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T.N. Vance

The Crisis in Distribution

(May 1955)

From New International, Vol.21 No.2, Summer 1955, pp.86-98.
Transcribed & marked up by Einde O’Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

While the economy keeps rolling on to new peaks of prosperity, with high levels of production and profits, there are some clouds on the horizon. These may be small, but they can grow. Moreover, they are discernible to more or less orthodox supporters of the present system. Above all, they perturb the defenders of small business.

The Annual Report of the Select Committee on Small Business (of the United States Senate, 84th Congress, 1st Session, Report No.129) in its report of March 1955 has this to say in its introduction:

A searching appraisal of the position of small business within our economy during 1954 does not provide a basis for viewing the future of small, independent enterprises with complacence. In a sense, 1954 was a “normal” year. No war galvanized the industrial community. No depression swept large numbers of small enterprises out of existence. Indeed, the somewhat slower tempo of business activity which became apparent in 1953 and carried over into the first quarters of 1954, quickened perceptibly during the closing months of 1954. It may be assumed that a well-founded spirit of optimism about the immediate business outlook was responsible for the 11,981 business incorporations in December, the highest monthly total since January of 1947, and for the full-year total of 117,164 incorporations which exceeded those of each year since 1947. On the other hand, 10,300 fewer businesses of all types started in the first 6 months of 1954, compared with the same period of 1953, and Dun & Bradstreet recorded 2,224 more failures involving court proceedings or voluntary action likely to end in loss to creditors in 1954 than in 1953.

Your committee realizes, however, that it is easy for selective indices to mislead those who hold that what seems good for the economy as a whole must of necessity also be good for small business. The fate of small, independent businesses is not chained by natural law to the more narrowly fluctuating fortunes of the larger and hardier units within the industrial complex. Countertrends are not only possible, but clearly discernible.

To a businessman, the proof of the pudding must be in the profits. And it is precisely in the profit position of smaller manufacturing enterprises that your committee detects one of the basic aspects of the current small-business situation which is most disturbing. Whether measured by percentage of stockholders’ equity or by percentage of dollars of sales, the profits of smaller manufacturing corporations, after taxes, have shrunk since 1952, while, with few exceptions, the profits of the largest corporations have increased....

Profits as a percentage of dollar sales present a similar picture for the first 6 months of 1952, compared with the first half of 1954. On this basis, the smallest group’s money-making ability declined 60.9 per cent, while the biggest corporations showed an increase of 10.5 per cent. In addition, the small manufacturer’s share of total sales has drifted downward from 19 per cent in 1947 to 14 per cent in 1953, a trend which, if unchecked, can easily assume alarming significance.

These and other factors strongly suggest to your committee that there are obscure, complex, and underlying forces at work within our economy that are inimical to the future of small, independent enterprise. To discover and correct these causes of the mounting disadvantages facing the small-business man should be a major concern of all who want to see preserved the vigor of our free-enterprise system....

Your committee has long been deeply disturbed over the multiplying evidences of concentration of economic power in the managements of a relatively few huge corporations. Oligarchic control over groups of vital industries, even though such control may be exercised within the letter of the law, must inevitably exert a contracting influence on freedom of endeavor. In each of its annual reports since 1951, your committee has stressed its belief that the threat of monopoly has not lessened, not remained constant, but has, in fact, assumed more menacing proportions. It would, indeed, not be stating the case with excessive emphasis to say that your committee’s uneasiness of former years has turned to grave apprehension.” (Italics mine – T.N.V.)

The above findings, it should be emphasized, are those of the Senate Small Business Committee. Their concern over the growth of monopoly and the consequent weakening of small business is reinforced by the still more recent study of the Federal Trade Commission. As reported in The New York Times of May 20, 1955: “Business mergers, while still well below the pre-depression levels of the late Nineteen Twenties, are running at three times the 1949 rate.” The FTC “gave two major reasons for the current merger wave: an urge to expand production and an inability of smaller companies to get adequate financing for expansion.” (Italics mine. – T.N.V.)

The tremendous accumulation of capital that has taken place in recent years is beginning to be accompanied by a fall in the rate of profit – attacking first the smaller capitalists. The process is not an unexpected one. In discussing the relationships between accumulation of capital and the rate of profit, Marx states (Capital, Vol.III, p.283):

A fall in the rate of profit and a hastening of accumulation are in so far only different expressions of the same process as both of them indicate the development of the productive power. Accumulation in its turn hastens the fall of the rate of profit, inasmuch as it implies the concentration of labor on a large scale and thereby a higher composition of capital. On the other hand, a fall in the rate of profit hastens the concentration of capital and its centralization through the expropriation of the smaller capitalists, the expropriation of the last survivors of the direct producers who still have anything to give up. This accelerates on one hand the accumulation, so far as mass is concerned, although the rate of accumulation falls with the rate of profit.

It may be objected that profits increased in 1954, but the increase did not help the rate of profit. This, moreover, is true of leading corporations. In the annual study of the National City Bank, contained in the April 1955 Monthly Letter, the return on net assets declined (for 3,442 leading corporations) from 10.6 per cent in 1953 to 10.3 per cent in 1954 despite a four per cent increase in reported net income after taxes. Imagine what the results would have been if not for the tax swindle law of 1954! States the National City Bank:

In the manufacturing industries, which in number of companies and capital investment comprise over half of the totals for all lines of business included in our tabulation, the 1,778 reporting companies show combined net income up 4 per cent. Tax details given by the larger companies indicate that in 1954, on an over-all volume of sales about 5 per cent lower than in 1953, pre-tax earnings were down 10 per cent. Liability for federal income and excess profits taxes declined by 25 per cent, with the portion of pretax earnings absorbed by such taxes in the two years declining from an average of 53 to 45 per cent.” (Italics mine. – T.N.V.)

The dependence of private capitalists on the capitalist state for maintenance of the profits of the bourgeoisie as a class is thus shown in a relatively new and graphic form. Profits, of course, remain the end-purpose of economic activity (“the proof of the pudding”) under capitalism.

One of the main props of the prosperity in the first half of 1955 has been the automobile industry. Never before in history has American capitalism produced automobiles at such fantastic rates. According to Dun’s Review and Modern Industry for May 1955,

More cars were produced in the first quarter than in any other quarter in history. The record total of 781,000 cars reached in March was almost matched in April (a shorter month) as production continued at, the starting rate of about 30,000 cars per day, which means that cars have been rolling off the assembly likes at the rate of one each three seconds, night and day ... During the first half of 1955 more than 4 million cars will probably be made. Before 1949 there had been only one year – 1929 – in which more than 4 million cars were made during an entire year.

Profits of the big three (GM, Ford and Chrysler) have been huge. The smaller automobile companies have been forced to merge in an attempt to remain alive. Meanwhile, what has happened to the dealers? They are not doing so well; in fact, they are not sharing in the profits of the big automobile manufacturers at all. Nor is the outlook likely to improve, as dealers have been forced to take unprecedented quantities of cars from the manufacturers. The same analysis in Dun’s goes on to say:

The supplies of new cars with dealers rose noticeably to 624,277 in the beginning of April, to reach a postwar peak. However, at the present rate of sales which have been outrunning output, new car inventories are entirely reasonable. Notwithstanding the expansion in sales, The National Automobile Dealers Association reports that operating profits for new car and truck dealers are the worst in fifteen years. (Italics mine. – T.N.V.)
 

IT IS NOT ONLY the small manufacturer, but the small business man in general whose position is steadily worsening, while monopoly capital is steadily strengthened. These fundamental trends of a capitalism that has outlived its historical usefulness more than a generation ago are reinforced and accelerated by the development of the Permanent War Economy. War outlays are necessarily concentrated in large aggregations of capital. The Senate Small Business Committee, in the previously cited report, states in the chapter on Military Procurement that

“all business and Government agencies have experienced dislocations due to the conversion from the highly geared war economy of the Korean war period to a reduced defense-production economy. This transition period has been fraught with changes in Government buying policies, which have caused much concern within the ranks of small business and among Government officials charged with the responsibility of procurement functions.”

Later on, it becomes clear that the concern is with “negotiated” contracts, as small business is suspicious of all contracts awarded by negotiation. When to this attitude is added the fact that “Since 1950 approximately 90 per cent of the dollar value of all purchasing has been awarded by negotiation, and the emergency exception has been widely used to justify this sharp departure from the basic method of advertising,” it becomes clear that despite all the double-talk small business has not been doing so well in receiving military contracts.

Perhaps, if large-scale war outlays do not mean increased business for small enterprises at the manufacturing level, small retailers benefit from the existence of the Permanent War Economy. Not very directly, according to the Hoover Commission Report on Business Enterprises, for the digest published by the Research Department of the Citizens Committee for the Hoover Report bemoans the fact that government is allegedly taking business away from private enterprise by various forms of government enterprise. The magnitude of the competition is indicated by the volume of business done by commissary stores and post exchanges. The annual figures cited are as follows:

Thus, over $1.3 billion of sales are “lost” by retailers. The Hoover Commission observes that

The whole operation [of commissary stores] is at least a vivid illustration of how bureaucracy can expand against the intent of the Congress, accompanied by a failure to include real costs. The real justification of the continued operation of most of these stores is a “fringe benefit” to the military personnel and their families.

The question arises as to whether ... increased salary payments ... would not be more consonant with sustaining our economic system.

What hurts is not only the loss of business, but the fact that millions of servicemen, and through them their families, are able to purchase a variety of commodities at substantial reductions from prevailing retail prices. From the point of view of the military budget, it would obviously be poor economy to raise military salaries in order to provide military personnel with purchasing power comparable to civilians.

Such considerations do not intrude upon the cerebrations of the Hoover Commission, who conclude by asking: “Is this [government enterprises] ‘creeping socialism’?” The answer is a model of its kind:

“Most of these projects were started for what, at the time, appeared to be justifiable operating reasons. Therefore, we cannot say that they were socialistic in intent. However, their perpetuation beyond the emergency period has led to the tremendous increase in the rate of growth of government wealth – as compared to private wealth – which the Harden Subcommittee cited. This is certainly an alarming symptom. Further, the rate is such as to suggest that ‘running’ is a more apt description than ‘creeping’.”

Not only is large-scale manufacturing prospering, but retail business is running about 8 per cent ahead of a year ago. Perhaps there has been some slight decline in the rate of profit, and perhaps small manufacturers are having their problems but, state the apologists of the bourgeoisie, 1955 will be the best or second-best year on record. Not only will we have “two cars in every garage” (who was it who said “two chickens in every pot”?), but eventually “every family will have three cars.” This pious wish is supposed to solve the problem of maintaining the present high rate of automobile sales in the latter part of the year.

The first signs of trouble occur as a rule, not merely in the difficulties that small businesses have in surviving, but in wholesale distribution. Marx puts it this way (Capital, Vol.III, p.359):

Hence we note the phenomenon that crises do not show themselves, nor break forth, first in the retail business, which deals with direct consumption, but in the spheres of wholesale business and banking, by which the money-capital of society is placed at the disposal of wholesale business.

The manufacturer may actually sell to the exporter, and the exporter may in his turn sell to his foreign customer, the importer may sell his raw materials to the manufacturer, and the manufacturer his products to the wholesale dealer, etc. But at some particular and unseen point, the goods may lie unsold. On some other occasion, again, the supplies of all producers and middle men may become gradually overstocked. Consumption is then generally at its best either because one industrial capitalist sets a succession of others in motion, or because the laborers employed by them are fully employed and spend more than ordinarily ... the production of constant capital never takes place for its own sake, but solely because more of this capital is needed in those spheres of production whose products pass into individual consumption. However, this may proceed undisturbed for a while, stimulated by prospective demand, and in such lines the business of merchants and industrial capitalists prospers exceedingly. A crisis occurs whenever the returns of those merchants, who sell at long range, or whose supplies have accumulated also on the home market, become so slow and meager, that the banks press for payment, or the notes for the purchased commodities become due before they have been resold. It is then that forced sales take place, sales made in order to be able to meet payments. And then we have the crash, which brings the deceptive prosperity to a speedy end. (Italics mine. – T.N.V.)

To be sure, Marx was discussing the turnover of merchants’ capital in the above passage, and describing the development of crisis in a fairly simple, undifferentiated type of capitalism that prevailed a century ago. He could not have foreseen the development of the Permanent War Economy stage of capitalism in decline, where production of the means of destruction becomes an integral “third” department of the economic scene. Constant capital is currently not only produced when needed by industries “whose products pass into individual consumption,” but also – and with equal social acceptability – when needed by industries whose products enter into military consumption. In some cases, the individual product that enters into military consumption is identical with that which enters into individual consumption. The ability of the state thus to subsidize whole industries (mining, for example) materially helps to stabilize the entire economy.

Depending on the character and degree of state intervention in the economy, the traditional course of the capitalist business cycle becomes considerably modified. The possibilities of the boom culminating in sudden, abrupt crisis are remote so long as the political preconditions, nationally and internationally, of the Permanent War Economy obtain. Moreover, economic fact-gathering and knowledge have progressed to the point where any unsold goods are fairly conspicuous. They are either agricultural surpluses bursting out of government warehouses or automobiles bulging in dealers’ showrooms – to mention the two major points where quasi-crisis conditions are presently in the process of developing.

Nevertheless, Marx remains eminently correct in stating that crises tend to originate with the wholesale level of distribution. In this connection, it is most interesting to examine the latest figures on business failures (as published by Dun’s, op. cit., p. 32). There were 2,854 failures during the first quarter of 1955 compared with 2,895 during the first quarter of 1954 – a decline of almost two per cent in number of failures. The liabilities represented by these failures declined from $134.6 million to $121.1 million during the year under comparison – a decline of ten per cent. Yet, against this favorable performance for the economy as a whole, wholesale trade is the only sector of the economy where the number and dollar volume of failures rises significantly from the first quarter of 1954 to the first quarter of 1955. The number of failures in wholesale trade increased from 289 to 337 – a rise of 17 per cent; while the dollar volume of the liabilities involved in these failures rose from $12.9 million to $13.7 million – a rise in excess of 6 per cent.

By themselves, these figures could be merely episodic. Yet for the month of March – the latest month for which figures are available – business failures rose 12 per cent over February 1955. According to Dun’s, “Casualties were higher only once, in March 1954, in the entire postwar period.” This is the type of cloud on the horizon that may only be a speck today, but tomorrow can be very sizable.
 

THE FUNCTION OF DISTRIBUTION, the turnover of capital in retailing and wholesaling, is fundamentally to realize the values and surplus values embodied in capital employed in production. Only in this manner can the capitalist cycle of M–C–M be completed and the capitalist achieve the profit that is his sole aim in business. When production increases faster than consumption (unless military expenditures consume the entire disproportionate excess of production), there is another cloud on the horizon that is symptomatic of quasi-crisis if it continues to grow.

That all is not serene for the American capitalists may be seen from a glance at the figures on retail and manufacturing sales. Retail sales in 1946, the first postwar year, are reported at $102,488,000,000; in 1954 they were $170,664,000,000 – an increase of 67 per cent. Manufacturing sales, on the other hand, rose from $151,402,000,000 in 1946 to $287,707,000,000 in 1954 – an increase of 90 per cent. As a matter of fact, if the comparison is made with 1953, the postwar peak, the increase in retail sales remains the same, 67 per cent, while the increase in manufacturing sales reaches 100 per cent, as manufacturing sales for 1953 are estimated to have reached over $303 billion.

While a portion of the increase in manufacturing must go to replace the constant capital that has been used up in prior production, and a portion (about $20 billion) goes into increased inventory that is presumably salable, it is clear that a sizable portion of the increase in commodity production (capital) has been immobilized by the state principally in the form of military stockpiles and government storage of agricultural surpluses.

The use of state power, no matter how haphazard or inefficient it may be, for such equilibrium purposes introduces an aspect of planning into the anarchic system of capitalism that neither Marx, Lenin nor Trotsky could have foreseen in detail, as fundamentally the decisive aspects of state intervention and “planning” are products of the Permanent War Economy. Eliminate the threat of Stalinist imperialism, remove the social acceptability to all classes of the huge expenditures for war outlays, destroy the political basis for state intervention in the economy on such a huge scale, and the pre-World War II violent swings in the economy are immediately restored.

The “triumph” of American capitalism today lies not so much in its ability to maintain an historically outmoded social system, but its ability to persuade the masses of the population that the Permanent War Economy is really the Welfare State. This, however, is a separate subject outside the scope of this article.

Another way of expressing the fundamental economic developments that have taken place during the past decade as a result of the huge accumulation of capital is to refer to the increasingly high organic composition of capital, with its consequent rapid increase in productivity of labor. These tendencies we analyzed in Part III, Increasing State Intervention, of the original series on the Permanent War Economy (cf. The New International, May-June, 1951, p.150):

“Precisely where the breaking point is likely to be, no one can say, but it is clear that the composition of capital is already dangerously high and constitutes a sword of Damocles, hanging over the unsuspecting head of such a highly-geared capitalist economy that in a few years it is possible to produce all the automobiles, television sets, etc., that can be sold under capitalist conditions of production.”

Labor productivity, according to an unpublished study of the Federal Reserve Research Department, may have reached the fantastic figure of between four and eight per cent last year in manufacturing, against a normal current rate of increase of three per cent. The resulting rise in national income has, in turn, given rise to significant increases in personal savings. The forms of savings have recently been studied by Raymond Goldsmith. As reported by Will Lissner in The New York Times of May 29, 1955,

“The information already developed has been credited with aiding in the formulation of policies that moderated recent tendencies toward boom and slump. Economists in close touch with the research going on predict that within five years enough will be known about the business cycle to banish major depression from the American economy.”

What these economists ought more profitably to study is how to sustain the economy once production of the means of destruction declines appreciably below present levels. This is not to be interpreted as a forecast that such will happen. The basic decisions are now political in nature. But the Stalinist peace offensive has as one of its objectives the promotion of a political climate in western Europe and the United States that will bring about a reduction in war outlays on the part of American capitalism. It is by no means excluded that the Stalinists will achieve some degree of success in this part of their strategic aim.

Without speculating about substantial reductions in war outlays, however, there are already evident signs of stress and strain in the field of distribution. The size of the average capital engaged in retail or wholesale trade is smaller than in manufacturing. Its return on sales is less, as it depends on a higher turnover of capital to maintain its share of the average rate of profit. By the same token, however, capital engaged in distribution is more vulnerable to minor changes in the business cycle. From the point of view of monopoly capital, the overwhelming majority of the almost four million enterprises engaged in retail and wholesale distribution are at best necessary evils. If a substantial percentage of merchants’ capital were to disappear, provided that the process did not rock the capitalist boat, monopoly capital would not be unduly concerned. Except for propaganda phrases, consequently, monopoly capital is not at all alarmed about the “mounting disadvantages facing the small-business man,” nor for that matter is monopoly capital the “vigorous defender of the free-enterprise system” that it poses as.

As a matter of historical record, the decisive majority of commodities intended for consumption by individuals is produced by a relatively small number of monopoly capitalists. These manufacturers, except in the case of a few large aggregations of merchants’ capital, are able to ignore with impunity the desires and aspirations of retailers and wholesalers. During the Great Depression of the 1930’s, when the capitalist structure was rocked to its foundations by the ravages of the crisis, monopoly capital engaged in the production of consumer goods sought legislation to enable it to withstand the vicissitudes of competition. The result was the passage of the Miller-Tydings Act of 1937, which exempted manufacturer-retailer price fixing contracts from anti-trust prosecution. This was really the origin of the Fair Trade movement, whereby monopoly capital attempted direct control of the pricing activities of merchants capital.

Under Fair Trade agreements, if a manufacturer enters into a minimum pricing agreement (price fixing agreement) with one retailer in one of the 48 states (there are at present 42 states where this monopoly practice is legal), all other retailers in that state who are selling the same commodity – whether they have signed a Fair Trade agreement or not – are bound to the schedule of prices dictated by the manufacturer. The main argument in favor of Fair Trade has always been that the manufacturer needs protection against those retailers (and wholesalers) who follow the practice of loss leaders; i.e., the manufacturer of a nationally branded and advertised product claims that he has spent considerable sums to establish consumer preference and desire for his product, and the “unscrupulous” retailer sells this product at a loss in order to lure customers into his store, on the theory that once they are in the store they will purchase other merchandise on which he makes his normal profit or more. Certain retailers, especially department stores, have been the main supporters of such price-fixing agreements, as they find it difficult to cope with the competition of specialty stores and discount houses who slash prices on branded merchandise. The fact that the consumer pays more under such monopoly practices as Fair Trade is, after all, relatively unimportant to the monopolist so long as his profit position is adequately maintained.

The legislative history is important in only one respect – as the supplies of civilian products on the market increased in the postwar period, advocates of Fair Trade attempted to solve the problem on a state by state basis, once the Supreme Court declared that the Miller-Tydings Act could not be used to support Fair Trade. They found, however, that this would not work as there was an immediate and obvious conflict with the Federal antitrust laws. Consequently, Congress passed the McGuire Act in 1952 which exempts state Fair Trade laws from the provisions of Federal anti-trust laws. The McGuire Act gives permission to monopoly capital to establish price-fixing agreements at the wholesale and retail level on a state by state basis without fear of prosecution under Federal anti-monopoly laws.
 

THE GROWTH OF FAIR TRADE has been accompanied by an immediate and parallel rise in discount houses, much like the passage of the Prohibition Act was accompanied by the growth of bootlegging. Discount houses are no longer confined to New York and a few large cities. They have spread across the entire country. Everyone is “discount-conscious.” Every commodity that has a list price, or suggested list price, or whose retail price can be established in the minds of the consumer through advertising or any other device, is immediately sold at a discount. The havoc that this process has caused among various types of distributive outlets has given rise to what may properly be termed a veritable crisis in distribution.

Discount houses are not to be confused with retail outlets that have periodic sales. A proper definition would have to confine the term to those retailers that are selling as a regular daily occurrence Fair-Traded merchandise at less than the Fair-Traded prices. How extensive is this practice? The surprising, or perhaps not so surprising, thing is that nobody knows. The estimates vary so widely as to be almost meaningless. Yet, unless there are some quantitative measures, it is impossible to analyze the current crisis in distribution.

The same Annual Report of the Senate Small Business Committee, previously cited, has an interesting chapter on the Distributive Trades, in which we find the following illuminating discussion of the extent of discount houses:

Various estimates have been made of the extent to which these discount houses have made inroads into more normal retail outlets. Spokesmen for the Toy Manufacturers’ Association and the National Retail Dry Goods Association, both of which operate in areas especially vulnerable to the competition of discounters, have provided your committee with their guess that the total sales volume of discount houses is about $5 billion. On the other hand, the United States Chamber of Commerce has given a figure of $25 billion, or five times as great, as its best guess of the extent of business being done by these outlets, most of whose business is done in fair-traded items. On this point, incidentally, the American Fair Trade Council feels that over 80 per cent of the discount houses’ revenue comes from prixe-fixed merchandise, and there seems to be no reason to doubt that the 80 per cent figure is close to the mark.

Your committee, however, has no means and no data by which it could come to a decision on the relative reliability of either the $5 billion or $25 billion annual revenue estimate. Since it is generally agreed that only 10 per cent of total retail sales in the Nation are in fair-traded goods, the total amount of such business would come to about $18.7 billion with total sales of $187 billion. (Dun’s figure for total retail sales is about $170 billion, but the difference is not significant for purposes of this analysis.) Therefore, it would seem that the Chamber of Commerce figure overstates the income of the discounter, but your committee is unable to find any mutually agreed upon level between the $5 billion and $25 billion estimates. Naturally, precise information is not available, since the discount houses do not file reports with any agency of the Government or with any private association regarding the extent of their sales. (Italics mine. – T.N.V.)

On the other hand, Housewares Review, a trade publication, in its May 1955 issue has an article by the editor on the Distribution Revolution. In it, he refers to 10,000 discount houses doing an annual volume of $500 million. To be sure, there are other types of discount operations, including supermarkets and mail order and catalog operations, but the figure given by Housewares Review for gross volume of discount houses looks like they placed the decimal in the wrong place. An annual volume of $500 million divided among 10,000 discount stores (the figure seems to be extremely conservative) would yield only $50,000 gross volume per store. A genuine discount house could not exist on such a small volume, as the key to a successful discount operation is large volume on a small mark-up, resulting in a much faster turnover of capital than the average retailer. Surely, a $500,000 average annual volume is more apt to be correct for the typical discount house than $50,000. On this assumption, the annual volume would be $5 billion, coinciding with the estimate of the Toy and Dry Goods Associations cited by the Senate Small Business Committee.

Whatever the actual figures, it is clear that a very substantial percentage of the volume of many commodities, especially certain types of consumer durables, is sold at discount. In fact, E.B. Weiss, one of the main trade analysts of “off-list” selling, in a comprehensive article in Advertising Age for April 18, 1955, states:

The president of Webster-Chicago had declared that “in the New York City area, 85 per cent of all major appliances were sold by discount houses in 1964.” That figure is correct as applied to the discount operation: not as applied to the discount house. He also said that the discount house is “tending to become more like a conventional dealer every day” – a statement that is not quite factual. A small handful of discount houses are opening more luxurious outlets and giving more services. But the total discount operation is far from conventional. If anything, the contrary would be a more accurate summation – in other words, the conventional outlet is tending toward the unconventionality of the discount operation – witness the circusy warehouse sales of department stores.

While, as Housewares Review puts it, “The factory list price, made into a legalized point of reference for the discounter, became the discounter’s chief asset,” the fact remains that the average discount house works on a gross margin of 10-20 per cent, whereas the average department store requires a mark-up at least twice that of the discount house. How does the discount house do it? Masters, one of New York’s largest discount houses, has made its figures publicly available. They are analyzed by Housewares Review, as follows:

Thus, assuming that merchandise costs are identical (and many of the large discount houses receive larger quantity discounts from most manufacturers than do department stores), the discount house has definitely lower selling costs, lower overhead, and above all lower payroll. With a margin of 20 percentage points, or thereabouts, there is little wonder that the average discount house can undersell the average department store by an appreciable amount – enough to attract the average consumer.
 

THE DISCOUNT HOUSE, and the discount method of operation, have been growing. This is not to imply that all discount houses are prospering and all department stores suffering. Many department stores are doing quite well, and recently a number of discount stores have gone into bankruptcy. Still, however, some old and honored names in retailing have disappeared from the scene: McCreery’s, Wanamaker’s and Hearns in New York, Loeser’s in Brooklyn, O’Neill’s in Baltimore, Famous of Los Angeles, and Alms & Doepke in Cincinnati. There is no doubt that a squeeze is beginning to operate on retail distribution. This is the central aspect of the crisis in distribution. The frantic seeking of other distributive outlets, the general chaos that prevails, are merely symptoms of the falling average rate of profit in distribution at large.

Fair Trade was supposed to have protected the profit margins of the distributor and retailer. Properly policed it was supposed to have eliminated the discounter. At least, that was the theory on which the manufacturer sold the concept to the retailer. When the Supreme Court ruled in 1951 that the Miller-Tydings Act of 1937 applied only to those retailers who actually signed price agreements with manufacturers, large-scale price wars broke out in most major cities, with the result that retailers took the lead, assisted by manufacturers, in pushing through the McGuire Act of 1952. The vote was overwhelming in Congress, 196 to 10 in the House and 64 to 16 in the Senate. Yet after three short years of operation, Fair Trade would seem to be on its way out.

States the Senate Small Business Committee, after reviewing the disparity of statistical estimates on the size of discounting:

Even with that degree of statistical uncertainty, though, it is apparent that discounters do account for a sizable share of the retailing pie. Furthermore, any increase in their sales during the coming year which even closely approximates the growth of the past 12 months will undoubtedly provide a most definite and pragmatic answer to the question of what happens next in the fair-trade puzzle. In the opinion of your committee, a more serious challenge to the fair-trade laws than was ever presented by any court decision arises in the shape of these ever-expanding operations of discount houses located in those States which have resale-price-maintenance laws.

Based on current observations, your committee concludes that favorable court actions against individual price cutters have proved ineffective in halting such retail outlets. While protracted litigation was under way which was aimed at forcing 1 operator to respect the fair-trade price of 1 manufacturer’s articles, hundreds and thousands of discount houses were cutting prices on hundreds and thousands of fair-traded articles.

This air of hopelessness of the official watchdog over the health of small business merely reflects the economics of the situation. Discounting on a large scale is here to stay. It exists not only with the tacit support of manufacturers, but with their complete cooperation. It goes without saying that discount houses could not survive for one day without the benevolent support of manufacturers. Many manufacturers supply discount houses openly. Many more use one or more indirect or surreptitious methods of supplying discount houses, so that they can piously inform their more conventional distributive outlets that “they” are not selling the discount houses.
 

THE ENORMOUS INCREASE in the productive capacity of American capitalism has led to a frantic search for every type of market. It is this which is fundamentally responsible for the chaotic condition in distribution. It should be clear that no legal device, Fair Trade or its repeal, or any other patented formula, can serve as a nostrum to remedy the crisis in distribution. Meanwhile, however, the government appears to be getting ready to sponsor repeal of Fair Trade.

The Federal Trade Commission recently, according to Electrical Merchandising (a McGraw-Hill publication) for April, 1955, in an article entitled, Is Fair Trade Dying?,

released a letter to retailers refusing to enforce state Pair Trade laws. And to add insult, the Commission advised retailers they could “with impunity” ignore the state laws where they were not being diligently enforced.

The FTC said that if a manufacturer persists in discriminatory or lax enforcement of his Fair Trade contracts “he has forfeited his rights to enforcement and there is no longer any legal obligation – or at least any legally enforceable obligation – upon a retailer to observe the manufacturer’s fixed prices.”

The commission went on to advise retailers to “resort to various avenues of self-help.” Among the avenues suggested: disregard the fixed price “and compete on a price basis with the discount house.”

The FTC concluded, “It cannot seriously be suggested that price competition is morally reprehensible. A retailer forced to cut prices to compete ... could do so with impunity.”

Hard on the heels of this FTC letter came Attorney General Brownell’s long-heralded and long-delayed study. Formed in 1953 to review the whole structure of anti-trust legislation, the Brownell committee was composed of 60 top lawyers and economists.

In strong words, the committee’s report attacked the federal laws which exempt Fair Trade agreements from antitrust action.

The report said, “We regard the Federal statutory exemption of Fair Trade pricing as an unwarranted compromise of the basic tenets of national anti-trust policy. The throttling of price competition in the process of distribution that attends Fair Trade pricing is, in our opinion, a deplorable yet inevitable concomitant of Federal exemptive laws.

“We therefore recommend Congressional repeal both of the Miller-Tydings amendment to the Sherman Act and the McGuire amendment to the Federal Trade Commission Act, thereby subjecting resale-price maintenance as other price-fixing practices, to those Federal anti-trust controls which safeguard the public by keeping the channels of distribution free.” (Italics mine. – T.N.V.)

The Administration is thus squarely behind repeal of Fair Trade. Whether immediate legislation will result is doubtful, but it makes little difference so far as the over-all problem is concerned. While some manufacturers will state that they favor continuation of Fair Trade, more and more retailers are moving in the direction of advocating repeal of Fair Trade.

In fact, Attorney General Brownell in a speech before the Annual Conference of the NRDGA (reported in Retailing Daily of April 4, 1955) tried to convince the department store owners (apparently, without too much resistance) that they would be aided in their fight against discount houses by repeal of Fair Trade.

He suggested that the discounter probably owes more to fair trade than anyone else since it gives him a fixed ceiling and makes it a simple matter to undersell those retailers bound by fair trade contracts....

“It may be that elimination of fair trade would hamper the operations of discounters to a greater extent than it would hurt those who have so earnestly sought the protection of fair trade!” ...

The Attorney General’s declaration constituted his first detailed discussion of fair trade “price-fixing” as the Justice Department sees it. Included in his reasoning were these fundamental points:

Although fair trade legislation was supposed to help small retailers compete with chain stores and other large outlets, “the anticipated benefits have been somewhat illusory.”

Fair trade handicaps those small retailers who cannot afford extensive advertising, or elaborate establishments or services and whose best hope of attracting customers is in charging lower prices ...

The argument of some manufacturers that fair trade is needed to protect the small merchant has “a somewhat false ring” when they admit they have engaged in manufacturing for sale under private brand an article identical, except for a different brand name, with the fair traded item.

One of his major conclusions was when “He said it ‘seems evident’ that the absence of competitive pricing under fair trade results in higher prices for the consumer and that consumers are deprived of the opportunity of ‘shopping around’ for the same product priced competitively and advertised freely by different retailers.”

It would thus seem fairly clear that despite the development of state monopoly capitalism and the Permanent War Economy, with all the modifications that have taken place in the structure of capitalism, some of the basic laws of capitalism still operate. The trends toward concentration of capital, and its increasing organic composition, that Marx observed and analyzed are still at work. Competition is still cannibalistic in its impact, especially on smaller aggregations of capital. The crisis in distribution and its continuation are both inevitable and incurable. They are a reflection of the fact that American capitalism, despite its tremendous wealth, is in reality a sick economy.

The fact that capitalist crisis does not appear in traditional form, as a sudden curtailing of credit at the peak of a boom, with resultant forced liquidations on an extensive scale, does not at all mean that capitalism has solved the problem of the business cycle, or that capitalist prosperity is permanent. On the contrary, as we have repeatedly observed, unless there is a constantly increasing ratio of war outlays to total output, the equilibrium becomes more and more precarious until it is finally upset.

The dead weight of mass unemployment will become more and more a powerful social and political lever, despite the fact that the increase in unemployment is uneven and gradual, and despite the fact that the labor movement has lost much of its militancy. In 1949, unemployment reached a postwar peak averaging 3.4 million for the year. The equilibrium of the economy was certainly endangered at that point. But, fortunately for American capitalism, the Korean war was launched by Stalin at just the right time. Unemployment which had averaged 3.1 million in 1950, declined to 1.9 million in 1951, 1.7 million in 1952, and 1.5 million in 1953, but in 1954 unemployment rose to an average of 3.2 million.

It is impossible to predict at what level (four, five or six million) unemployment will become such a dead weight on the entire economy that the far-reaching nature of the present crisis will be apparent to all. The fate of small business may be of only passing interest to monopoly capital, but its decline tends to aggravate the unemployment problem, and of course its demise is hastened by rising unemployment. If 1955 becomes the most prosperous (profitable) or the second-most prosperous (profitable) year in the history of American capitalism, with unemployment remaining at about the three million level, then what will happen to unemployment when there is a 5-10 per cent decline in production? And the crisis in distribution is a sure sign that in the not-too-distant future there will be a fall-off in production!

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Last updated: 7.10.2005