The Great A&P and the Struggle for Small Business in America (35 page)

That the president of the largest retail organization in the world would even read a three-page handwritten letter from a disgruntled former employee is remarkable enough. That he would intervene personally with high-ranking executives on four separate occasions concerning a problem at one of his company’s nine thousand stores, repeatedly challenging their explanations and ultimately accepting the former employee’s story over theirs, is extraordinary. But if such interventions could be humiliating for the employees concerned, they were a critical management tool. Mr. John was watching everything, or so he wanted his people to believe. And every A&P employee knew that if there was something wrong, Mr. John would try to set it right. That remarkable loyalty extended even to ex-employees such as G. D. Keller. In April 1940, a year after his first letter to John Hartford, Keller sent Hartford another handwritten note to say that business was better and he hoped soon to be out of debt. “I want to thank A&P for teaching me the grocery business,” Keller wrote.
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John A. Hartford took an extremely long-term view of his family’s business. For A&P executives, John’s demands could be infuriating. Rather than urging higher profit margins, he often insisted on the opposite. His view that A&P should focus on return on investment rather than profits as a percentage of sales was not widely shared within the company. To his division presidents, who were overseeing thousands of stores or substantial industrial operations, a large profit, relative to sales, indicated good performance. To John, though, a large profit was a warning light, signaling an attempt to maximize short-term returns by paying workers inadequately or by holding prices too high. Either way, too much profit in the short term was bad for the company’s position in the long term. As he saw it, excessive prices would reduce volume. Once that occurred, A&P would be forced to spread the fixed costs of its warehouses and factories across a smaller customer base, which would require it to raise prices even higher. No matter what the short-term implications for the bottom line, damaging A&P’s reputation as the low-price grocer was a risk he was unwilling to take. In 1940, John went so far as to tell his division presidents the company should not attempt to earn more than $7 per common share; if earnings were above that, then their prices were simply too high.
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So long as it could hold down costs, A&P could undercut the competition even under the tight legal constraints on prices. The supermarkets brought lower costs, and their lower prices brought customers flocking back. In 1940, according to the company’s estimates, it captured 10 percent of the available business in the places it had stores—more than it had held before the National Industrial Recovery Act, state chain-store taxes and fair-trade laws, and the legislative efforts of Wright Patman. In Pittsburgh, where its pre-Depression market share had been around 12 percent, A&P sold 20 percent of the groceries in 1940. In Chicago, its market share climbed from 11 percent to 14 percent, in Detroit from 10 percent to 15. Perhaps, John Hartford suggested, the relentless political attacks on A&P had backfired by focusing public attention on the fact that A&P was the cheapest place to shop. Whatever the cause, A&P found itself in a virtuous circle just as he had predicted: low prices brought higher volume, and volume boosted the bottom line. A&P’s pretax return on equity climbed above 15 percent in 1940 for the first time since 1933. The fourth revolution, bringing A&P quickly into the supermarket age, proved to be the company’s salvation.
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THE TRUSTBUSTER

The demise of his bill to tax chain stores in June 1940 brought an end to Wright Patman’s hopes of pushing anti-chain legislation through Congress. It also doomed Patman’s ambitions to enter the U.S. Senate. Patman had long coveted a Senate seat, and the death of Senator Morris Sheppard in April 1941 created an opening. When he tried to rally support across his huge state, though, Patman found he lacked for friends as well as money. The flamboyant populism that endeared him to voters did not appeal to potential patrons such as Sam Rayburn, now the powerful Speaker of the House, and Franklin Roosevelt. Roosevelt’s support went to a young congressman, Lyndon Johnson, who then lost to the conservative governor, W. Lee “Pappy” O’Daniel, in a fraud-ridden election. Patman, humiliated, abandoned the race and sent a pitiable missive to the Democratic Party boss, Edward J. Flynn: “Having been a loyal Administration supporter, I am hoping that I will be considered the next time a situation arises in Texas that will warrant an evaluation of my merits.”
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The tax bill’s crushing legislative defeat did not mean the end of the anti-chain crusade. Far from it. The cause was taken up by a most unlikely protagonist, Franklin Roosevelt’s antitrust chief, Thurman W. Arnold.

Arnold shared Wright Patman’s small-town roots, but not much more. Born in Wyoming in 1891, Arnold had struggled through Princeton before flourishing at Harvard Law School. He opened a law practice in Chicago in 1914, handling divorces, collecting debts, and struggling to make ends meet. The call to military service was timely. In 1916, his National Guard unit was ordered to Texas to help track down the Mexican guerrilla leader Pancho Villa, and that adventure was followed by wartime service in France. Following his military career, Arnold moved back to Wyoming and won a seat in the state legislature, where he was the only Democrat. His most famous initiative involved nominating himself to be Speaker of the House, rising to second his own nomination, and then rising once more to proclaim: “Mr. Speaker, some irresponsible Democrat has put my name in nomination and I wish to withdraw it.”
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In 1923, Arnold became mayor of Laramie, a city of sixty-three hundred that was home to the University of Wyoming, where he taught law. He moved east when a former Harvard Law classmate recruited him to become dean of the law school at West Virginia University. An offer to teach at Yale Law School, one of the most prestigious legal faculties in the country, came in 1930. At Yale, Arnold developed classes on leading-edge subjects such as psychiatry and the law, and his writings made him one of the best-known professors at the school. Easily identified by his three-piece suits, his neatly trimmed mustache, and the cigar that was often between his fingers, Arnold was a colorful character with many friends in New Deal Washington. During vacations and sabbaticals from Yale, he worked in the Agricultural Adjustment Administration (whose counsel was his former Yale Law School colleague Jerome Frank), the newly established Securities and Exchange Commission (headed by his former Yale Law School colleague William O. Douglas), and the tax division of the Department of Justice. Arnold turned down appointments to the National Labor Relations Board and the Securities and Exchange Commission. “An academic seat on the Atlantic Seaboard is more to my liking than anything else I can possibly think of,” he wrote to the Harvard Law professor Thomas Reed Powell in March 1938. When the offer to head the Justice Department’s antitrust division came in 1938, it was one he could not pass up.
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Antitrust law was not Arnold’s field of expertise, and his nomination brought forth protests from senators who thought him insufficiently concerned about the economic dominance of big business. His record suggested as much. At Yale, he was associated with a group known as legal realists, who were more interested in the ends to be achieved with the law than in philosophical consistency or political ideology. Realism left him skeptical that antitrust policy was an effective way to encourage competition. He thought the antitrust laws were a subterfuge, serving to “promote the growth of great industrial organizations by deflecting the attack on them into purely moral and ceremonial channels.” But the worries about his commitment to activist competition policy were unfounded. As a Westerner, Arnold shared the West’s deep suspicion of eastern capital and of large, centralizing institutions. During the five years of Arnold’s tenure at the antitrust division, from 1938 to 1943, it would undertake almost as many investigations of corporate power as it had since passage of the Sherman Antitrust Act in 1890. The division’s 215 investigations would lead to ninety-three court cases, a number limited only by Arnold’s ability to hire additional investigators and prosecutors.
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The political situation Arnold faced was difficult, for the Roosevelt administration’s attitude toward competition was nothing if not confused. On the one hand, the New Deal favored restraints on competition in the interest of raising prices and wages; the National Industrial Recovery Act, to take the most extreme example, lent the federal stamp of approval to price-fixing across the economy between 1933 and 1935. On the other hand, Roosevelt was always willing to criticize the monopolistic tendencies of big business. In the spring of 1938, just after Arnold’s appointment, he had launched a blistering attack on “the concentration of economic power in American industry and the effect of that concentration upon the decline of competition.” The president’s ambivalence about a matter that did not deeply interest him permitted Arnold great freedom. He regarded the legal assaults on companies deemed too big as intellectually unsound. Arnold determined to focus on “not the evil of size but the evils of industries which are inefficient or do not pass efficiency on to consumers.”
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The food industry was one of many that came into Arnold’s sights. Although he had no patience with Patman’s plan to use the tax system to punish big retailers, Arnold shared his concern about competition in food retailing. In June 1940, as Patman’s tax bill was going down to defeat, Arnold’s staff recommended a “systemic nationwide attack” on restraints of trade in the food sector. Arnold jumped on the idea. Food was a huge part of the average household’s budget, and both farm interests and consumers would applaud policies that might shrink the gap between the prices farmers received and the prices consumers paid. “In my opinion there is no excuse for not cleaning the Augean stables of food distribution,” Arnold wrote in a 1940 book arguing that their control of “bottlenecks” in the distribution system enabled companies to exploit consumers.
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Patman urged him on—and specifically urged him to investigate Carl Byoir. Byoir, the mastermind of the effort to block the chain-store tax, had boasted of its defeat in a series of triumphant twenty-four-page pamphlets:
What Farmers of America Did to Defeat the Patman Bill and Why
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What Manufacturers of America Did to Defeat the Patman Bill and Why
, and so on. Patman was bent on revenge. The congressman’s appointment books, which are largely blank, refer to meeting after meeting to discuss Byoir between 1940 and 1942. He talked about Byoir with Arnold on March 16, 1940, with a State Department official on May 27, and with a New Jersey woman on June 2. On July 21, he attacked Byoir in a statement to the Associated Press. A discussion of Byoir appears on Patman’s calendar again on August 17. Patman’s staff gave information about Byoir to Martin Dies, who was looking into Byoir’s work for the German Tourist Information Office in 1933; after Byoir testified before Dies’s committee that certain interests “were paying Patman what I would consider large sums of money” to fight chain stores, Patman responded with the claim that “big business is cooperating with Nazi agents for the purpose of having this country follow an appeasement policy.” On September 20, Byoir was the subject of a meeting between Patman and Arnold’s top deputy, Wendell Berge, after which Patman’s staff furnished derogatory information to Arnold’s investigators concerning Byoir’s role in the antitax campaign.
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In 1941, the antitrust division set up an office in New York specifically to pursue antitrust violations by chain grocers. Indictments followed quickly. On May 23, A&P, First National Stores, and several wholesalers were charged in Connecticut with conspiring to fix prices through an organization called the Connecticut Food Council. Five days later, A&P and John Hartford, along with several other retail chains and some labor unions, were indicted in Washington, D.C., on charges of fixing the price of bread. On September 25, 1941, a grand jury in New York indicted A&P and ninety-one other organizations on charges of using the Monday meetings of the Cuba Cheese Board in tiny Cuba, New York, and of a similar board in Gouverneur, New York, to fix cheese prices for the entire state.
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The theory behind the food investigation was that, while A&P accounted for just 12 percent of U.S. food sales and four other big chains jointly took 20 percent, “they are a monopoly in actual practice or effect.” Yet the economic logic behind Arnold’s attack on the chains was muddled. The Connecticut Food Council was blatantly anticompetitive, which is why all defendants, including A&P, pleaded guilty to antitrust violations. Yet this “conspiracy” was no secret; as one of many organizations set up by grocers and food wholesalers to control competition after the NRA’s demise in 1935, it had been tolerated and even encouraged by the Roosevelt administration until Arnold attacked it. The main evidence of price-fixing in the bread case was that bread cost more in Washington than elsewhere; a federal judge thought the government’s case so weak he dismissed the charges. The cheese case dragged on for three years before A&P and other defendants eventually pleaded no contest, relieving the government of having to explain how there could be a secret conspiracy with ninety-two participants.

Confusing matters further, in September 1941, Corwin Edwards, the antitrust division’s chief economist, said that “the protection of all grocers, in their ability to buy goods on equal terms,” was the greatest antitrust issue facing food retailers. Allowing all grocers to buy on equal terms, as Edwards demanded, is exactly what the government sought to stop in the Connecticut Food Council, bread, and cheese cases. Indeed, even as the antitrust division was suing chain grocers for keeping food prices artificially high, the State Department was signing deals with twenty countries to artificially hold up the prices of coffee, sugar, and other commodities. Rather than straightening out the administration’s ambivalent approach to antitrust enforcement, Arnold continued it, at least where chain stores were concerned.
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