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Advertising at War
BUSINESS, CONSUMERS, AND GOVERNMENT IN THE 1940S
By INGER L. STOLE
UNIVERSITY OF ILLINOIS PRESS
Copyright © 2012 Board of Trustees of the University of Illinois
All right reserved.
ISBN: 978-0-252-03712-2
Chapter One
Prelude to War
The advertising industry concluded the turbulent decade of the 1930s with some sense of accomplishment. Its public relations campaigns appeared to have marginalized the consumer movement's most radical demands, and the five-year battle over federal regulation of advertising had culminated in the Wheeler-Lea Amendment, a law that for all practical purposes sanctioned existing advertising practices. Nonetheless, the years from 1938 through 1941 were fraught with danger in the minds of industry leaders, who perceived the notorious New Dealers to have intensified their critical stance toward advertising as the decade drew to a close. Many were of the opinion that the federal government was determined to crack down on advertising, or even destroy it.
A series of events reinforced this notion. One was the formation of the Temporary National Economic Committee (TNEC) in 1938. Although the committee's objective was not specifically to investigate advertising practices, its focus on monopoly building cast advertising as a tool used in the creation of uncompetitive markets and as an impediment to economic recovery. Subsequent investigations by the Federal Trade Commission (FTC) were more explicit in this regard and put the advertising industry in a defensive stance. While the industry worked frantically to debunk the claim that it was fostering monopolistic tendencies, the escalating war in Europe generated additional concerns. Raw materials were becoming increasingly scarce as production shifted from consumer to military markets, causing critics to question the need for advertising of consumer goods. Promotion of products that were in short supply might have an inflationary effect and could lead to the emergence of black markets. A series of bills were proposed in Congress that would have effectively halted advertising during the war, leaving advertisers to fear that the public might not be eager to return to an advertising-laden society once the fighting was over. The industry was faced with a formidable challenge in attempting to justify its role in the economy and fight back.
Advertising, Business Concentration, and Antitrust
Problems surrounding economic concentration and monopolistic tendencies had been an ongoing concern in the United States since the latter part of the nineteenth century. Congress had responded by passing the Sherman Antitrust Act in 1890, which prevented monopolies and cartels from obstructing competition and harming consumers in the marketplace. Enforced primarily by the Antitrust Division of the Justice Department, the law prohibited contracts, combinations, and conspiracies in restraint of trade, as well as monopolization, and it prescribed substantial fines, even prison terms, for violators. But the legislation was far from perfect. If a corporation violated the law, it could simply dissolve and reorganize as a new corporate entity. And because corporations had traditionally been created by state governments, they were not subject to federal control and oversight.
Concerns about corporate dominance of markets continued into the twentieth century, becoming a cornerstone of Theodore Roosevelt's presidency. In 1914, Congress augmented the Sherman Antitrust Act with the Clayton Antitrust Act, which addressed specific types of restraints not covered by the 1890 measure, including exclusive dealing arrangements, tie-in sales, price discrimination, mergers and acquisitions, and interlocking directorates. With the Justice Department's Antitrust Division and the Federal Trade Commission jointly overseeing compliance, it was quickly apparent that the new law would not be vigorously enforced.
Business consolidation continued to strengthen after World War I and had become a problem by the time the nation plunged into the Great Depression in the 1930s. Many blamed the economic stagnation on monopolistic pricing structures and production restraints. Between 1930 and 1938, the per capita U.S. income was $397 a year, down from $606 in the previous decade. The decrease was shared by all segments of the population. By 1937 the economy had finally returned to 1929 output levels, and unemployment had been reduced from a peak of 25 percent to 14 percent. The Depression appeared to be over. Then the economy unexpectedly went into a tailspin: by early 1938, manufacturing had fallen 30 percent from its 1937 high, five million additional Americans were out of work, and the unemployment rate was nearing 20 percent. The economic crisis, now approaching a decade in length, began to look as if it might never end.
Some liberal economists, joined by Thurman Arnold, the assistant attorney general in charge of the Antitrust Division, saw this as an opportune moment to turn their attention to the question of monopoly and stagnation. They wanted to explore how concentration and market control were contributing to the sluggish economy, which had left factory capacity unused and millions of workers unemployed. They argued that firms in highly concentrated industries had gained the power to control prices, in terms not only of what to charge for their products but also what they were willing to pay their suppliers. This meant that a few large firms enjoyed immense power over their individual markets, thereby preventing the economy from becoming efficient. These giant firms in largely noncompetitive markets could use their economic leverage to force suppliers to sell raw materials at low prices. But because they had a large reserve of capital, they were not forced to sell their own products at low market prices; they were able to hold on to their inventory until higher prices could be commanded. This upset the economy. With few people buying products, production was cut to limit the accumulation of surpluses, which resulted in a vicious cycle of unemployment and weakened purchasing power. Monopolistic (or what we today would refer to as oligopolistic) markets, Arnold suspected, might well be exacerbating the economic stagnation and depression.
Seeking to get the economy back on track, Arnold and other influential members of the Roosevelt administration argued that stricter enforcement of the antitrust laws was the best strategy for securing free markets and policing monopolistic tendencies. If individual markets could be opened to a larger number of players, suppliers of raw materials would be able to sell at a fair market price instead of being limited to the artificial price ceilings set by a few powerful firms. Similarly, if producers had to compete for consumers on the basis of the price and quality of their products rather than trademarks developed through advertising, prices would come down and consumers would trickle back into the marketplace, gradually increasing the demand for goods and effectively bringing the economy back on track. Economic inequality would be lessened as workers' incomes rose, and that money would be spent, thereby spurring more investment and economic growth. The key to economic recovery was to move back toward market freedom and away from monopoly. This, however, was easier said than done, because even business interests acknowledged that "the corporate form has a tendency toward concentration."
The Temporary National Economic Committee
In the late 1930s, the country found itself at a rare political moment. It was then that American corporate capitalism was subject to the most intense level of scrutiny in the nation's history, accompanied by fundamental questioning about its suitability. Economists and New Dealers were increasingly gravitating toward the conclusion that monopoly (and its resulting inequality) was the explanation for the stagnation in the nation's economy. Frustrated by not gaining traction for a serious antimonopoly program at the Department of Justice, Arnold was pleased to offer his blessing and promise of cooperation when Congress decided to pursue the matter.
After a series of legislative deliberations, the Temporary National Economic Committee—commonly referred to as the Monopoly Committee—was established by a joint congressional resolution on June 25, 1938, with a mandate to study the "concentration of economic power in American industry and the effect of that concentration upon the decline of competition." Noting that "concentration of private power had escalated to unparalleled historical levels with the result of seriously impacting the economic effectiveness of private enterprise," President Roosevelt expressed hope that an investigation into these practices might reveal strategies that could "make the American way of living work more effectively" and lead to a "more equitable distribution of income and earnings among American people." While advertising was never the specific focus of any TNEC investigation, its role in protecting markets and preventing competition reappeared in hearing after hearing, leaving many industry leaders ill at ease.
Congress initially allocated $100,000 for the committee and an additional $400,000 for the government departments and agencies that were expected to work closely with the TNEC, including the Department of Justice's Antitrust Division, the Federal Trade Commission, the Securities and Exchange Commission, the Treasury Department, the Commerce Department, and the Labor Department. In an effort to show that there was broad support for the effort, members were drawn from the administration and from both houses of Congress. Joseph O'Mahoney, a Democratic senator from Wyoming, was tapped as the TNEC's first chairman, while Leon Henderson, the chief economist of the Public Works Administration, served as executive secretary.
The Twentieth Century Fund, a philanthropic foundation started by the liberal businessman Edward Filene, had begun a study on "big business" in the United States as early as 1934, but a few years later the organization found itself overwhelmed by the scope of this undertaking. Thus its researchers were happy to transfer their records and findings to the TNEC, a government outfit with far more resources at its disposal. The committee's first task was to review the existing federal economic policies in order to formulate a plan for better distribution of national income and full employment of "men, materials, machines, and money." Working at breakneck speed during the fall of 1938, the group established the groundwork for public hearings on monopoly-related issues. In spite of loud grumbling from some business circles, in which the committee was viewed as yet another New Deal strategy for "putting the blame on business," the National Association of Manufacturers, the American Bar Association, and the United States Chamber of Commerce lent their support. The time was not right for a business attack on government, and the government's public pronouncements were all conciliatory toward free enterprise. "No one," promised Chairman O'Mahoney, "will gain more than business from whatever steps are taken to define and clarify the role of Government as traffic officer in enforcing the rules of fair competition." This meant taking stock of what individual companies and industries were doing to meet their social responsibilities.
One year after the committee's inception, more than twenty experts were at work writing and supervising the preparation of monographs on various aspects of concentrated economic power. The publications fell into three general categories. One group produced historical, analytical, and statistical surveys of the status of competition and the nature and extent of concentration of economic control. Another analyzed data and made recommendations on how to deal with problematic issues. The third group evaluated the applicability of available devices for freeing the economy from the effects of monopoly control. The TNEC's intention, explained Leon Henderson, was to present through reports and hearings "a series of typical situations, drawn from different industries, and illustrating different problems," and to analyze the significance of the varied situations for the "complicated and dynamic process which constitutes American industry." If an investigation disclosed the existence of a harmful monopolistic condition, the corrective process under the antitrust laws would be set in motion, with the violator facing either criminal or civil prosecution or a combination of the two.
The committee was quick to point out, however, that its purpose was not to single out businesses as bad, or to frighten anyone, but merely to apply antitrust regulations to determine whether an industry had gone so far along the path of monopoly control that competition was being hampered. The TNEC asked two basic questions in its detailed case study of American business. First, it asked whether a particular business combination had gone beyond the necessities of efficient mass production and become an instrument of arbitrary price control. Second, it asked whether the marketing practices in an industry—of which advertising was generally far and away the largest expense—tended merely to create orderly marketing conditions in which competitors could exist, or whether they were used to prop up rigid prices and maintain market control. The stakes were high. Unless the government was willing to close the door on the arbitrary power exercised by private organizations and give the free enterprise system a chance, warned O'Mahoney, "we shall have a terrible time preventing the exercise of arbitrary power by the Government."
Between 1939 and 1941, the TNEC spent more than $1 million, had a staff that included 182 experts, fully examined 95 different industries, and took testimony from 552 witnesses. It left a permanent record consisting of 37 volumes of printed testimony and 43 exhaustive monographs on various phases of its study. "There never was before, and may never be again, quite such an economic study as the committee closed its books on," Time magazine wrote in 1941. "It made headlines month after month with sensational charges of patent monopoly in the glass-container industry, of international patent combines which put Germany's finger in the U.S. magnesium and optical-glass industries, etc." The publicity helped the TNEC generate large numbers of letters from citizens urging the government "to pursue the good work more vigorously and to take off the back of consumers the enormous spending of advertising." One of the committee's rather disturbing conclusions was that out of the hundreds of American industries, only four or five firms controlled between 50 and 75 percent of the output, which effectively gave them control over the smaller firms in their fields. And as manufacturers were soon to discover, advertising emerged as one of the culprits responsible for keeping markets noncompetitive. "Advertising," reported a writer for the Christian Science Monitor, "appears to be under both political and economic attack, and advertising men are becoming increasingly concerned." The ideological raw material for a number of blows to the industry could be traced to the first TNEC monograph, Price Behavior and Business Policy, especially the chapter titled "Advertising Brands, and Trade-Marks," with its expressed distrust in the economic usefulness of advertising and its particular disdain for brand names.
Special TNEC hearings to investigate "Problems of the Consumer" were held in May of 1939, putting advertisers on further alert. Some of the testimony went to the heart of parity advertising as a noncompetitive force. One of the most damaging witnesses was Jerome W. Ephraim, a New York City cosmetics manufacturer. After carefully researching the medical literature on oral hygiene, Ephraim had developed a toothpaste of such good quality that the American Dental Association recommended it to their patients. Ephraim had sent samples to major drugstore chains, mail-order houses, and department stores, but he was unable to break into the market. The story was the always the same: he was complimented on the quality of his product, and manufacturers found his price to be fair, but nobody wanted to carry his toothpaste unless he would agree to a massive advertising campaign, at a start-up cost of $100,000, to build up demand. With ten brands of toothpaste controlling 90 percent of the market and those manufacturers able to lay out millions of dollars to tout the superiority of their brand over one that was nearly identical in quality, Ephraim was up against a stone wall of monopolistic competition. "If I go into the open market today," he stated, "I can't do that at all, because the basis of competition there isn't the basis of quality and price, it is the artificial basis of brand competition."
(Continues...)
Excerpted from Advertising at War by INGER L. STOLE Copyright © 2012 by Board of Trustees of the University of Illinois. Excerpted by permission of UNIVERSITY OF ILLINOIS PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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