The impact of inflation upon the steel industry in the United States, 1946-1954

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Content THE IMPACT OF INFLATION UPON THE STEEL INDUSTRY * I IN THE UNITED STATES, 1946-1954 by Yen Hui Ho A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (Economics) August 1957 UMI Number: DP23269 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Dissertation Publishing UMI DP23269 Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 4 8 1 0 6- 1346 9h. O Ec.„/-U7<f This dissertation, w ritte n by Yen Hui Ho under the direction of Guidance Committee, and approved by a ll its members, has been p re sented to and accepted by the F a culty of the Graduate School, in p a rtia l fu lfillm e n t of re quirements fo r the degree of D O C T O R O F P H I L O S O P H Y Dean Gui/tanch C om m it Chairman TABLE OF CONTENTS CHAPTER I, INTRODUCING THE PROBLEM ................ Inflation after World War II • • • • • . The world-wide inflation............ The inflationary pressure . . . . . The rising price levels • ........ Suppressed inflation . ........ .. The long-run outlook of inflation • » The world tension The institutional forces •••••• A review of literature on inflation • • Inflation and prosperity • .......... Advocates of inflation ••••••» Impossibility of perpetual inflation •••••••••••• Destructiveness of inflation • . • . Inflation and distribution ...... Unfavorable redistribution • • • • . Dissenting views • ••.•••••• Inflation and the price structure • • Distortion of the price mechanism ..... .. .. .. . Is price mechanism really distorted? • ••••••••••• PAGE 1 1 1 1 3 6 6 7 7 9 10 11 12 14 16 16 17 15 IS 19 iii CHAPTER PAGE Some general comments ............ 20 Futile controversy • • • .......... 21' i Lack of factual investigation . . . 21 i The proposed study ...... ........ 22 The general approach • •••••••• 23; Segmentary investigation ...... 23 An industry as the center • . • • • 24 i The steel industry and inflation . . . 26 I Why the steel industry ••••••• 26 j Some illustrations • •••••••• 27 The aim • 29 II. THE CONCEPT OF INFLATION........... 30 Definition of inflation .......... 30 A review of common definitions • • • • 30 Monetary definition .......... 32 Price level definition . ........ 34 Income definition ........ 38 Multiple definition ••••.••• 40 The selected definition ••••••• 41 The statement ••••.•••••• 42 Some explanation ••••• ........ 42 Further clarification ....... 47 Measurement of inflation •••••••• 49 i Three alternatives •••••..••• 50 j i . _j iv CHAPTER PAGE Money and its income velocity • • • 51 The inflationary gap.............. 52 r Index of price levels . 53 j The index of inflation . . 56 j Some current proposals 56 j The index to be used 56 i Interpretation of the index • • • • 59 j III. DEMAND AND SUPPLY OF STEEL UNDER j i INFLATION— A GENERAL ANALYSIS ..... 71 Demand for steel................. 71 General characteristics of demand for steel............. 71 Derived demand ••••••••••• 71 Storability and durability........ 73 Anticipation and speculation .... 75 Other factors determining the demand for steel .•••••••••••• 75 Price ...............•••• 76 Industrial production ••••••• 76 Trend factor......... 77 Substitutes •••••••••••• 77 The demand function ••••...•• 76 Notation................... 76 Analysis of the function ••••.. 76 CHAPTER PAGE j Supply of steel • ••••••••••• 79 General characteristics of steel I supply • • • • ..............• • • 79 1 | Large fixed investment • •••••• SO j Oligopolistic market ........ £4 * The supply function ••••••••• £6 The equation ... .. .. ... .. £6 Identification ••••••••••• £7 A statistical study • • • • .......... ££ Statistical data • •••••••••• ££ Steel production • ••••••••• £9 Steel prices • ••••••••••• 90 Cost ..................... . . 91 Demand and supply functions ..... 92 Some interpretations ••••••••• 92 j Influence of inflation ••••••• 96 IV. EFFECT OF INFLATION UPON DEMAND FOR STEEL AND STEEL USERS .............. 9S Changes in demand for steel in general •••••••••••••.. 9S Further on demand function of steel ••••••••••••••• 9S The Whitman study ••••••••• 99 A verification ...... ........ 101 CHAPTER PAGE An explanation ........... 104 Changes in the elasticity of demand • ......................... 109 U. S. Steel study................ 110 Changes of elasticity • •••••• 112 Changes in the composition of demand for steel • • • • • • • • .......... 116 Position of steel consuming industries • •••••••••••• 113 Steel distribution • •••••••• 120 Differences in the consuming industries •••••••••••• 122 Changes in product mix •••...•• 141 Heavy versus light steels • • • • • 141 Low versus high grades • •••••• 149 Changes in market relations ...... 155 Deviation from market forces • • • . • 155 Allocation programs............. 156 Gray market ............ ••••• 161 Selection of customer ..•••••• 163 Ownership link ••••••••••• 163 Location factor •••••••••• 165 Size of customers ••••••••• 166 vii CHAPTER PAGE V. CAPITAL EXPANSION UNDER INFLATION . . . . 169 Incentive to invest • •.•••••.. 169 The need............... ...... 17© Full employment implications • • • • 171 ; Capacity operation ••••••••• 172 General attitudes ............. 174 Early stage •••••••••••• 176 After the summer of 1950 •••.•• 180 Government policy ••••••••• 184 Expansion programs ••••• .......... 190 Types of facilities ••••••••• 190 Steel making facilities .......... 191 Material capacity ••.•••••• 197 Finishing facilities •••••••• 201 New plant and intra-plant expansion •••»;•••••••• 209 Construction costs ••.•••••• 210 Intra-plant expansion ....... 215 A balance ••••••••••••. 217 Investment •••••••••••••• 219 Steel companies .......... 220 Total expenditures. ~ • •••••••• 222 Industrial comparison ••••••• 227 CHAPTER VI. COSTS OF PRODUCING STEEL UNDER INFLATION .............. ....... Cost of raw materials ......... Prices of raw materials ••••••• Steel making materials ....... Inflation versus prices of raw materials •••••••••••• Cost effects • • • • ........... Consumption of raw materials • • • • . Difference in production stages • • Economy in pig iron production ... Substitutes •••••••••••• Cost of labor ••••••••••••• Compensation of labor .••••••• Wage movements in inflation • . • • Wage determination ••••••••• Remuneration of steel workers ... Productivity of labor.......... Plant utilization and productivity.............•••• Operational economies Productivity statistics •••••• Employment cost •••••••••• Unit cost under inflation ••»•••. v m PAGE 231 ! 231 I i 231 ! 233 235 237 242 245 247 243 24S 256 265 266 271 276 261 264 • • * • IX , CHAPTER PAGE < Some preliminary considerations • * . 285 I Changing conditions ........ 286 Break-even point • ••••••••. 2B6 j I Unit cost behavior .......... 288 j s The data 288 ! Price level adjustment ....... 289 Capacity utilization •••••••• 294 VII. STEEL PRICES AND FINANCIAL POSITIONS OF THE STEEL COMPANIES UNDER INFLATION Steel prices and pricing policies Pricing steel products •••..«•• 296 Secrecy about prices •••••••• 298 Price quotation .......... 301 Price movements ............... 305 Composite price •••••••••• 306 Semi-finished steel ••••.••• 313 Different finished products • • • • 315 Financial position of the steel industry ••••••••••••••• 320 Balance sheet items ....••••• 320 Property account .........•••• 321 Capitalization ••.•••••••• 331 Working capital •••••••••• 334 Income statements .................. 336 I X CHAPTER PAGE Earning power •••.•••••••. 336 j Industrial comparison ....... 342 j Company comparison . . . 34$ ! VIII. SUMMARY AMD CONCLUSIONS 354 | The foundation of the present study • • 354 The inflationary environment • • • • • 356 Inflation defined and measured ... 356 The postwar inflation ••••••• 357 Inflation term in a functional analysis •.••••••••.... 359 Statistical estimates ••••••• 361 Changes in demand and production facilities •••••••••••••• 362 Demand ...............••••• 362 Demand curve •••••••••••• 362 Composition of demand ••••••• 363 Seller-buyer relations ••••••• 366 Production facilities • • • • . . . . 367 Forces for and against expansion . . 36S Material, ingot, and finishing capacities ••••• 369 Effectuation of expansion . • • • • 371 Costs, prices, and finances •••••• 373 Cost behavior . . . . . . . . . . . . 374 I XI ! | CHAPTER PAGE S Material and labor costs ...... 374 I | Unit cost .......... 376 i j • | Prices and financial conditions . . . 377 j Prices of steel products •••••• 377 ! Financial position ••«•••••• 379 Some concluding remarks •••••• 3&1 BIBLIOGRAPHY ....................... . 3$2 1 LIST OF TABLES TABLE PAGE I* Wholesale Price •Movements of All Goods in Principal Countries, 1945-1954 • • • 4 II* Cost of Living Indexes of Principal Countries, 1945-1954 • •••••••• 5 III* U* S* Consumer Price Index, Wholesale Prices, & Their Means • •••••*.• 60 I?. Indexes of Inflation, Gross National Product, & Real Output of the United States • •••••••••• ........ 65 V. Changes in the Indexes of Inflation, Gross National Product, & Real Output of the United States • •••••••* 66 VI* Data for Computing Demand and Supply Functions ••••••••••••••• 93 VII* Steel Shipment, Composite Steel Price, and Inflation ........ • ••••••• 102 VIII* Steel Production Per Capita • •••••• 105 IX* Domestic Shipments of Finished Steel by Market Classification, 1940-1955 ... 123 X* Steel Shipments by Consuming Industries, Select Years, 1926-1952 ......... 125 XI* New Construction Expenditures and Steel Shipments to Construction, 1946-1954 135 xiii TABLE PAGE XII. Heavy Steel Products as Per Cent of Total Steel Shipments & Inflation Index, 1933-1954 144 XIII. Output of Carbon, Alloy, and Stainless Steel in Relation of Total Steel Production (Ingots and Steel for Castings), 1926-1955 ......... 151 XIV. Cold Rolled Sheets as Per Gent of Both Cold and Hot Roll Sheets Produced, Selected Years 1933-1955 ••••••• 154 XV. Steel Capacity, Production, and Per Cent of Operations, 1914-1955 ....... 175 XVI. Some Projections of Steel Capacity ... 163 XVII. Comparisons of Plant Expenditures and of Accelerated Amortization Charges ... 169 XVIII. Annual Steel Capacity by Types of Furnaces......... •••• 193 XIX. Capacity and Production of Coke Ovens, Blast Furnaces, and Steel Furnaces • . 199 XX. Shipments of Semi-fini shed Steel Products as a Per Cent of the Total Domestic Steel Shipments, 1943-1955 . • 203 XXI. Changes in the Steel Finishing Capacities, 1946-1951 ••••••••• 205 TABLE XXII. XVIII. XXIV. XXV. XXVI. XXVII. XXVIII. XXIX. Increases in the Steel Finishing Capacities, 1946-1951 & 1951-1954 . . . Indexes of Construction Cost and Inflation, 1930-1954 ................ Cost of Construction Items of a Steel Plant in 1952 as Per Gent of 1936-1939 Average .••••••••••••••• Capacities of Steel Companies by Groups According to Size, 193&, 1945, 1947, and 1949 ••••••••••••••• Capital Expenditures of the Steel Companies as Per Cent of Gross Plant, 1946-1954 . .......................... Outlays for New Construction and Improvement, and Retained Earnings of the Steel Industry, 1935-1954 . . . . . Expenditure on New Plant and Equipment by the Primary Iron and Steel Industry as Per Gent of that by Durable Goods Industries, All Manufacturing Industries, and All Non-farm Businesses, 1939-1954 .............. . Wholesale Price Indexes, by Production Stages, 1947-1954 .................... xiv 1 PAGE I | 207 212 i i I 213 ! i i 221 224 226 232 j |TABLE XXX. i ; XXXI. XXXII. XXXIII. XXXIV. XXXV. XXXVI. XXXVII. i I I i j jXXXVIII. 1 I Percentage Increase Above the 1936-1939 Average in the Prices of Raw Materials for Iron and Steel Making, as of March 1, 1946 »••••••••.••• Indexes of Scrap Prices, Pig Iron Prices, and Inflation, 1929-1954 . . • Net Tons of Scrap and Pig Iron Used in Producing One Net Ton of Steel (Ingots and Castings) • Consumption of Ore, Scrap, Mill Cinder, Limestone, and Coke Per Net Ton of Pig Iron Produced, 1935-1955 ....... Consumption of Power Materials by Iron and Steel Producers, 1946-1955 . . ♦ . Wage Rate Increases in the Steel Industry, 1946-1956 •••••••••. Hourly Earnings of Steel Workers, 1940-1955 ............ ....... Average Hourly Earnings in Constant and Current Prices: The Steel Industry and All Manufacturing Industries, 1939-1955 . . . . . . . . . . . . . . . Increases in "Real" Incomes from 1939 to 1956 by Income Groups ••••••••• xv PAGE i ! S 234 1 1 236 I 1 241 244 246 257 256 260 263 TABLE XXXIX. XL. XLI. XLII. XLIII. XLIY. XL?. XLVI. XLVII. XLYIII. XL IX. L. Variable Labor and Plant Utilization . . Productivity of Labor in the Steel Industry, 1926-1955 .......... Indexes of Productivity, Hourly Earnings, Employment Cost, and Inflation • • • • Average Unit Cost: The Steel Industry Versus Three Steel Companies • • • • • Inflation, and Capacity Utilization and Unit Cost of Steel, 1929-1954 . . . . . Steel Prices, by Statistical Sources, 1929-1954 . . . . . . . . . . . . . . . Ratios Between Steel Price Indexes and Inflation Index, 1929-1954 ...... Price Indexes of Finished and Semi finished Steel Products •••••••• Price Indexes of Some Finished Steel Products, 1939-1954 •••••••••• Gross and let Property Accounts of the Steel Companies, 1945-1955 ...... Depreciation Charges of the Steel Companies, 1945-1955 •» ........ .. Capital Expenditures, Increase in Inventory Value, and Internal Sources of Fund, 1946-1955 ............ xvi , PAGE ; 268 , 273 282 « 292 310 314 317 327 323 330 xvii TABLE PAGE LI. An Analysis of Capitalization of the Steel Companies, 1945-1955 ...... 333 LII. An Analysis of Working Capital of the Steel Companies, 1945-1955 ...... 335 LIII. Total Revenue and Its Distribution of the Steel Companies, 1946-1955 .... 337 LIV. Operating Income, Pre-tax Profits, and let Income of the Steel Companies, 1946-1955 .......... 339 LV. Distribution of Sales Dollar of the Steel Companies, 1929-1955 340 LVI. Distribution of Met Income of the Steel Companies, 1946-1954 ........ . 343 LVII. Returns on Met Assets for Leading Manufacturing Industries and the Iron and Steel Industry, 1925-1955 ..... 344 LVIII. Met Earnings as a Per Cent of Sales: i All Manufacturing and Iron and Steel, 1939-1955 ............... 347 ; LIX. Comparison of Net Income of "Light” & | "Heavy" Steel Producers, 1939-1954 • • 349 LX. Comparison of Profit Margins Between Integrated and Mon-integrated Steel Producers, 1941-1954 ••••••••• 351 xviii TABLE PAGE ' LXI. Comparison of Met Return on Sales Between Integrated and Non-integrated Steel Producers, 1941-1954 ••*••• 353 LIST gf figures FIGURE 1. Wholesale Prices, Consumer Price Index, & Their Mean in the United States, 1913-1954 . . . ........ ......... 2. Comparison of Arithmetic Mean & Geometric f Mean of the Wholesale Prices & Consumer Price Index of the United States......... ! 3* Indexes of Inflation, Gross National Product, I 1 & Real Output in the United States • • • • • 4. Year to Year Percentage Changes in the Indexes of Inflation, Gross National Product, & Real Output in the United States, 1913-1954 ........................ 5. Shifting of the Hypothetical Demand Curve for Steel Under Inflation •••••.••• 6. Indexes of Steel Shipments, Per Capita Steel Production, & Inflation, 1933-1954 . • * * • ! 7. Demand Schedule in Inflation, After j Acknowledging Changes in Elasticity • • • • | £. Per Cent of Domestic Steel Shipments to Mining, Quarrying, & Lumbering Against the Index of Inflation, Plotted with a One-year Lag •••••••••••••••• PAGE 62 63 I i 67 6G 99 106 117 127 XX FIGURE PAGE 9. Per Cent of Steel Shipments to Rail Trans portation Versus the Inflation Index • . . • 129 10. Inflation, Motor Vehicle Sales, and Shipments of Steel Products to Automotive Industry . . 131 11. Per Cent of Steel Shipments to Automotive Industry in Relation to Inflation • • . • • 132 12. Steel Shipments to Machinery (Including Electrical) and Industrial Equipment, and to Domestic and Commercial Equipment Versus Inflation •••••.•••..... 134 13. Inflation and Per Cent of Steel Shipments to Construction and Contractors* Products . . . 137 14. Steel Shipments to Gil and Gas, and Output of Oil and Gas Industries ••••••••••• 139 j15. Per Cent of Steel Shipments to Oil and Gas Versus the Inflation Index ......... 140 16. Per Cent of Steel Shipments to Containers Industry Versus the Inflation Index • • • • 142 17. Heavy Steels as Per Cent of Total, & the Inflation Index, 1913-1954 ......... 146 jIS. Shipments of Steel Sheet, Strip, and Tin i Plate Compared with Personal Expenditures for Durables ......... 148 FIGURE PAGE 19* Production of Alloy and Stainless Steels as Per Gent of Total Steel Production, and Inflation Index, 1926-1954 ........ 152 20. Inflation Versus Expenditure on Hew Plant and Equipment by the Primary Iron and Steel Industry as Per Cent of that by Durable Goods Industries 230 21. Movements in the Indexes of Scrap Price, Pig Iron Price, and Inflation, 1929-1954 * * 23# 22. Changes in the Capacity Operation and.Hours Worked by Wage-employees as Per Cent of Total Hours Worked by All Employees • • • • 269 23* Relationship of Shipped Tons Per 1000 Man Hours and Volume of Public Shipment, U. S. Steel Experience, 1934-1951 • • • • • 274 24* Volume Effect on Man Hours Per Ton, U. S. Steel Experience, 1934-194# ........ 275 CHAPTER I INTRODUCING THE PROBLEK INFLATION AFTER WORLD WAR II It will be shown in this section that inflation has become a concern of the world, because of its prevalence and long-run prospect in the principal countries of the world following World War II. The World-wide Inflation Since the end of World War II, most countries have been confronted with serious inflation problems. There were, to be sure, in some quarters worries of unemployment, depression, and deflation. However, no sizable unemployment appeared prior to 1954 and what was seemingly a deflationary wave in 1949 was too short to be a real threat. On the other hand, the general concern was the shortage of goods and rising priee levels. The inflationary pressure. Indeed, the world in the postwar period was unmistakably dominated by inflationary forces, which had several sources. First of all, the effective demand was extremely high. Consumers in the United States and several other jcountries, enriched by wartime high national incomes, had ' i been contemplating the purchase of many commodities in the j post-war years. And the industrial concerns had j jaccumulated demands for plant and equipment to replenish jtheir facilities which either had been worn out or had I j 'become inadequate for their expanded production ; ^requirements. Moreover, both demand for consumers’ goods | ! i and that for producers* goods were bolstered by high j liquidity in the national economies which was a result of war financing. i I By the time the pent-up demand had been relatively l well-satisfied, the world was in tension again, and the rearmament programs were initiated. Principal countries, therefore, had full employment and well-maintained purchasing power in the postwar years. In the second place, world production was inadequate. The productive facilities in belligerent countries, except in the United States, had been largely destroyed or had deteriorated. Even the greatly increased productivity of the United States appeared to be insufficient to supply the postwar markets. In the third place, the national governments were preoccupied with the depression experiences in the prewar decade. Consequently, the governmental policies in many a country had an inflationary bias. This bias is clearly [illustrated in the Employment Act of 1946 passed by the____ United States Congress, and in the British Employment White < Paper, issued in 1944.^ With this bias, the governments 1 pursued easy money and expansionist fiscal policies, • inspite of the fact that the problems of inflation were recognized as being serious.^ j j t The rising price levels. The extent of world-wide I inflation in the postwar period can be seen from Tables I j and II, which show, respectively, the wholesale prices and j ithe cost of living indexes of various countries, as | collected by the authoritative agencies of the respective J countries. In both tables, 1939 has been selected by this j investigator as the base year in order to indicate how far j prices advanced from the prewar level. J i 5 In both series, prices rose year after year. This is true even in the deflation threatening year of 1949 for most of those countries. Only four out of the twenty countries experienced a slight decline in wholesale prices, and five out of the twenty-five countries had the rise in 1 His Majesty’s Government (United Kingdom), Employment Policy (Cmd. 6527; New York: Macmillan Company, 1944), 31 pp. 2 For a thorough discussion of this aspect in the United States and Great Britain, see Lester V. Chandler, Inflation in the United States. 1940-194& (New York: Happer & Brothers, 1951), 402 pp.; Yen Hui Ho, "British iCredit Control, 1930-1950" (Unpublished Master’s thesis, the University of Southern California, 1951), 250 pp. i I TABLE I 1 I WHOLESALE PRICE MOVEMENTS OF ALL GOODS j ! IN PRINCIPAL COUNTRIESj 1945-1954 j j 1939 = 100 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 Austria 107 303 333 427 567 760 860 811 852 Belgium — 327 350 385 365 385 465 438 409 405 Brazil 222 263 318 370 407 470 570 633 719 927 Canada 133 141 165 196 202 214 243 229 225 220 Egypt 316 284 287 412 294 325 362 353 336 326 Finland 364 573 691 909 918 1054 1509 1400 1346 1346 France 358 619 944 1629 1824 1971 2524 2655 2528 2478 India 231 232 279 345 359 376 414 362 369 362 Italy 1979 2708 4947 5208 4947 4687 5364 5052 5052 5102 Japan 241 1117 3390 8813 14407 16949 23559 24068 24068 23827 Mexico 200 231 245 263 289 316 389 405 397 433 Netherlands 173 240 259 270 281 316 386 378 363 367 New Zealand 148 148 155 172 171 186 217 241 239 237 Norway 175 166 173 179 182 205 255 271 271 274 Spain 206 250 291 312 332 393 506 512 550 550 Sweden 168 l6l 172 185 187 196 259 274 258 258 Switzerland 198 192 200 208 198 196 219 216 208 210 Turkey 432 418 423 453 490 441 468 472 482 535 U. K. 163 170 185 213 218 255 311 317 317 320 U. S. A. 137 156 192 208 198 206 229 223 221 221 Source: International Financial Statistics, VI.10:34-168, October 1953; U. N. Monthly Bulletin of Statistics, X.1:115-122, January 1956. 5 TABLE II GOST OF LIVING INDEXES OF PRINCIPAL COUNTRIES, 1945-1954 1939 = 100 . I 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 Argentina 132 156 176 200 262 330 450 624 650 676 Australia 122 124 130 141 153 169 206 239 249 252 Belgium ------ 307 322 370 359 356 393 393 393 393 Bolivia 263 304 352 370 407 552 700 785 1570 3517 Brazil 258 296 383 417 408 433 471 554 676 797 Canada 118 123 135 154 160 165 182 188 186 188 Chile ' 229 262 354 417 496 571 696 850 1063 1828 Costa Rica 174 181 206 213 230 253 270 260 260 268 Denmark 156 156 159 164 166 175 195 210 210 212 Egypt 289 283 275 278 275 289 317 314 294 282 Finland 277 438 569 769 831 946 1138 1184 1208 1208 France — 1221 1440 ' 1599 1880 2088 2131 2131 Greece 1941 14812 17812 25312 29062 31250 35312 36875 33925 39014 India 22 3 243 263 286 289 294 311 317 327 294 Italy 2279 2698 4419 4651 4698 4651 5116 5302 5410 5572 Japan 2817 6338 11408 15070 14084 16338 17042 18130 19218 Netherlands 170 186 194 200 212 232 256 256 256 266 New Zealand 119 120 124 123 136 343 159 172 179 188 Norway 153 157 158 157 157 164 190 208 212 220 Spain 179 238 276 294 309 344 376 368 376 380 Sweden 139 139 143 149 152 154 178 191 193 195 Switzerland 150 150 156 161 160 158 164 169 167 169 Turkey 351 341 345 345 379 359 355 376 388 426 U. K. 146 147 156 169 175 180 197 214 221 225 U. S. A. 128 140 160 172 171 172 186 190 192 192 Source: International Financial Statistics, VI.10:34-168, October 1953; U. N. Monthly Bulletin of Statistics, X.1:140-147, January 1956. [ j 6 | the cost of living halted in that year. In the period covered, wholesale prices climbed up 1 two hundred and fourteen times in Japan, fifty times in j ! Italy, twenty-six times in France, and exactly fourteen j times in Finland. In no country did wholesale prices fail ; i !to double the 1939 levels. t ^ I Cost of living indexes showed a parallel movement. They had a minimum increase of 70 per cent in Switzerland and in New Zealand, with the median of 217 per cent i j jrepresented by India, and with extremes in Greece and ■ Japan where the index numbers had five digits. Suppressed inflation. This phenomenal rise of price levels, indicative though it is, understates considerably the postwar inflation. One of the postwar varieties of inflation is known as suppressed inflation, in which prices are kept from rising by governmental actions such as price controls, rationing, and subsidies. And practically every national government adopted one or several of these actions at one time or another in the postwar period. In other words, the price levels would have increased even more, had the governments not 1 suppressed them. m The Long-run Outlook of Inflation The inflation did not stop with the end of 1952. For example, the Consumer Price Index of the United States Bureau of Labor Statistics continued to advance up to i the time of this writing (February, 1957). Inflationary ; i jtendencies are persistently present, even though the ; I * ! shadow of deflation and depression scares many people from j | I |time to time. Among the factors which support these I i jlong-run inflationary tendencies are (1) the world tension, (2) institutional forces, and (3) some views favorable to inflation. The world tension. In spite of the cease fire j ! 1 arrangements in Korea, high-level international : conferences, and the peaceful coexistence propaganda, the I world is still far away from a lasting peace. The two rival camps, one for freedom and democracy and the other i for Communism, are as antagonistic to each other as before. As is evident from the problem in the Middle East in 1956-1957, there is no promising indication that this tension will be eased in the short run. So long as this world tension continues, the world-wide rearmament race will be carried on. These programs of military production tend to generate income without at the same time providing consumption or capital goods. This is an ample source of inflation. The institutional forces. In democratic countries such as Great Britain and the United States, one finds some pressure groups like organized labor and organized farmers, .which.. haye_and usually exercise the power of______ exacting benefits from the economy. Thus they demand wage ‘ increases or price supports. Farmers are unwilling to j tolerate a decline in the prices of farm products, while j organized labor is not willing to accept a wage cut or j I even an increase less than what it considers its fair ! share according to its own formula of productivity, cost * of living, and/or ability to pay. Under these pressures, J 1 cost and prices are rigid in downward adjustments but j jflexible in upward movements. i In fairness to labor and farmers, they are not the only pressure groups in a democratic country like the |United States. As one probably has observed, no less j forceful than their voices is the American businessmen’s outcry against a well-intended tight monetary policy in early 1953 and again in 1956-1957* In addition, governments since the war have become big contributors to as well as big claimants of the national incomes. Consequently, no less a Keynesian than Seymour E. Harris Said: ...never have the institutional long-run inflationary forces been so strong — in part because of the increased strength of labor and farmers, and in part because of the larger contributions of government.3 These institutional factors, plus the advocacy of 3 Seymour E. Harris, "Inflationary Process: 2. Theory and Recent History," Review of Economics and Statistics. 3l!209, August 1949* i r r T n " 9, I inflation voiced by some, support the view that inflation is still a lively problem to be faced. A REVIEW OF LITERATURE ON INFLATION i Since inflation has been a general phenomenon since j (the end of the World War II, it has been a cause of great < concern among economists, politicians, as well as the j general public. As one economist admitted, nmost of us j who were frankly expansionists before the Second World War have since felt impelled to change our emphasis if not our basic principles.”^ With the result, ”the major part of post-war literature is characterized by an antiinflationary bias as strong as the earlier anti-deflationary bias.”^ Much discussion of inflation so far has been about the causes and cures of inflation, which were generally centered around governmental policies as to money supply, 4 Paul Einzig, Inflation (London: Chatto and Windus, 1952), p. 7. 5 Ibid., p. i I j jfiscal programs, and/or wage and price regulations.6 This | I . . I type of discussion is apt to proceed on the premise that i inflation is undesirable; a premise which has become a subject of controversy in recent decades. The present section is to analyze some of the important assertions and i 1 j viewpoints, in order to show the general unsatisfactory j state of the literature on this problem. i ;Inflation and Prosperity [ The first question concerning the desirability of I |inflation is the relationship between inflation and prosperity. A review of the opinions expressed by some i ' jeconomists is perhaps helpful for one to realize the . ! controversial nature of the question. 6 The literature of this kind is too voluminous to be quoted. The following list of books is offered as an illustration only: Jules Backman, The Economics of Armament Inflation (New York: Rinehart & Company, Inc., 1951), 234 pp.; Chandler, op. cit.: Lester V. Chandler and Donald H. Wallace, Economic Mobilization & Stabilization (New York: Henry Holt and Company, 1951), 610 pp.; Aaron Director, editor, Defense. Controls, and Inflation (A conference sponsored fey the University of Chicago Law School; Chicago: The University of Chieago Press, 1952), 342 pp.; Seymour E. Harris, Inflation and the American Economy (New York: McGraw-Hill Book Company, Inc., 1945), 559 PP*» Seymour E. Harris, The Economies of Mobilization and Inflation (New York: W. W. Norton & Company, Inc., 1951), 308 pp.; Albert G. Hart, Defense Without Inflation (New York: The Twentieth Century Fund, 1951), lBb pp.: kenneth K. Kurihara, Monetary Theory and Public Policy (New York;. W. W. Norton & Company, Inc., 1950), Chs. IV and V. . 11 Advocates of inflation. There are many economists, besides the well known Mercantilists, who prefer inflation j i to deflation. The Eighteenth Century London merchant, Jacob Vanderlint, even made the title of his book, Money j Answers All Things t or. An Essay to Make Money Sufficiently Plentiful Amongst All Ranks of People, and Increase Our Foreign and Domestic Trade.7 David Hume clearly advocated a policy of maintaining a continually rising price level, because he observed that j | I prosperity prevailed when prices were rising.^ Hume was ; i inot alone in his observation. Indeed, many classical ! ' . i •economists, including Ricardo, thought in the same way, j namely, that prosperity and rising prices go hand in hand.9j In recent years, the advocates of inflation have based their case on two arguments, which are not all together groundless. Since the modern free economy has inherited a huge debt, so goes one of the arguments, a long-term upward price movement is preferable because it reduces the burdensomeness of past debts on present and 7 Jacob Vanderlint on Money Answers All Things; ••• (originally 1734 in London; Baltimore, Md.s The. Lord Baltimore Press, 1914), 164 pp. 3 David Hume, "Of Money," Political Discourses (Edinburgh: A. Kincaid & Donaldson, 1752), 304 pp. 9 Cf* infra. note 17. 12 future generations.^ This argument sounds plausible in ■these days of large public debts which are involuntarily incurred by the citizens. However, this argument is tenable only if the large debt itself is not a factor of price increase and the problem of equity is simply ignored.j More convincing is perhaps the other argument which j is based on Keynesian economics. It is best expressed j * l as follows: ! | Inflation and suppression in a productive economy are; usually associated with full employment and maximum i real income. Output cannot go above this point however ! quickly prices rise. Deflation and depression are t ! usually associated with unemployment and declining realj | income. In both situations problems of equity, and of ! J the distortion of consumer choice, arise. But the j important distinction is that a given degree of t distortion with a maximum real income leaves consumers better off than the same degree of distortion with a i declining real income. An excess of demand means, it as true, that we do not get everything we want -— but we do at least get everything that the economy can produce. An insufficiency of demand, however, means that we do not even get what the economy can produce.- * - 1 I It should be noted that, in this argument, alternatives are limited to inflation and depression, and the inflation that is preferred is presumably moderate. Impossibility of perpetual inflation. Many 10 Cf., e. g., Geoffrey Crowther, An Outline of iMoney (Revised edition; London: Thomas Nelson and Sons, Ltd., 1948), p. 135. 11 Harold M. Somers, ^Comments on Inflationary jProcess by Harris and Lerner," Review of Economics and Statistics. 31:213, August 1949. 13 economists would agree with Ludwig von Mises in saying that, "consistently and uninterruptedly continued inflation: must lead to collapse."12 «j*he reason is simply this: People, in anticipating the diminution of the purchasing power of money, would progressively reduce their demand for money in favor of "real" goods, and eventually the money would become worthless and a breakdown would occur.3-3 Hayek also refutes, though implicitly and on different grounds, the possibility of a perpetual inflation. According to Hayek, inflation will inevitably shorten the production process (i. e., an increase of production of direct consumer goods, concurrently with a decline in investment) since inflation increases income which make it more profitable to produce consumer goods than capital goods. The shortening of the production process is, in Hayek*s theory, equivalent to depression.^ Even the famous Keynesian, Abba P. Lerner, admits that permanent inflation is self-defeating. He thinks that the monopolistic bargaining power enjoyed by 12 Ludwig von Mises, The Theory of Money and Credit (New edition; New Haven: Yale UniversityTress, 1953)» p. 227. 13 Ibid., pp. 227-231; 413-428; Human Action (New Haven: Yale University Press, 1949), pp. 423ff• 14 Friedrich A. von Hayek. Profits. Interest and Investment (London: Routledge & Ke&an Paul, Ltd!. . 1939). PP 3-72. - 14 organized labor in an inflationary period, if unchecked by government policies, will advance wages far in excess of productivity increase and eventually lead to 15 unemployment and depression. It should be noted, however, that to say permanent and uninterrupted inflation is impossible is not the same as to say occasional and uneven inflation is impossible over a long period. So long as there is fear of depression and there is uncertainty in price movements, inflation may not necessarily be self-defeating. And there is an actual case of long-run inflation in Brazil.^ Therefore, the question of the possibility of a long-run inflation is by no means settled by deductive reasoning. Destructiveness of inflation. It is not uncommon even among economists to think of inflation as being accompanied by prosperity. However, this proposition has been ably attacked by Knut Wieksell, who said: The view which was formerly so often held — even by a writer such as Ricardo — that a higher standard of living in a country was always combined with a high price level, was an illusion, fostered no doubt by the fact that prices in England, compared with other countries, were unusually high, especially at 15 Abba P. Lerner, Economics of Employment (New York: McGraw-Hill Book Company, 1951)> pp. 19. 16 Henry ¥. Spiegel, ttA Century of Prices in Brazil,n Review of Economics and Statistics. 30:52-62, February 194^. 151 i the beginning of the last century.^-7 Wieksell thought that prosperity need not lead to I higher prices. Both he and Marshall spoke of long run falling prices as possibly advantageous. Marshall stated that a depression of prices, of interest, and of profits might be consistent with a condition of prosperity in other respects. For instance, Marshall saw that during depression the wage-earners if employed at the same wages would get more than before .I** Schumpeter went along with Marshall in holding that ; j history shows that inflation periods ”have always sown the j iseeds of coming disasters.”19 To Schumpeter, j i ... capitalist evolution produces a long-run (or | “secular”) tendency of prices to fall. This downward result trend embodies the method by which the capitalist mechanism diffuses the fruits of industrial improvement over the masses of the people, and characterizes the specifically capitalist "road to plenty.”20 In Schumpeter*s view, a falling trend of prices is essential for the efficient operation of the capitalist 17 Knut Wieksell, Lectures on Political Economy. Vol. II, Money (New Yorks The Macmillan Company, 1935), p. 157. IB Alfred Marshall, “Memoranda and Evidence before the Gold and Silver Commission (lSB7),t t Official Papers, pp. 9^ff. 19 Ibid.. p. 99. 20 Joseph A. Schumpeter, Business Cycles (New York: McGraw-Hill Book Company, Inc., 1939), Vol. ll, p. 465. 16 j system. He said categorically, "neither capitalism itself j nor the social institutions associated with it, democracy j among them, can work efficiently and with comparative smoothness except on a falling trend in prices."2^ In general, those who are against inflation maintain their view on the strength of two alleged evils of inflation, namely, injustice in the redistribution of income and distortion of the price structure.22 Both of these, however, are not free from debate. Inflation and Distribution j The effect of inflation upon income distribution is j ;through its effect upon changes in the prices of jproductive agents. As these changes usually vary, , !inflation tends to bring about a shift in the distribution of income in favor of some recipients to the detrimant of the others. This redistributive effect is usually condemned, but is defended by some economists in recent years, as shown presently. Unfavorable redistribution. The most commonly acknowledged evil of inflation is its redistributive 21 Ibid., pp. 465ff. Schumpeter, however, said immediately in a footnote that "what has been said does not apply to the fall of prices in depression." Ibid., p . 4 6 6 . 22 Edwin Walter Kemmerer, High Prices and Deflation (Princeton: Princeton University Press, 1920), p. 4l. 1 7 ! effect. To quote an authority: I Inflation was always a terrible instrument for redistribution of wealth. . . . It may be said on the whole that inflation generally favored the ! entrepreneurs and the owners of the material means of production, especially strengthening the positions of industrial capitalists; that it caused a lowering of the real wages of workmen; that it decimated or destroyed altogether the old middle class of investors, possessors of those securities which now could only, ironically, be said to show a fixed income; and that it created a new middle class of intermediaries, traders, small speculators on the Bourse, and small profiteers of the monetary depreciation.2- ^ Such an instrument of redistribution is ’ ’terrible,1 1 simply because "it acts powerfully and blindly. It is no 1 respecter of persons and needs.*2^ It is to most economists extremely unjust and dangerous. Dissenting views. Inflation, however, is not so "terrible* to some other economists. For them, inflation hurts "unproductive" classes but is good for productive classes.Putting the redistributive effect of inflation this way, the injustice element is eliminated or minimized. Indeed, the redistributive effect may, for these economists, even be a blessing for the economy, because it effects "the euthanasia of the rentier, of the functionless investor,” a famous phrase coined by the 23 Constantino Bresciani-Turroni, The Economics of Inflation (London: Allen & Unwin, Ltd., 1937), p. 2tk>. 24 Kemmerer, op. cit.. p. 53» 25 Einzig, op. cit., p. 137- IB famous economist, John Maynard Keynes.26 Moreover, inflation appears to be "terrible" only when it is compared with a static equilibrium, or an absolute stable price level, which is yet unseen in the world, is far as redistributive effect is concerned, deflation acts just as powerfully and blindly as inflation,; only in the reverse direction. Inflation and the Price Structure As changes in prices, as a result of inflation, vary for different goods, inflation tends to bring about a change in price structure. This effect of inflation is jalso a subject for debate. Distortion of the price mechanism. The other alleged evil of inflation is its influence upon the price structure. This alleged evil is the basis for the commonly held belief of "boom and bust." Surprisingly, this evil has been greatly emphasized by Abba P. Lerner. Peoples* expectations, to him, always lag behind reality. And therefore, "people are induced to do things other than what they really intend," during inflation.27 lerner said: 26 John Maynard Keynes, The General Theory of Employment. Interest, and Money (New York: Harcourt, Brace and Company, 1936),p. 376. 27 Abba P. Lerner, "Inflationary process — I. Some Theoretical Aspects," Review of Economics and Statistics. 31il94, August 194^T i<?; By force or fraud itCinflation3 frustrates the ! choice of consumers in the distribution of their incomei between its various uses. By sabotaging the price mechanism it clouds the judgment of all uses of resources and frustrates their socially valuable tendency to be more economical of resources that are more useful in other parts of the economy. ... Inflation is bad because it sabotages one of the most valuable instruments of modern society — the price mechanism. The injustice, the inefficiency and the dangers to democracy are only some of the results of this sabotage.28 Many other writers note the lead and lag relationship and the varying degrees of response in the prices of different goods and services. This factor will lead to the appearance of bottlenecks and maladjustments. L. Albert Hahn suggests that it is possible for labor i |monopolies to push wages too high in relation to other i ■prices with the result that it creates "inflationary I recession, ”29 in the same vein, Lloyd W. Mints argues that, it is highly probable that the volume of output { I I 1 under rising prices will be less than under stable prices, J 1 because of uncertainties created by rising prices and industrial warfare.30 Is the price mechanism really distorted? Upon 2$ Ibid.. p. 196. 29 L. Albert Hahn, Economics of Illusion (New York: New York Institute of Finance, Distributor, 1949), pp« 130ff. 30 Lloyd W. Mints, Monetary Policy for a Competitive Society (New York: McGraw-Hill Book Company, Inc.; 1950)', p. 125. 20 ' ! further reflection, this seemingly apparent evil of j inflation is not too apparent after all. Lerner*s case is j based on human beings* imperfect foresight* which is j equally applicable to any situation where there are ! changes. If this element of human imperfection were enough to cause the breakdown of the price mechanism under inflation, then the price mechanism would not work at all in the real world. It is true that the price structure will change under inflation, just as it will under deflation. And it is not clear that a change in one condition is good and in the other it is bad. For, first of all, the norm has never been and probably never will be ascertained in i ! definite quantitative terms. The supposedly long-run cost-price relations are helpless in judging the phenomena happening in any definite period. The views of Hahn and Mints are sprung not so much from inflation per se as they are from the monopolistic bargaining power of labor. If a free labor market is ! assumed, as it was usually done before World War II, then one has every reason to believe that costs lag behind prices, and output and employment generally increase with rising prices. Some General Comments After reviewing the existing literature on inflation, 21 this investigator thinks that the following comments are in order. Futile controversy. Apparently from existing literature one can not find an answer to the question of desirability, or the same thing, the effects of inflation. Although the majority of economists voice the warning of the destructive and self-defeating nature of inflation, there are, nevertheless, quite a few dissenters, who declare boldly and attractively that: Had it not been for the financial resources and the stimulus provided by inflation through the ages, the progress of civilization would have been much slower,31 The reason for this inconclusive nature of this controversy lies in the abstraction and generality with jwhieh the participants approach the problem. With so wide a variation in economic conditions, in degrees of inflation, and in people*s reactions toward it, the < abstract generalization is bound to be fruitless, and perhaps dangerous in so far as it may spread unfounded opinions or even prejudices. Lack of factual investigation. The fundamental reason for the vast literature on inflation being inconsequential is the general lack of factual knowledge 31 Einzig, op. cit.. p. 139. 22 j of the impact of inflation. Without adequate factual accounts of inflation, the whole discussion can hardly go beyond expressing unsupported opinions or even prejudices. Of the numerous inflationary experiences of different countries through several centuries, only a few j have ever been sketched in a comparatively creditable manner. It is hard to find studies such as Wesley Clair Mitchell,s volumes on the Greenbacks32 and Frank D. Graham’s on German hyperinflation.33 As to the inflation after World War II, this investigator has so far not known of any comparatively i |satisfactory account. This lack of factual account of ^inflation is a disappointment to people who are interested J jin the answer to the question mentioned, namely, whether jinflation is desirable. And since this question concerns jalmost everyone, a realistic analysis is urgently needed. THE PROPOSED STUDY It is evident from the foregoing discussions that 32 Wesley Clair Mitchell, A History of the Greenbacks (Chicago: The University of Chicago Press, 1903)7577 pp.; Gold. Prices and Wages under the Greenbacks (Berkeley: The University of California Press, 190$), 627 pp. 33 Frank D. Graham. Exchange. Prices, and Production in Hyperinflation: Germany. X9£TKL923 (Princeton: Princeton University Press, 1930), 362 pp. 23 there is a gap in the literature on inflation. This study ; Is designed to, fill the gap in the way prescribed here. The General Approach Unlike the common approach to the problems of inflation, this study is to be made with a new approach, concentrating the attention on the workings of inflation as they are reflected in a segment of the economy. Segmentary investigation. There is a recent trend in studies of economic cycles to regard inflation as something more than a monetary phenomenon. The very nature of inflation or deflation is the unbalanced state of aggregate supply and aggregate demand. For this reason, recent published studies in inflation are usually undertaken in the light of macro-economic analysis, that is in terms of aggregate national income and its components. A further trend in economic thinking, however, is to go beyond the macro-economic analysis, which is regarded as inadequate for the purpose of understanding the intricate economic processes and activities. Suggestions and attempts have, consequently, been made to integrate the macro and micro-analysis. Following these trends of thought, this investigator will make an attempt to investigate a small section of the economy under inflationary circumstances. It is true j 24! I I ithat inflation is essentially a general phenomenon in the isense that it prevails* if at all, throughout an economy. I 1 But, no less true is the fact that it has different effects on different sections of the economy. An economy is a [complex body consisting of heterogeneous segments. Each of these segments acts and reacts upon the general course and upon the other segments according to its own peculiarities. Consequently, the aggregates are nothing more than 'the results of these interweaving segmentary processes. In other words, it is this investigator’s ! conviction that, in order to understand the effects of inflation upon the economy generally, one may start with I I ja study of its effects upon a segment of the economy. An industry as the center. An economy, however, can be divided according to many different standards. Consumers, for instance, are a category definitely in constrast to producers as a group. And a study of changes in consumption as a result of inflation may be worthwhile, as once suggested by Wesley C. Mitchell.34 Without underestimating the value of other classifications and segmentary studies, this investigator, 34 Wesley C. Mitchell suggested to make a comparison of consumption of coffee, sugar, flour, and other necessities with consumption of tobacco, liquors, and other luxuries before and during the greenback standard. See his History of Greenbacks, op. cit.. however, undertook the present study from the point of view of a single major industry, for several reasons. First of all, industrial output is the basis of material well-being. Any change in consumption will be reflected rapidly in production; but the converse is not necessarily true, because a considerable part of industrial output is in the category of capital goods, which are known to be very sensitive in demand to business expectations. Secondly, an industry is a complete ring or link in the chain of economic activities in the economy. It is not only a center of production, but also a center of exchange and distribution. It is a logical unit for a study of the impact of inflation upon a section of the ! economy. Thirdly, economic analysis concerning production and prices have advanced further than that concerning idemand and consumption, especially in quantitative terms. And therefbre an industrial approach will make a better start. I ! This investigator is aware of the fact that the concept of an industry has been seriously challenged by many competent economists, and that, in its place, the concept of a firm has met increasing approval in economic analysis. Nevertheless, a firm is not suitable for a statistical study of inflation. In a statistical and 2 6 factual study, the concept of an industry is not only usually employed, but also generally accepted. Summing up, the central problem of this study is this: How does inflation affect an industry, which is subject to the influence of decisions made by its customers, investors, management, labor, government, and the general public? Or, more specifically, what bearing and to what degree, if any, has the inflation in the I United States of America had from 1946 to 1954 upon the steel industry of the United States? The Steel Industry and Inflation This section is designed to justify the selection of the steel industry as the center for this study, and to illustrate some of the problems that will be covered in this study, i j Why the steel industry? The selection of the steel industry as the center for this study is not purely accidental. The steel industry occupies a stragetic position in the economy. It produces the basic raw material for many industries, such as the automobile industry, the construction industry, and the machinery industry. It is the very basis for the industrial capacity of the nation. And it is vulnerable to economic fluctuations. It is “either prince or pauper.” Furthermore, the statistical data of the steel I 1 27 industry are comparatively accessible. The Federal j Government and the American Iron and Steel Institute publish much dhta about the steel industry. In addition, both the Iron Age35 and the Steel magazine36 contain some statistics of the industry. i Some illustrations. The questions that may be asked under the central theme are numerous. Several of them, however, are set forth in the following statement for purposes of illustration. How is the demand for steel products, for instance, affected by the inflation in which the aggregate demand in the economy is high or excessive? This question entails an analysis of the demand function of steel products, the conditions of the steel consuming Iindustries, and government regulations such as the i Controlled Material Flan. i Assuming a sustained high demand for steel products, then, the second question is: How does the steel industry adjust to the situation? The answer is clearly not simply an increase of output or rise of steel prices, but some combination of the two. And it is the 35 The Iron Age is published weekly by the Clinton Co*, Inc., Philadelphia, Pa. 36 The Steel is published weekly by the Penton Publishing Company, Cleveland, Ohio. I 2* task of this study to ascertain that combination, the reasons for it, and its effects. An increase of output means either an increase in the utilization of existing capacity, or an increase in the capacity, or both. A managerial decision must be made in this regard. What bearing has the accelerated amortization scheme upon management’s decision? Suppose it is concluded that a capital expansion is called for, there arise immediately the problems of the source of funds, the fora of the expansion (e. g., intensive expansion or extensive expansion; expansion of capacities of what product or products and in what proportion), and its relations with the economy as a whole. An increase in the utilization of the plant and equipment for a heavy investment industry enables a considerable cost reduction. But on the other hand, the general inflationary pressure pushes upwards the cost of labor and the prices of raw materials and machinery. The net results of these conflicting influences are unknown until the records have been examined. With the costs, prices, and volumes being clarified, one may say something about the financial standing of the industry. In particular, one may have a learned opinion concerning the controversial subject of whether the profits are excessive or inadequate. The aim. All the above mentioned problems and many others are dealt with in this study. Or in other words, this study is designed to make a factual and economic analysis of the behavior of the steel industry in the inflationary environment from 1946 to 1954* It is inevitable, in the course of analysis, to make references to the expressed views or theories known to the investigator up to the date of writing. However, a study of this kind is primarily aimed at finding the facts. It is hoped, of course, that some objective and constructive conclusions are reached in this study, and that some light is thrown upon this pertinent economic i |problem of the present day. It is further hoped that those conclusions, though far from constituting a theory themselves, will be valuable to theorists of inflation, business cycles, and relevant fields. CHAPTER II THE CONCEPT OF INFLATION Before analyzing the impact of inflation upon the i !steel industry in the United States, it must be made clear what is meant by inflation and how it is measured. The task of this chapter is to form a concept of inflation on an acceptable basis so that it can be followed in this study. DEFINITION OF INFLATION A review of common definitions of inflation seems to be very helpful as a preliminary to finding an acceptable concept of inflation. A Review of Common Definitions Inflation has been defined again and again in many i ways. One writer, in 1935, attempted to group different views on inflation into five categories as follows: . . . (1) inflation is the arbitrary creation of purchasing power by the government, through the issuance of fiat money, through an artificial expansion of bank credit, through a managed currency, or generally through government interference with , economic processes designed to change income distribution; (2) inflation is a depreciation of the currency in terns of foreign currencies; (3) inflation Is a rise in the general price level; Ik) inflation is an increase CsicJ in purchasing power, resulting in a general rise in prices, or without an equivalent production of goods, or without an equivalent production of values; (5) inflation is 31 i i a redistribution of wealth and income .*• The above list though impressive is not exhaustive* The common ground for all aforementioned groups is apparently the quantity theory of money, which has been challenged by the income theories* And the adherents of the income theories have advanced their own views on inflation. At the present time, there are roughly four types of definition of inflation prevailing. The first is the monetary definition, according to which inflation is essentially an expansion of money relative to goods, i. e., "too much money chasing too few goods*" The second is the definition of inflation by the price level, i. e., "inflation means a rising general price level." The third type is based on money national income and may be represented by the saying, "inflation occurs whenever an increase of money ineome exceeds the increase of real income." And finally, there is a multiple definition of inflation which classifies and describes different types of inflation such as demand inflation and monetary inflation, or open inflation and suppressed inflation. Each of these four types of definition deserves further 1 Anatol Murad, "Inflation in Current -Economic Literature," in H. Parker Willis and John M. Chapman, The Economics of Inflation (New Tork: Columbia University Press, 1935), p. 22l. 32 I I | remarks. Monetary definition. The crude monetary definition of inflation, which regards it as any increase in the amount of money, has long been abandoned along with the crude quantity theory of money. But some refined versions j of this view persist. Despite the difference in wording, all proponents of this definition regard it as an excess of money supply relative to goods and services available in the economy.2 The emphasis is placed on the quantity of money. 2 The proponents of this definition are too numerous to be named. The following citations are only few examples: Irving Fisher called ”per capita increase of money** as absolute inflation, and the increase in **the per capita flow of money relative to the per capita flow of goods” as relative inflation. Cf . his The Money Illusion (New York: Adelph Company, 192#), p. 3£. T. E. Gregory in his article on “Inflation and Deflation,” in Encvclopeadia Britannica (1951 ed., XII, 346} defines inflation as ”an abnormal increase in the purchasing power.” E. W. Kemmerer defined it as “when at a given price level, a country* s circulating media — money and deposit currency — increase relatively in trade needs.” Cf. his “Inflation,” American Economic Review. £:247> June“X9lS; lalso his High Prices an3. Deflation (Princeton University jPress, 1920), p. 3. j Lempert and Harwood state: “during a period of : inflation, the purchasing media made available to and used by the public exceed the normal value of goods offered in the market.” Cf. Leonard H. Lempert, et al, What Will Inflation and Devaluation Mean to You (Great Barrington, Mass.: American Institute for Economic Research, 1952), P * 13 * 33 i But, just what is the "excess" of money over goods and services is subject to different opinions,3 Moreover, ! !an important element in the equation of exchange, the !velocity of money, is generally neglected* This is i !unfortunate, because the experiences of recent decades in \ various countries show that the velocity of money increases rapidly during inflation, especially hyperinflation.^ The I increase in velocity of money under these conditions is explained by the fact that the quantity of money does not expand fast enough to meet the needs* Indeed, a shortage of currency was felt in Germany in 1923, the peak year of the much cited German hyperinflation*5 The definition of this sort, therefore, is quite difficult to maintain. Adhering to it, one would probably ' I . follow the mistake of most German economists and bankers !in the 1920*s who refused to recognize the inflation in 3 Ralph G. Hawtrey, immediately after defining it I as "the issue of too much currency," stated that it was j certainly a matter of opinion what "too much meant." Cf. I his Trade and Credit (London and Hew York: Longmans, Green j & Co., 1928), p. 64* I i i 4 George H. Halm stated: "A period of hyper inflation is one of amazing increase in the velocity of circulation of money." Cf. his Monetary Theory (second edition; Philadelphia: The Blakiston Company, 1946), p. 77. Also, Loong-Kwei Yung (tf^jtfrjL), "1947 Money and Price Levels in Shanghai," Economic Forum (-^%'tf'lfe); | (published in Chinese in Shanghai), January 10, 194&, pp. 11-14. 5 Paul Einzig, Inflation (London: Ghatto and Windus, 1952), p. 13. j their country after World War 1*6 Or, one would say with ialarm that the United States was suffering from inflation | in the 1930’s, since the money was expanded tremendously by| jdevaluation, government deficits, and a cheap money policy.! ! 1 | However, if the monetary definition of inflation is I I | stated in terms of an excess of monetary expenditure over the available supply of goods and services, then it becomes the basis of either the price definition or the income definition. Because the money expenditure is the whole | ' 1 demand side of the equation of exchange (in Fisherian j ; symbols, it is MV) and may also be the aggregate effective j ! " i i |demand in national income analysis (in Keynesian equation, j !it is C plus I), if all the spending is for purchasing finished goods and services. Price level definition. This definition may be I 1 istated, in Mints words, as "inflation is simply a rise in ; [some particular index in. the price level."7 So far this 1 6 Constanino Bresciani-Turroni, The Economics of ! Inflation (London: Allen & Unwin, Ltd., 1937)# pp. 15 5*'?. I 7 Aaron Director, editor, Defense. Controls. and Inflation (a conference sponsored by theUniversity oT Chicago Law School; Chicago: University of Chicago Press, 1952), p. 35. 35 type of definition is still very popular,** and if correctly i interpreted and properly delineated, it is not without imerit. j ! As has been said, this definition has a kinship with the monetary definition.9 This kinship is clearly seen in the statement of this definition such as "a state in which the value of money is falling, i. e. prices are rising.**1° S Willis stated: "Almost all popular expositors of inflation represent it as being substantially idential with an advance in commodity prices. • .** Cf. Willis, op. cit., p. 123. And most popular textbooks on money define it, implicitely or explicitely, in this way. Cf. for instance, Halm, op. cit.. p. 17; Albert Hart, Money. Debt and Economic Activity (Hew York: Prentice-HallV Inc.. 194 ST; p. 2k5~. 9 To paraphrase Ludwig von Mises’s words, price inflation is the necessary consequence of excessive expansion of money, and deposits subject to check. Cf. Director, editor, pp. cit.. p. 3, note 4. Enlightening is also this quotation: "As contrasted with mere price fluctuations and adjustments, the term inflation is used to describe a dynamic and continuous upward trend of the price level. ... Inflation usually arises when purchasing power in the hands of the people expands more rapidly than the current output of goods." — Thomas L. Kibler. "Inflation." Encyclopaedia Americana. 1952 edition, XV, 123. It is interesting to note that A. C. Pigou, in 1920, defined inflation as "that part of the rise in prices that is consequent upon governmental interference with money and banking." Cf. his Economics of Welfare (first edition: London: Macmillan and Co., Ltd., 1^20), pp. 665f. This definition has long been discarded, even by Pigou himself in the second edition (1924) of that book. 10 Geoffrey Crowther, An Outline of Money (revised edition; London: Thomas Nelson and Sons, EtTd•, 1948) » p. 107. Cf. Bruce D. Mudgett’s statement: "Inflation means high-prices, and they, in turn, mean low purchasing power." See his Index Numbers (New York: John Wiley & Sons, Inc., 1951), P* 7. 36; i i And therefore, the quantity theory of money, which is the ; theoretical basis for the monetary definition, was j generally advanced as the interpretation of the general price level, or the same thing, of the purchasing power of i money. To the extent that this is true, the price definition has not been much improved from the monetary definition. It inherits all the limitations of the quantity theory of money,^ and adds some more of its own. For one thing, it definitely does not include so-called , "suppressed1 * or "repressed” inflation, which acquires a definite status in recent economic writings. i However, while no writer denies that an increase of quantity of money relative to economic need will finally raise the general price level in the absence of the I government intervention, there are some who insist that the price level may be influenced by the factors other than money. Paul Einzig, for instance, maintains that price inflation is quite different from money inflation. The former, according to him, may be the cause, instead of being the result, of the monetary expan s i o n . - ^ And 11 Hugo Hegeland, The Quantity Theory of Honey (Goeteborg, Sweden: Elanders Boktrykeri AktieboXag, 1951)» pp. 174f• 12 Einzig, op. cit.. pp. l6f. 37 Kenneth E. Boulding has ably explained that the price level may be raised even without any monetary changes, and that this rise in prices will of itself bring intensifying monetary changes in its wake. To Boulding, what we call the price level is mainly the price level of circulating capital. An attempt at buying more than current fun employment output will diminish the circulating capital as the fixed capital is being constructed. It is this shift in the relative structure of capital from circulating to fixed which makes the rise in price level likely.^3 The price level definition so interpreted is much more acceptable than the monetary definition. However, this is not to say that the price definition is beyond criticism. Abba P. Lerner for one has said pointedly that theoretically, rising prices are not only insufficient to indicate inflation; they are also unnecessary. We can not only have rising prices without inflation (as in the example of . . . a foreseen prices rise) but we can have inflation without rising prices.14 Lerner*s point, though only partially true, is very illuminating. A definition of inflation based simply on 13 Kenneth E. Boulding, “Price Control in a Subsequent Deflation.” Review of Economics and Statistics. 30:15-17, February 194#: 14 Abba P. Lerner, "The Inflation Process," Review of Economics and Statistics. 31:194, August 1949. 33 rising prices is bound to leave many cases unaccounted for ; and many other unjustifiably i n c l u d e d . j Income definition. Since the recent trend ©f economic thought has stressed income, definitions of inflation based on income are frequently offered as an improvement over the previously mentioned definitions. Thus, both Hawtrey and Pigou, in the place of their old definitions, define inflation as an expansion of money income relative to employment.16 But, as Pigou frankly admitted, his definition is "out of line with common speech," because "according to this definition inflation may be taking plaee even though money income is contracting, . . . even though prices are falling."I? In the daily usage of the term, inflation is always, though in a vague way, as Pigou said, associated with expansion. And it is the best practice to define a term in line with j its common usage, as closely as possible. The more popular version of income definition is the 15 Infra, pp. 43-49. 16 Hawtrey’s words are: "... inflation means an expansion of the consumers’ income and outlay, and deflation a contraction, more than in proportion to the factors of production employed." Cf. 1. G. Hawtrey, "Money and Index-numbers," reprinted in Readings in Monetary Theory (Blakiston Series of Republished Srticles on Economics, v. 5; Philadelphia: The Blakiston Company. 1951), p. 155. 17 Ibid.. pp. 14f. , 39 ! |expansion of money income relative to real income, or what amounts to the same thing, ”a joint rise in prices and money incomes.”^ The more careful writer would express this version by saying, to paraphrase Horsefield, the existence in the economy of dynamic forces which increase the national money income both in absolute terns and relative to the preceding value of available goods and services.3-9 Basically, this popular version of income definition follows one of the two approaches, namely, the price level approach and the inflationary gap approach. The former is evident in the expression, the expansion of money income relative to real income, which is really but another way of saying the rising of the price level. Only in this case the price level is made up by the prices of not all exchangeable items, but consumption and investment goods. Even the inflationary gap approach does not dissociate completely with the concept of price level. The gap is the excess of the estimated monetary demand (or identically, money income or expenditure) over the value IB G. G. F. Simkin, "Note on Theory of Inflation,” Review of Economic Studies. XX (2): 143, 1952-1953; also, William Fellner, A Treatise on War Inflation (Berkeley: University of California,1942), p. 2, note 1. 19 I. K. Horsefield, ”The Measurement of Inflation.” International Monetary Fund Staff Tapers. 1:1?, February ly>0. 40 of the available goods and services at the base prices.2® The gap, if there is any, is to be bridged either by government actions such as taxing and borrowing, or by raising prices. This concept of the inflationary gap was advanced as an estimate of the inflationary pressure for the benefit of government actions. The quantities in the equation are necessarily ex ante, for the gap is always zero ex post. This approach is therefore not very useful for a study of facts and events which have happened. Multiple definition. Many writers think that there are different types of inflation resulting from different forces and bringing about different consequences, and that, therefore, it is better to distinguish them than to lump them together. One economist even went to the extreme to say to the effect that each inflation is unique, and that no generalization about inflation is meaningful.2-1 - However, those who believe that inflations can be grouped into several categories can not agree upon the 1 20 For literature expounding this concept, see 1J. M. Keynes, How to Pay for the War (Hew York: Harcourt, Brace and Company,“T95o5", pp. 13-26; Kenneth K. Kurihara, lop, cit.. Ch. 4; W. S. Salant, ”The Inflationary Gap: jMeaning and Significance for Policy Making,” American Economic Review. 32:303-314. June 1942. 21 Kestnbaum, in Director, pp. cit,. p. 42. ! criteria with which to classify inflation. While the notion distinguishing repressed (or suppressed) inflation, open inflation, and hyperinflation is popular, some prefer \ the distinction between monetary inflation and price | i inflation.22 Others have pointed out cost-push inflation j as basically different from demand-push inflation.23 And there is at least one writer who went so far as to numerate seven distinctive types of inflation.24 It is to be reminded that to classify is not to define. And definition is the basis for classification. Any classification is necessarily preceded by a definition. For this reason, this investigator is to define inflation without offering any classification at this stage. This procedure is, in this investigator’s opinion, in harmony |with the purpose of this chapter, which is to find an acceptable concept of inflation. The Selected Definition From the foregoing review of common definitions of inflation, it is clear that no single one is acceptable to 22 Einzig, op. cit.. pp. 15f• 23 Albert G. Hart, Defense without Inflation (Hew York: The Twentieth Century Fund, 1951), PP* 72-75. 24 Richard D. Skinner, Seven Kinds of Inflation (Hew York: McGraw-Hill Book Company, Inc., 1^37), 273 pp. all economists, yet all definitions offered are directly or: indirectly interrelated. Gn the basis of this i understanding, the following definition is given so that j i there may be found a consistent and workable measurement ofj i j inflation. ! The statement. Inflation is the state of economic disequilibrium, in which the general effective demand is in excess over the supply at the base prices, and which will, in the absence of artificial counter forces or controls, lead to rising prices. The reverse condition is deflation. Some explanations. First to be noted is that inflation (and deflation) is a general phenomenon for an economy as a whole. Since this concept of inflation is based on the general effective demand, it is improper to apply the term only to a segment of an economy. The general effective demand is represented by M*v in the income type of equation of exchange: M • v - p*0 * Y (1) where M is the average quantity of money during a period, v the circuit or income velocity of that money stock, p the average price of all finished goods and services that are added to capital or consumed, 0 the national output in physical quantitative terms (or its index), and Y is the national income in monetary terms.^5 Using this static equilibrium equation as a basis, ; i inflation may be expressed mathematically as "r’i p0*®i <2) where the subscript o denotes the base time and i the period concerned. This inequality may be satisfied with several different sets of conditions, each of which requires some analyses and explanations, 1. That inequality may be satisifed with Mi»Vi< Mo.v0, Pi pD, C>i < 0Q, and ^p <<k). In other words, the inequality may be true if the national real output decreases in a greater degree than the prices increase. Apart from a generally monopolized economy, this set of conditions may be established by a destruction of productive facilities or a restriction of productive activities, or both, while the general effective demand is persistently on a high level. Illustrations of these circumstances may be found in recent war economies in those countries which suffered from heavy enemy attacks. Also illustrative is the United States economy of 25 For a discussion of this type of equation see 'Lester Y. Chandler, The Economics of Money and Banking (New York: Harper & Brothers, 194&T7 PP« 57&-580; Halm, op, cit,, pp. 77-^0; Stephen Enke. Intermediate Economic i fneory (New York: Prentice-Hall, Inc., 1950), pp* 87-&9* 44 I 1946. In that year, the general effective demand was high, but a considerable part of the productive facilities and ; activities was paralyzed for some time by the prolonged and widely spread labor disputes. With the result, the national gross product declined from 215,210 million dollars in 1945 to 211,100 million dollars (in index, from 253.3 to 249.0), and the real output, as measured by the gross national product in constant dollar (1939 dollar), dropped from 153,400 millions to 133,400 millions (in j i i index, from 132.2 to 164.4), while the price index rose j from 130.0 to 144.9 for the same respective years. (see table IV). This is a situation of inflation in that the demand exceeds;the supply, even though the disequilibrium is directly caused by a curtailment of supply. However, not infrequently a persistently high demand is the ultimate factor responsible for the situation. It is apparent that the prolonged labor disputes in the United States in 1946 were largely due to the high level of effective demand accumulated during the years of World War II. 2. A special case of the previous set of conditions is = M0*v0 yrhile p^ ^ pQ and 0j_ 0Q. This case is a result of <)p = 3 0. In other words, if changes in the price level (increase) are counterbalanced by the changes in the opposite direction in the national real output 45 ' i (decrease), then the value of the current output at the base prices is less than the current national money income, which, even though, is the same as in the base year. 1 ! j | The circumstances leading to this situation are j ! 1 |similar to that discussed in the preceding section. This j is also a situation of inflation in that, for one reason or the other, the supply fails to satisfy the demand which is persistently high. 3. Perhaps the most important set of conditions which fullfils the requirements of the inequality (2) is: M^»vi M0 * v q and p^ > - p0, while 0^ g i 0 Q. In simpler language, it is that, an excess of demand over supply at the base price exists if the national money income expands along with the rising price level, regardless what happens to the national real output. In the case of an expanding real output resulting from rising prices an added condition is called for, in order to be able to distinguish inflation from economic recovery or prosperity. For, the situation such as in the jtfnited States in 1934, 1935, 1936, is clearly a recovery jfrora depression, and can hardly be called inflationary when ithe national real output increases in greater degree than |the price level. The added condition may be stated as ^p I>^G, that is, the situation in which the money income, the prices, I and the real output all increase, is inflationary only if I jthe real output increases less than the prices. This case | may occur in a free and competitive economy when the employment level is high. Under such circumstances, the expansion of real output is restricted by bottlenecks, availability and quality of manpower and other resources. Consequently, a greater portion of the excess demand is absorbed by increases in prices. This is the case which Keynes called “semi-inflation.“26 this is the case i i i which the advocates of inflation or optimum inflation really want to see. When the real output is constant in the face of rising prices and money income, then full employment has been reached, and any increase in effective demand is entirely absorbed by rising prices. This is what Keynes called “true inflation.“27 ! The case of a declining real output with a rising !price level and national money income is quite realistic, ! jbecause when the effective demand has expanded far beyond Jthe full employment level, then inefficiencies will set in j and genuine productive enterprises will not be as profitable as speculative operations. Such phenomena are | 26 John Maynard Keynes, The General Theory of Employment. Interest and Money (New York: Harcourt, Brace and Company, 1936),p. 301. 27 Ibid.. p. 303. often seen in hyperinflation. To a certain extent, the behavior of real output under the condition of rising prices and national money income indicates the nature and degree of inflation. Thus, it is a mild inflation if the real output expands along with rising prices and money income. When the real output cannot expand further, giving constant productivity, then the inflation is rather severe. If the real output actually declines, that is hyperinflation. To recapitulate, the inequality (2) can be satisfied only if the price level rises, while the real output and the national money income may be declining, constant, but most frequently expanding. In other words, the most reliable sign of inflation is rising prices, which, if supplemented by data of real output and money income, will show the degree of inflation. Actually, it is almost self-evident that only a rising price level is consistent with the inequality (2). For, if each term is properly defined, It is necessary that s p^.O^. This means that p^-0^ can substitute for M^*v^ in the inequality (2). So, Pi.0i ^ Po.0i and therefore, % ^ p© Farther clarification. The definition has been ; 4# i based on the concept of excess demand, which is by no means! ! the investigator’s innovation.The merit of employing such a concept is in its exactness in representing the j characteristics of inflation, in its usefulness as to j detecting the symptoms of inflation. j In the definition, no mention has been made as to the cause or causes of the excess of demand. Traditionally, inflation is regarded as being associated i with expansion. Some writers stressed greatly the expansionary characteristics of inflation.29 Perhaps it is true that an expansion of effective demand is the most 2& J. R. Hicks has explored this term in his Jalue and Capital (Oxford: Clarendon Press, 1939), p* 63. later this concept was used,to define inflation by Abba P. Lerner and Bent Hansen. Cf., Lerner, ®The Inflationary Process,® on. cit.. d. 194: Hansen. A Studv in the Theory of Tnflatxon iLondois/AllenVTBSSBT T?5lJ7 QhTT. ““ 29 For instance, Paul Einzig defined inflation as ®an expansionary trend of purchasing power that tends to cause or to be the effect of an increase of the price level.® Einzig, op. cit., p. 17. While this investigator conceives inflation essentially as a process, he finds it difficult to limit this process to an expansionary one only. Thus, he finds |the following statement of Lionel Robbins being one-sided: i ®*..we conceive of the inflationary, process as a process in which the volume of expenditure is increasing faster than the volume of production measured at constant prices.® Cf., his The Economist in the Twentieth Century and Other lectures in Political Economy (London: Macmillan & Co., ltd., 1954), p* 63* frequent cause of inflation. But that is an insufficient I reason to disregard those situations briefly discussed above, in which the supply is cut while there is no decline! i I ■in the effective demand. Therefore, no further explanation! ! i concerning the causes of excess demand is necessary. In ! other words, it is insignificant as to what causes the effective demand to be excess over the supply at the base price. So far, the preceding discussions pertain to only with what is generally called open inflation. The assumption has been made that there are no artificial forces to offset or counter-balance the free market forces. Therefore, no consideration is given to the so-called "suppressed," ©r "repressed," or "latent" inflation, in which the excess effective demand is frozen or controlled i by governmental regulations. The reason is simply that the characteristics of such inflation, if it is inflation, differ considerably from that of open inflation. And for the purpose of present study, it is sufficient, to expound open inflation, with due recognition of the existence of repressed inflation. MEASUREMENT OF INFLATION Since this study will be undertaken to a large degree in quantitative terns, it is obvious that some; kind 50i i of measurement of inflation is necessary so that the i concept of inflation as defined above has a definite |meaning. The following discussion is designed to lead to , |a way for measuring inflation. \ j i J Three Alternatives I There are four elements in the selected definition of inflation, namely, the quantity of money, its income velocity, the real output, and the price level. Any measurement of inflation, which is consistent with this concept of inflation, therefore, must be based on one or several of these four elements, independently or relative to the other. For this reason, suggested measurements which involves other elements than those four, such as Pigou*s, must be rejected.30 In view of this requirement and the relationships of those elements, one has only three measurements to choose from, each of which is to be analyzed in this section. 30 Pigou, based on his own definition of inflation as the expansion of money income relative to the output of work, proposed, as the partial successful measurement of |inflation, the following formula: ! T money income of year 2 . employment in year 2 | Inflation - m0ney income of year 1 7 employment in year 1 I jCf. his Veil of Money (London: Macmillan & Go., Ltd., 1949), p. 16. The employment element in Pigou*s formula has not been considered in the selected definition of inflation. 51 Money and its income velocity# Supply of money is j the chief cause of inflation according to the quantity theory of money.31 However, quantity of money alone does not determine effective demand, which is the product of money and its income velocity. As income velocity is by no means stable, there is no definite relationship between effective demand and the quantity of money. It follows that any measurement pertaining to j effective demand has to be the quantity of money multiplied by its income velocity, if quantity of money is j to be used at all. Yet, unfortunately, income velocity canj not be ascertained, at the present stage of knowledge, before aggregate effective demand is known. And, once the aggregate effective demand is known, the procedure of multiplying money by its income velocity is not only unnecessary but also is circular reasoning. 31 In recent years, the trend in economics circles has been away from employing the quantity of money as a yardstick. However, there is one index of inflation currently circulating which is constructed on this basis. That is ”the Harwood Index of Inflation,” published by the American Institute for Economic Research, and constructed according to the formula: Total Purchasing Media • (Total Purchasing Media - Inflationary Purchasing Media)• The amount of inflationary media is found by substraeting from ithe investment type of assets of the commercial banks the total of savings type liabilities. Cf. American Institute Jfor Economic Research, Where Are We Sfoing (Great 'Barrington, Mass.: American Institute for Economic jResearch, 1952), p* 15* Also, The Institute’s Monthly iBulletin. March 30, 1953# PP* 50-52. I 52 ! Furthermore, the absolute magnitude of effective demand is irrelavant as inflation is excess demand over supply. It is, therefore, concluded that money and its I jincome velocity are not suitable for measuring inflation. I The inflationary gap. Money multiplied by its ^ — — velocity is national income, which may serve as a basis for a measurement of inflation. According to the national income analysis, M*v = Y = C / I where C stands for the aggregate consumption expenditure and I for the aggregate investment expenditure. And, though I is always equal to S, the aggregate savings, ex post, it is not necessarily so ex ante. When the anticipated investment exceeds the anticipated savings, at a given national income, the excess constitutes a net inflationary pressure, which was called by Keynes the inflationary gap. Consequently, it is possible to measure the inflationary gap, or the net inflationary pressure. Given a base year, a base price level, and a savings function, then the net inflationary pressure is: tJ = (G ^ Id / E) - (S) I . . . Iwhere G denotes the government deficits, private domestic investment, and E the export surplus. 53 : This measurement of inflation has met wide a c c e p t a n c e .32 But as it has been said previously, there \ jis a fundamental weakness inherent in such a measurement, ! namely, all quantities in that equation are ex ante i jquantities. No reliable ex ante statistics can be found : ? i jat the present time. The more reliable data published by the government agencies are ex post data. And yet ex post, i investment is always equal to savings. No real j • measurement by this approach is therefore obtainable. ! 1 i i Index of price levels. The foregoing brief j I analysis eliminates two of the three alternative | I measurements. The remaining one is price level indexes. I i It has been shown that, Pi^> P0> by substituting pi#Oi I for Mi-Vi in the inequality (2). The same result may be obtained by writing the inequality into: M-s.y. Po (3) As the working of economic forces tends to bring about an equilibrium, there is always a current 32 The United Nations has used it to measure the inflationary and deflationary tendencies of various countries• Cf., the United Nations Department of Economic Affairs, Survey of Current Inflationary and Deflationary Tendencies (Series A. No. 2; Lake Success, New York: United ;Nations, 1947), passim. ; For other advocates, cf*, supra.. notes 19 and equilibrating price level. That is: (4) If (3) and (4) are true, then Pi ^ P0 (5) This inequality means that, unless prevented by some artificial forces, the prices tend to rise in times of inflation. And the heavier the inflationary pressure is, the higher the prices rise. Therefore, in an ideally free economy, the price level is a perfect indicator of inflation, provided that the economy is known not to be emerged from depression. Yet, as known to practically everyone, the real economy is not, and probably can never be an ideally free one, and therefore, the price level is not, and may never be a perfect measurement of inflation. However, this imperfection does not prevent it to be a good yardstick. Admittedly, government regulations and controls, and private monopolistic practices can reduce somewhat the extent of prices rise. But, the case remains to be seen, in which these artificial forces hold prices from rising completely in times of inflation. In recent experiences, even a strictly controlled economy such as the economy of the Soviet Union failed to prevent prices from rising in ‘ inflation.33 In the United States economy, which is the I main concern in this study, prices have been reflecting thei ! economic conditions (inflation or otherwise) noticeable j to the men on the street. ! ♦ ! j | It is true that not every rise in prices is a ; i | !reflection of inflation. But, any rise in the j ! widely-covered price level, which is persistent (as distinguished from daily or seasonal fluctuations) and greater than the output increase is definitely an indication of inflation. Furthermore, there are at least three additional advantages of the price level measurement over others. First of all, the price level characterizes distinctively the nature of inflation. The rising prices are the direct resultant of the excess of demand over supply. And most repercussions of inflation that are commonly regarded as evils come directly from the fact that the prices rise unevenly and irregularly. Secondly, as economic theories (at least the micro-economic theories) center around the theory of price, a measurement of inflation based on prices is 33 Gf. William H. Loucks and J. Weldon Hoot, Comparat iveHliconomlc Systems (Hew York: Harper & Brothers, 1948), pp. 540-545; Joan Robinson, "Theory and Practice of planning," Soviet Studies, 4;53-58, July 1952; Peter (Wiles, "Soviet Economics," Soviet Studies. 4:133-138, [October 1952. 56 particularly useful in a study of the effects of inflation ! upon an industry* The acceptance of this measurement i instead of others, facilitates a great deal of the economic! | janalyses to be employed in this study. j j i j Thirdly, so far the price level statistics compiled : i i by the government agencies are among the most valuable and ; i reliable data concerning the whole economy. It is true that the national income data and the monetary statistics are at least as good as the price indexes in the United States. However, they are much less useful to this study, as indicated in the foregoing discussions. It is concluded, therefore, that the best measurement of inflation available today is the rising price level over time, as represented by some kind of indexes of prices in a time series provided that it is not a recovery from depression, which is characterized by rapid expansion of real output. It is the best, in spite of the fact that it may considerably undervalue the extent of inflation due to the existence of government controls and private monopolistic practices. The Index of Inflation Some current proposals. There is no agreement among statisticians and economists as to what index of prices is to be used as an index of inflation. The proposal of longest standing is the index of wholesale prices compiled by the United States Bureau of Labor Statistics .34- The advantages of this index are in its sensitivity and its wide coverage.35 Unfortunately, it excludescentirely the retail prices, to which the common people are much attached. Precisely because of the dominant position given to the concept of cost of living in recent years, the Consumer Price Index compiled by the same Bureau has been increasingly recommended as an index of inflation.36 However, the Consumer Price Index is fstr too narrow in coverage as it is derived from the family budgets of a particular income group (wage earners and clerical workers) in a special list of large cities in the United States. Not satisfied with any of these indexes of prices, the Department of Commerce constructed a National Income Deflator, to be used in converting the national income data 34 Its recent ardent supporter in this country is Lloyd W. Mints. Cf. Mints, op. cit., p. 136. And the Department of Commerce publishes current data on "The Purchasing Power of Money as Measured by the Wholesale Prices.” 35 It is frequently referred to as the general price index. 36 In one instance it had been used to measure inflation in analyzing the effects of inflation upon nine steel companies. Cf. Ralph C. Jones, “Effect of Inflation on Capital and Profits,■ Journal of Accountancy. £7:10, January 1949. 58 in current dollar into constant dollar (1939 dollar)* ThatJ deflator is arrived at by averaging the price series of items in the income statistics, weighted with the dollar jvalues of each item. This would be a good index of inflation, had it been extended further back into 1920*s and in shorter time interval such as being available in quarterly figures* The index to be used* The index of inflation to be used in this study is the combination of the wholesale prices index and the consumer price index* The procedure followed is very simple. First, the base period of both newly revised indexes is shifted from 1947-1949 to 1935- 1939* And then, the arithmetic average of these two series is used. The relationships of the two original I price indexes and the derived index of inflation can be i f seen in Table III and Figure 1, Some economists think that the geometric mean, instead of the arithmetic mean, should be used.37 However, an examination of these two means in Table III and Figure 2 shows that the differences are too insignificant to warrant the differentiation. I The base period is shifted from 1947-1949 to 37 Gene H. Fisher, "A Simple Econometric Model for the United States, 1947-1950,** Review of Economies and Statistics. 34:47, February 1952. 59 1935-1939 for two reasons. In the first place, the numerical differences in the series will be greater and therefore will be more impressive to non-statistically- minded readers. In the second place, the years from 1947 to 1949 are within the period to be studied extensively, and it is better to have other years as a base period, especially preferable to have a base in non-inflationary years in order to make a distinct contrast of effects of Inflation. The years of 1935-1939 meet these requirements. Besides, they were formerly the base period of the consumer price index. Interpretation of the index. Caution is required in interpreting the index. Basically it is no more than a price level index. It shows inflation or deflation only when it indicates a persistent tendency of rising, or declining prices, together with other subsidiary conditions as discussed previously. From the tables and figures presented in this chapter, it is clear that there were two periods with distinctively persistent and rapidly rising prices, in the past forty years in the United States. The first was from 1916 to 1920; during these years, the index increased year after year, from 92 to 167.5 (see Table IV and Figure 3)• The second period was from 1940 to 1952; the index went up from 9S*5 in 1940 to the peak of 202.5 TABLE I I I 0. S. CONSUMER PRICE INDEX, WHOLESALE PRICES, & THEIR MEANS 1935 - 1939 « 100 CONSUMER WHOLESALE ARITHMETIC GEOMETRIC DIFFER YEAR PRICE INDEX PRICES MEAN MEAN ENCE 1913 70.7 86.5 78.6 78.2 - .4 1914 71.8 84.5 78.2 77.9 - .3 1915 72.5 86.2 79.2 79.0 - .2 1916 77.9 106.1 92.0 90.9 -1 .1 1917 91.6 145.8 118.7 116.1 -2.6 1918 107.5 162.9 135.2 132.3 -2.9 1919 123.8 172.0 147.9 145.9 -2 .0 1920 143.3 191.7 167.5 165.7 -1 .8 1921 127.7 121.2 124.5 124.5 0 1922 119.7 120.0 119.9 119.9 0 1923 121.9 124.8 123.4 123.3 - .1 1924 122.2 121.7 122.0 122.0 0 1925 125.4 128.5 127.0 127.0 0 1926 126.4 124.1 125.3 125.2 - .1 1927 124.0 118.4 121.2 121.2 0 1928 122.6 120.1 121.4 121.4 0 1929 122.5 118.2 120.4 120.3 - .1 1930 119.4 107.1 113.3 113-1 • i • 2 1931 108.7 90.5 99.6 99.2 - .4 1932 97.4 80.4 88.9 88.5 - .4 1933 92.4 81.7 87.1 86.9 - .2 1934 95.7 93.0 94.4 94.3 - .1 1935 98.1 99.3 98.7 98.7 0 1936 99.1 100.2 99.7 99.6 - .1 1937 102.7 107.1 104.9 104.9 0 1938 100.8 97*6 99.2 99.2 0 1939 99.4 95.7 97.5 97.5 0 1940 100.2 97.6 98.9 98.7 - .2 Continued on the next page. TABLE III (CONTINUED) U. S. CONSUMER PRICE INDEX, WHOLESALE PRICES, & THEIR MEANS 1935--1939 = 100 YEAR CONSUMER PRICE INDEX WHOLESALE PRICES ARITHMETIC MEAN GEOMETRIC MEAN DIFFER ENCE 1941 105.2 108.5 106.9 106.8 - .1 1942 116.6 122.6 119.6 119.6 0 1943 123.7 128.0 125.9 125.8 - .1 1944 125.7 129.1 127.4 127.3 - .1 1945 128.6 131.4 130.0 130.0 0 1946 139.5 150.3 344.9 144.8 - .1 1947 159.6 184.1 171.9 171.5 - .4 1948 171.9 199.4 185.7 185.0 - .7 1949 170.2 189.5 179.9 179.6 - .3 1950 171.9 196.9 184.4 184.4 0 1951 185.6 219.3 202.5 201.7 - .8 1952 189.6 213.2 201.4 201.1 - .3 1953 191.1 210.4 200.8 200.7 - .1 1954 191.7 210.8 201.2 201.0 - .2 Source: U. S. Bureau of Labor Statistics, Monthly Review, and U. S. Department of Commerce, Survey of Current Business. FIGURE 1 WHOLESALE PRICES, CONSUMER FRIGE INDEX. & THEIR MEAN IN THE UNITS) STATES, 1913-1951* ZlO 9,10 U» S* Bureau of Labor Statistics m 190 190 no 170 ISO m i4o 130 (20 tzo no no (Mean) too too 90 70 COMPARISON OF ARITHMETIC MEAN & GEOMETRIC MEAN OF THE WHOLESALE PRICES & CONSUMER PRICE INDEX OF THE UNITED STATES 200 200 Source: U* S* Bureau of Labor Statistics (as computed in Table III) 150 ARITHMETIC MEAN | 64 i in 1951 and the next-to-peak of 201.4 in 1952. {During these long thirteen years, only 1949 had a 3.1 per cent, and 1952 a .5 per cent, decline in the index from the respective preceding years.) These two periods in general, therefore, can be safely regarded as inflationary (see Table V and Figure 4)• Definitely contrary to those two periods were the years of 1921, 1922, and 1930 to 1933 inclusive. In these years a sharp decline in the index was shown, and therefore they were deflationary, according to the concept of inflation and deflation defined above. The period from 1923 to 1929 and that from 1953 to 1955 may be roughly thought of as an example of stable prosperity, in whieh no persistent trend of the index was seen, and the variations from year to year were comparatively mild. A recovery from depression and deflation (and toward prosperity) seemed to be the characteristic of the period from 1934 to 1939 (excluding 1938). In these years, the index showed a moderate rise from the ! depression years, but still below the level attained in the late nineteen-twenties. At the same time, the index of output showed even a greater increase. (See Table V and Figures 3 & 4)• Questions may arise as to whether it is appropriate 65; TABLE IV INDEXES OF INFLATION, GROSS NATIONAL PRODUCT, j I & REAL OUTPUT OF THE UNITED STATES j 1935-1939 = 100 YEAR INFLATION* G.N.P.® OUTPUT^ YEAR INFLATION* G. N. P.® OUTPUT^ 1913 78.6 1935 98.7 85.2 87.8 1914 78.2 1936 99.7 100.8 99.6 1937 104.9 106.4 104.4 1915 79.4 1938 99.2 99.9 99.8 1916 92.0 1939 97.5 107.7 108.4 1917 118.7 1918 135.2 1940 98.5 119.7 118.8 1919 247.9 1941 106.9 249.1 137.2 1942 119.6 190.5 154.0 1920 167.5 1943 125.9 229.2 173.0 1921 124.5 1944 127.4 252.0 186.3 1922 119.9 1923 123.4 1945 130.0 253.8 182.2 1924 122.0 1946 244.9 249.0 164.4 1947 171.9 275.1 164.5 1925 127.0 1948 185.7 305.1 170.4 1926 144.9 1949 179.9 304.6 171.0 1927 121.2 1928 121.4 1950 134.4 338.3 182.9 1929 120.4 122.5 102.0 1951 202.5 389.0 198.7 1952 201.4 410.4 204.3 1930 113.3 107.2 92.8 1953 200.8 433.3 213.5 1931 99.6 89.6 85.6 1954 201.2 428.5 209.5 1932 38.9 6 8.8 73.5 1933 87.1 65.8 73.0 1934 94.4 mi t > 1_____ 76.5 80.6 * The arithmetic mean of the Corisumer Price Index and Wholesale Prices. See Table III. @ Computed from the Department figures. $ Computed from the Department in Constant Dollar. of Commerce, Gross National Product of Commerce Gross National Product TABLE V CHANGES IN THE INDEXES OF INFLATION, GROSS NATIONAL PRODUCT, & REAL OUTPUT OF THE UNITED STATES Year to year, in percentage YEAR INFLATION G.N.P. OUTPUT YEAR INFLATION G.N.P. OUTPUT 1913 1935 4-6 11.4 8.9 1914 - .5 1936 1.0 18.3 13.4 1937 5.2 5.5 4.8 1915 1.5 1938 - 5.4 - 4.2 - 4.4 1916 15.9 1939 - 1.7 7.8 8.6 1917 29.0 1913 13.9 1940 1.0 11.1 9.6 1919 9.4 1941 8.5 24.5 15.5 1942 11.9 27.8 12.2 1920 13.3 1943 5.3 20.3 12.3 1921 -25.7 1944 1.2 9.9 7.7 1922 - 3-7 1923 2.9 1945 2.0 .7 - 2.2 1924 - 1-1 1946 11.5 - 1.9 - 9.8 1947 18.6 10.5 .1 1925 4.5 1948 8.0 10.9 3.6 1926 - 1.3 1949 - 3.1 - *2 - .4 1927 - 3.3 1928 .2 1950 2.5 11.1 7.0 1929 1951 9.8 15:0 8.6 1952 - .5 5.5 2.8 1930 - 5.9 -12.5 - 9.0 1953 - .3 5.6 4.5 1931 -12.1 -16.4 - 7.8 1954 .2 - 1.1 - 1.9 1932 -10.7 -23.4 -34.1 1933 2.0 - 4.4 - .7 1934 8.4 16.3 10.4 Source: Supra., Table IV. FIGURE 3 INDEXES OF INFLATION NATIONAL PRODUCT & REAL OUTPUT IN THE UNITED STATES | Ratio Scale I I 400 300 300 m O U T P U T Sources U* S. Department of Commerce and Bureau of Labor Statistics m 1930 to VO FIGURE k YEAH TO YEAR PERCENTAGE CHANGES IN THE INDEXES OF INFLATION* GROSS NATIONAL PRODUCT, & REAL OUTPUT IN THE UNITED STATES, PeucenrAiB I OMMfrC +30 GNP +20 +20 +10 +10 INFLATION OUTPUT * i Sources Table IF -30 '22 24 20 1 9 1 4 69 | jtd regard the period of 1934-1939 as non-inflationary and j the period of 1940-1945 as inflationary, for both of these periods show, in the measurement used in the study, the same characteristics, namely, a rise in the i“J— reasons for regarding these two periods differently. First, the numerical values of the inflation index are much greater in 1940-1945 than in 1934-1939* Is the later |period, the inflation index was still below the stable government actions in 1934-1939 were in general designed to bolster prices. In other words, had there been no governmental intervention, the rise in the index would be much less than it has been for the 1934-1939 period, and on the other hand, would be much greater than it has been for the 1940-1945 period. Incidentally, since governmental controls and regulations were comparatively more complete and effective in World War II than in the Korean War, the inflation was relatively "repressed” during 1940-1945, and relatively "open” afterwards. This difference explains the fact that the advance in the inflation index during World War II was far less than that in the Gross National Product and in the output index. |inflation was less than that in the output. prosperity period of 1923-1929* Second, the federal In the post World War II years (except in 1946), L_ _ _ 70 . the Gross National Product ran almost parallel with the j inflation index. In those years in which both of these ! i series were rising, the inflation was of the nature j i represented briefly by M^.v^ Mo.vq and p^ ^ pQ while j i 0.- ^ 0o. This was the situation of all the inflationary ! I | years from 1940 to 1952, except 1946. The 1946 inflation i i ^ was characterized by M. ,v_- ML .v„, p. > p , and 04 < 0 . x i o o A i . © i o Generally speaking, the inflation in the United States in recent years has been mild. However, the degree of inflation in the years of 1946-1952 was uneven as shown i by the varying percentage changes in the inflation index. Furthermore, to be precise, the year of 1949 cannot be called inflationary, since the index showed a decline of 3*1 per cent from the previous year's height. Rather, it was a recession year as it is commonly called. But the decline of .5 per cent in the index in 1952 indicates that the inflationary pressure was lessened but was still present. For, in that year, the Consumer Price Index increased from 185.6 to 189.6, even though the whole prices dropped from 219*3 to 213.2. The fact that the same trend was sustained in the subsequent years, that is in 1953, 1954* and 1955, substantiates the view expressed here. With inflation defined and measured, and the nature of the postwar inflation clarified, a discussion on the relations between inflation and the steel industry is to be proceeded in the chapters that follow. CHAPTER III DEMAND AND SUPPLY OF STEEL UNDER INFLATION — A GENERAL ANALYSIS Discussions may be facilitated if they are proceeded on a familiar ground* Since supply and demand are the fundamental concepts of economics, a general analysis on the effect of inflation upon the demand for and supply of steel may serve as a good start. The central task of this chapter is therefore to ascertain the significance of inflation as an independent variable in both the demand and supply functions of steel* I i | DEMAND FOR STEEL l i The aim of this section is to determine the demand function, including its independent variables and its form. General Characteristics of Demand for Steel The influences of inflation, both direct and indirect, upon the demand for steel are made clear by way of an analysis of the general characteristics of demand for steel* Derived demand* It is common knowledge that steel itself in general does not satisfy any human want directly; that is, by itself steel is not a good for the final consumer. However, it is an extremely important 72 raw material for a great variety of goods which are either indispensable, highly preferable or desirable to men of ! modern society. Demand for steel, therefore, arises from | the fact that it is a basic raw material of modern j t industry. In other words, it is a producers’ good, or in | Ithe Austrian School’s terminology, a good of higher order, j and the demand for it is a derived demand. Being a producers’ good, it can hardly fit into the theory of demand which is based on the concept of utility, and that includes the indifferent analysis of consumer , i behavior at the present level. I One of the fundamental characteristics of a derived i demand is the prominent position occupied by the producer. The producer is the one who makes the purchase and does so for the sole purpose of turning what is purchased into something which he can sell to the final consumer at a profit. One can say that what the producer purchases, in the final analysis, is not steel, but steel’s profit-making ability in his judgment. The producer’s judgment on the profitability of a purchase is made on the basis of the price of that material at the present time; the price of its product or products at the present; his estimates on (1) the price of that material at some future time, (2) the price of its products at some future time, and (3) the quantity of its 73 products that the consumer will buy at the prices; and I many other elements which may enter into an entrepreneur’s calculation. The quantity of its product that the consumer will buy depends upon the consumer’s preference I jon the one hand and upon the consumer’s ability on the j other. While the consumer’s preference is rather stable in the short run, his ability is definitely a function of general economic conditions* Hence, the producer’s purchase of a material is i based upon his forecasts on the price movements and the general economic conditions, both of these are manifestations of inflation and deflation. It is clear then that a derived demand is subject to tremendous influence of inflation (and deflation). Storabilitv and durability. Demand for steel is further complicated by the fact that it is storable for a long time at a very low cost and its products last for years• The effects of steel’s storability upon the demand for it are best stated by the authors of the United States Steel Corporation T. N. E. G. Papers. They said: Steel itself is a durable commodity; that is, it may, with some exceptions, be kept in stock for more or less long periods without serious physical depreciation. Thus purchasers of steel may currently buy more steel than they need for current consumption, building up a stock of steel for future consumption. Conversely, the building up of such a stock in the past enables a steel purchaser (user of steel) 74 currently to buy less than he consumes, the balance of such consumption coming from depletion of his stock.1 | Such inventory adjustments are predominantly j short-run phenomena and are held in check by the costs J involved. Yet, such short-run phenomena may last for j jmonths and months in great magnitudes. j I Consequently, its effects are far-reaching. It not only affects the timing of the purchase as some claim,2 but also ultimately influences the total volume of purchasej for the entire year.3 The reason is simply that these fluctuations add great forces to the prevailing psychology and the current tempo of total economic activities. The characteristics of storability of steel and goods made of steel are liable to make the demand for steel more sensitive to inflation and more contributive to the general economic fluctuations than the derived demand for 1 "An Analysis of Changes in the Demand for Steel and in Steel Prices — 1936-1939,” United States Steel Corporation T. H. E. C. Papers (New York: United States Steel Corporation, 1940), vol. I, p. 14.. 2 Ibid.. pp. 13, 15. 3 In recent years, a difference of five to ten million tons of steel purchased and produced as a result of this inventory adjustments has been estimated for a single year in the United States. See Bay E. Estes, "Demand for Steel,” the Analyst Journal. IX-3:95, June 1953. nondurable commodities. Anticipation and speculation. The nature of demand for steel and steelT s durability afford sunple room for speculation. As the purchaser of steel always makes his purchasing decisions on the basis of his anticipation of Ithe steel price movements, and the demand and prices of his i products, speculative elements are always present. The durability makes this speculation more feasible. It is generally held by economists that the basis J I ifor a businessman’s anticipation and speculation is the ' currently prevailing tendencies. Hence, the excessive demand which is characteristic in inflation, will reaffirm the optimism which is a general phenomenon during inflationary periods and which will create more excessive demand as speculation enters into the picture. The effect of inflation upon the demand for steel is thus the accelerated increase of the demand through the increase of the demand for goods made of steel and the induced speculative buying. Other Factors Determining the Demand for Steel There are other factors in determining the demand for steel. However, for the purpose of this study, it is not necessary to give an explicit account for all factors involved. Some of them may be set aside. This section is to determine what factors should be included and what others excluded in the demand function of steel. Price. That demand is a function of price is one of; -i ■ » ir n-r- i the acknowledged fundamental principles of economics. And the pattern of this function has been prescribed as an I * j J |inverse relationship in almost all situations. As a rule, j t ? ! Ithe higher the price the lower the quantity demanded. A |presumption behind this principle is that other things are jequal. This presumption assures that price is an jindependent variable which does not depend on other Ifactors. Industrial production. As steel is an important ! material for modern industry, the level of industrial production has, no doubt, an important bearing upon the demand for steel. The demand for steel increases as the industrial production increases. In defining inflation in this study, distinction has been made between increase in national output and inflation which is measured by an increase in the general price level. It has been further stated that inflation may be accompanied by increased, constant, or decreased output.4- Accordingly, industrial production should not be confused with inflation or deflation as defined in this study. If this distinction is made clear, there will be no 4 Supra.. Gh. 2. 77 objection in lising both inflation (represented by an index of the general price level) and industrial production ! (represented by an index of physical output) as independent! | variables in the equation representing the demand function ; i of steel. ! Trend factor. Because of gradual changes in ! technology and consumer’s taste, there is a tendency for j the per capita consumption of steel to increase over the ; years. This tendency and the population increase ;constitute a trend factor in the demand for steel. ! i However, as the central attention of this study is I |given to the relations between inflation and the steel i industry, explicit account of this long run factor is not necessary. All the factors not explicitly accounted for will be shown in the residual term, which has been called by some economitricians the error term of the equation, for it represents the factors left out in the explicit terns in the equation. ' Substitutes. The substitutes of steel are another factor which will not warrant an explicit term in the demand equation. It is true that high price and shortage of steel will induce the steel user to look for substitutes. However, the substitutability is severely limited by technology and customs. And the feasibility of substitution is also further limited by the lack of good ' 7B ' substitutes whieh are abundant and cheap when steel is j i expensive and in short supply. I i i i The Demand Function ! With the factors in the demand function for steel j I determined in the above fashion, the next step is to ascertain the form of the function, which is to be expressed in mathematical symbols. Notation. Let D denote the quantity of steel demanded, p the price of steel, G the general price level, : ■ ' ! 11 the industrial production, and R the residual term or | I ■ . . random disturbances. Then the demand for steel is: ! . I D = f(p, G, I, R). In this function, to all the variables can be added a subscript t to denote the period* Hence, the function can be written as: D = f(pt, Gt, It, Rt) When this function is specified, the constants or parameters will be denoted by a^, a£, a^, . . . Analysis of the function. First, the time lag may be ignored. This is justified only as an approximation. It is generally known that there is a time lag ranging from a month or so to more than half a year between the date the customer places his order and the date the steel Is shipped. Yet, as there is no definite time lag, and the price and the order are often revised to conform with the t 79 prevailing conditions at the time of shipment, the time involved loses mneh of its significance. t The form of the function is subject to speculation. At the present level of knowledge, econometricians in general approximate the function by one of the two forms, namely, the logarithmic linear function and the simple linear function. Since the present study is dealing with the 'structural relationship between the dependent variable and > i i the independable variables, and the central point of J interest is in the significance of the parameters, jespeeially the parameter of the inflation term, the simple linear function offers a convenient and adequate approximat i on• The demand function of steel, therefore, will be written as: Dt = alPt ^ a2Gt / a3Jt ^ a4Rt SUPPLY OF STEEL Since the demand and supply of steel are treated as two simultaneous equations, the analysis on the supply of steel may be made in the same way as the analysis on the demand for steel. General Characteristics of Steel Supply The most outstanding single characteristic of steel supply is perhaps the limitation on its entry, which is i I originated in the nature of the steel making process. This; basic characteristic brings about many other characteristics of steel supply, which require some further analysis• l Large fixed investment. Steel making is a mass J production operation, and the steel industry is composed of large scale units. According to Charles F. Ramsayers, a consulting engineer to the steel industry, the minimum i efficient size of a steel ingot plant is about one million j tons of annual capacity. - A plant of this size is able to ! « keep three shifts a day busy.5 To build an integrated steel plant from mining to finished steel of this minimum efficient size, in Ramsayerst estimate, requires an investment of #250,000,000 in 1950. This figure is very close to Ernest T. Weir’s estimate of a minimum of #1,100,000,000 required to duplicate his National Steel Corporation’s facilities with an annual ingot capacity of five million tons in 1950.6 These estimates are by no means high. In fact, all 5 U. S. House of Representatives, Committee on the Judiciary, Subcommittee on the Study of Monopoly Power, 81st Congress, Second Session, Hearings, Serial No. 14, Pt. 4A. Steel (Washington, D. C.: the Government Printing Office, 1950), p. 416. 6 Ibid.. p. 805. 81 the estimates of this nature offered in recent years are very close to these figures.? Fixed investments are heavy in the steel industry not only because it requires a large scale operation but also because it requires a large portion of the capital in the fora of fixed property. It has been estimated that 68 per cent of all capital employed in the leading steel companies is invested in fixed property, in contrast to only 38 per cent in the automobile industry, and 25 per cent in the confectionary industry. The ratio of sales to fixed property investment runs 70 cents for each dollar in the steel industry while it is 9.62 to one in the meat packing industry.** A corollary of heavy fixed investments is a high fixed cost. The authors of the United States Steel Corporation T. N. E. C. Papers calculated the aggregate fixed costs at #182,100,000 a year for the United States Steel Corporation from 1927 to 193& with an annual 7 Carl M. Loeb, Rhoades & Co., Steel (Hew York: Carl M. Loeb, Rhoades & Co., 1951), p. 22. 8 E. B. Alderfer and H. E. Miehl, Economics of American Industry (second edition; Hew York: MeGraw-EXl1 Book Company, 1950), PP» 31f* 32 capacity of eighteen million weighted tons of steel.9 This i was claimed to be true "when production averages as high as 90.4% and as low as 17.7% of ingot capacity for the | entire year."10 In the meantime, they also found the variable cost to be constantly at $55.73 per weighted ton.11 In criticizing these findings, Martin Taitel had j recalculated from the same data and showed the fixed costs at 25 to 30 per cent higher and the variable costs from 50 'to 65 per cent lower. Anyway Martin Taitel too found the I variable cost per ton to be somewhat constant.12 I A high fixed cost means that, within the capacity I ; operation, the unit cost declines as the volume of jproduction increases. In times of inflation when the demand is excessive, the high rate of capacity utilization is practically assured, unless the productive facilities are prevented from being operative such as that caused by 9 "By weighted tons are meant tonnages of each type of product shipped . . . converted, on an average mill cost basis, to equivalent tons of average Cost rolled and finished steel products." See "An Analysis of Steel Prices, Volume and Costs," the U. S. Steel Corporation T. N. E. C. Papers. op. cit., Vol. I, p. 232. 10 Idem 11 Idem 12 Temporary Rational Economic Committee, Hearings (Washington: Superintendent of Documents, 1940), p. 13703. 83 | labor troubles. With high rate of capacity utilization and: , . . I high prices of the products, the steel companies in general will be financially better off in times of inflation, provided that the advantages of high rate of capacity j utilization are not offset by the increase in the prices ! S of the productive agents. It is obvious that, at fixed prices of their products above the variable cost, the steel companies are willing to supply as many tons of steel as their capacities permit in the short run. However, since inflation means excessive demand, i 9 * jadditional capacity is often needed. In this respect, the i isteel industry’s response is not certain. On the one hand, it has the ability to expand as it is financially well off. On the other hand, it has the fear that this good time may not last long. The appearance of bottlenecks and inefficiencies at capacity operations cannot be expected to provide a strong incentive for expansion because the customers are willing and able to pay for these inefficiences in inflation and the uncertainty of the future overshadows the present trouble. Moreover, the long run supply of steel depends upon the total investments that the economy is willing to invest in steel, and this, in a free and competitive economy, is ultimately dependent upon the comparative returns on 84 investments in the steel industry relative to other industries. This aspect is quite complicated and requires > a careful study. It is, however, beyond the scope of the present inquiry. The mentioning of this is merely to show the recognition of this problem. Oligopolistic market. In spite of the fact that the spokesmen for the steel industry always laud the competitive conditions prevailing in the industry, the consensus of economists is that competition in the steel industry cannot be perfect or pure. The basis for j economists to maintain such a view is simply the i [oligopolistic market structure of the industry. | The steel industry is oligopolistic because three j |of the largest producers supply over 50 per cent of the finished steel and ten leading steel companies account for imore than 80 per cent of the total steel ingot capacity of this country.13 The steel industry is oligopolistic without product differentiation. It is true that steel is not a single homogeneous product. There are many types of steel with 13 The companies, in the order of size, are: the United States Steel Corporation, the Bethlehem Steel Corporation, the Republic Steel Corporation, the Jones and Laughlin Steel Corporation, the National Steel Corporation, the Youngstown Sheet and Tube Company, the Armco Steel Corporation, the Inland Steel Company, the Colorado Fuel and Iron Corporation, and the Wheeling Steel Corporation. g5; almost innumerable variety of specifications, each having its own special characteristics and meeting certain specific requirements which cannot be satisfied by any other type of steel or by the same type of steel with different specifications. Hevertheless, any one type of steel with definite specifications can be supplied not by one but several or many steel producers, and in so far as all the suppliers can produce the same product with the same quality, it makes no difference to the purchaser whether he buys it from company A or company B. Without product differentiation, the steel prices afford easy comparison. And the action of an oligopolistic concern will be, with reasonable certainty, followed or i retaliated by other oligopolists. Under such conditions, the industry is, therefore, farther from competition and closer to monopoly. One manifestation of this market structure of the steel industry is that steel prices are administered and the administered prices are likely to deviate from the competitive level. Believing in the inelasticity of demand for steel, the steel companies resist price reduction in deflation and / depression. On the other hand, they are reluctant to raise steel prices in inflation for fear of stirring up public antagonism, getting into a disadvantageous position at the 86! bargaining table with the labor union, and the like. As a j result, steel prices are relatively inflexible; that is, they are reduced less in deflation and raised less in j i inflation than they would be if pure competitive market j existed. The price inflexibility exerts, in times of inflation, two different types of influence. On the one hand, it prolongs the phenomena of shortage and thus adds forces to inflationary tendencies. On the other hand, it [serves, as the steel men like to claim, as a brake on the | !inflationary spiral. The net effects of these two opposite I 'influences depends entirely upon the contigency of the prevailing situation. The Supply Function Assuming that supply of and demand for steel are two simultaneous and parallel functions, then the supply function of steel may be specified by modeling after the demand function, without further analysis on the factors that enter into the function. The equation. Let S denote the total quantity of steel supply, G the cost of making steel, and the rest symbols the same as the demand function contains. Then the supply function of the steel industry can be written as: ®t * ^Pt* ^t» ®t* ®t^ a? Under the assumption of linearity of the function, I this supply function will be specified as: st = alPt / a2Gt t a3°t / a4Et Identification. The two equations Dt ■ alpt / a2Gt ^ a3It * \ Rt st = alPt / a2Gt ^ a3Ct ^ a4Ht have been said as the demand function and the supply function for the steel industry respectively. They are true only if the assumptions underlying these equations l hold. It is assumed that the industrial production enters j I [into the demand for steel but not the supply of it, and .that the cost of making steel affects the supply of but not the demand for steel. These assumptions are approximately justified. For, cost is not income, even though the cost to the industry becomes the income of the production agents; and the aggregate industrial production for the economy as a whole at the given technological level measures the need of steel, one of the basic industrial materials, but not necessarily the supply of coal, limestone, iron ores, and facilities for steel I making. With and It, both are endogeneous variables, appear in one but not the other equation respectively, the system of structural equations is justly identified. That is to say, the first equation is the demand equation and as the second the supply equation.^ A STATISTICAL STUDY All the variables in the supply and demand equations may represent a statistical reality, except the residual terra, which by its very nature is undetermined until other t terns are determined* It is customary therefore to drop | the residual term in a statistical study, if for no reason other than feasibility. There are now five variables i i ' * ] Ientering into a statistical calculation in both of the i jdemand and supply functions. i ! iStatistical Data i j The Dt tern in the demand function equals the St term in the supply function, ex post, according to equilibrium analysis. The Pt and Gt are identical in both equations. In order to statistically determine the functions, five sets of data are needed. They are: the steel production, the price of steel, the index of inflation, and the index of industrial production, and the cost of producing steel. 14 For a discussion and bibliography of identification problem in a system of structural equations see: Gerhard Tinter, Econometrics (Mew York: John Wiley & Sons, Inc., 1952), Ch. 7; and Lawrence Klein, A Textbook of Econometrics (Evanston, 111.: Row, Peterson and Company, 1953)> PP» 253-265. ! S 9 ! Of the five sets of data, the index of inflation andl ! the index of industrial production entail no selection j problem, since the former has been discussed at length in j Chapter II of this study and the latter is available in | only one series for the United States in this period. This! is the index compiled and constructed by the Federal j i Reserve System. The problem of selecting a suitable statistical series do exist in other three variables. Steel production. Since the process of steel making may be classified into several stages, such as the primary,j the semi-finished, and the finished stages, the steel jproduction data may be collected in each of these stages. |The data for one stage in steel making differ from that for another stage, and there is hardly any definite proportional relationship between these sets of data, especially since the composition of steel products at latter stages varies in different periods. Finished steels are in a great number of forms, types, and grades. A production series of finished steels has to be in the form of either a weighted tonnage such as done by the authors of the United States Steel T. N. E. C. Papers, or an index number such as the Federal Reserve index of steel production in the industrial production statistics, or a classified tabulation of tonnages for each category such as in the census of manufactures of the 90 Bureau of the. Census* The complexity involved in a weighted tonnage series t makes it infeasible to build for the steel industry as a whole, while an index number or a classified tabulation is unsuitable for the present purpose* The semi-finished stage is but a transitional t stage, which has become increasingly unidentifiable as continuous mills are replacing old individual mills in steel making. ; 1 For the above reasons, the commonly used series for i jsteel production is collected at the primary stage of i steel production* That is, it usually measures the production of steel ingot and for castings. This investigator finds it proper and advantageous to follow the convention. Consequently, the steel production figures, which include both steel ingot and for castings, compiled by the American Iron and Steel Institute will be employed. Steel prices. There are at least as many price quotations as there are types and grades of steel. Fortunately, two composite price series of authority have been devised for measuring the movement of steel prices. One is published by the Iron Age, and the other by the American Metal Market. Inasmuch as the latter series has been used by government agencies, the investigator will 911 tentatively accept it for computing the functions in this chapter. A further discussion on these two series will be made in a later chapter. Cost. The data for cost of producing steel are most difficult to obtain. What is needed here is unit cost data. There are no such data publicly available for the industry as a whole, nor for individual companies, in spite of voluminous documentation pertaining to the costs, wages, and financial conditions of the steel i ;industry displayed in the collective bargaining in recent j jyears. Furthermore, there are only a handful of the steel companies which give out sufficient information for ( i :a rudimentary and loose computation of cost of producing \ steel. Moreover, not all these handful of steel companies publish this information for a number of years adequate for this study. In fact, the investigator finds only three steel companies which publish a minimum information necessary for this computation for an adequate length of time. They are the United States Steel Corporation, the Bethlehem Steel Corporation, and the Armco Steel Corporation. Fortunately, these three companies produce more than one half of the steel in the United States. Their average unit cost may be considered as representative for the industry as a whole. The soundness of this procedure will be shown in Chapter VI. Demand and Supply Functions With the necessary data collected in the above manner and presented in Table VI, the supply and demand functions can be set up by following normal statistical procedures. The results are: D = 1,081.236 - 13,537Pt - 62.203Gt - 708.047It S = -4,829.558 - 455.191Pt - 544.679Gt - 437.667Ct In the demand function, the price exerts a negative influence while the inflation factor and the industrial production are positive. These results are in conformity with the general belief. What is perhaps !disputable is the supply function, in which the price | ' ' also exerts a negative influence, and the cost factor is positive. Explanations for these results may lie in that the steel prices are rigid, that the cost was pushed upwards along with the steel production in the period covered, that the supply function as constructed and computed here is less accurate than the demand function, and that, which is more important for the purpose of the present study, the current production of steel is largely determined by the demand if it is not beyond the present capacity. Some Int erpret at i ons The comparative accuracy of these functions can be shown by making a comparison of the standard errors and 93 TABLE V I DATA FOR COMPUTING DEMAND AND SUPPLY FUNCTIONS YEAR STEEL PRODUCTION (1) STEEL PRICE (2) INFLATION INDEX (3) INDUSTRIAL PRODUCTION (4) STEEL COST (5) 1929 61,742 50.8 120.4 59 35.396 1930 44,591 46.4 113.3 49 38.267 1931 28,607 44.0 99.6 40 45.968 1932 15,123 43.0 88.9 31 59.864 1933 25,725 43.2 87.1 37 42.387 1934 29,182 48.4 94.4 40 43.205 1935 38,184 48.8 98.7 47 41.239 1936 53,500 48.2 99.7 56 37.991 1937 56,637 56.8 104.9 61 43.440 1938 31,752 55.6 99.2 48 55.147 1939 52,799 52.8 97.5 58 44,357 1940 66,983 53.0 98.9 67 42.957 1941 82.839 53.0 106.9 87 52.780 1942 82,032 53.0 119.6 106 67.734 1943 88,837 53.0 125.9 127 79.294 1944 89,642 53.0 127.4 125 78.641 1945 79,702 54.6 130.0 107 75.127 1946 66,603 60.0 144.9 90 66.626 1947 84,894 68.4 171.9 100 69.088 1948 88,640 78.2 185.7 104 79.879 1949 , 77,978 84.2 179.9 97 80.382 1950 96,836 88.0 184.4 112 78.760 1951 105,200 94.2 202.5 120 87.257 1952 93,168 96.4 201.4 124 100.403 1953 111,610 102.6 200.8 134 94.567 1954 88,312 106.6 201.2 125 99.321 SOURCES: See notes on next page 94 Notes on Table VI: (1) Total steel production (ingots and for castings), in 1,000 net tons; from American Iron and Steel Institute, Annual jStatistical Report. 1955% p. 55. (2) In dollars per net ton; computed from the price of composite finished steel in cents per pound, compiled by American Metal Market as reproduced by Business Statistics. 1955, p. 157. (3) From SuprSj Table IV. (4) Index of industrial production compiled by the Federal Reserve System; new series; 1947-1949 = 100; Business Statistics. 1955, p. 11. (5) In dollars per net ton; computed from the annual reports to the stockholders of the United States Steel Corporation, the Bethlehem Steel Corporation, and the Armco Steel Corporation, according to the following formula: Cost = (Total gross revenue - total net income - total taxes) = total ingot production. This is an average unit cost for the three steel companies at zero profit and excluding taxes. the coefficients of multiple correlation. The standard errors of estimate adjusted to the number of observations for the demand function is 8,386.59, and that for the supply function is 16,411*1* The latter is almost twice as large as the former. The adjusted coefficient of multiple correlation for the demand function is 0.95138, and that for the supply function is 0.79819. In other words, there is over i I 20 per cent of the variations unaccounted for in the supply function, as compared with only 5 per cent in the demand jfunction.15 There are several factors responsible for the i jrelative inaccuracy of the supply function. For one thing, 'the production of steel is subject to interruption by i labor strikes. And the cost data presented here are far from precise. The gross revenues of the companies include not only the operating revenues but also receipts from other sources such as security and property holdings. Moreover, no; adjustment was possible to account for discrepancies in the accounting procedures, in the amortization and depreciation allowances, and others. All 15 For a discussion of the advantages of this adjustment and the computational technique involved, see Mordeeai Ezekiel, Methods of Correlation Analysis (second edition; New York: John Wiley & Sons, Inc., 1941), pp. 209-211. jthese three companies included are integrated steel concerns. Their principal products for sale are finished steels. But the only production figure available from them to the public is the ingot tonnage. The defects in the cost data are thus apparent, let alone that the data cover only a part of the steel industry. Influence of inflation. However crude the functions so ascertained may be, they indicate beyond any doubt the positive influence of inflation upon both the demand and the supply of steel. The importance of inflation is readily seen if the coefficients of the variables are transformed into beta coefficients. Since the beta I ' I coefficients are stated in units of the variables* own ! standard deviations, their relative sizes represent their relative importance.3-6 The beta coefficients in both functions are: &2.34 STEEL PRICE 013.2k INFLATION $14.23 INDUS. PROD, or COST DEMAMD -0.003125 0.029985 0.2S0231 SUPPLY -0.105072 0.262567 0.103922 In the demand function, the absolute value of the beta coefficient for inflation term is almost ten times of 16 Ibid.. p. 217 97! I that for the price tern, even though it is the industrial j production tern which occupies the dominating position. In the supply function, the influence of inflation is even more striking* The absolute value of its beta coefficient is larger than the combined absolute value of the other two beta coefficients. It is therefore established by this statistical study that inflation has a significant, positive influence t upon both the demand for and the supply of steel. In other words, the analysis in this chapter, both in theoretical terms and in quantative terms, demonstrates ;that inflation tends to bring about an expansion of both jthe demand for and the supply of steel. However, this janalysis, especially that part in theoretical terms, also shows that an expansion of steel supply is subject to powerful influences other than inflation, while an increase in the demand for steel is a certainty under inflation. CHAPTER IV EFFECT OF INFLATION UPON DEMAND FOR STEEL AND STEEL USERS CHANGES IN DEMAND FOR STEEL IN GENERAL In the literature of economics, two types of changes in the demand are generally distinguished. One type is a shifting of the entire demand curve. This is commonly called an increase or decrease of the demand. The other type is a change in the shape of the curve, commonly known | I as a change in the elasticity of demand. How inflation I i affects these two types of changes in demand is the subject! of this section. Further on Demand Function of Steel The findings of Chapter III show that inflation exerts a significant positive influence on the demand for steel. In other words, as the index of inflation rises, so rises the demand for steel. And this change in the demand is an upward shift of the entire demand schedule. The magnitude of this shift is a thirteen point increase in the quantity demanded for every point increase in the index of inflation. 99 Illustrated in a diagram, it is; P FIGURE 5 D' Q This diagram is drawn with no reference to the actual shape of the demand curve for steel. It shows merely that, if the demand curve for steel under a normal condition is DD, then it will change to D’D* as the inflation index increases by one unit. The Whitman study. This conclusion is in agreement with the pioneering work of Roswell H. Whitman, who made a statistical study into the demand for steel for his doctoral dissertation at the University of Chicago in 1934 and later published it in an article.1 According to the published article, Whitman used 1 Roswell H. Whitman, **The Statistical Law of Demand for a Producers* Good as Illustrated by the Demand for Steel,* Econometrics. IV-2:13S-152, April 1936. least square multiple correlation as this investigator did ■ in Chapter III* Using the published data in the period from 1921 to 1930, he arrived at the following demand functions y = 1.49 -1.27p / 6.27 (dp/dt) / 4.641 -0.03t where y is index of sales of steel in millions of gross tons, represented by ingot production figures with correction for unfilled orders made public by the United States Steel Corporation; p, price of steel in cents per pound, taken from the Iron Age composite price of finished steel, and corrected for trend; dp/dt, rate of change of the price of steel over time, approximated by the first derivative of p; I, index of industrial production of the Federal Reserve System; and t, time. Bespite all its imperfections, Whitman’s study shows definitely that the coefficient of the time derivative of the steel price, dp/dt, is positive (/ 6.27) and several times larger than the regression coefficient of the steel price, p.2 The term, dp/dt, or rate of change of the steel price over time, is not exactly the same as the inflation tern in the demand function of Chapter III. Nevertheless, they represent the same thing, because rate of change of 2 Criticisms are largely directed at the data used by Whitman. See: Baugherty, Economics of the Iron and Steel Industry (first edition; &ew York: McGraw-Hill Book Company, Inc., 1937), pp. 6$-o6. the steel price is necessarily correspondent to rate of change or the general price level, which in turn measures inflation.3 In short, the Whitman study, though undertaken for different periods and for different purposes than this investigator*s, confirms the conclusion drawn in Chapter III of this study. That is, there is a positive relationship between the steel demand schedule and inflation. An upward shift is noticeable in the demand for steel as inflation prevails. A verification. In Table ¥11 the annual total shipment of steel products, published by the American Iron jand Steel Institute, is put against the index of inflation, iwith reference to corresponding composite steel price figures. From that table one can see that in the years under study steel shipments followed very closely the i inflation index, in spite of uninterrupted increases in the steel price, if steel production was not stopped by strikes. For instance, as the inflation index rose from 171*9 in 1947 to 185*7 in 194#, steel shipments increased from 63 million to 65.9 million tons. Again, the 1950-1951 changes were from 184.4 to 202.5 in the inflation index and from 72.2 million tons to 78*9 million tons in 3 Supra. Ch. II. diversity of Southern CaUfornia Libt^g TABLE ¥11 STEEL SHIMENT, COMPOSITE STEEL PRICE, AND INFLATION YEAR STEEL SHIPMENTS* (thousands N. T.) INDEX OF SHIPMENT (1935-1939= 100) COMPOSITE PRICE® ($ per Net Tons) INFLATION INDEX (1935-1939= 100) 1933 17,171 55.6 1*3.2 87.1 193k 19,515 63.2 1*8.1* 9U. 1 * 1935 21*, 763 80.2 1*8.8 98.7 1936 31*, 927 113.1 1*8.2 99.7 1937 38,31*5 121*. 2 56.8 10it.9 1938 21,356 69.2 55.6 99.2 1939 31*, 955 113.2 52.8 97.5 19U0 1*5,965 11*8.9 53.0 98.9 191*1 60,91*3 197.1* 53.0 106.9 19i*2 60,5>91 196.3 53.0 119.6 191*3 62,210 201.5 53.0 125.9 19Wi 63,250 201*. 9 53.0 127.1* 191*5 56,602 183.1* 51* .6 130.0 191*6 1*8,775 158.0 60.0 11*1*. 9 19l*7 63,057 20l*.3 68.1* 171.9 191*8 65,973 213.7 78.2 185.7 191*9 58,101* 188.2 8i*.2 179.9 1950 72,232 231*. 0 88.0 181*.l* 1951 78,929 255.7 9l*.2 202.5 1952 68,001* 220.3 96.1* 201.1* 1953 80,152 259.6 102.6 200.8 1951* 63,153 20l*.6 106.6 201.2 * From American Iron and Steel institute, Annual Statistical Reports, 1955, p. 87, and a table furnished to this investigator Toy the Institute • @ Compiled by American Metal Market, as appeared in Business Statistics, 1955, p7“T57T" 103 steel shipments. The years, 1946, 1949, 1952, and 1954, in which steel shipments declined from the respective previous years, were the ones in which steel strikes occurred. With the exception of 1949, in whieh the inflation index also declined, steel shipments would, in all likelihood, have increased over the respective previous years along with the inflation index, had work stoppages due to strikes not occurred in these years. For instance, the annual rate of steel shipments for the non-strike months in 1952 was estimated at more than 80,000 tons. Discounting the "catch-up" production and shipments following the end of the strike, it is generally estimated that 78,000,000 to 79,000,000 tons of steel would have been shipped in 1952 if there had been no steel strike.4 This figure is very close to actual 1951 steel shipments, and the inflation indexes for these two years are likewise very close. To make allowance for population growth, comparison between per capita steel production and inflation is made 4 Steel Facts. 119:6, April 1953* Estimates of steel lost due to strikes vary considerably. However, it has been said that by the twenty-seventh day of the 1946 strike 6 million tons of raw steel or 4.2 million tons of finished steel products had been lost, and that the 1949 strike cost more than 10 million tons and the 1952 strike 17.5 million tons of raw steel. Cf. Neil W. Chamberlain and Jane M. Schilling, The Impact of Strikes s Their Social and Economic Costs {New York: Harper & Brothers, 195577 ipp. 208. 104 : in Table VIII. Expressed in relatives of the same base years, the two series run very much in parallel, as seen in, f ! Figure 6, for those strike-free years. An explanation. Why is there an upward shift in the demand for steel as inflation prevails? Two fundamental i ! ' features of the demand for steel are responsible for this ! change. Speculation has been often emphasized in the ! literature on demand for steel.5 If speculation in the market is made on the assumption, generally held by economists, that existing conditions will continue into the future, then inflation tends to prompt steel users to buy more than what they actually consume or need, in the belief that inflation will continue; and thus prices, I including the price of steel, will rise, and steel requirements will expand while steel supply will continue to be tight. This operation is what is usually called inventory buying or stockpiling. How this speculative element affects the demand for steel is vividly illustrated by the events from 1946 to 1949. Following the end of the steel strike of 1946, steel supply was tight relative to demand, as was the case with almost all goods at that time. Most steel users were 5 II* §.• Steel T. W. E. G. Papers (Mew York: United States Steel Corporation,""1940), v. 1, p. 14; Daugherty, op. cit., p. 5&9« 105; TABLE VIH STEEL PRODUCTION PER CAPITA PER CAPITA INDEX 0F INDEX YEAR STEEL PRODUCTION PER CAPITA OF (pounds) STEEL PRODUCTION INFLATION 1933 i * l l * 57 88.9 193k 1*62 63 87.1 1935 600 83 9i*.i* 1936 836 115.8 98.7 1937 879 121.7 99.7 1938 1*89 67.7 10i*.9 1939 807 111.7 99.2 191*0 1,015 11*0.5 97.5 191*1 1,21*5 172.1* 98.9 191*2 1,278 176.9 106.9 191*3 1,302 180.3 119.6 19kk 1,298 179.7 125.9 191*5 1,11*2 158.1 127.1* 191*6 91*3 130.6 130.0 191*7 1,179 163.3 11*1*. 9 191*8 1,210 167.5 171.9 191*9 1,01*5 2M.7 185.7 1950 1,277 176.8 179.9 1951 1,366 189.1 131*«1* 1952 1,187 I6i*.l* 202.5 1953 1,398 193.6 201.1* 1951* 1,088 150.6 200.8 1955 1,1*16 196.1 201.2 Sources For 1933-1952, Iron Age, 171-1:1*00, January 1, 1953; for 1953-1955, computed from production figures of the American Iron and Steel Institute and the population figures in the Statistical Abstract, 1956, p. 5. 106 FIGURE 6' INDEXES OF STEEL SHIPMENTS, PER CAPITA. STEEL PRODUCTION, & INFLATION, 1933-195U STEEL SHIPMENTS STEEL P R O D U C T IO N PER CAPITA Source; Supra., Tables VII, VIII. 107. eager to take every pound of steel they could get their j hands on. Their eagerness was not solely prompted by their expanded production requirements. They were also buying to! i build up steel inventories, even at the black or gray j ! market price. That was at a time when inflationary forces i were strong, as reflected in the increase in the inflation j index from 144.9 in 1946 to 171.9 in 1947 and 165.7 in 1946. But by late 1946, general economic conditions had changed and the inflationary forces were tapering off. Once that point had been reached, steel users not only stopped adding to their inventories but actually started to liquidate their steel stock. As a result, "almost overnight the steel industry’s operating rate dropped 10 to 15 per cent," even though there was only a slight decline in the amount of steel actually consumed.^ Another factor responsible for the upward shift of the demand under inflation is the actual increase in the demand for products made of steel. In times of inflation, both the ability and willingness of purchasers are i augmented. Hence, the marginal utility of money to purchasers declines relative to that of real goods. This is manifested in a general upward shift of demand schedules 6 Bay E. Estes, "Demand for Steel," Analyst Journal. IX-3:96, June 1953. for almost all goods, since demand schedules as conventionally conceived are preference schedules between a commodity and money (the general purchasing power)• This situation is applicable to demand for steel. In the case of demand for steel, moreover, this shift is reinforced by repercussions arising from similar shifts in the demand for other capital goods and for consumer goods. In general, such a shift is of greater magnitude for capital goods than for consumer goods. This is so, because purchasers of capital goods are in a position to discount the future increases in price of the end products as well as of the same capital goods* Consumers are not in a similar position in this respect. ■ i jln the same vein, the demand for consumer durables will be ; pushed upward further than that of consumer non-durables. If the foregoing analysis is tenable, and there is no reason to believe otherwise, the increase in demand for steel as a result of inflation will be noticeably larger for most steel is used for processing into capital goods and consumer durables. It has been found that 70 per cent of home-consumed steel goes into capital goods and another 23 per cent into consumer durables, while only about 7 per cent flows into consumer non-durables.7 7 Ibid.. p. 97. The exact magnitude of this increase in demand for steel arising from increased demand for products made of steel depends upon a number of factors at the time, including the rate and nature of inflation. What can be said here is merely that this upward push resulting from an increase in the demand for products made of steel is perhaps more powerful, long-lasting, and fundamental than the similar push arising from pure speculation, though these two forces work hand in hand, exert influences on each other, and are very difficult to isolate. For instance, the building up of steel inventories of steel users is influenced by both speculative psychology and the requirements of their production. As their production i operations are expanded, so are their requirements for steel stock. Unlike speculative inventory building, the purchase of more steel to meet production needs does not involve a risk-taking decision, but is merely done out of necessity. While there are gains in speculative inventory building during inflation, not all steel users will naturally exploit this advantage. Some may hold back. On the other hand, no steel users can afford to attempt to buy less than all the steel they need in their production, especially in an inflationary period. Changes in the Elasticity of Demand Price elasticity of demand for steel has not been explored extensively in the literature of economics. Analysis on this point will be made on the basis of the only known study and the relevant factors that are likely to affect the elasticity of demand for steel under inflationary conditions. i . . . . . | 2* * ■ » . Steel study. Up to date, there is only one statistical study, as far as this investigator knows, with the specific purpose of finding out the elasticity of demand for steel. That is the article ®An Analysis of Changes in the Bemand for Steel and in Steel Prices — 1936-1939,” in the United States Steel Corporation T. JJ. E. £• Papers. published in 1940.& That study has since become an authoritative source in this field, even though it was undertaken with an aim of justifying the Corporation’s action of maintaining a rather rigid price structure• Employing internal statistical data of the Corporation, which are otherwise unavailable, the authors of that paper came to the following conclusions The statistical analysis indicates, although not entirely conclusively, that the demand for steel is very inelastic, i. e., that changes in the level of steel prices (other conditions of steel demand remaining the same) cause much smaller percentage changes in the opposite direction in the quantity of steel sold. The best estimate of the elasticity S United States Steel Corporation T. Jl. E. C. Papers. op. cit., v. 1, pp. 1-170. of demand for steel by this analysis is approximately • 3 or .4.° I This conclusion did not go unchallenged. Mordeeai , i Ezekiel, for one, criticized the authors for giving no j consideration to the indirect effects. A reduction in the J i steel price, Ezekiel argued, would lead to an initial j i increase of demand for steel, which in turn would lead to more employment in other industries; more employment results in more income and more spending money; more spending money means more goods would be bought, and thus more steel would be d e m a n d e d . : Inasmuch as the concept of demand elasticity is to measure changes in the quantity demanded as the price of that commodity changes by one unit under the assumption that other things remain unchanged, Ezekiel*s criticism is directed at this very concept, rather than at the methods or the conclusion of the authors of that study. If the concept is still of value, the conclusion quoted above is the only definitive one available so far. The study in Chapter III confirms, though also inconclusively, that the demand for steel is rather inelastic. In the demand equation, the coefficient of the 9 Ibid.. pp. 169-17©. 10 T. N. E. C., Hearings (Washington, D. C.: The Government Printing 6ffiee, 1940), pp. 1367ff• 112 price term is only 13, in contrast to 62 for the inflation ; term and 70S for the industrial production term. In terms of betas, it is .003. The same is true in the Whitman study, in which the coefficient of the price term is 1.27 while that of the time derivative of the price movement is 6.27. Changes of elasticity. However, the central concern here is rather how the elasticity of demand for steel is affected, if at all, by inflation. Would it increase, decrease, or remain the same? On this point, the U. S. Steel paper was silent. The Whitman study did make a brief reference to this question. Whitman considered his findings inadequate to give an accurate measure of elasticity of demand1 , which, he recognized, varied considerably between prosperity and depression periods.^ A statistical study of changes of elasticity of demand for steel as a result of inflation is extremely difficult to make under present conditions. The pricing practices common in the steel industry preclude a collection of accurate statistical data. The inflation factor is also difficult to be isolated. Instead of trying to make a quantitative estimate of such changes, which, if attempted, would be even more 11 Whitman, oja. cit.. pp. 151f. 113 ; inconclusive than a simple measurement of elasticity of demand for steel under normal conditions, several observations are to be made, j | First, inasmuch as optimism and a spending mood j prevail among all purchasers in the economy in inflationary periods, price sensitivity on the part of all purchasers, including steel purchasers, is reduced considerably. In other words, as the urge to purchase on the part of purchasers is intensified by inflation, their price resistance is proportionally lessened. This is especially true in the case of steel. According to a survey, those persons who are directly or indirectly responsible for buying steel for their respective companies are much more interested in the properties of steel than in price comparison.12 in times of inflation, steel buyers are preoccupied by availability I of steel rather than by its prices. Second, if it is true— and it is generally held to be true— that people expect the current inflation to continue and also the rising trend of prices, then the burden of the advance in price at present is reduced by the eapected future advances during the useful life of the commodity. This is especially true for all durable goods, 12 “Irons and Steels Market Survey,® made by Meterials and Methods in July 1955. p. 12. 114 including steel. Third, in the case of capital goods, of which steel 1 is one and into which most steel goes, there is an added factor in discounting the burden of the present price increase, namely, the expected future increases of their end-product prices* Practically all direct purchasers of steel are enterprises, which process it by themselves or sell to others for processing it into end products. The time lag involved in the processing affords steel purchasers opportunities to take advantage of the difference in end product priees of the two periods. 3-3 Fourth, the basis for a producer to make a purchase of raw materials or capital goods is the profitability of his production activities made possible by the purchase. In any event, such profitability is heightened in a sellers* market, which is the case in inflation. With the profitability heightened, producers of products made of steel have a better ability to absorb (or to pass on to final consumers) the Increment in steel prices. This is especially true when interest rates are deliberately maintained at low levels by governmental action in times of inflation. The burden of a higher steel price is reduced to the extent of the capital value 13 Gf. F. V. Meyer, Inflation and Capital (Cambridge,-Ingland: Bowes & Bowes Publishers, 1954)» pp* 12-16. 115 j of the difference between the natural interest rate and the government-maintained interest rate. j Fifth, a demand curve is usually drawn with a j i decreasing elasticity at successively higher prices above j a certain point (the point of inflection)• This practice comes from a recognition of the fact that, as the price of a commodity is increased above this certain point, a further price increase will bring about a decreasing proportional increase in the burden. These observations lead to the conclusion that the elasticity of demand for steel is in all likelihood decreased in times of inflation. In other words, the same forces which cause the steel demand schedule to shift upward in inflationary periods will likely operate in such a way as to make the demand for steel more inelastic.^ The total effect of inflation upon demand for steel seems, then, to be that a higher quantity at a higher price is demanded, though the exact magnitude is very 14 It is interesting to note that the spokesmen of the steel industry in recent years have never referred to the sales volumes in announcing price revisions, even when announcing a price reduction. They usually said that their decision to reduce steel prices was prompted by a public spirited desire to halt inflation. Cf. "Statement on Steel Price Reduction," by Benjamin F. Fairless, then president of tha U. S. Steel Gorporation, on April 22, 1948. difficult to ascertain. In general, it depends on the relative strength of the relevant factors involved, including the rate of inflation and the level of steel prices. Figure 7 is drawn to show the point just diseussed. B^D" is the hypothetical demand schedule for steel under inflationary conditions, after taking into account a change in the elasticity and a shift in the demand schedule to D’D* from BB, which represents the hypothetical normal demand schedule under normal conditions. CHANGES IN THE COMPOSITION OF DEMAND FOR STEEL While the overall demand for steel is increased and become more inelastic in inflation periods, such a change is not and cannot be originated uniformly in all steel consuming industries. To the extent that the economic characteristics of different steel consuming industries are different, the effects of inflation upon their demand for steel cannot be the same. These differences tend to give rise to changes in the composition of the demand for steel. To examine these changes is the purpose of this section. 117 FIGURE 7 DEMAND SCHEDULE IN INFLATION, AFTER ACKNOWLEDGING CHANGES IN ELASTICITY P 118 Position of Steel Consuming Industries In order to show the relative positions of steel consuming industries under inflation, Table IX Is tabulated by broad groups of market classifications in percentages of total domestic shipments* The original table in recent annual statistical reports of thecAmerican Iron and Steel Institute is in more detailed market classifications and contains the absolute figures. In regrouping the market classifications, this investigator relies on the authority of the same institute as shown in a chart in its pamphlet Charting Steel*s P r o g r e s s . Since the Institute compiles this series as far back as 1940 only, Table X is compiled from different sources as noted on the table , in order to compare changes in recent years and earlier years. The series in Table IX and that of Table X are not comparable, because of differences in classification. However, there is consistency within each table and therefore comparability is present in each series. In reading the tables, it should be borne in mind that the distribution of steel by industry classification |and nature of product and end use was distorted by war and 15 American Iron and Steel Institute, Charting Steel*s Progress (1955 edition; Hew lork: American Iron and Steel Institute, 1955), p. 32. 119 armament and rearmament programs from late 1939 to late 1945 and late 1950 to early 1953* From 1939 to December 1941, foreign orders for munitions, semi-finished steels and scrap, coupled with the war preparedness program of I this country, caused bulges in the proportion of total output taken by exports, construction, shipbuilding, and transportation other than automotive* Also, production and shipments of steel were subject to government control and military priorities from 1941 to 1945 on a very strict basis and to a lesser degree from late 1951 to early 1953* To the extent that steel distribution in these periods was distorted by exogeneous influences such as armament programs and government direct controls, it is not indicative of the impact of inflation. The years which are of more value in this connection are the years which were relatively free from direct controls— 1937 and 193&, and 1947 to 1950. It should also be noted that the tables refer to direct mill shipments only. They do not represent the percentage of steel and steel products received and consumed by those industries in the classifications. The tables are designed to show the relative importance of the classifications as direct customers of the steel industry only, excluding the part played by them as indirect customers. Steel distribution. Prom these tables, four different reactions to inflation in the percentage of steel claimed by consuming industries may be distinguished (1) the per cent of steel shipped to an industry is constant over the years, irrespective of the movements of the inflation index. The per cent of steel shipped to mining, quarrying, and lumbering industries is a good example. The year-to-year changes are relatively infrequent. For four years, from 1946 to 1949 inclusive, the percentage was constantly at 5. (2) the movement in the steel shipments in percentages is the reverse of the movement of the inflation index. In this group are construction and contractor’s products, oil and gas, and containers. While the inflation index showed a decrease from 1937 to 1938 steel shipments to construction increased from 14*7 to 18.7 per cent; and in postwar years, such a relationship is detectible, with the exception of 1951, which was influenced by the rearmament program. The oil and gas industries* claim on steel shipments shows the same direction of movement if the long term trend of growth is eliminated. As the inflation index dropped, steel shipments to oil and gas increased from 7«4 in 1937 to 7.7 in 1938, and from 6.8 in 1948 to 8.2 in 1949. And when the inflation index increased, the steel shipments • • 121 j i dropped to 7*7 in 195© and 6.8 in 1951* However, the most ; i noticeable reverse relationship is in the container j industry. The container industry increased its steel shipments from 7*$ to 9*1 per cent between 1937 and 1938* and again from 8.5 to 8.6 between 1948 and 1949, while the figures showed a decline from 1946 to 1947 to 1948, even though the long run trend was to the contrary. (3) the steel shipment varies directly with the inflation index. Industries showing this relationship are converting and processing, forgings, and bolts, nuts, rivets, and screws; automotive; machinery and industrial equipment; domestic and commercial equipment; railroads; and shipbuilding. The first industrial group is closely i linked with other industries such as automotive, machinery and equipment, and others. The automotive industry’s share of steel was 18.9 in 1937 and 17*2 in 1938. In the postwar years, its share was steadily growing, and this growth was interrupted only in 1951 and 1952 when the Controlled Materials Plan was in effect. The jump from 16.3 to 20.8 in the 1948-1949 period is probably explainable by impetus carried over from the previous years when the production of automobiles was far short of demand due to lack of productive facilities and materials. The movements of steel shipments to machinery and tools industries, and railroads are very close to the inflation L 122 index. The direct relationship between steel shipments to the shipbuilding industry and the inflation index can be seen if a lag of one year is observed. (4) an irregular pattern in the relationship between steel shipments and the inflation index is seen in the case of warehouses and distributors, and agriculture. Warehouses and distributors are actually the middle man, who redistributes the steel to nearly all other steel consuming industries. Therefore the steel shipments to warehouses and distributors depend on the extent that other steel consuming industries need their supply. The picture in agriculture is somewhat blurred by the government poliey of price support on major agricultural products. Differences in the consuming industries. Underlying the differences in the steel distribution pattern are the economic characteristics of the consuming industries. Theoretically, those industries receiving a constant percentage of steel shipments expand and contract at the same rate as movement of the inflation index, while the opposite movements between steel shipments and inflation show a rather stable condition in the consuming industries, and similar movements in the two series indicate that the consuming industries rise and fall along with inflation, but at a greater magnitude. 123 TABLE IX DOMESTIC SHIPMENTS OF FINISHED STEEL BY MARKET CLASSIFICATION, 1940-1955 % of total domestic shipments ag I I 0g m q O E H o o to °3 5 _ o Eh - B c§ EH Q O O E h S § E h % i —i •6 n <4 9 < 3 y - go M O S e C5 <# s 8 1940 7.3 15.9 13.1 19.4 10.0 2.6 4.3 1941 7.9 14.7 14.6 16.0 10.1 5.2 5.0 1942 7*6 10.7 16.3 5.5 8.1 18.8 2.6 1943 8.6 11.4 7.8 5.5 7.9 21.8 2.7 1944 9.0 12.5 7.6 5.2 9.1 18.2 3.1 1945 9.7 16.7 8.7 7.6 9.6 5.7 3.8 1946 7.8 I8.4 12.5 14.3 8.3 •6 4*4 1947 8.2 16.2 12.9 15.8 8.3 .7 5.4 1948 8.9 15.9 12.2 16.3 8.4 1.0 6.8 1949 7.7 16.3 12.9 20.1 6.7 1.3 8.2 1950 9.1 16.8 12.4 20.8 6.2 .6 7.7 1951 9.6 16.7 13.1 17.0 7.6 1.4 6.8 1952 8.9 18.4 12.4 16.7 6.2 1.8 7.0 1953 8.1 16.9 13.3 18.9 6.2 1.3 7.1 1954 7.0 16.4 15.7 19.5 4.1 .9 7.8 1955 8.0 16.7 13.8 23.1 4.3 .9 6.7 Continued on next page* 124 TABLE IX (Continued) DOMESTIC SHIPMENTS OF FINISHED STEEL BY MARKET CLASSIFICATION, 1940-1955 % of total domestic shipments W I X , D 25 Or 1 - 4 O tM -a O C 3 f O 1 - 4 1940 0.4 2.4 5.0 5.7 7.9 • • • 6.0 1941 0.4 2.1 5.2 6.7 7.7 2.6 1.9 1942 0.5 1.1 4.8 3.2 6.9 11.6 2.3 1943 0.4 1.3 4.5 2.2 6.3 13.2 6.4 1944 0.4 1.8 4.2 2.7 6.2 11.2 8.7 1945 0.4 2.1 4.5 4.0 8.1 10.3 8.8 1946 0.5 2.3 7.8 5.8 9.3 0.1 7.9 1947 0.5 2.1 7.8 5.5 8.6 0.1 7.9 1948 0.5 2.3 7.7 5.8 8.5 0.1 5.7 1949 0.5 2.7 7.1 4.8 8.6 0.2 2.9 1950 0.4 2.2 7.6 5.6 8.4 0.3 1.9 1951 0.5 2.1 8.2 5.2 8.6 1.6 1.7 1952 0.5 2.1 8*4 4.5 8.6 3.2 1.3 1953 0.4 1.6 8.3 5.4 7.8 3.5 1.2 1954 0.3 1.9 8.7 5.3 9.7 1.6 1.1 1955 0.3 1.7 8.6 5.4 8.3 1.1 1.1 Souree: American Iron and Steel Institute, Annual Statistical Report, 1255,. pp. 92-93; 1254, p. 87. Nineteen forty is the earliest in this series, which was installed in 1946 by the Institute. TABLE X 125 STEEL SHIPMENTS BY CONSUMING INDUSTRIES Select Years 1926-1952 % of total shiments in year o M S3 O n o E h Q 53 « g M O ^ O S h - ? o o EH M w Q O l - H S3 o a M O eg c5 S3 CD Pi M tO S3 EH 1926 3.5 15.0 18.0 4.5 3.5 • • • • • • 21.5 • • ♦ • • • 34.0 1937 5.7 18.9 14.7 7.8 3.4 7.4 * * • 11.4 0.9 9.5 19.3 1938 4.7 17.2 18.7 9.1 3.5 7.7 • • • 6.1 1.7 10.2 21.1 1939 3.6 15.1 15.6 7.6 3.7 4.7 1.7 8.3 1.3 7.2 31.2 1940 3.3 16.4 14.3 6.3 4.8 3.9 4.7 8.3 2.1 17.9 17.8 41-4 Av. 2.3 8.8 13.3 6.7 5.1 3.5 4.5 8.6 15.3 12.2 19.4 1945 4.3 9.7 14.7 7.6 8.3 4.7 6.7 9.3 5.9 6.7 22.2 1946 4.3 15.1 16.7 9.7 9.1 5.1 6.4 9.8 .7 6.9 16.2 1947 3.8 16.3 15.9 8.9 9.0 6.1 6.0 9.5 .6 7.4 16.5 1948 4.2 17.1 15.4 8.9 8.1 7.7 6.5 8.9 1.1 5.4 16.7 1949 4.6 20.5 17.3 8.6 7.4 9.4 3.4 6.9 1.2 6.5 12.2 1950 4.3 21.8 17.1 8.9 8.0 9.2 6.4 6.6 .5 3.8 13.3 1951 4.1 18.4 18.0 9.2 8.9 8.5 5.8 8.3 1.3 3.9 13.4 1952 4.2 17.1 17.4 9.5 9.2 8.9 5.3 6.8 1.5 5.5 14.4 Sources Steel Facts. 4ls3, June 194-0; Iron Age. 157-1:81, January 3, 194-6; Ibid.. 171-1:4-01, January 1, 1953. 126 However, this does not always hold, because other forces such as a long term trend may have played a role. i The mining industry, for instance, took a constant J i percentage of total domestic steel shipments in the later i 1940’s. This case seems to be one of moving in the same s direction and at the same rate with inflation. A further study of these data suggests that the long term tendency of decline in the percentage of steel shipments to mining, quarrying, and lumbering industries was temporarily interrupted by inflation. Granting a lag of one year, one can see that the per cent of steel shipments fell steadily as the inflation index tapered off. This situation is illustrated in Figure S. It is therefore fairly established that the inflation strengthened the demand for steel from the mining, quarrying, and lumbering industries to the point that their relative position was unchanged. Similarly, the long run decline in the relative importance of railroads in steel shipments was obscured by the inflation. Thus, in 1946, 1947, and 194#, the per cent of steel shipments to railroads was maintained at around #.3, and as soon as there was a slight dip in the inflation index, in 1949, steel shipments to railroads fell to 6.7 in 1949. In later years, the inflation index came almost to a standstill and steel shipments to rail transportation showed a downward trend. Figure 9 127 FIGURE 8 PER CENT OF DOMESTIC STEEL SHIPMENTS TO MINING, QUARRYING, & LUMBERING AGAINST THE INDEX OF INFLATION, PLOTTED WITH A ONE-YEAR LAG 0/0 INFLATION SHI PWeNtS 210 200 S T E E L S TO MINING ETC. 0 . 5 19 0 180 0 . 3 170 0 . 2 150 1 40 130 Sources Supra,, Table IV; American Iron arid Steel Institute, Annual Statistical Report, 1955, pp. 92-93, 128 presents this point in a clear way. In the group of industries which increased their share of domestic steel shipments along with the increase in the inflation index and vice versa, the most important ones are the automotive and machinery and tools industries.* The importance of the automotive industry as a customer of ! the steel industry is often noted. The automotive industry’s products are in the nature of consumer durables, even though a substantial part of its products are sold to enterprises and farmers. Actually as customers of the automotive industry, individual consumers, enterprises, and farmers all have the same characteristic, namely, that the effective demand for the products of the automotive industry changes as money incomes change, but in even greater proportion. Insofar as this is true, the demand for the products of the automotive industry is similar to the demand for other consumer durables. The relationship between the demand for consumer durables and inflation is vividly illustrated by the steel industry’s attempt to correlate the sales of consumer durables with surplus or supernumerary income, which is defined as the part of consumers’ money income remaining after deducting expenses for food and shelter and other 129 FIGURE 9 PER GENT OF STEEL SHIPMENTS TO RAILROADS VERSUS THE INFLATION INDEX INFLATION INDEX o 2& 2 . 1 0 2oo l9o )80 Iro l&o } So l4o PER CENT OF STEEL SHIPMENTS i o S te e ls t o r a ilr o a d s / 9 -{ 8 7 H b 5 4 3 / m (o % 48 49 'So S i ® 84 Source: Table IV5 American Iron and Steel Institute* Annual Statistical Report. 1955* PP* 92-93* 130 necessary daily items.16 Supernumerary income will increase as inflation prevails. ; I The events in the period under study confirm this j i analysis. Motor vehicle sales increase along with the inflation index, as did steel shipments to the automotive ; industry in both absolute and relative figures, as shown in Figures 10 and 11. The discrepancy in 1949, as has been explained, is due to the momemtum carried over from earlier years when the demand for automobiles was too large for the automobile industry to meet in those years. As to the 1951 and 1952 deviations, they are due to the government imposed Controlled Materials Plan, under which the automobile industry was deprived of a part of its steel supply in favor of the priority rearmament program. As soon as this priority allocation control was eased, the automobile industry’s relative share of steel shipments jumped from 16.7 in 1952 to 18.9 per cent in 1953- Steel shipments to machinery (including electrical) and industrial equipment establishments also correspond with oscillations in the inflation index, particularly in later years of the period. As seen in Figure 12, steel shipments to this market classification failed to rise in 16 Lionel Edie’s testimony in Company Testimony before the Presidential Fact-finding Board. Steel Industry Case. 1949 (no place of publication, T95&7, v. IV, pp. 1948ff. FIGURE 10 INFLATION, MOTOR VEHICLE SALES, AND SHIPMENTS OF STEEL PRODUCTS TO AUTOMOTIVE INDUSTRY 131 STEEL IN MHIIONS O f . MET TONS M iUlON «F VEHICLES INFMRW 10.9 STEEL MILL SHIPMENTS TO AUTOMOTIVE INDUSTRY PASsm&en cars, T R U C K S A N ® B U S E S r 4b '47 "48 '49 '50 ' 5 1 '$2 '53 '54 Source: American Iron and Steel Institute, Charting Steels Progress, 19$$ edition, p* 33* 132 FIGURE 11 PER CENT OF STEEL SHIPMENTS TO AUTOMOTIVE U3DUSTHX IN RELATION TO INFLATION INFLATION INDEX PER CENT oT= •S T E E L S H IP W E H T S - 20 ZtO I8o 170 lAo 1944, i . / f . h t . A A /, Sourcet Table IV5 American Iron and Steel Institute, Annual Statistical Report^ 1955, PP* 92-93* 133 earlier postwar years even though the index of inflation recorded a very sharp advance. This is partly due to overstatement of the advance in the inflation index as a result of wartime price controls, and partly due to uneertainity in the minds of businessmen as to the general economic outlook. The general expectation in the early postwar years was that the postwar inflation would soon be over and deflation and depression would emerge any time Just as was the case following World War I. In other words, so long as society is preoccupied with deflation, the influence of inflation is considerably weakened. The same can be said about the market for domestic and commercial equipment. The decline in the per cent of steel shipments to these industries in 1951 and 1952 was caused by the same factor as the decline in steel shipments to the automotive industry. The behavior of the construction industry in recent years is unexplainable by earlier belief, studies, and theory. The general consensus before was that there is a regular construction cycle averaging about 10 years from bottom to bottom. And now Table XI tells a different jstory. Construction has been unusually active, increasing almost every year since the end of World War II from 15.7 billions in 1946 to 30.4 billions of constant dollars. The explanations for this phenomenal growth of FIGURE 12 STEEL SHIPMENTS TO MACHINERY .(INCLUDING ELECTRICAL) AND INDUSTRIAL EQUIPMENT, AND TO DOMESTIC AND COMMERCIAL EQUIPMENT VERSUS INFLATION 134 INFLATION INOEX Z3o 220 Zio 200 1 90 iSo 170 \bo \5o 140 PCR CENT OF STEEL •SHiFMEMt S 10 STEELS TO MACHINERY INFIATIOM STEELS TO DOMESTIC EQUIPMENT / 9 8 7 b 5 4 3 Z I (94C *4J '48 '5° *Sl l5*Z ‘ S 3 Scarce: Table IV; American Iron and Steel Institute, Annual Statistical Report, 1955, PP* 92-93* 135* TABLE X I NEff CONSTRUCTION EXPENDITURES AND STEEL SHIPMENTS TO CONSTRUCTION, 191*6-1951* N W STEEL TEAR CONSTRUCTION* " SHIPMENTS** (billions of dollars) (millions of net tons) 191*6 15.7 6.6 19U7 17.9 8.9 191*8 20.8 9.8 191*9 22.1 9.6 1950 26.7 11.7 1951 26.7 12.7 1952 27.1* 10.1* 1953 28.9 13.2 1951* 30.1* 11.6 Source: American Iron and Steel Institute, Charting Steel1s Progress, 1955, p. 35. * In constant dollars; the expenditure figures compiled by U. S. Departments of Commerce and Labor are converted to constant dollars with Composite Construction Cost Index of the U. S. Department of Commerce. Direct mill shipments for construction and contractors* products, including oil and gas construction. 136 construction are now made usually in terms of war deferred demand, high marriage and birth rates, governmental policies in favor of building construction, and suburbanization. These factors are truly instrumental to the growth of the construction industry. Without a fundamentally inflationary economy, however, it is doubtful that these factors would be as powerful as they have been. At any rate, as a result of this orderly and steady growth of the construction industry, Figure 13 shows a reverse relationship between movements of the inflation index and per cent of steel shipments going to the construction and contractors’ items.3-7 17 Demand for steel from construction is in direct positive correlation with construction activities. This is demonstrated in an estimate equation as: Xlc = 1532.87 / O.23523X2 / I.OO204X3 / 0.04064X^ where X^e * Calculated fabricated structural steel shipments, X2 = Mew industrial building construction, X3 = New warehouse, office, and loft building construction, Xj^ = New highway construction. Cf. Nathan H. Schein, “Estimating Demand for Fabricated Structural Steel.” Construction Review. 1-12:11. December 1955. 137 FIGURE 13 INFLATION AND PER GENT OF STEEL SHIPMENTS TO CONSTRUCTION AND CONTRACTORS' PRODUCTS INFLATION PER CENT IN D E * STEEL SHIPMENTS zto r ~ 100 I Z 170 140 / A /, / / I , Source: Table IVj American Iron and Steel Institute, Annual Statistical Report, 1955* pp* 92-93• L 138 Another steadily growing group of industries consuming steel is the oil and gas group. Mot only is this group of industries itself growing, but also its steel requirements rise faster than its output, as indicated in Figure 14- This is because oil and gas wells are drilled deeper, more wells are drilled, and longer pipelines are laid.-*-^ As a result of this steady growth of steel requirements, their percentage share of steel shipments shows reverse movements with the index of inflation. This is shown in Figure 15• The most obvious inverse relationship between the inflation index and per cent of domestic steel shipments to a market classification is in the container industry. Most of the tin plate produced in the United States by the steel industry goes to the container industry. And three-fourths of metal can shipments in the United States in 1954 consisted of cans for food and b e v e r a g e s . Since 18 For instance, it was reported that the average depth of oil and gas wells drilled during 1953 was 4*006 feet, about 15 per cent more than in 1945* that the total number of oil and gas wells drilled annually recorded an increase of 84 per cent from 1945 to 1953, and that total length of gas pipelines was 30 per cent greater in 1953 than at the end of 1945. Of. Steel Facts. 129:5, December 1954. 19 Of. Charting Steel*s Progress, op. eit., p. 39. Steel in Millions of Tons Crude Petroleum in Billions of Barrels Matural das Trillions Cu. Ft. 3 2 * Steel Shipments include those to oil and gas drilling, / construction, and oil country warehouses. 10 o 8 i a Source: Steel Facts, 129:5* December 195k} American Iron and Steel Institute, Annual Statistical Report, 1955, p. 92; Charting SteePs Progress, 1955, p. 38. H v * > v £ ) 140 1 INFLATION TNDEX %to RjOO 1 90 /SO 170 t&o 15T0 140 FIGURE 1$ PER CENT OF STEEL SHIPMENTS TO OIL AND GAS VERSUS THE INFLATION INDEX 1 PER CENT STEEC. SHJPM6WS, / 8 - 7 i 5 4 mt* ’ 4? ' 4 8 ' 49 f 5o 51 5 2 . ’ 53 ’ 54 Sources Table IV; American Iron and Steel Institute, Annual Statistical Report, 1955» PP* 92-93• consumption of canned foods is markedly stable as compared with the changes in general economic conditions,2® the proportion of steel taken by the container manufacturers tends to rise as the inflation index declines and vice versa- So, the container industry received 9-3 per cent of total domestic steel shipments in 1946, dropping to 8.6 in 1947, further to 8-5 in 1948, and returning to 8.6 in 1949, and dropping again to 8.4 in 1950. The two move ments are set against each other in Figure 16. Changes in Product Mix Since steel consuming industries use different types of steel, changes in their relative positions will bring about changes in the product mix of the steel industry. leaw versus light steels. There is a conventional classification of steel products, which divides them into two broad categories, namely, heavy and light steels.2^ Employing this dichotomy, one finds that some steel 20 The steady rise in pounds of canned fruits, juices, and vegetables used per person per year is illustrated in these figures: 28.1 pounds in 1920, 41*0 pounds in 1930, 59*7 pounds in 1950, and 73*8 pounds in 1954. Idem 21 Heavy steel products include plates, structural shapes, rails, bars, skelp, billets for forging, tube blanks, and others; light steels are mainly sheets, strip, tin plate, and wire products. 142 FIGURE 16 PER CENT OF STEEL SHIPMENTS TO CONTAINERS MDUSTHT VERSOS THE INFLATION INDEX WO S TE E L TO CONTAINERS / ------ 190 170 iso m Source: Table IV; American Iron and Steel Institute Annual Statistical Report, 195$9 pp* 92-93- 143 ; industries use primarily heavy steels, and some others light steels. Railroads, mining, oil and gas, and the j shipbuilding industries are primarily customers of heavy steels, while the^automotive and container industries consume mainly light steel products. It has been found that the long run tendency for the per cent of steel shipments to railroads and mining to decline is likely to be interrupted by inflation. On the other hand, no disturbing effects of inflation upon the orderly growth of the oil and gas industries and container industry have been noticeable. Furthermore, the fortunes of the automotive industry seem to vary with the inflation index. Consequently, the effects of inflation on heavy and light steels are hard to ascertain. Nevertheless, the figures in fable XII seem to indicate a direct relationship between the inflation index and shipments of heavy steels as a per cent of total steel shipments. When the inflation index was at the bottom ($7.1) in 1933, so was the portion of heavy steels in the total steel shipments (at 2&.6 per cent). During the war years, heavy steel shipments were proportionally higher than other years. When the inflation index rises, heavy steel shipments also tend to reeord a higher percentage in total steel shipments. However, this uplift is counterbalanced by the long run trend of decline. The 144 I | TABLE XII ! i HEAVY STEEL PRODUCTS AS PER CENT OF TOTAL STEEL | SHIPMENTS & INFLATION INDEX, 1933-1951* | HEAVY STEELS INFLATION YEAR % OF TOTAL INDEX 1933 28.6 87.1 1931* 31**3 9l*.i* 1935 30.9 98.7 1936 35.1* 99.7 1937 38.8 10l*.9 1938 37.6 99.2 1939 37.6 97.5 19kO 1*3.8 98.5 19kl 1*3.2 106.9 191*2 53.0 119.6 19i*3 53.7 125.9 19hh 52.6 127.1* 191*5 1*6.1 130.0 191*6 37.8 11*1*.9 191*7 39.5 171.9 191*8 38.6 185.7 191*9 38.6 179.9 1950 36.3 181*.1* 1951 38.1* 202.5 1952 38.9 201.1* 1953 38.1 200.8 1951* 36.3 201.2 Sources: American Iron and Steel Institue, Annual Statistical Report, 1955* pp. 86-87? supra, Table XV. 145 net results are either a lesser increase or a lesser decrease than otherwise would have been true, in shipments of* heavy steel products in relation to total steel i j shipments. This would be rendered more clear by extending | the comparison further back between the inflation index J , and per cent of steel shipments in the heavy steel category. Figure 17 serves this purpose well. Close parallel movements in the two series are obvious, especially when allowance is made for the trend factor. Early in the twentieth century, heavy steel products constituted over one-half of the total tonnage of steel shipped. During World War I, as the inflation index rose, so did heavy steel products as a percentage of the total. This percentage dropped back in the 1920’s along with the inflation index and reached the bottom about the same time as the inflation index. Following World War II it has resumed its long run decline, but has been prevented from declining further by the inflation factor. The fact that its decline in the percentage of the total has been halted in the postwar years is particularly remarkable, since not only have light-steel-consuming industries— such as the automotive and container industries— had a phenomenal growth, but furthermore the industries which traditionally consumed heavy steel FEJOBE I? HEAVY STEELS AS FEE CENT OF TOTAL, & THE INFLATION INDEX, 1913-195U TnfUtton — rmxzo 200 140 loo 76 7g 'Zo *Z ' 24* Z6 Z8 32 * 34. '36 ’ 3g '40 4< Source: Table XIIj Carl H* Loeb, Rhoades & Oo», Steel, p* 32* 1 I [ 147 j products have also shown a definite shift toward the lighter forms of steel. The trend in railroad equipment, , for example, has been toward lighter steel. Also, the building industry is developing into an important potential customer of sheets, strip, and small shapes. The growth of sheets and strip has been the most pronounced among all light steel products. As Steel Facts reported: The production of hot rolled sheets and strip, including steel for tin plate, soared to over 31 million tons a year as an average for 1950-1952, from less than l.S million tons in 1905-09. The increase in tonnage in this class of products is more than three times the simultaneous increase in the combined heavy products. Sheets and other light flat rolled products represented over 41 per cent of total hot rolled production in recent years, contrasted with a little over 9 per cent in 1905-09.22 The huge increase in the production of sheets and strip is explained by the fact that there is a remarkable correlation between the movements in tonnage of sheets and other light flat-rolled products and personal expenditures for consumer durables, as shown in Figure IS. Furthermore, personal expenditures for consumer durables, as has been noted, are increased as inflationary conditions prevail• However, this is not to say that the growth in the iabsolute tonnage in light steel products necessarily means 22 Steel Facts. 123:2, December 1953* FIGURE 18 SHIPMENTS OF STEEL SHEET, STRIP, AND TIN PLATE COMPARED WITH PERSONAL EXPENDITURES FOR DURABLES BHLlOMS O F f<>39 D0LLABS Millions of tcns 35 shipments op sheet, Sthip, &. T /n p u re Personal expenditures for durables Except Hoosmt Sources Steel Facts, 122:2, October 1953 30 25 20 » 5 1 0 5 o I 149 an increase in the percentage of the total tonnage that ( j goes to light steels* As Figure 17 indicates, heavy steel | products have not fallen behind in times of inflation. In ifact, Figure 17 seems to suggest that heavy steel products i tend to increase less or decrease more in comparison with i ilight steel'products in non-inflationary periods, and therefore are able to maintain their relative position only in times of inflation* This is quite in line with general belief in economic circles, which holds that the demand for capital goods tends to oscillate more widely than the demand for consumer durables during a business cycle. Low versus high grades* In the last two decades or more, production of alloy and stainless steels experienced a spectacular growth. Stainless steel increased from 62,791 net tons in 1934, the first year production statistics were available, to 11,036,035 net tons in 1953- In the same period, alloy steel production rose from 1,072,957 net tons to 9,437,775 net tons, while carbon steel only gained from 27,376,176 to 106,375,994 net tons.23 in other words, stainless steel increased over 19 times and alloy steel 5*6 times, in contrast to a mere 3*9 times for carbon steel in this period* 23 American Iron and Steel Institute, Annual Statistical Report. 1955. o p * cit., p. 55* 150 1 Apart from the factor of long run growth, which is beyond any doubt, inflation may have a role in facilitating this tremendous gain of alloy and stainless steel. For one thing, alloy steels are heavily demanded l by machinery, and other capital goods industries, which j i in general fare better in inflation periods than in deflation years. Furthermore, alloy and stainless steels are of better quality than carbon steel. Insofar as inflation tends to stimulate people’s desire and increase their ability to buy higher quality goods, it increases demand for alloy and stainless steels relative to carbon steel. A perusal of the production statistics, as in Table XIII and Figure 19, reveals that this is the case. Except for the great spurt in early World War II and the return to normal the following years, production of alloy and stainless as a per cent of the total varies with the inflation index. When the inflation index took a down turn in 1930, so did alloy production as a percentage of the total. In the years following 1934, both the inflation and production series remained somewhat stable, until 1938, when both series recorded a temporary setback. The movements of the series since the war have also icorresponded well. Alloy and stainless steels combined accounted for only 7*6 per cent of the total steel TABLE XIII OUTPUT OF CARBON, ALLOT, AND STAINLESS STEEL IN RELATION OF TOTAL STEEL PRODUCTION (INGOTS AND STEEL FOR CASTINGS), 1926-1955 TEAR TOTAL (in thousands of net tons) Per cent of Total Carbon Alloy Stainless 1926 52,902 95.0 5.0 • • • 1927 1*9,273 91*.5 5.5 • • • 1928 56,623 93.9 6.1 • • • 1929 61,71*2 93.1 6.9 • • • 1930 1 * 1 * , 591 91*.1 5.9 • « • 1931 28,607 9l*.6 5.1* • • • 1932 15,123 9l*.3 5.7 • • • 1933 25,725 93.5 6.5 • • • 1931* 29,182 93.8 6.0 0.2 1935 38,181* 93.8 6.0 0.2 1936 53,500 9 1 * .0 5.8 0.2 1937 56,637 91*.0 5.7 0.3 1938 31,752 91*.7 5.0 0.3 1939 52,798 9l*.0 5.7 0.3 191*0 66,983 92.6 7.0 o.l* 191*1 82,839 90.1 9.5 0.1* 191*2 86,032 86.6 13.0 0.1* 191*3 88,837 85.2 11*. 3 0.5 191*1* 89,61*2 88.2 11.3 0.5 191*5 79,701 89.1 10.2 °.7 191*6 66,603 91.0 8.3 0.7 191*7 81*,891* 91.2 8.2 0.6 191*8 88,61*0 90.1* 9.0 0.6 191*9 77,978 92.1* 7.0 0.6 1950 96,836 91.1 8.0 0.9 1951 105,200 90.1* 8.7 0.9 1952 93,168 90.2 8.8 1.0 1953 111,610 90.8 8.3 0.9 1951* 88^312 91.8 7.2 1.0 1955 117,036 90.0 8.1 1.0 I Source: Americal Iron and Steel Institute, Annual Statistical j Report, 1955, p. 55* 152 FIGURE 19 PRODUCTION OF ALLOT AND STAINLESS STEELS AS PER GENT OF TOTAL STEEL PRODUCTION, AND INFLATION, 1926-195U £tayg|e» Ai|0y 220 m --OS --/O 120 V— •So *52 (9S$ 1955, p. 55* (12L '2& '30 Source: American Iron and Steel Institute, Annual Statistical Reports | 153 ! i produced in 1949, the lowest figure in the postwar years. ! < The inflation index also registered the largest decline in I this period. After bouncing back in 1950 and a further I gain in 1951, both series moved along on a plateau. I Within the scope of carbon steel, there is a ] similar tendency for more highly finished types, especially cold-rolled forms, to gain prominence over hot-rolled steel. How much of this tendency is aided by inflation is difficult to ascertain; for the available data, compiled in Table XIV, show that the gain of cold-rolled sheets as per cent of total cold-rolled and hot-rolled sheets has been steady over the years, even in the 1930*s. To the extent that inflation has accelerated the growth of consumer durables, which in turn is responsible for the phenomenal growth of cold-rolled sheets, inflation has promoted the growth of cold-rolled sheets and other cold finished forms. Moreover, complaints have been made by steel consuming enterprises, i especially the smaller ones, that steel companies took advantage of a seller’s market for steel in the early postwar years and in 1950-1951, and deliberately produced more cold-rolled sheets in order to make higher profits and thus supplied them with cold-rolled sheets regardless 154 TABLE XIV CD ID RO LLED SHEETS AS PER GENT OF BOTH COLD AMD HOT ROLL SHEETS PRODUCED, SELECTED YEARS 1933-1955 YEAR TOTAL (cold & hot rolled) thousands of net tons COLD ROLLED SHEETS % OF TOTAL 1933 2,81*9 ' 875 30.7 1934 3,31*7 1,087 32.5 1935 5,058 1,791* 35.5 1936 6,573 2*269 34.5 1937 7,006 2,271* 32.5 1938 3,91*8 1,31*1* 3lt.0 1939 7,109 2,021 28.1* 191*5 9,21*2 2,868 31.0 191*6 9,598 1*,076 1*2.3 191*7 12,806 5,505 1*2.3 191*8 13,830 6,71*0 1*8.7 19l*9 13,151* 6,91*2 52.8 1950 17,11*3 9,338 51**5 1951 17,812 9,61*1 51**1 1952 li**108 8,009 56.8 1953 19,017 11,271* 59.3 1951* 15,700 9,606 61.2 1955 21*, 599 15,168 61.7 Sources American Iron and Steel Institute, Annual Statistical Report, 1955, p* 86-87* 155 i of their needs.The truth of these complaints was I difficult to ascertain, and congressional authorities even 1 made special studies on this problem.25 At any rate, the profitability of a more highly finished form of steel is I i probably enhanced by the presence of a seller*s market, which is a characteristic of inflation. CHANGES IN MARKET RELATIONS It is characteristic in an inflationary period that the seller gains a stronger bargaining power than < otherwise would be the case. Such a shift in bargaining power may and usually does induce the institution of government controls. It seems to be worthwhile to examine a little further into this aspect of ehanges as a result of inflation. Beviation from Market Forces Since steel is one of the most basic materials in a modern economy, its flow affects an economy greatly. Its flow is supposedly in large measure governed by market forces in a free competitive economy. This may be true in 24 N. S. Senate, Select Committee on Small Business, Subcommittee on Monopoly, The Distribution of |Steel Consumption. 1949-50. Report of Federal Trade Commission, March 31, 1952 (Washington, D. G.,. Superintendent of Documents) pp. 14-15. 25 Idem : 156 ; times of a buyer’s market, or deflation, or even normal ■ periods. But the play of market forces is often deemed j inadequate or undesirable in times of shortages — which is a manifestation of inflation — in the eyes of | governmental authorities and/or the general public, which j ! may have preferred objectives other than an efficient economy. Means are thus introduced to counter or obstruct the working of market forces. In order to remedy the inadequacy or to attain some desired objectives. This is especially feasible and desirable if the objectives are national survival or security, for instance. Allocation programs. Thus, some sort of artifical allocation program is invariably adopted by the government of a modern nation in times of war, and to a lesser extent in times of preparedness. In the United States, production and distribution of steel were subject to strict government control during World War II. This control was reintroduced on a somewhat modified basis during the Korean conflict, under the name of the Controlled Materials Plan, under which important materials were allocated by the federal government for specific programs• Under the Controlled Materials Plan during the Korean conflict, steel was allocated on the basis of a priority rating system as well as the base period I 157 ; consumption. Under this plan,, steel was channeled to i defense production without resorting to competitive bidding in the market. Thus, 9.1 per cent of all direct steel mill shipments in 1952, the only full year of this period in which this plan was operative, went to defense i programs, in contrast to 7*6 per cent in 1951 and 7.1 in 1953, when the plan was effective during part of those y e a r s . Furthermore, it was estimated that shipments to manufacturers for the output of components incorporated in defense end items represent an additional 18 to 20 per cent of the tonnages of direct shipments to the defense programs• However, this program also placed a limitation on i any changes in the proportion of steel shipments going to enterprises engaged in civilian production. In other words, the relative status of these enterprises as steel consumers was frozen at the base period. Thus the dynamic force of inflation, which tends to induce some particular industries or firms to grow faster than others, was suppressed at least temporarily. Direct allocation by governmental authorities is not the only form of government intervention in the 26 U. S. Department of Commerce, "Shipments of Steel Mill Products to Defense Programs, First Quarter 1951 — Fourth Quarter 1953” (Facts for Industry Series, NPAF-17-03), p. 2. 158 j i distribution of steel during periods of shortages* There | are times when an acute shortage seems to call for governmental action but public sentiment does not desire J \ ! a government allocation program. This was the case in I i | I 1946 and 1947* At that time, small proportion of steel ! | j j was set aside for essential needs, and the remainder was ; left for the steel producers to distribute as they saw fit. However, the Civilian Production Administration set a ceiling on inventories that steel-consuming firms were allowed to accumulate. When the 1946 strike began, the maximum steel stock allowable was a sixty-day supply. Because sheet steel was especially scarce, a forty-five-day supply of this type was the maximum allowed. On the twelfth day of the steel strike, the Civilian Production Administration reduced maximum stock limits for all kinds of steel to a forty-five-day supply. Another action taken by the federal government in both the 1946 and 1952 steel strikes — but not in the 1949 strike, which occurred when inflationary forces were on the ebb — was control over distribution of stock in steel warehouses. On the first day of the 1946 strike, governmental authorities adopted a program whereby all warehouse steel was reserved for uses necessary to public health and safety. Again in 1952, the federal government imposed an extensive embargo on exports of steel and 159 froze warehouse inventories at the beginning of the strike.27 ! Actions of this sort may be of limited value to the | I announced objective on I j psychology on the other. The control over warehoused steelj j 1 I stock, for instance, can hardly increase the supply of j i steel for military, public health, and public safety uses, j because the types of steel in warehouses are mostly sheets, especially galvanized sheets, strip, and general purpose bars.2^ When government direct intervention is not feasible, the government may induce steel producers to allocate their products on the same basis as a governmental agency would. This is the origin of the voluntary allocation program adopted in 1943. The Office of Industry' Cooperation was established in the U. S. Department of Commerce to coordinate voluntary allocation programs in the general industrial field. This voluntary allocation scheme was discarded in 1949 when the inflationary pressure eased. Effects of this scheme have 27 For discussion of governmental actions in these strikes, see Chamberlain and Schilling, Impact of Strikes. o p . cit.. pp. 196-199* 28 The Iron Age contains statistics on different types of steel shipped to warehouses in its annual numbers. the one hand, and create a scarcity 160 been summarized by a congressional report as follows: The Department of Commerce claims that the percentage of diversion (or dislocation), monthly is 3.23 percent. That is, only 3*23 percent of the total [ monthly allotments is diverted to users who may not j normally have received the steel to the extent j provided by the program. The freight-car program, the i tanker program and the armed forces program aceount fori the major part of this diversion. j Productionwise, the greatest concentration, accord- j ing to the QIC, is in the allocation of plates, with j structural shapes; hot-rolled bars; sheet and strip; i and pipe following that order. All these items, with the possible exception of structural shapes, are in very short supply for the manufacture of many items which do not benefit through allocation of steel, and in which the livelihood of many smaller manufacturers is involved.29 The effectiveness of this voluntary allocation scheme is to a large extent dependent on the cooperation on the part of the steel companies. The attitude of the steel companies on the whole was cooperative, especially during the later period of the program•30 The enlightened self- interest seems to require the steel companies to take this attitude. In short, when there is inflation or a threat of inflation, especially when it is accompanied by a national emergency, governmental intervention in the distribution 29 B. S. Senate, Special Committee to Study Problems of American Small Business, Steel Supply and Distribution Problems: Final Report. Pursuant to S. kes. 20; 30th Congress, Second Session (Washington, B. C.: Superintendent of Documents, 1949), p* 21. 30 Idem ! 161! | i iof steel is likely to take place. Governmental controls | in one form or other were in effect in those inflationary years under study. They were relaxed or discarded when the inflationary pressure was eased. Such intervention is invariably designed to replace market forces in channeling j |steel into a desired distribution pattern. ' ! Gray market. However, market forces are not easily submerged. The appearance of a gray market for steel is a case in point. The gray market is so named because it is not a black market, which is an illegal market existing underground and outside of an official market, and yet it is akin to a black market in that the prices are other than the publicly announced ones and the transaction is usually consummated in secret. The gray market for steel gained publicity in 1947 and 1946, when an all-out government allocation program was discarded. The shortage was g r e a t ,31 and yet the announced prices were not allowed to soar to the point sufficient to bring about a balance in demand and supply. Congressional hearings were staged to investigate this 31 The only available official estimate of the gap between steel supply and demand was at about 6,000,000 tons of finished steel as of the end of 1946. Cf. Steel Supply and Distribution Problems. op. cit., p. To, s i t u a t i o n ,^2 Statements were made to the effect that i i steel was selling on the gray market for several times I the mill price, and that in some areas, particularly in steel deficit and nonproductive areas, and for some steel users, the gray market supplied from a third up to £0 per cent of the steel p r o c u r e d .33 A gray or black market is not a necessary product of inflation. If there are no artificial forces to counter the market forces, free competition on the part of both the sellers and the buyers will bring about an increase in price high enough to equilibrate the opposing forces of supply and demand. If either the sellers or the buyers do not want to see this situation for any reason, a gray or black market is likely to take place in times of excessive demand. 32 U. S. House Committee on Public Works, Subcommittee to Investigate Questionable Trade Practices, Investigation of Questionable Trade Practices. Hearings (January 5 to lugust 10, i$48), Part 1. Position of the Steel Industry in Respect to Black Market~Operations (80th Congress, Second Session; Washington, D. C.: Superintendent of Documents, 1948), 528 pp.; U. S. Senate Select Committee on Small Business, Steel Gray Market. Hearings (before a Subcommittee, October 25-Deceraber 19, 1951) (82nd Congress, First Session; Washington, D. C.; Superintendent of Documents, 1952), 404 pp* 33 Ibid., p. 49; "Gray Market Seen as Large Factor to Certain Users.” Iron Age, 160:111-114, September 18, 1947* 163 In the case of the steel gray market, it was the steel producers who held back the price increase. More will be said about pricing policies of steel producers in a later chapter. Suffice to say here that the steel gray market existed because the steel producers were in a position to administer steel prices, and they refrained from charging a equilibrating price which would appear to be phenomenally high in times of inflation as a result of changes in the demand function. Selection of Customer Since steel prices are often prevented from functioning as a rationing agent in times of inflation, steel producers are in a position to select their customers on the basis of many considerations other- than the present prices. This is true to the extent that the distribution of steel is left to the discretion of the producers. Thus it has been a general practice in periods of shortage for the steel companies to notify users of the amount of steel the latter might expect to receive, in contrast to the situation wherein steel consumers let producers know how much tonnage they expect to order in times of abundant supply. Ownership link. It has been alleged that the steel companies, in exercising this strong bargaining position, discriminated against those users with whom they had no 164 ownership affiliation, A congressional study found that, as a result of favoritism shown by integrated steel companies over their own finishing mills, around 2,000,000 tons of finished steel is being lost to the country yearly because the semi-integrated i and the nonintegrated steel makers of the country are ! unable to obtain enough raw materials to operate their j mills at rates of capacity comparable with the industry as a whole.34 ! There is a, basic weakness in this reasoning. If \ the basic or semi-finished steel were distributed on an equal proportion to the capacity of all finishing mills, regardless of ownership, not a single ton of additional finished steel would be produced, provided other things are unchanged. This is because the loss of finished steel due to comparative surplus capacity of nonintegrated mills was due to inadequacy of steel ingot and semi-finished capacity. Nevertheless, if it is true that integrated steel mills have advantages over nonintegrated mills in times of inflation in the matter of receiving raw materials, then inflation tends to promote integration. However, integra tion may not take the form of merger. The semi-integrated 34 Steel Supply and Distribution Problems. o p . cit.. p. 38. 165 and the nonintegrated companies may establish their own ingot and semi-finishing facilities* Insofar as small steel companies seem to have expanded more than the larger i ones, and their financial positions were actually improved in the recent inflationary years, as will be shown in later chapters, no detrimental effects are apparent* ■ The same can be said about the ownership link of steel companies with steel warehouses and other steel- using industries, although evidence of preference being given affiliated companies was presented by another congressional study.35 Location factor. The selection of customers closer to the mill was noticed as early as 1946.^6 As this practice grew and the steel industry continued to concen trate in relatively small areas, the steel deficit and nonproducing areas suffered a lack of steel relative to producing areas* To the extent that this is true, industrial location is affected. This effect is most seriously felt in new industrial development* 35 Distribution of Steel Consumption, op. cit., pp. 6—11. 36 “Hew Pattern for Steel,” Business Week, pp. 15-16, June 8, 1946. 166 However, such an effect on industrial location is | rather a play of genuine economic forces* There is ' economy in locational proximity of markets, especially in those cases where freight costs are high. In shifting to neighborhood customers, steel companies mot only mean to j avoid freight costs, but also to build a more constant produc er-customer relationship. This is evidenced in the letter by Ben Moreell, president of Jones & Laughlin Steel Corporation, to Senator Edward Martin on Oct. 12, 1946, which was cited in a congressional study.37 the letter, Moreell explained why his company discontinued supplying steel to a distant customer and found a nearby customer for that tonnage. It was not only the freight cost, which was traditionally absorbed by steel companies under basing point pricing, but the prospect of a long-run reliable customer, especially in times of abundant supply, that prompted his company to take this step. Size of customers. It has also been found in a congressional study that steel distribution in times of shortage tends to favor large customers to the detriment of small ones.3^ Small customers have a weaker bargaining power than the larger ones. This difference becomes more 37 Steel Supply and Bistribution Problems, op. cit., pp. 10-11. I 36 Ibid.. pp. 24 and 52. 167 apparent when the supply is limited. But such a shift seemed to be not very pronounced in the steel industry for i this period. If the function of steel warehouses is to supply small customers, as is generally presumed,39 then the per cent of steel shipments that goes to warehouses may serve as an indication of this shift. In Table IX, the per cent of total domestic steel shipments to warehouses and distributors (exeluding oil and gas warehouses), though it varied between 16 to 18 per cent, shows no noticeable difference between the inflationary and non-inflationary years. All in all, the power of the steel companies to ! select customers on considerations other than price ! i arises from a shortage of supply relative to demand. Such j power is more obvious and more frequently exercised in the steel industry because the price function has not been fully relied upon. At any rate, this power is a result rather than a cause of the shortage. There may be inequities in the distribution of steel as a consequence of exercising this power. But the steel companies 39 G. A. Livesey, "The Steel Warehouse Distributor,” Harvard Business Review. 25:397-408, Spring 1947; A. L. Collins, ”Warehouse Distribution of Steel.” Journal of Marketing Supplement. 14:358-361, S ept emb er 1949. themselves merely followed the direction of economic forces insofar as they exercised this power properly, long as there is inflation, there will always be this power for the steel companies in the present social framework. j CHAPTER Y CAPITAL EXPANSION UNDER INFLATION IMCENTIfE TO INYEST \ One of the fundamental characteristics of inflation is the presence of an effective demand that exceeds the available supply* In the ease of steel, it was manifested in the general condition of scarcity and in the appearance of a black or gray market after World War II. The most beneficial remedy for such a condition is to increase production. Under such circumstances, however, steel production is usually close to its capacity. Consequently the only way to increase production is to increase the steel making capacity. The expansion of steel making capacity has been undertaken most actively in times of excessive demand in the history of the American steel industry, even though itsj capacity has risen steadily all the time. The largest additions to capacity on record so far have always been I made in the periods when steel production was straining existing capacity. Thus, the steel producing capacity of the United States was expanded by 16.5 million tons, or 36.7 per cent from January 1, 1914, to January 1, 1919; and by 11.4 million tons, or 13*5 per cent from January 1, 1941, to January 1, 1945; and by 26.4 million tons, or |26,6 per cent fro® January X, 1950, to January 1, 1955*^ The Need It is to be noted that the expansion of capacity fro® January 1, 1941, to January 1, 1945, was far below I the expansion during World War I and the rearmament period of the early 1950’s. In other words, the expansion of steel making capacity during World War II, impressive as it was, was insufficient in comparison with other war or preparedness periods. This being the case, there was a great need for steel making capacity to expand in the years following World War II. The necessity for a postwar expansion is further evident if one compares the increase of peak year production over a period of time with the increase in steel capacity over the same period. It has been found that in each of the first three decades from 1900 to 1930, the added capacity was about equal to the increase in production of peak years. In the decade of the 1940’s, however, production during peak years increased by 33 million tons, while corresponding additions to capacity 1 Calculated from American Iron and Steel Institute, Annual Statistical Report. 1955 (Hew York: American Iron and Steel Institute, 1956), p. 53; figures in Table XV, infra, are on a different basis for some years• 171 were only 17 million tons.2 Full employment implications. There are farther implications in the need for an expansion of the steel imaking capacity, beyond the satisfaction of the consumer iof products made of steel. Arguments have been advanced that steel making capacity should be adequate for a full employment economy.3 Since steel is a basic material of modern industry, the production activities of an economy rely on an adequate supply of steel. An inadequate supply of steel will hinder production activities, which should be constantly expanding in an economy wherein living standards are continuously improving and the population is steadily increasing. It seems obvious that there is a close 2 Gf . "Steel Expansion and Demand,* Survey of Current Business. 31-SjlG, August 1951. 3 There are many noted advocates for expanding the steel capacity as a measure to provide a favorable condition for full employment. Perhaps one of the most ardent economists is Louis H. Bean, Economist, U. S. Department of Agriculture. Gf . his Steel Requirements for Full Employment. (a memorandum to Senator James fe. Murray, April 1947); and "The Dependence of Industrial-Agricultural Prosperity on Steel Requirements for Full Employment,” (a statement before the steel subcommittee of the Senate Committee to Study Problems of American Small Business, June 19, 1947), in U. S. Senate Special Committee to Study Problems of American Small Business, Problems of American Small Business. Hearings, Pt. £, Steel Supply and Distribution Problems Affecting Smaller Manufacturers and Users: 7 (SOth Congress, 1st Session; Washington, D. G.: Government Printing Office, 1947), pp. 997-1013. correlation between steel production and total industrial j production and the gross national product if a study is made of the relevant statistics. It follows that the steel [making capacity must be expanded adequately in order to i | achieve full employment in an economy in which the popula- ! jtion is growing and the productivity is increasing. : This full employment argument for steel expansion carries more weight when a shortage of steel is felt, even though the argument itself is orientated from a fear of deflation and depression. Capacity operation. There are many indicators of a steel shortage, such as the presence of a steel gray market, an increase in steel order backlogs, or postponement of steel deliveries. But one particular indicator is most obvious and at the same time available. It is statistics on percentages of capacity operations. These figures are derived by dividing production by the rated capacity, on an annual basis. Theoretically, a 100 per cent of capacity operation is the absolute limit beyond which production can never go. But, rated capacity itself is not absolute, in that it is a concept allowing variations. Rated steel capacity is based on the previous performance during a full year of continuous operation of each group of furnaces. The capacity of a furnace is the 173 net tonnage which can be produced while the furnace is in continuous operation, less an allowance for the time | required periodically to reline or rebuild and for any * * other periods when the furnace is not available. Time j allowances vary.4 On the average, the rated steel capacity! of a furnace, a shop (a group of furnaces), a plant, a J firm, or the entire steel industry in the United States is arrived at by subtracting 12.5 per cent from the maximum production of the relevant unit under ideal conditions.5 The rated steel capacity so derived is therefore not an absolute limit, nor a definitive figure. It can be surpassed conceptually, and it has been surpassed in practice. More than 100 per cent of capacity operations have often been seen in monthly statistics for the steel industry since World War II, and 1951 recorded a 100.9 per cent of capacity operation for the entire year. Even though capacity, as a concept, is difficult to pinpoint and should perhaps be considered as a range, being dynamic in nature, a rated capacity, as established in the American steel industry, does represent the optimum 4 "Capacity Statistics — . Formulae,” Steel Facts. 113:6-7, April 1952. The article contains a formula for computing ingot capacity of a representative open hearth plant. 5 James A. Morris, "The Concept of Steel Capacity,” The Journal of Industrial Economics. III-l: 55f*, December 1954* 174 output attainable from a firm or the industry. Sustained i near capacity operations are definitely a sign of shortage i and indicate that additional capacity is needed. ! i <Statistics on steel operations for the years following j i World War II definitely suggest the need for expansion. j i Table XV shows that from 1946 to 1955 inclusive, the annual steel production was above 90 per cent of capacity every year, except in 1946, 1949, 1952 and 1954* The low percentage ©f capacity operation in 1946 and 1952 was caused solely by labor strikes, while in 1949 and 1954 it was perhaps more the result of recessive economic conditions in those years. Particularly indicative of a steel shortage is the 61.1 per cent of capacity operations in 1949, which was generally considered a recession year, and during which there was an industry wide strike lasting for four weeks. That level, 61.1 per cent of capacity operations, was surpassed only in 1926, 1926, and 1929 — the most prosperous years of the twenties — during the two decades between the two world wars, from 1919 to 1939 inclusive. General Attitudes The need for more steel may not prompt an expansion of steel making capacity. The steel companies may not view expansion favorably; or they may not have the financial resources for the expansion. The general 175 TABLE X? ; I STEEL CAPACITY, PRODUCTION, AND PER CENT OF OPERATIONS, 19ll*-1955 ' (ingots and Steel for Castings) Absolute figures in thousands of net tons YEAR CAPACITY ? OF PRODUCTION CAPAC ITY YEAR CAPACITY PRODUCTION % OF CAPAC ITY 191U 1*2,678 26,335 61.7 1936 78,161* 53,500 68.1* 1915 kk,k5k 36,009 81.0 1937 78,11*8 56,6 3 6 72.5 1938 80,186 31,752 39.6 1916 1*9,266 1*6,793 95.0 1939 81,829 52,799 61*.5 1917 53,911* 1*9,787 92.3 191*0 81,619 66,983 82.1 1918 57,083 1*9,010 85.9 1919 59,171* 38,099 61* J* 191*1 85,158* 82,839 97.3 1920 6 0 ,2 2 0 1*6,183 76.7 191*2 88,887* 86,032 96.8 191*3 90,589* 88,837 98.1 1921 61,928 21,639 3l*.9 191*1* 93,851** 89,61*2 95.5 1922 63,135 38,91*5 61.7 191*5 95,505 79,702 83.5 1923 63,383 1*9,017 77.3 1921* 61*, 137 1*1,1*1*6 6i*.6 191*6 91,891 66,603 72.5 1925 65,962 1*9,705 75.1* 191*7 91,21*1 81*, 8 91* 93.0 191*8 91*, 233 88,61*0 91*. 1 1926 62,925 52,902 81*.1 191*9 96,121 66,603 72.5 1927 65,31*1* 1*9,273 75.1* 1950 99,983* 96,836 96.9 1928 6 6 ,9 6 0 56,623 81*.6 1929 69,581* 61,71*2 88.7 1951 101*, 230 105,200 100.9 1930 71,01*2 1 * 1 * , 591 62.8 1952 108,588 93,168 85.8 1953 117,51*7 111,620 91*. 9 1931 75,328 28,607 38.0 1951* 121*, 330 88,312 71.0 1932 76,898 15,123 19.7 1955 125,838 117,036 93.0 1933 76,767 25,725 33.5 1931* 78,128 29,182 37.1* 1935 78,1*52 38,181* 1*8.7 Source: American Iron arid Steel Institute, Annual Statistical Report, 1955, PP. 51 and 53$ and Annual Statistical Report, p. * Average annual capacity as of January and July 1. 176 i attitudes toward this question hence have a great bearing , ( on the actual outcome. Early stage. Statements have been made by observers to the effect that inflating prices and costs created unprecedented incentives to expand productive j apparatus.6 In the case of the steel industry, rising costs under inflation were said to have spurred expansion during the late 1940*s.^ This is so because an expansion, either by building new plants or renovating old ones, will create more facilities with higher efficiency. However, if the men managing the steel companies think that an expansion at a particular time is infeasible or disadvantageous, they may choose to abandon or dismantle the inferior and inefficient facilities and to renovate the others in such a way that the total capacity is reduced instead of increased. The behavior of the steel companies in 1946 and 1947 seems to be a case in point. The total steel capacity of this country was reduced from 95,505,000 net tons in 1945 to 91,691,000 tons in 1946, and further to 91,241,000 in 1947. This reduction was 6 Gf. for example, Melchior Palyi, “Commitment to Prosperity/^ Commercial & Financial Chronicle. 171:2045f., May 16, 1950. 7 R. M. Bleiberg, “Steel Expansion Spurred by Need to Cut Cost,1 * Barron*s. 30:7-6, January 23, 1950. 177 done by abandoning over-aged, inefficient facilities i without adding new ones, or adding fewer new ones. ! The steel industry is one requiring heavy fixed t investment, as has been noted previously. Its fixed costs j are heavy. Its profitability is thus higher at higher operating levels within the limit of the efficient capacity. One way to maintain this condition is to refrain from expanding capacity; and the steel industry is in a position to do this, because of its oligopolistic structure.^ In view of their long-run interest, it is small wonder that the steel companies were very reluctant to expand at first, especially when they had had the very unpleasant experience of having a very low operating level the decade before. Another reason for the steel companies* reluctance to expand even in the face of inflationary demand is the super-conservative tradition of the steel industry under the leadership of the United States Steel Corporation. This was pointed out two decades ago by Fortune which was quoted at length in Industrial Price Policies and Economic $ Cf., Peter L. Bernstein, “Profit Theory — Where Do We Go From Here,“ Quarterly Journal of Economics. LXra-3:415, August 1953. I 17g ! Progress by Edwin G. Nourse and Horaee B. Drury.9 j i Fortune« a magazine in sympathy with management, said: The chief energies of the men who guided the [United States SteelU Corporation were directed to preventing deterioration in the investment value of the enormous properties confided to their care. To achieve this they consistently tried to freeze the steel industry at present, or, better yet, past levels. . . . the super conservative outlook of the Corporation has been contagious, and the steel masters have in matters of policy acted like bankers. ... The industry still suffers from the heritage of three decades of inertia . . . because their orientation is financial rather than industrial.10 Such a tradition of conservatism apparently had not ehanged in the late 1940*s. Before the Korean conflict began, spokesmen for the steel industry constantly expressed a fear of overexpansion. For instance, Walter S. Tower, then president of the American Iron and Steel Institute, forecast in 1944 that the demand for steel would be between 65 and 70 million tons of ingots in good years after the war.H He wrote: **It seems to be a foregone conclusion that no more steel capacity than 9 "U. S. Steel: The Corporation,1 * Fortune, March 1936; as quoted in Edwin G. Hourse and Horace B. Drury, Industrial Price Policies and Economic Progress (Washington, D. C.: the Brookings institution, 1938), pp. 148f., n.7. 10 Idem 11 American Iron and Steel Institute, Iron and Steel Year Book. 1944 (Hew York: American Iron and Steel Institute, 1944;, pp* 32f. _ . ( 179 | is now available will be required for the approaching j i transition from production for war to production for peace."^2 Speaking before the 55th general meeting of the American Iron and Steel Institute in 1947, Wilfred Sykes, then president of the Inland Steel Company, was reported to have concluded that in 1950 the peak consumption rate of steel would call for only 76,373,000 tons of steel, and I in 1955 it would be 73,464,000 tons, enough to support a i steel operating level of 84 per cent and 86 per cent of the 1947 capacity.13 The shortages of steel felt in those years were explained as a short-run situation and repeated predictions asserted they would end soon.l^ When the shortages were prolonged, they were said to be the consequence of underpricing.^*5 it is true that steel was underpriced in those years and this underpricing was 12 Idem 13 Steel Facts. 85:7, August 1947* 14 "Steel Easier to Get Soon," U. S. Mews & World Report. pp. 11-12, March 12, 1948; "Steel Shortage Seen Ended by 1949,” Steel. 121:46f., September 22, 1947* 15 Marvin Barloon, "The Question of Steel Capacity," Harvard Business Review. 27:236, March 1949* 180 responsible for the failure to attain an equilibrium between supply and. demand as demonstrated in Chapter IV, Nevertheless, underpricing cannot explain away the need for more steel in an inflationary period, i I The conservative outlook and the preoccupation with ! I overexpansion on the part of the management of the steel j companies did not change until the outbreak of the Korean conflict. As late as in the spring of 1950, spokesmen for the industry were talking about excess steel capacity.^ The "result of this pessimistic and conservative outlook was an unusually low rate of capacity growth from 1946 to 1950* The decline of 3*6 million tons in capacity from January 1, 1945 to January 1, 1946, was the largest in the history of the industry, surpassing the 1925-1926 decline of 3 million tons. The two-year continuous decline in 1946 and 1947 was matched only once before, that was in the depression decade of the thirties — 1936 and 1937* The gain of 8.2 per cent in capacity from January 1, 1946 to January 1, 1950, was far below the 12.9 per cent gain achieved in the five-year span of 1926-1930, and was also less than the 10 per cent gain in 1930-1934. After the summer of 1950. The reluctance to expand on the part of management was changed overnight when the 16 E. T. Weir, "Steel Capacity Surpasses Needs," Iron Age, I65tll4f. April 6, 1950. 181 : I Korean conflict broke out in the summer of 1950. A sense i i of national emergency was prevalent among the public. The j need for a much larger steel capacity had suppressed, if ■not overwhelmed, the fear of overexpansion. The j management of the steel companies had for some years j propounded their responsibility to the public and the ! steel workers, in addition to their traditional obligation to the investors. Confronted by such an emergency demand, they could not find any justification for failing to expand the steel capacity. Perhaps more effective in convincing the steel management to expand was the fact that their earlier belief of a coming depression was decredited by the events up to that date. Nineteen forty-nine turned out to be merely a less prosperous year, experiencing 81.1 per cent of capacity operations, which was higher than most prosperous years before World War II. The aetions of the labor unions and the policies of the government, particularly the federal government, seemed to point to a long-run inflation. Institutionalized inflation had emerged. In any event, the large-scale rearmament program was enough to render assurance of a sufficient demand for steel for some years to come. Facing the long-run prospect of inflation and the short-run demand of national emergency needs, the management of steel companies were 182 | apparently convinced that the best policy was to expand ! much faster than during the preceding period. How the attitudes of the management had changed at that time was clearly demonstrated in a tabulation of the j projections of steel capacity, as presented in Table XYI. j James Boyd, Director, Bureau of Mines, estimated in I April 1950 that it would take the steel industry 15 years to expand its capacity from 100 million to 117 million tons and his estimates were reportedly reaffirmed as late as October 1950 by Earl C. Smith, chief metallurgist of < the Republic Steel Corporation.17 The projection of Louis H. Bean, depicted as necessary for full employment, was criticized by leading company spokesmen as a fantastic exaggeration.!^ But his goal of 118 million tons for I960 was reached by the industry in 1953. H. S. Harrison’s figures of 125 million tons for 1970, which were estimated in March 1951, after a vast expansion program had been under way, was surpassed as of January 1, 1955. In short, the actual expansion program of the steel companies since the outbreak of the Korean conflict exceeded the most daring estimates. 17 As reported in Carl M. Loeb, Rhoades & Co., Steel (Mew York: Carl M. Loeb, Rhoades & Co., 1951), p. 20. 18 Ibid., p. 21. IB 3 TABLE 171 SOME PROJECTIONS OF STEEL CAPACITY millions of net ingot tons Boyd (a) Bean (b) Harrison (c) Actual (d) April 1950 May 1950 March 1951 Capacity 1951 100 102 — 10U 1952 101 10k — 109 1953 101 106 115 118 195U 101 108 — 12U 1955 102 110 126 1956 103 112 — — a» _ 1957 10U 111* — 1958 106 116 — -- I960 110 118 120 -- 1965 117 135 — -- 1970 125 — 125 -- 1980 — 130 _ _ (a) James Boyd, Director, U. S. Bureau of Mines. (b) Louis H. Bean, Economist, Department of Agriculture. (c) H. S. Harrison, Treasurer, Cleveland-Cliffs Iron Company. (d) Actual capacity as in supra, Table X7. Source: Carl M. Loeb, Rhoades & Co., Steel (1951), p. 20 Government policy♦ Following the end of World War II, the federal government adopted a non-interference policy as far as steel capacity expansion was concerned. The investment decision was left entirely to private parties. It was not until the outbreak of the Korean conflict that the federal government saw the need to encourage expansion of steel production capacity. It followed the precedent set during World War II when accelerated tax amortization on costs of defense facilities were allowed. Under the Revenue Act of 195© enacted on September i 23, 195©, which was incorporated in the Internal Revenue Code as its Section 124A, the corporations were permitted to charge off against their incomes, for corporate income tax purposes, over a period of five years all or a specified portion of the cost of a newly built or newly acquired facility which had been certified by proper authorities as necessary for defense. The Administrator of the Defense Production Administration was charged with the responsibility of issuing Certificates of Necessity and specifying the portion for amortization.19 Actually a certificate of necessity was granted for the dual purpose of aiding a concern to obtain 19 Executive Orders 10172 and 10200 185! construction materials and equipment, which were brought j under a priority control system, and aiding it to finance j j its defense project. In accomplishing the latter purpose I the process worked somewhat like this: The Internal Revenue Service normally allowed the original cost of a I f 1 facility to be charged against income over a period of 1 20 to 25 years, depending on the span of useful life of the facility. Under the new system, the original cost of a facility covered by the certificate of necessity was allowed to be charged off in 5 years. Thus, the ' uncertainty of usefulness of a facility in the future was removed as a factor deterring capacity expansion, and current high earnings could be used to finance the project j of expansion to the extent of the tax savings resulting from a smaller tax base than would otherwise exist. Opinions as to the effectiveness, costliness, and fairness of this tax amortization program differ.2® In the case of the steel industry under this particular inflationary period, John P. Miller’s analysis on this program seems to be of particular value. Miller said: Accelerated amortization is an especially useful device in an inflationary economy where prices are based on average costs for the industry or where direct price controls are imposed after substantial inflation of construction costs. Thus in such an 20 Robert Schlaifer and et al, “Accelerated Amortization,” Harvard Business Review. 29i124, May 1951* 186 industry as steel, where market prices are geared to the industry’s costs even in the absence of formal price control, it is difficult to attract new capacity in an inflationary economy since current construction ; costs are substantially in excess of the average costs j of existing capacity. Some special concession is I necessary under such conditions if there is to be an expansion of capacity and average cost pricing in the face of continuously rising construction costs.21 The new and expanded industrial facilities covered by the certificates of necessity between January 1, 1950 to June 22, 1955 (the program had its inception in October 1950 but it was made retroactive to the beginning of that year), amounted to 30.5 billion dollars.22 iron and steel industry had a larger share of the certificates than any other single industry.23 Most of the certificates granted to the iron and steel industry were for the expansion of basic steel making facilities and raw materials. It was reported that, as of October 1, 1952, necessity certificates had been issued for projects of the iron and steel companies costing §4*6 billion. Of that total, rapid amortization privileges were granted for 21 John Perry Miller, "Pricing Effects of Accelerated Amortization," Review of Economics and Statistics. 34s16, February 1952. 22 "Expansion of Industrial Defense Facilities in the United States: January 1, 1950 - June 22, 1955,” a release of Business and Defense Services Administration, U. S. Department of Commerce, dated October 1955, p. 1. 23 Of*, Steel Facts. 114:2, June 1952. 187 about #3.1 billion. About 73 per cent of the amount i I certified, or 7» per cent of the amount amortizable, was granted for steel making facilities and raw materials. About 27 per cent of the amount certified or 22 per cent of the amount amortizable was for the expansion of steel ! j finishing facilities.2^ The response of the steel industry to this I incentive was very favorable. The steel companies openly acknowledged this program to be most helpful in stimulating! expansion.2^ Some idea of the extent that this program stimulated steel capacity expansion may be seen in a table ; |compiled by Standard & Poor*s Corporation on capital outlays and amortization charges of several steel ■ 24 Gf-> Steel Facts. 118:2, February 1953* 25 For example, the United States Steel Corporation said in its Annual Report to Stockholders. 1954. p. 25: "The opportunity to recover capital expended on new facilities more quickly without eroding taxation produced a remarkable response. For example, business expenditures (excluding agricultural businesses) for plant and equipment totaled #83 billion during the four years, 1947-1950, which preceded the expansion made necessary by the Korean conflict. In the four following years (with the 1954 amount being partly estimated) the corresponding total was #107 billion — an increase of #24 billion. During the latter four years certificates of necessity covering approximately #30 billion were issued. By the end of 1954 actual expenditures on these certified projects approximated #22 billion. Expenditures on certified projects thus were almost the same as the increase in the four-year expenditures over the 1947-1950 total." 166 I companies. It is given here as Table XVII. It is to be noted that the table begins with 1944 and gives no figures | for accelerated amortization in 1945, when all steel j i companies were required to charge off all the remaining amortizable expenditures authorized during World War II. j i i These steel companies had a total plant outlay of j #6,050,000,000 from 1944 to 1954 inclusive, for a net gain of 23,267,000 net tons of ingot capacity. They had amortization charges amounting to $232 million in 1953 j |and $309 million in 1954* Their amortization charges will j I ' 1 i continue to be heavy until 1959. j 1 ' | Only a few steel companies have made public the ! total capital projects covered by the certificates of necessity. The United States Steel Corporation reported that its certified projects amounted to $777 million as of the end of 1 9 5 5 The Bethlehem Steel Corporation had approximately $557 million in the same period.^7 The Crucible Steel Company of America had $41 million of its completed capital expansion projects certified for the same period. 26 United States Steel Corporation, Annual Report. 1955* p. 5. 27 Bethlehem Steel Corporation, Annual Report. m i > p* 7. 26 Crucible Steel Company of America, Annual Report. 1955. p. 4. 189 TABLE XVII COMPARISONS OF PLANT EXPENDITURES AND OF ACCELERATED AMORTIZATION CHARGES Thousands of Dollars or Net Tons Company 19l*l*-51* Plant Outlays Amortization Chgd. in Chgd. in 1953 1951* 19l*i*-51* Net Incr. in Ingot Capacity Armco Steel 287,388 H*, 551 18,832 1,670 Bethlehem Steel 901,730 35,000 51*, 000 6,200 Col. Fuel & Iron li*8,53l* 1,962 1*,376 1,31*0 Crucible Steel 106,557 5,297 5,717 -95 Inland Steel 2ltf,0l*3* 8,597 9,901* 1,1*00 Jones & Laughlin 511,337 28,313 17,272® 1,11*2 National Steel Elk,050 11,990 17,500 2,100* Republic Steel 1*59,931* N. A* 21*, 766 1,882 U. S. Steel 2,535,317 105,100 11*2,778 6,350 Wheeling Steel 157,000 2,816 5,31*9 -100 Youngstown Sheet 281*, 896 18,1*27 26,202 1,398 6,01*9,780 232,053 309,1*21* 23,287 Since 191*6. < § For Federal income tax purpose only* Sources Standard & Poor1 s, Industry Surveyss Steel and Iron (Basic Analysis), June 23, 1955, p*17* 190 With this incentive, the steel companies launched an unprecedented expansion program* Thus, the steel ingot capacity increased by 25 per cent in the five years from 1950 to 1954, or by 27 per cent in the six years from 1950 to 1955• By contrast, there was only an 8.2 per cent gain in the five years from 1946 to 1950; and the capacity i increase for the whole decade between 1940 to 1950, which j i includes World War II, was only 22 per cent. j i ' j EXPANSION PROGRAMS j I I There are many ways to effectuate an expansion j i of steel capacity. To ascertain the specific expansion programs of the steel industry during the period under ! study, this section is devoted to an analysis of three pertinent questions: (1) What productive facilities in steel making were expanded? (2) Were these expansion programs effectuated by building new plants or enlarging the existing plants? (3) Which steel companies expanded and how they financed the expansion? Types of Facilities In periods of inflation, when demand is excessive, bottlenecks appear here and there along the line of a production process. If production Is to be expanded at all, the bottlenecks should be overcome first. It is, therefore, common sense that, during a period of expanding 191 j i demand, investment in the steel industry tends to j alternate between iron making, steel producing, and finishing facilities, overcoming bottlenecks and raising capacity. However, this statement does not imply that, at a given period, expansion always starts with iron making facilities, and then comes to steel smelting plants. The sequence usually starts with the bottlenecks. Thus, in the period under study, the steel companies expanded their finishing facilities first, and these more than | their steel furnaces. Their coke ovens and blast furnaces i * ! were expanded on a much lesser scale. This fact will be j ! I > I ; made clear in the next section. The present section is i ! ! concerned with the different types of steel making j facilities. Steel making facilities. There are four types of steel making facilities in this country, namely, open hearth furnaces, bessemer converters, electric furnaces, and crucibles. Steel made in crucibles has been declining from a long-run point of view, and the capacity of this type of facilities dropped to 20 net tons a year in 1946-1951# though it increased to 40 net tons in 1952. No change has been made since then.2^ xhe fact is that, in the midst of a great expansion program, this type of 29 American Iron and Steel Institute, Annual Statistical Report. 1955. p. 53- 192 steel making facilities not only has had no expansion since World War II, but has had a tremendous cutback as compared with an annual capacity of 3,BOO net tons maintained from 1942 to 1945*30 ( Bessemer converters, another type of steel making furnace, also showed a decrease in capacity during this period. As with crucibles, bessemer converters have been losing to open hearth and electric furnaces for several decades, as shown in Table XVIII. The capacity of bessemer converters lost 2B.3 per cent in the decade 1921-1930* while that of open hearth furnaces gained 32.3 i per cent and the overall steel making capacity increased by 14.7 per cent. In the decade 1931-1940, the capacity of bessemer converters went down by 34*5 per cent, in contrast to a 12.9 per cent gain in the capacity of open hearth furnaces and a B.4 per cent advance in overall steel making capacity. In the decade 1941-1950, the capacity of bessemer converters decreased by 21.9 per cent, while that of open hearth furnaces increased by 16.7 per cent and the overall capacity gain was 1B.1 per cent. From 1951 to 1956, bessemer converters lost 14.2 per cent of their capacity, while open hearth furnaces gained 23.4 per cent in capacity and the overall 30 Idem TABLE X V III ANNUAL STEEL CAPACITY BY TYPES OF FURNACES (Ingots and Steel for Castings) Thousands of Net Tons As of Jan. 1 Open Hearth Bessemer Electric Total* Capacity■ % of Total Capacity % of Total Capacity % of Total 1911* 28,6?8 67.1 13,695 32.1 078 0.2 1*2,678 191? 30,070 67.6 11*,027 31.6 101 0.2 1 * 1 * , 1 *5 1* 1916 32,853 66.7 15,922 32.3 217 0.1* 1*9,266 1917 1*0,011 7i*.2 13,220 2J*.5 1*18 0.8 53,911* 1918 1*3,000 75.3 13,282 23.3 596 1.0 57,083 1919 1*5,021 76.1 13,133 22.2 828 1.1* 59,171* 1920 1*5,756 76.0 13,329 22.1 909 1.5 60,220 1921 1*7,21*6 76.3 13,51*6 21.9 920 1.5 61,928 1922 1*7,638 75.5 11*, 386 22.8 896 1.1* 63,135 1923 1*8,973 77.3 13,378 21.1 828 1.3 63,383 1921* 1*9,779 77.6 13,220 20.6 938 1.5 61*, 137 192? 52,019 78.8 12,795 19.1* 970 1.5 65,962 1926 52,271 83.1 9,71*1 15.5 822 1.3 62,921* 1927 55,126 81*.3 9,315 H*.3 835 1.3 65,31*1* 1928 56,690 81*.7 9,331* 13.9 882 1.3 66,960 1929 59,150 85.0 9,51*0 13.7 861* 1.3 69,581* 1930 60,557 85.2 9,556 13.5 898 1.3 71,01*2 1931 65,325 86.7 9,038 12.0 935 1.3 75,328 1932 66,897 87.0 9,038 11.8 939 1.2 76,898 1933 66,976 87.3 8,81*2 11.5 926 1.2 76,767 1931* 68,222 87.1* 8,81*2 11.3 1,01*5 1.3 78,128 193? 68,51*1* 87.1* 8,81*2 11.3 1,053 1.3 78,1*52 1936 68,91*7 88.2 8,058 10.3 1,11*7 1.5 78,161* Continued on the next page TABLE X V III (Continued) ANNUAL STEEL CAPACITY BY TYPES OF FURNACES (ingots and Steel for Castings) Thousands of Net Tons A® Open Hearth Bessemer____ Electric_____ # Jan. 1 0apaCity % of Capacity % of Capacity % of Total Total Total 1937 67,726 89.2 7,081* 9.1 1,327 1.7 78,11*8 1938 71,1*72 89.1 7,213 9.0 1,1*91 1.9 80,186 1939 72,960 89.2 7,139 8.7 1,725 2.1 81,829 191*0 73,722 90.3 6,010 7.1* 1,883 2.3 81,619 191*1 71*,566 88.6 6,996 8.3 2,586 3.1 81*, 152 191*2 78,107 88.2 6,721 7.6 3,737 i*.2 88,570 191*3 79,181 87.7 6,553 7.3 i*,555 5.0 90,293 191*1* 82,221* 87.8 6,071* 6.5 5,351 5.7 93,652 191*5 81*, 17 2 88.1 5,871* 6.2 5,1*56 5.7 95,505 191*6 81,236 88.1* 5,151* 5.6 5,5oo 6.0 91,891 191*7 81,011 88.8 5,151* 5.6 5,076 5.6 91,21*1 191*8 83,611 88.8 5,226 5.5 5,397 5.7 91*, 233 191*9 81*, 817 88.2 5,191 5.1* 6,113 5.1* 96,121 1950 86,981* 87.5 5,537 5.6 6,871 6.9 99,392 1951 91,051* 87.1* 5,621 5.1* 7,555 7.2 101*, 230 1952 91*, 971* 87.5 5,381 5.0 8,233 7.5 108,588 1953 102,678 87.1* 1*,637 3.9 10,232 8.7 117,51*7 1951* 109,095 87.7 li , 787 3.9 10,1*1*9 8.1* 121*,330 1955 110,231* 87.6 1*,787 3.8 10,807 8.6 125,828 1956 112,317 87.5 1 *, 787 3.7 11,259 8.8 128,363 * Does not include capacity of long idle plants. Source: American Iro n and S te e l In s t it u t e , Annual S t a t is t ic a l Report , 1955, P« 53• 195 steel making capacity increased by 23.2 per cent. In other words, the decline in the steel making capacity of crucibles and bessemer converters was not stopped in the inflationary period under study, despite a | tremendous expansion in the total steel making capacity of i this country. Insofar as the total steel making capacity tends to increase more rapidly in inflationary period than otherwise, the capacity of bessemer converters as a percentage of the total steel making capacity tends to ! i i j i i decline faster during inflationary periods. It is true t - > that a sudden emergency need tends to increase the I relative capacity of bessemer converters temporarily, such j I ■ I as was seen in 1941 and 1950, because long idle facilities j • 1 I are likely to be reactivated, nevertheless, the newly built facilities constructed in response to the increased demand are likely to be more efficient types. In terms of tonnage capacity, open hearth furnaces have had the greatest increase, adding 31 million tons of capacity from 1946 to 1956 or 25 million tons from 1950 to 1956. But, as a percentage of the total steel making capacity, the capacity of open hearth furnaces has decreased since the end of World War II. In the recent three decades, the relative capacity of open hearth furnaces tended to gain in years when the total steel capacity increased very little or even decreased a little, 196 such as in 1936, 1937, 1940, 1946, and 1947* This observation points out that open hearth furnaces have not had the fastest growing rate among all types of steel making facilities, especially in times of rapid expansion of total steel capacity, even though they have constituted the bulk of steel capacity. Electric furnaces were the fastest growing type of steel furnace during the period under study, their annual capacity having increased from 5*5 million in 1946 to i ! 11*3 million in 1956. This is a growth rate of over 100 ! per cent in eleven years. The technological progress in ] 1 the construction and operation of an electrie furnace in i recent years is of course an important factor for this | phenomenal growth of electric furnaces. However, the persistent great demand for high alloy steels and high grade carbon steels in this inflationary period should also be recognized as an important contributing factor. In the absence of such demand, it is doubtful that the steel companies would ever launch a heavy construction schedule for electric furnaces, especially in a period of increasing construction costs. This is especially true in view of the fact that the steel making facilities of small steel companies are predominantly electric furnaces. In 1952, there were 86 steel ingot producers in this country, according to the American Iron and Steel 197 Institute. Among them, 60 companies owned and used electric furnaces, as compared with 39 in 193#. Of the 60 companies, 42 made steel exclusively in electric furnaces. Prior to World War II, 21 of the 74 steel ingot I producers were in this classification. In 1952, all five j of the companies newly added to the list of steel i i producers operated exclusively electric furnaces for producing steel. All five were relatively small in capacity.31 If the steel demand had not been so high and thus had not promoted high operating levels for i i electric furnaces, it is very doubtful that these five j |small companies would ever have erected electric furnaces j at that time of high construction costs. i Material capacity. - As steel capacity expands, more raw materials are needed. The steel companies, especially the fully integrated ones, have always been concerned with long-range development of raw materials, particularly iron ores. Discussions here, however, will be limited to the facilities directly associated with iron and steel making* Specifically, only coke and blast furnace capacities will be discussed. 31 Steel Facts. 121:S, August 1953. it shouldbe noted that electric furnaces, not only produce stainless and alloy steel ingots, but also high grade carbon steel. In fact, the electric furnaces have turned out more carbon steel than alloy steel every year since 1946. Idem 196 The total capacity of blast furnaces in the United States in 1955 was 64 million net tons, a gain of 69 per cent over the 1914 capacity of 49«7 million tons. In the meantime, the number of blast furnaces was reduced from 462 to 261 — a reduction of 44 per cent. But, the average annual capacity per furnace increased from 108,000 net tons to 322,000 net tons — an increase of 193 per cent.32 That is to say, the blast furnaces today are much larger and more efficient than those of forty years ago. However, much of the increase in the capacity came during the last fifteen years. The capacity of blast | furnaces was almost identical in 1921 and 1930. It showed ! a net decrease of 2.3 million tons from 1930 to 1940. It ! had increased 11.6 million tons from 1940 to 1945* A«3 million tons in the 1945-1950 period, and 12.4 million tons from 1950 to 1955• As shown in Table XIX, there has been a long-run decline in the ratio between the blast furnace capacity and steel capacity. This decline was reversed only in the 1940-1945 period. Since 1946, this decline has resumed its course, in spite of the increase in the capacity of blast furnaces. The explanation apparently lies in a greater expansion of the steel making 32 American Iron and Steel Institute, Charting Steel*s Progress. 1955 (New York: American Iron and Steel Institute, 1955), p. 17* I I TABLE XEX CAPACITY AND PRODUCTION OF / COKE OVENS, BLAST FURNACES, AND STEEL FURNACES Capacity and production in million net tons YEAR CAPACITY RATIO TO STEEL CAPACITY PRODUCTION OPERATING RATE Coke Blast Furn. Steel Coke Blast cofce Blast Furn. Furn. Steel Coke B^ - as%teel Furn. 1921 58.0 61.9 93.7 18.6 21.6 32.1 31*.9 1922 58.8 63.1 93.2 30.3 38.9 51.6 61.7 1923 59.0 63 . 1 * 93.1 1*5.0 1*9.0 76.3 77.3 19 2U 59.0 6U.1 92.0 35.0 1*1.1* 59.3 6U.6 192$ 59.8 66.0 90.6 1*0.9 1*9.7 68.1* 75.1* 1926 57.3 62.9 91.1 1*3.9 52.9 76.6 81*.1 192? 58.7 65.3 89.9 1*0.7 1*9.3 69.1* 75.1* 1928 56.6 67.0 8U.5 1*2.5 56.6 75.2 8i*.6 1929 57.1* 69*6 82.5 1*7.5 61.7 82.8 88.7 1930 58.0 71.0 81.7 35.3 1 * 1 * . 6 61.1 62.8 1931 59.0 75.3 78.1* 20.5 28.6 3l*.7 38.0 1932 58.0 76.9 75.1* 9.7 15.1 16.8 19.7 1933 56.5 76.8 73.6 H*.8 25.7 26.2 33.5 193U 57.2 78.1 73.2 17.9 29.2 31.3 37.1* 1935 57.1 78.5 72.7 23.7 38.2 1*1.5 1*8.7 1936 55.8 78.2 71.1* 3i*.5 53.5 61.7 68.1* 1937 55.6 78.1 71.2 1*1.2 56.6 7l*.l 72.5 1938 56.8 80.2 70.8 21.2 31.8 37.3 39.6 1939 56.3 81.8 68.8 35.1* 52.8 62.8 61*.5 19itO 55.7 81.6 68.3 1*7.0 67.0 81*.3 82.1 191*1 57.8 85.2 67.8 56.1 82.8 97.1 97.3 191*2 51*.5 6o.6 88.9 61.3 68.2 60.1 86.0 99.2 96.8 19l*3 57.5 61*. 2 90.6 63.5 70.9 61.9 88.8 96.5 98.1 19 ii ii 59.9 67.9 93.9 63.8 72.3 62.1 89.6 91.1* 95.5 191*5 60.9 67.3 95.5 63.8 70.5 5i*.2 79.7 80.5 83.5 Continued in next page 200 TABLE XIX (Continued) YEAR CAPACITY RATIO TO STEEL CAPACITY PRODUCTION OPERATING RATE Coke Blast steel Coke Blast Coke Blast steel coke Blastgteel Furn, Furn. Furn. Furn,I 19h6 60.1* 67.3 91.9 65.7 73.2 iiit.5 1*5.5 66.6 73.7 67.6 72.5 19i*7 60,3 65.7 91.2 66.1 72.0 57.3 59.3 81*.9 95.1 90.3 93.0 191*8 62.5 67.1* 91 *.2 66.3 71.5 59.3 61.0 88.6 91 *.8 90.5 9l*.l 191*9 6l*,9 70.5 96.1 67.5 73.1* 51.0 51**2 78.0 78.5 76.8 81.1 1950 65.5 71.6 100.0 65.5 71.6 57.9 65.1* 96.8 88.5 91.1* 96.9 1951 66.3 72.5 10l *.2 63.6 69.6 62.9 71.2 105.2 9l*.9 98.3 100.9 1952 67.1 73.8 108.6 61.8 68.0 55.2 62.2 93.2 82.3 81*.2 85.8 1953 71.2 79.1* 117.5 60.6 67.6 65.8 75.9 1 1 1 .6 92.1* 95.6 91**9 1951* 73.2 82.0 12l*.3 58.9 66.0 52.8 58.7 88.3 72.1 71.6 71.0 1955 72.7 81*.0 125.8 57.8 66.8 65.3 77.8 117.0 91.6 92.6 93.0 Source: American Iron and Steel Institute, Annual Statistical Report, 1955, pp. 3$, hi, and 535 1914-6, p. 11*; I$l*2, p. 10, I 201 capacity. There are indications that the capacity of blast furnaces varies within a much lesser range than steel ' capacity. Thus, when steel capacity suddenly dropped, or increased at a slower, pace, the ratio between the blast furnace capacity and the steel capacity tended to increase, and vice versa. The 1940-1945 trend seemed to j be an exception, because of the scarcity of scrap during J J the war. ! i i The operating rate of blast furnaces was in general{ much lower than the operating rate of steel furnaces in i the earlier years covered by the tabulation. It was not i until the later thirties that the operating rates of blast | i and steel furnaces approached each other. The proximity f of these two operating rates indicates that the capacity ratio of blast and steel furnaces were approaching an optimal level. The same thing may be said about the capacity of coke ovens owned and operated by steel companies. The expansion of coke capacity in the 1950*s up to the present has been less rapid than the expansion of steel capacity. This is a reverse of the 1942-1949 trend. Finishing facilities. There are no statistics available on the finishing capacity of the steel companies. Table XX shows that shipments of semi-finished 202 steel products as a percentage of total steel shipments declined sharply after World War II as compared with during the war. In view of the fact that ingot capacity of the steel industry has increased tremendously since 1946 and the per cent of steel shipments in the semi-finished category has not increased at all, it is perhaps safe to assume that the finishing facilities of the steel companies has expanded proportionally along with the ingot capacity. Moreover, there are signs showing a greater increase in the finishing capacity than in the ingot capacity prior to 1951. Steel Facts reported in June 1953: The ability of the steel industry to produce finished steel mill products has nearly doubled in the past three decades — a substantially more rapid growth than in ingot capacity which has been - increased 78 per cent. ... The near doubling of the effective capacity to produce steel products took place mainly in flat rolled products (plates, sheets, and similar items). This is shown by the fact that out of an increase of 45 million tons in the output of all hot rolled products from 1923 to 1951, 31 million tons were in hot flat rolled.33 Earlier, Steel Facts presented a table on changes in the finishing capacities for different products in the three years 194&-1951. The table is given here as Table XXI. According to the table, the expansion and improvement programs of the steel companies in those 33 Steel Facts, 120:1, June 1953- 2 0 3 i I TABLE XX SHIPMENTS OF SIMI-F1NISHED STEEL PRODUCTS AS A PER CENT OF THE TOTAL DOMESTIC STEEL SHIPMENTS, 191*3-1955 YEAR % OF TOTAL SHIPMENTS 191*3 11.8 19 i * l * 11.8 191*5 10.9 191*6 5.9 191*7 6.1 . 191*8 5.8 191*9 5.1 1950 5.6 1951 5.8 1952 6.1* 1953 5.5 1951* 1**3 1955 5.6 Source: American Iro n and S te e l In s t it u t e , Annual S t a t is t ic a l R ep ort, 1955j pp. 8 6 f. 204 I i three years up to the beginning of 1951 increased their j total hot rolled sheet and strip capacity almost 30 per cent, their cold rolled sheet and strip capacity more than 23 per cent and their electolytic tin plate capacity 49 per cent. Those increases were said to reflect the heavy demand for consumer goods in 194&, 1949, and 1950.3** At the same time, the capacities for other finished steel products were increased, including a 12 per cent gain in j the capacity for making heavy structural shapes and j piling. Only the capacity for hot rolled bars showed a decline. However, expansion of finishing steel capacity has had a lesser encouragement from the federal government I than the expansion of basic steel capacity. About three fourths of the amount covered by the certificates of necessity were for steel making facilities and raw materials. Only one fourth of it was for “rounding out“ the steel industry’s finishing capacity.35 fhe expansion of finishing steel capacity was for the most part carried out by the steel companies in the hope of earning a greater profit margin. It is common knowledge that the more highly finished forms of steel yield a better return 34 Steel Facts. 109:3, August 1951. 35 Steel Facts. 11£:2, February 1953 TABLE XXI CHANGES IN THE STEEL FINISHING CAPACITIES 191 *8-1951 Rolled Products Capacity — net tons 191*8 1951 Hot Rolled Sheets & Strij^ 26,589,1*60 31*, 1*9 2, 310 Cold Rolled Sheets & Strip 11,1*13,785 11*, 321*, 170 pipe and Tubing 8,778,720 12,576,170 Heavy Structural Shapes & Piling 5,1*81*, 330 6,137,1*50 Plates 7,865,700 8,260,580 Tin and Terne Plates^ 5,890,250 6,1*53,31*0 Hot Rolled Bars® 12,008,260 11,977,810 Wire Rods 6,195,170 6,360,350 # Includes strip for cold reduced black plate, tin plate. Electrolytic and hot dipped, © Not including concrete reinforcement bars. Source: Steel Facts, 109:3, August 1951, 206 1 i to the steel companies* When there is a heavy demand for steel products, there is an opportunity for the steel companies to expand their finishing capacity. The steel companies capitalized on this opportunity not only to expand their normal finishing facilities, but also to go further into the fabricating business. It was reported that the steel industry increased its capacity of finished hot rolled products from B4 million tons a year in 1951 to 96.6 million tons in 1954, a gain of 15 per cent in three years, as against an i increase of 19 per cent in ingot c a p a c i t y .36 Table XXII shows that the increase in the finishing capacity has been !continuous and great. The increase in 1951-1954 was just ; i i as impressive as that in 1946-1951• The capacity increase of hot rolled sheet and strip steel was 26 per cent in 1951-1954 as against 29.7 per cent in 1946-1951. But, the capacity of cold rolled sheet and strip steel was increased by 42 per cent as compared with 25*5 per cent in the earlier three-year period. The capacity of tin and terne plate increased by 12 per cent in 1951-1954 and 9.6 per cent in 1946-1951. The capacity of hot rolled bars decreased a little in 1946-1951, while it registered a gain of IB per cent in 1951-1954. 36 Steel Facts. 127:1, August 1954. TABLE XXII INCREASES IN THE STEEL FINISHING CAPACITIES 191*8-1951 S c 1951-1951* In per cent of increase Rolled Products 191*8-1951 1951-1951* . ............... . ... 1 Hot Rolled Sheet & Strip 29.7 26 Cold Rolled Sheet & Strip 29.7 1 * 2 Tin and Teme Plate 9.6 12 : Hot Rolled Bars —0.3 18 Cold Finished Bars N. A. 27 Pipe and Tubing 1*3.2 1 1 * Wire Rod 2.7 10 Source: Steel Facts, 127:1, August 1951*; Steel Facts, 109:3* August 1951* 206 It has been a common practice in the steel industry in recent years to build a new fully integrated steel mill with its finishing capacity far in excess of its ingot j " capacity. The Fairless Works of the United States Steel Corporation is said to have about 50 per cent more rolling than ingot capacity,37 jn fact, one of the reasons that i only a small percentage of the amount covered by the J l certificates of necessity granted to the iron and steel j industry was for finishing facilities was that, as a report of the Defense Production Administration put it, steel finishing capacity had always exceeded raw steel ! capacity.^ i ! Another reason was that the steel industry1s rolling and finishing capacity was found to be "extremely flexible."39 That is to say, one type of finishing facility may produce several different products. According to statistics of the American Iron and Steel Institute, around 49 per cent of all the plates made for all purposes during World War II came from continuous sheet and strip mills.Flexibility has been kept in 37 Richard Austin Smith, "Bethlehem Steel and the Intruder," Fortune, p. 196, March 1953* 38 As cited in Steel Facts. 116:2, February 1953* 39 Idem 40 Idem 209 j the newly built or enlarged and improved steel rolling j facilities in recent years.^- i In short, the steel companies have regarded expansion of finishing capacities with a more favorable view. They have considered that it is desirable to maintain some reserve capacity to meet market growth and allow for fluctuations in demand for different steel products. By contrast, they have been very hesitant to expand the basic steel capacity and the related facilities, because their operating costs and construction costs have been pushed up in an inflation period. This i I hesitation was removed only when they were given tax j j concessions by the government by way of an accelerated ^ I amortization program. When a large-scale expansion program was decided upon, they tried to build the most efficient type of furnace feasible, while at the same time they developed the necessary raw material supply. Hew Plant and Intra-Plant Expansion Expansion may be achieved through erecting new plants or modernizing and enlarging the existing plants. There are advantages in either of these approaches; and the steel industry seems to have utilized both during the 41 Steel Facts. 127:1, August 1954 ; 210 I j period under study. This section is to give some detailed account of the factors that prompted the steel industry to build new plants or to enlarge the existing ones. Construction costs. One of the deterring forces working against expansion during inflation is the soaring cost of construction. High construction costs impose a heavy requirement for funds and a high overhead cost if new plants are to be built. How construction costs have increased since World War II is shown in Table XXIII. The rise of the index of construction costs has been much greater than that of the inflation index, regardless of whether one uses the Engineering News Record index or the U. S. Department of Commerce composite index. Construction costs of the steel industry’s facilities have increased just as much as general construction costs. Many estimates of the cost of a new steel plant were made during 1950-1952, when the great expansion in steel capacity was initiated. The ! estimates of the cost of a new fully integrated steel plant ranged from #200 to #300 per ton of ingot, depending | on whether raw material resources were included and the kind of finishing facilities used. Charles F. Ramseyer, ! a consulting engineer for the steel industry, estimated | i costs at about #250 per ton of ingot capacity for a new j integrated steel plant when appearing before congressional j 2X1 hearings in April 1950.^2 He gave a detailed estimate as follows: Cost per ton of Steel Ingot Capacity Coke ovens and blast furnaces # 50 — # 60 Steel furnaces 25 — 30 General plant facilities 50 — 60 Rolling mills and other finishing facilities 100 — 125 $225 ~ $2W By contrast, the cost of an integrated steel plant in the late thirties was reported to be $75 to $125 per ingot ton.^3 it was also estimated that, as of 1952, the cost of items needed in a new steel plant increased from 73 per cent to 153 per cent as compared with the 1936-1939 cost for the items. The percentage increases for these items are given in Table XXI?. j High construction costs necessitate a large sum of investment funds and bring about a heavy overhead charge, and thus constitute a deterring force working against expansion. It was reported in 1952 that a steel company had to spend $33 million to build an open hearth plant of 42 U* S. Congress, House, Committee on the Judiciary, Subcommittee on the Study of Monopoly Power, The Iron and Steel Industry. Report (81st Congress, 2nd Session; Washington, D. C.: Government Printing Office, 1950), p. 47. 43 Loeb. op. cit.. p. 22: Steel Facts. 114:8, June 1952. TABLE XXIII INDEXES OF CONSTRUCTION COST AND INFLATION, 1930-1951* YEAR ENGINEERING NEWS RECORD, GENERAL*. CONSTRUCTION COST INDEX 1939 = 100 U. S. DEPARTMENT OF COMMERCE COMPOSITE CONSTRUCTION COST INDEX 191*7-1*9 S 100 INFLATION INDEX 1935-39 = 100 1930 85.5 50.1 113.3 1931 75.8 99.6 1932 66.1* 88.9 1933 73.3 87.1 193k 81*.3 9k»k 1935 83.1* U6.6 9 8.7 1936 88.3 99.7 1937 100.3 101*. 9 1938 99.8 99.2 1939 100.0 97.5 191*0 102.7 50.1 98.9 191*1 109.1* 106.9 191*2 117.6 119.6 191*3 123.1 125.9 1 9 1 * 1 * 126.8 127.1* 191*5 130.6 66.7 130.0 191*6 11*6.9 1 1 * 1 * . 9 191*7 175.1* 171.9 191*8 195.6 185.7 191*9 202.5 179.9 1950 216.2 106.5 181*.!* 1951 230.5 115.5 202.5 1952 21*1.6 119.2 201.1* 1953 25U.6 122.0 200.8 1951* 266.7 121.6 201.2 Source: Statistical Abstract of the United States, 1956, p. 760f. TABLE XXIV CD ST OF CONSTRUCTION ITEMS OF A STEEL PLANT IN 1952 AS PER CENT OF 1936-1939 AVERAGE Blast Furnace 20U Open Hearth Furnace 191 Hot StripHSheet Mill 196 Cold Strip-Sheet Mill 198 Bar Mill 196 Rod Mill 202 Pipe Mill 253 Tube Mill 220 50-JTon Crane 208 75GO H. P. Motor 173 Other Construction 221 Source: Steel Facts, 120:2, June 1953 214 1.2 million tons annual capacity, while it spent only a i little over #9 million for an older plant of the same capacity at the same location, built in four main sections from 191B to 1943.^ This deterring force has been strengthened by the federal corporate income tax provisions which allow depreciation charges on an original cost basis only, and the low valuation of steel stock by the general investing public. Depreciation based on the original cost, which is several times lower than the current replacement costs, would not be sufficient for replacement needs and thus a portion of the net earnings must be appropriated to fill the gap. Moreover, the net earnings after taxes are reduced by the extent of the tax base increase as a result of original cost depreciation rather than current replacement cost depreciation. As to outside sources of funds, it has been repeatedly stated by spokesmen of the steel companies that it is simply unsound to raise equity capital, say at #50 per ton capacity, which is even below the book value, say #77 per ton, to build steel plants 44 Steel Facts. 114:3, June 1952; Steel Facts. 113:3, February 1953. 2151 | at #250 per ton capacity.45 A prime example of high construction costs as a . deterring factor to expansion is found in the proposed New England steel mill. The New England Steel Development Corp., organized by the New England Council, was planning to build an integrated steel mill at New London, Connecticut, in 1950. The Bethlehem Steel Corporation had the same idea earlier and was interested in owning and operating the new mill. However, the plan was abandoned after a careful economic study. The market potential was found to be narrow. But the more important ! i reason was that the return on investment would be too low j as a result of high construction costs, which were estimated at #215 per ton of capacity in early 1951*46 Intra-plant expansion. Since there is need for more steel capacity and yet the cost of new steel plants is so high under inflation, many steel companies consequently have been induced to find opportunities for capacity expansion at existing plants. Intra-plant expansion is much cheaper than building new steel mills. 45 Cf• for example, an interview with Ernest T. Weir, Chairman of the Board of Directors, the National Steel Corporation, in U. S. News & World Report. pp. 61-62, September 10, 1^54 • 46 Steel Facts. 114:6, June 1952; Richard A. Smith, op. cit.. pp. 193ff. 216 It has been stated that expansion within existing mills I would cut the cost by one half as compared with building : new mills.47 A very illuminating example is found in the j expansion achieved by the Bethlehem Steel Corporation* The Bethlehem Steel Corporation added 7*1 million tons to its ingot capacity from January 1, 1946, to January 1, 1956, with total expenditures of $923*4 million, representing $131 per ton of capacity* Much of this expansion took place within its existing plants If the expansion had been achieved through building new plants, the total cost would have been more than $1,775,000,000 at $250 per ton as generally estimated in 1950-1951, without taking into account the advance of construction costs since then* How this cost saving was realized may be seen in the individual cases of the Bethlehem Steel Corporation: At Steelton (steel capacity January, 1946: 740,000 tons; January, 1954; 1,300,000), potential output was doubled mainly by adding one open hearth* At Lackawana (from 3,120,000 to 5,000,000) capacity was boosted 30 per cent before any furnaces had to be built.49 47 Richard A. Smith, pp. cit., p. 103« 43 Bethlehem Steel Corporation, Annual Report, 1955. pp* l6f. and 6f* 49 Richard A. Smith, pp. cit., p* 104« 217 1 l Moreover, intra-plant expansion offers an j opportunity to modernize the entire plant, bringing down the operating cost considerably* For instance, at the Bethlehem plant of the Bethlehem Steel Corporation, the ingot capacity was raised from 3,120,000 to 5,000,000 tons in the 1946-1954 period* At the same time two new blast furnaces were built to produce more than double the tonnage of the old ones, but with the same number of men* A modernized blooming mill in another plant was built so the rolls, which are changed as frequently as once a day, could be replaced in twenty minutes instead of three to four hours*50 A balance. It should be noted, however, that there ! are advantages in building a new plant* For one thing, a new plant can be built in a new area to serve the formerly distant market, such as those new plants built in western states* It can be built also to take advantage of low-cost water transportation for utilizing newly developed iron ores, as in the case of the Fairless Works of the United States Steel Corporation, which was built at Morrisville, Pennsylvania* Savings in freight charges are a big item in the steel business* Moreover, a new plant will have an operating cost just as low as, if not lower than, a 50 Idem 21S i modernized old plant•51 The actual decision on expansion is vested with the management of the steel companies. As the circumstances varied from one company to another, so varied the expansion program. This can be seen from the estimated expenditures per ton of new ingot capacity for seven leading integrated steel companies in the 1951-1952 phase of expansion: U. S. Steel, #270; Armco, #250; Republic, #213; Jones and Laughlin, #12&; National, #120; Bethlehem, #115; and Youngstown, #105.52 The high cost for U. S. Steel, Armco, and Republic, reflected heavy outlays for j new plant and new sources of iron ore. The low cost of the others refleeted their expansion programs mainly j through additions and improvements to their existing plants. j In the steel industry as a whole, the expansion program before the Korean conflict was for the most part achieved through modernization and enlargement of existing plants. After the outbreak of the Korean conflict, the expansion program of the steel industry relied more 51 For instance, it was reported that the new capacity of the United States Steel Corporation, like the Fairless Works, was expected to earn twice as much as the old. Cf. Ibid.. p. 201. 52 Loeb, op. cit*. p. 23. 219 heavily on building new plants. It was reported that the 1950 increase of ingot capacity was largely by way of intra-plant expansion, and therefore the cost was only #106 per ton.53 The number of companies producing steel ingot increased to 76 from 1939 to 1951* a net gain of three, while it reached 85 in 1954* a net gain of nine in three years.54 The number of plants making steel ingots was increased from 128 in 1939 to 143 in 1953, according to the American Iron and Steel Institute.55 Investment It seems that the tremendous expansion of the steel industry during the period under study was carried out not by just a few companies, but by all the companies in the industry. In fact, the number of steel companies listed by the American Iron and Steel Institute recorded a net increase of 12 from 1939 to 1954* as has been noted. It was reported that the 1953 list of the Institute contained more than two dozen new steel ingot producers which were not listed as such in 1939* Some of these companies were newcomers to the steel industry. Others had installed steel making furnaces in addition to their 53 Idem 54 Steel Facts. 127:2, August 1954* 55 Steel Facts. 119:2, April 1953* 220 i ! traditional steel processing operations.56 j Steel companies. A congressional study was made i in 1950 on the market structure of the steel industry. It found that other steel companies had expanded more j than the ten largest integrated companies from 193# to 1949* According to the tabulations produced by this congressional study from statistics compiled by the American Iron and Steel Institute, as given in Table XXV here, the ten leading steel companies had expanded their steel making capacity by 13.8 per cent from 193$ to 1949, j while all other steel makers had had a 35*2 per cent | expansion during the same period. Moreover, from 1945 to 1949, the ten leading companies experienced a 2.5 per cent decrease in steel making capacity in sharp contrast to a 15*9 per cent gain registered by all other steel makers. The smaller companies had also expanded their coke capacities more than the ten leading concerns. As a result, the combined steel making capacity of the ten leading companies, as a percentage of the total for the industry, declined from 82.8 per cent in 193& to 8O.3 per cent in 1949- This decline actually took place from 1945 to 1949. An analysis of the 1939 and 1953 steel capacity 56 Steel Facts. 119:1, April 1953. 221 i I TABLE XXV CAPACITIES OF STEEL COMPANIES BY GROUPS ACCORDING TO SIZE i 1938, 191*5, 191*7, and 19l*9 INDUSTRY GROUP COKE PIG IRON INGOTS & CASTINGS RATED CAPACITY COKE OVENS % RATED % RATED % INCREASE CAPACITY INCREASE CAPACITY INCREASE TOTAL 1938 19l*5 BLAST 1938 191*5 STEEL 1938 191*5 191*9 191*9 FURNACES 191*9 191*9 MAKING 191*9 191*9 All Companies 1938 51,857 25.2 - 57,368 23.0 mm 81,811* 17.7 - 100.0 19i*5 60,856 - 6.7 67,313 - 1 * . 8 95,505 - 0.6 100.0 19i*7 60,281 - 65,709 - mm 91,21*1 - 100.0 19h9 61*, 919 - 70,51*2 - - 96,121 _ 100.0 Ten Largest Integrated Companies* 1938 1 * 1,708 25.1 - 1*8,557 23-6 m m 67,788 13.8 - 82.8 19l*5 1*9,583 - 5.2 57,683 - l*.o 79,108 - -2.5 82.9 19U7 1*8,61*2 mm mm 56,557 - - 73,81*2 mm mm 80.9 19U9 52,190 — — 60,001 - - 77,127 m m mm 80.3 A H Other 1938 10,11*9 25.5 - 8,811 19.6 m m 11*,026 35.2 - 17.2 191*5 11,273 - 29.3 9,631 - 9.2 16,397 - 15.9 17.1 191*7 11,639 - - 9,535 M - 17,399 - - 19.1 191*9 12,728 * *“ 10,51 * 0 mm •N 18,991* a* mm 19.7 * U. S. Steel Corp., Bethlehem Steel Corp., Republic Steel Corp., Jones & Laughlin Steel Corp., National Steel Corp., Youngstown Sheet and Tube Co., Armco Steel Corp., Inland Steel Co., Wheeling : Steel Corp., and Colorado Fuel and Iron.Corp.,- @ Included integrated companies, semi-integrated companies, and merchant pig iron producers. Sources U. S. Senate, Special Committee to Study Problems of American Small Business, Steel Supply and Distribution Problems. Final Report; 81st Congress, ist Session. Pp. 78f. 222 lists of the American Iron and Steel Institute reveals i I the same trend* The share of the United States Steel Corporation — the largest in the United States and in the World — in the national capacity declined from 35*3 per cent in 1939 to 31*0 in 1953* The eleven largest steel companies in 1939 — those capable of making more than 1,000,000 tons of steel a year — increased their combined capacity about 40 per cent during this period. In the same length of time the capacity of all other steel companies grew nearly 66 per cent. Twenty-three smaller steel companies, which were in business in both 1939 and 1953 and which had a combined capacity of around 670,000 tons in 1939* had increased their combined capacity about 51 per cent during tbis 14-year interval.57 Judging from these data, the steel industry during this inflationary period had become more competitive in the sense that it had emerged with more firms, and its smaller members had increased their share at the expense of the larger ones. Total expenditures. The capital expenditures of the steel companies, as may be expected, have been high during the period under study. Table XXVI shows that the average capital expenditure of the twenty-one companies 57 Idem 223 j was 9*6 per cent of gross plant value from 1946 to 1954, with the low at 6.1 per cent recorded by the Colorado Fuel ; and Iron Corporation and the high at 19.S attained by the Granite City Steel Corporation. The ratio of capital j expenditure to gross plant value is indicative of the efficiency of the plant. The higher the ratio, the more efficient the plant, because the ratio indicates the proportion of the plant which is newly built or installed. It is, therefore, logical to infer that a high percentage of capital expenditure in relation to gross plant value means a relatively new and efficient plant. The same conclusion can be drawn if one compares the total net worth of the steel industry at the beginning and the end of the time interval. It was reported that the iron and steel industry had a total investment of #S.7 billion in 1954* The corresponding figure was $4*7 billion in 1947*5^ In other words, nearly one half of the total investment of the iron and steel industry was newly invested between 1947 and 1954* Moreover, this comparison reflects only part of the new plant and equipment erected and installed by the industry during the time interval, because it does not take into account the depreciation of both old and new facilities. Charting Steel1s Progress, op. cit.. p. 11. 2 2 4 TABLE XXVI CAPITAL EXPENDITURES OF THE STEEL COMPANIES AS PER CENT OF GROSS PLANT, 1946-1954** COMPANIES 1946 1947 1948 1949 1950 1951 1952 1953 1954 Average Armco Bethlehem Col* Fuel & Iron Crucible Granite City Inland Jones & Laughlin National® Pittsburgh Republic Sharon U. S« Steel Wheeling Acme** Alleg. Ludlum Carpenter Continental Gopperweld Keystone Superior Average 8.7 13.6 9.3 6.8 10.1 8.2 3.4 3.9 5.5 6.4 14.0 18.5 13.2 14.9 2.7 10.6 7.0 12.2 6.1 9.5 12.2 11.5 10.5 1.7 7.2 4.9 11.2 7.9 7.8 6.0 9.3 20.0 7.6 6.2 6.0 8.3 26.3 7.6 9.4 9.0 ll.l 14.4 13.7 7.5 7.1 5.6 6.9 7.4 9.7 7.7 4.7 7.0 3.4 5.8 11.8 9.3 4.5 6.5 3.2 12.1 15.0 5.1 4.2 7.6 12.5 42.3 38.6 20.7 25.9 8.7 6.6 10.6 8.5 6.2 7.0 9.9 9.2 23.8 12.6 5.9 4.0 7.1 6.8 11.6 13.7 13.2 9.9 5.0 3.3 12.5 26.1 16.3 4.5 5.1 8.6 18.5 12.5 2.8 2.5 7.5 4.9 9.0 9.9 7.3 8.2 5.8 5.6 10.1 12.0 8.6 5.2 8.4 5.2 7.0 10.4 13.6 6.6 11.8 17.5 12.0 2.4 8.4 12.4 11.6 18.5 8.7 12.9 8.5 5.0 NA NA NA 8.5 8.9 13.5 NA 10.0 16.6 5.0 11.1 21.4 5.2 7.8 8.0 6.9 7.3 6.0 22.8 16.1 8.6 7.2 3.4 4.9 20.8 21.8 11.7 5.0 7.7 19.6 12.9 10.3 4.1 4.0 15.1 7.8 8.2 12.1 5.2 8.3 6.6 8.0 8.8 5.0 6.7 6.3 2.7 9.4 15.7 6.1 2.9 10.5 7.5 6.1 | 9.4 19.8 8.6 10.4 10.2 6.6 8.0 9.9 8.0 9.6 8.8 12.4 10.8 9.9 9.3 8.8 9.0 6.8 10.3 11.6 7.0 6.7 13.3 14.4 9.9 6.8 9.6 @ Including investments in raw material companies. This last group are non-integrated steel companies. NA — Not available• ■ i f * Arrived at by using gross plant at year end to divide capital expenditures for year. I Source: Standard and Poor’s, Industry Survey: Steel and Iron (Basic Analysis; 1955)> P. 22. 225 ' I The total capital outlay of the steel industry — j expenditures for expansion, improvements, and acquisitions — amounted to $6.4 billion from 1946 to 1954 i n c l u s i v e#59 The total expenditure for new construction and equipment by the steel industry was about $6.2 billion during the same period, as shown in Table XXVII. Particularly heavy expenditures for this purpose were incurred in 1951, 1952, and 1953, when an unprecedented expansion program was undertaken. Table XXVII also shows the retained net earnings of the steel companies which thus were made available for reinvestment through the years 1935 to 1954* During the period from 1946 to 1954, these retained earnings amounted i to $2.6 billion. In other words, 42 per cent of the $6.2 billion spent for new construction and improvement by the steel companies came from their undistributed profits. This-is in sharp contrast to the corresponding ratio of 16 per cent during the period from 1935 to 194© when the total expenditure for such purposes was only $1.1 billion, one-fifth of the 1946-1954 amount. It is, therefore, apparent that the steel industry has emerged during this inflationary period as a larger, more efficient industry, with more new facilities. 59 Ibid.. p. 64. 226 I TABLE mil j I OUTLAYS BOR NEW CONSTRUCTION AMD IMPROVEMENT, AND RETAINED EARNINGS OF THE STEEL INDUSTRY 1935-1951* $ millions YEAR CAPITAL OUTLAYS* RETAINED EARNINGS** 1935 li*o 2 1 * 1936 216 1 * 8 1937 320 81 1938 11*0 -198 1939 121 75 19l*0 171 11*3 191*1 295 161 19l*2 265 69 19l*3 239 52 19hk 136 1*1 191*5 11*8 1 * 1 * 191*6 291 117 19U7 1*96 228 191*8 583 336 19l*9 510 307 1950 513 1*56 1951 1,01*1 270 1952 1,170 225 1953 1,000 1*11 1951* 609 291* From Steel Facts, 12l*:3, Februaiy 1 9 5 1 * S and 76:1, March 191*6; except the figure for 1951*, which was taken from American Iron and Steel Institute, Charting Steel's Progress, op cit., p. 61*. - 5 H 5 - From American Iron and Steel Institute, Annual Statistical Report, 1955, pp. ll*f.; 1951, pp. 8f.; 19U6, pp. 6f.; and 19l*2, pp. 6f. 227 At the same time, it has drawn more on its own earning j power than otherwise to finance its renewal and expansion. 1 Industrial comparison. These capital expenditures of the steel industry were enormous not only in terms of their absolute amounts, but also in comparison with similar expenditures of other industries. Steel Facts reported the findings of a study by the U. S. Department of Commerce as follows: Steel companies are spending at least 313 per cent more for expansion and improvement this year C1950 J than in 1939* That figure compares with an increase of about 244 per cent for all industries, as covered by a Department of Commerce study. The percentage gain in steel between those two years exceeds the increase in railroads, other transportation, mining, manufacturing, and miscellaneous industries, all of which are .included in the Department of Commerce study. It is exceeded only by the percentage gain shown by the electric and gas utilities.6© This means that the increase in capital expenditures of the steel industry was greater than that of most industries during the period, 1939-1950. This fact is clearly shown by Table XXVIII, which shows the capital expenditures of the primary iron and steel industry as percentages of the capital expenditures of durable goods manufacturers, all manufacturing industries, and all non-farm businesses in the United States. In all 60 Steel Facts. 105:2, December 1950. 22$ i i TABLE x m i l EXPENDITURE ON NEW PLANT AND EQUIPMENT BT THE PRIMARY IRON AND STEEL INDUSTRY AS PER GENT OF THAT BY DURABLE GOODS INDUSTRIES, ALL MANUFACTURING INDUSTRIES, AND ALL NON-FARM BUSINESSES, 1939-1951 + YEAR PRIMARY IRON AND STEEL EXPENDITURE ($ MILLION) PER CENT DURABLE GOODS INDUSTRIES PER CENT ALL MANUFACTURING INDUSTRIES PER CENT ALL NON-FARM BUSINESS 1939 122 16.1 6.3 2.2 191+5 198 12.5 5.0 2.3 191+6 500 16.1 7.1+ 191+7 638 18.7 7.3 191+8 772 22.2 8.5 191+9 596 21.1 8.3 1950 599 19.1 8.0 2.9 1951 1,301* 23.2 11.3 1+.7 1952 1,511 26.9 13.0 5.7 1953 1,210 21.1* 10.2 1+.3 1951+ 751+ 11+.8 6.8 2.8 1955 863 15.9 7.5 3.0 Source: Survey of Current Business, 32-1*:l5, April 1952j Statistical Abstracts, 1956, p. "1*98• 229 postwar,years, the percentages were greater than in 1939, except during 1954, when other durable manufacturers spent relatively more for new plant and equipment than the primary iron and steel industry* It is also interesting to note that the inflation index seemed to move in parallel with the movement of the capital expenditure of the primary iron and steel industry expressed as a percentage of capital expenditure by all durable goods manufacturers. This fact is made more visible in Figure 20* It is therefore clear that the steel industry experienced an unprecedented expansion during this period, in spite of the hestitation in early stages. The expansion took place in the more efficient types of facilities in all phases of steel making. The smaller i companies expanded relatively more than the larger ones. The vast investment required was largely financed through internal sources of the steel companies. 230 FIGURE 20 | INFLATION VERSUS EXPENDITURE ON HEN PLANT AND i i I EQUIPMENT BT THE PRIMARY ISON AND STEEL INDUSTRY AS PER CENT OF THAT HI DURABLE GOODS INDUSTRIES INFLATION Ex p e n d it u r e 210 ZZ (80 ZO 170 A I / I , t I Sources Surrey of Current Business, 32-Usl5> April, 1952; Statistical Abstracts oT~the United States, 1956, p. &98* CHAPTER VI COSTS OF PRODUCING STEEL UNDER INFLATION COST OF RAW MATERIALS Changes in the cost of raw materials may arise either from changes in the prices of raw materials or from changes in the quantity of raw materials consumed in producing a ton of steel* How inflation effects these two types of changes is to be discussed in the following pages* Prices of Raw Materials Inflation is characterized by continuously rising prices, as demonstrated in Chapter II* The prices of raw materials in general and raw materials for steel making in particular are no exception. Furthermore, since the prices of raw materials fluctuate more widely than finished goods during a business cycle, the prices of raw materials naturally rise more quickly and in greater magnitude during inflation. This fact is shown in Table XXIX, in which the wholesale price indexes are assembled in groupings by production stages. In the years 1947, 194S, and 1951 when the inflationary pressure was heavy, the price indexes for both crude and intermediate materials were higher than that of the finished goods* I I TABLE fflX WHOLESALE PRICE INDEXES, BY PRODUCTION STAGES, 191*7-1951* 191*7-191*9 = 100 TEAR ALL COMMODITIES CRUDE MATERIALS INTERMEDIATE MATERIALS FINISHED GOODS 191*7 96.1* 98.6 96.2 95.9 19h& iol*.i* 108.0 ioi*.o 103.5 19k9 99.2 93.1* 99.9 100.6 1950 103.1 101.8 10l*.3 102.1* 1951 Ull.8 116.9 116.9 112.1 1952 111.6 107.1* 113.5 111.5 1953 110.1 99.2 l l i u l 110.1* 1951* U 0 .3 98.3 111*. 8 110.7 Source: Statistical Abstract of the United States, 1956, p . 323* 233; Again, in the indexes of spot primary market prices ; ' I computed by the Bureau of Labor Statistics, which are much more sensitive to changes in market conditions than are annual, monthly, or weekly wholesale price indexes, the price index for *raw industrials® jumped from 90*7 on j June 20, 1950, to 140.0 on June 19, 1951* On these same days, the spot price index for all commodities was 33*4 and 123 • 3 respectively.• * - Steel making materials. The prices of raw materials for steel making are just as sensitive to inflation and | i deflation as the prices of industrial raw materials in general. The extent of price increases of raw materials for steel making may be seen in Table XIX, which shows the percentage increase in the prices of 23 materials required by iron and steel companies above the 1936-1939 averages, as of March 1, 1948* According to the table, the greatest increase in a single item was the price of palm oil, which is imported for use in the making of tin plate. The greatest increase in a group of materials was in scrap and fuels. The next was in coating materials such as lead, zinc, terne mix, and tin. The prices of refractories, fluxes, and alloying elements had a 1 U. S. Bureau of the Census, Statistical Abstract of the United States. 1956 (77th edition; Washington, B. C.: Government Printing Office, 1956), p. 322. 234 TABLE XXX PERCENTAGE INCREASE ABOVE THE 1936-1939 AVERAGE IN THE PRICES OF RAW MATERIALS FOR IRON AND STEEL MAKING, AS OF MARCH 1, 1948 MATERIALS PER CENT INCREASE MATERIALS PER CENT INCREASE Lake Ore — 24 Fe rro chromium 57 Old Range 24 Ferotungsten 42 Mesabi 22 Other Ferro-alloys 58 Other Iron Ore 24 Fluorspar 67 Purchased Coal 129 Lime 50 Fuel Oil ’ 175 Sulphure 15 Purchased Cole 140 Sulphuric Acid 17 Heavy Melthfing Scrap 163 Copper 94 Limestone ! 40 Tin 96 Sl^ca Brick 56 Lead 188 Clay Brick 54 Zinc 117 Cement 4o Terne Mx 101 Electricity 17 Palm Oil 461 Ferromanganese 64 Silicomanagese 69 Sources S te e l F a c ts , 90s 3> June 1948. 235 relatively smaller percentage increase, while the prices of electricity and sulphur and sulphuric acid increased the least among all the items included. Such a pattern of price increases in raw materials for steel making continued to the later years under study. It is reported, for instance, that among the more important raw materials for iron and steel making that had more than doubled in price from 1939 to 1951 inclusive were purchased iron and steel scrap, fuel oil, slab zinc, pig tin, ferromanganese, silica brick and coke.2 Inflation versus prices of raw materials. The extent of price increase in the raw materials for steel making may be seen from Table XXXI, in which the index of inflation is put against the price indexes of scrap and pig iron, two of the most important materials in steel making. It is to be observed that, while the price index i of scrap shows a greater fluctuation than that of pig : iron, the price indexes of both scrap and pig iron rose far above the inflation index. The index of scrap stood at 238.3 in 1951 and 279.1 in 1952, and that of pig iron reached 257.0 and 262.5 in the respective years, while the inflation index had its peak at 202.5 in 1951 with 1952 a 2 Steel Facts. 113:2, April 1952; also ibid.. 104:3* October 1950. L 236 TABLE XXH INDEXES OF SCRAP PRICES, PIG IRON PRICES, AND INFLATION, 1929-1954 1935-1939 = 100 YEAR SCRAP* PIG IRON** INFLATION 1929 108.9 90.0 120.4 1930 89.4 83.7 113.3 1931 65*6 75.6 99.6 1932 50.6 68.3 88.9 1933 61.8 74.1 87.1 1934 69.0 85.7 94.4 1935 78.7 87.1 98.7 1936 99.7 92.2 99.7 1937 121,4 110.9 104.9 1938 90.5 105.7 99.2 1939 109.7 103.3 97.5 1940 124.3 110.4 98.5 1941 130.1 115.0 106.9 1942 128.1 115.1 119.6 1943 128.1 115.1 125.9 1944 123.9 115.1 127.4 1945 127.9 121.0 130.0 1946 135.4 133.1 144.9 1947 244.0 167.5 171.9 1948 277.2 209.4 185.7 1949 182.4 225.2 179.9 1950 237.2 233.4 184.4 1951 288.3 257.0 202.5 1952 279.1 262.5 201.4 1953 263.9 272.9 200.8 1954 190.9 276.0 201.2 computed from composite price of no* 1 heavy melting scrap as reported in Iron Age, 149-1:168, January 1, 1942} 171-1:432, January 1, 1953} 177-1:300, January 5, 1956. ** computed from composite pig iron price as reported in Iron Age, 149-1:162, January 1, 1942} 171-1:430, January 1, 1953} 177-1759^7" January 5, 1956. 237 ; ! close second at 201.4* The price of pig iron has shown j i i an uninterrupted trend of increase since 1946, reflecting higher labor and overhead costs of making pig iron year j after year.3 The price of scrap is one of the most j sensitive prices, constantly reflecting the general economic conditions. For instance, it had an increase of 105 per cent in the 1946-1946 and an increase of 56 per cent in the 1949-1951 inflationary spirals. By contrast, in the 1946-1949 period when the inflation index took a downturn, the price index of scrap had a 34 per cent drop. Figure 21 shows these facts distinctly. Cost effects. The effect on costs of the high prices of raw materials varies with the company. The non-integrated steel companies purchased all or most of their raw material requirements including scrap and semi-finished steels. The ratio of purchased materials against home-produced materials also varies among integrated companies. In 1946, for instance, the coke capacity of the steel industry was about 94 per cent of its ingot capacity, an average determined mainly by the 3 This statement is valid within the years covered by Table XXXI. In 1954* a year of recession, the price of pig iron decreased as compared with 1953* Taking the average of 1947-1949 prices as 100 per cent, the index of pig iron wholesale price was 136.4 in 1953 and 137.6 in 1954* See Statistical Abstract. 1956. p. 633* 23$ FIGURE 21 MOVEMENTS IN THE INDEXES OF SCRAP PRICE; PIG IRON PRICE, AND INFLATION, 1929-19$k 300 • IOO %y> zzo ZOB zoo Scrap Price Pig Iron Price Inflation ISO too Sources Tattles IV, XXXI /Mo 239 i large coke capacity of the United States Steel Corporation | and the Bethlehem Steel Corporation. The United States j Steel Corporation had a coke capacity of 96 per cent of j its ingot capacity, while the Bethlehem Steel Corporation j \ had 90 per cent. In sharp contrast was the coke capacity I of the Armco Steel Corporation, which amounted to only 46 per cent of its pig iron capacity.A- The distribution of pig iron capacity is similarly uneven. In 1950, the pig iron capacity for the steel industry as a whole was 72 per cent of steel ingot capacity. But this ratio was 101 per cent at the Wheeling Steel Corporation, and 90 per cent in the case of the Youngstown Sheet and Tube Company. At the other extreme, the Armco Steel Corporation had only 42 per cent. 5 The steel companies with higher raw material capacities are in an advantageous position when raw material prices soar, because they have to buy fewer raw materials at higher prices than other companies. The steel companies with a comparatively higher capacity for producing pig iron are likely to use more pig iron and less scrap in their steel ingot production, in comparison with other steel companies. Higher prices of scrap, 4 Carl M. Loeb, Rhoades & Co., Steel (New York: Carl M. Loeb, Rhoades & Co., 1951), p. 55 5 Idem 240 ! therefore, will have a lesser impact upon them than other steel companies* Consumption of Raw Materials The cost impact of rising prices of raw materials j i i may also be alleviated by way of economies in raw material consumption* It is true that consumption of raw materials in the production of steel is largely determined by the quality of materials and the production technique* Inasmuch as both these factors are of a long-run nature, inflation, being a short-run proposition, seems to have only a slight, if any, bearing on consumption of raw materials* Nevertheless, high prices of raw materials tend to provide incentives to producers to seek ways to conserve raw materials or to find lower-priced substitutes* If a new production technique which promises a saving in raw materials has been found, high prices of raw materials provide an excellent inducement for its adoption on a broad scale* This process may take some time to bear fruit. The course of the steel industry in the postwar years seems to illustrate this point well* Difference in production stages. The total tonnage as well as the proportion of scrap and pig iron that go into a ton of steel oscillated somewhat over the years, as shown in Table XXXII* No significant tendency, however, has been determined so far* Materials in this stage of 241 i I TABLE m i l NET TONS OF SCRAP AND PIG IRON USED IN PRODUCING ONE NET TON OF STEEL (INGOTS AND CASTINGS) YEAR SCRAP PIG IRON TOTAL 1935 0.6025 1936 0.5867 1937 0.5639 1938 0.5644 1939 0.5424 1940 0.5231 1941 0.5509 1942 0.5302 1943 0.5303 1944 0,5318 1945 0.5463 1946 0.5284 1947 0.5259 0.6091 1.1350 1948 0.5332 0.6055 1.1387 1949 0.5355 0.6158 1.1513 1950 0.5549 0.5816 1.1365 1951 o.55io 0.6089 1.1599 1952 0.5709 0.5907 1.1616 1953 0.5506 0.6044 1.1570 1954 0.5427 0.6030 1.1457 1955 0.5462 0.6001 1.1463 Sources computed from American Iro n and S te e l In s t it u t e , Annual S t a t is t ic a l R ep o rt, 19$ $ , pp. 2 0 f.j 1948, p . 23s 1939, p . 13. 242 1 the production process have been treated, and a slight j loss is incurred only during the melting in the furnace. In the finishing operation, one does find examples ; of economy in material consumption. One of the most notable examples, perhaps, was in the use of tin in making tin plate. During 1953* 4»$ million tons of tin plate was manufactured, requiring 37,613 tons of tin to coat the steel. In 1950, when 4*6 million tons of tin plate was produced, 42,442 tons of tin was consumed. That is to say, in 1953* 4*3 per cent more tin plate was produced with 11.4 per cent less in tin than in 1950.6 Economy in pig iron production. The opportunities for raw material economy are greater in the early stage ! i of steel making, where benefieiation of iron ore and coal may improve the quality of deteriorated raw materials. The high grade iron deposits in the country have been depleted, and the iron content of the ore mined has been declining. The supply of metallurgical coking coal has also declined in quality since the war. But by sizing and sintering iron ore and washing coal, the steel companies were able to increase the output of pig iron and coke 6 Steel Facts. 127:5, 1954 243 . with less ore and coal*? Gf course, it takes several 1 | years for the results to show* j This fact is brought out in Table XXXIII, where j consumption of iron ore, scrap, mill cinder, limestone, and coke per net ton of pig iron produced is given from 1935 to 1955* Iron ore consumption in producing one ton of pig iron in 1936-194© averaged 1*713 tons* It was increased to 1*731 tons in wartime 1941-1945 and continued to rise to 1.746 in the immediate postwar 1946-1950. Actually the peak was reached in 1943 when it amounted to 1.767 tons. Since then the consumption of iron ore per net ton of pig iron has declined steadily, the low of 1.656 tons being attained in 1954* Limestone requirements in producing one ton of pig iron showed a continuous increase after 1942, until the peak at 0*432 ton in 1951* Increasingly mechanized mining was responsible for this. However, improvements in coal 7 The United States Steel Corporation has presented case studies of effects of washing operations on efficiencies of coal and that of sizing and sintering operations on efficiencies of iron ore. It showed that in one test £.1 per cent more pig iron was produced with S.5 per cent less coal. In another test, 21*2 per cent of pig iron was produced from 15*3 per cent less ore. Cf. BU. S. Steel Exhibit l,w in the Companies* Presentations before the U. S. Wage Stabilization Board, Steel Industry Wage Case TGase MoV D-18-G. 1952:no puETTsEerT,""v7 II?7 pp7"l51f * 244 TABLE XXXIII CONSUMPTION OF ORE, SCRAP, MILL CINDER, LIMESTONE, AND COKE PEE NET TON OF PIG IRON PRODUCED, 1935-1955 j | (in net tons) YEAR IRON ORE SCRAP MILL CINDER, SCALE, ETC. TOTAL LIMESTONE COKE 1935 1.693 0.044 0.161 1.898 0.362 0.871 1936 1.701 0.044 0.144 1.889 0.362 0.895 1937 1.718 0.041 0.138 1.897 0.361 0.903 1938 1.731 0.035 0.145 1.911 0.347 0.887 1939 1.711 0.038 0.148 1.897 0.355 0.880 1940 1.729 0.029 0.134 1.892 0.362 0.878 1941 1.717 0.038 0.140 1.895 0.362 0.873 1942 1.754 0.034 0.124 1.912 0.387 0.896 1943 1.745 o.o44 0.114 1.903 0.387 0.900 1944 1.725 0.045 0.122 1.892 0.389 0.905 1945 1.715 0.049 0.134 1.898 0.392 0.920 1946 1.725 0.033 0.136 1.894 0.406 0.934 1947 1.748 0.030 0.127 1.905 0.412 0.950 1948 1.767 0.035 0.126 1.928 o.44o 0.954 1949 1.753 0 .o42 0.123 1.918 0.428 0.935 1950 1.737 0.056 0.110 1.903 0.429 0.922 1951 1.725 o.o54 0.102 1.881 0.432 0.924 1952 1.710 o.o55 0.110 1.875 0.426 0.922 1953 1.691 0.053 0.125 1.869 0.418 0.906 1954 1.656 0.050 0.153 1.859 0.395 0.873 1955 1.662 0.049 0.149 1.860 0.387 0.873 Source: American Iron and Steel Institute, Annual Statistical Report, 1955, p. 47? 1951, p. 22 j 1946, p. 215 1939, pTTT. 245 j i preparations have halted this rising trend of* limestone j requirements. Only 0.395 ton in 1954 and 0.387 ton in ! 1955 were required in making one ton of pig iron. The story of coke consumption is very much the same. The rising requirements of coke in pig iron production, which started during the war, came to a crest at 0.954 ton of coke per ton of pig iron in 1948. Since then the requirements have been declining. In both 1954 and 1955* the figures stood at 0.873 ton. As most coal consumed by the iron and steel industry is used for making coke, coal consumption in iron and steel making will rise and decline along with the movement of coke consumption. As Table XXXIV shows, coal consumption per ton of steel produced was 1.117 tons in 1946 and dropped to 0.857 in 1955. Substitutes. It should be noted, however, that the decline in coal consumption was not solely due to the decline in coke consumption. The consumption of coal in making a ton of steel has been declining since 1946, while the consumption of coke in producing one ton of pig iron rose from 1946 to 1948. Another reason for the decline in coal consumption is that the steel companies have substituted a cheaper power source for coal. As Table XXXIV shows, total units of natural gas and electricity consumed by the steel industry have been steadily 246 TABLE XXXIV CONSUMPTION OF POWER MATERIALS BI IRON AND STEEL PRODUCERS, 194.6-1955 NATURAL GAS COAL ELECTRICITY FUEL OIL Total Per Total Per Total Par Total Per Ton YEAR (million Ton (million Ton (billion Ton (thousand gallons)(gallons) net tons) (tons) kwt-hours) (kwt-h) gallons) (gallons) 1946 144.4 2.168 74.4 1.117 17.5 263 1,783 .02276 1947 148.9 1.754 94.3 1.110 21.0 248 2,168 .02556 1948 167.2 1.887 97.7 1.102 23.2 262 2,196 .02478 1949 163.0 2.090 82.9 1.064 19.7 253 1,835 .02356 1950 203.9 2.106 92.9 0.9556 24.7 255 2,294 ,02369 1951 206.8 1.969 100.2 0.9970 27.6 262 2,524 .02399 1952 209.0 2.242 87.3 0.9367 25.9 278 2,240 .02403 1953 223.9 2.006 101.3 0.9077 31.1 279 2,393 ,02144 1954 280.1 3.172 81.8 0.9261 26.7 302 1,798 .02036 1955 297.1 2.540 100.3 0.8570 34.8 297 2,278 .01947 Sourcet American Iron and Steel Institute, Annual Statistical Report. 1955. pp. 22f,, 33; ibid. 1951. pp. 23f.; ibid.. 1948. pp. 24f. 247 ! ! ! increasing, while the consumption of fuel oil and coal varied but slightly. Translating these figures into units ! per ton of steel produced, the increasing use of natural i gas and electricity is made more apparent* In 1947, 1*754 j gallons of natural gas per ton of steel produced was consumed* This figure was increased to 2.106 gallons in 1950 and to 3*172 gallons in 1954* The corresponding figures for electricity for these years were 24$ kilowatt-hours, and 255 kilowatt-hours, and 302 kilowatt-hours. In sharp contrast, fuel oil consumption per ton of steel was 0.02556 gallon, 0.02369 gallon, 0.02036 gallon for the respective years. Moreover, the absolute tonnage of coal used to produce steam and gas declined 39 per cent from 1946 to 1954* It was 9*5 million tons in 1946, 8.9 million tons in 1950, and 5.8 million tons in 1954*^ GOST OF LAB01 Just as in the case of material costs, variations in the cost of labor may arise either from changes in the price of labor or from changes in the labor productivity. In order to understand how inflation affects the cost of 8 American Iron and Steel Institute, Charting Steel1s Progress (1955 edition; Mew York: American Iron and £>teel Institute, 1955), p* 10* 24# labor in steel production, it is, therefore, necessary to j analyze both of these changes during inflation* ~ j j Compensation of Labor During inflation, wages will advance along with other prices* However, sinee there is a lack of uniform movement in prices, there is a question as to which price rises faster and higher, the price of labor or the price of goods* Wage movements in inflation. Statements are made that during an upward trend of prices, wages lag somewhat behind the rise in prices*9 Wesley G. Mitchell, in his study of inflation in the Civil War period, concluded: All of the statistical evidence that has been presented in the preceding pages supports unequivocably the common theory that persons whose incomes are derived from wages suffer seriously from a depreciation of the currency.1© Mitchell went further to say that this conclusion was true even under very favorable conditions, such as the army's demand for manpower and workers* concerted action in bargaining and in using strikes as a weapon.H 9 R* Bellerby, Monetary Stability (London: Macmillan and Co., Ltd., 1925), pp* 84f. 10 Wesley G. Mitchell, A History of Greenbacks (Chicago: University of ChieagoHPress, 19®J), P« 3&?• Ibid.. pp. 34Sff. 249 The conditions in the period after World War II might fee different from Civil War days* For one thing, the power of organized labor is incomparably greater today I I than it was even two decades ago, let alone nearly a | century ago* In fact, fear has been frequently expressed j by some economists that labor monopolies may demand wage j increases far in exeess of increases in productivity and/or the cost of living.12 At the collective bargaining table, or, more noticeably, in the public statements pertaining to any specific collective bargaining, spokesmen for management have never failed, in recent years, to point out that wages have increased more than the cost of living* Nevertheless, there are serious considerations which tend to limit the likelihood that organized labor might obtain wage increases in excess of increases in productivity and/or the general price level. If organized labor were to succeed in doing so, either the prices of its products would have to rise proportionally, or the profitability of investment would be reduced to a corresponding extent. In the former case, the general price level would rise proportionally with wage increases. In the latter case, investment flow would be disturbed 12 Supra. Ch. I and. employment opportunities would disappear or decrease. Furthermore, wage rates are in the nature of contractual prices and thus do not change as freely as : most commodity prices which are mostly spot market prices. The comparative lack of freedom of movement in wage rates i alone will cause wages to lag behind the general price level in an upward trend. The cost of living escalator ; clause incorporated in collective labor contracts in recent years cannot remove this disadvantage completely. This condition can be changed or reversed only if wage rates are established in constant anticipation of priee increases. While this case is not entirely impossible in the short run, this investigator is not aware of any practical instance in the United States in the period under study. Wage determination. As far as the steel industry is concerned, this investigator is aware of only one case in which a spokesman for the steel companies attempted to argue that wage increases in a particular contract were made to allow for future increases in the cost of living. Jules Backman, in his statement before the Wage Stabilization Board on behalf of the steel companies in the 1952 steel wage dispute, stated that nthe amount Cof wage increases! agreed upon [in November 1950] clearly was designed to anticipate, at least in part, the rise in 251 retail prices that had been foreshadowed by rising basic material and wholesale prices® at that time. The steel companies did not stress this argument ! in that wage case, nor in any other case. Other spokesmen j for the companies did not mention it at all. Even Jules Backman himself presented it only as a secondary argument for refusing the union*s demand in the 1952 dispute. As far as wage bargaining in this period is concerned, the steel industry seems to have differed little from other major industries in the United States. In another statement on behalf of the steel companies in that wage dispute, Backman approvingly quoted a passage from a study by ¥. S. Woytinsky and two associates on factors in wage bargaining as revealed by both company and union officials in many industries in answering their questionnaires. The passage reads in part: The answers received from both parties revealed a strong imprint of the particular conditions of the postwar wage rounds. Both placed the heaviest emphasis on recent changes in cost of living. Both groups ranked wages in other industries and in other areas close together in the second and third places. Half of the union officers and nearly one-third of the businessmen named comparison with other unions as a factor in determining wage increases. Consideration of the profits of the company was 13 Company Exhibit no. 3, in Companies* Pre sentat ions (D-lB-G), op. cit.. v. I, p. 83; also pp. 1$ff. I 252 1 mentioned less frequently by both parties.^* ! It seems to be apparent, then, that wage bargaining j in the steel industry, as in other major industries during j this period, was predominantly determined by j | considerations given by both company and union sides to j the rising cost of living. This was more so in the later j years of this period, when the United Steelworkers of America completely discarded its earlier argument for a high wage to provide an adequate effective demand as a way to maintain full employment.15 14 W. S. Woytinsky, Morris C. Bishop, and Thomas G. Fichandler, Labor and Management Look at Collective Bargaining (a Canvass of Leaders’ Views; mimeographed; ftew York; Twentieth Century Fund, 1949), p. 71* as quoted by Backman in Companies’ Presentations. op. cit., Company Exhibit no. 6, v. 1, p. 335. 15 This argument was embodied in the publications commonly known as Nathan reports in 1947 and 1949 on behalf of the Congress of Industrial Organizations and the United Steelworkers of America* The most important one of the Nathan reports is Bobert R. Nathan Associates, Inc., ^ National Economic Policy for 1949 (Washington, B. G.: Robert R. Nathan Associates, Inc., July 1949), 52 pp. In the later economic studies of similar nature made for the Congress of Industrial Organizations and the United Steelworkers of America, the main arguments were changed to be comparisons in wages, prices, and profits. Cf. Stanley M. Ruttenberg, Wage Policy in Our Expanding Economy (Washington, B. C.: Congress of Industrial Organizations, 1952), 60 pp. (it was presented to the U. S. Wage Stabilization Board as union exhibit no. $ in the case No. B-lS-C); United Steelworkers of. America, Steel and the National Economy (Pittsburgh: United SteelworkersoT America, July 1956), 57 pp* 253 I The cost-of-living consciousness, which is a result of continued inflation, in wage bargaining is most vividly- demonstrated by the so-called escalator elause in collective labor contracts in recent years. Even though there was and still is no escalator clause as such in collective labor contracts in the steel industry, the steel companies have recognized the fairness and necessity of granting wage increases to compensate for rises in the cost of living. Thus, the steel companies have never argued that wages* need not be adjusted to accommodate the rising cost of living.^ They emphasized only that the wages of steel workers had increased more than the prices, or that an increase of steel workers1 wages would amount to a start on a new inflationary spiral, through the pattern-setting role of the industry1s collective bargaining settlements, and, more important, through the repercussions of a wage increase upon prices of raw materials and the prices of steel, and thus upon prices 16 The officials of the steel companies always argued that steel workers1 wages in their companies rose more than cost of living. However, Jules Baekman, stating on behalf of the steel companies, did argue that steel jworkers might be better off if they, instead of asking for Imore money wages so that the prices would not drop, waited for the prices to decline as a way to increase their real wages. This argument of course is not the same as the argument suggested in the text. Gf. Companies1 Presentations. op. cit., Company Exhibit no. 5» v. I, pp. 215-25*7* 254 : I I in general. j i Furthermore, the steel companies have shown an 1 increasing willingness to grant wage increases to j compensate for the rise in the cost of living as the ; I inflationary conditions continued* Thus, a "wage ] » reopener" clause was inserted in labor contracts of a two-year duration and the 1956 settlement provided a total of 10*5 cents in increases in wages the first year of the contract, another 9*1 cents in the second year, and another 9*1 cents in the final year.l? Such a yearly t increase in wage rates was clearly a measure to cover the J anticipated increase in the cost of living during the life of the contract. What should be noted is that the principle and even the actual amount of such a settlement had been agreed upon by both sides long before the strike,1^ In announcing the agreement after the strike, the steel companies stated: "Under the new agreements, the steel workers of the United States are assured of cost-of-living protection in each of the next three years."19 17 Hew York Times, July 2S, 1956, section G, p. S. IS Daniel Bell, "Steel’s Strangest Strike," Fortune, September 1956, p. 125* 19 New York Times, July 2S, 1956, section G, p. S. At any rate, wage bargaining in the steel industry during this period was heavily shrouded in the atmosphere of inflation. The cost-of-living consciousness is not the j only avenue through which inflation exerts its influence upon collective wage bargaining. There are other plausible arguments presented in collective wage bargainings in an attempt to convince the opposition, or, more often, the public, that a wage demand is reasonable or unreasonable, depending on which bargaining party presented them. Favorite arguments of the union such as increases in productivity, the company’s ability to pay, and wage comparisons with other industries all bear the imprint of inflation to a greater or less extent. On the other hand, the steel companies like to point out the cost-price-tax squeeze upon profits under inflation. Insofar as inflation is characterized by the presence of an excessive effective demand, and therefore induces the steel companies to utilize all their resources to the fullest extent, the labor union is in a powerful bargaining position to gain concessions from the companies. This is particularly true in an industry like the steel industry in which the rate of capacity operations is very significant in relation to the profit and loss account. However, the wage gains at the bargaining table may not necessarily mean gains in real wages. The prices of 256 commodities may rise more and Taster. j Remuneration of steel workers. The steel workers, however, seem to have fared well in the period under ! study. In eleven years from 1946 to 1956, they received i a total of #1.13? in wage rate increases through collective! bargaining as set forth in Table XXXV. That is to say that they have more than doubled their straight time average hourly earnings of $lt073 in 1945* Of this total increase, $0.93 was received from 1946 to 1954, representing an 87 per cent gain over the 1945 straight time average hourly earnings of the steel workers. During these same nine years, the index of inflation registered an increase of only 55 per cent. The straight time average hourly earnings of the steel workers stood at $2,107 in 1954 and $2,246 in 1955, as shown in Table XXXVI. These figures are about twice as large as the corresponding figures in 1945* Measured by the average total hourly earnings, the 1945-1954 increase was 85 per cent in statistics of the American Iron and Steel Institute, and 86 per cent in the comparable statistics of the Bureau of Labor Statistics. Both of these percentage gains are much higher than the 55 per cent gain in the index of inflation for the same period. The higher percentage gains of earnings in relation to the index of inflation meant that the real income of 257 TABLE XXXV WAGE RATE INCREASES IN THE STEEL INDUSTRY 191*6-1956* INCREASES YEAR (Cents) Total 191*6 18.5 191*7 16.0 191*8 13.0 191*9 00.0** 1950 16.0 1951 00.0® 1952 16.0 1953 08.5 195h 05.0 1955 15.2 1956 io.5# 118.7 * As provided in the labor contracts between major steel companies and the United Steelworkers of America signed in the respective years. The figures include both general wage increase and average increments. ** The 19k9 labor contract provided no general wage increase. @ No labor contract signed. # The increase for the first year only. Source: American Iron and Steel Institute, Annual Statistical Report, 1955, p. 31j United Steelworkers of America,Research Department, "Major Contract Gains: U. S. Steel Corporation — Basic Contracts — 1937-1952" (a mimeographed report to the officers of the Union), p. 2j New York Times, July 28, 1956, section C, p. 8. 25S TABLE XXXVI HOURLY EARNINGS OF STEEL WORKERS, 191*0-1955 YEAR AISI BLS Straight Time Average Average Hourly Hourly Total Earnings* Earnings** Average Hourly Earnings in Steel _________ INDEX , OF j Index INFLATION j 191*0*100 1935-39=100 191*0 0.836 0.81*3 0.81*1* 100 98.5 191*1 0.928 0.91*1* 0.91*1 111 106.9 191*2 1.013 1.01*1* 1.018 121 119.6 191*3 1.01*1* 1.121 1.116 132 125.9 191*1* 1.061* 1.167 1.157 137 127.1* 191*5 1.073 1.200 1.179 11*0 130.0 191*6 1.228 1.279 1.281 152 Hilt.9 191*7 1.393 1.1*56 1.1*39 170 171.9 191*8 1.502 1.573 1.580 187 185.7 191*9 1.571* 1.633 1.61*6 195 179.9 1950 1.603 1.681 1.691 200 181*.!* 1951 1.769 1.872 1.89 221* 202.5 1952 1.921* 2.01*1* 1.99 236 201.1* 1953 2.023 2.169 2.16 256 200.8 1951* 2.107 2.221 2.20 261 201.2 1955 2.21*6 2.399 2.38 282 * Does not include shift differentials, w Includes straight time hourly earnings, shift differentials, overtime premium, holiday pay and premium. The AISI figures for average hourly earnings are comparable with BLS average hourly earnings for blast furnaces, Steel Works and Rolling Mills, Source: American Iro n and S te e l In s t it u t e , Annual S t a t is t ic a l R eport, 1955. p . 31. ! 259 ■ the steel workers had increased. This point is brought ; out in unmistakable terms in Table XXXVII, where the average hourly earnings of the steel workers are put against those of workers in all manufacturing industries ! I - 1 |in the United States, and the figures are shown in both j current prices and constant prices. In terms of current prices, the average hourly earnings of the steel workers increased from #0.333 in 1939 to $2.20 in 1954, an increase of 166 per cent, while they were #1.615 and #2.19 for the respective years in terms of the 1955 level of ! consumer prices. That is to say, the steel workers’ average hourly "real* earnings increased by 36 per cent from 1939 to 1954* By comparison, the "real* average hourly earnings of workers of all manufacturing industries rose from #1.220 in 1939 to #1.30 in 1954, representing an increase of 4& per cent. In other words, the steel workers have fared well only in terms of their own "real" hourly earnings without making reference to the earnings of others. If a comparison is made, the steel workers are found to be lagging behind the average worker in all manufacturing industries insofar as increase in average “real" hourly earnings are concerned. A further analysis of the figures, however, reveals that the less proportional increase in "real" hourly 260 TABLE YXX7II AVERAGE HOURLY EARNINGS IN CONSTANT AND CURRENT PRICES: THE STEEL INDUSTRY AND ALL MANUFACTURING INDUSTRIES, 1939-1955 YEAR BLAST FURNACES STEEL 'WORKS ROLLING MILLS ALL MANUFACTURING INDUSTRIES Current Prices 1955 Prices* Current Prices 1955 Prices* 1939 I .838 $1,615 $ .633 $1,220 191*0 .81*1* 1.613 .661 1.261* 19U1 .91*1 1.713 .729 1.327 191*2 1.018 1.672 .853 1.1*01 191*3 1.116 1.723 .961 1.1*87 191*1* 1.157 1.762 1.091 1.551 191*5 1.179 1.756 1.023 1.522 191*6 1.281 1.759 1.086 1.1*92 191*7 1.1*39 1.725 1.237 1.1*83 191*8 1.580 1.760 1.350 1.503 191*9 1.61*6 1.851 1.1*01 1.526 1950 1.691 1.883 1.1*65 1.631 1951 1.89 1.95 1.59 1.61* 1952 1.99 2.01 1.67 1.69 1953 2.16 2.16 1.77 1.77 1951* 2.20 2.19 1.81 1.80 1955 2.38 2.38 1.88 1.88 * Earnings in current prices divided by consumer price index on base 193# » 100. Source: Statistical Abstract of the United States, 1956, pp. 220 and 321*3 the Bureau of Labor Statistics figures as appeared in American Iron and Steel Institute, Annual Statistical Report, 1955» p. 31. 261 ( earnings received by the steel workers in comparison with workers of all manufacturing industries from 1939 to 1954 was largely a consequence of wage freezes during World War II. From 1939 to 1945, the increase in the "real" hourly j earnings was $0,141 or 8.7 per cent for the steel workers, j j and $0,302 or 24*7 per cent for workers of all j manufacturing industries. By contrast, the steel workers gained an increase of 24*5 per cent in "real" hourly earnings in 1946-1954, while the average worker of all manufacturing industries received a 20.6 per cent increase. Furthermore, the steel workers received a $0.19 increase in “real1 * hourly earnings in 1955 and thus gained 35 per cent in “real* hourly earnings from 1946 to 1955* During the same length of time, the average worker of all manufacturing industries gained only 26 per cent. A study made by the U. S. Mews & World Report shows that the steel workers ranked eleventh in a total of 35 population groups whose "real* incomes had increased from 1939 to 1956. The 56 per cent increase in "real" income attained by steel workers is impressive, but is still below the 59 per cent gain for an average factory jworker.20 This study thus seems to confirm the analysis jin the preceding paragraphs. A tabulation of that study |is given here as Table XXX?III. | As the tabulation shows, almost all gainfully |employed persons and investors in common stocks have i increased their "real" incomes during this inflationary period. This fact demonstrates that an increase in the standard of living for workers does not necessarily mean a squeeze on the incomes of investors. Or more specifically, a gain in "real” wages of workers through an increase in money wages may not necessarily mean a proportional increase in cost which has to be borne by the investors in the form of profit reduction. There are two points which might help explain this statement. One is that an increase in money or "real" wages may be offset by a concurrent increase in labor productivity. The other is that an increase in wages may be passed on to the consumer by way of a proportional increase in prices. The discussion on steel prices will be delayed until the next 20 "Inflation Race -- Who’s Ahead, Who’s Behind," (Special Report), U. S. Mews & World Report. August 3, 1956, pp. 95f. It is unknown to this investigator whether the study made by U. S. Mews & World Report covered the "fringe" and other benefits” TKe discussions in this chapter, however, have been limited to hourly earnings, which exclude "fringe" benefits such as vacation, holiday premium, and pension. TABLE XXXVIII INCREASES IN “REAL” INCOMES FROM 1939 TO 1956 BT INCOME GROUPS INCOME GROUPS % INCREASE* Coal miners (bituminous) 107 Farm Laborers 89 Cigarette-factory workers 81* Lumber workers 73 Paper-mill workers 65 Textile workers 61* Investors in stocks- 5 5 - * 63 Furniture makers 59 Metal miners 59 Chemical workers 58 Steel, copper, aluminum workers 56 Metal-product workers 56 Cannery workers, others in food processing 51 Machinery makers (non-electrical) 1*8 Shoe-factory workers 1*8 Meat-packing workers 1*7 Farmers 1*6 Petroleum-refinery wo rkers. 1*3 Machinery makers (electrical) 1*1 Tire-factory workers 1*0 Aircraft-factory workers 39 Oil and gas-field workers 36 S cho olteachers 36 Printing, publishing employees 32 Garment workers 31 Continued on nest page. I TABLE m V I I I (Continued) INCREASES IN "REAL” INCOMES FROM 1939 TO 1956 BY INCOME GROUPS INCOME GROUPS % INCREASE* Cleaning, dyeing workers 28 Retail clerks 2k Electric, gas—company employees 2k Railroad workers 2k Laundry workers 23 Coal miners (anthracite) 22 Auto workers 20 Telephone employees 16 Federal Government workers Ik Veterans on compensation® k * after allowing for taxex. Average return on securities bought in 1939 and held to date of this study. @ Married veteran with no dependents.; Sources U* S. News & World Report, August 3, 1956, p. 95. \ 265 i chapter. For the present, the concern is labor ! productivity in the steel industry during this period. Productivity of Labor How an increase in wages begets a rise in productivity and vice versa is aptly depicted as follows: ... a significant rise in productivity anywhere in the economy, thanks to the importunities of organized labor, means a more or less general rise in wages, often at a rate higher than that of the national productivity rise. Companies are therefore forced to raise wages and reduce hours whether or not their own productivity justifies it. If their productivity is lagging, they must either improve it or suffer growing disadvantages in the market — unless, of course, they are lucky enough to have a product that people will buy regardless of price. This is not to imply that wage increase of any kind or any amount are boons to productivity. Occurring in the wrong place and occurring too often, they can sour investment prospects of a whole industry. But it is a fact, good or bad, that wage pressures have been a powerful general stimulant to productivity.21 This description is actually but a footnote to a common economic theory, namely, the high price of anything tends to promote a more economical use of it. Moreover, this wage-productivity relationship is not the only avenue through which inflation exerts its influence on productivity. The more important avenue through which inflation may be able to raise productivity of labor is the effect of inflation upon the degree of plant 21 "Productivity,” Fortune. November 1955, pp. 103-105. 266 1 utilization. I i Plant utilization and productivity. A hieh desree I of plant utilization in the economy is a characteristic of inflation. It is generally accepted by economists that a high degree of plant utilization (measured in terms of iproduction as a percentage of capacity) will bring about I a high productivity of labor, unless, of course, it is beyond the optimum degree. Goris and Koyck, in a study of prices of investment goods, including iron and steel in the United States from 1919 to 1939, found that the short-run fluctuations in labor input per unit of product and the degree of plant utilization are negatively correlated. That is to say, the productivity of labor has been found to be high as the degree of plant utilization is high, in the steel industry.22 One of the reasons that this is so is the well known fact that in the steel industry, as in most industries, there is a core of labor which is in the nature of overhead, in the sense that if production is to be continued at all, a certain minimum amount of labor is indispensable, even though the output is zero for the moment. As the output expands, this overhead labor is 22 Hendrieke Goris and Leen M. Koyck, “The Prices of Investment Goods and the Volume of Production in the United States,1 * Review of Economics and Statistics. 35:63, February 1953* 267 spread out over a large quantity of output* There are no statistics available on overhead and variable labor in the steel industry. However, an approximation may be obtained by assuming that all employees of the steel industry receiving wages are engaged in variable labor and all salaried employees are engaged in overhead labor in steel production* This assumption is not unreasonable according to common economic theory, even though it is far from accurate. On the basis of this assumption, Table XXXIX and Figure 22 have been prepared to show that there are parallel movements in short-run fluctuations in the proportion of variable labor to total labor and the degree of plant utilization in steel production. In other words, the proportion of variable labor in relation to the total labor employed by the industry tends to increase as the degree of plant utilization increases, and vice versa. This analysis points out further that, as the output expands, there is not only a larger output to share the overhead labor, but there is also a smaller proportion of total labor that is in the nature of overhead labor. Insofar as this is true, inflation tends to raise labor productivity through raising the degree of plant utilization. However, it is reminded that inflation may not 263 I i i TABLE IXXIX VARIABLE LABOR AND PLANT UTILIZATION YEAR TOTAL HOURS WORKED BY WAGE-EMPLOYEES AS PER CENT OF TOTAL HOURS WORKED BY ALL EMPLOYEES DEGREE OF PLANT UTILIZATION (Production As Per cent of Capacity) 1935 88,8 1*8.7 1936 90,1 68.1* 1937 88.3 72.5 1938 82.8 39.6 1939 86.it 61*.5 191*0 87.5 82.1 191*1 88.1* 97.3 191*2 87.3 96.8 191*3 86.6 98.1 19 i* i* 86.2 95.5 191*5 85.2 83.5 191*6 82.8 72.5 191*7 81*.3 93.0 191*8 81*.3 9l*.l 191*9 82.1* 81.1 1950 81*.3 96.9 1951 82**2 100.9 1952 81.6 85.8 1953 83.3 91**9 1951* 80.6 71.0 1955' 82.6 93.0 Sources Computed from Americas Iro n and S te e l In s t it u t e , Annual S t a t is t ic a l R eport, 1955, pp. 30, 51? 19l*3, p . 11, FIGURE 22 CHANGES IN THE CAPACITY OPERATION AND HOURS WORKED BT WAGE- EMPLOIEES AS PER CENT OF TOTAL HOURS WORKED BT ALL EHFLQXEES Per cent of Per cent hours worked by all 90 Plant Utilization 70 ZS r-~\ 6o Honrs Worked by Wage-eraployees 81 " I Ho Source: Derived from American Iron and Steel Institute data, as set forth in Table XXXIX# 270 necessarily bring about a high degree of plant utilization, as explained at length in Chapter II* Occurrence of labor strikes is a case in point. It is difficult to ascertain the relative frequency of labor strikes in times of inflation as compared with times of deflation. But, as far as the steel industry in this period is concerned, there were five industry-wide strikes in the eleven years from 1946 to 1956.23 The longest of these strikes lasted for almost two months, idling some 600,00© steel workers.24 As a result, the production of the steel industry was reduced to 85*9 per cent of its rated capacity that year, in sharp contrast to 100.9 per cent the previous year, and 94*9 per cent the following year. Moreover, the low of 72.5 per cent capacity operation in 1946 was brought about largely by labor strikes, which included a four-to-sixteen-week strike in the steel industry.25 During a strike, a minimum labor force has to be maintained in order to keep the facilities in shape fbr production as soon as the strike is over. Furthermore, 23 Hew York Times. July 28, 1956, section C, p. 8. 24 Neil W. Chamberlain and Jane M. Schilling, The Impact of Strikes: Their Social and Economic Costs (New ihrk; Tiarper & Brothers, 1954), p. 188. 25 Idem 271 some labor also has to be expended on preparations for shutdowns and reactivation, or even for repairing and rebuilding coke ovens, blast furnaces, and steel furnaces which are damaged because of the strike.26 Under these circumstances, labor productivity as measured by total labor input per unit of output is sure to decrease, other things being equal. Operational economies. Besides the factor of lowering overhead labor per unit, there are other factors which contribute to raising productivity as output expands. In the course of labor disputes in 1949 and 1952, some valuable information on productivity was published. The most important one as far as the present discussion is concerned is the data presented by the United States Steel Corporation.27 in one case, it showed the effect of order size upon productivity. It displayed that, at the same plant with the same crew in producing the identical product, the factor of one roll change per 26 George Stocking, Basing Point Pricing and Regional Development (Chapel Hill: University of North Carolina Uress, 1^4), p. 25. 27 **U. S. Steel Exhibit 3” in the Company Testimony before Presidential Fact Finding Board. Steel Industry Case (1949) (no distributor), v.Ill, pp. 1512-1956; also nU. S. Steel Exhibit 1” in the Companies* Presentations, op. cit.. v. Ill, pp. 1472-1521. / 272 order caused the expenditure of 0.5&9 standard man-hours per ton on a 1,000 ton order while there was an expenditure of 0.913 standard man-hours per ton on a 100 | ton order, merely because the work required to change ! rolls was the same whether for a large order or for a ' small one. Thus, if the order size is 1,000 tons the i output per man-hour would be 1.70 tons, or 55 per eent higher than the 1.10 tons on the 100 ton order.2$ During inflation, order sizes are likely to be large, because the customers* steel requirements are expanded and they try to get all the steel that is available, and because the steel companies are able to be more selective about their customers, as shown in Chapter IV. Insofar as this is true, inflation tends to increase productivity through increasing order sizes. Other important factors in customer requirements, such as specific shipment schedules or tolerance specifications, have comparable results indicating that, in times of stringent steel supply, steel users tend to adjust their requirements in such a way as to facilitate maximum steel production. These tendencies have an important bearing on the overall labor productivity.29 2S Companies* Presentations, on. cit.. v. III. p. 1505. 29 Ibid.. p. 1473. 273 The total effect of these operational economies realized as the volume of production expands, or more accurately, as the degree of plant utilization increases, will bring about a close, positive correlation between volume of production and productivity. The United States Steel Corporation has shown this relationship in two tables and a graph, which have been consolidated into one graph here as Figure 23* The United States Steel Corporation also presented another graph drawn on the basis of data from 60 quarterly reports from its own records from 1934 to 1948 to show this relationship. This graph is reproduced here as Figure 24. The graph was presented originally as evidence to discredit the union’s contention in 1949 that, for the United States Steel Corporation, production at 30 per cent of capacity required approximately 20 per cent more man-hours per ton than production at 95 per cent of capacity.30 But, what the company tried to show was that the union underestimated the effect of the level of operation upon productivity. As Figure 24 indicates, at the 1948 yield of 70.5 per cent from ingots to shipped products, the man-hour requirements per ton would be 31*8 man-hours 30 Robert R. Nathan Associates, Inc., Economic Position of the Steel Industry. 1949 (Washington, D. C.: Robert R. Nathan Associates, Inc., July 1949/, p. 7. 274 ! RELATIONSHIP OF SHIPPED TONS PER 1000 MAN HOURS AND VOLUME OF PUBLIC SHIPMENT, U. S. STEEL EXPERIENCE, 1934-1951 t \ I Tons per 1000 man hoars tons i i t ! i t I Tons per 1000 man hours i I Tota . tor s shi] ped % - • Sources U* S* S* Exhibit 1, Ccs ________ D-18-C), t . Ill, pp i * Presentations before the Wage Stab*n«ation Board (Case No, and 1457. ------------ FIGURE 2k VOLUME EFFECT ON HAN HOURS PER TON, TJ. S. STEEL EXPERIENCE, 193U-19l*8 O $ f > o iOOO 1500 Z m Z500 3000 35c0 iOM 4500 5000 55<« 6«te t5bo GUARTERLT VOLUME OF TONS SHIPPED TO THE PUBLIC (000 Omitted) Sources U# S* S« Exhibit la Companies* Presentations before Wage Stabilization Board (Case No* D-18-C0, v* III. p* IgSliY “ — : — ' ............ 276 | at 30 per cent of capacity operations and IS,6 man-hours at 95 per cent of capacity operations for the United States Steel Corporation,31 in other words, the company tried to establish the fact that it required 71 per cent, not 20 per cent, more man-hours at 30 per cent of capacity operations than at 95 per cent of capacity operations. As far as this present study is concerned, however, the union and the company were in agreement in that they all recognized the fact that productivity increases along with the degree of plant utilization within the bounds of the optimum level of operation. Productivity statistics. This factor in productivity is also recognized in the study of productivity in the steel industry made by the Bureau of Labor Statistics, the estimates of which will be used here in an attempt to avoid being involved in the discussion of the complicated subject of measurements and estimates of productivity.32 in Table XL the column of "output per production worker man-hour" is more significant than the other two because it represents labor efficiency more 31 Company Testimony (1949), p. 1510. 32 U. S. Department of Labor, Bureau of Labor Statistics, Man-hours Per Unit of Output in the Basic Steel Industry. 1939-1955 (Bulletin too. 12^0; Washington, D. C.: the Superintendent of Documents, September 1956), 40 pp. 277 accurately; and it is those figures in this column that are commonly taken to represent labor productivity. Examining year-to-year changes in this column, one finds that, with occasional exceptions, productivity gains have been influenced by ups and downs in the production volume, or more accurately, the degree of plant utilization. For example, a decline in productivity occurred in 1930, 1931, and 1954. In all these years, the level of capacity operation declined from the previous year's level. On the other hand, sharp gains in produc tivity (4 per cent or more) have generally been achieved when production volume expanded rapidly and when such expansion followed a previous year's reduction in the employed labor force. These are the years such as 1920, 1933, 1935, 1939, 1941, 1950, and 1955. The long-run trend of man-hours per unit of product has been decreasing constantly. From 1919 to 1939, unit man-hours in steel decreased an average of 3*6 per cent a year, compared with an annual decrease in all manufacturing of 3*3 per cent. Most of the improvement in steel came in the prosperous decade 1919-1929, when the average annual rate was $.9 per cent. From 1939 to 1955, the improvement in steel seemed to have slowed a little, registering an average annual reduction of 2.7 per cent in man-hours per unit. But, in this period, as TABLE XL PRODUCTIVITY OF LABOR IN THE STEEL INDUSTRY 1926-1955 191*7-191*9 = 100 YEAR All Employees OUTFUT PER Production Worker Production Worker Man-Hour 1926 66.5 1*9.9 1927 65.8 50.5 1928 75.5 57.0 1929 77.1 57.3 1930 61*.9 51*.2 1931 55.9 52.6 1932 36.6 5i*.8 1933 1*9.0 58.9 1931* 1*5.2 58.0 1935 55.1* 62.3 1936 67.0 61*. 2 1937 6U.lt 65.3 1938 1 * 8.8 66.6 1939 72.9 71.2 78.6 191*0 79.2 77.3 81.1* 19U1* 90.3 87.9 86.3 191*7 99.8 99.3 99.2 191*8 101.1 100.8 99.1* 191*9 98.8 99.9 101.6 1950 113.2 113.1* 110.8 1951 116.6 117.1 111.5 1952 116.0 119.0 116.0 1953 119.2 121.7 117.0 1951* 107.5 110.9 lll*.0 1955 129.6 132.1 127.0 * 191*2-191*6 figures were omitted in the original report. Source: U. S. Department of Labor, Bureau of Labor Statistics, Man-hours Per Unit of Output in the Basic Steel Industry. 1939-1955. pp. Bfl 279 I in the earlier one, the steel industry’s improvement j continued to exceed the reduction in man-hours per unit in all manufacturing industries* From the latest information available, the steel industry experienced an average decline of 2*3 per cent in unit man-hours from 1939 to 1953, while the corresponding decrease in all manufacturing industries was 1*8 per cent* This difference was largely the result of discrepancies in the improvement of productivity in the steel industry in comparison with all manufacturing during World War II, when the steel industry underwent a hitherto unprecedented expansion. Between 1939 and 1947, unit man-hours in the steel industry decreased 2.3 per cent annually on the average, quite different from the meager 0*5 per cent recorded by all manufacturing industries. In the period 1947-1953, however, the steel industry lagged behind all manufacturing industries for the first time in more than three decades, having a 3»2 per cent annual rate against a 3.3 per cent for all manufacturing.33 There are many factors responsible for the retarded productivity advance in the steel industry during this last period. The potentials of the facilities were utilized to the fullest extent and depreciation and 33 Ibid.. p. 6. L 280 exhaustion were heavy during the war* The results of new and improved facilities installed following the war would show up only after some length of time had elapsed. Moreover, the quality of raw materials has deteriorated as has been noted. It was some years after the war that increased and improved treatment and beneficiation of raw materials were able to counterbalance the quality decline. At any rate, this problem is more related to long-run than short-run factors. How the short-run factors operate within the framework of long-run factors is demonstrated by the events in 1949 and afterward. In the words of a report produced by the Bureau of Labor Statistics, it is like thisi . . . in 1949* production in the steel industry followed the downward trend of business in general. Increased efficiency of existing facilities and installation of up-to-date furnaces and mills in the postwar years began to show their effect in portions of the year during which the industry was in full operation, but a nation-wide steel strike in October 1949 left less than 10 percent of the industry’s capacity in operation. These and other faetors re sulted in only moderate gains in man-hour output and in a less-than-average decline in unit man-hours. On the other hand, the business upturn in 1950 has a generally favorable effect on total manufacturing and unit man-hours declined at a rate almost double that for the period as a whole. Steel shared in the favorable business situation — in 1950, steel works operated at about 97 percent of capacity. The reduction in unit man-hours in this year — as in many other individual manufacturing industries — was large. In steel the decline was over 8 percent. Again, the decline in activity between 1953 and 1954 2&L (and subsequent recovery) resulted, first, in an increase in unit man-hours, and then in a large decline between 1954 and 1955*34 Employment cost* Since it has been established that there is a correlation between productivity and the degree of plant utilization, it follows that a high price for labor in inflation may not necessarily and often does not mean a high unit labor cost* Statistical evidence pertaining to the steel industry in the period under study seems to suggest that unit labor cost in the steel industry has not increased, at least not as much as the steel companies claimed in their public statements* Converting the figures in the ”output per production worker man-hour” column in Table XL with 1939 as the base year, and tabulating them side by side with hourly earnings and total employment cost per hour, all in index numbers with 1939 as the base year, as is done in Table XLI, one can see that both hourly earnings and hourly employment cost overstate the increase in labor cost during this period, simply because they have not taken productivity increases into account. Making an adjustment allowing for productivity increase, average hourly earnings of wage-employees of the steel industry gained 77.& per cent from 1939 to 1955 and total 34 Ibid.. p. 4* TABLE XU INDEXES OF PRODUCTIVITY-, HOURLY EARNINGS, EMPLOYMENT COST, AND INFLATION 1939 = 100 Year Output Per Production Worker Man-Hour "^Total %ourly EJnploy- Sarnings ment Cost of Wage of Wage Employees Employee Man-Hour ^Hourly **Hourly Earnings Employment Adjusted by Cost Productivity Adjusted by Productivity Index of Infla tion 1939 100.0 100.0 100.0 100.0 100.0 100.0 191*0 103.6 100.9 101.0 97.1* 97.5 101.0 191*1 109.8 113.1 112.9 !03.0 102.8 109.6 191*7 126.2 17l*.l* 171* . 1 * 138.2 138.2 176.3 191*8 126*5 188 .k 187.1* 11*8.9 11*8.1 190.5 191*9 129.3 195.6 195.6 151.3 151.3 181*.5 1950 11*1.0 201.3 212.9 11*2.8 151.0 189.1 1951 11*1.9 221*. 2 235.9 158.0 166.2 207.7 1952 11*7.6 221*. 8 258.1* 165.8 175.0 206.6 1953 11*8.9 259.8 272.3 171*.5 182.9 205.9 1951* 11*5.0 266.0 280.1* 183.1* 193.1* 206.1* 1955 161.6 287.3 303.8 177.8 188.0 Source: Supra, Tables V and XL, and American Iron and Steel Institute, Annual Statistical Report, 1955, p. 31j 19U8, p. 11# * Including straight time regular wage rates, shift differentials, overtime and holiday pay and premiums, and paid vacation. ■ a - # Hourly earnings plus pensions, insurance and Social Security payments. 283 employment cost per wage-employee hour gained 88.0 per cent for the same period. HI these figures are also included in Table XLI. To the steel workers, hourly earnings before productivity adjustment allowances have been made are more meaningful because the hourly earnings together with the index of inflation provide a gauge for measuring their current standard of living. The "real1 1 hourly earnings of the wage-employees of the steel industry increased by j 28.9 per cent in the 1939-1954 period. To the steel companies, on the other hand, the column of "hourly employment cost adjusted by productivity" in that table is a better indicator of their labor cost. The figures |in the column show an increase of 88.0 per cent from 1939 to 1955, or 93*4 per cent from 1939 to 1954* However, if allowances are made for increases in the index of inflation, then the "hourly employment cost adjusted by productivity" stood at only 93*7 in 1954 — a drop of 6.3 per cent from the 1939 level. Furthermore, in none of those postwar years represented in the table had the index numbers in the column exceeded the 1939 base after making allowances for the general price level. As the column is but another way of showing unit cost of wage-employees, the labor cost of the steel industry had increased in terms of monetary units only, and had I 234 . actually decreased somewhat from 1939 to 1954 if j allowances for the concurrent rise in the general price level are permitted* However, any further inferences on labor cost and its effects on the steel industry should be exercised with extreme care* There are many other factors involved. For one thing, the relationship between the index of inflation and the index of steel prices has a J great bearing in this matter. Furthermore, the labor cost discussed so far is only a part of total labor cost in steel production. The role of salaried employees of the steel companies has been deliberately set aside in order j I to simplify and facilitate the discussion. The employment i i cost of wage-employees and the cost of raw materials are j largely, though not completely, in the nature of variable i costs. The overhead cost is very important in an industry I like steel, which ties up a large portion of its investment in the form of fixed property. In order to understand the cost behavior of the steel industry under inflation, a discussion of unit cost seems necessary. UNIT GOST UNDER INFLATION Changes in the cost of raw materials and the cost of labor are reflected in the unit cost. An analysis of changes in the unit cost of steel production under inflation may serve to sum up the discussion of cost 2 $5 effects of inflation. Some Preliminary Considerations In discussing the supply function of the steel industry in Chapter III, a section was devoted to the characteristic of a heavy fixed investment. There reference was made to the famous study of the United States Steel Corporation of the cost function. In that study, the overhead cost, which was termed fixed cost, was found to be very high proportionally. If the level of operation is raised, this overhead cost will be borne by a larger quantity of output, and thus will be a lighter burden in relation to each unit of output • The importance of a higher rate of capacity operations to the burden of this heavy overhead cost is vividly illustrated by such statements as: the overhead cost constitutes 15*4 per cent of total costs at the 100 per cent of capacity operating rate, and 57*2 per cent of total costs at 10 per cent of capacity operations.35 It follows that, insofar as inflation tends to raise the level of operation, it tends to lower total unit cost of steel, other things! being equal. 35 James A. Morris, “The Concept of Steel Capacity,** The Journal of Industrial Economics. 111-1:47-59, December 1954. 236 Changing conditions. Usually other things change as inflation prevails. Changes in the cost of raw mate- j i rials and the cost of labor have been discussed. Labor strikes, which prevent the plant facilities from operating, may be more f r e q u e n t .36 Overhead cost itself is also subject to change. In general, the amount of overhead cost tends to rise along with inflation. This is so because the prices of those goods and services which constitute overhead cost tend to rise in times of inflation. Even taxes, which are among overhead cost items, excepting on income or output, tend to rise during inflation. j Moreover, if inflation is quite severe, it would |strain the steel capacity, thus causing bottlenecks and 1 i inefficiencies to appear. Under such conditions, the j total unit cost would increase as the level of operation j I exceeds the optimum mark. This is to say, inflation tends to bring a lower unit cost for steel up to a certain point beyond which the unit cost would reverse its course. Break-even point. The question of the break-even 36 For instance, Edgar L. Warren found the "national emergency strikes” occurred more frequently in the two postwar periods 1919-1922 and 1945-1949. Edgar L. Warren, "Thirty-six Years of * National Emergency* Strikes,** Industrial and Labor Relations Review. V; 12ff; as cited in Chamberlain, Impact of Strilce. op. cit., p. o. 237 ! point in the steel industry was brought up during the 1949 ^ labor dispute. The spokesman for the union stated that under June 1949 conditions ”the steel industry would break even at 32 per cent of c a p a c i t y .”37 Many company spokesmen refuted this statement by pointing to actual operating losses incurred at much higher operating rates, or by offering alternative estimates at much higher levels of operation. The concensus of the spokesmen for the steel companies was that the break-even point of the steel industry was somewhere between 60 per cent and 70 per cent of capacity under the conditions prevailing in June 1949.3S It is to be noted that the break-even point of 1 either a company or an industry cannot be ascertained until the cost function is accurately estimated and the net selling prices of the products are known. Both of these data are unavailable to an outsider. Furthermore, a break-even point for an industry represents nothing more than the relationship between the average cost function for the industry and the prices of its products. The implication of the statements on this matter made on 37 Nathan, Economic Positions of the Steel Industry, 1949. op. cit.T~P. 23. 33 Company Testimony, op. cit.. v. IV, p. 1720. 238 behalf of the steel companies was that the cost of producing steel had gone up but the prices of steel had not risen proportionally since the war. The validity of this implication can be ascertained only after the cost behavior and the steel prices have been thoroughly examined and compared. However, when this has been done, it is unnecessary to refer back to the question of the break-even point. Unit Cost Behavior While discussing the supply function of the steel f industry, reference was made to the scarcity of cost information, and the data computed from the annual reports of three integrated steel companies were taken to represent the entire industry. The data used seem to be i quite representative even though they cover less than one i half of the total capacity of the industry. This is substantiated by comparing them with the data made available by the American Iron and Steel Institute, representing over 90 per cent of the industry’s capacity since 1944* I The data. The data from the Institute were derived in the same way as the data for the three steel companies, namely by using the reported total production to divide the total reported costs after the taxes on income were eliminated. The resulting data are presented here in Table XLII. As can be seen, the unit cost derived from the annual reports of the Institute are somewhat higher than the data derived from the reports of the three companies for all postwar years* There are several possible explanations for this discrepancy* First of all, the institute’s data include all taxes other than the federal income tax, while the data for the three companies exclude a majority of other taxes. Furthermore, the institute’s data pertain to many companies which sell highly finished steel products only and thus have a higher unit cost, while the dominating company — the United States Steel Corporation — of the three companies is the largest seller of semi-finished steel products, and to a lesser extent, the Bethlehem Steel Corporation also is an important seller of semi-finished steel products* Despite this discrepancy, however, the two sets of data are comparable. Their comparability can be seen from the parallel year-to-year percentage changes for all the postwar years. Since the data derived from the records of the three steel companies cover more years than the data from the institute’s reports, they will be used in the following analysis on the relationship of unit cost and inflation. Price level adjustment« Table XLIII shows the TABLE 3LH AVERAGE UNIT OOST: THE STEEL INDUSTRY VERSUS THREE STEEL COMPANIES YEAR THE INDUSTRY* THREE COMPANIES** $ PER NET TON % CHANGE $ PER % NET TON CHANGE 19lUi 7U.90 78.62* 19U5 76.15 1.7 75.13 -OU.5 19U6 71.15 -05.5 66.63 -11.6 19ii7 77.35 7.5 69.09 k.l 19U8 89.23 15.5 79.88 15.6 19U9 91.13 2 .1 80.38 0.6 19^0 89.76 -01.5 78.76 -02.1 1951 100.81 13 »k 87.26 10.8 1952 113.25 12.3 100.UO 15.1 1953 108.26 - O i j - . l j . 9ii.5 7 -05.8 195U 111.88 3.3 99.32 5.0 1955 107.32 -o lw i 98.25 -01.1 * Computed from the data covering over 90 per cent of the steel industry’s total steel production, published by the American Iron and Steel Institute, Annual Statistical Report, 1955, pp. 12f 1951, pp. 8f. The formula is:(total employment costs and other expenses - estimated Federal taxes on income) net tons of steel produced by the reporting companies. - sb* From supra, Table VI 291 index of steel unit cost in both current price level and a constant price level* In terras of current price level, the unit cost of steel increased for most years since 1941* It stood at 223*5 in 1954, taking the 1935-1939 average as 100* While this index of unit cost at current price level reveals to some extent the factors such as the degree of plant utilization in shaping the unit cost movements, it is greatly overshadowed by the rise in the general price level* In other words, the postwar rise in the unit cost of steel at current price level, just as the rise in many individual prices and costs, was largely a reflection of the rise in the general price level* To judge the movement of the unit cost of steel, the index at a constant price level is more meaningful* Converting the unit cost index into a constant price level (the 1935-1939 average level), one can see^that the unit cost of steel had increased 11*1 per cent in 1954 above J the 1935-1939 base* This was not the highest of the j postwar period, for the peak was 12*2 per cent above the | base in 1952. However, even this postwar peak was j i surpassed by many years during the war and deflationary years such as 1932 and 193&* Moreover, the cost data were derived from the annual financial reports of the companies, and therefore were subject to the influence of changes in accounting procedures. The accelerated 2 9 2 TABLE XLIII INFLATION, AND CAPACITY UTILIZATION AND UNIT COST OF STEEL 1929 - 1901+ Unit cost in Per cent Year-to-year percentage YEAR (1930-39=100) of changes in current constant capacity inflation capacity cost in const prices prices operation index operation ant prices 1929 79*7 66.2 88.7 — — « 1930 86.1 76.0 62.8 - 0.9 -30.1 H+.8 1931 103.0 103.9 38.0 -12.1 -39.0 36.7 1932 131+.7 101.0 19.7 -10.7 —1+8.2 1+0.8 1933 90.1+ 109.0 33.0 - 2.0 70.0 -28.8 1931* 97.2 103.0 37.1+ 8.1+ 11.6 - 3.9 1930 98.8 100.1 1+8.7 1+.6 30.2 - 2.8 1936 80.0 80.8 68.1+ 1.0 1+1.1 -11+.3 1937 97.8 93.1+ 72.0 0.2 6.0 9.3 1938 121+.1 120.1 39.6 - 0.1+ -1+3.1+ 33.9 1939 99.8 102.1+ 61+.0 - 1.7 62.9 -19.1 191+0 96.7 98.2 82.1 1.0 27.3 — l+.l 191+1 118.8 111.1 97.3 8.0 18.0 13.1 191+2 102.1+ 127.1* 96.8 11.9 - 0.0 H+.7 191+3 178.0 11+1*8 98.1 0.3 1.3 11.3 19 1+ 1+ 177.0 138.9 90.0 1.2 - 2.7 - 2.0 191+0 169.1 130.1 83.0 2.0 -12.6 — 6.3 191+6 H+9.1+ 103.1 72.0 11.0 -13.2 -20.8 191+7 100.0 90.5 93.0 18.6 28.3 -12.2 191+8 179.8 96.8 91+.1 8.0 1.2 7.0 191+9 180.9 100.6 81.1 - 3.1 -13.9 3.9 1900 177.2 96.1 96.9 2.0 19.0 - 1+.0 1901 196.1+ 97.0 100.9 9.8 l+.l 0.9 1902 226.0 112.2 80.8 - 0.0 -10.0 10.7 1903 212.8 106.0 91+.9 - 0.3 10.6 - 0.0 1901+ 223.0 111.1 71.0 0.2 -26.1 1+.8 Source: supra, Tables V, VI, and XV* amortization charges on certified defense facilities and | the accelerated depreciation on all facilities since 1954 allowed by federal tax laws were responsible, at least in part, for the high unit cost shown during the war and after 1952* Taking this factor into account, the unit cost of steel in constant prices during this inflationary period appears to be no higher than in the late 1930*s. This observation is reinforced when attention is drawn to the fact that in four of these postwar years — 1947, 194#, 1950, and 1951, all highly inflationary years — the unit cost in constant prices was below the j 1935-1939 level. In two other postwar years in which the ! j unit cost of steel in constant prices was above the 11935-1939 level, one was deflationary 1949, the other ! strike-ridden 1946* Incidentally, a steel strike that shut down most steel mills for almost two months occurred in 1952, and 1954 witnessed a mild recession. In view of these factors and many others such as a seeming change in the product mix toward more highly finished forms, inflation in this period in the United States seems not to have brought about a higher unit cost to the steal industry in terms of constant prices. On the contrary, it appears to have brought about a lower unit cost,- as compared with the late 1930*s. The reason seems to lie in the increased degree of plant utilization under 294 inflation* Capacity utilization. This factor is brought into focus in those columns in Table XLIII showing year-to-year percentage changes in the indexes of inflation and unit cost, and capacity utilization. In 17 years of the 25-year interval from 1930 to 1954, the per cent of capacity operation varied directly with the index of inflation. In the three years, 1953, 1939, and 1933, when the index of inflation declined but the rate of capacity operation increased, the decline in the index of inflation was insignificantly low. In another five years — 1954, 1946, 1945, 1944, and 1942 — when the rate of capacity operation failed to rise along with the index of inflation, the failure was due to one of the following facts: The inflationary force was too weak, as in 1954 when the index of inflation rose only by 0.2 per cent after a successive two-year mild decline; labor disputes shut down the steel mills, as in 1946; or the years were the war years. The inverse relationship between capacity utilization and unit cost appeared in 17 of the 25 years. In 1946, 1945, and 1944, the unit cost declined along with the rate of capacity utilization. This was because there was a large segment of inefficient facilities maintained for war production and the change in the 295 product mix was toward less highly finished forms. When I ! unit cost rose along with the level of capacity utilization in 1951, 194$, 1943, 1941, and 1937, it was largely due to the fact that the level of capacity utilization had risen beyond the optimum level. The case of 1937 seems to be an exception. In that year, the United Steelworkers of America secured a wage increase of $0.10 per hour while the productivity increase was an insignificant 1.7 per cent.39 To sum up this chapter, it is found that both the prices of labor and materials in steel making increased more than the general price level during the period under study. However, the high prices of labor and materials were usually counterbalanced by increased efficiencies in utilizing labor and materials as a result of high operating rate brought about by inflation. Consequently, the unit cost of steel at constant prices showed no increase in the inflationary 1946-1954 as compared with that in non-inflationary 1935-1939. 39 Research Department, United Steelworkers of America, "Major Contract Gains — U. S. Steel Corporati — Basic Contracts, 1937-1952" (mimeographed memorandum I for the union officers; dated October 13, 1952), p. 1; |supra.. Table XL. CHAPTER VII STEEL PRICES AMD FINANCIAL POSITIONS OF THE STEEL COMPANIES UNDER INFLATION STEEL PRICES AND PRICING POLICIES This section is devoted to an analysis of the characteristics of steel prices and the price movements of different steel products during this inflationary period* Pricing Steel Products Students of prices are generally aware of the fact jthat monetary priees, either in the form of public I quotations or invoice dollar value per unit paid by the buyer, may be only nominal or secondary considerations* There are other aspects that may have more weight in determining a transaction under particular circumstances* In the category of consumer goods, brand names, location, credit terms, services, and the like have been recognized as very important in determining a sale* In the case of producer goods such as steel, factors other than monetary prices, also have a role. It is true that several steel producers may be able to supply the same type of steel with identical properties. However, it is not true that all of the steel producers have the same delivery schedule r 297 available to a particular customer, or have the same ratio of rejects, or have exactly the identical service available, or will enter the same reciprocal purchase agreement with a customer*! To the extent that these variations other than monetary prices entail variations in costs to the producers and/or satisfaction or costs to the purchaser, they constitute a part of wrealB prices of commodities* Such factors are not constant under different economic conditions* They tend to vary with inflation and deflation; and there are no reliable statistics available on them* Nevertheless, it is generally agreed that the producers tend to offer more or better services as extra inducements to customers in times of deflation and vice versa. This is particularly known to be true in the steel industry* Since the steel industry is oligopolistic, and the steel producers are able to have a price policy in the economic sense, the steel producers have the choice of either changing monetary prices of their products in response to changing economic conditions, or varying other factors in lieu of price fluctuations. 1 Conference on Price Research, Committee on Price Research in the Iron and Steel Industry, Price Research in Steel and Petroleum (New York: National Bureau of Economic Research, 1939), pp* 31f• Insofar as this is true, the statistics on monetary prices | I of steel, no matter how accurate they are, tend to , understate the "real" price in times of inflation and overstate it in times of deflation. Secrecy about prices. What is more, it is almost impossible to have accurate statistics on monetary prices of steel other than a compilation of the published base prices, because the monetary prices of steel inelude extras and many secret elements such as rebates and discounts. Oskar Morgenstern stated in his essay on the accuracy of economic observations: Secrecy of prices is a primary concern of both buyers and sellers, because of private rebates and the individual treatment of customers. To this must be added that such discriminatory treatment occurs largely when firms are also producing a great variety of commodities (e. g*, steel, where there are reportedly 10f000 and more different kinds) and when great variations in the quantities are observed. Thus, large automobile producers will obtain a very different price of steel (with different range and frequency of fluctuation) than regional, small, builders: A measure of **thew price of steel is, therefore, difficult to carry out.2 The importance of these elements in shaping the total prices paid by the buyers is seen in a study on consumers’ prices of steel products by the Bureau of Labor 2 Oskar Morgenstern, On the Accuracy of Economic Observations (Princeton: Princeton UniversityTress, 1950), p. 92. Statistics made in 1943 and published after the w a r .3 it j is found in that study that extras, especially during the i early war years, assumed increasing importance as a component of the delivered price, and that actual prices varied from 50 to 135 per cent of April 1942 published delivered prices during the period covered {January 1939 to April 1942), while the published prices remained stable.^ Moreover, the importance of extras also varied 1 with products* Between 1939 and 1942, for instance, extras for eight major steel products averaged 14 per cent of the delivered prices, ranging from 1*5 per cent for structural shapes to 35 per cent for cold rolled strip.5 Rebates and discounts also have the same influence i ' ;upon the prices actually paid by the buyers* For 1 instance, from 1938 to 1941* the composite steel prices published by the Iron Age and the American Metal Market 3 The summary of this study was published as "Labor Department Examines Consumers* Brices of Steel Products," in Iron Age. April 25, 1946, pp* 11S-145H. The full version was published in: Office of Price Administration, Studies in Industrial Price Control (Historial Reports on War Administration; General Publication No. 6; Washington, D. C.: the Government Printing Office, 1947), Pt* VI, Price Control in Steel. 44 pp. 4 Ibid*. pp. 42f. 5 Idem j showed a decline of about 2.5 per cent and 4.7 per cent l I respectively. Actual prices, however, were estimated to have increased by 13 per cent during this p e r i o d .6 Fortunately, the movement pattern of these elements is similar to those service factors discussed. All indications detected show that discounts and rebates tend to be reduced or eliminated, and extras tend to rise either alone or along with the base prices, in times of inflation; and vice versa. To the extent that this is true, the statistics on steel prices available — the wholesale price index of iron and steel by the Bureau of Labor Statistics, the index of steel prices published by the Steel magazine, the composite prices of finished steel compiled by Iron Age and by American Hetal Market — will show a j general, though not accurate, tendency of movement of * steel prices, even though they cover only the part of the j actual prices paid by the buyers called base prices. In reading these statistics, one should, of course, bear in mind that they probably understate the actual prices during inflation and overstate them during d e f l a t i o n .7 6 Carl M. Loeb, Rhoades & Co., Steel (lew York: Carl M. Loeb, Rhoades & Co., 1951), p. 50. i ! 7 Price Control in Steel, op. cit., p. 41* I 301 \ Price quotation. Within the scope of base prices, the steel industry*s customary practice was to quote the J base prices at delivery point under a system commonly known as the multiple basing point system. Under the system, the prices are quoted as delivery prices at the steel production center designated as the basing point for particular products in particular market areas, which will result in lowest freight charges to the customer, regardless at where the steel is actually produced. Under this system, the steel producers usually pay most of the freight charges. This practice is called freight absorption. There has been great debate among government officials, industrialists, and economists in this country as to whether this basing point system of pricing would tend to promote competition or monopoly.** As far as this study is concerned, it is unnecessary to be involved in such a controversy. The point should be made is that the inflationary forces during the period under study were partially, if not largely, responsible for the brief i !deviation from this system from July 1948 to early 1954* j I mm. ■ ■ — — i m .............................................. ■ I 8 For a bibliography, about this debate, see George Stocking, Basing Point Pricing and Regional Development (Chapel Hill: University of" North Carolina tress, 1954), pp. lOf. n. 6; Donald Dewey, “A Reappraisal of F. 0. B. Pricing and Freight Absorption,* * Southern Economic Journal. XXII-1:48, July 1955. 302 I On July 7, 194$, the United States Steel j Corporation announced that it would thereafter sell steel i only on an f . o. b. basis. That is to say, it announced the abandonment of the basing point pricing system and the adoption of the mill pricing practice*^ Most steel producers followed suit, although some small steel producers never did drop freight absorption in favor of mill pricing. The reasons given by the steel companies for this change were mostly legal. They said that the Supreme Court’s decision in the Cement Institute case handed down in the spring of 194$, which upheld the Federal Trade Commission’s cease and desist order against the use of the basing point pricing system in the cement industry, practically outlawed the basing point pricing system for all industry. Furthermore, the Federal Trade Commission had started proceedings on August 16, 1947, against the American Iron and Steel Institute and all major steel producers for conspiracy to restrict competition in the 9 "Steel Industry Abandons Basing-point Pricing," Business Week. July 10, 194$, PP* 19f. 10 "More Freedom for Steel Pricing," Steel, 126:47, June 5, 1951. 303 use of a multiple basing point pricing system. Actually the Supreme Court’s decision did not outlaw the basing point system as such, and the Federal \ Trade Commission’s proceedings against the steel producers were not concluded until in the summer of 1951* Furthermore, and this is even more important, the Federal i Trade Commission specifically sanctioned delivered pricing of freight absorption “when innocently and independently pursued, regularly or otherwise, with the result of promoting competition,” in its decision in this matter, even though it did issue a cease and desist order against conspiracy to restrict competition.^2 However, the steel companies continued to practice mill pricing until 1954 i when the inflationary forces were weakened and the steel , I companies were operating at a rate much lower than what j jthey had experienced for many recent years. It was then and only then that the steel companies gradually reintroduced the multiple basing point system. The essence of this matter is this: In early I 11 The Decision of the Federal Trade Commission in ! the Matter of American"*Iron and Steel Institute et al.. 48F7C Decisions 123 (1951)• Abrief summary and discussion of this case can be found in Stocking, op. cit., pp. 176-1&1. 12 Decision of the Federal Trade Commission. op. cit., p. 154* postwar years, the steel companies suddenly discovered that, instead of a slack demand for steel as they had , ! forecast, their cmstomers needed more steel than they could produce. They found that the practice of freight absorption under the basing point system of pricing, which had been used profitably for decades to attract distant customers, had now become an unnecessary burden* This was so because their neighboring customers, who were and would be much more desirable customers than distant j ones, could buy and often eagerly desired to buy all j i tonnage that they produced* In addition, the freight burden seemed to have become heavier since the freight rate had been raised considerably as a result of inflation* For instance, the allowable rail freight rate increased by 88*9 per cent from June 30* 1946, to early 1952*3-3 Under these I • | circumstances, the steel companies naturally came to realize that it was unprofitable and there was no need to 13 Standard and Poorfs, Industry Survey: Steel and Iron (Basic Analysis; Mew York: Standard and K>or Corporation, 1955)* p* 12* Benjamin Fairless testified in early 1950 that it would cost the United States Steel Corporation about one dollar a ton if it returned to the basing point system. Ben Moreell testified that it would cost Jones and Laughlin Steel Corporation about #1.25 per ton. Gf. U. S. Congress, Joint Committee on the Economic Report, December 1949 Steel Prices Increases * Hearings (81st Congress, 2nd Session; Washington: Government Printing Office, 1950), pp* 13* 59, and 189. 305 ' i continue to pay the outgoing freight bills which the i i customers were able and willing to pay. When the legal pretext gave them an excuse (they needed a pretext because they had defended the basing point system for decades), they abandoned their long-cherished tradition of the multiple basing point system. Only a few years later, in 1954, when the demand for steel slackened temporarily, the steel companies found that it was advantageous to resume the tradition again. The practice of mill pricing was too short to have a long-lasting effect upon the steel industry and its customers. For most of the time during which mill pricing was in effect, the inflationary forees were strong and the demand for steel was high, and thus many would-be effects such as the advantage of the steel producers in the surplus areas and vice versa were concealed. However, to I the extent that there are differences in proximity of mill : location to markets and in freight rates for different classes of steel products, such a shift from the freight paid by steel producer to that paid by steel user would have a different impact upon different steel producers and users. But the statistics on this point are quite inadequate for making a meaningful analysis. Price Movements In order to make a general survey of movements of steel prices, discussions will be undertaken on composite price, which represents the price of steel products in general, and prices of some particular steel products in broad classifications. Composite price. As noted previously, the available statistics on steel prices may serve as an adequate indication of general tendencies, even though they are by no means accurate, nor do they cover all monetary components of steel prices. In Chapter III the composite of finished steel prices published by the American Metal Market was used to represent the steel price in general. One of the reasons for its selection is that it is a widely used source of statistics, and is quoted in publications of government agencies.^ Another reason is that it covers more steel I products than the finished steel composite price published i by the Iron Age. While both cover finished steel and are MKMMM. aiBikn. weighted by shipment volumes, the composite price of the American Metal Market pertains to the average price of finished steel products, except rails, and the composite price of the Iron Age is calculated from 10 major steel 14 Business Statistics. 1955 edition, for instance, quoted this composite price. Business Statistics is a supplement to the Survey of Current Business, published by the U. S. Department of Commerce. products only, excluding all coated productsThis difference in coverage explains the fact, as shown in Table XLIV, that the Iron Age figures are generally below those of the American Metal Market. However, the relationships between these two sets of figures are, while not constant, found to be relatively stable, the figures of the American Metal Market being, as a rule, 13 to 15 per cent higher than those of the Iron Age over both the deflationary and inflation years, except when strict price control was exercised by the government* This being the case, the two sets of composite steel price are comparable. Both sets of steel composite prices show a continuous increase year after year since the war. Taking the period 1939-1954 as a whole, the increases in both sets were about the same as the increase in the index of inflation, as demonstrated in the index number columns of Table XLIV. But, the movements of steel price indexes and the inflation index are by no means always parallel. The inflation index tends to fluctuate more widely and irregularly while the steel price indexes move more slowly 15 The ten steel products are: hot-rolled bars, structural shapes, plates, rails, pipe, wire and hot- and cold-rolled sheets and strip. Cf . Iron Age. 171-1:409* January 1, 1953* TABLE X LIV STEEL PRICES, BY STATISTICAL SOURCES, 1929-1954 YEAR AMERICAN METAL MARKET COMPOSITE* IRON AGE COMPOSITE** BLS WHOLESALE PRICE INDEX# INFLATION INDEX $ Per Net Ton 1935-39 *100 $ Per Net Ton 1935-39 =100 Iron and Steel 1935-39 =100 Steel Mill Products 1939 =100 1935-39 *100 1929 50.8 96.9 45.76 99.6 101.8 120.4 1930 46.4 88.5 42.22 91.9 95.6 113.3 1931 44.0 83.9 39.14 8 5.6 89.5 99.6 1932 43.0 82.0 37.46 81.5 85.3 88.9 1933 43.2 82.4 37.02 80.5 84*4 87.1 1934 48.4 92.3 41.02 8 9.2 94.0 94-4 1935 48.8 93.1 41.36 90.0 93.0 98.7 1936 48.2 91.9 42.36 92.3 93.0 99.7 1937 56.8 108.3 50.72 110.3 105.3 104.9 1938 55.6 106.0 49.18 107.0 105.8 99.2 1939 52.8 100.7 46.22 100.5 102.8 100.0 97.5 1940 53.0 101.1 45.46 98.9 102.1 100.1 98.9 1941 53.0 101.1 47.92 104.3 103.4 100.6 106.9 1942 53.0 101.1 47.92 104.3 104.4 100.7 119.6 1943 53.0 101.1 47.92 104.3 104.4 100.9 125.9 1944 53.0 101.1 47.92 104.3 104.2 100.9 127.4 1945 54.6 104.1 48.98 106.6 106.5 103.3 130.0 1946 60.0 114.4 53.72 116.9 118.5 112.3 144.9 1947 68.4 130.4 60.28 131.1 143.6 131.6 171.9 1948 78.2 149.1 68.68 149.4 167.0 150.2 185.7 1949 84.2 160.6 74.26 161.6 169.7 162.8 179.9 1950 88.0 167.8 77.24 168.0 181.1 171.4 184.4 1951 94.2 179.6 82.62 179.7 197.2 184.9 202.5 1952 96.4 183.8 84.74 184.3 199.6 188.9 201.4 1953 102.6 195.7 90.36 196.6 210.2 203.9 200.8 1954 106.6 203.3 94.32 205.2 212.8 213.2 201.2 * Business Statistics. 1955. p. 157. ** Iron Age. 165-1:157. January 5, 1950; 171-1:409, January 1, 1953; 177-1:236, January 1, 1956. # Business Statistics. 1955. p. 30; American Iron and Steel Institute, Annual Statistical Report. 1955. p. 27. 309 j and consistently. As a result, the increase in the steel j prices tend to fall behind that of the general price level i when the inflationary pressure is heavy. This was the case in 1946, 1947, 1943, and 1951* The steel prices would catch up with the general price level if enough time elapsed or the inflationary forces tapered off. To show this relationship more clearly, Table XLV is I presented here, tabulating the ratios between the indexes of composite steel price and the index of inflation. The ratio was low in early postwar years, with the bottom in 1947* Since then the ratio was higher every year except the brief interruption of 1951* Moreover, the base price quotations, from which both these sets of composite prices were calculated, were on a basing point delivery basis prior to July 1943 and afterwards on an f. o. b. mill basis. This difference resulted in a smaller price increase reflected in the j later statistics than otherwise, would have been the case. In other words, the "catching up" of steel price increases was actually faster than the ratios shown in Table XLV. This observation is substantiated by the ratios in another column in the same table, hitherto undiscussed. That is the ratios between the inflation index and the index of prices of steel mill products compiled by the Bureau of Labor Statistics as a component in its index of RATIOS i t i I TABLE XLV BETWEEN STEEL PRICE INDEXES AND 1929-54 INFLATION INDEX YEAR A M M COMPOSITE IRON AGE COMPOSITE BLS INDEX STEEL MILL PRODUCTS 1929 80.5 82.7 102.6 1939 103.3 103.1 101.2 1940 102.2 100.0 101.2 1 1945 80.1 £2.0 1 79.5 1946 79.0 80.7 77.5 1947 75.9 76.3 76.6 1943 80.3 80.5 80.9 1949 89.3 89.8 90.5 1950 91.0 91.1 93.0 1951 88.7 88.7 91.3 1952 91.3 91.5 93.8 1953 97.5 97.9 101.5 1954 101.0 102.0 106.0 Source: Supra, Table XLIV. 311 wholesale prices. In this column, the ratios are higher than the other two columns pertaining to composite steel prices of the American Metal Market and the Iron Age since 194#* reversing the 1946 and 1947 situation. Both the price indexes of iron and steel, and steel mill products compiled by the Bureau of Labor Statistics, which have been included in Table XLIV, indicate that, by 1953, the steel prices had not only caught up with the general price level, but also exceeded it. Moreover, these indexes of the Bureau, like the other two composite steel prices, probably understated the actual steel prices paid by the buyer in times of inflation, even though these indexes are designed to measure the rate and movement of "real” changes in steel prices. If consideration is given to this fact, then the steel prices probably caught up with the general price level earlier than in 1953* This discussion, of course, does not point to the conclusion that the upward movement of steel prices may not have lagged behind the general price level. All that can be said is merely this: the gap in price increases between steel products and general commodities during this period probably was not as large nor did it last as long as Table XLV indicates. Insofar as there was this gap, the steel industry had suffered from a price disadvantage. The profits of 312 | the steel companies might be lower than otherwise. It j least the profits before taxes on income (including the excess profits tax when it was in effect) would be definitely higher than the realized figures, other things being equal. However, the steel industry was not the only industry in which the priee of its products increased less than the general price level* The price of electricity increased much less, for instance; and the price of aluminum even showed a decline before 1952. Furthermore, this period is not the only period in which steel prices failed to increase as much as the general price level. In fact, a divergence in price movement between steel and general commodities was found for earlier periods in this century.16 As a rule, steel prices have been lower than : general prices in times of inflation and higher than general prices in times of deflation. J This general phenomenon is a result of the policy deliberately pursued by the steel companies. As has been noted previously, the steel companies are able to pursue | a price policy in the economic sense. For whatever I i I ----------------------------------------------------------------------------- I 16 Herman H. Chapman, Iron and Steel Companies in j Years of Prosperity and Depression (Doctoral Dissertation Torthe Columbia University; Tuscaloosa, Alabama: privately printed, 1935), p* 260. 313 reasons, they have chosen a policy of maintaining relatively stable prices of steel. Such a policy followed by an industry as important as steel probably has the effect of restraining the inflationary pressure, because this policy would result in a lower pressure than otherwise on steel-using industries to raise their prices and strengthen the position of the steel companies at the collective bargaining table to resist wage demands of the union by weakening the union argument of "ability to pay" which has a considerable convincing power before the public and the government. Semi-finished steel. Both the composite price of the American Metal Market and that of the Iron Age cover only finished steel products. The Bureau of Labor Statistics price index of steel mill products includes both finished and semi-finished steel products. Price movements of finished and serai-finished steel products are not always the same. ! Table XLVI shows the indexes of finished and semi-finished steel prices compiled by the Bureau of Labor Statistics, with the base period converted to 1939 by this investigator. It is readily seen from this table that semi-finished steel prices have increased more than the finished steel prices. Taking 1939 as 100, the finished steel prices rose to 210.0 in 1954* In the 314: i TABLE X L 7 I PRICE INDEXES OF FINISHED AND SEMI-FINISHED STEEL PRODUCTS 1939 * 100 YEAR FINISHED STEEL PRODUCTS SEMI-FINISHED STEEL PRODUCTS 1939 100.0 100.0 1940 100.1 100.6 1941 100.6 100.6 1942 100.7 100.6 1943 100.9 100.6 1944 100.9 100.6 1945 103.2 104.0 1946 112.4 112.6 1947 131.0 135.7 1948 149.0 163.2 1949 161.3 178.8 1950 169.4 193.9 1951 183.1 204.3 1952 187.1 208.9 1953 201.3 231.8 1954 210.0 248.9 Source: Bureau of Labor Statistics, as appeared in American Iron and Steel Institute, Annual Statistical Report, 1955. p. 27. 315 meantime, the semi-finished steel prices reached 248*9* That is to say, the prices of semi-finished steel products ! increased IS*5 per cent more than did the prices of finished steel products from 1939 to 1954* Moreover, most of this difference came after World War II, especially in 1948 and later. In fact, the prices of semi-finished steel products have increased more than the index of inflation since that year. In this respect, the non-integrated steel companies, which have to buy semi-finished steel from the integrated competitors, seem to have been put at a disadvantage. Such a consequence was practically admitted by spokesmen for the integrated steel companies which raised the semi-finished steel prices, Benjamin Fairless, then president of the United States Steel Corporation, stated before a congressional hearing in 1948 that he expected the non-integrated steel companies to pass on to their customers the price increases on semi-finished steel products, while the United States Steel Corporation itself would not have to do so*17 Different finished products* Price movements for 17 U. S. Congress, Joint Committee on the Economic Report, Increase in Steel Prices* Hearings (SOth Congress, 2nd session: Washington, D. C.: Government Printing Office, 1948;, pp. 14-20, 3X6 different finished steel products lacked uniformity in this period, as can be seen from Table XLVII, in which the prices of fifteen finished steel products are pre sented in index numbers with 1939 as the base* From 1939 to 1954, the price increases ranged from 145*1 per cent for steel rails and 125*6 per cent for high speed tool steel, down to 26*7 per cent for stainless sheets and 53*1 per cent for galvanized sheets* However, this pattern of price movements was set in early postwar years. For instance, the price indexes in 1949 were at 179*6 for steel rails and only 111*2 for stainless sheets* From 1950 to 1954* the percentage increases in prices of different steel products seem to be close, with the central tendency at around 20 per cent. The exceptions are the prices for high speed tool steel and stainless sheets. The price of the former increased by 50 per cent in the five-year period, while that of the latter increased by only 12.9 per cent. The large increase in the price of high speed tool steel during this period reflected the sudden expansion of tool needs by American industry in general, as a result of the outbreak of the Korean conflict. In fact, most of the price increase of high speed tool steel was made in 1951 and 1952; and the index of its price showed a 7 per cent decline from 1953 to 1954* 317 | I TABLE XLVTI ; I PRICE INDEXES OF SOME FINISHED STEEL PRODUCTS, 1939-1954 1939 = 100 YEAR STEEL RAILS PIPE PLATES MERCHANT BARS HOT- ROLLED STRIP COLD- ROLLED STRIP HOT- ROLLED SHEETS COLD- ROLLED SHEETS 1939 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1940 100.0 100.0 100.0 98.2 101.5 97.6 101.5 98.1 1941 100.0 100.0 100.0 93.2 101.9 97.9 101.9 98.4 1942 100.0 100.0 100.0 98.2 101.9 97.9 101.9 98.4 1943 100.0 100.0 100.0 98.2 101.9 97.9 101.9 98.4 1944 100.0 100.0 100.0 98.2 101.9 97.9 101.9 93.4 1945 106.1 100.0 105.2 100.9 101.9 97.9 105.8 98.4 1946 121.0 108.6 117.6 112.8 113.1 105.9 116.5 104.5 1947 145.6 132.3 133.3 124.7 127.7 117.1 127.7 108.1 1943 164.1 154.3 151.9 1A2.9 147.1 131.5 145.6 120.3 1949 179.6 163.3 163.3 153.9 158.3 140.2 158.3 129.0 1950 191.5 172.6 167.6 158.4 158.7 148.6 163.6 132.9 1951 201.6 135.7 176.2 168.9 169.9 166.1 174.3 140.3 1952 205.9 190.6 180.0 173.0 175.2 169.6 173.6 143.5 1953 229.7 208.6 191.0 185.4 185.9 185.0 187.4 151.0 1954 245.7 220.6 198.1 192.7 193.7 195.3 193.7 156.8 To be continued on next page. 318 TABLE X L V II (C o n tin u ed ) PRICE INDEXES OF SOME FINISHED STEEL PRODUCTS, 1939-1954 1939 = 100 YEAR BRIGHT WIRE TIN PLATE HIGH SPEED TOOL STEEL COLD FINISHED BARS STRUCTURAL SHAPES STAINLESS SHEETS GALVANIZED SHEETS 1939 100.0 100.0 100.0 100.0 100*0 100.0 100.0 1940 100.0 100.0 100.0 99.3 100.0 100.0 100.0 1941 100.0 100. Q 100.0 99.3 100.0 100.0 100.0 1942 100.0 100.0 100.0 99.3 100.0 100.0 100.0 1943 100.0 100.0 100.0 99.3 100.0 100.0 100.0 1944 100.0 100.0 100.0 99.3 100.0 100.0 100.0 1945 103.5 100.0 100.0 100.7 100.0 100.0 104.3 1946 116.2 100.0 107.2 114.6 110.5 106.0 114.0 1947 131.2 115.0 112.8 125.5 125.2 108.3 106.3 1948 150.0 135.4 127.6 140.1 142.9 110.5 118.0 1949 161.5 155.0 135.1 149.1 155.2 111.2 125.7 1950 174.2 150.0 150.4 156.6 162.9 112.2 126.6 1951 186.5 173.4 200.3 170.4 173.8 119.8 137.1. 1952 192.7 176.2 229.2 176.4 178.1 122.6 140.6 1953 207.3 179.0 241.9 189.9 189.5 131.7 148.0 1954 216.9 179.6 225.6 198.5 198.6 126.7 153.1 Source: Computed from the Iron Age and the Steel Magazine figures as appeared in a tabulation in Standard and Poor's, Industry Surveys: Steel and Iron (Basic Analysis; 1955)> p. 19. 319 i With this exception, the difference in price j i increases for different products, in general, seems to reflect the difference in cost increases. Demand for those products the prices of which increased by a smaller percentage has been high. The shipments of cold-rolled sheets, stainless steel, and galvanized sheets have been increasing not only in terms of tonnage, but also in terms of percentages of total steel shipments. On the other hand, the shipments of steel rails, which registered the highest percentage price increase, have decreased in tonnage as well as in percentages of total steel Moreover, the steel price structure underwent a large-scale revision in December 1949. The steel companies publicly stated that revision was made to equalize returns on different products.-^ a result of this revision, the prices of steel rails, bright wire, and even high speed tool steel were increased much more 13 American Iron and Steel Institute, Annual Statistical Report« 1955. pp. 36f . 19 Benjamin F. Fairless and Enders M. Voorhees, »U. S. Steel Officials Defend Price Advances,” Commercial & Financial Chronicle. 171:441, January 26, 1956; G. T. Sullivan, “Steel Extras Revised on Cost Basis,” Iron Age. 164:37, December 22, 1949; “Steel Price Increase Average Four Dollars," Steel. 125:45, December 19, 1949. from 1949 to 1950 than the prices of stainless sheets and galvanized sheets. The price of tin plate, which showed only a 79.6 per cent increase from 1939 to 1954, even decreased by 3.2 per cent. FINANCIAL POSITION OF THE STEEL INDUSTRY The financial position of a company is generally reflected in two financial statements of the company. One is the balance sheet and the other the income statement. An analysis of the items contained in these two financial statements in general will reveal the financial conditions of the company. Therefore, an analysis of the consolidated balance sheet and the income statement of the steel companies for the years covered will reveal the financial conditions of the steel industry during the inflationary period. Balance Sheet Items j There were great public debates as to whether the j steel industry earned an excessive or inadequate profit J during the postwar inflationary period. Frequently these jdebates arose from labor disputes and steel price advances. The arguments were generally reduced to whether the financial position of the steel companies was reflected correctly in the published financial reports : 321 i |of the steel companies under the provisions of the i ; existing law* In these reports, no allowance was made for higher replacement costs and the depreciation charges did not relate to the current replacement requirements* The issue therefore turned into one of accounting procedures, especially on the property account and depreciation charges* Property 4ccount* Attempts were made by both company spokesmen and independent observers to show the inadequacy of straight line depreciation on original cost of the depreciable fixed assets. Company spokesmen argued that if the accounts were adjusted to the price level, then the fixed assets of the steel companies would be much higher than appeared in the reports and the depredation charges should be proportionally higher, I resulting in a lower net income shown in financial reports | and a lower income tax liability. W. A* Paton, testifying I | j before the Wage Stabilization Board in 1952 on behalf of |the Bepublic Steel Corporation in the wage dispute, made J ja detailed recalculation of the property account of the ' Bepublic Steel Corporation on the basis of the construction cost index of the Engineering Hew Record, and came to the conclusion that if adjustments were made on property account to price level, then a great amount of retained earnings shown on the books might become a deficit, 322 as the capital account was adjusted to the property account — as was the case for the Republic Steel Corporation at the end of 1951 20 Statement of W* A* Paton, as Republic Exhibit 3, in Companies1 Presentations Before Special Panel* Wage Stabilization Board. Steel Industry Wage Case tCase No* h-l8-d; no publisher, 1952:), v. tV, pp* 1981-3, et passim* The effect of inflation upon cost of replacing depreciable assets is the most sharply felt, though by no means the only noticeable, impact of inflation as far as ithe management of the steel companies is concerned* This impact is aggravated by the fact that the lawful (and also conventional in accounting) basis for depreciation charges is only the historical, original cost* Accelerated depreciation allowed by Section 124A of the 1954 Internal Revenue Code of the federal government seems to have lessened the gravity but has not changed the basic cause of concern* Thus, the management of the United States Steel Corporation felt that the 4-page general indictment of inflation in the Corporation’s 1955 Annual Report j(pp* 26-29) was insufficient, and tnat it was necessary ito elaborate more on this matter at its annual stockholders’ meeting held on May 7, 1956* The words of Roger M* Blough, Chairman of the Board of the Corporation, seem to be very illuminating as to the impact of inflation to the steel industry in the eyes of the steel management* ] 'The July 1956 issue of the Monthly Letter — Business and ! Economic Conditions of the First National City Bank of Sew York quoted him (p* 79) as saying at the meeting the 1 following: I nWhen a machine is used to produce steel — or anything else — it wears out a little each year* In other words, it ’depreciates*’ So if we buy a machine that will last for 25 years, and if the machine costs us 25 million dollars, it will wear out at the rate of a million dollars’ worth each year* Thus the Federal tax laws permit us to recover a million dollars a year, on ithe average, on this machine as a cost of doing business* !And at the end of the 25 years, when the machine wears j out, we have got our 25 millions back through this process I of ’normal depreciation*’ So theoretically we can buy a |new machine with it* • • 323 In the same vein, Ralph C. Jones, an independent observer, recalculated all the balance sheets and income statements of nine steel companies from 1941 to 1947 by (continued from previous page) "But that’s where Old Man Inflation steps in. During the past ten years alone, our plant and equipment costs have more than doubled. So 25 million dollars won’t begin to pay for the new machine. Let me give you an actual example of this problem as we face it todays "Back in 1930 we built an open hearth plant which cost about 10 million dollars. Today it will cost us about 64 million dollars to replace that plant. Through depreciation we have recovered the original 10 millions that we spent on this facility. The remaining 54 millions, however, will have to come out of our profits . . . our profits after taxes. "But in order to earn 54 millions in profits after taxes, we have to earn 112^ millions before taxes. And, last year, it took the profit on six hundred million of the dollars we received from our customers — about one-seventh of our total sales — to pay for that one open hearth plant. "So every penny of profit we made on one-seventh of our total sales last year will be wiped out in replacing this open hearth. And that, of course, is only one facility. We have many other furnaces, mills and machines which must be replaced each year. "In this connection, however, I should point out that,many new facilities we buy today are better and more productive than the old ones they replace; and the new open hearth shop I have Just described will produce about one-third more steel than the present one does. But taking this into full account, it will still cost more than 4i times as much, per ton of capacity, as the original facility did. "Thus you see that a substantial part of our profits are not real profits in the sense that they can be used to pay dividends, or to provide for expansion and growth, or to serve any of the other functions that adjusting the accounts with the index of consumer prices, and concluded that the steel companies had only $457 millions of net income instead of the reported $1,63$ million during these years, and, what is more that "not only that no income was retained but also that some $285 million in excess of income was paid out" as cash dividends Without being involved in a discussion in accounting theory of price level adjustment, the following observations are to be made on the matter of property account and depreciation of the steel companies: 1. It has been reported that the Securities and Exchange Commission had computed additions to plant account and depreciation charges for the eight largest steel companies for the years 1934 to 1949 inclusive. t The result was that, excluding the United States Steel i iCorporation which had large write-offs of intangibles | during this period, the remaining seven companies reported ! gross additions to plant and properties of $2,135 million ; j and total depreciation of $1,638 million, which was 77 j (continued from previous page) a profit is supposed to perform. They are what I would call phantom profits destined for replacement, profits which are eaten up by inflation, almost before we get them. They cannot finance progress. We must use them just to stand still." 21 Ralph C. Jones, "Effect of Inflation on Capital and Profits." Journal of Accountancy. 87:17, et passim. January 1949. ___ 325 per cent of the property additions of these companies* During this period, these seven companies added about S million tons of new ingot capacity and greatly improved their plant efficiency and forward integration.22 i 2. Besides the accelerated amortization allowed by the tax laws during World War II and after the outbreak of the Korean conflict, some steel companies such as the United States Steel Corporation, the Republic Steel Corporation, and the National Steel Corporation adopted accelerated depreciation for financial reporting purposes, which was not deductible for income tax purposes before 1954«2^ Since 1954, the federal income tax law has provided a more flexible depreciation allowance. The companies are now permitted for income tax purposes to charge depreciation at a higher rate in the earlier years of life of the property. Thus the effect of a higher price level upon the adequacy of depreciation on original cost basis has been lightened to a certain extent. 3. The steel companies reporting to the .American Iron and Steel Institute increased their gross property account by $6,422 million from #5,790 million at the end of 1945 to #12,212 million at the end of 1955, as shown 22 Loeb, op. cit.» p. 73. 23 Ibid., pp. 72f. 326 !in Table XLVIII. During 1946-1955 inclusive, they had a total depreciation charge (including accelerated amortization) of $4*153 million, as revealed in Table XLIX. That is to say, during this period, the steel companies charged off 65 per cent of their gross property additions as depreciation. Moreover, this was the period in which the steel industry had an unprecedented expansion, increasing its total steel capacity by over 36 million tons. i 4* Table XLVIII also shows that more than half of the total gross plant account at the end of 1955 was added after 1946 when the inflation index was already mounting. Most of the additions during this period occurred between 1951 and 1955 when the inflation index reached a high plateau following which there have been relatively small variations. This means that a large part of the present property was added at high original cost. 5. Depreciation charges of the steel companies were generally below 4 per cent of the gross property account in 1946-1949, except in 1943, and were higher from 1950 to 1955, with the peak at 6 per cent in 1955* Table XLIX also shows that depreciation charges amounted to less than 4 per cent of sales from 1946 to 1951 and have been improved since 1952. The corresponding ratio before World War II was generally around 5 per cent. TABLE X L V III GROSS AND NET PROPERTY ACCOUNTS OF THE STEEL COMPANIES 1945-1955 $ Millions YEAR GROSS PROPERTY ACCOUNT NET PROPERTY ACCOUNT 1945 5,790 2,079 1946 6,089 2,313 1947 6,541 2,626 1948 7,074 3,218 1949 7,467 3,407 1950 8, 06l 3,736 1951 9,080 4,458 1952 10,375 5,353 1953 11,187 5,684 1954 11,657 5,613 1955 12,212 5,565 Source: American Iron and Steel Institute, Annual Statistical Report, 1221, PP. 14f.; 1241, P- *5 Wtk, P- &• TABLE XLIX DEPRECIATION CHARGES OF THE STEEL COMPANIES 1945 - 1955 YEAR TOTAL $ MILLIONS Gross Property AS PERCENT OF Net Property Sales 1945 339 5.8 16.3 5.75 1946 169 2.8 7.3 3.53 1947 239 3.7 9.1 3.58 1948 302 4.3 9.4 3.73 1949 278 3.7 8.2 3.76 1950 327 4.1 8.8 3.45 1951 374 4.1 8.4 3.17 1952 450 4.3 8.4 4.16 1953 614 5.5 10.8 4.69 1954 670 5.7 11.9 6.36 1955 735 6.0 13.2 5.29 Source: American Iron and Steel Institute, Annual Statistical Report. 1955. pp. 12-15j 1948. pp. 8f.j 1946. pp. 8f. 329 Thus, the depreciation charges in earlier postwar years were relatively low. The accelerated amortization has increased the ratios of depreciation charges to both gross property account and sales volume. 6. The relatively low rate of depreciation charges in earlier postwar years is also revealed by Table L, in which additions to asset value and internal sources of funds are presented for the steel companies reporting to | the American Iron and Steel Institute. The ratio of * > jdepreciation to capital outlays was exceptionally low in il951 and 1952, being 0.23 and 0.39 respectively, j reflecting the extraordinarily large expansion projects. But, in 1946 and 1947, the steel ingot capacity was not expanded, and the ratio was relatively low at 0.5$ and 0.4$ respectively. Again, the total amount of internal funds, which include both depreciation charges and retained earnings, was insufficient to cover all the capital outlays in 1946 and 1947* The ratio between total internal funds and total capital outlays and j increases in inventory value was even lower than the ratio between total internal funds and capital outlays alone for •1946 and 1947* Total internal funds were sufficient to cover capital outlays in 194$* but fell short of the j total of capital outlays and increases in inventory value. Taking the 1946-1955 period as a whole, depreciation 330 TABLE L CAPITAL EXPENDITURES, INCREASE IN INVENTORY VALUE, AND INTERNAL SOURCES OF FUND, 1946-1955 In Million Dollars Inventories Total Capital Total Capital Value Outlays & Depreciation Reinvested Internal Year Outlays Increase Inventory Charges Earninss Funds 1946 291 60 351 169 117 236 1947 496 132 628 239 228 467 1948 583 219 802 302 336 638 1949 510 -31 479 278 307 585 1950 513 155 668 327 456 783 1951 1,041 194 1,235 374 270 644 1952 1,170 218 1,3 88 450 225 675 1953 1,000 231 1,231 614 411 1,025 1954 609 -95 514 6?0 294 964 1955 .107. - 2Ak m 661 U 2 & Total 6,920 1,22? 8,147 4,158 3,305 7,463 Ratios Depreciation Reinvested Total Internal Total Internal Funds to Capital Earnings to Funds to to Capital Outlays Year Outlays Capital Outlays Capital Outlays & Inventory 1946 .58 .4© .98 .82 1947 •48 46 .94 .74 1948 .52 58 1.09 .80 1949 .55 . 60 1.15 1.22 1950 .63 • 39 1.53 1.17 1951 .23 . 16 .62 .52 1952 .39 . 19 .58 .48 1953 .61 .41 1.02 .83 1954 1.1 0 .48 1.5 8 1.87 1955 1.04 1.97 I.64 Total .61 .48 1.09 .93 Source: Supra. . T ab le X X V II; Am erican Ir o n and S te e l In s t it u t e , Annual S t a t is t ic a l R e p o rt. 1 9 55 . pp. 12£ and l 6 f ; 19 43 . pp. 3 f , H gTpp. sr. 331 charges alone amounted to 61 per cent of capital outlays, ■ and retained earnings 4$ per cent. Total internal funds, therefore, were more than total capital outlays, but were 7 per cent less than the combined amount of capital outlays and increases in inventory value. About the same result was obtained for 1946-1953 in a study by a staff of the U* S. Department of Commerce. For that period, it was found that in the basic and fabricated metals corporations the ratio of internal funds to outlays for plant and equipment was 1.05, while to plant and equipment outlays and increases in inventory value the ratio was 0.S0. In comparison, the correspond ing ratios for all manufacturing corporations were 1.02 and 0.73 respectively.24 In other words, the basic and fabricated metals corporations had a higher ratio of internal funds to capital outlays and increases in I inventory value than the average for all manufacturing corporations. i Capitalization. The total capitalization of the steel companies reporting to the American Iron and Steel !Institute had more than doubled from 1945 to 1955, i i ......................... -■ i i 24 Loughlin F* McHugh, "Financial Experience of !Manufacturing Corporation," Survey of Current Business. 34-12:17, December 1954. ! increasing from #4,104 million to #9,435 million# During the same period, their long-term debts rose from #4# 5 million to #1,53# million, but their preferred stock declined from #683 million to #635 million. As a result, the proportion of common stock equity to total capitalization not only did not decline, but on the contrary, increased from 71*5 per cent to 77*0 per cent, despite the fact that the ratio of long-term debts to total capitalization gained from 11*8 per cent to 16.3 per cent from the beginning to the end of this period. An analysis of these relationships during these years is shown in Table LI. Table LI testifies that although the debt burden of the steel companies increased, the common;stock equity was strengthened at the expense of preferred stock. The increase of long-term debts was greatest from 195© to 1952, reflecting the need for outside financing in the huge expansion program. However, the outside financing was in the form of debt rather than equity capital. The strong showing of common stock equity was largely due to the heavy influx of retained earnings. Retained earnings were only 34*1 per cent of total common stock equity in 1945, but rose to 61.9 per cent in 1955* Thus, earned surplus has outstripped the combined amount of capital surplus and par value of the common stock. 333 TABLE LI AN ANALYSIS OF CAPITALIZATION OF THE STEEL COMPANIES 1945 - 1955 YEAR TOTAL $ MILLIONS LONG-TERM DEBT PREFERRED STOCK COMMON STOCK EQUITY RETAINED EARNINGS AS o/o OF COMMON STOCK EQUITY * Millions o/o of Total * Millions 0 /0 of Total $ 0 /0 of Millions Total 1945 4,104 485 11.8 683 16.7 2,936 71.5 34.1 1946 4,255 544 12.8 646 15.2 3,065 72.0 36.3 1947 4,532 604 13.3 643 14.2 3,285 72.5 42.4 194a 5,215 649 12.4 653 12.5 3,913 75.1 45.9 1949 5,566 681 12.2 652 11.7 4,233 76.1 49.0 1950 6,222 763 12.3 644 10.4 4,815 77.4 53.9 1951 7,063 1,030 14.6 685 9.7 5,353 75.7 54.2 1952 7,820 1,447 18.5 692 8.8 5,681 72.7 56.3 1953 8,108 1,327 16.4 702 8.7 6,079 74.9 58.9 1954 a, 625 1,486 17.2 670 7.8 6,469 75.0 59.7 1955 9,435 1,538 16.3 635 6.7 7,262 77.0 61.9 Source: American Iron and Steel Institute, Annual Statistical Report, 1955, pp. 12-15; 1242, PP- PP« ! 334 ! | Ho important floating of new common stock issues was 1 detected for this period* The pressing need for more funds, which was a result of inflation, was met by utilizing internal sources and to a lesser degree by borrowing* Working capital* Inflation also causes an expansion of the need for working capital, just as it causes an increase in the need for more funds to maintain the physical assets intact, and to expand* Working capital requirements are expanded under inflation because the monetary wages and material prices have increased, and the volume of sales has expanded. The total working capital of the steel companies reporting to the American Iron and Steel Institute grew from $1,339 million at the end, of 1945 to #3,425 million at the end of 1955, as Table LII indicates. However, most of the increase occurred in 1954 and 1955* From 1953 to 1955, it increased by $1,130 million, while it gained only $406 million from 1945 to 1953* Moreover, in some years during the 1945-1953 period, the working capital actually decreased somewhat* For instance, it was only $1,323 million in 1946, $1,742 million in 1947, and $1,337 in 1943. As this inflationary period went on, the steel !companies seemed to become less liquid. This tendency 1 335 TABLE L I I AN ANALYSIS OF WORKING CAPITAL OF THE STEEL COMPANIES 1945 - 1955 TOTAL PER TON OF PER DOLLAR PER COMMON PER TOTAL YEAR $ MILLIONS STEEL CAPACITY* OF SALES STOCK EQUITY CAPITALIZATION 1945 1,839 $ 20.01 # .312 $ .63 $ .45 1946 1,828 20.03 .383 .59 .43 1947 1,742 18.48 .261 .53 .38 1948 1,837 19.11 .227 .47 .35 1949 1,990 20.70 .269 .47 .36 1950 2,147 20.60 .226 .45 .35 1951 2,190 20.17 .186 .41 .31 1952 2,253 18.93 .208 .40 .29 1953 2,245 18.06 .171 .37 .28 1954 2,852 22.67 .271 .44 .33 19 55 3,425 26.68 .247 .47 .36 Definition: working capital = total current assets - total current I liabilities. * Working capital at year end divided by steel capacity at the beginning of next year. Source: American Iron and Steel Institute, Annual Statistical Report. 1955. pp. 12-15, 53J 1948; pp. 8f.j 1946. pp..8f. j 336 I | can be seen from Table LII, in which the working capital ! was converted into ratios to steel capacity, sales, total i capitalization, and common stockholders* equity. Every year from 1946 to 1955, the working capital per dollar of total capitalization and common stockholders’ equity was less than what it was in 1945* The working capital per ton of steel capacity did not: show an improvement for these years until 1954* The working capital per dollar of sales, which sometimes is regarded as the most signif icant ratio of all these, was at #0.312 in 1945 and #0.3^3 in 1946, and has since been below the mark of #0.300. In some years, as in 1951 and 1953# this ratio was as low as less than 50 per cent of the 1946 figure. Income Statements The earning power of a company or an industry is dependent upon its total revenue and its costs. i Table LIII shows the total revenue, and its distribution, i f of the steel companies which reported to the American Iron and Steel Institute. As far as the total revenue is concerned, the steel industry seems to have fared well in i jthis inflationary period. It rose from $4,S12 million in 1946 to #13#973 million in 1955# a net increase of 190 j ! per cent. i . . . Earning power. However, the cost of products sold 337 TABLE LIII I i TOTAL REVENUE AND ITS DISTRIBUTION OF THE STEEL COMPANIES 1946 - 1955 $ Millions EMPLOY- MATERIAL TOTAL MENT SERVICE CASH YEAR REVENUE COST COST DEPRECIATION INTEREST TAXES DIVIDENDS 1946 4,812 1,983 2,174 169 18.1 203.1 147.4 1947 6,705 2,464 3,197 239 18.7 373.6 184.2 1948 8,119 2,832 3,931 302 20.2 493.3 205.3 1949 7,436 2,601 3,517 27 8 21.7 489.8 222.4 1950 9,535 3,151 4,356 327 25.1 909.1 3H.5 1951 11,845 3,829 5,488 374 29.4 1,442.5 3U.7 1952 10,858 3,789 5,401 450 45.5 633.8 315.9 1953 13,156 4,477 6,088 614 54.9 1,188.2 324.4 1954 10,593 3,888 4,578 670 53.3 766.4 343.2 1955 13,973 4,684 6,086 735 53.6 1,317.3 437.7 Source: American Iron and Steel Institute, Annual Statistical Report. 1955, pp. 12fj 1953. p. lOf. 338 aiay have increased more, and thus the profitability of j I the steel companies may have dropped. The best measurement of the earning power of an industry or a 'company is perhaps operating income, particularly when expressed as a percentage of the total revenue. This is so because operating income is defined as the residue of the revenue after subtracting costs of employment and goods and services bought. Table LIT shows that operating income of the steel companies advanced from #655 million in 1946 to #3>2®3 million in 1955, a net gain of 3^9 per cent in this ten-year period. Even if the comparison is made between 1947 and 1954 — a better beginning year and a less prosperous ending year — the net gain is still an impressive 104 per cent. In 1946, operating income of the steel companies was 13*6 per cent of total revenue, a figure which perhaps is abnormally low in comparison with 16 per cent on the average for the 1936-1940 period, as seen in Table LV. But it showed improvement every year until 1952, when there was a temporary setback. When it resumed its advancing course, operating income reached 22.9 per cent in 1955* Admittedly, this height is below the 26 per cent achieved by the steel industry in 1929. nevertheless such figures by themselves seem to cause no alarm. I What is perhaps disturbing is the fact that the 339 TABLE LI? OPERATING INCOME, PRE-TAX PROFITS, AND NET INCOME OF THE STEEL COMPANIES 191*6 - 19$$ OPERATING INCREASE PRE-TAX PROFITS NET EARNINGS TOTAL $ MILLIONS o/o $ o/o $ 0/0 REVENUE Total MILLIONS Total MILLIONS Total I year ^ . $ MILLIONS Revenue Revenue Revenue 1 191*6 M 12 655 13.6 397 8.3 265 ! 5.5 191*7 6,705 1,01* 1* 15.6 696 10. 1 * 1*12 6 .1 19i*8 8,119 1,356 16.7 930 11.5 51*1 6*7 191*9 7,1*36 1,318 17.7 906 12.2 529 7.1 1950 9,535 2,028 21.3 1,514* 16.2 767 8 .0 1951 U, 81*5 2,528 21.3 1,960 16.5 682 '5.8 ,1952 10y858 1,668 15.1* 1,021* 9.1* 51*1 5.0 |1953 13,156 2,591 19.7 1,731 13.2 735 5.6 | 1951* 10,593 2,127 20.1 1,230 11.6 637 6.0 1955 13,973 3,203 22.9 2,201 15.8 1,098 7.9 Definitions: Operating income = total revenue - (employment cost / goods and services bought) Pre-tax profits s operating income - (depreciation / interest / miscellaneous taxes other than income) Net earnings £ pre-tax profits - federal taxes on income Source: American Iron and Steel Institute, Annual Statistical Report, 1955, pp. 12f; 1953, pp. 10f. I 340 ! i i TABLE LV | DISTRIBUTION OF SALES DOLLAR OF THE STEEL COMPANIES- j 1929 - 1953 ! YEAR EMPIOYMENT COST PURCHASED GOODS & SERVICES DEPRECIA TION INTEREST TAXES DIVIDENDS RETAINED INCOME 1929 35.5 38.5 5.° 1.5 4.0 6.5 9.0 1936 36.0 46.0 5.5 1.5 4.2 4.5 2.0 1937 37.0 44.0 5.0 1 .0 5.5 5.0 2.5 1938 40.5 45.0 7.0 2.0 5.5 __•* 0. 0* 1939 37.0 45.0 5.5 1.5 5.5 2.5 3.0 1940 35.0 44.5 5.0 1 .0 6.5 4.0 4.0 1942 36.$ 47.7 # °.5 12.5 2.5 1 .0 1944 40.5 45.0 4.5 0.5 7.0 2.0 0.5 1945 40.0 45.0 6.0 °.5 4.4 2.5 0.7 1946 41 .0 45.0 3.5 0.5 5.0 3.0 2.5 1947 36.7 47.7 3.6 0.3 5.6 2.7 3.4 1948 34.9 48.4 3.7 o.3 6 .1 2.5 4.2 1949 35.0 47.3 3.7 0.3 6.6 3.0 4.1 1950 33.0 45.7 3.4 o.3 9.5 3.4 4.7 1951 32.3 46.3 3.2 0.2 12.2 2.6 3.2 1952 34.9 49.7 4.2 0.4 5.8 2.9 2 .1 1953 34.0 46.3 4.7 0.4 9.0 2.5 3.1 1954 36.7 43.2 6.3 0.5 7.2 3^2 2.8 1955 33.5 43.6 5.3 o.4 9.4 3.1 4.8 • j ? - Some dividends were paid; but a deficit of $15 million was incurred. # Included in purchased goods column. Source: Steel Facts, 26:4, June 1938; ibid., 34:3, June 1939; ibid., 4l:l, June 1940; ibid., 72:4, June 1945; ibid., 78:5, June 1946; American Iron and Steel Institute, Annual Statistical Report, 1955, pp. 12f; ibid., 1953, pp. 10f. j 341 I average operating rate of the steel industry was higher ;in 1946-1950 than in 1936-1940, but the average operating i income was lower in the postwar five-year period than the prewar five-year period. This seems to suggest that the heavy inflationary pressure in early postwar years pushed wages and material prices far in excess of steel prices, while the economies resulting from a higher operating rate were partly counterbalanced by the deterioration of raw materials and the fact that an insufficient length of time had elapsed for technological improvements and other, adjustments to bear fruit. The rate of profits before income taxes was higher in 1946-195© than in 1936-1940, and had a strong showing in 1951-1955, even though it did not come near the 19.5 per cent figure reached.in 1929. Arguments perhaps may be made to show that the relatively high rate of pre-tax profits in the postwar years was largely due to j undercharges in depreciation. This line of reasoning is j particularly directed at the early postwar years. But the ! i situation changed after the Korean conflict, as has been noted on several previous occasions. In fact, the rate of pre-tax profits for 1952-1955 was rather understated because of heavy write-offs under the accelerated amortization provision. The same can be said about the rate of net earnings | 342 |in relation to sales* But, the burden of corporate income and excess profit taxes was much heavier in the postwar years than in any prewar years, and yet the steel companies were able to realize a net income of 6*3 cents on the dollar of sales in the ten-year period from 1946 to 1955• Of the total net income of #6,207 million realized by the steel companies during this period, 53 per cent was reinvested in the business as shown in Table I¥I. That is to say, the steel companies emerged in a financially strong position during this inflationary period. Industrial comparison. The strong earning and financial position of the steel industry is even more evident when comparison is made between the steel industry and all manufacturing industries as a whole. Table L7II shows the statistics compiled by the First National City Bank of New York on the net income of forty-five manufacturing industries expressed in terms of percentages i of book value of net assets. These are the statistics that the management of the steel companies cited frequently in an effort to show that wages of steel workers were too high, steel prices were too low, and all this was reflected in low profits for the steel companies. jHowever, if the question is limited to the impact of < inflation upon the financial position of the steel I i t I TABLE LVI DISTRIBUTION OF NET INCOME OF 191*6 - 1951* $ Millions THE STEEL COMPANIES YEAR TOTAL CASH DIVIDMJS REINVESTMENT 0 /0 of Total 19U6 269 11*8 117 i * i *.2 191*7 1*12 181* 228 59.3 191*8 51*1 205 336 62.1 191*9 529 222 307 98.0 1950 767 311 1*56 59.5 1951 682 312 270 39.6 1952 51*1 316 229 1 * 1 .6 1953 735 321* 1*11 55.9 1951* 637 31*3 291* 1* 6.2 1955 1,098 1*37 661 60.2 Total 6,207 2,802 3,309 53.2 j Source: American Iron and Steel Institute, Annual Statistical •Report, 1955, pp. 12f.$ 1953, pp. 10f. 344- TABLE LVII ' i i RETURNS ON NET ASSETS BOR LEADING MANUFACTURING INDUSTRIES AND THE IRON AND STEEL INDUSTRY, 192$-19$$ (After Taxes) YEAR PER CENT RETURN STEEL’S RANK All Manufacturing Steel Spread 1925 10.7 5.8 4.9 1926 10.8 7.3 3.5 1927 9.0 5.3 3.7 1928 11.6 7.0 4.6 1929 12.8 11.2 1.6 1930 6.4 4.5 1.9 1931 2.3 -0*5 2.3 1932 —0.5 -4.0 3.5 1933 2.5 -1.9 4.4 1934 4.3 —0.4 4.7 1935 6.7 1.3 5.4 4o 1936 10.4 4.7 5.7 41 1937 10.8 6.9 3.9 35 1938 4.8 -0.2 5.0 4o 1939 8.5 4.5 4.0 4o 1940 10.3 8.5 1.8 31 1941 12.4 9.6 2.8 4o 1942 10.1 6.5 3.6 45 1943 9.9 5.6 4.3 43 1944 9.8 5.2 4.6 44 1945 9.3 5.1 4.2 44 1946 12.1 7.5 4.6 41 1947 17.1 11.3 5.8 41 1948 18.2 13.9 4.3 34 1949 13.8 11.5 2.3 26 1950 17.1 15.3 1.8 27 1951 14.4 12.3 2.1 24 1952 12.3 8.8 3.5 34 1953 12.5 11.6 .9 21 1954 12.4 9.4 3.0 32 1955 15.0 15.2 -.2 14 Sourcei First National City Bank of New York, Monthly Letter - Business and Economic Conditions (formerly Monthly Letter on Economic Conditions and Government Finance), April issues. I 345 t industry in this period, these statistics show that the steel industry was better off in this inflationary period than in any previous period covered by the table. It is true, as the Bank pointed out in its Monthly Letter of August 1956, that "for the entire 31-year period covered by our tabulations the steel companies realized an average return on book net assets of 6.7 per cent — less than two-thirds the 10.3 per cent average shown by reporting companies in manufacturing generally."25 However, the gap in the rate of net return on net worth between the steel companies and all manufacturing companies reporting was the narrowest in the decade 1946-1955 for all decades covered. During the active 1925-1929 period, the steel companies had an average net return of 7*3 per cent annually in contrast to 11.0 per cent for all manufacturing industries. During the depressed decade of 1930-1939, the average return for the steel companies was only 1.5 per cent in contrast with 5*6 per .cent for all j manufacturing. During the war years of 1940-1945, the 1 I corresponding figures were 6.7 per cent and 10.3 per cent | respectively. But, during the inflationary decade of j1946-1955, the steel companies realized an average of 11.7 j i i i I i 1 25 First National City Bank of lew York, Monthly iLetter — Business and Economic Conditions. August 1956, p. 68. 346 per cent in comparison with 14*5 per cent for all m a n u f a c t u r i n g*26 Putting these figures in another way, the ratios of the average net return for steel to that for all manufacturing companies are as follows: during the active 1925-1929, 66.4 per cent; during depressed 1930- 1939, 26.8 per cent; during war years 1940-1945, 65.0 per cent; and during the inflationary 1946-1955, 80.7 per cent. Furthermore, 1955 was the only year up to then that the steel industry’s net return on net worth exceeded that iof all manufacturing companies. ! The First National Bank of New York, in the same tabulations, also published net return on sales dollar for the corporations in the forty-five manufacturing industries, including iron and steel. In these figures as given in Table LVIIX, the relative improvement of the steel companies over the average of all manufacturing companies is even more marked. In five of the inflationary ten years, the net return of the steel companies as a per cent of sales exceeded that of all manufacturing companies. Most of these five years were ! in the 1950*s, when the accelerated amortization program j effectuated heavy write-offs. j After pointing out the improvement gained by the 26 Idem ' 347 TABLE LVIII NET EARNINGS AS A PER GMT OF SALES ALL MANUFACTURING AND IRON AND STEEL 1939 - 1955 YEAR ALL MANUFACTURING IRON AND STEEL 1939 6.4 5.3 1940 7.6 8.! 1941 6.5 6.2 1942 4.4 3.4 1943 3.7 2.8 1944 3.3 2.6 1945 3.5 3.0 1946 6.0 5.6 1947 7.0 6.2 1948 7.1 6.7 1949 6.8 7.2 1950 7.7 8.1 1951 6.2 5.8 1952 5.4 5.0 1953 5.3 5.7 1954 5.9 6.0 1955 6.7 7.8 Sources First National City Bank of New York, Monthly Letter — Business and Economic Conditions, April issues of each year. 343 i |steel companies in their relative earning position, a caution seems to be in order* The improvement for the most part came in the later half of the inflationary decade. As for the earlier years, the steel companies’ relative position had had little improvement, if any. Moreover, improvement in relative earning power does not necessarily imply that the net earnings are adequate. Before one can say anything about adequacy of industrial net returns, one must establish a norm. It is precisely the difficulty involved in establishing a norm for this purpose that leads this investigator to refrain from diseussing this problem. Company comparison. A relatively greater improvement in earnings for the steel companies in the postwar inflationary ten years is also substantiated by Table LIX. Taking the net earnings of the companies in 1939 as 100, both the pre-tax and after-tax net earnings of 14 integrated steel companies showed a greater expansion than that of 373 industrial companies combined in all the years during this period. Among the steel companies included, the 10 •companies which had a product mix predominantly composed of light-weight steel products showed a better gain in 1946, 1947, and 1943 than the 4 "heavy® steel producers, but were surpassed in later years. This fact is a o ; _* O'v i TABLE HX COMPARISON OF NET INCOME OF 1 1 LIGHT” & "HEAVY" STEEL PRODUCERS, 1939-1954 1939 ■ 100 1940 1946 1947 1946 1949 1950 1951 1952 1953 1954 u Steel Companies Before Taxes and After Res. After Taxes and Reserves 209.5 200.0 223.8 196.4 390.5 296.4 523.8 392.9 514.3 382.1 828.6 542.9 1161.9 657.1 514.3 360.7 919.0 503.6 680.9 453.6 *10 “Light’ 1 Steel Producers Before Taxes and After Res. After Taxes and Reserves 185.0 155.0 240.0 175.9 425.0 300.0 585.0 403.4 490.0 331.0 850.0 517.0 1005.0 434.5 555.0 337.9 850.0 424.1 600.0 365.5 **4 “Heavy" Steel Producers Before Taxes and After Res. After Taxes and Reserves 238.0 232.1 223.8 207.1 376.2 289.3 500.0 371.4 552.4 414.3 842.9 550.0 1323.8 814.3 500.0 371.4 1000.5 557.1 766.7 510.7 378 Industrial Companies Combined Before Taxes and After Res. After Taxes and Reserves 140.7 120.0 218.5 180.0 333.3 254.3 414.8 317.1 366.7 288.6 544*4 368.6 600.0 340.0 522.2 314.3 577.8 342.9 522.2 360.0 * Companies included ares Acme Steel, Allegheny Indium, Armco Steel, Crucible Steel, Inland Steel, National Steel, Pittsburgh Steel, Republic Steel, Wheeling Steel, and Youngstown Sheet and Tube. ** Companies included ares Bethlehem Steel, Colorado Fuel & Iron, Jones & Laughlin, and U, S. Steel. Source; Standard and Poor’s, Industry Surveys: Steel and Iron (Basic Analysis; 1955), p. 20. ! 350 i :manifestation of two factors. One is that the demand for light-weight steel products such as sheets and strip, which are used mostly in the production of consumer durable goods, was strengthened by the limited production of consumer durables during the war. Another factor is that the “heavy" steel producers, which had comparatively more military orders during the war, needed some time to readjust to the new situation, and when their new "light® steel facilities or even fabricating facilities were completed in later years, their relative position was strengthened further by the rearmament program. A reading of Table LX, which compares operating income as a percentage of sales between integrated and non-integrated steel companies, suggested that except in the immediate two postwar years, in which the prices of semi-finished steel were comparatively low, the non—integrated steel producers were in a disadvantageous position in comparison with the integrated steel companies.! By 1943, the average profit margin for the integrated !steel companies rose to 15*46 while that for the i non-integrated companies dropped to 13.64. During the j 1950-1951 inflation spiral, the non-integrated steel companies were also behind the integrated companies in the increase in profit margins. When the business conditions took a downturn, as in 1949 and 1954, the 351 j * TABLE LX i COMPARISON OF PROFIT MARGINS BETWEEN INTEGRATED AMD NON-IN TIGRATED STEEL PRODUCERS 191*1 - 195U YEAR AVERAGE ,INTEGRATED COMPANIES* AVERAGE NON-INTEGRATED COMPANIES** 191*1 18.81 18.93 19l*2 17.55 18.91 191*3 15.1*3 15.20 1914 12.96 11* .1*0 191*5 11.09 ll*.86 19U6 9.91* H*.5 9 191*7 H*.l5 15.37 191*8 15.1*6 13.61* 191*9 13.95 9.17 1950 18.81 3.6.93 1951 19.61 18.56 1952 12.89 12.91 1953 16.1*0 13.77 1951* 15.96 12.67 Definition: Profit margin * operating income, before depreciation, !as a percentage of sales. k Including Armco, Bethlehem, Colorado Fuel & Iron, Crucible, Granite City, Inland, Jones & Laughlin, National, Pittsburgh, Republic, Sharon, U. S. Steel, I'Jheeling, and Youngstown Sheet and Tube. Including Acme, Allegheny Ludlum, Carpenter, Continental, Copperweld, Keystone, and Superior. Source: Standard and Poor's, Industry Surveys: Steel and Iron (Basic Analysis; 19$$), p. 21*. 352 intensity °i adjustment was more severe for the non-integrated companies than the integrated ones* The same situation is found in a comparison of net returns on sales between these two groups of steel producers, as set forth in Table LXI. During World War II and from 1946 to 1946, the non-integrated steel companies earned a higher rate of net return on sales than their integrated competitors* Since 1949, however, the reverse seems to be true* It is therefore apparent that, though the financial position of the steel industry as a whole showed a marked improvement during this inflationary ten years, this improvement was hot uniform for different groups of steel producers. Furthermore, this improvement came about largely during the later part of this period, when the steel prices had caught up or surpassed the general price level, and many other favorable factors were present. i TABLE LEE COMPARISON OF NET RETURN ON SALES BETWEEN INTEGRATED AND NON-INTEGRATED STEEL PRODUCERS 192*1 - 1951* Net income as a per cent of sales YEAR INTEGRATED PRODUCERS NON-INTEGRATED PRODUCERS 191*1 5.96 7.20 191*2 3.96 5.57 191*3 3.U* 2*.30 1 91 * 1 * 2.70 3.81* 191*5 2.95 3.71* 191*6 l*.3 l* 6.90 191*7 6.1*1 8.61* 191*8 7.21 7.82 191*9 6.2 9 6.01 1950 7.91* 7.89 1951 5.82 5.93 1952 lt.89 i*.70 1953 5.22 2*.91 1951* 5.18 1*.26 Nafttes of the companies covered see supra,. Table LX. Sources Standard & Poor’s, Industry Survey: Steel and Iron (Basic Analysis; 1955), p. 26. CHAPTER VIII SUMMARY AND CONCLUSIONS THE FOUNDATION OF THE PRESENT STUDY This study has been prompted by the world-wide inflation that has been prevalent during the years after World War II, and more important, by the prospect of a I continued inflation which rests on institutional forees. Dissatisfied with the existing literature on inflation, which is largely concerned with theoretical discussions in general terms and thus often leads to futile controversy as to the desirability of inflation, this investigator has attempted to make a factual study of changes that have taken place in a segment of the economy as a result of inflation during the 194-6-1954 period, with the aim of throwing some light on the actual workings of inflation, which are effectuated through and only through I interweaving segmentary processes of the economy, even though inflation itself is essentially a general phenomenon in the sense that it prevails, if at all, throughout an economy. The segment chosen for study is the steel industry i of the United States, which is defined as represented by | those companies, practically all of which are incorporated private enterprises, whose primary business is to produce and sell steel ingots and steel Tor castings, and/or rolled steel products. The steel industry is chosen as the center of this study because of its strategic importance in an economy as well as relative accessibility of data. Actually attention has been directed to some, not all, aspects of the steel industry for the reason of feasibility. Without ajudging relative importance of the aspects, this study has covered only the changes, result ing from inflation during the 1946-1954 period, in the demand for steel products, productive facilities for making steel products, costs in producing them, prices of steel products, and financial conditions of the steel companies. This study has been undertaken with a realistic attitude and a pragmatic approach, which is not designed as an application or an illustration of a theory. However, as the purpose of this study is to ascertain the reality, it does not preclude its findings serving as a basis for generalization or theorizing. Utilizing materials available to the public, especially quantitative data, and with some references to the few studies known to this investigator, this study has made use of standard i statistical techniques to ascertain the actual behavior of the steel industry in the inflationary environment. 356 The Inflationary Environment This study begins with an ascertainment of i inflation in the United States during the years to be I covered* This is done on the basis of the definition | of inflation selected by this investigator and the measurement of inflation that follows* Inflation defined and measured* Inflation is defined as a state of economic disequilibrium, in which the general effective demand is in excess of the supply at the base prices. Using the income type of equation of exchange, inflation may be expressed mathematically as pQ*Oi, where M represents the average quantity of money during a period, v the circuit or income velocity of that money stock, p the average price of all finished goods and services that are added to capital or consumed, 0 the national output in physical quantitative terms | (or its index), subscript o the base time, and i the period concerned* It is found that this inequality can be satisfied only if the price level rises, while the real output and the national money income may be declining, constant, though most frequently expanding. Thus a persistently rising price level is the most reliable indicator of inflation. As an ideally free competitive economy is yet to be seen, the general price level is far from being a I 357 S I j perfect indicator of inflation. Fortunately, this imperfection does not prevent it from being a good yard stick, especially when references are made to the movement in the national real output and the restrictive forces in the economy that tend to handicap the movement of the priee level. In an attempt to cover widely the prices of both investment and consumption goods and services, the arithmetic mean of the index of wholesale prices compiled by the U. S. Bureau of Labor Statistics and the consumer price index compiled by the same Bureau has been used as the index of inflation in this study. Of course, it is basically no more than a price level index. It shows inflation only when it indicates a persistent tendency of rising prices, accompanied by a no greater increase in real output. The greater and faster the prices rise, the heavier is the inflationary force. The postwar inflation. The period under study, from 1946 to 1954, as a whole is inflationary according to the index of inflation, which, based on the 1935-1939 average as 100, rose from 130.0 in 1945 to 144*9 in 1946 and to 202.5 in 1951, around which level the index fluctuated little in later years. Taking the period as a whole, the inflation was mild because it showed an average increase of only 5*5 per cent a year from 1945 356 to 1954* and it was accompanied by a parallel advance in real out pat. If there is such a thing as an economically useful inflation, this period is an example, because the inflation in this period was a special variety in which not only the gross national product advanced rapidly but also the national real output experienced a vast expansion* However, the inflation during this period was not « uniform. The degree of inflation in these years was uneven as shown by the varying percentage changes in the inflation index. Moreover, the 1946 inflation was a distinctive type different from other years, beeause the index of inflation registered an 11.5 per cent increase over the previous year, while the indexes of the gross national product and real output showed a decline — the decline was especially heavy for the index of real output, being 9*6 per cent lower than in the previous year. The year 1949, strictly speaking, was not an inflationary year, since the index of inflation showed a decline of 3*1 per cent from the previous year's height. The 1947-1946 and 1950-1951 inflationary spirals were similar in that all these relevant indexes showed a parallel movement. In these years, the inflationary pressure was the heaviest of the period. In the years from 1952 to 1954* the inflationary pressure was present, 359 but was weakened to the extent that the index of inflation showed no advances at all* Making this distinction in the degree and characteristics of inflation during these years has been helpful to this study* j Inflation Term in a Functional Analysis The influence of inflation upon the demand for steel may be felt through its influence upon the price of steel and industrial production* But, inflation may also exert a direct influence upon the demand for steel for two important reasons* One is that inflation, by ] raising prices generally, and continuously, enhanced the j i profitability of a purchase of steel for the buyer who buys steel for the purpose of turning it into one or many end products by himself or someone else* Another reason is that storability and durability of steel afford ample room for speculative buying, which is always prevalent in times of inflation simply because people’s anticipations l are activated in the assumption that the prevailing I t I conditions will continue* ! i i The influence of inflation upon the supply of steel i may also be felt through its influence upon other independent variables such as steel prices and the cost of producing steel. However, it also provides an incentive to the steel producer to make every possible effort to produce more with the existing facilities and 360 to expand his productive capacity. On the other hand, inflation may discourage capacity expansion by raising the cost of the facilities. The most important influence of inflation upon the supply of steel is perhaps its influence upon the relative return of investment. Insofar as the steel industry is characterized by the saying nit is either prince or pauper," inflation tends to increase the supply of steel. With the status of inflation as an independent variable in the demand and supply of steel ascertained, it is practicable to set up both the demand function and the supply function for steel with the aim of measuring the direct influence of inflation in quantitative terms, by assuming that the steel price and inflation enter in both functions while the industrial production term i t J enters the demand function but not the supply function, I and the cost term enters the supply function but not the demand function. With a further assumption that these \ I functions are linear by nature, these functions are j established as statistically estimable, parallel equations j with tonnage of steel produced as the independent variable, and three independent variables being steel ! price and inflation index in both equations, and industrial production in the demand equation and cost of steel production in the supply equation. 3 6 1 Statistical estimates* The estimates have been obtained by using the following annual data for the years from 1929 through 1954; production of steel ingots and steel for castings compiled by the American Iron and Steel Institute, composite steel priee published by the American Metal Market, index of industrial production compiled by the Board of Governors of the Federal Reserve System, unit cost of producing and selling steel calculated from the annual reports of three integrated ; steel companies accounting for over 50 per cent of the steel industry’s capacity, and the index of inflation as i discussed above. The estimates so obtained show that the parameter of the price term is negative in both equations, while that of the other two terms is positive in both equations. The demand function is dominated by the influence of the industrial production term while the parameter of the inflation term has the largest absolute value among all beta coefficients in the supply function. Even in the demand function, the influence of the inflation term is ten times greater than that of the price term. However crude these estimates are, they seem to have established | beyond doubt that inflation exerts a significant, positive influence upon both the demand for and the supply of steel. In other words, the statistical evidence presented shows that inflation tends to increase both the demand for 3 6 2 and the supply of steel* This conclusion is verified by the parallel movement of annual steel shipments and the inflation index. CHANGES IN DEMAND AND PRODUCTION FACILITIES Armed with the findings in the functional analysis, this investigator has proceeded to discuss the changes in various aspects of demand for steel and the various problems in connection with the expansion of production facilities in this particular inflationary environment. Demand With regard to demand, discussions have been made on the changes, as a result of inflation, in the demand * curve, the composition of demand, and the market relations. Demand curve. In the course of analysis, mostly theoretical, two different influences of inflation upon i the demand curve have been found. One is an upward shift j of the entire demand curve, and the other a decrease in the elasticity. An upward shift of the demand curve is brought about by speculative buying for inventories as was evidenced in the events from 1946 to 194&, and more important, by expanded steel requirements of steel users, which in turn are a manifestation of a general shift of preference from money to real goods brought about by 363 | inflation. Such a shift is in greater magnitude for j capital goods and consumer durables than for consumer i | non-durables. Since most steel goes into capital goods I ! and consumer durables, this upward shift in the demand curve for steel is found to be noticeably greater than similar shifts in the demand for non-durables and even some other durables. The same forces which bring about an upward shift in the demand curve are responsible for a decrease in the elasticity of demand for steel. Fundamentally it is a lowering of price resistence as a result of inflation, which is reinforced, in the case of steel as well as other capital goods, by expected future increases in the prices of steel and its end products. The conclusion is thus drawn that, in all likelihood, a larger quantity of steel at a higher price is demanded as a result of inflation, even though no quantitative estimate of this change seems to be obtainable at the present stage of knowledge. Composition of demand. Analyzing the data on domestic steel shipments to different market classifications as a percentage of the total for both inflationary and non-inflationary years, it is found that inflation exerted different degrees of influence upon different industries, insofar as their demand for steel | 364 | is concerned, because of their difference in economic ! characteristics. It is found, for instance, that inflation tends to strengthen the demand for steel by mining, quarrying, and lumbering industries to the point that the long-run tendency for their share of steel to decline was halted so that the per cent of steel shipments to them was constant over the inflationary years. The long-run tendency of decline in the railroads* share of steel was not only stopped but even reversed by inflationary forces. The relative importance of automotive, machinery, and commercial and domestic equipment industries in the domestic steel shipments varied with the index of inflation, showing that inflation and deflation tend to arouse a greater change in the demand for steel by these industries than by other industries. A reverse relationship between the index of inflation and the per cent of steel shipments to container and construction industries has been detected, showing a stable demand for steel by these industries over the years. While a stable demand for steel irrespective of inflation or deflation seems to be the characteristic of the container industry, it is doubtful that a stable demand for steel shown by the construction industry in recent years would take place without a fundamentally inflationary economy. 365 Changes in the relative importance of these industries as steel consumers arising from inflation are f reflected in the changes in the product mix of the steel industry. It has been found that the long-run decline of heavy types of steel in the percentage of the total steel products shipped has been interrupted by the inflation factor. This interruption is more remarkable in the postwar years, in view of the fact that not only the light-steel-consmming industries had a phenomenal growth but furthermore the industries which traditionally consumed heavy steel products have also shown a definite shift toward the lighter forms of steel. These findings seem to suggest that heavy steel products are able to maintain their relative position only in times of inflation. The demand for higher grades of steel such as alloy and stainless steel is found to be considerably strengthened by inflation. But, with regard to the category of carbon steel, no conclusive evidence has been detected on the effect of inflation on the product mix, even though all indications point to the likelihood that inflation probably has contributed to gaining of prominence by the more highly finished forms of carbon steel such as cold-rolled sheets and strip steel, a trend which has been in the making for decades. ; 366 | Seller-buver relations. Simply because of the strategic position occupied by the steel industry in a modern industrial economy, governmental intervention in one form or another is often found in the distribution and even pricing of steel products, as well as in other aspects of the steel industry in times of shortage of steel supply relative to demand. Such intervention is invariably designed to supplant the market forces in determining the relationship between the seller and the buyer of steel. The ultimate economic effects of governmental intervention of this kind are beyond the scope of the present study. What has been determined so far is merely that market forces are difficult to suppress by any artificial elements regardless of whether these elements come from the government or private concerns. They may find expression in one way or other. The appearance of a gray market for steel in the highly inflationary years is a case in point. The steel gray market existed from 1946 to 1946 simply because the steel producers, who by virtue of the oligopolistic market \ structure were able to administer steel prices, refrained from charging an equilibrating price which would appear to be phenomenally high in those years as a result of changes in the demand curve, for many reasons, most important of which was perhaps the well-reasoned fear of arousing an 367 antagonistic public opinion. In spite of this restraint exercised by the steel producers, the steel prices in the gray market were reportedly several times their publicly announced prices. However, the steel producers were compensated for this restraint in that they had the power to select their customers on the basis of many considerations other than prices. Thus, they might choose to sell more to the customers with whom they have an ownership link, or who are located closer to the mill and thus would likely be more stable and reliable customers, or who have greater steel requirements. There may be inequities in the distribution of steel as a consequence of exercising this power, but, insofar as this power is a result, rather than a cause, of a shortage of supply relative to demand, such a power is a manifestation of the working of economic forces, and in exercising this power, the steel producers seem to be acting as agents of economic forces. Production Facilities It has been found from a functional analysis that inflation increases both the demand and supply of steel. An increase of supply by utilizing the existing facilities entails no inherent difficulties. But an expansion of the facilities would encounter obstacles, many of which may also arise from inflation. 3 6 8 Forces for and against expansion. Near-capacity operation of the steel industry in most of the strike-free years in the period under study clearly suggests that more steel capacity was needed. Moreover, whether through modernization or new construction, expansion afforded an opportunity to reduce costs of producing steel, costs which rose as a result of soaring prices of the productive agents under inflation. But there were many factors present that constituted an effective obstacle to expansion. Among them were the traditionally conservative outlook of steel management, the unpleasant experience of the 1930’s, and the general preoccupation with deflation. However, the most powerful single deterring factor seemed to be the increased construction costs, which increased at a greater rate than the inflation index since 1946. Expansion of the steel industry was effectively blocked when the current construction cost was much higher than the average cost of the existing plants, coupled with a federal corporate income tax law requiring straight depreciation on original cost and a market value of common stock of the steel companies that was considerably lower than its book value. Consequently, the early postwar inflationary years witnessed, instead of an expansion, a decline of 3*6 million tons of steel capacity from 1945 to 1946, the largest in the history of the 369 industry, and a continuous two-year decline in 1946 and ' 1947 that was matched only once before — in the j depression decade of the thirties. The gain of 8.2 per j ■ cent in capacity from 1946 to 1950 was even below the 10 i t per cent gain in 1930-1934* But, the obstacles were removed partially by the experience and expectation of a continuous inflation that j seemed to be supported not only by the rearmament program, but also by institutional forces. The obstacles were finally overcome by action of the federal government which instituted an accelerated amortization program for certified defense facilities in 1950, modeled after an innovation during World War II. Because this program provided quick tax write-offs, a quick recovery of invested capital, and a higher cash flow in earlier years during the life of the certified facilities, it was an effective encouragement for expansion, which was even acknowledged by steel management. With this incentive, the steel industry launched an unprecedented expansion. The steel ingot capacity was increased by 25 per cent in the five years 1950-1954, or by 27 per cent in the six jyears 1950-1955* i | Material, ingot, and finishing capacities. The coke jcapacity was increased by 12.3 million tons from 1946 to !1955> but more than one half of this increase came in the 370 1950-1955 period* During the same period, the capacity of blast furnaces increased by 16.7 million tons. But nearly three-fourths of this increase came in 1950-1955* However, these increases in the raw material capacity were more rapid than the increase in steel ingot capacity before 1950, but were slower in the 1950*s when the steel ingot capacity increased vastly. The indications are that the raw material capacity varies within a much lesser range than the steel capacity. The expansion of steel ingot capacity did not take place in the capacity of crucibles, which has been reduced to negligible, nor in the capacity of bessemer converters, which showed an actual decline from 1946 to 1954* The bulk of the increase was in the capacity of open hearth furnaces, which gained from 81 million tons in 1946 to 109 million tons in 1954* But the fastest growth rate was achieved by electric furnaces, which more than doubled their total capacity in the eleven years from 1946 to 1956. The evidence thus seems to suggest that the inflation did not stop the long-run decline in the capacity of crucible and bessemer converters, but it did promote the growth of open hearth furnaces, and particularly electric furnaces — the more efficient types of steel making furnaces. As far as the finishing capacity is concerned, the j expansion during the period before the Korean conflict |almost matched that during the period following the outbreak of the conflict* This type of expansion was undertaken by the steel companies in an effort to stretch further in forward integration, with little encouragement from the government because only a small percentage of the certificates of necessity granted to the steel companies was for finishing facilities. Effectuation of expansion. It has been found that as the steel companies differ in their particular circumstances, so vary their expansion programs. Some steel companies were more concerned with the high cost entailed in building new plants and consequently elected to effectuate the expansion by way of renovating and expanding the existing plants, thereby achieving a dual purpose of both expansion and cost reduction. Some others saw the opportunity for entering into a new market and further expansion, and hence ventured to erect new plants to exploit the advantage of proximity to market and/or a low freight cost. Taking the steel industry as a whole, the expansion was largely through enlarging the existing plant before the Korean conflict, but it was achieved mainly by building new plants after the accelerated amortization program was instituted following the outbreak of the Korean conflict. 372 The number of steel ingot producers increased to 76 from 1939 to 1951, a net gain of three, and to 65 in 1954, a net gain of another nine from 1951 to 1954. l |Moreover, the combined capacity of the eleven largest steel companies increased about 40 per cent from 1939 to 1953, well below the 66 per cent gain shown by the combined capacity of all other steel companies. Inasmuch as these changes occurred for the most part; during the j inflationary period under study, an inference may be made I ;to the effect that the steel industry has emerged from this period as a more competitive industry on the strength that it has enlarged its membership and its smaller members have increased their share at the expense of the larger ones. For modernization and expansion, the steel industry has reportedly spent $6.2 billion from 1946 to 1954 inclusive, a figure which was equivalent to 71 per cent of the total investment of the steel industry (in the coverage of the American Iron and Steel Institute) in 1954- Of the $8.7 billion total investment in 1954, $4.0 billion was newly added between 1947 and 1954. This large sum of new investments for the most part came from internal sources — depreciation charges and retained net earnings — of the steel companies. From 1946 to 1954, the depreciation charges of these companies totaled $3*4 373 billion, representing 55 per cent of their total capital expenditures; and the total net earnings amounted to $2.6 billion, making up 42 per cent of the total capital expenditures. Extending this comparison to 1955, it is then found that the total funds of #7.5 billion available from internal sources — #4.2 billion from depreciation (charges and #3*3 billion from retained earnings — were more than sufficient to cover the total capital expenditures of #6.9 billion from 1946 to 1955 inclusive. j In view of these facts and the higher percentage of the steel industry’s capital expenditures to total expenditures of all manufacturing in the postwar years as compared with prewar 1939, it seems to be true that the steel industry had become much larger and more efficient by the end of this period than at the beginning, thanks to the enhanced desire for and ability to expand and modernize brought about by the inflationary environment. COSTS, PRICES, AND FINANCES After the changes in the demand for steel and the facilities for steel making were discussed, this investigator has proceeded on the questions of costs and prices of steel products, and finances of the steel companies during the inflation. 374 Cost Behavior Discussions on cost behavior under the inflation have been centered around the labor and material costs, and the unit cost. Material and labor costs. It is general knowledge that prices of raw materials fluctuate more violently than those of finished products or the general price level in inflation and deflation. The prices of raw materials for steel making have been found to have increased much more than the index of inflation during the period under study. To the extent that this price increase constituted a higher material cost, those steel companies with no or a lower capacity of raw materials were in a disadvantageous position, because they had to buy more raw materials at high prices than the other steel companies. This is more true, in view of the fact that opportunities for economy in raw material consumption are greater in the early stage of steel making. However, there is an avenue for economy j that seems to be open to all steel producers within the limits of technological feasibility. That is using cheaper materials as substitutes for expensive ones. The steel companies seemed to have exploited this in this period, for they showed an increase in the use of i cheaper power sources such as electricity and gas in place of more expensive ones such as coal. 375 ' The price of labor has advanced greatly in these postwar years, as measured by the increase either in the straight time hourly rate or in the straight time hourly earnings. Inflation has a great bearing on this wage increase, since the collective bargaining negotiations in the steel industry in this period were heavily shrouded in I the atmosphere of inflation as evidenced by the keen consciousness of the cost of living shown by both the union and company representatives. The strong bargaining position attained by the union in the inflationary environment enabled the steel workers to gain an increase of 85 per cent in the total hourly earnings from 1945 to to 1954, a rate which was much higher than the 55 per cent advance in the index of inflation for the same time interval. Moreover, the steel workers have gained higher wage increases in comparison with the average worker in all manufacturing in this inflationary period. For instance, the steel workers gained an increase of 24*5 per cent in "real" hourly earnings in 1946-1954, in contrast to a 20.6 per cent increase for the average worker in all manufacturing during the same period, even though the 36 per cent increase in the ^real® hourly earnings gained by the steel workers in 1939-1954 was i j below the 4& per cent increase achieved by the average factory worker because of the wartime wage freeze. 376 The cost effect of this wage increase was alleviated by the concurrent increase in productivity* It has been established that the high rate of plant utilization, brought about by inflation in the absence of labor troubles, will result in high productivity, through the spread of overhead labor and other operational economies* The Bureau of Labor Statistics estimated that the steel industry had a 3*2 per cent annual rate of increase in productivity from 1947 to 1953* The increase in wages were thus partially absorbed by increases in productivity* The net increase in hourly employment cost of the steel industry at constant productivity is found to be 93*4 per cent from 1939 to 1954* which is less than the 106*4 per cent increase in the index of inflation for the same time interval* In other words, at constant productivity and with a constant general price level, the hourly employment cost of the steel industry seems to have been lower in the postwar inflationary years than in 1939* Unit cost* Just as a high rate of capacity utilization tends to bring down hourly employment cost, so it tends to lower total cost per unit, due to the spread of overhead costs* In comparing the year-to-year movements of unit cost and capacity utilization of the steel industry from 1929 to 1954, a reverse relationship ! 377 between them is found. Inflation and high capacity utilization have also been found to have occurred i concurrently in more of these years than not. Therefore, j inflation tends to bring about a lower unit cost measured at constant prices for the steel industry provided it is able to effectuate a high capacity operation. Because of this factor, the unit cost of steel at a constant f price level appears to have been lower in the highly inflationary years 1947, 194&, 1950 and 1951 than the 1935-1939 average. Prices and Financial Conditions It is to be noted that the resultant figures of the unit cost and the employment cost at a constant price level are indicative of the actual cost burden of the steel companies only if the steel prices move at the same rate and in the same direction as the general price level, j « If the steel prices fail to increase as fast or as much i as the general price level in times of inflation, then the jactual cost burden of the steel companies will be proportionally higher than the figures shown. The relationships between costs and prices are naturally reflected in the financial positions of the steel i companies. I Prices of steel products. An examination of I 373 i available statistics of steel prices indicates that steel ! prices have been more stable than the general price level. I They tend to increase less in inflation and to decrease less in deflation. In the earlier years of this postwar inflationary period, steel prices lagged behind the inflation index. It was not until 1953 when the inflation . index remained at a plateau that steel prices caught up with the general price level. It is probably true that i ! jthe increase in aetual prices of steel is higher and i faster than the statistics indicate, because the steel companies, influenced by inflation, stopped absorbing out-going freight charges by adopting f. o. b. pricing instead of the traditional basing point pricing from 1943 to early 1954, and because other elements in steel prices tend to work toward increasing steel prices in times of inflation. However, this does not change the basic i characteristic of the movement of steel prices, which are administered by the steel companies. Insofar as steel prices increase less and slower than the general price i level in inflation, especially in more severe inflation such as was experienced in 1947-1943 and 1950-1951, the steel companies are in a disadvantageous position. But when steel prices have increased as much as or even more than the general price level, the steel companies will benefit from the increased degree of capacity utilization. 379 This seems to be the case in the later years under study. i Price movements have not been uniform for all steel products. The prices of semi-finished steel products have increased more than those of finished steel produets since 194$- Consequently, the non-integrated steel companies, which have to buy semi-finished steel for further processing, have been at a disadvantage. This was reflected in the comparatively poor showing in net earnings in 194& and after. Financial position. Taking the period as a whole, especially when the period is extended to 1955, in which inflationary forces were more active than in 1954, the steel companies appear to have emerged stronger financially. They have increased their gross property account from #5*3 billion at the end of 1945 to #12.2 t billion at the end of 1955, with physical capacity expanded by 36 million ingot tons. Hinety-three per cent of their funds for capital expenditures and increases in inventory value was drawn from internal sources. Their total capitalization increased from #4*1 billion to #9.4 billion during the same ten years. Moreover, the proportion of common stock equity to total capitalization increased from 71.5 per cent to 77.0 per eent, despite a gain from 11.8 per cent to 16.3 per cent in the ratio of long-term debts to total capitalization. Most of the ' increase in the common stock equity came from retained J ! earnings, raising the ratio of retained earnings to total ! common stock equity from 34.1 per cent in 1945 to 61.9 in j1955. Taking the period as whole, the earning power of the steel companies appears to have improved. Their total revenue increased by 190 per cent from 1946 to 1955* while their operating income gained 389 per cent and their profit margin reached 22.9 per cent in 1955* They realized a net income of 6.3 cents on the dollar of sales. Furthermore, in the oft-quoted tabulation of the First National Bank of New York, the gap in the rate of net return on net worth between the steel companies and all manufacturing companies reporting was the narrowest in the decade 1946-1955 among all decades covered. In 1955, the steel companies* net return on net worth unprecedentedly exceeded that of all manufacturing. However, the steel companies seem to have been pressed by the need for additional working capital during these inflationary years. Their working capital in relation to their sales and capitalization decreased during these years. In the years 1946-1949, the steel industry experienced a net decrease in working capital, a deficit in the depreciation charges and retained earnings in 331 | I I relation to the capital outlays which did not result in much capacity expansion, and a low operating income which was even below that of the late 1930*s, even though the average operating rate was higher in the postwar period than in the prewar period. The improvement in the financial position of the steel industry came about largely in the later years of the period, that is in the 1950’s, especially in those later years when inflationary forces have tapered off* Some concluding remarks * This study has thus been concluded* It has been undertaken to show the actual workings of inflation as reflected in the steel industry of the United States in a particular historical environment* It has shown that the steel industry’s reactions to inflation are multitudinous and heterogeneous, varying with the degree and kind of inflation, and, more particularly, depending to a great extent on other factors within the environment. While inflation in a proper degree, occurring in a favorable i environment, may be conducive to the growth and progress of an industry or an entire economy, its disquieting and disrupting influences seemingly cannot be ignored. BIBLIOGRAPHY A. 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Department of Commerce, Business Statistics. 1955 biennial edition. A Supplement to Survey of Current Business: Washington, D. C.: Superintendent of Documents, 1955* 339 pp* Expansion of Industrial Defense Facilities in the United States: January 1, 1950-June22,1955* release of Business and Defense Services Administration, U. S. Department of Commerce, dated October 1955* 4 pp* U. S. Federal Trade Commission, The Decision in the Matter of American Iron and Steel Institute et al. 4&F. C., Decision 1^3 (1951); August 10, 1951* U. S* House, Committee on Public Works, Subcommittee to Investigate Questional Trade Practices, Investigation of Questionable Trade Practices. Hearings, Pt. 1. Position of the Steel industry"*in Respect to Black-marEet~l?perationsI 50th Oongress, 2ncl Session; Washington, D. C.: Government Printing Office, 1943* 528 pp. U. S. House, Committee on the Judiciary, Subcommittee on the Study of Monopoly Power, Study of Monopoly Power. Hearings, Serial No. 14* Pt. 4A. Steel^ 81st Congress, 2nd Session; Washington, D. C.: Government Printing Office, 1950. 1011 pp. U. S. House, Committee on the Judiciary, Subcommittee on the Study of Monopoly Power, The Iron and Steel Industry. Report, December 1950. SXst Congress, 2nd Session; Washington, D. C.: Government Printing Office, 1950. 92 pp. U. S. Internal Revenue Code (1954)• Section 124A. U. S. Office of Price Administration, Studies in Industrial Price Control. Pt. VI* Price Control in Steel. Historical Reports on War Administration; General Publication No. 6. Washington, D* C.: Superintendent of Documents, 1947* 44 pp* U. S. President* s Executive Order 10172. i 335 S* S. President * s Executive Order 10200. U. S. Senate, Select Committee on Small Business, I Subcommittee on Monopoly, The Distribution of Steel Consumption. 1949-1950* Report of Federal Trade Commissionto Committee on Small Business* 32nd Congress, 2nd Session; March 31, 1952; Washington, D* C.: Superintendent of Documents, 1952. 20 pp* U. S. Senate, Select Committee on Small Business, Steel Gray Market. Hearings before a subcommittee, October 25-December 19, 1951* 32nd Congress, 1st Session; Washington, D* C*: Superintendent of Documents, 1952. 404 pp. U. S. Senate, Special Committee to Study Problems of American Small Business, Changes in Distribution of Steel. 1940-1947• Special Report, pursuant to Senate Resolution 20* 31st Congress, 2nd Session; Senate Report No* 44; Washington, D. C*: Government Printing Office, 1950* 49 pp* U* S. Senate, Special Committee to Study Problems of American Small Business, Steel Supply and Distribution Problems. Final Report, pursuant to Senate Resolution No. 20. 3lst Congress, 1st Session; Senate Report No. 43; Washington, D. C.: Government Printing Office, 1949. 79 pp. U. S. Senate, Special Committee to Study Problems of American Small Business, Problems of American Small Business. Hearings, Pt. "Wl Steel Supply and Distribution Problems Affecting Smaller Manufacturers and Psers: V. 80th Congress, 1st Session; Washington, | D. C.: Government Printing Office, 1947. Pp. 945-1033.J i U. S. Temporary National Economic Committee, Investigation of Concentration of Economic Power. Hearings, Pt. 26. J Iron and SteelTndustry. 75th dongress, 3rd Session; i Washington, D. C.s Government Printing Office, 1940. Pp. 13305-14123. B. BOOKS Alderfer, E. B., and H. E. Michl, Economics of American Industry. Second edition; New York: McGraw-Hill Book Company, Inc., 1950. 716 pp. 336 American Institute for Economic Research, Where Are We Going? Special bulletin. Great Barrington, Mass.: American Institute for Economic Research. June 1, 1952. 32 pp. Backman, Jules, Economics of a Fourth Round Wage Increase. Answer to the Nathan Report; Testiraony on Behalf of Steel Companies Before the Presidential Steel Board. No place of publication, August 1949. 233 pp. Also published as Vol. V of Company Testimony before Presidential Factfinding Board. Steel Industry Case. August 1949* Backman, Jules, The Economics of Armament Inflation. New York: Rinehart & Company, Inc., 1951* 234 pp. ! Bellerby, J. R., Monetary Stability. London: Macmillan I and Co•, Ltd., 1&25* 174 PP* | Bresciani-Turroni, Constantino, The Economics of Inflation, j London: Allen & Unwin, Ltd., 1937* 464 pp* j 1 Carl M. Loeb, Rhoades & Co., Steel. An Analysis of the j Steel Industry and the Eight Leading Companies. New York: Carl M. Loeb, Rhoades & Co., 1951* 102 pp. Chamberlain, Neil W., and.Jane M. Schilling, The Impact of Strikes: Their Social and Economic Costs. New York: Harper & Brothers, 1954. ^57 pp. Chandler, Lester V., and Donald H. Wallace, Economic Mobilization & Stabilization. New York: Henry Holt and Company, 1951. 6l0 pp. i Chandler, Lester V., The Economics of Money and Banking. New York: Harper & Brothers, 194^. 732 pp. Chandler, Lester V., Inflation in the United States. 1940-194$. New York: harper & Brothers, 1951• 402 pp. Chapman, Herman H.. . . Iron and Steel Companies in Years of Prosperity and Depression. Doctoral Dissertation for the Columbia University. Tuscaloosa, Alabama: Privately printed, 1935* 267 pp. Conference on Price Research. Committee on Price Research in the Iron and Steel Industry. Price Research in j Steel and Petroleum. Prepared for the Conference on Price Research. Hew York: National Bureau of Economic Research, 1939. 170 pp. 337 Crowther, Geoffrey, An Outline of Money, Revised edition; London; Thomas Nelson and Sons, Ltd*, 1943* 417 pp* Daugherty, Carrol R., Melvin de Chazeau, and Samuel S. Stratton, The Economics of the Iron and Steel Industry. First edition; New York: McGraw-Hill Book Company, Inc*, 1937* 2 vols* 1188 pp. Director, Aaron, editor, Defense. Controls, and. Inflation. A conference sponsored by the University of Chicago 1 Law School. Chicago; University of Chicago Press, 1952. 342 pp. Einzig, Paul, Inflation* London: Ghatto and Windus, 1952* 223 pp. Enke, Stephen. Intermediate Economic Theory. New York: Prentice-Hall, Inc., 19501 5#8pp. 1 I Ezekiel, Mordocai, Methods of Correlation Analysis* j Second edition; New YorlcF John Wiley & Sons, Inc., 1941. 531 PP. Fellner, William, A Treatise on War Inflation. Berkeley: University of California !Press, 1942* ICO pp. Fisher, Irving, The Money Illusion* New York: Adelphi Company, 192#• 245 pp* Graham, Frank D., Exchange. Prices, and Production in Hyper-inflation: Germany. 1920-1923* Princeton: Princeton University Press, 1930. 361 pp. Hahn, L. Albert. The Economics of Illusion* New York: New York Institute of Finance, Distributor, 1949. 273 PP. Halm, George N., Monetary Theory.* Second edition; Philadelphia: The Blakiston Company, 1946. 491 pp. Hansen, Bent, A Study in the Theory of Inflation. London: Allen & Unwin, Ltd., 1951. 262 pp. Harris, Seymour E., The Economics of Mobilization and Inflation. New York: W. W. Norton & Company, Inc., T25T. 3C8 pp. Harris, Seymour E., Inflation and the American Economy. New York: McGraw-Hill Book Company, Inc., 1945. 559 pp. 333 jHart, Albert G., Defense without Inflation. New York: The Twentieth Century Fund,1951. 186 pp. Hart, Albert Gailord, Money. Debt, and Economic Activity. New York: Prentice-Hall, Inc., 1943“ 553 pp. . •Hawtrey, Ralph G., Trade and Credit. New York: Longmans, Green and Co., 1928. “T39 pp* Hegeland, Hugo, The Quantity Theory of Money. Goteborg, Sweden: Handers Boktryckeri AktTebolag, 19 51 • 262 pp. Hayek, Friedrich A. von, Profits. Interest, and Investment, London: Routlege & Kegan Paul, Ltd., 1939. 266 pp. !Hicks, J. R., Value and Capital. Oxford: Clarendon Press, i 1939. 331 pp. Hollander, J. H., editor, Jacob Vanderlint on Money Answers All Things. Originally published in 1734 in London; A reprint of economic tracts: Baltimore, Md.: The Lord Baltimore Press, 1914. 164 pp. Hume, David, Political Discourse. Edinburgh: A. Kincaid & Donaldson, 1752. 304 pp. Kemmerer, Edwin Walter, High Prices and Deflation. Princeton: Princeton university Press, 1920. 36 pp. Keynes, J. M., How to Pay for the War. New York: Harcourt, Brace and Company, 1940. 33 pp. Klein, Lawrence R., A Textbook of Econometrics. Evanston, 111.: Row Peterson and Company, 1953* 355 PP* Kurihara, Kenneth K., Monetary Theory and Public Policy. New York: W. W. Norton & Company, Inc., 1950. 393PP* Lempert, Leonard H., John J. Carter, and E. C. Harwood, What Will Inflation and Devaluation Mean to You? Great Barrington, Mass.: American Institute for Economic Research, 1952. 123 pp. Keynes, John Maynard, The General Theory of Employment. Interest and MonNew York: Harcourt, Brace and Company, 1936* pp. New York: Harcourt, Brace and 389 Lerner, Abba P., Economics of Employment. New York: ! McGraw-Hill Book Company, 1951* 397 pp* I * Loucks, William N., and J. Weldon Hoot, Comparative Economic System, New York: Harper & Brothers, 191*8• 8y6 pp. Meyer, F* V., Inflation and Capital, Cambridge, England: Bowes & Bowes, Ltd,, 1954* 75 pp* Mints, Lloyd W,, Monetary Policy for a Competitive Society. NewYork: McGraw-HillBook Company, Inc•, 1950. 236 pp. Mises, Ludwig von, Human Action: A Treatise on Economics. New Haven: Yale University Press, 1949* ~~&89 pp. Mises, Ludwig von, The Theory of Money and Credit. New edition; New Haven:Xale UniversityT’ ress, 1953* 493 pp. Mitchell, Wesley Clair, A History of the Greenbacks. Chicago: The University of Chicago Tress, 1903* 577 pp. Mitchell, Wesley Glair, Gold. Prices and Wages under the Greenback Standard. Berkeley: University of California Press, 190S. 627 pp. Morgenstern, Oskar, On the Accuracy of Economic Observations* Princeton: Princeton University Press, 195b* 101 pp. Mudgett, Bruce D., Index Number. New York: John Wiley & Sons, Inc., 195TI 135 pp. Nourse, Edwin G., and Horace B. Drury, Industrial Price Policies and Economic Progress. Washington, D. G.: The Brookings institution, 1958. 314 pp. Pigou, Arthur Cecil, The Economics of Welfare. First edition; London: Macmillan and Uo., 192b. 976 pp. Pigou, Arthur Cecil, The Veil of Money. London: Macmillan & Co., Ltd., 1949. 150 pp. Robbins, Lionel, The Economist in the Twentieth Century and Other Lectures in Political Economy. London: Macmillan k CoT, LtH7, 1954* 225 pp. 390 j Schumpeter, Joseph A., Business Cycles* New York: j McGraw-Hill Book Company, Inc., 1939* 2 vols. 1094 pp*| i Skinner, Richard D., Seven Kinds of Inflation. New York: McGraw-Hill Book Company, 19377 273pp. Standard and Poor Corporation, Industry Survey; Steel and Iron. Basic Analysis. Vol. 123, No. 25, Sec. 2. toew York: Standard and Poor Corporation, June 23, 1955. 32 pp. i Stocking, George, Basing Point Pricing and Regional I Development. A case study of the iron and steel ! industry. Chapel Hill: University of North Carolina Press, 1954. 274 pp. Tintner, Gerhard, Econometrics. New York: John Wiley and Sons, Inc., 1952. 37® pp. Wieksell, Knut, Lectures on Political Economy. Vol. II, Money. New York: The Macmillan Company, 1935* 238 pp. Willis, H. Parker, and John M. Chapman, The Economics of Inflation. New York: Columbia University Press, 1935. 443pp. C. PERIODICAL LITERATURE Barloon, Marvin, ”The Question of Steel Capacity,” Harvard Business Review. 27:209-236, March 1949. Barloon, Marvin J., **Pricing Policy in the Steel Industry,” Business History Review. XXVIII-3:214-235, September T$5I T. Bell, Daniel, “Steel*s Strangest Strike,” Fortune. September 1956, pp. 125, 246. Bernstein, Peter L., “Profit Theory — Where Do We Go From Here?” Quarterly Journal of Economics. LXVII-3:407-422, August 19^3. Bleiberg, R* M., "Steel Expansion Spurred by Need to Cut Cost,” Barron*s. 30:7-8, January 23, 1950. 391 Boulding, Kenneth E., "Price Control in a Subsequent Deflation," Review of Economics and Statistics. 30:15-17, February I94BI Collins, Am L., "Warehouse Distribution of Steel," Journal of Marketing Supplement. 14:353-361, September 1949. j ! "Composite Pig Iron Price," Iron Age, 149-1:162, January 1 1, 1942; 171-1:430, January 17x953; 177-1:296, ; January 5, 1956. ; "Composite Price for No. 1 Heavy Melting Scrap," Iron Age. 149-1:163, January 1, 1942; 171-1:432, January 1, 1953; 177-1:300, January 5, 1956. "Composite Steel Price," Iron Age. 157-1:31, January 3# 1946; 171-1:420, January 1, 1953; 177-1:236, , January 5, 1956. 1 I Dewey, Donald, "A Reappraisal of F. 0. B. Pricing and Freight Absorption," Southern Economic Journal. XXII-i:43-54, July 19551 Estes, Bay E., "Steel Demand," The Analyst Journal. IX-3:93-97, June 1953. "Expenditures on New Plant and Equipment," Survey of ^ Current Business. 32-4:15# April 1952. Fairless, B. F., and E. M. Voorhees, "U. S. Steel Officials Defend Price Advances." Commercial & Financial Chronicle, 171:441# January 26, 195^• Fisher, Gene H., "A Simple Econometric Model for the United States, 1947-1950," Review of Economics and Statistics. 34:46-43, February 1952. First National City Bank of New York, Monthly letter — Business and Economic Conditions. April Issues, 1939-19567~July 1956; August 1956. Goode, Richard, "Accelerated Depreciation Allowances as a Stimulus." The Quarterly Journal of Economics. LXIX-2:191-257 May 1955. Goris, Hendrieke, and Leen M. Koyck, "The Prices of Investment Goods and the Volume of Production in the i United States," Review of Economics and Statistics. 35:59-66, February 1953• 392 i S“Gray Market Seen as Large Factor to Certain Users," Iron Age. 160:111-114, September 1$, 1947. Harberler, Gottfried, "Causes and Cures of Inflation,” Review of Economics and Statistics. 30:10-14, February 194$. Harris, Seymour E., “The Inflationary Process: 2. In Theory and Recent History,” Review of Economics and Statistics. 31:200-210, August 1949. Horsefield, J. K., “The Measurement of Inflation," Int ernational Monetary Fund Staff Papers. 1:17-43, February 1950. “The Harwood Index of Inflation," Monthly Bulletin of American Institute for Economic Research, March 30, 1953, PP. 50-52, "Inflation Race — Who*s Ahead, Who*s Behind," U. S. Hews & World Report. August 3, 1956, pp. 95-97. "Interview with Ernest T. Weir, Chairman of the Board, National Steel Corporation," U. S. News & World Report. September 10, 1954, PP* 60-6$. Jones, Ralph C., “The Effect of Inflation on Capital and Profits: The Record of Nine Steel Companies," Journal of Accountancy. $7:9-27, January 1949. I Kemerer, Edwin Walter, "Inflation," American Economic ! Review. $:247-269, June 191$. "Labor Department Examines Consumers* Prices of Steel Products," Iron Age. 157-17:11$-145H, April 25, 1946. Lerner, Abba P., "The Inflationary Process: 1. Some Theoretical Aspects," Review of Economics and Statistics. 31:193-200, August 1949. Liversey, C. A., "The Steel Warehouse Distributor," Harvard Business Review. 25:397-40$, Spring 1947. McHugh, Loughlin F., "Financial Experience of Manufacturing Corporations," Survey of Current Business. 34-12:13-17, 2$, December 1954. 393 Miller, John Perry, nThe Pricing Effects of Accelerated Amortization," Review of Economies and Statistics, i 34:10-17, February 1952. "More Freedom for Steel Pricing." Steel. 128:47-8. June 25, 1951. Morris, James A., "The Concept of Steel Capacity," The Journal of Industrial Economics. 111-1:47-59, December 1954. Nassimbene, Raymond, and Donald G. Wooden, "Growth of Business Capital Equipment, 1929-1953,n Survey of Current Business. 34-12MS-27, December 1954. "Hew Pattern for Steel," Business Week, p. 15-16, June 8, 1946. i Palyi, Melchior, "Commitment to Prosperity," Commercial & Financial Chronicle. 171:2045f, May 18, 1950. "Productivity," Fortune. Hovember 1955, pp. 103-105, 241. Robinson, Joan, "Theory and Practice of Planning," Soviet Studies. 4:53-58, July 1952. Salant, W. S., "The Inflation Gap: Meaning and Significance for Policy Making," American Economic Review. 32:300-314, June 1942. Sehein, Nathan H., "Estimating Demand for Fabricated Structural Steel," Construction Review. 1-12:8-13, December 1955. Schlaifer, Robert, J. Keith Butters, and Pearson Hunt, "Accelerated Amortization." Harvard Business Review. 29:113-124, May 1951. Simkin, C. G. F., "Notes on the Theory of Inflation," Review of Economic Studies. XX(2).52:143-151, 1952-195T. “ Smith, Richard Austin, "Bethlehem Steel and the Intruder," Fortune. March 1953, PP. 100-105, 193-201. Somers, Harold M., "Comments on Inflationary Process by Harris and Lerner," Review of Economics and Statistics. 31:212-213, August 1949. | Spiegel, Henry W., "A Century of Prices in Brazil," i Review of Economics and Statistics. 30:57-62, February 1948. "Steel Easier to Get Soon,” U. S. Hews & World Report. March 12, 1948, pp. 11^-12. "Steel Industry Abandons Basing-point Pricing," Business Week. July 10, 1948, pp. 19-20. "Steel Price Increase Averages Four Dollars," Steel. 125:45-46, December 19, 1949. "Steel Shortage Seen Ended by 1949," Steel. 121:46-47, September 22, 1947. Sullivan, G. T., "Steel Extras Revised on Cost Basis," Iron Age. 164:87-86, December 22, 1949. Weir. E. T.. "Steel Capacity Surpasses Meeds." Iron Age. 165:114-115, April 6, 1950. Wiles, Peter, "Soviet Economics," Soviet Studies. 4:133-138, October 1952. Whitman, Roswell H., "The Statistical Law of Demand for a Producers* Good as Illustrated by the Demand for Steel," Econometrica. 17-2:138-152, April 1936. Wylie, Kathryn H., and Mordecai Ezekiel, "The Cost Curve for Steel Production," Journal of Political Economy. XLVIII:777-821, December 1940. Young, Loong-kwei ( ), "1947 Money%and Price Levels in Shanghai," Economic Forum ( ); (published in Shanghai, China, in Chinese), January 10, 1948, pp. 11-14. ! Gregory. T. E.. "Inflation and Deflation." Encyclopeadia j Britanniea. 1951 edition, XII:346-347. D. ESSAYS \ 395 Hawtrey, Ralph G., "Money and Index-nurabers," reprinted in Readings in Monetary Theory. Blakiston Series of Republished TGFtieles on Economics, v* 5; edited by Friedrich A. lutz and Lloyd W* Mints; Philadelphia: The Blakiston Company, 1951* Pp. 129-155. Kibler, Thomas L., "Inflation." Encyclopeadia Americana. 1952 edition, XV:123-123j. Marshall, Alfred, "Memoranda and Evidence before the Gold and Silver Commission (1SS7)," Official Papers. London: Macmillan and Co., Ltd., 1926. Pp. 17-195* E. PUBLICATIONS OF STEEL COMPANIES AND TRADE ASSOCIATIONS American Iron and Steel Institute, Annual Statistical Report. 1955. New York: American Iron and Steel Institute, 1956. 136 pp. American Iron and Steel Institute, Annual Statistical Report. 1954. New York: American Iron and Steel Institute, 1955. 130 pp. American Iron and Steel Institute, Annual Statistical Report. 1953* New York: American Iron and Steel Institute, 1954. 116 pp. American Iron and Steel Institute, Annual Statistical Report. 1951* New York: American Iron and Steel Institute, 1952. 100 pp. American Iron and Steel Institute, Annual Statistical Report. 194&. New York: American Iron and Steel Institute, 1949. 196 pp. American Iron and Steel Institute, Annual Statistical Report. 1946. New York: American Iron and Steel Institute, 1947. 162 pp. American Iron and Steel Institute, Annual Statistical Report. 1942. New York: American Iron and Steel Institute, 1943* H & PP* I 396 ! i American Iron and Steel Institute, Annual Statistical j Report. 1939* New York: American Iron and Steel Institute, 1940* 104 pp* American Iron and Steel Institute, Charting Steel*s Progress. 1955 edition; New York: American Iron and Steel Institute, 1955* 6S pp. American Iron and Steel Institute, Iron and Steel Year Book. 1944* New York: American Iron and Steel Institute, 1944* 124 PP* Araco Steel Corporation, Facts and Figures From the Armco Record. 1950 edit ion; Middietown7 Ohio: Armco Steel Corporation, September 1950. 32 pp. Araco Steel Corporation, Facts and Figures. 1955 edition; Middletown, Ohio: Armco Steel Corporation, October 1955. 22 pp. Bethlehem Steel Corporation, Annual Report. 1955* Bethlehem, Pa.: Bethlehem Steel Corporation, 1956. 21 pp. Companies* Presentations Before: - Special Panel. Wage Stabilization BoardT Steel Industry Wage Case. Case No. D-18-C. January-February, 1952* No j publisher, 1952. 4 vols. 2300 pp. j Company Testimony Before Presidential Fact-finding Board. i j Stee!8~~lndustry Case. August 1949• No publisher, 1950. 5 vols. V. 1-4, Company Exhibits; v. 5, Economics of a Fourth Round Wage Increase, by Jules Backman. Crucible Steel Company of America, Annual Report. 1955* Pittsburgh, Pa.: Crucible Steel Company of America, 1956. 33 PP. Statement of C. L. Austin. President, Jones & Laughlin Steel Corporation, before the House of Representatives, Banking and Currency Committee, May 19, 1952. IS pp. Statement on Steel Price Reduction. Statement of Benjamin j F. Fairless, President of United States Steel Corporation, on April 22, 194S. 3 PP* United States Steel Corporation, Annual Report. 1955* New York: U. S. Steel Corporation, 1956. 42 pp. 397 United States Steel Corporation, Annual Report. 1954. Hew York: U. S. Steel Corporation, 1955* 38 pp. United States Steel Corporation, United States Steel Corporation T. N. E. £. Papers’ ! Hew York: United States Steel Corporation, 1946• 3 vols. Steel Facts. 41:3, June 1940. Steel Facts. 85:* 7, August 1947. Steel Facts. 90:;5, June 1948. Steel Facts. 104 3, October 1950. Steel Facts. 105 2, December 1950. Steel Facts. 109 3, August 1951. Steel Facts. 113 2,6,7, April 1952. Steel Facts. 114 2,8, June 1952. Steel Facts. 118 2-3, February 1953. Steel Facts. 119 1,2,6, April 1953. Steel Facts. 120 1,2, June 1953. Steel Facts. 121 8, August 1953. Steel Facts. 123 2, December 1953. Steel Facts. 124 3, February 1954. Steel Facts. 127 1,2, August 1954. Steel Facts. 129 5, December 1954. F, PUBLICATIONS OF THE Nathan, Robert E., Economic Position of the Steel Industry. 1949. A Survey of Facts for Wage Negotiations prepared for the United Steelworkers of America. Washington, D. C*: Robert E* Nathan Associates, Inc., July 1949. 53 pp. Nathan, Robert E., A National Economic Policy for 1949. i An analysis prepared forthe Congress of Industrial i Organization. Washington, B. C.: Robert E. Nathan j Associates, Inc., July 1949. 52 pp. I Ruttenberg, Stanley H., Wage Policy in Our Expanding Economy. Union Exhibit No. 8 to the U. S. Wage Stabilization Board in the matter of United Steelworkers of America-CIO and various steel and iron ore companies. Case No. D-1S-C. Washington, D. C.: Congress of Industrial Organizations, 1952. 60 pp. United Steelworkers of America, Facts on Steel: Profits. Productivity. Prices and Wages. 195~6. Pittsburgh, Pa.: United Steelworkers of America, July 1956. 51 pp* United Steelworkers of America, Research Department, "Major Contract Gains: U. S. Steel Corporation — Basic Contracts, 1937-1952." A mimeographed report to the officials of the union, dated October 13, 1952. 9 pp. | United Steelworkers of America, Steel and the National j Economy. 1956. Pittsburgh, Pa.: United Steelworkers I of America, July 1956. 57 pp* G. SPECIAL REPORTS Materials and Methods, Irons and Steels Market Survey. Completed in July 1955* New York: Materials and Methods, 1955. 15 pp. H. NEWSPAPERS I I 1 i New York Times. July 26, 1956. Section C, p. S. I. UNPUBLISHED MATERIALS Ho, Yen Hui, "British Credit Control, 1930-1950." Unpublished Master*s thesis, University of Southern California, Los Angeles, 1951* 250 pp. U niversity 6f Southern Cafrfornta Library

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Creator Ho, Yen Hui (author)

Core Title The impact of inflation upon the steel industry in the United States, 1946-1954

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Degree Doctor of Philosophy

Degree Program Economics

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Tag Economics, Commerce-Business,OAI-PMH Harvest

Language English

Advisor Garis, Roy L. (committee chair), Guild, Lawrence R. (committee member), Phelps, Clyde William (committee member), Phillips, Bruce (committee member), Pollard, Spencer D. (committee member)

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