Surviving the Great Depression
2The Code of Fair Competition
Surviving the Great Depression
Wall Street and Hollywood
The Exhibition Market
Foreign Films and Foreign Markets
The Paramount Case
More than a year after the great Wall Street crash of 1929, conventional wisdom had it that the movies were immune to the Depression. The motion-picture business had been improving yearly since 1927. The public had welcomed the talkies enthusiastically and unequivocably, which seemed to justify the enormous expenditures required to wire the nation's theaters and to convert Hollywood's studios to sound. Looking back over 1929, Variety reported that in New York City the talkies had "driven legit shows to the side streets and [had] given filmdom a command of Broadway with an array of pictures unexcelled numerically and in quality."1 In 1930, motion-picture attendance reached a then all-time peak of 80 million patrons a week.
But beginning in 1931, Hollywood felt the effects of America's disabled economy. Describing the magnitude of this disability, one historian said that during the Depression, "the statistics of unemployment read like casualty figures in the great battles of the world wars. In three years following the crash an average of 100,000 workers were being discharged every week." Unskilled laborers, particularly blacks, were the shock troops, followed by white-collar workers and technicians. By the end of 1932, an estimated "34 million men, women, and children, that is 28 percent of the total population, were without any income at all." (These figures did not include the 11 million people living on farms—which is to say, 25 percent of the population—who were trying to live off the land.) Correspondingly, national income dropped from $81 billion in 1929 to $68 billion in 1930, to $53 billion in 1931, and to $41 billion in 1932, which was rock-bottom. Stated another way, during the first three years of the Depression, eighty-five thousand businesses failed, five thousand banks closed, and 9 million savings accounts were wiped out.2
Looking back over 1931, Variety said, "The outstanding market lesson of the year…is the exploding of the ancient dictum that low-priced amusements are depression-proof.…The current bear market has demonstrated that nothing is depression-proof, including Government bonds." Theater admissions fell to around 70 million per week in 1931, a drop of more than 12 percent. The price of a theater ticket also fell—from 30 cents to 20 cents on the average. To make matters worse, Hollywood saw production costs for the new talkies more than double and revenues from foreign markets dwindle. Film rentals reflected the times; in 1931, hit pictures grossed at most between $400,000 and $500,000 but cost between $300,000 and $800,000 to make; profits, when there were any, were slim.3
By 1932, all of show business was a shambles. Motion-picture attendance dropped another 15 million to 55 million a week. On Broadway, two-thirds of the playhouses had been shuttered, throwing the Shubert theater organization into receivership, leaving producers stranded, and forcing actors into penury. The road for touring legitimate theater virtually ceased to exist. Vaudeville was on its last legs; troupers, extras, stagehands, and musicians were especially hard hit. Tent shows, with the exception of Barnum and Bailey, had collapsed.4
Radio was the only diversion to prosper during the Great Depression. Audiences had time to kill. Radio manufacturers had huge inventories, creating a buyer's market. And as the average price of a radio fell from $90 in 1930 to $47 in 1932, 4 million families purchased receivers.5 By 1934, radio was reaching 60 percent of all American homes and had become a common habit. Many small local stations suffered or closed down, but the two major networks, NBC and CBS, consolidated their position by earning profits even in the most abysmal years of the crisis.
As his decisive first move to attack the Depression, newly elected President Franklin Roosevelt declared a four-day national bank holiday in March 1933. In closing the banks, FDR prevented further panic withdrawals and gave the Treasury Department time to draft emergency legislation. The effect on the motion-picture business was catastrophic. During the moratorium, box-office receipts fell about 45 percent, crippling theaters all over the country. To stay open, some operators were accepting IOUs, and others, produce, groceries, or almost anything in lieu of cash. Said Variety, "The decline was such that it leaves an open question whether the moving picture will ever again know the popularity of those peaks it reached in the silent era and then again with sound."6
Hollywood also felt the impact of the bank holiday. The cash flow dried up, which prevented the studios from meeting their payrolls. Production chiefs concluded that the studios could be kept open, temporarily at least, if employees earning $50 or more a week took a 50 percent cut for eight weeks. "Morale was already low," said Variety, "and the 50% cut to men who had already taken two or three cuts, seemed the last straw."7
As the Depression wore on, studios laid off more than 20 percent of their work force. Paramount shut down its Long Island studio and laid off almost five thousand employees who had been earning between $35 and $50 a week. General salary cuts for executives, contract people, and those who worked on a week-to-week basis were put into effect on practically all the major lots. The number of unemployed and underpaid extras in Hollywood became a national scandal. Wages for those lucky enough to find work dropped from $2 a day to $1.25. As a result of such economizing, the annual payroll of major companies dropped from $156 million in 1931 to an estimated $50 million in 1933.8
Exhibition was even harder hit. In 1930, more than twenty thousand theaters were operating in the United States. Two years later, an estimated four thousand had gone dark. The vast majority of these theaters seated an average of seven hundred and were owned by independents. The number of workers in this sector of the business dropped by a third, from 130,000 in 1929 to a low point of 87,000 in 1932.9
The impact of these conditions on the bottom lines of the major motion-picture corporations was as follows: after registering profits of $14.5 million in 1929 and $7 million in 1930, Warners lost nearly $8 million in 1931; Fox's earnings fell from $10 million in 1930 to minus $4 million in 1931; and RKO's $3.4 million surplus from 1930 turned to a $5.7 million deficit in one year. Paramount remained in the black in 1931, but Adolph Zukor saw his company's earnings fall from $18.4 million to $6.3 million and then, in 1932, to a record loss of $21 million.
The bottom fell out of the market in 1933. No longer able to avoid the ignominy of bankruptcy and receivership, RKO went down first, in January 1933, followed soon after by Paramount and Fox. Warners, battered by losses of $14 million in 1932 and $6 million in 1933, was fighting to stay afloat. Of the Big Five, only Loew's had yet to show a deficit; however, its earnings plunged from $15 million in 1930 to $4.3 million in 1933. As for the Little Three, Universal had gone into receivership, and Columbia and United Artists were wounded, but not down.10
Bankruptcies and receiverships were common enough during the Depression and enabled distressed companies to protect their assets for the benefit of investors while a court-approved plan was worked out to pay creditors in an orderly fashion. In the motion-picture industry, bankruptcies and receiverships occurred in the exhibition subsidiaries of the majors and not in the production and distribution ends and resulted from the ferocious battle for control of the nation's theaters at the end of the 1920s. During 1929, "hardly a week elapsed but that two or more of the giant interests were not amalgamating or absorbing one another," said Variety. Paramount, Warners, and RKO were particularly aggressive and built or acquired hundreds of theaters, thereby encumbering themselves with millions of dollars of debt. When the boom ended in 1931, the so-called deluxe theaters, built in flush times and at recklessly extravagant costs, became white elephants, at least for the duration of the Depression. In short, the major companies could not meet their fixed cost obligations, which simply meant they did not have the cash to pay their mortgage commitments, short-term obligations, and the heavy charges on their funded debts.11
RKO, a newcomer to the industry, was the most vulnerable. Founded in October 1928 as a holding company, Radio-Keith-Orpheum Corporation was created nearly overnight by RCA to exploit its Photophone sound system. The company amalgamated the Film Booking Office, a small Hollywood producer and distributor, the Keith-Albee-Orpheum vaudeville theater circuit, and Photo-phone into a vertically integrated giant containing a national chain of three hundred theaters, four studios, and assets of more than $100 million. RKO's receivership was caused by a 40 percent drop in attendance at its theaters and a paucity of successful films from Radio Pictures. RKO tried to compensate for its poor product by pushing vaudeville, but its circuit could not carry the burden.12
Paramount's bankruptcy was the second largest the country had ever known and one of the most complicated. During the 1920s, Paramount's theater chain, known as Publix, expanded to fifteen hundred houses. Most were acquired with money raised with bond issues underwritten by Kuhn, Loeb & Company. But according to Fortune, some theaters "were acquired in what seemed a shrewder way: exchange of stock, with a guarantee to repurchase at $80 a share. (Paramount stock never sold above 78.)" The repurchase agreements matured when Paramount's stock sold below $50 and when credit was tight; and when theater attendance plummeted, "not all the managerial resolution in the world could nick the fixed charges [that the company] had been so sanguinely accumulating. It required the judiciary ax."13
Fox's troubles began in 1929. The company was fully extended; by then, Fox had acquired extensive theater holdings, had become a leader in the innovation of sound, and had invested heavily in the construction of Movietone City, an all-sound studio facility in West Los Angeles. But in an audacious move, founder William Fox purchased a controlling interest in Loew's, Inc. from the estate of Marcus Loew and from Loew's management for $28 million. Fox borrowed the money from AT&T and Halsey, Stuart & Company, the La Salle Street investment firm. Fox's strategy was to merge his company with Loew's and create the world's largest motion-picture enterprise. But the Justice Department of the new Herbert Hoover administration blocked the move as a violation of the antitrust laws. As a result, Fox was forced to sequester the Loew's stock.14
Meanwhile, William Fox had been hit hard by the crash. To stay afloat, he sold off assets to AT&T and Halsey, Stuart, but in return for the cash, he had to relinquish control of his company. Dethroned from the company he founded, Fox sold his majority interest to Harley C. Clarke, the president of General Theatres Equipment, in 1930. The takeover was financed largely by AT&T and the Chase National Bank. In 1931, Fox divested himself of the Loew's stock. As will be discussed later, Harley Clarke did not possess the know-how to revive a distressed film company. Fox Films lost nearly $11.5 million in 1931 and 1932, which pushed it to the brink.15
Universal Pictures, the only member of the Little Three to seek protection in the courts, entered the Depression with a chain of more than three hundred theaters. Unlike the Big Five's theaters, Universal's were mainly small neighborhood and rural houses. During the conversion to sound, Universal did not have the money to wire its houses and sold off most of its circuit. The remainder of the theaters were placed into receivership in 1933 and were soon sold.16 Universal was chronically short of cash afterward. To raise production financing, Carl Laemmle, Sr., borrowed $750,000 from J. Cheever Cowdin's Standard Capital Company in 1935. As part of the loan agreement, Laemmle granted Standard a ninety-day option to purchase a majority interest in the studio for $5.5 million. Cowdin exercised the option in March 1936 and took over operating control of Universal Pictures. After selling his stock in the studio, Laemmle, who had founded the company in May 1912, retired from motion pictures.
The motion-picture companies that escaped the Depression unscathed—which is to say, weathered the Depression without bankruptcy, reorganization, or shake-up any kind—were Loew's, Inc., Warner Bros., Columbia Pictures, and United Artists. Of the group, Loew's was the strongest. Considered by Wall Street as the Tiffany's of motion-picture corporations, Loew's earned profits every year of the Depression. Two factors were responsible for Loew's outstanding achievement. The first was the company's fiscal conservatism. Loew's had branched out into production during the 1920s by absorbing Metro Pictures, Goldwyn Pictures, and Louis B. Mayer Productions to form MGM, but stood pat with its chain of 125 high-class theaters, which founder Marcus Loew had earlier acquired. The second was MGM's singlar success in gauging public tastes. During the thirties, MGM produced more hits than any other company. Of the twenty-four films that made it to Variety's annual list of top-grossing films from 1930 to 1933, MGM produced nine, or more than a third. As Fortune put it, MGM was "encrusted with more stars and triumphs than Hollywood had seen in one place."17
The Depression hit Warner Bros, hard, but the company refused to seek protection in the courts. Warners was the only member of the Big Five still run by the original founders: Harry Warner was president of the company; Albert Warner, treasurer and vice-president; and Jack Warner, vice-president in charge of production. Warners entered the thirties having just completed a spending spree the likes of which had never been seen, even in the movie business. By being the first to innovate sound, Warners generated extraordinary profits, which it used to solidify its position in the industry. Beginning in late 1928, Warners acquired First National Pictures, the Stanley chain of three hundred theaters, music publishing houses, and other investments that boosted its assets from $5 million to $230 million. In a few short years, Warners had become a leading company in the industry. Forced to retrench during the Depression, the company sold or closed more than half of its theaters, cut wages, and pared production budgets to the lowest level among the majors. In 1930, Warners was $113 million in debt, but as a result of Harry Warner's bloodletting, the debt had been greatly reduced (to $2g million) by 1938, and by 1943 it was fully retired.18
Columbia Pictures, the healthiest member of the Little Three, was also a family-run business. Under the direction of brothers Harry and Jack Cohn, who held most of the equity and voting stock in the company, Columbia won the admiration of Wall Street for its restraint; the studio neither tried to acquire theaters nor encumbered itself with long-term contracts with high-priced talent. Columbia stayed afloat during the Depression by sticking to its strategy of producing and distributing shorts, programmers (low-budget films that could fill either the A or B position on a bill), and B pictures for the low end of the market. In 1934, Columbia won recognition as a full-fledged member of the Little Three by producing two surprise hits, Frank Capra's It Happened One Night and Victor Schertzinger's One Night of Love.19
United Artists, the smallest major, had always led a precarious existence. As a distributor of independent productions, UA's livelihood depended solely on the ability of its producers to secure a steady flow of financing, which in turn would allow UA to keep its pipeline full. Without an adequate number of features to distribute, UA could not meet the fixed costs of operating an international sales organization. A decline both in box-office admissions and in the number of independent productions during the early 1930s forced UA into the red in 1932, but improved conditions thereafter stabilized the company's business.
The Code of Fair Competition
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."22
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."23
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."24
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.
Wall Street and Hollywood
Receiverships and bankruptcies changed Wall Street's relationship to the motion-picture industry. During the first two decades of its history, the film industry was financed almost exclusively from earnings or from private capital. When the movies proved their potential as big business, the great Wall Street and La Salle Street investment houses vied for the underwriting of new stock issues for capital expansion, which they sold to the public. Kuhn, Loeb & Company, for example, financed Famous Players' acquisition of a theater chain beginning in 1919; Goldman, Sachs & Company bankrolled Warners' acquisition of Vitagragh, First National, and Stanley Theatres during the conversion to sound; and Halsey, Stuart & Company enabled Fox Films to construct the Fox Movietone Studio and to acquire theaters during the same period. The wiring of the nation's theaters and the construction of sound studios in Hollywood was financed largely by the Morgan and Rockefeller banking groups. In underwriting these stock issues, investment houses placed representatives on the boards of directors of the respective film companies, where they worked hand in hand with top management to oversee fiscal matters. When motion-picture firms went under during the Depression, these same bankers installed themselves in the top management positions and took charge of the distressed companies.
Bankers and financiers proved singularly inept in managing motion-picture businesses. They were skillful at cutting costs, but they did not have the know-how or the temperament to make pictures audiences liked. Take the case of Fox Films. After William Fox sold his interest in the company to Harley C. Clarke, the board appointed Clarke the new president and chief executive officer. Clarke's credentials in addition to his post as head of General Theatres included the presidency of a Chicago-based holding company that owned or controlled more than fifty gas and electric companies in the United States and Great Britain. According to Gomery, Clarke "felt he could 'clean up' the mess by applying techniques of scientific business management which had worked so well in the utilities industry. But … standard business practices did not always work in the motion picture business. During the Great Depression they produced only debt. Clarke resigned in 1931 after only one year on the job."25
Clarke was succeeded by Edward R. Tinker, the former board chairman of the Chase National Bank. Tinker also failed to clean up the financial mess, and within a year the theater division of Fox filed for bankruptcy. Exit Tinker. Neither a former utility executive nor a former bank chairman had been able to cure the ailing motion-picture corporation.
Finally, the board chose a veteran of the movie business to direct the company. Sidney Kent, the former head of distribution at Paramount and "one of the driving forces behind Paramount's rise to power," said Gomery, used his considerable managerial skills to reorganize the theater chain, to put distribution back on the right track, and even to clear the company of debts.26 But Kent understood that the long-term health of the company depended on a steady supply of popular films. Kent therefore revamped studio operations on the West Coast in 1935 by negotiating a merger of the Fox Film Corporation and Twentieth Century Pictures.
Twentieth Century was a highly successful independent production company that had been distributing through United Artists. Founded in 1933 by Joseph M. Schenck, UA's chairman, the production unit revolved around the talents of Darryl F. Zanuck, the former production chief at Warners, and his associate, William Goetz, the son-in-law of Louis B. Mayer and a former RKO producer. Zanuck had joined Warner Bros, in 1924 at the age of twenty-two to become one of the most prolific scriptwriters in Hollywood. After making a name for himself creating the incredibly successful Rin Tin Tin series, he became studio manager and helped to guide operations through the transition to sound. In 1930 he was made head of production. In this position, Zanuck developed the formula for action-filled, fast-paced, and topical pictures that characterized the Warner output during the early thirties. Zanuck walked off the lot in 1933 when, at the conclusion of the bank moratorium, Harry Warner went back on his word to restore the salaries of studio employees who had taken cuts.
Schenck took advantage of the situation by going into partnership with Zanuck to supply United Artists with badly needed product. In his first year with Twentieth Century, Zanuck demonstrated his production skills by delivering twelve pictures, most of which were hits. Because of personality differences with UA's owners, particularly with Mary Pickford and Charlie Chaplin, UA did not offer Zanuck a partnership in the company, as was its custom with successful producers. Schenck thereupon resigned from UA, taking Twentieth Century with him.
As part of the merger with Fox, Schenck was named chairman of the board of the newly named 20th Century-Fox Film Corporation, and Zanuck, vice-president in charge of production. Although the net worth of the former UA production unit was placed at $5 million, its earning capacity surpassed the huge Fox Film Corporation, which had assets of more than $50 million. Because of this, Twentieth Century appeared first in the composite name.27
Paramount offers another case of Wall Street mismanagement. When the Depression hit the box office in 1931, Paramount named John Hertz, a retired Chicago taxicab millionaire and partner in Wall Street's Lehman Brothers, to the board and appointed him chairman of the finance committee. Hertz slashed production budgets by a third, reduced salaries across the board, and streamlined distribution. But cost cutting could not attract people to Paramount's theaters. Paramount was awash in red ink by 1933, convincing Hertz to step down just as the company opted for receivership.
During the receivership, "fifty-three different law firms, banks, protective committees, and experts yammered and bled for two and one-half years over the sick giant and its 500 subsidiaries," said Fortune. After the court approved Paramount's reorganization plan in July 1935, the new board of directors was led by former debtors and bankers, including Lehman Brothers, Electrical Research Products, Inc. (ERPI), and the Royal Insurance Company of Great Britain. Of the fifteen men on the board, only Adolph Zukor, the founder of the company, and one other member had any experience in motion pictures. Seeking to vindicate his tenure at the helm, Hertz convinced the board to name ERPI president John Otterson the chief executive of the company. Another solid businessman, Otterson, imitating Harley Clarke at Fox, tried to run Paramount like a public utility. Otterson bombarded the studio with cost-accounting procedures, efficiency schemes, and personnel forms, and morale sank to a new low.28
To investigate the situation, Paramount's board sought the advice of the prominent businessman and former film executive Joseph P. Kennedy, the father of future president John F. Kennedy. In his report to the board, Kennedy stated "that negative costs were exceeding their budgets by $7,000,000; that shooting schedules were being disregarded; that one scenario (average cost, $15,000) was junked for every one that could be charged to productions; that the planning of the 1936-37 program was hopelessly inchoate, costly stars were being alienated, writers were loafing, truck drivers were sulking, and things generally were in one hell of a mess." Concluding his investigation, Kennedy told the board "to get rid of their quality businessmen or prepare for another receivership."29
Stanton Griffis, who headed the financiers and real estate men on Paramount's board, acted in the summer of 1936. To replace the "quality businessmen" at the helm, Griffis installed a show-business management headed by Barney Balaban, a founding partner of the Chicago-based Balaban & Katz theater chain that had become a Paramount subsidiary in 1926. "In putting Balaban into the pilothouse at Par," said Variety, "a theatre operator had been given the presidency of a dominant producer-distributor for the first time." Adolph Zukor, who had been moved up to honorary chairman of the board, was placed in charge of the studio. Simultaneously, Griffis shook up the board by making ten new appointments. Leaving production entirely in Zukor's hands, Balaban went to work putting Paramount's house in order. Within six months, he had turned the company around and Paramount entered a new era of prosperity. Commenting on the reorganization, Fortune said, Paramount's postbankruptcy directors "capped an era of Wall Street influence on management that had reduced the once accurate name of Paramount to a symbol of all that was ludicrous, luckless, and unprofitable in the show world."30
Wall Street's involvement in the affairs of Hollywood gave rise to the belief in film scholarship that Wall Street took over virtual control of the film industry during the Depression. The idea was formulated by two Britishers, F. D. Klingender and Stuart Legg, in their book Money Behind the Screen, which was published in 1937. The gist of Klingender and Legg's argument, in Janet Staiger's words, is as follows:
Mode of Production to 1960 [New York: Columbia University Press, 1985], p. 315">
The introduction of sound equipment (controlled by the electrical and telephone companies) gave the Morgan and Rockefeller [banking interests] virtual control over the major film companies. This was accomplished indirectly through their control of sound equipment and patents and directly through the number of their key executives on the boards of directors…. Writing in the middle of the 1930s depression, they claim: "Whether the movies will regain their former financial success ultimately depends on whether the Morgans and Rockefellers will find it in their best interest in the unceasing change of American life to provide the masses with the type of pictures that alone will induce them to flock to their cinemas." (David Bordwell, Janet Staiger, and Kristin Thompson, The Classical Hollywood Cinema: Film Style and Mode of Production to 1960 [New York: Columbia University Press, 1985], p. 315)
Popularized by Lewis Jacobs's The Rise of the American Film in 1939, the argument became dogma in film scholarship until Douglas Gomery and others offered alternative models for understanding the modern business enterprise. These revisionist accounts rest more or less on contemporary critiques of finance capitalism that focus on corporate hegemony—in other words, on management rather than ownership. Robert Sklar succinctly summarized the new thinking when he said that it is not so important "who owns the movie companies but who manages them."31
Investment bankers exercised financial control of motion-picture companies during the Depression, but failed to revive the sick firms. The revival of the industry occurred only when the majors behaved like modern business enterprises. Alfred D. Chandler, Jr., has defined the modern business enterprise as having two specific characteristics: "It contains many distinct operating units and is managed by a hierarchy of salaried executives."32 Motion-picture firms took on the first characteristic during the teens and twenties when they integrated both horizontally and vertically. As they grew in size, these firms became managerial, which is to say, they rationalized and organized operations into autonomous departments each headed by a professional manager. The founders ran the companies at first, but over time as death and economic convulsions took their toll, the founders were replaced by salaried executives. When this occurred, motion-picture firms took on the second characteristic of a modern business enterprise. At this point in a firm's development, said Chandler,
Harvard University Press, 1977], pp. 9-10">
the management of the enterprise became separated from its owner-ship…. Unless the owners or representatives of financial houses became full-time career managers within the enterprise itself, they did not have the information, the time, or the experience to play a dominant role in top-level decisions…. In time, the part-time own ers and financiers on the board normally looked on the enterprise in the same way as did ordinary stockholders. It became a source of income and not a business to be managed. Of necessity, they left current operations and future plans to the career administrators. (Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business [Cambridge, Mass.: Harvard University Press, 1977], pp. 9-10)
As mentioned earlier, Warner Bros, and Columbia Pictures were still run by their founders. However, both firms qualified as modern business enterprises according to Chandler's definition because the founders had become full-time career managers, and very successful ones at that.
By the thirties, corporate operations were financed from within. To supplement internal financing, companies sometimes turned to commercial banks for lines of credit. Designed to be used for short-term loans, lines of credit evened out the cash flow to meet payrolls, to pay operating expenses, and to acquire raw materials for production, among other things. The amount of the line depended on a company's needs, its fixed debt, and other obligations—in other words, its overall financial health. The point is, commercial banks did not make production loans per se to the major motion-picture companies. Nor did banks review motion-picture projects and pass on their commercial viability or artistic merit. Money for production came out of earned income—and the designated amount depended on the discretion of management.
The Exhibition Market
In 1930 the domestic exhibition market consisted of twenty-three thousand theaters. The most important theaters in the group were the four hundred movie palaces located in cities of fifty thousand or more. According to government census figures, these cities contained 35 percent of the population or around 43 million people and were situated mainly in the large eastern states and in California.33 (The vast majority of states outside these areas had fewer than ten such houses.) To take advantage of such concentrations of population, "deluxers," as the palaces were called by the trade, offered an array of inducements, including large seating capacities, comfortable appointments, proximity to public transportation, and air conditioning.
In the largest cities—New York, Chicago, Detroit, and Boston—flagship theaters of Paramount-Publix, Loew's, and Warners combined first-run movies and live entertainment consisting of presentations (comedy or musical skits) and top vaudeville acts, among them such stars as Al Jolson, Eddie Cantor, Maurice Chevalier, George Jessel, Kate Smith, and the Marx Brothers, and such bands as those of Cab Calloway, Duke Ellington, Paul Whiteman, Guy Lombardo, and Fred Waring. This combination policy of film and live acts put the last nail into the coffin of big-time vaudeville and paradoxically forced most deluxers, with the exception of the Radio City Music Hall, the Capitol, and the Roxy in New York, to switch to a pictures-only policy by 1934.34
Fully 65 percent of the population, or nearly 80 million people, lived in small towns at the start of the decade. Hundreds of these towns had only a single theater, a house that changed bills as often as three times a week and charged 35 cents tops for a ticket. Individually such theaters yielded rentals of from $7 to $15 per film, but as a group, they could spell the difference between a profit or a loss for a picture.35
Theaters were forced to close their doors during the Depression because most of the pictures in release neither drew nor held patronage. It was not long before neighborhood houses and even deluxers started shortening the length of the runs for pictures "without legs." This practice consumed product so fast that even the largest chains had to forage around in the independent field for pictures. Contributing to the product shortage was the panic swing by exhibitors to double features.
Night sports such as miniature golf, baseball, softball, boxing, wrestling, and dog racing also took their toll. Early in the decade, miniature golf provided most of the worry. In 1930 nearly every town between San Diego and Vancouver had at least two miniature golf courses. These places stayed open until well after midnight and charged as little as 25 cents. Night baseball competed for the entertainment dollar throughout the decade. Variety estimated that in larger cities, night baseball games cut into receipts only 10-15 percent, but in smaller communities, games affected the box office by as much as 30 percent.36
The repeal of Prohibition in 1933 provided business a shot in the arm. As Variety explained, repeal drew people out of their homes: "In many cities there had been no downtown life to speak of for the 13 years of the Great Mistake, whereas repeal had the effect of immediately bringing life to hotels, restaurants and other places in such downtown zones where the larger theaters are located."37
To rekindle the moviegoing habit, exhibitors experimented with a "galaxy of appetizers" from stage shows to vaudeville. RKO tapped small-time vaudeville by presenting four-act bills along with motion pictures in some of its houses. This policy was credited with keeping the grosses up and the losses down in the circuit up to 1932. RKO played vaudeville out of necessity because of the weakness of the studio's pictures.38 To attract patrons to its small-town theaters in Pennsylvania, Warners roadshowed band acts complete with lines of chorus girls and comedians for one-to-three-day stands. Paramount-Publix introduced live acts in its theaters in New England, Pennsylvania, and the Southwest. By 1933, however, small-time vaudeville had lost its effectiveness and was dropped from all the circuits.
As a substitute for the lure of vaudeville, exhibitors cut ticket prices. Before the Depression, the difference in admission price between a first-run affiliated theater and a subsequent-run house owned by an independent was around 20 cents a ticket on the average. When moviegoers tightened their purses, first-run theaters reduced the price of a ticket to within 5 cents of the scale charged by independents. Houses that once charged 25, 30, and 35 cents going into 1931 were charging from 10 to 15 cents by the end of the year. The number of 10-cent houses increased as well to around two thousand by the end of 1931.39
But ticket prices could be lowered just so far. As a result, exhibitors resorted to other forms of price cutting, such as double features, two-for-one tickets, half-priced student tickets, free ladies' matinees, and prizes. Prizes were particularly popular with independents who had already instituted double features and were in need of an additional lure. Since offering a third picture would have been impractical, some exhibitors initiated "premium nights" and gave away dishes, hams, and even automobiles as prizes. Testifying to the popularity of such gimmicks, a theater might announce on its marquee, "Tonight Is Dish Night—Also a Feature."40
The majors did not follow suit in the belief that such measures would soon lose their effectiveness. And they were right. Within months, dishes, food, and the like had lost their pull. Ever resourceful, independent theaters then offered cash prizes. The first cash prize game to sweep the country was Bank Night, the creation of Charles U. Yeager, a Fox West Coast theater manager. After trying out the scheme in a few small towns in the Rocky Mountains, he copyrighted the game and marketed it to other theaters. Time described Bank Night as follows:
In his lobby a theatre owner places a large book. Persons who wish to do so may enter their names in the book opposite numbers corresponding to which the box office keeps a book of tickets. On Bank Night, usually Monday, when receipts are normally lowest, the tickets are placed in a drum on the stage. One number is drawn from the drum and announced. If the person whose name is entered for that number in the lobby book appears on the stage within a specified time, usually three minutes, he receives a cash prize of, say, $150. ("Bank Night," 3 February 1936, pp. 57-58)
Since Bank Night could increase box-office receipts several fold, more than four thousand theaters adopted the game by 1936. Bank Night and kindred contests, such as Prosperity Night, Movie Sweepstakes, and Treasury Night, were used throughout the decade and were generally believed to have kept more theaters open during the Depression than any other device.41
The exhibition scheme that made the greatest impact on the industry was double features. Showing two pictures for the price of one was an old industry practice. As Variety put it, "every time theatre figures have lagged the two-forone has bobbed up in spots." However, the shortage of talking pictures during the conversion to sound and the higher rentals they commanded would spell the death of the practice, predicted Variety in 1929. But the trade paper soon did an about-face: "Almost down and out six months ago, double features are suddenly staging a strong comeback. Houses everywhere, including important first runs in chains, are leaning toward two talkers for the price of one." Double features established a foothold in New England in 1930. By the middle of 1932, six thousand of the fourteen thousand theaters then operating, or 40 percent, had adopted the practice. In some situations, independents had combined a talkie or a silent produced by an independent producer with a sound picture produced by a major. In highly competitive situations, exhibitors even resorted to triple features.42
The economic rationale of double featuring was simple enough. In essence, indies used the practice to break down the barriers of booking protection, which is to say, excessive clearances enjoyed by first-run theaters. Indies reasoned that if they could not present hit pictures in a timely manner to their patrons, they would offer quantity instead. Legally, a distributor could do nothing to stop them. Because double features would inevitably break open the market for independent producers, the MPPDA outlawed the practice in drafting its version of the NRA Code of Fair Competition. But independent producers and exhibitors fought back and convinced the NRA to legalize dual billing in August 1934, nearly one year after the industry adopted the Code. Variety called the decision "the Blue Eagle's first truly revolutionary decree for filmdom."43 By then, nearly every theater in competitive situations—the markets that generated the bulk of the domestic box-office gross—had fallen into line.
And by then, the biggest users of double bills were the affiliated theaters. There were several reasons for this. The widespread acceptance of double bills made it awkward for a first-run house without a stage show to charge a higher ticket price for a single feature than a subsequent-run theater offering a double bill. Those theaters that still relied on stage shows found talent more expensive and increasingly hard to find in the waning days of vaudeville. And lastly, the overall reduction in quality of pictures made it necessary to offer "two pictures, even of poor quality … to satisfy a bargain-hunting public."44 Thus, in dealing with this practice during the days of the NRA, the majors adopted an anomalous position of fighting a policy that made a favorable impact on their own box office.
Legalizing double features had the direct effect of doubling the demand for product. Had the NRA mandated a single-feature policy, the eight majors could have easily satisfied the production demands of the market, even for theaters that changed bills three times a week. But double features doubled the demand: Variety estimated that a minimum of seven hundred features were needed each year.45 Since the production facilities and talent even of the majors limited the number of pictures they could produce, a gap existed between supply and demand, which was quickly filled by Poverty Row.
Hollywood had always produced a full range of pictures in various price brackets. Budgets depended on the basic ingredients of the picture—the underlying property, the stars, the director, and the physical requirements, among other factors. Low-budget pictures often served as vehicles to break in young actors, new writers, and novice directors. In reacting to the new market conditions, studios divided production more or less into two groups—class A and class B—and formed special production units to handle the lower grade product. Class-B pictures cost anywhere from $50,000 to more than $200,000 to produce, whereas the average class-A picture cost roughly $400,000.46 Producing more pictures did not necessarily generate more revenue for the simple reason that exhibitors could not afford to rent two expensive pictures for each double bill. The majors therefore used a differential pricing policy—flat fees for class-B features and percentages for class-A pictures. Although flat fees were low out of necessity, producers could predict with great accuracy the amount of revenues B features could generate and so could scale production costs accordingly.
By the end of the decade, double features had become an institution, prevailing either all or part of the week in an estimated 60 percent of the nation's seventeen thousand theaters. The practice, said Bosley Crowther, created "one of the most prolonged disputes ever to disturb the American public." Women's clubs, parent-teacher organizations, and the education establishment complained that double bills were too long for children, that they offered too much excitement for little ones, and that they were terribly hard on youngsters' eyes. No one was willing to defend the double features. Why, then, did the practice persist? As Variety explained it, bitter experience had shown exhibitors that so long as one of them in a community offered two pictures for the price of one, double-featuring would persist in that community.47
The U.S. Department of Commerce indicated that the recreation and amusement industries started to revive in 1934, although nearly all their employment, payroll, and earnings figures were still below 1929 levels. Motion pictures, the last business to feel the pinch of the Depression, was "in the vanguard of industries emerging the earliest," said Variety. "Thus, although severely struck when it was hit, the picture industry was bedridden a much shorter spell than many other members of big business." Box-office receipts and theater admissions rebounded in 1934, and one thousand theaters were said to have reopened. During 1935, Paramount and Fox had undergone reorganization and were clear of debts, although RKO was not stabilized until 1940. In 1936, Universal, after selling off the last of its theaters, came out of receivership. The majors had survived the Depression intact.48
The media attributed the turnaround to quality pictures that had struck the public's fancy. The Magazine of Wall Street, for example, stated that as a result of the Legion of Decency's drive for cleaner pictures in 1934, "the industry awoke to the fact that the public was much more interested in quality films which neither offended its taste or intelligence."49 The type of picture the magazine referred to was the prestige picture—a big-budget film, based typically on a popular novel, a standard classic, a stage success, or an opera. Examples of such pictures would be Columbia's One Night of Love (1934), MGM's Dinner at Eight (1933), RKO's Little Women (1933), MGM'S David MGM Copperfield (1935), and Warners' A midsummer Night's Dream (1935).
The Magazine of Wall Street also reported that in 1936, motion-picture patronage "now equals within a few thousand a week its peak of six or seven years ago when over 100,000,000 persons per week pushed their silver across the glass slides of the box offices, and there is little competition on the horizon." The magazine grossly exaggerated the number of weekly admissions. Not even the film industry itself ballyhooed such inflated figures. The Film Daily Yearbook, for example, stated that average weekly attendance rose from 60 million in 1933 to 70 million in 1934, to 80 million in 1935, and to 88 million in 1936. However, a Gallup poll in 1940 indicated that weekly attendance at films had been averaging only around 54 million. Regardless of the actual figures, a turnaround of sorts did occur. Box-office receipts rose steadily after 1934. Motion-picture stocks, led by Loew's, Paramount, and Warner Bros., "assumed something like their old positions as trading favorites," said Variety. And 20th Century-Fox, Loew's, and Paramount, among other companies, started earning hefty profits, although no company earned in one year as much as it had in 1930.50
Widespread unemployment continued throughout the decade: by 1937, an estimated 7 million workers were still without jobs, and of those in the work force, 60 million received less than $1,000 per year.51 Since motion pictures were not luxuries, they did not depend on "great general prosperity for profitable operation." It took America's entry into World War II to break the back of the Depression, and then conditions on the home front created the best market Hollywood had ever seen.
Foreign Films and Foreign Markets
Prior to 1930, foreign markets generated 30-50 percent of a picture's worldwide gross. Of this gross, nearly half came from English-speaking countries, mainly Great Britain. During the Depression the foreign take fell to around 20 percent, but by mid decade the percentage rebounded to normal levels. Hollywood's commanding position in world markets is documented by the following figures: by 1930, Hollywood produced 75-80 percent of all the pictures shown throughout the world, which pictures collected about $200 million in film rentals out of a total annual world gross of $275 million.52
The film industry's entry into the principal overseas markets began in earnest after World War I. For a crucial five years in the postwar period, European nations devoted their limited capital and purchasing power to rebuilding their shattered economies; little was left to rehabilitate their home film industries.53 Hollywood producers capitalized on at least three built-in, natural advantages over their foreign competitors. First, they utilized the natural scenery of the Pacific Coast to produce the tremendously popular Westerns and other action films. Second, they situated their studios in a climate that enabled work to continue year-round. Third, they functioned in a large domestic market with a high standard of living that ensured large revenues. In addition, American firms controlled the domestic market through theater ownership, which meant that European producers could not hope to obtain distribution except for an exceptional film.
European governments responded to these barriers to entry by establishing barriers of their own to protect their domestic film industries. Germany was the first European nation to react by instituting a contingent act in 1925. Designed to prevent a deluge of American films from overwhelming national producers, the law stipulated that for every film produced in Germany, a contingent, or permit, would be issued to its distributor to import and release a foreign (read "American") film of equal length. In practice, the act was designed to force American companies either to become producers of German films or to invest in German production. Rather than protecting the home film industry, measures such as this merely encouraged the production of cheap, low-quality pictures, which damaged the reputations of European producers.
The talkies impeded foreign distribution at first, since spoken dialogue seemingly introduced an impenetrable language barrier. Moreover, theaters overseas were slow to convert to sound. To service these theaters, American distributors used subtitling. To service theaters wired for sound, Hollywood produced foreign-language versions of its latest releases using native casts. Paramount established a studio in Joinville, France, outside Paris, to produce versions of its films in French, German, and Italian. In the days of silents, said Variety, any picture could be retitled for all foreign markets for $10,000; in 1930 the cost of making multilinguals cost a minimum of $70,000 for each language.
Dubbing soon became the accepted practice in international trade. But not without a fight. Claiming that dubbed pictures were cheap to produce and hence constituted unfair competition, France and Germany passed laws barring films dubbed outside their borders. American film companies therefore constructed dubbing studios in each of these countries. Not only were dubbed releases cheaper to produce than foreign-language versions, but they also retained the commercial value of the Hollywood stars. The combination of these factors restored foreign distribution to its former profit levels. By the mid thirties, American films were dubbed into practically all languages of the world. Said Variety, "Europeans accept them easily and without argument because dubbing has made such exceptional strides technically that flaws are the exception rather than the rule today. Thus, auditors frequently can't tell the difference between dubbed and straight screened product."54
As always, European films faced many obstacles breaking into the American market. They had to outperform Hollywood's best product, for one thing. For another, they had to wedge their way into the key theater chains—chains that were controlled by the majors' distributors and were well supplied with product as a result of reciprocal booking arrangements. To secure a playdate in a deluxe house, a foreign film had to be not only good but a smash hit. For these reasons, few foreign films gained access to the mainstream exhibition market.
During the 1930s, only around forty theaters in the United States played foreign films exclusively; an additional two hundred theaters played imports on occasion. German imports made the strongest impact on the foreign-language market. In 1931, Variety reported that Loew's, Publix, and RKO played German films one day a week in some of their neighborhood houses in metropolitan New York. Three German companies, UFA, Tobis, and Capital, had distribution offices in New York and handled around seventy pictures a year as a group. Their pictures played in German-speaking neighborhoods of New York, Milwaukee, and a few other cities. But demand for such pictures dropped when Hitler came to power in 1933. After the Nazis nationalized the German film industry, the Reich offered pictures to American exhibitors at no cost up front, just a percentage of the take, but only a half dozen or so German-language houses accepted the offer.55
Demand for French films hardly existed in the American market during the Depression, when only about a dozen pictures a year were imported. Interest picked up later in the decade, but only in Manhattan, which had six thriving art houses. A small market existed for Spanish-language pictures in Texas and California. These pictures, plus an occasional Russian film, constituted the foreign-language film market in the United States.
Only Great Britain had the ability to make films suitable for the American market. Most of the credit for this achievement goes to Alexander Korda. Korda's The Private Life of Henry VIII premiered at the Radio City Music Hall on 12 October 1933 and grossed a respectable $500,000 in the United States; Charles Laughton won an Academy Award playing the title role; and Korda proved to the world that a British film could match the best that America could produce in spectacle and lavishness. Korda, a Hungarian, had been producing quota quickies in England for Paramount. On the basis of his Service for Ladies (U.S. title: Reserved for Ladies), United Artists awarded him a two-picture distribution contract. Korda's second UA picture, Catherine the Great (1934), was another hit and earned Korda a long-term contract with United Artists and a partnership in the company in 1935.
Korda was soon heralded as the man who single-handedly put the British film industry on its feet. Production companies mushroomed after 1934, lured into existence by the prospect of making another Henry VIII. Hoping to cash in on the American market, Gaumont British opened a sales office in New York in 1934. J. Arthur Rank, the prominent British film magnate, became a partner in Universal Pictures in 1936 when J. Cheever Cowdin bought out Carl Laemmle. Parliament tried to give British pictures a boost in this country by placing a reciprocity clause in the new Quota Law of 1938 relieving American companies of the obligation of distributing British films in Great Britain if they distributed British films in the United States.56
United Artists became a principal distributor of British pictures in the United States. UA was solely a distributor and did not finance films; therefore, the company did not have to give top priority to its own product. UA was always in search of quality product from anywhere to include on its roster. On the strength of his UA contract, Korda's London Films Ltd. became the leading motion-picture company in Great Britain by 1937. Among the films Korda released through UA were René Clair's The Ghost Goes West (1935) and two H. G. Wells fantasies, William Cameron Menzies's Things to Come (1936) and Lothar Mendes's The Man Who Could Wrk Miracles (1937); in addition, UA released two films starring Vivien Leigh, Dark Journey and Storm in a Teacup (both 1937), which were produced by Victor Saville.
As hostilities spread in Europe and in the Orient, revenues from foreign markets declined. Before the Nazis came to power, the German film industry had been second to the United States in prestige and sales in the major European markets. With the exception of the United States, no other country had an international film market to speak of. American film imports had been dropping steadily in Germany, from more than two hundred in 1929 to fifty in 1932. By 1936, Germany virtually ceased to exist as an outlet for American films. The Reich Film Law of 1934 had instituted rigid censorship. The German mark was frozen, and with the passing of the Enabling Act in 1936, all imported films had to be "German" in character, which meant they had to be produced, directed, and performed by persons of Aryan descent. In 1937 the German film industry was nationalized and placed under the supervision of Minister of Propaganda and Public Enlightenment Joseph Goebbels. American distributors had no choice but to leave the country.57
Hollywood faced similar obstacles in Italy, but with a few special twists. For example, Mussolini prohibited American film companies from operating distribution subsidiaries; all imports had to be handled by a government film monopoly called Ente Nazionale Industria Cinematografica. This was something new; here, for the first time, a foreign government had gone into the business of distributing foreign and domestic pictures for profit. Although the monopoly was established in 1938, Italy had laid the groundwork for it ten years earlier by instituting quota laws, dubbing restrictions, and currency restrictions to bleed, antagonize, and alienate American film companies. American companies did only a token amount of business in Italy after 1938. When the United States entered the war, Hollywood severed all relations with the country.
Meanwhile, American film distributors had withdrawn from Spain following the outbreak of civil war in 1936, from the Far East in the wake of Japanese expansion in 1938, and from Central Europe following the Anschluss in 1938. After England declared war on Germany in September 1939 and while Britain's theaters remained boarded up during the Nazis bombings of London and other English cities, Hollywood saw its overseas market virtually disappear.58
The Paramount Case
The industry's monopolistic trade practices remained in force without significant alteration after the demise of the NRA. But the debate over these practices continued unabated and culminated in the historic antitrust case United States v. Paramount et al. The suit was filed personally by trustbuster Thurman Arnold, the chief of the Department of Justice's Antitrust Division, on 20 July 1938. The government charged the majors with combining and conspiring to restrain trade unreasonably and to monopolize the production, distribution, and exhibition of motion pictures. The bill of particulars contained charges that were nearly identical to those heard during the days of the NRA. So were the remedies: the government's petition asked for the divorcement of production from exhibition, the elimination of block booking, the abolition of unfair clearance, and the quashing of many other producer-distributor trade practices.
The case was scheduled for trial in the Southern District Court of New York in June 1940, but after a period of negotiation, the government entered an amended complaint providing for the entry of a consent decree that was to run for three years. The majors again succeeded in warding off an attack on their industrial structure. During the war, the majors earned record profits. When the case was finally adjudicated in 1945, the decision was appealed all the way to the Supreme Court. In 1948, when the Court handed down its decision, which went against the defendants, the remedies were too little, too late, to help the supposed beneficiary of the case—the independent exhibitor. An era of motion-picture history had ended and, along with it, a place for the small businessman.