5. The Steel Industry

The essential purpose of a cartel is to keep competitors from cutting each others’ prices…. The goal is to restrain disturbing influences, to stabilize prices, and to assure those in the business the comfortable feeling that their position is secure.

—Harold Fleming

The years following World War I found the steel industry actively involved in the trade association movement in an effort to harmonize and moderate trade practices. Through not only association “codes of ethics” but, more importantly, the rhetoric of “cooperation” expressed by its leading spokesmen, the steel industry sought to tranquilize competitive pressures. No industry made greater use of its trade association in seeking to promote a spirit of “cooperative competition” than did the steel industry in its employment of the American Iron and Steel Institute (AISI).

Though this study is focused upon the post-World War I years, it would be misleading to assume that only then did steel industry efforts begin to establish a more cooperative form of competition. Actually, the tone for the spirit of “cooperation” had been expressed at least as early as 1913 by two of its abler spokesmen: George W. Perkins, the right-hand man of J. P. Morgan and a director both of U.S. Steel and International Harvester, and Elbert Gary. Perkins declared:

I do not believe that competition is any longer the life of trade… I have long believed that cooperation through large industrial units properly supervised and regulated by the Federal Government, is the only method of eliminating the abuses from which labor has suffered under the competitive method. I believe in cooperation and organization in industry. I believe in this for both labor and capital… under strict regulation and control of the Federal Government in order that they may give the public the maximum amount of good and the minimum amount of evil.¹

Gary added:

We have taken a new departure; we have left the old lanes; we have abandoned the old practices; we are dealing in confidence one with the other; we are looking further ahead than we used to. When prices go off one per cent, we do not immediately run out into the market and put our prices down ten per cent in order to see if we cannot get ahead of our neighbor and make five or six cents for ourselves, by securing business that legitimately belongs to him, even though we may lose five or six dollars within a week by doing it.²

The following year Gary added these words of advice to his colleagues:

[L]et us have courage and let us be patient, taking care of our interests, and … trying in every way to help one another. Let us remember we cannot make anything for our individual selves by injuring any other person, and we cannot assist and benefit any of our neighbors or competitors in business without at the same time benefiting and assisting ourselves.³

There were few business leaders who devoted more of their time and energies to moderating competitive trade practices than Elbert Gary. Employing the meetings of the AISI as his customary forum, Gary came to be recognized as the chief missionary of the new gospel of “cooperation,” a role he carried out with the fervor and eloquence of a faith healer. “Cooperation” for the steel industry became one of the catchphrases of the day, one of those harmless-sounding bromides guaranteed to bring convention delegates to their feet in thunderous applause. Much of the progress that the steel industry was able to make toward the realization of a more passive form of competition can be traced to the efforts of Gary, whose message can be summarized by the phrase, “destructive competition must give way to humane competition.”⁴ Because of the significant impact that Gary’s views had as a catalyst for industry attitudes, rather close attention should be given to his estimates of the quality of competitive life in American business and his proposals for improving it.

One must preface an examination of the statements of steel industry spokesmen by looking at conditions within the industry itself. Contrary to the protestations of steel producers, who sought to create the impression that World War I was a tremendous hardship on the industry, steel production and prices hit all-time highs during the war. As table 1 demonstrates,⁵ annual steel ingot production increased sharply—both in terms of tonnage and percentage of total industry capacity—between 1914 and 1918, and then dropped off just as dramatically following the end of the war. By 1923, production returned to the general level of the war years 1916–18.

Table 5.1

Year	Annual Tonnage ( millions of tons)	Percentage of capacity
1914	22.8	57.8
1915	31.3	71.5
1916	41.4	87.0
1917	43.6	86.5
1918	43.0	82.3
1919	33.7	63.5
1920	40.9	74.9
1921	19.2	34.5
1922	34.6	61.6
1923	43.5	76.6

The general price level rose sharply in 1916, climbed even higher in 1917, dropped off a bit in 1918 and 1919, reasserted itself in 1920, and dropped off further in 1921. In spite of the price decline following the war, the 1921 price level was significantly above the ten-year prewar average—in a range from 33 percent to 57 percent above those levels. Steel is a classic example of an industry characterized by economies of large-scale production, and the sharp changes in quantities of steel produced from year to year put tremendous pressures on firms seeking to align their respective volumes of output with their most efficient scale of production. The combination of decreased prices and production with increased plant capacity provided an environment after the war in which steel manufacturers dealt with business conditions and competitive practices within the industry.

U.S. Steel’s market position at the start of the 1920s reflected the intensity of competition within the industry. Following the 1901 merger that gave it the predominant position in the industry, U.S. Steel experienced a steadily declining share of the steel market. Beginning with a 61.6 percent share of the nation’s steel production in 1901, U.S. Steel found itself entering the postwar decade with only 39.9 percent of the industry’s output. This pattern is not unlike that of the International Harvester Company, which, following the 1902 merger creating that firm, saw its share of the harvester market fall from 85 percent in 1902, to 80 percent in 1911, and 64 percent in 1918, while its market share for other implements also declined.⁶ Since this was the era in which the courts applied the “rule of reason” to antitrust cases, and both U.S. Steel and International Harvester had been found not to have violated the Sherman Act, their respective declines in market shares cannot be attributed to a vigorous antitrust policy. Though the argument has been made that U.S. Steel’s drop is explainable as the attempt of a monopolist to reduce its output in order to counter the decline in prices occasioned by the entry of new firms,⁷ the phenomenon demonstrates the extent to which the company had to respond to the pressures of competition.

The postwar conditions within the steel industry helped foster a continuing criticism, by many steel producers, of the ethical standards of their competitors. Gary, for example, observed that persons engaged in competition are “naturally selfish” and “often inconsiderate and indifferent.” He later explained, “[W]e seek to secure a little more of business when business is dull, because we think our stockholders or those who are depending upon us would be better satisfied if we made a little more money.” He admonished his competitors to be more “reasonable and generous” with one another, and to seek “only our fair share of business, on the basis of fair profits.” Noting that competition in the steel industry was “carried too far,” Gary also expressed what some others had only implied, namely, that unrestricted competition was undesirable because of its effects on firms’ profits, not because of any adverse consequences for customers:

I do think that sometimes competition, which I have said is a great thing for all the people, has been carried too far, and from motives of selfishness we sometimes secure business for ourselves that really, justly and naturally belongs to some of our competitors.

I think we fail to realize that in the long run, year by year, month by month, we will get more business, and certainly will get fairer prices, if we act more unselfishly, if all the time we consider the rights and interests of our neighbors.⁸

Gary then pointed out that it is oftentimes the newcomers to the industry who resort to the methods of “destructive competition” in order to gain a share of the market. To such persons, he suggested a policy of fairness and later declared, “We believe in competition, in vigorous, energetic, unyielding competition…. But we do not believe, or certainly most of us do not believe, in unfair, destructive, unrighteous competition, which is calculated to ruin the competitor. We believe … that stability and just dealing are desirable and beneficial to all who are interested.”⁹ Such statements reflect the view that the promotion of increased profits to the firm should be eschewed when the methods necessary to accomplish such ends conflict with the purpose of preserving the value of existing firms.

In an optimistic tone, Gary noted the change that had been taking place in the steel industry, a change nurtured by a spirit of “friendship” among competitors. He then quoted an industry member to the effect that “the real test of friendship is in adversity,” but that such friendship had permitted business to change many of the “undesirable” business methods of prior years. “It is true,” he concluded, “that the law of supply and demand still governs the output, and that we still have competition, but it is reasonable competition.”¹⁰

Gary was later to elaborate upon his views with respect to the proper limits of competitive behavior. He said, “[E]very one of us should get out of this position of trying to get away our neighbor’s business unfairly. And by that I mean the business that naturally comes to him.” He then advised his colleagues to

always take into account the rights and interests of your neighbor to the extent that you take into consideration your own…. [Y]ou know about what business you ought to have and how much your neighbor ought to have; and if you exercise your business rights and interests only as you ought, with decent concern for your neighbor, there will be a better maintenance of fair prices, there will be a more equitable division of business, and in the long run you will find you did a good thing, because you have been active or silent, as the case may be, in the restoration of business to its natural and proper equilibrium.¹¹

As indicated earlier, any inquiry into the subject of “fair competition” by businessmen reveals that such a concept was intended as more than simply a discourse on abstract principles of ethics. The “fairness” of one firm’s competitive methods was something that could be translated into another firm’s profit and loss statement. The subject of “prices,” then, was a continuing consideration, and Gary took occasion to outline his attitudes regarding “fair” pricing policies for business. While acknowledging that the customer has the right to seek the lowest possible price, he warned both customers and producers not to be so selfish as to end up “bringing about conditions which benefit one and prejudice the other.” Then, as an expression of the concern about low prices and their effect on producers in the industry, Gary added a warning both to his competitors and to customers seeking lower prices that “there are others who are involved in the consideration of this question.”¹²

Gary, in effect, rejected the role of market pricing as a regulator of economic activity. He once declared, “Prices should always be reasonable. The mere fact that the demand is greater than the supply does not justify an increase in price, nor does the fact that the demand is less than the supply justify lowering prices. What we want is stability—the avoidance of violent fluctuations.”¹³ The tendency of prices to seek equilibrium in response to fluctuations in supply and demand was ignored by Gary. What he was desirous of maintaining, of course, was not market responsiveness, but a stabilized level of profits that would be insulated from the consequences of managerial decisions in response to changes in market conditions.

Gary was so fervent in his hopes for greater industrial solidarity that he called for the steel manufacturers to begin holding regular meetings again, much like the old “Gary dinners.” This proposal caused the industry’s leading trade journal, Iron Age, to comment editorially upon the low prices that had resulted from intense competition and to add: “There is abundant evidence that the great problem of the steel industry, under present competitive conditions, is that of securing a reasonable profit for investors in its securities.”¹⁴ The views of Gary, then, were consistent with the sentiment that competition ought not be engaged in to the point where the existing positions of any firms were threatened. A much more restricted form of competition was envisioned, in which each firm acted with full consideration of the right of others not to be threatened with any serious invasions of their markets. It is in this sense that one must evaluate what was intended by the phrase “fair competition.”

Anticipating the objection that a system of “cooperation” among members of the industry might simply be a euphemism for “restraint of trade,” Gary sought to draw a distinction between competition that is “honest, fair and decent” and that which is “ruthless” and “destructive.” In his opinion, “There can be perfect competition and, at the same time, perfect cooperation.”¹⁵ It is rather evident that, to Gary, “perfect competition” meant something less than a condition in which buyers and sellers would each be free to seek to maximize their well-being without having their efforts restricted by a claimed right of other sellers to be free from such a condition. “Perfect competition,” in other words, was not to be identified with “unrestricted competition.” The fact that “cooperation” was being resorted to as a means of moderating the influence of “unrestrained competition” makes Gary’s statement but a further contribution to the already existing confusion regarding the nature of competition.

So successful was Gary in helping to mold opinion in the steel industry toward a greater degree of “friendly cooperation” and away from “destructive competition” that he was able to comment, in 1926:

Everyone present will remember the days when the steelmasters of this country were engaged in industrial war; when the hand of the steelmaker was raised against his brother; when practically, in the steel business, might made right; when the Golden Rule was subordinated to the supposed pecuniary, if temporary, success of might and strength; when jealousy, discord and brutal antagonism prevailed; and all this to the ultimate loss of all who were engaged in the strife.…¹⁶

As pointed out earlier, there were few—if any—business leaders who matched Elbert Gary’s enthusiasm and influence in helping to generate an attitude receptive to bringing the dynamics of competition to within limits acceptable to most firms in an industry. There is a frankness in his views that contrasts with the sanitized pap generated by modern-day public relations technicians. His words leave us with little doubt as to the direction he felt business and governmental policy should take regarding the control of trade practices. In a visionary spirit, Gary went so far as to suggest that the principle of business cooperation be extended to the entire world.¹⁷

The profound influence of Gary’s views upon the thinking of other members of the steel industry can be seen in the statements of men like Eugene G. Grace and Charles Schwab, both of Bethlehem Steel. Schwab, who became president of the AISI late in 1927 upon the death of Gary, offered one of the most blunt appraisals ever given by a businessman of the need for greater cooperation among producers:

[D]estructive competition in an industry as large as ours, for the sole purpose of gaining a position in the industry, is ill-advised and costly to the people who have their money in the industry. Think of the fact that eight or nine billions of dollars are invested in the steel industry, and on the average we are not earning as much on our investment as we would if we had put our money in gilt-edged bonds. That is a wrong condition. What we want in this industry is the sincere and hearty cooperation of everybody in it. As Judge Gary has so often expressed it, live and let live. These works are here and we have our customers and we have our trade and we have our position, and therefore we must try and respect our relative positions and see if we cannot do something toward the betterment of our returns, profits and business. That is the real purpose of the cooperative spirit that is necessary for the betterment of our business and the industry.¹⁸

There is no other passage that so succinctly captures the spirit of cooperative competition. Schwab’s words reflect an underlying business purpose to redefine competition as a less dynamic and flexible process, in order to maintain equilibrium conditions within industries.

Schwab, who was to succeed to Gary’s position as chief spokesman for the steel industry, expressed his concern for stabilizing competition at a price level that would insure an adequate return on invested capital. He then launched an attack upon the perennial nemesis of most businessman: the “price cutter.” Noting that “[t]here are always individuals who are shortsighted enough to believe that they can, by price cutting, secure an advantage peculiar to themselves,” Schwab outlined what, in his estimation, were the three ways of stabilizing industry: namely, by increasing the demand for steel, by discouraging the construction of new productive capacity, and by the avoidance of “uneconomic price cutting.”¹⁹

In an address to the AISI in October 1928, Schwab elaborated his views about the necessary conditions for prosperity in the industry. He placed heavy emphasis on limiting production through a moratorium on increased plant expansion. This would, he believed, “insure fair and reasonable profits in the industry for many years to come.” Schwab again attacked price cutting, noting that the practice of charging different prices to different customers, instead of a “single price open to all,” had resulted in harm to the industry “by inviting our customers to haggle over prices, and tempting them even to misrepresent the prices charged by our competitors in the hope of coaxing lower prices from us.” Schwab also observed that the practice of a manufacturer from a different part of the country underbidding “the fair price” offered by the local plant would lead to “indiscriminate price cutting and to cross-hauling.” He concluded that such a practice, along with the general policy of one producer lowering its price for a product would, in the long run, reduce the profit margin of each producer. An open-price policy would, in his estimation, lead to a stabilization of prices and a more prosperous condition for the industry.²⁰

The similarity of thought among Gary, Schwab, and other members of the steel industry is reflected in the pronouncements of other executives and trade associations. Among those praising the importance of the spirit of cooperation for the steel industry were James A. Farrell, president of United States Steel; Willis L. King, vice-president of Jones & Laughlin Steel Corporation; James A. Campbell, president of Youngstown Sheet and Tube Company; and John F. Hazen, of Pittsburgh Steel Company. King appeared to sum up the hopes of many that this sense of cooperation would make the steel industry “what we would want and what we deserve in view of our investment.”²¹

Fears of unrestrained competition were expressed elsewhere. In a message to the 1921 meeting of the AISI, one of its directors, Joseph G. Butler Jr., enunciated a typical industry reaction against “the evils of competition” that had been “directed only by a narrow and selfish policy” on the part of firms. “We all regret to observe signs of a revival of the old and disastrous idea of ‘everyone for himself and the devil take the hindmost,’” he declared, and went on to urge a rededication to the “splendid policy of the last twenty years.”²² George M. Verity, president of the American Rolling Mill Company, spoke of the need for a legal way to control production in order to stabilize conditions in the industry,²³ while another industrialist, Thomas J. Foster, chairman of National Bridge Works, called for crystallizing “the best thought regarding proper relationships among competitors on the one hand and between mills and buyers on the other.” Foster, concluding that business was still in a “state of barbarism,” remarked that “[s]ociety cannot exist without proper controls.”²⁴ Horace S. Wilkinson, of Crucible Steel Company of America, believed that “cooperation,” rather than “attempting to do a one hundred per cent business against your competitors,” would help promote prosperity for the industry.²⁵ Sharing these views was W. S. Horner, president of the National Association of Sheet and Tin Plate Manufacturers, who expressed his interpretation of the efforts to restrain the influence of what he termed the “killing pace of competition” from which American business had suffered an “overdose.” Referring to “price cutting” as a “contagious disease” against which all of business must be “inoculated,” Horner added:

[T]here is only so much business to be placed, and each company usually obtains its due proportion, trading facilities and other manufacturing conditions considered. If more business is wanted, it is better to unite effort toward increasing the markets and uses of the manufactured product, whatever it may be, than to compete for a larger proportion on a purely price basis, at the expense of someone else, and in the end, at the sacrifice of sufficient profits necessary to the continued production of good quality material.²⁶

Endorsing the same need for greater “cooperation” among members of industry, John L. Carter of Barlow Foundry told a convention of the National Founders Association in 1928: “The trend of the times is away from individualism and toward cooperative action. The foundryman who insists on running his business with a total disregard of the interests of his industry is out of date.”²⁷ Charles N. Fitts, a steel-company executive and president of the American Institute of Steel Construction (AISC), stated: “Business individualism invites outside competition. Better organized industries from other sections of the country come in and take away from local firms the business that belongs to them by right of territorial location.” Fitts urged a greater degree of cooperation “to fight for that business which is rightfully ours.”²⁸

Charles F. Abbott, executive director of the AISC, expressed the same desire for moderating individual decision-making in order to promote collective interests. Abbott, an active champion of industrial self-rule, stated his concern for the effects that unrestricted competition would have on one’s competitors. He declared that “a manufacturer has as much right to legal protection as the consumer. He should be accorded as much protection from the vicious acts of his competitors as are consumers.”²⁹ These statements necessarily lead to the conclusion that the major concern of the advocates of business “cooperation” was to structure the market in such a way as to eliminate competitive practices that would have an adverse effect upon established firms.

Abbott provided additional insight into his thinking when he declared that “short-sighted selfishness” was the root of most selling problems in industry. The answer to such selfishness lay in the development of a “spirit of justice and fairness and a sense of duty to one’s industry,” which could be achieved “through sincere cooperation and fair play.” According to Abbott:

The individual who refuses to cooperate with his competitors, and who insists upon ruthless price cutting as a means of obtaining business, is worse than a criminal. He is a fool. He not only pulls down the standing of his company; he not only pulls down his competitors; he pulls down himself and his whole trade. He scuttles the ship in which he himself is afloat.³⁰

Abbott proceeded to outline what he believed were some of the more glaring unethical trade practices. These included a seller submitting “a second and lower price when the order rightfully belongs to a competitor”; a manufacturer selling to a jobber’s customer at the same or lower prices than he had charged the jobber; a failure to adhere to a one-price policy; "commercial bribery”; and submitting a price to a customer that is not the lowest price the seller is willing to offer.³¹

It is rather clear that Abbott was primarily concerned with eliminating trade practices that were too competitive. Commercial bribery is nothing more than a rebate, a way of reducing the effective price to a buyer. The other practices complained of involve the outbidding of a competitor and the haggling process associated with bargaining and negotiation. Abbott believed that these practices subjected firms to a too severe competitive strain. In other words, as long as the competition did not become so aggressive as to cause other firms to have to abandon their traditional marketing practices, or did not pose a threat to established market positions, the practices would fall within the scope of “fairness.” Seeking to provide stability in marketing procedures was consistent with Abbott’s concern for establishing a condition of “stabilized production.”³² Much the same attitude was expressed by James Farrell in asserting that “we must get into our minds that all the customers do not belong to the man who wants to cut the price to get the business.”³³

The same sentiment was voiced by E. J. Frost, president of the American Gear Manufacturers Association, who, quoting Charles Schwab, declared: “The day of the individualist, when personal interest overshadowed all other motives, has passed. It has been forcibly demonstrated that individual prosperity depends absolutely upon the success of the industry; that no individual can permanently prosper at his industry’s expense.”³⁴ Though it may only appear that Frost was asserting that a firm could not prosper long if the product line of its industry were to disappear, closer examination reveals a concern that goes to the essence of the business community’s problem in aggressively competitive behavior. Frost and other business leaders recognized that it is indeed possible for business firms to promote their individual interests and, at the same time, work against the industry’s collective interests. Contrary to the literal meaning of Frost’s words, individual firms were prospering at their industry’s expense. As Mancur Olson’s analysis suggests, it was true that individual firms were acting in furtherance of their own rational self-interest, even though their collective interests as members of an industry were being thwarted by these very actions.

Some steel-industry representatives voiced their support of the principle of amending the antitrust laws to permit businesses to cooperate more openly to stabilize competitive conditions. The Southern Metal Trades Association adopted a resolution opposing the Sherman and Clayton Acts, while the Metal Branch of the National Hardware Association voted to seek methods of modifying the antitrust laws to allow for greater cooperation. George H. Charls, president of the National Flat Rolled Steel Products Association, warned against “mindless, senseless, destructive competition” and sought to place the responsibility for adverse economic conditions upon the firm that “flagrantly slashes prices.” The business community, Charls added, needed a “collective effort” to overcome “uneconomic” trade practices.³⁵

The failure of the voluntary methods—whether in the form of codes of ethics or appeals to business “cooperation"—to effectively restrain such competitive conditions as price reduction, aggressive sales promotions, and challenges to a competitor’s existing markets and clientele caused business leaders to turn to political methods to accomplish their objectives. Recalling Mancur Olson’s analysis, where large groups are involved, “coercion” or some other “special device” is necessary to cause individuals to conform their behavior to what is in the interests of the group. It was recognized that the lack of effective means for enforcing restrictive agreements in the marketplace could be overcome by having trade practice standards enforced by political agencies that possessed the requisite coercive machinery.

In support of the proposition that the pursuit of individual interests ought to be moderated in favor of the promotion of collective interests, a number of business leaders sought to popularize the idea that entrepreneurs and managers should be regarded as stewards acting for the benefit of the general public and should be subject to the same degree of political oversight as the management of a charitable trust. Myron C. Taylor, chairman of United States Steel, asserted that “wealth is … a stewardship which must be exercised for the benefit of mankind at large.”³⁶ George Perkins had made similar observations as early as 1908: “If the managers of the giant corporations feel themselves to be semi-public servants, and desire to be so considered, they must, of course, welcome supervision by the public, exercised through its chosen representatives who compose the government.” Perkins was also of the opinion that “when an industrial corporation wishes to reach beyond the state in which it is created, it should be obliged to do so under Federal regulation,” because, as he had often stated, the justification for government regulation of a business increased with the size of that business.³⁷

In a hearing before the Senate Committee on Interstate Commerce, Perkins and Elbert Gary argued on behalf of a federal commission that would not only license but would have the authority to approve in advance, when asked to do so, the actions of corporations operating in interstate commerce.³⁸ Perkins envisioned a commission that would, in addition to licensing corporations, collect and publish data concerning business methods and organizational structures.³⁹ Whether Perkins was naive, disingenuous, or simply lacking in historical perspective is not evident from his view that government supervision of industries by agencies composed of former industry insiders posed no real threat of a conflict of interest. In his opinion, “the business man would merge into the public official, no longer controlled by the mere business view, and would act the part of a statesman.” Perkins added that the business community did not fear government regulation itself—in fact, it welcomed it; it feared only “unintelligent, inexperienced administration,” a condition that could be obviated by “a law requiring that those who supervise should be practical men, thoroughly versed in the calling.”⁴⁰ That such “practical men” were conveniently to be found almost exclusively within the industries to be regulated attests to the cartelizing sentiments underlying a great deal of business thinking at this time. Gary reflected this view when, in 1919, he reiterated his support for a system of federal incorporation and licensing to be administered by a “disinterested commission” that would have the authority to “determine when and how and under what conditions a corporation should receive its charter or its license, and should have supervision over the management of the corporation.”⁴¹

Like a number of other business spokesmen, Elbert Gary realized that any system for bringing competitive conditions under control would require enforcement by political institutions. His endorsement of such government regulation had been voiced in 1911 at the Stanley Committee hearings in the House of Representatives:

Martin Littleton: Your idea then is that cooperation is bound to take the place of competition and that cooperation requires strict governmental supervision? Elbert Gary: That is a very good statement.⁴²

Ten years later, he reiterated this position: “If it should be deemed necessary and wise to have governmental supervision over organized industry in order to protect the public interest, I personally would not object, provided the laws and rules shall apply alike to organized capital and organized labor.”⁴³ He repeated this sentiment the following year when, in an address to the AISI, he noted that “the majority of individuals or associations, if they themselves are exempt and unmolested, are quite willing and even anxious to have all others subjected to the most rigid governmental investigation and exposure to the public.” He then added that, while most might argue that American business would fare better without such supervision, “it seem[ed] to [him] to be fair and reasonable that big business, with all its advantages and power, should be subjected to governmental inquiry and supervision.”⁴⁴ While Gary articulated such proposals as necessary for the protection of the “public interest,” it is evident that the protection of much narrower industry interests was foremost in his thinking.

When one considers the relentless efforts of various industry leaders to create an environment immunized against aggressive methods of competition that threatened the stability and even the permanency of established firms, little imagination is required to depict the advantages anticipated from such a commission. An agency that is able not only to approve the content of business decisions but also, by implication, to withdraw the licenses of firms unwilling to adhere to prescribed standards of conduct would possess the element of enforcement necessary to make effective that which voluntary compliance failed to realize. Government, in other words, would supply the coercion that Olson’s analysis tells us is essential to the enforcement of group interests.

A much bolder argument for government regulation of business was made in early 1928 by Julius Kahn, president of Truscon Steel Company. Kahn referred to the government as “the guardian of the nation’s industry,” declaring that “the Government must assume the trusteeship of our welfare.” He then went on to state, “Every solution to the problems of bad business I feel must emanate from a guiding, central authority—namely, our Government.” He then concluded by calling for “government regulation in industry … to prevent the abuse of good business and to establish sound business principles.” In what was to prove a poor piece of prophecy, Kahn saw in such government direction of business practices the opportunity to achieve greater industrial stability, “just as it has been made possible to regulate against financial depressions and panics through a central body, our Federal Reserve Board.”⁴⁵

Thus, by the late 1920s, as a result of the failure of voluntary efforts to effectively restrain the magnitude of competitive practices, some steel industry leaders began advocating a closer relationship with the political sector in order to resolve their own internal trade problems. What they sought was not a government determination of business standards, but a means for the enforcement of proscriptions as decreed by business representatives. This step was a logical progression from the proposed system of self-regulation by business. Hence, business representatives sought to amend the antitrust laws to permit business to establish its own rules of conduct and make the machinery of government available to enforce those rules. It would be totally erroneous to conclude that the attraction of industry leaders to the use of political means for stabilizing internal competitive conditions reflected a predisposition of business toward a socialized economy or a desire to turn industrial decision-making over to forces outside their own sphere of control. What they did seek was an effective means of employing the coercive machinery of the state against the minority of firms that would not adhere to the restricted standards of competition sought by the majority. Implicit in all these efforts, however, was the premise that such business interests—and not interests outside of business—would establish the standards. This distinction was clearly drawn by Charles Schwab, who declared, “[T]he best and most economic results will not be obtained in America by government ownership or direct control; that there should be national supervision of all great enterprises, supervision such as will prevent destruction, but will preserve in business, as elsewhere, our priceless gift of national freedom”⁴⁶ Elbert Gary echoed this same thought when he stated: “I do not believe in socialism; in Governmental management or operation; but I do advocate publicity, regulation and reasonable control through Government agencies.”⁴⁷

The steel industry, in other words, had realized the truth of Mancur Olson’s subsequent proposition: the maximization of collective well-being required the introduction of coercion to compel firms to temper the pursuit of their individual interests.

In the months following the stock-market crash in October 1929, members of the steel industry, along with their counterparts in other industries, reemphasized their concern for trade stabilization. While the impact of the Great Depression injected a new sense of urgency into their appeals, it did not appear that leading industry spokesmen made any significant deviation from their efforts for a system of industrial self-rule under federal supervision. The trade journal Iron Age renewed the call for the “rationalization” of industry, which it was quick to point out did not mean “abolishing the law of supply and demand,” but only providing for its “adjusted operation.”⁴⁸ Charles F Abbott complained in 1930 that unfair, unethical practices had been responsible for the lack of profits in business and called for the establishment of a governmental agency to coordinate industrial activity.⁴⁹

Abbott expressed a widely held business sentiment in declaring that “iron and steel products should command prices more in keeping with their intrinsic values” in order to insure the future development of remaining ore deposits. Abbott then lamented the problems associated with price declines:

It is easy to cut a price, but it is difficult to reconstruct the price structure after it has once been pulled down. The constant lowering of prices is an endless process. In this downward trend of prices there comes a time when the selling prices are below the cost of production, profits are dissipated, and the business is being transacted at a loss. In this wild scramble for volume, industry must learn that distress lurks just ahead and the only remedy lies in the rationalization of output.

Abbott saw this “rationalization of output” as leading to “a uniformity of success” brought about through an improvement in “prices and profits” and the elimination of “destructive forms of competition.” “We have,” he continued, “awakened to the necessity of putting a curb on selfishness and of ridding industry generally of the tremendous wastes in marketing produce.”⁵⁰

As one might expect, Abbott was attracted to the Swope Plan and supported the proposition that it be made obligatory for recalcitrant firms. In his words, “[W]hen all parties, through duly conducted hearings and organized expert study of the needs of public interest and safety, agree to the traffic rules, they become binding even upon the blustering individual who claims his right to do as he pleases.”⁵¹ Abbott was more vociferous in his criticism of the “irresponsible, non-cooperating, self-delusive actions” of firms that “act short-sightedly in what they suppose is their own interest,” adding: “We cannot have in this country much longer irresponsible, ill-informed, stubborn and non-cooperating individualism.… It makes a ridiculous and tragic spectacle when industry has no effective means of coordinating itself and must look on while a part of itself is acting irresponsibly and destructively.”⁵² The steel industry took further steps toward trade stabilization and greater industrial cooperation when, in August 1932, Robert Lamont took over the presidency of the AISI. His role was seen, by some, as that of a “czar” or “dictator” of the industry.⁵³

The steel industry, having long championed the principles of industrial self-regulation, was naturally outspoken in its support of Roosevelt’s recovery bill. Following a meeting of the AISI, top industry executives voted unanimously to support FDR’s efforts toward industrial recovery and, while the bill was still in the Senate, began drafting a trade practice code for the industry. Robert Lamont, president of the Institute, summarized the attitude of the steel men when he declared:

The lip service which we have been so ready to render to the ideal of cooperation and the maintenance of ethical standards will now be supplemented by a very real cooperation and standards enforced by law. The selfish and often ruthless minority will now be compelled to conform to a code of fair and ethical practices….⁵⁴

Looking forward to a “governmental partnership,” under which “ruinous trade practices and price cutting” would be replaced by “cooperation,” Charles Schwab concluded: “The President offers to the business world the facilities and prestige of the government in eliminating unfair competitive practices with all of their ruinous effects upon prices, wages and profits.”⁵⁵ Schwab went on to attack the “selfish interests” who engage in “unfair practices” that are “ruinous to industry,” and he observed that the industry was in need of “price stability.”⁵⁶

Iron Age looked forward to the industrial self-regulation anticipated in the recovery bill, concluding that “action must be had":

History has shown clearly that the price cutter has no respect for costs, whether they be his own or his competitors'. Unless there be teeth provided to bite him when he does so, he will continue to sell below the cost indicated by whatever wage rates and working hours that may be fixed, in order to gain for himself the personal advantages of an increased share of business…. We suggest that the simplest approach to steel industry control will be found in the establishment, under government approval, of an enforced price base for the more common products, established in accordance with a reasonable return to capital on the average cost of production.…⁵⁷

Stripped of all excess verbiage, this proposal amounted to little more than advocating the right of the industry to engage in enforceable price fixing at levels that would not pose a competitive threat to the principal members of the industry. While regretting having to call upon government to solve the problem of enforcing the will of the “90 per cent” upon the “unfair 10 per cent,” the trade journal Steel editorialized that since “no force, other than moral suasion” had been available to businesses to deal with the “destructive minority,” the majority of industry leaders would welcome this new “partnership” with government.⁵⁸ An earlier Steel editorial stated: “Industry should welcome the opportunity to participate in the shaping of the national industry recovery act…. The majority of industrial executives will be willing to sacrifice certain rights and privileges temporarily for the benefits to be derived from sanely coordinated activity.”⁵⁹

Other trade association representatives offered their support for the objectives of the recovery bill. The president of the American Machinery and Tools Institute praised efforts to end the “unfair tactics of the sweat-shop owner and the price-cutter demoralizer” and looked forward to the “rational regulation of production.”⁶⁰ The managing director of the Steel Founders Society of America hailed the bill as an “advanced step in social evolution” that was both “workable and inevitable.” To his thinking, “the question has not been whether industrial control and a planned economy were wise or sound, but to determine by whom the regulation would be administered.” He felt that each industry knew best its own problems, including “what fair prices for its products should be.”⁶¹

With the bit in their teeth, some industry representatives proposed additional measures that, it was hoped, would lead to greater stability. Recognizing that an “artificially controlled price system” could invite new competition into the industry, one man suggested the development of a plan “whereby further capacity can be discouraged.” A similar statement was made by another industrialist who recommended that entry of new firms be restricted by requiring prospective firms to obtain a “certificate of necessity,” as required in the regulation of public utilities, with trade associations advising the government as to the “necessity” for any new competitors. Yet another steel spokesman called for “a still more drastic law” that would require firms to adhere to price schedules established by trade associations, with violators, whether buyers or sellers, subject to criminal penalties, including imprisonment.⁶²

Another industry executive suggested amending the antitrust laws, which, in his opinion, foster “limitless cut-throat competition,”⁶³ a position also taken by an industrialist who declared that “the time has come when all manufacturers must get together and get a fair profit.”⁶⁴ Support also came from T. M. Girdler of Republic Steel, H. G. Batcheller of Ludlum Steel, and Albert C. Lehman of Blaw-Knox Company. Lehman stated that Roosevelt’s program to eliminate “unfair competition” and “to give industry a chance to associate itself with its competitors, under government control, as to wages, hours and prices” would restore order to the industry.⁶⁵

Other steel manufacturers declared that “uncontrolled competition is causing industrial suicide” with “destructive price cutters gnawing away” at industry. Response was virtually unanimous that “some method of avoiding cut-throat competition must be devised,” with government being looked upon as a medium for disciplining “the recalcitrant individual who refuses to belong to any organization, and who believed that his success or money making ability could only be maintained by an orgy of self-destructive competition.” One executive urged industry members to “work together with their competitors … with the help of our General Manager in Washington.”⁶⁶

Support came from other industry members as well. One declared:

We may condemn the vileness of the few in our industry who through feebleminded instinct and perverted judgment have dealt in policies of ruinous price cutting, wage slashing and quality sacrifice, to the point of absolute corruption of all reason, but there must be some effective and drastic action that will absolutely assure an end to the source of these destructive policies.⁶⁷

An executive of Republic Steel added:

We are not afraid of government intervention in business. If it corrects some of the long-standing evils in the steel business it will be doing something we have for years been trying unsuccessfully to accomplish for ourselves. We welcome this chance to put the entire industry on an equitable and ethical basis.⁶⁸

One of the most severe proposals for industrial regimentation was made by George Torrence, president of Link-Belt Company, who suggested the establishment of an “industry dictator” for steel, coal, oil, lumber, and agriculture. The basic role of these dictators would be to control supply within each industry in order to keep up prices. The rules established for the respective industries would be subject to approval by the FTC and, thereupon, would be binding upon all members of the industry, subject to enforcement through a system of penalties and/or licensing. In Torrence’s view, these “dictators” would have authority to control production, set prices, terms of sales, and wage rates, and pass upon business consolidations and the closing of facilities.⁶⁹ His proposal is evidence of the degree to which various business leaders were willing to evoke political intervention to restrain the effectiveness of such factors as pricing and the entry of new competitors, factors traditionally thought of as the principal source of competitive discipline. It is further evidence of the lengths to which business institutions were prepared to go to maintain the status quo.

One company president not only voiced approval of the idea of amending the antitrust laws to permit firms to enter into contracts with competitors but also advocated making these arrangements binding on other firms as well! He stressed that this system would provide “a necessary means of controlling those who do not wish to be controlled,” adding that he had held to this position for the previous twenty years. One means he recommended for the enforcement of this type of law would be to deny recalcitrants the use of the U.S. Mail.⁷⁰ Other executives openly called for “more restriction and more control” and praised efforts “to stabilize production, wages or prices.” “Efforts … should not be hampered that tend to restrain a vicious, unintelligent, and uneconomic breaking down of a normal and fair price level,” said one industrialist, while another argued that “industry should not be required to meet the prices of the unintelligent or price cutting producer.” Still another urged his colleagues not to destroy the spirit of cooperation in industry “by attempting to obtain any selfish advantage.” Steel industry representatives lined up in support of this new piece of legislation that promised to bring forth an industry-controlled condition of stabilized production and prices and to put an end to “unfair trading” practices that one spokesman openly equated with “below cost” pricing.⁷¹

As we have seen, the great concern of steel manufacturers in early 1933 was, as it had been for a number of decades, to find an effective, enforceable means of restricting aggressive sales practices that had the effect of lowering steel prices. In an effort to stimulate business, some manufacturers offered special inducements, such as long-term, low-price requirements contracts, which the dominant members of the industry considered to be unfair. The criticism of these practices was not founded on any contention that they constituted dishonest or fraudulent behavior. The real objection was directed to the efforts of some companies to secure orders by resorting to that most competitive element—offering to undersell one’s competitors.⁷²

COMPETITION AND THE “STEEL CODE”

Steel industry spokesmen responded favorably to the NRA code system. Praise for this “new sort of helpful partnership between government and business” was expressed by George M. Verity. Asserting that “we have accepted an entirely new philosophy,” Verity added, “We are in the midst of a new deal and we seem to like it,” suggesting that the old laws requiring unrestricted competition should be replaced by the new system of cooperative competition. Reflecting upon the “destructive competition” that had hitherto existed in the industry, he saw in the NRA a program containing “almost unlimited power for good or ill” that provided “a means for the elimination of the ills, weaknesses and withering effect of conflicting effort.”⁷³ Like other industry leaders, Verity called for an “improvement” (i.e., increase) in prices, making the anomalous argument that “[i]t is not in the interest of the public to buy these splendid products of industry at ruinously low prices.”⁷⁴ Verity rejoiced at the economic improvements he believed had been realized during the early months of the New Deal and sought to preserve these gains.⁷⁵ He expressed the belief that business would continue to embrace this new philosophy “as long as we feel it is sound.”⁷⁶

James W. Hook of Geometric Tool Company praised the NRA as a system for stamping out “bad competitive practices” such as “selling below cost” and the granting of “trade-in allowances, secret rebates, [and] unreasonably free servicing.” He also praised it for requiring “uniform accounting systems.” Hook embraced a widely held sentiment when he stated: “The old notions of unbridled competition, wild and baseless expansion of producing capacities … are rapidly giving way to a belief in rationalized regulation as a means of saving us from our own selves.” Then, in a gross example of contradictory reasoning, Hook proceeded to criticize that portion of the NRA giving the government authority over matters involving labor-management relations. He saw this provision as a “usurpation” of management prerogatives and expressed a fear that “the Government agency may not decide correctly or in line with our own judgment.”⁷⁷ That the entire NRA was, in fact, created for the purpose of usurping business decision-making and that members of the “recalcitrant minority” might also object to having decisions imposed upon them that were not in line with their own judgments apparently did not trouble Hook. His position also has the self-serving weakness of favoring industry determined trade practice standards, while discouraging the regulation of employment practices in which labor organizations might exert substantial influence.

Thomas J. Foster recounted the history of voluntary efforts to deal with unfair practices in the steel industry dating back to the year 1907. Observing that these practices were “as old as industry,” he added that “no method of voluntary control ha[d] been successful” because of the lack of enforcement powers, a condition that the NRA would correct. This system could not succeed, in Foster’s view, “unless selfish interests [were] overruled” and unless industry came to realize that “the right of each individual is made secure only by circumscribing the rights of all.”⁷⁸

Eugene Grace concluded that as a result of the NRA “a sounder basis has been developed for industry out of these hard times than it has enjoyed at any time during the postwar period.” Grace added that one of the major contributions of the legislation “has been the banishing of speculation in industrial prices.” He asked, “Why should any company be confronted with the disturbing situation of having its entire financial structure continually at the mercy of negotiations between customer and salesman?"⁷⁹ To anyone who has confronted an analysis of the law of supply and demand, it may seem a little strange that companies should believe themselves imperiled by the presence of customer free choice in the negotiation of prices. Clearly, this attitude reflected a compelling desire to secure business organizations from the elements of risk and speculation associated with a system of private capitalism.

This speculation in prices had been curbed, Grace thought, through an open-price system within the steel industry. Open pricing, which many business leaders had long advocated, required (as we have observed) each firm to publicly announce its price lists and to make that price available to all buyers without deviation therefrom. A firm could ordinarily change its prices (provided, as Grace pointed out, it did not attempt to charge prices that did not cover all costs of production), but only after filing a new schedule. While this system may seem rather innocuous and appear to have little effect upon competition, its intended consequence was to prevent a particular firm from deviating from its standard price in order to consummate a sale with a buyer who might otherwise be attracted to another supplier. Furthermore, the open-price system took the guesswork out of determining a competitor’s effective prices. Both factors combined to stabilize the price structure, a situation sought by producers since the memory of man runneth not to the contrary. Grace acknowledged that this open-price policy had led to a uniformity of most prices throughout the steel industry, a condition that could contribute to “purging business of vicious activities and policies to the end that there might be a fair return on investment and a satisfactory compensation for labor.”⁸⁰

Open pricing, coupled with a prohibition of “below cost” prices, had another not-so-obvious, anticompetitive effect: if the prices of a given firm had been attacked on the grounds they did not permit the firm to recover its costs, which included not only variable costs but a pro rata share of fixed costs as well as a reasonable return on investment, the respondent firm could successfully defend itself by showing that the lower prices were the product of improved efficiency. This, in effect, would require the more efficient firms that were able to lower the unit costs of production to publicize the techniques that gave them a competitive advantage, thus serving to benefit their competitors.

Grace’s approval of the NRA and his hope for making its basic concept a permanent fixture in American economic life were clearly expressed in rhetorical fashion:

What shall we do if the period of the emergency is over at the end of the two-year limit indicated in the Act? … [A]re we willing to throw overboard the benefits which have been derived from this experience? I think not. I think that we have learned a great deal which can be and must be preserved for the benefit of the future…. We should watch [the NRA’s] progress constructively with the object of preserving its best features for the years to come.⁸¹

The Scbechter case dashed any industry hopes that the “best features” of the NRA would become permanent. The initial response of the steel industry to the decision was to seek to continue the stabilizing influences that had been realized under the NRA, with some company spokesmen advocating legislation to permit cooperative efforts to regularize trade practices. There was a concern within the industry that abandonment of the open-price system that existed under the code, along with the dropping of provisions relating to labor, might tend to a general reduction in prices.⁸² Frank Purnell, president of Youngstown Sheet and Tube Company, seemed to sum up the sentiments of most industry members when he expressed a hope that “a way will be found so that the cooperative experience of the last two years will be continued for the benefit of labor, business and the public.”⁸³ Similar ideas were expressed by executives of other major steel producing firms including United States Steel, National Steel, Republic Steel, Jones & Laughlin Steel, and American Rolling Mill Company. Eugene Grace was emphatic in urging a continuation of existing code provisions; he declared that “nothing in the [Schechter] decision requires the industry to go back to chiseling of wages, secret rebates or any discriminatory methods of competition” and that the industry should exert “every possible effort to prevent a recurrence of the evils, abuses and unfair business methods of the past” in order to protect the positions of both employees and investors. When asked if he had seen any indications of price cutting following the Court’s decision, Grace responded, “Not one, thank God! Not one.” Meanwhile, at a special meeting of the AISI, some two hundred executives representing over 90 percent of the productive capacity of the industry unanimously resolved to continue following the NRA code provisions on a voluntary basis.⁸⁴

It would be unrealistic to suppose that the experience with the NRA had, in any significant way, soured steel-industry leaders on the idea of government interventionist programs for the stabilization of trade, pricing, and production practices. Though there were gradations of opinion and lack of universality of support for particular proposals, one searches fruitlessly for any evidence of advocacy, within the steel industry, of laissez-faire policies. The illusions of efficiency and profitability associated with so-called economies of scale had been the major contributor to the highly structured nature of this industry. But the apparent advantages of massive organizational size concealed an Achilles’ heel: such firms found themselves vulnerable to the loss of competitive resiliency, a loss occasioned by the enervating nature of size itself. Such were the harsh realities that contributed to steel-industry efforts to restrain the constant inconstancies of vigorous competitive practices.