82 IN RESTRAINT OF TRADE

developments discussed earlier and the unrestrained, aggressive practices of

one's competitors reinforced business understanding of the proposition later
put forth by Mancur Olson: that the competitive self-interests of individual
firms will work to the detriment of the collective interests of the industry
.
itself "unless there is coercion . . to make individuals act in their common
interest." The centralizing demands of'the new industrial order that had
been impressing its character upon American society caused many business
leaders to begin experimenting with various political formulas to reorient
the perspectives of businessmen.

One of the initial efforts of trade associations to obtain some degree of

government approval and enforcement of codes of business practices involved
the "trade practice conferences" established and conducted by the Federal
Trade Commission. The FTC had frequently received complaints from in-
dustry members concerning trade practices that were so pervasive within
particular industries that it would have been fruitless to attempt to deal with
them on the basis of formal proceedings against each firm engaging in the
practices. Consequently, as early as 1919 the FTC began inviting members
of specific industries to participate in conferences designed to identify trade
practices that were felt by "the practically unanimous opinion" of industry
members to be unfair. As already noted, individual firms were unwilling to
adhere to more passive trade standards, not only for the self-interest motiva-
tions mentioned by Mancur Olson but for the correlative reason that they
knew their competitors would also deviate from agreed rules. While the ear-
liest conferences were initiated by the FTC itself and were without any spe-
cific statutory authorization, it did not take long for trade associations and
industry members to see in such machinery an effective method for the en-
forcement of those rules which, it was hoped, would stabilize the conditions
so many had found so intolerable. The conference procedure was, apart from
the enforcement offered by the FTC, rather close in concept to the trade
association "codes of ethics," making it a readily acceptable political alter-
native to the more disappointing voluntary efforts. As a result, the trade
practice conferences received the active support of the U.S.Chamber of Com-
merce and other trade groups throughout the 1920s and up into 1931 when,
as a consequence of the FTC suddenly reducing the scope of trade practice
rules, many within the business community began actively promoting alter-
native programs, some of which were to ultimately become part of the New
Deal's National Industrial Recovery Act.14
The basic procedure governing a trade practice conference involved the
 3 / POLITICAL ALTERNATIVES 83

FTC inviting the members of a specific industry to attend a conference, at

which a discussion of trade practice problems and proposed solutions would
take place under the general supervision-though not the direction-of a
representative (ordinarily a commissioner) of the FTC. Complaints regard-
ing existing conditions and proposed rules to deal with such conditions came
from industry members themselves, with the commission playing a role more
akin to that of a moderator than that of an ultimate authority. Industry
members 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 practically
unanimous opinion of the representatives of the industry condemns a given
..
practice . [it] is given great weight by the Commission in considering such
practices."ls It must be emphasized that such industry expressions did not
obligate the FTC to follow any of the recommendations made at the confer-
ence. Though such expressions were purely "advisory" in nature, it is also
correct to point out that, to the degree they represented a consensus of opin-
ion within the industry, they tended to have a great deal of influence with the
FTC as statements of the "common law" for that industry. The commission's
attitude toward such declarations was stated rather succinctly: "The effect is
that the weight of opinion of the industry has been communicated to the
Commission and that thereafter the Commission will feel it to be its duty in
case complaints are made to it of a continuance of the condemned practices
..
on the part of any member of the industry, to issue its formal complaint. ."I6
It is understandable, then, that the business community saw in the trade
practice conferences a greater potential for the enforcement of industry stan-
dards than what had existed in the trade association-formulated codes of
ethics. Despite the commission's having acknowledged that the enforceabil-
ity of rules emanating from such conferences would ultimately be subject to
judicial review, any experienced legal counsel could give adequate assurance
to his clients-at least at this point in time -that the courts would tend to
give a stamp of prima facie "reasonableness" to rules that represented the
nearly unanimous thinking of industry members who had participated in the
formulation of such rules under the auspices of the FTC.
The rules that came out of the conferences and were approved by the
FTC fell into two categories: Group I rules and Group I1 rules. Group I rules
were considered by the commission as expressions of the prevailing law for
the industry developing them, and a violation of such rules by any member
of that industry-whether that member had agreed to the rules or not-
would subject the offender to prosecution under Section 5 of the Federal
Trade Commission Act as an "unfair method of competition."17 Although a
number of business leaders and trade association executives were fond of
speaking of the "voluntary" nature of the trade practice conferences, there
was no question as to the binding nature of Group I rules on all members of
84 IN RESTRAINT OF TRADE

a 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 or
..
not. ."I8
Contained within Group I were rules that dealt with practices consid-
ered by most business organizations to be the more "disruptive" of stable
economic conditions. Generally included were prohibitions against inducing
.
"breach of contract; . . enticement of employees; . . . espionage; .. . dispar-
.. ..
agement of competitors; . commercial bribery; . price discrimination by
secret rebates, excessive adjustments, or unearned discounts; ... selling of
goods below cost or below published list of prices for purpose of injuring
..
competitor; misrepresentation of goods; , use of inferior materials or de-
viation from standards; [and] falsification of weights, tests, or certificates of
manufa~ture."'~ While 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 effect
upon the competitors of firms employing such methods.
Group I1 rules, on the other hand, dealt with practices that the courts or
the FTC had not generally held to be unlawful per se. They usually were
practices that were objectionable to members of a specific industry but were
not universally regarded as "unfair methods of competition" within the
meaning 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 had
actually agreed to them, a fact that prompted FTC chairman Abram F. Myers
to observe that the absence of enforcement against nonsigners was "a seri-
ous stumbling block" to business efforts on behalf of self-regulation.'O
The basic content of trade practice conference rules, whether of the Group
I or Group I1 variety, did not generally differ from the trade association
codes of ethics. What did differ, of course, was that the FTC now afforded a
means for the enforcement of such rules, with the categorization of rules
into either Group I or Group I1 determining how and against whom such
rules would be enforced. To illustrate the point, a trade practice submittal of
the National Petroleum Marketers Association, adopted in 1920, contained
a provision outlawing cash discounts and secret rebatesa21The trade practice
rules for the oil industry, adopted the same year, provided for uniform agency
and tank rental agreements, with minimum rental rates established. Cash
discounts were also prohibited. The 1928 rules for the petroleum industry in
Virginia required, as a Group I rule, the posting of and adherence to selling
prices, along with the prohibition of any discounts, while the Group I1 rules
sought to discourage the direct sale of petroleum from bulk plants into the
 3 / POLITICAL ALTERNATIVES 85

buyers' 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 that
banned, among other practices, "commercial bribery" and "paid commer-
cial advertising from motion picture exhibitions" (Group I), as well as "fake
motion picture acting school^'^ and "deceptive titles" (Group II).23The gro-
cery trades, responding to the intense competition generated for the most
part by the chain stores, adopted proposals seeking to restrict such price-
lowering practices as "secret rebates," "free deals," "premiums, gifts, or
.
prizes," "selling . . below delivered cost," and "price dis~rimination."~~
That such rules and proposals were principally reactions against the very
aggressive competition taking place within these industries, and not a "mor-
alistic" response to corporate fraud and corruption, will be more evident
from 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 rules
to prohibit the more energetic competitive modes was rather predictable. As
Kittelle and Mostow have noted:

A study of trade practice submittals and rules issued prior to 1930 indicates
that businessmen, in requesting conferences, were not always motivated by a
desire to help the consumer. Many were unquestionably hopeful of achieving
some measure of price-fixing or control over production or the channels of
distribution; and some of the early rules went rather far toward making this
hope 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 to
regard as 'unfair competition' almost any kind of active competition that
discommoded 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 from
shaving prices to win a new customer, and thus eliminate one of the leading
inducements for price competition. " 2 6
The role that the trade practice conference played as a tool for business
self-regulation was noted by M. Markham Flannery, director of trade prac-
tice conferences for the FTC: "Never in the history of American business has
there been a time when self-regulation has received more intensive consider-
ation." Discussing the role of trade practice conferences in the self-regulatory
scheme, Flannery pointed out what others had observed: effective self-regu-
lation was dependent upon the establishment of rules that could be enforced
86 IN RESTRAINT OF TRADE

against violators, a function for which the conferences were best suitede2'
Edwin B. Parker praised the trade practice conference as "an expeditious
and economical means of eliminating the use of unfair methods of competi-
tion," adding that such "voluntarily" adopted rules would, when ratified by
the FTC, become "the rule of business conduct for that industry." Such a
procedure, Parker concluded, "offers to business an opportunity in good
faith to set up simple machinery in each trade, diligently to seek out the
abuses which unquestionably exist to a greater or less extent in every indus-
try, and to take effective measures to eliminate them."28
Echoing these views was 0. H. Cheney, who observed that "about the
only way to regulate business effectively is to let it regulate itself by giving
the best thought and character in an industry a chance to come to the top,
and to back it up with the police power of the Comrnis~ion."~~ In his opin-
ion, then, the "self-regulation" was presumably to be subject to enforcement
by the federal government and was not to be "voluntary" in the sense that
any recalcitrants could avoid adhering to the standards developed by mem-
bers of the industry.
Retailer Lincoln Filene's appraisal of the trade practice conference pro-
cedure was that "it was a definite forward step in the general movement to
make industries 'self-regulating' so far as unfair trade practices are concerned,
and to tie in the self-regulating process with the only federal administrative
body then in existence to cooperate with and to enforce the conclusions of
the industry." Filene saw in such procedures the possibilities for FT.C activ-
ity in areas in which the NRA later became involved. In his view, trade prac-
tice standards upon which an industry could not reach agreement could be
determined by the FTC itself. The consequence of following such principles
would be, according to Filene, "to build a structure of lasting value to busi-
ness and to the community," one that would be consistent with his long-held
goals of competitive regularization for the retailing trades30

A number of proposals for the establishment of regulatory machinery,

patterned on variations of the trade practice conferences, were made by busi-
ness leaders during the postwar decade. One such plan, put forth in 1924 by
Bernard Baruch, envisioned the creation of a so-called Court of Commerce.
Such a court would, in his mind, provide business with a tribunal for seeking
to stabilize business conditions. The procedure employed would be much
like the seeking of a declaratory judgment. Businessmen would appear be-
fore the court "with such questions as whether in time of overproduction
and low prices they could cut down production and fix a price." Baruch