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82 IN RESTRAINT OF TRADEdevelopm ents discussed earlier and the unrestrained, aggressive practices ofone's com petitors reinforced business understandin g of the prop ositio n laterput forth by Ma ncur Olson: tha t the competitive self-interests of individualfirms will work to the detriment of the collective interests of the industryitself "unless ther e is coercion . . o make individuals act in their com moninterest." The centralizing demands of'the new industrial order that hadbeen impressing its character upon American society caused many businessleaders to begin experimenting with various political formulas t o reorientthe p erspectives of businessmen.

On e of the initial efforts of trade associations to obta in some degree ofgovernm ent approval and enforcem ent of codes of business practices involvedthe "trade practice conferences" established and conducted by the FederalTrade Commission. The FTC had frequently received complaints from in-dustry members concerning trade practices that were so pervasive withinparticular industries that it w ould have been fruitless to attem pt t o deal withthem o n the basis of form al proceedings against each firm engaging in thepractices. Consequently, as early as 1 91 9 the FTC began inviting mem bersof specific industries to participate in conferences designed to identify trad epractices that were felt by "the practically unanimous opinion" of industrymembers to be unfair. As already noted, individual firms were unwilling toadhere to more passive trade standards, n ot only for the self-interest motiva-tions mentioned by Mancur Olson but for the correlative reason that theyknew their com petitors would also deviate from agreed rules. While the ear-liest conferences were initiated by th e FTC itself a nd w ere without any spe-cific statutory auth orization, it did n ot take long for trade associations andindustry mem bers to see in such machinery an effective method for the en-forcement of those rules which, it was hoped , would stabilize the conditionsso many had found so intolerable. The conference procedure was, ap art fromthe enforcement offered by the FTC, rather close in concept to the tradeassociation "codes of ethics," mak ing it a readily acceptable political alter-native to the more disappointing voluntary efforts. As a result, the tradepractice conferences received the active suppo rt of th e U.S.Chamber of Com-merce and other trade groups throughout the 192 0s and up into 1 93 1when,as a consequence of the FT C suddenly reducing the scope of trade practicerules, many w ithin the business community began actively promoting alter-native programs, som e of w hich were to ultimately become part of the NewDeal's National Industrial Recovery Act.14Th e basic procedure governing a trade practice conference involved the


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3 / POLITICA L ALTERNATIVES 83FTC inviting the members of a specific industry to attend a conference, atwhich a discussion of trade practice problems an d proposed solutions w ouldtake place under the general supervision-though not the di re ct io n- of arepresentative (ordinarily a commissioner) of the FTC. Complaints regard-ing existing conditions and proposed rules to deal with such conditions cam efrom industry m embers themselves, with the com mission playing a role m oreakin to that of a moderator than that of an ultimate authority. Industrymembers were then invited to express themselves as to the fairness or unfair-ness of specific trade practices. In the words of the FTC, "If the practicallyunanimous opinion of the representatives of the industry condemns a givenpractice . . . [it] is given great weigh t by the Com mission in considering suchpractices."ls It must be emphasized that such industry expressions did notobligate the FTC to follow any of the recomm endations made a t the confer-ence. Though such expressions were purely "advisory" in nature, it is alsocorrect to po int o ut that, to the degree they represented a consensus of opin-ion within t he industry, they tended to have a great deal of influence with theFTC as statements of th e "com mon law" for that industry. The commission'sattitud e tow ard such declarations was stated rather succinctly: "The effect isthat the weight of opinion of the industry has been communicated to theComm ission an d tha t thereafter the Comm ission will feel it to be its duty incase complaints ar e made t o it of a continuance of the condem ned practiceson the pa rt of any member of the industry, to issue its form al complaint. . "I6It is understandable, then, tha t the business community saw in the tradepractice conferences a greater potential for the enforcement of industry stan-dards than what had existed in the trade association-formulated codes ofethics. Despite the commission's having acknow ledged tha t the enforceabil-ity of rules emanating from su ch conferences would ultimately be subject tojudicial review, an y expe rienced legal counsel could give adequa te assuranceto his clients-at least a t this point in time -that the courts would tend togive a sta mp of prima facie "reasonableness" to rules tha t represented thenearly unanimous thinking of industry mem bers wh o had participated in theform ulatio n of su ch rules under the ausp ices of the FTC.The rules tha t came ou t of the conferences and w ere approved by theFTC fell into tw o categories: Gro up I rules and G roup I1 rules. Grou p I ruleswere considered by th e commission as expressions of the preva iling law fo rthe industry d eveloping them, a nd a violation of such rules by any mem berof tha t industry-whether tha t mem ber had agreed to the rules or not-would subject the offender to prosecution under Section 5 of the FederalTrade Co mm ission Act as an "unfair m ethod of competition."17 Althoug h anumber of business leaders and trade association executives were fon d ofspeaking of the "voluntary" nature of th e trade practice conferences, therewas no question a s to the binding nature of G roup I rules on all members of


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84 IN RESTRAINT OF TRADEa given industry, regardless of whether a particular firm had ever "voluntar-ily" chosen to be bound by such rules. As one chairman of the FTC put it,"[Tlhe Commission undertakes to enforce compliance [with Group I rules]by proceeding against all violators, whether they have subscribed thereto ornot. . . "I 8Contained within Group I were rules that dealt with practices consid-ered by most business organizations to be the more "disruptive" of stableeconomic conditions. Generally included were prohibitions against inducing"breach of contract; . . enticement of employees; . . espionage; .. .dispar-agement of competitors; . . .commercial bribery; . . price discrimination bysecret rebates, excessive adjustments, or unearned discounts; . . . selling ofgoods below cost or below published list of prices for purpose of injuringcompetitor; misrepresentation of goods; . . use of inferior materials or de-viation from standards; [and] falsification of weights, tests, or certificates ofma nufa~ture. "'~ hile some of these rules involved efforts to restrain fraudu-lent practices that would harm consumers, most were clearly directed to-ward competitive practices that, it was feared, would have a harmful effectupon the competitors of firms employing such methods.Group I1 rules, on the other hand, dealt with practices that the courts orthe FTC had not generally held to be unlawful per se. They usually werepractices that were objectionable to members of a specific industry but werenot universally regarded as "unfair methods of competition" within themeaning of the Federal Trade Commission Act. Even though the FTC con-sidered the violation of a Group I1 rule to be an unfair method of competi-tion, this class of rules was considered binding only upon the firms that hadactually agreed to them, a fact that prompted FTC chairman Abram F. Myersto observe that the absence of enforcement against nonsigners was "a seri-ous stumbling block" to business efforts on behalf of self-regulation.'OThe basic content of trade practice conference rules, whether of the GroupI or Group I1 variety, did not generally differ from the trade associationcodes of ethics. What did differ, of course, was that the FTC now afforded ameans for the enforcement of such rules, with the categorization of rulesinto either Group I or Group I1 determining how and against whom suchrules would be enforced. To illustrate the point, a trade practice submittal ofthe National Petroleum Marketers Association, adopted in 1920, containeda provision outlawing cash discounts and secret rebatesa21 he trade practicerules for the oil industry, adopted the same year, provided for uniform agencyand tank rental agreements, with minimum rental rates established. Cashdiscounts were also prohibited. The 1928 rules for the petroleum industry inVirginia required, as a Group I rule, the posting of and adherence to sellingprices, along with the prohibition of any discounts, while the Group I1 rulessought t o discourage the direct sale of petroleum from bulk plants into the


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3 / POLITICAL ALTERNATIVES 85buyers' trucks. The millwork industry rules, adopted in 1928, required ad-herence to published prices by all manufacturers." A trade practice confer-ence for the motion picture industry, held in 1927, resulted in a code thatbanned, among other practices, "commercial bribery" and "paid commer-cial advertising from motion picture exhibitions" (GroupI), as well as "fakemotion picture acting school^'^ and "deceptive titles" (Group II).23The gro-cery trades, responding to the intense competition generated for the mostpart by the chain stores, adopted proposals seeking to restrict such price-lowering practices as "secret rebates," "free deals," "premiums, gifts, orprizes," "selling . . . below delivered cost," and "price dis~rimination."~~That such rules and proposals were principally reactions against the veryaggressive competition taking place within these industries, and not a "mor-alistic" response to corporate fraud and corruption, will be more evidentfrom the examination of specific industries in subsequent chapters.

Based upon the past efforts of many businessmen to foster more seden-tary methods of competition, the tendency of trade practice conference rulesto prohibit the more energetic competitive modes was rather predictable. AsKittelle and Mostow have noted:

A study of trade practice submittals and rules issued prior to 1930 indicatesthat businessmen, in requesting conferences, were not always motivated by adesire to help the consumer. Many were unquestionably hopeful of achievingsome measure of price-fixing or control over production or the channels ofdistribution; and some of the early rules went rather far toward making thishope a reality.They added what, by now, should be rather apparent, namely, that business-men, in seeking the prohibition of certain practices, "were all too prone toregard as 'unfair competition' almost any kind of active competition thatdiscommoded them, particularly if it related to price."2s A similar conclu-sion was drawn by Robert Himmelberg, who declared that "the codes be-came potential instruments for limiting competition. The blanket prohibi-tion of price discrimination would have the effect of preventing a seller fromshaving prices to win a new customer, and thus eliminate one of the leadinginducements for price competition. "26

The role that the trade practice conference played as a tool for businessself-regulation was noted by M. Markham Flannery, director of trade prac-tice conferences for the FTC: "Never in the history of American business hasthere been a time when self-regulation has received more intensive consider-ation." Discussing the role of trade practice conferences in the self-regulatoryscheme, Flannery pointed out what others had observed: effective self-regu-lation was dependent upon the establishment of rules that could be enforced


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