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This article is excerpted from the introduction to In Restraint of Trade: The Business Campaign Against Competition, 19181938 (2008).
Until relatively recent times, the symbiotic relationship existing between economic and political institutions has only been vaguely comprehended. It has been popular to view these two major sectors of American society as having a generally antagonistic relationship, with political institutions serving as a countervailing force to economic influence.
This view is reflected in the traditional conception of economic history that suggests the American business system had, during the late 19th and early 20th centuries, maintained an existence largely independent of, and indifferent to, the interests of the American public. The business community in this era is seen by many as ruthless and hegemonic, exercising nearly unlimited corporate power that threatened the very foundations of a free and competitive economic system.
Those who hold to this view insist that the interests of the public required the imposition of political controls to regulate such matters as trade practices, pricing policies, and the size and entry of business firms in the market. It supports a consensus that government regulation of economic activity represents a national policy commitment to elevating the "ethical plane" of competition in order that market influences may more freely serve some vaguely defined "general welfare." One business scholar has reflected this attitude well:
It is not always safe to leave business to its own devices; experience has shown that its freedom will sometimes be abused. … Competitors have been harassed by malicious and predatory tactics, handicapped by discrimination, excluded from markets and sources of supply, and subjected to intimidation, coercion, and physical violence. Consumers have been victimized by short weights and measures, by adulteration, and by misrepresentation of quality and price; they have been forced to contribute to the profits of monopoly. …
[T]he nation’s resources have been dissipated through extravagant methods of exploitation. These abuses have not characterized all business at all times, but they have occurred with sufficient frequency to justify the imposition of controls. Regulation is clearly required, not only to protect the investor, the worker, the consumer, and the community at large against the unscrupulous businessman, but also to protect the honest businessman against his dishonest competitor.
This impression of the purposes and effects of the regulatory process is reinforced by a common historical view of the 1920s as the declining years of laissez-faire capitalism, in which "big business" had its last profligate fling before being brought under the discipline of rational, politically supervised economic planning. Indeed, the so-called Great Depression that ended this decade is generally perceived as one of the high-water marks of corporate dissipation and irresponsibility, ushering in the uncomfortable aftereffects of the 1930s.
The New Deal is, to this day, regarded as a major turning point in government and business relationships, and it represents to many the inevitable consequences of undisciplined market power. The National Industrial Recovery Act, the Agricultural Adjustment Act, the National Labor Relations Act, and the Fair Labor Standards Act, as well as the operation of intraindustrial agencies such as the Federal Communications Commission, the Securities and Exchange Commission, the Civil Aeronautics Board, and the Federal Power Commission are commonly depicted by historians as having imposed competitive discipline and socially responsible behavior upon a recalcitrant business community.
Paralleling this view of history, however, is a recognition that government regulation has generally served to further the very economic interests being regulated. The economist and later United States senator Paul Douglas was not the first to become aware of this fact when, in 1935, he observed with some bewilderment, "Public regulation has proved most ineffective. Instead of the regulatory commissions controlling the private utilities, the utilities have largely controlled the regulatory commissions."
Nor was he the last to perceive the truth of that proposition. Indeed, in the intervening years, research has revealed the dominant influence of commercial and industrial interests in shaping and directing government regulatory policies in order to advance such business interests. While there is a debate as to whether businessmen had advocated the establishment of political agencies in order to structure the marketplace for their benefit or had only captured such agencies after they had been created, few would question the idea that the regulatory processes of government have been actively and purposefully employed by business interests in order to gain advantages denied them in the marketplace.
Though recognizing the existence of a legitimate debate on the question of the origins of regulatory legislation, one of the underlying premises of this book is that most political intervention into economic activity has been fostered by business leaders and trade associations desirous of restraining or eliminating those trade practices of their competitors that most threatened existing market positions or price structures.
As historian Gabriel Kolko and others have observed, competition was very intense among business firms in the early 20th century. Firms with established market positions wanted to reduce the impact of such competition and employed voluntary methods (such as mergers, pooling, trade association "codes of ethics," and other agreements) in efforts to stabilize competitive relationships. When such voluntary means failed due to lack of effective enforcement, influential corporate leaders having found a condition of unrestrained competition and decision making unacceptable to their interests helped promote the enactment of legal restraints upon trade practices. As Kolko has written,
The dominant fact of American political life at the beginning of this century was that big business led the struggle for the federal regulation of the economy. If economic rationalization could not be attained by mergers and voluntary economic methods, a growing number of important businessmen reasoned, perhaps political means might succeed.
Or, as an earlier scholar, Myron Watkins, noted,
From the time of President Theodore Roosevelt’s second administration there had been an insistent movement among certain industrial leaders for either a legislative or administrative definition of an exact standard of competitive conduct."
It is the purpose of this book to inquire into the attitudes of business leaders toward competition during the years 19181938 and to see how those attitudes became translated into proposals for controlling competition through political machinery under the direction of trade associations.
This particular 20-year period has been selected because of the fundamental metamorphosis taking place within the business community itself and the importance of this era in the history of government regulation of economic activity. During these years, men of commerce and industry began forging, through the trade associations, a consensus as to the proper scope and intensity of competitive behavior. This 20-year period brackets American business experiences with two major industry-dominated government regulatory systems: the War Industries Board (WIB) and the National Recovery Administration (NRA).
Under these two systems, businessmen increasingly exhibited a disposition for a collectivized authority over one another, with trade associations serving as government-backed enforcement agencies. Perhaps the historian Robert Wiebe has best summarized the attitudes toward government-business relationships with which business leaders emerged from World War I. Recognizing that "[o]nly the government could ensure the stability and continuity essential to their welfare," men of commerce and industry did not focus upon a "neutralization of the government." On the contrary, "They wanted a powerful government, but one whose authority stood at their disposal; a strong, responsive government through which they could manage their own affairs in their own way."
The attraction of so many business leaders to systems of government-enforced trade practice standards reflected a continuing institutionalization of economic life. The systemwide benefits of maintaining openness in competition with no legal restrictions on freedom of entry into the marketplace or on the terms and conditions for which parties could contract with one another were being rejected by business organizations more concerned with the survival of individual firms and industries. As a consequence, business leaders expressed an increasing desire for the maintenance of conditions of equilibrium that would help preserve the positions of existing firms.
Free and unrestrained competition demanded a continuing resiliency in responding to market changes. The innovation in products, services, and business methods that made economic life creative and vibrant came to be seen as a threat to the survival of firms unable or unwilling to respond. Concerns for security and stability began to take priority over autonomy and spontaneity in the thinking of most business leaders.
There were a number of factors that helped to influence efforts on behalf of government-enforced equilibrium policies. To begin with, there were significant organizational and technological changes that occurred within the business system, both prior to and following World War I, to which businessmen had to respond. One analyst of the business scene, Carl F. Taeusch, declared that the factor that did the most to stimulate the growth of trade associations was "the advent of trade or industrial as opposed to individual competition."
Taeusch noted that starting with the early 1900s and continuing through the 1920s, American business underwent quite radical changes in the development of major new industries and new methods of manufacture and product distribution. The combination of these factors had a major impact, not only upon the firms within the industries that were undergoing such changes, but also upon businesses indirectly related to such industries.
The principal new industries included those producing automobiles, airplanes, electrical power, and products powered by electricity (including radio, motion pictures, the phonograph, and consumer appliances). There was also a total revamping of the petroleum industry which, prior to the automobile and electricity, had existed primarily as a source of lighting accompanied by a realignment of the relative market positions of petroleum, electricity, and coal as fuel and power sources.
The revolutionary changes in distribution methods included the development of chain stores, direct selling by manufacturers, vertically integrated retailing organizations, and the growth of new consumer-credit practices. The new manufacturing methods embraced many industries and resulted in a restructuring of business organizations to take advantage of new efficiencies brought about by such new production methods. The combination of these factors led to the growth of product (or "industrial") competition. Some of the consequences to industries of such radical changes are given by Taeusch:
The use of structural steel and cement in the building industry has confronted the lumber interests with a problem of self-preservation; changes in food habits and the more aggressive tactics of new food businesses have faced the older staple-goods concerns with the problem of rapidly declining sales; style changes ruthlessly affect the use of textile goods.
Taeusch’s explanation found support in the analysis offered by economist Joseph Schumpeter. Addressing himself to the "process of Creative Destruction," through which established firms are challenged and often replaced by new sources of competition, Schumpeter concluded that price competition is not the most significant factor to which firms have to respond. In his view,
it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.
Citing retailing as an example, Schumpeter declared that the competition that was most critical arose "not from additional shops of the same type, but from the department store, the chain store, the mail-order house and the supermarket."
“Because ‘collectivism’ reflects conservative, status quo sentiments, its underlying premises were consistent with business efforts to resist change.”
Whatever its relative significance vis-à-vis price competition, there is no doubt that the processes emphasized by Schumpeter served as the progenitors of economic advancements that revolutionized American life: the replacement of the horse by the automobile and of the kerosene lamp by the electric light; the opening up of worldwide systems of communication, transportation, and distribution; and the introduction of the consumer to an increased variety of services and products.
In such a volatile climate, change became one of the few constants upon which businessmen could rely. Economic survival often depended upon innovative resiliency; firms with higher unit costs and prices had to either become more efficient or drop out of the race. Instability and turnover were continuing threats with which firms had to contend. The severity of the competitive struggle was best reflected in the automobile industry: of the 181 firms manufacturing cars at some time during the years 1903 to 1926, 83 remained in business as of 1922, while 20 managed to survive through 1938.
In addition to the technological and organizational sources of change, trade policies proved disquieting. So intense was the pace of competition that many firms turned with increasing frequency to aggressive sales practices and lowered prices in order to gain some comparative advantage. The consequence, of course, was to further heighten the intensity of trade rivalry. Businessmen seeking nothing more than the most pragmatic route to survival in such a competitive and evolving environment became pariahs to industry colleagues.
Such aggressive trade practices provided the climate in which American business found itself as it entered World War I. Paradoxically, men of commerce and industry found, in the wartime management of the WIB, a temporary respite from what many regarded as the killing pace of commercial warfare. The economic cease-fire imposed by a centrally directed alliance of government and business afforded businessmen the opportunity of experiencing a less-menacing trade atmosphere.
When peace was restored to the rest of the world, however, competitive aggression returned to the marketplace. Businessmen, recalling the managed harmony of the war years, confronted the intensely competitive 1920s with hopes of realizing a more durable and predictable setting in which to conduct business. Firms that viewed the processes of change as threats to their positions began organizing resistance. Speaking to this phenomenon, economist Walter Adams observed that such firms "quickly and instinctively understood that storm shelters had to be built to protect themselves against this destructive force."
Businessmen confronted, not only the kinds of changes observed by Taeusch and Schumpeter, but a political environment within which antibusiness sentiments were widespread. As Wiebe has observed, political hostility toward large industrial combinations, and a good deal of confusion over Supreme Court cases that sought to distinguish "reasonable" and "unreasonable" restraints of trade, left the business community in a somewhat unsettled frame of mind.
These "tensions from political uncertainty and economic instability" generated a transformation in the thinking of business leaders. Politics and ideology became employed in the efforts of businessmen "to protect their positions of leadership in America’s twentieth-century society in transition." The result was a more conciliatory attitude toward government; for purely pragmatic reasons business leaders attempted to absorb reform movements and use them to their advantage.
A very broad range of social and economic conditions existed during the years 19181938: a war, an era of seemingly endless prosperity, the Great Depression, and the New Deal with its promises of a politically engineered recovery. Continuing throughout this period, however, was an organizational transformation that had begun long before World War I: the "collectivization" of human society. The principle of "collective organization," postulating the superior interests of the group over those of its individual members, was emerging within the business system as well as within other sectors of society.
Because "collectivism" reflects conservative, status quo sentiments, its underlying premises were consistent with business efforts to resist change. Industries organized themselves through the machinery of the trade associations and began the task of altering the attitudes, belief systems, and practices that represented the old order. Business decision making that emphasized the well-being of the individual firm was to be eschewed in favor of attitudes that stressed the collective interests of the industry itself. Individual profit maximizing was to be de-emphasized when confronted by the "greater interests of the group"; independence and self-centeredness were to be put aside in favor of a more "cooperative" form of "friendly competition."
Nothing so threatened the interests of this emerging industrial order as the free play of market forces at work in an environment of legally unrestrained competition. Nothing so preoccupied industry-oriented business leaders in the postWorld War I years as the effort to structure this environment so as to keep the conduct of trade within limits that posed no threat to their collective interests.
Throughout the years 191838, there was a consistent effort by many business officials and trade associations to develop a spirit of "business cooperation" through which, it was hoped, severe competitive pressures could be restrained. As we shall discover, many business leaders tried to establish systems of business relationships that would mitigate aggressive competitive practices and reduce the threat of economic loss to firms unable to withstand such competition. One finds industry leaders and trade groups railing constantly against the "price cutter," the "cutthroat" competitor, and the entrepreneurial interloper who dared to "invade the territory" of an established competitor. Such efforts invariably began with voluntary methods of "self-restraint."
When voluntary approaches failed to produce the desired stability, many businessmen mindful of the advantages experienced under the WIB sought to effectuate this spirit of "cooperation" through politically backed programs designed to fashion a greater degree of centralized business decision-making. Characterizing their proposals as "industrial self-regulation," business spokesmen and trade associations worked to secure for themselves a diluted competitive environment that would not be threatening to their interests.
Such political efforts to control trade practices led, ultimately, to the enactment of the National Industrial Recovery Act, a piece of legislation put to death in 1935 by the US Supreme Court. We shall examine both the contributions and responses of businessmen to this recovery program and will consider the post-NRA period in order to determine whether its existence had significantly affected the policy recommendations of business leaders for controlling trade practices.
After a more general development, in the first four chapters, of business responses to competition, we shall examine a number of specific industries. In chapters 5 through 7, we shall look at such industries as steel, petroleum, coal, textile manufacturing, and retailing in order to obtain a more detailed understanding of competitive conditions and business responses to those conditions. These particular industries were selected for a number of reasons:
they were all considered major industries throughout the period encompassed by this book and were among the principal industries undergoing the substantial changes discussed by Taeusch and Schumpeter;
representing such diverse fields as capital-goods manufacturing, natural-resource development, consumer-goods manufacturing, and retailing, they provide a fair cross section of American commerce and industry;
not having had a "public-utility" status imposed upon them, these industries were, for the most part, open to entry by would-be competitors and had pricing practices determined by market rather than political influences; and
because competition was particularly intense within these industries during the period, some of the most spirited and vocal efforts to tranquilize competitive inclinations came from these sectors of the economy.
An examination of other industries reveals similar tendencies and influences at work, and it is believed that the industries selected for specific study herein offer a fairly representative picture of the development of business attitudes toward competition and regulation during the 20 years following the end of World War I.
 Some of the more significant contributions have included Gabriel Kolko, The Triumph of Conservatism (Glencoe, Ill.: Free Press, 1963); Gabriel Kolko, Railroads and Regulation, 18771916 (Princeton: Princeton University Press, 1965); James Weinstein, The Corporate Ideal in the Liberal State, 19001918 (Boston: Beacon Press, 1968); G. William Domhoff, The Higher Circles (New York: Random House, 1970); Michael Parrish, Securities Regulation and the New Deal (New Haven: Yale University Press, 1970); Robert Cuff, The War Industries Board (Baltimore: Johns Hopkins University Press, 1973); Murray Rothbard, America’s Great Depression (Princeton, N.J.: D. Van Nostrand Co., 1963); Ron Radosh and Murray Rothbard, eds., A New History of Leviathan (New York: E.P. Dutton, 1972); Melvin Urofsky, Big Steel and the Wilson Administration (Columbus: Ohio State University Press, 1969); James Gilbert, Designing the Industrial State (Chicago: Quadrangle Books, 1972); Ellis Hawley, The New Deal and the Problem of Monopoly (Princeton: Princeton University Press, 1966); and Robert Himmelberg, The Origins of the National Recovery Administration (New York: Fordham University Press, 1976).
 Kolko, Triumph, pp. 5758.
 Myron Watkins, Public Regulation of Competitive Practices in Business Enterprise, 3d ed. (New York: National Industrial Conference Board, 1940), p. 38.
 Carl Taeusch, Policy and Ethics in Business (New York: Arno Press, 1931), p. 258.
 Ibid., pp. 25859.
 Joseph Schumpeter, Capitalism, Socialism, and Democracy, 3d ed. (New York: Harper & Bros., 1950), p. 156. It should be noted that a contemporary economist of the Austrian School, Israel Kirzner, minimizes the distinction Schumpeter draws between "price competition" and the more meaningful "entrepreneurial competition." Kirzner suggests that "the process of price competition is as entrepreneurial and dynamic as that represented by the new commodity, new technique, or new type of organization." See Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973), p. 129.
 Taken from Ralph C. Epstein, The Automobile Industry (Chicago, 1928), p. 164ff., and other sources cited in Donald A. Moore, "The Automobile Industry," in The Structure of American Industry, ed. Walter Adams, rev. 2d ed. (New York: Macmillan, 1954), p. 274ff.
 Walter Adams, "The Military-Industrial Complex and The New Industrial State," American Economic Review 65 (May 1968), reprinted in Superconcentration/Supercorporation, ed. Ralph Andreano (Andover, Mass.: Warner Modular Publications, 1973), R3372-3.
 Robert H. Wiebe, Businessmen and Reform: A Study of the Progressive Movement (Cambridge: Harvard University Press, 1962), p. 69ff.
 Ibid., pp. 8284.
 Ibid., p. 100.
 Ibid., p. 221ff.
Reprinted from Mises.org.