not cost $50,000. Fifty thousand dollars is a lot of money when you are trying to start something new. And if the interference case gets out into the courts, you can name any figure you want.

In the oil industry, I am told they have run as high as $2,000,000 in interference suits.

So some way of accelerating the adjudication of the patents, doing away with some of the formalities required, would be of great help.

Mr. BALLINGER. Do you have any other suggestions for protecting the small inventor and his invention from what are sometimes called trumped up infringement suits, or cases where he has a bona fide invention and somebody else just pirates it from him, and he is dragged into the courts?

Mr. FIELD. The small man can rarely afford an interference suit with a big company, because of these costs that I have just mentioned. The only way would be-and this should be investigated most thoroughly by your committee, gentlemen-to have the Government step in-which again gets us into bureaucracy-with some sort of a public defender to look into it. That I hesitate to mention because we already have so many burdens on government that we should not have. But if you are striking at it the other way, by rendering it impossible for a man to give his inventions for just merely a salary, a nominal salary, then you have cut out the source of a great deal of this hemming in work.

So I think that would probably be most profitable.

Mr. BALLINGER. This is the only industrial engineer, Mr. Chairman, that we have brought before this committee, and I wanted to ask him some questions with respect to size of business, because he is an expert on that. This will just take 5 minutes.

Do you think, Mr. Field, that a considerable amount of business and manufacturing and that is your specialized field-is today organized in units which are too large to be efficient?

Mr. FIELD. There is no question about that, sir.

Mr. BALLINGER. Do you think it would be possible to dissolve those larger units, without impairing industrial efficiency?

Mr. FIELD. If done by skilled men, the answer is unequivocally "Yes." I think we have, for example, the case of the divorcement of the Hercules Co., some twenty-odd years ago, from duPont. That is one of the best examples you have; and there are many others. That one comes to mind as you ask me.

In addition to that, when I was in charge of engineering for one of these large chemical companies, we frequently divorced lines of business which did not seem to be down our main alley, and we would go out and sell that business to someone else, or to a new firm. And we did not suffer, and the divorced business did not suffer.

Strange as it may seem, there are some industrialists who find themselves in a position where lines of business are losing money for them, but are profitable for other people, and they sell them. If you want specific examples, I could give them.

Mr. BALLINGER. In your own experience as an industrial engineer, have you not managed some properties which were then absorbed by a larger concern?

Mr. FIELD. Yes, sir.

Mr. BALLINGER. And you found, when you got to the larger concern, that you could not get the same efficiency out of those plants after they were absorbed?

Mr. FIELD. No question about that. And the answer to that is that efficiency is a matter of plant. And when you interfere with the plant efficiency by administrative matters that have nothing to do with the plant itself, but have something to do with the company as a whole, you decrease efficiency.

For example, if you are running a small plant, or a plant of any size, and right there at the plant you want to buy a certain product which your engineers or technical men tell you is the product to use, you go ahead and buy it. But if you are a large company, you have to refer it to headquarters, because it might be that that product is not the product that an allied company makes.

Putting it very crudely, I had a heck of a time at the National Aniline & Chemical Co., getting concrete roads in my plant, because Barrett made Tarvia. That is just an example right off the cuff. And we had to put Tarvia in, after a big fight. But that is neither here nor there. That is just a sample of what you get.

Another thing that gives you great trouble in a large organization is that you cannot tell whose toes you are stepping on. A man who wants to hold his job as chief engineer of a large organization takes a hint that when the appropriation comes up to the board of directors, if it happens to include a type of material or a type of operation which steps upon the toes of one of the directors, it may not go through, so therefore, even though the plant may need it and it may be a good thing for the plant, it is not even presented to the board, as a rule. I have actually had those things happen to me.

Mr. BALLINGER. In your opinion, Mr. Field, is an integrated company more efficient than a nonintegrated company, in manufacturing, or is integration merely a condition which permits the integrated company to exploit the nonintegrated company unfairly?

Mr. FIELD. Well, the answer to that question is unequivocally the latter. You can integrate, of course, vertically and horizontally, as it is called; and in each case the integration has to do with something other than the manufacture of the product and the putting of it out into the field. That is something that is usually financial, although it may not always be such.

Mr. STEVENSON. Thank you, Mr. Field. That was very, very interesting.

We will adjourn until 10 o'clock tomorrow morning.

(Whereupon, at 4: 40 p. m., the committee adjourned, to reconvene at 10 a. m. Tuesday, November 16, 1948.)

MONOPOLISTIC AND UNFAIR TRADE PRACTICES

TUESDAY, NOVEMBER 16, 1948

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE No. 2 OF THE

SELECT COMMITTEE ON SMALL BUSINESS,

Washington, D. C.

The subcommittee met in room 129, Old House Office Building, at 10 a. m., the Honorable William H. Stevenson presiding.

Present: Representatives William H. Stevenson, R. Walter Riehlman, and Wright Patman.

Also present: James W. Foristel, executive director; Willis J. Ballinger, economic counsel; and Paul O. Peters, staff investigator. Mr. STEVENSON. The meeting will come to order.

I think the first witness is Dr. Fetter.

Mr. BALLINGER. Dr. Frank Fetter, will you come forward?

Mr. Chairman, in the course of the hearings held by the committee in various cities recently, a number of witnesses appeared before the committee complaining about the recent decision of the Supreme Court in the Cement case.

The committee is now asking to come before us this morning a number of witnesses who know a good deal about that decision, and who are going to explain what it means to small business in the United States; and the first witness is Dr. Frank A. Fetter, who has had a long and distinguished career as an economist, and great experience with basing-point systems.

STATEMENT OF FRANK ALBERT FETTER, PROFESSOR AT

PRINCETON UNIVERSITY

Dr. FETTER. My name is Frank Albert Fetter. I have been asked to explain, at first, what the basing-point system is. That is not a simple thing, but it is evident that a great many people talking about the subject now do not know what the basing-point system is, and that is rather a prerequisite for any intelligent discussion of the subject.

The basing-point system, as contrasted with the f. o. b.-mill system, is a discriminatory method of pricing as opposed to a uniform method of pricing at the mill or at the point of sale. The almost universal method by which goods were sold in the days of our grandparents was what we now call the f. o. b.-mill plan. Every customer who went to the neighboring mill, grist mill, sawmill, or lumber mill, found the posted price and bought at that price and furnished his own transportation, usually in the farm wagon.

In 1880 the steel industry changed from an f. o. b.-mill method, which still is widely used by smaller industries, to a basing-point

method, which was essentially the German cartel system. The essence of the German cartel system in steel was that buyers all over Germany were quoted an identical delivered cost to their place, figured from a specified basing point, which did away substantially with competition among the mills.

Andrew Carnegie was not blind to the opportunity, and in 1880 he changed the sale of certain kinds of steel from an f. o. b.-mill system to the German cartel system. The German cartel system now has worked out its final destiny. We know where it has gone.

Beginning with steel bars, gradually the system was extended to one steel product after another in the next 20 years; then was extended to cement, which was bound by financial bonds, as you know, closely with the steel industry.

Mr. STEVENSON. A byproduct of the manufacture?

Dr. FETTER. In certain mills, where they use slag. And the largest cement mill in the world is owned by the United States Steel Corp. Mr. STEVENSON. Where do they get the term "basing point”?

Dr. FETTER. Well, from this fact: there were apparently only four considerable producers of steel bars in the United States in 1879. The Carnegie plant, much the biggest, was at Pittsburgh. There were two in New Jersey, and one in eastern Pennsylvania. Each one of those mills had been charging a mill price uniform to all buyers, leaving to the latter the cost of transportation to destination. The rule was suddenly introduced, undoubtedly by agreement, that all four mills should quote the Pittsburgh delivered price. Pittsburgh thus was called the basing point. The mill-base price, which Carnegie could name, plus rail freight from Pittsburgh to destinations anywhere in the United States, was the formula for identical delivered prices quoted by all the mills.

Mr. STEVENSON. Where did they get this term "basing point," to call it the basing-point system?

Dr. FETTER. The prices were all based upon Pittsburgh. That is, the basing-point delivered cost to every destination was the Pittsburgh base price plus freight from that destination. All shipments are imagined to start from that basing point, whether they do or not. It is quite poetic.

Mr. STEVENSON. Pittsburgh was the point?

Dr. FETTER. That was the point. It was then the largest producer of that kind of steel, if not of all kinds.

Mr. BALLINGER. Doctor, that was the single basing-point system? Dr. FETTER. That was the single basing-point system; and, with minor changes later of a differential base at Birmingham and then at Chicago, that continued until 1924.

This method was then gradually extended, before the formation of the United States Steel Corp. in 1901, to the sale of all other kinds of steel products. Pig iron was for a long time an exception, and scrap iron even longer. They even made basing points at locations where there were no mills. It isn't necessary to have a mill at a basing point in order to have the system work. It is just an arbitrary point at which a base price can be named and from which the delivered cost to various destinations can be calculated.

Mr. STEVENSON. On the basing-point price, would it be the same all over the United States, no matter where the basing point is?

Dr. FETTER. No; not the delivered price. The delivered cost to the buyers will vary all over the United States, according to the rail freight from the basing point. But, in a single basing-point system, every mill in the United States, no matter where located, would quote that delivered price to its customers and would adjust the imaginary freight and its own net realized price accordingly.

Mr. STEVENSON. Well, if Birmingham is a basing point, and Pittsburgh is a basing point, and another basing point is in the East, will the basing-point price be the same from all of those three points, or will it be different, depending upon where the basing point is; and then you would have as many different prices for the delivered steel or cement as you have basing points?

Dr. FETTER. I think the answer to your question is that a single. basing-point system would give at every destination identical delivered prices from all mills in the United States; but, if there is more than one basing point for a certain commodity, each can have a different base price which controls the price in a certain region. That is a multiple-basing-point system. But, still, at every destination, all mills in the United States would quote identical delivered prices if they wished to sell there at all.

There may or may not, at the same time, be some mills that are nonbase mills, have no base price at all. At the time of the trial of the cement case, as indicated in the decision of the Supreme Court, there were about equal numbers of base mills and nonbase mills. There were about 80 nonbase mills in the United States. I hope to come to an explanation of the technical difference between a base mill and nonbase mill, and will not take that up at this point.

Mr. PATMAN. There is one point I would like to get cleared up. You mentioned that the freight was charged from this basing point. I thought, in the case of steel, that the seller or the manufacturerproducer paid the freight anywhere in the zone of that basing point. In other words, if the distance happened to be 300 miles, it would cost the purchaser at this 300-mile point away from the basing point the same price as the one within a mile of the mill.

Dr. FETTER. Mr. Congressman, that is a common misunderstanding. Mr. PATMAN. I can see that it is. I thought in the case of steelin the newspaper items that you see, the articles appearing there, they always bring that out, you know, that the man who is away from the mill is placed at a disadvantage, because heretofore he has been getting his material, his raw material, his steel, at the same price as the one near the mill. And you state that is not true.

Dr. FETTER. Why, it is ridiculous, Mr. Congressman. Many of the items that I have read give a completely false understanding of the case, and imply that there is now to be added to the price as you go out, from the neighborhood of the mill, a freight which formerly was not added.

Mr. PATMAN. That is right.

Dr. FETTER. You can put this down as an axiom : that the customers always pay the freight.

Mr. PATMAN. Whether basing point or non-basing point?

Dr. FETTER. The question is whether they shall pay the real freight or some imaginary freight. That is the only difference. And the idea that the price of steel or cement, or of any other article sold on the