The Agricultural Implement Industry in Canada: A Study of Competition 9781487582814

Citation preview

THE AGRICULTURAL IMPLEMENT INDUSTRY IN CANADA

CANADIAN STUDIES IN ECONOMICS A series of studies sponsored by the Canadian Social Science Research Council, and edited by V. W. Bladen. 1. International Cycles and Canada's Balance of Payments, 1921-33. By Vernon W. Malach. 2. Capital Formation in Canada, 1896-1930. By Kenneth Buckley. 3. Natural Resources: The Economics of Conservation. By Anthony Scott. 4. The Canadian Nickel Industry.

By 0. W. Main.

5. Bank of Canada Operations, 1935 -54. By E. P. Neufeld. 6. State Intervention and Assistance In Collective Bargaining: The Canadian Ex perience, 1943-1954. By H. A. Logan. 7. The Agricultural Implement Industry in Canada: A Study of Competition. W. G. Phillips. 8. Monetary and Fiscal Thought and Policy in Canada, 1919-1939. Brecher.

By Irving

By

The Agricultural Implement Industry in Canada A

STUDY

OF

COMPETITION

W. G. PHILLIPS

UNIVERSITY OF TORONTO PRESS

1956

Copyright:C, Canada 1956 University of Tcronto Press Printed in Canada Reprinted in 2018 ISBN 978-1-4875-8153-4 (paper)

PREF A CE

THE agricultural implement industry in Canada is at once a very well-known and a very little-known industry. It is well known because agriculture is a substantial part of Canada's economy, and the products of the implement industry are sold exclusively to agriculture. On most occasions in the past, when agriculture has been in difficult straits, the political spotlight has been turned on the implement industry. At such times, demands for tariff and freight reforms, and for official investigation of the industry's pricing and other pc•licies have been numerous and have brought the industry periodically into public view. It is a little-known industry for various reasons. In its peak month in 1950, the industry employed only . 9 percent of the total persons engaged in manufacturing in Canada. More important, its product has traditionally been sold principally in markets outside the country. It is a surprising fact that throughout the early' fifties the Canadian implement industry exported well over half of itll product, while in the same years more than three quarters of the farm machinery sold in Canada was imported. This study traces the development of the Canadian industry since its inception, and examines some aspects of competition, past and present. The historical approach tc• competition is based on the hypothesis that competitive patterns are not generally accidental but are rooted in a variety of influences which conditjon an industry's growth. The author extends grateful acknowledgment to Professor H. A. Logan, who first suggested the topic and whose patience, guidance, and encouragement have been indispensable to its completion. Special thanks also go to Professors W. T. Easterbrook, G. A. Elliott, and V. W. Bladen for their large number of helpful suggestions and criti cisms throughout the research and the preparation of the manuscript. The major com panies of the implement industry--particularly Massey-Harris-Ferguson, Cockshutt Farm Equipment, and International Harvester - -were most co-operative in granting interviews and supplying information at the author's request. Generous assistance was also extended by the Dominion Departtnent of Agriculture, of which particular mention is made' of Dr. J. F. Booth, the Dominion Bureau of Statistics, and the Department of Trade and Commerce. The typing of the manuscript was financed by the Canadian Social Science Research Council. The author found that the library staffs of the various governmental, academic, and civic libraries consulted lived up to their reputation for couneous and effective assistance in the research. The charts and illustrations in the book are by the author. W.G.P.

CONTENTS

Preface

V

Introduction

ix PART ONE: THE AMERICAN INDUSTRY

I II III

Instability: The Nineteenth Century

3

Concentration: 1900 to 1915

14

The Tractor Revolution: Since 1915

25

PART TWO: THE CANADIAN INDUSTRY IV V VI VII

Production in Canada: to 1900

37

The Implement Industry and Agriculture to 1930

47

Technology and Depression

62

Production, Exports, and Imports

77

PART THREE: COMPETITION VIII

Price Com petition: Demand and Cost

93

IX

Price Competition: Behaviour of Implement Prices

112

X

Non -Price Competition: Distribution

133

Non -Price Com petition: Credit Extension

144

conclusion

158

Notes

165

Appendixes

195

XI

xn

vii

INTRODUCTION

A STUDY of competition in an industry in which every firm is more than one hundred years old , necessitates some prior consideration of the industry's history. This is done in Pans One and Two. Emphasis is placed on the different forms which competition assumed during the implement industry's early grOWth, and on the significant contrasts between the American and Canadian scenes. Before 1900 American firms were effectively excluded from the Canadian market. From the beginning of this century until World War II, however, a most important aspect of competition in Canada was the competition provided by American firms. American participation in the Canadian market increased as the effects of the tractcr revolution -brought lower costs to the American industry, and as the level of the Canadian tariff on implements fell during the first three decades of this century. In self-defense the Canadian industry conducted a vigorous campaign in favour of protection in the early years of the century. When this was drowned out by the rising voice of agriculture, it was abandoned, and some individual companies proceeded successfully to develop and expand their overseas markets. Since the end of World War II, some important changes have taken place in the competitive position of firms in Canada relative to those in the United States. There has been a large expansion of exports from Canada, particularly into the United States market. Costs have been much affected by the tractor revolution which, though its effects were felt in the United States as early as 1920, did not appreciably affect the Canadian companies until the post-war years. When it did, its influence was to be noted not only in the position of the Canadian industry with respect to the American, but in the nature of competition among the individual firms located in Canada. This is the principal subject of Part Three. To facilitate the study in Part Three, competition is broken down into two types: price competition and non -price competition. Of the four chapters which make up Part Three, two are devoted to each type. The main areas of price competition are found in conditions of demand, costs, and the pricing process, and these are the focal points for the study of price competition. In the implement industry, the principal areas of nonprice competition in the past have been in the methods of distribution and of credit ex tension, and these are the focal points for this part of the study; Some points about the methodology in Part Three deserve mention. To base a study of competition in the implement industry in Canada solely on the experience of the postwar years might prove rather unfruitful because of the extraordinary condition of the market far farm implements during ma;t of that time. Post-war shortages of implements meant that all forms of competition were virtually in abeyance. In this study, therefore, attention is devoted to the competition which characterized the period prior to World War II, with emphasis on the permanent changes which have taken place sincethattime and which seem likely to affect competition in the future. Throughout, an attempt has been made to conduct the study of competition using ix

X

Introduction

c urrent price theory "as an embarkation point and general guide rather than as a fixed body of principles for detailed verification. "l Although specific references to current theory are only incidentally made in the study, the influence of theory on the general approach and on the framework used will be obvious to anyone with an economic back ground. Occasionally, where it is felt that empirical findings throw some doubt oo the postulates. of theory, mention of this is made, but no detailed effon to trace the ramifications of such questions is included. Rather the lines of demarcation are those stated by Joe s. Bain: The task of empirical research would seem to be to find out in many more cases how prices are made , and to examine the price-making process to find if the results are highly systematic, or in fact rather arbitrary and capricious. It is not evident that the question of whether profits are maximized is really amenable to treaonent. 2 Competition and pricing, moreover, are treated with relation to market and cost functions only. Although institutional factors are considered insofar as they bear on either of these functions , no attempt is made to treat the financial and other aspects of price policies not directly related to cost and demand . Much of the material in Part Three is based on personal contacts made by the a~thor with executives of the leading implement finns. In the process not a little was learned concerning the most fruitful approach to be followed by the price -policy researcher in making the best of such contacts. Difficulties are abundant in such research. Principally they arise from a lack of understanding on both sides. Not infrequently businessmen become apprehensive over the very fact of the researcher's interestin the occultscience of price-setting. Reminiscences of public enquiries, or possibly of confidences betrayed in the past, or doubt concerning the researcher's sincerity or the extent of his familiarity with competing firms are all possible sources of suspicion. The price researcher learns early that it is extremely difficult for the businessman and the economist to meet on common ground. Once having conveyed to the businessman an idea of what he is attempting to do (something which must be accomplished, however awkwardly, if any co-operation at all is hoped for), the researcher encounters a series of obstructions ranging from mere differences in terminology to entirely different concepts of the behaviour of such functions ascostanddemand. Termssuchasprofits, revenue, variable costs, fixed costs, overhead costs, all must be used with considerable care to ensure that they convey the same meaning to both persons. Different ideas of output-cost behaviour are another hazard, and much inconclusive discussion may take place before the businessman' s predilection for linear cost functions, and the economist's for U -shaped functions, are recognized. Further comment will be made throughout Part Three on the difficulties faced by the price-policy researcher and the methods which might be used, An even more formidable difficulty than that of method is often encountered when the researcher takes up the task 1. Joe S. Bain, "Price and Production Policies" in A Survey of Contemporary Economics, ed. H. S. Ellis (American Economic Association, 1949), 164. 2. Ibid. , 155

Introduction

xi

of using what he has learned through such first-hand contacts. In most cases descriptions of the price -setting process cannot be docwnented with anything but the word of the price-setter himself. Price -setting is usually done within a highly subjective framework, and in the theory of price the subjective factors are recognized to be as imponant as the objective. The value of price -policy research must therefore depend in part on the success experienced by the researcher in discovering and accurately recording the subjecti?e factcxs important in the price-setting process.

CHAPTER .ONE

INSTABILITY:

THE NINETEENTH CENTURY

EARLY REAPERS THE evolution of fann machinery into its present form began in the late eighteenth and early nineteenth centuries, when the mechanical reaper was invented to replace th,? sickle and the scythe in the cutting of grain. Between 1786 and 1831 there appeared thirty-three varieties of reaper in England, twenty-two in the United States, two in France, and one in Germany. 1 The nwnbers, though impressive, reflect the persistence of the inventors rather than the progress being made, for only a few of the machines had any commercial value. 2 Not until the end of the period, in 1831, did a reaper appear which so co-ordinated the known principles of reaper construction as to perform successfully in the field. This was the invention of Cyrus Hall McCormick, a Virginia farmer who became the founder of the McCormick Harvesting Machinery Co. , now International Harvester. McCormick cut grain successfully with his reaper on a farm near his home in 1831; yet he does not appear to have realized its potential commercial value, for he allowed three years to pass before-he applied for patent protection. The delay was costly, for in December, 1833, a reaper patent was granted to one Obed Hussey, then living near Cincinnati, Ohio. Six months later. McCormick hastened to obtain a patent on his own in vention. Then, reading of Hussey's machine in Mechanics' Magazine, he proceeded to "warn all persons against the use of the (McCormick) principle, as I regard and treat the use of it, in any way, as an infringement of my right . .,3 Open conflict between the McCormick and Hussey machines was delayed by the slow progress of innovation. The market for such machinery being confined to areas close to the centre of production, the work of experimentation under actual harvesting con ditions had to be crowded into a few weeks of each year. Thus it was not until 1843 that the McCormick and Hussey machines met in the same market and the reaper war began. In March of that year, a letter from Obed Hussey appeared in the Richmond Southern Planter. I see by your last Planter an account of another reaper in your state, which is attracting some attention; it shall be my endeavour to meet the machine in the field in the next harvest. I think it but justice to give this public notice, that the parties concerned may not be taken unawares but have the opponunity to prepare themselve~ for such a contest, that no advantage may be taken. These gentlemen who have become prudently cautious, by being often deceived by humbugs, will then have an opportunity to judge for themselves. 4 Vigorous rivalry developed between McCormick and Hussey in the ensuing few years. 3

4

Tne Agricultural Implement Industry in Canada

Up and down the seaboard states, the two reapers were matched repeatedly in field trials and public exhibits. · Both inventors bombarded the press with claims of superiority for their own machines and with belittling comments about the rival. The campaign doubtless provided good advertising fa the rivals, and fa the idea of mechanical grain cutting, but its results were highly inconclusive as far as the respective merits of the two machines were concerned. 5 Until 1847 and 1848, the years when the Hussey and McCormick patents expired, reaper production was carried on almost exclusively by these two. Hussey invented his reaper in Ohio but moved eastward to Baltimore to produce it. McCamick, more wisely, moved his centre of production from Virginia westward with the market. In 1843 McCormick , while still producing reapers in his blacksmith shop on the family 0 farm at Walnut Grove, Va. , announced that he proposed to sell rights to other producers for the manufacture of his machine. Several contracts were written in the next few years, the two most impatant being with Backus, Fitch, and Co. and Seymour and Morgan, both of Brockport, N. Y. In each case, the contract was to run until 1848, the date of the expiration of McCormick's original patent. These early contracts solved the transportation problem and were helpful in overcoming the prejudice of pioneer farmers against machinery made at far-distant points. But the arrangements were never very satisfactory to McCormick. Too often the wrk was of a poor quality, reflecting adversely on the McCormick name. Finally, when McCormick's original patent expired in 1848, the firms producing his machine on contract organized themselves into one of the most vigorous of the blocs opposing his application for an extension. When the extension was refused, these firms immediately be came McCormick's leading competitors, producing and selling his own machine. Probably in anticipation of this development, McCormick decided in 1847 to centralize his production in the midst of the developing western market. To this end, he formed a parmership with one C. M. Gray, his former licensee in Chicago, and built a factory in that city, then a raw little community of 17, 000 people . The first parmership ended in a lawsuit over the respective obligations of the partners, and Gray sold out to William B. Ogden, who had been the first mayor of Chicago. Production continued under the name McCamick, Ogden, and Co. until this second parmershipwas dissolved in 1849, McCormick buying Ogden's share of the business for $65,000.6 McCormick's decision to move west with the market was perhaps the most important single decision in the history of his company. As early as 1825, the completion of the Erie Canal had made possible the first significant migration westward from the Atlantic states, and the large -scale settlement of the regions bordering the Great Lakes. By 1840 settlers had pushed the frontier through Ohio, southern Michigan, Indiana, and Illinois, and were beginning to penetrate the region west of the northern Mississippi. The Erie Canal also provided the incentive for production of a variety of cereal crops along the western frontier. Whereas prior to 1825 the only cereals grown on a large scale were corn and rye, used respectively for feeding animals· and making whiskey, the access to the eastern market provided by the Erie made profitable the production of wheat, barley, and other grains. 7 The trends in population movement and crop production were quickened by the rapid development of the railroads. Following closely behind the vanguard of settlers, the railroads by 1860 had extended beyond the Mississippi River as far as St. Joseph, Miss. ,

Instability: The Nineteenth Century

5

bringing both the products and the markets of the outside world to the settler's door. Important among the products were the newer types of farming equipment. The wooden plows which many settlers had brought from the east were found inadequate for breaking the tough prairie soil, the fertility of which was generally underrated before the introduction of the steel moldboard plow in the late 1830's. 8 Increasing interest in grain productie&-and the scarcity of labour in newly settled areas created a large potential demand for harvesting machinery. "In Europe," said Jefferson, "the object is to make the most of their land, labour being abundant; here it is to make the most of our labour, land being abundant. n9 Markets for grain widened as the railways made them accessible.. Domestically, the rapid urbanization of the east and the rise of the great packing .and milling centres of the interior brought new and concentrated markets, while abroad, the removal of the English Corn Laws had by 1843 opened that country to American wheat. McCormick's move to the west sealed his victory in the reaper was with Obed Hussey. Hussey's machine had always more closely resembled a mower than a reaper, lO which explains its greater success in the eastern grass -growing states than in the grain- growing areas further west. Produced in Baltimore, it remained popular in the east until Hussey "sold ou:: to a mowing machine syndicate in 1860. nll Meanwhile, McCormick's Chicago venture prospered. Fifteen hundred reapers were produced in the first two years of its existence, and the years after 1849 were a period of increasing prosperity. Following hard upon the labour shortage created by the California gold rush, came the Crimean War and the resultant increases in the price of wheat in 1854 and 1855, both of which stimulated purchases of harvesting equipment. . By the year 1860, CyrusHallMcCormick, the farmer-inventor from Walnut Grove, was a Chicago millionaire . COMPETITION FOR PATENTS The four decades following the expiration of McCormick'sreaperpatentin 1848 were the period of thepatentpoolsin the American implement industry. By 1850, 30newreaper firms had come intoexistence,12 and by 1857, 176 grain reapers and 62 mowing machines had been patented in the United States . 13 Patent disputes began early. In 1850 McCormick brought suit against Seymour and Morgan, one of the earliest producers of the Mee ormick machine on contract, and was awarded victory in 1854. Thereupon: McCormick turned his sights on the firm of John H. Manny, charging infringement of a minor McCormick patent of 1847. This time McCormick lost. These were two of hundreds of suits and counter-suits which mark the era. Successful patent arrangements could mean the difference between a firm's success or failure . The expanding farm market, anxious to avail itself of every labour-saving device, received improvements enthusiastically, while manufacturers ~ame to fear obsolescence above all else. Logically, therefore, patent pools sprang up wherein groups of competing firms sought to centralize control over the principal patents covering an implement. If success ful, the pbol was in a position to monopolize that implement or to collect royalties from others who produced it under license. Pooling arrangements did not mean that the identities oj the participating firms were in any way merged. Through aligning with patent pools, individual firms might hope to gain temporary advantage over some rivals, but few were yet willing to enter into full-

6

The Agricultural Implement Industry in Canada

scale mergers. Individualism was the dominant characteristic of the industry as long as expansion continued to be rapid and the product continued to undergo constant change, ensuring rapid prosperity for those firms shrewd ( or fortunate) enough to be holding the key patents. Looming large in the background of the merger movement when it did come, around the end of the nineteenth century, were a stabilized market and a prod uct in which improvement and innovation were at a standstill. To assist the reader in seeing the pattern of mergers, a chronological chart of mergers from 1830 to 1940 is included in this chapter following page 12 (Chart I). Cyrus McCormick, who had contributed so significantly to the development of the early reaper, had permanently abandoned his inventor's calling by 1850. Probably the main reason was the tremendous demand on his time and energy ry.ade by the day-today affairs of the Chicago factory. l4 But McCormick's talents were as well adapted to running a business as to inventing. Until his death in 1881 the former inventa: was the driving force behind the exceptionally aggressive tactics in patent matters, advertising, and selling to which the firm owed much of its early growth. Such tactics are best illustrated in McCormick's relations with the patent pools. The first of these was the hinged -bar pool in mowers. In 1856 C. Aultman and Co. of Canton, Ohio, makers of threshers since 1849, prodw::ed the first of the famous twowheeled, front-cut Buckeye mowers . The machines enjoyed instant success and, withi'l 1 year, Aultman had sold licenses to several other manufacturers to build the Buckeye. At the same time Aultman, observing the growing number of patent infringement cases in the implement industry, shrewdly began to buy patents wherever he could. By 1861 the company had acquired thirty-four patents, among which there was one covering a hinged cutter bar, a device by which the mowing arm of the machine could be ungeared and raised by a lever to a position perpendicular to the ground, or could be swung around parallel to the wheels. At about the same time another group, producing Cayuga Chief mowers at Auburn, N. Y., and dominated by one Cyrenus Wheeler, had purchased a formidable array of patentrights, including a hinged bar device, and was openly threatening to prosecute infringers. Because of the considerable overlapping in the patents held by the Cayuga Chief and the Buckeye groups, an arrangement was made to pool most of the patents in 1860. For Early Hinged Bar Mower the next twenty-one years this combination dominated the mower market. With characteristic vigour, McCormick defied the pool. Not only did he manage to resurrect some old unused patents which apparently covered the hinged bar, but he even employed Pinkerton detectives to track down two machines which supposedly embodied a hinged cutter bar antedating that of the pool. Finally hailed into court in 1870, Mee ormick fought the charges of the pool for eleven years, at the end of which time the pool agreed to dismiss the suit in return for a $25,000 payment. McCormick showed similar defiance to the self-rake reaper pool. Samuel Johnston, later head of the Johnston Harvester Co. of Brockport, N. Y. , perfected a device by which

Instability: The Nineteentll Century

7

tile driver of a reaper could, by use of a pedal, operate a rake which swept the cut grain to the ground in gavels of any desired size. By 1867 this innovation had rendered early self-rakers obsolete, and all of the leading producers, including most of the firms in the hinged -bar mower pool, were paying tribute to Johnston for manufacturing rights. McCormick again refused to pay. For nine years he fought the pool in the courts and successfully prevented the reaching of a decision. Finally within a few months of the expiry date of Johnston's key patent, McCormick agreed to pay a royalty of $3. 25 for each self-raker he produced thereafter. This arrangement ended when the pool dissolved for lack of patent protection _in late 1879. 15 The self-rake reaper enjoyed ccnsiderable popularity because its introduction coincided with the farm labour shortage occasioned by the Civil War. Throughout the war period, crops were generally abundant and demand for agricultural produce was high. Under the stimulus of good prospective returns, farmers were quick to adopt any mechanical innovation which promised worthwhile savings in harvest labour. In the transition from the early reaper to the automatic binder, however, it was the harvester, not the self -rake reaper, which pointed the direction of advance . The purpose of the harvester was to eliminate the waste of grain and the exhaustive labour of binding it on the ground after it had been raked or swept from the platform of a reaper. The problem was to raise the grain from the platform up over the mainwheel of the machine to a table where it might conveniently be bound by hand and then thrown to the ground in sheaves. In most harvesters this was accomplished through the inclusion on the machine of a series of canvas conveyor belts, a table onto which the grain was conveyed, and a footboard on which the binders might stand. With these accoutrements the harvester accom plished everything the self-rake reaper did, eliminated much wastage of grain, and made the work of binding faster and easier. More important, it presented an obvious challenge to inventors to perfect a device capable of re placing the human hands in the bindmg process. The best known of the harvesters was the one invented by C. W. and W. W. Marsh of Illinois in 1857. Six years later the Marsh brothers had secured sufficient capital to set up the Marsh Harvester Co. in Plano, a suburb of Chicago, and were selling manufacturing rights to other producers. In the fashion by then common in the industry, the Marsh Co. in 1869 pooled all of the harvester patents it had been able to accumulate with those of its two chief licensees, 16 and looked over the industry for potential infringers. Among these, of course, was McCormick. Having regarded the harvester for many years as a humbug, the McCormick firm found itself in the early seventies casting about desperately for suitable patents. To add to its difficulties, the original Marsh patents of 1857 were extended by the Patent Office in 1872 for another fourteen years . The plight of the company is reflected in a letter written by a company official to C.H. McCormick in 1873: Mr. L.J. (McCormick) is beginning to feel the pressure of these facts (concerning the popularity of the Marsh Harvester) • .. and he has had me write to Baldwin to investigate what is the scope and validity of the patents which stand in the way of manufacturing harvesters. L.J. is strongly inclined, provided the way is open, to take hold of that machine, the Marsh Harvester, without making any ex eriments, and build a certain proportion of the coming year's machines of that style. 7

1

8

The Agricultural Implement Industry in Canacta

This was never done. Instead, the McCormicks contracted m 18'74 to buud a harvester under the Garnhart patent, the property of the Garnhart and Rice Harvester Co. of Madison, Wis. Even so, the pool charged McCormick with infringement. In the affray that followed, McCormick exhibited his usual ingenuity, this time sending some of his men to the home town of the Marsh brothers to Scats for binder• look into the circumstances of their original invention. Whatever evidence was collected h:! appears to have used effectively to browbeat the pool into submission. In a letter to a friend, McCormick stated, "I think Marsh will be glad to comproThe Marsh Harvester mise -and save his patents. We believe we have the name of the party who invented the Marsh machine, as patented in 1858. nl8 In the face of such baleful statements, the plaintiffs ardour cooled and the suit was allowed to lapse. Partly because of McCormick's threats, but mcre because of the appearance of the wire binder, little more was heard from the harvester pool after 1875. The harvester was among the first in a series of revolutionary developments which changed the character of American agriculture from 1860 to the end of the century. These included not only innovations in farm machinery, but also vast improvements in transpcrtation, the rapid growth of government aid to agriculture, and a widespread movement toward agricultural education and scientific farming. In a milieu thus favourable to agriculture, it is not surprising that barely ten years separated the introduction of the first harvester and that of the first automatic binder. Indeed, the first binders were simply harvesters with a binding attachment added. The two men who had formerly stood doing the binding by hand were replaced by an arm which, when sufficient cut grain had been collected, would thrust its way over it, seize the bundle, lock a strip of wire about it, cut it loose and toss the bundle upon the stubble. The popularity of wire binders was intense but short-lived. 19 Farmers and millers complained that small pieces of wire inevitably broke off, and either remained on the ground as a hazard to livestock or became mixed with the grain to cause damage to milling machinery. But the first wire binders had hardly been placed on the market when experiments with machines using twine began to show promise of success. Leaders in these experiments were John F. Appleby of Wisconsin and Marquis L. Gorham of Rockford, Ill. Gorham took out patent protection in 1875. Though Appleby appears to have built a successful twine binder in the same year, he failed to obtain a patent until 1878, Then, seemingly unaware of his vulnerable position, he sold to Gammon and Deering the exclusive right to build his machine for the Illinois market, and at the same time licensed several smaller manufacturers for other areas. 20 The McCormick firm, which i1ad been somewhat skeptical of the wire binder and

Instability: The Nineteenth Century

9

the twine binder alike, only began to acquire patents in earnest in 1879. By 1880 the firm had licenses to produce both the Appleby and the Gorham twine binders, and had bought a host of smaller patents. With considera1,le discernment, the McCormick Co. reached a conclusion later confirmed by the United States Circuit Court of t,.ppeals, namely, that the Gorham patents had anticipated those of Appleby, and that the possession of the Gorham patents should prove a very effective weapon against producers using those of Appleby. This was McCormick's opportunity to sue rather than be sued, and the firm was quick to seize it. At this time, the only other producer of the Gorham binder was N.C. Thompson and Co. of Rockford, Ill., which had begun in 1859 and was destined to go bankrupt in 1884. In 1881, on McCormick's initiative, an agreement was made among the McCormick Co., the Thompson Co. and the Gorham heirs, to pool all the patents which they possessed and to demand royalties of $10 per machine from infringers. Thus cam·e into being the last of the important patent pools in the implement industry. The McCormick firm was not slow to adjust to its new role. Infringers were ferreted out and brought to terms with all possible speed. Even Nettie McCormick, widow of Cyrus, the inventor, showed that she knew something about the technique of successful coercion, as she exhcrted her son in 1883: Lack of prompmess in moving, or lack of deciding while the iron is hot may lose us the expected profits of the pool. Dragging along loses everything in such a business where the best chance of bringing the parties to terms is while they are under the impression of their peril in not coming to terms. . .. Delay is loss . Strike while the iron is hot. And in the poolcases make more moderate demands than we have made · but settle quick. That is the secret. Settle while they are in the mood for settling. 21 Trans la ting this wordly bit of advice into action, the pool was able to collect from in !ringers in most cases without court action. Its success lasted until 1889 when the Gorham patent expired, at which time the pool went quietly out of existence . EARLY PRODUCTION IN CANADA The early American implement industry did little selling in Canada. Demand in Canada for commercially-produced fami machinery remained negligible until the 1840's when wheat gradually came to succeed timber production follow_ing the scaling down of the timber preference in Great Britain. American producers made serious attempts to cater to the new market. As early as 1839, scythes of American make were cited as displacing those of British make in Upper Canada. 22 In 1847 the Canadian Economist noted that "agricultural implements, thus far, have but imperfectly engaged the anen tion of the manufacturers, although we see no reason why we should not make them as well as our neighbours. " 23 Six years later a report from Toronto stated that "during the last two or three years, manufactories of farmers tools and implements have been established in all the principal towns and cities in Upper Canada. So great is the demand for improved machinery that even American manufacturers have set up branch establishments in Canada, with very profitable results . .. 24 Americans were soon to find great difficulty competing with establishments located

10

The Agricultural Implement Industry in Canada

in Canada during the nineteenth century. Canadians enjoyed a threefold advantage in the form of natural protection, lower costs of labour and materials, and tariff protection. By the mid-sixties, Canadian firms were virtually in possession of the Canadian market, and an agricultural historian of the day pointed out that "so great has the supply ( of implements) become from our home manufacturers that an American machine is now as great a rarity as a Canadian one was a few years ago ... 25 Considerable natural protection was enjoyed by the Canadian implement industry as long as the market was confined to eastern Canada. This resulted principally from the lack of concentration in the implement market, the need for on -the -spot repairs, and the inadequate transportation facilities of the country, all of which made markets local. In addition, some American producers noted sales resistance among Upper Canadian farmers during the mid -century. In 1856 one of the Canadian agents of the McCormick Co. wrote to the Chicago office that "the Canadians are clannish and strongly prejudicial" in the matter of farm implements. 26 Again, in 1864 the company wrote to one of its agents that "high freights and duties have about played out that business (in Canada) and . . . that Canadians are a little shy of trading with Yankees, fearing that they will get the worst of the bargain always." The sentiments seem to have persisted even into the early years of Western settlement, for in 1876 the McCormick Co. refused to allow its Minnesota agent to extend his district into Canada "in view of the 171/2o/oduty and the known preference of Canadians for binders made under their own flag . .. 27 The cost advantage which the Canadian producers enjoyed was principally in the prices paid for materials and labour. American prices and wage levels rose considerably with the discovery of gold in California, and gained momentum during the Civil War and the post-war period. 28 But Canada's advantage in materials costs is perhaps more directly traceable to the low Canadian duties on pig-iron, bar iron, and steel -imported from Britain, which made these materials available to Canadian manufacturers at lower prices than to American. Even in the middle seventies the McCormick Co. , defending· its prices against the attacks of the Granger Movement, complained that "if Congress could be persuaded to reduce the import duties ( on iron and steel), the price of agricultural machinery would certainly fall ... 29 As it was, McCormick did very little selling in the Canadian market after 1857, when the company sold only three reapers in Canada, and these at a price of $160, while similar Canadian -made reapers were selling for $125 and $130 . 30 Most American selling in Canada, it seems, was done at sacrifice prices. Considerable dumping on the Canadian market followed the over expansion of American industry during the Civil War period, and some Canadian implement companies were among those submitting briefs to the select committee of the House which investigated the practice in 1874. The rapid obsolescence of farm machinery in the United States during the heyday of the patent pools made Canada a convenient place to dispose of machines considered obsolete below the border. 31 Similarly, the loser in patent infringement cases in the United States, prevented from selling the infringing machines in that market, frequently shipped them into Canada for sale at bargain prices. Hutchinson reports that, in the previously cited case between McCormick and Seymour and Morgan, the latter were driven to market the infringing reapers in Canada. 32 The first Canadian tariff on farm implements was imposed in United Canada in 1847, and for many years acted simply to supplement the other advantages. This was the be -

Instability: The Nineteenth Century

11

ginning of almost 100 years of implement tariff history, during which the level of the tariff, its purpose, and its political importance all underwent great change. (See Chart II p:55.): In the 1847 schedule the general line -0f agricultural implements was made dutiable at 10 per cent ad valorem, while duties on threshing machines and. fanning mills were placed at 12 1/2 per cent. Although revenue was the avowed purpose of most of the tariffs imposed in 184 7, some protective intent may have been present in the setting of higher duties on threshing machines and fanning mills. · Many of the smaller producers in Canada in the fifties specialized in the ·production of these imple ments, the firm of Paige and Johnston of Montreal being the largest. Probably as a result of the 1847 tariff, these Canadian companies met little American competition in the domestic market for these implements. As late as 1878, threshing machines in use in Manitoba were reported as "all brought up from Ontario. ,.33 COMPETITION FOR SALES Following the dissolution of the twine -binder patent pool, the character of competition in the American implement industry underwent a marked change. For fifty years the focal point of competition in the industry had been the product itself. Affected by a succession of radical changes and improvements between 1840 and 1890, the product had provided an outlet through which competitive pressures might find release in periodic scrambles for patents, patent infringement suits, and pooling arrangements. Adequate patent protection became a condition of survival, and patent matters became virtually an all-absorbing interest for the individual firm. Possession of the key patents for a particular implement reduced the need of resorting to price cuts, pressurized selling tac tics or other forms of aggression in order to gain competitive advantage. If a demand-for royalty payments went unhee·ded, a lawsuit could usually be relied on to bring results. Such was the era of the reaper, the reaper-mower, the self-raker, the harvester, ani the binder. The binder, however, did not soon give way to any new or radically different type of machine, and when the basic binder patents expired in the late eighties, there ensued a period of product stabilization not previously experienced in the industry. The result was new emphasis given on all sides to the development of elaborate selling organizations and selling techniques . Funds and personal energies formerly expended on patent advantages were free to be directed almost entirely into selling competition. The new emphasis on selling competition was augmented by the cessation of expansion in the domestic market at about the same time. Westward. migration, which had been held in check during the Civil War period, began anew in the late sixties and continued on a large scale throughout the next two decades. Encouraged by the Homestead Act of 1862 and the initiative of the Union and Central Pacific Railways in forging beyond the frontier of settlement, pioneers in the seventies pressed westward through South Dakota, Nebraska, Kansas, and Oklahoma. From the end of the Civil War to 1880, the acreage and production of wheat almost doubled. 34 , Expansion continued during the eighties under the stimulus of more prosperous times, continued railway development, and the increasing awareness that the supply of good free land was rapidly diminishing. In fact, says C. W. Wright, "the close of this decade is generally considered as marking the disappearance of the frontier and the end of the great westward movement: .,35 Market stabilization affected competition in the implement industry in three ways.

12

The Agricultural Implement Industry in Canada

First, it decreased the importance of spatial competition, in which producers vied for favourable location in relation to the market. The first harvesting machinery plants had been located along the eastern seaboard. As the market expanded westward, production followed into New York State via Brockport and Buffalo, through Ohio via Can ton and Springfield, and finally into Illinois where cities like Rockford, Rock Island, Moline, and Chicago became noted centres of production. Some extended intoWisconsin and Minnesota. The needs of the market dictated the geographical pattern of production. Thus mower firms usually remained in the hay-producing states of New York and Ohio, while reaper, harvester, and binder producers were to be found in the grain areas further west. After 1890, however, there were no further significant changes in the location of plants. With few exceptions, the principal centres of implement production in 1890 still hold that position at the present time. Second, market stabilization brought the disappearance of many small firms which had previously produced on contract with the larger holders of key patents. This fringe group served a purpose as long as inadequate transportation led buyers to prefer local producers over distant ones. With improved transportation and a stable market, the use fulness of such arrangements diminished and implement manufacturing came to be carried on by the leading firms in their own plants. Largely as a result of this, there was a marked reduction in the number of fi..rms between 1880 and 1890, from 1943 to_ 910 firms. 36 Third, market stabilization induced manufacturers to take a long, critical look at their distributive organizations. Implement manufacturers had traditionally appointed agents who received implements on consignment and sold them on commission throughout an allotted territory . In an expanding market, manufacturers were handicapped iu the selection of their agents by the ever-present necessity of penetrating new areas and the uncertainty sw:rounding the conditions of sale and the best locations within those areas. By 1890, however, the stabilized market, with its improving communications, its developing towns and roads, and the increasing specialization in agricultural production, made it possible for manufacturers to turn in earnest to the improvement of their selling organizations. Greater care was exercised in the selection of agents, and efforts were made by the leading companies to secure representation in all strategic points of the market. Such were the conditions in the American implement industry which paved the way for the harvester war of the 1890's and for the wave of concentration that followed. During the nineties, selling competition among harvesting machinery producers was carried to what now appear ridiculous extremes. Flamboyant advertising, extravagant field contests, and unbelievably easy terms all seem to have been the order of the day. One favourite field test consisted of tying two competing binders together and pulling them apart with teams to demonstrate that one or other was stronger; another, in which an employee of one company drove the competitor's machine, called for ramming the cutter bar of a mower into a post and then attempting to cut grass with it. In August, 1890, an implement trade paper reported that binder prices had never been more irregular and competition never more reckless than in that year. 37 In Jan uary, 1892, complaints began to arise from dealers' organizations, especially in the West, urging "that the manufacturer through his agent will cancel any contract with any dealer that is found cutting prices during the season • .,33 In the same year the

Instabilitv: The Nineteenth Century

13

:hairman of the harvester committee of the Western Dealers' Association wrote: "What we desire of manufacturers of harvesting machinery is that they should say how their goods should be sold, have fixed prices on the .goods, and compel all agents to maintain fixed prices and terms. ,,3 9 To what extent manufacturers did try to prevent price-cutting by dealers is not clear. It does seem that most of the reckless competition of the harvester war arose on the retail level and was not officially sanctioned by the companies involved. On at least one occasion, twenty-four of the competing companies issued a joint order to alldealers, bearing the signatures of their presidents, deploring "the habit of trying to break up sales made by other agents when you have not been successful in making a sale." In part it read: It has become a very common practice, as soon as a sale is made by one agen·t , for the agents of all other machines to try to break up that sale, by misrepresentations or by lowering the price.... We wish it now thoroughly understood that we will not tolerate this practice in any agent, and we will be glad to have reports from you of the agents of any machines who have tried to break up your sales in this way • • .• Our advice is: 1. Hold firmly to your prices. 2. Sell your own machine . Convince your purchaser that you have the best machine made. 3. Settle for the machine at the time of delivery. A machine works better after being settled for. 4. If you lose the sale do not try to break up the sale of your competitor. It won't pay. 40

CHAPTER TWO

CONCENTRATION:

1900 to 1915

THE HARVESTING MACHINERY INDUSTRY THE harvester war of the late nineteenth century came to an end when the five largest producers of harvesting machinery in the country were consolidated into the International Harvester Co. in 1902. They were: the McCormick Harvesting MachineryCo., Chicago; the Deering Harvester Co., Chicago; the Plano Manufacturing Co., West Pullman, Ill.; Warder, Bushnell, and Glessner, Springfield, Ohio; and Milwaukee Harvester Co., Milwaukee, Wis. 1 Having thus brought under single control 90 percent of the trade in grain binders and 80 per cent in mowers for the United States, 2 the International Harvester Co. proceeded to acquire three more important firms in the first year of its existence: D. M. Osborne and Co., Auburn, N. Y.: Aultman-Miller Co., Akron, Ohio; Minnie Harvester CQ., St. Paul, Minn. 3 ·Two of the latter group of acquisitions, those of Osborne and Minnie Harvester, were kept secret by International Harvester for nearly two years, during which the two companies were operated and advertised as independent concerns. Although International contended that such secrecy was necessary to facilitate the liquidation of certain accounts of the purchased concerns, much criticism and suspicion arose when the method became known. In 1912 the Bureau of Corporations cited the operation of these "bogus independents" as one of the unfair methods of competition resorted to by the International Harvester Co. in its early years. In addition to these eight companies which had entered the harvester merger by 1903, several others were seriously considered by the company, and in some case negotiations were actually carried some way before they broke down. Among these companies were the Walter A. Wood Mowing and Reaping Machinery Co. of Hoosick Falls, N. Y., the Acme Harvester Co. of Peoria, / Ill. , and the Massey-Harris Co. of Toronto, Canada. 4 In addition, at least two other substantial concerns were offered to the International Harvester Co. during the process of its formation, these being Adriance -Platt and Co. of Poughkeepsie, N.Y . and the Johnston Harvester Co. of Batavia, N.Y. 5 Deeringdesired that these companies be accepted into the merger, but the McCormick Co., seemingly desirous of preserving a measure of competition in the industry, successfully opposed him. A typed memorandum from the McCormick Co. to the Morgan Co., negotiators of the merger, stated:

Mr. Deering has urged that the whole trade be taken into the combination. Against this it has been suggested to him that if only 9fP/o were brought in, it would be quite possible to deal with another of the minor companies if any one made excessive de mands. That is, no minor company is probably essential to the combination, although the five named are undoubtedly the most desirable. 6 14

Concentration: 1900 to 1915

15

A considerable measure of vertical integration characterized the new company on its fonnation, resulting principally from the acquisitions made by the Deering Co. during the competitive period of the nineties. Shortly before the merger, Deering had built a rolling mill near his plant in Chicago. He acquired a controlling interest in a South Chicago blast furnace, bought leases on iron -ore property on the Mesabi Range and coal lands in Kentucky. He purchased hardwood forests in Missouri and yellow pine in Missis sippi. Deering apparently hoped by these purchases to gain a cost advantage over his chief rival in the binder trade. 7 From the outset, therefore, International owned many of its own sources of raw materials, a factor of considerable importance to the company's later competitive position. The formation of the International Harvester Co. in 1902 brought to a close twelve years of intermittent discussion on the subject among the principal binder manufacturers. As early as 1890 a group of leading binder producers, including McCormick and Deering, had reached a tentative agreement to consolidate into the American Harvester Co. This company had already incorporated in Illinois when the negotiations finally broke down because of disagreements over valuations. 8 Following this, at least two conferences had taken place between the McCormick and Deering Cos. with a view to amalgamation before 1902. 9 Only in June, 1902, however, did the House of Morgan enter the picture, and events proceeded rapidly after that. Whether Morgan or the harvesting machinery companies supplied the initiative in carrying through the merger is not entirely clear, though this became an imponantlegal question in later years. The Bureau of Corporations concluded emphatically that the Morgan interests had simply carried out the desires of the companies. International Harvester, on the other hand , contended that George W. Perkins, partner in the Morgan Co., conceived the idea, conducted the negotiations, and brought them to a conclusion. The harvester men met togethe1 around a Morgan confe1ence table in late July. Perkins talked again of the benefits to them and to their customers of a consolidated industry, of economies in manufacturing and distribution, of foreign fields waiting to be developed. He talked of his proposed financial structure and the new conquests of new fields of endeavour that should result. He talked so well and painted such a 1osy picture of the future that his listeners almost forgot their ancient differences and were willing to try to be friends. 10 Such was International Harvester's later description of the procedure. The original International Harvester Co. was capitalized at $120 millions, $ 60 mil lions being issued to the merging companies for their plants, equipment, and inventories, $50 millions for bills and accounts receivable, and $10 millions of stock issued to the House of Morgan for cash.11 A remarkable feature.of the merger, considering that it took place shortly after 1900, was the absence of any significant amount of watered stock. The Bureau of Corporations estimated the assets of the original Intemational Harvester Co. to be worth $110 millions and, since this figure included no allowance for goodwill, the Bureau concluded that in this case, "the usual practice of inflating the issues of stock was not attempted in any marked degree. " / In explanation of this, the Bureau cited the money-market conditions of the time, 12 and the close family ownership of the companies merged. In the new company ( the McCormick family received

16

The Agricultural Implement Industry in Canada

42. 6 per cent of the stock and the Deering family 34. 4 per cent. Control of the policies of the International Harvester Co. during the first ten years of its existence was placed in the hands of a three-man voting trust composed of C.H. McCormick, the new President, Charles Deering, the new Chairman of the Board of Directors, and G. w. Perkins of the Morgan Co., presumably representing the smaller constituents. The purpose of the voting trust, which for ten years exercised all of the normal powers of stockholders, was "to carry the company through its first years and to retain control in the hands of the old harvester families. nl3 Although technically the voting trust gave equal voice to the three representatives, the Bureau of Corporations found in 1913 that the "predominating influence appears to have been with the McCormick interests. nl4 EARLY PROBLEMS OF INTERNATIONAL HARVESTER The first major problem faced by International Harvester was that of integrating into a unit the manufacturing and distributing operations of the constituent companies. The task was extremely difficult. In addition to the tremendous duplication of physical resources that existed in the new company, an undercurrent of jealousy hampered negotiations among the former competitors. The persistence of family interests and the c.on., centration of control in a voting trust in which the two most powerful families predominated, made rapid adjustment impossible. Cyrus McCormick noted some years later that "the final solution of jealousy-bred, petty friction did not come until the flowering of company spirit at the expiration of the voting trust. nl5· These difficulties were intensified by the shrinkage of the market for harvesting machinery relative to what it had been during the period of active competition in the 1890's. This was partly a result of overselling the market during the competitive period, but the major reason was the failure of wheat acreage and production to expand in the decade.1900 to 1914 at a rate comparable to that of the preceding decade. In fact, in the opening decade and a half of this century wheat acreage and production remained nearly stationary.16 As a result, the annual sales of harvesting machinery made by the company declined during its early years. Whereas the average annual number of binders sold by the merging companies prior to 1902 had totalled 152,000, the binder sales of International Harvester during the first ten years averaged only 91,000. For mowers, the figures for the same periods were 217,000 and 170,000. The reduced volume meant heavier average overhead costs in both manufacturing and distribution, and provided an incentive for the company to rearrange its existing facilities with a view to broadening its line of products to include tillage as well as harvesting implements. As a first step, a separate selling organization was established. The International Harvester Co. acquired all the stock of the Milwaukee Harvester Co. ( of which it already held the property), changed the name of this subsidiary to the International Harvester Co. of America, and transferred to the new company all of its warehouses and other facilities for selling. Since then the International Harvester Co. of America has been the separate selling subsidiary of the larger company. The reason for this move in 1902 was that the Milwaukee Co. , with its smaller capitalization, was allowed todo business in many states from which it was felt the combination might be excluded.

Concentration: 1900 to 1915

17

For a full year aft.er the merger, the productive organizations of the componentcompanies were left virtually intact, being simply renamed divisions of the new corporation. By 1904 it was possible to attempt some rearrangements . First, plant space rendered idle by the reduced sales of harvesting equipment was converted to the production ofother types of implements. The Plano Co.'s machinery was moved to the Deering Works at Chicago, and the Plano plant turned over to the production of wagons and manure spreaders. Simi larly, the Milwaukee Harvester C o.'s equipment was moved to the McCormick Works and the Milwaukee plant equipped to produce cream separators and stationary gasoline engines. Second, the new company purchased in its early years several firms already established in the production of tillage implements. Such purchases were meant to reduce the heavy overhead cost of marketing harvesting implements during very short selling seasons each year, by spreading the company's selling activity over a greater part of the year. In 1904 the Weber Wagon Co. of Chicago and the Keystone Co. of Rock Falls, Ill. , were acquired, the latt.er being the producer of an historic line of tillage and haying implements.17 In 1906 two manure ~preader plants operated by the J. s. Kemp Co. at Newark Valley, N. Y., and Waterloo, Iowa, were acquired. In addition to purchasing short-line firms, International made selling arrangements with several of them under which the company marketed their products under its own name. In 1905 such a contract was made with the Bettendorf Axel Co. of Davenpon, Iowa, for the sale of its entire output of steel wagons . In 1909 International contracted to sell in the Canadian market only, the plows of the Parlin and Orendorff Co. of Canton, Ill. A similar contract was made with the Oliver Chilled Plow Co. in the following year. In 1912, through an arrangement with the American Seeding Machinery Co., International became the sole seller of the entire output of that company's plant at Richmond, Ind., later purchased by International in 1920. By these means Internati"onal Harvest.er was gradually transformed from a short-line company producing binders, mowers, and rakes, into a long-line company marketing a year-round variety of farm equipment. The company' s selling arrangements with other firms during the transition period helped it to retain its dealers in the inter-harvesting seasons e ven before it had become a full-line firm. In fact, the company did not become a full-line manufacturer until 1919, when it was able to announce in its annual report: The most important manufacturing development of 1919 was the company's entrance into the plow business in the United States. This was accomplished by the purchase of the well-known and long-established Parlin and Orendorff plow business at Canton, Illinois, and of the Chatanooga Plow Works, Chatanooga, Tennessee. By these purchases the company has rounded out its list of products with an essential implement not heretofore manufactured by it. It is interesting to note that while at its forma tion in 1902, the Harvester Company manufactured only nine kinds of machinery, the "International line" now consists of 54 separate classifications. An interesting phase of the integration problem had to do with trade names. For years the new company hesitated to abandon the trade names formerly used by its constituents for fear of losing buyers who, through habit or conviction, had become attached to one of them . When the Aultman-Miller Co. was acquired', H. F. McCormick stat.ed in a letter to C. S. Funk, general manager of the company:

18

The Agricultural Implement Industry in Canada The Buckeye selling organization will market a certain number of Buckeye machines each season by reason of the prestige of the Buckeye machine and on account of the standing that a good many of the dealers have in the country. They have always been able to hold some good strong dealers, and for this reason there is some natural demand for Buckeye machinery; and their local selling organization is so generally scattered over the trade that there is a local influznce and prestige connected with the sale of the Buckeye machine which is almost entirely lacking in the Acme line. 18

Thus in 1912, though the Mc:Ccrmick and Deering lines had become established as the leading sellers, the company was still marketing harvesting machinery under the names of McCormick, Deering, Champion, Buckeye, Milwaukee, and Osborne. This involved severe handicaps. During the competitive period, for example, most of the constituent companies, and particularly McCormick and Deering, had pressed their retail agencies into nearly every town, village, and hamlet in the country. After the amalgamation, the McCormick and Deering dealer outlets were retained almost ir. their entirety, along with a scattering of dealerships marketing other names. The problems were manageable as long as the company produced harvesting implements only; ?ut as production and marketing operations were extended to a variety of tillage implements, they became extremely difficult. Each of the McCormick and Deering sets ,of dealers had to be provided with a complete line of implements, distinct from the other in design as well as in name. For almost twenty years, two complete lines of both harvesting and tillage machinery were produced and for a while there were even two tractors. Such a multiplicity of models taxed to the limit the planning ability of the company's engineers and the productive ability of its plants. How the International Harvester Co. viewed this situation is summed up in the following extract from a company sales committee report: We believe that so long as there is competition it is desirable for the company to maintain five selling organizations for the purpose of getting the largest amount of effort from the greatest number of local agents without expense to the company, and for the purpose of utilizing in its own business as much as possible of the local agency material rather than permit any of it to become available for competitors.19 Only in 1918 was this view modified and then by action of the courts. A consent decree of that year20 enjoined the company from having more than one agent or representative in any city or town in the United States for the sale of its harvesting machinery or other implements. The immediate effect was a drastic reduction in the number of dealers from 21,800 in 1917 to 13,860 in 1919. 21 In addition, the company discon tinued the practice of producing two complete lines of implements to bear the McCormick and Deering names. Following the restriction on dealerships, such production became purposeless and uneconomical. By 1923 the company had designed an entirely new binder, which it claimed embodied the best features of both former models. This implement, shortly to be followed by a host of others, introduced to the market for the first time the famous "McCormick-Deering" trade name which has since appeared on the company's farm implements. 22 A second provision of the consent decree aimed at reducing the number of smaller lines marketed. The company was ordered to offer for sale

Concentration: 1900 to 1915

19

the harvesting machinery lines now made and sold under the trade names of "Osborne," ,'"Milwauke~!__: and "Champion·," respectively, including the exclusive right to use such trade names, and all patterns, drawings, blueprints, dies, jigs and other machines and equipment specially used by the International Harvester ComKany in the manufacture of the said three harvesting machine lines respectively. 2 The purchaser was to be a responsible manufacturer of agricultural implements in the United States, with no affiliation with International Harvester. In the event of disagreement over the price , the Court was to decide what it should be. As a result of this order, the Osborne line was immediately sold to the Emerson -Brantingham Co. of Rockford, and the Champion line to the B.F. Avery Co. of Louisville. The Milwaukee line was not disposed of until 1924 , when it was sold to the Moline Plow Co. of Moline, Ill. A third stipulation required the company to offer for sale the plants in which it was then producing the Osborne line and the Champion line, these being loca ted at Auburn, N. Y., and Springfield, Ohio, respectively. Apparently it was hoped that these plants would be sold to the buyers of the Osborne and Champion lines of implements, but these buyers did not want them. The Court, therefore, with the consent of the government, permitted the company to cmtinue to operate these plants for other purposes. The consent decree of 1918 was only one of a number of Court decisions which af fected the company during the first quarter-century of its existence . The United States government, though frustrated in its early attempts to enforce the Sherman law, 24 did what it could by passing, in 1912, a Senate resolution directing the Bureau of Corpora .tions to investigate the International Harvester Co. and the farm implement trade. 25 The report of the Bureau of Corporations on International Harvester was completed in 1912 and published in 1913 . The Bureau observed that although competition in the pre-amalgamation period hctd been keen, it had not been as ruinous as the companies had claimed. On the basis of an examination of the profit records for the pre-amalgamation period, the Bureau concluded: "There is no doubt that the principal motive for the formation of the International Harvester Company was to eliminate competition and to secure a dominant position in the trade. 26 Regarding the competitive methods used since the merger, the Bureau referred to the use of bogus independents, full-line forcing, monopolizing the best dealers available, and resale price maintenance . The use of bogus independents has been discussed. 27 Full-line forcing is the tenn generally used in the implement industry to denote exclusive dealing. The Bureau found that Harvester was able to force dealers to handle the new tillage lines which it was introducing under threat of depriving dealers of its monopolized harvesting machinery lines. The report stated that the company had -originally included an exclusive-dealing clause in its contracts with its dealers, but that this practice was discontinued in 1905 "when antitrust proceedings wer,e threatened against the company in several states. " The charge of monopolizing the best dealers sprang out of the company's efforttore tain multiple sets of dealers in the various rural localities. On the subject of resale price maintenance, the Bureau charged that ''The company at one time openly attempted, through a clause in its .commission contracts, to control th~. prices paid for its machines by the farmer. Since the elimination of this clause, 'suggested' retail price lists have been rather generally circulated by some of its branch.es. n28 Nevert.'leless it was con0

20

The Agricultural Implement Industry in Canada

tended that the use of "suggested" price lists had virtually the same effect as an outright stipulation, especially in view of the company's strategic power to deprive an offending .1gent of the right to handle its monopolized products. In addition to these four abuses, the exceptional financial resources of the company were cited as helping maintain its monopolistic position. The company's connections with J.P. Morgan and Co. and John D. Rockefeller, the latter the father-in-law of one of the McCormicks, gave it ready access to loan capital not so easily available to the company's competitors. This, the Bureau contended, not only enables it to secure the economies of largescale operations, which, as a rule, give it marked advantages in manufacturing costs, but also enables it to maintain a very elaborate selling organization by virtue of the variety and extent of its business. Furthermore, (the company's financial resources) give it a great advantage in extending credit to purchasers, an exceedingly important feature of the farm machinery industry. 29 Encouraged by the findings of the Bureau of Corporations in 1912, the United States government immediately brought suit against the International HarvesterCo. for violation of the Sherman Anti-trust, Act. 30 The government contemplated a decree, splitting up 1te combination, and it appeared that the primary requisite of such a split was the separation of the two chief elements of the combination, the McCormick and the Deering plants and brands. 31 Thus the original petition of the Department of Justice asked for the appointment of a receiver for the company if it did not submit to a bona fide plan for such a separation. This petition was considered by the Court for two years before a decision was reached. In August, 1914, the Court found in favour of the governmem, and the company was ordered "separated and divided among at least three substantially equal, separate, distinct and independent corporations with wholly separate owners and stockholders. "32 Im mediately International appealed the decision to the Supreme Court of the United States. The appeal was argued inconclusively in 1915 and again in 1917, and was then placed on the calendar for reargument. It was still unsettled early in 1918 when, along with seven other anti-trust suits, it was postponed for hearing for the duration of the war. International's legal status remained thus in the balance until July, 1918,• when the company, fretting under the uncertainty of the case, made a proposal to the Attorney General. The two parties agreed to enter a consent decree, the company stipulating that this should be a modified form of the original decree. Thereupon the company moved to have its appeal on the 1914 decision dismissed, and the modified consent de i:ree, the provisions of which have already been noted, 33 was entered in November of the same year. In the Report of the Attorney General for 1918 the Harvester case was described as "the most fundamental issue which had arisen under the Sherman Act since its constitutionality was determined." The Attorney General cited the dissolution order of 1914 and the consent decree of 1918 as support for the government's contention that industrial combinations "large enough to make the resulting restriction of competition direct and substantial" were unlawful regardless of whether or not the combination had actually used its power wrongfully .

Concentration: 1900 to 1915

21

The government's optimism was unwarranted in the light of the events of the following nine years. In July, 1923, the Department of Justice filed a petition in the District Court of Minnesota for revision of the consent decree to bring about a further dissolution cf the International Harvester Co. The department claimed that the consent decree had failed to restore competition, and that InternationalHarvester, by virtue of its size, still dominated the industry . To prove this, the department had marshalled impressive evidence. It showed, for example, that in 1922 International enjoyed 75. 4 per cent of the total binder trade of the country, 66. 7 per cent of the mowe_rs, and 70.5 per cent of the corn binders. Its closest competitor in that year was the John Deere Co. _with between 11 per cent and 15 per cent of the totals in these implements. Moreover, it had the support of the Federal Trade Commission, which had issued a Report on the Causes of High Prices of Farm Implement; in 1920. The Commission had concluded that the consent decree of 1918 had had very little effect on Harvester's dominating position in the industry, because the lines which it gave up were declining in popularity and were costly to produce. The Commission therefore recommended the separation into two companies of the McCormick and Deering plants and brands. Nevertheless the Department of Justice lost its suit. In 1926 the District Court denie,i its petition, stating: The evidence in this case ... fails to prove ... that the International HarvesterCompany, since the sale of the 'Osborne' , 'Milwaukee' and 'Champion' lines and their appurtenances has been or is unduly or unreasonably monopolizing or restraining interstate commerce in harvesting machinery in the United States; but in our opinion it conclusively proves that it has not done and is not doing so, that competition in the manufacture and sale of harvesting machines in interstate commerce in the United States has been and is free and untrammeled. The Court pointed out that since 1902 Im~rnational's share of the market for all harvesting implements had decreased from about 85 per cent to 64 per cent and that powerful com petitors (doubtless referring to the John Deere Co.) had entered the field, in whose presence "Harvester cannot and does not control or dictate the prices of the harvesting machinery. " The government appealed this decision to the Supreme Court of the United States which, in June, 1927, upheld the decision of the iower court, thus bringing to an end Harvester's fifteen-year interim before the courts. In so doing, the Supreme Court issued the often -quoted dictum that "the law does not make the mere size of a corporation, however impressive, or the existence of unexerted power on its part, an offense, when unac companied by unlawful conduct in the exercise of its power. ,.34 The Supreme Court conceded that independent firms usually sold their implements at the approximate prices charged by International, but this was done "independently and as a matter of business expediency." Moreover, the Court stated that no instance had been discovered where Harvester had reduced its prices for the sole purpose of driving out a competitor. The 1927 decision on the Harvester case has recently been cited as an example of "bad law and bad economics" on the ground that power that exists must be used, whether

22

The Agricultural Implement Industry in Canada

for good or for ill, and that "unless it abandons its business objectives, a compan/ will use its market power to maximize its earnings over some period, short or long • ..3 Yet the subsequent history of the farm implements industry has shown that the possession of a preponderance of power by the International Harvester Co. did not prevent the rise of strong competitors or the relative decline of Harvester's positionin theindusay. Though it may appear as "bad law and bad economics," the Court's decision in the Harvester case may not have been bad psychology. The company, chastened by fifteen years under threat of dissolution by the courts, may well have seen the long-term maximization of its earnings dependent on the establishment of a mere competitive industry. TD.LAGE MACHINERY PRODUCERS Sizeable competitors did begin to appear in the early years of the century, the most important of which grew out of firms making plows and other simple tillage implements. As long as the chief instruments of the harvest were the scythe and the cradle, the size of the crop which the farmer might safely plant was restricted by the inefficiency of harvesting. Only after considerable progress had been made in the development of harvesting machinery did a market begin to develop for implements to speed the preparation and seeding of the soil. Plows and harrows, of course, had always been in demand, and improvements in the design and the materials used in plows were among the firstinventicns to take place outside the harvesting machinery fold. A notable feature of plow production has always been the tremendous variety of shapes, strengths, and designs which must be turned out to accommodate different soil conditions. The opening of the prairies broughtsoil and growing conditions not previously encountered, and the variety of plows required was greatly increased. Among other things, superior strengths were required to break the tough prairie sod, and gang plows came to be preferred over the single-furrow type previously most widely used. For twenty years after the close of the Civil War, plow producers appear to have been very numerous, competition among them intense, and turnover of firms high. Subsequent development paralleled that in the harvesting machinery indusay, insofar as the stabiliza tion which set in in the latter part of the century produced for the first time conditions favourable to concentration in the industry. By 1900 the adaptation of the plow to new soil conditions was virtually complete and the competitive advantages to be gained from exploiting the market in newly opened areas had disappeared. Under these conditions, price and selling competition became more intense, consolidations were numerous, and the number of firms in the industry was greatly reduced. The first sign of concerted activity among plow manufacturers appeared in 1884 when a loose -knit plow association was formed by several of the leading producers. 36 Later in the 1880's a broader organization was formed, known as the National Plow Assoc., com prising about twenty plow concerns, including such important names as Deere, Moline, Parlin and Orendc.df, and A very. Both of these organizations appear to have attempted with considerable success to restrict competition in the industry and regulate prices. The first large-scale effort at consolidation was made in 1901 when an attempt was made to consolidate the leading plow manufacturers into one giant company to be called the American Plow Co., and to be capitalized at $70 millions. Deere and Co. was the

Concentration: 1900 to 1915

23

leader in this attempted consolidation but the project failed. 3 7 After this unsu-::cessful attempt, the large plow companies appear to have returned their attention to acquiring other firms, specifically firms producing other types of tillage implements, grain drills, and seeders. In this their experience again paralleled that of the harvester producers, for it was found that the establishment of a strong and permanent dealer retail organization required the handling of a full year-round line of both tillage and harvesting implements. Thus the tillage producers soon began either to develop harvesting machinery producti.0_1 in their own plants or to acquire firms already established in the field. Among the plow firms which expanded in this manner, the name of John Deere Co. stands out. The present John Deere Co. traces its history back to 1837 when John Deere, a blacksmith in Grand Detour, Ill., fashioned the first commercial steel plow from a broken handsaw blade, heated and hardened over a wooden form hewn from a log. 38 The mos~ popular feature of the steel plow was its ability to scour. Earlier wooden and cast-iron plows had usually succeeded in breaking the sod, but in later plowings the earth often clung to the moldboard, increasing the draft and making the plow difficult to hold in the ground. A paddle to clean the moldboard had been standard equipment for every plowman. After inventing his steel plow, Deere immediately formed a parmership with one Majer Andrus and began production for sale. Nine years later, 1,000 plows were produced in the factory at Grand Detour. In 1847, because of the difficulty of obtaining raw materials and of moving the finished plows from Grand Detour, John Deere sold out to his partner and moved to Moline, Ill. , where he again began the manufacture of plows. The Grand Detour Plow Co. , which Deere left, continued to flourish. Eventually, in 1918, it was absorbed by the J. I. Case Co. (see Chart I, between pp. 12 and 13). 39 Once established in Moline, the Deere Plow Co. grew so rapidly that adequate distribution facilities became an early problem. To solve it, the company established branches in the main distributive centres where Deere products were sold. Sufficient volume for these branches was obtained by selling the products of other manufacturers. In 1877 the company further increased its volume by building a second plant at ~Ioline, which manufactured a variety of harrows, cultivators, and other plowing and tillage implements. By the end of the century, Deere and Co. was recognized as the largest manufacturer of plows and tillage implements in the United States. Developments in the first few years of the century, however, caused the company some concern. Not only did its efforts to consolidate the plow producers in 1901 fail, but in 1903 a New Jersey

$3,573,817 3,183,181 1,566,052 893,284 753;435 1,035,735

Empire as a per centage of total 20 17 21 33 54 55

The Agricultural Implement Industry in Canada

74

TABLE IX (cont'd)

Year 1935 1936 1937 1938 1939

Total exports of farm machinery

Exports to Empire countries and United Kingdom

Empire as a percentage of total

$ 1,956,991 2,348,897 2,726,216 3,343,553 2,320,655

54 36 43 30 36

$ 3,567,253

6,344,437 6,276,608 10,705,957 6,453,042

(a) Source: Committee on Agriculture and Colonization 1936, p. 280; and Canada Year Books.

TABLE X Canada(a)

otal exports of farm machinery

·.L

Year 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939

$15,870,918 18,396,688 7,188,078 2,484,965 1,324,776 1,819,826 3,567,253 6,344,437 6,276,608 10,705,957 6,453,042

Exports to the United States $ 4,367,408

4,118,842 2,030,436 749,012 220,794 332,519 603,040 2,467,203 1,926,351 3,743,473 1,802,895

Exports to United States as percentage of total 27 22 28 29 15 15 17 38 30 34 28

(a) Source: Committee on Agriculture and Colonization 1936, p. 280; and Canada Year Books. RECOVERY: LOW TARIFFS By the middle thirties the desperate plight of Western farmers had given rise to con siderable parliamentary discussion of implement prices. The Liberal government, still much aware of the desirability of winning Western farm support, had its opportunity when it was swept to power in 1935. Without delay the government began negotiations for a new trade treaty with the United States and before the year was out the implement in dustry's second term within the protectionist fold had ended. With the negotiation of the

Technology and Depression

75

Canada -United States Trade Agreement, tariffs on implement imports from the United States were reduced from 25 percent to 12 1/2 percent, and duties on all tractors from the United States were eliminated. This 50 percent decrease was really only a beginning. The Agreement came into effect on January 1, 1936. At almost the same time, the new price lists of the Canadian implement companies appeared announcing a 3 percent rise in the pri~es of a group of farm implements. This price increase, which affected only twenty-eight of the seventy-eight important machines sold in Western Canada, and which the industry claimed was the result of higher steel prices, met with loud protests within the Liberal party. Many regarded it as a clear breach of the industry's pledge of 1930. As a result, on March 2, the House Standing Committee on Agriculture and Colonization was ordered to enquire immediately "into the causes underlying the high prices of farm implements, with particular reference to the advance in prices for the year 1936." Simultaneously, the industry was requested to suspend the price increases until the Committee had decided upon their justification. Some of the implement companies complained against the appointment of the Committee and this request, as having had the effect of slowing business at a time when recovery was just beginning. 37 The request to defer the price increase was not heeded by the companies and, after a vigorous debate in the House, the Liberal government retaliated by further reducing the duty on American imports from 12 1/ 2 percentto 7 V2 percent in May, 1936. Very little opposition was voiced in the House of Commons to this sec end reductioo., though one Eastern member claimed, rather fancifully it would seem, that the 1924 decreases had already "ruined the industry ...3 s The announcement of the impending investigation into the implement industry evoked various reactions. The industry as a whole appears to have resigned itself at the outset, and indeed it extended gratifying co-operation and assistance to the Committee throughout all of its work. The financial press was less urbane. One of the bitterests outbursts against the investigation came from The Financial Post, which caterwauled editorially: Trouble looms for the farm implement industry. Every dependable sign points to this industry being made the victim of as implacable a head-hunting expedition as any commercial enterprise since the more malignant days of the Price SpreadsCommittee. On Parliament Hill it is conceded that the implement industry has committed a major crime. It has seen fit, in the early days of the Liberal Ministry, to boost prices of implements -- this at the very time the government is reducing tariffs and cheapening production costs. Western Liberals are outraged. 3 9 The "head-hunting expedition" proved to be a most orderly and objective enquiry in which an extremely patient effort was made to secure all relevant facts from both industry and government sources. The Committee on Agriculture and Colonization did not complete its investigation in 1936, and it was succeeded in 1937 by a Special Committee on Farm Implement Prices, which submitted a report to the House in that year. The Committee found that the implement companies over the period of their operations as a whole, had made "substantial profits on the capital invested." The losses sustained in the thirties were a result of farmers' inability to purchase implements, and

'16

The Agricultural Implement Industry in Canada

not the fact that prices of farm implements were lower than was justified by manufacturing and distribution costs. With regard to tariffs the Committee concluded that tariff reduction had tended in the past to lower the price level to the farmer, "depending on the extent of free price competition in the industry." The 1936 price increase, con eluded the Committee, was not justified by an increase in manufacturing or distribution costs. Indeed, the prices of implements over the period 1891 to 1936 had been "maintained at too high a level as shown by the financial returns to the companies engaged in the industry during the period. " Unfortunately, although some thousands of pages of oral testimony were collected by the Committee, an insufficient attempt was made at the time to correlate the evidence and to make it readily available to the public. Indeed, in its final report, the Committee recommended "that some agency of Government should carefully analyse and correlate the evidence appearing in the records of the Committee." No such analysis was ever made, and the Committee's work stands as a monument to a patient but somewhat unfruitful investigation. One is struck by the contrast between the paucity of the con clusions in the report produced by the Canadian committee and that of the United States Federal Trade Commission on the implement industry in that country two years later. No tariff reductions resulted from the work of the Ottawa Committee. This investigation was followed in 1939 by a provincial enquiry into implement prices, conducted by the Province of Saskatchewan. The Saskatchewan Committee's report included rec ommendations that the implement tariff be entirely eliminated, that proceedings be instituted against the industry under the Combines Investigation Act, that Crow's Nest Pass Agreement freight rates be restored on farm implements, and that extensive government assistance be made available to co-operative associations interested in the manufacture and distribution of farm implements. Like that of its predecessor in Ottawa, however, the work of this Committee resulted in no positive action. Meanwhile, life returned slowly to agriculture and to the implement industry in the late thirties, Cash income from the sale of farm products increased each year, from $536, 0 millions in 1935 to $735, 0 millions in 1940. Income of wheat farmers rose, except for the drought year of 1937, from $173. 0 millions in 1935 to $309. 5 millions in 1940, With the return of prosperous conditions, the controversy over implement prices quieted, and the industry accepted without much complaint the new tariff level. In the absence of pressure, the government, faced with important problems of reconstruction and dominion -provincial relations, limited its tariff activity to the renegotiation of the Empire agreements in 1937, and the drawing up of a new trade treaty with the United States in 1938, neither of which affected the tariff on farm implements,

CHAPTER SEVEN PRODUCTION,

EXPORTS,

AND IMPORTS

WARTIME RESTRICTIONS AND TARIFF REMOVAL DURING World War II, the implement industry, in both the United States and Canada, experienced restricted production, price control, and rationing. In the United States, increasing shortages of materials forced curtailment of production even before that coun try entered the war. On September 30, 1941, the U.S. Limitation Order L-26 was issued restricting farm implement manufacturers to 80 percent of their 1940 tonnage in new machines and 150 percent in repair parts. This order was operative until October 31, 1942. The effect of the restriction was immediately felt in Canada where imports from the United States had comprised over 55 percent of the total implement sales in the three years through 1941. Canada had as yet introduced no similar restrictions, but, as a result of the United States move, conferences were immediately held in Washington between representatives of both governments, following which the United States War Production Board agreed to supply to Canada its full share of the restricted American production, based upon imports into Canada for the year 1940 . Simultaneously, Canada agreed to impose limitations on implement production similar to those in the United States, and in January, 1942, the first Administrative Order affecting farm machinery was issued by th~ Wartime Prices and Trade Board, limiting production to 84 percent of the 1940 tonnage in new machinery and 140 percent in parts. More drastic curtailment became necessary in 1943 as steel shortages became more acute. Limitation OrderL-170 of the United States War Production Board limited production of new machines for that year to 20 percent of the 1940 base, leaving parts at 150 percent. At the same time, through Administrative Order A-749 of the Wartime Prices and Trade Board, Canadian production was limited to 35 percent in new machines and 150 percent in parts. Some modification of these orders was begun in late 1943 as the materials situation slowly improved. This continued throughout the first six months of 1944, and by July of that year virtually all restrictions on productionhadbeenrer.1.oved. Restricted production in the early 1940's coincided with a sharp rise in farm income, consequent upon a series of extraordinarily good crop years and favourable prices. As a result of the upward pressure on implement prices, the Wartime Prices and Trade Board in February, 1942, froze implement prices at their 1941 level, announcing that separate adjustments not exceeding 5 percent might be made in individual cases through special application to the Board. Only two significant relaxations of this policy occurred before price restrictions were completely removed in September, 1947. Late in 1945, the Board permitted the prices of imported machines to be raised to the extent of the increase approved by the Office of Price Administration in the United States. In April, 1946, a 12 l ' :2 percent price increase was allowed on domestic production- in Canada, the first since 1941. Concerning the latter increase, the Board stated: 77

78

The Agricultural Implement Industry in Canada Authority to raise prices was granted because, with the changeover from wartopeacetime production, manufacturers no longer appeared to be in a position to absorb the full wartime increase in the cost of production. Moreover, some costs had recently increased because of the authorized advance in the price of steel and castings and because of the rising cost of component parts imported from the United States. The price adjusonent was limited to the smallest practicable amount and was based on the best obtainable information on the current and prospective operating results of the companies concerned. The fact that export prices were considerably higher than domestic prices was a significant factor in limiting the advance required in the domestic ceiling. 1

The apologetic tone of the statement reflects the Board's awareness of the strategic political importance of farm implement prices in Canada. The announcement of the authorized increase was made by the Minister of Finance before the House of Commons, rather than by the Wartime Prices and Trade Board, as was customary with ordinary price :ncreases. It is also true that the increased cost to the Canadian consumer resulting from this price increase, considering especially the large percentage of imported implements, was much less than that resulting from many other increases. The protest raised against !.t, however, both in and out of Parliament, was out of all proportion to the amountin·,olved. In addition to production and price controls, Canada and the United States both imposed war time export restrictions and an elaborate system of rationing on the implement industry. Export restrictions were roughly comparable to those on production. Rationing was begun when production was reduced in 1942. Under this program pra;pective purchasers submitted requisition forms through the implement dealers to the governmentrationing officers, who passed on their merit. Deliveries to implement dealers were scaled down in proportion to the decreased production. The sharp drop in implement production which followed war time restrictions was balanced by war -production orders. Of the total sales volume of the C ockshutt Plowe o. in 1943 and 1944, amounting to $33,760,000, 60 percent was war production. Fer the Massey-Harris Co. the corresponding figures were $183,238,000, and 64 percent. At the outbreak of hostilities, Massey-Harris wrote down the net assets of its German plant to one dollar, thus adding $682,000 to its already-substantial debit balance m 1939. 2 In the following year the company's assets in Denmark, Belgium, and France were also written down to one dollar, adding another $1,349,500 to the deficit. Thus by the time of the capital reorganization of 1941, most of the company's European assets had been added to the company's debit balance. When the war ended, it was found that the German plant had been completely destroyed, but the plant and branches in France, Belgium, and Denmark were relatively unharmed. For some years after the war, all of the com pany' s European assets were carried on the balance sheet at the nominal value of $4. 00, "owing to the inflationary situation and the resultant continued uncertainty as to the valuation of the various currencies." 3 In 1944 the Canadian government removed all tariffs from farm implements and parts. This was done through the passage of Bill No. 167, in the form of an amendment to the Tariff Act itself, a procedure which immediately suggested that the change was intended to be permanent. The step was in keeping with the general post-war policy of facilitating

Production, Exports, and Imports

79

low-cost production in all segments of Canadian industry . It appears to have been similar in intent to the Prairie Farms Rehabilitation Act, the Agricultural Prices Support Act and the Farm Improvement Loans Act as a direct aid to the agricultural sector of the economy, and to the privilege accorded to industry of writing off certain types of new investment at special rates of depreciation for income tax purposes between 1944 and 1947. In introducing Bill 167 to the House in his Budget Speech in 1944, Finance Minister Ilsley stated: The government desires to give concrete evidence of the direction which 1t is endeavouring to follow in the formulation of post-war commercial policy. It desires also to give to agriculture assurance in respect of some of the conditions under which it may expect to operate after the War, just as it has tried to give to industry some assurance in the field of taxation policy. Canadian agriculture will be faced with important opportunities in the post-war period and if it is to take full advantage of them, its costs of production should be at the lowest practicable level. . .. With (this) end in view, the government believes it appropriate to provide at once and without waiting for the completion of reciprocal arrangements with other countries, for the removal of all customs duties on agricultural implements. It is therefore recommended that agricultural machinery, including cream separators, and parts thereof, be made free under all tariffs. While it is impracticable from a revenue standpoint to remove the war exchange tax on the general range of commodities, the war exchange tax on agricultural machinery and cream separators and parts thereof is being removed along with the customs duties. 4 The government recognized , said Mr. Ilsey , thatthestepwouldhave little immediate effect on the volume of imports, because of the tremendous backlog of demand which had built up in both Canada and the United States over the preceding fifteen years. The move, in other words, was well timed to cause little immediate dislocation in the Can adian implement industry and to evoke as little protest as possible. It was not entirely free from political significance, however, for the government was to face a general election in the near future, and the rising strength of the CCF party, especially in Western Canada, could not be ignored. CCF members of the House of Commons, led by Mr. Coldwell, had long condemned the tariff and in 1944 were urging the government to build government-owned plants for the manufacture of implements. 5 On the other hand, it is interesting to note that the Liberal member from Brantford, the home of a large segment of the Canadian industry, vigorously opposed the tariff elimination stating that it was not in accord with the United Nations principle of multilateral action in tariffs. The complete removal of the tariff on farm implements in 1944 exposed the industry in Canada for the first time to the full impact of American competition. Yet the misgivings and apprehension expressed in 1944 concerning the effects of this OJl the Canadian industry, do not appear to have been warranted in the light of subsequent events. Tariff removal did not result in any marked change in the position of the leading Canadian firms. Rather it simply confirmed some trends which were already well established, particularly in the direction of international specialization of production. The effects of such international specialization on Canadian sales and imports, production, and exports, for the period from 1925 to the early fifties are now discussed.

The Agricultural Implement Industry in Canada

80

From 1921 to 1929 the domestic sales of the Big Three Canadian companies approximated 70 percent of the total sales for Canada, 6 the remaining 30 percent being divided among about sixty-five small prcducers in Canada and a number of purely American firms selling through their own sales outlets in Canada. TABLE XI

Implement Sales in Canada (thousands of dollars)

Year

1922 1923 1924 1925 1926 1927 1928 1929

International Harvester Co. (approx) $ 7,320 7,745 4,745 7,604 9,136 11,969 16,113 12,061

MasseyHarris Co, $ 6,930

7,385 4,480 7,844 9,820 10,850 14,963 13,648

Cockshutt Plow Co.

Total Big Three

Total Canada

$2,269 3,936 1,592 2,809 3,475 4,108 4,897 5,387

$16,519 19,066 11,017 18,257 22,461 26,917 35,973 31,096

$20,931 29,732 21,677 23,631 38,897 52,538 66,533 52,386

· Not all of the Canadian sales of the Big Three however, were of implements produced in Canada, It has been seen that all three imported tractors for resale inC anada, either from their own plants or from others, and, largely because of this, tractors comprised about 50 percent of total imports in the latter half of the twenties. This is shown in Table XII. TABLE XII Tractor Imports

Year

1925 1926 1927 1928 1929

Total value (thousands of dollars)

$2, 604 6,272 8,558 16,819 21,581

Percentage of total implements

40'/o 47 45 56 53

The increases in 1928 and 1929 resulted in part from the importing done by MasseyHarris and C ockshutt Plow in those years - - Massey-Harris from its own subsidiary in Racine, and C ocksh utt from the Allis -Chalmers Co. 7 In addition, International Harvester and Massey-Harris imported other implements from their respecthe plants in the United States.

81

Production, Exports, and Imports

That this should result in imports constituting a substantial portion of total implements sales in Canada is not surprising. However, the relative importance of imports in total Canadian sales has varied widely in different periods in the past. This may be seen in Table XIII. TABLE XIII Farm Implements (thousands of dollars} Year

1925 1926 1927 1928 1929 1930 .1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952

Total imports into Canada 6,495 13,337 18,946 29,636 40,293 30,075 16,495 3,316 2,208 2,283 3,716 9,373 17,234 20,320 20,918 3.0, 673 30,972 23,644 40,611 50,435 68,352 105,405 139, 993 177,210 161,642 195,082 197,266

Total sales in Canada 23,631 38,897 52,538 66,533 52,386 38,410 12,130 6,119 6,106 8,670 13, 000 ( app.) 19,344 30, 755 36,213 34,060 47,748 52,106 50,462 29,797 71,908 82,433 102,525 145,671 197,662 245,193 218,187 235,620 250,277

Imports as a percentage of sales 27 35 36 44 76 79 136 54 36 26 29 48 56 56 61 64 59 46 56 61 66 72 70 72 74 82 79

In the latter half of the twenties, imports as a percentage of sales rose from 27 per cent to 79 percent. Following 1931 the percentage declined sharply, until by 1934 it was about the same as in 1925. The trend was again reversed after 1934, following which imports as a percentage of total Canadian sales rose-steadily. Sporadic drops oc curred during the war years; then the upward trend began again in the late forties and continued through the early fifties, reaching a high of over 80 percent in 1951. 8

82

The Agricultural Implement Industry in Canada

Thus there have been three main periods during which imports have risen sharply relative to total sales -- 1925 to 1930, 1935 to 1940, and 1944 through the early fifties. Each of these was a period of rising income and each had been preceded by a drop in the level of tariff protection. Precisely what importance should be attributed to these factors is difficult to determine, but, of the two, the changes in farm income have probably been the more important cause of import behaviour. This was the era of mechanization, and during high-income years thousands of farms were purchasing tractors and combines for the first time. Not until after World War II was either of these produced in any appreciable volume in Canada. The effect of tractor imports can be appreciated from an examination of Table XIV, from which tractor figures have been excluded. Fluctuations in imports as a percentage of sales is considerably more moderate in the absence of tractors. 9 TABLE XIV Farm Imp~ements excluding Tractors (thousands of dollars)

Year

1925 1926 1927 1928 1929 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1944 1945 1946 1947 1948 1949

Total imports into Canada 3,890 7,064 10,389 12,817 18,713 9,352 2,381 1,378 1,510 1,889 2,879 3,801 5,501 5,916 8,436 11,594 17,397 22,733 35,959 51,326 58,706

Total sales in Canada 21,026 32,715 44,981 50,714 31,806 4,987 5,184 5,276 7,897 11,173 13,130 18,232 20,902 19,291 27,116 49,421 62,137 77,542 104,148 134,603 143,168

Imports as a percentage of sales 18 21 23 25 59 188 46 26 19 17 22 20 26 30 31 23 28 29 34 38 40

The cyclical variation which remains in the percentage figure is probably explained either by (1) tariff changes, or by (2) the destination of imports. Available data do not take account of the sales destination of imports, but it is reasonable to assume that the

83

Production, Exports, and Imports

greater share goes to Western Canada, where the cyclical fluctuations in farm income have been considerably more marked than in the East. This would account for a cycli cal variation in imports greater than that in total sales. Exports from Canada likewise show the effects of international specialization of production. Just as a large amount of the farm machinery sold in Canada is imported, a large amount of that produced in Canada is exported. A similar, though not quite so marked, variation may be seen in the year-to-year percentage of domestic production exported. This fell during the depression but increased during the recovery period of the late thirties and again during the post-war period, as shown in Table XV. TABLE XV Farm Implements: Canada (thousands of dollars)

Year

1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952

Gross value of production

24,770 38,269 42,996 41,199 40,659 26,902 5,510 5,326 8,818 13,692 15,957 18 , 961 21,299 16,035 44,678 56,952 61,099 58,258 63,239 89,423 176,970 149,500 171,172 205,775

Exports

11,343 13,628 17,413 15,643 15,871 18,397 7,188 2,484 1,325 1,820 3,567 6,344 6, 277 10,706 6,453 3,090 10,283 13,434 20,196 28,662 42,238 73,760 92,527 87,811 106,438 105,408

Exports as a percentage of production

44 34 39 39 39 68 45

24 20 26 39 33 50 40 7 18 22 34

45 47 52 59 62 51

84

The Agricultural Implement Industry in Canada

Farm machinery exports from Canada increased from $5,3 million in 1922 to $15. 8 million in 1929. In those years the principal foreign markets for Canadian implements were United States, the United Kingdom, South Africa, and South America. The different timing of the harvest in southern-hemisphere markets assisted Canadian producers in overcoming the effects of seasonality at home. During the latter half of the decade, exports as a percentage of totalCanadianproduction remained fairly steady in the vicinity of 40 percent. Chief exports in these years were binders, which exceeded 60,000 units, as compared with 18,000 imported. Total exports of plows were valued at $12 millions, as compared with imports of $7. 2 millions. Threshing machines and mowing machines stood respectively third and fourth among exports, followed by a large number of smaller implements such as cultivators, drills, harrow, hay rakes, and others. No exports of combines are listed in official statistics before 1930. Exports fell drastically in the early thirties, from a record high of $18. 3 millions in 1930 to$1.3 million in 1933. Slow recovery began in 1934 and continued unevenly throughout the decade. The difficulties experienced in most of the industry's export markets during the depression are reflected in the fall in the portion of production ex ported during the period. . After 1935 increases in this percentage took place, partly because of crop failures in Canada, and partly because of extraordinarily good conditions abroad. The sharp rise in average farm prices for wheat from. 61 to $1. 02 in 1937, benefitted producers abroad but was insufficient to offset the effects of severe drought in Canada in 1936 and 1937. In those years, the Canadian wheat yield fell to its lowest level since 1914: 219 million bushels in 1936 and 180 million bushels in 1937. In 1938 the Massey-Harris Annual Statement reported record levels in world crop production and sales abroad were up correspondingly. The decline in the percentage in 193 9 is accounted for by a crop failure in Argentina, the elimination of much of the European market, and a sharp general drop in exports to the United States. lO (see Appendix A). Binders continued to lead the list of exports, plows being second, and exports of bot.1-i these being substantially greater than corresponding imports. A newcomer to the list in 1930 was the combine, 2,535 of which were exported in that year. Most of these, it seems, were the product of the Massey-Harris Co. Both exports and imports of combines became negligibly small as the depression progressed, and recovered only slowly during the latter half of the decade. In 1939, 1,134 were exported and 702 imported. Since World War II the absolute volume of exports from Canada has risen steadily, and increases have also taken place in the portion of Canadian production exported. 11 Tariff removal in 1944 was instrumental in increasing the exports of the International Harvester Co. of Canada. For many years Harvester had produced grain drills, field cultivators, stationary threshers, and brush-breaker plows in Canada for the Canadian, South American, and some British Empire markets. After the elimination of the Canadian tariff, it wasdeemed feasible to specializefurthertheCanadiancompany's operations in these lines, totheextent that in the early fifties the company's entire production of these implements for its world-wide market was being carried on in Canada.

85

Production, Exports, and Imports

Also instrumental in increasing exports since tl-ie war has been the entry of the Cockshutt Farm Equipment Co.12 into tractor production. When tariff removal was announced in 1944 this company, 83 percent of whose total sales in the previous ten years had been made in Canada, was most apprehensive about the possible effects. In its Annual Report for 1944 the company stated: The action taken by our Government in removing the duty on farm implements im ported into Canada is, we feel, certain to have an adverse effect upon our business. During the war period, with the demand for farm implements being far greater than the supply, the effect of this legislation has not yet made itself felt. The company has made known its views to the proper authorities.

' ~,i----+--+--fl?. ' ~' Li I)/

'w

i

11\

R

E/ /

/

47

39

4 'l

CHA.RT III Principal Destinations of Implement Exports from Canada 1'1:35 -105:.:: (shown in percentages; for ahs(,lute figures see A.ppendh \, p. 105)

0

.5 l

The Agricultural Implement Industry in Canada

86

In 1945 Cockshutt attempted to find sales outlets in the United States and succeeded in establishing marketing connections with the National Farm Machinery Cooperative and Gamble Stores, Inc. Through these organizations, Cockshutt implements were retailed in some areas of the United States under the names ''Coop" and "Farmcrest" respectively after 1945. With these connections established, the company entered tractor production in 1947 and tractors have since become the company's leading export to the United States.13 The growth of the company's exports following tariff removal is shown in Table XVI.

TABLE XVI Exports of the Cockshutt Farm Equipment Co., 1945-1949 (thousands of dollars)

Year

Total sales

Exports

1945 1946 1947 1948 1949

$17,556 14,,694 27,629 41,765 48,246

$2,018 3,785 10,210 16,377 2_0, 254

Exports as a percentage of sales 11

25 37 39 42

A check of more recent figures indicates that the company's exports have been maintained in the neighbourhood of 40 percent of production in recent years. The most spectacular post-war advances in foreign markets have been made by the Massey-Harris Co., and these particularly in the United States. The growing importance of exports to the United States is illustrated in Chan m, p. 85. The Masseytfarris Co. embarked on an expansion program in the United States in 1946. By 1952 new branches had been opened in Atlanta, Ga.; Memphis, Tenn. ; Des Moines, Iowa; Columbus, uhio; Minneapolis, Minn.; Omaha, Neb.; Kansas City, Kan.; and Dallas Texas. Merrill Denison stated in 1947 that the increases in Massey-Harris sales in the U. s. A. have been 588 per cent in com bines, as against 118 per cent for the American implement industry as a whole, as reported by the United States Department of Commerce, in 1947; 240 per cent in tractors compared with 40 per cent; 218 per cent in general implements against 77 per cent; and 650 per cent in supplementary sales against the 108 per cent average of the American farm machinery industry. 14 Massey-Harris sales in the United States in 1948 were 81.0 percent above 1947 levels, with a further increase of 39. 4 percent in 1949. A substantial portion of these sales in the American market is of Canadian origin, combines shipped from Toronto being the leading •!xamples (see Appendix B). It should be remarked that increases in the Massey-Harris Co.'s manufacturing capacity abroad have probabiy reduced tne percentage ofitsCanaoian-made produce ex-

Production, Exports, and Imports

87

ported in recent years, below what it was in the 1920's exclusive of shipments to the United States. An example of the company's progress in manufacturing abroad is seen in SAFIM (South African Farm Implement Manufacturers), of Johannesburg, an interest in which was acquired in 1947. The company became a distributor of SAFIM's products in 1947 and acquired financial control in 1952.

2o~r,......+--+---11----,---;---t---+-----t-----a 10'11---+----+--t----+----+--+---;---;------.

CHART N The Principal Components of Canada's Implement Exports to the United States, 1943 -1952 (shown in percentages; for absolute figures see Appendix B, p. 197} After 1949 the Massey-Harris Co. was consolidated on a North American basis, all subsidiaries abroad being carried on thebbalance sheet as investments, only the dividends received from them being included in the profit and loss account. "The continuing un certainties," stated the company, "as to the actual conversion values of the various currencies concerned and the remittance of profits to Canada make it difficult to state with

88

The Agricultural Implement Industry in Canada

certainty the value in dollars of the assets and operating results of these subsidiaries. nl5 It is evident that the unusual patternofCanadianexports and imports of farm implements can only be explained by the extent of international specialization of production. In the early fifties, all of the International Harvester tractors and combines sold in Canada were imported. Most of the tractors sold by Massey-Harris were imported. On the other hand, International Harvester specialized its world production of many tillage lines, and Massey-Harris almost all of its combines production in Canada.16 C ockshutt Farm Equipment, operating on a smaller scale, had specialized production of its main lines (including both tractors and combines) in Canada, doing little importing from its American subsidiary. The changing can position of exports is illustrated in Chart IV, p. 87. ORGANIZATION OF MASSEY -HARRIS -FERGUSON An important development in the Canadian implement industry in 1953 was the 1malgamation of the Massey-Harris Co. with the operating companies controlled by Harry G. Ferguson, whose part in tractor development was seen earlier. 17 After the 'Jreak between the Ford and Ferguson interests, the Ferguson Co. was set up in the United States to continue output of the tractor and implements. Ferguson himself returned to England where he made an arrangement for manufacture with the Standard Motor Co. In the next ten years the company built up annual sales of about$150 millions, and Ferguson once again donned the mantle of the inventor, working especially on "a new large tractor ••• and a new small combine harvester of revolutionary design." Ferguson's own description of the negotiations with Massey-Harris are as follows: While all these secret developments were going on, The Ferguson Companies in America and England had had many offers of parmerships or amalgamation with other companies, but none were of interest to them. A few weeks ago, however, Mr. Duncan, the brilliant and genial Head of Massey-Harris Company Ltd., of world renown, called to see me at Abbotswood, my home at Stow-on-the-Wold, in connection with some minor business arrangements. We were immediately attracted by each other and, in a short time, agreed that in the light of world conditions generally, farm machinery manufacturers faced somewhat limited business opportunities, especially in the United States and Canada. This led to a discussion on whether Ferguson and Massey-Harris might get together in an effort to produce machines at lower cost. We considered it obvious that to get the maximum business possible, the farm machinery costs to the consumer must be kept to the minimum. After some discussion I suggested to Mr. Duncan that if he could make any sound proposals for a world amalgamation of our mutual interests, I would disclose to him in full all the new inventions, including the new large tractor which had been so secretly developed in the past ten years and a new small combine harvester of revolutionary design which we have started to develop. Mr. Duncan went home, and, after a couple of weeks' thinking and discussions with his own people, he came back to Abbotswood and put up such proposals. It was then agreed that the highest technical and commercial staff of Massey-Harris Com pany Ltd. should come to England to see the demonstrations.

Production, Exports, and Imports

89

After only one afternoon of demonstrating these experts were so deeply impressed with what these new machines could do for the world that Mr. Duncan contracted his co-directors and lawyers in Canada and their head representatives in the United States and brought them over at a day's notice. Demonstrations were then carried on at full speed and heavy tractors of other makes were put into competition with the Ferguson. An investigation was then made into the commercial and patent situation, the result of it all being a final conference, and in the course of a few hours a complete agreement for the whole world was completed. 18 As was pointed out by the Massey-Han:is Co. in its announcement to its shareholders in August, 1953, the two businesses were "more complementary than competitive." Moreover, the Ferguson Co. had followed a policy of having its tractors and implements manufactured not by itself but by other firms. Thus, while it brought within the reach of Massey-Harris an additional $150 millions of sales, it brought only about $1. 7 million in fixed assets, most of which was represented by the company's tractor assembly plant at Detroit.19 The added volume which this meant for Massey-Harris plants, particularly in the tightening market of the early fifties, was one of the more attractive features of the merger. The plan of amalgamation called for the transfer to the Massey-Harris Co. of all the shares of the operating Ferguson Cos. in exchange for the issue of 1,805, 055 shares of Massey-Harris common stock. Upon completion of the transaction, the Ferguson com panies became wholly-owned subsidiaries of the Massey-Harris Co. It is as yet too early to attempt any analysis of · the. long-term significance of this amalgamation. Time will be needed to accomplish all the tasks of integration. One of the more difficult of these has been on the distribution level. Although the name of the company was changed at the time of amalgamation to Massey-Harris-Ferguson, im plements of the new company still were to bear either the name, Massey-Harris or the name, Ferguson. On this subject,. Mr. James s. Duncan, then· President of the com pany, stated in his address to shareholders in 1954: Because "Massey-Harris" and "Ferguson" are valuable names, which have come to be regarded throughout the world as the hallmarks of quality in power farmingequipment, your Company has decided to market two lines of machines, one under the name "Massey-Harris" and the other under the name "Ferguson". This will be accomplished by having two separate dealer franchises which, in some instances, may be held by the same dealer. This policy will ensure the widest possible distribution of our equipment.

CHAPTER EIGHT PRICE COMPETITION:

DEMAND AND COST

I. DEMAND ANALYSIS of pricing processes and price canpetition in any industry must pre-suppose some prior study of the coqditions of demand for the products and the .costs of producing them. Thus, in this chapter, attention is centred on those characteristics of demand and cost which exert a direct influence on the pricing of farm implements, the discussion of the pricing process itself being left until Chapter Nine. A major problem which arises in such a study is that of reconciling the subjective views and estimates of sellers with the objective· realities of the market. Particularly is this true in the case of demand functions. The uncertainty surrounding buyer behaviour in response to changes in income or in price frequently gives rise to what appears to be a subjective estimate of demand but is in reality an attempt to rationalize a long-standing price policy. A preliminary job of price-policy research, therefore, must be to appraise the validity of subjective views held by sellers in the light of the actual market situation. In what follows, attention is centred on the objective nature of the demand for farm implements. The effects of changes in buyers' incomes are explored, and then the effects of changes in price • .The conclusion reached is tha.t, in the main_, the interpretation of demand which is most widely held among producers of farm implements does reflect the actual state of the market. The view of the industry is that the demand for farm implements is determined first and foremost by the level of farm income. Experience has shown that when farm income is high, implement sales are high and when farm income is low, implement sales are low. Corollary to this, the view also seems to be general within the industry that changes in the level of farm implement prices do little to discourage purchases when farm income is high or to encourage them when income is low. In the language of the economist, such demand is characterized by a high degree of income elasticity and a low elasticity for price changes. The -use of available statistics to show the historical relation between farm income, implement prices, and implement purchases supports the contention of high income elasticity. In Canada the Dominion Bureau of Statistics furnishes annually a complete set of farm income figures for the colUltry, an index of farm implement prices based on the 1935 -1939 average and extending back to 1913, and the total sales of farm implements and machinery for Canada including parts. This combination of income -price -sales data was the principal source used in the construction of Chart V. Here, simple index numbers, all based on 1935-1939 averages, are plotted for the period 1920 to 1952, a period which included a minor and a major depression, as well as a minor and major period of high in come. 1 Cha.rt V shews t'1at changes i.a farm cash income duri.."lg d1c period have been accompanied by considerably greater than proportional changes in implement purchases. Such 93

The Agricultural Implement Industry in Canada

94

behaviour may be seen in the depression of the early twenties, the upswing of the late twenties, the depression. of the early thirties, and the subsequent protracted income rise. The war-time restrictions on implement production in 1942 and 1943 interrupted a steep upward trend in purchases which began in 1935, a factor which doubtless intensified the rate of post-war increase. 2 l1 tia)

Oak

Linseed oil

1929 1934

100.0 84.7

100.0 93. 7

100.0 87.5

100.0 83.3

100.0 76.7

(a) Source: Proceedings and Evidence of the Committee on Afiliculture and C oloni zation (Ottawa), 1936, 148ff. What was apparently not fully appreciated by the industry's critics was that the cyclical decreases in variable costs during the depression were more than counter-balanced by increases in unit overhead costs as a result of lower output, Thus, as was illustrated in Chapter VHI, full unit costs in these years actually increased. The implement companies claimed that it was in order to meet these increased full costs that they raised their prices in 1934 and again in 1936. The latter increase, although less than 3 percent on all implements taken together, was more substantial on some of the important individual implements. The amounts of price increase on eight-foot binders,

Price Competition: Behaviour of Implement Prices

117

as an illustration, were: International Harvester, from $263 to $281 (7 percent) and Cockshutt Plow, from $268 to$280 (4 percent) . The increases were the occasion for the parliamentary investigation into the industry in 1936 and 1937. Throughout these enquiries, most of the argument over prices hinged on the complex interrelationship among volume, costs, and prices. A gulf separated the thinking of the Committees and that of the industry in this matter, springing from their different estimates of elasticity of demand, and leading to sharp divergence of opinion on what should have been the industry's price policy during the depression. At one point, the Vice-president of the Massey-Harris Co. remarked to the Committee that "there is a large difference between your viewpoint and ours on some of these matters ...4 In retrospect, it appears that the one real accomplishment of the 1936 and 1937 price investigations, insofar as they affected the industry's price policies a tall, was toreimpress on the industry the political risk involved in price increases even during times of rising farm income. The recurring theme of the Committee's criticism of the 1936 price increase was the behaviour of unit overhead costs, which the Committee repeatedly asserted should be decreasingwith the then increasing output. With this argument, the Committee sought to undermine the rather vague claims of the industry that the increase had been made inevitable by rising costs and depression losses, without much attempt to explain why it was being made then and not earlier. A close study of the proceedings and evidence of that Committee suggests that the 1936 price increase was a politically unwise attempt on the part of the industry to recover its depression losses through the medium of a price increase in a highly inelastic market. To that extent, the 1936 increase resembled that of 1924; the difference was that in 1924 sales fell off as prices went up . The likelihood of a recurrence of this phenomenon in 1936 was reduced by the greater length of the depression which had pre ceded it, and by the fact that farm income had been rising, albeit slowly, since 1933. The price increase put into effect in January of 1936 did not prevent the domestic sales of the Big Three Canadian companies from increasing as much as 40 percent in one case, but the lengthy investigation to which it gave rise has probably had a retarding effect on subsequent increases. Although implement prices in the United States actually declined slightly in 1936, their over-all behaviour from 1933 to 1938 was quite similar to that of Canadian prices. Probably as a result of the National Recovery Administration policies, American -prices rose steeply in 1934 and 1935, then remained fairly stable through the remainder of the decade. Canadian prices were again increased in 1938. It may be noted that in 1939 there was a slight decrease in implement prices in Can ada. Following the publication of the Report of the Federal Trade Commission on the Agricultural Implements Industry in the United States in 1938, the International Harvester Co. , doubtless mindful of its former prolonged ordeal in the courts, announced that it was voluntarily lowering its prices on a large number of implements and also that it was eliminating every trade practice criticized by the Commission. This announcement gratified the Commission, which in a later report took credit for its part in the achieve ment. 5 Other producers were forced to follow Harvester's lead and as a result, the general level of implement prices in the United States was 2 percent lower in 1939 than in 1938. The effects of this decrease seem to have spread into Canada where the index declined slightly in 1939, before going into the rise from which it has not yet emerged.

118

The Agricultural Implement Industry in Canada THE RATIONALE OF THE INDUSTRY'S LONG-TERM PRICE POLICY

From an economic point of view, the key to the relatively stable price level of farm implements over the past thirty years is to be found in the fourfold circumstance of few firms, high income elasticity, low price elasticity, and rigid overhead costs. Be cause of the small number of firms, substantial uniformity in pricing policies is to be expected under certain market conditions. 6 Because of high income elasticity, the fluctuations in Canada's farm income have been projected onto the operations of the implement industry in magnified form, resulting in alternating periods of very high and very low output. The substantial profits which have been made by the industry in high output years have resulted primarily from decreased unit overhead costs in those years rather than from increased prices. Likewise, losses have resulted during years of low output, not because of falling prices, but because of vastly increased overhead per unit. Any hope which the industry may entertain of stabilizing output and costs from period to period through cyclical price adjusonent, appears to be thwarted by the extreme sen sitivity of the market to farm income changes and its low sensitivity to changes in implement prices. Further evidence of this cost and price behaviour may be seen in data published by the Massey-1,farris Co. and by the International Harvester Co. in their annual reports for 1952. These show the percentage increases in the average hourly wage rates _paid by these companies, in the raw materials prices, and in the prices of their farm implements between 1941 and 1952. In its comment on these data, reproduced in Table XXII, the Massey-Harris Co. attributed the relatively smaller increase in implements prices to the "high volume of sales resulting in a lower ratio of selling and production expenses and to the increas;d efficiency in production resulting from the extensive modernization programmes carried out by the companyTABLE XXII Percentage Increases over 1941 Levels of Wages, Materials and Implement Prices, ( a) Massey-Harris 1952 1955

International 1952

165

189.9

144

Raw materials

94

99.2

95

Prices of company's implements

66

76.0

83

Average hourly rates

(a) Source: Annual Reports of the Companies. There is a fourth factor, indicated briefly above, which has had an influence on the industry's long-term price policies and without which these cannot adequately be ex plained. This is the political significance of implemeut prices and price changes. In a country as highly agricultural as Canada, it is not surprising that, whether farm in -

Price Competition: Behaviour of Implement Prices

119

come is low or high, few years pass without demands from some quarter that the price policies of the implement industry be investigated. 7 Certainly the position of the in dustry among Canadian manufacture.rs does not warrant such attention, since it produces only around 1 percent of Canada's total manufactured product, and in 1952 employed only 1.4 percent of the total persons engaged in the manufacturing industry. 8 Itis the industry's position as an oligopolistic supplier of capital goods exclusively to agriculture which attracts to it the attention of sincere reformers and political opportunists alike. Political considerations appear definitely to have helped shape the industry's pricing policies. It is clear that, if economic factors alone had been considered, the prices of farm implements might have been considerably raised during the period of the late twenties, or raised more sharply than they were after World War II without materially affecting purchases. Even during the depression years, there is much to suggest that a price increase would have been the logical economic adjusonent to the decreased demand. As Joan Robinson observed, demand may well become less elastic as it falls, and under these conditions, "a rise in price may be the appropriate response to a fall in demand, and not a mere act of folly on the part of the producer ... 9 The fact that prices were not raised at the low point of the depression was more a result of fear of political repercussions than of conviction that such increases were not economically justifiable. To sum up, the position of farm implement manufacturers over the course of what might be termed a "normal" farm income cycle is one in which long-term incentives, both political and economic, point in the direction of stable prices. In low-income years, price increases, though they might decrease depression losses, would incur gov ernment and farmer ill-will, the ultimate effect of which could be decidedly unfavourable. Price decreases, on the other hand, would at best force sales in the low-income period and by so doing decrease the sales that might be made in the ensuing high-income period at higher prices. lO Similarly, in periods of high farm income, substantial profits can be made even though prices are increased less than the increases in costs of material and labour, because of the offsetting influence of decreasing overhead cost. Other factors have probably contributed to the long-term stickiness of implement prices. Joel Dean points out that where there is an element of price leadership, "major price changes cause follower adjusonents that are always unpredictable to some extent and to minimize these uncertainties, official prices are kept fixed as long as there is hope of maintaining them. ,.ll Professor Dean's observation has relavance to the imp le ment industry; the Federal Trade Commission was of the opinion in 1948 that the International Harvester Co. was still the price leader in the industry, even though one of its major post-war price changes (a downward revision in 1947) was not followed by competing firms because of the buoyant market. 12 ·One might add to Professor Dean's observation that the degree of uncertainty concerning follower adjustments would be increascJ in cases involving a line of products where no one producer had cost advantages in all of them, a characteristic already noted in the implement industry. Mention might also be made of the stabilizing effect of the administrative costs of price changes, which W. J. Fellner suggests may discourage such changes, especially if the shifts in market functions which induced them are expected to cancel out overtime _13 A long-standing practice in the implement industry is that-of issuing price lists annually and avoiding as far as possible interim price adjustments during the year. Prices of harvesting machinery, set months ahead,_ may not reflect the conditions which obtain in

120

The Agricultural Implement Industry in Canada

the market during the actual selling season. Yet the uncertainty surrounding the ex pected conditions of demand, combined with the shormess of the selling season and all of the administrative costs and difficulties of making mid -season price changes, have traditionally meant that these prices are maintained throughout the year. THE QUESTION OF COLLUSION So far we have been speaking of the industry's price policy, virtually implying that the implement industry acts as a unit in the matter of pricing. This method has been followed partly for the sake of convenience - - to make easier the discussion of the genera 1 level of farm implement prices - - but partly, too , because single-firm price changes have traditionally been rare in the industry . Most of the price changes discussed in the early part of th is chapter were introduced by all the companies at approximately the same time and in most cases for approximately the same amounts. Uniformity of pricing action in an industry over a period of time raises a question concerning collusion, or price understanding, among the sellers . The existence of collusion on price matters is, quite apart from its effect on consumer welfare, extremely difficult to prove . Wherever it exists in modern industry every precaution is taken to avoid leaving traces. Many businessmen are sincerely of the opinion that price understandings are not in themselves contrary to public interest, and many therefore engage in and promote such understandings without personal qualm . Nevertheless, their awareness of the disfavour in which the practice is held by public bodies impels them to keep their actions secret. Very seldom is anything put in writing which may later serve as evidence that understandings existed; and not uncommonly are younger executives censured for their imprudence in this respect. For these reasons collusion in pricing is still a dark corner in most modem industry studies. Factual analysis necessarily gives way to inference and suggestion with only inconclusive results. Such inference may be seen in the following extract from the Report of the 1937 Committee on Implement Prices in Canada: The companies insist that no understanding existed between them in the matter of the 1936 price increase and that the increases resulted from the same conditions arising in each company. It is extremely difficult for the Committee to understand the remarkable coincidence of the price increase occurring in the same month of the same year, and, generally speaking, on the same implements to the same extent.14 Excerpts from the minutes of the Committee's proceedings illustrate the difficulties which confront investigators in reaching even this type of conclusion. The Vice-presi dent of Massey-Harris was testifying: Q. If it were true , then, if the competitive factor were an important one, obviously you would not ha ve been able to raise your prices (in 1936) until you were assured that the International Har vester Company were going to raise theirs? b_ No ; we arrived at our own price. ~ How on earth would (all the companies) arrive at exactly the same amount of increase?

Price Com petition: Behaviour of Implement Ptices

121

A. I do not know; I am not in a position to say that. Q. I think you will be forced to this conclusion that if your board made the price in -

crease first, the International Harvester Company became aware of it and simply increased to the extent your company had increased. A. No. I do not know by what process they arrived at it. I do not know their sec rets. 15 Shortly afterward, the President and General Manager of the Frost and Wood Co.(also a director of the Cockshutt Plow Co.) took the stand. Q. What were the reasons which induced the CockshuttCompany to increase prices

in January of 1936? A. I am not going to argue that materials costs ... or labour costs were factors in that advance. I am not so sure about burden. I think that was not. Q. You do not join with International Harvester Company and Massey-Harris in asserting that? ~ No, I do not ... I am quite frank to admit that in the main we wait until our competitors, our large competitors, come out; and then we might have to adjust our prices a little way one way or another, not very much. In the light of the vigorous denials of collusion by both of the larger companies, 1t 1s interesting to note the comparative prices and price changes in eight-foot binders sold by the four leading companies in Canada during the period 1920 to 1936. These are shown in Table XXIII. A marked similarity is seen to have characterized binder prices, both in their levels and in the direction and extent of changes. In the period 1925 to 1929 virtually no change at all took place in any of the prices. Each of the companies dccreasec.l prices by $5 in 1930 and again in 1932 . In 1933 decreases of from $8 to $12 brought prices closer together than they had been previously. Small increases by John Deere, Cockshutt, and Massey-Harris in 1935 were not paralleled by International Harvester but this company made a larger increase in 1936 to close the gap. As a result, in 1936 prices differed by an amount of only $2. TABLE XXIII Prices of Eight-foot Binders in Canada, 1920 to 1936(a) (basis Regina)

Year

Deere

1920 1921 1922 1923 1924 1925

$279 333 272 279 310 286

Cockshutt

International

$275 328 270 278 306 282

$269 326 266 '274 308 283

~lassey-H.:mis (at factory)

$~60

The Agricultural Implement Industry in Canada

122

TABLE XXIII (Cont'd)

Year

Deere

Cockshutt

International

Massey-Harris ( at factory)

1926 1927 192S 1929 1930 1031 1932 1933 1934 1935 1936

$285 285 285 285 280 280 275 265 265 268 282

$283 283 283 283 277 277 272 264 264 268 280

$283 283 283 283 278 278 273 263 263 263 281

$256 256 256 256 251 250 245 26z