Sebastian Siegele

"(...) With the codes in effect, and properly enforced, industry finds itself protected from the chiseler, from design-steal pirates, from labor-sweaters, and from below-cost-sellers, who, in the past, made profits practically impossible and general conditions in industry intolerable for management and labor alike. Codes raise wages and shorten hours. (...)"

Malcom Muir, former president of McGraw-Hill Publishing Co.Inc. and former division administrator of the NRA, 1934 at the annual meeting of the U. S. Chamber of Commerce. (Textile World, 1934, p. 1049)

This statement from 1934 shows that the idea to protect production and trading from unfair competition, wage dumping, child labor as well as guarantee the rights of collective bargaining and freedom of coalition through self regulation isn't as new as it seems today.

In June 1933, in the midst of the depression, the U.S. government under President Franklin D. Roosevelt pushed the National Industrial Recovery Act (NIRA) through Congress and established the National Recovery Administration (NRA). This early New Deal legislation sought to end unfair and destructive competition by authorizing industry-based codes which contained provisions for minimum wage, maximum working hours and collective bargaining. The agency ultimately established 557 basic codes and 208 supplementary codes that affected 22 million workers (Encyclopaedia Britannica, 2001). Other sources claim 7,000 codes for different types of business and industry (Reynolds, 1997)

The NIRA was called for by business leaders, for instance the president of General Electric (Reynolds, 1997). Consequently the authorities which developed the individual codes for each industry section, were dominated from the onset by business executives of large firms. Less than 10 % of these organizations included representatives of labor, only 2 % had consumer delegates (Fleischmann and Tyson 1997, p. 4, in reference to Hawley, 1966).

Developing the codes was an opportunity for business to establish minimum prices, something which was illegal under existing anti trust laws. In addition, the codes allowed firms to protect themselves against foreign competition by displaying NRA's Blue Eagle label which was originally intended to prove the compliance with the codes. This and patriotic appeals clearly show the protectionist character of the NIRA.

Although the codes reflected the interests of big business, they nevertheless did improve labor conditions in some industries and helped trade unions to organize. In May 1935, however, the U.S. Supreme Court declared industrial codes unconstitutional (Fleischmann & Tyson, 1997, p. 18). At this time, the NRA had already lost much of its popularity because the codes were implemented at the expense of small business and consumers. The former didn't have the resources for the change and the latter had to pay artificially high prices.

But this weren't the only reasons for failure. In contrast to most traditional code of conducts, social labelling programs or workers right's clauses, the great majority of the NRA codes included no-selling-below-cost provisions and demanded an implementation of cost accounting methods from the companies. It was seen as impossible to control the compliance to minimum price and minimum wage regulations or violations of the codes concerning fair trade practices without cost accounting.

Just as in many developing countries today, U.S. business at that time barely used any modern methods of calculating or estimating costs. A lot of managers didn't even know whether the low market prices caused by the extreme overcapacity still covered their manufacturing costs. This was particularly the case in the apparel industry -- just as it is today, as the author of this paper can attest, as an apparel industry professional.

In this industry in particular, offering products below costs forces competitors to do the same which can cause to a vicious circle which, in turn, usually leads to wage dumping, child and forced labor. In the long run, this process can impoverish entire regions and countries. Continuous below-cost selling is generally an indication for the violation of core worker's rights.

In 1934 Percy C. Magnus, president of the New York Board of Trade asked: "Can the vicious circle of lower prices, lower standards of living, and still lower prices be stopped by any process within our control, (...)?" (Textile World, 1934, p. 1256)

Companies had high hopes that the NRA would help to establish an uniform cost accounting method, not just to make the no-selling-below-cost provisions applicable, but also to make their businesses more efficient. This was seen as a quid-pro-quo for business. Yet, from that perspective too, the NRA failed. Although it offered opportunities for executives of large companies or accounting firms, their differing interests kept them from developing a workable accounting system. In this sense, the NIRA had already become obsolete, even without the Supreme Court decision.

Today, the issues of overcapacity, selling-below-cost practise and the lack of modern cost accounting methods aren't widely discussed in the context of social standards. But when you have to deal with real-life cases to implement social standards -- no matter whether they are code of conducts, labelling programs, international worker's rights clauses or national labour laws -- these issues can't be avoided.

Take the garment industry in China, where I did some social audits in early 2001. Most of the managers of the business we audited didn't have sufficient skills to do serious cost accounting or even cost estimating. Originally, we had planned to collect some financial data to study how expensive the implementation of social standards would be for local garment businesses and their importers. But the data we found was incomplete or non-existent. Yet, you need such data to develop realistic implementation programs.

Only in few cases we could clearly establish that the products' selling price had any relation to the wages paid. In many cases, it took us hours just to find out whether the wages are in compliance to the Chinese labor law. How can you negotiate fair corrective action plans for each individual production site when the basic data for developing realistic steps is sorely missing? How can you prove that the lack of compliance with social standards is the result of greed or ignorance? Currently, the answer purely depends on the experience and gut feeling of auditors and monitoring groups.

If we want to succeed in preventing violations of basic, internationally-recognized worker's rights, we have to solve this dilemma: having to implement social standards in the context of an underdeveloped business infrastructure.

This is why code of conducts must include no-selling-below-cost provisions based on modern cost accounting. They would force transitional companies to think anew about cutting their prices, realizing that suppliers are setting their offer prices regularly below cost. It would also force management to implement cost accounting methods and the results would at least give them a basis to reject an order if expenses are not covered. Even more importantly, in doing so, they would realize that violating their worker's basic rights is one of the most expensive economical mistakes they can make and that labor as a cost factor is overrated compared to other costs. Audited manufacturers have to be taught that modern cost-accounting methods make them more efficient -- and these gains in efficiency more than compensate the additional costs they incur by complying with social standards. It should not be forgotten that cost accounting is a crucial part of the business infrastructure in developed countries and contributes much to productivity and competitiveness.

The NIRA shows that developing and implementing no-selling-below-cost provisions will be a very difficult job. The NRA tried to assert an Uniform Formula for cost determination, but there was a controversy about two regulatory approaches: to have minimum prices fixed by the NRA or in negotiations between the companies. Furthermore, there was no agreement how to define minimum prices. Should a factory set their minimum price based on their own production costs (and, in this case, on which costs) or should there be a generally binding minimum price for all producers of one product? The solutions discussed were overly complicated, not practicable or not legal.

Today we are faced with similar problems. It will be necessary, for example, to clarify which wage calculation should be the basis of no-selling-below-cost provisions: the minimum wage stipulated by the national labor laws, a living wage or the actually paid wage? National and international trading laws must also be taken into account. In different regions there are different ratios between direct productions costs, indirect costs and macro costs.

At the same time, however, the situation is much better than in the 30s. Highly sophisticated cost accounting methods with clear definitions of all relevant cost factors now exist. Based on these methods it should be possible to develop no-selling-below-costs codes and programs which meet the demands of different countries, regions, industries and productions sites. In addition, we now have some experience how self-regulation and competition can co-exist. Last, but not least, there is more time. In the 30s, the NRA was given two years to come up with a workable solution.

It is important not to underestimate the link between administrative aspects such as accounting methods and social standards as well as basic worker's rights. To pay attention to the former will help to succeed in the efforts to implement the latter.

Bibliography

Encyclopedia Britannica Article, National Recovery Administration (NRA), July 2001, www.britannica.com/eb/article?eu=56383&tocid=0

Fleischmann, Richard K.; Tyson, Thomas; Private Interests vs. Public Service: Cost Accounting and the Demise of the National Industrial Recovery Act of 1933, Fifth Interdisciplinary Perspectives on Accounting Conference, Manchester, July 1997

Hawley, E.W., The New Deal and the Problem of Monopoly, Princeton University Press, 1966

Reynolds, John F.; Lecture: Debate over Causes and Remedies of Depression, College of Liberal and Fine Arts, University of Texas at San Antonio, March 1997, www.csbs.utsa.edu/users/jreynolds/newdeal.txt

Textile World; Volume 84, Years Edition January to December 1934; Bragon, Lord & Nagle Company, New York 1934

Author

Cand. Ing. Sebastian Siegele, University of Applied Science Berlin (FHTW Berlin)
Hans Boeckler Foundation Fellow
Apparel Industry Technician

Copyright Sebastian Siegele

For use in the research Project 'Codes of Conducts' at Hamburg University of Economics and Politics (HWP Hamburg) and the Hans Boeckler Foundation. Any other distribution or use requires written permission of the author.

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September, 2001