All Commentary
Friday, May 1, 1998

In Restraint of Trade: The Business Campaign Against Competition, 1918–1938

Does Government Regulate Big Business in the Public Interest?

In Restraint of Trade is an excellent book that deserves a large readership among historians, economists, and politicians. Butler Shaffer effectively challenges the traditional historical argument that government during the early 1900s regulated big business in “the public interest.” In truth, as Shaffer ably shows, most businessmen in the 1920s and 1930s wanted government regulation to protect their companies from talented entrepreneurs who were giving consumers better products at lower prices. In other words, American businessmen followed the path predicted by Adam Smith when he observed, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

The late 1800s and early 1900s were a time of growing national and international markets. In business after business, chain stores and improved transportation increased competition. For consumers, this was good news: they had more products to choose from at lower prices. Sellers, by contrast, had to innovate and improve their products to stay in business. Faced with this challenge, many of them preferred to organize, merge, or consolidate to better control prices and retain their market shares. The snag with this strategy was that bigness in a free market is no guarantee of success. Large corporations often became bureaucratized and lost their creative edge. U.S. Steel, International Harvester, and American Sugar Refining were all examples of large merger-driven corporations that lost market shares steadily throughout the early 1900s.

Shaffer sees World War I as a critical time when larger corporations—through the War Industries Board—discovered they could use government to set prices, stifle competition, and guarantee a steady market for whatever they sold. Bernard Baruch, chairman of the WIB, commented on the advantages (to sellers, not buyers) of cartelization: “Many businessmen have experienced during the war, for the first time in their careers, the tremendous advantages, both to themselves and to the general public, of combination, of cooperation and common action, with their natural competitors.”

During the 1920s, with wartime controls lifted, most businessmen were thrust back in the free market again. Now they tried to use trade associations to prop up prices and divide markets among the members. These codes would often condemn “cutthroat competition” and talk about establishing prices that would be both “customer friendly” and provide a “fair return on investment.” After analyzing these codes, Shaffer observes that “The essential factor to keep in mind regarding a study of business code making is the overriding concern of businesses to protect themselves—not the customer—from the effects of aggressive competitive practices.” Without the force of government, however, these attempts to write binding codes always failed—cost-cutters and innovators in industry after industry found ways to beat the trade association standards and attract more customers.

The New Deal, Shaffer argues, was the golden opportunity for businesses to use government to protect themselves from competition. Roosevelt’s National Recovery Act (NRA) allowed businessmen throughout the country to fix prices, hours of work, and wages for their industries. According to Business Week at the time, “Washington hotels rejoice and Cabinet members groan over the wild rush of business men to the capital to find out about the new industrial plan. They want to know everything, but mostly how to punish the rascal who has been cutting prices in their industry, and how to fix some nice new prices.”

Shaffer specifically looks at steel, coal, oil, retailing, and textiles to show how the stodgy majority imposed a variety of controls on their industries. Even though the Supreme Court struck down the NRA in 1935, many businessmen since then—in industries from railroads to airplanes to sugar production—have worked through Congress and various regulatory commissions to maintain high prices, dispense quotas to members, and restrict the actions of innovative competitors.

Shaffer emphasizes the collaboration between business and government in the New Deal era “to provide the coercion essential for holding together a collectivized industrial order.” He concludes that “Legislative inroads into economic life were occasioned not by the failure of the market to provide order and discipline but by the market’s general immunity to being corrupted for the benefit of special interests. The purpose of such legislation, including the NRA legislation, was to repress and stabilize competitive conditions—to ossify industries and restrain those influences that represented the threat of change.”

Parts of Shaffer’s argument have been advanced by historians Gabriel Kolko, William Leuchtenburg, Ellis Hawley, and Alfred Chandler, Jr. But Shaffer pulls together these many threads, knits them together with his own craftsmanship, and produces a sturdy and original garment that wears well and is likely to be durable over time.