Planning for Business Activity

Planning for Business Activity

The first business enterprises to come under governmental di­rection and control were the railroads. The period of expansion following the Civil War placed tremendous economic power in the hands of the railroads. Abuses in the operation of railroads could not be curbed by state action. Consequently in 1887 the federal government took the first step in that direction. The Interstate Commerce Act prohibited discrimination in rates and service, rebating and pooling. The Act was to be enforced by the Interstate Commerce Commission. Since that time the number of regulations and the power of the Commission have grown tre­mendously. The Commission must approve rail rates, schedules must be adequate for public service, accounts must be open to the public, and the Commission is empowered to investigate and recommend consolidation of railroads. Mergers or changes in the capital structure of a railroad must be approved by the Commission. In addition to railroads, the Interstate Commerce Commission also has general supervision over bus and truck lines, water transport and interstate pipe lines. Its original control over electric light and power, telephone and telegraph and radio has been given to two other federal Commissions, the Federal Power Commission and the Federal Communications Commission.

In addition to the railroads, other types of public utilities fell under government regulation. Street railways, electric, gas, and water companies were made subject to both the state and local governments because of the character of the business and the dependence of the public upon their services. The state govern­ments through the granting of franchises and the appointment of commissions have sought to guarantee the public adequate service at reasonable rates and at the same time see that the private owners of these utilities receive a fair return on their investment. To accomplish these aims has not been easy. Endless hearings, investigations, and legal disputes have arisen over questions of property evaluation, rate making formulae, and the rights of owners and consumers. Throughout, however, the ideal of the government has been to retain as much of private ownership and private initiative as the public welfare would stand.

The growing importance of the interstate business of public utilities, especially electric light and power companies, and the power and complexity of holding companies in this field led to federal regulation. The public utility holding company is a de­vice for consolidating the operation and enlarging the area of control of public utilities by means of a central company which owns a controlling interest in a number of operating companies. Undoubtedly economies of operation can be achieved by this centralized direction. Nevertheless, the abuses to which the hold­ing company easily lent itself were pernicious. It will be sufficient to cite two. Holding companies own no assets save the stock of operating companies. On the basis of such ownership, shares of holding company stock were sold to the public in order to in­crease the holdings of the holding company. This resulted not only in an overabundance of new stock issues without a corre­sponding increase in the capital equipment of the company, but it also made possible fraudulent manipulation of stock. Further­more, the holding company having a controlling interest in the operating company could force the latter to purchase goods and services from the holding company or from its affiliated com­panies at exorbitant rates, thus transferring the legitimate earn­ings of the operating company into fraudulent gains for "insid­ers" of the holding company. Recognizing the legitimate place that some holding companies held, the Public Utility Holding Company Act of 1935 outlawed all holding companies except those confined to single integrated utility systems, i.e. holding companies just once removed from operating companies. All holding companies are registered with the Securities and Ex­change Commission which exercises control over the financial or­ganization of the companies.

The traditional policy of the American government has as­sumed that consumer interest is best served by small competitive business units. Consequently the most striking characteristic of business regulation has been the regulation of trusts and monopolies. Although the evils of combination among large-scale industry were recognized in the decades of industrial expansion following the Civil War, no action was taken until 1890. Sporadic efforts at regulation under common law by the states proved wholly inadequate. The Sherman Act, passed in 1890, was the Congressional answer to the problem. The first provision of the Act states: "Every contract, or combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce among the several states or with foreign nations, is hereby de­clared illegal." Furthermore criminal prosecution of violators of the Act was provided.
Enforcement of the Sherman Act was in the hands of the At­torney General. Pressure of other work, however, and the un­sympathetic attitude of the courts, prevented adequate enforce­ment of the law. Prosecution of the trusts was almost a dead issue until the accession of Theodore Roosevelt to the presidency in 1901.

In making its decisions the Supreme Court gradually modified the original meaning of the Act; whereas the Act declared any combination in restraint of trade illegal, the Court said that dis­solution would be ordered only where the restraint of trade was unreasonable. This dictum has since become known popularly as "the rule of reason." Certain justification exists for this attitude on the part of the Court. All trusts are not harmful, or—as Theo­dore Roosevelt once said—there are "good trusts and bad trusts." Competition among industrial enterprises frequently leads to waste, destructive price wars, cheapening of products, and re­duction of wages. Certain industries cannot operate except as semi-monopolies. Therefore to enforce the law literally would have brought real hardship. On the other hand, "the rule of reason" opened numerous loopholes through which combinations could escape prosecution.

Agitation for a stiffening in the anti-trust policy resulted in the passage of the Clayton Act and the creation of the Federal Trade Commission. By these acts the scope of federal regulation was ex­panded to include a number of unfair economic practices in ad­dition to combination in restraint of trade, and the method of enforcement was simplified and made more direct by charging the Federal Trade Commission with investigation and prosecu­tion. The Commission, either on its own initiative or as a result of a protest by businesses or individuals, can summon individuals and records for purposes of investigation. It can issue orders to cease and desist if its investigation indicates that the concern in ques­tion has been engaging in a practice of unfair competition.

In spite of the modifications of the Sherman Act, serious ques­tion as to the basic philosophy of competition by small business units did not arise until the national government was forced to devise a program for economic recovery in 1933. It appeared that competitive rivalry only made the depression more serious. Under the National Industrial Recovery program combinations, price fixing, and market allocations, which had been only re­cently condemned were encouraged as means of securing eco­nomic benefits for workers and consumers and stability for pro­ducers. Specifically the aims of the N.R.A. were to spread the work among the unemployed by the elimination of child labor and the reduction of working hours; to increase the purchasing power of the masses by setting minimum wages; to stimulate the organization of labor and collective bargaining; to stabilize in­dustrial relations; and to abolish unfair competition among busi­ness men, and to introduce some planning into industry.

It is not necessary to describe in detail the administrative or­ganization of the National Recovery Administration. The codes of fair competition were the core of the program. In accordance with the ideal of self government each industry through its trade association or special conference was responsible for formulating a code embodying the principles of the N.I.R.A. When accepted by the National Recovery Administrator and signed by the Presi­dent of the United States these codes became law. Various ad­visory boards were available to assist the industries in framing their codes and to protect the interests of labor and consumers. The use of codes to govern their activities was common practice in monopolistic industries long before the N.R.A. The procedure now was different only in the fact that the practice was now legal and the rights of workers and consumers were incorporated into the codes. In spite of the optimism with which it was launched, the N.RA. was not a success. It was already unpopular when it was declared unconstitutional by the Supreme Court. The idea on which the program was founded was apparently sound, how­ever, and almost surely will be revived in the future as a means of industrial regulation and planning. But the enforcement ma­chinery was inadequate, various factions within each industry were not willing to accept new relationships in good faith or to accept fixed relationships to rival groups.

With the passing of the N.R.A. the United States returned temporarily to a policy of "trust busting," but the menace of war quickly forced upon the government a more rigid program of regulation than even the wildest dreams had contemplated. In­dustry during the" war period made what the government asked for, in the quantities which the government determined, and sold the product to the government or to the public at prices which the government prescribed. Only in the Soviet Union has gov­ernment control of industry surpassed that of the United States in World War II.

Let us now review the development of economic planning in the Soviet Union. The goal of the Communist Party in Russia has been the erection of the economic structure of the Soviet Union upon the theoretical foundations laid by Karl Marx. In the Communist Manifesto, published in 1848, Marx and Engels described the general structure of a socialistic society, not the final form perhaps, but Socialism in its initial stages. The chief characteristics were specifically stated: abolition of all property in land and the application of all rents to public uses; a heavy progressive income tax; abolition of all rights of inheritance; centralization of credit in the hands of the state through the creation of a central national bank with state capital and ex­clusive monopoly; state ownership of means of communication and transport; extension of factories and means of production owned by the state; employment of all persons so that none should be voluntarily or involuntarily idle; creation of agricultural labor corps; planned relationship of agriculture to industry so as to remove inequalities and secure balanced production; free education for all children in public schools.

Ever since the Russian Revolution of 1918 when the Com­munists (Bolsheviki) under Nicolai Lenin (Vladimir Ilich Ulianoff, 1871-1924) came to power, the economic system has been in a constant process of adjustment. Lenin believed im­plicitly in communistic ideals, hence he lost no time in introducing various elements of the communistic state. Money was eliminated; all means of production, transportation, and communication were confiscated by the state; food and clothing were given by the state according to need; and each person was expected to work in any occupation to which he was assigned without pay. Through rigid dictatorial control Lenin expected to force the acceptance of these procedures until they became habitual. Oppo­sition by individualistic elements among the population, especially among the farmers, led to open sabotage. Severe shortages of food resulted, ultimately forcing Lenin in 1921 to accept a limited amount of private production and exchange and, of course, the revival of the use of money. This was known as Lenin's New Economic Policy, a temporary expedient to get the forces of production running once again. The immediate goal was achieved; and after two disastrous years marked by widespread famine, food became plentiful once more. But the policy also ef­fected the rise of a class of private landowners and traders known as kulaks and nepmen who were responsible for a considerable part of the domestic economic activity.

To Lenin goes the credit for the establishment of the political dictatorship of the Communist Party in Russia. It was Joseph Stalin (Yosif Dzhugashvili, 1879- ), however, who really fos­tered economic communism and large-scale economic planning. Defeating Leon Trotsky, Lenin's first associate, for control of the Communist Party on the death of Lenin, Stalin turned the in­terest of his followers from international affairs to the develop­ment cf Russian economic resources. In spite of much opposition, he held unswervingly to his idea that it was possible to build a socialist state, strong economically and politically, in the midst of a capitalistic world order.

Under Stalin industry was organized into a group of trusts comprising a large number of productive units in a given in­dustry. In some cases there were several trusts in one industry; in oil, for example, there was a trust for each of the major oil fields. These trusts were controlled in matters of general policy, prices, and capitalization by the Supreme Economic Council, a division such as a government department in the United States Government. Each trust had its own managing board, appointed by the Supreme Economic Council, which assumed responsibility for operating the trust within the broad lines laid down by the Council. From this point on the various businesses comprising the trust were operated as independent business enterprises, seeking a profit which, of course, could only arise through efficiency in production. The "profit," however, went to the government, for workers' insurance and for expansion. Frequently the earnings of one trust were applied by the Council to cover the deficit in another, if the deficit arose from experimentation, newness of the industry, or other legitimate cause. Transportation and communi­cation systems were not incorporated in the trust system, since they were already managed as separate departments of the gov­ernment.

In matters of distribution the system was more flexible. In ad­dition to state trusts there were co-operatives and private mer­chants. The Supreme Economic Council exercised control over prices and quantities provided to these agencies through wholesale trusts. Over a period of years the policy of the Council favored the state trusts and gradually forced the co-operatives and the private dealers out of business.

The principal planning operation in the Soviet Union was the co-ordination of the forces of production and distribution. The goal was the greatest production of material goods consistent with the health, safety, leisure, and education of the masses. With limited capital, a tremendous population to feed and clothe, and the necessity of building basic industries, only comprehensive planning could prevent complete chaos. Thus in 1923 the State Planning Commission was created. For years this planning com­mission did little but collect data and offer rough experimental plans such as the 1926 plan. The fruition of the preparatory work appeared in the latter months of 1927 when the Five Year Plan was published. Designed to cover the years between 1928 and 1933, the plan had two main goals: to increase the general economic productivity of Russian industry, and develop those resources and industries necessary to make Russia self-supporting. The plan was carried through in four years, but not without se­riously endangering the production of consumers' goods industries which were at times drastically curtailed to provide men and material for the basic industries. The work of the planning com­mission was highly centralized, but less powerful commissions were organized in provinces and districts. Their chief work was to gather statistics and plan for the needs of the local areas, sub­ject to review by the State Planning Commission at Moscow. There was unquestionably a vast scope in the planning in the Soviet Union.