Arthur Burns

The Decline of Competition




This Summary from the book by Arthur Burns shows the closed functional links between state and corporations and puts to rest the rosy image of a capitalist system based on free competition to the advantage of consumers. This idealistic view has never been fully expressive of historical reality, and especially since the beginning of the 20th century, with the growth of the large corporations. To talk then of a crony capitalism opposed to free market capitalism appears as a misunderstanding dictated either by ignorance or by motives of propaganda.



The history of the National Industrial Recovery Act is the resultant of two sets of forces, the policies urged by business managers, on the one hand, and those of the administration, on the other. The policies urged by business interests were those developed by trade associations prior to the act; they rested ultimately upon the restriction of competition and control of output by each industry group. The act gave fresh hope to the supporters of these policies by promising emancipation from the limitations of the anti-trust laws and offering the aid of the state in enforcing uniform policies. The state, on the other hand, was dominated during this first year by a desire to secure the seedy acceptance of codes in all industries. This anxiety resulted in a large measure of acquiescence in the plans of trade associations. The very magnitude of the task of securing the universal adoption of codes and its delegation to a new and hastily assembled administrative machine contributed to this docility on the part of the state. The absence of any clear plan resulted in shortsighted policies as well as inconsistencies in the codes. [1] The initiation of the new program at the low point of a depression turned immediate attention to the acceleration of business activity and the reversal of the downward trends of wages and prices, and away from the long-run implications, of industrial regulation.

The net result of these two sets of forces was a large measure of open concentration in each industry of the functions performed by the individual entrepreneur in a regime of competition; viz., the functions of determining the volume of output, prices, the nature of output produced, methods of selling, and long-term investment. The degree in which these functions were actually concentrated varied greatly from industry to industry, more particularly with the number of firms in each and the relations between them.

Direct control of output was denied to industry at large. Some (but not all) industries marketing exhaustible natural resources were granted such control and all that can be said of the policy pursued in the exercise of this power is that it was aimed at increased prices. Indirectly, however, control of production and the rationing of output in proportion to capacity to produce gained importance trough the regulation of the maximum hours of plant operation. At first applied to few industries and in such a way as to leave total output unaffected, these regulations gradually came to affect total output and to apply to an increasing number of industries.

Explicit authority to fix prices was sought by many industries but obtained by few. Those who obtained the power were usually concerned with exhaustible natural resources, but even their experience was not encouraging. In the bituminous coal industry price fixing resulted in widespread evasion. In the lumber industry the power was given but subsequently withdrawn and replaced by "emergency" price fixing. In the copper industry reliance was placed at the outset upon control of sales, and the oil industry, setting out with explicit powers to fix prices, moved towards the organization of cartels to control sales. In the cleaning and dyeing industry price control proved unenforceable. In the distributing trades minimum margins between purchase and resale prices were usually fixed, sometimes with the object of preventing the use of any commodity as a "loss leader" and sometimes merely to "stabilize competition."

In spite of the difficulties that emerged when attempts were made to administer clear and continuing powers to fix minimal prices, price fixing found its way into a number of codes by indirect route. Prohibitions upon "destructive price cutting" and the power to set minimum prices during "emergencies” came to apply to an increasing number of industries, these powers being, however, clearly placed in the hands of the administrator. The prohibition of sales at prices below the cost of production appeared in the early codes and survived all attacks during the first year of the administration: failure to secure approval methods of calculating costs, however, rendered most of them inoperative.

The open-price policy of the trade associations was early entrenched in the codes and was blamed for increasing the uniformity of prices among sellers. Coercion upon those giving notice of intention to reduce prices was charged, with the result that efforts were made to amend, but not to abolish, the open-price clause. Policy moved in the direction of the elimination of notices of changes in price, the elimination of information concerning the identity of the seller quoting each price, and the obstruction of short-period price cutting by filing a reduced price to prevail only for a very short period (covering one important sale).

The standardization of products and methods of selling which had been increasingly sought by trade associations prior to the act as a means of avoiding disguised price competition and non-price competition was extensively provided for in the codes. Finally, the trade associations sought and often obtained the concentration of authority over long-term investment as a means of attacking the problems of cutthroat competition at their source.

The immediate effects of this relocation of authority over economic resources are impossible to segregate from movements in world economic conditions or from the consequences of the policies of the federal government with regard to monetary conditions, agriculture, the relief of the unemployed, and public works. Accurate measurement is, of course, impossible because of the absence of adequate statistics of output, wages, employment prices, and profits. Nevertheless the general measures of economic conditions summarized at Fig. 52 throw some light upon the matter.

The immediate objectives of policy were the stimulation of business activity by increasing payrolls and between March and July, 1933 [2] payrolls increased by 35%, employment in manufacturing by 23%, while manufacturing activity rose by 66 per cent and the wholesale prices of non-agricultural products on the average 11 per cent. [3] Between July, 1933, and December, 1934, factory payrolls increased a further 23 per cent, and factory employment (adjusted) 8 per cent. Industrial production (adjusted) however, after falling in November, 1933, to 28 per cent below the July, 1933, figure rose in May, 1934 to 14 per cent below it, then fell to 29 per cent below in September, 1934, and by December, 1934, was again 14 per cent below it. The wholesale prices of non-agricultural products rose 10 per cent between July, 1933, and December, 1934. These statistics indicate that increases in output and payrolls were accompanied by increases in prices, the most rapid rise occurring between March and July, 1933. The marked increase in the volume of production during this period was accompanied, however, by an increase of 8 per cent in stocks of manufactured goods, an increase in harmony with the assumption that dealers and manufacturers were speculating on increases in prices and costs. But when sales at the higher price level failed to carry off all current production, prices were not reduced; they were further increased [4] with the result that between August, 1933, and December, 1934, production averaged 21 per cent below its level in July, 1933, but 34 per cent above its level in March, 1933. [5]

These increases in price resulted in considerable increases in profits, 659 manufacturing and trading corporations which had reported aggregate profits in 1932 of $41,000,000 reporting profits of $598,000,000 in 1933 and. $911,000,000 in 1934. [6] Doubtless part of this improvement in profits was due to the introduction of more efficient methods of production and organization, and part to the fuller utilization of plant, but it is hard to reject altogether the suggestion that prices were increased to an extent more than necessary to cover increases in payrolls. The deficiencies of statistics of profits are too obvious and numerous to specify; but there is no reason for rejecting the general conclusion to which they point, viz., that prices were raised sharply between March and July, 1933, and more slowly between July and December, 1934, and that production was adjusted to the rising level of prices.

The particular admixture of collectivism and individualism established by the act failed to secure compliance with the President's plea for temporary sacrifices in the hope of later gain from the fuller utilization of the means of production. The maintenance of production in December, 1934, at a level some 30 per cent above that in December, 1932, must be attributed in large part to other aspects of government policy. Beginning in September, 1933, considerable amounts of purchasing power were placed in the hands of farmers in the form of crop allotment payments, and a little later the distributions made for Civil Works projects, Public Works, and the Civilian Conservation Corps attained sizable proportions. [7] Thus the elevation of the trade association to a position of control in industry and the larger measure of acquiescence in their policies by the state resulted in the use of the new concentration of authority to seek immediate profits in increases in prices rather than in the acceleration of business activity.

It is difficult to attribute this outcome to any particular clauses in the codes except where explicit and effective control of output, sales, or prices has been permitted and proved enforceable. Although the open-price clauses probably exert an upward pressure upon prices, they do not, as we have seen, determine prices. It is unlikely that the elimination of these clauses would have resulted in a fall in prices [8]; producers were schooled in the process of cooperative price making and would be unlikely to revert to short-run price cutting. Nor were the clauses prohibiting sales at prices below cost of production of primary importance in determining prices. They were not brought into general operation because of the time required to establish uniform methods of calculating costs; many of the codes, moreover, required that the administrator approve of proposed methods of calculating costs and the machinery for examining and approving proposed cost accounting systems was slow in being established. In any event the policy of the administration in interpreting the phrase “cost of production” could at best set the minimum and not the maximum price. The administration avoided the use of its power to license industries and had little other direct power to reduce prices [9] or prevent their increase except where firms were willing to reduce actual prices when minima were reduced. It is nevertheless probable that considerable pressure could have been exerted by the threat to withdraw approval of the code in an industry whose price policy was disapproved; the industry would then become subject to the anti-trust laws. [10]

The Board of Review established to investigate the extent to which the National Industrial Recovery Act had induced monopolistic practices or hampered small businesses concluded that

“monopoly sustained by government. . . is clearly the trend in the. . . National Recovery Administration. . . .
“Fair competition is merely a resounding and illusory phrase. . . what the powerful producer calls fair his weaker rival fiercely denounces as most unfair; and there is no way to reconcile the difference. All competition is savage, wolfish, and relentless; and can be nothing else.” [11]

A supplemental report concluded that no power under the act was showing itself able to protect the small producer and that

“there is no hope for the small business man or for complete recovery in America in enforced restriction upon production for the purpose of maintaining higher prices. . . . To give the sanction of the government to sustain profits is not a planned economy but a regimented organization for exploitation. . . . The tendency to raise prices while forcing down wages reduces the purchasing power which alone can balance production and consumption.” [12]

There is little doubt that the programs in the main successfully urged by business managers were not even in their own interests as a group. It may be argued that their failure to bring to the solution of the problems of depression nothing more than their old policies writ large and plain was due partly to the fact that the full consequences of these policies had never been revealed in the earlier period because of the impotence of trade associations.

Yet general reasoning suggests very forcibly that, while restriction of output by some groups may benefit them at the expense of the remainder, the policy cannot be generalized for all groups simultaneously. A society is not generally better off the less it produces. Rather the explanation lies in the fact that business managers were, as would be expected, still motivated by the pursuit of private profit. They had broadened the basis of their calculation of profit to compass the interests of each industry as a group, but no further. They were beginning to resemble very closely in their policies the craft guilds of the middle ages. This measure of concentration, however, possesses neither the merits of the wide distribution of authority implied in free competition nor those of its complete concentration in the state.

The President announced that “we have created a permanent feature of our modernized industrial structure” which will prevent both ruinous rivalries in industry and monopoly and restraint of trade “under the supervision but not the arbitrary dictation of the government itself.” [13] The gesture was cramped at the outset, however, because policy was directed to considerations no more far reaching than an estimate of what representatives of industry would accept without protest. Essential reform must necessarily involve from time to time the imposition of policies distasteful to the class that is most highly organized and articulate. During the first year of the act the administration, however, spoke with two voices, one for business and another for critics of its policy. Repeated references were made to the abandonment of price fixing and the maintenance of a free market; in fact it merely changed the forms of control of prices and output without reducing the extent of the control although during its second year clauses permitting price control became less important.

The declaration that the National Industrial Recovery Act was unconstitutional [14] brought to an end an experiment in industrial control estimated to have cost for its administration about 94 million dollars. [15] It was received by industrialists with mixed feelings. They were gratified by the decision of the Supreme Court to obstruct greater government control of industry but conscious, for the most part, that the control hitherto exercised under the act had been very helpful to them. There were signs, however, of the development of a more critical attitude within the administration. [16] A number of trade associations and large corporations sought to avoid a general exodus from the promised land by declaring publicly their intention to continue adherence to the codes now unsanctified by law. [17] General adherence to the wage levels set in the codes was expected to prevent general price reductions. Plans were made for voluntary codes to be enforced by resort to arbitration. [18] The remnant that remained of the National Recovery Administration moved warily in encouraging the adoption of voluntary codes. It was aware that the government, being no longer able to offer immunity from the anti-trust laws, had little to offer as a reward for the acceptance of clauses distasteful to industry. [19]

It was made clear that voluntary codes must comply with the anti-trust laws [20] and industries were invited to submit codes to the Federal Trade Commission which would deal with them in cooperation with the National Recover Administration under its former Trade Practice Conference procedure, although possibly the commission might “modernize” some of its rulings concerning the acceptability of trade practice rules. [21] The first voluntary code under the new regime of cooperation between the National Recovery Administration and the Federal Trade Commission was obtained by the wholesale tobacco distributing trade on Sept. 30, 1935. The Trade Practice Division of the commission accepted as rules which it was prepared to enforce prohibitions on “loss leaders,” and selling below cost with intent to injure a competitor “and where the intent may be to lessen competition, or tend to create a monopoly, or unreasonably restrain trade.” Price discrimination, secret rebates, allowances, and services were prohibited under similar conditions. [22] In some industries, however, there was evidence that part of the ground gained under the act would have to be evacuated. The declaration of the American Iron and Steel Institute of the intention of its members to continue to act in accordance with its code diminished the prospect of price reductions but greater flexibility of prices was expected; the prohibitions on quantity discounts and the requirement of resale-price maintenance were expected to be modified and the rules governing fabrication in transit [23] to be materially altered. [24] There was grave doubt whether the rationing of sales of copper could be continued under any voluntary code. [25]

The abandonment of the National Industrial Recovery Act provided no solution to the problem of adapting economic institutions to an industrial system diverging increasingly from free competition. Under the act even where there was no explicit sanction of control of output and prices the aspects of sales other than prices were often so closely regulated that informal regulation of prices was relatively easy. [26] Return to the regime prevailing prior to the act may somewhat hinder such regulation but the preceding chapters have shown how persistent is the trend away from competition under existing law. The state cannot by refraining from positive control obtain the benefits of free competition. On the other hand, state participation in price policies presents profound and complex problems both economic and political. Yet some such participation is inevitable.




[1] 1 Cf. National Industrial Recovery Board, Code Revision Memorandum No. I: Evolution of Trade Practice Policies.

[2] The sharp upturn in business activity before the National Industrial Recovery Act became operative on June 16, 1933, cannot be dismissed as unrelated to the act because it was in part stimulated by anticipation of the effects of the act (as well as of the effects of the monetary policy of the administration) in raising both prices and labor costs. Efforts were made to increase production before labor costs increased, in order to sell when prices had been raised.

[3] A fuller analysis of these statistics will be found at BURNS, "The First Phase of the National Industrial Recovery Act," Polit. Sci. Quart., 49: 161 (1934).

[4] The index of wholesale prices is far from a perfect measure of increases in prices. There was considerable complaint that the custom of adding a fixed percentage to cost to cover distributing costs at each stage of the process of distribution resulted in increased charges for distribution whenever the wholesale price of the product increased and irrespective of changes in the actual cost of distribution. In some industries the elimination of sales at less than the announced price, as well as the reduction and elimination of discounts and allowances of various kinds, caused considerable increases in actual prices not included in these figures. It was also claimed that actual increases in the cost of paper, for instance, exceeded those suggested by these averages because the prices of the important types were drastically raised, while those of the less important were raised very little.

[5] The raising of prices and restriction of output were most notable in the building materials industries where prices were by 1935 only 9 per cent below their level in 1929. The composite index of the cost of construction compiled by the Engineering News-Record was in October, 1934, only 1 1/2 per cent below the average for 1929. Construction awards were only 20 per cent of their average for 1923 to 1925 (CONSUMER ADVISORY BOARD, The Effect of Price Control and Price Stabilization on the Construction Industry).

[6] These statistics relating to large corporations are probably not typical of industry in general. The National Bureau of Economic Research has called attention to a remarkable inverse correlation between size of firm and rate of return in 1931 and 1932 (Bulletin 55, April, 1935).

[7] The Consumer Advisory Board concluded in 1935 that if rents had not lagged behind other elements in the cost of living “the subsidy of consumers by the federal government would be the only source of the increased physical volume of sales” (Prices in Relation to the Consumer's Income, 2).

[8] Cf. CONSUMER ADVISORY BOARD, Private Price Control and Code Policy, 1.

[9] The power to fix minimum prices in an emergency was used to secure a reduction of retail lumber prices but this case stood alone and untested.

[10] The labor clauses would then also have ceased to operate unless a limited code applying to them alone had been imposed or only the clauses affecting prices and output withdrawn.

[11] ("DARROW") BOARD OF REVIEW, Report, cit. New York Times, May 21, 1934.

[12] loc. cit. Counsel for the administration charged that the board was partial in its attitude and incorrect in its facts.

[13] Message to Congress of President Roosevelt, Jan. 3, 1934.

[14] U.S. v. Schechter Poultry Corp., 55 S. Ct. 837 (1935).

[15] J I Estimate of National Industrial Conference Board (cit. New York Times, June 10, 1935). The expenditures of code authorities included in this figure were estimated at 71.8 million dollars.

[16] Cf. National Industrial Recovery Board, Code Revision, Memorandum No. 1: Evolution of Trade Practice Policies; LYON and others, op. cit., Chap. XXIX.

[17] Cf. New York Times, June 4, 1935; address of president of U.S. Chamber of Commerce, cit. New York Times, June 15, 1935; cf. also New York Times, July 19, 1935.

[18] New York Times, June 13, 1935.

[19] New York Times, June 20, 26, 1935.

[20] New York Times, June 8, July 4, 1935.

[21] New York Times, July 4,1935.

[22] New York Times, July 20, 1935.

[23] See p. 348.

[24] New York Times, June 6,1935.

[25] New York Times, June 19, 28, 1935.

[26] Cf. CONSUMER ADVISORY BOARD, General Statement by Dexter M. Keezer on Jan. 9, 1935.


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