Chapter II: Front Matter (2)

The monopoly clique considered this a form of bootlegging. On March 15, 1940, the Vernon-Benshoff Company (Pittsburgh), a member of the clique, made various suggestions to the Rohm and Haas Company which, although they were not placed in actual effect, offer valuable insight into the shocking extremes to which monopolists will consider going:

“Our discussion of the Pure Food and Drug Law and pulling the acrylic denture under it leads me to wonder if the manufacturers of the commercial molding powders might not add an ingredient which would not effect the molding properties, but which would disqualify it under the act. Apparently a slight trace would suffice. Naturally it would be omitted from the strictly denture powder.

“Recently I asked Dr. Johnson to suggest an addition which might interfere with distillation of monomer or retard polymerization. He could not think of anything that wouldn’t spoil the molding properties or clarity of the powders. But there the quantity needed to accomplish the result was the handicap.

“Under the very finicky regulations of the above act however, it may be the slightest trace of the right agent, too little to constitute harm to molding (or health either as a matter of fact) would suffice to have bootleg products in bad.

“A millionth of one per cent of arsenic or lead might cause them to confiscate every bootleg unit in the country. There ought to be a trace of something that would make them rear up.”

In its reply the Rohm & Haas Company said that it was in agreement with the general principles presented in the letter quoted above and that it would ask its research department to work on the matter. This was expressed in a letter of March 21, 1940 to the Vernon-Benshoff firm:

“With reference to your letter of March 15th, we shall be glad to investigate whether denture materials come under the Pure Food and Drug Act. We agree with you that if we could put some ingredient in our commercial molding material which would disqualify it under the Pure Food and Drug Act, this would be a very fine method of controlling the bootleg situation. We shall take this matter up with our development department and advise you whether any such material could be used.”

A striking way in which research can be perverted is illustrated by another example. The dyestuffs industry is one which is basically monopolistic and cartelized. A tight grip is maintained over its price structure. This is especially true of dyestuffs for textiles. Recently the duPont Company’s research laboratories developed a pigment which can be utilized either in paints or as a dye for textiles. The duPont research laboratories considered various ways to be sure that the pigment could be limited in use to the paint and finishing field so as not to disturb the price structure of the textile dyestuffs field. The trend of duPont’s research thought on this subject was stated by the director of one of its laboratories:

“Further work may be necessary on adding contaminants to ‘Monastral’ colors to make them unsatisfactory on textiles but satisfactory for paints.”

After working on this problem for some time, duPont’s Jackson Laboratory reported on its progress somewhat dolefully. (DuPont says of Jackson Laboratory that it is “one of the largest organic chemical research laboratories in the world.”) The particular task involved was difficult, according to a report by the Jackson Laboratory dated June 26, 1940:

“Mr. Chantler was of the opinion that pigment mixtures, unsuitable for textile printing would be very difficult to obtain.

“(B) _Agents Injurious to Textile Printing._--The suggestion was made that certain compounds that were white under ordinary conditions but that would be oxidized to give colored bodies when the prints are subjected to chlorine bleach, could be used. A few experiments had been made along this line using such compounds as Chlorostain N, dianisidine and DuPont Oxy Black Base. Complete data on this work are not available. Mr. Dahlen expressed the opinion that the addition of such compounds probably would cause as much or more damage to the paint trade as to textile printing.

“Such substances as ground glass and carborundum were suggested for incorporation with the pigment. While these materials would undoubtedly scratch printing rolls, there is considerable doubt as to their effect in paints and lacquers.”

Two days later the problem was again attacked at a meeting between the representatives of General Aniline Works and the duPont Company. Eight possible methods of adulteration were considered. I quote a few from the confidential memorandum of their discussion:

“1. A new type of copper phthalocyanine (CPC) for the paint and lacquer trade which would be unsuitable for application textiles.

* * * * *

“The importance of solving these problems was recognized, and it was agreed that both parties would work on promising ideas which resulted from this discussion. The three problems are closely related, and it is possible that the solution of one or two will automatically solve the third. It was agreed that a powder would be the preferable standard. After detailed discussion of various modes of attack, the following appeared to be outstanding:

“1. (a) Mixtures of CPC with Lakes.--The most promising mode of attack appears to lie in the formulation of a mixture of CPC with a lake, especially a lake of CPC. Such a mixture should have fairly good fastness to light and _yet be poor in wash fastness on textiles_ or incompatible with the usual textile printing lacquers....

* * * * *

“(d) Deteriorate Cotton.--Compounds might be incorporated into CPC which when applied to textiles and followed by bleaching or heating treatment _might increase the deterioration of the cloth_. Compounds such as chlorates or aliphatic halides which would produce hydrochloric acid were specific examples.

* * * * *

“(g) Irritating Substances.--_It is known that certain resins and solvents are irritating to the skin, often causing dermatitis. It might be possible to formulate a CPC composition which will make textile materials irritating to the skin._

“(h) Incorporation of Grit.--It seemed too dangerous to attempt to add gritty material to CPC since, although it would interfere with the use of the material for textiles, it would also offer serious disadvantages in grinding on application of surface coatings.

“It was agreed that the mere dulling of the material would not be a satisfactory solution since dull shades are often used in the textile trade. Most of the above comments are often based on work on blue, and many of the solutions would apply equally well to the green. In fact it is believed that there is a larger market for the sale of green than the blue.”

It seems to me that we cannot afford to place our sole reliance upon monopolistic corporations whose interests have only too often been divided, who have sought restricted production rather than full employment of our resources and labor, and who have sought for monopoly control rather than public welfare. We must learn by the bitter lessons of the early years of this war which found us lacking both materials and the know-how to make them, resulting from the restrictive practices of monopolies which instinctively seek to produce as little as possible for the greatest profit.

In war and peace alike technology is a vital factor in our national life. The present war is being waged with weapons and equipment which represent the last word in scientific development. Careful planning and rigorous adherence to the plans enabled Germany to have, in 1939, the most efficient war machine the world had ever seen. Now, after several years of feverish activity, the United Nations have at last caught up with and passed Germany in the race for armament superiority.

Now that our war effort has finally been put in high gear an entirely different kind of problem seems to be emerging. Under the forced draft of war urgency and unlimited government expenditure, materials and products are being made the like of which we have not heretofore known. The light metals, aluminum and magnesium, the wonder metal beryllium, the miraculously efficient diamond tools and the tungsten carbide tools, the plastics and dozens of other new developments will unquestionably make the postwar world something entirely different from that to which we have been accustomed. Many of the processes which can revolutionize our mode of living are owned by the government. Some are in the custody of the Alien Property Custodian. Others have been developed with federal funds, either by government agencies or by private concerns. No one will seriously dispute the wisdom of retaining control of these government-owned processes and of fostering the fullest possible use of them for the benefit of all.

There can be no denying that the war has resulted in a concentration of productive facilities in the hands of a relatively small number of gigantic corporations. Even before Pearl Harbor some of them were enormous concerns capable of wielding irresistible power in the competitive struggle with other, smaller companies. Today and after the war the smaller competitors which have survived will find the odds against them a great deal more disheartening than before. It is not in the public interest to allow the small competitors to be killed off in the uneven fight. Neither is it in the public interest to place hampering restrictions upon the effects of the large companies to fully utilize their research laboratories and technical experience for the purpose of strengthening their competitive position.

Without doubt the sensible thing for us to do is to make research and technology available to the little fellow as well as to his big competitor. In agriculture this policy has amply demonstrated its soundness. Experiment stations financed by state and federal funds extend the benefits of their research to the small farmer as well as to the large. It is doubtful that one could find a single intelligent farm operator, large or small, who would voice the opinion that governmentally financed agricultural research has not been worth many times the money spent for it. The small industrialist has the same right to expect that a government wishing him to continue to make his contribution to the national welfare shall offer him those benefits of research and expert advice which he cannot afford to provide for himself but which can easily be provided by the government.

There are those who scoff at all mention of cartels and refer to them as bogies conjured up to justify an attack on all big business. Such an attitude is dangerous. Cartels present the greatest challenge to our system of free enterprise.

In every cartel arrangement which has come to the attention of the Antitrust Division of the Department of Justice technology has been a vital factor. It is the responsibility of government to see that technology remains free from artificial control and monopoly perversion.

Every instance of this sort is evidence of the possibility of service to the public which might be expected if the government should see fit to provide itself with an adequately financed and numerically sufficient staff of technologists. It is my belief that the time has arrived for the adoption of legislation which will adequately protect and advance the public interest in technological development.

4

_Patents_

The importance and the position of patents in the American economy have been sharply defined since the outbreak of the present war. While the problem which patents have presented to our economy did not begin with the attack on Pearl Harbor, our experience within the past few years has crystallized many of the questions and issues at stake.

Patents are fundamental factors in the cartel problem because patent agreements are quite frequently used as the basis of cartel arrangements. The vital importance of control over technology and research to the achievement of cartel power enhances the significance of patents as the foundation stones of cartel structures. At the same time, the effects of patent abuses upon the economy are magnified to a critical degree.

We are all familiar with the historical background of the patent system and with the intent of the authors of the Constitution in stating that Congress shall have the power to promote the progress of science and useful arts by the grant of a patent. It is no accident that the original clause in the Constitution was phrased in careful terms. The framers of the Constitution inherited a concern toward the grant of any monopoly by government. They were specific in limiting the scope of the patent monopoly because they did not wish the patent to become the basis of a system of privilege.

When the American patent system was born, we were a frontier nation. Pioneers in every branch of science had before them an inviting horizon of discovery. The recognition of their contribution towards the promotion of science and useful arts served as a stimulus to their initiative and ingenuity. During this period the patent system served our country well and acted as a major incentive in the making of industrial America.

Our patent system was designed to “promote the progress of science and useful arts.” In many respects it has done so, and has given proper protection to inventors and enterprising businessmen. Where it operates to carry out this purpose, there can be no just complaint. But in many instances the patent system has been perverted to accomplish exactly the opposite effect. The patent has become the principal power weapon of modern monopoly, and the misuse of patents the major tactic of industrial cartels. This perversion has become so widespread as to jeopardize the whole patent system.

The patent problem as it exists today arises in an environment vastly different from the handicraft era in which modern industry found its beginnings. It is not the patent grant as such nor is it the operation of the individual inventor that brings the patent system into question. Invention today is a large-scale industry in a complex economy. In many branches of industrial production vast monopolies exercise a dominating influence over research. It is the abuse and misuse of patents by such concentrated groups wielding tremendous economic power which have brought patents into conflict with the fundamental purpose of the patent law and with the Sherman Act.

Monopoly interests, which have violated the antitrust laws in the course of their abuse of patents, have made the claim that the Antitrust Division of the Department of Justice is endangering the patent system by prosecuting restraints of trade based on patents. Many honest and innocent bystanders have been confused and misled by this propaganda. The fact of the matter is that danger to the patent system arises not from enforcement of the antitrust laws but from the flagrant abuses of those who use patents as the foundation stone of illegal monopolistic control of industry. If the patent system is finally wrecked we shall have to thank those who brought it into disrepute by their unflagging attempts to use the patent grant in a manner contrary both to the law and to the national interest.

Because patents have become an instrument of power-hungry and power-seeking groups in industry, grave doubt now exists as to whether our economy can longer tolerate and permit the control and consolidation of patents by industrial oligarchies.

Among the many serious abuses to which patents have become subject within the last few decades, it is necessary only to specify a few.

1. Patents have been used illegally to establish regimented systems of industrial control by private groups.

2. Patents have been used, contrary to the tradition and intent of the American economy, to stifle new enterprise, to limit capacity and production, to divide world markets, to impose artificial and arbitrary price levels, and to set up private tariff walls.

3. In their determination to eliminate competition among themselves and to prevent the emergence of new enterprise, monopoly groups in industry have used patents as a shield for conspiracy to violate the antitrust laws.

4. Employing the instruments of law designed to secure justice and protection to the small inventor and small businessman, monopoly interests have used litigation and threats of litigation based on patents to compel the submission or surrender of independent enterprise to the dictates of monopoly control.

5. Patents have been used by industrial giants here and abroad to fasten their grip on international trade by setting up patent cartel agreements which slice world markets into exclusive trade areas. In many instances these international patent cartels have made it plain that they consider adherence to monopoly rules to be above and beyond the laws of the United States and other countries.

6. Our experiences in the first World War and the present global war have demonstrated conclusively that the interests of hostile countries have been able to use patents as weapons in economic warfare against the United States. By delaying the development of strategic new industries, by withholding know-how, and by strangling the market with exorbitant prices for critical materials, monopoly groups in aggressor nations have sought to weaken the war potential of the American economy.

7. In numerous instances, scientific research has been perverted and misused in order to strengthen monopoly restrictions illegally based on patents.

In the scores of Department of Justice cases involving patents and illegal agreements based on patents and in the testimony before various congressional committees investigating the facts, it has become overwhelmingly clear that if free enterprise is to be maintained, patent abuses must be eliminated. At the same time, the protection which the patent right was designed to give to the independent inventor and businessman must be strengthened and restored. If the system of economic competition on which this nation depends for its well-being is to be preserved, it is imperative that economic opportunity be granted to all on equal terms. This cannot be accomplished if privileged groups are able to obtain unfair advantage over new enterprise or to amass huge patent structures which block the road to industrial initiative.

In a whole roster of industries, patents have been employed as the police power of private economic governments. Our industrial history is replete with examples of industries dominated by a few small monopoly groups whose power rested on patents. In the radio industry, in explosives, in spectacles, in glass containers, in magnesium, in vitamins, in medicines, in building materials, in dyestuffs, in electrical equipment and in synthetic rubber, to mention prominent examples, the development of the industry has been decided by the arbitrary discretion of groups controlling concentrated patent structures. Using patents as an excuse, monopolists have sought to determine who shall be given permission to manufacture, to buy and to sell. They have determined what prices should be fixed and in what markets sales might also be made. Illegally wielding their patent power such groups have completely squelched free enterprise in these and in many other industries. Such control is regimentation and bureaucracy in an extreme and pernicious form. The independent businessman who falls victim to this system of control is without recourse.

Many businessmen seriously object to the regulation of industry by government. What they do not realize is that it is not public government but private government which exercises the most rigid control over industrial conduct. Such regimentation violates the fundamental and elementary principles of economic liberty. If we believe in free enterprise, we cannot at the same time tolerate the existence of private economic government which bears no responsibility to the public. This type of regimentation has acquired such influence in numerous branches of industry that free enterprise no longer operates.

A striking example of the manner in which patents are misused to create private industrial governments is afforded by the glass container industry. For more than a generation this industry has been dominated by a monopoly group whose main function it has been to acquire and license patents. This private governing body produced nothing itself, yet the production of practically all the glass containers made in this country was subject to its will. The amount of glass containers to be produced by any manufacturer was closely regulated and limited. The type of bottle he could make was determined by a system which permitted practically no competition. Outsiders who attempted to enter the industry were promptly eliminated by vigorous and costly patent suits.

The patent policy of the monopoly group was neatly set forth in a company memorandum which states:

“In taking out patents we have three main purposes: (a) To cover the actual machines which we are putting out and prevent duplication of them ... (b) to block the development of machines which might be constructed by others for the same purpose as our machines, using alternative means; (c) to secure patents on possible improvements of competing machines so as to ‘fence in’ those and prevent their reaching an improved stage....”

In the administration and regulation of the glass container industry, this group pursued a licensing policy equally intended to perpetuate its monopolistic position. In a memorandum outlining this aspect of its control, the following statement appears:

“Consequently, we adopted the policy which we have followed ever since, of restricted licensing. That is to say, (a) We licensed the machines only to selected manufacturers of the better type, refusing many licenses whom we thought would be price cutters, and (b) We restricted their fields of manufacture, in each case, to certain specific articles, with the idea of preventing too much competition. (c) In order to retain more complete control of the situation, we retained title to the machines and simply leased them for a definite period of years, usually 8 or 10 years, with the privilege of renewal of a smaller additional term.”

Obviously, the patent and licensing policy in the glass container industry constitutes a system of oppressive regulation which neither promotes the progress of science and the useful arts nor permits the operation of competitive economic processes. Yet, instances like the glass container industry could be multiplied for it is by no means unique in modern American industry.

The restrictive effects of patent abuses on the production of critical materials in this country became clearly apparent following the outbreak of war. Shortage followed shortage, and in nearly every instance the basic device restricting our expansion of capacity and output was found to be a patent cartel agreement.

A dramatic illustration of a shortage resulting from a restrictive patent agreement enforced by cartel groups is provided in the case of tungsten carbide. Few items are as important as machine tools to our economy both in peace and in war. The best cutting edge for machine tools is made from tungsten carbide. Because of a patent cartel agreement between the General Electric Company of this country and the Krupp Works of Germany, the price was maintained at such a high level that the second largest manufacturer of this commodity said:

“The control of the tungsten carbide patents by the General Electric Company and the Krupp Company has resulted in keeping the prices at exorbitant levels. Now when the emergency has come, industry has not learned how to use tungsten carbide and has not the machines, the skilled men, or the technique which it would have had if the material had been available at the same low prices at which it was available to German industries.”

Before the patent cartel was organized, the price in the United States was less than $50 a pound. After the cartel was formed in 1928, the price of tungsten carbide rose to as high as $453 a pound or, in other words, much more than the price of gold. Significantly enough, the price in Germany never rose above $50 a pound.

While we recognize that technology is the most dynamic factor of change in the modern world, it is not sufficiently realized that in the struggle to control technological development and to confine research within their feudal domains, monopolistic interests divide the universe of technology in exactly the same way that they parcel out world territory. Using the huge patent structures which they have amassed, industrial giants divide among themselves the major branches of technology and allow no one to encroach on their preserves.

Although we depend upon research as the principal source of those advances which promise a better and a healthier world, we tend to overlook the fact that the power which modern monopoly wields over research, by virtue of patents, often perverts the spirit of discovery. How the deliberate misdirection of research is carried out is clearly indicated in at least three cases involving electric lamps, plastics, and dyestuffs.

Electric lamps in the United States are practically the private preserve of a domestic monopoly. The history of this industry can be written in terms of the elimination of competition, based largely on the abuse of patent litigation and price fixing. One of the great threats to monopoly control can come from the virility and imagination of our inventive genius. For this reason the vested interests attempt not only to control their current monopoly, but take every precaution to project their control into the future and to guard against the development and exploitation of inventions by outsiders.

One of the greatest developments in the lighting art since Edison invented the incandescent lamp is fluorescent lighting. It has already proven to be many times more efficient, and cheaper, than incandescent lighting. The rapid development of this newer type of lighting which would come from a competitive situation has been carefully suppressed by the monopoly group. Patent control by the monopoly group controlling incandescent lamps has been the main instrument for the suppression of fluorescent lighting. Not only the monopoly group governing incandescent lighting, but the electric utility companies as well, fear the effects of the widespread use of more efficient means of lighting, since it would reduce their sale of electricity and hence their profits. A letter from the manager of the lighting bureau of a large power company to the General Electric Company should be of interest to the public:

“Increasingly I seem to become the ‘father confessor’ on fluorescent lighting as far as the utility men are concerned. This concerns one of the displays dealing with fluorescent lighting in your G. E. building at the New York World’s Fair. I must confess that although I have been in your exhibit twice I did not see this particular display.

“It appears that 20 watts of fluorescent lighting are compared with 20 watts of incandescent lighting, the sign purporting to read something to the effect ‘See the difference between equal wattages of fluorescent and mazda lighting.’ Of course, the readings on the foot candle meters show dramatic differences.

“If this demonstration is as explained to us, I think it does _violate the spirit of the understanding that our group had in Cleveland. As a matter of fact, I would think it violated the fundamental concept of the lamp department that advances in the lighting art should not be at the expense of wattage_, but should give the customer more for the same money. I hope you can find a way to change this exhibit, so that it does not give misleading impressions to the crowd who will see it.”

Here is the reply by the General Electric Company:

“When Miss Winters showed me the attached letter ... I immediately got in touch with Al Reas with regard to the demonstration at the fair. Apparently this particular demonstration was temporarily loaned for use at the fair, and is now being returned to the exhibit shop. _Therefore, by removing this particular exhibit, Sharp and the other utility men need have nothing to worry about._”

Even if such flagrant misuse of patents did not occur, the grip on our economic life which monopoly holds through patents would be a threat to our system of enterprise. The spirit and substance of free enterprise cannot exist in an environment where an independent businessman with an independent idea, or an inventor with a new discovery in a monopoly-ridden field, finds himself compelled either to submit to monopoly control or to be barred from the market. It is ironical but true that while a patent is supposed to give protection and encouragement to the inventor, possession of a patent today is little more than an invitation to predatory litigation. The threat of expensive and protracted patent litigation is perhaps the most effective means by which monopoly enforces its private rule on industry to eliminate competition.

The small businessman facing such obstacles has limited choices of action. He can sue the large group, or risk suit, but in either event will find himself involved in a costly, lengthy process. He generally emerges with a broken spirit and a petition in bankruptcy.

The files of the Department of Justice are crowded with complaints and pleadings of these little men. They have found these handicaps insuperable in their attempts to compete. In giving testimony before the Temporary National Economic Committee, one small manufacturer in the glass container industry recited a tale which is frequently and tragically repeated throughout many branches of production. This particular witness, sued for infringement on nine or ten counts, stated:

“We naturally were finally forced to hire a patent attorney. We had to acquire the services of a Texas attorney, and I think there are some two or three patent attorneys in the State. They brought us into court in April of 1935, as I recall. Well, when I arrived in San Angelo and met them there in the hotel, I can conservatively say there was a half train load of attorneys and equipment. There were motion picture projectors and attorneys all over the place. I don’t know anyone of the Hartford legal staff that was not there. They were prepared to give us a nice battle. Well, I had only one attorney and he was considerably lost in that crowd. I wish you might have seen his face that morning. So I promptly asked for a recess until the afternoon in order to see if we couldn’t settle the case out of court.”

As the witness testified at the time, the “settlement” was “a sort of slow death arrangement.”

This situation has become a common condition, but it is not new. Thomas Edison once stated that patent litigation cost him more than he ever made from an invention. Unfortunately, the government has not as yet developed any procedure to protect the legitimate rights which a patent is supposed to confer on the little man. I have hopes that this aspect of the problem will be considered and met in the not too distant future.

Even if every other charge of malpractice or problem of monopolistic abuse of patents were ignored, there would remain a crucial question. Technology is an index of national security, and technological strength depends upon technological freedom. Yet, in two world wars we have learned that the infiltration of American industry by foreign and hostile interests has been conducted through patents and patent agreements.

In 1914, we experienced severe and crippling scarcities of dyestuffs and medicines, because patents held by German interests had prevented the development of American production. In the case of salvarsan, Ehrlich’s “magic bullet” for the cure of syphilis, we found that a patent protected the product, but did not reveal the method of its manufacture. The same situation occurred in other drugs, such as veronal and novocaine, and in other fields, such as metal alloys and special electrical equipment.

Since the outbreak of the present war, our vulnerability to this method of attack has been revealed once more. The use of patents as the spearheads of attack in industrial and economic warfare, intended to weaken our war potential, is illustrated in the beryllium industry, in synthetic rubber, in pharmaceuticals, in optical goods, and in other important military and civilian supplies. It is clear that abuses of this nature, having consequences which affect both our national security and our standards of living, cannot be tolerated.

Whether at the hands of domestic or foreign interests, misuse of the patent system and abuses of patent power militate against the best interest of the American people. It is our task and our responsibility to uproot these malpractices. Within the space of four years the Antitrust Division of the Department of Justice has brought more than forty cases involving these typical abuses, and this Division is investigating many more.

I should like it clearly understood that I believe the patent system in many respects has served this country well. As long as it stays within its proper orbit it can continue as a great force in the industrial and scientific development of our country. Indeed, it must be one of our aims to strengthen the patent system to make it more effective for the protection of small business and for the encouragement of new invention. Those who have a deep belief in the patent system should support the government’s action in uprooting and eliminating the abuses which have done so much to discredit the patent system generally.

The vigorous enforcement of the antitrust laws is, of course, our greatest guarantee that democratic opportunity will be kept alive in our economic system. Something more is needed, however, to make certain that free enterprise has a fighting chance. In this connection, it is encouraging to note that the Senate has had under consideration legislation intended to provide access to technology to government and public alike. It is, of course, absolutely necessary that in the present stage of technological development, where the military security of the nation may depend upon the quality of its technology, that the government have every facility at its disposal to keep abreast of technological change. From the standpoint of economic health, however, means must be found of granting to the small businessman or the small inventor, who cannot hope to compete on an equal footing with the massive strength and enormous resources of great industrial laboratories, a chance to initiate and develop new ideas, new processes and new products.

In numerous instances patents have been used to discourage research by independent inventors and businessmen. What incentive is there to inventors to develop new products or processes when they may be, in effect, inventing themselves into a patent infringement suit? Very often in such cases the fact of infringement is never determined. We all know that patent litigation is costly and time consuming. In disputes between monopoly groups and smaller opponents the difference in economic strength between the two parties is usually the determining factor. In this situation small competitors often find it less expensive to depend upon the research and the largesse of great corporations, by accepting licenses which are usually restrictive. Under such conditions neither the opportunity nor the fact of free enterprise can flourish.

Conduct of research by government does not mean that it would enter into competition with industry. Rather, research sponsored and carried on with the facilities and support of the government would constitute a strong stimulus to private initiative.

The government would enter no business as a result of carrying on research. It would sell nothing, and it would not prevent others from going into business. The fruits of discoveries produced by government research would be open to all. It is primarily those interests which seek to deny access to technology by independent enterprise that are opposed to the entry of government into this field.

The great need of small business in the post-war world for new opportunities and new directions cannot be fulfilled if the small businessman is denied access to technology. If the government provided the scientific and technical resources which placed small enterprise on an equal footing with great corporations, we should undoubtedly witness a revival of the spirit of industrial adventure.

Ultimately, the entire public as consumers would receive the benefits of a government research program. When competition is absent and research is dominated by monopoly groups, the consumer not only pays higher prices for what he does get, but has no assurance that he is obtaining the best possible products. Monopoly has no incentive to progress, and so long as it is able to control research it need not strive to make better products at lower prices.

In addition to meeting the needs of small business and consumers, the maintenance of scientific research by an over-all public agency is a direct concern of government. The importance of technology to national welfare has been shown strikingly during the present war. There are many areas of scientific research and development which private industry cannot adequately explore and develop. There are many branches of science and technology, as well as of industrial development, where government cannot afford to be dependent upon the efforts of private monopoly groups. The lists of shortages which hampered our war effort in early days of the present struggle resulted in nearly every instance from restrictive effects of monopoly control. Government was forced to turn to monopoly groups which dominated the market. It is essential for the future that the hazard of dependence on monopoly be removed.

Industry itself, large as well as small, would profit tremendously if research conducted by the government supplemented private efforts and increased our stock of scientific knowledge. The creation of new industries would open up new channels for private investment and would help to eliminate the periodic effects of depression. The constant flow of new ideas into industry is essential if we wish to have both full production and full employment. Government research could become one of the principal means of stimulating and encouraging new industry and at the same time overcoming the effects of the business cycle.

The means of correcting patent abuses and of renewing competitive opportunity in industry are available in existing law and with relatively minor modifications in the scope of governmental authority. Unless we are willing to accept private industrial government as a substitute for a free economy, it must be our determination that the spirit and purpose of the patent laws and the conditions necessary to competition shall be securely established. If we would avoid the destruction of the patent system as the consequence of its abuse, it must be made clear to monopoly groups and industry that they cannot base their restrictive practices and policies on patent privileges.

5

_Medicines_

In a very real sense the producers and distributors of medical products occupy a position of public responsibility. On the whole, those in the drug industry who are charged with this responsibility have carried out their obligations in a highly praiseworthy manner. They are to be commended and congratulated.

In nearly every instance in which the standards of service and of public welfare have not been maintained we find that monopoly groups have been responsible for the abuse of public confidence. When monopoly is able to impose restrictive conditions on the production, the price and the distribution of vital medicines and to determine who may buy and sell products, it is in the interests of the drug industry and the public alike for government to intervene.

Thus when it was found that a small ring of producers had been able to maintain fixed prices on insulin and to pick and choose those who would be allowed to distribute insulin to the public, it was necessary for the government to act.

There are approximately two million persons in the United States suffering from diabetes. Most of these sufferers require one or more daily injections of insulin. They are dependent for their very lives on an adequate supply of the drug at a reasonable price. Yet a monopoly group exploiting its privileged position took advantage of the industry and of the public to impose arbitrary prices and unreasonable conditions of distribution. Wholesalers, distributors, and retailers were compelled to adhere to the edicts of the monopoly group under the threat that if they did not do so, no insulin would be sold to them.

The possible consequences of this exercise of monopoly power on the well-being of victims of diabetes are appalling, yet in the hands of monopoly the needs of the public become subordinated by the edicts which are imposed on the industry and the public alike. It is for this reason that the industry itself, as well as government, must continuously be vigilant to oppose the growth and exercises of monopoly power and to stimulate wholesome competition.

Few effects of monopoly have been more insidious than the consequences of cartel control over many areas in the drug and medical field.

Because of cartel and patent agreements which carve up world markets and divide fields of production, American drug manufacturers have in some cases been denied the right and the chance to develop the American drug industry to its full possibilities. Because international cartels have been able to set up their own trade restrictions, American drug manufacturers have been prevented from competing within the United States. In many cases American manufacturers have been barred from engaging in competition in other countries and from exporting to such countries. In particular, American producers have found themselves shut off from South American markets. Illegal patent abuses and agreements have in other cases prohibited American manufacturers from entering production or carrying on research in many important fields dominated by foreign interests.

The fight against disease is a primary concern of society everywhere. Yet the brilliance and the industry of modern scientists have all too often been perverted by the efforts of selfish groups to fasten the grip of monopoly on products essential to health and welfare. There have been numerous illustrations of the malignant effects of monopoly on national health and on the maintenance of free enterprise in the pharmaceutical industry. It is instructive to recall some of the more flagrant examples of the abuse of monopoly power in the drug and medical field.

The cartel spirit in the pharmaceutical field is exemplified by the following paragraph, written in July 1938 by the German company, I. G. Farbenindustrie:

“There is an agreement between German and Swiss firms of the Chemical Pharmaceutical Industry for the protection of original preparations which are marketed by the individual members of the group.... This agreement provides that products which compete with the original products of members of the association and their subsidiaries or affiliated firms shall not be introduced in any country throughout the world.”

This agreement may be described as a conspiracy to deprive the world of the benefits of research in new drug products wherever such benefits may conflict with the vested interests of any of the participating drug manufacturers.

The present war is not the first time that the United States has found itself dependent in a period of crisis for vitally needed drugs and medicines on cartels dominated by foreign interests. During the first World War the scarcity of salvarsan, of veronal, of novocaine, and similar synthetic medical products seriously affected the health of our people. It was not until after the war was over that we were able to relieve some of these shortages. In the years between the World War and the present global war cartel interests once more were able to reestablish their monopolistic control over new pharmaceutical products.

The myth of German superiority in the production of organic medical compounds has been dispelled for many years. It is necessary, however, to recall that this prestige rested not on superior skill but on the abuse of monopoly and patent privileges. A well-known instance of the way in which the German cartel interests sought to exploit their monopoly position is the story of Bayer 205, sometimes called Germanin. Shortly after the end of the World War I. G. Farben announced that it had discovered a cure for sleeping sickness, the disease which is so prevalent in Africa. The Germans refused to reveal the formula for Bayer 205. Instead they sought to use their discovery as the basis of an exchange of the secret process in return for the restoration of Germany’s lost colonies. While this bold attempt to balance medical achievement against political advantage is an extreme case, it nevertheless reflects a cartel attitude.

From the standpoint of the progress and growth of the American drug industry it must be realized that the influence of cartels has been the principal factor in keeping American products from world markets. Foreign concerns, by making treaties with monopoly groups in the American drug industry, have been able to monopolize practically the entire continent of South America. One typical agreement between an American corporation and a German concern divided the world market for more than 400 pharmaceutical and chemical products into non-competitive areas. Among the fields included in the agreement were quinine derivatives, sulfa drugs, vitamins and narcotics. The American firm was prohibited from exporting. This same pattern of restriction by which American producers were barred from selling to South America has been found in a whole roster of cartel agreements involving pharmaceutical products. The effects of these agreements have severely handicapped our good neighbor relations with South America and have made more difficult the establishment of healthy trade between the United States and Latin American countries.

If we are to succeed in our efforts to create a better postwar world, it should be evident that we must uproot every vestige of illegal monopoly control over products essential to the health and welfare of our people. Whether the restriction stems from the efforts of a cartel to confine American industry to the domestic market, or to strangle research and production by American concerns, or to use patents to impose unlawful restraints on trade in the drug industry, it must be our determined purpose to restore free enterprise in the pharmaceutical field. Given freedom of opportunity and the incentive to enter branches of the industry heretofore dominated by cartel interests, we may rest assured that American drug manufacturers will demonstrate their outstanding capabilities in research and their ability to compete both at home and abroad. Competition will benefit the American drug industry and permit it to attain its maximum development. What is perhaps even more important, this country will be assured that in the future the health and welfare of its citizens will not be dependent upon the arbitrary exercise of monopoly power.

I am sure that responsible persons in the pharmaceutical industry will not argue that European technology in this field is so superior to ours that competition is futile. If American manufacturers have free access to technology and are not barred by the misuse of patents and the resurrection of cartel arrangements, then the industry will find itself in a healthier financial and technological position as well as in a position more fully to discharge its obligations to the American people. The myth of European superiority in the medical field has been carefully nurtured by foreign interests which have used this propaganda as a commercial device. Only free competition and free enterprise can fully dispel this myth. This cannot be done, however, unless the pharmaceutical industry sees to it that victims of diabetes, malaria, pellagra, rickets and arthritis are not at the mercy of privileged groups who have abused public confidence and exploited human suffering.

The laboratories of our pharmaceutical industry have brought forth wonderful discoveries. Their achievements have been a boon to the human race. But they have a responsibility to erase the blemish caused by those few who have misused their economic power to violate their trust.

The promotion of public welfare as well as the best interests of the pharmaceutical industry are served when research, production and distribution are carried on free from the taint of monopoly. National health, like national economic well-being, demands that freedom of opportunity to conduct research, to engage in business, and to compete in domestic and foreign markets be preserved. No compromise is possible with monopoly control in an industry which is so directly concerned with human welfare.

6

_Synthetic Hormones_

The use of synthetic hormones in the United States has grown to such an extent that the annual sales amount to many millions of dollars. Something more than half of the entire business in this country has been carried on by four companies. Each of these companies is the subsidiary or affiliate of a corresponding company in Europe. The European companies belong to a hormone cartel which has controlled the hormone business most effectively abroad and in the United States.

After investigating the ramifications of the cartel’s activities in this country the Department of Justice prosecuted the four American companies for violations of the antitrust laws. Pleas of nolo contendere were entered by the four corporations and by five of their officials and fines totalling $54,000 were assessed and paid. At the same time, on December 17, 1941, the defendants consented to the entry of a decree in a civil action brought by the government, which enjoined them from further activities in violation of the antitrust laws.

These are the basic aspects of the hormone cartel:

1. Research has been seriously affected by restrictions imposed by foreign cartel members.

2. German interests have entered into patent licensing arrangements with American affiliates under which they--the latter--agreed to withhold their products from Latin American markets.

3. During the war American companies have aided their German affiliates in evading the British blockade.

4. American companies have participated in the use of paper corporations and dummy consignees to avoid the effects of the Black List in Latin America.

5. American concerns have devised deceptive labels to preserve markets for their German affiliates and to aid the spread of German propaganda in Latin America.

6. Members of the cartel have misused patents in schemes to camouflage flagrant violations of the laws of the nation.

7. The recognized benefits which might be obtained by the widespread use of hormones have been to a large extent curtailed by reason of the restrictions and illegal policies of the cartel members.

8. In the case of one of the synthetic hormones, there is evidence indicating that it may have a substantial contribution to make in connection with treatment of wounded soldiers for shock. The cartel restrictions have had their effect upon the production and wide use of this hormone as well as the others.

9. Two of the American companies have been taken over by the Alien Property Custodian and one of these has been sold.

The following explanation of the nature of hormones does not purport to be a scientific discussion. It represents my understanding of the subject based upon what I believe to be reliable authority. I merely give it for what it may be worth as background for the discussion of this cartel.

Hormones are the secretions of certain ductless glands. As they enter the bloodstream they regulate chemically practically every function of the human body. They are really special agents of chemical coordination of the body. They regulate, order and correlate bodily functions with the same precision as that achieved by the nervous system. Since their first definite isolation by the great English physiologists, Bayliss and Starling, in the early years of this century, there has grown up a whole new field of research. Infinitely small amounts of certain hormones have the most profound effects upon the human body and its emotions. As in the case of vitamins, much of our present knowledge is the result of observing the striking pathological defects and abnormalities produced by excess or deficiency of hormones.

Thus deficiency of certain of these drug-like substances from the small thyroid gland causes a marked decrease in metabolism and mental and physical sluggishness. Excess of this same hormone, or complex of substances, has the opposite effect, increasing oxidation and pulse rate, and causing nervousness and emaciation. It also has striking effects upon growth and development. Deficiency in children results in dwarfism and idiocy.

Other hormones such as those from the anterior lobe of the pituitary gland affect the growth of bone. Hormones from the adrenal glands, located near the kidneys, cause constriction of blood vessels, accelerate the heart beat and cause discharge of glucose from the liver. Insulin, one of the most widely known of the hormones, plays an essential role in the metabolism of carbohydrates. Its absence causes diabetes which is characterized by a failure of normal carbohydrate metabolism.

Medical investigators and chemists have been exploring this vast new field of research for many years. They have learned more and more about the actions and composition of these complex substances. For many years they have worked with the extracts from the glands of certain animals to obtain the hormone itself, or as much of it as could be saved in the process of extraction. At the same time they have been analyzing the composition of the hormones, and endeavoring to synthesize the active principles. Among those which have been produced in synthetic form are the male sex hormone, testosterone; the follicular and corpus luteum, both being female sex hormones; and desoxycorticosterone acetate, a synthetic substance which has effects similar to those of cortin.