Page 112

113

114

115

116

117

118

119

120

STATEMENT OF JOHN D. CLARK, MEMBER OF COUNCIL OF
ECONOMIC ADVISERS-Continued

The second development after First World War was the unwillingness to press competition to the point where even the marginal producer was driven out of business. There has been advocacy of "soft competition."

The Federal Trade Commission early fell into practice of devising rules tempering the competitive structure.

Miller-Tydings Act amended Sherman Act to permit price fixing under sanction of State laws. Nearly every State now allows manufacturer to control retail prices.

This should be looked into as it will spread widely. States have also enacted fair-trade-practice acts under protection of Miller-Tydings Act under which prices are set high and one competitor can police the prices of another and maintain suits for damages.

Robinson-Patman Act has amended Clayton Act to strengthen rule against price discrimination.

There is a tenuous line between unfair methods and rugged but fair competitive practices. The decision, again, must be made upon a pragmatic basis. Sometimes, he believes that particular rulings of FTC overstep the line between unfair methods and those necessary to competition. Rules should be clearly expressed in the statute and not lurk in ambiguous phrases.

The burden is on those who wish such acts as Robinson-Patman Act
and Miller-Tydings Act to show that they will not deny people
larger production of goods, lower costs, etc., and an improved standard
of living. End of prepared statement.

Labor should be part of inquiry only insofar as indicated above.
He believes Miller-Tydings Act should be repealed; Robinson-Pat-
man Act clarified, to make sure it did not prohibit aggressive methods
of competition which were not unfair.

Would eliminate the power given to the States by the Miller-Tydings
Act.

Miller-Tydings Act is an open policy to fix prices.

It permits vertical price fixing between manufacturing distributor and retailer. Where there is no fair-trade law prices are lower. Miller-Tydings Act is frequently violated by price cutting, though usually the Miller-Tydings Act markets maintain prices higher than elsewhere. Most contracts have escape clauses for obsolete and outmoded goods.

Report of Council of Economic Advisers states that administered price industries depart from competitive industries in three respects:

1. Expansion of production and plant capacity.

2. Volume of employment.

3. Price levels.

Clark describes operation in industries where production, employ-
ment, etc., are manipulated to avoid depressing prices.
Some argue of the social desirability of the administered price indus-
tries in lending a semblance of stability in business decline.
And during inflation, the administered price industries maintained
lower prices than others. They were unwilling, however, to expand
their business as did the competitive economy. If they had ex-
panded and brought down prices, the entire market level of a few
months ago might have been maintained.

There is a difference between agriculture where support prices are
necessary, and industry.

Mr. Celler asks what he recommends should be done by Congress regarding administered price situations.

Clark prefers to postpone suggestions because:

1. He wants the benefit of this investigation.

2. His proposals are such that they will be startling and wishes the seriousness of the problem recognized before stating them. Mr. Wilson asks about dangers of overexpansion of capacity.

Page 120

121

122

123

124

125

126

127

128

STATEMENT OF JOHN D. CLARK, MEMBER OF COUNCIL OF
ECONOMIC ADVISERS-Continued

Clark talks about recent Socony case where circuit court upheld right of Federal Trade Commission to prevent Standard Oil from selling gas at 12 cents below the price to retailer. Clark was shocked by that decision.

Mr. Denton points out that chain store has greater buying power, can run smaller people out of business, then can raise prices.

Dr. Clark says that small business does have advantages which can be capitalized on, such as personal managership, etc.

Clark does not approve of policies such as NRA designed to prevent competition working itself out.

Will agree that competitors are not bad just because for the moment they are in the driver's seat.

If steel had expanded competitively in 1947-48, prices would have yielded a livable profit.

Unemployment is result of entire economic situation.

An industry that cuts production rather than prices in a soft market is generally governed by administered prices. The textile industry, though apparently widely scattered was found to be an administered price industry in separate segments.

Mr. Celler asks Clark for future discussion of excessive size and technological inefficiency, and of amount of power one firm should have in an industry.

Bigness nearly always results in price leadership.

Price leadership is not a violation of Sherman Act, but that is what the committee should concern itself with. Cannot have price leadership in a dispersed industry without a trade association that evades antitrust laws.

Shoe industry does not have any price leadership nor does ladies' garment industry or furniture industry.

Food industry is fairly free from price leadership. During inflation, the administered price industries kept prices below the competitive level for which they must be given credit.

The example of Henry Ford in an administrative price field Clark feels was peculiar to Ford. It backs up his thesis that expansion of production yielding lower prices is profitable.

Steel productive capacity is not now large enough to meet normal demand in a full employment economy.

Still are 20,000,000 families not able to buy goods because prices are excessive.

Doesn't think overexpansion in 1929 caused the depression.

He favors Government ownership of public waterworks systems, for example.

Also favors public power such as TVA. Public ownership is proper in any kind of business where it is no longer controlled by the forces of competition and public utility regulation does not work well enough. Does not believe any problem of Government going into steel business

now.

He did recommend before a congressional committee that the Government should study what capacity was necessary to supply the needs of the people, to encourage all private means to attain such production, but if it were impossible to achieve through private manufacture, the Government should step in itself.

When people decide they are not getting the goods they need through private enterprise they have the right to require the Government to act for them. A national referendum would be impracticable. He believes that Congress should decide.

If Congress felt that private industry was not producing enough, it should authorize Government to go into any kind of production. Will not draw the governmental function line of distinction.

Page

129

130

131

132

133

134

135

136

137

138

STATEMENT OF MORRIS L. ERNST, ATTORNEY

This is the twelfth time he has testified before a congressional com-
mittee in connection with monopoly and concentration of power.
Quotes Ernest Wier on bigness becoming unmanageable.

Ten years ago for Brandeis he did a study to discover optimum size for
efficiency. Determined that for savings banks, optimum point for
savings banks in New York was $250,000,000. Minimum point of
efficiency was $40,000,000 in New York City, but $15,000,000 for
banks up-State. Bigness generally results from power; not from
ingenuity.
Bigness is creating a race of robots. Also when bigness is too big for
the public, there is a demand that Government take over business,
and then Government gets too big. Does not favor Government
going into business, as will get too big and too powerful.
Bigness does not benefit the economy-witness TNEC reports, FTC
reports, miscellaneous statistics. Twenty-eight companies each
with resources of over $1,000,000,000 own one-half of the total re-
sources of the United States. That creates a threat of statism.
So many studies have been done that they will do no good unless the
point of view of the American public is oriented toward the problem.
Last 10 years have been a seller's market. Now we no longer have
one. There will be an onslaught upon the small-business men.
Bob Lovett made a study of a woman investor who invested savings
in largest corporations over decades and her capital in no single
decade remained intact. Look at all big corporations of last 50 years.
Should have more studies of the optimum size for efficiency. There
are 121 products in the United States with sales of over $10,000,000
where four companies or less have 75 percent of the business.
Folkways in New York determine American culture. In New York
four networks dominate air; five movie companies; three press
associations.

Too much delay in getting antitrust decisions from the courts.
Congress has appropriated meager funds for antitrust department.
In motion-picture case, the picture companies spent million dollars
for legal talent.

He thinks Secretary of Commerce should be a representative of small
business bent on seeing that there be decent and fair competition.
This investigation will only make back pages of papers for, although
vital, there is nothing scandalous.

Ernst will try to see that this committee gets some publicity.
More mergers this year than in last 15 years. One impulse toward
merger is capital gains tax. People sell out in order to pay capital
gains tax instead of income tax.

No

Sliding postage rate is unfair discrimination against small business.
one can get into cigarette business. He suggests a graded tax on
cigarettes.

Of three or four large soap companies dominating the market, three have
steel mills. Nothing new in prohibiting such practice, since railroad
by statute cannot own coal mine, airplane company; bank cannot
be in security business.

Line should be drawn case by case in prohibiting companies from going into sundry industries. Celler points out that makers of alcohol

started to make penicillin.

Ernst's standard of expansion is to prohibit entry into fields where
such expansion has no economic base. Newspapers own forests and
paper mills.
Result: Thousand dailies lost in United States in last
20 years and 2,500 weeklies.
Seven years ago there were 100 areas where only newspaper owned only
radio.

Many people wish to go into FM radio but telephone company discrim-
inates by refusing to rent less than an hour of time.

Telephone people were hostile to letting thousands of sporadic regional networks spring up.

He is for the Robinson-Patman Act.

But Robinson-Patman Act does not cover certain things such as newspaper advertising. Rates discriminate in favor of size.

Page

139

140

141

142

143

145

146

147

148

STATEMENT OF MORRIS L. ERNST, ATTORNEY-Continued

Congress has been subsidizing magazines through lower postal rates. But the small newspaperman is run out of business, partly by monopolizing of newsprint.

Big issues of securities are now generally privately placed with insurance companies.

Mr. Celler points out that Dillon Read placed $550,000,000 of gas
transmission bonds with insurance companies.

One insurance company takes in more money each year than the total
budget of 19 States. The big companies should be broken up into
regions. No competition in the price of insurance.
Does not want to abolish the Miller-Tydings Act.

If abolish Miller-Tydings Act, small retail outlets will evaporate.
Since the Southeastern Underwriters case, Congress may regulate
insurance under the commerce clause.

Ernst wishes a bill directing Secretary of Commerce to act as watchdog
to keep enterprise functioning.

Ernst doesn't think congressional committees by investigation can get
any information of any value to the public. Secretary of Commerce
should have power to be advocate of free enterprise.
Another problem is the placement of orders to the big corporations by
the military. Subcontracts make small business dependent on the
big.

HEARINGS, FRIDAY, JULY 15, 1949

STATEMENT OF FRANCIS P. MATTHEWS, SECRETARY OF NAVY He speaks for all branches of the military. He is confining his discussion principally to procurement.

Recognizes that concentration of power in few business concerns requires greater Government power which may lead to corporate state.

In

Military recognizes that hundreds of thousands of small business concerns scattered throughout the country are source of potential industrial expansion in the event of a national emergency. many cases during the war, small business, which was flexible and did not need involved processes of retooling, supplied the small but necessary percentage of material to meet requirements. Small plants also achieve geographic dispersion essential from military point of view; the opposite of concentration.

Determination of what is small business:

(1) Position of concern in its trade or industry.

(2) Number of employees does not exceed 500.

(3) It is independently owned and operated.

In evaluating bids, it is easy to apply standard based on number of
employees. Criterion of dominance would be more difficult.
About 72 percent of all purchase actions of the military and 29 percent
of the dollar volume go to small business.

Chart showing above statistics inserted in record.

These statistics show that military in peacetime is not causing con-
centration of power. Liaison officials have been appointed to help
small business with its problems. Lists of who does buying, and
where, are available to businessmen. Information on awards and
purchases to be negotiated are made widely available.
Mobilization planning includes studies and plans to assist small busi-
ness in procurement activities in event of emergency. These studies
include Government supervision of contracting and subcontracting
where small business gets a large proportion of Government orders.
The widest participation by business is goal of military. Competition
in response to advertised bids is the basic way of the military doing
business under the statute. Direct negotiation is permitted by law
only in special instances.

Many activities of the military-benefit business as a whole, including
small business. Work is being done to simplify procurement
practice and methods. Military favors competition.

Page 149

152

153

154

155

156

157

158

STATEMENT OF FRANCIS P. MATTHEWS, SECRETARY OF NAVY-Con.

He reads statement of policy on small business approved by the Muni-
tions Board. Policy is to encourage small business and to assist
small business in its dealings with the military departments.
The 28.5 percent of procurement placed with small business does not
include any subcontracts. They are aiming to step up the percentage.
Does not know the geographical distribution of the contracts. In
wartime, perhaps Mr. Ernst's figures are correct but doesn't know.
Information will be supplied for the record.

Statistics are from whole Military Establishment. Most contracts
let by bidding. Law requires bidding except in certain circum-
stances.

He has never encountered the 5-percenters.

In his 5 weeks with the Navy, he hasn't found any trace of them. He sees no reason why businessman cannot deal directly with the appropriate department of the military, both large and small business. In times of emergency, they are relieved of obligation to call for bids when the national welfare demands it.

Mr. Michener calls attention to fact that smaller-business man in time of war gets his contracts through a contractor who often is only a broker.

Witness believes there is merit in the basing-point system. However, in the Middle West, the basing-point system discriminates against industry and causes concentration.

If he personally had to adopt a program, he would establish that set by the Supreme Court.

Sometimes competitive bidding is hardship on small business. Not
allowed to give business to small concern at expense of higher cost
to the Government.

Doesn't know if small business got more contracts under negotiation
during the war than under bids now. It is easier dealing with a
large company than with a small one. Instinctively turn to easiest
placement.
Dividing up orders among many small businesses would require con-
siderable supervision on part of military. Is trying to get lower
echelons to do this.

Admiral Boyle, sitting beside Matthews, says that there is something
in Public Law 413 giving the Secretaries the right to preclude con-
tracts going to any concerns guilty of price fixing or violating the
antitrust laws.

May not be any need for additional legislation. Policy with regard to
Government-owned naval yards is to keep them functioning and
at the same time not impair the welfare of private business.
Doesn't know how many people employed on production in navy yards.
There are 11 or 12 major navy yards, though not all in United States,
engaged in overhauling ships primarily.

In addition, there are ordnance plants which produce munitions also
made by private industry. Private enterprise cannot supply every-
thing the Government needs, and Government must be sure of its
supply.

It is a long-established policy. They could have all ships repaired by private enterprise, but in times of emergency the Government yards are essential. Thinks it would be imprudent to do away with them. Mr. Keating feels that here is a branch of activity which could legitimately be turned over to private enterprise.

Two problems in this discussion: (1) as to the growth of the military budget due to policy considerations; (2) expenditures for production of requisites of Navy itself, which perhaps could be purchased from private enterprise.

If there is a tendency in the Government to manufacture unduly in competition with private enterprise, he would try to reverse the trend. Mr. Celler asks if there has not been too great a growth in post exchanges competing with private enterprise.