Before FDR stole the term coined by Yale Professor William Graham Sumner, "The Forgotten Man" was a hypothetical "D" who was stuck with the bill after "A" and "B" got together to find a way to help poor, suffering "C." (FDR of course, tried to make us forget about "D" by claiming "C" was "The Forgotten Man.")

I have attempted to make my new book (The Big Ripoff: How Big Business and Big Government Steal Your Money) a book for the Forgotten Man. Specifically, I describe how big businesses lobby for and profit from big government programs  higher taxes, stricter regulation, corporate welfare  that rip off consumers, entrepreneurs, and taxpayers.

The Forgotten Man is an abstraction, but in researching some big ripoffs for The Big Ripoff I came across a man whose name is now immortal among lawyers, but who still is fairly called "The Forgotten Man."

His name is Pennington: James Pennington. In the field of anti-trust, that name is now synonymous with the collusion between big business, big government, and big labor. Lest his story be forgotten, I will tell it here.

The 1950s began with labor unrest in the coal industry. Mineworkers, protesting their wages, shortened their weeks and threatened to walk out. Things were approaching a crisis. That year labor and ownership came face to face.

George H. Love had worked in a coal mine in his youth, but then went to Harvard Business School. By 1950, Love had pieced together a coal empire, combining a handful of coal companies into Pittsburgh Consolidated Coal Company, the world's largest coal company. When Love sat down at the table he was representing not only his own coal giant, but all the big soft coal mine operators in the country.

Across from him was John L. Lewis. The son of Welsh immigrants, Lewis was working the mines by the age of 15. At 37 years old, he was the head of the United Mine Workers of America (UMW). He founded the Congress of Industrial Organizations, which is now the "CIO" of the AFL-CIO.

When the two hammered out an agreement giving Lewis almost everything he wanted on wages and hours, newspapers called it "submission" on the part of Love. As the agreement played out for the rest of the decade, it began to look like something else. A jury later it called it "a conspiracy."

The agreement was modified over the next few years, and by 1958, the coal companies Love had represented were paying far higher wages than any other industry. They were also prohibited from buying coal from or selling it to non-union shops, and could not lease their land to non-union shops.

This arrangement, it turns out, was a good one for the big coal companies. The large mine operators were already shifting towards increased mechanization of mining. This increased productivity, which offset the higher wages. If George Love paid a worker 50% more, but the worker dug up twice as much coal each day, Love was paying less per ton than before. These machines, however, were expensive, and the smaller coal companies could not afford them. If all mineworkers demanded these wages, the small coal companies would go out of business.

Even with mechanization, Love and Lewis knew these agreements would drive up the cost of mining coal.1 This was unproblematic as long as the costs were being absorbed by the whole industry — which was almost the case. There still remained, however, small coalmine operators who did not sign onto Love's agreement. The agreements surely made things harder for the little guys, with the higher union wages dragging away most potential labor. But they could still survive as long as they had customers. Given their lower costs, these small, non-union mines (such as James Pennington's Phillips Brothers Coal Company) could get customers by charging less for their coal than Love's mines would.

So, the unions and big coal mines tried to take away these small coal companies' labor. A union organizer in 1955 beat Andrew Frost for refusing to sign a union contract, Frost testified in court.2 But this wasn't enough, so big business and big labor had to take away their customers. The typical way to do that would be to offer a better product or lower prices. But coal is a commodity: a ton of Mr. Pennington's coal is no worse than a ton of Mr. Love's. Also, Love was charging more, and had to, thanks to his higher wages. Why, then, would a buyer ever willingly pay higher prices for a commodity? He would do so only if he were spending someone else's money. Enter big government.

During the Depression, Franklin Roosevelt created the Tennessee Valley Authority, which was supposed to create jobs and electrical power at the same time. The TVA originally was in the business of building and operating dams, which would use water to generate electricity. By 1954, however, it was in the business of coal-run power plants. This made it the largest coal customer in the country.

In 1954, the TVA bought 8 million tons of coal from the "dogholes in the mountains" as Lewis called the small coal mine operators.3

Lewis and Love would set this right. Lewis met with Dwight Eisenhower's Secretary of Labor, James Mitchell. The Labor Department, Lewis argued, should invoke the Depression-era Walsh-Healey Act, which allowed the federal government to set a minimum wage for any company receiving a government contract worth $10,000 or more.

Love, of course, agreed with Lewis, and all the biggest coal companies joined forces. They leaned on the Eisenhower Administration to go even farther than Lewis's original request, and stop making even small purchases (exempt from Walsh-Healey) from small mine operators.

Lewis and his big business cohorts got their way, and the federal government agreed to freeze out any coal company not paying union wages  all in the name of protecting the worker, FDR's "Forgotten Man."

But what about Sumner's Forgotten Man? The small operators were now unable to sell coal or subcontract for the big operators (thanks to the labor agreements) and also unable to sell to the biggest coal customer in the country: Uncle Sam. From the small mine operators' perspective, a conspiracy of big labor, big business, and big government, was threatening their existence. Some tried to make due under these restrictions. Others caved and signed the union contracts.

James Pennington ran the Phillips Brothers Coal Company, which, facing all these handicaps for non-union operators, signed on with Lewis's agreements. Soon he found it impossible to afford the high costs, and he was unable to make the contributions (40 cents per ton) to the mineworkers' retirement fund that the agreement demanded.

Pennington went out of business, but then he fought back. He went to court in 1961, alleging a conspiracy in restraint of trade that violated anti-trust laws. Pennington argued that the big coal companies and the UMW had conspired to drive him and other small coal companies out of business by demanding the companies contribute 40 cents to a UMW retirement fund for each ton of coal mined and by imposing the high minimum wage. He also alleged that the unions loaned millions of dollars to the companies to help them conspire against the little guys.

Pennington's argument, as summarized later by the Supreme Court, was: "the union entered into a conspiracy with the large operators to impose the agreed-upon wage and royalty scales upon the smaller, nonunion operators, regardless of their ability to pay and regardless of whether or not the union represented the employees of these companies, all for the purpose of eliminating them from the industry, limiting production and pre-empting the market for the large, unionized operators."

In May 1961, a jury found the union guilty. In December 1963, a federal appeals court upheld that verdict. UMW went to the Supreme Court.

Justice Byron White wrote that the agreements between Love and Lewis might have constituted a conspiracy in constraint of trade, but that bilateral agreement wasn't what drove Pennington under. The nail in Pennington's coffin was the entrance of the government into the conspiracy. According to White, that government's involvement also made the conspiracy legal.

The opinion read: "Joint efforts to influence public officials do not violate the antitrust laws even though intended to eliminate competition."4

The irony in the case of Pennington is that as long as the conspiracy did not involve the government, it was ineffective and illegal. Once the government entered, the big business-big labor plan to drive out the small guy started to work.

The net effect of coal companies' going out of business was a marginal upward pressure on coal prices for consumers. This meant that electricity bills were higher than they would have been. To the degree the TVA was paying more for coal, its customers and its patrons — the taxpayers — were paying more. The agreements also led to massive unemployment in the coal mining industry.

James Pennington lost his coal company, and then his court case. In so doing, he won eternal fame among anti-trust lawyers. The Noerr-Pennington doctrine, combining the coal case with a similar case (Noerr) in the realm of trucking and railroads, lays out, in effect, that a conspiracy in restraint of trade is legal as long as one of the co-conspirators is the government.

Notes

A.H. Raskin, "Mines to Pay Part of Coal Price Rise," The New York Times, March 13, 1950. Associated Press, "Mine Union Tried in Antitrust Case," The New York Times, April 19, 1961. Joseph A. Loftus, "Lewis Scores U.S. on u2018Doghole' Coal," The New York Times, February 2, 1955. 381 U.S. 657, 14 L.Ed.2d 626, 85 S.Ct. 1585.

July 11, 2006

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