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The Code of Fair Competition

trade picture run industry

In a comprehensive attempt to revive the economy, President Boosevelt drafted the National Industrial Recovery Act (NIRA), which became law in June 1933. 20 Administered by the National Recovery Administration (NRA), the act assumed that cooperative action among trade organizations was superior to cutthroat competition and that the business community would be willing to put aside selfish interests for the good of the nation. Specifically, the act mandated that industries were to draw up codes of fair competition that would be enforceable by law. The government was willing to waive antitrust laws, but in return, industries had to make concessions guaranteeing labor the right of collective bargaining and establishing minimum wages and maximum hours.

The Code of Fair Competition for the Motion Picture Industry was signed into law on 27 November 1933. The major film companies quickly embraced the Code. Reflecting the vertically integrated structure of the industry, the Code regulated labor at the production level and trade practices at the distribution and exhibition levels. Concerning labor, the Code banned company unions, set minimum rates of pay, and allowed workers to organize and bargain collectively. The studios readily acceded to the demands of the craft unions and the army of stagehands and technicians that were organized by the International Alliance of Theatrical Stage Employees (IATSE), who received a reduction in hours, increased wages, and greater job security. One hundred and forty different labor unions in the industry approved and signed the Code without controversy. These concessions cost management relatively little, since the salaries paid to these workers constituted a small percentage of the cost of production.

In the mind of the public, Hollywood’s chief industrial imbalance was not the underpayment of labor, but the overpayment of executives and talent. Concerning executives’ salaries, the majors rewarded their managements “far in excess of the normal standards of far larger corporations,” said Douglas Gomery. 21 For example, MGM’s top management had personal service contracts that paid them large salaries plus a fixed percentage of the company’s profits. Washington bureaucrats and others believed that the extraordinary salaries Hollywood paid its top people contributed to the bankruptcies and receiverships that were plaguing the industry.

To quell public indignation, MGM’s Louis B. Mayer and other industry moguls took temporary cuts in pay, so that during the turbulence of preparing the Code, they capitalized on the situation by blaming stars for the financial difficulties of their businesses. When the finished version of the Code appeared, the moguls had succeeded in writing in provisions barring star raiding, curbing the activities of agents, and limiting the salaries of artistic personnel.

Talent reacted by forming the Screen Writers Guild in April 1933 and the Screen Actors Guild that June. Actors and writers bombarded Washington with telegrams, held mass meetings, and launched publicity campaigns opposing the control of salaries on any basis other than an open market. A threat of a strike and intensive lobbying of the White House resulted in the permanent suspension of the obnoxious provisions of the Code. However, as will be explained in chapter 4, the guilds failed to receive recognition as bargaining agents for actors and writers or to substantially improve the status of their members in the industry.

Although the bitterness of the fight over salaries turned Hollywood into a union-minded town—to the chagrin of the studios—the majors were victorious in the larger and more significant battle over the marketplace. They succeeded in receiving government sanction for the trade practices that they spent ten years developing through informal collusion and that enabled them to make the highest possible profits. In short, the Motion Picture Code legalized the monopolistic structure of the industry.

On one side of the battle line stood the Motion Picture Producers and Distributors of America (MPPDA), better known as the Hays Office after its head, Will H. Hays. On the other stood the Allied States Association of Motion Picture Exhibitors, a trade association representing small unaffiliated exhibitors headed by Abram Meyers, a former member of the Federal Trade Commission. The battle was really no contest. Allied dropped out early in the negotiations, charging that the interests of independent exhibitors were not being safeguarded. To resolve the demands of the independents, the Hays group met privately with Allied and made concessions, the most important of which deleted the ban on double features.

The trade practices sanctioned by the Code comprised the block-booking system, clearance and zoning, and admission price discrimination. In the minds of small independent exhibitors, these trade practices had been used to wrest the greatest possible profits from the market and to keep them in a subordinate position. Block booking was the most controversial trade practice. All the important companies sold their pictures in blocks of varying size, often consisting of an entire season’s output. These were offered to exhibitors on an all-or-nothing basis before the pictures had actually been produced. In contracting for a block of pictures, an exhibitor was required to take short subjects as well. This practice of linking shorts to features was known as full-line forcing. A congressional investigating committee remarked, “This is the only industry in which the buyer, having no idea of what he is buying, underwrites blindly all the product offered him.”

The independent exhibitor was not against the practice of block booking per se, since he needed a large number of pictures to fill the playing time of his theater, which typically showed double features and changed programs two or three times a week. But he did object to having all the pictures of a studio foisted on him, regardless of their quality or desirability. And he felt particularly victimized in noting that compulsory block booking did not apply to the affiliated circuits; in dealing with one another, the major chains negotiated selective contracts allowing them to pick and choose the best of each other’s pictures.

The benefits of compulsory block booking for the majors were real. Knowing that even the poorest picture would find an outlet, the studios could operate at full capacity. In the process, the majors shifted the risks of production financing to the independent exhibitor. The long-term effects of the policy also stifled competition by foreclosing the market to independent producers and distributors. In short, block booking allowed the majors to wrest the greatest amount of profits from the marketplace. Before it was endorsed by the NRA, block booking had been attacked by consumer groups, congressmen, and the Federal Trade Commission, in addition to independent exhibitors, so in drafting the Motion Picture Code, the majors made a few concessions, in the hope of quelling the controversy. But the block-booking system remained pretty much intact.

By dominating the clearance and zoning boards established by the Code, the majors also succeeded in protecting the favored status of their theaters. These boards took over the function of the local film boards of trade, which were established before the NRA and dominated by the Big Five to arrange theaters in their respective regions into a marketing pattern consisting of run, clearance, and zoning. Organizing distribution, the majors had divided the country into thirty markets, with each market subdivided into zones. Theaters within each zone were classified by run. Located in the downtowns of the largest cities, first-run theaters seated thousands and charged the highest admission prices. Second-run houses were typically located in neighborhood business districts and charged lower prices. Subsequent-run theaters, going down the scale to fifth-, sixth-, seventh-run, and more, were located in outlying communities and charged-still less. A film would move from zone to zone like clockwork, with each zone separated by a clearance ranging from fourteen days to forty-two days or more. In a large market, a picture might remain in distribution for as long as a year.

Since the value of a motion picture to an exhibitor depended on its novelty, the granting of excessive clearance to prior-run houses had the effect of increasing their drawing power and keeping patronage in subsequent-run houses at low levels. Practically every legal action independent exhibitors or the government filed against affiliated circuits contained charges of inequitable clearance and zoning. With the creation of the clearance and zoning boards, the majors now had the power to adjudicate these matters for themselves.

The same held true for complaints of admission price discrimination heard by the grievance boards. In their rental contracts with exhibitors, distributors stipulated minimum admission prices for each playdate. This practice prevented price rivalry among theaters and guaranteed that the distributor would collect the optimum revenues from rentals.

The affiliated circuits, which operated first- and second-run theaters primarily,   had a vested interest in seeing later-run independents subjected to strict admission-price control, since if these houses cut prices, the affiliates would stand to lose business. To drum up business at the outset of the Depression, independents offered prizes, coupons, two-for-one admissions, and the like, which indirectly reduced the cost of admission. To prevent these practices, grievance boards were vested with extraordinary power. They could punish exhibitors found violating Code admission-price provisions by ordering a boycott by the distributors.

Leaders of the motion-picture industry behaved probably no better and no worse than their counterparts in other American businesses. Frederick Lewis Allen, in his social history of the thirties, has described a probe into the NRA that appeared in Harper’s Magazine in the autumn of 1933. The article concluded that “the spirit and intent of the National Industrial Recovery Act and the codes are being frustrated, openly or in secret.” The article also demonstrated, in Allen’s words, “that the governments’s aim to raise wages was being defeated, either by the sheer refusal of employers to obey the minimum-wage provisions of the blanket code, or by their raising some wages up to the minimum and lowering others down to it.”

On 27 May 1935 the Supreme Court invalidated the NRA. In a unanimous decision, the Court declared that the NRA was unconstitutional on two grounds: first, Congress had violated the constitutional principles of the separation of powers by delegating its powers to the executive; and second, Congress had overstepped its authority by enacting laws regulating the business practices of firms engaged in interstate trade. “The decision implied that it would be unconstitutional for the Federal government to deal with a national industrial or social or agricultural problem by dictating to individual factories, stores, or farmers what they should do,” said Allen. FDR was outraged by the decision and told a press conference afterward that “we have been relegated to the horse-and-buggy definition of interstate commerce.”

The NRA clearly had failed as a recovery measure. Understanding this, FDR devoted his second term to reform, believing that big industries, such as steel, oil, and aluminum, had not cooperated with the NRA and were now obstacles to economic recovery. Working through the Department of Justice, he launched an antitrust crusade; one of the principal targets was the motion-picture industry.

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