Reserve Requirements We recommend that all insured banks be made subject to the reserve requirement applicable to Federal Reserve member banks. This would improve the effectiveness of Federal Reserve control over the size and cost of the Nation's money supply, and would eliminate the restraint now felt by the Federal Reserve Board against reserve requirement increases that might lead banks to withdraw from membership to obtain laxer State reserve requirements. This step would not infringe on the present dual banking system or the right of the States to charter and supervise banks. It would only change the requirements for Federal deposit insurance to include the reserve requirements applicable to member banks. Chapter XII FEDERAL TRADE COMMISSION The Federal Trade Commission, composed of five members, with 7-year staggered terms, was established in 1914. Its duties are derived mainly from the Federal Trade Commission Act and the Clayton Act (1914), which were designed to supplement and strengthen the Sherman Act of 1890. The impetus for the Trade Commission and Clayton Acts was supplied largely by the Supreme Court's 1911 decision in the Standard Oil case (221 U. S. 1), interpreting the Sherman Act, which prohibited combinations in restraint of trade and monopolizing, with enforcement by criminal and civil proceedings in the courts. Announcing the rule of reason, the Court held that the Sherman Act outlaws only unreasonable restraints of trade. Support for a Trade Commission came from two divergent groups, which joined mainly in dissatisfaction with judicial enforcement of the antitrust laws. Businessmen wanted greater certainty as to the lines of legitimate conduct and more specific standards, through an authoritative commission. Others, interested in a more vigorous and effective enforcement of the antitrust laws, desired to limit the broad powers of the courts under the rule of reason. They felt that human inventiveness in devising new unfair practices required a commission of trained experts, of quasi-judicial character, with continuity of policy, and capacity to establish a body of administrative law. Thus the Commission, while intended to be one of the strongest of the Federal administrative agencies, differs from many of them in purpose. It represents not a departure from reliance on free competition, but an effort to maintain effective competitive conditions by preventing the development of monopolistic and restrictive practices. By continuous, expert attention, it was expected to adapt and apply the general terms of the statutes to current business practices, to make their enforcement more effective, and to build up a body of precedents to govern business conduct. Measured by these high hopes, the Commission's record is disappointing. The reasons have been various. The Commission has been hampered by inadequate funds, hostile court rulings, mediocre appointments. Its operations, programs, and administrative methods have often been inadequate, and its procedures cumbersome. It has largely become absorbed in petty matters rather than basic problems. 817988-49- -9 119 Despite this record, the conception of the Commission seems to us a sound one for this field. The developments in industry in recent decades have only reenforced the need seen in 1914 for an administrative agency devoted to a vigorous program to maintain effective competitive conditions and to eliminate and correct restrictive practices. But if the Commission is to perform the significant functions intended by Congress a number of basic changes will have to be made in its organization and program. Fortunately, the Commission itself has become aware of the need for reform and has taken some measures in this direction. However, these are only first steps and many basic ones remain. This chapter outlines our reasons for these conclusions and recommends some of the reforms necessary to strengthen and revitalize the Commission. A. Functions and Activities of Commission Both the Federal Trade Commission Act and Clayton Act were intended to prevent practices leading to monopoly or competitive restriction before their objective was attained. The Clayton Act outlawed specific practices where they might tend substantially to lessen competition. The Trade Commission Act forbade unfair methods of competition leaving it to the Commission to make the term specific. Under these acts the Commission had two main weapons: (1) The power of investigation, and (2) the power to issue cease-and-desist orders against violations. STATUTORY FUNCTIONS The primary duties of the Commission under these and other statutes are as follows: Unfair Competition Section 5 of the Federal Trade Commission Act makes unlawful unfair methods of competition and unfair or deceptive acts or practices. Under this section, the Commission has developed its major work. In general, this has taken two lines: (1) Attack upon a number of relatively minor offenses such as false and misleading advertising, and (2) a series of cases involving basic restraints of trade such as are involved in the Cement Institute case. Stock Acquisitions Section 7 of the Clayton Act had great potential importance. It sought to prevent the development of monopoly by forbidding acquisitions of stock of competing enterprises. In interpreting the pro vision, however, the Supreme Court narrowed its application so far as to deprive it of practical usefulness. As a result, the Commission's work on enforcement of this section has virtually ceased. Price Discrimination Section 2 of the Clayton Act, amended in 1936 by the RobinsonPatman Act, is designed to maintain equality of competition by eliminating price discriminations. In actual practice the enforcement of this section has been woven into the antimonopoly work of the Commission. The Commission has brought a number of cases combining in one action charges under both section 2 of the Clayton Act and section 5 of the Federal Trade Commission Act. Investigations Section 6 of the Federal Trade Commission Act gives the Commission wide investigatory powers over the business economy. Its purpose was twofold: (1) To provide general information on corporate practices and relationships as a guide to legislation and public opinion, and (2) upon direction of the President or either House of Congress to report the facts on violation of the antitrust laws by any specific corporation, and turn on the spotlight of publicity. Enforcement The Commission's orders under the Clayton Act are not final. In the event of violation, the Commission may apply to a circuit court of appeals for enforcement, and only a violation continued after this court ruling subjects the company to a penalty (for contempt of court). The same provisions applied to the Commission's orders under the Federal Trade Commission Act until a 1938 amendment made those orders final if not brought to court by the company within 60 days, and prescribed a $5,000 civil penalty for each violation. Under the Trade Commission Act, the Commission was also expected to assist in the enforcement of the Sherman Act by investigating the compliance of defendants with decrees, by assisting the courts in the formulation of equity decrees, and by recommendations to the Attorney General for readjusting the business of corporations to conform to the antitrust laws. In practice almost none of these powers has been used. Other Duties The Commission has other duties under a miscellany of acts. Section 3 of the Clayton Act prohibits tying or exclusive dealing contracts which have monopolistic tendencies; section 8 prohibits interlocking directorships which have the same effect. The Commission also administers the Export Trade Act, which exempts export trade associations from the Sherman Act provided that their activities have no restraining influence upon domestic trade, and the Wool Products Labeling Act, which requires labeling of wool products for the protection of the trade and the public. PAST WORK OF THE COMMISSION Over the years, the Commission has engaged mainly in activities contributing little toward accomplishing the primary congressional objective of assuring widespread effective competition. Cease and Desist Proceedings In the past this has been particularly true of its proceedings for orders to cease and desist. Approximately 70 percent of the cases have involved false and misleading advertising and deceptive practices. The remaining 30 percent have been concerned with price discriminations and anticompetitive practices, yet the bulk of even these cases has been minor in importance, involving small corporations of little consequence to the national economy. In part, this condition was due to numerous adverse court rulings in the Commission's first two decades. These cast doubt upon the Commission's power to find unfair methods of competition in acts not illegal at common law, rejected the Commission's views as to the effect of various provisions of the Clayton Act, and virtually nullified section 7, which forbade acquisition of stock of competing enterprises. After 1934, the Federal Trade Commission was lost in a backwash. For several years the Government veered away from an antitrust policy. In the late 1930's the Department of Justice began a militant enforcement of the antitrust laws, which has continued, subject to wartime postponements. But in the Federal Trade Commission the members were reappointed, and its dockets were preoccupied with false and misleading advertising cases, save for an assault upon basing point pricing systems. Conciliatory Settlement: Trade Practice Conference The Commission has developed conciliatory procedures, short of formal trials, for false and misleading advertising cases. These may be handled without a hearing by formal stipulation, negotiated after issuance of a complaint and filed as a public record. The most minor matters are handled by letter; if the company ceases its practices, the matter is ended. Where a particular practice seems widespread, the Commission may attempt to clear it up on an industry-wide basis through a trade practice conference. Subsequently, rules of fair-trade practices are promulgated for the. industry; signatures are received from companies desiring to adhere to the rules; and an attempt is made, with the cooperation of an industry committee, to keep the industry in line with the established rules. However, since there is no statutory |