American fair trade: proprietary capitalism, corporatism, and the 'New Competition,' 1890-1940 9781108548045, 1108548040, 9781139924658, 1139924656

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American Fair Trade

Rather than viewing the history of American capitalism as the unassailable ascent of large-scale corporations and free competition, American Fair Trade argues that trade associations of independent proprietors lobbied and litigated to reshape competition policy to their benefit. At the turn of the twentieth century, this widespread fair trade movement borrowed from progressive law and economics, demonstrating a persistent concern with market fairness – not only fair prices for consumers but also fair competition among businesses. Proponents of fair trade collaborated with regulators to create codes of fair competition and influenced the administrative state’s public-private approach to market regulation. New Deal partnerships in planning borrowed from those efforts to manage competitive markets, yet ultimately discredited the fair trade model by mandating economy-wide trade rules that sharply reduced competition. Laura Phillips Sawyer analyzes how these efforts to reconcile the American tradition of a well-regulated society with the legacy of Gilded Age of laissez-faire capitalism produced the modern American regulatory state.    is an assistant professor at Harvard Business School, where she teaches in the Business, Government, and International Economy Unit. Her work has appeared in the Business History Review, Journal of the Gilded Age and Progressive Era, The Legitimacy of Power, and Capital Gains. She received the  Sonnedecker Prize for Best Article by the American Institute for the History of Pharmacy. Her work has been supported by numerous grants and fellowships.

American Fair Trade Proprietary Capitalism, Corporatism, and the “New Competition,” –

LAURA PHILLIPS SAWYER Harvard Business School

University Printing House, Cambridge  , United Kingdom One Liberty Plaza, th Floor, New York,  , USA  Williamstown Road, Port Melbourne,  , Australia –, rd Floor, Plot , Splendor Forum, Jasola District Centre, New Delhi – , India  Anson Road, #–/, Singapore  Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/ : ./ © Laura Phillips Sawyer  This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published  Printed in the United States of America by Sheridan Books, Inc. A catalogue record for this publication is available from the British Library. Library of Congress Cataloging-in-Publication Data : Sawyer, Laura Phillips, – author. : American fair trade : proprietary capitalism, corporatism, and the new competition, –  / Laura Phillips Sawyer, Harvard Business School. : New York, NY : Cambridge University Press, . | Includes bibliographical references and index. :  |   (Hardback : alk. paper) |   (pbk. : alk. paper) : : Trade regulation–United States–History. | Competition, Unfair–United States–History. | Industrial policy–United States–History. | United States–Commerce–History. | United States–Commercial policy–History. :  .   |  /.–dc LC record available at https://lccn.loc.gov/  ---- Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

For my partner, Logan

Contents

Preface

page ix

Acknowledgments

xi

Introduction: American Competition: Trade Associations, Codes of Fair Competition, and State Building The American Antimonopoly Movement and the Rise of Antitrust Law Fair Competition and the Administrative State Chapter Overviews 





Contracts and Competition in an Era of Economic Uncertainty, – Nineteenth-Century Competition Policy: Liberty of Contract and the Common Law Governing Proprietary Capitalism: The Dr. Miles Medical Company Rules of “Excessive Competition”: Muzzy Starch and National Combinations Industrial Consolidation: Corporations, Trusts, and Competitive Federalism The Origins of American Fair Trade: The Sherman Antitrust Act and Conflicting Interpretations of Law, – State Antitrust: The Ideas, Interests, and Institutions of Market Competition Passage of the Sherman Antitrust Act Early Antitrust Jurisprudence The Economics and Ideology of American Fair Trade: Louis Brandeis, Resale Price Maintenance, and Open Price Associations, – vii

   

    

   



Contents

viii

Brandeis and the Making of American Fair Trade Woodrow Wilson’s “New Freedom” and Brandeis’s “Fair Trade” The AFTL and the U.S. Chamber of Commerce: Defining Fair Competition Exigencies of War: The Cooperative Alternative to Free Market Competition







Institutionalizing the “New Competition”: Herbert Hoover and the Adaptation of Regulated Competition, – Confronting Regulated Competition: Trade Associations and the State The U.S. Chamber of Commerce and State Building The “New Competition” in Social Sciences and Academic Associations Hoover and the Reconceptualization of Regulated Competition California Fair Trade: Constitutional Federalism and Competing Visions of Fairness in Antitrust Law, – Constitutional Federalism and Competing Meanings of Fairness California Capitalism versus National Competition Policy Edna Gleason and the Druggists’ Campaign for a “Fair Trade” Law Managing Competition in the Great Depression: Between Associational and State Corporatism, – Section I: Hoover’s Response to the Great Depression President Hoover and the Limits to Associational Corporatism Proposals for Economic Planning

Section II: Roosevelt’s New Deals The First New Deal and State Corporatism The NIRA in Practice: “Fair Trade,” Corporate Capture, and Internal Dissent

Section III: Institutional Legacies Constitutional Federalism and the Adaptation of State Corporatism Populism, Proprietary Capitalism, and the Vestiges of Associational Corporatism

   

    

   

   



 



 

Conclusion: Varieties of Competition and Corporatism in American Governance



Bibliography Case Index Subject Index

  

Preface

American Fair Trade argues that trade associations of independent proprietors acted as regulatory intermediaries between individual firms and government agencies in the fifty years before World War II. In doing so they facilitated the growth of the administrative state and altered the legal meaning of “fair competition.” These rule-making partnerships between private business associations and the Department of Commerce and the Federal Trade Commission circumvented the U.S. Supreme Court’s early antitrust jurisprudence, expanded the rule of reason, and informed New Deal partnerships in planning. The conventional history of American capitalism has dismissed associative management of competitive practices as impracticable due to the Court’s stringent antitrust law and the coordination challenges of collective action. Yet, trade association organization, litigation, and lobbying played an influential role in modern American state-building. American Fair Trade argues that the businessmen and -women who led association efforts to craft, monitor, and enforce voluntary codes fair competition through the s made important and lasting contributions to modern American political economy by institutionalizing partnerships with federal regulators. Those partnerships conferred legitimacy to the trade association movement to manage competitive markets and contributed to nascent administrative agencies’ early efforts at macroeconomic management. This approach to regulation relied upon popular rhetoricians and reformers, such as Louis Brandeis, who capitalized on antimonopoly sentiment and argued that economic decentralization best protected the American liberal-democratic tradition. It also appealed to reformers, such as Herbert Hoover, who reconfigured Brandeis’s regulated competition to prioritize economic rationalization ix

x

Preface

and standardization. Thus, the American experiment with codes of fair competition resulted from regulatory initiatives on the left and the right, rather than solely business self-interest or rent-seeking. Over the course of the early twentieth century, the advocates for the “new competition” provided a timely critique of free market competition and helped shape the foundations of the modern administrative state. By , although New Deal experiments in a coordinated market economy had largely ended, the modern American administrative state had achieved a level of autonomy that subsumed issues of managing competitive markets into various administrative processes of rule-making, adjudication, and enforcement, largely away from public scrutiny.

Acknowledgments

Over the course of this multiyear project I have incurred many debts. While a mere “thank you” seems woefully inadequate to express my gratitude, it is with immense joy that I write these acknowledgments. I owe a great deal to my many teachers, mentors, friends, and colleagues who have engaged with the ideas put forth in this book. I have also benefited from multiple academic institutions – the University of Virginia, Brown University, and Harvard Business School. This book project has been strengthened by those relationships and institutions, though any errors or oversights remain my own. I am grateful to the mentors and teachers who helped direct this project in distinct ways. My first debt is to Brian Balogh, my dissertation advisor at the University of Virginia, who shepherded me through the process of identifying, developing, and revising a thesis topic. He then continued to guide me through the process of turning the dissertation into a book manuscript. His perspicacious insights into American political development and his unrivaled dedication to both his scholarship and his students have served as an inspiration not only to me but to all his students. He is a practitioner and a teacher of good citizenship, something I will strive to pay forward. He also has made the Miller Center of Public Affairs an exciting and intellectually rigorous academic environment for scholars of American politics. I am incredibly thankful for his consistent support and friendship over the years. Gerald Berk joined my dissertation committee as an outside reader and thankfully, stayed on as I revised the book manuscript. His scholarly work on Louis Brandeis and regulated competition helped to guide my research interests as a graduate student, and his

xi

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work continues to generate new insights. He generously gave his time and energy to help develop this project, for which I am very appreciative. I am also incredibly fortunate to have worked with Charles McCurdy, whose knowledge of legal history is unparalleled in both depth and breadth. His excitement about legal history and his high expectations for deep research are contagious. Olivier Zunz, Bernie Carlson, and Michael Holt, as well as Mel Leffler, who sat on my father’s dissertation committee years ago, provided me critical feedback and encouragement. My experience at the University of Virginia would not have been complete without the academic debate and friendly banter of numerous colleagues and dear friends: Brent Cebul, Christy Chapin, Philip Herrington, David G. Hill, Laura Kolar, Chris Loomis, Whitney Martinko, Armin Mattes, Andrew Meade McGee, Loren Moulds, Victor Nemchenok, Cynthia Nicoletti, Rachel Shelden, and of course Logan Sawyer. As I finished my graduate work and began to engage more deeply with the business and legal history community outside of the University of Virginia – first as a postdoc and then as a junior faculty member – I was lucky to find enthusiastic and engaged interlocutors at both Brown University and Harvard Business School. I am grateful to John Tomasi, who runs the Political Theory Project (PTP) at Brown, for welcoming a historian to a roster of outstanding political theorists and philosophers. John’s dedication to intellectual curiosity and open debate made PTP an exciting place to work. I also gained insights into theory and philosophy from my PTP colleagues – Alex Gourevitch, Javier Hidalgo, Jessica Flannigan, Jeppe von Platz, and Kevin Vallier – and I continue to treasure those friendships. The history department at Brown proved both welcoming and engaging, especially Seth Rockman and Michael Vorenburg. As the HarvardNewcomen Fellow in business history, Geoff Jones and Walter Friedman were always willing to provide critical engagement and constructive feedback that helped bring this project to completion. Walter and Geoff both read chapter drafts and articles, lending me one of their most precious commodities: time. They have been invaluable colleagues at HBS. I am extraordinarily thankful for the remarkable level of support I’ve received as a junior faculty member at Harvard Business School. Dean Nitin Nohria and Associate Deans Frances Frei, Paul Healy, and Youngme Moon have made HBS a supportive and productive environment for research and writing. The School’s emphasis on case method teaching and the guidance provided by Willis Emmons have sharpened my abilities beyond the classroom. Joining the interdisciplinary Business, Government, and International Economy (BGIE) Unit has been an intellectual journey

Acknowledgments

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unlike any other. I’m especially thankful for my colleagues in the BGIE teaching group from whom I’ve learned a great deal about teaching both the technical and the big picture: Kristin Fabbe, Jeremy Friedman, Akshay Mangla, Vincent Pons, Sophus Reinert, Meg Rithmire, Julio Rotemberg, and Gunnar Trumball. Our energetic debates over how to best teach our remarkable students have improved my teaching, writing, and thinking. Additionally, my colleagues Rawi Abdelal, Laura Alfaro, David Moss, Dante Roscini, Forest Reinhardt, Jesse Schreger, Rafael di Tella, Richard Vietor, and Matt Weinzerl have each taught me important lessons about scholarship, teaching, and collegiality. The HBS Business History Initiative, which is sustained by Geoff, Walter, Sophus, and Tom Nicholas, has provided a venue for continuous intellectual engagement and exploration. The Harvard community offers a surfeit of academic riches, ranging from the activities at the School to Harvard’s history of capitalism seminar and Harvard Law School’s legal history workshop. I am grateful to Sven Beckert and Ken Mack for welcoming me into these groups. Yet even with all of these opportunities for personal academic enrichment, one cannot forget that our duty is to educate and engage our students. I am indebted to my students at Virginia, Brown, and HBS. They have taught me as much as anyone about how to ask probing questions and communicate overarching principles. They have also endured my dry humor along the way, perhaps even enjoying it from time to time. Teaching at HBS has been particularly rewarding, especially with my sections in the winter term of . I would like to thank the numerous archivists and librarians who responded to my inquiries with timeliness, good cheer, and expert knowledge. This book could not have come to fruition without their knowledge and assistance. I have been lucky to find trade association journals and company papers at particularly nice places to work. The University of California – San Francisco medical library holds a treasure trove of pharmaceutical trade association journals and papers. The basement stacks were a wonderfully quiet place to read documents. The National Institute of Health Medical Library in Rockville, Maryland, also holds trade journals and pamphlets that are difficult to find elsewhere. The librarians at the NIH make these easily accessible. The American Institute for the History of Pharmacy (AIHP) at the University of Wisconsin holds an amazing catalog of primary sources, including photographs and rare documents. Anything not found in the files, Greg Higby at AIHP could probably still tell you about. Frank Fisher at the Elkhart County History Museum helped locate several documents on the Dr. Miles Medical

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Company. Jennifer Johns, the curator at the Ruthmere Museum in Elkhart, Indiana, deserves special thanks for guiding me through the Dr. Miles Medical Company archives. It was wonderfully enriching to read the company ledgers, tour the Beardsley home, and discover the handwritten letters that plotted business strategy through the early twentieth century. Thank you for preserving these historical documents! As all business historians know, the Hagley Museum and Library not only has vast holdings of business records and personal papers, but it is a truly lovely place to work. I would like to thank Roger Horowitz, Carol Lockman, and Terri Snyder for granting me the pleasure of an extended stay with the Henry Belin du Pont Dissertation Fellowship. I would especially like to thank Majorie McNinch at the archive for all her help navigating the U.S. Chamber of Commerce documents and the Seagram’s collections. I have enjoyed each of my visits to Hagley, and I look forward to future trips. The public library and historical society of Stockton, California, have kept detailed newspaper records, including local business publications. The archivists that the Herbert Hoover presidential library, who mailed documents to Boston, facilitated my research when travel proved impossible. This project was also supported by research grants from the University of Virginia history department, the Bankard Fund for Political Economy, the Tobin Project, the John Anson Kittredge Educational Fund, the Robert L. Platzman Memorial Fellowship at the University of Chicago’s Special Collections, the Business History Conference Chandler Grant, and the Policy History Conference Critchlow Award. I have been incredibly fortunate to work with highly skilled and dedicated research assistants and support staff. Research assistants James Berard, Arielle Gorin, and especially Matthew Linton have helped track down citations and gather materials from the Baker Library. Chris Grosse has been both a steadfast support and a friendly face. The librarians, especially the interlibrary loan staff, at the University of Virginia and the HBS Baker Library proved indispensable to this project. Austin Haley at HBS deserves special thanks for his persistence and amiability, even when we really struggled to locate a source. Early drafts of the book and related articles were presented at conferences and seminars. I continue to be appreciative of my friends and colleagues at the Business History Conference for providing such a nurturing environment for junior scholars. Mark Rose and Pam Laird organized the Oxford Journals Dissertation Colloquium, where I presented an early prospectus and benefited from feedback from Matthias Kipping and Mary

Acknowledgments

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O’Sullivan. I have presented my work to the BHC and benefited from innumerable formal and informal interactions with senior and junior colleagues at the BHC. Ed Balleisen, Christy Chapin, Bill Childs, Jennifer Delton, Colleen Dunlavy Richard John, Naomi Lamoreaux, Maggie Levenstein, Marc Levinson, Stephen Mihm, Caitlin Rosenthal, Philip Scranton, Ellie Shermer, R. Daniel Wadhwani, Ben Waterhouse, and of course Lou Galambos, my “grand-advisor.” Lou and Christy in particular have given me constructive feedback and dependable positivity. They both certainly know how to keep it all in perspective – a lesson I continue to learn. The Policy History Conference has also been a fruitful place to try out new ideas and develop existing ones. Gerry Berk, Don Critchlow, and Dave Robertson have given me helpful observations and valuable comments at the conference. (Gerry, thanks for believing in this project!) The American Society for Legal History (ASLH) has truly opened new vistas for me and this project. Tony Freyer initially encouraged me to participate in the ASLH and he has continued to be not only an intellectual inspiration but also a role model of collegiality. Herbert Hovenkamp also has served as a mentor in both those capacities – not only do I admire his scholarship but I am so grateful to him for all of his help in developing this project. His comments, questions, and concerns guided many of my revisions. Bill Novak’s publications and probing questions have been a consistent influence on my research and writing. He, too, has been incredibly generous with his time and very kind to include me on panels and in workshops. For Tony, Herb, and Bill, I hope to pay it forward as I keep learning from each of you. The ASLH has also brought me in contact with scholars whose work I admire: Dan Ernst, Joanna Grissinger, Sabeel Rahman, and Victoria Saker Woeste. Thank you for taking the time to read my work, send me comments, and encourage me to press on. My editors at Cambridge University Press – Lew Bateman and Deborah Gershenowitz – have provided insightful guidance on research, writing, and living a full life. I am grateful for Lew believing in the dissertation project and supporting its revisions into a book manuscript. Deborah guided the manuscript to completion and provided feedback throughout the process. I’d like to thank the anonymous reviewers, whose penetrating comments and probing questions improved the manuscript far beyond what I could have done alone. Pam Ozaroff and John Allen Elder provided copy editing and proved diligent compatriots in a long struggle with Bluebook legal citations. The manuscript is much better for all their hard work. Meghan Miller Brawley of Potomac Indexing compiled the index and bibliography with great speed, good cheer, and steady encouragement.

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Hillary Ford copyedited the manuscript with great precision and care. Any lingering errors remain my own. A special thank you is due to my family, whose love and support has made all of this worthwhile. My father, Hugh Daniel Phillips, always encouraged me to find a passion and pursue it. He also pushed me to think critically and question the conventional narrative. I wish he could be here to see this project completed. My stepmother, Cynthia Etkin, has always been a source of moral support and reassurance. Penelope SladeSawyer, L. E., Carolyn, Brent, and Slade Sawyer have welcomed me into their family. I am incredibly lucky to have a compassionate and close family. I owe more than I can say to my mother, Elizabeth Stone, who made countless sacrifices for our family and kept us all moving forward. No one can match her enthusiasm for life, her ability to turn rain clouds into sunshine, or her gardening skills. My brothers, Daniel and Jonathan, can handle anything with grace and poise. They also know how to lowtwist. They’ve taught me strength, supported me when I most needed it, and helped me learn how to tell a good story. And finally, Logan – my partner. There aren’t words to express my gratitude to you. Not only have you read multiple drafts of chapters, articles, seminar papers, and discussion comments, you’ve also listened patiently over breakfasts and dinners as I pieced together my research and revised my arguments. You’re an inspiring researcher, teacher, and colleague. I’m beyond lucky to have you in my life. Your support of my career, my dreams, and all my crazy ideas gives me confidence that we can do anything together. This book is of course dedicated to you.

Introduction American Competition Trade Associations, Codes of Fair Competition, and State Building

As for the ethical side, there is no cure but in an increasing scorn of unfair play, an increasing sense that a thing won by breaking the rules of the game is not worth the winning. When the business man who fights to secure special privileges, to crowd his competitor off the track by other than fair competitive methods, receives the same summary disdainful ostracism by his fellows that the doctor or lawyer who is “unprofessional,” the athlete who abuses the rules, receives, we shall have gone a long way toward making commerce a fit pursuit for our young men. – Ida M. Tarbell, History of the Standard Oil Company ()

Writing in popular magazines at the turn of the nineteenth century, Ida Tarbell, a famous investigative journalist, biographer, and “muckraker” (according to President Theodore Roosevelt), challenged one of America’s most cherished Gilded Age myths – that of the self-made man and the free enterprise system. Her exposé of John D. Rockefeller’s business tactics focused on his manipulation of railroad rates to capture market share in oil refining and distribution and his use of predatory pricing to temporarily drive market prices below his competitors’ costs. Independent refiners decried Standard Oil’s abuse of market power, believing that “the railways were bound as public carrier to give equal rates; that any combination which favoured one firm or one locality at the expense of another was unjust and illegal.” Tarbell prescribed a remedy of “free and equal transportation privileges” for the oil industry, as well as more rigorous



Ida M. Tarbell, The History of the Standard Oil Company (New York, ), : . Tarbell’s writing on Rockefeller and Standard Oil first appeared in McClure’s magazine before being published as a book.





American Fair Trade

antimonopoly investigations and prosecutions in general. While acknowledging that there was much to praise in Rockefeller and his business empire, Tarbell wrote that ultimately, “religious emotions and sentiments of charity, propriety, and self-denial seem to have taken the place in him of notions of justice and regard for the rights of others.” For Tarbell, justice required free and open market competition guaranteed by state oversight to guard against abuses by dominant firms. As Tarbell and many others noted, by the late nineteenth century, the growth of large-scale industrial and financial corporations, along with rising income inequality, seemed to belie the liberal-democratic tradition that had promised some level of rough equality and entrepreneurship. Antimonopoly sentiment had previously expressed hostility to the special privileges that government conferred to individuals or corporations for private gain. By the s, however, new concerns arose that hegemonic concentrations of market power – even those achieved without stateconferred special privileges – facilitated undue economic and political influence. Common law on competition policy had developed over the course of the century to govern proprietary capitalism – largely personal exchanges involving sales and employment contracts within confined geographies. These rules governing marketplace exchanges relied upon a presumption of equality that no longer appeared consonant with a changing economic reality. Although states exercised considerable authority over corporations chartered within their borders, a coordination problem arose as businesses and commerce increasingly traversed state lines. The older regulatory order broke down as states competed to attract corporations and their tax dollars. Displaced or marginalized farmers, workers, and independent proprietors protested the wealth accumulated by the very few and demanded legislative intervention. Harnessing this antimonopoly sentiment unleashed a new era of market regulation that was intended to restore market competition through a combination of stronger state and federal laws as well as private trade association rules. American Fair Trade focuses on the development of antimonopoly law and economics from the late nineteenth century through the New Deal era. It shows how groups of independent proprietors, first in manufacturing and later in retailing, crafted an antimonopoly movement to create codes of fair competition whose purpose was to reshape industrial corporate capitalism. These business owners included drug makers, druggists, printers,



Ibid., : .



Ibid., : .

American Competition



stationers, booksellers, electronics manufacturers, specialty producers of brand-name foodstuffs, grocers, and distillers. As a result of this movement, the notion of fair competition transformed from a populist concern for community and individual rights into a progressive preference for bureaucratic organization and administrative oversight. By coordinating industryspecific trade associations and the U.S. Chamber of Commerce, a formidable group of businesspeople, lawyers, and legislators orchestrated a legal and economic movement to liberalize antitrust laws. Through the s, they simultaneously facilitated a new regulatory agenda that empowered both federal administrative agencies and private trade associations to manage market competition. American Fair Trade investigates the contested political and legal meanings of fair competition and reveals how the development of the administrative state occurred in tandem with the empowerment of business associations to shape the rules of modern American capitalism. While a great deal of scholarly attention has followed Tarbell’s lead and focused on political and legal efforts to either break apart or regulate large industrial firms, another agenda was also afoot: to empower independent proprietors to manage competitive markets. The predominant historical narrative of American capitalism has focused too narrowly on the ascent of corporate capitalism, as characterized by centralized markets, managerial hierarchies, adversarial relationships with the state, and limited regulation. That narrative fails to account for the diversity of approaches that private organizations, public administrative agencies, and heterodox economists pursued – approaches that promoted new techniques to manage competitive markets. Initially, the Supreme Court treated efforts by trade associations to manage trade practices through their distribution networks as attempts at cartelization and therefore found their agreements unenforceable. Eventually, however, changes in public policy empowered administrative agencies to collaborate with trade associations in industry-wide deliberation, rule making, and enforcement processes. By the late New Deal era, the combination of private associations and public regulatory agencies created a largely unseen regulatory regime that subsumed the antimonopoly tradition. The institutional development of the modern American regulatory state – particularly its configuration of public and private governance over socalled ordinary trades – accommodated forms of proprietary capitalism alongside the new industrial order of corporate capitalism. In fact, the struggle over the meaning of fair competition helps explain the rise of the modern regulatory state as an embodiment of the symbiotic relationship



American Fair Trade

between trade associations and administrative agencies, such as the Department of Commerce and the Federal Trade Commission. Reexamining the history of American capitalism with an emphasis on public–private regulatory structures reveals a more expansive regulatory state than scholars have previously acknowledged. This regulatory state contained alternative models of corporate liberalism that at times prescribed solutions to destructive competition while also eliciting new forms of cooperation between government and business. At the onset of the Great Depression, many leading businesspeople, bureaucrats, and academics believed that these partnerships could bring about a new system of economic planning. The breakdown in that cooperation in the mid-s signaled a divisive shift in business–government relations, wherein the federal government embraced Keynesian fiscal stimulus, experts in administrative agencies meted out antimonopoly prosecutions, and large-scale corporate capitalists found representation in government departments. The shift left little room for the pro-competitive arguments made by proprietary capitalists – arguments that seemed increasingly antiquated to consumers and regulators alike. Nevertheless, the preceding fair trade movement had lasting effects on the development of state police powers, bureaucratic capacity, and antitrust policy, not to mention private trade associations.

          The history of American price regulations provides a framework for evaluating the rules, expectations, and practices that characterized distinct eras in the history of capitalism more generally. The legal doctrines governing older, eighteenth-century customary ideas of fair exchange and substantive justice had gradually given way to nineteenth-century marketbased, transactional notions of fairness. What became known as laissezfaire liberalism – in which a fair price was determined by the trade bargain struck between individual dealers and set out in a written contract – overtook those older customs of equitable exchanges. Political economists from Adam Smith to Alfred Marshall helped legitimize free 

Bernard Bailyn, “The Apologia of Robert Keayne,” William and Mary Quarterly  (Oct. ): –; Morton J. Horwitz, The Transformation of American Law, – (Cambridge, MA, ), –, –. Horwitz explains that the influence of Adam Smith and the Scottish Enlightenment also encouraged the movement away from the eighteenth-century customary ideas of natural justice and fair exchange and toward “the

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

market exchanges as the actualization of individual choice and the prerequisite for competitive markets. Undoubtedly, these ideas were not without their detractors; nevertheless, the market-based notions of fairness characterized the era. In contract law, for example, the doctrine of caveat emptor (buyer beware) replaced older protections for consumers, and principles of equity no longer extended to labor contracts. In business law, states facilitated an ever-greater number of market transactions by passing general incorporation laws that reduced the privileges and responsibilities that special charters of incorporation had previously conferred. These laws democratized and deregulated the corporation; by the s anyone could form a limited liability corporation. The nineteenth century was by no means strictly laissez-faire – after all, common law rules of competition, state corporate laws, and police powers abounded. Nevertheless, in the post–Civil War “liberty of contract” era, marketplace









will theory of contracts,” whereby private contracts could circumvent common law or statutory obligations (). Laura Phillips Sawyer, “Contested Meanings of Freedom: Workingmen’s Wages and the Company Store System, Godcharles v. Wigeman, ,” Journal of the Gilded Age and Progressive Era  (July ): –; Christopher L. Tomlins and Andrew J. King, Labor Law in America: Historical and Critical Essays (Baltimore, MD, ); William E. Forbath, “The Shaping of the American Labor Movement,” Harvard Law Review  (Apr. ): –. Horwitz, Transformations, –; Herbert Hovenkamp, Enterprise and American Law, – (Cambridge, MA, ), ; Lawrence Friedman, A History of American Law, rd ed. (New York, ), –. Connecticut passed the first general incorporation law in , and many states followed suit during the s and early s. See George Evans, Business Incorporations in the United States, – (New York, ), ; Willard Hurst, The Legitimacy of the Business Corporation in the Laws of the United States, – (Charlottesville, VA, ), ; Henry N. Butler, “Nineteenth-Century Jurisdictional Competition in the Granting of Corporate Privileges,” The Journal of Legal Studies  (Jan. ): –. For a critique of the functional demand for general incorporation laws, see Robert W. Gordon, “Critical Legal Histories,” Stanford Law Review  (Jan. ): –. On state and federal rules shaping the American political economy, see William J. Novak, The People’s Welfare: Law and Regulation in Nineteenth-Century America (Chapel Hill, NC, ); Brian Balogh, A Government Out of Sight: The Mystery of National Authority in Nineteenth-Century America (Cambridge, ). Novak and Balogh built on the post– World War II “commonwealth studies” in business and political history, which emphasized the influence of government policies over economic development. See Louis Hartz, Economic Policy and Democratic Thought: Pennsylvania, – (Chicago, IL, ); Oscar Handlin, Commonwealth: A Study of the Role of Government in the American Economy: Massachusetts, –, rev. ed. (Cambridge, MA, ); Harry N. Scheiber, “The Road to Munn: Eminent Domain and the Concept of Public Purpose in the State Courts,” in Law in American History, eds. Donald Fleming and Bernard Bailyn (Boston, ), –.



American Fair Trade

transactions came to symbolize the rough, formal, legal equality of individuals – despite inequalities in market power among those individuals. In the closing decades of the nineteenth century, the political economy of resource allocation shifted again. The rise of large-scale, vertically integrated corporations and corporate finance revolutionized capitalism by introducing new managerial and organizational techniques designed to coordinate production and distribution more efficiently, with greater scale and scope. Managerial capitalism seemed to be replacing proprietary capitalism – but how the governing structures of liberalism would be reformed remained contested. The growing market power of these vertically integrated corporations displaced many small, traditional enterprises and eroded the autonomy of independent proprietors and farmers. Some of these changes resulted from the expansion of firms forward or backward into retailing or raw materials production, while others occurred through mergers and combinations. In the s Americans largely conflated these various paths to corporate consolidation. They focused on bigness, deriding corporate consolidations under the moniker monopoly and holding it in opposition to a bygone era of free and open competition, whether real or imagined. Political cartoons, for example, depicted Standard Oil as an octopus set 





Alfred Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA, ), –, –; Alfred D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, MA, ), –. Chandler pioneered the field of managerial capitalism by studying the growth of the top corporations throughout American history. He has been criticized for embracing an organizational determinism – arguing, for example, that managers in manufacturing firms recognized either the necessity or the improved efficiency of vertical integration into marketing or sales. For a critique that emphasizes the persistence of batch and bundle production methods, see Philip Scranton, review of Scale and Scope, in Technology and Culture  (Oct. ): –; Philip Scranton, “Diversity in Diversity: Flexible Production and American Industrialization, –,” Business History Review  (spring ): –; Philip Scranton, “Small Business, Family Firms, and Batch Production: Three Axes for Development in American Business History,” Business and Economic History  (): –. For a revision of Chandler’s explanation of vertical integration that instead emphasizes new firms rather than older, adapting firms, see Eric Hilt, “Corporate Governance and the Development of Manufacturing Enterprises in Nineteenth-Century Massachusetts,” in Enterprising America: Businesses, Banks, and Credit Markets in Historical Perspective, eds. William J. Collins and Robert A. Margo (Chicago, IL, ), –. Philip Scranton, Endless Novelty: Specialty Production and American Industrialization, – (Princeton, NJ, ); Elizabeth Sanders, Roots of Reform: Farmers, Works, and the American State, – (Chicago, IL, ); Charles Postel, The Populist Vision (New York, ). William Letwin, Law and Economic Policy in America: The Evolution of the Sherman Antitrust Act (New York, ), –.

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

atop a map of the United States. With angry eyes, it whipped tentacle arms around statehouses and clutched politicians, workers, and farmers. The vast economic and political power wielded by such large corporate entities seemed to belie the classical liberal tradition of rough individual equality. America’s antimonopoly tradition, which rested on the assumption that widespread economic competition helped protect both well-functioning markets and democratic pluralism, appeared threatened by these social and economic changes. The visible hands of managerial capitalism made a mockery of any belief in the invisible hand of market forces, and in reaction, a widespread movement in business, academia, and government arose to mitigate these changes. Farmers, laborers, and independent proprietors decried the so-called laissez-faire rules of market capitalism and led efforts to enact new rules of fair competition, calling for government regulations to protect weak or marginalized groups and reinstate market competition. The Sherman Antitrust Act of , one of the first federal statutes seeking to restore equity in market exchanges, prohibited anticompetitive conduct and required investigations into “trusts.” But although this law appeared straightforward, in reality it was something quite new and ambiguous. At face value, the act codified common law prohibitions on monopoly activities, attempting to bring centuries of Anglo-American jurisprudence into a single federal law. Congressional intent, however, remained unclear. Moreover, the act empowered both private litigants and public officials to bring suit, leading to a slew of cases to be reconciled by the courts. Thus the judiciary became the institution that established antitrust public policy. On the one hand, passage of the act suggested that the courts should scrutinize exorbitant concentrations of private economic power







See, for example, Udo J. Keppler, The Standard Oil Octopus, cartoon, Puck, Sept. , , –; G. F. Keller, The Curse of California, cartoon, The Wasp, Aug. , , –; Frank Norris, The Octopus: A Story of California (New York, ). For more antimonopoly octopus images from the period and helpful annotations, see http://natio nalhumanitiescenter.org/pds/gilded/power/text/octopusimages.pdf. For a comparison of Gilded Age antimonopoly imagery with that of the present, see Rebecca Solnit, “The Octopus and Its Grandchildren,” Harper’s, Aug. , –. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (New York, ; Boston, ); Mark Blyth, The Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century (Cambridge, ); William J. Novak, “Law, Capitalism, and the Liberal State: The Historical Sociology of James Willard Hurst,” Law and History Review  (spring ): –.  Stat. ,  U.S.C. §§ –. The act prohibited any “restraint of trade” in interstate commerce and created treble damages and criminal penalties.

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American Fair Trade

and break up the trusts. On the other hand, the antitrust mandate functioned within an existing jurisprudence that protected private economic rights and adhered to a nineteenth-century model of federalism, which circumscribed national regulation of the market. Antitrust existed in tension with itself – intended to reign in the trusts while also limited by “liberty of contract” protections on private business activity and a limited sphere of federal action. Uncertainty beset the first decades of U.S. antitrust jurisprudence, and the Supreme Court floundered in search of clear rules to govern competitive markets. By  it was clear that the Court’s rulings encouraged further corporate consolidations and targeted laborers and independent proprietors acting through loose associations. These types of associations did not fit neatly into the Court’s binary framework of corporate hierarchy versus market competition. According to that analysis, largescale corporations created managerial hierarchies to mitigate the vicissitudes of a market by instituting singular corporate control, while laborers and independent proprietors, in contrast, participated in market 



 

In the late nineteenth century, there were three types of combinations: federated enterprises, holding companies, and trusts. The first trust was formed in  by Standard Oil Co. when its member companies turned over their individual stocks to a governing board of trustees and received trust certificates of equivalent value. The trustees acted as managers of operating and investment decisions. The trust was created in New Jersey to avoid paying taxes in Pennsylvania, where many of its refineries were located. Chandler, Visible Hand, –. Although a trust is a specific legal vehicle, the term was used colloquially to generalize about corporate consolidation and was often used as a synonym for “combination.” Letwin, Law and Economic Policy, –. United States v. E. C. Knight Co.,  U.S.  (). The Court held that despite the fact that the company controlled  percent of the sugar-refining capacity in the United States, the company was not engaged in interstate restraint of trade because refining constituted manufacturing, not commerce, and thus fell under the regulatory purview of the states. Letwin, Law and Economic Policy, –. Charles W. McCurdy, “Federalism and the Judicial Mind in a Conservative Age: Stephen Field” in Power Divided: Essays on the Theory and Practice of Federalism, eds. Harry N. Scheiber and Malcolm M. Feeley (Berkeley, CA, ), –; McCurdy, “The Knight Sugar Decision of  and the Modernization of American Corporation Law, –,” Business History Review  (autumn ): –; Addyston Pipe and Steel Co. v. United States,  U.S.  (). In Addyston Pipe & Steel, the Court ruled that the agreement to divide territories among members of the association constituted a restraint of trade. The case is also significant because Chief Judge William Howard Taft’s majority opinion for the Sixth Circuit Court of Appeals ruled against the association but reasoned that some restraints of trade – those found to be reasonable and ancillary to a lawful contract – would be permissible under the Sherman Act. Though the Supreme Court did not affirm this reasoning, Taft’s opinion is credited with moving the Court away from its earlier literalist interpretation. See also Daniel R. Ernst, “The Labor Exemption, –,” Iowa Law Review  (July ): –.

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

exchanges governed by unfettered competition. Labor and trade associations stifled market competition for their own benefit. Despite that tidy narrative, antitrust law was not settled; it would remain a contentious political and economic issue throughout the New Deal era. The Court’s binary ran aground when confronted with older common law traditions of managing markets and newer progressive impulses to regulate competition – both of which sought to mitigate the social costs of industrialization. That legal and political uncertainty galvanized a movement to bring the antimonopoly tradition into regulatory governance – if not to break apart large firms, then to empower independent proprietors and laborers to cooperate through associations. In turn, a new era of associationalism coincided with the growth of the administrative state, and the two are intimately connected.

      Throughout U.S. history, questions of market fairness have animated debates over economic regulations in both form and substance, in both procedure and outcome. Protesting the unfairness of a market exchange or defending the fairness of an economic system appeals to political and ideological frameworks as well as legal rules and norms. While there is no timeless definition of fairness, understanding how people interpreted its meaning during a specific era can help historians discern historical trends from which we may periodize legal and economic regimes as well as social and cultural norms. In the late nineteenth century, widespread economic, social, and intellectual changes galvanized multiple social movements that challenged the existing rules of fair competition. 

 

Admittedly, it is somewhat anachronistic to refer to the markets-versus-hierarchy divide, given its recent prevalence in economic history literature. Nevertheless, the Court’s early antitrust rulings relied upon just such a distinction, encouraging vertical consolidation by striking down the efforts of individual firms and associations of firms to manage markets through what the Court deemed cartel-like behavior. See Oliver Williamson, “Markets and Hierarchies: Some Elementary Considerations,” Organizational Forms and International Efficiencies  (May ): –; Walter Powell, “Neither Market Nor Hierarchy: Network Forms of Organization,” Research in Organizational Behavior  (): –; Naomi R. Lamoreaux, Daniel Raff, and Peter Temin, “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History,” American Historical Review ,  (): –. On associationalism, see note , p. . Michael J. Sandel, Democracy’s Discontent: America in Search of a Public Philosophy (Cambridge, MA, ).



American Fair Trade

American Fair Trade demonstrates how groups of independent proprietors, working through trade associations, came to partner with government administrators to shape economic regulations through the s. The co-evolution of trade association governance and administrativestate capacity redefined the meaning of fair competition and culminated in New Deal efforts to coordinate markets. Although the First New Deal’s price controls fell under the Court’s ax, by the end of the s, federal administrative agencies had absorbed the legalistic procedures recommended by the courts and emerged as the primary arbiters of fair competition. The collaboration between businesses and government agencies had carved out a middle ground between free market competition and regulated monopoly; independent proprietors were able to collude or cooperate, depending on one’s perspective. Between  and , the United States developed national competition policies that over time accommodated a diverse set of economic and political ideals. This process of accommodation occurred not only through courts and parties but also through nascent administrative agencies and diffuse business associations. Independent proprietors, many of whom feared the competitive advantages of large-scale corporations, spearheaded efforts to form trade associations, with the goal of promulgating codes of fair competition that would dictate trade rules, business ethics, and (at times) so-called fair prices. These business associations overcame collective action challenges, such as defection or cheating, by institutionalizing rules for in-group deliberation, information sharing, monitoring, and enforcement. U.S. laws never sanctioned overt cartels or private price-fixing agreements; however, state-level competition policy often provided exemptions for certain groups. In California, for example, antitrust law exempted labor unions as well as independent producers of farm products and specialty consumer goods from antitrust prosecution. Legal reformers such as Louis Brandeis, the famous “people’s





On interest group collective action problems, see Joseph C. Palamountain, The Politics of Distribution (Cambridge, MA, ); Mancur Olsen, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, MA, ); Guy Alchon, The Invisible Hand of Planning: Capitalism, Social Science, and the State in the s (Princeton, NJ, ). Olsen’s thesis that collective action problems impede dispersed interest groups’ political goals has recently been challenged. See Gunnar Trumball, Strength in Numbers: The Political Power of Weak Interest Groups (Cambridge, MA, ). See Victoria Saker Woeste, The Benevolent Trust: Law and Agricultural Cooperation in Industrial America, – (Chapel Hill, NC, ); Paul Duguid, “A Case of

American Competition



lawyer” and future Supreme Court justice, wanted to see these state laws extended to federal legislation to protect fair competition. At the federal level, persistent litigation, lobbying, and public debate regarding the direction of the antimonopoly tradition demonstrate the extent to which antitrust remained far from settled law. Particularly under the guidance of Herbert Hoover, the Department of Commerce and the Federal Trade Commission (FTC) wrestled with the Supreme Court and the Department of Justice to institute public–private regulations that implemented codes of fair competition through industry associations. The fact that the

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Prejudice? The Uncertain Development of Collective and Certification Marks,” Business History Review  (summer ): –; Postel, Populist Vision. See Louis Brandeis, “Cut-Throat Prices – Competition That Kills,” Harper’s Weekly, Nov. , , . Much of the economic and legal literature argues that U.S. antitrust law was settled by the early twentieth century in that the Court had enshrined a model of market competition that foreclosed the possibility of loose combinations, thereby encouraging corporate consolidations and usurping the U.S. antimonopoly tradition that favored economic decentralization. See Martin J. Sklar, The Corporate Reconstruction of American Capitalism, –: The Market, the Law, and Politics (Cambridge, ). See also Naomi Lamoreaux, The Great Merger Movement in American Business (Cambridge, ); Tony A. Freyer, Regulating Big Business: Antitrust in Great Britain and America, – (Cambridge, ), though Freyer rejects the argument that antitrust law was necessarily settled. Sklar’s history of antitrust law contributed to a historiographical consensus that explained how corporate elites used, or “captured,” economic regulation for their own benefit. This school of thought, often described as “corporate liberalism” or “corporate capture,” emphasizes the limitations of national social and economic regulations – limitations resulting from the fact that those elite, hegemonic economic interests have penetrated and now control administrative agencies. See Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, – (Chicago, IL, ); James Weinstein, The Corporate Ideal in the Liberal State, – (Boston, ); George Stigler, “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science  (): –; Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York, ). Scholars on both the left and the right have embraced this narrative, though they derived diametrically different policy prescriptions from it. Business historians pioneered organizational studies that have investigated the great bureaucracies of both large-scale corporations and the federal government, often drawing on the organizational similarities between business and government. See Robert H. Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Cambridge, MA, ); Louis Galambos, Competition and Cooperation: The Emergence of a National Trade Association (Baltimore, MD, ); Louis Galambos and Joseph Pratt, The Rise of the Corporate Commonwealth: U.S. Business and Public Policy in the Twentieth Century (New York, ); Robert F. Himmelberg, The Origins of the National Recovery Administration: Business, Government, and the Trade Association Issue, –, nd ed. (New York, ); Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence (Princeton, NJ, ). On post–World War II regulated industries, see Richard Vietor, Contrived Competition: Regulation and Deregulation in America

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American Fair Trade

Department of Commerce and the FTC crafted economic regulations through trade associations demonstrates that a stronger (though often out-of-sight) administrative state influenced business practices and shaped antitrust law. Thus the history of modern American capitalism cannot be told solely as the inevitable ascent of corporate consolidations or the proliferation of lowest-price consumption models. Lowest-cost efficiency concerns did not always guide legislative or judicial decision making. Instead, alternative organizational forms presented a range of policy options available to policymakers, regulators, and jurists for managing competitive markets, a system sometimes referred to as “associationalism.” Experiments in business associations, public–private







(Cambridge, MA, ). Currently, legal historians are focused on the administrative state’s role in expanding federal regulators’ rule-making powers, often to advance political goals. See Ajay Mehrotra, Making the Modern American Fiscal State: Law, Politics, and the Rise of Progressive Taxation, – (Cambridge, ); Joanna Grisinger, The Unwieldy American State: Administrative Politics since the New Deal (Cambridge, ); Daniel Ernst, Tocqueville’s Nightmare: The Administrative State Emerges in America, – (New York, ). See also Philip Hamburger, Is Administrative Law Unlawful? (Chicago, IL, ). Brian Balogh, A Government Out of Sight: The Mystery of National Authority in Nineteenth-Century America (Cambridge, ). Balogh breaks with the now conventional American political development (APD) literature that has built on the corporate liberalism thesis and emphasized the institutional, or structural, limitations imposed on the U.S. welfare state. APD has been termed the “weak state thesis.” See Stephen Skowronek, Building a New American State: The Expansion of National Administrative Capacities, – (Cambridge, ); Theda Skocpol, Protecting Soldiers and Mothers: The Political Origins of Social Policy in the United States (Cambridge, MA, ); Barry Karl, The Uneasy State: The United States from  to  (Chicago, IL, ); Jacob S. Hacker, The Divided Welfare State: The Battle over Public and Private Social Benefits in the United States (Cambridge, ). Scholars on both the left and the right, whether lamenting or praising the rise of corporate capitalism and low-cost consumerism, have largely dismissed the trade association and cooperative alternative. See Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself, rev. ed. (New York, ); Thomas K. McCraw, “Rethinking the Trust Question,” in Regulation in Perspective, ed. Thomas K. McCraw (Cambridge, MA, ), –; Lizabeth Cohen, A Consumer’s Republic: The Politics of Mass Consumption in Postwar America (New York, ); Meg Jacobs, Pocketbook Politics: Economic Citizenship in Twentieth-Century America (Princeton, NJ, ); Nelson Lichtenstein, The Retail Revolution: How Wal-Mart Created a Brave New World of Business (New York, ). See also Lawrence Glickman, Buying Power: A History of Consumer Activism in America (Chicago, IL, ); Roland Marchand, Advertising the American Dream: Making Way for Modernity, – (Berkeley, CA, ). On associationalism, see Ellis W. Hawley, “Herbert Hoover, the Commerce Secretariat, and the Vision of an ‘Associative State,’ –,” Journal of American History  (June ): –; Hawley, New Deal and the Problem of Monopoly; Hawley, “Herbert Hoover and the Sherman Act, –: An Early Phase of a Continuing

American Competition



regulation, and administrative state building must be integrated into that historical narrative as well. Through the interwar period, some administrative regulators, along with businesspeople in peripheral industries, began to reject neoclassical economic models of perfect competition; instead, they sought to implement an alternative view of competition policy that allowed for tinkering to correct the imperfections in competitive markets. Minutes of trade association meetings and FTC trade practice conferences shed light on an influential group of economists and administrators who developed a model of competition intended to rival neoclassical assumptions about perfect competition and regulatory structures. Bookended by two world wars, a group of progressive economists known as the institutionalists developed leading university and think-tank research programs and served in government agencies. They promoted public–private regulatory structures, bringing together trade associations and administrative agencies to pass trade rules that attempted to manage competitive markets. Later, during the emergency of the Great Depression, President Franklin Roosevelt’s New Deal programs borrowed from this variegated tapestry of U.S. competition policy by employing institutional economists as toplevel administrators, extending public–private regulations, and experimenting with mandatory price and production controls. New approaches to managing competition by the FTC, Department of Commerce, and trade associations challenged the Supreme Court’s authority to determine what constituted fair or unfair competition.





Issue,” Iowa Law Review  (–): –. Current economics literature refers to these associations as “relational contracts,” which facilitate long-term exchanges between firms or among groups of firms. See Lamoreaux, Raff, and Temin, “Beyond Markets and Hierarchies”; George Baker, Robert Gibbons, and Kevin J. Murphy, “Relational Contracts and the Theory of the Firm,” Quarterly Journal of Economics ,  (): –. Robert H. Bork, “Legislative Intent and the Policy of the Sherman Act,” Journal of Law and Economics  (): –; Bork, The Antitrust Paradox: A Policy at War with Itself, rev. ed. (, New York, ). Bork famously proclaimed that the original intent of antitrust laws was always to promote consumer welfare, which he defined as free-market competition that promotes efficiency and thereby drives down consumer prices. On institutionalist economics generally, see Malcolm Rutherford, The Institutionalist Movement in American Economics, –: Science and Social Control (Cambridge, ); Geoffrey Martin Hodgson, The Evolution of Institutional Economics: Agency, Structure, and Darwinism in American Institutionalism (New York, ). Institutional economists are best known for their influence on labor law and Social Security policy. See also Dorothy Ross, The Origins of American Social Science (Cambridge, ); David Moss, Socializing Security: Progressive-Era Economists and the Origins of American Social Policy (Cambridge, MA, ).



American Fair Trade

Although the Court asserted its supremacy over the “fourth branch of government,” by the mid-s new justices on the Court were more willing to sanction agency rule making if those agencies adhered to common law procedures of fact finding and adjudication. In , for example, Justice Harlan Fiske Stone upheld private sector trade rules and information-sharing practices promulgated by a lumber association in part because the Department of Commerce and FTC had observed and sanctioned those management practices. In this way the antimonopoly tradition directly contributed to the rise of the administrative agencies charged with overseeing competitive markets. Fair competition as a legal category and cultural norm evolved through a process of accommodation among a variety of competing interests, not just large-scale firms. American Fair Trade thus looks beyond the wellknown trust-busting cases that deterred loose combinations and aided vertical integration. Instead, it explores the alternative organizational forms pursued by “combinations of competitors” – trade associations of independent proprietors in both production and retail services. These associational activities appealed to a longstanding antimonopoly tradition and represented the vast majority of antitrust litigation, lobbying,



 





The “fourth branch of government” has come to refer to administrative agency rule making. See Dwight Waldo, The Administrative State: A Study of the Political Theory of American Public Administration (; New Brunswick, NJ, ), . Maple Flooring Manufacturers’ Assn. v. United States,  U.S.  (), . On self-regulating organizations, see Edward J. Balleisen, “The Prospects for Effective ‘Co-Regulation’ in the United States,” in Government and Markets: Towards a New Theory of Regulation, eds. Edward J. Balleisen and David A. Moss (New York, ), –. By the early twentieth century, “the modern industrial corporation secured an initial de facto legitimacy, legal scholars called for a ‘realistic’ jurisprudence, and the central precepts of nineteenth-century corporation law met a lingering death.” McCurdy, “Knight Sugar Decision,” . Sumner H. Slichter, “The Legality of the Combination of Competitors Under the Sherman Act,” Journal of Political Economy  (Oct. ): –. For a contemporary historical analysis, see Gerald Berk, “Communities of Competitors: Open Price Associations and the American State, –,” Social Science History  (autumn ): –. Berk demonstrates that trade associations in specialty industries pioneered collaborative trade practice rules to preserve their artisanal production techniques when those industries were threatened with technological unemployment (i.e., machine processes replacing skilled artisans). These production methods also facilitated price stabilization agreements. See also Philip Scranton, Endless Novelty: Specialty Production and American Industrialization, – (Princeton, NJ, ); Scranton, “Diversity in Diversity.”

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and administrative deliberation. The history of fair competition – as opposed to free-market competition or regulated monopoly – first arose in private associations, then existed under the auspices of the Department of Commerce and the FTC, later became a hallmark of the First New Deal, and finally returned to its original position as a private activity monitored by the state. Although post–World War II Keynesianism largely replaced this experiment in the control of business in favor of macroeconomic controls that promised full employment and widespread, low-cost consumerism, the legacy of antimonopoly sentiment remained ensconced within the administrative functions of the state. Through the s, for example, the Justice Department and the Supreme Court rejected mergers that would concentrate market power, even when it would be limited to a relatively small geographic area. The crucial role of trade associations in the development of the U.S. political economy has been overlooked or dismissed in mainstream accounts of the history of U.S. capitalism. Typically, these accounts have disparaged trade association activities as either temporary efforts at price fixing or backward nostalgia for a bygone producerist era. In both 







Peter A. Hall and David Soskice, Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford, ); Gerald Berk and Marc Schneiberg, “Varieties in Capitalism, Varieties of Association: Collaborative Learning in American Industry,  to ,” Politics & Society  (Mar. ): –; Gerald Berk, Louis D. Brandeis and the Making of Regulated Competition, – (Cambridge, ); Tracey Deutsch, Building a Housewife’s Paradise: Gender, Politics, and American Grocery Stores in the Twentieth Century (Chapel Hill, NC, ). The “varieties of capitalism” literature in business history and international political economy argues that the conventional narrative has been dominated by “economic determinism” that neglects the ways in which policy choices affect comparative advantage and institutional outcomes. For an overview of the state of the field, see “‛Varieties of Capitalism Roundtable,’” Business History Review  (winter ): –. Richard Hofstadter, “What Happened to the Antitrust Movement?” in The Paranoid Style in American Politics, rev. ed. (; New York, ), –; Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York, ). Hofstadter’s famous question remains politically salient. Most recently, see Matt Stoller, “How Democrats Killed Their Populist Soul,” Atlantic online, Oct. , , www.theatlantic.com/ politics/archive///how-democrats-killed-their-populist-soul//. Herbert Hovenkamp, “The Chicago and Harvard Schools and the Dominant Firm,” in How the Chicago School Overshot the Mark: The Effect of Conservative Economic Analysis on U.S. Antitrust, ed. Robert Pitofsky (Oxford, ), –. The term producerist refers to a political ideology that values the people involved in the production process, such as farmers or laborers, above those people who merely own capital and participate in market exchanges as middlemen or speculators. By the late nineteenth century, two strands had developed: proprietary producerism and industrial producerism. The former described self-employed farmers and independent proprietors

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American Fair Trade

scenarios collective action problems inherently plagued associations and confounded cooperation. Moreover, the antitrust rulings of the early twentieth century laid out clear incentives for vertical integration, continuously quashing efforts at associational activities. Trade association activities have varied greatly over time and space, and certainly they have sometimes violated price-fixing prohibitions and resisted the “creative destruction” of market forces. Nevertheless, independent proprietors in a variety of trades and their respective business associations never disappeared. In fact, they thrived despite uncertain conditions and a hostile legal environment; ultimately, they fostered both self-regulation and partnerships with government agencies. This is not to say that trade association activities were altruistic or benign, nor does this book support cartels or deny the efficiency gains of large-scale mass production and distribution. Instead, it reorients our attention to the contingency of corporate capitalism and emphasizes the variety of private organizations and regulatory structures that prevailed upon competition policy before the Keynesian revolution.

  The story of the modern American regulatory state begins with the second industrial revolution and its reordering of American economic life. Chapter , “Contracts and Competition in an Era of Economic Uncertainty, –,” explains how economic and business developments led to the reconsideration of existing legal rules and assumptions about market







who owned their shops. The latter referred to industrial wage earners and artisans. Roseanne Currarino, The Labor Question in America: Economic Democracy in the Gilded Age (Urbana, IL, ), –; Kenneth Lipartito, “The Antimonopoly Tradition,” University of St. Thomas Law Journal  (Apr. ): –, . McCraw, “Rethinking the Trust Question,” in New Deals: Business, Labor, and Politics in America, –, ed. Colin Gordon (Cambridge, ); Butler D. Shaffer, In Restraint of Trade: The Business Campaign against Competition, – (Lewisburg, PA, ); Jonathan J. Bean, Beyond the Broker State: Federal Policies toward Small Business, – (Chapel Hill, NC, ). Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York, ), . Schumpeter coined the term “creative destruction” to describe capitalism’s “process of industrial mutation . . . that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” For a recent work on the international management of business standards in high-tech industries, see Craig Murphy and JoAnne Yates, The International Organization for Standardization (ISO): Global Governance through Voluntary Consensus (New York, ).

American Competition



competition. Three types of business organizations emerged – vertical combinations, horizontal combinations, and trusts – and law and policy struggled both to accommodate and to control each. The American system of constitutional federalism and judicial supremacy had created certain rules and norms to foster proprietary capitalism, mostly through state law and adjudication. Yet through the s, state laws seemed increasingly unable to meet the challenges of the new industrial era to the satisfaction of the majority of Americans. This dissatisfaction led to federal debates on antimonopoly policy. Chapter , “The Origins of American Fair Trade: The Sherman Antitrust Act and Conflicting Interpretations of Law, –,” demonstrates how the impetus for a federal antitrust law emerged from state laws regulating shipping prices. Lacking a consensus on the congressional intent of the Sherman Antitrust Act of , the U.S. Supreme Court struggled to adjust existing common law rules to new federal law and changing economic conditions. By  the Court had adapted its older, common law “rule of reason” to federal antitrust law. Thereafter, the Court prohibited any vertical price schedules between manufacturer, wholesaler, or retailer. Other tactics, such as predatory pricing, were also outlawed. At the time, it remained unclear whether these rules would remain federal law; however, it became increasingly apparent that the Court’s antitrust jurisprudence encouraged corporate consolidation or its alternative – pure and open market competition. Existing anywhere in between exposed a company to litigation. What became known as fair trade began with vertical price contracts that set specialty and brand-name retail prices, service guarantees, and rebates. Open price associations, or combinations of proprietors, also sought to regulate the distribution chain through association-based rule making, monitoring, and enforcement. These associations had roots in nineteenth-century common law and business practices and received strict scrutiny under the new federal law. The associational alternative quickly gained proponents in a broad coalition of business leaders, scholars, and policymakers who disliked the Court’s strict interpretation of antitrust law and/or distrusted the rise of corporate capitalism. The term “fair trade” emerged in  in response to the U.S. Supreme Court’s strict interpretation of market competition. The Court forbade any contractual agreements regarding downstream pricing as a violation 

Arthur Jerome Eddy, “The New Competition: The Open Price Policy,” in The World’s Work: A History of Our Time, ed. Arthur Wilson Page (Oct. ) : –.



American Fair Trade

of the Sherman Act per se. The per se prohibition, as it become known, signaled that the Court would not hear arguments on the economic benefits of cooperative pricing agreements. In contrast, the rule of reason allowed for economic arguments to legitimize questionable business activities, even if such conduct led to monopolization. The trouble was that the per se prohibition outlawed agreements that had been used by independent producers to protect and grow their brands through established retail networks. Under such a scheme, known formally as resale price maintenance (RPM), producers sold only to retailer networks that agreed to sales terms such as sell-by dates, service guarantees and warranties, and price schedules. Retailers, in turn, were given assurances that any competing retailers had agreed to similar terms. For these producers and retailers, price maintenance was central to preserving long-term, interfirm collaboration through the distribution chain, as well as to promoting new brands and products. For the Court, however, these agreements resembled pools of competitors that restricted new market entrants and therefore constituted illegal price fixing. The Court’s strict interpretation of antitrust law, especially as it applied to independent proprietors with limited market share, precipitated the fair trade movement. Chapter , “The Economics and Ideology of American Fair Trade: Louis Brandeis, Resale Price Maintenance, and Open Price Associations, –,” analyzes the first decade of this movement, its stated goals, and its developing relationship with government agencies. Louis Brandeis, known as a crusader against “bigness,” helped form the American Fair Trade League (AFTL) to rebrand RPM as fair trade, a much more palatable term. Brandeis cared deeply about economic decentralization as a protection against the undue political power of economic elites. The league brought together a group of artisanal producers and specialty proprietors in pharmaceuticals, watch making, electronics, and printing. They pursued two goals: first, to create trade networks strong enough to compete with the growing market power of large-scale manufacturers and discount retailers; second, to convince policymakers, jurists, and consumers that codes of fair competition ensured quality brand names, encouraged entrepreneurial innovation, and protected consumer welfare. Fair trade manuals taught proprietors basic cost accounting to standardize business practices within the network. Their idea was to maintain price stability by emphasizing non-price competition, such as brand management and quality controls,  

Dr. Miles Medical Company v. Park & Sons, Inc.,  U.S.  (). Standard Oil Co. of New Jersey v. United States,  U.S.  ().

American Competition



product innovation and placement, and retail services. The AFTL blacklisted and prosecuted defectors as well as discounters who sold brand-name goods in violation of fair trade agreements. Pharmacists and grocers expanded their earlier consumer advocacy and promotional campaigns for brand labeling and quality controls into new efforts to organize in support of fair trade. Although the AFTL campaign failed to win national legislative antitrust exemption until the Second New Deal, its campaign influenced the development of administrative law through the Clayton Antitrust Act and the Federal Trade Commission Act. Both pieces of legislation acknowledged the need for the legal category of fair competition to exist in between purely free-market competition and regulated monopolies. Advocates such as Arthur Jerome Eddy dubbed it the “new competition.” The league litigated, lobbied, and publicized, but its greatest successes resulted from working within the newly formed U.S. Chamber of Commerce (USCC) and later collaborating with administrative agencies such as the Department of Commerce and the FTC. Chapter , “Institutionalizing the ‘New Competition’: Herbert Hoover and the Adaptation of Regulated Competition, –,” demonstrates how fair trade advocates participated in USCC study groups and partnered with federal agencies to collaborate on creating and implementing industry-specific trade rules and standards. The USCC, founded in , brought together a diverse group of trade associations and municipal chambers of commerce to discuss national commercial interests. Its explicit goal was to cooperate with federal agencies to promote interfirm and public–private information sharing so as to facilitate best practices for regulators, policymakers, and businesspeople alike. AFTL members positioned themselves in USCC study groups that reported on recent trends in uniform cost accounting, industry-specific grading and standardization, and information sharing on supply-chain management and pricing. Through the s USCC members also considered fair wages, pension programs, and profit sharing as additions to the new competition agenda. Of course, none of this would have been possible without the complicity of federal agencies, which provided oversight and at times consent. The FTC and the Department of Commerce sent representatives to USCC meetings to educate businesspeople on compliance



For more on the economic analysis regarding why manufacturers and retailers might support RPM, see Lester G. Tesler, “Why Should Manufacturers Want Fair Trade?” Journal of Law and Economics  (Oct. ): –; Kenneth G. Elzinga and David E. Mills, “Leegin and Procompetitive Resale Price Maintenance,” Antitrust Bulletin  (): –.

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American Fair Trade

with antitrust rules when they were discussing bids, contracts, deliveries, prices, or wages. In  the FTC began hosting trade practice conferences, which facilitated trade association standardization practices, costaccounting rules, codes of ethics, and price comparisons. The discussion of certain activities, such as retail prices, garnered the attention of Department of Justice prosecutors looking for easy antitrust convictions. Throughout the s tensions continued between administrative agencies interested in pursuing new avenues of managed competition and attorneys at Justice charged with enforcing antitrust laws. Alongside business leaders and administrative officials, a group of progressive economists provided a trenchant critique of neoclassical economic theory – particularly the assumption that free-market competition necessarily maximizes aggregate public welfare – and probed the feasibility of new types of economic planning. They called for a new era in government–business relations, in which government agencies would collaborate with businesses to facilitate more equitable economic and social outcomes. The founders of this movement – among them Walton Hamilton, Wesley Mitchell, and Thorstein Veblen – had served as economic advisors to the War Industries Board (WIB) and the U.S. Food Administration during World War I. Like many businesspeople at the chamber, they did not want to maintain wartime controls; instead, they insisted that the successes of a partially coordinated economy could be replicated in peacetime through public–private partnerships. The new competition movement in business and law thus coincided with a powerful critique of laissez-faire liberalism coming out of economics 



Malcolm Rutherford, “Understanding Institutionalist Economics: –,” Journal of the History of Economic Thought  (Sept. ): –; Hodgson, Evolution of Institutional Economics; Yuval Yonay, The Struggle over the Soul of Economics: Institutionalist and Neoclassical Economists in America between the Wars (Princeton, NJ, ). For a more critical assessment of institutionalists, see Mark Blaug, Economic Theory in Retrospect, th ed. (Cambridge, ). Rutherford explains that the conventional history of the institutionalist movement in the early twentieth century portrays it as disjointed and incoherent. He and other revisionist economic historians, however, have recently countered this interpretation, arguing that “institutionalism was associated with a particular research agenda that must, at the time, have seemed full of promise and excitement.” Rutherford, “Understanding Institutionalist Economics,” . Robert D. Cuff, The War Industries Board: Business-Government Relations during World War I (Baltimore, MD, ). Cuff argues that “the WIB and its administrative program were a bundle of paradoxes where decentralization vied with centralization, competition with combination, individualism with integration, freedom with coercion.” Ibid., –. See also William J. Barber, From New Era to New Deal: Herbert Hoover, the Economists, and American Economic Policy, – (Cambridge, ), –.

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departments, think tanks, and other progressive institutions. Fair trade fit within that agenda. The onset of the Great Depression further galvanized business associations and policymakers to manage markets in order to maintain services, wages, and prices. States led experiments in partial planning. Because federalism limited the Sherman Act to interstate commerce, states were free to maintain their own antitrust jurisprudence. Chapter , “California Fair Trade: Constitutional Federalism and Competing Visions of Fairness in Antitrust Law, –,” explains how that state emerged as the leader in fair trade business networks and public policy. Through the early twentieth century, some state courts had maintained exceptionally permissive competition law, despite the trend in federal courts to curtail fair trade practices. This permissiveness, in turn, encouraged trade associations to experiment in collaborative buying, marketing, and sales policies. An unlikely leader in the California fair trade movement, Edna Gleason, known as the “mother of fair trade,” exemplified the dual appeal of woman as citizen–consumer and local business leader as protector of the community interest. She spearheaded the California campaign for fair trade legislation to exempt fair trade contracts from antitrust law when those agreements protected brand name goods that were traded in free and open competition with other brands. The act allowed manufacturers to set contract terms, but retailer associations exerted powerful influence over manufacturers and largely policed these agreements. Ultimately, the California fair trade movement influenced New Deal experiments in national economic planning. Finally, Chapter , “Managing Competition in the Great Depression: Between Associational and State Corporatism, –,” examines how the concepts of fair trade and managed competition translated into mandatory codes of fair competition that defined President Franklin Roosevelt’s early New Deal policies. The National Industrial Recovery Act (NIRA) stretched the tenets of the new competition and applied them on an unprecedented scale. The associational model briefly gave way to state corporatism, a system in which businesses were required to join industryspecific associations and abide by production and pricing rules approved by new administrative agencies. Despite a short rebound, the NIRA proved both unpopular and inconsistent with existing constitutional doctrine. The Court eviscerated the NIRA only two years after its passage, largely ending the experiment in a coordinated market economy. Unable and unwilling to sustain direct federal management of the economy, political leaders returned to piecemeal legislation meant to reflate the economy. The ad



American Fair Trade

hoc approach to policymaking reinstated a liberal market economy, though one in which an associational model persisted in business, labor, and agriculture. Business leaders pushed hard to protect the gains made under state fair trade laws and the NIRA. After decades of legal advocacy and institution building, the fair trade movement passed two major federal laws: the Robinson-Patman Act () prohibited sales below cost, and the Miller-Tydings Act () enabled cooperative price and service contracts between fair trade states. Each law came with its own limitations and failings. The former proved to be an administrative nightmare that permanently marred implementation, and the latter left cooperative networks to fend for themselves in the marketplace without their coveted relationship to federal administrators. As the American public tired of economic depression and wartime price controls, Keynesian economics offered new tools for macroeconomic management through fiscal spending. Post–World War II, low-cost consumerism coincided with the decentralization of bargaining and the pluralist fragmentation characteristic of a liberal market economy. The American fair trade regulatory experiment had largely ended, but long after it had fallen out of favor with consumers, its legacy of antimonopoly sentiment against market concentration remained part of both the administrative state and antitrust law. Although part of this narrative chronicles fair trade interest-group formation and political maneuvering, the antitrust issues embodied in fair trade and the new competition transcended the capture of the regulatory state by single-issue interest groups. On the one hand, the pharmaceutical industry case study demonstrates how and why specialty producers and retailers supported fair trade agreements and why other interest groups did not. Yet these proponents of market cooperation and coordination championed a competing vision for American capitalism that appealed to progressive reformers outside the business sphere. Thus on the other hand, the fair trade controversy also illustrates an alternative vision for



For a discussion of pluralist fragmentation, see Peter A. Hall, “The Changing Role of the State in Liberal Market Economies,” in The Oxford Handbook of Transformations of the State, eds. Stephan Leibfried et al. (Oxford, ), –. In the post–World War II era, the term “fair trade” became an international status symbol appealing to wealthy consumers willing to pay above-market prices for ethically sourced goods from the developing world, though even these networks have sometimes raised the ire of antitrust regulators. See Murphy and Yates, International Organization for Standardization; Sarah Rackoff, “Room Enough for the Do-Gooders: Corporate Social Responsibility and the Sherman Act,” Southern California Law Review  (July ): –.

American Competition



American capitalism that percolated out of the Progressive Era and culminated in New Deal policies. This alternative vision must be understood within the context of the evolving marketplace of regulatory ideas, as well as the changing economic environment. American Fair Trade argues that while the Great Depression created a political opportunity for progressive policies, those policies were pulled from an existing playbook of progressive ideas and therefore were not merely the preferences of a powerseizing interest group. Fair trade was part of a lost alternative for American corporate capitalism, though one that persists within the institutional foundations of the modern administrate state and latent populist impulses of the American public. American fair trade should not be dismissed as merely a transient, rentseeking movement. In terms of state-building, the movement to institutionalize the new competition facilitated the development of administrative state capacity through durable public–private collaboration. By  experiments in a coordinated market economy that affected ordinary goods had largely ended. Yet the modern American administrative state had achieved a level of autonomy that subsumed issues of managing competitive markets into various administrative processes of rulemaking, adjudication, and enforcement – largely away from public scrutiny.

 Contracts and Competition in an Era of Economic Uncertainty, –

Monopoly and anti-monopoly, odious as these words have become to the literary ear, represent the two great tendencies of our time: monopoly, the tendency to combination; anti-monopoly, the demand for social control of it. – Henry Demarest Lloyd, “Lords of Industry” ()

Quoting Adam Smith’s warning that whenever businesspeople gather, “even for merriment and diversion,” collusion and price fixing result, political commentator Henry Demarest Lloyd reminded his readers that all businesspeople invariably sought to control market prices and stifle competition to their own benefit. What appeared most egregious to Lloyd, however, was the spread of combinations – groups of businesses that attempted to fix prices across sectors. Combinations of competitors, he explained, used horizontal contracts or informal agreements to link together producers, limit supply, and thereby raise prices, such as among coal companies in Pennsylvania and New York, starch producers in the northeast, cotton manufacturers in the South, and dairy farmers in the midAtlantic. These agreements were unenforceable at law, yet they appeared ubiquitous, and state attorneys general, not party to the contracts, found it difficult to intervene under common law rules and state laws.





Henry Demarest Lloyd, “The Lords of Industry,” North American Review  (June ): –, . Quoting Adam Smith: “People of the same trade hardly meet together even for merriment and diversion but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (London, ), : . Lloyd, “Lords of Industry,” –.



Contracts and Competition in an Era of Economic Uncertainty  In the closing decades of the nineteenth century, the American economy transformed from what Lloyd characterized as a nation of competitive, independent shopkeepers to one that was becoming dominated by largescale industrial corporations and combinations. As Lloyd noted, businesspeople responded to the new economic opportunities and challenges presented by a rapidly changing economy, and competition policy shaped their choices in important ways. New business ventures capitalized on both the flexibility of nineteenth-century common law and the limitations of state laws governing the growing national market for goods and capital. Lloyd lamented that the legal rules and institutions crafted during the preceding century failed to adequately govern new forms of business organization. He provided a progressive critique of these limitations, demonstrating not only the embeddedness, or inertia, of legal institutions but also the potentially sclerotic relationship between the form and function of the law. Existing legal rules, as well as their underlying assumptions about the nature and purpose of market competition, had failed to adapt to the new economic reality of the s, according to Lloyd. But he also held out hope that new rules could be crafted to promote citizenship over wealth, and morality over industry. He called for public scrutiny of these new business organizations, the inadequacy of existing legal rules, and what he believed were the anticompetitive effects of aggregated market power. By the s technological and economic developments had produced significant dislocations and difficult new challenges. Not only had transportation and communication systems revolutionized the speed at which goods and services were exchanged, but new manufacturing techniques in industrial and consumer products had also dramatically lowered prices and flooded markets with an array of new brand-name goods. Exposed to the  



 Ibid., –. Ibid., . “If the tendency to combination is irresistible, control of it is imperative. . . . Not new land, but new virtue must be the outlet for the future.” Ibid. This theme has been picked up by historians as well. See William J. Novak, “Law, Capitalism, and the Liberal State: The Historical Sociology of James Willard Hurst,” Law and History Review  (spring ): –. On the “hardening” of American common law rules and the rise of “legal formalism” in the late nineteenth century, see Morton J. Horwitz, The Transformation of American Law, – (Cambridge, MA, ), . See also Robert W. Gordon, “Morton Horwitz and His Critics: A Conflict of Narratives,” Tulsa Law Review  (summer ): –. Railroad track mileage totaled , in  and reached , miles in . Robert Fogel, Railroads and American Economic Growth: Essays in Econometric History (Baltimore, MD, ); Albert Fishlow, “Productivity and Technological Change in the Railroad Sector, –,” in Output, Employment, and Productivity in the United States After , ed. Dorothy S. Brady (New York, ), –. See also Richard John, Network Nation: Inventing American Telecommunications (Cambridge, MA, ), –.



American Fair Trade

growth of world production, U.S. agricultural prices fell. As markets became more competitive, overall price levels in the country fell by  percent between  and . Additionally, because the U.S. money supply failed to keep pace with ever-rising demand, nominal wages also fell. While many Americans enjoyed improved standards of living, the downward pressure on prices and wages caused deflation, which made debts harder to pay off. Deflation combined with recurrent recessions to further complicate labor relations, farm debts, and business management, especially for smaller firms with lower cash flow and capitalization. To address these challenges, many businesspeople pursued new forms of intra- and interfirm organization, but jurists and policymakers struggled to reconcile these novel organizations with older legal norms. The existing legal order – what legal historians have referred to as “classical political economy” – had developed over the course of the nineteenth century to govern contract disputes involving comparatively small, individually owned and operated enterprises. Private contract disputes, which comprised the vast majority of common law disputes, involved individual claimants. By the s common law competition policy treated parties to a contract as rough equals and presumed that the contractual obligations reflected the will of both parties. Judges strictly enforced contracts governing employment relations and sales agreements, rather than intervening to determine the equity of the deal, as had been customary in a previous era. The triumph of liberty of contract doctrine effectively depoliticized unequal bargaining power, elevating the so-called meeting of the minds to a standard of fair dealing, often to the detriment of weaker groups. 

 



For an early documentation of falling prices and farmer unrest, see Solon J. Buck, The Granger Movement: A Study of Agricultural Organization and Its Political, Economic, and Social Manifestations, – (Cambridge, MA, ), , –. N. Gregory Mankiw, Principles of Economics, th ed. (Mason, OH, ), , . See note , p. . See also David A. Wells, Recent Economic Changes and Their Effect on Production and Distribution of Wealth and Well-Being of Society (New York, ). On average inflation rates throughout U.S. history, see U.S. Department of Commerce, Historical Statistics of the United States: Colonial Times to  (Washington, DC, ), : –. For an overview of deflation and debtors, see also David M. Kennedy and Lizabeth Cohen, The American Pageant, th ed. (Boston, MA, ), . On the industrial revolution and technological change, see David S. Landes, The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from  to the Present (Cambridge, ). Herbert Hovenkamp, Enterprise and American Law, – (Cambridge, MA, ); William Wiececk, The Lost World of Classical Legal Thought: Law and Ideology in America, – (Oxford, ). See also Horwitz, Transformation; P. S. Atiyah, The

Contracts and Competition in an Era of Economic Uncertainty  Nineteenth-century competition policy allowed considerable flexibility in business contracts, particularly to mitigate economic downturns by controlling supply or allocating market territories in what were known as ordinary trades – private businesses that were neither public utilities nor companies that served some special public purpose, such as common carriers. Jurists argued that when such contracts were limited in time and space, they reasonably protected the public interest in maintaining competitive markets over the long term. But contracts that fixed prices solely for the benefit of producers or retailers unreasonably violated the public’s interest in competitive markets and low prices. By the s an increasing number of largescale firms began experimenting with such contracts to aggregate market power throughout entire sectors and regions of the economy. These experiments raised concerns about the efficiency and desirability of such agreements. Lloyd and other commentators questioned whether the law should categorically differentiate among types of businesses in applying contract rules. Throughout this period policymakers and commentators struggled to reconcile the existing private rights of property and liberty of contract with the public’s interest in competitive markets and fair dealing. Competition policy relied on the supplementary power of state corporate law to define the privileges and duties of corporate entities; these laws often circumscribed the ability of corporations to combine through contracts or more formal merger agreements. John D. Rockefeller of Standard Oil dismissed the use of contracts and informal agreements to control supply or prices as “ropes of sand.” Instead, he consolidated managerial control and market power through innovative legal devices



Rise and Fall of Freedom of Contract (Oxford, ). On liberty of contract and labor law, see Daniel R. Ernst, Lawyers against Labor: From Individual Rights to Corporate Liberalism (Urbana, IL, ); William E. Forbath, “The Shaping of the American Labor Movement,” Harvard Law Review  (Apr. ): –. On law, farmer organization, and social protest, see Lawrence Goodwyn, Democratic Promise: The Populist Moment in America (New York, ); Charles Postel, The Populist Vision (New York, ); Victoria Saker Woeste, The Benevolent Trust: Law and Agricultural Cooperation in Industrial America, – (Chapel Hill, NC, ). On independent proprietors and proprietary capitalism, see Philip Scranton, Proprietary Capitalism: The Textile Manufacture at Philadelphia, – (New York, ); Scranton, Endless Novelty: Specialty Production and American Industrialization, – (Princeton, NJ, ). See note , p. . On ordinary trades versus public utilities regulation, see Hovenkamp, Enterprise and American Law, –; William J. Novak, “The Public Utility Idea and the Origins of Modern Business Regulation,” in The Corporation and American Democracy (Cambridge, ); Gail Radford, “From Municipal Socialism to Public Authorities: Institutional Factors in the Shaping of American Public Enterprise,” Journal of American History  (Dec. ): –.



American Fair Trade

that, in turn, challenged the scope of corporate law. Rockefeller eliminated competitors and middlemen altogether: first, through a formal legal contract that created a corporate trust by exchanging member corporations’ stock for certificates of the newly issued Standard Oil Trust and, later, through mergers and acquisitions. Consolidated, large-scale corporations came to control some markets by acquiring significant segments of producing capacity, centralizing management and streamlining production, and expanding either backward or forward into complementary industries. Such firms constituted a profound transformation in American business, and many Americans responded by asking how the law should change to both accommodate and control these new creations. This chapter describes the legal foundations of competition policy that emerged during the nineteenth century and examines how that policy shaped the different responses of businesses that were trying to address the dislocations caused by economic and technological change. State corporate law and the common law of competition had provided a sufficiently robust framework for governing most of the nineteenth-century political economy. By the s, however, that framework had begun to strain under new economic conditions, and eventually it proved incapable of regulating interstate corporations and combinations. Nevertheless, state-level legal institutions and business organizations established during this period shaped what some historians have called the “formative era”







Allan Nevin, Study in Power: John D. Rockefeller, Industrialist and Philanthropist (New York, ), : . See also Sean Dennis Cashman, America in the Gilded Age: From the Death of Lincoln to the Rise of Theodore Roosevelt, rd ed. (New York, ), . On corporate consolidation, see Alfred D. Chandler, The Visible Hand: The Managerial Revolution in American Business (Cambridge, MA, ); Naomi Lamoreaux, The Great Merger Movement in American Business, – (Cambridge, ). Additionally, Philip Scranton has advanced a business history emphasizing the persistence of batch and bundle production methods, which allowed independent producers to survive and even thrive through this time period. See Scranton, Endless Novelty: Specialty Production and American Industrialization, – (Princeton, NJ, ). See Louis Galambos, “The Emerging Organizational Synthesis in American History,” Business History Review  (autumn ): –; Galambos, “Technology, Political Economy, and Professionalization: Central Themes of the Organizational Synthesis,” Business History Review  (winter ): –; Richard R. John, “Elaborations, Revisions, Dissents: Alfred D. Chandler, Jr.’s The Visible Hand after Twenty Years,” Business History Review  (summer ): –, ; Richard John, “Governmental Institutions as Agents of Change: Rethinking American Political Development in the Early Republic, –,” Studies in American Political Development  (fall ): –, .

Contracts and Competition in an Era of Economic Uncertainty  of national competition policy. The chapter follows three business organizations through the s: the Dr. Miles Medical Company, a start-up manufacturer of proprietary medicines that used vertical price contracts with retailers to control its brand; the Muzzy Starch Company, a manufacturer of cooking and laundry starch that attempted to fix prices by creating a combination; and the Standard Oil Trust, a group of oil refiners led by Rockefeller that consolidated control over oil production and distribution. Each business responded to existing legal constraints, pursuing various business tactics that were emblematic of the era’s economic and legal transformations. And, as the chapter shows, each business helped shaped U.S. competition law through federal court cases.

-  :        Over the course of the nineteenth century, jurists and policymakers struggled to formulate a common law of competition that would govern marketplace transactions. This struggle revolved around reconciling the private rights of property and contract with the public interest in a well-regulated society. At law, the distinction between public and private spheres is foundational. All law can be subsumed into these two categories, but they have changed and 



Historians have often neglected the development of state-level competition policy and thereby have obscured the constraints that state law posed on national policy. On the formative era of national competition policy, see Richard Hofstadter, “What Happened to the Antitrust Movement?” in The Paranoid Style in American Politics (; repr., New York, ), –; Letwin, Law and Economic Policy; Hans Birger Thorelli, Federal Antitrust Policy: Origination of an American Tradition (Baltimore, MD, ); James Weinstein, The Corporate Ideal in the Liberal State: – (New York, ), –; Robert Bork, Antitrust Paradox: A Policy at War with Itself (New York, ). On state and federal antitrust, see James May, “Antitrust in the Formative Era: Political and Economic Theory in Constitutional and Antitrust Analysis, –,” Ohio Law Journal  (spring ): –. Charles W. McCurdy, “The ‘Liberty of Contract’ Regime in American Law,” in The State and Freedom of Contract, ed. Harry N. Scheiber (Stanford, CA, ), –; McCurdy, “Justice Field and the Jurisprudence of Government-Business Relations: Some Parameters of Laissez-Faire Constitutionalism, –,” Journal of American History  (Mar. ): –; Howard Gillman, “The Antinomy of Public Purposes and Private Rights in the American Constitutional Tradition, or Why Communitarianism Is Not Necessarily Exogenous to Liberal Constitutionalism,” Law & Social Inquiry  (winter ): –; Harry N. Scheiber, “Private Rights and Public Power: American Law, Capitalism, and the Republic Polity in Nineteenth-Century America,” Yale Law Journal  (Dec. ): –; William J. Novak, “Public-Private Governance: A Historical Introduction,” in Government by Contract: Outsourcing and American Democracy, eds. Jody Freeman and Martha Minow, (Cambridge, MA, ), –.



American Fair Trade

been contested over time. Essentially, public law affects society as a whole and includes constitutional issues, criminal laws, and administrative laws that govern state agencies. In state law the public sphere is regulated by state police powers – the authority to promote public health, safety, and morals. In contrast, private law – which includes property, tort, family, and contract law – involves the rights and obligations of individuals, families, and businesses. State police powers limit private rights, but private rights, in turn, limit state regulations. Throughout American history, various configurations of public and private spheres of governance have defined distinct regulatory traditions and shaped both social and economic power dynamics within each era. During the s jurists expanded the private rights of contract to the detriment of competing public-interest goals. Both British and American courts came to sanctify private contracts as both protecting individual autonomy and ensuring market competition. In  the famed Oxford historian Sir Henry Maine presented a theory of world history in which he argued that societies progress “from status to contract” as duties of family and kinship are superseded by market relations defined by impersonal contracts. In reality, however, the legal tradition made a less sweeping move from the status relationship of master and servant, with its long-term 





 

William J. Novak, Intellectual Origins of the State Police Power: The Common Law Vision of a Well-Regulated Society (Madison, WI, ); Novak, The People’s Welfare: Law and Regulation in Nineteenth-Century America (Chapel Hill, NC, ); James Willard Hurst, The Legitimacy of the Business Corporation in the Law of the United States (Charlottesville, VA, ); Eric Hilt, “History of American Corporate Governance: Law, Institutions, and Politics” NBER Working Paper , National Bureau of Economic Research (Cambridge, MA, July ). Christopher G. Tiedeman, A Treatise on the Limitations of Police Power in the United States Considered from Both a Civil and Criminal Standpoint (St. Louis, MO, ), secs. –. See also David Mayer, “The Jurisprudence of Christopher G. Tiedeman: A Study in the Failure of Laissez-Faire Constitutionalism,” Missouri Law Review  (winter ): –. On the rise of liberty of contract in the late nineteenth century, see Phillips Sawyer, “Contested Meanings of Freedom.” These cases expanding liberty of contract rights involved working men, whereas women and children were governed under the doctrine of respondeat superior, conferring a higher standard of care and liability over those people not deemed to be free market agents. Over the course of the late nineteenth century working men’s contract rights became increasingly formalized such that legislative or judicial protections on behalf of a weaker party became more difficult to uphold and enforce. Atiyah, Freedom of Contract, –, , –, –; Horwitz, Transformation, –. Sir Henry Summer Maine, Ancient Law: Its Connection with the Early History of Society, and Its Relations to Modern Ideas (London, ), –.

Contracts and Competition in an Era of Economic Uncertainty  duties and obligations, to that of employer and employee, with its shorterterm contractual relationship. The new liberty of contract era eroded the older customs and legal duties of equitable servitude. Free workingmen gained greater individual autonomy to make contracts (an expression of free will) but also assumed the new risks of potentially making bad deals. The most egregious examples of judicial policymaking that coupled the twin freedoms of greater individualism and greater risk emerged in cases involving labor laws. By the s state courts routinely struck down labor laws that set workingmen’s maximum hours or affected wage rates as violations of both employees’ and employers’ liberty of contract rights. These cases curtailed state regulatory power and granted an implicit subsidy to employers. Critics decried such judicial interventions as establishing “laissez-faire constitutionalism,” wherein supposedly free market contracts reinforced existing economic and social relationships. The problem was that workers did not exercise as strong a bargaining position as employers, especially as corporate power continued to amass capital and social control in the hands of the few. This idea that private contracts could dictate the conditions of economic exchanges and labor relationships was a new concept that had emerged when judges analogized labor contracts to merchants’ trade contracts. As late as , the principles of equity jurisprudence allowed courts to intervene in contractual obligations “by reference to the fairness of the underlying exchange.” In equity jurisprudence a chancellor 

 



See Horwitz, Transformation, –; Amy Dru Stanley, From Bondage to Contract: Wage Labor, Marriage, and the Market in the Age of Slave Emancipation (Cambridge, ), –; Jonathan Levy, Freaks of Fortune: The Emerging World of Capitalism and Risk in America (Cambridge, MA, ), . See also Karen Orren, Belated Feudalism: Labor, the Law, and Liberal Development in the United States (Cambridge, ). Orren argues that the prescriptive nature of the master and servant relationship continued to guide labor law and maintain workplace order through the late nineteenth century. McCurdy, “Federalism and the Judicial Mind,” –. For a contemporary view of the application of police power to liberty of contract issues, see Frederick N. Judson, “Liberty of Contract under the Police Powers,” American Law Review  (Nov.–Dec. ): . Horwitz, Transformation, . Equity jurisdiction developed as a complement to formal legal proceedings, which followed statutory interpretation or common law precedent. Equity courts sat without a jury when the court deemed that the law inadequately addressed a problem, such as considerations of the fairness of an exchange or extenuating circumstances that exonerated violations of a law. Equity was intended to follow the spirit of the law. See Christopher G. Tiedeman. A Treatise on Equity Jurisprudence: With Particular Reference to the Present Conditions of Jurisprudence in the United States (St. Louis, MO, ), secs. , ; John Norton Pomeroy, A Treatise on Equity Jurisprudence, rd ed., Vol.  (San Francisco, ), secs. –, , –.

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American Fair Trade

(a judge sitting without a jury) could annul or amend contracts that exhibited “undue consideration,” such as evidence of inequality of bargaining power, skill, or intelligence. Merchants, however, had already begun circumventing such interventions by entering into sealed contracts that specified performance, damages, and rules of arbitration in trade deals so as to avoid the uncertain outcomes of an equity court’s intervention. The expansion of markets and sales contracts across time and space made this form of customary commercial transaction (“law merchant”) increasingly popular. Futures contracts presented a case in point, wherein the expected value of a commodity could be set out in an executory contract regardless of the market value at the time of execution or delivery. Similarly, as early as the s, state courts had been enforcing speculative contracts on stock trades regardless of price fluctuations – in contrast to the prior rule, which had dictated that the buyer owed only the original value at the time of purchase plus a reasonable interest rate. Far-flung and impersonal trade agreements used contract freedom to displace older customs of rights, duties, and equitable exchanges. The tension between private contract rights and the public interest in wellregulated markets also animated the development of competition policy during the nineteenth century. Common law regulation of marketplace competition emerged from the judiciary’s role interpreting the boundaries

 





See Joseph Story, Commentaries on Equity Jurisprudence, th ed. (Boston, ). John Joseph Powell, Essay upon the Law of Contracts and Agreements (Dublin, ), : x. “But it is absolutely necessary for the advantage of the public at large, that the rights of the subject should, when agitated in a court of law, depend upon certain and fixed principles of law, and not upon rules and construction of equity, which when applied there, must be arbitrary and uncertain, depending, in the extent of their application, upon the will and caprice of the judge.” Ibid. According to Morton J. Horwitz, “Powell’s argument against conceptions of intrinsic value and just price reflects major changes in thought associated with the emergence of a market economy.” Horwitz, Transformation, . See Davis v. Richardson,  Bay.  (), enforcing a contract for the delivery of stocks at their increased market value rather than at their original price plus interest; J. P. Benjamin, Benjamin’s Treatise on the Law of Sale of Personal Property (Boston, MA, ), ; Horwitz, Transformation, . See also note , p. . Horwitz, Transformation, –, . Businesspeople used what is known as the sealed instrument to circumvent common law rules governing contract law. This application of law merchant allowed businesspeople to specify performance in the case of defeasance or malfeasance – without the oversight or approval of a judge, who might use equity jurisdiction to intervene in a common law case. Early in the nineteenth century, courts collapsed the distinction between sealed and unsealed contracts, adopting the law merchant into other common law decisions. Horwitz, Transformation, –. See also Polanyi, Great Transformation, –, .

Contracts and Competition in an Era of Economic Uncertainty  of permissible contracts. Over the course of the century, the scales of justice tilted toward the importance of free contracts, which often protected competitors, rather than free competition as such. By the s courts asked, first, “whether the contract [was] the result of fair bargaining,” and, if so, whether the contract posed a “reasonable” restraint. The test to determine the reasonableness of a contract that restrained trade developed alongside contract law affecting employment and trade. While jurists increasingly enforced contractual agreements regardless of market price fluctuations or undue consideration, not all business contracts were permissible. The courts deemed a contract to be unreasonable if it overextended a restraint across too long a time horizon or too vast a territory, depriving not only the party to the contract of future market participation but also depriving the public. In Mitchel v. Reynolds, a seminal English case establishing the “rule of reason” in competition policy, the Queen’s Bench enforced a bakery lease contract that contained a five-year non-compete clause for the tenant. The court ruled that even though the non-compete clause restrained competition, the clause was legal because it was limited in time and scope; moreover, both parties had taken the clause into account when agreeing on the lease price. In other words, ancillary, or partial, restraints were those that were limited in time and place, as opposed to restraints that were general in application and thus illegitimate. General restraints might, for example, have barred an apprentice from practicing his trade in perpetuity or throughout the entire realm. Thus general restraints, said the court, unreasonably hampered both one’s ability to earn and one’s industriousness. With this ruling, the court created a public interest in both industriousness and market competition – a public interest that could supersede contract rights.



 



Beal v. Chase,  Mich. ,  (), upholding a non-compete contract among printers that covered the entire state of Michigan for the life of the business; Gibbs v. Consolidated Gas Co.,  U.S. ,  (), stating that “the question is whether, under the particular circumstances of the case and the nature of the particular contract involved in it, the contract is or is not unreasonable.” Mitchel v. Reynolds,  Eng. Rep.  (), enforcing a non-compete contract and establishing the rule of reason test. Ibid. at . See Horner v. Graves,  Eng. Rep. ,  (), employing the reasonableness test to uphold a non-compete covenant: “to afford a fair protection to the interests of the party in favour of whom it is given, and not so large as to interfere with the interests of the public.” See also Letwin, Law and Economic Policy, –; William Taylor Hughes, Datum Posts of Jurisprudence (Chicago, IL, ), –. Mitchel,  Eng. Rep. at ; Hans Thorelli, The Federal Antitrust Policy: Origination of an American Tradition (Baltimore, MD, ), –.

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American Fair Trade

By adopting the English rule of reason, American courts institutionalized both the individual’s contractual right to labor and the public’s interest in competitive markets. General restraints, wrote Justice Marcus Morton of the Massachusetts Supreme Judicial Court, would “deprive the public of the services of men, . . . discourage industry and enterprise, [and] diminish the products of ingenuity and skill.” Moreover, they would “prevent competition and enhance prices,” a violation of the public interest. Other American jurists also resolved that the public had an interest in competition, but not “under all circumstances nor to every extent.” Justice James V. Campbell, writing for the Michigan Supreme Court, expounded upon the reasonable limits to competition: The public is quite as much interested in the prosperity of its citizens in their various avocations as it can possibly be in their competition. The latter may bring low prices to purchasers, but may also bring them so low that capital becomes unprofitable and business men fail, to the general injury of the community.

The public interest might therefore validate reasonable contracts that protected competitors, even to the detriment of competition. (As the English court had ruled in Mitchel, the lease contract was reasonable and therefore legal despite its non-complete clause because the two men who had negotiated the contract had considered that clause to be part of the stipulated price of the lease.) Jurists also acknowledged the problem of 

 

Alger v. Thacher,  Mass. ( Pick.) ,  (). The decision listed five “obvious” reasons that a general restraint should be unreasonable and therefore void: “. Such contracts injure the parties making them, because they diminish their means of procuring livelihoods and a competency for their families. They tempt improvident persons, for the sake of present gain, to deprive themselves of the power to make future acquisitions. And they expose such person to imposition and oppression. . They tend to deprive the public of the services of men in the employments and capacities in which they may be most useful to the community as well as themselves. . They discourage industry and enterprise, and diminish the products of ingenuity and skill. . They prevent competition and enhance prices. . They expose the public to all the evils of monopoly. And this especially is applicable to wealthy companies and large corporations, who have the means, unless restrained by law, to exclude rivalry, monopolize business and engross the market. Against evils like these, wise laws protect individuals and the public, by declaring all such contracts void.” Ibid. at . See also Morse Twist Drill & Machine Co. v. Morse,  Mass.  (), upholding a territorial non-compete covenant; Oregon Steam Navigation Co. v. Winsor,  U.S.  (), upholding a non-compete territory that included all of California; Wooden-Ware Association v. Starkey,  Mich.  (), finding a restraint unreasonable because it was too broad and therefore unenforceable. Beal v. Chase,  Mich. ,  (). Beal,  Mich., at , citing Mitchel. “Competition seems not to be regarded as necessarily in itself beneficial, but as something which may or may not be beneficial according to the circumstances.” Ibid. at .

Contracts and Competition in an Era of Economic Uncertainty  so-called destructive competition, writing that an oversupply in any particular trade would diminish the price of the good and consequently reduce the number of suppliers. While the public had an interest in competitive markets, the contracting parties had an interest in limiting that competition. Flouting their old role as arbiters of conscience in equity jurisdiction, courts began their proceedings from the presumption that freely negotiated contracts were valid and enforceable. A contract might be legitimate even if it restrained competition in order to allow an independent proprietor to create or sustain the property right in his brand or business. However, the contract could not explicitly intend to monopolize, raise prices, or restrict output. As a practical matter, the courts’ ability to assess competitive effects was rudimentary at best, with judges often simply requiring low barriers to entry to establish competitive rivalry. Some courts even went so far as to validate contracts that included pricefixing agreements if those agreements were limited to a particular brand that remained in competition with other similar brands. By the late nineteenth century, jurists increasingly deferred to the contracting parties to determine their own self-interest as beneficiaries to the agreement, rather than attempting to measure the competitive effects on market prices. Thus common law competition policy developed in tandem with



 





Leslie v. Lorillard,  N.Y.  (), upholding contracts between steamship companies on the grounds that restricting trade was not found to be ultra vires (a violation of the company charter). Judge John C. Gray wrote: “When, therefore, the provisions of agreements in restraint of competition tend beyond measures for self protection, and threaten the public good in a distinctly appreciable manner, they should not be sustained. The apprehension of danger to the public interests, however, should rest on evident grounds, and courts should refrain from the exercise of their equitable powers in interfering with and restraining the conduct of the affairs of individuals or of corporations, unless their conduct, in some tangible form, threatens the welfare of the public.” Ibid. at . See note , p. . Leslie,  N.Y. at . A restrictive covenant was more likely to be struck down if it involved a staple or necessary good. See Raymond v. Leavitt,  N.W.  (); Chicago Gaslight & Coke Co. v. People’s Gaslight & Coke Co.,  N.E.  (). Fowle v. Park,  U.S.  (), –, upholding a territorial sales agreement on a secret-processed cough suppressant; Bowling v. Taylor,  F.  (), the lower federal court granting an injunction against Taylor for violating a price-setting contract. See also Freyer, Regulating Big Business, –, –. Herbert J. Hovenkamp, “The Sherman Act and the Classical Theory of Competition,” Iowa Law Review  (July ): –, . “This concern with contract and freedom from coercion rather than with price/cost relationship explains why the classical model made little distinction between ‘horizontal’ and ‘vertical’ arrangements in restraint

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American Fair Trade

liberty of contract supremacy as another doctrine that courts used to delineate both private rights and the public interest. Shifting power dynamics in the late nineteenth century, however, called the economic and legal assumptions of liberty of contract into question – particularly its presumption of equality (at minimum, formal legal equality), which had effectively removed unequal bargaining power as a legitimate point of intervention for courts and legislators.

  :  .    While the late nineteenth century is recognized as the formative era of big business, small- and medium-sized firms also coalesced around an agenda to stem falling prices and control product markets through vertical contracts and horizontal combinations. In the s proprietary manufacturers used a variety of tactics – such as informal agreements, trade association rules, and resale price-fixing contracts – to develop brands, improve sales, and control prices. The Dr. Miles Medical Company is a prime example. A start-up manufacturer of therapeutic tonics and elixirs, the company built its brand during a period of price deflation and intense interstate competition. Initially, the firm struggled to differentiate its product from its competitors’ brands. New company leadership, however, pursued an additional tactic to control the distribution chain through a “price protection plan” that contractually set price schedules, guaranteed retail services, and established a buy-back program for unsold goods. While this type of plan was permissible through the s, by the early twentieth century, American courts had begun to disfavor such vertical contracts. As the Dr. Miles Medical Company persisted in its efforts to create, enforce, and expand cooperative price-fixing networks among small producers and retailers, it became embroiled in some of the earliest national litigation on competition policy. The early history of this firm shows how the U.S. regulatory state, particularly through the development of contract law, influenced internal management decisions at small businesses. The company’s story also reveals how the state transferred some of its regulatory powers to professional associations, thereby strengthening those of trade. . . . Neoclassicism greatly broadened this concept of ‘coercion’ to include what might be called ‘market coercion,’ or the deprivation of opportunities that the competitive market itself could be expected to provide. . . . The point was that the doctrine of competition was part of the doctrine of liberty of contract.” Ibid., –.

Contracts and Competition in an Era of Economic Uncertainty  groups and laying the groundwork for them to shape regulatory traditions and even the state itself. Despite its unassuming beginnings, the Dr. Miles Medical Company came to play a key role in American legal history, especially in the development of competition policy. The founding of the Dr. Miles Medical Company was a quaint story, not unlike that of many other independent businesses that began in the late nineteenth century: an entrepreneur created a product, built up a small consumer base, sought funding from family and neighbors, and formed a small corporation to raise additional funds that would ensure its longevity. Yet the fate of the company changed when Albert R. Beardsley joined the firm. His expertise in sales management, which he had cultivated as a manager of the Muzzy Starch Company, transformed the business and brought it in contact with a brave new industrial world. Beardsley worked with Dr. Franklin Miles to build a marketing organization and sales force, and Beardsley pioneered a price protection plan to control prices, bolster the brand, and incentivize retailers to carry their products – skills he had acquired when he witnessed the Muzzy Starch Company’s attempt to maintain a starch combination. Dr. Franklin Miles and his wife, Ellen Lighthall, moved to Elkhart, Indiana, her hometown, in . They had met in Chicago, where both Franklin and Ellen had received medical training – he from Rush Medical College and she from Chicago Hospital for Women and Children. Upon returning to Elkhart, the young couple bought a small cottage downtown, opened a medical practice, and began seeing patients in the front rooms of their home. Franklin, who took an interest in problems of the nervous system, had developed his specialty while interning at the Charitable Eye and Ear Infirmary in Chicago, but he accepted any patients who visited. Ellen had trained as a “woman’s physician.” They had three children before Ellen succumbed to an illness in the summer of . 



Company history by Herbert Beardsley, presented as a memo from Herbert Beardsley to A. L. Beardsley, E. H. Beardsley, C. S. Beardsley, and W. R. Beardsley, Aug. , , Box , Rebate Contracts, Druggists Case, Dr. Miles Medical Company Archives, Ruthmere Museum, Elkhart, IN (hereafter cited as DMMCA). In preparation for a commemoration ceremony for a new building, Herbert Beardsley prepared “a short history of the progress of Dr. Miles Medical Company since it was first started” and presented it to the board of directors. “Dr. Miles Dead in Florida,” Elkhart Truth, Apr. , ; “Round Town,” Elkhart Observer, May , ; “Round Town,” Elkhart Observer, May , , clippings from Box , Rebate Contracts, DMMCA. Ellen died of what was described as “typhomalaria” fever on August , . Franklin also became ill; he recovered but continued to suffer from a cough and frequent bouts of pneumonia for the rest of his life. The family

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American Fair Trade

Elkhart was a typical small industrial town of the upper Midwest, yet its location at the intersection of the St. Joseph and Elkhart Rivers, as well as its proximity to Chicago, made it ideal for commerce and trade. A slight change in elevation made the area suitable for the canals and locks that powered local industry, such as a grain mill, a knitting factory, and a paper company. In  the Michigan Southern Railway built a line through Elkhart, and the following year the New York Central Railroad opened a railroad freight yard. The rails connected Elkhart to both the Atlantic seaboard and other midwestern towns and cities, expanding geographic reach of consumer demand. The town’s population grew at a steady rate throughout the late nineteenth century. Franklin Miles’s medical practice and pharmaceutical services grew along with Elkhart’s population. In  he began corresponding with patients by mail, and as early as , he began shipping the elixirs and tonics that he compounded in his home office. Two years later, at the age of thirty-eight, Miles opened the Dr. Miles Medical Company and began advertising “Dr. Miles’ Remedies” in the town’s newspaper. These “restoratives” included “Nervine” to treat nervousness, antipain pills, a tonic of “pyrophosphate with quinine and iron” to cure weakness, liver pills “efficient in constipation,” and laxative tablets. To raise funds, in  Dr. Miles incorporated and sold shares to two local businesspeople, Norris Felt and Hugh McLauchlan, raising just over $,.







stayed in downtown Elkhart until , when Franklin joined the first wave of retirees advised by their doctors to follow the railroad south to Florida, where hot weather might relieve respiratory ailments. On the expansion of consumer demand by the railroads and communication networks, see Glenn Porter and Harold Livesay, Merchants and Manufacturers (Baltimore, MD, ), –; Glenn Porter, The Rise of Big Business, – (Wheeling, IL, ), –. See also Martha M. Pickrell, Dr. Miles: The Life of Dr. Franklin Lawrence Miles: – (Carmel, IN, ). Elkhart’s population grew by  percent between  and , from , to , people; it grew by  percent the following decade, to ,. During those same two decades, the U.S. population grew from . million to . million, while the foreignborn U.S. population almost doubled, from . million to . million. In , Europeanborn immigrants to the United States comprised  percent of the total immigrant population. See Campbell J. Gibson and Emily Lennon, “Historical Census Statistics on the Foreign-Born Population of the United States: –,” Population Division Working Paper , U.S. Bureau of the Census (Washington, DC, Feb. , last modified May , ) www.census.gov/population/www/documentation/twps/twps .html. Meeting minutes, Nov. , , Nov. , , and July , , Box , Stock Book, DMMCA; company history by Herbert Beardsley, Aug. , , Box , Rebate Contracts, Druggists Case, DMMCA.

Contracts and Competition in an Era of Economic Uncertainty  In the early s, Dr. Miles compounded the formulas himself in the front rooms of his cottage and over time he built a small sales force. After bringing in partners, Miles expanded the company to include a small factory, where batches of compounds were made in large steel tubs. Everything was done by hand in small batches: chemicals and botanicals were poured into vats; those were broken down and mixed by men with giant wooden spoons resembling paddles; tonics were poured into vials and powders were stuffed into capsules, usually by women; labels were pasted onto bottles and boxes and prepared for shipment. Despite the moniker “patent medicine,” Dr. Miles’ Remedies were “secret-processed goods,” containing botanical extracts and chemical compounds. Initially, Dr. Miles sold directly to consumers, but over time his jobbers built a retail network, selling pills at $. per dozen and tonics at $. per dozen. This was the world of proprietary capitalism, where independent proprietors sold their wares through jobbers who maintained regional networks of wholesalers and retailers. The Dr. Miles Medical Company needed to differentiate its products from those of its more established rivals, each of which had developed brand names through regional and national marketing campaigns. The most successful companies included Edward R. Squibb in Brooklyn (); Parke, Davis & Co. in Detroit (); Eli Lilly in Indianapolis (); and William E. Upjohn in Kalamazoo (). Each company compounded its own formulas, distributed promotions, and branded its specialty products. At that time the most well-known female proprietor in therapeutic remedies was Lydia Pinkham, who began marketing the Lydia Pinkham’s Vegetable Compound in . Her ads promised that her special compounds cured women’s ailments, and she encouraged customers to write directly to her for advice. Pinkham used her own name as a





 

See William C. Cray, Miles: A Centennial History (Englewood Cliffs, NJ, ), –. (Unfortunately, this company history provides very few references.) On batch and bundle production methods, see also Scranton, Endless Novelty, –. Zechariah Chafee, “Equitable Servitudes on Chattels,” Harvard Law Review  (June ): –. For a more recent argument for the protection of trade secrets, see Mark Lemley, “The Surprising Virtues of Treating Trade Secrets as IP Rights,” Stanford Law Review  (Nov. ): –, esp. –. Jan. , , Box , Stock Book, DMMCA. Scranton, Proprietary Capitalism, ; Marc Levinson, The Great A&P and the Struggle for Small Business in America (New York, ), ; Sklar, Corporate Reconstruction of American Capitalism, , , ; James Livingston, Pragmatism and the Political Economy of Cultural Evolution, – (Chapel Hill, NC, ), –.

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American Fair Trade

brand, which her heirs continued long after her death in . To establish himself as a reputable doctor and pharmacist, Dr. Miles launched the publication Medical News. In an attempt to set his brand apart from Pinkham’s remedies and other competitors, Medical News and advertisements boasted about Dr. Miles’s medical credentials. Each ad contained the statement that no alcohol was used in his preparations, addressing the accusation leveled against most patent medicine dealers. While regional manufacturers had once relied on wholesalers to repackage and distribute their goods to retailers, by the turn of the century, manufacturers increasingly exercised greater control over their brand names by standardizing their own packaging and marketing. In an era with loose product regulations and innumerable “quack” remedies, brand names ostensibly distinguished products from comparable rivals by establishing the reputation of the product, its manufacturer, and its retailers. Brand-name reputation, which came to be known as goodwill, held a real value to the manufacturer that reverberated through the distribution chain, affecting the buying decisions of wholesalers and retailers as well as customers. Goodwill, in turn, came to be treated as an alienable property right that could be defended against fraudulent replications. In the field of “therapeutics,” as the pharmaceutical industry was then called, consumers often struggled to distinguish between quack remedies and legitimate medicines. Most advertising and packaging boasted panacea formulas but offered little to no information about chemical and botanic ingredients. The average customer was, of course, unable to test the chemical composition of a product. Especially for 



 

Harvard University’s Schlesinger Library on the History of Women in America has digitized much of its collection of Pinkham pamphlets. See Lydia E. Pinkham Medicine Company Records, –, Schlesinger Library, Radcliffe Institute, Harvard University, Cambridge, MA, http://nrs.harvard.edu/urn-:RAD.SCHL:. See also the Pinkham ad in Saint John Daily Evening News, Apr. , , ; Samuel Hopkins Adams, “The Great American Fraud,” Colliers, Feb. , , –, , ; “Propaganda for Reform,” Journal of the American Medical Association  (May , ): –. Peter Temin, Taking Your Medicine: Drug Regulation in the United States (Cambridge, MA, ), –. Elkhart Review (Apr. ) reported that the company had printed its first Medical News. For a later example of Dr. Miles advertising, see Dr. Miles Medical Co., What to Eat (Elkhart, IN, ), Box , Culinary Pamphlets, Corporate, Schlesinger Library, Radcliffe Institute, Harvard University. Susan Strasser, Satisfaction Guaranteed: The Making of the American Mass Market (New York, ), –; Chandler, Visible Hand, . See “Piracy of Marks or Signs of Merchants and Traders,” American Jurist and Law Magazine  (Apr.–July ): –, .

Contracts and Competition in an Era of Economic Uncertainty  intimate products like food and drugs, customers often relied on little more than the reputation of the producer, the brand name, or the retailer behind the counter. In the nineteenth century, consumers purchased goods largely at their own risk, despite numerous economic regulations that otherwise controlled market transactions. Municipal laws, for example, dictated the location of a town’s marketplace; state and local licensing laws restricted who could sell at these locations; ordinances prohibited peddlers, who traveled to sell their wares. Additionally, many cities fixed maximum prices on staple products, such as flour. However, most consumer products fell into another category of ordinary goods, as opposed to staples, or the “necessaries of life,” and the regulations that governed those private transactions were much more limited, as they were considered private transactions. Excluding cases of outright fraud or undue consideration, courts enforced sales contracts as private, consensual agreements between equally competent individuals. By the mid-nineteenth century, the common law doctrine of caveat emptor, or “buyer beware,” had removed the consideration of how adverse market power might affect participants to the exchange. In other words, unequal bargaining power no longer swayed jurists to overrule or alter the terms of an exchange, as courts of equity had done in a previous era. Instead, courts focused on the question of whether an advertisement or a verbal sales pitch qualified as a legal warranty – a question that courts increasingly interpreted in the negative. For example, in  a Tennessee court held that selling a sick horse to an unsuspecting buyer did not constitute fraud or misrepresentation without an explicit written



 





Rudolph Peritz, “‛Nervine’ and Knavery: The Life and Times of Dr. Miles Medical Company,” in Antitrust Stories, eds. Eleanor Fox and Dan Crane (New York, ), –; “Trade-Marks and Unfair Competition,” Harvard Law Review  (Mar. ): –. Novak, People’s Welfare, –; Deutsch, Building a Housewife’s Paradise, –. James Fleming, “Assumption of Risk,” Yale Law Journal  (Feb. ): –, ; William Prosser, “The Assault on the Citadel (Strict Liability to the Consumer),” Yale Law Journal  (June ): –. See review of An Essay on the Doctrine of Contracts: Being an Inquiry How Contracts Are Affected in Law and Morals, by Concealment, Error, or Inadequate Price, by Gulian C. Verplanck, United States Law Journal (Jan. ): : –. For a discussion of legal doctrine moving away from equity consideration as well as jury interpretation of contract obligations and toward judge-made caveat emptor, see Thomas Peirce, “Implied Warranties on Sales,” United States Law Review  (Oct. ): –, –.

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American Fair Trade

guarantee of the horse’s health. Additionally, courts did not hold an advertisement to be a literal promise of a product’s content, performance, or value. As a result, a brand name’s goodwill, or reputation, came to be considered a particularly valuable type of property, one that could be sold in contracts along with the business itself and associated real property. The disclaimer pasted on every Dr. Miles bottle of tonic and tablets reiterated the caveat emptor principle and the value of branding. Not only did it waive any liability or refund if the product did not cure the patient, but it also begged satisfied customers to send testimonials to the company. Like Lydia Pinkham, Miles offered free medical advice by post. The early years of the Dr. Miles Medical Company were spent trying to build a brand name by mimicking many of the marketing and sales tactics used by competitors. In December  the company bought a lithograph for printing box labels and two years later purchased a printing press to publish promotional booklets and calendars. While the company dealt with minimal state regulation of its formulas and marketing, private associations of doctors, pharmacists, and drug manufacturers exercised a quasi-regulatory role that affected prices. Professional associations coordinated production techniques and recommended dosages for an array of approved products – both those compounded by pharmacists and those produced in labs and factories. A layering of trade associations with regulatory powers emerged in the  







McFarland v. Newman,  Watts  (). Goulding v. Skinner,  Pick.  (). The U.S. Supreme Court first validated the caveat emptor doctrine in Laidlaw v. Organ,  U.S.  (), upholding a futures contract despite the fact that the value of the product had dramatically changed and the buyer had privileged information affecting that price. Lacking evidence of fraud, the sales contract would be enforced. See also “Notes of the Month” and “Questions and Answers at the Solicitors’ Honours’ Examination, June ,” Law Students’ Journal  (July ): –, –; Friedrich Kessler, “The Protection of the Consumer under Modern Sales Law,” Yale Law Journal  (): –; Horwitz, Transformation, –; William E. Nelson, Americanization of the Common Law: The Impact of Legal Change on Massachusetts Society, – (Athens, GA, ), –. George Joseph Bell, “Inquiries into the Contract of Sale of Goods and Merchandise as Recognised in the Judicial Decisions and Mercantile Practice of Modern Nations,” Law Library  (): i-, esp. . Caveat emptor is described here as “Let every man look to his own interest, and be vigilant to observe defects in what be he buys, or to stipulate a special warranty.” Ibid., . At the first annual meeting, Dr. Miles pasted the printed disclaimer in the otherwise handwritten ledger. It read: “It is the Christian duty of every person greatly benefited to inform Dr. Miles that the truth may be known and other fellow sufferers likewise cured.” Meeting minutes, Nov. , , Box , Stock Book, DMMCA. Ibid.

Contracts and Competition in an Era of Economic Uncertainty  nineteenth century. Although the American Pharmaceutical Association (APhA) was not formally established until , thirty years earlier a group of state associations had issued the first Pharmacopeia of the United States of America in . Following the lead of the Massachusetts Pharmacopeia, the publication intended to galvanize a national association of medical professionals, including both pharmacists, who made compounded prescriptions, and apothecaries, who sold manufactured medicines. Pharmacopeia cataloged and standardized chemical compounding formulas and dosages into two categories – proved and “uncertain” – but it did not cover botanicals (such as vegetable extracts) and minerals. The sixth edition of the catalog, published in , signaled a turning point in the professional stature of the APhA and neighborhood pharmacists. The APhA reorganized to create a single executive body tasked with testing and revising the Pharmacopeia, ending feuds between New York and Philadelphia pharmacists. Moreover, the revised publication instructed pharmacists to perform quality-control tests for compounded and manufactured formulas, thereby increasing the formality of procedure and provision. Several states issued laws making the Pharmacopeia the official standard for pharmaceutical dispensaries. The revisions to the sixth edition of the Pharmacopeia had jettisoned many ingredients and formulas used by manufacturers in patented or secret-processed drugs; neighborhood pharmacists, however, continued to offer these ingredients through their compounding services. As a result, Philadelphia pharmacists established the National Formulary of Unofficial Preparations (NF) in  to “collect and arrange . . . local unofficial formulae.” The National Formulary served as a complement to the Pharmacopeia, standardizing the ingredients and compounding formulas used by pharmacists. In fact, the pharmacists had hoped to stave off further competition from brand-name drugs by standardizing compounding services and advertising them as a cheaper alternative. Despite the inclusion of “unofficial” in the formulary’s title, the U.S. Food and Drug 





Edward Kremer and Glenn Sonnedecker, Kremers and Urdang’s History of Pharmacy, th ed. (Madison, WI, ), . After the  edition, the Pharmacopeia also encouraged pharmacists to use the metric system, “Report of the Committee on Local Unofficial Formulae,” Proceedings of the American Pharmaceutical Association  (): –. Following the report were lists given by pharmacists from New York, Boston, Philadelphia, Baltimore, MD, Washington, DC, Alexandria, VA, and Plaquemine, LA. Ibid., –. Louis Diehl, “The Evolution of the National Formulary,” American Pharmaceutical Association Bulletin (Feb. ): –.

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American Fair Trade

Act of  officially sanctioned its use by pharmacists, just as it did the U.S. Pharmacopeia. The effect of these self-regulating organizations was to control and coordinate not only production methods and output, but also prices. In addition to a decent product and a marketable brand name, the Dr. Miles Medical Company needed a reliable distribution system. Miles needed to secure relationships with wholesale and retail networks that would enable the company to reach both new and existing customers through predictable and reliable channels. Regional manufacturers, as Miles hoped to become, often established relationships with wholesalers, who purchased bulk orders and then distributed goods through a network of retailers. Those retail merchants bought smaller quantities and sold directly to customers. At a time when most retail stores kept goods behind a service counter, customers had to interact directly with the salesperson, giving him or her (though usually him) considerable influence over purchases. Ultimately, those businesses were responsible for the dissemination of the product, and they exercised considerable power over producers. Five years into the venture, Miles had not created a distribution network or a sales force; orders only trickled in from individual customers and retailers. Miles was good at many things, but business management was apparently not one of them. He reached out to members of his community to secure greater working capital to maintain the firm, and luckily, in  Albert Beardsley joined the company. By that time Beardsley was perhaps one of the wealthiest and best-known businessmen in Elkhart. He had gotten his start working in a local dry goods store as an apprentice – but he was no ordinary apprentice. His uncle, Dr. Havilah Beardsley, had founded Elkhart in . Having had no children, Havilah’s widow had invited Albert to live at her home when he was a teenager. The young Beardsley left his family farm in Ohio and relocated to Elkhart. In , at the end of his five-year apprenticeship, his father sent him $, which Albert invested to become a partner in a general store. Under Beardsley’s ambitious direction, the company modernized its advertising, distribution, and sales strategies. He organized regular Monday evening meetings to discuss orders and shipments, and he gave

 

Temin, Taking Your Medicine, . Susan Spellman, Cornering the Market: Independent Grocers and Innovation in American Small Business (Oxford, ).

Contracts and Competition in an Era of Economic Uncertainty  himself the power to order any further “special meetings” as well. Beardsley “agreed to assume charge of the office, finance, books, newspapers, printing, wrapping, packing, and shipping,” though he kept A. R. Burns on – at a $ annual salary – to “continue compounding the medicine and superintend the bottling.” Beardsley received a salary of $ for sixteen months of work, and Miles continued to receive royalties. Beardsley brokered the purchase of a lot adjacent to the compounding facilities, bought a lithograph for printing carton labels, and hired an advertising firm to begin advertising in New York City and Brooklyn. A few years later, he hired four traveling salesmen to drum up business with both wholesalers and retailers as far away as Philadelphia and Brooklyn. His greatest contribution to the firm, however, came in the early twentieth century when he issued the “Dr. Miles Price Protection Plan” with wholesalers and retailers. While the company’s price schedules proved popular with retailers, the plan also exposed the firm to prosecution for price fixing as courts began reinterpreting the meaning of competition policy. Beardsley’s approach to managing the Dr. Miles Medical Company drew from his earlier experience as a sales manager for Elkhart’s Muzzy Starch Company, which he had joined just when Franklin and Ellen Miles had moved to Elkhart. While the two companies exemplified divergent production methods and business strategies, they also faced similar challenges: building a brand, controlling a sales force, and combating price deflation. The Dr. Miles Medical Company was a modest up-start. By contrast, the Muzzy Starch Company seemed much more attuned to the changing industrial landscape. Nevertheless, the Dr. Miles Medical Company ultimately proved to be the more enduring brand.

   



Meeting minutes, May , , Box , Stock Book, DMMCA. Meeting minutes, May , , and Dec. , , Box , Stock Book, DMMCA. Meeting minutes, Dec. , , Box , Stock Book, DMMCA; ibid., Dec. , . Meeting minutes, Dec. , , Box , Stock Book, DMMCA. On late nineteenthcentury salesmen and sales techniques through the distribution chain, see Walter Friedman, The Birth of a Salesman: The Transformation of Selling in America (Cambridge, MA, ). Beardsley also maintained an active career in Republican Party politics, serving as Elkhart’s treasurer and in  helping to organize and disseminate Republican campaign literature. See Russel M. Seeds, ed., History of the Republican Party of Indiana, Vol. , Biographical Sketches of the Party Leaders (Indianapolis, IN, ), –; Hugh J. McGrath and William Stoddard, Men of Progress, Indiana: A Selected List of Biographical Sketches and Portraits of the Leaders in Business, Professional, and Official Life (Indianapolis, IN, ), –.

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  “ ”:      The story of Muzzy Starch illustrates the promise and peril experienced by producers in the late nineteenth century. Muzzy capitalized on new production technologies to increase output and reduce average costs. It also branded and diversified its products. Ultimately, when sales prices declined Muzzy joined a combination with its competitors to control industry-wide production and prices. Like many other starch producers, the Muzzy factory took advantage of improved production technologies in water-powered milling and alkaline refining that allowed it to process ever-greater amounts of corn at a lower per-unit cost. Situated on the banks of the St. Joseph River, Muzzy gained access to the power generated by Elkhart’s municipal hydraulic company. Muzzy’s proximity to the Elkhart railways provided easy access to farmers’ raw materials, as well as to expanding sales markets. Yet Muzzy was not alone in taking advantage of these cost-saving and production-increasing technologies; the railroads also expanded the reach of the company’s competitors. According to one estimate, by  the corn starch industry was producing at an overcapacity of twenty-eight million pounds per year. While a great deal of starch was sold in bulk packages, Muzzy also advertised its own trademarked brands of boxed starches oriented toward retail consumer sales. These smaller packages were used in sizing cloth, laundering 





U.S. alkaline production began in  at a processing plant owned by the Colgate Company in Jersey City, New Jersey. By  Hiram Duryea was operating the nation’s largest corn-processing plant, in Glen Cove, Long Island. In  corn starch manufacturers began producing refined corn sugar, or anhydrous sugar. In the same year, corn byproducts, such as the fiber, germ, and proteins that compose gluten, began to be used in animal feed. Corn syrup, it should be noted, was not commercially used until the mids, when it became a competitor to other types of sugar. Arthur S. Dewing, Corporate Promotions and Reorganizations (Cambridge, MA, ), –; Pamela White, “Properties of Corn Starch,” in Specialty Corns, ed. Arnel R. Hallauer, nd ed. (Boca Raton, FL, ), –, esp. . Elkhart Paper Co. v. Fulkerson,  Ind. App. ,  N.E.  (). In this case Fremont Fulkerson, who operated a flour mill, sued the paper company for using more than its fair share of reservoir water, causing the flour mill to close for some months in . The appellate court affirmed earlier water-power allocations that had been set for the Elkhart hydroelectric dam in . These allocations prioritized the use of water by type of occupation and decreed that insufficient water levels would trigger a water shutoff in the inverse order of the prioritized businesses. Ibid. at –. Dewing, Corporate Promotions, . Dewing estimated that in  the annual consumption of corn starch in the United States was  million pounds, whereas productive capacity had reached  million pounds.

Contracts and Competition in an Era of Economic Uncertainty  clothes, and preparing desserts. The Muzzy trademark and smallersized packaging allowed the company to recoup a higher per-unit profit margin, as compared with its bulk sales of starch. Nevertheless, overproduction and declining prices throughout the industry threatened the Muzzy business model. The plight of starch producers was not exceptional. Extraordinary advancements in both industrial and agricultural production technologies fueled the rapid rise in labor productivity, economic growth, and falling prices. Between  and , the U.S. real GDP more than doubled, as did per capita GDP (in other words, the rise in real GDP was not simply the result of a rise in population). Nevertheless, this was also an era of economic turmoil, marked by price deflation, unemployment, and social unrest. The long depression of  through  rattled the nation. In  the bankruptcy of Jay Cooke’s railroad investment company sparked a panic that reverberated through the United States and Europe. As railroad expansion began to slow, demand for steel and iron fell, affecting the U.S. industrial core. Unemployment rose and credit contracted. The panic lasted more than forty days, after which seventythree members of the New York Stock Exchange and , mercantile houses had failed. Restrictive monetary policy exacerbated the crisis 







For example, see the following pamphlets: Muzzy’s Corn Starch (Detroit, ), Muzzy’s Corn Starch: Manufactured & Prepared Expressly for Food, (Elkhart, IN, n.d.), Muzzy’s Corn Starch: The Purest and the Best Trade Card (Chicago, IL, ), and Muzzy’s Large Crystal Sun Gloss Starch (Elkhart, IN, ) in the Alan and Shirley Brocker Sliker Collection, MS , Special Collections, Michigan State University Libraries, www.lib .msu.edu/exhibits/sliker/detail.jsp?id=. GDP refers to the gross domestic product and is a measure of the market value of all final goods and services produced within a country over a given year. In other words, GDP is the total value of all outputs. Real GDP has been adjusted for inflation; nominal GDP has not. Nominal as opposed to real gains in productivity may be attributable to an increase in population, an increase in capital, or improvement to efficiencies. (Total Factor Productivity then measures the efficiency with which labor and capital are used.) Per capita GDP measures a country’s total output by dividing GDP by the total population. See David A. Moss, A Concise Guide to Macroeconomics: What Managers, Executives, and Students Need to Know (Boston, MA, ), –, –, –. In  real GDP was $ billion, and in  it was $ billion (in  dollars). Wayne D. Collins, “Trusts and the Origins of Antitrust Legislation,” Fordham Law Review . (): –, . Jay Cooke & Co. experienced a cash flow shortage and suspended payments on its debts, an action that effectively amounted to a bankruptcy. Approximately two-thirds of railroad securities were held overseas. “The Panic of : Views of the Controller of the Currency,” New York Times, Nov. , , ; Roger W. Babson, “The Recovery from the Great Panic of ,” New York Times, Apr. , , .

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American Fair Trade

and prolonged the credit crunch. The United States had reentered the Gold Standard after the Civil War, ending the Greenback period; however, the U.S. Treasury’s gold holdings failed to keep pace with rising demand, leading to price deflation. Thus even as U.S. productivity grew, nominal GDP (i.e., GDP not adjusted for inflation) declined by nearly  percent. Many Americans, including leading economists, attributed the economic recession to the problem of overproduction brought about by technological improvements. By  aggregate output had rebounded, but prices remained in slow decline. The wholesale price index reflected this trend – as a measure of all commodities, prices fell from  in  to  in , holding – prices as parity. In drugs and chemicals, prices declined at an even sharper rate, from  in  to  in . Producers complained that competition – commonly referred to as “excessive” or “ruinous” competition – had driven prices below levels that would enable reasonable profits. In fact, the large fixed costs of opening an industrial facility encouraged producers to continue churning out products even as prices declined – so long as prices exceeded variable costs of production. The problem of “excessive” or “ruinous” competition, causing prices to fall below the costs of production, prompted businesspeople to either shut down, combine with competitors to fix prices or suppress output, or consolidate with rivals. Courts struggled to determine under what circumstances cooperation, or rather combination, might be in the public interest. In some cases courts allowed contracts to set “uniform prices and   





Gretchen Ritter, Goldbugs and Greenbacks: The Antimonopoly Tradition and the Politics of Finance in America, – (Cambridge, ), . After the depression of the s, the price deflator remained in a slowly declining repose. David Wells, one of the most popular political economists of the era, wrote a five-part series on price declines. See Wells, “The Economic Disturbances since ,” Popular Science Monthly (July ): –; (Aug. ): –; (Sept. ): –; (Oct. ): –; (Nov. ): –. For a critique of Wells’s arguments and support for bi-metallism, see Moreton Frewen, The Economic Crisis (London, ), chap. . U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to  (Washington, DC, ), . The bureau, in turn, cited George F. Warren and Frank A. Pearson, Prices (New York, ), . Chandler, Visible Hand, –, –. See also Milton Friedman and Anne Jacobson Schwartz, A Monetary History of the United States, – (Princeton, NJ, ), –. Chandler, Visible Hand. Today economists refer to this phenomenon as the “empty core.” See Lester Tesler, Economic Theory and the Core (Chicago, IL, ); Abagail McWilliams, “Rethinking Horizontal Market Restrictions: In Defense of Cooperation in Empty Core Markets,” Quarterly Review of Economics and Business  (autumn ): –.

Contracts and Competition in an Era of Economic Uncertainty  living rates,” if the agreement protected the livelihood and “industriousness” of its independent members. Contracts that addressed a temporary problem of falling prices or oversupply in a local market might be found reasonable if they were limited in time and place. Jurists considered these contracts to be promoting the public interest, as they ensured the survival of competitors and in turn helped maintain a competitive market over the long term. Therefore, courts reasoned, temporary and limited restraints of trade could reasonably protect the public interest against consolidated market power. In a case upholding a combination of St. Louis quarrymen’s agreement to temporarily fix prices, Judge Robert A. Bakewell argued: The danger to be apprehended from the accumulation of wealth and power in the hands of great corporations, and the abuses by which large capitalists may so combine as to relax or destroy competition in trade, are matters of public concern, and the essential question is one of monopoly and of injury to the public.

Bakewell went on to explain that similar restraints of trade pursued by large-scale producers had been found unreasonable and unenforceable because they did not protect the public interest in competition, viewed as a system of robust competitors.





 

Skrainka v. Scharringhausen,  Mo. App. ,  (), upholding a price-fixing contract among twenty-four St. Louis quarrymen, because the contract affected only one district of the city and lasted for only six months. Such common law cases persisted into the twentieth century, mostly in the Midwest and West. Contracts that were limited to time, place, and persons, though in restraint of trade, were not necessarily void. See Stearns v. Barrett,  Pick.  (); Pierce v. Woodward,  Pick.  (); Nobles v. Bates,  Cow.  (); Palmer v. Stebbins,  Pick.  (); Beard v. Dennis,  Ind.  (); Wintz v. Vogt,  La. An.  (); Presbury v. Fisher,  Mo.  (); Long v. Towl,  Mo.  (). See also San Diego Water Co. v. San Diego Flume Co.,  Cal.  (), upholding a price-fixing contract because it was limited to only one city; Herriman v. Menzies,  Cal.  (), upholding a stevedore association rule to hold down prices; Eugene McQuillen, “Validity of Contracts in Restraint of Trade,” American Law Register  (Apr. ): –; ibid., part  (May ): –; Victor Morawetz, A Treatise on the Law of Private Corporations (Boston, ), . Skrainka,  Mo. App. at . “This agreement does not, upon its face, purport to be in restraint of trade. . . . The recital is, rather, that it is to advance trade; because, if competition reaches such a point that goods cannot be sold at living prices, many manufacturers must be driven out of business.” Ibid. at –. Ibid. See also Craft v. McConoughy,  Ill.  (), striking down a price-fixing agreement among grain dealers; Morris Run Coal Co. v. Barclay Coal Co.,  Pa.  (), striking down an agreement among “five wealthy incorporated companies” to fix the price of bituminous coal.



American Fair Trade

Such combinations of competitors used contracts to prohibit sales below cost, assign exclusive dealing territories, or set production guidelines. These contracts also carried malfeasance penalties against detractors. Penalties included the recovery of specific damages or the forfeiture of a bond or some amount of money to the other members of the combination. Courts enforced contracts among independent proprietors as the exercise of a sui juris meeting of the minds, analogous to an employment contract. During the deflationary years of the s, producers of all sizes flocked to form pools – horizontal combinations – to control prices and output. However, when these agreements facilitated price fixing among corporations, they failed to pass the reasonableness test because they appeared to monopolize and aggrandize corporate power, which the state had more power to regulate. Thus horizontal combinations lacked a mechanism to enforce their contracts through the courts, and cheating and malfeasance proved insurmountable. As a result, most corporate combinations failed to maintain industry control, as was the case in the starch industry. In reaction, members of combinations turned to tighter forms of cooperation and control, such as mergers and acquisitions. The corn starch industry in Elkhart, as in the rest of the country, confronted the endemic problem of falling prices, which at times fell below the cost of production. As early as , efforts had begun in the starch industry to form an organization to regulate supply. In  Chester W. Chapin organized the Cumberland Investment and Security Company, through which he promoted an industrial combination in starch manufacturing. This plan allowed the National Starch  







See Palmer v. Stebbins,  Pick.  (); Diamond Match Co. v. Roeber,  N.E.  (); De Witt Wire-Cloth Co. v. New Jersey Wire-Cloth Co.,  N.Y.S.  (). Pools included the following industries: cordage, coal, meat packing, iron pipe, steel, wallpaper, and whiskey. See William H. S. Stevens, “A Classification of Pools and Associations Based on American Experience,” American Economic Review . (): –, –. See Industrial Combinations and Trusts, ed. William S. Stevens (New York, ), , . See also Santa Clara Valley Mill & Lumber Co. v. Hayes,  P.  (); Craft case. Dewing, Corporate Promotions, . For example, the starch-processing plant in Glen Cove, Long Island, the country’s largest producer by far, reported running twenty-four hours a day despite its acknowledgement of industry-wide overproduction. U.S. Industrial Commission, Report of the Industrial Commission on Trusts and Industrial Combinations, (Washington, DC, ), . “There was no question, however, that the producing capacity of all the plants together was considerably beyond the need of the market at remunerative rates.” Ibid., .

Contracts and Competition in an Era of Economic Uncertainty  Manufacturing Company to secure an option on twenty smaller starch firms by directly paying  percent of the value of each mill to its owner, along with newly issued securities worth the remaining  percent of the mill’s value. At the time, state corporation law limited the size and scope of a corporation and prohibited the outright ownership of a corporation based in another state. Thus the combination linked the various starch producers through shared assets but did not centralize ownership or management of the firms. In retrospect, William Piel, the owner of the combination’s secondlargest starch manufacturing facility, admitted in a statement that if he and his directors had been more aware of the conditions at the smaller producers, he would not have entered a combination with them; perhaps he would have instead tried to drive them out of business through direct competition. Nevertheless, he admitted, despite difficulties in centralizing the management of the starch combination, the real estate and trademarked brand names it acquired proved valuable. The combination restricted output and reduced surplus product, in part by closing some of the poorer firms. Nevertheless, some members continued to produce above their quota. By  the combination was teetering on the edge of ruin because the largest producer had exited the group, ending that firm’s compliance with the supply restriction. “Excessive competition” returned to the industry, and prices fell again. When the combination eventually collapsed, both Elkhart starch companies, Muzzy and Excelsior, formally merged with their national competitors. 

 



Dewing, Corporate Promotions, –. Of the  percent value paid in National Starch securities,  percent was paid in bonds,  percent in first preferred stock, and  percent in second preferred stock. See note , p. X. Dewing, Corporate Promotions, . Piel made this statement to the Commercial and Financial Chronicle (c. June ), as quoted in U.S. Industrial Commission, Report of the Industrial Commission, cxiii, , –. “National Starch Company,” Chicago Securities  (Chicago, IL, ): –. Originally, National Starch was chartered in , when corn prices were very low. It had purchased several corn starch companies around the Northeast and Midwest regions, including Muzzy. National Starch Company was then incorporated as a holding company under the laws of New Jersey on April , . In February , the Corn Products Company “acquired practically all its capital stock”; however, National Starch retained separate ownership and administration. The plan in  was to create a holding company by swapping company stocks and uniting the most powerful food production companies: National Starch Company, Corn Products Company, Glucose Sugar Refining Company, and others. See also “National Starch Manufacturing Co.,” The Manual of Statistics: Stock Exchange Handbook (New York, ) : ; “National Starch,” United States Investor  (Oct. , ): .



American Fair Trade

Because the starch combination lacked the power to control the management decisions of its individual members and could not shut down the least productive plants, it instead tried to use informal agreements to control output and distribution. By coordinating output, the combination had hoped to achieve supracompetitive profits by increasing prices above those that would have been produced by a competitive market. But the production facilities never integrated in terms of real property or centralized management. While the exchange of securities granted a subsidy to the least efficient firms, the fixed costs of each remaining firm stayed unchanged, creating powerful incentives to cheat, produce more, capture higher profits, and destroy the combination. After Muzzy exchanged its stock to join National Starch, Albert Beardsley resigned from the company’s management but took with him experience in managing the distribution chain and organizing competitors. He remained on the board of National Starch through the s but declined to move to New York, where the company was headquartered. With his proceeds from the starch industry, Beardsley purchased stock in the Dr. Miles Medical Company and, in return, became the new general manager and treasurer, positions he held until his death in . In Beardsley’s first years at the company, fourteen regular employees plus four traveling salesmen comprised the entire staff. Nevertheless, Beardsley appeared determined to grow the business through extensive regional advertising and a branding campaign. In his first year, the company printed , medical advice pamphlets, which were distributed to doctors and mail-order customers. Over the next few years, he also introduced a new form of sales contract – the Dr. Miles Price Protection Plan. Rather than reaching out to competitors to fix prices, as Muzzy Starch had attempted to do, the Dr. Miles Medical Company established a distribution network of wholesalers and retailers who agreed to adhere to price schedules that reduced retail prices according to their time on the shelf. The purpose of the plan was to incentivize retailers to push the company’s products for quick sales – which would entitle them to charge higher prices and receive a larger commission – and to thereby reduce the likelihood that those retailers

   

History of the Republican Party of Indiana, –. Minutes of the annual meeting of stockholders, July , , Box , DMMCA. Minutes of stockholders’ meeting, Sept. , , Box , DMMCA. Four traveling salesmen were appointed at the January , , meeting. Cray, Miles, .

Contracts and Competition in an Era of Economic Uncertainty  would use the Dr. Miles brand in a loss-leader advertisement or sale. Like the horizontal contracts used to control prices and output in the starch industry, this sort of vertical price protection contract was intended to manage and stabilize prices. Product differentiation and brand competition in the therapeutics industry, however, precluded an industry-wide effort to dictate prices across brands, even when these products were very similar.

 : , ,    John D. Rockefeller, writing in , reflected on his company’s triumph over the “unreliability” of voluntary agreements to control output and prices. Yet the move from a corporate combination to a singular, consolidated corporate entity was neither immediate nor inevitable. While nineteenth-century competition policy relied on a version of liberty of contract, the states retained significant legislative authority to regulate economic activities in the public interest, especially those activities conducted by corporate actors. States retained the power to charter, or incorporate, corporations within their borders, thereby conferring special privileges and commensurate obligations on corporations within their borders. While state corporate law allowed for the sale of a corporate entity, many states prohibited corporations from owning the stock of another. Moreover, many states levied special taxes on out-of-state (“foreign”) firms so as to protect in-state corporations. To consolidate control over the oil-refining industry and avoid state taxes, Rockefeller’s leading corporate attorney, Samuel Dodd, created the legal form of the trust. In  members of the Standard Oil Group, a consortium of forty refiners that controlled  percent of U.S. refining capacity, exchanged their corporate stock for newly created Standard Oil Trust stock certificates. The trust effectively consolidated management over all its corporate parts. This new legal form, however, conflicted with the prevailing legal interpretation of states’ domain over corporate law. Although the trust itself was a short-lived legal form, the term became indicative of an era when combination and consolidation took a variety of



Quoted in Alan Nevins, John D. Rockefeller: The Heroic Age of American Enterprise (New York, ), : .



American Fair Trade

forms, and it ultimately signified the economic and legal reorganization of competitive markets away from the rules that had governed nineteenthcentury proprietary capitalism. Standard Oil’s meteoric rise to become perhaps the most successful and notorious private industrial corporation began in the early s when the petroleum industry – like so many other industrial sectors – experienced rising output and falling prices due to technological advances. Under Rockefeller’s direction, Standard Oil of Cleveland, Ohio, led efforts to form the National Refiners Association. While the association failed to stabilize industry output and prices, Rockefeller leveraged Standard Oil’s position as the largest refiner to negotiate a volume discount from the Lake Shore Railroad on shipping rates to New York City. Rockefeller controlled access to this transportation discount and allocated it only to those firms that agreed to his pricing. This combination of refiners then organized as the Standard Oil Group by swapping their corporate stock certificates among members. Rockefeller and his associates controlled four-sevenths of the group’s securities. Members met to determine output and prices but did not control the managerial decisions of individual producers. Additionally, there remained uncertainty about which refineries would be modernized and connected to a developing oil pipeline and which would be closed. On January , , the members of the Standard Oil Group signed documents to create the Standard Oil Trust, which effectively centralized management over all member refineries and avoided the legal problem of





For the moment, I am leaving aside the railroads, despite the fact that they were the first entities to employ managerial hierarchies, which is a defining characteristic of modern industrial corporations. At law, railroads are special in two regards. First, railroads operate as common carriers, which confers special privileges and duties in the public interest. Second, because railroads require high fixed costs, state legislatures often grant railroads land grants, eminent domain rights of way, and special tax exemptions. Both of these special characteristics make the railroads quasi-public entities. See James Willard Hurst, Law and the Conditions of Freedom in the Nineteenth-Century United States (Madison, WI, ), –, , . See also Harry N. Scheiber, “The Road to Munn: Eminent Domain and the Concept of Public Purpose in the State Courts,” in Law in American History, eds. Donald Fleming and Bernard Bailyn (Boston, ), –. Chandler, Visible Hand, –. The story of Standard Oil in the late nineteenth and early twentieth centuries was well known at the time, and it has remained a staple of conventional U.S. history. See also Lloyd, “Lords of Industry,” –; Raymond Foss Macon and William A. Hamor, The American Petroleum Industry (New York, ); Harold Williamson and Arnold Daum, The American Petroleum Industry: The Age of Illumination, – (Evanston, IL, ).

Contracts and Competition in an Era of Economic Uncertainty  contracts that could be construed as illegal restraints of trade and thus unenforceable. After swapping all their corporate stocks for the new Standard Oil Trust stocks, the trustees then swore a fiduciary duty to act in the trust’s interests. Each member received dividend payments based on the performance of the trust, rather than the performance of any of its component corporations. The document conferred all of the attributes of a corporation onto the trust, including the power to issue new stock to acquire additional assets or raise capital. The Standard Oil Trust used its new managerial authority to consolidate production facilities, closing more than half the existing fifty-three refining plants under its control – and thus achieving what National Starch had failed to accomplish. These closures allowed the trust to invest in the most efficient production facilities and lower its costs of production. However, this consolidation also reduced market supply, raising concerns that the trust intended to limit output and increase prices. Consolidation also gave the trust monopsony power, whereby its strengthened market position allowed it to demand lower input prices from its suppliers. Because of its large volume of refining capacity, Standard Oil was able to bypass the crude oil exchanges in favor of its own buying agency, a maneuver that allowed the trust to control the raw materials market. By the late s, Standard Oil had begun to produce its own crude oil, having eliminated the crude oil exchange, wholesalers, and many producers in Indiana and Pennsylvania. According to late twentieth-century business historians, the actual number of national trusts remained relatively small, including only eight industries: cattle, cordage, petroleum, cottonseed oil, linseed oil, lead 



See Report of the Committee on General Laws on the Investigation Relative to Trusts: Transmitted to the Legislature, Mar. , , New York Senate Doc.  (New York, ). Tarbell, History of the Standard Oil Company; Standard Oil v. United States,  U.S.  (); Gilbert Montague, The Rise and Progress of the Standard Oil Trust (New York, ). Additionally, these maneuvers raised legal concerns that the trust “watered” its stock. At the time, corporations issued stock at par value, meaning that the value stated on the stock matched the capital paid in to the corporation. See Wood v. Dummer,  F. Cas.  (), establishing the “trust fund doctrine,” wherein stockholders could be held liable for the difference between the par value of outstanding stock and its actual capital reserves. Stock could be purchased below the par value, but then the corporation retained the right to call in the remaining value of the stock. See also Sawyer v. Hoag,  U.S.  (), recognizing the trust fund doctrine. The problem with watered stock, in addition to the fact that it constituted fraud, was that a corporation might raise prices on its products to cover the fictitious value of its collateral. See Frederick J. Stimson, “Trusts,” Harvard Law Review  (): .



American Fair Trade

processing, sugar refining, and whiskey distilling. In the s, however, the popular press accepted the term trust as synonymous with combination, portraying both as existing in sharp contrast to competition. Throughout the s stories of “cutthroat” business tactics and unbridled corporate power created a sense of distrust that began to pervade popular American political culture. The Democratic-leaning magazine Puck, for example, defined a trust as “an organization formed to secure a practical and perpetual monopoly of the business in which it is engaged.” Political cartoons from the era illustrated the nation’s growing frustration and unease with the rise of big business, especially as its market power became equated with political corruption. In  perhaps one of the most well-known political cartoons of the era depicted Standard Oil as a giant octopus uncoiling its arms across a map of the United States and attaching its tentacles to statehouses, Congress,





 

On the increased use of the trust form to facilitate combinations, see Norbert Heinsheimer, “The Legal Status of Trusts,” Columbus Law Times  (): –; Luther Conant Jr., “Industrial Consolidations in the United States,” Publications of the American Statistical Association  (): –. On the number of industries in which a legal deed creating a trust existed, see Chandler, Visible Hand, . Letwin argues that trusts existed in several other industries, especially in regional markets. See Letwin, Law and Economic Policy, . See Milford Howard, The American Plutocracy (New York, ), –, appendix D listing industrial combinations. On the term “combination” coming to encompass both vertically integrated corporations as well as mergers, see Letwin, Law and Economic Policy, –. Letwin explained: “Since ‘combinations’ reduced the number of competitors and sometimes produced monopolies, Americans in the s fell into the habit of contrasting ‘combination’ and ‘competition’ as though they were direct opposites. It seemed to follow that each act of ‘combination’ led to a proportional decline in competition.” See also New York Senate Doc. No. , “Report of Committee on General Law on the Investigation Relative to Trusts,” Mar. , , (New York, ), –. “Cartoons and Comments,” Puck, Nov. , , . For example, see Puck’s Perplexing Position – Between Two Evils, cartoon, Puck, Oct. , , . Puck considers two options: the “anti-monopolist” Tammany Hall, a notorious institution of graft and corruption, and men representing the railroad and telegraph companies, depicted with bodies made of money bags with men’s heads. In another cartoon, the “honest farmer” is depicted being hanged by the “monopolistic telegraph company.” The Honest Farmer, the Load of Hay, and the Monopolistic Telegraph Company, cartoon, Puck, Aug. , , . See also “Puck’s Pictorial Gazetteer: Oil City, PA.,” Puck, Mar. , , . Standard Oil is described as “a corporation famed for owning things that belong to somebody else.” See also Richard John, “Robber Barons Redux: Antimonopoly Reconsidered,” Enterprise and Society  (): –.

Contracts and Competition in an Era of Economic Uncertainty  complementary industries, and – “Next!” – the White House. By that time, the cartoon required little commentary to convey its dire message. The rising public discontent with combinations and trusts encouraged state attorneys general to challenge the legality of the trusts by prosecuting the corporations that comprised its parts. Corporations constituted a special category of business that enjoyed state-granted privileges and commensurate duties. A corporation, declared Chief Justice John Marshall, is “an artificial being, invisible, intangible, and existing only in contemplation of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it.” Charters acted as a contract between the state and the company. In the capital-scarce early nineteenth century, state legislatures issued “special charters” that created corporations to foster internal improvements, such as building and maintaining canals, mills, toll roads, and bridges. Those charters conveyed both privileges, such as tax incentives and eminent domain access to real property, and duties to provide a public service at a reasonable price. Interpreting the benefits and obligations fell to the courts, and in  the U.S. Supreme Court handed down a definitive ruling that curtailed exclusive monopoly privileges not specifically granted by state charters. Beginning in the late s, special

 



 

Keppler, Standard Oil Octopus. For cases regarding the legality of corporate trusts, see State v. American Cotton Oil Trust,  La. Ann.  (), upholding the trust; New York v. North River Sugar Refining Company,  N.Y.  (), , holding that the creation of the Sugar Trust violated New York State law (General Manufacturing Act of , N.Y. Laws, ch. ); State v. Standard Oil Co.,  N.E.  (), ordering the dissolution of the trust because it created a monopoly; State v. Nebraska Distilling Co.,  N.W. ,  (), ordering the dissolution of the trust as an “illegal combination” intent to “destroy competition and create a monopoly”; Distilling & Cattle Feeding Co. v. People,  N.E.  (), dissolving the trust under quo warranto proceedings. Trustees of Dartmouth College v. Woodward,  U.S. ,  (). Justice John Marshall continued: “Among the most important [characteristics] are immortality, and, if the expression may be allowed, individuality; properties, by which a perpetual succession of many persons are considered as the same, and may act as a single individual. They enable a corporation to manage its own affairs, and to hold property without the perplexing intricacies, the hazardous and endless necessity, of perpetual conveyances for the purpose of transmitting it from hand to hand.” Ibid. at . John Lauritz Larson, The Market Revolution in America: Liberty, Ambition, and the Eclipse of the Common Good (Cambridge, ). Charles River Bridge v. Warren Bridge,  U.S.  (), holding that corporate charters should be narrowly construed, not granting implied exclusive privileges. See also Stanley I. Kutler, Privilege and Creative Destruction: The Charles River Bridge Case (Baltimore, MD, ).



American Fair Trade

franchise charters fell out of favor; to replace them, general incorporation laws were passed in nine states by  and in all states by . These laws democratized the profit-seeking corporate form, allowing anyone to enjoy the benefits of incorporation, such as limited liability and immortality of the firm beyond the life of its founders. As a result of this new administrative (rather than legislative) process, a flood of smaller and more diverse corporations opened for business. Nevertheless, states held the power to charter – the power to create corporations and define their privileges and obligations. Among other obligations, corporate charters imposed on boards of directors a fiduciary duty to act in the interest of the corporation and not that of any other entity. In the late s, New York State Attorney General Charles F. Tabor launched a case to bring down the Sugar Trust, a group of seventeen sugar refiners. Rather than attacking “the character of the combination, i.e., as tending to monopoly and repugnant to public policy,” Tabor focused on the “corporate death” of the North River Sugar Refining Company, one of the trust’s members. Tabor demonstrated that the corporate directors who had joined the Sugar Trust and subsequently





 





In the s and s, companies began to require more explicit guarantees in their contracts with states. Although some states inserted “reserve clauses,” which allowed the state legislature to alter the charter at any time, corporate lawyers negated these with more specific rights and obligations in the contract. Adolf Berle and Gardinier Means, The Modern Corporation and Private Property (New York, ), –. On general incorporation law, see Hurst, Legitimacy of the Business Corporation, –. It should be noted that many states passed general incorporation laws much earlier for nonprofit religious, charitable, and literary organizations. Ibid., . The spread of for-profit general incorporation laws took off in the s; however, New York had passed the first such law in . Ronald E. Seavoy, “Laws to Encourage Manufacturing: New York Policy and the  General Incorporation Statute,” Business History Review  (spring ): –. See also Berle and Means, Modern Corporation, –. Hurst, Legitimacy of the Business Corporation, –. See Bank of Augusta v. Earle,  U.S.  (), upholding Alabama’s law requiring banks to charter within their own state and establishing the “exclusion principle”; Paul v. Virginia,  U.S.  (), upholding Virginia’s foreign corporation law and creating the distinction between interstate commerce and domestic production. North River Sugar Refining Co,  N.Y. at –. “So much they could have done as corporate officers; so much it was their duty to have done as representatives of the corporation; and when, beyond that corporate neglect, they recognized the validity of the stock transfers in trust, put the new and unlawful ownership upon their books, and accepted its votes in the choice of new directors who were to throttle the independence of the corporation and chain it to the will of the trust, I think we must shut our eyes in willful blindness if we fail to see both corporate neglect and corporate action.” Ibid. at .

Contracts and Competition in an Era of Economic Uncertainty  ceased producing had violated their original fiduciary duty (ultra vires), rendering North River Refining “only a shell of a corporation left standing.” Tabor urged the court to revoke the North River corporate charter, which had been conferred by the state “in trust, and upon condition . . . that they be not abused to the public detriment.” Not only had joining the Sugar Trust been illegal under corporate law, Tabor concluded, but the trust itself had also violated the public interest, as it “tended to monopoly.” But, Tabor noted, “reference to its effects in actual operation,” such as prices or output, had been deemed superfluous by the state. Judge Edward Finch, writing for the New York Court of Appeals, agreed with Tabor’s assessment that North River had violated corporate law, but dissolving the corporation required evidence of “some sin against the law of its being which has produced, or tends to produce, injury to the public.” Finch proposed a two-step test, first inquiring if the corporation had abused its state-granted powers and then determining if that abuse might “harm or menace the public welfare.” At issue was North River Sugar Refining’s decision, “at the command of that master [the trust],” to “cease to refine sugar . . . for the purpose of so far lessening the market supply as to prevent what is termed ‘over production.’” He agreed with North River’s attorneys that preventing overproduction through a contractual agreement did not necessarily harm the public interest, as previous cases had shown. However, in those cases, businesses had been acting to preserve the life of the business and as such, competitive markets. Additionally, those contracts had been limited in time and place. The deed creating the Sugar Trust, however, did not constitute a sales contract, which could have legally terminated production. “A contract of sale implies some negotiation between buyer and seller, each consulting his own interest and acting independently and of his free choice.” Finch explained: “Here there was no negotiation with the board, but the vendors having created their vendee, themselves alone dictated the terms on which they should sell



 

Ibid. at . “It is quite clear that the effect of the defendant’s action was to divest itself of the essential and vital elements of its franchise by placing them in trust; to accept from the State the gift of corporate life only to disregard the conditions upon which it was given; to receive its powers and privileges merely to put them in pawn; and to give away to an irresponsible board its entire independence and self-control.”   Ibid. at . Ibid. at . Ibid. at . See Leslie v. Lorillard,  N.Y.  (); Diamond Match Co. v. Roeber,  N.E.  (); Fowle v. Park,  U.S.  (); Skrainka v. Scharringhausen,  Mo. App.  ().



American Fair Trade

and it should buy.” But North River had “divest[ed] itself of the essential and vital elements of its franchise by placing them in trust; [and] accept [ed] from the State the gift of corporate life only to disregard the conditions upon which it was given.” Thus North River’s actions violated not only the letter but also the spirit of the law. In this case the court revoked the North River Sugar Refining Company’s corporate charter, rendering the trust a precarious legal form for carrying out industry consolidation. But despite Finch’s opinion against the trust form, corporate lawyers heard in that opinion a clarion call to reorganize combinations yet again – but this time as a singular corporate entity. As Judge Finch contemplated “the abstract idea of a corporation, the legal entity, the impalpable and intangible creation of human thought,” he reasoned that courts must judge the actions of the “corporators, the individuals, the acting and living men” to determine if they had harmed the public welfare. He was thus asserting that function mattered more than organizational form. After all, “similar results may be lawfully accomplished” by “an individual having the necessary wealth [to] have bought all these refineries.” Yet he warned against any aggregation of market power in “enormous combinations, vastly exceeding in number and in strength and in their power over industry any possibilities of individual ownership.” In other words, if a single corporation had carried out these closures legally, through a merger or acquisition, then the closures themselves were not problematic at law. The corporate members of the trust were prosecutable only in that they violated their original duties prescribed by corporate law. Thus Judge Finch concluded that the issue of the proper size and scope of corporations rested in the domain of public policy, not the courts. At the same time that Finch’s ruling affirmed state authority over corporation law, the U.S. Supreme Court restricted other state regulatory powers and instead enlarged the federal government’s jurisdiction over interstate commerce. As states attempted to use taxation and    

 North River Sugar Refining Co,  N.Y. at . Ibid. at –. Victor Morawetz, A Treatise on the Law of Private Corporations (Boston, ), : –, .  North River Sugar Refining Co,  N.Y. at . Ibid. at . Gibbons v. Ogden,  U.S.  (), striking down a state-granted steamship monopoly as a violation of federal commerce powers that included navigable rivers; Brown v. Maryland,  U.S.  (), holding that federal commerce powers include transportation of goods in original packaging, striking down a state regulation and creating the “dormant commerce clause”; Welton v. Missouri,  U.S.  (), striking down a state licensing law on out-of-state corporations as a violation of the dormant commerce clause. See also Thomas Johnson Michie, ed., The Encyclopedia of United States

Contracts and Competition in an Era of Economic Uncertainty  regulatory powers to limit interstate competition, the Court intervened, significantly circumscribing the ability of states to regulate economic behavior within their borders. As legal historian Charles W. McCurdy has demonstrated, the U.S. Supreme Court responded to the ongoing revolution in business organization by enlarging the federal commerce powers to enforce free trade among the states. The revolution in business production and organization led to the subsequent enlargement of the market, which the Court facilitated to the detriment of state regulatory powers that affected interstate commerce. While the U.S. Supreme Court affirmed the states’ authority over corporate law, the American political system encouraged a scheme of competitive federalism that eroded those state powers. New Jersey provided a case in point when in  it amended its corporate law to allow corporations chartered within its borders to hold the stocks and bonds of out-of-state corporations, breaking with the original conception of the corporation as confined to a single state’s jurisdiction. As one historian put it, to pay down the debts the state had acquired during the Civil War, New Jersey broke with the “original conception” of the corporation and “sold the public’s interest in corporate structures for several million dollars in franchise-tax revenue.” Four years later, the state further



  

Supreme Court Reports (Charlottesville, VA, ), : –; Charles W. McCurdy. “American Law and the Marketing Structure of the Large Corporation, –,” Journal of Economic History  (Sept. ): –. Robbins v. Shelby County Taxing District,  U.S.  (), holding that interstate commerce may not be taxed by the states. But see also Slaughterhouse Cases,  U.S.  (), upholding a local regulation granting monopoly privileges to a butcher association as a legitimate police power and thus refusing to apply the Fourteenth Amendment’s privileges and immunities clause to state citizenship rights; Powell v. Pennsylvania,  U.S.  (), upholding legislation prohibiting the importation of oleomargarine from other states; Kidd v. Pearson,  U.S.  (), upholding an Iowa law prohibiting the manufacture of alcohol for out-of-state sales, because the law did not interfere with federal interstate commerce powers. Federal and state courts generally upheld state police power regulations in the face of constitutional challenges; see Lawrence M. Friedman, A History of American Law, nd ed. (New York, ), –; Michael Les Benedict, “Laissez Faire and Liberty: A Reevaluation of the Meaning and Origins of Laissez Faire Constitutionalism,” Law and History Review  (): ; Melvyn I. Urofsky, “State Courts and Protective Legislation during the Progressive Era: A Reevaluation,” Journal of American History  (): . Charles W. McCurdy, “Knight Sugar Decision,” –; McCurdy, “Marketing Structure of the Large Corporation,” –.  N.J. Laws –, ch. . McCurdy, “Knight Sugar Decision,” . See also Harry Scheiber, “Federalism and the American Economic Order, –,” Law and Society Review  (fall ):



American Fair Trade

relaxed corporate laws by allowing New Jersey corporations to hold property in other states. Other restrictions also disappeared, such as capitalization requirements for common stock without par value, time horizons on the life of the corporation, and limitations on the scope of permissible business ventures. By  the law allowed holding companies to exist solely as finance companies that owned shares in other companies. As the U.S. Supreme Court circumscribed state regulatory powers and state legislatures razed their own corporate laws, the legal institutions that had once governed proprietary capitalism appeared up for grabs. Other states followed New Jersey’s lead, such as Delaware, West Virginia, and New York; however, New Jersey had captured the lead. By , half of all mergers valued over $,, were incorporated there, including Standard Oil. *** The aggregation of private economic power by modern industrial corporations and combinations – coupled with their lack of public accountability and set against a backdrop of producer strife – became the bugaboo of public discourse in the s. The American federal system of liberty of contract and states’ rights had helped create the “giant firms that, by their very existence, threatened competition.” Thus the legal institutions that had shaped and limited proprietary capitalism had ultimately failed to meet the challenges of the new industrial era to the satisfaction of the majority of Americans. But when managerial capitalism was grafted onto the structures that governed proprietary capitalism, it did not destroy those older

  



–; Christopher Grandy, New Jersey and the Fiscal Origins of Modern American Corporation Law (New York, ), .  N.J. Laws , ch. . Joel Seligman, “A Brief History of Delaware’s General Incorporation Law of ,” Delaware Journal of Corporate Law  (): –. Ralph L. Nelson, Merger Movements in American Industry – (Princeton, NJ, ), . In  the Supreme Court of Ohio affirmed a lower court ruling that revoked the corporate charter for Standard Oil of Ohio because it had joined the Standard Oil Trust. The corporate board of Standard Oil had violated public policy by joining the trust, an action that superseded the original duties the state had conferred on the company and created a “virtual monopoly,” which has “always been regarded as contrary to the spirit and policy of the common law.” State v. Standard Oil Company,  Ohio St. ,  (). Brian Balogh, A Government Out of Sight: The Mystery of National Authority in Nineteenth-Century America (Cambridge, ), .

Contracts and Competition in an Era of Economic Uncertainty  business methods or the state institutions that developed around them. Debates over the new era of American political economy focused on limiting the disproportionate economic power of corporations and combinations while retaining the competitive markets that had been idealized in an earlier era. Political economists and jurists now turned their attention to constructing an active federal law to restrain private power. The inadequacy of common law rules, the divergence and limited geographic scope of state corporation laws, and the growing political problem of private economic power provided the impetus for federal action. The older ideal of a reciprocal relationship between formal legal equality and free market competition had reached a breaking point; likewise, the existing relationship between state and federal law came under sharp reconsideration. State laws struggled to limit the undue market power of an increasingly small percentage of the population that controlled ever more wealth and income. However, in the absence of a federal incorporation law, the states retained governing authority over corporations. The new federal default to free and open interstate trade diminished the impact of state regulation and eviscerated the public purpose that had originally been embedded in corporate law from the outset of the republic. This system of classical political economy increasingly seemed unable to protect consumers, independent proprietors, laborers, and a host of other interest groups that had coalesced around a growing demand for state and federal laws to control the trusts. The rise of big business undoubtedly transformed and inflamed the antimonopoly sentiment of the late nineteenth century into a more activist call for federal action.

 The Origins of American Fair Trade The Sherman Antitrust Act and Conflicting Interpretations of Law, –

This idea – that the strong have, somehow, a right to control the weak – used to be a question of race, nationality, or class, but now it is a question of individuals. . . . The big fish are constantly swallowing the little ones, and are themselves growing greater and fewer. All forms of business are going into the control of fewer and fewer men. – Albion Tourgée, Murvale Eastman: Christian Socialist ()

Although Albion Tourgée is best remembered for his Radical Republican political and legal activism, his popular writings also address issues of economic power and freedom. A Union veteran, he moved to Guilford County, North Carolina, to practice law in . Tourgée participated in that state’s post–Civil War constitutional convention and argued for African American voting rights. He advocated for civil rights through his work as a lawyer, judge, and popular writer. In  Tourgée famously helped establish the National Citizens’ Rights Association and represented Homer Plessy in the infamous case of Plessy v. Ferguson. Although his challenge to the Jim Crow “separate but equal” segregation laws failed, he succeeded in creating a movement for color-blind racial justice, which he viewed as part of a larger social and economic critique of American capitalism. His many works of fiction addressed civil rights, the labor movement, and the steady ascent of managerial capitalism. Writing in  for the North American Review, Tourgée lamented the federal government’s flailing efforts to confront the problem of the trusts. Like Henry Demarest Lloyd writing ten years earlier, Tourgée 

Mark Elliott, Color-Blind Justice: Albion Tourgée and the Quest for Racial Equality from the Civil War to Plessy v. Ferguson (Oxford, ), , , –.



The Origins of American Fair Trade



believed that the corporate consolidation of American capitalism heralded economic changes with significant political repercussions: the demise of entrepreneurship and independent ownership and, consequently, the rise of a new plutocracy, or rule by the wealthy. His writings reflected the widespread sense that consolidated market power, even if it had been legitimately gained through improved efficiencies, created a “disparity of opportunity” and threatened democratic governance. Likening the “Western crusade against trusts” to the previous century’s struggle for democratic representation over hereditary rule, Tourgée contended that “as combination was the strength of [economic] privilege, so it has now become the right hand of plutocratic power.” In contrast to the preceding century’s state-granted monopolies, the economic power wielded by private corporate entities called into question the regulatory frameworks available to govern competition and political influence. Populist political movements in the Midwest and South demanded novel state laws to set “reasonable rates” in railroad freight and prohibit the “intent to monopolize” in transportation and manufacturing. These new laws, however, coincided with a burgeoning critique of existing economic theory and policy that supported state interventions to manage market competition through both regulatory and litigation channels. Alongside political commentators like Tourgée and Lloyd, a new school of political economists, including Richard Ely and Simon Patten,  



Albion Tourgée, “The Anti-Trust Campaign,” North American Review  (July ): . Ibid., . “It is not a crusade against ‘wealth’ any more than democracy is a crusade against power. It is only a demand for the restriction of power exercised by combined accumulation, as democracy was a crusade against the power of combined privilege.” Important surveys of the varieties of late nineteenth- and early twentieth-century political economy include Joseph Dorfman, The Economic Mind in American Civilization (New York, ); Sidney Fine, Laissez Faire and the General Welfare State: A Study of Conflict in American Thought, – (Ann Arbor, MI, ); Thomas Haskell, The Emergence of Professional Social Science: the American Social Science Association and the Nineteenth-Century Crisis of Authority (Urbana, IL, ); Richard Hofstadter, Social Darwinism in American Thought, rev. ed. (New York, ); Edward Purcell, The Crisis of Democratic Theory: Scientific Naturalism and the Problem of Value (Lexington, KY, ); Richard Wiebe, The Search for Order, – (New York, ); Dorothy Ross, The Origins of American Social Science (New York, ); Daniel T. Rodgers, Atlantic Crossings: Social Politics in a Progressive Age (Cambridge, MA, ); James Kloppenberg, Uncertain Victory: Social Democracy and Progressivism in European and American Thought, – (New York, ); James Livingston, Origins of the Federal Reserve System: Money, Class, and Corporate Capitalism, – (Ithaca, NY, ); Herbert Hovenkamp, The Opening of American Law: Neoclassical Legal Thought, – (New York, ).



American Fair Trade

lamented the increasingly imbalanced power relations brought on by industrial capitalism. The new public policies of the late nineteenth century cannot be characterized as purely political or as reflecting merely the personal sympathies of policymakers or jurists. Indeed, economic arguments played an important role on both sides of the antimonopoly debates, often employing similar language that described – and often praised – a natural process of industrial consolidation. However, political economists who were resistant to these new public policy approaches dismissed political protest as naïve and retrograde – and new economic critiques as misguided. State intervention into the economy, argued Yale University social theorist William Graham Sumner and prominent industrialist Andrew Carnegie, would upset the natural order of the market, exacerbate crises, and stem productivity gains. While the academic communities remained at loggerheads, independent businesspeople in both agriculture and manufacturing began coordinating alternative business organizations to counter the market power of large-scale firms, as well as lobbying for protective legislation. To be clear: these businesses did not eschew the corporate form or new forms of management. What bound together this middle way, or “alternative track,” was in part their preference for maintaining independent, often family-oriented ownership of production, rather than simply redistributing corporate profits from large-scale firms. Many of these businesses were characterized by their batch and bundle production methods. Farmers fell into this category, as did professional artisanal producers, though these groups were not always treated as a unified subgroup. 







See note , p. . See also Thorstein Veblen, “Why Is Economics Not an Evolutionary Science?” Quarterly Journal of Economics  (July ): –; John Patrick Diggins, Thorstein Veblen: Theorist of the Leisure Class (Princeton, NJ, ), xiii. Antitrust historians have often minimized the influence of economic theory on the formation and early jurisprudence of both state and federal antitrust policies, instead emphasizing political motivations. See Hofstadter, “What Happened to the Antitrust Movement?,” ; Bork, Antitrust Paradox, arguing that the “formative era” of American antitrust relied on political protest movements, namely the so-called prairie populists, to justify state interventions against behaviors that were later deemed pro-competitive by the Chicago School. See also McCraw, Prophets of Regulation, arguing that misguided economic thought in the early twentieth century had resulted from political preferences. Ross, Origins of American Social Science; Haskell, Emergence of Professional Social Science; Richard S. Kirkendall, Social Scientists and Farm Politics in the Age of Roosevelt (Columbia, MO, ); Hovenkamp, Opening of American Law. Gerald Berk, Alternative Tracks: The Constitution of American Industrial Order, – (Baltimore, MD, ). See also Michael Best, The New Competition: Institutions of Industrial Restructuring (Cambridge, MA, ).

The Origins of American Fair Trade



Farmers formed cooperatives to pool their marketing and buying power. Confronted with falling prices, they standardized certain product grades and often set prices. Independent proprietors in industries such as pharmaceuticals relied on professional associations and trade groups to standardize production methods, branding, and sales policies – and their proprietors’ associations followed the farmers’ business and political organizations with keen interest. These two alternative business organizations launched the most formidable campaigns, both in business management and in political action, to shape U.S. antitrust law. Following the script set in motion by state-level railroad rate-setting commissions and ambitious prosecutions under corporate laws, the institutional development of competition policy flowed from the states to the federal government as constitutional federalism and judicial supremacy supplemented and supplanted aspects of state antitrust law. This chapter begins with a discussion of state antitrust laws and the political protest and economic thought that supported a widespread movement to reconsider the meaning of monopoly and institute new standards of reasonableness in competition policy. At issue was not only how to “rein in the trusts” but also how to accommodate the alternative forms of business organization exemplified by farmers, laborers, and independent producers. Congress struggled with this issue and deferred to the Supreme Court to reformulate the common law rule of reason so that it could manage a reconstituted market. Ultimately, the large national market governed by constitutional federalism and judicial supremacy ensured the diversity of business organizations. Even as the Supreme Court reached a consensus against cartels, prohibiting interstate contracts that fixed prices or created exclusive sales territories, the Court also reaffirmed and entrenched the state-level promotion of certain industries’ alternative approaches to managing competition through vertical contracts and trade associations. By  the Court had established a new equilibrium in political economy, though one that remained contested through the New Deal era. This equilibrium suppressed populist antimonopoly activism by 



On agricultural cooperatives’ business management and political action, see Postel, Populist Vision. On artisanal producers, see Scranton, Proprietary Capitalism; Scranton, Endless Novelty. Tony A. Freyer, Producers versus Capitalists: Constitutional Conflict in Antebellum America (Charlottesville, VA, ), –. This diversity, however, also facilitated racial segregation and discriminatory labor contracts in southern states. See Michael Klarman, From Jim Crow to Civil Rights: The Supreme Court and the Struggle for Racial Equality (New York, ).



American Fair Trade

adapting the Court’s rule of reason to foster large-scale industrial firms, while at the same time prohibiting interfirm agreements that the Court believed would cartelize industries. Operating in the interstices of this legal consensus on the national viability of trusts and the illegality of cartels, alternative forms of business organization persisted at the state level – and campaigned to reform federal law.

 :  , ,      Affirming a general preference for “full and free competition,” between  and , thirteen states passed antitrust laws that prohibited combinations or monopolies that limited output or raised prices. Most of these laws were passed in agrarian states in the West and South, and several offered exemptions to agricultural cooperatives, labor groups, and independent producers. Tourgée and other legal and political commentators praised state antitrust laws for advancing the populist agenda of protecting small producers and encouraging forms of economic cooperation that would rival large-scale combinations and corporations. Yet these state laws were based on more than just the political movement fueled by agrarian dissent against the direction of industrial, managerial capitalism. The language of “natural prices” and “real value,” found both in laws and in judicial opinions, borrowed from existing economic debates taking place in the halls of government and academia. Indeed, this formative era of antitrust policy – first at the state level and then at the 



Act of April , , ch. ,  Iowa Acts ; Act of March , , ch ,  Kan. Sess. Laws ; Act of March , , ch. ,  N.C. Sess. Laws ; Act of March , , ch. ,  Neb. Laws ; Act of March , , ch. ,  Tex. Gen. Laws ; Act of April , , ch. ,  Tenn. Acts ; Act of May , ,  Mo. Laws ; Act of July , , no. ,  Mich. Pub. Acts ; Act of February , , ch. ,  Miss. Laws ; Act of March , , ch. ,  N.D. Laws ; Act of March , , ch. ,  S.D. Sess. Laws ; Act of May , , ch. ,  Ky. Acts . Additionally, fourteen states added antimonopoly provisions to their state constitutions before the passage of the Sherman Antitrust Act in July . Six states had both an antitrust law and a constitutional provision. See Joseph Davies, Trust Laws and Unfair Competition (Washington, DC, ), –. See also Arthur Power Dudden, “Antimonopolism, –: The Historical Background and Intellectual Origins of the Antitrust Movement in the United States” (PhD diss., University of Michigan, ). On state antitrust exemptions, see Charles Fisk Beach, A Treatise on the Law of Monopolies and Industrial Trusts as Administered in England and in the United States (St. Louis, MO, ).

The Origins of American Fair Trade



federal – reflected an ongoing reevaluation of economic thought and regulatory policy. Within each state antitrust law, legislators used the language of supply and demand to describe the “natural” workings of the market, as juxtaposed to what they believed were the illegitimate interventions made by certain business interests to control and capture markets. The North Carolina legislature, for example, prohibited price increases deemed “beyond the price that would be fixed by the natural demand for or the supply of” products in question. In contrast, numerous southern and western states prohibited combinations that might reduce prices, presumably in an attempt to restrict monopsony power, whereby a buyer or combination of buyers might consolidate or pool purchasing power to demand lower prices for downstream goods or services. Similarly, both North Carolina and Tennessee prohibited price reductions intended to undercut competitors, a practice known as predatory pricing. While the vast majority of state cases involving anticompetitive actions occurred through private suits, state attorneys general also prosecuted local producers and distributors as well as combinations of multistate actors. Challenges to anticompetitive contracts, both by private lawsuits invoking the common law of competition and by state statutes, dramatically rose around the turn of the century and frustrated efforts at cartelization. State prosecutorial discretion increased the likelihood of suits brought in the public interest against combinations or corporations. The Standard Oil Trust, for example, responded to twenty-four separate state



 

 

Charles J. Bullock, “Trust Literature: A Survey and a Criticism,” Quarterly Journal of Economics  (Feb. ): –; Paul T. Homan, “Industrial Combination as Surveyed in Recent Literature,” Quarterly Journal of Economics  (Feb. ): –.  N.C. Sess. Laws at . Kansas, North Carolina, Texas, Tennessee, Mississippi, and South Dakota passed antitrust laws that prohibited collective action that reduced prices, presumably to stem monopsony power. Davies, Trusts Laws, –. James May has estimated the combined numbers of these private suits and state statutes by examining cases regarding anticompetitive contracts that were reported in the American Digest and the First and Second Decennial Digests. He put those numbers at “over  cases in the s; over  in the s, almost  in the s, nearly  in the first decade of the twentieth century, and  between  and .” See James May, “Antitrust Practice and Procedure in the Formative Era: The Constitutional and Conceptual Reach of State Antitrust Law, –,” University of Pennsylvania Law Review  (Mar. ): –, n.



American Fair Trade

suits between  and . Before Congress passed the Sherman Antitrust Act in July , six states challenged major trusts and annulled their in-state corporate charters. Moreover, each state law empowered that state to bring criminal charges against companies or groups of companies, whereas earlier common law prohibitions on restraint of trade or intent to monopolize had carried only civil penalties. Criminal fines varied by state, ranging from Michigan’s minimal fine of $ to Mississippi’s maximum fine of $,. In addition, nine states implemented incarceration penalties. North Carolina, Texas, and Mississippi provided the harshest penalties of up to ten years’ imprisonment. Although many states actively pursued antitrust cases against multistate combinations and corporations, practical concerns of access to markets and production facilities also constrained prosecutorial discretion. State courts might be empowered to strip an out-of-state corporation of its prerogative to do business within state borders or to dissolve the corporate charter of an in-state corporation that had joined a trust or combination; however, such actions might deprive the state’s citizens of access to oil refining, for example. At the turn of the century, Tennessee struggled with this conundrum. It had only out-of-state oil refining companies, which either leased or owned facilities in the state but were incorporated elsewhere. In  Tennessee attorney general Charles Cates successfully prosecuted Standard Oil of Kentucky – an out-of-state affiliate of the Standard Oil of New Jersey (SONJ) holding company operating within Tennessee – on charges of criminal conspiracy and predatory pricing. (The Standard Oil Trust, a legal maze of interlocking firms controlled by John Rockefeller, had been reorganized under New Jersey corporate law in  as a holding company that operated subsidiaries across the U.S.) In response to the Tennessee suit, however, SONJ simply transferred its holdings to another one of its affiliates, which 





Suits were brought by ten states and the Oklahoma territory. See Bruce Bringhurst, Antitrust and the Oil Monopoly: The Standard Oil Cases, – (Westport, CT, ), . On the influence of state antitrust laws on Standard Oil’s business strategy, see Joseph Pratt, “The Petroleum Industry in Transition: Anti-Trust and the Decline of Monopoly Control in Oil,” Journal of Economic History  (Dec. ): –. See California ex rel. Attorney Gen. v. American Sugar Ref. Co. (Cal. Super. Ct.), Railway and Corporate Law Journal  (Jan.–July ): ; People ex rel. Peabody v. Chicago Gas Trust Co.,  Ill.  (); State v. Nebraska Distilling Co.,  Neb.  (); People v. North River Sugar Ref. Co.,  N.Y.  (); State ex rel. Attorney Gen. v. Standard Oil Co.,  Ohio St.  (). See also Louisiana v. American Cotton Oil Trust,  La. Ann.  (). May, “Formative Era,” –.

The Origins of American Fair Trade



happened to be Standard Oil of Louisiana. Moreover, while the Tennessee court could prohibit Standard Oil of Kentucky from establishing a business within the state, it could not prohibit a company from engaging in interstate commerce within Tennessee. Thus SONJ’s presence in Tennessee hardly changed, and its hegemony in refining, more generally, remained outside Tennessee’s jurisdiction. As a result of these limitations on state control over corporate power and privileges, political commentators looked for innovative state regulatory initiatives to control firms engaged in interstate commerce or transportation – and these commentators consistently highlighted the legislative and legal successes of the populist Granger movement. This farmer movement began in  to advance agricultural methods but quickly became a political and economic movement to advocate for farmers’ interests. In his literary critique of the changing nature of American capitalism and power relations, Tourgée praised western farmers’ organizations and legislative actions as a model for a national antitrust movement to emulate. In laying out his argument about the dangers of plutocracy, he explained that the Grangers had identified the great threat to their economic autonomy and future prosperity: The power of [corporate] wealth would be multiplied by unheard-of legal devices and the opportunities for combination and cooperation in the application of capital would be so enhanced that whole peoples may be subjected to the will of a “combine” of to-day as easily as a single purchaser or tenant to his creditor’s demand a hundred years ago. . . . As combination was the strength of privilege, so it has now become the right hand of plutocratic power.

The rising inequality in wealth and opportunity imperiled civilization by creating “feudalism based on wealth.” The only remedy against this new “plutocratic power,” Tourgée concluded, was “the enhancement of opportunity for the many.” This “conviction” was both the impetus behind and the promise of the Granger cases, which “forced all parties to admit the right of State and Nation to regulate corporate control” and “restrict the power of capitalistic ‘combines.’” 

 

 

Tennessee v. Standard Oil Co. of Kentucky,  S.W.  (). See Charles W. McCurdy, review of Antitrust and the Oil Monopoly: The Standard Oil Cases, –, by Bruce Bringhurst, Business History Review  (autumn ): –. Tennessee v. Standard Oil Co. of Kentucky,  S.W. at . Tourgée, “Antitrust Campaign,” . He argued that antitrust law should encompass “all combinations of capital intended to take advantage of the necessities of the many for the benefits of the few.” Ibid., . On Tourgée, see Elliott, Color-Blind Justice.   Tourgée, “Antitrust Campaign,” –. Ibid., . Ibid., . Ibid., .

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American Fair Trade

Throughout the late nineteenth century, farmers’ organizations had experimented with both political activism – first with the Greenback Party and later with the Populist Party – and novel forms of business organization, particularly cooperative associations for buying, marketing, and selling. The secular decline in agricultural prices coupled with farmers’ rising indebtedness to eastern financiers fueled this drive for political activism and organization. Embodying an antimonopoly ideology, the Greenback Party, though short lived, is perhaps best remembered for its formidable campaign against the gold standard. The party called for the free coinage of silver and government-issued paper currency, with the idea that increasing the money supply would prompt inflation and thereby reduce the real value of farmers’ debts. William Jennings Bryan, a Democratic politician from Nebraska, came to represent these rural interests as he campaigned with dramatic vigor to promote farmers’ and debtors’ interests. In the summer of , he delivered what would become known as his “cross of gold” speech at the Democratic National Convention, entreating the “struggling masses” to stand up “against the encroachments of aggregated wealth.” Although the Greenback Party faded into the Democratic Party after the presidential election of , it left a legacy of third-party activism and an antimonopoly sentiment in midwestern and western states. “Aggregate wealth” against the “struggling masses” became the watchwords of both the agrarian and antimonopoly movements. The agrarian antimonopoly agenda, intent on reformulating power relations across major industries, extended from farmers’ organization as cooperatives to new forms of public regulation, including the nationalization 





On farmers’ political organizations, see Ritter, Greenbacks and Goldbugs; Elisabeth Clemens, The People’s Lobby: Organizational Innovation and the Rise of Interest Group Politics in the United States, – (Chicago, IL, ); Postel, Populist Vision; Elizabeth Sanders, Roots of Reform: Farmers, Workers, and the American State, – (Chicago, IL, ); Goodwyn, Democratic Promise. On the secular decline in agricultural prices and the problem of price deflation, see Jeffrey G. Williamson, Late Nineteenth-Century American Development: A General Equilibrium History (Cambridge, ), –. Bryan stated: “This was a struggle between the idle holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country; and my friends, it is simply a question that we shall decide upon which side shall the Democratic Party fight. Upon the side of the idle holders of idle capital, or upon the side of the struggling masses?” See Official Proceedings of the Democratic National Convention Held in Chicago, Illinois, July , , , , and ,  (Logansport, IN, ), –, reprinted in The Annals of America, –: Populism, Imperialism, and Reform (Chicago, IL, ), : –.

The Origins of American Fair Trade



of the railroads and the public administration of railroad rates. Spurred on by the state’s interest in the railroads’ contribution to industrial “empire building,” farmers searched for the ways and means to level the playing field between them and the railroads. The first major farm organization, a fraternal order called the Grange (formally known as the National Grange or the Order of Patrons of Husbandry), became the most effective organization to advocate for statutory railroad regulations. These laws, known as the Granger Laws, focused on regulating the rates charged to transport railroad freight as well as to operate grain elevators – the massive physical structures that hoisted farmers’ grain into the deep beds of railroad cars. The Grangers argued that both the railroads and the grain elevator operators held unfair monopoly privileges over the diffuse and powerless farmers. Initially, the Grange had endorsed the nationalization of the railroads in an effort to combat railroad pools, which effectively controlled transportation lines and colluded to set rates. According to the Grangers, these combinations set unreasonable and discriminatory rates – particularly for short-haul trips and smaller shipments – that farmers had no power to refuse. In  Illinois passed the first state law requiring railroad rates to be “just, reasonable, and uniform” and created an independent administrative commission to oversee rates and intervene if necessary. Other midwestern states followed suit, establishing railroad and warehouse commissions to ensure the reasonableness of prices. By  cooperative associations had achieved most of their success in midwestern and southern states, establishing administrative boards to monitor the freight rates that railroads charged farmers. Although railroad companies challenged the legal authority of statelevel administrative commissions to set or approve rates, at law, railroads 

 





On farmer organization in relation to antimonopoly protest, see Clemens, People’s Lobby; Postel, Populist Vision; Sarah Milov, Growing the Cigarette: Regulating Tobacco from the Grassroots (Cambridge, MA, forthcoming). Thorelli, Federal Antitrust, . See Frederick A. Cleveland and Fred W. Powell, Railroad Promotion and Capitalization in the United States (New York, ), –, –. For contemporaneous studies of railroad rate setting that affirmed the Grangers’ charges of discriminatory rates, see D.C. Cloud, Monopolies and the People (Davenport, IA, ); Henry Demarest Lloyd, Wealth against Commonwealth (New York, ). See also Richard White, Railroaded: Transcontinentals and the Making of Modern America (New York, ). Thorelli, Federal Antitrust, . After Illinois, Minnesota passed a similar law in , followed by Iowa, Wisconsin, Ohio, Missouri, Michigan, Nebraska, California, and Massachusetts. The Massachusetts commission did not set rates but rather acted a publicity organ. Ibid., n. Postel, Populist Vision,  and chap. , “A Farmers’ Trust: Cooperative Economies of Scale.”



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fell into a special regulatory category. Historically, common carriers were considered quasi-public entities. Because of the public service they provided and the privileges the state conferred on them, common carriers were subject to greater regulation than the so-called ordinary trades, which were governed by corporate law (if incorporated), regulatory police powers of the state, and common law rules. Like most public utilities, these infrastructure projects required large sums of capital that encouraged both public officials and private investors to lobby for stategranted monopoly privileges so as to recoup costs. State and federal governments had facilitated the frenetic construction of rail lines across western states by granting railroad companies vast tracts of land and equally generous loans and tax breaks. Along with these privileges came obligations and duties to serve the public interest by promoting commerce and economic growth. To challenge the economic power of the railroads, the Grangers pursued both private and public strategies of reform. They helped establish cooperative associations that pooled farmers’ purchasing power for agricultural equipment and warehousing; they created democratic forums that made marketing decisions; and they launched the most successful legislative campaigns to reform railroad rate regulations in several states. The Grangers argued that at the very least, state-level rate regulations would provide a necessary adjustment of bargaining power between farmers and shippers, on the one hand, and railroad companies, on the other. By the same logic, the Grangers and other likeminded groups campaigned for exemptions to state antitrust laws. Both the rate-setting regulations and the antitrust exemptions were considered not only tolerable but necessary to balance economic power against the perceived manipulations of other actors.







On railroad development and public grants of land and loans, see Robert Fogel, Railroads and American Economic Growth: Essays in Economic History (Baltimore, MD, ), ; John D. Hicks, The Populist Revolt: A History of the Farmers’ Alliance and the People’s Party (Minneapolis, MN, ), –. Harry Schieber, “The Road to Munn: Eminent Domain and the Concept of Public Purpose in the State Courts,” Perspectives in American History  (Jan. ): –. On the ideas of “natural monopoly,” see note , p. . See Davies, Trust Laws and Unfair Competition, –. The Supreme Court struck down an agricultural exemption to state antitrust law as a violation of the equal protection clause of the Fourteenth Amendment in Connolly v. Union Sewer Pipe Co.,  U.S.  (). The case was overruled in Tigner v. Texas,  U.S.  () because “the differences between agriculture and industry call for differentiation in the formulation of public policy.” Ibid. at –. While several states struck down state antitrust laws on the

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

In  the U.S. Supreme Court upheld these state rate-setting commissions, holding that the railroads were granted special privileges by the states, served a public purpose, and thus constituted a “business affected with the public interest.” Consequently, the Court ruled that states could regulate some activities of both common carriers and grain elevators to protect the public interest in production and commerce. This landmark case, Munn v. Illinois, made clear that the Grangers had successfully helped reorder the power relations between shippers and the railroads by fostering the state’s administrative function to tame the vicissitudes of the market. Despite this regulatory victory in Munn, within a decade the railroads had devised a challenge to this ruling, pitting the state-level regulation of common carriers against federal regulatory prerogatives. In Wabash the Court clarified the extent to which states could regulate businesses engaged in interstate commerce. “Direct” burdens placed on a railroad company did not pass constitutional muster and violated article , section , of the Constitution, which granted the federal government the power to regulate commerce “among the several states.” “Indirect” restraints, on the other hand, were permissible regulations under the federal commerce clause. In the same year, the Court extended the rights of corporate “personhood” in Santa Clara County v. Southern Pacific Railroad Co. by granting corporations engaged in interstate trade access to the Fourteenth Amendment’s equal protection clause. This decision opened up another avenue for litigation challenging the constitutionality of innovative expansions of state







grounds established in Connolly, according to legal historian James May, “state courts rejected the great majority of equal protection–based attacks made on state antitrust legislation prior to the First World War.” May, “Antitrust Practice and Procedure,” –, . See also Woeste, Benevolent Trust, –. Munn v. Illinois,  U.S.  (). Chief Justice Morrison Waite wrote that the state regulation of railroad rates did not violate the Fourteenth Amendment’s due process clause. Wabash, St. Louis & Pacific Railway Company v. Illinois,  U.S.  (). The Supreme Court had created what one historian has called a “free trade zone” among the states, forbidding as unconstitutional state regulations that affected purely interstate transactions and fell outside of the state’s legitimate police powers. See Welton v. Missouri,  U.S.  (), holding that if the Singer Sewing Machine Company employed traveling agents, rather than local retailers or warehouses, then the Missouri legislature could not prohibit it. Corwin Edwards, The Commerce Power Versus States’ Rights (Princeton, NJ, ), ; Charles McCurdy, “American Law and the Marketing Structure of the Large Corporation, –,” Journal of Economic History  (Sept. ): –. See also Thomas McIntyre Cooley, “Limits to State Control of Private Business,” Princeton Review  (Mar. ): . U.S. Constitution, article , section , clause .

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American Fair Trade

regulation. These two cases limited the Munn ruling, reducing the test of reasonableness from an advancement in administrative governance to another judicial issue of jurisdiction. Yet mounting farmer–merchant advocacy for railroad rate regulation led to nearly unanimous congressional support for the Interstate Commerce Commission (ICC), the first federal regulatory agency responsible for ensuring “reasonable and just” railroad rates and eliminating discriminatory pricing policies. These new forms of regulatory authority found support from a cohort of economists who questioned the deductive reasoning at the base of classical law and economics and advocated for greater state intervention into the supposed natural workings of the economy. Writing in , Arthur Hadley, a professor of economics and political economy at Yale, explained how the start-up costs for railroads conflicted with the classical notion of competitive markets as a baseline general principle. According to Hadley, the theory of classical economics “was simple; and, as long as the facts were equally simple, it served its purpose extremely well. Unfortunately,” he continued, “the facts outgrew the theory.” Railroads and telegraphs, with their high fixed costs of infrastructure investment, sometimes rendered competing carriers and lines “physically impossible” and very often wasteful. Competition among parallel lines encouraged railroads to “reduce rates almost to the level of operating expenses, even if this [left] nothing for interest and repairs.” Railroads were “industries of increasing return,” with each additional mile of track yielding more than the last in returns to scale, thus encouraging continual track production. 



   

Santa Clara County v. Southern Pacific Railroad,  U.S.  (). Corporate entities already enjoyed other constitutional protections, such as the right to sue and be sued in court under article  and the right to contract under article , section . See Dartmouth College v. Woodward  U.S.  (); Bank of Augusta v. Earle,  U.S.  () . See also Morton J. Horwitz, “Santa Clara Revisited: The Development of Corporate Theory,” West Virginia Law Review  (fall ): –. Edmund James, “The Agitation for Federal Regulation of Railways,” Publications of the American Economic Association  (): –. See Kolko, Triumph of Conservativism. See also Samuel DeCanio, Democracy and the Origins of the American Regulatory State (New Haven, CT, ). Purcell, Crisis of Democratic Theory, –. For an overview of the literature on classical economics as a deductive science, see note , p. . Arthur Hadley, “Private Monopolies and Public Rights,” Quarterly Journal of Economics  (Oct. ): –. Ibid., . Hadley cited Henry Carter Adams on the “law of increasing return, which gives the large producer the advantage.” Ibid., . On industries of increasing return and railroad rate regulation, see Adams, “Relation of the State to Industrial Action,” Publications of the American Economic Association  (Jan. ): –.

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

Agriculture, by contrast, operated under “the law of the diminishing return” because each additional unit of production yielded a smaller return than the previous. Hadley argued that “cut-throat competition” in railroads could not “continue indefinitely. It must end in consolidation,” rendering competition null. Hadley went on to praise the Granger Laws, concluding that “where responsibility and equality of treatment can only be secured by combination, regulated combination is better than irresponsible competition.” In his position as a member of the ICC, he lamented that Congress had authorized the commission only to review past rates and to issue cease and desist orders against “unfair” practices. Although the ICC law prohibited short- and long-haul rate discrimination and mandated that rates be publicized, the first administrators at the ICC found their discretionary power stripped by the Court. Nevertheless, Hadley and ICC Chairman Thomas Cooley recognized the potential power of the new administrative agency to oversee railroad monopolies as well as combinations of competitors. Yet even as Congress strengthened the ICC’s administrative authority through the Hepburn and Mann-Elkins Acts in the early twentieth century, the commission remained politically fragile. Classical economists’ resistance to state and federal antitrust regulation did not arise out of a laissez-faire prescription for all economic policy. Instead, it developed both from an idealized notion of perfect competition as a natural state and from an antiquated definition of monopoly. Adam Smith, the eighteenth-century Scottish Enlightenment professor, popular   





 Ibid., –. Ibid., . Brian Balogh, The Associational State: American Governance in the Twentieth Century (Philadelphia, ), –. See also White, Railroaded, chap. . See Arthur Hadley, “The Good and the Evil of Industrial Combination,” Atlantic Monthly  (Mar. ): –; Hadley, Economics: An Account of the Relations between Private Property and Public Welfare (New York, ), –, –; Hadley, “Competition and Combination,” Andover Review  (Nov. ): ; Hadley, “Corporations – Their Uses and Abuses,” Independent  (Jan. ): ; Charles Bullock, “Trust Literature: A Survey and a Criticism,” Quarterly Journal of Economics  (Feb. ): –, . The Hepburn Act of  authorized the ICC to set maximum rates and expanded its jurisdiction over other forms of transportation and public rights-of-way. The MannElkins Act of  further expanded the ICC’s jurisdiction over communication systems. While nineteenth-century classical economics varied in its details, a common belief emerged that economic life could be understood as a consequence of basic, natural economic laws. See Joseph A. Schumpeter, History of Economic Analysis, ed. Elizabeth Boody Schumpeter (New York, ), –, reviewing the major economics writings from the early republic through .

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writer, and progenitor of classical economic thought, helped enshrine both ideas. While he had recognized the problem of market collusion, Smith was equally skeptical of “the man of system,” by which he meant regulators and administrators. Writing predominantly against the eighteenth-century British mercantilist system of state-sponsored private monopolies, Smith argued that economic growth hinged upon market exchanges that facilitated entrepreneurship and competition. According to Smith, the state should neither grant monopoly privileges nor enforce anticompetitive agreements among businesspeople, and neither should it intervene to protect disadvantaged businesses. During the nineteenth century, Smith’s Wealth of Nations () became a staple in American higher education, wedding political economy and moral philosophy into what historians today refer to as “moral economy.” In the United States, Reverend Francis Wayland’s extremely popular textbook Elements of Political Economy () reinforced and extended the classicists’ so-called laissez-faire prescriptions. Wayland embraced these prescriptions even though America was neither a free trade nor a free enterprise nation, given its tariff barriers erected to support industrial development and state subsidies granted to public works projects. Despite its flawed analysis, Wayland’s textbook was largely reproduced in Arthur Latham Perry’s Elements of Political







 

Adam Smith, The Theory of Moral Sentiments, eds. D. D. Raphael and A. L. Macfie (New York, ; originally published ), pt. , sec. , chap. , –. See also Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, ed. Edwin Cannan, (Chicago, IL, ; originally published ), Vol. , bk. , chap. . In The Wealth of Nations, Smith concluded: “To widen the market and to narrow the competition, is always the interest of the dealers . . . The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” Ibid., . However, Smith endorsed state funding for public education, for example, because he believed that the costs of starting and maintaining a school would be too high for many individuals. See Smith, Wealth of Nations, Vol. , bk. , chap. . Joseph Dorfman, The Economic Mind in American Civilization (New York, ), : ; Jeffrey Sklansky, The Soul’s Economy: Market Society and Selfhood in American Thought, – (Chapel Hill, NC, ), –; Hovenkamp, Enterprise and American Law, –, –. Francis Wayland, The Elements of Political Economy (New York, ). On state-led industrial growth, see Larson, Market Revolution. On local regulations that shaped business and society, see Novak, People’s Welfare. On federal regulations and state-led growth, see Balogh, Government Out of Sight.

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Economy (), which sold nineteen editions between  and . According to classical political economy, collusion and monopoly rents would not last in the long run because competitive markets would either incentivize one member to cheat and therefore break down the collusive agreements or because such agreements would attract new competitors. According to either scenario, supracompetitive profits would yield to potential competition. The fact that these tenets were not overthrown by the rise of large-scale industrial corporations and combinations and the high fixed costs of industrial capitalism remains a testament to the power of classical political economy as an ideational force. Yet clearly, business organization, economic relations, and legal structures had undergone massive restructuring since Smith’s time. John Stuart Mill’s Principles of Political Economy () built on Smith’s classical economics and contributed the concept of natural monopoly. In contrast to “artificial,” or government-created, monopolies, “natural monopolies” such as street lights were predisposed to single firm dominance rather than multifirm competitive markets. Mill employed classical economic theory to expound on what he saw historically – that the high costs required to establish street lights, water works, or gas infrastructure, for example, precluded rivals from entering the market. Because the threat of potential competition failed, prices could rise to uncompetitive rates. As a result, the government had to intervene to regulate or set rates so as to restrict the natural monopoly’s ability to reap undue profits from the public. The exception disproved the elegant rule of competitive markets checked by actual or potential competition. Although Mill anticipated some of the problems addressed by later economists, he confronted these market imperfections with the tools of classical economics, using historical averages of costs rather than projected values of marginal utility.

  



Arthur Latham Perry, Elements of Political Economy (New York, ). See Dorfman, Economic Mind, : –, ; Hofstadter, Social Darwinism, . Thorelli, Federal Antitrust, . See also Lamoreaux, Great Merger Movement; Hovenkamp, Enterprise and American Law. John Stuart Mill, Principles of Political Economy with Some of Their Applications to Social Philosophy, ed. W. J. Ashley, new ed. (London: ; originally published ), bk. , chap. , “Of the Grounds and Limits of the Laisser-Faire or Non-Interference Principle.” Mill also related the concept of natural monopoly to the natural skills or endowments that may account for wage differentials. Ibid., bk. , chap. , “Of the Differences of Wages in Different Employments.” See also Manuela Mosca, “On the Origins of the Concept of Natural Monopoly,” European Journal of the History of Economic Thought , no.  (): –. Hovenkamp, Opening of American Law, –, .

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Mill’s observations coincided with the spread of general incorporation laws across the United States – laws that circumscribed the use of special corporate charters and largely democratized the corporate form. Nevertheless, the colloquial meaning of monopoly retained its early attachment to state-granted “exclusive privileges.” Testifying before the New York State Senate on pending antitrust legislation, S. C. T. Dodd, a corporate attorney and the creator of the Standard Oil Trust, argued that “the struggle against monopoly ever has been, and ever will be, a struggle against interference in business by government.” For Dodd, monopolies referred to specific public utilities, such as water and gas companies, or patent rights granted by the state. Corporations, which he conflated with combinations, constituted an entirely different category – “a higher plane” of competition, where “the fittest survive, and the public is benefitted by the best and cheapest service.” Dodd believed in the naturalness, benefits, and inevitability of corporate consolidation and combination: “Talk of preventing combinations,” he insisted, was “childish and futile,” akin to affirming “socialistic prejudice against capital” or “re-enacting . . . laws against witchcraft.” In the late nineteenth century, the tenets of classical political economy combined with a rough version of evolutionary theory, creating the popular philosophy of social evolution and the “natural” progression of business development. William Graham Sumner, who is best known for his propagation of Social Darwinism and its shibboleth “the survival of the fittest,” argued that regulations impeded the evolutionary process. Consequently, he campaigned against antitrust legislation, tariffs, and interstate commerce laws. While Sumner shared with progressive  

 

 



See Chapter , note , p. . S. C. T. Dodd, Combinations: Their Uses and Abuses, with a History of the Standard Oil Trust (New York, ), . The book is based upon the testimony that Dodd presented to the New York State Senate Committee on General Laws. Ibid., . Ibid. “The franchise to be a corporation, the right to combine, is no longer sold or granted as a favor. Corporations are no longer created by special but by general laws. Franchises are no longer exclusive and indestructible privileges.” Ibid., . Ibid., . Ibid., , ; Dodd, “Address to the Merchants’ Association of Boston,” Railway and Corporation Law Journal  (Feb. , ): . He continued: “To-day industry by individuals, without combinations, is the characteristic of barbarous and semi-civilized countries. . . . Savages seggregate [sic], civilized people associate.” Ibid. William Graham Sumner, “Definitions of Democracy and Plutocracy,” in Essays of William Graham Sumner, eds. Albert G. Keller and Maurice R. Davie, rev. ed. (New Haven, CT, ), : ; Sumner, “An Old ‘Trust,’” in The Forgotten Man and Other

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

reformers a distrust of plutocracy, he believed it to be a creation of stategranted privileges, rather than the accumulation of wealth by industrial capitalists. His extreme version of laissez-faire borrowed classical economists’ faith that markets would produce an equilibrium state of perfect competition. Yet at the same time, he concluded that industrial consolidation and combination naturally occurred through the workings of the market. Many classical economists, Social Darwinists, and industrial capitalists argued that the economic reality of industrial consolidation and combination did not warrant state intervention because the potential for competition remained a check against supracompetitive prices and profits. Industrial concentration was the natural by-product of competition, industrialists promised – simply a new phase of competition. Andrew Carnegie of U.S. Steel adapted these ideas to create his “gospel of wealth,” arguing that industrial consolidation and concentration could not threaten “the great laws of the economic world,” which “alone remain unchanged through all these changes.” The trusts, he explained, resulted from their superior production facilities, which created economies of scale and reduced costs and prices. Thus consolidation and the supposed problem of cutthroat competition were merely by-products of these large-scale enterprises, with their high fixed costs and increasing returns on investment based on their large scale. These producers continued to churn out goods even when prices fell below a remunerative level because to produce each additional unit cost less and less. High through-put production lowered per-unit costs. Thus producers were incentivized to keep producing, sometimes flooding markets with surplus goods and driving prices below the production costs of less efficient producers. Carnegie saw industrial consolidation as the natural, if not



 

Essays, ed. Albert G. Keller (New Haven, CT, ), ; Sumner, “State Interference,” North American Review  (Aug. ): –. For an overview of Sumner’s views and influence, see Thorelli, Federal Antitrust, –; Hofstadter, Social Darwinism, –; Hovenkamp, Opening of American Law, –, . Andrew Carnegie, “The Bugaboo of Trusts,” North American Review  (Feb. ): . See also Carnegie, “Wealth,” North American Review  (June ): –; Carnegie, “Popular Illusions about Trusts,” Century Magazine (May ): –. Chandler, Scale and Scope, –. For example, Carnegie was famous for his “hard-driving” blast furnaces, which ran continuously and at ever-higher temperatures. This practice caused the furnaces to require more frequent replacement, but it also helped Carnegie implement new technological advancements that drove down per-unit costs. See David O. Whitten and Bessie Emrick Whitten, The Birth of Big Business in the United States, –: Commercial,

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inevitable, consequence. What Carnegie would not concede was that this cycle of competition and consolidation foreclosed the potential of future competition because it limited the number of competitors. For him, “the great law of the survival of the fittest vindicates itself.” Carnegie’s certainty provided little comfort for those who viewed the agglomeration of market power as an intractable violation of American egalitarianism – or at least the promise of it. Henry Demarest Lloyd, who had led the muckraking crusade against the trusts since the early s, responded to the Social Darwinist defense of combination and consolidation as the natural result of the survival of the fittest. Throughout his popular writings in the Atlantic Monthly, Chicago Tribune, and North American Review, Lloyd attacked the combinations in starch, oil, matches, steel, and salt, to name a few. He did not prescribe policy responses; instead, he galvanized public opinion around the social and moral problems of rising inequalities in wealth and opportunity – inequalities that the rise of these behemoths had created. An increasing number of professional political economists began to criticize the notion that an unregulated national market necessarily maximized aggregate welfare. These economists agreed that the greatest



 





Extractive, and Industrial Enterprise (Westport, CT, ), –; Charles R. Morris, The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy (New York, ), –. Carnegie, “Bugaboo of the Trusts,” . “Given freedom of competition,” Carnegie argued, “all combinations or trusts that attempt to exact from the consumer more than a legitimate return upon capital and services . . . write the charter of their own defeat.” Ibid., . Interestingly, Carnegie even extended his argument to competing railroad lines, where high fixed costs clearly precluded potential competitors, at least in the short run. Chester Destler, “Wealth Against Commonwealth, –,” American Historical Review  (Oct. ): –. See Henry Demarest Lloyd, “The Story of a Great Monopoly,” Atlantic Monthly  (Mar. ): –; Lloyd, “Lords of Industry,” –. Lloyd’s “Story of a Great Monopoly” was reprinted seven times. Lloyd was an editorial writer for the Chicago Tribune from  to . He wrote the following unsigned editorials, according to his sister and biographer, Caroline Augusta Lloyd: “Cable Monopolies,” Dec. , ; “Stiff Monopoly,” Dec. , ; “Why Coal Is Dear,” Jan. , ; “The Match Monopoly in Congress,” Jan. , ; “A Silent Monopoly,” Jan. , . Cited in Caroline Augusta Lloyd, Henry Demarest Lloyd, –: A Biography (New York, ) : . See Thorelli, Federal Antitrust, n. Anne Mayhew, “How Economists Came to Love the Sherman Antitrust Act,” History of Political Economy , suppl. (): –; George Stigler, “The Economists and the Problem of Monopoly,” American Economic Review  (): –. Stigler concludes that economists accepted the Sherman Act only after the development of technical price

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

threat to individual liberty was not government regulation but rather undue economic coercion – and they believed that it posed a threat that necessitated political remedies. Simon Nelson Patten, a professor at the University of Pennsylvania’s Wharton School of Finance and Economy, and Henry Carter Adams, an economist and statistician, both wrote influential works in the s urging the abandonment of what they referred to as laissez-faire policy prescription among economists. Having both studied economics in Germany, Patten and Adams subscribed to the German historical school and adopted the new economic methods of marginalism, which revised the classical theory of value. Rather than determining value based on historical average costs, marginalism determined value based on expected utility – which, they insisted, was what guided decision making for individuals and firms. This more subjective measure of value encouraged a reevaluation of the classicists’ nonintervention in economic exchanges. Marginalism also questioned the universalism of economic tenets, preferring locational and industryspecific analysis instead.









theory that could better define a pro-competitive market. See John B. Clark, “The Limits of Competition,” in The Modern Distributive Process: Studies of Competition and Its Limits, of the Nature and Amount of Profits, and of the Determination of Wages, in the Industrial Society of To-day, eds. John B. Clark and Franklin H. Giddings (Boston, ), –. See also Dorothy Ross, “Socialism and American Liberalism: Academic Social Thought in the s,” Perspectives in American History  (–): –. Adams, “Relation of the State to Industrial Action,” –. Adams urged Congress to recognize that “regulated combinations are better than irresponsible competition.” See also John Bates Clark, The Control of the Trusts (New York, ). Simon N. Patten, The Premises of Political Economy: Being a Re-examination of Certain Fundamental Principles (Philadelphia, ); Adams, “Relation of the State to Industrial Action.” Three economists are credited with simultaneously devising marginalist theory: William Stanley Jevons in England, Cark Menger in Austria, and Léon Walras in Switzerland. See Jevons, “A Brief and a General Mathematical Theory of Political Economy,” Journal of the Royal Statistical Society  (June ): , and The Theory of Political Economy (London, ); Menger, Principles of Economics (Auburn, AL, ; originally published ); Walras, Elements of Pure Economics, or The Theory of Social Wealth, trans. and eds. Donald A. Walker and Jan Van Daal (Cambridge, ; originally published ). On the history of marginalism in economic thought, see Mark Blaug, Economic Theory in Retrospect, th ed. (Cambridge, ), –; Hovenkamp, Enterprise and American Law, , –. Patten and Edmund James (another Wharton professor who had trained in Germany) helped establish the American Economic Association (AEA), whose goal was “to combat the widespread view that our economic problems will solve themselves, and that our laws and institutions which at present favor individual instead of collective action can promote the best utilization of our material resources and secure to each individual the highest development of all his faculties.” Letwin, Law and Economic Policy, .

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American Fair Trade

While these “new school” economists borrowed the familiar language of classical economics to describe the “natural” tendencies of many industries to consolidate, their prescriptions for regulatory reform set them apart from Social Darwinism, Carnegie’s gospel of wealth, and traditional forms of classical economic theory. Patten and Richard Ely advanced prescriptions for an inductive approach to economics that urged state interventions to improve economic conditions through public regulatory initiatives and private business associations. This tension between schools of thought animated the founding of the American Economic Association (AEA) in , as its “first principle” illustrated: We regard the state as an educational and ethical agency whose positive aid is an indispensable condition of human progress. While we recognize the necessity of individual initiative in industrial life, we hold that the doctrine of laissez-faire is unsafe in politics and unsound in morals; and that it suggests an inadequate explanation of the relations between the state and the citizens.

One of the most adamant critics of classical economics and laissez-faire, Ely played an instrumental role in framing the AEA’s mission and goals. He believed that the Granger Laws and state antitrust laws hardly went far enough, and he remained committed to protective labor laws and the nationalization of certain industries. This is not to say that these economists supported federal antitrust legislation per se, but rather that they supported novel forms of public regulation to reorder existing power relations. While many of these economists believed that consolidation and combination occurred naturally in industries with high fixed costs, they did not believe that these industries should be left to their own devices. Combinations might be an inevitable and perhaps even desirable result of falling prices – which were themselves the product of deflation as well as technological advancements in production and distribution – and these combinations might create greater price stability. However, just as the state had played a role in creating those opportunities, the state should likewise reorder the reciprocal duties that traditionally constrained corporate entities. 





On the founding documents of the American Economic Association, see Richard Ely, “Report of the Organization,” Publications of the American Economic Association ,  (), ; Mary O. Furner, Advocacy and Objectivity: A Crisis in the Professionalization of American Social Science, – (Lexington, KY, ), . Henry Carter Adams, “Economics and Jurisprudence,” Science  (July , ), . See also Andrew Jewett, Science, Democracy, and the American University: From the Civil War to the Cold War (Cambridge, ), –. On the handful of economists who supported federal antitrust law, see Frederic Scherer, “Efficiency, Fairness, and the Early Contributions of Economists to the Antitrust Debate,” Washburn Law Review  (): –.

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

As the nation became riveted by the “trust question,” the popular press responded with a flood of articles and editorials. Spurred by the New York legislature’s  investigation into the trusts – along with Harry (Henry) Havemeyer’s testimony on his role in creating the Sugar Refineries Company, better known as the Sugar Trust – the Independent newspaper in New York City surveyed the Republican Party’s responses to the trusts. Public Opinion, a compendium of popular newspaper articles, printed more than forty-seven articles from thirty-one daily newspapers between  and . Each article carried the label of Democrat, Republican, or Independent, none of which lent approval to the “trusts.”

      Unsatisfied with the states’ ability to effectively and predictably regulate corporations engaged in monopolistic business practices, national political parties seized the opportunity to draft antitrust legislation. Both Republicans and Democrats vowed to ensure competitive markets, and both claimed fair prices to be their goal. But the parties offered different visions of competitive markets and different organizational schemes to achieve rough competitive equality. Republican senator John Sherman of Ohio introduced his antitrust bill in  to protect “full and free competition.” A career politician, Sherman had served in the Senate for twenty-five years and run for the presidential nomination several times. Under Sherman’s original legislation, any restraint of interstate commerce constituted a violation of the act. Debates on the passage of the Sherman Act revolved around the two parties’ divergent interpretations of industrial liberty and separate visions 





Report of the Committee on the Investigation Relative to Trusts; “Trusts Pools and the Law,” Independent, Mar. , , ; “Legislative Regulation of Trusts,” Independent, Apr. , , . Using Public Opinion as his source, Hans Thorelli conducted an exhaustive survey of periodical and newspaper literature to refute earlier claims that the public had paid scant attention to the antitrust legislative debates. Thorelli argues that widespread interest in the antimonopoly issue pervaded all regions of the nation and created an “irresistible tide of public opinion” that culminated in the Sherman Antitrust Act of . Thorelli, Federal Antitrust, –. According to common law, striking down a contract in restraint of trade could not destroy a monopoly. A contract could be struck down only if it was deemed too broad in its application. See Diamond Match Co. v. Roeber  N.Y.  (), in which the New York State Court of Appeals ruled that the exclusionary contract prohibiting Roeber from engaging in business anywhere in the United States, except Nebraska and Montana, was “partial” and thus reasonable.

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American Fair Trade

of twentieth-century federalism. Leading the Democratic opposition, Senator James George of Mississippi argued that the proposed federal law would violate states’ rights to regulate businesses within their borders. As such, he argued, the bill was an unconstitutional extension of federal commerce powers. At that time, states employed distinct laws regarding competition and combination. Some combinations were permissible under state law, such as farmer cooperatives that pooled buying, selling, and marketing power. George insisted that it would be unreasonable to outlaw all restraints of trade. After all, he reasoned, weren’t the Republican tariffs a clear restraint of “free and full competition”? George wanted to keep tariffs on the political agenda and detract from antitrust momentum. “This [bill] leaves unpunished and perfectly lawful all those combinations which have proven so disastrous, that have for their object a decrease in the price.” Though low prices may appear in the interest of consumers, George argued, some combinations also protected consumer interests, such as agricultural cooperatives that maintained numerous producers. According to the Democrats, combinations to secure fair profits for producers and retailers or a fair return on property investments produced a reliable social good. In  Sherman introduced a revised bill and insisted that it would prohibit only those combinations that were already illegal under common law. In his legislative testimony, Sherman presented the recent Michigan Supreme Court ruling against the Diamond Match Co. as a case in point. In that  case, the court would not enforce an agreement among



 



Legal scholar Rudolph Peritz has explored the conflicting meanings of industrial liberty and concludes that the differences were primarily rhetorical. He emphasizes that both Republicans and Democrats enunciated related images of ethical competition as attached to equality and liberty. Peritz, Competition Policy, esp. chap. .  Cong. Rec. –, – ().  Cong. Rec.  (). The accusation that Senator Sherman used the antitrust bill as a ploy to gain support from populists attracted to the Democratic Party platform aroused attention then as it does now in the historical literature. See Robert L. Bradley Jr., “On the Origins of the Sherman Antitrust Act,” Cato Journal  (winter ): –. Moreover, much later, during the Fifty-First Congress (–), Senator Sherman sponsored legislation to increase tariff rates, which many viewed as a direct cause of many of the trusts. See  Cong. Rec.  () for a list of “The Tariffs and the Trusts,” read by Senator George Graham Vest (D-MO). Critics of antitrust legislation, then and now, have condemned the act because of its linkage to Republican tariff policies. See “Mr. Sherman’s Hopes and Fears,” New York Times, Oct. , ; Donald Bourdeaux and Thomas DiLorenzo, “The Protectionist Roots of Antitrust,” Review of Austrian Economics ,  (): –.  Cong. Rec.  ().

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

company executives because it formed a monopoly. This testimony also gave him an opportunity to take aim at a political rival, General Russell Alger, a Diamond Match executive who had defeated him in the  Republican presidential nomination. Finally, Sherman reiterated the Michigan ruling, responding to the Democratic economic logic of consolidation and freedom of contract with his own explanation of how industrial liberty played out in the real world: It is sometimes said of these combinations that they reduce prices to the consumer by better methods of production, but all experience shows that this saving of cost goes to the pockets of the producer, the price to the consumer depends upon the supply, which can be reduced at pleasure by the combination. . . . The aim [of the monopolist] is always for the highest price that will not check the demand, and, for the most of the necessaries of life, that is perennial and perpetual.

Lower prices could not be guaranteed by monopolists, who retained the power to subsequently raise prices. Sherman’s economic logic was predicated on the idea that competitive markets required some robust number of competitors, though he did not furnish a more precise definition of competitive markets. As such, the Republicans appeared to agree that protecting some competitors should be within the letter of the law. American politicians understood that this political debate united economic questions of efficiency and competitive markets with moral concerns about businesses conduct and the preservation of industrial liberty. Republican Senator Henry M. Teller of Colorado agreed with Sherman that although the growth of large-scale firms may be natural and may produce efficiencies, such concentration of capital and market power might render competition impossible. “I do not believe that the great object in life is to make everything cheap,” Teller argued. The goal of an antitrust law was not simply to obtain the lowest consumer prices, 



 

The Michigan court held that because the combination was known to prevent fair competition and to control prices, it could not use the fact that it reduced prices as a defense of its business model. Lower prices could simply demonstrate the power of the firm to undercut competitors and subsequently “to raise the price to an exorbitant degree.” Richardson v. Buhl,  Mich.  at  (). Sherman also cited Chicago Gas Co. v. People’s Gas Co.,  Ill.  (); People v. Chicago Gas Trust Co.,  Ill.  (); People v. North River Refining Co.,  N.Y.  (). Critics of the Sherman Act have emphasized this personal vendetta as a motivation for the antitrust act. This interpretation seems overstated, though surely Sherman enjoyed the snipe. See Bradley, “Origins of the Sherman Antitrust Act.”  Cong. Rec.  ().  Cong. Rec.  (); Rudolph Peritz, “The ‘Rule of Reason’ in Antitrust Law: Property Logic in Restraint of Competition,” in The Political Economy of the Sherman

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American Fair Trade

which corporate trusts offered as a temporary means to undercut competition. Instead, an antitrust law was intended to restrict market power – foreclosing the possibility of monopoly pricing – and reinstate entrepreneurial rivalry and market competition. Much of the congressional arguments reflected tensions in society at large – between the classical liberal laissez-faire attitude and the “new liberal” regulatory approach, which acknowledged the interdependence between the functioning of the state and the functioning of the market. This tension, characterized by old and new liberalism, animated debates in the academy as well. Textbook classical political economy had taught that market competition was a necessary social good that helped maintain a democratic society uncorrupted by special interests or a privileged hegemon. In other words, competition had become equated with formal legal equality and egalitarianism, as opposed to the older eighteenthcentury mercantilist political economy of state-granted privileges to select corporate entities. Full and free competition in itself both reflected and ensured individual liberty and freedom of choice. People should be free to decide what occupation to pursue, what prices to charge, and with whom to deal. In general, the Democratic Party adhered to a classical notion of free competition that allowed the exercise of contractual liberties that in fact constrained trade through combinations. The Republicans, on the other hand, sought to limit the market coercion that existed in many contractual relationships, preferring instead an enforcement of competition that would ensure some level of equality. After all, common law had held a contract to be unreasonable if it included a non-compete clause that prohibited someone from practicing his or her trade anywhere, indefinitely. In other words, one’s right to practice a trade superseded the contractual obligation. For the most part, however, classical competition policy had entailed a noninterventionist stance that had permitted combinations of businesses to make all sorts of agreements in the marketplace. But that bygone era of a healthy,



 

Act: The First One Hundred Years, ed. E. Thomas Sullivan (New York, ), –, . See Wayland, Elements of Political Economy. See also Amasa Walker, The Science of Wealth: A Manual of Political Economy Embracing the Law of Trade, Currency and Finance (Boston, ). Sherman had wanted to exempt labor unions from antitrust prosecution.  Cong. Rec. , –. Justice Oliver Wendell Holmes made these arguments in his dissent in the Northern Securities case. Northern Securities Co. v. United States,  U.S. ,  ().

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competitive marketplace marked by the intense rivalry of numerous firms, the Republicans argued, had been supplanted in some industries by a handful of firms that had accumulated vast capital and wealth. What the Republicans prescribed was the protection of industrial liberty by enforced competition that would restrict combination and competition alike. The final Sherman Antitrust Act reflected this moment of transition – both in academic political economy and in the practical politics of public policy. Democratic political figures, generally adhering to the older notion of classical law and economics, feared an outright prohibition of combinations and a challenge to industrial liberty qua liberty of contract. In an attempt to solidify a compromise to pass the Sherman Act, Sherman conceded: “I admit that it is difficult to define in legal language the precise line between lawful and unlawful combinations. This must be left for the courts to determine in each particular case.” And thus this conflict between two competing directions for law and economics was handed over to the courts. Initially, that compromise seemed to be a conservative settlement in that the Sherman Antitrust Act codified existing common law language, declaring illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.” It prohibited monopoly “or [the] attempt to monopolize, or combine or conspire with any other person or persons.” Ultimately, however, the federal law radically altered American federalism and extended common law prohibitions well beyond their previous scope. After  the federal government possessed new authority to regulate commerce through litigation. Additionally, the law made violations of the act criminal offenses, carrying much heavier penalties than civil procedure. Whereas previously, restraints of trade had been simply unenforceable in courts, after  criminal prosecution could be brought by the Department of Justice and state attorneys general. The new federal law also empowered private litigants and incentivized them to bring antitrust

Holmes argued that the government should not break apart a voluntary agreement only because the combination diminished competition among the contracting parties. Holmes did not view their enhanced market power as threatening market competition writ large.  See  Cong. Rec.  () for Senator George’s opposition to the creation of a per se prohibition against all combinations.   Cong. Rec.  ().   Stat. , §§ . Senator Sherman substituted the language of “full and free competition” with the common law language of “restraint of trade.”

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suits by awarding three times the amount of injury, known as treble damages, plus attorney fees. In turn, the Department of Justice faced the twin problems of insufficient administrative capacity and leadership, which resulted in limited enforcement of the new federal law. Housed in the upstairs of a bank building, the department consisted of eighty employees, only eighteen of whom were attorneys. Burdened with an increasingly heavy case load, nearly all of the early prosecutions arose in the state attorneys general offices and ended in defeat. As a result, Attorney General Richard Olney recommended to Congress that the Sherman Act be amended to clarify the legal meanings of monopoly and restraint of trade. He also wanted to make any combination constitute prima facie evidence of an effort to monopolize. Finally, he urged that investigative work be performed by an agency outside of the Department of Justice, and he announced that he would not prosecute when the law was so feeble. Olney’s inability to successfully prosecute under the Sherman Act could be attributed either to an unwillingness to enforce the act or to insufficient administrative capacity. Regardless, the law’s vagueness on what constituted a restraint of trade or an attempt to monopolize created uncertainty for prosecutors and businesspeople alike.

   The first decade of federal antitrust enforcement did not inspire confidence that the government could successfully deploy the Sherman Act to rein in the trusts, circumscribe combinations, or protect marginalized groups. Not only might one question the capabilities and capacity of the Department of Justice, but the Supreme Court appeared unable or unwilling to enforce the act even in the case of an outright monopoly. With one exception, the federal courts failed to break apart the so-called trusts  

 

Letwin, Law and Economic Policy, . The Department of Justice failed to break the Sugar Trust, for example, despite the trust’s control of  percent of the domestic sugar-refining industry. The Court ruled that the Sherman Act applied only to commerce and not the manufacture of a good because manufacturing fell under state regulatory jurisdiction. United States v. E. C. Knight Co.,  U.S.  (). See H.R. Doc. No. – (), repr. in Att’y Gen. Ann. Rep. – (), xxvii. Cited in Letwin, Law and Economic Policy, , . E. C. Knight Co,  U.S. . The Knight case was largely limited during the New Deal era.

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in the first few years of the act, yet the courts did break apart price fixing through associations. As a result, the courts’ interpretation of the act encouraged further market consolidation. Two years after the passage of the act, the Court refused to intervene against the “whiskey trust,” stating that “its mere existence” was not a violation. The Court stated that it had no objection to monopoly market power if it arose from successful fair competition, accident, or state edict – suggesting that Justice would have to identify tactics of unfair competition to successfully bring criminal charges. On October , , the Supreme Court heard arguments by the Department of Justice against the Sugar Trust, the department’s first case under the Sherman Act. Two years prior, Henry Havemeyer, the majority owner of the American Sugar Refining Co. based in New York, had acquired the E. C. Knight Co. and other refiners based in the Philadelphia and Delaware areas. This acquisition solidified what Havemeyer had long sought – nearly complete control of the sugar-refining sector. The Sugar Trust controlled  percent of the nation’s refining capacity, prompting pro-business Democratic President Grover Cleveland to seek to block the merger. Cleveland had only recently begun his second term in the White House when the depression of  swept the nation. In response, he orchestrated the repeal of the Sherman Silver Purchase Act, which had contributed to the depletion of gold reserves – but his action raised the ire of western farmers, who wanted cheaper currency. As was characteristic of





 

United States v. Jellico Mt. Coal & Coke Co.,  F.  (), dissolving a combination between retail dealers and mine owners. The federal court held that the object of the exchange was to fix prices and exclude other producers and retailers from its market. It is conventional history that the courts’ rulings in early antitrust cases led to further corporate consolidation. Overt price fixing or loose combination agreements were more easily identified and struck down, incentivizing corporate consolidation as a legal path to avoid prosecution. See Lamoreaux, Great Merger Movement; Freyer, Regulating Big Business. In re Greene,  F.  (), holding that the whiskey trust neither controlled the market exclusively nor required retailers to enter exclusionary contracts and therefore had not monopolized the industry. See Hovenkamp, Enterprise and American Law, . Greene,  F. . Petitioner’s Exhibit , District Court of the United States for the Southern District of New York, United States v. American Sugar Refining Co.,  U.S.  () (New York, ), :. (These district court documents include meeting minutes from the sugar refining companies involved in the suit.) See also David T. Beito and Linda Royster Beito, “Gold Democrats and the Decline of Classical Liberalism, –,” Independent Review  (spring ): –; McCurdy, “Knight Sugar Decision,” –.



American Fair Trade

Democratic politics at the time, Cleveland campaigned to roll back the high tariffs enacted by Republican administrations. The Wilson-Gorman Tariff Act of  effectively repealed many of the protections guaranteed to U.S. manufacturers; however, the more than  amendments to the bill nullified its substance. The American sugar-refining industry was one such group of producers. The following September the cover cartoon for Harper’s Weekly depicted President Cleveland’s defeat by the trust – a chariot labeled “sugar trust,” being pulled by a donkey and crushing the Wilson bill beneath its wheels, is dragging President Cleveland behind it in chains. Cleveland responded to such criticisms by promptly accusing members of the Senate of accepting bribes from the Sugar Trust in exchange for assured protective tariffs. Havemeyer and the trust’s secretary, John Searles, refused to answer questions at congressional hearings. Indeed, Cleveland would not defeat the Sugar Trust. The incident seemed to affirm allegation that the trusts corrupted and controlled Congress as well as the marketplace. Despite the Sugar Trust’s outright monopoly on sugar refining, the Court’s decision focused on the question of federal jurisdiction. The Court enforced the older common law standards of state authority over manufacturing facilities. Chief Justice Melvin Fuller wrote: “That which belongs to commerce is within the jurisdiction of the United States, but that which does not belong to commerce is within the jurisdiction of the police power of the State.” The Court’s E. C. Knight decision validated state police powers over the regulation of manufacturing facilities and



 



Allan Nevins, Grover Cleveland: A Study in Courage (New York, ), –. Cleveland sought to offset the reductions in federal revenue by instituting a federal income tax on earnings above $,. The Supreme Court ruled this tax unconstitutional in Pollock v. Farmers’ Loan & Trust Co.,  U.S.  (), affirmed on rehearing,  U.S.  (). In that landmark case, the Court held that the Income Tax of  constituted a direct tax on individuals, violating the constitutional provision stating that federal direct taxes must be apportioned. The Sixteenth Amendment, ratified in , superseded this ruling. Gorman’s Triumph – A Humiliating Spectacle, cartoon, Harper’s Weekly, Sept. , , front cover. Senator Arthur P. Gorman co-sponsored the bill. Joseph Wheless, “The Sugar Trust Cases: A Legal Comedy of Errors,” American Law Review  (July/Aug. ): . Havemeyer was accused of buying state elections in New York and Massachusetts to ensure that certain state senators would be elevated to national representation. Nevertheless, no subpoena was issued demanding that Havemeyer respond in testimony because, Judge Bradley held, the election bribery was a state matter. United States v. E. C. Knight Co.,  U.S. at , citing Justice John Marshall in Gibbons v. Ogden,  U.S.  (), among others.

The Origins of American Fair Trade



affirmed the legal status of large-scale industrial corporations regardless of size or scope. The Court held that the size of the Sugar Trust did not prove the indictment of a restraint of trade. While Chief Justice Fuller found the Sherman Act to be hemmed in by existing federalism doctrine, certainly not all the justices agreed with his interpretation. The Sherman Act, it seemed, had been rendered toothless through a jurisdictional objection. However, the Court had not argued that potential competition would defeat the trusts. Thus along with the issue of federalism, another issue remained unsettled – namely, what constituted a restraint of trade according to the Court. How the Sherman Act would alter existing common law rules regarding prohibitions on restraints of trade and monopolization remained ambiguous. Much of the early antitrust jurisprudence came to rely on the developing field of public regulation of railroads and utilities. With Justice Rufus Peckham at the helm, the Court reordered the established common law rules regarding restraints, which had relied on the test of reasonableness. Instead, the Court established the “literalist” interpretation. In two cases, United States v. Trans-Missouri Freight Association () and United States v. Joint Traffic Association (), Justice Peckham, writing for a divided Court, ruled that the Sherman Act had empowered the Court to extend the law’s antimonopoly provisions. According to his rulings, all direct restraints of trade constituted a violation of the act. In the first case, a railroad pool had agreed to a rate-setting scheme to avoid, as they argued before the Court, “excessive competition” that drove rates below a remunerative level. Peckham held that this price-fixing combination constituted a direct restraint on interstate commerce, whereas indirect restraints, such as the

 



 

William G. Roy, Socializing Capital: The Rise of the Large Industrial Corporation in America (Princeton, NJ, ), . For two opposing views on the case, see “Common Sense on Trusts,” Gunton’s Magazine of American Economics and Political Science, Dec. , ; “Alarming Growth of the Trusts: Money Kings Combine and Kill Competition,” Cincinnati Enquirer, Apr. , , . Stephen Siegel, “Understanding the Lochner Era: Lessons from the Controversy over Railroad and Utility Rate Regulation,” Virginia Law Review  (Mar. ): –; James May, “Antitrust in the Formative Era: Political and Economic Theory in Constitution and Antitrust Analysis, –,” Ohio State Law Journal  (): –. United States v. Trans-Missouri Freight Ass’n,  U.S. ,  (); United States v. Joint Traffic Association,  U.S.  (). Trans-Missouri Freight Association,  U.S., .



American Fair Trade

purchase of one railroad by another, would be permissible under the law. For Peckham, the Sherman Act intended to preserve market competition by preventing combinations from “driving out of business small dealers and worthy men.” Justice Edward White wrote the dissenting opinion, which three other justices joined. White reiterated the utility and flexibility of the older common law reasonableness standard. For White, the literalist interpretation reduced the prevailing liberty of contract doctrine to “the mere caprice of judicial authority.” These two interpretations of what constituted a restraint of trade – Peckham’s literal interpretation versus White’s common law rule of reason – vied for the Court’s majority for the next decade. Ultimately, the rule of reason would win, but not without a substantive reordering to fit the changing times. Both Trans-Missouri and Joint Traffic concerned rate regulation in an industry that was paradigmatic of “business affected with a public interest.” Extending the literalist interpretation of direct and indirect restraints to private businesses proved more difficult for Peckham. In Addyston Pipe & Steel Co. v. United States (), the Court issued a permanent injunction against an association of six Tennessee pipe manufacturers accused of price fixing and bid rigging. The association’s members had agreed not to bid against one another for certain municipal contracts, thus rigging the state’s open-bid system, which had been designed to find the lowest price. The manufacturers’ association argued that their activities were reasonable restraints of trade, that all parties had voluntarily entered into the agreements, and that the rates themselves were reasonable. Moreover, their association did not control the entire market; competition still existed in other territories. Justice Peckham disagreed and affirmed the lower court’s ruling that these methods and outcomes were unreasonable. Although Peckham, employing his literalist interpretation, wrote that the Addyston Pipe Co. had committed a direct restraint of trade, he relied on the lower court’s findings, which had instead deployed a test of reasonableness. Judge William Howard Taft, writing for the Sixth Circuit Court of Appeals, wrote that of course not all restraints were prohibited under the Sherman Act; such a rule would 

 

Ibid., . Peckham went on to say that lowered prices “might be dearly paid for by the ruin of such a class, and the absorption of control over one commodity by an allpowerful combination of capital.” Ibid., . For a discussion of the literalist interpretation in relation to the liberty of contract doctrine, see Letwin, Law and Economic Policy, . Addyston Pipe & Steel Co. v. United States,  U.S.  ().

The Origins of American Fair Trade



freeze commerce. In contrast to Peckham’s literalist interpretation, Taft argued that reasonable restraints were ancillary to a lawful contract, but if the primary purpose of the contract was to restrain trade, then the contract violated the act. From that point onward, the Court maintained a generalized rule against collusion, especially if it affected prices. The brilliance of Taft’s lower court Addyston ruling lay in its application of the language of the common law rule of reason while in fact it significantly altered the actual common law rules that existed prior to the Sherman Act. Common law competition policy had not concerned itself with voluntary agreements among producers to limit competition through contracts, as long as those agreements did not violate state corporate law or prohibit someone from practicing his or her trade indefinitely, across time and space. Taft’s twist on the rule of reason instituted a more stringent test, moving beyond the noncoercion standard to ensure the functioning of competitive markets. It mattered less, therefore, that the contract was voluntary or partial. What mattered was the effect on market competition more generally. To be clear, Taft objected to Peckham’s literalist interpretation of antitrust and argued that to some extent, all contracts intended to restrain trade. In his lower court decision, Taft used the example of non-compete contracts that restricted labor markets for some duration. Such a restraint, he argued, was ancillary to the sale of a business, the transfer of goodwill, or the contract of an apprenticeship. It had in fact facilitated these exchanges and proved beneficial to maintaining competitive markets and was therefore in the public interest. He contrasted that ancillary restraint to “naked” restraints, which included price-fixing agreements whose primary objective was to limit competition. This was an innovation – coercion took on a new meaning, extending beyond contractual relationships to include effects on market competition. Previously, common law had sanctioned certain price-fixing arrangements that limited competition for temporary time periods. Similarly, the Supreme Court upheld voluntary (i.e., noncoercive) contracts that contained territorial non-compete clauses that also fixed  



United States v. Addyston Pipe & Steel Co.,  F.  (). Ibid., . Taft cited common law rulings on the reasonableness of ancillary noncompete restraints, including Mitchel v. Reynolds,  P. Wms. ,  () and Alger v. Thacher,  Pick. ,  (). Skrainka v. Scharringhausen,  Mo. App.  (), upholding a price-fixing agreement among stone quarry operators in St. Louis as a reasonable restraint that temporarily staved off ruinous price competition.



American Fair Trade

resale prices. Taft’s Addyston decision moved the courts toward a more neoclassical interpretation of competitive markets, in which any price agreement necessarily disrupted market competition and thus required no further investigation by the judiciary into any potential benefits. The Supreme Court applied this logic against labor unions in  and independent proprietors in , severely limiting – though certainly not destroying – efforts by labor and trade associations to manage competitive markets. The adaptation of common law rules to new federal laws exacerbated uncertainty in an era of market transformations, especially for independent proprietors and combinations of these individuals. In  committee members of the American Pharmaceutical Association (APhA), a group of manufacturers, orchestrated industry-wide efforts to effectively govern the pharmaceutical distribution chain. The group was not interested simply in price fixing, though that was certainly one plank in their overall platform. Their efforts included standardizing the National Formulary’s suggested prescription compounding, regulating peddlers and “quack” pharmacists through licensing laws, and coordinating standards in advertising. By the turn of the century, state licensing had become increasingly prevalent. Notes, the newsletter of the National Association of Retail Druggists (NARD), began to devote most of its attention to the problem of price cutting and ruinous competition. As early as , the NARD, together with wholesaler and manufacturer associations, coordinated information exchanges on price schedules, cost accounting methods, and quantities sold. Soon the druggists came into direct conflict with the new federal antitrust law as they coordinated their “tripartite plan” among manufacturers, distributers, and retailers. The plan’s stated 



 

Diamond Match Co. v. Roeber,  N.Y.  (), upholding a territorial noncompete contract that included the entire United States, except for Montana and Nevada; Fowle v. Park,  U.S. , esp. – (), upholding a territorial sales agreement that included manufacturer-set resale price fixing; Bowling v. Taylor,  F.  (), the lower federal court granting an injunction against Taylor for violating a price-setting contract; In re Greene (known as the whiskey trust case),  F.  (), upholding the trust against charges of monopoly because it had not been found to have exercised coercive tactics. See Loewe v. Lawlor,  U.S.  (), applying the Sherman Act against labor unions as a restraint of trade; Dr. Miles Medical Co. v. Park & Sons, Inc.,  U.S.  (), holding that a manufacturer’s contract with retailers to set prices violated the Sherman Act as a restraint of trade. A. R. Elliot, “Revivification of the Tripartite Plan,” American Druggist and Pharmaceutical Record  (Aug. ): . For more on the National Formulary, see Chapter .

The Origins of American Fair Trade



goal was to rationalize business methods by adopting standard form sales contracts and instituting “price protection” schedules across member businesses. These coordinating devices, they argued, might mitigate the problem of price cutting and overproduction. The National Wholesale Druggist Association also helped shape and promote the plan. By  the associations were encouraging the enforcement of the tripartite plan, where manufacturer, distributor, and retailer were contractually bound together by a schedule of minimum prices. The NARD, the Proprietary Association of America, and the National Wholesale Druggists’ Association (NWDA) held conferences to negotiate retail prices for compounding chemicals and botanicals as well as retail brands; they printed and circulated price schedules, often affixing them to packages. They also published blacklists that threatened exclusion if members violated the compact. The plan allowed manufacturers, together with retailers and wholesalers, to determine fair prices for certain proprietary goods and services. Resolution C, an agreement that created a list of price-cutters, became a regular feature in the NARD’s Notes. For all intents and purposes, Resolution C was a blacklist of noncompliant retailers, with whom members were expected not to deal. The association had created an integrated system of printed price lists, quantity discounts, and regimented sales requirements that (it argued) preserved legitimate, albeit managed, competition. Such industry self-regulation, the NARD insisted, excluded so-called quack remedies and disreputable 





 

“Patent Medicine Trade: Efforts to Secure a New Plan for Distributing Articles,” New York Times, Nov. , , . This article covered the meetings of both the National Wholesale Druggists’ Association and the Association of Manufacturers and Wholesale Dealers of Proprietary Articles. “Wholesalers to Proprietors; Advocates Limited Price Plan,” American Druggist and Pharmaceutical Record  (Jan.–July ): , National Library of Medicine, National Institutes of Health, Bethesda, MD; “Jobbers Discuss Rebate Plan: Charges of Bad Faith, Excessive Rebates, and Secret Selling to Cutters,” American Druggist and Pharmaceutical Record  (Jan.–July ): , National Library of Medicine. NWDA Journal, (), p. . “The plan final formulated was adopted upon an overture from the retailers, at the annual meeting of the wholesalers, at Chicago in September, , in which the proprietors as associate members participated.” The plan remained in effect for almost a decade before being sued by California chain drug store. See Jayne v. Loder,  F.  (). “Patent Medicine Men Meet,” New York Times, May , , . See Briefs for the Petitioner, Ex. K, at –, Dr. Miles Medical Co. v. John D. Park & Sons, Inc.,  U.S.  (). Exhibit K contains the District Court’s ruling in Jayne v. Loder,  F. , which considered the case of Park v. National Wholesale Druggists’ Ass’n,  N.Y.  () and the discussion of the Tripartite Agreement and Resolution C.



American Fair Trade

druggists, thereby protecting consumers as well. Any retailer who refused to follow the stipulations in the contract – whether regarding prices, service guarantees, or return policies – would be ousted from the trade group. John D. Park, a Cincinnati retail druggist, focused his attention on efforts to undercut the tripartite plan. Park & Sons, Inc., exemplified the persistent price-cutter; for twelve years he violated an otherwise successful trade association profit-sharing plan. He adamantly defended his business practices and increasingly accused the proprietary drug trade of operating as a monopoly. In  the New York Times described Park & Sons as a Cincinnati firm that “arrogates to itself the right to buy and sell proprietary articles as it pleases.” The Times reported that Park & Sons “has been ‘blacklisted,’ but it has always succeeded, by various devices, in procuring all the proprietary articles it wants.” Litigation records show that Park obtained brand-name, price-protected proprietary medicines through wholesalers and then sold the products as loss leaders at retail. In  Park sued for an injunction against the NWDA for damages totaling $,, which he later revised to $. million. The trade association responded that the tripartite plan was a necessary protection against discount retailers who destabilized the market for its members’ brand-name drugs. In  the New York Court of Appeals unanimously ruled that doing away with price competition among dealers was not in restraint of trade because there was no evidence of coercion or fraud. The products in question existed in free and open competition with similar products. Moreover, the dealers maintained the right to “induce manufacturers to establish a uniform price for fixed quantities so that they can purchase as cheaply as the great merchants and thus compete with them.” In other words, networks of retail druggists, along with wholesalers, insisted on the price protection plans, which manufacturers crafted. As legal treatise   



 “Patent Medicine Trade,” New York Times, Nov. , , . Ibid. “Millions Involved in Drug Firm Suit,” New York Times, July , , . Park attempted to appeal but was denied cert, meaning the Court would not hear his case. Park v. National Wholesale Druggists’ Ass’n,  N.Y.  (). “The members of the association clearly had the right to work for their own interests; they had the right to devise and adopt a plan for the conduct of the business in which they could make a commission or a profit, so long as they did not unlawfully interfere with the rights of others. They had the right to petition the manufacturers to adopt the plan devised by them and to support their petition with all of the arguments and persuasions that they could bring to bear, so long as they did not resort to threats or intimidations.” Ibid., . Ibid., .

The Origins of American Fair Trade



writer John Lewson explained a few years after the case was decided: “The arrangement amounted to nothing more than an understanding as to commissions to be realized by the members of the dealers’ association for their services in handling manufacturer’s goods. The fixing of prices was a means to gain said end.” Thus the appeals court ruled that an ancillary restraint of trade that protected brand-name goodwill did not constitute a violation of the Sherman Act. In the same year, the Dr. Miles Medical Company of Elkhart, Indiana, initiated its own price protection plan. As the company’s sales expanded, it increasingly relied on direct sales in addition to bulk sales to wholesale distributors. The “Dr. Miles Price Protection Plan” effectively mimicked the tripartite plan; however, the Dr. Miles plan carried out vertical agreements between the producer (the company) and either the retailer or wholesaler. According to the company’s new policy, all medicines were assigned a serial number to enable tracking and monitoring through the distribution chain. The sales contracts stated the serial numbers of the products sold and assigned a mandatory price schedule based on the number of days on the shelf for that good. At the end of the stated period, the Dr. Miles Medical Company would buy back unsold items. The medicines were sold at fixed prices, and the jobbers agreed to sell only to retailers that entered into similar executory contracts. The bottles bore the trademark, trade name, and resale price. These agreements were intended “to prevent secret rebates, discrimination, price-cutting, demoralization of trade, and injury to the reputation of and good will of the complainant’s business.” Moreover, these contracts were in ubiquitous use – more than forty thousand retail druggists being party to such contracts. If the retailer failed to comply with the terms of sale, then the Dr. Miles Company refused to continue dealing with that retailer. By  Miles boasted  percent compliance nationwide with the plan and publicized its standard form contracts, which it sent to all its wholesalers and retailers. The Dr. Miles Price Protection Plan operated through widespread advertising in trade journals, radio spots, and newspapers explaining the terms of the contract to businesses and consumers. The company expanded its budget for mailings to individual dealers and jobbers and   

John Lewson, Monopoly and Trade Restraint Cases, Including Conspiracy, Injunction, Quo Warranto, Pleading and Practice and Evidence (Chicago, IL, ), –. Box , Rebate Contracts, DMMCA. Dr. Miles Medical Company v. Jaynes Drug Co.,  F. ,  ().



American Fair Trade

began distributing promotional materials like cookbooks, calendars, and almanacs. The plan and its various iterations were well known; thus when John Park advertised cut-rate prices on Dr. Miles Restorative Nervine, its most popular formula, competing wholesalers and retailers quickly reported the infraction to the company. Some retailers threatened to stop carrying the Dr. Miles line of products unless the price cutting was stopped. By  Franklin Miles and his business partner Albert Beardsley had brought suit against Park for injuring both the Dr. Miles Medical Company’s trade with other retailers and the goodwill the company had built with the public. As the Dr. Miles legal team anticipated, the lower court enjoined Park from selling any Dr. Miles products. Park, in turn, appealed to the U.S. Supreme Court. The Dr. Miles legal counsel, in addition to the larger pharmaceutical community, maintained that both liberty of contract and the company’s property right in its “secret-processed” formula shielded the Dr. Miles Price Protection Plan from antitrust violation. Although  





Box , Rebate Contracts, DMMCA; Meeting minutes, adopting the “direct contract plan,” Jan. , , Box , Stock Book, DMMCA. Briefs for the Petitioner at –, Dr. Miles Medical Co. v. John D. Park & Sons, Inc.,  U.S.  (). In the following cases, Dr. Miles Medical Company brought suit against various discount wholesalers and retailers, and in each case the company’s property rights in its “secret-processed” manufacturing protected the Dr. Miles Price Protection Plan of resale contracts from antitrust objections. See Dr. Miles Medical Co. v. Goldthwaite,  F.  (C.C. Mass. ); In re Park,  F.  (C.C. Ohio ); Dr. Miles Medical Co. v. Platt, World’s Dispensary Medical Ass’n v. Same, Hartman v. Same,  F.  (C.C. Ill. ); Wells Richardson v. Abraham,  F.  (C.C. N.Y. ), affirming  F. ; Jayne v. Loder,  F.  (rd Cir. Ct. App. ), reversing  F. ; Dr. Miles Medical Co. v. Jaynes Drug Co.,  F.  (C.C. Mass. ). Dr. Miles Medical Company v. John D. Park & Sons,  U.S.  (). “This is a writ of certiorari to review a judgment of the circuit court of appeals for the sixth circuit court which affirmed a judgment of the circuit court dismissing, on demurrer, the bill of complaint for want of equity.  F. .” Ibid., . In Dr. Miles v. Jaynes, the court had held that the owner of the property rights “may sell them to one person, and not to another, and at such prices and upon such conditions as it may deem most advantageous. Contracts like those set out in the bill concerning articles made under trade secrets, the same as similar contracts concerning articles made under a patent or copyright, are outside the rule of restraint of trade, whether at common law or under the federal statute.” Dr. Miles v. Jaynes,  F. ,  (). See Writ for the Petitioner, Ex. H, at –, Dr. Miles v. Park & Sons,  U.S. , citing several decisions supporting the analogy between patent-protected rights and secret-processed goods. For example, Fowle v. Park,  U.S. ,  (); John D. Park & Sons v. National Wholesale Druggists’ Ass’n,  N.E.  (); E. Bement & Sons v. National Harrow Co.,  U.S.  (); Victor Talking Machine Co. v. The Fair,  F.  (). See also NARD Journal  (): : “The courts

The Origins of American Fair Trade



the company publicized its contracts and encouraged other manufacturers to adopt similar plans, it had not coerced participants; neither had the firm created a horizontal combination with other manufacturers to set retail prices. This vertical restraint (e.g., between manufacturer and retailer), the Dr. Miles team reasoned, must be permissible. For the Dr. Miles Medical Company the case hinged on the property right in the elixir and the validity of the sales contract. Park had violated principles of equity by obtaining the product through fraudulent means and selling at cut prices, contrary to the terms of the contract. The team was confident because previous court decisions had upheld the Dr. Miles Medicine Company’s property and contract rights and dismissed restraint of trade complaints. Park, on the other hand, insisted that the proprietary drug industry, rather than providing a public service, intended to create a cartel to dominate the industry and destroy competition. Park did not deny his violation of the Dr. Miles Price Protection Plan (though he often feigned ignorance), nor did his legal team deny the problem of “ruinous competition” in the retail drug trade. Instead, Park’s legal team set out to prove that the actions of the Dr. Miles Medicine Company and other open price policies constituted coercive restraints of trade that were injurious to free and open competition and thus against the public interest. Drawing on recent judicial interpretations of the Sherman Antitrust Act, Park insisted that Dr. Miles had not instituted a vertical restraint, but rather had created a horizontal “combination between dealers” inimical to free competition. Despite Dr. Miles’s several legal victories against “price-cutters,” Park recognized that the tide was turning. Building on Taft’s categorization of types of contracts in the Addyston decisions, Park’s team labeled the





uniformly held that a manufacturer of trade-marked articles, who desires to maintain a fixed price at retail has a right to do so especially if his articles do not fall within the category of the necessity of life. The doctrine thus laid down is that these goods are proprietary and therefore the sole right to manufacture them belongs exclusively to the proprietor.” Dr. Miles v. Jaynes,  F. . “The bill alleges that the complainant is the exclusive owner of these secret formulas, and the exclusive manufacturer of these remedies. It follows that, until voluntary disclosure or lawful discovery, the complainant has an exclusive property in these trade secrets, and has the exclusive right to make, use, and vend the articles made thereunder. The exclusive right of property in a trade secret is, of necessity, a monopoly, the same as a patent or a copyright. . . . Contracts like those set out in the bill concerning articles made under trade secrets, the same as similar contracts concerning articles made under a patent or a copyright, are outside the rule of restraint of trade, whether at common law or under the federal statute.” Ibid., –. Dr. Miles v. Park & Sons,  U.S. at .



American Fair Trade

resale contracts that set minimum prices and exclusive sales territories as a direct restraint of trade. Individual retailers, like John D. Park, began to retaliate against what he called the “manufacturers’ trust” that controlled distribution and retail. Through a series of antitrust decisions in the early s, the Court had moved away from evaluating the reasonableness of property rights and contract agreements and had begun analyzing the effects of such agreements on the free flow of goods across state lines. In the Dr. Miles case, the Supreme Court found that the effect was market coercion – and that Dr. Miles’s property right in the secret-processed good did not protect it from antitrust prosecution. Chief Justice Charles Evans Hughes, writing for the majority, relied on the Addyston decision, along with two more recent antitrust precedents. In Swift & Co. v. United States, the Court extended the Addyston decision’s ancillary versus naked distinction to strike down practices in the meat-packing industry, a ruling in which ancillary restraints were deemed reasonable, whereas naked restraints, such as those concerning price fixing or predatory prices, were not. In , Swift established the “stream of commerce” doctrine, broadening what constituted interstate commerce to include products that, though produced in intrastate trade, were intended for sale in the national market. The Dr. Miles medicines were clearly intended for the national market, and the company’s sales network touched nearly every state. Park’s lawyers analogized the Dr. Miles Price Protection Plan to efforts by labor unions to set wage rates and refuse to deal with shops that

 

 

See “ Years Getting a Suit to Trial,” New York Times, June , , . Hughes’s ruling in Dr. Miles drew from another Sixth Circuit ruling in addition to Addyston. In  Judge Horace Harmon Lurton ruled against John Hartman’s price protection plan over his secret-processed Peruna brand. Secret-processed goods, Lurton argued, did not entitle the producer to an exclusive right analogous to copyright or patent protections. Doing away with the property and contract arguments, Lurton held that the Sherman Act protected the “great freedom of traffic.” Moreover, Lurton pointed out that Hartman had failed to provide an economic rationale to support the contracts as ancillary and necessary for the protection of the brand. John D. Park & Sons Co. v. Hartman,  F. , ,  (). Swift & Co. v. United States,  U.S.  (). President Theodore Roosevelt had his attorney general, Philander Knox, bring charges against the Chicago meat-packing industry, or “Beef Trust,” in . In response to the charges, the six leading meat-packing producers formed the National Packing Company, a holding company, to maintain their divisions of the national market and fix prices. The Swift decision built on the Court’s ruling in Northern Securities Co. v. U.S.,  U.S.  (), wherein the Court struck down a railroad holding company that monopolized western lines.

The Origins of American Fair Trade



violated their demands – efforts that the Court had recently found to violate the Sherman Act. In  the Court held that the Danbury Hatters’ boycott of Loewe & Co., a self-proclaimed open shop, constituted an illegal combination in restraint of commerce. Even labor, the Court ruled, could be commodified and reduced to its role in interstate commerce; the Dr. Miles secret-processed elixirs and tablets were no different. In  the Supreme Court decided three landmark cases interpreting the Sherman Act, each having to do with a high-profile price war. In both Standard Oil and American Tobacco, the Department of Justice successfully argued that predatory pricing by a dominant firm demonstrated an intent to monopolize and constituted a violation of the standards of reasonableness in business contracts. The Court ordered the dissolution of both industrial corporations, but only after both firms failed to pass the test of reasonableness to determine whether such business contracts resulted in higher prices, reduced output, or reduced product quality. For independent proprietors, on the other hand, the Court refused to perform such a test at all. Its ruling in the Dr. Miles case proved pivotal to proprietary firms that managed the market through networks and associations rather than consolidated ownership. Chief Justice Charles Evans Hughes, writing for the majority, created the per se prohibition against any open price plan or fair trade contract. The new legal rule proscribed the standard form contract promoted by numerous trade 

 



See Brief for the Respondent, Dr. Miles v. Park & Sons,  U.S. . Park’s counsel argued that Dr. Miles goods were sold to the wholesale and jobbing druggists throughout nearly all of the states of the United States, a practice that constituted interstate commerce. Addyston,  U.S. ; Montague & Co. v. Lowry,  U.S.  (); Swift & Co. v. United States,  U.S.  (); United States v. Trans-Missouri Freight Ass’n,  U.S.  (); Loewe v. Lawlor,  U.S. ,  (). Loewe v. Lawlor,  U.S. . Standard Oil Co. v. United States,  U.S.  (), breaking apart Standard Oil of New Jersey under the authority of the Sherman Act; United States v. American Tobacco Co.,  U.S.  (), affirming the “rule of reason” test, but breaking apart American Tobacco Co. because its contracts went beyond reasonableness. Dr. Miles v. Park & Sons,  U.S. at . Chief Justice Hughes paraphrased the language used in Judge Horace Harmon Lurton’s decision passed only one year earlier in the Second Circuit Court. In Park v. Hartman, Lurton refused to enforce a property right in secret-processed, brand-named goods by distinguishing the product itself from its method of production. Lurton found no property right in the later, which exploded the analogy between patent and secret-processed goods. With that accomplished, Lurton declared the contract unconstitutional according to antitrust common law and statute. He concluded that to uphold such a contract would be to “grant a monopoly.” Park v. Hartman,  F. ,  (Cir. Ct. App. ).



American Fair Trade

associations, a key coordinating mechanism for maintaining diffuse ownership and industry self-regulation. Hughes, who left the Court the following year to pursue his presidential ambitions in the Republican Party, has been accused of writing a politically motivated opinion to boost his position as a “trust buster” and antimonopolist. However, Hughes’s words merely echoed the earlier Hartman decision, which was written by a staunchly Democratic judge from Kentucky. Both Hughes and Horace Lurton agreed that Park had not violated a property right or committed fraud. Rather, the Dr. Miles Medical Company had asked the judiciary to sanction a monopolistic behavior. The  cases constricted the business practices of both managerial and proprietary capitalism; however, they fundamentally reordered the latter. The per se rule prohibited any contract in interstate trade that affected prices between a manufacturer and either its wholesalers or retailers, regardless of that contract’s economic or political effects. The Court treated such contracts as horizontal restraints of trade. The new rule meant that courts refused to consider any potential benefits of resale price maintenance (RPM) networks. The Court distinguished between the efficiencies that were gained within the firm, as in the Standard Oil case, and those efficiencies sought in market exchanges, such as in the Dr. Miles case. Hughes argued that once Dr. Miles had conveyed its elixirs or pills, its property right in the goods ceased, and the company could no longer affect subsequent market exchanges. The Court chose to safeguard the market, to protect free and open competition, and to police business-tobusiness contracts. The  cases – and in particular, the private litigation in Dr. Miles – established the Court’s anticartel policy. Yet it also created a problem. The dichotomy between corporate, managerial hierarchies and purely market exchanges left little room for other types of business organizations. Rather than ebbing the tide of professional and business associations, the Dr. Miles ruling encouraged new organizations across sectors of the economy that pursued antitrust revisions and new forms of interfirm management. ***  

See note , p. . Chief Justice Hughes wrote: “The maker of so-called proprietary medicines, unpatented, stands on no different footing from that of other manufacturers.” Dr. Miles v. Park & Sons,  U.S. at . “With respect to contracts in restraint of trade, the earlier doctrine of the common law has been substantially modified in adaptation to modern conditions.” Ibid., .

The Origins of American Fair Trade



The Dr. Miles case signaled a shift in U.S. political economy dictated not by elected officials but rather by judicial supremacy. The Court’s determination of what constituted fair competition relied on an ideal of markets and hierarchies that precluded the governance practices of trade associations and proprietary networks. As a result, the case touched off a protracted legal and political battle over how markets for ordinary consumer goods should be managed. Although it has too often been overshadowed by cases involving large-scale corporate giants, Dr. Miles played an important role in early twentieth-century political economy. Miles thought he would win against Park. History had been on his side. But rather than returning to common law interpretations of reasonable restraints of trade, the Court maintained a literalist interpretation of antitrust, creating the per se rule. The case signaled a new mode of economic thinking that had come to influence the ideas of coercion and fairness in competition. Many independent proprietors, farmers, and laborers rebuked this new ideal of market competition and formed organizations to resist it. Subsequently, new reform movements were launched, often beginning at the state level. Such was the American antimonopoly tradition. Antimonopoly in the s had been composed of disparate interests that traversed far-flung corners of the country. It was not a tidy movement convening on a singular idea of what the social control of business necessarily entailed. It certainly was not simply about low prices. Although antimonopolists charged that combinations, trusts, and dominant firms could suppress output to raise prices, the antimonopoly movement should not necessarily be characterized as solely seeking the lowest prices as its objective. Antimonopolists worked to protect independent producers and retailers against corporate consolidations, even as those independents were accused of employing anticompetitive practices to maintain or enhance their market share. These disparate but overlapping groups used the language of individualism, ownership, and independence to describe and defend proprietary capitalism. Yet the antimonopoly movement should not be dismissed as merely backwards or nostalgic for a bygone era, even though at times they certainly appeared conservative and reactionary. Ultimately, the antimonopoly movement supported novel forms of business organization, encouraged democratic participation in the development of industrial capitalism, and played an integral role in American state-building. Antimonopolists cheered the earliest rate regulations for

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American Fair Trade

railroads, a regulatory system from which the modern administrative state sprang. What became known as the fair trade movement coalesced around the Dr. Miles defeat and demanded changes to the administration of market fairness. The story of these well-organized and politically powerful independent proprietors within the larger U.S. antimonopoly movement demonstrates the contingency of both modern America’s industrial capitalism and liberal democracy. The rules of the game were not predetermined.

 The Economics and Ideology of American Fair Trade Louis Brandeis, Resale Price Maintenance, and Open Price Associations, –

We abandoned the old laissez-faire doctrine, and began to realize that somehow some system and order must be put into this great development. – Charles Nagel, U.S. Secretary of Commerce and Labor ()

Louis Brandeis, the “people’s lawyer,” led the fair trade movement from its beginning, coordinating the formation and early strategy of the American Fair Trade League (AFTL), a group of independent producers of specialty goods. Spurred by the Supreme Court’s interpretation of the Sherman Antitrust Act to the detriment of private associations of independent producers and unionized laborers, Brandeis shifted his role from that of a renowned litigator, representing independent producers and labor groups, to that of an expert witness, testifying for public utilities regulation and legal reforms to limit the market power of those individuals and firms with immense wealth. For Brandeis, “fair competition” required not only generalizable and predictable common law rules but also specific state interventions to ensure that dominant firms did not abuse their market power. His advocacy of trade associations and labor unions emerged from what he saw as the failure of common law adjudication and the Court’s misinterpretation of antitrust law. 



William H. Ingersoll, “Manufacturers’ Efforts for Relief,” in The Control of Resale Prices: Merchandising and Legal Phases of Price-Cutting, Price Maintenance and Quantity Discounts, eds. Roy W. Johnson, William H. Ingersoll, and Gilbert Montague (Chicago, IL, ), –. On Brandeis’s life, see Philippa Strum, Louis D. Brandeis: Justice for the People (New York, ); Melvin Urofsky, Louis D. Brandeis: A Life (New York, ). See To Prevent Discrimination in Prices and to Provide for Publicity of Prices to Dealers and the Public: Hearings on H.R.  Before the H. Committee on Interstate and





American Fair Trade

His efforts to reform U.S. competition policy reached a crescendo in  when he joined Woodrow Wilson’s presidential campaign as an economic and legal advisor. As the election of  demonstrated, dissatisfaction with the direction of U.S. capitalism remained a salient political issue. Indeed, this was the height of progressivism in American presidential politics and Brandeis’s career exemplified many of its regulatory tenets, including women’s maximum hour legislation, recognition of labor unions, and public utilities regulation. His main fight, however, was to reform the Court’s antitrust jurisprudence, which had created a binary distinction between the permissible vertically integrated corporations and the impermissible non-integrated trade associations. The “rule of reason,” which allowed the Court to weigh the effects of a business agreement on prices, applied to the former and not the latter, rendering associations an ineffective form of business organization. Rather than accepting antitrust law as “settled” or portraying the “corporatization” of American capitalism as a foregone conclusion, Brandeis and the proponents of the AFTL demonstrated the contingency of both law and business organizations. This, then, is the story of how independent proprietors, progressive jurists, and a heterodox set of economists participated in the restructuring of U.S. business firms and associations, fought to resist the monolith of large-scale managerial capitalism, and promoted an alternative vision for associational control of market competition. Brandeis, first working independently and then through Wilson’s administration, provided independent proprietors and laborers with the strategies and tactics to legally resist corporate consolidation. Given



  



Foreign Commerce, d Cong., , Feb. , –Jan. ,  (statement by Louis Brandeis); Brandeis, “The Living Law,” Illinois Law Review  (Feb. ): –, , ; Brandeis, “Cut-Throat Prices – Competition That Kills,” Harper’s Weekly, Nov. , , . On the election of  as a referendum on modern industrial capitalism, see Arthur S. Link, Woodrow Wilson and the Progressive Era, – (New York, ); Hawley, New Deal and the Problem of Monopoly. See Ethel C. Macomber, “Woman’s Progress,” Twentieth Century Magazine  (June ): –. See previous chapter. Sklar, Corporate Reconstruction of American Capitalism; Martin Sklar, “Periodization and Historiography: Studying American Political Development in the Progressive Era,” Studies in American Political Development  (fall ): –. On associational activities to determine marketplace equity and punish unfair trade practices before the Wilson administration, see Galambos, Competition and Cooperation; Louis Galambos and Joseph Pratt, The Rise of the Corporate Commonwealth: U.S. Business and Public Policy in the Twentieth Century (New York, ).

The Economics and Ideology of American Fair Trade



the persistence of the organizational forms that he championed, it behooves historians to take seriously his alternative solutions for economic organization and for progressive legal rules to govern the market. While the AFTL has largely been forgotten to history, or dismissed by historians as a fleeting nostalgia for a bygone era, it fit within a widespread popular movement to reform the politico-constitutional order, both to accommodate new forms of economic organization and to extend the public administration of law. Brandeis proved instrumental in challenging the precepts of neoclassical political economy and law that relied so heavily on price-cost analysis. In a liberal democracy, he argued – echoing concerns expressed throughout the s and s – more was at stake than low prices. Borrowing from research on European competition policies, he demonstrated that competition policy could be used to shape society’s economic organization, division of labor and ownership, and distribution of wealth. Other countries, Germany and Denmark among them, promoted competition through producer, retailer, and laborer associations, which were facilitated and policed by the state. These ideas were not unfamiliar in the United States. Brandeis also drew from Arthur Jerome Eddy’s work, The New Competition (), which similarly advocated the study of information-sharing on prices, costs, and production methods among manufacturers and retailers. Brandeis’s solution was not simply self-regulation by associations; he supplemented private power with federal government reform. He argued for the creation of an administrative body like the Interstate Commerce Commission, which had been created in  to intervene in railroad rate-setting. The “interstate trade commission” that he first proposed in  for Senator Robert La Follette would investigate business contracts, evaluate





On the conventional dismissal of the League and on Brandeis’s understanding of economics, see Thomas K. McCraw, Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn (Cambridge, MA, ): “Brandeis offered regulatory solutions grounded on a set of economic assumptions that were fundamentally wrong” [], –, –, –; May, “Antitrust in the Formative Era,” –; Robert Bork, The Antitrust Paradox: A Policy at War with Itself (New York, ), –; Richard Hofstadter, “What Happened to the Antitrust Movement?” , , , . For an excellent exposition on Brandeis and “regulated competition,” see Gerald Berk, “Neither Markets nor Administration: Brandeis and the Antitrust Reforms of ,” Studies in American Political Development  (spring ): –; Berk, Brandeis and Regulated Competition. Arthur Jerome Eddy, The New Competition: An Examination of the Conditions Underlying the Radical Change That Is Taking Place in the Commercial and Industrial World – The Change Taking Place from a Competitive to a Cooperative Basis (Chicago, IL, ).

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American Fair Trade

merger agreements, and respond to charges of predatory tactics and claims for damages. Rejecting the inevitability of either corporate control of market prices or government regulation of corporate prices, Brandeis proposed a third way, which by  he called “regulated competition.” While this idea animated the creation of the Federal Trade Commission in , empowering it to determine “unfair trade” practices, Brandeis also actively encouraged private trade associations to organize, lobby, and litigate to influence business law. Through his campaigning for regulated competition in policy and practice, Brandeis helped popularize this third way between atomistic free markets and government regulation of corporate monopolies (or oligopolies, as the case might be) as a mechanism to manage markets. When he joined the U.S. Supreme Court in , that third way became available to an array of practitioners interested in managing markets. During World War I, for example, Herbert Hoover displayed a particular penchant for exploiting these new public–private partnerships for wartime purposes. Hoover’s interaction with trade associations and government agencies focused on promoting efficiency and eliminating waste through production processes, as opposed to Brandeis’s arguments for new trade rules that would incentivize entrepreneurial innovation, encourage product differentiation, and balance competing market forces. While Hoover had demonstrably different goals than Brandeis, it was clear that the mechanism of regulated competition could be adapted to manage competitive markets economy-wide.

        In , Louis Brandeis advised several independent producers to form a trade group to collectively challenge the Court’s recent antitrust rulings through lobbying and litigation. The American Fair Trade League was formed in direct response to the Dr. Miles ruling, which outlawed price 

 

On the development of these ideas in , see Otto Raymond Barnett, “The Oldfield Bill,” Yale Law Journal  (Mar. ): –. See also George E. Mowry, Theodore Roosevelt and the Progressive Movement (Madison, WI, ), –; David Paul Thelen, Robert M. La Follette and the Insurgent Spirit (Madison, WI, ), ; Scott C. James, Presidents, Parties, and the State: A Party System Perspective on Democratic Regulatory Choice, – (Cambridge, ), –. Federal Trade Commission Act,  U.S.C. §  (). Hawley, “Herbert Hoover, the Commerce Secretariat,” –, ; Berk, “Neither Markets nor Administration,” –.

The Economics and Ideology of American Fair Trade



protection plans, and to ongoing public debates regarding the failure of antitrust to live up to the goals of the antimonopoly movement. By  the Court had formalized its preference for market-based price competition, circumscribing existing methods of managing the distribution chain. The Court’s rulings incited a business movement against legal rules that enshrined laissez-faire economic competition. As an alternative to purely market-based competition or hierarchical corporate control of prices, the AFTL proposed an active role for both private and public regulatory bodies in monitoring and policing trade practices, borrowing from European competition standards. The League pursued a publicity campaign, private litigation, and “the enactment of federal and state legislation” to reform the Court’s antitrust jurisprudence. Through this reform movement, the self-regulation practices of the late nineteenth century were transformed into a proposal for public–private management of the market. Initially, the League’s goal had been to overturn the Dr. Miles ruling that created the per se rule against business-to-business contracts concerning prices and other services. The Court, the League argued, had erroneously held that these contracts were an illicit vehicle to support horizontal collusion among retailers. As in its rulings against labor contracts only a few years prior, the Court would neither enforce nor allow horizontal collective action among retailers that affected prices. It did not rule on price protection plans as such, but rather focused on the various tactics used to achieve those results. The Dr. Miles Company thought its price maintenance contracts constituted a legitimate vertical 



 

“The ‘Fair Trade League,’” Bulletin of Pharmacy  (Dec. ): –. The Bulletin also reprinted Brandeis’s article from Harper’s Weekly (Nov. ); see Brandeis, “Cutthroat Prices: Competition that Kills – Engenders Monopoly, Destroys Small Merchant, and Injures the Body Politic,” Bulletin of Pharmacy  (Dec. ): –. “Instead of seeking, as all previous plans have done, to make price protection legal, it seeks to make price destruction illegal. It seeks, indeed, to penalize the price–cutter and to outlaw his methods.” “Fair Trade League,” . For the continuity of Brandeis’s endorsement of a “people’s lobby” as a watchdog and activist political organization, see “‘Muck–Rakers’ There: President Has ‘People’s Lobby’ at White House,” Baltimore Sun, Oct. , , . “The ‘Fair Trade League,’” . The article called attention to Danish and German law that held price cutting on brand-name goods to constitute an unfair trade practice. See previous chapter on Lowe v. Lawlor (). See also Ernst, Lawyers against Labor; Andrew Wender Cohen, Racketeer’s Progress: Chicago and the Struggle for the Modern American Economy, – (Cambridge, ). Cohen’s local study of the Chicago industrial economy shows how craftsmen and their associations carved out space in the industrial economy, at times using extra-legal tactics.



American Fair Trade

contract between producer and retailer (or wholesaler). The company had wagered that its secret-processed formula was analogous to a patent, conferring an exclusive right over product vending. In , however, the Court disagreed, exploding the property right analogy, throwing out the contract protection, and insisting on open price competition for such brand-name goods. The result was a binary distinction between market competition on the one hand and vertical integration on the other. In other words, legal business contracts affecting prices were either made on the open market, subject only to rules of equitable bargaining, or internalized within a firm and subject to managerial control. The ruling came as a shock. Previously, Dr. Miles and other producers had relied upon resale contracts as a reasonable restraint that facilitated the distribution of brand-name products. But the passage of the Sherman Antitrust Act of  had endowed the judiciary with new authority to monitor economic transactions and early in the twentieth century, the Court’s economic logic appeared to be shifting toward an outcomeoriented evaluation of the price–cost relationship. Whereas the older common law rules had enforced contracts concerning personal property and employment unless found to unreasonably impinge on one party’s ability to pursue his trade, the newer rule of reason adopted in  created a more expansive ideal of free-market competition, emphasizing the effects of a restraint on market conditions rather than the substantive rights of the contracting parties. In turn, the Dr. Miles Company reorganized to avoid further litigation. Miles and Beardsley dissolved the corporation and drew up papers to reformulate it as a partnership, wherein the company owners retained greater property rights over the goods they sold. They reissued their sales contracts, clarifying that these new consignment contracts allowed the company to retain ownership over the Dr. Miles products even as they sat on retailers’ shelves. These formal letters to retailers and wholesalers





Fowle v. Park,  U.S.  (), upholding a resale price agreement on a secretprocessed good. On reasonable restraints of trade and employment relations through the late nineteenth century, see Chapter . See Hovenkamp, Enterprise and American Law, –. See also Mary Furner, Advocacy and Objectivity: A Crisis in the Professionalization of American Social Science, – (Lexington, KY, ); Thomas Haskell, The Emergence of Professional Social Science (Urbana, IL, ), –; Herbert Hovenkamp, “The Sherman Act and the Classical Theory of Competition,” Iowa Law Review  (): ; Hovenkamp, “The First Great Law and Economics Movement,” Stanford Law Review  (Apr. ): –.

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

explained that only when consumers purchased the final product did the transfer of ownership take place. Until that moment, local agents acted as jobbers to distribute Dr. Miles products and earned commissions on sales; the faster the sales, the higher the commission percentage. The local agent also became contractually prohibited from offering any discounts. Any unsold product would be returned to Dr. Miles. Wholesalers and retailers were notified of the new system and directed to work with agents and adhere to their new price-tag system. Products purchased directly from the firm by retailers would operate under similar consignment terms. In essence, it looked as though not much had changed; however, now the Dr. Miles Company had no legal recourse against price-cutters. Upon reorganizing as a co-partnership, the firm remained family run, with management controlled by Albert Beardsley. The company’s board also reissued existing stock to its shareholders, which included both the Miles and Beardsley families as well as Herman Compton. Much of the annual meetings were consumed with the subdivision of shares to children and grandchildren. Albert Beardsley turned his attention to advertising campaigns, placing Dr. Miles products in a variety of media: printed calendars, almanacs, recipe books, and radio shows. If the consignment contracts lacked legal force, Beardsley intended to shape consumers’ price expectations. The problem of property and contract rights conflicting with market competition extended to patent-holders who maintained fixed prices and service standards on a variety of novel electronics and specialty consumer goods. Patent-holders argued that they could legally control resale prices 

 



Meeting Minutes, signed as approved for distribution June , , Box , Stock Book, DMMCA. “The local agent received a commission of % on the value of all services for the handling and sale. . . . Should such local agent make advances covering any consignment within  days from the date thereof, the commissions shall be  / % of the invoice value, with a further commission of % on the net amount, if such advance be made within  days from the date of shipment.” Letter to Retail Dealers, June , , ibid. Albert Beardsley offered the resolution that the company adopt consignment contracts, as per Justice Holmes’s recommendation in his Dr. Miles opinion, to facilitate control over its distribution network. Meeting Minutes, Apr. , , ibid. The corporation also dissolved and transferred all property and assets to a co-partnership operating under the same name. Meeting Minutes, June , , ibid. Since , when Beardsley joined the firm, he had spearheaded efforts at printing Dr. Miles materials and advertising. See Meeting Minutes, May , , Dec. , , Mar. , , and May , , ibid. See also “Local Agency Appointment,” June , , ibid., stating that prices would be pasted on every container.



American Fair Trade

through notices attached to the product. Like price tags, these notices functioned as a contractual obligation on retailers; they reduced price fluctuations, encouraged nonprice competition, and ensured a “fair profit” to retailers. Litigation records seemed to vindicate this group of patent-holders, which included the National Phonograph Company, Victor Talking Machine Company, Thomas Edison Company, Automatic Pencil Sharpener Company, Winchester Repeating Arms Company, U.S. Consolidated Seeded Raisin Co., and A. B. Dick Company, the maker of a rotary mimeograph. That final case, A. B. Dick Co. v. Henry, concerned the enforcement of patent rights, a rather narrow topic, but the case quickly became embroiled in the larger public debate over antitrust rules and the future of American capitalism. A. B. Dick issued licensing contracts to its vendors, which obligated mimeograph sellers to also purchase complementary stencil, ink, and paper products. A metallic plate attached to the “duplicating machine” advertised its sales policy. When the company learned that Sidney Henry, one of its dealers, had refilled A. B. Dick ink bottles with a competitor’s purple ink, it sued. They argued that “long and protracted experiments of color-makers and experts” had calibrated the chemical compositions of the inks to produce the best duplicate copies without degrading the wax stencils. Moreover, the inks were marketed at a “reasonable price.” The New York court held that Henry had contributed to the infringement of the patent right. The competitor’s ink was “not of the same kind and quality” as that created by the manufacturer. The ink, however, was not part of the patent but had been tied to mimeograph sales.







See National Phonograph Co. v. Schlegel,  F.  (); Victor Talking Machine Co. v. The Fair,  F.  (); The Fair v. Dover Manufacturing Co.,  F.  (); New Jersey Patent Co. v. Weinberg,  F.  (); Edison Co. v. Smith Manufacturing Co.,  F.  (); Automatic Pencil Sharpener Co. v. Goldsmith Bros.,  F.  (); Winchester Repeating Arms Co. v. Olmstead,  F.  (); U.S. Consolidated Seeded Raisin Co. v. Griffin & Skelley Co.,  F.  (); Henry v. A. B. Dick,  U.S.  (). A. B. Dick Co. v. Henry,  F. ,  (). The notice read: “Edison Rotary Mimeograph No. . License Restriction. This machine is sold by the A.B. Dick Co. with the License Restriction that it may be used only with the Stencil Paper, Ink, and other Supplies. Made by A.B. Dick Company, Chicago, U.S.A.” A. B. Dick,  F. . With regard to copyright infringement, this case was overruled by Motion Picture Patents Co. v. Universal Film Mfg. Co.,  U.S. ,  (). Contributory infringement occurs when one knowingly aids or abets the infringement of someone else.

The Economics and Ideology of American Fair Trade



The A. B. Dick Co. case divided the Supreme Court in a four-to-three opinion, upholding the lower court ruling. Justice Horace Harmon Lurton, who had written the lower court opinion in Dr. Miles, upheld A. B. Dick’s patent right, but found its notice stipulating resale polices to be unenforceable, as enforcing such a notice constituted an “inconvenience to the public.” Nevertheless, the patent-holder could refuse to deal with sellers who failed to comply. Encouraging legislative action, Lurton concluded that “Congress alone has the power to determine what restraints shall be imposed” or permissible. Chief Justice Edward White dissented, arguing that the patent-holder should not be allowed to use contracts to extend its monopoly privileges to its complementary products, even if found unenforceable. White’s logic reinforced his distinction between prices administered by the free market and those controlled by vertically integrated firms. This quest for generalizable legal rules to govern all business tactics affecting prices provoked a Congressional response. Representative William Allen Oldfield, chairman of the House Committee on Patents, proposed revisions to the patent law “to develop the underlying principles of the Sherman antitrust law,” as one commentator put it. A lawyer and Democratic Congressman from Arkansas, Oldfield proposed to reorganize the judicial process for patent suits by creating a special judicial tribunal to hear cases and appeals from the Patent Office. While many commentators, such as Frederick Fish, supported the streamlining of judicial procedures, the  Oldfield bill went further, seeking to restrict the exclusive rights of patent-holders over their products’ retail sales policies. On the latter point, Fish, who served as counsel for General  

 

  U.S.  (), . Ibid., . Frederick Fish, “Letters Patent in Relation to Modern Industrial Conditions,” S. Doc. No. –, –, esp. , (). Fish urged members of the American Bar Association to campaign against the bill because of its intended effects on the contractual relations between manufacturer and vendors, but not in opposition to the patent courts. This paper was read before the American Bar Association at Montreal on Sept. , . Alfred Gradenwitz, “The Inventor’s Department: Simple Patent Law,” Scientific American  (Nov. , ): . “Hearings on H.R. Doc. , Oldfield Revision and Codification of the Patent Statutes,” nd Cong., – () (hereafter Oldfield Hearings). Testimony was taken between April  and May , . See also David Noble, America by Design: Science, Technology, and the Rise of Corporate Capitalism (New York, ); “The Oldfield Patent Bill: Not the Law, But Its Administration at Fault,” Scientific American Supplement  (Aug. , ), –; “Oldfield’s Bill to Change Patent Law,” Spokane Review, July , , ; “Effect of Proposed Oldfield Patent Bill: ‘Don’t Dynamite Industrial Monument,’” Patent and Trade Mark Review  (June ): .

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American Fair Trade

Electric and had founded the American Patent Law Association, publicly argued that the bill would stifle industrial development by limiting the ownership rights of patent-holders and would thereby diminish the incentives to invest in innovative technologies. Indeed, the Oldfield hearings became a forum for arguing the merits of antitrust as well as patent law and the proper balance of public interest in free and open competition versus the rights of patent-holders. Entangled in these debates was the legal and economic thinking regarding incentive structures for consumers, producers, and investors. The Oldfield bill became a proxy for ongoing debates on antitrust law and the meaning of fair competition. Oldfield’s bill responded to the mimeograph case and called for a reconsideration of the exclusive or monopoly rights entailed in patent law. Unsurprisingly, manufacturers, retailers, and many patent attorneys visited Washington to testify against the bill. Yet, not all of these interested parties were patent-holders. Instead, the hearings turned into a wide-ranging discussion of resale pricing policies, networks, and the meaning of “fair competition.” For example, Fletcher Gibbs, chairman of the National Association of Stationers and Manufacturers, pleaded for a federal law that “would permit [retailers], under proper governmental supervision, to preserve the integrity of their business by maintaining fair profit-yielding prices or that would prevent unscrupulous competitors from quoting prices calculated to cause loss of profit to other dealers.” Oldfield responded to this testimony by asking Gibbs if patent-holders should be allowed to fix retail prices, to which Gibbs replied, “Yes, sir.” Gibbs then carried the argument further, explaining how his trade association publicized suggested prices for non-patented goods. He argued that the association’s system of collective cost accounting did not destroy competition but rather protected independent proprietors. The system aggregated various costs of doing business and made recommendations to shopkeepers, many of whom did not know their own costs of doing  

 

James T. White, The National Cyclopaedia of American Biography (Clifton, NJ, ), :. Albert E. Parker, “Discuss the Decision on Patent Rights: Representative Here of British Firm Quotes the Law of England,” New York Times, Mar. , , ; “Monopoly Victory in Patent Decision,” New York Times, Mar. , , ; John Loveland, “Patent Monopolies: Defended as Suitable Reward,” New York Tribune, Mar. , , ; “Supreme Court Decided Rotary Mimeograph Case,” Wall Street Journal, Mar. , , . “Favor Patent Law Revision: Oldfield Bill to Prevent Monopoly Reported to the House,” New York Times, Aug. , , . Oldfield Hearings, –,  (Apr. , ) (statement by Fletcher Gibbs).

The Economics and Ideology of American Fair Trade



business. The problem of “ruinous competition,” Gibbs explained, often resulted from independent proprietors being unable to determine the necessary retail prices from which they might derive a “fair profit.” Price protection plans stemmed predatory business tactics and the resultant industry consolidation. Louis Brandeis, who had represented several independent producers involved in similar cases, also testified before the committee to protest the “strong sense of injustice to the investor and to the public” posed by the bill. Brandeis not only wanted to preserve the right of patent-holders to fix resale prices, he also argued that that right should be extended to brand-name goods. To say that the members of the committee were incredulous would be an understatement. Yet Brandeis’s lengthy conversation with them provided a framework for evaluating business contracts and trade networks that did not fit neatly within the existing judicial categories of free-market competition or regulated corporate monopoly. Price fixing, he argued, constituted a violation of the public interest only if leading to a “general trade monopoly.” If the product remained in open competition with similar goods, then price fixing could in fact encourage competition in that market by establishing stable and reliable retail prices and attracting new producers. Oldfield wanted assurances that consumers were not being charged exorbitant prices, but Brandeis dismissed the question. The popularity of Gillette’s fixed-price safety razors, he explained, begat others like it, such as the Gem, Auto-Strop, Daisy, and Everready, placing pressure on Gillette to maintain competitive prices. “You have the most complete guaranty against extortionate prices, because the moment one of those concerns fixes a price higher than it ought to be, there is the incitement to the other to push their goods.” Moreover, he continued, the several producers might then be encouraged toward non-price competition, improving the look, finish, or quality of the article. That continued competition would incentivize “not only a cheaper article but a better article.”    



Ibid., . Oldfield Hearings No. , – (May , ) (statement by Louis Brandeis). Ibid., –. Referring to the shoe industry, Brandeis explained: “They do not compete on price, but on quality, and the Regal people will tell you that their $ shoe or $. shoe, as compared with the Douglas at the same price, is better looking, better finished, or has some other quality which makes it a very desirable shoe, and they are competing just as hard as they can in quality because the price is fixed.” Ibid., . Ibid., .

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American Fair Trade

For Brandeis, vertical or relational price-fixing contracts offered several potential benefits. He argued that price-fixed goods, if remaining in free competition with comparable goods, created incentives for innovation and industry by guaranteeing profit margins for both producer and retailer. By ensuring independent retailers’ profit margins on those priceprotected goods, the system protected independent retailers from certain business tactics used by large corporations that had greater capital with which to undercut their smaller competitors. Consolidation in many industries had been achieved through predatory pricing tactics alongside improvements in production and distribution techniques, Standard Oil being the premier example from previous decades. Brandeis took aim at the former while acknowledging the benefits of the latter. Brandeis’s testimony demonstrated his understanding of efficiency gains from economies of scale as well as his appreciation that different sectors of the economy required tailored regulatory responses. He differentiated between regulated monopoly and regulated competition. Regardless, laissez-faire was a thing of the past, if it had ever existed at all. Monopoly market power could be achieved by economic or political means, but both entailed duties of the “business affected with a public interest,” including public regulation of reasonable rates. “Monopoly, whether it is fixed by law or whether it is natural,” as in the cases of railroads and telephone companies, existed because “you can not [sic] have competing systems that do not impose burdens upon the customer.” Goods and services in free and open competition constituted a different category of regulation. In response to Oldfield’s fear that price fixing for ordinary goods allowed for exorbitant prices, Brandeis responded that the issue applied not to goods and services in open competition but rather “should prevail in railroading, [or] in any public-service corporation which has a monopoly and necessarily must have a monopoly of the particular activity.” Regulation of businesses capable of achieving supracompetitive prices required public regulation of prices and greater scrutiny of business practices. Ordinary goods in competitive markets, however, required not governmental regulation of prices as such but rather public regulation of business practices so as to maintain competitive markets.   

Louis Brandeis, “Trusts and Efficiency,” Collier’s Weekly, Sept. , , reprinted in National Economic League Quarterly  (Dec. ): –. Oldfield Hearings, No. ,  (May , ) (statement by Brandeis). “I am strenuously opposed to the Government fixing any price in any business that is competitive, but I do think that a man who has an individual article, whether it be covered by a patent, copyright, trade-mark, or trade name – something which is known

The Economics and Ideology of American Fair Trade



Brandeis insisted that relational contracts might promote competition in various industries by proactively defeating the predatory tactics that he saw being used to drive down prices and consolidate market power. In the s, Brandeis abandoned his trust in classical political economy’s common law rules that regulated trade relations. The ideal of formal legal equality – that employer and employee met on a level playing field to negotiate contracts as equally free men – proved inadequate when confronted with labor unrest and demonstrably unequal bargaining positions between employer and employee. As his biographer, Philippa Strum, recounted, Brandeis felt forced to rewrite his law lecture, “Legal Relation of Labor and Capital,” in response to the  steel workers’ strike at Homestead, Pennsylvania. I saw at once that the common law, built up under simpler condition of living, gave an inadequate basis for the adjustment of the complex relations of the modern factory system. I threw away my notes and approached my theme from new angles. Those talks at Tech marked an epoch in my own career.

Andrew Carnegie’s response to the Homestead strike, which included bringing in Pinkerton private police and scab workers, ended in violence. In turn, Brandeis concluded that the courts had failed to protect the steelworkers’ union (Amalgamated Association of Iron and Steel Workers), bolstering the excessive power of ownership and management. In that way, he linked his critique of corporate capitalism, his endorsement of unionization, and his advocacy of trade association rule-making; each was part of a larger vision for the continued economic experimentation necessary to maintain a robust liberal democracy. Nevertheless, such contracts could go too far and incentivize exploitative private monopolies. For this reason, Brandeis did not endorse the closed shop. In terms of the ongoing patent law debate, he held that exclusive rights were only problematic when they created “an instrument





as his article – should have the right to have that article distributed under the conditions which he deems best, including a fixed price, provided always that it is a competitive article.” Ibid., . On rate regulation, see Louis Brandeis, “How Boston Solved the Gas Problem,” American Review of Reviews  (Nov. ): –, endorsing industry consolidation to achieve efficiency and economies of scale as well as the British solution of sliding-scale rate regulation. Interview with Brandeis: Livy S. Richard, “Up from Aristocracy,” Independent  (July , ): –. Quoted in Strum, Louis D. Brandeis, . Richard’s article also covered Brandeis’s profit-sharing plan between producer and consumer in the Boston gas merger. See also Brandeis, Business Law, – (Boston, ), –. Strum, Louis D. Brandeis, –, –.

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American Fair Trade

of obtaining a commercial monopoly, such as is obtained by the United Shoe Machinery Co., or as has been done in some instances by the tobacco company, the Standard Oil Co., [or] the harvester company.” In some instances, he explained, patents were collected so as to suppress competition. The United Shoe Machinery Company was just such a case. Brandeis insisted that the company, a manufacturer of shoe-making equipment, had become a monopoly of “essential parts of [the] mechanical industry.” Controlling the market in shoe machinery, the company had abused its position through tying contracts that bound lessees of its equipment to complementary products. Brandeis, in , had helped draft some of these original contracts, though he resigned from United Shoe the following year. He recounted that he found its business tactics “legally and morally objectionable,” referring to the company’s use of tying contracts. Furthermore, he learned that the company had used its financial connections in Boston and New York to block loans for a new type of shoe machinery. Brandeis refused to represent the blocked entrepreneur, Thomas G. Plant, perhaps because of a conflict of interest given his previous involvement with United Shoe, but thereafter he publicly criticized the company’s tactics. For Brandeis, United Shoe represented the great threat of corporate consolidation: the abuse of a position as dominant firm to block future innovation and “kill competition.” In arguing that these were economic rather than strictly legal questions, Brandeis brought the issues of business organization, competition policy, and legal reform back into the realm of politics. Echoing Justice Oliver Wendell Holmes Jr.’s dissent in Dr. Miles, Brandeis insisted that these issues constituted questions of public policy best confronted by the

   



 Oldfield Hearings, No. ,  (May , ) (statement by Brandeis). Ibid. “Studies in Values: United Shoe Machinery Co.,” United States Investor  (Nov. , ): . “Brandeis Explains: His Change of Heart toward United Shoe Machinery Company,” Cincinnati Enquirer, Feb. , , . “United Shoe Counsel Attacks Jones and Brandeis Testimony,” Christian Science Monitor, Feb. , , ; “United Shoe Co. Is Reassured by Mr. Brandeis,” Christian Science Monitor, Jan. , , ; “Brandeis and United Show Suits: McClennen Defends Law Partner’s Conduct,” Harford Courant, Mar. , , . See also John Braeman, “‘The People’s Lawyer’ Revisited: Louis D. Brandeis versus United Shoe Machinery Company,” American Journal of Legal History  (July ): –; Joseph Pratt Harris, The Advice and Consent of the Senate: A Study of the Confirmation (Berkeley, CA, ), –; Berk, Brandeis and Regulated Competition, –; Alpheus Mason, Brandeis: Lawyer and Judge in the Modern State (Princeton, NJ, ), –.

The Economics and Ideology of American Fair Trade



legislature. But the American version of antitrust law was not the only path. Instead, Brandeis supported the Americanization of European competition policies. There was ample evidence that other countries, as well as several U.S. states, had pursued alternative competition policies that protected association-led management of competitive markets and maintained productive economic growth. He studied German, Danish, and British laws that protected uniform selling prices through cooperative practices, such as trade associations and even outright cartels. Indeed, Brandeis praised these European legal regimes for maintaining what he viewed as socially responsible trade relations while promoting export growth, as in the German and Danish cases. While these ideas appeared anathema to U.S. antitrust law, cooperative associations had a long history in Europe and resonated with many Americans. In  Brandeis’s prescriptions for regulated competition composed one part of his larger vision to reform antitrust in order to facilitate structural adjustments that might better manage competitive markets and foster industrial democracy. Brandeis’s industrial democracy required the cooperation of worker associations along with that of producer and retailer associations, which  







Louis Brandeis, “Cut-Throat Prices – Competition that Kills,” Harper’s Weekly, Nov. , , , praising Justice Holmes’s “forward looking” dissent in the Dr. Miles case. Charles L. Miller, “The Maintenance of Uniform Resale Prices,” University of Pennsylvania Law Review  (Nov. ): –; Strum, Louis D. Brandeis, –; Freyer, Regulating Big Business, , –, –; Berk, Brandeis and Regulated Competition, –. In  Louis Brandeis testified before the Senate Interstate Commerce Committee. See Senate, Report of the Committee on Interstate Commerce, d Cong.,  () (hereafter Clapp Committee). For the response of Sidney W. Winslow, president of United Shoe, to Brandeis’s allegations, printed in the Boston American, see Clapp Committee, – (Mar. , ). In German law, see Jandorf v. Incorporated Association of Manufacturers of Branded Articles, Berlin Geschaftsummer ., .,  VI. . (). In British law, see Elliman Sons & Co. v. Carrington & Sons ()  Ch. Div. ; National Phonograph Co. v. Edison-Bell Co.,  Ch. Div.  (). In Denmark, see Section  of Act No. , Uniform Pricing, (June , ). For an overview of these cases, see Hearings Before the Committee on Interstate and Foreign Commerce on the Regulation of Prices, th Cong.,  (). Clapp Committee, –, – (statement by Louis Brandeis); Brandeis, “Trusts and Export Trade: America Falls Behind Other Countries in Steel,” Baltimore Sun, Sept. , , . See also Strum, Louis D. Brandeis, –. Strum recounts Brandeis’s advocacy of consumers’ cooperatives based on his study of Sweden, Denmark, Switzerland, and England. She focuses on his study of Denmark and “its social experiments,” noting that “he later encouraged his wife and his sister-in-law [Josephine Goldmark] to publish a volume entitled Democracy in Denmark.”



American Fair Trade

in turn required the revision of antitrust laws so as to legalize the association activities of so-called open-price associations. He found fodder for his campaign in the legal treatises of Arthur Jerome Eddy. Although perhaps best remembered for his substantial Cubist and postImpressionist art collection, which his widow donated to the Art Institute of Chicago, Eddy had a very successful law career, studying at Harvard and then practicing in Chicago. In  he published a legal treatise on combinations and their relation to trusts and monopolies, establishing himself in the field. Over the next decade, he published several articles on competition and cooperation in The World’s Work, which were collected into a book, The New Competition, in . On the cover, above the title, read the statement: “Competition is War, and ‘War is Hell.’” Eddy believed that in response to the turn-of-the-century crisis of corporate consolidation, legal scholars, economists, and jurists had falsely embraced “enforced competition” as a neutral principle by which to return some natural order to the market. Eschewing the popular Social Darwinist language of “survival of the fittest,” Eddy, like Brandeis, viewed laissez-faire economics as unhinged from economic reality. From the family unit to the community, from state to nation, rules and norms both shaped and limited economic interactions. As new technologies facilitated communication and trade across greater distances, new forms of cooperation and organization arose. He envisioned the “new competition” as a more cooperative alternative that might foster a multiplicity of enterprises, including “consolidations,” unions, and associations. While Eddy may have been more comfortable than Brandeis was with “big business,” they agreed on the need for countervailing powers in the private market and believed that public regulation could only go so far in limiting monopoly power. Ultimately, Brandeis tried to convince the Oldfield committee that antitrust law rather than patent law should be reformed to monitor the structure of various product markets and to intervene either when commercial monopoly had been obtained or when business conduct violated      

Louis Brandeis, “Efficiency by Consent,” Industrial Management  (Feb. ): –. On Eddy’s art collecting and criticism, see Arthur J. Eddy, Cubists and Post-Impressionism (Chicago, IL, ). Arthur J. Eddy, The Law of Combinations Embracing Monopolies, Trusts, and Combinations of Labor and Capital (Chicago, IL, ).  Eddy, New Competition. Ibid., –, . Ibid., –. Eddy cited Richard T. Ely, “Evolution of Industrial Society,” –. Urofsky, Louis D. Brandeis, –.

The Economics and Ideology of American Fair Trade



the legal and equitable rules of exchange. He urged the members to report to Congress recommendations for a general amendment to antitrust law to create an administrative body capable of blocking mergers that might hoard patents and limit competition. The danger comes in creating an organization in itself so large that it has unlimited funds, connected with other organizations, connected with what has been commonly termed the Money Trust, in such a way that you can not [sic] get capital. That is the inherent danger in the trust as a commercial organization – its money traps.

The laws, Brandeis concluded, should incentivize individual entrepreneurship and organizational experimentation. For him, this meant allowing businesses to safeguard themselves, through private collective action, against the consolidation of the means of production and providing government intervention in cases of patent monopolies that stifled competition. Likewise, Brandeis argued that in the mimeograph case, the Court had erroneously allowed the patent right to become distended through the company’s tying contracts, an overreach of patent law. The assemblage of many independent manufacturers, cooperatives, and attorneys during the Oldfield hearings presaged the formation of the American Fair Trade League. Brandeis, it seems, seized the opportunity. William H. Ingersoll, a founding member of the AFTL, later recounted Brandeis’s influence on the League’s formation. According to Ingersoll, who was a partner in his brother Robert’s watchmaking business, between the several Oldfield hearings, Brandeis approached a group of manufacturers who had gathered to testify and warned them that the independents were “lending themselves as cat’s-paws to pull the chestnuts out of the fire for the big concerns which were abusing the patent privilege under the law as it stood.” He urged that the independent producers and retailers should instead disassociate themselves from the “monopolists and join with those who have a common interest with you in  



Oldfield Hearings, – (statement by Brandeis). “Every time you approach the subject you come back to this proposition: Preserve competition; make your antitrust law effective, so the great combinations can not [sic] control, and these individual devices under the patent law may not only be safely permitted, but they will work in harmony with your general purpose of advancing the interests of the people through competition.” Ibid., . Pierrepont B. Noyes, president of the Oneida Community, Ltd., a cooperative of manufacturers of silverware, canned goods, and hardware, testified in a similar vein before the committee. Oldfield Hearings, No. , – (May , ) (statement by Pierrepont B. Noyes). Ingersoll, “Manufacturers’ Efforts for Relief,” .



American Fair Trade

maintaining free competitive independence.” “Our whole position,” Ingersoll recounted, “fitted into his well-knit philosophy of economic democracy based upon fair competition.” The AFTL would be composed of specialty producers of secret-processed and patented brands. William Ingersoll, who represented the Ingersoll family business at the Oldfield hearings, served as the League’s first temporary chairman. Robert H. Ingersoll & Brother had started out as producers of low-cost rubber stamps in New York City in the early s. In less than a decade, it had pivoted its business toward watchmaking by partnering with the Waterbury Watch Company to take advantage of that firm’s production facilities and workforce. In , the Ingersolls began selling the Universal, an affordable pocket watch made from stamp-produced mechanical parts and no jewels. The watches sold through wholesalers, retailers, and mail order catalogs. The Universal, the firm’s cheapest model, sold for a standardized price of one dollar, gaining the moniker “the Dollar Watch.” By , the Ingersoll-Waterbury venture boasted production of approximately . million watches annually. As the market for affordable pocket watches expanded, many producers found themselves squeezed by cheaper rivals. With the popularity of its products soaring, Ingersoll expanded, buying factories in Trenton, New Jersey, and Waterbury, Connecticut, and diversifying its product lines to include watches priced from one to nine dollars. Ingersoll advertised its “clean and sun-lit modern factories” and “skilled and well-paid workmen,” producing “exact test of standard and reliability.” The Ingersolls were thriving. Members of the AFTL included an array of specialty producers and retailers of products including panacea medicines, custom-made jewelry, specialty tobacco products, brand-name foods, printing services, quality machine-tools, and novel electronics. These products appealed to the rising middle class’s shifting tastes and its demand for stylized goods and

 

 

 Ibid. Ibid., . William J. Pape, “Clocks, Watches, Pins, Needles, Hooks and Eyes,” in History of Waterbury and the Naugatuck Valley, Connecticut (New York, ), : –, –. Advertisement in National Magazine  (May ), front matter, n.p. See also Ingersoll advertisement in The Twentieth Century Magazine  (June ), back cover, n.p. For a selective list of AFTL members, see William H. Ingersoll, “Manufacturers’ Efforts for Relief,” –. For seminal works on the field of specialty production, see Scranton, Endless Novelty; Philip Scranton, “Diversity in Diversity: Flexible Production and American Industrialization, –,” Business History Review  (spring ): –.

The Economics and Ideology of American Fair Trade



consumer services. Small dealers used value-added competition, meaning that product value represented only one facet of the services or quality offered by a name brand and a local proprietor. Small manufacturers competed to produce nonsubstitutable goods and/or services and maintain higher profit margins through higher resale prices but at a lower volume than the department and chain stores. These small proprietors enforced fixed-price schedules by maintaining tight personal relations through interfirm communications and regional trade associations. While extra-legal enforcement, such as boycotts and blacklists, might curtail price-cutting practices, the fair traders preferred to keep their older arrangement of resale price maintenance contracts enforced by law. Unsurprisingly, AFTL members were motivated to protect their bottom lines, way of life, and social clout. Even so, they came to embrace Brandeis’s economic philosophy of public–private governance, which pushed them away from self-regulation as a purely private matter and, by , toward partnership with new administrative agencies, loosening their control over business management and association organization. Charles Ingersoll, the secretary-treasurer of the Ingersoll Company and the first president of the League, displayed this uncomfortable disjuncture between a distrust of the state and a desire to coordinate economic activity so as to mitigate business waste, falling prices, social inequity, and unemployment. That disjuncture would remain an animating  





Eric Rauchway, “The High Cost of Living in the Progressive Era,” Journal of American History  (Dec. ): –. Charles Sabel and Jonathan Zeitlin, “Historical Alternatives to Mass Production: Politics, Markets and Technology in Nineteenth-Century Industrialization,” Past and Present  (Aug. ): –. Some of the extra-legal tactics used by druggists in California to maintain fixed retail prices will be explored more thoroughly in Chapter . While this chapter-length case study focuses on the policy responses to advocacy action, the extra-legal power exercised by druggists through boycotts and blacklists also influenced the success or failure of these marketing and distribution programs. See William Ingersoll to Louis Brandeis, June , , in Letters of Louis D. Brandeis (hereafter Letters of LDB), eds. Melvin I. Urofsky and David Levy (Albany, NY, ), : . Brandeis to Charles Ingersoll, Mar. , , Letters of LDB, : . Ingersoll advocated the nationalization of land and the Henry George single-tax as a solution to unemployment; Charles H. Ingersoll, “Board of Trade Versus Board of Assessors,” American City  (Nov. ), –. On the original members and their goals, see also Paul T. Cherington, “Appendix: Officers, National Commission and Department Organization of the Associated Advertising Clubs of the World, –,” in The Advertising Book (New York, ), –; “‘Fair Traders’ Pleased: See Hope for Price Maintenance,” New York Times, Oct. , , ; “A.N.A.M. [Association of National Advertising Managers] Chicago Meeting,” Advertising & Selling  (Jan. ): –.

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American Fair Trade

feature of the AFTL and antitrust reform through the s. Yet in each example of a functional uniform price system, particularly in European countries, it was clear that the state played a critical role in monitoring and policing. Here, the attorneys for the League were instrumental not only in building a strategy to legalize some private forms of uniform pricing policies but also in shaping the public law regarding what constituted unfair competition. Edward S. Rogers and New York University Professor Gilbert H. Montague made up the League’s legal counsel. Rogers brought expertise in patent and trademark law. Montague provided economic analysis and legal advice; he was also active in the “institutionalist” economics movement, a progressive and heterodox group of young economists who dissented from the strictures of neoclassical economics. Montague had earned both a masters in economics () and a law degree () from Harvard, where he also taught undergraduate economics. As a practicing attorney, he played a leading role in publicizing the abuses of ruinous competition and subsequent consolidation and in advocating antitrust reform. Alongside the leaders of the AFTL, Rogers and Montague decided to approach Brandeis to help draft fair trade legislation.



 





 

See Brandeis to William Ingersoll, Feb. , , Letters of LDB, : , urging Ingersoll and the AFTL to maintain advocacy for the Stevens RPM bill as opposed to more radical legislation with questionable constitutionality. See Brandeis to William Ingersoll, Mar. , , Letters of LDB, : –. Edward S. Rogers, “Comments on the Modern Law of Unfair Trade,” Illinois Law Review  (Apr. ): ; “The Unwary Purchaser,” Michigan Law Review  (June ): ; “Some Historical Matter Concerning Trade-marks,” Michigan Law Review  (Nov. ): ; “Predatory Price Cutting as Unfair Trade,” Harvard Law Review  (Dec. ): –. Gilbert H. Montague, “The Future of the Sherman Act,” Independent  (July , ): , ; Letter to the Editor, “Judge’s Views on Brain Property: Wrong, Gilbert H. Montague Says, and Parent of Anti-Patent Legislation,” New York Times, Sept. , , ; Gilbert Montague, “The Proposed Patent Law Revision,” Harvard Law Review  (Dec. ): –. Wyatt Wells, “Counterpoint to Reform: Gilbert H. Montague and the Business of Regulation,” Business History Review  (autumn ): –, . Interestingly, Montague taught the future president Franklin D. Roosevelt. Montague, “German and British Experience with Trusts,” Atlantic Monthly, Feb. , ; NARD Journal, July , , . See Brandeis to William Ingersoll, Feb. , , Letters of LDB, : ; Ingersoll urged Brandeis to differentiate between price fixing and resale price maintenance, the latter of which he argued was pro-competitive; Brandeis to Edward Hurley, Feb. , , Letters of LDB, : .

The Economics and Ideology of American Fair Trade



Montague met Brandeis for the first time in  and they maintained a close friendship thereafter. Like Brandeis, Montague championed both progressive and conservative views simultaneously. While on the one hand he subscribed to a pragmatic view of the law, espousing a progressive legal philosophy that advocated law adapting to societal needs, he also retained a conservative skepticism of government intervention. As an attorney, he pioneered the role of the lawyer-lobbyist by representing the nation’s largest wholesaler group, the Merchants’ Association of New York, and organizing legislative campaigns in its interest. Montague believed that strong patent rights for brand-name consumer goods ensured both quality and innovation, even if raising prices in the short term. Yet his work for the AFTL demonstrated a concern that the level of corporate consolidation and concentration had eliminated competition. The Supreme Court continued to galvanize the movement. Not long after the A. B. Dick decision, the composition of the bench changed and the new majority embraced Chief Justice Edward White’s interpretation of patent rights, which coincided with a stricter view of antitrust rules. As Brandeis had predicted, the Court soon extended the Dr. Miles rule, striking down price fixing for patent medicine. The Court refused to “force the purchaser to foot the bills for the greed or inefficiency of the retailer as well as the profit of the patentee.” The last vestiges of protection for producers to manage distribution channels or for retailers to insist on uniform prices crumbled as the Court’s rule of reason increasingly viewed any market price restraint as an irrefutable violation of antitrust law. But rather than becoming settled law, in , the movement for antitrust reform began pushing in new directions.

 ’ “ ”  ’ “ ” Upon Woodrow Wilson’s winning the Democratic Party’s nomination in , Brandeis sent him a congratulatory letter. Governor Wilson, already familiar with Brandeis’s work against the Taft administration’s embroilment in the Ballinger-Pinochet controversy, invited the “People’s Lawyer” to join him at his Sea Girt estate in New Jersey. Shortly   

  Wells, “Counterpoint to Reform,” –. Ibid., –. Ibid., . Bauer v. O’Donnell,  U.S.  (), striking down the price maintenance contracts attached to the patent medicine Sanatogen. “A Blow at Monopoly,” Chicago Daily Tribune, May , , .

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American Fair Trade

thereafter, Brandeis became an advisor to Wilson’s “New Freedom” presidential campaign. Wilson had promised lower tariffs, a mainstay of Democratic politics, and reform of U.S. banking policy, both issues that Brandeis endorsed as well. But Wilson could not escape the public debate surrounding the “trust question” and the inadequacy of antitrust enforcement. Brandeis, who had endorsed Robert La Follette for the Republican nomination for president only a year earlier, had presented a proposal for an interstate trade commission to the Senate Interstate Commerce Committee. La Follette had been undercut by Theodore Roosevelt’s decision to pursue the Republican nomination, an unanticipated turn of events as the former president had previously promised not to run. Roosevelt then challenged the incumbent William Howard Taft, though to no avail. Taft secured the nomination, pushing Roosevelt to form his own third party, the Progressive Party. In this crowded field of candidates, Brandeis urged Wilson to differentiate himself from Roosevelt and capture the meaning of economic freedom. The election of  is remembered for many noteworthy events. Roosevelt was shot at a campaign stop in Milwaukee, but delivered his speech with a bullet lodged in his chest. Eugene V. Debs ran the Socialist Party’s most successful campaign, securing nearly a million votes. But that election is most often characterized by the division between Roosevelt’s “regulated monopoly” and Wilson’s “regulated competition” proposals for antitrust reform. Roosevelt’s “new nationalism” platform proposed broad social reforms, including a federal child labor law, minimum wages, and the creation of a federal trade commission to oversee business practices. His vision for the commission differed from Brandeis’s in that Roosevelt had embraced the inevitability of large-scale corporations and argued that regulating monopoly provided the best solution for consumer and worker protection. Both Wilson and Brandeis remained skeptical of both big business and big government, arguing that Roosevelt’s proposal threatened to create inefficiencies and attenuate democratic participation in government. The alternative of regulated competition, as Brandeis had argued many times, required an administrative body to monitor nearly all 



McCraw, Prophets of Regulation, . Other notable planks included Wilson’s determination to lower the tariff and enforce strict monetary policy. See also Arthur S. Link, Wilson: The Road to the White House (Princeton, NJ, ), ; Brandeis, “Shall We Abandon the Policy of Competition?” Case and Comment, Feb. , . For Brandeis’s official endorsement of La Follette, see Boston Journal, Sept. , , n. p. Brandeis’s proposal was known as the La Follette-Lenroot bill or the Stanley bill. See Brandeis, “Trusts and Efficiency.”

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

business practices – creating a forum for redress – to prevent the use of the predatory or unfair business tactics that often accompanied industrialization and market consolidation. Given the divided Republican Party, Wilson scored a handsome victory and promptly set out to reduce tariffs, reorder monetary policy, and reform antitrust. Brandeis articulated his program for an interstate trade commission on the pages of Harper’s magazine between November  and the following January. Similar to the ICC, the trade commission would be empowered to investigate and report instances of restraint of trade, a much wider category than monopolies. Brandeis also urged that the commission participate in “industrial experiment stations” to educate businesspeople on new technologies, accounting methods, retailing practices, and forms of organization, similar to what he had seen done in Denmark and Germany. Brandeis envisioned the FTC collecting cost information, then disseminating it after it had been filtered by FTC experts in political economy – a process similar to the self-regulatory practices popular with various trade associations. He hoped that his vision would appeal to Democrats and Republicans. Generally, the Democratic Congress wanted a loosely enforced antitrust law that would allow combinations to promote self-regulation of industry prices and would maintain decentralized economic power. Republicans, on the other hand, endorsed more stringent regulatory measures to either manage monopolistic industries or enforce pure market competition. Brandeis offered an investigative and policing solution. On January , , President Wilson delivered a special address to Congress outlining Brandeis’s regulatory approach to amend antitrust law. The passage of the FTC Act represented a compromise between the major parties: Republican progressives won a regulatory agency empowered to determine the limits of “unfair competition” while Democratic populists weakened the agency’s broad powers and ensured that it 



 

Brandeis formulated these ideas in response to the  Supreme Court decisions that forbade vertical resale price fixing in Dr. Miles, but also prohibited predatory practices in Standard Oil while failing to provide any compensation to those businesses destroyed by the company’s practices. See Strum, Louis Brandeis, –. On Wilson’s reduction of tariffs (Underwood-Simmons Act, ), see John Milton Cooper, Woodrow Wilson: A Biography (New York, ), –. On the creation of the Federal Reserve Act of , see Cooper, Woodrow Wilson, –; Ott, When Wall Street Met Main Street, , . Hearings Before the H. Interstate Trade Commission, d Cong., – (Jan. –Feb. , ). Berk, Regulated Competition, .

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would act as an information-sharing body. Given the commission’s ambiguous beginning, it is understandable that historians have interpreted the act as either “stillborn” or an overreaching compromise. However, the alternate contention that this act settled the antitrust debate hardly makes sense. The creation of the commission delegated the issue to a smaller body of experts from leading universities and business organizations, but, as political scientist Gerald Berk has argued, “the debate over multiple meanings [of fair competition] endured.” Although Brandeis did not draft the Federal Trade Commission Act, he handpicked George Rublee to carry out the task in concert with Representative Raymond Stevens of New Hampshire. Rublee, an independently wealthy lawyer and former member of the Progressive Party, extended Brandeis’s investigatory program by granting the Federal Trade Commission regulatory powers. The bill gave the FTC the power to hold hearings and issue injunctions against companies to “cease and desist” from using “unfair” practices. Brandeis also encouraged the passage of the Stevens Price Maintenance Bill as a necessary amendment to clarify the meaning of “fair” competition. The main objective of the  Stevens Price Maintenance bill was to establish the right of a manufacturer to “prescribe the sole, uniform price at which each article covered by [a sales] contract may be resold.” Wielding President Woodrow Wilson’s endorsement, Representative Stevens and Senator Henry Hollis (both Democrats from New Hampshire) proposed an amendment to the Clayton Antitrust Act of , the Stevens bill. Crafted by Louis Brandeis, the bill sought to eliminate unfair trade practices by legalizing voluntary fair-price agreements among  

   

Berk, Regulated Competition, , referring to McCraw, Prophets of Regulation. See Sanders, Roots of Reform, which argues that the FTC Act resulted from a compromise between sectional interests; Scott James, Presidents, Parties, and the State, which argues that Democrats, who were in power, compromised with Republicans – who wanted a regulatory agency – by making the FTC a weak agency. Sklar, Corporate Reconstruction, which argues that corporate liberals outflanked progressives by creating an interclass alliance between small and large business concerns. Berk, Regulated Competition, . Marc McClure, Earnest Endeavors: The Life and Public Work of George Rublee (Westport, CT, ), . McCraw, Prophets of Regulation, –, . “The core of the FTC’s authority lay in three fundamental provisions Rublee had inserted into the bill: that ‘unfair methods of competition in commerce are hereby declared unlawful’; that the commission in effect had the power to determine which methods were unfair; and that it could order offenders ‘to cease and desist’ from using such unfair methods. Altogether, the act envisioned a far more powerful and active agency than anything Brandeis had proposed.”

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coalitions of proprietors. The bill clearly answered the judiciary’s prohibitions against resale price maintenance as legal form of sales contract; moreover, it fit within the president’s New Freedom platform and with the general public’s antitrust sentiments. Brandeis orchestrated these synergies. The Stevens bill appealed to the prevailing “trust-busting” public sentiments as well as to the progressive quest for social justice between large and small proprietors. It affirmed the manufacturer’s right to “fix a notice to the product with the advertised price,” but required that a vendor could not possess monopoly control over the market. Failing to win an exemption from antitrust laws, the AFTL had altered its legislative strategy and, like Brandeis, endorsed federal administrative oversight. Their proposal created a system whereby manufacturers would file price schedules, which usually allowed for price decreases coinciding with time on the shelf and sometimes including buy-back provisions, with the Bureau of Corporations. The FTC would approve, reject, or amend these schedules and collect a small fee. Price schedules were required to make allowances for price cutting; for example, in case of failure to sell the product within a given time. The legalization of uniform-price policies carried out through private contracts and federal administrative oversight seemed to fit with Wilson’s recipe for corporate capitalism – private power coupled with minimal government oversight and a dash of marketplace equity to produce stable and productive commerce. In February, the House Committee on Interstate and Foreign Commerce began hearings on the Stevens bill. Brandeis gave the first testimony in support of it. His arguments focused on restoring equity to the marketplace by directly altering the Supreme Court’s recent rulings, such as Dr. Miles. He demonstrated that under common law, these pricefixing contracts had been enforceable and, in order to protect the public interest, the legislature must circumscribe more recent judicial rulings.  



Jacobs, Pocketbook Politics, –. To Prevent Discrimination in Prices and to Provide for Publicity of Prices to Dealers and the Public: Hearings on H.R.  Before the H. Committee on Interstate and Foreign Commerce, rd Cong., (Feb. , –Jan. , ) (hereafter To Prevent Discrimination in Prices). Prior to the enactment of the Sherman Act of  and the U.S. Supreme Court’s “literalist” construction of that act as prohibiting any restraint of trade, the courts had enforced some price-fixing agreements when limited in time and space and deemed to protect against “ruinous competition” and, thereby, held to protect the public interest in market stability. In Horner v. Graves,  Bingham  (), a British court upheld contracts among competitors that restricted output and fixed prices; Skrainka v.

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American Fair Trade

Moreover, several states had already enacted prohibitions on “unfair competition” and other states had legalized contractual resale price maintenance agreements. The Stevens bill presented a necessary amendment to the Clayton Act because the FTC could not create new rules; it was the legislature that needed to specify the meaning of “fair” competition. Representatives of the National Association of Retail Druggists, the American Fair Trade League, and numerous other business associations testified before the House Commerce Committee with equal verve on the merits of the Stevens bill. These businessmen argued that the recent Supreme Court decisions curtailed equality before the law and the legitimate property rights in brand-name goods. They sought to establish that price cutting constituted fraud against both the consuming public and the property rights of the manufacturer. Samuel C. Henry, president of the NARD, assured the Congressmen that the bill would best serve public policy by altering the rules created by the Court. Moreover, legalizing RPM contracts as stipulated by the Stevens bill followed the logic of the progressive reforms of corporate capitalism that provided equity in the marketplace via government supervision. “The suggestion that the public will not pay a fair uniform price for standard goods indicates an attitude contrary to the public policy that has created and will maintain the ICC and FTC, a policy of equality under the law; equality of opportunity and reward for initiative.” For







Scharringhausen,  Mo. App.  () upheld a pooling agreement because it did not result in unemployment or higher prices, but instead protected the community against ruinous competition. See Sklar, Corporate Reconstruction, –, . Brandeis stated, “The laws of Massachusetts, of New York, of Kentucky, for instance, permit contracts to establish standard prices. It is only in their interstate business that they are prohibited by reason of the Supreme Court decisions.” To Prevent Discrimination in Prices, d Cong., – () (statement of Louis Brandeis). New Jersey passed “An act to prevent unfair competition and unfair trade practices,” Chapter No. , Laws of , State of New Jersey. See Rogers, “Predatory Price Cutting as Unfair Trade,” . (Chapter  explores state “unfair competition” laws.) The following organizations sent a representative to speak before the House Committee in support of the Stevens bill, –: Anderson Foundation, National Association of Retail Druggists, American Fair-Trade League, Hamilton Watch Co., Ford Motor Co., National Association of Retail Grocers, Michigan Retail Grocers and General Merchants Association, General Merchants Association of Michigan, Indiana Wholesale Grocers Association, Michigan Wholesale Grocers Association, Judson Grocery Co., Missouri and Kansas Wholesale Grocers Association, National Grocery Co., Western Grocery Co., Iowa-Nebraska Wholesale Grocers Association, and Printer’s Ink [magazine]. To Prevent Discrimination in Prices, d Cong.,  () (statement of Samuel C. Henry).

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

Henry, it didn’t matter if price discrimination distorted railroad rates or retail prices, since progressive government agencies were tasked to uncover price manipulations intended to drive certain competitors from the market. Yet this rationale depended on the argument that “predatory price cutting is a fraud upon the consumer,” as Henry concluded. The representatives of the AFTL echoed these sentiments en masse before various committee hearings on antitrust revision and expansion during the rd Congress. In Brandeis’s view, the consumer required good information about quality and reliability, which were often conveyed in the brand’s reputation and linked to price. The Stevens bill also gained the support of some women’s organizations and consumer advocacy groups, which held considerable political power and organizational strength, especially at the local and state levels. Women’s groups were also diverse and divided concerning issues of prime importance. In  the issue of uniform prices coincided with the problem of truth in advertising, an ongoing concern with food and drugs, despite the passage of the Food and Drug Act of . Christine Frederick, a pioneering home economist, testified on behalf of the Housewives League and the Ladies Home Journal. She lent support to the bill as a remedy to the evils of price cutting that endangered the consumer and threatened so-called legitimate business.

 





Ibid. Representing the druggists associations, particularly under the umbrella group the American Fair Trade League, the following testimonies employed property rights and equity principles of fair competition to support RPM legalization: ibid.,  (testimony by Jacob H. Rehfuss, representing NARD); ibid.,  (Samuel Henry, president, NARD); ibid.,  (Edmund A. Whittier, secretary-treasurer, AFTL). See also Trust Legislation: Hearings Before the H. Committee on Judiciary, st Cong.,  () (testimony by James Finneran, representing the NARD); ibid.,  (testimony by C. F. Nixon, retail druggist). For a representative glance at  testimony on behalf of the AFTL, see Regulation of Prices: Hearings Before the H. Committee on Interstate and Foreign Commerce, th Cong.,  () (testimony by Samuel Henry, representing NARD); ibid.,  (testimony by Thomas Latham, retail druggist, New York). The Stevens bill or some iteration thereof was presented in each Congressional session through the New Deal. “Stephens Bill Man Replies to Marshall Field,” Women’s Wear, June , , , ; “General News,” Women’s Wear, Apr. , ,  (urging readers to support the Stevens bill and the AFTL); Jacobs, Pocketbook Politics, ; Deutsch, Building a Housewife’s Paradise, . On the Food and Drug Act, see Daniel Carpenter, Forging Bureaucratic Autonomy: Reputations, Networks, and Policy Innovation in Executive Agencies, – (Princeton, NJ, ), –.

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American Fair Trade

Both I and manufacturers and  per cent of dealers know it is far better to set an honest, fair-profit price, and sell at that price uniformly to all. It is a principle of honesty and fair dealing which I am astonished to find it disputed. . . . I make a plea for a general law against unfair competition, so that we can be mutually rid of that body of men who live on the reputation and labor of others, but who do not give honest service themselves. I believe competition will work out the salvation of business quickly if real competition is given a chance by having Uncle Sam umpire the game fairly.

Frederick, perhaps even better than Brandeis, argued that market relations were social relations, in which reputation and other noneconomic values mattered. She defined the price cutters as “destroyers, not builders.” Samuel Gompers, president of the American Federation of Labor, also testified before the Committee. Although he did not speak directly on the RPM bill, his support for the Bartlett-Bacon bill shows the unlikely alliance between labor and agricultural interests to gain association control of prices. The bill sought to amend the Sherman Act to allow voluntary associations of labor as well as of farmers and to give both the necessary legal sanction to “enhance prices.” The Stevens bill did not pass in the rd Congress, leaving open the definition of unfair competition for the FTC and the courts to determine through the adversarial process or legislative intervention. For Brandeis, the Court had “merely exercised its judgment as to what the interests of









Hearings on Antitrust Legislation – Revision and Expansion Before the H. Committee on the Judiciary, rd Cong., –, ,  (Feb. , ) (testimony by Christine Frederick). Frederick, representing the Housewives League, was consulting editor of the Ladies Home Journal, the New York Sun, and the Philadelphia Public Ledger. The literature on women’s groups’ lobbying efforts reflecting an emerging “cost of living consciousness” depicts women as wholly against price-fixing measures. It should be noted that Fredrick was the wife of the editor of Printer’s Ink, which also openly supported RPM legalization. See To Prevent Price Discrimination, rd Cong.,  () (testimony by Gilbert Montague on behalf of Printer’s Ink). To Prevent Price Discrimination, rd Cong.,  () (testimony by Christine Frederick). Fredrick gave similar testimony in . See Regulation of Prices: Hearings Before the H. Committee on Judiciary, th Cong.,  () (statement by Frederick). See also Christine Frederick, The New Housekeeping: Efficiency Studies in Home Management (New York, ). Hearings on Antitrust Legislation – Revision and Expansion: Hearings Before the H. Committee on the Judiciary on H.R. , rd Cong.,  () (statement by Samuel Gompers). Ibid., . Later, during the Depression, organized labor would support consumer price setting by the government in hopes of keeping both prices and wages up. See Jacobs, Pocketbook Politics, –.

The Economics and Ideology of American Fair Trade



the country demand and made its interpretation as to what Congress had intended by the Sherman Act.” But, “if Congress does not agree with the Supreme Court in this respect, it should so declare [it] by enacting the Stevens bill.” Consistent with his advocacy of a “living” constitutional law, he condemned the Supreme Court for disregarding equity in market competition; not only were businesses destroyed but consumers suffered as well. Predatory pricing, the epitome of unfair competition, diminished both private profits and public welfare. “The law,” Brandeis stated, “as declared by the majority of the Supreme Court, is a law that is playing into the hands of the big men . . . You certainly do not wish to crush the little men,” he chided the Congress. Seeking “democracy and social justice,” Brandeis concluded, the law should reflect the prevailing public sentiments of equity rather than economic efficiency.

    ..   :    The main tenets of the “new competition” extended beyond Brandeis and influenced the establishment of the U.S. Chamber of Commerce (USCC), a nongovernmental organization of businesspeople. The Chamber’s archival records reveal its involvement in the campaign to extend the more permissive “rule of reason” logic from the analysis of interfirm competition to the analysis of trade associations. The Chamber endorsed the creation and expansion of administrative agencies as an alternative to judge-made law regarding competition policy. Working within the Chamber of Commerce, key AFTL leaders encouraged the study of antitrust reform as a method by which uniform pricing could function through open price associations. The League and the Chamber solicited testimony and tutorial from economists and legal experts regarding the possibilities for the “new competition.” Perhaps unwittingly, those business leaders became exponents not only of Brandeis’s pragmatic progressivism but  

 

To Prevent Price Discrimination, rd Cong.,  () (testimony by Brandeis). “Resale Price Maintenance and the Anti-Trust Laws,” University of Chicago Law Review  (winter ): –, ; Rogers, “Predatory Price Cutting as Unfair Trade,” ; Brandeis, “Cutthroat Prices.” Brandeis wrote, “Shall we, under the guise of protecting competition, further foster monopoly by creating immunity for the pricecutters?” See also Jacobs, Pocketbook Politics, –. To Prevent Price Discrimination, th Cong.,  () (testimony by Brandeis). Louis Brandeis, “The Living Law,” Illinois Law Review  (Feb. ): –, esp. –.

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American Fair Trade

also of a nascent school of economic thought later to be known as institutional economics. Those economists expressed an interest in creating and sustaining both public and private institutions to balance equity and efficiency. While Brandeis’s proposed “interstate trade commission” presented an opportunity to embark on a creative mission to gather and disseminate industrial statistics and new management techniques, there was also a role for private firms and associations. The Chamber, established in February , brought together national industry-specific associations, local and municipal business associations, and state and local chambers of commerce. Herbert Miles, president of the National Association of Manufacturers (NAM), presented the new organization at its first meeting: “We should have a clearing-house for these questions which to-day the separate organizations are very busy on, and [have] no means of communicating with each other.” For Miles and other business executives, information sharing offered a way to solve the problems of predatory pricing and unfair competition and, more generally, of business cycles. However, without a role for government oversight and policing, such information sharing on output, price, or production standards mirrored the cartel-like behavior explicitly forbidden by the Court. Charles Nagel, Secretary of the Department of Commerce and Labor, played an influential role in creating the Chamber and establishing it as an intermediary between government and business. He recounted that commerce and industry had undergone “something of a revolution” in its relationship to the state. From America’s founding, he argued, the federal government had been preoccupied with limiting political power; however, industrialization had demonstrated that “industrial problems involve the use of power, of intelligent control, and of intelligent promotion equal to those in the political sphere.” First, there emerged restrictive legislation to limit the monopoly power of railroads through the Granger laws and the ICC. “We abandoned the old laissez-faire doctrine, and began to realize that somehow some system and order must be put into this great 

 

Louis D. Brandeis, “Disseminating the Facts of Industry,” from a statement before the Federal Trade Commission (Apr. , ) in The Social and Economic Views of Mr. Justice Brandeis, ed. Alfred Lief (New York, ), –. Robert Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Cambridge, MA, ), –. Chamber of Commerce of the United States Records, “Conference of Representatives of Commercial Organizations,” Feb. , , Accession No. , Box , Hagley Museum and Library, n.p. (hereafter USCC Rec.).

The Economics and Ideology of American Fair Trade



development.” Antitrust law appeared to offer a solution for stable and productive growth; however, the Court had foreclosed this possibility through its strict interpretation of the law. As a result, he concluded, the USCC should become the private administrative body that, working with the Department of Commerce and Labor, would explain what cooperative devices remained available to businesses. The following year, Edward Filene, a well-known proponent of progressive social legislation and the owner of Filene’s Basement (a pioneering discount clothing store), spoke to the Chamber regarding how the organization might cultivate a system of cooperation. He urged the Chamber to consider how other developed nations have managed the government–business relationship: For more than one hundred and fifty years the close cooperation which has existed between the business men of Great Britain, through the medium of their organizations and the Government, has produced results which make a profound impression upon any man of affairs who takes the pains to investigate. . . . This same kind of harmonious work, more scientifically and effectively carried out in Germany, in thirty years brought her commercial and civic achievement which is recognized as one of the greatest feats of modern history.

Records from the USCC reveal a striking reliance on European competition models, which had also influenced the development of institutionalist economics in America.  

 

Ibid. On the founding of the USCC as a partnership with the federal government, see Laura Phillips Sawyer, “Trade Associations, State-Building, and the Sherman Antitrust Act: U.S. Chamber of Commerce, –” in Business and Politics in the Twentieth Century, eds. Richard J. John and Kim Phillips-Fein (Philadelphia, ); Richard Hume Werking, “Bureaucrats, Businessmen, and Foreign Trade: The Origins of the United States Chamber of Commerce,” Business History Review  (autumn ): –. E. A. Filene, “The Place of Commercial Organization in National Development,” Jan. , , Box , , USCC Rec. Malcolm Rutherford, “Understanding Institutionalist Economics: –,” Journal of the History of Economic Thought  (Sept. ): –. Rutherford explains that the conventional history of the institutionalist movement in the early twentieth century portrays the movement as disjointed and incoherent. However, he and other revisionists have recently written against this interpretation, arguing that “institutionalism was associated with a particular research agenda that must, at the time, have seemed full of promise and excitement.” Ibid., . The movement began with Thorstein Veblen’s critique of modern capitalism and continued through the work of Wesley Mitchell, John Commons, Walton Hamilton, and John Maurice Clark. During the interwar years, as later chapters in this book show, several of the leading institutionalist economists worked with the AFTL, the FTC, and other federal administrative agencies to shape competition policy.

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American Fair Trade

In February , Professor Karl Rathgen of Hamburg, Germany, presented to the Chamber a paper, “Public Opinion in Germany in regard to the Trust Problem.” He explained the historical problem of cutthroat competition in that country, beginning with economic crises of the s and s: The prevailing form of the cartel or syndicate, the German cartel, is a combination in regard to prices, limiting the liberty of the members relative to the fixing of their prices and limiting also the output, but leaving in all other respects the various enterprises which have combined independent of each other. It leaves, therefore, a competition, not in price, but in the whole internal management; competition in improvement with respect to machinery and business organization, as well as in the whole organization of labor within business.

Consensus emerged at the meeting that the U.S. Supreme Court’s construction of the antitrust laws to prohibit combinations had led to the great merger movement. Rathgen spent the year at Columbia University, a stronghold of progressive economic scholarship, and his fellow political economist, Professor Henry H. Seager, joined his call for regulated competition. “I believe it is still an open question economically whether the advantage is not with combination rather than unregulated competition also in some branches of mining and manufacturing.” Seager advised that a federal law should not explicitly define “contract,” “combination,” or “restraint of trade” because there was no robust academic agreement on these terms’ meanings. Instead he urged that an interstate trade commission

 





Karl Rathgen, “Public Opinion in Germany in Regard to the Trust Problem,” Feb. , , Box , –, USCC Rec. Professor Charles Van Hise repeated the conventional theory that the Court’s attack on combinations encouraged corporate consolidation – and later, holding companies – to protect those corporate trusts. Charles Van Hise, “Concentration of Industry in the United States,” Feb. , , Box , –, –, USCC Rec. Yonay, The Struggle over the Soul of Economics: Institutionalist and Neoclassical Economists in America between the Wars (Princeton, NJ, ), . “Probably the best testimony of the high standing of institutionalism was the positions they held in academia and government. In the academic world, Columbia, Harvard, and Chicago were the three main universities during the interwar period, as they are today. Columbia was clearly an institutionalist stronghold, with Mitchell and Clark among its faculty; both [Rexford] Tugwell and Keyserling were graduate students there. The University of Wisconsin, the home of John Commons, which actually ranked third, before Harvard, in the production of PhDs in –, was the second stronghold of institutionalism.” Henry H. Seager, “The Proposed Trust Legislation,” Feb. , , Box , , USCC Rec.

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

should “test the real merits of combination in the industries where it is claimed to be superior to unregulated competition.” Professor Charles R. Van Hise, an engineer by training and then president of the University of Wisconsin, another bulwark of progressive economics, spoke before the Chamber to explain the history of competition policy in America. Like Brandeis, he called for a “third cycle of development,” in which reasonable restraints of trade would be applied equally to large and small businesses. The Court’s antitrust rulings, he explained, attacked small proprietors’ cooperatives and encouraged the corporate consolidation that antitrust should actively limit. Van Hise, however, provided a foil to Brandeis’s optimism on business associations and FTC cooperation; in short, he promoted “regulated monopoly.” As an advisor to Theodore Roosevelt in , Van Hise held that many industries gained efficiencies through economies of scale and scope and those efficiencies could be passed on to consumers, as in the case of steel production. Such corporations posed a problem only insofar as their market power could be used to the detriment of the public interest or translated into undue political power. Nevertheless, he presented a new alternative to free market competition: cooperation among proprietors to promote scientific management to minimize waste, a slightly different take on Brandeis’s vision for regulated competition. Henry R. Towne, president of Yale University, seconded this call for “retention of competition, prohibition of monopoly, permission for cooperation, and regulation of the latter.” He elaborated with a proposal for an interstate trade commission, which resembled populist preferences for the shaping of the FTC Act. As a clearinghouse for industry-specific information, the commission would also operate as a

 



 

Ibid., . Charles R. Van Hise, “Concentration of Industry in the United States of America,” Feb. , , Box , , USCC Rec. Van Hise published Concentration and Control: A Solution of the Trust Problem in the United States (New York, ), in which he advocated the creation of a commission to enforce regulated competition. See “Van Hise on the Trusts: Nation Must Control without Bridling Industrial Genius,” New York Times, Oct. , , ; McCraw, Prophets of Regulation, , . Charles Richard Van Hise, “Co-operation in Industry,” an Address to the National Lumber Manufacturers Association (Chicago, ): –, –. See also Phillips Sawyer, “Trade Associations, State-Building, and the Sherman Antitrust Act.” Charles Van Hise, Concentration and Control: A Solution of the Trust Problem in the United States (New York, ). Henry R. Towne, “Proposed Trust Legislation,” Feb. , , Box , , USCC Rec.

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American Fair Trade

“court of first instance.” The educational training and administrative oversight provided by the commission would allow greater freedom of exchange and help protect against monopoly by promoting the welfare of smaller units of industry, Towne argued. This would especially benefit “those which aim at high and fixed standard of quality in their products, and also a vast number of consumers. Its chief effect would be to promote the improvement of quality in production and to maintain a high standard of trade morality.” Resale prices acted as a management device for cooperative combinations, particularly to ensure the development and diversification of quality products. For Brandeis, President Wilson’s “New Freedom” platform signified the path to “industrial democracy.” It was “not a program of free and unrestricted competition, but [rather] a program of regulating competition instead of regulating monopoly.” In order to ensure a level playing field among competitors and diminish the threat of “ruinous competition,” Brandeis proposed revised accounting methods to avoid overproduction and falling retail prices. Therefore, he and others reasoned, the “broad question of equality and opportunity” in America required exhaustive study of industrial statistics and business practices, such as the work he had pioneered in the discriminatory railroad rates case. “Training Industrial Secretaries,” a speech given by Paul T. Cherington from the Harvard Graduate School of Business Administration, promised the Chamber a new era of business organization and efficiency achieved through expert accountants and managers. For example, in the course “Commercial Organization,” the Business School had developed its “own system of uniform cost accounting.” The School operated in a way similar to the Harvard Law School’s famous case-study method, which Cherington referred to as “the laboratory method.” Its “trained recruits” mastered banking, railroad rate making, and commercial law and accounting by attending lectures by professors and industry leaders and then performing fieldwork as an apprentice of sorts. Adopting a uniform 

   

Ibid., . Towne explained that the Commission should act as clearinghouse and administrative court “to promote uniform practice in all sections of the country and dispatch in dealing with all minor cases.” Ibid., . Louis Brandeis, “The Democracy of Business,” Feb. , , Box , , USCC Rec. Ibid., –. See also Berk, Brandeis and the Making of Regulated Competition, , –. Paul T. Cherington, “Training Industrial Secretaries,” Feb. , , Box , , USCC Rec.

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

system of cost accounting became an important plank in the fair trade platform for antitrust reform because it facilitated and complemented proposals for both trade association and federal oversight. The scientific accounting methods of these “commercial secretaries” explained pricing policies and provided important legal defense for price protection. William Ingersoll, representing both the AFTL and Ingersoll & Brothers Watches, explained his company’s use of resale price schedules and outlined the pro-competitive arguments constructed by those “commercial secretaries.” Like the courts, Ingersoll began with consumer welfare as a priority, followed by the desire to “keep the way open for individual enterprise.” If markets remained competitive (that is, if no barriers to entry existed), then monopoly prices could not be maintained because new firms would enter and lower the market price. The open price system, though often misunderstood, according to Ingersoll, meant “standard prices to all,” not high prices. “Under the present conditions the individual merchant is doomed,” but fair trade offered an attractive alternative. In terms of price, fair trade allowed producers and retailers to standardize resale prices to consumers. A guarantee of a certain profit margin for the retailer came with obligations to provide quality assurances, service assistance, knowledgeable salespersons, and other shopping amenities. After all, a retailer’s services affect the demand for a product; brand-name goods “are personally identified and morally guaranteed by his mark and his advertisement.” Resale price maintenance in a given industry encourages intra-brand service competition and price stability; if the service is not valued, consumers shop elsewhere. The days of caveat emptor are over, Ingersoll explained, and the new slogan of “buy at our risk, we guarantee” should be embraced by all competitors. The FTC Act included many of the antitrust reforms that the AFTL and the Chamber of Commerce had endorsed, thus bringing together business leaders, economists, and legal scholars to define “unfair methods of competition.” The FTC commissioner, according to the Honorable Joseph E. Davies, the Commissioner of Corporations for the Department of Commerce, would act as “master of chancery” before the U.S. Supreme Court. Acting as a nonpartisan third party to antitrust disputes, the

  

For a more recent explanation of the pro-competitive effects of resale price maintenance, see Elzinga and Mills, “Leegin and Procompetitive Resale Price Maintenance,” . William Ingersoll, “Protection from Price Juggling,” Feb. , , Box , , USCC Rec.   Ibid., . Ibid., . Ibid.

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Commission had the authority to conduct investigations and facilitate consensual agreements between adversarial parties. The Chamber assembled a Special Committee on Trust Legislation to aid the Commission in fact-finding missions. The committee included Professors Van Hise, Seager, and Cherington, along with Brandeis (who passed these duties to George Rublee when President Wilson appointed him to the Supreme Court in ) and William L. Saunders of the Ingersoll Rand Company. The recommendations submitted by the committee restated Ingersoll’s arguments from the “Dollar Watch” case and clarified the connection between uniform cost accounting and fair trade legislation to further clarify the meaning of unfair competition. The Chamber’s Federal Trade Committee emphasized findings that price cutting in specialty goods markets, a problem which resale price contracts sought to eliminate, resulted from large retailers offering below-cost sales. “In some lines like drugs and groceries, in which identified goods play an increasingly important part,” Cherington explained, price cutting diminished the ability and desire of producers to introduce new products and services to market. He argued that manufacturer-set price schedules allowed both producers and retailers to promote brand-name products more effectively, helping both firms and consumers. Moreover, price setting on one brand would not change price competition among manufacturers of different brands. The appendixes to the committee report cataloged the legal and economic arguments used in lobbying to support fair trade legislation, including a study of international laws and state cases that ruled price cutting detrimental to the public interest. In , Harry A. Wheeler chaired the committee and praised its success. Although fair trade legislation had not passed, the Chamber had created a new lobbying strategy: “[N]ot through public campaigns,” but rather through “a confidential relationship” within the FTC, the Chamber “exerted quietly impressive influence.” Interest groups opposed to fair trade formed as well, appearing both within the Chamber of Commerce and in Congressional testimony. In , R. H. Macy of New York helped form the National Retail Dry  

Joseph E. Davies, “The Federal Trade Commission,” Feb. , , Box , –, USCC Rec. Harry A. Wheeler, “Federal Trade Committee Report,” Feb. , , Box , , USCC Rec.

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

Goods Association, which adamantly opposed the Chamber’s policy of lending approval to the fair traders. The  Federal Trade Committee also submitted a minority report that denied the pro-competitive effects of fair trade practices. Borrowing from classical economics texts, the report stated that “monopoly and competition being the exact opposites, anything tending to destroy competition tends to monopoly.” These immutable laws of supply and demand determined the market price and any previous litigation that allowed resale price fixing had been superseded by the Supreme Court’s interpretation of the Sherman Act. Despite the minority report’s adamant rejection of fair trade resale price maintenance, the Chamber remained active in lobbying for fair trade legislation.

  :        World War I altered the context of the fair trade debates. In part, the fair traders rejoiced at the surge in popularity of cooperative capitalism; however, the war did not create a fully developed institutional order. It left an ambiguous legacy. The War Industries Board (WIB), established in July , lacked sufficient statutory power to institute compulsory price fixing to keep wartime prices stable and low; in turn, administrators at the WIB relied on trade associations and industry leaders to administer price stabilization agreements. Through the auspices of the Chamber of 







U.S. Federal Trade Commission, Report of the Federal Trade Commission on Resale Price Maintenance (Washington, DC, ), –. Opposition to the fair trade bills, particularly during the Capper-Kelly bill debates, was led by R. H. Macy, and included the following groups: R. H. Macy & Co., represented by Edmond A. Wise (attorney) and Percy S. Straus (vice president); National Retail Dry Goods Association (two thousand manufacturers), represented by Lew Hahn (managing director); O’Neill & Co., Baltimore, MD, represented by R. C. Hudson; National Grange, represented by A. M. Loom; Homemakers’ Association (NJ), represented by Frank C. McKinney. Report of the Federal Trade Commission on Resale Price Maintenance, Appendix III: “Statement of Law Annexed to Minority Report,” Feb. , , Box , , USCC Rec. Ibid., . The report states, “the situation changed . . . the people themselves believed combinations, and particularly combinations regulating prices, to be against public policy.” Robert D. Cuff, The War Industries Board: Business-Government Relations during World War I (Baltimore, MD, ). Cuff argues that “the WIB and its administrative program were a bundle of paradoxes where decentralization vied with centralization, competition with combination, individualism with integration, freedom with coercion” Ibid., –.

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American Fair Trade

Commerce and other industry associations, smaller firms also participated in these efforts, despite resistance from larger mass producers such as U.S. Steel. President Wilson refused to sanction outright price fixing by WIB administrators, yet the war’s legacy strengthened the voluntary character of fair trade agreements to do just that. In May  Congress passed the Overman Act, which authorized the president to delegate executive powers to administrative agencies during the war, but it did not grant explicit authority to fix domestic prices. Given the strong antimonopoly sentiment and the skepticism concerning the “dollar-a-year” men in government, the Lever Act forbade government administrators from having any financial connection with the industries with which they would be facilitating agreements. As a result, Wilson appointed men such as Robert Brookings, a retired businessman who had devoted himself to “the ideology of social cooperation and enlightened capitalism,” and Frank Taussig, a Harvard economist dedicated to the preservation of neoclassical economics. Similarly, Bernard Baruch, whom Wilson appointed to chair the WIB, had made his fortune speculating on Wall Street and, thereafter, devoted himself to public service and Democratic politicking. Given the constraints placed on the WIB from its inception, along with the conflicting personalities charged with its coordination, it is perhaps no surprise that the Board turned to the Chamber of Commerce and various associations to fulfill its mission. Herbert Hoover, the U.S. Food Administrator during the war, exemplified this vision of the “associative state,” which he continued to cultivate throughout his political career. In September , Hoover visited the Chamber’s National Council and encouraged voluntary participation to raise production but maintain stable prices on products vital to the war effort. He warned that shortages during the war could lead to price spikes and cause discontent at home. “We are thus between two fires – to control prices or to readjust the income of the whole community. The verdict of the whole of the world’s experience is in favor of price control as the lesser evil.” The effort to conserve, stimulate production, and regulate distribution had already begun, Hoover explained, through the organization of  volunteer representative businessmen and experts. To date, over   

Cuff, War Industries Board, . Hawley, “Herbert Hoover, the Commerce Secretariat.” Herbert Hoover, Sept. , , Box , , USCC Rec. Interestingly, according to Rutherford, Veblen served on the Food Administration before joining Mitchell at The New School for Social Research. See Rutherford, “Understanding Institutional Economics,” .

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

 production conferences had been held. That year, the Chamber passed a unanimous resolution in support of President Wilson exercising executive authority to fix prices and control distribution. While Hoover must be credited as an effective wartime Food Administrator, the Chamber and its members had maintained a vision of cooperative capitalism since the organization’s founding and proved integral to his success. By  the Chamber’s members hoped to replicate the success of agricultural combinations, which Hoover had helped coordinate during the war. In his  address to the Chamber, he had outlined the process by which agricultural cooperatives controlled sales and distribution. Farmers in remote areas – sometimes through a local chamber of commerce or another organization – established sales agents in larger eastern cities who monitored prices and supply in their vicinities. Farmer cooperatives collaborated to save on advertising and shipping costs, which gave them greater flexibility in guiding their products to the markets with highest prices. R. Goodwyn Rhett, a Southern lawyer and former president of the Chamber, explained the process: [The farmer] did not crowd the market and he got fair prices. Every day there was put down exactly how much had been shipped by each individual, and when the returns came in, exactly how much it brought, what were the receipts of the day, and these receipts were divided by the amount shipped. The small man got the same price as the biggest man in the combination.

Rhett stressed that when the war ended, reconstruction of domestic business would do well to incorporate farmers into the Chamber so as to learn from their successes. George Peek, an agricultural economist whom Wilson appointed to the WIB, addressed the Chamber in April  and explained the role of the Chamber’s War Services Committees. With over three hundred committees, Peek explained, the plan coordinated government orders for various products, such as wood products, with the WIB Requirements Division; output and price information was then distributed to members each day. The purpose of the plan was to handle raw materials and finished products so as to avoid actual or threatened shortages as well as to control wartime inflation. The Chamber resolved to continue its   

Robert Goodwyn Rhett, “A Closer Relationship between Commercial and Agricultural Interests,” Dec. , , Box , , USCC Rec. George Peek, “Government Organization in Relation to War,” Apr. , , Box , , USCC Rec. Ibid., .

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American Fair Trade

ongoing study of price fixing and “the conditions relating thereto and [to] provid[e] a formula upon which costs and investments may be ascertained, and reasonable prices fixed.” In late  fighting ceased in Europe and President Wilson allowed the WIB to dissolve, leaving trade associations frantic that deflation would set in as surplus goods reentered the market and consumer goods rebounded in production. In response, the Chamber coordinated “An Emergency and Reconstruction Congress” in December , held in Atlantic City, New Jersey. Chamber members feared several changes: cancellation of wartime government purchasing contracts, rapid deflation caused by overproduction, and a return of the “literalist” interpretation of the Sherman Antitrust Act. A few days before the reconstruction meeting, Baruch wrote to Harry Wheeler, the Chamber’s president, promising that “materials that are not of a perishable character or of which there is no shortage shall not be placed on the market in competition with producers.” With the Chamber’s fears of cancelled contracts assuaged, they moved to press for greater legal freedom for industrial cooperation. A resolution passed by the group stated its conclusions drawn from the wartime experience: The war has demonstrated that through industrial cooperation great economies may be achieved, waste eliminated, and efficiency increased. The nation should not forget, but rather should capitalize [on] these lessons by adapting effective war practices to peace conditions through permitting reasonable cooperation between units of industry under appropriate federal supervision. It is in the public interest that reasonable trade agreements should be entered into, but the failure of the government to either clearly define the dividing line between those agreements which are, and those which are not, in unreasonable restraint of commerce, or to provide an agency to speak for it on application of those proposing to enter into such agreement in effect restricts wholesome cooperation and deprives both industry and the general public of its benefits.

This resolution held that the war had positively affected American capitalism by permitting cooperative combinations of producers and retailers to control output and prices. The role of the government, the Chamber concluded, should be to facilitate such productive arrangements, namely   

Resolution: “Price Fixing and Cost Accounting,” ibid., . George Peek, Apr. , , Box , , USCC Rec. Peek, who represented the WIB, read the letter from Baruch to the Chamber assembly. Resolution: “Industrial Cooperation,” Apr. , , Box , , USCC Rec. This language was repeated in the formal resolution that passed the Chamber. See, Dec. –, , Box , , USCC Rec.

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

through FTC oversight and Congress codifying “the fair-trade decisions of the American and British courts.” The U.S. antitrust tradition banned collusion among competing firms and other “unfair” business practices, but did not limit “the growth of companies that exploited economies of scale and scope to deliver products more efficiently than rivals.” European firms, on the other hand, cooperated in cartels, setting prices and allocating markets, often with the support of the government. “By setting minimum prices, [cartels] protected small firms against larger competitors, and by stabilizing markets, they kept the overall economy stable,” which was exactly what the Chamber resolved during its  reconstruction meeting. In yet another resolution, the Chamber made two pleas to Congress. First, it asked Congress to pass the Webb-Pomerene bill, which would permit “competitors to coordinate and cooperate in the development of foreign business.” Second, the Chamber wanted to reform domestic antitrust policy to permit combinations found “to prevent destructive competition, to prevent the sale of goods below cost, to protect the consumer from extortion; to permit industries to cooperate in eliminating needless waste.” Samuel Henry, a leader in the National Association of Retail Druggists and one of the most vocal proponents of fair trade legalization, suggested that the method to ensure fair competition required a uniform system of cost accounting. He explained that “a proper cost accounting system is the only safe basis for the conduct of any business, and the only effective restraint for ignorantly destructive competition” and suggested that this be a prerequisite for federal loans and FTC oversight. After all, leading FTC regulators, such as the former chairman Hurley, had already actively endorsed such a proposal. Thus, the Chamber should continue its lobbying efforts but also focus on influencing FTC administrators.  

  



Resolution: “Trade Marks and Copyright,” Apr. , , Box , , USCC Rec. Wyatt Wells, Antitrust and the Formation of the Postwar World (New York, ), . Wells demonstrates that in , leaders in the Antitrust Division of the U.S. Department of Justice attempted to impose their ideal of antitrust (i.e., decartelization) on the rest of the world, particularly Germany and Japan. He explains the rise of international cartels in the post–World War I era. Ibid., . Resolution: “Industrial Cooperation,” Dec. –, , Box , , USCC Rec. Resolution No : “Industrial Combinations,” Chamber Records, Box  (Dec. –, ), . This resolution came from the clearance committee and passed the Chamber’s general assembly. Samuel Henry, Dec. –, , Box , , USCC Rec.

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American Fair Trade

During the war years, the AFTL focused on collaboration with the Chamber of Commerce and its various war service committees, popularizing the themes of the “new competition” in both private self-regulation and public administration. World War I also galvanized the progressive economists who, like Brandeis and Eddy, sympathized with institutional reforms that might create more equitable forums for economic exchange. A confluence of new organizations, including the FTC, AFTL, USCC, and WIB, supported uniform cost accounting as being unequivocally the method to stem unfair trade practices and rationalize industries. *** Brandeis’s original vision of “regulated competition,” developed between  and , informed the governance strategies of both public and private organizations. In the American Fair Trade League, specialty producers vied to control largely unregulated markets in ordinary goods through private contracts and through Congressional lobbying for antitrust exemptions. The League came to adopt the progressive vision of administrative reform as a way to circumvent the Supreme Court’s use of antitrust law against trade associations and uniform price policies. AFTL “fair trade” legislation would have enumerated unfair trade practices, including loss-leader advertising and predatory pricing. While the Federal Trade Commission Act created an administrative agency empowered to determine the parameters of “unfair competition,” it remained unclear how the FTC would exercise its authority. The idea of regulated competition borrowed from European and domestic sources, attesting to the popularity of the “new competition” as an organizational force, but it remained unclear how the American adversarial system would adapt these new ideas to existing constitutional structures. The U.S. Chamber of Commerce emerged as an important intermediary between business firms and regulators, reflecting this historical moment’s pervasive optimism about the possibilities and limitations of public–private governance. The exigencies of war also helped popularize the “new competition” and the possibilities of administrative intervention in competitive markets. Yet the war also altered the original ideas of regulated competition. For Brandeis, managing competitive markets offered the mechanisms to Americanize European competition policy and achieve more equitable distribution of wealth, ownership, and opportunity; during wartime, however, those mechanisms were transformed to achieve different results, prioritizing efficiency and rationalization over equity and collective negotiation.

 Institutionalizing the “New Competition” Herbert Hoover and the Adaptation of Regulated Competition, –

The original conception of this legislation [the Sherman Act] seems to have been to maintain a great host of highly competitive units in every trade. By degrees we have been retreating from this notion because the competition it required became at times highly destructive. – Herbert Hoover ()

The economics and ideology of the American fair trade movement became suffused with the more widespread reconsideration of competition policy, which advocated what came to be known as the “new competition.” In the wake of experiments with a partially coordinated market economy during World War I, a distinctly American view of “new economics” emerged that embraced a greater role for government intervention in and coordination of the economy. Institutional economists called for the reconsideration of the efficacy and efficiency of free market competition, bringing them into direct conflict with antitrust policy. This “first great movement in law and economics” challenged the Supreme Court’s narrow interpretation of antitrust laws, which had effectively created a binary distinction between prices set either by market competition among firms or by a corporate hierarchy, wherein vertically integrated firms administered prices. The distinction was largely based on a neoclassical understanding of perfect competition as the alternative of 

Hovenkamp, “First Great Law and Economics Movement,” –; Barbara H. Fried, The Progressive Assault on Laissez Faire: Robert Hale and the First Law and Economics Movement (Cambridge, MA, ). On institutional economics as a school of thought, see Malcolm Rutherford, “Institutionalism between the Wars,” Journal of Economic Issues  (June ): –; Hodgson, Evolution of Institutional Economics.





American Fair Trade

monopoly. In contrast, a heterodox group of economists – the institutionalists – envisioned a system of cooperative capitalism, building on the edifice Louis Brandeis had helped erect, that managed production and consumption so as to maintain price stability, facilitate innovation, and ensure fair play among competitors. Increasingly business arrangements that had seemed anathema to antitrust law gained adherents under the moniker “new competition.” Although no one advocated the continuation of wartime economic policies, many prominent economists, business leaders, and regulators urged that the lessons of wartime government–business cooperation be sustained through peacetime. During the war, the War Industries Board and the Department of Commerce adopted many of the measures promulgated by the AFTL in the mid-s. These agencies extended the goals of managing competitive markets by creating local war services committees through existing trade associations – including the U.S. Chamber of Commerce – which monitored and enforced wartime price and output restrictions. At the close of the war, these committees were reformulated to confront the problems of inflation and production adjustment. The economic stabilization programs that brought together public and private regulation of domestic trade practices altered U.S. regulatory strategy and tactics. Herbert Hoover, who had served as the U.S. Food Administrator during the war, emerged as a leading advocate of these new fiscal and regulatory tools to manage the macroeconomy. Alongside him stood institutionalists, such as Wesley Mitchell and Edwin Seligman, prepared to propose new ways to mitigate business cycles by adapting the existing institutions of public–private governance. Implementing these new goals to manage the macroeconomy not only required strengthening administrative agencies’ regulatory capacities and enlisting the cooperation of often fractious trade associations, but also required approval from the Supreme Court. Commerce Secretary Hoover played an instrumental role in the expansion of both the Commerce Department and the FTC, layering his vision for managing competitive

 



William J. Barber, From New Era to New Deal: Herbert Hoover, the Economists, and American Economic Policy, – (New York, ), –. See also note , p. . Cuff, War Industries Board; Robert Himmelberg, The Origins of the National Recovery Administration: Business, Government, and the Trade Association Issue, –, nd ed. (New York, ). On Hoover’s relationship with Mitchell, see Walter Friedman, Fortune Tellers: The Story of America’s First Economic Forecasters (Princeton, NJ, ).

Institutionalizing the “New Competition”



markets on top of the framework for regulated competition. Although organizational capacity varied from industry to industry, the Chamber of Commerce helped organize compliance with recommended production, distribution, and retail management practices. Rather than acting as a roadblock to the burgeoning administrative state, the USCC helped shape it. This co-evolution of business and government regulatory capacity relied on new social science research institutes for statistical data collection and analysis. Rather than regulatory agencies retreating from their original progressive goals or trade associations remaining incoherent or unsuccessful, a process of institutional layering through the s bolstered the organizational capacity of both public and private institutions, with both refining and reorienting their goals. The original goals of the “new competition,” which included uniform cost accounting and standardized production and grading systems, became the basis for Hoover’s vision of managing the macroeconomy. The benefits that he sought from this system were not the same as those Brandeis envisioned, though the tactics often looked similar. Hoover believed that trade association “self-regulation” could rationalize industry practices, reducing waste in production and distribution and thereby improving efficiencies. His desire to improve private organizations required the expansion of administrative agencies. By the mid-s, trade association meetings began submitting their trade rules – which affected information-sharing practices, standardization recommendations, and sales policies – to the Department 



On Hoover as Commerce Secretary, see Hawley, “Herbert Hoover, the Commerce Secretariat,” –. Hawley also argues that the s were not an interlude between progressivism and the New Deal but rather the beginning of an important shift in regulatory policy away from classical economics. In this book, however, I distinguish between classical and neoclassical economics informing antitrust jurisprudence in an earlier period and present the s regulatory shifts as involving a more widespread and disparate reconsideration of neoclassical categories of antitrust. On the postwar return to normalcy in regulatory agencies, see G. Collum Davis, “The Transformation of the Federal Trade Commission, –,” Mississippi Valley Historical Review  (Dec. ): –. On the incoherence of trade associations, see Colin Gordon, New Deals: Business, Labor, and Politics in America, – (Cambridge, ), , . Gordon explains that New Deal legislation resulted from the “competitive anxieties of business interests” () and the systems created to manage cutthroat competition in the s. Ultimately, however, the framework for private regulation collapsed. On institutional layering and capacity-building, see Karen Orren and Stephen Skowronek, The Search for American Political Development (Cambridge, ); Margaret Weir, “When Does Politics Create Policy? The Organizational Politics of Change” in Rethinking Political Institutions: The Art of the State, eds. Ian Shapiro, Stephen Skowronek, and Daniel Galvin (New York, ); Carpenter, Forging Bureaucratic Autonomy.



American Fair Trade

of Commerce and the FTC for approval. The ultimate goal – to stabilize prices – was refined through the s implementation process, incorporating the preferences of businesspeople and of government regulators. By  the Supreme Court had substantially shifted its interpretation of antitrust jurisprudence, allowing for voluntary statistical information sharing that effectively sanctioned participating businesses to coordinate production and prices and to determine what constituted fair competition. With Brandeis on the bench, the Court expanded the legal boundaries for managed competition and both federal regulators and trade associations of private firms began codifying new industry rules. The FTC sponsored trade practice conferences to facilitate this movement and make permanent the new competition in American trade.

  :      As World War I came to a close, advocates of American fair trade had scored several victories through association organizing by industry or region, legislation creating the Federal Trade Commission, and litigation affirming certain mechanisms used to carry out cooperative pricing agreements and information sharing. While the American Fair Trade League’s initial campaign for federal legislation to legalize manufacturer-set price schedules had failed, its most prominent legal advocate, Louis Brandeis, had helped direct the formation and trajectory of the FTC, giving it not only an investigative mandate but also a regulatory role in determining what constituted “unfair competition.” With his appointment to the Supreme Court in , many commentators foresaw further victories for the “new competition” movement for producer, retailer, and worker associations collaborating to manage competitive markets. Yet, defining and prosecuting “unfair competition” proved an elusive goal, further impeded by the Court’s interventions to limit the FTC’s regulatory powers. Perhaps the most important component of ensuring fair trade 



“Brandeis Named for Highest Court,” St. Louis Dispatch, Jan. , , ; “Brandeis Faced Hard Fight for Supreme Court,” Detroit Free Press, Jan. , ,  (describing his “socialistic tendencies”); “Open New Line upon Brandeis: Senators to Look Up ‘Fair Trade’ Work,” Boston Globe, Mar. , , ; “Manufacturers Testify in the Brandeis Case,” Christian Science Monitor, Mar. , , ; “Senate Confirms Louis D. Brandeis,” Atlanta Constitution, June , , . See Federal Trade Commission v. Gratz,  U.S.  (), overruling an FTC determination of unfair competition as too “liberally construed” ( U.S. at ). See note , p. .

Institutionalizing the “New Competition”



practices, and its corollary of identifying unfair trade practices, became the development and implementation of uniform cost accounting. Regulated competition relied on standardized business information to facilitate the collection and dissemination of business statistics, processes which both government agencies and trade associations worked to institute through the s. Originally, President Wilson appointed Brandeis as a Commissioner of the FTC and, although Brandeis later gave his position to George Rublee, he made significant contributions to the initial direction of FTC activities. The second chairman of the FTC, Edward Hurley, built on Brandeis’s notion that regulating competitive markets depended on reliable cost information to locate predatory pricing. Hurley, who had been the president of the Illinois Manufacturers’ Association, endorsed cost accounting programs to be taught by trade associations. Although he held the chairmanship for only two years (–), Hurley popularized cost accounting practices by circulating over , cost accounting manuals through Congressional members to their constituents. Hurley and the FTC manual provided important correctives to conventional cost accounting practices, which had valued volume over other goals. In particular, the report urged producers and retailers to determine the costs and revenues of each product line and distribute the overhead expenses accordingly (i.e., to actuate product-line expense reports). Hurley continued Brandeis’s mission to rationalize independent proprietors’ bookkeeping through “an educational movement for better accounting methods.” This was the first step in building state capacity to effectively monitor and police trade practices and in establishing generalizable trade rules to operationalize antitrust law through administrative means, as opposed to strictly adversarial and costly litigation. When the Chamber of Commerce “Emergency and Reconstruction Congress” met in December , instituting uniform cost accounting  



Hurley sent out the FTC publication, Fundamentals of the Cost System (Washington, DC, ). See also Berk, Brandeis and Regulated Competition, –. Annual Report of the Federal Trade Commission (Washington, DC, ), . Hurley recounted: “As a fundamental basis for any successful development of such useful information as might be derived from corporation reports it was found that it would be necessary to bring about an improvement in the methods of accounting used by business corporations, particularly with respect to accurate and uniform methods of cost accounting. Only in this way would the Commission be able to secure comparable data in the reports from corporations authorized by law. The first step of the Commission, therefore, was to inaugurate an educational movement for better accounting methods.” Ibid.



American Fair Trade

as standard operating procedure was one of the most important planks in its platform for postwar readjustment and price stabilization. Another important goal was maintaining the industrial cooperation of the war years. By the close of World War I, the FTC had emerged as the nation’s cost accountant and each of the Chamber’s resolutions to spread accounting techniques involved FTC cooperation. Samuel Henry, a Chicago pharmacist who held leadership roles in the National Association of Retail Druggists and the AFTL, declared proper cost accounting systems to be the “only effective restraint for ignorantly destructive competition.” He praised Hurley as “an ardent advocate of a uniform system of accounting as applied to corporations engaged in interstate commerce.” The Chamber wanted Congress to impose mandatory cost accounting systems that would be submitted to the FTC for oversight, dissemination, and prosecution against destructive competition. A new conception of competition emerged from these discussions, neither nostalgic for classical political economy or laissez-faire constitutionalism, nor favoring the Court’s turn-of-the-century antitrust rulings that had created a dichotomy of free market competition and regulated monopolies. The Chamber of Commerce resolved that the methods by which to revise price schedules required uniform cost accounting across industries, which would simplify and promote more effective public supervision. The resolution stated: “Congress has recognized the principle that freedom of competition is not to be held more as a creed than freedom of contract, that competition may be undue and may result detrimentally to the public, and that it should, therefore, be subjected to regulations.” The Chamber resolution acknowledged the changing political economy of competition policy, relating it to the eclipse of common law rules of property and contract rights and to the ongoing reevaluation of the relationship between business and government. “Noteworthy is the recognition given by Congress to the idea that cooperation among competitors is lawful within defined limits. Such cooperation has been authorized in various lines of





Samuel Henry, “Resolution: Cost Accounting,” Dec. –, , Accession No. , Box , –, Chamber of Commerce of the United States Records, Hagley Museum and Library, Wilmington, Delaware (hereafter cited as USCC Rec.). Resolution, Apr. , , Box , , USCC Rec. Prior to delivering this resolution, Herbert E. Miles, a member of the U.S. Training Service of the Department of Labor, had endorsed government funding for industrial training schools, presumably to create the professional accountants necessary to institute uniform cost accounting throughout American industries. See also Goldthwaite H. Dorr, “Salvaging the War Machine,” Nation’s Business, June , .

Institutionalizing the “New Competition”



production and industry and may be subject to Governmental supervision.” Each Chamber resolution supporting cooperative price schemes called for legislation to allow the FTC to act as a monitoring agency and provide advance reviews of business contracts. The push for antitrust reform at the Chamber not only reflected satisfaction with the wartime experience of coordinated markets but also found encouragement in two recent Supreme Court rulings. While the Court maintained the per se illegality of any interfirm contracts or combinations affecting prices, it moved toward an “illegal in fact” interpretation of certain restraints of trade by loose combinations. “Illegal in fact” means that the Court will investigate the facts of the case to determine the reasonableness of the restraint, while “illegal at law” would enable the Court to strike down an agreement without factual investigation of its merits or consequences. Justice Brandeis helped orchestrate this shift in the Court’s antitrust jurisprudence, expanding the application of the Court’s “rule of reason.” In , the Court upheld the selfregulatory practices of the Chicago Board of Trade, which limited afterhours purchases of grains traded on its exchange to the price fixed at closing. The Department of Justice charged that such an agreement among members was sufficient evidence of an illegal restraint of trade, citing the leading antitrust case law that had created the dichotomy of pure market competition and regulated monopoly. Justice Brandeis, writing for the Court, held that Justice “made no attempt to show that the rule was designed to or that it had the effect of limiting the amount of grain shipped to Chicago, . . . or of raising or depressing prices; or of discriminating against any part of the public; or that it resulted in hardship to anyone.” In other words, Brandeis demanded that prosecution

  



Resolution, Apr. , . See “Price Fixing Agreements and the Sherman Act,” Indiana Law Journal  (Mar. ): –. Assistant Attorney General Carroll Todd cited the leading antitrust that relied on neoclassical economic analysis and enforced either perfect market competition or regulated monopoly, see: United States v. U.S. Steel,  F. ,  (); Standard Oil Co. v. United States,  U.S. , ,  (); Swift & Co. v. United States,  U.S. ,  (); United States v. Trans-Missouri Freight Association,  U.S. ,  (); Addyston Pipe Co. v. United States,  U.S. , ,  (); Loewe v. Lawlor,  U.S.  (). Board of Trade of the City of Chicago et al. v. United States,  U.S.  (), . The Court upheld the Board’s rule which had limited after-hours grain purchases to the closing bid price.

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American Fair Trade

show the effects of the restraints as would be required under the “rule of reason.” The legality of an agreement or regulation cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The truest test of legality is whether the restraint imposed is such as merely regulated and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition.

Thus, Brandeis urged the Court to reconsider its previous formulation of the rule of reason. The restraint imposed by the association, even though it explicitly fixed prices by association rules, reasonably regulated its market and did not adversely affect competition or the public. The following year the Court upheld Colgate & Company’s sales practice that dictated retail prices and services to its entire retail network. Much like the Dr. Miles Plan, which the Court had struck down as a per se violation of antitrust law, the Colgate Plan set retail price schedules according to time on the shelf. Colgate also informed its retailers and wholesalers that the company would refuse to deal with any business found in noncompliance. Writing for the lower circuit court, Judge Waddill had enforced the Colgate Plan, holding that no conspiracy or monopoly had been proven and that the goods remained in open competition with similar products. He concluded: “What the public is interested in is that only reasonable and fair prices shall be charged for what it buys, and it is not claimed that the defendant’s manner of conducting its business has otherwise resulted.” Although a slightly ambiguous decision, given the weakness of the indictment, the fair traders were more than ready to call it a victory. Aiding this interpretation, former Chief Justice Charles Evans Hughes, who had penned the Dr. Miles opinion creating the per se prohibition of contracts to set retail prices, had participated in the Colgate defense team. Additionally, Justice James McReynolds, who had represented the government against American Tobacco Company in  and served as  





Ibid. United States v. Colgate & Co.,  U.S.  (), enforcing the Colgate sales contracts that in effect established resale prices by threat of refusal to deal with retailers who sold at lower prices. Transcript of Record, Jan. , , U.S. Supreme Court Records and Briefs, –, –, available at The Making of Modern Law, Gale, Cengage Learning, Harvard University Library. Ibid., –.

Institutionalizing the “New Competition”



President Wilson’s Attorney General, wrote the Court’s opinion in Colgate. McReynolds embodied the Court’s old era of classical political economy, being both a trust-buster against monopolies and an ardent defender of laissez-faire economics, harkening back to the late nineteenth century when courts upheld resale price maintenance as enforcing property or contract rights. In the absence of any purpose to create or maintain a monopoly, the act does not restrict the long recognized right of trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal. And, of course, he may announce in advance the circumstances under which he will refuse to sell.

In turn, the Court seemed to encourage efforts by private businesses to regulate and control competition and prices. At each turn, the preoccupation with cooperative systems of competition came back to the necessity of uniform accounting procedures and standardized information sharing. Professor of Economics William F. Gephart, Dean of the School of Commerce and Finance at Washington University in St. Louis, addressed the Chamber regarding “What Is the Matter with the Retail Distribution Business?” According to Gephart, the modern system of retail distribution suffered from being preoccupied with the production process (i.e., factory cost accounts), rather than cultivating distribution networks between producer and retailer. The scientific management of the factory, however, could be applied to the distribution system and coordinating the two could eliminate problems of price and production fluctuations. Constructing and maintaining stable networks depended on manufacturers setting reasonable and predictable prices, which encouraged stable retail prices for brand-name and nationally advertised goods as well as for retail services. Gephart argued that destructive competition among manufacturers, like price cutting by



 



See Chapter . On McReynolds, see John M. Scheb II, “McReynolds, James Clark,” in The Oxford Companion to the Supreme Court of the United States, ed. Kermit Hall (Oxford, ), –. Colgate & Co.,  U.S. at . Ewald T. Grether, “Solidarity in the Distributive Trades in Relation to the Control of Price Competition,” Law and Contemporary Problems  (June ): –. See also William H. Spencer, “Recent Cases on Price Maintenance,” Journal of Political Economy  (Apr. ): –; Federal Trade Commission, Resale Price Maintenance, part II (Washington, DC, ). William F. Gephart, “What Is the Matter with the Retail Distribution Business?” Apr. , , Box , –, USCC Rec.

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American Fair Trade

retailers, resulted from inefficient business practices and “inherited political ideals” that wrongly prized unrestricted free competition over deliberative cooperation. His solution was uniform cost accounting to correct the inefficiencies within businesses and a new era of cooperation along the distribution chain facilitated by impartial rules and regulators. In his academic writings, he had explained that the function of the “fixed price system” was to combat the problem of price cutting, arguing that manufacturers must be able to refuse to deal with price-cutting retailers in order to protect the goodwill and reputation established through advertising and product quality. “The [cut-price] retailer thus reaps where he has not sown and may indeed do an injury to the producer of the article which is sold at a cut price if thereby the demand for it through the cheapening of the price is in part destroyed.” Nevertheless, the producer “is no philanthropist”; he does not fix retail prices to assure the small retailer of his existence or guarantee him fair profit. The producer wants to protect advertising investments, distribution networks’ stability, and quality assurances to consumers. After all, Gephart stated, “it is [neither] the advertising nor the price in which the consumer is chiefly interested. It is in getting as good as possible an article at as low as possible a price.” Stable price levels acted as a signal to consumers of the brand name’s quality. A fixed-price system, however, “would not result in a static condition in distribution.” Instead, changing production, distribution, and retail costs required a process of continued negotiation and revision of price schedules. Over a long weekend in mid-April, , the USCC gathered in Atlantic City for its annual meeting, at which business leaders discussed postwar adjustments, especially the boom in consumer demand. During the general assembly, Matthew Woll, president of the International Photo-Engravers Union and vice president of the American Federation of Labor, urged the continuation of negotiated price and production standards and argued that 



 



Ibid., –. Gephart argued that “the costs of competition in many cases outweigh the benefits secured.” He called for “a clear realization of the benefits which can come from a closer cooperation of business units and especially of a better relationship between Government and business.” William F. Gephart, “Economic and Legal Aspects of Fixed Prices,” Washington University Studies  (Apr. ): –. His  address to the Chamber largely drew from this publication.  Ibid., . Ibid., , . For recent economic literature on this phenomenon, see Elzinga and Mills, “Leegin and Procompetitive Resale Price Maintenance;” Julio Rotemberg, “Fair Pricing,” National Bureau of Economic Research Working Paper No.  (). Gephart, “Economic and Legal Aspects of Fixed Prices,” .

Institutionalizing the “New Competition”



these should also retain organized laborers’ seat at the table as they had during the war under the War Labor Board. “The war,” he said, “has demonstrated very clearly the importance of proper and efficient labor management and direction,” to which the audience gave applause. Just as the Chamber had embraced bringing the “practical engineer” into the science of management, Woll continued, USCC members should incorporate laborers into decisions on production improvements and negotiated wage adjustments. The alternative, according to Woll, a staunch anticommunist, might be “what Lenin and Trotsky are doing in Russia,” to which the Chamber replied with “hisses” and “cries of ‘No.’” Alluding to industrial courts, Woll prescribed a craft union idea of labor organization that worked well for the photo-engravers union, but he did not embrace a more widespread model of wage and hours rules that such a court might hand down. Subsequently, Woll published articles with the USCC monthly publication, Nation’s Business, urging members to embrace the open shop movement and to endorse arbitration and deliberative industrial democracy rather than accept the much-maligned strikes. If not, he warned, an industrial court might one day have “the power to control or to dominate” labor relations. Like the war services committees, the Chamber was divided into study groups, in which experts gave testimony, members debated, and resolutions were drafted and revised. At the Cost Accounting group, for example, J. Lee Nicholson, president of the National Cost Accountants’ Association, explained that the question of retail prices must include the costs of stocking and selling a good as well as the possibility of overall prices dropping. Balance sheets should reflect all overhead expenses and “also whether this balance sheet shows correctly the value of the material on hand and in process of manufacture.” Frank Wilbur Main, a

  



Matthew Woll, “Labor’s Attitude in Relation to Production,” Apr. , , Box , –, , USCC Rec. Ibid., . Matthew Woll, “Industry’s Eternal Triangle,” Nation’s Business, June , –. “We are opposed to the destruction of our conception of freedom, democracy and justice and the substitution of dictum of law for a relationship founded upon contractualism.” See also “Business to Take Stand on Labor,” Nation’s Business, July , ; “A Stand on Labor Principles,” Nation’s Business, Sept. , . On the AFL’s advocacy of “freedom of contract” as a legal strategy, see William Forbath, “The Shaping of the American Labor Movement,” Harvard Law Review  (Apr. ): –; Victoria Hattam, Labor Visions and State Power (Princeton, NJ, ). J. Lee Nicholson, “Accounting, Fundamentals of Business Success,” Apr. , , Box , , USCC Rec.

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American Fair Trade

certified public accountant and member of the Pennsylvania State Board of Examiners of Public Accountants, reiterated Nicholson’s claim that the fixed-price system required continuous evaluation of costs as well as of general price levels. Given the fluctuations of price levels, Main concluded that a simple formula basing retail prices on a “cost-plus basis” – that is, costs of production plus a certain percent profit – would not work. Determining price schedules required constant deliberation and therefore the cost accountants favored accounting practices and pricing systems that followed overall price trends. In addition to the professional accountants and university professors, several industry leaders testified on their own industry’s experience implementing uniform cost accounting methods. Gideon D. Ellyson, vice president of the American Association of Pharmaceutical Chemists and owner of Standard Chemical Company, stated that the pharmaceutical trade groups had already established uniform cost accounting methods. He urged the Chamber to pass a resolution commending the accounting methods implemented by Commissioner Hurley at the FTC. During the  American Pharmaceutical Association meeting, several professors from the Wharton School of Business Science at the University of Pennsylvania delivered instructions on the fundamentals of cost accounting for manufacturers and retailers. Members were then encouraged to contact their state and federal representatives in support of pharmaceutical price maintenance legislation. Retail druggists relied on profit margins in both therapeutics (such as tonics, elixirs, and compounded medicines) and brand-name toiletries (such as feminine products, razor blades and shaving creams, and toothpastes). The Colgate ruling had the effect of encouraging both intra- and interfirm cost accounting – allowing manufacturers to implement and enforce price schedules, which ensured retailer profits and facilitated non-price competition on services and advertising.    

Gideon D. Ellyson, “Comment: Pharmaceutical Cost Accounting,” Apr. , , Box , –, USCC Rec. For a program of this convention with relevant cost accounting talks by Wharton professors, see Practical Druggist and Pharmaceutical Review  (July ): . Ibid., . Ibid., . This advertisement from the Colgate & Co. exemplifies the firm’s continued campaign for fair trade prices. The ad reads: “‘The Colgate Plan’ is completely vindicated by the unanimous decision of the United States Supreme Court” (emphasis in original). The Court “sustained the legality of ‘The Colgate Plan’ for insuring fair prices.” The ad continues: “More than forty years ago the Company determined, so far as in its power lay, to insure a fair and reasonable profit to dealers in its products. The policy was then

Institutionalizing the “New Competition”



Following Ellyson’s comments, Nathan B. Williams, associate counsel for the National Association of Manufacturers, recounted the successful tactics used in the printing industry. Government participation in the rulemaking procedure of the artisanal printers’ trade association, the United Typothetae of America (UTA), had garnered approval from FTC regulators, especially then-chairman William Hurley. The United Typothetae of America, an organization of some , employing printers, held a cost congress a good many years ago and developed a cost accounting system for printing establishments. That cost accounting system was submitted to the government at its suggestion, and a formal resolution was passed by the Commission endorsing it as being distinctly adapted to the uses of printers.

Gerald Berk, a political scientist writing in , conducted a study of the printing industry’s use of collaborative managerial practices. His work explains how the printing industry overcame its overcapacity problem by protecting artisanal techniques through standardized production grading and pricing structures. The printers were a well-studied group in their own time, too, offering an exemplary study in trade association selfregulation and cooperation with federal regulators. Within the UTA, each firm agreed to abide by the association’s instructions for general cost accounting. This required that proprietors submit information – including departmental cost accounts, per-product cost assessments, and overhead estimates – to the association. These statistics were intended to benchmark changes over time, reduce waste, and maximize profitable services. Ultimately, Berk concludes, the collaborative process provided many consumer and industry benefits. The association created an artisanal community that shared methods to enhance specialized printing methods through improved machinery, such as high-speed electric presses, the automatic paper feed, and multicolor and two-sided printing.

  



adopted, and is still followed, of refusing to sell to those whose resale prices are unfair. No price agreements are demanded, but no goods are sold to those whose selling methods are injurious to the trade.” Nathan B. Williams, “Comment: Printers’ Cost Accounting,” Apr. , , Box , , USCC Rec. Berk, Brandeis and Regulated Competition, –. See “The Standardization of Paper,” Pacific Printer  (Aug. ), ; “U.T.A. and Federal Trade Commission,” Pacific Printer  (Aug. ), ; “Complaint against U.T.A.,” American Printer and Lithographer (Mar. , ), –. See also Federal Trade Commission, Annual Report of the FTC (Washington, DC, ), . Berk, Brandeis and Regulated Competition, .

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American Fair Trade

Edward A. Filene, the renowned Boston retailer, also endorsed standardized cost accounting methods, to which he attributed his company’s great successes. He had inherited Filene’s & Sons, a women’s fashion store, and by  had transformed it into the largest specialty store in the world. He pioneered the Automatic Price System, a fixed schedule by which prices declined over time in order to accelerate stock turnover. In , he innovated in market segmentation by opening Filene’s Basement below the main store to sell off unsold items to modest-income customers. Filene capitalized on organized quantity buying and selling and he believed that independent proprietors organized into local cooperatives could do so as well. On April , , Filene proposed that in order to preserve the small neighborhood store, “the small store owner will himself voluntarily combine into a chain” so as to compete with the increasingly ubiquitous corporate chain stores. The local cooperatives “will have retained all the desirable features of neighborliness with a personal touch and a personal approach of the proprietor to the customer.” In fact, he predicted that the “department store of the future” would replicate such “neighborliness” and worried that his own successful stores might become too rigid in their own practices. Such local cooperatives, therefore, would not suppress competition, but rather would preserve smaller concerns while enhancing consumer choice. Filene’s comptroller, Austin C. Benton, elaborated on Filene’s claim that the standalone independent store could not compete with the national or regional chain stores. Like Brandeis, both Filene and Benton believed that it was poor cost accounting and not simply the greater efficiency of chain and department stores that explained declining profits in the wholesale and retail industries. Benton read from an article by Carl Snyder, a statistician at the Federal Reserve Bank of New York, published in that month’s issue of McClure’s. “Who Is Profiteering?” addressed public concern over rising postwar retail prices and argued that general inflation of prices had, in fact, decreased retailers’ profit per dollar of total sales. Snyder concluded that retailers must increase their sales volume     

William Leach, Land of Desire: Merchants, Power and the Rise of a New American Culture (New York, ); Jacobs, Pocketbook Politics, , . Edward A. Filene, “Common Interest in Improved Distribution Methods,” Apr. , , Box , –, , USCC Rec. Ibid., . Austin C. Benton, “A Plea for Standardized Retail Expense Accounting,” Apr. , , Box , –, USCC Rec. Carl Snyder, “Who Is Profiteering?” McClure’s  (Mar./Apr. ), –.

Institutionalizing the “New Competition”



through higher product turnover because intense price competition necessarily entailed lower profit margins per unit sold – a conclusion that Benton and Filene probably shared. As inflation affected all industries, especially smaller retailers who felt compelled to keep prices low and stable but had less savings or available credit, the necessity of accurate cost accounting proved increasingly pressing. Filene and Benton thought this could be achieved through association education campaigns, echoing Hurley’s earlier sentiments. Benton, a Harvard graduate, argued that a triumvirate of high prices, increased retail competition, and new federal income tax laws had “compelled . . . [retailers] to give more attention to the cost of retail distribution.” He explained the results of a study conducted by the Harvard Bureau of Business Research, surveying the expense reports of  retail grocers in leading American cities. Benton read this statement by the Bureau’s Director, Melvyn T. Copeland: We have found in the course of our investigations many instances of merchants who do not know what it costs them to do business. We frequently have merchants tell us specifically that they do not know what their total expense is. In the retail grocery trade and retail drug trade, I judge that probably % of the storekeepers do not take an annual inventory. Without such an inventory a merchant cannot know whether he is losing money or not.

Benton and his colleagues agreed that informal accounting methods would no longer suffice in the new era of the s. As he described it, retailers had once simply taken money from the cash drawer to pay wages and restock shelves; however, current conditions demanded expense sheets to calculate tax and credit accounts as well as to gauge the success or failure of new products. Moreover, information sharing within an industry and along the distribution chain – the second goal of uniform cost accounting – required standardized methods of collecting and disseminating that information.

 ..       Chamber president Joseph M. Defrees introduced Herbert Hoover as “a man who personifies the spirit of the Chamber.” Indeed, there may have been no one who espoused greater enthusiasm than Hoover did for  

 Benton, “A Plea for Standardized Retail,” . Ibid. See Hoover’s address, Apr. , , Box , –, , USCC Rec.

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American Fair Trade

private business organizations and self-regulation through trade associations. Like the Chamber itself, he maintained a belief that government could aid business through statistical research, like that begun during the war, but he also distrusted unbridled power, whether in government or in business. It was in the balancing of those sometimes conflicting ideas that Hoover’s “associationalism” took form, ultimately adapting the institutional structures of regulated competition to accommodate his vision of administrative agencies acting as information clearinghouses and facilitating trade association rule-making in its various forms. An engineer by training, Hoover wanted to apply his knowledge of scientific management to the macroeconomic problems of postwar adjustment. In this way, Hooverian associationalism differentiated itself from Brandeisian regulated competition, though using similar mechanisms to achieve divergent ends. Taking the stage to address the Chamber’s general assembly meeting, in , Hoover confronted the problem of the – economic boom and bust. He explained that while the United States was currently experiencing a postwar readjustment– characterized in  by rising unemployment and a decline in gross national product – it was faring better than its European counterparts, which now looked to the United States for gold and dollars. Similar to Snyder’s analysis of ’s rising prices, Hoover recognized that wartime rationing had created pent-up demand, especially in the construction industry. Likewise, price ceilings had held prices below market-clearing levels. Prices were bid up to speculative levels through  and then crashed as overproduction flooded the market. Hoover argued that although “the national government cannot go into the business of building[,] . . . a voluntary movement to secure the development of more uniform building codes and the standardization of certain materials” might control costs and fluctuations in production despite shifts in demand. Hoover the engineer saw the  recession as a management problem exacerbated by uncoordinated





Ibid., . After the war, European countries needed U.S. dollars to service their wartime debts and reparations to the U.S. See also Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, – (New York, ), –. Although monetarist explanations were not widely used at the time, it should be noted that in , in order to restore gold reserves, the U.S. Fed increased interest rates to attract gold inflows, which also led to a contraction of the money supply and the cooling of the  speculative boom in prices. Unemployment reached nearly  percent. See U.S. Department of Commerce Bureau of the Census, Historical Statistics of the United States: Colonial Times to  (Washington, DC, ), , , , . Herbert Hoover, address to USCC, Apr. , , Box , , USCC Rec.

Institutionalizing the “New Competition”



competitive markets. The solution was information sharing to facilitate better management practices through government oversight. Hoover explained to the Chamber assembly: I believe there has been a great underestimation as to the potential importance to commerce and industry in this connection of an adequate service of statistics. I believe that the stability and soundness of business can be greatly enhanced and that vicious speculation can be curtailed by a more adequate information service maintained by the government.

More timely and accurate information regarding production and consumption, according to Hoover, might not only improve building, in this example, but also stave off business cycles of boom and bust. Hoover boasted extensive knowledge and experience in coordinating private businesses for larger public purposes. At the time of his first address to the Chamber, in September , he had already organized the Commission for Relief in Belgium and joined President Wilson’s domestic wartime efforts as the U.S. Food Administrator. He had coordinated domestic food production and conservation with astounding success. After the war, in July , he established the American Relief Administration, a nonprofit that fed approximately  million people in twenty-one countries during European reconstruction efforts. One month prior to Hoover’s visit to the Chamber in April , President Warren G. Harding had appointed him to his cabinet as Secretary of Commerce, a post he held until he declared his candidacy for the presidency of the United States in early . As Secretary of Commerce, Hoover wanted to expand on the types of regulatory design that he had used during his wartime service. He was not simply an advocate of voluntarism, nor could he be characterized as endorsing laissez-faire economic policy. While serving as President Wilson’s wartime Food Administrator, he met Louis Brandeis, who described him as “the biggest figure injected into Washington life by the war.” They discussed war preparation and, in , Hoover brought Brandeis’s brother, Alfred, into the administration as a special assistant. Hoover

 



Ibid. Herbert Hoover, address to USCC National Council, Sept. , , Box , –, USCC Rec. See also George I. Gay and H. H. Fisher, Public Relations of the Commission for Relief in Belgium: Documents (Palo Alto, CA, ). Brandeis to Norman Hapgood, July , , in Letters of Louis D. Brandeis (hereafter Letters of LDB), eds. Melvin I. Urofsky and David Levy (Albany, NY, ), :. See also Mason, Brandeis, ; Strum, Brandeis, .

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American Fair Trade

had worked with the president and Attorney General Thomas Gregory to craft legislation exempting wartime service efforts from antitrust prosecution. According to a leading Hoover scholar, “Secretary Hoover embraced the strand of postwar managerialism that drew on the war system’s machinery for standardization, statistical analysis, and conflict resolution.” His “vision of an ‘associative state’” involved “scientific rationalization and social engineering without sacrificing . . . individual effort, ‘grassroots’ involvement, and private enterprise.” These goals depended upon trade associations, including agricultural and labor organizations, partnering with both professional experts and government bureaus to coordinate production methods, eliminate waste, and – ultimately – stabilize price levels. Within his first year as Secretary of Commerce, Hoover headed two major initiatives – publication of the Survey of Current Business and coordination of the President’s Conference on Unemployment – both of which institutionalized new social science research methods as guiding principles for businesspeople and regulators to manage markets. By August, the Department of Commerce launched its monthly publication of the Survey, providing information on changes in wholesale and retail prices, total production outputs by sector, and general price trends. Hoover’s Advisory Committee on Statistics, a group of academic economists and regulators, compiled tables on current trends from standardized surveys collected from firms across the country. On that committee, Wesley C. Mitchell acted as leading economic advisor to Hoover; both men envisioned a system of disseminating business information so as to foster rational planning by businessmen and, therefore, promote

   

Ellis W. Hawley, “Herbert Hoover and the Sherman Act, –: An Early Phase of a Continuing Issue,” Iowa Law Review  (July ): –, . Hawley, “Herbert Hoover, the Commerce Secretariat,” . “Country’s Business Continues to Increase,” Wall Street Journal, Dec. , , . Barber, New Era to New Deal, . “One of his first acts as secretary of commerce was to appoint an Advisory Committee on Statistics, with [Wesley C.] Mitchell as one of its members. Others invited to join this group were Edwin R. A. Seligman ([Professor of Economics] Columbia University), Allyn A. Young ([Professor of Economics] Harvard), Walter F. Willcox ([Professor of Economics and Statistics] Cornell), Carroll W. Doten ([Professor of Economics] Massachusetts Institute of Technology), Edwin F. Gay (then president of the New York Evening Post, who had formerly served as the first dean of the Harvard Business School), and William S. Rossiter (formerly the head of the U.S. Census Bureau).” On the Advisory Committee, see also Michael Alan Bernstein, A Perilous Progress: Economists and Public Purpose in Twentieth-Century America (Princeton, NJ, ), –.

Institutionalizing the “New Competition”



macroeconomic stabilization. That Hoover turned to Mitchell is no coincidence. Mitchell’s work studying the history of modern business cycles had earned him a reputation as an expert in statistical analysis and business management, which would prove critical in negotiations with businesspeople and regulators. While Hoover’s vision for the Department of Commerce gained support from the business community and his economic advisors, not all regulators agreed with his plan for managing competitive markets. According to Attorney General Harry M. Daugherty, also a Harding appointee, Hoover’s Survey came dangerously close to those tactics used by private firms to facilitate price-setting collusion, which the Supreme Court had ruled to be an antitrust violation. Hoover, however, argued that trade data collected and disseminated only by the Department of Commerce – that is, not through private trade associations – provided a public service. The published data did not identify individual firms or trade disputes, which fell under the jurisdiction of the Department of Justice. Nevertheless, under Hoover’s leadership, the Department of Commerce continued to expand its administrative jurisdiction, encroaching on the Department of Justice and the Federal Trade Commission. Hoover and his staff remained committed to the goal of creating a public authority to oversee trade negotiations between firms and among trade association members in order to avoid costly litigation and bad publicity. Negotiations between Hoover and Daugherty received widespread public attention in , as it seemed the fate of the Hoover’s entire system of administrative governance hung in the balance. The immediacy of postwar economic challenges instilled a sense of urgency in Hoover and his Advisory Committee, despite resistance from



 

Herbert Hoover to Wesley Mitchell, July , , and Mitchell to Hoover, Aug. , , Herbert Hoover Commerce Papers at the Herbert Hoover Presidential Library (hereafter HHP), Box , Folder: “Mitchell, Wesley.” See Jeff Biddle, “Social Science and the Making of Social Policy: Wesley Mitchell’s Vision,” in The Economic Mind in America: Essays in the History of American Economics, ed. Malcolm Rutherford (New York, ), –, . See also Hodgson, The Evolution of Institutional Economics, . Barber, New Era to New Deal, –. See Correspondence between Herbert Hoover Secretary of the Department of Commerce and Hon. Harry M. Daugherty, Attorney General of the United States upon the Activities of Trade Associations (Jacksonville, FL, ), published by the Southern Wholesale Grocers Association; Hearings Before the Select Committee on the Investigation of the Attorney General of the United States Senate, S. Res. , th Cong. (Washington, DC, ), : –. See also Himmelberg, Origins, –.

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American Fair Trade

the Department of Justice. Adjustment away from the wartime economy sent a formidable shock through the U.S. economy, especially the reentry of soldiers into the labor market. In , the civilian labor force increased by . million people (or .%), wages declined, and peacetime weakened labor unions’ bargaining power as employers hired more workers overall. Moreover, wartime price inflation had created an expectation of postwar deflation. Just as Hoover published his first Survey, President Harding announced plans for a conference to address the problem of rising unemployment. He intended it to create permanent structures to mitigate business cycle downturns that created unemployment. Hoover coordinated Harding’s Conference on Unemployment, which convened over  businesspeople at the White House to discuss the volume and distribution of unemployment. The Department of Commerce Advisory Committee on Statistics, staffed by the leading institutional economists in academia, helped lead the assembled representatives of manufacturers, 









See Joseph A. McCartin, Labor’s Great War: The Struggle for Industrial Democracy and the Origins of Modern American Labor Relations, – (Chapel Hill, NC, ), –, . J. R. Vernon, “The – Deflation: The Role of Aggregate Supply,” Economic Inquiry , no.  (): –, . Vernon argues that the sharp deflation in prices and decline in real product “was caused by a decline in aggregate demand combined with an increase in aggregate supply.” For information on the month-long estimates from January  to July , see “US Business Cycle Expansions and Contractions, National Bureau of Economic Research,” www.nber.org/cycles/cyclesmain.html. “President to Call a Conference Soon on Unemployment; Harding Wants Inquiry to Find Remedies for the Situation, Hoover Announces. Scope Will Be National: Government, Capital and Labor Will Have Representation in the Deliberations,” New York Times, Aug. , , . The article estimated that there were approximately  million unemployed Americans. “Permanent Employment Policy Is Harding’s Aim,” Washington Post, Sept. , , ; Henry Seager, “Income in the United States: Its Amount and Distribution, –,” Political Science Quarterly  (Jan. ): . See also “Business Cycles and Unemployment,” in President’s Conference on Unemployment (New York, ). Institutionalist economics refers to a heterodox strand of the economics discipline that emphasized how legal and political institutions shaped economic outcomes. Barber, New Era to New Deal, , at fn. : “There was considerable overlap between the membership of this committee and the Advisory Committee on Economic Statistics, which Hoover had appointed the preceding March. Holdovers included Mitchell, Seligman, Young, Willcox, Doten, Gay, and Rossiter.” For a complete list, see “Harding Names  on Unemployment: Hoover, Chosen Chairman, Announces Conference Will Begin Work on Monday. Advisory Committee of : Experts Are Now Preparing Data and Program for the Meetings,” New York Times, Sept. , , . Other members of the Economic Advisory Committee to the President’s Conference on Unemployment included John B. Andrews (Executive Secretary of the American Association for Labor

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labor groups, and trade associations through the deliberations. The conference embraced Hoover’s vision of voluntary action coordinated by the federal government. In this case, however, it would be state and local governments partnering with private firms to stabilize prices and unemployment. Ultimately, the conference recommended the use of public works projects to accelerate the upturn in the business cycle – an important minimum goal of Mitchell’s. Public funds were designated for “productive” commercial purposes, such as construction projects and highway work, and not as direct payments of unemployment relief. While the states were urged to enact countercyclical public spending, the federal government did not contribute funding. The President and Secretary Hoover argued that “through mobilization of the fine cooperative action of our manufacturers and employers, of our public bodies and local authorities,” existing governing institutions could avoid







Legislation), George Barnett (Professor of Statistics, The Johns Hopkins University), E. S. Bradford (statistician), Bailey B. Burritt (Executive Secretary of the Association for Improving the Condition of the Poor, New York), Davis R. Dower (Professor of Economics and Statistics, Massachusetts Institute of Technology), Clyde L. King (Professor of Political Science, University of Pennsylvania), Samuel McCune Lindsay (Professor of Social Legislation, Columbia University, and Chairman of the National Child Labor Commission), Henry R. Seager (Professor of Economics, Columbia University), Leo Wolman (New School for Social Research), Samuel A. Lewisohn (New York banker), Otto T. Mallery (member of the Pennsylvania State Industrial Board), and Sanford E. Thompson (Boston industrial engineer). See also “Hoover Would Limit Employment Parley,” New York Times, Aug. , , ; Guy Alchon, The Invisible Hand of Planning: Capitalism, Social Science, and the State in the s (Princeton, NJ, ). Barber, New Era to New Deal, . Both Samuel Gompers (president, American Federation of Labor) and John Lewis (president, United Mine Workers) as well as others represented labor unions. The Chamber of Commerce was represented by former president Julius Barnes and current president William Defrees. See Wesley Mitchell, “Tentative Plan of Investigation and Report” (c. Feb. ), Commerce Papers, Unemployment, HHP, Box , recommending “long range planning of public works” to address problems of unemployment. See also “Harding Appeals for Aid of States on Unemployment,” New York Times, Oct. , , . There was discussion of a federal bond issue to finance public works programs, in addition to offering federal services as a clearinghouse for business information. “Would Spur Public Works to Aid Idle, Committee of Conference on Unemployment Believes Funds Are Available,” Washington Post, Sept. , , ; “To Meet Needs of Unemployed,” Los Angeles Times, Sept. , , . See also “Engineers Endorse Hoover Work Plan,” New York Times, Sept. , , . The American Engineering Council, an executive body representing the American Society of Mechanical Engineers and the Federated American Engineering Society, provided the Department of Commerce with data compiled by its Committee on the Elimination of Waste in Industry. Edward Eyre Hunt, a member of the Federation’s Committee, attended the President’s Conference on Unemployment to present this data and unemployment measurements in “metal trades, boots and shoes, clothing and printing industries.”

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American Fair Trade

expanding the “paternalism” of the federal government. Such was the watchword to protect the dual federalism system, which allowed states to retain authority over corporate law, insurance policies, and municipal tax structures. Indeed, between  and , state and local government provided approximately  percent of public spending outlays, which the federal government supported by exempting state and municipal bonds from income taxes. This system formed the basis of fiscal stabilization plans throughout Hoover’s tenure as Commerce Secretary and into his presidency. While Hoover might have liked to include monetary policy, alongside his fiscal recommendations, in his macrostabilization plans, the Federal Reserve was sufficiently insulated from the political branches to safeguard it from Hoover – or Harding, for that matter – influencing its policies on interest rates. Hoover failed to gain cooperation from Federal Reserve members, especially Chairman Benjamin Strong (governor of the New York Federal Reserve Bank), to use the Fed to manipulate market prices; for example, by reducing the discount rates for member banks and thereby promoting cheaper credit, the Fed could encourage increased prices, greater imports, and ultimately gold outflows. Despite the limited federal role, the conference was not a return to business as usual. Publication of the Survey, the conference itself, and the growing administrative apparatus signaled a new role for the federal government in managing interstate commerce and for social science research on the behavior of markets. The conference produced a new agenda for economic stabilization that embraced institutionalist economics as a guiding paradigm. New social science research on the theory of business cycles, like the preceding years’ Chamber of Commerce deliberations, influenced proposals to reverse the recession and prevent future   



“President Opens Conference to Aid the Unemployed,” New York Times, Sept. , , . Barber, New Era to New Deal, –. Ibid., –. Two other alternatives existed to alter monetary policy and thereby price levels. The Fed could change banks’ reserve ratios, the amount required in savings to secure bank lending. Raising the reserve rate would shrink the capital available for lending. Secondly, by , the Federal Reserve banks had experimented with buying and selling government securities, known as open market operations. Reserve banks would buy or sell securities to cover their own operating expenses. Buying securities from member banks injects money into the economy, whereas selling them does the inverse. In the case of the former, member banks placed less money in Fed coffers and increased their lending, creating more money circulating in the economy. See “Review of the Month,” Federal Reserve Bulletin  (May ), –. “Guesswork Blamed for Business Slump, Unemployment Conference Experts Would Make Accurate Information Available,” New York Times, Oct. , , .

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downturns. The conference relied on data compiled by the National Bureau of Economic Research, the social science research agency founded by Wesley Mitchell, who also chaired the conference committee on unemployment statistics. The conference’s recommendations reflected the ideas espoused by Mitchell, Hoover, and the institutionalists; namely, that uncoordinated economic activities could lead to problematic social consequences, such as unemployment, for which the solution was government oversight and coordination of private sector business decisions. The conference “emergency program” envisioned public and private cooperation to quickly stem unemployment through “new competition” practices, such as cooperative efforts to lower consumer prices to pre-war levels and to facilitate private sector home-building and public construction projects. With fiscal tools at his disposal, Hoover positioned trade associations to serve as intermediaries between public regulators and private firms, ostensibly to carry out the goals of stabilizing prices and encouraging more construction projects. Questions in a survey circulated to trade associations at the unemployment conference included: how businesses planned long-term projects to secure lower prices; whether they offered unemployment insurance for workers; whether they used statistical information on business conditions; whether they offered part-time employment; and, finally, “through what channels can this study of unemployment and business cycles be of most service to your members?” As in World War I domestic planning efforts, municipalities were responsible for assembling emergency committees to carry out plans for relief, beginning with public employment agencies identifying citizens looking for work. Harding identified “the greatest area for immediate relief of unemployment [as] the



  

“President Opens Conference,” . The committees and chairmen included: unemployment statistics, Wesley Mitchell; employment agencies and registration, Henry R. Seager; emergency state and municipal measures and public works, Otto T. Mallory; emergency measures by manufacturers, Gordon Lee; emergency measures in transportation, Charles P. Neill; emergency measures in construction, John M. Gries; emergency measures in mining, David L. Wing; emergency measures in shipping, E. S. Gregg and R. A. Lundquist; public hearings, John B. Andrews. On September , committee chairmen presented suggestions for emergency relief. “Adjourns Till October , but Committees to Work,” Washington Post, Sept. , , ; “Committees at Work to Relieve Unemployment,” Chicago Daily Tribune, Sept. , , . On Hoover and Mitchell, see also Friedman, Fortune Tellers. “Adopts Program for Quick Relief of Unemployment,” New York Times, Oct. , , . Questionnaire Sent to Trade Assn (Apr. , ), Commerce Papers, HHP, Box .

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construction industry.” Though the administration preferred private construction projects, it also endorsed public works projects for roads, sewage, and public buildings such as schools. For Hoover, like Mitchell and his cohort of institutional economists, the government’s proper role during downturns in the business cycle was countercyclical spending. By , Hoover argued: “We should do all our government works in times of depression, thereby providing greater continuity of employment, and contributing toward planing [sic] out the valleys of depression and levelling [sic] the peaks of booms.” In addition, both public and private employers were urged to reduce hours and days per week in order to employ more people. Likewise, manufacturers, wholesalers, and retailers were encouraged to cut prices in order to reverse wartime inflation. During the war, Mitchell had envisioned the nonpartisan NBER to provide serviceable social science data for both public and private management purposes and by  he felt secure that this institution would survive him. The accumulation and analysis of such knowledge, Mitchell argued, required permanent government institutions to support social science research and affect public policy outcomes. In , Mitchell, having hired quantitative economists, statistical calculators, and support staff, assumed the role of director of research priorities. There was a great deal of overlap between the memberships of the Advisory Committee and the NBER. The Bureau’s stated purpose was the study of national income, which Mitchell   



  

“Adopts Program for Quick Relief of Unemployment,” . Hoover, Address to the USCC General Assembly, May , , Box , , USCC Rec. Arthur Sears Henning, “Construction Work Is Urged for Idle Army,” Chicago Daily Tribune, Oct. , , ; Arthur Sears Henning, “Building Would Give Work to Millions,” Los Angeles Times, Oct. , , . “Favors Price Cuts in All Industries to Aid Unemployment,” New York Times, Sept. , , ; Harry N. Price, “Reports on Job Plan,” Washington Post, Oct. , , , urging passage of public works programs to relieve unemployment and “price readjustment”; “Important Job Is Cleaned Up,” Los Angeles Times, Oct. , , ; “The Unemployment Conference,” Outlook, Oct. , , . N. I. Stone, “The Beginnings of the National Bureau of Economic Research,” in The National Bureau’s First Quarter Century, ed. Wesley Mitchell (New York, ). Wesley C. Mitchell, Business Cycles, –. See also Biddle, “Social Science,” . The overlap between the NBER’s original board of directors and the Advisory Committee included Mitchell, Edwin Gay, John Commons, and Allyn Young. The NBER also established several institutional affiliations, which included private trade associations – such as the American Economic Association, American Statistical Association, American Engineering Council, American Bankers Association, American Federation of Labor, and American Federal Farm Bureau – and the following universities: Chicago, Columbia, Harvard, Wisconsin, and Yale. See Gay to Hoover (Oct. , ), Commerce Papers, HHP, Box . See also Bernstein, Perilous Progress, , n..

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

supplemented with business-cycle macroeconomics. The NBER provided the president’s unemployment conference with technical data and scientific objectivity that fulfilled Mitchell’s desire to see the Bureau actively affecting business-cycle downturns by influencing policymaking priorities. Hoover declined to join the NBER board, but aided Mitchell in soliciting donations from the Russell Sage Foundation and the Carnegie Corporation. Mitchell explained to the Chamber of Commerce general assembly his ideas on business cycle theory. “Business cycle is a high-brow term which is used to indicate simply the ebb and flow which experience has taught us to expect in business affairs.” Luckily, he argued, the crisis of  had not created the financial turmoil experienced during the financial panics of  or , when banks stopped lending and employers laid off workers, “because we as a nation have learned how to control this most threatening of the phases of the business cycle.” As his work on the business cycle committee at the president’s conference – along with Hoover, Owen Young (chairman of General Electric), and Joseph Defrees (president of the Chamber of Commerce) – demonstrated: The best service Government can render is to collect the necessary information to show us what the present situation in business is, what current trends are, to collect comparatively simple statistics from a very wide circle of industries, to put it in effective form and then make use of it for the business public.

The Bureau’s statistical services required voluntary participation from private firms and trade associations; they, in turn, gained current and forecasting information.

 “ ”       A founding member of the institutional economics school of thought, Mitchell was perhaps the best person to reach out to the Chamber and explain not only the firm-level benefits but also the macroeconomic benefits of cooperative action. His book, Business Cycles (), had famously explained economic downturns as the result of endogenous   



Biddle, “Social Science,” ; Alchon, Invisible Hand of Planning, . Biddle, “Social Science,” ; Alchon, Invisible Hand of Planning, –. Edwin Gay to Hoover (Dec. , ), Commerce Papers, HHP, Box ; E. E. Hunt to Henry Pritchett (Apr. , ), Commerce Papers, HHP, Box ; Hunt to Pritchett (Feb. , ), Commerce Papers, HHP, Box .   Mitchell, May , , Box , , USCC Rec. Ibid., . Ibid., .

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shocks that reverberated throughout the economy. First, he categorized the variables that determine costs, revenue, and of course profits; next, he conducted empirical work to explain the behavior of each variable through the stages of a cycle. Mitchell’s study concluded that “during the revivals prices of labor rise less than prices of commodities.” In light of this hypothesis of sticky prices, Mitchell supported private and public unemployment insurance programs to protect workers during economic downturns – a point on which not all conference participants would agree – as well as cooperative efforts to keep retail prices stable. From its outset, the institutionalist movement in economics was wedded to government and business relations. The term “institutionalist” first emerged at the  American Economic Association conference directly following World War I. Walton Hamilton is credited with coining the term, though he was involved in an ongoing conversation regarding the direction of the discipline of economics and economic theory and its relation to postwar economic regulation. At the small, one-day conference, five panels convened to discuss various aspects of postwar recovery, including monetary stability, maintenance of peace, price-fixing during peacetime, and agricultural policies. Hamilton’s paper, which appeared in the following year’s American Economic Review, surveyed the state of the discipline and called for revisions to better the forthcoming postwar economic adjustments. According to Hamilton, although neoclassical economics was not wholly laissez-faire, economists of that school rarely questioned the legitimacy of the prevailing organizational or institutional arrangements. The world   

 

Howard Sherman, “The Business Cycle Theory of Wesley Mitchell,” Journal of Economic Issues  (Mar. ): –, . Ibid., . See also Mitchell, Business Cycles (, ), . Mitchell, “Tentative Plan of Investigation and Report.” Mitchell’s proposal included “long-range planning of public works; long-range planning of construction and maintenance work by private employers; unemployment insurance and unemployment prevention by government agencies; depression insurance by private employers; employment offices, public and private; out-of-work benefits by labor organizations; financial devices for controlling the business cycle; [and] improvement of statistical indices of employment and other ‘business barometers.’” See also “Business Cycle Meeting, Transcript” (Apr. , ), Commerce Papers, HHP, Box . “Program for the Thirty-first Annual Meeting,” American Economic Review  (Mar. ), –. Walton H. Hamilton, “The Institutional Approach to Economic Theory,” American Economic Review  (Mar. ): –. The discussants on Hamilton’s panel were well positioned to focus on the postwar adjustments: W. W. Stewart (War Industries Board), L. H. Haney (FTC), and B. M. Anderson Jr. (National Bank of Commerce).

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had changed with industrialization and war, Hamilton and many other progressive economists argued, bringing new social problems and greater demand for public control of private interests to ensure macroeconomic stability and “human well-being.” Hamilton envisioned administrative agencies capable of identifying the “economic dynamics” that created and distributed value. Partnership between business, government, and social science could improve that distribution. Those new administrative bodies would collaborate with firms and business groups to gather information and help shape business interactions through “conscious control.” Through the early s, institutionalist economics emerged as a wellrespected and robust research agenda within the social sciences, influencing university departments, nonpartisan research institutes, and business schools. Of the three or four leading economics departments in the United States, Columbia University and the University of Wisconsin became strongholds of institutionalist economics. Also, while the NBER remained the nation’s leading quantitative research institute, Charles Merriam had established the Social Science Research Council (SSRC) at the University of Chicago in . It employed similar empirical methods and, by the early s, had become influential in national political economy. Like Mitchell, Merriam denied the utility of orthodox neoclassical economic theory and supported the use of data collection and quantitative analysis in the field of political science. He pioneered the behavioralist approach to the practice of politics, which, like institutionalist economics, followed the natural sciences in its empirics. Unlike the work of the institutionalists, however, Merriam’s work focused on individual actions and choices, focusing on issues such as how expertise informed policymaking decisions and influenced public opinion, rather than on institutional configurations and path dependence. His work pushed the disciplines of political science and business management toward politically progressive ideals of pluralism.







Ibid., . See also Laura Phillips Sawyer, “Between Economic Planning and Market Competition: U.S. Law and Economics in the s,” in The Legitimacy of Power: New Perspectives on the History of Political Economy, eds. Sophus Reinert and Robert Fredona (New York: Palgrave, ). Rutherford, “Institutionalism between the Wars,” –. Also, the NBER and the Social Science Research Council received Rockefeller Foundation funding, coordinated by Edwin May, assistant director of the Foundation’s Social Sciences Division (ibid., ). May studied economics under Walton Hamilton (ibid., ). Patrick Reagan, Designing a New America: The Origins of New Deal Planning, – (Amherst, MA, ), –.

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The Harvard Bureau of Business Research, established “for the purpose of assembling and classifying business data and establishing . . . standards and principles of business action,” adopted the institutionalist methodology, if not its progressive political agenda. From the Bureau’s outset, Edwin Gay, a trained institutional economist, complained that “no accounting and statistical standard existed,” especially in retail management. Gay urged the bureau’s directors to conduct its first study in the retail distribution of men’s shoes. Given the industry’s relatively standardized and stable production, its retail management techniques could be isolated and analyzed. The bureau developed the “Harvard System” to analyze multiple firms and compare their business methods. It used a cooperative framework of information sharing: six hundred participating shoe retailers from across the country submitted sales data to the bureau’s statisticians, who created standard accounting methods and principles. They measured each store’s gross profits, total operating expenses (excluding freight, cartage, and interest), buying expenses, costs of maintaining a sales force and advertising, deliveries, rent, interest, stock-turns per year, and annual sales of the average salesperson. The bureau then calculated the average percentages for each category and circulated comparative charts to show how the least- and most-profitable businesses were operated. During the summer of , as the recession came to a close and prices began to rebound, the Harvard Bureau emerged as a leading institution for the study of retail distribution methods, uniform cost accounting practices, and the future of the chain store. At the Chamber of Commerce, Dr. Paul Nystrom, who had recently left his tenure as a professor of political economy at the University of Wisconsin to direct the Retail Research Association of New York, testified to the preeminence of the Bureau’s research methods and recommendations. In , both businesspeople and regulators wanted to know what type of distribution system might 

  

Arthur E. Swanson, “The Harvard Bureau of Business Research,” Journal of Political Economy  (Nov. ): –, . Swanson, an economics professor at Northwestern University, provided a prescient critique of the bureau’s importance: “The development by the Harvard Bureau of a distinct co-operative plan of organization for conducting business research should be recognized as a valuable contribution in itself. This plan, modified in particulars as a result of further experience, will doubtless serve as the basis for the inauguration of research activities by other institutions” (ibid., ). Ibid., . See also “Systematizing Drug Store Expense,” Pharmaceutical Era  (Apr. ): –. Swanson, “Harvard Bureau,” . Paul Nystrom, May , , Box , –, , USCC Rec.

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provide the most efficient and equitable method of getting goods and services to consumers. Nystrom, along with numerous members of the Chamber and the academy, agreed that chain stores posed a potential danger to the existing system of decentralized proprietary firms, not necessarily because of the latter’s inefficiency but because of the structural inequities of antitrust law. According to the Federal Reserve Bulletin, while the nation suffered during the depression, A&P added over a thousand stores, Woolworth’s nearly a hundred stores, and J. C. Penney over fifty. However, Nystrom insisted, these statistics did not mean that chain stores would inevitably vanquish independent proprietors. Referring to Harvard Bureau studies on independent drug stores, shoe stores, and general merchandise stores, he concluded that “the facts, meager though they be, seem to indicate that the costs of both independent and chain stores correspond quite generally to the amount of service rendered to the public.” Offering personal services, therefore, incurred costs for the specialty shop that the larger stores might forego. Thus, the cost per unit was higher for smaller stores given their lower sales volume. To ensure longevity, Nystrom continued, the independent retailer must take advantage of the successful practices of chain stores. “Chain store sales managers study consumer buying trends and adjust stocks accordingly,” he noted, while “the independent merchant relies on trade materials and hunches to detect trends.” Moreover, chain stores operated under standardized practices ranging from purchasing large quantities on buying schedules to systematized merchandise displays and sales services. For Nystrom, who represented “nineteen department stores owned and operated cooperatively,” the chain store age had arrived but success was not preordained. Like Filene and Benton, Nystrom worried about the formation of “a more or less crystallized caste system within the [large] organization, reducing its flexibility and preventing it from expanding, and reducing its ability to take free advantage of opportunities presented to it under conditions that arise.” Independent proprietors, he concluded, offered the flexibility to capture new trends and markets, but not if they had already succumbed to market competition. Efficiency aside, social scientists and regulators fretted that the chain stores’ growing market power would displace traditional competition in the consumer goods market. The neoclassical economic models of perfect



Ibid., .



Ibid., .



Ibid., .



Ibid., .

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market competition predicted tidy adjustments of supply and demand that ensured efficiency, innovation, and lower costs. Institutionalists, however, denied that such idealistic conditions existed in the real world and argued that chain stores enjoyed privileges not bestowed on the independent retailer. Like Brandeis before them, they argued that the chain store garnered considerable power through quantity buying and secret discounts and rebates from producers, which constituted unfair competition. In response to such disadvantages, Brandeis and others advocated “producer cooperatives” to “lessen the abuses of private capital,” with buying associations serving as a viable alternative for independent retailers, just as unions pooled the market power of individual laborers. Additionally, “if properly conducted[,] consumer cooperatives will eliminate wastes and particularly the excessive spread between cost of production and the price to the consumer.” Wholesale and retail druggists were perhaps the most successful in pioneering this field, maintaining over twenty wholesale associations in . In addition, grocers, hardware dealers, furniture craftsmen and distributors, jewelers, and makers of ready-to-wear clothing created formidable purchasing agencies to rival the chain stores.

       During his tenure as Secretary of Commerce, Hoover adapted the existing system of regulated competition to fit with the macroeconomic policies that he and his Advisory Committee believed would best ensure price stabilization and mitigate business cycles. For him, the Department of Commerce and the FTC controlled the administrative apparatus to fulfill his vision for scientific management across sectors. In July , as the postwar recession lifted and prices began to exceed pre-war levels, Hoover attributed these successes to the cooperative practices of the “new competition.” At the  USCC annual meeting, held in conjunction with the International Chamber of Commerce, Hoover declared that the recovery “is the result of steady improvement in management and method all along the [distribution] line. It is an accumulation of better practice in the elimination of waste,” which he

 

Brandeis to Frankfurter (Sept. , ), Letters of LDB, :, . Nystrom, May , , Box , , USCC Rec.



Ibid., .

Institutionalizing the “New Competition”



attributed to public–private cooperation between trade associations, labor unions, and public regulatory agencies. Hoover believed that interfirm cooperation to eliminate waste, coordinate production and prices, and allocate market shares would stabilize industry and allow dominant firms to thrive. Members of the Chamber of Commerce, of course, shared his enthusiasm for voluntary cooperation, especially in efforts to standardize industrial information sharing on prices and products. For example, W. Lee Cotter of Cotter Warehouse in Mansfield, Ohio, who was also vice president of the American Warehousemen’s Association, testified to the successes of the Furniture Manufacturers’ Association’s efforts to standardize loading, marking, and billing practices. The furniture makers also employed local and regional associations to pool freight shipments to reduce transaction costs. Similarly, Frederick Kelley, president of the Portland Cement Association, recounted the construction industry’s voluntary efforts to create a uniform grading system. The Portland Cement Association was established in  to “increase the knowledge, utility and use of Portland cement through scientific investigation, public education and national promotion.” A uniform grading system became one of the most important methods used to demonstrate the safety and reliability of the Portland cement recipe. These businessmen had not invented this grading system; they had imported it from the Isle of Portland in England, the site of the original English quarries used in cement making. Once this method was in production in the U.S., the association brought together the American Society of Civil Engineers as well as the American Society for Testing Materials to gauge the cement’s quality and strength in “laboratory research and . . . experience in the field.” Also, the National Bureau of Standards, a nonregulatory branch of the Department of Commerce, participated in standardizing common rules in this industry. It demonstrated the strength and durability of Portland cement, which had nearly double the minimum

     

Hoover, May , , Box , –, , USCC Rec. W. Lee Cotter, “Pool Car Shipments as an Aid to Distribution,” May , , Box , –, USCC Rec. Frederick E. Kelley, “The Voluntary Setting up of Quality Standards in Commodity Production,” May , , Box , –, USCC Rec. Ibid., . “Celebrate th Anniversary of the Discovery of Portland Cement,” New York Times, Oct. , , . Kelley, “Voluntary Quality Standards,” .

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American Fair Trade

strength requirement of earlier specifications. After nearly twenty years of internal negotiations, “a single standard cement specification became an accomplished fact and was recognized by all established organizations in the U.S. in .” It became known as “Specification Number One.” On June , , the Portland Cement Association adopted a bylaw requiring all members to comply with the standard specifications. On the one hand, the advantages of the standardized cement recipe included greater safety and reliability, simplification of building processes, improved export relations abroad, and “greater efficiency in production and lower cost . . . through continuous operation on a standard product.” On the other hand, standardization limited the number of competitors and created barriers to entry by raising the costs of production, especially for cement companies in low-density population areas. The association’s methods of enforcement could also verge on the extra-legal; for example, forcing nonmembers to abide by stringent cement recipes and sales rules. When Lucius Eastman raised the question of uniform standards lessening competition among manufacturers, Kelley explained: “[P]ossibly some concerns have been unable to make a product that conforms to those specifications. I presume it has made it more difficult for them to operate, but it has resulted in an intense competition within the standard quality field.” Similar questions arose in the lumber industry regarding standardization of the quality grades and dimensions of processed lumber. The Chamber resolved that confining competition to service and quality competition within a given industry did not significantly diminish fair competition but rather protected consumers and producers alike. While the Department of Commerce endorsed the use of trade associations to collect and disseminate statistical data regarding production standards and prices, the Department of Justice continued to bring suits against private organizations carrying out such tasks. Although Attorney General Harry Daugherty had accepted Hoover’s publications of such trade information, the use of this information to either suppress  



  Ibid., . Ibid., . Ibid., . Fred C. Backus, “The Voluntary Adoption of Standards of Quality,” May , , Box , –, USCC Rec. Backus represented the National Jewelers’ Board of Trade, of New York City. “Cement Men Face Trial as a Trust,” New York Times, Apr. , , . The suit brought charges against forty-four individuals and nineteen corporations under the Sherman Act’s criminal provisions.

Institutionalizing the “New Competition”



supply or enhance prices clearly violated the law. Detractors in the Department of Justice, Daugherty foremost among them, maintained an active hostility toward information-sharing practices, especially concerning prices. For Daugherty, any price agreements made by similar competitors constituted an unjust restraint of the free market. His vision of rigorous antitrust enforcement did not differentiate between manufacturers, retailers, and labor organizations. Daugherty coordinated the federal charges against the Cement Manufacturers’ Protective Association, which coordinated cement manufacturers throughout the mid-Atlantic region, from Pennsylvania to New York. His case, which brought the first criminal prosecution of “new competition” open-price plans, emerged from evidence first collected by the New York state legislature on construction and labor prices in New York City, where a postwar housing shortage had caused rent prices to soar. In , Samuel Untermeyer, the special attorney general conducting the New York investigation, uncovered evidence of employers and labor leaders colluding to fix wages and prevent competition. While Untermeyer’s investigation focused on prosecution of labor leaders, it encouraged federal prosecutors to take legal action against the construction industry as well. Daugherty, a former Republican Party boss and Harding booster, stepped in with gusto, despite protests from Secretary Hoover. Daugherty had reason to be confident as he built the government’s case against the cement manufacturers. In December , the Supreme Court had upheld federal prosecution of the American Column and Lumber Company and the American Hardwood Manufacturers’ Association. 







On Daugherty’s correspondence with Hoover regarding information sharing and trade associations, see “Nation’s Business Observatory,” Nation’s Business, Apr. , ; note , p. . “The Lockwood Housing Investigation in New York City,” Domestic Engineering and the Journal of Mechanical Contracting  (Feb. , ): –. Untermeyer’s prosecution focused on Robert P. Brindell, leader of the Building Trade Employers’ Association, despite Untermeyer’s admission that the mortgage finance industry had more to do with the housing shortage in New York City. M. Browning Carrott, “The Supreme Court and American Trade Associations, –,” Business History Review  (autumn ): –. On Hoover’s correspondence with Daugherty, see Barber, New Era to New Deal, –. For more information on the types of data exchanged by members of the association, see American Column and Lumber Co. v. U.S., Records and Briefs of the United States Supreme Court,  U.S. , – (). See also “Court Dissolves Cement Combine,” New York Times, Oct. , , . The ruling echoed the Lockwood inquiry, noting evidence that limiting competition through information sharing necessarily led to higher prices.

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American Fair Trade

Although the government did not uncover formal written agreements to restrain trade, the Court’s majority held that the circulation of sales reports among members allowed individual firms to effectively raise the price of hardwood products. Justice John Clarke, writing for the majority, inferred that monthly meetings and marketing letters had been used as tactics to keep prices high and supply low. The prosecution used letters written by association members thanking the statisticians and association leadership for help in eliminating destructive competition as evidence of restraint of trade. Not all of the Justices, however, agreed with the majority. Justices Oliver Wendell Holmes and Louis Brandeis, joined by Joseph McKenna, dissented in American Column. Both Holmes and Brandeis argued that because information-sharing practices could help smaller businesses compete on an equal basis with larger manufacturers who already possessed privileged market information, they should be legalized. Holmes referred to these practices as “common sense,” categorically accepting the freedom of businesses to engage in this activity. Brandeis, on the other hand, offered a different logic; namely, that the Hardwood Association had not sought to form a monopoly or control prices but instead had encouraged decentralized competition by avoiding corporate consolidation in that industry. In fact, there was still interbrand competition among the association’s members. Thus, the effects of the restraints constituted reasonable management of competition according to his conceptualization of the rule of reason as he had laid it out in Chicago Board of Trade. As a result of the Court’s decision in American Column, businesses became more subtle in their exchanges of industry information, seeking professional consultation to avoid legal infractions. Milton Nelson, a professor of economics at the University of Illinois, explained that instead of written agreements, association members exchanged information 

 

Two years later, the Court would use similar data to strike down an information-sharing plan in U.S. v. American Linseed Oil Co.,  U.S.  (). The Court held that the American Linseed Oil Company had violated the Sherman Antitrust Act by employing the Armstrong Bureau of Related Industries in Chicago to circulate industry price statistics to members. See also Galambos, Competition and Cooperation, . American Column,  U.S. at . Their position on the rule of reason would later become the dominant position on the Court. National Industrial Conference Board, Trade Associations: Their Economic and Legal Status (Washington, DC, ), ; Milton N. Nelson, “The Effect of Open Price Association Activities on Competition and Prices,” American Economic Review  (June ): –.

Institutionalizing the “New Competition”



“relating to prices actually quoted or charged, terms of payment, manufacturing and selling costs, purchases, stocks, production, orders, shipments, inquiries, bids, contracts, returned goods, cancellations, advertising, and credits.” In contrast to the loosely organized and coordinated trade association, Nelson explained, “the typical open price association is a small, closely knit organization. Its members place heavy emphasis on the importance of assembling, compiling, and disseminating among themselves complete and accurate statistics.” The consulting firm Stevenson, Jordan & Harrison, established in , helped manage associations and published instructional pamphlets on price stabilization programs. The firm’s recommendations followed those provided earlier by Commissioner Hurley, to institute uniform cost accounting, and by Secretary Hoover, to collect and disseminate industry information on orders, output, past prices, and so on. For Secretary Hoover, governmental oversight and enforcement should help mitigate the challenges of carrying out collective action and thus “secure more regular production, more regular employment, better wages, the elimination of waste, the maintenance of quality or service, decrease in destructive competition and unfair practice, and oft times to assure prices or profits.” The Chamber of Commerce shared this disposition and its members helped arrange a test case to challenge the Department of Justice prosecution. At the same meeting, Colonel George T. Buckingham, a member of the Cement Manufacturers’ Association litigation team, explained the cement industry’s position to the Chamber’s general assembly. The purpose of the trade association had been to balance production and consumption “in order that the results and the evils that follow over-production may not occur.” For

    

 

Milton N. Nelson, Open Price Associations (Urbana, IL, ), , as quoted in Carrott, “American Trade Associations,” . Nelson, Open Price Associations, . On the Stevenson consulting firm, see George Stocking and Myron Watkins, Monopoly and Free Enterprise (), –, quoted in Peritz, Competition Policy, –. Hoover, address to the general session, May , , Box , –, , USCC Rec. “Report of the Committee on Trade Associations,” Referendum , June , , Box , , USCC Rec. See also Francis Walker, “The Government’s Function in Collecting Business Information,” Proceedings of the Academy of Political Science,  (Jan. ): –, . Walker was the Chief Economist at the Federal Trade Commission. George T. Buckingham, “The Opportunities and Responsibilities of Trade Associations,” May , , Box , –, USCC Rec. Ibid., .

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American Fair Trade

the cement industry, this meant keeping low-quality cement off the market, which both protected consumer interests and guarded against destructive competition that might depress profits and wages. Buckingham explained the association’s strategy and tactics. First, it collected standardized price surveys, called “blank forms,” from manufacturers across the country. Trade association secretaries then prepared tabulated and condensed statistics. The intention, Buckingham argued, was to “iron out or make flatter the curves” of business cycles. The “chief controversy” arose when statistical information covered “prices at which commodities have been sold, and . . . at which sales have been made.” According to the Department of Commerce, information sharing on price data provided benchmarks of “past transactions and they do not relate to that which takes place in the future.” In thinly veiled terms, he lambasted the Department of Justice attorneys as enforcing an “archaic” vision of business practices and neoclassical models of unfettered competition, “like a battle royal, in the dark, where every competitor was unintelligent, uninformed.” He ended, however, on a positive note, anticipating his team’s victory. He predicted that “new economic principles will prevail” and that in fifteen years the Chamber will wonder “that anybody would have been discussing so elementary a thing” as information sharing by trade associations on price points. The following summer, the Supreme Court handed down two important antitrust decisions that changed the trajectory of permissible trade association information-sharing practices. The cases, involving the construction trades and the lumber and furniture industries, brought a notable victory for the trade associations, holding that “the gathering and dissemination of information by trade associations on costs, prices, production and stocks do not necessarily constitute restraint of trade in violation of antitrust laws.” In the first case, federal prosecutors charged the Cement Manufacturers’ Protective Association with price fixing, dating back to its establishment in . The War Industries Board had supported these  

  

 Ibid., . Ibid., emphasis added. Ibid., . Buckingham identified two Department of Justice lawyers as “perfectly honest and upright; but their views on economic subjects, as I have said to them, and therefore can say to you without violating a confidence, are, in my judgment, archaic.” Ibid., . “Court Upholds Trade Alliance.” Los Angeles Times, June , ,  (quoting Justice Harlan Fiske Stone’s majority opinion for the Court). Ibid.

Institutionalizing the “New Competition”



practices, the government argued, which had contributed to the problem of high costs in the construction industry in the mid-s. The association had formed as a means to protect manufacturers against misrepresentation and fraud. The sales agreements – known as “specific performance contracts” – made between building contractors dictated future delivery at a set price; however, the contractor could cancel the contract at any time, which allowed builders to shop for the best prices. If it were discovered that a contractor, in order to hedge against a rising market, had taken out overlapping contracts or contracts for a job other than that specified in the agreement, then a manufacturer could cancel delivery. To monitor this process, the cement association created bylaws that required manufacturers to submit monthly reports stipulating the details of all sales contracts, delivery, and cancellations. The association’s secretary then sent daily reports to members regarding new job contracts, completed jobs, and freight rates. The government asserted that the association’s activities resulted in uniformity of prices and limitation of production. Although the U.S. district court found in favor of the government, the majority did not find that concrete prices were “excessive or unreasonable . . . as compared with the rise of prices of other basic commodities.” Also, the court found that competition had not been destroyed and, in fact, that there was still competition among association members. Referring to the recent Supreme Court precedent, the federal court concluded that the association’s practices had “tended to limit the amount of cement distributed to the trade under those contracts,” which tended to create uniform prices as well; however, this was not the Court’s key finding. Justice Harlan Fisk Stone, referring directly to Buckingham’s defense team arguments, conceded that the organization already maintained considerable uniformity of trade practices prior to  without these constituting unfair price fixing. The Court found that the sales contracts allowed for the legitimate refusal to deal with disreputable contractors. The association’s publication of freight rates, calculated according to a basing point system for standard cement deliveries, allowed manufacturers to adhere to a “one-price” base rate determined by each mill and to which transportation costs were more easily added. Ultimately, the    

Cement Manufacturers’ Association v. United States,  U.S.  (), . Ibid., . Ibid., –. See American Column,  U.S. at , ; American Linseed Oil. Cement Manufacturers’ Ass’n,  U.S. at .

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American Fair Trade

Court found that the information-sharing practices had the effect of reducing fraudulent contracts and that the government had failed to establish a concerted action by the association to fix prices per se. This case significantly advanced the trade practice rule-making and monitoring procedures developed in conjunction with trade associations and the FTC. Where the Colgate case of  had validated the price policies of individual firms, the Cement Manufacturers’ Association ruling legitimized association tactics. In the other test case, Association of Maple Flooring Manufacturers v. U.S., the Department of Justice argued that the hardwood association had violated the Sherman Act by gathering and distributing to members (and to the Department of Commerce) industry statistics on production, stocks, sale prices, and freight rates. Justice Stone, writing for the majority, held that it did not violate the Sherman Act to “openly and fairly” collect and distribute information regarding costs, output, or prices, as long as such information sharing did not result in explicit price-fixing agreements. As Holmes and Brandeis had done in earlier opinions, Stone held that the association-guided information sharing merely constituted “intelligent conduct of business.” He wrote: It is the consensus of opinion of economists and of many of the most important agencies of Government that the public interest is served by the gathering and dissemination, in the widest possible manner, of information with respect to the production and distribution, cost and prices in actual sales, of market commodities, because the making available of such information tends to stabilize trade and industry, to produce fairer price levels and to avoid the waste which inevitably attends the unintelligent conduct of economic enterprise.

Greater “intelligence” in business trades did not disturb free competition, he reasoned. Justice Stone’s majority opinions affirmed both Hoover’s vision for trade association-based fiscal stabilization plans and Justices Holmes and

  



Ibid., . Maple Flooring Manufacturers’ Association v. United States,  U.S.  (). Ibid., . He wrote that to “openly and fairly gather and disseminate information as to the cost of their product, the volume of production, the actual price which the product has brought in past transactions, stocks of merchandise on hand, approximate cost of transaction from the principal point of shipment to the points of consumption as did these defendants . . . without however reaching or attempting to reach any agreements . . . with respect to prices or production or restraining competition, do not thereby engage in unlawful restraint of commerce.”  Ibid., . Ibid., –.

Institutionalizing the “New Competition”



Brandeis’s views on information sharing as a reasonable business practice. Stone benefited from Hoover’s influence over both the Harding and Coolidge administrations. At Hoover’s suggestion, Coolidge appointed Stone, who had been Dean of the Columbia Law School, to be his Attorney General and Stone initiated both the cement and the maple flooring cases. After only a year in that office, Stone was promoted to the Supreme Court, an appointment praised by the Chamber of Commerce and Secretary of Commerce Hoover. Lew Hahn, the managing director of the National Retail Dry Goods Association of New York City, predicted that “it ought now to be possible for Mr. Hoover and Mr. Stone to get together and thresh out these things and give to trade organizations some course that they should follow.” As a complement to Stone’s appointment as Attorney General, William Humphrey, a lawyer and former congressman from Washington State who had served as President Coolidge’s campaign manager, joined the Federal Trade Commission, where he helped institute significant changes to antitrust investigations. This change in leadership struck many progressive commentators as a further setback for the FTC’s progressive regulatory mission. As Humphrey explained to the Chamber of Commerce general assembly, the FTC would no longer issue public announcements listing companies against which complaints of “unfair trade practices” had been alleged. The FTC made this change because of the bad publicity and loss of goodwill created by those public announcements, especially in cases in which formal charges were not issued after FTC investigations. Instead, the Commission would use its investigatory powers to urge settlements between firms and it would guide trade association rule-making procedures. All documents and evidence submitted to the FTC would remain confidential, circumventing the “sunshine” approach Brandeis had initially envisioned. Despite Humphrey’s pro-business political rhetoric, the expansion of FTC initiatives to shape business practices – and, thereby, market relations – appears no less radical a vision for American capitalism than the    

Rudolph J. R. Peritz, Competition Policy in America: History, Rhetoric, Law (New York, ), . Lew Hahn, “Congressional and Other Federal Activities Affecting Distribution,” May , , Box , –, , USCC Rec. Davis, “Transformation,” –. Humphrey, address to the general session, May , , Box , –, USCC Rec. The Chamber passed a resolution in support of these changes to the FTC (ibid., ). See also Himmelberg, Origins, .

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American Fair Trade

previous iterations of regulated competition, albeit less adversarial. The Court left little room for legal maneuvering, having already eviscerated the FTC’s authority to declare trade practices “unfair,” despite Section  of the FTC Act of . Moreover, it was Hoover, not really Humphrey, who owned this vision. But Humphrey’s reputation as a “fearless advocate of big business” and his antagonistic relationship with the progressive press put him squarely in the limelight. Regardless, it seems that Secretary Hoover pushed the FTC to coordinate and monitor its trade practice conferences, at least by his own account. Through these conferences, trade association members defined in precise bylaws what constituted fair competition in their particular industries. The methods by which these conferences were carried out followed the instructions laid out in Brandeis’s dissent in American Column and Stone’s majority opinion in Maple Flooring. The FTC trade practice conferences created both formal and informal rules of conduct to govern intra- and inter-firm business. Informal rules might dictate conduct or procedures in the distribution system, but did not carry legal enforcement. Formal rules, on the other hand, enjoyed FTC oversight and enforcement. Charged with the responsibility to distinguish between fair and unfair practices, the FTC regulators weighed whether or not competition had been substantially lessened or if certain business practices constituted a tendency to monopolize. The burden of proof fell to the FTC regulators, mostly economists and antitrust attorneys, who through the s focused on prohibiting price discrimination, sales below cost, and price-fixing agreements. 



  

FTC v. Gratz,  U.S.  (). Section  of the FTC Act declared “[t]hat unfair methods of competition in commerce are hereby declared unlawful,” but “unfair” methods were not defined, vaguely leaving that to the Commission – or the courts – to determine. See Brandeis dissent,  U.S. , . See also Nelson Gaskill, The Regulation of Competition (New York, ), ; Thomas C. Blaisdell, The Federal Trade Commission: An Experiment in the Control of Business (New York, ), –. “Mr. Coolidge Makes Good,” The Nation  (Feb. , ): ; George W. Norris, “Boring from Within,” The Nation  (Sept. , ): –. See also La Follette’s Magazine  (May, ): , as quoted in Davis, “Transformation,” –. Hoover to Coolidge (Sept. , ), HHP, FTC files, quoted in Himmelberg, Origins, n.. Blaisdell, Federal Trade Commission, . National Conference Board, Public Regulation of Competitive Practices, rev. ed. (Washington, DC, ). This publication categorizes the complaints received and issued by the FTC. See Richard Tedlow, “From Competitor to Consumer: The Changing Focus of Federal Regulation of Advertising, –,” Business History Review  (spring ): –. Tedlow argues that FTC regulators shifted their attention from governing

Institutionalizing the “New Competition”



As Hoover explained it, older economic ideas that had informed competition policy were now being challenged, if not overthrown. The “growth of a cooperative sense” represented a movement toward “more efficient, more ethical business practice and better synchronizing of the parts” of the economy as a whole. “It is a long cry,” he continued, “from the conceptions of the old economist.” Gradually, the social sciences had become a tool for explaining and implementing cooperative trade practices and Hoover maintained his vision of instituting managed competition. The original conception of this legislation [the Sherman Act] seems to have been to maintain a great host of highly competitive units in every trade. By degrees we have been retreating from this notion because the competition it required became at times highly destructive. We have modified its application to organized labor. It has been partially and will probably be fully withdrawn as to cooperative agricultural marketing.

Indeed, agricultural cooperatives helped pioneer novel antitrust practices that allowed for collective advertising and information sharing as well as collective production and price controls. The narrow construction of antitrust law’s rule of reason that required pure market competition, exemplified in Addyston Pipe, Dr. Miles, and American Column, seemed increasingly contrary to trade association activities that were supported by administrative agencies and progressive economists. In , Congress approved the creation of a new division of the FTC to oversee trade practice conferences, at which trade associations “presented, and the Commission approved, complete codes of fair practice.” The codes promulgated by these conferences created two categories of code governing industry conduct and ethics. In the first group, the FTC approved association trade practice rules and declared certain practices legally unfair. In the second group, the FTC approved of the trade association rule but did not offer legal enforcement. Hoover explained that these bureaucratic changes supported constructive information sharing meant to mitigate “destructive competition” and preserve competitive freedom. Where there had once been conflict between the Departments of Commerce and Justice, he stated, a new spirit of

  

competitive practices between businesses to protecting consumer interests, such as truth in advertising campaigns. Hoover, address at the annual banquet, May , , Box , , USCC Rec.   Ibid., . Ibid., . Himmelberg, Origins, . Ibid., . In October , the FTC extended legal enforcement to the second group as well.



American Fair Trade

cooperation and promotion of “self-regulation” had emerged. The following year, the Department of Commerce published Trade Association Activities (), to clarify the Court’s shifting interpretation of information sharing by trade associations. “The statistical, standardization, and ‘better business’ programs were also expanded, each with a large and growing associational component.” As Sydney Anderson, the former chair of the Congressional Joint Commission of Agricultural Inquiry, explained to the Chamber of Commerce National Distribution Conference of , uniform cost accounting coupled with information sharing offered one method to standardize accounts, reduce wasteful competition, and bolster interbrand competition. “The competition which these factors and conditions have created has not merely been a competition of prices. . . . The phenomena which this competition has produced are rather to be found in the development of the service idea.” Greater variety in the types, sizes, and styles of a product resulted from a trade association’s efforts to secure more stable prices and production levels through codes of ethics and business practices. By  the Chamber of Commerce had redoubled its efforts to gain federal legislation to clarify and extend its victories in the Maple Flooring and Cement Manufacturers’ cases. Judge Edwin Parker, quoting extensively from Justice Stone’s opinion in Maple Flooring regarding the “consensus of economists” and government agencies, explained that price stabilization could be achieved by managing competitive markets. The general knowledge that there is an accumulation of surplus of any market commodity would undoubtedly tend to diminish production, but the dissemination of that information cannot in itself be said to be a restraint upon commerce in any legal sense.



 

  

Hawley, “Herbert Hoover and the Sherman Act,” . See also Himmelberg, Origins, –, –; Federal Trade Commission, Annual Report (Washington, DC, ), , –; Federal Trade Commission, Trade Practice Conferences (Washington, DC, ), v–vii. Hawley, “Herbert Hoover and the Sherman Act,” . Sydney Anderson, “New Aspects of Distribution Costs,” May , , Box , , USCC Rec. See also “Low Cost for Distributing Food Products: Joint Commission of Agricultural Inquiry, Appointed by Congress, Finds Good Condition in Grocery Trade,” American Food Journal  (June ): –; Nelson Gaskill, “Some Aspects of Price Cutting,” American Food Journal  (June ): –. Anderson, “New Aspects of Distribution Costs,” –. Edwin Parker, presentation to the Domestic Distribution Roundtable, May , , Box , –, , USCC Rec. Ibid., .

Institutionalizing the “New Competition”



Parker recommended that the Chamber create its own statistical institute – a Joint Trade Relations Committee – to investigate the distribution process along vertical lines in order to “survey industries, identify wasteful practices, and compile recommendations in a report, which the FTC would then review. Pending approval from the FTC, this report would constitute a trade practices agreement.” In effect, Parker argued, this would create administrative law without going through the legislative process. Among his supporters at the meeting, Herbert Hoover, Lew Hahn, A. Lincoln Filene, and several institutionalist economists praised Parker’s summary of events and call to action. Of those economic experts in attendance at the USCC annual meeting, Paul Cherington, of the Harvard Graduate School of Business Administration, explained the potential benefits of associational learning through business surveys, statistical number-crunching, and the development of new management techniques. He had worked with Owen Young to summarize the preliminary results of the Chamber’s  census of distribution in Baltimore. He described some of the more interesting trends revealed by the report, which cataloged wholesale and retail businesses’ stocks, employees, firm size, and so on. Department stores and delicatessens and groceries had become the leading trades in retail and averaged the highest per capita spending. The figures also demonstrated the number of customers necessary to turn a profit. Everett R. Smith, of the Fuller Brush Company, praised the Harvard studies that aided cooperation within the Chamber: “This matter of sales quotas is exceedingly important if we are to progress in the new competition that we have in this country today. We need facts. We need study. We need research; and, above all, cooperation.” Edwin Gay, of the Harvard Business Bureau, echoed these sentiments that business methods would be improved by the analysis of industrial trends by academic experts.



  

Ibid., –. “This is still the language of the Federal Trade Commission,” Parker continued. “If you make your own rules, and they sanction them, they will help you to enforce them as against a member who will not play the game, and ‘who indulges in practices condemned by the industry as unfair.’” Paul T. Cherington, presentation to the Domestic Distribution Roundtable, May , , Box , –, USCC Rec. Everett R. Smith, discussion at the Domestic Distribution Roundtable, May , , Box , –, , USCC Rec. Edwin P. Gay, presentation to the Domestic Distribution Roundtable, May , , Box , –, , USCC Rec.



American Fair Trade

By the last year of s prosperity, many businesspeople in the Chamber, regulators in government bureaus, and social scientists in the academy had embraced the “new competition” as a desirable model of American productivity. Orion Howard Cheney, an attorney and banker who participated in business as well as governmental supervision efforts in New York State’s banking industry, described the necessary interdependence of manufacturer, laborer, and retailer according to the high-wage doctrine: The basis of American prosperity is high efficiency, high buying power and a high standard of living. The prosperity of the manufacturer and merchant depends on the prosperity of the wage-earner and the prosperity of the wage-earner depends on that of the manufacturer and merchant. The wheels of American prosperity keep on going at a good speed as long as there is nothing seriously affecting efficiency, buying power or standard of living. . . . The new competition has become an overwhelming influence towards higher efficiency, higher buying power and higher standards of living. In fact, it is probably the most important influence on these factors today.

The problems of overproduction and destructive competition, simply put, could be overcome through the new economics of management, if employed by both businesspeople and government regulators. “The new competition,” Cheney concluded, “demands a new economic statesmanship.” By , the federal courts had fully adopted this prescription for the American economy, as had leaders in business and government. William Humphrey became the government’s liaison to the USCC, explaining the FTC’s new investigatory procedures – namely, the move away from public announcements listing companies under preliminary investigation. He focused on minimizing costly and slow litigation by making FTC procedures more transparent and encouraging internal reviews of complaints as well as settlements with stipulations to alter specific trade practices. The trade practice conferences, “called by the Commission and presided over by a member of that board” of 

  

Orion H. Cheney, “Keeping Up with the New Competition,” May , , Box , –, USCC Rec. Cheney later wrote two detailed studies of the lumber industry and the book publishing industry, both of which were known for their commitment to tight coordination by trade associations. See Cheney, The New Competition in the Lumber Industry (Chicago, IL, ); Cheney, Economic Survey of the Book Industry, – (New York, ). See also Theodore Striphas, The Late Age of Print: Everyday Book Culture from Consumerism to Control (New York, ), –.  Cheney, “Keeping Up with the New Competition,” –. Ibid., . William E. Humphrey, presentation to the general session, May , , Box , , USCC Rec. See also Himmelberg, Origins, . Humphrey, presentation, May , , Box , –, USCC Rec.

Institutionalizing the “New Competition”



commissioners, presented “an invitation and an opportunity for the industry to clean its own house, to adopt its own rules or ethics in trade.” The furniture industry, for example, gathered approximately  manufacturers and retailers (making up  percent of the domestic industry), which signed a code to eliminate fraud by instituting a standard grading system for various types of wood. Similarly, the artificial silk industry held a trade practice conference and adopted the term “rayon” for its product, allowing for easier differentiation from natural silk products. Secretary Hoover, during the  Conference on Unemployment, had also served as chairman of the Committee on Recent Economic Changes and initiated a new series of social science surveys. The group concluded its work in February  and published Recent Economic Changes in the United States the following spring. The report found that since the – recession, the U.S. had enjoyed economic growth and price stability; however, the decade had also brought important changes that demanded governmental attention. First, the economists raised the issue of “technological unemployment,” whereby increases in manufacturing efficiency resulted in loss of jobs. Second, industrial concentration had not abated. The report attributed this trend both to narrow antitrust laws, which encouraged vertical integration, and to the marketing revolution, which allowed firms to increase market share not through greater efficiency but through national advertising campaigns. Wesley Mitchell and his staff at the NBER also made several prescient observations about the secular decline in agricultural prices and the problem of undersecuritized rural banks throughout America. The farm problem would occasion Hoover’s first recommendation to Congress as president of the United States to establish the Federal Farm Board to lend $ million to agricultural cooperatives. The Farm Board did not sanction overt price fixing, but it rather built on the existing marketing cooperatives to mitigate price fluctuations by reducing agricultural surplus through information sharing on harvests and planting. By encouraging the “new competition” ethos of cooperation and standardization, the Farm Board intended not only to stabilize farm prices but also to raise them. Yet, the greatest problem with the “new competition” or “associationalism” was still how to determine when trade associations had gone too far – when their efforts to rationalize business practices through  

Ibid., . Ibid., –.



Ibid., .



Barber, New Era to New Deal, –.



American Fair Trade

information sharing constituted a scheme against the public interest to raise prices or suppress competition. For the courts, this had been the challenge since the s, when business combinations began proliferating across industries. Hoover was prepared to use the regulatory mechanisms of the administrative state to offer guidance to associations, both at Commerce and through his influence at the FTC. Those agencies’ complicity shielded associations, at least in part, from prosecution and guided them toward permissible activities. But the use of associations to enact policies intended to effect macroeconomic price stability remained untested outside of the prosperous s. *** The Brandeisian system of regulated competition had relied on a vision of trade associations, labor unions, and consumer cooperatives rivaling the economic power of large-scale industrial corporations. Brandeis’s endorsement of “fair trade” policies, which sought to legalize manufacturer-set resale price fixing, provided a mechanism to facilitate open price associations. The first step on that road was uniform cost accounting. The FTC could then serve as the public administrator to investigate and regulate unfair competition, such as sales below cost and predatory pricing. Hoover co-opted the FTC to serve his own vision of the “associative state,” which he first began to pursue at the Department of Commerce. On the one hand, the mechanisms that he created in the Department of Commerce – such as publication of the Current Survey – and at the FTC – such as his oversight of the trade practice conferences – continued the Brandeisian vision of managing competitive markets. This “third way” existed in between the Court’s dichotomy of pure, free market competition and regulated monopoly. Yet Hoover cared less about rivaling centers of economic power and much more about streamlining production processes to eliminate waste and stabilize prices. Nevertheless, Brandeis proved critical to the implementation of Hoover’s associationalism. From his seat on the Court, Brandeis steered



On Hoover’s political economy of trade associations, see Secretary of Commerce, Annual Report (Washington, DC, ), –; Secretary of Commerce, Annual Report (Washington, DC, ), –; Department of Commerce, Business Cycles and Unemployment: Report and Recommendations of a Committee of the President’s Conference on Unemployment (Washington, DC, ). See also Hawley, “Hoover, Commerce Secretariat,” –.

Institutionalizing the “New Competition”



antitrust jurisprudence toward a more expansive rule of reason, allowing firms and associations greater opportunities to collude or cooperate, depending on one’s perspective. Whether sympathetic or not to the alternative vision of American capitalism that Brandeis – and, separately, Hoover – had adopted, businesspeople now had a legal and economic language in which to argue for the positive effects of managing competitive markets. Previously, the Court’s rule of reason had adhered to a narrower rule that prohibited agreements affecting price. Ultimately, Hoover both co-opted and continued Brandeis’s program of regulated competition. Their goals were not the same, but the mechanisms at their disposal and their trust in government–business cooperation often looked quite similar.

 California Fair Trade Constitutional Federalism and Competing Visions of Fairness in Antitrust Law, –

The trade practice conference affords, broadly stated, a means through which representatives of an industry voluntarily assemble, either at their own instance or that of the commission, but under auspices of the latter, for the purpose of considering any unfair practices in their industry, and collectively agreeing upon and providing for their abandonment in cooperation with and with the support of the commission. – Christie Benet, “Trade Associations and the FTC” ()

By the late s, the Federal Trade Commission had institutionalized trade practice conferences as an important component of its regulatory repertoire. Since its creation in , the Supreme Court had circumscribed that repertoire by limiting the FTC’s jurisdiction from its original role as a quasi-court of industrial relations that could litigate and settle claims of unfair competition, serving as a prophylactic to new types of unfair competition, to an administrative body bound by the Court’s determination of what constituted unfair competition. Herbert Hoover’s tenure as Secretary of Commerce cast a long shadow over the FTC’s regulation of competitive practices. Trade practice conferences brought together trade associations on an industry-by-industry basis under the auspices of the FTC to agree on best practices and to standardize certain in-group procedures, including product specifications, uniform 

Federal Trade Commission v. Gratz,  U.S.  (), limiting the FTC’s regulatory mandate to determine what constituted unfair methods of competition and requiring the FTC to follow the Court’s interpretation of unfair competition. See especially Justice Louis Brandeis’s dissent in Gratz,  U.S. at . On the shifting regulatory mandate and repertoire of the FTC due to Supreme Court rulings and the appointment of Republican commissioners, see Chapter .



California Fair Trade



cost accounting, and codes of ethics. The rules promulgated at these conferences facilitated information sharing on production methods, output, orders, and prices. The number of trade associations in the United States quickly expanded over the decade, linking more businesses to an association. The FTC publicized the results of these conferences and the burgeoning association movement, boasting that a new era in efficient and ethical competition had arrived. Indeed a new era in U.S. business–government relations had been devised through the creation and adaptation of federal bureaucratic agencies and their counterparts in private trade associations. The two were inextricably linked, though that link was certainly not predetermined. Hoover’s vision for the Department of Commerce and the FTC differed significantly from Louis Brandeis’s original program for the FTC. Brandeis’s “regulated competition” favored tactics similar to those used by the FTC trade practice conferences, but with different results in mind than those Hoover sought. The former insisted that competition policy must safeguard competitors from undue corporate consolidation achieved by unfair means, such as predatory pricing. Hoover, on the other hand, used similar means to achieve greater efficiency in commerce. Nevertheless, those advocates of “fair trade” who shared Brandeis’s preference for independent proprietors protected by an associational order remained a viable influence within trade associations and, at times, seized opportunities to alter political economy in their favor. Within the United States, California perhaps best exemplifies the structures of political economy that Brandeis envisioned as protecting competitive markets, limiting monopoly power, and ensuring democratic participation in both politics and the economy. California was unique: its competition law and policy openly fostered cooperative practices that the U.S. Supreme Court had declared illegal in interstate trade. The problem of federalism thus created the opportunity for organizational





Federal Trade Commission, Annual Report (Washington, DC, ), , listing the following trade practice conferences held in the preceding year: “motion picture, golf ball, edible oil, shirting fabrics, fur, heavy sheet glass, hickory handle, millwork, wax paper, flat glass, cottonseed oil mills, paint, varnish and lacquer, rebuilt typewriters, and publishers of periodicals.” See also Berk, Brandeis and Regulated Competition, –, demonstrating the ubiquity of these associations. See Laura Phillips Sawyer, “California Fair Trade: Antitrust and the Politics of ‘Fairness’ in U.S. Competition Policy,” Business History Review  (spring ): –. Much of this chapter has been adapted from this publication. See also Woeste, Benevolent Trust; Berk, Brandeis and Regulated Competition.



American Fair Trade

entrepreneurship, a task that the unlikely business leader and independent pharmacist Edna Gleason embraced. This chapter emphasizes the instrumental role of Gleason and her colleagues in the passage of the California Fair Trade Act of , later referred to as the “Little NRA” in reference to the New Deal’s National Recovery Administration (NRA). The law was the culmination of fair trade activism dating back to the s. It is no coincidence that it passed first in California. This chapter first explores the issues of constitutional federalism that shaped California’s competition policy, allowing it to diverge from national law. Yet, the threat of federal intervention through the FTC and the Supreme Court remained a problem for businesses engaged in interstate trade, over which California’s trade rules could not hold sway. That threat galvanized the campaign for a state fair trade law, led by retail druggists, while the onset of the Great Depression created the urgency to deploy new tools of macroeconomic policy to stabilize the economy, though on an industry-by-industry basis. The California Fair Trade Act appeared to be the culmination of the new era’s government-business relations, empowering private trade associations to manage competitive markets with minimal government oversight. These macroeconomic policies to stabilize prices and wages coincided with the breakdown and reordering of American economic policy, yet became increasingly popular in the early years of the Depression.

       While federal courts embraced strict prohibitions against the horizontal cooperation of businesses or laborers, California competition policy went in the opposite direction. That state fostered some of the earliest cooperative efforts of union laborers and farmers. As early as the s, California labor unions and craft guilds used a union label campaign to improve their working conditions and to denounce immigrant laborers, child labor, and tenement production facilities. Xenophobia animated these campaigns to a large extent. Nonetheless, California courts enforced the sales provisions attached to the union labels. Registered collective 

John Brooks, “The Trade Union Label,” Bulletin of the Department of Labor  (Washington, DC, ): –;  Cal. Stat. –, sect. –; Paul Duguid, “A Case of Prejudice? The Uncertain Development of Collective and Certification Marks,” Business History Review  (summer ): –.

California Fair Trade



marks spread beyond labor unions to include winemakers, farmers’ cooperatives, fruit growers, and butchers throughout the state. Farmers in the citrus and raisin industries pioneered associational techniques to control supply and distribution, using both legal and extra-legal means. Raisin growers, for example, initiated standardized grading, packaging, and shipping. They established an incorporated exchange, where crops were deposited, loans could be issued, and sales were made across the country. However, the farmers’ “benevolent trust” also relied on violence and intimidation to punish detractors and deter outside competitors. Constitutional federalism allowed states to facilitate and protect these business practices and relationships often outside of the Supreme Court’s purview. In the United States, collective associations and certification trademark laws, which were also popular throughout Europe, depended on state law and enforcement but increasingly existed in tension with federal antitrust. According to California courts, however, not all restraints of trade constituted a violation of law. In some cases, trade association regulation of business practices improved market conditions by mitigating intense competition that led to overproduction and falling prices. In , the California Supreme Court upheld an agreement among San Francisco stevedore union members that instituted a profit-sharing scheme by regulating the prices charged by its members. The Master Stevedore Association was created “to govern and control the business of master stevedores, to be carried on by its members, and to divide the profits and losses of said business.” By a majority vote, members agreed “to fix a schedule of prices or charges for any and all work, as stevedores, to be done and performed by its members.” Each member was also required to “keep full and correct accounts of the business done by him, including 

 





Victoria Saker Woeste, The Benevolent Trust: Law and Agricultural Cooperation in Industrial America, – (Chapel Hill, NC, ); Charles Postel, Populist Vision (New York, ). Woeste, Benevolent Trust, –. Ibid. See also Elizabeth Hoffman and Gary Libecap, “Institutional Choice and the Development of U.S. Agricultural Policies in the s,” Journal of Economic History  (June ): –; Lawrence Shepard, “Cartelization of the California-Arizona Orange Industry, –,” Journal of Law and Economics  (Apr. ): –. Report of the Commissioners Appointed to Revise the Statutes Relating to Patents, Trade and Other Marks, and Trade and Commercial Names (Washington, DC, ): , –. The Lanham Act of  granted trademark status in federal law to collective and certification marks.  Albert Herriman et al. v. Stuart Menzies et al.,  Cal. ,  (). Ibid.



American Fair Trade

all receipts and disbursements, and render statements thereof at stated intervals to the association.” The court acknowledged that the association effectively managed prices and services, but ruled that it neither constituted a monopoly nor intended to monopolize the industry. In turn, the court upheld the association agreement against a price cutter who had feigned association membership and charged lower prices to garner business. Combinations between individuals or firms for the regulation of prices, and of competition in business, are not monopolies, and are not unlawful as in restraint of trade, so long as they are reasonable, and do not include all of a commodity or trade, or create such restrictions as to materially affect the freedom of commerce.

The court upheld the association’s cooperative contracts binding members to a voluntary code of conduct dictating prices and services. The Herriman case cited decades of trade association contract enforcement similar to that of the stevedore association in San Francisco. For example, a comparable case had arisen in St. Louis, Missouri, nearly two decades earlier. Quarry owners and operators had agreed to limit production for six months to diminish the oversupply on the market. The association hired a sales agent to represent all group members. When one member abrogated the terms of the deal, the group sued for an injunction as well as the enforcement of the contract’s malfeasance clause. The Missouri court determined that [The quarrymen’s contract] is to advance trade; because, if competition reaches such a point that goods cannot be sold at living prices, many manufacturers must be driven out of business. But not every agreement in restraint of trade is illegal. Where the contract injures the parties making it, by diminishing their means for supporting their families, tends to deprive the public of the services of useful men, discourages industry, diminishes production, prevents competition, enhances prices, and, being made by large companies or corporations, excludes rivalry and engrosses the markets, – tends to “make a corner,” to use the slang of the stock and provision gamblers, – it is against the policy of the law.

The Missouri Supreme Court considered the purpose and outcome of the association’s management of individual competitive practices and

   

Ibid. See also Howell Harris, “Coping with Competition: Cooperation and Collusion in the US Stove Industry, –,” Business History Review  (winter ): –. Herriman,  Cal. at . William Skrainka v. Diettrich Scharringhausen,  Mo. App. ,  (). Emphasis added.

California Fair Trade



accepted that certain cooperative agreements not only benefited the members and their families by ensuring a living wage but also benefited the public. Both the California and Missouri rulings reflected the ubiquity of international jurisdictions that also weighed the social benefits of associational managed competition, so long as the association did not charge “unreasonable rates” or “preclude fair competition with others engaged in the business.” In a similar vein, Ontario courts upheld an association agreement among salt manufacturers, Melbourne courts enforced an agreement of stevedores, and British courts allowed stagecoach masters to agree on routes and fares. This permissive analysis of the reasonableness of certain restraints of trade effectively allowed some business and labor groups to set prices, if courts could determine the economic and social benefits derived from the restraint. The challenge to associations managing competitive markets had always been the quintessential collective action problem; namely, the problem of malfeasance, such as breaking the contract and selling at a lower price or by another standard to undercut the group and capture market share. Escaping collective action problems required either state complicity, if not outright enforcement of association agreements, or else the use of extra-legal means of enforcement. These cases illustrated how multiple legal jurisdictions recognized not only the fragility of cooperation but also the instances when it might be in the public interest; for

  



Skrainka,  Mo. App. at . See Ontario etc. Co. v. Merchants etc. Co.,  Grant. U. C.  (); Collins v. Locke, L. R.  App. Cas. ; Hearn v. Griffin,  Chitty  (K.B., ). The prevailing interpretation of the early, common law rule of reason in restraint of trade cases comes from British law. See Chapter  infra for a discussion of Mitchel v. Reynolds and the adaptation of the rule of reason by the U.S. Supreme Court. The seminal work on collective action problems precluding the organization of diffuse interests has been Macur Olsen, The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, MA, ). This thesis has a longer tradition as applied to a theory of regulation resulting from interest group conflict and the challenges of coordinating economic interests into viable political coalitions. See Arthur Bentley, The Process of Government (Bloomington, IN, , reissue of  ed.), –, –, ; Joseph Cornwall Palamountain, The Politics of Distribution (Cambridge, MA, ), . For more recent work on trade associations applying this model, see Colin Gordon, New Deals: Business, Labor, and Politics in America, – (Cambridge, ). Political scientist Gunnar Trumball reconsiders the Olsen thesis by examining diffuse interest groups that have overcome collective action problems. See Gunnar Trumball, Strength in Numbers: The Political Power of Weak Interests (Cambridge, MA, ).



American Fair Trade

example, by mitigating business downturns. Profit sharing in gains and losses through associations represented a widespread trend to guard against intense price competition that might lead to industry consolidation. To be clear, this solution presented itself not in suppressing production volume, as combinations had attempted in the late nineteenth century, but rather in the systemization and standardization of the rules of the game through collective agreements. At the turn of the century, state courts tested the validity of a cooperative contract by analyzing the procedures by which the association had been formed and by which the contract had been created and enforced. Next, they considered the economic and social effects of these agreements. The state provided regulatory governance for staple commodities and services, ranging from foodstuffs to oil, gas, water, and common carriers. These “necessaries of life” and public utilities were subjected both to state privileges and to subsequent regulation. However, economic regulation of industries that were not staple products or public utilities followed a less straightforward path that combined private management with public oversight. In the s, West Coast grocers coordinated a campaign to standardize the grading and pricing of agricultural products, demonstrating the collective power of the retail grocers. In , the California Retail Grocers’ Association, largely based in Los Angeles and San Francisco, launched a cooperative buying campaign by approaching five major flour millers about creating uniform quality standards for flour grades and standardized pricing based on those grades. Only one manufacturer agreed immediately, but the others followed suit as retailers refused to handle products that lacked systematized sales agreements. Within a few months, according to the trade association’s journal, the four resistant manufacturers had agreed to minimum resale price schedules. The following year, the formation of the Pacific Coast Grocers’ Association



   

On late-nineteenth-century production-suppressing combinations being uniformly against state common law, see Chapter  infra. See also Tony Freyer, Regulating Big Business, –; Gerald Berk, “Communities of Competitors: Open Price Associations and the American State, –,” Social Science History Association  (autumn ), –, . On the development of rate of return regulations for public utilities as a special category of law, see Chapters  and . Brian Balogh, A Government Out of Sight, –. Lorenzo McHenry, “Price Stabilization in the Grocery Trade in California,” Journal of Marketing  (Oct. ): –, . California Retail Grocers’ Advocate, Aug. , , .

California Fair Trade



expanded the movement throughout the Pacific Slope states: California, Washington, Oregon, and Utah. When California codified its competition policy in the early twentieth century, it maintained its distinctive history of supporting trade association practices. California antitrust law focused on penalizing concentrations of capital, while exempting combinations of laborers, farmers, and independent proprietors from prosecution. Amendments narrowed the state’s competition policy to apply only to combinations of capital, dealing mainly with public utilities. In short, California antitrust law created a unique environment for trade associations and labor unions to flourish under the auspices of protecting market competition – and thereby consumer welfare – by ensuring fair play among competitors and guarding against monopolistic trade practices. The California Supreme Court established that specialty producers’ minimum retail prices would be enforced despite federal antitrust developments to the contrary. The first test cases of the California antitrust law involved the retail sales contracts used by the grocer associations. In , Charles P. Grogan, a California producer of small-batch, specialty olive oil, sued H. P. Chaffee, a Los Angeles discount grocer, for price cutting on his brand-name product. Grogan argued that he held a property right in the trademark olive oil. He had paid for extensive advertising over a ten-year period to bolster the reputation and set the price of his pure olive oil. In addition, when Grogan’s cease-and-desist

 





 

California Retail Grocers’ Advocate, May , , ; ibid., June , , . California passed the Cartwright Act in ; amendments in  exempted laborers, marketing associations, and any agreement “the object and purpose of which is to conduct business at a reasonable profit.” California Business and Professions Code (Deering’s California Codes), Sect. –, , ,  (San Francisco, ). Woeste, Benevolent Trust, –. Woeste describes California antitrust law as similar to the Clayton Act in that both “embraced a specific version of cooperation – the nonstock form – and declared it compatible with [existing federal] antitrust law.” Charles P. Grogan v. H. G. Chaffee,  Cal.  (), upholding manufacturer-set minimum prices because of an absence of intent or power to monopolize; Ewald Grether, “Experience in California with Fair Trade Legislation Restricting Price Cutting,” California Law Review  (Sept. ): –. Grogan,  Cal. . Ibid., . The court stated that the “plaintiff has extensively advertised to the public the fact that he manufactures a pure olive oil, and that such oil is guaranteed to be pure and wholesome. In his advertising the plaintiff has used certain designs copyrighted by him, and these designs are placed on every bottle or package of oil manufactured and sold by him, as a trademark.”



American Fair Trade

order failed to stop the price cutting, other retailers began cancelling orders. The California Supreme Court found that “[the contract was] simply a means of securing the legitimate benefits of the reputation which his product may have attained.” Grogan’s resale policies, the court found, did not constitute a restraint of trade because substitutable goods existed. In other words, Grogan’s policies had no tendency toward monopoly power over the industry. The second test case involved Ghirardelli chocolate and presented an even stronger affirmation of resale price agreements under California antitrust. The Grogan case had arisen under the Civil Code, not the Cartwright Act, California’s competition law. The Ghirardelli case challenged common law, the Cartwright Act, and the civil code. In this case, a retailer purchased ground chocolate from a wholesaler, agreed to the Ghirardelli sales policies, and then violated the resale price notices affixed to the original packaging. Following the Grogan ruling, the court held that because no monopoly existed in luxury chocolates and the intended result of the contract had been to protect third parties (the consuming public), the manufacturer’s resale contract must be enforced. The California court reasoned that protecting the public – and not just the specialty manufacturers and their trade representatives – required price and service contracts between manufacturer and retailer. The cooperative price agreements, therefore, represented consumer welfare protections as well as safeguards for manufacturers’ interests. Simultaneously, federal courts began moving in the opposite direction, interpreting antitrust law as strictly prohibiting both unilateral and associational agreements that managed interfirm market behaviors affecting price. Since the late s, the U.S. Supreme Court had interpreted antitrust law as prohibiting contracts that facilitated cartels or horizontal combinations of competitors. Despite the Court’s adaptation of the “rule of reason” analysis, which allowed it to weigh the competitive

 

  

Id., . The Grogan case arose under civil code section , which involved contracts made in restraint of trade that affect the rights of a citizen to ply his or her trade. Don T. Hibner Jr. and Heather M. Cooper, “‘Per Se’ and Not ‘Per Se’: An Historical ‘Quick Look’ at Minimum RPM under California Law,”  Competition (spring ): . Competition is an official publication of the California State Bar. Ghirardelli v. Hunsicker,  Cal.  (). Park & Sons Co. v. Hartman,  F.  (); Dr. Miles Medical Co. v. Park & Sons Co., Inc.,  F.  (). U.S. v. Trans-Missouri Freight Association,  U.S.  (), striking down a railroad combination.

California Fair Trade



effects of such business arrangements, it maintained a strict opposition to contracts that might promote horizontal combinations and enforced a per se prohibition of unilateral price controls. By , the Court had created a strict rule against manufacturers using contracts with their wholesale or retail counterparts that affected sale prices. These vertical contracts were deemed to promote horizontal collusion. In such cases, the Court not only refused to consider the social or economic effects of such agreements but also would immediately strike down any agreement that affected prices as an undue restraint of trade. The intent or competitive effects of any such networking agreement would be irrelevant. Despite the Court’s hard line, it remained divided on how best to protect competitive markets. The salient question for antitrust policy remained: what rules best protected both “small dealers and worthy men” as well as market efficiencies? Rather than a strict prohibition, Justice Oliver Wendell Holmes Jr. had advocated the older common law application of the “rule of reason,” which allowed for more a flexible application of antitrust laws. Justice Brandeis, the “people’s lawyer” who joined the Supreme Court in , formulated a similar interpretation, arguing that the legislature should determine the parameters of “fair competition” and the courts must investigate the particular facts relevant to the industry and the “evils believed to exist.” Although the Supreme Court implemented Brandeis’s more permissive view of association-based rule-making in , it remained divided between strict constructionists and liberal activists. In Grogan, the California court politely rejected what became the U.S. Supreme Court’s per se prohibition of unilateral, or vertical, resale price maintenance by an individual manufacturer: Most of the cases cited by us in our opinion heretofore filed are reviewed by Judge Lurton in Park v. Hartman and are either disapproved or sought to be  

 

Dr. Miles,  U.S. at . For more on this case and the per se prohibition of price fixing contracts, see Chapter . Trans-Missouri,  U.S. at . It was Justice Rufus Peckham’s contention that the strict prohibition of combinations would best protect independent proprietors from industry consolidation. The “literalist” interpretation of the Sherman Act is attributed to his jurisprudence. See Chapter . On Justice Holmes’s antitrust jurisprudence, see G. Edward White, Justice Oliver Wendell Holmes: Law and the Inner Self (Oxford, ), –. See Chapter  for a discussion of Brandeis and his alternative vision for American capitalism, known as “regulated competition.” Chicago Board of Trade v. U.S.,  U.S. ,  ( ), upholding private association rules affecting prices; Freyer, Regulating Big Business, –, –.



American Fair Trade

distinguished. It does not appear to us, however, that the attempt to distinguish has in all instances been entirely successful, and notwithstanding the great respect entertained by us for so able and learned a court as that which decided the cases of Park v. Hartman and Miles v. Park, we must remain of the opinion that the conclusion there reached, so far as it is applicable to the case before us, is contrary to the weight of authority.

The California Supreme Court distinguished its ruling from the federal court’s by dismissing the federal cases as unrelated to the specialty producers engaged in intrastate commerce in California. Thus, the California court argued, these contracts remained enforceable within California jurisdiction. The Ghirardelli ruling, in , was reached after the U.S. Supreme Court declared such contracts void under the Sherman Act; however, the price cutter sued by Ghirardelli could not appeal to federal courts because the commerce took place within California. Yet the California Supreme Court concluded that “we see no reason for modifying the rules expressed in Grogan.” Meanwhile, other Pacific Slope states followed suit and enforced manufacturers’ contracts to dictate retail prices of their products and/or services. In the s, cooperative retail grocer associations grew in popularity, especially in Californian urban centers, and the number of brands under resale price maintenance expanded. At the same time, however, the market diversified to include more discount chains and specialty stores. In  cash-and-carry stores that offered no credit and few services emerged in northern California and became both consumer outlets and

 



 Grogan,  Cal. at . Ghirardelli,  Cal. at . Fisher Flouring Mills Co. v. Swenson,  Wash.  (). The Supreme Court of Washington held that if no monopoly existed, then manufacturers’ resale contracts did not violate the public interest and did not cause extreme price competition that could decrease market competitors. Moreover, if a product’s price was set too high, then consumers would not buy it or more competitors would flock to the market, thus bringing down retail prices. See To Prevent Discrimination in Prices and to Provide for Publicity of Prices to Dealers and the Public: Hearings on H.R.  Before the H. Committee on Interstate and Foreign Commerce, rd Cong. (Feb. , –Jan. , ), . This publication begins with testimony by Louis Brandeis in support of the “Stevens bill,” which provided for the legalization of resale price control by manufacturers and retailers; it would have effectively nullified the Dr. Miles ruling discussed earlier. Ewald Grether, “Whole Grocery Trade in San Francisco: –,” Harvard Business Review  (): –; California Retail Grocers’ Advocate (June , ), . The journal printed a comparison of prices at the Bethlehem company store and retail grocers’ wholesale prices for several brand name goods, including Del Monte canned goods, Kellogg’s corn flakes, Carnation milk, and Aunt Jemima’s buckwheat flour.

California Fair Trade



suppliers to chain stores. By  an explosion of chain stores in the Bay Area reordered the market and precipitously drove down food prices through the late s. By the end of the decade, the grocery trade had expanded to include chain stores, cash-and-carry outlets, and specialty stores. Each pursued a different revenue stream and branding approach. Uniform prices became increasingly relegated to specialty shops where private brands remained popular, especially for coffee, fruits, vegetables, and fish products. As early as  California’s courts and legislature had created legal rules and business norms that protected certain trade association practices that promoted product standardization and protected brand-name goodwill. Such efforts were carried out both by associations, as in the case of standardizing flour grades, and by producers of specialty goods, such as Grogan’s olive oil or Ghirardelli chocolate. Goodwill attached to the brand or trademark as a property right of the manufacturer or owner and, in California, could be protected through retail price setting policies between producer and retailer. This tool for brand management often functioned through retail networks and ostensibly protected consumers’ interest in quality and safety. But according to the federal law, a producer that wanted to control production, distribution, or retail policies had to own those processes; that is, it had to be vertically integrated. Nevertheless, producers in California – acting unilaterally or through associations – could make sales agreements with networks of retailers, allowing each entity to retain independent ownership while cooperatively managing market relations, including services and prices. Other states followed California’s formulation of antitrust law by exempting farmers, laborers, and independent proprietors conducting business to maintain “reasonable prices.” 

 

 

Grether, “Wholesale Grocery Trade,” . For example, in , San Francisco had four grocery chains with a total of  stores; the following year, there were seven chains operating  stores. Ibid., . Goodwill refers to the value of the brand name and its association with quality or price. Federal Trade Commission, Report on Resale Price Maintenance (Washington, DC, ), : , ; Federal Trade Commission, Report on Price Maintenance (Washington, DC, ), : , , ; Roy Johnson, William Ingersoll, and Gilbert Montague, The Control of Resale Prices (Chicago, IL, ), –. See Herriman case; California Cured Fruit Association v. F. E. Stelling et al.,  Cal.  (). See also Woeste, Benevolent Trust, –. See Fisher Flouring Mills Co. v. Swenson,  Wash.  (); Colo. Sess. Laws, , c. .



American Fair Trade

      Despite the autonomy of state laws within intrastate commerce, federal antitrust jurisprudence still loomed over private actions as well as state law. The Federal Trade Commission, for example, went after San Francisco–based Hills Brothers for price fixing its fair trade coffee. Hills had maintained a nationwide retailer network for its high-end vacuumpacked coffee since the early s. Trouble arose when Piggly Wiggly, a discount grocer initially based in the South, began advertising Hills coffee as a loss leader, flouting Hills’s wholesale and retail contracts that required vendors to maintain “reasonable prices” as determined by the contract. Coffee had presented a unique opportunity for advocates of fair trade. Given California’s abundance of ports to receive shipments from Central and South America, it was home to many coffee roasters and distributors. As demand for coffee continued to grow, more start-up firms entered the market and improvements in distribution and packaging lowered prices. Prior to World War I, coffee could only be advertised in regional markets because of its relatively short shelf life, but postwar innovations in packaging expanded the reach of West Coast roasters. Prices for coffee had historically fluctuated as violently as those in other agricultural markets, which presented another challenge to advertising campaigns. To maintain and grow market share, roasters and retailers invested heavily in both advertising and brand-name product differentiation, each hoping to set its product apart from competitors’ wares. The Hills Brothers, a coffee importer and roaster in San Francisco, pioneered price protection policies as it developed its specialty brand coffees. Reuben W. Hills, known to his friends as “RW,” patented vacuum-packaged coffee beans, which are still in use today. Hills then     

See People v. Sacramento Butchers’ Association,  Cal. App.  (), upholding the California antitrust act. Hills Bros. v. Federal Trade Commission,  F.  (). Mark Pendergrast, Uncommon Grounds: The History of Coffee and How It Transformed Our World (New York, ), –, , . Pendergrast, Uncommon Grounds, . See www.hillsbros.com/history.aspx, accessed February , ; “Hills Bros Coffee Fuels Up Chicago,” Business Wire (June , ), “Hills Bros Coffee, founded in , has grown to become a market leader in the coffee industry, offering the highest quality coffee beans throughout the United States.” Pendergrast, Uncommon Grounds, –. The Hills family made a great deal of money selling butter to the U.S. army

California Fair Trade



hired N. W. Ayer to design a regional advertising campaign for the vacuum-sealed Red Can. After ads were posted in streetcars across the West, demand jumped and the roasting house boosted production. Beginning in November , Hills’s contracts stated that any retailer of their coffee must sell it at least one nickel over the wholesale price, which provided all retailers an  percent markup to cover overhead costs. Hills Brothers expanded its product lines and implemented a quality-control certification process tied to members’ resale price schedules. The company employed  sales agents who maintained a network of over , customers, approximately half of whom were in California, through regional offices and store visits. Hills also advertised in trade journals and sent advertising materials directly to grocers, creating a uniform price for its high-end products. After a two-year campaign, the company boasted that all major San Francisco roasters had also implemented such price protection plans. As the Hills sales network grew, the Federal Trade Commission launched an investigation focusing on its price policies that crossed state borders; namely, the firm’s explicit refusal to deal with vendors that failed to abide by the Hills price protection plan. The FTC became aware of the Hills policies when Piggly Wiggly began advertising “cutrate” Hills products in open defiance of the price protection plan. Retailers in the Hills sales network threatened to cancel orders if the price policies could not be uniformly enforced. Hills had little recourse aside from its stringent promises to cease dealing with Piggly Wiggly suppliers. It was their detailed recordkeeping – the stickers in their account books that read “Do Not Sell” – that ultimately enabled the FTC to prove Hills’s price fixing in interstate trade. Hills Brothers’s decision to refuse to deal with Piggly Wiggly made the company a hero to the small retailer



  

during World War I. At that time butter was shipped in brine so that it would not spoil. In an attempt to improve the shelf life of butter, R. W. Hills inquired about a novel vacuum seal, which he then applied to coffee beans. Pendergrast, Uncommon Grounds, –. “Prior to World War I, Hills Brothers Red Can vacuum-packed coffee was sold throughout the seven western states, in part of Montana and Alaska. In , [advertising] moved into New Mexico, Colorado, Wyoming, and the rest of Montana. Throughout the rest of the twenties, the company steadily marched east, systematically saturating every new area with newspaper ads while salesmen set up window displays in local retail outlets.”   Hills Bros.,  F. . Ibid., . Ibid. Pendergrast, Uncommon Grounds, , . Hills Bros.,  F. . See also Federal Trade Commission, Annual Report (Washington, DC, ), .



American Fair Trade

community. It became the leading proponent of fair trade coffee in the early s. The FTC exercised its administrative authority to review interstate trade contracts by intervening against Hills Brothers’s unilateral pricing policies. The FTC found that Hills’s systematized recordkeeping coupled with its refusal to deal with noncompliant retailers had the intended effect of fixing prices. Moreover, Hills had not participated in an FTC trade practice conference or participated in association-based information-sharing practices, which might have helped establish the reasonableness of its contracts. The incident convinced proponents of unilateral as well as association-based resale price policies that success required protective legislation. The Hills Brothers controversy demonstrated that the FTC could be used against California “fair trade” agreements, even though those business methods were legally sanctioned within the state. Forty-six percent of Hills Brothers’s business occurred outside California. After Hills launched its fair trade coffee campaign in , sales rose to approximately ,, pounds of the Red Can and Blue Can brands. Despite the costs of constantly revising, communicating, and monitoring minimum retail prices, Hills Brothers considered the price policy a trade-off for the retailers’ help in advertising and in soliciting customers. Nevertheless, the FTC found the company’s systematized recordkeeping and refusal to deal with retailers who breached the minimum price policy problematic. It reported that the sales policy injured the public because its effect was to fix prices. Hills Brothers retorted that “it  





 

Pendergrast, Uncommon Grounds, . In April , the FTC demanded an explanation from Hills Brothers of its resale price policy. Hearings were held in Washington and San Francisco. The Hills Brothers brief argued that the company, in fact, promoted competition by protecting the small corner grocery against predatory price cutters. Beginning in the fall of , the firm refused to deal with chains that did not sell its product for at least a nickel above the wholesale price, which, it argued, would allow for an  percent markup. Hills felt this sufficient to protect the small dealers against the loss-leader advertising of newer chain stores. See Pendergrast, Uncommon Grounds, –. Hills Bros.,  F. . The Court found that Hills’s records of price-cutting retailers constituted proof of restraint of trade. Otherwise the Colgate ruling would have controlled, allowing a firm to refuse to deal with retailers if not proven to be in the service of price-fixing. See Maple Flooring Manufacturers’ Association v. United States,  U.S.  (), upholding trade association information sharing on product costs and distribution methods and prices. Hills Bros.,  F. . Ibid., . “A bulletin issued by the petitioner under date of January , , and addressed to salesmen, contains the following: ‘Whenever the necessity occurs for a

California Fair Trade

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is lawful to adopt and maintain a minimum resale price plan in these [western] states, under the decisions of their Supreme Courts.” Thus, the FTC limited the validity of the Hills open price policies to intrastate commerce, making them untenable for nationally advertised and distributed merchandise. Rather than confront the social and the economic interests at stake, the circuit court followed Supreme Court precedent, which proscribed interstate fair trade campaigns and their accompanying contracts. The petitioner offered considerable testimony tending to show the evils resulting from price cutting and selling below cost, but, as said by Judge Lurton in John D. Park & Sons Co. v. Hartman, “This is an argument better addressed to legislative bodies than to the courts.”

The Hills case demonstrated the need for federal legislation to enable price and service contracts be enforced across state lines. Despite the overwhelming California legislation and litigation that upheld fair trade agreements, the federal courts limited their impact because of the growing importance of interstate trade, even for distributors who held large market shares in individual states. As a result, Hills reoriented its business model to mimic that of a chain selling mass-produced goods. In  the company introduced a new roasting technique that relied on lower costs and high throughput production methods: large quantities of beans would be roasted on a conveyor belt. With the abandonment of batch roasting, coffee quality ostensibly declined and artisanal roasters lost out to machines, but Hills succeeded in gaining market share against A&P’s Eight O’Clock coffee brand. In accordance with the FTC trade practice conferences of the late s, association self-regulation without government oversight or approval failed to pass constitutional muster. Monitoring and enforcement required state complicity. As trade associations passed bylaws to require compliance with trade rules and established institutes to monitor and enforce industry-wide agreements, the problem of malfeasance persisted. If one firm – or worse, a group of firms – decided to break from the trade practice rules and undercut standardized production, prices, or service guarantees, then the strength and integrity of the entire association’s trade rules could be undermined. While the Colgate ruling ()



salesman to close the account of a customer for noncompliance with the Hills’ minimum resale price policy, the San Francisco office and the branch office shall both be notified. “Do Not Sell” indicators will then be attached to ledger folio (or ledger cards).’”   Ibid., . Ibid., –. Pendergrast, Uncommon Grounds, .

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American Fair Trade

had established that manufacturers could refuse to deal with price-cutting retailers, the FTC case against Hills cut in the other direction, holding that the recordkeeping necessary to maintain price protection plans demonstrated an intent to fix prices. In the same year, the Court allowed the Maple Flooring Association to carry out information sharing on prices, sales contracts, deliveries, and the like, but also made clear that no formal contracts could be drawn up to guarantee uniformity of pricing. Thus, business stabilization plans organized through self-regulation remained toothless without state sanction. The U.S. Supreme Court retained the power to invalidate all or part of the California codes, as it had in Colorado. Thus, the problem of federal antitrust law presented a major hurdle to the expansion of associational business activity both inside and outside California.

    ’    “ ”  The California campaign for “fair trade” really began with Edna Gleason, a self-trained and state-certified pharmacist, who in the late s became known as the “mother of fair trade.” She owned and operated three drugstores in Stockton, California, the first of which she and her husband had opened in . His death left her as the sole proprietor and manager, a task she embraced with aplomb. In a rapidly changing retail market, Gleason confronted new types of competition from chain stores and what were then known as pineboards: discount outlets that often sold overstocked brands at bargain prices. Neither of the new competitors sold prescription compounds or offered medical advice; however, the brandname goods that they advertised at cut-rate prices presented a major threat to the traditional pharmacist’s bottom line. In turn, Gleason became interested in cooperative efforts to manage this highly competitive market.





Cline v. Frink Dairy Co.,  U.S.  (), striking down Colorado’s “reasonable price” provision as too vague. The California Supreme Court upheld the Cartwright Antitrust Act in Spegle v. Board of Fire Underwriters,  Cal. d  (). “Gleason Taken by Death,” Stockton Record, Mar. , , ; Otis R. Tyson, “‘I Had to Have More Stores’ So Said Edna Gleason,” Pacific Drug Review (hereafter PDR), May , n.p.; “Edna Gleason Seated by Council: Councilwoman Is Cut-Rate Foe,” Stockton Record, Oct. , , . Unfortunately, Gleason did not leave personal papers, making it difficult to speculate on her motivations.

California Fair Trade

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In a town of roughly , inhabitants, Gleason focused on advertising her pharmacy as locally owned, community-oriented, and – most of all, according to Gleason – not a chain store. After her husband’s death, she renamed her store “Tom Gleason’s” to “avoid giving out the bigchain impression.” She also offered medical advice, delivery services, and prescription compounding – services not offered by department stores. Additionally, Gleason cultivated a reputation for providing indigent community members with medical advice and services. In the s, she identified three threats to the longevity of her business: chain store price competition, rising rent, and downtown parking. The latter two she countered by opening two additional stores in newer neighborhoods close to the trolley line. Price competition, however, became the centerpiece of her decades-long activism for fair trade. Already, national and regional trade associations of retail druggists published prescription formulas and recommended retail prices. In an authoritative study of U.S. drug regulation, economic historian Peter Temin has shown that there was very little price variance in compounding. Fair trade sought to extend price controls to brand-name medicines and toiletries. While pharmacists differed from chains by offering advice and expert prescription compounding, chain and department stores began carrying brand-name toiletries similar to what the pharmacists carried. In the s, the retailing revolution came of age when chains and department stores spread across America, offering lower prices on a wide range of goods. East Coast chain stores, like the Great Atlantic & Pacific Tea Company (A&P), and department stores, like R. H. Macy’s, pioneered a business model that captured profits by combining high-volume sales with

  

  

John Moody, Moody’s Analyses of Investments (New York, ), : . Tyson, “More Stores.” Alice Jean Matuszak, “Edna Gleason: Dynamite from California,” Pharmacy in History  (Jan. ): –. The author interviewed Professor Matuszak, who had previously interviewed several people who had worked with Gleason. They attested to her providing free health care advice and products to poor members of the community. Carmen Spradley, “The Gleason House: Serving the Medical Needs of the Homeless,” San Joaquin Magazine Health and Medical Guide , –, last modified May , , http://issuu.com/sanjoaquinmagazine/docs/medguide_issuu_final. Peter Temin, Taking Your Medicine: Drug Regulation in the United States (Cambridge, MA, ), . Ibid. Nelson Lichtenstein, The Retail Revolution: How Wal-Mart Created a Brave New World of Business (New York, ), –.



American Fair Trade

lower profit margins. Most of these retailers purchased goods from a variety of manufacturers. High-throughput manufacturing revolutionized consumer products from processed foods (e.g., Campbell’s Soup) to cigarettes (e.g., American Tobacco). Taking advantage of manufacturers’ economies of scale, these new retailers uprooted the existing distribution system, tilting economic power toward large-scale retailers and away from the networks of regional manufacturers, wholesalers, and local retailers. Many manufacturers also complained that they had lost control of their brands. Chain stores, such as Owl Drug and Walgreens, pursued retailing tactics similar to those of the variety grocery chains, like A&P and Ralph’s Grocery Company. These firms relied on bulk wholesale purchases from either a producer or a jobber, though the latter was increasingly becoming displaced by direct sales. Historians have emphasized how the retailing revolution created consumer demand through extensive brand advertising campaigns and grand openings of new stores. Certainly, chain stores captured consumers’ attention, offering reduced prices on brand-name goods by increasing their sales volume. Manufacturers and independent retailers, however, did not back down from the challenge; they contested the rise of chain stores and their discount counterparts, arguing that an alternative, more ethical form of capitalism could be achieved through cooperative efforts. For Gleason, however, chain stores were not exactly the problem. In fact, many chain stores joined the fair trade movement, agreeing to abide by association-based trade rules. Instead, she and her fellow independent retailers identified pineboards, as they were known on the West Coast, as the major threat to their livelihood. These discount outlets were sometimes chains, but not all chains were pineboards. The pineboard’s distinctive feature was its ability to offer brand-name products at prices below those of the manufacturers’ retail network, thus undercutting even the chain stores. Typically, outlet stores lowered their fixed costs by   

Chandler, Visible Hand. Susan Strasser, Satisfaction Guaranteed: The Making of the American Mass Market (New York, ), –. Federal Trade Commission, Chain Stores: Growth and Development of Chain Stores (Washington, DC, ), ix–x. The FTC estimated that over a forty-three-year period through , approximately , new chain stores were opened and , stores were acquired by chains. Between  and , acquisitions rose to  percent of the total. On creating consumer demand, see Roland Marchand, Advertising the American Dream: Making Way for Modernity, – (Berkeley, CA, ).

California Fair Trade

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occupying low-rent commercial space on a temporary basis to test the competitive waters. They could also lower their variable costs of labor by employing unskilled, low-wage laborers rather than trained pharmacists. Costs were further reduced as these stores required cash payments and did not offer delivery services. Rather than offering prescription drugs requiring a registered pharmacist, they sold more basic consumer goods. Pineboards were alleged to practice predatory pricing – sales below cost intended to injure competitors – in an effort to force traditional retailers out of business. Gleason’s arguments against pineboards emanated from her appeal to local control, economic independence, and the self-regulation of competitive markets. In , she entered into her first contest with a so-called pineboard. In response to R. L. McMaster opening Kut-Price drug outlets in three California towns – Fresno, Stockton, and Modesto – Gleason launched a campaign to coordinate Stockton’s Independent Merchants’ Association to open the town’s first cooperatively owned discount drugstore, aptly named Bed Rock Drug Store. By pooling local resources, Bed Rock advertised aggressively and mimicked Kut-Price’s no-frills sales approach. The major difference, of course, was the reputation of the Independent Merchants’ Association. By October, Gleason had bought out the Kut-Price store and liquidated its merchandise. The “Stockton Plan” demonstrated the feasibility of competitors forming a market-based collaboration while preserving service competition and minimizing direct price competition. By the end of the decade, the limits of cooperation and control through an independent cooperative had been reached in Stockton, but Gleason’s work had gained her notoriety with the state pharmaceutical associations and soon she shifted her goals to influencing business practices in a much larger market.  

 

“Who’s Your Competitor? What Is This New Type of Competition Commonly Called the ‘Pine-Board’ Store?” PDR, Apr. , n.p. “Below-cost pricing” refers to selling a good below its average variable cost, which may include the cost of purchasing it from the manufacturer or wholesaler as well as labor costs. If done in an effort to drive competitors out of business, this is referred to as “predatory pricing.” See Philip Areeda and Donald F. Turner, “Predatory Pricing and Related Practices under Section  of the Sherman Act,” Harvard Law Review  (Feb. ): –; Eric Rauchway, “The High Cost of Living in the Progressives’ Economy,” Journal of American History  (Dec. ): –; Marc Levinson, The Great A&P and the Struggle for Small Business in America (New York, ), , , . “Beating ‘Pineboards’ to the Punch,” PDR, May , n.p. “California,” PDR, Nov. , .



American Fair Trade

As Gleason entered the fair trade campaign in California, the U.S. Chamber of Commerce examined the processes by which new administrative laws could govern trade association practices. Although the FTC trade practice conference idea would not “cure all competitive or trade differences,” it offered “another step in the orderly development of selfregulation of business” by incorporating “the cooperation of government in so far as that is possible.” Christie Benet, general counsel for the Interstate Cotton Seed Crushers’ Association (Columbia, SC), addressed the annual meeting of the USCC to explain the legal significance of the trade practice conferences. He explained that trade associations “stand firmly for security, stability, efficiency, technological progress, higher quality of goods and higher ethical conduct of business.” Through “deliberative but voluntary cooperation,” these groups established workable rules prescribed by an industry for its own regulation. Reading from the FTC’s  Annual Report, Benet described how this process created administrative law: The trade practice conference affords, broadly stated, a means through which representatives of an industry voluntarily assemble, either at their own instance or that of the commission, but under auspices of the latter, for the purpose of considering any unfair practices in their industry, and collectively agreeing upon and providing for their abandonment in cooperation with and with the support of the commission. It is a procedure whereby business or industry may take the initiative and make its own rules of business conduct – its own law merchant, subject, of course, to inaction or acceptance by the Commission.

“Law merchant” refers to the generally accepted rules of custom and usage established by an industry for the regulation of commercial transactions. Of course, “it remains for the trade practice conference procedure to supply, in a measure at least, an element which heretofore has been completely lacking – namely, enforcement.” Since the first trade practice conference in , held by an association of dairy creameries, approximately fifty industries had availed themselves of this method and over  trade rules had gained approval from the Commission. The institutionalization of the “new competition” ideal in     

Christie Benet, “Trade Associations and the FTC,” Apr. , , Box , –, , USCC Rec. Ibid., . Ibid. See also Federal Trade Commission Annual Report (Washington, DC, ). Benet, “Trade Associations and the FTC,” . Ibid., –. “A fairly good cross section of American business life is shown in the names of the different industries represented. Some of these are creamery, rebuilt typewriters,

California Fair Trade



trade associations and in public administrative bodies required explanation to Congress. In February  the FTC’s economists and lawyers submitted to Congress a comprehensive report on open price associations undertaken during a three-year period “to test for effects of the open price activity on the stabilization of prices and of industrial operations.” The report argued that “open-price associations of certain kinds work largely in the direction of uniformity and constancy of prices, but it does not appear that open-price work is the major and dominant factor in the situation generally.” It concluded that “if price reporting is an efficient substitute for a more highly organized form of market, such as is afforded by an organized exchange, then the effect of price reporting may properly be expected to be greater uniformity of prices at a given time in the industry where the open-price association is active.” The trade practice conferences carried out many of the same regulatory functions of a formal stock exchange or trade association in standardizing information-sharing practices that led to more stabilized commodity prices. The California advocates of fair trade envisioned a strong state pharmaceutical association that would publicize standardized price lists and monitor member compliance, much like the trade practice conference approach. The publication of monthly price lists would, they argued, allow businesspeople and regulators alike to monitor price changes. This was modeled after the U.S. National Formulary, established in  by the American Pharmaceutical Association to standardize compounding formulas and their input prices. As representatives of a profession, the pharmaceutical associations endorsed tougher regulations on prescription

   

butter manufacturers, oil, package macaroni, standard sheet music, hog cholera serum, gold-filled watch cases, insecticide and disinfectant industry, motion pictures, gold balls, fur, hickory handles, cottonseed oil mill, grocery, knit underwear, beauty and barber supplies, face brick, [and] fertilizer. Among those to be held are cut stone, upholstery, spice grinders, plumbing and heating, scrap iron and steel, and jewelry.” Ibid., –. Quote taken from FTC Report on Open Price Associations, S. Doc. No. – (Washington, DC, ), . Benet, “Trade Associations and the FTC,” . Federal Trade Commission, Annual Report (Washington, DC, ), . Edward Kremers and Glenn Sonnedecker, Kremers and Urdang’s History of Pharmacy (; repr., Madison, WI, ), ; Temin, Taking Your Medicine, –. In , the National Formulary (NF) was adopted by the federal government as an official document of compounding formulas. The NF was modeled after the U.S. Pharmacopeia; in , the two standard-setting organizations merged. See Lee Anderson and Gregory J. Higby, The Spirit of Voluntarism: A Legacy of Commitment and Contribution: The United States Pharmacopeia, – (Rockville, MD, ); Gregory J. Higby, ed. One Hundred Years of the National Formulary: A Symposium (Madison, WI, ).

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American Fair Trade

compounding, licensure exams, standardization of colleges of pharmacy, and ownership rules for pharmacies. As business owners, the pharmacists pushed for price schedules to create transparency in retailers’ buying, marketing, and sales. Former FTC commissioners Abram Myers (–) and Nelson Gaskill (–) joined Benet at the USCC annual meeting in  to address the legality and enforceability of such trade practice rules. Myers and Gaskill emphasized the necessity of cooperation with the FTC in creating and enforcing trade rules that the judiciary would allow. Myers began by explaining the benefits of the new conference rules. The FTC’s new grouping system differentiated between trade rules with FTC enforcement from those that lacked it. “By voluntary action,” he explained, associations could “insure against governmental interference in your business” by agreeing to abide by trade rules. Of course, these conferences were held under the auspices of the FTC and required approval from the commissioners. Group  rules enjoyed legal enforcement and Group  rules did not, usually because the judiciary had not ruled on such practices. Myers had attempted to have Group  rules enforced under the auspices of a voluntary contractual agreement. Upon questioning, he made clear that recent conferences had all specified that “selling below cost for the purpose of injuring some competitor” constitutes an unfair practice and is therefore found in Group  and explicitly forbidden by the conference. While Group  rules required compliance and became industry-wide custom, Group  rules were more experimental. Cooperate with the FTC, Myers advised, to be free of judicial interference. Gaskill, too, recounted his experiences at the FTC, emphasizing the coevolution of trade associations and the FTC as rule-making authorities. Initially, fearing violation of antitrust laws, the FTC had allowed “trade practice submittals” wherein the Commission tentatively approved certain trade rules. Over time, however, the Commission came to accept that “the efforts of the trade conferences is [sic] not to eliminate competition . . . but to devise a system of rules under which each individual will be free, with  



Abram Myers, “Eliminating Unfair and Uneconomical Practices,” Apr. , , Box , , USCC Rec. (presentation to the Roundtable on Trade Practice Conferences). Meyers, Roundtable on Trade Practice Conferences discussion, Apr. , , Box , , USCC Rec. According to Myers, the FTC stated: “If you do not exercise your right to openly and fairly withdraw, but you secretly violate the resolution, that may be regarded as an unfair method of competition.” Ibid. Myers, “Eliminating Unfair and Uneconomical Practices,” .

California Fair Trade

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justice as to all others, to express his full and true competitive force.” Trade associations had other mechanisms by which to enforce Group  rules, he continued, such as excluding noncomplying firms from association benefits. Gaskill, however, disagreed with Myers regarding the need for legislation to guarantee enforcement of trade rules. Myers insisted that the FTC could co-evolve with trade associations and without legislative intervention. He pointed to the FTC Act’s stated intention that the Commission constantly renegotiate the meaning of an “unfair trade practice.” He argued that, ultimately, the purpose of the FTC should be to create administrative law, or “law merchant, if you please,” which would guide the FTC’s interactions with businesses and facilitate new rules for competition policy. His rules intended to conflate administrative law propounded by the FTC and law merchant produced by interfirm organizations and agreements. While the ideas circulating at the federal level were inspiring, the problem for California pharmacists such as Edna Gleason was that the FTC sponsored conferences for producers, not retailers. In February , Gleason teamed with W. Bruce Philip, a well-known San Francisco pharmacist and lawyer, to lead efforts to unify pharmaceutical associations and coordinate a statewide initiative for legislation to strengthen the “reasonable price” provisions of California law. Such a law would give manufacturers of brand-name goods greater power to set service and price agreements, but would also empower retailers, who carried out the monitoring and sometimes the enforcement functions. Through the s, Philip had led efforts by the American Pharmaceutical Association to modernize retail management. As a professor of pharmacy at the University of California, he advocated revising curricula to better educate students on modern merchandising and cost accounting,

  

Nelson Gaskill, discussion at the Roundtable on Trade Practice Conferences, Apr. , , Box , , USCC Rec. For Myers’s discussion with Gaskill during the general session question-and-answer, see ibid., –. The use of the term “administrative law” refers to its use in the early twentieth century, meaning the rules promulgated by administrative agencies, as opposed to its current meaning of Congressional or executive rules promulgated to govern the functioning of administrative agencies. See Frank Goodnow, Principles of Administrative Law in the United States (New York, ). For an interesting overview of administrative law, Goodnow, and the “German connection,” see Philip Hamburger, Is Administrative Law Lawful? (Chicago, IL, ), –. For a discussion of law merchant and sealed contracts leading to the rise of contract law in the nineteenth century, see Chapter .

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American Fair Trade

a first step toward price transparency and standardization. Philip’s efforts to institute cost accounting courses for pharmacy students served the larger goal of shaping competitive practices in commercial services. Vierling Kersey, Director of Education in California, supported Philip’s educational mission through the s, encouraging pharmacists to contribute to training their part-time junior assistants, often high-school age, as “industrial secretaries.” Kersey endorsed this training as both a public service and smart business, “for this broad idealism of the new competition . . . involves more ethical and social implication than increased skill in production.” The first step, according to Kersey, Philip, and Gleason, should be “informational training,” followed by instruction on business law and bookkeeping. These tactics were critical to managing a modern store, but also to maintaining a strong association of retailers. First, Gleason and Philip reorganized the California Pharmaceutical Association (CPhA), consolidating two regional associations into a more formidable single entity. Next, they focused the CPhA’s publications and meetings on “reasonable prices” that would be set by manufacturers but agreed upon through the voluntary consent of CPhA members. The association’s dues supported monthly price bulletins circulated through the state medical journals and lobbying in Sacramento. The bulletins included standardized prescription compounding formulas and pricing and informed readers about uniform cost-accounting methods and manufacturer-set fair trade price schedules. A system of open bidding would allow firms to compare costs, prices, bids, and contracts on medicines and consumer brands. The state journal, Pacific Drug Review, also 

  

See the following by W. Bruce Philip: “Increasing Net Profits by Increasing Average Sales,” Journal of the American Pharmaceutical Association (hereafter JAPA)  (June ): –; “Conference of Teachers of Commercial Pharmacy,” JAPA  (Oct. ); “The Right Side of the Show Case,” JAPA  (Aug. ): –; “A New Faculty Member,” JAPA  (Apr. ): –. Philip encouraged the APhA to endorse the federal fair trade bill, which had been stalled in Congress for decades. See “The Department of the National Association of Boards of Pharmacy,” JAPA  (Mar. ): –. Vierling Kersey, “Part-Time Commercial Training,” Vocational Education Magazine  (May ): –, . “California United,” PDR, Feb. , . The PDR published a ten-part series, called “Prescription Pricing,” throughout . Prior to the unification of the northern and southern pharmaceutical associations, each region published separate price listings to members. “Los Angeles and Southern California: Cut Prices and Cut Profits,” PDR, May , . The article endorsed the use of “blue books” for all pricing by Southern California Pharmaceutical Association members.

California Fair Trade



advertised fair trade products, price lists, and locally owned retailers who agreed to abide by the standardized service policies. At the summer annual convention, the association announced plans to launch a new monitoring system. Initially, enforcement of voluntary price plans operated through the pharmaceutical associations compiling information on “price chiselers” to be shared with manufacturers, but these efforts at partial planning required state complicity. Pharmacists pressured manufacturers to advertise and enforce fair trade sales contracts that set price schedules and service guarantees. Retailers then policed one another, to maintain price levels and service agreements, and reported detractors to their local association and the manufacturer. Manufacturers were then to pressure pineboards and department stores to abide by those same sales contracts or they would be blacklisted, even though keeping or publishing such a list was against federal law. Lacking much enforcement power, the committee needed state enforcement, which was uncertain given that most drugs and toiletries traveled across states lines into California. The July  meeting of the CPhA demonstrated the limitations of self-regulatory price stabilization plans. Edna Gleason, the only woman among the  attendees at the Pasadena conference in a leadership position, took center stage. Her gaze was cast upon L. N. Brunswig, president of Brunswig Drugs, who allegedly dumped unsold products to cut-rate retail outlets that then sold the goods at prices far below those of their competitors. He had acknowledged that his wholesale company sold items to cut-rate dealers in Stockton and Fresno. Gleason, who “apparently [came] to the convention determined to open up this question and have it thoroughly discussed,” accused Brunswig of misrepresentation and predatory practices, garnering her the moniker “the dynamite from California.” Brunswig denied the accusation, but Gleason’s fellow Fair Trade Committee members defended her allegations. It was men like Brunswig, they believed, who threatened the network and had caused



  

“Armand Defends Sales Policy,” PDR, May , ; G. L. Sorenson, “Profit and Success in Independence” PDR, Mar. , n.p.; McKesson & Robbins advertisement, “Write to Your Congressman,” PDR, Apr. , n.p.; “Los Angeles and Southern California,” ibid., ; E. J. Clary, “Right Competition Is a Stimulant,” PDR, Aug. , . “Convention of the California Ph. A.,” PDR, July , –, .  See note , p. . “California A. Ph. A. Convention,” PDR, July , –. “Druggists Forget Program in Cut-Price Uproar. Chain-Store Accusations Hurled in Huge Doses. Brunswig Assures Woman He’s Not an Octopus,” Los Angeles Times, June , , .

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American Fair Trade

recent falling prices. Heated discussion revealed that buyers for discount pineboard chain stores in southern California had traveled to Chicago and New York to circumvent jobbers and wholesalers who required fair trade contracts. While Brunswig capitulated, he also referred to her comments as “hysteric” and “hot-blooded,” to which many of her colleagues rose in her defense, congratulating her on her frank discussion and association work. Yet, the victory must have seemed fleeting to Gleason. She redoubled her efforts to secure compliance with the association’s policies of retail price-setting. Rather than stopping at the “Stockton Plan” or being content with her membership in the state pharmaceutical associations, Gleason remained focused on protecting pharmacists’ bottom lines and guarding against industry consolidation. She proved willing not only to enter but to dominate men’s clubs and committees, always standing out as the only woman on the Fair Trade Committee and never joining the wives’ picnics or outings. Her demeanor in photographs was that of a strong woman, perhaps even an angry woman, but always clad in pearls, a dress, and her wedding ring. (That said, Herbert Hoover never looked too jovial in photographs, either.) But, she was no longer “Mrs. Thomas Gleason”; the medical journals addressed her as “Edna Gleason” and her audience listened with great care as she accused Brunswig of being an octopus whose nefarious tentacles might entrap them all, harkening back to the antimonopoly movement’s earliest depictions of Standard Oil Company and other so-called trusts. As a result of both continued price deflation and the “most vitriolic [meeting] on record,” the California Fair Trade Committee focused on legislation to make mandatory its codes of fair competition. The association also began to address ways in which the FTC’s trade practice conferences and ongoing chain store investigation might aid its cause.  

 

 Ibid. “California A. Ph. A. Convention,” . “Druggists Forget Program in Cut-Price Uproar,” . See also “Beating ‘Pineboards’ to the Punch,” which interviewed Philip to discuss the “Stockton Plan,” though he attributed it to Gleason; “California A.Ph.A. Convention,” listing “Mrs. Thomas Gleason” as an executive committee member. On the late nineteenth century antimonopoly movement’s popular depictions of Standard Oil Company as an octopus, see Chapter . Ibid.; “California Appoints Fair Trade Committee,” PDR, Nov. , . “Trade Ethics,” PDR, May , –. Congress ordered the FTC to conduct a study of chain stores and their relation to independent proprietors in addition to a study of public utilities. The results of the chain store investigation were released in two parts. The first, in , advocated for experiments in RPM under FTC oversight. The second, in , stated that RPM was not workable and instead endorsed (a) uniform

California Fair Trade

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With the onset of the Great Depression and the souring of public opinion against big business, a number of chain drugstores and out-of-state producers began publicly advocating for codes of fair competition. (An effective countermobilization had yet to arise, other than the federal-level lobbying and litigation against RPM contracts by the department store Macy’s.) The FTC’s trade practice conferences illustrated both the possibilities and the legal limitations of association efforts to manage competition. These conferences brought together businesses within a single industry to voluntarily coordinate information on production, orders and bids, distribution costs and services, and prices. FTC commissioners presided over these meetings and approved association “submittals” that circumvented Department of Justice antitrust prosecution, but the FTC failed to reach internal consensus. In , it issued a report that called for greater administrative oversight of competitive practices while also questioning the positive effects of such rules. Nevertheless, the information shared at trade practice conferences provided a blueprint for trade associations to institute standardization guidelines and codes of fair competition, addressing sales below cost and price lists. Although the Supreme Court continued to limit the FTC’s authority to define unfair competition, the appointment of Harlan Fiske Stone to the bench bolstered Brandeis’s cause. Shortly after Stone’s appointment, the Court extended Brandeis’s previous “rule of reason” decision, applying it to a hardwood lumber association. In both administrative

    



prohibitions on loss limitation provisions and (b) codes of fair competition outlawing, for example, sales below cost. “The Winds Change,” PDR, May , . Federal Trade Commission, Annual Report (Washington, DC, ), –. Federal Trade Commission, Report on Open-Price Trade Associations (Washington, DC, ), xxi, –. See Federal Trade Commission, Millwork Industry, Trade Practice Conference (Washington, DC, ),  [circulation of price lists],  [later rescinded]. Federal Trade Commission v. Gratz,  U.S.  (), limiting FTC power to determine what constituted unfair practices; American Column Co. v. U.S.,  U.S.  (), striking down trade association information-sharing practices on costs and prices as intent to fix prices; Federal Trade Commission v. Ralamdam Co.,  U.S.  (), limiting the FTC to proscribe only conduct directly related to competitive practices. The Wheeler-Lea Act of  later extended the FTC’s jurisdiction to “unfair and deceptive practices.” Freyer, Regulating Big Business, –, –, –, –. Maple Flooring Manufacturers’ Association v. U.S.,  U.S.  (), upholding association information-sharing on prices and output.



American Fair Trade

procedure and legal precedent, new avenues were opening up for price stabilization plans. Similarly, the members of the Chamber of Commerce remained hopeful for economic recovery but felt that stabilization tools developed through the s should be expanded so as to provide adequate institutional structures to alleviate the recent economic downturn. When USCC president Julius Barnes addressed the Chamber in April , he expressed optimism that the nation was better equipped to solve the current financial downturn than it had been in , thanks to the business stabilization techniques that had been studied since then. “The underlying philosophy,” he explained, “is that America has reached such a stage in its development that recovery of stabilization could be attained by individual action guided by mutual counsel.” Secretary of Commerce Robert P. Lamont echoed Barnes’s sentiments and praised the work of his department’s Current Survey and the publication of the Committee on Recent Economic Changes in providing statistical services to businesspeople for the purpose of price stabilization. Gilbert Montague, the lead attorney for the American Fair Trade League, explained to the Chamber that price stabilization efforts by individual firms could eliminate unfair trade practices and reflate prices and wages. He described advising a client on setting up an institute to establish and enforce trade practice conference rules. He had advised his client to acknowledge and abide by congressional mandates, FTC rulings, and Supreme Court cases, especially George Van Camp & Sons Co. v. American Can Co., decided in January . In that case, the Court held that price discrimination violated Section  of the Clayton Act by substantially reducing prices, lessening competition, and tending toward monopoly. Montague argued that the best enforcement mechanism was a tightly knit trade group. Although government oversight and enforcement  

 

“Sherman Act Conspiracy Theory in Resale Price Maintenance Cases,” University of Chicago Law Review  (summer ): –. Julius Barnes, address to the general session of the Chamber meeting, Apr. , , Box , –, , USCC Rec. President Herbert Hoover sounded a similarly optimistic note when he addressed the Chamber at its annual dinner. The crash had precipitated “for the first time a great economic experiment . . . to stabilize economic forces to mitigate the effects of the crash, and to shorten its destructive period.” Hoover, address to the annual banquet, Apr. , , Box , , USCC Rec. Robert P. Lamont, “Economic Balance,” Apr. , , Box , –, USCC Rec. Gilbert Montague, “To What Extent May the Members of an Industry Legally Agree to Eliminate Trade Practices Not in Violation of Existing Law?” ibid., Apr. , , ; George Van Camp & Sons Co. v. American Can Co.,  U.S.  ().

California Fair Trade



might be ideal, the associations must instead work through constant negotiation and internal monitoring – through “month to month discussion of business men as to whether they were or were not beyond the line.” These association procedures, he explained, provided the FTC with the necessary information to approve trade practice rules and provided the courts with economic data to support the consumer welfare arguments made in favor of fair trade cooperatives. The confluence of falling retail prices, growing associational power, and increasingly permissive competition policy attracted parties prominent in business, law, and economics to the cause. In July , for example, Lehn & Fink, manufacturers of Lysol, the first brand-name disinfectant in the U.S. market, joined the fair trade bandwagon. Company president Edward Plaut announced a “comprehensive campaign designed to induce the public to trade only at those retail stores where fair retail prices prevail and to encourage the retail druggists of the country to maintain fair trade retail prices.” Advertisements flooded the Saturday Evening Post and Collier’s magazine. After traveling to Europe, Plaut believed that European competition policy might provide a model for the United States. As the chairman of the New York Board of Trade, he commissioned two economists to study price maintenance policies. Professors Edwin R. A. Seligman of Columbia University and Robert Love of City College of New York released their study in ; they recommended strengthening the right of refusal to sell, expanding the FTC trade practice conferences, and formalizing federal oversight through legislation. At the time, Columbia’s economics department housed some of the most vociferous proponents of institutional economics – a progressive school of economics that supported managing competition through public-private partnerships. The institutionalists rejected neoclassical economists’ models of perfect competition and instead  

 



 Ibid., . “Price War Wages Merrily,” PDR, July , . “Lehn & Fink to Undertake Fair-Price Campaign,” PDR, July , . For a brief description of the company, see Lehn & Fink Products Co., Lehman Brothers Collection, Baker Library, Harvard Business School, www.library.hbs.edu/hc/lehman/company .html?company=lehn_fink_products_co. Ibid. “Europe Has Met Price Cutting,” PDR, Nov. , ; “NARD to Consider Philip Survey,” PDR, Apr. , n.p.; H. S. Noel, “Pacific Drug Review Survey Excites Comment from Easterner,” PDR, Apr. , n.p. Edwin R. A. Seligman and Robert Love, Price-Cutting and Price Maintenance: A Digest (pamphlet, n.d.), and Price Cutting and Price Maintenance: A Study in Economics (New York, ): –.

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American Fair Trade

argued that market imperfections required empirical study and regulatory intervention. The California Fair Trade Committee sought a remedy to what it, too, believed was an information problem caused by inaccurate cost accounting at the firm level and insufficient coordination statewide. The committee had announced plans to partner with the Census Bureau for a drug distribution survey covering the Pacific Slope states. Problems arose immediately. But, as Gleason pointed out, that survey failed to differentiate among types of store or locations. Only in a handful of cities did survey participants and local administrators compare medicinal products and prices across various categories of drugstore. In response, Gleason and Philip organized their own statewide survey, which reached over , California druggists and cataloged manufacturer and retailer prices on over one hundred trademarked goods and compounded prescriptions. On the latter, prices varied little among pharmacists in urban and rural areas. On trademarked goods, pharmacists were asked to identify competition they felt in their local area; namely, from department stores and pineboards. The survey cataloged falling prices, sales, and employment among independent drugstores. It also encouraged druggists to write in their complaints against special advertising allowances, quantity discounts, and rebates given to large retailers – either in their survey responses or in a letter sent directly to their representatives in the California legislature. What the druggists needed to demonstrate to the legislature was that independent proprietors were being denied the ability to earn a reasonable profit. The survey identified trade practices found to “generate and perpetuate predatory price cutting” and to diminish independents’ market share. It suggested that sharing information on prices through the association’s submittal process made it easier to monitor outlet sales and price fluctuations. Finally, the state association recommended that each firm submit a letter to both the California general assembly and the National Association of Retail Druggists “stating the firm’s position in respect to the [federal] bill” before Congress. Its report argued that sales below cost, secret rebates, and advertising allowances generated price wars that exacerbated     

Rutherford, “Understanding Institutional Economics,” .  F. C. Felter, “Drug Distribution Census,” PDR, Apr. , n.p. Ibid.  “Philip Survey,” PDR, Apr. , . Ibid., . “Criticism Requested,” PDR, July , n.p. “Philip Survey,” ; “Philip Survey ‘Goes National,’” PDR, Oct. , . Seventeen state pharmaceutical associations issued similar surveys.

California Fair Trade



deflation and unemployment, especially for independent proprietors who were less likely to have reserve capital or to be able to switch product lines easily. Carl Weeks, president of the Armand Company, testified before the FTC in favor of national fair trade legislation. Weeks hired Charles Wesley Dunn, who had defended Colgate’s and Beechnut Packing Company’s price protection plans, to write Armand’s fair trade contracts. Dunn, who also served as counsel to the American Pharmaceutical Manufacturers’ Association, proposed that the FTC be given the regulatory power to determine “unfair trade practices,” using uniform pricing data collected by associations. E. R. Squibb & Sons also joined the campaign. Curtis Beach, the staff economist at the California Pharmaceutical Association, suggested that the printing industry’s success in standardizing uniform cost accounting methods could act as a model for pharmacists. Pharmacy can take a leaf from the experience of the various local printing-shop organizations when it comes to pricing the goods and services they have to sell. In the printing industry, the costs of operation of every member shop is [sic] averaged and a profit of  per cent is added for a uniform price schedule. In addition to this,  per cent is added to the price of paper stock, which in pharmacy represents raw materials.

Columbia University economics professor Paul Olsen also instructed the association to gather the necessary cost and pricing information to demonstrate the need for legislation to permit and enforce uniform accounting standards. As in the discussions at the Chamber of Commerce, the California druggists looked first to national movements that had created and deployed successful profit-sharing plans that protected independent proprietors through technological change and economic downturns. The problem of accurate business information remained acute through the early years of the Great Depression, which reinvigorated discussions of timely price indices. Paul Nystrom, Professor of Economics and

      

“The Seligman Price Survey,” PDR, Dec. , , . “Volunteer Fighters,” PDR, June , n.p. Front matter on Capper-Kelly bill, PDR, Jan. , . R. D. Keim, “The Economics of Price Standardization,” PDR, Aug. , . Curtis L. Beach, “What Price Prescriptions?” PDR, Mar. , –. Ibid. On the commercial printing industry as “classic artisanal republicans,” see Berk, Brandeis and Regulated Competition, –, esp. . “News of the Associations,” PDR, Nov. , .

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American Fair Trade

Marketing at Columbia University, addressed the Chamber of Commerce on the role of fact-gathering and price indices in business improvements: The oldest, most fundamental, and most useful of all business indices are those which present the facts concerning prices, changes in prices, price levels, and price trends. Prices indicate and measure market conditions. Prices represent the effective balance of supply and demand and consequently the forces of production and of consumption.

Wholesale price indices, though mistakenly thought of as merely listing the prices charged by individual wholesale companies, presented aggregate data on purchases of raw, semi-finished, and finished goods. Nystrom listed ten producers of wholesale price indices, ranging from governmental bodies to private firms to academic research institutes. Retail price indices, however, were “neither as accurate nor as representative as the wholesale price indices.” Nystrom explained that the peculiarities of retail distribution and retail selling made such price indices more difficult to formulate and use: Complexities of retail selling, the lack of standardized commercial exchanges such as found in the raw commodity markets, the individuality of retail transactions, the variety and wide differences in qualities and services make it very difficult to compile retail prices that may be useful and fairly adequate as retail price indices.

Only the Bureau of Labor Statistics cataloged retail prices; however, it focused on grocery items and other “necessaries,” such as coal and gas, to estimate semiannual cost of living indices based on  price levels. These data failed to indicate the price changes necessary to guide business executives to change operational procedures such as production and distribution flows. Price indices should be used for “planning production,  

 

Paul H. Nystrom, “The Role of Price Indices in Business Improvement,” Apr. , , Box , –, USCC Rec. Ibid., –. These wholesale price indices included: the U.S. Bureau of Labor Statistics, the National Fertilizer Association, the New York Times Analyst, Dun’s Weekly, Irving Fisher’s Weekly, the Harvard Committee on Economic Research, the Guaranty Trust Company of New York, the U.S. Department of Agriculture, and foreign indices. Each index used its own base price points (usually around  prices) and classified different wholesale products. There was no standardization across industries or indices.  Ibid., . Ibid. Nystrom, critical of the Bureau of Labor Statistics, explained that it needs “an accurate basis of weighting its present cost of living index . . . for securing a new and comprehensive study of the costs of living of a representative number of people through the country. The last study of this type was made during the years –, at a time of abnormal economic conditions” (ibid., ).

California Fair Trade

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buying raw materials, making stock accumulations, making plant extensions,” budgeting, pricing individual products, and forecasting the net values, earnings, and security prices of business concerns. Not only would this help retailers adjust price schedules, but it would also “assist in the control of credit” and be an “aid to government in its conduct of public works and its purchasing policies.” These surveys, he argued, could serve as the basis for government–business cooperative management of the economic crisis. The California Pharmaceutical Association wanted something similar to the cooperative reforms that had been instituted in the printing industry; however, as Nystrom said, the association lacked the necessary cost and pricing information to demonstrate its need for legislation permitting and enforcing uniform accounting standards. Rather than solely pursue national legislation, which the NARD held as its bailiwick, the regional and municipal groups used the “Philip Survey” to coordinate their own interfirm price schedules based on manufacturer price lists. In fact, the NARD invited Philip to Washington to meet with Professors Seligman and Love to discuss their ongoing national study of associational management of consumer prices. Philip also conferred with USCC administrators regarding the progress of the ongoing California drug survey. According to the findings of the Philip Survey, which were submitted to the California general assembly, pineboard outlets presented a new and particularly vicious threat to price stabilization in retail consumer goods, challenging the better business practices of both chain stores and independent proprietors. “What is happening on the Pacific Coast, especially in California, indicates very clearly that the chain organizations, once vigorous competitors of the independent druggist, are now their allies in the battle against the pine-board operators and department stores using similar merchandising tactics.” The price surveys conducted on the Pacific Coast demonstrated that the entrance of low-cost outlets created intense price competition to the detriment of customer service and quality



  

Ibid., . Nystrom recommended official price series on farm products, manufactured goods, and personal services purchased by consumers. Each would be classified to show price changes by item and by groups of commodities. A cost of living index could then be formulated to show how general retail prices affected the cost of living for each class (low, middle, high). Ibid., . Ibid., –. “NARD to Consider Philip Survey,” PDR, Apr. ; H. S. Noel, “Noel on Prescription Pricing,” ibid. “Who’s Your Competitor?”



American Fair Trade

assurances, not to mention wages. As presented to the California legislature, the problem could be resolved by allowing manufacturers to enforce uniform retail prices against the pineboard price-cutters. While the NARD continued to pursue a type of self-regulation akin to price fixing, the Californians had done something slightly different. Gleason, Philip, and their association of pharmacists lobbied the state legislature to expand its own police powers, in a time of economic emergency, over ordinary businesses trying to maintain so-called reasonable profits. What they wanted was the setting of minimum price provisions by manufacturers with feedback from retailers – a vertical restraint permissible by law. Moreover, the Board of Pharmacy would review and approve the codes generated through trade association deliberation. This regulatory beachhead transformed the initial self-regulation movement and gave it a different trajectory in the early s. The pharmacists’ efforts to reorganize the state association, collect complaints, and publish price statistics and feedback proved fruitful. In the summer of , the state legislature passed the Fair Trade Act. Gleason later recalled her experience of conducting the survey with Philip and presenting the results to the assembly: “I left my store one day with only a toothbrush for baggage. I didn’t get back for six weeks. I talked to druggists and grocers in every county in the state. And they talked to their legislators. . . . We got the law!” Unfortunately, the legislature held closed sessions, rendering those debates lost to history, but still, the bill has been widely regarded as the result of the pharmacists’ lobbying. The California Fair Trade Act of  applied to any “grower, baker, maker, manufacturer or publisher” holding a trademark, brand, or name of the producer or owner on the product. The Act replicated national proposals that exempted fair trade agreements from antitrust prosecution; however, it relied on state police powers over intrastate trade. “Articles which are trade-marked and which are competitive with articles of a   



Eugene C. Brokmeyer, “News from the Nation’s Capital,” PDR, July , . Stuart Nixon, “Hawkins’ Challenge of Fair Trade Starts ‘Rumble’ from ‘Mother’ of Act,” Stockton Record, Feb. , , , . National Recovery Administration (hereafter NRA), Tentative Outlines and Summaries of Studies in Progress National Recovery Administration, Work Materials No.  (Washington, DC, ): –. Assembly Bill No. , ch.  (signed by the Governor May , ); Amendment to the “Unfair Competition Act,”  Cal. Stat. –; Brokmeyer, “News from the Nation’s Capital,” . In July , the legislature amended the act, extending its provisions to apply to non-signers as well. See Assembly Bill No.  (effective August , ); “Fair Trade Act Gets New Teeth,” PDR, June , .

California Fair Trade



similar nature, if manufactured in California, may be price-protected in that state through contracts between the local producer and local distributors.” Further, consumer goods “in fair and open competition with commodities of the same general class” could be controlled by price contracts, stipulating that “the buyer will not resell such commodity except at the price stipulated by the vendor.” The independents had secured a bill that they believed would eliminate unfair methods of competition. Passage of the Fair Trade Act did more than strengthen the existing price association networks; it also attracted new business to California. The Dr. Miles Medical Company, for example, announced plans to establish “a branch in California to test the legality of the Junior Capper-Kelly bill.” The Dr. Miles Company had remained a strong supporter of resale price maintenance since the s and its involvement in the Supreme Court case creating the per se prohibition against contracts affecting final prices made the firm an eager proponent of the California law. The “California experiment,” as Miles internal documents called it, required setting up a subsidiary with its own salaried administrators and salesmen, warehousing and freight expenses, and advertising in print and radio. In April , the Dr. Miles Company calculated that over the preceding two years, it had spent $,. on its California experiment, including over $, in salaries for administrators, office workers, and salesmen and $, for legal expenses. Beardsley reported that his staff sent out over four thousand contracts to jobbers and retailers requesting their participation in the Miles price stabilization plan. Increasingly, companies began to advertise in trade        

“Interstate or Intrastate?” PDR, Aug. , –. “California’s Capper-Kelly Bill,” PDR, July , n.p.;  Cal. Stat. . “Miles Incorporates California Company,” PDR, Nov. , –; “Majority Sentiment Favors Resale Price Maintenance,” PDR, Nov. , . “Southern California Elections,” PDR, Jan. , n.p. For discussion of the Dr. Miles case, see Chapter . “Analysis of Expenses: Dr. Miles California Co.,” June , , Box , Annual Reports, DMMCA. Ibid. See “Wholesale Consignment Contract,” n.d., “California” folio, DMMCA. The consignment contract allowed jobbers to possess and sell Dr. Miles products without down payment for the goods. The jobber would then pay Dr. Miles after sales were made, “deducting compensation for services” provided. The jobber was instructed to keep detailed bookkeeping on all sales, which were “subject to inspection” upon written request. The jobber made payments on the tenth of every month and furnished the company with a list of all purchasers. Jobbers subtracted the wholesale price from the



American Fair Trade

journals and newspapers, endorsing private fair trade agreements and calling for protective legislation. The Dr. Miles California Company – the new subsidiary – reported overwhelming cooperation but anticipated that it would wind up in court to enforce the agreements. Indeed, by the following summer, the company had sued two well-known cut-rate retailers, the Sontag Drug Company and Thrifty drugstores, and settled out of court. A company circular from the Los Angeles office encouraged compliance and then made clear the threat of litigation, listing cases initiated against Whitmore & Swan (Oakland), Maurice Mercantile Company (San Francisco), Colorado Street Market Drug (Pasadena), and Sontag Chain Stores Corporation. The reverse side of the flyer advertised Alka-Seltzer as Dr. Miles’s most popular brand, encouraging retailers to purchase, advertise, and endorse it. The price protection plan offered  / percent profit if sold by the package at the listed price; alternatively, if sold on the scheduled discount rate, retailers stood to earn profit margins per package of  percent. The plan offered a high return for retailers agreeing to the fixed price and allowed Dr. Miles to push its new product. Previously, the company sold more of its Dr. Miles Pain Pills, an aspirin tablet, but its new Alka-Seltzer products had nearly doubled in sales between  and , offsetting

  

 

total profit and also deducted  percent commission plus  percent for timely payments. The contract then listed wholesale prices and quantity discounts. See also “Retail Sales Contract,” ibid. The retail contracts stated that retailers must use authorized dealers, listed wholesale prices, and demanded that retailers “must never [sell] at less than the prices herein specified.” The minimum prices were discounts from the original packaging sticker price, allowing the retailer to determine the final price within that range. Effective Jan. , , preparations marked for $ could be sold for  cents; -cent preparations for  cents; and -cent preparations for  cents, “without reduction for quantity.” Combination deals, wherein an item might be given away with the sale of some other product, were also forbidden. “Operating Entirely within the Law,” PDR, Dec. , n.p. “Price Protection Plans Progress,” PDR, Mar. , n.p. Their circular boasted  percent compliance from California retailers, surely an exaggerated figure. “Malicious Merchandising,” PDR, June , . Richard W. Longstreth, The DriveIn, the Supermarket, and the Transformation of Commercial Space in Los Angeles (Cambridge, MA, ), ; “To Operate under Fair Trade Act,” PDR, Mar. , n.p. “Price Protection – Price Maintenance,” n.d., “California” folio, DMMCA. This separate collection of documents did not have a box number. The large bottles of Alka-Seltzer sold for  cents and the small for  cents under the price protection plans.

California Fair Trade



the firm’s “old line” products. Relieving the nation’s acid reflux during the Great Depression, Alka-Seltzer also sponsored National Barn Dance, a popular radio show broadcast coast to coast by the National Broadcast Company (NBC) several times a week. Edna Gleason remained an outspoken advocate for fair trade and price protection plans. While still maintaining the Gleason Pharmacies in Stockton, she continued to lead the pharmaceutical associations in monitoring and policing compliance with manufacturer-set price schedules. Although the California Pharmaceutical Association switched to “closed” sessions of its Fair Trade Committee, news often leaked of her impassioned speeches scolding alleged price cutters. In , she became the association’s first female president and began campaigning for fair trade laws in other states. That same year she won the NARD’s SmithWilson Award for “the most distinguished service to pharmacy in connection with fraternal relations.” In , Governor James Rolph appointed Gleason to a four-year term on the State Board of Pharmacy, which his successor, Frank Merriam, renewed in . The State Board monitored pharmaceutical sales and business methods. With the passage of the Fair Trade Act, the pricing schedules printed in the Pacific Drug Review constituted the Drug Institute’s official minimum resale prices. Also, the state’s codes of fair competition established working hours and minimum wages and prohibited secret rebates or discounts. Trade journals taught retailers how to maximize profits while adhering to the new codes. California provided a testing ground for fair trade networks – state and federal regulators and reformers watched to see if Californian druggists could maintain cooperation. 

    

“Year : Report of Dr. Miles Laboratories, Inc.” n.d., Box , DMMCA. Sales of Pain Pills (small bottles), sold by the dozen, fell from , () to , () while Alka-Seltzer sales nearly doubled, moving from , () to , (). “ Californians Meet at Long Beach,” PDR, July , –, esp. . Ibid., . Other members of the legislative committee were James C. Munn, George H. Frates, and Thomas J. Leneham. “Mrs. Gleason Wins Notable Award,” PDR, Nov. , . “NARD Code of Fair Competition: Presented to Drug Institute for Inclusion in Drug Code,” PDR, Oct. , , . “They Are Watching You, California!” PDR, Oct. , –. “Evidence continues to accumulate that CA retail druggists, through their associations and as individuals, are bringing pressure to bear on manufacturers in such measure that more and more firms are enlisting under the fair trade banner. The list grows larger almost daily. As this is written forty or more firms have either started to operate in the state under the Fair Trade act or have signified their intention to do so” (ibid., ).



American Fair Trade

As soon as Governor Rolph signed the amended Fair Trade Act into law, challenges arose. By November , thirty-one cases had been initiated in California courts; however, in February , the California Supreme Court upheld the “junior Capper-Kelly Bill” – which had become known as the “little NRA” – as a legitimate exercise of state police powers. In the deciding case, Kunsman, a cut-rate outlet for toiletries and cosmetics in Beverly Hills, advertised and sold Max Factor products for prices below what the company stipulated in sales contracts. Max Factor & Company, a Delaware corporation, sold its goods to Sales Builders, Inc., a California wholesaler that had agreed to the terms of the fair trade contract. While most retailers maintained the price schedules set by the manufacturer and wholesaler, Kunsman refused to sign the contract or conform to its stipulations. As a result, leading retailers who maintained prices complained to the manufacturer and distributor and threatened to stop carrying Max Factor products. The California Supreme Court held that Kunsman’s business methods demoralized trade and diminished the goodwill the producer had built up in its product. Proponents of the California Fair Trade Act had waited over two years for the Max Factor case to reach the state’s highest court and they greeted the victory with celebration. The ruling “establishes for all time a principle of fair trading in that state which, with the cooperation of manufacturers, wholesalers and retailers, means abolishment . . . of vicious and predatory price-cutting.” The National Association of Retail Druggists, buoyed by the judicial confirmation of the Fair Trade Act’s non-signer clause, held its most well-attended annual meeting to date. Over , druggists arrived in Washington and sent President Franklin D. Roosevelt the following message: On this third anniversary of the inauguration of the present administration, there remains unfilled the pledge to strengthen and revise the anti-trust laws for better protection of the small distributor and producer. There are no “equal rights to

 



 Cal. Stat. . Max Factor & Co. and Sales Builders, Inc. v. Kunsman,  Cal.  (); Pyroil Sales Co. v. the Pep Boys, Manny, Moe and Jack of California,  U.S.  (). The U.S. Supreme Court upheld the California Fair Trade Act as amended. The U.S. Supreme Court had recently upheld the nearly identical Illinois fair trade law, which became the controlling precedent applied to the subsequent California cases. Old Dearborn Distributing Co. v. Seagram-Distillers Corporation,  U.S.  (). For more on this case, see Chapter .  “Fair Trade Wins in California!” PDR, Mar. , . Ibid.

California Fair Trade



all.” There are special privileges to [the] few at the expense of the many. There is a real threat of monopoly. The little man in business, the small merchant and manufacturer here in conference asks only equal rights to all. He asks no special privilege – he wants no special privilege. He asks an opportunity to compete on an equal basis with all his competitors, both large and small.

The judicial affirmation of the California Fair Trade Act reinvigorated the movement by giving it greater legal standing. Now the fair traders in California turned to the national stage. *** California proved to be fertile ground for the fair trade experiment in price stabilization agreements. Already benefiting from fairly permissive antitrust laws, especially compared with the juridical development of federal antitrust rules, the state’s cooperative manufacturer and retailer associations thrived in specialty markets through the first decades of the twentieth century. Associations of competitors established and enforced trade rules intended to eliminate fraud and misrepresentation and also to ensure price and wage stability. The price deflation of the early s disrupted ordinary trades to such an extent that the price data collected by Philip and Gleason provoked an outcry against price-cutting tactics. Participation from other Pacific Slope states demonstrated the popularity of cooperative price stabilization efforts in retail distribution and pricing. This voluntary attempt at administered pricing reflected a trend in specialty markets to manage competition through collaborative trade rules. In the years following California’s passage of the Fair Trade Act as amended in , several other state legislatures adopted copies of it. Edna Gleason, among other California druggists, maintained an active role in monitoring and enforcing fair trade pricing policies. At the NARD’s  annual convention in Boston, she led a boycott against Listerine, a national mouthwash company. In , she led the NARD campaign to convince the Colgate Company “to quit selling to giant, cutrate Macy’s.” A widow who never had children, she seemed to embrace her title as the “mother of fair trade,” a title she clung to in

 



“Two History-Making Events,” PDR, Apr. , .  Ill. Laws, S.B. ;  Iowa Laws, S. F. ;  Md. Laws, c. ;  N.J. Laws, c. ;  N.Y. Laws, c. ;  Ore. Laws, c. ;  Pa. Acts, Act. No. ;  Wash. Laws, c. ;  Wis. Laws, c..  Nixon, “Hawkins’ Challenge,” . Ibid.



American Fair Trade

her old age. She did not leave personal papers, but one wonders if she might have preferred “dynamo” even to “mother.” Gleason seemed to embody what the American public idealized in the independent proprietor – someone unafraid to go it alone and undeterred by the capriciousness of the market. Yet she also exemplified the s notion of the possibilities of the “new competition” for political economy, leading efforts at deliberation and democratic rule-making through associations of likeminded businesspeople. The next step to ensure compliance in every state would be national legislation, which now appeared closer to fruition than it had since the campaign began with the founding of the American Fair Trade League in .

 Managing Competition in the Great Depression Between Associational and State Corporatism, –

When the Chamber of Commerce of the United States is brought to consent, realization cannot be far off. – Rexford Guy Tugwell, “The Principle of Planning and the Institution of Laissez Faire” ()

The onset of the Great Depression in late  exacerbated a persistent contradiction in U.S. political rhetoric and policy making between the desirability of a limited national government and the necessity of greater regulatory control over market forces. Throughout the crisis, experiments using trade associations to manage competitive markets – experiments the FTC and the Department of Commerce had initially conducted through the s – provided a blueprint for new regulatory frameworks. Rather than signaling a return to normalcy after World War I, the s had unleashed a proliferation of public and private governing agencies and associations that institutionalized the new competition as a workable alternative to free market competition. This embedded public–private partnership emerged as the middle way between the two extremes of economic planning on the one hand and laissez-faire capitalism on the other, appealing to Americans’ desire both to institute greater regulatory control over business and to maintain the economic benefits of managerial capitalism. This middle way also presented an alternative to more extreme policy proposals on the left and the right that existing legal institutions had delineated. As such, the s may be characterized as time of policy experimentation at the state and federal level that followed the distinct patterns and preferences developed over the course of the preceding generation. What changed, the progressive economist Rexford 



American Fair Trade

Guy Tugwell forewarned, was the new heights of government–business collaboration, particularly as leading industrial capitalists put forth planning proposals and entered government service. Despite the perceived failure of Herbert Hoover’s presidency, the succeeding presidential administration blended Hoover’s style of associational management with a new brand of state corporatism, which coordinated markets more forcefully at the national level. Hoover had largely reenacted policies consistent with those he had supported during his tenure as secretary of commerce. His preferred reliance upon private associations to carry out public services remained at the core of his corporatist vision of political economy. But as economic activity continued to slow, he found himself increasingly isolated. Alternative proposals arose that called for enhancing public regulatory agencies as well as private associations in order to better respond to the crisis. The business community, as U.S. Chamber of Commerce (USCC) documents show, retained its loyalty to Hoover’s vision while also pressing for greater regulatory experimentation in public–private governance to control output, prices, and wages. Ultimately, the voting public deemed Hoover’s policies inadequate to the task of managing the macroeconomy through the crisis, resulting in more robust state experimentation that many business leaders endorsed. President Franklin Delano Roosevelt was elected to do what his predecessor would not – expand the federal government’s direct regulatory control over market functions and provide economic relief to millions of Americans. FDR revived the Democratic project of building an administrative state capable of regulating a national market economy, but he also approached this project with an ambivalence that at times led to conflicting policy goals. That ambivalence, however, reflected the contradictory economic thought, legal advice, and business influence within his administration. Nationalizing the trade association idea, particularly through the National Industrial Recovery Act (NIRA), failed to encourage recovery and provoked antimonopoly populism. In fact, FDR’s early New Deal policies both discredited government–business partnerships on the left and led to the radicalization of business elites on the right, as seen in the founding of the conservative American Liberty League in .



Ellis W. Hawley, “The New Deal and Business,” in The New Deal: The National Level, eds. John Breaman, Robert Bremner, and David Brody (Columbus, OH, ); Hawley, New Deal and the Problem of Monopoly.

Managing Competition in the Great Depression



The associational vision for managing competitive markets nevertheless survived, though it was reformulated by the Court’s interventions against early New Deal policies and tarnished by its relationship with NIRA cartelization. This chapter examines the limits to both Hoover’s associational corporatism and FDR’s state corporatism, arguing that both contributed to the significant growth of public and private governing power, which morphed from partnership in planning to adversarial rivalry between business and government. Judicial supremacy and constitutional federalism informed an American political culture that largely rejected centralized national programs to coordinate market economies, even during the Great Depression, and instead seemed to prefer that the states and private associations act as intermediaries between the federal government’s policies and citizens’ pocketbooks. As historian Brian Balogh recently put it, intermediary institutions remained “essential ingredients

 

Barry Cushman, Rethinking the New Deal Court: The Structure of a Constitutional Revolution (New York, ). The term associational corporatism borrows from Ellis W. Hawley’s work on the associative state as well as the literature on corporate liberalism. In his New Deal and the Problem of Monopoly, Hawley draws a dichotomy between businesspeople who preferred “selfregulation” and those “neo-Brandeisians” who proposed self-regulation through partnership with regulatory agencies as well as antitrust enforcement against monopoly. Hawley, New Deal and the Problem of Monopoly, –. My research in the U.S. Chamber of Commerce archives revealed a consistent acceptance and preference for the latter. Hawley’s later work focusing on Hoover’s time at the Commerce Department emphasizes the latter as well. The USCC persistently advocated partnership with the state to develop ways to manage competitive markets, though certainly to their own benefit. Nevertheless, these relationships created inextricable links between public regulatory agencies and private trade associations, empowering both and promoting a form of Americanized corporatism. The term corporate liberalism has taken two predominant forms in the historical literature: the determinist and the revisionist. The former is critical and includes both neo-Marxists and libertarians, who argue that regulatory agencies have been captured, or co-opted, by the very businesses that were the object of the original legislative intent. See Gabriel Kolko, Railroads and Regulation, – (Princeton, NJ, ); James Weinstein, The Corporate Ideal in the Liberal State: – (Boston, ); Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York, ); Jonathan Bean, Beyond the Broker State: Federal Policies toward Small Business, – (Chapel Hill, NC, ). The revisionists largely include business historians who have viewed the rise of managerial capitalism as inspiring and requiring the growth of the bureaucratic state. See Louis Galambos, “The Emerging Organizational Synthesis in American History,” Business History Review  (autumn ): –; Thomas K. McCraw, Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn (Cambridge, MA, ). On “welfare capitalism,” see Sanford M. Jacoby, Modern Manors: Welfare Capitalism since the New Deal (Princeton, NJ, ).

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American Fair Trade

of American political development.” The American fair trade movement provided a case in point. It survived the Great Depression, even winning critical protective legislation that legalized fair trade contracts in interstate commerce during the Second New Deal – a long sought after goal. But those protective laws did not provide the administrative protections for codes of fair competition that the NIRA had previously. Thus fair trade contracts that ensured standardized prices and service guarantees were relegated to private enforcement and the whims of consumer choice. By the late s, macroeconomic management focused on peak industries – the leading industrial producers and financial institutions – and left ordinary goods largely to the vicissitudes of the market – that is, unless the newly expanded regulatory domain of public interest could envelop and protect it.

 : ’      President Hoover and the Limits to Associational Corporatism President Hoover entered office in March , only months before the New York Stock Exchange crash that signaled the coming of the Great Depression. He brought with him a detailed analysis of s macroeconomy and policy based on his own experiences at the Commerce Department and his interactions with a coterie of researchers. Under his direction, in  the Commerce Department had secured funding from the Carnegie Corporation and the Laura Spelman Rockefeller Memorial Foundation to launch a joint venture with the National Bureau of Economic Research (NBER), a social science research agency, to survey U.S. macroeconomic indicators. Published in , Recent Economic Changes in the United States reflected Hoover’s understanding of current economic conditions and informed his presidential agenda. At Commerce, Hoover had cultivated a vision of macroeconomic policy that relied upon philanthropic and academic organizations, private trade associations, and public administrators acting collectively to manage the corporate economy and mitigate business cycles. His vision of associational corporatism rejected free  



Balogh, Associational State, . U.S. Department of Commerce, Recent Economic Changes in the United States: Report of the Committee on Recent Economic Changes, of the President’s Conference on Unemployment (Washington, DC, ). See also U.S. Department of Commerce, Recent Economic Changes in the United States,  vols. (New York, ). See Herbert Hoover, introduction to The Stabilization of Business, by Wesley Mitchell et al., ed. Lionel D. Edie (New York, ).

Managing Competition in the Great Depression

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market competition and insisted on the interdependence between public and private groups. Although he helped build the administrative capacities of federal agencies to convene and oversee trade association conferences, setting rules of fair competition and standardizing production and distribution practices, Hoover still clung to the idea of private business organization and limited government regulation as the sine qua non of the American regulatory tradition. The Great Depression, however, galvanized support for extending the FTC’s authority to regulate markets beyond Hoover’s model, contributing to the president’s ouster from office. President Hoover’s approach to the continued crisis in agricultural prices exemplified his approach to federal aid. Agricultural prices had been in secular decline since , when exports to European markets began dropping and prices fell by half. At the time, farmers had been earning incomes roughly the equivalent of factory workers, but the continued decline in agricultural prices had thrown that ratio out of balance. During the s farmers’ incomes had fallen to one-third the national average. As secretary of commerce, Hoover had supported the Capper— Volstead Act, which empowered agricultural cooperatives to manage competitive practices and exempted these groups from antitrust prosecution. The act appeared emblematic of Hoover’s policy preferences as well as his limitations; he would not support direct subsidies or price supports to boost farm incomes. In  Congress established the federal Farm Board, authorizing it to lend up to $ million to farmer cooperatives to stave off defaults on equipment, taxes, and mortgages. Similar to previous legislation, the Agricultural Marketing Act of , which created the board, was intended to empower farmer associations through cooperative advertising and distribution networks that might reduce oversupply and thereby stabilize prices. The act did not empower the Farm Board to

 

 

Recent Economic Changes. These price declines and political activity by the so-called agricultural bloc of midwestern and southern politicians led to the passage of the Capper-Volstead Act in . An Act to Authorize Associations of Producers of Agricultural Products,  U.S.C. ,  () (amended ). On Capper-Volstead and farmers’ cooperatives, see also Henry Harrison Bakken and Marvin A. Schaars, Economics of Cooperative Marketing (New York, ); Jerry Voorhis, Cooperative Enterprise: The Little People’s Chance in a World of Bigness (Danville, IL, ); Anne Meis Knupfer, Food Co-ops in America: Communities, Consumption, and Economic Democracy (Ithaca, NY, ). Agricultural Marketing Act of ,  Stat.  (). Barber, New Era to New Deal, –; Kirkendall, Social Scientists and Farm Politics, –, –. See also David Hamilton, From New Day to New Deal: American Farm Policy from Hoover to Roosevelt, – (Chapel Hill, NC, ).



American Fair Trade

reduce agricultural supply, though it did fund warehouses for holding agricultural surpluses. Hoover’s preference for employing private businesses to carry out public goals, such as stabilizing agricultural prices, exemplified his dedication to associational corporatism despite congressional opposition or constituent demands for further action. Recent Economic Changes identified several additional macroeconomic indicators that forewarned of a “problem of maintaining economic balance.” The committee noted that despite growing purchasing power and relative price stability throughout the s, rising “‘technological’ unemployment, resulting from the displacement of workers by improved machinery and methods,” coupled with increasing speculative investments in stocks, could portend uncertain consequences. The money pouring into the stock market, the report explained, came from savings as well as individual and institutional borrowing and resulted in an “abnormally high rate for call money and an appreciable increase in the rate of interest for business purposes.” In other words, the report highlighted not only increased speculation in stocks but also the effects of rising interest rates in . Hoover had also expressed concerns about lax Federal Reserve rediscounting rates fueling speculation, and in February  he urged the Fed’s district banks to deny rediscounting privileges to member banks that used these funds on the call market. Bankers resisted the new directive, however, and the Fed banks had no means to enforce their mandate. As production slowed in  some members of the Federal Reserve Board believed that speculative and nonproductive lending needed to be   





Throughout the s Hoover had led opposition to the McNary-Haugen bill, which proposed farm subsidies. U.S. Department of Commerce, Report of the Committee on Recent Economic Changes, xii. Ibid., x, xii. See also “Industry,” “Marketing,” “Labor,” and “Agriculture,” in U.S. Department of Commerce, Recent Economic Changes, : –, –, : –, and –. The report quantified purchasing power as the relationship between changes in wholesale prices and wage rates. The latter had risen faster than the former, thus increasing the purchasing power of wages. Report of the Committee on Recent Economic Changes, xii. At the time, the Fed lent to member banks at .– percent, and those banks then issued call loans with interest rates of around – percent. Barber, New Era to New Deal, . The Memoirs of Herbert Hoover: The Great Depression, – (New York, ), : , –. In his memoir Hoover summarized public statements by Adolph Miller, who had been a member of the Federal Reserve Board in : “Mr. Miller . . . states that the easy credit policy of , which was father and mother to the subsequent  collapse, was originated by Governor Strong, of the New York Federal Reserve Bank, and that it did not represent a policy either developed or imposed by the Board on the Reserve Banks against their will.” Ibid., n.

Managing Competition in the Great Depression



purged. The Fed tightened monetary policy by increasing the overnight lending rate and “sterilizing” gold inflows from abroad; as a result, the economy slowed. By the summer of , the tightening of monetary policy had led to higher interest rates, which, in turn, halted U.S. lending to Germany, creating a capital shortfall that depressed investments in Germany. The same scenario played out in other countries, leading to loan defaults, which reverberated back to the United States as European countries both failed to meet loan obligations and reduced their U.S. imports. Tighter monetary policy and weaker consumer demand led to a deterioration of the American economy, punctuated by the stock market crash on Thursday, October , . “Black Thursday” was followed by “Black Tuesday,” when brokers sold off over sixteen million shares in a single day. Panic led to bank runs all over the country, wherein large numbers of depositors queued to withdraw funds before the banks shuttered their doors due to empty tills and vaults. Nevertheless, Hoover remained sanguine, waiting weeks to address the public. He responded to the crash by convening a series of meetings with business, labor, and public service leaders to initiate policies that only marginally expanded his previous state-building through “associational corporatism.” In mid-November, he assembled business leaders from the U.S. Chamber of Commerce and economists from across the political spectrum at the Conference for Continued Industrial Progress, which drew directly from his experience coordinating President Warren G. Harding’s  Conference on Unemployment. The  conference made similar recommendations on wage and employment stabilization plans, public and private construction projects, and voluntary relief initiatives. Hoover believed that he could bolster aggregate demand by persuading businesspeople to continue to adhere to the “high wage 



 



Sterilization is a monetary policy in which the central bank takes money out of circulation by selling assets, such as bonds. In this case the goal was to counteract the inflow of gold from exports and loan repayments. Sterilization is used to control inflation, or rising prices, which would result from gold inflows. In March  the Austrian central bank, Kreditanstalt, collapsed, exacerbating the crisis in Germany. In June the Germany Reichsbank announced that World War I reparation payments would halt. Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, – (New York, ), –, . Ibid. See also Friedman and Schwartz, Monetary History of the United States, blaming the Fed for tightening monetary policy when greater liquidity could have helped economic recovery. See “Industrial and Labor Conditions,” Monthly Labor Review  (Jan. ): –.

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American Fair Trade

doctrine” that the Report of the Committee on Recent Economic Changes had identified as providing “economic balance” between production and consumption. Stable wage rates, he argued, provided “practically insatiable” consumer demand that prevented overproduction, price declines, and destructive competition. But although Hoover assured labor leaders that his administration would maintain high-wage policies, he did nothing to ensure those assurances. Nevertheless, he did go beyond previous measures. The following January Hoover signed a $ million public works act to stimulate the construction industry. This act created public– private initiatives that expanded the federal government’s intervention in the private sector economy. Thus Hoover acknowledged the greater need for federal funds but also continued to rely upon voluntary cooperation from the private sector. Hoover’s efforts, however, were undercut by officials at the Fed and Treasury Department, who continued to tighten monetary policy through their gold sterilization and open market operations. As Hoover pressed employers to maintain wage rates, layoffs increased. Deflation of prices and wages depressed output and employment. Banking panics disrupted financial services and exacerbated uncertainty. Increasingly, no coordinating device seemed capable of reflating the U.S. economy. Throughout the s Hoover had advocated both fiscal and monetary interventions into the economy to promote productivity and price stability. For example, he advocated legislation to expand the Fed’s authority to manage price stability through more active open market operations, rather than simply managing the gold supply and the international gold standard. In fact, he described Benjamin Strong of the New York Federal Reserve as a “mental annex to Europe” and other members of



   

See Herbert Hoover, address to the U.S. Chamber of Commerce, Apr. , , Box , , USCC Rec. See also Report of the Committee on Recent Economic Changes, xiv, xxi. Report of the Committee on Recent Economic Changes, xxii. Memoirs of Herbert Hoover, –. In return for Hoover’s assurances, labor leaders agreed to withhold strikes and boycotts. See Hoover, address to the U.S. Chamber of Commerce, Apr. , , . In the early s, Hoover had endorsed legislation to alter the policies of the Fed. He believed that the Fed should actively intervene in monetary policy to promote price stability though open market operations. On this legislation, called the Goldsborough Bill of , see David Laidler, Fabricating the Keynesian Revolution: Studies of the Inter-War Literature on Money, the Cycle, and Unemployment (Cambridge, ), –.

Managing Competition in the Great Depression

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the board as “mediocrities.” Yet as president he seemed unwilling to implement more drastic fiscal policies and unable to affect monetary policies at the Fed. In the spring of , Hoover still remained optimistic that the voluntary coordination of business and labor could stave off further economic downturn, but by the following year it was clear that his plans for macroeconomic stabilization had failed to deliver. Although he authorized the Grain Stabilization Corporation to purchase wheat on the open market to prop up the price, the Smoot-Hawley Tariff of  further destabilized agricultural markets, weakening exports and deepening the economic depression. The tariff raised duties on imports, reduced American lending abroad, and inspired retaliatory tariffs from trade partners. Hoover’s  Emergency Committee for Employment granted scant public resources and largely endorsed private unemployment relief. In  his designs for fiscal stimulus did not materialize because state and municipal governments cut spending in light of falling revenue, reducing expenditures on construction by almost one quarter of  levels. Hoover refused to initiate new efforts to support state and local spending, and his doctrine of voluntary high wages had led to increased unemployment. The Fed had not enacted policies to lower interest rates, nor had Hoover restored consumer confidence in the banking system. In  USCC support for the president’s economic policies had begun to wane. Julius Barnes, USCC president, continued to support efforts to coordinate and disseminate more frequent and elaborate information sharing on changing supply and demand, such as through the organization’s annual USCC Business Survey Conference, but he also warned that

 

 

Memoirs of Herbert Hoover, . As president, Hoover again endorsed legislation to expand the authority of the Fed to manage price stability – namely, selling bonds to reflate prices. On the reconsideration of the bill in , see ibid., . Instead Congress passed the Glass-Steagall Act in , which allowed the Fed to issue Federal Reserve bank notes backed by government securities rather than only by gold reserves. See Friedman and Schwartz, Monetary History, , –. See also Guy Alchon, The Invisible Hand of Planning: Capitalism, Social Science, and the State in the s (Princeton, NJ, ); Barry Karl, “Presidential Planning and Social Science Research: Mr. Hoover’s Experts,” Perspectives in American History  (): . Erving P. Hayes, Activities of the President’s Emergency Committee for Employment (Concord, NH, ), –, –. In December  Hoover proposed the creation of the Reconstruction Finance Corporation (RFC) to funnel federal loans to ailing banks and companies, though both types of institutions had to demonstrate collateral solvency.

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American Fair Trade

“foreign trade problems” were not “yet realized.” Divergent policy preferences quickly animated USCC meetings and resulted in both a fracturing of the business elite and a split with Hoover’s economic policies. Some industry leaders simply refused to comply with Hoover’s recommendations, such as commercial banks that chose to invest in safer assets or hold cash reserves rather than continue lending in the mortgage or construction markets. Others remained steadfast in their ideological commitment to voluntary management reform at the firm level, such as company unemployment insurance. Still others advocated greater collaboration with policymakers and regulators, offering a range of proposals that went beyond voluntarism. At the  USCC general meeting, members broke out into study groups, conversations turned to considering what could be done to convert this information sharing into new regulation. The study groups focused on particular issues, including standardized cost accounting, retail distribution, transportation, and trade practice conferences. Each group presented resolutions to the general assembly, published articles in the USCC’s monthly publication, Nation’s Business, and hosted experts from academia, regulatory agencies, and law firms. New ideas for business regulation percolated up from these USCC study groups. The study group on trade practice conferences viewed the crisis as an opportunity to expand the reach of association-based codes of fair competition through either the expansion of existing administrative rules or legislative mandate. Gilbert Montague, a trade attorney and advocate for the American Fair Trade League (AFTL), a consortium of independent    

See Julius Barnes, Apr. , , Box , –, esp. , USCC Rec.; “Report of the Committee on Resolutions,” Apr. , , Box , –, USCC Rec. See Mark S. Mizruchi, Fracturing of the American Corporate Elite (Cambridge, MA, ). See U.S. Bureau of Commerce, Historical Statistics, : . Marion Folsom, the assistant treasurer at the Eastman Kodak Company, presented the “Rochester Unemployment Plan” to the USCC general assembly. Folsom advocated using business management techniques to smooth, or even out, production levels and fluctuations in employment. He also favored company unemployment and pension plans. Marion B. Folsom, “Reducing Seasonal Fluctuations in Employment,” Apr. , , Box , –, USCC Rec. See also Folsom, Kodak Retirement Annuity, Life Insurance, and Disability Benefit Plan (Rochester, NY, ); Folsom, Responsibility of the Individual Community toward the Unemployment Problem (Rochester, NY, ); Sanford M. Jacoby, “Employers and the Welfare State: The Role of Marion B. Folsom,” Journal of American History  (Sept. ): –; Jacoby, Modern Manors, , . The Rochester Plan continued to operate through , when New York State’s unemployment insurance law superseded it.

Managing Competition in the Great Depression



proprietors and trade associations that campaigned for antitrust reform, explained to the group how trade associations might coordinate supply “into better balance with demand.” As consumer demand dipped and prices continued to fall, Montague argued, recent Supreme Court decisions had validated trade association information-sharing practices that could address the “continued congestion of over-production.” While the Court maintained a strict prohibition on price fixing per se, the judiciary had validated several techniques used by trade associations and sanctioned by the FTC to stem overproduction and standardize prices. In the mid-s, Montague explained, the Court had upheld information-sharing practices on output, bids, and final prices. Moreover, in January  the Court had ruled against price discrimination that favored large quantity orders, holding that such discounts violated the Clayton Act by substantially lessening competition and having a tendency toward monopoly. Montague, in other words, remained hopeful that these cases would encourage trade associations to coordinate price information and reduce overproduction by large-scale manufacturers. The group resolved to work more closely with the FTC to expand “Group I rules,” which were crafted at FTC-sponsored trade practice conferences and carried the weight of FTC enforcement powers. Yet uncertainty still remained. The “big question,” argued Arthur Fisher, an attorney and advisor to trade groups, remained whether associations could alter prices by collectively prohibiting both sales below cost and 







Gilbert Montague, “To What Extent May the Members of an Industry Legally Agree to Eliminate Trade Practices Not in Violation of Existing Law?” Apr. , , Box , , USCC Rec. Ibid. “We have presented to us by the U.S. Supreme Court in the Cement case and the Maple Flooring case the possibility of exchanging figures to show everybody in the industry the degree of over-production as compared with demand.” Ibid. See also H. H. Rice, “The New Cooperation in Industry,” Nation’s Business, May , ; John Lord O’Brian, “Trade Practices and the Law,” Nation’s Business, Sept. , ; Charles F. Lender, “The New Cooperation in Industry,” Nation’s Business, Sept. , . Montague, “To What Extent,” ; George Van Camp & Sons Co. v. American Can Co.,  U.S.  (), holding price discrimination to be a violation of the Clayton Act because the “effect of the discrimination is to substantially lessen competition, and its tendency is to create a monopoly in the line of interstate commerce in which petitioner and the other company are competitively engaged.” Ibid., . The Court, however, had reiterated its prohibition of price fixing in United States v. Trenton Potteries Co.,  U.S.  (). See Marc J. Stern, The Pottery Industry of Trenton: A Skilled Trade in Transition, – (New Brunswick, NJ, ). See Arthur Fisher, “The Effect of the Declaration by the FTC That a Trade Rule Is ‘Accepted as an Expression of the Trade,’” Apr. , , Box , –, USCC Rec.

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American Fair Trade

price discrimination. Both Fisher and Montague wanted the state to lend its regulatory powers to manage the economic downturn by mandating that all businesses join trade associations and abide by their FTCsanctioned trade rules. Lacking that power of compulsion, members discussed tactics of “legal and moral persuasion” to convince association members not to deal with non-signers to the industry’s trade rules. To develop and popularize trade rules, several industries formed “institutes” that helped develop the requisite consensus before trade practice conferences. Later, these institutes taught production and service methods, as well as cost accounting, and they also publicized FTC trade rules. Fred W. Swanson, commissioner of the Chicago-based National Plumbing and Heating Institute, explained that the association collectively determined whether to take a complaint to the FTC, “as a last resort.” He suggested that FTC backing would be more likely if the complaint arose against a single firm, rather than a group of firms. In  the most prominent proposals representing the business community’s response to the economic crisis both built upon existing public– private partnerships and extended the FTC’s regulatory capacity beyond what President Hoover was willing to sanction. The twin problems of falling prices and rising unemployment, which had reached  percent, created a sense of urgency. In turn, corporate business leaders increasingly endorsed policy proposals that unabashedly coordinated wages and prices across industries. These plans required greater coordination with government agencies to navigate around clear-cut antitrust rules against coordinated conduct that created price or wage floors. Gerard Swope, the president of General Electric (–) and a former War Industries Board (WIB) official, proposed one of the most broadly influential plans for public–private cooperation for economic stabilization. At the annual meeting of the National Electric Manufacturers’ Association, held in Manhattan on September , , Swope “proposed a national organization of modified cartels in which competition would be limited, overproduction governed, [and] workers and 



Fred W. Swanson, “Administration of Trade Rules from within the Industry,” Apr. , , Box , –, USCC Rec. Other association spokespeople involved in the conversation included Charles J. Brand (executive secretary, National Fertilizer Association, Washington, DC), Irving W. McLean (Trade Practice Administration for the Paperboard, Container and Folding Box Industries, Chicago), and representatives from the beauty and barber shop industry, National Association of Retail Druggists, and the dairy cream industry. “Gerard Swope, , Ex-G.E. Head, Dies,” New York Times, Nov. , , .

Managing Competition in the Great Depression

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investors vigorously protected.” Either the FTC or a bureau of the Department of Commerce would provide oversight and advice to trade associations responsible for establishing industry-wide practices and codes of fair competition, including codes of ethics, standardized cost accounting methods, simplified production processes, and price and wage stabilization policies. Trade association membership would be mandatory for any firm that engaged in interstate commerce and had more than fifty employees. Not only would trade associations standardize practices internal to each member firm’s management, but the Swope Plan required external reporting by management to shareholders and government supervisors. “There is nothing new or original in what I am proposing,” Swope told Time magazine. The Swope Plan simply extended WIB initiatives working with trade association representatives, as well as ongoing policy debates on the management of competitive markets to provide price stability, or “economic balance,” through both corporate and social welfare programs. To stabilize and regularize industrial employment, Swope proposed unemployment compensation plans (including life and disability insurance) based on state laws already in place. Old age pensions would be worked out along similar lines, with employees and employers sharing dollar-for-dollar contributions up to a certain amount. Already fortyfour states had workmen’s compensation acts, seventeen had some form of old-age pensions, and some corporations offered unemployment plans. The previous summer GE had introduced an unemployment insurance policy whereby laid-off workers received $ per week for up to ten weeks. The Swope Plan distended Hoover’s vision of associational corporatism by allowing businesses to dictate industry-wide output and prices – while also requiring the inclusion of other stakeholders, such as laborers and public regulators – but it did not fundamentally challenge Hoover’s preference for corporate control of American political economy. However, as social reformer and labor activist Mary van Kleeck observed, workers gained little more than vague guarantees of protection  

  

“Industry: Swope Plan,” Time, Sept. , , . Gerard Swope, “Stabilization of Industry,” in American Faces the Future, ed. Charles A. Beard (Boston, ), –. This is a copy of the speech delivered to the National Electric Manufacturers’ Association on September , . “Industry: Swope Plan,” Time. See Edward D. Berkowitz and Kim McQuaid, Creating the Welfare State: The Political Economy of Twentieth-Century Reform, rev. ed. (Lawrence, KS, ), , –. Swope, “Stabilization of Industry.”



American Fair Trade

against unemployment, old age, and disability. Moreover, the Swope Plan failed to allocate any board seats at major corporations or representation in trade associations to employees or their representatives. Wesley C. Mitchell, a Columbia University economist and the director of the NBER, who had worked closely with Hoover and his team of economists to assemble Recent Economic Changes, also believed that scientific management could transform the macroeconomy. Speaking at the USCC’s spring meeting in , he explained the merits of “stabilization” as a program of government-sponsored information sharing and collaborative business management: “In the language of the President’s Committee on Recent Economic Changes, we need to develop a ‘technique of balance,’ based on scientific knowledge” because there had been identified a “grave defect in the workings of the business economy as a self-regulating mechanism.” Mitchell argued that this attempt to stabilize the business economy was similar to trade union efforts to create wage and hours rules; trade association efforts to establish codes of ethics; or the federal government’s initiatives in the ICC, Farm Board, and Federal Reserve. He also maintained that “success in stabilizing one basic factor in the business complex would tend toward stabilizing other factors also.” Focusing on employment and wage rates would boost consumer demand, he explained, which would in turn allow manufacturers to smooth production and purchase materials with greater confidence, thus reducing price fluctuations. “In short, stable employment and stable wages would act like a gyroscope in the ship of business,” guiding business decisions. At the USCC meeting, every study group and every speaker at the general assembly embraced the “associational approach” to ensure “fair competition” and “stabilization.” Mitchell concluded



  



Mary van Kleeck, Creative America: Its Resources and Social Security (New York, ), , –. See also Chris Nyland and Tom Heenan, “Mary van Kleeck, Taylorism and the Control of Management Knowledge,” Management Decisions ,  (): –. Wesley C. Mitchell, “What Is Stabilization?” Apr. , , Box , –, USCC Rec. Ibid., –. Interestingly, he also praised the ability of German cartels to “help prevent dramatic price fluctuations.” Ibid., . Mitchell also acknowledged that falling gold supplies or the secular decline of prices in a particular industry, such as in agriculture, would necessarily lead to falling prices. “If the output [of gold] lags behind monetary needs, still more if the output presently shrinks, we face the probability of a secular decline in the price level, like the secular decline from  to .” Ibid., . See Harry Wheeler, “The Associational Approach to Problems Which Challenge Business Leadership,” Apr. , , Box , –, USCC Rec.

Managing Competition in the Great Depression



with a final warning: “But if business does not recuperate soon, angry discontent will spread rapidly” and “drastic changes” will be “hastily” put into effect.

Proposals for Economic Planning A turning point appeared to be afoot, with micro solutions no longer seeming sufficient to cure macro ailments – yet insofar as the USCC embraced “planning,” this turning point was on the chamber’s own terms and in pursuit of “economic stabilization,” not fundamental social change. Ultimately, the chamber’s “Planning Proposals” borrowed from Mitchell’s language, arguing that “the possibilities of business and employment stabilization” to alleviate the current “cyclical business depression” required the “proper coordination of production and consumption [to make] a sane, orderly, and progressive economic life be developed.” The current economy-wide Great Depression had created a problem of oversupply for many industries, similar to the problems of overproduction and falling prices in the previous depressions of the s and s. Just as in agricultural markets, as prices fell producers and retailers scrambled to meet fixed costs either by continuing to produce or by selling below cost, in both instances exacerbating oversupply and falling prices. This type of widespread market failure required innovative proposals for coordinating recovery. According to Harry Wheeler, the former president of the USCC (–, –), existing federal antitrust laws needed to accommodate new forms of business organization and coordination to save the existing capitalist system from the economic downturn. This downturn would encourage business closures and consolidations, he explained, but “so long as we have a national policy that frowns upon large business units approaching a monopolistic character, we must strike a balance between cooperation and competition and this is represented by the trade association.” On the whole the chamber pivoted toward the trade  





Ibid., . “Planning Proposals of the Committee on Continuity of Business and Employment of the United States Chamber of Commerce,” in Beard, America Faces the Future, –, . Ibid., , , . The report rejected “technological unemployment” as a cause of the Depression, instead emphasizing speculation, and recommended “more stringent regulation around credit.” Wheeler, “Associational Approach,” .



American Fair Trade

association techniques that the WIB had used during World War I and that the USCC’s trade practice conference study group had promoted during the s. The language and logic of the USCC’s “Planning Proposals” combined elements of Brandeisian prescriptions for fair competition with a heavy dose of stasis, not conceding any significant managerial power to either regulators or laborers. The older corporate liberal plans had gained new appeal, not just for smaller proprietors but now even for industrial corporate capitalists. Rather than pushing for repeal of the federal antitrust laws, the chamber recommended reforms to allow “contracts for the purpose of equalizing production to consumption . . . unless the governmental authority having supervision finds on its own initiative or on complaint that such agreements are not in the public interest.” The USCC’s “Planning Proposals” explained the nationwide problem of falling prices as a market failure. Individual businesspeople responded to market incentives to lower prices, lay off employees, or reduce workers’ hours, leading to a cascade of economic contraction. In turn, business leaders searched for some kind of coordination device to keep competitors from exacerbating falling prices by selling below cost – or worse, liquidating supplies if faced with bankruptcy. In other words, industrial corporate capitalists borrowed the cultural language of fair trade advocates and argued that they too were like the prairie populists and independent proprietors and should be allowed to form cooperative associations. The chamber also recommended that an administrative body provide a preliminary review of association agreements on trade practices and have the power to rescind approval if it deemed them no longer in the public interest. The report left the details for legislators to determine but urged that individual firms be required to participate in trade associations so as to coordinate industry-by-industry “planning for stability in operation and employment.” It concluded that “business prosperity and employment will be best maintained by an intelligently planned business structure which affords a fair opportunity to make a reasonable profit through productive activities.” The USCC declared: “We have left the period of extreme individualism” and the

  

“Planning Proposals,” . Ibid., . See also comments made by Alfred Sloan of General Motors in “A. H. Wiggin Holds Slumps Inevitable; Predicts Upturn,” New York Times, Oct. , , . “Planning Proposals,” .

Managing Competition in the Great Depression



“freedom of action which might have been justified in the relatively simple life of the last century.” The chamber released its proposals at the end of , recommending the creation of a national economic council to advise the president and Congress on the current state of credit and finance, wage and price levels, foreign trade, and consumer demand. Henry Ingraham Harriman, a New England power company executive and soon-to-be USCC president, became a central spokesperson for the creation of this council of advisors. During the war Harriman had served as a regional WIB official, president the Boston Chamber of Commerce, and a member of the Massachusetts State Planning Board. The council, Harriman explained at the  meeting of the American Economic Association (AEA), would be advised by the heads of major trade associations and would speak directly with the president. The chamber’s plan mimicked the structure and authority of the WIB and revealed the group’s great audacity and selfinterest by proposing to control the council itself. Harriman explained that in order to remain nonpartisan and uncaptured by any particular sector, “the economic council should be appointed and supported by business, though it should co-operate with government departments and with trade organizations. . . . The Chamber of Commerce of the United States [should] name fifty leading representatives of industry, the professions, labor, and agriculture to act as an elective board to choose such a council.” In other words, not only would the USCC select the business leaders to be appointed to the council, but it would also select the representatives from labor and agriculture. In testimony before the U.S. Senate, Harriman stated that some governmental authority would “absolutely” be necessary to “secure uniform accounting and the right to examine the books of corporations.” Likewise, Swope conceded that “of course” he would be “willing to see the Government exercise the 

 

 

Ibid., . See also “Planning Business Stability,” Nation’s Business, Nov. , ; “Industrial Relations: U.S. Chamber Unemployment Report,” Women’s Wear Daily, Sept. , , ; “U.S. Chamber Stabilization Program Is Made Public,” Women’s Wear Daily, Dec. , , , . See “ Industrial Directors: One Appointed for Each Zone in the United States,” New York Times, June , , . Henry I. Harriman, “The Stabilization of Business and Employment,” American Economic Review , suppl. (Mar. ): –, . Harriman presented this paper at the AEA’s December  annual meeting. Ibid. Hearings on S.  on the Establishment of a National Economic Council Before the S. Committee on Manufactures, nd Cong.  () (statement of Henry



American Fair Trade

power to compel” to attain stabilization plans. Thus, for the USCC, partnering with government agencies appeared potentially beneficial, but altering the composition of corporate boards or industry associations with representatives from labor and agriculture constituted a bridge too far. Harriman made many recommendations in his talk at the AEA, including agricultural price supports and acreage retirement, banking reforms to regulate branch banking, monetary reform to broaden rediscount policies, and the creation of a central mortgage bank. However, his AEA audience focused almost exclusively on Harriman’s proposal that the chamber coordinate and control a national economic council to advise the president and Congress. Lewis L. Lorwin, a labor economist based at the Brookings Institution, provided panel comments in response to both Harriman and Rexford Tugwell, a radically progressive economist. Lorwin dismissed Harriman’s vision as repackaged “laissez faire.” Yet even Lorwin, who had played an instrumental role in the World Social Economic Planning Congress in  and who adamantly advocated national economic planning, conceded that Harriman’s remarks signaled some kind of progress: “It is a sign of progress that the American business world, speaking through Mr. Harriman, is ready to admit that [the speculative] aspect of business must be curbed and that business must be built with a view to security for all.” Lorwin argued that Harriman’s idea for a national economic council, while praiseworthy in spirit, failed “to go the full way,” stopping short of a truly national economic planning because it was subordinate to business interests. For Lorwin the economic downturn required a complete reconsideration of existing political economy and validated “the growing movement for rational economic and social control.” Quoting Mary van Kleeck,



  



I. Harriman). See also Donald Blaisdell, Economic Power and Political Pressures, TNEC Monograph  (Washington, DC, ), –. Hearings on S.  on the Establishment of a National Economic Council Before the S. Committee on Manufactures, nd Cong.  () (statement of Gerald Swope). See also Louis Domerstzky, “Cartels and the Business Crisis,” Foreign Affairs  (Oct. ): –. See Harriman, “Stabilization of Business and Employment,” –; Lewis L. Lorwin, “Discussion,” American Economic Review , suppl. (Mar. ): –. Lorwin, “Discussion,” . Karl W. Kapp, “Economic Regulation and Economic Planning: A Theoretical Classification of Different Types of Economic Control,” American Economic Review  (Dec. ): –. See also Lewis L. Lorwin, Time for Planning (New York, ), –, .  Lorwin, “Discussion,” . Ibid.

Managing Competition in the Great Depression



who had organized the World Social Economic Planning Congress in Amsterdam, Lorwin promoted the idea of a World Social Economic Center “to centralize the planning of research which would preferably be carried on by national and international bodies devoted to research.” The World Congress had provided the first opportunity for socialist planners from the Union of Soviet Socialist Republics (USSR) to present their ideas and promote their first Five-Year Plan. As opposed to the old binary of capitalist versus socialist, however, the Congress had been organized to discuss a “third way” and promote “social economic planning” as an outgrowth of scientific management. Lorwin derived these ideas from the management techniques of large-scale industrial firms, which had created management boards and agencies to govern multiple plants and far-flung marketing campaigns. He believed that these coordination devices used by multidivisional corporations could be transposed onto policymaking to achieve democratic planning. Technical experts from government and business could establish economic and social standards, oversee pricing, and guide profits toward social ends. In the United States, Lorwin advocated the idea of economic rationalization and efficient planning through the Economic Social Planning Association, monthly discussion groups, and the publication Plan Age. Given the state of economic emergency, Lorwin argued, democratic planning presented “the only alternative to dictatorial government.” Speaking opposite Harriman on the AEA panel, Tugwell, a leading institutionalist economist at Columbia University, advocated mandatory price and wage controls set by government agencies working in





 

Lewis L. Lorwin, “World Social Economic Planning Congress,” Life and Labor Bulletin  (Nov. ): . (Prepared by the International Industrial Relations Association, this article reprints remarks delivered at the World Social Economic Planning Congress, August .) See also V. Obolensky-Ossinsky, “The Nature and Forms of Social Economic Planning” in World Social Economic Planning: The Necessity for Planned Adjustment of Productive Capacity and Standards of Living, ed. Mary L. Fledderus (New York, ), –. See Fledderus, World Social Economic Planning. On Soviet planners at the meeting, see S. L. Ronin, “Planned Economy in Operation in the Soviet Union,” in World Social Economic Planning, –; “Geneva and Soviet in Clash at Parley: Russians at Amsterdam Congress Assail Labor Organization Delegate as Pro-Capitalist,” New York Times, Aug. , , . Lewis L. Lorwin, “The Plan State and the Democratic Ideal,” Annals of the American Academy of Political and Social Science  (July ): –. Quoted in Ira Katznelson, Fear Itself: The New Deal and the Origins of Our Time (New York, ), .

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American Fair Trade

consultation with business, labor, and agricultural associations. Like Lorwin, he agreed that the current system of political economy created wealth and prosperity, but it also fostered inequality, poverty, and unemployment – the social costs of corporate capitalism. Those costs, however, could be ameliorated through structural and legal changes. In an homage to Frederick W. Taylor’s labor management studies in massproduction facilities, Tugwell argued that both modern industrial firms and trade associations operated differently than the individual shopkeepers of the preceding era, who still retained the “dogmatic dream of the economists” – the myth of market competition and individualism. The technologies that had created immense wealth by improving industrial production, distribution, and organizational forms, he argued, had “outrun institutional change” because “the government ha[d] attempted to preserve primitive forms of competition” rather than embrace new forms of organization. He urged his audience to consider that “national planning can be thought of – in a technical rather than a 



 

Rexford Guy Tugwell, “The Principle of Planning and the Institution of Laissez-Faire,” American Economic Review , suppl. (Mar. ): –. See also Rexford Guy Tugwell, ed., The Trend of Economics (New York, ). Today’s leading economic historian of institutionalist economics refers to Tugwell’s text as “an institutionalist manifesto.” See Rutherford, “Understanding Institutional Economics,” . “But a mature and rational economy which considered its purposes and sought reasonable ways to attain them would certainly not present many of the characteristics of the present – its violent contrasts of well-being, its irrational allotments of individual liberty, its unconsidered exploitation of human and natural resources.” Tugwell, “Principle of Planning,” . Tugwell also related the problem of overproduction to the separation of ownership and management in large-scale industrial firms. Modern industrial firms, he argued, had reordered the profit motive by separating ownership and management such that the owners of capital had a decreased incentive to reinvest profits to increase productivity. Instead, owners “who have no share in the control of operations” were more likely to “set aside [profits] as surplus reserves” and invest “in the securities of other industries.” As a result, the basic premise that capitalism operates through the profit motive had been transformed. Ibid., , . Tugwell cited Gardiner Means, “The Separation of Ownership and Control in American Industry,” Quarterly Journal of Economics  (Nov. ): –. On “some strenuous attacks on the economists’ naïve view of human nature,” see Rexford Guy Tugwell, “Human Nature and Economic Theory,” Journal of Political Economy  (June ): ; Tugwell, “Human Nature and Social Economy,” Journal of Philosophy  (Aug. ): ; Charles Horton Cooley, Human Nature and the Social Order (New York, ). Tugwell, “Principle of Planning,” , . Ibid., . “We might have had some such form of organization as the German cartel system if we had not set out so determinedly, forty years and more ago, to enforce competition.” Ibid. Tugwell drew these remarks from H. S. Person, “Scientific Management as a Philosophy and the Technique of Progressive Industrial Stabilization,” in World Social and Economic Congress, .

Managing Competition in the Great Depression



political sense – merely as [a] normal extension and development of the kind of planning which is the familiar feature of contemporary business.” Only a new coordination device provided by the state could direct private profit motives away from “speculative profit-making” and toward “supporting productive enterprises.” Tugwell argued that the time had come for a centralized, national group of experts with power to compel businesses toward socially constructive goals. Although he rejected both the USCC’s proposed “‘National Economic Council’ with advisory duties” and Senator Robert M. La Follette Jr.’s bill for an advisory council to be part of the government, Tugwell also praised the chamber’s recognition that “we have left the period of extreme individualism and are living in a period in which national economy must be recognized as the controlling factor.” Moreover, he noted, “when the Chamber of Commerce of the United States is brought to consent, realization cannot be far off.” Thus for Tugwell, the USCC proposals signaled “a clear recognition, one that can never be undone, that order and reason are superior to adventurous competition.” In other words, competition had been discredited in favor of economic planning – in favor of managed competition. However, Tugwell believed that reaching that new system required “a period of violent reconstruction,” during which the institutions of constitutional federalism would be quickly and fundamentally reordered. “It will require the laying of rough, unholy hands on many a sacred precedent, doubtless calling on an enlarged and nationalized police power for enforcement” and diminishing the power of the several states to enforce localized economic policy. There would be no place for the distinction between “private and public or quasi-public employments,” and ultimately, “business will logically be required to disappear.”  

 

 

 Tugwell, “Principle of Planning,” . Ibid., , , respectively. Ibid., –. Quoting Lewis Lorwin: “The laissez-faire of the nineteenth century was based upon a metaphysics of providential guidance. The planning of the twentieth century rests its case on a philosophical faith in the power of man to promote orderly economic and social change.” Ibid., n. Ibid., –n. Ibid., . See the U.S. Chamber of Commerce pamphlet Committee on Continuity of Business and Employment, Report  (Oct. –, ). See also C. F. Remer, “Professors in Washington,” Quarterly Review  (Jan. ): –.  Tugwell, “Principle of Planning,” . Ibid., –. Ibid. “It is, in other words, a logical impossibility to have a planned economy and to have businesses operating its industries, just as it is also impossible to have one within our present constitutional and statutory structure.” Ibid., .

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American Fair Trade

In his discussion of the two papers, Lorwin rejected Harriman’s proposal as a continuation of discredited “laissez-faire” policy, a time-worn shibboleth; yet Lorwin and other speakers also criticized Tugwell’s prescription for “a complete economic and social revolution.” Instead, Lorwin argued that “planning can be applied under different schemes of social institutions and in different degrees and different forms.” His study of economic councils in foreign countries had led him to the conclusion that the multiplicity of corporations, trade associations, labor unions, farmer cooperatives, and consumer leagues required some unifying force that a national economic council might provide: This associative process was inherent in modern industrialism and justifiable for purposes of economic efficiency and social welfare. . . . The task was to bring groups and associations into a legitimate relation with government by giving them a recognized place in the political and legal system. This the economic council is supposed to do.

Indeed, a middle ground between Harriman’s independent advisory council and Tugwell’s regulatory planning council emerged through the National Progressive Conference’s proposal for “long-range planning for the regularization of industry.” Conference chairman J. M. Clark, another Columbia University economist, proposed a representative advisory council that would act as an extension of the executive branch.

 







Lorwin, “Discussion,” . Ibid. On Lorwin’s notion of a spectrum of planning, including public–private partnerships, see Kapp, “Economic Regulation and Economic Planning,” –. See also Kapp, “In Defense of Institutional Economics,” Swedish Journal of Economics ,  (): –. Lewis L. Lorwin, Advisory Economic Councils, Brookings Institution Pamphlet Series, No.  (Washington, DC, ), –. Lorwin’s book explored the history of national economic councils in Europe, specifically focusing on Germany and France. See John Maurice Clark, “Long Range Planning for the Regularization of Industry: Report of Subcommittee of the Committee on Unemployment and Industrial Stabilization of the National Progressive Conference,” New Republic, Jan. , , pt. , –; George Soule, “Long-Range Planning and the Marxian Indictment,” letter to the editor, New Republic, Jan. , , –. See also “National and World Planning,” special issue, Annals of the American Academy of Political and Social Science  (July ): –; George Soule, A Planned Society (New York, ); Laurence Shute, John Maurice Clark: A Social Economics for the Twenty-First Century (New York, ); U.S. Department of Commerce, The International Cartel Movement, Trade Information Bulletin  (Washington, DC, ), summarizing German cartel activity. Hearings on S.  on the Establishment of a National Economic Council Before a Subcommittee of the S. Committee on Manufactures, st Cong. – () (statement of John Maurice Clark).

Managing Competition in the Great Depression



A compromise bill for a national economic council emerged from the office of Senator La Follette Jr., a progressive Republican from Wisconsin. La Follette’s father had partnered with Louis Brandeis in  to propose an “interstate trade commission,” which preceded the FTC. La Follette’s council expanded the powers of administrative governance under the executive branch. The council would be appointed by the president with the Senate’s consent and would represent industrial, labor, agricultural, and financial interests. Its task would be to study economic issues and make recommendations to the president. Similar to his father’s work with Brandeis, the  La Follette bill borrowed from studies on foreign countries’ experiences with such advisory governmental bodies. After the Senate Committee on Manufactures conducted hearings on the bill and the “advisability of economic planning,” the bill was revised to require private businesses with gross annual sales of more than $ million to report the quantities and values of the materials they purchased, processed, stocked, and sold. Additionally, businesses would be required to report new investments, depreciation, and output prices. The national economic council would then publish these reports, providing analysis by industry and region, and make recommendations on capital allocation. Although the bill made reporting mandatory, La Follette’s council focused on persuading private businesses to make certain decisions on investments and production. By early  congressional proposals for structural adjustments focused on expanding FTC authority to identify and prevent unfair methods of competition. Senator Gerald Nye of North Dakota, a progressive Republican who often supported La Follette’s policies, proposed two bills that empowered the FTC to define the pricing methods used by various industries and to police final prices. Nye viewed the FTC trade practice conferences as the best way to promote the public interest by collectively prohibiting sales below cost. Similarly, Senator David  



See Chapter . A Bill to Establish a National Economic Council, S. , st Cong. (). Senator La Follette’s revised economic council bill also reduced the council members from fifteen to nine, each of whom would serve a term of four years and receive a salary of $,. See also Governor Philip La Follette, “The State Plan,” delivered to the Wisconsin legislature on Nov. , , reprinted in Beard, America Faces the Future, –. Philip La Follette was Robert La Follette Jr.’s brother. To Establish a Federal Trade Court and Other Purposes, S. , nd Cong. (); To Amend the Act Titled “An Act to Create a Federal Trade Commission, to Define Its Powers and Duties, and for Other Purposes, Approved September , ,” S. , nd Cong. ().

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American Fair Trade

I. Walsh, a Democrat from Massachusetts, introduced a bill that attempted to provide a comprehensive definition of unfair competition, which included price discrimination, concealed subsidies, selling at or below gross costs, and any specific trade practices deemed unfair by the FTC. The FTC could determine whether a contract among firms or an association resulted in “a fair and reasonable compensation to producers of average ability and efficiency and to labor and does not result in a selling price of the good or commodities in excess of a fair and reasonable profit.” The bills echoed industry proposals for a cost-plus-reasonableprofit basis to fix prices. Advocates of state-led economic planning, such as Tugwell and George Soule (an economist and editor of the New Republic), criticized congressional proposals to expand the FTC as not going far enough and dismissed USCC proposals as laissez-faire repackaged, drawing battle lines reminiscent of previous generations’ debates on corporate capitalism and the nature of liberalism. But neither characterization was entirely true. While clearly not laissez-faire, the plans went beyond Hoover’s preferred associational corporatism by facilitating new relationships with federal regulators that further expanded the oversight and enforcement powers of these regulators but also increasingly brought business within government in an official capacity. Yet these plans largely failed to counterbalance the greater powers of corporate leaders with representation for consumers and workers. Even as Swope and Harriman conceded that workers should be represented within the council, their vision of the state’s changing relationship with corporate entities failed to truly reorder power relations, leaving consumer and labor advocates deeply unsatisfied with collaborative efforts to manage the economic downturn. To protect their own material interests and preserve existing power relationships, the USCC leadership had drawn from existing plans that were based primarily on a neo-Brandeisian vision of corporate liberalism – signaling a turning point in capitalism itself, as Tugwell noted. Objections to the USCC proposals surfaced from those small business liberals who feared that relaxing antitrust laws would, in this case, be detrimental for them. Including large-scale industrial manufacturers and chain store retailers might diminish not only the power of proprietary capitalists within their associations but might also tarnish their cooperative brand  

To Protect and Foster Trade and Commerce to Supplement the Powers of the Federal Trade Commission and for Other Purposes, S. , nd Cong. (). Ibid.

Managing Competition in the Great Depression



and political rhetoric. But USCC leadership proved persuasive. The associative model for coordinated markets through private associations and state agencies informed a wide variety of proposals on both the left and the right, each of which viewed the Sherman Antitrust Act as the major impediment to more equitable forms of governance and emergency relief. According to Edward A. Filene, of Filene’s department stores, a consensus had emerged, however disparate in its particulars, that the “new capitalism” required “cultivating and extending the principles of cooperation” to raise wages, reduce hours, and curtail unemployment so that the “buying public shall be prosperous.” Indeed, Matthew Woll, vice president of the American Federation of Labor, agreed that “the [antitrust] law remains, a strange anomaly of medievalism in a day of scientific miracles” and he advocated for its repeal. If the “old capitalism” enshrined laissez-faire doctrine based on economic individualism and market competition, then the new version conceded that “every agreement concerning trade, every regulation of trade, restrains” competition, echoing Louis Brandeis. And thus closer scrutiny must be paid to evaluating the competitive effects of large-scale industries as well as trade associations and labor unions, rather than simply presuming that they violated the public interest. Distending and manipulating the idea for their own purposes, Harriman and Swope ultimately co-opted the trade practice conference model that advocates of fair trade and fair competition had espoused throughout the s. In turn, the corporate liberal vision that Brandeis and the socalled fair traders had promoted to preserve and support individual proprietors and industry-based substantive rules of fair exchange had morphed into a system controlled by corporate capitalists, by large-scale 



 

See Beard, America Faces the Future. The volume chronicles proposals by Charles Beard, Gerard Swope, the USCC, the American Federal of Labor, Franklin D. Roosevelt, Wisconsin governor Philip La Follette, Herbert Hoover, and others. Edward A. Filene, “The New Capitalism,” Annals of the American Academy of Political and Social Science , pt.  (May ): . Filene continued: “Even Big Business, that amazing phenomenon of the modern world, is not the creation of big business geniuses. There are no half-gods directing our affairs today. There are not even any superman. There is just a body of scientific research upon which business men have been operating, because it paid them better to operate along the lone of fact finding than to stay in the rut of traditional thinking.” Ibid., . Matthew Woll, “Organized Labor Demands Repeal of the Sherman Act,” Annals of the American Academy of Political and Social Science  (Jan. ): –, . Emerson P. Schmidt, “The Changing Economics of the Supreme Court,” Annals of the American Academy of Political and Social Science  (Jan. ): . See also Chicago Board of Trade v. United States,  U.S.  ().



American Fair Trade

industrial firms – the very businesses that the original fair trade movement had sought to control through partnerships with government. But joining those corporate capitalists were progressive reformers and economic planners who found that the associative model could be a potentially useful tool in organizing and managing business in the public interest and on an even grander scale. Working with aggregated business interests eased the problems of information gathering, monitoring, and enforcing. While each scheme differed in its details, there appeared to be agreement on “a number of fundamental principles” that included relaxing antitrust laws and creating some kind of national economic council to represent industry associations as well laborers and regulators in the policymaking process. Each plan relied on different mechanisms to expand state regulatory powers to promote employment and price stabilization in the public interest, though most focused on expanding the FTC model of administrative governance. This consensus left Hoover standing alone, steadfast in his commitment to policies devised before the stock market crash.

 : ’   The First New Deal and State Corporatism By  the American people demanded federal action to address worsening economic conditions, even as economists continued to publicly dither over federal deficit spending for public works and monetary policy activism. Since  prices had fallen by  percent, manufacturing output had declined by a third, and unemployment had reached  percent. Many workers saw their hours cut and wages reduced. Many lost their savings as banks closed at an alarming rate through .  



Charles A. Beard, “The Rationality of Planned Economy,” in Beard, America Faces the Future, –. Frank A. Fetter, “The Economists’ Committee on Anti-Trust Law Policy,” American Economic Review  (Sept. ): , surveying economists opposed to antitrust reforms but divided on fiscal and monetary policy responses to the Depression. See also Kennedy, Freedom from Fear: The American People in Depression and War, – (Oxford, ), –; Barber, From New Era to New Deal, –, –. In  there were , banks operating in the United States, holding a combined $. billion in assets, $. billion in liabilities (much of which was owed to depositors), and $. billion in shareholder equity. Between  and , on average  banks closed per year; most often these were small, rural banks. As a result, many states passed deposit insurance programs. In late  panic led to bank runs that

Managing Competition in the Great Depression



While state legislatures responded by creating administrative boards under emergency conditions to control competitive practices, wages, and retail prices on an industry-by-industry basis, the economic crisis quickly spilled over state lines. U.S. financial institutions carried high debt-to-equity ratios of approximately six to one, making them especially vulnerable to insolvency if depositors demanded cash withdrawals. Moreover, states had little recourse, since banking panics and price deflation presented a nationwide problem, driving down prices, pushing up unemployment, and causing more panic. As British economist John Maynard Keynes explained, Americans experienced an unprecedented crisis of confidence, constituting a coordination failure that only a comparably widespread macroeconomic shock could alleviate. While Franklin Roosevelt was prepared to provide just such a shock, he and his advisors were limited by the available proposals for economic planning. Hoover was clearly on the way out. Even as President Hoover expanded the purview of the Reconstruction Finance Corporation (RFC) to lend to businesses as well as banks struggling to make payments, he still maintained his outward commitment to limited federal intervention and nominally balanced budgets. By contrast, his opponent in the

 



drained banks’ reserves, forcing many more banks to close. By the end of that year, , banks had closed. Great Britain exited the gold standard in September , causing another panic and conversion crisis as depositors wanted to convert their deposits into gold. That same year , banks failed, incurring a loss of more than $ million to depositors. See U.S. Department of Commerce, Historical Statistics of the United States (), : –. See James T. Patterson, The New Deal and the States: Federalism in Transition (Princeton, NJ, ). John Maynard Keynes, The Means to Prosperity (London, ), . Keynes chose the analogy of lorries unable to pass on a road to represent the coordination failure that the Great Depression posed. “But the lorries of these people will never, I fear, get by. They may stay up all night, engage more sober chauffeurs, install new engines, and widen the road; yet they will never get by, unless they stop to think and work out with the driver opposite a small device by which each moves simultaneously a little to his left.” Ibid. On coordination failures, see also Ben Bernanke, “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” in New Keynesian Economics: Coordination Failures and Real Rigidities, eds. N. Gregory Mankiw and David Romer, th ed. (Cambridge, MA, ), : –. On the expansion of the RFC, see Hearings Before the S. Committee on Banking and Currency, rd Cong. – () (statement of Ogden Mills, Sec’y of the Treasury). In late spring of , Hoover expanded the RFC from lending to banks to also lending to private businesses and state and local governments for construction projects. The RFC’s budget provisions were doubled from $. billion to $ billion; however, these were “off budget” expenditures that did not appear in the Treasury Department’s



American Fair Trade

election of , Franklin Delano Roosevelt, campaigned for new policies that promised to surpass Hoover’s initiatives. FDR’s track record as governor of New York proved his commitment to socioeconomic policies. In New York he had helped initiate old-age pension plans and unemployment relief, which helped him secure a decisive victory in the presidential election. Although Roosevelt’s New Deal for the American people promised economic security and pledged to reform American institutions to reach that goal, both structural and ideological constraints impinged on his programs. Roosevelt then faced many of the same ambiguities and limitations that Hoover had confronted in office. In his first term, FDR borrowed from Hoover’s priorities as president – to rejuvenate confidence in U.S. banking, balance the federal budget, supply federal aid to agriculture, and promote industrial stabilization. Even as FDR was prepared to expand those initiatives in meaningful ways, the twin problems of limited federal government capacity to implement economywide programs and the widespread preference for balanced budgets exerted contradictory pressures on the First New Deal’s goal to reflate prices and wages. For example, he reduced the salaries of federal employees, raised taxes on beer and wine, and cut nearly $ million from the federal budget. Simultaneously, he authorized vast public works and reemployment through the Civilian Conservation Corp and the Tennessee Valley Authority. The outcome, however, appeared “disorderly,” “ambiguous,” and “ad hoc,” according to leading historians. Yet insofar as the Great Depression persisted as a crisis of confidence and a systemic fear that froze lending, investment, and consumption, FDR’s immediate executive orders and socioeconomic policies reassured many Americans that their new president might deliver on his promise of economic security. In his first  days in office, his administration unleashed a flurry of legislation and executive orders that built on existing programs and pursued new initiatives in banking, agriculture, and industrial policies.

 

accounts. On Hoover’s explanation of the expanded RFC as consistent with his previous commitments, see Herbert Hoover, “Letter to the President of the American Society of Civil Engineers on the Economic Recovery Program,” May , , online by Gerhard Peters and John T. Woolley, The American Presidency Project, www.presidency.ucsb .edu/ws/?pid=. Kennedy, Freedom from Fear, . Kennedy, Freedom from Fear. Kennedy links together the Great Depression, the New Deal, and World War II as a distinct era of American history, placing FDR at the center

Managing Competition in the Great Depression



At  .. on Monday, March , , only thirty-six hours after taking office, FDR took his first step toward restoring market confidence. He declared a nationwide bank holiday to stem banking panics, halt the outflow of gold from U.S. reserves, and restore confidence in the U.S. financial system. He then informed the public that only banks with sufficient capital holdings would reopen. Two days earlier, all twelve Federal Reserve Banks had been closed, and banks in thirty-seven states had either operated under limited withdrawals or closed according to state-mandated bank holidays. New York Fed chair George Harrison, alongside the Clearing House Banks of New York, had requested that then-President Hoover declare a national bank holiday. But lacking President-elect Roosevelt’s support, Hoover refused to act. Upon taking office, FDR convened officials from the Treasury and Federal Reserve to devise a protocol for reviewing banks. For one week Americans had no access to banks or financial services; however, major newspapers reported public compliance and waning panic. By the end of March, approximately two-thirds of U.S. banks had reopened, comprising  percent of deposits. Along with the president’s “fireside chats”







 

of elucidating a new vision for modern American liberalism based on stability and security, or riskless capitalism, rather than the older classical liberal idea of formal legal equality. Ellis W. Hawley, on the other hand, presents the New Deals as more ambiguous and prone to experimentation based on the preceding formation of interest groups and ideological frameworks. FDR’s administrations and policies are often characterized as the First and Second New Deals. See Hawley, New Deal and the Problem of Monopoly, . American Fair Trade embraces the methodology of the latter while acknowledging the overarching legitimacy of the former. Franklin D. Roosevelt, “The President Proclaims a Bank Holiday. Gold and Silver Exports and Foreign Exchange Transactions Prohibited. Proclamation No. ,” Mar. , , in The Public Papers and Addresses of Franklin D. Roosevelt (New York, ), : – (hereafter cited as PPA). See also William L. Silber, “Why Did FDR’s Bank Holiday Succeed?” Economic Policy Review  (July ): –; Susan Estabrook Kennedy, The Banking Crisis of  (Lexington, KY, ), –. Memoirs of Herbert Hoover, : . For a list of the twenty-four states with declared bank holidays, see Raymond Moley, The First New Deal (New York, ), –. For a description of the exchange between Roosevelt and Hoover on Mar. , , see Moley, First New Deal, –. On Roosevelt’s refusal to partner with his unpopular rival to endorse a bank holiday during the transition between administrations, Raymond Moley reflected: “The baby was Hoover’s anyhow.” Moley, After Seven Years (New York, ), . See Federal Reserve Bank of Boston, Closed for the Holiday: The Bank Holiday of  (Jan. ), –, www.bos.frb.org/about/pubs/closed.pdf. William J. Barber, Designs within Disorder: Franklin D. Roosevelt, the Economists, and the Shaping of American Economic Policy, – (Cambridge, ), .

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American Fair Trade

and the Emergency Banking Act (passed March ), FDR’s administration delivered comfort and confidence that helped stem the banking panic. To address the economic crisis, FDR also promised “permanent farm relief” based on “national planning in agriculture.” Throughout the  presidential campaign, Roosevelt had linked rural bank closures with the postwar secular decline in agricultural prices. Even as agricultural prices fell, farmers continued to produce and sometimes raised output to cover debts, thereby exacerbating falling prices. Roosevelt rejected dumping cheap U.S. farm products on foreign markets for fear of retaliation and instead advocated domestic supply management of staple crops. Similar to earlier agricultural initiatives to manage competitive markets, agricultural cooperatives had created a blueprint for public– private regulation of farm production, marketing, and sales standards, all of which Roosevelt argued should be “enhance[d] and strengthen[ed]” through federal policies. The president entrusted Secretary of Agriculture Henry A. Wallace and Assistant Secretary Rex Tugwell to create a program with the twin goals of raising farmers’ purchasing power and restoring agricultural prices. In the case of agriculture, three solutions prevailed to solving the problem identified as a market failure: direct control over production quotas, export promotion, and indirect promotion of land-use planning. The Agricultural Adjustment Act, signed into law on May , , selected a limited number of staple products and promoted both acreage retirements and output restrictions. Farmers’ benefits were paid from the redirected taxes levied against primary processors of staple products, and for farmers who processed their own commodities, taxes would be collected on all product marketing. The act also mandated the destruction of some existing staple crops, such as cotton and hog surpluses. Ultimately, the act’s Domestic Allotment Plan adapted Tugwell’s vision for  



 

See Franklin D. Roosevelt, “The First ‘Fireside Chat’ – An Intimate Talk with the People of the United States on Banking,” Mar. , , in PPA, : –. See Franklin D. Roosevelt, “‘A Restored and Rehabilitated Agriculture,’ Campaign Address on the Farm Problem at Topeka, Kans.,” Sept. , , in PPA, : –, . See also Roosevelt, “Address before the Conference of Governors on Land Utilization and State Planning. French Lick, Ind.,” June , , in PPA, : –. Roosevelt, “Restored and Rehabilitated Agriculture,” . Part of FDR’s plan called for “an economic soil survey” to guide the “proper utilization of the land and future distribution of population along sound economic lines.” Ibid., . Agricultural Adjustment Act of ,  Stat.  (). Hawley, New Deal and the Problem of Monopoly, –; Barber, Designs within Disorder, , .

Managing Competition in the Great Depression



agricultural readjustment and implemented governmental controls over production investments and prices. FDR’s team of advisors, what became known as the Brains Trust, constructed an industrial-sector corollary to the structural adjustments applied in agriculture. Two proposals surfaced for industrial recovery – one from within the administration and the other from the office of Senator Robert F. Wagner, a Democrat from New York. Assistant Secretary of State Raymond Moley, a professor of government at Columbia, coordinated proposals and solicited advice from the USCC, the American Bar Association, the Brookings Institution, and General Hugh Johnson, who had led the War Industries Board during World War I. The plan from Moley’s office called for suspending antitrust laws and expanding executive power to approve industry-specific agreements to stabilize both wages and prices. An alternative proposal came from Senator Wagner, who had followed President Roosevelt’s suggestion to also investigate industrial plans for recovery. In consultation with trade association lawyers such as Gilbert Montague, as well as Senator La Follette and Pennsylvania representative Melville Clyde Kelly, Wagner helped create a proposal that included public works programs, labor union guarantees, direct loans to industry, and trade association agreements to stabilize prices and wages. Both proposals coupled reflating prices with raising purchasing power through increased wages. To balance countervailing interests, however, the La Follette-Wagner plan relied on both trade associations and labor unions to carry out those tasks. Thus from the beginning, industrial regulation and social welfare policy intertwined in the national recovery plan.



  

Tugwell, “Principle of Planning,” –. Another institutionalist, John Maurice Clark, also endorsed long-range planning in response to the Depression. See Clark, “LongRange Planning,” –. See also Preface to Social Economics: Economic Theory and Social Problems, eds. John Maurice Clark, Moses Abramovitz, and Eli Ginzberg, (New York, ). See Moley, After Seven Years, . Hawley, New Deal and the Problem of Monopoly, ; John Braeman, Before the Civil Rights Revolution: The Old Court and Individual Rights (New York, ), . For an overview of the Moley-Johnson group, the Wagner group, and the resulting coalition agreement, see Charles Frederick Roos, NRA Economic Planning (Bloomington, IN, ), –. According to an FTC report to Congress, approximately  open price associations were in existence in . While that number fell to  by , it still suggests a robust field despite FTC investigations and prosecutions. See Open Price Associations, S. Doc. No. –, at xvii, –, – (). On open price associations, see Chapter .



American Fair Trade

Ultimately, the First New Deal instituted a “partnership in planning” between government and “organized private industry,” which included organized business and labor. The National Industrial Recovery Act (NIRA) sought to eliminate unfair business practices that drove down prices, to stabilize industrial production, and to enhance purchasing power by empowering unions to lift wages and reduce hours. For those laborers outside of unions, codes of fair competition dictated wage rates on an industry-by-industry basis. As with the market failure in agriculture, executive advisors and leading businesspeople believed that the NIRA could rationalize industrial production, distribution, and sales. Unlike with agriculture, however, FDR’s Brains Trust did not advocate production limitations. Instead, new codes of conduct would guide business transactions away from the proverbial race to the bottom. “These [antitrust] laws,” FDR explained “were never intended to encourage the kind of unfair competition that results in long hours, starvation wages and overproduction.” To alleviate the effects of market failures, the president proposed a new management system for the capitalist order – one that was based on the preceding decades’ experience with public– private initiatives to manage competitive markets but that added mandatory controls. To implement these structural adjustments, the administration turned to both academic experts in economic planning and industrial corporate leaders. Like the Swope Plan before it and as Tugwell had predicted, the NIRA would rely upon trade associations to determine trade practice rules and implement industrial policy. By collectively deciding what constituted unfair competition, the associations intended to control a minority of businesses that implemented so-called destructive price cutting and wage reductions, that sold poor-quality goods, or that wasted natural resources. By gathering and disseminating trade information on business practices and conditions, Swope and Harriman believed that adjustments could be made to establish a level playing field among competitors while also stabilizing prices and wages. For Harriman such a system could   

Franklin D. Roosevelt, “The Second ‘Fireside Chat’ – What We Have Been Doing and What We Are Planning to Do,” May , , in PPA, : , . Ibid., . Franklin D. Roosevelt, “A Recommendation to the Congress to Enact the National Industrial Recovery Act to Put People to Work,” May , , in PPA, : –; Roosevelt, “The Goal of the National Industrial Recovery Act,” June , , in PPA, : . See also Roosevelt, address to the USCC annual banquet, May , , Box , –, USCC Rec.

Managing Competition in the Great Depression



create an equitable basis for market transactions, “rather than to continue the present harsh and unremunerative competitive system.” Regulators at the National Recovery Administration (NRA), the body charged with carrying out NIRA objectives, would extend the model of the FTC trade practice conferences to set mandatory codes of fair competition, which were intended to stop price deflation by mitigating oversupply and controlling retail prices on an industry-by-industry basis. Industrial corporate leaders appeared to embrace New Deal plans to alleviate the destructive practices of free market competition and harmonize supply and demand so as to raise prices in all sectors of the economy. Addressing the general assembly at the USCC’s  annual meeting, one month before the final passage of the NIRA, Harriman argued that “the devastating economic and social results that have come through ruthless and unrestrained competition in times of great human deprivation” must be stopped through a combined effort of government and business. I am confident that if trade associations, as in conference with labor and the government, were permitted to promulgate fair rules for industry – covering limitation of hours of operation, minimum pay for employees, minimum prices for standard products, and the setting up of reserves for accident, sickness and old age – the serious economic problems which confront us would soon vanish.

Like Tugwell, Harriman believed that the public works and minimum wage proposals under consideration in Congress failed to go far enough. Too few workers were incorporated under the minimum wage bill introduced by Senator Hugo Black, a Democrat from Alabama, because it exempted workers in agriculture and personal service. Moreover, the bill did not affect industrial prices. Harriman insisted that more far-reaching legislation should consider wages and prices as interlocking pieces in the recovery puzzle; however, the complexity of the puzzle required coordination from public and private participants.    

Harriman, “Stabilization of Business and Employment,” . National Industrial Recovery Act, Pub. L. No. –,  Stat.  (); Hawley, New Deal and the Problem of Monopoly, –, , . Henry I. Harriman, “Our Changing World,” May , , Box , , USCC Rec. Ibid., . Later at the meeting, Harriman explained to a luncheon of American Trade Association Executives: “It is necessary that the evils which have developed from rather unrestricted competition, should be reasonably curbed, and that through those curbs we should have greater liberty, greater individual opportunity to progress, than we have under the laissez faire doctrine which we have accepted as our economic philosophy for such a long time.” Henry I. Harriman, luncheon discussion, May , , Box , , USCC Rec. See also Harriman, “Mr. Harriman’s Business Platform,” Nation’s Business, July , , .

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American Fair Trade

Yet even as Harriman insisted that laissez-faire was dead and advocated for giving federal regulators a greater role in the economy, he also feared compulsory state welfare programs, or a European-style permanent “dole.” This fear reflected the concerns of industrialists and the limitations of engaging in partnership with business. In response, Columbia economist J. M. Clark argued that the expansion of state planning coupled with unemployment insurance would safeguard against the necessity of long-term unemployment relief. Social economic planners argued that unemployment relief – which they often characterized as insurance rather than relief – combined with wage reflation acted as a complement to raising industrial prices by bolstering purchasing power. While Swope echoed Harriman’s fears, he insisted that trade association executives would be wise to participate in the regulatory movement, lest they be left behind. He suggested that in addition to the rules promulgated by trade practice conferences, industry-specific trade association by-laws should be revised, standardized, and made mandatory. New by-laws should institute both industrial and welfare provisions, including () “a code of ethics in regard to what constitutes fair competition”; () “uniform cost accounting and uniform periodical reports to [companies’] stockholders and to the federal government”; () “comprehensive and cooperative plans for the protection of their employees,” such as old-age pensions; and () programs “to stabilize employment” or build up reserves for periods of unemployment. Finally, a National Economic Council, composed of elected representatives and businesspeople, would advise and supervise “the coordination of production and consumption with an opportunity for the government to review the acts and agreements of members of the association.” While Swope’s ideas built on the previous decade’s FTC trade practice conferences, his proposal for partial planning served to aggregate power in the hands of a select few industrial elites who would have access to the president and Congress. Industrial leaders at the USCC described New Deal policies as an opportunity to revise and expand the preceding era’s “new competition,” which had rejected free competition in favor of public–private initiatives to rationalize industry. Assistant Secretary of Commerce John Dickinson,     

Harriman, luncheon discussion, . See Harriman, “Mr. Harriman’s Business Platform,” , . Clark, “Long Range Planning,” –. Gerard Swope, “The Opportunities for Trade Associations,” May , , Box , , USCC Rec. Ibid., .

Managing Competition in the Great Depression



who had been working with Senator Wagner and Assistant Secretary of Agriculture Tugwell, also appealed to the USCC membership to consider how free market competition had contributed to the Great Depression and threatened the longevity of the market system. At a roundtable on antitrust revisions, Dickinson explained: “The stereotyped classical theory of economics” maintained a stranglehold on economic logic by insisting that supply necessarily adjusts to demand through the entry and exit of firms, eliminating the inefficient, rewarding the efficient, and gradually adjusting prices to equal the cost of production. But there are situations, he insisted, where free competition resulted in market failures, such as overcapacity problems or predatory practices that degraded prices and wages: If the depression has taught us anything about the nature of the economic process, it has certainly shown us how the results of competition depend upon the types of competitive practices employed, and upon the industrial situation within which competition goes on. It has disclosed that under the special conditions of modern industrial life and with the type of competitive practices which have widely prevailed, practically every one of the supposed beneficial checks and balances of competition, practically every one of the automatic adjustments which economic theory attributes to competition, may simply refuse to work.

The modern factory system and mass production, Dickinson argued, were subject to market failure, the same as with agricultural markets. Industrialization brought the “pressure of very heavy overhead costs” and an “unstable equilibrium with reference to the demand which they aim to supply.” Industrial producers experienced a plight similar to that of farmers: The burden of overhead costs entailed a “strong temptation on the producer to step up volume” by offering discounts on future orders to favored customers. Although destructive competition was not a direct cause of the Great Depression, “destructive competition has operated and is operating to retard recovery, and, on the contrary, to prolong and deepen the depression.” For Dickinson and the Commerce Department, “proper regulation of competitive practices, especially practices relating to secret prices, price discrimination, discounts and other types of discrimination,” would help industry reflate the interlocking prices of raw materials, retail goods, and wage rates. Moreover, recent Supreme Court cases had affirmed that “it is  

John Dickinson, “Competition and the Depression,” May , , Box , , USCC Rec.   Ibid., . Ibid., . Ibid.

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American Fair Trade

permissible for competitors at any time to regulate their competitive practices for the purpose of eliminating those types of practices which destroy and render abortive the normal working of competition as a beneficial system of industrial self-adjustment.” Consequently, Dickinson recommended that the state lead businesses to organize and coordinate industrial recovery efforts. And so by , prior to the passage of the NIRA, the USCC leadership had begun to embrace an economy-wide program of industrial management with state oversight. Harriman reflected: “The philosophy of the farm bill, which is the control of the payment of a fair price in the domestic markets and the control of ruthless minorities, is, in my opinion, a principle that we are going to extend, before this session ends, to industry as a whole.” But the NIRA would not “create government boards with the power to impose their will ruthlessly upon industry.” Instead, he explained, the bill would extend the trade practice conference ideal and make it more efficient: The new bill for the control of industry is going to be passed upon the fact that through trade associations, the industry will meet together and will say what is fair in their view as a minimum wage, as a minimum price, as maximum hours of labor – nothing rigid, nothing fixed, nothing that cannot be changed with changed conditions of demand for various products. And then when these findings have been made, they will be submitted to a central authority, they will go into effect automatically, but there will always be the opportunity to review if they are found to be unfair to the public.

Ultimately, Harriman concluded, the result of FDR’s New Deal policies would be fair wages and fair returns on invested capital. “Thereby, we are going to build up our purchasing power.”

The NIRA in Practice: “Fair Trade,” Corporate Capture, and Internal Dissent President Roosevelt signed the National Industrial Recovery Act into law in mid-June, bringing together overlapping and conflicting interests to “promote cooperative action, eliminate unfair practices, increase  



Ibid., . Henry I. Harriman, breakfast discussion, May , , Box , , USCC Rec. Harriman delivered these remarks at the presidential breakfast held at the New Willard Hotel ballroom on the final day of the USCC annual meeting.  Ibid., . Ibid., .

Managing Competition in the Great Depression



purchasing power, expand production, reduce unemployment, and conserve natural resources.” The final product of the Moley-JohnsonWagner coalition created a vague yet ambitious outline of the law’s structural reforms that encouraged an ad hoc approach to rule making, leaving various interest groups to submit their own codes for economic planning. With General Hugh Johnson as the national recovery administrator, the general cum businessman surrounded himself with a coterie of familiar business executives, bringing business further within government. Over the course of a year, the law strained under the conflicting visions, demands, and appraisals vying for influence within the NRA’s administrative bodies and among competing trade association code proposals. On the one hand, the NRA’s Industrial Advisory Board (IAB) and the Businesses Advisory Council at Commerce pushed for state-mandated price collusion and largely abandoned the social welfare purposes originally attached to the rationalization movement in public–private governance. On the other hand, the Consumer Advisory Board (CAB) came to represent consumers’ interest in restored purchasing power and lowcost consumerism, perhaps before any other administrative agency did so. Given these conflicts within government and the difficulty of implementing contradictory codes, those corporate capitalists who had initially endorsed the New Deal project had abandoned it within a year. Nevertheless, many of the neo-Brandeisians remained committed to the FTC vision 





National Industrial Recovery Act, Pub. L. No. –,  Stat.  (). FDR’s message to Congress argued that “one of the great restrictions upon such co-operative efforts up to this time has been our anti-trust laws. They were properly designed as the means to cure the great evils of monopolistic price fixing. They should certainly be retained as a permanent assurance that the old evils of unfair competition shall never return. But the public interest will be served if, with the authority and under the guidance of Government, private industries are permitted to make agreements and codes insuring fair competition. However, it is necessary, if we thus limit the operation of anti-trust law to their original purpose, to provide a rigorous licensing power in order to meet rare cases of non-co-operation and abuse. Such a safeguard is indispensable.” Roosevelt, “Recommendation to the Congress,” : . See also Hawley, New Deal and the Problem of Monopoly, ; Barber, Designs within Disorder, ; David Ciepley, Liberalism in the Shadow of Totalitarianism (Cambridge, MA, ), –. Secretary of Interior Harold L. Ickes headed the Public Works Administration (PWA). See Hugh S. Johnson, The Blue Eagle from Egg to Earth (New York, ). On the initial staffing of assistant and deputy administrators at the NRA, see Roos, NRA, –. Economic rationalization refers to the efforts in academia, government, and business to reform ad hoc industrial production and distribution methods in order to improve efficiency and reduce waste. On Hoover’s efforts to use government agencies to implement rules based on rationalization studies, see Chapter .

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American Fair Trade

of corporate liberalism and hoped the project could be reformed and maintained. Similarly, labor unions and their advocates continued to affirm the necessity of labor associations to rival corporate power. Yet just as the business community became fractured, so too did the NRA’s internal governance. Although the Court struck down the act, officially ending the federal experiment in mandatory state corporatism, the NIRA had already died a death of a thousand cuts, discrediting the idea of social economic planning as a partnership with business. The NIRA contained three important titles that expanded executive authority over both interstate commerce and labor relations. Title I authorized the president or his delegate to approve industry-wide codes of fair competition. Perhaps best known, it also codified protections for the collective bargaining rights of unions and banned “yellow dog contracts,” which forbade workers from joining a union. Senator Wagner’s addition of Section (a) promised to equalize bargaining power by mandating that codes allow employees the right to organized and bargain collectively. Title II created the Public Works Administration (PWA) and allocated $. billion for employment efforts, allocating funds specifically for construction projects of highways, bridges, roads, and railways. Title III created new tax revenues to cover the act’s administrative costs, which were largely written by Congress. The President’s Reemployment Agreement encouraged employers to commit to maximum hours for work weeks and minimum pay scales. It also introduced the Blue Eagle campaign, through which participants in the NIRA received an emblem to advertise their compliance with the provisions of the law. General Johnson worked closely with Alexander Sachs, an investment banker and economist from Lehman Brothers, to sketch the administrative structure and functions of the NIRA machine, which FDR later







See Hearings on S.  and H.R.  Before the S. Committee on Finance, rd Cong. – (). See also Senator Wagner’s original Labor Disputes Bill, S. , rd Cong. (), which did not pass. Under Executive Order No.  (June , ), the president created the National Labor Review Board (NLRB) and empowered it to investigate complaints arising under Section (a). Tax provisions in the bill extended a special excise tax for one year and prevented businesses from carrying over into subsequent years any losses incurred on the sale of stocks and bonds. The NLRB was not empowered to directly enforce the board’s findings, except through its power to revoke the Blue Eagle emblem. The FTC enforced orders. The NLRB could, however, order and conduct union elections, subpoena witnesses and documents, and act as a voluntary arbitration panel.

Managing Competition in the Great Depression



revised. Ultimately, Johnson received both code proposals and feasibility reports from multiple administrative agencies and private trade groups. He then relayed these to the president’s advisors. Johnson’s deputy for industrial recovery analyzed the proposed industrial codes and held public hearings. Stephen DuBrul, an economist from General Motors, headed the Research and Planning Division (originally known as the Code Analysis Division); Donald Richberg, an attorney and longtime political supporter of FDR, led the Legal Division and reviewed the codes brought by trade associations. At the same administrative level, FDR added three advisory boards to be staffed by executive-level appointees: Secretary of Labor Frances Perkins appointed a Labor Advisory Board (LAB), Secretary of Commerce Daniel Roper appointed an Industry Advisory Board (IAB), and Perkins later insisted on a Consumer Advisory Board (CAB) to balance the interests of consumers against those of labor and business. FDR intended these multiple advisory boards and administrative divisions to serve as checks and balances against corporate capture; however, the original system largely incentivized bargains between industrialists and labor groups to the detriment of consumers’ purchasing power. At the same time that these boards were forming within the NRA, Secretary Roper organized the Business Advisory Council (BAC) within the Commerce Department to advise government officials and provide industrial expertise at meetings that would be undisclosed to the 





FDR made two important revisions to the Johnson-Sachs outline for the NIRA. First, Johnson would report to an advisory board rather than directly to the president. Second, FDR appointed Harold Ickes to head the PWA, removing the responsibility to allocate those funds from Johnson. See Roos, NRA, –. Richberg later reported directly to the president as director of the Industrial Emergency Committee (IEC), a group that included the secretaries of the Interior and Labor departments and the heads of the NRA and Federal Emergency Relief Administration (FERA). However, he resigned in December  after political attacks and another reorganization of FDR’s cabinet. See Franklin D. Roosevelt, “Executive Order A: Consolidating the National Emergency Council, the Executive Council and the Industrial Emergency Committee,” Oct. , , in PPA, : –; “Second Thoughts,” Time, Jan. , , . On IAB and LAB appointments see Roos, NRA, n. On the passage and organization of the NIRA, see Leverett S. Lyon, The National Recovery Administration: An Analysis and Appraisal (Washington, DC, ); Donald Richberg, My Hero: The Indiscreet Memoirs of an Eventful but Unheroic Life (New York, ); Arthur M. Schlesinger, The Coming of the New Deal, – (Boston, ); Charles Morris, The Blue Eagle at Work: Reclaiming Democratic Rights in the American Workplace (Ithaca, NY, ). For two quite different accounts of the internal politics of the NIRA and its legal battles with the U.S. Supreme Court, see Peter Irons, The New Deal Lawyers (Princeton, NJ, ); Cushman, Rethinking the New Deal Court.

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American Fair Trade

public. Swope served as the BAC’s first chairman, and in consultation with Johnson, he agreed to help staff the NRA’s Industry Advisory Board. The BAC’s sixty-five members came predominantly from private industry and served five-year terms. These newly formalized relationships among private industry, the Commerce Department’s BAC, and the NRA’s IAB represented the culmination of the previous decades’ attempts by organized business to partner with government officials in policymaking. In fact, the USCC had been established in  for the express purpose of pursuing the public–private gathering and disseminating of economic statistics. That businesspeople, particularly those with considerable wealth and political influence, desired government aid and the suppression of competitive markets in their favor was neither new nor surprising. Yet the structural changes implemented during the Great Depression signaled a shift in public–private governance. The BAC committees existed within the national government in a formalized advising capacity that increasingly represented large-scale industrial interests rather than the multiplicity of business forms within the U.S. economy.









Daniel Roper, Fifty Years of Public Life (Durham, NC, ), –. On the BAC’s history and influence, see Kim McQuaid, “The Business Advisory Council of the Department of Commerce, –: A Study in Corporate-Government Relations,” in Research in Economic History: An Annual Compilation of Research, ed. Paul Uselding (Greenwich, CT, ), : –. For a list of the names and addresses of businesspeople at the BAC during Secretary Roper’s tenure at Commerce (–), see Roper, Fifty Years, –. That list included Gerald Swope (chairman, General Electric), Winthrop Aldrich (chairman, Chase National Bank), Henry Dennison (president, Dennison Manufacturing Co.), R. R. Dupree (president, Proctor & Gamble Co.), William Dickerman (president, American Locomotive Co.), Pierre S. DuPont (chairman, DuPont Co.), Lincoln Filene (chairman, Filene’s Sons Co.), Marion Folson (treasurer, Eastman Kodak Co.), Henry I. Harriman (New England Power, and president, USCC), William Harriman (chairman, Union Pacific Railroad Co.), Alfred Sloan (chairman, General Motors), Walter Teagle (chairman, Standard Oil Co.), C. C. Teague (president, California Fruit Growers Exchange), and S. Clay Williams (chairman, R. J. Reynolds Tobacco Co.). U.S. Department of Commerce, The Business Council: A Review of Its Activities since Its Original Formulation under the Name “Business Advisory Council for the Department of Commerce,” June –March  (Washington, DC, ), . Laura Phillips Sawyer, “Trade Associations, State Building, and the Sherman Act: The U.S. Chamber of Commerce, –,” in Capital Gains: Business and Politics in Twentieth-Century America, eds. Richard J. John and Kim Phillips-Fein (Philadelphia, ), –. Similar to the IAB committee, BAC members formed ad hoc committees to advise on the Banking Act, Securities Act, Social Security, Air Commerce, Standardized Accounting Procedures, Waste in Distribution, Interstate Trade Barriers, and others including Atomic Energy, Patents, and Antitrust policy. See Department of Commerce, Business Council, .

Managing Competition in the Great Depression



Despite these innovations in administrative governance – intended to balance competing interests through multiple advisory boards and oversight divisions – the NRA ultimately relied upon industrial elites and trade associations’ code committees to devise codes of fair competition, which were then circulated to the various deputies, divisions, and advisory boards. Granted, the president had proposed the NRA to function in partnership with business, but the extent to which well-organized trade associations and politically powerful industrial capitalists would capture code-making authority had yet to be fully understood, even by Johnson, who preferred a close public–private partnership. Within the first month, the NRA had approved only one code, which had been submitted by the Cotton Textile Institute just three days after FDR signed the act. The cotton industry, perhaps one of the best-organized trade associations, had stood ready for this opportunity. Additional trade associations quickly followed suit, submitting  codes of fair competition for review, and by July those proposals totaled . The following month code proposals totaled , and the NRA received an additional  by late September . Within its first year, the NRA approved more than  codes of fair competition. Johnson garnered the cooperation and support of major industries by agreeing to industry-wide prohibitions on sales below cost, which Sachs believed sanctioned cartel-like market power and conduct. According to Charles Roos, a statistician and director of research at the NRA, this reliance on trade associations resulted both from the inadequacy of the government’s statistical data on private business and from the preexisting relationships between associations and both the FTC and the Department of Commerce. Additionally, DuBrul and others argued that devising a uniform policy on cost accounting presented a major hurdle because neither industry leaders nor accounting firms possessed a consensus on valuation issues regarding (for example) idle plant

 



Barber, Designs within Disorder, –. Alexander Sachs, “National Recovery Administration Policies and the Problem of Economic Planning,” in America’s Recovery Program, eds. A. A. Berle Jr., et al. (London, ), –. On June , , Johnson announced: “In these codes it will be proper for an industry to say that it will not sell below cost of production, but if he uses the code to fix extortionate prices, I would have to step in immediately in conformance with the law.” Quoted in Schlesinger, Coming of the New Deal, . On the New Deal’s effort to gather new statistics, see Charles Roos, “Annual Survey of Statistical Information,” Econometrica  (Oct. ): –. Between  and , Roos chaired the Cowles Commission for Economic Research, founded in .



American Fair Trade

expenses, developmental costs, and fixed assets. In other words, the NRA needed to quickly standardize industry-wide accounting procedures while simultaneously collecting current data on production costs, prices, inventories, wage rates, depreciation, and debts – tasks that were insurmountable without business cooperation. Although neither the NIRA nor the President’s Reemployment Agreement, which raised wages and lowered working hours, allowed explicit price fixing, Johnson was willing to allow the codes of fair competition to grant quasi-monopoly power over prices in exchange for cooperation. Many industries argued that higher wages and agreements with organized labor entitled them to the quid pro quo of higher prices. A whole host of industry-specific code provisions indicated that the government planned to guarantee profits. These included limitations on new investment in the cotton textile code, price fixing in the lumber and timber products code, control of production in the petroleum code, cartelization in the iron and steel industry code, restrictions on capacity building in the ice industry code, and a variety of retail sales restrictions. Trade association executives then enthusiastically worked with NRA officials to collaborate on minimum statistical requirements to facilitate industry-specific codes and broader economic planning. The result of this industry-specific approach was not only the monopolization of the price-setting mechanism but also the creation of overlapping and often contradictory codes.

  



Stephen DuBrul to John M. Hancock, assistant administrator for policy, Aug. , quoted in Roos, NRA, –. See “President’s Reemployment Agreement,” Monthly Labor Review  (Aug. ): –. Each code reflected the perceived needs of the industry. Retail codes included restrictions on “commercial bribery,” such as sales rebates, consignment selling, returns on merchandise, design piracy, and limitations on speculative increases in industrial capacity. For example, see Lumber Consumption, Lumber Stocks, and Anticipated Consumption for the Third Quarter, Report of the Special Lumber Survey Committee of the Timber Conservation Board (Aug. , ), quoted in the Current Survey of Business (June ), ; Benjamin Parker, “Control of Production under the Ice Code,” Harvard Business Review  (summer ): –. DuBrul objected to the partnership, arguing that it unconstitutionally extended both NRA and trade association powers over private businesses. Johnson changed the reporting requirements when industrialists balked at the added expenses of surveys and reporting. It was after Johnson left the NRA in October  that the administration engaged in more detailed “field studies.” See memorandum by Stephen DuBrul to Colonel R. W. Lea, “Statistical Requirements Section of Suggestions Outline for Codes,” Nov. , , quoted in Roos, NRA, –. See also George Galloway, Industrial Planning under the Codes (New York, ).

Managing Competition in the Great Depression



For example, separate codes dictated wage rates for hauling coal, sand, or gravel, even though one company or union hauled all three kinds. DuBrul’s successor at the NRA’s Research and Planning Division, Colonel Robert H. Montgomery – a founding partner of Lybrand, Ross Brothers, and Montgomery (an accounting firm later known as PricewaterhouseCoopers) and a professor of accounting at Columbia – simplified the firm-specific cost accounting procedures and focused on industry-wide price trends. He also advocated for giving the NRA authority to declare “emergency minimum prices.” NRA officials would field complaints of destructive competition and prices, and if they deemed the industry to be in a state of emergency, then they were authorized to determine “lowest reasonable costs” and set price floors according to studies of firms that were deemed representative of the industry as a whole. When Montgomery resigned from his post in order to return to the private sector, his successor, Leon Henderson, adopted the same policies and drafted a model code, which was adopted in turn by the Fair Trade Practices Board. Not long after assuming public office, Montgomery addressed the USCC general meeting to promote private uniform cost accounting and public information sharing with NRA officials. He began by lamenting: “If the maintenance of adequate cost records had been more universally recognized during the past few years, distress selling would not have resulted in such ruinous prices.” He explained to Chamber members that this innovation would add a third protective layer to the existing NRA trade practice rules that prohibited sales below cost and facilitated open price systems, both of which pushed prices toward uniformity. The open price system already required that “each member file with the administrative body for his industry his price lists, discount schedules, etc.  

 

Roos, NRA, . Blakewell Smith, assistant counsel to DuBrul in the Legal Division, originally proposed the “lowest reasonable cost” policy in late September . Smith recommended having the accountants at the FTC oversee the provisions to avoid favoring large businesses with the lowest costs. Memorandum by Blakewell Smith to Stephen DuBrul, Sept. , , quoted in Roos, NRA, –. See also meeting minutes of the Division of Research and Planning Advisory Committee, Dec. , , quoted in Hawley, New Deal and the Problem of Monopoly, –. Robert H. Montgomery, “Cost Production and Pricing,” May , , Box , , USCC Rec. The Supreme Court had approved price reporting on past and closed transactions but held that reporting on current prices, while not explicitly illegal, could be regarded as evidence of price fixing. See Maple Flooring Association v. United States,  U.S.  (); Cement Manufacturers’ Protective Association v. United States,  U.S.  ().

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American Fair Trade

to be effective at the expiration of a certain prescribed period after filing.” These stated prices then became binding on all sales agreements. The prohibition of sales below cost, Montgomery continued, ensured that not only “the lowest cost producer in each industry” would survive the Depression but others as well. In addition, Montgomery hoped that such a provision would encourage “selling on the basis of quality of goods. If more concerns would adopt the motto of ‘better quality’ rather than ‘lower price,’” he argued, “we should find that industry would soon begin to show signs of a more healthy condition.” A price floor constituted the final emergency measure to stem price cutting and wage reductions; it would be instituted on a temporary basis to simplify industry-wide cost accounting practices and review procedures. He reasoned that this price floor would be necessary to protect wages and invested capital, even of the least efficient producer or retailer. The federal government’s enforcement power was limited to its authority to allocate Johnson’s Blue Eagle emblem to participating firms, using social pressure to encourage compliance, and the President’s Reemployment Agreement, instituting a federal boycott against noncompliant firms. Lacking a federal police power, however, the authority to regulate industrial and consumer prices fell under the auspices of constitutional interstate commerce powers, leaving intrastate businesses untouched by Roosevelt’s regulations. The threat that intrastate businesses might undercut interstate firms rendered state cooperation with federal code authorities imperative. Moreover, New Deal structural   





 Montgomery, “Cost Production and Pricing,” –. Ibid., . Ibid., . (Emphasis in original.) Ibid., . During the question-and-answer session, Montgomery stated that he supported the “prohibition clause as to selling below reasonable cost” only in the current emergency situation. On branding noncompliant firms as outcasts, see National Recovery Administration, Bulletin No. , June , . See also A Handbook of NRA, nd ed., ed. Lewis Mayer (Washington, DC, ), . On the requirement that every contract for supplies entered into by the federal government or its agencies specify that the contractor must comply with all the provisions of relevant codes or the President’s Reemployment Agreement, see Franklin D. Roosevelt, “‘A Plan to Raise Wages, Create Employment, and Thus Restore Business’ – The President’s Reemployment Agreement,” July , , in PPA, : –; Roosevelt, “Code Compliance Made a Condition for Government Purchases. Executive Order No. ,” Aug. , , in PPA, : –. Hammer v. Dagenhart,  U.S.  (), striking down a national child labor law as a regulation of intrastate manufacture. This case stood in contradistinction to Champion v. Ames,  U.S.  (), upholding the commerce power as plenary. See Logan E. Sawyer III, “Constitutional Principle, Partisan Calculation, and the Beveridge Child Labor Bill,” Law & History Review  (May ): .

Managing Competition in the Great Depression

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policies reframed what could be construed as the reasonable regulation of prices and wages at both the state and federal levels. Several states responded, with California foremost among them. In  California enacted two laws to strengthen its codes of fair competition and to extend them to more industries. First, California passed an amendment to its Fair Trade Act that extended fixed prices beyond parties to the original contract. It also permitted anyone, not just the manufacturer that set the minimum resale price schedule, to bring suit against alleged pricecutters. Second, California passed a statute incorporating the NRA codes of fair competition into state law. Where federal codes did not exist, the California law allowed code-making authority in intrastate commerce. Other states suspended their antitrust laws; in each of those states, the codes of fair competition approved by the NRA carried the weight of state police powers. California’s codes of fair competition, for example, included maximum working hours, minimum wages, and prohibitions on secret rebates and discounts. The state’s Board of Equalization oversaw approved codes, and the courts retained adjudication power. Distributors and especially retailers supported codes that prohibited sales below cost, including invoice costs, and prescribed set markup levels. This support was based largely on their belief that, for the most part, consumers were ignorant of both the quality and prevailing price of all but a select few goods. Ever since Louis D. Brandeis had helped   

 



For example, see “Building Executives Confer on Code for Recovery Act Plans,” California Highways and Public Works  (July–Aug. ): .  Cal. Stat. . Ibid. Other states enacted similar laws:  Utah Laws (nd Spec. Sess.), ch. ;  New Jersey Laws, ch. ;  Wisconsin Laws, ch. ;  New York Laws, ch. ; – Colo. Sess. Laws (nd Spec. Sess.), ch. ;  N.M. Laws, ch. ;  S.C. Acts, No. ;  Va. Acts (st Spec. Sess.), ch. ;  Wash. Sess. Laws (st Spec. Sess.), ch. ;  W. Va. Acts (nd Spec. Sess.), ch. ;  Wyo. Sess. Laws (Spec. Sess.), ch. .  Kan. Sess. Laws (Spec. Sess.), ch. ;  Miss. Laws, ch. ;  Tex. Gen. Laws (st Spec. Sess.), ch. . “Tentative Code of Fair Competition Adopted; Edna Gleason Elected to Presidency,” Pacific Drug Review, July , –; “NARD Code of Fair Competition,” Pacific Drug Review, Oct. , , ; “NRA Writes Retail Drug Code,” Pacific Drug Review, Oct. , –; “Code of Fair Competition for the Retail Trade,” Pacific Drug Review, Nov. , n.p. National Recovery Administration, Code of Fair Competition in the Retail Trade (Washington, DC, ), art. –, § . The prohibition of sales below cost was strengthened on March , , by art. , § , which prohibited sales below the manufacturer’s wholesale list price per dozen items.



American Fair Trade

form the American Fair Trade League in , industries dominated by small-scale and independent firms continuously organized for open price associations and prohibitions on sales below cost. Of course, chain and department stores contended that loss leaders were a legitimate advertising expense to increase sales volumes, which ultimately benefited the consumer by lowering prices. The code authority, however, declared that loss leaders “place[d] a disproportionate burden upon all other goods handled, and [were] antagonistic to the stated purpose of the national recovery program, which is directed to fair and equal competition.” The NRA Code of Fair Competition for the Retail Drug Industry did not legalize resale price fixing per se, and the retail drug sector continued to lobby for stronger codes, rather than their repeal. Otherwise, all the other demands of the California druggists and their national counterparts had been met, including an exemption from antitrust regulation. Moreover, their active and well-organized trade associations established “institutes,” such as the Drug Institute of America (DIA), which worked with the NRA to publicize and monitor codes of fair competition across states. Nevertheless, the plight of independent proprietors could not be completely remedied by granting them the trade rules they had long advocated – namely, prohibitions on sales below cost and loss leaders. In particular, the price uniformity promoted by open price associations could not redress the sharp credit contraction that disproportionately affected firms with low capitalization or high debt-to-net-worth ratios. 



  

Ibid., art. , § . The code declared a standard markup of  percent, though retailers had initially submitted proposals to guarantee profits of  percent above invoice price. The Retail Survey of the U.S. Department of Commerce found the average expense of retailing ordinary commodities was closer to  percent on average. National Recovery Administration, Code of Fair Competition for the Retail Drug Industry (Washington, DC, ). The exception was the NRA’s Code of Fair Competition for the Petroleum Industry (Washington, DC, ), art. , rule . See also Handbook of NRA, –.  U.S.C. §  (Supp. VII, ). “Drug Institute of America, Inc.,” Druggist Circular  (): iv. See also Ronald Hamowy, Government and Public Health in America (Northampton, MA, ), . A study of the causes of commercial failures made by the Department of Commerce in  revealed that the vast majority of failed concerns were small enterprises with relatively little capital and that at least  percent of commercial failures had very moderate or no credit ratings prior to insolvency. U.S. Department of the Commerce, Statistical Abstract of the United States,  (Washington, DC, ), “Table : Commercial Failures, by General Classes of Business, by States,” . Also note that the passage of the Glass-Steagall Act of  contributed to diminishing working capital loans, as it separated investment and deposit banking without immediately opening up

Managing Competition in the Great Depression



The Great Depression’s rise in defaults and bankruptcies had reduced commercial deposits, leading to depositors’ panicked withdrawals and banks’ shrinking balance sheets. Individual households, farmers, incorporated businesses, and small corporations remained most dependent on bank credit, which was increasingly unavailable to them. To be clear, complaints varied widely, often focusing on the exclusion of small or independent businesses from advisory boards. In addition, both the costs and the benefits of any particular code depended on the structure of the industry. If a business did not have access to credit, the codes could have only a limited impact. Opposition to the NRA’s price and production controls also found a voice within the NRA’s Consumer Advisory Board. Initially, the group lacked direction and administrative authority. Johnson considered it “useless nonsense.” But with the appointment of Corwin D. Edwards, a New York University law professor, as director, the CAB became an active participant in NRA policy formation and an increasingly vocal opponent of price fixing. For the employed, the NRA’s price inflation effectively reduced any real gains of NRA nominal wage floors, and for the unemployed, rising prices destroyed any purchasing power left from savings. As complaints about price fixing and intimidation mounted from consumers and businesses, Edwards helped establish the Bureau of Economic Education to survey price and wage data and recommend policy changes. He appointed Paul Douglas of the University of Chicago to direct the bureau. The CAB also formed more than  county-level consumer councils, which exerted pressure on top NRA officials and the president for public hearings about these complaints. Edwards and Douglas, both trained in the heterodox school of institutionalist







new avenues for lending. See also U.S. Bureau of the Census, Historical Statistics of the United States, – (Washington, DC, ), “Appendix I: Monthly and Quarterly Indicators of Business Conditions, Table : Peaks and Troughs of Business Cycles in the United States:  to ,” ; “Series App. : Liabilities of Business Failures, Monthly,” –. Ben Bernanke, Essays on the Great Depression (Princeton, NJ, ), . Additionally, larger corporations could sell securities to raise capital. See also Milton Friedman and Anna Jacobson Schwartz, The Great Contraction, –, rev. ed. (New York, ; Princeton, NJ, ). In early  Simon N. Whitney, chief of the Price Unit in the Research and Planning Division, directed a study of open prices and confirmed that although they achieved price stability, they also resulted in price fixing. See Simon N. Whitney, “Competition under Secret and Open Prices,” Econometrica  (Jan. ): –, . Hawley, New Deal and the Problem of Monopoly, –.



American Fair Trade

economics, supported codes of fair competition as well as price and wage reflation policies; however, they did not trust that business executives could legitimately promulgate or enforce these standards in the public interest. When Leon Henderson became the Director of the NRA’s Research and Planning Division, he united with the CAB to oppose government– business collaboration on price and production controls. He had served since  as director of consumer credit research at the Russell Sage Foundation, where he worked on regulations to moderate lending practices and curb profligate installment buying. Within a few months of joining the NRA, Henderson and Edwards collaborated with Leverett Lyon, who had been recruited from the Brookings Institution, to propose code revisions that would stimulate competition, not suppress it. While they had agreed to Johnson’s insistence on emergency minimum prices, they argued that the existing codes unconstitutionally fixed prices and sanctioned intimidation against noncompliance. Henderson, Edwards, and Lyon also argued that these codes protected dominant firms to the detriment of smaller, independent proprietors, who relied on price competition to undercut their larger rivals. Their internal critique of the NRA’s emergency minimum price policy was strengthened by FTC reports charging that NRA procedures were contrary to the public interest. This rival regulatory agency, the FTC, had already ruled against using a basing point price system, a pricing system that fixed industry prices according to invoice prices or current market costs. Moreover, Republican senators William E. Borah of Idaho and Gerald Nye of North Dakota attacked the NIRA for fostering monopoly by promoting big business to the detriment of smaller and independent   

Robert E. Smith, “The Veblen-Commons Award: Corwin D. Edwards,” Journal of Economic Issues  (June ): –. Office Memorandum  (released on June , ) quoted in Hawley, New Deal and the Problem of Monopoly, n.. See also Barber, Designs within Disorder, –. In March the NRA’s Distribution and Consumer Service Trades Committee reported to General Johnson that a basing point price system could relieve price competition by stemming unfair competition practices. A basing point price schedule allowed producers to set base prices plus freight charges according to delivery zones. See Federal Trade Commission, Annual Report (Washington, DC, ), –, –; Federal Trade Commission, Practices of the Steel Industry under the Code, (released Mar. , ) S. Doc. – (). The FTC’s trade practice specialists studied more than  price codes and focused on the following in the agency’s annual report: power and gas utilities, steel, gasoline, chain stores, milk prices. See also “The Basing Point Method of Quoting Delivered Prices in the Steel Industry,” in Federal Trade Commission, The Basing Point Problem, TNEC Monograph  (Washington, DC, ), , .

Managing Competition in the Great Depression



dealers. Borah argued that especially in the cement and steel industries, where undifferentiated products had few substitutes, the industrialists who had sponsored the NIRA set minimum prices below and wages above the levels that smaller businesses could sustain. Because the NRA could not produce satisfactory uniform cost accounting based on data from all available firms, their emergency minimum prices aided cartelization led by the large firms that dominated the code-making authorities. Furthermore, Senator Nye explained, the codes worked to the detriment of small and independent retailers by prohibiting the quantity and cash discounts that had been used by chain stores as well as cooperative-buying associations of independents. Those discounts had acted as a risk premium for wholesalers and manufacturers; lacking these methods, the disaggregated independents saw their credit further tighten as their inventory prices rose. In response to mounting political pressures, FDR appointed Clarence Darrow to head the newly established National Recovery Review Board to review complaints against bid rigging and monopolization. The public hearings held in January galvanized the antimonopoly opposition to the NRA, which charged that the agency facilitated monopoly and state corporatism to the benefit of industrial corporate capitalists. The presiding officer at the price policy hearing, Arthur D. Whiteside of Dun and Bradstreet, a credit reporting agency, tried to hold the administration together, insisting that FDR and Johnson had intended to enact policy that would encourage self-governance and stability, not 









Senator Nye stated that their offices had received more than eighteen thousand complaints from small businesses. See  Cong. Rec. –, –, – () (statements of Sen. Nye). Borah referred to the FTC report on the steel code, finding that U.S. Steel and its subsidiaries controlled almost  percent of the code authority’s voting, Bethlehem Steel controlled  percent, and eight other corporations controlled  percent. An additional fifty firms held the remaining vote. See Federal Trade Commission, Practices of the Steel Industry under the Code. In reference to the steel code, Senator Borah stated: “It is shown here that there is now almost a complete scheme for the elimination of small business, and the elimination takes place under the color of law. Small independent business concerns, the very foundation of our economic strength as a nation, are being forced into bankruptcy.”  Cong. Rec.  () (statement of Sen. Borah). See  Cong. Rec.  () (statement of Sen. Borah) and –, – () (statements of Sen. Nye). On the monopsony power of retailers to put backward pressure through the distribution chain to bargain for lower prices from wholesalers and manufacturers, see Joan Robinson, Economics of Imperfect Competition (London, ), . See Roos, NRA, –.

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American Fair Trade

dictate industry-wide price or production controls. Johnson dismissed the complaints, arguing that small businesses simply wanted exemptions from fair wage policies. Whiteside, who had worked with Johnson at the NRA and with Roper at the BAC, believed in the efficacy of associational corporatism even though price fixing had clearly resulted. But he could not quiet the dissent from consumer and small-business advocates, who believed that the NRA injured the public by arbitrarily raising prices too high and concentrating industrialists’ economic and political power. Whiteside had not wanted the codes to establish price floors; he insisted that they should instead reflect acceptable and equitable cost-accounting methods, which tended toward uniformity in undifferentiated product markets such as raw materials or semiprocessed goods. President Roosevelt responded to the growing unpopularity of the NRA with changes to the agency’s personnel and structure. FDR reorganized the agency to be run not by a single administrator, but rather by a five-member National Industrial Recovery Board. FDR fired Johnson, replacing him with Samuel Clay Williams of R. J. Reynolds Tobacco Company, who was not sympathetic to centralized price and production controls. Upon entering office, Williams notified industry leaders that price controls would end, an announcement that was met with great consternation. Time magazine reported that approximately  percent of businesspeople favored maintaining NRA price codes. “To them a guaranteed price for their products looks like a royal road to profits. A fixed price above cost has proved a lifesaver to more than one inefficient producer.” Of course, that had been the purpose of profit-sharing  

 



Arthur D. Whiteside, “Code Provisions Designed to Effect Price Stability,” May , , Box , , USCC Rec. “Text of General Johnson’s Address to the National Convention of Retail Merchants,” New York Times, Jan. , , . See also “Johnson Warns Congress to Avoid ‘Scuttling’ NRA,” New York Times, Jan. , , ; “Johnson Lashes Critics of NRA,” Boston Globe, Jan. , , ; “Johnson Hints Revolution If NRA Is Scuttled,” Chicago Tribune, Jan. , , . Arthur D. Whiteside, “The Future of Trade Associations and the NRA,” May , , Box , , USCC Rec. Hawley, New Deal and the Problem of Monopoly, –. In addition to Williams, the board included Whiteside, Sidney Hillman of the Amalgamated Clothing Workers, Professors Walton Hamilton and Leon C. Marshall, and nonvoting ex officio members Blakewell Smith and Leon Henderson. “The reorganization was generally regarded by the press as a victory for the professors and economists, for the so-called liberal experts as opposed to the conservative, practical men of affairs.” Ibid., . “Recovery: Dollar Men and Prices,” Time, Jan. , , . “The , businessmen present might have applauded their hosts if this fact had been called to their attention,

Managing Competition in the Great Depression



plans during economic downturns – to stem business closures and maintain artificially high wages. The problem was mounting evidence that profits were not being shared with laborers and NIRA rules suppressed competition to the detriment of consumers. Not all businesspeople immediately abandoned the NRA’s sinking ship. Goldthwaite Dorr, a New York attorney specializing in antitrust law, led publicity in support of the NIRA. He had helped craft not only the NIRA itself but also the first code approved by the president – the code from the Cotton Textile Institute, where Dorr served as general counsel. In response to the NRA’s critics, Dorr explained: The word “Code” did not come into the industrial dictionary with the N.R.A. . . . For twenty-five years the industries of this country had sought collective measures to secure competitive methods. The rules which they felt should govern the competitive game, they had repeatedly sought to formulate in Codes of Fair Practice.

Dorr praised the system of FTC trade practice conferences that set industry rules of competition but did not fix prices. The FTC had failed “because of the inability of the Commission to approve and enforce rules that went beyond those ancient technical rules of unfair competition that had their origin and limitation in the conditions of another economic day.” The new conditions of the Depression required a stronger commission empowered to both coordinate industries and enforce competition. Dorr explained that the experience of World War I had provided a blueprint for managing the current economic crisis, and that framework had been extended through the s under the auspices of a collaboration with the FTC. “In the Great War we proceeded at once to call industries together to organize themselves and in collaboration with the government to set limits above which competition was not to be allowed to force up prices.” The Chamber of Commerce orchestrated war service committees to coordinate work hours and price controls. “But for this collective action with the cooperation of the government, prices,

  

but they were by no means ready to applaud when Chairman Williams told them plainly that, unless they could prove it would damage business, NRA was going to put an end to price control. Said he: ‘Greater productivity and employment would result if greater price flexibility were attained.’” Ibid. Galambos, Competition and Cooperation, –, , , , –. Goldthwaite Dorr, “Competition under the Codes,” May , , Box , , USCC Rec.  Ibid. Ibid., .



American Fair Trade

both of wages and commodities, if left to unregulated competition, would have gone far higher.” The problems of , Dorr noted, were the reverse of those during war – deflation had replaced inflation. Additionally, unemployment soared to  percent of all American workers. Even so, the War Industries Board served as an important “precedent” for building new administrative capacity to manage industries during an emergency. “Again each industry was organized and in cooperation sought to put a floor below which unbalanced competition could not force wages or the prices of commodities by providing in codes provisions for minimum wages and for the regulation of competitive methods destructive in their character.” The NIRA addressed the unemployment problem with a “share-the-work movement” that lowered work hours and increased wage rates. Despite internal debates and public disillusionment, a consensus remained that “some collective regulation of competition [was] essential to the continuance of modern industrial life that is in the public interest.” Yet as in previous moments of economic turmoil and public discontent, it was unclear which regulatory procedures would best protect the public interest – or how to reconcile the growing number of competing interests within government agencies. The newer regulatory system of “emergency minimum prices” had simplified administrative procedures and was intended to create a baseline above which even smaller producers or retailers could still thrive. However, industry-specific codes created incentives for interest-group mobilization in both the private and the public sphere. In the s industrial corporate capitalists had preferred firm-specific employment, pension, and self-governance plans. By the s, however, they had shifted their views to accommodate a greater role for government in business. They thereby protected their economic interests and secured new political powers for business in government. Although their political power was often ad hoc and did not long go unrivaled, these industrial corporate capitalists succeeded by co-opting

 



Ibid. Ibid., –. The NRA accomplished its “objective of putting a floor under wages and prices below which competition should not continue to force them down. . . . Some stabilizing of prices at some level to check the demoralization of shrinking inventory values, impairment of working capital and destruction of credit was, I believe, necessary. . . . The most [the codes] could do was to establish a base from which the natural forces of recovery and expansion of business could begin to operate again. It was a grave mistake for the public ever to expect more.” Ibid. . Ibid., .

Managing Competition in the Great Depression



the language of managed competition, or corporate liberalism, and its preference for so-called fair competition, which was now administered by government agencies that served business own interests.

 :   Constitutional Federalism and the Adaptation of State Corporatism By the end of , support for NIRA policies eroded within both the administration and the public at large. Gilbert H. Montague, the New York–based trade association attorney who had helped draft the NIRA legislation and subsequent codes, was representative of this turning tide. Montague now openly questioned whether the NIRA was in fact “fascistic.” He had advocated codes of fair competition throughout the s, representing trade groups in FTC investigations and drafting new association rules to facilitate compliance with shifting antitrust law. He had also adamantly praised the late s Supreme Court rulings legitimizing the expansion of both trade association information-sharing practices and FTC administrative capacities. Montague now believed, however, that the NIRA had created “arbitrary” “lawmaking by executive fiat” and relied upon industrial corporate capitalists to guide code policies, often to the detriment of those whom the act purported to serve. According to Montague, the NRA violated the Court’s established rules of evidence and procedure for administrate lawmaking, thereby doing “violence to the law” as well as the democratic legitimacy of economic planning. Although he agreed with the architects of the NIRA that strict antitrust law stood in the way of a coordinated economic recovery, he insisted that alleviating so-called destructive competition still 

 



Gilbert H. Montague, “Is the NRA Fascistic?” Annals of the American Academy of Political and Social Science  (July ): –. On Montague, see Wyatt Wells, “Counterpoint to Reform: Gilbert H. Montague and the Business of Regulation,” Business History Review  (autumn ): –. Montague, “Is the NRA Fascistic?” , . Ibid., , . In this article Montague incorporated material that he had previously used in several lectures and addresses, include a January , , address to the New York State Bar Association entitled “Lawmaking by Executive Fiat under NIRA.” Radio Commission v. Nelson Brothers Co.,  U.S. ,  (). “A finding without substantial evidence to support it – an arbitrary or capricious finding – does violence to the law.” Ibid., , quoted in Montague, “Is the NRA Fascistic?,” . See also Gilbert Montague, “New Deal Costs and the High Cost of Living,” Annals of the American Academy of Political and Social Science  (Jan. ): .



American Fair Trade

required administrative oversight to stem unfair discrimination and consumer price gouging while also protecting independent businesses against corporate consolidation. Now Montague wanted the return of Brandeis’s vision of antitrust – a cause that businesspeople and cooperatives across the country supported with state-level “little NRAs.” As Montague had predicted, the U.S. Supreme Court famously struck down the NIRA, dealing a severe blow to the First New Deal’s experiment in economic planning through state corporatism. However, the ruling did not invalidate the preceding decade’s jurisprudence establishing administrative procedures to review and legitimize public–private experiments in managing market competition. Moreover, although the Court struck down the NIRA, the judiciary simultaneously affirmed the “little NRAs” operating at the state level. The expansion of state police powers over all aspects of the private economy validated the basic logic of New Deal–era economic policymaking, severing the distinction between public and private economic spheres. In time, FDR’s administration reframed New Deal legislation to accord with the Court’s rules for administrative agencies and reinstituted many of the original provisions of the New Deal. For many critics, however, the Court’s partial accommodation of new economic regulations simply demonstrated the judiciary’s persistent overreach and antidemocratic power over fundamentally legislative issues. Nevertheless, the Court’s interpretation of economic regulations had been transformed by external pressures as well as internal shifts in constitutional 

 



A. L. A. Schechter Poultry Corp. v. United States,  U.S.  (), striking down the NIRA. Two years earlier, in Appalachian Coals Inc. v. United States,  U.S.  (), the Court had upheld a cartelization scheme in the coal industry. However, in early January , the Court foreshadowed its doubts as to the constitutionality of the NIRA, though it passed on determining the validity of the act. See Panama Refining Co. v. Ryan,  U.S.  (), stating that “we cannot regard the President as immune from the application of these constitutional principles. When the President is invested with legislative authority as the delegate of Congress in carrying out a declared policy, he necessarily acts under the constitutional restriction applicable to such a delegation.” Ibid., . See Cushman, Rethinking the New Deal Court. The major objectives of the NIRA were reembodied in subsequent federal and state laws and upheld by the Court. In West Coast Hotel v. Parrish,  U.S.  (), the Court upheld the protection of wages. In Jones & Laughlin Steel Corp. v. United States,  U.S.  (), the Court upheld the Wagner Act of , which guaranteed collective bargaining and created the National Labor Relations Board. See John Maurice Clark, Social Control of Business, nd ed. (New York, ), –. See also Robert Hale, “The Constitution and the Price System: Some Reflections on Nebbia v. New York,” Columbia Law Review  (Mar. ): –; Fried, Progressive Assault on Laissez Faire.

Managing Competition in the Great Depression



jurisprudence. FDR, too, changed his approach to national competition policy and structural adjustments, empowering Thurman W. Arnold at the Department of Justice to prosecute interstate price fixing by cartels and to impose oligopolistic competition on supposed monopolists. Thus the Court’s mid-s rulings were not simply a return to s “new era” competition policy. They were an affirmation of the expanded role of the administrative state – at both the federal and state level – acting through private economic associations. In the infamous “sick chicken case” of , the U.S. Supreme Court invalidated the NIRA on two grounds. The Court held that Congressional power to regulate interstate commerce did not extend to purely intrastate traffic, and moreover, that the delegation of legislative powers to the executive was unconstitutional. The ruling, however, did not consider the concerns of consumer welfare advocates who charged that the codes raised consumer prices. Instead, the Court focused on determining the administrative parameters under which the federal government might constitutionally intervene to effect competitive practices and prices. In this case a New York family, the Schechters, owned and operated a kosher slaughterhouse that bought poultry from wholesalers and sold it to retailers located within the state. In July  the Schechters were arrested and charged with sixty counts of violating New York City’s Live Poultry Code, which included regulations stipulating minimum wages, maximum hours, retail prices, and service standards. President Roosevelt had authorized the code as a necessary emergency measure under the authority of the NIRA. At trial, the lower court convicted the Schechters on eighteen counts. The Circuit Court of Appeals dismissed the two counts regarding wage and hour violations but convicted the 

 

On oligopoly competition, see Neil Fligstein, The Transformation of Corporate Control (Cambridge, MA, ), –, –. On partial planning, see Himmelberg, Origins of the National Recovery Administration; Hawley, New Deal and Problem of Monopoly. On Thurman Arnold, see Alan Brinkley, The End of Reform: New Deal Liberalism in Recession and War (New York, ), arguing that Arnold did not sufficiently carry on the antimonopoly tradition because New Deal policymakers shifted their focus to “consumption-oriented liberalism” and full employment. See “Blue Eagle Termed Soviet Duck Whipped by a Sick Chicken,” Chicago Daily Tribune, May , , . See “Code of Fair Competition for the Live Poultry Industry of the Metropolitan Area in and about the City of New York,” art. , § . “Straight Killing. The use, in the wholesale slaughtering of poultry, of any method of slaughtering other than ‘straight killing’ or killing on the basis of official grade. Purchasers may, however, make selection of a half coop, coop, or coops, but shall not have the right to make any selection of particular birds.” Ibid.



American Fair Trade

Schechters of violating the code’s “straight killing” rule, which stipulated that customers purchase a chicken at random rather than by selecting their preference. That rule gave the case the “sick chicken” moniker. Donald Richberg and Solicitor General Stanley Reed, who led the Department of Justice legal team, argued before the Court that the rule had been devised to ensure standardized grades and prices of chickens. The Schechters, however, allowed customers to select their own chickens from the coop or half coop, which Richberg and Reed argued prevented standardization and promoted the sale of unfit chickens as less knowledgeable customers might select poorer quality birds. Additionally, because the “New York market dominate[d] the live poultry industry, and determine[d] the prices in other markets as well as the prices received by shippers and farmers,” the Schechters’ failure to abide by set prices and standards would reverberate through neighboring states and drive down prices. The Schechters, in turn, appealed to the U.S. Supreme Court, arguing that the NIRA and its codes violated both the commerce and due process clauses of the Constitution, regardless of their effect on prices or standards. Chief Justice Charles Evans Hughes, writing for the Court, held that “it is not the province of the Court to consider the economic advantages or disadvantage of such a centralized system,” but rather the Court must determine the constitutionality of the administrative processes set out in the act. Specifically, the Court held that the Schechters’ practice of allowing customers to select their live chicken before its slaughter did not constitute a direct influence on the stream of interstate commerce, the lynchpin of Richberg and Reed’s brief regarding the emergency necessity of the NIRA codes. Hughes found that “The persons employed in slaughtering and selling in local trade are not employed in interstate commerce. . . . Their hours and wages have no direct relation to interstate commerce.” These were matters for state regulation. More generally, the NIRA “supplie[d] no standards for any trade, industry or activity” and failed “to prescribe rules of conduct to be applied to particular states



 



Schechter Poultry,  U.S. , – (). See also “NRA Trial Stirs Mirth,” Los Angeles Times, May , , , reporting that “chicken methods tickle jurists [and] Hughes roars with laughter.” Brief for the United States, Schechter Poultry,  U.S. . On the legal arguments presented by Richberg and Reed, see Irons, New Deal Lawyers, –. Schechter Poultry,  U.S. at . Echoing previous decisions: “Whether the free operation of the normal laws of competition is a wise and wholesome rule for trade and commerce is an economic question which this court need not consider or determine.” Northern Securities Co. v. United States,  U.S. , – ().  Schechter Poultry,  U.S. at , . Ibid., .

Managing Competition in the Great Depression



of fact determined by appropriate administrative procedure.” Thus the Court also rejected the government’s argument that the NIRA’s codes of fair competition simply extended the existing administrative procedures and rules established by the FTC’s trade practice conferences. Instead, the Court reasoned that the NIRA had authorized “virtually unfettered” presidential discretion to enact laws “without precedent.” As the Court dismantled a signature piece of New Deal legislation, state-level “little NRAs” continued to manage competitive markets through administrative boards authorized to prohibit “predatory price cutting” and, at times, to set minimum prices. One year before Schechter, the Supreme Court had affirmed a New York State law regulating milk prices by the Milk Control Board as a valid exercise of police powers to regulate the health, safety, and welfare in the public interest. Although regulating milk production and sales historically fell under the domain of state police powers, price fixing by an administrative agency presented a murkier legal realm, wherein the Supreme Court had previously curtailed direct regulations over price and production when an industry was not deemed to be a public utility or monopoly. The case  







Ibid., –. Ibid., . In a concurring opinion, Justice Benjamin Cardozo, who had dissented in Panama Refining, wrote that the NIRA’s delegation of power to the executive constituted “unconfined and vagrant” “delegation running riot.” Ibid., . See “Developments in the Law – Unfair Competition,” Harvard Law Review  (May ): –; James T. Patterson, “The New Deal and the State,” American Historical Review  (Dec. ): –. See also F. C. Felter, “Pharmacy’s ‘New Deal’” and “Drug Institute Formed,” Pacific Drug Review, July , n.p.; “N.A.R.D. Code of Fair Competition: Presented to Drug Institute for Inclusion in Drug Code,” Pacific Drug Review, Sept. , , . Nebbia v. New York,  U.S.  (), validating the Emergency Milk Control Act, N.Y. Laws , ch. , art. . Section  of the act declared the milk industry to be “a business affecting the public health and interest.” On the history of police powers, see Chapter . See also Howard Gillman, The Constitution Besieged: The Rise and Demise of Lochner Era Police Powers Jurisprudence (Durham, NC, ); Hovenkamp, Enterprise and American Law; Phillips Sawyer, “California Fair Trade.” For cases upholding state milk regulations through quality standards and licensing provisions as valid police powers, see Liebermann v. Van De Carr,  U. S.  (); Lodes v. New York,  N. Y.  (); Herkimer v. Potter,  N. Y. Supp.  (Sup. Ct. ). See also Wilson v. New,  U. S.  (); Block v. Hirsh,  U. S.  (), upholding emergency police powers. More recently, the Court had limited the ability of states to use licensing regulations to limit production and thereby control prices. See New State Ice Co. v. Liebmann,  U.S.  (), striking down an Oklahoma licensing law that limited ice producers because ice did not qualify as a public interest. See also Adkins v. Children’s Hospital,  U. S. ,  (), striking down a women’s minimum wage law as a violation of Fifth Amendment contract guarantees; Wolff Packing Co. v. Court of Industrial Relations,  U. S.  (), striking down a Kansas law regulating wages in the meat packing business



American Fair Trade

signaled a sea change in the Court’s interpretation of constitutional price fixing by an administrative board. Between  and , the retail price of milk declined from sixteen to twelve cents per quart, leading to milk strikes and rioting farmers. New York represented the third largest milk-producing state and the second largest in the value of its dairy products. Approximately half of all New York farm income came from dairy. Both the largest, most powerful and the smallest, least organized New York dairy producers supported the Milk Control Board legislation. The Dairymen’s League Cooperative, however, opposed the bill because its members feared that an administrative board would be controlled by the large-scale distributors who already dominated the New York City market. Members also feared that the board would ignore their preference for a mandatory producers’ cooperative and milk exchange. Nevertheless, the Milk Control Board received authorization to license distributors and to fix retail milk prices as well as producers’ wholesale prices to prevent distributors from putting downward pressure on prices.





 



during an emergency; Tyson & Bro. v. Banton,  U. S. ,  (), striking down a New York law that limited the resale charges for theater tickets; Ribnik v. McBride,  U. S.  (), striking down a New Jersey statute regulating rates charged by an employment agency; Williams v. Standard Oil Co.,  U. S.  (), striking down a Tennessee law that prescribed gasoline prices, calling it an illegitimate use of police power. See Robert L. Hale, “The Constitution and the Price System: Some Reflections on Nebbia v. New York,” Columbia Law Review  (Mar. ): –; Frank E. Horack Jr. and Julius Cohen, “After the Nebbia Case: The Administration of Price Regulation,” University of Cincinnati Law Review  (May ): –. Report of the Joint Legislative Committee to Investigate the Milk Industry, Apr. , , New York Legislative Doc. No. , (Albany, NY, ), – (hereafter cited as Report on Milk Industry). Ibid. Borden’s Farm Products Company and the Sheffield Farms Company controlled approximately half the New York City retail milk market. These were owned by holding companies and constituted the largest dairy distributing system in the country. By contrast, of the eighty-four thousand commercial dairy farmers in New York State, average herd size totaled fewer than twenty cows. See M. M. Wilner, “Low Milk Return Cause of Unrest,” New York Times, May , , E. On lobbying efforts by distributors, see “The Milk Bill,” New York Times, Apr. , , ; Dennis Tilden Lynch, “Intimidation, Threats, Boycotts Shown in Milk Inquiry at Albany,” New York Herald Tribune, May , , . New York’s Emergency Milk Control Act originally passed in  as an emergency measure that expanded existing regulation on health and quality to price regulation. The board set varying prices according to both locality population size and distributors’ size, allowing smaller distributors that did not advertise to sell milk at a slightly lower price. See “State Board Lists Milk Prices Here,” New York Times, Apr. , , ; James A. Tobey, Legal Aspects of Milk Control (Chicago, IL, ), published by the

Managing Competition in the Great Depression



Leo Nebbia, a New York retailer, violated the board’s minimum price by advertising and selling a combination deal of milk and bread. He argued that the Milk Control Board deprived him of his property rights without the due process of law because his business was not “affected with a public interest.” The state attorney responded that the board’s price fixing represented a temporary emergency measure within the state’s police powers and that dairy production and distribution qualified as a business affected with the public interest. At the same time, producers complained that the board set prices that were barely sufficient to cover the costs of production, and they bemoaned their continued unequal bargaining power with large-scale distributors. In Nebbia v. New York, Supreme Court Justice Owen Roberts provided the critical swing vote, writing for the – majority to uphold the law. The Court held that the state had exercised legitimate police powers by intervening in private markets to “regulate it in the common interest” when the regular laws of supply and demand had failed to clear markets. Having found that the legislature investigated the “relevant facts,” Roberts held that “unfair and destructive trade practices in the distribution of milk [had led] to demoralization of prices,” and “unrestricted competition [had been] found to be an inadequate protection to consumer interest” in the safe and reliable production and distribution of milk. Such “economic maladjustments” had made state intervention into private markets necessary to protect the public welfare. With this decision the Court expanded the logic of public regulation in private markets as it had been construed in Munn v. Illinois (). Munn had delineated two spheres of public and private businesses and granted private “business affected with a public interest” greater public regulation. In Nebbia the Court affirmed the Fourteenth Amendment’s due process protections against “unreasonable, arbitrary, or capricious” laws but concluded that the milk price controls reasonably protected the public interest even if they curtailed the property and contract rights of private business owners. Likewise, laws forbidding unfair competition, price

    

International Association of Milk Dealers. On the legislative compromises between interest groups see “Legislative Regulation of the New York Dairy Industry,” Yale Law Journal  (June ): –. “Milk Price Raised for the Producers,” New York Times, May , , .  Nebbia v. New York,  U.S. ,  (). Ibid., , . Ibid., , . Cushman, Rethinking the New Deal Court, ; Munn v. Illinois,  U.S.  () Nebbia,  U.S.  at . “Laws passed for the suppression of immorality, in the interest of health, to secure fair trade practices, and to safeguard the interests of



American Fair Trade

discrimination, and monopolies had passed constitutional muster. The Court conceded that the milk industry was neither a public utility nor a monopoly; nevertheless, no constitutional principle prohibited a legislature from correcting price “maladjustments” as circumstances may dictate. In response, Justice James McReynolds and the rest of the old guard dissented, calling the Milk Control Board an unconstitutional “management control” of production and retail markets in ordinary, private markets. The case signaled a deferential posture on the part of the Court toward legislative initiatives to control prices and wages – and according to McReynolds, the decision distended the boundaries of “business affected with a public interest” by ignoring the substantive effects on the economy or individual rights. Nebbia marked a shift in the Court’s approach to reviewing both price and wage regulations, wherein the Court deferred to states’ legislative investigations and regulatory police powers rather than scrutinizing the substantive effects of particular economic regulations. By affirming these ubiquitous state-level administrative boards that controlled competitive practices and price outcomes for ordinary goods and services, the Court helped precipitate a constitutional revolution, which also involved labor standards, wage legislation, and consumer prices. For the so-called fair

 





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depositors in banks, have been found consistent with due process. These measures not only affected the use of private property, but also interfered with the right of private contract. Other instances are numerous where valid regulation has restricted the right of contract, while less directly affecting property rights.” Ibid., –. Ibid., . Ibid., . Additionally, “there is no closed class or category of businesses affected with a public interest.” Ibid., . “So far as the requirement of due process is concerned, and in the absence of other constitutional restriction, a state is free to adopt whatever economic policy may reasonably be deemed to promote public welfare, and to enforce that policy by legislation adapted to its purpose. The courts are without authority either to declare such policy, or, when it is declared by the legislature, to override it.” Ibid., . Ibid., , . McReynolds was joined by Justices Willis Van Devanter, George Sutherland, and Pierce Butler. The four became known as the “Four Horsemen” for their opposition to New Deal economic regulations. Ibid., –. See Barry Cushman, “The Secret Lives of the Four Horsemen,” Virginia Law Review  (): . Cushman, Rethinking the New Deal Court; Gustavus Robinson, “The Public Utility Concept in American Law,” Harvard Law Review  (Jan. ): –; Breck McAllister, “Lord Hale and Business Affected with a Public Interest,” Harvard Law Review  (Mar. ): –. Cushman, Rethinking the New Deal Court, , –. Cushman challenges the conventional history of the s constitutional revolution by emphasizing the Nebbia decision of  as the Court’s turning point toward upholding greater economic regulation and ending the so-called Lochner era’s striking down of economic legislation. Previously, legal scholars have emphasized the president’s “Court-packing plan” of  as having

Managing Competition in the Great Depression



trade agreements, which the NIRA had momentarily elevated to federal law, state laws shifted the Supreme Court’s focus to the issues of legislative police powers and legislative economic reasoning.

Populism, Proprietary Capitalism, and the Vestiges of Associational Corporatism In response to Schechter and the unpopularity of NIRA state corporatism, FDR abruptly changed his administration’s antitrust policy while simultaneously reiterating his commitment to small proprietors, laborers, and consumer interests. In his Second New Deal, FDR appointed Thurman Arnold to revive the Antitrust Division of the Department of Justice, where he focused on prosecuting the very agreements among rivals – especially among dominant firms and vertically integrated corporations – that the NIRA had once sanctioned. At the same time, President Roosevelt also maintained an allegiance to the democratic populism that encouraged legislation to protect small or independent proprietors against concentrations of wealth or market power. In  he proclaimed that “the liberty of a democracy is not safe if the people tolerate the growth of







influenced Justice Owen Roberts to shift his swing vote to create a progressive majority on the Court. The latter group emphasizes West Coast Hotel v. Parrish,  U.S.  () as the “switch in time that saved the nine,” upholding a state minimum wage law and overturning Adkins v. Children’s Hospital,  U.S.  (). However, Cushman shows that Roberts had privately announced his shift before FDR’s plan had been announced. See Cushman, Rethinking the New Deal Court, –. “Fair Trade Legislation,” Harvard Law Review  (Mar. ): –; John Barker Waite, “Public Policy and Personal Opinion,” Michigan Law Review  (Jan. ): –. FDR also experienced setbacks with the failure of both his Court-packing plan and his proposed reorganization of the executive branch. Additionally, in June  the president authorized reduced spending on Works Progress Administration (WPA) and PWA projects; fearing inflation, the Fed tightened monetary policy. Social Security taxes also went into effect. Consequently, by early  unemployment rose to almost  percent, consumers reduced their spending, and industrial production slowed as orders fell. The following year Roosevelt reinstated many of the WPA and PWA public works spending programs, and Congress passed the second Agricultural Adjustment Act, which created crop loans and insurance against natural disasters and subsidized reduced agricultural production. On the “Roosevelt Recession,” see Kennedy, Freedom from Fear, –. See United States v. Socony-Vacuum,  U.S. , – (). In this case Arnold successfully prosecuted cartel-like self-regulation that limited output, even though the criminal indictment stretched back to a time when the NRA had sanctioned those activities. See also Daniel A. Crane, “The Story of United States v. Socony-Vacuum: Hot Oil and Antitrust in the Two New Deals,” in Antitrust Stories, eds. Eleanor M. Fox and Daniel A. Crane (New York, ), –.

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American Fair Trade

private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is fascism.” Yet even as the president reinstated antitrust prosecutions and shifted away from state-led planning, the influence of corporate interests within government agencies, both at the state and federal levels, had already been institutionalized through New Deal policies and state regulations. Both state agencies and private associations had grown in political and economic power, creating an institutional legacy of continued rivalry and partnership between public and private governance. Under Arnold’s leadership, the Antitrust Division reinstituted antitrust investigations and prosecutions, bolstered its resources and capacities, and reinforced the capacities of other administrative agencies, such as the FTC. While he supported agricultural price controls and output quotas, Arnold argued that the industries formerly governed by the NIRA suffered from “bottlenecks” in production and distribution because cartels and monopolies kept consumer prices high and retarded economic recovery. Arnold also understood the importance of publicity and the necessity of restoring the “social symbol” of competition as an American ideal. In addition to pursuing criminal indictments against leading  





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Franklin D. Roosevelt, “Recommendations to the Congress on Curbing Monopolies and the Concentration of Economic Power,” Apr. , , in PPA, : –. On FDR’s New Deal and competition policy, see Roos, NRA, arguing that the New Deal administrators were divided among supporters of industrial self-government, national economic planning, and Brandeisian antitrusters; Hawley, The New Deal and the Problem of Monopoly, describing FDR’s policies as “ambivalent”; William Leuchtenberg, Franklin D. Roosevelt and the New Deal – (New York, ), describing New Deal policies as “contradictory.” On Arnold’s tenure at the Antitrust Division, see Brinkley, End of Reform; Wilson Miscamble, “Thurman Arnold Goes to Washington: A Look at Antitrust Policy in the Later New Deal,” Business History Review  (spring ): –. Between  and , the Antitrust Division quadrupled its budget and enlarged its staff from  to almost  at its height. While appropriations remained relatively meager compared to those of other agencies, Arnold’s tenure marked a turning point in the Antitrust Division’s capacity to shape law. See Thurman W. Arnold, The Bottlenecks of Business (New York, ), , . See also James Willard Hurst, Law and Social Order in the United States (Ithaca, NY, ), –. Arnold, Bottlenecks, –, arguing that vertical integration contributed to the maldistribution of wealth by limiting the number of smaller firms. See also Arnold, Folklore of Capitalism (New Haven, CT, ), defending the New Deal; “Report of Assistant Attorney General Thurman Arnold in Charge of the Antitrust Division” in Annual Report of the Attorney General of the United States (Washington, DC, ), –. Arnold moved the Antitrust Division away from issuing consent decrees, wherein the Justice Department might accept promises to reform business practices and then drop an indictment; instead, he preferred indictments and trials that were open to public scrutiny.

Managing Competition in the Great Depression



firms, he sought favorable jurisdictions in which to bring charges. Despite these successes, reorienting competition policy required coordinating not only federal agencies but also state legislatures and the Court, which had already validated the administrative agencies and partnerships with business groups deemed necessary to fulfill much of the NRA’s original mission. Relying on the Nebbia decision, the Court validated California’s “little NRAs,” affirming a new era of public–private regulation of consumer prices that reached into markets for ordinary goods and encouraged the spread of state-level fair trade campaigns. In the aftermath of Schechter, the same organizations and associations that had lobbied for state fair trade laws – which allowed manufacturer-set minimum retail prices and established administrative boards to oversee association-based price fixing – then turned their attention to reinstating the protectionist policies that the NIRA had sanctioned. To be clear, state fair trade laws legalized resale price maintenance (RPM) contracts that the Court had struck down in  as an anticompetitive restraint on alienation, meaning that once an item for sale was in the hands of a retailer or wholesaler,









“Report of the Assistant Attorney General” (), . On the importance of competition as a political symbol, see Arnold, The Symbols of Government (New Haven, CT, ), –, . See also Arnold, “Prosecution Policy under the Sherman Act,” American Bar Association Journal  (June ): –. See also Hawley, New Deal and the Problem of Monopoly, –. For example, in Arnold’s first high profile case, wherein he prosecuted the “big three” car companies for criminally coercing dealers to offer only the manufacturer’s financing programs, he changed venue after the first case was thrown out in a Milwaukee, Wisconsin, court. See Spencer Weber Waller, “The Antitrust Legacy of Thurman Arnold,” St. John’s Law Review ,  (): –. Despite his efforts to bolster the administrative capacities of the Antitrust Division, Arnold ultimately believed that antitrust suits should be decided by the Court in order to preserve the independent, expert role of administrators and the Court’s role as the ultimate interpreter of the law. See Arnold, Bottlenecks, –, –. Max Factor & Co. and Sales Builders, Inc. v. Kunsman,  Cal. d  (), –. The U.S. Supreme Court denied cert, allowing the lower court ruling to stand. See note , p. . Northern California Drug News, July , , n.p.; Northern California Drug News, Sept. , , ; “Two History-Making Events,” Pacific Drug Review, Apr. , ; “California Druggists Map Big -Month Program,” Pacific Drug Review, July , ; “Patman-Robinson Bill Signed,” Pacific Drug Review, July , ; “Big Battle on in California,” Pacific Drug Review, Aug. , ; “Some Interpretations of RobinsonPatman Law,” Pacific Drug Review, Aug. , ; “Here’s Stanley Weigel, Fair Trade Defender,” Pacific Drug Review, Aug. , . See also Joseph Palamountain, The Politics of Distribution (Cambridge, MA, ). For more on the California fair trade campaign, see Chapter .

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American Fair Trade

the manufacturer could not legitimately control the price. But by  RPM had transformed from a tool of producers to control prices on trademarked goods into a political weapon for small proprietors to insist on price schedules and guaranteed profit margins. Under pressure from retailer associations, by August  forty-two states had passed fair trade laws, most of them simply copying the California law as amended. The National Association of Retail Druggists (NARD) and National Wholesale Druggist Association (NWDA) spearheaded the campaign for a federal law to enable fair trade contracts in interstate trade if the contracts were made between fair trade states. These associations were joined by retail grocers, furniture makers, producers of distilled spirits, printers, booksellers, and confectioners. These interest groups, having advocated for a national fair trade law since , redoubled their efforts through extensive litigation and lobbying campaigns at the state and national level. The fair trade laws used trademarks and branding to protect price-fixing agreements, a practice that galvanized specialty producers and small retailers attempting to establish and protect market share. With the end of Prohibition in , for example, distillers had competed to establish trademarks and retail distribution networks. Samuel Bronfman, who purchased the Canadian distillery Seagram & Sons, quickly moved to advertise multiple trademarked whiskey lines at different price points, but he soon found his



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See Dr. Miles Medical Co. v. Park & Sons, Inc.,  U.S.  (), creating the per se prohibition of Resale Price Maintenance contracts, meaning that the courts would thereafter presume such arrangements to be unlawful and not weigh competitive impacts. For a discussion of the Dr. Miles case, see Chapter , and for a discussion of state fair trade laws, see Chapter . Correlation of Statutory Provisions (New York, ), published by the National Wholesale Druggists’ Association with Clarke & Allen, legal counsel; Fair Trade Manual (Chicago, IL, ), published by the National Association of Retail Druggists; Harry S. Kantor, Resale Price Maintenance Legislation in the United States, National Recovery Administration, Work Materials No.  (Washington, DC, ), –; Saul Nelson, Harper’s, Aug. , . The first fourteen states to pass fair trade laws were California, Illinois, Iowa, Louisiana, Maryland, New Jersey, New York, Ohio, Oregon, Pennsylvania, Rhode Island, Washington, Wisconsin, and Virginia. See also Hawley, New Deal and the Problem of Monopoly, –. See note , p. . Note that the states controlled trademark law until the Lanham Act,  Stat.  (). See Paul Duguid, “A Case of Prejudice? The Uncertain Development of Collective and Certification Marks,” Business History Review  (summer ): –. On prohibition and state power, see Lisa McGirr, The War on Alcohol: Prohibition and the Rise of the American State (New York, ).

Managing Competition in the Great Depression

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dealers complaining of imitation brands and cut-rate competition. Bronfman, with the help of the Jacobi & Jacobi law firm and the Dun & Bradstreet investigatory and ratings agency, requested that the Department of Commerce investigate trademark infringement and issue immediate injunctive relief. Ultimately, Seagram brought suit against an imitator, Old Dearborn Distributors, for price cutting under the Illinois fair trade law. Bronfman described his company’s sales policy as “a fair profit to the wholesaler, a fair profit to the retailer, and a fair price to the consumer,” rephrasing New Deal language to include his own terms. But, in reality, the case had as much to do with protecting the Seagram’s brand against imitators and falling prices. Seagram’s prosecution of price-cutter Old Dearborn Distributors pitted the Court’s logic in its  prohibition of RPM contracts against its more recent reasoning in Nebbia. On appeal, U.S. Supreme Court Justice George Sutherland, writing for the majority, enforced Seagram’s use of fair trade contracts with retailers as a legitimate protection of its trademarked product and upheld the Illinois law as a valid exercise of the state’s police power. Sutherland, who had dissented in Nebbia, used his opinion to restate his commitment to classical property and contract rights, disregarding the Court’s  determination that RPM contracts “amounted to an unlawful restraint of trade.” His affirmation of the Illinois fair trade act relied on more recent Court rulings that affirmed 



 

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Federal Alcohol Control Administration, Form , Dec. , Box , Accession No. , Hagley Archive, Seagram Collection, Hagley Museum and Library, Wilmington, DE (hereafter cited as Seagram Collection). See also Mira Wilkins, The History of Foreign Investment in the United States, – (Cambridge, MA, ), –. M. H. Brotman (San Francisco) to Guyer (New York), Seagram interoffice correspondence, Jan. , , Box , Accession No. , Seagram Collection. M. H. Brotman, an agent of the Seagram company, stated that although sales were small, “the situation is quite annoying,” especially if Seagram planned to continue sales in the northern California region. See also Dannenberg report of the General Detective Service, May , , Box , Accession No. , Seagram Collection. Leslie Frazer, assistant commissioner at the Department of Commerce, affirmed the injunction by the examiner of trademarks, who held the trademarks to be “confusingly similar.” Appeal, Seagram v. Fall, Dec. , , Box , Accession No. , Seagram Collection. John Morton Blum, ed., From the Morgenthau Diaries (Boston, ), : , quoted in Wilkins, History of Foreign Investment, . Old Dearborn Distributing Co. v. Seagram-Distillers Corporation,  U.S.  (). Seagram used a standard form contract for these price schedules, which had been produced by the Distilled Spirits Institute. See “Fair Trade Agreement,” memorandum by the Distilled Spirits Institute, May , , Box , Accession No. , Seagram Collection. Seagram-Distillers Corp.,  U.S. at .

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American Fair Trade

protective state legislation for “standardization-of-price agreements” when fully investigated by the legislature and not found to be “so arbitrary, unfair or wanting in reason as to result in a denial of due process.” The ruling further encouraged federal lobbying, which the druggists’ associations led by drafting a model act and providing congressional testimony. Ultimately, the Miller-Tydings Act of , which legalized fair trade contracts in interstate commerce when made between fair trade states, passed as a rider to a Washington, DC, tax bill, even though the president opposed it. Senator Millard Tydings, the conservative Democrat from Maryland who sponsored the act, believed that empowering trade associations could counterbalance the growing power of administrative agencies. Tydings and Sutherland, therefore, both favored the return of Brandeisian associational corporatism as an antidote to New Deal state corporatism. But other progressive populists saw the limitations of private contract enforcement and reached instead for administrative oversight and public enforcement of rules against “unfair competition.” The Robinson-Patman

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





Ibid.,  and , respectively. Sutherland cited the – and – congressional hearings that Brandeis had coordinated on fair trade legislation, arguing that the House bills in question were “in all essential respects like the Illinois act. The hearings disclose[d] exhaustive legal briefs, and testimony and arguments for and against the economic value of the proposed laws. . . . It is not without significance that, while the proposed legislation was vigorously assailed in other respects, we do not find that any constitutional object was urged.” Ibid., . Sutherland analogized fair trade laws to other state protective laws based on some classification scheme, such as limiting women’s working hours, which the Court had found to be a reasonable use of police powers in Radice v. New York,  U.S. ,  (). Ibid., . Sutherland concluded that “the sale of identified goods at less than the price fixed by the owner of the mark or brand is an assault upon the good will, and constitutes what the statute denominates ‘unfair competition.’” Ibid., .  Cong. Rec. , –, –, –, ,  (). See also Federal Trade Commission, Legalization of Contracts for Minimum Resale Prices, S. Doc. No. –, at – (); Minority Views of Members of the Committee on the District of Columbia, S. Rep. No. -, pt.  (); Bean, Beyond the Broker State, –; Hawley, New Deal and the Problem of Monopoly, . Miller-Tydings Act, Pub. L. No. –,  Stat.  (). See also “Trade Regulation. Resale Price Maintenance. Miller-Tydings Act,” Columbia Law Review  (Oct. ): . Herbert Levy, counsel for the National Association of Retail Druggists, drafted the final version of the fair trade law and solicited his former law partner, Senator Millard E. Tydings, to sponsor the legislation. Although he was a Democrat, Tydings opposed the New Deal because he was a fiscal conservative and ardent supporter of a balanced federal budget. Millard E. Tydings, Counter-Attack: A Battle Plan to Defeat the Depression (Indianapolis, IN, ).

Managing Competition in the Great Depression

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Act (), commonly criticized as a convoluted and ineffectual law, prohibited sales below cost and secret rebates, and it relied on fact finding and enforcement by public agencies. The U.S. Wholesale Grocers’ Association drafted the original bill to authorize the FTC to control quantity discounts, brokerage payments, and advertising allowances that manufacturers made to certain chain stores, such as A&P. The association intended these measures to curb the discounts (or “price discrimination”) given to dominant chain stores, which dictated prices and product specifications to food processors and moved consumer preferences away from fresh produce. These grocers relied on the FTC’s Chain Store Investigation of , which concluded that the “extensive growth” of the chain store was “based largely upon special price concessions from manufacturers.” Grocers also found support from Representative Wright Patman, a Texas Democrat who had used the report to launch a special House investigation into the American Retail Federation, the largest chain store trade association. The act, however, largely overlooked the buyer’s liability (although that was its intended purpose), and subsequently, it could be used only to prosecute manufacturers, particularly smaller manufacturers who found themselves “trapped in the [law’s] legal maze.” Thus Robinson-Patman did little to discourage chain store buying practices. Despite President Roosevelt’s objections to legislation mimicking certain price provisions of the unpopular and unconstitutional NIRA, these two 

 





Robinson-Patman Act, also known as the Anti-Price Discrimination Act, Pub. L. No. ,  Stat.  (). See also Nancy Beck Young, Wright Patman: Populism, Liberalism, and the American Dream (Dallas, ), –. Levinson, Great A&P. Federal Trade Commission, Final Report on Chain Store Investigation, S. Doc. No. – (), at , recommending actions to eliminate “unfair” and “unjust” price discrimination and providing statistical tables comparing prices and special discounts indices. See also Levinson, Great A&P, –. On Patman’s House investigation, see Hearings to Amend the Clayton Act Before the H. Judiciary Committee, th Cong. –, –, –, – (). See also Charles F. Phillips, “The Federal Trade Commission’s Chain Store Investigation: A Note,” Journal of Marketing  (Jan. ): –. Phillips, a professor of economics at Colgate University, disagreed with the commission’s conclusions from price and discount surveys. He argued that the chain stores maintained an advantage through lower gross margins and higher volume of sales, making the effect of the special discounts negligible. Frederick M. Rowe, Price Discrimination under the Robinson-Patman Act (Boston, ), –. See also Richard Steuer, “Crossing the Streams of Price and Promotion under the Robinson-Patman Act,” Antitrust  (fall ): –; Phillip Areeda and Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application, rd ed. (New York, ), : .



American Fair Trade

laws – the Robinson-Patman Act and the Miller-Tydings Act – reinstitutionalized certain codes of fair competition along with their problems of enforcement. Both President Roosevelt and Thurman Arnold opposed these pieces of legislation; however, they shared the concerns of populists, economic institutionalists, and legal realists that vertical integration contributed to both the maldistribution of wealth and market concentration akin to monopolization. The administration pursued multiple venues to incorporate antimonopoly concerns about industry concentration – for example, through banking reform, which instilled market stability and suppressed industry concentration. Generally, the Second New Deal’s prescriptions for market failure shifted to stimulating consumer demand and production, rather than allowing industry-led efforts to restrict output and raise prices. This policy change followed public discontent







See Arnold, Bottlenecks, –. Between  and , the Temporary National Economic Commission (TNEC) produced forty-three monographs investigating distressed markets. In these monographs the commission recommended stronger antitrust enforcement and a federal incorporation law to control against competitive abuses and market concentration. The commission also warned against the twin problems of underconsumption and administered prices hindering economic recovery. See Temporary National Economic Commission, Final Report and Recommendations, S. Doc. No. -, at  (); Thurman Arnold, Fair Fights and Foul: A Dissenting Lawyer’s Life (New York, ), –; Brinkley, End of Reform, –. Arnold, a legal realist, borrowed from economic institutionalists such as John Commons. Compare Arnold’s work with the analysis of vertical integration (or “control”) and monopolization in Commons, Legal Foundations of Capitalism (New York, ), . For a discussion of the relationship between economic institutionalists and legal realists, see Hovenkamp, Opening of American Law, , –; Rutherford, Institutionalist Movement. The Glass-Steagall Act of ,  Stat. , forced commercial banks to divest securities in investment banking and established deposit insurance through the Federal Deposit Insurance Corporation, which could address bank insolvency issues. Likewise, the Securities and Exchange Commission Act of ,  Stat. , reined in financial excesses by regulating interstate sales of securities and implementing uniform disclosure rules. See Barry Eichengreen, Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History (Oxford, ). Agricultural policy remained an important exception to this general trend in New Deal policy. The Agricultural Adjustment Act of ,  Stat. , reinstated farmer production quotas, restricting agricultural and livestock output. Those quotas had appeared in the original Agricultural Adjustment Act of ,  Stat. , which the U.S. Supreme Court had struck down as unconstitutional because it taxed intrastate farm processors to pay for farm subsidies. See United States v. Butler,  U.S.  (). The  law, however, did not use such a tax but rather provided funding through the federal government. It also instituted the Federal Crop Insurance Corporation. See Wickard v. Filburn,  U.S.  (), upholding the act as a legitimate regulation of interstate

Managing Competition in the Great Depression



with NIRA state corporatism and prolonged economic malaise, along with the persuasiveness of John Maynard Keynes’s consumer-led growth strategy. FDR’s administration bolstered its spending programs, especially after , and recanted its early sponsorship of cartelization. Arnold’s work at the Antitrust Division reflected this renewed attention to nationwide antitrust enforcement through consumer-oriented monopolization suits and substantial capacity building at the Department of Justice. For all the excitement around economic planning in the early New Deal, the Second New Deal embraced Keynesian economic management through spending and – perhaps most ironically – a revised version of enforced market competition. In the post–NIRA New Deal era, proponents of fair trade associationalism lacked the meaningful enforcement powers of a federal administration, rendering their movement entirely dependent on their own organizational strength in the marketplace. They stood little chance against department and chain stores advertising campaigns against fair trade – and consumers voted with their dollars, purchasing store-brand ready-to-wear clothes, toiletries, and processed foods. For example, Macy’s department store publicized its private brands as a cheaper alternative to fair trade goods. Advertisements decried the entire fair trade







commerce even though the plaintiff, Roscoe Filburn, produced wheat above the legal quota to feed his cattle, not for resale. On the unpopularity of NIRA policies, see Hawley, New Deal and the Problem of Monopoly, –. On Keynes’s influence on Second New Deal policies, see Kennedy, Freedom from Fear, –; Barber, Designs within Disorder; Robert Skidelsky, John Maynard Keynes, –: Economist, Philosopher, Statesman (New York, ). On the unpopularity of other New Deal policies and the formation of the American Liberty League, see Frederick Rudolph, “The American Liberty League, –,” American Historical Review  (Oct. ): –. The TNEC investigations prompted Arnold’s cases in Hartford-Empire Co. v. United States,  U.S.  (); Hartford-Empire Co. v. United States,  U.S.  (). See American Medical Association v. United States,  U.S.  (), fining the AMA for boycotting a group health plan clinic; United States v. S. E. Underwriters Association,  U.S.  (), subjecting the insurance industry to antitrust law; United States v. Socony-Vacuum Oil Co.  U.S. , – (), striking down arrangements between oil companies to fix retail prices even if those agreements were made to avoid “ruinous competition.” Arnold reflected on the consumer orientation of antitrust suits in Arnold, Bottlenecks, . See also Alva Johnson, “Thurman Arnold’s Biggest Case,” New Yorker, Jan. , , . See A Fair Trade Manual for Management (Chicago, IL, ), published by the American Fair Trade Council, formerly known as the American Fair Trade League; The Basis and Development of Fair Trade (New York, ), published by the National Association of Wholesale Druggists.



American Fair Trade

program as anticonsumer and sought to take back the meaning of market fairness. Macy’s also led lobbying and litigation efforts attacking police powers regulations that had enabled liberalized antitrust laws as well as anti–chain store taxes. The National Retail Federation and the National Retail Dry Goods Association published journals such as Chain Store Age, which had featured articles on chain store financing, marketing, and retailing practices since . Rather than openly campaigning against fair trade as such, Chain Store Age urged its readers to use advertisements that boasted lowest price guarantees, price comparisons, and department store brands – none of which were subject to fair trade laws. So although fair trade laws and networks persisted into the post–World War II era, they depended on brand-name distribution networks, persuasive advertising, and consumer support – all of which were waning. Fair trade as a political ideology, along with the economics of imperfect competition, also came under attack within the academy. The University of Chicago’s Free Market Study Group discredited the progressive populism of the Robinson-Patman Act, arguing that such laws were anticonsumer, anti–big business, and anti–free market. Indeed,  





 

On consumer activism in support of low prices, see Meg Jacobs, Pocketbook Politics: Economic Citizenship in Twentieth-Century America (Princeton, NJ, ). On anti–chain store taxes, see Richard C. Schragger, “The Anti–Chain Store Movement, Localist Ideology, and the Remnants of the Progressive Constitution, –,” Iowa Law Review  (Mar. ): –. See “How the States Now Stand on Price Maintenance” Chain Store Age  (Dec. ): , –; Godfrey Lebhar, “The Robinson-Patman Bill,” Chain Store Age  (July ): –; Willis Parker, “Chains Won Their Own Fight, Says Francisco” Chain Store Age  (Dec. ): –, on the defeat of the California chain store tax; Frank Landau, “Supreme Court Decision Opens Way To Extend Fair Trade Acts” Chain Store Age  (Jan. ): , –: Godfrey Lebhar, “As We See It” Chain Store Age  (Aug. ): , –, celebrating the ineffectiveness of the Robinson-Patman Act; Godfrey Lebhar, “As We See It,” Chain Store Age  (Sept. ): , –, arguing that grocery chain store private brands will circumvent the Tydings-Miller Act but also noting that this may not be the case in drug retailing, where nationally branded goods are more ubiquitous. Another legacy of the American fair trade movement has been state licensing laws. Although these laws do not sanction price fixing they do protect certain professional classes and retail establishments. See Aaron Edlin and Rebecca Haw, “Cartels by Another Name: Should Licensed Occupations Face Antitrust Scrutiny?” University of Pennsylvania Law Review  (Apr. ): –; Rebecca Haw Allensworth, “The New Antitrust Federalism,” Virginia Law Review  (Oct. ): –. Hovenkamp, Opening of American Law, –. See, for example, George J. Stigler, The Theory of Competitive Price (London, ); Aaron Director and Edward H. Levi, “Law and the Future: Trade Regulation,”

Managing Competition in the Great Depression



many of the studies the group produced to reach that conclusion showed that early New Deal policies prolonged the Depression through cartelization and output restrictions that constrained wages and consumer purchases. Arnold had helped set the stage for the Chicago School’s antitrust analysis with his emphasis on consumer-oriented harm in competition law – although he supported far more stringent merger guidelines and government interventions to limit market concentration than Chicago School law and economics would sanction. Thus Arnold’s legacy was twofold: On the one hand, he bolstered the Antitrust Division’s capacity for expert litigation and encouraged stringent antitrust enforcement, not against bigness per se but against concentrations and abuses of market power. On the other hand, he helped steer the country away from both the progressive and conservative populist regulations that had shielded small proprietors from market competition and preserved the antimonopoly movement’s concern with market power and social control. Nevertheless, in the end American consumers, through organized protests and individual purchasing choices,





Northwestern University Law Review  (): –. See also Robert Van Horn and Philip Mirowski, “The Rise of the Chicago School of Economics and the Birth of Neoliberalism,” in The Road from Mont Pelerin, eds. Philip Mirowski and Dieter Plehwe (Cambridge, MA, ). Today the Chicago School of Law and Economics supports private RPM agreements as a permissible vertical restraint. Arnold and other progressive legal realists drew their economic theory from Edward Chamberlain and Joan Robinson’s writing on “monopolistic competition,” which argued that rather than existing in a state of perfect competition or perfect monopoly, most industries were controlled by only a few firms that competed through product differentiation, not price. See Edward Chamberlain, The Theory of Monopolistic Competition (Cambridge, MA, ); Joan Robinson, The Economics of Imperfect Competition (London, ). See also Rudolph Peritz, Competition Policy in America (New York, ), –. Following the TNEC’s recommendations, in  Congress enacted the Celler-Kefauver Act, which required advance notice of mergers. The Supreme Court upheld the law and its stringent requirements in Brown Shoe Co. v. United States,  U.S.  (), prohibiting the merger of two shoe companies that together would have comprised only five percent of retail shoe sales in the U.S. market. The Court relied on geographical markets as well as product markets, holding that in some cities, the merger companies would reduce effective competition. See also United States v. Philadelphia National Bank,  U.S.  (), striking down the merger of the second and third largest commercial banks in Philadelphia and establishing the presumption of illegality for mergers that significantly increase market concentration; United States v. Von’s Grocery Co.,  U.S. ,  (), striking down the merger of two grocery store chains in Los Angeles that together would have comprised only . percent market share.



American Fair Trade

abandoned populist antimonopoly sentiment – and only on rare occasions have they looked back. *** New Deal experiments in economic planning and state corporatism significantly empowered both public administrative agencies and private business associations. Yet in the end, those attempts at partnerships in planning failed, leaving in their wake formidable rivals. Perhaps ironically, the national successes of the fair trade movement ultimately weakened its cause. Organizationally, by incorporating large-scale manufacturers and retailers into that movement, the cooperative ethos of the fair trade agenda became distended and discredited. Just as large-scale manufacturers used the NIRA to suppress output and raise prices, while often resisting wage increases or union organization, chain store retailers co-opted the language of fair trade to protect their own bottom line during the early s. The rejection of NIRA state corporatism called into question the liberal corporatism that Brandeis had promoted as a counterbalance to consolidation and concentration. Although trade associations remained formidable organizational tools for standards setting, information sharing, and collective representation, they did not retain a privileged position within the federal government. Instead, the Business Advisory Council at the Department of Commerce survived and thrived, a living legacy of industrial leaders’ pursuit of business in government. The proponents of fair trade networks won legislative protections that proved weak and largely ineffective, leaving the retail druggists’ and grocers’ associations dependent upon their own in-group organizational strength and enforcement powers. They had spent their political capital – and the democratic populism on the left and right that had once sustained both a robust antimonopoly movement and the fair trade campaign became superseded by expert administrative bodies that increasingly produced dry rulings written in technical legalese and based on narrow economic reasoning.



Jacobs, Pocketbook Politics. On the end of experimentation in antitrust policy and law, see Brinkley, End of Reform; Richard Hofstadter, The Age of Reform: From Bryan to F.D.R. (New York, ). Congress repealed the Miller-Tydings Act in , during an era of inflation.

Conclusion Varieties of Competition and Corporatism in American Governance

The history of American capitalism is a story of contested truths and competing visions. There are always winners and losers and, perhaps too often, the supposed losers are dismissed as having had blatantly wrongheaded ideas that impeded technological or economic progress. Certainly, this argument has been levied against those independent proprietors and their advocates who challenged the rise of corporate capitalism and questioned the wisdom of neoclassical law and economics in the early twentieth century. But the history of American capitalism is composed of more than the drive toward economic efficiency and technological advancement. The organizational and political strength of populist groups – farmers, small proprietors, and laborers – and their moral appeal shaped and limited the contours of American governance through dissent against, as well as collaboration with, their rivals. At one time, antitrust debates over the meaning of fair competition, fair prices, and equitable distribution played a central role in American political debate and institutional development. This is not to lament the passing of some bygone era of simpler economic times or simpler economic models that made antitrust debates more accessible to the public than they are today. Instead – as American Fair Trade seeks to demonstrate – in the fifty years before World War II, reasonable people disagreed about the legitimate purposes and desirable effects of competition policy because there were multiple antitrust models and competing visions for modern industrial organization. A great deal was up for grabs – determining how firms should compete in a modern industrial economy would alter not only business organizations but also the structure of the regulatory state. 



American Fair Trade

Lacking a consensus economic model that dictated public policy, various interest groups, academics, and regulators implemented experiments in associational corporatism through the s. These experiments were not aberrations, nor were they merely naked attempts to capture institutional, economic, or political power. Rather, these organizational experiments in business and government defined this era of American capitalism. The fair trade story, as it fits within that fifty-year antimonopoly movement, demonstrates the widespread appeal of harnessing collectivist organization to guide public policy. Corporatist interventions in the market coincided with new theories of fair competition and technocratic management in the first great law and economics movement – theories that challenged classical and neoclassical ideologies and facilitated the development of both administrative governance and private business associations. The purpose of American Fair Trade is not to revive or defend the corporatist visions for American capitalism but rather to demonstrate how contemporaneous actors took seriously the associational model of public and private governance and defended it as a viable strategy for achieving economic growth, distributional equity, and macroeconomic planning by the state. Thus the first law and economics movement, as it was deployed by advocates for associational governance, altered the trajectories of the administrative state, antitrust law, and even progressive economic planning. In the late nineteenth century, populist preferences for maintaining local control and independent ownership prevailed over those of classical economists whose economic determinism more readily accepted new forms of business organization and conduct. That populist fervor animated the antimonopoly movement that propelled the passage of the Sherman Antitrust Act of , a federal law prohibiting anticompetitive conduct and requiring state investigations into the trusts. Yet just as Congress had remained divided on the applications of the new law, the Court floundered as it tried to create clear rules and norms. Even when intending to protect “small dealers and worthy men,” the Court, in fact, incentivized further consolidation and integration. But these defeats neither settled antitrust law nor extinguished antimonopoly sentiment. The election of  exemplified the extent to which divergent interpretations of antimonopoly policy informed clashing ideas of modern American capitalism. In that four-way  

 Stat. , § . The act prohibited any “restraint of trade” in interstate commerce and created treble damages and criminal penalties. United States v. Trans-Missouri Freight Ass’n,  U.S. ,  ().

Varieties of Competition and Corporatism



race Eugene Debs argued for nationalization of the trusts, Theodore Roosevelt embraced the rise of the trusts but proposed to regulate them through the executive branch, incumbent William Taft defended the courts rather than endorse administrative agencies, and Woodrow Wilson, who secured the victory for the Democratic Party, campaigned to regulate all business competition through an expert trade commission. Wilson’s victory did not end the debate about competition policy and American capitalism, but it set the stage for subsequent administrative reforms as well as New Deal–era experiments in coordinating competitive markets. Passage of the Federal Trade Commission (FTC) Act in  helped transform populist preferences for a decentralized economic and political order into concrete public policy in the form of bureaucratic statebuilding. Louis Brandeis, an architect of the FTC Act, envisioned federal regulators monitoring and enforcing standards of fair competition that privileged independent proprietors, particularly entrepreneurial manufacturers. Thus the businesses and trade associations that had worked to liberalize strict antitrust laws (expanding the rule of reason) through litigation and lobbying found potential partners in the FTC. For Brandeis, fair trade could be achieved through the use of long-term vertical contracts to control brand-name marketing and pricing, as well as association-based trade rules to manage market competition, even when those affected prices. He believed that limiting the permissible channels of competition, prohibiting sales below cost, and requiring uniform cost accounting could mitigate cutthroat competition. These public and private initiatives facilitated distribution networks that could rival largescale corporate enterprises and stave off economic consolidation, protecting independent proprietors and ensuring market competition that would spur entrepreneurship and innovation while preserving a decentralized economic and political order. However, this could not happen without assistance from the state. These initiatives required the FTC to police business agreements and associations to prevent monopolization, cartelization, and overt price fixing, even though he argued that market-based competition between brands would negate these problems. In short, he believed that the associative state provided consumer benefits through both product innovation and open, or transparent, prices, as well as procompetitive economic and political benefits. Ultimately, for Brandeis the possibility that corporate capitalists could capture both market and political power posed a greater threat to liberal democracy than the cooperative (bordering on collusive) agreements among diffuse independents and associations.



American Fair Trade

Brandeis’s public–private prescription for fair competition attracted the attention of other regulators interested in using such initiatives to rationalize industrial production, distribution, and sales. As secretary of commerce during the s, Herbert Hoover adapted Brandeis’s strategy of regulated competition to further his own agenda of standardizing products, reducing economic waste, and improving efficiencies. His influence spread over FTC trade practice conferences, running into direct conflict with Department of Justice antitrust lawyers, but eventually his program won significant victories in the Supreme Court. By  antitrust law acknowledged the permissibility of trade association information sharing on output, bids, contracts, and prices, especially when sanctioned by federal administrative agencies. To be clear, the Court never approved overt price fixing or cartels, but the Court’s previous dichotomy between market competition and corporate hierarchy substantially weakened over the course of the s, leading to greater associational efforts by private businesses working in collaboration with government. American Fair Trade argues that an alternative vision for modern American capitalism emerged from populist antimonopoly sentiment and that, through the s, this vision adopted a progressive regulatory agenda that simultaneously transformed business and government. The private businesses and trade associations that profited from firmlevel fair trade contracts and association-based rules of fair competition pursued partnerships with federal regulatory agencies in order to protect and advance their own position in the marketplace. But these partnerships also contributed to the growth (in both structure and capacity) of the administrative agencies that monitored private contracts and associations and that helped promulgate these new rules to manage competitive markets. A symbiotic relationship developed. Policing competition or rationalizing market activities required up-todate market information at both the micro and the macro levels – information that trade associations collected, disseminated, and used for their own economic advantage. The sectoral approach to understanding macroeconomic phenomena then proved popular among administrators who were attempting to manage industrial organization and competitive markets. The partnerships established between trade associations and the administrative state in the s not only facilitated a continued effort to liberalize antitrust’s rule of reason, expanding the permissible limits of information sharing and collusive behavior, but also informed policy responses to the Great Depression. President Franklin Roosevelt’s first

Varieties of Competition and Corporatism



administration pursued experiments in economic planning that adapted existing public–private approaches to industry-wide rationalization programs and information gathering. Throughout their discussions about economic planning to reflate prices and wages, the administration consulted a spectrum of proposals on the left and right. Drawing from the emergent field of social economic planning in Europe and America, institutional economists and legal realists crafted administrative agencies to control the functions of the market, with government acting both to facilitate and to restrain business. The U.S. Chamber of Commerce, on the other hand, doubled down on its support for association-led managed competition, calling for a greater advisory role for business within government. Yet both sides agreed on the need for mandatory state controls on production and prices. In response to these policy options, the United States briefly experimented with state corporatism, a system in which the government coordinated markets by mandating that industries organize into associations that fixed the rules of competition. Although these new regulatory efforts, such as the National Industrial Recovery Act (NIRA), built on existing public and private initiatives to manage market competition, the First New Deal also created complex, incongruous, and often antagonistic relationships – both between firms and among administrators. Nevertheless, in hindsight it is surprising neither that New Deal administrators and business leaders enacted such measures nor that such policies failed to achieve their stated goals – particularly given both the Fed’s decisions to tighten monetary policy and the institutional constraints imposed by constitutional federalism. The failure of the First New Deal’s experiment in industrial state corporatism – both at law and in the public mind – led to the reconfiguration of the rules, institutional structures, and ideas of federal competition policy. However, the New Deal’s overarching promise to identify and implement macroeconomic tools to manage the economy remained its guiding principle, and the legacy of public–private collaboration on information-gathering and policymaking continued to animate federaland state-level interventions into the economy. The National Resources Planning Board (NRPB), for example, continued many of the centralized controls used by the National Recovery Administration (NRA). Established in , the board brought together leading social scientists, such as Charles Merriam and Wesley C. Mitchell, with long-time advocates of planning, such as Frederic Delano. Henry Dennison, a businessman and proponent of scientific management, joined the board in . NRPB regulations, however, were limited to the management of natural

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American Fair Trade

resources and regulated monopolies. At the state level, the “little NRAs” continued to regulate prices and wages in ordinary consumer industries subject to state police powers. Thus, even as the Supreme Court struck down the NIRA, the momentum for macroeconomic management hardly slowed. As President Roosevelt embraced deficit-financed spending after the recession of  and subsequently emphasized war preparedness, consumer and then government spending became a top priority of public and private advisors. By lifting the mandatory controls that affected prices and production, federal policymakers returned to an ad hoc approach to industrial regulation. This pluralistic method of organizing a liberal market economy relied on various interest groups vying for their own sectoral or firmspecific interests. Although this shift did not sever the intimate relationships between business and government, it did reorder them. Independent proprietors and trade associations pursued piecemeal legislation and litigation, while CEOs in peak industries (aluminum, steel, auto, oil, and chemicals) retained their positions in government on the Commerce Department’s Business Advisory Council. Ironically, those same fair trade advocates who had mobilized to resist industrial concentration by partnering with government agencies had in fact eased the way for corporate capitalists to assume an influential role within government. While in





Charles Merriam, “The National Resources Planning Board; A Chapter in American Planning Experience,” American Political Science Review  (Dec. ): –. President Hoover’s  Recent Social Trends in the United States recommended the creation of such a board to act as a national advisory council to the president. That same year Harold Ickes, the head of the Public Works Administration, created the National Planning Board, from which President Roosevelt created the NRPB in . The NRPB worked with the secretaries from leading executive departments. Ibid., . See also National Resources Planning Board, The Structure of the American Economy, Part II: Toward Full Use of Resources (Washington, DC, ); Charles Maier, “The Politics of Productivity: Foundations of American International Economic Policy after World War II,” International Organization  (Oct. ): –; Alan Brinkley, “The National Resources Planning Board and the Reconstruction of Planning,” in The American Planning Tradition: Culture And Policy, ed. Robert Fishman (Washington, DC, ), –. In  top CEOs formed the Business Roundtable, the leading lobbying group for corporate interests. See Thomas Ferguson and Joel Rogers, “Knights of the Roundtable,” Nation, Dec. , , –; Mark Green and Andrew Buchsbaum, The Corporate Lobbies: Political Profiles of the Business Roundtable and the Chamber of Commerce (Washington, DC, ); Kim McQuaid, Big Business and Presidential Power: From FDR to Reagan (New York, ), –; David Vogel, Fluctuating Fortunes: The Political Power of Business in America (New York, ); Ralph Nader, The Big Boys: Power and Position in American Business (New York, ); Mark Mizruchi, The Structure of

Varieties of Competition and Corporatism



 Congress established the U.S. Small Business Administration (SBA), a government agency created to aid independent proprietors by improving access to capital and providing business counseling, it never intended to meet the previous era’s populist demands for the redistribution of wealth and power away from concentrated corporations. That New Deal experiment in coordinated capitalism had passed. Increasingly, Americans accepted business concentration if it produced lower prices and proved relatively accountable to government; antimonopoly sentiment faded from public debate. Antitrust law became the sole domain of legal experts and specialized economists. These elite academics, attorneys, and professional administrators recast antitrust in legal jargon and cost–benefit analyses inaccessible to the public. That shift from public debate to technocratic tinkering depoliticized antitrust policy and narrowed its purposes. By the s a new economic consensus had emerged that rejected state-led antitrust interventions in favor of a selfregulating marketplace. The new symbol of a robust market economy became the satisfied consumer with abundant cheap goods, not the activist policymaker, regulator, or populist who deigned to protect supposed market fairness. As the Department Justice moved away from monopolization prosecutions in antitrust, private litigants continued to shape antitrust law through narrow suits that pursed firm-specific self-interest. Perhaps the best independent proprietors could hope to achieve was to win approval of resale price maintenance contracts – what Brandeis had rebranded as fair trade back in . Only by litigating the economics of cost–benefit analysis could fair trade advocates demonstrate the consumer benefits of vertical contracts that controlled specialty production methods, dictated sales polices, and created retail networks. But in the Chicago School era of antitrust law and economics, fair trade was on the right – not the

 



Corporate Political Action: Interfirm Relations and the Their Consequences (Cambridge, MA, ); Benjamin Waterhouse, Lobbying America: The Politics of Business from Nixon to NAFTA (Princeton, NJ, ). Jonathan Bean, Beyond the Broker State: Federal Policies toward Small Business, – (Chapel Hill, NC, ). See Herbert Hovenkamp, “United States Competition Policy in Crisis: –,” Minnesota Law Review ,  (): –, explaining that antitrust policy since the s has been preoccupied with anticompetitive practices in product-differentiated markets. These resale price maintenance contracts not only stipulated retail prices, but also involved service agreements and quality assurances and required advertising displays and demonstrations. With brand-name products, manufacturers wanted to discourage discount



American Fair Trade

progressive left – because it functioned through private contracts, not regulatory governance. Nevertheless, American fair trade – similar to its later twentieth-century counterpart in international trade – retained both its market orientation (relying on consumer choice) and its dependency on legal structures to legitimize and enforce the terms of the bargain. Americans, it seems, made a trade-off between equitable production and labor standards on the one hand and guaranteed low prices and high consumption on the other. That trade-off emerged over a long period of time, not simply with the passage of any particular law or the ruling of any one court case. The choice was contested and contentious, as it is today. Indeed today’s debates about the meaning of market fairness and fair prices still revolve around these old tensions between the social control of business and the benefits of creative destruction; between equity protecting the weak and law enshrining predictable rules; and between populism representing democratic demands and orthodox economics promoting open competition. What’s intriguing about the American fair trade movement is how it cut across each of these conflicting impulses within the American regulatory tradition, exemplifying and at times resolving these contradictions. Between the s and the s, new institutions arose to address those tensions. American Fair Trade has focused on the co-evolution of private business associations and federal administrative agencies that together shaped the rules of American capitalism. First on a sectoral basis and then through multi-sector organizations, such as the U.S. Chamber of Commerce, businesspeople promulgated rules to manage competition in what was a relatively unregulated capitalist market. Certainly, these interfirm management tools – which often sought to control production,

pricing while developing a distribution or retail network. RPM contracts diminished intrabrand price competition but enhanced intrabrand service competition. Among different brands, however, these contracts could potentially augment both price and service competition. Lester G. Tesler, “Why Should Manufacturers Want Fair Trade?” Journal of Law & Economics ,  (): –. See also Continental T.V., Inc. v. GTE Sylvania, Inc.,  U.S.  (), holding that interbrand competition provides a significant protection against intrabrand market power because consumers have the ability to select another brand name; Business Electronics v. Sharp Electronics,  U.S.  (), holding that vertical restraints might enhance interbrand competition by facilitating efficient distribution and brand development; Leegin Creative Leather Products, Inc. v. PSKS, Inc.,  U.S.  (), overruling the Dr. Miles case, which had created the per se prohibition against resale price maintenance. See also Howard P. Marvel and Stephen McCafferty, “The Welfare Effects of Resale Price Maintenance,” Journal of Law & Economics ,  (): –.

Varieties of Competition and Corporatism



prices, and market entry – served the self-interest of businesses. Yet, they also required legal sanction and fostered the growth of the administrative state as a partner with business in facilitating economic growth through projects in standardization, innovation, and labor relations. Until the New Deal’s experiments in a coordinated market economy, neither the administrative state nor the judiciary intended to promote cartels or stifle industrial development by necessarily favoring small businesses. Instead, both private associations and public agencies helped mitigate the political strife of an industrializing capitalist economy by cordoning off certain aspects of political economy from democratic discontent. Ultimately, the fair trade movement helped render American capitalism into a plurality of fractious associations. Ironically, that movement also opened American politics to capture by those peak corporate interests that effectively steered state development strategies toward supposedly neutral and certainly orthodox economic principles. Advocates for fair competition or fair prices – on both the left and the right – have since appealed to consumer choice through marketing campaigns and fair trade labeling generated by firms, associations, and government bodies. That emphasis on individualism and consumer choice acting as the litmus test for market fairness, in turn, has informed macroeconomic policymaking and the depoliticization of antitrust. The American fair trade movement represented both the promise and the contradiction of the liberal-democratic tradition. As Ida Tarbell, Albion Tourgée, and Louis Brandeis had each lamented, the new political economy of industrialization and centralization had reordered not only economic power and entrepreneurial opportunities but also political representation. They tapped into deep-seated fears that market concentration reduced competition, discouraged independent business, and displaced local autonomy. That concentrated economic power also threatened to seize undue political influence. Antimonopolists thus called for both private and public regulation to ensure market fairness and political justice. Yet despite their concerns, industrialization and market concentration offered many benefits – efficiency gains in production, distribution, and retailing benefited both consumers and workers with lower prices. In the roaring twenties and the postwar fifties, American consumers felt liberated by the abundance of cheap goods and rising living standards. Ultimately, market concentration had both fostered and delimited economic independence, which had been long been recognized as a necessary but not sufficient condition of a thriving liberal democracy. In turn, rival meanings of economic independence have



American Fair Trade

remained a perennial tension within American politics – on the one hand driving a consumer-oriented demand for low prices, market efficiencies, and self-regulating markets, and on the other hand motivating a citizenship-focused preference for self-ownership, the social control of business, and rules of fair competition.



For the most recent iteration of this argument, see Jason Furman, “Beyond Antitrust: The Role of Competition Policy in Promoting Inclusive Growth,” presented to the Searle Center Conference on Antitrust Economics and Competition Policy (Sept, , ), available online at https://obamawhitehouse.archives.gov/administration/eop/cea. Furman was the chairman of President Obama’s Council of Economic Advisers. See also Council of Economic Advisers, “Benefits of Competition and Indicators of Market Power,” Council of Economic Advisers Issue Brief (Apr. ), available online at https://obamawhite house.archives.gov/administration/eop/cea.

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Case Index

A. B. Dick Co. v. Henry,  F.  (), nn– A. L. A. Schechter Poultry Corp. v. United States,  U.S.  (), n, nn–, nn– Addyston Pipe & Steel Co. v. United States,  U.S.  (), n, n, n, , n, n Adkins v. Children’s Hospital,  U. S.  (), n, n Albert Herriman et al. v. Stuart Menzies et al.,  Cal.  (), n, nn–, n, n Alger v. Thacher,  Pick.  (), n Alger v. Thacher,  Mass. ( Pick.)  (), n American Column and Lumber Co. v. U.S.,  U.S.  ()., n, n, n, n American Medical Association v. United States,  U.S.  (), n Appalachian Coals Inc. v. United States,  U.S.  (), n Automatic Pencil Sharpener Co. v. Goldsmith Bros.,  F.  (), n Bank of Augusta v. Earle,  U.S.  (), n, n Bauer v. O’Donnell,  U.S.  (), n

Beal v. Chase,  Mich.  (), n, nn– Beard v. Dennis,  Ind.  (), n Block v. Hirsh,  U. S.  (), n Board of Trade of the City of Chicago et al. v. United States,  U.S.  (), n Board of Trade of the City of Chicago et al. v. United States,  U.S.  (), n, n Bowling v. Taylor,  F.  (), n, n Brown v. Maryland,  U.S.  (), n Brown Shoe Co. v. United States,  U.S.  (), n Business Electronics v. Sharp Electronics,  U.S.  (), n California Cured Fruit Association v. F. E. Stelling et al.,  Cal.  (), n California ex rel. Attorney Gen. v. American Sugar Ref. Co. (Cal. Super. Ct.), n Cement Manufacturers’ Protective Association v. United States,  U.S.  (), n, nn–, n Champion v. Ames,  U.S.  (), n Charles P. Grogan v. H. G. Chaffee,  Cal.  (), nn–, nn–, n





Case Index

Charles River Bridge v. Warren Bridge,  U.S.  (), n Chicago Gas Co. v. People’s Gas Co.,  Ill.  (), n Chicago Gaslight & Coke Co. v. People’s Gaslight & Coke Co.,  N.E.  (), n Cline v. Frink Dairy Co.,  U.S.  (), n Collins v. Locke, L. R.  App. Cas. , n Connolly v. Union Sewer Pipe Co.,  U.S.  (), n Continental T.V., Inc. v. GTE Sylvania, Inc.,  U.S.  (), n Craft v. McConoughy,  Ill.  (), n Dartmouth College v. Woodward  U.S.  (), n Davis v. Richardson,  Bay.  (), n De Witt Wire-Cloth Co. v. New Jersey WireCloth Co.,  N.Y.S.  (), n Diamond Match Co. v. Roeber,  N.E.  (), n Diamond Match Co. v. Roeber  N.Y.  (), n, n, n Distilling & Cattle Feeding Co. v. People,  N.E.  (), n Dr. Miles Medical Co. v. Goldthwaite,  F.  (C.C. Mass. ), n Dr. Miles Medical Co. v. Jaynes Drug Co.,  F.  (C.C. Mass. ), n, n, nn– Dr. Miles Medical Co. v. Park & Sons, Inc.,  F.  (), n Dr. Miles Medical Co. v. Park & Sons, Inc.,  U.S.  (), n, n, n, nn–, n, n, n, n, n, n Dr. Miles Medical Co. v. Platt, World’s Dispensary Medical Ass’n v. Same, Hartman v. Same,  F.  (C.C. Ill. ), n E. Bement & Sons v. National Harrow Co.,  U.S.  (), n Edison Co. v. Smith Manufacturing Co.,  F.  (), n

Elkhart Paper Co. v. Fulkerson,  Ind. App. ,  N.E.  (), n Elliman Sons & Co. v. Carrington & Sons ()  Ch. Div. , n Federal Trade Commission v. Gratz,  U.S.  (), n, n, n Federal Trade Commission v. Ralamdam Co.,  U.S.  (), n Fisher Flouring Mills Co. v. Swenson,  Wash.  (), n, n Fowle v. Park,  U.S.  (), , n, n, n, n George Van Camp & Sons Co. v. American Can Co.,  U.S.  (), n, n Ghirardelli v. Hunsicker,  Cal.  (), n, n Gibbons v. Ogden,  U.S.  (), n, n Gibbs v. Consolidated Gas Co.,  U.S.  (), n Goulding v. Skinner,  Pick.  (), n Hammer v. Dagenhart,  U.S.  (), n Hartford-Empire Co. v. United States,  U.S.  (), n Hartford-Empire Co. v. United States,  U.S.  (), n Hearn v. Griffin,  Chitty  (K.B., ), n Henry v. A. B. Dick,  U.S.  (), n Herkimer v. Potter,  N. Y. Supp.  (Sup. Ct. ), n Hills Bros. v. Federal Trade Commission,  F.  (), n, nn–, nn–, nn–, n Horner v. Graves,  Bingham  (), n Horner v. Graves,  Eng. Rep. ,  (), n In re Greene,  F.  (), nn–, n In re Park,  F.  (C.C. Ohio ), n

Case Index Jandorf v. Incorporated Association of Manufacturers of Branded Articles, Berlin Geschaftsummer ., .,  VI. . (), n Jayne v. Loder,  F.  (), n, n, n John D. Park & Sons Co. v. Hartman,  F.  (), n John D. Park & Sons v. National Wholesale Druggists’ Ass’n,  N.E.  (), n Jones & Laughlin Steel Corp. v. United States,  U.S.  (), n Kidd v. Pearson,  U.S.  (), n Laidlaw v. Organ,  U.S.  (), n Leegin Creative Leather Products, Inc. v. PSKS, Inc.,  U.S.  (), n Leslie v. Lorillard,  N.Y.  (), nn–, n Liebermann v. Van De Carr,  U. S.  (), n Lodes v. New York,  N. Y.  (), n Loewe v. Lawlor,  U.S.  (), n, nn–, n Long v. Towl,  Mo.  (), n Louisiana v. American Cotton Oil Trust,  La. Ann.  (), n Maple Flooring Manufacturers’ Association v. United States,  U.S.  (), n, nn–, n, n, n, n Max Factor & Co. and Sales Builders, Inc. v. Kunsman,  Cal. d  (), n Max Factor & Co. and Sales Builders, Inc. v. Kunsman,  Cal.  (), n McFarland v. Newman,  Watts  (), n Mitchel v. Reynolds,  P. Wms.  (), n Mitchel v. Reynolds,  Eng. Rep.  (), nn–, n,  Montague & Co. v. Lowry,  U.S.  (), n Morris Coal Co. v. Coal Co.,  Pa , n



Morse Twist Drill & Machine Co. v. Morse,  Mass.  (), n Motion Picture Patents Co. v. Universal Film Mfg. Co.,  U.S.  (), n Munn v. Illinois,  U.S.  (), n, n, , n National Phonograph Co. v. Edison-Bell Co.,  Ch. Div.  (), n National Phonograph Co. v. Schlegel,  F.  (), n Nebbia v. New York,  U.S.  (), n, n, nn–, nn– New Jersey Patent Co. v. Weinberg,  F.  (), n New State Ice Co. v. Liebmann,  U.S.  (), n New York v. North River Sugar Refining Company,  N.Y.  (), n, nn–, nn–, nn–, nn– Nobles v. Bates,  Cow.  (), n Northern Securities Co. v. United States,  U.S.  (), n Northern Securities Co. v. United States,  U.S.  (), n, n Old Dearborn Distributing Co. v. SeagramDistillers Corporation,  U.S.  (), n, nn– Ontario etc. Co. v. Merchants etc. Co.,  Grant. U. C.  (), n Oregon Steam Navigation Co. v. Winsor,  U.S.  (), n Palmer v. Stebbins,  Pick.  (), n, n Panama Refining Co. v. Ryan,  U.S.  (), n Park & Sons Co. v. Hartman,  F.  (), n Park v. Hartman,  F.  (Cir. Ct. App. ), n Park v. National Wholesale Druggists’ Ass’n,  N.Y.  (), n, nn– Paul v. Virginia,  U.S.  (), n People ex rel. Peabody v. Chicago Gas Trust Co.,  Ill.  (), n



Case Index

People v. Chicago Gas Trust Co.,  Ill.  (), n People v. North River Sugar Ref. Co.,  N.Y.  (), n, n People v. Sacramento Butchers’ Association,  Cal. App.  (), n Pierce v. Woodward,  Pick.  (), n Plessy v. Ferguson,  U.S.  (),  Pollock v. Farmers’ Loan & Trust Co.,  U.S.  (), n Powell v. Pennsylvania,  U.S.  (), n Presbury v. Fisher,  Mo.  (), n Pyroil Sales Co. v. the Pep Boys, Manny, Moe and Jack of California,  U.S.  (), n Radice v. New York,  U.S.  (), n Radio Commission v. Nelson Brothers Co.,  U.S.  (), n Raymond v. Leavitt,  N.W.  (), n Ribnik v. McBride,  U. S.  (), n Richardson v. Buhl,  Mich.  (), n Robbins v. Shelby County Taxing District,  U.S.  (), n San Diego Water Co. v. San Diego Flume Co.,  Cal.  (), n Santa Clara County v. Southern Pacific Railroad,  U.S.  (), , n Santa Clara Valley Mill & Lumber Co. v. Hayes,  P.  (), n Sawyer v. Hoag,  U.S.  (), n Seagram v. Fall, Dec. , . n Skrainka v. Scharringhausen,  Mo. App.  (), n, n, nn–, n, n, n, nn– Slaughterhouse Cases,  U.S.  (), n Spegle v. Board of Fire Underwriters,  Cal. d  (), n

Standard Oil Co. of New Jersey v. United States,  U.S.  (), n, n Standard Oil Co. of New Jersey v. United States,  U.S.  (), n State ex rel. Attorney Gen. v. Standard Oil Co.,  Ohio St.  (), n State v. American Cotton Oil Trust,  La. Ann.  (), n State v. Nebraska Distilling Co.,  Neb.  (), n State v. Nebraska Distilling Co.,  N.W.  (), n State v. Standard Oil Co.,  N.E.  (), n State v. Standard Oil Co.,  Ohio St.  (), n Stearns v. Barrett,  Pick.  (), n Swift & Co. v. United States,  U.S.  (), n, n, n Tennessee v. Standard Oil Co. of Kentucky,  S.W.  (), nn– The Fair v. Dover Manufacturing Co.,  F.  (), n Tigner v. Texas,  U.S.  (), n Trustees of Dartmouth College v. Woodward,  US  (), n Tyson & Bro. v. Banton,  U. S.  (), n U.S. Consolidated Seeded Raisin Co. v. Griffin & Skelley Co.,  F.  (), n United States v. Addyston Pipe & Steel Co.,  F.  (), n United States v. American Linseed Oil Co.,  U.S.  (), n, n United States v. American Sugar Refining Co.,  U.S.  (), n United States v. American Tobacco Co.,  U.S.  (), n United States v. Butler,  U.S.  (), n United States v. Colgate & Co.,  U.S.  (), n, n United States v. E. C. Knight Co.,  U.S.  (), n, n, n, n

Case Index United States v. Jellico Mt. Coal & Coke Co.,  F.  (), n United States v. Joint Traffic Association,  U.S.  (), , n United States v. Philadelphia National Bank,  U.S.  (), n United States v. S. E. Underwriters Association,  U.S.  (), n United States v. Socony-Vacuum,  U.S.  (), n, n United States v. Trans-Missouri Freight Association,  U.S.  (), , nn–, n, n, n, n, n United States v. Trenton Potteries Co.,  U.S.  (), n United States v. U.S. Steel,  F.  (), n United States v. Von’s Grocery Co.,  U.S.  (), n Victor Talking Machine Co. v. The Fair,  F.  (), n, n



Wabash, St. Louis & Pacific Railway Company v. Illinois,  U.S.  (), n Wells Richardson v. Abraham,  F.  (C.C. N.Y. ), n Welton v. Missouri,  U.S.  (), n Welton v. Missouri,  U.S.  (), n West Coast Hotel v. Parrish,  U.S.  (), n, n Wickard v. Filburn,  U.S.  (), n Williams v. Standard Oil Co.,  U. S.  (), n Wilson v. New,  U. S.  (), n Winchester Repeating Arms Co. v. Olmstead,  F.  (), n Wintz v. Vogt,  La. An.  (), n Wolff Packing Co. v. Court of Industrial Relations,  U. S.  (), n Wood v. Dummer,  F. Cas.  (), n Wooden-Ware Association v. Starkey,  Mich.  (), n

Subject Index

A. B. Dick Company, – academic community. See also institutionalism approach to business practices, –,  Chicago School of Law and Economics, n, n,  education, , , ,  stabilization proposals, – USCC statistical institute, – waning support for fair trade,  accounting systems. See uniform cost accounting Addyston Pipe & Steel Co., n, – administrative state. See also associational corporatism; regulated competition fair trade legacy, –,  “fourth branch,” n growth of, –, – influence of,  postwar rise,  Advisory Committee on Statistics (Dept. of Commerce),  AEA. ,  See American Economic Association (AEA) AFL.  See American Federation of Labor (AFL) AFTL. See American Fair Trade League (AFTL) Agricultural Adjustment Act (), , n Agricultural Adjustment Act (), n

Agricultural Marketing Act (),  agriculture industry antimonopoly movement, – central planning under First New Deal, – cooperatives, ,  corn processing, n early cooperative efforts,  exception to Keynesian Second New Deal policies, n farmers’ cooperatives, , – Federal Farm Board, ,  price depression, , –, , – state-level price controls, n, –, n subsidies,  Alka-Seltzer,  alternative track, , See also associational corporatism American Column and Lumber Company, – American Economic Association (AEA), ,  American Engineering Council, n American Fair Trade League (AFTL) Brandeis’s leadership,  economic reform movement,  formation, , , – goals, –,  members, – public-private regulatory cooperation, –





Subject Index

American Fair Trade League (AFTL) (cont.) support of Stevens bill,  USCC collaboration, – wartime collaboration with Chamber,  American Federation of Labor (AFL),  American Hardwood Manufacturers’ Association, – American Liberty League,  American Linseed Oil Company, n American Pharmaceutical Association (APhA), , , , , , See also pharmaceutical industry American political development, defined, n American Relief Administration,  American Tobacco Co.,  ancillary restraints, , , , See also restraint of trade Anderson, Sydney,  antimonopoly movement. See also California fair trade movement; public opinion; Sherman Antitrust Act () administrative state legacy,  against New Deal, , – classical definitions of monopoly, – contributions, – criticisms of classical economics, – depoliticization, – overview, – plutocracy, –,  public attention to prosecutions,  roots in growing inequality,  Second New Deal prosecutions, – shift in focus to influential market share,  Antitrust Division, Dept. of Justice, n, –, n, nn– antitrust law. See also Supreme Court, U.S.; specific legislation chain store advantages, – concentrations of capital,  consumer welfare, n corporate liberalism, n federal antitrust jurisprudence within states, – interagency tensions,  private litigation,  state authority, –, , – trade practice protections, , –, –

APhA (American Pharmaceutical Association), , , , , , See also pharmaceutical industry Armand Company,  Arnold, Thurman, n, , , n artisanal producers. See also independent proprietors cooperative associations, , – printing industry,  technological unemployment, n, , , n associational corporatism. See also California fair trade movement; institutionalism; regulated competition; trade associations adaptation of Brandeisian regulated competition, –, ,  coordination failures, –, n definition, n emergence as middle way, – expansion of trade associations, – Hoover’s dedication to, – lack of federal police powers, –, ,  lack of government funding, , n legacy, , , – management of competitive markets,  New Deal expansion of,  postwar development, –,  public interest, – regulation of,  relational contracts, n resistance to managerial capitalism, – rise of, – unemployment conference, – USCC support, –,  voluntary standards, –,  Association of Maple Flooring Manufacturers, ,  associative governance,  Austria, n Ayer, N. W.,  BAC (Business Advisory Council, Dept. of Commerce), , –, n,  Balogh, Brian,  banking panics, n, –, n Barnes, Julius, ,  Bartlett-Bacon bill,  Baruch, Bernard, ,  batch and bundle production methods, n, 

Subject Index Beach, Curtis,  Beardsley, Albert, , –, , –, ,  Beardsley, Havilah,  Bed Rock Drug Store,  Beef Trust, n behavioralism,  below-cost pricing. See also price fixing definition, n FTC trade practice conferences, , , , ,  by large retailers, – by pineboards, ,  prohibitions, , –, n resale price maintenance as protection,  Robinson-Patman Act, , ,  ruinous competition, –, ,  Benet, Christie,  Benton, Austin C., – Berk, Gerald, ,  Black, Hugo,  blacklisting,  Black Thursday. See also Great Depression Black Tuesday, , See also Great Depression Blue Eagle campaign, , n,  boom-bust cycles, –, – Borah, William E., n Borden’s Farm Products Company, n Brains Trust, – Brandeis, Louis. See also regulated competition AFTL formation, ,  antitrust reform, , –,  European competition policies, – fair competition definition,  FTC creation, , –, , ,  industrial democracy, –,  interstate trade commission, , –,  price fixing defense, – producer cooperatives,  relational contracts,  role in Wilson’s administration, – “rule of reason” expansion, , , – Stevens bill, –, n Brandeisian system. See regulated competition



brand-name goodwill, –, –, , , – Brindell, Robert P., n Bronfman, Samuel,  Brookings, Robert,  Brunswig, L. N., – Bryan, William Jennings,  Buckingham, George T.,  Bureau of Labor Statistics, U.S.,  Burns, A. R.,  Business Advisory Council, Dept. of Commerce (BAC), , –, n,  business cycles, –, – Business Cycles (Mitchell),  Butler, Pierce, n CAB (Consumer Advisory Board), – California Fair Trade Act (), –, –, –,  California fair trade movement codes of fair competition,  federal antitrust jurisprudence, – federalism as opportunity for, – Gleason fair trade campaign, – information-sharing problems, – organization of pharmaceutical associations, – overview,  police powers, – price reporting, –, n price stabilization efforts,  public interest regulation, – specialty products associations, – support of NRA, – Supreme Court validation of regulation,  California Pharmaceutical Association (CPhA) consolidation,  Fair Trade Committee, , – Gleason as president,  information-sharing needs,  Philip Survey, – price plans, – California State Board of Pharmacy,  Campbell, James V.,  capitalism. See specific schools



Subject Index

capitalism, modern American, –, nn–, – Capper-Volstead Act (), n Carnegie, Andrew,  cartels, , , n, , , – Cartwright Antitrust Act (), n, , n caveat emptor doctrine, , –, nn–,  cement industry, – Cement Manufacturers’ Protective Association, – Chaffee, H. P., – Chain Store Age (journal),  chain stores anti-fair trade campaigns,  associationalism as response to, –,  business model, – challenge to proprietary system, – competition from,  FTC investigation, n,  growth, n impact on food prices,  takeover of fair trade agenda,  Chamber of Commerce (USCC), U.S. AFTL collaboration, – associational corporatism, –, – First New Deal, –, – government support of collective action,  Great Depression, –, –, – institutionalism, n intermediary role, ,  labor relations, – “new competition,” – quality standards support, – statistical institute, – trade practice conferences, , –, – uniform cost accounting, –, –, – World War I, –, ,  Chamberlain, Edward, n Chapin, Chester W.,  charters, , – Cheney, Orion Howard,  Cherington, Paul T., , ,  Chicago Board of Trade,  Chicago School of Law and Economics, n, n, 

Clark, John M., ,  Clarke, John,  classical economics. See also laissez faire doctrine challenges to,  competition theories, –, – contract rights, ,  corporate conflict with, , ,  definition of monopolies, –,  evolution of business, – inadequacy of, , ,  new school evolution, – Clayton Antitrust Act (), , –, , n Cleveland, Grover, – Colgate & Company, – Colorado, n combinations. See also corporations Dr. Miles Medical Company, –,  emergence, , – importance of management centralization, ,  incentives for,  influence on resource allocation,  judicial encouragement of, n,  Muzzy Starch Company, – organizational determinism, n public discontent, –,  rise, – common carriers, , n, –, ,  common law. See “rule of reason” competition policies. See also associational corporatism; regulated competition challenges of economic changes, – consequences of high infrastructure costs, – diversity of business organization, – in Europe, –, –, , ,  flexibility, – literalist interpretation of antitrust, – natural state of perfect competition, – New Deal, – nineteenth-century contract law, – presumption of equality, –,  public vs. private spheres, – quality standards, – reasonable restraints, –, n,  reliance on state corporate law, –, n Second New Deal reorientation, –

Subject Index trade association determination, – competition theories, – Conference for Continued Industrial Progress, – Conference on Unemployment, , – Congress, U.S. See also specific acts deference to Supreme Court,  ICC, –,  regulatory power,  responsibility for determining restraints,  SBA,  consolidation market control,  public discontent, , – regulated monopoly, , ,  Standard Oil, – constitutional revolution, –, n construction industry, –,  Consumer Advisory Board (CAB), – consumer welfare antitrust promotion of, n trade practices, , ,  value-added competition, , , , , ,  women’s group concerns, – consumerism, , ,  contracts. See also “rule of reason” balance of power, , – consignment, – cooperative,  flexibility of competition policy,  liberty of contract doctrine, , –,  non-compete,  ordinary trades,  presumption of equality, –,  relational,  rights of women, n sealed instrument, n specific performance, – striking down, n tying,  Cooke, Jay,  Cooley, Thomas,  cooperative action. See also trade associations AFTL embrace, – agricultural associations, ,  Chamber of Commerce intermediary role, –,  development, –



economic stabilization, – emergence,  failure of NIRA, – FTC Act, , , –, ,  macroeconomic benefits,  national economic council schemes, – postwar applications, –,  regulated competition, –,  subordination of national planning to business interests,  trade practice conferences, – USCC preference for, n voluntary local chains, – wartime, , – Copeland, Melvyn T.,  corporate liberalism, –, n, n corporations. See also combinations anti-fair trade campaigns,  consumer-driven consolidation,  control of trade practices, , , n, n,  holding companies, – increase in political power, , , – personhood rights,  state charter powers, , – Supreme Court encouragement of consolidation, n,  takeover of fair trade agenda, –,  cost accounting. See also information sharing APhA,  benefits,  distribution system application, – facilitation of price fixing,  FTC’s role, – implementation, – intra- and interfirm,  NRA need for, , –,  pharmaceutical industry, – USCC proposals, – cost-plus basis, ,  Cotton Textile Institute, ,  CPhA. See California Pharmaceutical Association (CPhA) creative destruction, n,  dairy industry, n, – Dairyman’s League Cooperative,  Danbury Hatters,  Darrow, Clarence, 



Subject Index

Daugherty, Harry M., , – Davies, Joseph E.,  Debs, Eugene V., ,  deflation. See also Great Depression; price controls agriculture, , – overproduction as cause, , , – postwar, , n price-cutting, , –,  Defrees, Joseph M., ,  Democratic Party, –, – Department of Commerce, U.S. acceptance of information sharing, – competition management,  cooperation with trade associations,  expansion under Hoover, – quality standards,  Survey of Current Business, –,  trade practice education,  wartime price and production controls,  Department of Justice, U.S. Antitrust Division, n, –, n, nn– attention to USCC,  destructive competition. See also price fixing First New Deal address of, – overproduction, , –, , ,  regulation as solution, , , ,  uniform cost accounting as restraint, , , – Dickinson, John, – discount outlets, , –, ,  distribution networks. See also price fixing; resale price maintenance (RPM) Farm Board,  price cutting, , , –,  scientific management, – seen as cartels,  trade associations,  Dollar Watch, ,  Dorr, Goldthwaite, – Douglas, Paul,  Dr. Miles Medical Company Beardsley’s role, , –,  branding, , ,  California branch price protection, n, – consignment contracts, –

distribution system,  early history, – Medical News,  Park & Sons case, –,  price protection plan, –, , – reorganization as partnership,  rivals,  druggists. See pharmaceutical industry DuBrul, Stephen, ,  Dunn, Charles Wesley,  E. C. Knight Co., n E. R. Squibb & Sons,  Eastman, Lucius,  economic determinism, n economic planning, national, , , –, n, ,  economic stabilization dual federalism, –, n failure of Hoover plans, ,  Harding’s Conference on Unemployment, – lack of enforcement powers, –, ,  prices, –, –,  proposals, – trade association self-regulation, – Eddy, Arthur Jerome, ,  education, , , ,  Edwards, Corwin D., – Elkhart, Indiana, –, n Ellyson, Gideon D.,  Emergency Banking Act (),  Emergency Committee for Employment,  Emergency Milk Control Act (New York) (), –, n equality balance of power between parties to contracts, – corporate personhood,  fair trade movement, , – liberty of contract doctrine,  plutocracy,  presumption of, , –,  racial segregation,  equity jurisprudence, n, n, – European competition policies, –, –, , , 

Subject Index fair competition defining, , –,  institutionalist approaches,  market fairness, –, , ,  NIRA authority,  NRA reliance on business to define, – protection against dominant firms,  fair trade movement. See also American Fair Trade League (AFTL); antimonopoly movement; associational corporatism; California fair trade movement; price controls; price fixing administrative state legacy, –, – cooperative capitalism, , – corporate control,  depoliticization, – Depression-era popularity, ,  influence of World War I, – modern application to goods from developing world, n USCC influence, – waning support, – farmers. See agriculture industry Federal Crop Insurance Corporation, n Federal Deposit Insurance Corporation (FDIC), n Federal Farm Board, ,  federalism, –, n, –, – Federal Reserve, –, –, –n, – Federal Trade Commission (FTC), U.S. See also trade practice conferences chain store investigation, n,  competition management,  cooperation with trade associations,  cost accounting, – creation, , , –, , ,  dispute resolution authority,  formation, , – Hills Brothers Coffee investigation, – investigatory powers, –,  opposition to NRA price controls,  police powers, –, –, ,  Federal Trade Commission Act (), , , –, ,  Felt, Norris,  Filene, Edward, , –



Filene’s Basement, – Finch, Edward, – First New Deal. See also National Industrial Recovery Act (NIRA) agricultural planning, – banking panics, – challenges,  failure of NIRA, –, – industry reaction, – opposition to price policies, – price controls,  Supreme Court interventions, –, –, n Fisher, Arthur,  Fish, Frederick, n,  flooring products, –, ,  Food and Drug Act (),  Fourteenth Amendment, n, n, ,  Frederick, Christine, – FTC. See Federal Trade Commission (FTC), U.S. Fuller, Melvin,  Gaskill, Nelson, – Gay, Edwin, ,  George, James,  Gephart, William F., – Germany, , n Ghiradelli chocolate, ,  Gibbs, Fletcher,  Glass-Steagall Act (), n Gleason, Edna activities following Fair Trade Act passage,  expansion of state police powers,  leadership of fair trade movement,  price-cutting allegations against Brunswig, – price surveys, ,  reputation, , – retail competition, – gold standard, , n, n, –, n Gompers, Samuel,  goodwill and reputation, –, –, –, n, – Granger Laws, – Great Britain, n Great Depression. See also National Industrial Recovery Act (NIRA);



Subject Index

National Recovery Administration (NRA); New Deals banking panics, n, – changes to public-private cooperation, – credit contraction, – early hopes for public-private cooperation,  fair trade popularity, – Federal Reserve, – influence on market management,  lack of public relief under Hoover, –, – national economic council schemes, – national fair trade efforts, – price stabilization plans, – push for greater government regulation,  regulatory efforts, – “Roosevelt Recession,” n stabilization proposals, – Greenback Party,  Gregory, Thomas,  grocer associations, – Grogan, Charles P., – Hadley, Arthur,  Hahn, Lew,  Hamilton, Walton, , – Harding, Warren G., , – Hardwood Association, – Harriman, Henry I., –, –,  Hartman, John, n, ,  Harvard Bureau of Business Research, – Harvard Graduate School of Business Administration,  Harvard System,  Havemeyer, Harry (Henry), ,  Henderson, Leon, ,  Henry, Samuel C., ,  Henry, Sidney,  Hepburn Act (), n Herriman, Albert, – high wage doctrine, –,  Hills Brothers Coffee, – Hills, Reuben W.,  The History of the Standard Oil Company (Tarbell), – holding companies, –

Hollis, Henry,  Holmes, Oliver Wendell Jr., , ,  Hoover, Herbert. See also associational corporatism agricultural price crisis, – as Commerce Secretary, – Committee on Recent Economic Changes,  cooperative practices, – early response to Great Depression, – economic policy as president, , – failure of stabilization, ,  government support of collective action,  opposition from Federal Reserve, – opposition to subsidies,  regulation of associationalism,  shaping of administrative state,  wartime cooperative capitalism, , – Hooverian associationalism. See associational corporatism horizontal combinations, , , –, –, –, See also trade associations Housewives League, – Hughes, Charles Evans, –, ,  Humphrey, William, , – Hunt, Edward Eyre, n Hurley, Edward, – Hurley, William,  IAB (Industrial Advisory Board),  ICC. , n,  See Interstate Commerce Commission (ICC) “illegal at law” restraints,  “illegal in fact” restraints, – Illinois, – income inequality, rise of,  income taxes, n Independent Merchants’ Association,  independent proprietors. See also artisanal producers antimonopoly movement, – challenges from chain stores, – credit contraction, – detrimental price policies, n, n open price associations, – overtaken by corporate interests, , –, –

Subject Index producerism, , n, –,  proprietary association formation,  replacement by managerial, –,  vertical combinations, –,  Industrial Advisory Board (IAB),  industrial liberty,  industrial revolution, , – industrial sector. See also National Industrial Recovery Act (NIRA) cooperative associations, , –, , – First New Deal recovery planning,  printing industry,  producerism, n, , –,  railroads, , n, –,  reaction to First New Deal, – technological unemployment, n, , , n inequality. See equality information sharing. See also uniform cost accounting benefits, , – federal clearinghouse role, –, n, – formal contracts,  Harvard System,  inaccuracy problems, – inadequacy of government data, , ,  permissible, –, – pharmaceutical industry, –, n Philip Survey, –,  price indices, – price reporting, – production coordination, – prohibitions antitrust law,  rationalization movement, n as restraint of trade, – and “rule of reason,”  Survey of Current Business, –,  Ingersoll, Robert,  Ingersoll, William, –, – institutionalism. See also associational corporatism; regulated competition cooperative capitalism,  economic stabilization programs, – emergence as economic school, , n, n, – European influence, – Great Depression, –



interbrand competition, ,  interest groups. See trade associations interstate commerce. See also Federal Trade Commission (FTC), U.S.; price fixing Brandeis’s interstate trade commission, , –,  challenges to combination policy, – direct and indirect restraints, – increases in, ,  per se rule, –, –, n state powers, –, – “stream of commerce” doctrine,  traveling agents, n Interstate Commerce Commission (ICC), , n, , See also Federal Trade Commission (FTC), U.S. interwar period. See Great Depression; postwar period (–) intrastate commerce, –,  Johnson, Hugh, , –, , n,  Kelley, Frederick, – Kelly, Melville Clyde,  Kersey, Vierling,  Keynes, John Maynard, ,  Keynesian economics, , , , , n Knox, Philander, n Kreditnanstalt, n Kunsman,  Kut-Price drug outlet,  labor associations, , –, , , , See also trade associations labor law, , n La Follette, Robert, ,  La Follette, Robert M. Jr., , n, ,  laissez faire doctrine, –, –, , See also classical economics law merchants, n, , , See also trade practice conferences Lehn & Fink,  Lever Act,  Lewson, John,  liberty of contract doctrine, , –,  Lighthall, Ellen (later Miles), n



Subject Index

“little NRAs” California, –, –, –,  Supreme Court affirmation, –, n,  Lloyd, Henry Demarest, –,  Lockwood Housing Investigation, n Loewe & Co.,  Lorwin, Lewis L., –,  loss leaders. See below-cost pricing Love, Robert, ,  lumber industry, –,  Lurton, Horace Harmon, n, , ,  Lyon, Leverett,  Lysol,  Macy, R. H.,  Macy’s department store, ,  Maine, Sir Henry,  Main, Frank Wilbur,  managed competition. See also associational corporatism; First New Deal; Second New Deal enforcement, – expansion, ,  impact of, , – information sharing, – management, business Dr. Miles Medicine Company, – importance of centralization, ,  market power growth, – organizational determinism, n scientific approach, –, –, , , – visibility as market force,  managerial capitalism, –, , –, See also corporations Mann-Elkins Act (), n maple flooring association, ,  Marshall, John,  Massachusetts Pharmacopeia,  Master Stevedores Association, – Max Factor & Company, – May, Edwin, n McCurdy, Charles W.,  McKenna, Joseph,  McLauchlan, Hugh,  McMaster, R. L.,  McReynolds, James, ,  meat-packing industry, n Melbourne, Australia, 

Menzies, Stuart, – Merriam, Charles,  Miles, Ellen Lighthall, n Miles, Franklin, n, –, See also Dr. Miles Medical Company Miles, Herbert,  Milk Control Board (New York), – Miller, Adolph, n Miller-Tydings Act (), ,  mimeograph patents, – Missouri, – Mitchell, Wesley C. agricultural price declines,  business cycle management, , , – competition movement,  information sharing,  NBER, – Moley, Raymond,  monetary policy exclusion from macro-stabilization,  leading up to Great Depression, – price levels, n sterilization, n,  tightening as response to Depression, –, n monopoly. See also trade associations; vertical combinations history of term, ,  natural,  regulated, , ,  striking down of contracts, n Supreme Court tolerance of, ,  monopsony power, ,  Montague, Gilbert H., –, –, –, , – Montgomery, Robert H., – moral economics,  Morton, Marcus,  Munn and Scott,  Muzzy Starch Company, , – Myers, Abram, – Nagel, Charles,  naked restraints, , . See also restraint of trade NAM.  See National Association of Manufacturers (NAM) NARD. –, , , ,  See National Association of Retail Druggists (NARD)

Subject Index National Association of Manufacturers (NAM),  National Association of Retail Druggists (NARD), –, , , ,  National Bureau of Economic Research (NBER), –,  Recent Economic Changes in the United States, , , ,  National Bureau of Standards,  National Citizens’ Rights Association,  national economic planning, , , –, n, ,  National Formulary of Unofficial Preparations (NF), , ,  National Grange or the Order of Patrons of Husbandry, – National Industrial Recovery Act (NIRA) administration, – antimonopoly populism,  Blue Eagle campaign, , n codes of conduct, – failure, –, –, –,  goals,  overview, – public rejection of,  Supreme Court invalidation, – titles,  trade practice conference model, , – National Labor Recovery Board (NLRB), n National Packing Company, n National Progressive Conference,  National Recovery Administration (NRA). See also California Fair Trade Act () codes of fair competition, , – IAB,  information sharing needs,  limited federal enforcement power,  price fixing policies, –, – state cooperation, – state-level “little NRAs,” , , –, n National Recovery Review Board (NRRB),  National Refiners Association,  National Resources Planning Board (NRPB), 



National Retail Dry Goods Association, ,  National Retail Federation,  National Starch Manufacturing Company, –, n National Wholesale Druggist Association (NWDA), –,  NBER. See National Bureau of Economic Research (NBER) Nebbia, Leo, – Nelson, Milton,  neoclassicism, n, , , See also institutionalism new competition. See associational corporatism The New Competition (Eddy),  New Deals, , , –, , –, See also First New Deal; Second New Deal New Freedom platform,  New Jersey, – New York, –, n, – NF. , ,  See National Formulary of Unofficial Preparations (NF) Nicholson, J. Lee,  NIRA. See National Industrial Recovery Act (NIRA) NLRB. n See National Labor Recovery Board (NLRB) non-price competition, , , , , ,  nonprofit corporations, n North River Sugar Refining Company, – NRA. See National Recovery Administration (NRA) NRPB.  See National Resources Planning Board (NRPB) NRRB.  See National Recovery Review Board (NRRB) NWDA. –,  See National Wholesale Druggist Association (NWDA) Nye, Gerald, , n Nystrom, Paul, –, –, nn– Old Dearborn Distributors, –, n Oldfield bill, – Oldfield hearings, – Oldfield, William Allen, 



Subject Index

Olney, Richard,  Olsen, Paul,  Ontario, Canada,  open price systems, , n, – Overman Act,  overproduction agricultural readjustment, – associational remedies, – information sharing, – market failures,  Muzzy Starch Company, –, n ruinous competition, , –, , ,  Pacific Coast Grocers’ Association,  Pacific Drug Review (journal), n Panic of  – Park & Sons, Inc., – Parker, Edwin,  Park, John D., –, ,  patent rights, –,  Patman, Wright,  Peckham, Rufus, – Peek, George,  perfect competition, – per se rule, –, –, n Peruna brand, n pharmaceutical industry. See also California Pharmaceutical Association (CPhA) destructive competition, –, ,  goodwill and reputation, – management practices, – Massachusetts Pharmacopeia,  NARD, –, , , ,  National Formulary of Unofficial Preparations, , ,  NRA codes,  NWDA, –,  patent medicine, – Pharmacopeia of the United States of America, – price protection plans, – price reporting, – regulation, , – support of fair trade agreements,  tripartite plan, – uniform cost accounting,  Pharmacopeia of the United States of America, – Philip, W. Bruce, –, , –, 

Piel, William,  Piggly Wiggly, – pineboards, , –, ,  Pinkham, Lydia,  Plant, Thomas G.,  Plaut, Edward,  Plessy, Homer,  pluralist fragmentation, n plutocracy, n,  police powers agriculture industry, – California expansion, – contract enforcement legislation, – corporate opposition to,  economic planning, , – enforcement challenges, – Federal Reserve limits,  of FTC, –, , –, –, ,  lack of government funding,  NRA enforcement,  state-level “little NRAs,” –, n trade practice enforcement, –, – wage rates,  political economics antimonopoly debates, n, – high infrastructure costs and competition, – neoclassical focus on prices,  populism, –, –, n, , –, – Portland Cement Association, – postwar period (–) boom-bust cycles, –, – economic changes,  economic models,  extension of wartime public-private cooperation, – peacetime application of public-private cooperation, – rise of administrative state,  unemployment, – President’s Reemployment Agreement,  price controls. See also wage controls basing point price systems, n cooperative stabilization efforts,  during business-cycle downturns,  floors, –,  focus of neoclassicism,  for national economic planning, 

Subject Index FTC collection of cost information, ,  NRA, , ,  sales contracts, – Standard Oil Group/Trust, – at state level, n, –, n, –,  sticky price hypothesis,  trade-offs,  price fixing among dealers,  benefits of, – challenges of competition policy, – Colgate Plan, – “illegal in fact” expansion of “rule of reason,” – information-sharing tactics,  intra- and interfirm cost accounting,  NRA policies, – opposition to, – patent rights, – per se rule, –, –, n protection plans, –, , –, –, – railroad rate regulation, – as restraints, – social benefits of associational rulemaking,  state-mandated,  trade association,  trademark protection, – validated by courts, , n wartime cooperatives, – price indices, – price reporting, – prices discrimination, n monetary policy pressures, n retail market changes, – schedules,  stabilization plans, – pricing, below-cost by large retailers, – by pineboards,  definition, n FTC trade practice conferences, , , , ,  pineboards,  prohibitions, , –, n resale price maintenance as protection, 



Robinson-Patman Act, , ,  ruinous competition, –, ,  printing industry, ,  producerism, n, , –,  production methods batch and bundle, n,  impact of advances, – innovation, – overproduction, –, nn– technological unemployment, n, , , n vertical integration,  water power issues, n profit sharing,  Progressive Party, – Proprietary Association of America, – proprietary capitalism. See also artisanal producers antimonopoly movement, – challenges from chain stores, – credit contraction, – detrimental price policies, n, n Dr. Miles Medical Company, – industrial-era challenges to,  open price associations, – overtaken by corporate interests, , –, – producerism, , n, –,  proprietary association formation,  replacement by managerial, –,  vertical combinations, –,  public opinion against NRA, – antitrust, –,  combinations, –,  of consolidation, , , – depoliticization of antimonopoly movement, – federal action, – push for greater government regulation,  unpopularity of fair trade regulation,  public-private regulatory cooperation. See also administrative state; associational corporatism; First New Deal; Second New Deal AFTL, – corporate liberalism, – Great Depression, , – legacy, –



Subject Index

public-private regulatory cooperation. (cont.) postwar extension of wartime, –, – World War I,  Public Works Administration (PWA), , n purchasing power, n PWA. , n See Public Works Administration (PWA) quarry associations, – railroads, , n, –,  Rathgen, Karl,  rationalization movement, n Recent Economic Changes in the United States (NBER), , , ,  recession (), – Reconstruction Finance Corporation (RFC),  Reed, Stanley,  regulated competition adoption by fair trade movement,  antitrust policies,  compared to associational corporatism, , –, ,  counter to state corporatism, ,  development, –, – economic planning,  interstate trade commission, – neo-Brandeisian state partnerships, n, ,  uniform cost accounting, – regulated monopoly, , ,  Reichsbank, n relational contracts, n, See also associational corporatism Republican Party, , – resale policies,  resale price maintenance (RPM) benefits, – Brandeis support, n brand management, , – Colgate Plan, – debates, n feasibility investigations, –n Macy’s campaign against,  opposition,  permissability of private agreements, n

prohibitions, , , n state-level fair trade laws, – Stevens bill, – reserve clauses, n respondeat superior, n restraint of trade. See also “rule of reason” direct and indirect, – naked/ancillary, , ,  redefinition of, – trade secret protection, n, n, n vertical restraints, – retail distribution networks. See also price fixing; resale price maintenance (RPM) Farm Board,  price cutting, , , –,  scientific management, – seen as cartels,  trade associations,  retailing revolution, –, n retail price indices, – RFC.  See Reconstruction Finance Corporation (RFC) Rhett, Robert Goodwyn,  Richberg, Donald, n,  Robert H. Ingersoll & Brother,  Roberts, Owen, , n Robinson, Joan, n Robinson-Patman Act (), , ,  Rockefeller, John D., –, , –, See also Standard Oil Company Rogers, Edward S.,  Rolph, James,  Roos, Charles,  Roosevelt, Franklin D. appointment of Darrow to NRRB,  banking panics, – Brains Trust, – court-packing plan, nn– election of , – message from NARD,  modern liberalism, n New Deals, – opposition to populist fair trade acts,  reorganization of NRA, – Second New Deal shift, – state corporatism,  Roosevelt, Theodore, n, , , ,  RPM. See resale price maintenance (RPM) Rublee, George, , 

Subject Index ruinous competition. See also price fixing First New Deal address of, – overproduction, , –, , ,  regulation as solution, , , ,  uniform cost accounting as restraint, , , – “rule of reason.” See also Sherman Antitrust Act () development, , – expansion, –, –,  flexible application,  “illegal in fact” interpretation, – information-sharing practices,  narrowing, ,  reformulation, –, – unequal application,  Sachs, Alexander, ,  San Francisco stevedore union, – Saunders, William L.,  SBA.  See Small Business Administration (SBA) Schechter Poultry Corporation, n, – Seager, Henry H., ,  Seagram & Sons, –, n Second New Deal antitrust prosecutions, – demand-side policies, , n,  focus on peak industries,  lack of federal enforcement,  Securities and Exchange Commission Act (), n Seligman, Edwin R. A., , ,  Sheffield Farms Company, n Sherman Antitrust Act () ancillary/naked restraints, ,  corporate consolidation,  effect on judiciary, –,  final version, – industrial liberty,  influence, – Oldfield bill, – original draft,  partisan debates, – per se prohibition, – redefinition of restraint of trade, – revised version, – “rule of reason,”  Sherman, John, –, n Sherman Silver Purchase Act (), 



“sick chicken” case, n, – Singer Sewing Machine Company, n Small Business Administration (SBA),  Smith, Adam, n, , n,  Smith, Blakewell, n Smith, Everett R.,  Smoot-Hawley Tariff (),  Social Darwinism,  Socialist Party,  Social Science Research Council (SSRC),  Soule, George,  SSRC.  See Social Science Research Council (SSRC) stabilization dual federalism, n, – failure of Hoover plans, ,  Harding’s Conference on Unemployment, – lack of enforcement powers, –, ,  prices, –, –,  proposals, – trade association self-regulation, – Standard Oil Company, –, , ,  Standard Oil Trust consolidation tactics,  creation, n, , – state suits, – standards, quality, –, ,  state corporatism. See First New Deal; Second New Deal state laws. See also states; specific states antitrust exemptions,  charters, , – cooperative contracts,  direct and indirect restraints, – fair trade movement,  federal antitrust jurisprudence, – licensing, n prices, – regulation of manufacturing facilities,  role in maintaining business diversity, – support of NRA, – states. See also specific states authority over corporation law, –,  challenge of horizontal combinations,  circumscription of interstate powers, –, –



Subject Index

states. (cont.) countercyclical spending, n, – federalism, –, –, n, – prosecution of anticompetitive actions, – RPM, – steel industry, n, n sterilization, n,  Stevenson, Jordan & Harrison,  Stevens Price Maintenance Bill (), –, n Stevens, Raymond,  sticky prices, , See also price controls Stockton Plan,  Stone, Harlan Fiske, , –,  “stream of commerce” doctrine,  Strong, Benjamin, , n,  Strum, Philippa,  subsidies,  Sugar Refineries Company, n, , – Sumner, William Graham,  supply/demand imbalances agricultural readjustment, – associational remedies, – information sharing, – market failures,  Muzzy Starch Company, –, n ruinous competition, , –, , ,  Supreme Court, U.S. acceptance of association information sharing, – acknowledgement of associationalism,  caveat emptor doctrine, n encouragement of corporate consolidation, n,  encouragement of legislative action,  extension of rule of reason,  information sharing as restraint of trade, – interpretation of Sherman Act, –, ,  interstate commerce, –, – interventions against New Deal policies, – maintenance of business diversity, – NIRA, , –,  reasonable restraints,  redefinition of restraint of trade, – shift toward upholding regulation, n

“stream of commerce” doctrine,  Sugar Trust decision, – support of state-level “little NRAs,” –, n,  tension between constructionists and activists, – Survey of Current Business (Dept. of Commerce), –,  Sutherland, George, n, n Swanson, Fred W.,  Swope, Gerald, –,  Swope Plan, –,  Tabor, Charles F.,  Taft, William Howard, n, –, ,  Tarbell, Ida, – Taussig, Frank,  technological unemployment, n, , , n Temin, Peter,  Temporary National Economic Commission (TNEC), n Tourgée, Albion, –, n,  Towne, Henry R.,  Trade Association Activities (Dept. of Commerce),  trade associations. See also labor associations as cartels, , , n competition management, – competition with discount outlets, , –, ,  devising of codes of fair competition with NRA, – distribution networks,  fair trade lobbying efforts, – FTC trade practice conference participation, – influence, –, n information sharing, – loss of political power, , – national fair trade lobbying efforts, , – price protection agreements, – price protection plans, –, , –, –, – rise, – self-regulation, , – supply/demand coordination, – Swope Plan, – weakness against corporations, 

Subject Index trade practice conferences antitrust enforcement, , –, – below-cost pricing, , , , ,  defining of fair competition, – extension through NIRA,  FTC oversight, –,  Hoover’s influence,  information sharing to address production, – regulatory role, –, – takeover of model by large capitalist corporations, ,  trade secrets, protection of, n, n, n tripartite plan, – trusts emergence,  judicial responsibilities, – public discontent, –,  Standard Oil Trust, n as synonymous with combinations,  types, n Tugwell, Rexford Guy, , –,  Tydings, Millard,  unemployment compensation plans,  Depression-era lack of public relief,  fears of permanent welfare programs,  Harding’s Conference, , – postwar rise,  President’s Reemployment Agreement,  technological, n, , , n under Roosevelt, n uniform cost accounting. See also information sharing American Pharmaceutical Association (APhA),  benefits,  distribution system application, – facilitation of price fixing,  FTC role, – Harvard Business School,  implementation, – intra- and interfirm,  NRA need for, , –,  pharmaceutical industry, – USCC proposals, – United Typothetae of America (UTA),  Untermeyer, Samuel, n USCC. See Chamber of Commerce (USCC), U.S. U.S. Food and Drug Act (), 



U.S. Steel, n U.S. Wholesale Grocers’ Association,  UTA.  See United Typothetae of America (UTA) utilities, , –, See also common carriers value-added competition, , , , , ,  Van Devanter, Willis, n Van Hise, Charles, ,  van Kleeck, Mary, ,  Veblen, Thorstein,  vertical combinations. See also corporations Dr. Miles Medical Company, –,  emergence, , – incentives for,  influence on resource allocation,  judicial encouragement of, n,  organizational determinism, n rise, – vertical restraints, – voluntary cooperation. See associational corporatism Waddill, Edmund Jr.,  wage controls balance with prices, –,  high wage doctrine, – legislation,  mandatory,  Wagner, Robert F., ,  Wallace, Henry A.,  Walsh, David I.,  War Industries Board (WIB), –, , ,  Washington State, n Waterbury Watch Company,  water power allocations, n weak state thesis, n The Wealth of Nations (Smith),  Webb-Pomerene bill,  Weeks, Carl,  Wheeler, Harry A., , ,  whiskey trust,  White, Edward, ,  Whiteside, Arthur D.,  wholesale price indices, – WIB. –, , ,  See War Industries Board (WIB) Williams, Nathan B.,  Williams, Samuel Clay,  Wilson, Woodrow, –, –, , , 



Subject Index

Wilson-Gorman Tariff Act (),  Woll, Matthew,  women, n, –, n, See also Gleason, Edna Works Progress Administration (WPA), n World Social Economic Planning Congress, – World War I cooperative action, , – exploitation of public-private partnerships, 

food administration efforts,  influence on fair trade, – “new competition,” – precedent for administrative economic management,  price and production controls,  reparations payments, n WPA. n See Works Progress Administration (WPA) Young, Owen, , 