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Dr. THORP. I think it is certainly true that durable goods tend to be large unit products.

The CHAIRMAN. And there has been a change. Senator King was speaking about mining in Alaska. Now, when placer mining was no longer profitable it became impossible for the individual to engage in mining which had to be done by a large corporation.

Dr. THORP. The only comment I would like to make on that is that it is not a general rule. Our most concentrated industry here is tobacco products, which is hardly a durable goods. Our next to the bottom is forest products, which comes in the durable-goods classification, but perhaps those are exceptions to the rule.

Senator KING. În your survey, did you find that where there were mergers, a corporation with two, another with two, and they merged, and you stop at five, that a portion of the increased stock was sold for the expansion of the united corporations and to increase their productivity or enter into wider fields which were germane to or a part of the activities of the former two?

Dr. THORP. There are a number of cases where a merger is part of a general expansion program, where part of new capital may definitely go into that expansion program. On the other hand, even where that takes place there is usually some reward for the promoters.

PART PLAYED BY THE SHERMAN ACT

Dr. THORP. I should like to introduce one other point, although I think in this rambling way I have covered almost everything important. I should like to advance the suggestion that the Sherman Act or antitrust law is in considerable part responsible for the development of these large enterprises. The reason for that is that through the process of interpretation, we have arrived at a state of law where five enterprises, each of which, let's say, represents 10 percent of an industry, cannot have collective action with regard to prices or markets or allocation of production without running afoul of the antitrust laws. That becomes a combination or conspiracy in restraint of trade. If, however, those five enterprises should merge into a single enterprise, then that single enterprise has no problem of conspiracy or combination; it is only a single enterprise.

Mr. ARNOLD. I don't think that is the position which the antitrust division is taking, and I don't think it is one that they are in a position to take. We have the identical problem in the Aluminum case.1

Mr. OLIPHANT. Do you know of any combinations or mergers dictated solely by the considerations that you enumerate? That would be the best way of putting it.

Mr. ARNOLD. That is a common interpretation, newspaper interpretation of the antitrust law, but without arguing the point, I wish to make the record clear that we made no such distinction, and we will get a specific decision on that, I think, in the Aluminum case.

Dr. THORP. I am merely citing this in terms of business motivation, and I am afraid business isn't always motivated in a perfect understanding of the meaning of the laws.

Mr. ARNOLD. I would question that statement very seriously.

1 U. S. v. Aluminum Co. of America. At time of publication of this volume in litigation District Court, Seventh District of New York.

Mr. FRANK. Isn't it possible, Mr. Arnold, that some lawyers heretofore have given their clients the interpretation of the anti-trust laws to which Mr. Thorp refers, and while they may have been in error, that, nevertheless, would account for the motivation to which he directs attention. I have some reason to believe that there has been such advice given by counsel.

Mr. DAVIS. Isn't it a fact that Congress undertook to prevent these mergers by section 7 of the Clayton Act, enacted in 1914, and that after a lapse of a few years, the corporation attorneys advised clients how to avoid the application of this statute in the merger by acquiring assets instead of capital stock, which is the term designated in the act?

Dr. THORP. That is a very important procedure which has permitted developments which were not intended.

Mr. ARNOLD. Isn't it perfectly true that the lack of the application of the Sherman Act to new situations has certainly contributed in this case rather than the Sherman Act, itself, has. I wouldn't disagree with you that, under the "administration" of the Sherman Act, combinations have actually been encouraged in the past.

Representative SUMNERS. I should like to add, until comparatively recently. [Laughter.]

Dr. THORP. I agree with your amendment, and I wonder if you would agree with mine, that where it is not a predominant part in the industry, it probably would have been recognized by these businessLet us say there are five of them, each of whom represents 5 percent of the industry. If the five of them conspired, that would be contrary to the antitrust law. If their merger did not bring them to a monopoly position in the industry, it might be permissible under the law.

Mr. ARNOLD. Or the same way if five of them got together in the Appalachian Coal case. I question very much if a distinction can be made such as you are now drawing.

The CHAIRMAN. This is a point on which contrary legal opinions might be submitted by different persons. We are just discussing the facts.

Dr. THORP. I think so. It is certainly one on which I would hesitate to get into argument.

Mr. ŎLIPHANT. Mr. Thorp has been good enough to discuss the fundamental issue. I would draw Mr. Thorp's attention to a statement which I think might be misinterpreted. I don't think you would say, when you instance the example of automobiles, the necessity for concentration, because in the early production of the automobile they weren't produced as they are produced now.

Dr. THORP. Yes, and in that case I am not talking in terms of concentration in the sense of the size of the present automobile companies. For example, the production of an automobile by its very nature requires a larger scale enterprise than the production of a pair of shoes, but you could perfectly well have an economy which happened to evolve in such a way that shoe factories were larger than automobile factories.

Senator KING. If I may supplement my friend's statement, many of the automobile companies along in the twenties and as far back as

1 Appalachian Coal Inc. v. U. S, 288 U. S. 344.

1912 failed, and the automobiles then cost four or five times as much as what they cost now under this concentration.

Representative SUMNERS. Doctor, is it necessary to have a big organization in order to finance contact between the place where the commodity is produced and the far-flung group of purchasers? Does that enter into the development of these big concerns?

Dr. THORP. The problem of financing is certainly one of the advantages of large enterprises. It is possible for them to use different methods of raising capital, if that is what you mean.

PROBLEM OF MARKETING BY SMALL ENTERPRISES

Representative SUMNERS. A little concern, for instance, manufacturing hosiery in the South, may make a perfectly good article, but the people over the country don't know that that article is produced in that community, and that concern doesn't have the amount of money to let them know that it is produced there. When production was primarily to meet local demand, local demand accommodated itself to local production. But now since the rapidity of transportation and that sort of thing has moved the field of production and consumption far apart, does that cut any figure in the disappearance of the small manufacturing concerns, the inability to bridge the distance between the place where they produce and the people who want to buy? Have you studied that?

Dr. THORP. I don't know that I can give you any factual reply on that at the present time. I think it is true that for certain types of products we have developed national markets, and one can't operate in a national market unless one is of a certain size. Part of one of the characteristics of these large enterprises is the fact that they market over a larger scale.

Representative SUMNERS. Take production of gasoline, for instance. A small gasoline plant may make good gasoline, but the people don't know it is good gasoline. They can't sell it because the people don't know it is good gasoline. The result is that they sell to the larger plants who in turn attach their names to it. Is it possible by standardization to make any improvement in that direction, or haven't you studied that?

Dr. THORP. That is something that requires a great deal of study. I have had some exposure to the problem, particularly in N. R. A., and there are a number of commodities where the establishment of standards and grades might help, where at the present time judgment rests almost entirely on advertising. I don't think we have any elaborate studies which will define the limits or the extent, perhaps I should say, to which that might be helpful.

Senator KING. Judge Sumners, doesn't the question with respect to gasoline

Representative SUMNERS (interposing). I use that merely to

illustrate.

Senator KING. Yes, but with respect to that commodity the question of distribution is one of primary importance, is it not? Take Texas as an illustration. You produce large quantities of oil, but your market is limited if you are limited to the local market so that gasoline is produced and is shipped to New York and shipped all over the United States through pipe lines, through trucks, and railroads.

A small producer, the man who produces or develops the oil field would be unable to find a market other than by selling to some of these companies that have arranged for a wide distribution of the commodity.

Representative SUMNERS. The casual purchaser wouldn't know whether this commodity that is offered for sale is a good thing to put in his car. But I asked the question whether or not, it might be possible to establish standards, and I am using it purely to illustrate, of merit for gasoline so that if a small producer should be able to meet those standard requirements he could have something to indicate to the public that he had produced such an article, and then the public might have confidence to use it. I was not making a statement, I was making an inquiry.

Senator KING. I think the Interior Department has established standards with respect to the quality of the gasoline produced in your State so that the independent producers find as ready a market when they can get to the market as the large producers, because of the fine quality of their product.

CLUSTERS OF LARGE ENTERPRISES

Dr. THORP. In considering these larger corporations, it is evident from this chart that they appear in different degrees in different sections of the economic system.

I would like to give one other demonstration to show that the development is to some extent uneven. This is based upon the pioneering work done by Berle and Means in The Modern Corporation and Private Property. In this book they listed the 200 largest nonfinancial corporations in the country. You may examine the 89 corporations which are manufacturing and mining, which one can fairly say includes the 89 largest manufacturing and mining enterprises in the country. There is a decided tendency for them to appear in groups or in clusters. Twenty out of the eighty-nine are petroleum companies, 11 are iron and steel, 4 automobiles, 4 tires, 4 coal, 3 copper, 3 meat packing, 3 paper, and then there are 12 cases of pairs, companies that one would put together, like General Electric and Westinghouse, for example. The remaining 21 have no rival, you might say, on the list, but most of them can hardly be thought of as being dominant in their industry.

The only ones which I could see in checking over the list which can be thought of as standing clearly alone are the Aluminum Corporation and the United Shoe Machinery Co. There are certain other cases. which stand partially alone, as, for instance the Pullman Co., which has monopoly of all circumstances under which one wishes to sleep on the railroad trains. On the other hand, as far as their manufacturing of railroad equipment is concerned, they are in competition with other enterprises.

Then, of course, there is competition between these various large enterprises, in areas not necessarily their primary activity, for instance General Motors and General Electric both being active in the electric refrigeration field.

The one point I wish to make in citing these cases is merely to illustrate the fact that rather than having single large enterprises

which have emerged here and there, each one standing more or less. by itself on its own island, dominating a particular part of the economic system, there has been a tendency for the large enterprises to emerge in groups or in clusters, so that we have certain industries which are very clearly industries in which there are a small number of large enterprises. I will give some measures of concentration when we get to that. At this moment I merely want to emphasize the fact that throughout the entire system there seem to be certain spots at which the large enterprises have grown, and then of course there are a number of other spots where they haven't appeared at all.

TYPES OF FUNCTIONAL ORGANIZATION

Dr. THORP. The next topic which I wanted to discuss, and I think perhaps I had better cut my discussion somewhat at this point, has to do with looking at these business enterprises from the point of view of what they do, a functional classification.

After all, there are a whole series of jobs to be done from the raw material stage to the consumer, and those can be arranged in a number of different sorts of patterns. You can have a situation in which one enterprise works all the way from the raw material through to the consumer, or you can have a situation in which the various steps are done by a whole series of separate enterprises. There are a number of ways of organizing it, and we haven't any elaborate material available at present which will indicate what those patterns are exactly.

We do know the types of organization that there are. The most frequent way in which enterprises grow is usually described as horizontal growth, which means doing more and more of the same thing. In other words, you have a given plant of a certain size and you expand by building another plant which will do exactly the same thing. That is a very natural form of expansion, that is the kind of enterprise in which you are expert, and therefore when you expand you tend to follow your own expertness. Furthermore, it means that it may come merely because you are being successful and you have to expand your capacity.

The second type is described as the vertical integration, where rather than expanding,doing more and more of the same sort of thing, you expand forwards or backwards, back into raw materials or onward toward the market, and that kind of structure has developed in certain industries very considerably. You will find, for instance, very often in the metal industries the expansion has been of the vertical sort. On the other hand, in the textile industries, surprisingly enough, there is a relatively small amount of vertical integration. They tend to expand horizontally. And there are rather different cases, even within industries. Tin can manufacturers, for instance, have never expanded back into either raw tin or steel, while wire fence, which is another steel product, is largely produced by integrated manufacturers.

Then there is another type of functional organization which you might call diagonal, cases where an enterprise has a single raw material and then expands by different means of using that raw material, or where it may sell to a particular market and produce a number of varied things which go into that one market.

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