Recovery Code of Fair Competition for the Iron and Steel Industry 
and pursuant to that code they had been required to file prices for 
that industry and refrain from certain unfair trade practices defined 
in that code. 

Many manufacturers, they said, acting in evasion of the provisions 
of the code, sold as stock plate that plate which was properly classified 
as production plate, and whOe apparently selling at the same prices, 
discriminated in price between different customers, making corrective, 
action within the industry necessary. 

The Commission did not consider this to be a good defense and did 
not consider that it authorized the making and execution of the 
agreements which I have described. 

Senator King. Is it not a fact that in a number of cases which were 
initiated by the Commission or were initiated by complaints by com- 
peting companies you ran up against the proposition you have just 
described, namely, they justified their agreements by virtue of the 
N. R. A. and the codes which had been adopted by the N. R. A.? 

Mr. Morehouse. That has been frequently the case. Senator. 

Senator King. So you discovered, did you not, that the N. R. A. 
had not only initiated but had countenanced and permitted and 
enforced monopohstic practices. 

Mr. Morehouse. With that I don't think we were so much con- 
cerned as we were with the fact that subsequent to, after the Schechter 
decision they continued those practices, which were illegal, and of 
course such an attempted defense would not be recognized. 

Senator King. You didn't recognize that defense. 

Mr. Davis. Mr. Chairman, I think it proper to state in this con- 
nection that while, of course, the Commission could not recognize 
those agreements as a defense, yet in the interest of fairness the Com- 
mission has never predicated a case upon conduct of any respondent 
which was done under the terms of an N. R. A. code unless they con- 
tinued an unlawful conduct subsequent to the Schechter decision. We 
did not disturb them for conduct under authority of a code prior to 
the Schechter decision because we did not want to be in the attitude 
of undertaking to take corrective action against any citizens who had 
been advised that such course of conduct was legal by Government 
authority. 

The Chairman. I think that was a very proper course, if I may 
presume to say so. You may proceed. 



CONCENTRATION OF ECONOMIC POWER 1733 

Mr, Morehouse. Of course, the Commission found that these 
practices enhanced the price of stock plate and tended to suppress 
competition in the sale of tin plate, particularly in that grade. It had 
a tendency to destroy the business of jobbers of tin plate and create a 
monopoly in the manufacture of tin containers in the American Can 
Co. and the Continental Can Co., the principal customers of these 
concerns, by depriving their small competitors of their normal source 
of supply of tin plate, and forced smaller manufacturers to buy produc- 
tion plate at prices substantially higher than they formerly paid for 
stock plate. 

A copy of the complete findings as to the facts, conclusion, and 
order of the Commission requiring the respondents to cease and 
desist from such practices is marked F. T. C. Exhibit 24. We have 
already referred to that. 

The Chairman. That is one of the exhibits already referred to in 
the files of the committee? 

Mr. Morehouse. Yes. 

The next case deals with a product, turbine generators. That 
was a section 5 case, decided in April 1937. 

respondent's right of appeal under wheeler-lea act 

The Chairman. With respect to the case you have just discussed 
and all the others, the findings of the Trade Commission were accepted 
without appeal? 

Mr. MoREHOtrsE. Yes, sir; unless I have otherwise stated. In all 
these cases I can state right now, except the very late ones where the 
time hasn't yet arrived, reports of comphance have been duly received 
and filed by the Commission indicating compliance with the provi- 
sions of the order. I have, I think, one or two here where the 60-day 
period allowed for the filing of such report has not expired. 

Mr. Patterson. You are going to explain in due time rather fully, 
I hope, all cases that have been appealed, those cases that have 
reached the Supreme Court, how many cases have gone against 
you, those cases you have had to take to the Supreme Court and 
those cases others have taken to the Supreme Court. 

I want to know for the record in due time just what happened 
during the past 7 years as to cases you have lost in the Supreme Co\lrt. 

The Chairman. I think that probably will come a Httle later, 
Mr. Secretary. It is not within the purview of this testimony. 

Mr. Morehouse. It is not within the purview of what I am pre- 
senting, Mr. Secretary. 

Mr. Davis. I can answer the question very briefly, however, by 
saying that during the past 7 years the Commission has been reversed 
by the United States Supreme Court in only one case, and that was 
by a 5 to 4 decision in the Arrow-Hart & Hegemen case, which involved 
section 7 of the Clayton Act. 

The Chairman. Judge Davis, could you tell us ofiTiand what pro- 
portion of the cases handled by the Trade Commission are accepted 
without appeal by the defendants? 

Mr. Davis. A very large percentage. I don't know whether the 
exact figures are available. 



1734 CONCENTRATION OF ECONOMIC POWER 

Mr. Morehouse. We can supply them.^ 

Mr. Davis. We can assemble those figures and will be glad to do 
that.^ 

Mr. Morehouse. Of course, Senator, you will appreciate that 
since the passage of the Wheeler-Lea Act, making the Commission's 
orders final if not appealed from within 60 days, and also making 
all prior orders final, that resulted in an abnormal amount of appeals. 

The Chairman. It has been my impression that by and large the 
decisions of the Federal Trade Commission are accepted. 

Mr. Davis. That is true, notwithstanding the fact that any re- 
spondent dissatisfied with the decisions of the Commission has an 
absolute right of appeal to the Court of Appeals of his own circuit, 
and then has the same right to present a petition for certiorari to the 
Supreme Court if the Court of Appeals decides against him. That you 
have in any case, and in addition to that our statute directs that our 
appeals shall be speedily heard. 

The Chairman. In other words, the record rather conclusively 
demonstrates that the Federal Trade Commission has not wantonly 
intermeddled with the affairs of business. 

Mr. Kelly. That is correct, Mr. Chairman. I would say that 
about^ — just getting at this to give the figures — not over 5 percent of 
the cases are appealed, and I may say that of the cases that are 
appealed, usually they are the weaker ones. They are the ones where 
the defendants, respondents we call them, think they can induce the 
Circuit Court of Appeals to reverse the Commission. Generally 
speaking, the business concerns proceeded against abide by the 
decisions of the Commission. 

The Chairman. When you say that they are the weaker cases, 
do you use the word from the point of view of the Commission or of 
the respondent? 

Mr. Kelly. From the point of view of the respondent. 

Representative Sumners. That is interesting. The cases appealed 
from are the cases the respondents have the least chance to win? 

1 Commissioner Davis later supplied the following data in accordance with the Chairman's request: 
During the period from January 1, 1933, to April 30, 1939, the record of the Federal Trade Commission is 
as follows: 

Total cases investigated and reviewed 22,038 

Number of stipulations to cease and desist accepted 3,379 

Number of formal cease and desist orders - 1,218 

Cases decided by the circuit courts of appeals, including all of the circuits, of which 48 were on res- 
pondents' petitions for review and 37 on the Commission's petitions for enforcement 85 

Cases in which Commission was aflBrmed by circuit courts of appeals ^ 81 

Cases in which circuit courts of appeals reversed the Commission, but which were carried to the Su- 
preme Court on certiorari, and in which the Supreme Court reversed the circuit courts of appeal and 
aflBrmed the Commssion - 

Case in which the circuit court of appeals reversed the Commission, and which was not carried to the 
Supreme Court - - -- 1 

Case in which the Commission was aflBrmed by the circuit court of appeals, which was cnrried to the 
Supreme Court on petition of respondents, and in which the Supreme Court reversed the Commis- 
sion and the circuit court of appeals by a 5-to-4 decibion ^ - -- -- 1 

In addition, since the organization of the Commis,«ion there have been 14 cases in the Federal courts in- 
volving questions relative to the Commission's procedure in the irial of cases under section 5 of the Federal 
Trade Commission Act, with the enforcement of which the Commission is charged. These cases related 
generally to efforts by respondents, through injunction or e.straordinnry procass. to interfere with the normal 
course of procedure in the trial of casas; in a few instances they related to actions by the Commission to com- 
pel the testimony of recalcitrant witnesses. These cases were all decided in favor of the Commission. 

In addition, since the organization of the Commission there have been 9 cases in the Federal courts involv- 
ing questions relative to the Commission's procedure in the administration of section 6 of the Federal Trade 
Commission Act. This section of the act empowers the Commission to make certain specified general in- 
vestigations. These casas related generally to efforts by interested corporations, through injunctive or other 
extraordinary process, to interfere with the procedure by the Commission to secure data deemed necessary 
to the Commission's investigations, or to compel the production of testimony by recalcitrant witnesses. 
Five of these cases were decided in favor of the Commission and four decided adversely to the Comniis- 
sion . The latter four cases were decided durine the early years of the Commission, at a time when the 
Commission was undertaking to administer a new act and without legal precedents for its guidance. 



CONCENTRATION OF ECONOMIC POWER 1735 

Mr. Kelly. No; they have a good chance to win. 

Representative Sumners. I thought you gentlemen didn't under- 
stand each other. 

Mr. Kelly. That is perhaps my fault. 

Mr. Davis. In other words, they are border-line cases, where the 
•evidence is conflicting or not as strong as it is in other cases. 

Representative Sumners. I can't see any reason for continuing it. 
It is as clear as it can be. 

The Chairman. They just decided to make it clear in the record. 
You and I understood it. 

Representative Sumners. I guess when yo'u and I understand it 
the general pubUc will. [Laughter.] 

One question I don't understand there is the effect upon the number 
of appeals of the passage of the Wheeler-Lea Act. I am afraid I 
didn't catch your answer. 

Mr. Morehouse. The Wheeler-Lea Act, in making the decisions 
of the Commission for the first time final upon expiration of a definite 
period of time, resulted presumably in a considerable number of 
respondents fiUng appeals to prevent the order from becoming final 
who might otherwise not have done so, because prior to that time 
they could wait 4 or 5 or 6 years before they filed an appeal and would 
«till have that right. 

Representative Sumners. They would have the right to appeal, 
but they wouldn't have to comply. Could they file any certificate of 
supersedeas proceedings which would prevent the going into effect of 
your order? 

Mr. Morehouse. No, sir. 

Representative Sumners. That is a very interesting result. Do 
you gentlemen consider it an important result in the administration? 

Mr. Morehouse. I think it was only temporal. I don't see any- 
thing particularly important about that, except it made a little more 
work during that particular period of time immediately following the 
passage of the act. 

Representative Sumners. They feel that in order to save the chance 
to appeal they must act quickly, and therefore they act. 

Mr. Morehouse, I know there was a comparatively large number 
of such appeals filed immediately after that act went into effect and 
before the time limit arrived at by which all the prior orders of the 
Commission would be final. In some of the cases where there had 
been orders outstanding for yeai-s and years, if they didn't want to 
abandon forever their right to apply for reveiw, they came in at that 
particular time. 

Mr, Frank, You think the new statute has had desirable results, 
then? 

Mr. Morehouse. Absolutely. 

Mr. Berge. Prior to the new statute there wasn't any pen<alty for 
disobedience of an order unless the Commission appUed for enforce- 
ment of the order? 

Mr. Morehouse. That is correct. The only penalty would be 
after the Commission's order had been enacted into a decree of a 
circuit court and there violated, and punishment for contempt, 

Mr, Berge, Doesn't that account, probably, for the increased liti- 
gation? Now there are civil penalties if an order is not appealed from 
within 60 days and then is violated, so that if they question the order 



1736 CONCENTRATION OF ECONOMIC POWER 

now their only opportunity is to do it within 60 days. Previously, 
you might say their orders were not self -executing. An order only 
nad teeth in it — I don't want to say it quite that way because the 
moral force of the order was, of course, the important thing, but a 
party was immunLe, you might say, from trouble, until the Commis- 
sion apphed for enforcement prior to the Wheeler-Lea Act. Isn't 
that so? 

Mr. Morehouse. That is correct, and just how much that had to 
do with any increase in appeals I don't know. I would say it would 
be a part of and incident to the general proposition that a definite 
time had been set within which they must apply for review or forever 
hold their peace. 

Mr. Davis. Mr. Chairman, I think that our staff will agree with 
the statement which I make that I do not think there has been any 
substantial increase in appeals. Right at the time, before the 60-day 
limit went into effect, there were several appeals, as you explained, 
because they had to get in under the deadline, and there was an appeal 
in one case in which the Commission had entered a cease and desist 
order 14 years before. But for a few who wanted to get in under the 
deadhne, all cases having done so, I do not think there has been any 
abnormal number of appeals since. 

Mr. Morehouse. I did not intend to so intimate. I am just 
speaking about there being a purely temporal thing at that particular 
tmie. 

Mr. Kelley. There were 23 cases, about 23, where the Commission 
had theretofore issued orders, that sought a review in the circuit court 
of appeals, but those are being handled. Now I don't think there is 
any particular inference in the appeal work, but the Commission does 
have additional work in the Department of Justice. We are institut- 
ing a number of civil, suits for the recovery of penalties for violation 
of the order after it has become final, and also a number of criminal 
proceedings under the food and drug provisions of the act for engaging 
m advertising that is dangerous to health or with an attempt at fraud, 
so in that connection we have a great deal of additional work, but 1 
don't think, after we handle those 25 or so cases that appealed, after 
those are disposed of, I don't think there will be any particular increase 
in the appeal work, review of the Commission's orders by the court. 

Representative Sumners. Mr. Chairman, I would like to mth- 
draw the question. [Laughter.] 

The Chairman. The suggestion of the vice chairman is that we 
proceed. 

Mr. Morehouse. The case involving turbine generators, decided 
in 1937, arose under section 5 of the Federal Trade Commission 
Act. Parties were the General Electric Co., Westinghouse Electric 
& Manufacturing Co., AlHs-Chalmers Manufacturing Co., and ElUott 
Co. They manufactured and sold turbine generators, principally 
to different governments, municipal, State and Federal. Combined, 
they were so influential as to influence and control the trade in all 
such products. Before 1933 they were in competition with each other, 
both as to efficiency and performance guarantees and initial cost, 
all of which were vital factors in making the sales of these generators. 

The Commission found that they got together and agreed to fix 
and maintain uniform delivered prices and performance guarantees 
for turbine generators. They adopted and adhered to, as their own, 



CONCENTRATION OF ECONOMIC POWER 1737 

the delivered pricing sheets and confidential performance data com- 
piled by one of them, without giving any consideration to their 
respective costs or to the true theoretical or actual performance of 
their turbine generators. 

The Commission found that this monopolized this business unrea- 
sonably, restrained, stifled, and suppressed competition in the indus- 
try, depriving the public of price, service, and other advantages which 
would otherwise have accrued. 

A copy of the findings and the conclusions and the Commission's 
order to cease and desist is among the miscellaneous exhibits herewith 
submitted. 

At the same time the Commission issued its findings and order 
against all of the corporations I have named except t}ie General 
Electric Co., who were engaged in the manufacture and sale of con- 
densers, as well as the turbme generators, and who had combiijed 
with each other to accomplish the same objectives in the same manner 
with reference to their condensers as they all had with reference to 
their turbine generators. 

That finding and order is included in "Exhibit No. 305," already 
introduced. 

Representative Sumners. Before you go to the next case, may 1 
ask you, in your practice do you have any formal conferences at any 
time with any of these people whom you think possibly are violating 
the rules and regulations of law that don't go into your regular order? 

Mr. Morehouse. When a case is being investigated, upon com- 
plaint of a member of the public or a competitor, it is the rule, I believe, 
for the examining attorney to call upon the party against whom the 
complaint has been directed and obtain the advantage of hearing 
anything he may wish to say, any data he may submit, and call 
upon any other person that the proposed prospective respondent 
might suggest, the idea being to get all the facts. Is that what 
you mean? 

Representative Sumners. No, sir; it isn't. I was wondering if 
in your practice you sometimes are able to adjust conditions, straighten 
out conditions, without going to the point of a formal hearing or pro- 
cedure. 

Mr. Morehouse. We do that quite frequently except in cases 
that involve violations of antitrust laws.' The general line of policy, 
as I understand it, and Mr. Kelley will correct me if I am wrong, has 
been not to enter into stipulations 

Mr. Kelley (interposing). No; that isn't quite correct. Mr. 
Congressman, frequently we hold conferences with industry and 
we are glad to whenever they request it, and if the Comrnission 
makes an investigation and determines that there is a violation of 
law, frequently counsel for the companies, sometimes representatives 
of the companies themselves, come down for conferences. Some- 
times they will last most of a week, and frequently terminate by the 
companies filing an answer admitting the facts that the Commission 
alleged in the complaint to be true, and terminating the case without 
trial. 

Representative Sumners. 1 understand. That wasn't the question. 
My question is: Do you confer with management prior to filing of 
complaint? 



1738 CONCENTRATION OF ECONOMIC POWER 

Mr. Kelley. Frequently, Mr. Congressman, but when we have 
evidence that they have violated certain practices Uke fixing prices, or 
that there was a deliberate intent to defraud, we don't compromise 
those cases. 

Representative Sumners. I understand that. 

Mr. Kelley. But in all other character of cases they come in. 
They are terminated without even a complaint. 

Representative Sumners. Now that is what I was asking for. 

Senator King. Where there is no mala fide in the conduct of those 
against whom complaint is made, you oftentimes compose the 
differences and not follow them. 

Mr. Kelley. Yes. 

Mr. Davis. As a matter of fact a very large percentage of our casess, 
I would estimate not less than 85 percent, are settled by respondents, 
signing stipulations in which they admit the essential facts which 
constitute a violation of the statute and agree to cease and desist 
from those respective practices. At least an overwhelming percent 
of our cases are settled that way. 

Senator King. But if in those negotiations and investigations you 
reach the conclusion that no law has been violated, then* there is no 
complaint filed and no cease and desist order entered and no agreement 
entered into between the complainant and the Government and the 
respondents. 

Mr. Davis. That is true, and as a matter of fact, Senator, the Com- 
mission investigates and closes a great many more cases than it takes 
corrective action in, because if after an investigation by its staff it 
appears that there is not a violation of law ov^er which it has jurisdic- 
tion, it is closed without any publicity or release or anything of the 
kind. 

Representative Sumners. That answers my question. 

Mr. Morehouse. Shall I proceed, Mr. Chairman? 
■ Mr. Davis. Yes; proceed, Mr. Morehouse. 

representative cases of monopolistic and restraint of trade 

practices ^ 

Mr. Morehouse. The next case iuvolves water gate valves, hy- 
drants and fittings. Approximately 31 corporations who were 
engaged in the business of manufacturing those and similar products, 
and in the sale of such products to towns, cities and municipalities and 
State and Federal Gov^ernments, comprised substantially all of the 
manufacturers of such products used for water supply systems, and 
before December 1933, these 31 were in competition with each other 
as to price. 

They were incorporated and had their principal offices and places of 
business in some 17 different States, and were members of what was 
known as the Water Valve and Hydrant Group of the Valve and 
Fittings Institute, a New York corporation. From December 1933 
until January 1935, this industry operated under the code authority 
pu *suant to the National Industrial Recovery Act, and some of the 
respondents named in this case were administrative ofl&cers of that 
authority. 

I This subject Is resumed from p. 1726 et seq. 



CONCENTRATION OF ECONOMIC POWER 1739 

The monopolistic practices in this case consisted of agreements by 
and between these 31 corporations to fix and maintain prices. The 
Commission found they so agreed and did fix and maintain enhanced 
uniform delivered prices for their products. They divided the 
United States into zones, fixing uniform discounts to distributors and 
requiring the distributors to maintain uniform minimum resale prices, 
and by intimidation and persuasion certain of the respondents induced 
others of them to raise prices to the prices agreed upon. 

By uniform delivered prices the various members were prevented 
from allowing differences in the proximity of any given customer ta 
their respective manufacturing plants to result in any difference in 
the amount to be paid as the delivered price. 

The Commission found that this uniform delivered price system 
results in discrimination in price between the various customers 
after making due allowance for the cost of transportation, t..iacting^ 
higher prices from customers having little or no transportation expense- 
and lower prices from those having heavy transportation expense. 
That is to say, customers located in or near the place of manufacture 
and shipment are deprived of the economic advantages of their loca- 
tion, and are required to contribute to the cost of transportation to , 
more distant customers. The Commission found that these acts 
and practices had a dangerous tendency, that they had actually 
hindered price competition in the sale and resale of these products, 
and had created in the respondent members of this group a monopoly 
unreasonably and unlawfully restraining interstate commerce. 

A copv of the findings and order of the Commission in that case are 
marked F. T. C. Exhibit 49 and is included in "Exhibit No. 305," 
already introduced. 

The next case is commonly referred to as the Cal-Pack case and 
involves the California Packing Corporation, the Alaska Packers 
Association and several individuals. It was decided in 1937. It 
afose under section 5 of the Federal Trade Commission Act. 

The California Packing Corporation was organized in California in 
1916. It packed and. distributed food products such as dried and 
canned foods, canned vegetables and fish, pineapples, and coffee. It 
was one of the largest packers and distributors of such products in the 
world, pnd an important factor in the Hawaiian pineapple industry 
and the packing of sardines and tuna fish since 1936. It had more 
than 100 canning factories, located over 10 States and Alaska and 
Hawaii, and sold some of the products under such brand names as 
"Del Monte," "Sunkist," "Goldbar," and so forth. 

The Alaska Packers Association, another California corporation, 
engaged exclusively in the packing of salmon and the sale thereof, 
with nine canning factories located in Alaska and one on Puget 
Sound. Eighty-four pwcent of its stock was owned by the former 
company, the California Packing Corporation. 

In the course of their respective businesses, these two compam'es 
purchased substantial quantities of raw materials and manufactured 
products, such as containers and cartons, tin, steel, copper, paint, 
and other articles from the manufacturers thereof throughout the 
United States, and both in the sales of their products and their pur- 
chases of materials they were in competition with other manufacturers 
and producers and purchasers using the same instrumentalities of 



1740 CONCENTRATION OF ECONOMIC POWER 

distribution and transportation as these respondents, including various 
ports, docks, wharves, and terminals located in San Francisco Bay 
and tributary waters. 

Encinal Terminals was a public wharfinger corporation in the city 
of Alameda, on the east side of San Francisco Bay, and leased the 
land upon which its facilities were located from the Alaska Packers 
Association. It was organized by these two corporations who since 
1925 utilized its faciUties in the distribution of their product. 

San Francisco Bay, upon which the cities of San Francisco, Oakland, 
and Alameda are located, is a land-locked harbor, 48 miles long, with 
100 miles of shore line, and for many years has been recognized as the 
principal harbor for steamships on the Pacific Coast, and ranks second 
only to New Yorii Harbor in the United States as to the number of 
steamship lines landing their cargoes at docks and wharves there. 
Approximately 166 steamship lines carry freight to and from those 
three ports which are under the immediate control of the board of 
State harbor commissioners and are operated on a nonprofit basis. 
Five other terminal companies were there engaged in the public 
wharfinger business competitively with each other and with the 
Encinal Terminals. The function of each was to act as a connecting 
link from railroad to ocean carriers and vice versa, acting as the 
agents for both exporters and in-bound steamers. 

The practices which the Commission found to have a monopolistic 
tendency in tliis case were as follows: By promises that these cor- 
porate respondents would buy or increase their volume of purchases 
from the suppliers of their raw and manufactured materials, and by 
threats of reduction or discontinuance in the purchase of such ma- 
terials, they coerced and compelled a substantial number of the sellers 
to divert substantial quantities of freight tomiage wliich normally 
and usually would have been routed through the competitive ter- 
minals located on San Francisco Bay to their owned and controlled 
Encinal Terminals Co. 

By the same means they also coerced the routing through their 
terminal of shipments by steamship companies, although the services 
and facilities of the competitive terminals were equal to those of the 
Encinal Terminals, and in many instances,. more economical to the 
said steamship companies and shippers. Incidental to this program, 
the respondents coerced and compelled a number of steamship com- 
panies to disclose the identity of consignees of freight shipments and 
to allow confidential records and manifests to be inspected so as to 
enable the respondents to bring pressure and influence to bear upon 
the said consignees to divert traffic to their own terminals. They did 
this acting concertedly and in cooperation with the individual re- 
spondent officers named, and spied upon the business of their com- 
petitors for the same purpose. 

Of course, the effect was that the distribution expenses of the 
California Packing Co. and the Alaska Packers Association were re- 
duced and their revenues increased to the unfair advantage of their 
competitors who had been compelled, against their interest, to route 
their products through the Encinal Terminals. 

There was one port there way inland, I think on the San Joaquin 
Kiver — is it Stockton? — where it was possible for an exporter to ship 
his goods by rail (it was maybe 160 miles inland), and of course the 
freight by shipping by boat came less than by rail. They could save 



CONCENTRATION OF ECONOMIC POWER 1741 

in many cases $1 a ton, I believe the Commission found, if they 
weren't required by these coercive practices to ship it by rail to the 
east side of San Francisco Bay to this Enchial Terminals Co., owned 
and controlled by these two respondents. 

This naturally caused the competitors to have to pay more for their 
raw materials and manufactured products and gave the respondents 
an unfair competitive advantage over all their competitors who did 
not control large freight tonnage and who did not engage in such 
coercive practices. The usual and normal competitive considerations 
of quality, service, and price were thus displaced by respondent. The 
CoYnmission found that this tended to create a monopoly in them in 
the sale and distribution of the food products which I have described. 

A copy of this finding and order is included in "Exhibit No. 305" 
already introduced. 

The next case involves metal windows and was a matter of the 
Metal Window Institute.^ In this -case the findings were upon th« 
answer of the respondents. It arose under section 5 and was decided 
in November 1937. Nineteen corporations constituting substantially 
all of the manufacturers and distributors of steel window products in 
the United States, and who had been in active and substantial com- 
petition with each other, became members of the Metal Window Insti- 
tute, which was a voluntary unincorporated trade association. ' The 
products manufactured and sold by these respondents and firms were 
principally used in the construction of industrial and commercial 
buOdings, and generally sold through competitive bids. A sub- 
stantial part of their sales for several years had been to the United 
States, to the several States, as well as to municipalities or political 
subdivisions of municipalities for use in the construction of pubUc 
buildings. 

Before the association was formed, certain of the members had 
compiled and afterward through the association revised and computed 
their sales prices by the application of discaunts according to a formula 
to gross or basic prices published in a so-called basic price book. This 
was a comprehensive and detailed list of prices for all of the products 
of the metal window industry. 

Acting through this association, the 19 firms established and main- 
tained clearing bureaus to assist each other in checking estimates for 
bids for metal window products from plans and specifications. In 
connection witlf this method they entered into agreements in further- 
ance of which they combined to establish and Maintain uniform prices, 
terms, and conditions of sales and schedules of discounts from these 
basic prices. In any given geographic area the members would sub- 
mit all estimates of bids to be made on a project located there to one 
of the clearing bureaus in that geographical area theretofore designated 
by the assQciation to clear bids or prices for that particular area, and 
identical gross, and in some cases identical net, price estimates were 
agreed upon and used in submitting bids on these projects. 

The association required all its members to adhere to and abide 
by the estabhshed prices and actively policed the industry and 
threatened to impose penalties on those who sold for less than the 
established prices. 

One way in which the nonmember competitors were prevented from 
becoming successful bidders on projects and induced to join the asso- 



1742 CONCENTRATION OF ECONOMIC POWER 

ciation was the agreement by members that in certain cases the bidding 
should be open, and in those cases the members would concertedly 
underbid the nonmember, the nonmember competitors: sometimes by 
concerted action the members were able to secure the withdrawal or 
cancelation of bids where the bids were less than the prices which 
they had established by mutual agreement. 

The Commission found that this was an unlawful restraint of trade 
on metal window products, that it increased prices, maintained prices 
at artificial levels, and deprived the public of benefits which it would 
otherwise have obtained had free and open competition been permitted 
to exist among these 19 competitors. 

The Commission's order in the case is included in "Exhibit No. 305", 
already introduced. 

The Chairman. That was a case which rather clearly illustrated 
the practice whereby the members of that association were preventing 
new competitors to enter the field in which they were engaged. 

Mr. Morehouse. Absolutely; it was impossible — nearly im- 
possible. 

The Chairman. In other words, it was the Establishment of the 
closed door, to use the phrase which has come into common practice, 
with respect to China; we talk of the open door in China, the neces- 
sity of maintaining free, open access to the trade of a great country. 
Here was an illustration of a practice, the purpose of which was to 
close the door except to certain favored individuals, and it was being 
done by those individuals or those corporations themselves in their 
own association. Is that a correct statement? 

Mr. Morehouse. Exactly, Senator. I think it also illustrates the 
idea that monopoly does not have to exist in one person. Nineteen 
competitors can still be nominally competitors and separate organi- 
zations and still have a monopoly. 

The Chairman. In other words, it was a combination to maintain 
prices and to exclude all but the members of the association from the 
opportunity to participate in the particular business. 
Mr. Morehouse. Yes, sir. 

Mr. Frank. For educational purposes might it be desirable to get 
in the record the notion that the economists have invented the word 
"oUgopoly," to describe what you are describing. 

Mr. Morehouse. I never heard the word before, but I think it is 
a good word. 

Mr. Frank. As I understand it, "monopoly" means one seller and 
"duopoly" means two, and the economists, as I said, have invented 
the word "oligopoly" to describe several sellers who, so to speak, 
have a joint or shared monopoly. Also someone invented the world 
"monopsyny" to indicate one buyer having a strategic position giving 
him advantages equivalent to that of one seller. There should, I 
suggest, be another word, "oligopsyny" to describe several buyers 
■who together have such a strategic position. 

The Chairman. I am inclined to think that is an unfair competi- 
tive practice so far as the understanding of economics is concerned. 
H is designed on the part of the economist to exclude the common 
people like myself from understanding what we are talking about. 



CONCENTRATION OF ECONOMIC POWER 1743 

Mr. Frank, As I understand it, Mr. Chairman, that is frequently 
the function of economists. They vie with lawyers in that respect. 

The Chairman. Using language to conceal thought. 

Mr. O'CoNNELL. In these cases that you are discussing, what 
penalty, if any, is imposed on the group who have so combined as 
indicated in that case to suppress competition? 

Mr. Morehouse. I don't know if the findings detail that penalty 
or not. If you will give me just a moment I will see. It was a threat, 
I believe I said; a threat of imposition. I don't know that any were 
imposed. 

[ Mt. Kelley. The only penalty is the order; but after 60 days the 
order becomes final and in case of a violation after it becomes final 
then they become liable for a civil penalty, recoverable in a civil suit 
by the United States. 

Mr. O'CoNNELL. I wanted to be sure that I understood. For a 
■continued practice such as this the penalty up to the point of a cease- 
and-desist order is merely the order to cease and desist from the 
practice, and it is only for a continuation of the practice that any 
additional penalty is given. In other words, it is a technique which 
merely tells a person violating the law merely to stop violating the 
law. 

Mr. Kelley. That is right. 

Mr. Morehouse. I thought you were asking what penalty these 
members would impose on somebody for violating their rules. 

The Chairman. Mr. Morehouse, I wonder how rnuch more time 
you will need. 

Mr. Morehouse. I have six or seven more cases, most of them 
very brief. I should say that if there are not too many inquiries, I 
might be able to finish in a half an hour to thirty-five minutes. 

The Chairman. I discussed the plan for the afternoon with Senator 
King before he was called away. That buzzer that you just heard, 
of course, was the roll call in the Senate, and it may be that there 
will be some voting in the Senate this afternoon, so it is my purpose 
at the termination of this particular testimony to suggest a recess 
until tomorrow morning at 10 o'clock, so we would have the afternoon 
free. Now we might stay here until you conclude, if that is agreeable 
to the committee. 

Mr. Davis. Mr. Chairman, we will be very glad to conform to the 
convenience of you and the other members of the committee. We 
are ready to go right on, or we can stop, whenever occasion requires, 
and Mr. Morehouse is to be followed by the chief counsel with par- 
ticular reference to section 7 cases, and other phases of historical 
review of our work. 

The Chairman. My understanding was that it would probably 
take about a day and a half to cover the testimony of Mr, Morehouse 
and Mr. Kelley, and I was planning to go through tomorrow without 
interruption all day. I always dislike to hurry a witness or to seem 
to cut off the opportunity for questions. Now whatever is the desire 
of the Federal Trade Commission, I shall be very glad to follow. 
Shall we proceed and conclude Mr. Morehouse's testimony and then 
recess until tomorrow morning, or should we recess now and allow 
Mr. Morehouse to take it up again in the morning? 



1744 CONCENTRATION OF ECONOMIC POWER 

Mr. Morehouse. It is a matter of no concern to me. 

Mr. Davis. It is immaterial to us. Whatever the other members 
of the committee prefer is all right with us. 

(The members of the committee conferred.) 

The Chairman. If there is no objection, it being 5 minutes after 
12, the committee will stand in recess until tomorrow morning at 
10 o'clock, and Mr. Morehouse will resume his testimony at that time. 

(Whereupon, at 12:05 noon a recess was taken until Thursday^ 
March 2, 1939, at 10 a. m.) 



investictAtion of concentration of economic powee 



THURSDAY, MARCH 2, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The coiiimittee met at 10:35 a. m., pursuant to adjournment on 
Wednesday, March 1, 1939, in the Caucus Room, Senate Office Build- 
ing, Senator Joseph C. O'Mahoney presiding. 

JPresent: Senators O'Mahoney (chairman) and King; Representa- 
tives Sumners (vice chairman), Reece and AViUiams; Klessrs. Thorp, 
Davis, Berge, Frank, O'Connell, Henderson, and J. B. Wyckoff, 
representing Department of C^ommerce. 

Present also: Federal Trade Commissioners William A. Ayres and 
Charles H. March; Willis J. Ballinger, director of studies and economic 
advisor to Federal Trade Commission; William T. Kelley, Chief 
Counsel and Joseph E. Sheehy, Assistant Chief Examiner, Federal 
Trade Commission. 

The Chairman. The committee will please come to order. 

Mr. Ballinger, are you ready to proceed? 

Mr. Ballinger. I think Mr. Morehouse is still on the stand. He 
has a few concluding remarks to make. 

TESTIMONY OF PGAD B. MOREHOUSE, DIRECTOR, RADIO AND 
PERIODICAL DIVISION, FEDERAL TRADE COMMISSION, 
WASHINGTON, D. C— Resumed 

representative cases of monopolistic and restraint of trade 

practices ^ 

Mr. Morehouse. Mr. Chairman and members of the committee. 
The next case which I have to discuss is the case of the Pittsburgh 
Plate Glass Co., which arose both under section 5 of the Federal 
Trade Commission Act and section 2 of the Clayton Act, 2 (a) and 
2 (f). The facts in tbiit case were these: 

The Pittsburgh Plate Glass Co. manufactured and sold window 
glass and other glass products. It had 8 factories. They were 
located in the States of Pennsylvania, Indiana, Missouri, Ohio, West 
Virginia, and Oklahoma. They also had 70 warehouses located in 
many different States from which they distributed their products. 
This company and 7 competing glass manufacturers comprised 
the membership in an association known as the Window Glass Manu- 
facture! s' Association. 

' This Eubect is resumed from p. 1738 et seq. 

1745 

124-'01— 39— pt. 5 8 



1746 CONCENTRATION OF ECONOMIC POWER 

The National Glass Distributors' Association was composed of dis- 
tributors of window glass and like products. The 7 manufacturers 
whom I have mentioned and one more were associate members in this 
distributors' association; the Pittsburgh Plate Glass Co., however, 
held membership in the distributors' association for some 38 of its 
70 distributing establishments. 

Except for the monopolistic practices which I will briefly detail, the 
members of each group would have been in competition with the 
other members of the same group, or other members of their class, and 
also in competition with other manufacturers and distributors. The 
manufacturers who constituted the membership in the manufacturers' 
association owned and controlled practically all of the factories pro- 
ducing window glass in the United States, and the distributors group 
was also so large and influential as to be able, and it did, control 
prices, terms and conditions upon which these products were sold 
throughout the United States. 

About 1935 these manufacturing and distributing firms combined 
and conspired to enforce by coercive means observance of certain 
policies and sales methods by distributors who were either not per- 
mitted to be or did not desire to become members of the association. 

Some of these policies and practices may be briefly described as 
follows: 

First, all buyers were classified as either quantity buyers or carload 
lot buyers, and lists so classifying them were printed and circulated. 

Next, each of the manufacturers published only one window glass 
price list shewing the prices for quantity buyers exclusively. 

The distributors' association published price lists for carload lot 
buyers exclusively and only their members could distribute them. 

AH who were not classified as quantity buyers had to buy glass from 
or through quantity buyers. 

All buyers except quantity buyers had to pay up to 7 K percent more 
for window glass of the same grade and quality than the price quoted 
to and paid by the quantity buyers. 

The sales of quantity buyers were confined to a restricted area 
apportioned to the authorized quantity buyers who either never or 
very rarely accepted orders for window glass to be transmitted to the 
manufacturer from dealers located outside of that particular area. 

Two or more dealers were precluded from making pooled purchases 
in carload lots to get the benefit of the discount accruing to that 
classification. Carload-lot buyers might not reconsign or divert the 
shipment to any other dealer. 

Distribution and outlets for the product were otherwise generally 
controlled. 

Quantity buyers were arbitrarily defined as those buyers purchasmg 
from 3,000 to 5., 000 50-foot boxes of window glass for stock each year. 
The manufacturers issued price lists for window glass to carload lot 
buyers and refused to.sfeU carload lots directly to any buyers except 
approved quantity buyers and sought and obtained the assurances of 
cooperation from one another Ln making these practices, policies, and 
pricing activities effective. 

I might state also that in some instances where the manufacturer 
sold to a non quantity buyer he shipped the glass direct to the customer 
but took 2}^-percent increase for himself and a 5-percent increase for 



CONCENTRATION OF ECONOMIC POWER 1747 

the quantity buyer in that area, whether it came through the quantity 
buyer or not. 

The Commission found in its findings which were entered in Octo- 
ber of 1937 that all these practices tended to place control over the 
channels of distribution in the particular manufacturers and distribu- 
tors who had so cornbined. The practices, the Commission found also, 
concentrated and limited in these quantity buyers the opportunity 
to buy window glass from the manufacturers at the manufacturers' 
discount price; standardized prices and favored certain purchasers 
through unlawful discrimination in prices to the unfair competitive 
disadvantage of others; and unreasonably restrained, stifled, and sup- 
pressed competition in the window glass industry. In turn this tended 
to and did increase the cost to purchasers of such window glass, dis- 
criminated against small business enterprises, and obstructed the es- 
tablishment of new window glass distributing concerns, and otherwise 
interfered with the ordinary flow of trade in the general commerce of 
window glass, to the injury of all dealers, distributors, and others who 
refused to conform to this program as laid down by these two groups. 
Competition was substantially lessened and a monopoly in the sale 
and distribution of window glass promoted. Real competition be- 
tween manufacturers and their competitors was prevented. 

A copy of the Commission's findings, its conclusion, and order, is 
among the exhibits to which I have already referred, as No. 59. 

Senator King. If I properly interpret your statement, it would seem 
that the manufacturers were probably not cooperating with the dis- 
tributors or some of the other intermediaries through which the prod- 
ucts passed to the ultimate consumer. 

Mr. Morehouse. The manufacturers possibly were more sinned 
against than sinning, but because they cooperated in the general set-up 
they were made parties and subjected to the same order. 

Senator King. This organization would seem to have been pro- 
moted by or at any rate officered by very largely the distributors and 
the intermediate organizations between the manufacturer and the 
ultimate consumer. 

Mr. Morehouse. The findings are not clear on that subject. I 
assume from the set-up that the distributors received as much advant- 
age if not more than the manufacturers from the set-up. 

The Chairman. But you say in the testimony that seven maniifac- 
turers were members of this national distributors' association. 

Mr. Morehouse. They were associate members, so-called, and the 
oflSicers 

Senator King (interposing). Did the evidence tend to show that 
they imposed their wishes upon the organization of which they were 
associate members or that the distributors and these other organiza- 
tions which had to do with the dissemination of the products domi- 
nated the organization and determined its policies? 

Mr. Morehouse. It is not stated in the findings, Senator, as to 
which group dominated; it simply states that together they com- 
bined and conspired to bring about these ends. The officers of the 
Window Glass Manufacturers' Association were individually made 
respondents along with the directors and members of that association, 
also the officers of the distributors' association, which oflBcers in each 
case were different. 



1748 CONCENTRATION OF ECONOMIC POWEK 

Senator King. Has the Commission followed up the decision to 
determine whether or not it effectively prevented the further con- 
summation of the conspiracy to monopolize the industry? 

Mr. Morehouse. The records show that a satisfactory report of 
compliance was received and filed, and while I have no present 
information, I assume that it is being compHed with, either that or 
at present being investigated. 

The Chairman. Investigated by whom? 

Mr. Morehouse. By the Federal Trade Commission. 

The Chairman. Does the Trade Commission follow up these 
certificates of compliance to see whether or not they are being carried 
out? 

Mr. Morehouse. Yes, sir; to a large extent. Of course, we are 
somewhat dependent upon the other members of the industry who 
have been affected by these practices. Generally when practices of 
this sort are continued after an order of the Commission to cease and 
desist, we have no trouble hearing about it, and immediately of 
course look into it. 

Senator King. The persons who initiated the proceedings are the 
ones who would look after the enforcement of the findings of the 
Commission? 

Mr. Morehouse. Usually, sir. 

The Chairman. Of course there have alwsys been two points of 
view expressed with respect to the manner in which the principles 
of the antitrust laws should be upheld. There has always been one 
group which has contended that there should- be active government 
pohcing; that is to say, it is the group which during the past genera- 
tion have been urging that there should be some sort of a Board or 
Commission which would, in the words of Woodrow Wilson, be 
empowered to make terms with monopoly. Another group has 
always felt that that would be unwise and that the function of gov- 
ernment is rather to act as a judge when individuals or corporations, 
members of an industry, make their complaint about unfair trade 
practices or violations of the antitrust laws, and that progress should 
be made hj judgment in individual cases, the results being left to 
determination by the general public later on as to whether or not the 
practices have been abandoned. 

Mr. Morehouse. I think, Senator, that the latter is the general 
way in which the Commission operates. It has been my observation 
since I have been there that when we issue a "cease and desist" order 
and receive what purports to be in good faith a statement that the 
respondent has been and is complying with that order, it has never 
been my experience that we go out, we might say, snooping, to see 
whether that is so or not. We accept his statement or the statement 
of his counsel until it is called to our attention that it is wrong, in 
some way which necessitates further action. Does that answer your 
question? 

Mr. Berge. May I ask, these certificates of compliance, or what- 
ever the form of evidence of compliance is that you speak of, that 
comes from the respondent itself? 

Mr. Morehouse. In some cases from the respondent or from his 
accredited attorney of record. At present I think they require the 
respondent himself to sign the report. 



CONCENTRATION OF ECONOMIC POWER 1749 

Mr. Berge. I suppose that as a ufval thing when your order 
requires abandonment of some practice, the company will have to 
set up some substitute procedures to take the place of the methods 
abandoned, and I was wondering whether your certificate of com- 
pliance had to state what they were doing in place of the abandoned 
practice. 

Mr. Morehouse. This report of compliance takes no particular 
form. It is comprised of a statement showing the manner and form 
in which the respondent is complying, and if he makes a full state- 
ment that will show up what you have suggested, and if he does not 
make a full statement we call on him for further information. 

Mr. Berge. Are those certificates ever in the form generally of 
merely a blanket certification, "We are complying with your order"? 

Mr. Morehouse. I have never seen one of that simple nature re- 
ceived and filed by the Commission. Generally in a case like that I 
would say there would always be further ascertainment of just what 
was the manner and form in which he claimed he was complying. 

Senator King. Like a decree of the court in an injunction proceed- 
ing and the person or persons against whom the injunction is issued — 
although the injunction may define several acts which he is forbidden 
to do or restrained from doing, if the court finds he has complied with 
the terms of the injunction it isn't necessary he should set out in detail 
w^hat the terms are when the injunction itself states what the terms, 
are, so I assume when your findings and decree indicate just what 
practices are unfair, and an order to cease and desist those respective 
practices states what those practices are, if the defendant, the re- 
spondent or his counsel states that they will comply with those things, 
you assume that that will be done, and if not, complaint will be made 
and the necessary steps supplemental in character will be taken in order 
to assure compliance with the decree. 

Mr. Morehouse. That is correct. A certificate will sometimes 
take this form. The respondent will say since being served with the 
Commission's order to cease and desist he has done none of the acts 
or things therein prohibited and expects not ever again so to do, and 
that is sometimes sufficient. 

Mr. O'CoNNELL. Mr. Morehouse, may I ask a question on that 
same line. You are probably familiar with the cease-and-desist order 
in the Pittsburgh Plus case, in vol vine: the United States Steel Corpora- 
tion in 1924. 

Mr. Morehouse. I am sorry, I am not familiar with it because 
that was before my time with the Commission, and I have never 

Mr. O'Connell (interposing). There have been some recent de- 
velopments in connection with that case. I can bring you up to date. 
As I undierstand, in 1924 a cease-and-desist order was entered which 
provided among other things that the steel companies were directed 
to cease-and-desist from selling steel on any other basis than f. o. b. 
points of shipment of the steel, and I take it when the steel companies 
signed the statement in which it was stated they have determined to 
conform to the provisions of the cease-and-desist order, that is the 
equivalent of what you refer to as a certificate of compliance. 

Mr. Morehouse. That is the equivalent of what I refer to, no 
doubt, but if you wish to know more about what happened in that 
case, I would appreciate it if you would let me refer you to the Chief 
Counsel. 



1750 CONCENTRATION OF ECONOMIC POWER 

Mr. O'CoNNELL. Possibly Mr. Kelley can answer that. 

Mr. Kelley. That isn't just the case in that particular case. 
That particular case you mentioned is an exception. Perhaps that 
will be more or less brought out in the hearing in a few days in con- 
nection with steel.' I will say this, that after the enactment of the 
Wheeler-Lea Act making the orders of the Commission final if not 
appealed from within 60 days, the United States Steel Co. felt that 
they couldn't let that order in the Pittsburgh Plus case become final. 

They filed a petition to review the case in the circuit court of appeals 
in Philadelphia. 

There has been a good deal of water under the dam since the Com- 
mission issued its order in that case and the Commission is trying 
now — it has just about completed its case against all of the cement 
companies involving fundamentally this question of identical de- 
livered prices and basing point systems. In view of that case, in- 
volving facts brought up to date, which undoubtedly, I think, will 
reach the higher courts, I entered into a stipulation with Mr. Bye, of 
the United States Steel Corporation, approved by the Commission, 
asking the circuit court to suspend hearings of that Pittsburgh Plus 
case for a year, thinking in the meantime that there will be a decision 
by the .Commission in the cement case and perhaps a decision by the 
court. If they don't reach that in that time we intend asking the 
circuit court of appeals to postpone it. 

Mr. O'CoNNELL. I hadn't intended asking anything that might be 
developed later by the Federal Trade Commission. We were dis- 
cussing the effect of a cease-and-desist order and- a certificate of com- 
pliance by some respondents directed to do something. I would just 
as soon reserve it imtil a little later if we are going to talk about 
steel. 

Mr. Kelley. If the Commission issues an order, say in a false 
advertising case, and it finds a certain representation is false, it 
requires them to (juit that representation. Of course a report in that 
kind of case is a simple matter. However, when we come to requiring 
them to show the manner in detail, and just how they have complied 
with a complex order involving conspiracy or combination in restraint 
of trade, we take particular care in that kind of case to have a sufficient 
report to see that the order has been complied with, and that the future 
conduct will not transgress the order. If we think it does, we call it 
to their attention, and sometimes we have conferences with respect 
to those reports. It depends upon the character of the order that 
the Commission issued. 

The Chairman. You may proceed, Mr. Morehouse. 

Mr. Morehouse. Thank you. 

In 1937 the Commission issued findings and order against the Build- 
ing Material Dealers Alliance, which was organized in 1931 as an unin- 
corporated trade association with a membership of over 150 dealers 
in building materials and builders' supplies who were all located in 
what V as krown rs the Pittsburgh-Cleveland trade area. The mate- 
rials which they dealt in included cement, brick, tile, clay products, 
sewer pipe, plaster, sand, gravel, stone, lime, lumber, lath, roofing, and 
other materials ordinarily used in the construction industry. The 
trade area described consisted of a portion of Ohio and Pennsylvania 

1 See testimony on the basing point system as practiced in tbe steel industry, begiDuing infra, p. 1861. 



CONCENTRATION OF ECONOMIC POWER 1751 

and was one of the largest markets in the country for the sale of such 
supplies. 

This alliance was managed by a board of councilors who were rep- 
resentative of the dealer members. For the more effective operation 
of the alliance, the membership was divided into local associations or 
subdivisions. 

The Pittsburgh Builders Supply Club, another respondent, was an 
association of the largest business firms in this industry in Pittsburgh, 
Pa., who sold over 75 percent of the builders' supplies in that area. 

Dealers operating in the trade area around Cleveland banded to- 
gether in an unincorporated trade association* known as the Building 
Material Institute. These dealers, with few exceptions, were also 
members of the alUance. 

Dealers in the western half of Pennsylvania and the adjacent trade 
area, which territory .was part of the Pittsburgh-Cleveland trade area, 
formed the Western Pennsylvania Builders Supply Alliance. This alli- 
ance was affiUated with and actively cooperated with the other asso- 
ciations in carrying out^heir joint programs and policies. Its members 
were also members of the alliance. 

The Allied Construction Industries of Cleveland, Inc., was an Ohio 
corporation. Its membership consisted of firms engaged in various 
lines related to the building and construction industry, including cer- 
tain building materials and builders' supply dealers in and about 
Cleveland. Five of these dealers were members of the alliance. 

Then there was the Lime and Cement Exchange of Baltimore. 
That was an incorporated association, and an afiiliated unit of the 
National Federation of Builders Supply Associations. 

The Middle Atlantic Council of Builders Supply Associatio-ns was a 
trade association with eight builders' supply associations engage-^ in 
the same industry. 

The Maryland Builders Supply Association comprised dealers in 
builders' suppHes from that part of the State of Mar3dand lying 
west of the Chesapeake Bay and west and south of the Susquehanna 
River, It was a unit of the Middle Atlantic Council and the National 
Federation. 

The National Federation of Builders Supply Associations was 
incorporated in 1933 under the New Jersey laws and it comprised 
certain associations of dealers engaged in the several States and 
federated together for the purpose of promoting their common business 
interests. It consisted of 41 federated units located in approximately 
32 States throughout the United States. 

The members of these organizations and associations whom I have 
mentioned bought their supplies from manufacturers and producers 
located throughout the United States and sold and shipped them in 
interstate commerce, in the course of which but for the combinations 
and other conspiracies they would have been in competition with 
each other and with other firms engaged in this industry. 

The practices and policies which they engaged in may be described 
as follows: They classified their members and other approved concerns 
as recognized dealers. This classification theoretically depended 
upon whether the dealer seeking recognition could establish some 
reasonable justification for the existence of his business in the com- 
munity which he served, or proposed to serve, but in fact and actually 



1752 CONCENTRATION OF ECONOMIC POWER 

it depended upon an arbitrary decision of the officers and members of 
the associations and who were competitors and prospective competitors 
of the dealer who desired recognition. 

The main objective of the program in which all of these associations 
and their members actively cooperated was to control and confine 
retail distribution in building materials and supplies to such recognized 
dealers and to prevent the direct sale by manufacturers to all others, 
including consumers, nonrecognized dealers, contractors. State govern- 
ments, and other political subdivisions; and to force all purchases and 
flow of commerce in such materials to come through the recognized 
dealer channels of distribution upon the terms and conditions of sale 
which would afford them a satisfactory profit, which they fixed. 

A further objective was to limit the distribution of such supplies to 
carload quantities by rail, eliminating motortruck distribution so as 
to prevent competitors from obtaining truckload quantities. Another 
objective was to prevent other than recognized dealers from participat- 
ing in pool car shipments; to prevent certain manufacturers from 
purchasing raw materials direct from other manufacturers and to 
facilitate price fixing among the recognized dealers in their respective 
communities, and also to eliminate brokers. 

To these ends they procured written agreements from each member, 
from manufacturers and from producers, to support their program. 
By circulating statements of policy and threats of boycott against 
those who refused to cooperate these agreements ' were enforced. 
Insistent pressure was exerted by dealers upon manufacturers and 
producers to cooperate. 

Price lists were furnished dealer members in some communities for 
their guidance. If a dealer failed to observe such prices, the organiza- 
tions brought pressure on manufacturers who sold to the offending 
dealer to refuse to make any further sales to him. 

At the last meeting of the Building Material Dealers Alliance, held 
on January 3, 1933 (that is the last one before these findings were 
written), the, National Federation of Builders Supply Associations 
was formed to apply on a national scale the foregoing principles and 
policies. In 1936 the National Federation issued what they called a 
"call to arms" to five hundred or more dealers throughout the United 
States who had always sold more than one-half of all hard material 
distributed through dealer channels in this country. Various com- 
modities committees were formed such as a committee on cement, clay 
products, metal lath, lime, and so forth. These various committees 
formulated certain recommendations. For instance, some of the 
recommendations of the cement committee which the Federation 
adopted were: That manufacturers should not ship to dealers outside 
the prescribed dealer territory; that the organized units, with their 
dealer members, should determine what that territory was to be ; that 
cement manufacturers stop all warehouse operations ; that all trucking 
of cement be stopped; that a minimum differential of 15 cents per 
barrel on sales of portland cement in carload quantities should be 
maintained; that the federated units should make revised lists of 
established dealers to be furnished to all cement manufacturers ship- 
ping into their territory. 

Now in 1935 the United States, through the Procurement Division 
for the Relief Administration, had tried to buy direct from manufac- 
turers and sent to Ohio manufacturers an invitation for bids on 100,000 



CONCENTRATION OF ECONOMIC POWER J 753 

barrels of cement. As a result of prompt action on the part of the 
Ohio Builders' Supply Association, which I have heretofore described, 
as an affiliated unit of the National Federation, no cement company 
would quote prices. When the same invitation was mailed to manu- 
facturers outside of Ohio, again no direct bids were made. The Na- 
tional Federation in this way succeeded in having the United States 
Government change its policy of direct purchases of materials for 
relief purposes, and a form letter was sent to the various units of the 
federation referring to the last-described activity, which I have just 
detailed, as "one of the finest pieces of cooperative work that this 
industry ever engaged in. bucking a department of the Government." 

The Commission found that interstate commerce in the sale and 
distribution of building materials was thus restrained by eliminating 
so-called irregular dealers and manufacturers and producers selling 
to such dealers, and restricted and confined to such manufacturers 
and producers and dealers as would conform to these plans of combi- 
nation of the different associations and their members. Competition 
in, the sale of all building materials was substantially lessened and 
suppressed. Competitors of members were unable to obtain inter- 
state shipments of their requirements due to the combined will of 
the associations and their members. Manufacturers were injured in 
their business and in their freedoni to seU their products direct to 
purchasers as they pleased; they dared not sell to many to whom they 
wished and considered as dealers, and would not sell to consumers, 
contractors, the Government or its political subdivisions. Truck 
transportation was interfered with, and the small purchaser injured 
by being prevented from obtaining supplies in that way. Costs to 
the consuming public were increased and the public denied the ad- 
vantages in price which it would otherwise have obtained had not 
these practices been cooperatively carried on and the agreements of 
the various associations adhered to. 

The Chairman. I suppose the contention is always made in cases of 
this kind that unless these practices were followed and competition 
were absolutely wide open, the result would be what has been called 
cutthroat competition, which in turn is said to bring about a condition 
under which none of the manufacturers or distributors cooperate at a 
profit, swinging to the other side. Do they not justify the practices 
which they followed upon the ground that it is necessary to establish 
such practices in order to stay in business? 

Mr. Morehouse. Senator, while I did not try this case, I have 
tried cases somewhat similar where that contention was advanced, and 
it no doubt was in this case. 

The Chairman. Has the Federal Trade Commission in any cases 
in which you participated given weight to these contentions? 

Mr. Morehouse. None whatever. 

The Chairman. What has been the view — what has been your view 
with respect to it? 

Mr. Morehouse. That would seem to involve a personal opinion 
with respect perhaps to the Miller-Tydings law, and that is the law 
which deals with the so-called cut-price or throat-cutting competition, 
and I am going to take that up, if I may, in the very next case that 
I discuss. 

Senator King. I want to ask one question. This case did not come 
under your supervision, as I understand it. 



1754 CONCENTRATION OF ECONOMIC POWER 

Mr. Morehouse. That is correct, Senator. 

Senator King. Do you know whether the Commission considered 
the facts sufficient to warrant proceedings under the antitrust laws by 
the Department of Justice? It seemed in the r6sum6 which you have 
presented that there was such a conspiracy to restrain trade or to 
monopoUze trade to have warranted criminal proceedings under the 
antitrust laws. 

Mr. Morehouse. Senator, please, that is a matter of policy with 
which I had nothing to do and I would prefer either for Judge Davis 
or the Chief Counsel to answer that. 

Senator King. I am not making any criticism of the proceedings. 
I was just wondering whether or not the Commission probably would 
have the authority to remit that question to the Department of Justice. 

Mr. Davis. Senator, if I may be permitted, it very frequently 
occurs that the Federal Trade Commission does refer matters to the 
Department of Justice and makes our files available to them where we 
feel that there is an indication of the violation of the Sherman Act, 
either as to which the Commission does not have jurisdiction or whgre 
the Commission feels that it is a matter that can be better handled, 
more effectively handled, by the Department of Justice through the 
Sherman Act. Invariably, I think I might say, under at least the 
present policy of the Commission, if an investigation is made that 
mvolves possible monopolistic practices in interstate commerce and 
if the Commission thinks it is of a nature that the Commission itself 
could not undertake further, I think it is practically an invariable 
practice to bring it to the attention of the Department of Justice for 
such action as they may deem proper to take under their jurisdiction. 

Senator King. I assume front what you have stated, Judge Davis, 
that there is cooperation between the Department of Justice and the 
Federal Trade Commission so that in investigations which it makes, 
if it finds there have been transgressions of the Sherman antitrust 
law, those facts are brought to the attention of the Department of 
Justice. 

Mr. Davis. Yes, sir; that is the general practice, and, on the other 
hand, from time to time the Department of Justice will bring to our 
attention, just like other departments of the Government do, matters 
which they think would come peculiarly within our jurisdiction, and 
in that respect there has been entire harmony between the Commission 
and the Department of Justice. 

Senator King. I would like to ask a question, if I may. Were those 
various organizations in the States and Districts organized with any 
capital, or was it just a loose association without capital, but under 
articles of incorporation or association? 

Mr. Morehouse. The findings are sUent upon that. I believe the 
attorney — Mr. Kelley, do you know that? 

Mr. Kelley. I do not. 

Senator King. I will not press the matter. Just one other question. 

Mr. Morehouse. I imagine they were in the nature of either volun- 
tary trade associations or some of them are incorporated, as the findings 
show. I don't think that any of them were engaged in business. 

Senator King. So far as the record shows, were the manufacturers 
the moving spirit in effecting the organizations, the combinations, to 
v^hich you have referred as the subject of investigation by the Federal 
Trade Commission? 



CONCENTRATION OF ECONOMIC POWER I755 

Mr. Morehouse. The findings, I don't believe, Senator, show 
«,gaui who was the moving spirit. It deals with each ^oup on a par 
as having, group by group and individual by individual, actively 
•cooperated together in doing these things. 

Senator King. What I have in mind is, were the manufacturers 
coercing the distributors or purchasers or whether the distributors 
and purchasers, retailers, or wholesalers, coerced the manufacturers 
into participation in this wholesale or broad national organization. 

Mr. Morehouse. Well, the picture as I get it from the findings, 
Senator, is that after these things get started they coerce each other. 

Mr. O'CoNNELL. I didn't understand that Senator King's question 
as to whether this particular case was ever referred to the Department 
of Justice for prosecution under the Sherman Act had been answered. 
Do you happen to know? 

Mr. Morehouse. Judge Davis, I believe, just answered. 

Mr. O'Connell. What was the answer? 

Mr. Morehouse. This case was not referred to the Department of 
Justice. 

Mr. Davis. For the reason that the Commission itself took correc- 
tive action. In addition to monopolistic practices there were various 
unfair trade practices involved in this industry, in the opinion of the 
Commission, and it felt that by cease and desist order it could tneet 
the situation, and as far as we know did. We have reason to believe 
that it did. 

The Chairman. In other words, this was another one 01 tne cases 
in which no appeal was taken from the cease and desist order of the 
Commission. 

Mr. Davis. That is correct. 

The Chairman. And the Commission felt that having achieved 
the objective, having obtained an abandonment of the condemned 
practices, it was not necessary to pursue a criminal remedy also. 

Mr. Davis. Yes; and right in that connection, if any of them against 
whom the order had been directed violated the cease and desist order, 
then the Commission might and doubtless would present the facts 
to the Department of Justice to proceed against thein imder the 
criminal statute, but up to to date we have received no information 
of violation of the order. 

Mr. O'Connell. In a proper case is there any reason why if the 
conduct was sufficiently objectionable, the Federal Trade Commission 
could not enter a cease and desist order which would be as to prospec- 
tive conduct, and at the same time have the Department of Justice 
proceed under the Sherman Act for the conduct which you have 
already directed the cease and desist order toward. 

Mr. Davis. While that technically is possible, it practically is a 
rather difiicult situation. I think it is generally felt that perhaps 
one remedy is sufficient unless it proves ineffective. They are not 
supposed to want to impose corrective action and penalties upon 
violators under different acts, different agencies, except where it has 
proved to be necessary. It is just a question of psychology, a quesn- 
tion of resistance to double effort, you might say. 

Mr. O'Connell. As I understood Mr. Morehouse's r6sum6 of 
that particular situation it seemed to me that that particular conduct 
was very reprehensible and that it might be that in that case, and in 



1756 CONCENTRATION OF ECONOMIC POWER 

some other cases, the mere direction not to do it again probably 
would not be adequate to meet the situation. 

Mr. Davis. Of course that is true, and yet this particular case in- 
volved hundreds of businessmen who generally speaking were good 
citizens, who stood well in their communities and if you undertook 
to go into all the different communities in which they were affected 
and prosecute them criminally I imagine you would have consider- 
able difficulty as well as the delay and expense and other matters 
incident, and besides, just as was suggested by Mr. Morehouse, it is 
like a snowball, it is one of those things that the more it goes the 
more it grows. This man will do this and another one that and 
another that, and of course there is a portion on one side and a 
portion on the other, and they fall into those practices, many of them 
justifying their own conscience by way of a defensive proposi- 
tion, so I personally, for whatever my opinion may be worth in the 
light of my experience, would say that in many instances, generally 
speaking, a cease and desist order, which is in effect a permanent 
injunction, is quite as effective as sporadic^ criminal prosecution, 
especially when as we know from experience in matters of this kind, 
the fines imposed by the courts generally do not amount to a farthing 
80 far as corporations are concerned. 

The Chairman. As a matter of fact Judge Davis, it would be pos- 
sible for the Department of Justice, or for any United States attorney, 
to take up any one of these cases, irrespective of the recommendations 
of the Federal Trade Commission, if it desired or he desired. 

Mr. Davis. Oh, sure. 

Mr. Kelley. Mr. Chairman, in that connection and in answering 
Mr. O'Coimell, the order to cease and desist of the Federal Trade 
Commission is not simply a command to quit. The law provides 
that after an order has become final, and it becomes final in 60 days 
unless it is appealed from. [Reading:] 

Any person, partnership, or corporation who violates an order of the Com- 
mission to cease and desist after it has become final * * * shall forfeit and 
pay to the United States a civil penalty of not more than $5,000 for each viola- 
tion, which shall accrue to the United States and may be recovered in a civil 
action brought by the United States. 

Mr. O'CoNNELL. I was only raising a question as to whether the 
prospective nature of the cease and desist order was always adequate 
in the situation. I was merely raising the question as to whether 
this technique, which is pureljr prospective, was adecjuate, and 
whether or not there was any point in considering a punishment for 
past offenses. 

The Chairman. It seems to me it might be appropriate to remark 
that this colloquy rather illustrates the desire and the practice of the 
Federal Trade Commission as a Government agency to cooperate 
with business by not making the corrective activity too severe upon 
individuals who may have been acting in good faith in some instances. 

Mr. Davip. In other words, the Federal Trade Commission has no 
authority to impose any penalties or forfeitures, no fines, no im- 
prisonment or anything of the kind, and we are glad we don't. The 
Commission is not advocating that authority and we don't want it. 

Now, all that we can say is, when we, upon investigation and upon 
trial and fair hearing, decide that certain members of the industry 
are violating the law over which we have jurisdiction in this respect 



CONCENTRATION OF ECONOMIC POWER I757 

and that respect and other respects, to say, "Stop!" "Stop!" That is 
the purpose of it, and in these trade matters they generally do not 
pertain to criminal matters in the ordinary acceptation of that term. 
It wasn't contemplated that the Federal Trade Commission should 
have criminal jurisdiction or partake of it. It is corrective action, 
it is preventive action, and it has proven successful in a remarkably 
'arge percentage of the cases. Relatively speaking, the Federal Trade 
Commission orders are seldom violated, and the same is true, equally 
so, with respect to stipulations to cease and desist which, as I before 
explained, constitute perhaps 85 percent of our cases. They observe 
those stipulations in an overwhelming percentage of the cases, stopping 
the practices involved and making unnecessary any further action 
on the part of any branch of the Government, 

Senator King. Let's proceed. 

Mr. Morehouse. Sometime in the latter part of 1937 the Commis- 
sion issued its formal complaint against the five largest distillers of 
liquor in the United States, which were Seagram, Gooderham & Worts, 
the Schenley Distillers organization, Hiram Walker, and the National 
Distillers Products Corporation.^ 

These complaints were issued simultaneously and were substantially 
the same in that they charged each of these large distUling groups with 
the maintenance of minimum resale prices contrary to section 5 of the 
Federal Trade Commission Act. 

A little background of these distilling corporations might be in order. 
The Seagram Distillers Corporation was one of the four largest dis- 
tributors of alcohohc liquors in the United States. It sold wherever 
liquor was lawful in an annual total dollar volume of about $70,000,000. 
It had sales offices in New York, Illinois, California, Louisiana, Mich- 
igan, Pennsylvania, and Massachusetts, and employed a large number 
of salesmen to solicit the trade of wholesalers, retailers, hotels, bars, 
and restaurants all over the United States. It did a very substantial 
amount of national advertising. It made direct sales of all its prod- 
ucts to carefully chosen distributors who in turn sold to the package 
stores, retailers, and bars. From time to time it put out price lists 
upon which were scheduled suggested prices at which its liquors should 
be sold by the wholesale distributor, and by the retailer, all the prices 
from the manufactured price down to the last consumer price. These 
prices varied for different States. The liquors were sold to wholesalers 
upon the definite understanding and agreement that the wholesaler 
would observe the suggested minimum prices and would sell only to 
retailers who likewise observed them. 

Gooderham & Worts w^as a Delaware corporation, affiliated with a 
Canadian corporation of the same name. It sold alcohoUc beverages, 
some of which were manufactured and sold to it by the Canadian 
corporation, and the balance of which it purchased from Hiram Walker. 
It had four large sales distribution centers: New York, Illinois, Colo- 
rado, and Cahfomia, and with regard to the maintenance of minimum 
resale prices it conducted its business in substantially the same manner 
as Seagram. 

Schenley, also a Delaware corporation, owned aU the stock of manv 
subsidiary distilleries, including some in Pennsylvania and Maryland.. 
It also owned Schenley Products Co., its sales corporation. Together 

' See hearings on the liquor industry, Hearings, Part VI. 



1758 CONCENTRATION OF ECONOMIC POWER 

with its owned and controlled subsidiaries, it constituted one of the- 
largest units for the distilling and distribution of alcohoUc liquors in 
the United States. In 1935' its gross sales exceeded $63,000,000. It 
has sales offices in some 10 or 12 States and did a large amount of 
periodical and newspaper advertising. It followed the same practices 
as the other distillers. 

Hiram Walker, also a Delaware corporation, was one of the largest. 
It had around 200 salesmen, did a large amount of national advertis- 
ing, selected its distributors very carefully who sold in turn to package 
stores, retailers, and bars. It prepared the same kind of suggested 
price lists. 

National Distillers Products Corporation was a Virginia corporation, 
manufacturing in its own name and through wholly owned and con- 
trolled subsidiary distilleries, including those formerly operated by the 
American Medicinal Spirits Corporation, Penn-Maryland Corporation, 
A. Overholt & Co., Inc., the Old Taylor and Old Crow Distilleries near 
Frankfort, Ky., and many others. 

It was one of the largest distillers in the United States, had divi- 
sJbnal sales offices in several States and employed a very large num- 
ber of salesmen, traveling throughout the United States, calling on 
wholesalers, retailers, hotels, chain stores, including the Great Atlantic 
& Pacific Tea Co., Ligge*t's Drug Stores, Whelan Drug Stores, and 
othefs, and it also of course did a large-amount of national advertising. 

In connection with the sale and distribution of their respective lines 
of products, these distillers in order to stabilize and make uniform the 
resale prices established and maintained what is known as the Beech- 
nut system of merchandising, v/hereby they fixed specified standard 
and uniform resale prices, discounts, and mark-ups at which their 
said products should be sold all the way down the line to the consumer, 
and they received and accepted the active support and cooperation of 
the wholesalers and retail dealers in the maintenance of this system. 

In pursuance of this plan, each of these distillers had agreements or 
understandings with their wholesale distributors. These agreements 
provided that the distributors would sell Only to the retailer who would 
agree to resell at the suggested minimum prices. 

The distributors also agreed to sell the distillers' products at a 
uniform fixed price to retailers and without any discounts from the 
suggested list prices. 

The distillers agreed to cooperate by furnishing so-called missionary 
men — that is the trade nam^ for them, I understand ; these missionary 
men would travel around to these various territories and act as sort of 
policemen as well as salesmen — and other designated representatives 
m securing and furnishing all necessary information for the purpose of 
enforcing the suggested prices. 

The distillers agreed to drop from their fist of distributors any who 
were found offering to make or making a discount from their suggested 
list prices. 

The distributors agreed to stop supplying retailers who cut prices 
and to compile and maintain reports or fists, namely blacklists, of 
those retailers who failed or refused to maintain the suggested mini- 
mum resale prices, and not to reinstate them until such reinstatement 
had been authorized by the distillers. 

The Chairman. And this was all the work of the whisky mission. 

Mr. Morehouse. Whisky missionaries. 



CONCENTRATION OF ECONOMIC POWER 1759 

The distributors agreed to dismiss salesmen who oflfered or gave 
discounts or who divided their commission with retailers. 

The distributors agreed to furnish the distillers with the names of 
wholesalers w4io offered or were suspected of offering discounts to 
retailers, and the distillers in turn would supply the distributors with 
the same information and lists. 

Employees of the distillers were instructed to report any violations 
of the above agreements and the distillers received and acted upon 
these reports to the end that the supply of products on hand with 
offending retail liquor dealers and distributors should be exhausted. 
They cut oft' the supplies of all price-cutting retailers and reinstated 
offending price-cutters who agreed to behave. On their part, the 
retail dealer vendees handling these respective Unes agreed with the 
distributors and with the distillers' representatives that the retail 
dealer's profit should be made uniform by fixing and maintaining 
minimum prices for Uquor, and only such retail dealers who promised 
to maintain uniform resale prices should be suppHed. 

They also agreed that wholesalers should be notified not to supply 
any price-cutting retailers. 

All of these foregoing agreements were carried out so far as possible 
by the concerted and cooperative action of the parties named as re- 
spondents in these cases. 

The Commission found that the direct effects making these agree- 
ments were to suppress competition and to cause them to sell at prices 
suggested rather' than at such lower prices as they themselves might 
deem adequate and warranted by the respective selling costs and 
competitive conditions in their particular territory. 

The Commission proceeded, as I said before, against each of these 
five distinct concerns in five separate complaints which were based on 
extensive interviews and investigations of hundreds of prospective 
witnesses located throughout the New England and Atlantic sea- 
board areas.. 

On August 17, 1937, the Miller-Tydings Act was passed, as title 
VIII of an act to provide additional revenue for the District of Co- 
lumbia. As the committee knows, this act amended section 1 of the 
Sherman Antitrust Act and section 5 of the Federal Trade ComMiis- 
sion Act so as to permit contracts and agreements for resale price 
maintenance such as were involved in the instant cases in all States 
or Territories where such contracts had been made lawful as applied 
to intrastate transactions under any statute, law, or pubUc policy 
then or thereafter in effect in such State or Territory. 

At the time of the passage of the MiUer-Tydings Act there were 
about 42 States which had enacted fair-trade laws; all except Texas, 
Missouri, Vermont, Alabama, and Delaware and the District of Co- 
lumbia. Since then I beUeve Mississippi has enacted one. There 
are 43 now I know. Yes, Mississippi. This left minimum resale 
contracts affecting commerce going into the District of Columbia and 
those States as the only such contracts which the Commission con- 
sidered that its jurisdiction any longer appHed. 

It appeared from our investigational files that except for the dis- 
tillers' acts and practices occurring in connection with liquors shipped 
for resale into the District of Columbia all the acts and practices I 
have mentioned occurred in these so-called fair-trade States, one of the 
43 States. The Commission, therefore, Umited its findings of fact and 



J760 CONCENTRATION OF ECONOMIC POWER 

orders to the acts and practices of these distillers in connection with the 
liquor sold in the District of Columbia so that presumably, in the 
absence of any restraint except as to liquors sold in the District of 
Columbia or shipped for resale therein, these 5 distilling enterprises 
are by the Miller-Tydings Act enabled to and do continue by agree- 
ment to control the resale prices of their products elsewhere through- 
out the United States. 

In the Beech-Nvt case (257 U. S. 441) a system of merchandising 
similar to that used by these distillers was held by the vSupreme Court 
to suppress and prevent freedom of competition in violation of the 
declo ration of public policy embraced in the Sherman Act, and to 
constitute an unfair method of competition in violation of the Federal 
Trade Commission Act. 

In the case of Old Dearborn Distributing Company v. Seagram 
Distillers, decided December 7, 1936, by the Supreme Court, it was 
held that the Fair Trade Act of Illinois, which except for minor differ- 
ences not important here, was the same as the fair-trade laws of the 
other States, was not unconstitutional and that prices in respect to 
identified or branded goods could be fixed under legislative leave by 
contract between the parties. 

In this latter decision the Supreme Court referred to bills intro- 
duced in Congress from time to time authorizing standardization of 
price agreements in respect of identified goods upon which bills 
extensive hearings had been held by congressional committees. These 
bills were in all essential respects like the Illinois act. Exhaustive 
legal briefs, testimony, and arguments for and against the economic 
value of the proposed laws were described in the records of these 
hearings. Those were the hearings before the Interstate and Foreign 
Commerce Committee, House of Representatives, H. R. 13305 (63d 
Cong., 2d and 3d sess.), H. R. 13568 (64th Cong., 1st and 2d sess.), 
and report of Federal Trade Commission on Resale Price Maintenance 
(70th Cong., 2d sess.). House Document No. 546. 

The Chairman. What was the gist of the Federal Trade Commis- 
sion's report, not in this case but in the particular report that you 
have just cited? 

Mr. Morehouse. I am going to describe it in just a few moments. 
I don't know if it will answer, but if it doesn't answer, I can't answer 
it. I have the report here and it is submitted in one of these docu- 
ments. 

Copies of the Commission's complaints in these cases and its findings 
and orders so far as the District of Columbia is concerned are sub- 
mitted with these exhibits. 

With the exception of Seagram Distillers Corporation, the Com- 
mission's findings in each of these cases were based upon aTiswers filed 
by the distillers in which they admitted the acts and practices insofar 
as they related to liquors sold in or shipped for resale in the District 
of Columbia. In the Seagram case the Commission had set the case 
down for trial and a complete copy of the transcript of testimony, 
together with photostatic copies of certain exhibits are contained 
among the exhibits here offered. 

A copy of the Commission's Report on Resale Price Maintenance, 
to which the chairman just referred and wlrich was referred to by the 
court in its decision in the case of Dearborn v. Seagram, is submitted. 
This document comprises a report on the general economic and legal 



CONCENTRATION OF ECONOMIC POWER 17gl 

aspects of resale price maintenance and was undertaken on the 
initiative of the Commission. It covers information received in 
reply to questionnaires sent to manufacturers, wholesalers, retailers, 
and consumers, together with a discussion of the legal status of resale 
price maintenance in the United States and certain foreign countries. 
It was transmitted to the Speaker of the House of Representatives 
in two parts on January 30, 1939. Part II dealt with the commercial 
aspects and tendencies, and summarized the results of the inquiry 
undertaken by the Commission, based upon statistical information 
furnished by manufacturers, wholesalers and retailers, aud supple- 
mented by direct oral inquiries made by agents of the Commission. 

It is my impression — I would like to be corrected if I am wrong — 
that there weren't any recommendations. 

The Chairman. Can you answer that, Mr. Kelley? 

Mr. Kelley. I think perhaps Dr. Walker,' who is here, can answer 
it better than I can. My recollection is that there was no specific 
recommendation, but I recall the Commission in its report and 
conclusions made some very pertinent statements. 

Dr. Walker. I wasn't paying attention. I didn't hear the 
question. 

The Chairman. The question was what, if any, recommendation 
the Federal Trade Commission made in its report on resale price 
maintenance, which was made to the Congress on January 30, 1939. 

Dr. Walker. The general tenor of the Commission's report was 
to oppose legislation in favor of resale prices. 

The Chairman. In other words, the Commission found that the 
economic effect of resale price maintenance and contracts was bad? 

Dr. Walker. They found the balance of public interest, as I 
understood the conclusion, was in favor of leaving persons free to resell 
at their own prices. 

The Chairman. Thank you-. Dr. Walker. 

Mr. Morehouse. If I may supplement that, Mr. Chairman, the 
concluding comments of the Commission, after its report at the end 
•of the second volume, will be found commencing on page 162 of 
Coiiimission's Exliibit 74-B. It is rather long, a page and a half or 
two. I don't know that you would desire to have it read into the 
record. 

The Chairman. I suggest that it be incorporated in the record at 
tliis point without reading. 

Mr. Morehouse. Very well. I suggest that it be so incorporated, 
and offer it. 

The Chairman. If there is no objection on the part of any nember 
of the committee, it will be so offered. WiU you be good enough to 
see that it is copied? 

(The document referred to was marked "Exliibit No. 306" and is 
included in the appendix on p. 2170.) 

Mr. Morehouse. We also have submitted here among these 
exhibits, in addition to these copies of findings, conclusions, and cease- 
and-desist orders in these five cases, which I explained only affected 
the District of Columbia by reason of the Miller-Tydings Act, copy of 
the transcript of the testimony taken in the Seagram case, and I wish 
to call special attention to that record, pages 312 to 329, and pages 
356 to 364, 542 to 550, and 599 to 618 for testimony relating to press 

* Dr- Francis Walker, Chief Economist, federal Trade Commission. 
J24491— 39— pt. 5 9 



1762 CONCENTRATION OF ECONOMIC POWER 

cooperation with distillers' resale price maintenaDce policies. There 
is also in the record at pages 1196 to 1253 and 1289 to 1330, and 1348 
to 1357, specific testimony as to specific instances showing the opera- 
tion and effect of the distillers' policy upon the wholesale and retail 
trade. 

There will also be found among the Commission's exhibits in the 
trial of that case, Exhibits Nos. 1 to 4 and 5 to 125, sample reports 
made by these missionary men that they would make daily showing 
instances of price cutting and showing their extensive field efforts in 
enforcement of the pohcies, and we also have physically obtained 
and there are incorporated as Commission's exhibits 87, 88 and 89, 
specimen blackUsts of the type used by the distillers, Seagram's in 
particular in this case, and exhibit 189-C in the Seagram case is their 
statement of their policy in that regard. 

Mr. Berge. Mr. Chairman, may I ask a question. I suppose that 
until the passage of the State Fair Trade Acts and the Miller-Tydings 
act there wans't the sUghtest doubt that agreements of this kind were 
illegal as a matter of law. 

Mr. Morehouse. I never had any doubt, and I am sure the Com- 
mission never had any doubt, nor did the courts. 

Mr. Berge. What defense could they possibly make for this sort 
of practice, at least in the District of Columbia? 

Mr. Morehouse. Of course I might call attention to the fact that 
I was trying the Seagram case and had rested for the Commission at 
about the time when the Miller-Tydings Act became law, so that 
that restrained my efforts considerably. 

The Chairman. In other words. Congress intervened to throw you 
out of court. 

Mr. Morehouse. But we did get the order appUcable to all their 
practices insofar as the District of Columbia was concerned, but our 
investigational efforts, while very extensive and comprising huge 
volumes of exhibits and interviews, it so happened related only to 
principally the New England States and Atlanitc Seaboard, most of 
which adopted these price-fixing laws. Some people call them fair- 
trade laws; I like "price-fixing" laws. 

The Chairman. If I remember correctly, the Miller-Tydings Act 
was added as a rider to a District of Columbia measure of which the 
Senator from Utah had charge. 

Senator King. And the Senator ought to remember that it was a 
rider and that I opposed it vigorously. 

The Chairman. I remember that very distinctly. 

Senator King. Did you vote with me? , 

The Chairman. I think I did. 

Senator King. May I say I vigorously opposed it, but the pressure 
was so great that it passed the Senate, but the President manifested 
opposition to it and said in effect that if it were not for the imperative 
necessity of having the revenue bill, to which it was attached as a 
"rider," he would veto it. 

The Chairman. Was it a revenue bill, Senator? 

Senator King. Yes, for the District of Columbia, a vital bill im- 
peratively needed by the District, and the President— I am not 
criticizmg him ; perhaps he did the right thing — was opposed to it as 
evidenced by the statement to which he appended his signature. 



CONCENTRATION OF ECONOMIC POWER ][7g3 

I should add that on April 14, 1937, Mr. Ayres, then Chaurnan of 
the Federal Trade Commission, wrote to the President stating that 
the Commission recommended against the enactment of the Miller- 
Ty dings amendment, stating the view that "the potential damage to 
consmners through price fixing would be much greater than any exist- 
ing damage to producers through this form of price cutting." 

Much could be said in support of the position which I then took 
and which I understand the Federal Trade Commission is ready to 
take in opposition to the Miller-Ty dings bill and the principle therein 
involved. 

Mi-. Berge. The real point I wanted to bring out, though, was 
whether they had any other defense to this conduct than the State 
fair trade acts and the Miller-Tydings Act, 

Mr. Morehouse. Oh, yes; they employed very able lawyers and 
presented numerous defenses, among which, of course, they didn't 
nave the MUler-Tydings Act at the time they were putting on their 
defense. One defense was that, first, they didn't do it; the next was, 
if they did do it they had a right to do it; and the third one might be 
summarized by saying it was a good thing anyway. 

Mr. Berge. Assuming that they did it, how could they get around 
the Supreme Court decisions which clearly made resale price main- 
tenance agreements illegal? 

Mr. Morehouse. Of course, at that stage of the proceedings there 
was no legal argument offered for either side. We were just taking 
testunony. I don't see how they could, either, but we hadn't reached, 
and never did reach, the stage of arg-ument, so I don't know whether 
they would have had the temerity to argue it was legal. 

Mr. Berge. I wonder if this case wasn't a pretty good example of 
what could" be accompUshed imder the Fair Trade Act. 

Mr. Morehouse. I think it is. 

Mr. Berge. Doesn't it amount to this, that through a vertical 
agreement in an industry you can accomplish what is forbidden if 
attempted horizontally; that is, the retailers can be bound by dicta- 
tion of the manufacturers to maintain what might be substantially 
the same or even higher prices than they would fix by horizontal 
agreements with their competitors? Don't you have here a situation 
where the very thing that is clearly forbidden by agreements of com- 
petitors is permitted? 

Mr. Morehouse. If I may say so, it has always been my opinion, 
based upon what little experience I obtained from the Seagram case, 
that it has that effect, that it is impossible -to have a vertical price 
maintenance without at the same time haying in piactical effect 
horizontal price uniformity wherever you have competing branded 
goods of the same class. It works out that way. 

The Chairman. You may proceed, Mr. Morehouse. 

Mr. Morehouse. Thank you. 

The next case involves calcium chloride, brought under section 5 
of the Federal Trade Commission Act, and is a recent case decided 
by the Commission in December 1938. 

The Columbia AlkaU Corporation and three other companies who 
together were the only manufacturers of flake calcium chloride in 
the United States, and who also manufactured over 75 percent of all 
other forms of calcium chloride, controlled the sale and distribution 



1764 CONCENTRATION OF ECONOMIC POWER 

of a substantial majority of the entire output of this product in 
commerce. Normally and except for the actual acts and practices 
which I will refer to, they would have been in active and substantial 
competition. 

During the period between November 1937 and January 1938 they 
entered into understandings, agreements, and conspiracies to fix and 
maintain and they carried out these agreements to fix and maintain 
uniform prices. To aid them in the accomplishment of this purpose 
they maintained a uniform zoning system, exchanged information 
with respect to the prices which each was to charge for calcium 
chloride in its various forms, and suggested what the retail prices 
should be. If it in any event developed that there was to be a change 
in prices, they would make the same change at the same time, and 
they offered identical bids for carioad and less-than-carioad lots to 
prospective purchases; they uniformly eliminated discounts for 
prompt payment, and made identical raises in prices, -always acting 
in concert one with the other. 

The Commission found that these acts and practices were to the 
prejudice of the public and had a dangerous tendency to hinder and 
prevent price competition in the sale of calcium chloride in various 
forms in commerce in the United States, and constitute an unfair 
method of competition. 

A copy of the Commission's findings as to the facts, conclusion 
and order to cease and desist is submitted herewith, which order is 
in the exhibits, marked 81-E.' 

Senator King. Before you proceed, may I ask you a question? 

Mr. Morehouse. Yes. 

Senator King. In the numerous cases to which the attention of the 
Commission has been brought during the past year or two, have they 
not discovered that many of those against whom complaints were 
made predicated their conduct or justified their conduct upon the 
N. R. A., that the organization or the acts which were complained of 
were the result of the codes which were prepared under the N. R. A.? 

Mr. Morehouse. There have been a few, maybe, you might term 
it many, such cases. I do not know that this particular one is one, 
but there were several, and I think the record shows that I called 
the attention of the committee to some of them during the previous 
session. 

Senator King. In the case you examined a short time ago, about 
the building materials, cement and so on, a very large organization, 
did not the respondents, at least some of them, justify their course 
by pleading the N. R. A.? 

Mr. Morehouse. I am just now informed by the attorney who 
tried the case that that is correct. 

Senator King. So we are finding the repercussions now in some of 
these alleged monopolistic practices, of the National Recovery Act. 
You needn't answer that if you don't want to. 

The Chairman. That is a statement by the Senator, it isn't a 
question. 

Mr. Morehouse. I so took it, Mr. Chairman, please. 

Senator King. Which the testimony of the witness corroborates. 

Mr. Morehouse. We have covered quite a lot of commodities. 
Now we come to corn cribs and silos. In 1938, December, also, the 
Commission decided a case of the Rowe Manufacturing Co., anilli- 



CONCENTRATION OF ECONOMIC POWER 17^5 

nois corporation, wliicli together witli another lUmois corporation and 
two Iowa companies, one individual and a partnership, made and 
sold combination wood and wire portable corn cribs and silos. 
Together they produced the major portion of such products in the 
industry, and were so large and influential as to control that trade. 
Portable corn cribs and silos are made from pine picket latliing 
measuring 4 feet by IK inchs by ji inch, and spaced 2 inches apart, 
woven together with wire, sometliing on the order of snow fencing, 
differing only as to use, largely used by the corn producing States of 
the Middle West, especially Iowa, for the storage and preservation of 
corn, ensilage and other corn products. Normally these concerns 
were in competition with each other. 

They entered into joint agreements and combinations and conspira- 
cies to fix and maintain prices, allowing the Howe Manufacturing Co. 
to act as a clearing house for the exchange of price information and 
suggestions as to what prices should be charged. Having intiated 
this for the State of Icwa during 1936, they began to apply it to the 
other corn States as closely as possible. They had uniform prices, 
common basing points, and made all price changes effective simul- 
taneously. They reported price cutting, stimulated and encouraged 
others to report it, and acted upon such reports for the purpose of 
eliminating all price concessions. The Commission found that this 
raised the prices on portable corn cribs and silos to the farmer in the 
above-named States and placed in respondents the power to control 
and enhance prices, and ordered them to stop as tending to create a 
monopoly. 

One interesting and quite recent case in which the Commission 
issued its order in January of this year involved automobile carbure- 
tors and parts, the Carter Carburetor Corporation. That was a 
Delaware corporation engaged in business at St. Louis, Mo. It made 
and sold carburetors and parts for original standard equipment and 
for replacement. Together with the Bendix Corporation, in 1937 it 
supplied carburetors to more than 90 percent of domestic passenger 
cars. Marvel and Tillotson carburetors, and recently Chandler- 
Groves have been made standard equipment on some popular makes 
of automobiles. In 1937, 60 percent of the passenger cars and trucks 
w^ere equipped with Carter carburetors,, and for 3 years prior to 1937 
on more than half of all passenger cars and trucks Carter carburetors 
were standard equipment. 

Business in carburetors has two principal branches, original equip- 
ment and replacement. The ordinary automoble owner doesn't 
know what kind of carburetor he has m his car any more than he can 
tell you off-hand what the number of his license plate is. In order to 
estabhsh the Carter carburetor business, it has been found in this 
industry it is necessary to maintain a system of service stations 
throughout the country that will enable the automobile driver to get 
service on his particular make of carburetor when he requires it. 
This is also necessary before a competing carburetor could be accepted 
by any automobile manufacturer as a standard of equipment. It is 
also necessary to equip and maintain rather a specialized group of 
mechanics who are competent to make repairs and adjustments and 
keep them throughout the field to work upon the particular make of 
carburetor. 



1766 CONCENTRATION OF ECONOMIC POWER 

A carburetor is a very complicated device, the particular oiiv. er^ 
in question having some 150 to 170 parts. Carter, during 1937. sold 
1,635,000 of its carburetors to automobile manufacturers as original 
equipment, and in the same year more than 103,000 replacement 
carburetors. The price on them ranged from $10 to $28. 

This business that I have described, of repairing automobiles and 
automobile equipment, is carried on by about 60,000 independent 
service stations, about 7,000 of which specialize in the service of 
electrical eq^uipment and carburetors. Practically all such carburetor 
service stations carry and sell Carter carburetors, so a large part of 
this business is handled by these 7,000 specialized service stations. 

These stations had always been accustomed, for the reasons which 
I have heretofore explained, to deal in and stock parts of competing 
carburetors. The gist of this case is simply that Carter devised a 
means whereby they had to cut out the competing hues and parts or 
he wouldn't give them his price concession, and he signed up agree- 
ments with the majority of his dealers so that they eliminated the 
competing parts, or else they hid them under the shelves and wouldn't 
display them, and in that way he built up his business. 

Carter didn't enter the service field on a large scale until about 
the year 1930. Then it put out a general-parts cabinet, containing 
replacements for all these 150 to 170 parts, to about 6,000 stations. 
They were known as cabinet stations, and they got a 40 percent dis- 
count, as compared with Carter's general trade discount of 25 percent. 

Then he began to threaten them with the withdrawal of that extra 
discount if they continued to deal in competing lines. That is what 
the case was about, in substance. Field representatives were in- 
structed to insist upon enforcement of this new poHcy, and it resulted 
in considerable damage to the competing lines of carburetors. 

The Commission found that the effect was to substantially lessen 
competition and create a monopoly in the sale and distribution of 
carburetors and parts. They found that Carter had induced, coerced, 
and compelled a large number of service stations throughout the 
United States to refuse to deal in and purchase the products of the 
Chandler-Groves Co. This closed to that competitor a substantial 
number of actual and potential service station outlets for its products 
and diverted business and trade from it to Carter, and prevented the 
service stations from deaHng in a full Une of such products and giving 
the necessary effective service to the public. Copy of the Commis- 
sion's findings is among the exhibits. 

Mr. Davis. Mr. Morehouse, I find that there is some inquiry as to 
the use of calcium chloride. 

Mr. Morehouse. Calcium chloride? 

Mr. Davis. Calcium chloride, which you discussed in' a previous 
case. 

Mr. Morehouse. Do you know? I don't know. 

Mr. Kelley. We had two price-fixing cases, one calcium chloride 
and one hquid chlorine. I do know in the liquid chlorine case it was 
used largely by communities for purifying water, and the commun- 
ities complained about i4entical bids and uniformity of prices. In 
that case there was a very wide use of liquid chlorine for use in 
purif3dng water. 

Mr. Morehouse. Calcium chloride, Judge — I'd heard this but 
wasn't sure of it and just had it verified — was used in connection with 
roads. It is a chemical used on roads, principally. 



CONCENTRATION OF ECONOMIC POWER 17g7 

The Chairman, For what purpose? 

Mr. Davis. For surfacing unpaved roads to settle and to hold down 
the dust and to form a bmder to shed the water, rainfall, and so forth. 
They didn't want to go to the expense of paving. 

The Chairman. So that in each instance the effect of the combina- 
tion was to increase prices to public bodies. 

Mr. Morehouse. That is right. 

Mr. Davis. For public use, either the purification of water in cities 
or to improve roads, highways, generally country roads, and so forth. 

Mr. Frank. Mr. Morehouse, in these cases that you have been 
describing, would there be a civil action by the party injured prior 
to the time you entered your cease and desist order? 

Mr. Morehouse. I suppose there would be if he would prove his 
case. 

Mr. Frank. Does the treble damage section cover matters other 
than violation of the Sherman Act? 

Mr. Morehouse. I would have to look at that. I don't think so. 

The Chairman. It is in the Clayton Act, is it not? 

Mr. Frank. Some of these cases would not be Sherman Act cases, 
would they? 

Mr. Morehouse. It wouldn't have to be a Sherman Act case for 
them to get treble damages. 

Mr. Kelley. Some cases would nofey but every case Mr. More- 
house has related to this committee would also constitute a violatioti 
of the Sherman Law. 

Mr. Frank. So there would be an action for treble damages on the 
part of the person aggrieved. 

Mr. Morehouse. I think so, yes. May I proceed? 

The Chairman. Proceed, pleaSe. 

Mr. MoRFHOusE. Also in January 1939, the Commission issued an 
oreder to cea^e and desist against the National Biscuit Co., a New 
Jerse> corporation, selling bakery and packaged food products, in- 
cluding over 500 varieties of biscuits. It is the largest company, of 
course, of its kind in the United States. It has factories in more than 
21 different States, and with sales branches in approximately 257 
cities. 

It maintains a very extensive sales and delivery organization. It 
sells and delivers directly to retailers by motortrucks. Among its 
competitors, many small concerns do not have localized delivery 
services and depend largely upon jobbers and wholesalers for their 
marketing outlets. So the National Biscuit Co. entered into agree- 
ments with certain jobbers and wholesalers whereby it would pay 
them a percentage or discount on sales by the company to certain 
allocated groups of retailers when the particular jobber or wholesaler 
to whom the percentage or discoimt was paid performed httle or no 
service in connection with such sales. In return, the wholesalers- and 
jobbers agreed not to deal in competitive products. Many customer 
and noncustomer wholesalers and jobbers received these discount . 
upon these understandings and agreements. The purpose, of course, 
was to prevent the wholesaler and jobber from dealing in the products 
of competitors and to prevent retaU dealers in competitive products 
from receiving the customary and ordinary services of jobbers or 
wholesalers upon which they were entirely dependent, not having 
this big motortruck delivery organization. 



1768 CONCENTRATION OF ECONOMIC Ei)WER 

The Commission found that these practices tended to greatly curtail 
the services of jobbers and wholesalers in the marketing of their prod- 
ucts, and so long as the jobbers and wholesalers continued to receive 
compensation from the National Biscuit Co., the largest and most 
dominant factor in the industry, all resulting to the prejudice and 
injury of the public and the National Biscuit Co.'s competitors. 

The findings, conclusion, and order are among these exhibits^ 
marked 81-H. 

Mr. Davis. Mr. Chairman, it is the noon hour and there is one 
more case that Mr. Morehouse had contemplated discussing in some 
detail, but I suggest that perhaps we might conclude his discussion of 
these specific cases now and just let the other go in the record, although 
we would be perfectly willing to continue indefinite discussion of the 
cases. 

Senator King. How many more did you have in mind? 

Mr. Davis. There is just one more. 

Mr. Morehouse. There is only one and it is along the same general 
lines. I was about to suggest that myself. 

The Chairman. If there is no objection, the prepared statement 
which you have made available to the members of the committee 
with respect to the American Ftange & Manufacturing' Co., Inc., 
Docket No. 3391, wiU be printed in the record as part of your presen- 
tation. 

(The Federal Trade Commission report on the American Flange & 
Manufacturing Co. "was marked "Exhibit No. 307" and is included in 
the appendix on p. 2172.) 

Mr. Morehouse. Very well, Mr. Chairman. 

Mr. Davis. Mr. Chairman and gentlemen of the committee, that 
document which Mr. Morehouse holds which has already been 
described in general terms as being in three parts, two parts of which 
deal with cases, one part the restraint of trade cases, or including 
those, which Mr. Morehouse has discussed but involves quite a good 
bit more than that, and then the Commission's experience with Sec- 
tion 7, Clayton Act cases, and then the third part of the economic 
investigation which the Commission has made, all of which is indexed 
as to subject, industry, and the company involved, and aU that, is in 
very concrete, usable form, and it occurs to me that it would be well 
to insert that in the record even though there may be some duplica- 
tion as between that and the discussion. 

The Chairman. You mean for printing in the record and not for 
filing? 

Mr. Davis. Well, most of its contents will not be presented orally. 

Mr. Morehouse. May I make this suggestion. Judge Davis and 
Mr. Chairman, if you please: If that is to be done I don't see why it 
couldn't be printed in the record with the elimination of the cases 
which I have verbally discussed. That could be omitted, and I my- 
self think this will be a very useful document for the committee to 
have; it was prepared for that purpose, and if there is no objection I 
would like to offer it. 

The Chairman. How many pages are in that? 

Mr. Morehouse. It is hard to tell exactly because we have had 
to make so many insertions. There are only 342 pages numbered, 
but some of them run "a" and consecutive letters, so I suspect there 



CONCENTRATION OF ECONOMIC POWER 1769 

will be about 375 pages, not more than 375, which covers the whole 
presentation. 

The Chairman. That is, typewritten pages? 

Mr. Morehouse. Yes; one of these typewritten pages, I noticed, 
Senator, made up on the press release only about a third of a page. 

Senator King. So there would be a little over a hundred pages of 
the printed record. 

Mr. Morehouse. I am speaking of the mimeographed press release. 
1 don't know about the printed record. I don't know how much is 
in there. I wouldn't be competent to make that estimate. I should 
say that one of these pages would cover about three of these type- 
written papers, I should think. 

Senator King. Then there would be about a hundred pages. You 
have 300 there. 

Mr. Morehouse. Nearly 400, about 375. 

Senator King. I didn't quite understand Judge Davis' statement 
as to the contents of that document which you have before you there, 
Mr. Morehouse. 

Mr. Morehouse. This document starts with 59 cases digested as 
concisely as possible, including the 15 which I verbally explain(;d to 
the committee. Then, of course, it has in the back of it a list of the 
Commission's pending complaints, just a list of them, with a brief 
paragraph about them explaining why we don't think it wise to discuss 
them when they are pending for trial. Then part II deals with the 
Clayton Act exclusively. The first half of it takes up all the cases — 
there were some 10 or 11 — and which Mr. Kelley is going to present 
following me, involving section 7 of the Clayton Act, and details the 
history of the court proceedings, just a brief digest similar to the ones 
I have explained except that they relate to the Clayton Act. The 
details are in these exhibits. There are no details in here. The 
second part about the Clayton Act relates to a brief resum6 of the Com- 
mission's informal investigations. 

The Chairman. This is a compilation which is available no place 
else? 

Mr. Morehouse. The last part takes up some 20 economic studies 
that the Commission has made, describing in briefest kind of outline, 
the detail and scope of the Commission's study and indicating, where 
recommendations were made, what the rocommendations were. That 
is the third. 

The Chairman. Unless there is objection by some member of the 
committee the request of the Federal Trade Commission that this 
study which was prepared by the Federal Trade Commission at the 
request of the committee will be printed in the record. 

(The bound volume labeled "Federal Trade Commission— Report 
of Monopohstic Practices in Industries," was marked "Exhibit No. 
308" and is printed separately as Hearings, Part 5-A). 

Senator King. I would hke to ask a question. In view of the 
acceptance of this memorandum, will that make necessary the printing 
in the final compilation of our proceedings of the testimony which you 
heretofore have given? 

Mr. Morehouse. I have not followed that exactly at all times, and 
I would suggest that it might be just as well to omit those cases from 
the report that I did detail here. There is no use duphcating it; 
certainly. 



1770 CONCENTRATION OF ECONOMIC POWER 

The Chairman. But you were subject to inquiry and there was a 
good deal of colloquy intermixed with your testimony, and it is the 
feeling of the Chair that both the testimony and the report should 
be printed. 

Senator KiNd. Obviously, the testimony which Mr. Morehouse has 
given should be printed in the record. I was wondering if there are 
duplications in this memorandum or document which you have just 
handed us, of your testimony, whether those cases might be deleted 
from this memorandum and not printed in the record. 

Mr. Morehouse. I don't think there is any necessity for printing 
in the record the cases which are in here and which I have talked 
about. 

Senator King. That is the point which I have tried to make. I 
'would suggest, then, Mr. Chairman, that Mr. Morehouse eliminate 
from this document the cases to which be has testified, because as he 
states, the document and the testimony somewhat duphcate each 
other. 

The Chairman. Without objection, it will be so ordered and the 
report will be withheld from pubUcation until Mr. Morehouse has 
had the opportunity to examine it and ehminate the dupKcations. 

Mr. Morehouse. I might also suggest, Senator, please,' that in the 
next order of procedure, after Mr. Kelley addresses the committee^ 
there will be certain of the economic studies taken up, 3 out of the 20 
or more that are in there, and they should also if they are taken up 
verbally be stricken from the written report to avoid duphcation there. 

The Chairman. Do any members of the cornmittee desire to ask 
Mr. Morehouse any additional questions? 

Mr. Davis. He will be available here after lunch. 

The Chairman. The committee will stand in recess until 2 o'clock 
this afternoon When I understand Mr. Kelley will proceed. 

(Whereupon, at 12:15 p. m., a recess was taken until 2 p. m. of the 
same day.) 

afternoon session 

The committee resumed at 2:15 p. m. on the expiration of the recess 

The Chairman. The committee will come to order, please. Mr. 
Kelley, you are to take the stand this afternoon. I was waiting be- 
cause I wanted a very full meeting of the committee to hear your con- 
tribution, because I know that it is going to be a valuable one. Judge- 
Sumners has been detained by the fact that he has a meeting of the 
House Committee on the Judiciary, which he hopes will conclude in 
just a few moments. Mr. O'Connell, of the Treasury Department,, 
and Mr. Arnold, of the Justice Department, have also been detained^ 
but I fancy they will be here shortly. It is getting a little bit late, 80> 
I thought we would just as well proceed. 

In accordance with the rule, I will administer the oath. Do you 
solemnly swear the testimony you are about to give in this proceedings 
shall be the truth, the whole truth, and nothing by the truth, so help, 
you God? 

Mr. Kelley. I do. 

Judge Davis. Mr. Ballinger desired to make a brief statement be- 
fore Mr. Kelley. 

The Chairman. Very well, Mr. Ballinger. 



CONCENTRATION OF ECONOMIC POWER 1771 

SECTION 7 OF THE CLAYTON ACT 

Mr. Ballinger. I am just going to speak briefly on the importance 
of section 7, its importance to the future of American industry. This 
section of the Clayton Act is now regarded as a dead law, but the Com- 
mission is very anxious to put some life into it. This law was origi- 
nally passed to prevent the concentration of the control of production 
in American industry, and to take out of the hands of the would-be 
monopolists one of their favorite technics for creating monopoly. 

So long as monopolists enjoyed the right of unrestricted merger, 
combination, and purchase of competitors' assets, it became a very 
simple matter in some cases to weed out the numerous competitors in 
an industry so that they would come down to about 4 or 5 or 10, and 
then it became easier to enter into conspiracies to restrain trade. So 
Congress accordingly decided industry should grow by what are called 
natural methods of growth by reinvestment of a company's surplus in 
the business but not by entering into combinations or mergers with its 
competitors or acquiring their assets. Since this law has become a 
nullity the Commission is engaged at the present time in studying the 
causes of bigness in the United States, especially since 1914, after this 
law was passed. We are trying to find out how much bigness in Amer- 
ican industry is due to combination and merger, how much of it i^ due , 
to natural niethods of growth, how much of it 13 due to unfair methods 
of trade. We hope, at some future date, to present the fruits of the 
study to the Temporary National Economic Committee. 

Now, a restoration of section 7 seems to the Commission to be very 
important. In the last 6 years we have had another great industry 
come on the scene in American industry. Within the short space of 
6 years five concerns have got a preponderant amount of the produc- 
tion in that industry, and as was the case at the time when section 7 
was passed, so is the case today: this concentration of control has 
flowered into monopoly and monopoUstic practices. We are going to 
have a great many new industries coming on in the next year or 20 
years from now, and we want this law vitalized so that as competition 
ushers in new industries this competition may be preserved and 
protected. 

But perhaps the most fundamental interest of the Commission in 
vitalizing tlds law is that if you leave the right of unrestricted merger 
and combination open, it is possible to create one of the most dan- 
gerous types of monopoly, the price-leader type of monopoly. Tliis 
type of monopoly is often beyond the pale of existing law, because 
you can't find any evidence of conspiracy or collusion. 

If you create one unit in a field sufficiently large, the very existencb 
of that unit with its vast financial resources acts as automatic intimida- 
tion to smaller competitors who may have cheaper and more economi- 
cal costs of production, and who should on strict capitalistic and 
competitive theory be challenging the prices that are laid down by 
these cumbersome giants. But prudence dictates they foUow the 
leader, because if they do this thing which is the thing we would like 
to have them do, it might be followed by selling below cost, in which 
event their financial assets couldn't possibly match those of the giants 
and they would inevitably go under. And so for that reason we don't 
want a big loophole through which monopoly can be generated — a 



1X72 CONCENTRATION OF ECONOMIC POWER 

monopoly extremely difficult to get at. A revitalized section 7 
would do much to mitigate the creation of a dominant giant in an 
industry, the effect of which' bigness is not necessarily efficiency but 
is rather a power to intimidate smaller competitors from competing 
and to create a monopoly which can keep its skirts clear of existing 
law, because it is often unnecessary for this big fellow to conspire with 
these smaller competitors to refrain from competition. It is only 
when competitors are fairly equal in strength that conspiracy to re- 
frain from competition becomes important. When one concern is 
very much more powerful than any of its other competitors, it can 
establish a leadership in prices often without any necessity of con- 
spiring: with the small fry. And such a situation is just as monopohs-- 
tic in substance as if there was an actual agreement among competitors 
to conspire to refrain from competition. 

The Chairman. Mr. Ballinger, you spoke once of the restoration of 
section 7, almost implying that it had been repealed, whereas of 
course it has not been repealed, it has been devitalized or interpreted 
in such a way as to make ineffective the purpose of Congress when it 
was passed. I assume that that is one of the subjects that Mr. Kelley 
will undertake to discuss. Do you care at this time to put into the 
record at the beginning of your testimony the text of section 7? 

Mr. Kelley. I will come to that in the course of my talk. I will 
refer to the pertinent parts of it. 

TESTIMONY OF WILLIAM T. KELLEY, CHIEF COUNSEL, FEDERAL 
TRADE COMMISSION, WASHINGTON, D. C. 

Mr. Kelley. If you please, Mr. Chairman and Members of the 
Committee, the Federal Trade Commission desires to submit some 
facts and observations with respect to section 7 of the Clayton Act, 
"An Act to supplement existing laws against unlawful restraints and 
monopolies, and for other purposes," approved October 15, 1914. 

The Clayton Act has been in effect 24 years. The act, as its title 
and the history of its enactment show, was intended to supplement 
the purpose and effect of the Sherman Act of 1890. It was designed 
to eliminate certain practices which in the opinion of Congress were 
monopolistic in tendency and effect. 

Section 7 attempted to deal with the vital problem, which was before 
Congress at that time, growing out of the unprecedented concentration 
of control over competition m various lines of industry, which had 
been achieved by some large corporations by the use of a* process of 
consolidation with competing corporations. 

I just referred to some large corporations. I have particularly in 
mind the American Tobacco Co., the Standard Oil. and the United 
States Steel consolidations. 

In reports about the makers of farm machinery and the processors 
of the principal farm products presented to the Congress in 1937 and 
1938, the Federal Trade Conmiission found that absorption of com- 
petitors is still largely responsible for concentration of control. 
Such absorption has been the chief means of growth of the large milk 
and dairy-products companies ^ and the large farm-implement manu- 
facturers, and in recent times of the large wheat-flour millers. , 

I For UeariBgs un the dairy industry see Hearings, Part VIL 



CONCENTRATION OF ECONOMIC POWER I773 

I might say here in this connection that I particularly refer to the 
National Dairy Products Corp., Borden, Swift, and Armour, and the 
International Harvester Co. and General ^ills. 

Prior to 1914 corporate consoUdation had largely followed the 
channel of one corporation acquiring the capital stock of competing 
corporations or of the formation of a holding company to take over 
the stock of two or more competing corporations. Congress in 
section 7 undertook to prohibit these practices where their effect was 
substantially to lessen competition. In the face of this statutory 
prohibition other means were soon devised which were equally as 
effective in bringing about the eliminatin of competition and the 
creation of monopolistic conditions. Among these methods are: 
For one corporation to acquire the control of a competitor through 
purchase of its voting stock and then use the stock to obtain its physi- 
cal assets and going-concern value; or to create a holding company to 
purchase the voting stock of competing operating companies and 
then vote the stock to obtain title to assets and effect a consolidation 
of the competing properties; or for one corporation to purchase out- 
right the factory, equipment, goodwill of a competitor or competitors. 
This latter method, the purchase of assets or merger of properties as 
distinguished from the purchase of capital stock is not prohibited by 
the Clayton Act. Of course the Commission has not instituted pro- 
ceedings where competiion was suppressed soMy by a purchase of 
assets. 

From time to tune, since 1927, the Federal Trade Commission has 
called to the attention of Congress the situation created by these 
developments and to the comparative futihty of its efforts to carry out 
the legislative mandate insofar as the suppression of the evil originally 
aimed at was concerned. 

Section 7 of the Clayton Act provides: 

That no corporation engaged in commerce shall acquire, directly or indirectly, 
the whole or any part of the stock or other share capital of another corporation 
engaged also in commerce, where the effect of such acquisition may be to sub- 
jstantiaUy lessen competition between the corporation whose stock is so acquired 
and the corporation making the acquisition, or to restrain such commerce in any 
section or community, or tend to create a monopoly of any line of commerce. 

And that — 

No corporation shall acquire, directly or indirectly, the whole or any part of the 
stock or other share capital of two or more corporations engaged in commerce 
where the efiect of such acquisition, or the use of such stock by the voting or 
granting of proxies or otherwise, may be to substantially lessen competition 
between such corporations, or any of them, whose stock or other share capital is 
^0 acquired, or to restrain such commerce in any section or community, or tend 
to create a monopoly of any line of commerce. 

Section 1 1 of the Clayton Act provides that if the Commission finds 
that any of the provisions of section 7 have been or are being violated, 
it shall issue an order requiring the offending corporation to cease 
and desist from such violations* and divest itself of the stock held in 
the manner and within the time fixed by said order. 

The power conferred by section 11, I will later show, becomes 
very important. 

The fost important complaint under this section was one issued by 
the Commission in 1919 against the Aluminum Co. of America. At 
that time the Aluminum Co. was the sole producer of pig aluminum 



1774 CONCENTRATION OF ECONOMIC POWER 

in the United States and it produced about one-half of the world's 
output of the metal. The Aluminum Co., through subsidiary com- 
panies, manufactured sheet aluminum and a large variety of fabricated 
and unfinished products. The Aluminum Co. had three competitors 
who manufactured and sold aluminum sheet from raw material which 
they imported. One of these competitors was absorbed by the 
Aluminum Co., the other was small and relatively unimportant. The 
third competitor was the Cleveland Metal Products Corporation. 

In 1918 the Aluminum Co. and the Cleveland Metal Products Co. 
organized a new corporation known %s the Aluminum Rolling Mills 
Corporation with a capital stock of $600,000, of which the Aluminum 
Co. took $400,000 and the Cleveland Co. $200,000. 

This new corporation then took over the Cleveland Co.'s sheet 
aluminum business. • In this way the Cleveland Co.'s sheet aluminum 
business, the only competitor of any consequence of the A].uminum 
Co., came under the colitrol of the Aluminum Co. 

In view of the language of sections 7 and 11 of the Clayton Act, the 
case presented some technical difficulties for the Federal Trade 
Commission. The Aluminum Co. did not directly buy the stock of a 
competitor. It organized an affihate company which purchased 
certain assets of the competitor. However, upon careful study and 
analysis of the evidence in the case, the Commission came to the 
conclusion that the new corporation had taken over not only assets but 
a rolling-mill business, and that it had begun operating the mill before 
the transaction resultmg in the acquisition of the stock by the Alumi- 
num Co. was fully completed, and that as a consequence the Alumi- 
num Co. had purchased the stock of a competitor engaged in commerce 
and that the effect was to substantially lessen competition and create 
a monopoly. 

The circuit court of appeals took the same view and affirmed the 
Commission's order. A petition for certiorari for review of the 
decision of the circuit court of appeals filed by the Aluminium Co. 
was denied by the Supreme Court. In passing it may be mentioned 
that the practical effect of the judgment in this case waj? destroyed by 
a decision of the same court in 1924, when it denied the application of 
the Federal Trade Commission to modify the court decree so as to 
prevent the Aluminum Co. from bidding in at sheriff's sale the physical 
property of the acquired corporation in satisfaction of a debt which 
the Commission contended was fictitious. 

A few months after the institution of proclS'edings in the Aluminum 
case the Conmiission instituted separate proceedings under section 7 
against three meat-packing companies, Swift & Co., Armour & Co., 
and the Western Meat Co. In the Sunft case, Swift acquired all of 
the capital stock of two independent packing plants, one the Moultrie 
Packing Co., located in Georgia, the other the Andalusia Co., located 
in Alabama. These two independent packing companies were pros- 
perous and growing. Swift was in direct competition with them. 
These two plants furnished all the competition Swift and the other 
Chicago meat packers met in the sale of pork and lard and beef in 
the southeastern part of the United States. 

Shortly after Swift bought the stock of these independent packing 
companies they executed a deed of trust of all of their property to 
Swift. Swift had asPquired the packing plants before the Commission 
had issued its complaint. The Commission realized that to merely 



CONCENTRATION OF ECONOMIC POWER 1775 

order a divestiture of the stock was useless. After a careful con- 
sideration of the evidence the Commission found that bhe deed was 
for a nominal consideration and was a mere paper transfer, and it 
ordered Swift to restore the property to the independent packers and 
then to divest itself of the stock. 

Swift appealed from the Commission's order to the circuit court of 
appeals. The circuit court affirmed the Commission's order. I 
would like to read an excerpt from the opinion of the circuit court in 
that case. The court said: 

Must Congress act only when the child has grown to the stature of a giant? 
If authority exists to curb, or to dissolve, a corporation, when it has reached the 
trust stage, may Congress not take steps to arrest the corporation's growth before 
the final stage has been reached? Is our national-defense policy based upon an 
impending conflict, or a desire to prevent one? 

The Government mav under the commerce clause of the Constitution forbid 
every contract which is reasonably calculated to injuriously affect the public 
welfare. It may act to anticipate or prevent an unfortunate situation, as welj as 
deal with one that existed. 

The Clayton Act— 

the court continued — 

supplemented the Sherman Act, the practical enforcement of which was found 
difficult and often resulted in hardships to interested parties. The section under 
consideration sought by means which the Congress deemed expedient and effec- 
tive to prevent a condition which the Sherman law was designed to overcome when 
once it existed. Certainly courts should hesitate to say that the means selected 
are not appro'priate or primarily adapted to accomplish the desired end when it is 
conceded that the prevention of such ends through dissolution is within the 
recognized power of Congress. 

If competing corporations may not consolidate, it naturally follows that it 
will be difficult for one corporation ever to monopolize an industry. 

The case went to the Supreme Court. The Supreme Court reversed 
the Commission and the circuit court of appeals, holding that the 
Commission lacked the power to make such an order under the 
authority conferred upon it by section 11. The Supreme Court held 
that although the packing plants were obtained through an unlawful 
purchase of capital stock, that the Commission lacked authority to 
require Swift to dispose of them. Four justices, including the Chief 
Justice, dissented. 

The Armour case was similar to the Swijt case. The acquisition 
of the capital stock was followed by an acquisition of the property 
before the Commission issued a complaint. 

In the Western Meat case it happened that the corporation had 
not voted the stock so as to acquire the assets before the Commission 
filed its complaint. Because qf this circumstance, the Supreme Court 
sustained the power of the Commission to order a divestiture of the 
stock in a manner that would prevent merger of the assets. 

In 1921 the Commission instituted proceedings against the Thatcher 
Manufacturing Co., which acquired the stock and then the physical 
assets and patent license agreements of five competitors engaged in 
the manufacture and sale of milk bottles in competition with each 
other and with Thatcher. • The assets were acquired before the Com- 
mission issued its complaint. The circuit court of appeals agreed 
with the decision of the Commission that the stocks were unlawfully 
acquired and that since the property was obtained through the stock 
acquisitions, the Thatcher Co. should dispossess itself of the prop- 
erties so as to restore previously existing competitive conditions. 



1776 CONCENTRATION OF ECONOMIC POWER 

The Supreme Court decided this case on the same day it handed 
down its decision in the Swift case, and held that sections 7 and II 
of the Clayton Act had no application to physical assets acquired 
prior to action by the Commission, even though the property was 
acquired by reason of stock illegally held. Three justices and the 
Chief Justice also dissented in this case. 

There is necessarily a lapse of time between the institution of the 
Commission's inquiry into the facts and its issuance of the complaint 
charging the violation of law. Offending corporations may readily 
use this time to acquire the physical assets of companies whose stock 
they have previously acquired in violation of law. 

The Commission pointed out in its 1927 annual report that the 
effectiveness of the section to fulfill the purpose of Congress was 
materially lessened by these decisions. 

In March of 1928 the Commission issued a complaint against 
Arrow-Hart & Hegeman, a holding corporation, charging that it had 
violated section 7 of the Clayton Act by acquiring all of the common 
stock of two competing manufacturing companies, the Hart & Hege- 
man Manufacturing Co. and the Arrow Electric Co. On December 
6, 1928, Arrow-Hart & Hegeman, the holding company, transferred 
the common stock of one of these manufacturing companies, to a newly 
created holding company, and the common voting stock of the other 
manufacturing company to a second newly created holding company. 
Steps were then taken to dissolve the original respondent; that is, 
the original holding company. On December 31, 1928, the Arrow- 
Hart & Hegeman Electric Co. was formed in a merger and consohda- 
tion of the two manufacturing companies and the two newly formed 
holding companies. 

On June 29, 1929, the Commission issued a supplemental com- 
plaint, joining the Arrow-Hart & Hegeman Electric Co. as a respond- 
ent. The Commission, after hearings, found that the original holding 
company's acquisition of the common stock of the two manufacturing 
companies constituted a violation of section 7 of the Clayton Act in 
that the effect had been and was substantially to lessen competition 
between the two manufacturing companies in the sale .and provision 
of electrical wiring devices in interstate commerce, to restrain inter- 
state commerce in electrical wiring devices in various sections and 
communities, and to tend to create a monopoly in the electrical wiring 
devices industry ; and that the transfer by the original respondent — 
that is, the original holding company — of the common stock to the 
newly created holding companies was not such an investment as to 
constitute a compliance with the Clayton Act. It concluded that the 
acquisition by tlie original respondent holding company, the first 
holding company, of the common stock of the two manufacturing 
companies and the continued ownership and control and the voting 
of said stocks by the said original holding company which culminated 
in the organization of the Arrow-Hart & Hegeman Electric Co., and 
the acquisition by it through merger of the common stocks and of 
the assets of the two manufacturing companies, constituted a violation 
of section 7 of the Clayton Act. 

It ordered the respondent to divest itself of the stock and the assets 
of one or the other of the two manufacturmg companies. The circuit 
court of appeals affirmed li^e Commission to order a divestiture of ^he 
assets under the priirciple-^^tj^he Supreme Court decision vn. the Stern 



CONCENTRATION OF ECONOMIC POWER 1777 

Meat case. One judge dissented upon the ground that the order 
excluded the Commission's jurisdiction. The Supreme Court, with 
four Justices dissenting, held that the Commission had no power to 
make such an order, that its power was limited to divestiture of the 
stock originally acquired. 

Well, we have this situation, having first obtained control of a 
competitor through purchase of its voting stock, the second step, that 
is, obtaining title to physical assets, is usually a comparatively simple 
matter. Although the first step violates the Clayton Act, the Court 
by a bare majority held that the second step does not, even though it 
is proved as it was in the Arrow-Hart & Hegeman case that the second 
step was made possible only because the first one, which was in viola- 
tion of the law, had been taken. 

Section 7 does not prohibit acquisitions of physical assets as dis- 
tinguished from capital stock. The reason for this, no doubt, is the 
fact that stock acquisitions were the usual and ordinary method which 
had been used to effectuate corporate consolidations prior to the enact- 
ment of the Clayton Act in 1914. This is emphasized in the dissenting 
opinion in the Arrow-Hart (f* Hegeman case, in which Mr. Justice Stone 
said; 

It is true that the Clayton Act does not forbid corporate mergers but it does- 
forbid the acquisition by one corporation of the stock of competing corporations 
BO as substantially to lessen competition. It follows that mergers effected, as they 
commonly are, through such acquisition of stock necessarily involve violations of 
the act, as this one did. Only in rare instances would there be hope of a successful 
merger of independently owned corporations by securing the consent of their stock- 
holders in advance of the acquisition of a working stock control of them. Hence, 
the establishment of such control by the purchase or pooling of the voting stock, 
often effected in secrecy, is the normal first step toward consolidation. It is by 
this process that most corporate consolidations have been brought about, often 
by adding one consolidation to another through periods of years. 

In its 1930 annual report the Commission stated that acquisition 
of assets "is now the usual procedure in effecting acquisitions, con- 
solidations, and mergers." In its 1929 annual report the Commission 
referred to that period as "a day when mergers and consolidations are 
forming with a rapidity hardly foreseen even by the authors of the 
present antitrust laws." 

When this section was debated in Congress in 1914, a large number 
of Senators were in favor of returning to the common-law rule that 
no corporation could own the stock of another corporation, and it was- 
pointed out that in many of the States this was stiU the rule. A num- 
ber of arnendments were offered, prohibiting all stock holding between 
corporations engaged in interstate commerce in the same or a compet- 
ing line of business, whether the effect might be to lessen competition 
between them or not. (Congressional Record, *63d Cong., 2d sess., p. 
14459, rejected, 22 to 27; pp. 14467-14468, rejected, 16 to 36; p. 14473^ 
rejected, 16 to 36.) 

An amendment by Senator Walsh, of Montana, to eliminate all 
holding companies, whether of competing -corporations or not, was re- 
jected, the vote being 21 to 26. 

Senator King. Judge, some concrete cases have been brought to. 
my attention, not recently, except one of them. May I,>with the per- 
mission of the Chair, ask whether or not under the interpretation or 
under the cases whichrhave been decided either of these would come^ 
within those cases as prohibited? 

124491^8&— pt. 6 rlQ 



1778 CONCENTRATION OF ECONOMIC POWER 

Two competing grist mills foimd that the field that they had, owing 
to the diminishing production of wheat and cereals, resulted in loss, 
and one bought out the other; I don't know whether they bought the 
stock or the assets. Now the case was clear that neither made profit 
and in the end both would go into the hands of the receiver. Do any 
of the decisions to which you have referred or which you may refer to 
regard that as improper and prohibited? 

Let me cite the other case. The other is two mining companies. 
The smelters were competing, of course, for the ore, buying the ores 
of those who were producing from the mines, and there had been con- 
siderable rivalry in the purchase of ore, and to that extent the mine 
producers were benefited. Some of the mines closed down and one of 
the smelters found that it could not operate because it didn't have 
■sufficient production, i think it was taken over by the other com- 
pany. It salvaged a little of the million plus which had been invested 
in the production of the smelter. Would any of those decisions to 
which you have referred or maj^ refer prohibit that transaction? 

Another: Two mining companies were producing or mining lead 
ores and copper ores. They were almost side by side. The operation 
of one of the companies was larger than the other's because they had to 
sink a deeper shaft. If they had been permitted to crosscut and avail 
themselves of the shaft of the other company, that company might 
have been saved and the ore rescued from the ground which other- 
wise was lost. They merged. One company bought out the mining 
property that was adjoining it, and it operated then both mines 
through the same shaft. Would that be denounced under any of the 
decisions to whicli you have referred? 

Mr. Kelley. Well, I will say first, Senator, that in the cases I 
referred to and those that I will refer to later, the Commission found, 
after taking evidence, that there was substantial competition between 
the corporations and that the effect of the acquisition was to substan- 
tially lessen competition and tend to create monopoly. The competi- 
tion was really substantial, and in addition the corporations were 
solvent and growing. There wasn't any likeliliood of their passing 
out of the picture of competition because of failure. 

I would say, if the Commission had before it the facts as you have 
just related them, that the Commission wouldn't issue a complaint 
because I think it v/ould conclude that competition was either not 
substantial or that there was impending bankruptcy or failure to 
survive. However 

Senator King (interposing). I was just gouig to say that I didn't 
want to ask you to prejudge. I merely wanted to know whether any 
of the cases which you had cited or might cite would deal with those 
three instances to which I have referred. 

Mr. Kelley. No; I don't believe so. 

Mr. Davis. Another feature to which I wish to direct attention is 
that it is the duty of the Commission and it is the policy of the Com- 
mission under the act to consider whether or not a proceeding, even 
though a technical violation, would be in the public interest, and it 
isn't an infrequent thing for the Commission to decline or fail to issue 
a complaint in a case of a technical violation because it thinks there 
is an absence of public interest that would warrant proceedings, and 
if I may not be speaking out of school, along this same line, since I 
have been on the Commission there has been a consideration of an 



CONCENTRATION OF ECONOMIC POWER 1779 

alleged violation of section 7 of the Clayton Act which after investiga- 
tion the Commission closed because it involved a merger of some 
smaller elements of an industry which we thought not only did not 
tend to monopoly but would make a couple of smaller elements 
better able to compete with their more powerful competitors. 

Mr. Kelley. Where several corporations, all of them remaining 
in business and continuing to produce and sell, mutually agree among 
themselves not to compete in a given territory, by the apportionment 
of customers, the fixing of common prices, or the establishments of 
common standards, there is no hardship on any of the parties to the 
agreement. Each is trying to increase his profits. The interest 
threatened in such cases is the public interest through the danger of 
unreasonably high prices or deteriorated quality or restricted output. 

Cases at common law in this country hold that such agreements 
are unlawful if th e parties possess power to control the market nation- 
ally or in any section or community. The power to enhance prices 
or to restrict output is sufficient to condenm them. Proof of actual 
evil results, such as that the price of the commodity was unreasonably 
high or that all competition in the trade was destroyed, is unnecessary 
so long as potential power to accomplish these things is present. 
Under the Sherman Act and the Federal Trade Commission Act a 
mutual agreement or combination between competitors is unlawful 
if it effects or aims at a control of the market. Power to work injury 
to the public is sufficient to condemn per se such an agreement or 
combination. Proof of actual injury to the public need not be shown. 

However, where the suppression of competition is not brought 
about through an agreement between the pq,rties, each remainmg 
in business, but by merger or consolidation of competing properties, 
no one can state with any assurance that power to control the market 
and enhance prices is sufficient to condemn such a combination, and 
it is unnecessary to show by proof actual evil results. 

The International Harvester Co. was created by consolidating five 
large competing companies which at that time controlled more than 
80 percent of the trade in necessary farm implements. This combina- 
tion, not the result of normal competitive growth or, subsequently 
controlled the major portion of the farm machinery industry and 
generally established the price of farm machinery. 

In a suit by the United States v. The International Harvester Company 
imder the Sherman Act, the United States district court held the com- 
bination in harvesting machinery to be in violation of the Sherman 
law. The district court saw no difference in the eyes of the law be- 
tween the suppression of competition brought about through merger 
and the suppression brought about through an agreement of parties, 
each remaining in business. The court said: 

We think it may be laid down as a general rule thjit if compani* s could not make 
a legal contract as to prices or as to collateral services tliey could not legally unite. 

The company appealed to the Supreme Court from this decision, 
but whOe this was pending a consent decree was arrived at. A sub- 
sequent effort by the Government to revise this decree was defeated 
in the district court and this decision was upheld by the Supreme Court 
in 1927. The question whether the suppression of competition by 
agreement among corporations, if illegal, is equally so, if accomplished 
by merger or consolidation, was not directly in issue when the case 



1780 CONCENTRATION OF ECONOMIC POWEK 

reached the Supreme Court, However, with respect to this consoli- 
dation the Supreme Court said : 

The law, however, does not make the mere size of a corporation, however im- 
pressive, or the existence of unexerted power on its part, an offense, when un- 
accompanied by unlawful conduct in the exercise of its power. 

r understand this if the Court had reference to the growth of a 
corporation by natural expansion and development, but if it means 
that there is no Hmit under our antitrust laws to the size of corpora- 
tions brought about, not through natural growth and development 
but through corporate consoUdation or merger, then it seems to be 
plainly out of harmony with other decisions of the Court and the 
philosophy of our antitrust laws. 

Representative Reece. May I ask if the Intemationai Harvester 
Co. is still operating under the consent decree to which you referred? 

Mr. Kelly. Yes. 

In its 1937 annual report to the Congress the Commission made the 
following recommendation: 

On a number of occasions the Commission has called attention to the fact that 
while this section now declares unlawful the acquisition by one corporation of 
the capital stock of a competing corporation where certain monopoUstic tendencies 
, and conditions may result, it does not purport to declare unlawful the acquisition 
/> of physical assets where similar • tendencies and conditions may. result. The 
Commission has also pointed out that this unforbidden method of accomplishing 
these similar results has been increasingly employed by corporations engaged in 
interstate commerce. The Commission has therefore recommended in earlier 
annu^ reports and upon other occasions and now renews its recommendation 
that the acquisition of assets be declared unlawful under the same circumstances 
that the acquisition of stock is already so declared. 

In its recent report on agricultural income, pursuant to joint resolution of the 
Senate and House of Representatives, the Commission amplified the foregoing 
recommendation so as to preclude the acquisition of assets where the combined 
assets would exceed an amount to be specified by Congress. 

The Commission in its report to Congress June 6, 1938, on the 
agricultural implement and machinery industry, made pursuant to 
public resolution, said: 

The dominance and price leadership by these large companies is the result almost 
solely of their size and great financial strength; and this, in turn, was achieved 
very largely through merger, purchase of control of formerly competing manu- 
facturers, and purchase of the plants and other assets of either competing, or 
other, farm implement companies. 

The Commission believes that a merger of important competitors in an in- 
dustry is likely to be even more destructive of effective competition than temporary 
price agreements or understandings. While the Clayton Act forbids a company 
to purchase the capital stock of another company where the effect may be to 
substantially lessen competition or iend to create a monopoly, the act does not 
forbid the purchase of the factories, equipment, or any other assets of a com- 
petitor, even though the result would be more effective than that accomplished 
by acquisition of stock. 

The practice of merging competitors followed by various farm-machinery com- 
panies with respect to different lines has been going on for half a century, and hat 
tended to a constantly increasing concentration of economic power. 

The Chairman. Mr. Kelley, would it interrupt the continuity of 
your remarks to ask you here whether in your studies of the pro- 
ceedings in Congress at the time section 7 was enacted, there was any 
suggestion upon the part of any Member of Congress in the debates 
that this method of evasion to which you have alluded would result? 

Mr. Kelley. I don.'t recall any, Senator, but there was con- 
siderable opposition by a number of Senators, notably Senators 



CONCENTRATION OF ECONOMIC POWER 1781 

Walsh and Cummins and Poindexter. They objected largely to the 
difficulty that the Government would encounter in proving a sub- 
stantial lessening of competition and tendency to create a monopoly. 

The Chairman. That is another matter. 

Mr. Kelley. Yes; that is another matter. 

The Chairman. They were opposing the language which made it 
prerequisite for the Commission to find that the acquisition of the 
stock would result in substantially lessening competition, but what 
I am directing your attention to 

Mr. Kelley (interposing). Strictly answering your question, I 
don't recall. Senator. 

The Chairman. Wouldn't it be proper to say that Congress 
deemed the acquisition of stock as practically the exclusive method 
whereby competing concerns could be merged? 

Mr. Kelley. That is correct. 

The Chairman. And that in forbidding the one company to acquire 
the stock of a competing company, the purpose of Congress was to 
prevent a merger of the assets. 

Mr. Kelley. Yes; I think it is safe to say that Congress thought 
that by making stock acq^uisitions unlawful they would stop in its 
incipiency corporate consolidations, because they felt that largely cor- 
porate consolidations were brought about by first acquiring the stock. 

The Chairman. It would have been very simple for Congress to 
have amended this first section so as to extend the prohibition to the 
acquisition of assets. 

Mr. Kelley. Yes. When the cases reached the Supreme Court the 
majority of the Court, I think, thought that section 7 was sufficient, 
but they thought that section 1 1 didn't sufficiently empower the Com- 
mission to follow the unlawful acquisition of the stock through to 
order divestiture of the assets. The minority thought it did, the cases 
went off in the Supreme Court largely on the question of a lack of 
power under section 11. 

The Chairman. Not under lack of power under section 7? 

Mr. Kelley. Not so much; no. 

The Chairman. Nevertheless it can be stated, can it not, that 
inadequate and inexpert drafting of section 7 resulted in the failure 
of Congress to make its will effective. 

Mr. Kelley. That is right, Senator. I don't think the blame is 
entirely on the courts. I think a good deal of it goes back to bad 
draftsmanship. 

Senator King. May not the drafters and Congress have accepted 
the view that the evils resulting from monopoly, from monopolistic 
practices, were developed by the acquisition of the stock, but by pur- 
chasing the assets, continuing the competing company, the danger of 
monopolistic practices was not so great, and therefore they would not 
entertain the prevention of the purchase of the assets of the corporation? 

'The Chairman. As I recall, Senator, I think that was just about the 
view that was expressed in a shoe case afterward. The court held that 
one of the competing concerns, the assets of which was acquired by the 
other, was manufacturing a different grade of shoe which would con- 
tinue to be in competition. 

Mr. Kelley. The Standard Oil consoUdation and the American 
Tobacco consoUdation and the United States Steel consoUdation were 
fresh in the minds of Congress in 1924. They wanted to stop those 



1782 CONCENTRATION OF ECONOMIC POWER 

things before they started, and I think, from the legislative history of 
the section, they thought section 7 would go a very long way in that 
direction. 

The Chairman. One of the curious things, to me, in the history of 
the passage of the Trade Commission Act and the Clayton Act, arises 
from the fact that at that titne the pubhc prints were filled with a 
discussion of the decision of the Supreme Court in the Standard Oil 
cases, in which Chief Justice White was said to have interpolated the 
word "unreasonable" into the Sherman antitrust law. The Sherman 
antitrust law forbade every contract in restraint of trade, and in the 
Standard Oil cases it was said that that meant not every contract, but 
every contract in unreasonable restraint of trade. 

Then Congress came along with the Clayton Act and forbade the 
acquisition of stock, not in every case but only in those cases in which 
the effect was to "substantially" reduce competition, thereby intro- 
ducing an undefined word, raising the necessity of the exercise of dis- 
cretion on the part of the Commission and the courts, whereas at that 
very moment there was great criticism of the Court for having inter- 
polated a similar word which requires discretionary interpretation: 
"Unreasonable." 

Mr. Kelley. That is right; and not only that, but the courts, in 
interpreting section 7, have to a large extent given the Sherman law 
test, and in that sense have been legislating themselves. 

The Chairman. It all goes to show that we are just human beings 
after all, very liable to err. 

Representative Reece. Mr. Chairman: Mr. Kelley, if these con- 
solidations had been brought about lawfully through the acquisition 
of physical assets, stocks or otherwise, can Congress now, by legisla- 
tive enactment, break up these consolidated corporations? 

Mr. Kelley. I would say no, unless you are able to do it under the 
Sherman law. I don't think Congress can pass any retroactive act 
that will unscramble these conditions. Congressman. I think it 
would be unconstitutional. 

Mr. Berge. Would you say that the effect of section 7 has been to 
cause corporation lawyers, in planning mergers, to direct the plan 
toward acquisition of assets instead of stock acquisition? That is, 
has it not had the effect of pointing out a way of accomplishing the 
purpose that perhaps wasn't so clear before? 

Mr. Kelley. It has, in practically every case, and corporation 
lawyers are well aware of the loopholes. 

Senator King. Could you call that a loophole? There is the law, 
which prohibits it. 

Mr, Kelley. I will retract the word. Senator. I will say 

Senator King. I think common experience and common interpre- 
tation of the law, regardless of lawyers, the interpretation of every 
man of sense who is running a business and had sense enough to run 
a business, would place the same interpretation upon the statute that 
you place upon it now under the decisions of the court. In other 
words, the lawyers were not the ones that evolved any line of conduct 
that might be at variance with morals or proper corwception of duty 
which a lawyer owes to his client and to the court and to the country, 
but it was generally accepted by the court and by the country, by 
•business men as well as those who were not business men, that that 
law did not forbid the acquisition of the assets. 



CONCENTRATION OF ECONOMIC POWER 17^3 

Mr. Kelley. It didn't forbid the acquisition of assets as distin- 
guished from the acquisition of stock, but I have been trying to point 
out that corporations have acquired stock in violation of law and 
after acquiring the stock in violation of law where it substantially 
lessened competition and tended to create a monopoly, evaded the 
law 

Senator King. You are putting into the^xhain a Unk which I did 
not place in the chain. 

Mr. Kelley. By acquiring assets befo^,e the Comrftission could 
act, and as I pointed out, the Supreme Court held that the extent 
of the Commission's power was to order divestiture of stock. 

Mr. Berge. I wasn't suggesting that the acquisition of assets was 
illegal under the law as framed, nor that Congress intended to make 
the acquisition of assets illegal. I was suggesting, however, by fail- 
ing to make the acquisition of assets illegal they were leaving open a 
very important way of acoomphshing the purpose. 

Mr. Kelley. That is true. 

Mr. Davis. Mr. Chairman, I wish to observe too that I think it 
will be generally admitted that when we talk about acquiring or 
think about acquiring an interest in a corporation, and certainly 
prior to the method that was employed to at least avoid the applica-, 
tion of Section 7 of the Clayton Act, we thought in terms of stock, 
of acquirement of stock in a corporation, rather than the acquire- 
ment of assets. It was almost the universal rule; any sort of a 
transaction for interest in a corporation was a transaction through 
stock, and that is what no doubt everybody had in taind and what 
the Congress contemplated when the act was passed. 

The Chairman. And in any event it is clear that the Federal Trade 
Commission is still of the opinion that the prohibition should run to 
the acquisition of assets as well as to the acquisition of stock. 

Mr. Davis. Yes; or if the act isn't so amended we may as well 
regard it as an absolute dead letter, and we would want the public 
tq- understand. All of the lawyers know now just exactly how to 
avoid the application — we will not say evade it, but how to avoid 
the application of section 7 in acquiring either all or part of the as- 
sets of a competing corporation. That is the whole picture. Of 
course, it is a matter of policy — we fully understaad that — by the 
determination of Congress as to whether this situation shall be per- 
mitted to exist and that they shall, as they have in the. past, proceed 
with mergers of competing corporations and the gradual growth of an 
industrial empire or whether an effort shall again be made to stop 
further procedure along that line. 

The Chairman. Of course the pubUc can be held only to an ob- 
servance of what Congress actually said and not to an observance of 
what Congress intended to say. 

Mr. Davjs. Oh, yes; actually literally construed, and I want to 
say this, on what Senator King is speaking to, as one member of the 
Commission; we have found no quarrel with the declaration that the 
Commission is not authorized under the act to correct a divestiture 
of assets, except this, that where it was very clearly the result of a, 
circuitous subterfuge, first the violation of the act and then during 
the time that they are being investigated or perhaps tried, they get 
a second hold and oust the jurisdiction and the order of the Com- 
mission, when if it had been in the courts the doctrine of lis pendens- 



1784 CONCENTRATION OF ECONOMIC POWER 

w^ould undoubtedly have applied. We say the court could look 
through that and say that was unwarranted or a subterfuge to evade 
the jurisdiction of the court — I mean of the Commission. 

Mr. Frank. Mr. Kelley, it has been said by a legal historian that 
the statute of uses had no other effect than -to add three words to a 
conveyance; that has been in effect the history of section 7 of the 
Clayton Act. It has meant merely a little more paper work for the 
lawyers? 

Mr. Kelley. That is all. It has been a good business for the 
lawyers. 

A statement more in detail with reference to section 7 of the Clayton 
Act is to be found in part II, subdivisions (a) and (b) of the report 
of the Commission, which has already been filed with this honorable 
committee. 

Subdivision (a) embraces those situations in which the Commission 
issued complaints charging violation of law. Subdivision (b) deals 
with matters in which investigation was made but in which complaint 
did not issue. In a number of these cases investigated by the Com- 
mission in which for one reason or another they did not issue com- 
plaint, there were 28 of them where the Commission found, that there 
was an outright purchase of physical assets, the companies probably 
preferred to surmount the practical difficulties of such a method of 
acquisition to the uncertainties of a stock acquisition possibly in 
violation of section 7. 

It has been my purpose in testifying before this Committee to 
briefly give an account of the efforts of the Commission to enforce 
section 7 of the Clayton Act and to develop rather simply the obstacles 
and difficulties encountered. By this narration of facts, I have 
attempted to show that section 7 has failed of its original purpose, 
principally because means not violative of the letter of the statute 
have been found to circumvent it. 

I have proceeded on the premise that section 7 of the Clayton Act 
was intended to prevent concentration and control over the various 
lines of commerce and industry and that it was designed to forestall 
acts and tendencies in this direction which Congress considered to 
be inimical to the public welfare. 

In expressing the conclusion that section 7 as it has been construed 
as it now stands is susceptible of easy evasion and is ineffective in 
enforcing the public policy laid down by Congress, I do so without 
any intention or desire to criticize. It is rather to call attention to 
factors which have prevented the attainment of the original objective 
of this legislation. 

I have merely tried to bring out the fact that the policy laid down 
.by the Congress in 1914 with reference to court combinations has 
been rendered ineffective for the reasons which I have outlined. 

Mr. Frank. Mr. Kelley, you answered a question directed to you 
by Congressman Reece to the effect that where these mergers have 
occurred not in violation of the statute as construed by the Supreme 
Court, Congress could not now undo the mergers or consolidations, 
and the like. Assuming that to be true — and I don't know whether 
it is true, frankly — then does not the so-called problem of monopoly, 
insofar as it is now existent as a result of those mergers and consoli- 
dations, become one, so far as any possible future legislation is con- 
cerned, rather of trying to bring about proper economic and socially 



CONCENTRATION OF ECONOMIC POWER 17g5 

desirable use of the powers thus obtained than of now talking about 
V. hat might have been done by Congress and what was not done by 
Congress? 

Mr. Kelley. Well, to a large extent I think that is true, Mr. Com- 
missioner. It presents a very serious problem for this committee. 
On the other hand, tliinking about the future, unless legislation is 
enacted we will have a repetition of the history of consolidation. 

Mr. Frank. Yes, but what I am getting at is that it is certainly 
true that over a large area of American industry those combinations 
and consolidations are already in existence. Now if it be true — I 
don't laiow that it is, I just have no opinion on the subject — that 
Congress now lacks the power to disintegrate those integrations, then 
is not the problem confronting this committee one of how those in- 
tegrations may be made to be socially useful, assuming that in any 
particular instances they are not now so? 

Mr. Kelley. I think so. 

Representative Reece. If Congress should now conclude that 
these acts by which the consolidations or mergers were brought about 
greatly affected the public interest, and thereby undertake to enact 
legislation controlling them or requiring them to be broken up, as was 
done in the case of the Holding Company Act, let us say, is it possible, 
do you think, that they might be gotten at in that way? 

Mr. Kelley. WeU, Mr. Congressman, there may be a number of 
consolidations that were formed or accomplished in violation of the 
Sherman law. Of course, if so, they could be reached under the 
Sherman law. As to how far Congress can go in ordering a restoration 
of properties that have been merged, I wouldn't want to say. The 
act may be retroactive, you know, in that regard. 

The Chairman. That reminds us of the old simile of trying to 
unscramble the scrambled egg. 

Senator King. Fortunately, though, Congress isn't omnipotent, so 
that it may not superimpose its judgment in violation of the rights 
of individuals under the Constitution. 

The Chairman. Absolutely correct. 

Senator King. Some people seem to get the idea that the legisla- 
tive branch of the Government is all powerful, it may say that black 
is white and thereby it becomes white. I don't accept that philosophy. 

Mr. Kelley. I don't either. Senator. 

The Chairman. Are there any other questions to be asked of Mr. 
KeUey? 

Mr. O'Connell. Mr. Kelley, you may remember that yesterday I 
asked you whether under section 6 of the Clayton Act which authorizes 
the Comniission, as I recall it, to require annual special and other 
types of reports from corporations, the word "corporations" as used 
in section 6 was broad enough to include trade associations.^ My 
question was inspired by quite a bit of discussion that had been had 
as to trade associations prior to my question. 

Mr. Kelley. I don't know that I would Uke to answer that question 
except to talk out loud. 
, The Chairman. In other words, you want to answer it and yet not 
be committed. 

Mr. Kelley. Section 6 says that the Commission shall also have 
power to require corporations to do certain things. Now, a corporar 
tion has a definite and precise meaning in our law, and I don't think 
that a corporation would include an unincorporated trade association. 



1786 CONCENTRATION OF ECONOMIC POWER 

Mr. O'CoNNELL, Well, Mr. Kelley, I should like to straighten that 
out because section 4 of the Clayton Act defines the word "corporation" 
as including among other things an association incorporated or unin- 
corporated which is organized to carry on business for its own profit 
or that of its members. 

Mr. Kelley. Section 4 of what? 

Mr. O'CoNNELL. Section 4 of the Federal Trade Commission Act. 
I beg your pardon. Section 6 about which we were speaking was also 
the Federal Trade Commission Act. So that the definition of a cor- 
poration includes unincorporated associations. The reason I was 
raising the question was I didn't want the record to make it appear 
definitely that a trade association or other unincorporated association 
was not within the meaning of section 6 (b) of the Federal Trade 
Commission Act because, having heard as much as we have, during 
the recent hearings about regulation and registration of trade associa- 
tions and that sort of thing, it seems to me that sooner or later the 
question might come up as to whether or not the Federal Trade Com- 
mission does not have under the existing law of section 6 (b) of the 
Federal Trade Commission Act authority to require reports from 
trade associations. 

Mr. Kelley. Well, I had forgotten the original Federal Trade Com- 
mission Act didn't define a corporation, and I recall at one time we 
issued a complaint under section 7 of the Clayton Act against the 
Massachusetts trust. It so happened that Chief Justice Hughes was 
then in private practice and represented the corporation, which was 
the Standard Oil Co. of New York, and he argued, and I think cor- 
rectly, and he did successfully, that it being a Massachusetts trust it 
wasn't a corporation within the meaning of the act, and we always 
had that in mind, and when the Congress came to. pass the Wheeler- 
Lea Act, we had them define corporation so that corporation now 
includes, as you just mentioned, associations. 

Mr. O'CoNNELL. What I was more interested in was the general 
question as to what the Commission had done or to what extent it 
had used the power which was conferred to it under section 6 of the 
Federal Trade Commission Act. Do you happen to know in general? 

Mr. Kelley. I can generally, but Dr. Walker can answer better 
than I can. That power was used almost altogether by the Commis- 
sion in connection with these investigations of industry pursuant to 
resolutions of Congress. 

The Chairman. Am I correct in assuming that section 6 is a sort 
of a carry-over from the old statute by which the Bureau of Corpora- 
tions was originally established? 

^ Mr. Kelley. Yes, you are correct, Senator; but in addition sec- 
tion 6 

The Chairman. Of course, it has been amended. 

Mr. Kelley, Amended and given some very definite and broad 
powers. 

The Chairman. The Wheeler Act, which is an enactment of only 
last year, is the one which has broadened the power of the Commission 
to investigate Massachusetts trusts and associations so that it is a 
jurisdiction not yet a year old for the Federal Trade Commission to 
check up on trade associations. 

Mr. Kelley. Judge Davis may help me out on this, but the Corn- 
mission has used section 6 a great deal and does use it constantly in 



CONCENTRATION OF ECONOMIC POWER lygy 

connection with its general investigations, but in connection with its 
work under section 5 dealing with law violations it has used section 6 
but little. There was no occasion for it. 

Representative Reece. Mr. Chairman, unfortunately I was absent 
during part of your presentation, but I am wondering if you touched 
upon section 8, as to whether it is meeting the situation at present. 

Mr. Kelley. No; I didn't. If the committee likes, I would like 
to touch on it for a few minutes. Before I leave Mr. O'Connell,. I do 
think that section 6 in that regard furnishes the Commission con- 
siderable power in that it can do what you just referred to with respect 
to requiring trade associations to file with the Commission informa- 
tion and reports. 

Mr. Davis. Mr. Chairman, in that connection, and this is ap- 
parently something that Mr. O'Connell has in mind, it has been 
suggested by many and it has been seriously considered by the Com- 
mission several times as to the advisability of calling for quarterly 
or semiannual or annual reports from various members of industry in 
order to receive and assemble^ and disseminate information of general 
interest to members of the industry as well as the general public. 
That matter has been submitted to the Budget more than once, as to 
whether or not they would approve an appropriation sufficient for 
the Commission to enter upon that work because, as you doubtless 
understand, Mr. O'Connell, that would require a very considerable 
force of employees and a very considerable expenditure of money to 
engage in that work extensively enough to be generally useful, and 
the Commission, having no appropriation to approve that particular 
work, can't enter on it without an appropriation for that purpose, 
which has not been made. 

Mr. O'Connell. Just to make my idea clear, I understood that 
something was said yesterday that indicated that section 6 of the 
Federal Trade Commission Act was not suflBciently broad to include 
trade associations, and I merely raised the question todaj^ to verify 
my understanding that the section with the definition was m all prob- 
ability broad enough, and I didn't intend to indicate anything further 
than that. The thing that called for my first question, I will say, is 
that the President's message, as I recall it, included some recommen- 
dation as to a Bureau of Industrial Economics to have some function 
along the lines that Commissioner Davis has indicated with regard 
to the activities of industry to trade associations, to the collection of 
statistics, and so forth, and I didn't want the record to indicate some- 
thing other than what is the fact as to what section 6 (b) means. 
That is all I had in mind. 

Senator King. Mr. Chairman, before we leave, before the Judge 
leaves the stand, I would like to make a suggestion or make an in- 
quiry. There has been considerable discussion among some officials 
of the Government, and that was particularly true of our deceased 
friend, Mr. Oliphant, and others, of the propriety, if possible, of de- 
vising some plan under the terms of which there might be provision 
made for declaratory judgments. 

You win recall. Judge, that we passed through Congress a provision 
whereby imder controversies in judicial proceedings, in controversies 
between two individuals, declaratory judgments may bo obtained. 
Recently a bUl which I had the honor to introduce passed Congress, 
under the terms of which you may obtain what is in effect a declaratory 



1788 CONCENTRATION OF ECONOMIC POWER 

judgment with respect to the duties you are compelled to pay upon 
imported articles. 

When the question was under consideration for the continuance of 
the life of the Reconstruction Finance Corporation, the matter was 
brought to the attention of the President and Mr. Richberg and others, 
as to whether or not some authority might not be given to the Federal 
Trade Commission to aid business and to aid persons in legitimate 
efforts to square their couduct with morals and with the law, to pre- 
pare and define or pass a law providing for what would be a declara- 
tory judgment with respect to the validity of contemplated acts by 
individuals or corporations in business. 

I was wondering if that matter has received the attention, inform- 
ally, of the Commission or of you. I am not asking for the conclusions 
which have been reached, but whether it has received any attention. 

Mr. Kelley. It has received our informal attention. We have 
talked it over a number of times. 

Senator King. Before the hearings are concluded, if it meets with 
views of my colleagues upon the committee here, I hope that we may 
explore that matter a little further, because I am sure that that was 
in the mind of President Wilson when he recommended the Clayton' 
Act and the act under which your organization is proceeding. He 
wanted some place that business, honest businessmen, might resort to 
to ascertain whether their conduct of their business, and that in the 
future,, would square with the law or square with the highest degree 
of morality. 

Mr. Keh,ey. I think it is accurate to say, Senator, that President 
Woodrow Wilson had it in mind when he made the message to the 
Congress, but the Congress, after long — several months'— study and 
deliberation, didn't adopt that view. 

Mr. Frank. Haven't there been statutes enacted since that time 
which do provide for something of that kind in other fields? 

Mr. Kelley. Yes; somewhat similar. Those were cases of actual 
controversy, though. I don't want to get into that subject today. 

Senator King. I just introduced it with the hope that we might get 
into it. 

Mr. Davis. I would state that if the committee desires to do so, we 
would be very glad, before the conclusion of the hearing, to undertake 
to submit some material that may be helpful to the committee, but in 
passing I think we may as well understand that it involves a grave 
constitutional question. 

Mr. Frank. Just to clarify the situation, Mr. Kelley and Judge 
Davis, I did not have in mind The Declaratory Judgment Ad. Perhaps 
the words "declaratory judgment" in tliis context involve the use of a 
popular term rather than words of art. I had in mind administrative 
determinations upon which persons could rely, and my suggestion was, 
and I think I am correct, that Congress has, since the enactment of 
the statutes under which you are operating, enacted other statutes 
which do provide for advance administrative determinations upon 
which the citizen may rely — in some cases after notice and opportunity 
to be heard by all "persons interested and in some cases not — and I 
would suggest, Judge Davis, if the Federal Trade Connnission con- 
templates bringing before this committee a discussion of that subject, 
it might be well to collate what has been done under those other 
administrative statutes to which I have referred. 



CONCENTRATION OF ECONOMIC POWER 17g9 

Senator King. When I used the words "declaratory judgment" 
I had in mind what my friend has so clearly expressed now, and the 
bill to which I referred is one under the terms of which you may now 
obtain an administrative ruling with respect to imports and the duties 
which you would be expected to pay, which would be binding upon 
the government, and that has resulted in saving large sums of money 
in htigation which would have been involved under the old procedure. 

Mr. Frank. Of course, such administrative action would not come 
under the section of the Constitution relating to controversies in 
judicial tribunals and therefore I doubt whether any constitutional 
question could be raised with respect thereto. 

The Chairman. This matter, like every other matter, of course, is 
susceptible of various interpretations, particularly when we try to 
appraise what was meant by our predecessors. I have before me the 
message which President Wilson read to a joint session of Congress in 
January 1914. It is particularly interesting because he stated so well 
what I conceive to be the general purpose of this commit te. He said: 

We are now about to give expression to the best business judgment of America, 
to what we know to be the business conscience and the honor of the land. The 
Government and businessmen are ready to meet each other half way in a common 
effort to square business methods with both public opinion and the law. The 
best informed men of the business world condemn the methods and processes and 
consequences of monopoly as we condemn them; and the instinctive judgment of 
the vast majority of businessmen everywhere goes with- them. We shall now be 
their spokesmen. That is the strength of our position and the sure prophecy 
of what will ensue when our reasonable work is done. 

Then, reaching the subject to which Senator King alluded a moment 
ago, he said: 

And the businessm^en of the country desire something more than that the menace of 
legal process in these matters be made explicit and intelligible. They desire the 
advice, the definite guidance and information which can be supplied by an adminis- 
trative body, an interstate trade commission. 

Then he went on to explain his own meaning, saying: 

The opinion of the country would instantly approve of such a commission. 
It would not wish to see it empowered to make terms with monopoly or in any 
sort to assume control of business, as if the Government made itself responsible. 

And I think in that statement he drew the distinction which is in 
the minds of many who are very fearful of granting to any Govern- 
ment commission the power, the discretionary power, to say to A. 
B, and Q "You may combine; you may do thus and so," and to E. F, 
and G, "You may not." 

Mr. Davis. Mr. Chairman, in connection with tJie matter under 
discussion I think it proper to state that the Federal Trade Commission 
has what might be termed daily callers on the part of members of 
business and members of the legal profession who want to discuss their 
problems. There are always trained, experienced members of our 
staff, some of whom are appearing before you and others of whom are 
chiefs of different divisions and expert in the subjects, who are always 
ready to talk with them informally. It is done constantly. We 
have the Trade Practice Board, for mstance, and chief counsel, chief 
examiner, and all of those, and of course they are told that it is in- 
formal, and a member of our staif doesn't undertake to give an opinion 
upon a doubtful or controversial subject; but where it is clear, where 
the answer is possible without incurring any great risk, it is given to 



;[790 CONCENTRATION OF ECONOMIC POWER 

them, and most of them go away satisfied. But the fellows who 
complain, who go away dissatisfied, are the ones who want the Federal 
Trade Commission to give thfem the green light to rim straight through 
the law and to fix prices and curtail production. That is what it 
always resolves itself down to on the part of those who are persistent 
in obtaining an advisory opinion . and it is a matter of common knowl- 
edge — any of them in the Department of Justice can tell you that their 
experience has been the same — that if some prior official in a depart- 
ment upon an ex parte statement of facts, which can never be full and 
complete and really ever take into consideration what other affected 
people might say or what the injurious effects might be, undertakes to 
tell them that that is all right, "You can do business along that line 
and be within the law," they will tell you that it has invariably con- 
fronted them in a way that made it practically impossible to enforce 
the law. 

A similar subject was being considered by a House committee when 
r happened to be a humble Member of that House, and then At- 
torney General Mitchell appeared before the committee and he 
objected to the proposal by which authority was to be vested in the 
Attorney General or any other person, and he said he knew of no 
instance where anybody under the guise d'f governmental authority 
had told anybody that they could do thus and so, and if a man was 
then indicted in the courts for doing that, or something which a jury 
could be made to believe was tantamount to it, there was simply no 
chance of conviction. 

Mr. Frank. Isn't thpre a distinction, Judge Davis, between such 
an ex parte presentation as you have referred to and a totally different 
device where, upon full notice and hearing and opportunity for all 
persons in the indystry or representing the public or in any manner 
interested to appear and present evidence, an administrative tribunal 
in such circumstances would be vested with the power to say to' the 
citizen, "Upon the basis of the facts as you set them forth you may 
proceed lawfully. If, however, you deviate from the pattern of con- 
duct set forth, then you wUl not be within the terms of this adminis- 
trating ruling." 

Now with an exploration of that kind at a public hearing, after the 
fullest kind of investigation of all the facts, such an investigation as 
the Federal Trade Commission now conducts with reference to sus- 
pected violations of law, would not the difficulties to which you have 
referred, of informal, casual, ex parte determinations disappear? 

Mr. Davis. Well, now, in the case of members of industry or a 
member of industry on one side, and nobody except the public-on the 
other, which is generally the case in the case of monopolistic or re- 
straint cases, how often do representatives of the public appear, even 
if you give notice to the world? How often do they appear, especially 
people who are familiar enough with the situation or who could, no 
matter how much they desired, present the other side and present 
the pitfalls? 

Mr. Frank. Well, the Commission staff itself is frequently fully 
familiar, or can make itself fully familiar, with all the detailed facts 
as to the industry. 

I don't want to make the ears of the Commission bum, but I think 
their accomplishments are well known and no one has ever ventured 



CONCENTRATION OF ECONOMIC POWER 1791 

to say that when they examine into the practices of an industry they 
do not know virtually everything that there is to be known. If that 
can be done after the fact, why can it not be done before the fact and 
why could not a problem be presented as to whether proposed conduct 
would be within the terms of the statute? 

Of course there are those instances which you have referred to, 
where the answer is so obviously "yes" or so obviously "no" that no 
one could have any doubt, but may there not be circumstances where 
there is doubt, where it would be well, in the interest of expediting- 
industry, in which we are all interested, to allow the citizen to act 
with knowledge that he is not violating the law? 

I know from my personal experience as a lawyer it is extremely 
difficult in some instances to advise a client as to whether he will be 
violating the law, and if in uncertainty, he will of course, if he is well 
advised as to his own welfare, refuse to act, and may that not be in 
many instances an undesirable impediment to the advancement of 
industry? 

Mr. Davis. I can readily see why it would be a most desirable 
thing if we could all look into the future and see these things, but the 
Federal Trade Commission invariably makes a full, careful, unbiased 
investigation in the first instance before it ever issues a complaint. 

Mr. Frank. That isn't my point. Judge Davis. I am not in any 
manner criticizing the Trade Commission. I gravely doubt whether 
the Commission, has the power to advise in the manner that I have 
indicated. 

Mr. Davis. Of course it hasn't. 

Mr. Frank. But what I am suggesting is, should not this committee 
consider whether it wouldn't be advisable to recommend to Congress 
that there be enacted legislation by which, after notice of hearing and 
full investigation by the Commission, the Commission should be 
empowered to advise businessmen whether or no they may proceed 
as not in violation of the statutes which are under the jurisdiction of 
the Commission? 

Mr. Davis. Do you think that the Federal Trade Commission 
should be vested with authority which Congress can vest in no court? 

Mr. Frank. There are many powers vested in administrative 
bodies which Congress can invest in no court. I can point to the- 
daily conduct of the Commission on wliich I happen at the moment 
to be serving. We have powers that could not constitutionally be 
vested in any court. The Bureau of Internal Revenue I think to a 
limited extent — my colleague ' here can advise better than I can — 
already is given the power to make such advance determinations.. 
No Federal court, except perhaps courts in the District of Columbian- 
could make them because the constitutional provision prohibits such 
judicial adjudications in the absence of a case or controversy. So it 
isn't a constitutional question, it is a question of expediency^ of pohcy,. 
of desirability — a policy as I have suggested that has already been 
adopted in certain instances by Congress in other fields. 

Mr. Davis. We would be very glad to have you or anyone else, 
Commissioner Frank, submit any Supreme Court decisions which 
will indicate that the Federal Trade Commission or any other tribunal 
can be clothed with authority by the Congress to pass upon any 

» Refers to Mr. Joseph J. O'Oonnell, Jr., member of the Committee representing the Treasury Depart- 
ment. 



1792 CONCENTRATION OF ECONOMIC POWER 

matter, and their decision be binding, that does not involve an actual 
controversy or a case. 

_Mr. Frank. I wouldn't presume to do so, but I. would like to refer 
to several writings which might be incorporated in the record by our 
honored and deceased colleague, Mr. Ohphant. He was very much 
interested in that subject and he wrote an article in the American 
Bar Association Journal about 3 years ago. 

Senator King. The two matters to which I am about to call atten- 
tion may not be in line with the views just suggested by Judge Davis, 
but it seems to me there is a sort of analogy between the two cases 
to which I am about to refer. The Judge knows that we have laws 
respecting tariff duties. 

Recently the followers of a certain pastor in Pennsylvania built a 
church and it was desired by .the members of the church to have rich 
vestments from Holland. They applied to the representative of the 
Treasury Department as to the tariff duty and were told that it was, 
as I recall, $12,000. Thereupon they purchased these vestments to 
place in their church and when they were brought to the United 
States, the duty imposed was $20,000. Well, it Seemed to me when 
that was brought to my attention, that was so unfair and so unjust 
that I, in conference with Mr. Oliphant drafted a bill under the terms 
of which persons desiring to import commodities may furnish the 
Treasury Department with full and complete knowledge, hearing 
may be had if desired, and thereupon after that presentation the 
Department may make a ruling as to the tariff duty which will be 
exacted. Then the purchases are m.ade abroad. In the meantime, 
the importer makes his contacts with persons in the United States 
who desire those commodities and he makes his 'commitments based 
upon the tariff which he is expected to pay, and under the terms of 
that act the Government may not renege, to use the language of the 
street; it is bound by its decision, and the result has been .very satis- 
factory. It has encouraged imports and it has avoided litigation. 

Now we have a committee set up by the Senate and by the House, 
a joint committee on internal revenue tax, and when controversies 
arise regarding refunds, they are referred to this committee and our 
decision is a finality. We are an administrative body in a sense, 
and yet we make that decision and the Government is bound, and of 
course the taxpayer is bound. 

Mr. Frank. Mr. Chairman, I want to withdraw the suggestion I 
made about incorporating Mr. Oliphant's study in the record, for I 
have been advised by jVIr. Henderson that the Treasury Department 
is making a study of the pros and cons of the entire question as to' 
determinations of that character. 

The Chairman. Yes; that is a question wliich is under considera- 
tion and which may be presented at the proper time, when it may be 
fully examined from both sides. 

If there is no objection on the part of any member of the committee, 
I shall ask leave to print in the record at this point, at the conclusion 
of Mr, Kelley's remarks today, the address of President Wilson to 
the Congress in January 1914. It seems to be altogether germane to 
the subject of our discussion during the past few days. 

(The address of President Wilson was marked "Exhibit No. 309" 
and is included in the appendix on p. 2174.) 



CONCENTRATION OF ECONOMIC POWDER 1793 

The Chairman. Mr. Kelley, it is now 10 minutes after 4. You 
were requested by one of the members to discuss Section 8, I beUeve. 
I have another meeting this afternoon and if you would be good 
enough to take that up in the morning, would it be convenient for you? 

Mr. Kelley. Yes, I will be glad to. I will use only a few minutes, 
but I wiU be glad to. 

The Chairman. I didn't know how long you wanted to take. 

Mr. Kelley. It may take 15 or 20 minutes. 

The Chairman. Then I would prefer to have the matter go over 
until tomorrow.^ 

The committee then will stand in recess until 10 o'clock tomorrow 
morning. 

(Whereupon, at 4:10 p. m., a recess was taken until Friday, Mar. 3, 
1939, at 10 a. m.) 

1 Mr. Kelley's testimony on section 8 appears infra, p. 1813 et seq. 



124491— 39— pt. 5 11 



INVESTIGATION OF CONCENTRATION OF ECONOMIC POWER 



FRIDAY, MARCH 3, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:30 a. m., pursuant to adjournment on 
Thursday, March 2, 1939, in the Caucus Room, Senate Office Building, 
Senator Joseph C, O'Mahoney, presiding. 

Present: Senators O'Mahoney (chairman) and King; Representa- 
tives Reece and Williams; Messrs. Thorp, Henderson, Davis, Berge, 
O'Connell, Frank, Hinrichs, J. B. Wyckoff, representing Department 
of Commerce, and Edwin Martin, representing Department of Labor. 

Present also: Federal Trade Commissioners William A. Ayres and 
Charles H. March; Willis J. Ballinger, director of studies and econoijiic 
adviser. Federal Trade Commission ; William T. Kelley, Chief Coun- 
sel; Joseph E. Sheehy, Assistant Chief Examiner; Col. William T. 
Chantland, Dr. Robert B. Dawkins, Pgad B. Morehouse, attorneys; 
Dr. George A. Stephens, Chief Statistician; Dr. Francis Walker, 
Chief Economist; Col, William H. England, Assistant Chief Economist. 

The Chairman, The committee will please come to order. 

It had been our plan to have Mr. Kelley proceed this m'Qtning to 
respond to an inquiry that was made yesterday afternoon by Congress- 
man Reece, In the absence of the Congressman, who is necessarily 
detained, it has seemed desirable to suspend Mr. Kelley 's response, and 
we shall proceed, therefore, with the next witness, and at the con- 
clusion of his testimony, if Congressman Reece has arrived we will 
recall Mr. KeUey to the stand to discuss section 8. 

Who is the next witness, Mr. Ballinger? 

Mr. Ballinger. The next witness is Mr. Joseph Sheehy, Assistant 
Chief Examiner of the Commission. Mr. Sheehy will discuss the 
monopolistic practices uncovered by the investigations authorized by 
Congress in the last 7 years. 

The Chairman. Do you want him sworn, Mr. BaUinger? 

Mr. Ballinger. Yes. 

The Chairman. Do you solemnly swear the testimony you are 
about to give in this proceeding shall be the truth, the whole truth, 
and nothing but the truth, so help you God? 

Mr. Sheehy, I do. 

TESTIMONY OF JOSEPH SHEEHY, ASSISTANT CHIEF EXAMINER, 
FEDERAL TRADE COMMISSION, WASHINGTON, D. C. 

Mr. Ballinger. State your name for the record . 
Mr. Sheehy. Joseph E. Sheehy, Assistant Chief Examiner, 
Mr. Ballinger. How long have you been with the Federal Trade 
Commission? 

1795 



1796 CONCENTRATION OF ECONOMIC POWER 

Mr. Sheehy. I have been with thE Federal Trade Commission since 
January 1925. 

Mr. Ballinger. Any further questions, Mr. Chairman? 

The Chairman. You are a lawyer? 

Mr. Sheehy. Yes, sir. 

The Chairman. Appointed to the law staff at that time? 

Mr. Sheehy. I was appointed as attorney-examiner in the investi- 
gation. 

The Chairman. What is your position now? 

Mr. Sheehy. Assistant Chief Examiner. 

The Chairman. You have been with the Federal Trade Commis- 
sion for approximately 14 years? 

Mr. Sheehy. That is correct, sir. 

section 6 OF THE FEDERAL TRADE COMMISSION ACT 

Mr. Sheehy. Among the powers granted tc- the Federal Trade 
Commission under section 6 of its organic act are tne following: 

1. To gather and compile information concerning, and to investi- 
gate from time to time, the organization, business conduct, practices, 
and management of any corporation engaged .in commerce except in 
banks and common carriers subject to the act to regulate commerce, 
and its relation to other corporations and to individuals, and associa- 
tions, and partnerships. 

2. Whenever a final decree has been entered against any defendant 
corporation in any suit brought by the United States, to prevent and 
restrain any violation of the Antitrust Act, to make investigation upon 
its own initiative of the manner in which the decree has been or is 
being carried out, and upon the application of the Attorney General, 
it shall be its duty to make such investigation. It shall transmit to the 
Attorney General a report embodying its findings and recommenda- 
tions as a result of any such investigation, and the report shall be 
made pubHc in the discretion of the Commission. 

3. Upon the direction of the President or either House of Congress, 
to investigate and report the facts relating to any alleged violations of 
the antitrust acts by any corporation. 

Under the authority of this section the Federal Trade Commission 
has conducted more than 100 general inquiries or studies. Most of 
these were made in pursuance of Congressional resolution, although 
many have been conducted pursuant to Presidential orders, at the 
request of the Attorney General, or on the Commission's initiative. 

Many of these inquiries have supplied valuable information bearing 
on competitive conditions and trends in interstate trade and industrial 
development, and have shown the need for and wisdom of legislative or 
other corrective action. 

Copies of several of these reports will be submitted as exhibits. 
They have been summarized briefly in the report already filed with 
this committee yesterday. 

At this time we desire to present brief summaries of a few reports 
covering important investigations made by the Federal Trade Com- 
mission in response to the direction of the Congress. The 'first of these 
deals with the Commission's report on chain stores, and will be pre- 
sented by Dr. Francis Walker, Chief Economist of the Federal Trade 
Commission. Dr. Walker. 



CONCENTRATION OF ECONOMIC POWER I797 

The Chairman. Do you solemnly swear the testimony you are 
about to give will be the truth, the whole truth and nothing but the 
truth, so help 3'^ou God? 

Dr. Walker. I do. 

TESTIMONY OF DR. FEANCIS WALKER, CHIEF ECONOMIST, 
FEDERAL TRADE COMMISSION, WASHINGTON, D. C. 

Mr. Ballinger. State your name for the record. 

Dr. Walker. Francis Walker, 

Mr. Ballinger. What is your present position on the Federal 
Trade Commission? 

Dr. Walker. Chief economist, 

Mr. Ballinger. How long have you been chief economist with the 
Federal Trade Commission? 

Dr. Walker. Since the organization of the Commission. 

Mr. Ballinger. You had general supervision of the chain-store 
inquiry? 

Dr. Walker. Yes. 

The Chairman. Were you not in the service of the Government 
before the Federal Trade Commission was established? 

Dr. Walker, Yes, sir; I was with the Bureau of Corporations. 

The Chairman. And how long had you been with that Bureau? 

Dr. Walker. I entered the service on March 1, 1904. 

The Chairman. Were you a civil-service employee at the beginning? 

Dr. Walker. I was by exception of the President. I was the 
Deputy Commissioner when the Bureau bf Corporations was incor- 
porated in the Federal Trade Commission. 

The Chairman. Your service, Dr. Walker, exceeds that of most 
Members of Congress. 

You may proceed, please. 

CHAIN store study 

Dr, Walker. The study I am to report on deals with the chain 
stores, and a short statement has been prepared regarding it which I 
will read. 

On May 12, 1928, the United States Senate, through Senate Resolu- 
tion No. 224, Seventieth Congress, first session, directed that the 
Federal Trade Commission to — 

undertake an inquiry into the chain-store system of marketing and distribution 
as conducted by manufacturing, wholesaling, retailing, or other types of chain 
stores and to ascertain and report to the Seriate (1) the extent to which such con- 
solidations have been effected in violation of the antitrust laws, if at all; (^) the 
extent to which consolidations or combinations of such organizations are sus- 
ceptible to regulation under the Federal Trade Commission Act or the antitrust 
laws, if at all; and (3) what legislation, if any, should be enacted for the purpose 
of regulating and controlling chain-store distribution. 

In response to this resolution a detailed investigation was made, 
which included the use of both questionnaires and field agents. The 
data procured in this manner were assembled and transmitted to the 
Senate in 33 factual reports, covering various phases of chain-store 
operation. Each of these was printed as a Senate document, 

I may state that these five volumes [pointing] comprise the reports 
referred to and contain also the final report which was issued some- 



1798 CONCENTRATION OF ECONOMIC POWER 

what later. The original 34 reports were in separate issues made as 
Tapidly as they could be prepared and, in binding the report in this 
form, the material was organized on the basis of the subject matter 
rather than in the order of chronology of issue, and I think it may be 
convenient, therefore, for the purposes of references for the com- 
mittee, to give in addition to the regular citation the order in which 
they appear, thereby making them more readily found in these 
volumes. 

The total number of pages in the report is about 2,700. The titles 
and citations are as follows 

The Chairman. Dr. Walker, in order to save your time, may I 
suggest that this list may be printed in the record at this point as 
part of your presentation and it will be unnecessary for you to read it. 

(The list of titles was marked "Exhibit No. 310" and is included in 
the appendix on p. 2177.) 

Dr. Walker. On December 14, 1934, the Commission transmitted 
to the Senate its final report on the chain-store investigation, covering 
approximately 100 printed pages, in which it summarized the facts 
and presented its conclusions and recommendations based upon the 
factual data obtained during the inquiry. 

The study indicated that the chief advantage enjoyed by the chain 
store was its lower selling prices to consumers. These were attribut- 
able to a variety of factors, chief among which were special discounts 
and allowances to chains, use of loss leaders and, in some localities, 
the more extensive use of short and less extensive use of overweighing 
by chains as compared with independents. Among other factors con- 
tributing to lower prices by the chains were less service to customers, 
lower wages in some localities, eUmination of wholesale selling expense, 
handling of private brands upon which there were wider profit margins, 
profits from wholesaling, abihty to use newspaper advertising profit- 
ably, and the advantage of being able to average the profit results 
obtained from stores in various locaHties. 

The Commission discussed, but did not recommend, certain pro- 
posals, including the graduated chain-store tax, exemption of co- 
operatives from the operation of the antitrust lews and from taxation, 
and the suggestion that manufacturers might be requested to file with 
the Commission special prices or discounts to chain stores. The Com- 
mission, in its final report on the chain-store investigation, made the 
following statement with regard to recommendations for legislation: 

If the public policy thought to have been expressed in section 7 of the Clayton 
Act is to be revived and pursued to any real accomplishment, it is obvious that 
the act requires substantial amendment. The amendments indicated under the 
circumstances fall into two categories: First, such as would make section 7 efTec- 
tive to the extent of its original intent; second, such as would extend it beyond 
its original intent in order to make it a more effective obstacle to the trend towasd 
monopoly. If the first course be adopted, it could be accomplished by an amend- 
ment of section 11 authorizing the Commission to order the divestiture of physical 
assets acquired as the result of an unlawful stock acquisition and regardless of 
whether complaint is filed before or after the assets are acquired. Such an amend- 
ment would restore to the section something of its supposed original intent and 
eflFectiveness and would but establish what a strong minority of the Supreme Court 
on several occasions have stated is already a correct interpretation of the law. 
The Commission recommends such amendment in the event its recommendation 
for amendment of section 7 is not acceptable. 

The fact that important consolidations of competing corporations have been 
consummated through acquisition of physical properties rather than stock suggests 
the second type of amendment. To the extent that acquisition or consolidation 



CONCENTRATION OF ECONOMIC POWER 17% 

of assets tends to create monopoly or substantially lessen competition it might 
logically be prohibited to the same extent that stock acquisitions and consolida- 
tions are prohibited and on the same grounds. 

Section 7 now declares that stock acquisitions are unlawful — 

where the effect of such acquisition may be to substantially lessen competition 
between the corporation whose stock is so acquired and the corporation making th$ 
acquisition, or to restrain such commerce in any section or community, or tend to 
create a monopoly of any line of commerce. 

A vital part of the section is in the words above italicized. As pre- 
viously quoted from the opinion of one of the Federal circuit courts of 
appeal — 

if competing corporations may not consolidate, it naturally follows that it will be 
difficult for one corporation ever to monopolize an indujstry. 

The Chairman. Of course, Dr. Walker, the criticism which is made 
of suggestions of this kind is cliiefly that legislation of the character 
suggested, unless very carefully drafted, might have the result of ac- 
tually hindering the growth of the coujitry. It is pointed out that 
the rapid improvement in the last 20 years of the means of comndunica- 
tion and transportation has brought the country closer together. We 
all know that not only the Nation but the world is very much smaller 
today than it was even 10 years ago. Airplanes and radio and wireless 
telephony and all of the various inventions which have marked the 
last decade have tended to do away with the geographical divisions 
so it is urged that corporations ought to be bigger to meet that, so 
there is always the difference in mere size and monopolistic practices. 
Is that a correct statement of the situation as it has been presented to 
you from time to time? 

Dr. Walker. As a personal opinion, I would say that you have 
stated the problem. As to the answer, I think opinions would be 
various, and it would require a balancing of different advantages and 
disadvantages from the procedure proposed. 

The Chairman. Business has become more and more national in 
scope, and any attempt to return business to the local boundaries that 
obtained at the time before these advantages from invention became 
available would tend to turn back the clock of economic progress, 
would it not? 

Dr. Walker. I don't see that such legislation as the Commission 
proposed would turn back the clock. It might halt and delay some 
developments that, if they were sporadic and didn't extend too far, 
might not be objectionable; it might save in some cases the construc- 
tion of new plant and facilities. 

The Chairman. Your feeling, therefore, is that the legislation should 
be directed against monopolistic practices, but should not be directed 
against normal expansion or normal growth which is the result of 
purely legitimate effort. 

Dr. Walker. Well, if you say that normal expansion, as some peo- 
ple say, is an expansion from within, then there could be no possible 
objection, but then some would question whether an expansion by 
acquiring a competitor was a normal expansion. We have examples 
in this country of very large organizations, with tremendous invest- 
ments of capital and a great volume of business, that have grown 
by themselves. 



1800 CX)NCENTRATION OF ECONOMIC POWER 

The Chairman. Of course, section 7 depends wholly upon the inter- 
pretation which is to be given by the Trade Commission or the courts 
to the phrase "substantially lessening competition." 

Dr. Walker. That is right. 

The Chairman, So that what may be a substantial lessening of 
competition in one decade may not be a lessening of competition at all 
in a succeeding cecade. 

Dr. Walker. Quite true. 

The Chairman. So that you have a changing standard which is not 
based upon any law of Congress, but is controlled solely by the dis- 
cretion of the persons who enforce the law. 

Dr. Walker. Well, it might be that you could meet the gradual 
and steady growth of the country regarding the hmitation as one that 
had reference to proportion, rather than absolute volume or quantity, 
and conditions of competition, and to that extent there would be no 
special need of a new approach by the Commission or other authority. 

The Chairman. Have you, as chief economist of the Federal Trade 
Commission, at any time suggested this rule of proportion as being 
one fhat ought to be adopted? 

Dr. Walker. I think the rule of proportion is one that has been 
very largely adopted by those who have dealt with these subjects, 
and in the actual cases before the Commission with which I have had 
only casual concern. I think most economists would apply auto- 
matically, almost, the rule of proportion, to state it crudely not in 
definite percentages, but to take account of the relative volume of the 
whole trade and the part that was proposed to be consolidated, and 
the particular circumstances, also, that might effect a particular con- 
solidation with a certain proportion, and another without. Here 
might be a concern, for example, such as was suggested by members 
of the honorable committee yesterday, where certain consolidations 
would have been economical and might quite readily, in my idea of 
the Commission's attitude under these matters, have been acquitted 
as not substantially lessening competition or being in any way against 
the public interest. 

I refer to Senator King's remark about a certain mining company 
that couldn't make any money, but if they could make a crosscut and 
save making a new shaft, they might have both worked on a profitable 
basis. 

The Chairman. That, of course, was an instance in which the pro- 
portion of the entire mining industry controlled by the two after the 
merger was infinitesimal. We are discussing, I thiiik, rather the cases 
where a substantial proportion of an industry is brought into con- 
sohdation or merger. 

Dr. Walker. I think that "substantial" is relative, and if it is 
substantial in the relative sense, then I think the Commission is 
bound by the terms of the statute, and I think broadly speaking the 
statute is a proper provision of law. 

The Chairman. The matter which you have just suggested might 
easily result in allowing one merger of A, B, and C to control, let us 
say, for the purposes of illustration, 60 percent of an industry, while 
in another industry E, F, and G would be denied the right to control 
more than 50 percent. 

Dr. Walker. I would say both would be out. 



CONCENTRATION OF ECONOMIC POWER JgQl 

The Chairman. Well, then, in your judgment, what would be the 
percentage? 

Dr. Walker. That is a matter that I think should fluctuate some- 
what. 

The Chairman. That is exactly the point that I am making. You 
are urging a fluctuating standard, not only from year to year but in 
the same year with relation to different industries. 

Dr. Walker. I will qualify that, maybe, this way: It should fluc- 
tuate ideally. Practically it may be desirable to fix it. Such sugges- 
tions have been made; for example, there is the famous suggestion of 
30 percent. I wouldn't regard any definite suggestion of that kind as 
being ideal. ' It might be practical. That depends on the necessities 
of the situation politically and economically. Under certain condi- 
tions there might be no problem in any case whatever. 

The Chairman. The reason I have asked these questions is merely 
to illustrate what I conceive to be the nubbin of this problem. I have 
always been rather inclined to believe that the most desirable rule of 
legislation is one which would definitely state, in the law, just what 
can or cannot be done so that there is no excuse for uncertainty and 
so that there may be no reason for businessmen to apply to any par- 
ticular board for permission to do this or to do that. 

Dr.*WALKER. I would Uke that better myself. 

The Chairman. I am sorry to have interrupted you so long. 

Dr. Walker. No, I think this is a more perfunctory matter. 

I just spoke of a passage in an opinion of a Federal court regarding 
section 7 of the Clayton Act which was commented on by the Federal 
Trade Commission in its final report on chain stores. It made there 
a further statement as follows: 

Unless that portion of the section be made eflfective, the remaining effects pro- 
hibited may be interpreted as substantially equivalent to those forbidden by the 
Sherman Act, though the words "may be" and "tend to create" import a different 
intention on the part of Congress which the courts have previously recognized. 
The theory that size and power alone do not constitute monopoly under the 
Sherman Act seems bound, however, to affect interpretaton of another statute 
aimed at tendency toward monopoly, on the legal doctrine of pari materia. 

The Supreme Court seems to narrow construction of the word "competition" 
between the acquiring and the acquired corporation. In International Shoe Co. v. 
Federal Trade Commission (280 U. S. 291) the Court held that the competition 
between the corporatiocs must be substantial and that the, act deals only with 
such acquisitions as probably will result in lessening competition to a substantial 
degree. This last decision may possibly be interpreted to make the effect on 
competition in general the test and not the effect on competition between the two 
corporations. The Court also, in its requirement of substantial competition, in- 
cidentally held that the competition must be actual as distinguished from poten- 
tial. However, in numerous other cases, construing laws against monopoly and 
restraint of trade, the courts have held potential competition a legitimate object 
of legislative protection. 

The Chairman. Do you conceive, Dr. Walker, that there is any 
difference between the language of section 7, which uses the phrase 
"to substantially lessen competition" and the apparent language of 
the court in this International Shoe case which from your statement 
would seem to be to lessen substantially competition. ^ 

Have I made a correct summary of the two expressions? 

Dr. Walker. I have no doubt you have. I am not quite sure that 
I understand the difference. 

The Chairman. Well, as I listened to you I was impressed by your 
statement that the Court held in the International Shoe case that the 



1802 CONCENTRATION OP ECONOMIC POWER 

act deals only with such acquisitions as probably will result in lessening^ 
competition to a substantial degree. Now I conceive that to mean 
to lessen substantial competition, whereas the actual language of the 
act is to substantially lessen competition. 

Dr. Walker. I think that the words of the act might import a 
slightly different meaning. 

The Chairman. In other words, the language which you have just 
attributed to the Court is much narrower than the actual language 
of the act, it seems to me. 

Dr. Walker. Yes; what I am reading is a part of a report of the 
Commission. 

Mr. Davis. I think "substantially" applies to both. 

Mr. Ferguson. Substantial competition and substantial lessening. 

The Chairman. I think perhaps I have been dividing the hair 
betwixt the north and the northwest. 

Dr. Walker. I think one could differ about it. 

The Chairman. The thought just occurred to me as you were pro- 
ceeding with your discussion, Dr. Walker. I won't pursue the matter. 

Dr. Walker. Several cases are cited which it may not be necessary 
to repeat here. 

The Chairman. They may be printed in the record. 

(The citations not read are as follows:) 

U. S. V. Patterson (59 Fed. 280 at 283); U. S. v. Colgate cfc Co. 
(250 U. S. 300 at 307); Aluminum Co. oj America v. F. T. C. (284 
Fed. 401 at 408); i^. T. C. v. Klesner (280 U. S. 19 at 28); F. T. C. v. 
Raladam Co. (283 U. S. 643 at 649, and 651). 

Dr. Walker. The Commission continued: 

We respectfully recommend amendments to sections 7 and 11 of the Clayton 
Act as follows: 

1. That the first two paragraphs of section 7 be amended to read: 

"That no corporation engaged in commerce shall acquire, directly or indirectly, 
the whole, or a controlling interest in the voting stock or other share capital or 
the whole of, or a major part of the assets of another corporation engaged also in 
commerce and in competition with the acquiring corporation. 

"No corporation engaged in commerce shall acquire, directly or indirectly, any 
part of the stock or other share capital or any part of the assets of another cor- 
poration engaged also in commerce where the effect of such acquisitfon may be 
to substantially lessen competition between the corporation whose stock or assets 
is so acquired and the corporation making the acquisition, or to restrain such 
commerce in any section or community or tend to create a monopoly of any line 
of commerce. 

"No corporation shall acquire, by merger, consolidation, or otherwise, directly 
or indirectly, the whole of, or a controlling interest in the voting stock or other 
share capital, or the whole of, or a major part of the assets of two or more cor- 
porations engaged also in commerce and in competition with each other. 

"That no corporation shall acquire, by merger, consolidation, or otherwise, 
directly or indirectly, any part of the stock or other share capital or any part of 
the assets of two or more corporations engaged in commerce where the effect of 
such acquisition, or of the use of such stock by the voting or granting of proxies 
or otherwise, may be to substantially lessen competition between such corporations, 
or any of them, whose stock or other share capital or assets is so acquired, or to 
restrain such commerce in any section or community or tend to create a monopoly 
of any line of commerce." 

2. That there be inserted as the fifth paragraph of section 7 the following: 
"After the issuance of a complaint charging a corporation with having violated 

the provisions of paragraphs 1, 2, 3, or 4 of this section, as amended, and prior 
to the dismissal of such complaint or the entry of an order as provided for in Section 
11 of this Act, no other corporation shall acquire from such corporation all or any 
part of the capital stock or assets charged in such complaint to have been acquired 
in violation of paragraphs Ij 2, 3, or 4 of this section as amended." 



CONCENTRATION OF ECONOMIC POWER 1803 

3. That the second paragraph of section 11 be amended by inserting in the 
twenty-first line thereof after the word "stock" the words "or assets." 

In the discussion of the legal status of special prices to chain stores by manu- 
facturers (ch. 1\', sec. 4) the uncertainties and difficulties of enforcing section 2 
of the Clayton Act were pointed out at some length. The conclusion was reached 
that most of those uncertainties and difficulties grew out of the various provisos 
which narrowed the scope of the original prohibition to an indeterminate degree. 
A .simple solution for the uncertainties and difficulties of enforcement would be 
to prohibit unfair and unjust discrimination in price and leave it to the enforce- 
ment agency, subject to review by the courts, to apply that principle to particular 
cases and situations. The soundness of and extent to which the present provisos 
would constitute valid defenses would thus become a judicial and not a legislative 
matter. 

The Commission therefore recommends that section 2 of the Clayton Act be 
amended to read as follows: 

"It shall be unlawful for any person engaged in commerce, in any transaction 
in or affecting such commerce, either directly or indirectly to discriminate unfairly 
dr unjustly in price between different purchasers of commodities, which com- 
modities are sold for use, consumption, or resale within the United States or any 
Territory thereof or the District of Columbia or any insular possession or other 
place imder the jurisdiction of the United States." 

In the discussion of the legal status of special prices to chain stores by manu- 
facturers (ch. IV, sec. 4) it was also stated that unless the price discrimination 
permitted "on account of" quantity shall make "only due allowance" therefor, 
section 2 of the Clayton Act may be readily evaded by making a small difference 
in qnnntity the occasion for a large difference in price. If the section is to have 
any vitality it must either be interpreted and enforced to that effect or it should 
be amended to that effect. 

The Commission further recommends that at the end of section 11a new para- 
graph be added to read as follows: 

"If any clause, sentence, paragraph, or part of the amendments herein contained 
to sections 2, 7, or 11 of this Act shall, for any reason, be adjudged by any court 
of competent jurisdiction to be invalid, such judgment shall not affect, impair, 
or invalidate the remainder of said separate and several amendments to said 
sections, but shall be confined in its operation to the clause, sentence, paragraph, 
or part of said separate and several amendments to said sections directly involved 
in the controversy in which such judgment shall have been rendered." 

A recommendation for amendment of the Federal Trade Commission Act 
seems essential as shown by results of the chain-storeinvestigation; namely, firsts 
that the prohibition of unfair methods of competition in section 5 of the act be 
broadened so as to include unfair or deceptive acts and practices in interstate 
commerce, and, second, so that unfair methods, acts, and practices may be reached 
when they unfairly affect interstate commerce, regardless of whether the offender 
is engaged in commerce or the acts are done in the course of commerce. 

Wherefore, we respectfully recommend that the first two paragraphs of section 
5 of the Federal Trade Commission Act be amended so as to read as follows: 

"Unfair methods of com.petition in or affecting commerce and unfair or deceptive 
acts and practices in or affecting commerce are declared unlawful. 

"The Commission is empowered and directed to prevent persons, partnerships, 
or corporations, except banks and common carriers subject to the acts to regulate 
commerce, from using unfair methods of competition in or affecting commerce 
and unfair or deceptive acts and practices in or affecting commerce." 

The Commission is giving consideration to still other amendments of its organic 
act and of other statutory provisions committed to it for enforcement, but since 
these do not grow out of the chain-store investigation as such they are reserved 
for presentation in another connection. 

That is the end of the Commission's statement for this record. 

Amendments to section 2 of the Clayton Act and section 5 of the 
Federal Trade Commission Act have already covered, in large part, 
two of these recommendations. 

Copies of the Commission's reports on chain stores, consisting of 
five volumes, are transmitted as F. T. C. exhibits 195-A to 195-E, 
inclusive. The conclusions and recommendations are contained iij. 
chapter VTI of the final report which appears in volume V. 



1804 CONCENTRATION OF ECONOMIC POWER 

The Chairman. The exhibits may be received as part of the records 
of the committed. 

(The five volumes referred to were marked "Exhibits Nos. 311 to 
315" and are on file with the committee.) 

Mr. Frank. Will they be printed, Mr. Chairman? 

The Chairman. No. 

Do any members of the committee desire to ask Dr. Walker a 
■question? 

Mr. O'CoNNELL. Is the amendment to sections 2 and 5, particu- 
larly 5, of the Federal Trade Commission Act what is generally known 
as the Robinson-Patman Act? 

Dr. Walker. The one to section 5? 

Mr. O'CoNNELL. Yes. 

Dr. Walker. The amendment to section 5 

Mr. Davis (interposing). The Wheeler-Lea amendment is gen- 
erally referred to. The Robinson-Patman Act refers to the amend- 
ment to section 2 of the Clayton Act, and also some other matters. 

Mr. O'CoNNELL. Would you say that the Robinson-Patman Act 
grew out of or at least followed the chain-store investigation made by 
the Federal Trade Commission? 

Mr. Davis. Did I understand you asked about the Robinson-Pat- 
man Act? 

'The Chairman. Did it grow out of the investigation? 

Mr. Davis. Oh, yes; I think undoubtedly that; and it followed in 
remarkably close detail the findings and the conclusions of the Com- 
mission in the case against the Goodyear Rubber & Tire Co., involv- 
ing a contract they had with Sears, Roebb k & Co. 

Prior to that there was very considerable difference of opinion as to 
the interpretation of the old section 2 of the Clayton Act which was 
directed against discrimination in price, but there had always been a 
very great controversy as to just what was meant by it. As a matter 
of fact, it probably was ambiguous, but the interpretation placed 
lipon the act by the Commission in the Goodyear case was crystalized 
into a given legislative approval by the Robinson-Patman Act. 
' Mr. O'CoNNELL. Would it be fair to say that the Robinson-Patman 
Act is an act which does not contain any particular standards for 
determining the legality, or rather the illegality of the prohibited 
practices, and that it is the position of the Commission that the deter- 
mination of the illegality of any- particular practices under that sec- 
tion is a judicial and not a legislative or administrative matter? On 
page 6 of the statement that Dr. Walker was reading there is a sen- 
tence to the effect that the soundness and the extent to which the 
present provisos would constitute valid defenses would thus become a 
judicial and not a legislative matter. I may not have made myself 
clear. What I had m mind was that it is my impression that the 
Robinson-Patman Act prohibits certain practices — price discrimina- 
tion and that sort of thing— but without expressing in detail or setting 
up any particular standards for determining whether or not a particu- 
lar ty})e of practice is discriminatory under that act; and it was also 
my impression that it is the position of the Commission that the deter- 
mination of whether or not a particular type of conduct is in violation 
of the Robinson-Patman Act is and should be purely a judicial matter 
rather than something that could be deolt with by the administrative 
agency 



CONCENTRATION OP ECONOMIC POWER 1805 

Mr. Davis. Well, in addition to the general inhibition, the Robin- 
8on-Patman Act embraces certain presumptions and certain defenses 
or justifications and, in effect, makes certain exceptions in its deter- 
minations; but in the final analysis, of course, it is for the Commission 
to determine upon the facts and circumstances and the effects in each 
case whether or not there is in a given case a violation; in other words, 
as to whether the respondent has discriminated against some of us 
customers or in favor of others with injurious effects, and if he has 
done that without one of the justifications that are provided in the 
act, why, of course, that constitutes a violation. 

It is rather fully defined in many respects but in general terms. 

The Chairman. The answer is probably confirmed in the terms of 
section 2 itself, as amended by the so-called Robinson-Patman Act. 
There we find exactly the same situation to which I was referring a 
short while ago in discussing with Dr. Walker section 7 and the lan- 
guage of section 7 which, as you will remember, was a prohibition 
against the acquisition of stock where the acquisition would tend to 
substantially lessen competition. Now that seems to be the guide 
in the Robinson-Patman Act because the Federal Trade Commission 
must find that the discrimination, the alleged discrimination, is such 
that its effect may be — 

substantially to lessen competition or tend to create a monopoly in any line of 
commerce or to injure, destroy, or prevent competition with any person who either 
grants or knowingly receives the benefit of such discrimination. 

Obviously, there is no definite standard and it imposes upon the 
Trade Commission the responsibility as well as the duty of determining 
whether or not the particular act alleged has any of the effects outlined 
in that language. That, I suppose, is what you mean by a judicial 
determination. 

Mr. O'CoNNELL. It seemed to me it also imposed a duty on the 
part of indnstry and businessmen of determining at their peril without 
any particular understanding as to what the particular type of conduct 
was that was intended to be touched by this act, what they should or 
should not do. I was merely raising the question without any inten- 
tion of pursuing it at any length as to whether it was not the fact that 
section 2 and section 7 also are rather difficult for a business man to 
understand before he does something which may subject him to prose- 
cution for having done it. 

Mr. Davis. Do you not think that it is a relatively simple matter 
for a member of industry who is thoroughly famihar with all of his 
own affairs and his ow^n customers' to know whether or not he is treat- 
ing all of his customers alike under like circumstances? Do you not 
think that is a very simple matter? 

Mr. O'CoNNELL. Even assuming that he knew all you assume, I 
do not believe it would be simple for him to know. 

Mr. Davis. Well, I will tell you, our experience has been and our 
observations are that out of the thousands of members of industry 
who have come to the Commission in order to get their bearings, the 
overwhelming percentage of them have done so and have gone away 
apparently perfectly satisfied that they know how to and have pro- 
ceeded to comply with the law. 

The Chairman. Did they receive helpful suggestions from the 
Trade Commission? 



1806 CONCENTRATION OF ECONOMIC POWER 

Mr. DAvrS. From our staff. In that connection, Senator, as it 
was a new law, the Commission took the Hberty and the responsibihty 
of establishing a committee of some of its best lawyers and economists 
and accountants who had permission to informally discuss the prob- 
lems with the innumerable members of industry who were pouring 
in there to try to get their bearings, and right in that connection, for 
several weeks, I think, the Secretary reported to us we received an 
average of 400 letters a day, maldng inquiry about the Robinson- 
Patman Act, and so forth. So we authorized this committee to be 
as helpful as they could, not to get out on a limb or in deep water, 
because it was new to everybody and in the final analysis the courts 
had their say as to interpretation and, in addition, the Department 
of Justice had concurrent jurisdiction, and we had to proceed care- 
fully and cautiously. But the point that I wish to make is this 
Although they were told that these conferences were informal, they 
were not binding on the Commission upon a subsequent trial, upon 
the actual evidence or upon the court or upon the Department of 
Justice or anybody else, yet they were the best judgment of those 
trained experts of the Commission as to what would be a proper appli- 
cation of this law in a given instance. Now, although at first there 
was a tremendous amount of confusion and a large number of lawyers 
and economists and others were writing articles and debating the 
question as to what was meant and what wasn't and what could be 
done and what couldn't be done, which still further confused the 
situation because most of them making these speeches and writing 
these articles didn't know any too much about it, and so there was a 
tremendous amount of confusion, but that finally disappeared and 
most everybody got their bearings and there has been, we think, a 
remarkable compliance on the whole on the part of industry with the 
act. They adjusted their discounts, their methods of doing business, 
and all of that, and had no serious difficulty in doing so if their pur- 
pose was to comply, but the fellows who were going away dissatisfied 
and the fellows whom you hear constantly complaining are not the 
ones who wanted to find out how to comply \vith the law, but they 
wanted to know just how near the precipice they can drive without 
falling over, or they wanted to know how they can run through the 
law and get by with it; they wanted an absolution in advance. Now 
that is our experience in the light of a tremendous amount of con- 
ferences. 

Mr. O'CoNNELL. I should hate to suggest Jbhat that group you 
speak of includes a substantial number of the business community, 
but it is entirely possible. Certainly this type of legislation anticipates 
that there will be people who are not entirely willing to live up to a 
very, let us say, high moral conduct in the business community. 
But getting away from that, I have been under the impression — ■ 
I am apparently wrong from what you say-^ — that there is still quite 
n bit of difference of opinion among various people as to what the 
various provisions of the Robinson-Patman Act mean, and it will 
probably take a series of opinions of the Supreme Court to estabhsh 
that. 

Mr. Davis. That is perfectly true — a question of interpretation of 
langimge. Therefore, .what the Commission went ahead to do was 
this: As. the facts vrere presented it issued complaints, after investi- 
gation and upon showing, in order to get an opinion, an interpretation 



CONCENTRATION OF ECONOMIC POWER 1807 

of all the various different controversial phases of the act. Different 
things were raised in order to get test cases. Those things have either 
been tried or are in course of trial; and then some of them have been 
appealed. The Supreme Court has passed upon only one, and that 
involved the brokerage section, and they affirmed the Commission. 

When these various changes that are in the bill shall have been fully 
determined it will clear up most of the questions as to which there is 
any legal or economic controversy, but until that is done, I don't 
think there is any person on earth, the Federal Trade Commission or 
anybody acting for it or anybody else, that can give a final opinion, 
because under the law the Supreme Court of the United States, or 
at least circuit courts of appeal, are the ones clothed with authority 
to give final opinions, and for the Commission to undertake, upon a 
new question, a question of first impression which has not been passed 
upon b}^ the courts, to give any dogmatic opinion except in the course 
of its procedure under the statutes, would simply be just as apt to 
mislead a member of the industry as it would to help him. 

Mr. O'CoNNELL. Judge Davis, I never had any question but what 
the law was such that it did require a decision by the circuit court of 
appeals or the Supreme Court before anyone would know what any 
particular provision of that act means. I was only wantmg to make 
clear, to my own mmd at least, that that was what the act or law 
provides. 

The Chairman. May I suggest that Mr. Kelley has had the aspect, 
for the last 3 minutes, of a man who desired to make a contribution 
to this discussion. Did I judge your look correctly, Mr. Kelley? 

Mr. Kelley. With reference to the Patman Act, it has certainly 
given the Commission Considerable thought for study, and perhaps 
business too, but the act is in various parts. Take, for instance, the 
section with respect to brokers. We have a case against A. & P., 
the Atlantic & Pacific Tea Co., now pending in court. We won one 
in the second court; we have another pending in the Richmond cir- 
cuit. Ultimately that section will go to the Supreme Court of the 
United States, and until then I don't know that we will know exactly 
where we are at. 

But there are other difficult provisions in the law. But we were 
talking here about price discrimination. Now we haven't had a case 
Teach the court on price discrimination under this Robinson-Patman 
Act, and I doubt that we will have any. I don't thuik that that is 
particularly different. I thuik there is a little difference between sec- 
tion 7 and section 2 of the Clayton Act with respect to this "sub- 
stantially lessening competition." One applies to an involuntary 
restraint and the other applies to a mutual or voluntary restraint. 
^\'he^e a man discriminates in price between two customers, Congress 
wrote into the Robinson-Patman Act and its adjudication under the 
law that if a difference in price is based upon or relatively reasonably 
related to the difference in cost of selling and service, it is all right. 
The Patman Act doesn't prohibit domg busmess on efficiency and 
service, based upon cost. 

But where a man discrimmates in price by favoritism to one, and 
that difference in. price" isn't based upon cost, efficiency of serving to 
two customers, but the price to one is in excess of the difference in 
the differes.ce of cost, |^en jiJjecomes unla\vful.if the effect may be 



1808 CONCENTRATION OF ECONOMIC POWER 

criminations in a competitive market, in the grocery line, sometimes 
a price of 1 cent or 2 cents will not only have the effect of substan- 
tially lessenging competition, but will perhaps drive the man out of 
business. 

Business itself is the only one that is informed as to the facts. It 
knows its costs; it Imows whether the differences in price are based 
upon the difference in the cost and selling and service and efficiency 
between the two customers. It is up to business to so price its goods 
that the difference reflects the differences in cost, and it is up to them 
to ascertain that if there is a difference, even though it be a few 
cents, whether that will have the effect of enriching one and unjustly 
injuring the other. 

So I say that the problem with administering section 2 is not the 
law. I don't know how Congress, on that particular section, could 
have improved the section. The difficulty is inherently in ascertain- 
ing all of the ficts so that the Commission can properly apply the 
section. 

The Chairman. Perhaps it would clarify the discussion if I were 
to ask you, Mr. Kelley, if in your opinion it would be possible for a 
manufacturer, without intending to make a discrimination against 
any of his" customers, nevertheless to make such a change of prices 
as would, in the opinion of the Federal Trade Commission in enforcing 
the Robinson-Patman Act, be a discrimination. 

Mr. Kelley. Yes; that has happened now and again, and fre- 
quently in most cases, after we have an informal conference and go 
over the whole matter, they go back home and adjust their discpunts 

or prices. I don't see ^ - 

The Chairman (interposing). That, of course, raises the question, 
to what extent these informal discussions of which you speak should 
be recognized or should be standardized in law. It comes back to 
the whole discussion which was undertaken yesterday afternoon with 
respect to the advisability or in advisability of what is called a declara- 
tory^ judgments act with respect to the mterpretation of a law which 
uses language which might be characterized as vague rather than 
explicit. 

Mr. Kelley. The difficulty with that, as applied generally, is that 
the public interest is to be protected, and you can only protect the 
public interest by knowing what are the true facts, and you don't get 
the true facts from ex parte visitors or interested visitors. We can 
listen to them and we can take what they have to say, but we have to 
find out what are the true facts and how thev affect the public, and 
from experience we have found that we can on „■ do that by dihgently 
ascertaining them ourselves, and we cannot rely on making rulings 
on any such propositions as stated to us. And in these informal 
conferences there is no opinion on our part given. 

'The Chairman. Well, in your opinion, Mr. Kelley, based upon 
your long experience as a member of the law staff of the Federal 
Trade Commission, is it possible to define clearly, in understandable 
language, the unfair trade practices and the deceptive methods of 
competition which ought to be condemned? 

Mr. Kelley. Senator, that needs considerable explanation. It is 
not susceptible of being answered "Yes" or ''No." In the law there 
are two kinds of practices. One is called voluntary and the other 
invohmtary. The involuntary restraints hke boycott or fraud or 



CONCENTRATION OF ECONOMIC POWER 1809 

false advertising are inherently unfair because they always work in 
favor of monopoly. Consequently, the law condemns them per se; 
they have no justification. If we should ascertain that a manufacturer 
is blacklisting his competitors, that a combination of manufacturers 
is blacklistmg certain dealers, that is unlawful per se. If we find that 
a manufacturer is making disparaging statements, lying about his 
competitor's goods, that is unlawful per se. They are inherently 
unfair; they have no justification. Of course, that kind of practices 
we have no difficulty with except to detect them, and once we detect 
them we apply the law. They are unfair, that is all. 

The Chairman. And those fall in the category of which Judge 
Davis was speaking. The manufacturer or the businessman or the 
corporation which engages in those practices knows that they are 
illegal per se. 

Mr. Kelley. Yes; let me speak about these mutual agreements. 
Mr. Morehouse yesterday or the day before related to you some 59 
cases where the Commission made a finding and an order. I dare say 
to this committee that there wasn't a lawyer representing a company 
that didn't know that that conduct was unlawful, and I will dare to 
say that there wasn't a respondent that didn't know that that con- 
duct was unlav/ful. Why was it unlawful? There were from 75 to 95 
of the producers in those industries that agreed among themselves 
as to a common price, ^'\^len you have a preponderant size, a com- 
bination, that power is sufficient to condemn such an agreement 
because of its injurious effects upon the public. The business of the 
United States and the lawyers of the United States Imow that those 
kinds of agreements are unlawful; they know just as well as the 
Government. When we investigate these cases and we issue the 
complaints and the lawyers come down to our office, what do they 
come down for? To try to find out what facts we have got, what we 
know about them, and once they find out that we know the truth 
they are willing to throw up the sponge. They are not coming down 
with the proposition: "Oh, we didn't know this was unlawful," or 
"Is this lawful or is it unlawful?" No! There is only one way_ to 
protect the public interest in this country against those monopolies, 
those combinations, as to which the public is not a party when they 
are entered into, and that is for the Government to diligently ascertain 
the facts with respect to them and find them out and when they find 
them out prohibit them and then put a penalty on them for repeating. 

There is too much of this talk that business doesn't know what is 
lawful and business doesn't know what to do. I say there are some 
things of doubt, yes; that should be cleared up, but by and large they 
know what's lawful and what's unlawful. The Commission in 20 
years has published its decisions and its orders based upon facts in 
each case, wliich should guide them as a precedent, but do_ they pay 
any attention to that? No, they don't. Congress when it enacted 
the Wheeler-Lea put teeth into the Commission's order. They said . 
that a violation of the Commission's order would be punishable by 
fine, recoverable in a civil suit by the Department of Justice. Since 
that law -went into effect and those orders have become final we have 
sent over to the Department of Justice a considerable number of them 
and they have filed penalty suits, civil suits, and in some cases they 
have filed criminal actions. I dare say that when those cases are 
decided and those parties are subject to fine they are going to be mighty 

124491— 39— pt. 5-^12 



I^IQ CONCENTRATION OF ECONOMIC POWER 

careful in the future, when the Commission issues an order, to obey 
it, and I tliink the lawyers will come to a realization for the first time 
in this country that the Government means business. 

What I would like to see is the Federal Trade Commission and the 
Department of Justice given money adequately to detect these things 
and let Congress amend the law so as to make things more clear, and 
plug up the loopholes so we can stop these conspiracies and these 
monopolies that are making it hard for the public in this country. 
The whole philosophy back of the antitrust laws is nothing but the 
dread of the enhancement of prices; that is what they are afraid of. 
That is what these corporations do — they are in business for profit. 
From their point of view I don't blame them; they are seeldng to 
increase their own profit. 

Where does the public come in? They are not represented at those 
conferences. Labor is not called in. Somebody must protect labor; 
somebody must protect the consuming public. If we are going to 
do that we are going to do it with force and vigor and according to law. 

Representative Reece. Judge,' you made reference to the Wheeler- 
Lea Act. Has your budget been increased very considerably under 
the Wheeler-Lea Act for the purpose of carrying out its provisions? 

Mr. Kelley. No; it hasn't, Congressman. One of the biggest 
troubles, one of the biggest difficulties, that we have to overcome is 
that we have nbout twice as much work as we have men or money 
to do with. We have cases piled up in the public interest that we 
can't touch because we haven't any money or men to do with. It is a 
crying need. We mean business and we are going to carry out the 
purpose and the intent of the antitrust laws-. 

It is true that the Department of Justice has on a larger scale taken 
hold of this matter and taken on new employees, and they will help us 
out, but the Commission is overburdened with work. It is vital. 

Mr. Davis. In that connection, Congressman Reece, it may be 
stated that the number of cases handled by the Commission, both 
the number investigated and the number actually tried and the num- 
ber in which cease-and-desist orders were issued, the number in which 
stipulations were agreed upon, are three or four times as large as they 
were 5 or 6 years ago, and yet during that period we have had not 
over a 25-percent increase in appropriations. 

Mr. Frank. Mr. Kelley, I thoroughly agree with you in most of the 
instances to which you referred, where the Commission has taken 
action, has filed complaints, the persons complained of knew and their 
lawj^ers doubtless knew when they were consulted that if and when 
you were able to prove the facts there was a violation. I cannot, 
however, agree with you that over the entire range of the antitrust 
laws there are not numerous instances where people contemplating 
action are unable to know whether or not if they take that action it 
will constitute a violation of the antitrust laws. I have never had to 
do with the prosecution of the antitrust laws, but I have frequently 
been in the position, as a lawyer in private practice, of endeavoring to 
advise citiz(^ns as to whether if they acted they would fall afoul of those 
laws, and I can conscientiously say that I endeavored to answer to the 
best of my knowledge and not infrequently foimd it impossible to 
advise the client whether what he was contemplating doing would 
involve infraction of the law. I think you must differentiate between 
those citizens who are intent upon evading the law or violating it 



CONCENTRATION OF ECONOMIC POWER JgU 

without the possibility of detection, and those who conscientiously 
want to go about their business, are confronted with the provisions 
of the statute, find that it contains general terms, and go to their 
lawyer, who finds it impossible in advance of a court decision to say 
whether or not the proposed action will or will not be in violation of 
the antitrust law. 

Mr. Ferguson. Mr. Chairman, when the Federal Trade Commis- 
sion was first organized in March 1915 and the members of the 
Commission at that time were presented with this very question as to 
making declaratory judgment where persons who wanted to engage 
in a line of conduct suggested by Commissioner Frank would present 
matters before the Commission and have the Commission decide 
whether or not that conduct would be in violation of the law, the 
Commission called into conference a number of the most distinguished 
lawyers in the United States, and among those was Louis Brandies, 
who was then practicing law in Boston before he became a member of 
the Supreme Court, and Justice Brandeis, as he afterward became, 
advised the Commission that it would be a very dangerous thing for 
the Commission to undertake, that no body of men were wise enough 
and capable enough to advise any person how closely to walk to the 
edge of a precipice without falling over, that it was very easy to 
advise people how far they could stay away from the edge of the 
precipice and be perfectly safe. That is a matter of record in the 
files of the Federal Trade Commission. 

Mr. Frank. Commissioner Ferguson, I don't want to be misunder- 
stood. I have not suggested nor am I suggesting that it would be 
desirable or indeed lawful for the Commission under the existing 
statutes to give such opinions. I would quite agree with Mr. Kelley 
from such experience as I have had, which is very limited, that it 
would be undesirable on the basis of purely informal conferences to 
give opinions which would operate as estoppels. I am neither sug- 
gesting that the Commission can lawfully engage in such undertaking 
nor that if amendments to the statutes were enacted along the lines 
I have suggested, that those amendments should authorize action on 
the basis of informal conferences. That is not what I have in mind. 

I have in mind that upon application formally made, setting forth 
facts, and after full and adequate investigation by the Commission, 
and after a public hearing at which all persons interested might appear, 
including the Commission's own staff representing the public interest, 
the Commission might well by statute be authorized to enter orders 
stating that such and such conduct would be lawful. Now such 
orders might be carefully conditioned ; they might say that for the time 
being or for a given experimental period the Commission will allow such 
conduct to be undertaken; they might say that the order, which would 
be in the nature of an estoppel or exemption, should be operative only 
until such time, if no fixed time was inserted in the order, as the Com- 
mission on its own motion, after further investigation and determina- 
tion of new facts, should cause the order to cease to be operative. That 
is not a novel suggestion. In the years that have intervened since the 
Commission first went into action numerous other administrative 
agencies have experimented with that device. 

It seems to me that it would be worth while to collate all the ex- 
perience of the various administrative agencies of the Government 
and determine whether the dire consequences that you picture have 



1812 CONCENTRATION OF ECONOMIC POWER 

in fact occurred in those instances where administrative agencies 
have been vested with those powers. In other words, we needn't 
discuss this thing today in vacuo, as you were obhged to discuss it at 
the time when your Commission was first created, nor is it necessary 
to consider what would happen if without authorization of Congress 
and purely upon the basis of informal conferences you were to engage 
in such a practice, but I do suggest that it wcTuld be well worth wfiile 
f^r this committee to know what has happened in other administra- 
tive agencies empowered by statute to go through such a procedure. 

I understand there is a subcommittee on which the Treasury is 
represented, your Commission is represented, and the Department of 
Justice is represented, to canvass that subject. Maybe this is not the 
time to discuss it, but I just didn't want to let your discussion go by 
without that much questioning; that is to say, I don't think you ought 
to rest your conclusions upon an opinion formed several decades ago 
with respect to what would happen if without authority^ of Congress 
your Commission wpre to give decisions based upon informal con- 
ferences. 

Mr. Kelley. I will just take half »i minute, Mr. Frank. This is a 
big subject. First, I will say I don't think that Congress should give 
such power tp any commission. Now the Federal Trade Commission 
is rather limited under the law. For instance, the Federal Trade 
Commission under the Federal Trade Commission Act has no author- 
ity to order a divestiture of property or transfer of property, even 
though it was used as an unfair method of competition. They held 
that in the Eastman Kodak case with certain justices dissenting. 

As I pointed out yesterday, as far as the antitrust laws are con- 
cerned, the sky is just about the Umit with respect to mergers. Where 
it is an agreement between the parties remaining in business, it is 
unlawful if they have ability to control the market. 

I doubt that is true under the law as it is written just now witn 
respect to mergers. Frequently there will be an agreement between 
competitors with respect to the suppression of competition between 
them that will be lawful. Because of various factors, they have no 
power to raise the price or hurt the pubUc. 

If such a group came in to the Commission, we would tell them so. 
But it is very rare, indeed. I have an open mind about it. I just 
have had the feeling that it wouldn't be protecting the public interest; 
it would be legislation directly and squarely in the teeth of the pubUc. 

We issued a complaint a couple of years ago against all of the 
cement companies in the United States. We had the greatest difficulty 
in getting facts in that case, and presenting our case. It will be closed 
in a couple of weeks. If the Commission in place of issuing that com- 
plaint and going at getting the truth and the facts with respect to 
those matters, had called a hearing and issued an order to the industry 
to come before the public and show cause to us why they shouldn't 
have an order, what would we do? We would have facts upon which 
there would be a finding that the Commission couldn't do anything 
except dismiss them and tell them to go home — "Your conduct is 
lawful." We wouldn't know the real truth about it, the honest truth. 
We have got to get that by going out in the byways, the paths. 

The Chairman. This discussion has been extremely interesting, 
but, of course, it is obvious we can't determine it here. I rather 
judge, Dr. Walker, that the members of the committee don't desire to 



CONCENTRATION OF ECONOMIC POWER 1813 

ask you any further questions. So unless there is objection, you may 
be excused. 

(The witness, Dr. Francis Walker, was excused.) 

The Chairman. It was the understanding when we took the recess 
last night,^ Congressman Reece, that Mr. Kelley was to make a 
response to your inquiry' with respect to section 8 of the Clayton Act. 
Mr. Kelley, if you will be good enough to take that matter up, perhaps 
we can fimsh it before we recess this noon. 

TESTIMONY OF WILLIAM T. KELLEY, CHIEF COUNSEL, FEDERAL 
TRADE COMMISSION, WASHINGTON, D. C— Resumed 

SECTION 8 OF THE CLAYTON ACT 

Mr. Kelley. I have only a word or two to say about this section. 
The Commission has instituted very few cases under section 8 of the 
Clayton Act, and the Department of Justice has instituted very few, 
if any, that I know of. 

Mr. Beege. I don't recall any. 

Mr. Kelley. No; I don't recall any, Mr. Berge. 

Why hasn't the Government instituted any cases under that section? 
I will say first that I think the principal reason Ues in the fact that the 
statute as to the competitive relationship between corporations and 
the effect of common directors on that relationship is the reason. 

Let's read section 8: 

That from and after two years from the date of the approval of this Act no 
person at the same time shall be a director in any two or more corporations, any 
one of which has capital, surplus, and undivided profits aggregating more than 
$1,000,000, engaged in whole or in part in commerce, other than banks, banking 
associations, trust companies, and common carriers subject to the Act to regulate 
commerce * * * jf such corporations are or shall have been theretofore, by 
virtue of their business and location of operation, competitors, so that the elim- 
ination of competition by agreement between them would constitute a violation 
of any of the provisions of any of the antitrust laws. 

Under this section it will be noted that common directors between 
corporations engaged in interstate commerce are prohibited only if 
such corporations are or shall have been theretofore by virtue of their 
business and location of operation, competitors, so that the elimina- 
tion of competition between them by agreement would constitute a 
violation of any of the provisions of the antitrust laws. 

Now this is pure and simple, the test of legality laid down in the 
Sherman law, and the difficulty in applying such a test is that it is 
exceedingly difficult to determine under just what circuinstances, 
without long trial and hearing, the elimination of competition by 
agreement would constitute a violation of the antitrust laws. 

Under the rule of reason, the test of legahty is the test of reasona- 
bleness at common law, and as we pointed out yesterday, in discussing 
section 7, an agreement between competitors limiting competition 
between them is illegal at common law if the parties by reason of their 
position in the field possess the power to control the market. 

Now, this power to control the market perhaps needs further 
explanation. 

In determining whether a control of the market would result from 
the elimination of competition, it would be necessary to consider the 

• See p. 1793, supra. 



1814 CONCENTRATION OF ECONOMIC POWER 

extent of your market, depending upon the relative transportation 
costs, perishability of the commodity, and so forth; the size and out- 
put of the corporation. If the market is a national one, the output 
must be compared to the national output. Where the market is 
restricted, covering only a section of the country, the output must be 
compared with the supply available normally for that territory at 
normal prices. 

Imports from abroad are aflPected by tariff duties, which is a factor 
that may be taken into account. 

So all of these things determining this means in the case of commoD 
directors that you have to have an extended investigation to deter- 
mine whether the corporations are in such a position that if they 
entered into agreement with respect to prices they would be illegal 
under the test of the Sherman law. 

I think that is the principal reason why the Government hasn't 
done very much in enforcing that law. There is another reason, 
perhaps the other reason is more important than the reason I have 
spoken about, and that is, you all know what the so-called dummy 
director is. Well, this section is so written that it affects the in- 
dividual but doesn't prohibit the dummy, and if you had an order 
requiring John Jones to get off one corporation, or two or three of them, 
he could just still say to his secretary, "You attend." 

Now, whatever the reason is, or which of the two, I think that both 
have caused the Commission and the Department of Justice not to do 
much with that section. Wlien this section was under debate, Senator 
Cummins offered an amendment ag^a substitute for the present section 
8. His amendment read as follows: 

It shall be unlawful for any person to be at the same time a member of the board 
of directors or other managing board or an officer of two or more corporations, 
either of which is engaged in commerce and which corporations are carrying on 
business of the same kind or competitive in character, provided that this para- 
graph shall not apply to banks, banking institutions, and common carriers. 

That appears iu Congressional Record, 14534. His amendment was 
rejected by a vote of 15 to 44, It wiU be noted that his amendment 
eliminated the Sherman law test and that it did not contain the 
$1,000,000 limitation. The principal speech against Cummins' 
amendment was by Senator Chilton, He said that it was desirable 
to let a man expand his business by organizing new corporations, and 
that he believed in legislating against big business, not against Uttle 
business, an4 that he thought that section 8 would legislate against 
little business. 

It is not clear from the debates whether the Cummins amendment 
was defeated because of the elimination of the Sherman law test or 
because of the absence of the $1,000,000 limitation. From the de- 
bates, I would say it was probably because of the elimination of the 
$1,000,000 limitation. 

The Chairman, Don't you have an idea, Mr. Kelley, when one 
considers all of the laws which have been passed during the past 50 
years for the purpose of preventing conspiracies to restrain trade and 
to raise prices, and the difficulty which the courts and the commissions 
have experienced in attempting to enforce those laws, that the chief 
objective now should be to bring about a realization upon the part of 
that small proportion of business to which you and Judge Davis re- 
ferred this morning, which wants to practice these restrictive devices^ 



CONCENTRATION OF ECONOMIC POWER 1815 

that their only result is to prevent, in the last analysis, themselves 
and the whole pubhc from attaining the prosperity that everybody 
needs. It has appeared to me to be getting more and more plain since 
we have tried dozens of ways to restore prosperity that the thing to be 
done now is to get a consensus of public opinion that instead of follow- 
ing restrictive practices any more we should come to a determination 
to follow practices wliich will expand business. Every businessman 
wants to grow, every businessman wants to increase his trade; but it is 
perfectly apparent from our 50 years of history that one definite result 
of restraint of trade has been to reduce the possible volume of busi- 
ness and to bring about such a tremendous and appalling degree of 
unemployment that the market which the businessman himself wants 
to reach is being restricted far below what it ought to be. 

Mr. Kelley. I agree with that statement. Senator. 

The Chairman. Then it comes down to a conclusion that we don't 
need new laws so much as we need a new understanding of how to 
build up prosperity by recognizing one another's rights and by having 
all businessmen who want to be fair join hands with Government in 
suppressing the well-known practices and abuses which bring about 
restriction of trade. 

Are there any questions to be addressed to Mr. Kelly? 

The Commission is ready to proceed this afternoon? What will be 
the program this afternoon? 

Mr. Ballinger. We have to finish up two investigations authorized 
by Congress, the pubhc utihties investigation and the agricultural 
income inquiry. Then we want to start in on the farm-machinery 
industry as one of our industry studies. 

The Chairhan. Can you complete that this afternoon? 

Mr. Ballinger. We hope to. 

The Chairman. The members of the committee have impeded 3'our 
program repeatedly this morning by precipitating that very interesting 
debate. Perhaps we can refrain from that this afternoon. Tomorrow 
of course, there is to be a special session of Congress to mark the one 
hundred and fiftieth anniversary, and it is probable that we won't 
want to have a session tomorrow. It is very desirable, therefore, 
that if possible we proceed this afternoon to a conclusion. The com- 
mittee, then, will stand in recess until 2 o'clock this afternoon. 

(Whereupon, at 12:10 p. m., a recess was taken until 2 p. m. of the 
same day.) 

afternoon session 

The hearing was resumed at 2:15 p. m., upon the expiration of the 
recess. 

The Chairman. The committee will please come to order. 

Judge Davis, are you ready to proceed? 

Mr. Davis. Whom do you want to call? 

Mr. Ballinger. I want to call Colonel England, assistant chief 
economist of the Commission, to the stand, who will discuss the Com- 
mission's investigation of agricultural income, an investigation au- 
thorized by the Congress. 

The Chairman. Do you solemnly swear the testimony you are 
about to give in this proceeding shall be the truth, the whole truth, 
and nothing but the truth, so help you God? 

Colonel England. I do. 



1816 CONCENTRATION OF ECONOMIC POWER 

TESTIMONY OF COL. WILLIAM H. ENGLAND, ASSISTANT CHIEF 
ECONOMIST, FEDERAL TRADE COMMISSION, WASHINGTON, 
D. C. 

Mr. Ballinger. Will you state your name for the record? 

Colonel England, William H. England. 

Mr. Ballinger. What is your present position to the Federal 
Trade Commission? 

Colonel England. Assistant chief economist. 

Mr. Ballinger. How long have you been with the Federal Trade 
Commission? 

Colonel England. Continuously since May 1920. 

Mr. Ballinger. How long have you been assistant chief economist? 

Colonel England. Since about June 1920. 

Mr. Ballinger. Have you any further questions, Mr. Chairman? 

The Chairman. No. 

results of federal trade commission's report on 
agricultural income 

Colonel England. Mr. Chairman and members of the committee, 
the agricultural inquiry was made by direction of Congress under 
Public Resolution No. 61, Seventy-fourth Congress, first session, 
approved August 27, 1935, and amended by Public Resolution No. 86, 
Seventy-fourth Congress, approved May 1, 1936. The resolution, as 
amended, authorized and directed the Federal Trade Commission 
to investigate and report the extent of decline in agricultural income 
in recent years; the increase or decrease for the same years of the in- 
come of the principal corporations or other principal sellers engaged in 
handling or processing certain essential farm commodities; the 
distribution of the consumer's dollar paid for those commodities, as 
between farmers, processors, and distributors; the growth of capitaliza- 
tion and assets of principal corporations and their costs, profits, in- 
vestments, and rates of return; the avoidance of taxes by such cor- 
porations or their officers; the extent of control or monopoly in the 
handling or processing of those commodities and the methods and 
devices used for obtaining and maintaining such control or monopoly; 
the extent to which any fraudulent, dishonest, unfair, and indirect 
methods are employed in the grading, warehousing, and transporta- 
tion of those commodities, and the prevalence of producer-cooperative 
organizations and their effects on producer and consumer. The 
Commission was also directed to report its conclusions and recom- 
mendations growing out of the inquiry. 

An interim report was made on December 26, 1935, and printed as 
House Document No. 380, Seventy-fourth Congress, second session, 
and the final report, Principal Farm Products — Agricultural Income 
Inquiry, was submitted to the Congress March 2, 1937. The sum- 
mary and conclusions and recommendations of the final report were. 
printed as Senate Docimaent No. 54, Seventy-fifth Congress, first 
session. 

principal farm products covered 

Colonel England. Principal farm products covered in the investi- 
gation were wheat, cotton, tobacco, potatoes, livestock, and milk. 
Wheat reflected the greatest decline in gross income to farmers from 



CONCENTRATION OB^ ECONOMIC POWER ^817 

1929 to 1932. In 1932 gross incomo from wheat amounted to only 
about 29 percent of the gross income of 1929. Milk showed the small- 
est decline, but the gross income of farmers from that commodity in 
1932 was only 54.3 percent of that in 1929. The sharpest recovery 
in the gross income of farmers from the low year of 1932 was in tobacco. 
By 1934 the income from tobacco production aggregated 78.5 percent 
of that in 1929. 

Generally speaking, the gross income represented by sales by the 
principal manufacturers, processors, and distributors of these products 
fell off less than the gross income of farmers from their production, 
and the recovery from the low point of the period by the manufac- 
turers, processors, and distributors reached a higher percentage of the 
1929 figure than was true^of the gross income of the farmer-producers 
of these products. 

The report shows how the consumer's dollar was divided between 
distributor, processor, and farmer in the prices paid for butter, fluid 
milk, wheat flour, wheat bread, cigarettes, beef, veal, and pork during 
the period covered by the inquiry. Butter, ac contrasted with bread, 
a product involving a relatively large processing cost, showed a high 
percentage of the consumer's dollar going to the farmer. In 1934 in 
51 cities the weighted average retail price of butter, graded 92 score 
or better, was 31.5 cents per pound. Of this retail price, wholesale 
and retail distributors received a combined average gross margin of 
about 25 percent, manufacturers about 16 percent, and producers 
about 59 percent. In 1935 in 51 cities the weighted average retail 
price of white wheat flour bread was 8.3 cents per pound. Retail 
distributors received about 19 percent of this price as their average 
gross margin, bakeries 56 percent, flour millers 7 percent, wheat 
middlemen and transportation agencies 5 percent, and the gross 
proceeds of wheat farmers were about 13 percent. 

TOBACCO group's CONCENTRATION OF CONTROL 

Colonel England. The inquiry disclosed that 13 tobacco manu- 
facturers sold in 1934 more than 97 percent of the cigarettes, more" 
than 90 percent of the smoking tobacco, upward of 75 percent of the 
chewing tobacco, and in ejccess of 98 percent of the snuff produced in 
the United States. The report discus.ses methods by which the 
larger companies obtained commanding positions in their respec- 
tive industries, which are shown to have been by acquisition of 
competing firms, or by expansion, or by both. 

The Chairman. Was it suggested that the acquisition of the com- 
peting firms was in any degree in violation of section 7 of the Clayton 
Act? 

Colonel England. No, sir; it was through the acquisition of assets. 

The Chairman. After that device of acquiring assets instead of 
stock had been adopted? 

Colonel England. That is right. 

Mr. HiNRiCHs. May I ask a question, Mr. Chairman? In the 
third line on that page you referred to producers. I assume you are 
using producers and- farmers as synonymous terms in more or less a 
physiocratic sense. You are not implying the other groups are not 
also producers, are j'ou? 

Colonel England. That is correct. 



1818 CONCENTRATION OF ECONOMIC POWER 

Rates of return on the investment for the period covered, 1929 to 
1935, inclusive, earned by the reporting tobacco manufacturers, the 
biscuit and cracker companies, and the chain grocery companies are 
shown in the report. The annual averages were 15.8 percent for the 
tobacco manufacturers, 14.6 percent for the biscuit and cracker com- 
panies, and 16.4 percent for the chain groceries. Milk processors and 
distributors, wholesale baking companies, and wheat middlemen showed 
higher rates of return during the first 3 years of the period than for 
the last 3 years. Average annual returns for the entire period were 
9.57 percent for the milk companies, 8.76 percent for the bakers, and 
10.59 percent for the wheat middlemen. Returns to wheat processors, 
wholesale flour distributors, and chain drug store companies (large dis- 
tributors of tobacco products) were substantial for all years except 1932 
and averaged 7.76 percent, 9.61 percent, and 8.29 percent for tliese 
respective groups. Reporting meat packers had an average rate of 
return of 4.28 percent; shoe manufacturers, 4.77 percent; leaf-tobacco 
middlemen, 7.44 percent; tobacco wholesalers and jobbers, 4.43 
percent; cotton processors, 1.52 percent, with losses in some individual 
years. Tanning and leather companies sustained a loss, averaging 
for the period 1.89 annually; and chain tobacco stores, a loss averaging 
1.37 percent annually. 

The Chairman, In other words, the conclusion that you want us 
to gather from these figures is that in these particular industries in 
which the processors have been able to effect a high degree of con- 
centration they have also been able to maintain their prices and to 
maintain their profits during this general period of depression, while 
the farmer and the rancher who produce the raw material which the 
processor makes available to the consumer have not been able to get 
the cost of production out of their goods. 

Colonel England. Senator, that states it very nicely. That is 
correct. 

CONDITIONS IN TERMINAL GRAIN MARKETS AND RECOMMENDATIONS OF 

THE COMMISSION 

Colonel England. Inquiry made into conditions of merchandising 
grain in the terminal markets showed that many of the practices 
which were the subject of criticism by the Commission in earlier inves- 
tigations of terminal grain markets still existed. One of these is the 
control of railroad-owned terminal elevators, leased by large merchan- 
disers of grain at low rentals, giving the lessees an undue competitive 
advantage over other grain merchandisers in the purchase and handling 
of grain, with the result that such large merchandisers practically 
dominate both the cash" and futures markets. 

In its conclusions and recommendations with respect to the grain 
trade, the report said that correction of conditions described therein 
could not be left to the trade itself, and that Federal legislation should 
be enacted providing, among other things: 

1. That all deliveries of grain on futures contracts shall be made 
from public warehouses: 

a. Licensed by Federal authority; 

b. Subject to Federal regulation; 

c. Not owned, operated, or controlled, directly or indirectly by any 
person, firm, or any other organization directly or indirectly dealing 
in grain. 



CONCENTRATION OF ECONOMIC POWER Igjg 

2. That all deliveries of grain on any future contracts shall be 
subject to: 

a. Federal grading and inspection; 

b. Federal regulation of the delivery of grain on such contracts. 
In respect to cotton merchandising, the report, after showing that 

•cotton merchants and spinners generally regard the operations of the 
futures market under southern deUveries with satisfaction, recom- 
mended further study of the system of southern deliveries to ascertain 
whether legislation should be enacted providing for making the con- 
tract more merchantable. 

The report cited the unbalanced relations between industry and 
agriculture and suggested that making available to the public of re- 
Hable and adequate information concerning the large industrial cor- 
porations would constitute an important step toward correcting this 
condition. 

Concerning the value of cooperative associations, the report ex- 
plained that although an exact measure of their value in dollars and 
cents would be difficult to obtain, the Commission desired to add to 
the vast body of opinion its own conclusion that true cooperative 
associations have been of great value to the producers of farm prod- 
ucts, and that such cooperatives have significantly increased the 
bargaining strength of producers and reduced the spread between 
producers' and consumers' prices. 

The inquiry disclosed, in several of the industries, a high degree of 
monopolistic control, frequently due to methods contrary to the 
letter or spirit of the law. In this connection, the Commission, in 
its report, renewed its recommendation for amendment of section 7 
of the Clayton Act, which now prohibits the acquisition by one cor- 
poration engaged in commerce of stock in a competing corporation 
so engaged where the effect may be to substantially lessen competition 
between such corporations. The Commission recommended an 
amendment to prohibit acquisition of assets, not only indirectly 
through use of stock unlawfully acquired, but also direct acquisition 
of assets independently of stock acquisition. Under a decision of 
the Supreme Court, the Commission cannot efTect the separation of 
units acquired through purchase of capital stock if, following the 
stock acquisition, but prior to service of the Commission's formal 
complaint, assets of the companies whose stock has been acquired 
are merged. 

Additional recommendations were made by the Commission as a 
further check to monopolistic tendencies. 

TOBACCO MARKETING 

Colonel England. Legal studies of the extent of possible concen- 
tration of control and of monopoly, and of any methods and devices 
used to gain such control, were made with regard to tobacco and 
potfotoes. 

The investigation failed to disclose that any one company had a mo- 
nopoly in the manufacturmg, processing, warehousing, distribution, or 
marketing of leaf tobacco or tobacco products. Considerable concen- 
tration of control was found, however. Five buyers of leaf tobacco, 
two of whom primarily represent English companies, generally pur- 
chased about 75 percent of the total domestic production and their 
purchases are largely concentrated in the auction belts. Three com- 



1820' CONCENTRATION OF ECONOMIC POWER 

panies and, to a less extent, a fourth, substantially control the manu- 
facture of cigarettes of the most popular price class, and arc also im- 
portant factors in the manufacture of smoking and che^\^ng tobacco. 
Three other companies control about 97 percent of the total snuff 
business. 

No substantial price fixing or price agreements in the marketing 
of leaf tobacco were found except in the minimum sale prices estab- 
lished for dealers in Connecticut shade-grown tobacco pursuant to an 
Agricultural Adjustment Administration marketing agreement. 

The Chairman. In other words, that particular agreement, then, 
was made after conference with the A. A. A.? 

Colonel England. That is correct. 

The Chairman. And to what extent were the minimum prices 
fixed by that agreement? Do you know? 

Colonel England. I cannot answer that, Senator. I didn't have 
direct charge of this. Dr. Dawkins may answer it. 

Dr. Dawkins.' The minimum prices were estabhshed in the market- 
ing agreement itself. 

The Chairman. To what extent were they established? Covering 
different grades? How many different prices were there that were 
nxed? 

Dr. Dawkins. There was provision for each grade recognized 
under the grading system of the Department of Agriculture. The 
minim.um price was fixed for each such grade. 

The Chairman. That Avaj minimum price to the tobacco farmer? 

Dr. Daw^kins. No, sir; a minimum price for the marketing com- 
pany or individual. There wei"o no prices fixed covering the purchase 
from the actual producer. 

The Chairman. Wlio got the benefit of this minimum price? 

Dr. Dawkins. I should say the marketing agencies. 

The Chairman. Who paid the price? 

Dr. Dawkins. The tobacco, the cigar manufacturers. 

The Chairman. It was, then, a minimum price to be paid by the 
processor to the middleman? 

Dr. Dawkins. That is correct. 

The Chairman. And there was no protection granted to the to- 
bacco farmer? 

Dr. Dawkins. Except such as may have indirectly been reflected 
to him as a result of the stabilization of price which the middleman 
received. 

Mr. Frank. May I suggest that I am not sure that the Depart- 
ment of Agriculture would agree with him on that. It was felt there 
was control of supply coupled with that and agreement and that the 
two together had that consequence. I am not speaking for the 
Department. 

The Chairman. Had which consequence? 

Mr. Frank. Had the consequence of reflecting an increase in price 
to the farmer. I think in fairness to the Department of ^Agriculture 
that statement ought not to stay unchallenged. 

The Chairman. But it would appear from the statement that the 
only price which was actually fixed was the price which the middle- 
man received. The price was not fixed for the tobacco farmer. 

> Dr. Robert Bi Dawkins, member of Chie.' Exeminer's Stall, Federal Trade Commission. 



CONCENTRATION OF ECONOMIC POWER 1821 

Re was left for his benefit to the incidental result which might flow 
from whatever control was exercised over the amount to be produced. 

Mr. Frank. Yes. I wouldn't want to make an exact statement, 
because I wouldn't be qualified to, but I think before such inference 
as might be drawn from the statement is allowed to stand in the record 
the Department of Agriculture ought to be given an opportunity to 
supplement it. 

Mr. Ballinger. Mr. Dawkins is a lawyer in the cliief examiner's 
office and has worked actively on this study. 

Colonel England. This is a part of the legal study. 

The Chairman. I wondered if the reference which you have here 
to exhibit 266 of the Federal Trade Commission has any bearing on 
this particular item. 

Colonel England. Senator, that does not. 

Mr. Morehouse. That refers to the page of the compilation which 
was previously entered in the record. 

The Chairman. Very well, you may proceed. 

Colonel England. Information obtained during the inquiry indi- 
cated that competition in the cigarette industry might be increased 
by popular cigarettes selling in various price ranges and that new or 
more important competition in manufacturing would result in in- 
creased competition in the purchase of leaf tobacco. The opinion 
was expressed that the uniform internal revenue tax of $3 per thou- 
sand on small cigarettes has tended to restrict the manufacture and 
sale of 10-cent cigarettes, the most active and substantial new compe- 
tition that has manifested itself in the industry in many years. The 
Commission therefore recommended that Congress consider the ad- 
visability of levying a graduated tax on cigarettes in lieu of the present 
uniform tax. 

The Chairman. In preparation of this report, did the Commission 
consult the Treasury Department? 

Colonel England. I understand so. 

Dr. Dawkins. Yes, sir. 

The Chairman. Did the Treasury have any opinion with respect 
to the statement the witness has just made? 

Dr. Dawkins. The Secretary of the Treasury at a previous time 
had furnished to the Ways and Means Committee of the House an 
estimate of the effect upon the revenue of certain graduations in the 
cigarette tax. When this investigation was in progress we consulted 
the general counsel of the Treasury Department wdth regard .to this 
recommendation, and he had no opinion to express for the Treasury 
at that time and had no objection that he cared to express with respect 
to it. 

The Chairman. Mr. O'Connell makes no comment. 

Colonel England. I might say. Senator, that that is our general 
practice. When our studies overlap those of some other organization, 
we find out pretty definitely that we are on safe ground. 

The Chairman. I am sure that is the case. 

POTATO marketing 

Colonel England. Processing of potatoes is so limited in volume as 
to be of little consequence. No close approach to monopoly was found 



1822 CONCENTRATION OF ECONOMIC POWER 

in their warehousing, distribution, or marketing. Excessive produc- 
tion financing charges and local marketing fees are exacted in certain 
instances, but remedies are- available to the majority of growers 
affected through production credit associations organized pursuant 
to the Farm Credit Act of 1933, and by collective action among 
producers. 

FRESH FRUITS AND VEGETABLES AND THE COMMISSION'S CONCLUSIONS 
AND RECOMMENDATIONS 

Colonel England. Public Resolution No. 61, amended by Public 
Resolution No. 112, Seventy-fourth Congress, second session, approved 
June 20, 1936, authorized and directed the Commission to make 
further investigation with respect to agricultural income from table 
and juice grapes, fresh fruits and vegetables, and to make both 
interim and final reports. The interim report was submitted February 
1, 1937, and printed as Senate Document No. 17, Seventy-fifth Con- 
gress, first session, and the final report was submitted June 10, 1937. 

Under the resolution, the scope of this investigation was generally 
the same as that of agricultural income. 

^ The Commission's final report shows -that the farmers' gross income 
from the production of fruits and vegetables declined in 1932 to 51.84 
percent of the 1929 gross income. This was the lowest point reached 
during the 7-year period, 1929 to 1935, inclusive. By 1935 it had 
recovered to 70.02 percent of the 1929 level. The sales of no group 
of the reporting processors and distributors of fruits and vegetables, 
either fresh or processed, fell during the 7-year period to as low a 
percentage of its 1929 sales as did the farmers' gross income in relation 
to its 1929 level, nor failed to exceed the percentage of recovery 
reached by the gross income of the farmer. 

In other words, it is generally the same situation as for the principal 
products. 

In the matter of monopoly and control, the inquiry on fruits and 
vegetables disclosed significant proportions of the national production 
of certain kinds of fruits and vegetables handled by only a few of the 
large corporations and cooperative associations, such as the California 
Fruit Growers' Exchange, Florida Citrus Exchange, Mutual Orange 
Distributors, and Lake Wales Citrus Growers' Association. The 
most important chain-store systerfi-in the distribution of fresh fruits 
and vegetables is the Great Atlantic & Pacific Tea Co. 

The distribution of the consumer's dollar paid for five fresh fruits 
and five fresh vegetables handled by chain grocery stores is shown in 
the report. The fruits are (1) table grapes, (2) Florida and California 
oranges, (3) Florida grapefruit, (4) Pacific Northwest apples, and (5) 
Georgia and Carolina peaches. The vegetables are (1) Maine, Vir- 
ginia, Maryland, and Idaho potatoes, (2) Texas onions, (3) Texas 
and Florida cabbage, (4) Florida and California tomatoes, and (5) 
iceberg lettuce from the Pacific coast. Of the consumer's dollar paid 
for the five fresh fruits combined, for those markets and producing 
areas for which the information was obtained, the growers' proceeds 
were 29.4 cents, distributors' gross margins were 35.33 cents, and 
transportation and all other costs, including packing and loading, 
absorbed the remainder of the dollar. The retail margin alone 
amounted to 31.14 cents and transportation costs, including icing 



CONCENTRATION OF ECONOMIC POWER 1823 

and heating, to 20.21 cents. For the five fresh vegetables, growers' 
proceeds were 34.78 cents; distributors' margins, 32.10 cents; and 
transportation and all other costs, 33.12 cents. The retaU margin 
alone was 27.26 cents and transportation was 22.82 cents. 

For all groups of companies comprising the processors and wholesale 
distributors, the rates of return on investment were lowest in 1932, 
and for the groups comprising the chain-store distributors they were 
lowest in 1935. Relatively liigh rates of return, however, were earned 
by chain-store distributors. 

Producers' marketing cooperative associations are important in the 
distribution of some fresh fruits. In 1934, they marketed almost 62 
percent of the total cranberry production of the United States, 57 
percent of all citrus fruits, 28 percent of the dried prunes, 16 percent 
of the grapes, and 7.5 percent of the apples. For some vegetables 
the percentages are substantial, and for particular commercial pro- 
ducing areas for both fruits and vegetables the proportions are large. 
Processing and bargaining cooperatives are of less importance in the 
fruit and vegetable industry. Marketing cooperatives were found to 
be most successful for products having relatively long marketing 
seasons, making possible the permanent employment of skilled market- 
ing personnel, and for products, the commercial production of which 
is largely concentrated in, at most, a few highly •specialized producing 
areas, such as oranges in California and Florida. 

Many aspects of the marketing of fresh fruits and vegetables are 
discussed in the report, including marketing by large organizations, 
production financing, shipping by truck, character and adequacy of 
terminal market facilities, terminal market inspection, terminal 
market cartage, loss and damage claims, and sf.le of fruits at auction. 

The report shows that monopolistic and racketeering practices in 
the carting of fruits and vegetables exist in several of the larger 
terminal markets, particularly in New York, Philadelphia, and 
Chicago. An analysis of the facilities and conditions existing in a 
limited number of the larger terminal markets shows that although 
many of the facihties have been modernized, there has been a marked 
lack of scientific planning. Many unfair practices have developed 
in the terminal inspection service in recent years, particularly as it 
affects loss and damage claims. 

Five concerns, other than cooperative associations, distribute fresh 
fruits and vegetables on a national or very wide scale. Three of 
these, the Atlantic Commission Co., Wesco Foods Co., and Tri-Way 
Produce Co., are subsidiaries of chain grocery stores while the other 
two, American Fruit Growers, Inc., and Nash-Finch Co., are inde- 
pendently owned. The subsidiaries of the chain-store companies 
follow substantially identical methods in the purchase of fruits and 
vegetables. They buy from growers and shippers as well as from 
terminal market receivers and distribute some tonnage to the inde- 
pendent trade in addition to that sold to their parent companies. 
Prior to the passage of the Robinson-Patman Act in 1936, chain 
buying subsidiaries customarily obtained a brokerage, or its equivalent, 
in the form of a price reduction, from their principal shippers. This 
practice has been discontinued, but each of these companies, to a 
greater or lesser extent, receives discounts or price reductions in lieu 
of brokerage in purchases from principal shipping connections. 



1824 CONCENTRATION OF ECONOMIC POWER 

In the Commission's conclusions, it was set forth that certain 
practices in the carting of agricultural products in New York, Cliicago, 
and Philadelphia amounted to illegal agreements in restraint of trade 
and in violation of the antitrust acts; and that the activities of the 
agents of the teamsters' union in Chicago, Cleveland, and Philadelphia 
in interfering with outside trucks were in violation of the Federal 
Antiracketeering Act. As to these practices, the Commission has 
made its evidence available to the Department of Justice. 

The report recommended that the Perishable Agricultural Com- 
modities Act be amended to Oathorize and direct the Secretary of 
Agriculture to make complete condition inspections for the purposes 
of determining the extent of damage and insofar as practicable the 
cause of such damage on all cars of the more perishable commodities 
arriving in the principal terminal markets. 

It also recommended that the Interstate Commerce Commission 
be authorized and directed to require the claim division of the Asso- 
ciation of American Railroads to furnish periodically, for the infor- 
mation of all interested persons, certain data concerning tonnage or 
number of carloads of each kind of fresh fruits and vegetables and of 
melons delivered by each railroad to each of the principal terminal 
markets, and the average amount of claims paid by each of these 
railroads per carload of each of these perishable commodities deUv- 
ered in the various terminal markets. 

Amendment of the Interstate Commerce Commission Act was 
also recommended to empower the Interstate Commerce Commission 
to prescribe certain rules and regulations governing the filing, investi- 
gation, and payment of all loss and damage claims in the shipment of 
perishable commodities. 

The Chairman. Did you participate in this study? 

Colonel England. I did not; I was working on the utilities investi- 
gation at that time. 

The Chairman. The results of it, however, would indicate that the 
returns of the farmer have fallen further and recovered less than the 
returns obtained by the middlemen and the processors combined. 

Colonel England. That is absolutely "correct and as you stated a 
while ago that profits were larger where there was a high degree of 
concentration— profits for the manufacturers were larger where there 
was a high degree of concentration. 

The Chairman. But the recommendations for legislation which are 
contained here all seem to tend toward a higher degree of policing 
of the industry. 

Colonel England. That is correct. 

The Chairman. Do you think it is possible effectively to police an 
industry of this kind? 

Colonel England. That is a tremendous task, Mr. Senator. 

The Chairman. We'd have to employ half of the people of the 
country to watch the other half, wouldn't we? 

Colonel England. Something like that. 

The Chairman. Doesn't that in your opinion indicate that per- 
haps reform is to be obtained in some other way than merely by 
legislation and by punitive action? 

Colonel England. Possibly, but just the fact that there is inspec- 
tion, even period inspection, would have quite a good efTect. It is 



CONCENTRATION OF ECONOMIC POWER 1825 

like the policemen. We don't have as many policemen as we have 
citizens but most of our citizens 

The Chairman (interposing). Here are two outstanding facts which 
are constantly recurring to everybody who studies this problem: First, 
the return of the farmer is decreasing; his proportion of the national 
income is constantly decreasing. Naturally as his return decreases, 
as his proportion of the national income falls away, he becomes a 
poorer market for the products of industries. The second fact is that 
while this concentration is proceeding, this concentration of middle- 
men and processors, unemployment is increasing. The larger the 
number of persons unemployed, necessarily the smaller is the market 
to which the processor and the middlemen must appeal if they are 
to maintain profits over a long period, so that it would appear that 
those who participate in restrictive programs, those who build up 
concentration at the expense of free enterprise, are in the last analj'sis 
eventually killing off their own markets. 

Colonel England. I think that is undoubtedly true. 

The Chairman. Are there any questions to be asked of tliis witness? 

Mr. Davis. Mr. Chairman, with regard to your suggestion about 
policing, as I understand it, it is the conception of tlie Commission 
that what is contemplated by the suggested policing, if we term, it 
that, is primarily to ascertain the actual facts upon \\'iUch corrective 
action may be taken and, secondly, to undertake to see that the 
different members of industry play the game fairly and that tliey do 
not engage in these unfair practices which are mjurious to their com- 
petitors and injurious to the consummg public. It isn't contemplated 
that any government tribune should imdertake to run their businesses 
for them, or doing anything approaching that, but simply to umpire 
the proceedmgs to the end that they m.ay be prevented insofar as 
possible from indulging in practices which different laws denounce or 
which the committee might see proper to recommend that might be 
further conceived in an effort to maintain fair competition and tg 
prevent these predatory practices which make for restraint of trade 
and the evils which some of us think flow from that. 

The Chairman. I think I understand your point of view. Judge. 

Mr. Hinrichs, you were about to ask a question. 

^Mr. Hinrichs. Yes, Mr. England, on page 5 ^ you were referring 
to the relatively high rates of recurring returns earned by chahi-store 
distributors, at the bottom of the page. At the end of the preceding 
paragraph you referred to an average retail price margin. Was the 
retail price margin larger in the case of Atlantic & Pacific than it was 
in general? Is that a proper question or are your returns of such a' 
confidential character that it can't be answered? 

Colonel England. I am going to ask my colleague. Dr. Stephens. 
Can you answer that question? I cannot answer it. 

Dr. Stephens.^ I don't think I quite get that question. 

Mr. Davis. Dr. Stephens is one of our economists. 

Mr. Hinrichs. The reference is made here to high rates of return 
in a discussion of concentration and monopoly. Earlier you had re- 
ferred to the costs of distribution. I take it that a high rate of return 
can be earned either under conditions of low-cost operation or under 

* Page reference Is to copy from which Colonel England was reading. See p. 1823, supra. 
Dr. George A. Stephens, Chief Statistician, Federal Trade Commission. 

124491— 39— pt. 5 1-3 



1826 CONCENTRATION OF ECONOMIC POWER 

conditions where either high prices prevail or low prices are paid, and 
I was wondering if you had any evidence in this study of excessive 
costs of distribution throrgh the chain stores, or if it was simply 
incidental, that you were referring to a high rate of earnings. 

Dr. Stephens. I think we do not have these costs that you speak 
of, of distribution by the stores. We do have the margin, the gross 
margin; we have the part that the distributors, the retail distributors, 
their proportion of the consumers' dollar. We have that. 

Mr. HiNRicHs. Is that proportion of the consumers' dollar higher 
in the case of the Atlantic & Pacific than in the case of the distribu- 
tive trades generally? 

Dr. Stephens. Well, I don't think we have anything on that here, 
but. I think that probably that would be generally true. 

Mr. HiNRiCHS. That their distributive costs 

Dr. Stephens (interposing). No; that the margin, but understand, 
that is a gross margin we are speaking of here. 

Mr. Hinrichs. But it would indicate the combination of its higher 
costs or higher profits but not a condition of lower cost to the con- 
sumer? 

Dr. Stephens. It would indicate a gross, a higher gross there. It 
w'ouldn't indicate which was greater, whether it was the profit or the 
costs. 

Mr. Hinrichs. Would it be proper to ask to have information on 
that point introduced into the record in connection with this presen- 
tation? 

Dr. Stephens. I tliink it would. ^ 

Mr. Hinrichs. The figures on profits alone are inconclusive, {im I 
correct in that? 

Dr. Stephens. Yes; P should say so, as to profits. 

Mr, Hinrichs. One further question in connection with rates of 
returns. On page 2, am I to understand from those rates of returns 
that were shown on page 2 that you found a direct correlation between 
the degree of monopoly or concentration and the rate of profit which 
was being earned? 

Dr. Stephens. The rate of profit on the investment. There are 
cases as it is shown here by the packers, the meat packers, where the 
rate of profit is comparatively low; concentration there is hi^h so. it 
isn't universally true. You will note that fact that I think it is be- 
tween 4 and 5 percent for these large packers. 

The Chairman. In other words, the profits do not increase in the 
same degree that the concentration increases. 

Dr. Stephens. The net profits on the investment, you do not find 
-that always true, no increasing in that rate. I don't think you can 
make a generalization of that sort. 

Mr. Hinrichs. It is also true, is it not, that in some of these in- 
dustries with a very low degree of concentration, possibly with a low 
rate of return, that very high rates of returns are earned by individual 
efficient producers? 

Dr. Stephens. Yes, indeed. 

Mr. Hinrichs. That would be true, for example, in connection with 
that 1 .52 percent return for cotton processors. 

' Dr. Stephens submitted a iremorandum which was introduced at hearings held May 22, 1939, and 
marked "Exhibit No. 598"; it is included in the appendix on p. 2299. 



CONCENTRATION OF ECONOMIC TOWER ^§27 

Some of those in 1936 would show 25 percent returns or more on 
investment. Is that correct? 

Dr. Stephens. I think that might be true. 

Colonel England. I might say that we always find a very wide 
variation in the rates of return, and you find that the companies may 
have a high rate of return one year and may have a low rate the next 
year. There are so many conditions. If a local company of a cer- 
tain community is prosperous you have higher rates of return than if 
it is relatively depressed with relation to the rest of the country, 

Mr. HiNRiCHS. A low rate of return may indicate nothing more than 
a very inefficient utilization of capital while a high rate of return indi- 
cates either an unusual degree of efficiency or an efficient utilization 
of capital in an expanding market that may in itself be highly com- 
petitive. Is that not true? 

Colonel England. That is correct; yes, sir. 

The Chairman. Are there any other questions? 

Mr. O'CoNNELL. I have a question in arithmetic on page 5,' para- 
graph entitled "Distribution of the consumer's dollar," middle of the 
paragraph. "Of the consumer's dollar paid for the five fresh fruits 
combined, for those markets and producing areas for which the infor- 
mation was obtained, the growers' proceeds were 29.4 cents, distribu- 
tors' gross margins were 35.33," and the rest of the cost you have 
taken up. "The retail margin alone amounted to 31.14 cents and 
transportation costs 20.21." Adding those four figures together I get 
about 116 cents. It must be that there is an overlapping between 
some of those figures. Is that right? 

Colonel England. You see, the remainder between 29 plus 35.33 
and $1 includes the packing, loading, and so forth. The retail margin 
was 31.14.and that is 31.14 out of the 35.33. 

Mr. O'CoNNELL. I see. 

Colonel England. Do I make myself plain? 

Mr. O'CoNNELL. Yes. 

Colonel England. It would have been much better if there had 
been one other figure put in there; it w^ould have made it clear. 

Mr. O'CoNNELL. I have another question I should like to ask. 
Going back again to page 2, paragraph entitled "Conditions in terminal 
grain markets," the statement is made that inquiry indicated "that 
many of the practices which have been the subject of criticism by 
the Commission in earlier investigations." Do you happen to have 
any first-hand information about what in particular that refers to, 
as to whether the Commission had taken any action or had merely 
criticized practices of this type before? 

Colonel England. That goes back to a series of inquiries that 
were made at the beginning of the war and continued over a long 
period of time in the grain market. I would have to refer to the 
record to refresh my mind on that. If it is desired we can furnish 
the information. 

Mr. O'Connell. No; never mind. 

The Chairman. Are there any other questions? 

Dr. Thorp. I have one, Senator, as to whether the investijjatioii 
carried over a long enough period of time to give light on tii(> generally 
held belief that more and more of the consumer's dollar is going into 

' Refers to copy from which Colonel England was reading. See p. .822. .'upra. 



1828 CONCENTRATION OF ECONOMIC POWER 

distribution costs and less and less is going to the original producer, 
not only in agriculture but in the general economic system. 

Colonel England. It did not cover a sufRcient period to establish 
that fact. That would be, as you know, quite an expensive inquiry. 

The Chairman. Thank you very much, Colonel England. 

Mr. Morehouse. In connection with Colonel England's testimony 
we would like the record to show that the reports of which I spoke, 
containing the full details and the reports to Congress, are left here 
as a part of the permanent records of this committee, marked "Fed- 
eral Trade Commission Exhibit 194, a, b, and c." (a) Covers the 
principal farm products, (b), fruits, vegetables, and grapes, and (c) 
the summary report. 

The Chairman. These reports may be filed with the committee. 

(The reports referred to were marked "Exhibits Nos. 316, 317, and 
318," respectively, and are on file with the Committee.) 

Mr. Ballinger. I wish to call Colonel Chantland to the stand. 
I will qualify the witness and then Judge Davis, I think, would like 
to make a preliminary statement before Colonel Chantland proceeds. 

The Chairman. Do you solemnly swear that the testimony you 
are about to give in this proceeding shall be the truth, the whole 
truth and nothing but the truth, so help you God? 

Colonel Chantland. I do. 

TESTIMONY OF COL. WILLIAM T. CHANTLAND, ATTORNEY 
FEDERAL TRADE COMMISSION, WASHINGTON, D. C. 

Mr, Ballinger. State j^our name for the record. 

Colonel Chantland. William T. Chantland. 

Mr. Ballinger. What is your present position in the Federal Trade 
Commission. 

Colonel Chantland. I am an attorney, helping out on this work. 

Mr. Ballinger. How long have you been with the Federal Trade 
Commission? 

Colonel Chantland. I came over here, in, March 1915, shortljjr 
after it was organized and helped set up the Chief Ejxaminer's Divi- 
sion at that time. 

The Chaiiiman. You say you came over there. From where? 

Colonel Chantland. From the Department of Justice. 

Mr. Ballinger. What particular position or what particular role 
did you play in the public utilities inv^estigation? What was the 
particular nature of your work? 

Colonel Chantland. That, as I think most of you know, occupied 
us 8 full years, or a little more, and during the first 6}^ years of that 
period I was in direct charge of the legal staff under Judge Healy, as 
chief counsel. After lie went to the Securities and Exchange Com- 
mission I was in full charge. The latter portion of the period included 
the time in which our reports were prepared. 

Mr. Ballinger. Would you state briefly what experience you hav-e 
had with the Government? 

Colonel Chantland. As I said, I came to Washington, to the De- 
partment of Justice in 1911, when Senator Kenyon was trust buster, 
intending to stay 2 months, and I am still here. After the war -was 
over I was in private practice for a little while, during which I was 
counsel for two Senate committees and one House committee, the 



concj:ntration of economic power 1829 

Senate committee on post-war activities and the House committee on 
war activities. In 1922 I was sent back from the Federal Trade Com- 
mission to the Department of Justice on Presidential order to become 
a part of the War Frauds Section there, and came back to the Com- 
mission in 1927, and this utility inquiry opened, as you know, by the 
resolution of the Senate of Februarj^ 15, 1928, and from that time 
until it closed in 1936, I gave my entire attention to that. 

Mr. Davis. Mr. Chairman: Before Colonel Chantland enters upon 
his statement in regard to the utility investigation 1 wish to make a 
general explanatory statement. As has already been indicated, this 
committee delegated to the Federal Trade Commission the duty of 
assembling and presenting for the consideration of the committee 
such material as it had in its files in the light of its past experience 
which related to the subject under inquiry. There was so much in 
the files of the Commission that it was impossible to present every- 
thing that related to the subject, and in the interest of brevity and 
having due consideration for the valuable time of the members of the 
committee, the Commission in effect has gone back only 7 or 8 years, 
and in presentmg much of the material which has already been 
presented orally or filed with the committee, and other material which 
will follow, there is no indication that all of that embraces any present 
live issue so far as requiring action by the committee, but it is pre- 
sented in order to give what might be termed a historical picture of 
what has happened in various cases and what has been developed by 
investigations in various industries. For instance, the Commission 
has presented summaries, together with, as exhibits, the pertinent 
documents of various cases wliich were formerly tried by the Com- 
mission and in which cease-and-desist orders were entered and in 
which decisions of the Commission became final either by failure of 
appeal or upon affirmation upon appeal. 

So far as we know, the persons and concerns involved in those par- 
ticular cases have complied with the cease-and-desist orders of the 
Commission and have ceased the practices condemned in those orders. 
However, that is presented to the committee in order that you may 
have a picture of the methods employed in these various cases, and 
by these various industries or members of industry, to effectuate 
restraint of trade, or to indulge in monopoUstic practices and the 
effects thereof. 

The Chairman. In other words, while individual corporations 
may have reformed, you cite history in prder to show what the prac- 
tices have been or are. 

Mr. Davis. Yes, and well-known practices which we leam from 
time to time are being engaged in by other members of those or other 
industries. 

The Chairman. So that the issues are live enough for the consider- 
ation of the committee so far as practices are concerned, but they 
are merely historical data so far as individuals are concerned. 

Mr. Davis. That is the point exactly which I want to make. It 
wasn't presented with any idea that we want the help of the committee 
or of the Congress to deal with those particular instances, but we do 
think that every case that we have presented, and particularly the 
certain number which were picked out as representing various different 
types of practices which were indulged in, are very live matters and 
we feel will have to be considered by the committee in reaching a 
solution of some of the questions involved. 



1830 CONCENTRATION OF ECONOMIC POWER 

The Chairman. I take it, therefore, that you haven't reached such 
a degree of optimism as to justify the hope or the beUef that a cease- 
and-desist order by the Federal Trade Commission in a particular case 
means the abandonment of that particular monopolistic practice for 
all time in the future by all other industries. 

Mr. Davis. That is true. While most salutary effects outside 
the particular ones involved have very frequently occurred, yet un- 
questionably they do not occur in all cases, and others who are not 
involved persist in taking up some of the same practices involved. 
So what I say with regard to that is likewise true of some of the 
general investigations which have been conducted by the Commission 
and which are being presented and will be further presented. 

For instance, with respect to the matter which Colonel Chantland 
is going to discuss, the electric and gas utility investigation which 
was conducted by the Commission pursuant to a Senate resolution, 
in which Congress was sufficiently interested that it provided from 
year to year additional funds to carry on that investigation for a 
period of eight years, under the terms of the resolution, except 
during the time when Congress was not in session, the Commission 
filed monthly reports of its progress with the Senate, and then those 
and subsequent reports, including the summaries and conclusions and 
recommendations, were all filed with Congress, aggregating all told 
nearly 100 volumes, which are Senate documents and which are of 
such interest that the Commission still receives frequent requests for 
various volumes, both from members of the industry, from banking 
houses, and from economists and students of the problem, from various 
Government departments and from State commissions; in fact, so 
much so that Congress has had to provide additional funds for printing 
new volumes of a good many of those reports, so that they are still in 
general use and frequently are quoted from by various students and 
writers on the subject. 

There were two or three phases of that investigation as directed by 
the Senate resolution. One was the propaganda methods employed 
by the industry, and we have two filed volumes on that which give a 
very illuminative picture of the various methods that were employed 
to lull the public into a sense of security with respect to their corporate 
issues and also that everything that they were doing was perfectly 
all right, and so forth. That was one phase of it, of which Colonel 
Chantland had direct charge. 

Another phase of it was the holding-company system. It particu- 
larly directed a study and report upon holding companies, their con- 
duct and methods in those industries, and a good deal of our various 
factual reports and other reports relate to that subject because, as 
was developed in the inquiry, nearly all of the electric and gas utility 
systems are under the control of holding companies. 

Largely as a result of those disclosures and reports, Congress enacted 
certain legislation. I think it generally is conceded that these develop- 
ments, these reports, contributed most materially to the enactment of 
the Securities Act in 1933 and to the Securities and Exchange Commis- 
sion Act and the Holding-Company law, and the 1938 Gas Act. 

Many of the evils which were pointed out as existing in the industry, 
and with particular reference to the holding-company system, are 
condemned in these acts. Take for instance the Holding Company 
Act, which was passed by Congress and the administration of which 



CONCENTRATION OF ECONOMIC POWER 1831 

was vested in the Securities and Exchange Commission. It, gener- 
ally speaking, condemns and prohibits at least the major part of those 
practices which Congress considered to be evil and also, as you know, 
provides for deahng with the holding-company situation with respect 
to certain industries, particularly the electric utility industry and, J 
think, to some extent the gas, and so far as we are advised and as we 
believe, the Securities and Exchange Concmiission is faithfully and 
efficiently administering that law according to the intent of. Congress. 

But we are presenting these facts in relation to the operation and the 
various practices that grow up in these holding-company systems, 
where a holding company will have innumerable subsidiaries and they 
will have affiUated companies and all of that, and all dealing with each 
other and making charges, and so forth. We think that the same 
evils, the same practices that were present with respect to the utiUty 
industry, are in large measure in vogue certainly more or less in 
various other industries, and that a proper subject for the considera- 
tion of this committee is as to whether or not the holding company 
should be banned in other industries, or curtailed or regulated, or 
some action taken with regard thereto. 

Now that is the purpose of presenting this jpicture. 

Fiu-thermore, it may be stated that there have been other beneficial 
results flow from the disclosure of the facts presented. For instance, 
numerous State utility commissions have taken that as a basis and 
have effectuated reductions in price of services to the public. Many 
of the companies have, as the result of investigation, undoubtedly 
voluntarily terminated some of the practices that were engaged in, 
and in many instances are said to have voluntarily reduced rates, and 
so forth. 

Our reports undertake to evaluate the amount of those reductions 
that resulted throughout the country froni the time that the investiga- 
tions commenced until we made our final report, and they go into very 
high figures. 

With that explanation, Mr. Chairman, I would hke for Colonel 
Chantland to proceed with his statement. 

Colonel Chantland. Mr, Chairman, gentlemen of the committee, 
you appreciate that with the Commissioner's very able summary of 
this report, I might perhaps shorten it, except for the fact that I am 
assuming you desire to insert this report into the record as it stands 
because it has been prepared rather carefully and makes reference 
statements and things of that sort, and if there is time I think I should 
read it in full. You appreciate the fact that Commissioner Davis, 
for the latter half of the eight years, was in direct charge of this utility 
investigation and is therefore able accurately to make the summary 
that he has given you so completely. 

On February 15, 1928, the United States Senate, through Senate 
Resolution 83 of the Seventieth Congress, first session, directed the 
Federal Trade Commission to conduct an inquiry into and to report 
on the growth of capital assets and liabilities of public-utility corpo- 
rations, both operating and holding companies, doing an interstate or 
international business; the facts concernmg the issuance of securities; 
the extent to which holding companies owned or controlled engineer- 
ing, construction or management companies; and complete details 
concerning the operation of holding companies, together with a 
recommendation as to the legislation, if any, which should be enacted 



1832 CONCENTRATION OF ECONOMIC POWER 

by Congress to correct existing abuses. In the second part of the 
resolution, the Commission was directed to investigate and report 
concerning the propaganda or publicity activities of public utilities, 
particularly with regard to efforts to influence public opinion concern- 
ing municipal or public ownership, or to influence elections of Presi- 
sident, Vice President, and Members of the Senate, during a period 
stated in the resolution. 

At first statistical schedules consisting of 225 printed pages was pre- 
pared and submitted to the companies for which the information 
was desired. Many of the companies filed reports in accordance with 
these schedules, filled them out, but most of these were lost in the 
fire which destroyed our building in August 1930. 

For the most part, then, the data, used were obtained directly, by 
direct examination by the Commission's accountants, auditors, and 
other representatives, of the corporate records of the utility com- 
panies and their files, including contracts, correspondence, corpora- 
t'on minutes, stock transfer books, accounting records including 
vouchers, and so forth. Engineering examinations were also made 
among the more important groups for the purpose of securing first- 
hand information concerning physical condition and ; managerial 
'efficiency. Data were also procured from State public-service com- 
missions to some extent and other State agencies, from Federal in- 
come-tax returns, from the Federal Power Commission, and from 
proceedings before public-service authorities and the courts. 

Upon completing the examination of a company's records, the 
Commission's examiner who conducted the investigation of that par- 
ticular group or company prepared a report covering the material 
procured. Conferences were then held with representatives of the 
companies, covering the material procured after it had been sub- 
mitted to the companies for checking as to facts. This was for the 
purpose of eliminating any possible fact errors. The report, to- 
gether with the pertinent exhibits, were then formally put into 
the record at a pubUc hearing as directed by the resolution of the 
Senate. The examiner who prepared the report testified in explana- 
tion and interpretation of his report, and, on some important financial 
transactions, company employees conversant with them were also 
called to testify, and the company involved was permitted to be, and 
was represented by counsel and had the privilege of cross-examin- 
ing, and the opportunity was also given to the companies to intro- 
duce any pertinent testimony or evidence which they desired to 
present. May I here interpolate that the record is full of expressions, 
when we were through with them, of entire fairness in treating them 
in the whole matter; that appeared repeatedly after Judge Dal and 
those of us who were in this had, gone down the line with them, as we 
felt, rather thoroughly. 

The accuracy of the examiner's reports was seldom challenged and 
in only a few instances did the companies offer any evidence contro- 
verting the contents of the examiner's report or his conclusions. Of 
course the conclusions were our own, that is our own examiners'. 

In accordance with the terms of the Senate resolution, the Commis- 
sion filed monthly interim reports during the 8 years of the investiga- 
tion except during the summer months. A total of 94 such monthly 
reports and 7 accompanying reports of exhibits were filed, together 
with 11 special reports, what we might call a summary or in a sense 



CONCENTRATION OF ECONOMIC POWER 1833 

final on a topic, as follows: 69-A, 71-A, 71-B, 72-A, 73-A, 77-A, 
81-A, 84-A, 84-B, 84-C, and 84-D. So that the committee may 
understand it, we put the letter after those so as not to break up the 
sequence of the regular commanded and directed monthly reports. 
That seems to be a better way of doing it. Some of these will be 
hereafter explained. All were printed as a part of Senate Document 92 
of the Seventieth Congress, first session, and they were also identified 
by a part or volume number. 

UTILITY PROPAGANDA. 

Colonel Chantland. I will mention first something as to the propa- 
ganda part of the resolution. The material contained in volumes 1 to 
20, with the 7 exhibit volumes, wliich dealt with pubUcity and propa- 
ganda activities and expenditures therefore by the various associations 
of the electric power and gas industries, was summed up in part 71-A, 
which was submitted to the Senate on December 12, 1934. A copy of 
this I have here, consisting of 486 pages, and it is attached hereto and 
offered as exhibit F. T. C. 205-A, and, as I understand, this is received 
in evidence but not to be reprinted. 

The Chairman. That is correct. The exhibit is received. 

(The exhibit referred to was marked "Exhibit No. 319" and is on 
file with the committee.) 

Colonel Chantland. The material relative to pubhcity and 
propaganda activities by utihties groups and compam'es carried on 
outside of and in addition to their participation in and contribution 
to the activities of the various associations was summed up in part 
81-A, together with an index to the record on company pubhcity 
and propaganda. This was submitted to the Senate on November 14, 
1935. A copy of this report I have here, consisting of 570 pages, at- 
tached hereto, and offered as F. T. C. exhibit 205-B. This also 
contains some association propaganda activities that were disclosed 
subsequent to the filing of the other. 

The Chairman. It will be received. 

(The volume referred to was marked "Exhibit No. 320V and is on 
file with the committee.) 

C olonel Chantland. Volume 71-A consists of two parts. Part I 
siaies the ultimate objective or the purpose of the activities and 
methods used in obtaining such objective or purpose^ the persons or 
agencies employed, together with a statement as to how they func- 
tioned and were financed. .Part II is in the nature of a brief of facts 
setting forth examples of the activities thus carried on and engaged in. 
The Commission's represent: atives examined the files of numerous 
associations and committees and procured voluminous pertinent data. 
From this material, representative illustrations were taken, and these 
were complemented with charts, consolidated tables, and appendices. 
There are some very illuminating charts made up at the end of 71-A 
bringing together the activities in the schools, bringing together the 
hiring of professors and things of that sort, all combined in tables. 
All of the relevant facts are from testimony, and this should be re- 
membered, and records of the associations, agencies, persons, and 
concerns of the electric and gas utility industries themselves, on this 
propaganda phase. . The statements and conclusions, therefore, are 
the declarations and admissions of these associations and the persons 



1834 CONCENTRATION OF ECONOMIC POWER 

connected with them, or are based on such declarations and admissions 
and are not hostile testimony, but are really declarations and admis- 
sions, so to speak. 

The investigation established that since 1919 the electric and gas 
utilities have engaged in the greatest peacetime propaganda campaign 
ever conducted by private interests in this country. In addition to 
using their own agencies, they enlisted outside organizations and 
personnel in active and often secret aid in their efforts to disparage 
all forms of public ownership of utilities. All activities in this regard 
were carefully considered and planned by responsible heads of the 
industries and their associations and responsible committees. Such 
propaganda activities were carried on chiefly through the National 
Electric Light Association, which was the national association of the 
electric industry, comprising in membership over 90 percent of the 
industry, and by the American Gas Association, the national associa- 
tion of the gas industry, to a lesser degree in expenditure, which 
comprised over 90 percent of that industry. State or regional asso- 
ciations were organized to carry out locally the work nationally 
planned. State committees or bureaus on public utility information 
were also set up, which were devoted solely to propaganda, and at 
one time there were 28 of these covering 36 of the morfe populous 
States. State directors of these committees were selected for their 
ability to contact press associations and newspaper men and educators, 
because it was the declared opinion of the utilities that the press and 
schools represented the two greatest public opinion forming agencies 
of the present and future generations. 

In the press, the material ran the gamut from harmless and often 
needless advertising to "canned editorials" furnished to thousands, 
of newspapers throughout the United States, especially the smaller 
local weeldies. In the schools the material furnished began with a 
picture book for kindergarten and included insertion of desired 
material and the elimination of undesired material in books intended 
as text and research books. Their efforts were thus not confined to 
affirmative propaganda, but included efforts to block""!! full and fair 
expression of opposition views, especially in books intended for 
school and research work. 

The variety of this activity carried on was well illustrated by the 
testimony of Mr. Oxley, the National Director, when we went over 
that with him, and he conceded that the propaganda ran the gamut, 
and used everything except sky writing — they didn't hire that. 

In addition to general press pubficity, the utilities carried on 
propaganda through a number of subsidized pubKcity agencies. 
In some instances newspapers or a controlling interest therein, were 
acquired. The National Electric Light Association formed various 
committees for contacting and cooperating with other industries and 
with many associations. In this manner, agencies such as the United 
States Chamber of Commerce, Kiwanis, Rotary, Lion's Club, women's 
clubs, and many others, were utihzed to aid the utility program. 
Repeated attacks were made on every outstanding pubhc project, 
whether existing or contemplated, for example the Ontario hydror 
electric system, Muscle Shoals, and Boulder Dam, and may I here 
again interpolate, that in the Ontario situation they published a series 
of books, and as soon as one was assailed another book was issued, and 
the matter in the former book was quoted as though it had stood 



CONCENTRATION OF ECONOMIC POWER 1835 

unchallenged, until they thus built up a line of authority, each of 
wliicli had been discredited. 

As indicated by the sales of their security issues in the period from 
1923 to 1929, the utihties by such propoganda built up a belief by the 
general public in the soundness and value of all security issues of 
privately owned utihties, and I think, Senator, you will remember 
the brief that was submitted to the Senate Interstate Commerce 
Committee signed by some 190 lawyers, in which they set forth as a 
reason why this investigation should not take place that the whole 
situation was sound. It was rather amusing after the disclosures. 

May we insert the remark that " the assertion of soundness and 
one reason for such soundness, viz: alleged complete and sufficient 
regulation by the States, was made in a printed brief submitted to tlie 
Senate committee, to which I have just referred. It consisted of 261 
pages and was in support of the contention of the utilities that the 
proposed investigation was unnecessary. • This is in the Commission's 
record as exliibit 924. We do not have a spare copy of it, but it was 
filed with the Senate Committee at the time. Billions of dollars of 
nominal value of securities were issued, often with little or no regard 
for the underlying soundness of or necessity for such issues. The 
years of propaganda activity undoubtedly proved a powerful aid in 
having made the general public utility*' conscious. Boastfully,- Mr 
Aylesworth, then the managing director of N. E. L. A., set forth as a 
reason why such a Nation-wide and expensive propaganda program 
should be pushed for the utilities, that the "public pays" — that is, 
that the rate-paying public paid the bill. 

To measure accurately what the investing public lost in these issues 
is impossible, due to other factors, including the depression, and to the 
further fact that no one has ever assembled the varying prices and 
amounts paid for such security issues, but the amount of loss caused 
in whole or in part by such extensive and reckless issues was very great 
indeed, certainly running into the hundreds of miUions. 

Part 81-A dealt with the propaganda and publicity of 16 groups and 
their companies, carried on outside of and in addition to their partici- 
pation in and contribution to the activities of the various associations 
reported in part 71-A, and, as I said, containing some association 
propaganda uncovered subsequently. 

It was found that most of the propaganda carried on by the holding 
company groups or local operating companies was in harmony with 
and in pursuance of the general plan made and carried on by the 
various associations and committees (National and State) of the 
electric and gas industries. Some groups had quite complete intra- 
system propaganda organizations, similar in general character and 
functioning to the associations of the industries. The associations 
furnished material either volmitarily or upon sohcitation of the com- 
panies, and the latter distributed these loeally. This scheme, whereby 
the associations produced the propaganda and the groups or indivi- 
dual companies distributed it, was very effective and in general use 
throughout the United States. 

Schedules and exhibits were included in the report which showed 
the amounts expended by the various groups and companies for 
advertising; their contributions to other, trade associations; fees, 
retainers, and other payments to attorneys, to educational institu- 
tions, and to professors and teachers; and contributions to the national 



1836 CONCENTRATION OF ECONOMIC POWER 

committee of the two major parties which were made by persons con- 
nected with these companies. 

FINANCIAL STRUCTURE, PRACTICE, RATES, AND RETURNS OF PUBLIC 

UTILITIES 

Colonel CiiANTLAND. I will pass now to the financial phase of the 
holding and operating companies of electric and gas utilities. On 
January 28, 1935, the Commission submitted to the Senate chapters 
XII and XIII of a summary report with recommendations, on holding 
and'operating companies of electric and gas utilities, consisting of 218 
printed pages. This report was published as Senate Document No. 92 
(pt. 73-A). I have a copy of it here as Commission's exhibit 205-C, 
for this investigation, wl Jch I presume will receive the same treatment 
as those previously offered. •- 

(The report referred to was marked "Exhibit No. 321"; and is on 
file with the committee.) 

Colonel Chantland. This report, together with 69-A and 84-B 
covered a survey of State laws and regulations, certain pertinent legal 
studies, the present extent of Federal regulation and the need of 
Federal legislation, together with conclusions and recommendations. 
In 69-A there are two parts, one a compilation that we gathered to- 
gether, that I think perhaps had a special interest for the Senator at 
the time, and now has — a compilation of proposals and views for and 
against Federal incorporation or licensing of corporations, and com- 
pilation of State constitutional, statutory, and case law concerning 
corporations, with particular attention to public utility holding and 
operating companies. 

(The report referred to was marked "Exhibit No. 322" and is on 
file with the committee.) 

Colonel Chantland. The exhaustive study made by the Commis- 
sion established that no substantial progress was being made by the 
States generally toward effective regulation of holding companies. In 
a few States efforts were made, but generally the situation remained as 
it was 25 years earlier. The power of the States in regulating holding 
companies was handicapped by nonresidence and the interstate charac- 
ter of their business, and other causes. Then, too, certain of the States 
granted roving charters with practically unlimited powers, thereby 
leaving the States in general quite helpless. 

The holding company, as such, performs no producing function. In 
the utility field it has not, therefore, been subject to regidation as such. 
Charters were granted to operating utilities to perform j.-'^neral public 
utility service, but as a result of holding company control and man- 
agement, many operating companies contracted away their charter 
duties and. real performance of their principal charter functions to ih? 
holding company or to other companies designated by the controlling 
holding company, thus ousting practically all State jurisdiction over 
the business. The opinion was expressed that appropriate Federal 
legislation would remed}'^ this situation. The Commission further 
stated that there appeared to be three methods which seemed to com- 
mend themselves for the exercise of Federal jurisdiction: (1) The taxa- 
tion method; (2) direct statutory inhibitions with penalties; (3) a com- 
pulsory Federal licensing act, coupled with a permissive Federal incor- 



CONCENTRATION OF ECONOMIC POWER 1837 

poration act. These methods are explained in detail at pages 67 to 75, 
inclusive, of part 73-A, that I have already presented here. 

On June 17, 1935, the Commission submitted to the Senate chapters 
I to XI (preceding 73-A already referred to), being a review of the 
record with regard to the economic, financial, and corporate phases 
of holding and operating companies of electric and gas utilities. The 
reason they are in this order, although this precedes the other one 
is that we were able to complete the one before the accounting work 
could be completed. 

This report, which is devoted to the electric-utility group and some 
manufactured gas-utility groups, consisted of 882 printed pages and 
was published as Senate Document 72-A and is here offered as 205-D. 
. The Chairman. It may be received under the same conditions. 

(The report referred to was marked "Exhibit No. 323" and is on 
file with the committee.) 

Colonel Chantland. During the earlier expansion period of electric- 
utility services, occurring about 1905-10, and especially in the period 
after the World War up to 1930, when war-profit money was seeking 
an outlet, the utilities seemed to offer an especially invitmg and lucra- 
tive field, with their mere sporadic and ineffective State regulation. 
The public-utility holding company then became an active and domi- 
nant influence in utility development, although — I am talking 'now 
about electric and gas utilities — there continued to be numbers of small 
independent companies. The functions, variously and in varying de- 
grees, performed or claimed to be performed by many holding com- 
panies, v/hich were asserted as advantages for this type of structure 
were (this is what they were claimed): obtaining funds from investors 
which probably could not be obtained by small independent compa- 
nies, supplying the advantages of large-scale production, skilled man- 
agement, and expert engineering; and extending and improving service, 
with attendant increases in consumption and decreases in production 
costs, which make lower rates possible, although accompanying un- 
sound financial practices often constituted aids to maintaining rather 
than reducing rates. Even when some or all of the economies claimed 
were in fact brought about, no substantial rate reductions to the public 
occurred. The usual result was a siphoniug off of the earnings so 
resulting into the holding-company coffers. 

Among the evils of the holding-company management were pyra- 
miding, attended with the issuance of highly speculative securities, 
enabling a few men to gain practical control of vast utilitjr empires, 
with a minimum of investment; the exaction of various kmds of es- 
cessive fees from controlled operating companies; inflation of capital 
structures accompanied by pressure to obtain earnings on inflated 
values at the expense of the rate-pa3^ing public, because of course that 
was practically the only source from which the money came into the 
till; objectionable, misleading, and nonrevealing accounting practices, 
maintaining fictitious prices on their stocks through manipulations of 
the market; retaining excessive funds collected from the operating 
companies as purportedly required for Federal income taxes; and im- 
pressing their activities with an interstate character for the purpose 
of escaping and avoiding whatever otate regulation existed or was 
attempted. This last point is especially illustrated by a number of 
cases in volume 73-A, beginning at page 79. 



1838 " CONCENTRATION OF ECONOMIC POWER 

FINANCIAL ACCOUNTING PRACTICES OF UTILITY COMPANIES 

Colonel Chantland. More specifically as to the financial and ac- 
counting practices, the assets of large utility systems which were built 
up through acquisitions of independent operating companies and their 
subsequent unification through consolidation and merger and related 
construction, reflected large amounts by which they were written up 
in value in one way or another in the process. Write-ups, improperly 
capitalized intangibles, and inflation in the fixed assets of all of the 
holding, subholding, and operating companies examined, so far as dis- 
closed, were found to aggregate approximately $1,500,000,000 at the 
final dates of examination. 

Some examinations were made subsequent to thai so that even our 
total is not in the table thus shown, arid we do not claim to have 
discovered all of them nor to have examined all the companies. 

A large part of the write-ups reflected the cap'talization of the addi- 
tional earning power which was presumed and anticipated through 
the consolidation and merger of acquired independent operating com- 
panies by whatever economies might be affected and to any future 
economic growth in the community or territory served. Often this 
reflected nothing more than the optimistic judgment of the pro- 
moters or the result of a so-called horseback appraisal, that is, a super- 
ficial inspection of the properties by their engineering stafTs. 

The merged or consolidated company was required to issue, directly 
or indirectly, ts common stock or other securities to the controlling 
interests in exchange and consideration for the assets of the constituent 
companies at their increased values. The sale to the public of the 
nonvoting stocks and long-term debt so issued by the new company 
permitted those in control to reduce their investment and in some 
instances to recover all of it, and in extreme cases more than all of it, 
and still to exercise the same degree of control over the properties 
through the retention of the new companies voting common stock 
which emanated from the write-up, and cost the controlling interes^-^ 
little or nothing. 

In some Instances utility operating companies employed appraisals 
and revaluations as a basis of writing up the values of capital assets. 
As contrasted with the more common forms of write-ups encountered 
as referred to above, the write-ups based on appraisal, which in 
many cases resulted from State regulatory commission orders in con- 
nection with rates and other matters, were credited for the most 
part to capital surplus or retirement reserve. 

Numerous appraisals made of the properties in the Associated Gas 
& Electric Co. system resulted in an appreciation of fixed assets of 
approximately $83,000,000 in that one system; and here is the strange 
thing, that these appraisals were made by E. J. Cheney, who was 
supposedly an independent appraisal engineer. 

It was developed by our examiner that Cheney had been operating 
in the interest of and under the control of H. C. Hopson, vice president 
of the Associated Gas & Electric Co., who, together with Mr. Mange 
was in full control of the system, and could not have been considered 
in any sense as having an independent professional status. 

There were other similar cases, none perhaps so bald. 

Other forms of write-ups reflected the capitalization of large profits 
taken by holding companies in the performance of construction work 



CONCENTRATION OF ECONOMIC POWER 1839 

for their operating subsidiaries, the capitaUzation of stock and bond 
discounts incurred in connection with security issues, and the appre- 
ciation of capital assets through failure to remove the value of property- 
retired from service. 

We found in the big Insull group, I forget how much but it was in 
the millions, that hadn't been used for a long time but was still carried, 
and we found that in many instances. 

In a part of the subsidiaries of one large holding-company system 
which was in receivership, the accountants discovered that over 
$18,000,000 of worn oiit and abandoned property was carried in the 
property account. Yes; that was the Insull illustration. 

In connection with mergers and consohdations, the investigation 
developed instances of reorganizations, of what it appeared that the 
principal purpose was to avoid the payment of Federal income taxes. 
These instances involved United Gas Improvement Co., Associated 
Gas & Electric Co., certain Insull companies, Halsey, Stuart & Co,, 
American Superpower Corporation, and the United Corporation. I 
recall one instance where a $9,000,000 item was carried through in 
that way, in a trade betwex^n Associated and United. These com- 
panies entered into complicated usually intersystem transactions in 
securities involving large sums in which the payment of taxes on the 
profits was avoided. 

Certain holding-company groups carried on a process of actively 
buying its own securities on the organized exchanges, while they were 
being sold to the public through other channels. During the 3 years 
and 9 months from April 21, 1927, to December 31, 1930, one holding 
company group sold 41,488,512 shares of its common no-par stock to 
the public for $1,146,518,779.19. During the same period its pur- 
chases of this stock on the exchanges amounted to 34,057,929 shares 
at an expenditure of $965,710,037.65. That is, in order to make a 
net issue of less than 5,650,000 shares this company effected sales 
more than seven times as great and purchased simultpneously a volume 
nearly six times as great. If there could be an example of attempting 
to rig a market, that would be it. 

Company purchases constituted a large proportion of the total 
transactions on the New York Curb Exchange. For example, from 
April through mid-October 1929, company purchases ranged from 
54.6 to 99.6 percent of the total sales on the curb and averaged 72.9 
percent for the 6}2-montli period. This buying demand furnished by 
the company and the general public, plus the influence of the specu- 
lative demand for utility stocks, led to an increase in the closing curb 
price from $28^/i per share on June 9, 1924, to $46K July 19, to $52 
September 2, and $68 on October 15, 1929. Then followed the crash 
and they went down to $1, $2, $3, and $4, if I recall rightly. 

Pyramiding of holding companies, subholding companies, sub- 
subholding companies, and so on, upon the operating company was 
found to be carried to a very attenuated pinnacle. In one holding- 
company group there were 10 companies in one line of .control from 
the top to the bottom of the pyramid. 

I have some typewritten copies of this illustration. I will pass 
that to the committee. I think that might be printed right into the 
record at this point, Senator, if it is not too long. 

The Chairman. Wfthout objection, it may be so ordered. 



1840 CONCENTRATION OF ECONOMIC POWER 

(The chart referred to was marked "Exhibit No. 324" and is in- 
chided in the appendix on p. 2178.) 

Colonel Chantland. The sample that I have just now offered is 
part of the situation. Tiiat can be traced out from this large chart, 
F. T. C. exhibit 5160, that is in our records. 

(F. T. C. chart 5160 was marked "Exhibit No. 325" and is on file 
with the committee.) 

Colonel Chantland. At the top of this (referring to "Exhibit No. 
325") 3^ou see Hopson and Mange because they were in complete con- 
trol, but follow the right lines around here and you will have exactly 
what you have on the typewritten sheet, that is 1 1 in the tier. You 
find the last one there, Patchogue, around in here (indicatmg). That 
is a chart of the Associated Gas system at one moment, and that is 
all I can say. The Associated system changed from day to day, 
maybe. In other words, there may have been 11 here that 4ay and 
the next day there may have been less, but they changed very rapidly. 

I can give you the illustration of a beautiful holding company up 
in the State of New York, the General Gas & Electric. If there was 
an example of a fine holding company with one tier of operating com- 
panies, it was perhaps that. You and I perhaps had a little stock in 
that in the evening and relied on our holdings in the operating com- 
pany; we were close to it, but the next morning we had the same 
stock but we didn't have any stock in those operating companies. 
They had switched our interest in those companies over into the 
Associated system somewhere else and put back into tliis company, 
in which we had stock, General Gas & Electric, merely some created 
stuff in the system that was a tenuous equity in nothing. That is 
what we had the next morning and we had nothing to say about it. 
Of course, the story isn't all told yet. 

In the Insull system, I will show you a little bit there at the same 
time. I submit this to be placed on file. 

The Chairman. The chart may be admitted without printing. 

(The chart referred to was marked "Exhibit No. 326" and is on 
file with the committee.) 

Colonel Chantland. This chart shows you only the top Insull com- 
panies, beginning with the voting trustees, and the various corpora- 
tions, carried down to where we begin to get the subholding companies. 
We carry around through here (pointing to " Exhibit No. 326 ") down to 
the Middle West Utilities Co. and the Midland United Co. Remem- 
ber that we have four tiers there. 

Now I Avill show you a chart that gives what is in this sub-holding- 
company group only. Presto! That is it. I think if that could go 
in the record, it would be well. 
^ The Chairman. It is received. 

(The chart was marked "Exhibit No. 327" and is on file with the 
committee.) 

Colonel Chantland. That is just one of them. 

In the next chart, without opening it, is a similar thing for the 
Midland United. If there is any justification that anyone has thought 
of yet for such a maze as the two samples I have shown, we haven't 
heard it. 

In the Insull system in which aU of the holding and subholding com- 
panies became bankrupt or went into receivership, there was a pyra- 
mid, as you will find there. I think it went as far as 9, some of them 



CONCENTRATION OF ECONOMIC POWER lg41 

8, some of them 7. Through the device of a pyramid of holding 
companies the controlling interests were able to control a vast chain 
of operating companies with a minimum of investment. For instance, 
in the Insull tier pyramid, $1 of investment by the Insulls controlled 
$2,000 of investment in the West Florida Power Co. a common-capital 
structure consisting of 50 percent of 5 percent bonds, 25 percent of 
nonvoting 6-percent preferred stock, and 25 percent of common 
stock for the operating company, and 50 percent of nonvoting pre- 
ferred stock and 50 percent of common stock for each holding and sub- 
holding company in the pyramid. 

Those were typical methods of setting it up. In prosperous times 
when the operating company made 8 percent on its total investment, 
in a six-company pyramid having no write-ups the earnings available 
for the first holding company would be 25 percent on the common 
stock and on the apex company 295 percent, but earnings of 5 percent 
on the operating company's total investment would leave only 5 
percent for its common stock, only 1 percent for the common stock 
of the first holding company and nothing for the four other holding 
companies in the pyramid. ...,t 

You will find the charts setting forth that in the record as men- 
tioned in a footnote. 

The earning statements of a number of companies contained many 
fictitious items of income. For example, preparatory to its refinancing 
in 1929, Middle West Utilities Co. — that is the one chart I have just 
handed you, that long one — the principal Insull holding company, 
began pa3-ing di\idends on its common stock in 1925. From 1922 to 
1928, inclusive, the Middle West annual reports showed $16,000,000, 
nearly $17,000,000, of income available for common-stock dividends. 
Now that is the book showing. During the same period it included 
in its income $16,781,100 of fictitious income as profit on sales and 
exchanges of securities among the companies in the Middle West 
system, and from revaluations of securities and properties owned; in 
other words, trading back and forth at a set-up and mark-up of values 
that had no basis, not an item of new assets came in — I mean not a dol- 
lar of new items — when those were made. Cash dividends amounting 
to $8,843,000 were paid in the period from 1925 to 1928. It is evident, 
therefore; that if amounts claimed as profit on sales, exchanges, and 
revaluations of securities and properties were illusory, there was 
little or no income available for dividends on common stock and such 
dividends were paid out of capital; without the dividend record the 
company could not have sold common stock to the public, and, of 
course, that was the purpose of doing it under the complete State 
regulation that the people believed and as represented to the Senate 
that there was, which amounted to nil. 

The undistributed earnings of prosperous subsidiaries were often 
included in the earnings of holding companies although such sub- 
sidaries had not declared any dividends out of the earnings nor set 
up any obUgation on their books to pay anything to the holding 
company. Now, mark you, not a step had been made to move this 
up in there and yet the holding companies took it in as though it 
was there. This practice was wholly indefensible, both legally and 
as a matter of correct expression of business transactions, and resulted 
in misleading financial statements for individual companies in the 
holding-company system in that the surplus was improperly duphcated 

124491— 39— pt. 5 1 i 



1842 CONCENTRATION OF ECONOMIC POWER 

in the accounts, both claim agencies being at one and the same time 
in the accounts, being at one and the same time recorded in the books 
of the subsidiary and the holding company. The earnings so taken 
up by the holding company were considered as valid assets but in 
some cases they were never realized due to receiverships. 

The investigation disclosed that a substantial source of net income 
to many holding companies, either directly or indirectly, was the fees 
collected from subsidiary or affiliated operating companies for financial, 
management, and engineering services and other supervisory charges. 
In many cases the actual services rendered under the service contracts 
were questionable and the fees collectedd were high and frequently 
extremely high in relation to cost. For example, the Associated Gas 
<fe Electric system, in a little more than 5 years, had a net income of 
over $6,500,000 for management and construction service alone, or 
193 percent net profit on service cost, and in addition had servicing 
income on merchandising, purchasing, and other services. 

Byllesby Engineering <^ Management Corporation, servicing the 
Standard Gas & Electric group had a total net income for 11 yearsrof 
over $17,000,000, derived almost wholly from servicing. Nearly all 
of this amount was distributed in dividends to its one stockholder, 
the Standard Gas & Electric Co. 

Here is one: In Senate Document 213, Sixty-ninth Congress, 
second session, which is a report by the Federal Trade Commission 
on the control of power companies, directed at that time to find out 
whether there was a monopoly in electric power (that was the time 
the General Electric parted with its electric properties and they were 
set up as the Electric Bond & Share Co.), on page 75 of that report, 
our Commission solemnly reported as follows: 

The Electric Bond & Share Co. states that the general service fee just about 
covers the cost of the service. 

Please remember that at that time, for some reason, we were not 
given access to the files, so we accepted that statement, which was 
made to one member sitting here and one member who was here this 
morning by responsible officials of that company. 

Referring to engineering they stated, and the Commission so 
reported to the Congress: 

The fee, the company asserted, consists of the total of the costs thus recorded. 

As to construction the Commission reported: 

The company states that the fees just about cover the expense of the construc- 
tion companies. 

It summarized the matter as follows: 

From the foregoing account it will be seen that the Electric Bond & Share Co. 
regards this service staff as an auxiliary organization that does not directly 
produce for the company more than a nominal profit. 

I am quoting from the Federal Trade Commission's report to the 
Congress, and we usuailly aim not to make misrepresentations. 

But let's see now. Having gotten into the books, after lawsuits, 
however, following court action undertaken in the last investigation 
to overcome refusal of the company to give access to its records in the 
utility' investigation (the latter one, the one we are talking about now) 
and two decisions, the examination disclosed that the profits were far 
from merely nom nal. In most instances they ran over 100 percent, 



CONCENTRATION OF ECONOMIC POWER 1843 

in one instance 269 percent, and they aggregated millions — not a 
nominal matter. These profits were after most liberal salaries had 
been allowed as the major items of expense, all of which will be found 
in the record of the investigation, part 62, at 330 and 332 to 334 in 
exhibit 5602. 

During a period of 5 years, Columbia Engineering & Management 
Corporation collected fees from the affiliated Columbia Gas & Electric 
group for engineering and management services amounting to nearly 
$15,500,000, on which it incurred expenses of slightly over $7,500,000, 
realizing a net profit on the cost of servicing of 106 percent. 

W. S. Barstow & Co., Inc., and its subsidiary, W. S. Barstow 
Management Association, both^servicing organizations for affiliated 
companies, had a combined net income for a period of 4 years and 
9 months of $4,400,000, or 321 percent on expenses. Of this total 
net income, $2,122,000 was distributed to 15 officers and employees 
as so-called "extra compensation,"— quite extra — and in addition 1 of 
the 15 received $650,000 under an income-sharing contract, the latter 
individual receiving almost one-fourth of the total net income under 
these two forms of extra distribution. 

Service fees were collected from operating subsidiaries for many 
services, such as accounting, advertising, engineering and construc- 
tion, legal, merchandising, financing, purchasing, and general manage- 
ment. 

Just to sum up a bit, it is generally conceded that this inquiry 
contributed materially to the passage of the Securities Act of 1933, 
the Holding Company Act, the Securities and Exchange Act of 
1934, and the Federal Power Commission Act of 1935, and the Natural 
Gas Act of 1938, and also that as a result of the disclosures of exorbi- 
tant rate bases and rates, the whole utility rate structure was perma- 
nently lowered to the extent of many millions of dollars per annum, 
although of course, in that inquiry we couldn't go into the examina- 
tion of rates as a primary proposition, and were not so commanded. 

Let me pass, now, to the natural-gas-producing, pipe-line, and 
utility industries. 

On December 31, 1935, the Commission submitted to the Senate 
its final report covering economic, corporate, operating, and financial 
phases of the natural-gas-producing, pipe-line, and utility industries, 
with conclusions and recommendations. It consisted of 617 printed 
pages and was pubhshed as Senate Document No. 92 (pt. 84-A), of 
the Seventieth Congress, a copy of which I have here and ask that 
it be received as the others have been received. 

The Chairman. The exhibit may be received in the same manner. 

(The volume referred to was marked "Exhibit No. 328" and is on 
file with the committee.) 

Colonel Chantland. The report dealt with a number of evils that 
had been found in the natural-gas and natural-gas pipe-line industry, 
and I keep repeating the two because they are separate things, the 
correction or prevention oY which would, in many instances, require 
extension of regulatory authority over the industry. Among these 
evils were some 16 that have been enumerated here. 

Shall I read them, or shall we put them into the record? 

The Chairman. They may be put into the record. 

(Following are the 16 items referred to:) 

1, A great waste of natural gas in production. 

2. Excessive cost of natural-gas production through extravagant competition 
in drilling wells. 



1844 CONCENTRATION OF ECONOMIC TOWER 

3. Unregulated monopolistic control of certain natural-gas production areas. 

4. Unregulated control of pipe-line transmission and of wholesale distribution. 

5. Discrimination in some instances in field purchases of natural gas, and re- 
fusals to purchase from independent producers. 

6. Unregulated competition in building natural gas pipe lines to markets. 

7. Costly struggles between rival natural-gas interests to conquer or defend 
territories of distribution. 

8. Excessive and inequitable variations in city gas rates for natural gas among 
different localities. 

9. Pyramiding investments in natural-gas enterprises through holding com- 
panies, with attendant evils. 

10. Excessive profits in many natural-gas sales between affiliated companies. 

1 1 . Inflation of assets and stock watering of certain natural-gas companies. 

12. Misrepresentation of financial condition, investment, earnings, etc., of 
some natural-gas operating and holding companies. 

13. Reckless financing and stock manipulation by certain natural-gas holding 
companies. 

14. Exploiting subsidiary natural-gas companies through fees for construction, 
management, promotion, etc. 

15. Exaction of excessive bonuses or commissions by investment bankers in 
connection with financial transactions with natural-gas companies in certain 
instances. 

16. Exaction of excessive fees and bonuses or commissions by officials of certain 
companies in connection with sales and construction of properties. 

In order to correct these existing evils the Commission, in 1935, 
among other recommendations, suggested: (1) Measures for real 
conservation and use, including equitable ratable taking, or othermse 
protecting all interests in a common reservoir. But such laws must 
be carefully drafted so as not to result merely in the lengthening and 
strengthening of the hold of the larger and dominant interests, and to 
the detriment and elimination of the very numerous smaller projects. 
The Commission specifically warned against the danger that laws 
enacted in the name of conservation might prove mxcrely to be the 
means of lengthening and strengthening the control of the dominant 
companies and groups, and for that reason divorcement of certain 
functions within companies and groups in each industry deserves 
serious consideration as affording a most likely effective remedy. 

The second recommendation: That a Federal regulatory law be 
enacted applicable to interstate natural-gas pipe lines which transport 
gas for ultimate sale to and use by the pubHc, regulating rates for 
carriage or city gate rates at the end of such transportation; also regu- 
lating security issues, accounts, beginning and abandonment of opera- 
tions, and intercorporate relations of companies owning or controlling 
gas pipe lines; retaU rates for gas transported and delivered in inter- 
state commerce to be federally regulated only where they are not regu- 
lated by the State in which the gas is distributed to the public. 

3. That a Federal agency be empowered, insofar as it may lawfully 
be done, to order all reasonable extensions of service to communities 
desiring natural gas which can be suppUed by companies which trans- 
port gas for public consumption, without undue disturbance of existing 
service requirements. 

4. That there be a divorcement of gas and electrical utilities because 
of the fact that they are increasingly competitive, and in many com- 
munities are the two chief sources of power and light, and further 
because three of the four dominant interests in natural gas and 
natural-gas pipe lines are also large in the electric utility field. 

The fifth recommendation: That Federal and State legislation be 
adopted which will restrict banks to investment in, and shall forbid 
their control and management of, utilities. 



CONCENTRATION OF ECONOMIC POWER 184:5 

In substance, (2) and (3) were incorporated in the Natural Gas Act 
of 1938. This part of the summary has been also abbreviated for the 
reason that later on there will be a further presentation on natural 
gas. 

FEDERAL INCORPORATION OR LICENSING OF CORPORATIONS 

Colonel Chantland. In conjunction with its investigation of utility 
corporations, the Commission caused a compilation to be made of 
proposals and views for and against Federal incorporation or licensing 
of corporations. This report was divided into two major parts, one 
covering the period prior to the enactment of the Federal Trade Com- 
mission and Clayton Acts in 1914, and the other including the material 
subsequent to that date. The topics covered included official and 
personal expressions and views, proposed legislation, party platforms, 
viewpoints with regard to constitutional amendments, and the attitude 
of the press. That is in volume 69-A that is now in here as exhibit 
205-F. 

In the same volume, a compilation was also made of State consti- 
tutional, statutory, and case law concerning corporations, with par- 
ticular attention to public utility holding and operating companies. 

As I have already said, that was transmitted to the Senate on 
September 21, 1934. 

Part 84-D of the reports, not here, is a comprehensive general index 
of parts 21 to 84-C, inclusive. Parts 71-B and 81-A, pages 259 ^to 
570, are indexes to the propaganda. 

That gives the explanation of the lettered volumes. 

In closing, it seems proper to remind the committee that not all 
of the groups and companies either in the electric or gas and gas pipe 
line industries v/ere examined. The funds, personnel, and time 
allotted did not permit. Nor is it claimed that all unsound issues 
were discovered and reported. Therefore, the aggregates are to that 
extent less than the actual totals for the entire industries. As to 
some of those that were examined, complete records could not be 
obtained, so that full disclosure has not been made. In at least one 
instance, desired books and records were said to be in Canada. 

Mr. Frank. As I understood him, Commissioner Davis has pointed 
out that as a result of the studies made by the Commission there was 
enacted the Public Utility Holding Company Act of 1935. 

Colonel Chantland. I don't suppose we can claim 100 percent, but 
probably we ought to have some credit. 

Mr. Frank. Congress itself recognized that fact, for in section 1 
(B) it referred to your report. 

In that Act utility holding companies are forbidden to do many 
things. In some instances they are flatly prohibited to act and in 
others they may act only pursuant to orders, rules, or regulations of 
the Securities and Exchange Commission. 

I want to call your attention to a device that is recurrently used in 
that Act by Congressional Mandate. For instance (and I am simply 
picking out one of many such provisions), it is provided that the 
Commission, upon application by a holding company, shall by order 
declare that a company is not a holding company if the Commission 
finds certain facts. The findings' of the Commission can only be upon 
an order and after a notice and hearing. At that hearing persons 
may intervene, including state or local governmental^ agencies, per- 
sons showing an interest in the company, or a public or consumer 
interest. 



1846 CONCENTRATION OF ECONOMIC POWER 

The statute provides that as a condition to the entry of such an 
order granting such an appHcation and as a part of any such order, 
the Commission may require the applicant to apply periodically for 
a renewal of such order and to do or refrain from doing such acts or 
things in respect of voting rights, control over proxies, designation of 
officers and directors, and other matters, and to submit such periodic 
or special reports regarding affiliations or intercorporate 4-elationships 
of the applicant as the Commission may find necessary or appropriate 
to insure that in the case of the applicant the conditions specified in 
the statute, as a basis for finding that it is not a holding company, are 
satisfied during the period for which such order is effective. The 
Commission, upon its own motion or upon application of the company 
affected, is to revoke the order declaring such company not to be a 
holding company whenever, in the Commission's judgment, any con- 
dition (specified in those clauses to which I have referred and which 
are set out in the statute) is not satisfied in the case of such company, 
or the Commission may modify the terms of such order whenever m 
its judgment such modification is necessary to insure that in the case 
of such company the specified conditions are satisfied during the 
period for which such order is eft'ective. 

Colonel Chantland. Mr. Commissioner, in the definitions "hold- 
ing companies" mean "utility holding companies." 

Mr. Frank. Utility holding companies. The statute also provides 
that no provisions of the statute imposing any Uability shall apply 
to any act done or omitted in good faith in conformity with any rule, 
regulation, or order of the Commission, notwithstanding that such 
rule, regulation, or order may, after such act or omission, be amended 
or rescinded or be determined by judicial or other authority to be 
invalid for any reason. 

Now I have simply taken those particular provisions as a pattern; 
there are numerous other instances in which the Commission by 
order may determine that a holding company may do certain things 
which, were it not for the order of the Conomission, it could not do. 
For instance, under section 6, in connection with the exercise of certain 
privileges granted by the company's charter which would diminish 
the rights of persons interested, a company is forbidden to act unless it 
files a declaration; there is then a hearing and the Commission there- 
after enters an order finding that the proposed action will or will not 
be detrimental to investors, to consumers, or adverse to the public 
interest. Under that Act the Securities and Exchange Commission 
almost weekly has hearings and enters such "advance" orders. Now I 
ask you whether those are not advance administrative determina- 
tions, in the nature of declaratory administrative findings, which the 
Congress considered to be perfectly valid and which it assumed could 
feasibly be employed without injury to consumers or the public interest. 

I may add that our Commission has found no difficulty in the exercise 
of its powers and duties under the statute and that its administrative 
obligations under that statute seem to be working with full satisfac- 
tion to all persons interested. I would like to ask you whether, 
with your knowledge, gained from your vast study of this industry, 
you have any reason to believe that such a device is defective? 

The Chairman. Before you answer, may I just intervene and say 
that it is a riddle in my mind — when is a holding company not a hold- 
ing company? When the S. E. C. says it is not. 



CONCENTRATION OF ECONOMIC POWER 1847 

Mr. Frank. When theS. E. C. acts pursuant to statutory stand- 
ards carefully stated in the statute by the honorable body of wiiich 
the Chairman is a member. I assume he voted for that statute and 
was familiar with its terms when he voted for it. 

The Chairman. I voted for it, but whether I was familiar with it is 
a question. 

Colonel Chantland.^ Of course, Mr. Frank, I may have personal 
views on this proposition of declaratory judgment that are not in 
accord with some of those expressed here, and I think you are as 
capable of answering your -own question as I am, so I don't see any 
point in pursuing it. 

The Chairman. Seriously speaking, I wonder if there has been a 
definite pattern in tlie judgment and rules which the S. E. C. has 
rendered under these sections. 

Mr. Frank. There has been. Congress was careful to set forth the 
standards. Those standards, however, must be applied to a multitude 
of specific circumstances. A body of precedents, of course, is being 
built up. 

My question, addressed to Colonel Chantland, was perhaps unfair; 
it was intended as a rhetorical question rather tban as one to elicit 
•information. 

Colonel Chantland. I rather assumed that. I didn't mean to be 
making a facetious answer. 

Mr. Frank. I used what was sort of a subtei-fuge for presenting 
to the Committee the fact that, since the enactment of the Anti- 
trust Act and the Federal Trade Commission Act and the Clayton 
Act, Congress has, with great particularity, in this piece of legislation 
which resulted in large part from the work of the Federal Trade Com- 
mission, seen fit to provide for advance administrative rulings. 

The Chairman. Isn't it a fact, however, Mr. Frank, that the 
Public Utility Act was a compromise in effect between what Congress, 
what the Interstate Commerce Committee of each House, desired, 
what the Federal Trade Commission recommended, and what seemed 
to be the demand of investors throughout the country, or those who 
thought they were investors, who felt that if these recommendations 
were thoroughly carried out the whole house of cards would be brought 
down about our ears, so that it was necessarily decided to set up this 
sort of procedure so as not to completely wreck the system. 

Mr. Frank. No doubt that was the congressional purpose. What 
I wanted to indicate is that it is possible to have this kind of advance 
ruling which seems to be adequately protective of all the interests, 
namely, not only those of investors but of the public interest and of 
consumers, for those interests are designated in the statute in various 
sectijns. The hearings are very detailed; the staff of the Commis- 
sion prepares an immense amount of data; after the hearing there is 
an argument unless the parties desire to waive it. The Commission, 
with that data before it (I hope, earnestly and patiently and ade- 
quately)' considers the facts, and makes determinations upon which 
citizens may rely. There is a provision for judicial review by persons 
aggrieved. If someone has been aggrieved, the matter can be taken 
into a court. 

I nlso want to indicate that there is provision for experimental 
orders. That is, the orders of the Commission may provide for ter- 



1848 CONCENTRATION OF ECONOMIC POWER 

mination if, upon investigation or subsequent disclosures, the orders 
appear to have been mistaken. 

I might call attention to a recent regulation that the Commission 
has issued, pursuant to certain sections of the statute, which relates 
to the fees of underwriters and finders in certain circumstances; it 
puts a kind of burden of proof on them where they are affiliated in 
certain ways. To avoid the difficulty that an underwriter may have 
expended a great deal of time and money and then find that he is 
unable to procure Ids fees, the Commission (we think, acting in accord 
with the statute) has provided that — 

In appropriate cases the Commission upon application may make a finding or 
render an opinion for purposes of this paragraph in advance of any issue, sale, or 
acquisition of any security. 

We have a case now pending where a proposed underwriter has 
come to us. We are investigating the facts thoroughly to see whether 
he will offend the standards of the statute. If we say "no," then, 
unless he appeals, he cannot act; if we say "yes," then he can proceed. 
If he proceeds in a manner that deviates from the order, then we will 
find he is not entitled to his fee. 

The Chairman. Would it be possible, Mr. Frank, that 4 or 5 j^ears 
hence, when possibly the personnel of the Commission might be 
altogether changed, an utterly different decision could be rendered in 
another case upon a very similar state of facts with respect to whether 
or not a holding company was to be prohibited or not? 

Mr. Frank. I have no doubt of that, and that is something inherent 
in human nature. There is a possibility of differences of opinion. 
There is always present the fact of human fallibility. That is true 
of our courts. That is true of any determination by any human being. 

The Chairman. The thought that comes to my mind— and this 
without any intention at all to reflect upon the Federal Trade Com- 
mission — that the Federal Trade Commission from 1914 to 1921 was 
one sort of a Commission, but from 1921 down to 1933 it was an 
utterly different sort of a Federal Trade Commission; and though 
these gentlemen who are testifying here today in most instances were 
on the staff of that Commission throughout that period, their activity 
was controlled by the policy-making power of the members of the 
Commission whose point of view and whose purposes changed with the 
administration. 

Mr. Frank. Certainly; that same thing is true of any prosecutor's 
enforcement of any statute, even if the prosecution is not vested in an 
administrative body. The personal perspective, background, char- 
acteristic outlook, or whatever you choose to call it — we can pick 
many words out of the thesaurus to describe what we are getting at — 
those same factors are found in the Department of Justice. 

The Chairman. Exactly. 

Mr. Frank. Under one administration minded to enforce the 
antitrust laws vigorously, you may find enforcement; under another 
administration minded not to enforce them, the Department of 
Justice could go into court, begin a proceeding and agree to a consent 
decree which would give a complete wholesale exemption to any 
affected industry. There is no way I have been able to discover — 
your wisdom is beyond mine 

The Chairman (interposing). I would hesitate to say that. 



CONCENTRATION OF ECONOMIC POWER |g49 

Mr. Frank. By which the vicissitudes of liuman nature can be 
controlled by legislation. Government officials having such powers 
must be impressed by their own inward restrictions and by the out- 
ward pressure of public opinion. 

The Chairman. I think we might agree on that. I have repeatedly 
stated that the success or failure of the antitrust laws as we have had 
them has depended too much upon the diligence and the point, of view 
of those who happen temporarily to be in the Department of Justice. 
If we happen to have a vigorous and active head of an antitrust divi- 
sion, we have a certain type of enforcement." If, on the other hand, 
we have a head of the antitrust division who is not so vigorous, we 
have an utterly different sort of enforcement . 

That, I feel, is largely due to the fact that our antitrust laws to date 
have either by their interpretation of the court or by express language, 
lodged discretionary power in the courtfe or in the commissions. That, 
is the specific fact which has led me to the conclusion that the satis- 
factory way of solving this problem of preventing restraints of trade 
is to do it by means of the charters of the corporations which carry 
on the trade. I don't believe that you are ever going to succeed by 
personal government, by personal power, by personal enforcement of 
particular personal desires, and that the only possible success can be 
attained by clearly writing into the charters of these corporations — 
that is to say into their contracts with the people — the powers which 
they shall have. And by these charters to withdraw from corpora- 
tions the corporate power to commit the abuses which the entire 
experience of the American people has proven bey-jnd any possibility 
of contradiction are bad- upon the economic affaifS of the entire 
people. 

.Mr. Frank. Senator, I wouldn't attempt to dispute with you be- 
cause you have thought this over a great many -hours and days and 
weeks, and my own inclinations are to agree with you to a very large 
extent. And yet I find 'this difficulty: Whether the inhibitions be 

Eut in charters, statutes, criminal laws or whether their enforcement, 
e sought through civil penalties, some human being has to see that 
there is no violation of the matters that are prohibited. 

Now putting prohibitions in a charter will not prevent violations- 
of the provisions of that charter unless somebody, whether he be a 
private person or a public agency, or a prosecuting officer, designated 
by statute, sees to it that those provisions are not violated. The 
books are full (sometimes the law books, sometimes the court reports,, 
sometimes reports of investigatory bodies) of instances where plain 
unmistakable provisions of State laws are violated. Only a very 
small fraction of the instances of violation are brought to judgment 
before some court which either redresses the wrong by damages or 
prevents the wrong by injunction. It seems clear to me that some- 
one, somewhere, has to have the power to enforce statutes — unless we 
turn men into angels so that the mere fact that there is an inhibition 
in a statute will mean that men, by their own impulses, will comply 
with it. 

It matters not whether the person who enforces the statute s a 
Government officer or a stockholder or officer of a corporation, 
someone has got to see to it that infractions of prohibitions in a statute 
are vindicated. I find it difficult 'to see how you can avoid vesting 



1850 CONCENTRATION OF ECONOMIC POWER 

that power in some human being. And once you recognize that fact 
you must also recognize that if that human being does not exercise 
that power, violations of the statute will result. There is necessarily 
involved a delegation of authority to someone. We call it delegation 
when the enforcing authority is given to administrative agencies; we 
do not use the word "delegation" when we give that authority to a 
prosecuting attorney or to a stockholder; but, nevertheless; there is a 
delegation no matter what words we use. For the decision as to when 
and whether to enforce the statute has to be made by someone, whether 
that someone be a department of justice, a prosecuting attorney, or a 
stockholder. The statute won't enforce itself, if men are minded not 
to comply. Someone, somewhere, has to have the discretion to 
enforce laws; whether the penalties be civil, criminal, or injunctive, 
that is true- We do not usually use the word "discretion" in that 
context; but yet it is discretion, because there has to be a decision by 
.some person as to whether and when the statute is to be enforced. 

The Chairman. Of course, that isn't entirely correct. It has not 
been the theory upon which our law has been built up at all. As a 
matter of fact, the fundamental principle which is taught in every 
elementary law school with respect to criminal law, for example, is 
this, that it is better to allow nine guilty persons to escape than to 
punish one innocent person. That is our fundamental principle. 
Our economic system has become so compUcated that we have been 
endeavoring to escape from that fundamental, and somehow or other 
to clothe some Government authority with the power to take every 
violator by the back of the neck and rub his nose in the sanct, regard- 
less of the effect upon the innocent, and it is because the innxXent 
have been compelled to suffer along with those who have violatedT it, 
that we find such a fear among many businessmen of what they call 
Government regulation. 

I feel that we have got to find the way to do as you suggested a 
moment ago, to make men a little more like angels, but I would ex- 
press that rather in this way, to say to get a better understanding 
among a larger proportion of business leaders of the abuses that ought 
to be abolished. I fear, in other words, that there is always the 
danger of creating more abuses by vesting discretionary power in 
any government than there is from permitting things to govern them- 
selveS^as far as possible. 

Set up your standards for the masses of the people and that is the 
most you can hope to do, because when all is said and done, law is 
the crystallization of public opinion, and you can no more enforce 
the antitrust law upon the business community without an under- 
standing upon the part of the business community of what ought to 
be abandoned, than ydu could enforce prohibition among the masses 
of the people. Unless the people want a law enforced, it wont' be 
enforced, no matter how large a government machinery you establish 
to carry it out. 

Mr. Frank. Senator, I most heartily agree with you as to that last 
point. I think any qjovernniental arrang^^ment or economic institu- 
tion cannot be effective and persist unless it is founded upon the habits 
of the community. Those habits can be changed to some extent by 
law, but in the last analysis any law must have a foundation in a 
favorable community attitude. But, unless we proceed on the hy- 
pothesis (which none of us would be willing to accept in toto) that all 



CONCENTRATION OF ECONOMIC POWER |g51 

laws should be abolished, or that laws should merely be hortatory and 
never enforced in courts of law, we must rely upon someone to enforce 
them. 

Now. to enact into a statute a provision that something has to 
be done, is not sufficient unless, there be somebody who can enforce it 
either as I say tiy way of damages, by way of injunction, or by way of 
penalties. 

I am heartily in accord with you on this point: I don't know any- 
one who could feel more strongly than I that in this day of all days 
we need to guard against the abuse of the innocent, the terrorizing of 
the innocent by the threat of the use of state force against them with- 
out the preservation of their civil liberties. If anything, we should 
throw more safeguards about the innocent to prevent the abuse of 
criminal enforcing powers in the hands of prosecutors. But whether 
it be by criminal law, civil law, equity or common law, statute or other- 
wise, merely writing or having something in a law, or merely putting 
something in a charter, saying this shall or this shall not be done., isn't 
sufficient, because it won't work automatically. Somebody has got to 
have whatever you want to call it — discretion, judgment, or the like — 
as to whether or not, and when, the statute shall be enforced. 

We have on the books of most States thousands of laws. All of 
them cannot be enforced, some of them are obsolete, some of them are 
inadequately drafted, some of them are just plain foolish. The en- 
forcing officer, the prosecuting officer having to do with these criminal 
laws, has to make a selection. He has to determine which statutes to 
enforce and which of the numerous suspected violators to enforce 
them against. We are not accustomed to calling the power to make 
that selection "discretion." But we can't enforce all laws against all 
\'iolators or, as you said, half the people in the United States, I 
should say three-fourths of the people in the United States, would 
be engaged in enforcing law. Whether you call it discretion or not, 
somebody has to make a choice. 

The Chairman. Let me give you an example of what I mean. 
In the bill which Senator Borah and I have introduced from time to 
time for the establishing of Federal licensing or a Federal franchise 
system, it is provided among other things that no person who has 
himself loaned money to a corporation, or who is a director of an 
institution which has loaned money to a corporation, may be a director 
of that corporation. 

Now I want to ask you as a lawyer whether you think that any 
lawyer would advise the director of a bank to allow himself to be 
elected director of a corporation which was borrowing from that 
bank, or whether the corporation which was borrowing it would 
permit the director of a bank to continue to serve as director. Would 
it be necessary to clothe anybody with discretion to enforce a pro- 
vision of that kind? 

Mr. Frank. Senator, I can answer that best by saying that similar 
statutes have been on the books and have been violated, and have 
been allowed to go into desuetude. I think the history of corporation 
law shows that clients in those instances either do not go to their 
.lawyer, or go to a foolish lawyer, or a crooked lawyer, and also that 
they find all kinds of devices for apparently complying so that the^ 
can salve their consciences or their lawyer's conscience, or meet his 
high or low standard of intelligence sufficiently so that they are 
willing to do what you or I would consider a violation of statute. 



1852 CONCENTRATION OF ECONOMIC POWER 

I just can't think of any law that some people haven't violated, 
and unfortunately, some people who ought to know better. 

The Chairman. I think -possibly you naight agree with me in 
saying that one of the causes for the condition which you described 
may be the fact that so many of these corporations are created by 
^tate charter but are engaged in national business, and thereby the 
self-enforcement is rendered almost impossible. 

Mr, Frank. I agree with you, to this extent, as you know — we 
might as Well put it in the record — that it is high time that we had 
some kind of Federal incorporation or licensing law. I think that 
the migratory or tramp corporation ought to be ended, or if allowed 
to exist it ought not to be allowed to engage in interstate commerce 
without complying with certain minimum standards of decency as to 
the conduct of its directors and stockholders. 

The Chairman. We are now in complete agreement. 

Colonel Chantland. Mr. Chairman, might I offer one observation 
on the point fro;n which we started. One distinction occurs to me 
very quickly, Mr. Commissioner Frank, as between the ability that 
you have to offer declaratory judgments or to pronounce them in the 
utility field, and the Federal Trade Commission's field that covers all 
industry. The theater and character of operations in a utility which 
has just a service to render, and in free, independent trade of all 
kinds, are very, very different. 

Mr. Frank. The field is much larger. 

Colonel Chantland. The theater and character both. 

Mr. Frank. Exactly, and I quite agree that were the Federal 
Trade Commission or any other agency to be vested with power to 
make such advance administrative determinations as I have in- 
dicated it should have, it would of course be necessary that it have 
a very large personnel and appropriation. 

Mr. Davis. Mr. Chairman, as this seems to be a pretty live subject, 
I wish to make this observation. If I understand the practice, the 
instance stated by Commissioner Frank, I do not understand that 
the Commission rendered any advance opinion in the sense that we 
generally discuss that. The Congress in the Holding Company Act 
defined a holding company. It laid down various standards and 
then delegated to the Securities Commission the authority to deter- 
mine whether a given corporation was a holding company, and to 
take appropriate action in the event it foimd it as prescribed by the 
statute. 

Now when a given corporation makes an application to you for the 
determination of that question, you have presented to you an actual 
issue under your jurisdiction. It is a matter to determine upon facts 
that are a matter of record. There is no difficulty in determining the 
corporate set-up of a given corporation, and I know that your Com- 
mission has all those fa<3ts before you, before you reach a decision. 

It is purely a factual matter, you might say largely upon the record 
ot evidence, and that is vitally different from any agency undertaking 
to give an advance opinion as to, whether a certain state of fact will 
constitute a restraint of trade which involves various industries par- 
ticularly concerned who wish to engage in the conduct that is sub- 
mitted for approval and which affects their customers and their 
customers' customers and various competitors of all others, and which 
affects the general public. Neither their corporations nor anybody 



CONCENTRATION OF ECONOMIC POWER 1853 

else without a very extensive investigation both legal and economical 
can ascertain what those facts are and what those effects are upon the 
various elements of society involved, and Congress does not lay down 
a standard of rules for the determination of those varying industries 
and varying methods and various circumstances with varying effects 
which would be applicable to all of them, although I can well conceive 
where it would be done in the instance that you state, just as yester- 
day Senator King referred to authority given the appropriate gov- 
ernment official to determine in advance what the tariff would be 
upon a given article; that is a matter of revenue; it is a matter between 
the importer, m other words the taxpayer, and the Government, and 
it affects nobody else except the taxpayer, and so that is a simple 
factual matter that has to be determined bj^" that appropriate official 
sooner or later and w^liich he determines. It involves a question of 
calculation or a question of classification under the law. 

Mr. Frank. Commissioner Davis, you chose simply one of my 
illustrations. Let me give you one that comes closer to the kind of 
situation that 5'-ou were discussing. In section 6 (a) of the Holding 
Company Act, it is provided that — 

Except in accordance with a declaration effective under section 7 and with the 
order under such section permitting such declaration to become effective, it shall 
be unlawful for any registered holding company or subsidiary company thereof 

I am skipping now. 

to exercise any privilege or right to alter the priorities, preferences, voting power, 
•or other rights of the holders of an outstanding security of such company. 

Turning now to section 7, it provides that such a company "may 
file a declaration with the Commission," and that it shall have a 
hearing. The Commission must now allow such a declaration to 
become effective (that is, it must not permit the company to do 
something it wishes to do but cannot lawfully do without the order 
of the Commission) if the Commission finds "that such exercise of 
such privilege or right will result in an unfair or inequitable distribu- 
tion of voting power among the holders of the securities of the dec- 
larant," or (now I come to the significant language that bears on 
j^our point) "is otherwise detrimental to the public interest or the 
interest of investors or consumers." 

Now, whenever a utility holding company is engaged in the vast 
operations in which many such companies are engaged, a reorganiza- 
tion (for that is what this is— a quasi reorganization of that company) 
will affect, as Congress recognized, not only the persons immediately 
concerned but the public interest and the interest of consumers; for 
the financial structure ma.y have important ramifying effects upon 
future rate determinations to be passed upon by State commissions. 
Accordingly, the Commission' when passing on that question must 
take all those facts into account. To be sure, the Commission acts 
upon a record and that is what I have been saying, parrotlike, for 
the last 3 days, that I think the informal method of Bill's dropping 
into someone's office and saying "What do you think of this?" and tell- 
ing it informally and then getting a letter in effect saying, "Sure, that's 
all right," is not the way to do it. But what this statute requires 
our Commission to do is to have a full hearing and to have a full 
investigation. Our staff works arduously digging out all the facts 
'which appear to be pertinent to the issue. Those facts are put into 



1854 CONCENTRATION OF ECONOMIC POWER 

the record and then the Commission must make the determination, 
among other things, that neither the pubUc interest nor the interest 
of consumers will be adversely affected. In addition, in the par- 
ticular kind of situation I am discussing, the statute provides that 
"Any order permitting a declaration to become effective may contain 
such terms and conditions as the Commission finds necessary to assure 
compliance with the conditions specified in this section," including 
those conditions which I have quoted. 

I have simply, so far, taken two instances; I suppose I could give 
you a dozen or more out of this statute in varying contexts where 
the proposed action does not constitute a case or controversy; nobody 
is having a dispute; somebody wants to do something. Instead of 
Congress saying, "You can't do this," Congress said,- "You can't do 
this unless the Commission finds that the public interests and the 
interests of consumers and the interests of investors are protected;" 
and the Commission does find that, if at all, only after a hearing and 
after a full investigation. 

All that I am suggesting is that there may well be circumstances 
(perhaps they need to be limited in scope) where the same technique 
could be applied to situations arising under other laws, including the 
antitrust laws; in other words, without a case or controversy, with- 
out a dispute arising such as a court could pass upon, prior to an 
order of an administrative body. For often no company could, in 
the first instance, go into a Federal court (except perhaps those in the 
District of Columbia) to procure such an advance adiudication; the 
ordinary Federal court, under our Constitution, could not, usually, 
in the first instance, make such a finding, since there wouldn't be a 
case or controversy. As I understand the authorities, most of such 
cases would not conceivably come within the terms of the Declaratory 
Judgment Act; and, if they, did come within the terms of that act, I 
think the act, to that extent, wojild be unconstitutional. 

What the Holding Company Act provides is not, "You can't do 
this unless certain things are true," but this: "You can't do it unless 
the Commission finds that certain things are true," or, in other 
words, "You can do it if the Commission finds that those things are 
true." 

To be sure, the scope of activities of our Commission with respect 
to utility companies hasn't nearly the breadth of the antitrust laws. 
Maybe, for the purposes of using such a technique the antitrust laws 
would hav« to be broken down into subdivisions and certain portions 
/Segregated for such advance administrative determinations. All I 
am suggesting is that the technique seems to work well, that it seems 
to be desirable, that as the Holding Company statute provides, if 
the Commission makes an order and a citizen relies upon it, then he 
will be protected from the pains and penalties provided in the statute, 
even though thereafter that order be revoked, amended, or found to 
be void. In other words, it means that it is not an instance of telling 
the citizen, "You are presumed to know the law," when in many in- 
stances none of us^know the law until the Supreme Court has acted. 
There are many statutes on which many of us have been entirely 
mistaken in the light of subsequent Supreme Court interpretations. 
And it seems to me that such a technique would be wise, if we are 



CONCENTRATION OF ECONOMIC POWER 1855 

interested, as the cluiirman has indicated, in making it possible for 
citizens to go about their business, to know that they are not acting 
at their peril, so that our industry may be advanced, so that the 
wheels of industry may turn and people be employed and goods 
produced at increasing efficiency, at lower prices to consumers, and 
so that our economy may function well. It seems to me unmistak- 
ably desirable that so far as possible the citizen should not fear when 
he is acting that some day he may be called into court and either 
have damages assessed against him, or even worse bear the stigma of, 
an indictment and a jail sentence or a fine, a criminal sentence which 
will be a blot on his escutcheon for the future. 

Mr. Davis. Do you understand that an appeal lies from your 
action in the instance you state? In other words, suppose that you 
hold that a certain corporation is a holding company. Do you under- 
stand that the appeal lies and that the circuit court of appeals and 
the Supreme Court would have a right to review that? 

Mr. Frank. They would have the power to determine whether 
we had abused or exceeded our powers; that is, they would have the 
power to determine in a particular instance that the statute under 
which we were acting was unconstitutional, and they would also 
have the power to say that the Commission had exceeded its statu- 
tory powers. In certain instances the courts might, perhaps, not 
have th'3 power both to reverse the adjudication of the Commission 
and to direct what the Commission's revised adjudication would bft. 
But I have no doubt that there are many kinds of Commission action 
where a claim is made in court that the Commission, in acting, 
violated its statutory powers and where the courts would have power, 
either on appeal or by injunction or mandamus or otherwise, to make 
the Commission comply with the statute. 

Mr. Davis. Well, if the courts have that authority, it is a contro- 
versy and a justiciable question. 

Mr. Frank. No; the controversy then arises because the Com- 
mission is said, in a law suit, to have violated its duty. It is true 
that some kinds of questions put up to the Commission may be of 
such character that, if by statute, they could first come before a 
court, there would be a case or controversy. But I think that the 
Federal courts (other than, perhaps, those in the District of Columbia) 
could not, in the first instance, constitutionally deal with most of the 
kinds of cases I have adduced, because no case or controversy would 
exist; and therefore, the Federal courts themselves could not, in such 
cases, give the kind of advance decisions which I have described. 
But if it were asserted, in a lawsuit against the Commission, that it, 
in dealing with the kind of situation I have described, had failed to 
comply with the statute, or had gone outside of its statutory powers, 
then there would be a case or controversy between the Commission 
on the one hand and, on the other hand, the person either wanting 
to do the act which the Commission attempted to prohibit or desiring 
not to do an act which the Commission had directed him to do. 

The controversy then would arise between the litigants, who would 
be the citizen who felt he was aggrieved, and the Commission which 
either refused to do an act that the statute called upon it to do, or 
directed acts to be done which it had no power to direct to be done. 



1856 CONCENTRATION OF ECONOMIC POWER 

Mr. Davis. I respectfully wish to state that I think in the case 
you stated there is a controversy, not between citizens but between 
the Government, represented by the Commission, and the applicant. 

Mr. Frank. I agree with you. Judge, but — 

Mr. Davis. And if there is not a controversy, neither the circuit 
court of appeals nor the Supreme Court would have any right to pass 
upon anything except the constitutionality of the act. 

The Chairman. Now I am going to exercise my authority as chair- 
man. This is too good an argument, and if I don't stop it I will be 
back in it myself, so the committee w411 stand in recess 

Mr. Morehouse (interposing). Mr. Cli airman, may I say before 
we close, in order to get the record straight, as this is the close, as I 
understand it, of part 2 on the program of the Federal Trade Com- 
mission, I would like to have it understood, with the committee's 
permission definitely on the record, that the Commission's files of 
exhibits, numbered from 1 to 205-F inclusive, and which are here 
physically present and which are described in the report which was 
already received when I testified, may be received by the committee 
as physical exhibits, but not 

The Chairman (interposing). But not for printing in the record. 
That is the understanding, Mr. Morehouse. 

The Federal Trade Commission will be prepared to proceed at the 
next session. 

The committee will stand in recess until Monday morning at 10 
o'clock. 

(Whereupon, at 5:05 p. m. an adjournment was taken until Mon- 
day, March 6, 1939, at 10 a. m.) 



INVESTIGATION OF CONCENTRATION OF ECONOMIC POWER 



MONDAY, MARCH 6, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. C. 

The committee met at 10:20 a. m., pursuant to adjournment on 
Friday, March 9, 1939, in the Caucus Room, Senate Office Building, 
Senator Joseph C. O'Mahoney presiding. 

Present: Senator O'Mahoney (chairman); Representatives Reece 
and Williams; Messrs. Thorp, Henderson, Davis, Ferguson, O'Con- 
nell, Patterson, Berge, and Hinrichs. 

Present al«o :., Federal Trade Commissioners William A. Ayres and 
Charles H. INIarch; Willis J. Ballinger, director of studies and eco- 
nomic adviser to the Federal Trade Commission ; William T. Kelley, 
chief counsel; Eugene W. Burr, attorney; and Dr. G. C. Gamble, 
supervisor of monopoly studies. Federal Trade Commission. 

The Chaihmax. The committee Avill please come to order. 

]\Ir. Ballinger, are you ready to proceed? 

Mr. Ballinger. Yes, sir. 

STATEMENT OF WILLIS J. BALLINGER, DIRECTOR OF STUDIES AND 
ECONOMIC ADVISER TO THE FEDERAL TRADE COMMISSION 

INIr. Ballinger. Mr. Chairman, before beginning this morning's ses- 
sion I have some charts and tables which I would like to otter for 
the record. The first set pertain to a statistical analysis of the data 
which the Federal Trade Commission presented in its 7 years' pro- 
gram of experience in enforcing the antitrust laws. Some of the 
tables project the work of the Federal Trade Commission back to its 
•organization in 1915. 

The first table which I offer for the record and which I will ask to 
be marked shows the extent to which industries have been affected 
in the United States by the prosecuting activities of the Federal 
Trade Commission. 

The Bureau of the Census classifies all industries into 16" major 
groups. These 16 major groups in turn are classified into approxi- 
mately 354: commodity divisions. Table No. 1 shows that since 1915 
the cases of the Commission which involved a violation of the anti- 
trust law successfully prosecuted dealt with practically every one of 
the major industry groups classified by the census with the exception 
of leather and its "manufacture and railroad repair sliops. 

Taking the year 1935 as a base year, it may be said that directly 
or indirectly the decisions reached in these various cases have exerted 
at one time or another an influence on a manufacturing area of 'busi- 

124491— 39— pt. 5 15 1857 



1858 CONCENTRATION OF ECONOMIC POWER 

ness in the United States made up of approximately 81,000 manufac- 
turing establishments employing over 3,177,000 wage earners and pro- 
ducing commodities valued at almost $20,500,000,000. 

This table further shows that of the cases successfully prosecuted 
by the Federal Trade Commission since 1915, 15 percent involved 
chemicals and allied products; 11 percent iron and steel, excluding 
machinery; 11 percent textiles and their products. Food and kindred 
products and machinery, excluding transportation equipment, each 
cover 9 percent; printing and publishing, 8 percent; nonferrous 
metals and their products and transportation equipment each include 
5 percent of the cases. The remaining industry groups have less than 
4 percent each of the total number of cases. 

Table No. 2, which I offer for the record, is an analysis of the 64 
cases involving violations of the antitrust laws in manufacturing 
industries which the Federal Trade Commission has successfully 
prosecuted in the last 7 years. This table shows that of the 16 major 
industry groups classified by the Bureau of the Census, practically 
all were affected by these cases with the exception of the products of 
petroleum and coal and railroad repair shops. Fifteen percent of 
these 54 cases involved textiles; 13 percent chemicals and allied prod- 
ucts; 13 percent iron and steel products, excluding mach,inery; 7 
percent food and kindred products; 8 percent rubber products; 6 
percent stone, clay, and glass; 6 percent machinery, excluding trans- 
portation equipment ; and 6 percent transportation equipment. 

Taking 1935 as a base year, it may be said that these 54 cases 
exerted an influence on an area of business comprising approximately 
36,780 establishments employing approximately 1,784,000 wage earn- 
ers who produced approximately $10,395,000,000 worth of commodities. 
. Table No. 3, which I offer for the record and ask that it be so 
marked, is an analysis of the 22 cases involving violations of the 
vRntitrust laws in retail and wholesale distribution successfully prose- 
cuted by the Federal Trade Commission in the last 7 years. Twenty- 
three percent of these cases were directed against liquor distributors, 
23 percent against food distributors. The lumber and building ma- 
terials industry were defendants in 28 percent of the cases ; machinery 
and equipment dealers in 13 percent of the cases. Five other dis- 
tributing groups were involved in one case each; taking 1935 as a 
base year, it may be said that these 22 cases exerted a direct or in- 
direct influence on an area of business comprising over 237,000 
establishments, with net sales approximating $7,270,000. 

Table No. 4, which I offer for the record and request that it be so 
labeled, is an analysis of the particular kind of unfair trade practices 
involved in the 54 cases successfully prosecuted against manufacturing 
industries by the Federal Trade Commission since 1932. Sixty-nine 
unfair trade practices were condemned by these 54 successful prose- 
cutions; 43 of these unfair trade practices were either combinations 
and conspiracies for the purpose of eliminating competition, or 
schemes to fix and maintain priced or techniques, the purpose of which 
w^s to restrict distribution to recognized dealers. These 3 unfair 
methods to restrain a free and fair competition constituted 62 percent 
of the 69 unfair trade practices discovered in the 54 total cases. Price 
discrimination was found in 17 percent of the unfair trade practices ; 
coercion or intimidation was discovered in 3 cases. 



CONCENTRATION OF ECONOMIC POWER I359 

Table No. 6, which I oflfer for the record and ask that it be so 
designated, is an analysis of the unfair trade practices found in the 
22 cases involving violations of the antitrust laws in retail and whole- 
sale distribution successfully prosecuted by the Federal Trade Com- 
mission in the last 7 years. Twenty-eight unfair trade practices 
were discovered in these 22 cases ; 26 of these unfair trade practices 
involved the fixing and maintaining of prices combining to restrict 
production to recognized dealers, and combining to eliminate compe- 
tition. Only 2 of the 28 unfair trade practices of retail and whole- 
sale distributors involved price discrimination. 

Table No. 6, which J offer for the record, and ask that it be so 
labeled, is a compilation of the fundamental types of unfair methods 
of competition encountered by the Commission since its organization 
in 1915. There are many variations of these fundamental techniques 
so that the total number of unfair methods of competition combated 
by the Commission in the course of its prosecuting activities is a far 
greater number. We offer this table to the committee because we 
believe it is an excellent summary of the numerous and sundry basic 
•ways through the use of which businessmen have attempted to get 
around the antitrust laws of the Federal Government. 

The Chairman. These exhibits may be accepted and printed in the 
record as requested. 

(The tables referred to were marked "Exhibits Nos. 329 to 334," 
respectively, and are included in the appendix on pp. 2179-2182.) 

Mr. Ballinger. Senator O'Mahoney, the Federal Trade Conmiis- 
sion has now completed parts 1 and 2 of its program. The third part 
is a presentation of monopoly and monopolistic practices foi^nd in 
certain selected industries. The Commission regards this part of its 
program as particulary important because in these industry studies 
the Temporary National Economic Committee will be shown current 
conditions in a number of important industries. 

Before beginning this part of our program I wish to offer two 
charts and one table for the record. This chart is a list of the indus- 
tries which the Federal Trade Commission proposes to analyze befora 
this committee. We may not be able to get all of these industries in 
on our present program, but we will endeavor to get as many of them 
in as time permits. 

(The chart referred to was marked "Exhibit No. 335" and is in- 
cluded in the appendix facing p. 2184.) 

Mr. Ballinger. The second chart, which will be hefe in a minute, 
which I offer for the record and request that it be marked, is a chart 
showing the 50 largest manufacturing industries in the United States 
according to the 'Biennial Census of Manufacturers for 1935. This 
chart shows how many of the 50 largest manufacturing industries in 
the United States have been successfully prosecuted by the Federal 
Trade Commission for violating the antitrust laws since the organi- 
zation of the Commission in 1915. It shows that 56 percent of the 
largest manufacturing industries in the United States, producing ap- 
proximately 63 percent of the total value of products of these 60 
industries, have been guilty of restraining trade in one way or another 
in the last quarter century. 

(The chart referred to was marked "Exhibit No. 336" and is in- 
cluded in the appendix on p. 2185.) 



1860 CONCENTRATION OF ECONOMIC POWER 

Mr. Ballinger. From this chart it is seen that at least five of the 
industries selected by the Federal Trade Commission for presentation 
to the Temporary National Economic Committee are among the 
largest manufacturing industries in the United States. Thus steel is 
the third largest manufacturing industry, tobacco eleventh, rubber 
tires twenty-third, liquor twenty-fifth, farm machinery thirty-eighth. 

The fluid milk industry, which is a nonprocessing and nonmanu- 
facturing industry, is a very large industry but could not be included 
on this chart because of the fact that it is not a manufacturing 
industry. 

The table which I am now offering for the record contains some 
basic information about the industry as we are presenting it, as far 
as this information could be obtained. 

(The table referred to was market "Exhibit No. 337" and is in- 
cluded in the appendix on p. 2185.) 

•IMr. Ballinger. The number of factories in each industry, the num- 
ber of employees in each industry, the total salaries and wages paid in 
each industry, and the wholesale value of the product, are shown. 

This information was obtained from sources which gave the best 
obtainable estimates for the year 1937. The estimate on sulfur was 
unobtainable,, though the Commission knows that there are only five 
sulfur producers in the United States, the two largest of which pro- 
duce an overwhelmingly preponderant amount of all the sulfur pro- 
duced in the United States. 

Now we are ready to proceed with the steel industry as our first 
industry study. Before an industry has been presented I have been 
directed by the Federal Trade Commission to explain to the Tem- 
porary National Economic Committee just why this industry was 
selected for presentation. We have hundreds of industries in the 
United States and the files of the Federal Trade Commission offered 
an unusual amount of material from which selection could have been 
made. Out of this wealth of material we selected the steel industry 
as well as other industries for certain very definite reasons. So far 
as the steel industry is concerned, Senator, I think one reason would 
entirely suffice. The Federal Trade Commission was directed by the 
Temporary National Economic Committee to report specifically on 
the steel industry, and so I don't think that any other reason is neces- 
sary. So I will call as the first witness for the Federal Trade Com- 
mission, Mr. Burr. 

TESTIMONY OF EUGENE W. BURR, ATTORNEY, FEDERAL TRADE 
COMMISSION, WASHINGTON, D. C. 

Mr. Ballinger. Will you state your name for the record ? 

Mr. Burr. Eugene W. Burr. 

Mr. Ballinger. What is your position in the Federal Trade Com- 
mission ? 

IVIr. Burr. I am a member of the trial staff — attorney. 

Mr. Ballinger. How long have you been with the Federal Trade 
Commission? 

Mr. Burr. Since November 1920. 

Mr. Ballinger. Any further questions? 



CONCENTRATION OF ECONOMIC POWER ^gQl 

The Chairman. No; but may I interrupt at this point to say that 
the leaders of the Senate last week beo;an a concentrated drive to 
persuade the various legislative committees of the Senate to speed 
up their work so that bills pendinf; before the various conmiittees 
may be transferred to the Senate calendar. That accounts for the 
absence this mornino; of St^nator King, Senator Borah, and probably 
a similar reason accounts for the absence of Vice Chairman Sumners 
and Congressman Williams. 

I have before me five notices of other committee meetings this 
morning at 10:30, committees of whicli I am a member, so I am 
going to have to beg to be excused for at least a portion of tliis 
morning's hearing. I regret very much, JSIr. Burr, that I am not 
going to be here to follow the opening of your presentation, but I 
hope to be on hand before it is concluded, and I assure you that I 
am going to read it with a great deal of interest. 

Mr. Burr. You are very kind indeed, sir. 

(Representative Reece took the Chair.) 

Acting Chairman Reece. You may proceed, Mr. Burr. 

Mr. BuHR. Mr. Chairman and members of the committee, the sub- 
ject that I have to present is really threefold ; at least consider it as 
divisible into three parts. The first is the basing-point system as 
practiced in the steel industry. The second is the extent so far as 
we know of the delivered price system considered in a generic sense 
in industry at large in this country; in other words, the steel indus- 
try in practicing the basing-point system is to be considered to a large 
extent as representative of similar practices in other industries which 
use either the basing-point system or Avhat is know^n as the freight 
equalization system. The third topic is the effect of these systems 
upon the public interest. 

Mr. Patterson. Before Mr. Burr gets into his subject, phase 1, 
would you kindly define for the layman the basing-point system? 
AVhat does that mean ? 

THE BASING-POINT SYSTEM AS PRACTICED IN STEEL INDUSTRY 

Mr. Burr. I might as well come to the definition now as any time, 
I take it. A basing-point system is one under which there are cer- 
tain points of production and sometimes certain points that are not 
points of production, as is true in steel, that are selected as ba:sing 
points. Each producer charges at any given point of destination, 
any location of the customer, a price which is made up of the basing- 
point price plus the freight from that point to customer's location, 
and defrays the actual cost of delivery itself. If the customer is 
located at the basing point and buys from the basing-point plant, 
then the actual and the charged freight are the same. The first 
thing to determine when you make up the price is this : What basing 
point governs the destination in question ? And the way to determine 
what basing point governs the destination in question is this: That 
basing point governs which has the lowest sum total of the base price 
there plus the freight to destination. Is that clear? 

Mr. Patterson. Would you give an example? Take Pittsburgh 
and some one or two other points and give names and examples, if 



1862 CONCENTRATION OF ECONOMIC POWER 

you can, to bring it out a little more clearly. I have before me what 
I understand is a layman's definition of the basing-point system, 
but even that could be cleared up. 

Mr. Burr. Well, suppose your destination is Miami, Fla., and 
suppose that they want some sheet piling in Miami and the Govern- 
ment is a buyer of sheet piling at Miami and asks for bids. Now 
suppose that they ask for bids from the Jones & Laughlin Steel Co. 
at Pitsburgh and the Carnegie at Pittsburgh and the Kalman Steel 
Co., which is a subsidiary of Bethlehem at Buffalo, and suppose they 
ask for bids from Inland at Chicago, those four being the only ones 
in the country that make sheet piling, and they want it delivered 
at Miami. Now, then, that basing point will govern which has the 
lowest freight rate from those three points to destination, plus the 
base price at each of those points of production. In other words, 
Inland's freight from Chicago to Miami will be so much, put that 
there, plus Inland's base price; then put in a separate item, a separate 
computation, the price of Carnegie at Pittsburgh, plus the freight 
from Pittsburgh to Miami ; do the same thing for the Kalman Steel 
Co. at Bethlehem, and whichever one is lowest to Miami, including 
freight and base price, that will be the governing basing point. Then 
all four of those concerns will charge that base price plus that, 
freight as its price at Miami, making an identical price to Miami 
for all four of them, two at Pittsburgh, one at Buffalo, one at Chicago, 
each of them outside of the governing basing point will absorb the 
actual freight. That is an actual experience. Is that clear now? 

Mr. Patteeson. Thank you. 

Mr. HiNRicHs. Mr. Burr, you are talking about an identical price 
in Miami. As I understand it, you are using the basing price as an 
illustration of a monopolistic practice. Isn't it equally true that a 
competitive price presumably would be identical in Miami, if they 
were being offered on strictly competitive bids ? 

Mr. Burr. I wouldn't think so; no, sir. 

Mr. HiNRiCH. Can you cite any instance? 

Mr. Burr. Under a competitive set-up nobody would know what 
the other fellow was going to charge. 

Mr. HiNRiCHS. Can you cite any instance of a competitive price 
in which effective sales are not made at a relatively uniform price 
in a single market ? 

Mr. Burr. That is pretty hard to do because there is so much of 
this same kind of thing in industry in general. 

Mr. HiNRiCHS. It is also rather hard to do, isn't it, because it is 
a complete violation of all orthodox economic theory which presup- 
poses that there is a single price and a single market. The thing that 
you are complaining of is not that there is a single effective selling 
price in Miami but rather that there is a single bid price in Miami 
which can be computed from your series of identical prices. It is 
not selling price, the price at which goods move, in which you com- 
plain of identity, is it? 

Mr. Ballinger. Mr. Hinrichs, may I say that a demonstration that 
a basing-point system is a monopolistic device will be given by 
another witness, complete with charts, and so forth, so that if possible 
questions should be reserved for that witness and it probably will 
facilitate the hearing. 



CONCENTRATION OF ECONOMIC POWER 1863 

Mr. Burr. I think I'd rather attempt an answer, if I may. 
The dill'erence between the competitive set-up, the difference be- 
tween tlie basing-point system and the competitive set-up is this: 
Eacli one of tlie persons who sells on a really competitive market 
knows what he is willing to sell at, and if he comes on the market, 
we will say, in Chicago, the grain market, there is an active market on 
which a man, if he wants, will drop his price immediately. The 
others can or need not, as the case may be, follow. 

When you come to the basing-point situation, you have got some- 
thing that is entirely different. You have got a situation where 
everybody who is selling steel knows what "the formula is, and is 
prepared to make an identical delivered price based upon the formula. 
You haven't got an open market there, sir, at all. There isn't any 
such thing as an open market in these basing-point systems. There 
is a formula price, and they are under an understanding, they are 
under a meeting of the minds whereby anything that is sold in a 
given area that is governed by given basing points is sold at the 
formula price. It is the complete antithesis, though it seems perhaps 
superficially to resemble a market situation, from a market situation, 
because the man who sells, we will say, from the Buffalo point or the 
man that sells from the Chicago point of production follows the 
Pittsburgh base price and he follows the rate of freight from Pitts- 
burgh to destination and absorbs the excess freight charge that he 
has to pay actually to gel it there, and that price is fixed for him. 
It isn't an open price in the slightest. There is nothing "market" 
about it. It is a formula price which is known in advance, and if 
the Kalman Steel Co. or Inland were to cut that price they would 
be in the category of a price cutter. 

Acting Chairman Reece. Will you permit an interruption? 

I think it might be helpful to the committee, Mr. Ballinger, if 
you could give the committee the names of the witnesses which you 
expect to call in steel and the topics to be covered. 

Mr. Ballinger. I think Mr. Burr is going to cover the history of 
the basing-point system in the steel industry and the encounters the 
steel industry has had with the Federal Trade Commission, and to- 
morrow Dr. Fetter will attempt a demonstration that the. basing- 
point system is a simon pure monopolistic device. Then Mr. Burr 
will discuss some of the reasons why, under existing law, it is so 
difficult to get at the basing-point system and get it out of an in- 
dustry. That, in general, is the program we are pursuing. 

Mr. Burr. The situation is just this: Wherever you have a system 
which determines in advance on the part of whatever concern is fix- 
ing the base price, you have a set price at every destination within 
that basing-point territory. Within basing-point territory, governed 
by the Chicago, for examplej the Pittsburgh sellers sell on that Chi' 
cago base plus the freight from Chicago to destination, and absorb 
the freight from Pittsburgh to destination. In other words, the 
formula makes the price, and everybody knows what it is going to be 
and there isn't any more market to it. It is the complete abrogation 
of the market theory with respect to trading in goods. 

Gentlemen, if you will permit me — I don't object to these ques- 
tions except to this extent. If you will permit nie to outline the 
facts, I think we will get along a little faster. I don't object to the 



1864 CONCENTRATION OP ECONOMIC POWER 

quaiitions, but just let me get over these facts, if I can, and I believe 
tKat some of these thingjs will iron themselves out. 

Acting Chairman Reece. Is that agreeable to the committee, to 
proceed on that basis? 

Mr. Burr. I don't want to bar out questions at all. 

Mr. Davis. Mr. Burr, just one suggestion. I think it should be 
made clear to the members of the committee that when reference is 
made to freight, you mean rail freight. 

Mr. Burr. R^il freight as a rule. The formula is the all-rail 
freight formula, but there are certain places where there is part rail 
and part water, and some that is all water. 

The Federal Trade Commission has conducted some investigations 
into the steel business, and for the purposes of the committee may I 
offer, not for the record, not to be printed at all, certain documents 
that relate to the steel industry and the Commission's work upon 
steel. 

Acting Chairman Reece. They will be accepted. 

Mr. Burr. The Commission made a report to the Senate entitled 
Practices of the Steel Industry Under the Code. That with the 
covering letter was printed as document 1259 of the Seventy-third 
Congress, second session. I would like to offer that. 

Also report of the Federal Trade Commission to the President,, 
with respect to basing-point system in the iron and steel industry, of 
November 1934. That was prepared in response to- an Executive 
order issued by the President May 30, 1934. I would like to offer 
that. 

The third is a Report on Steel Sheet Piling, addressed to the Presi- 
dent by the Commission on June 10, 1936, and that also was in re- 
sponse to a direction from the White House. 

Now I don't expect to refer very much to the N. R. A. Code, but 
I think it perhaps might not be out of order, if the chairman is agree- 
able, to have the Code of Fair Competition for the Iron and Steel 
Industry as approved on August 19, 1933, by President Roosevelt, and 
also the amended code as approved May 30 the following year — if you 
care to receive those. 

Acting Chairman Reece. The committee will be glad to receive 
them. 

Mr. Burr. Now, the next thing is the Findings as to the Facts and 
Conclusion, and the Order to cease and desist in the Pittshurgh Plus 
case, issued by the Commission July 1924. Will you receive that? 

Acting Chairman Reece. Without .objection. 

Mr. Burr. Now finally there were taken rather extensive hear- 
ings — oh, comparatively extensive — comprising about 700 pages on 
the basing-point bill offered by Senator Wheeler. It was S. 4055 in 
the Seventy-fourth Congress, second session. Now that contained 
the examination by the committee of some IT witnesses of the steel 
industry, if I remember correctly, and contains matter to which I 
shall refer today. I think you should probably have it on file. I 
think it is out of print. 

Acting Chairman Reece. The committee will be glad to i^ceive it. 
(The documents referred to were marked "Exhibits Nos. 338 to 
344," respectively, and are on file with the Committee. 



CONCENTRATION OF ECONOMIC POWER 1865 

Mr. B^RR. Now one of. the news organizations printed the state- 
ment recently to the effect that the Commission's presentation today 
would be based upon the investigation which has been made u;ider 
the T. N. E. C. inquiry. That is not quite true. That investigation 
has not proceeded far enough, and in fact it is not related to the 
fundamentals of this system so as to make it at all necessary to have 
those data, which are now being collected, in hand for the present 
purpose. The investigation does not go to the character of the 
S3'stem as a means for curtailing price competition. 

It will show some of the effects up to date, and will also show the 
extent of cross hauling up to date, but it does not go to the funda- 
mentals of this situation, and furthermore the Commission is of the 
opinion, as I understand it, that this committee ought to have on 
hand, ought to have in mind, the importance and general effects of 
this system so that they will be able to be turning the thing over in 
mind and not have it come, when the investigation is complete, de 
novo, as a new problem. It is important, I believe, that the com- 
mittee should understand the scope and the tremendous public reac- 
tion of this general system, and at a later time we will put in a final 
report which will bring up to date the system and show the results 
of the investigation being conducted, provided the life of the com- 
mittee is extended, as I think it will be. 

Mr. Ballinger.. Mr. Burr, I believe you said the T. N. E. C. was 
conducting an inquiry into the steel industry. I do not believe that 
is correct, is it? The inquiry is being directed by the Department of 
Justice, and the Federal Trad». Commission cooperating. Is that not 
correct ? 

Mr. Burr. That is probably correct. 

Mr. Ballinger. And we are discussing today and in our hearings 
before this body one phase of the steel industry, leaving other phases 
to be discussed by the Department of Justice. 

Mr. Burr. That is true, Mr. Ballinger; that is entirely true. The 
Commission does not want to say it has no responsibility at all with 
regard to the investigation being conducted by the Department of 
Justice because we united with them and their letter, with our 
authority, said it was a joint request that they were making on 
behalf of both branches of the service, Ijut they are doing the actual 
work. 

Mr. Ballinger. May I make one more comment, Mr. Burr? Will 
you explain to this committee that in bringing up this phase of the 
steel industry we are not basing our case upon any information re- 
quested from the steel industry in that joint questionnaire which was 
sent out under the auspices of the Department of Justice, and the 
Federal Trade Commission? The story seems to be current in the 
press that we are prejudging the case without waiting for the 
information. 

Mr. Burr. Before I go further I think it should be said that 
there were certain changes in the system which were made in June 
1938. Those changes, or rather the effect of them — we know what 
the changes were — the effect of those changes will appear in the 
final report with respect to the basing-point system in steel. I 
would say at this time, so as to get it out of the way, that the 



1866 CONCENTRATION OF ECONOMIC POWER 

changes which were made in June last are important. But they do 
not go to the fundamentals of the situation with respect to the effect 
upon price competition in the steel industry. 

At that time additional basing points were created which had 
not been basing points for the specific products in question up to 
that time. 

Furthermore, the price at Pittsburgh was reduced and the price 
elsewhere was reduced still more. The prices at the main producing 
points for the main products were in most instances leveled off even 
with the prices at Pittsburgh so that the price at Chicago on most 
of the principal steel products, the price at Buffalo, the price at 
Bethlehem, and the price at Birmingham, Gary, and other points, are 
now for most products equal to those at Pittsburgh. Previously, 
'these base prices had been higher than ■ those at Pittsburgh. 

This,' therefore, has had an advantageous effect with respect to 
the sectional character of the discrimination which existed prior to 
that time in some sections of the country. So far as the system, 
however, is subject to criticism on the ground of its elimination of 
price competition, the changes made last June do not have any effect. 

Now, at this point I was intending to define the basing-point system 
and the formula. I would like to ask members of the committee if 
that has been sufficiently defined. If not, let us go through it again. 

Mr. Berge. There was one question. I think I did not quite 
understand how the freight charges are added from the various 
points to the destination in determining the total charge, but I do 
not understand whether the base prices at the different points, Pitts- 
burgh, Chicago, Buffalo, and so forth, are the same or different, and 
if they are different, what elements go into fixing them. That is, 
are they fixed by agreement or are those prices based on the indi- 
vidual costs at the different points? 

Mr. Burr. I am going into that right now. That is a very good 
question. I may give a little bit before I introduce the answer to 
that, if I may. Thank you, sir. The general outline, the basic 
facts of the basing-point system in steel is thoroughly admitted. It 
cannot be denied, and it has not been denied by the industry. Wil- 
liam A. Irvin, president of the United States Steel Corporation, 
testifying before the Wheeler committee, to which I have referred, 
in hearings that are now before you, was asked this question — I read 
from page 583 : ^ 

Now the testimony of practically all witnesses so far who have testified 
here as to how they arrived at their sale prices has been to the effect that they 
figured out the lowest combination of base price and freight rate to a given 
destination in order to determine what price they would have to meet in that 
market. Is that your view of it? 

Mr. Ievin. That is generally correct. 

Now, Mr. Walter S. Tower, executive secretary of the American 
Iron and Steel Institute, defined the system as one where, now quot- 
ing again — 

The seller quotes a delivered price to the buyer. The delivered price Is 
composed of the price at the basing point, which may or may not be the 
location of the seller's plant, plus freight charges from the basing point to 
the point of delivery. * * * In quoting prices for his products the seller 
uses the basing point which will give the prospective customer the lowest 
delivered price. 



t "Exhibit No. 844", on file with the Committee. 



CONCENTRATION OF ECONOMIC POWER 18^7 

That is page 273 of the record. 

Now, Mr. Irvin, testifying again, said : 

Under ordinary circumstances the price at any given destination for any 
steel producer is the price at the basing point that covers the customer's 
location, plus the freight rate from the basing point to the customer * » * 
except where we have basing points on the Gulf coast or in the Pacific coast. 

Page 610. And also auotinar again: 

Each producer of steel, when he follows the basing-point system, makes that 
price at any given destination. 

Now, also saying — 

When prices other than those are made it makes a departure from the 
multiple basing-point system. 

Page 610-11. Now, do you get the import of that testimony? It 
means that in any destination in the United States, unless a man is 
walking out on the system, he is making the same destination price 
precisely that every other man who is producing that same thing in 
the United States is making at that destination. And that is known 
in advance; that does not change from hour to hour, like the open 
market of grain at Chicago or other exchanges ; that is not a market. 

To answer the question a moment ago again, perhaps, or attempt 
to anyway, that means that the buyer, if he knows what the govern- 
ing basing point is and the freight rate, can tell in advance just what 
the bid is going to be and he will know in advance what the bid is 
going to be from everybody, no difference who it is, unless some 
producer violates the system. Then the adherence to the all-rail 
freight factor of the formula is important. Mr. Irvin again testi- 
fying said — 

Now in calculating the freight rate from the basing point to the destina- 
tion 

Mr. Ferguson. Mr. Burr, you have overlooked answering Mr. 
Berge's question. 

Mr. Berge. AVell, I intended a moment ago to inquire just how the 
base price at these various cities is determined. 

Mr. Burr. I am still coming to it, and — well, I will turn to it 
right now, right here^ I will give it to you right here. Mr. Irvin 
testified upon that very question — president of the United States 
Steel Corporation— on page 595: 

I would say we generally make the prices. 

The Chairman. You generally make the prices? 

Mr. Irvin. Yes, sir ; we generally make the prices, unless some of the other 
members of the industry think that that price may be too high and they make 
the price. 

The Chairman. You lead off, then, with a price charged, either up or down, 
at Gary, is that correct? 

Mr. Irvin. Yes, sir. 

He also testified again : 

We always notify the trade papers • • • and others interested as to 
what our prices are. 

The Chairman. Then the rest of them follow that? 

Mr. IBv^N. I think thfey do. That is, I say they generally do. 

They may quote the same price, but maybe they need some business and 
make a better price. We do not always know that until it is over. 

Then he testified — that is, page 695 — Plater that those who do not 
follow the corporation's price "are looked upon as price cutters in the 



1868 CONCENTRATION OF ECONOMIC POWER 

industry," and Mr. Irvin added, "We have them with us always." 
The amount of price cutting "is dependent upon business conditions," 
it was testified ; and Mr. Irvin said : 

When we are going at 30 or 40 percent (that is, of capacity) we have more 
of them (that is, price cutters) with us than when we are going at 60 or 70 
percent 

After the corporation has issued its base prices — 

if anyone in the industry decides to have a price other than the one we may 
have and publishes that price to his trade, of whicli we have become acquainted 
immediately through our connections with the trade, having 2,700 salesmen, then 
we immediately change our price to meet his lower level. (Page 612.) 

This testnnony confirms the findings of the Commission in the 
Pittsburgh Plus case to the effect that thQ United States Steel Corpo- 
ration's prices "are generally followed by their competitors." That is 
volume 8 of the F. T. C. Decisions, at page 32, paragraph 12-i. 

Mr. Irvin further testified that such a producer is not considered 
a chiseler — ■ 

if he comes out and makes a price lower than ours. It is only when a price 
is made which is lower than the price he has made to the trade. (Ibid.) 

In other words, if he makes a low^er base price then that ipso f acto"" 
is taken by the Corporation and becomes a part of the basing-point 
formula, and then all delivered prices are identical again and the 
fellow hasn't gained anything by cutting his price except a headache. 

Mr. Berge. Then as I understand you, the base price is fixed by 
the process commonly called price leadership, and the United States 
Steel Corporation is the price leader. 

Mr. BuER. It is worse than that, sir. It can't be resolved down to 
a case of price leadership. It is a case of price leadership in the 
initiation of one element in a formula delivered price. Now, when 
those base prices are fixed, then the formula operates automatically 
unless some fellow wants to get in and either chisel on the price, 
adopting for the moment Mr. Irvin's definition, or if he wants to cut 
the price, after which the .leadership immediately operates to make 
that price the Corporation's price, and then that price becomes the 
basing price and you start on another cycle of formula prices. Is 
that clear, sir? 

Mr. Berge. I think it is. How about a situation where there may 
be a small plant, a small company operating in a locality where there 
are no competitors, geographically, nearby?-- 

Mr. Burr. And where it is not. a basing-point? 

Mr. Bergb. What determines the base price there? The price 
leader, ^the big fellow, has no plant in that community. 

Mr. Burr. Well, that depends upon where the small man's plant 
is located. If he has a basing-point there at his mill location, which 
he probably won't have, but he may, then the prices he makes in 
the area governed by that basing-point are the base price there plus 
the freight to any given destination within that basing-point area. 

Now if he sells in some other basing-point area, then he uses the 
other basing-point base price plus the freight from that other basing 
point to that destination, whatever basing-point governs. It is the 
same whether the man is big or small. It all depends on Avhether he 
has a base at ,that point and whether he is selling in his own gov- 
erning basing-point area or elsewhere. But if he has a basing-point 



CONCENTRATION OF ECONOMIC POWER 1869 

there at his own place of production, all of the rest of them follow- 
ing the system honor that base price for his particular area. He has 
no business to go out and slash the price under this system. He won't 
get any more business by doing so, and it is very seldom that they 
do slash the price. 

Mr. HiNRiCHS. What do you mean by saying that he won't get 
any more business? 

Mr. BuER. I mean he won't get any more business — thank you very 
much; the words "he won't get any more business" don't mean he 
won't get any more business at all. I mean he won't get any more 
business than he would have got if he hadn't slashed the price. 

Mr. HiNRicHS. You don't think there is any relationship between 
the prices at which goods sell and the quantity that is sold? 

Mr. Burr. Of course, but the other people all adopt his price, as 
testified by Mr, Irvin. 

Mr. HiNRiCHS. I shall be glad to reserve my questions until tomor- 
row if that is the most convenient way of handling it. 

Mr. Burr. No, indeed ; let's take them now. 

Mr. HiNincHS. Let's take the case of cotton print cloth, something 
ordinarily regarded as a competitive product. If the price of cotton 
print cloth changes in the New York market, I have always under- 
stood that mills had to meet that change in print-cloth prices. That 
is your understanding, too, isn't it ? If I have a heavy inventory of 
80-80's on hand and want to get rid of some of that, I normally do 
it by shading the price in the New York market and getting an im- 
mediate order. As soon as that order has been placed that becomes, 
in general, the price at which goods move in the New York marketr 
Wouldn't that be correct? 

Mr. Burr. I don't know anything about that particular industry. 
I haven't been in it, and I haven't studied that industry, but I would 
say this, that if one man wants to move particular goods on an open 
market now — postulate an open market for the purposes of this 
answer — if a man wants to move certain goods, he can offer a reduced 
price on that market. 

Now, I think it is quite possible that on an open market men will 
say, "We don't care to sell at that price. That won't last long. He 
will sell all he wants ; we will reserve; we will hold out and not follow 
it." On the other hand, so long as that offer persists on the open 
market, the chances are that other people who are maintaining a 
higher price will not get many sales, won't get many sales at their 
price. But if you are considering an industry like steel, where the 
minute a lower base price is made that becomes the base price factor 
in the formula, then everybody will sell at the new base price thus 
created for sales in that area and your competitive feature does not 
persist. 

There is a very great and overwhelming — excuse me just a min- 
ute — difference between a controlled market under the basing-point 
system and a market which is of an open character where the buyers 
and the sellers meet together and are in constant stress of how much 
will you pay and how much will you sell at. 

Mr.. Henderson. Just for purposes of illumination, Mr. Burr, do 
you not mean that because of the fact that a price cut will be met 
instantly and thus become the price factor in the formula, there is a 



1870 CONCENTRATION OF ECONOMIC POWER 

decided repression of price jcutting and, therefore, the opportunities 
for a lowered price to move a larger volume of goods as would obtain 
in a competitive market are not present? 

Mr. Burr. I think that is true. 

Mr. Henderson. I think, Mr. Chairman, that is what Mr. Burr 

Mr. Burr (interposing). If I catch the import of the question. 

Mr. Davis. Mr. Burr, right in connection with what Secretary 
Henderson asked, I will ask if your observation of the operations of 
industry have not indicated that quite frequently if one member of 
the industry fails to comply with the system and submits a bid lower 
than the formula price, for some reason or other he very frequently 
withdraws that bid when the bids are opened and that fact becomes 
known ? 

Mr. Burr. Yes, sir ; that is true, and documents you gentlemen have 
received in evidence are replete with instances of that kind. I can't 
go into details here, gentlemen, but there is a world of that material. 

Now, just a few moments on the adherence to the all-rail freight 
factor of the delivered price formula in the steel industry. Mr. Irvin 
was asked: "In calculating the freight rates from the basing point, 
to the destination, you use the all-ran freight cost, do you not?" Mr. 
Irvin : "That is generally so with some exceptions. "It" — that is, 
the exceptions — "is where we have arbitrary basing points such a3 
Mobile, New Orleans, and Galveston and other places on the Gulf 
in order to meet foreign competition. We also have arbitrary basing 
points on the Pacific coast and I think we have an arbitrary basing 
point at Savannah on the east coast." ("Exhibit No. 344," intro- 
duced supra, p. 1864.) 

Now, on the question asked me a moment ago as to hpw these base 
prices are made, Mr. Irvin admitted that the representatives of his 
companies participated in meetings with other steel companies when 
they "talk of market conditions, what the possibilities are and prices 
in various localities; foreign competition, how much is coming in at 
this port or at that port, and at what price it is coming in ; at what 
price foreign materials are being sold at the various seaports, and 
anything that would naturally arise in connection with the steel in- 
dustry and other industries as well." In other words, the meetings 
of the industry touch on price matters, but the overwhelming influ- 
ence remains apparently in the United States Steel Corporation be- 
cause the same witness testified: 

The various presidents and sales managers in the corporations of subsidiary 
companies * * * get together with us in New Yorli and we go over the 
whole situation and decide upon what price we should fix (p. 611). 

Wlien you remember that by and large the rest of the companies 
follow the United States Steel Corporation and have apparently been 
doing it since before the Pittsburgh Plus case was decided, and also 
when you remember the Gary dinners when the Corporation took the 
lead on prices, which the Circuit Court of Appeals in the Third Cir- 
cuit held had been unlawful ; when you remember that set-up, it looks 
like a very closely controlled price system. And, furthermore, it 
should be added as a safeguard that I don't say there aren't times 
wlien price competition, genuine price competition breaks out in the 
steel industry. There are. There is plenty of it on record. In the 
Pittshurgh Plus case it was so found. But by and large in most 
times members of the industry find it advantageous to follow the 



CONCENTRATION OF ECONOMIC POWER J §71 

prices made by the Corporation and with the formula system work- 
ing you can tell to a gnat's hair what the price is going to be — you 
can tell in advance I mean. 

The head of the Bethlehem Steel Corporation, Mr. Eugene D. 
Grace, testified that the corporation — that is, the United States Steel 
Corporation — underbid Bethlehem's base prices, and Mr. Irvin, testi- 
fying later, said that he thought that statement had been made "in 
a rather facetious way," and he went on to say : "If I thought he 
intended it, I would have resented it very much." This is illustra- 
tive of what was said by the United States Supreme Court in the 
Hardwood Lumher case about the plan which was there declared to 
be unlawful. It was said that the plan and those back of it relied 
"not upon fines and forfeitures as in earlier days, but upon what 
experience has shown to be the more potent and dependable restraints 
of business honor and social penalties." That is from the American 
Column & Lumher Co. case^^ 257 U. S. at page 411. 

This system, gentlemen, is one of reciprocity. The aim is to put 
prices high enough so that all producers can ship over wide areas, 
if not throughout the country, but each under ordinary circumstances 
refrains from reductions in his own home territory and permits 
others to sell in that territory. 

Now. under ordinary circumstances, you would expect a man who 
has a local advantage in the territory adjacent to his own mill to 
hold that territory, which is high net return area to himself, against 
all comers. You would expect him to make a price, provided his 
costs were in line with those of others, such that it would be unde- 
sirable for others to enter his territory and sell there. This system 
is one under which they definitely look forward to shipping all over 
the United States, each of them. 

In testifying before the Darrow committee, Mr. Tower, the execu- 
tive secretary of the Institute, used as an illustration the man who 
wants to buy steel in Atlanta, and he said that he had the inestimable 
privilege of buying either from eastern Pennsylvania or from Qii- 
cago or from Birmingham, his nearby point of production, or from 
Pittsburgh, but it was all the same price delivered. 

You would expect under a competitive system that Birmingham 
would have its price and would ship naturally to such points as Mem- 
phis and Chattanooga and New Orleans and Atlanta, and not invite 
a man from Buffalo or a man from Chicago or Gary to come down 
there and sell in Atlanta. You would thnik that the Birmingham 
price would hold the Birmingham territory including Atlanta ; but no, 
they don't have any price; tb\?re is no set price; there is a set base 
price, but there is no set price because the real price, the net return 
upon which they calculate whether they are going to make a profit or 
not, is different" from the base price. If a producer sells outside of 
his basing-point territory, he is absorbing probably more freight than 
he gets back in the delivered price, you see. A man shipping from 
Chicago or Gary or Pittsburgh down to Atlanta can collect as part 
of the formula price only the rate of freight from Birmingham over, 
and he has to defray the actual .freight which will be more. Now, 
then, the actual price at those points is to be computed as different, 
depending upon how_much freight price factor he adds and how 
much actual freight he must defray. 



1872 CONCENTRATION OF ECONOMIC POWER 

Now the net return is what they are considering in each case as ta 
Avhether or not they will figure on the job, and, if that net return is 
different, then you can see that they are making more or less profit 
or loss, depending on how much freight they must absorb. 

Taking that Atlanta illustration again, if Birmingham was actu- 
ally competing, they would make a price for their own territory such 
that it would not be attractive to the other steel producers. Instead 
of that it is a case of the buyer having an opportunity to buy from 
any one of those points but all at the same price, and that price, 
delivered price, I would say, is high enough so that they can all 
afford to compete in each other's home territory. 

It is the base-price factor in the formula which is put up high 
enough, and designedly so, so that they can ship all over the country, 
and the consumer ultimately has got to pay the excess for that privi- 
lege that the producers have of sending their goods throughout the 
country. 

Are there any questions with regard to that phase of it? 

IVIr. HiNRiciis. Just as a matter of record I am reserving questions. 

Mr. Burr. The basing-point system is one which does not require 
to be supported at least in its bare outline by a meeting of the minds 
with respect to each particular job. It doesn't have to be the outcome 
(I mean the individual price doesn't have to be the outcome) of the 
calling up of one steel company over the telephone or telegraphing 
what they are going to ask the Government to pay for a job, we will 
say, at Miami. They don't have to do that. The formula is auto- 
matic. If they are following the formula, and if they know M'hat the 
base price is, and if they know what tariff they receive froni the 
Institute on that destination, that is all they need, they know precisely 
what the price is going to be and they don't need to get in touch with 
one another with respect to each individual job of the Government 
or anybody else. 

Now there have been times when they have gotten in touch with 
each other, as Judge Davis suggested, when somebody makes a mis- 
take on the bid, or something or other ; then they do that very thing. 

In order that the committee may gain an insight into how this situa- 
tion works out, I want to further illustrate with the basing-point 
results that the Government experienced in connection with the steel 
piling bids upon which the Commission was asked by the President 
to report, and the report upon which is now received in evidence. 

The situation was this : The Government was in need of this piling 
in connection with public jobs at Morehead City, N. C., at Miami, 
Fla., and for the big Triborough Bridge in New York City, and there 
are only four people who make this in the entire steel industry, the 
names I mentioned before. Accordingly, the Government got only 
those four American bids on the jobs and those bids were alike for 
each one of those three jobs, delivered at those three destinations. It 
is necessary, I believe, for this committee to get a real insight into 
how this thing works out; you will never know anything about it 
until you see just how the thing actually develops to the prejudice of 
the Government, State buyers, and private buyers. 

Not only was the base-price part of the formula identical as used 
by these four concerns,- the price per .hundred pounds for the un- 
welded piling and for the unwelded piling in pairs, but it was the 
same for piling corners, it was the same exactly for piling T's, it was 



CONCENTRATION OF ECONOMIC TOWER lg73 

the same for fabrication, the same for the extra in welding in pairs, 
the same identically for copper content, the same for all-rail freight 
factor from Pittsburgh to Morehead City, although they offered to 
ship from Chicago and they offered to ship from Buffalo; the same 
actual identical delivered unit price with all of the extras. This was 
also true with regard to a great variety of extras on Miami and the 
Triborough. 

Mr. Davis. Mr. Burr, those were all sealed bids, weren't they ? 

Mr. Burr. Yes; those were all scaled bids. The Government re- 
quires sealed bids, I take it, for all these jobs. 

The monetary consideration to be secured was not the controlling 
factor with respect to those bids by any manner of means. They 
weren't thinking about whether or not they were going to get the 
job when they bid; no. They all bid identical and for those different 
jobs they got differing net realization figures at f. o. b, their plant, 
which is the only thing which is going to tell in the long run whether 
you make a profit or a loss. 

The Inland on tliese three jobs for the same products, the same 
general type of products, ditfered this way. 

Mr. Ferguson. They were all bidding under the same specifica- 
tions ? 

Mr. BiTRR. Yes, they were all bidding under the same specifica- 
tions for each respective job. Disregarding special-price factors, the 
basic commodity^ steel-sheet piling, was the same for each of the three 

The steel companies, not located at the governing basing-point, so 
bid as to obtain substantially different net realized prices at the 
different destinations on the same commodity. 

The Inland Company bid on the steel-slieet piling so as to realize 
for the Triborough Bridge, $40.20; for the Morehead City job, $42.80; 
and at Miami, $38.70. Similarly, the Bethlehem Steel Corporation 
so bid as to realize $43.40 on the Triborough job, $40.60 at the More- 
head City, and $43 at Miami. 

This means that these two companies were willing to accept on one 
]*ob less net realization than they would have realized on the other 
jobs if awarded, them. It seems probable that if price competition 
had existed, delivered prices could well have been Ioav enough to pro- 
vide the minimum net realization which each was willing to receive 
on the job. ^ 

Be this as it may, it seems an irresistible conclusion that true price' 
competition would not have resulted in identical delivered prices and 
substantially diverse net realization prices. This is but illustrative. 
Most bidding on Government and private jobs discloses identical 
delivered prices and diverse price realizations. 

This business of selling nearly or all over the country brings about 
a differing net return according to the destination, and as a corollary 
to that it means that presumably they could have afforded to have 
taken a less price in their own home territory had there been com- 
petition, and thus kept out competitors from a distance. 

This system has been supported by a great variety of different 
subsidiary methods, subordinate methods, of securing identical de- 
livered prices, and for securing freedom from competition in price 
among the producers. 

124491— 39— pt. 5 16 



1874 CONCENTRATION OF ECONOMIC POWER 

Mr. O'CoNNELL, I would like to ask you a question about the identi- 
cal business that you just spoke of on the Government jobs. You 
said there were four domestic producers or manufacturers on steel- 
sheet piling, and I take it they were the only bidders on these jobs. 

Mr. Burr. No; there was a German subsidiary. 

Mr. O'CoNNELL. Is there foreign competition in this? 

Mr. Burr. This German subsidiary bid on two of those jobs and 
bid very much less than domestic producers, but I believe there is 
a provision in another statute, I believe the Walsh-Healy Act, that 
puts a handicap on the foreign subsidiary or foreign companies, 
something like 15 or 16 percent. 

Mr. O'CoNXELL. I believe it is 25 percent. 

Mr. Burr. They didn't quite go low enough to take it; they bid 
very mucli lower than the four American producers. 

Mr. O'CoNNELL. I think it is true that on Government work there 
is a differential, I think 25 percent, in favor of the domestic producer. 

Mr. Burr. Yes, sir. Tlie subordinate methods are some of them 
extremely important. The extras are all idputical and have been 
identical for many years. They have a book of extras about an inch 
or so thick which goes into the greatest detail with respect to the 
extras that are to be charged for the chemical formulas and for 
quality and for special sizes and for a great mass of different speci- 
fications that can be included, and those extras are followed through- 
out by the industry. There may be some competition, sneak into it, 
but not very much, apparently. 

The extras in some tyi)es of {product are a more important factor 
in the total price than the base price. Sometimes the extras mean 
more than the regular steel of the same tonnage and the same gen- 
eral type, and the tendency down through the years lias been dis- 
tinctly to boost prices on extras. I don't know whether recent 
changes since last June have been made on extras, but occasionally 
a reduction in the base price is partly at least compensated for by 
a boosting of the extras which doesn't appear in the trade journals. 
Thus prices seem to haA^e been reduced and they haven't been 
reduced, sometimes, as much as they appear to have been because 
extras will bring in the revenue to a somewhat compensating extent. 

Means for securing identical destination prices and for prevent- 
ing price competition from leaking into the trade, are many. They 
have a traffic committee. The traffic committee informs the industry 
of all changes that are made in freight rates for steel commodities. 
The industry gets from the Institute through its traffic committee the 
freight rate factor that is to be charged, and if a new freight rate is 
brought in there may be a lag (there is always, I take it, a lag) 
before the information is handed out by the Institute to the industry 
after the change has been made. The freight rate factor for the 
purposes of all bidding is not the freight rate which has been an- 
nounced by the railroad company until the traffic committee says 
they can go ahead and use it. 

In other words, the freight rate is not a freight ^ate until the 
Institute has informed the trade, and that appears with illustrations 
in the reports that I have submitted. 

Mr. Ferguson. You mean by that the freight which they add to 
their own price? 



CONCENTRATION OF ECONOMIC POWER J §75 

Mr. Burr. Yes. The rate of freight from the basing-point is a 
factor added to the base price. The actual delivery costs they have 
to meet. That is different from the charged freight, generally. 

They have cooperated also with respect to the land-grant rates of 
the Government. Those are technical and I won't attempt to go into 
them, but that is an important factor and there is distinct coopera- 
tion to police the special rate of freight that the Government enjoys 
in connection with the grants which it made many years ago to west- 
ern railroads. Lest those land-grant arrangements introduce a com- 
petitive factor and result in different bids at destinations in the West, 
the producers have taken important and careful cooperative steps. 

In addition to that there are the steps that were taken to prevent 
delivery by trucking from injecting a price competitive factor into 
the industry. The demand for being able to obtain deliveries in 
some way cheaper to some destinations than by the all-rail freight 
factor was so strong that steel producers concluded that some conces- 
sion must be made with regard to trucking. So they passed a resolu- 
tion during the code period that anyone who wanted to take the 
goods at the mill wouldn't be charged the fidl all-rail freight to 
destination, but would be credited with 65 percent of the carload 
freight and he could take it himself, either by hired or his own truck, 
to destination. 

Now then, that means that if the mill is willing to accept the 
base price to their local customers, they discriminate against the 
customer at a distance who adopts this privilege that I have de- 
scribed by penalizing him to the extent of 35 percent of the all-rail 
freight to destination. He comes and gets it and he pays 35 percent 
of the all-rail freight, and the company is under no obligation what- 
ever to pay any of the delivery costs, because he has come and got it 
himself and he bears the expense of delivery by truck. But they had 
to make some concession and that is the concession they made. I am 
not sure whether that concession still holds. 

On less-than-carload quantities, the buyer doesn't get the 65 percent 
off from the less-than-carload freight rates. If the man comes with 
a truck and gets less than a carload quantity, he then is given 65 
percent off from the carload rate. Thus, the small buyer is dis- 
criminated against, as contrasted with buyers of carloads, in the mat- 
ter of deliveries by customers' trucks.. 

Mr. Ferguson. That is the freight from the basing-point. 

Mr. Burr, Yes. 

Now then, in all fairness I want to say that in this later inquiry we 
will have to check up and see whether that is still in vogue since the 
code. I simply don't know whether these auxiliary means of secur- 
ing identical destination prices are still in use. 

Mr. O'CoNNELL. Do I understand, according to this practice, if I 
went to a steel mill with a truck or several trucks to get a carload of 
steel I would have to disclose the destination of the steel and the 
price would be based upon that destination ? 

Mr. Burr. This is a delivered price system. You can't buy it with- 
out giving your destination. 

Now then, a great deal of care has been taken with respect to 
fractions. In some instances the fraction works out a little different 
in the delivered price, and if they don't carry it out to the same num- 



1876 CONCENTRATION OF ECONOMIC POWER 

ber of decimal points they may get to destination with a slight differ- 
ence in price. For example, on April 11, 1935, just a few months be- 
fore the cede went out of effect, the Youngstown Sheet & Tube Co. 
wrote to the chairman of the Institute's traffic committee and stated 
that a W. P. A. project calling for about $60,000 worth of pipe, in that 
case bidders had named a delivered price by carrying out decimals 
two places, as usual, but that the Republic Steel Corporation was 
awarded the bid "because they carried the basing point price three 
places, resulting in their bid being 12 cents low." 

Mr. Ferguson. Twelve cents a ton ? 

Mr. Burr. Twelve cents per unit, I presume. My colleagues tell me 
it was 12 cents on the entire job. 

In other words, here you have one of the major steel companies 
complaining to the Institute, forsooth, because there was 12 cents 
worth of price competition left in the industry. Price competition 
breaks through the industry once in a while, but it is a pretty stiff 
wall. 

Here is an illustration, occurring subsequent to the code days, of 
the efforts that they make to make sure that the tariff used by them, 
the freight-rate factor in the delivered price used by them, is iden- 
tically the same. 

On November 13, 1935, the Institute wrote one of the producers, 
the Newport Rolling Mill, as to a new railroad freight rate out of 
the Chicago-Gary production territory to a Wisconsin destination 
as follows: 

In the meantime (that is, imtil the association's new amended freight tariff 
should be issued to the industry) in connection with the question raised in the 
second paragraph of your letter (that is, which tariff rates should be used), it 
is my understanding that until such time as the rates in freight tariff No. 2 
are changed (that is, until the tariffs as issued by the tariff committee are 
changed) the rates to be used are those carried in freight tariff No. 2. 

In other words, he was inquiring whether he could use the new 
tariff. Oh, no; he mustn't do that, gentlemen, until all steel njills 
changed, until they had given official notice to everybody that the 
change had been made. Then and only then can they use the new 
factor. That was in order that all should use the same identical 
freight rate so as to arrive at identical destinations up to one identical 
day. 

The Commission, in its report to the Senate, has recited a great 
many cases of protest against the all-rail freight factor. These pro- 
tests are by chambers of commerce, they are by individual industries 
located at river points, they are by water transportation companies 
and other concerns. Those will be found in the report to the Senate, 
pages 29 to 35. The reason why these complaints are made and the 
reason why the industry is so careful along this line appears in this 
testimony : 

The Chairman (of the Wheeler Committee). I asked you a moment ago, and 
I will repeat it. • You staled you would agree that unless steel mills calculated 
delivery costs in terms of a common mode of transportation,^ such as all rail, 
the delivered prices could not be identical at the place of delivery. That is the 
real reason for calculating delivery in terms of all-rail freight, is it not? 

Mr. Ievin. Yes, sir. 

That is from the hearings, page 587. 



CONCENTRATION OF ECONOMIC POWER 1877 

The rule of the association carries decimal places to small frac- 
tions of a mill in order to eliminate the possibility of this I'i-cent 
margin that turned that sale. 

Then everybody is charging the same identical net cash 30 days, 
half of 1 percent if paid within 10 days, and the discount will be 
allowed only on the basing point value of the material. They all 
follow that identically. 

Acting Chairman Reece. Mr. Burr, it is now about 12 o'clock. 
What is your wish with reference to when we should recess? 

Mr. Burr. I have no wishes other than those of the committee. 

Acting Chairman Reece. Is this a convenient place? 

Mr. Burr. Any time, any place. 

Acting Chairman Reece. The committee then will stand at recess 
until 2 o'clock. 

(Whereupon, at 12 o'clock noon, a recess was taken until 2 p. m. of 
the same day.) 

ArTERNOON SESSION 

The hearing resumed at 2 : 10 p. m., on the expiration of the recess. 
Acting Chairman Reec^. Are you ready to resume, Mr. Burr? 

TESTIMONY OF EUGENE W. BURE, ATTORNEY, FEDERAL TRADE 
COMMISSION, WASHINGTON, D. C.— Resumed 

Mr. Burr. Yes, Mr. Chairman; I am ready whenever the com- 
mittee is ready. 

Acting Chairman Reece. You may proceed. 

Mr. RoRR. At the time that adjournment was taken I was en- 
deavoring to tell the committee about the various methods by which 
the industry has closed subordinate avenues through which competi- 
tion may leak into the industry. They have even gone so far as to 
make it less possible for the buyers of one producer, the customers of 
one producer, to compete in business with the customers of other pro- 
ducers. In other words, they have taken certain steps whereby they 
have fixed the resale prices of those who buy steel products from the 
producers of the steel industry. 

I had a recent case come over my desk and it showed a rather 
careful investigation, a particularly careful investigation, of ' the 
Memphis area. The trade was in black and galvanized pipe bought 
from the steel industry and jobbed in the Memphis territory. It was 
shown that the jobbers of Memphis bought their supplies from the 
United States Steel Corporation, from Bethlehem, from the Wheel- 
ing Steel Corporation, Youngstown Sheet-& Tube, Jones & Laughlin, 
all known as major producing companies, and also from a couple of 
warehousemen in addition. 

These jobbers showed that they had, themselves, nothing to do what- 
ever with their own selling prices. Those selling prices were made 
and modified, they said, on notice from the producers to them, and 
all changes from time to time w-ere announced to these jobbers by each 
steel company for effectiveness on the same identical date. 

How far that extends to other industries I wouldn't be willing to 
tell this committee at this time. I don't know, but that is only one 
of a number of similar cases where there is a considerable body of 



1878 CONCENTRATION OF ECONOMIC POWER 

evidence before the Commission that the steel companies are engaged 
in demanding that their customers themselves not compete, so that 
buyers of the Steel Corporation, for example, will have no advantage 
over customers of the Bethlehem and vice versa, all those customers 
selling on identical prices received from the companies themselves. 

Now there are a large number of different methods subordinate to 
the main basing point methods which have been used. I shan't go 
into more detail on the matter. There are a number of others that 
might be brought out. I have brought out quite a few in my talk 
this morning. 

This all, in my judgment, fits into the history of the industry, and 
by the history of the industry I am referring to the fact that hereto- 
fore the steel industry has been under fire in this matter of eliminat- 
ing, through one device or another, competition in price. You are all 
somewhat familiar, I take it, with the Steel Dissolution case. There 
the Supreme Court referred to the United States Steel Corporation 
as a merger of mergers. That was the language used, if I remember 
correctly. That was in 1920. One of the reasons why the court by 
a majority of one decided not to dissolve the United States Steel Cor- 
poration, one of the reasons which very obviously sticks out, was that 
while the Corporation was formed by Judge Gary in 1901 the matter 
did not come up for decision till 1920, and the court remarked specif- 
ically upon the important financial and other readjustments, which 
had been made during the course of the intervening years, And it 
almost looks as though that decision rested chiefly upon economic 
grounds. For that I have no criticism to offer except this — and this 
is not a criticism of the Court either, in the slightest or of the decision 
that was then made — they did not have before them the fact that 
there was a system then in \ogue, the basing-point method, a system 
of identical delivered prices, and the Court, having but one of the 
members of the industry before it, didn't consider the question of 
the basing-point system. So that the result was that they took cog- 
nizance of the fact that from 1901 to 1920 the percentage of busi- 
ness done by the Corporation had diminished rather than increased. 
From that they reasoned that there was no monopoly that had re- 
sulted from the merger of mergers which formed the. United States 
Steel Corporation. But the case did not take one consideration into 
account, and that is this: That the merger was not a prerequisite to 
a monopolistic condition in the industry, and that through the basing- 
point system the buyer gets no more price advantage from there being 
many units in the industry than if they were all under one control, 
because under the formula system, price competition is almost ob- 
literated and they all make the same identical delivered price, wher- 
ever you may name a destination ; they all get in at the same price 
delivered. Now that feature was not before the Supreme Court. 

In addition to that merger there have been other mergers in the 
industry that have taken place since, and that whole merger situation 
is being studied ; I think Dr. Fetter is likely to refer to it tomorrow, 
and I do not intend to go into it, but it may be stated that the Depart- 
ment of Justice made an effort to prevent the last amalgamation of 
companies by the Kepublic Steel Corporatior. and the Federal Trade 
Commission made an effort to stop the acquisition of certain com- 
panies by the Bethlehem Steel Corporation, and both of those efforts 
tailed. 



CONCENTRATION OF ECONOMIC POWER 1879 

Mr. Kelley, Chief Counsel of the Commission has recently testified 
to you about the difficulty the Commission has experienced attempt- 
ing to enforce section 7 of the Clayton Act as to acquisitions by 
one corporation of other corporations. Now, going further with the 
history of the eliihination of price competition, after the formation 
of U. S. Steel Corporation. Following that was the period of the 
Gary dinners. That method was held unlawful by tlie third cir- 
cuit in the Dissolution case, but they found it had been abandoned. 

At the Gary dinners they made gentlemen's agreements as to what 
the prices should be for each ensuing quarter. Then there was a 
period when the industry had its zone prices. "Those prices were sim- 
ilar to the present pricing system and resulted in identical delivered 
prices at any given destination you can name, made by all companies, 
the same as the basing-point system-. Then, even before that period 
there were pools and agreements which Mr. Charles M. Schwab, 
chairman of the board of the Bethlehem Steel Corporation, testified 
about in the Pittsburgh Plus case. So that the Commission found 
that from 1873 there had been restraint of price competition up 
to the time that the Pittshurgh Plus ca^e was decided in 1924. 

Under all of these systems the same identical delivered character 
of prices at each" given destination adhered : zone, single basing point, 
dual basing point with the Birmingham dilfferential, and then later 
the present more multiple system. The more multiple basing-point 
systems were doubtless ushered in by the suit that was brought by the 
Federal Trade Commission and decided in 1924 to which I have 
already referred several times, the Pittshurgh Phis case. At that time 
there were great degrees of discrimination in price. It went so high 
that whereas Duluth had a production of certain prodvicts in the 
plant of the United States Steel Corporation and whereas that was 
right on Lake Micliigan and they could put it out pretty reasonably, 
the price at Duluth was the price at Pittsburgh plus the freight from 
Pittsburgh to Duluth. It was $13.20 more for a customer wanting to 
remanufacture and use steel as a raw material; it cost him $13.20 
more than it would a competing remanufacturer making goods at 
Pittsburgh. Now, that is a terriffic handicap to anybody trying to 
remanufacture goods and get a general trade; it is prohibitive. At 
Chicago, under the Pittsburgh-plus system, the differential against , 
the fabricator using steel as his raw material was $7.P0 more than 
the Pittsburgh man had to pay under the formula; $7.60 made it 
impossible for a fabricator to sell 20 miles east of Chicago in compe- 
tition with the Pittsburgh fabricator. 

The largest steel fabricating concern at that time in Chicago, 
Morava Bros., testified that the system was a Chinese wall on the east 
boundary of the city of Chicago, and he couldn't go east in competi- 
tion because he had to pay a short-haul freight on any job to the east, 
besides having to pay the rate of freight from Pittsburgh to Chicago. 

Mr. BALLiNtJER. Even though the steel was manufactured at Du- 
luth and at Chicago and this differential amounted to phantom" 
freight, freight that never actually occurred. Is that correct? 

Mr. Burr. That is correct. In other words, a producer of steel at 
Chicago would sell his steel at the Pittsburgh price plus the freight 
into Chicago, although he wasn't shipping it in at all, he was making 
it right there in Chicago, and Judge Gary testified that he was 
making it 18 percent cheaper there than at Pittsburgh. 



1880 CONCENTRATION OF ECONOMIC POWER 

Mr. Ferguson. You mean plus the freight from Pittsburgh, not 
Chicago. 

Mr. Burr. Did I say Chicago? Thank you very much. 

Mr. Ballinger. I understand Duluth is on Lake Superior, not on 
Lake Michigan. 

Mr. Burr. Right. Thank you very much. Any further correc- 
tions, gentlemen, before I proceed? I am very grateful for them. 

The thought is this. The manufacturer of building material or 
anything else at Chicago, buying steel as part of his raw material, 
might have it made at Chicago and he would pay, as the price to him, 
the Pittsburgh price plus the freight from Pittsburgh to Chicago, 
and if he wanted to send it over on his own truck he would still pay 
that freight. Judge Gary testified that it was made 18 percent lower 
cost at Chicago than at Pittsburgh at that very time, approximately. 

Mr. Ferguson. Mr. Burr, just for the record, although almost 
everybody knows, will you state who Judge Gary was. 

Mr. Burr. Judge Gary was the head of the United States Steel 
Corporation for many years and was the leading spirit in the New 
York decision for the merger. 

(Senator O'Mahoney resumed the chair.) 

Mr. Ferguson. He was at the time he made this stateriient ? 

Mr. Burr. Yes, indeed ; yes, indeed. He was called as a witness in 
the Pittsburgh Plus case. 

Following the Pittsburgh Plus decision, the miiltiplicity of the 
system was gradually broadened. Before we could get the matter be- 
fore the Commission itself, Chicago was put in as a third basing- 
point, added to Pittsburgh and Birmingham, and the differential was 
reduced to "about two to three dollars, as contrasted with $7.60. Other 
basing points have been established from time to time, and as I 
mentioned this morning, quite a number of additional basing points 
on additional products were adopted last June. So that the system is 
now very multiple indeed, but there are still quite a number of small 
points of production that are not basing points and where this phan- 
tom freight which I have just told you about still persists to a certain 
extent, to a substantial extent. But the sectional character of discrim- 
ination as against Chicago or against Duluth or against Birming- 
ham has now been wiped out because the Chicago and Birmingham 
prices, and the prices at most of the points of principal production, 
have been leveled off. That is not quite true of Duluth, however. 

Mr. O'Connell. That wiping out only goes to the phantom freight. 
It hasn't affected the arbitrary character of the base price. 

Mr. Burr. No; it hasn't wiped out the phantom freight entirely, 
but it has leveled the base prices at most of the important points of 
production, so that there is no longer a differential against Birming- 
ham producers, or against Chicago purchasers of steel. 

Mr. O'CoNNELL. What I mean is, it hasn't affected the character- 
istic of the system in that the base prices remain the same. 

Mr. Burr. It hasn't affected the system as a system of identical 
delivered prices or as to the elimination of price competition. The 
elimination of price competition is even simpler than it was before, 
because if they should want to penalize a man for cutting a price 
they can do it by putting a low base price at his point of production, 
in his home territory, where he would presumably still make quite a 



CONCENTRATION OF "ECONOMIC POWER 1381 

percentage of his sales, cut it for that area, and they wouldn't have 
to cut the price for the entire country. Under the old system, if 
somebody got chiseling on the single basing point system they would 
have to cut the price at Pittsburgh in order to reach that chap. They 
would cut it for the entire country. If he was chiseling,. we will say, 
on sheets, they would have to cut it in the entire country, and they 
would stand for a good deal of chiseling before they would take that 
much trouble and loss. Is that clear? 

Mr. O'CoNNELL. It is clear except the use of the word "chiseling." 
I take it you mean a person who would vary from the prescribed 
formula. 

Mr. Burr. One who would vary from the regular formula ; a man 
who gets behind that system and violates the understanding that 
exists in the industry to follow the system. But if he puts in a par- 
ticularly low base price, it wouldn't fall within their definition, as 
I take it, of chiseling. They can go lower than his own base price 
and in that way reach him, so that a man who is in the industry is 
always subjected to a fear, and sometimes it is justified, of reprisal 
under the system, if he offers price competition. . 

Now, then, with each basing-pbint territory more restricted through 
the formation of more bases, you can penalize a man in his own home 
territory by putting in a particular bas'e price there and sell at 
the old price elsewhere in the country, and still reach him very 
effectively. 

Mr. Ballinger. Don't you think the word "chiseling" is not as 
good an expression as just "trying to compete"? A moral stigma at- 
taches to the word "chiseler," whereas these gentlemen were just 
trying to introduce competition in the steel industry. 

Mr. Burr. I think the correction is well taken. 

Now with regard to the origin of the system here, I want to read 
you something that Judge Ga^-y said many years ago with respect 
to the origin of the system. 

He said this : 

It was deemed necessary for the orderly conduct of the business to have one 
basing price, and this was not alone for the benefit of the pr(iducer but for the 
benefit of the. purchaser who in turn fabricated the steel which he bought 
into something else, finish(?d some form of steel with it, and therefore desired 
stability of prices, something that was well understood so that every user of 
steel all over the country bought and used his steel on a certain basis, knowing 
in advance that everyone else who bought steel had to pay exactly as he did, 
with the addition of the increased freight, depending upon where he wanted 
to use the steel. (Pittsburgh Plus record, p. 11,736.) 

In other words, the recognition right in the very beginning was 
that they wanted a stabilized — but more than a stabilized-price; 
that "stabilized" is a good word — but they wanted to have a fixed price 
that everybody would get and that everybody would know and from 
which there would be no deviation except by somebody who actually 
assumed the position of a price cutter. 

Now then the system has, therefore, ever since the earliest days in 
the industry, been one under w^hich every producer who was follow- 
ing the system would quote identically the same price at any given 
destination in the United States. I was one df the counsel for the 
.Pittsburgh Plus case^ and I examined one of the members of the 
industry and he said this: He said that if you would change the 



1882 CONCENTRATION OF ECONOMIC POWER 

letterhead and the signature, you could always use on the part of 
every company in the business, every producer of steel, the same let- 
ter of quotations for any given purchaser that you might want to 
name. You could always send him the same letter. The price at 
the basing point plus the freight from there to destination could be 
used by every producer if you just changed the letterhead. 

How does the industry defend this system? Mr. Towerfe idea of 
what constitutes competition has been clearly and recently stated 
by him, as executive secretary for the Institute. It may be a little 
surprising. "Competition," he says, "is at its perfection of expres- 
sion when all of the sellers are on the same price level." That is 
the hearing of the Wheeler committee, page 2B9. 

Gentlemen, I am not oblivious of the economic theory that sharp 
price competition may coexist with the making of the same price. If 
two retailers are on opposite sides of the street and one retailer cuts 
the price of sugar, the other fellow is pretty apt to drop down, but 
that is not the same thing. This is a system of identical delivered 
prices. Competitors have natural advantages which they recipro- 
cally waive in order to arrive at identical delivered prices. The one 
retailer can't make the other retailer across the street come up in 
his price. He may induce him to go down, but he can't make him 
come up. But under this system any man who has control of the base 
price can make every other producer in the steel industry raise his 
price in the territory that is governed by that basing point. That 
IS very different from the two retailers. 

The Chairman. I woijld consider it a great advance in public 
understanding of the economic conditions which exist if I could 
prevail upon economists and witnesses like you to stop referring to 
corporations as men. I have observed time and time again that 
even courts, when passing upon cases which involve the interaction 
of these huge aggregations which are created by law under charter, 
constantly speak in the personal term, as "he," as a man, as a natural 
person when, of course, the truth of the matter is the fundamental 
trouble with our model economy is that all of these operations are 
carried on by corporations which are creatures of the State and are 
not carried on by natural persons. 

Mr. BuER. The point is mighty well taken. I will try to observe 
it and if I fail I hope you will interrupt me. 

The Chairman. It is a very natural use of lariguage, however, may 
I say. 

Mr. Burr. I have that to say for myself, anyway. Now, what has 
industry got to say for itself further in this, matter? Quoting Mr. 
Tower again, he states the system this way — 

As the result of that practice a producer no matter where located, may sell the 
products in any part of the country in competition with all other producers. 

Page 273. He continues with this : 

That fact is an advantage to the producer because it frees him from depending 
upon local markets alone to absorb his products. He may, if he desires, reach 
out for markets anywhere in the country. 

Page 273. Again he says — 

It is also an advantage to the buyer btecause he is not dependent on local steel 
producers either as to price, time of delivery, or quality of material. He, as a 
purchaser, may draw upon the entire country for supplies without penalty of 
price. 



CONCENTRATION OF ECONOMIC POWER 1883 

Now, I said this morning that different prices were made when dif- 
fering net returns are received or are charged, if we may say so, by 
the producer. In other words, where he absorbs, we would say, more 
freight than he charges, he receives one — "it" receives one net return ; 
whereas if it ships across the town, it receives another net return. 
In another place it may receive less .freight than it charges, and so 
you have there three different kinds of net returns. I called them 
prices this morning, and I think that is what the Commission will 
hold them to be, but the Commission has this very thing before it, 
as to the meaning of the word "price" as used in the Robinson-Pat- 
man Act, and the Commission may decide quite differently from the 
view that I have expressed this morning. 

However, the Commission considered in the Pittsburgh Plits case 
the meaning of the word "price" as used in the old Clayton Act before 
it was amended, and reached the conclusion that "price" was the net 
return received after the readjustment from the freight charged to 
tlie customer. In other words, the net realization is the actual price ; 
what they will hold on this question now before them, or soon to be 
before them, in connection with the cement case, which is now being 
tried, I do not know. Since the Clayton Act was passed the Robinson- 
Patman Act has amended section 2 and the question Of what is a price 
under the Robinson-Patman Act may be decided differently from the 
original decision under section 2 as first enacted in the Clayton Act. 

Now, Mr. Tower's statement that I read you a moment or two ago, 
namely, that the buyers are satisfied by the basing-point system, for 
several reasons specified, is not entirely borne out if you consider the 
Pittsburgh Plu^ case — the basing-point case, from its historical stand- 
point. As a matter of fact, the buyers discriminated against under 
the old Pittsburgh plus system were anything but satisfied and some 
800 of them bound themselves together as the Western Association of 
Rolled Steel Consumers, and about 200 banded themselves together as 
the Southern Association of Rolled Steel Consumers, and petitioned 
the Commission for the issuance of a complaint against the system, so 
that they were by no means well satisfied with it; and as a matter 
of fact, four States appropriated some $55,500 to assist the Commis- 
sion in fighting that case. Moreover, some 32 States bound them- 
selves together as the Associated States Opposing Pittsburgh Plus 
as a result of the fact that the people in their respective territories 
were injured by the system. So that it has not been entirely satis- 
factory, considered, by and- large, down through the years, to the 
buyers. 

At the same time I think the committee should understand this — 
namely, that there is not as much protest from the buyers as you 
would expect under this kind of a system. 

Buyers don't object to paying high prices if they can p^-ss them 
along to the ultimate consumer, to the public. Many o^^ them are 
practicing basing-point systems and other devices for the purposes of 
restricting price competition among themselves, and you do not hear 
the chorus against the system that we did hear against the old system 
of sectional discrimination. During the course of the years sectional 
discrimination has been wiped out; there is still discrimination, as I 
have illustrated to you, in that sometimes more freight and sometimes 
less freight is charged than is in the price at destination. 

Mr. Ferguson. Mr. Burr, isn't the principle all the same? 



1884 CONCENTRATION OF ECONOMIC POWER 

Mr. Burr. But the principle, so far as price-fixing devices are con- 
cerned, is all the same.; the principle as regards discrimination is 
different. But the price-fixing feature is fully as strong, and, as 
I illustrated a few minutes ago, is perhaps a trifle stronger with re- 
spect to policing it. You can get after the man who strays away from 
the system more readily now than you could in the old days, and 
there is that distinction between the two. But as far as discrimina- 
tion is concerned and as far as receiving the support for a change in 
the system from fabricators in Chicago because they are discriminated 
against $7.60 worth for every ton, is concerned, that is done away. 

The Chairman. Is thdre any justificatioji for the system so far as 
you are able to see ? 

Mr. Burr. No economic or public interest justification for the sys- 
tem whatsoever. Now so far as the industry is concerned they think 
they profit by it. Personally I think they are perhaps a little short- 
sighted because they are destroying the purchasing power of the 
people, and that is the kind of thing I think we will have to agree — 
I am not an economist — brings on depressions. If you are going 
to have this kind of a system in a great many industries you have 
an effect upon the purchasing power of the public that is tremen- 
dous. In other words, you give a subsidy for one industry and, as 
I will show you in a very few minutes, everybody is doing it, or a 
great many are doing it, and these prices are higher than they would 
be, for the reason that competition fails properly to check prices a"nd 
the public is paying foi shipping the stuff all around the country. 

Mr. Ferguson. Do you know (I believe you have shown it before) 
how many industries in the United States employ the basing-point 
system ? 

Mr. Burr. That is my second point and I will come to it in a few 
minutes. 

The Chairman. You refer to this as a fictitious freight. 

Mr. Burr. It sometimes is called phantom freight or fictitious ; yes, 
sir. 

The Chairman. In other words, you mean by that it is a freight 
charge which the railroads never get. 

Mr. Burr. Yes, sir; but it goes even deeper than that, Senator, 
for this reason: It is not merely the rate back of it, but it is the 
base price back of it that is put high enough so that it contemplates, 
as I read this morning from the testimony of industry men, that 
shipping all over the country will be indiUged in as a matter of 
course, and is indulged in. The extent of it, how far it has been 
reduced by the June changes ne^ds study. Cross-hauling may easily 
have been somewhat reduced by the reduction, the leveling off, of the 
former distinction between base prices at Chicago and Pittsburgh, 
Birmingham and Pittsburgh, Bethlehem and Pittsbursfh, Buffalo 
and Pittsburgh, and those other differentials now taken off. 

The Chairman. There seems to be a general agreement that the 
railroads constitute a sick industry. I was wondering what, in your 
opinion, might be the effect upon their income if the railroads actu- 
ally collected this phantom freight. 

Mr. Burr. If they collected it? If they collected all of the phan- 
tom freight, it might help some. The railroads, I take it, will profit 
if industry is restored to health. If you take some of these subsidies 



CONCENTRATION OF ECONOMIC POWER IggS 

off the back of the ultimate consumer, it is possible that industry will 
be restored to health, and with it will come a reasonable degree of 
business for the railroads, I take it. But I am not an economist, 
and I think I will leave that to Dr. Fetter. 

Mr. Ferguson. Doesn't it follow, Mr. Burr, as a matter of course, 
that if the railroad company actually received the actual freight on 
goods that were shipped from Chicago to Duluth, and the railroad 
company actually received the freight from Pittsburgh instead of it 
going into the pockets of the steel industry, it would be of benefit to 
the railroad companies ? 

Mr. Burr. Yes; of course, it would. You see the industries are 
not great friends of the railroads. What they do is to reserve to 
themselves the right to ship by truck if they want to, and if they 
ship by truck they still charge the all-rail freight. If they ship by 
water, they charge all-rail freight. There are some exceptions to 
that, but that is the general rule, as I read this morning from the tes- 
timony of Mr. Irvin. 

Mr. Ballinger. Of course, that wouldn't be a sound way to help 
the railroads. It would be just making them split up the boodle of 
the steel company. 

Mr. Ferguson. But if they hauled the freight from Pittsburgh 

The Chairman (interposing). Please don't misunderstand my 
question. It was designed merely to emphasize the fact that this is a 
fictitious freight charge which really does not purchase any railroad 
transportation. 

Mr. Burr. Before I go further I would say that during the code 
period the industry tied up the trade against price competition very 
conclusively. Then, in May 1935, the Schechter decision supposedly 
destroyed the code system, but by formal resolution of June 6, 1935, 
more than 90 percent of, tliQ iron and steel producers' capacity 
throughout the country ratified a resolution adopted by the board of 
directors of the Iron and Steel Institute; and under that resolution 
declared their intention, among other things, "During the present un- 
certainty, to maintain * * * the standards of fair competition 
which are described in the steel code." They had already subscribed 
'to the declaration of the code '*that each member of the code, 
by becoming such member, agrees with every other member thereof 
that the code constitutes a valid and binding contract by and among 
all members of the code." 

I fancy they may have departed from some of the features of the 
code, but I think the main outline of the code provisions, to eliminate 
price competition, and whereby it was eliminated, have been carried on 
through. Certainly the basing-point system and the identical extras 
and the other identical features have resulted in a great deal of ] 
identical bidding on the part of the steel industry to the Government, 
private, State and municipal authorities, in their purchasing to bring 
back prosperity to the country. In other words, that system has been 
foisted upon all buyers of steel so far as we can judge. We will have 
the facts more nearly brought down to date for you when we make our 
next presentation, 

Mr. Hinrichs. I am a little confused about this phantom freight. 
I had understood first, that you felt that the steel was on wheels 
and was moving all over the country, so that Chicago was delivering 



1886 CONCENTRATION OF ECONOMIC POWER 

into what might be Denver territory, and vice versa, and that the 
cost of the extra movement, cross-hauling, was adding to the cost of 
steel to the consumer. Then you described the thing as phantom 
freight and indicate that, if the railroads got it, it might conceivably 
be advantageous to rail revenues. Is there some confusion? There 
is a confusion in my mind. Can you clarify it? 

Mr. BuER. The phantom freight comes in here. Here is a man 
that is not at a basing point but he is producing steel. Suppose his 
basing point is at Pittsburgh, that covers that territory. Suppose 
he is selling right to his home town. He will charge the freight 
from Pittsburgh to his own home town, although he is producing it 
there, his customer is there, and his customer comes and gets it by 
truck. He will charge freight from Pittsburgh. That is phantom 
freight. 

Mr. HiNRiCHS. Within a basing-point area there is phantom freight 
charged on steel that doesn't get shipped. As between" basing-pomt 
areas there is freight which is moving. You don't know which of 
those two, in terms of revenues, is the greater. 

Mr. Burr. We don't know which is the greater, and the Depart- 
ment of Justice is asking the industry for some facts which will show 
whether they collect more freight than they pay or whether it is 
vice versa. I am not going to pretend to guess which the answer 
.is going to be, but I will say this to you, that it doesn't make any 
difference which the answer is. So far as the system is to be regarded 
from the standpoint of price competition it is absolutely immaterial. 

The base price is put high enough so they can afford, and they do 
afford and it looks forward to their affording, to ship long distances, 
past the other man's point of production, clear on beyond, and still 
regard the business as desirable and acceptable. 

Mr. Davis. Mr. Burr, isn't it also a fact that at least occasionally, 
if not frequently, a shipment could be made by water or by rail and 
water, or by truck, at a less rate than the rail-freight rate and yet, 
as you have already explained, the freight rate that is added to the 
base price is always the rail rate ? 

Mr. Burr. That is the general rule; yes, sir. There are some 
exceptions. 

Mr. Ferguson. Not from the point of manufacture or from ware- 
house, but from some fictitious point, some basing-point. 

Mr. Burr. There are fictitious basing-points ; yes, sir. 

Mr. Ferguson. Aren't all the basing-poihfs practically fictitious? 

Mr. Burr. The base prices; yes. If you are going to talk about 
basing-points as isolated from the industry, from the system, why, 
that is a little different question. 

Mr. Davis. Another thing right in that connection, is it not a fact 
that there are not basing-points at all the points of production ? 

Mr. Burr. That is true, absolutely. It is still true. 

Mr. Da,vis. And that if a shipment is to be made from a factory 
not located at a basing-point the freight is not from the point of loca- 
tion of the factory to the point of destination, but the freight that 
is'added is from the basing-point, wherever that is. 

Mr. Burr. That is right ; yes, sir. 

Mr. Ferguson. And it may be 1,000 miles away. 



CONCENTRATION OF ECONOMIC POWER 1887 

Mr. Davis. One further question, Mr. Burr. You liave been talk- 
ino- about the various basing-points, and the fact that last June there 
was an increase in the number of basing-points. Will you please 
explain whether all the basing-points in the aggregate are for each 
commodity or item of steel or whether there are different basing- 
points for different items? » _ . 

Mr. Burr, There are different basing-points for different items. In 
Pittsburgh, for example, there is a basing-point for practically every- 
thing; I presume virtually everything. There may be some excep- 
tions. Chicago or Gary are basing-points for almost everything. 
Birmingham, for a large percentage of steel products, and so it goes. 

Mr. Davis. Well, that isn't the matter that I was undertaking to 
list. To be more specific, I will ask you whether or not it is a fact 
that with respect to each item or commodity in steel, and particularly 
the ones in most common use, there is only a relatively small number 
of basing points for each commodity v 

Mr. Burr. Well, there has been quite an increase. I wouldn't say 
it was relatively small. There's a substantial number of basing- 
points for the big commodities, a dozen or so in some ; that is not 
true for sheets. There was quite a long while there when Youngs- 
town, the principal producer for sheets, was not one and Pittsburgh, 
which produced none, was a basing-point, but the changes last June 
have changed that situation quite an extent so that most of the im- 
portant points of production are basing-points for most of the pro- 
ducts. That is true today, but if they were to make every point of 
production in the United States a basing-point, that would not change 
the price-fixing character of the system, because every time one 
producer went into some other basing-point territory, governed by 
any other point under the system, his formula price would be made 
right there and the freight from the basing-point to destination would 
be the same freight factor as charged by all other producers. 

Tlie Chairman. In other words his formula would be made by the 
rule applying in the district to which he shipped ? 

Mr, Buer. Yes; his price would be automatically fixed for him 
■ unless he was what Mr. Irvin said is a price-cutter ; in other words, 
as long as he stays within the industry and lives up to their system 
he is always using the other man's base price in the other man's terri- 
tory — plus the freight from the other man's basing-point to destina- 
tion. Pig iron is an indu.'rtry with almost every production point as 
a basing-point, but that does not mean that it is not a basing-point 
system with identical delivered prices for everybody that is in the 
industry. 

The Chairman. Now your contention of course is that this results 
in an unwarranted and perhaps extortionate charge upon the con- 
sumer; am I right? 

Mr. Burr. The charge upon the consumer is placed at an artifi- 
cially high level by the system. 

The Chairman. Unwarranted from your point of view ? 

Mr. Burr. Unwarranted from my point of view; yes, sir; unwar- 
ranted in law and economics, I believe, if I may express myself. 

The Chairman. You also contend that it is maintained uy the in- 
dustry primarily for the purpose of fixing and maintaining prices? 



1888 CONCENTRATION OP ECONOlVnC POWER 

Mr,. Burr. They would not go to any such degree of trouble unless 
that was their effort. -\ 

The Chairman. Now does not industry 

Mr. Burr (interposing). It is wholly meaningless unless that is 
the purpose and the result. 

The Chairman. Does not industry defend the system upon the 
ground tliat perhaps it leads to standardization of prices and stabili- 
zation of markets? 

Mr. Burr. Yes, sir. 

The Chairman. Now what is your view with respect to that con- 
tention ? 

Mr. Burr. With respect to the contention of stabilization, why I 
think it does stnbilize tlie price. I think it crystallizes, freezes the 
price. 

The Chmrman, I said fixing the price and stabilizing the indus- 
try. Is there any justification, from your point of view, after your 
long study of tliis system, f<Dr any contention tliat the stabilization of 
industry, whicli it is alleged proceeds from it, is a benefit? 

Mr. Burr. It is not a benefit to the ultimate consumer, and I think 
it is even questionable that it is beneficial to the industry, because I 
think it drives the ultimate consumer off the markets. It gives a 
subsidy to the industry, what amounts to a subsidy, and what amounts 
to a special privilege to the industry, and that special privilege, that 
special subsidy, cannot lead to anything except a subsidy to labor, 
subsidy to agriculture, subsidy to the white-collar man,' and the 
ultimate consumer's back is broken. It drives him off the market and 
you have 'depression. 

The Chairman. Is it your point of view that the system which 
should prevail would be one under which the producer would sell his 
product at the cost of firoduction where he produces — you see I am 
falling into the same error that I criticized you for a few moments 
ago — the producer would sell the product at the cost of production, 
plus a fair profit, plus the actual freight to the point of delivery? 

Mr. Burr. I would put it a little bit differently, if I may venture 
to rephrase that, rather than say yes or no. I would say this; it- 
ought to be placed where the price ig a competitive price, the result 
of the play of the forces of supply and demand, operating without 
understanding on the part of competitors for the purpose of lessening 
or destroying price competition. I would say that under our com- 
petitive system, a man who is particularly well located as regards his 
raw materials, and his market, will charge, and under our system is 
expected to charge, a good fat profit until somebody else puts in a 
plant there and competes with him. 

In other words, I am not looking forward to a system under which 
we will say what is a fair profit and what is a fair price, but a com- 
petitive system which will result, if our economics are correct, in a 
fair price through the play of the forces of competition. 

The Chairman. When I used the phrase "fair profit" I was using 
it from the point of view of the producer and not with any thought 
of having a fair profit determined, either privately or publicly, for 
an industry. I quite agree with your expression of the desirability of 
competitive prices generally, but I was trying to elicit your point of 
view with respect to what the result of this competitive-price system 
would be upon — if at all — the decentralization of industry. 



CONCENTRATION OF ECONOMIC TOWER IggQ 

Mr. Burr. A competitive system is ^oin^ to (leceiitrulize industry. 
When it comes to this question it seems to me the line of demarcation 
mi^ht be ilhistrated like this: A man producing; at Pittsburt^h or 
Chicago under a competitive system would not get more than a fair 
profit; he will get a small margin of profit; but suppose he were 
the first man on the Pacific coast to put in a plant, and suppose he 
had a fine market there and all that kind of thing; I would expect 
he would get probably more than what we would say was a fair profit. 
He might be getting a big profit out of it for a while, but it would 
result in somebody else, under the competitive system, going into 
business there and on the Pacific coast there are several of them. 
Now, a man starting in Pueblo all by himself, with plenty of coal 
and iron right close by, I would expect that fellow, under the com- 
petitive system would make a wonderful profit for a few years, until 
some competition went in there, and I would not say it was unfair 
or uneconomic under the competitive system for him to take advan- 
tage of his territorial situation there, as long a it lasted; that is, 
the competitive system; get all you can; but to enuiinate thesi' things 
that artificially curtail price competition, that i> what we are shoot- 
ing at. 

The Chairman. But the basing-point systeni itself standing alone 
does not have the effect of eliminating develo}>!nent of competition, 
does it? 

Mr. Burr. The. basing-point system standing alone ? Why, it is the 
antithesis of price competition. 

The Chairman. I mean it hasn't actually. resulted in suppressing 
competition, even in the steel industry 

Mr. Burr. Not all competition — no, sir; but it has suppressed price 
competition except in these sporadic instances when the dam gives 
way and some water trickles through. Price competition has to be 
distinguished — there are several varieties of competition, there is 
personal competition that may be rendered more spirited and inore 
bitter, co-incident with the elimination or restriction of price com- 
petition. 

Dr. Thorp. I wanted to inquire . whether the large profits which 
you feel have come out of this system have resulted in an expansion 
in the steel industry itself, that is if it is logical that a local situation 
with large profits will lead to new steel developments in that circum- 
stance, why won't a high level of profits through an entire industry 
as the result of such a price structure lead to a marked expansion in 
the whole industry? 

Mr. Burr. The system has certainly held an umbrella over badly 
located plants, over inefficient plants, and the last report of Mr. 
Myron Taylor, of the steel corporation, indicates that they ha^ now 
eliminated a lot of obsolete plants that have been obsolete for a long 
time, and they have been carrying them along. I deduce from that 
and previous reports that they carried them long after they became 
obsolete. The umbrella is held over them, but I think it is an un- 
healthy condition rather than otherwise. I think plants should stand 
on their own legs. We don't want a condition of paternalism where 
we are carrying and protecting units of large concerns or independent 
concerns; that is all done 'at the expense of the ultimate consumer, he 

124491— 39— pt. 5- 17 



1890 CONCENTRATION OF ECONOMIC POWER 

is the fellow whom after all you have to look after, and when he is 
unable to buy we are all caught. 

The situation there has been one of holding the umbrella, arti- 
ficially, oyer certain units, and some of those units apparently are 
obsolete or badly located. Does that answer the question? 

Dr. Thorp. Not quite. Is there an evidence of new enterprises 
taking advantage of this umbrella? 

Mr. Burr. 1 wouldn't be able to say as to that. Yes ; I think that is 
quite probable; yes, I think that is true. I wouldn't like to specify 
individual cases, though I have one or two in mind, but that is 
getting a little too personal and I don't want to call names and faces 
on that. 

Mr. Berge. May I ask what effect, if any, do you think this system 
has had upon the volume of steel production? You say it has kept 
alive certain inefficient plants. You don't mean by that that it has 
kept the level of steel production higher than it otherwise would be. 

Mr. Burr. No, indeed ; I think it has restricted steel production. 

Mr. Berge. Restricted it, I suppose, because it has maintained 
higher prices and thereby cut down the consumption. 
- Mr. Burr. Yes. If you put your base price high enough so you 
caii ship long distances past interviewing points of production, that 
means that you are charging the remanufacturer and the ultimate 
public more than they would be charged under a purely competitive 
system. If you reduce the prices it may reallocate the business to 
some extent, but there would be just as much consumed as there was 
before, there would be just as many men employed in making the 
larger volume that would result from a reduction in prices. 

Mr, Berge. Probably more, wouldn't there? 

IV^i'. Burr. Yes; there would be more, indeed there would, in my 
judgment. You don't have to have a Ph. D. in mathematics to add 
up a column of figures; it looks to me like that is a column of figures. 
You don't have to be a trained economist to see some things in eco- 
nomics. I notice the economists talked about the effect of law deci- 
sions — I hope I am not trespassing upon their prerogatives. 

The Chairman. Of course, we all know that as lawyers, Mr. Burr, 
we won't cover the whole field. 

Mr, Burr. Here is what Mr. Charles M. Schwab, chairman of the 
Bethlehem Steel Corporation, speaking to the Institute in 1929, said : 
"One of the principal instances of such waste" — that is of distribu- 
tion — "i^ the cross-hauling of steel products. It is manifestly uneco- 
nomic for a steel manufacturer in Chicago to ship 100,000 tons of steel 
to Pittsburgh at a time when a Pittsburgh manufacturer is shipping 
a like quantity of like material from Pittsburgh to Chicago. The 
sales in each case must be made at pribes prevailing in the districts 
where the steel is sold, and consequently the sales prices net less to 
the manufacturer in each case than they would have netted if the 
Chicago manufacturer had supplied the Chicago market and the 
Pittsburgh manufacturer the Pittsburgh market." 

Further on he remarks : 

All steel manufacturers know that at the end of the year they have not 
changed their relative rates of operations as compared with those of their com- 
petitors to any appreciable extent, so that the net result of the cross hauling 
of m_aterials has-^not been to increase the output of tlie Individual producers 
by any appreciable amount. It has merely served to dissipate a part of their 
profits In unnecessary transportation. 



CONCENTRATION OF ECONOMIC POWER IgQl 

He is thinking about the producer. 

I would say to you it has resuhed in the ultimate buyer's bearing 
a burden which otherwise he wouldn't have been called upon to bear. 

The'executive secretai-y of the institute said that: "In no industry 
io there keener or more severe competition;" that is, meaning than in 
the steel industry. "This is an actual result," he said, "of the basing- 
point method under which a large number of producers are enabled 
to compete at a given point. The greater the number of sellers 
seeking orders in any consuming area the greater competition. Con- 
versely, the fewer the num^ber of sellers the less the competition." 

But, gentlemen, bear in mind that that is personal competition. 
It is not price competition. It isn't in quality, for in much of the 
steel business, much of it is just standard stuff, you know. There 
is no price competition there and such competition as is secured to 
the buyer is in these other things, and the question of price competi- 
tion — they all go in there at identically the same price. 

Mr, Ballinger. Competition in the art of making friends and con^ 
tacts, isn't it ? 

Mr. Burr. Right. That is well put. 

Now then, have I said enough about the changes last June? 1 
believe I have, Mr. Chairman. The changes last June vrere, first, to 
put in a lot of basing points on a number of products which had not 
been basing-points for those products before ; the establishment of 
some basing-points in certain products that were never basing-points 
for any product before. So much for the increase in the number of 
basing points. 

Secondly, was the leveling off or equalizing of the base price at 
most of the principal points of production with the Pittsburgh baije 
prices in those commodities. 

Thirdly, the reduction of the price at Pittsburgh so that at other 
points there' was a double reduction in price due to the reduction 
at Pittsburgh and the leveling-off of the differential that had existed 
before. Is it clear? 

Those are the three points. That is all the changes that were 
made. 

That lessened the discrimination feature to some extent. It cer- 
tainly does, but it does not affect in the slightest this system .as a 
means for arriving at identical deliA^ered prices throughout the 
country. 

May I sum up with regard to steel, and thpn I want to say a 
few words as respects the delivered prices in othL-r industries? 

The basing-point system is a system of identical delivered prices, 
and to it they have added the identical character and prices of extras 
of all kinds, extras being more important in many cases than the 
base price itself and much more important than the freight element. 
In other commodities they don't amount to much. They have also 
fortified it with identical discounts, identical treatment of buyers, 
including retail price maintenance, which I illustrated this morning^ 
identical deviations from the system which they have put in at par- 
ticular points. 

They put in for southern Michigan some special features which 
Tesulted in discriminating in their favor as against the people jn 



1892 conc>:ntration of economic power 

the automobile industry, buying on the other side of the State line, 
and people in Toledo, Ohio. In other words, they have patched up 
the system, by identical action always. If one does it, they all do 
the same thing under their agreement. 

In other words, the system has been so top-heavy and artificial 
"that they have had to patch it up here and take care of this interest 
there and take care cf this man at Duluth. At Duluth they made 
^ special concession for a manufacturer of hand agricultural imple- 
ments. They made a special concession for him. In other words, 
these things have to be patched up and then they all do the same 
thing, and it is all done by concordat. 

Now, among the effects 

Mr. Baijlinger (interposing). When did the basing-point originate 
in the steel industry? 

.Mr. Burr. Tlie basing-point in the steel industry originated pretty 
•close to the turn of the century. 

Mr. Ballinger. How many years would you say it has been con- 
tinually in operation in the steel industry? 

Mr. Burr. Well, there was a little period of zone prices, but con- 
sidering that as a mere variation I would say it has been in effect about 
40 years. In fact, some member — I thought I read that this morn- 
ing — of the industry said 40 years, I think. If not, it is admitted. 

Mr. Ballinger. Then, Mr. Burr, if it is true that it is shown that 
the basing-point system is a simon pure monopolistic device, it is true 
that steel has been the most successful monopoly and the most endur- 
ing one in the history of American industry. 

Mr. BurR. If you are going to refer to monopoly in the general 
sense as contrasted with concentration in the hands of but one unit ; 
yes. In the modern sense of monopoly as you have used it correctly 
speaking, it is a monopoly. You can't get around it, gentlemen. If 
you are going to have the same identical delivered price made by 
mutual understanding through the industry, it can't be anything but 
monopolistic. 

What advantage is there, as to standardized commodity, in being 
able to buy it from several producers in various parts of the country, 
if it is all at the same price, delivered to you? It might just as well 
be made by the same producer. 

Among the effects is to give an excessive share of highway and 
waterway advantages to the steel mill. They charge, as a rule, 
the all-rail freight, and then they arrogate to themselves the privi- 
lege of hauling it to destination by truck or by water, if they can 
save by it. But if the buyer hauls it from the mill by truck he must 
pay to the steel mill 35 percent of the all-rail freight for the privilege 
of accepting delivery at the mill. Thus the buyer must be able to 
make delivery arrangements below 65 percent of the cost of rail 
delivery in order to effect a saving by making delivery under his 
own or hired trucks. 

Also, it deprives persons of their natural advantages of location;, 
also, its effect is to give others an artificial equality in spite of nat- 
ural handicaps in their location ; to undermine incentives to econom- 
ical production and distribution; to continue obsolete mills long after 
they would have gone out of business if price competition had pre- 
vailed in the industry; above all to deprive the public of the benefit 
of price competition by barricading all avenues and alleys through 
which such competition can reenter the industry, except that of viola- 



CONCENTRATION OF ECONOMIC POWER 1895 

tion of the agreement of the industry to employ the basing-point 
system. 

It should also be borne in mind that almost all of the steel that is 
sold by the producers goes into remanufacturing. A good deal of it 
passes through one or two middlemen. Those middlemen sell on a 
mark-up, so that there is a snowball effect to this thing rolling up the 
amount of the overcharge due to the elimination of price competition. 
It rolls up when the middlemen price it to the man who buys from 
them. Then, if it is sold to a remanufacturer instead of to middle- 
men the remanufacturer in his turn figures it in as part of his costs, 
and whenever he makes a sale, suppose it is agricultural implements, 
it figures in his cost. He sells to middlemen and the wholesaler 
marks it up 15 percent based upon that increased cost as well as the 
rest of the costs; and then the retailer probably marks it up 35 to 50 
percent of his purchasing price, so that you have got the thing passed 
along to your ultimate consumer far larger than it was when it left 
the steel corporation in the first instance. 

I was asked the time when this was brought into existence. The^ 
basing-point system was introduced at differing times for different 
industries. I got that a little bit too early, Mr. Ballinger. It was 
1902. I think I said about the turn of the century. It was intro- 
duced by the bar manufacturers by agreement in 1902. That was 
according to the Commission's findings in the Pittshurgh Plus case. 

Then it was introduced by agreement by the plate and shape manu- 
facturers in December 1903; the nail manufacturers took it up in 
1904; the tube manufacturers agreed upon it. That seems to have 
been in 1900, and billets in 1900. Some of it was at the turn of the 
century. 

Bolts and nuts and rivet makers didn't go into it until 1918; tin 
plate, 1903 ; sheets, no date of agreement was espressly found by the 
Commission. 

All that is to be found in Eighth Federal Trade Commission Re- 
ports, pages 36 to 38. 

Pig iron, as I told you before, didn't go into it until the code, but 
they were already arranging for it before the code was drafted. 

Mr. Tower testified before the Wheeler committee tliat the basing- 
point method of quoting prices existed for many years before the 
code was heard of. It was used during the code period — 

quite iinchanged from what it was before the code incident * * * and it is 
still being used, and the code incident has nothing whatever to do with the 
consideration of the basing-point method of quoting prices and its efCect upon- 
either producer or consumer. 

That is page 253 of the hearings. 
Mr. Tower also declared that — 

the basing-point method of quoting steel prices has been in use in the industry 
for more than 40 years. 

Mr. Davis. Will you explain in this connection who Mr. Tower 
was at the time he gave this testimony. 

Mr. Burr. He was still executive secretary of the Iron and Steel 
Institute, and is so today. 

Gentlemen, I submit to you the proposition that since 1873 pro- 
ducers of the iron and steel industry have shown no loyalty to the 
competitive system in this country, considered as a class, and yet I 



1894 CONCENTRATION OF ECONOMIC POWER 

think they are patriotic American citizens. I think they would have 
their sons going over the top if there was another war. They are 
men of great ability, but I think they are misguided so far as the 
real welfare of even their own industry is concerned. I think they 
are oblivious to the fact that if they do it, others will do it, and if 
they get away with it it is only at the expense of the ultimate con- 
sumer, and that that means depression for them as well as for the 
rest of us. 

IDENTICAL DEUVERED PRICE SYSTEMS IN INDUSTRIES OTHER THAN STEEL 

Mr. Burr. Let me turn briefly, to my second topic — I don't know 
how long it will take — to the system as it has spread from the iron and 
steel industry to other industries. There are a couple of other methods 
for arriving *at identical delivered prices in industries. One of them 
is what is known as the freight-equalization system. That is sub- 
stantially ,the same kind of system as would exist if you had a basing 
point at every point of production. There all they do is to equalize 
on the bill the freight factor with the freight, the all-rail freight, 
which would be charged by thi3 producer nearest, in terms of freight 
charge, to the customer being quoted. 

Is that clear? In other words, all you have to do is to find out 
which producer of the product has the lowest freight rate to the 
customer; then if you are not that particular producer you add to 
your price at the plant, that corporation's freight rate and that is 
your delivered price. All use the same rate for the same buyer. The 
system 'doesn't work, or isn't worth working, I would say, unless they 
have some kind of an understanding whereby on the same commodity 
they have the same plant price. 

Mr. Ballinger. The same base price. 

Mr. Burr. You can call it base price; they don't use the word 
"base" price in industries that are organized that way, that I know 
of. That is as distinguished from delivered price; yes, sir. 

Then there is the zone system. That is still more artificial and 
difficult to defend. The zone price system is this. TTie country is 
divided up into various zones, and then there is some equalized 
freight charge that is made and is decided to be applicable for the 
entire zone. In other words, if New England is a zone, the price will 
be fixed with a freight element which will be identical throughout 
New England, so that when they sell in New England there is always 
the same freight factor made throughout that territory. That is quite 
discriminatory when you reach the boundary of the zone, the inter- 
zone boundary. To illustrate, if east of the Mississippi River is 
one zone, and if the western zone has a higher freight factor, then 
the man who is on the boundary at the river will pay less, if he is on 
the east side, and more if he is on the west side of the river, than he 
would pay if he were across the river. The most important feature 
is not discrimination, but that the system so results for "competing" 
producers, that they all deliver in each zone, throughout the zone, 
at the same price identically, provided their basic price is identical, 
and they don't go into this zone business unless it is. In other words, 
there is some industry leader or some agreement with regard to the 
basic price, and then in the zone delivered prices are identical for 



CONCENTRATION OF ECONOMIC POWER 1895 

they have added the same arbitrary freight factor for that zone to 
the same basic price. 

Eepresentative Reece. In these cases how is the basing price 
arrived at? 

Mr, Buio?. That you Avould have to investigate in the individual 
industry. I am not going to generalize on that because I am not in 
shape to. I don't want to tell you that they follow the leader or that 
they agree upon price among themselves unless I know exactly what 
the situation is. That would vary for various industries, but the 
thing is not worth following unless they have an identical price 
system of one kind or another. 

Now the Commission issued an order to cease and desist on an 
uncontested case in the United Fence Manufacturers case here only a 
few months ago. That was a zone system for the 14 northeastern 
States under which all the manufacturers made an identical delivered 
price in that zone of 14 States. In other words, an identical delivered 
price, wherever it was. A man might manufacture in Maine and 
deliver in New Jersey, or vice versa. It would be all the same price. 
That is the same freight factor would be added and if their .prices 
were identical, why that would bring you in the same delivered price 
in each case. 

Now with respect to the various systems of delivered prices, I 
would like to do what I did this morning and submit certain docu- 
ments here for the information of the committee, and not of course 
for reprinting in any way. This includes the Commission's Price 
Bases Inquiry, with Particular Reference to the Basing-Point 
Formula and Cement Prices, dated March 1932. This was an eco- 
nomic investigation made by the Commission, and it was very 
comprehensive. I would like to offer that. 

(The document referred to was marked "Exhibit No. 345" and is 
on file with the committee.) 

Mr. Burr, Also a document, No, 71, of the Seventy -third Congress, 
first session, entitled — this was Senate document — ^"Cement Indus- 
try," w^ith covering letter, addressed to the President of the Senate. 

(The document was marked "Exhibit No. 346" and is on file with 
the committee.) 

Mr. Burr. Now these are on the multiple basing-point system in 
the cement industry. Then the Commission made a study of the 
zone price formula in the range-boiler industry some years ago. This 
was submitted to both Houses of Congress, I believe — yes ; submitted 
to the President of the Senate and the Speaker of the House of Rep-. 
resentatives. This was March 30, 1936. This, I think, is the last copy 
we have, except the file copy. It should have been printed but the 
Commission has never had the money to print it, and I submit it to 
you for your information. 

(The manuscript referred to was marked "Exhibit No. 347" and is 
on file with the committee.) 

Mr. Davis. You are referring to documents filed with the Senate 
on the cement industry. Did you mean that, or the steel industry?" 

Mr. Burr. Cement; yes, sir. I am presenting the documents no"W 
in other industries ; I am through with steel. 

The Chairman. These documents may be received, to be filed with 
the various other reports of the committee, not for printing. 



\^: 



1896 CONCENTRATION OF ECONOMIC POWER 

Mr. Burr. Thank you, sir. Now I think it would be a good idea 
for the committee to have the complaint and the principal answer, 
that of the Cement Institute, in the proceeding now being conducted 
by the Commission, being tried by the Commission. 

The Chairman. Well, those proceedings have not yet been com- 
pleted? 

Mr. Burr. No, sir ; they have not, but the complaint and the answer 
are public documents; ,they are complete so far as they have gone 
and I thought that the theory of the case might possibly be of in- 
terest. Of course, that is not decided and this does not make a prima 
facie case at all; it merely states the reasons which the Commis- 
sion has to believe that the Patman Act as well as the Federal Trade 
Commission Act have been violated. 

The Chairman. Well, the documents may be received, to be placed 
in the files. 

(The manuscript entitled "Complaint" and "Answer," both Docket 
No. 3167, was marked "Exhibit No. 348," and is on file with the 
committee.) 

The Chairman. May I ask, Mr. Burr, with respect to these other 
reports which you have offered for the information of the committee, 
whether the industries affected have on any occasion submitted to 
the Commission or published any sort of comment upon or response 
to them ? Apparently none has been called to your attention. 

Mr. Burr. I don't recall ; I don't think so ; no, sir. 

The Chairman. Thank you very much 

Mr. Burr. Now, I have here also the Commission's report including 
its findings and conclusions of fact and of law in this zone price case 
that I told you about a moment ago as to the United Fence Manu- 
facturers' Association, producing snow fence. This was dated — this 
is a recent case and the report was issued and the order to cease and 
desist was served on July 13, 1938. That is your zone price system 
and illustrative of it. I would like to offer that, if you think it is 
appropriate. 

The Chairman. Without objection, it may be received. 

(The manuscript was marked "Exhibit No. 349" and is on file with 
the committee.) 

Mr. Burr. Now I do not believe that I need to go further into the 
zone price system, or the freight equalization system by way of de- 
scription, unless some member of the committee desires to ask some 
question, or submit some comment. 

The Chairman. I think Mr. Ballinger wants to address a question 
to you. 

Mr. Burr. All right, sir, I would be very glad to hear it. 

Mr. Ballinger. I think, Mr. Burr, some time previous in your 
testimony you said that you were aware that where competition was 
intense and vigorous that there might be a case of uniform prices in 
the market. Now, when the steel industry deals with the United 
States Government could there by any stretch of the imagination be 
a competitive situation with all these facts before us : 

First of all, the bids are submitted secretly, is that not correct? 

Mr. Burr. Yes, sir. 

Mr. Ballinger. If a man were acting in a true and competitive 
manner he would not be telling his rivals what his price was going 
to be? 



CONCENTRATION OF ECONOMIC POWER 1897 

Mr, Burr. Correct. 

Mr. Ballinger. And that would be against his self-interest, and 
yet is it not true that bids received by the United States Government 
are identical to four decimal points? 

Mr. Burr. Yes, sir. 

Mr. Ballinger. And therefore by no stretch of the imagination 
could that be called competition in the steel industry dealing with the 
United States Government, at least? That is to show what the situ- 
ation is in dealing with private business. 

]\Ir. Burr. The same is true in many States where concealed and 
supposedly secret bids are required by law to be submitted and the 
same is true in the case of many municipalities throughout the country. 
Not all of them, probably. Now, in the price bases inquiry of March 
1932, which related chiefly to cement, there was a showing that the 
preliminary studies of numerous industries showed a widespread 
delivered price system in various lines of industry, not that it was 
unanimous; it did not show it was unanimous but it showed that the 
basing-point system was working into a large number of industries 
and among these were listed food products, textiles, lumber and 
lumber products, paper and paper products, chemicals, rubber and 
finished products, leather and finished products, clay, steel, machinery, 
transportation equipment. That is on page 12 of the exhibit that 
you received a moment ago (No. 349), Mr. Chairman. Now, in speak- 
ing to the Wheeler committee. Commissioner Freer, of the Federal 
Trade Commission, said that among the industries having basing- 
point systems which the Commission had been inve^igating, were 
steel, pig iron, cement, lumber, and sugar, as basic industries. Also 
range boilers, bolts, nuts and rivets, cast-iron soil pipe, asphalt roof- 
ing, power cable, linseed oil, denatured alcohol, and corn derivatives. 
That is the hearings that you received this morning, page 309. 

We had a check made just the other day, or recently, in the Fed- 
eral Trade Commission of the codes adopted a few ye^rs ago, as 
indicative of th^ existence of delivered price methods of the class of 
basing-point systems, in various industries. The- codes indicate that 
basing-point systems are followed in these industries : Iron and steel, 
lime, retail lumber, glass containers, builders' supplies, farm equip- 
ment, ice, motor-vehicle retailing, road machinery, paint and varnish, 
business furniture, liquefied gas, auto parts, ladders, paper and J)ulp, 
structural clay,, china and porcelain, reinforcing materials, vitrified 
clay sewer pipe, antifriction bearing, retail food and grocery . prod- 
ucts, end grain strip wood block, wholesale food and grocery prod- 
ucts, retail farm equipment, construction machinery — district trade, 
paper-bag manufacturers, lye, ready-mixed concrete, wholesale coal. 

Among zone systems indicated by the codes are: salt producing, 
farm equipment, ice industry, fertilizer industry, road-machinery 
manufacturing, floor and wall clay-tile manufacturing, shovel and 
drag line and crane, reinforcing materials, vitrified-clay sewer pipe, 
valves and fittings, cast-iron pressure pipe, pap ;^ ''-bag manufactur- 
ing, cordage and twine, ready-mixed concrete. 

Inasmuch as the codes were not revolutionary but were rather 
declaratory of preexisting conditions in the main — that is not true 



1898 CONCENTRATION OF ECONOMIC POWER 

in pig iron and may not be in others — the chances are that these 
devices which are spreading over the country have not been departed 
from, if they were adopted prior to or during the code period ; the 
chances are that they are still doing something along the line of 
delivered-price systems of one kind or another if the codes indicate 
that such was the case. I don't present this as absolute proof, it 
would hardly be either fair or judicial to do so, but it is sympto- 
matic of the conditions in that group of industries. 

The Honorable Harold L. Ickes, Secretary of the Interior, testify- 
ing before the subcommittee of Senator Wheeler on this basing-point 
bill, the printed hearings ^ from which I read portions this morn- 
ing, pointed out that in purchases by the Government under his 
administration between June 1935 and March 1936, less than a year, 
you see, identical bids occurred at least 257 times involving a gross 
expenditure, he said, of $2,866,252.97 (page 286). 

This was exclusive of these huge reclamation projects which were 
then being handled by the Secretary. 

The Chairman. Mr. Burr, you have about finished, have you not? 

Mr. Burr. Pretty nearly; yes, sir. 

The Chairman. I wonder if it would be asking too much if I 
should request you to put that in the record now without reading. 
That buzz is a signal that apparently there is about to be a vote in 
the Senate and I should like very much to respond to the roll call. 

Mr. Burr. Yes, sir. 

The Chairman. With that understanding, the remainder of your 
statement may be incorporated as part of your remarks and the 
committee will stand in recess until tomorrow morning at 10 o'clock, 
at which time Professor Fetter will take the stand for the Federal 
Trade Commission. 

(Mr. Burr's additional statement follows:) 

Among the points made out by Mr. Ickes are the following: 

(a) That it was "practically impossible for the Government to comply with 
section 3709, Revised Statutes, which provides that awards must be made on 
the basis of competitive bids" (Hearings, p. 286). 

(&) It was necessary for the Department in certain cases to resort to choos- 
ing the successful bidder by Ipt, in violation of the statute (p. 290). 

(c) In other instances, under his direction award was made to the producer 
"farthest removed from the project on the theory that we Would get a little- 
extra railroad employment out of it anyhow" (Id.). 

(d) At times bids were rejected and new proposals asked for but almost 
always identical bids were again submitted. On one or two offers f. o. b. mill 
bids were submitted but subsequently producers "refused to bid that way."' 
The result was loss of time in the employment of labor and the tJonstructloQ 
of the project (Id. p. 291). 

(e) The "identical bids are high bids. And high bids means that it take* 
more money to build a project than if materials could be bought on a competi- 
tive basis" (p. 289). 

(f) "If we have a certain sum of money with which to build projects in 
order to give work to the unemployed, the' result of paying high prices for 
materials means fewer men put to work ♦ * *. The more money paid out 
for materials, the fewer the projects for the money and the fewer persons given 
work" (p. 289). 

iff) As to settlers on the great reclamation works being built under his 
administration, Mr. Ickes remarked, "they are able to meet their payments only 
by great industry and self-denial and if costs go beyond a certain point it will 
become necessary to give up the building of such projects" (p. 287). 

1 Refers to "Exhibit No. 344" on file with the committee. 



CONCENTRATION OF ECONOMIC POWER 1899 

(h) * * * a heavy burden" has been thrown "upon municipalities and 
other public bodies. In many instances local authorities have been subjected 
to high-pressure salesmanship, which has not had a healthy effect on municipal 
morale" (p. 290). 

(i) Mr. Iclces has reached the conclusion that "if the Government would 
build two or three cement plants I have not any doubt in the world but that 
not only the Government but the general public would receive tremendous 
benefits." 

(;■) Mr. Ickes suggested that of equal importance with the slogan "Buy 
American" is a possible slogan, equally important, of "Sell American." 

Mr. Ickes gave a list of the following 48 different lines of material 
and equipment upon which identical bids had been received for pur- 
chases under his Administration (p. 287). 

School equipment Valve boxes 

Typewriters Turbogenerators 

Steel lockers Condensers 

Typevvriter stands Well drilling 

School desks Fire hydrants 

School chairs Fire-alarm sirens 

Auditorium seats Pumps 

Tables Plumbing and heating specialties 

Arriichairs Feed water heaters 

Padlocks Aerators (sewage) 

Hospital and office equipment Pipe covering 

Fire extinguishers Electrical transformers 

Classroom desks Cast-iron pipe 

Operating-room equipment Water meters 

Kitchen equipment Copper pipe 

Glass and glazing Electric locomotives 

Switchboard Stokei's 

Stage equipment Machine tools 

Lighting standards Creosoted poles 

Sewing cabinets Filter equipment 

Structural steel Heavy crane 

Steel tanks Tractors' 

Steel sheet piling Transmission-line equipment 

Reinforcing steel Electrical cable 

Mr. Ickes further pointed out that there is an "increasing tendency" 
toward the extension of the identical delivered price bidding. This 
trend is particularly noticeable on different makes of machinery. 

Mr. Ickes pointed out further that the tend«icy is for bids made on 
proposals for equipment to specify identical efficiency of the ma- 
chinery, and so forth, so that various industries present an ^'im- 
pregnable phalanx of common prices and identical performance." 

EFFECT OF IDENTICAL DELTVEEED PRICE 8TSTEM8 "DPON THE FUBLIO 

INTEREST 

Mr. Burr. This great prevalence of identical delivered price sys- 
tems in American industry, as a device for the enhancement of prices 
and the elimination of price competition, brings me to my third and 
final topic — the effects of these systems. This, in view of what has 
already been elicited by questions, can be briefly presented. 

These identical delivered-price systems, supported often by auxil- 
iary devices, so far as they are adhered to, result in all buyers, public 
and private, being quoted and charged identical delivered prices, at 
their respective locations, by all supposedly competing producers. 

They result in the complete abrogation of price competition. The 
producers merely follow the formula used by the industry and each 



1900 CONCENTRATION OF ECONOMIC POWER 

knows what the bids of all others will be at each destination at any 
given time. If any producer does not follow the formula, its officers 
are subject to the "social penalties" which, as already quoted, the 
Supreme Court found to be more "potent" than forfeitures.^ 

Unless the country is to remove these basing-point systems through 
appropriate means, they will be continued in the, many industrieg 
already having tliem, and will be adopted by other industries in 
which there is a desire to eliminate price competition. 

Businessmen have shown very widely that they regard the com- 
petitive system as excellent — for the other fellow. If left at liberty 
to do so, they will place, and are now placing, base prices so high 
as to compensate them for the sharing of their own nearby territory, 
where they have a natural advantage, with remote producers; while 
they receive in return the privilege of selling in the local terri- 
tories of other producers without fear of low prices or price competi- 
tion. 

This means a drastic lessening of the incentive to efficient produc- 
tion and distribution, as well as the destruction of other benefits of 
price competition. 

All of this is obviously at the expense of the ultimate consumer, 
as a class. The public are deprived of a substantial part of their 
purchasing power. 

Unless this situation is remedied, we shall have failed to remove 
one reason for the inabilitj^ of consumers to buy enough products to 
keep producers, both capital and labor, employed, probably a pri- 
mary cause of overflowing warehouses, closed factories, unemploy- 
ment, depression, and high taxation. 

It means also an increased tendency toward a public demand that 
rthe policy of the Federal Government shall be so changed as to de- 
clare, or to act upon the assumption, that the competitive system is 
infeasible for one industry after another; and so as to cause the 
Federal Govermnent to assume the burden of determining and polic- 
ing what should be regarded as "fair prices." 

This is a comparatively new tendency. The theory of our institu- 
tions hitherto has been that the protection to the public against high 
prices has been price competition and not official supervision over 
prices, production, and the right to engage in industry. 

Whether such new trend is compatible with oui' present form of 
government is a question too large for p^^sent consideration. But 
the existence and importance of this trend, I believe, is absolutely 
undeniable. 

The basing-point system is nothing more nor less than a subsidy 
wTiich has been seized by many industries, whereby they have raised 
their prices above the levels which would exist under price competi- 
tion. It exists in defiance of the competitive system. 

It means that such industries, particularly agriculture, as are not 
able to seize corresponding subsidies, and that labor and the clerical 
classes, must sell their products or services on a competitive market, 
while they must buy much of what they need under conditions of 
price control ; or they in turn must be subsidized to sustain their 
standards of living. 

^Hardwood Lumber Case. See testimony, supra, p. 1871. 



CONCENTRATION OF ECONOMIC POWER jgOI 

Such subsidies through the basing-point system and other price- 
fixing devices, on the one hand, seized by industry, and any subsidies 
necessitated in favor of agricuKure, labor, and the unemployed, on 
the other hand, all obviously must be deemed to exist at the expense 
of ultimate consumers as a class. The ability of. consumers to buy 
manufactured goods is impaired in turn, to the loss of producers. 
Thus the circle becomes complete. 

In the last analysis, the manufacturers may find that they have 
been trying to "lift themselves by their boot straps," and that they 
have not prospered because the consumer and taxpayer as classes 
have been crippled. 

Manuf acturei's cannot long continue to produce more than can be 
sold. When their warehouses and yards are filled to overflowing and 
the demand drops off, they discontinue production and turn their 
employees over to relief. 

The ability of the manufacturer to produce and the ability of the 
consumer to purchase are correlatives; each measures and limits the 
other. It is only through the prosperity of both that either can 
prosper. The piicing systems in steel and other commodities are 
among the chief factors in the crippling of consumers as a class pri- 
marily, and taxpayers and producers secondarily. 

I am grateful to the committee. 

(Whereupon, at 3 : 55 p. m., a recess was taken until Tuesday, 
March 7, 1939, at 10 a. m.) 



INYESTIGATION OF CONCENTRATION OF ECONOMIC POWER 



TUESDAY, MARCH 7, 1939 

United States Senate, 
Temporary National Economic Committee, 

Washington, D. G . 

The committee met at 10:15 a. m., pursuant to adjournment, on 
Monday, March 6, 1930, in the Caucus Room, Senate Office Build- 
inor, Senator Joseph C. O'Mahoney presiding. 

Present: Senator O'Mahoney (chairman); Representatives Sumr 
ners (vice cliairman) and Reece; Messrs. Davis; Ferguson; O'Con- 
nell ; Berge ; Frank ; Hinrichs ; Ernest Tupper, representing Depart- 
ment of Commerce ; and Henderson. 

Present also : Federal Trade Commissioners AVilliam A. A^yres and 
Charles H. March; Willis J. Ballinger, director of studies and eco- 
nomic adviser to the Federal Trade Commission; and William T. 
Kelley, Chief Counsel, Federal Trade Commission. 

The Chairman, The committee will come to order. Mr. Ballinger, 
are you ready to proceed? 

Mr. Ballinger. Yes, sir. Before Dr. Fetter takes the stand, Sen- 
ator, Mr. Burr has a motion he would like to offer to you. 

Mr. Burr. I should like to move the committee for permission to 
offer the exhibits that are really a part of the steel-sheet-piling report 
that you received yesterday. These are the supporting exhibits. They 
have never been printed, but we have gotten up a copy of these ex- 
hibits for the purpose of this committee. 

The Chairman. You want to offer them for the files? 

Mr. Burr. Yes; if you please. 

The Chairman. They may be accepted for filing. 

(The volume of exhibits referred to was marked "Exhibit No. 350'* 
and is on file with the committee.) 

Mr. Ballinger. Now, Senator, Dr. Fetter will explain the basing- 
point system to the committee, technically. 

The Chairman. Professor Fetter, we are very glad indeed to have 
you present to explain it to us. 

Professor Feiter. It is a subject, Senator, that evidently needs 
much explaining. 

The Chairman. I confess it needs explaining to me. 

Professor Fetter. I think that no one is confident enough to say 
that he understands everything about it. 

1903 



1904 CONCENTRATION OF ECONOMIC POWER 

TESTIMONY OF PROF. FRANK A. FETTER, PRINCETON, N. J.— 

Resumed 

Professor Fetter. There has been a vain effort on the part of pub- 
lic purchasing agents, Federal, State, and municipal, for a number of 
3^ears to get competitive sealed bids as required by the law, because 
all they received were identical de'livered quotations. 

In the Addy stone Pipe case^ decided on appeal by the Supreme 
Court unanimously, it was declared that the effort of public officials 
to get competitive bids was defeated by the practice of collusion by 
the bidders, "and that this constituted a fraud which violated the 
whole proceeding. 

It is largely this aspect of the question which has forced this sub- 
ject into the public discussion of recent years. The individual private 
purchaser is unorganized and helpless, but the Government, which 
of recent years, in its various branches has been purchasing some- 
thing like 50 percent of a number of tlie fundamental basic materials, 
is organized and can speak on behalf of the public. That is what 
has largely forced this subject before our attention. 

I would like to say a word regarding tlie spirit of this discussion. 
It is worth while to indicate that spirit in order to prevent any pos- 
sible misapprehension as to our purpose in discussing basing-point 
practice. 

I approach the subject, and I trust that all of us speaking on behalf 
of the public approach the subject, not in a crusading spirit. I 
have no special concern either for or against any particular industry, 
as those have whose profits and personal success are largely bound up 
with some one business and with certain business practices, or at least 
they think that that is the case. 

The basing-point practice has become a burning issue in the last 20 
years, strongly opposed and, on the other hand, vehemently defended, 
because there are large practical private and social interests at stake. 
The basing-point practice began gropingly in one or two industries 
with reference to one or two products at first, and then it spread 
slowly, very slowly for a time, from one industry to another, but 
finally with accelerating speed it has spread throughout a large por- 
tion of the fundamental industries of heavy materials, basic crude 
materials, that are used in manufacturing. 

Now, the basing-point practice is a very large part — ^not the whole, 
but a very large part — undoubtedly, of the large problem that en- 
gages the attention of this committee and unless some conclusions are 
reached regarding it and some solution of it, this committee will have 
largely failed. Our interest in the basing-point practice is not in 
the steel industry as such, or in any other industry, so to speak, as 
such. To the student of economics they are just so much laboratory 
material; they are tadpoles and pollywogs — begging the pardon of 
these giant industries— -but it is in that spirit that we are considering 
them, as a pa;rt ^f the whole set-up of American business and as 
laboratory material. 

I personally, if I may make this slight autobiographical allusion, 
hat^e been accused of being hostile to particular industries. A good 
friend of mine who was a director of one of the big basing-point 



CONCENTRATION OF ECONOMIC POWER 1905 

industries said to me jokingly one day, "Do you know what your 
name is in our industry?" I told him I did not knoAV that I had any 
name. He said, "You are^known as the 'devil' of this industry," and 
he smiled, and I s»id, "Of course that is because solely of my attitude 
on the basing poijit." "Yes," he said ; "that is all." He understood 
very well. 

My interest as an economist was aroused a third of a century ago 
when I began to realize that something was happening to prices, to 
markets, and to competition, that was not laid down in the textbooks ; 
that the economists had not been reckoning with it. The theoretical 
picture of the ideal markets which we force our unwilling students to 
study was evidently less and less fully realized as -the years went on. 
It was no longer a true reflection of the American scene. Tliese 
changes had happened and were happening almost entirely within 
the lifetime of men here present. The world of commerce that many 
of us knew as boys was very different from that which students and 
teachers of economics or Members of Congress are still thinking 
about. 

The textbooks and the teachers of elementary economics still talk 
more or less in the old phrases — or did up to a few years ago^and 
a good many of them do not yet realize what has been liappening. 
A striking and significant fact is that probably no general textbook 
used by the tens of thousands of American students now studying 
economics ever mentioned such a thing as an identical delivered price 
before the great war, and I question whether many of them, if any, 
even mention them now. 

The- picture of a market that was drawn was the market of the 
nineteenth century, at the point where competition probably reached 
its height and from which point it has been almost steadily retreat- 
ing, as I tried to describe the other day. It was a picture of a local 
market, a locality where sellers and numerous buyers — numerous 
sellers and numerous buyers — were congregated to exchange goods. 
It was a place where they freely assembled, where there was common 
knowledge and information, so largely emphasized not long ago by 
the Supreme Court, rightly, as a necessary condition for free com- 
petition. It was a freightless market. The buyer came for his goods 
and took them away, where and how he pleased, and that is a most 
essential thing. The discussions of competition and markets in the 
nineteenth century textbooks do not even dream of the freight ele- 
ment or of the quotation being made on a delivered price. 

In numerous industries this now has ceased to be the case. The 
markets are closed to buyers, in the sense that they are not allowed 
to come and assemble and compare with each other' and see whether 
they are getting equal treatment. The basing-point practice has 
been followed in a number of leading industries for periods ranging, 
let us say, from 20 to 40 years, even more in certain exceptional cases. 
Most corporation officers in these industries, men in middle life, 
hardly know of any other method of sale, and that is an important 
psychological fact entering into this problem. 

They have no experience with competition of the old type, the sale 
at the place of production where numerous buyers and sellers are 
congregated. They cannot conceive, because it is outside of their 

124491— 39— pt. 5 18 



1906 CONCENTRATION OF ECONOMIC POWER 

experience, of such a situation, and for certain reasons that I will 
further discuss they can see only disaster in changing from the pres- 
ent conditions. (Representative Reece assumed the chair.) 

I have had many and pleasant personal contacts with a number of 
these men, and I do not impugn their motives nor do I doubt their 
sincerity. There are reasons for their attitude, and you and I and 
others, if we were put in their position, would look at it as they do, 
but that is not my position and, gentlemen, that is not your position 
when you come to consider this problem and its possible solution. 

There is some justification for their attitude. The present meth- 
ods, known as the basing-point practice and identical delivered 
prices, were adopted as a means of escape from a chaos of discrimi- 
nation to which they look back with a certain terror. There is a 
tradition of the reign of terror of this cutthroat competition which 
preceded the basing-point practice. They take, it is true, in my 
■judgment a short-time view. They fail to realize the price that is 
being paid, the disadvantages of this solution which they have ar- 
rived at, but they have got into an impasse, an uneconomic practice 
from which individually' and separately they are unable to extricate 
themselves. In the long run legitimate business as well as the whole 
public can profit only by sound economic practices. 

So what I shall try to present to you this morning is a diagnosis 
rather than a prescription for a cure. You have to write that pre- 
scription, but if I am helping at the bedside of the patient, it is as 
a consultant to try to give you my honest impression of what the 
trouble really is, because until we properly diagnose a disease, we 
are not likely by mere hit or mis_s to find the proper remedy. 

It seems to me that perhaps the first thing we should do is to try 
to see how the sale of goods at identical delivered prices came about 
according to the basing-point formula and how it differs from the 
ordinary methods of competition which we consider normal, the 
norm, at any rate the ideal which was presented in the textbooks by 
the economists. I shall not undertake to give a history of the devel- 
opment of the steel industry, and yet, because of the dominant place 
which the steel industry has had in the development of the basing- 
point practice, it is certainly very helpful to have some of the prin- 
cipal tacts, the outstanding facts in that development, in mind. 

HISTORT' OF THE BASING-POINT PRACTICE IN INDUSTRY 

Professor Fetter. The basing-point practice in America, I think 
it is generaly agreed, began in the steel industry. It was under the 
influence apparently of Andrew Carnegie that the practice began 
sometime before the great merger in 1901. It was possibly — and this 
is rather speculative — copied from Germany where there were traces 
of it in the cartel system probably as early as 1870, and Andrew 
Carnegie, who was always looking for good ideas, found this, it 
seemed to him, helpful in entrenching his power as a steel baron. 

The first authentic evidence of its use in the United States that is 
revealed in the proceedings of the Pittsburgh Plus case^ which is our 
main source book now for the earlier history of this practice, seems 
to have been about 1880, a little earlier date I think than any men- 
tioned by Mr. Burr yesterday. The testimony of an old steel em- 
ployee, then retired, named Colonel Bope, told haw the rule of sale 



CONCENTRATION OF ECONOMIC POWER 1907 

for all steel products had been up to 1880, he said, f. o. b. mill. Then 
in 1880 the practice was begun on a sin<>le type of product, luunely, 
beams, and these seem to have been manufactured in only four mills 
in the country. The Carnegie mill at Pittsburgh was the furl best 
west and the largest of them all. The other three mills, the Phoenix 
in Pennsylvania, the Passaic Kolling Mills of New Jersey, and (he 
New Jersey Steel & Iron Co., entered upon the arrangements that ai-e 
essentially the same as the basing-point practice; that is, Pittsburgh 
was taken as the basing point and all these other mills, according to 
Colonel Bope, then matched that delivered price, which gave (liem 
of course a very, very attractive and a very, very allurin<? phantom 
freight in all the shipments in the neighborhood of their mills. 

There was then a single basing point at Pittsburgh, but there was 
no considerable extension of the basing-point practice until after 
1901, which was the date of the formation of the United States Steel 
Corporation. 

(The Chairman, Senator O'Mahoney, resumed the Chair.) 

There was some undoubtedly, but the whole subject is more or less 
involved in confusion and fog and probably never will be entirely 
cleared up. It is doubtful whether the historical data can be dis- 
covered. 

The development after 1901 was dominated by the United States 
Steel Corporation. It was the view of the minority of the Supreme 
Court that price control was the very purpose of the formation of 
the steel corporation, that is, in the decision of the dissolution suit, 
and not economy of production; whereas, the majority of the judges, 
both in the circuit court belaw and in the Supreme Court, were 
wavering, thinking that perhaps, some of them, that it was the j)ur- 
pose and intention, but that the intention could not be carried out, us 
Justice McKenna said. 

The formation of the United States Steel Corporation has been 
called, as Mr. Burr quoted the term, a merger of mergers. That is a 
very significant fact, because, during the nineties there was a large 
merger movement which went on during those 10 years, which ef- 
fected the merger of various lines of production, that is, tubes, beams, 
hoops, and so forth, some five or six different important lines that wo 
shall mention in a moment in connection with the merger. This was 
a period of mergers in the nineties, particularly of single lines of 
industry, horizontal mergers of like plants, which laid the founda- 
tion then for the great merger by the holding-company device of the 
United States Steel Corporation. This merger has been romantically 
described by a contemporary writer by comparing it to an assembly 
of the fleets of the earth. He uses the term "fleet" to express the 
separate big subsidiaries, the term "squadron" to indicate a grou]) of 
mills under one of these subsidiaries, and the term "vessels" to a])ply 
to the separate plants. The account is very spectacular, but I have 
been unable to total his figures exactly, but there were at the begin- 
ning eight powerful corporations very quickly added to it, that is, 
eight fleets, as he called them. The Carnegie Co. under Andrew 
Carnegie and the Federal Steel mider Gary were of course the two 
leading ones, and to those were added these other mergers that had 
been largely formed in the preceding 10 years: 

American Steel & Wire, American Tin Plate, National Tube, Na- 
tional Steel, the American Steel Hoop, and then almost immediately 



1908 CONCENTRATION OF ECONOMIC POWER 

(1hi Anioriciin Hridp^e, Shelby Steel Tube, and then the Rockefeller 
pliinls. Tlic American Tin Phite, for example, alone had what this 
M-ritor calls .38 squadrons — tliat is, 38 groups — a total of 278 vessels — 
(hat is, 278 separate plants, production plants of various kinds. The 
total that this writer gives was ?13 groui)s under the 8 principal fleets, 
21H sdjuadrons or groups, and then in the course of years there were 
added, besides those that I mentioned, American Bridge, Shelby Steel 
Tube, Union Steel, Clairton Steel, Tennessee Coal & Iron, the most 
notable ]H>rhaps in 11)07, and so on with several other rather minor 
ones ^vhich we need not list. 

I tiMist that the history of these mergers will be more fully recorded 
and studies of this committee continued in a year or two, and they 
should include a study of the I>ackawanna-Bethlehem merger, the 
llejuiblic Steel, Youngstown, and a number of the other great 
corporations. 

With the formation, then, of tlie United States Steel in 1901, the 
basing-poiut practice rapidly develo]ied muler its leadership, and 
(here is |)retly good reason to think that that was perhaps the essential 
purjiose, 1 mean it wa.s to establisli price control, and that was the 
metliod of priiv control on which they experimented and in which 
they had confidence. 

This is very well presented in a brief by the Associated States in 
the Pittsburgh Plus ])roceeilings in which it is told that in January 
15)01 light sheets were ])ut untlei- the basing point (that was a few 
months before the merger was complete), in April of that year, steel 
bars, in .latuuu'v 1902 wire nails ami wire, and so on from 1901 to 
1904 was the ])eriod of experiment* with the zone system, where identi- 
cal delivere<l prices were cpioted in the same manner, but not varying 
from station to station by the actual rail freight, but varying by 
ai'bitrary selected zones in which the variation for the freight element 
was approximately the average of the actual freight rates in that 
region. That ])roved tji be unsatisfactory. Now, this period was a 
period of experiment ; this whole period from 1880 to about 1910 was 
more or less a period of exjx'riment. 

The (^iiAiRM.vN. You say, Professor, that that method proved to be 
unsatisfactory'^ 

l*rofessor Fkitek. The zone method. 

The Chairman. Fn^m whose point of view? 

Professor FKrrKR. From the standpoint of the industry, because it 
made a very c»Hisiderable ditference. The only difference between the 
zone system and the all-rail freight system is that the all-rail freight 
metluni varies exactly to the penny according to the freight book from 
station to station, whereas the zone system is a sort of arbitrary set-up 
so that any zone system of jiricing will be relatively a little higher at 
one edge and relatively a little lower at the other edge of the zone; 
constvpiently. wluMi y(Mi come to a point like a State line or the Mis- 
sissippi River, the difference in delivered price just across the river 
would be very considerable, and tliat breaks it up. They get discon- 
tent and (liey get evasion — I should say a very legitimate kind of 
evasion, Invause this is not a public law which they are evading; it 
is a device meant io catcli them, and businessmen very legitimately 
try any plan of iliverting shijunents or iTshipping acix>si; the river. 
So tliat is really the reason; the zoneisystem has been tried in several 



CONCKN ri{ A ri(>\ OK KroNOMic row in 



\\H)\) 



otluM- ii\diis(iios ;nul 1 (limU, («> i>(MUM:»li.'o. (hiU ll usually hui; (niui 
nadnl in this nil rjiil lr»Mi>h( whuh cnu ho so easily !uli\ums((M«Ml Ity 
iho oIliiMjil Jiri^ht hook. It «lo»>sn't iumKo nny «iHVtM»M\»o wht^thrr tho 
ftvi«»h( ht>ok is rii^ht, (UmI isi\'( <»ssimi(iu1; i( \\\'.\\ not ^\\o tho Iruo 
into, as lonu: ms «>v<Myhotlv s(irks (•> (ho fitM^h( l>ook (hoy uro nil righ(. 

So (hii>uiih (ho (Jiiry dinnors, \vhi»'h |)orl»!»|)s hovo hooji inululy oin 
phnsi/od ns an ngoiuy ("or o*hioM(in^ (ho imlnstjy («> (his praolioo Uom 
ll>()7 (o 15)ll,(h«> IMttshniiih phis |>r.'n-(i»o hooMint* |>nM(y (hoion^hly 
ontriMU'hod h<d'oro (ho on(l»r<\'»k (»l (lio war, h»^foio «>nr ondnnro in(o 
i( in 15>17. 1( \V!is(hon niotliliod in paii hy (l»o W'nv ln«his(tios lloiirti 
from SoptonihtM- 15M7 (o.hino I'.US in |>Mr(, 1 say. hy nialon^', Chu'n^o 
a hasint; |)oin( antl chani^mjj; soniowhnl ( h«> r«^Ia(iv«* |)rio«vi in \nnonM 
«lis(i"io(s. That is a chMail wliii'h \\«>nhl h«^ vory coninsmji? and is no| 
osstMU ial. 

1( was ohan«it'(l haolv in ,lni\o htdtno (ho arniis(ico, sonu> inonlhM, on 
motion of a ro|»i»"'son(a(ivt> of (ho indnsdv, an«l (ho rapitl iiuTouso of 
ffoi<^h( ra(t*s which ofcnnc'd ra(hiM' (ardily ii( (ho oh>m* of (ho war, 
as yoii'all know, hi<>nii^li( n mos( nnoxp»^-(o»l incroaso in (Im^ hurdiMJ 
of (his |)luin(on\ ft(M^li( upon fahiiralors in and aronnd ('hifa^'O, 
Tho fi'oi<^h( ra(o was ino^<^•^^;^ul from TiKshni'^'h (o ('hica^Mi hv siui- 
<-ossi\(> s(a«^os from $.'l.()() a (on (<» I (liinii $ft.S() iind (h(>n $(i.S(>, inid 
(h(Mi $7. 'JO, and (h<Mi I (hink hy ( ht^ (iino «d' (ho 1M( (;;hin;.'li phis pro 
<'oiMlinos, if 1 |•(Mn4Mnh^^^ fifhly, i( had aj'aii'i fallon (o$()M(>, Ixil il wa.'i 
(htMi (wico as lii^h as il luni hoon oidy a fow yj^aiM h<doio. 

Woll, <d' (•onrsi\ (ha( \oi y groady nuM'onHod- i,( hi'oko (ho ha<l<;:, in 
a stMiso, of (ho fahriraiois in (h(^ W«vs(, (hoi disadvan(ll^M^ a( which i( 
pn(. (horn in (ho pnr«'haso of (h«Mr i-aw ina(j'iials; i(. was- wha(. lijuilly 
<h'o\i^ (Ikmii in(o a rohollion, so (o spoak, and load ( lioiii (o hiiiif? IhiH 
<-omplain(. Il is a cniioiis fac( (hal sonio (d (ho vory mon and I am 
spoalvin^- of individual iii(>ii in ( h(^ corporal lops, Sonalor \\\\>> woro 
acli\(<< in l)riii<j^iii^ I his complninl ha<l t<^s|ili(Ml in I ho diNNoliil ion .muI. 
in favor of ( ho.cor|)oral ion (hal. il was a highly honovolonl or^'Miii/a 
(ion, (hal (roa.(od (horn (Miliroly fairly. 

I lalkod will) onoof Ihom ai>oii( il oiil in llliiioiMand, if I niay iimo 
(ho phra.so, kid<lod him a lillli^ ahoiil. IIiih, an<l ho said, ''Woll, I hoy 
had always (roalod ns all ri^hl and vv(^ know (hal wan in»( ^rood prnc 
I ico for ns, l)ii(. wo could sdind il ; wo did no|. waii(. lo kick up a fiiHH. 
|{ii( when I hoy camo lo doiiltio (hal. fn-i^dil," ho Maid, ''if hrok«^ our 
hacks.'' Thai is paraphraMiiif^ his ^m-ihmhI mI alomoid., and I hal i^ I ho 
way llial a-.f^roal many foil a))oiil. if. Tho nilo of Iho Slool ( !or|ioru. 
lion, I I hink, (o I li<>. fahricalorH is no(. a cniol nilo; Ihoy an^ proliahly 
(i'oalo(| as faiily hy t hal coVponil ion mh hy any oljioi- thai Ihoy c(niM 
have any doalin^s wilh. 

So Iho rillshiii'^h phiM complainl. and docroo. waH iKsiiod hn/j'oly 
on i\\d inolion of poopio in Iho VVohI., all.hoii^h, of coiirMO, I ho oirort, 
of Iho. pra<'(i<M^ ohhI of J*il li^hiir^h wa.4 ahoiil. o(pia.lly oppror.Mivo, 
l)oc}iiis«i Now York (^il.y and all of Iho cilioM on (ho coii.^il. vvorr l»ayiiif^ 
plianlom fioi^hl and (he plii.4 from Til l.".hiirt<h, which wan llio nolo 
hasiii*^ poinl. for mo;;l of Iho. prodinl:;. The dofoiiHo ihal wiim pill, 
up al. Iho. ho^Miinin^ hy (ho corporal ion a(/;ainKl. IImh complainl., which 
was hroijf^hl- ai^ainsl, ihom only and iiol. fiynw^nt. Iho wliolo indiir.liy, 
was (ho very simplo and vory cloar Hlalomonf. of wliiil. w«i call I In-. 
supply and demand llioory. i(- waH hn.H(M| upon (In-, olomonlary pjin 



1910 CONCENTRATION OF ECONOMIC POWER 

ciple of deficit in surplus areas. They said, "Chicago does not produce 
enough products ; therefore it is a deficit area. Pittsburgh produces 
more than enough to supply its own needs ; it is a surplus area. And 
on sound principles," they said, "of demand and supply Chicago 
should get a price equal to the Pittsburgh price, plus the freight." 

Now the joker in that, which was easily exposed, was that this 
deficit, so-called, at Chicago was artificially created. If you have 
a surplus area, a surplus region, and a deficit region, the deficit 
region, on sound economic principles, does not proceed to increase 
its deficit by shipping back into the surplus region. There was the 
joker. Here was a method of mutual dumping, and the increase of 
products at Chicago and at Gary had become so great that it was 
shipping eastward a considerable part of its product instead of sup- 
j>lying the local market, whereas at the same time Pittsburgh was 
shipping into the local market. It was riot a deficit area in the true 
sense of the term at all ; it was a counter-deficit area, and the Com- 
mission, with these facts before it, and with all the careful analysis, 
so decided, and rightly. 

It was a fake application of the principle of supply and demand, 
and it is interesting to note that so far as I Icnow, no basing-point 
industry now is basing its defense upon this, which was the main 
pillar of the defense of the Steel Corporation in the Pitishurgh 
Plus ease. The counterfeit character, in other words, of that deficit 
conception has been pretty thoroughly exposed. Now the recent 
changes that were made within the past year have carried still fur- 
ther the change from a single-basing-point plan to a multiple-basing- 
point plan. It is well to observe, to think exactly on this subject,, 
that there never was a complete single-basing-point plan in steel, even 
at the time of the Pittshurgh Plvs^case; there was a basing-point at 
Birmingham, with a differential in the base price between there and 
Pittsburgh, but Pittsburgh was not the sole basing-point and there 
had been various times, as I mentioned 

Mr. Ferguson. Would that apply to all steel products? 

Professor Fetter. To all those that were manufactured at Bir- 
mingham, that is my understanding, and of course during the war, 
the period of 1917 and 1918, there was a basing point at Chicago and 
at some other points, some minor changes of that sort, and when thi& 
order was accepted by the corporation in 1924 with a statement that 
so far as practicable they would carry it into effect, they proceded 
to make a basing-point at Chicago with a differential still of $2 so 
that we have always had the essential features of a multiple basing 
point in steel, but it has had fewer basing points for a continental 
Nation like this than any other industry, with perhaps some very 
minor exceptions, small products. 

Now, I come to what I suppose is my essential job, a discussion 
of the elementary principles of competition and market prices as 
related to basing-points and I beg your indulgence because this 
basing-point practice is certainly a most ingenious invention. It pro- 
vides a formula so simple that anyone in the sixth grade who knows 
addition and subtraction can apply it, and yet it presents complica- 
tions which will puzzle the wisest members of Congress. 

The many questions that arise, that possibly will be put to me here 
today, some of which I fear I will not be able to answer, are varia- 



CONCENTRATION OF ECONOMIC POWER IQH 

tions of this practice, are attempts to understand the varia- 
tions of this practice. Now, I have already referred to certain con- 
fusion in usin^ the old terms and conceptions of markets and attempt- 
ing to apply them to quite different conditions that have arisen. A 
very excellent example, that is rather tragic in its way, was presented 
in the case of the Trcuie Association cases, decided in March 1925 — • 
celebrated leading cases. There was economic testimony given there 
by an economist, a friend of mine, and in other fields a very compe- 
tent economist, who misled the Court, I am convinced, perhaps inno- 
cently on his part — to be as charitable as I can about it — by using the 
phrases with reference to uniform market prices in a manner that led 
the Court to believe that he was referring to these identical delivered 
prices. At any rate, they took it that way. He did not — I have very 
carefully examined and reread that testimony — in any place say that 
these uniform market prices that he was discussing, and for which he 
quoted 17 leading authorities, he said, of whom I happen to be one, 
according to him — he did 4iot once say .that the uniform market price 
that these economists were talking about was the same thing as the 
identical delivered prices that happened to come up in that case ; but 
the Court evidently so took it, emphasized the importance of this 
mass, they said, of economic testimony, of leading economic authori- 
ties, and were undoubtedly influenced very greatly. 

In my judgment, the result was an unfortunate miscarriage of 
justice, not due to any corruption or to lack of intelligence on the 
part of the court but to a misunderstanding of the sort to which I 
referred in my very opening remarks. Now, I have attempted to 
present here — I do not know whether this is too far away ; maybe I 
can bring this chart up a little nearer. Congressman Sumners has 
objected to this excess use of charts, but I may say in justification 
that these are not statistical charts which represent graphically masses 
of facts; ihej are schematic charts. In other words, they are an 
attempt to picture ideas; ideas are very hard to picture — they are 
very hard to get. But it is in that sense they are more or less 
symbolic. Now, I spoke of how the conception of a uniform market 
price set is found in the textbooks. Can you see that far? 

The Chairman. Yes; it is visible here. Won't you identify the 
chart ? 

Professor Fetter. This is Chart A, tntitled "Intermarket Com- 
petition, With Uniform Market Prices." And this, I submit, is what 
economists are talking about in the textbooks. 

(The chart was marked "Exhibit No. 351" and is included in the 
appendix on p. 2186.) 

Professor Fetter. We have in these little circles a representation 
of a number of independent shops and producers at a given location, 
and this is a, so to speak, freightless market; they are near to each 
other. The sale of the goods occurs there [indicating spot marked "B" 
on the chart] ; the delivery occurs there. There is no thought of a 
delivered price or of the freight at all. What happens is that the 
prospective buyers from all directions con;e to this market and in the 
normal conditions which prevailed up to 100 years ago, before the 
days of railroads, they did supply their own transportation. The 
idea of a delivered price, a quotation of a delivered price was just 
practically out of consideration before the invention of the railroads. 



1912 CONCENTRATION OF ECONOMIC POWER 

It was 50 years after the railroads before the practice of quoting 
delivered prices came in in a small decree. 

Mr. Frank. This is a picture of a railroadless world ? 

Professor Fetter. Yes; it is really — of a nontransporting price. 
A freightless market, in other words. And so you would have here 
a uniform market price resulting from competition. That is the 
axiom and that is the fundamental principle laid down, and I need 
not go at great length into that. Every elementary student of eco- 
nomics knows that. Under conditions assumed, I think that probably 
no one would dispute it; they are there together, and the funda- 
mental uniformity, I believe, of that is a uniformity in the treatment 
of one's own customers by the seller. It is a market in the sense that 
numerous buyers are there ; they are watching each other ; they over- 
hear each other ; and- consequently the fundamental uniformity is a 
uniformity in the treatment of one's own customers, of the custom- 
ers of each seller. 

Now there follows from that a secondary uniformity, namely a 
uniformity in the prices that the different sellers are charging, but 
I believe this to be less fundamental for the reason that if any one of 
the sellers thinks that price is too low he temporarily withdraws from 
the market. He simply continues to quote a somewhat higher price, 
expecting that the conditions of the market a little later will bring a 
higher price. 

Therefore, for the time being, he has a reserve valuation that is a 
little higher than the market price, the going market price, and if 
he has figured it right the others have sold out at a little lower price 
and then his stock will sell at the higher price. So we can say there 
is uniformity in a general sense, a tendency toward uniformity, both 
as between the buyers and as between the prices quoted and received 
by the sellers, but the second uniformity is a somewhat less accurate 
one than the other. So we have laid down practically the test of a 
true market by the economists, a price uniformity there. That has 
no reference whatever to a delivered price, nor is it a uniformity in 
the price quoted at places outside of the market. A market in that 
sense, clear from the Middle Ages, was a locality, a place where 
people assembled. There was connected with that, of colirse, always 
the thought that the influence of this market extended outward to the 
distance of the customers that could be attracted to it. 

We are familiar with the contrast between interstate and intrastate 
commerce, and paralleling that terminology (which I think is not 
confusing now) we can think of the difference between intramarket 
competition, the old type of competition, and intermarket competi- 
tion, because with the existence of any two local markets where there 
is real competition among the dealers there always is also in the 
background a certain amount of intermarket competition. If 
the market price established here is higher than the market price 
there, then when people have their own means of transportation they 
will travel a little farther to this market. In other Words, that is a 
very simple elementary principle of choice,' a principle of indifference 
of the individual for, an equilibrium to be found between these two. 
It is quite possible for this intramarket competition here at A, we 
will say, to result in a price higher or lower than the intramarket 



CONCENTRATION OF ECONOMIC POWER 1913 

competition at some more or less neighboring market B. But these 
two market prices will be competing, are competing practically, 
always have been, in the intermediate zone. This zone is what we 
will call the geographical margin of competition, and in any set-up in 
a country where competition of the old type prevails in a very high 
degree, you have these two not in conflict with each other but 
necessarily adjusting themselves to each other. 

See what would happen if the conditions of production and supply 
are more favorable, let us say, in A than in B, so that while the true 
competitive market price in B is $1, the true competitive market price 
in A, without collusion at all on tlie part of any merchants in either 
market, would become 80 cents instead of $1. Then the amount that 
is saved in the price of goods can be spent on freight, and you will 
find a shift in the geographical margin between those two competi- 
tive markets. That can be easily calculated by adding the two base 
prices, adding the complete freight between them and dividing by 
two. As indicated here, A, with a 35-cent price paid in freight, has 
a total delivered aost of $1.15, and with 15 cents freight added to $1, 
B, has a total delivered cost at this median point of $1.15. In other 
words, there would be a point here of equilibrium and all the buyers 
on this side would be attracted toward this market, assuming homo- 
geneous products, and all the buyers on the other side of that line 
to that market. There is necessarily no crossing; it is unthinkable 
that there would be cross shipment excepting as some other consider- 
ations would come in; a man might have relatives in one market and 
would be willing to travel a little farther, he may be going there 
anyhow on other business, it is the county seat and he has to go there 
on account of a lawsuit, etc. There w^ould be hundreds of things 
that might lead them across, but the pure economic consideration, 
the price of the goods, the price of the freight, would give a definite 
dividing line there. 

That is the type of geographical competition which always has been 
considered, until very recently, to be normal. The idea that the 
base price, that is, the market price, in any competitive market will 
permit the producers in that market to sell everywhere over the land- 
scape would just seem to be an utter absurdity to the economists of 
that day, and- it is only in the last quarter^ of a century or so that that 
idea resulting from the basing-point practice has come, that you must 
have shipment in all directions. 

This whole chart A refers to the competition with uniform market 
prices without discrimination, because uniform price is merely a 
synonym for a nondiscriminatory price. 

Mr. HiNRicHs. Is this a convenient time to ask >Mr. Fettet a ques- 
tion with reference to chart A, or would you prefer that I wait until 
he has gone further in this discussion? 

Professor Fetter. I think possibly that it would be better if we 
went a little further ; I may touch upon those points. Of course that 
picture there conceives of an independent relationship of all the dif- 
ferent sellers in the intramarket competition; it also cojiceives of an 
independence between the markets, there is no collusion between these 
markets, they simply can meet each other and get customers if they 
can make it practical. That is really the normal type which still 



1914 CONCENTRATION OF ECONOMIC POWER 

prevails, I am sure, gentlemen, in a great many lines of business. 
It is the one price system in retail merchandising which has replaced 
largely the chaffering, the higgling, which there was once. 

Corresponding with this chart A which shows the difference in 
the market prices of the two competing markets, I have here a bird's- 
eye view (chart D) of the same thing. This picture on chart A 
is what you call the architect's elevation, showing the relationship 
at one point along one line between the two.^ 

, The Chairman. This is the view of an imaginary bird poised above 
the imaginary median point of the lower part of chart A, I take it. 

Professor Fetter. I see the Senator is getting into the spirit of 
this thing. 

It is the simple principle that what a buyer can save by getting 
a lower price he can afford to spend on freight. 

It happens that as the area within which the one market can 
attract from the other is narrowed, the area of the one with the 
relatively lower price is enlarged, so as the relative prices of those 
two under the competitive conditions rose or fell, the area would be 
pushed back or forth not as a straight line, but as a succession of 
curves, hyperbolic curves, if that means anything. It is simply a 
line traced by points with a common difference from two foci. 

That indicates the motive that there is in competition between 
markets, even on a completely competitive basis, and intramarket 
competition here" would have the motive always, I mean the iner- 
chant's intramarket competition, of lowering their prices, to draw in 
customers from the greater distance, and undoubtedly that does so 
operate. 

This is just a little fragment of the same chart, a bird's-eye view 
of intramarket competition where you would have three or more 
markets competing, and the relative market prices of those three 
markets would determine the amount of area from which they would 
be able to attract buyers.^ 

Of course, I need hardly say that where we are dealing with 
centripetal markets, that is produce markets that are gathering from 
widely separated small producers like farms to a single buying center, 
like Chicago, the wheat pit, that there this is true with a difference. 
Other things equal, you have to diverse your thoughts somewhat 
to get 

Mr. Ferguson (interposing). Dr. Fetter, on the second chart, (re- 
ferring to "Exhibit No. 352"), the one you spoke of on the bird's-eye 
view, shouldn't that be introduced into the record? 

Professor Fetter. Yes. I will then introduce these two — chart D 
and chart E. 

The Chairman. "Wliich is which ? 

Professor Fetter. The chart D was this one showing the ground 
plan. 

The Chairman. Please identify it so that it will be clear in the 
record. 

Professor Fetter. It is called "Market Areas Determined by Com- 
petitive Price Differentials." 

The Chairman. That is the second chart to which you referred ? 

1 Referring to "Exhibit No. 35l" appendix, p. 2187. 
» Ibid. r. ff 



CONCENTRATION OF ECONOMIC POWER 1915 

Professor Fetter. Yes ; and chart E is called "Mutual Exclusion of 
Three Competing Markets." 

Of course, this is the most elementary conception of the thing. 

Mr. DA^^s. Dr. Fetter, if you are through with those, just hand 
them to the reporter. 

Professor Fetter. I think they have been sufficiently photographed 
upon your retina, and I can refer to them without having them up 
there. 

(The charts referred to were marked "Exhibits Nos. 352 and 353," 
respectively, and are included in the appendix on pp. 2187-2188.) 

Professor Fetter. Right at this point I would like to refer to some 
testimony o:^ Judge Elbert Gary in the United States Steel Corpora- 
tion dissolution suit, if I may read this brief ex;tract. He was ques- 
tioned by Mr. Lindabury : ^ 

In the latter part of the year 1907 you acquired the properties of the Ten- 
Eessee Coal & Irou Co. I wish you would explain what led to that acquisition^ 
beginning at the beginning and stating the circumstances in your own way. 

Answer. In my previous answer I did not refer to the Tennessee ores at all. 
I do not consider they come into competition really with the northwestern ores, 
the Minnesota and Lake Superior ores. 

Question. You might as well, now that you have alluded to that, state why 

TiOt. 

Answer. Because the markets are different. The Tennessee Coal & ' Iron 
plant supplies a certain market within a certain tercitory. The territory is 
large in extent but limited in demand for the products. At some time we hope 
and expect that to be a very great market. It may be a long time in the future. 
The freight rates determine largely the market for any given product and the 
question of territory of any particular market is susceptible of mathematical 
demonstration by reason of the freight rates. The products of the Tennessee 
Coal & Iron cannot successfully compete with the other markets, the northern 
markets. They never have and never will possibly successfully compete with 
them. It is true a man can send anything from any place to any other place 
and put it in competition at that last-named place, but that is not competition 
that is worth considering for a moment. It is not practical competftion. It 
might be a destructive competition. A manufacturer might sell at a loss a 
given commodity in a limited quantity at a remote market for the purpose of 
ilriving someone engaged in business at that market out of business, but I do 
not consider that ordinary, natural competition. 

Question. It is not economic competition? 

Answer. It is not economic competition, quite the contrary. 

Judge Gary was no mean economist when he wanted to be, and in 
this case, as in so niany, I find myself so nearly in complete agreement 
with what the big-business man says that I begin to doubt my sanity, 
but my confidence is restored by the fact that almost the next moment 
he will say something exactly contrary and I know then I must be 
right. Very soon afterward in the Pittsburgh Plus case he presented 
a very different conception of the subject. His words almost per- 
fectly — I might quibble with a little phrase or two — express this 
notion that if you really had two competitive markets they would not 
sell all over the landscape. They can't, if they are really competing. 

The result of these conditions of intermarket competition are ob- 
vious, several important ones. There is no cross-^ipment of homo- 
generous goods ("Exhibit No. 353"), referring to that; there is a geo- 
graphical margin between the areas that are controlled hy these dif- 
ferent markets. The principle of indiflference to the buyer operates at 
a certain line or at a zoije. That zone is not just merely a knife blade 

^From transcript of record. Dissolution Suit, Volume 12, pp. 4833-4834. 



1916 CONCENTRATION OF ECONOMIC POWER 

but there is a certain range there, varying with the motives of indi- 
viduals, their opportunities for shipment or their preferences for 
personal relations, and so forth, but a considerable margin there. 
There is no dumping, to use the phrase that we are all familiar with 
in foreign trade. Dumping means simply the selling over in the 
other territory at a price that nets less than the price obtained from 
those nearby. Those who have made a special study of dumping in 
foreign trade, I think, are unanimous in the opinion that dumping 
can take place only when there is monopoly at the point from which 
the dumping occurs, where there is monopolistic power, " because 
otherwise the excess of supply at that point would be offered in the 
local market to that neighborhood and in that area with the result 
under conditions of supply and demand, of bidding down the price 
in and near the mill. 

In other words, there is more lost by dumping by an individual, 
but if he controls the whole supply, is able to control all of the 
supply in that neighborhood, he may sell a portion at a cut price 
and on the whole profit by it. 

The^ advantage or profit to the individual monopolist selling by 
dumping cannot be questioned. We mav question, of course, his 
influence on the public policy and his effect upon the buyers as a 
whole. 

Here is a little supplementary diagram. I have called the chart 
a supplemental to indicate the very substantial effect that there is 
in a change in relative market price. 

(The chart referred to was marked "Exhibit No. 354" and is 
included in the appendix on p. 2189.) 

Professor Fetter. The areas of circles vary according to the square 
of diameters is a simple geometric principle with rather surprising 
results when we come to a change in the base price. We have indi- 
cated in chart A the change bv which the price in A falls from a 
dollar to eighty. This area [rndicating circle on right] is half of this 
area here of A. The area shown by B and the smaller circle here is 
the area, market area, that A would have when its base price — that is, 
A, the competitive market would have when its base price — is the 
same as the competitive base price of B. But if it can enlarge this 
by the amount shown in the other diagram by extending the 10 
points of freight further, it would .increase its area, market area, 
by 96 percent. A rather striking mdthematj^cal fact is that this area 
in here 

The Chairman (interposing). Between the two circles. 

Professor Fetter. The outer zone that would be annexed, though, 
it doesn't look so to the eye, is 96 percent of the area of the inner 
zone that was represented before the price change. You cannot calcu- 
late this effect on B very exactly because only one side of B is toward 
this market A. So the sales of mill increase as its price falls in com- 
parison with all the surrounding mills. The result is a constant 
temptation to reduce its price because of this very large, area which 
may be annexed. 

Of course, it might he that that area had few customers in it or 
it might be one very rich in customers and very plentifiil in cus- 
tomers and, of course, the motive would vary according to that. This 
might be an unin^habited region and then there would be little induce- 



C50NCENTRATI0N OF ECONOMIC POWER I917 

mcnt, or it might be a very important industrial and commercial 
region and then the motive would be far greater than that indicated 
by 96 percent. Those are practical conditions that would enter 
into it. 

But on the side toward A, B would lose, possibly not all that is 
shown there, because it would depend on the relative position of other 
mills surrounding it, but by and large that represents the general 
schematic comparison — the schematic effect of a change of base prices. 

Mr. HiNRicHS. Professor Fetter, the point that you just mentioned 
about the density of that outer zone really needs to be strongly em- 
phasized, doesn't it? That is, one of the characteristics of the market 
at the pr^ent, time is that it is aggregated in large cities which are 
separated By substantial distances from one another. Therefore when 
an effort is made to extend the market you either annex a large gob 
or else you don't get anything. It doesn't come in as the economist 
visualizes the thing schematically in terms of little additions to the 
market but it is great gobs that you reach when you get out, or else 
jou don't reach anything, which influences the reasoning as to its 
practical effect. I don't mean that it upsets the scheme that you have 
portrayed which you described very adequately ; but you do need to 
emphasize very distinctly the discreet character of that area which 
you are annexing and that you get a lot or nothing. 

Professor Fetter. I quite agree with the impo'rtance of recognizing 
that and I did mention it, but I think on the other hand that the 
point that you speak of has been greatly exaggerated. I mean it i3 
as wrong to take one extreme of the statement as the other, and in. 
all of the defenses of the basing-point, of which I know, publicity 
•documents, they take the extreme of that; they assume there is only 
one place where the products of that mill can be sold, and that 
liappens to be right there on the border, right over, just inside of the 
territory controlled by the other mill. There is need of keeping a 
very carefully balanced judgment of the thing, and in principle what 
yon say is perfectly sound, that if this were the case, that the only 
place for which that mill ws producing was located over there, then 
there would be a question as to whether it could and should reach that 
so-called market; that is, that consuming center, I should prefer to 
call it. You see, you are changing your terminology when you call 
that a market and move away from the point of production to that. 
At any rate, that producing center, and it can be reached either by 
lowering the base price or by making exceptional discriminatory 
prices just for that neighborhood. 

Mr. Davis. Doctor, isn't it true that a company might be able to 
successfully compete in a portion of that added area, but not in all 
of it, because of the closer proximity of some competitor to one side, 
we will say, of that wider circle ? 

Professor Fetter. Yes; it is a question of what policy should be 
pursued and what I have tried to bring out here is that, if you have 
■completely competitive centers, that they have no choice; all they 
can do is to reach that outside area by reducing their base price; 
that is, by reducing the market price. They have no choice, but I 
come right here to that next point of where there is a choice. 

Now, in chart B I have tried to picture the idea that we must take 
when this old competitive system of markets began to break up. 



1918 CONCENTRATION OF ECONOjMIC POWER 

Now, as you recall this chart A (referring to "Exhibit No. 351"), 
supposing that market B — I am speaking of chart B here entitled 
"Monopolistic Versus Competitive Producers, Results of Discrimi- 
natory Prices" — or that all of the producers at market A ("Ex- 
hibit No. 355") should merge. There is no longer then intra- 
market competition at that point. There is only one producer and 
one seller. Therefore, the intramarket competition disappears at 
one of these points but it continues at the other. 

(Chart B referred to was marked "Exhibit No. 355" and is in- 
cluded in the appendix on p. 2189.) 

Professor Fetter. Now that is what began to happen in this 
country in a number of industries along after the Civil War, and 
it introduces a tremendously disturbing factor; it exposes the com- 
petitive market [pointing to circle on chart B] where smaller fax3- 
tories still continue, and there is something like real competition in 
a real market price; it exposes them to the sort of raiding which 
our domestic producers suffer when a foreign monopoly dumps upon 
our territory. This procedure at A (on chart B), if completely 
merged, can become a nonbasing point. That is, there is no longer 
a market price, it is an administered price, and the corporation at 
that point has the right, if it is permitted, to simply cease to have 
any price. That is a non-basing-point mill or point of production. 

Now what can it do? It can make this its basing-point and some- 
thing veiy similar to that has happened in several different indus- 
tries, and it can then collect phantom froiijht. There is where your 
phantom freight begins, as soon as you hvve a nonbasing point. It 
can charge the price here, plus the total amount of the freight [re- 
ferring to line on lower section]. It is emancipated from any rela- 
tion to its cost of production, you see, for the time being, and even 
a single mill that was a large single mill under modern methods of 
large production would be in that position, even if it did not result 
from a merger, but in many cases undoubtedly this situation of a 
single seller does result from merger. Now we have, or may have, 
the beginnings of the basing-point practice when this mill here 
(at A) chooses to quote not a uniform delivered price, a uniform 
market price or mill price, but to make its quotat4on (circle B, chart 
B) upon the other mill. Then its net realized prices begin, of course, 
to be adjusted in this way. They go down twice as fast as the 
delivered price as you move away from the non-basing-point n:iill. 
So that at this point where the delivered price is $1.50 with this 
relationship of price, if the basing-point price is a dollar, the net 
realized price obtained by a monopoly mill here would be $1. But 
if it continues to sell clear into this market (circle B in "Exhibit 
No. 355") , as is not an uncommon proceeding, its net realized price 
would be only 50 cents. Here it would be 50 percent more than the 
price realized [pointing to A on "Exhibit No. 351"] by sellers at B, 
but here if it sells to there, not an uncommon proceeding, its net 
realized price would be only half as much, would be 50 cents less^han 
the net base price. . 

There I think it is well to recall a comment that I made when I 
appeared before the committee last week of the importance of con- 
sidering monopoly and monopolistic power not as a percentage of 



CONCENTRATIUN OF ECONOMIC POWER 1919 

the national capacity of the industr}' but as essentially a local prob- 
lem. You mi<^ht have this mill here with strong financial backing, 
representing not more than 1 or 2 or 3 percent of the total producing 
capacity of the United States, and yet it would be able to behave iu 
this nianner, with relation to all the surrounding territory, and in 
some regions that would be for steel or cement or lumber or l)uiiding 
materials, an area as large as the German Empire. Our country, 
you must always remember, is about 15 times as big as France, con- 
sequently we are playing with figures when we speak of the pei'cen- 
tage of the national production, v^'hich may be located, conceutratod 
in one comparatively small portion of the whole country. Now this 
is a kind of a dumping and discrimination on the part of the merged 
mills, the nonbasing point, which the competing mills are incapable 
of dealing with, because they cannot in turn dump unless they come 
together and that probably is a part of the explanation of the des- 
perate necessities of the trade association, often the small producers. 

I offer that only as a suggestion for further inquiry, but the 
centralized producers are at the mercy of the larger centralized and 
strongly financed competitors. Now in the case of Chart A^ a uni- 
form market price, without freight elemfent calculated at all, gives 
uniform market price, without freight element calculated at all, gives 
a net realized price exactly uniform wherever the seller disposes of 
his goods, the net realized price is the same as the uniform market 
price. That, of course, is simply another way of saying that they 
all sold at the same price at the place and the buyer looked out, for 
the freight himself, but S,t the same- time it is well to think of that. 

Now let this merger go on a little further, or to 'the point where 
you have two large single mills or producers. 

The Chairman. Before you proceed to chart C, Professor Fetter, 
may I refer to B again? Do I understand you to say that under the 
condition which you have described, the merged producers at A adopt 
the price of the competitive producer B in the market B and add (o 
that the freight? Is that the manner in which you describe (heir 
ability to take away the market of B ? 

Professor Fetter. I think I have left the wrong impression on 
that. Senator. What I would say is this, that the moment that you 
have a producer of capacity and financial strength at a considerable 
distance from any competitor, there 3'ou have monopoly power. The 
real question is how that monopoly power will be used. The mere 
fact itself that a mill is off there at a distance, 100 miles or 200 
miles, 300 miles, from another producer of the same product, gives 
it a potential monopoly power. That is the sort of thing that Mv. 
Berle referred to in a statement he made some months ago, and I 
give a conditional assent to his view — but a conditional dissent, too. 

He emphasized the fact that the local blacksmith of the old days, 
and the local general merchant in the village, was a monoi^olist. 
Well, I consider that an academic expression. The local merchant 
and the local blacksmith 

The Chairman (interposing). Well, you are just using different 
terms, that is all. He was conveying an idea different from that 
which you seek to convey by the same word, was he not ? 

» "Exhibit No. 351." appendix, p. 2186. 



1920 CONCENTRATION OF ECONOMIC POWER - 

Professor Fetter. No; I do not know. I think where we differ 
probably is our notion of what really happens after that. I agree 
with him that the moment that you have any seller at a distance from 
any other seller, you have potential monopoly. That is that seller 
is m a potential monopoly position. 

The Chairman. When you use the word "monopoly," now, are you 
using it in the sense that this distant producer has an exclusive market 
to which he alone may successfully go, or are you referring to a 
power which he has to fix prices to the disadvantage of other pro- 
ducers by using the so-called basing-point system? 

Professor Fetter, Well, I think neither of those, quite. I am refer- 
ring to a power which he has to charge higher prices to his neighbors 
than at a distance. That be^ns at once, as soon as you have any 

The Chairman (interposing). Of course, that is precisely what 
Berle's blacksmith could do? 

Professor Fetter. Yes; but did he do it? My own memory goes 
pretty nearly back to those days in the West, and the farmers came 
in in their own wagons to the county seats and centers, and a black- 
smith who was known to do that would have been pretty well boy- 
cotted, I think. 

The Chairman. Well, would you not agree that even in those days, 
which I take it are not so long ago 

Professor Fetter (interposing). Which a young man like you and 
me would remember. 

The Chairman (continuing). That the producers did not at that 
time charge "what the traffic would bear"? 

Professor Fetter. I think the local merchants and the local black- 
smiths did not. That is, nofe charging what the traffic — they did not 
charge what the traffic would bear in the sense of charging a different 
price for homogeneous products from all their different neighbors; 
they could not have done it. Public opinion would not stand for it. 

Mr. Frank. Professor Fetter, to shift from the rural to the urban 
centers, don't you concede there is such a thing as a special or location 
monopoly ? 

Professor Fetter. Yes; that is just the point I am talking of now. 

Mr. Frank. So there is such a thing. For instance, a merchant 
having a store at a strategic point in the congested center of a large 
city has certainly something resembling a monopoly advantage as 
compared with the merchant who owns a store on the periphery of 
the city. . 

Professor Fetter. Yes; but that will be shifted to land value. 

Mr. Frank. Indeed ; but out of the fact tliat he is able to and does 
purchase land at that point, out of that fact grows a strategic ad- 
vantage over those who have land at less desirable points? 

Professor Fetter. Yes; but I would not consider that the value of 
land at different locations is essentially of a monopoly character; it 
is a scarcity. All value involves scarcity, and, of course, that does 
involve scarcity of advantageous location. 

Mr. Frank. That is, if you analyze the word "monopoly" and break 
it down in its components, the essential ingredient of a monopoly is 
the fact that you have an advantage over others; that you are in a 
comparatively sheltered position — you are sheltered from competition 
up to a point. 



CONCENTRATION OF ECONOMIC POWER 1921 

Professor Fetter. Yes. 

Mr. Frank. I think we would agree that seldom, if ever, is there 
a perfect monopoly. 

Professor Fetter. Exactly. 

Mr. Frank. Because there is always the possibility of seeking sub- 
stitutes if the prices goes too high. So that you have degrees of 
monopoly or degrees of monopolistic advantage, and there can be 
such a thing in that sense as a sheltering from competition to a degree 
and in that sense a monopoly growing out of the fact of location. 
Now, it may be that the blacksmith in the small town did not know 
the law of monopoly price or that public opinion would not let him 
apply it, but in the large city the merchant who has an unusually 
fortunate location, where people will come to him just because he is 
located there, is sheltered from the competition of a merchant 5 miles 
out on the periphery of the city. 

Professor Fetter. I think I agree entirely, but the real question 
comes here, what is he going to do with that monopoly power? What 
is he going to do with it, and that is ^^e question of public policy. 
What are we going to allow him to do with it ? 

Mr. Frank. The point I wanted to bring out is that all through 
our economy, necessarily there are circumstances giving people vary- 
ing degrees of shelter from competition, and a purely competitive 
condition, all through our industry, has seldom, if ever, existed. 

Professor Fetter. I quite agree with you. 

The Chairman. To return to what I was saying, Professor Fetter, 
when Berle's blacksmith charges more than the traffic will bear, then 
he invites competition and he can't prevent it from coming in because 
he doesn't have command of the devices which will prevent the com- 
petition from coming in. A monopoly which proceeds from a strate- 
gic position, as Commissioner Frank has just described, or which pro- 
ceeds from a superior and more efficient manner of production or a 
particular brand of goods, is one thing against which no one com- 
plains. That is what maj^ be termed a natural monopoly, and, of 
course, I realize that I am using that phrase not in the technical 
meaning in which it is usually applied. But our concern has to do 
not with these normal monopolies which have always existed until 
they began to charge more than the traffic would bear; our concern 
is with the manipulated monopoly which is the result not of normal 
factors but of abnormal and artificial factors which are interjected 
into the situation by reason of conspiracy or fraud or force or some 
device, and I take it that you are explaining to this committee today 
how it is that the so-called basing-point system can be used and has 
been used to lend false strength to certain producers and to enable 
those producers to achieve the artificial monopoly which results in 
maintaining prices and reducing production. 

Professor Fetter. I think that is a perfectly fine statement of it, 
and I am in entire agreement with Commissioner Frank as to the 
pervasivieness of monopoly influences and factors all through. In 
fact, for 30 years before this recent rise of interest in competitive 
monopoly, which I think is a fine development of theory for the 
younger men, I have been preachirfg substantially the same doctrine. 
I lost my naive f aitK in the practical universality of this complete 
condition of competition which I described at the beginning. 

124491 — 39 — pt. 5 19 



2922 CONCENTRATION OF ECONOMIC POWER 

Mr. Frank. In other words, for adequate thinking on the subject 
of the nature of our economy or of virtually any economy, one ought 
to blend the rigid concepts of monopoly and competition. They 
shade off from one to the other, and the question is, in any given 
situation, looking at it from the point of view of policy, how much 
competition we want, how much monopolar we want. The elimina- 
tion of all monopoly would end you up either in anarchy or com- 
munism, wouldn't it? To take away all monopoly would be to take 
away all private property in producers' goods. If you want to have 
ja world in which there was complete competition and everybody 
started equal, you would have to take away all those privileges that 
go with property in producers' goods, and I don't know but that 
would be the point where anarchism and communism would meet — I 
don't know where that would be. 

Professor Fetter. I think I will throw in my fortunes with the 
Senator's statement, for I think he made a distinction there. We 
are not going to deal with all cases of scarcity value wherever they 
exist. That is a part of the system of private property. 

Mr. Frank. Exactly. 

Professor Fetter, But public policy comes in at that point where 
we see the"individual trying to get more than natural scarcity, more 
than his natural ability will give him. 

Mr. Frank. That is, it is a question of what is socially desirable in 
any given instance and not a question of applying some a priori 
notion of an economic world moving as did what might be called 
the Newtonian economic world, which was conceived on a purely 
mechanical basis and without the interruption of any social habits 
or custom, the kind of world which the old economist tended to 
conceive. 

Professor Fetter. In the extremist sense (and the extremist sense 
verges on nonsense I am inclined to say) a man has a monopoly of 
anything he owns. If your heart is set upon that little 20-cent ) fiife 
there, I have a monopoly of that knife, but I don't believe that that is 
something on which you should pass a law. 

The Chairman. To ^et back to the question which gave the im- 
petus to this rather delightful discussion, let me call'your attention 
to chart B. I was trying to get a more clear understanding of your 
explanation of the manner in' which the producer at A uses this 
device to drive out of business the independent producer at B. 

Professor Fetter. My thought was not that immediately on get- 
ting this power he would dump. He might behave in a quite dif- 
ferent way. He might continue to keep ^is price there in somewhat 
relation to ordinary cost ; he would be get ing normal profits, and he 
would continue to have a basing-point n ill there — this corporation 
would continue to have a basing-point mill there. All I wish to 
point out (and I think it is unescapable at this point) is that as soon 
as you have this economic situation here you do have a potential 
monopoly power on the part of this mill. 

The Chairman. How do you illustrate the exercise of that power ? 
That is what I understand to be the picture, this chart, this idea, 
which you have portrayed here, which I might call surrealist chart B. 

Professor Fetter. This is what it can do. It can .boost its price 
here, it can become a non-basing-point mill, because a non-basing- 



CONCENTRATION OF ECONOMIC POWER 1923 

point mill is nothing but a basing-point mill, if you want to think of 
it that way, that has put its basing-point price so high that it doesn't 
control any territory; it has priced itseli out of the control of the 
territory, but it doesn't price itself out of the sales because by con- 
tinuing to match the prices of some other mill, exactly match them, 
delivered prices all along the line, it still can continue to quote and 
bid just as well as it could before. It doesn't price itself out of the 
market by abandoning the basing-point price. 

Mr. Ballinger. At the monopoly^ point there the monopolist can 
charge a price equal to the competitive price in the distant market, 

Elus the freight to that market, which allows him the phantom 
reight. That, in other words, gives him the sinews of war, extra 
profit, and using that extra profit he can then invade the competitive 
market on the basis of dumping and eventually destroy it. 

Professor Fetter. Yes ; or he mi^ht use the extra profits that he 
got in selling in this market by raiding with cutthroat prices in some 
other direction up here. If the heart of this combine is set upon 
acquiring some mill out in the other direction, it now has sinews of 
war in the way of prices, and it can cut its prices out there. Give 
it the power of local discrimination and you have given it a dagger. 

Mr. HiNRiCHS. I want to come back for just a moment to that ques- 
tion of the local monopolies that prevail within a market which, 
on a national basis would be regarded as generally competitive. You 
spoke of them as normal or natural, almost inevitable monopo- 
lies growing out of position, and yet you said that it was very im- 
portant as to the maner in which that monopoly power was exer- 
cised. There were several characteristics of that kind of local mo- 
nopoly, weren't there, that need to be remembered? Wasn't the 
fundamental concept that was holding people in line there in the 
exercise ©f monopoly power, among other things, a. survival of the 
concept of a just price, of a reasonable return for labor? Your 
answer to that was "yes" ? 

Professor Fetter. Yes, partly. I would Jike to explain it fur- 
ther. 

Mr. Hinrichs. Then in the second place, the part that capital in- 
vestment played in the man's determination of what was a just price 
was, under the technological conditions of those times of small scale 
production, relatively less important than it has since become. 

Professor Fetter. Yes. 

Mr. Hinrichs. So that you had as a third characteristic a situa- 
tion in which relatively few individuals were employed as wage 
earners. In arriving at a concept of a reasonable price a man was 
thinking in terms of the rerturn to his own personal labor, and he 
was not in a position to arrive at lower costs through the lowering 
of the returns to other people whom he employed. It seems to me 
that those three characteristics of that situation of local monopoly, 
when you thought of the monopoly as natural and of the monopolist 
as good, are characteristics which we are going to need to remember 
when I come to some of the questions that I would like to ask in con- 
nection with chart A. I just wanted to get that point settled at this 
time. I will withhold the other questions, if I may, until later. 

Does Professor Fetter want to answer what I was saying? 

The Chairman. Do you care to make any comment upon Mr. 
Hinrichs' interpretation? 



1924 CONCENTRATION OF ECONOMIC POWER 

Professor Fetter. I think merely this, that undoubtedly these 
technological changes have gone on and are a part of the problem 
of the large production and of the isolated producer and of the 
dwindling number of sellers. That really comes to the heart of the 
problem. We have pursued the spiral. The Middle Ages in which 
just price was a leading concept was a period of scarcity when there 
were very few producers. It originated when the population of 
England was about 2,500,000. Even the small shopkeeper was iso- 
lated. Therefore, there developed there a concept of the common law 
whicl^ seemed to be completely outdated by the beginning of the 
nineteenth century. Therefore, there was a repeal of a great number 
of the old statutes and a change of the common law at that time with 
reference to common occupations. Now, through technological 
change and large production we are back very much on the same 
problem of fewness of sellers, and that raises the very serious ques- 
tion and the very fundamental question for this committee to decide 
as to whether we do not need legislation which recognizes the scarcity 
of sellers and the lack of competition. 

Mr. Frank. "Would 3'ou say. Professor Fetter, that the common 
law, at the time when the manorial system was beginning to break 
down — with the rise of the common person engaged in a common 
calling — recognized the problem, in part by statute and in part by 
judicial decisions, and imposed obligations in the interest of the con- 
sumer; and tHat as competition increased those obligations went 
into desuetude because the pressure of competition protected the 
consumer? Might it, therefore, be argued that where monopoly 
either legalized or otherwise arises the common law has in its a 
latent power which might be expressed in constitutional terms by 
saying that the buyer or consumer has a due-process right, so to 
speak ; or if he doesn't have it by a revivification of the common-law 
principles that were applied in the period of which you speak, that 
the Government owes an obligation to protect the buyer, the con- 
sumer, as competition did or was supposed to have protected him. 

Professor Fetter. Your statement delights me, Mr. Frank. I feel 
strongly that we must recognize this recrudescence of the problem 
of the fewness of sellers and the old common-law doctrine — an econ- 
omist speaking on the law now. 

Mr. Frank. Lawyers purport sometimes to speak on economics &. 
there ought to be reciprocity. 

Professor Fetter. We just can't keep off of each other's territorjf. 

The Chairman. Will it be convenient to resume at 2 o'clock? The 
committee will stand in recess until 2 o'clock. 

(Whereupon, at 12 : 10 noon, a recess was taken imtil 2 p. m. of the 
same day.) 

afternoon session 

The committee resumed at 2 : 30 p. m. on the expiration of the 
recess. 

The Chairman. The committee will please come to order. You 
are ready to proceed? 

Mr. Ballinger. Yes. 

The Chairman. All right. Professor Fetter. 

Professor Fetter. I think I was perhaps midway in a question, 
but if I may pass that and have it raised later, I will conclude with 



CONCENTRATION OF ECONOMIC POWER 1925 

reference to the charts and speak for a moment on this, chart C, 
where we were speaking of two or more isolated and independent 
producers and producing points. 

(The chart referred to was marked "Exhibit No. 356" and is in- 
cluded in the appendix on p. 2190.) 

Professor Fetter. There are no competitors around it to make it 
behave in a competitive manner, and it finds itself with a certain 
latent monopoly power, and the question is, What will it do with it? 
It might go on behaving very much as if it were surrounded with 
competitors and sell at uniform prices, as we saw would be necessary 
if there were competitors surrounding it, but it now has the power 
to discriminate, and this is both theory and history. 

That power when it is first acquired is used sporadically, unsys- 
tematically, in a sort of opportunist manner. Each mill isolated there 
begins to deal with each customer as it has to, individually and sep- 
arately. In other words, it has thef power to depart from uniform 
prices, which prevailed in the competitive market. It can discrim- 
mate and, I think, it is the whole history of our industry in the last 
75 years since this geographical factor has become so important that 
it does discriminate. And what happens — something like an orgy 
of discrimination. Each mill has it in its power. It is a game at 
which more than one can play, and so they proceed to play it; and 
I think it is not exaggerating the analogy to say that this power of 
discrimination is like a dagger that you give to two or more com- 
petitors and lock them in a dark room and say, "Go to it." 

The result is a sort of chaos and anarchy of competition, but our 
analysis here has shown that that is truly not competition, but it is 
monopoly exercising its new-found right. It is like giving a boy an 
air gnn, and he shoots himself in the mouth, and it is that condition 
of anarchistic discrimination, I should say, rather than competition, 
which all of these basing-point industries Avent through at a certain 
time in their history. That was more or less the situation throughout 
the nineties, a depressed period in which mergers were being rapidly 
formed and which most of the subsidiaries that came to make up the 
United States. Steel Corporation were formed, as horizontal mergers 
of a number of former competitors in the same line of business; that 
is, a combination of numerous mills und locations producing the 
same kind of goods. 

Then, as we saw, this was followed by the holding-company device 
which was more of an integrating merger, which united all these 
various types of horizontal subsidiaries, and I remember well in the 
nineties that the price of some kinds of products in that depression 
reached a most abnormally low stage. I remember this illustration 
that went the rounds of the papers. 

Representative Sumners. What period do you speak of at the 
moment ? 

Professor Fetter. The nifieties, the latter nineties. At that time 
wages in the building trades ran around $2.50 to $3, and the estimate 
was made that at the price of wire nails at that time that it did not 
pay a contractor to have his carpenter stoop down and pick up the 
wire nail ; that the price that he was paying for his labor exceeded 
the price of the wire nail. That was given, of course, as a paradox- 
ical and extreme illustration and held for only a short time. 



1926 CONCENTRATION OF ECONOMIC POWER 

Representative Sumners. What wage were the laborers getting 
who were producing the wire nails then at that period ? 

Professor Fetter. That I do not know; they were low wages, of 
course, compared with the present scale. About 5 years after that 
time I built a house entirely by union labor, not a stroke on it by 
nonunion labor, in which the union scale for carpenters was $2.50. 
That was, of course, not in a big city. Now the basing-point practice 
may be, I think, fairly conceived of, trying to look at the thing with 
unprejudiced eyes, as the method discovered and adopted by the 
industries, one after the other, for escaping from this period of 
anarchistic discrimination, and they experimented with it, and they 
finally hit upon this device. 

For many years they had great trouble in getting the habit estab- 
lished ; it was so easy for individuals to break away ; they were con- 
stantly tempted by the desire to get an order by quoting just a little 
bit below the formula, but what they finally hit on was this mutual 
discrimination, mutual dumping, as we have called it, into each 
other's controlled territory, but exactly following the formula, each 
one matching the delivered price in the territory of the other mill. 

From time to time, especially in periods of depression, as witnesses 
of industries have repeatedly emphasized, the thing would break 
down. Ordinarily, it would work very well indeed during periods of 
rising prices and general prosperity, and now and then some indi- 
vidual, separate corporation, would try to beat the game, and then 
there would come trouble. There were various methods of discipline 
with large merged industries where the dominant interest in the indus- 
try had a number of mills, and they were able, practically free, from 
discovery, to delegate fighting mills. It can" be done in ways which 
probably just elude discovery. 

Representative Sumners. While we are on that point, if you could 
discover it, what would you find as to the method of disciplining 
competition ? 

Professor Fetter. We know a number of things that have been 
done in the steel and other industries — just a general price war in 
which the whole base prices are cut to the bone was the thing that 
Judge Gary repeatedly threatened in these Gary dinners. 

Representative Sumners. You mean if a small mill was reducing 
its price in a territory then they would threaten to send in commod- 
ities from their own mill at a lower price than the small mill could 
compete with. 

Professor Fetter. There are two methods of cutting prices that 
can be pretty clearly distinguished. One is the cutting of base prices 
generally. 

Representative Sumners, You mean for the general mafketff 

Professor Fetter. For the general market. The other is to cut the 
base price of a mill that is closest to the offender. 

Representative Sumners. Would this mill that would cut its prices 
be at all sustained by the group of mills that were opposed^ to the 
reduced price? 

Professor Fetter. I couldn't say as to that. 

Representative Sumners. What I mean is, suppose there was an- 
other reasonably small mill that was going along with the big organi- 
zation in the neighborhood of the mill that had initiated the cut 



CONCENTRATION OF ECONOMIC POWER 1927 

price. Would they designate this neighboring mill to meet the price 
of the reducing competitor, or how would they go about it ? 

Professor Feiter. Congressman, I don't believe you can get as tan- 
gible evidence as that. We know such cases, for example, as the 
rather classic case of the cement industry putting in a mill base at the 
South Dakota State mill. When a corporation that has mills several 
hundred miles away put in a basing-point at a mill which they don't 
own, they are reducing the price in all that territory. It is a punitive 
measure if another corporation puts in a basing-point at the mill of 
the offending corporation. 

Representative Sumners. I don't want to lead you away from your 
discussion, but I am wondering if you are going to cover the possible 
efficacy of any sort of regulation which would require a mill covering 
a broad market that would reduce its price to force a competitor to 
make that price general in its market, varied by difference in freight 
rates. 

Professor Fetter. Well, I take it that is what the Clayton Act 
was intended to do. I think the Clayton Act was formulated in the 
period when the problem was felt to be the problem of cutthroat 
competition, the effort of one corporation. to crush out another cor- 
poration. It was not conceived of as primarily and directly to pro- 
tect the consumer. Indirectly, of course, the thought was you would 
protect the consumer by preventing cutthroat competition. 

Representative Sumners. Those are general terms that you are 
using now, if you will pardon me. I was attempting to inquire with 
reference to specific policies in the event prices were cut obviously 
for the purpose of destroying the competitor. Have you people ever 
considered the possible efficacy of compelling uniform prices in the 
sales territory of a big concern that would reduce its prices in a 
given territory to destroy a local competitor ? 

Professor Fetter, That thought has been considered by various 
bodies, and I think it is something that this committee should very 
seriously consider, but whether public opinion would support such 
a measure that is a' matter of serious consideration. 

Representative Sumners. My inquiry is for eliciting information, 
not for getting judgment. Maybe I am leading you away from your 
particular subject. 

Professor Fetter. I was simply pointing out here how the basing- 
point practice is a systematizing, an organizing of discrimination in 
a way which will prevent this whittling away of prices, in a way 
which it did in- a number of industries. That is a matter of history, 
I think, and those industries look back upon that period with a 
certain horror, and they look upon the proposal to abolish the basing 
point practice as a proposal to bring back the bad old days, as they 
look upon it. 

The Chairman, This basing-point system developed, in the first 
instance, in steel, did it not ? 

Professor Fetter. Yes; it did. 

The Chairman. Now, on several occasions during this testimony 
we have heard reference to cement as another product in which the 
basing-point system appears to be used. What would you say, from 
your experience and study of this subject, as to whether or not the 
basing-point system has not been particularly exemplified or devel- 



1928 CONCENTRATION OF ECONOMIC POWER 

oped where the product is of a uniform quality ? Now, steel is steel, 
generally speaking, so that the competing manufacturers of the prod- 
uct have nothing on which to appeal to their purchasers in the quality 
of the product itself, have they? 

Professor Fetter. That is their own 

The Chairman (interposing). Now the same is true with respect 
to cement. Cement is cement, just as sugar is sugar. 

Professor Fetter. The companies say so. 

The Chairman. Is that a fact or is it not a fact, according to your 
experience? 

Professor Fetter. I have no direct experience in that. I know it 
is a common opinion outside that there are really differences of 
quality, but not so material that the average users consider it. 

The Chairman. I confess that, for my own part with respect to 
sugar, I always like to differentiate beet sugar from cane sugar, and 
I would prefer beet sugar because we produce sugar beets in 
Wyoming; but for the life of me I really can't tell any difference, 
except that I am told by the trade that beet sugar doesn't ordinarily 
go into cubes or dominoes, so that, except for that physical form in 
which it is presented, I can't tell one from the other and I doubt if 
any other consumer can. 

Professor Fetter. Well, whatever the differences, though, wheii 
subjected to scientific measurement, they are nevertheless so small the 
average user doesn't notice them. They can be treated as homogeneous. 

The Chairman. Do you think there is any justification for the 
basing-point system which is an effort to maintain a stabilized price 
where the product is uniform ? 

Professor Fetter. That is the only sort of industry, apparently, 
that uses it. 

The Chairman. Then would you say that it is a natural result of 
the fact that the products which these industries manufacture are 
uniform in quality? 

Professor Fetter. Not at all. Senator, not at all. I would not say 
it is natural. It is possible to grade many agricultural products just 
about as closely as you grade these industrial and fabricated products. 
That doesn't lead to the basing-point practice. 

The Chairman. Agricultural products fall into an utterly differ- 
ent category because, as has already been demonstrated before this 
committee, the agricultural products are the products of individual 
flesh -and -blood producers. 

Professor Fetter. There you are getting at the cause. 

The Chairman. Industrial products are produced by corporations. 
I think it was the testimony before this committee that corporations 
produce less than 10 percent of the total agricultural output of the 
country, whereas, with respect to almost any other product, certainly 
with respect to steel, with respect to cement, with respect to refined 
sucrar, the product is put upon the market by the corporation. 

That makes a tremendous difference. So I can't make any com- 
parison in my own mind between the price rule which obtains in the 
agricultural industry and that which obtains in the industrial in- 
dustry. It is my feeling that the farmer takes the price which he 
can get. He ships his product to a central market and then he 
hopes that circumstances will be such as to enable him to get a 



CONCENTRATION OF ECONOMIC POWER 1929 

price that will make it possible for him to recoup the cost of pro- 
duction ; whereas, if he wants to buy a Ford car or a radio or steel for 
liis barn or whatever he may want in the way of industrial products, 
he goes to the town and he pays the price that is fix^d. He is in an 
utterly different category; isn't that true? 

Professor Fetter. That is true, but I would not make the difference 
consist in a charter of incorporations. I would make it consist in the 
difference in the number of sellers and in the existence, therefore, of 
competition. 

The Chairman. Well, that is saying the same thing in another 
way. 

Professor Fetter. If you consider it so. 
' r> Chairman. The number of the sellers in the industrial field is 
reduced because of the fact that the corporation is an instrumentality 
for making collective enterprise jx)ssible. A corporation, insofar as 
these products which we are concerned with now, cement and steel and 
sugar, are concerned, i^ an instrumentalityj an artificial agency which 
enables a large number of people to contribute their capital to a big 
enterprise. It is a collective effort. 

Professor Fetter. Yes; and our corporation laws, it is true, have 
permitted the merger of a large number of these enterprises. 

The Chairman. Yes «. and it is, therefore, the corporation law and 
the merging of corporations that has limited the number of sellers in 
the industry in the field and brought about the condition of which 
you are speaking. 

Professor Fetter. When you use the word "merger," then we are 
going down the same road. It is to account for the great reduction 
in the number of "Sellers, and there has been a very great deal of 
emphasis, I think 

The Chairman (interposing). Yfhat impresses me. Professor Fet- 
ter, is this : We are dealing were now, so far as the basing-point system 
is concerned, primarily with steel and have mentioned cement, sugar — 
there may be others. Now, if you think of automobiles, on the other 
hand, you think of a product which is sold ordinarily f. o. b. The 
purchaser of an automobile pays the price at the mill, or at the factory, 
plus the transportation charge. Is that not the case ? 

Professor Fetter. That is, but generaPy there are some little excep- 
tions. 

The Chairman. Some little exceptions; but by and large, we are 
speaking of. Now, here we are dealing with a commodity which iS 
differentiating, which is not uniform. You may want a Cadillac, I 
may want a Ford, or somebody else may want a Chrysler car, or what 
not, according to our particular personal desire. So apparently the 
basing-point system does not operate with respect to motorcars, because 
there you are not dealing with a,uniform product. 

Professor Fetter. I think that enters into it. 

The Chairman. Well, is it not significant? 

Professor Fetter. It is impossible to administer a basing-point prac- 
tice of identical delivered prices unless the products are homogeneous. 

The Chairman. Then let us take another case. 

Professor Fetter. But there must be other conditions besides that. 

The Chairman. Let us take the case of cigarettes, for example, and 
candy, confectionery, commodities of that kind. There is a single 



1930 CONCENTRATION OF ECONOMIC POWER 

price for cigarettes of a particular brand, or of two or three competing 
brands, all over the country, without respect to freight at all. Now, 
is that a good system or a bad system ? Chesterfields, Camels, Lucky 
Strikes, all sell for the same price, regardless of the freight which is 
to be charged by the transportation. 

Professor Fetter. And necessarily; we listen to a good deal of 
ballyhoo £)ver the radio about differences of quality. 

The Chairman. Certainly, and if you listen to that you might think 
that Lucky Strikes were really good for the throat, you know; you 
might do that. But what I am getting at now is there are apparently 
different methods of pricing in these different commodities and I am 
wondering whether as a result of your studies, you think there is any 
justification for the belief that the character of the commodity deter- 
mines the method of sale; that is to say, whether or not a basing- 
point system is used. 

Professor Fetter. No; it is one of the necessary conditions. 
Basing-point practice is found only in those industries where the 
products are homogeneous, and as we have seen, where you deal with 
extraSi, that are not homogeneous, they reduce them very carefully. 

The Chairman. Now cigarettes are homogeneous, but there is no 
basing-point system there, is there"? 

Professor Fetter. Well, I am not so sure about the conditions there. 
It is a very light product, where the element of freight plays a very 
small part. 

Representative Stjmners. People believe it to be different. They 
go in and ask not just for a package of cigarettes, but one package — 
one has one delusion and the other another. 

The Chairman. It is all a delusion. 

Representative Sumners. They do call for a different brand of 
cigarettes. 

Professor Fetter. At least it is all smoke. 

Mr. Frank. Professor Fetter, is it true — I am just asking for in- 
formation, that the automobile industry does not use \n part a basing 
point ? For instance, if I buy a car that is assembled in Philadelphia, 
m Philadelphia, do I not pay the price f. o. b. Detroit, plus freight 
from Detroit? 

Professor Fetter. That is my understanding. 

The Chairman. That probably is true. I was merely thinking of 
the advertisements that are usually f. o. b. Detroit. 

Mr. Frank. It may have been modified, but I thought that was 
true. I was just asking for information. 

The Chairman. But most of the assembly plants are not pretty 
well scattered, or are they? Can you answer that, Mr. Hinrichs? 

Mr. Hinrichs. They are quite well scattered, and becoming more so. 

The Chairman. And you think the basing-point system is used 
with respect to automobiles? 

Mr. Hinrichs. I may be confused as to what the basing-point 
system is, but I would assume that the prize example of basing-point 
would be a system in which there was only a single basing-point in the 
country, from which delivered prices were figured; that is, if you 
picked a single -producing center as the exclusive point on which 
prices were quoted that that would be a very excellent illustration of 
basing-point practice. 



CONCENTRATION OF ECONOMIC POWER 1931 

Professor Fetter. It would be an excellent illustration, but it would 
not exhaust the practice by any means. 

Representative Sumners. In the basing-point, with regard to auto- 
mobiles, take for instance Detroit, if you get your car from Phila- 
delphia you pay the Detroit price, plus the freight from Washington 
to Detroit, even though you may get your car from Philadelphia; 
whereas when th^e shipment is made they ship the parts from Detroit 
to Philadelphia at a lower rate of freight than they charge for the 
full car, maybe, and that would be to that degree your shipping point 
operation, would operate in that situation ? 

Professor Fetter. I think that certain elements of the basing-point 
practice are creeping into those industries that ship and assemble else- 
where. It is only a very minor degree. For instance, some of the 
Detroit manufacturers or Michigan manufacturers have assembling 
plants on the Pacific coast and it is evident that they are able to ship : 
in a way to save $40 or $50 at least; I do not know how much more, 
over the all-rail freight in that way, and then they proceed to charge 
on the Pacific coast on the basing-point principle, of the all-rail 
freight to the various points on the Pacific coast. 

Representative Sumners. I want to ask just one question, if I may. 
That is as to what it is all about, what we are trying to get at. Sup- 
pose Pittsburgh is the basing-point and my home is Dallas and we 
try to start some business activity there. If Pitfsburgh is the basing- 
point for the territory which would include Dallas and Waxahach]e, 
Waxahachie being 30 miles from Dallas, the person who lives at Wax- 
ahachie 30 miles from Dallas could buy a commodity assembled ^t 
Pittsburgh, if the basing-point system operated, as cheaply as some- 
bodj' could get it 30 miles from Pittsburgh. Is that right under tha 
operation of the system? 

Professor Fetter. Oh, no ; I think not. 

Representative Sumners. What would interfere with that? 

Professor Fetter. As cheaply? Do you mean delivered? 

Representative Sumners. That is right. 

Professor Fetter. No. If Pittsburgh were the basing-point it 
would be the Pittsburgh-base price plus the full rail rate to this ppint 
in Texas. 

Representative Sumners. To Waxahachie. 

Professor Fetter. Yes ; I suppose so 

Representative Sumners. If that same steel concern had a plant at 
Dallas 30 miles away, what would they charge ? 

Professor Fetter. That is just the case that we were discussifig 
there. ' 

Representative Sumners. That is just the case I am asking about. 
'Professor Fetter. What will they do? 

Representative Sumners. Tliat is what I am asking. What do 
they do? 

Professor Fetter. What they do under the- basing-point practice 
is to continue without a basing-point of their own. 

Representative Sumners. Let me talk about something concrete 
here now. 

Professor Fetter. Yes ; that is what they are doing! 

Representative Sumners. I am afraid your answer is not right 
clear. May I ask it again so as to get it clearly in the record. Sup- 



1932 CONCENTRATION OF ECONOMIC POWER 

pose a concern has a factory at Pittsburgh and has a factory at 
Dallas, we will say in round numbers a thousand miles apart. If I 
have to be exact I will get the map and figure it out, but I am just 
guessing a thousand. I thought those figures would do sufficiently 
for the purpose of getting the facts. From Dallas to Waxahachie 
is 30 miles, and they have got a plant at Dallas. Would the man who 
lives 30 miles from Dallas have to pay the same freight as the man 
who lives 30 miles from Pittsburgh? 

Professor Fetter. Very much more freight. He would have to pay 
the freight from Pittsburgh to this point that you speak of. 

Representative Sumners. To Dallas. 

Mr. Ferguson. Notwithstanding that the product was manufac- 
tured in Dallas. 

Mr. Burr. Where is the basing-point — at Dallas? 

Representative Sumners. The basing-point is Pittsburgh. 

Professor Fetter. There is no basing-point at Dallas ? 

Representative Sumners. No; but I am trying to give you a "sup- 
pose" case here. I don't know where basing-points are. 

Mr. Ballinger. Judge, if you purchase in Dallas from the manu- 
facturer in Dallas you pay the rates from Pittsburgh, the phantom 
freight that didn't actually occur and was fictitious purely. 

Professor Fetter. It is impossible to answer the question as you 
have asked it unless you know whether this Texas plant is a basing- 
point. 

Representative Sumners. It is not. 

Professor Fetter. Then if it is not, its price is based upon the 
Pittsburgh price, and the price of delivery at any point in Texas 
from this Dallas mill will be the Pittsburgh price plus the freight 
from Pittsburgh. 

Representative Sumners. That is what I was trying to get at. 

(Representative Sumners, vice chairman, assumed the Chair.) 

Mr. Davis. With reference to the discussion on automobiles, I 
think we are all generally aware that almost any automobile, any 
make of automobile, is priced at the factory price plus the freight 
from the factory to the point of delivery — Washington, Philadelphia^ — 
wherever the case may be. But here is one distinction between that 
and the industries in which the basing-point is employed, that if the 
purchaser, as they do from time to time, desires to go to the factory 
and get his car, he can get an order from Jjiis local dealer and go 
there and get the car and bring it home and save the freight, but you 
can't do that where the basing-point system applies because they will 
only make you a delivered price, which means the basing-point price 
plus freight, no matter if you offered to deliver it yourself or to send 
your own truck for it, or what not. 

Vice Chairman Sumners. In the event we take Dallas as an in- 
stance, it is a point where they assemble cars for one of the factories. 
You buy a car at Dallas and you can get it at the price charged "at 
Detroit plus the freight on the assembled car as distinguished from 
the parts. It is the assembled car, isn't it? 

Mr. Davis. I think they are supposed to, as far as we know, add 
the actual price, the assembly price, but perhaps it would be that 
plus the price of parts to the point of assembly. 



CONCENTRATION OF ECONOMIC POWER 1933 

Vice Chairman Sumners. Professor, do you expect to develop fur- 
ther how this practice affects the development of monopoly ? 

Mr. Dams. Well, they have been talking on that for 2 days, and I 
think you will find that all in the record. 

Vice Chairman Sumners. I've no business asking questions, I 
wasn't here then, 

Mr. Davis. I am sure that Professor Fetter will be more than glad 
to make a brief explanation of the way it works. 

Mr. Ballinger. Professor Fetter, this practice, if it does obtain in 
the automobile industry, is not to be likened to a basing-point sys- 
tem, is it, because the effect of a basing-point system is a repress 
price competition, and I don't think the Federal Trade Commission 
has found any repression of price competition in the automobile 
industry, that is as far as the manufacturer is concerned in selling 
the product? 

Professor Fetter. No; I have always looked upon the automobile 
industry as a sort of shining example of a large industry that has 
pretty successfully avoided the basing-point practice. A friend of 
mine in that industry wrote me not long ago a sort of conscience 
letter telling about how it was gradually edging in a little bit because 
of this assembly business, but that is a very, very small peccadillo of 
offense against uniform pricing, if any. I gave him some conscien- 
tious advice and told him I thought he hrfd better cut out that little 
petty practice, but I think they will not do it. 

(Representative Reece assumed the Chair.) 

Mr. Hinrichs. Mr. Chairman, in connection with that example 
that you have given of the automobile industry as illustrating com- 
petition, I want to know something about what we mean, then, by 
the basing-point system. In terms of the mechanics of having a 
price f. o. b. Detroit plus freight to the point of delivery, the auto- 
mobile industry operates on this system of based prices. The prices 
of the cars are not identical at Detroit and may very well be priced 
in such fashion as to give rise to real competition in the basing price 
itsdf. Is that what you mean by saying that there is competition 
in the automobile industry, that is when Ford, Chrysler, and Chevro- 
let set their prices they set them with reference to each other in an 
effort to capture as large a share of the market as they can, while 
they nevertheless set their prices as prices f. o. b. Detroit no matter 
where the car is assembled. 

Professor Fetter. I do not recall using the expression that there is 
competition in the automobile industry, but with reference to your 
last question I believe that is true. I have felt that the existence of 
Henry Ford and his individual attitude was perhaps the reason why 
we hadn't had monopoly quicker in the automobile business, despite 
the large amount of merging, there evidently is there, to the outside 
observer, active competition as regards models, styles, types, and so 
forth. So we have the benefit of technical progress there. I think 
it seems to be the general principle, to a very large degree. 

Mr. Hinrichs. There is a second characteristic of those automobile 
prices that is in outward asjject somewhat like the basing-price sys- 
tem, tliat is that the prices'are published in advance and are main- 
' tained for rather considerable periods of time unchanged, ordinarily 



1934 CONCENTRATION OF ECONOMIC POWER 

from one model year to the next. So the mere fact that prices are 
published doesn't constitute the basic criterion that there is or is not 
monopoly in the pricing -system. 

Professor Fetter. No ; I would say not. The prices of automobiles 
apparently are quoted on the mill. You hear of f. o. b. Flint and 
f. Oj b. Lansing, as well as f. o. b, Detroit. It is simply that we more 
frequently hear f. o. b. Detroit, and I take it each of these quotations 
is an independent quotation. The uniformity is in the way in which 
the customers of the particular automobile company are treated. 
There is not a uniformity in the price of automobiles of different 
makec; that is a different question. 

(Senator O'Mahoney resumed the Chair.; 

Mr. HiNRicHS. So' the peculiarity of this basing price that you are 
talking about is the identity of _ the quoted prices at the base by all 
of the different companies. The fact that you have identical quota- 
tions on as nearly as you can tell identical products at these basing- 
points is the thing that gives the peculiar character to the basing- 
point system that you have been describing. 

Professor Fetter. I would be inclined to call the identical de- 
livered prices the result of a method rather than the method itself. 

I was asked by the newspaper men to formulate (they are always 
getting Robinson Crusoe in words of one syllable) a definition of bas- 
ing price in 50 words. I think I have got it in 51 or 52 here, 
and perhaps if I read it, it would help. I am not at all sure that 
this is completely bomb proof, but this is an honest effort. "The 
basing-point practice is quoting and selling in certain territory" 
(that is to cover the control area) "homogeneous products by a for- 
mula of delivered prices identical with that of another mill or mills 
made up of the base price of another mill than the one selling," I 
think that is really the crux of it— the formula is based Upon another 
mill than the one selling, "plus freight from that mill," not the mill 
selling. 

The Chairman. I am afraid that no headline writer is going to 
make very. much out of that. You understand that economists have 
their rules > .Tid their habits and lawyers their rules and their habits ; 
newspapermen are worse than either, they have got to get it down into 
just a few letters. 

Professor Fetter. This is as near, you know, as economists can 
come to words of one syllable. 

I add one phrase to that that I think is helpful : "It necessarily 
involves refusal to sell at f. o. b. prices." That is the point. 

The Chairman. Would you accept an amendment and say it is 
necessarily involved? 

Professor Fetter. I think so. I think that is the trouble with it. 

Mr. Ballinger. Dr. Hinrichs, you said that it was the identity of 
the prices at base. That is not, I think, absolutely correct. It is the 
identity of prices at the point of delivery.' If all prices were identical 
at base, there might be different prices at point of delivery. I think 
Professor Fetter will correct me. 

Professor Fetter. Yes. I didn't catch that phrase. 

Mr. Hinrichs. Well, the prices are identical at the base-point in 
which they are quoted and also at points of delivery from tne base, 
figured by the formula of base plus freight. 



CONCENTRATION OF ECONOMIC POWER 1935 

The Chairman, Isn't it true that actually it is the lowest sum of 
price plus freight at a given destination that determines the price? 

Mr. BuKR. That is determined by the governing basing-point. 

The Chairman. Certainly. 

Professor Fetter. Each destination is in some area of that kind. 
Every destination in the country lies inside of some basing-point 
controlled area. Even if there were only one basing-point for the 
whole country, that would be so. 

The Chairman. When you sp)eak of a basing-point, you mean the 
point at which the f. o. b. price is effective, which is taken as the base 
for the entire field in which the basing-point system operates, and 
then you add to that price the freight to the point of destination 

Mr. Davis (interposing) From the^iearest basing-point. 

The Chairman. WithoutVegard to the point of origin of the ship- 
ment. Isn't that it? 

Professor Fetter. Yes ; and I think that is covered by a definition 
given in the Encyclopedia of the Social Sciences. 

The Chairman. Oh, well, let's have that. 

Professor Fetter. Now, you can see these rival definitions. "Bas- 
ing-point prices are delivered prices calculated by adding together 
the established price at some point called the basing-point and speci- 
fied freight charges from such point to the several points for w-hich 
these prices are rriade, this formula being irrespective of actual origin 
of shipments or of actual freight incurred." That is the point which 
the Commissioner makes. 

The Chairman. Of course, the purpose of that is to maintain so 
far as possible a uniform price system through the largest possible 
area. 

Professor Fetter. Yes. 

The Chairman. Another purpose, of course, is to maintain prices 
properly. 

Now, the significance of this system was brought home to me only 
this week by a certain incident that has happened. Everybody 
knows the degree to which motortrucks have been competing with 
the railroads in the transportation of freight and particularly in 
the transportation' of motorcars. Within the week, because the motor 
transportation from Detroit to Denrver has resulted in tremendous 
competition with the railroads, cutting down their business, the rail- 
roads made application to the Interstate Commerce Commission^ and 
received a decision by which they were granted a lO-percent reduc- 
tion in the freight from Detroit to Denver. Now, the city of Chey- 
enne, which is only about 103 miles north of Denver and which is 
on the main line of the Union Pacific Railroad and which is a rail- 
road division point, has as a matter of policy attempted to discour- 
age the transportation of motorcars by truck in order to favor the 
railroad. But tKe decision of the Interstate Commerce Commission 
now gives Denver, which did not attempt to discourage transporta- 
tion by truck, a 10-percent advantage over Cheyenne, and now, of 
course, the motor distributors in Cheyenne are asking me to try 
to persuade the Interstate Commerce Commission to give them a 
10-percent reduction on railroad freight also. 

Obviously, if there- had been this oasing-point system in effect, 
the price of motorcars would be the same in Cheyenne as in Denver, 
and there would be no question about this 10-percent reduction. 



1936 CONCENTRATION OF ECONOMIC POWER 

Mr. Davis. And, Senator, the delivered price would have been no 
cheaper even though they could be brought cheaper by truck because 
the price is the railroad freight and not the truck freight. 

The Chairman. You are right. 

Mr. Davis. Of course, that applies equally with respect to water 
transportation which is always cheaper but which never applies 
where the basing-point system is operated. 

The Chairman. It raises the question whether or not in the last 
analysis it is not beneficial to local industry to have a fixed delivered 
price, and whether or not it wouldn't be the best solution of this 
problem if there could be divorcement, as it were, of the effort to 
fi"x these prices for the purpose of holding the price to the consumer 
up from the more beneficial effect of maintaining a standard price 
for all purchasers. That, it seems to me, is the question. 

Professor Fetter. Something for the committee to consider. 

The Chairman. Yes; but I am askino- your opinion now because 
you have studied thiE. You have been studying it, may I say, 
largely from the point of view of one who lias seen the effect of the 
basing-point system in maintaining the prices to the consumer, and 
I am wondering whether you have given consideration to the pos- 
sibility that the standardization of prices in homogeneous commodi- 
ties all through the country may not be beneficial in some respects, 
at least. 

I see Mr. Burr is very anxious to answer that question. 

Mr. Burr. No; I am not. If you will excuse me, Senator, all I 
want to do is to get you, if you will, to say what you mean by stand- 
ardization. Do you mean standardization by the industry, by some 
industry leader, by the Federal Government, or by whom? If I 
could get you to clarify that. 

Mr. Ballinger. Any kind of standardization. 

The Chairman. Any kind of standardization, as Mr. Ballinger 
says. What I have in mind now is the standardization which we 
have with respect to cigarettes, for example. What are the factors 
which have brought about this fixed price for cigarettes? You can 
go into a drug store in Washington, D. C, or in Seattle, Wash., and 
you pay the same price for a package or a carton of cigarettes. 

Mr. Burr. Of each of various varieties? I have never looked into 
the cigarette industry and I do not know whether that is price 
leadership or price understanding. 

The Chairman. Now that is what is called, I think, the postage- 
stamp system of prices. Now postage stamps are the same in price 
to the citizens of America in w^hatever post office you buy them. 

Mr. Burr. There is quite a little difference 

Mr. Ballinger (interposing). It is a legal monopoly. 

The Chairman. But it was made so because it was conceived by the 
framers of the Constitution and Congress that that would be a bene- 
ficial thing. Now this price system of which I am speaking to you — • 
which -is exemplified in the case of cigarettes — is called the postage- 
stamp system. So the question which poses itself is: Is that sort 
of a pricing system a beneficial one where obviously there is no actual 
competition among the varieties, and the difference, the choice of the 
consumer, is based wholly upon the degree to which he is responsive 
to advertising on che radio and on the stands, and the degree to 
which he thinks that one particular brand tastes better than another? 



CONCENTRATION OF ECONOMIC POWER 1937 

Professor Fetter. Gertainl}^ we would not choose the tobacco in- 
dustry as a fabricating industry that exemplifies pure competition. 
Even since the days of the decision in the Tobacco case in 1911, there 
has been a very large amount of concentration of ownership and 
control there, and it is a product of very light weight and the cost 
of shipping that is very small. I would think that you might have 
a uniformity of price, such as you note for the different brands, 
if they are of equal quality, whether it was monopoly or competi- 
tion. I do not think that would tell the story. You may be having 
a high monopoly price here, a high price because it is monopoly, 
or if you had true competition you might have it uniformly low, 
with very little difference in the delivered price in different parts of 
the country, because of the small cost of the freight. The postage- 
stamp rate in transportation refers to an equal rate, no matter what 
the distance is. It does not refer to an equal price. 

The Chairman. Well, have you given any consideration to this 
phase of the problem? If there were no basing-point system and no 
delivered-price system, what would bfe the effect upon the develop- 
ment of industry in States which are far distant from the centers of 
population? 

Professor Fetter. My judgment is that it would tend very largely 
toward decentralization of physical plants in industry, and would 
tend to decentralize the control of industry to a considerable extent, 
and to make industries serve their own communities and neiglibor- 
hoods to a greater extent, and make collusive prices more difficult, if 
not impossible. 

The Chairman. I say that because on one occasion, a year or so 
ago, the executive officer of a large sugar-beet refining company 
stated to me his belief that the uniformity of price for .sugar is a 
material factor in enabling western sugar factories to produce a much 
greater output than they would if that system were not in effect. 
Now I made no effort at the time to study it and I have no opinion 
upon the matter, but I am merely stating the conclusion that was 
expressed to me. 

Professor Fetter. I thought maybe you mi^ht hit upon that sugar 
industry. It is so near to you thete, up m Idaho, and I have 
heard 

The Chairman (interposing)'? Wyoming, please. 

Professor Fetter. Well, I meant in the neighboring State. That 
is the one I have heard about. 

The Chairman, You surprise me. Professor. 

Professor Fetter. I have heard of Idaho beet sugar and Idaho 
potatees and, of course, of the many virtues of Wyoming. 

The Chairman. In other words, Wyoming is more famous to you 
for its virtues than for its products. 

Professor Fetter. Well, the complaints of the farmers in all that 
region are loud and frequent. They sell their beets and those beets 
are made into sugar, and they buy the sugar back at the price of San 
Francisco plus, as if their beet sugar had been shipped to San Fran- 
cisco and shipped back to them. 

The Chairman. Well, there is a more exciting instance even than 
that. It is the case of gasoline. In Wyoming • we have the Salt 
Creek oil field and the Teapot Dome, of which the whole country 

124491— 3»—pt. 5 20 



1938 CONCENTRATION OF ECONOMIC POWER 

has heard. We produce a very high grade of natural petroleum, 
crude petroleum, and we have refineries there — the Midwest Oil 
Co., and the Standard Oil Co. of Indiana, and the Sinclair Refining 
Co., and yet though the crude petroleum is pumped out of the soil, 
as it were, in Wyoming and refined in Wyoming, and turned into 
the tanks of the filling station in Wyoming, the Wyoming citizen 
who rolls up in his automobile to the Standard Oil filling station 
immediately outside of the Standard Oil refinery pays a price Tulsa 
plus,- not the price of oil as refined in Wyoming from Wyoming 
crude, but as though that oil had been refined in Oklahoma and 
transported by railroad all the way from Tulsa to Caspar; and 
there our people pay this phantom freight. So it is a matter of 
great interest to the consumer as to whether or not that is a system 
which should be permitted to exist. 

Professor Fetter. These illustrations all are very pertinent to show 
how the ba sing-point practice inverts geographical relations. There 
is something rather offensive to the reason of men that it should 
do that. 

The Chairman, If you had not emphasized the virtues of Wyom- 
ing I probably would not have given you the example of that 
Wyoming "product. 

Professor Fetter. I think I got my reward. 

Mr. Ballinger. I think we did not answer your question about the 
cigarette industry. I think you asked why we did not have sta- 
bilized prices in the cigarette industry. 

The Chairman. I did not put it quite that way, but I will be very 
glad to have that answer. 

Mr. Ballinger. It depends on how those stabilized prices are 
arrived at; if they are arrived at by manipulation you will not be 
willing to let that continue without the Government stepping in and 
determining what was the fair rate of return to that industry, which 
would, of course, be a tremendous problem. If, on the other hand, 
we decide to break up that stabilization of prices by enforcement of 
the antitrust laws, the chances are we will get our cigarettes more 
cheaply in the end and I think there is a whole school of opinion that 
holds we might get them more cheaply in the end than if we created 
a public utility. 

Certainly the most amazing example of cheapness is the automo- 
bile industry, starting out with cars costing $5,000 ana $10,000, now 
down to $450, by a competitive system. In other words, that is the 
great argument for the competitive system, that if you give it a 
chance it may give you the cheapest prices you can possibly get; if 
you venture with the public utility you may run into all kinds of 
snails; the question of honest regulation, the question of what base 
you are going to use, all kinds of tangled problems, and you may end 
up with very little achievement as has been the case in a number of 
public utilities. 

Mr. Davis. In addition to that, and referring again to the auto- 
mobile industry, you not only have a marked lessening in price, but 
you have a marked increase in quality because they are all competing 
with each other- on quality and attractive features of their respective 
automobiles, as well as in price. 

' Mr. Frank. Professor Fetter, although the basing-point system 
may be one means by which monopoly is procured, you would not 



CONCENTRATION OF ECONOMIC POWER 1939 

say, would you, that the aboUtion of the basing-point system would 
mean the end of monopoly? 

Professor Fetter. Certainly not. The ways of monopoly are devi- 
ous, and it is exceedingly ingenious. I discussed that somewhat last 
week here, that the ways of monopoly are protean. You never may 
be sure. You may stop this gap, and then you may have another one 
to stop later, but this is the truth, that the basing-point practice is 
far and away the most successful single device that large American 
business in these homogeneous products has hit upon in the last 75 
years, and the thing to do is to take one thing after another, as you 
find it. If we can put an end to that we have at least stopped that 
difficulty. 

Mr. Frank. But the consequences of breaking up the basing-point 
system would be, as you have indicated, decentralization. Now there 
could be decentralization of manufacturing and yet integration in 
ownership, could there not? 
Professor Fetter. Yes. 

Mr. Frank. So there might be differentials in the prices to the 
consumer and, never-the-less, we might still have a condition that 
would not be competition. 

Professor Fetter. I think when you speak of integration of own- 
ership, are you not referring there rather to horizontal financial 
merger ? 

Mr. Frank. Let me put it differently. You could have something 
that was not competition between units of the industry, separately 
owned, and yet have decentralization with differentiated prices in 
different localities, to the benefit of the consumer. That is conceiv- 
able, is it not? 

Professor Fetter. I think so. If there is no further question at 
this point, I would just add this to our discussion about the effect of 
the basing-point, still referring to our chart C for a moment. Now 
the effect of this practice of exactly matching the delivered prices in 
each territory so that every bidder and every seller knows exactly 
what he has to meet and will exactly meet it is that there is no 
price competition anywhere. One question I never have been able 
to answer at all satisfactorily to myself is why any mill would volun- 
tarily be a basing-point mill. Why are they not all non-basing-point 
mills? Because, permitted this system of matching prices, a mill 
does not cut itself out of sales at all by raising its base price so high 
that it becomes a non-basing-point mill. That is, it does not cut itself 
out of sales because it can still continue to bid and quote just as 
before. Each one of these mills can quote in the other territory with 
the certainty that none of these other fellows who are playing the 
game will cut its price by one single cent per ton or per barrel. 

Now, that relieves them from all pressure to keep base prices down, 
excepting one, and it is exactly the same pressure or motive that a 
complete monopoly would have, a monopoly in the sense of complete 
unified ownership of all the mills of the country in any one industry ; 
namely, the essential monopolistic limitation of charging what the 
traffic will bear, because the very extremest monopoly has to consider 
that. It can price itself out of the market. Fortunately, there is. 
still a considerable degree of interindustry and interproduct competi- 
tion, but that is not the thing that is considered by the antitrust laws. 



1940 CONCENTRATION OF ECONOMIC POWER 

The antitrust laws are concerned with competition within an industry 
and among the members of that industry, but this interproduct com- 
petition is pretty nearly the only protection the public has left, when 
you have a system like the basing-point in an industry. And that 
becomes a motive undoubtedly for a mill or some mill in a neighbor- 
hood that is so far-away that its delivered price is very high. It 
becomes a motive for putting in a base price. The price is too high 
in that neighborhood; the benevolent monopolist would lower the 
price there. 

The benevolent absolute monopolist, the man who has complete 
control, finds that he is operating under that limitation. It is 
charging, the principle of charging, what the traffic will bear that 
does keep these prices from going out into the stratosphere. 

But that is not the determination of prices on what we would con- 
sider a fair, normal competitive level at all. It may permit those 
prices to be 50 percent or 100 percent higher than they would be if 
we had anything like normal competition. 

I might discuss at some length — ^but I think we might dispense with 
any long discussion of that subject — the matter of the results of the 
basing-point practice in waste and inefficiency. It has a certain con- 
nection with this point I have just spoken of. The base prices can 
be lifted and are lifted in each neighborhood without any tear at all 
that one or the other— that is, as long as the system is working; 
once in a while somebody breaks away from it — without any fear 
that that price will be cut by a single penny, and that would have a 
tendency to raise it and raise it until the producers in that territory 
felt that the price was too high and thev were cutting off the con- 
sumer demand. 

Now that would seem to make a very high price and would give an 
enormous profit to the industry, but these industries all complain 
that their profits are very limited, and there we at once turn our at- 
tention to the evident wastes of the industry. I will just enumerate 
. those. I won't attempt to discuss them in detail further unless it is 
the desire of the committee that I should do so. 

There is, of course, first, the tremendous waste of cross-hauling. 
The basing-point industries themselves are conscious of that. It is 
the economic absurdity of carrying loads of brick from one side of the 
road to the other and back again. 

I have one little chart here of actual cross shipments. This was 
testimony taken in the Lackawanna merger. It is a public document. 

Mr. Ferguson. Identify it for the record, please. 

Professor Fetter. I will call this chart F on "Cross hauling in 
steel," which shows actual orders in shipments. 

(The chart referred to was marked "Exhibit No. 357" and is in- 
cluded in appendix on p. 2191.) 

Professor Fetter. This is Lackawanna, this point here is Cleve- 
land, that is Youngstown, this is Pittsburgh, this is Johnstown, this 
is Pottsville, this is Baltimore, and this is Wilmington, and that one 
is Bethlehem. It shows the cross shipments .like a spider web, and 
charts of this sort without limit can be compiled from the various 
.basing-point industries. That, of course, is a certain bonus to the 
railroads, and there have been dire predictions of what would happen 
in ease we did away with this cross hauling. It represents a con- 



CONCENTRATION OF ECONOMIC POWER 1941 

siderable fraction undoubtedly of the freiglit receipts of the rail- 
roads, but my own conviction is that the basing-point practice is such 
an incubus upon our whole economic system that if it were removed 
that the railroads would profit along with other industries. 

The Chairman. This chart, however, demonstrates rather clearly, 
does it not, that a producer at a given point under the basing-point 
system is no longer limited to the area which he could serve without 
the basing-point system. 

Professor Fetter. Yes; it shows that. 

The Chairman. In other words, this is a system which tends to 
make the whole Nation the market for every producer provided he 
can produce a commodity which is homogeneous with that of the 
other producers. 

Professor Fetter. Yes; and it results in the mill selling a large 
part of its product at a large distance from the mill, while permitting 
other sellers to come into that very territory and take away business 
on which the local mill would be netting a very much larger amount. 

Now, that is the most striking fact in the whole situation, showing 
the noncompetitive character of this. In ordinary competition we'd 
say at least men fight for their largest profits. 

The Chairman. To my mind the most important question to be 
answered in any study of this subject is simply whether or not the 
basing-point system tends to raise the price to the consumer beyond 
which it would be under the other system. 

Professor Fetter. This waste of cross hauling is a w^aste, even 
though somebody gets it. The railroads get it and need it. It may 
not seem a waste from the standpoint of that particular industry. 

There are a number of other wastes of various sorts. I will men- 
tion some of them. If those things are wastes, they are money ex- 
pended without any results. Somebody has to pay for it. The in- 
dustry evidently considers that it doesn't have to pay for it. They 
would not fight so strenuously to maintain this system unless they 
thought it was to their advantage; therefore, they think it is to their 
advantage despite the fact that it involves these wastes which they 
recognize and deplore. Therefore, who does pay for it? In the end, 
if it is paid for at all, it must be by the public, by the consumer, by 
the national economy. 

Now, in addition to these wastes of cross hauling 

The Chairman (interposing). Is there any evidence to indicate 
that these wastes of cross hauling are sometimes obviated by agree- 
ments among producers whereby producer A at Baltimore — is that 
the lowest city ? 

Professor Fetter. 1 nat nappens to be there ; yes. 

The Chairman. By which producer A at Baltimore, having re- 
ceived an order from a purchaser in Chicago, instead of shipping 
the product from his mill, would actually ship it from Chicago, 
but the purchaser would nevertheless pay for it as though the freight 
had actually been paid and the charge incurred. 

Professor Fetter. I think that all these industries frankly say 
that when they have more than one mill, when a corporation owns 
more than one mill, it fills the order that it gets from that mill that 
will give it the largest mill net. 



1942 CONCENTRATION OF ECONOMIC POWER 

The Chairman. In other words, it fills the order from the mill 
nearest the point of delivery but charges, of course, the price from 
the basing-point. 

Professor Fetter. From the basing-point, wherever that be. 

Mr. Ballinger. Is there any doubt that the basing-point system 
raises prices to the consumers? Senator O'Mahoney asked you that 
question. It seems to be very pertinent. 

Professor Fetter. Of course, my own belief, my answer, is in- 
volved in what I am now saying, that somebody is paying for this, 
and we have seen in this explanation how the basing-point price is 
raised. Remember that no matter who sells any particular order of 
goods, steel or otherwise, no matter how much is realized by the mill 
wiio sells it, the consumer always pays the base price plus the actual 
freight to his destination. The base price is always paid by the 
consumer. Part of that base price may be wasted by the seller by 
cross hauling, frittered away, so to speak; it doesn't get into his 
pocket, but it does come out of the pocket of the consumer in every 
case; the consumer never buys under this system for less than the 
base price plus the actual freight. 

Mr. Ferguson, By actual freight you mean from the basing-point. 
It may not be actual freight at all. 

Professor Fetter. He pays the base price plus the freight from 
the basing-point; that is correct; I thank you. 

Mr. Ferguson. That may not be the actual freight at all. 

Professor Fetter. The actual freight is deducted and that may 
become a loss to the seller. 

Mr. Ballinger. This is a system for eliminating price competition. 
Doesn't every price-fixing system cost the consumer more than the 
competitive system or it wouldn't be in existence? 

Professor Fetter. I would answer that yes, but I confess to more 
prejudice than a judgment. I mean on general principles you can't 
conceive of its being anything else than added cost, although there- 
are, of course, both wastes of competition and wastes of monopoly, 
both kinds of wastes. 

Mr. HiNRiCHS. Dr. Fetter, in connection with your last answer, 
you said that you thought it was a matter of prejudice in your an- 
swer, and then you went on to say that you couldn't conceive of its 
being otherwise. Aren't there two questions that are involved here? 
First of all, there is the question of whether the profit that results 
from the operation of the system is high or low. Competitive prices 
with severe overcapacity might be so low as to result in tremendous 
losses to almost all producing units in the industry. Your base price, 
your basing-point system, might conceivably be used for nothing 
more than a minimizing of losses or for the establishment of a rela- 
tively low level of return in an industry which under fully competi- 
tive conditions would be incapable of earning anything. Your an- 
swer is not necessarily concerned with the justice of things. You 
may quite well disregard the problem of whether the returns 
received are reasonable or unreasonable, and simply look at the ques- 
tion of, Are prices higher under a basing-point system than they 
would be under a fully competitive system? Is it conceivable to you 
that the basing-point system could be established, except as a means 
of establishing prices which are at least temporarily higher than 



CONCENTRAl'ION OF ECONOMIC POWER 1943 

they would otherwise be? Is it prejudice to answer that in the 
affirmative ? 

Professor Fetter. Well, maybe I went too far leaning backward in 
saying it was prejudice. As I indicated, that is my own conviction 
in the matter. If with all of the wastes that there are in this 
system, and uneconomic operations, the industry still desperately 
clings to it, it me'kns that it is profitable to that industry, in its 
opinion; it may be mistaken. When you refer to the wastes of 
competition there, I wouldn't be able to answ^er or agree with you or 
disagree unless I knew just what you meant by the wastes of com- 
petition. If you meant by the wastes of competition there this sort 
of anarchic, cutthroat condition tliat we were discussing awhile ago, 
I think that is pretty bad all around, it is bad for the industry, it is 
bad for the community. 

The Chairman. And yet there are cases, are there not — I gather 
this from your response to Mr. Ferguson a moment ago — in which 
the actual freight paid by a producer to transport the commodity 
to a purchaser is greater than the freight from the basing-point to 
the destination, so that when the producer deducts the actual freight 
from the basing-point plus price he actually suffers- a loss. 

Professor Fetter. Yes; yes, indeed. The two terms that are used 
so frequently and give such difficulty in really grasping what they 
mean are phantom freight and freight absorption. Those two things 
are the two aspects of these discriminatory prices. The phantom 
freight never occurs e«ceptin^ in the case of a nonbasing-point mill. 
A nonbasing-point mill profits by what we call phantom freight, 
and that means that up to a point tli^t is halfway between the basing- 
point — ^you remember we used this as an illustration of a nonbasing- 
point mill in "Exhibit No. 355" — in selling at any point halfway 
irei^htwise toward the basing point, this nonbasing-point mill is re- 
ceiving phantom freight, to use the popular phrase, receiving freight 
that is in excess of the actual freight that is being paid. 

The Chairman. Provided that the mill sells on the basing-point 
system. 

Professor Fetter. Yes ; that is what we are talking about. 

The Chairman. Though you call it a non-basing-point mill. By 
hat you mean it is a mill which is not located at the basing-point. 

Professor Fetter. Yes, Senator ; we mean it is in the system. 

The Chairman. Though it may use the device. 

Professor Fetter. It is in the system. It is using the device. 

The Chairman, But not at the basing-point. 

Professor Fetter. Yes. 

Mr. Ferguson. Instead of being at Chicago it might be at St. Louis. 

Professor Fetter. Yes ; so that at the moment it reaches this point 
of equilibrium where th§ actual freight shipping toward the basing 
point is in excess of the calculated freight, then this becomes absorbed 
freight, and when any two basing-point mills are shipping toward 
each other they are both absorbmg freight at the halfway point 
f reightwise, and neither one of the basing-point mills gets this thing 
called phantom freight. 

The Chairman. Of course, the question which must finally be 
posed is whether or not these cancel one another. 



1944 CONCENTRATION OF ECONOMIC POWER 

Professor Fetter. Yes; well, that is really irrelevant, Senatoi', it 
is really irrelevant. I think there have been many false comparisons 
made on that point. 

The Chairman. Let me follow through. Your chart ("Exhibit No. 
355") shows a picture with a median point between mill A and the 
basing point at B, and on the right side of that median point you 
have a shaded area. I gather from your explanation that if mill A 
ships to any point to the right of the median point, that is to say if 
it ships to the shaded portion,, it is absorbing freight. 

Professor Fetter. Yes. 

The Chairman. That is to say, the actual freight which it pays 
for the transportation of the commodity is greater than tlie freight 
from the basing-point. 

Professor Feiter. Yes. 

The Chairman. Therefore, in such case the mill is absorbing the 
freight and is not getting the benefit of it ; it is losing on the basing- 
point-plus system. If, on the other hand^ it shipped to any point to 
the left of the median point, then it receives the benefit of an excess 
more than it actually pays. That is where the phantom freight comes 
•into existence. Therefore, the question finally presents itsiplf whether 
in the administration of this basing-point system throughout the 
country there are more shipments to the freight absorption area than 
to the phantom area, or whether there are more to the phantom area 
than to the absorption area^ or whether they cancel one another. 

Upon the answer to that question depends certainly the determina- 
tion as to whether or not the consumer eventually by and large, all 
taken together, pays a heavier toll as a result of the basing-point 
system than he would without it. 

Professor Fetter. I am sorry to differ with you. 

The Chairman. Of course, that is the question I would like to be 
informed upon. 

Professor Fetter, All of that freight absorption and sending 
over into the territory of the other, the* consumer does not buy for one 
penny less than he would buy from the local mill. There is a ques- 
tion begging implication in the term "absorption freight." It implies 
that the seller is giving something to the consumer and giving some- 
thing to the public. He is not. He is just wasting something. 

The Chairman. Your answer, then, to the question is this, that 
what the freight absorber loses by shipping to the shaded area is not 
gained by the consumer, but is gained by some other producer who 
ships into the unshaded area because the price to all is the same; is 
that correct? Have I made that clear? 

Professor Fetter. I think it is not even gained by the other pro- 
ducer. It is just lost. It is just wasted. 

Mr. Burr. Senator, may I 

The Chairman (interposing). Of course, the actual figure is not 
gained. I am talking, of course, in by and large. I merely mean that 
one offsets the other. The loss which the shipjDer from A into the 
shaded area suffers by reason of his absorption is offset by the gain 
which the B shipper in that same area achieves because he charges the 
basing point plus, is that right? 

Professor Fetter. No ; because on that sale the other mill is losing 
the sale. We have assumed that the one mill which is absorbing the 



CONCENTRATION OF ECONOMIC POWER 1945 

freight is the one that has made the sale. Consequently it has taken 
away a profitable sale from the other mill. 

The Chairman. That is right. 

Professor Fetter. It has taken it away ; it has involved a loss to the 
other mill of its most profitable business,- and instead of that we have 
this mill selling over and realizing less, and there is a, mutuality in 
that when we get the other diagram there which indicates that they 
are both acting on the same principle. 

So they are both proceeding to waste and they are following the un- 
economic policy of trading low-profit territory for high-profit terri- 
tory. Now, that is contrary to the most elementary principles of 
merchandising. Good merchandising consists in buying in the cheap- 
est and selling in the dearest market, or area, dnd in this case we find 
them selling in the cheaper market; the seller selling in the cheaper 
markets arid allowing the other seller to come in and take away his 
most profitable business. It is a topsy-turvy, irrational process, and 
they would not follow it if they had found any other way that could 
escape the antitrust laws successfully, as this has up to date. 

Mr. Ballinger. Senator, when we look at it another way, phantom 
freight is another dividend the system pays ; if you put a basing point 
at every point of production in the United Statess the phantom freight 
would largely disappear except where shipment was made by truck, 
and you charge the all-rail freight, but even if you had that system 
you would still have the deadening burden upon the consumer of a 
fixed price system which, as I was pointing out here a minute ago, 
wherever you get a fixed, price system the assumption is that that is 
above the competitive level and we have numerous examples to show 
that any fixed price system is generally above the competitive level 
because there have been breaks in this system in the steel industry 
and instantly the price goes down, when some vigorous guy gets going 
and tries to smash it up a little bit. In numerous other industries we 
have price fixing ; some fellow is off the reservation and, plunk, down 
go the prices. 

The Chairman. We are not talking of the same thing. I was 
thinking of A and B producer as both being within the system ; were 
you? 

Professor Fetter. Yes ; they are both, following it. 

The Chairman. They are both following the basing-point system. 
Well, then do you wish me to understand that you contend that pro- 
ducer B within the system using the basing-point plan is suffering 
a loss, a great detriment because as a result of that system which he 
permits, producer A is able to sell in his territory ? 

Professor Fetter. It is necessary to distinguish between the partic- 
ular transportation and the whole system. The whole system evi- 
dently pays the industry.' They are glad to maintain it. 

The Chairman. Yes ; because producer B can do the same thing in 

Eroducer A's territory, so that is it not therefore the fact, which I 
ave been trying very imperfectly to say, that as between these two 
producers within the system, each selling in the other's territory, the 
losses which they sustain whenever they pass beyond the median line 
are balanced one against the other, assuming that. they have the same 
volume ? 



1946 CONCENTRATION OF ECONOMIC POWER 

Professor Fetter. No; they are balanced by the higher base price, 
if possible, as a result. 

Mr. Burr. Base price is put so high, Senator — excuse me just a 
oecond — the base price is put so high as to permit every producer to 
find business attractive in all parts of the country, pretty much. 

The Chairman. That is another phase. We have not been discuss- 
ing that. 

Mr. BnRR. When the Senator used the word "loss" in connection 
■with the absorption of more freight than is charged, with regard to 
any particular piece of business, this seemed to me a little unfor- 
tunately lost sight of the fact that, in accordance with the testimony 
that I read you yesterday, from the Wheeler anti-basing-point com- 
mittee hearings, the system contemplates the shipment of the goods 
by all of the producers over hundreds and even thousands of miles 
and past other producers. 

The Chairman. That is another question. This afternoon we were 
not discussing the elements which went into the making of the price 
at the basing point; this discussion was purely one of freight, so that 
I was not bringing that into consideration at all. 

Mr. Burr. Well, the use of the word "loss," it seemed to me, was a 
little bit unfortunate there. 

The Chairman. I borrowed that from Professor Fetter, because in 
response to a question asked by Mr. Ferguson he referred to it as a 
loss. 

Mr. Burr. This business of absorbing more freight than thev 
charge does not 'mean a loss, because the base price is put up so high 
that that business is still attractive, although they get less than their 
base price in their net return. 

Mr. Frank. There may be a loss in the economic sense; that is to 
say, there may be unnecessary shipments, which means an economid 
loss to the community. 

Mr. Burr. I thought the context meant a loss on that shipment, and 
there is not any loss if the base price is put suflficiently high that that 
business is attractive, and if it were not attractive they would decline 
to bid for that particular job, so it must be attractive and there must 
be generally a gain, even though they are absorbing more than they 
charge in the way of freight factor. 

The Chairman. May I interrupt? 

Mr. Burr. Excuse me, I am interrupting. 

The Chairman. That is all right. The proceeding at this time, 
I am advised, is at the point where several members of the committee, 
Professor Fetter, would like to address a large number of questions 
to you, so many that it is impossible to cover them tonight, and at the 
same time afford the opportunity to present here this afternoon some 
material which it was understood Mr. Burr was to offer to the com- 
mittee today, so if you will be good enough to return in the morning 
at 10 o'clock, I will turn you over to the tender mercies of these other 
inquisitors here. 

Professor Fetter. I am at their service for a Roman holiday. 

The Chairman. I rather imagine you will have the holiday. 



CON