Part 1

Transcriber’s Note

This file uses _underscores_ to indicate italic text. Small capitals changed to all capitals.

CARTELS

Challenge to a Free World

_By_ WENDELL BERGE _Assistant Attorney General of the United States_

_Public Affairs Press_ WASHINGTON, D. C.

_To My Father_

GEORGE W. BERGE

_who throughout his life and in his public career was guided by the conviction that the people’s rights are not won without struggle and will not be maintained without vigilance_.

_Public Affairs Press, 2153 Florida Ave., Washington, D. C._ _Copyright, 1946, by American Council on Public Affairs_ _M. B. Schnapper, Executive Secretary and Editor_

_Preface_

Plastics, television, new chemical and electrical techniques are but a few of the instruments which will furnish the stuff for the pioneers of a new age. The challenge of housing will excite bold minds to action, on a scale never before attempted, to wipe out slums and give dwellers in country and city alike a new and higher standard of living. Not only at home, but also abroad, the opportunities for daring enterprise which will be offered by the needs of world reconstruction will surpass anything ever before known.

How are we going to meet this challenge? At the outset, we must face frankly the greatest obstacle to making the most of our opportunity. It is the threat of cartel control of major world industries. Unless this threat is understood and dealt with decisively, our opportunity to realize the great potential benefits of a free economy will be lost. And worse still, the hope of maintaining democratic political institutions will be seriously impaired.

The pattern of cartel operations has been clearly revealed in recent years by antitrust investigations. From public records in antitrust proceedings and congressional hearings, information about cartel operations is now available. The public should be familiar with the facts. As head of the Antitrust Division of the Department of Justice, I have frequently been called upon to discuss cartel problems before congressional committees, trade associations and civic groups. Since my testimony and speeches received varying degrees of public notice at the time they were given, the casual reader of newspaper reports necessarily obtained only an impressionistic picture of the far-flung ramifications of the subject. Something more is needed for thorough understanding.

With this thought in mind, a number of friends and associates have suggested from time to time that my material should be woven together in book form. This I have undertaken to do in the present volume.

Merely to make assertions about the evil effect of cartels is a simple matter. But I believe that the real usefulness of this book will depend upon its fairly detailed explanation of the operation of particular cartels, with direct quotations from letters, memoranda and other documents.

While I have not tried to compile a complete source-book, I have striven to make this discussion as non-technical as possible. The factual material is drawn largely from the documents of the Kilgore, Truman and Bone Senate Committees, and from the public records of antitrust cases.

The investigations which unearthed the facts cited in this book were, of course, the work of a great many men and women in the Antitrust Division extending over a period of years. Acknowledgment of credit to all of them would be impossible. Many of the men who have developed these facts are now serving their country in the armed forces.

I cannot praise too highly the ability, energy and devotion to public service of the men and women of the Antitrust Division. It is a privilege to head such a splendid staff, as it is to serve under such an able and distinguished Attorney General as Francis Biddle, who has maintained at all times an extremely deep interest in our cartel work and has given it his fullest support. Attorney General Biddle has repeatedly impressed upon me his own conviction that the vigorous enforcement of the antitrust laws against cartels is an indispensable condition to the maintenance of a free competitive economy in this country.

In the preparation of this book I am particularly indebted to Joseph Borkin of my staff, who is in my opinion one of the best informed men in America on the activities of international cartels. For more than five years Mr. Borkin has devoted his great resourcefulness and energy to investigation and study of cartel problems. His contribution in this field has been invaluable.

I also want to acknowledge my deep obligation to my First Assistant, Edward H. Levi, with whom I have spent many hours discussing the legal and economic problems of cartels, and on whom I have relied so heavily in the practical administration of the Antitrust Division. And I am greatly indebted to Myron W. Watkins, Charles A. Welsh, Ernest S. Meyers, George P. Comer, Herbert A. Berman, Bartholomew Diggins, Robert Hunter, and Heinrich Kronstein of the Antitrust Division staff, all of whom have been of great assistance in the preparation of this book and in the cartel work of the Division. Professor Walton Hamilton of Yale, who has been a part-time member of the staff, has also worked closely with me on these matters and has made a signal contribution to our work.

Mr. M. B. Schnapper, Executive Secretary of the American Council of Public Affairs, has been of greatest assistance in the planning of this book and in the editorial work which it has involved.

WENDELL BERGE

CONTENTS

_1_: Trusts to Cartels 1

_2_: Enterprise Eclipsed 10

_3_: Technology 19

_4_: Patents 36

_5_: Medicines 52

_6_: Synthetic Hormones 58

_7_: Vitamins 82

_8_: Quebracho Extract 112

_9_: Titanium 124

_10_: Optical Instruments 142

_11_: Miscellaneous Products 176

_12_: The Webb Act 192

_13_: Private Governments 208

_14_: Freedom or Control? 233

_Appendix I_: Recent Cases 250

_Appendix II_: Bibliography 257

Index 261

1

_Trusts to Cartels_

The problem of monopoly is no longer a distinctively domestic and national phenomenon. It has come to encompass the wide world. Like a parasite upon its host, monopoly has grown with the marketplace. Today hardly a corner of the world remains free from the malignant influence of its latest and most sinister form, the cartel. Diamonds discovered in Arkansas may prompt agitated conferences within 48 hours in London and the Belgian Congo; a lawsuit in New York challenging the aluminum monopoly brings simultaneous outbursts of oratory in the House of Lords and of vituperation on the Axis radio.

For over half a century, the Sherman Act has stood as a positive expression of the inflexible will of the American people to preserve freedom of economic opportunity. When this measure was enacted the oil, whiskey, and sugar trusts had placed barriers directly athwart the arteries of commerce and were exacting tolls for every gallon or pound of product permitted to pass. Since nation-wide industrial monopoly of a comparatively stable character first took the form of a simple trust agreement the Sherman Act came to be designated an antitrust statute. But its thrust was positive: the maintenance of free, competitive markets and a democratic system of industrial control.

If such an Act were passed today, I am quite sure it would be called an “Anti-Cartel Act.” For our attention is at the present time focused on industrial monopoly in a different form, operating in a wider orbit. But our basic concern is the same. We are as determined today as were our grandfathers, two generations ago--indeed, as were the founders of the republic--to countenance no infringement of the right to engage in any legitimate enterprise and to conduct business without let or hindrance from any self-constituted group presuming to monopolize trade or industry.

The Sherman Act has proved an effective instrument no less for dealing with the cartel problem than for curbing the trusts. It must be conceded, however, that, in default of proper implementation and appropriate supplementation, it has not fully realized the salutary object for which it was designed. In particular, our policies with regard to patents, trademarks, the tariff, monetary and credit matters, interstate commerce, and foreign trade, all have a direct bearing upon competition and the pattern of industrial organization. They are important factors conditioning the efficacy of a free market for performing its basic economic functions. To our comparative neglect of the incidence of these policies on the problem of maintaining healthful competitive conditions in industry must be attributed a large share of the responsibility for the difference between antitrust goal and business practice.

In these circumstances, cartels--which, in effect, are trusts magnified to an international scale--have been able by clandestine means to impress their sinister mark upon our economy. In mobilizing for war, we discovered, almost too late, that they were responsible for shortage after shortage of vital materials. The fact is that they have retarded technological advance and the introduction of improved devices and products, whenever such developments seemed to threaten their vested interests despite the fact that thereby national security might be jeopardized. They have, indeed, obstructed and in no small measure thwarted the declared foreign policies of the American government, placing their own business interests above the public interests.

In peace time, their high-price, restricted-output strategy has impeded the advance of our living standards and general economic well-being. Through the abuse of our patent system, cartel controls have been established over large segments of technology. With this leverage, industrial monopolies of international compass have at times deliberately brought about the deterioration of quality standards. When it might be to their advantage in maintaining or exploiting their monopoly position, they have adulterated their products to an extent and in a manner endangering the health, and even the lives, of consumers. Almost incredible as these assertions may be, they are not subject to contradiction--the incontrovertible facts are clearly set forth in Congressional investigations and in the evidence in antitrust cases of the Department of Justice.

Cartels are in essence private governments which threaten to subvert and even engulf duly constituted authority. In Germany, Kaiserism and later Nazism received enormous impetus, indeed decisive support, from the regimented, cartelized structure of the national economy.

Totalitarianism represents simply the ultimate consummation of cartelism--the final, full expression of the reactionary forces stemming from special privilege. In totalitarian states all industrial enterprise is subservient to the predatory interests and fear-dominated will of a government which openly flouts the democratic principle of consent of the governed. In the economic sphere, the investment of fresh capital, the volume of production, the prices to be charged, the markets to be served, are determined by arbitrary decrees. Risk-taking, managerial discretion, bargaining freedom, the essential elements of the capitalistic system as we have known it, are absent. One can neither start a new industry, launch a new enterprise, or change one’s occupation without first obtaining official consent. It is in the nature of cartels that they should operate in a similar fashion, even if in their application the devices used for consolidating the vested interests of established concerns and throttling the dynamic forces which economic freedom would release may lack something of the rigor they exhibit under totalitarian “leadership.” In order to maintain their control over production and prices cartels must determine who may enter the industry, how they shall operate and where they may sell.

The basic American concept of free enterprise is the antithesis of a cartelized market. Yet, all too frequently, some of our industrialists have had the effrontery to attempt to promote a pro-cartel policy by a specious appeal for free enterprise. The pretension is that freedom to compete in trade must encompass freedom to suppress competition! As though the right to start a fire in order to heat a house must include the right to burn down the house in complete disregard of the peril to the whole community! The common sense of ordinary men has no difficulty in distinguishing between the right to start a fire and the “right” to commit arson.

Unless I am greatly mistaken, the American public will no more tolerate a cartel-sanctioning abrogation of the antitrust laws in the name of “free enterprise” than they would countenance a repeal of the laws against arson in the name of “freedom of self-preservation”--the right to keep warm!

It is significant, and deserves thoughtful reflection that Germany, the “classic land of the cartel,” where regimented economic restrictionism is the accepted “way of life,” has in the course of two generations farrowed Kaiserism and Hitlerism--the natural offspring of militarism and cartelism. Even in times of peace, the militarists and industrial monopolists of Germany found cartel restrictions an excellent means for conducting covert warfare. In this way industrial “colonies” were acquired and prospective victims “softened up.” Back in 1883, Joseph Chamberlain, as a member of the British Cabinet, declared, in sponsoring a bill designed to forefend the sub-rosa “invasion” tactics of imperialistic Germany:

“It has been pointed out especially in an interesting memorial presented on behalf of the chemical industry that under the present law it would have been possible, for instance, for the German inventor of the hot blast furnace, if he had chosen to refuse a license in England, to have destroyed almost the whole iron industry of this country and to carry the business bodily over to Germany. Although that did not happen in the case of the hot blast industry, it had actually happened in the manufacture of artificial colors connected with the coal products, and the whole of that had gone to Germany because the patentees would not grant a license in this country.”

A quarter century later, Lloyd George, introducing a more drastic bill for curbing these insidious depredations on strategically vital British industries, pointed out:

“Big foreign syndicates have one very effective way of destroying British industry. They first of all apply for patents on a very considerable scale. They suggest every possible combination, for instance, in chemicals, which human ingenuity can possibly think of. These combinations the syndicates have not tried themselves. They are not in operation, say, in Germany or elsewhere.... A good many of these patents have been taken out not for the purpose of working the patents in this country, _but for the purpose of preventing their being worked_.”

The “big foreign syndicates” to which George referred were, of course, the German cartels.

The adroit strategy of stealthily sapping the industrial foundations of the national security of countries capable of resisting the German _drang nach_ all-points-of-the-compass has been relentlessly pursued and resourcefully developed, through thick and thin, decade after decade. If the cartels are thwarted in the use of the patent system as a weapon for disarming potential competitors abroad, they may inveigle the intended victims of German aggression to a ‘simulated’ love-feast at which the latter are gorged with the poisoned food of production quotas, technology restrictions, market-territory limitations, and pricing inhibitions. What these tactics accomplished in the way of immobilizing French industry is now a familiar story. To cite the record of only three of the most strategic industries, through cartel manipulations the Germans succeeded in (a) reducing the relative output of French steel from substantial equality with German output in 1926 to 40 percent thereof in 1938, (b) retarding the growth of French aluminum production to a rate which fell short of doubling the output in the same period, while German production was increasing five-fold, and (c) restricting the French dyestuffs industry in such fashion that its output in 1937 was barely two-thirds of what it had been in 1924, whereas German production, even according to official estimates (none too reliable though they are) had increased five percent in the same period.

Nor were the European countries alone the “potential enemies” whose vital economic defenses were thus impaired by subtly imposed cartel restrictions. In this hemisphere, likewise and not least of all in our own country, the cartel device was sedulously--and effectively--used for the same ulterior purpose. As President Woodrow Wilson declared shortly after the first World War,

“Our complete dependence upon German [dyestuffs] supplies before the war made the interruption of trade a cause of exceptional economic disturbance. The close relation between the manufacture of dyestuffs on the one hand and of explosives and poisonous gases on the other, moreover, has given the industry an exceptional significance.... It will ... be a policy of obvious prudence to make certain of the successful maintenance of many strong and well-equipped chemical plants. German chemical industry, with which we will be brought into competition, was and may well be again _a thoroughly knit monopoly, capable of exercising a competition of a peculiarly insidious and dangerous kind_.”

Despite this warning in 1919, we were only slightly better off, relatively, in respect of the arts of organic chemicals manufacture twenty years later, when Germany decided the time was ripe for another attempt at world conquest, than we had been in 1917. In the matter of synthetic rubber technique, today the most strategically critical of all these processes, I. G. Farbenindustrie had succeeded, through its cartel arrangements with the leading American firms in the petroleum and chemical fields, in keeping this country in an extremely vulnerable position--as all the world now knows. Partly through persistent stalling tactics, partly through playing one American firm off against another, partly through cajolery, and partly through deliberate deceit, the German cartelists had not only stifled the development of American technology in this field, even by their “partners” on this side of the Atlantic, but had done even better, from their standpoint. They had obtained the German patent rights and the essential know-how for the most signal contributions of American technicians to the art of synthetic rubber manufacture. And, incredible though it may seem, they had obtained these advantages without divulging a single significant detail of their own carefully guarded know-how!

As the President’s Office of Facts and Figures ruefully summed up the situation in 1942:

“[The enemy] has worked for many years to weaken our military potential. Through patent controls and cartel agreements he succeeded in limiting American production and export of many vital materials. He kept the prices of these materials up and the output down. He was waging war, and he did his work well, decoying important American companies into agreements, the purpose of which they did not sense.”

Thus, sixty years after a member of the British Cabinet first testified to its awareness of the menace in the insidious penetration of German cartels in the international sphere, a branch of the American Executive confirms the continuing pertinence of his observations.

How, in the face of this record, in the light of this evidence of the persistence of the cartel movement and of its chronic tendency to pervert the processes of industrial production to ulterior ends leading indefeasibly to the devastation and slaughter of war can it be contended that cartels represent a promising way to order the post-war world economy? Is it not plain, rather, that “if we would guide by the light of reason,” we must reaffirm our pledge of democratic equality of opportunity for all in trade and industry, and resolutely set about the task of putting our house in order in accordance with that basic principle of American life? Is it not plain, too, that monopolistic industrial control in the domestic sphere cannot be completely achieved without the uprooting of the foci of cartel infection in German industry? Once German industry is purged of its cartel hook-ups and monopolistic animus and all non-German industry is released from the haunting fears and seductive temptations which go so far to explain these international industrial alliances, I am confident that the prospects for the restoration of genuine freedom of enterprise and healthy competitive markets will be good. While I am not sanguine of the goal being reached forthwith and easily, “at one bound” as it were, I have an abiding faith that the dynamism of economic freedom will enable us, in the end, to surmount every obstacle erected by special privilege or vested interest on the highroad to full utilization of resources. A truly great adventure is ahead.

2

_Enterprise Eclipsed_

It is the determination of our people not only to gain victory over the military power of aggressors, but to establish securely the lasting conditions of peace. We know that beyond victory we shall have to face a multitude of perplexing economic problems. We must also realize that we shall meet new dangers to those free institutions on which our national economy is based. If the problems of peace are to be solved, we shall have to come to grips with these difficulties in the same spirit of resolution with which the war has been waged.

It seems abundantly clear that America can never have a foreign policy based on the principles of democracy and international good will as long as international trade is dominated by cartels. It does not seem possible that the Atlantic Charter, the Good Neighbor policy, and the reciprocal trade pacts can effectively prevail if the special privileges of cartels dominate trade and politics in the postwar world.

In many respects cartels form one of the central issues of the present period. The greatest threat to our success in achieving full production and full employment at home, and friendly cooperation with other nations abroad, is the philosophy and practice of privilege embodied in cartels. If there is to be a free and productive economy in the United States, or a free exchange of goods in world markets, the power of cartels must be broken.

It is essential to understand that cartels seek to divide and rule world industry on the basis of economic privilege. If cartels are successful in gaining a foothold in the postwar period, it will almost be impossible for this nation to maintain a high level of peacetime production or to cooperate in the reconstruction of world trade.

In general, cartels restrict rather than promote trade. Cartels typically engage in such practices as dividing fields of operation and market areas between members so as to eliminate competition, restricting production by agreement, and fixing prices so as to avoid price competition. They also promote various kinds of patent licensing contracts which enable them to control and limit the use of new inventions and thus restrict the benefits of technological advance. The effects of these practices include reduced production and employment, higher prices and profits, retarded spread of technological improvements and a lower standard of living.