or another, the State attempts to exercise some sort of fiscal control, in 99.99 percent of the cases the cities are absolutely free to run their own business because their powers are clearly defined and they do what they are authorized to do. Mr. KEATING. But that is not true in the States of business corporations, is it? Senator. O'MAHONEY. No, because the business corporations under State charter are given the power to do anything they please by these blanket charters. Mr. KEATING. In other words, you feel the remedy would lie in a more definite and detailed statement of powers and privileges? Senator O'MAHONEY. That is right. And then when that is written into the statute you do not have to have any commission or any large agency to enforce it. I think such a law would be self-enforcing because other corporations which found a given corporation engaging in a business in which it had no authority to engage, for example, would immediately go before the courts. That would be settled in the local courts. In other words, we recognize the fact that a corporation has no power except that which is given to it by some government. My principle is that the State governments should not be permitted to define the powers which can be exercised in interstate and foreign commerce, because that is the domain that was set aside in the Constitution for Congress. So if Congress defines the power, the result will be, in my judgment, that the economy itself would stabilize the development, and the courts and the competitors and employees would naturally enforce it. Mr. MICHENER. In short, your bill would write the pattern for all corporations engaged in interstate commerce? Senator O'MAHONEY. That is right. Mr. MICHENER. And you would prohibit any State granting a charter that did not embody your pattern? Senator O'MAHONEY. The bill as drafted is that a corporation to engage in commerce must comply with certain provisions. And it also provides that the charter shall be issued when the certificate of compliance is filed, so that no discretion is left in any bureau of the Government to say whether or not the charter should issue. I believe in economic freedom. We just have to develop the rules of the game. We do not have any rules now, and the result of it is the terrible economic chaos in which we find ourselves. And so, Mr. Chairman, I am convinced that the only successful way to bring about a solution of the problem is for Congress somehow or another to call a conference on corporate law which would define what the policy ought to be. I do not pretend to believe I know how to write it. is the biggest question before business and government. The CHAIRMAN. Thank you very much. The Chair wishes to state that each member will have a copy of Commissioner Ferguson's brochure on decartelization. We will resume our hearings on Wednesday at 10 o'clock when Dr. Clark of the President's Economic Advisory Council will be the witness. (Whereupon, at 12:30 p. m., the committee recessed, to reconvene at 10 a. m. Wednesday, July 13, 1949.) STUDY OF MONOPOLY POWER WEDNESDAY, JULY 13, 1949 HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON THE STUDY OF MONOPOLY Washington, D. C. The special subcommittee met, pursuant to adjournment, at 10 a. m., in room 346, Old House Office Building, Hon. Emanuel Celler (chairman) presiding. Present: Representatives Celler, Bryson, Wilson, Denton, Michener, Keating, and McCulloch. The CHAIRMAN. The committee will come to order. Our first witness scheduled for today is Dr. Clark, member of the Council of Economic Advisers to the President. Dr. Clark has rendered splendid service to our Government as an economist and as one of the President's advisers, and we are very happy to hear you, doctor, on the study of the concentration of economic power. STATEMENT OF JOHN D. CLARK, MEMBER, COUNCIL OF ECONOMIC ADVISERS Mr. CLARK. Mr. Chairman, in the interest of brevity, and also in order that it may be clear that the statements are quite deliberate, I have written out the statement I wish to present. In this statement I shall discuss the character of the problem of maintaining competition in our modern economy, and shall then point out certain specific inquiries into the operation of our antitrust laws which are not too extensive for the limits set by considerations of time and of personnel, but which will explore the major issues of policy with which you are concerned. The antitrust legislation which culminated in the Sherman Act of 1890 was initiated when the Senate, on July 10, 1888, adopted a resolution offered by Senator John Sherman in which the economic philosophy of the proposed statute was set out as successfully as it has ever been stated. Trusts and combinations were to be forbidden, it was said, in order "to preserve freedom of trade and production, the natural competition of increasing production," and "the lowering of prices by such competition.' Note well that the competition we must preserve, according to the resolution, was not some group of promotional devices and efforts. It is what the Senator called "the natural competition of increasing production." The lowering of prices to which he looked forward is not the final objective of social policy. The prime objective is in creasing production, upon which improvement in material well-being of the people depends. The normal consequence of increased production is the lowering of prices, and this in turn makes possible the distribution of the larger volume of goods without which the whole process would have no social advantages. One would go too far in attributing to Senator Sherman any provision of the problem of competition as it exists today, but the principle he announced is the very foundation of antitrust policy, if that policy is valid. Although it was the enlargement of the volume of production and the consequent activity of competitive effort to market additional goods upon which Senator Sherman centered his attention in his original resolution, he recognized the importance of competition in inducing larger production itself. In the ensuing congressional debates the argument was divided between the discussion of outright combinations and agreements which directly limit production and the discussion of unfair methods of competition, especially discrimination in railroad rates and in prices, which threaten weaker competitors and tend to destroy the competition which leads to larger production. In its final form the statute which bears his name deals with both aspects of the problem. The economic principle announced by Senator Sherman should be kept in mind throughout this inquiry because in it is found the economic justification for our system of free, private enterprise. Our claim of superior productivity for our system is based upon the very argument he then outlined. The elements of strength and progress in this system remain dormant if competition does not press the enterpriser into greater effort to reduce his costs, to improve the quality of his goods, to uncover new markets, and to expand his business. Remove competition and technology languishes, production lags, costs rise, and the economic advantages of our system disappear, leaving the imperfections of which its critics make so much. Twenty years after the Sherman resolution, the first President who made a serious effort to enforce the Sherman Act was ready to abandon the policy in most of its important aspects. In three special messages and in his final annual message to the Congress in 1908, Theodore Roosevelt pressed with his customary vehemence of expression his view that we cannot enforce competitive conditions upon big business and cannot rely upon the forces of competition to control the decisions of corporate managers concerning prices and volume of production. That "it is worse than folly to attempt to prohibit all combinations," and that where prohibition is effective it "works almost as much hardship as good," are statements in his annual message of December 1908. He demanded "that instead of an unwise effort to prohibit all combinations there shall be substituted a law which shall expressly permit combinations which are in the interest of the public, but shall at the same time give to some agency of the National Government full power of control and supervision over them." He made it clear that what he had in mind was control similar to that exercised by the Interstate Commerce Commission. This may, indeed, be the only alternative to the policy of the Sherman Act, and it is because I am deeply reluctant to contemplate such a shift of base that I place such great hope in the success of your effort to bring forth proposals for the strengthening of the Sherman Act which will make it unnecessary for the Nation to turn to another policy. Colonel Roosevelt was neither able to persuade the Congress nor could he gain popular approval when he carried his views to the people in his campaign as the candidate of the Progressive Party 4 years later. Mr. Taft and Mr. Wilson joined in supporting the theory of competition and in expressing faith in our ability to strengthen the antitrust laws to the point where they would be effective. In his campaign speeches, published in the book, The New Freedom, Mr. Wilson disclosed the philosophy which controlled his later proposals for the Federal Trade Commission Act and the Clayton Act in these words: That is the difference between a big business and a trust. A trust is an arrangement to get rid of competition, and a big business is a business that has survived competition by conquering in the field of intelligence and economy. A trust does not bring efficiency to the aid of business; it buys efficiency out of business. I am for big business, and I am against the trusts. Any man who can survive by his brains, any man who can put the others out of the business by making the thing cheaper to the consumer at the same time that he is increasing its intrinsic value and quality, I take off my hat to, and I say, "You are the man who can build up the United States, and I wish there were more of you." There will not be more, unless we find a way to illegalize monopoly. You know perfectly well that a trust business staggering under a capitalization many times too big is not a business that can afford to admit competitors into the field; because the minute an economical business, a business with its capital down to hard pan, with every ounce of its capital working, comes into the field against such an overloaded corporation, it will inevitably beat it and undersell it; therefore it is to the interest of these gentlemen that monopoly be maintained. They cannot rule the markets of the world in any way but by monopoly. So it is not surprising to find them helping found a new party with a fine program of benevolence, but also with a tolerant acceptance of monopoly. Nearly 40 years later, we are again struggling with the problem of big business and the question of social policy to preserve competition. The problem has been aggravated to such a degree that many of us who were undisturbed when Theodore Roosevelt first sounded the alarm now frankly accept his view that effective competition is too greatly eliminated when a few large firms control the bulk of the business in any line of production. This phenomenon of our business structure has even grown to the point where we have a phrase to describe it. We talk about administered-price industries, because we wish to emphasize the important economic difference between those industries in which a few large firms are dominant and those lines of business in which many firms are true competitors. This is the difference. Where the business is divided up among many small competitors, each business manager realizes that the market price will not be materially affected by changes in his own volume of production. If he enjoys as much as 5 percent of the market, a change of 20 percent in his output will change the market supply only 1 percent. His normal ambition to grow when conditions are favorable leads him to endeavor to market additional production by aggressive salesmanship, without worrying lest market prices will be affected. On the other hand, if he faces a declining market, he knows that no reduction in output which he makes will help to sustain market prices, and instead of reducing production, which means reducing employment, he fights for the market, cuts prices as deep as he can, and maintains output as long as possible. Where three or four large firms control 70 percent or 80 percent of the market, each manager knows that market price will be materially affected by his decision about the volume of his production, and he knows that each of the others has the same understanding. Each restrains his impulse to grow when business is booming and keeps his expansion within limits which will protect the market price. When prices weaken, each reduces his production and employment rather than his price, confident that each of the others will do likewise. That may be prudent and it may good business, as those now participating in the practice warmly assert, but it is not the practice of a competitive business. Although I have described the policies of managers of administered-price industries in terms of noncollusion, I am not so naive as to believe that in these days of business camaraderie and of trade institutes each manager's confidence that each of the others will follow what is for them the orthodox course is not fortified by adequate communication of ideas about the market situation and what it calls for. But the bold days of the "Gary dinners" of 40 years ago are long past, and the interchange of ideas is now carried on with a finesse which frustrates the prosecutor except in the rare case when some carelessness places a damning memorandum in a file which is investigated. Irrespective of the possibility that ways might be found to discover collusion of this covert character, however, the point is that there need be no collusion. Inherent in the administered-price situation is the failure of the forces of competition to work effectively, and the remedy must be found by attacking the structure of the industry. If that fails, we must consider alternative policies, and foremost among them is that of Theodore Roosevelt. Others who will appear before your committee have the detailed information about the growth of concentration in industry which creates this problem. Permit me to leave it at this point and move on to a discussion of the specific problems I have mentioned. Following the First World War, two features of antitrust policy developed which, together with the increasing concentration of industrial control, require your careful attention. Unlike the growth of the administered price situation, which lies within the structure of American business, each of them represents an important modification of legal policy, and they have now continued long enough to furnish the Congress with ample basis for a thorough reexamination and for a fresh judgment whether they modify the policy of the Sherman Act in a manner which brings desirable economic con sequences. The first is the further withdrawal from the principle of the Sherman Act of a number of business activities, a movement which began in 1919 with the message of the Webb-Pomerene Act, which permits exporters to make agreements in restraint of competition, and which had its most recent display in the Reed-Bulwinkle bill in 1948, which permits railroads with approval of the Interstate Commerce Commission to establish joint rate bureaus through which each has an opportunity to check the enthusiasm of any particular railroad management to reach out for potential business by making a rate which is satisfactory to itself and which it hopes the Commission will approve. |