CARTEL or KARTEL, a form of combination among manufacturers, by which the independent firms and establishments in a particular trade or process contract to regulate their output and, in certain cases, their prices.
During the last decade before the World War, in Germany and in other countries cartels were gaining great importance. They were by no means confined to the so-called heavy industries, which are most suited for the formation of cartels owing to their large scale; industries with smaller units, especially the textile industries, were also increasingly organized in such groups. The increasing formation of cartels in merchanting, partly under the influence of the great industrial cartels, may also be mentioned.
During the World War the Government of the German Reich made use of cartels for supplying the enormous requirements of the army. As the output capacity of the individual undertakings was known, it was possible to allocate orders amongst them in a satisfactory way. It is true that the sudden demand, even apart from the scarcity of raw materials, which soon set in, necessitated the grant of higher profits, but the price increases were often much higher where application had to be made to individual firms.
Many cartels, especially the so-called contracts cartels, were formed during the war for the exploitation of urgent army re quirements, and, later, associations of traders were formed to exploit the increasing scarcity of goods; but the great and well known cartels were moderate in their price-fixing. The fixing by the State of maximum prices was not so often necessary in their case, and was, in any case, more easily effected. Nevertheless the Government soon found themselves compelled to intervene in the cartel system, because many cartels failed to show proper consid eration to consumers. The textile cartels, in particular, were com pelled to reduce prices to the consumer.
State Interference.—But State interference with the cartels went further, as a rule, in the form of maintaining existing cartels or of compulsory amalgamation. It was recognized that dissolu tion of the cartels and return to unregulated competition was eco nomically undesirable, and would render impossible the economic utilization of raw material and labour. Following the precedent created in the case of the potash syndicate, which in 1910 was compulsorily reconstituted in order to prevent its collapse, the German Governments have created compulsory syndicates, espe cially in mining. Under the threat of such action the Rhenish Westphalian coal syndicate was reconstituted just before the con tracts expired. The State justly feared that if this great organiza tion fell to pieces the maintenance of a regular supply to the consumers and a uniform control, both of export and of internal consumption, would not be possible.
The industrialists have, for the most part, not been opposed to such compulsory cartels, because the accompanying rationing of production, raw materials and marketing also facilitated future monopolistic combination. Herein, however, lies the danger of these methods, which the State endeavours to counter by granting the consumer and also the workers certain rights in these organi zations, and by consulting with their representatives.
The power of the State in relation to industry, which had grown extraordinarily during the war, was still further strengthened in Germany when the Socialists came into power after the collapse in 1918, and demanded the socialization of these industries. In practice, however, the existing compulsory syndicates for potash, coal and iron were merely further extended, and far-reaching powers for the regulation of prices were given to the Federal coal council and the Federal potash council, on which workers and consumers were represented. In the iron and steel federation (Eisenwirtschaftsbund) State intervention was not carried so far. On the other hand, in the electrical industry, where the so-called "mixed undertakings" (whose capital was raised jointly by public and pri""ate bodies) had played a great role in the production and delivery of power over large areas before the war, the attempt was made to increase the influence of the Reich and of its con stituent states.
Even before the World War cartels were far from the only form of combination of several undertakings. After the strong cartels in coal-mining had come into being, it was more advantageous for the large iron and steel works to possess their own coal-mines. The so-called "pure" rolling-mills, which had to buy their raw material from the combined steel works, which were also their competitors in the sale of the manufactured products, were like wise at a disadvantage. Thus the association of raw material pro ducing and manufacturing concerns in a single undertaking be came increasingly common. Great combined undertakings arose, above all in the mining industry and in the electrical and other metal industries, which extended far into the finishing industries. The term "trust" made its appearance ; but real trusts—the amal gamation of a whole industry into a single monopolistic undertak ing—these were not. Such trusts only arose in a few specialized industries : in the dynamite trade, and also in regard to the amal gamation of all German rice-mills in a holding company, and in the accumulator industry.
With the increase in the number of joint-stock companies in many industries, the tendency to fusion, and still more to the acquisition of participations in other industries, was very active. In banking, the linking of provincial banks to the great Berlin banks had been going on for a long time. Participation and the formation of subsidiary companies was most extensive in the elec tro-technical industry and in large constructional undertakings. A substitute for cartels is provided in a smaller category of under takings by the Interessengemeinscha f ten. These consist chiefly in a pooling of profits to secure an equalization and distribution of risk ; they are mostly formed for long periods, and practically exclude competition between those concerned. As a rule there is also an interchange of directors and members of control boards (Aufsichtsriite), and often participation by the acquisition of shares. After the crisis of 1 9oo the first important Interessenge meinscha f t was the agreement concluded in 1902 for 20 years between the two largest German shipping companies and the International Mercantile Marine Company, which ended at the outbreak of the war.
In the post-war period, with its economic insecurity and its colossal inflation, financial forms of organization became more prominent, while the cartels lost for the time being in importance. With the shortage of goods and the apparent prosperity due to inflation, high prices could be obtained without cartels. These played a larger role in local industry and trade, where it was im portant to make prompt adjustments to the daily price increases. In large-scale industries, however, certain traders and speculators took advantage of the opportunity of buying up whole groups of undertakings with cheap credits. There arose the great vertical combines (Konzerne), such as had already existed in the electrical and mining industries, whose scope was now greatly extended.
By the dissociation of the Lorraine and Luxembourg works many of the greatest undertakings had lost their economic basis, and had to be completely reconstructed. Thus Hugo Stinnes created in the Siemens-Rhine-Elbe-Schuckert Union a close Inter essengemeinscha f t of three great mining undertakings with the electro-technical Siemens-Schuckert-Konzern. At the same time he built up a great private combine with a number of very distinct undertakings. Other mining combines also, such as the Phonix, Klockner, Lothringen, etc., were further extended. In the potash, cotton and cement industries great vertical combines were also created. The penetration of wholesale trade, which had made very large profits during the war, into industry is worthy of note ; often even very large undertakings suddenly came into the hands of a large trader or speculator. In many cases undertakings were thus grouped together which stood in no organic relation to one an other, and which were only kept united by the financial transac tions of the founders. In 1926 about 75% of the German coal output, 75% of the coke output, and about 79% of the steel output was produced in the great vertical combines of the mining industry.
With the stabilization of the mark in 1924 and the great scarcity of capital consequent on the destruction of all liquid capital, many of these artificial combines broke down, with great losses for those concerned. On the other hand the shortage of capital and the unfavourable economic outlook demanded a great reduction of costs and the most efficient technical and commercial organization. Thus many new amalgamations came into being, mostly in the more rational form of a complete fusion. The seven chemical firms already mentioned as being associated in an Inter essengemeinscha f t were absorbed by the oldest and largest of them, the Badische Anilin and Soda Fabrik, which increased its capital for this purpose from 176,000,000 marks to 646,000,00o marks, and took the name of Interessengemeinschaft Farben-In dustrie A.G. In 1926 the capital was raised to i.i milliards marks, and the great explosives ring of the Coln-Kottweil A.G. and Dina mit Nobel A.G. were taken into it, through which the I.G. dye stuffs industry came into yet closer relation with the artificial silk industry. There are also relations existing with other German and English artificial silk producers, with the Imperial Chemical In dustries, Ltd., with the two great oil rings (through the German Gasolin Gesellschaft) and with many more German and foreign chemical enterprises. This group had already a monopoly position in many products, so that here we may speak of a real trust.
An equally great concentration of capital is found in the union of several of the greatest vertical combines of the Rhine-West phalian iron and steel industry, namely, the Phonix A.G., the Thyssen undertakings, the combine of the Gelsenkirchen and Ger man-Luxembourg Mining Company, to which the Bochum Cast Steel Union also belongs, and of the Rheinische Stahlwerke. These transferred their production plants to the newly founded Vereinig ten Stahlwerke A.G. (capital 80o million marks common shares, and 125 millions preference shares). They themselves remained in existence, however, as holding companies. The construction is here somewhat different from that of the great chemical industry. Although other large steelworks have been acquired (Stinnes Trust), the Vereinigten Stahlwerke (United Steelworks) have no monopolistic position. Their share in the various federations amounts only to 22-53%. In Upper Silesia and Central Germany also there have come about great fusions of steelworks.
In other industries, the striving for the greatest possible cheap ening of costs of production makes fusion very prevalent. Many great fusions are to be found in the linoleum industry, in jute, cement, and mill construction, and in the watch, clock and photo graphic industries.
In spite of these great amalgamations, the number of cartels has not become less; the desire of employers to restrict competi tion was further increased by the severe economic crisis. The saying that cartels are children of necessity holds good.
Section 4 is the most important : "If a contract or regulation of the type described in Section r . . . endangers the economic system as a whole or the well-being of the community, the Federal minister of economics can (I) appeal to the cartel court to declare the contract or regulation to be invalid . . . decree that all parties to the contract or regulation can at any time cancel the contract or withdraw from the regulations, (3) demand the sub mission of copies of all agreements. The welfare of the com munity is to be regarded as endangered when production or marketing are restricted in an economically unjustified manner, when prices are raised or kept high, or when price increases are made to cover the risk of currency depreciation, or when economic freedom is inequitably restricted by embargoes on purchase or sale or by discriminating prices or conditions." These provisions are only permissive, since power is merely given to the Federal minister of economics under certain circum stances to apply for a declaration rendering the contract null and void. Section 8 goes much further. It runs: "Contracts or regulations of the type described in Section I can be cancelled without notice where an important reason exists." An important reason is always to be held to exist if the economic freedom of the cancelling party is inequitably restricted in regard to production, marketing or the determination of prices.
Section 9 runs : "Guarantees may not be demanded, nor embar goes or similar prejudicial measures be imposed, in virtue of con tracts and regulations of the type described in Section 1, without the consent of the chairman of the cartel court. Those concerned can appeal within a week of the decision to the cartel court." Hitherto Sections 8 and 9, which are directed against the so called exclusive contracts (obligations to trade exclusively with members of the cartel, boycotts, embargoes on delivery and the like) have been mainly enforced. But in the summer of 1925 the Government resolved, in connection with its endeavours to bring about a fall in prices, to proceed more energetically against the cartels, and a number of them have been dissolved, while others have been compelled to alter their trading conditions. (See