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MEMORANDUM OF SUGGESTIONS: INVESTIGATION OF BUSINESS ORGANIZATION AND PRACTICES* CONFIDENTIAL - NOT FOR PUBLICATION. Two members of the Temporary National Economic Committee requested a memorandum embodying suggestions f o r possible l i n e s of i n v e s t i g a t i o n . memorandum embodies certain phases. The attached I t does not purport to be complete. A. A. Berle, Jr., July 12, 1938. MEMORANDUM4 Introduction. Investigation of Business Organization and Practices* 1. General Objectives. The investigation of business organization and practices (frequently c a l l e d investigation of monopolies) should be e s s e n t i a l l y a search to f i n d an organization of business that a c t u a l l y works. 1. Economic organization may be roughly tested by the following: (a) Does i t provide an adequate supply of goods as tested by the normal market? As tested by the apparent need? (b) Does i t provide a maximum number of people with an opportunity to make a l i v i n g under t h i s process a l i f e under this process - conceived as cond i t i o n s under which people can l i v e , maintain f a m i l i e s , expect to continue i n the economic systom and end t h i s side of the r e l i e f l i n e or the poor house. (c) Does i t accomplish t h i s process with due regard f o r the l i b e r t y and self-development of the individual? One r e s u l t ought to be something i n the nature of a t r i p l e income statement for the i n d u s t r i a l system; the income statement being: (1) A statement of production - set against (a) d i s t r i b u t i o n (b) need. (2) A statement of employment and wa.ges, set against the number of people who may reasonably be e n t i t l e d to expect to support themselves i n the industry. (3) A commercial statement of p r o f i t and l o s s . Such an approach w i l l at l e a s t indicate the major successes or, more often, the f a i l u r e s r e s u l t i n g from the e x i s t i n g i n d u s t r i a l system. At l e a s t , i t w i l l end c e r t a i n i l l u s i o n s which now confuse national thinking. We know i n advance that the present p r o d u c t i v i t y of industry, which i s so h i g h l y regarded and so often praised, i s not, i n f a c t , s u f f i c i e n t to meet the aggregate of "legitimate claims11 made against i t by labor, by consumers, possibly also by investors, i n many instances. But t h i s f a c t i s r a r e l y appreciated. 2. Some 2. Some Unwarranted Assumptions. A l l previous investigations of this kind have commonly commenced with a set of preconceptions. There i s reason to believe that the present investigation may be i n danger of doing the same thing. It i s appropriate to note a few of them. (a) Small Business Is Not Necessarily Competitive. There i s a tendency to i d e a l i z e the early nineteenth century and to assume that small business and the prices i t charged were the r e s u l t of competition. As f a r as I am able to see, there i s l i t t l e , i f any, foundation f o r t h i s . The v i l l a g e grocery store, the v i l l a g e blacksmith, the v i l l a g e g r i s t m i l l , were a l l monopolies. U n t i l the advent of the automobile, they charged conventional p r i c e s or administered prices which were not e l a s t i c . The people of the v i l l a g e could not go many miles to the next town. In a large measure t h i s i s s t i l l true In small towns. Such competition as there has been, curiously enough, came from large scale enterprise; mail order houses, and l a t e r the chain stores. The theory that p r i c e s were adjusted by competition under the o l d small scale production in small towns, as f a r as I can see, simply never was generally true, despite some nostalgic reminiscences which are indulged i n today. (t>) Small Business Is By No Means Necessarily Humane. There was a c t u a l l y competition on a wide scale i n large centers between small business. But there i s no point In i d e a l i z i n g t h i s though, to some extent, i t produced desirable r e s u l t s from the point of view of p r i c e and d i s t r i b u t i o n . The type of competition In small business i s more nearly the New York "sweat shop" In the garment trade, and the elimination of the "sweat shop", as such, while i t considerably improved the l o t of the workers, has not produced units which stand out as monuments to a desirable s o c i a l system. Actually, high speed competition by small units Is as l i k e l y as not to produce, through sheer economic pressure, conditions that are undesirable, i f not cruel; undesirable because there i s constant attempt to meet the competition by depreciating the q u a l i t y , as w e l l as the p r i c e ; cruel because labor, or the shop masters (who are, to a l l Intents and purposes a section of the laboring class) are either exploited or forced to exploit themselves. I am by no means clear that the existence of a large number of half-starved contracting garment shop owners (usually laborers who t r y to go I t independently) may not be only s l i g h t l y less a n t i - s o c i a l than the o l d sweat shops. I f the f i r s t was an open scandal, the second i s c e r t a i n l y not pretty to look at. Where there Is no competition, the small scale unit may or may not be a creditable piece of s o c i a l machinery,, depending e n t i r e l y on the character of the men who run i t . Actually, Actually, the v i l l a g e monopolist) the e x p l o i t i n g grocery store owner, who was also the money-lender, i s a p e r f e c t l y f a m i l i a r type. He must be set as a l i a b i l i t y alongside of similar proprietors, who are assets to the community, i n that they handle h i s store, t h o i r cash and t h e i r credit r e l a t i o n s so as to try to develop the town and make a l i v i n g easier f o r everyone. The p r i n c i p a l advantage of small business lay in the f a c t that p u b l i c opinion, s o c i a l pressure and the l i k e , could be brought to bear on the small owner to tiie general advantage of the community. It cannot be brought to bear on the absentee owner, the chain store proprietor, the m i l l owner, who i s as dominant a f a c t o r i n the community, et cetera. (c) E f f i c i e n t y of Size, There are two d i s t i n c t preconceptions which cancel each other. One of them i s that large scale enterprise i s more e f f i c i e n t ; the second i s that i t i s , by hypothesis, less e f f i c i e n t as i t grows. I see no reason f o r indulging either preconception. The only s o l i d factor about i t is*"" that pointed out by Mr. Brandeis on many occasions, namely, that a large scale enterprise w i l l frequently and easily outrun the moral and mental stature of the man or men who d i r e c t i t . Aside from that point, the f a l l a c y l i e s i n the undefined use of the word "efficiency 1 1 . An enterprise largo enough to mesh with the f i n a n c i a l machinery, i n cluding the Stock Exchange and commercial banks, i s c e r t a i n l y more e f f i c i e n t , so f a r as obtaining c a p i t a l goes, than a small scale enterprise. This i s true even i f i t is less effective technically. It may be i n a better p o s i t i o n to meet legitimate claims of labor, (most labor union people seem to think so) though I am, by no means clear that t h i s i s generally true. As to straight technical or mechanical effectiveness, there i s presumably an optimum size. No one knows i n respect to any industry what t h i s optimum size i s . Further, the optimum s i z e w i l l change overnight with the development of a now method or process or set of machinery. Tho claimed effectiveness of a unit i n finance or production may be completely neutralized, despite i t s a b i l i t y to produce, i f i t i s unable to b r i n g i t s product i o n towards a known demand. The d i f f i c u l t y with t h i s l i n e of preconception i s that a standard of approach has yet to be set. It is f a m i l i a r l y i n s i s t e d that the old-fashioned farm was an i n e f f i c i e n t u n i t . Yet i f , besides the assumed cost of production, there were taken into account the continuity of employment, the a b i l i t y to use energies of adolescents and of o l d people, the a b i l i t y to take care of sickness and give some scope for i n d i v i d u a l creation and the l i k e , i t might prove that, i f the same f a c t o r s were applied to a a large scale plant, the old-fashioned farm was one of the most e f f e c t i v e units known- Put d i f f e r e n t l y , a highly e f f i c i e n t plant, according to modern ideas may merely mean a plant which has succeeded i n unloading the maximum poss i b l e amount of obligations on the community, to be handled socially. Perhaps i t has passed on some of the advantages of t h i s escape from o b l i g a t i o n to the consumer i n the form of p r i c e ; leaving the state to c o l l e c t the rest i n the form of taxes. (d) E f f i c i e n c y i n Meeting Need. The major argument i n favor of large scale industry has been that i t did r a i s e the standard of l i v i n g , which, reduced to understandable terms, meant that i t stimulated want f o r many goods and services, produced a great many goods and supplies and got those goods and supplies, on the whole, very widely d i s t r i b u t e d . I see no reason f o r indulging t h i s preconception. A clear d i s t i n c t i o n ought to be made between what people want and what they need. It i s legitimate c r i t i c i s m of such studies as have been made by Stuart Chase that they take as a s t a r t i n g point, not what people want, but what an impartial commentator thinks they ought to want. In New York, i t i s probably true that milk can be l a i d down at d i s t r i b u t i n g stations, l i k e chain stores, for 7 cents a quart, but that, i f i t i s delivered i n b o t t l e s , the cost w i l l be not less than 11 or 12 cents. People ought to want 7 cent milk and be prepared to go around the corner every morning to get it. They a c t u a l l y do want i t put on the doorstep. I t probably i s true that, without advertising, people would not want the number of things they want today. I t does not f o l l o w that the standard of l i v i n g would diminish i f they stopped wanting cigarettes or canned soups or cosmetics or a new car every two years. The debate on t h i s point r e a l l y involves a p h i l o s o p h i c a l assumption, namely, what i s the "good l i f e " . That d i s cussion started, or rather reached a high point, i n the time of Socrates, and no one has resolved i t yet. Nevertheless, because discussions have to start somewhere, the only p r a c t i c a b l e method of handling an i n v e s t i g a t i o n of the i n d u s t r i a l system today i s to assume that people are e n t i t l e d to want what they a c t u a l l y do want; and to define economic e f f i c i e n c y as g i v i n g people what they want. Anything else involves deciding (and ultimately t r y i n g to t e l l people) what they ought to want, which becomes tyranny pure and simple. Summarizing these observations, i t seems to me that: F i r s t , the general scope of the i n v e s t i g a t i o n ought to be a search for an organization of business that a c t u a l l y works; Second, the standard must be whether i t supplies the e x i s t i n g and developing wants of the people as they appear; Third, Third, that t h i s i n v o l v e s t h e p r o v i s i o n o f an a d e q u a t e supply of goods; Fourth, and a d i s t r i b u t i o n system that takes these goods towards known wants to the maximum degree possible; F i f t h , that the system must provide a maximum number of people with means of s a t i s f y i n g those wants through a contribution to the system; Sixth, that the system must provide the people engaged i n the process with a manner of l i f e , which at least tends to s a t i s f y a f a i r proportion of t h e i r wants; Seventh, the system must evolve a method of organizat i o n that does not i n t e r f e r e unduly, actually or potent i a l l y , with the l i b e r t y of tho i n d i v i d u a l ; - i . e . , that i t s controls must release more i n d i v i d u a l i t y than they suppress; Eighth, that there i s no need to assume that these tests w i l l be met by any single system or any single standard of size or set of p r a c t i c e s at any given point. As a f i n a l point, I note that, whenever a s i t u a t i o n appears, i t i s always wise to attack i t with the r e a l i z a tion that there i s a r e a l reason f o r i t . Habits, i n a large country, do not emerge by chance. The reason may not be a good reason or may have ceased to be v a l i d . The habit may be a bad habit, But there i s always a reason, with which we may i n t e l l e c t u a l l y disagree, but which cannot be disregarded as a s o c i a l force. Mere i n t e r ruption of habits and s o c i a l machinery means nothing unless an equivalent or better machinery i s simultaneously provided or suggested. I. The I. The Subsidy of Industry by the government. The immediate problem to be dealt with i s that of the r e l a t i o n s h i p of government to business. As a f i r s t step, there should be ascertained the precise contribution or subsidy which the government now makes to e x i s t i n g business. It seems to me, accordingly, that a major and p o s s i b l y f i r s t subject of investigation ought to be the amount of subsidy which the Federal, and possibly the state governments, d i r e c t l y or i n d i r e c t l y , make to i n d u s t r i a l enterprise. In one aspect t h i s i s r e a l l y a study of how much of the cost of production, including i n that f i g u r e the cost of maintaining the necessary labor and obtaining the necessary market, has been loaded o f f on the community by the enterprise. Without f i g u r e s before me, i t i s , nevertheless, safe to say that the r e s u l t w i l l be l i t t l e short of amazing. Among the forms of subsidy there may be l i s t e d the following: (1) Direct Subsidies. These include d i r e c t grants, such as those made to the merchant marine and to the airway l i n e s . Included i n d i r e c t subsidies must be taken payments made nominally for service, but a c t u a l l y for the purpose of establishing the industry. Mail subsidies are frequent i n t h i s connection. (2) Indirect Subsidies. These represent the r e l i e f of enterprise from charges which otherwise would be paid. I believe that the p e c u l i a r l y low r a i l rates granted to newspapers and to second-class material f a i r l y comes i n this class. Exemption from taxes, franking p r i v i l e g e s , et cetera should be included. (3) Government Orders. Technically government buying should not be c l a s s i f i e d as ,r aid M to business. P r a c t i c a l l y , however, i t frequently works out t h i s way. I t would be i n t e r e s t i n g to know how much of I n d u s t r i a l development depended on buying by the government f o r government purposes. For instance, how much of p r o d u c t i v i t y of a company l i k e Bethlehem Steel i s used by the government for war or navy orders. (4) Special P r i v i l e g e s Granted. In t h i s connection shining examples are, of course, patent and trade-mark p r i v i l e g e s . With t h i s must be bracketed government exclusive l i c e n s e s , for instance, the kind of license the Federal Communications Commission grants to radio companies. Great Great care has to be taken especially with federal or state license investigation. For instance, the Federal Communications Commission has taken the view that a part of i t s business i s to protect an e x i s t i n g communication f a c i l i t y from impairment by a competitive f a c i l i t y as i n the famous case when a radio beam license between New York and Oslo was denied because there already was a cable communication. Yet the Federal Commission nominally i s merely created to keep order i n the a i r . What l e g a l r i g h t i s there f o r the maintenance of cable monopolies by the Federal Communications Commission? The same applies to the denial of licenses to use short wave transmission i n the United States, thereby assuring a continued monopoly to the A. T. and T. (5) The State F i e l d Ought Not to Be Overlooked. The use of c e r t i f i c a t e s of p u b l i c necessity have, i n f a c t , resulted i n the granting of monopoly licenses i n certain kinds of businesses, notably u t i l i t i e s , bus l i n e s , et cetera. (6) T a r i f f s . This point needs no comment. Most industry enjoys t a r i f f protection designed to give i t immunity from a considerable degree of foreign competition. In some cases t h i s goes farther and i s designed not only to cut out d i r e c t competition, but competition from other commodities or goods. In many cases t h i s i s designed to prevent the consumer from buying products they do want so that they w i l l be forced to buy products which they do not want. (7) Government Protection of P r i c e . I t i s not altogether clear whether trends i n t h i s f i e l d have yet gone far enough to make certain tho u t i l i t y of experimental investment. A great experience has been i n e f f e c t i n sugar p r i c e s through the operation of the quota p r i c e s ; but i t i s not clear that the system has been i n e f f c c t long enough to j u s t i f y the time involved. I set i t down here f o r the sake of completeness. In the other f i e l d s , however, data i s complete and worth doing. For instance, p r a c t i c a l l y a l l insurance rates are closely regulated by law and minimum rates are quite frequently fixed. Since the p u b l i c health work of the Government diminishes the mortality and r i s k , the rate i s f i x e d by a minimum. The e f f e c t on the insurance companies i s material. (8) C o l l a t e r a l Subsidies Not Readily Apparent. Here i s a tremendous f i e l d which should be thoroughly opened up. This i s p e c u l i a r l y true i n view of the a t t i t u d e of some people that the Government i s so much overhead which i t has to carry. For instance, the automobile market would cease to exist i f the l o c a l state and federal governments stopped providing roads. Certainly the expansion of roads and road improvement has had to go hand i n hand with the expansion of the automobile industry; when road expansion stops, the automobile industry w i l l run into a saturation point within a very short time. There There are a considerable number of such cases of i n c i d e n t a l subsidies running into extremely large amounts. The construction supply trade, f o r example, i s a direct subsidy by the government housing program. (9) R e l i e f i s a Subsidy to Industry. I f i t be r e a l i z e d that labor i s at least as necessary to production as plants, and that the maintenance of a large body of labor normally ought to be a charge on production i n one form or another, only one conclusion can be drawn. R e l i e f to workers i n time of l a y - o f f i s a subsidy to industry. General Motors, for instance, pays an average annual wage of approximately #1100 a year. When plants are running f u l l t h i s about takes care of the worker. When the plants shut down or lay o f f , men who are unable to save on t h i s wage go onto the r e l i e f r o l l s . I f this wore c l a s s i f i e d as a cost of General Motors, there might be a d i f f e r e n t p i c t u r e of the extent to which General Motors depended on the government for i t s p r o f i t s . I t w i l l come as a shock to the p u b l i c to learn that unemployment r e l i e f i s e s s e n t i a l l y a subsidy; but I see no escape from the underlying economics of I t . (10) Direct Loans, as Through the Reconstruction Finance Corporation, Farm Credit Corporation and the Like. The foregoing i s not Intended as an exhaustive l i s t , but merely as a set of suggestions. The desirable method, I think, would be to take c e r t a i n industries and companies and go r i g h t through the whole l i s t . Reverting to the motor Industry, i t would be discovered that the Industry required huge assistance from the government In the form of patents, licenses, monopoly grants, government orders, i n d i r e c t subsidies through roads, r e l i e f and the l i k e : a l l of which are costs In considerable degree to the motor Industry as at present organized; but pushed o f f onto the government. A s l i g h t l y d i f f e r e n t view of "private i n i t i a t i v e " would probably emerge from such a p i c t u r e . II. Non-government P r i v i l e g e s to Big and Small Business. The aim of t h i s should be to determine the e f f e c t of certain p r i v a t e mechanisms on the development of the i n d u s t r i a l structure. (1) Short Term Credit. There should be an Investigation of the way the commercial banking system works i n extending short term c r e d i t i n each of the Industries Investigated. It would be found that c e r t a i n companies have access to short term c r e d i t , others do not. What determines t h i s ? In part i t Is the r e l a t i o n s h i p of management to the banks. In part I t i s the assets and size of the company. In part I t i s the success of the company. I am prepared to think that there i s probably l e s s discrimination i n terms of size down to a certain point i n the short term c r e d i t f i e l d than i n the long term c r e d i t f i e l d noted hereafter, but c e r t a i n discriminations w i l l r e a d i l y appear. More importantly, i t w i l l appear that the larger the corporation, the l e s s i t r e l i e s on short term c r e d i t machinery, at least d i r e c t l y ; though i t frequently does so i n d i r e c t l y by pushing the burden of carrying inventory onto i t s agents or s e l l i n g o u t l e t s . One by-product of t h i s w i l l be a substantial r e v i s i o n of the c l a s s i c theory that short term c r e d i t i s created against the creation of goods, i . e . , that production of goods involved expansion of deposits* This would be true under small scale industry, when p r a c t i c a l l y every producing u n i t went to the banks to expand production or stock. Today, I am i n c l i n e d to think that short tefrm c r e d i t has, i n large measure, ceased to be an agency of production and has become an agency of distribution. An instance i s one important sub-division, financing of installment buying, by which industry, instead of borrowing money i t s e l f , induces the purchaser to borrow money f o r i t . Another sub-division must be the improvement i n the c r e d i t status by the mere process of becoming large scale industry with access to the stock market. The small concern having tangible assets, i f i t wishes to borrow, must be l i m i t e d more or less to those tangible asse.ts, especially inventory and stock and trade. A large concern, able to create large subsidiaries and to f l o a t the stock of those subsidiaries on the exchange, can borrow against f i x e d or c a p i t a l assets represented by the stock of i t s subsidiaries. Further, the amount of c r e d i t i t can command w i l l be measured, not by asset value, but by the value of s e c u r i t i e s . For instance, the Southern P a c i f i c Railroad can command credit by pledging the stock of the P a c i f i c F r u i t Express. My d i s t i n c t impression i s that i t can borrow a great deal more on the stock of the P a c i f i c F r u i t Express than i t could i f i t endeavored to give i t s i n t e r e s t i n the r e f r i g e r a t o r cars as security. (2) Long Term Credit-Capital. I t i s obvious, though not commonly noted, that i n any given industry the large scale u n i t has a huge p r e f e r e n t i a l p o s i t i o n i n the matter of r a i s i n g c a p i t a l . My b e l i e f i s that t h i s p r e f e r e n t i a l i s the greatest single factor i n encouraging large scale as against small scale industry. S p e c i f i c a l l y i t would be found that there i s almost no machinery by which any concern can enter the c a p i t a l markets on decent terms to obtain c a p i t a l of l e s s than, say, |3,000,000: and that a b i l i t y to obtain that c a p i t a l increases steadily and the cost diminishes as the size of the concern increases. Again i t i s important to notice what happens when a concern graduates from the class of being a "private" or "family" enterprise and becomes a p u b l i c l y financed stock exchange a f f a i r . D i r e c t l y i t s s e c u r i t i e s and p a r t i c u l a r l y i t s stock gain admission to an exchange, there i s a change i n valuation. Physical assets are immobile as a basis f o r c r e d i t , save f o r a l i m i t e d extent on f i r s t mortgage. The valuation placed on these assets i s not very f a r from a conservative physical valuation. But the stock representing those same assets, when l i s t e d on the exchange, w i l l s e l l on an e n t i r e l y d i f f e r e n t basis; the aggregate value of such stock i s not infrequently 6, 8, 10, or 15 or 20 times even the balance sheet asset value. Since a d d i t i o n a l c a p i t a l can be raised by the f l o t a t i o n of a d d i t i o n a l stock at or somewhere near market value> the r e s u l t i s to give to the large concern an a b i l i t y to r a i s e several times the amount of c a p i t a l on the same assets which are available to the i n d i v i d u a l l y owned or family owned or closed concern. To a l e s s extent t h i s i s true of obligations or bonds issued by the corporation. These again are commonly measured, not by the underlying assets, but by the apparent earnings, which, indeed, must be the r e a l source from which the i n t e r e s t and ultimate re-payment of the bonds must be expected. Naturally, therefore, p u b l i c l y financed concerns have a ready avenue to much more c a p i t a l and much cheaper c a p i t a l than any smaller enterprise. A f a c t o r must be noted. By the device of authorized or unissued stock and the existence of a market quotation a p u b l i c l y financed corporation can v i r t u a l l y p r i n t i t s own currency f o r the d i r e c t purchase of other plants. The United States Steel Corporation purchased the Columbia plant on the P a c i f i c Coast i n t h i s way. It Is a f a m i l i a r p r a c t i c e to f i n d the expansion of a corporation accomplished through the d i r e c t exchange of stock through new assets. Through the medium of holding companies, the same machinery can be s t i l l more e f f e c t i v e l y used. (3) Buying P r i v i l e g e s . To a greater or l e s s extent the large u n i t i s fostered by the use I t can make of i t s mass buying power. To some extent t h i s has been c u r t a i l e d by the provisions of the Patman Act, but i t i s probably true that a considerable amount of p r i v i l e g e survives. I t does not, of course, f o l l o w that a lower p r i c e f o r a large or continuous order i s necessarily wicked or even uneconomic. I t may be l i t e r a l l y true that the cost of dealing with a single customer i e l e s s than the cost of dealing with many customers: by consequence, that size and power to buy en masse i s , therefore, more e f f e c t i v e . If so, however, i t i s worth discovering what happens to the supplier under these circumstances. It may well be that so-called " e f f i c i e n c y " i s not a r e a l saving, but consists of shoving the cost item of production from the back of the buyer to the back of the s e l l e r or by him onto the back of labor. I t would be interesting, for instance, to know whether the r e a l p r o f i t s of a chain store corporation came from actual saving of waste or whether they come from the f a c t that, in place of many small shopkeepers, there are now a highly exploited group of so-called "store managers," on the d i s t r i b u t i o n side and a highly exploited group of small suppliers on the production side. (4) The P r i v i l e g e s Granted to Labor Unions. I t i s axiomatic among business men that a small cannot cope with a powerful labor union. A business labor union can d i c t a t e , not only rates of pay—which presumably should be uniform—but the number of employees, which frequently w i l l put a small concern out of business. A large concern can meet labor demands, either because i t can pass the cost on to the buyer, or because i t can improve i t s methods and expand i t s machinery s u f f i c i e n t l y to s a t i s f y progressively demands f o r higher pay and more jobs through increase of output and increase of p r o d u c t i v i t y per man. I t i s a f a m i l i a r l y known fact i n large scale business that, whatever pay scale i s set, the business can, over a period of years, improve i t s methods so that the r a t i o of labor cost to the cost per u n i t of ultimate output remains the same. Small businesses frequently cannot do t h i s . In t h i s connection, some consideration ought to be given towards the p o s s i b i l i t y of uniform labor schedules i n competing industries. Naturally, i f there are d i f f e r e n t i a l wage scales i n competing industries, the industry having the lower wage scale has an advantage. The l a t e Prank Taplin prepared charts at one time showing that d i f f e r e n t i a l wage scale between southern bituminous mines and northern bituminous mines i n e v i t a b l y put the northern mines at a hopeless disadvantage, with the r e s u l t that bituminous coal traveled a thousand miles f a r t h e r to supply Consolidated Gas Company i n New York, although the l o g i c a l suppliers were the bituminous mines i n the Ohio Valley region. Incidentally, i t is probably due to t h i s that the Norfolk and West V i r g i n i a roads were prosperous when most other r a i l r o a d s were unable to make ends meet. It i s possible that i t would be found that labor contracts, which were non-uniform, were as dangerous as r a i l r o a d rebates used to be i n the olden days—that i s , that i t i s as dangerous to allow discrimination to labor unions as to public service agencies. f (5) Rates For Power, et oetera. , .1 This subject ought to be dealt with i n very much the same way as rates f o r labor or f o r large suppliers. It i s very p o s s i b l e that there i s a r e a l saving when power i s supplied i n large quantity to one customer. On the other hand, t h i s may not be true. The point here simply i s to discover whether or not large scale or quasi monopolist development i s due to r e a l effectiveness, or to the f a c t that s t r a t e g i c p o s i t i o n i s increasingly weak as size diminishes. This examination ought to be started without preconception. Save i n the long term c r e d i t f i e l d , the case either way appears to be wholly unproved. Sharp d i s t i n c t i o n has to be made between private discrimination forced by mere mass, and actual discrimination a r i s i n g out of lower cost of large scale transaction. In the l a t t e r cases, the genesis of lower cost ought to be looked at so that i t can be discovered whether or not such lower cost i s not merely the f o r c i n g of cost back on to the laborer or community or a f o r c i n g of i t on to the consumer. III. III * The E f f e c t s of Large or Small Business on I n i t i a t i v e and Product. I t i s frequently s a i d that government interference s t i f l e s i n i t i a t i v e , that l a i s s e z f a i r e (which presumably would include the allowing of business to set up any norm of s i z e i t chose) tends to decrease i n i t i a t i v e * We have no accurate information on i t * 1. Technical Improvements* For instance, the development of new inventions* At present a very large number of inventions are made i n research laboratories of large corporations. We have no knowledge as to how many of them are used; and, of course, no guide at a l l as to what would happen were these inventions open to e x p l o i t a t i o n by any group other than the corporation developing them. I t would be i n t e r e s t i n g , accordingly, to have some f a c t u a l knowledge as to whether the net result of research laboratories i s not to s t i f l e invent i o n s , once they are made, quite as much as to cause actual invention* 3. The Development of Mew Uses and Fields* I t already appears from the experience of the Tennessee Valley Authority that a very large untapped use f o r power could be developed by d i f f e r e n t forms of organization* S p e c i f i c a l l y , they organized cooperative associations to take care of the l o c a l marketing of e l e c t r i c current; and the Tennessee V a l l e y Authority s e l l s only to m u n i c i p a l i t i e s or to such cooperative associations* Commercial enterprises are commonly obliged, not only not to do t h i s , but to d i s courage t h i s because they have to protect t h e i r other marketing o u t l e t s , such as marketing by middlemen and the like* A single unit producer, who d i d not f e e l responsible f o r the whole system, conceivably might get farther than the large scale enterprise* 3. The necessity of Protecting Capital Investment* One reason why i n d i v i d u a l i n i t i a t i v e i s almost always r e s i s t e d i n any business system l i e s i n the fact that i t can destroy the e x i s t i n g investment of c a p i t a l — a new method, a new machine upsets a l l of the interests* Labor w i l l commonly r e s i s t the process almost as much a3 c a p i t a l or the employers, though not always. The C*I*0* did not r e s i s t the introduction of the r o l l i n g machine i n the s t e e l d i s t r i c t , though i n e v i t a b l y the e f f e c t must be to throw out of work a great many s t e e l employees, who w i l l not be replaced through employment i n the manufacture of r o l l i n g m i l l machinery* Certainly the sugar r e f i n e r s have c o n s i s t e n t l y r e s i s t e d the l o g i c a l development i n the sugar trade, which i s the r e f i n i n g at the sugar m i l l i n small units instead of transporting raw sugar to the United States for r e f i n i n g here* 4* Geographic and Natural Advantage Effects* A large business can develop "blankets" (the famous one i s the Pittsburgh-plus system) whereby a manufacturer in market w i t h a nearer by manufacturer. I t has never been ascertained whether i t makes f o r competition or monopoly. Conceivably every p r i c e "blanket" which an industry dominated by large u n i t s can l a y down i s to increase, rather than to decrease competition, since the a l t e r n a t i v e would be the erection of l o c a l p l a n t s . Here the choice seems to be what kind of a system i s r e a l l y wanted. A monopoly i s no l e s s monopolistic because i t i s l o c a l . In f a c t , a l o c a l monopoly i s l i k e l y to be more cut-throat from an economic point of view than a n a t i o n a l monopoly though i t does not have the same p o l i t i c a l threat. The problem i s whether a few large scale competing u n i t s are s o c i a l l y more desirable than a r e l a t i v e l y large number of small ocale monopolies dominating the l i v e s of that p a r t i c u l a r d i s t r i c t . Much of the thinking today tends towards the f e e l i n g that l o c a l monopolies would be preferable; but a close study of the l i f e o f , say, West V i r g i n i a , compared to the l i f e o f , say, D e t r o i t , Toledo and F l i n t , might lead to a r e v i s i o n of the theory. IV. National Concentration of Power. I presume some attention w i l l be given to the problem of the concentration of power. This ought not to be confused w i t h concentration qf property or ownership. These are two d i f f e r e n t problems. I have not been able to get up any i n t e l l e c t u a l respect f o r books l i k e Lundberg f s w Sixty Families" (leaving aside the f a c t that i t was extremely i n accurate) because property i s one thing and power i s another. Concentration of power i n New York or Boston has nothing whatever to do with the private fortunes of i n d i v i d u a l s . The Van Sweringens were no l e s s powerful at the end of t h e i r l i v e s , when they were bankrupt, than they were i n midstream, when they had between them a fortune worth on paper two or three hundred m i l l i o n . A study of concentration of property i n t e r e s t s and of income would be i n t e r e s t i n g , but probably would prove nothing except the existence of a property owning c l a s s . By the time i t was discovered that one hundred thousand i n d i v i d u a l s owned a considerable percentage of the national income, i t would also be discovered that most of these i n dividuals had very l i t t l e to say about what a c t u a l l y was being done. There may be s t r i c t l y s o c i a l reasons f o r having no i n d i v i d u a l s w i t h large incomes, though I rather doubt t h i s ; but such reasons have l i t t l e to do with i n d u s t r i a l organization. Powerful i n d i v i d u a l s i n industry may have large incomes; or they may not. There i s no p a r t i c u l a r connection between the two f a c t s . The methods of control are w e l l known. The most obviouc of them are l i s t e d here purely f o r convenience. Ownership J o i n t ownership w i t h others Ownership of voting stock Ownership of c o n t r o l l i n g v o t i n Ownership of a special class o weighed as to vote Pyramided holding corporations f minority stock over Interlocking I n t e r l o c k i n g directorates Interlocking marketing agreements Unity of f i n a n c i a l group control Control through short term c r e d i t Control through patent l i c e n s e s and p r i c e r e s t r i c t i o n s Control through being a p r i n c i p a l customer Control through monopoly of a necessary raw material, e.g. rayon, Et cetera. No accurate d e f i n i t i o n of control has ever been made. I t i s impossible to describe the process., In a good many cases the r e s u l t s would be f a n t a s t i c i n the extreme. I have a good working knowledge of how the f i r m of J • P# Morgan and Company "controls" the Guaranty Trust Company. They have no l e g a l control of any kind. There i s nothing to prevent the Board of Directors from doing anything i t pleases. Yet at various i n t e r v a l s i n the l i f e of the Guaranty Trust Company i t has been i n d i f f i c u l t i e s and on each occasion i t has applied to Morgan and Company for assistance and got i t . By consequence, they not unnaturally seek and generally, though not always, f o l l o w the advice of Morgan. There Is nothing necessarily v i c i o u s i n t h i s . It was frequently good advice from the s t r i c t banking point of view. Certainly I t was good ethics i n the 1921 i n c i d e n t . But i t does create the problem of power. There i s no way of changing that r e l a t i o n s h i p unless and u n t i l some system of c a p i t a l banking i s evolved, whereby the Guaranty Trust Company can look for help i n time of trouble to someone other than the private i n t e r e s t s . I have observed that the concentration of power Is more l i k e l y to come from unity of i n t e r e s t , than from any l e g a l device. This seems almost beyond l e g a l control• You cannot prevent men whose i n t e r e s t s are about the same, and whose minds run along s i m i l a r l i n e s , from doing about the same thing at about the same time. I t seems to me that one important l i n e of study i s that of i n d u s t r i a l geography. The Aluminum Company has preempted c e r t a i n great areas i n the United States through i t s a l l i a n c e s with the power companies. In t h i s connection, l e t me say that i t would be an assistance to the State Department i f more were known about the a l l i a n c e between that company and the Niagara-Hudson and that company and the Canadian power interests than i s known today. We know the r e s u l t well enough. No industry can buy power i n the St. Lawrence area without making terms with that p a r t i c u l a r group of i n t e r e s t s . Very much the same thing i s true i n the rayon industry. Here there i s p r a c t i c a l control, through the control of the supply, over k n i t t i n g and weaving of rayon. That, I understand, i s one of the few country-wide "blankets", sharing d i s t i n c t i o n with the block booking i n the movie industry, and, u n t i l recently, the " f o l l o w the leader" steel p r i c e . There i s even more importance i n knowing why those things happen, than that they happen. I think i t would be found that the r e a l desire to monopolize the market, either d i r e c t l y or through a l l i a n c e s , i s less an anxiety to make huge p r o f i t s than a desire to be sure that the concern w i l l continue to e x i s t . As to r e s u l t s , one might compare the s t e e l industry with the highly competitive t e x t i l e industry and, when the comparison i s f i n i s h e d , ask whether the count r y would he m a t e r i a l l y better o f f i f s t e e l production were to f o l l o w the pattern of the t e x t i l e m i l l s . For i t must be considered that competition i n large scale industry does not produce r e s u l t s as i t does i n small scale industry; that i t does not drive the least e f f i c i e n t producer out of existence. I t drives the least e f f i c i e n t producer into bankruptcy, whereupon someone buys the enterp r i s e f o r a song; he can charge a lower p r i c e because he has no f i x e d charges to pay f o r his c a p i t a l ; he can then bankrupt the next most i n e f f i c i e n t producer; et cetera. Only when the e n t i r e industry has been bankrupt and competit i o n i s reduced to the basis of t h e i r operating p r o f i t s does the condition a r i s e i n which any unit i n the industry goes out of business. The economic law of competition works, no doubt; but the time taken for i t to work i s so long that we have not completed any cycle o f that process yet; though i t i s just beginning to be completed i n the sugar production industry and perhaps i n the t e x t i l e industry. My point i s merely that i t , by no means, follows that some concentration of power may not bo desirable i n c e r t a i n i n d u s t r i e s . I am by no means clear t h a t , i n some s i t u a t i o n s , the c o n t r o l l e d c a r t e l may not l i b e r a t e i n d i v i d u a l s i n the industry a good deal more than uncontrolled competition. V. Evaluation of the Job Done. My hope i s that the i n v e s t i g a t i o n of each industry w i l l wind up w i t h an evaluation of the job done by that industry, rather than, as i n the case of previous a n t i t r u s t i n v e s t i g a t i o n s , an assumption that any p a r t i c u l a r form i s or i s not wicked. As I see i t , the r e a l question i s whether a good job i s being done from a l l points of view. In the introductory note a suggestion was made as to a t r i p l e balance sheet, which would serve as some t e s t . More s p e c i f i c headings as to which one would l i k e to have an estimate are these: (a) The amount of employment Wage scale-hourly and annual Regularity of employment Conditions of employment (b) The output A c t u a l l y marketed Apparently needed (c) The p r i c e P r i c e i s merely a method of How nearly does i t work? distribution (d) The waste i n the process of production and d i s t r i b u t i o n . This l a s t f a c t o r can be roughly measured by the d i r e c t costs (e.g. cost o f the raw material and the direct cost of labor) set against the p r i c e to the consumer. Unless t h i s difference shows up i n terms of net paid out p r o f i t s or accumulated accumulated surplus, i t goes to i n d i v i d u a l s who l i e between the producer and the consumer. These individuals f i n d t h e i r means of making a l i v i n g through just t h i s process. In a sense, waste i s a form of taxation of the consumer for the benefit of a set of people i n between, who have to be taken care of somehow; the elimination of waste means, of necessity, f i n d i n g some useful form of outlet f o r the people displaoed. (e) The p r o f i t or l o s s . From a commercial point of view, the job i s evaluated, at l e a s t p a r t i a l l y , by p r o f i t s or l o s s . The r e s u l t s of any audit of the e n t i r e industry are l i k e l y to be s u r p r i s i n g . I t has been s a i d that the o i l industry, f o r instance, works at a net loss i n any jgiven year, though, of course, some u n i t s make very large p r o f i t s . In t h i s aspect operating p r o f i t s only are important; the d i s t o r t i o n of them by the f i n a n c i a l structure i s a r e l a t i v e l y minor element. The operating p r o f i t s indicate what the f i n a n c i a l structure could be or ought to be. (f) Improvement of the art* Any f a i r evaluation of any i n d u s t r i a l process must include a study of the speed and soundness w i t h which i t has evolved. I f i t be assumed that there i s v i r t u e i n improvement of the process, as such, that degree of improvement i s worth noting. I am not altogether clear that mere s w i f t improvement i s desirable i n i t s e l f . C e r t a i n l y i t i s not unless the r e s u l t s are promptly passed on to the consumer and a l l costs involved i n i t are taken care o f . For instance, the evolut i o n of labor saving machinery may lower the cost of product i o n . I t may also throw a great many people out of work. The cost of r e e s t a b l i s h i n g the people thrown out i s thrown o f f on tho community; except as savings of men involved may be used up. In t h i s sense, as things now stand, much of the cost o f the improvement of any art i s paid f o r , not by the industry, but by other people f i n a n c i a l l y l e a s t able to bear it. The problem i s whether i t i s s o c i a l l y more desirable to have r a p i d l y developing technique i n industry, i r r e s p e c t i v e of 'who i s hurt i n the process, or whether i t i s better to have a regulated technique. Highly competitive development tends towards the f i r s t process, a c a r t e l i z e d form at l e a s t affords the p o s s i b i l i t y of the second. (g) L i f e created. I am unable to think of any audit of an industry without thinking of what happens to the people engaged i n i t . The automobile industry i s highly successful from the point of view of production. But the l i f e history of an automobile worker might t o l l a wholly d i f f e r e n t story. Certginjiy, without some general notion of what the industry ikifok to i t s people, we have no method of appraising whether the industry i s a good thing or a bad t h i n g for the country as a whole-—"good" and "bad" being determined by the general average of the health and happiness of the largest number of people. VI. Claims against industry4 I f the system i n any industry i s to be judged by i t s e f f e c t s , some audit has to be made of the e f f e c t s which apparently are desired. Another way of p u t t i n g t h i s i s that some examination ought to be made of what the industry i s expected to do. There are four main claims which are being advanced: (a) The claim of the consumer f o r the product. This i s a claim f o r a l l goods or supplies which may be needed. This i s not l i m i t e d merely to a l l goods and supplies which can be paid f o r commercially. A low p r i c e n a t u r a l l y increases the a b i l i t y of goods and supplies to t r a v e l towards need; a higher price impedes t h i s . To t h i s extent p r i c e i s important: p r i c e i s the method by which goods move from production toward need. I t i s , so far as I can see, the only reason why price has any importance at a l l . But there may be non-commercial ways of getting goods towards need, e . g . , r e l i e f purchases, surplus commodity d i s t r i b u t i o n , community use, et cetera, which i n greater or l e s s degree cut under the p r i c e system. (b) The claim of l a b o r . For continuous work at an adequate rate of pay, labor organizations are e s t a b l i s h i n g t h e i r claim almost e n t i r e l y i n terms of hourly wage rates and hours of l a b o r . I think t h i s i s probably short-sighted; i t would be more consonant with what they perhaps r e a l l y want i f the claim were advancec i n terms of annual income and permanency of jobs, plus pensions and sick r e l i e f . Nevertheless, i t ought to be p o s s i b l e to get some clear statement as to what the labor organizations r e a l l y are steering f o r . (c) The claim of c a p i t a l f o r a return. This i s h i s t o r i c ; i t involves some idea of the reward or hope which has to be held out to induce investment of c a p i t a l . Since most investment i s at l e a s t p a r t i a l l y risk-bearing, t h i s would be i n t e r e s t plus a premium f o r risk. (d) The claim of management. This claim has never been stated and no one knows what i t i s . Management wants pay, of course, but i t also wants p r e s t i g e , power, et cetera. In a word, i t wants very much what most p o l i t i c i a n s and people i n government want. One of the most i m p o r t a n t t l i i n g s / t ^ t i o n can do i s to serve as a forum i n which these various claims can be stated. I f , industry by industry, there are c e r t a i n sessions set as£de at which each group can l a y out wlmt i t expects the industry under i n v e s t i g a t i o n to do f o r it i t , we s h a l l have brought the discussion measurably forward. This would clear the a i r i n the whole f i e l d of labor; l i k e wise i n the whole investment f i e l d ; and i t i s possible we might even get some more or l e s s r a t i o n a l ideas as to what i s expected of an industry i n dealing w i t h the p u b l i c . Tho "public" would be represented generally by the immediate customers of the industry; at a l l events, I can think of no other way of getting an i n t e l l i g e n t statement of p o s i tion. VII• The Program, I t i s obvious that no memorandum could undertake to l a y out a program i n advance of the data. Certain observations may be worth consideration. (l) Methods of control are meaningless unless an objective i s stated. Senator OfMahoney has worked out an extremely i n t e r e s t i n g b i l l to l i c e n s e corporations. I t has a variety of subs t i t u t e s f o r federal incorporation, desired by many statesmen from President Taft on. This i s a b r i l l i a n t and apposite method of c o n t r o l . But unless the reason for the control and the r e s u l t to be achieved i s accurately a r r i v e d a t , i t means very l i t t l e . The i n d i v i d u a l l i c e n s i n g corporations would be merely an economic d i c t a t o r ; we should merely replace a more or less management control by a more or less responsible p o l i t i c a l control unless very c a r e f u l standards are l a i d down. A f a i r c r i t i c i s m of the technique of the New Deal has been that i t indulged shotgun imposition of regulation without adequate d e f i n i t i o n of standard. The p o s s i b i l i t y of recapture or perversion of an agency l i k e the Securities and Exchange Commission, f o r example, gives pause f o r thought. By consequence, before the problem of ultimate control i s taken up, the purpose and design ought to be d e f i n i t e l y worked out, so that the normal methods of enforcement can cover the great bulk of the area, leaving administrative processes to deal w i t h the doubtful, the experimental, and the cloudy areas. I f the argument i n t h i s memorandum i s accepted, the design of any c o n t r o l undertaken should be to (a) provide more goods, better goods and cheaper goods; (b) to provide more jobs, better paying and steadier jobs; (c) to provide continuous ready access to c a p i t a l financing needed to create and maintain a d d i t i o n a l plant; to provide for the continued development of the a r t s . This diverges from the newspaper approach. Where a high degree of competition w i l l accomplish the r e s u l t , tkat should be the method used. Where a high degree of o n r w l j U a t i o n under suitable control w i l l accomplish the rodttlt, that should be the method. Where quasi-public ownership produces the r e s u l t , use t h a t . he d i f f e r e n t i n d i f f e r e n t f i e l d s . The answers w i l l 3. Control by Competition. L e g i s l a t i n g competition (unless a l l previous experience i s worthless) simply does not work out. The unit which has the greatest number of governmental p r i v i l e g e s (see sec*t i o n one of the memorandum, page 6 ) accompanied by the best access to the c a p i t a l market, and the best access to markets and natural resources, w i l l , of necessity, event u a l l y either monopolize or dominate the f i e l d . I f r e a l l y small scale u n i t s are desired, the r e a l l y e f f e c t i v e procedure would be to take away corporate p r i v i lege of l i m i t e d l i a b i l i t y . Men who are asked to sign t h e i r own names to t h e i r own notes w i l l u s u a l l y be l i m i t e d by the resulting risk. I doubt i f t h i s p o s s i b i l i t y w i l l be seriously considered. During the century i n England (1720-1810), when corporations were v i r t u a l l y forbidden, the system worked u n t i l the end, but from 1800 on the pressure towards large scale enterprise became unbearable; and the "Bubble Act" had to be repealed. F a i l i n g t h i s , i t i s probably more e f f e c t i v e to a s s i s t competition, rather than l e g i s l a t e the large unit out of existence. This involves working out a v a r i e t y of expedients. Capital Credit Banks and a Capital Reserve System. (a) Revised methods of c a p i t a l financing* I t has already been noted that small industry docs not have the sane access to the c a p i t a l market as does large industry. A small step i n the r i g h t d i r e c t i o n was made by the change of the rules of the Comptroller of Currency with reference to bank loans and investments; but t h i s i s too l i m i t e d a step to have general e f f e c t . A r e a l system of c a p i t a l c r e d i t banks i s p l a i n l y indicated; a system which would have to be backed by a c a p i t a l reserve bank (presumably, e, d i v i s i o n of the Federal Reserve Bank) able to create c r e d i t , and to j o i n i n cont r a c t i n g i t when necessary. This c a l l s for a separate study. U n t i l t h i s i s done i t i s mere waste of time to grouse about "Wall Street." The Wall Street banking system i s doing exactly what one would expect i t to do—no l e s s and no more. I f anything real i s to be accomplished along t h i s l i n e , the foundation has to be l a i d f o r a c a p i t a l c r e d i t system that r e a l l y works. (b) Methods of taxation. The country has been through two or three f i g h t s i n connection w i t h corporate taxation, one of them having to do with the undistributed surplus tax and another with i t s modification and attempt to repeal. A courageous i n v e s t i gation of the working of that tax would be worth doing, but ( p o l i t i c s and predispositions aside) i t i s f a i r l y clear how i t w i l l come out. The undistributed surplus tax was put on under the theory that corporations today could be t r u s t s f o r the perpetual accumulation—that i s , could go on accumulating i n come and adding i t to c a p i t a l without l i m i t a t i o n . This i s true. Through compound i n t e r e s t a few corporations could eventually control the whole United States. What was not r e a l i z e d was the fact that a high undist r i b u t e d surplus tax, though i t retarded growth of e x i s t i n g large corporations, gave them a perpetual franchise, not only to stay large, but to be the only large corporations i n existence. No small business could grow up to a point where i t could give i t s larger competitors any r e a l b a t t l e . In consequence, every small business was i n danger f a r more than the large; and knew i t ; which was the r e a l reason f o r the r e v o l t and ultimate modification of the tax. Arithmet i c a l l y , there could bo no other r e s u l t . Failure to d i s t i n g u i s h between investment and holding corporations on the one hand, and operating or producing companies on the other, i n which the owner, though he might t e c h n i c a l l y "own" the income, was devoting i t to b u i l d i n g up a producing u n i t , frequently i n the hope of competing against larger u n i t s , made the tax necessarily unequitable. Further, and s t i l l worse, the tax l e f t i t open to the large u n i t to increase the area of i t s influence through marketing agreements, trade a l l i a n c e s and the l i k e . Thus i t d i d not even prevent the expansion i t was designed to remedy. There was a b l i s s f u l ignorance of the fact that a "small company11 i s not a matter of mathematics. A concern with a $75,000 average i n come might be a large grocery store; but i t would be a p i t i f u l l y weak s t e e l or automobile p l a n t . I f i t were r e a l l y desired to create a set of competit i v e u n i t s , one of the simplest ways of doing so would be to allow an exemption from undistributed surplus taxes—or p o s s i b l y even from competitive income t a x — u n t i l the corporat i o n reached a size equal to, say, 25 percent of i t s largest competitor, provided the income were devoted to b u i l d i n g plant or paying debts incurred f o r that purpose. The reverse process, of making i t impossible f o r any e x i s t i n g or future small concern to f i g h t a winning b a t t l e w i t h the larger concern, whose c a p i t a l structure and access s u b s t a n t i a l l y are already c o n t r o l l e d , obviously destroys more competition than i t can f u r t h e r . (c) Access to t e c h n i c a l improvements. I t i s at l e a s t conceivable that equality of access to a l l technical improvements might be granted on standard terms. Every invention could be made a v a i l a b l e to everyone who desires to use i t , provided the same royalty payment i s made. What was desired through the operation of patent laws was to encourage invention. To some extent, probably, the a b i l i t y of the patentee to grant an exclusive l i c e n s e accomplishes t h i s end; i n theory, at l e a s t , he might s e l l the exclusive l i c e n s e , or secure commercial development of h i s patent more p r o f i t a b l y i f he could grant such an exclusive l i c e n s e . But against t h i s the fact that the exclusive licensee needs fear no competition for a considerable period of time; a l s o , that much, i f not most, invention i s made i n corporate research l a b o r a t o r i e s . (d) Non-competitive fields. There are f i e l d s , of course, i n which competition does not work out. This i s p a r t i c u l a r l y true of transportation; i n part also of power; and, i n my view, i s true of many natural resources, e s p e c i a l l y o i l . Here the r e a l choice i s between regulated monopoly and government ownership. The analysis l a i d down by Professor de V i t t i di Marco i n h i s " P u b l i c Finance" (Marghet t r a n s l a t i o n ) i s , I think, the best in print. B r i e f l y , that analysis suggests that choice between government or quasi-public ownership and private monopoly turns e n t i r e l y on the r e l a t i v e e f f i c i e n c y of the two forms of production i n taking the product to the need. Where the product i s standard and uniform, where the i n e f f i c i e n c i e s of government ownership are not m a t e r i a l l y greater than the i n e f f i c i e n c i e s of monopoly, and where the greater actual use can be developed from public ownership, the public ownership i s preferable. There are other reasons for d e s i r i n g c e r t a i n f i e l d s w i t h i n which government expenditures may r e s u l t i n d i r e c t production of wealth; but they need not be d e t a i l e d here. 3. Control by Regulation. In c e r t a i n f i e l d s i t w i l l eventually become p l a i n that either ( l ) there w i l l be no real competition or (3) comp e t i t i o n cannot produce a balance. I t i s customary i n c e r t a i n c i r c l e s to become v i o l e n t l y excited at mention of regulation, rather than competition. Much of t h i s proceeds from a lack of a b i l i t y to d i s t i n g u i s h between d i f f e r e n t kinds of business, and rests on the assumpt i o n that competition w i l l produce a balance. The sound points of objection seem to be: Regulation i s always inherently dangerous; i t i s often unsound to have government boards making regulations, without assuming r e s p o n s i b i l i t y f o r the r e s u l t s . The decay of the Interstate Commerce Commission i s an admirable i l l u s t r a t i o n . Regulation i s always an attempt to generalize and I have yet to see a regulation, either of my own making or of any one e l s e ' s that f i t t e d the s i t u a t i o n . F i n a l l y , there i s always the c e r t a i n t y that, at some stage i n the h i s t o r y of a regulative body, the regulations w i l l be used f o r purposes which are either corrupt, p o l i t i c a l , or d o c t r i n a i r e . Any of these three may produce v i o l e n t and extremely unhealthy r e s u l t s . A Harry Daugherty running the Securities and Exchange Commission, as at present constituted, or a Whitney running the Federal Reserve Bank, could create a series of i n t e r e s t s which would take u t i l i t y regulations, of maii^— . states have turned out to be a means of s a n c t i f y i n g p r i v i leges, rather than of p r o t e c t i n g the p u b l i c . The "beneficial side of regulation i s t h i s : there are c e r t a i n f i e l d s i n which we are not prepared either f o r monopoly or f o r p u b l i c ownership, yet when planning i s e s s e n t i a l to a secure economy. Here i t may w e l l be that some sort of c a r t e l formation or other organization of the industry i s e s s e n t i a l . The f i e l d s i n which t h i s i s true are l i k e l y to be these: (a) F i e l d s i n which the u n i t of industry i s inherently l a r g e . This i s p a r t i c u l a r l y t r u e , for instance, of the s t e e l industry; c e r t a i n natural resource industries; the power industry. (b) F i e l d s where a planning of output i s inherently necessary. This i s true of motors, of o i l , possibly also of copper. I am not yet clear about t e x t i l e s . For instance the motor industry i n 1937 undertook l a r g e l y to increase i t s output and s a l e s . I t d i d t h i s at the cost of suspending much of i t s a c t i v i t i e s i n 1933 and causing widespread d i s tress i n the Detroit and Ohio area. Had anyone of the companies undertaken u n i l a t e r a l l y to l i m i t i t s output, a comrpeting company might—and probably would—have increased i t s output. Had the four major companies entered an agreement to plan t h e i r output, they would have been l i a b l e to criminal indictment. Yet common sense would i n d i c a t e some planning 03 output i n the motors f i e l d ; just as i t does i n the mining of crude o i l . The market can be estimated; the need i s approximately known; a mere senseless over-stocking and shutting down accomplishes nothing. (c) A t h i r d e s s e n t i a l where the regulative or quasi c a r t e l system might be appropriate i s the dependence of a large number of people on a reasonably continuous, reasonably even flow of the product. Against the obvious i n t e r est of the consumer and the theory (delighted i n by economists) of^an e l a s t i c p r i c e , there must be set a simple f a c t . You cannot gamble w i t h the economic safety of a large d i s t r i c t simply i n the hope that the expansion of inventory w i l l l e a d to a lower p r i c e , which i n turn w i l l l e a d to an expansion. The expansion of industry may l e a d to a lower p r i c e , but t h i s i n turn may lead to a s p i r a l engendering the hope of further price cuts, which w i l l stop a c t i v i t y f o r a p e r i o d of time, during which an entire d i s t r i c t i s out of work and a l l economic processes s u f f e r accordingly. Meanwhile the human s u f f e r i n g occasioned by the stoppage i s extreme. (4) Areas of d i r e c t production. I am pretty clear i n my own mind that, w i t h i n ten years, we s h a l l be forced i n t o a vast expansion of d i r e c t production of one sort or another; and that t h i s i s l i k e l y to be on a more or l e s s regional b a s i s , rather than on a s t r i c t l y i n d u s t r i a l b a s i s . The Tennessee V a l l e y Authority may very w e l l prove ta~~hjfr~the-greats example . i n t h i s regard. The advantages are obvious. Production without i n t e r ruption because of annual f l u c t u a t i o n s i s possible; so i s d i s t r i b u t i o n f i t h o u t intervention of the usual cumbrous, wasteful marketing process. L o c a l government u n i t s , such as m u n i c i p a l i t i e s and towns, may be used to t h e i r f u l l e f f i c i e n c y , cooperative associations g i v i n g f u l l scope f o r l o c a l i n i t i a t i v e may be developed; accessory a c t i v i t i e s of a l l kinds may be created. My f e e l i n g i s that the constructive side of the report w i l l need to develop the areas i n which a l l coivt r o l forms, namely, competition, regulation and d i r e c t production, are used. As stated above, there i s no reason f o r assuming that any of the three i s the sole answer f o r a l l i n d u s t r i e s , for any one industry, or f o r all localities.