MONOPOLISTIC AND UNFAIR TRADE PRACTICES

WEDNESDAY, SEPTEMBER 15, 1948

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE No. 2 OF THE

SELECT COMMITTEE ON SMALL BUSINESS,

Kansas City, Mo.

The subcommittee met in the United States district court room, Federal Courthouse Building, Kansas City, Mo., at 9 a. m., the Honorable Walter Ploeser (chairman) presiding.

Present: Representatives Walter Ploeaser (chairman) presiding, Cole, Scrivner, Reeves, Bell.

Also present: James V. Foristel, executive director, and Willis J. Ballinger, economic counsel.

Chairman PLOESER. The committee will come to order.

May I explain that this is the fourth of a series of planned and scheduled hearings of 12 on a subject which interests small business, namely, unfair trade practices and monopolistic tendencies.

The previous meetings have been held at Butte, Mont.; Casper, Wyo.; Salt Lake City, Utah, and, as I stated, this is the fourth. The committee goes from here to Omaha, then to Minneapolis, Minn.; Madison, Wis.; South Bend, Ind.; Detroit, Mich., then into Kentucky, Oklahoma, and Texas.

We want these small-business people to come and tell us their problems, as they understand them. It is the intent and purpose of the committee to be helpful in every way that we can. If the present laws are not sufficient to guarantee the freedom of the economy and opportunity for the successful life of small enterprise, then it is our job to find that out and to make whatever remedial changes may be required.

This committee was created by the Congress for the purpose of serving the smaller entities of commerce in America. In that sense it is probably a prejudiced committee. Small business is one particular group which this committee fathers, if you please. The purpose of the committee in being here is to be friendly. We are not out trying to probe into anyone's lives. We are trying to learn the problems and if in some way we can help solve them, that is our intent and purpose. So we want you to feel perfectly free to state your problems before the committee.

Mr. Ballinger, you may proceed.

171

STATEMENT OF ALBERT L. REEVES, A MEMBER OF CONGRESS FROM THE STATE OF MISSOURI

Mr. BALLINGER. Give your name for the record.

Mr. REEVES. Albert L. Reeves, Jr.

Mr. BALLINGER. You have a prepared statement you wish to read to the committee?

Mr. REEVES. Yes. First of all I would like to express my appreciation to the chairman of the committee and the members of the committee for their courtesy in permitting me to appear this morning to make this brief statement. With many others, I join in expressing thanks to the committee for its appearance here and for giving consideration to the special problems of small business in this section of the country. There is perhaps no other community in the United States which is so typical of small business as is Kansas City. There are no giant plants or industries here but, relatively speaking, all enterprise in this area is in the category of "small business," as well as independent business.

No doubt you have received from many sources in the Kansas City area and trade territory many complaints of unfair and monopolistic trade practices. No doubt others following me in these hearings will give you details in that regard. But very briefly I would like to outline to you two developments which are having a serious and distinctly adverse effect upon small business in this area. Specifically, they bear directly upon the steel fabricating industry but are reflected in all related industrial activities. Their impact is not confined to industry, but has seriously affected all employment and general prosperity of Kansas City and its vicinity.

These are matters on which I am expressing my own viewpoint, based upon inquiry and investigation independently made and on information independently acquired.

Industry in general and steel manufacturers and fabricators in particular with plants located in Kansas City have been adversely affected for some time because of the maldistribution of raw materials, especially steel. Steel is a scarce material. Its maldistribution is caused chiefly by the action of steel producers in recent years in acquiring and operating fabricating companies in nearly every manufacturing business in which steel is required.

A little later I will list some of the end products manufactured by companies integrated with and wholly owned by major steel producers. The critical problem of small business in obtaining materials is aggravated by the policies of the Federal Trade Commission, now effective and prospective, relative to freight adsorption and delivered prices, in accordance with the recent decision of the Supreme Court in the so-called Cement case. The effect of the decision, as interpreted by the Federal Trade Commission, is to require the abandonment of the so-called multiple basing point method of pricing. In other words, under the decision and its interpretations, industry is prohibited from following the practice heretofore in general use throughout the Nation of absorbing freight to meet competitive prices.

Kansas City and its steel fabricators have found themselves in a geographical calm for some time with respect to their steel supply. The added effects apparent from the change in pricing policy by the major producers of steel from the multiple basing point system to an

f. o. b. mill basis has aggravated their problem. In fact, it has tended to isolate this community from its normal supplies and sources of steel. The entire steel supply situation is of grave concern to all industries and all businesses in the Kansas City area.

First, however, I would like to comment on the consequences of the integration of steel-fabrication companies with the major steel producers. Let me cite instances in which the steel producer controls his product down to the ultimate consumer: Steel ships, nails, oilwell drills and derricks, pipe, fence, wire, steel culverts, bridges, structural steel, barrels, steel buildings and tanks. These are items which are controlled by the major producers of steel or some of them, from the time steel is produced down to the time fabrication is complete on the item enumerated.

There are numerous others. Independent producers of these end products have been reduced in their steel supply and, consequently, in their production. The large companies have become larger and the independent small businesses have become smaller and fewer. Deprived of their normal supply of steel for fabrication, independent small fabricators cannot compete with the subsidiaries of the large steel producers which are able to get almost unlimited amounts of steel from their parent companies. The strength of our national economy depends on the disbursal of our production and distribution facilities into the many independent small business units throughout the country. It is for that reason that we frequently say that small business is the backbone of our economy. Here we find a trend in the opposite direction. It is a trend toward concentration of the production, fabrication, and distribution of basic materials and commodities in the hands of a limited number of tremendously large enterprises, with resulting concentration of economic power. This trend greatly increases our vulnerability to nationalization of basic industries in the United States.

The work of this committee is especially significant and important because of its protection of small business by resisting monopoly and preventing nationalization of industry. One local fabricator anticipates that for the year 1948 it will receive only one third of its normal prewar tonnage of steel. At the same time the demand for its products exceeds the average of those years.

This same firm has been required, because of the shortage of materials, especially steel, to lay off a substantial number of its workers and is faced with a still further curtailment of its production. It faces additional lay-offs of employees.

All told, the steel-fabricating industry in Kansas City employs some 3,000 persons. It is a major industry in Kansas City and its activity directly affects the economy of this community.

Historically, steel has been supplied to this section from all of the major points of steel production: Pittsburgh, Cleveland, Detroit, Middletown, Chicago, Granite City, and other steel-producing points. Only a small percentage of the materials needed by Kansas City industries can be supplied by local mill capacity. For some time past major steel suppliers have been withdrawing from this territory and it has been generally impossible to purchase from prewar sources. Local firms have not been able to obtain a fair proportion of their prewar quota from the major steel mills. This was true even prior

to the decision in the cement case. In a broader aspect, the same situation exists throughout all of the so-called prairie States of the Mid

west.

Present demand so far exceeds steel production that local or nearby producers cannot, with their limited capacity, approach an adequate source of supply. The over-all situation is aggravated by the fact that substantially all of the larger steel producers and many of the smaller ones also are acquiring interests in all or in part in fabricating plants and that mills which once served fabricators in Kansas City are diverting the tonnage which they normally sold to fabricators in this area to their own processors and fabricators.

In these wholly or partly owned fabricating plants the steel producers are fabricating completed articles and competing with their former customers in the manufacturing and distribution of products manufactured from steel. This tendency is and has been growing for a number of years but has been particularly accentuated since the close of the war. To put the situation concretely the sales department of one of the larger producers said to a fabricator in this area:

We have three customers: No. 7, our own plants; No. 2, others that are located in our backyard; and No. 3, customers whom the president of the company tells us to supply.

Without doubt a large majority of the mill producers are first of all serving their own fabricating plants and their particular customers, customers where financial interests are interwoven to the very great disadvantage of independent local companies. Under the present conditions monopolies are being created. In addition to these conditions there is a further problem of large quantities of steel being somehow made available by mill sources either first-hand, second-hand, thirdhand, or otherwise, to gray- or black-market sources, many of which have large tonnages of materials which are available at about four times the normal value.

A suggestion has been made in the Congress concerning a survey to learn the complete record of sales by steel-producing companies to their integrated subsidiaries. It is proposed to make a comparison of such sales with those to independent companies at all levels of operation, and a finding as to the effect upon independent users and fabricators resulting from such integrated operations. Such a survey would certainly reveal what is actually happening in the distribution of the mill produced products and would offer a basis of determining how far-reaching has been the mills' policy of distributing their production to their own companies.

I do not profess to know the solution to this complex problem. Among others, the suggestion has been made-and I do not mean to advocate it-that there be a complete divorcement required between the production, fabrication, and distribution of basic products such as steel and, perhaps, oil. I have not formed an opinion with regard to this suggestion, but certainly it should be given careful consideration by this committee along with any effective alternatives which may be proposed.

Second, let me comment briefly on the forced abandonment of the freight absorption and delivered price system, both referred to in the decision of the Supreme Court in the Cement case, and its effect upon the production and sales of the products of local industries.