Committee may have available a brief summary of the problems to which the TNEC has devoted the past two and a half years.

Managed industrial prices

The American system of free enterprise can exist only if industrial markets are free from the manipulations and controls of private groups. Then alone can prices freely perform their function as the regulator and stabilizer of industry. But abundant evidence exists to show that in a vast range of commodities prices, far from being objectively determined in the market, are influenced, administered, or managed by persons of power, so that price competition has disappeared in many industrial fields.

The variety of control elements in industrial markets is legion, depending upon a number of factors such as those inherent in the technology of the industry, and in the size of individual concerns; the type of goods made, whether standardized or made to order; the nature of the demand for the product-whether postponable or non-postponable; and finally, those control elements which vary with what may be called the institutional climate-with the attitude of government and public opinion toward cartels, antitrust activity, patents, controls over radio and press, etc. The techniques of control include, among others, price leadership, basing-point systems, open-price systems which allow each concern to know exactly what its competitors are charging, and uniform cost accounting systems whereby all concerns base their pricing policies upon identical or similar methods of calculations.

Managed industrial prices, by creating disparity in incomes and purchasing power, increase economic maladjustment between freely competitive and managed areas of the economy, accentuate depressions, and retard recovery. In short, the net effect of such change in the purchasing power of any major group of the community must be appraised in relation to its effects upon the volume of spending, of investment, and of hoarding.

The existence of rigid prices in the economy is only one of the very many factors contributing to the failure to achieve full recovery during the decade 1929-39. Uniform flexibility of all prices is incompatible with the structures of modern economy, and even if commodity prices could in some miraculous way be made equally flexible, that alone would not suffice to insure continued full production and employment at a sustained high level. Nevertheless, it seems equally clear that prices which are sustained at artificially high levels through collusive or coercive tactics are at no time desirable. Where such restraints pervade an entire sector of industry, as in the case of building trades, their combined effect may be very serious.

On possible solutions, TNEC Monograph No. 1 observes:

"Although a broader view probably transcends the immediate horizon of the individual firm, it does not exceed the scope of public policy . . . In such a key sector of industry as building construction, for example, there is opportunity for a concerted approach. If means could be secured for simultaneous price reductions among all producers of important building materials, by labor, and by financial agencies to reduce the cost of financing, it might supply the incentive which is now lacking; insuring to each group that its own change of policy will be paralleled by such other changes as would in the aggregate exert an appreciable effect upon the market."

There is little doubt that the behavior of prices intimately affects the rate of business activity. Nevertheless, it seems equally evident that no simple, single approach to prices as such will solve the problem of increasing and maintaining industrial activity.

Controlled production and sales-trade associations and cartels

The place of the trade association and of the cartel in our economy is of great significance because through this medium control is achieved in fields where firms are numerous and none is dominant. A cartel may be defined as an association of independent enterprises in the same or similar branches of industry, formed for the purpose of increasing the profits of its members by sub

jecting their competitive activities to some method of common control. The fundamental purposes of trade associations are much the same since, in addition to cooperative research, arbitration, advertising, and publicity, they also frequently establish common cost accounting procedures, operate price reporting plans, interchange patent rights, administer basing-point systems, purchase supplies jointly, and promulgate codes of business ethics. Though membership in both cartels and trade associations is usually voluntary, compulsory cartelization has marked developments in various European countries.

There are some 2,000 national trade association offices in the United States. Upon occasion, the Federal Trade Commission or the Department of Justice makes an investigation and certain practices of an association are prescribed by the Commission or the courts. But such action cannot be expected to disclose each of the cases in which competition is restrained.

Almost every trade association attempts to regulate the terms of sale. Many associations attempt to control the prices at which goods are sold. Some allocate markets and customers among their members. Others seek curtailment of output on the basis of past production or capacity. Still others assign each of their members a quota in the total volume of production or sales. There have even been cases in which a common selling agency, like the European syndicate, has been employed. In all these activities the trade association's sphere of influence is identical with that of the cartel.

It is impossible to determine at exactly what point members of trade associations are actually engaged in cooperating to serve the public or are conspiring against it. The line between cooperation and conspiracy is not an easy one to draw, although the courts, to be sure, must attempt to draw it. It is obvious, however, that the area in which the economist will find effective competition to be superseded by common control must be larger than that in which the courts will hold such control to constitute a conspiracy in restraint of trade.

Competition and monopoly in American industry

No positive estimate concerning the extent of competition and monopoly in American markets is justified by available evidence. In those industries which appear to be normally competitive, competition is constantly breaking down. Competitors continually seek to limit competition and to obtain for themselves some measure of monopoly power. They enter into agreements governing prices and production. They set up associations to enforce such agreements. They procure the enactment of restrictive legislation. For a time they may succeed in bringing competition under control. But these arrangements, too, are constantly breaking down. Competitors violate the agreements. Associations lack the power to enforce them. New enterprises come into the field. Restrictive statutes are invalidated by the courts or repealed by the legislature. The lines of control are repeatedly broken and reformed. The facts that describe the situation existing in such an industry today may not apply to the one in which it will find itself tomorrow.

In those industries that appear at any time to be monopolized, likewise monopoly is constantly tending to break down. Human wants may be satisfied in many different ways. Shifts in consumer demand may rob the monopolist of his market. Invention may develop numerous substitutes for his product. The monopolist may suffer, too, from the lack of the stimulus to efficiency afforded by active competition.

It is sometimes asserted, or assumed, that large-scale production, under the conditions of modern technology, is so much more efficient than small-scale production that competition must inevitably give way to monopoly as large establishments drive their smaller rivals from the field. But such a generalization finds scant support in any evidence that is now at hand.

In those industries where the nature of the product, the market, the supply of materials, and the technology of production is such as to encourage it, competition reasserts itself in the face of collusive agreements and restrictive legislation. In other fields the characteristics of the product, the market, the supply of

materials, and the technology of production are conducive to monopoly. But monopoly cannot be attributed to natural factors alone. It is the product of formal agreements and secret understandings; of combinations, inter-corporate stockholders, and interlocking directorates; of the ruthless employment of superior financial resources and bargaining power; of unequal representation before legislatures, courts, and administrative agencies; of the exclusion of competitors from markets, materials, and sources of investment funds; of restrictive contracts and discriminatory prices; of coercion, intimidation, and violence. It is the product, too, of institutions of property which permit private enterprises to take exclusive title to scarce resources; of franchises, permits, and licenses which confer upon their holders exclusive privileges in the employment of limited facilities and the performance of important services; of patents which grant to their owners the exclusive right to control the use of certain machines and processes and the manufacture and sale of certain goods; of tariffs and State trade barriers which exclude outside producers from domestic markets; of legislation which limits output, fixes minimum prices, and handicaps strong competitors; and of inadequate enforcement, over many years, of the laws that are designed to preserve competition.

Concentration of production

When the Temporary National Economic Committee began its investigation of the concentration of economic power, there were certain large areas of the economy about which no factual information was available. One of the early tasks then was to conduct studies which would throw light on the structural and operational characteristics of these areas. This lack of basic data on concentration was nowhere more evident than in the manufacturing segment of the economy. To remedy in some measure the deficiency, the Committee authorized the preparation by the Department of Commerce of a study of the structure of manufacturing operations, which is to be published as TNEC Monograph No. 27, "The Structure of Industry,"

Three levels of analysis are necessary to measure concentration: (1) the size of manufacturing establishment, since it indicates the ease or difficulty of entrance into the industry; (2) the place of the multi-unit concern; and (3) the conditions of control surrounding individual products.

It was found that the size of manufacturing establishments had been increasing steadily for three decades, due largely to the increasing importance in the economy of certain large-scale industries.

Although central office establishments (manufacturing) were only 3.8 percent of the total in 1937, they employed 51 percent of all wage earners, paid 55 percent of the total wage bill, produced 61 percent of the value of all manufactured products, and accounted for 56 percent of the total value added by manufacture. The increased relative importance of the central-office groups during the last decade is indicated by a comparison of the 1937 with 1929 figures. In 1929 they employed 48 percent of the wage earners, produced 54 percent of the total value output and accounted for 50 percent of the total value added by manufacture.

It is impossible in small compass to give an overview of the concentration existing in the production of individual commodities. The Commerce study analyzed a cross-section sample of 1,807 manufactured products, selected to present a comprehensive over-all picture of the situation existing in the entire manufacturing segment of the economy. For one-half of the 1.807 products, the leading four manufacturers accounted for 75 percent or more of the total United States output. About a quarter of all the products were found to be extremely concentrated, while low concentration appeared in only about 5 percent of the

cases.

In an economy characterized by a high degree of concentration in production the traditional free market is seldom realized. For manufactured products in general, however, concentrated control does not appear to be associated with any unique price and production policy; that is, products manufactured under conditions of both high and low concentration apparently behaved similarly during periods of recession and recovery.

Technology in our economy

The problems raised by technology in our economy are legion. The primary economic problem it creates is the displacement of human effort, but presumably

there are certain compensatory forces inherent in the present economic order which operate more or less automatically to offset the labor-displacing effects of technology. Principal among them are the reduction of hours (without an accompanying decline in wages), the development of new industries, and the reduction of prices.

Certain indirect methods can be used to determine whether balance exists between the labor-displacing effects of technology and the compensatory forces. For example, if it is assumed that under normal conditions the present economic system would provide full employment, the existence of a large amount of longterm unemployment would indicate lack of balance. For over a decade this condition has been an all too conspicuous characteristic of our economy. The question of greatest importance is whether this unbalance may be expected to continue. It seems apparent that technology will continue to increase labor productivity, to displace skilled occupations, and to reduce unit labor costs. In the absence of effective offsetting forces, economic and social distress may accumulate. Only an adequate economic program fostered by sound public policy appears capable of offsetting the imbalance created by technological advance.

Whether it is possible to bring the social performance of business to a level where the impact of technological change will result in only minor dislocations and short-term unemployment for relatively small segments of the laboring population, remains an unanswered question of great importance. Nevertheless, there are ameliorative measures, such as dismissal wage contracts, wider and more social uses of collective bargaining agreements in which technological changes and the gains derived therefrom are distributed to labor as well as management and profit-takers, and universal programs of occupational training and placement, retraining, and replacement of workers, which may be incorporated into law and industrial practice in order to soften the impact of technological advance in highly mechanized society.

Concentration of ownership

Many of the investment problems of the nation arise out of the concentration of investment funds and their control in a few hands. In 1935-36, about 2 percent of all income receiving units in the United States had incomes over $5,000, while only 1 percent had incomes over $10,000. Nearly 70 percent, on the other hand, received less than $1,500 in that year, and almost a third received less than $750.

In the life insurance business, which controls $28,000,000,000 in assets, there' are 308 legal reserve life insurance companies, of which 5 control nearly 55 percent of the total assets of the companies.

There is marked concentration in the size of corporate assets and earning power. For instance, in 1929, 80 percent of all corporation income was received by that 0.3 percent of all corporations whose incomes were over $1,000,000 a year. The deficits incurred during the depression made it difficult to compare earnings of 1934 with the 1929 figure, but it is significant that not until the $1,000,000 income bracket was reached in that year were there any aggregate net earnings.

Concentration of ownership of corporations has been as marked as concentration of size in the corporations themselves. Over half the corporate dividends paid out in recent years have gone to about 2 percent of the total number of families and single individuals in the country. From 1927 to 1937, approximately 35 percent of all corporate net dividend payments went to 25,000 persons, or less than 0.1 percent of the total number of families and single individuals. Furthermore, within the dividend-receiving group, 4 of the recipients received more than 4 of the dividends paid, and 11 percent received approximately 3.

The figures on large corporations are of particular importance because of their dominance in the economic life of the country. In 1937 the 20 largest shareholdings in the 200 largest corporations studied, accounted on the average for nearly a third of the voting stock. In 40 percent of the corporations, control was held either in one family or in a small group of families. Fifteen of the 200 great corporations were controlled by three families (the duPonts, Rockefellers, and Mellons), and their holdings in these corporations were valued at $1,400,000,000.

Land ownership (rural) has become increasingly concentrated as a result, among other things, of the advance in farm mechanization, depression, and the drought, putting more farm land into the hands of large owners, financial institutions, and governmental units. A concomitant has been the lowering of living standards for many farmers and the forcing of some out of the farm economy entirely.

Home ownership shows a similar picture. Only a fifth of the urban non-relief families with incomes below $1,000 a year owned homes in 1935-36 while in the very much smaller group with incomes ranging from $5,000 to $10,000, more than 3% were home-owners.

The question of insurance policy ownership has never been adequately answered and cannot be in the absence of complete policyholder lists from the companies. It seems clear from the available data, however, that over 80 percent of the total insurance in force is held by a very small fraction of the total number of policyholders, and that, furthermore, the lapse rate is so much higher in the lower income groups that they are much more liable to heavy loss on their policies than the more fortunate groups.

Concentrated control of investment policies

These evidences of ownership, however, are only part of the story. The control of the resources of the country rests in even fewer hands. The dominance of three families over 15 of our 200 largest corporations has already been mentioned. On the boards (in 1937) of the 200 largest non-financial and the 50 largest financial corporations, there were 3,544 directorships, and these posts were held by 2,725 individual directors. Nor was the interlocking brought about primarily by inactive directors, for of the 83 directors holding 4 or more directorates, 59 were active in at least one of the corporations they served.

The piling up of more than $15,000,000,000 in assets by the five largest insurance companies provides an extraordinary chance for domination by a few, because in almost no case does the stockholder or mutual policyholder have a voice in the management of his company, which is carried on almost entirely by a small, self-perpetuating group of managing officers.

Concentration of savings

Individual savings are likewise the property of a very small group at the top of the pyramid. In 1936, the lower two-thirds of the nation's income groups had only negative savings. The bottom third went into the red to the extent of $1,207,000,000, and the middle third to $252,000,000. The top third, on the other hand, saved $7,437,000,000. To put this in another way, if the whole population were divided into equal numerical groups of 2,750,000 families each, the top 10 percent, with incomes over $4,600, saved 86 percent of the total savings made in 1929, while the second group, with incomes ranging from $3,100 to $4,600, saved 12 percent, and the other 2 percent of savings were accounted for by the remaining 80 percent of the population.

Business savings are about two-fifth of the nation's savings. In 1937 less than 0.2 percent of all corporations made 46 percent of all corporate savings, which comprise by far the greater portion of all business savings. These savings are, of course, in large measure controlled by the 200 great corporations, with the consequent management of their use by the extremely small group of men who form their active directorates.

Individual savings are generally transferred from the saver to the investor, by means of such devices as investment trusts, insurance companies, banks, building and loan companies, etc., which means a consequent sacrifice of the management principle by the saver, and an enlargement of the funds in the hands of the management group.

Executives of a number of great corporations appearing before the TNEC, stated that they did not contemplate going outside their own concerns for funds for expansion purposes, since they had sufficient reserves within the company for any additional equipment that was deemed necessary. This is partly due to the huge surpluses that have been built up in corporate treasuries, and partly to the conservative bookkeeping principles used, which set aside enough money annually to amortize the equipment of the concern, with little regard to the rate of