Mr. BALLINGER. Mr. Chairman, before calling the first witness, I want to take up a request of Mr. E. M. Welliver, an officer of the American Trucking Association, who desires that an excerpt from a pamphlet entitled "A Decade of Motor Carrier Regulation-What 10 Years Under the Interstate Commerce Commission Has Done to America's Trucking Industry," be inserted in the record. I have read the excerpt, and I think it is pertinent to the committee's inquiry. Mr. STEVENSON. We will be glad to have it put in at this point. Mr. BALLINGER. The excerpt is as follows:

IV. COMMON OWNERSHIP AND INTEGRATION

The first part of this question is of such general nature that it is liable to develop answers which are either unsatisfactory or misleading. It speaks of the “carriers” and apparently would apply to all forms of transportation. But these forms of transportation are different in their characteristics and what might be beneficial to one form would not be to the other and, consequently, not in the public interest.

As just one illustration, the recent report of Division IV of the Interstate Commerce Commission, approving the plan of the reorganization of the Alton Railroad and its acquisition by the Gulf, Mobile & Ohio, points to savings on equipment that should be made. The report observes that studies of the Alton equipment situation would indicate that any reorganization as an independent carrier would entail heavy expenditures for additional equipment. It is indicated that much of this expense can be eliminated or postponed by unification with the G. M. & O. As the latter road is carrying out a program to equip its present lines with Diesel electrical locomotives in all services, it could release its existing steam power for use on the Alton, replacing poorer equipment now in service on that railroad. It was likewise pointed out that a large number of company-service coal cars not requiring Diesel power, and other out-of-date boxcars now in service on the G., M. & O. would be turned over to the Alton for low-grade traffic on that line.

Because of the nature of motor-carrier operations, and because of the short life of motor equipment, there is little or no opportunity for savings of this kind. Nor is it probable that a unification of control of the various forms of transportation would render any greater service to industry and the traveling public. This program, in fact, if accepted by the public and carried into execution, would mean a decided weakening of the force and role of competition between the forms of transportation, if not the elimination of that type competition from our transportation system. It would result in a division of traffic between the instrumentalities and hold competition within narrow boundaries. Who would compete with himself?

The average man has had dinned into him the claim that consolidations and nergers result in lower cost to the public and greater earning for the combined enterprises. Many economists have argued in favor of this point without too much factual information to back their assertions.

It is interesting to note, however, that the contrary was found to be true in a study made under the auspices of the Federal Trade Commission for the Temporary National Economic Committee, Seventy-sixth Congress, third session, pursuant to Public Resolution 113, 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 and distribution of goods and services.

This study was published by the TNEC as a monograph No. 13-Relative Efficiency of Large, Medium-Sized, and Small Businesses. The study covered 15 industries-cement, blast furnaces, steel mills, farm machinery, petroleum production, petroleum refining, milk distribution, butter, canned milk, flour milling, baking, motor vehicles, chemicals, fertilizers, and rayon. The figures derived from these industries and companies within them were compared from almost every known angle. In summarizing this report, the Federal Trade Commission said:

"In the 233 combined tests, large-sized, whether represented by a corporation, a plant, a group of corporations, or a group of plants, showed the lowest costs or the highest rate of return on invested capital in only 25 tests. In these combined 8301949-9

tests, medium size made the best showing in 128 tests and small size in 80 tests Thus, large size was most efficient, as efficiency is here measured, in approximately 11 percent of the total tests, medium size was most efficient in approximately 55 percent of the tests, and small size was most efficient in approximately 34 percent of the tests."

We particularly commend to the committee that portion of the TNEC report, beginning on page 95, wherein is discussed the Fundamental Disabilities in sizes from the Standpoint of Efficiency. Here are a few pertinent excerpts from the report:

Frequently large corporations in American business were not created for the purpose of promoting business efficiency. Generally, the great corporations in American business did not attain their size by growth through the reinvestment of the profits of their efficiency under a system of fair competition where the soundness of every stage of such growth was thoroughly tested by competitive opposition. They attained their size mainly through the processes of financial merger and combination. Such processes make possible immediate and frequently tremendous growth in the size of business, but it is important to determine whether the resulting size of the business was achieved primarily for the purpose of promoting business efficiency. It is well known that there are many motives which have actuated promoters to merge and combine businesses which are not concerned in the least with promoting increased business efficiency. Suppression of competition and the desire for promotional and underwriting profits have often been the chief lure for creating size in business. Some members of industry are only too willing to relinquish the competitive struggle if monopoly profits can be achieved.

They know that if a consolidation is large enough it will be able to establish a price leadership in an industry which small competitors in the industry dare not challenge. Profits through price stabilization seem easy, whereas profits through cost reduction are hard.

For predatory promoters and underwriters, the creation of great size in business has many times afforded a royal road to riches. The bigger the business, the easier it is to magnify its prospects and to sell to the public its securities at inflated values. Promoters and investment bankers may naturally be expected to be more interested in bonuses and commissions than in the promotion of business efficiency.

Further evidence of the real motives behind most consolidations and mergers is their timing. Too many of the large corporations have been organized during the upswing of the business cycle when the stock market could readily absorb new securities issues. If consolidations and mergers could really effect substantial economies in business, it would be expected that mergers and consolidations would certainly occur during hard times, when economies are most needed in business. But, when hard times come along, the merger-and-combination movement practically ceases. In summary, it may be said that if the motives for size attainment in business were motives not connected with promoting business efficiency, one would not expect the resulting large size in business to be accidentally efficient. Moreover, there is considerable evidence to the effect that promoters employing the processes of merger and consolidation have often been very careless about the efficiency of the companies and plants brought into the combination or merger. One of the chief safeguards to the salutary operation of competitive economy is that the elimination of high-cost, inefficient producers be not deferred. In many mergers and combinations the reckless inclusion of high-cost properties has insured their survival through the protecting influence of price maintenance. * * *

Large busniess frequently necessitates absentee management. American business today is often so big as to defy human ability to manage it efficiently. The paralyzing effect of such giant size in business is further aggravated by an apparent reluctance on the part of directors and even presidents of corporations to confine their managerial activities to their own corporations. The leaders in American industry, entrusted by their stockholders with the control of many great companies, are perhaps the last specialized men in the business world. They serve as directors in many companies in addition to the ones they are supposed to direct. Many of them know little or nothing about the varied affairs of the corporations which they are supposed to manage. Most of them are frankly interested in only a small part of their general responsibility as directors and managers of enterprises. They almost exclusively confine their

attention to the financing of their companies, which activity is only one phase of a much broader, more difficult problem of efficiently managing business. The result is that the managers of very large corporations often totally neglect the most fundamental basis of real efficiency in business-the effective supervision of men, machines, and material so as to eliminate waste and achieve lower operating costs.

The TNEC report points out that there have been two important merger movements in the United States. The first period was from 1890 to 1904, and the second from 1919 to 1928. "Through the merger process," according to the report. "many thousands of originally independent establishments disappeared, narrowing in all directions. the field of competition and enlarging the domain of monopoly."

In 1921, the report continues, Prof. A. S. Dewing, then at Harvard University, made a study of the notable mergers that had occurred in the first merger period (1890 to 1904). Commenting on Professor Dewing's study, the report states:

Thirty-five industrial combinations were chosen which met the following six conditions: The combination must (1) have been in existence at least 10 years before 1914; (2) have been formed as a combination of at least five separate and competing plants; (3) have been of national rather than mere sectional or local significance; (4) have published financial reports in which at least some degree of confidence could be placed; (5) have available published or acceptable financial reports covering the separate plants prior to the time the combination was effected; and (6) the group as a whole represented a wide diversity of industries.

Roughly, the promoters of these consolidations believed or professed to believe that the mere act of consolidation would increase the earnings about one-half. In actual results, the earnings of the separate companies before the consolidations were nearly a fith greater (18 perc nt) than the earnings of the consolidated companies for the urst year after consolidation. The promoters expected the earnings to be a half greater than the aggregate of the competing plants; instead, they were about one-fifth less.

Nor were the sustained earnings an improvement, for the earnings before the consolidations were between one-fifth and one-sixth greater than the average for the 10 years following the consolidations. In 23 of the 35 consolidaitons, the earnings in the next 10 years were less than the earnings of the constituent companies before the merger; and, in half of these, less by from one-third to nine-tenths. In the aggregate, the earnings of all 35 consolidations were nearly one-fifth less than those of the separate competing establishments prior to consolidation, and this in spite of the inclusion in the latter period of earnings of large additions to capital and plants of new financing, the amounts of which could not accurately be estimated. Even the United States Steel Corp. earned only about 85 percent as much in its first 10 years (1901-11) as the previous earnings of its constituent companies.

The TNEC report observes that the success or failure of an enterprise is in fact usually determined by one man, and that there is a very definite limit to what one man can do. It is pointed out that a salaried employee, a manager or superintendent, is hardly likely to give such close personal attention to a plant in which he has no large interest as an individual who owns the plant. In this connection, the report recalls that Charles R. Flint, who recorded himself in the American Who's Who as "the father of trusts," testified frankly before the Industrial Commission:

One of the fundamental difficulties of the managment of these corporations lies in the fact that the managers have a smaller percentage of interest in the operations that they are conducting under the plan of an industrial combination than they had when it was an individual property, or when they had a large interest in a small corporation. That is fundamental. There is no way in which that condition can be changed.

tests, medium size made the best showing in 128 tests and small size in 80 tests Thus, large size was most efficient, as efficiency is here measured, in approximately 11 percent of the total tests, medium size was most efficient in approximately 55 percent of the tests, and small size was most efficient in approximately 34 percent of the tests."

We particularly commend to the committee that portion of the TNEC report, beginning on page 95, wherein is discussed the Fundamental Disabilities in sizes from the Standpoint of Efficiency. Here are a few pertinent excerpts from the report:

Frequently large corporations in American business were not created for the purpose of promoting business efficiency. Generally, the great corporations in American business did not attain their size by growth through the reinvestment of the profits of their efficiency under a system of fair competition where the soundness of every stage of such growth was thoroughly tested by competitive opposition. They attained their size mainly through the processes of financial merger and combination. Such processes make possible immediate and frequently tremendous growth in the size of business, but it is important to determine whether the resulting size of the business was achieved primarily for the purpose of promoting business efficiency. It is well known that there are many motives which have actuated promoters to merge and combine businesses which are not concerned in the least with promoting increased business efficiency. Suppression of competition and the desire for promotional and underwriting profits have often been the chief lure for creating size in business. Some members of industry are only too willing to relinquish the competitive struggle if monopoly profits can be achieved.

They know that if a consolidation is large enough it will be able to establish a price leadership in an industry which small competitors in the industry dare not challenge. Profits through price stabilization seem easy, whereas profits through cost reduction are hard.

For predatory promoters and underwriters, the creation of great size in business has many times afforded a royal road to riches. The bigger the business, the easier it is to magnify its prospects and to sell to the public its securities at inflated values. Promoters and investment bankers may naturally be expected to be more interested in bonuses and commissions than in the promotion of business efficiency.

Further evidence of the real motives behind most consolidations and mergers is their timing. Too many of the large corporations have been organized during the upswing of the business cycle when the stock market could readily absorb new securities issues. If consolidations and mergers could really effect substantial economies in business, it would be expected that mergers and consolidations would certainly occur during hard times, when economies are most needed in business. But, when hard times come along, the merger-and-combination movement practically ceases. In summary, it may be said that if the motives for size attainment in business were motives not connected with promoting business efficiency, one would not expect the resulting large size in business to be accidentally efficient. Moreover, there is considerable evidence to the effect that promoters employing the processes of merger and consolidation have often been very careless about the efficiency of the companies and plants brought into the combination or merger. One of the chief safeguards to the salutary operation of competitive economy is that the elimination of high-cost, inefficient producers be not deferred. In many mergers and combinations the reckless inclusion of high-cost properties has insured their survival through the protecting influence of price maintenance. ** *

Large busniess frequently necessitates absentee management. American business today is often so big as to defy human ability to manage it efficiently. The paralyzing effect of such giant size in business is further aggravated by an apparent reluctance on the part of directors and even presidents of corporations to confine their managerial activities to their own corporations. The leaders in American industry, entrusted by their stockholders with the control of many great companies, are perhaps the last specialized men in the business world. They serve as directors in many companies in addition to the ones they are supposed to direct. Many of them know little or nothing about the varied affairs of the corporations which they are supposed to manage. Most of them are frankly interested in only a small part of their general responsibility as directors and managers of enterprises. They almost exclusively confine their

attention to the financing of their companies, which activity is only one phase of a much broader, more difficult problem of efficiently managing business. The result is that the managers of very large corporations often totally neglect the most fundamental basis of real efficiency in business-the effective supervision of men, machines, and material so as to eliminate waste and achieve lower operating costs.

The TNEC report points out that there have been two important merger movements in the United States. The first period was from 1890 to 1904, and the second from 1919 to 1928. "Through the merger process," according to the report. "many thousands of originally independent establishments disappeared, narrowing in all directions the field of competition and enlarging the domain of monopoly."

In 1921, the report continues, Prof. A. S. Dewing, then at Harvard University, made a study of the notable mergers that had occurred in the first merger period (1890 to 1904). Commenting on Professor Dewing's study, the report states:

Thirty-five industrial combinations were chosen which met the following six conditions: The combination must (1) have been in existence at least 10 years before 1914: (2) have been formed as a combination of at least five separate and competing plants; (3) have been of national rather than mere sectional or local significance; (4) have published financial reports in which at least some degree of confidence could be placed; (5) have available published or acceptable financial reports covering the separate plants prior to the time the combination was effected; and (6) the group as a whole represented a wide diversity of industries.

Roughly, the promoters of these consolidations believed or professed to believe that the mere act of consolidation would increase the earnings about one-half. In actual results, the earnings of the separate companies before the consolidations were neari" a fl.th greater 18 perc nt) an de earnings of the consolidated companies for the first year after consolidation. The promoters expected the earnings to be a half greater than the aggregate of the competing plants; instead, they were about one-fifth less.

Nor were the sustained earnings an improvement, for the earnings before the consolidations were between one-fifth and one-sixth greater than the average for the 10 years following the consolidations. In 23 of the 35 consolidaitons, the earnings in the next 10 years were less than the earnings of the constituent companies before the merger; and, in half of these, less by from one-third to nine-tenths. In the aggregate, the earnings of all 35 consolidations were nearly one-fifth less than those of the separate competing establishments prior to consolidation, and this in spite of the inclusion in the latter period of earnings of large additions to capital and plants of new financing, the amounts of which could not accurately be estimated. Even the United States Steel Corp. earned only about 85 percent as much in its first 10 years (1901-11) as the previous earnings of its constituent companies.

The TNEC report observes that the success or failure of an enterprise is in fact usually determined by one man, and that there is a very definite limit to what one man can do. It is pointed out that a salaried employee, a manager or superintendent, is hardly likely to give such close personal attention to a plant in which he has no large interest as an individual who owns the plant. In this connection, the report recalls that Charles R. Flint, who recorded himself in the American Who's Who as "the father of trusts," testified frankly before the Industrial Commission:

One of the fundamental difficulties of the managment of these corporations lies in the fact that the managers have a smaller percentage of interest in the operations that they are conducting under the plan of an industrial combination than they had when it was an individual property, or when they had a large interest in a small corporation. That is fundamental. There is no way in which that condition can be changed.