Mr. BERGE. This war has naturally affected the market for quebracho in Europe. Several years before the war, the German Government took steps to render that country less dependent upon the continuance of quebracho imports. Clauses were inserted in all Army and Navy contracts for the purchase of leather goods that at least 12 percent of such goods should be tanned by German-manufactured tanning agents. This resulted in the development of a new industry based upon the production of tanning material from German trees. Tannic acid was extracted from the oak trees of south Germany and was permitted to find a place in the tanning industry by reason of the Government policy. Thus the German leather industry gradually became independent of quebracho importation from South America.

The loss of the continental European market due to the war was not felt to any great extent by the quebracho exporters because of the great increase of exports to the United States. During the war the imports of quebracho almost doubled due to the tremendous production of leather goods for the armed forces.

Structure of the quebracho industry: The quebracho industry consists of 22 producers in Argentina and Paraguay. Five of these are owned or controlled by the British corporation-the Forestal Land, Timber & Railways, Ltd.-through its Argentine subsidiary, La Forestal Argentina S. A. de Tierras, Maderas y Explotaciones Commerciales e Industriales. These 5 companies have a productive capacity which constitutes approximately 57 percent of the total capacity. All producers, except four, having a capacity of about 11 percent of the entire industry, are members of a quebracho pool which regulates the production and sale of the product.

The CHAIRMAN. Isn't it true that those companies that are not members of the pool cooperate fully with the pool in connection with restrictions on production, and with respect to prices, so that the pool has 100 percent control of the industry?

Mr. BERGE. So far as prices are concerned, International Products Corporation, the largest producer which is not a member of the pool, does cooperate with the pool, but La Chaquena and Weisburd, two other nonmembers of the pool, who together have a capacity of not more than 5 percent of the industry, have engaged in price cutting from time to time. As to production, I shall point out in a moment that since February 1942 export quotas imposed by the Argentine Government effectively prevent any manufacturer from producing at a greater rate than other manufacturers. Each company's sales, and therefore in the long run its production, is frozen.

The CHAIRMAN. It is practically a complete monopoly now, as far as that grown in Argentine territory?

Mr. BERGE. That's right.

Dr. SCHIMMEL. Wouldn't that apply to the material coming frc Paraguay, because it has to come through Argentine in order to be shipped out?

Mr. LEWIS. That's true. The Argentine Government and Paraguayan Government have issued decrees which are substantially similar regulating the export of quebracho.

Dr. SCHIMMEL. But the leadership is in the hands of the Argentine Government?

Mr. LEWIS. That's correct. The production of Argentina is 80 percent of the total of the production in both countries.

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The CHAIRMAN. Now we get to a situation there in Argentina on a large scale which parallels I. G. Farben in Germany, in which the Government really, through laws and so forth, is promulgating a monopoly, in cooperation with corporations.

Mr. BERGE. Yes.

The CHAIRMAN. That might account for the rather strong Fascist tendencies of the Argentine Government at the present time. In other words, Are they not following in the footsteps of similar governments in Europe?

Mr. BERGE. There certainly seems to be a similarity in the pattern; yes.

Dr. SCHIMMEL. We ran across very interesting information in that connection. I would like to ask who represented the quebracho pool when they appeared before the Department of Justice, after the indictments had been obtained. Who was the individual that represented them?

Mr. LEWIS. The representative of the pool in the course of our discussions in New York in connection with the indictment you refer to was a Dr. Alberto P. Severgnini.

Dr. SCHIMMEL. Did he represent the American company?

Mr. LEWIS. No; he purported to represent a Mr. John B. Sullivan, who is manager of the La Forestal company in Argentina.

The CHAIRMAN. Sullivan being a former American citizen, now a naturalized citizen of Argentina?

Mr. LEWIS. That's right.

Dr. SCHIMMEL. Did Severgnini come as a diplomatic or commercial representative of the Argentine?

Mr. LEWIS. He stated to the members of the Department of Justice he was here for both purposes, both representing the interests of Mr. Sullivan and the pool, and he also stated he was here on a diplomatic mission, which he did not disclose.

Dr. SCHIMMEL. Was there ever any evidence that he flaunted his diplomatic credentials in connection with his commercial representations?

Mr. LEWIS. Not other than stating he was here on a diplomatic mission.

The CHAIRMAN. In other words, we have a combination of attorney and, shall we say, envoy extraordinary, from the Argentine Government, representing a monopoly in the New York market?

Mr. LEWIS. Yes, and principal also, apparently, because he was representing the La Forestal Co., which had an interest in this industry.

Dr. SCHIMMEL. I think that shows the connection between the Government and the company.

The CHAIRMAN. That's the same pattern we had in Italy to start out with, and it also developed in Germany-the partnership between Government and business, or rather between business and certain ruling officials of the Government.

Mr. BERGE. I think that it is not overstatement to say that in Fascist countries generally there has been a similar pattern. The business control is pyramided to a certain point and centralized and then, whether the approach is made by the political control or by the economic control, somehow they get together and the monopoly or cartel and the controlling political party work in very close collaboration. That was the picture in Germany, the picture in Italy, and

apparently, from this information that I am disclosing now, it was the picture in Argentina.

I might say that quebracho is sold by official agents of the pool, which recognizes two official agents in the United States-the Tannin Corporation and the International Products Corporation, both of New York.

Forestal of England controls La Forestal of Argentina through the ownership of a majority of its stock and a substantial portion of its bonds. One John B. Sullivan, chairman of the board of Forestal of England, is also the manager of Forestal of Argentina. Sullivan is an Argentine citizen, who was formerly a citizen of the United States and a graduate of Harvard College.

By reason of La Forestal's ownership of 57 percent of the total productive capacity of quebracho in South America, which is approximately eight times the capacity of its next largest competitor, Forestal has completely dominated the quebracho industry. Its policy has been to restrict production and maintain high prices.

Forestal's economic dominance in Argentina has enabled it to exert a great influence upon the Government of Argentina. For example, in 1942 the efforts of John B. Sullivan alone were primarily responsible for the imposition by the Argentine Ministry of Agriculture of highly restrictive export quotas upon each producer. These restrictions were imposed upon the industry at a time when it appeared that the efforts of Forestal to continue similar restrictions upon the South American producers might fail.

In other words, when the company itself seemed to be in danger of losing some control of the situation, the aid of the Government was enlisted and effective control exerted through export quotas.

Forestal's domination extends not only over the production of quebracho, but over its distribution as well, including importation into this country. Through St. Helen's, Ltd., a Canadian corporation, Forestal of England owns substantially all of the stock of Tannin Products Corporation, a Delaware corporation, which in turn owns all the capital stock of the Tannin Corporation, a New York corporation. The Tannin Corporation imports approximately 70 percent of all quebracho extract consumed in the United States. The Tannin Corporation has been controlled by Forestal of England since 1913 and during the past 30 years its controlling officials have been completely subservient to the policies of Forestal of England. Thus Forestal controls this material from the tree to the United States consumer.

That's an interesting picture. There you have Forestal of England controlling, through the Argentina Forestal Co., the production of Argentina, the policies-I should say, exerting strong influence on the governmental policies of Argentina with reference to exports, controlling in this country the company which imports 70 percent of the imports of quebracho into this country, and it all goes back to the central control exercised by the British Forestal Co.

The CHAIRMAN. And doesn't it follow the general pattern of all these cartels in which you practically have dummy corporations in the United States, operating for foreign corporations, controlled by the foreign corporation, and going through the process of having American citizens on the board of directors?

Mr. BERGE. That's a very common pattern in this cartel organization of industry.

The questionable character of the functioning of these American subsidiaries is indicated by portions of a letter written December 23, 1941, by Carl B. Ely, president of the Tannin Corporation, to J. B. Sullivan, of Forestal, whom he addresses as "My dear Jack":

* * * You will recall the formation for good and practical reasons of the Tannin Products Corporation in 1925 at which time a very large dividend was paid, which procedure continued in a more or less degree during the following years, particularly in 1929 and 1934. The company, as you will see, earned $3,284,427.28 and paid out dividends of $4,200,000. In other words, we declared practically $1,000,000 more during the 16-year period than we earned.

Under the circumstances I have no fault to find with this, provided our principal stockholders, the Forestal Co., are aware of it and are prepared to take care of our money situation as the same arises.

** * To come right down to the last analysis, we have been living on Government funds, which under proper business procedure should be reserved for income-tax payments, but, as these payments are not due until next year, it has been possible to use this money. We owe the Government today $500,000. This money, together with your most helpful postponement of payments, has made it possible for us to have cash to pay the dividend we did. I believe that with the extra terms on future purchases of extract we will make our position stronger during the next 6 months, and we are trying diligently not to borrow from the banks, as in this particular case it would appear that such borrowing was done to pay dividends. This I believe would have a very bad effect on our good will and financial standing-and we enjoy today the good will and respect of the tanning industry as we never have before.

The CHAIRMAN. In other words, they were paying dividends to Forestal of England out of money that should have been set aside for the payment of income taxes in the United States of the American corporation, is that right?

Mr. BERGE. That's my understanding of this letter; yes.

I have already pointed out that Forestal controls 5 of the South American producers. One of the other 17 is the International Products Corporation of New York. Another producer, Samuhi S. A., is controlled through ownership of a majority of its stock by two American corporations, Proctor Ellison and Howes Bros. of Massachusetts. International Products Corporation and Samuhi together have a capacity of about 8 percent of the entire industry. Both of these producers have been ineffective in preventing La Forestal from carrying out its policy of restricted output and high prices, and International Products has in the past frequently cooperated closely with La Forestal to further such a policy.

The CHAIRMAN. I gather from your testimony that the effort to monopolize this industry goes back a great many years. Can you give me something about the history of the quebracho pool and its attempts to maintain high prices and restrict production and the years it was active?

Mr. BERGE. I have some general information here. There have been pools operative at different times in the past. I think 1919 to 1922 there was a pool, 1926 to 1931, and then from 1934 to date. During these years prices have been considerably higher than during the periods when the pool was inactive.

The CHAIRMAN. And has not that increased price due to the activation of the pool reflected itself in the increased price to the consumer in the United States of leather products?

Mr. BERGE. Undoubtedly it has, because we are one of the principal users of the product.

The CHAIRMAN. In other words, every time the pool becomes operative, the cost of a pair of shoes goes up.

Mr. BERGE. A little later in my statement I have some more specific data on it.

Since 1934 International Products Corporation has consulted with Tannin about the prices to be charged to quebracho extract consumers in the United States, so that the prices of both companies have been fixed, uniform and high. From May 1934 to July 1939, Tannin owned a substantial amount of the stock of International Products Corporation, and from May 1934 until May 1936, the president of Tannin, Carl B. Ely, was a member of the board of directors of International Products Corporation. On February 26, 1935, Ely wrote to Sullivan:

I am giving the International Products Corporation problems a lot of my time, and, as previously told you, have found that there is a lot to be done to straighten out that problem. I am working slowly so as not to upset the apple cart any more than is necessary.

I am getting their sales policies straightened out and believe now there will be no more monkey business.

The CHAIRMAN. Can you give some more specific information regarding the methods by which the quebracho is distributed in this country? I assume that the distribution is strictly controlled and allocated to a few distributing companies, similar to the methods used by similar cartels; is that right?

Mr. BERGE. Yes; I think so. I can give you, I think, an example that might illustrate how the control of distribution is exercised. Let us suppose that you operate one of many thousand tanneries scattered throughout the country. You wish to buy some quebracho extract. There are only two distributors to whom you can go-the Tannin Corporation and the International Products Corporation. Both will quote you identical prices in terms of sale, as they have always done since 1934. If you don't like it, there is little you can do about it, since between them they represent substantially all the quebracho producers. If you attempt to buy from Tanners' Trading, you will be met with the reply that Tanners' Trading purchases extract exclusively for a small group of leather manufacturers. As a last resort you may attempt to buy quebracho extract from the two independent producers, Weisburd and La Chaquena-the two independents in Argentina-whom you will approach through a New York broker, but their exports are limited by these export quotas which I am going to discuss in more detail later, and they may not be able to get shipping space to send the product to this country. I will discuss some of the difficulties that have obtained in efforts to get from independents needed quebracho, difficulties in getting space on ships to bring quebracho from the independents into this country.

The CHAIRMAN. In other words, if the independent has a supply, frequently the Government steps in and limits his shipping quotas so he cannot furnish you if you go to him?

Mr. BERGE. That's right.

The CHAIRMAN. You have the pattern here of what you might call "accumulating profits." In other words, the profit is made by La Forestal and then not content with that profit they set up an agency in the United States to exact another profit. Also, due to operations between two different corporations, they thereby split the taxes and the income, and pile up the costs; isn't that right?