Part 18
It is characteristic of many cartel agreements which are arrived at secretly and maintained in silence that concealment of their provisions is motivated by the desire to avoid scrutiny of their operations by public authority. In some instances, the illegal nature of the terms of cartel agreements explains the cloak of secrecy which is cast over their provisions. Moreover, it is often stipulated in cartel agreements that, in any eventuality of action taken by government, the parties to the agreements shall cooperate in order to maintain their relationships despite anything that government may do.
There are numerous examples among the many agreements which have been investigated by the Department of Justice which clearly reveal the intent as well as the necessity for secrecy from the point of view of the cartels. Thus, in a letter from Canadian Industries, Limited, to the du Pont Company, the writer states:
“In the course of recent meetings in connection with the new Patents and Processes Agreement, I understand a suggestion has been made by the du Pont legal representatives which will involve the new agreement making specific reference to the respective territorial rights of du Pont and ICI. I cannot help feeling that on broad grounds this is undesirable both from the viewpoint of C-I-L and of the major stockholders. For instance, should any investigation take place in Canada which will require the production of this agreement, the clause in question would automatically necessitate the production in its term of the ICI and du Pont agreements: at least that is the way we would read it, and this would be bound to lead to publicity of a very undesirable nature in regard to the division of world territories. My practical suggestion is that, as the detailed prior commitments are now to be dealt with in the form of a letter separate from the agreement (this at the suggestion of the du Pont legal representatives) it might be possible to include the point in question in that separate letter also.”
The attitude of cartels toward the relation between their own policies and the policies of government are epitomized in the exchange of correspondence between Sir Harry McGowan, Chairman of the Board of Imperial Chemical Industries, and Lammot du Pont in May 1933. Sir Harry wrote:
“With a large organization such as we have I find it is a good thing to issue such warnings from time to time--one went out at the time of the Ottawa Conference--so that everything possible is done to ensure that no prospective political or legislative action on the part of governments is permitted to influence relations between du Pont and I.C.I.”
On June 17, 1933, Lammot du Pont replied as follows:
“I am much interested in what you say and have heartily approved your attitude toward our Patents and Processes Agreement and the relations between the two companies. I feel the same; namely that our relations have been so happy and have produced such satisfactory results that we should let nothing in the way of international agreements interfere in any way with the progress we have made or may make in the future. If any legislation or international agreements are brought about which affect these I.C.I.-du Pont relations I am sure we will be able to adjust ourselves so as to get the continued benefit of our agreement.”
A striking and instructive illustration of the role of secrecy in cartel agreements is provided in the terms of an arrangement concerning the pharmaceutical industry, between the Schering Corporation of Bloomfield, New Jersey, and the Schering, A. G., of Germany. One clause in this agreement, which was made in 1938, stated that “the existence, the content, and the details of operation of this agreement have to be kept secret by both parties notwithstanding the possible obligation of disclosing it to public officials.”
In connection with an agreement concerning the plastics industry, the consideration taken into account by the Rohm & Haas Company and du Pont are indicated in a memorandum written by the latter company in 1936, in which it is stated:
“We discussed the whole situation again. They repeated over and over again that there is not the slightest possibility of the I.C.I.’s coming into the American market, but du Ponts are afraid to write a letter to this effect because in the case of an investigation of their firm by politicians, the politicians might make capital of such a statement, i.e., they might attempt to point out that the world was divided up between I.C.I. and du Ponts.
“I told Mr. Wardenburg that I had implicit faith in all the assurances which they had made to me, but that for my own protection I had to have a letter from du Ponts, in which they can assure us, in one way or another, that the I.C.I. will not take the opportunity to come into this market. After a lengthy discussion of the different ways to accomplish this purpose, it was agreed that Mr. Wardenburg will write a letter saying that while it is true that the I.C.I. under their contract have a right to come into the American market, they [du Ponts] happen to know that the I.C.I.’s development in the methacrylic ester field has taken a direction which is quite different from the one that is being taken by du Ponts and ourselves, so that it will be highly improbable that the I.C.I. will attempt to come into the U. S. market. I told him that such a letter will be satisfactory.”
It is clear that cartel interests fear that the revelation of the provisions of their agreements might impede the functioning of the agreements or perhaps draw down upon them action by public authority. Very often cartel agreements endeavor to discount this possibility in advance. In the case of the agreements between Standard Oil and I. G. Farbenindustrie it is provided that:
“It is our understanding ... that each party proposes to hold itself willing to take care of any future eventualities in a spirit of mutual helpfulness particularly along the following lines: In the event the performance of these agreements ... by either party should be hereafter restrained or prevented by operation of any existing or future law, or the beneficial interests of either party be alienated to substantial degree by operation of law or governmental authority, both parties should enter into new negotiations in the spirit of the present agreements and endeavor to adapt their relations to the changed conditions which have arisen.”
Because most cartel agreements provide for their resumption at the end of the present war, efforts to rehabilitate world trade may be insuperably handicapped unless prompt and effective action is taken by the government with full knowledge of the existence and character of such cartel agreements. Regardless of the particular form or direction of this nation’s trade policies after the war they could not become effective if secret agreements among the large industrial groups of the world contain arrangements which clash with the government’s program.
It is well to recall that the provisions of the Versailles Treaty at the end of the first World War which prohibited the manufacture of certain strategic products in Germany were rendered ineffective in many instances. Through foreign subsidiaries and under the cloak of cartel agreements with concerns in the United States and other countries, German producers of military equipment were able to nullify the application of the conditions imposed by the Treaty.
Public authority must not be left in the position of having to work in ignorance. Only by compelling the official acknowledgement and registration of the existence and provisions of agreements which affect our foreign and domestic commerce can government acquaint itself with the arrangements which have been made and which affect so vitally national security and national welfare.
During the present war one of the most serious problems with which the fighting services have had to contend on the battle fronts is the frequency of malaria, one of the most widespread diseases in the world. There are two standard remedies for malaria: one is quinine, a natural product obtained from the cinchona trees of Java; the other is atabrine, a synthetic coal-tar product. Because the production and distribution of quinine were controlled by one of the most closely-knit cartels in existence, a shortage developed almost immediately when the Japanese seized Java. The dwindling stockpile of quinine in the United States compelled the government to call upon druggists and housewives alike to turn over whatever small quantities were on hand in order to keep the fighting front supplied.
In the case of atabrine, only one company in the United States had a license to manufacture the drug under the I. G. Farben patents. It required the concerted effort of manufacturers and government to institute expanded production in order to make up for the deficiencies of quinine. Fortunately, these efforts have met with some success. With regard to the future, however, it must be borne in mind that cartels which are able to control and restrict the output of medical products, in particular those which are so widely needed, as quinine and atabrine, exert a direct influence on the military position of the United States and other countries, as well as upon the general health of the population. The opportunities for abuse which are present in monopolistic control of medical products are obvious. It is equally obvious that this government cannot afford to tolerate them. It would seem a minimum precaution to require that where cartels control the supply, the price, and the distribution of medical products, they should be compelled to record the terms on which control is based, in order that government might in its turn develop adequate safeguards for the general welfare.
I believe it has been clearly demonstrated that certain fundamental decisions affecting our relations with the rest of the world have been formulated and put into effect by private groups without the sanction or knowledge of government. These decisions concerning our strategic materials, industries and trade, our Good Neighbor and our European policies, our disposition of enemy property, considerations of espionage, secrecy and the evasion of our laws, have all been accomplished without the knowledge of our government or its acquiescence.
If cartels are permitted to continue to enter into their secret agreements, then it will be impossible for the peoples of the world to develop mutual understanding or to share industrial experience and progress. Cartels have been a focus of conspiracy and distrust among nations in the past. It is not too much to say that they will form a nucleus of future distrust and intrigue. A world partitioned by cartels breeds economic friction and disunity. We must face the fact that a cartelized postwar world would inevitably be a world of suspicion and of clandestine international intrigue. Full reciprocity in respect of trade and technology can only be founded on mutual confidence and good faith.
There is current a school of thought which believes we must differentiate between good cartels and bad cartels. Do these people still propose to leave the conduct of our foreign economic policy in the hands of private monopolists, with the one caveat that these people be good monopolists and not bad monopolists? With all the best intentions in the world, it is neither the role nor the responsibility of businessmen to determine political questions which can only be resolved by constituted government. This is a responsibility which I believe businessmen should not undertake, and one which I believe that they do not wish to undertake. Even those businessmen who have engaged in these practices would be shocked to realize the implications of their acts. At the time they were operating in this manner they never thought in political terms, but rather in terms of the local market. Once operating in the international market, however, these businessmen found themselves in ambiguous positions where they were forced to make choices which they never contemplated. What would they do when confronted with the problem of choosing between national policy as it should be and their own private interests? It would seem, from the standpoint of public interest, that when questions of national concern arise they should be handled by properly constituted government authority.
American businessmen have not realized the significance of the relationship between their foreign cartel partners and the foreign governments involved. I doubt that they knew, for example, that the following statement was made by Mr. Meinhardt of Osram, a member of the international lamp cartel: “An international cartel has no right of existence and a German businessman has no right to become a member of such a cartel if this cartel is acting against the common interests of Germany.”
The attitude of American businessmen is typified in the following statement by an executive of the General Motors Company: “an international business operating throughout the world, should conduct its operations in strictly business terms, without regard to the political beliefs of its management, or the political beliefs of the country in which it is operating.”
All American businessmen and the Congress particularly should weigh with care the type of thinking which results from a cartelized economy such as Germany’s. Carl Duisberg, formerly chairman of the board of I. G. Farbenindustrie, expressed succinctly the philosophy of Germany’s cartel system when he said, in 1932: “The narrowness of the national economic territory must be overcome by trans-national economic territories.... For a final settlement of the problem of Europe ... a close economic combine must be formed from Bordeaux to Odessa as the backbone of Europe.” The ultimate consequences of such cartel aims have been reckoned across the council tables of Munich and the battlefields of Europe and Asia.
14
_Freedom or Control?_
All of us want our country to be strong and prosperous after this war is won. In attaining strength and prosperity, foreign trade will play an important part. Manufactured goods will leave the shores of this country and will find their way through the miracle of new forms of transportation, as well as on the tramp steamer, to the four corners of the world. Raw materials, and finished products as well, will come from these same four corners into the hands of the American consumer. The foreign trade of this country will be measured in billions of dollars. And our nation will take its place and play its part in what we believe can be a healthy world economy.
I do not think that there is any basic difference of opinion in this country as to the importance of our foreign trade. There appears to be some difference of views, however, as to how our foreign trade shall be conducted in the post-war world. It is argued that since Europe has a cartel system, if we wish to carry on trade on commerce with Europe or in the world, we must permit our foreign businesses to become cartelized. We are told, in short, that we must join hands with the cartels if we are to engage in foreign trade. Most of the people who make this argument do so regretfully. They know that the Sherman Antitrust Act, which prohibits restraints on both domestic and foreign trade or commerce, has reflected the free enterprise spirit of this country for more than fifty years. They know that the people of this country are unalterably opposed to a cartel system under which either the government or one’s competitors can determine what may be manufactured, how much can be made, and what price may be charged. They know that you cannot have a democratic system if enterprise is to be subjected either to government bureaucracy or to the rule of private trade councils. Nevertheless, these people, seeing a cartelized world around us, believe that much as we may dislike it, we cannot conduct foreign trade unless we join hands with the cartels.
There is a small minority in this country, of course, which has always opposed our own free enterprise system. If these people could manage it, they would have the economy of this country run by enlightened and benevolent monopolists. These people make the argument, not at all regretfully, that we must join hands with foreign cartels. They know that once we have joined hands with foreign cartels, we will have opened the door to monopoly at home, and that is what they want.
Let me venture a prediction. This country will engage in foreign trade and commerce on a scale never before imagined, and we are not going to join hands with any foreign cartels. There will be a drive to get us into the foreign cartels; that drive in fact is now going on. It will fail. It will fail for two good reasons. The first of these is that our foreign trade would not be helped in the least if we joined with the cartels. The second and even more important reason is that this country is in no mood to give up an American way of life because Europe believes in cartels.
We have been willing to subject ourselves to all kinds of governmental controls over American business in order to win this war. When the war is over, these controls must go, and as soon as possible. We are not going to keep these controls either in the hands of the government or in the hands of a few private individuals. We are not going to imitate the very foreign economic system which we have defeated.
The monopolist tells us that European industry is cartelized and that it will remain so after this war is over. What kind of wishful thinking makes the monopolist so sure of that? I do not believe that the French or the Belgians will wish to embrace an economic system after this war is over which took their basic industries and put them into the hands of an international set of cartelists dominated by the Germans. I do not believe that the British will wish to encourage a system which in March 1939 gave birth to the announcement between the Federation of British Industries and the German Reichsgruppe Industrie that the two groups would eliminate competition between British and German industries, would fix prices, and would seek the aid of their governments against the industry of any third country, clearly meaning the United States, which did not join in this limitation of production plan. Great Britain needed its own full production in those days, and American production as well. I do not believe, for that matter, that the British will wish to have an economic system which has made the British consumer pay high prices and has restricted production in both Great Britain and the Dominions.
It is clear, of course, that in each country of the world, there are a few monopolists who will benefit from the cartel system. We have them in our country also. But we are not going to let these few determine our own economic life, and we should not let them control our attitude or actions in Europe. Certainly it is too early to predict that Europe will remain cartelized after this war. I think it is not unlikely that the consumers of Europe will decide they have had enough of that system and will demand a change.
But no matter what Europe does, our foreign trade will not be helped in the least by our joining foreign cartels. The very reverse is true. The way to kill American foreign trade is to have American producers enter into international cartels. One reason for the current drive to get American firms into foreign cartels is precisely that. There are a few monopolists who do not look with favor upon sales by American firms in the rest of the world. They are terrified that our mass production methods may benefit consumers in the rest of the world. They will not be able to maintain their own prices if this should occur. Their invitation for us to join them in cartel agreements is not an invitation to engage in trade or commerce; it is an invitation to discover upon what terms and conditions we will keep our trade at home.
The record is very clear. A small number of powerful American firms entered into illegal cartel agreements before the war, particularly in the halcyon days of the twenties. These were agreements to restrict American exports. Typically, the American firms agreed not only not to export themselves but wherever possible to keep other American firms from exporting. These agreements occurred in synthetic nitrogen, aluminum, magnesium, optical glass, electric lamps, pharmaceuticals, plastics, chemicals and a host of other items. It is quixotic to think of these agreements as having promoted foreign trade; their whole purpose was to prevent it. Where was our foreign trade when these firms agreed to turn over the Latin American market in pharmaceuticals to the Germans? What foreign trade was being promoted when we agreed not to export to Great Britain more than a limited quantity of magnesium? The underlying philosophy of these agreements was that if the foreign firms would stay out of the American market, we would stay out of the foreign market.
There is no mystery about this. The monopolists know it very well as do the other American companies, large and small, who were not permitted to export because if they did so, they would interfere with the arrangements to keep trade and commerce from flowing in either direction across the borders of this country. The reasoning is clearly set forth by an official of an American company in explaining why his company cannot export:
“... you spoke of a possible license from the G.E. to export lamps to certain countries. I don’t know whether I explained the situation to you, but the fact is that in the world at large, the more important electrical interests, such as the G.E., Siemens of Germany, Phillips of Holland, etc., are closely bound together in a cartel with the result that they have entered into binding agreements, apportioning world markets between the respective companies. Accordingly you can see that if the G.E. broke their agreement and allowed us to export into a foreign country which was assigned under the cartel agreement to a European manufacturer, that European manufacturer would have a claim to enter the American market in competition with us and probably could not be restrained from doing so. This is something which would probably not be to our advantage.”
One might as well urge that a railway wreck promotes transportation as to urge that a cartel agreement promotes trade.
The cartelist lives in a land of make-believe. I do not suppose that we can object to anyone having his own private fairy tale, but this kind of fairy tale can be dangerous to the future peace and security of this country. It is a self-perpetuating fairy tale. It is founded on economic maladjustments and it tends to prolong these maladjustments by collecting a hidden tax from consumers and by donating the proceeds to monopolists who have no incentive to change their ways. The consequences can be disastrous in both the military and the political sphere. As for our own economic life, international cartels breed domestic monopolies. Their final result is complete government control and management of business.