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Wednesday, October 24, 2012

Cattlemen, Butchers, and Other Rent Seekers - Donald J. Boudreaux and Thomas J. DiLorenzo

The agrarian interest group that seems to have exerted the greatest pressure for passage of Missouri's 1889 antitrust statute was com- prised of cattlemen and local retail butchers who were agitated over the allegedly monopolistic practices of the "beef trustn-the central- ized butchering and meat-packing firms that emerged in Chicago in the early 1880s as a result of the development of an economical refrigerated railroad car. The four largest Chicago meat packers during the 1880s were Swift, Armour, Morris, and Hammond, collec- tively known a s "the Big Four."
Although Gustavus Swift was not the first entrepreneur to ship slaughtered cattle by refrigerated railroad car, he was the first to do so economically, shipping his first refrigerated car full of beef from Chicago to Massachusetts in the fall of 1877. The "refrigeration" of this 1877 shipment of dressed beef was little more than open doors on a railroad car being hauled in cold weather. However, Swift saw profits in being able to slaughter meat in a centralized location served by several railroads (i.e., Chicago) and shipping it out year round to cities and towns across the country. The successful development of an economically viable refrigerated car allowed Swift to begin year-round shipments of dressed meats in 1879 (Clemens 1923, pp. 235-36).
In addition to integrating forward into wholesaling and retailing, Swift and his rival Chicago meat packers created markets for beef and hog by-products that had never before existed, thus extracting more profit from each cow or pig slaughtered than was being ex- tracted by local butchers. When this less wasteful use of the whole cow or pig is combined with the great economies of scale that were made possible by the centralization of butchering and shipping, it is not surprising that the price of meats to consumers fell throughout the 1880s (Yeager 1981, p. 70).
The average quality of beef also improved during the 1880s. This quality improvement is closely connected with the fall in the price of cattle that occurred from the mid 1880s through the early 1890s. The fall in cattle prices, in turn, was responsible for the decline of the range-cattle industry beginning in the mid 1880s.
In the wake of the decline of the range-cattle industry there emerged, for the first time in the midwest and the west, rumors of a "beef trust." Range-cattle producers, whose product-live grass fed cattle shipped by rail to wholesale or retail butchers or sold directly to butchers in nearby towns-simply could not compete with the much less expensive and higher-quality dressed meats shipped from Chicago. Cattlemen contended that "the Big Four" meat packers were conspiring to depress the price of range cattle (Yeager 1981,pp. 172-73).
In May 1886the "National Butchers' Protective Association of the United States of America" was formed in St. Louis. The goal of this organization of butchers "was to destroy the dressed meat industry, which was shipping meat from Chicago to eastern cities and sellingit for less than the meat killed by local butchers"(C1emens 1923, p. 243).
The complaints of the range-cattle producers and of the local butchers prompted the first investigation of the meat-packing indus- try by the U.S. Congress (Clemens 1923,p. 479). Responding to these complaints, the Senate in May 1888 appointed a commission to investigate the cause for the low price of cattle seemingly spawned by "the Big Four."
Senator George Vest of Missouri was appointed to chair this committee.13From its inception to the delivery of its final report in May 1890, the Vest Committee+omprised of five midwestern and western Senators (from Illinois, Kansas, Missouri, Nebraska, and Texas)-sympathized strongly with its cattle-raising constituents. The Vest Committee concluded in its final report that "the principle cause of the depression in the prices paid to the cattle raiser and of the remarkable fact that the cost of beef to the consumer has not decreased in proportion, comes from the artificial and abnormal centralization of markets, and the absolute control by a few operators thereby made possible" (Senate Report No. 829 [commonlyreferred to as the Vest Report], p. vii).
TheVest Committee did not deny that the price of beef to consum- ers had fallen, only that this price did not fall "in proportion" to the reduction in the price of range cattle. Consumer welfare is increased, of course, when the price of a consumer good falls-especially when the quality of the good rises simultaneously-regardless of whether the price of an input fell by more or less than in proportion to the reduction of the price that the consumer must pay for the good.
The Vest Committee found no evidence of collusion by the major Chicago meat packers. Instead,the Committee inferred the existence  of collusive action among the major packers in the buying of cattle from the fact that cattle prices fell during the mid and late 1880s. The Vest Committee reported that "Mr. P. D. Armour testifies a t Washing- ton that no such [collusive] agreement existed between himself and other packers and we do not contradict this statement. . . .[However] it is difficult to believe that with the most apparent motive for such action the same parties, or their subordinates with their knowledge, do not avail themselves of the opportunity presented by the centrali- zation of markets to combine for the purpose of lowering the price of cattle" (Vest Report, p. 6 ;emphasis added).
Several state legislatures also attempted to take action against the "beef trust." Late in 1888, Governor Lyman Humphrey of Kansas called on the governments of the states in the Mississippi valley region to send delegates to a conference for the purpose of framing statutes that could be passed by all states in the region.14 The ultimate goal of this conference of state legislators was uniform state statutes designed to "protect the stock-growerand farmer against the manipulations of such alleged [beef]trust."15It eventually adopted a model antitrust statute to meet this goal. There was no mention during the convention or in the proposed statute of the need to protect consumers from high prices; only to protect stockgrowers and farmers from lower-priced competitors.
The model antitrust statute declared all "trusts" to be in violation of the state corporate charter. Significantly, this model antitrust statute included in its definition of a trust the ability of "a combina- tion of capital, skill or acts by two or more persons, firms, corporations or association of persons. . . . [tlo limit or reduce the production, or increase or reduce the price of merchandiseor commodities"(emphasis added).16The statute that was eventually enacted in Missouri was entitled "AnAct for the punishment of pools, trusts and conspiracies." It passed by a vote of 98 to 1in the House, and by 27 to 4 in the Senate.17
Missouri's legislation prohibited "restraints of trade" in the form of pooling, forming trust companies, interlocking directorates, and so on, the effects of which were "to fix or limit the amount or quantity of any article, commodity or merchandise to be manufactured, mined, produced or sold" in Missouri.
This statute also prohibited actions intended "to limit or fix the price" of outputs (emphasis added)." Although the wording of the proscription against actions intended to "limit" the price of outputs is subject to interpretation, one plausible meaning of the verb "to limit" as it is used in this statute is "to reduce" or "to keep from rising." This interpretation of the statute as prohibiting actions intended to reduce prices is consistent with (1)the downward trend of prices in Missouri during the 1870s and 1880s;and (2)the support given by Missouri's Governor Francis and by Missouri's farmer-domi- nated General Assembly to the St. Louis beef-trust conference of March 1889 in light of the fact that this conference adopted a model antitrust statute that explicitly prohibited price reductions.
Our interpretation of the political events in Missouri during the winter and spring of 1889 is that Missouri's agrarian-dominated General Assembly passed antitrust legislation in 1889 as part of an attempt to shield politically powerful producer groups--especially range-cattle producers and independent retail butchers-from the intense competitive pressures being exerted by the centralized, ver- tically integrated meat-packing firms headquartered in Chicago. (Recall that cattle was Missouri's single largest agricultural output during the 1880s.) No evidence exists to suggest that consumers in Missouri (or anywhere else in the United States)were harmed by the so-called beef trust. In fact, as shown above, the evidence suggests
just the opposite: The centralization of meat packing generated substantial benefits to consumers in the form of lower prices and higher quality meat, as well as greatly expanded use of meat by-products which, until the 1880s, were discarded as waste. How- ever, the growth of the centralized meat packers did result in lower prices for range-cattle producers and, of course, for independent local butchers whose services ran head to head in competition with the services being performed more efficiently in the Chicago slaughtering and packing houses.

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