DEPARTMENT OF STATE Publication 2889 Commercial Policy Series 103 Reprinted from the Department of State Bulletin of May 11 and Isaiah Frank, author of the first article, is Chief of the Special Areas Section, Industry Branch, International Resources Division, Office of International Trade Policy, Department of State Raymond Vernon and Carolene Wachenheimer are members of the staff of the International Resources Division, Office of International Trade Policy, Department of State; Mr. Vernon is Assistant Chief, and Miss Wachenheimer is an Economist For sale by the Superintendent of Documents, U. S. Government Printing Office, Washington 25, D. C. · Price 10 cents 4-19-54 HE 1-155 .04. 10.103 AMERICAN POLICY CONCERNING GERMAN MONOPOLIES by Isaiah Frank A key element in American policy toward Germany is the elimination of excessive concentrations of economic power. The manner in which we are attempting to achieve this objective is presented against the background of the role played by German combines and cartels in the past. On February 12, 1947, laws entitled "Prohibition of Excessive Concentration of German Economic Power" were simultaneously promulgated by the military governments in the United States and British zones of Germany. Although it is premature to attempt an appraisal of the actual effect of these "decartelization" laws on the structure of German industry, their enactment signifies the culmination of about a year and a half of effort at statutory implementation of the Potsdam provision that "At the earliest practicable date, the German economy shall be decentralized for the purpose of eliminating the present excessive concentration of economic power as exemplified in particular by cartels, syndicates, trusts and other monopolistic arrangements." An analysis of the economic and political basis for American policy concerning German cartels and combines would lie beyond the scope of the present article. Three considerations, however, may be mentioned as of paramount importance. (1) It is recognized that the emergence in Germany of a liberal democratic government would be prejudiced if the economic power concentrated in the hands of German monopolists could be used in the political sphere to pursue their traditional anti-democratic aims. (2) Our conception of a post-war world free from restrictions on production and trade imposed by international cartels and combines could scarcely be realized if steps were not taken now to prevent the future resumption of German in!dustry's role as organizer and leader of restrictive organizations. Internal combination and carteliMay 11, 1947 zation of German industry served as the essential basis for her sponsorship of such organizations in the international field. (3) Allied security interests require the elimination of German monopoly. In combination with other important elements in German society such as "Junkerdom" and a militaristic tradition, the monopolistic organization of German industry has served indirectly as a cause of aggression. Monopoly leads to high prices, reduced output, and excess capacity with resultant pressures to engage in dumping or to enlarge the protected market through territorial conquest. In addition a monopolistic industrial structure tends to increase the rate of profit and therefore of savings while at the same time reducing opportunities for independent investment. Under normal conditions of private capitalism this situation typically aggravates the problem of unemployment and maldistribution of income and makes for political instability and extremism. This article presents briefly a statement of the position which monopolies occupied in Germany both before and during the Nazi regime and an account of attempts by the United States to deal with the problem since the end of the war. cartels. Though both forms of organization have assumed numerous variations, the combine may be described essentially as an enterprise uniting under common ownership or management competitors (horizontal combine) or producers at several stages in the production process (vertical combine). Cartels, on the other hand, are contractual arrangements among legally independent enterprises for the purpose of avoiding or reducing competition. Though the controls bearing on any particular market situation were likely to consist of elements of both types of arrangements, the cartel was in a sense a secondary manifestation of the condition in which a relatively few firms controlled a large part of German capital and production. In fields where powerful combines existed the pressure was strong upon all firms in an industry to conform to their policies through participating in a cartel. in th dation of su at the 2 busi int Sand Concentration was further encouraged before and during World War I by the allocation of Government armament orders which constituted the largest single outlet for the productive capacity of heavy industry. After the war the inflation wiped out substantial elements of small and medium-sized business and left the combines in a position to acquire additional properties at bargain rates. The merger process was abetted by the use for such purposes of indemnities received by heavy industry for the loss of properties in Lorraine and Silesia. In this connection it should be noted that, although the process of trustification Despite relied for its political support upon the conservative elements in the community, it was never vigorously opposed by the Left, which regarded industrial concentration as a process that would facilitate the tasks of socialization. The prototypes of the combines were those within so-called "heavy industry." Single Konzerne controlled extensive mining properties, coking plants, iron and steel works, heavy engineering works, and in a number of cases inland navigation companies. They dominated the Rhine-Ruhr region, the middle German industrial region, and Upper Silesia. The merger and growth of large firms both vertically and horizontally spread from iron and steel and its closely allied industries to chemicals, the electro-technical field, light metals, and later the great synthetic industries, including textiles. The effectiveness of cartel controls in Germany was in good measure a consequence of the dominant role played by the big combines. Though small and inefficient enterprises were sometimes kept alive under the protection of cartel agreements, basic policies were set by the larger firms. Voting power within the cartel was commonly based on a member's production quota, a circumstance which encouraged the merger process since the quota went along with the rest of the firm's assets. Cartelization also stimulated vertical combination as a device to avoid the necessity of purchasing materials in high-price, cartelized markets. Many reasons have been advanced for this growth of monopoly in Germany on a scale which has few parallels in industrially developed countries. Considerable emphasis is placed by some economic historians on the relatively late but rapid industrialization of Germany, accounted for in part by the lack of political unification during most of the nineteenth century. In other western countries technical knowledge and organizational forms developed slowly and were accompanied by the establishment of a strong and independent middle class with a tradition of economic liberalism and political democracy appropriate to such a social structure. In Germany, however, the compression of industrial development within a relatively short space of time meant the superimposition of large-scale industry upon a framework of institutions essentially pre-industrial or "feudal" in character. of her cola Ter to Membership in the pre-Nazi cartels was, at least nominally, voluntary except for a few cases such as coal and potash in which compulsory organizations were set up by special parliamentary enact ment. The freedom not to join and also to withdraw from cartels made possible in certain fields periodic outbursts of competition often induced by struggles surrounding the bargaining for higher quotas. Private market regulation of the cartel variety was a socially sanctioned and legally accepted way of doing business in Germany. Many court decisions reflected the view that price and quota agreements were a more civilized method of ordering the market than the "anarchy" of free competition. At times of national economic crisis, however, public sentiment became aroused against monopolies to the point where the Government was forced to take formal steps. The most sweeping of the Weimar decrees for the regulation of |