THE international cartel movement is by no means a new phenomenon. There were several such organizations in a thriving condition some years before the war, including the Franco-Belgian group of plate glass manufacturers which was set up in 1904, the borax organization, established in 1899 and comprising interests in Germany, France, Austria, Great Britain and the United States, and the glass bottle cartel dating back to 1907 and including most of Central Europe and the Scandinavian countries. Since the war, however, the movement has taken on several new aspects, the most conspicuous of which is its far greater activity. A widespread and general interest in it has resulted. Indeed, judging from the quantity of literature that has appeared within the last two years and the lengthy discussions devoted to the subject at recent conferences at Geneva and elsewhere, the international cartel has become -- at least in the minds of leaders of European thought, both political and industrial -- one of the outstanding factors in the rehabilitation of the Old World.

It is well at the outset to have that point definitely in mind, namely, that the underlying motive is clearly and predominantly the elimination of abnormalities within the European business world, and not primarily the forging of a weapon for an offensive against America. Quite conceivably this latter purpose may develop ultimately, but among the dozen or more conspicuously active cartels today (out of the hundred-odd international pooling arrangements which according to some authorities are now in force), the vastly preponderant interest is in the establishment of more orderly marketing conditions on the Continent. Germany, with her more than two thousand domestic cartels (or pools, as they would be called in the United States), has taken the lead in practically all of these movements and it is significant that about 75 percent of her exports find their outlet in nearby European markets. It is evidently the embarrassment arising from the new post-war trade barriers that has stimulated her cartel activities.

Especially with the stabilization of exchange since business began to emerge from the bottom of the 1921-22 pit the demand for some device for trade control and promotion has been increasing in volume. As the post-war burdens of wartime inflated production increased with declining buying power, and as nationalistic excesses continued to restrict and hamper the restoration of more nearly normal commerce, especially across the five thousand miles of new frontiers recognized by the peace treaties, public leaders generally become more anxious for every possible device which might modify the hostilities and frictions that must inevitably arise.

Hence, from the publicist's point of view, the international cartel was looked upon not simply as a business expedient but as a vital factor in the general establishment of more orderly international relations. This in part explains the declaration of Dr. Curtius, the German Minister of Economics, to the effect that "these great modern economic organisms transcend the bounds of purely private business and have gradually become public institutions with national responsibilities." After all, the movement is but a part of the general trend toward more cohesion among various Old World interests, a reflection of the increasing recognition of the indispensability of collaboration, especially in economic affairs. It is part of the same state of mind which has found expression in various movements for politico-economic unity, such as the Pan-Europa Congress in Vienna in October, 1926, and numerous less pretentious discussions of zoll-vereins.

As the impossibility of these more or less fantastic proposals has become increasingly evident, support for the international cartel idea has grown in strength, particularly among the business leaders whose influence in the general European situation has been gathering momentum at an impressive rate within the last two years. In a way, the cartel is a response to the political pronouncements at the series of diplomatic conferences culminating at Locarno. It is also getting support among those who have feared not simply the political perils of the various pseudo-economic pacts, vereins, leagues, etc., but who also doubt the wisdom of other devices which political leaders have desperately employed and advocated to rehabilitate the industrial world, notably a succession of subsidies, credit insurance schemes, and subventions, the unlimited costs of which they quite rightly regard with alarm in view of their already overwhelming tax burdens. Practically every European government has tried such subsidizing arrangements; examples are found in the sugar industry, civil aviation, steamship lines, industrial fairs, motion picture mergers, timber concessions, guarantees of company securities (in the case of aluminum and paper in Great Britain), and, more pretentious than any of these, a series of very large governmental credit insurance programs for the promotion of export. The strong endorsement given by business leaders to the cartel movement within the last year or two is due in no small measure to their utter weariness with the trade jealousies, the tax burdens and the political implications of most of these devices.

Broadly speaking, the whole European movement toward industrial centralization is being manifested in three different forms: first, through the establishment of international ententes or cartels; second, through the strengthening of international trade associations and other industrial promotive bodies; and, third, through the complete amalgamation of individual enterprises in different countries. The first is the one at present before us. Cartels have been variously defined, but perhaps the simplest way is to compare them with the old-time American pools -- loosely knit marketing agreements -- usually involving simply the allocation of trade territories, sales quotas, and the establishment of uniform prices. Occasionally in their later forms they have also involved the interchange of technical information and personnel, and even of patent rights, though this is not usual.

Dr. Schumpeter of Bonn has summarized the basic reasons for the foundation of cartels, as follows:

One cause was the loss of foreign markets through the disruption of colonial holdings and of international patent rights. Such losses have of course fallen especially severely upon Germany and her allies. As Europe depends very largely upon foreign trade (which contributes anywhere from 50 to 85 percent of its total business, as contrasted with a range from 8 to 11 percent, according to varying estimates, in the case of the United States), it is obvious that such a loss is far more ominous for Europe than the United States. This fact inspired the establishment recently of the chemical cartel, which bids fair to be the largest of the entire group.

The second cause of widespread international cartelization was, as indicated above, the excessive burden of wartime over-production.

Thirdly, the general business demoralization resulting from depreciated currency, from the adjustments of the reparation problem, and from the deterioration of living standards, served to make the problem of rehabilitation even more difficult and to inspire enthusiasm for every apparently reasonable proposition which might lead to a modification of excessive cut-throat competition. This feeling led to the adaptation of at least some parts of American industrial "rationalization" -- in other words, the elimination of wasteful practices in production and distribution and the introduction of certain forms of mass production, standardization, and simplification.

Another potent stimulant of the cartel movement was the derangement of raw material supplies during the war, and of marketing organizations. This was particularly the case with selling organizations lying outside the national borders, which had been among the most valuable pre-war trade assets of all the European nations, notably Germany. The cartel has been looked upon as an effective means of restoring the old ties across the new barriers.

Price stabilization is naturally one of the paramount objectives. In some instances the establishment of the cartels has brought about an increase in prices, under pressure from the less efficient members of the organization who have made it a condition of their membership. This price stabilization has obviously benefited other non-member producers, and in that respect competing American manufacturers for the most part have not viewed the movement with grave concern, at least thus far. However, the announced strategy of several of the organizations is to introduce economies by combinations of sales forces, the curtailment of advertising costs, the unification of shipping arrangements, and improvements in other aspects of distribution, so that if necessary price scales can be lowered in the face of outside competition.

In the case of the Erma (the European Rail Manufacturers Association) no effort has been made to control production directly. The home markets are reserved to the individual producers; and monthly meetings are held where the export trade is divided upon established percentages and the export prices for rails are agreed upon. This particular entente appears to be functioning satisfactorily to its membership and is, indeed, one of the most effective of the present international cartels. There are persistent rumors in European circles that American producers are members of this entente, working through the British; but the American companies officially deny it.

The Franco-German potash entente likewise involves a division of markets, price control, and the reservation of home markets, but no production control. This particular organization is in an unusual position, since both governments are involved in it through their control of or participation in the operation of the mines. The chief objective of this group was the elimination of competition among its members in the American market. As indicated in a recent report of the Department of Commerce, the original agreement of August, 1924 was unique in three respects. It involves a monopoly of an essential raw material; it applies only to sales in the United States; and its members are, to all intents and purposes, two sovereign States. There were several subsequent changes, including the expansion of the market allocation to include the world and to assure each member against competition from the other in its own market and in its colonies. There now is also a definite scheme to limit production with a view toward further price stimulation.

In their American operations the Alsatian members of the Franco-German potash entente have emphasized their governmental connection, and the French authorities have claimed for them exterritorial privileges. However, the American government has taken exception to this claim. In a letter to the Attorney General, dated July 7, 1927, the Secretary of State points out that the potash organization "does not have any diplomatic or consular status in this country . . . . Agencies of foreign governments engaged in ordinary commercial transactions in the United States enjoy no privileges or immunities not appertaining to other foreign corporations, agencies, and individuals doing business here, and should conform to the laws of this country covering such transactions."

As indicated in the decision of the Supreme Court in the sisal case, the activities of such international cartels in the American market can be effectively curbed, in so far as they represent a monopolization of an essential raw material. In that case the Court regarded the Mexican sisal organization, even though domiciled abroad, as a monopoly in restraint of American trade. It was held to be subject to the provisions of Section 73 of the Wilson Tariff Act, as amended, and, according to Col. Donovan, Assistant to the Attorney General, the decision in this case would seem to indicate that such foreign corporations are subject to the anti-trust laws when they participate in an enterprise in the United States that would be offensive under those laws, however innocent their conduct may be in the country of domicile.

The international steel entente, which was established in September, 1926, comprises most of the Continental steel producers. It represents a further variation of the cartel in that it involves definite control of output with penalties for over-production and premiums for under-production. Its price policies, however, have not yet been developed so far as in the potash and rail ententes, a shortcoming which in the opinion of many makes its progress more precarious. The original intention apparently was to establish some form of united sales office for semi-finished products and structural shapes, with unified price policies. This, however, has not yet been realized and the statement has persistently been made that the only effect of the steel cartel has been to shift the fight between producers from the open market to the privacy of the cartel's council chambers. Repeated efforts have been made, the last one in December, 1927, to establish some unified sales policy, but evidently it has been impossible to reconcile the demands for quotas made by the various members of these sales groups. The industries of Germany and Luxemburg demanded allocations based on their exportations over the last three years, while the Belgian interests opposed this arrangement unless allowances were made for the periods of industrial difficulty suffered by them during recent strikes and floods and also for the retarded reconstruction of some of their plants. Similarly, arguments were advanced by the French producers whose plants are not yet completely rebuilt. The members were also unable to arrive at an agreement to keep out of each others' markets. There were also indications that grave difficulty will be experienced when the division of export markets in South America and the Far East is attempted.

These problems are typical of those lying in the way of the cartel movement and indicate all too clearly that even under supposedly favorable conditions in closely controlled industries, or in monopolies under governmental patronage, the problem of closely-knit, unified operations is still far from solution.

The Franco-German dyestuffs cartel is one of the most recent and significant of these newer undertakings. It involves a division of markets, the establishment of export quotas, and an agreement upon prices. The export quotas have been fixed at approximately 80 percent for Germany and 20 percent for France on the basis of the average gold value of the dyestuffs exported during 1924-26. Negotiations are under way with British interests, and, if these are successful, it is understood that the export quotas will be redistributed by the assignment of 75 percent to Germany, 12 percent to France, and 13 percent to England. It is said that negotiations are being retarded because of some official British opposition, since dyestuffs are so closely associated with national defense. There is also said to be some disagreement as to the disposition of the colonial trade -- whether it should be regarded as trade of Britain's home market or of the general export field.

There have been some rather interesting arrangements made regarding the joint distribution of the products involved in this entente. The Germans are to act as distributors of French dyestuffs in the Far East and the French are to reciprocate on behalf of German products in Spain and parts of Africa. Furthermore, the French agree to refrain from manufacturing certain grades which are to be supplied by Germany. The control bureau which is in charge consists of five Germans and two French, but all important decisions must be unanimous to become effective. Much is expected of these joint distributive arrangements in the way of reducing overhead costs, which according to the officials of the organization should be cut by at least 50 percent. In neutral quarters, however, this estimated savings is considered to be high, and it is thought that 30 percent would be nearer the correct figure. The entente also has brought about the interchange of patent rights and technical aid, within limitations. There has been some intimation recently that the establishment of the entente has encouraged some of its members to take further steps towards a closer amalgamation of the industries through the acquisition of stock, but this is not believed to have made much headway. Industrial circles generally regard the Franco-German dyestuffs accord as but the first step in the development of a chemical entente throughout Europe.

In the case of this chemical group, as in several others, the leadership assumed by the German industries has been possible partly because of their much more highly concentrated control. In fact, the extent of the movement toward horizontal trustification since the inflation period has been brought forth conspicuously in connection with this German leadership in the cartel movement. 98 percent of the capital engaged in the potash industry is thus combined within Germany. The chemical industry has 96.3 percent of its capital in the hands of closely controlled combines. Other industries so controlled are: coal mining, 93 percent; electrical manufacturing, 87 percent; iron and steel industry, 80 percent; and insurance, 77 percent. In fact, according to one estimate, only in the wood industry is the portion under such combine control less than twenty percent of the total capital.

The lack of such concentration of control in other countries makes their participation in international cartelization somewhat more difficult. In the case of France, the negotiations for the dyestuffs accord instigated the establishment of a central committee of the chemical union, which is the trade association of that industry in the country. As a prelude to the participation of the Belgian manufacturers, a chemical union was also formed in that country and empowered to speak for its membership in the negotiations with the cartel. A similar merger of Polish steel interests came about as a prelude to Poland's participation in the steel cartel. As a further phase of this development, there have been stimulated in various countries, notably France, a series of purely domestic sales agreements, as, for example, in the case of finished steel and structural shapes.

The discussions of this problem at the World Economic Conference at Geneva in May, 1927, brought out the grave doubts which still prevail in many circles as to the desirability of this whole movement from the point of view of goodwill and general European welfare. It was realized that "controlled rehabilitation" was, broadly speaking, much more desirable than the wholesale squandering of energies in nationalistic excesses. Any contribution toward economies in production and distribution and the elimination of wasteful practices and drastic competition was recognized as helpful. The discussions indicated the gravest doubts, however, particularly on the part of representatives of labor and of various consumer groups, as to the reactions which widespread international cartelization might have upon them. They cited instances of the persistence of such cartels in failing to pass along the resultant benefits of economies either to labor on the one hand or to their ultimate consumers on the other. The quandary of the Conference was clearly indicated in its resolutions that it was impossible to establish any definite principles for the guidance of the cartel movement, which was simply a development that "has to be recognized and which from the practical point of view must be considered as good or bad according to the spirit which rules the constitution and the operations of the agreements, and in particular according to the measures in which those directing them are actuated by a sense of the general interest." As Mr. E. E. Hunt of the American Delegation pointed out, the discussion took on many of the aspects of the debates over "good" and "bad" trusts in the United States some thirty years ago. Taking another leaf out of the book of America's experience with big business, the Conference resolutions stated that "the publicity given in regard to the nature and operations of these agreements constitute one of the most effective means, on the one hand, of securing the support of public opinion . . . and, on the other hand, of preventing the growth of abuses."

A determined effort was made to set up some form of superbureaucratic control over the entire movement -- some international agency which should act not simply as a registration bureau of such understandings but possibly as an informational and even regulatory body. It was gratifying to note, however, that this proposal, though strongly advocated by certain leaders, was emphatically vetoed. This position was taken especially in view of the fact that there is the widest divergence in the specific legislative and administrative measures adopted in the various countries with reference to such pooling arrangements, and that this divergence made quite impossible the establishment of any such international "juridical régime".

The limit of the proposals of the Conference in this direction was that arbitral bodies should be set up to adjust any disputes among various cartels and that the League of Nations organization should follow developments closely and facilitate the collection of statistics either on its own account or in collaboration with various governments, in order that there might be the widest publicity with regard to the essential facts on production, price movements, world supplies, and other elements. The implication was clearly that nothing should be left undone to assure the consumer of accurate knowledge so that he might not be misled through any misrepresentations by international industrial groups.

The doubts voiced by the labor representatives at this Conference were based primarily upon the fear of exploitation of labor by strongly intrenched international combines and monopolies. There was also the fear that the sudden and widespread introduction of labor-saving machinery as a part of the rationalization programs of the cartels might seriously disrupt the labor market. Indeed with unemployment still a paramount problem in several countries, with the unemployed both in Germany and England periodically exceeding one million, the social and political as well as specifically industrial aspects of this problem are too obvious to be overlooked. If the cartel movement does involve (as has been intended) any considerable adaptation of American labor-saving devices, it is difficult to see how serious labor difficulties can be avoided. Indeed, there have already been intimations that this may occur in the case of the continental iron and steel group.

As a possible corrective of this danger that the international cartels may produce an economic oligarchy, with ominous consequences not simply to the economy of Europe but even to the preservation of the new European democracy, it has been suggested, notably by Francis Delaisi, that some form of tripartite understanding be set up within each cartelized trade or industry. These understandings should comprise the point of view not simply of producers but also of labor and of consumer groups. From the standpoint of the producers, the international cartel has thus far given some promise of more stabilized trade conditions. As the movement succeeds in this aspect, however, the other two elements in the economic picture also clearly become concerned.

Unless some attempt is made on the part of the producer groups at least to consult and win the friendly support of consumers, it is quite obvious that the latter may resort to some corresponding protective device. This may quite likely take the form of buyers' combinations. Indeed the Newton Bill, now pending before Congress, is an evidence of the likelihood of such a development. This measure, which has had the strong support of large groups of consumers of imported raw materials, notably rubber, potash, and sisal, is intended to afford some measure of defense against possible exploitation by foreign combinations operating in the American market. Among the qualifications stipulated for these consumer combines (which would thus be exempted from the antitrust laws) is that they shall not enter into any agreement which will artificially or intentionally enhance prices or lessen competition within the United States. They are not to discriminate in their sales or redistribution of the given commodities, nor are they to accumulate excessive stocks.

Industrial leaders in this country seem to feel that the cartel has thus far manifested no serious perils from the point of view of American trade, that it has, indeed, contributed some elements of stability to the international traffic in a few commodities. Nevertheless, in view of the clear prohibition against such organizations when operating under American laws, and particularly in view of the increasing concern of consumers and labor leaders, the further development of these ententes will be most carefully scrutinized. Undoubtedly they may in the future contribute an element of harmony to the general international situation, as they have been doing in the recent past, and undoubtedly in many respects they afford a better solution of the vexatious problem of unwarranted continental trade barriers and restrictions than could be expected from international political pacts, tariff unions, and similar devices, fraught as these are with all of the uncertainties of demagogic patrioteering and diplomatic bickering. But the industrial and commercial world is still a long way from abandoning its belief in individualism and competition. It is interested, of course, in the newer developments of these ententes and in the contributions which they admittedly are making toward more orderly trading and production, but it is by no means ready as yet to accept them as the harbingers of a new industrial and commercial revolution.

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  • JULIUS KLEIN, Director of the Bureau of Foreign and Domestic Commerce in the Department of Commerce
  • More By Julius Klein