The Reign of Error


IN his annual message to Congress last December, President Hoover made a recommendation of vital importance to American business. He suggested a study of the effects of existing antitrust legislation.

I recommend [he said] that the Congress institute an inquiry into some aspects of the economic working of these laws. I do not favor repeal of the Sherman Act. The prevention of monopolies is of the most vital public importance. Competition is not only the basis of protection to the consumer, but is the incentive to progress. However, the interpretation of these laws by the courts,

upon those enterprises closely related to the use of the natural resources of the country, makes such an inquiry advisable. The producers of these materials assert that certain unfortunate results of wasteful and destructive use of these natural resources, together with a destructive competition which impoverishes both operator and worker, cannot be remedied because of these prohibitive interpretations of the anti-trust laws. The well-known condition of the bituminous coal industry is an illustration. The people have a vital interest in the conservation of their natural resources, in the prevention of wasteful practices, in conditions of destructive competition which may impoverish the producer and the wage earner, and they have an equal interest in maintaining adequate competition. I, therefore, suggest that an inquiry be directed especially to the effect of the workings of the anti-trust laws in these particular fields, to determine if these evils can be remedied without sacrifice of the fundamental purpose of these laws.

Since the results of the proposed inquiry may determine in large part the course of the nation’s industrial development, the President’s suggestion should enlist the interest of manufacturers and distributors alike.

Everywhere, except in Congress, it has become a recognized fact that serious maladjustments exist in our economic life. At the annual conventions of nearly every industry, discussion centres upon the hardships imposed by ‘conditions of destructive competition.’ Many entire trades are unable to operate profitably under the blind type of competition that is imposed by law; as a consequence, a high premium is placed upon merging. But, as Mark Twain said in reference to the weather, everyone complains, but no one does anything about it.

At the moment we are in the throes of a severe industrial depression. Many economists have said that overproduction was one of its contributing causes, and several have proposed more careful economic planning as a method of preventing overproduction in the future and avoiding a recurrence of these periodic slumps. It is a sound idea, but it will remain impracticable until the Sherman Act is modified to allow business some adequate measure of control over its own destinies. One simple illustration will show that this is true. As times improve, suppose that there should be a definite increase of 10 per cent, let us say, in the demand for shoes. Each shoe manufacturer will know it, and it will be the signal for each factory to begin operations on a larger scale. This would be the critical time for rational planning if that were possible. If the manufacturers, through their trade association, could strike an agreement to limit their combined increase in output to 10 per cent, production would then be geared to consumption; the shoe industry would start off again on a sound basis.

At present, however, such an agreement — no matter how sensible it might be or how necessary to the general welfare — is illegal under the Sherman Act. It would be a ‘combination in restraint of trade,’ and therefore expressly forbidden. Forced to act independently, each shoe manufacturer will speed up his operations as much as he dares, in the hope that he will be able to sell more shoes than his competitors. In the industry as a whole, production will be increased, not 10 per cent, but 15 or 20 or 30 per cent. Here, at the very beginning of better times, the seeds of the next depression will be sown; the situation will continue to get more and more out of hand until, at last, another crisis will correct the excesses which the law has rendered the manufacturers powerless to correct for themselves.

It is vital to the general welfare that Congress undertake this long-overdue investigation which the President has recommended. If an unprejudiced, fact-finding committee were to study the problem, we should be able for the first time to chart our economic philosophy by definite findings, instead of leaving it entangled in misconceptions and cross-purposes. Congress, however, seems to be supinely indifferent to the health of industry. The only resolutions filed during the recent short session sought either to limit the proposed inquiry to a report upon the power of Congress to enlarge the administration of the existing laws, or to determine whether the Department of Justice has properly enforced them. Either type of investigation is a plain distortion of the President’s purpose; neither type seeks even a diagnosis of industry’s troubles, let alone a cure.

Even if the proper kind of inquiry is undertaken, there is some danger that it may be restricted to the coal and oil industries. This would be a colossal blunder. The problem of destructive competition is well-nigh universal in all branches of business. The plight of the coal and oil industries only seems to demand more urgent attention because they are forced to waste natural resources, a loss which is readily apparent to everyone. A vast number of other industries — industries which affect many more people — are forced to waste finished materials, and this loss, although less conspicuous, is a greater drain upon the nation’s wealth than the other. To be wholly effective, therefore, any Congressional inquiry must be comprehensive. It would simply perpetuate the costly policy of the past to temporize with the need for a complete solution by adding one or two more particularly hard-pressed industries to the piecemeal exemptions that have already been made — exemptions which create class privilege and stand as self-confessed evidence that our present anti-trust laws will not work.


The primary purpose of the Sherman Act was to banish from our economic life the power to create a monopoly in private industry. It committed us to ‘the principle of competition,’ which means simply the maintenance of competitive sources of supply. To this end ‘the liberty of the trader’ was protected against acts of oppression by his competitors. Thus, it was thought, the door of free competition would always remain open to independent capital and brains. If one searches through the history of the period which brought forth the Sherman Act, one will find no evidence that this law was ever intended to throttle legitimate business by enforcing a reign of cutthroat competition between financially disconnected units not seeking to oppress or absorb other competitors. This fact is not generally realized. There was also no indication, either in the Act or in the public opinion of the time, of any purpose to protect consumers beyond such ample protection as was explicitly granted in the provision forbidding monopoly and hence ensuring the existence of multiple sources of supply. Yet the broad language of the Act, as will presently be shown, has given rise to this wasteful economic philosophy, and it has been so generally accepted that it has become almost a part of the substantive law itself.

In order to see how this has come about, it will be necessary to distinguish clearly between the two separate parts into which consideration of the Sherman Act should fall. First is that part dealing with trusts, monopolies, oppression of competitors, and with questions of definition, administration, and jurisdiction. This is the true antitrust act. But there is a second part which is summed up in the wide clause: ‘Every contract [the italics are mine], combination . . . or conspiracy in restraint of trade or commerce . . . is hereby declared illegal.’ This constitutes what may fairly be called the ‘ restraint-of-trade act.’ Paradoxically enough, this second part of the Sherman Act has done much to defeat the primary purpose intended; by inducing mergers, the provision forbidding all agreements ‘in restraint of trade’ has actually had the effect of a pro-trust act.

When President Hoover, former President Coolidge, and others almost unanimously declare that they do not favor repeal of the Sherman Act, it is essential to bear in mind the distinction between the two parts of this law; an analysis of their statements always reveals that their real concern is to preserve our traditional opposition to monopoly in manufacture and distribution. The public is rightly united in the belief that monopoly is contrary to the national interest. But every utterance against repeal or amendment of the Sherman Act, justified in the main purpose though it be, creates a general impression that all the provisions of the Act are necessary bulwarks against monopoly. This is far from the truth. The ’restraint-of-trade act’ is not only not a bulwark against monopoly; it actually fosters monopoly, and this is the only part of the Sherman Act which business men wish to modify. If the present maladjustments of industry are to be cured at the source, the law which created them will have to be changed. Such a change has become necessary, not only to restore the balance of power between buyer and seller upon which our economic equilibrium depends, but also to prevent the nullification of the real will of the people with regard to monopoly.

The Supreme Court has never explicitly declared that voluntary agreements with respect to price, limitation of production, or apportionment of territory among competitors who have not even a remote chance of establishing a monopoly are contrary to sound economic policy. This fundamental point has never been reviewed on its merits, and indeed cannot be so reviewed, because Congress, with its ill-chosen if not inadvertent phrase, ’every restraint,’ has damned practically all agreements of this kind, the good along with the bad, in its blanket indictment. In the cases that have come before the courts it has only been necessary to show that such agreements are ‘in restraint of trade,’ as they obviously are, and hence ipso facto unlawful. But this leaves open the very important question whether some of these agreements between competitors in manufacture and distribution may not actually promote the public interest. As a matter of fact, if they are subject to proof of ‘reasonableness’ upon complaint, they not only do not tend to create monopoly, but are positive deterrents to it. Again, it is the absolute prohibition of such agreements that fosters monopoly, for, by placing unduly narrow limits upon the coöperative action of independent units, the law provides the most conspicuous motive for mergers.

Nowadays it is customary to dismiss giant industrial combinations as natural developments of the machine age, part of the inevitable trend of the times. But it is the restraint-of-trade part of the Sherman Act that has made them both natural and inevitable. In general, these mergers of competing companies were originally formed to enable them to exercise as a single corporation the stabilizing influence upon prices, production, and division of territory which the law forbids them to exercise by agreement as independent units. This has been the prime motive underlying the whole merger movement. Later, there have developed other collateral types of mergers calculated to effect control of raw materials, concentration of purchases, or diversification of product; but these have followed as by-products and have not figured prominently as motivating causes. These being the conditions which have promoted the growth of mergers, it is only natural that independent manufacturers and distributors have been left at a great disadvantage. Every large combination in a given industry brings together a concentrated purchasing power which, in its practical working, is a bludgeon leveled at the heads of all the important vendors to that industry. For example, if several mergers should take place among the publishing houses, every paper manufacturer would see the number of outlets for his paper reduced. If he should lose an important customer, he would find it extremely difficult to replace him. So difficult, indeed, that the manufacturer would not dare take the risk of losing him and the customer would be in such a strong position that he could virtually dictate his own terms. This is precisely what is happening with the spread of mergers. It is permitting the buyer to set the price. Since, under the operations of the law, purchasers can act jointly, while sellers cannot, the old trading slogan, ‘Let the buyer beware,’ has now become ‘Let the seller beware.’

At the root of our industrial maladjustment there is too much solicitude for the rights of the consumer and too little for those of the manufacturer and investor. It is imperative, therefore, to determine where the true public interest lies between the rights of those who buy and those who sell. Does it not lie, first of all, in the freedom of buyer and seller to deal or not to deal with each other? If so, then it follows that the welfare of the public is seriously jeopardized by the situation which now prevails. When an industry is controlled by a few merged corporations, the sellers to that industry are not free to deal or not to deal; they face the alternative of dealing at the price the purchaser dictates, which may be ruinous, or of going out of business. The equilibrium of the opposed parties is no longer maintained by the law of supply and demand; it is completely upset by the arbitrary power of the buyer to enforce his own terms.

With so many factors favoring the buyer against the seller, there can be no middle ground for American business between virtual monopolies, on the one hand, and, on the other, some relaxation of the law that will permit price agreements between sellers. Such agreements, of course, must be subject to public accountability and to penalties for abuse. With this safeguard they would be a means of preserving that freedom in competition which the antitrust laws were intended to guarantee.

It is true that the very thought of ‘price fixing’ is anathema to many people because of its past association with various forms of financial pooling and with misguided attempts to maintain artificial price levels. But there is a vital distinction between price fixing for greed and price stabilization from necessity, which keeps open the other important elements of competition — quality, service, and cost reduction.

To make this distinction clear, one need only mention the tense competition that exists between the railroads and between the banks, both of which operate under practically uniform rates. Moreover, such price agreements would not mean that prices would be held arbitrarily at a permanent level. Recent experiences with copper and rubber prove once more that this cannot be done. If the price were set too high, new competition or a ‘buyers’ strike’ would quickly bring it down to the proper point, agreement or no agreement. But the level would be adjusted at frequent intervals by competitors working together on the basis of cost and demand, and a retreat — if conditions called for retreat — would be orderly instead of hysterical and ruinous. Whether prices rise or fall, the manufacturer whose judgment dictates the lowest price will control. He will either have his own way or drop out of the agreement.

At present the laws forbid the use of this remedy; consequently vendors too have begun to merge in an effort to pit mass selling power against mass purchasing power. The ‘distribution merger’ of allied but non-competing products such as that of General Foods Corporation, as well as similar developments in other fields, shows still another phase of this economic urge. In order to keep abreast of the chainstore movement the local distributor may yet have to merge with others in neighboring cities. The banks are already consolidating their capital to keep pace with the growth of their corporate customers. Thus the vicious circle rolls merrily on, gathering accretions like a wet snowball. Eventually competitive units will be so few that there will be no alternative to this virtual monopoly, since two or three large corporations in unregulated control of a nation-wide field protect the public little better than one. What door of opportunity will then stand open to new competition?

These are among the fundamental conditions which have been created by the anti-trust laws. The problem which they raise, however, is not a legal problem; it is a matter of economics and practical business experience. A sane solution will provide us with a new economic and social philosophy of the utmost importance. The whole question of revising the Sherman Act has been widely misunderstood and distorted. In the forty years since our present course was charted our industry and commerce have undergone vast changes which would have rendered even the wisest legislation obsolete; yet no modification whatever has been made in the substantive law. No measure of relief has been granted to business except the special exemption of certain privileged industries. And this has gone hand in hand with a more liberal policy toward consolidations of capital which has tended directly to foster monopoly — the very thing that the Sherman Act was framed to prevent.


That the problems of industry have not received as sympathetic consideration from the Federal Government as the welfare of the country has required, or as labor and agriculture have received, is a matter of common knowledge. Former President Coolidge recognizes this with evident regret, for in one of his recent little messages to the country he says: —

We need a better understanding between business and government. It would be well to temper regulation with coöperation and season restriction with encouragement. The solicitous care given labor and agriculture by the government has generally worked to the public advantage. When the representatives or individual members of these interests make mistakes, they are not charged against the whole organization. But in commercial business the errors are usually considered to reflect on the whole group. All legitimate business is entitled to governmental consideration. When industry will be affected by governmental action, it ought to be heard sympathetically and without implication of seeking domination contrary to the public interest. We cannot have employment and prosperity except on the basis of justice to business.

For this public attitude of suspicion to which Mr. Coolidge refers, business has itself largely to blame. During the last century the ethics of big business, often little better than the ethics of pirates, caused every element of public opinion to be arrayed against it. In due course this universal condemnation had its effect, and in the end business capitulated completely. Human nature has not changed, but it may fairly be said of industry to-day that enlightened selfishness has generally supplanted the ruthless selfishness of a generation ago. Business men have learned their lesson and can now be trusted with a reasonable measure of responsible freedom — subject, of course, to the checks and balances which the public interest requires of all elements in the population.

Business is further handicapped in obtaining relief because its own counsels are divided. A few leading industrial organizations oppose reform of the Sherman Act because they fear that they may lose the right of injunction in labor disputes which the Act confers upon employers. Some industries have already attained the maximum advantages to be had from mergers, and their managers are loath to give up the present system, which permits them to buy at prices below cost from the disorganized industries that must sell to them. Others are persuaded that efforts to obtain relief would only result in the imposition of even harsher restrictive measures by the radicals in Congress. Still others have been converted to the ‘new era’ philosophy so prevalent during the boom period of 1929; they allow themselves to believe that economic laws have become obsolete, that the evil of overproduction is really the fault of underconsumption, that true prosperity lies in producing first and then making the public absorb whatever is offered.

Another group has been drugged by the doctrine, so freely expounded in Washington, that the rights of the consumer are superior to all others. This group spreads abroad the notion that cutthroat price competition is the only incentive to efficiency, that efficiency is inherent in mere size, that the mass of independent producers and distributors who urge revision of the law want protection against their ‘larger and more efficient competitors.’ It ignores the fact that many industries, because of their very nature, do not lend themselves to the methods of mass production, and that in many others even the most efficient cannot prosper. Such units want protection, not against greater efficiency, but only against those competitors who rarely, if ever, make an annual profit, and against the buyers whose power fosters this condition.

Finally, efficiency experts and legal advisers of many trade associations have exerted a discouraging influence. Their knowledge and experience of complex anti-trust cases are naturally bewildering to the man at his desk operating a business; he has probably never studied the anti-trust laws, but he wonders, nevertheless, why his competitors won’t let either him or themselves escape from red ink. The experts tell him that he needs better cost accounting, more trade statistics, better legal advice, and various other panaceas. They do not tell him that none of these services, all valuable in themselves, can help to equalize the artificially created disparity that now exists between buyer and seller.

In the face of such conflicting opinions, it is not strange that business sentiment has been unable to crystallize to end the uneconomic ‘reign of error’ which owes its origin to the Sherman Act.


If a Congressional inquiry into the workings of the anti-trust laws should be instituted in accordance with President Hoover’s suggestion, the committee would have to consider the following major defects of existing legislation : —

1. By prohibiting competitors from adjusting their total production to the total demand, it has caused wanton waste of our invaluable and irreplaceable natural resources.

2. By prohibiting the stabilization of both production and prices, it has caused widespread ‘profitless prosperity’ among manufacturers and distributors.

3. It is directly responsible for a large part of the present trend toward concentration of capital.

4. By forbidding agreements to eliminate the ‘cross-hauling’ of freight, it has prevented economies in the cost of steel and many other materials.

5. It has made it impossible for manufacturers of trade-marked articles to protect the reputation of their products against dealers who wish to feature them at less than the advertised price.

6. It has worked indefensible injustice against many specific interests, such as the meat packers; for it has forced some of the packers to refrain from handling groceries, while it has not only permitted their competitors to do so, but has allowed the grocery companies to enter the packing business.

7. It has been proved unworkable in principle by the necessity of granting numerous special exemptions amounting to class privilege.

8. Some of its applications have been so uncertain that many useful and lawful acts have been forestalled through fear of prosecution.

If a Congressional committee undertakes to determine the truth of this indictment and conducts its investigation with any degree of open-mindedness, it cannot fail to discover that these ills of business are to be cured only by a fundamental change in our economic philosophy, dictated by economic needs and interpreted by economic minds. Fair and equal treatment must be accorded to both buyer and seller, and this will require revision of the substantive law. It will not be necessary to repeal the Sherman Act, but it will be necessary to amend it. Once the changed philosophy is accepted, nothing more complex will be required than this simple addition to the Sherman Act: —

SECTION 9: That the words ‘in restraint of trade,’ wherever used in this Act, shall be deemed and interpreted to mean only such restraint of trade as, with equal regard for the interests of capital, labor, and consumer, shall be to the detriment of the public interest.

If the terms ‘equal regard’ and ‘detriment of the public interest’ seem to require definition, a simple measure is to ask the question whether the restraint upon any party is greater than is required to protect any other party’s interest. Obviously it would be impossible to list every conceivable restraint upon the public interest. Each case under review must be judged in the light of its specific circumstances.

By amending the anti-trust laws in this fashion, it would then be possible for the first time to measure any trade agreements that might be made in relation to a broad view of the public good which they might serve. This is precisely what has not been possible under the Sherman Act in its present form. In effect it now forbids every agreement in restraint of trade — good, bad, and indifferent alike.

In actual practice the courts have sometimes exercised broader discretion than the narrow letter of the law seemed to allow. Recent interpretations of the Supreme Court have inclined toward a more liberal view; and because of this several prominent trust-law specialists assert that only unreasonable restraint of trade remains outlawed to-day. But in the absence of a clearly formulated economic philosophy defining the public interest in terms that will do justice equally to capital, labor, and consumer, no one can predict what the court will consider ‘reasonable.’ Thus, in the Trenton Potteries case in 1926, the Supreme Court declared that any agreement in respect to price, no matter how reasonable the price may be, is unlawful. So it must be under the unqualified wording of the Act as it now stands. Again, in 1929, the Federal Oil Conservation Board, upon the advice of the Attorney-General, had to withhold from our oil producers its approval of their participation with foreign companies in the vitally needed agreement to limit the world’s production to the estimated demand, because to do so might contravene the Sherman Act. It is obvious, then, that the so-called ‘ liberal tendency’ of the courts falls far short of a real solution of the problem.

The law must first be changed. Then court decisions like that in the Trenton Potteries case can no longer be handed down to fly in the face of urgent necessity and confound every canon of economic sense. It will then be possible to weigh each case in the light of its peculiar circumstances and with an eye to the bearing of every proposed trade agreement upon the conditions of the time and the public interest that will be served. This will permit a flexibility of interpretation over the years as conditions change — an advantage which the restraint-of-trade part of the Sherman Act does not now possess. Those agreements which jeopardize the true public interest would continue to be forbidden just as they now are, but those which promote the general welfare would be allowed. Thus independent units in any industry would be permitted to estimate the total demand for their products and avoid both the waste and the demoralization which result from overproduction. They would be granted the right to apportion territory as a means of eliminating uneconomic cross-hauling. They would be allowed to make agreements about prices (including resale prices) when the prices proposed were not excessive in relation to investment, risk, frequency of turnover, attraction of new capital, and normal reserves for depreciation, obsolescence, and research, improved equipment, and the hazards of business. In short, the balance would at last be restored between buyer and seller.

Once the law has been brought into harmony with sound economic policy, it will be advisable to set up a new public tribunal, perhaps a strengthened Federal Trade Commission, to administer it. Such a tribunal should be divorced from politics. It should be made up of economists and business men, so chosen that membership in this body will be regarded as a symbol of success adequately rewarded; for it will be essential to attract men of the greatest experience, civic responsibility, and breadth of mind. The first important duty of this new trade commission will be to formulate the economic philosophy which I have touched upon, defining the public interest in the light of the revised law and working out a broad code of commercial conduct that will be permissible under it. This is a task for economic minds, since the problem is fundamentally economic and not legal. Once it is accomplished, it will provide the courts with new standards of judgment, which are badly needed. Both the lawyers and the courts ought to welcome such a plan, for it will afford them relief from the present necessity of interpreting unfamiliar matters of economic policy.

This public body should place its chief emphasis upon economic action rather than legal action. With regard to trade agreements, it should have advisory powers before consummation of the proposed acts at the option of the industry concerned, as well as administrative and quasi-judicial powers after the fact, either at its own option or upon complaint. When mergers are contemplated, it should have judicial powers before the fact. Thus only those cases which the tribunal recommended for civil or criminal prosecution would need to come up before the courts. So simple would be the operation of the amended law under the supervision of this tribunal that business men would no longer require legal aid in their everyday practices except when intricate questions arose.

It has frequently been urged upon high authority that, even without revising the Sherman Act, the ills of business could be adequately dealt with by setting up such a tribunal to give advance opinions upon the legality of proposed ‘contracts in commerce’ under the existing law. The proposal is misleading. Without first amending the law, the usefulness of an advisory commission would be confined solely to contemplated mergers, as they might be affected by the anti-trust part of the Sherman Act. While it is greatly needed for that purpose, it would obviously be futile to ask any such body to sanction an agreement affecting prices, limitation of production, or the apportionment of territory; the adverse decisions of the Supreme Court under the restraint-of-trade part of the Act preclude a consideration of these matters. Proposals of this sort, therefore, do more harm than good by encouraging industry to believe that practical relief for its major problems can be had without a definite change in our economic philosophy and in the law which reflects it.

Suppose, however, that such a plan as I have described were adopted. Industry would be required to assume the responsibility whenever its projects might be thought to endanger the general welfare. The burden of proof would rest squarely upon the industry against which a complaint was lodged — the only ones in possession of all the facts. Any party to an agreement which constituted restraint of trade would have to be prepared to show that it was not contrary to the new conception of the public interest. Subject to this limitation, mergers might still be permitted whenever competitive sources of supply would be adequately preserved. The independent producer or distributor, by cooperating with his competitors, could remain independent whenever efficiency would not be increased or survival better assured by merger. Both big business and small would be accountable to a common tribunal in case of complaint. The public interest would receive all the protection that it receives to-day, and it would be safeguarded by a flexible system that would be more fair and just to capital, labor, and the consumer alike. Moreover, a minimum of burden would be imposed upon the government, for the Department of Justice would need to prosecute only upon complaint of the new trade commission, and the commission itself would not be called upon to approve every proposed agreement in advance.

This programme does not permit monopoly, does not restrict the consumer’s sources of supply, does not allow large corporations to oppress small competitors, does not tend to limit new competition. It operates to maintain and improve the standards of American life by helping to stabilize the employment of both labor and capital. It promotes economic balance and security, and social peace. Is it not, then, high time for our government to probe the question thoroughly before industry and distribution pass completely into the stage of universal semi-monopoly? Until it does, economic chaos will continue to be the order of the day and industry will be driven headlong by the will-to-merge.