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Form F. R. 131 B O A R D OF OF FEDERAL GOVERNORS THE RESERVE SYSTEM Office Correspondence To Cr Date Subject; Chairman E c c l e s J u l y 16, 1958. Notes on I n d u s t r i a l P o l i c y Lauchlin Currie Mr. Sweezy and I met with some o f the people, who are on the Monopoly Investigation, the other evening, and the attached notes by Mr. Sweezy were inspired by the discussion. J u l y IS, 1958 NOTES ON INDUSTRIAL POLICY I. Objectives: (a) Reasonably f u l l employment for the economy as a whole. (b) Decent wages and working conditions i n each individual industry. (c) Scope for technical and operating improvements. (d) An adequate flow of new c a p i t a l . (e) The lowest prices to consumers consistent with the above objectives. To the extent that c o n f l i c t s are involved i n the pursuit of a l l these objectives at once, compromises must be worked out. This appears, i n f a c t , to be the r e a l core of the problem of formulating a satisfactory i n d u s t r i a l p o l i c y . II• Complexity of i n d u s t r i a l structure: The simple anthesis between competition and monopoly i s of l i t t l e use i n analyzing most industries. They present instead a diversity of mixed forms. For t h i s reason each Industry must be studied as a special problem and measures suited to i t s peculiar circumstances worked out. (Of course, i n some cases broad groupings may appear as the studies are carried out.) The organization and functioning of each industry should be studied with s p e c i f i c reference to each of the objectives l i s t e d above. To what extent i s the industry an unstabilizing factor? T h i s would involve consideration of behavior with respect to sales, inventory and plant expansion, as w e l l as p r i c e . (Particular attention should be given to periods of expansion since sustained expansion must be the primary aim of a l l national policy.) On t h i s point no a p r i o r i conclusions can be drawn simply from an examination of the competitive or monopolistic character of the industry. Competition i n sales pressure i n automobiles l a s t year, for instance, was as unstabilizing a factor as the monopolistic price p o l i c y of the steel industry. Inventories were increased excessively i n industries conforming to a wide variety -2l of competitive and monopolistic patterns. In some cases, as, for instance, i n a comparison of cement with lumber, the less organized industry, i . e . , lumber, was much more of an unstabilizing factor i n the r i s e of 1956-57 than the better organized industry, cement. Likewise of great importance i n judging the merits of a particular type of organization i s the effect i t has on the l i v e s of the workers and the communities dependent upon i t . Marked i n s t a b i l i t y as to location i s , for instance, generally recognized to be an e v i l . Types of organization which accentuate such i n s t a b i l i t y must be judged i n f e r i o r to those which moderate i t . Certain forms of organization under certain circumstances likewise put a premium on the lowering of wages and working conditions on those employed i n an industry. The garment and t e x t i l e industries are familiar examples. Another consideration i s the adequacy of the long-run supply of c a p i t a l which an industry w i l l be able to command. Had the railroad rate wars of the f70s continued i n d e f i n i t e l y , i t i s highly probable that, although shippers and travelers would have enjoyed very cheap transportation for a few years, eventually the r a i l r o a d system of the country would have f a l l e n into a dangerously bad technical condition. The r a i l r o a d case i s by no means an isolated example, moreover: The same type of destructive competition has broken out i n other industries with large fixed plant and might e a s i l y break out again. In these i n dustries some type of restrained competition or, putting i t d i f f e r e n t l y , some definitions of the l i m i t s within which competition can operate i s essential to the long-run health of the industries. As long as private sources of c a p i t a l are to be r e l i e d on, this consideration cannot possibly be neglected. The above considerations frequently point to the necessity or d e s i r a b i l i t y of various types of restraint on competition. They do not at a l l imply, however, that competition should be abandoned e n t i r e l y . Competitive e f f o r t s to improve techniques and to secure customers by passing on the benefit of these improvements i n the form of lower prices and better services are of the greatest importance. The problem, as already noted, i s to define the l i m i t s within which competition should operate and to give i t within those l i m i t s the greatest possible scope and freedom. Ill. Instruments of policy: (a) Prosecution of unfair methods of competition of the type specified i n the Federal Trade Commission and Clayton Acts. (b) Use of the anti-trust laws to i n h i b i t combinations and agreements which tend unreasonably to l i m i t output and raise prices. This does not mean that an attempt should be made -3- l I to break up a l l combinations and a l l agreements as was intended by some of the o r i g i n a l sponsors of anti-trust l e g i s l a t i o n . Such a construction of the anti-trust laws has necessarily broken down i n practice. As was pointed out above, competition where there i s much f i x e d equipment can e a s i l y become ruinous i n a very r e a l sense. Understandings, either e x p l i c i t or i m p l i c i t , on the part of producers to keep competition within the bounds of moderation are consequently inherent i n the structure of modern industry i f i t i s to function successfully. The railroad rate wars, i t should be repeated, are merely the most s t r i k i n g i l l u s t r a t i o n . The same thing can be seen i n the steel industry where the U. S. s t e e l Corporation i t s e l f was the r e s u l t of the threatened outbreak of a competitive war which would have been f u l l y as disastrous as any of the e a r l i e r r a i l r o a d c o n f l i c t s . (c) In many cases Government competition, actual or potential, or the use of the Government's bargaining power derived from i t s large purchases of goods, would be better instruments for securing reasonable prices than the vigorous enforcement of the anti-trust laws. This applies p a r t i c u l a r l y where there are marked advantages of large-scale organization or where the competition resulting from the breakup of e x i s t ing organizations would be of a wasteful or sporadic type. In cigarettes, for instance, the advertising competition of the four big companies i s a very doubtful advantage. In other industries the breakup of existing concerns might lead c h i e f l y to an increase i n excess capacity, combined with a policy of mutual tolerance i n order to escape the dangers of price cutting. (d) Government regulation and Government ownership. Public u t i l i t i e s , railroads, shipping, and to some extent natural resources are already under Government regulation. The railroads have now reached a state where regulation i t s e l f can no longer be effective and Government ownership i s the only possible way of overcoming existing d i f f i c u l t i e s . This may also be true of shipping. Natural resources, l i k e coal, petroleum and perhaps copper (not now subject to regulation), cannot be l e f t to the haphazard workings of competition. Regulation i s here to stay and i t i s a question of how regulation can be made most e f f e c t i v e . Where, as i n the case of the railroads, i t proves no longer feasible, Government ownership must be introduced. (e) Cooperation under Government supervision. In an i n dustry l i k e t e x t i l e s , more competition c l e a r l y i s no remedy for obvious shortcomings. I t appears that e f f o r t s to remove these defects w i l l result rather i n a trend toward increased cooperation on the part of those engaged i n the industry. This cooperation should, of course, be under public supervision and subject to public approval. A wide f i e l d i n which cooperative action might be extremely useful from a broad point of view i s as yet p r a c t i c a l l y unexplored. This comprises the whole range of problems i n connection with the unstabilizing effect of present competitive practices i n a variety of industries. I t i s p a r t i c u l a r l y serious at the present time with the economy suffering from a long period of depression, which has resulted i n i t s weakening at many v i t a l points. Building furnishes some of the most s t r i k ing examples. I t i s very doubtful at the present time i f the building industry could handle anything l i k e a prosperity volume of a c t i v i t y even i f such a volume were forthcoming. There seems to have been a permanent shrinkage i n the regular supply and perhaps also i n the capacity of the industry i t s e l f , which i s going to be d i f f i c u l t to r e p a i r . An attempt to enforce s t r i c t e r rules of competition w i l l do l i t t l e to remedy this s i t uation. As the volume of building increases i t would seem that a considerable measure of conscious planning with Government aid and supervision w i l l be necessary.
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