Regulation of American Business

Mr. Swearingen is President of the Standard Oil Company of Indiana. This article is from an address before the Rotary Club of Los Angeles, February 28, 1962.

I propose to tell what amounts to a modern-day ghost story. The specters in question are the mani­fold and proliferating regulatory agencies of the federal govern­ment, whose existence was not contemplated by our Constitution and whose all-pervasive powers and activities go largely unreal­ized today by the average citizen.

Too many of our people are going more or less blithely through life under the misapprehension that the country is being gov­erned pretty much according to the original ground rules. I am not at all sure that a little knowl­edge in this instance is merely dangerous. It could prove to be fatal.

Those who think that the fed­eral government is made up pri­marily of an executive and a legislative branch, with an indepen­dent judiciary standing by as an impartial arbitrator, have lost touch with reality. Such people dwell in wonderland. And while the wonderland may have un­questioned origins in the concepts under which this nation was wisely created, it is nevertheless a land of fantasy in terms of the facts of life in 1962.

What has actually happened is that, starting in 1887 with the creation of the first federal regu­latory commission—the Interstate Commerce Commission—we have witnessed the step-by-step devel­opment of a fourth branch of gov­ernment. Today it embraces over sixty independent federal agencies with approximately 400,000 em­ployees and a total annual budget of around $10 billion. Should any of you wish to examine this intri­cate structure in more detail, I refer you to the United States Government Organization Manual, which devotes 236 pages to the subject.

The results of this mushroom­ing process are in many ways as­tounding. We have arrived at the unhappy point at which the Cy­clopean eye of some almighty regulatory agency is upon us when we buy or sell, ship or receive, hire or fire, grow or manufacture, save or spend, drink or diet, profit or lose, talk or listen.

Furthermore, many of these regulatory agencies exercise un­usual powers in that they first promulgate regulations which have the force and effect of law, then enforce them, and later ad­judicate them.

Still another facet of this com­plex regulatory process that de­serves mention is that the commis­sioners of the various agencies who exercise such control over our economic and social system are nonelective officials, many of whom, while theoretically respon­sible to the Congress, are in large measure of fact responsible to no one in particular.

To complicate the situation further, many of the people who actually prepare the regulations, enforce and adjudicate them, are lower-level staff personnel whose role and deliberations in decision-making are almost impossible to determine. Yet their philosophy and judgments are reflected in conclusions affecting the daily lives of all of us.

When we add to this already seething cauldron the frequent lack of clearly-defined areas of jurisdiction between various regu­latory bodies, we arrive at a final mixture of widespread confusion as to precisely what a business­man or a corporation properly can or should do, as to what body has legitimate authority to make and enforce decisions regarding such conduct, and as to where one can effectively turn for appeal from a questioned ruling.

FTC Threatens the Competition It Was Established To Insure

My own company has had suffi­cient firsthand experience with this process to give us a certain status as experts on what the re­sults of such a system can be. Let me give you just one example of what can happen in the business area.

This problem originated in the 1930′s, at a time when competi­tion was especially rugged, and our competitors began trying to win over some of our best whole­sale customers in Detroit by of­fering them a lower price on gaso­line for resale. When several of our most important wholesalers actually started to buy from com­petitors, our company finally agreed to meet this threat by matching part or all of the reduc­tions our competitors had offered. The result was a complaint from the Federal Trade Commission, is­sued on a chill November day in 1940, that our action constituted unfair discrimination and amount­ed to an unlawful injury to com­petition. As the Commission saw it, either we should not have re­duced the price to these particular wholesalers, or we should have re­duced it to everyone in the area to whom we were selling—includ­ing all retailers.

We pointed out that neither of these two courses was at all rea­sonable. Unless we met the com­petitive price, we would have lost these jobbers as customers, and they would have received the lower price anyway. On the other hand, had we lowered prices to every­one, marketing in Detroit would have become uneconomic. The com­pany would have lost money, and, what’s more, our general price level in Detroit might have been so low that we could conceivably have been charged with trying to destroy competition there.

The case finally got to the Su­preme Court, which ruled on it in 1951, agreeing with our conten­tion that meeting competition in good faith is an absolute defense to a charge of price discrimina­tion. Eleven years may strike you as a long time to wait to find out whether a common business prac­tice is or is not permissible, but this was only phase one.

In the second round of litiga­tion, the FTC then sought to demonstrate that we had not acted in "good faith" in meeting our competitors’ price. Once again, we started the climb up the ladder to the Supreme Court, which once again decided in our favor, but not until early in 1958. In our judgment, the net effect was to preserve a competitive system for American business, but it took 17 costly and trying years of litiga­tion to do it. And, to preserve our right to compete, we had to fight off a federal agency originally es­tablished to insure the continu­ance of effective competition.

I give you this case history only as an example of the extent to which we are all wandering in a regulatory maze. If we had real­ized at the time we reduced our price to a handful of gasoline wholesalers in Detroit that this defensive action would lead straight to nearly two decades of litigation, I suspect we might have weighed the matter in a somewhat different light—al­though I doubt we would have al­tered our actions, which we con­sidered fully justified.

Nevertheless, I submit that this is the kind of thing that can give any responsible businessman nightmares at high noon. In our instance, the continuing threat to our ability to compete also threat­ened the interests of our thous­ands of stockholders and employ­ees.

And lest any of you be tempted to assume that this is the extreme to which an individual or a cor­poration is likely to be forced, let me give you my sorrowful assur­ance that it is little more than a taste of what lies ahead unless the course of events can somehow be changed.

Pre-Judging an Action

This is not merely an idle opin­ion. There is presently before the Congress a proposal to grant to the Federal Trade Commission new powers even more far-reach­ing than any seen thus far. In effect, this proposal would em­power the Commission to issue a "cease and desist" order at the out­set of a complaint, compelling an individual or a corporation to dis­continue any practice questioned by the Commission. Such an order against our company in 1940 would have left us under a serious competitive disadvantage in a ma­jor market for 17 years, pending ultimate vindication.

I could with ease present nu­merous other examples involving only the petroleum industry. There is the interesting tragedy of er­rors involving another federal agency—the Federal Power Com­mission—and the natural gas seg­ment of our industry. Here the situation has become so compli­cated that the Commission stated at the end of 1960 that it would not reach a current status in its independent producer rate cases until the year 2043—assuming its staff were to be tripled.

In the meantime, many gas pro­ducers are understandably reluc­tant to commit their supplies for periods of up to 20 years or more into the future without knowing the price they will ultimately re­ceive for their product. This un­certainty has led, among other things, to increasing sales of na­tural gas for industrial use within the producing states, since the pricing authority of the Federal Power Commission is limited to sales of gas moving into interstate commerce. Whatever else can be said of this development, it hardly appears to be in the long-term in­terest of the many residential users of natural gas outside the producing states.

But while I have mentioned only some of the problems facing my own industry, please remember that they are being duplicated at an increasing rate in every area of enterprise in the country. No undertaking can escape them. The railroads have had their share since the turn of the century, un­der the Interstate Commerce Com­mission—and many are near bankruptcy. As commercial avia­tion developed, a mounting num­ber of activities of the airlines have fallen under the jurisdiction of the Civil Aeronautics Board and the Federal Aviation Agency. We are all familiar with current diffi­culties involving the relatively new television industry and the Federal Communications Commission.

An interminable List

There is no need to run down the interminable list. It is suffi­cient to say that it would be diffi­cult to envision any form of enter­prise, including those yet unborn, which can now or could in the fu­ture escape the regulatory yoke. If existing agencies should some­how be found to lack authority, I have no doubt that new ones will be promptly created. Neither is there any need to belabor the point that this relentless extension of federal control presents a problem of serious dimensions.

Please keep in mind also that my comments have been confined largely to a single area of controls over business activity—that of the federal regulatory bodies. While I have singled out this area because the extent of its influence is so little comprehended by the public, it is well to remember that still other regulations and controls emanate steadily from other sources in Washington, while many of these bodies again have their counterparts at the state level.

Well what, you may ask, is the moral of this dismal tale? I am not certain that I am fully quali­fied to answer that question. Ob­viously, the situation is studded with morals of various sorts, de­pending on your viewpoint. We have at issue the steady erosion of individual liberties, the increasing substitution of bureaucratic plan­ning for individual decisions in the market place. The whole di­rection in which the world’s lead­ing democratic country is moving seems to be involved. It is not easy to say whether the problem is basically one of the theory of gov­ernment, of economics, of phil­osophy, or of morality. How much regulation of our private affairs is needed? How much is justified? How much can we undergo with­out drastically altering some of our oldest concepts about a free society?

Instead of attempting to answer questions of this complexity, let me rather conclude with a purely pragmatic observation or two in light of the present position of the United States in the world com­munity. I think it is by now no news to any of us that we are in the midst of a gigantic economic struggle with the Soviet Union. In so many words, Khrushchev has declared economic war upon us, and through this means expects to win the world for communism without the need for direct armed conflict.

Still another factor to be reck­oned with is the emerging Euro­pean Common Market, from which America can expect increasing competition in international trade, the answer to which can only lie in the direction of still greater effi­ciency and productivity within our own economy.

Meanwhile, American business is being looked to as the prime mover in the development of a gross national product of at least $570 billion to develop enough tax revenue to pay the government’s bills in the next fiscal year.

Unless the pronounced trend toward more and more regulation of more and more matters involved in the daily conduct of business can be halted, it is questionable whether American business can retain the necessary freedom of decision and action to meet the challenges which lie directly ahead. If we sit by and permit the increasing encirclement of business by bureaucratic regula­tion, we cannot in all common sense continue to expect the fruits of a vitally-needed expanding economy.

As a nation we are at this mo­ment faced with tremendous re­sponsibilities, both to our own peo­ple and to the entire free world be­yond. They can never be met with­out the creative contributions of a dynamic economic sector, yet we stand in danger of witnessing American business being little by little painted into a corner so small that it leaves hardly enough room in which to turn around. To state it another way, what we’re doing is applying pointless regulatory brakes to business in many im­portant ways when we should be trying to step on the gas. We are surrounded by seemingly number­less regulations of debatable need, uncertain effect, and arbitrary ori­gin. As for the element of public consent to this process, the public hardly comprehends what is tak­ing place.

Here, perhaps, lies the greatest danger—the danger that individ­ual initiative will become swamped by government edict before enough people awake to the threat. In the words of John Stuart Mill, "A state which dwarfs its men, in order that they may be more docile instruments in its hands—even for beneficial pur­poses—will find that with small men no great thing can really be accomplished."