or receive excessive or disproportionate gain or profit therefrom to the exclusion of any other branch of this industry.

This rule was subsequently accepted as rule 6 in the Petroleum Code approved by the President. But it never worked because the integrated oil companies paid absolutely no attention to it and the administrators of the code were powerless to force the integrated oil companies to do anything against their will. Any hope of accomplishing the principle above outlined without very positive legislation as suggested in the Harrington bill (H. R. 2318) is sheer waste

of time.

A month before the demise of codes under N. R. A., because of the Supreme Court decision in the Schechter case (295 U. S. 495), the so-called Blazer committee report (Petroleum Code Survey Committee on Small Enterprise, March 28, 1935, P. A. B. No. 97, 815) was filed. It outlined the problem of noncompliance with the rule of the code above referred to, saying:

Dealers complain, however, that large oil companies are not closing up those stations of their own which they are unable to operate profitably on the margins given to dealers. We consider this a valid and important complaint. Doubtless, enforcement of rule 6 of article V (pertaining to use of profits in one branch of the industry to subsidize losses in another) which we deal with elsewhere, would tend to correct the situation.

Typical of these complaints is a letter written by a consulting engineer who had given financial backing to a relative in the retail gasoline business. After commenting on a recent reduction in the margins to dealers, he writes: "Two new superservice stations are being erected within a stone's throw of my relative's station by companies whose gas he sells, and another chain superservice station is going up nearby. In the community where I live, north of New York, four such stations have been erected within a few months and the small men are being wrecked. These company stations have so many attendants and such a high investment cost that it is obvious they could not fail to lose money if they were charged on the books for oil and gas at the same price they charge to independent marketers."

Another marketer commenting on the situation writes: "The principal reason for the multiplicity of service stations is that every integrated company feels it must have service stations in every neighborhood of every city of every State. The local representative of the oil company told me he would

never be satisfied until his company had service stations in every neighborhood in our city giving them a total of 15 or 20 stations. Other integrated companies appear to have the same idea and soon we will have each of them represented by a service station in every neighborhood-if there are enough corners for all of them."

A number of those who sent in complaints call attention to the figures submitted in connection with the arbitration of the service-station strike in Cleveland last summer, as published in the National Petroleum News. The exhibits presented by 10 large oil companies showed that average costs for marketing through their own service stations had averaged 9.63 cents per gallon of gasoline sold during 1933. If, from these figures, is deducted the entire gross profit made on nongasoline products (equal to 1.7 cents per gallon of gasoline sold) the net cost of selling the gasoline itself would appear to have been approximately 7.93 cents per gallon. This cost, which includes a proper share of bulk plant and overhead expense, compares with an average combined margin at that time to jobbers and dealers of less than 6 cents per gallon. We believe that these costs are reasonably typical of major-companies, marketing expense. Obviously such uneconomical operation can exist only by virtue of subsidies from other branches of the industry.

In the same report there appears the following statement:

We have received so many complaints over the failure of rules 4 and 6 of article V, which pertain to selling below cost and subsidizing by integrated companies of unprofitable operations in one branch of the industry by revenues from

another, that we deem it desirable to give special consideration to these complaints.

These rules appear to have constituted the principal attempts in the code to safeguard the position of nonintegrated units engaged in only one or two branches of the industry and to protect them from subsidized, destructive competition.

We find that widespread violation of these rules undoubtedly has prevailed and that little attempt appears to have been made either to enforce the rules or, if they are not enforceable, to devise them so as to make them enforceable. As a result we find a widespread demand. especially by nonintegrated refiners and marketers, for separation or divorcement of one kind or another.

The profits of the major oil companies, as will appear from a review of their annual reports, have been large. I will not burden you with the figures.

The Standard Oil Co. of Ohio is sometimes referred to as an example of a combination refining and marketing company that can operate profitably without production profits. In 1937 this company showed a net profit of $3,362,960.18, and in 1938, $1,964,605.21. But this company is subsidized by transportation profits as it draws its crude oil to Ohio by pipe lines at small cost and sells its finished products at approximately 3 cents-an amount equivalent to the railroad freight rate-over the prices from other competitive markets, thus realizing through the pipe-line transportation medium a profit on its operations as a whole.

The Standard Oil Co. of Kentucky operates over a number of States and is generally considered a marketing company. In 1937, this company made $4,182,899.95, and in 1938, $3.779,706.27. But this company enjoys favorable prices from the Standard Oil Co. of Louisiana because of past affiliations and volume as well. In addition, most of that profit can be attributed to the money it has charged the consumer as freight rates when it hauled the products in its own tank ships and barges. To show you that the consumer does not benefit from these savings in transportation charges, I refer you to the testimony of the general traffic manager of the Standard Oil Co. of Kentucky a number of years ago in a hearing before an Interstate Commerce Commission examiner in Memphis, Tenn. He said:

We find that on all of our inland-waterways terminals we amortize this investment; as to our inland-waterways terminals, we usually amortize them within 2 or 3 years. In other words, the money we make on our water terminals, we put in our pocket. We don't pass it on to the consumer. No other oil company does, that I know of, except where there is price competition. The Standard Oil Co. of Nebraska, of the large major oil companies, comes the nearest to being a strictly marketing company comparable with a jobber operation. It has a tremendous advantage over smaller jobbers through its large purchasing power and the favorable prices given it by other Standard companies. Yet it has no production, no refining, no pipe lines, and no barges or tank ships from which to garner profits to subsidize its marketing operations. During 1937 this company showed an operating loss, after depreciation, of $133,206.28, and during 1938, a loss of $111,731.28. Those figures speak louder than any words I could invent.

Two subsidiaries of the Standard Oil Co. of New Jersey serve to illustrate the point that the major oil companies make money in production and pipe-line operation but lose money in refining and marketing.

The two subsidiaries are the Humble Oil & Refining Co., which has consistently shown profits, and the Colonial Beacon Oil Co. (which only refines and markets), a subsidiary of the principal operating subsidiary, which has consistently shown losses.

Just a few lines to acquaint you with the profits made by the integrated companies through the operation of pipe lines. In 1937, the pipe-line companies had a net income of $102,796,361 and for 10 years prior thereto never paid average dividends less than 21 percent, and these annual dividends ranged as high as above 51 percent.

Almost ironic is the statement of the Interstate Commerce Commission in its Statistics of Oil Pipe Lines, 1921-37, when it declares:

None of the pipe-line companies reporting to the Commission was in the hands of trustees or receivers at the close of 1937.

There are today 96,612 miles of pipe line, of which 5812 percent, or 56,550 miles, consist of trunk lines; that is, pipe-line facilities used in the transportation of oil which has been gathered from the wells of producers or has been received from connecting lines, refineries, or vessels.

The same reason exists for divorcing pipe lines as for the divorcement of oil marketing which we are now asking.

Over 30 years ago Congress divorced the railroads from their operation of coal mines. The abuses existing in oil marketing through the subsidized competition of the major oil companies is far worse than that which prompted Congress to adopt the Hepburn Act.

Under the antitrust laws, as they stand, the meat packers have been divorced from operating retail stores and the Department of Justice now has pending an equity suit to divorce the motion-picture producers from operating theaters.

More recent legislation by Congress along this line includes such

168511-39-ser. 8- 2

legislation as divorcement of banking and investment and the disintegration of the public utility holding company systems.

State divorcement legislation similar to the Harrington bill has been upheld in the courts, including the Mississippi statute preventing corporations manufacturing cottonseed oil and meal from operating cotton gins; the North Dakota statute prohibiting the operation or control of theaters by motion-picture producers; the Illinois statute forbidding grain warehousemen from engaging in grain trading, and numerous other State laws divorcing banking from investment and prohibiting manufacturers of alcoholic beverages from engaging in or having any interest in retail liquor stores. Independent jobbers do not fear the competition of the major oil companies in marketing if such marketing was not subsidized from profits from the other branches of the industry. Because of the consistent policy over these many years in operating their marketing departments at a loss, the only way we can see out of our difficulty, and the only way to prevent complete monopoly in the oil industry, is the prompt passage of divorcement legislation, such as that sponsored by Congressman Harrington in H. R. 2318.

This legislation would place all in the marketing branch of the petroleum industry on the same footing competitively, and make them all compete both in purchasing their refined supplies and in selling same to the dealers and consumers. If control over oil is to be broken, the breaking must start some place. The hardiness of the oil monopoly is not to be hindered by a few antitrust suits.

Mr. Chairman, that completes my formal statement. I have prepared and handed you a brief on the constitutionality of this measure, which I would like, if you see fit, to have incorporated in the record, although I do that merely for the information of the committee.

Mr. HEALEY. At this point, do you request that it be incorporated in the record?

Mr. HADLICK. Yes.

Mr. HEALEY. The stenographer will make a note of that to incorporate it at this point.

(The brief referred to is as follows:)

BRIEF ON THE CONSTITUTIONALITY OF H. R. 2318, BY CONGRESSMAN VINCENT F. HARRINGTON, PRESENTED TO SUBCOMMITTEE No. III, HOUSE JUDICIARY COMMITTEE, BY PAUL E. HADLICK, SECRETARY AND COUNSEL, NATIONAL OIL MARKETERS' ASSOCIATION, NATIONAL PRESS BUILDING, WASHINGTON, D. C., MAY 24, 1939

The bill before your committee, H. R. 2318, by Congressman Harrington, proposes to divorce the businesses of production, refining, and transporting of petroleum products from that of marketing petroleum products. The very meat of the bills contained in section 3, which reads:

"It shall be unlawful for any person, directly or indirectly, to be engaged in commerce in the marketing of refined petroleum products while such person or affiliate of such person is also engaged in one or more of the other three branches of the petroleum industry, namely, production, refining, and transportation.”

As will be brought out more thoroughly, "Congress, having the authority to regulate interstate commerce, may do so by such means as it deems appropriate, to prevent a condition which is contrary to the settled public policy of the Government and inimical to the welfare of its people" (Swift & Company v. Federal Trade Commission, 8 F. (2d) 595, 599).

If the Congress has the power to prevent a condition it has the power to put a stop to a condition already existing. "The Government may, under the com

merce clause of the Constitution, forbid every contract 'which is reasonably calculated to injuriously affect the public interest (Atlantic Coast Line v. Riverside Mills (219 U. S. 202). It may act to anticipate or prevent an unfortunate situation, as well as deal with one that existed" (Swift & Co. v. F. T. C., 8 F. (2d) 595).

There is not only a condition to be remedied by this legislation but an even greater condition of monopoly in the future to be prevented.

I realize that it is quite customary to challenge the constitutionality of measures which seek to carry out the powers of Congress under the various general delegations of power. I sincerely believe the authority exists for Congress to exercise its power over interstate commerce in the petroleum industry as proposed by Congressman Harrington's H. R. 2318 (companion to Senator Gillette's S. 448). The situation is somewhat as expressed by Congressman Cole of Maryland on the floor of the House on June 28, 1935 (p. 10788, Congressional Record, 74th Cong.), when the House had under consideration the public utility holding company legislation. He said:

"There is, of course, no definite decision of the Supreme Court of the United States which can be given as authority for a situation parallel in every respect to that which is embodied in this measure. Such is not expected for the Congress prior to the enactment of legislation, because in this progressive and rapidly growing age we must meet new problems and new conditions with new legislation which gives voice to our conception of the progressive application of precedents of the courts which can fairly be interpreted as applying to this or that new condition."

The Federal Government has the power to regulate businesses engaged in interstate commerce. The following cases are in point:

New York Central Securities Corp. v. U. S. (287 U. S. 12).
Standard Oil Co. v. U. S. (221 U. S. 1).

United States v. Reading Co. (253 U. S. 26).

Brooks v. U. S. (267 U. S. 432).

Northern Securities Co. v. U. S. (193 U. S. 197).

In the decision of the Supreme Court of March 28, 1938, in the case of Electric Bond & Share Co. et al. v. Securities and Exchange Commission, Chief Justice Hughes said:

"The findings of the district court based upon the stipulation of facts leave no room for doubt that these defendants are engaged in transactions in interstate commerce. That they conduct such transactions through the instrumentality of subsidiaries cannot avail to remove them from the reach of the Federal power. It is the substance of what they do, and not the form in which they clothe their transactions, which must afford the test. The constitutional authority confided to Congress could not be maintained if it were deemed to depend upon the mere modal arrangements of those seeking to escape its exercise. Compare Northern Securities Company v. United States (193 U. S. 197). We need not now determine to what precise extent these defendants are actually engaged in interstate commerce. It is enough that they do have continuous and extensive operations in that commerce, and Congress cannot be denied the power to demand the information which would furnish a guide to the regulation necessary or appropriate in the national interest. Regulation is addressed to practices which appear to need supervision, correction, or control. And to determine what regulation is essential or suitable Congress is entitled to consider and to estimate whatever evils exist."

There are numerous instances in the reports where the courts have dissolved corporations (Northern Securities Co. v. U. S., 193 U. S. 197; Standard Oil Co., v. U. S., 221 U. S. 1; Continental Insurance Co. v. U. S., 259 U. S. 156) under authority of either the Federal antitrust laws or the Interstate Commerce Act. The commodities clause of the Interstate Commerce Act (34 Stat. 584) compelled dissolution or separation of corporations operating both railroads and coal or other mining properties. This clause has repeatedly been upheld. SeeU. S. v. Del. & Hudson Co. (213 U. S. 366).

U. S. v. Lehigh Valley R. R. Co. (220 U. S. 257).

U. S. v. B. & O. R. R. Co., (231 U. S. 274).

Del. Lak. & Western v. U. S. (231 U. S. 363).

Tap Line cases (234 U. S. 1).

U. S. v. Butler County R. R. (234 U. S. 29).

U. S. v. Del., Lack. & W. R. R. (238 U. S. 516).

U. S. v. Reading Co. (253 U. S. 26)

U. S. v. Lehigh Valley R. R. (254 U. S. 255).