The History of Basic Metals Price Control in World War II 9780231894425

Table of contents :
PREFACE
TABLE OF CONTENTS
CHAPTER I. INTRODUCTION
CHAPTER II. EARLY PROBLEMS OF PRICE AND SUPPLY
CHAPTER III. EARLY PRICE CONTROLS
CHAPTER IV. THE EVOLUTION OF THE PREMIUM PRICE PLAN FOR COPPER, LEAD, AND ZINC
CHAPTER V. TECHNIQUES OF METALS PRICE CONTROL
CHAPTER VI. STANDARDS OF PRICE ACTION (1)
CHAPTER VII. STANDARDS OF PRICEACTION (2)
CHAPTER VIII. THE ADMINISTRATION OF THE PREMIUM PRICE PLAN
CHAPTER IX. ADJUSTING BASIC METALS PRICES
CHAPTER Χ. PRICES, PRODUCTION, COSTS, AND PROFITS UNDER PRICE CONTROL
CHAPTER XI. CONCLUSION
APPENDICES
SELECT BIBLIOGRAPHY
INDEX

Citation preview

STUDIES IN HISTORY, ECONOMICS AND PUBLIC L A W Edited by the FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY

NUMBER

541

THE HISTORY OF BASIC METALS Price Control in World War II BY

ROBERT F. CAMPBELL

THE HISTORY OF BASIC METALS Price Control in World W a r II

BY

ROBERT F. CAMPBELL

AMS PRESS NEW

YORK

COLUMBIA UNIVERSITY STUDIES IN THE SOCIAL SCIENCES 541

T h e Series was formerly known as

Studies in History, Economics and Public Law.

Reprinted with the permission of Columbia University Press From the edition of 1948, N e w Y o r k First A M S E D I T I O N published 1 9 6 8 Manufactured in the United States of America

Library of Congress Catalogue Card N u m b e r : 7 7 - 7 6 6 5 4

AMS PRESS, INC. N E W Y O R K , N. Y. 1 0 0 0 3

To My Mother and Father

PREFACE THIS study was conceived and executed while I was employed by the History Branch of the Office of Price Administration. It is based upon O P A records and memoranda and in part upon my own experience as an economist in O P A ' s Industrial Division. These circumstances were helpful in the preparation of the study, but they may also have led to some bias. Within the framework, however, of my own sympathy for the efforts of the Office of Price Administration to control inflation, I have made every effort to evaluate critically and objectively the measures undertaken by that agency during the war period to regulate the prices of the basic metals : iron, steel, aluminum, copper, lead, zinc, and the scrap metals. Professor George R. Taylor was the first to encourage me in the project when he was Chief of O P A ' s History Branch, and his successors in that position, the late Harvey Pinney, and Harvey C. Mansfield, continued to give me counsel, criticism, and friendly cooperation. I was given access to all pertinent documents and had complete freedom in the preparation of the manuscript. Naturally, however, I have accepted the limitations concerning the disclosure of confidential information imposed by statute upon employees of the government. These limitations apply principally to the disclosure of individual company data gathered under the authority of the Federal Reports Act. My first three chapters owe much to studies by George R. Taylor and John A. Hart, subsequently published in The Be' ginnings of OPA. Historical Reports on War Administration, Office of Temporary Controls ( O P A ) , General Publication No. ι. This is one of a series of excellent historical studies published under the general direction of Harvey C. Mansfield. The volume, Studies in Industrial Price Control, General Publication No. 6, appeared too late to be of aid in the preparation of this study, but it is a valuable piece of work that supple7

8

PREFACE

ments my own, especially in the iron and steel area. Further, it carries the iron and steel story through the period of decontrol. Those in the operating divisions of the Office of Price Administration who were extremely helpful in providing me with information and guidance in the preparation of this study included : Donald H. Wallace, John D. Sumner, Jesse Maury, Fred Holder, Karl Anderson, Warren Huff, Addison T. Cutler, Alexander Firfer, Eve Jacobs, and Elsa Lopez. At Columbia University this study was submitted as a Ph.D. dissertation under the joint direction of Professors Allan Nevins and Frederick C. Mills, each of whom gave me invaluable assistance at every stage in its preparation. Professors Richard B. Morris and Henry Steele Commager read the entire manuscript and offered important suggestions, and Professor Shepard B. Clough showed a friendly interest in the study from the outset. Edgar S. Rossin, Vice-President of the Miami Copper Company, was kind enough to give me the benefit of his experience in the mining industry, and our discussions of these and related matters have always been stimulating to me. My former wife, 1 lope L. Lacy, read the manuscript at an early stage and offered many helpful suggestions. WORCESTER,

MASS.

D r e . 31, 1947

TABLE OF CONTENTS PACE PREFACE

7 CHAPTER

I

Introduction

13

Inflation and the Problem of Stabilization

13

Development of Price Control ; Organization and Authority

18

CHAPTER

II

Early Problems of Price and Supply

26

Behavior of Metals Prices

26

Measures Undertaken to Increase Supply

30

Stockpiling

32

Imports

32

Export Control

37

Expansion of Facilities

39

Summary

49 CHAPTER

III

Early Price Controls

50

Informal and Formal Controls

50

The Imposition of Price Controls

S3

Iron and Steel

S3

Non-ferrous Metals

65

Summary

81 C H A P T E R IV

The Evolution of the Premium Price Plan for Copper, Lead and Zinc . . Differential Pricing and Subsidy

82 82

Origins of Premium Price Policy

84

Michigan Copper

84

Tri-State Zinc

91

Lead Prices

94

Development of the Premium Price Plan

96

Summary

I0 3

0

IO

TABLE

OF

CONTENTS

CHAPTER V PACK

Techniques of Metals Price Control DoUars-and-cents Prices

104 104

Grade and Quantity Differentials

105

Freight Charges

108

The Freeze-Formula Technique

114

Enforcement and Price Control Techniques

117

Summary

120 CHAPTER VI

Standards of Price Action (1) Legal Background

121 121

Emergency Price Control Act of 1942

12 t

The Stabilization Act

126

The " Hold-the-Line " Order The Earnings Standard

127 130

i936->939 as the Base Period

131

Single-line Companies and Multiple-Product Industries

135

Abnormally Distributed Earnings

137

Materially Diminished Output

138

The Product Standard

140

The Problem of Costs

140

Compensatory Adjustments

144

Differential Pricing

145

Summary

147 CHAPTER VII

Standards of Price Action (2) Discretionary Increases

149 14g

Industry-wide Actions Individual Adjustments

149 152

Standards for the Distributive Trades

162

Price Reductions

165

Summary

169 C H A P T E R VIII

The Administration of the Premium Price Plan

171

Development of the Plan

171

Standards of Quota Revision

173

TABLE

OF

CONTENTS

II PAGI

Mine Quotas

174

Mining Costs

176

Metal Margins

180

Manpower and Metal Requirements Summary

186 190

C H A P T E R IX Adjusting Basic Metals Prices

192

Summary of Major Price Actions

193

1941 and 1942

19e

1943

>94

1944

198

1945 Summary

202 211 CHAPTER X

Prices, Production, Costs, and Profit» Under Price Control

212

Behavior of Prices

212

Production

217

Costs and Margins

zaa

Metals Earnings

227

Summary

230 CHAPTER XI

Conclusion

232 APPENDICES

APPENDIX

I

236

APPENDIX

II

240 241

APPENDIX

III A

APPENDIX

III Β

242

APPENDIX

IV

243

SELECTED BIBLIOGRAPHY

245

INDEX

251

CHAPTER I INTRODUCTION INFLATION

AND

THE

PROBLEM

OF

STABILIZATION

THE control of inflation w a s one of the central problems in t h e management of the w a r e c o n o m y of the U n i t e d States duri n g the great conflict of 1 9 4 1 - 4 5 ; and it required the development of a stabilization p r o g r a m designed to check inflationary pressures at every point. Price control w a s only a part of this stabilization p r o g r a m , but it bore a m a j o r share of the antiinflationary burden. W h i l e w e are not prepared to undertake a n y careful, analytical study of the causes, nature, and sympt o m s of general inflation in w a r t i m e , w e m a y find it useful to outline, in a v e r y general w a y , the chief characteristics of this phenomenon, and thus establish a f r a m e of reference for a discussion of the problem of price control of the basic metals. A t the outset, let us consider the conditions w h i c h give rise to inflation in wartime. W e assume a peacetime economy in w h i c h optimum utilization of resources has not been achieved; i.e., in which there exist idle factors of production, including labor. A sharp increase in demand, or anticipated demand, for materials of w a r m a y result in a speculative increase in prices, especially of those commodities directly involved, but as long as there are readily available resources that can be utilized to satisfy this increased demand, w e w o u l d expect no sustained upward movement of prices generally. In some areas, of course, so-called " bottlenecks " will develop which will prevent the necessary expansion of supply of a particular commodity. If steps are taken to eliminate such bottlenecks as rapidly as possible, increases in the prices of the commodities involved can be minimized. A f t e r a while, h o w e v e r , the demand for materials of w a r becomes so intense that

in area after area

general

shortages appear with consequent price increases. 1 W h e n the 1 T h u s , the danger of g e n e r a l inflation arises before the conditions of full employment are achieved. F o r an elaboration of this point see J. K . Galbraith, " T h e T i m i n g of Inflation C o n t r o l s , " Rn\ llcn». Stai., M a y 1941, 23 ( 2 ) .

13

14

THE

HISTORY

OF B A S I C

METALS

point of approximately full utilization of resources is reached, when, for example, a general scarcity of manpower becomes the limiting factor in production, further increases in war production can be achieved only at a sacrifice of civilian production. The choice must be made for the first time between guns and butter. Cutbacks in civilian production, when undertaken, decrease the available supply of consumer goods. But the demand for such goods remains at the extraordinarily high levels brought about by full employment and a consequent increase in the national income. Prices of consumer goods are thus forced up, and the cost of living rises. Meanwhile, labor shortages have resulted in wage increases, the justice of which is supported by increasing living costs. These wage increases together with increases in material prices result in increased costs of manufacturing which in turn are reflected in still higher prices. The inflationary spiral has begun. It can readily be perceived that the fiscal policy of the Government is directly related to the problem of general inflation in wartime. Most of the increased demand for war materials derives from military and naval expenditures of the Federal Government. While some of these increased expenditures are financed by increases in Federal taxes, an increasing proportion of them are for one reason or another met through deficit financing. Now it is conceivable that by requiring individuals to purchase and hold a given amount of Government bonds, the amount of spendable national income could be so reduced that it would not exceed in value the amount of available consumer goods. In such an event, there would be no general pressure of demand upon the prices of such goods, and dangers of general inflation would subside. Actually, however, the Federal Government finds it politically difficult to embark on such a program of enforced savings, and indeed finances only a relatively small proportion of its expenditures through bond sales to individuals. Most of the Government's financing

INTRODUCTION

IS

is accomplished through the sale of bonds to the commercial banks who " pay " for the bonds by creating bank deposits for the credit of the Federal Government. This method of financing does nothing, of course, to sop up the excess of spendable national income, but on the contrary adds to the fuel of inflation by expanding the money supply. We need scarcely emphasize the evils of wartime inflation. If an inflationary price movement is permitted to take place, the financial burdens of the war are shared inequitably. Those who depend for their income upon fixed returns either from salaries or investments find the purchasing power of their incomes drastically reduced and their standard of living seriously lowered. Labor, when well organized, is in a better position to maintain its real income during a period of inflation, but in the race between prices and wages that accompanies the inflationary spiral, labor is seldom the victor. Speculators and profiteers may benefit from inflation, but uncontrolled price increases have only a disorganizing effect upon the productive process. Labor troubles, hoarding of materials, and other disruptive practices create business uncertainties of large magnitude, and make it difficult, if not impossible, for manufacturers to plan and execute production programs. Inflation, therefore, not only distributes the burdens of the war more inequitably than necessary, but also makes it difficult for the nation to organize its productive facilities for war. Finally, at the conclusion of the war, or at the end of the inflationary period brought about by war, the boom collapses. Depression, unemployment, bankruptcy, and chaos face the nation at a time when orderly transition from a wartime to a peacetime economy is imperative. Recognition of these facts, and remembrance of the unhappy experiences of the First World War, 2 led the Roosevelt Admin2 For an excellent analysis of the price control experience during World W a r I, see 77th Cong., ist Sess., House Banking and Currency Committee, Hearings on the Price Control Bill, 1941 ( P a r t 1).

l6

THE

HISTORY

OF B A S I C

METALS

istration to the conclusion that the problem of economic stabilization was one of the crucial problems in the organization of a war economy. Many administration leaders and their advisers were also well aware that this problem had to be attacked in a number of ways, that price control alone would not be enough to stem the inflationary tides. Thus, as we shall see, Leon Henderson and his staff were quick to recognize that in the early stages of the defense effort breaking bottlenecks and expanding industrial production were important weapons in the battle for price stability. Further, throughout the period of price control, O P A officials urged the imposition of drastic production controls to aid in the stabilization effort. Others in the Administration recognized that fiscal policy could be employed to minimize inflationary pressure, and, indeed, some proposals were made that were based on the Kalecki plan for overall expenditure rationing. 3 The idea of a spendings tax designed to limit expenditures and encourage savings was also discussed both in and out of the Administration. 4 Henderson himself favored a " tough " tax program, including progressive taxation of consumption, but he was unalterably opposed to a sales tax.'' President Roosevelt made it clear that the Administration aimed to develop a broad program of stabilization when in his budget message of January 5, 1942, he said, " A n integrated program including direct price controls, a flexible tax policy, allocations, rationing, and credit controls, together with pro3 See report on expenditure rationing prepared by the staff of the T r e a s u r y Department's Monetary Research Division (1942). 4 See discussion of expenditure rationing and its relation to the spendings tax in W . Allen Wallis, " H o w to Ration Consumers' Goods and Control Their Prices." .4m. Econ. Rev., Vol. X X X I I , no. 3, part 1 (Sept. ' 4 2 ) . See also article by Ralph E . Holben, " General Expenditure Rationing with Particular Reference to the Kalecki Plan," in the same issue of Am. Econ. Rev. Kalecki's views may be found in his article " General Rationing," Bull. Inst, of Stat. ( O x f o r d , E n g l a n d ) , vol. I l l , no. 1 ( J a n . i r , 1941). 5 Letter, Henderson to H a r o l d D. Smith, Director, Bureau of the Budget, Jan. 15, 1943.

INTRODUCTION

I7

ducers' and consumers' cooperation, will enable us to finance the war effort without danger of inflation. This is a difficult task, but it must be done and it can be done." β Already, the Federal Reserve Board, with the help of O P A officials had drafted and put into effect Regulation W, issued September ι, 1941, designed to curtail installment buying, and the Treasury was drafting tax proposals designed to meet the requirements of the President's program. Further evidence that the Administration considered price control to be only one of a series of measures to control inflation is found in the President's comments when he signed the Emergency Price Control Act of 1942. A t that time, he said, " . . . price control legislation alone cannot successfully combat inflation. T o do that, an adequate tax and fiscal program, a broad savings program, a sound production program, and an effective priorities and rationing program are needed." 7 Perhaps the most comprehensive statement, however, with respect to the necessity for an integrated stabilization program was the President's famous 7-point program set forth in a message to Congress on April 27, 1942. In this message, the President proposed : ι. Heavy taxes designed to keep profits at a low reasonable level. 2. An overall ceiling on prices at all levels of manufacturing and distribution, and on rents in areas affected by war industries. 3. Stabilization of wages. 4. Stabilization of farm prices. 5. An expanded War Savings program. 6. Rationing of essential and scarce commodities. 7. Discouragement of credit and installment buying and encouragement of debt repayment.8 6Quoted in O P A , First 7 Ibid., p. 22. S Ibid.,

pp. 35-36.

Quarterly

Report,

p. 33.

L8

THE

HISTORY

OF BASIC

METALS

Thus, the Administration conceived of the struggle against inflation as one in which price control would be supplemented by production controls, wage controls, rationing, and a flexible fiscal policy. These supplementary measures were of great help in the battle to hold the line of prices, but it is dear the Administration came to rely upon direct price controls to an everincreasing extent. DEVELOPMENT OF PRICE CONTROL; ORGANIZATION AND AUTHORITY

While the Army had, in the years following the First World War, developed plans for industrial mobilization that included general price controls," and while the Temporary National Economic Committee, at the direction of the President, had held hearings on War and Prices early in December I939, 1: the first step toward the creation of a price control agency was not taken until May 28, 1940, when the President, acting under the authority of the National Defense Act of 1916, revived the National Defense Advisory Committee ( N D A C ) . At the same time, he appointed Edward R. Stettinius, Jr., William S. Knudsen, Sidney Hillman, Chester C. Davis, Ralph Budd, Harriet Elliot and Leon Henderson to membership on the commission to advise him on problems of industrial materials, industrial production, labor, agriculture, transportation, consumer protection and price stabilization, respectively.11 Leon Henderson, the Commissioner for Price Stabilization, was given responsibility for directing efforts at price stabilization in the raw materials field. While this was theoretically an " advisory " job, Henderson along with other members of the Commission was led to assume powers of actual direction Commission 9 " Plan for Industrial Mobilization," U. S. War Policies Hearings, M a y 13, 14, 1931, pt. 2, pp. 396-478; and A r m y and N a v y Munitions Board, Industrial Mobilization Plan... (Revised 1933, 1936 and 1939). 1076th Cong., 2d Sess., T e m p o r a r y National Economic Committee, Hearings, Dec. 4-8, 1939, pt. 21, " W a r and Prices." 11 New York Times, M a y 29, 1940.

INTRODUCTION

I9

and administration. Indeed, it was during these days of the National Defense Advisory Commission ( N D A C ) that some of the most important actions were taken to stabilize the prices of many basic metals. In January 1941 the President established the Office of Production Management ( O P M ) whose function it was to increase " production for the national defense through mobilization of material resources and the industrial resources of the nation." i a Finally on April 1 1 , 1941, the President issued an Executive Order setting up the Office of Price Administration and Civilian Supply ( O P A C S ) . Leon Henderson was named administrator and Harriet Elliot, assistant administrator of the new agency, which was directed " t o take all lawful steps necessary or appropriate in order to prevent price spiralling, rising cost of living, profiteering and inflation. . . , " and to supervise the supply of goods for civilian needs.1* At the same time, the President appointed a Price Administration Committee which included the Administrator of O P A C S , as Chairman, and the Secretary of the Treasury, the Secretary of Agriculture, the Federal Loan Administrator, the Chairman of the Tariff Commission, the Director General and Associate Director General of the Office of Production Management, or their alternates. This committee was established to advise the Administrator on price control policies and to serve as a medium through which the Administrator could keep other Government officials informed of the activities of OPACS. This committee met regularly throughout the summer and fall of 1941, but finally passed into oblivion shortly after the passage of the Emergency Price Control Act early in 1942. In August 1941, differences between Henderson and officials of OPM with respect to the necessity of curtailing civilian production in the interests of defense production led to a reorgani12 Executive Order 8629, issued Jan. 7, 1941. 13 Executive Order 8734, issued April n , 1941.

20

THE

HISTORY

OF BASIC

METALS

zation of the production agencies of the Government. The Civilian Allocation Division of O P A C S was transferred to OPM, although Henderson remained its director. He also remained head of the newly titled Office of Price Administration. To resolve differences arising from the allocation of essential materials, the President created the Supply, Priorities, and Allocations Board ( S P A B ) to coordinate military, lendlease, and civilian requirements. Henderson was appointed to this board along with the Director General and Associate Director General of OPM, the Secretaries of War and Navy, the Lend-Lease Administrator, and the Chairman of the Economic Defense Board. 14 Early in 1942, the S P A B was superseded by the newly created War Production Board ( W P B ) that took over the operating functions of the OPM as well. 15 Henderson remained as Director for Civilian Supply of this new agency, and indeed, was a member of the War Production Board itself, but one of the results of this reshuffling of the production agencies was to separate price and supply functions in the organization of the war effort and to reduce Henderson's authority over civilian supplies. Meanwhile, the O P A continued its price control functions under the authority of Executive Order 8734, issued April l i , 1941. This order, which established O P A C S , authorized the Administrator to: (a) Take all lawful steps necessary or appropriate in order to prevent price spiraling, rising costs of living, profiteering and inflation . . . (c) Determine and publish, after proper investigation, such maximum prices, commissions, margins, fees, charges, or other elements of cost or price of materials or commodities, as the Administrator may from time to time deem fair and reasonable ; and take all lawful and appropriate steps to facilitate their observance. 14 Executive Order 8875, issued Aug. 28, 1941. 16 Executive Order 9024, issued Jan. i6, 194a.

INTRODUCTION

21

This authorization raised several interesting legal questions which are relevant to our discussion of the development of the organization and authority of the price control agency. The first of these questions involved the underlying authority of the President to issue maximum price schedules in the absence of price control legislation. The second question involved the Government's power to enforce these maximum prices. A good case was made out for the authority of the President to issue ceiling price schedules. In a memorandum to Henderson dated May 8, 1941, David Ginsburg, the General Counsel of the price agency, argued that: The authority underlying the issuance of ceiling price schedules is derived from (1) the implied constitutional powers of the Chief Executive during a period of emergency, and the obligation of the President " to take care that the laws be faithfully executed," and to integrate in sound defense policy the administration of the laws providing for the coordination of our industrial resources, including the laws providing for commandeering, and the law authorizing priorities for defense production; (2) congressional acceptance of such exercise of Executive authority, which was fully disclosed to congressional committees and commissions; (3) virtual reenactment of the commandeering provisions of the Army Appropriation Act of 1916 in section 9 of the Selective Service and Training Act of 1940, following reliance upon the commandeering powers to support such maximum prices, as indicating legislative approval thereof.1® But the authority to issue price ceilings was very different in character from the power to enforce such ceilings, and on this score the price office had to admit virtual lack of direct power. Theoretically, of course, the agency had the authority 16 Memorandum, Office of the General Counsel to Leon Henderson, " T h e Present Price Control Authority of the President and the Office of Price Administration and Civilian Supply," May 8, 1941. This memorandum was published in 77th Cong., ist Sess., House Committee on Banking and Currency, Hearings on the Price Control Bill, pt. 1, Aug. 5-Sept. 25, 1941,

pp· 373-384.

22

THE

HISTORY

OF BASIC

METALS

to ask the President to commandeer the property of those who acted in violation of ceiling prices, or it could ask the production authorities to deny priority assistance to violators of price schedules, but the agency did not in fact ever request such action. The only direct action taken by the price agency in its pre-statutory period, besides informal requests for compliance, was to state that the office would " make every effort to assure (a) that the Congress and the public are fully informed; and (b) that the powers of the Government are fully exerted in order to protect the public interest." 17 Faced with growing inflationary pressures and recognizing the inadequacies of non-statutory price control, the President urged Congress in a message of July 30, 1941, to enact legislation which " should include authority to establish ceilings for prices and rents, to purchase materials and commodities when necessary, to assure price stability, and to deal more effectively with excesses in the field of installment credit. T o be effective, such authority must be flexible and subject to exercise through license or regulations under expeditious and workable administrative procedures." " On the following day, Administration leaders introduced a price control bill based on earlier drafts of legislation prepared by O P A lawyers. After extensive hearings before the House and Senate Banking and Currency Committees, the bill in somewhat revised form was passed by both houses of Congress and signed by the President on January 30, 1942, almost two months after the United States was actively engaged in war. This Emergency Price Control Act of 1942 19 authorized the Administrator to establish such maximum prices for commodities as would be generally fair and equitable and would effec17 Price Schedule 1, issued Feb. 17, 194«. and other early price schedules. 1877th Cong., ist Sess., House Document 332, "Message from the President of the United States Transmitting Request for Legislation Stabilizing the Prices of Various Commodities and Rentals." 19 77th Cong., 2d Sess., Public Law 421.

INTRODUCTION

23

tuate the purposes of the act. The Administrator's powers over agricultural prices were limited so that in most cases he could not establish maximum prices below 110% of parity. Further, any maximum prices for agricultural commodities established by the Administrator had to have the prior approval of the Secretary of Agriculture. However, the Administrator was given power to buy, sell, store, or use any commodities in order to obtain the maximum necessary production. He was also given the power to make subsidy payments to domestic producers, but strategic or critical materials could only be bought and sold by the Reconstruction Finance Corporation. Finally, the Administrator was given authority to establish maximum rents for housing accomodations in so-called defenserental areas. To provide for judicial review of maximum price and rent regulations, the act set up an Emergency Court of Appeals which was given exclusive jurisdiction to review regulations and orders issued by the Administrator and which could set aside such regulations if they were not generally fair and equitable or if they were arbitrary or capricious. Provision was also made for review of these decisions by the Supreme Court upon writ of certiorari. The Act provided four principal means of enforcement: ( 1 ) Criminal proceedings were authorized with penalties ranging up to fines of $5,000 and prison sentences of one year. (2) Tederai, district, State and Territorial courts were authorized to issue injunctions or compliance orders against violators. (3) The Administrator was empowered to issue licenses as a condition of engaging in business, and after warning notices issued by him, courts were authorized to suspend such licenses upon the petition of the Administrator. (4) Finally, purchasers could bring suit for treble damages in the event of overceiling charges, if the purchase was not

24

THE

HISTORY

OF B A S I C

METALS

made in the course of trade and business. In other cases, the Administrator was authorized to bring such suits. Because of the unsatisfactory agricultural provisions of the bill and because of the failure to stabilize farm, wage, and other incomes, price stability was not achieved in the months following the enactment of the Emergency Price Control Act of 1942. Inflationary pressures arising from the failure of Congress to implement the President's 7-point program of overall inflation control were threatening to break down the barriers that had been erected to maintain price stability. The General Maximum Price Regulation, issued April 28, 1942, was designed to freeze all or nearly all, prices at March 1942 levels, but the price office recognized that it would be difficult to hold the line of prices by such a regulation unless it was supplemented by other measures of inflation control. In the absence of such measures it became urgent, at the very least, to stabilize farm and wage incomes at the relatively high levels of the last months of 1942. On September 7, therefore, the President urged Congress to amend the Price Control Act to permit better control of agricultural products. On October 2, Congress passed the Stabilization Act of 1942 20 which made it possible for the Administrator to establish maximum prices on agricultural products at levels approximating 100% of parity, rather than 1 1 0 % of parity as specified in the initial legislation. Further, this act authorized and directed the President to stabilize prices, wages, and salaries, so far as practicable, at September 15, 1942, levels. On the following day, the President issued Executive Order 9250 which set up an Office of Economic Stabilization with authority to establish a policy to carry out the purposes of the Stabilization Act. Justice James F. Byrnes of the Supreme Court was induced to resign his post on the court and became the first Director of Economic Stabilization. The weapons provided by the Stabilization A c t were still not potent enough to check further price increases, and on April 8, 20 77th Cong., ist Sess., Public Law 729.

INTRODUCTION

25

1943, the President issued the " hold-the-line order," Executive Order 9328, which tightened up controls on the cost-of-living and which limited the discretionary powers of the O P A with respect to price increases and of the War Labor Board with respect to wage increases in an effort to establish a greater degree of price and wage stability. In substance, these were the outstanding developments in the evolution of price control organization and authority during the war period. A t the conclusion of the war, important changes were made by executive order and statute, but we have not sketched these later developments because our study of basic metals price control is concerned primarily with the war period.

CHAPTER II EARLY PROBLEMS OF PRICE AND SUPPLY M E T A L S have played such an important part in the prosecution of modern warfare that we have come almost to regard them as " the sinews of war." The modern war machine may move on petroleum and rubber, but it is constructed of metals ; vast quantities of steel, aluminum, copper, lead, and zinc are required to produce the necessary guns, trucks, ships, and planes, and to provide ammunition for these engines of destruction. At the same time, there are several less direct but equally essential war requirements such as the maintenance of railroad transportation and public utilities that demand large amounts of these basic metals. It need scarcely be emphasized further that the metals industries are essential to modern warfare, and that these industries loom large in any consideration of the economic problems of war. 1 B E H A V I O R OF

METALS

PRICES

T o understand the effects upon these metals industries of the outbreak of the European war in September 1939, it is necessary to note that the economy of the United States w i s just emerging from the recession of 1937 and that full recovery, in terms of full utilization of productive resources and full employment of labor, had not been achieved. Y e t labor productivity had increased in the thirties and in 1939 output per man-hour in American industry was twice that of 1914. 2 1 This study is limited to a discussion of the basic metals : steel, aluminum, copper, lead, and zinc. Other metals such as magnesium, tin, cadmium, and the ferro-alloys played an important part in the war economy, but the price problems associated with what I have termed the basic metals are typical of the whole range of metals price control. Furthermore, we have with few exceptions excluded fabricated metal products from consideration. 2 F . C. Mills, Prices in a War Economy (National Bureau of Economic Research, 194J), p. 3. 26

E A R L Y P R O B L E M S OF P R I C E A N D S U P P L Y

27

The possibilities of increasing American production, therefore, were extraordinarily large when the European war broke out, and it was possible, at least in the early days of the American defense effort, to meet the major military requirements and expand civilian production at the same time. The potential and unused capacity of American industry at the outbreak of the conflict also postponed some of the intensive pressures upon the price level that were to develop when demand for war materials outstripped America's capacity to produce them. This is not to say that the news of the outbreak of the European war had no effect upon the American economy. While the reaction to this news was not as stimulating to the securities and commodities markets as the news of the outbreak of the First World W a r in 1914, prices of many commodities did react in a bullish manner especially in anticipation of renewed Anglo-French orders for airplanes and other war materials. A few of these orders had already been placed with American manufacturers and it was naturally assumed that more and greater orders would follow. Prices of metals were among those commodity prices responding to the war news. Copper prices which had averaged 10.37c. a pound in August rose to an average of 13.17c. a pound in November. Brass ingot prices increased in the same period from an average of 10.73c. to 13.75c. Zinc prices which were as low as 4.50c. in June 1939 gained to 6.50c. in November and prices of scrap steel, one of the most sensitive indicators of the anticipated supply-demand situation in the steel industry, rose from an average of $16.18 a ton in August 1939 to $23.26 in October.® This was part of a general price advance that carried the average level of 3 Prices from Metal Statistics, 1941. Copper quotations represent electrolytic copper delivered at Conn. Valley points; brass ingot quotations represent prices in the New York market for 85-5-5-5 grade; zinc prices are for Prime Western Zinc, E. St. Louis delivery; and scrap steel quotations represent prices of No. 1 Heavy Melting Steel Scrap, delivered at Pittsburgh points.

28

THE

HISTORY

OF B A S I C

METALS

wholesale prices up by about 6% * from August to October 1939. There is every indication that the basis of most of this increase in prices was entirely speculative. Anticipated demand, combined with speculative and forward buying, acted to raise the general level of metals prices before any serious shortages or increased costs developed to provide a more substantial basis for price increases. By December of 1939, the speculative fever had reached a climax and subsided, and, after about six months, prices had fallen to a level approximating that which existed at the time of the outbreak of the war. Wholesale prices fell from an index of 105.9 ' n January 1940 to 103.2 in August 1940.® Copper prices receded to an average of 11.62c. in the same month; zinc which had fallen to an average of 5.54c· in February 1940, recovered to an average of 6.25c. by July ; and steel scrap prices which had fallen to a $16.27 average in April 1940, also recovered to an average of $19.10 in July.· There were several reasons for this general decline in prices. In the first place, anticipated demands for war materials on the part of the British and the French failed to materialize, and whatever increased demands were made were easily met with available materials and capacity. In the second place, the English and French had placed controls over the international markets for raw materials that helped to stabilize prices. This general decline in prices continued throughout the winter of 1940. The prevailing sentiment in the metals market was well expressed by a commentator in the Engineering and Mining Journal who in April wrote, " Operations at domestic (copper) mines are continuing on a steady basis, but producers are beginning to view with ironical concern the growing uncertainty of world markets for metals as the European War 4 B L S , Wholesale Price Index.

5 Ibid. 6 Metal Statistics, of. cit.

E A R L Y P R O B L E U S OF P R I C E A N D S U P P L Y

2Ç

spreads." T In May, however, Hitler undertook a series of offensive operations in the Low-Lands that served to dissipate this " ironical concern." " Events of the past month ( M a y ) , " it was pointed out, " have completely altered the outlook for the domestic mining industry." 8 While metals markets in general did not respond at once to this change in situation, there were some instances of firmer prices in the metals. For example, in May, small producers and custom smelters of copper who had undersold the leading producers on the market by about % cent a pound at the beginning of the year, moved their prices up to the general market level of 11 Yi cents.8 This tendency toward increasing firmness in the metals markets was also stimulated by the President's message to Congress on May 16, which warned the American people against the dangers that confronted them and urged the establishment of a large national defense program for which Congress, by October, had authorized expenditures of over 12 billion dollars.10 The fall of France in June 1940 marked the lowest point in the decline in prices which followed the speculative fever of 1939. Although the demand for metals was active in that month, the collapse of French resistance " injected uncertainty into the minds of traders." 1 1 A t the same time, the defense program made its effects apparent, and in August prices of war materials and metals began to rise once again, this time as a direct result of domestic and British military requirements, and forward buying in anticipation of increased demands. By the end of the year, prices of metals had recovered the ground lost in the preceding months. Pressures for increased prices continued 7 Engineering and Mining Journal ( Ν . Y.), May 1940, p. 65. S Ibid., June 1940, pp. 31-32. 9 Ibid., June 15)40, p. 62. 10 Military Appropriation Act, June 1941. First, Second, and Third Supplemental National Defense Appropriation Acts ; June, September, October 1941. "Two-Ocean N a v y " Act, June 1941. 11 Engineering and Mining Journal, July 1904, p. 60.

30

THE

HISTORY

OF B A S I C

METALS

throughout 1941, although in many instances the upward movement was checked by the imposition of Government controls. Unlike the earlier speculative price increases, those that took place after the summer of 1940 were induced by real pressures of demand upon existing supplies and upon existing productive facilities. In some cases, the increased production that took place was accompanied by increases in costs that contributed toward further price increases. For example, in the period between 1939 and 1941, unit labor costs in steel works and rolling mills, in blast furnaces, and in non-ferrous primary smelters and refineries increased about 12%. 1 2 A t the same time, this increase in unit labor costs was frequently offset by reductions in overhead costs associated with substantially higher levels of volume. The steel industry which had been operating at an average of 6 4 % of rated capacity in 1939, averaged 9 7 % of rated capacity in 1941. 13 This made it possible for the steel industry, in spite of increased labor costs, to increase its earnings before taxes from an index of 100 in 1936-1939 to an index of 429 in 1 9 4 1 . " MEASURES U N D E R T A K E N TO INCREASE S U P P L Y

Officials of the Price Stabilization Division shared two convictions with respect to inflation control. The first of these was the belief that the problems of price inflation could be dealt with on a selective basis. These officials concerned with price stabilization did not feel that any blanket freeze should be placed on the prices of commodities and the wages of labor, especially in the first stages of the defense program. In opposition to the point of view of Bernard Baruch, these men argued that overall control of wages and prices at the outset of the war period was 12BLS, Productivity and Unit Labor Cost in Selected Manufacturing Industries, 1919-1040, Supplement 1941, quoted in BLS, Wartime Prices, pt. I, August 1939—Pearl Harbor, by J. M. Blair and M. J. Ulmer, p. 197. 13 American Iron and Steel Institute, Annual Statistical Report for 1941. 14 See Appendix IIIA.

EARLY

P R O B L E M S OF P R I C E A N D S U P P L Y

3I

not necessary to effective stabilization of prices, and indeed, might introduce a rigidity into the economy that would have a negative effect upon the full utilization of the nation's productive resources. It was believed that the imposition of price controls could be undertaken on a selective basis, and that by such a process not only would the prices of selected commodities be stabilized, but that such controls would prevent cost increases at later stages of production and would therefore serve to stabilize the whole economy. Upward spiraling of costs and prices would be prevented by judicious control of certain " strategic " commodities. The other fundamental conviction of the men who were in charge of the Price Stabilization Division—and this was especially true of Leon Henderson—was the belief in the necessity of expanding supplies and productive facilities. Expansion of production and of productive facilities was encouraged not only because Henderson believed that the nation's sights were too low with regard to defense requirements, but more particularly because he and his advisers recognized that such expansion of production was the surest method of attaining price stability. Henderson and his staff argued that the chief cause of price increases in the early days of the defense effort was the development of specific shortages or bottlenecks in the production of important war materials. The elimination of these shortages and bottlenecks would, it was believed, eliminate the chief pressure upon the existing price level and thus contribute to price stability. Further, Henderson argued that civilian production should also be expanded to meet the increased civilian demand until full utilization of the nation's resources was achieved. Faced, therefore, in the fall of 1940 with rapidly increasing prices of the basic materials for war, and of many of the most important metals, price stabilization officials devoted a great amount of energy and study to the problem of balancing supplies with estimates of military and civilian requirements. This

32

THE

HISTORY

OF BASIC

METALS

involved recommending a series of measures to increase available supplies when it appeared that such a course of action was necessary to meet the estimated requirements.15 Stockpiling. One of the methods encouraged by price stabilization officials to maintain adequate supplies of strategic minerals was the method of stockpiling these minerals. This technique was often used in conjunction with others discussed below, and it played an essential role in the struggle for adequate supplies of metals. Before January 1941, this stockpiling program was limited to scattered purchases by the Navy Department and the Treasury's Procurement Division of nine minerals including chromium, manganese, and tin ores. At the beginning of 1941, however, the Government's activities in this respect increased rapidly under the aegis of the Metals Reserve Co. At the close of business on September 13, 1941, MRC had made commitments to acquire minerals and metals at a cost estimated at $969,544,000. By July 1942, 51 minerals were being stockpiled by this agency.16 This program of augmenting and conserving the nation's supplies of strategic minerals along with other methods designed to assure her ability to wage war and maintain price stability was strongly supported by officials of the price stabilization agencies. Imports. One of the first efforts to increase available supplies of metals was the attempt of the Defense Commission, 15 This determined campaign to increase America's capacity to make war, was, of course, only a part of the larger Allied struggle to gain supremacy in the field of strategic minerals. In Northern Rhodesia, for example, the British strained to increase copper output and maintain it at productive capacity. Output of these copper mines reached the record-breaking figure of 611,000 tons in 1938, in spite of cartel production restrictions, and further steps were taken in 1939 to enlarge this output to meet the demands of war. Similarly, substantial increases in Belgian Congo copper production in the early years of the war helped to make up for Allied metal losses occasioned by the forced sale of the French-owned Bor mines in Serbia to the Germans in February 1941. See Minerals Year-book, 1940, p. 74; ibid., 1941, p. 1 8 ; New York Times, Feb. 18, 1941. 16 Minerals Yearbook, 1941, xxii.

EARLY

PROBLEMS

OF

PRICE

AND

SUPPLY

33

and particularly the Price Stabilization Division, to encourage directly and indirectly the importation of foreign supplies. The necessity for undertaking such measures to increase the available supplies of copper, for example, became apparent as early as the fall of 1940. A t that time, an estimate made by defense officials indicated that a serious shortage of copper could be expected in 1941 and 1 9 4 2 . " Early in 1941, it was indicated that requirements would exceed domestic production by almost 200,000 tons in 1941, and later estimates indicated that, in 1942, requirements would exceed total available supplies by as much as 600,000 tons. 18 The problem of importing copper was complicated by the existence of a relatively high import duty on the material. This duty was not technically a tariff but rather an excise tax levied by a revenue act of June 6, 1932, and was, therefore, not subject to modification by the President through reciprocal trade agreements. 19 Not all members of the industry favored this copper " tariff." The American Smelting and Refining Co., for example, which was not principally engaged in mining domestic ores but rather in treating both domestic and imported ores, was never enthusiastic about the tariff. T h e company's Annual Report for 1940 states, " During the period of the 12c. a pound price for copper in the United States, the foreign price was held at 10c. to 10 l / 2 c. Had there been a tax of only 2c. a pound on copper, the domestic demand might have been filled from the foreign supply, as it was in both zinc and lead, without Government intervention." 20 While some thought was given to the possibility of removing or lowering this copper tariff, it was recognized that such action 1 7 " R e q u i r e m e n t s a n d C a p a c i t y of C o p p e r " ( u n a u t h o r e d ) , O c t . 29, 1940. 18 L e t t e r f r o m H e n d e r s o n t o J e s s e J o n e s , J a n . 31, 1941 ; M e m o r a n d u m , M e l v i n de C h a z e a u t o H e n d e r s o n , Sept. 15, 194t. 19 See M e m o r a n d u m , Daniel F . M a r g o l i e s , L e g a l S t a f f , to D a v i d G i n s b u r g , Chief Counsel, P r i c e Stabilization Division, O c t . 31, 1940. 2 0 A m e r i c a n S m e l t i n g a n d R e f i n i n g C o m p a n y , Annual Report, 1940, quoted in t h e Mineral industry during 1Ç40 ( G . A . R o u s h , e d . ) , N e w Y o r k . 1941, pp. 149-150.

34

THE

HISTORY

OF B A S I C

METALS

would be received with hostility by many of the mining interests of the country and, indeed, by many of the political groups generally favorable to the Administration. A s Senator James E. Murray of Montana, a strong Administration supporter, wrote to Henderson, " I hope that the Administration will never permit the excise tax to be modified or repealed—it would ruin us out here." 21 Attention therefore, was given to the possibility of increasing imports of copper without directly repealing or modifying the tax. It was pointed out, for example, that the Secretary of the N a v y had specific legislative authority to make emergency purchases of war material abroad without paying the duty or excise tax. Further, the N a v y Department was specifically exempt from the so-called Domestic Preference Act of March 3, 1933, which directed the Federal Government to use domestic materials even at higher cost unless it was not in the interest of the United States to do so. 22 O n January 13, 1941, Henderson wrote to James V . Forrestal, the Under Secretary of the N a v y to urge that the N a v y purchase its requirements abroad to as great an extent as possible. Henderson enclosed a memorandum from Donald H. Wallace, who was in charge of the non-ferrous metals program of the Price Stabilization Division, pointing out that the growing shortage of copper was clearly evident and that such a shortage might lead to price increases which " would add materially to the cost of the defense program." 23 A more important and direct step was taken to expand imports of copper, when in November 1940, Edward Stettinius, in charge of the Industrial Materials Division, and Leon Henderson, in charge of the Price Stabilization Division of the N D A C , forwarded a joint request to Jesse Jones, Federal Loan Administrator, asking him to import copper for the 21 Letter, Senator James E. Murray to Leon Henderson, Nov. 4, 1940. 22 See memorandum, Margolies to Ginsburg, Oct. 18, 1940. 23 Letter from Henderson to Forrestal, Jan. 13, 1941, enclosing Memorandum, Wallace to Henderson, Jan. n , 194!.

EARLY

P R O B L E M S OF P R I C E A N D S U P P L Y

35

defense program. The authority for such purchases stemmed from the Act of June 25, 1940, which authorized the Reconstruction Finance Corporation to acquire " strategic and critical materials as defined by the President." 24 On June 28, 1940, the Metals Reserve Company ( M R C ) was chartered to implement this authority, and on the same day, the President addressed a letter to the Federal Loan Administrator defining " strategic and critical materials " as " those materials now contained in the list of strategic and critical materials of the Army and N a v y Munition Board, revised and approved January 30, 1940, as well as such materials as may hereafter be added to such list." 2S At the time of the joint Stettinius-Henderson request to Jones, copper was not on the list of " strategic and critical materials." It was not until December 1 1 , 1940, that the Army-Navy Munitions Board designated copper as a critical material. 2$ Immediately thereafter R F C announced that contracts had been signed with the foreign subsidiaries of the leading copper mining companies to purchase 100,000 tons of Latin-American copper at 10 l / 2 c. a pound f.a.s. New York. 2 7 M R C absorbed the excise tax and sold the copper at 12c. a pound, the informal ceiling already established by the Government. 28 The announcement of the purchase of this Latin-American copper, besides assuring an additional supply of the critical material, also " took some bullish price ideas out of both buyers and sellers." 2 9 Indeed, the program appeared so successful that Henderson urged the purchase of additional copper on a continuing basis, in subsequent letters to Jones on January 3 1 , 24 P. L. 664, 76th Cong., 3d Sess., approved June 25, 1940. 25 Quoted in Memorandum, Margolies to Ginsburg, Oct. 30, 1940. 28 Memorandum, Patterson and Forrestal to Jesse Jones, Dec. 11, 1940. 27 Federal Loan Agency, Press Release, Dec. 19, 1940. 28 See below, p. 71. Ή Engineering and Mining Journal, Jan. 1941, p. 60.

36

THE

HISTORY

OF B A S I C

METALS

1941, February 1, 1941, and April 9, 1941. In each case, the Federal Loan Administrator agreed to purchase the requested amounts, subject only to favorable shipping conditions.*0 By May 12, 1941, 500,499 tons of such copper had been contracted for by MRC.* 1 This copper was allocated to the industry by a committee appointed by Jones which included Donald H. Wallace as a representative of the Price Stabilization Division. The demands made by the industry for a share of this copper was a good measure of the seriousness of the copper shortages.*2 Similar action was taken with respect to zinc to assure continued supplies of this valuable metal and to aid in the stabilization of the prices of zinc. While the first real problem with respect to zinc supplies involved the construction of adequate smelting facilities, defense officials recognized as early as November 1940 that ore supplies would also be inadequate to meet estimated military and civilian requirements.83 On April 22, 1941, Henderson wrote to Jones requesting him to stockpile foreign zinc concentrates to assure full operation of zinc capacity in 1941 and 1942. In this letter, he pointed out that the recent executive order 34 setting up the Office of Price Administration and Civilian Supply, had authorized the Administrator to recommend additions to the list of strategic and critical materials under the Act of June 25, 1940. " Under the new powers granted me as Administrator," he said, " I am ready to propose and recommend that zinc concentrates be 30 Letter of Jan. 1941, reply of Feb. 2, 1941 ; letter of Feb. 20, 1941, reply of Feb. 26, 1941 ; letter of April 9, 1941, answered by letter f r o m William Clayton, Assistant Loan Administrator, on April 10, 1941, and letter from Jesse Jones on April 11, 1941. 31 The Mineral Industry during rç4l, G. A. Roush ( e d . ) . N e w Y o r k 1942, p. 123. 32 Memorandum, W a l l a c e and Holmquist to Galbraith, May 27, 1941. 33 Bureau of Research and Statistics ( N D A C ) , Requirements and Capacity Division, " R e q u i r e m e n t s and Capacity in Zinc," Nov. 6, 1940. 34 E . O. 8734, issued April 11, 1941.

EARLY

P R O B L E U S OF P R I C E A N D S U P P L Y

d e c l a r e d s t r a t e g i c a n d critical m a t e r i a l . "

37

Before taking such

steps, h o w e v e r , H e n d e r s o n indicated t h a t he w a n t e d the a s s u r ance

that

zinc

would

be

stockpiled. 3 5

On

April

30,

1941,

W i l l i a m Clayton, the Assistant L o a n Administrator, answered H e n d e r s o n , p o i n t i n g o u t t h a t o n A p r i l 2 5 the P r e s i d e n t h a d sent R F C and OPM

a letter d e f i n i n g z i n c c o n c e n t r a t e s

critical."

Further,

Clayton

said,

" we

as " strategic

understand

that

w i l l send u s a r e c o m m e n d a t i o n t h a t w e l a y in a s t o c k -

pile o f a t least 100,000 t o n s of zinc c o n c e n t r a t e s . " O n t h e basis o f t h i s r e c o m m e n d a t i o n , C l a y t o n said h e w a s t a k i n g steps t o a c q u i r e a stockpile of this i m p o r t a n t material. 3 ® Export

Control.

A n o t h e r m e t h o d of i n c r e a s i n g the a m o u n t

of a v a i l a b l e supplies w a s t o restrict e x p o r t s of these i m p o r t a n t m e t a l s . A n A c t of J u l y 2, 1 9 4 0 , a u t h o r i z e d the P r e s i d e n t t o p r o h i b i t o r curtail e x p o r t s of m a t e r i a l s t h a t w e r e essential t o t h e defense p r o g r a n ) . T h e P r e s i d e n t issued the first p r o c l a m a t i o n u n d e r t h i s statute o n J u l y 2, 1 9 4 0 , l i c e n s i n g the e x p o r t s of all s t r a t e g i c a n d critical m a t e r i a l s , e f f e c t i v e A u g u s t 1, 1940. 8 7 T o a d m i n i s t e r this l a w , the P r e s i d e n t set u p a n O f f i c e of E x p o r t C o n t r o l u n d e r the d i r e c t i o n of C o l o n e l L . P . M a x w e l l .

While

H e n d e r s o n h a d n o direct r e s p o n s i b i l i t y f o r the a d m i n i s t r a t i o n of the e x p o r t control p r o g r a m , his s t a f f participated in d i s c u s s i o n s l e a d i n g t o the i m p o s i t i o n of s u c h c o n t r o l s , a n d o f t e n . ^commended v i g o r o u s action in t h i s c o n n e c t i o n . I n the case of steel scrap, f o r e x a m p l e , the P r e s i d e n t ' s l i c e n s i n g p r o c l a m a t i o n h a d been e x t e n d e d t o N o . 1

H e a v y M e l t i n g Steel S c r a p o n

J u l y 26, e f f e c t i v e A u g u s t 1, 1 9 4 0 . T h i s l i c e n s i n g of o n e g r a d e of scrap m e t a l w a s l a r g e l y i n e f f e c t i v e , c h i e f l y because

other

g r a d e s of s c r a p not c o v e r e d b y the l i c e n s i n g o r d e r w e r e practically the s a m e a s N o . 1 H e a v y M e l t i n g S c r a p a n d could be used f o r the s a m e purposes. A f t e r a n u m b e r of a m o n g representatives

of the

Industrial

Materials

35 Letter from Henderson to Jones, April 22, 1941. 36 Letter from Clayton to Henderson, April 30, 1941. 37 See Minerals

Yearbook,

1940, pp. 503 and 504.

discussions Division,

38

THE

HISTORY

OF B A S I C

METALS

the Price Stabilization Division, and the State Department on the feasibility of placing more rigid restrictions on the exports of scrap, and after the price of No. 1 had soared to $23.00 a ton, Henderson recommended to the President that a complete embargo be placed on exports of scrap steel.38 The Industrial Materials Division took no position on the matter, and the State Department argued that, because of the international complications involved, such a step should not be taken unless absolutely necessary for the defense effort. 38 On September 26, the President extended licensing to all grades of scrap steel, and on October 16, he announced that licenses would be issued only for exports to Great Britain and the western Hemisphere.40 This had the effect of reducing the sources of scrap steel available to the Japanese and also had a salutary effect upon the domestic supply and price situation. Acting once again on the recommendation of Henderson and the staff of the Price Stabilization Division, the President on January 10, 1 9 4 1 , extended export controls to copper, zinc, brass, and bronze, including scrap. Effective February 3, 1 9 4 1 , similar licenses were required for exporting products containing a large proportion of copper and zinc. Finally, on March 4, 1 9 4 1 , lead and lead scrap were placed under such export controls. 41 In spite of these indirect measures to increase the supply of available materials for use in the defense program, reliable estimates of military requirements soared throughout 1941. Further, and of especial importance to the Price Stabilization Division, prices of the metals had shown every tendency to 38 Memorandum, Henderson to the President. Aug. 30, 1940. 39 Summary by Charles A. Bishop, Special Assistant to Henderson, of a meeting on S c r a p Steel, held in William Batt's office, Aug. io, 1940. Batt was Chief of the R a w Materials Section of the Priorities Division. 40 Minerals

Yearbook,

1940, p. 504.

41 Minerals

Yearbook,

1940, pp. 490, 498 and 492.

EARLY

PROBLEMS

OF P R I C E

AND SUPPLY

39

continue on their upward path, even though in some cases fairly effective informal price agreements had been established.42 Expansion of Facilities. A t the same time that price stabilization officials were recommending additional imports and the imposition of export controls, they were taking steps to expand domestic production of the important metals. Henderson and his assistants were in the vanguard of that group in official Washington which was trying to compel reluctant industries to expand their productive facilities to meet the requirements of both a huge defense program and increasing civilian demands. The reluctance of industry to expand had its origins partly in distrust of New Deal economists who were urging such action, partly in honest disagreement about the nature of these requirements and industry's ability to meet them, and partly in the fear that industry would be saddled in the postwar period with idle productive capacity. Writing in August 1 9 4 1 , the editors of Fortune explained this reluctance admirably when they said: It is obvious now that expansion of productive facilities for steel, electric power, aluminum and other essentials should have been undertaken as soon as the defense emergency was realized. But the advisers closest to OPM's general management were men accustomed to thinking in terms of production statistics for normal years. They reflected the fear of their several industries that the creation of vast new plant capacity would present a threat of post-war competition. O P M listened to them and did not act ; it was no lack of patriotism that led to this incredible paralysis, but rather a total lack of imagination as to what an all-out effort really means.43 One of the most dramatic instances of the failure of industrial expansion to keep pace with expanding requirements was the aluminum program. This whole problem was given a great deal of publicity by the Truman Committee and has been dealt with by Mrs. Muller in her recent study of the aluminum 42 See below, pp. 50-81. 43 Fortune, August 1941, p. 165.

40

THE

HISTORY

OF B A S I C

METALS

monopoly.44 It is only necessary to note here that in the early months of 1941, it was generally agreed that a critical shortage of aluminum had developed with apparent suddenness. While William Batt ascribed the shortage to the fact that "Our sights" had been " too low ", the Truman Committee believed it " reasonable to conclude that Alcoa had convinced the Office of Production Management of the adequacy of the supply in order to avoid the possibility that anyone else would go into a field which they had for so many years successfully monopolized."45 Price officials did not take a very direct part in the controversy over aluminum production, but in the summer of 1940 and again in January 1941 some members of the staff of the Price Stabilization Division, predicted an aluminum shortage and urged the more rapid expansion of aluminum facilities.48 Further, early in 1941, David Ginsburg and John Hamm, Henderson's assistants, believed that the aluminum program should be placed in the hands of independent government officials who were in no way connected with and would not be influenced by the Aluminum Company of America. 47 Price stabilization officials were involved more directly in the controversy over the expansion of steel capacity. In the summer of 1940, Henderson urged the necessity of expanding steel facilities, a position that was supported by a memorandum prepared by the Bureau of Research and Statistics and circulated among high officials. This memorandum indicated that with a major defense effort a serious ingot shortage would 44 See Charlotte Müller, " T h e Aluminum Monopoly a n d the W a r , " Pol. Sci. Quar., M a r c h 1945. See also her Light Metals Monopoly (Columbia University Press, 1947). 45 77th Cong., ist Sess., Senate Report No. 480, Report of Mr. June 26, 1941, p. 3.

Mead,

4β Galley P r o o f s of O P A First Quarterly Report (material omitted in publication) ; memorandum, Gilbert to H a m m , Jan. 28, 1941. 47 " Secret " memorandum f r o m Ginsburg and H a m m to J a m e s Rowe of the W h i t e H o u s e Staff, J a n . 21, 1941.

E A R L Y P R O B L E M S OF P R I C E A N D S U P P L Y

4I

48

appear. Henderson reinforced this opinion in November when he declared, " W e ought to be planning the expansion of the steel industry . . . because . . . regardless of how you allocate that production there is going to be a necessity for an increased amount of production if you are going to help the British and also come up to what are your own needs and what this society is going to demand." 49 In the same month, it was reported that a debate was ranging in the Defense Commission over the question of steel capacity in the face of opposition of industry men such as Walter S. Tower, President of the American Iron and Steel Institute, who was a consultant to the Defense Commission. 80 This debate carried over into 1 9 4 1 , and in January the National Planning Association, of which Robert Nathan of the Bureau of Research and Statistics was a director, urged steel expansion and rationing of steel products. 81 Simultaneously, it was reported that steel leaders resented the implication that they were opposed to plant expansion. They argued than no one had listed requirements and urged them to expand, nîthough they were willing to do so. 82 Finally, in February 1 9 4 1 , at the request of President Roosevelt, Gano Dunn, President of the J . G. White Company and formerly a consultant for the United States Steel Corporation, made a survey of the situation and reported that ingot making capacity would exceed requirements in 1941 by 10,000,000 tons and in 1942 by over 2,000,000 tons.® 3 On the bas's of this 4 S O P A , First Quarterly Report, p. 116; Bureau of Research and Statistic·;, ' Tpin and Steel Requirements and Capacity," ( C a ) Aug. 1940. Transcript of Conference on " Exploring the Factors Involved in Reemployment of Labor and Capital," Mayflower Hotel, Nov. 12, 1940, Sponsored by the Savings Bank Journal, p. 114. 50 New York Times, Nov. 30, 1940, p. 8. 51 National Economic and Social Planning Association, " Wanted—More Steel," ( C a ) Jan. 1941· 52 New York Times, Jan. 12, 1941, p. 3 7 ; III, p. F 1. 53 Gano Dunn, Report to the President of the United States (Feb. 1941).

42

THE

HISTORY

OF BASIC

METALS

report, the President announced that American steel production facilities were adequate to meet any actual or prospective demands for civilian use, the defense program and exports, and that no priority system was necessary.84 The New York Times stated editorially that " the announcement should put an end to the demands which were being made by various economic planners for a large expansion of steel capacity," and Arthur Krock rejoiced that New Deal " agitation " against Stettinius and the steel industry had been settled by the Dunn report.55 But the " New Dealers " were not shaken from their conviction that more steel production was necessary. Early in May, Henderson appeared before the House Ways and Means Committee to discuss the problem of financing the defense program, and he argued once again that the current rate of steel production was not high enough. " Every time we have a shortage," he said, " every time we see a bottleneck, every time we clamp down a priority, we must bend our efforts to make up the deficit in some way. If we find ten million more tons of scrap, if we build ten million more tons of pig iron capacity, if we bring down ten million more tons of ore from the Mesabi, and I am supremely confident these are possible, we can gain four billion dollars in national income, 8 points in the index of production and either put a million more people to work or keep the same number from being thrown out of work by a shortage of steel." 56 At the same time, the necessity for some increase in steel-making capacity became so evident that Dunn himself was led to revise his earlier report to the President, and indicated that he had under-estimated in some degree the demands upon existing steel capacity.57 Nevertheless, 54 New York Times, March I, 1941, p. 6. 55 Ibid., p. 14; IV, p. 3. 5677th Cong., ist Sess., House Commiittee on Ways and Means, Hearings on Revenue Revision of 1941, vol. I, April 24-May ç>, 1941, pp. 638-639. 57 Gano Dunn, Second Report to the President, May 1941.

EARLY

P R O B L E M S OF P R I C E A N D S U P P L Y

43

steel industry leaders continued to oppose large scale expansion of facilities, and for a while it appeared that they were supported in this position by the President himself. 58 Finally, however, the proponents of all-out expansion of industrial facilities won their point, and on June 4, 1 9 4 1 , the O P M asked the steel industry to expand its capacity by 10,000,000 tons with the assurance of government aid in financing. It was explained that " The additional steel capacity is designed to meet increasing civilian demands as the national income mounts toward $100,000,000,000 . . . Leon Henderson has approved taking from the civilian supply now whatever steel is required to expand capacity by 10,000,000 tons annually." 5 8 This steel expansion program was formally authorized by the Supply, Priorities, and Allocation Board ( S P A B ) on September 30, 1941. 9 0 The decision in June of 1941 to expand steel capacity was essentally a victory for Henderson's viewpoint. He believed, at this time, that industrial capacity should be expanded to take care of large military and civilian requirements. This position was bitterly attacked by industrial leaders and the conservative press who urged instead that civilian production should be cut back so that military requirements could be met without expanding industrial facilities. These groups charged Henderson with a " business as usual " position because Henderson was not at this time willing to curtail civilian production.®1 Henderson held to this position until the national economy reached full employment of labor and resources. Then he became the chief exponent of converting civilian production to war uses. In effect, Henderson's policies made possible first, 58 New York Times, May 8, 1941, p. 15. 59 Ibid., June 5, 1941, p. 13. 60 See W . A. Hauck, Steel Division, W P B — S t e e l Expansion June 1945.

for

War,

61 Ibid., editorials, May 23 and June 7, 1941. See also A r t h u r Krock in New York Times, June 12, 1941, p. 22.

44

THE

history

of

basic

uetals

the full utilization of the nation's productive resources and second, the conversion of these resources to war. A s a matter of fact, in spite of the large expansion program finally undertaken by the Government and the steel industry there were several occasions during the war when acute steel shortages held back programs planned by the Armed Services. In December 1942, for example, the House Committee on the Merchant Marine and Fisheries had this to say about the current steel situation, " Your committee has found that the supply of steel is woefully short of the requirements as set forth each month by the service agencies. . . . Notwithstanding the many drastic War Production Board limitation orders issued since Pearl Harbor . . . the shortage still persists. The magnitude of this shortage is so serious that any public statement of the actual figures is impossible at this time, for such information would be of real aid to the enemy." 83 Even after discounting this report on the basis of Committee publicity and politics, it offers some indication that the " New Dealers " may have been right in their early contention that the chief job of American industry was to expand production and facilities until full utilization of the nation's resources had been achieved. There is no better example of the interest of price officials in expansion of production than the manner in which O P A C S officials aided in the development of the copper program in 1941. Informal price control of copper had been instituted as early as October 1940,®' but increasing shortages of copper not only threatened the price stability thus informally established but also threatened the success of the defense program which depended so vitally upon adequate copper supplies. In the spring of 1941, the Bureau of Research and Statistics of O P M was predicting a shortage of from 500,000 to 700,000 6 2 7 7 t h Cong., 2d Sess., H o u s e Committee on the Merchant Marine and Fisheries, Interim Report on the Investigation of the Steel Shortage Situation, December 1942, p. 2. 63 See below, p. 71.

E A R L Y PROBLEMS OF PRICE AND S U P P L Y tons of copper in

1942. a 4

45

W h i l e it had early been indicated

that smelting and refining capacity w a s not adequate to take care of estimated requirements, good progress w a s being made along those lines. Price officials, therefore, devoted most of their attention to the problem of increasing the volume of mine production f r o m domestic sources. Since " Apparently

OPM

was doing nothing in this direction," O P A C S officials recommended a series of steps designed t o increase mine production, including the hiring of a mining engineer ; a meeting with the five largest producers at which they would be asked to submit plans for increasing their output ; and a " uniform subsidy " designed especially to increase production from the small mines without lifting the general level of prices." 5 O n June 17, H e n derson sent a memorandum t o W i l l i a m Knudsen, General of O P M ,

pointing out the need for a

Director

substantial

increase in copper production and suggesting that O P M and O P A C S call a joint meeting with the copper industry to discuss the possibilities of increasing copper production. 6 6 K n u d sen agreed, and the leading copper producers were invited to attend such a meeting on July 1 7 , 1 9 4 1 . In their letter of invitation, Henderson and Stettinius asked each copper producer to come prepared to supply information on the following subjects : I. Extent to which production of your company can be increased without appreciable plant expansion. A t what price or prices would such additional increments of output be forthcoming, assuming 12 cents per pound is obtained for the present volume of production ? 64 See memorandum, Donald H. Wallace, Head, and Carl Holmquist, Assistant Head, Non-Ferrous Metals Section, to J. K. Galbraith, Head of the Price Division, OPACS, May 27, 1941. 65 Memorandum, Wallace to Isadore Lubin, Special Assistant to the President, Aug. 22, 1941 ; Wallace and Holmquist Memorandum, op. cit. 66 Memorandum, Henderson to Knudsen, June 17, 194t.

4Ó

THE

HISTORY

OF B A S I C

HETALS

2. Extent to which production of your company can be increased through plant expansion providing— (a) A definite price for the additional output is guaranteed for a fixed period; or (b) Government aid is given in financing the cost of plant and mine expansion ; or (c) Provisions are made which include a combination of (a) and ( b ) . 3. Extent to which production can be increased from new properties or prospects.®7 The response of the copper industry at this meeting to proposals for the expansion of supply was not encouraging. In general, the industry took the position that a general price increase was needed to induce any further increases in the production of copper.®8 However, as a result of the meeting, Frank A y e r and George Gleason were chosen to represent the O P M and O P A C S respectively " in conferring with . . . companies that attended the meeting, to explore in greater detail the possibilities of increasing production, and to learn in what respects, if any, the Federal Government or its agencies can be helpful . . . in achieving the desired objectives." 8 9 A s a result of the effective missionary work undertaken by these t w o mining engineers, promises were elicited within a month of 60,000 tons annual increased production without price inducement or financial aid. 70 A t the instance of O P M and O P A C S , the Reconstruction Finance Corporation took steps to aid in the expansion of mining facilities by offering to finance such expansion on rela67 Letter from Henderson and Stettinius to a number of copper producers, July 9, 1941. 68 Memorandum, Wallace to Galbraith, July 4, 1941, " P r o g r e s s Report Week Ending July 19, 1941." 69 Letter from Stettinius and Henderson to a number of copper producers, July 28, j941. 70 Memorandum, Wallace to Lubin, Aug. 22, 1941.

EARLY

P R O B L E M S OF P R I C E A N D S U P P L Y

47

tively liberal terms. A s a result of contracts between R F C and a number of mining companies negotiated in 1 9 4 1 , more than 106,000 tons of additional copper were provided for. One of these contracts enlarged by an estimated 60,000 tons annually the capacity of the great open-pit property operated by the Phelps-Dodge Corporation at Morenci, Arizona. This property developed by Phelps-Dodge beginning in 1937 was designed to produce 75,000 tons annually without the facilities constructed by the Federal Government, and represented an important privately financed addition to the copper producing capacity of the nation. The first ore was sent to the Morenci mill in January, 1942. Another contract provided for facilities at Miami, Arizona, constructed for the Castle Dome Copper Co., a wholly owned subsidiary of the Miami Copper Co., which were expected to produce an additional 23,000 tons. 71 The Castle Dome contract, which was in many ways typical of the arrangements by which R F C aided in the expansion of mining and manufacturing facilities, provided for the construction by Defense Plant Corporation of the necessary facilities, and the lease of such facilities, along with essential equipment, to the copper company at a fee, based on copper content of the ores and the market price for copper. The copper company was given an option on the expiration of the agreement to purchase the facilities or continue a similar leasing arrangement. 72 Similar direct measures were urged by price officials to maintain the output of certain high cost mines, notably in the copper mining areas of Northern Michigan. After much negotiation, arrangements were made for the purchase of copper produced by these high-cost mines by the Lend-Lease Administration for foreign account. Together with the Premium Price 71 See Minerals Yearbook,

1941, p. 97.

72 Agreement 0} Lease, between Defense Plant Corporation and Castle Dome Copper Co., Inc., signed Dec. 1, 1941.

48

THE

HISTORY

OF B A S I C

METALS

Plan, this Government purchasing arrangement helped to increase copper supplies and to maintain price stability.78 A s early as August 1940, the necessity of increasing the available supplies of zinc had been recognized,74 and steps were taken to increase the volume of imports and control exports of zinc and zinc scrap. 75 A s the anticipated supply situation with respect to zinc steadily grew worse in the last months of 1940, Defense Commission economists recognized that the chief bottleneck in the production of adequate supplies of zinc was the lack of adequate smelting facilities. 7 ® Through cooperation, therefore, between the Price Stabilization Division, the R a w Materials Division, and the zinc industry, plans were developed for an expansion of zinc smelter capacity by about 100,000 tons annually between December 1940 and July 1941 without Government financial assistance. 77 In the early months of 1 9 4 1 , the zinc supply situation became even more critical, and Henderson recommended to Jones that financial assistance be given to the industry to increase its smelting capacity by another 50,000 tons annually. 78 Such encouragement to the expansion of smelting capacity resulted in an increase in estimated capacity from 787,000 tons at the end of 1940 to 950,000 tons at the end of 1941. 7 9 73 For a more extended discussion of the Michigan arrangement, see below pp. 84-87 under The Evolution of the Premium Price Plan. 74 Memorandum, James A. Carey, Economist, to Henderson (ca) August 1940. 75 See above, pp. 36-38. 76Bureau of Research and Statistics Capacity in Zinc," Nov. 6, 1940.

( N D A C ) , "Requirements and

77 Memorandum, Donald H . Wallace and Paul O'Leary to Henderson, Feb. 21, 1941. 78 Letter, Henderson to Jones, Feb. 21, 1941. 79 American Bureau of Metal Statistics, Year Book 1941, p. 71.

EARLY

P R O B L E M S OF P R I C E A N D S U P P L Y

49

SUMUARY

Basic metals prices which had responded in a fairly dramatic fashion to the news of the outbreak of the Second World War in September 1939 declined shortly thereafter when anticipated war demands failed to materialize. In the Spring of 1940, however, these prices began to increase once again; this time in response to genuine pressure of demand upon available supplies and productive facilities. Price stabilization officials believed that one of the best ways to check rising prices was to increase the supply of the commodities involved and expand productive facilities, steps that would also enlarge America's capacity to wage war. Thus, many of the earliest measures undertaken to maintain price stability in the metals area were measures which involved encouraging imports, licensing exports, and expanding productive capacity.

CHAPTER III EARLY PRICE CONTROLS INFORMAL AND F O R M A L

CONTROLS

in a few instances price officials hoped that encouraging additional production would alone stabilize prices, in most cases they recognized that the pressures of an expanding war economy were such that mure direct price control measures would be necessary. Indeed, in many cases these direct price controls were invoked simultaneously with attempts to increase the output and facilities of the metals industries. These early price control measures were at first almost entirely informal in nature. That is, price controls were imposed that depended for their success almost entirely upon the willingness of the industry to cooperate with the price stabilization authorities. These informal controls, while they were supported by the moral authority of the Government, were not in the form of mandatory price schedules of a formal character. WHILE

There were a number of reasons why Henderson and his price control staff adopted informal price controls before attempting to impose mandatory price ceilings upon American industry. In the first place, the experience of the Government in price control during the First World War was limited almost completely to such measures of informal control. Secondly, Henderson and his associates knew that the American people were neither accustomed nor friendly to direct intervention by the state in the economic life of the nation, and they recognized that Americans were not yet prepared psychologically for such large-scale intervention. Further, Henderson understood the importance of gaining the cooperation of industry in the defense effort and wanted to make every effort to get industry's voluntary support for price control measures. In addition, the legal and administrative position of the price control agency was insecure, to say the least. The Price Stabilise

EARLY PRICE CONTROLS

5I

zation Division had purely advisory powers, and while the executive Order establishing O P A C S gave the price control agency specific authority to issue price schedules, the question of whether the agency had the power to enforce these schedules was a moot one. 1 Finally, neither of these agencies was equipped with the staff or the experience necessary to administer a large-scale program of formal price schedules. Thus, when the price stabilization officials adopted direct measures of price control, such measures were first of an informal and voluntary nature. There were several types of informal controls adopted by the price stabilization agency in its attempt to preserve price stability of the metals. These informal price controls included so-called " warnings and suggestions," in which the agency usually issued a press release pointing out that prices of a given commodity had increased to an unwarranted extent ; suggesting that further increases be restrained ; and warning the industry that the Government was prepared to take more drastic measures if necessary to check increasing prices. This type of informal control was essentially one of psychological warfare against price increases. Thus, " warnings and suggestions " were often accompanied by statements designed to soothe the anxieties of industry with respect to material shortages so that speculative or forward buying could be avoided. Another type of informal price control was the so-called " fair price request," in which the Administrator asked individual members of an industry to adhere to specified " fair " prices. Sometimes these requests took the form of " freeze letters " which requested members of an industry to refrain from selling at prices above those quoted on a specified date in the past. Finally, and most important as far as the metals were concerned, the office was able to control prices by means of " voluntary agreements," of which there were two types : ( ι ) off-the-record agreements made with leading members of an industry to exercise a re1 See Chapter I for a summary of the powers of these two agencies.

52

THE

HISTORY

OF BASIC

METALS

straining influence in a market which they largely dominated, and ( 2 ) public agreements made with an industry to maintain specified price levels. These informal price control methods were used in an attempt to stabilize metals prices early in the defense effort, and they were often highly successful, especially in industries where a high decree of concentration and market control existed. 2 Y e t the price office soon found that if it was to do its job of curbing inflation it had little choice except to do so by extending formal controls. Early in 1 9 4 1 serious bottlenecks began to appear in the production of the metals most needed for the defense effort. Stabilization of these metals prices was crucial because these prices were in turn major cost-determining items f o r most plants manufacturing war equipment. Increasing pressures upon the price level together with the difficulties of enforcing informal controls upon industries consisting of many sellers made it necessary for Henderson and his aides to take mandatory action in this area. The structure of price stability was indeed straining under the impact of full production. B y October 1 9 4 1 , a number of industries were operating at near-capacity rates. Steel ingot production had reached 99 percent of estimated capacity, pig iron was being produced at 98.1 percent of capacity, zinc slab production had reached 98.8 percent, and copper refinery activity was at 86.7 percent of capacity. 3 While expanded production brought certain savings in unit overhead costs, such full utilization of facilities was also accompanied by cost increases resulting from the use of old equipment and the employment of inefficient labor. Industry leaders tended to anticipate these cost increases and discount the cost reductions. When, therefore, industry could definitely foresee cost increases, 3 This fact gave currency in the agency to the maxim, "Administered prices are the easiest to administer." 3 See table prepared by OPA, Division of Research in First Quarterly

Report, p. i t .

EARLY PRICE

CONTROLS

53 the price control agency could expect attempts to increase prices. Decisive and formal action was then deemed necessary. The need for mandatory price schedules was very apparent in those areas in which a large number of sellers and buyers engaged in highly competitive activity. Continuing shortages of scrap metals, for example, exerted such pressure upon existing prices that informal controls were inadequate and ineffectual in maintaining price stability among so many buyers and sellers. T H E IMPOSITION OF PRICE CONTROLS

With these general considerations in mind, let us turn to an examination of the application of price controls of both an informal and a formal nature to each of the important basic metals. Iron and Steel. Even in peacetime the iron and steel industry dwarfs most other American industries in terms of capital invested, labor employed, and value produced. In wartime the importance of steel is difficult to overestimate. This industrial behemoth finds its chief raw material in the iron ore deposits of the Lake Superior region. This ore is transported by ship to huge blast furnaces concentrated around Chicago, Pittsburgh, and Youngstown, where combined with coke and limestone the material is smelted to produce pig iron, the basic raw material for steel making. 4 Pig iron is then converted to steel either in open hearth furnaces, Bessemer converters, or electric furnaces, the first of which are most important in terms of volume. In the open hearth furnace, steel is made by melting a charge of pig iron, steel scrap, iron ore and limestone. Proportions of scrap and pig iron depend both upon the type of steel being made and the relative costs of the two materials. Steel is produced in the form of ingots which are usually reduced to slabs or blooms, and in this semi-finished stage, go to the rolling mills where they are manufactured into a wide series 4 That portion of the steel industry located in the Birmingham region depends upon contiguous ore deposits for its raw material.

(Ala.)

54

THE

HISTORY

OF BASIC

METALS

of finished products, including rails, sheets, plates, and structural shapes. In addition, hundreds of foundries purchase socalled merchant pig iron to manufacture many types of steel castings. Ingot-making capacity is heavily concentrated in the hands of large integrated companies, but certain products such as high-carbon tool steel and special alloy steels are produced almost entirely by non-integrated concerns. Production and consumption of steel is concentrated in two or three geographical areas, notably Pittsburgh, Chicago, and Birmingham. This concentration of production close to sources of iron ore and coal was fundamentally the result of the high cost of transporting these raw materials relative to their value, but huge investments in equipment and the basing point system of priceing have tended to limit the mobility of productive facilities. 6 In 1940 an off-the-record agreement was made with officers of the United States Steel Corporation to hold current prices of steel and steel products. β It was not, therefore, until the spring of 1941, when a wage increase was pending in the steel industry, that it became necessary to impose formal controls in this area. Quoted prices for steel remained stable in the interim, although there was evidence of a number of " hidden " price increases resulting from withdrawal of concessions, changes in " extras," and shipments outside of normal delivery areas. 7 In the meantime, however, steps of both an informal 5 For general material, consult Glover, J . G., and Cornell, W . B. (editors), The Development of American Industries (New Y o r k ) , 1941. F o r an excellent description of the iron and steel industry, see Daugherty, C. R., de Chazeau, M. G., and Stratton, S. S., The Economics of the Iron and Steel Industry (New York, 1937), vol. I, chap. a. Chapter 12 of the same work has a good discussion of the basing point system in the industry, but this should be supplemented by T N E C Monograph No. 42, " T h e Basing Point Problem." 6 John Hamm in an interview with John A. Hart of O P A ' s Branch, Nov. 30, 1941. 7 Wartime Prices, op. cit., pp. 209-21 x.

History

EARLY

PRICE

CONTROLS

55

and a formal nature were taken to stabilize the prices of the chief steel-making materials : iron ore, coke, pig iron and scrap steel. After the discovery and development of the famous Mesabi Range, the Lake Superior Region became the leading producer of iron ore in the United States. There are two important characteristics of iron ore mining in this region that have an important bearing on price policy. First of all, this ore comes from both open-pit and underground mines. Open-pit mines not only involve the most economical mining methods but also are associated with the highest grades of ore, reserves of which are rapidly declining in the Lake Superior area. Underground mines are frequently high-cost mines because of the mining methods used as well as the grades of ore mined. Secondly, a large proportion (over two-thirds in 1942) of all the ore mined is " captive " ore, that is, it is mined by companies directly or indirectly associated with integrated steel producers, and it is not sold on the open market but is transferred directly to the producers themselves. The remainder of the ore is termed " merchant ore " because it is sold on the open market. Merchant ore prices are generally quoted on the basis of a published price at lower Lake ports, but the actual prices charged usually reflect discounts from this published price, and much of the ore is sold pursuant to long-term contracts. 8 In 1940, the Oliver Iron Co., a subsidiary of U . S. Steel, offered to sell some of its iron ore on the market for the first time. This move, which was undertaken by the company to lower its tax bill and to mine and sell ore from existing lowcost leases before they expired, resulted in two general price reductions without any encouragement from the Government. These ore prices remained stable for some months, during which time price officials attempted without success to get the merchant ore producers informally to agree to hold their prices 8 F o r a good description of the industry, see Statement of Considerations, M P R 113, issued A p r i l 7, 1942; also article entitled " I r o n O r e Dilemma," in Fortune, Dec. 1945, pp. 129 ff.

56

THE

HISTORY

OF B A S I C

METALS

below the published prices at lower Lake ports. Finally, price officials determined upon a formal price schedule, which was issued as Maximum Price Regulation 113 on April 7, 1942. This regulation required each producer to sell his ore at a figure not to exceed the published base price of $4.45, less the usual discounts that were in effect in the 1941 selling season. New mining operations could charge the $4.45 base price. This technique of differential pricing permitted cost differences to be reflected in differing maximum prices for various segments of the total supply, and recognized the fact that new mining operations might involve generally higher costs. · Prices of by-product coke, another important steel-making material, were formally stabilized in Price Schedule 29, issued September 15, 1941, while the prices of beehive oven coke (coke produced by an obsolete method of production which was renewed only because of the urgency of defense requirements) were stabilized in Price Schedule 77, issued January 25, 1942. Each of these schedules permitted slight increases above the level of prices of the first quarter of 1941. The production of pig iron is so closely integrated with steel production that less than 1 5 % of total pig iron production is sold on the market The remainder flows directly (often in its molten condition) to the steel-making furnaces of the integrated companies. The merchant pig iron industry, i. e., those producers whose entire output is sold on the open market, has in fact been declining in importance as integrated steel operations have expanded. Most of the sales of the merchant pig iron industry are made not to steel makers at all but to foundries (castings manufacturers). 10 The impact of the defense program upon the steel industry resulted in at least one large merchant producer of pig iron raising his prices almost $2 a ton in October 1940. 1 1 Immedi9 Statement of Considerations, M P R 113, issued April 7, 1942. 10 Irwin A . Zuckerman, Iron and Steel Section, Research Unit, " P r e liminary Statement of Consideration on P i g Iron," J a n . 2, 1942. 11 Wartime Prices, op. cit., p. 200.

EARLY

PRICE

CONTROLS

57

ately thereafter, Henderson announced that the Price Stabilization Division was making a study of costs and prices of pig iron and was planning to confer with representatives of the i n d u s t r y . 1 2 During the last week in October, Henderson had conferences with several of the leading pig iron producers, and was able to announce that the recent price increase " was occasioned by local conditions," and that " In general, the indications are that a continuing supply of pig iron will be available at about the price which has prevailed in recent months." 1 3 A t the same time, Henderson asked these producers to make no price increases without notifying the price agency first.14 Prices of pig iron remained stable as a result of this agreement for several months, but in J a n u a r y 1 9 4 1 , apparently after notifying the Price Stabilization Division, a member of the industry increased his price by $ 1 per ton, an increase that was followed by the rest of the industry in several m o n t h s . 1 8 In the spring of 1 9 4 1 , the supply-requirements situation with respect to pig iron became extremely critical and wage increases were granted throughout the industry. Consequently in a move to prevent a price increase in pig iron that would have imperiled the ceiling already established for steel mill producto, O P A C S issued Price Schedule 1 0 on June 24, 1 9 4 1 , freezing existing pig iron prices. In the steel industry scrap steel is one of the most important raw materials. Generally half of the charge that goes into steel making consists of scrap, although the exact proportions of scrap and pig iron vary according to the relative cost of each material. This scrap consists of two general types : home scrap and purchased scrap. Home scrap is produced as a by-product of steelmaking and contributes about half the normal supply of steel scrap. Of the purchased scrap, about 5 0 % is industrial 1 2 N D A C , P r e s s Release, Oct. 28, 1940 ( P R 2 1 0 ) . 1 3 N D A C , P r e s s Release, N o v . 1, 1940 ( P R 224). U OPA,

First

15 Wartime

Quarterly

Prices,

Report,

p. 114.

op. cit., p. 2 0 0 ; Metal

Statistics,

1942, p. 55.

58

THE

HISTORY

OF

BASIC

METALS

scrap, 2 5 % is railroad, autowrecker, and demolition scrap, and 2 5 % is collected by peddlers. Supplies of home scrap, industrial scrap and railroad scrap are relatively inelastic, and are therefore relatively unresponsive to changes in price. Other sources of scrap have greater elasticity, but there is a clear limit to the amount of additional scrap that will be collected even at substantially increased prices. Costs of collection, which are borne by a large number of highly competitive dealers, have little relationship to the prices of scrap, which typically respond in a very sensitive manner to changes in the demandsupply situation. 1 4 Elaborate measures of informal control had been undertaken in an early attempt of the price agency to stabilize scrap steel prices. A s a result of the expansion of steel operations coincident with the inauguration of the defense program in the summer of 1940, prices of scrap steel shot upward. Prices of No. ι Heavy Melting Scrap Steel increased from an average of $18.46 per ton in August 1940 to an average of $22.63 Ρ"" ton in December of the same y e a r . 1 7 Early in October the advance was very rapid, and Henderson's advisers suggested that there was no occasion for such a rapid increase in prices, that such increased prices would not increase the supplies of available scrap, and that the Government should take action to restore prices to normal levels. 1 8 On October 8, 1940, representatives of the steel industry and scrap steel dealers met with members of the Price Stabilization Division and assured them that there was no justification for the rapid price increases then taking 16 T h e r e is a d e a r t h of economic l i t e r a t u r e on t h e s u b j e c t of t h e s c r a p metals, but r e f e r e n c e should be m a d e t o M a n l o v e , G. H . Scrap Metals ( N e w Y o r k ) 1924, a n d to the t r a d e j o u r n a l s of t h e m e t a l s i n d u s t r y . A g o o d d e a l of i n f o r m a t i o n on t h e iron a n d steel s c r a p i n d u s t r y m a y be d e r i v e d f r o m A Study of the New England Scrap ¡ron and Steel Industry Before and After Price Control, p r e p a r e d by P . B e r n a r d N o r t m a n f o r t h e E c o n o m i c A n a l y s i s a n d R e s e a r c h Section of t h e I r o n a n d Steel B r a n c h , O P A , J a n u a r y 1943· 17 Metal Statistics,

1941, p. 217.

18 M e m o r a n d u m , D a v i d N o v i c k , C o n s u l t a n t , t o H e n d e r s o n , O c t . 3, 1940.

EARLY

PRICE CONTROLS

59

place. A t the same time, Henderson announced that " Our survey of supplies and prices shows that enough scrap will be available, and even at the current steel operating rate or at higher rates the prices for scrap should not exceed and might be lower than the present level. " It was agreed among the representatives at the meeting that withholding and speculating should be eliminated as a factor in the price increases and that " if buying is orderly there is nothing on the demand side which would warrant rising prices." 1 9 This initial meeting contributed to a temporary stability in the scrap markets, 2 0 but obviously was not enough by itself to stem the rising tide of scrap metals prices. A week later another meeting was held, this time with representatives of the leading makers of scrap, notably the railroads, and agricultural implement, automotive, electrical, and machine tool manufacturers. " Those present at the meeting were unanimous in their opinion that, as large steel purchasers, they had no interest in seeing scrap prices rise to the extent that would make it necessary to increase the price of steel. " A t the same time they agreed that " the market is orderly at this'time and that there is no indication of a further sharp rise in prices." 2 1 F o r a little over a month, there were no important changes in scrap prices, but early in December an advance of 50c in the price of No. 1 H e a v y Melting Steel took place and was interpreted as an indication of the increased demands for scrap resulting from near capacity operations of the steel mills. 2 2 T o counter this renewed threat, Henderson held a conference with representatives of the steel producers in an effort to gain their cooperation in exerting their influence to hold down the price of scrap. 2 3 A t about the same time, Henderson held informal 1 9 N D A C , Press Release, Oct. g, 1940 ( P R 154). 20 Daily Metal Trade, Oct. 13, 1940. 2 1 N D A C , Press Release, Oct. 16, 1940 ( P R 168). 22 Edit. American

Metal Market,

Dec. 5, 194a

2 3 N D A C , P r e s s Release, Dec. 21, 1940 ( P R 322).

6o

THE

HISTORY

OF B A S I C

METALS

conferences with the railroads in which he urged them to bring their prices down to $20 per ton for No. 1 Heavy Melting Steel, and vigorous attempts were made to bring the large scrap brokers into line. 1 4 On January 6, 1941, Price Stabilization Division officials met with representatives of the iron and steel scrap industry and urged a voluntary reduction " of at least several dollars a ton. " The objective of such a request was to reduce prices to the $20 per ton level considered reasonable by the price agency and much of the industry. In announcing the results of this meeting, Henderson warned the industry that " Unless voluntary action is successful, drastic steps looking toward control will be recommended."28 In February and March 1941, the price agency persuaded the railroads and other large makers of steel scrap to include in their sales notices a statement that : " In conformity with our policy of cooperating with the Advisory Commission of the Council of National Defense, any prices out of line with the publicly expressed desire of that Commission to prevent unduly high prices will be rejected." ΐ β A s a result of these intensive efforts to prevent prices of scrap from getting out of hand, prices of No. 1 Heavy Melting Steel Scrap were actually reduced from an average of $22.63 in December 1940 to an average of $20.85 ' n February 1941. 27 This represented perhaps the most successful attempt to regulate scrap metal prices by informal methods. Yet even in this instance the overwhelming pressures of the war economy made it impossible to hold down these prices by methods involving voluntary cooperation. In an industry of so many independent 24 Charles A. Bishop, onetime acting head of the P r i c e Section, Price Stabilization Division, in an interview with John A. H a r t and R o b e r t E . Stone, of O P A ' s History Branch, M a r . 20, 1945. 2 5 N D A C , Press Release, Jan. 7, 1941 ( P R 339). 26 Letter, Bishop to railroads, makers of scrap, M a r . 12, 1941. 27 Metal Statistics, 1943, p. 231.

Feb. 5, 1941 ; letter, Bishop to

other

EARLY

PRICE CONTROLS

6l

sellers and buyers, it would indeed have been a miracle if warnings, suggestions, even threats had succeeded in keeping the entire industry in line. Indeed, so many dealers failed to observe the informal " ceilings " that numerous complaints were received from those w h o were complying, and the price stabilization officials were able to maneuver these " good boys " into the position of appearing to request the office to issue a formal ceiling so that the existing unfair situation could be eliminated. 28 Consequently, after warning the industry that scrap ceilings were going to be imposed at levels below current market prices, 2 9 the office on April 3, 1941, announced a formal price schedule establishing maximum prices for iron and steel scrap based on $20 per ton for No. 1 H e a v y Melting Steel Scrap at Pittsburgh, with appropriate grade differentials. 80 In issuing this schedule, Henderson described one of the factors that had contributed to the breakdown of informal controls. In January I asked the industry to cooperate with the Government in its effort to prevent runaway prices. For the most part, the response to my request has been wholehearted. Some persons in the industry, however, have been continuing their speculative practices at the expense of those who have cooperated. This Price Schedule is our answer to the speculators.*1 Henderson also insisted that the Government was going to take measures to see that these formal ceilings were observed : The Price Schedule for iron and steel scrap will be rigorously enforced. The powers of the Government to place compulsory orders, to condemn or requisition properties, to issue priorities and to use other powers available for carrying 28 Bishop interview, op. cit. 2 9 N D A C , P r e s s Release, M a r . 7, 1941 ( P M

139).

30 Price Schedule 4, issued April 3, 1941 ( P M 226). 3 1 N D A C , P r e s s Release, April 3, 1941 ( P M 226).

62

THE

HISTORY

OF BASIC

METALS

out the defense program will be exerted to the utmost against any person who may venture to disregard the ceiling prices established by this Schedule.32 Although the prices of the chief steel-making materials were thus effectively stabilized by April of 1 9 4 1 , it became necessary in that month for the price control agency to move promptly and decisively to prevent a general steel price increase by the imposition of a formal schedule of ceiling prices. A s we have already indicated, the steel industry was operating at rates close to capacity, already 9 7 % by February 1 9 4 1 . 3 3 At the same time, early in 1 9 4 1 , Philip Murray was pressing for a wage increase of at least 10c an hour for the steel workers. On January 23, Henderson had an off-the-record conference with Benjamin Fairless, President, and Irving S. Olds, Chairman of the Board of United States Steel Corporation, in which the steel leaders attempted to convince Henderson that he should oppose the wage increase demanded by Murray. Henderson did not commit himself, and pointed out that " it was peculiarly a matter for Hillman." 34 Shortly thereafter, Henderson went on an extended vacation, leaving the price office in the hands of his lieutenants, John Hamm and David Ginsburg. Hamm thereupon made an attempt to avoid a wage-price crisis by suggesting that, in consideration of a price reduction by U. S. Steel Corp., the Steel Workers Organizing Committee abandon its demands for higher wages. A s he said in a memorandum to the White House explaining this proposal, " Our position is that the Steel Corporation should cut prices so as to eliminate profits above a reasonable rate, thereby eliminating the basis of Murray's case and permitting all steel consumers to share the benefits 32 Ibid. 33 See table prepared by O P A , Division of Research, First Report, p. π.

Quarterly

34 Memorandum, Henderson to the President, Jan. 24, 1941, " Steel Prices and W a g e s . "

EARLY

P R I C E CONTROLS

63

of increased steel activity. " Hamm urged that the President in a forthcoming conference with Murray try to convince him of the wisdom of this proposal. " This seems to be the real test of the New Deal," he said, " W e have fought to get things for labor which were long overdue. The issue now is whether we are able to refuse labor's demands when they are not in the public interest." Further, Hamm argued that " if in this case we can establish the principle that industry should cut prices when costs are reduced due to capacity operations on defense business, the future of prices in this emergency, and in the future of our economy, will be far less precarious." 3 5 While Hamm made a great effort to sell this proposal to labor and government officials, 3 8 he was manifestly unsuccessful, and on April 14, 1 9 4 1 , the U . S. Steel Corporation granted wage increases of about 1 6 % , or 10 cents an hour. 3 T Meanwhile, members of the staff of the price agency had made studies which indicated that the steel industry could absorb such a wage increase without hardship and indeed without impairing a very excellent earnings position achieved through near-capacity operations. 38 The matter of a price ceiling on steel was discussed at a meeting of the Price Administration Committee, a committee of leading Government officials appointed by the President to coordinate anti-inflation policies, and Henderson pointed out that, even after the wage increase, U. S. Steel Corporation could be expected to earn about 7 percent on sales. 30 On April 14, as the wage dispute was being resolved, the price agency asked officials of the U. S. Steel Corporation to agree that they would make no definite anounce35 Memorandum, Hamm to James Rowe, Special Assistant to the President, Mar. 4, 1941, " T h e President's Conference with Philip Murray." 36 See Hamm interview, op. cil. ZI New York Times, April 15, 1941. 38 See memorandum, Victor Perlo, to Richard Gilbert, Head, Research Section, Feb. 6, 1941. 39 Summary of Transcript of Price Administration Committee Meeting, April 14, 1941.

64

THE

HISTORY

OF B A S I C

METALS

ment with respect to price increases without consulting the price agency. O n the following day, Henderson w a s advised by a member of his staff that " It is imperative that a price ceiling be placed on steel, now. T h e wage-price situation has come to a head. If left to develop without action by this Office on the price front, irreparable damage to the defense program and to the economy generally will be the result." 40 T h e proposal of issuing a ceiling w a s discussed with Olds of the U . S . Steel Corporation, and while Olds indicated that the company w a s opposed t o the issuance of such an order, he said that he would not fight it. 4 1 O n A p r i l ι 8 , 1941, Price Schedule 6 was issued, freezing steel prices at the level of the first quarter of 1941. In announcing this schedule, Henderson explained : Steel is an element of cost in practically every item of the defense program. It is also an element of cost, direct or indirect, in virtually every item of civilian consumption. The market place looks to the price of steel as sheep look to the bell-wether. A rise in steel prices would inevitably be followed by rises in prices of every other basic commodity. These increases would in turn be reflected in rising prices of manufactured goods. Presently the ultimate consumer would find that he must pay more for what he buys, and so the foundation would have been laid for a dangerous upward spiral of prices in general—which would mean, briefly, boosting the cost of living. 42 T h u s the Office issued one of its first and most important price schedules to prevent the steel industry f r o m increasing its prices as a result of w a g e increases. T h e differences between Government and industry on this issue reflected the belief of 40 Memorandum, Martin Taitel, Consultant, to Henderson, April 15, 1941. 41 Transcript of telephone call, Hamm (in New York) to Henderson, April 16, 1941. 42 Ο Ρ ACS, Press Release, April 17, 1941 (PM 279).

EARLY

PRICE

CONTROLS

65

the price administrators, later shown to be correct, that the steel industry could pay higher wages and continue to realize excellent earnings without increasing prices. Hamm's proposal to freeze wages and lower prices was based on similar assumptions with respect to the earnings of the steel industry, but carried with it the implication that a reduction in steel prices would so check the rising cost of living that labor would not feel the need of demanding higher wages. Although Hamm's proposal had many obvious merits, it is doubtful that it could have had anything but temporary success, and in all probability it would not have avoided the necessity of issuing a formal price schedule for the steel industry. In December 1941, O P A issued a regulation establishing maximum prices for the resale oj iron and steel products at levels in line with the manufacturers' prices set forth in Price Schedule 6. 4 3 Steps were also taken to stabilize the prices of steel castings at comparable levels. In November 1941, a formal schedule was issued establishing ceiling prices on so-called lowcarbon steel castings at July 1941 levels. 44 In February 1942, OPA informally requested gray iron foundries to freeze their prices and pricing methods at October 1, 1941, levels, and with the issuance of the General Maximum Price Regulation in April 1942, prices of gray iron castings, manganese steel castings and malleable iron castings were all stabilized by formal action. 45 Non-ferrous metals. The steps taken to stabilize the prices of iron and steel and their raw materials were extremely important in the history of the price control effort, but measures undertaken by price officials to check increases in the prices of non-ferrous metals were among the earliest evidences of the Government's determination to prevent inflation. It is to these significant measures that we now turn our attention. 43 Price Schedule 49, issued Dec. 13, 1941. 44 Price Schedule 41, issued Nov. 14, 1941. 45 OPA., First Quarterly Report, p. 121.

66

THE

HISTORY

OF B A S I C

METALS

The story of aluminum was for a long time the story of the Aluminum Company of America ( A L C O A ) . During World War II, however, the war time shortage of aluminum, the enterprise of several competitors, the operation of the anti-trust laws, and the policies followed in the disposal of Government surplus property combined to weaken in some degree this company's dominant position in the industry. Although alumina, the chief raw material for the manufacture of aluminum, can be derived from several alumina-bearing clays, bauxite, available domestically chiefly in Arkansa and imported from the Guianas, remains the only economical source of this material. 46 The reduction of alumina takes place in plants where electric power plays a crucial role, and therefore the location of reduction plants is determined almost entirely by the availability of cheap electric power. From these plarits, aluminum ingots are shipped to rolling mills whence the metal in sheet and similar form is shipped to consuming centers.47 In spite of the severe shortage of aluminum that threatened to hamper the defense program early in 1941, the price of primary aluminum was reduced four times by the Aluminum Company in the period from March 1940 to September 1941 resulting in a decline from 20 cents to 15 cents a pound.48 46 The agreement of the Aluminum Company to grant to the Government free use of its patents covering the cheap method of extracting alumina from bauxite has contributed to the development of competition in the industry. 47 Important information concerning the aluminum industry and the war may be found in Charlotte Muller, Light Metals Monopoly, Columbia University Press, 1947; the Attorney General's Report on the Aluminum Industry, prepared pursuant to the provisions of Section 205 of the War Mobilization and Reconversion Act, Sept. 11, 1945; and Reports of the Senate Special Committee to Investigate the Defense Program (Truman Committee). For a study of some important aspects of the aluminum industry, see D o n a l d H . W a l l a c e , Market Control in the Aluminum

Industry,

Harvard University Press, 1939. 48 G. A . R o u s h ( e d . ) Mineral Industry During

The Mineral 1941, p. 7.

Industry

During

7940, p. 10;

The

EARLY

PRICE CONTROLS

W h e t h e r these price reductions were l o w e r production costs resulting from because of competitive considerations, relations, such price reductions aided and were welcomed by price officials.

67

undertaken because of expansion of output, or or for reasons of public in preventing inflation

In the aluminum industry, as in many of the non-ferrous metals industries, secondary and scrap metals play a very important role. T h e r e are a number of aluminum smelting companies whose chief business is to make secondary grades of aluminum ingot by remelting aluminum scrap. These grades of secondary aluminum, while not meeting the quality standards of primary or virgin aluminum, m a y often be substituted for primary aluminum in the fabrication of aluminum products. T h u s a shortage of primary aluminum leads inevitably to increased pressures of demand upon available supplies of secondary and scrap aluminum. A l t h o u g h as early as A u g u s t 1940 the prices of secondary aluminum were already higher than virgin aluminum prices, and although prices of scrap aluminum

had failed to decline

following Alcoa's reductions in the price of the virgin m e t a l , 4 9 it was not until the early months of 1941 that the office took some action to check these price increases. T h e price agency was warned in January 1941 that

" s e c o n d a r y aluminum is

bringing a price f r o m 5c to 8c above the price of the

new

metal," and that the shortage of primary aluminum was giving " the secondary boys a chance to give it the old up and u p . " 5 0 T h i s runaway tendency was confirmed in the

same

month in an interview between price officials and the president of an important smelting company, w h o indicated that secondary prices were particularly out of line, that scrap prices had also gone up to some extent, and that he and other smelt49 Metal Statistics, 1941, p. 555.

50 Letter from George Renard, Secretary of the National Association of Pnrchasing Agents, to Henderson, Jan. 10, 1941.

68

THE

HISTORY

OF B A S I C

METALS

ing companies were anxious for the Government to impose controls. 5 1 The first move of the price agency to check the rising prices of secondary and scrap aluminum was to issue a warning to the industry on February 4, 1 9 4 1 , which condemned hoarding of these materials " whether for inventory or speculative purposes," and stated that " Unless this situation is rectified, drastic action will be necessary to prevent an upward spiral." This announcement pointed out that under existing statutes, the President was authorized to requisition and dispose of aluminum and aluminum scrap and that if supplies were not made available and prices lowered, " the Price Stabilization Division is prepared to recommend necessary action to insure reasonable prices for scrap and secondary aluminum." 52 T w o weeks later an industry committee was appointed to work with the Price Stabilization Division on problems of aluminum scrap. 5 3 On March 3, 1 9 4 1 , the Price Stabilization Division sent telegrams to airplane manufacturers and scrap metal dealers, requesting them to observe a top price of 1 1 cents a pound for mixed aluminum scrap (unsegregated aluminum clippings) released by airplane manufacturers to dealers under a recent order of the Priorities Division. These telegrams stated in part, " Until such time as a price schedule for aluminum scrap is issued by this Division, we request your cooperation in disposing of such scrap to purchasers who have customarily been buying from you, at a price not to exceed I I cents per pound." 54 Several days later, the price agency made a public request of secondary smelters to furnish complete 51 Memorandum, George S. Brady, Consultant, to Henderson, Jan. 15,1941. 52NDAC, Press Release, Feb. 4, 1941 ( P M 41). 53NDAC, Press Release, Feb. 18, 1941 ( P M 81). 54 Telegram to airplane manufacturers and to scrap metal dealers from Charles A. Bishop, acting head of the Price Section, Price Stabilization Division, March 3, 194t. See NDAC, Press Release, March 3, 1941 ( P M 123).

EARLY

PRICE

CONTROLS

69

information concerning inventories and orders, presumably in an effort to discourage hoarding. 65 In the face of tremendous pressures upon the scrap aluminum and secondary aluminum price level, pressures that were intensified by the issuance of a priorities order restricting the use of virgin aluminum to defense purposes, 88 and in the face of the difficulties of enforcing informal price controls upon such a large number of buyers and sellers, the Price Stabilization Division was finally driven to establish formal ceiling prices for aluminum scrap and secondary aluminum. This action was taken in Price Schedule 2, issued March 24, 1 9 4 1 , which established prices in line with then current prices for virgin aluminum, and involved a reduction of about 2 0 % in the current market prices for scrap and secondary aluminum which, as we have already indicated, had outstripped the virgin aluminum prices. 57 While we rnust reserve for later consideration the evolution of the significant Premium Price Plan for Copper, Lead, and Zinc, we may profitably review at this point some of the early price problems associated with these metals. But first, a word about the chief characteristics of these industries. Copper, lead, and zinc are derived from both domestic and imported ores. Arizona, Montana, and Utah lead the United 55NDAC, Press Release, March S, 1941 ( P M 127). 56 General Preference Order M-i, March 22, 1941. 57 Price Schedule 2, issued Mar. 24, 1941, NDAC, Press Release, Mar. 24, 1941 ( P M 186). As noted before, I have arbitrarily excluded magnesium from extensive consideration in this study. Magnesium, of course, accompanied aluminum as one of the basic metals going into the expanding aircraft industry during the war. Largely as a result of Government financing, domestic output of magnesium was increased from 6.7 million pounds in 1939 to 368 million pounds in 1942. The problem of price regulation was not difficult. A maximum price of 22.5c/lb. was established by the GM PR in April 1942, a price lowered in February 1943 to 20.5c/lb. Special provision was made for the purchase by the Metals Reserve Co. of output of one high-cost producer at prices exceeding this maximum. For a detailed discussion of the magnesium industry in the war see U. S. Tariff Commission, Magnesium (War Changes in Industry Series, Report No. 10).

70

THE

HISTORY

OF B A S I C

METALS

States in the mining of copper-bearing ores, although about five percent of the total supply is derived from Northern Michigan ores, and small quantities are produced in Tennessee. Lead ores are mined principally in South-eastern Missouri, the Coeur d'Alene district of Idaho, and (usually in conjunction with zinc ores) in the so-called Tri-State District, comprising Southwest Missouri, Southeast Kansas, and Northeast Oklahoma. The three U. S. areas of zinc ore production are ( i ) the Mountain States, where zinc is usually recovered as a byproduct of other mining operations; ( 2 ) the Tri-State District; and (3) the Eastern States of New Jersey, New York, Tennessee, and Virginia. Each of these areas accounts for about a third of the total zinc production. The chief sources of imported ores are Chile for copper, Mexico for lead, and Mexico, Peru, and Belgium for zinc. Although there are a large number of small and independent mines in the United States, the mining, smelting, and refining of copper, lead, and zinc are largely concentrated in the hands of a few companies, whose influence over prices is correspondingly great. In each of these industries, scrap and secondary metals play a very important technological and economic role. In the copper and brass industry, for example, two types of scrap are in demand: ( 1 ) brass mill scrap, and (2) old (obsolescent) scrap. The first is new scrap suitable for brass mills, which in a tight market compete for supplies of this scrap. The other is old scrap which is used by secondary brass ingot makers, copper fabricators, and copper foundries, all of whom also compete for short supplies. As in the case of aluminum, the demand for copper and brass scrap and secondary brass ingot increased as the shortage of primary copper became more apparent. 58 58 Information concerning these non-ferrous metals industries is scattered, but essential data may be derived from Government and trade publications, particularly the Minerals yearbook, published annually by the Bureau of Mines, The Yearbook of the American Bureau of Metals Statistics (New Y o r k ) , The Engineering and Mining Journal ( N e w Y o r k ) , and t h e

American Metal Market (New York). For a general discussion, see article by Alfred Marcus on " Metals," and article by H . O. Rogers and F. G. T r y o n o n " Mining " in Encyclopedia

of the Social

Sciences.

EARLY PRICE CONTROLS

7I

Before formal ceilings were imposed upon many of the nonferrous metals, several rather successful informal methods of control were adopted. A s early as September 27, 1940, Henderson issued a

statement of

warning in which he pointed out

that, " A survey of the nation's full requirements for the next several

months

shows that there

is no justification for the

recent unstable price situation in the copper, lead and zinc industries." H e said that " Recent flurries in the prices of these metals were due mainly to the desire of some consumers to cover

all their

long term requirements at current prices."

Further, he pointed out that ample supplies of stocks existed and that domestic supplies could

" easily "

be increased if

necessary. Henderson stated that " he would be reluctant to recommend

controls

over

these

metals,"

but

warned

the

industry that if " the apparently artificial price-supply-demand pressure continues,"

he was prepared

" to make

adequate

suggestions to the President as to what might be done under existing law to correct the situation."

89

Coincident with this general announcement designed to ease the market situation in the non-ferrous metals, officials of the Price Stabilization Division made an off-the-record agreement with the leading producers of copper to hold the price to 12c a pound delivered at

Connecticut Valley points.

80

The major

producers continued to sell their copper at this price, but small producers and custom smelters were able to realize up to 13 cents a pound on copper sales.

61

Henderson recognized that

this made it difficult for the larger producers to maintain the 12 cent price,

62

and on April 3, 1941, price stabilization offi-

cials conferred with members of the industry to discuss " the 59NDAC, Press Release, Sept. 27, 1940 (PR 130). 60 Engineering

and Mining Journal, Nov. 1940, p. 60.

61 Memorandum, Henderson to Bishop, Ginsburg, and Hamm, Jan. 8, 1941. 62 John Hamm in interview with Hart, Nov. 30, 1944.

72

THE

HISTORY

OF BASIC

METALS

current market situation in copper and brass," and to form an industry advisory committee. 6 3 B y this time, prices of brass ingot were also responding to upward pressures and the price agency was considering the possibility of some action designed to check these prices along with the prices of primary copper. On April 25, 1 9 4 1 , Henderson announced that ceiling prices for copper and brass ingot would not be fixed by a formal price schedule at that time but " t h a t an attempt (would) be made to correct the situation through cooperation of the industry with the Government." 84 A t the same time, Henderson called attention to the fact that although " the major portion of the copper industry has maintained a stable price of 1 2 cents, . . . a minor section has been selling at the so-called outside price which has ranged up to 13^/2 cents or more." Believing that this situation was " u n warranted," the price agency announced a list of suggested prices " to be made effective immediately" : Primary producers who are now selling or offering to sell at 12 cents should continue to do so. Primary producers who are now selling or offering to sell at more than I2}4 cents should reduce their selling price so as not to exceed 12 1 / 2 cents. All custom smelters should sell not in excess of

cents.

Casting copper producers should sell at prices not exceeding I2j4 cents. 85-5-5-5 (brass) ingot should sell at prices not exceeding 13 cents; and other ingots at the usual differentials.· 8 Henderson also pointed out that " if the individual members of the industry believe that they are able in cooperation with this Office, to correct a bad situation without formal action by this Office, and ask a chance to do so, they will be g i v e n that 63 OPACS, Press Release, April 3, 1941 (PM 229). M OPACS, Press Release, April 25, J941 (PM 317). 65 Ibid.

EARLY

P R I C E CONTROLS

73

opportunity. This Office will then follow a policy of ' watchful waiting ' and will step in as soon as it becomes apparent that formal action is the only corrective." e * These informal arrangements in effect between the copper industry and the price agency were very successful, at least with respect to primary copper. Some important members of the industry satisfied themselves that such a price was " confiscatory," 67 but the leading members of the industry abided by the informal arrangement, and only the smaller producers and the custom smelters were selling their output for over 1 2 cents per pound. The immediate cause of the establishment of a formal ceiling on copper was the imposition on August 2, 1 9 4 1 , of full priority control over copper, involving direct allocation of primary copper supplies. 68 This allocation order made it desirable to establish a uniform price for all primary copper, since it was difficult to reconcile the principle of multiple pricing with the necessity of allocating copper without regard to price. Thus on August 12, 1 9 4 1 , O P A C S issued Price Schedule No. 15, establishing a ceiling of 12c a pound for electrolytic copper delivered in the Connecticut Valley. Henderson's suggestion, in April 1 9 4 1 , that the price of the leading grade of brass ingot (85-5-5-5) should not exceed 1 3 cents per pound and that other grades should preserve their normal differentials, was relatively successful in stabilizing prices. 85-5-5-5 ingot prices remained at the level of 1 3 cents, but prices of some of the other grades increased slightly during 1 9 4 1 , an increase to which the agency gave tacit approval in July 1941. 69 In January 1942, suggested prices were again published by the price agency, 7 0 and on February 1, 1942, a 66 Ibid. 67 Quoted in memorandum, Holmquist to the Files, June 25, 1941. 68 0 P M , General Preference Order M-9-a, issued Aug. 2, 1941. 69 Metal Statistics, 1942, p. 361 ; " Summary of Price Action by the O P A in Brass and Bronze Ingot," in Branch files. 7 0 O P A , Press Release, Jan. 3, 1942 ( T 127).

74

THE

HISTORY

OF BASIC

METALS

schedule of prices for secondary ingot became effective through written agreements with individual producers. T1 These prices which recognized the increases that had already taken place were then frozen by the General Maximum Price Regulation in April 1942. Informal attempts to control the prices of copper and brass scrap did not meet with great success, largely because : ( ι ) competition among brass mills for brass mill scrap had resulted in unjustifiably high prices for this scrap with the consequence that severe pressure was developing on the prices for fabricated brass products; and ( 2 ) prices of old (obsoescent) scrap had soared to such an extent that custom smelters had been deprived of necessary scrap supplies. 12 A s early as March I i , 1941, Henderson issued warnings to the secondary brass and copper markets, " which have recently shown signs of following the same course leading to unjustified price increases which demoralized the secondary aluminum and zinc markets." He hoped that these producers and dealers would " learn from the unhappy examples of zinc and aluminum and consequently maintain order and stability." 7 * In July 1941, price officials believed that steps to meet this situation should include placing brass ingot under priorities and allocating brass and copper scrap to brass mills, ingot makers, custom smelters and " certain selected foundries." The price agency believed that if such controls were adopted over the flow of copper and brass scrap, it would be necessary to establish formal ceilings only for brass mill scrap. If such controls 71 OPA, Press Release, Jan. 30, 194a (PM 2355). 72 Memorandum, Wallace, Holmquist, and Auerbach to Hamm, Galbraith, Ginsburg, and Cobb, July 17, 1941 ; memorandum, Wallace to Galbraith, August 15, 1941. 73NDAC, Press Release, Mar. 11, 1941 (PM 147) ; for a description of the secondary zinc situation, see below, pp. 77-79•

EARLY

P R I C E CONTROLS

75

were not adopted, it would be necessary to establish formal ceilings on old copper scrap as well. 74 In the absence of direct controls over the flow of scrap, the price agency decided to take whatever measures were available to ease the situation through price controls. On July 22, 1 9 4 1 , therefore, the office issued a formal price schedule establishing ceilings for brass mill scrap at the prices in effect in the price lists of brass mills on December 26, 1940. 7 8 These prices, which were approved by the brass mills themselves, were expected to be high enough so that scrap would not be diverted to ingot makers or foundries, and yet not so high as to put pressure upon the existing prices for fabricated brass products. 78 In August 1 9 4 1 , price officials made known their intention to place the prices of old copper scrap under formal controls. 77 On September 19, 1 9 4 1 , a formal schedule was issued establishing maximum prices for copper scrap at levels substantially below the current market prices, and " so fixed in relation to the price of 1 2 cents for copper that copper scrap should begin to flow more freely in its accustomed channels." 78 These efforts to channel the flow of scrap through price controls were supplemented by direct priority action of the O P M on September 30, 1 9 4 1 . 7 9 In the early months of the defense effort, prices of zinc increased to a greater extent than the prices of the other nonferrous metals. In August 1939, before the outbreak of the European War, prices of Prime Western Zinc, delivered at E . 74 Memorandum, Wallace, Holmquist and Auerbach to Galbraith, July 8, 1941, " Priorities and Price Control over Brass Ingot, Copper Scrap and Brass Scrap." 75 Price Schedule 12, issued July 22, 1941. 76 Memorandum, Wallace, Holmquist and Auerbach, to Hamm, Galbraith, Ginsburg, and Cobb, July 17, 1941. 77 OPACS, Press Release, Aug. 6, 1941 ( P M 879). 78 Price Schedule 20, issued Sept. 19, 1941 ; memorandum, Wallace to Galbraith, Aug. 8, 1941. 79 General Preference Order M-9-6, Sept. 30, 1941.

76

THE

HISTORY

OF B A S I C

METALS

St. L o u i s averaged 4 . 7 2 cents per pound. B y October 1940, these prices had risen to 7.25 cents per pound. 80 T h e reasons for this large increase were t w o f o l d : ( 1 ) the zinc industry had been unusually depressed during the pre-war years, partly because of its relatively poor competitive position compared with such foreign sources of zinc as M e x i c o ; and ( 2 ) consequently, a severe shortage of zinc smelting capacity developed as soon as the demands of w a r exceeded the " normal " peacetime requirements for zinc. 81 T h e zinc industry w a s so organized, however, that it was possible to impose informal controls on primary zinc prices with a high degree of success. T h e early methods used t o insure price stability in zinc were well described by George Renard, a consultant to the Price Stabilization Division, when he wrote Henderson of an interview w i t h H o w a r d Y o u n g , President of the A m e r i c a n Zinc Institute : W e decided it best to approach the price problems of zinc through a statement by you (Henderson) that supplies are sufficient to meet known needs and additional capacity will be made available to meet defense requirements. They (the zinc industry) have their annual meeting at Denver next week at which time Mr. Young will report the very satisfactory conference with you and secure individual cooperation from important members of the industry. They are then to advise you and cooperate in the preparation of a statement which should take the fever out of the situation. In the meantime, the meeting and this understanding are expected to prevent any runaway and Mr. Young assured us he and other executives were definitely opposed to such movement and their price policies should prevent it.82 80 Metal Statistics,

1942, p. 535.

81 Memorandum, Wallace and O'Leary to Henderson, Feb. 21, 1941, " Zinc Capacity and Demand." 82 Memorandum, Renard to Henderson, SepL 12, 1940.

EARLY

PRICE CONTROLS

77

This informal agreement between the price agency and the leading producers of zinc was followed by the general statement of September 27, 1940, concerning non-ferrous metals prices and supplies, a statement which served to ease somewhat the pressure in the meials markets. 83 A s a result of this agreement with the industry, prices of Prime Western Zinc were stabilized at 7.25 cents per pound (delivered E . St. Louis) until October 1941 when a formal price schedule was issued, which, for reasons discussed below permitted zinc producers to increase their ceiling prices by 1 cent per pound. 84 Prices of secondary and scrap zinc got out of hand very quickly in the last months of 1940 and the early months of 1941. Prices of old zinc, for example, increased from an average of 3.44 cents a pound in A u g u s t 1940, to an average of 7.49 cents per pound in March 1941. Therefore, the price agency felt it necessary to impose formal price schedules upon zinc scrap without experimenting very much with informal methods of control. However, on January 23, 1941, officials of the Price Stabilization Division met with representatives of secondary zinc producers w h o agreed to prepare a report on their customers' requirements and how these requirements could be met. This move was taken because secondary zinc was selling at a premium over primary zinc. 85 A t the same time, the office pointed out that scrap zinc prices had jumped sharply upward because " consumers have been made unduly anxious by exaggerated rumors of shortages and high prices." 86 A n industry committee was appointed to advise the price office concerning the problem and to recommend appropriate action. 8 7 Finally, however, on March 3 1 , 1941, the office issued Price Schedule 3, which established prices for secondary zinc 83 See above, p. 71. 84 See below Chapter I V , Evolution of the Premium Price 8 5 N D A C , P r e s s Release, Jan. 24, 1941 ( P M 22). 86 Ibid. 8 7 N D A C , P r e s s Release, Jan. 30, 1941 ( P m . 3 1 ) .

Plan.

78

T H E H I S T O R Y OF B A S I C

METALS

and zinc scrap in line with the prices for primary zinc already fixed by informal agreement. This schedule fixed ceilings for secondary zinc at the same level as primary prices, i. e., 7.25 cents per pound for Prime Western. Prices of scrap zinc were established on the basis of 5.10 cents per pound for " o l d zinc." 88 While the supplies-requirements position of lead was never as serious as that of copper or zinc, prices of this metal began to increase soon after the launching of the national defense program in mid-1940. In spite of the warning issued to the non-ferrous metals industries in September 1940, lead prices continued their upward course until they had risen from an average of 4.85 cents per pound in August 1940 to an average 5-73 cents per pound in November. 89 In December, lead prices softened when it was revealed that some 130,000 tons of Mexican ore were being held under bond in Texas awaiting more favorable prices. These supplies had not been reported in the regular trade statistics and the disclosure of their existence apparently eased the market, so that prices of lead averaged only 5.50 cents per pound in December. 90 This reduction in prices was noted with enthusiasm by officials of the Price Stabilization Division who reported that " The price of lead was reduced twice during the past week (the news ticker said it was supply and demand, but we like to think at least some of the boys took us for a good healthy cussing.)." 81 Increasing demand for lead, intensified by the fact that lead may be used as a substitute for some of the more critical materials, resulted in further price increases in the early months of 1941, so that by April lead prices averaged 5.85 cents per pound. 92 At this point, and after discussion with officials of 88 Price Schedule 3, issued Mar. 31, 1941 ; NDAC Press Release of same date (PM 219). Metal Statistics, 1943, p. 46590 Wartime Prices, op. cit., p. 216; Metal Statistics, op. cit., p. 465. 91 Price Stabilization Division, Progress Report, Dec. 1^40. 92 Metal Statistics, op. cit., p. 465.

EAELY

P R I C E CONTROLS 83

79

the American Smelting and Refining Co., Henderson intervened by announcing the possible necessity of establishing a formal price ceiling on lead. Henderson pointed out that available supplies of domestic and foreign lead were adequate to meet " real consumption at current levels," and in view of this situation he publicly requested the leading producers to refrain from further price increases. 94 This request, which may have been supplemented by an off-the-record agreement with some of the producers, had the desired effect of stabilizing the prices of the metal at the 5.85 cents level. It was not until January 1942 that a price schedule was issued establishing formal ceilings on lead. 98 This schedule permitted an increase of 0.75c per pound in lead prices, again for reasons discussed below. 94 It was not until August 1 9 4 1 that it became necessary for price officials to take some action with respect to secondary lead and lead scrap. By this time, however, their prices had risen out of proportion to the prices of primary lead, and price officials warned scrap collectors and dealers to release hoarded scrap which was apparently being held in anticipation of further price rises. " These ridiculously high prices must be lowered," said Mr. Henderson. " The best way to do this is to get the scrap moving to the fullest extent." 97 Prices continued upward, however, and, in December, Henderson announced that the O P A was planning to establish ceiling prices on lead scrap and secondary lead " at levels below those now prevailing." 98 On January 1 3 , 1942, O P A established formal ceiling prices on these materials at levels, which, although not significantly below current market prices, were in line with the increased prices for primary lead simultaneously announced. 99 93 Memorandum, Holmquist to Files, April 5, 1941. 94NDAC, Press Release, April 5, 1941 ( P M 236). 95 Price Schedule 69, issued Jan. 13, 1942. 86 See below Chapter IV. 9 7 O P A C S , Press Release, Aug. 16, 1941 ( P M 958). 98 OPA, Advance Release, Dec. 13, 1941 ( T 99). 99 Price Schedule 70, issued Jan. 13, 1942.

8ο

THE

HISTORY

OF B A S I C

METALS

Prices of non-ferrous castings were controlled first by an informal agreement entered into by a large number of foundries to hold prices to October i - i 5 , 1941 levels, and then in April 1942 by a formal regulation that made such prices mandatory. 1 0 0 At this point, some attention should be given to the efforts of the price agency to control transactions on the Commodity Exchange which would have been contrary to the spirit and intent of the controls imposed upon regular market sales of the metals. Early in March 1 9 4 1 , for example, price officials investigated the extent to which fabricators of copper used the futures market for purposes of hedging or actual delivery, and also inquired about the current position of these companies on the E x c h a n g e . 1 0 1 Having determined that control of Commodity Exchange transactions would not have a seriously disruptive effect upon normal marketing operations in copper, and having publicly announced that sellers of copper at prices higher than 12J/2 cents should reduce their prices to that figure, the office suggested that Commodity Exchange Inc. refuse to permit the opening up of new positions in " Standard " copper at a price in excess of cents a pound. (Approximately equivalent to 1 2 ^ cents for electrolytic copper delivered at Connecticut Valley points. ) Commodity Exchange, Inc. agreed to this course of action on May 5, 1 9 4 1 , and at the same time made provision for liquidation of outstanding positions on the Exchange. 1 0 2 On July 22, the Board of Governors of Commodity Exchange, Inc. suspended futures trading in copper until further notice. 1 0 3 100 OPA, First Quarterly April 28, 1942.

Report,

p. 137; Price Schedule 125, issued

101 Telegram, Henderson to ig copper fabricators, Mar. 8, 1941. 102 Letter, Henderson to Martin H. Wehncke, Vice-President Commodity Exchange, Inc., May 2, 1941 ; reply dated May 5, 1941. 103 Minerals Yearbook, 1941, p. 109.

EARLY

PRICE

CONTROLS

8l

O n December 3, 1940, price stabilization officials conferred with representatives of Commodity Exchange, Inc. and it was agreed that the latter would investigate the existing zinc positions of the members of the Exchange. Exchange officials believed that this action would be enough to bring the transactions in line with the informal ceilings established by O P A , and consequently the Price Stabilization Division withdrew its request for prohibition of trading in zinc except for liquidation of contracts. 1 0 4 Shortly thereafter, however, the agency renewed its request and on March 4, 1941, the Exchange announced the virtual suspension of futures trading in zinc. 106 Summary While the encouragement that price officials gave to the expansion of basic metals production helped to stabilize prices early in the defense effort, it soon became clear that more direct price control methods would have to be used. These early price controls were largely of an informal character at first because of the nature of the industries involved and because of the lack of statutory authority for the agency's actions. Later, when price pressures became more acute and the agency began to extend its control over industries that could not be successfully controlled on an informal basis, formal price actions in the form of price schedules were undertaken in an attempt to check inflationary price increases in the basic metals. Thus as early as September 1940, the office moved to impose price controls, first of an informal and then of a formal nature, upon the most important basic metals. B y early 1942, prices of coke, iron ore, pig iron, scrap steel, basic steel products, primary and secondary aluminum, copper, lead, and zinc, nonferrous scrap, and ferrous and non-ferrous castings had been stabilized generally at 1941 levels through the issuance of formal price schedules. 104 Letter, Wallace to Julius D. Baer, Counsel, Commodity Exchange, Inc., Dec. 4, 1940. 105 Wartime Prices, op. cit., p. 22.

CHAPTER IV THE EVOLUTION OF THE PREMIUM PRICE PLAN FOR COPPER, LEAD, AND ZINC DIFFERENTIAL

PRICING AND SUBSIDY

THE Premium Price Plan was an integral part of a program developed by the Government early in the defense effort to maintain and expand production of copper, lead, and zinc without greatly increasing the general level of metals prices. This was especially difficult in the mining industry where increased production often involves the mining of lower grades of ore, and involves higher-cost mining operations. A large increase in prices, therefore, is often deemed necessary, in an uncontrolled economy, to induce even a small increase in production. In World War I, the general level of metals prices was established by the so-called " bulk-line " method of pricing by which the average mining costs of the leading metal companies were ranged from lowest to highest and a price set for all metal output at a figure designed to cover costs and permit a profit for those companies producing the " bulk " of this output. The application of this method during World War I resulted in very high prices, especially for the non-ferrous metals, because there existed large cost variations among the leading metal producers and because the price administrators chose to interpret " bulk " to mean upwards of 9 0 % of the total output. Thus prices were established which covered the costs of all but the very highest cost mining operations and, permitted the lower cost operators to earn extraordinarily high margins. 1 In this war, such price inflation was avoided by pricing techniques of a differential nature that involved either Government purchase of the output of low-margin producers or subsidy payments for high-cost metal production. 1 Hardy, C. O., Wartime Control of Prices, Washington, 1941, p. 129 ff. 82

EVOLUTION

OF T H E P R E M I U M

PRICE PLAN

83

W e have already described the steps by which the Government assisted in the expansion of new mining facilities and otherwise encouraged additional production from low-cost mines without giving any price assistance. There remained the necessity of safeguarding current marginal output, on the one hand, and of encouraging additional production from marginal properties, on the other. In each case, the objective was to satisfy rapidly expanding war requirements without increasing prices. The Premium Price Plan was one of the most successful of the methods by which the Government met this objective. The Plan involved premium payments to mine operators for all production of copper, lead, and zinc over quotas established generally on the basis of 1941 output. T h e payment of a small subsidy as an alternative to raising the general level of metal prices saved the Government, as a large purchaser of metal war materials, many millions of dollars, and aided in the stabilization of the prices of many metal products. The price stability achieved in the primary non-ferrous metals by the early months of 1941 was soon threatened by a number of factors that combined to increase costs, decrease margins, and jeopardize current production. In addition to lower grades of ore and higher mining costs associated with high rates of production, increased labor costs resulting from wage increases throughout the mining industry contributed to reduce mine margins and curtail production. In order to maintain price stability under such conditions, price officials believed it necessary to minimize the incidence of these cost increases on the price level by Government purchase of high-cost metals and the use of differential pricing techniques accompanied by subsidy payments. Differential pricing, i. e., the concept that cost differences should be reflected in differing maximum prices for various segments of output, had been discussed and specifically rejected by the Price F i x i n g Committee in the First W o r l d

War.

Furthermore, the idea that subsidies should be paid to high-

84

THE

HISTORY

OF BASIC

METALS

cost producers was anathema to the price controllers of 1918, who argued that the Government should not support productive units that could not operate profitably in peacetime. A s a result of the failure to use such methods of inflation control, maximum prices of copper, for example, were established at the high level of 26 cents per pound, almost double the average price in 1914.® Price officials in World War II were determined that such an experience should not be repeated, and early in 1941 they moved to devise a plan that would increase metal production without threatening price stability. O R I G I N S OF P R E M I U M

PRICE

POLICY

Michigan Copper. First of all, steps were taken to assure the continued production of several high-cost copper mines in northern Michigan. The Upper Peninsula of Michigan had been one of the earliest sources of copper production in the United States. In the i88o's, however, the center of copper mining activity shifted from Michigan to the Mountain States, the Michigan ores declined in grade, and the mining operations that continued in that region became marginal in character. Early in 1941, the further pressure of increasing costs against the informally stabilized price of copper jeopardized the continued operation of these mines. s Because of the expansion of the defense program and the increasing demand for critical metals, consideration was given to the possibility of keeping these mines in operation through Governmental intervention. While only about 5 % of the country's output of copper was normally obtained from the Michigan region, price and production officials were anxious to maintain and increase the supplies of this " precious " metal by whatever means were practicable. A t the same time, a clamor went up from the local Michigan population for Government action designed to keep the mines 2 Hardy, op. cit., p. 130. 3 U . S. Tariff Commission, Michigan Copper Industry prepared for O P A C S .

(1941), a report

E V O L U T I O N OF T H E P R E M I U M

PRICE PLAN

85

open and the workers employed. A commercial geography class of an elementary school in the Upper Peninsula sent a petition to the President which stressed the importance of full utilization of the productive resources of Michigan. 4 The Governor, the Legislature, and Michigan's representatives in Congress joined in the demand that the Michigan mines be kept in operation.6 The Michigan situation became critical early in February 1941, when the local mining union threatened a strike at the Quincy Mining Company. β The chief purpose of the threatened strike was to force an increase in wages held to be substandard, but the union leaders were also anxious through such action to force the Federal Government to assure the continued operation of the Michigan mines. Through the interposition of Federal officials, the company and the workers agreed on a 90-day contract providing for a wage increase of 10 cents per shift and a sliding wage scale increase or decrease of 10 cents per shift for every half cent change in the price of copper delivered in the Connecticut Valley. 7 On February 24, 1941, Ο Ρ A C S requested the Tariff Commission to make a study of costs in the copper industry, with particular and immediate reference to the Michigan situation, and the Tariff Commission agreed to initiate such a study in the first week of March. 8 The results of the study when completed indicated that three of the four com4 Letter, Miss Clarice Ebert, Secretary, Geography of Commerce Class, Ripley Public School, Hancock, Mich., to the President, Feb. 13, 1941. 5 See especially, letter, Senator Prentiss M. Brown to Henderson, Nov. 29, 1940; letter, Governor Murray D. Van Wagoner to Frank Bane, Chairman, Division o{ State and Local Cooperation, N D A C , Dec. 18, 1940; and State of Michigan, Senate Concurrent Resolution No. 10, forwarded to the President, Feb. 21, 1941· 6 New York Times, Feb. 9, 1941. 7 Memorandum, Herbert F. Taggart, Head, Accounting Division, to John Hamm, Deputy Commissioner, NDAC, Mar. 13, 1941 ; Engineering and Mining Journal, March 1941, p. 69. 8 Letter, Hamm to Raymond B. Stevens, Chairman, U. S. Tariff Commission, Feb. 24, 1941 ; letter, Oscar B. Ryder, Acting Chairman, U. S. Tariff Commission to Hamm, March 1, 1941.

86

THE

H I S T O R Y OF B A S I C

METALS

panies in production in that area could not be expected to continue operating at the prevailing informal ceiling price of 12 cents a pound. · After consultation with the Michigan companies, the Office, in June, agreed that some direct aid should be given by the Government to keep these and other high-cost mines in operation. 10 However, this decision was not made until price officials had considered the problem of whether or not labor could be transferred from that area to more efficient work elsewhere. The Michigan subsidy was recommended on the assumption that it would be difficult to move Northern Michigan labor to other areas and that care should be taken only to see that the subsidy was not so high that normal movement of labor away from the mines would be deterred. 11 Before the imposition in August 1941 of a formal ceiling of 12 cents a pound on copper, O P A C S officials had conferred with Metals Reserve Company ( M R C ) in an unsuccessful effort to persuade that agency to purchase at higher than 12 cents per pound marginal production that would be jeopardized by the 12 cent ceiling. 12 In spite of this rebuff, Henderson, in announcing the copper price schedule, publicly stated that he was going to recommend that M R C purchase high-cost copper at prices above 12 cents. 13 Consequently, on August 12, 1941, Henderson wrote to Jesse Jones, the Federal Loan Administrator, emphasizing the serious shortage of copper and pointing out the necessity of taking steps " to make sure ( a ) that all domestic mines now producing continue in operation and (b) that the general rate of production is increased." Henderson indicated that his recommendation with respect to the Michigan mines was related to the first of these problems. In order 9 Letter, Ryder to Henderson, May 5, 1941. 10 Memorandum, Wallace and Holmquist to Galbraith, June 9, 1941. 11 Ibid, 12 Reported in memorandum, Galbraith to Henderson, Oct. 14, 1941. 13 OPA, Press Release, Aug. 6, 1941 ( P M 879).

E V O L U T I O N OF T H E P R E M I U M

PRICE PLAN

87

to keep these Michigan mines and several other high-cost Western mines in operation, Henderson urged Jones to purchase at one cent over out-of-pocket costs the entire output of those companies whose out-of-pocket costs were more than 1 1 cents per pound for the first six months of 1 9 4 1 . Henderson estimated that this program, which he described as " a valuable supplement to the function which Metals Reserve is already performing in facilitating domestic use of Latin American Copper," would cost between $1,000,000 and $1,500,000 a year.11 The M R C took the position that it was not empowered to purchase this marginal copper and sell it at a loss. Officials of the company agreed, however, to try to find a purchaser for this high-cost copper, and after many conferences, the Lend-Lease Administration was finally prevailed upon to purchase a specified amount of this copper for foreign account. The price at which this copper was purchased was computed on the basis of the formula outlined above with appropriate adjustments for wage increases of a dollar a day granted to the Michigan copper miners on the basis of a recommendation of the Labor Production Division of O P M . Disagreements among the principals delayed the actual signing of the Michigan contracts until October, although agreements with several other high-cost companies were reached earlier. 1 3 These arrangements undertaken to maintain several highcost mines in operation were significant because they recognized the principle of differential pricing as a method of minimizing the effect of marginal costs upon the general price level. At the same time, the adoption of such arrangements with regard to maintaining current output in the Michigan mines strengthened the possibility that similar arrangements could be worked out 14 Letter, Henderson to Jones, Aug. 12, 1941. 15 Memorandum, George R. Taylor, Head, Copper and Brass Unit, to Files, Sept. 17, 1941 ; letter, Henderson to Jones, Sept. 2, 1941 ; memorandum, Galbraith to Henderson, Oct. 14, 1941.

88

T H E H I S T O R Y OF B A S I C

METALS

to induce additional copper supplies from a number of high-cost properties. The industry itself was quick to perceive the signifiance of the Michigan arrangements, and as early as March 1941, when the announcement was made that the Tariff Commission was undertaking a cost study of these and other high-cost mines, the Engineering and Mining Journal commented favorably " on the possibility of adopting a two-price policy for newly mined metals for defense," and suggested that " The plan might be tried for a predetermined period of time or for a specific tonnage of metal." 18 The possibility of a two-price policy in copper combined with subsidy payments to encourage additional copper output was seriously considered by price stabilization officials early in 1941. On May 27, 1941, Donald Wallace and Carl Holmquist predicted a severe shortage of copper, and urged that copper production be increased. They recommended to Galbraith that " While a portion of this increase might be secured by persuasion it would seem wise to offer a subsidy on uniform terms to the entire industry for any increase in production over the rate of the first months of 1 9 4 1 . " 1 7 Galbraith approved this recommendation two days later, and it received Henderson's approval in June when Wallace pointed out the urgency of the copper supply situation and indicated " that an additional production of somewhere between 50,000 and 100,000 tons might be secured at a higher price without raising the price above 12 cents for the amount of copper that can be produced for 12 cents or less." 18 Economists of the Labor Production Division of the Office of Production Management soon came to similar conclusions with respect to the desirability of subsidizing additional highcost output of copper, lead and zinc, and officials of that Divi16 Engineering and Mining Journal, March 1941, p. 34. 17 Memorandum, Wallace and Holmquist to Galbraith, May 27, 1941. 18 Memorandum, Galbraith to Wallace, May 29, 1941, and June 24, 1941 ; memorandum, Wallace and Holmquist to Galbraith, June 17, 1941.

E V O L U T I O N OF T H E P R E M I U M

PRICE PLAN

89

sion were of great assistance in working out the details of the Premium Price Plan and in gaining its acceptance by industry and labor. 1 9 The industry divisions, however, were reluctant to support any such proposals, and believed that general price increases would be more effective in increasing production. On August 2 i , 1 9 4 1 , for example, Knudsen wrote Henderson urging that the price of copper be raised to 1 3 cents a pound in order to increase production and meet the tremendous demands for copper being made by the armed services. 20 O P A C S officials were, of course, bitterly opposed to any such price increase. They pointed out that the 1 2 cent price covered the costs of 90 percent of the copper production and permitted the copper companies to earn favorable profits; that a 1 5 cent differential price for high-cost copper would yield greater additional production than 1 3 cents across the board; and that a general copper price increase would lead to wage increases that would cancel the benefit of the increased price. 21 The proposal to increase copper prices was discussed at meetings of the Price Administration Committee, and the consensus was that " the preferable way of handling the situation was for the Government to purchase the higher cost copper and that the copper price ceiling should not be raised to 1 3 c . " 2 2 On September 2, 1 9 4 1 , therefore, when O P A revised its recommendation to R F C with respect to the Michigan situation on the basis of certain wage increases granted to the miners, Henderson also asked Metals Reserve Company to purchase at 1 5 cents a pound " a l l additional high-cost copper which any 19 Memoranda, J. Douglas Brown to Sidney Hillman and to E. R. Stettinius, Aug. 4, 1941. Quoted in C. M. Wiltse, Evolution of Premium Price Policy for Copper, Lead, and Zinc, Historical Reports on W a r Administration : W a r Production Board, Special Study No. 4, Dec. 1943 (Reissued Feb. 1946), p. 2. 20 Letter, Knudsen to Henderson, Aug. 21, 1941. 21 Memorandum, Wallace to Galbraith, Aug. 26, 1941. 22 Summary of Transcript of Price Administration Committee meeting, Aug. 26, 1941

90

THE

H I S T O R Y OF B A S I C

METALS

companies including those not now in operation . . . will produce and sell to the Government at that price." He proposed that this offer should be restricted to those companies that did not need any Government assistance in financing expansion of facilities, and suggested that " additional output be defined as production above the average rate of operations in the first six months of 1941."** Henderson presented a careful statement of the reasons why such a solution of the copper price and production problem was desirable: I wish to stress that unless the principle of differential pricing is applied in cases of important raw materials where costs differ markedly between the various segments of supply, it will be impossible to achieve the avowed aim of the Administration in preventing severe inflation. In the case of metals and minerals the cost of producing additional increments of supply normally rises very rapidly as output is expanded, because lower grade ores or deeper mining must be resorted to. If the price on the whole supply is allowed to rise to the high price required to cover the high cost of the most costly parts of the supply as was done on the last war, the price will often be double the price prevailing prior to the Defense Program.24 While the Metals Reserve Company was finally induced to approve the arrangements for the purchase of the high-cost Michigan copper, Jones and Clayton were not easily persuaded that differential pricing should be extended to other situations. OPA officials complained of the " leisurely " attitude exhibited by M R C and noted that both Jones and Clayton regarded differential pricing as " an invention of the devil." 25 Under these circumstances, O P A officials made several attempts to bring Administration pressure to bear upon Jones. One of the President's special assistants was told that " Mr. Jones should be convinced once and for all that it is absolutely necessary to get 23 Letter, Henderson to Jones, Sept. 2, 1941. 24 Ibid. 25 Memorandum, Galbraith to Henderson, Sept. 2, 1941.

E V O L U T I O N OF T H E P R E M I U M

PRICE PLAN

9I

all additional copper that can be obtained, and that a multiple price system is the best way to implement the attainment of this objective and the general objective of price stabilization." ** Attempts were also made through Robert Nathan and Harry Hopkins to gain top Administration support for the O P A program and, if necessary, to gain the authority to carry it through without the assistance of the " unfriendly " M R C . 2T In October, Galbraith informed Henderson that M R C was still unwilling to undertake comprehensive subsidy arrangements in copper and that Clayton's most recent proposals for a limited program of this nature were inadequate. He suggested that the power to buy and sell at a loss be conferred upon some agency responsible to the O P A , or that some other arrangement be made so that O P A could carry out its copper program without delay. 28 It was not, however, until after the Pearl Harbor disaster that M R C was induced to embrace such an unconventional scheme, and in the meantime negotiations proceeded without notable success. Tri-state zinc. Meanwhile, in the summer of 1941, conditions developed in the Tri-State Zinc District (the Kansas, Missouri and Oklahoma area) that threatened the maintenance of zinc price stability, and led the office to consider the possibility of applying differential pricing techniques and subsidy payments to the zinc situation. In some respects, the Tri-State District was similar to the Northern Michigan copper producing area. Depleted ore reserves were characteristic of both regions, and in each of these areas, wage rates were below average. On the other hand, as much as a third of the nation's total zinc supplies came from the Tri-State District, whereas the Michigan region accounted for only 5 percent of the nation's copper supplies: Similarly, mines in the Tri-State District had 26 Memorandum, Wallace to Isadore Lubin, Aug. 22, 1941. 27 " Informal and Confidential " Memorandum, Taylor to Hamm, Sept. 5, 1941.

Sessions, Coombs and

28 Memorandum, Galbraith to Henderson, Oct. 14, 1941.

92

THE

HISTORY

OF BASIC

METALS

greater manpower difficulties than the Michigan mines, because of the existence in the Tri-State area of a larger number of competing defense industries with higher wage rates. 29 Since December 1940, the zinc producers in the Tri-State District had been urging a price increase to maintain production of zinc in that area. 80 By the summer of 1941 this position was strongly defended by officials of the Office of Production Management. In August 1941, for example, Knudsen wrote Henderson that the Tri-State situation was critical, that substantial wage increases would probably have to be granted to keep mine labor on the job in that area and " that under present conditions there is only one corrective, namely, an increase in the price of zinc." Knudsen argued that it was necessary to increase the price of zinc " not only to safeguard present production, but to make possible a reasonable increase in output," and he stated that financial stimulus was needed to encourage the discovery and development of new ore reserves. He asked that the price be increased to nine cents per pound for Prime Western Zinc at E. St. Louis, and in conclusion stated that " Since (such) a higher price will undoubtedly serve to encourage zinc production in many fields other than the TriState, we do not advocate limiting the increase to any particular district, and do not at this time advocate special prices to marginal producers." 81 O P A did not act at once, but John Sumner, of the staff of the price agency, made a first-hand investigation of the TriState problem and also recommended a price increase for zinc. His recommendations differed, however, from OPM's with respect both to the amount of price increase and to the purposes 29 See Report of John D. Sumner, " Price Policy and the Zinc Concentrate Situation," Sept. 9, 1941. 30 Memorandum, Wallace to Henderson, Dec. 2, 1940 ; letter, Evan Just, Secretary of the Tri-State Zinc and Lead Producers Association, to Wallace, April 21, 1941. 31 Letter, Knudsen to Henderson, Aug. 18, 1941.

EVOLUTION OF T H E P R E M I U M PRICE PLAN of such an

increase.

93

H e believed that zinc prices should be

increased only to 8 j 4 cents, and, as far as the T r i - S t a t e D i s trict was concerned, only for the purpose of safeguarding the current level of operations. T h e O P A official argued that, if it w a s decided to increase the rate of zinc production in the T r i State, " special inducements " should be offered by the Government for additional production after 1 9 4 1 . A t the same time, Sumner

recommended against

the

adoption

of a

two-price

plan in zinc as an alternative t o a general price increase because he believed that a w a g e increase w a s imminent that would affect all producers and would increase the number of submarginal mining

operations.

U n d e r these

circumstances, he

that an over-all price increase w a s justified. The

Price Administration

believed

82

Committee discussed this zinc

problem at several of its meetings, and although Donald W a l lace made the suggestion that the Government purchase all T r i - S t a t e zinc concentrates at a loss, the price agency

33

at increased prices and resell them took no

steps in this direction. 3 4

Finally, when the E a g l e - P i c h e r C o m p a n y , the leading producer in the T r i - S t a t e area, announced that it w a s g o i n g t o increase its wages, the O P A , h a v i n g first persuaded the company to postpone such action for several weeks,

35

at last agreed to permit

an increase in slab zinc prices. O n October 10, 1 9 4 1 , O P A announced

that

it

was

preparing

a

formal

ceiling

on

zinc

that would reflect an increase of 1 cent per pound in P r i m e Western Zinc. In making this announcement, O P A said that " This action represents a case where intensive study of the 32 Report of John D. Sumner, " Price Policy and the Zinc Concentrate Situation," Sept. 9, 1941. 33 Zinc concentrates are zinc ores that have been milled but not smelted. After being smelted, zinc ores emerge as slab zinc or spelter. 34 Transcript of Price Administration Committee Meeting, Sept. 10, 1941 ; Summary of Transcript of Price Administration Committee Meeting, Oct. 2, 1941. 35 Summary of Transcript of Price Administration Committee Meeting, Oct. 2, 1941.

94

THE

HISTORY

OF B A S I C

METALS

O P A staff has disdosed that a price increase is necessary to maintain and expand supply." M In short, the office had given official recognition to the recommendations submitted earlier by John Sumner in which he had argued for a price increase on the grounds that such action was necessary to permit wage increases, hold the labor force together, and maintain current operations in the Tri-State District. Although this general increase was also expected to have the incidental effect of increasing the output of mines outside of the Tri-State District, it was not offered as a substitute for other Governmental action designed specifically to increase zinc production, and immediately after the increase in the price of zinc, O P A officials, with the aid of engineering consultants, began the specific formulation of the Premium Price Plan. Lead Prices. The zinc price increase was greeted with some enthusiasm by the industry which immediately looked forward to higher prices for itad.The Engineering and Mining Journal averred that " the (zinc) advance was long overdue, partly because a year ago the price was fixed arbitrarily and without knowledge of what it fairly should be, and partly because changing conditions made it increasingly apparent that a rise was necessary to the fulfilment of the defense program." " It was also reported that the trade believed that " The move foreshadows a higher price for lead." 88 These rumors became so persistent that Henderson made a public announcement denying that any advance in the price of lead was being contemplated.*· A s a matter of fact, as early as October 31, 1941, John Sumner and Paul Linz, who were now in charge of the zinclead program for O P A , recommended that lead prices be increased by l/¡ cent per pound to increase production. The 36 O P A , Press Release, Oct. 10, 1941 ( P M 1340). 37 Engineering and Mining Journal, November 1941, p. 31. 38 Ibid., p. 60. 39 O P A , Press Release, Nov. 5, 194t ( P M 1300).

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95

circumstances which, in the minds of these OPA officials, made a price increase desirable involved the fact that the lead industry was operating on only a five-day week, and it was believed that a price increase would act as an incentive to the industry to adopt a six-day week. Further, these price officials argued that such an increase would discourage selective mining (i. e., mining only the highest grade ores) and would provide funds for mining development. However, they did not suggest that this general increase should be a substitute for differential pricing arrangements. As these officials stated, " The use of a small price increase at the present time in no sense involves the abandonment of differential price treatment as a means of bringing out higher cost production." However, such differential pricing techniques, it was argued, should be placed into effect only after the industry had already reached " a normal production ceiling." Up to this point " increase of production induced by rising prices is generalized and substantial throughout the bulk of the industry. Beyond this level, the increase of production encounters varied and widely different circumstances more susceptible of treatment by fitting a special price to the circumstances of each case." These officials argued, therefore, that differential pricing should not be put into effect until the lead industry had accepted the six-day week. 40 Wallace and Galbraith opposed a price increase at that time, arguing that it was unwise to grant price relief to the industry before the industry had incurred increased costs as a result of lengthening the working week. " The zinc price advance," argued Wallace, " was necessary in order to avoid a decline in production. A substantial increase in lead production . . . should be obtained before any price increase (is) permitted." 41 Thereupon Galbraith communicated with William Batt, Director of OPA's Materials Division, and it was agreed that both agencies would exert pressure upon the lead producers to 40 Memorandum, Sumner and Linz to Galbraith, Oct. 31, 1941. 41 Memorandum, Wallace to Lead Price Action Files, Nov. 24, 1941.

96

THE

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increase their production without increasing prices. On November 7, 1941, telegrams were sent to all lead producers urging them to increase production primarily by operating their mines six days per week. 4 2 In several weeks, Sumner and Linz again pressed for an increase, pointing out that the supply situation had further deteriorated and emphasizing the urgency of the current lead situation and the difficulties involved in working out a differential pricing system with the Metals Reserve Company. 4 3 Action on lead prices was postponed, however, until full details of the Premium Price Plan had been worked out. T h e lead and zinc situation differed in several respects from that in the copper industry. While a large proportion of the copper production could be produced without hardship at the prevailing ceiling price of 12 cents, an increasingly large proportion of the lead and zinc industries needed some price assistance to continue in production. In the case of the zinc industry, for example, the entire Tri-State District had been threatened with declining production unless some price aid was forthcoming, and in the lead industry, it was believed that some price relief was necessary to compensate for a longer working week in the industry. A l l of these situations were alike, however, with respect to the necessity and advisability of introducing differential pricing arrangements to assist in the securing of additional production of these critical metals. DEVELOPMENT

OF T H E

PREMIUM

PRICE

PLAN

Meanwhile, the idea of a two-price system in copper, lead and zinc had been presented to the industry and discussed with them. In a speech delivered before the American Mining Congress on September 30, 1941, John Hamm, Deputy A d ministrator of O P A , outlined some of the problems faced by the price stabilization agency in the first two years of the war in 42 Ibid.

43 Memorandum, Sumner and Linz to Wallace, Nov. 19, 1941.

E V O L U T I O N OF T H E F B E U I U U

PRICE PLAN

Ç7

Europe and how these problems were related to the techniques of price control in the metals. In discussing these techniques, H a m m pointed out very clearly the differences between the bulk-line system of pricing in the First World W a r and the system applied in the more recent war. In this connection, he stated, " W e have given much time to the problem of procuring the output of high-cost producers. But in establishing generally applicable ceiling prices we have concentrated our attention on the low and intermediate rather than the high-cost producers. In order to get the relatively small amount of highcost output we favor a multiple or differential price system rather than a uniform bulk-line price." 44 H a m m pointed out that the chief problems associated with the development of a multiple price system involved ( i ) the maintenance of current high-cost production, and ( 2 ) the stimulation of additional production through the intensive use of existing facilities and the development of new facilities. He referred to the Michigan situation as an example of the kind of arrangements that could be made to maintain current high-cost production and suggested that similar techniques could be used to stimulate added production from existing facilities : A s demand for metals increases we are naturally interested in seeing that idle facilities are brought back into use, that operating mines step up their rate of production, and that new mines are opened. The price problem here is in many ways similar to the problem of maintaining marginal production. We recognize that something over the ceiling price is required to accomplish the objective. We feel that the increased cost of the additional production should be met directly by the defense agencies of the Government.45 Hamm also indicated that attention would be given to adapting such arrangements for purposes of encouraging mine prospecting and development. 44 OPA, Press Release, Sept. 30, 1941 (PM 1254). 45 Ibid.

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The reaction of the industry to these proposals was mixed. On the one hand, such a multiple price arrangement was contrary to conventional price practices in the industry and would eliminate the wind-fall profits accruing to low-cost mines in a single price system. On the other hand, the industry believed that such an arrangement would have a stabilizing effect on wages in those cases where sliding scale contracts existed between the company and the union, and industry leaders found it difficult to formulate an alternative that would at the same time increase production and maintain price stability. Several months before Pearl Harbor, OPA officials had developed the Premium Price Plan to the point where it was ready for detailed and final discussion with OPM and MRC. After Pearl Harbor, the need for increased production of all metals became more urgent, and there developed increasing support for a differential pricing system in copper, lead, and zinc. The Labor Production Division of the OPM renewed its suggestion that such a price policy be adopted, Ben Riskin, Research Director of the International Union of Mine, Mill, and Smelter Workers (CIO), urged the adoption of such a plan before the Truman Committee, and the Truman Committee itself added its voice to those urging that such policies be adopted. 48 The industry divisions of OPM and one or two OPA officials, however, were still reluctant to adopt such a plan because they believed that a flat increase in prices would be more effective in securing additional production. 41 On December 8, the day following Pearl Harbor, Galbraith, acting on the recommendation of his staff, told Henderson that supplies of lead a n d z i n c would be inadequate, that the Office 4677th Cong., ist Sess., Senate Special Committee Investigating the National Defense Program, Hearings, part io, Dec. 4, 1941-Feb. 12, 1942, ρ 4215; 77th Cong.. 2d Sess., Senate Report 480, P a r t 5, Additional Report of the Special Committee Investigating the National Defense P r o g r a m , Jan. IS, 1942. 47 F o r a statement of this point of view by an O P A official, see memorandum, George W . Roddewig to John D. Sumner, Nov. 24, 1941.

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99

should " turn quickly to a two or multiple price system," under which " The M R C should offer to all producers a high price for additional output above quotas related to recent production." 48 Three days later, Henderson formally recommended a premium price plan for lead and zinc to the Supply, Priorities and Allocation Board. " I believe it is imperative," said Henderson, " to take immediate steps for effective implementation of a program which will provide a large increase in domestic production of zinc and lead without inflationary price movements and which will assure an equitable and desirable allocation between competing civilian demands." He suggested that " Each producer of lead and zinc should be assigned a quota based on recent production with some account for relative ability to run six or seven day operations. This quota is to be sold at the ceiling price. The Metals Reserve Company should offer to buy, for a period of two or three years, all output above these quotas at a fairly high price. Equitable quotas could be established in short order." At the same time Henderson urged that an allocation program be initiated for lead and zinc. 49 On December 16, S P A B gave this proposal its unanimous approval and urged that all necessary steps be taken to put such a program into immediate effect. 60 Perhaps because price officials believed that additional copper production could be assured by means of direct contracts between MRC and individual high-cost mines, copper was not included in this first recommendation for a premium price plan. Soon thereafter, however, it was publicly announced that the Office contemplated no increase in the ceiling price of copper, and after some discussion within the price agency, it was conceded that the application of the principles of a premium price 48 Memorandum, Galbraith to Henderson, Dec. 8, 1941. 49 Memorandum, Henderson to Nelson, Dec. 11, 1941. £0 SPAB, Minutes, Meeting X V I I I , Dec. 16, 1941.

ΙΟΟ

THE

HISTORY

OF BASIC

METALS

plan to copper would assure the largest increase in production and would maintain price stability. 5 1 Before the Premium Price Plan was announced, a decision w a s made to increase the ceiling price of lead by 0.65c a pound, action which had been recommended some months previously by Sumner. T h e argument was renewed that to compensate the lead industry for the increased cost of the longer w o r k week it w a s necessary to grant a general increase in prices, before applying the principles of paying premium prices for additional output. T h i s argument was, however, strongly opposed by the L a b o r Production Division of the O P M , by the Miners Union, and by some officials of the price agency. Opponents of a price increase for lead argued that the premium price plan was designed just to prevent such general increases in prices, and that under the proposed plan the office could avoid a general increase in lead prices by reducing the quotas of those companies that were unable to produce their current output of lead profitably at 5.85 cents per pound. A s one of the O P A lawyers remarked, " T h i s is the second time the Office has failed to apply the theory of differential prices in a situation in which an appreciable portion of the current output of a commodity is jeopardized by current prices. T h e first case was the zinc situation. These are two bad precedents." 82 In spite of these strenuous objections, the O P A decided to increase the ceiling price for lead on the assumptions ( 1 ) that a general price increase would induce increased production f r o m small mines with the least number of administrative difficulties, ( 2 ) that if the price were left at 5.85 and quotas lowered the M R C would be required to purchase too great a quantity of lead, and ( 3 ) that labor costs had gone up and margins narrowed for the entire lead industry. M δΐ OPA, Press Release, Dec. 22, 1941 (PM 1914) ; Memorandum, Taylor to Wallace, Jan. 2, 1942. 52 Memorandum, Auerbach to Cobb, Jan. 16, 1942; Memorandum, Richard A. Lester of the Labor Production Division, to Wallace, Dec. 31, 1941. 63 Memorandum, Linz to Wallace, Dec. 30, 1941.

E V O L U T I O N OF T H E P B E M I U U

PRICE PLAN

ΙΟΙ

After a number of conferences among agency officials, The Metals Reserve Company announced the adoption of the Premium Price Plan on January 12, 1942, and, on the following day, O P A and O P M made a joint announcement of the plan, setting forth more of the details.54 Finally, on February 9, 1942, the O P A and the War Production Board ( W P B ) issued a joint statement of the rules and regulations that were to govern the administration of the plan. The basic principle of the plan, as finally evolved, was the payment by M R C of premiums for all over-quota production of copper, lead and zinc. These premiums, as initially announced, were 5 cents per pound for copper, and cents a pound for lead and zinc. Thus, the total return to producers for over-quota production would be 17 cents for copper, 11 cents for zinc, and 9 % cents for lead. Initial quotas were to be fixed by a joint W P B - O P A committee and were not to be raised during the operation of the plan. Consideration had at first been given to the possibility of establishing quotas on an overall company basis in order to assure that current low-cost production would be maintained before a company got premium payments for its additional high-cost output. 5 8 Indeed, the initial announcement of the plan had indicated that quotas were to be assigned on a company basis. M Many price officials believed, however, as John Sumner later pointed out, that " an over-all company quota places the enterpriser in the position of having the dollar-and-cents result of any particular mining venture contingent not only upon the given operation but also on the ability of the company elsewhere to maintain a full level of quota production. Thus the risks attendant upon operations in a particular property become associated not only with conditions there but conditions elsewhere in the company's oper54 Federal Loan Agency, Press Release, Jan. 12, 1942 (FLA 641); OPM-OPA, Press Release, Jan. 13, 1942 (PM 2160). 55 Memorandum, Auerbach and Kegan to Wallace, Jan. 23, 1942. S6OPA-OPM, Press Release, Jan. 13, 1942 (PM 2160).

102

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METALS

87

ations." O P A officials finally decided, therefore, that quotas should be assigned on the basis of a particular mine or grOup of mines, and to prevent a company from shifting its equipment and manpower from low-cost to high-cost operations in order to collect higher premiums, it was provided that companies owning two or more properties must account f o r any material decrease below quota of any one property. If it appeared that such decrease could have been avoided, the committee was authorized to combine the quotas of all the properties, and pay premiums only for that production above the total company quota. Provision was made for five types of quotas designed to include all output that could reasonably be expected at existing ceilings. These were : ( ι ) Zero quotas ; to be assigned to any property that during 1941 had no production or production less than 200 tons; ( 2 ) Intermediate quotas; to be assigned to properties having a total production in 1941 of over 200 tons but less than 600 tons; ( 3 ) 100% quotas; for those properties that produced more than 600 tons in 1941. This quota was to be equal to the property's 1941 rate of production ; (4) Special quotas less than 100% ; in special cases ; (5) Special quotas in excess 0} 100% ; these special quotas for properties that could reasonably be expected to produce more than 1941 output at established ceiling prices.88 A n informal committee was established to set the initial quotas and the plan went into operation with premium payments retroactive to February 1, 1 9 4 2 . 8 8 57 John D. Sumner, " Differential Pricing in Nonferrous Metals," Am. Econ. Rev., Supplement, Vol. 33. No. 1, March 1943. 58 OPA, Press Release, Feb. 9, 1942 (PM 2458). 50 For later developments of the Plan see below Chapter VIII.

EVOLUTION

OF T H E

PREMIUM

PRICE PLAN

IO3

SUMMARY

The formal controls established over the prices of copper, lead, and zinc were supplemented early in 1942 by the so-called Premium Price Plan. This arrangement combined differential pricing with Government subsidy payments in an attempt to encourage additional production of these non-ferrous metals without increasing the general level of metals prices. This concept of differential pricing was peculiarly suited to the mining industries because increased production of metal ores usually involves the mining of lower grades of ore and the undertaking of other high cost mining operations. Thus, wide differences exist in the costs of mining various segments of the total output. The Premium Price Plan sought to take these cost differences into consideration and yet maintain a reasonable and uniform maximum price for copper, lead, and zinc. While the policy of maintaining in production several marginal copper producers in Northern Michigan by Government purchase of their entire output contributed to the development of premium price policy, the Tri-State zinc situation resulted directly in the framing of the Premium Price Plan. In order to increase wages, hold the labor supply, and maintain current production in that area, price officials finally agreed to permit a general increase in zinc prices. They recognized, however, that in order to encourage additional production a two-price subsidy arrangement would have to be introduced. Lead prices were also increased, but such an increase was not intended to be a substitute for premium prices for additional output of lead. After Pearl Harbor, war production officials intensified their efforts to increase the supply of non-ferrous metals. A t the same time, the Premium Price Plan received renewed support from the Labor Division of W P B , the International Union of Mine, Mill, and Smelter Workers, and the Truman Committee. The Metals Reserve Company was at long last induced to finance the arrangements, and the Plan went into effect in the early months of 1942.

CHAPTER V TECHNIQUES OF METALS PRICE CONTROL A F T E R price officials had made their initial decision to to maintain prices at a given level through formal price schedules, they were faced with a series of technical problems. These problems had to do with translating their decision into a workable and understandable price regulation which would be tailored to the needs of the specific industry in question and which would, in fact, establish the maximum prices determined upon by the price controllers. The fundamental question for which the price control agency had to find an answer was this : How can a formal price schedule make it clear to buyers and sellers alike exactly what prices are established as legal maximum prices? The answer to this particular question in any particular case depended upon the nature of the commodity as well as the pricing practices followed by the industry. The situations faced by the agency in the basic metals area, however, can be generalized to illustrate the types of answers that were developed by the agency in response to this overwhelmingly important question. DOLLAHS-AND-CENTS PRICES

A common situation in the metals area was that in which (a) the commodity in question was standardized and the variius quality grades were or could be defined and generally accepted by the industry; and (b) the prices of such commodities were generally uniform either throughout the industry or within a well-defined market area. In such a situation, it was relatively easy for the price agency to establish definite maximum prices by specifying dollars-and-cents prices for listed grades of the commodity. Because of the nature of many of the metals industries and 104

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IO5

the pricing practices followed in these industries, such dollarsand-cents prices were established in most of the areas with which we are concerned. In the scrap metals area, for example, where many of the earliest price regulations were imposed, the technique of dollars-and-cents pricing was used without exception. In each of the regulations establishing maximum prices for the scrap metals, specific prices were set forth in the regulation for listed grades of scrap. 1 In addition, maximum prices for the primary non-ferrous metals as well as basic steel products were specified in dollars-and-cents terms, although in the case of steel, the prices—which were those set forth in the price lists of the U . S. Steel Corp. and its subsidiaries— were incorporated by reference rather than by direct listing. Grade and Quantity Differentials. Dollars-and-cents pricing was not, however, always as simple as this description would seem to indicate. In many of the metals industries qualitative differences or grades were well defined and accepted, but this was not always the case. In several important instances, therefore, the various grades of metal had carefully to be defined in the regulation itself. This was the case, for example, in the steel scrap regulation, Price Schedule 4, where there were included careful definitions of each of the listed grades. In adopting these listed specifications, which were based largely upon Department of Commerce recommendations, O P A pointed out that " Prior to price control, no generally established specifications analogous to specifications for finished steel products were available for iron and steel scrap," and that the establishment of such specifications was essential to the maintenance of effective price control. 2 Similar specifications were set forth in Price Schedule 20 covering copper scrap, and the various grades of brass mill scrap listed in Price Sched1 In the scrap steel regulation, this was achieved by listing the dollarsand-cents price for a " b a s e g r a d e " and specifying differentials to be added to or subtracted from the price listed for the " base grade." 2 Supplementary Statement of Considerations to R P S 4, issued Sept. i i ,

1943·

Ιθ6

THE

HISTORY

OF B A S I C

METALS

ule 12 were accompanied by brief identifying descriptions. It was not deemed necessary, however, to list specifications of various grades of aluminum, zinc, and lead scrap, although some of terms used in describing aluminum scrap were defined in the regulation. Most of the scrap and secondary metal schedules had provisions for pricing unlisted grades by applying to O P A for a price " in-line " with the prices of the listed grades. Specifications of the principal grades of the primary and secondary metals were either so well known or self-descriptive that it was not believed necessary to set them forth in the regulations governing these metals. The scrap steel regulation when originally issued provided for a differential of $2.50 a ton between unprepared and prepared grades of scrap when sold to a consumer. The regulation did not, however, fix the maximum price which dealers could pay for unprepared scrap, and, in their zeal to compete with consumers for available supplies of scrap, dealers paid such high prices for this scrap that they were allowed an inadequate preparation margin. To meet this problem and to discourage direct purchases of scrap by consumers, a practice which had many uneconomic consequences, the preparation differential in the regulation was later widened to $3.50 a ton by lowering the maximum price that consumers could pay for unprepared scrap. This made it possible for dealers to outbid consumers for available supplies of unprepared scrap and still earn an adequate preparation margin. a This action recogized, of course, that dealers performed an important economic function for which they should be adequately remunerated. A problem of a similar nature encountered by the O P A in establishing specific dollars-and-cents regulations for the metals was the problem of quantity differentials. The clearest example of the nature and purpose of such quantity differentials is to be found in the case of the provisions for less-than-carload lot [I.e.!.] sales of primary copper, lead, and zinc. In each instance, 3 Amendment 10 to Revised Price Schedule 4, effective Jan. 22, 1943.

TECHNIQUES

OF M E T A L S

PRICE

CONTROL

IO7

the base prices set forth in the regulation applied to carload sales and specific premiums were provided for l.c.l. sales designed presumably t o cover the increased costs of such small lot

sales. A

provision

similar

in purpose was included

in

Amendment ι to Price Schedule 2, effective M a y 5, 1941. T h i s provided for premiums for sales of secondary aluminum ingot in quantities of less than 30,000 pounds. In most of the scrap metals regulations, i.e., covering zinc, aluminum, copper, and brass mill scrap, quantity differentials were provided f o r another purpose. In these regulations, in which ceilings were established specifically or in effect on sales to consumers only, premiums were permitted for large quantity sales.

In the case of

the copper scrap regulation,

the office

pointed out that these premiums were included specifically t o permit a margin for the wholesale dealer, w h o was described by O P A "

as the organizing force, the prime mover of the

industry."

In this instance, as a matter of fact, the quantity

4

breakpoint beyond which a premium was permitted w a s increased from 40,000 to 60,000 pounds " to assure that only wholesale dealers will earn this premium, and that the flow of scrap will not be retarded." T h e aluminum scrap schedule, Price Schedule 2, as originally issued, provided a specific margin between the m a x i m u m prices established for sale by the initial makers of aluminum scrap and the maximum prices established for final sales to consumers. T h e return for all

intervening

middlemen w a s to come out of this mark-up. Later the regulation was amended to provide for the type of quantity differentials noted above, with maximum prices applying only to final sales to the consumer.® Similar considerations supported these quantity premiums in other scrap regulations, where ceilings applied only to consumers and, therefore, these premiums served to ensure margins for types of dealers that were essential in the distribution 4 Statement of Considerations, RPS 20, as amended May 11, 1942. 5 Ibid.

Ιθ8

THE

HISTORY

OF BASIC

METALS

of scrap. In cases where premiums were not provided, various resellers of scrap were expected to realize margins by purchasing scrap well below ceilings and reselling the scrap at or near the ceilings set forth in the regulation. · Freight charges. One of the most difficult of the " technical " problems of price control in the field of the basic metals was the problem of adapting price schedules to the complicated practices with respect to freight that were characteristic of many industries, particularly the scrap metals industries. The handling of this problem by O P A reflected the tendency for price regulations to be complicated and difficult in direct proportion to the complexities and difficulties of the industry regulated. Paradoxically, in many industries to frame a workable regulation meant in effect to frame a complex regulation. There are an infinite variety of freight practices in American industry, but most arrangements for handling the problem of freight charges are based either upon a system of f.o.b. (free on board) prices, i.e., shipping point prices, or upon a system of delivered prices. When prices are quoted on an f.o.b. basis, the purchaser pays the freight charges ; under a delivered price system the seller pays the freight charges. Delivered prices may be uniform within a specified geographical area, or they may be figured by adding actual freight charges to the shipping point price, or they may be determined by adding freight charges to a so-called basing point price. The basing point system of pricing, which is very common in the metals area, is a system by which prices are quoted at one or more specified basing points and delivered prices are computed by adding freight charges to the prices at the nearest β It is interesting to note that this principle was applied by OPA in other commodity areas stich as lumber but in no other instance did it have the success that it did in the scrap metals. The typical experience in other areas was that sellers whose prices were covered by the regulation so bid up the exempted prices of their suppliers that they were able to earn only negligible margins and applied to OPA for price relief, which OPA was forced to grant because of the necessity of maintaining the production of essential supplies.

TECHNIQUES

OF

METALS

PRICE

CONTROL

IOÇ

basing point without reference to the actual shipping point. T h u s where Point A is the nearest accepted basing point, a buyer at Point Β pays the freight from A to B, although the material may actually be shipped from Point C. This system assures the uniformity of delivered prices at Point Β regardless of the origin of the material, and some sellers, therefore, absorb a portion of the actual freight charges and some buyers pay " phantom " freight charges. This system came increasingly under the attack of the Federal Trade Commission and the courts in the last years of the New Deal, but the O P A recognized the system in its regulations when it was the accepted trade practice of a given industry. A t the same time, O P A took pains to point out that this de jacto recognition did not imply any approval or disapproval of the system. 7 In many of the primary metals industries pricing practices with respect to freight charges were so well established that regulation presented no unusual difficulties. In the copper industry, for example, prices are generally quoted on the basis of electrolytic copper delivered at Connecticut Valley points. Prices at other points are determined on the basis of accepted freight differentials. So-called Lake Copper is priced in a slightly different w a y ; but all of these pricing practices were embodied in Price Schedule 15. Pricing of zinc was a little more complicated, but only because of the complicated trade practices of the zinc industry. In the schedule regulating the prices of zinc, it was necessary to include both f.o.b. and delivered pricing provisions in the same regulation. The basic grade of zinc, i.e., Prime Western Zinc, was given a price of 8}4 c. at the basing point of E. St. Louis, but high grade zinc was priced at c. delivered anywhere in the United States. Lead was priced on the basis of an intricate multiple-basing point system " by which delivered carload prices at various points are equalized with the price at New Y o r k in respect to 7 See introductory section of Price Schedule 6, Iron and Steel Products, issued April 17, 1941.

IIO

THE

HISTORY

OF B A S I C

METALS

such difference as there might be between the freight cost from the smelter to New York and from the smelter to the delivery point." 8 Prices of secondary aluminum ingot were first established on an f.o.b. shipping point basis but were later changed to a modified " carload freight allowed " basis to bring them in line with primary aluminum prices. 9 As far as the problem of industry acceptance of price regulation was concerned, however, the point to be noted is that these pricing practices were customary and familiar in the trade and therefore the regulation imposed on the industry was not arbitrary in form, although many sellers doubtless believed it was arbitrary in substance. The pricing system in the steel industry, i.e., a multiplebasing point system, was in essence a more complex type of pricing arrangement, but industry practice in this respect was again so well established that the problem of regulation was not in itself difficult or complex. The demands of war, however, resulted in some changes in the customary pattern of production and distribution of steel mill products, and these changes were reflected in specific provisions of the steel regulation. For example, producers who were required by the exigencies of the war to ship their products " into areas not normally served by such producer(s)," or required to absorb " abnormally high transportation costs resulting from lack of customary means of transportation," were permitted to apply for an exception from the ceiling prices established by the schedule. 10 The problem of freight charges in the scrap metals was complicated not only by the difficulties inherent in the pricing structure of the industry, but also by the shifts in patterns of distribution brought about by the war. This is nowhere better 8 Memorandum quoted in speech by Karl Anderson on Geographical Problems delivered before the O P A Training Program for Price, Feb. 4, 1943, and reprinted in O P A , A Manual of Price Control, Wash., 1943, p. 184. 9 R P S 2, as amended, effective August 14, 1942. See below Chapter IX. 10 Added to R P S 6 by Amendment 2, effective March 25, 1942.

TECHNIQUES

OF

METALS

PRICE

CONTROL

III

demonstrated than in the attempt of the O P A to draw up and administer a workable regulation establishing maximum prices for iron and steel scrap. W h e n P S 4, Iron and Steel Scrap, was originally issued, it provided a system of zone delivered prices based presumably on existing practices in the trade. T h i s system of pricing provided for 13 zones in each of which were established uniform delivered prices. T h i s system of pricing was abandoned early in the history of the schedule because it resulted in a situation in which many consumers were unable to get supplies of scrap. Since in each of these zones, the delivered prices included freight charges which were absorbed by the scrap dealers, it was advantageous to such dealers to sell their scrap to the nearest consumers. Consumers located at some distance from the dealers were, because of the general shortage of scrap and the absence of allocation, thus deprived of essential supplies. On M a y ó, 1941, the Office changed the schedule and tried to alleviate this situation by establishing 34 consuming points in place of the original 13, and by permitting consumers located outside these consuming points to pay as much as a dollar a gross ton more than a consumer at the nearest consuming point. 1 1 T h e problem of assuring adequate supplies to certain consumers still persisted, however, and on June 18, 1941, further changes were made in the regulation to facilitate the flow of scrap to consuming mills. First of all, provision was made for computing maximum shipping point prices. T o figure such shipping point prices, the dealer subtracted from the nearest basing point price (freight-wise) the lowest established transportation charges from the shipping point to the basing point. Maximum delivered prices could then be computed by adding to the shipping point price the established transportation charges from the shipping point to the point 11 Price Schedule No. 4, Revised, effective May 6, 1941. (OPA, Press Release, PM 375).

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THE

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OF BASIC

METALS

of delivery. However, at the same time, a so-called " springboard limitation" on maximum delivered prices was established which provided that such prices could not exceed by more than one dollar a ton the listed basing point price at the basing point nearest in terms of transportation charges the consumer's plant. This amendment also provided that consumers could apply to the O P A for permission to absorb additional freight charges in order to secure so-called remote scrap, which was defined as " scrap located beyond the zone from which the railroad freight rate to Pittsburg is $ 1 1 . 2 0 . " u In September 1941, further steps were undertaken to tap supplies of " remote scrap " by providing for higher shipping point prices for scrap originating in such distant areas as Florida and the Mountain States, and by stipulating that the maximum price of any grade of " remote scrap " delivered to the plant of a consumer could be $5.00 a ton above the top delivered price which the consumer had heretofore been permitted to pay. 1 3 While additional exceptions to the" springboard limitation " were later added to the regulation and while some details of the pricing methods were later changed to some extent, the scrap schedule remained in this essential form until 1944. The effect of these changes in the initial pricing methods was two-fold. It made the maximum shipping point price for any dealer independent of the consumer to whom he shipped, and it enlarged the area upon which consumers could draw for their scrap supplies. At the same time, the " springboard limitations " together with certain restrictions on the use of specified grades of scrap " served as one of the instruments of allocation since (these) restrictions . . . have prevented widespread raiding of either geographical markets or markets for 12 Amendment of Price Schedule 4, effective June 18, 1941. (OPA Press Release, PM 572). 13 Price Schedule No. 4, amended August 8, 1941 (OPA Press Release,

PM 887).

TECHNIQUES

OF M E T A L S P B I C E C O N T R O L

II3

special grades of scrap by consumers in need. This feature . . . (was) of great assistance to the War Production Board which at no time has allocated the entire available supply of iron and steel scrap." 14 Some of these limitations were eliminated in 1944 when supply conditions seemed to have eased.1* Freight problems were not as complex in other scrap metals regulations. The copper scrap regulation, however, was originally issued on the basis of uniform delivered prices and then within several months was amended to provide for shipping point prices so that buyers distant from sources of supply would be on an equal footing in acquiring necessary supplies.1* In the aluminum scrap schedule nationwide maximum prices were established for most grades on an f.o.b. point of shipment basis, although a few grades were given maximum delivered prices. A t the same time, provision was made for delivery charges to be added to the listed f.o.b. prices. Such delivery charges were defined as the actual transportation charges if the scrap was delivered by public carrier. In cases where the scrap was delivered by private carrier—not owned or controlled by the buyer—permitted delivery charges were listed in a table included in the regulation. Initially, the regulation had provided simply that such private carrier delivery charges were not to exceed " the lowest available commercial transportation rate," but after a study of such rates, O P A amended the regulation to include a specific schedule of delivery charges. " The same provisions with respect to delivery charges, together with a table of specified delivery rates also appeared in the other non-ferrous scrap regulations. 14 Statement of Considerations, Amendment 1, to M P R 4, issued Nov. 11,

1944. 15 Ibid. 16 Amendment to P S 20, effective Oct. 11, 1941 ( O P A , Press Release, P M 1349)· 17 Amendment 4 to R P S 2, issued July 17, 1942.

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THE

HISTORY

OF BASIC

T H E FREEZE-FORMULA

METALS

TECHNIQUE

A s we have seen, in most areas of the basic metals, grades and prices had such a degree of uniformity that it was possible f o r the O P A to establish maximum priccs on a specific dollarsand-cents basis. Such a method of price regulation was clearly unsuited to any situation in which prices charged by the sellers either were not uniform and could not readily be made uniform, or could not be grouped into clearly defined differential categories. Dollars-and-cents pricing techniques could not, for example, be adapted to many types of castings. T o meet such situations, the Office devised several techniques of price control which in effect provided methods by which individual sellers could establish their own maximum prices with reference either to past prices charged by them f o r particular commodities or to a pricing formula set forth in the regulation. T h e simplest of such methods froze the prices charged by each producer on a specified date in the past, and generally maintained freight charges and other terms of sale in effect on the so-called base date. In almost every case, such a " freeze " of prices had to be supplemented by a " formula " with which producers could figure maximum prices for new goods, or for types of products that were not being sold by the producer on the base date. A s we have pointed out, O P A had to adopt such pricing techniques in some areas of metal castings where conditions did not always permit the establishment of specific dollarsand-cents prices. R P S 4 1 , Steel Castings, for example, established dollars-and-cents maximum prices for " armor, navy, ordnance, ship and marine castings," and for certain types of industrial castings, on the basis of price lists in effect in the industry in 1941 and either incorporated by reference or actually embodied in the regulation. With some exceptions, the maximum prices for certain other types of industrial castings " made by such producer on or before J u l y 1 5 , 1 9 4 1 , or f o r steel castings substantially similar in design and specifica-

TECHNIQUES

OF M E T A L S

PRICE CONTROL

115

tion thereto shall be the prices, together with extras, terms and conditions, which were or customarily would have been charged by such producer on July 15, 1941." For steel castings that could not be priced under preceding provisions, manufacturers were to apply to O P A for a maximum price based on cost factors or profit margins in effect between October ι - ι 5, 1941, or currently in effect " i n the case of a producer who was not customarily reproducing steel castings in that period." M P R 214, High Alloy Castings, and M P R 235, Manganese Steel Castings, had similar pricing methods while the Malleable Iron Castings Regulation, M P R 241, provided a freeze at October 1 -15, 1941, levels for castings that were manufactured in that period. For other castings, a formula was set forth in the regulation by which the seller himself could figure his maximum price. The formula directed the manufacturer to use the pricing method in effect on October 15, 1941, employing labor cost, material cost, and margin factors generally prevailing on October 15, 1941, and employing overhead rates in effect in the first six months of 1942. 1 8 Such prices and pricing factors had to be filed with the O P A . M P R 244, Gray Iron Castings, provided for a freeze of prices prevailing between August 1, 1941, and February 1, 1942, and in addition provided a formula based on the pricing methods and factors prevailing on February 1, 1942. The regulation was amended shortly after its issuance to provide that foundries with annual net sales of $40,000 or less were exempted from price control. This exemption was permitted because, on the basis of the small proportion of total sales accounted for by this group, O P A did not believe that the effects of exemption would be inflationary, and because in this group of small foundries were most of the marginal concerns in the industry who had no adequate cost records and who 18 F o r a discussion of the reasoning underlying this pricing method, see Statement of Considerations, M P R 241, issued Oct. 16, 1942.

Il6

THE

BISTORY

OF B A S I C

METALS

could not be expected to comply with the formula provisions of the regulations. u Similar pricing techniques were used to established maximum prices for non-ferrous castings. Prices were frozen at October 1-15, 1941, levels and a formula was provided based on October 15, 1941, cost and margin factors. 20 When these castings prices were later reduced because of reduced ingot prices, the formula was revised to reflect current, i.e., lower than October 1-15, 1941, material costs. 21 A t the time of these price reductions, the regulation was also amended to exempt foundries whose sales of castings were less than $50,000 a year—for reasons similar to the reasons adduced to support the exemption of small gray iron foundries. The freeze-formula technique had serious limitations which it was difficult to avoid. Perhaps the most serious of these limitations involved the fact that pricing formulas, while generally based on pricing factors in effect during the base period, usually resulted in prices somewhat higher than prices specifically frozen by the regulation. There were several reasons for this : ( ι ) Frozen prices might already have been in effect for several years previous to the base period of the regulation. Under these circumstances, prices computed on base period pricing factors would normally be higher than frozen prices; ( 2 ) W h i l e wage rates used in formula pricing were generally limited to base period levels, hours of work could be computed on a current basis. Labor inefficiencies were thus reflected in higher current prices, especially in those cases where manufacturing overhead was determined on the basis of labor costs ; ( 3 ) It was more difficult to check formula prices than frozen prices, and in some cases pricing formulas were applied with something less than care and honesty. 19 Statement of Considerations, Amendment 2, to MPR 244, effective Dec. 26, 1943. 30 MPR 125, issued April 28, 1942. 21 Revised MPR 12s. issued January 27, 1943.

TECHNIQUES

OF U E T A L S

PRICE

CONTROL

II7

In the castings industry, certain patterns of castings had their prices frozen as of a specific base period in the past, or on the basis of price lists in effect in such a base period. Other patterns, however, often scarcely distinguished from the first, had their maximum prices established on the basis of pricing formulas, which frequently resulted in higher prices. One result of this was a phenomenon known in the trade as pattern shifting. In order to gain higher prices, foundries made every effort to manufacture and sell as many " formula " castings as possible in preference to the " frozen " castings. Thus, the general level of castings prices certainly increased without any specific permissive action based on O P A ' s policies. Some of the problems that arose out of this situation are dealt with in Chapter I X . ENFORCEMENT AND PRICE CONTROL

TECHNIQUES

While it is not our intention to undertake an investigation of all the enforcement problems of the metal schedules, we should take this occasion to point out the relationship that existed between some of these enforcement problems and the nature of the techniques adopted by the price control agency. Successful compliance and enforcement depended upon the ability of both buyer and seller to determine the exact maximum price and upon the ability of the investigator readily to check the actual price charged against the legal maximum set forth in the regulation. Obviously, therefore, specific dollars-and-cents prices for listed grades offered the best opportunity of effective enforcement. A s the head of O P A ' s Enforcement Department remarked, " A dollars-and-cents regulation is the ideal that enforcement attorneys dream about." M On the other hand, freeze regulations were very difficult to enforce unless reliable, full, adequate business records existed and were available to enforcement personnel. Further, maxi22 Thomas I. Emerson, Speech on Enforcement given before O P A ' s Training P r o g r a m for Price, March 15, 1943; reprinted in O P A , A Manual of Price Control, Washington, 1943.

Il8

THE

HISTORY

OF B A S I C

METALS

mum prices which were based on rather complicated pricing formulas were very difficult to enforce and depended for their effectiveness in large measure upon the willingness of the firms to cooperate with the intent of the price regulation. In the metals area, as we have seen, most of the regulations were of a dollars-and-eents character. W e would expect, therefore, a high degree of enforcement and compliance in that area. There were, however, other considerations of equal importance in determining the degree of enforcement that could reasonably be expected in a commodity area. Perhaps the most important consideration was the number of sellers and buyers, and the degree of market control exercised by these sellers or buyers independently of governmental regulation. In the steel industry, for example, where there were a limited number of sellers, all of whom were accustomed to follow the price leadership of United States Steel Corporation, the possibilities of widespread evasion were limited, although there was some room for hidden price increases through changes in extras and other variable charges. There was even less room for evasion in such areas as the basic non-ferrous metals where there were also relatively few sellers and where grades of the commodity sold and the pricing practices followed in the trade were probably standardized to even a greater extent than in the area of steel mill products. In the scrap metals area, however, although price controls were established on the basis of dollars-and-cents prices with detailed and elaborate specifications, there were a large number of sellers accustomed to carrying on their business under extremely competitive and indeed almost cut-throat conditions. This combined with the severe shortage of scrap and the often inadequate allocation policies followed by the W a r Production Board made violations ot the scrap schedules almost unavoidable. From February n to April 30, 1942, a period of the earliest operations under the Act and a period in which the enforcement activities of the agency consisted almost entirely

T E C H N I Q U E S OF M E T A L S P R I C E C O N T R O L

119

of investigating complaints of violations, over 3 3 0 complaints were received concerning the iron and steel scrap regulation alone. 28 In the period, May-July 1942, 323 additional complaints were received and over a dozen civil and criminal actions were instituted by the office for violations of the iron and steel regulation. 24 T o deal more readily with violations in the scrap and waste materials field, the licensing provisions of the Emergency Price Control Act were made effective in this area by the issuance of Supplementary Order No. 5, effective May 30, 1942. This Order automatically licensed all dealers in waste and scrap materials and required them to register with the Office of Price Administration. Under the provisions of this Order, the Administrator could issue license warnings in the case of violations. It is significant to note that the first license warning issued under this Order was a warning to a violator of Price Schedule 4, Iron and Steel Scrap. 28 Thus the mere fact that a commodity was covered by a dollars-and-cents regulation did not always make the enforcement problem less difficult, if the nature of the industry and the competitive conditions therein were such as to lead to violations. On the other hand, the formula pricing techniques in the gray iron castings regulation certainly contributed to the necessity of an enforcement campaign in that area which was inaugurated early in 1 9 4 5 . 2 9 In spite of the existence of many problems of enforcement in the field of the basic metals, which under ideal conditions would have absorbed the attention of many of the enforcement staff, these problems did not compare in magnitude and importance nor did they have the dramatic significance of the black market in gasoline and meat, or even the widespread 23 OPA, First Quarterly Report, p. 77. 24 OPA, Second Quarterly Report, p. 54. 25 OPA, Press Release, July 24, 1942 (OPA 363). 2β OPA, Thirteenth Quarterly Report, p. 64.

I20

THE

HISTORY

OF BASIC

METALS

violations of the wastepaper schedule. T h u s with a limited enforcement staff, the enforcement problems of the metals regulations were often neglected. A t the same time, there is little evidence that violations even of the scrap metals regulations were so persistent or widespread as to threaten in any significant degree the maintenance of price stability in the metals area. SUMMARY

In those areas of the metals where commodities were standardized and prices uniform, price officials could establish specific dollars and-cents maximum prices, a technique of price control that was the easiest to understand and often contributed to the highest degree of enforcement. The chief problems associated with this technique were: ( i ) the establishment of grades and grade differentials designed to give precision to ceiling pr tes and preserve normal price relationships among grades; ( 2 ) the provision of quantity differentials and premiums, primarily for the purpose of preserving dealers' margins in the scrap metal industries; and ( 3 ) the framing of freight charges provisions that would accurately mirror industrial practices in this respect. T h e freeze-formula technique was especially adapted to the pricing of ferrous and non-ferrous castings, but the disparity between the prices of frozen castings and the prices of formula castings led to the problem of pattern shifting which had a serious effect on price stability. The problem of enforcement was related to techniques of price control because dollars-and-cents prices were generally more easily enforced than formula prices. Other considerations, however, such as the number of sellers involved and the degree of price leadership exercised in the industry, were probably more important than pricing techniques in determining the degree of enforcement achieved.

CHAPTER VI STANDARDS OF PRICE ACTION (1) WE have had occasion to review the steps by which the Office of Price Administration and its predecessor agencies tried to maintain price stability in the basic metals during a period of expanding defense activity and rising national income. These steps culminated in the establishment of formal price schedules which after the passage of the Emergency Price Control Act in January 1942 had the force of law. Many problems of price administration were concerned with translating into the terms of a specific regulation the determination to stabilize prices of a given commodity at a given level. From many points of view, however, the most important problem of price administration was the crucial question of determining the conditions under which changes should be made in the level of prices initially established. LEGAL

BACKGROUND

Emergency Price Control Act of 1942. While the price office undertook a great deal of action operating solely under executive authority, drafts of proposed price legislation were available to the staff from the early months of 1941, and the earliest formal standards of the office were generally based upon such legislative proposals. W e may, therefore, begin our discussion of standards for price action with an analysis of the Emergency Price Control Act of 1942. 1 On July 30, 1941, the President transmitted a request for price legislation to Congress. He pointed out that inflationary price increases were threatening to undermine the nation's defense effort, and that legislation was needed to check such a 1 Henderson was very proud of the fact that this price legislation contained standards to which the agency's actions had to conform. This was not the case in Great Britain, Canada, or Australia. See National W a r Labor Board, Executive Meeting (with Mr. Leon Henderson) Transcript, Feb. 6, 1942.

121

122

THE

HISTORY

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METALS

2

development. On August ι , administration leaders introduced a bill embodying such legislation, and after long hearings before the House and Senate Banking and Currency Committees, the bill was passed and became law on January 30, 1942. 8 The Emergency Price Control Act of 1942 empowered the Administrator to establish ceiling prices whenever, in his judgment, " the price or prices of a commodity or commodities have risen or threaten to rise to an extent or in a manner inconsistent with the purposes of this Act." Apart from the special provisions of the Act relating to agricultural prices, this authority was limited in several ways : ( 1 ) ceilings must be " generally fair and equitable to buyers and sellers," and must " effectuate the purposes of this A c t " ; ( 2 ) in establishing maximum prices, the Administrator was directed " so far as practicable," to " ascertain and give due consideration to the prices prevailing between October 1 and October 15, 1 9 4 1 , " adjusted for factors of general applicability such as general increases or decreases in costs and profits; and ( 3 ) each regulation establishing ceiling prices must be accompanied by a " statement of the considerations involved in the issuance of such regulation or order." Section 2 (c) provided that regulations " may be established in such form and manner, may contain such classifications and differentials, and may provide for such adjustments and reasonable exceptions, as in the judgment of the Administrator are necessary or proper in order to effectuate the purposes of this Act." In addition, the Act gave the Administrator the power to buy and sell commodities or make subsidy payments if necessary to obtain the maximum necessary production of any commodity. This power, however, was delegated by the Act to the Federal Loan Administrator in the case of any strategic 277th Cong., ist Seat., H o u s e Document 332, " M e s s a g e from t h e President of the United States T r a n s m i t t i n g Request for Legislation Stabilizing the Prices of Various Commodities and Rentals." 3 Pub. L 421, 77th Cong., 2d Sess., Jan. 30, 1942.

S T A N D A R D S OF PRICE

ACTION

(i)

123

or critical material as defined by the President. This section of the Act has relevance to the problem of standards for price action because it expressed the intent of Congress and the policy of the office to use subsidies or government purchasing arrangements rather than price increases to obtain the necessary supply of a given commodity. This provision probably had its origin in the difficulties that the office experienced in persuading Jesse Jones to accept the principle of differential pricing in the metals field. It represented a limited victory for the price control officials because while Jones, as Federal Loan Administrator, continued to have authority over " strategic and critical " commodities, the principle of differential pricing and subsidies was at last recognized in legislation. Early in 1941, drafts of the price control legislation had been prepared and circulated for discussion in the price agency, so that long before the price bill became law price officials were familiar with the basic principles later to be formally incorporated in legislation, and were able to develop standards of price action that were well adapted to the statutory requirements of a later date.4 A s early as the spring of 1941, price officials were in general agreement that at least one measure of the fairness of maximum prices was the comparison of current industry earnings with earnings during the years 1936-1939. Incidentally, this early agreement was indicated in a study of the iron and steel industry undertaken to determine whether or not it was necessary to increase the prices established under Price Schedule 6 . 5 In the summer of 1941, Leon Henderson and Donald Nelson, writing in the Harvard Business Review, stated that business should absorb cost increases as long as profits are reasonable, and argued that " the only feasible basis for defining reasonable profits," is to use " average rates of return on 4 See, for example, N D A C , P r i c e Stabilization Division, Legal Section, Emergency P r i c e Control Act of 1941, D r a f t # 1, M a r . 22, 1941. δ O P A C S , " Proposed S t u d y of t h e I r o n and Steel Industry U n d e r P . S. 6," Washington, D . C-, M a y 8, 1941.

124

T H E

HISTORY

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METALS

investment in the industry over a period of y e a r s . " · T h i s idea w a s modified and combined with a cost standard in a statement circulated to the staff of the price division in November 1941. T h i s statement, which w a s d r a w n up largely by Joel Dean, Herbert T a g g a r t , Richard Gilbert, and Kenneth Galb r a i t h , 7 set forth standards for price action which, with a few changes, remained the basic criteria for the operations of the office for most of its history. T h i s statement emphasized the importance of differential pricing and argued that whenever a price was increased to induce increased output such a price increase should be contingent upon the production of a specified quantity of material in a specified time. In dealing with the question of fair and equitable prices, the statement read: A ceiling price is fair and equitable if, for producers producing the bulk of the output, it ( i ) covers the direct costs of production, including transportation, and ( 2 ) allows a reasonable overall profit on total operations. Direct costs are those directly attributable to the production or distribution or both of the commodity ; that is, those costs which would not be incurred if the production of the commodity were reduced. . . . A s a general rule, profits are reasonable if they are equal to or greater than the dollar profits earned on the average in the base period 1936-1939 (this being the base period under the excess profits t a x ) plus an allowance of 7 per cent on any change in invested capital since the base period. . . . When the greater part (i. e. more than 50 per cent) of the output of the commodity is produced by firms earning reasonable profits, profits for the industry are deemed reasonable. The position of the other firms does not affect the determination of reasonableness, although it may call for treatment in other ways in order that the purposes of the Act may be effectuated. 8 β Leon Henderson and Donald Nelson, " Prices, Profits and Government," Harvard Business Revine, Vol. XIX, No. 4 (Summer 1941), pp. 389-404. 7 Price Division Staff Meeting Reports; Monday, Oct. 27, 1941. 8 Memorandum, Richard Gilbert, Head, Research Section to Staff of Price Division Nov. 10, 1941.

S T A N D A R D S OF

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125

T h i s early statement also dealt briefly with the problem of determining fair prices in an industry of materially diminished output, and indicated that under such conditions the office would not have t o restore normal base period earnings but could devise some other standard consistent with the purpose of the A c t . A l s o in N o v e m b e r 1 9 4 1 , there was circulated a m o n g the staff a " M e m o r a n d u m on the Preparation of Statements of Consideration," which set forth the legal basis f o r price action under the proposed legislation. T h i s memorandum w a s v e r y similar t o earlier statements of price policy, but definitely tied economic policy to the legal standards of the A c t . It confirmed the propriety of the use of the years 1 9 3 6 - 1 9 3 9 as a base period for fair profits and the use of a direct costs standard for the determination of an equitable price. · T h e interpretation of the phrase " generally fair and equitable " given by price officials in these early memoranda w a s explicitly confirmed by Congress. In the report accompanying the Senate version of the E m e r g e n c y Price Control A c t of 1942, the Senate B a n k i n g and Currency Committee said : Because of the legislative nature of regulations establishing maximum prices, applying to large number of sellers, the bill does not guarantee a profit to each individual seller. It requires instead that such prices be generally fair and equitable as applied to sellers responsible for the major part of the output of any commodity, as to such sellers it is the effect of the maximum price upon their overall operations as business units that must be considered. A s for other sellers, the A d ministrator is authorized to establish price differentials . . . or to buy up their production at a higher price . . . if such action is necessary or appropriate to carry out the purposes of the bill. 10 9 " Preparation of Statements of Consideration Involved in the Issuance of Price Ceiling Regulations" (Nov. 1941). 10 77th Cong., 2d Sess., Senate Banking and Currency Committee, Report No. 504, Jan. 2, 1942.

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THE

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METALS

A f t e r the passage of the bill, these criteria were given further confirmation

by

officials

in

the

legal division, 1 1 and they

served as a general guide to price action in the agency for some months. The Stabilization

Act. In October 1942, Congress, respond-

ing to the demands of the Administration for more adequate anti-inflationary legislation, enacted the so-called Stabilization A c t , which, a m o n g other things, authorized and directed the President to stabilize prices, wages, and salaries affecting the cost-of-living as far as practicable at September

15,

1942,

levels. It also provided that the President might, with certain exceptions, make adjustments in w a g e s , prices, and salaries " t o aid in the effective prosecution of the w a r and to correct gross inequities." 1 2 O n October 3, 1942, the day after the Stabilization A c t . became law, the President issued E x e c u t i v e O r d e r 9250, which set up an Office of Economic Stabilization w i t h authority to establish a policy to carry out the purposes of the Stabilization A c t , and which in effect delegated to the Price Administrator the President's power to make price adjustments of the character described. A t the same time, this E x e c u t i v e O r d e r directed the Price Administrator " in reducing or increasing prices . . .

fixing,

to determine price ceilings

in a manner that profits are prevented which in his j u d g ment are unreasonable or exorbitant."

13

A s interpreted by the O P A , this A c t and the accompanying E x e c u t i v e Order made no change in the original price control legislation with respect to the mandatory

requirements of the

E m e r g e n c y Price Control A c t (except as to agricultural commodities which are not here under discussion). T h a t is, no change w a s made in the requirement that the office establish and maintain " generally fair and equitable " prices. T h e S t a b ilization A c t did, however, place new limitations upon 11 Memorandum, Ginsburg to Chief Legal Advisers, Jan. 30, 1942. 12 Pub. L. 421, 77th Congress, 2d Sess., Oct. 2, 1942. 13 E. O. 9250, issued Oct. 3. 1942.

the

S T A N D A R D S OF P R I C E A C T I O N

(i)

12J

discretionary authority of the Administrator to increase prices above the minimum requirements of the law when he deemed it desirable to " effectuate the purposes of the Act," i.e., " to assist in securing adequate production of commodities and facilities." Under the Stabilization Act and the accompanying Executive Order, discretion to permit increases in " prices affecting the cost-of-living " was confined to cases in which the increase was found to be necessary either ( a ) to correct a gross inequity or (b) to aid in the effective presecution of the war. 1 4 The " Hold-the-line " Order. In spite of the Stabilization Act of October 2, 1942, inflationary pressures continued to grow, and James F. Byrnes, Director of Economic Stabilization, moved to place further restrictions on price and wage increases. On February 3, 1943, Byrnes wrote to Prentiss Brown, Administrator of O P A , and requested him " not to approve any increase in general price ceilings without first advising me." He made the same request to the War Labor Board with respect to increases in general wage rates. 1 6 On February 9, Byrnes made a radio address in which he said that there must be no further price increases except as required by law to meet clearly established cost increases which could not be generally absorbed out of profits; that all food prices should be brought under effective control; and that prices should be reduced whenever exorbitant profits appeared. 1β On April 8, 1943, presumably at the request of Byrnes, the President issued his famous " hold-the-line " order, Executive Order 9328. This order implemented the policy set forth 14 " Memorandum on Certain Questions of Construction of the Emergency Price Control Act of 1943 and of the Stabilization Act of Oct. a, 1942," by Richard H . Field, General Counsel, and Henry M. Hart, Jr., Associate General Counsel of O P A (May 1, 1944). 15 Letter Byrnes to Brown, Feb. 13, 1943. 16 New York Times, Feb. 10, 1943. See also letter from Brown to Brynes, Feb. ir, 1943·

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THE

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METALS

in Byrnes' radio address, and limited the discretionary powers of both OPA and WLB. It directed the Price Administrator to place ceiling prices on all cost-of-living items ; to authorize no further increases in ceiling prices " except to the minimum extent required by law ", to use all his discretionary powers to prevent further price increases either direct or indirect; to prevent profiteering ; and to reduce prices which were " excessively high, unfair or inequitable." However, the order added that "Nothing herein shall be construed to prevent... the Price Administrator. . . from making such readjustments in price relationships appropriate for various commodities . . . provided that such action does not increase the cost of living." (emphasis supplied) 17 On the basis of this language, agency attorneys argued that the Price Administrator retained the discretionary authority to permit increases consistent with the Stabilization Act where such action would not increase the cost of living. In cases where such action would increase the cost of living, this discretionary authority now rested with the Director of Economic Stabilization.18 The essential changes in the original price control act made by the Stabilization Act and the hold-the-line order have been well summarized by Henry M. Hart, Jr., in testimony before the House Banking and Currency Committee: The Stabilization Act modified the original Act to the exextent . . . of limiting discretionary increases to correct gross inequities or to aid in the effective prosecution of the war . . . It provided for a finding by the President that the discretionary increases was necessary, or by the President's delegate, since it provided that the powers given to the President might be delegated to an existing agency. In Executive Order 9250, the President made a general delegation . . . of that power to make those two discretionary findings to the Price Administrator . . . That delegation, however, was, in 17 Executive Order 9328, issued April 8, 1943. 18 Field and H a r t Memorandum, op. cit.

STANDARDS

OF

PRICE

ACTION

(i)

12Ç

part, withdrawn by Executive Order 9328, the so-called holdthe-line order of April 8. There it was provided that the Price Administrator might grant such discretionary increases only in cases where the action did not increase the cost of living. Where the action did increase the cost of living, the discretionary authority was withdrawn from the Price Administrator and placed in the Economic Stabilization Director.1· It was not until after the issuance of the " hold-the-line " order that price officials developed detailed criteria as a guide to operations. Such action was particularly urgent because of the limitations upon O P A action set forth in the Executive Order. Specifically, that section of the order authorizing the O P A to make no further increases in ceiling prices affecting the cost of living " except to the minimum extent required by law," made necessary the issuance of appropriate operating instructions for the office. It was not, however, until September 13, 1943, that a definite price operating instruction was finally issued which set forth applicable criteria. 20 This September 13 statement of policy entitled a " Tentative Summary of Price Policy," equated the term " general fairness and equity " with the term " minimum requirements of law," and provided two standards for the determination of such fairness and equity: ( 1 ) an earnings standard; and (2) a product standard. Under the first of such standards it was stated that " a price increase is ordinarily required by law when it is necessary in order to provide the industry as a whole with aggregate returns before taxes fairly approximating those received during a representative peacetime period ( 19361939), adjusted for subsequent changes in investment." The product standard provided that, in multiple product industries, generally fair and equitable prices for a particular product 19 78th Cong., 2d Sess., House Committee on Banking and Currency, Hearings on the Extension of the Emergency P r i c e Control Act, Vol. I I , May 8-19, 1944, p. 2238. 20 Memorandum, Brownlee to All P r i c e Officials and Attorneys, " T h e attached Tentative Summary of P r i c e Policy," Sept. 13, 1943.

130

THE

HISTORY

OF

BASIC

METALS

must cover " the highest factory costs of producing that product incurred by any of the lowest cost sellers who together account for three quarters of its current output." 21 This "Tentative Summary of Price Policy," also pointed out that prices which met the minimum requirements of law could nevertheless in O P A ' s discretion be increased to assist in securing the essential amount of supply of a commodity or service. The statement directed price officials to explore " the availability of direct production controls" before recommending such an increase, and directed them to take no price action above the minimum requirements of law to secure additional supply " until an official determination of the essential amount of the supply has been secured from the Federal agency responsible for the supply of the commodity or service in question." In those cases in which a price increase was deemed necessary, it was directed that, " T h e upper limit to such an increase is ordinarily the price necessary to cover the total unit costs of the highest cost sellers whose supply is needed for the total essential output." A n y increases above this amount were to be granted only if conpensatory decreases were made in the prices of commodities sold by the same sellers. 2 2 THE

EARNINGS

STANDARD

The so-called earnings standard, by which the claim of an industry to a price increase was measured in terms of the current earnings of the industry as compared with the industry's earnings during the years 1936-1939, adjusted for changes in invested capital since that date, was the basic standard by which O P A determined whether maximum prices established by the office remained " generally fair and equitable." While the principle was not a difficult one to understand, its application involved a number of difficult questions of interpretation and administration. 21 Ibid., pp. 5, 7· 22 Ibid., p. 7·

S T A N D A R D S OF

1936-1939

PRICE

ACTION

as the base period.—To

(i)

I3I

begin with, the choice

of 1936-1939 as a representative base period w a s challenged both as a general proposition and as it related specifically t o particular industries. O P A had chosen these years because it w a s the period immediately preceding the outbreak of the w a r in Europe, because it was the period chosen by Congress as a representative peacetime period in the excess profits t a x law, a n d because it w a s a period that, for industry generally, represented

average peacetime conditions.

23

T h e choice of

these

years together with the earnings standard as a whole were upheld by the Emergency Court of Appeals in several significant decisions.

24

Congress,

Further, the earnings standard w a s explained to and

since

Congress did not act

to change

the

standard or the applicable base period it could be assumed that C o n g r e s s implicitly approved of their use.

28

In spite of the fact that the general validity of the use of the 1936-1939 base period w a s upheld by Congress and the Courts, a number of industries attacked its validity when the earnings standard w a s applied to them, and sometimes O P A made exceptions to the use of this base period when urged to do so by the industry concerned. L a t e in 1943, for example, OPA

granted price increases to M i d - W e s t e r n producers of

by-product

coke,

and

argued

that " A l t h o u g h the average

earnings for the period 1 9 3 6 - 1 9 3 9 ordinarily are used as a test of the general fairness of ( s i c ) equitableness of the m a x i m u m prices for a particular commodity, this standard was deemed inappropriate for the merchant by-product coke industry

in

the M i d - W e s t because of the abnormally low return obtained in 1938 and 1939." Therefore, O P A

determined

upon

the

23 Field and Hart Memorandum, op. cit. 24 Madison Park Corp. v. Bowles, 140 F. (2d.) 316 (1943), and Gillespie-Rogers-Pyatl Co., Inc. et al. ι·. Bowies, 144 F. (2d.) 361 (1944). 25 See testimony of James F. Brownlee. Deputy Administrator for Price, in 78th Cong., 2d Sess., House Banking and Currency Committee, Hearings on the Extension of the Emergency Price Control Act, Vol. I, April 12May 5, 1944, pp. 49-82.

132

THE

HISTORY

OF B A S I C

METALS

years IÇ3Ç-1941 as an appropriate base period, and granted an increase to M id-West producers on the basis of returning to the producers their average earnings during those y e a r s . M Similarly early in 1944 in the case of the Eastern producers of by-product coke, O P A decided that the years 1936-1941 were years that more nearly reflected normal operations of the Eastern plants, and authorized a price increase based on this revised earnings standard. 27 A t about the same time, the merchant pig iron industry appealed for a price increase, and argued that 1936-1939 was an unfair base period because none of these years was a good one in terms of the earnings of the merchant pig iron industry. The years 1939-1941 were suggested as an appropriate substitute. 28 O P A officials accepted much of the industry's argument in this matter, and, in consideration of the fact that the average return on net worth during the years 1936-1939 was only 3 . 6 6 % , they suggested that the years 1939-1940 be accepted as an appropriate base period for this industry. 29 This recommendation was discussed with a sub-committee of the industry in March 1944, and, in April, James F. Brownlee, the Deputy Administrator for Price, gave his approval to the proposed change in base period. T h e price action was, however, postponed pending a wage recommendation of the W a r Labor Board. 30 Meanwhile, in another area, the office was rejecting a request for change in base period made by the cotton textile industry. 26 Statement of Considerations, M P R 29, issued Dec. 6, 1943. 27 Statement of Considerations, Amendment 2 to M P R 29, issued J a n . 22, 194428 Letter, B. S. Stephenson, Chairman, P i g Iron I n d u s t r y Advisory Committee to D e x t e r A. Tutein, Chief, Basic Materials Section, Iron and Steel Branch, Dec. 30, 1943. 29 Memorandum, Bruce Allen, Cost Accountant, to W a r r e n M. H u f f , P r i c e Executive, Iron and Steel Branch, M a r c h 28, 1944. 30 Merchant P i g Iron Industry Advisory Committee, " Calendar Recommendation for General P r i c e Increase," Dec. 13, 1944.

on

STANDARDS

OF

PRICE

ACTION

(i)

I33

In a formal statement issued in November 1944, the office agreed that if an industry could show ( 1 ) that because of peculiar circumstances 1936-1939 was not a representative period in the history of the industry, or ( 2 ) that the industry was and had remained a " depressed industry " and was therefore entitled to earn more than it had in any recent representative peacetime period, exceptions would be made to the use of the 1936-1939 base period. O P A pointed out, however, that the purpose of the base period w a s : to assure that price controls do not reduce an industry's earnings below those which it was enjoying prior to the unusual circumstances which gave rise to the need for price control. O P A has not sought to equalize the profitability of various industries, either by reducing profits of the high profits industries or by permitting relatively low profit industries to use unlimited wartime demand too pull themselves above their pre-war status relative to other industries, or to restore a status which has not been enjoyed for a decade or more. 31 T h e cotton textile industry did not produce satisfactory evidence to meet the requirements for changing the base period, and O P A therefore rejected the industry's request for such a change. T h i s rejection established a pattern of price policy with respect to the base period problem that was followed to a very great extent throughout the agency. A n important result of the cotton textile action was the revaluation in other commodity areas of those actions which involved changes in the traditional 1936-1939 base period. W h e n the steel industry challenged the use of the years 1936-1939 as an appropriate base period for the steel industry, arguing that the industry was depressed in these years and that since the steel industry was traditionally a " feast or famine " industry it should be permitted to recoup in wartime the low returns experienced in other times, O P A denied the industry's 31 S t a t e m e n t of Considerations, A m e n d m e n t 25, M P R

30. 1944·

118, issued

Nov.

134

THE

HISTORY

OF B A S I C

METALS

request along the lines of the arguments set forth in the cotton textile action. The agency argued that the years 1936-1939 were representative of the recent peacetime experience of the steel industry as measured both by the rate of return on investment and by the rate of operations, denied that by any reasonable standard the steel industry could be considered a depressed industry in the years under consideration, and strongly rejected the industry's argument that earnings should be permitted in wartime sufficient to make up for some of the poor peacetime years. 82 Shortly thereafter, the agency reversed its earlier position with respect to the necessity of changing the base period for the merchant pig iron prices, and while the agency permitted an increase in pig iron prices, it did not accept a change in the 1936-1939 base period, arguing that the industry had not submitted enough information to justify such a change. 83 This reversal rather surprised the industry which had assumed that the earlier decision was going to be put into effect. More information was submitted, however, in an attempt to show that the years 1936-1939 were unrepresentative of the peacetime experience of the industry and that the industry was " depressed " during those years. M O P A , in turn, argued that in view of the declining character of the merchant pig iron industry for the past 20 years, this period was not unrepresentative of the industry's relative position. While admitting that the pig iron industry was, if judged by usual standards, " depressed " in 1936-1939, O P A argued that " T h e declining character of the merchant pig iron industry, absolutely and 32 Letter, James F. Brownlee, Deputy Administrator for Price, to Walter E. Watson, Chairman, General Steel Products Advisory Committee, drafted Dec. 2, 1944. 33 Statement of Considerations Amendment 10 to R P S 10, issued Feb. 14, 1945· 34 " Selection of Base Period—Recommendation and Supporting Brief— submitted by Industry Advisory Committee on Merchant Pig Iron to Office of Price Admit istration," May 21, 1945.

STANDARDS OF PKICE ACTION ( i )

I3S

relatively, renders inappropriate the tests heretofore used to determine whether an industry was depressed in 1936-1939, generally or in any one year." M Finally, in August 1945, O P A reversed its earlier position with respect to the normal base period for the by-product coke industry, and now argued that the base period fatio of earnings to net worth for both the Mid-West producers and the Eastern producers was adequate and that, therefore, the industry could not be considered " depressed " in the base period. ί β Single-line companies and multiple-product industries. A n important problem developed in the application of the earnings standard to multiple-product industries. The general rule remained, of course, to compare current and base period earnings from all operation. O P A recognized, however, that, in cases where a large proportion of the output was accounted for by single-line companies, this method of applying the earnings standard might result in severe hardship to these companies, and in such cases it was declared to be office policy to separate the earnings on the product or products in question from the overall earnings of the multiple-line companies. *T This policy was applied in an erratic manner because it was not generally agreed what proportion of the output must be accounted for by single-line companies in order to segregate the earnings of the specified departments of the multiple-line companies. In one instance, for example, the office was faced with a situation in which producers of manganese steel castings had generally considered themselves as an industry separate from the rest of the castings industry. Therefore, although there was only one single-line producer accounting for only 35 Memorandum, Alexander Firfer, Analysis and Reports Section, to Addison T. Cutler, Branch Economist, Metal Price Branch, NOT. 2, 1945. 30 Statement of Consideration, Amendment 4 to M PR 29, issued Aug. 7, I94S37 " Tentative Summary of Price Policy," op. cit., p. 5.

136

THE

HISTORY

OF B A S I C

METALS

1 8 . 6 % of the total production of manganese castings, the office decided that the producers of manganese castings were an industry within the meaning of O P A price policy, and applied the earnings standard to the segregated earnings from manganese steel operations. 38 It was generally assumed, however, that at least 3 0 % of the production should be accounted for by single-line companies before applying this method of measuring the overall earnings. This policy was modified in 1945 in order to make it more severe in its application. In testimony before the Senate Banking and Currency Committee in March 1945, Brownlee stated that " where a substantial proportion of the output of a product—for example, a third or m o r e — i s made by firms which do not make other products . . . we would ordinarily approve a price increase which is sufficient to restore the average aggregate base-period earnings either of the single-line firms or of all firms in the industry on the product in question. Unless there is compelling reason to the contrary, however, this increase is limited to the single-line firms who are in need of it." 39 In instances, where less than a substantial proportion of the total output was accounted for by single-line companies but where single-line companies constituted a large proportion of the number of producers, the Emergency Court of Appeals held that O P A had an obligation toward these single line companies even though the earnings of the industry as a whole were better than base period earnings. A s the Court said in the important Heinz Case, " If the maximum prices in R M P R 169, in conjunction with the subsidy payments, do not make adequate provision for the non-processing slaughterers as a group, 38 Statement of Considerations, Amendment 1, M P R 23s, issued Feb. 6, '945 ; Memorandum, M o r r i s Hershson, Chief Counsel, I r o n and Steel Branch, to Louis L. Rochmes, Court Review Branch, March 7, 1945. 3979th Cong., ist Sess., Senate Committee on Banking and Currency, Hearings on Extending the Emergency Price Control and Stabilisation Acts of 1Ç42, As Amended, Feb. 27-March 22, 1945, p. 106.

STANDARDS

OF

PRICE

ACTION

(i)

I37

( a n d ) do not a f f o r d a sufficient margin for profitable operation by this the most numerous g r o u p in the industry, then the regulation is invalid

as t o

the non-processing

slaughterers,

despite the fact that the regulation is . . . generally fair and equitable as applied to the processing slaughterers w h o constitute the greater part of the industry by volume of business."

40

In supporting its reasoning in this case, the C o u r t quoted its own decision in an earlier case : " W e are confident that Congress intended not only that regulations should be generally fair and equitable ; but that it should be the duty of the A d m i n istrator under Section 2 ( c ) to avoid or eliminate manifest inequities in exceptional classes of cases so far as might reasonably be done consistently w i t h the main objective of the A c t and with the effective administration of the stabilization program."

41

T h e decision of the E m e r g e n c y C o u r t in this case

made it necessary, therefore, for the office to provide in some degree for single line producers, if they constituted a numerous group in the industry, even though they did not account for a substantial proportion of the total output of the product in question. Abnormally

distributed

earnings.

T h e " Tentative S u m m a r y

of Price Policy," provided that in the case of industries whose current earnings were abnormally distributed, so that the application of the earnings standard would compel suppliers of a substantial portion of the total supply to operate at a loss, " a price increase is required sufficient to make total revenue equal total costs for each supplier in the industry exclusive of those which have historically comprised the industry's highcost marginal f r i n g e . "

42

There were few cases in the metals area where this policy was applied exactly in the manner described, but there were Vi Heinz et al. v. Bowles, 149 F. (2d) 277, 281, decided Mar. 29, 1945.

41 Adams, Roue, Norman, Inc. v. Bowles, 144 F. (2d) 357, 360; quoted

in the Heinz Case. 42 " Tentati ve Summary of Price Policy," op. cit., p. 5.

I38

THE

HISTORY

OF B A S I C

METALS

several cases in which abnormal distribution of earnings played a part in the determination of the amount of price increase granted. In February 1945 an increase was granted to the merchant pig iron industry designed to return to that industry slightly more than its average earnings during the years 19361939. This generosity was justified partly on the grounds that the maldistribution of earnings in the industry was such that a strict mathematical application of the earnings standard would have left eight of the ten producers still earning less than they did in the base period. 48 In December 1945, O P A granted a price increase to merchant iron ore producers, although the current earnings of these producers exceeded base period earnings. This was defended with the argument that there existed an " unbalanced distribution of earnings," resulting from the fact that one producer 44 who did not ship in the base period but who now accounted for 40% of the merchant ore output earned an overwhelmingly large proportion of the total profits. Four of the other five merchant producers, engaged principally in underground operations, were earning at a rate below the base period rate. O P A determined, therefore, that this " unbalanced distribution of earnings combined with economic disadvantages peculiar to underground operations requires that the Administrator give special consideration to the position of the underground mines," O P A in this instance permitted a price increase sufficient to permit the underground mines to earn a reasonable return, i.e., average total costs. 48 Materially diminished output. Another difficult problem 43 Statement of Considerations, Amendment 10, R P S 10, issued Feb. 14, 194544 The Oliver Mining Company, a U. S. Steel subsidiary. 45 Statement of Considerations, Amendment 2, M P R 113, issued Dec. 29, 1945. This was also in line with the recent Heinz case in which the Emergency Court of Appeals held that O P A had a responsibility to an important segment of the industry suffering hardship even though the earnings standard was satisfied with respect to the industry as a whole.

STANDARDS OF PRICE ACTION ( i )

I39

faced by price officials with respect to the so-called earnings standard was the problem of applying such a standard in cases where current levels of output were substantially below the levels of 1 9 3 6 - 1 9 3 9 . It was clearly not O P A ' s legal obligation to assure base period profits to an industry whose production had declined well below its production in the base period. This had been recognized early in the history of the agency, and in October 1 9 4 1 a statement of policy on the subject had been drawn up by Herbert T a g g a r t based on the necessity of recognizing only " normal overhead charges." 4 e One of the first actions to establish this principle was an amendment to the steel products price schedule increasing the price of steel screen cloth. While this action was relatively unimportant in economic terms, it was accompanied by a significant statement of policy: Although the O P A will not attempt to compensate for decreased profits attributable to conditions other than price, such as inabiliy to obtain materials or curtailment of production as a result of the war program, it is reasonable to make certain adjustments in such cases. These adjustments should, in general, permit a price which will cover, on particular products, direct out-of-pocket costs, a reasonable allocation of depreciation and selling and administrative expense based on production at normal levels, and a margin of profit on sales which, because of the inflationary effect of any increase in price, would be small.47 A similar policy was confirmed in September 1 9 4 3 with the issuance of the "Tentative Summary of Price Policy " which said that " the price required by law is one which covers the total direct costs of all suppliers except those in the industry's 46 Memorandum, Leo Davis to AH Assistant Directors and Section Chiefs, " Report on the Staff Meeting of October 13, 1941." 47 Statement of Considerations, Amendment 3, RPS 6, effective April 27, I9«a.

I40

THE

HISTORY

OF

BASIC

METALS

high-cost marginal fringe, plus an amount equal to typical unit overhead cost during a recent period of operation at normal volume."

48

THE

PRODUCT

STANDARD

The problem of costs. In addition to the earnings standard for determining the general fairness and equity of ceiling prices, the office developed another standard to be applied in multipleproduct industries. T h i s standard, known as the product standard, went through many transformations and interpretations during the course of its administration, but in spite of the fact that it was attacked by labor and consumer groups and w a s sometimes under fire from the Director of Economic Stabilization, it remained a basic office policy and was upheld by the Emergency Court of Appeals. ** As issued

stated in the " Tentative Summary of Price Policy " in

September

1943,

the

product standard read

as

follows : In the case of multiple-product industries, prices for particular products must be established which are not unreasonably out of line with prices established for other products of the industry. Ordinarily this means that prices for a particular product must at least cover the highest factory costs of producing that product incurred by any of the lowest-cost sellers who together account for three quarters of its current output.50 T h i s statement of policy was more liberal than earlier statements in which price officials had assumed that any allocation of factory overhead was an impossible administrative burden, and had considered that a price was generally fair and equitable if it covered the "direct costs of production " for those w h o 48 " Tentative Summary of Policy," op. cit., p. 5. 49 See the Gillespie case, op. cit. BO" Tentative Summary of Price Policy," op. cil., p. 6.

S T A N D A R D S OF P R I C E A C T I O N

(i)

I4I

produced the bulk of the output. 5 1 In any event, this product standard became the working policy of the office for some months. Early in 1944, however, Brownlee, in testimony before the House Banking and Currency Committee, interpreted the product standard in a slightly different fashion. In the course of an explanation of the fundamental policies followed by O P A , and after a description of the industry earnings standard, Brownlee said, " W e believe that a ceiling price for a particular line or product is generally fair and equitable so long as it does not result in out-of-pocket loss for any producer except the highest-cost fringe." 52 T h e most important change of policy involved in this statement was, of course, the substitution of the phrase out-ofpocket costs for factory costs. It should be emphasized that the phrase out-of-pocket costs has no precise meaning in accounting terminology. A s Herbert Taggart once pointed out, " T h e truth is that it is one of those relative terms which mean something different in every context. It should never be used except when accompanied by a clear statement of the intended limitations of its meaning . . . S o vague is this term 'out-ofpocket ' costs that its complete abandonment by O P A would be fully justified." 63 Generally speaking, however, it has reference to those costs that would not be incurred if production of the item were discontinued. The concept was first set forth 51 See memorandum of Nov. 10, 1941, " Principles to be Observed in the Determination of Maximum Prices," circulated among Galbraith's s t a f f ; t h e difference between these statements lies, of course, in the fact that " factory costs " include a reasonable allocation of factory overhead while " direct costs " do not usually include such an item. 52 78th Cong., 2d Sess., House Banking and Currency Committee, Hearings on the Extension of the Emergtncy Price Control Act, Vol. I, April 12-May 5, 1944, p. 59. 53 OPA, A Manual of Price Control (Lecture series delivered at the T r a i n i n g P r o g r a m for Price of the OPA—1943), " C o s t s and P r i c e Control," by H e r b e r t F . T a g g a r t , Director, Accounting Division, p. 71.

142

THE

HISTORY

OF B A S I C

METALS

in a proposed policy statement drawn up in March 1944 by the economic advisers to the Deputy Administrator for Price, 6 4 and its adoption was apparently an attempt to return to the earlier concept of " direct costs " that had been set forth by price officials in 1941 as one of the principal " minimum requirements of law." While the out-of-pocket costs concept became the official interpretation of the requirements of the product standard, O P A behaved as if this official interpretation were sheer rhetoric, and for seven months the office issued no price action that recognized the concept of out-of-pocket costs in distinction to factory costs. In October of 1944, however, O P A increased the prices of power shovel steel castings to meet the requirements of law under the newly defined product standard. In taking this action, the office rejected the recommendation of the industry advisory committee that total costs be the measure of out-of-pocket costs in this instance. Instead, O P A adopted as a formula for determining such costs the concept that out-of-pocket costs should include all costs except selling and administrative costs and 2 5 % of factory overhead costs. In other words, out-of-pocket costs should include only direct labor and materials and three-quarters of factory overhead. O P A decided therefore, to grant an increase designed to cover the out-of-pocket costs for companies producing slightly more than half of the total volume of these castings, and to grant a number of individual adjustments to the other members of the industry to permit them likewise to recover out-of-pocket costs. 6 5 After a while, still another concept was introduced to measure the amount of relief required under the product standard. This concept of average manufacturing (factory) costs was 54 OPA, " Price Policy Statement No. ; Standards Governing General Increases in Maximum Prices," Mar. 10, 1944. 55 Statement of Considerations, Amendment 13, PS 41, issued October 4, 1944.

S T A N D A R D S OF P R I C E A C T I O N

introduced

without relinquishing the

(i)

idea of

143

out-of-pocket

costs. A s Brownlee explained in the course of a short statement before the Senate B a n k i n g and C u r r e n c y Committee in M a r c h 1945 : W e do not believe that, as a working administrative rule, we should try in each case to make an exact determination of what costs are " out-of-pocket costs." Out-of-pocket costs are those which would be eliminated if manufacture of the product were to be discontinued. While these are the costs which in principle should be covered, we have found that it is often a matter of serious accounting difficulty to compute them . . . W e have come to the conclusion, therefore, that as a working rule we ought ordinarily to use the higher measure of manufacturing costs, although deductions from these costs, or additions to them, will be appropriate in some cases. By then using an average of these manufacturing costs, with or without such adjustment, we are able to cover the out-of-pocket costs for the bulk of the output. 58 In effect, Brownlee w a s g i v i n g official recognition to the fact, so clearly set forth by T a g g a r t t w o years before, that out-of-pocket costs w a s an unworkable concept. A t the same time, Brownlee's statement g a v e more precision to the product standard as a w o r k i n g policy, and the standard w a s applied on the basis of average manufacturing costs until the end of the war. Indeed, when O P A granted a general increase in prices for basic steel products in M a y 1945, the increase was justified in terms of this interpretation of the product standard. 8 7 T h e development and application of the product standard reflected the fact that one of the chief problems that

OPA

5679th Cong., ist Sess., Senate Committee on Banking and Currency, Hearings on Extending the Emergency Price Control and Stabilization 0} IÇ42, As Amended, Feb. 27-March 22, 1945, p. 106.

Acts

57 Statement of Considerations, Amendment 13, RPS 6, issued May 21, 1945·

144

T H E

HISTORY

OF B A S I C

METALS

faced in the administration of price control was the determination and evaluation of unit cost figures. Earnings data were relatively easy to obtain and were not impossible of interpretation, but accurate and reliable unit cost figures were often unavailable and sometimes difficult to appraise. There were several reasons w h y this was the case : ( ι ) Many firms, especially small firms, maintained no adequate cost records; ( 2 ) W h e n cost records were maintained, there was often little uniformity among firms with respect to the manner in which costs were figured. Thus, wide differences might exist in methods of determining inventory costs or of allocating overhead charges; ( 3 ) Within O P A itself, while the accounting work was supervised by an Accounting Department, uniformity was not always achieved in the treatment of costs. W e should recognize, therefore, that in spite of many doctrinal disputes within the agency over the proper relationship of costs to prices, the range of possibilities for agency action was often limited by the practical consideration involving the treatment of costs. Compensatory adjustments. The product standard came increasingly under the attack of a number of labor and consumer groups w h o were opposed to any price increases above those required by the industry earnings standard. T h e O P A Consumer Advisory Committee, for example, " questioned seriously the application of the ' product standard.' " T h e y said, " A t a time when earnings are at an unprecedented high for producers and distributors, the Committee would like to see less emphasis placed on finding a basis to increase prices and more emphasis on direct application of the industry earnings (or trade wide) standard at every level in the economic process." M Price officials had recognized the apparent injustice of granting price increases 011 the basis of the product standard when 68 Memorandum from Esther Cole Franklin, Consumer Relations Adviser, to Bowles, Mar. 12, 1945.

S T A N D A R D S OF P R I C E A C T I O N

(i)

I45

overall profits of the industry were greatly in excess of base period profits even before it was pointed out so severely by labor and consumer groups. To meet this type of criticism, Brownlee's advisers had included in the " Tentative Summary of Price Policy " the direction that " Where the returns of an industry are adequate but an increase is nevertheless required in the price of a particular product the Administrator will in all cases consider the feasibility of a compensatory decrease in the prices of other products sold by the same sellers." M Largely because of the practical difficulties of applying it, this standard became virtually a dead letter. In considering the problem of how much to increase steel prices early in 1945, however, the office had given some attention to the possibility of minimizing the net effect of such an increase by increasing the prices of some steel products and reducing the prices of others. For a number of reasons, such a compensatory adjustment was not made. 80 While the agency did not so state, certainly one of the reasons for the failure to carry out this policy was the difficulty of devising a series of compensatory adjustments that would equitably balance the increases granted. The suggestion of William H. Davis, who succeeded Judge Vinson as Director of Economic Stabilization, that compensatory reductions be made in products sold by other than the sellers receiving price increases was stoutly opposed by O P A officials, and a proposed directive from the Office of Economic Stabilization along these lines was never issued. 61 Differential pricing. Another important problem in the application of the product standard was the extent to which price increases should be granted on a differential rather than on a uniform basis. Contrary to the belief that the product stand59 " Tentative Summary of Price Policy," op. cit., p. 4. 60 Statement of Considerations, Amendment 13, R P S 6, issued May 21, 194561 Memorandum, Henry Hart, Associate General Counsel for Price, to James F. Brownlee, Deputy Administrator for Price, May 5, 1945.

146

THE

HISTORY

OF B A S I C

METALS

ard would theoretically be satisfied if the maximum price of each non-marginal producer exactly equaled his out-of-pocket costs, the price control act placed an obligation upon the O P A to establish a structure of prices that was reasonable and not arbitrary. A s Henry Hart pointed out, " In determining whether a proposed structure is reasonable, regard must be had on the one hand to the historical structure of prices in the industry and on the other hand to the structure which is necessary to effectuate the purposes of the Act." e2 Because of these and other uncertainties and difficulties involved in differential pricing, there were in fact very few instances where such a technique was used to meet the minimum requirements of law. When, for example, in February 1945, an increase was granted to the merchant pig iron industry designed to return base period earnings to the merchant producers, consideration was given to the possibility of granting a differential price increase, so that the integrated producers, who were entitled by law only to cover their out-of-pocket costs, would not get an increase above the minimum requirements of law. O P A decided, however, that such differential pricing would not be wise in this particular situation because, " W P B has informed us that pig iron is in very tight supply and that differential pricing would seriously threaten and complicate the orderly distribution of the output." Thus, the increase was made applicable to all the pig iron sold on the open market, whether it originated in the plants of integrated or non-integrated producers. 83 In the case of power shovel castings, however, the agency determined that cost variations among the companies producing these castings were so great that it would be inflationary to grant a uniform increase to the whole industry. So, O P A β2 Draft of statement on the Product Standard by Henry Hart, Jan. 5, 1945. 63 Statement of Considerations, Amendment 10, R P S 10, issued Feb. 14.

1945·

S T A N D A R D S OF P R I C E A C T I O N

(I)

I47

decided to grant an increase designed to cover the out-ofpocket costs for companies producing slightly over half of the total volume of these castings. The other producers were granted individual price adjustments to permit them to recover the same costs. ** SUMMARY

The Emergency Price Control Act of 1942 gave the Administrator the power to establish maximum prices that ( 1 ) were "generally fair and equitable," and ( 2 ) would "effectuate the purposes of the Act." Price actions undertaken to maintain the general fairness and equity of a ceiling were considered " mandatory," i.e., " required by law." The Stabilization Act of September 1942 and Executive Order 9250 issued at the same time limited the power of the O P A to make " discretionary" increases except for purposes of "aiding in the effective prosecution of the war," or of correcting " gross inequities." Executive Order 9328, the so-called " Hold-theline order," further limited the power of the O P A to make discretionary increases to those cases which did not involve an increase in the cost of living. Where an increase in the cost of living was involved, the action had to have the approval of the Director of Economic Stabilization. The " hold-the-line order" also provided that wage increases that would result in price increases also had to have the approval of the Director of Economic Stabilization before becoming effective. This was the basic legal framework in which O P A operated throughout the war period. Within this legal framework, O P A constructed criteria or standards for price action which were generally upheld by the courts as a reasonable exercise of administrative discretion and which served as a guide to office operations. T o meet the " minimum requirements of law," i.e., to maintain prices that were " generally fair and equitable," the O P A developed two M Amendment 13, PS 41, issued October io, 1944.

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standards; ( 1 ) the earnings standard, and ( 2 ) the product standard. The earnings standard provided that prices need not be increased as long as the current aggregate overall earnings from all operations of a given industry equaled those earned in a normal peacetime period, (usually 1936-1939), adjusted for subsequent changes in investment. The product standard provided that, even though the earnings standard might be satisfied, the prices of a given product must return at least " out-of-pocket costs " to producers accounting for the bulk of the output. A s variously interpreted at different periods of O P A ' s history, the product standard required that ceiling prices cover (1 ) " direct costs" for the bulk of the output, ( 2 ) " manufacturing costs " for the bulk of the output, (3) " outof-pocket costs" for the bulk of the output, and (4) " average manufacturing costs " properly adjusted. The application of these standards involved problems that were often encountered in the metals area, and O P A ' s experience in this area often contributed to a solution of these problems throughout the agency.

CHAPTER

VII

STANDARDS OF PRICE ACTION

(2)

DISCRETIONARY INCREASES Industry-wide actions. The Administrator's authority to increase prices above the minimum requirements of law " to assist in securing adequate production," was circumscribed by the Stabilization Act, which limited such discretionary action to instances where it was necessary either to eliminate gross inequities or to aid in the effective prosecution of the war ; and by the " hold-the-line " order, which required all discretionary actions that increased the cost of living to be approved by the Director of Economic Stabilization. Further, the standards for such discretionary actions set forth in the " Tentative Summary of the Price Policy " required price officials before recommending such action to explore the availability of direct production controls and receive from the appropriate supply agency an official determinination of the essential amount of the supply of the commodity in question. Industry-wide price increases were limited by the price necessary to return total unit costs to the highest cost sellers whose output was needed. One of the chief problems connected with the application of this essential supply standard was the problem of cooperative relations with supply agencies, especially the War Production Board. A s we have seen, the Office of Price Administration took the view that it would not ordinarily increase the price of a commodity above the minimum requirements of law unless the War Production Board made some effort to secure or direct the production of the necessary amount of supply. The War Production Board, on the other hand, usually dominated by a point of view extremely favorable to business, argued that in many situations they could not direct production until they were assured that prices would be revised upward. A s a result, a italemate often developed that effectively prevented 149

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either agency from acting to remove impediments to the production of essential supply. The development of such a stalemate in the textile and clothing field resulted, on November 16, 1943, in the issuance of the famous Vinson Directive, an attempt of the Director of Economic Stabilization to establish a firm policy in the matter. This directive in the form of a letter from the Director of Economic Stabilization to the Chairman of the War Production Board and the Administrator of the Office of Price Administration, directed the W P B to formulate plans to assure the production of essential consumer goods, particularly lowpriced textile and apparel items. Whenever the Chairman of the W P B believed that this program necessitated a price increase, he was to certify to the O P A that a shortage of the essential item existed and that the W P B had issued orders requiring production of these items in the necessary amounts. When these production programs had been approved by the Office of Economic Stabilization, the O P A was to grant increases above the minimum requirements of law " t o permit the effective operation of such production programs." 1 While the Vinson Directive applied chiefly to textiles and apparel, it pointed the way to a solution of the problems involved in coordinating price and production policies, and price officials moved to get the Vinson procedures adopted in other commodity areas. In this effort, price officials were supported by the Bureau of the Budget, and in May 1944, Harold D. Smith, Director of the Bureau of the Budget, proposed that a memorandum be sent by Nelson and Bowles to all their employees outlining a plan for coordination of the operations of the two agencies. The proposed memorandum pointed out that the Emergency Price Control Act imposed an obligation upon all the agencies of the Government to follow the stabilization 1 Letter, Fred M. Vinson to Donald M. Nelson and Chester Bowles, Nov. 16, 1943. In an amended form, this letter appears in 78th Cong., 2d Seas., House Committee on Banking and Currency, Hearings on the Extension of Emergency Price Control Act, vol. I, April 12-May 5. 1944, pp. 75-76.

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policies set forth in the Act, and that therefore the W P B was in some degree obligated to take stabilization policies into account in performing its chief function as a supply agency. Specifically, the memorandum suggested that the W P B continue to use its full authority to achieve the production of essential commodities, and that when the W P B believed that maximum prices were impeding production, it should certify this fact to OPA.* Bowles indicated his willingness to issue such a memorandum and put such procedures into effect, 8 but presumably because of the opposition of W P B officials the procedure was never officially adopted. Nevertheless, OPA insisted that such an approach was sound and proper, and price officials did what they could to insist that the War Production Board fulfill its obligations as a supply agency before price increases were granted " to assist in securing adequate production." OPA's reasoning in this matter was well expressed by Donald H. Wallace : Price increases above the legal minimum should not be used to secure essential supply wherever use of direct controls by a war agency can obtain that supply at existing ceilings. The basic reason for wartime shortages is lack of sufficient manpower, materials, and equipment Price increases cannot themselves create additional productive resources. Their effect is usually to induce a relatively larger supply of some commodities at the expense of a smaller supply of other commodities. Their results, which may often be inflationary, are highly unpredictable as to the amount of change in supply, the time it will take, and the effects on supplies of other things. Direct controls such as priorities, allocations, production directives, and the like, provide more effective ways to get 2 Letter, Harold D. Smith, Director of the Bureau of Budget, to Bowles, May i l , 1944, enclosing proposed memorandum on WPB—OPA relationships. 3 Letter, Bowles to Smith, June 6, 1944-

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available resources used in the needed proportions as between different products. Only if these controls cannot be used or if existing ceilings would impair their effectiveness should prices be increased.4 This problem was not a very significant one in the metals field because there already existed a wide range of direct controls in that area and because there were relatively few occasions when industry-wide price increases were granted " to assist in securing adequate production " of these metals. 8 Individual adjustments. The Price Control Act stated that "Any regulation. . . may provide for such adjustments and reasonable exceptions, as in the judgment of the Administrator are necessary or proper in order to effectuate the purposes of the Act." This power was, of course, limited by the Stabilization Act and the hold-the-line order, but it made possible the use of differential pricing on a large scale, especially for purposes of assisting in securing essential production. As soon as the price agency established the first ceilings of either an informal or a formal nature, price officiais became aware of the necessity of establishing criteria for determining under what conditions and in what amounts individual prices should be adjusted. When individual companies applied for exceptions, the office announced that its policy was " to afford relief in any special situation where ceiling prices result in undue hardships." β At the same time, price officials agreed not to increase prices " when companies are currently earning a greater return than in previous years." 7 Thus, in the earliest days of the agency, price adjustments were granted on the basis of hardship alone without reference to the essentiality of the commodity involved or the relationship of the seller's 4 Proposed policy statement on price increases drafted by Wallace about June 1944. 5 See below Chapter VIII. β OPA, Press Release, July 9, 1941 (PM 691). 7 Memorandum, Galbraith to the staff of the Price Division, June 27,1941.

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prices to prices of other sellers. Relief was generally granted on the basis of the earnings standard noted above, but other considerations often helped determine the amount of adjustment. 8 The issuance of the General Maximum Price Regulation in April 1942 increased the importance of the problem of individual adjustments. The G M P R as originally issued provided for adjustments only for retailers whose prices were frozen at abnormally low levels and who were subjected to substantial hardship as a result. It was assumed that any further maladjustments at any level of manufacturing or distribution could be taken care of by amendments of general applicability. 9 After a while, however, the office recognized the necessity of granting price adjustments to low-price manufacturers and wholesalers who were suffering hardship, and an amendment providing for such adjustments where a price increase at the manufacturing or distribution level would not threaten a price increase at retail was added to the G M P R in July 1942. 1 0 A s a result of this widening of eligibility for adjustments under the G M P R , and as the result of the increasing number of specific commodity regulations which contained provisions for individual adjustment, the office found that it was devoting too much time and energy to the task of adjusting prices of individual sellers. Leading price officials, especially in the legal division, pointed out that individual sellers had no constitutional or legal right to operate profitably under O P A regulations, that the processing of individual adjustments was already threatening to paralyze the operations of the office, and that steps should be taken to discourage and limit these individual adjustments so that office resources 8 O P A , Division of Research, Price Analysis and Review Branch, " E x ceptions Granted by O P A under Maximum Price Regulations (Schedules) through March 31, 1942," May 29, 1942. 9 " Statement of the Considerations Involved in the Issuance of the General Maximum Price Regulation." April 28, 1942. 10 Amendment 10 to the G M P R , issued July 9, 1942.

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could be devoted to framing regulations of general applicability. 1 1 This whole problem was discussed at length by the Policy Committee throughout the summer of 1942, and it was agreed that the agency's limited resources should not be dissipated on a large number of individual adjustments. After many attempts to devise definite criteria to be applied to all individual adjustments under the G M P R and under each specific regulation, the Policy Committee decided that it was " not possible to define for all types of civilian and war industries, all classes of firms and all types of services, the conditions and standards which justify individual adjustments." Therefore, it was agreed to establish criteria for adjustment policy, and permit each commodity branch to " formulate (subject to rigid standards of review and coordination) the adjustment policy appropriate to the individual industries under its jurisdiction." These criteria for adjustment policy had as their basic assumption the concept that no adjustment provision would be included in a regulation unless it affirmatively aided in controlling the cost of living or prosecuting the war. This concept was, of course, related to the provisions of the Stabilization Act of October 2, 1942. In most cases, therefore, individual adjustments were to be limited to three circumstances: ( 1 ) adjustments to high-cost producers of essential supplies; ( 2 ) adjustments to low-priced sources of supply, the loss of whose production would force a resort to higher-cost sources of supply; and ( 3 ) adjustments to alleviate local shortage situations. The amount of relief to be granted was set forth as that amount necessary to " insure the continuation of the essential supply." It was indicated that in most cases " relief should be limited to the amount necessary to cover the out-of-pocket costs of producing or selling (the) commodity or service," 11 Memorandum David Cobb, Assistant General Counsel, to Galbraith, Aug. 14, 1943.

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but it was recognized that special situations might justify different and more liberal standards. ia This new adjustment policy went into effect with respect to the G M P R on November 2, 1942 when the regulation was amended to provide that no application for relief of low-priced retailers filed after November 30 would be granted and that no applications for relief of low priced sellers other than retailers filed after November 15 would be granted. A t the same time, a provision was added which provided for individual adjustments to meet a local shortage " in the supply of a commodity or service which aids directly in the war program or is essential to a standard of living consistent with the prosecution of the war." Simultaneously with these changes in the G M P R adjustment provisions, the office moved to amend specific commodity regulations in a similar manner and to draw up essential supply adjustment provisions to meet the standards of the new adjustment policy. Meanwhile, with respect to commodities manufactured pursuant to war contracts and sub-contracts, adjustment policies had already been determined. On July i , 1942, the office issued Procedural Regulation No. 6, which provided that, " Any person who has entered into or proposes to enter into a Government contract or a sub-contract under such contract, who believes that an established maximum price impedes or threatens to impede production of a commodity or supply of a service which is essential to the war program and which is or will be the subject of such contract or sub-contract may apply for adjustment of that maximum price." This procedural regulation marked a long step forward in the efforts of the office to establish a uniform adjustment procedure. It was accompanied by explicit instructions designed principally for the 12 Galbraith to the staff of the Price Department, " The Program of the Office of Price Administration on Individual Price Adjustment Action," Oct. 7, 1943

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field offices but applicable as well to National Office operations under the regulations. 1 S These instructions provided in general that if the applicant's over-all profits were greatly in excess of those earned in 1936-39 he was entitled to cover manufacturing costs on the item in question ; if the applicant's over-all profits were approximately equal to those earned in 1936-39 the applicant was entitled to total costs; and if the applicant's over-all earnings were below those of the base period he was entitled to total costs plus a reasonable profit. 1 4 The issuance of the hold-the-line order in April 1943 gave renewed emphasis to the importance of individual adjustments as a technique of differential pricing for supply purposes, and the staff of the price agency made renewed attempts to establish a uniform adjustment policy in the office. The " Tentative Summary of Price Policy " issued in September 1943 included a section on individual adjustments, but unlike the standards for general price increases, which were set forth as an interim guide to action for the operating branches, these individual adjustment standards were presented for comment only. This statement of individual adjustment policy set forth two principal types of standard criteria: ( 1 ) adjustments to correct abnormally low prices and ( 2 ) adjustments to remove impediments to supply. In the first case, the amount of adjustment was to be such as to remove the price abnormality or restore 1936-1939 earnings, whichever took a smaller price increase. The amount of relief to be granted in the essential supply situation was the amount specified in the instructions for P R 6 ; i.e., manufacturing cost, total cost or total cost plus a reasonable profit, depending upon the over-all profit situation of the applicant. 18 These standards became the subject of wide discussion throughout the agency, but in spite of many proposals, any 13 Field Price Instructions No. 5, issued July 13, 1942. 14 Ibid.

15 " Tentative Summary of Price Policy," of. eit.

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one of which would have served as a basis for unity, price officials were unable to come to agreement on the exact terms of individual adjustment policy. Finally, in October 1943, the Deputy Administrator for Price appointed a committee representing most of the divisions of the Price Department to study the problems of price adjustments and recommend a proposed policy statement on the subject. Under the chairmanship of John Sumner, this committee succeeded in drawing up elaborate proposals for several types of adjustment provisions, but after these proposals were circulated for discussion, no action was taken to put them into effect. While no official statement of adjustment policy, therefore, was issued to the staff, the discussion did have the effect of stimulating thought on the question, and contributed indirectly if not directly to a greater uniformity in adjustment standards. In large measure, however, the operating branches continued to grant adjustments on the basis of standards that had been developed earlier in the history of O P A and that reflected differences of origin, purpose, and industry affected. The iron ore, by-product coke, and pig iron regulations, for example, contained adjustment provisions that were administered on the basis of granting price adjustments ranging from total costs to total costs plus a profit, depending on the relationship of the applicant's or the industry's current earnings to their earnings during the period 1936-1939. The bee-hive oven coke adjustment provision was more liberal ; the minimum amount of relief granted under this provision was " total costs plus a reasonable profit." 1T The problem of individual price adjustments in steel prices faced O P A officials early in the history of the organization. 16 See, for example, Memorandum, Gardner Ackley, an economist in the Price Department, to John Sumner, Economic Adviser to the Deputy Administrator, Sept. 15, 1943. 17 Memorandum, Evelyn Felix, Price Analyst, to A. T . Cutler, Metals Branch Economist, Aug. 28, 1945, "Criteria for Processing Individual Adjustments in Iron and Steel."

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Soon after the issuance of Price Schedule 6 in April 1941, some of the companies affected by the regulation applied for adjustments under that section of the regulation providing for such applications. On May 2, 1941, the office granted an increase of 20 cents a cwt., in the price of structural steel shapes manufactured by a company who argued that it had traditionally sold these structural steel shapes at higher prices than those quoted by U. S. Steel Corp., whose price lists had been the basis upon which maximum prices for the industry had been established. The company indicated that continued adherence to the schedule would force the company to reduce its prices and operate at a loss. 1 8 O P A officials recognized the necessity of outlining the precise criteria under which price adjustments of this character could be granted. It was first suggested in rather general terms that the financial ability of the company to operate at ceiling prices should be the determining factor in judging of the necessity of a price adjustment and in judging the amount of relief to be granted. M This very general guiding statement was supplemented by the more precise standard that individual prices should not be increased as long as " companies are currently earning a greater return than in previous years." 2 0 Early in 1942, the vague adjustment provision in the steel regulation was amended to provide that an individual company might apply for adjustment when : (1) its cost of production on iron and steel products is above its mill net realization on such products or (2) its mill net realization is inadequate in view of its high operating costs for continued operations at ceiling prices.21 18 O P A Press Release, May 2, 194: ( P M 356). 19 Memorandum Martin Taitel to Henderson, May 13, 1941. 20 Memorandum Galbraith to the staff of the Price Division, June 27, 1941. 21 Amendment 2, Revised Price Schedule 6, effective March 25, 1942.

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The language of this provision was intended to provide for adjustments when a company was either losing money on specific products or was failing to earn an adequate return on its whole business. In processing these applications O P A indicated that it would " consider all relevant data, including the relation of the current, requested, and projected realization on the particular iron and steel products, or on the particular mill to the total overall return of the petitioner, and, the necessity, in terms of the war effort, for the granting of such adjustments." » While the language of this provision was later changed, the standards used by the office in applying this provision to basic steel products remained fairly constant. In general, O P A granted manufacturing costs on a specific steel product if the overall earnings of the applicant were greater than 4 . 2 % of net worth, a figure which represented the average industry return on net worth in the base period. If the applicant's overall earnings were below this figure, O P A granted adjustments up to total costs plus a reasonable margin. 28 These standards were less liberal than the standards established for adjustment of prices of goods manufactured pursuant to war contracts or subcontracts under Procedural Regulation 6, but the adjustment provisions of the steel schedule superseded the provisions of P R 6 and were clearly adequate to aid in securing essential supplies of iron and steel products. In the field of ferrous castings, however, more liberal standards were considered necessary to assist in securing adequate production. In granting adjustments for steel castings, O P A in general followed the criteria set forth in the instructions for Procedural Regulation 6. 24 In the instructions accompanying the adjustment provision in the gray iron castings regulation, the amount of adjustment that could be granted depended 22 Ibid.

23 Felix-Cutler Memo, op. cit. "Λ Ibid.

ΐ6θ

THE

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upon the overall profit position of the applicant. If he was earning overall 8 % or more on sales, castings prices could be adjusted to cover manufacturing costs. Total costs could be granted if overall earnings were more than 4 % but less than 8°/o on sales, and total costs plus 4 % could be granted if overall earnings were below 4 % on sales. 2S Most of the problems involving individual adjustment of prices of the basic non-ferrous metals, copper, lead, and zinc, were handled by the Premium Price Plan, the administration of which is discussed in Chapter V I I I . There were, however, some problems of individual price adjustment in the field of non-ferrous metals that warrant our discussion at this point. First of all, with respect to those miscellaneous metals and minerals that were frozen by the G M P R and remained under that regulation, an amendment was issued to Supplementary Regulation 15 of the G M P R providing that where there existed a general shortage of the listed metals or where a low-priced seller was involved, O P A could " a d j u s t the (applicant's) maximum price or prices by an amount necessary to insure the maintenance or expansion of such production upon a reasonable operating margin." 26 Perhaps the most significant individual adjustments undertaken in the field of the non-ferrous metals, were undertaken in the castings industry. Price officials had early come to the conclusion that the criteria for adjustments under Procedural Regulation 6 were inappropriate for adjusting the prices of non-ferrous castings. The chief reason offered for this conclusion was that the years 1936-1939 were not very profitable years for non-ferrous foundries, and that some consideration should be given to the large increases that had taken place in the volume of business since the base period. 2 7 25 O P A Manual, Sec. 5-1439. 26 Amendment 3 to Supplementary Regulation 15 of the G M P R , issued Dec. 24, 1942. 27 Memorandum, Dorothy C. Bacon, Economist, to Carl G. Holmquist, Price Executive, Copper, Aluminum, and Ferro-Alloys Branch, Aug. 31, 1942.

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l6l

Thus in February 1943, O P A incorporated an adjustment provision in the non-ferrous castings regulation which explicitly provided for individual adjustment for essential sellers and low-priced sellers of castings, such adjustments to be based on a comparison of current with 1936-1939 earnings, or a comparison of current earnings with earnings " which O P A considered appropriate for foundries of comparable size." 1 1 In applying this adjustment provision, O P A drew up a scale of percentage returns on sales appropriate for foundries of differing sizes and granted relief whenever overall return of a foundry fell below this calculated figure. It is likely that the calculated returns for small foundries were designed to return to these foundries a higher return than that earned during the years 1936-1939, but O P A officials justified this liberality on the basis that capital invested in foundries had increased by a large but immeasurable amount, and that such adjustments would help prevent large scale shifting of patterns. M The operating policies of the commodity branches with respect to individual adjustments were modified in at least two respects by direct action of the Deputy Administrator. In the first place, in those cases where production was actually ordered by the War Production Board, it was directed that no less than total costs should be granted under any circumstances. 80 While this was not applied often, it did represent a change in traditional thinking on the question of adjustment policy. In another instance, it was believed that where the essential commodity in question was produced in a single plant entirely devoted to its production something more than factory costs should ordinarily be granted, in spite of the overall profit 2 8 R M P R 125, effective Feb. 1, 1943. 29 Memorandum, Karl L. Anderson, Economist, to John D. Sumner, Price Executive, Non-Ferrous Metals Branch, April 8, 1943. 30 Memorandum, Jacob Rosenthal, Special Assistant to Brownlee, to Wallace, Sumner, Hart, and Gilbert, June 14, 1944. This proviso was an essential part of the Vinson Directive as applied to textile and apparel items.

IÓ2

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position of the company involved. In the Industrial Divisions, it was decided with the Deputy Administrator's approval, that it would be appropriate to permit what was called " total local costs " in such instances. " Total local costs " were all those costs directly associated with the operation of the separate plant. 1 1 STANDARDS FOR T H E DISTRIBUTIVE TRADES

When prices at the manufacturing level were increased either to meet the minimum requirements of law or to aid in the securing of the essential amount of supply, the office was faced with the problem of determining whether such price increases should be absorbed at the distributive level or passed on to the consumers. In trying to solve this problem, the office adapted the concept of the minimum requirements of law to the distributive trades. It was not particularly difficult to apply the earnings standard to the distributive trades, because the problems faced in this connection were comparable to the problems faced in applying the standard to the manufacturing industries, and because the distributive trades were on the whole so profitable that they could not qualify for price adjustment under this standard. The product standard, however, was specifically framed with manufacturing industries in mind and proved extremely difficult to adapt to the distributive trades. The " Tentative Summary of Price Policy " that proved so effective in establishing general rules of operation for applying pricing standards to the manufacturing industries gave price officials very little precise guidance when it came to the distributive trades. The requirements of law were said to be met with respect to particular products in the distributive trades, " if ( ι ) the price affords distributors generally some margin over inventory costs; ( 2 ) the relationship to prices of other individ31 Memorandum, John S. Clement, Director, Industrial Price Divisions, T o all Price Executives and Chief Counsels, Sept. 17, 1945.

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ual items can be defended as reasonable; and (3) if the price allows a narrower margin over inventory cost than customary, a valid reason exists for maintaining it at that level." The statement then went on to say, however, that as a " working rule, particularly when OPA raises a supplier's price, the distributor's price will be set or raised so as to preserve the dollars-and-cents margin which is customary in the trade unless there is strong reason to the contrary. Where acquisition costs have not sharply increased, or where an adjustment in the amount of the dollars-and-cents margin is administratively impracticable, the distributor's price may be increased so as to preserve the customary percentage margin." 32 Acting under these instructions, the office generally followed a policy that reflected the vagueness of the " front office " thinking in this connection. Meanwhile, the Emergency Court of Appeals in the Philadelphia Coke Company case held that when price increases were permitted at manufacturing level, it was " the duty of the Administrator, so far as possible, to require them to be absorbed at some appropriate intermediate stage in the process of production or distribution at which there may be an existing margin of profit reasonably sufficient to absorb them." 33 Supported by this legal direction, and prodded by the economic necessity of preventing further increases in the level of retail prices, the office began in a somewhat belated fashion to develop more precise standards for the application of price policy to the distributive trades. At long last, after many staff discussions and conferences with wholesale and retail trade representatives, the office established formal standards for price action in the distributive trades, and the substance of these policies was announced by Brownlee in March 1945· 84 32"Tentative Summary of Price Policy," op. cit., p. 6. 33 Philo. Coke Co. v. Bowles, 139 F. ad 349, 356 (1943). 34 OPA, Press Release, March 12, 1945 ( O P A 5395).

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The office stated that, in applying the earnings standard to the distributive trades, it would compare current earnings as a percent of sales with base period earnings measured in the same way. Such earnings were to be measured in terms of return on sales rather than return on net worth because of the difficulty of determining changes in investment in the distributive trades. The product standard was to be applied to the distributive trades by determining a minimum margin below which cost absorption would not be required. Such a minimum margin was defined as the trade's average expense rate (percentage of operating expenses to sales) or the previous margin on the commodity, whichever was lower. Further it was explicitly stated that cost increases would be shared by wholesalers and retailers accprding to their relative ability to absorb such increased costs. " One of the clearest descriptions of the application of the product standard to the distributive trades may be found in the Statement of Considerations accompanying an action which required steel product wholesalers to absorb increases granted to steel manufacturers in May 1945. The product standard, as applied to distribution trades requires that the applicable maximum price of any product must not operate to reduce the margin thereon below the average operating expenses of the group most important in its distribution. Where, as may be the case with respect to the increases here involved, the products on which manufacturers' price increases constitute, when taken together, the major portion of the total sales volume of the group most important in the product's distribution, it may be necessary to fix the maximum prices of those products at levels which on the weighted average basis, will yield a margin of profit not to exceed the trade's average operating expenses either because such a margin is necessary to protect the distributors special36 Note from Richard B. Heflebower, Economic Adviser, to Brownlee, attaching a draft of a policy statement on " Standards for Distributive Trades," Jan. 19, Γ945 ; OPA, Press Release, op. cit.

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izing in certain of the products or because there is substantial reason to conclude that, unless a profit margin were added, the trade would not equal its base period earnings.** Having set forth at some length the applicable standard in this situation, O P A then indicated that the warehouses had not submitted enough information to determine the exact applicability of this standard in the situation at hand. O P A pointed out that it must assume that regulations are generally fair and equitable unless definite proof of the contrary is presented, and that it was the responsibility of the warehouses to provide the O P A with the necessary information for such a determination if they wished O P A to act in their favor. 87 PRICE REDUCTIONS

T h e authority of the office to reduce prices stemmed initially from that section of the Emergency Price Control Act of 1942 which directed the Administrator, in establishing maximum prices, " S o far as practicable," to " ascertain and give due consideration to the prices prevailing between October 1 and October 15, 1 9 4 1 , " adjusted " f o r such relevant factors as he may determine and deem to be of general applicability, including the following: Speculative fluctuations, general increases or decreases in costs of production, distribution, and transportation, and general increases or decreases in profits earned by the sellers of the commodity or commodities, during and subsequent to the year ended October 1, 1941." Acting under this general authority, the Administrator established many maximum prices at an initial level below prevailing market prices. It seemed clear that the Administrator had the power to reduce established maximum prices as well, if such reductions were deemed nçcessary because of general decreases in costs of production or general increases in profits earned by the sellers of the commodity. 36 Statement of Considerations, Amendment 31 to R P S 49, issued May M, 1945·

37 Ibid.

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METALS

T h e problem of price reductions became important soon after the imposition of the G M P R , for at that time there was undertaken a general program of substituting specific dollars-andcents regulations for the G M P R freeze. The policy of the office with respect to the level of prices was clearly set forth by Galbraith in a memorandum to the staff of the Price Department. " A n y schedule," he said, " which represents prices lower than those determined by the general maximum will be welcomed. Subject only to the necessity of showing that such lower prices are generally fair and equitable, a special schedule representing lower prices at any stage of production is preferable in principle to the general maximum." M In August of 1942 a specific regulation was issued establishing dollar-and-cents prices for brass and bronze alloy ingot. Simultaneously, this regulation reduced the level of maximum prices approximately 1.20 c a pound below the March 1942 level. In justifying this price reduction O P A placed a great deal of stress upon the excessive profit position of the industry. O P A pointed out that the overall profits of the secondary smelting industry were over five times greater than the profits earned in the base period years, 1936-1939. Further, O P A argued that the profit per pound on brass ingot was over three times the profit earned in the base period. These estimates were based on figures for 1941, and O P A indicated that further increases in profits were revealed in financial statements for the first quarter of 1942. 39 The Administrator's implied power to reduce prices in this manner was strengthened and given specific confirmation in the Stabilization Act of 1942 and particularly in the accompanying executive order, which directed the Price Administrator " in fixing, reducing, or increasing prices . . . ( t o ) determine price ceilings in such a manner that profits are 38 Memorandum, Galbraith to ( S t a f f ) , June 27, 1942, " C r i t e r i a to be Observed in the Issuance of New Regulations ". 39 Statement of Considerations, M P R 202, issued Aug. 13, 1942.

S T A N D A R D S OF P E I C E A C T I O N

(2)

167

prevented which in his judgment are unreasonable or exorbitant." 40 A f t e r the issuance of this order, a number of attempts were made by the staff of the price agency to establish criteria for determining when profits should be considered " unreasonable or exorbitant." 41 While there finally developed apparent agreement that excessive profits should be measured in terms of the current ratio of profits to sales as compared with that ratio in the year ending October i , 1 9 4 1 , 4 2 no formal price policy statement was issued to the staff at that time. Finally, the hold-the-line order of April 8, 1943 specifically directed the Price Administrator to reduce prices which were " excessively high, unfair or inequitable." 43 Thus, O P A was now armed with the authority to reduce prices whenever they were themselves too high or whenever they resulted in profits that were too high. V e r y soon after the issuance of this order, Galbraith issued a formal statement to the staff of the Price Department setting forth very briefly the chief considerations in the reduction of prices. This brief guide to price action said that O P A would reduce prices when prices under a freeze regulation were initially established at a level which subsequent experience demonstrated was too high; when prices obtained a larger profit margin than that obtained in the year ending October 1, 1941, as a result of price increases or declines in unit cost resulting from expansion of output ; or when unit cost had declined relative to price as the result of a reduction in the price of materials or owing to the simplification of the product. 44 A few days later a more extensive instruction 40 Executive Order 9250, issued October 3, 1942. 41 Memorandum, Galbraith to the Price Staff, Nov. 26, 1942 ; Memorandum, Wilcox to Wallace el al., Feb. 12, 1943. 42 Memorandum, Galbraith to the Price Staff, Feb. 27, 1943. 43 Executive Order 9328, issued April 8, 1943. 44 " Price Policy Instruction No. I," Memorandum from Galbraith to the Staff of the Price Department, April 14, 1943-

l68

THE

HISTORY

OF B A S I C

METALS

was circulated among the staff which repeated the above standards with respect to the reduction of excessively high prices, and indicated that price reductions were also to be instituted when profits were exorbitant, i.e., when the current ratio of earnings sales exceeded the ratio of earnings to sales in the period ended October ι , 194.1. 48 Soon after the announcement of these standards, O P A policy with respect to profit reductions became the subject of an investigation by the so-called Smith Committee of the House of Representatives. This committee began its investigations with a sensational announcement concerning Ginsburg's " missing files " which were alleged to contain evidence of an O P A plot to " bring the entire American industrial system into a bureaucratic control . . . by the regulation, not of prices for the purposes of preventing inflation, but for the purpose solely of controlling the level of profits which might be earned by American industry." 49 During this investigation, many price officials were interrogated on the origin and meaning of various memoranda written on the subject of price and profit reduction, and a statement from the Administrator was introduced to clarify the policy of the office in this respect. In this statement, the Administrator argued that the power to reduce prices was set forth in the Emergency Price Control Act of 1942, and that this power was simply " reinforced " by Executive Orders 9250 and 9328. " The only possible test," said the Administrator, " of the fairness and equity of the level at which maximum prices are set is to be found in its effect upon industry profits. If such profits are unduly squeezed by a ceiling, it 45 " Price Policy Instruction No. 2," Memorandum from Galbraith to the Staff of the Price Department, April 19, 1943. 46 Statement of Harold L. Allen, General Counsel of the Smith Committee, 78th Cong., rst Sess., Hearings before the Special Committee to Investigate Esecutive Agencies, part 1, April 7-June 22, 1943, p. 1195.

STANDARDS OF P R I C E A C T I O N

(2)

IÓQ

must be concluded that the ceiling is too low. If they are unduly inflated, it must be concluded that the ceiling is too high." 47 In spite of OPA's reasoned defense of its price reduction policies, the Smith Committee was not disposed to let the agency off easily, and, in its next formal report, the Committee renewed its charges that the American people were the victims of " a well devised and planned scheme to control the profits of American industry." 48 The political effects of such a charge were such that the incoming Administrator, Chester Bowles, while insisting that the office retained the authority to reduce prices in many circumstances, decided to place less emphasis upon this aspect of OPA's activities. Consequently, price officials gave little attention to this problem as a problem of policy, and while a number of price reductions were undertaken in the months that followed, price reductions were no longer an essential part of OPA's program. SUMMARY

The standards developed by O P A for discretionary increases were not as precisely defined as the standards for meeting the minimum requirements of law. Actions undertaken " to aid in the securing of adequate production " were usually limited to an increase necessary to return total unit costs to the highest cost producer whose output was needed. Occasionally, O P A permitted greater price increases. The office made every effort to grant all discretionary increases on a differential rather than on a uniform basis. The most common type of differential pricing for purposes of assisting in the securing of adequate supplies were individual adjustments. Such adjustments were usually granted to cover manufacturing costs, total costs, or total costs plus a profit, depending upon the overall profit position of the individual applicant. 47 Hearings, op. cit., p. 1200. 48 78th Cong., ist Sess., Second Intermediate Report of the Select Committee to Investigate Executive Agencies—House of Representatives, p. 12.

170

THE

HISTORY

OF BASIC

METALS

In many cases of industry-wide price increases for purposes of assisting in the securing of adequate supply, OPA tried to insist that the War Production Board use all of its direct powers over production before agreeing to increase prices. In general, the War Production Board was unwilling to undertake this type of direct action, and although some joint programs were worked out, deadlocks between the two agencies were often broken only by reluctant price action. Standards for the distributive trades were developed rather belatedly by price officials, who tried to adapt the concept of the minimum requirements of law to the problem of determining the extent to which distributors should absorb increases in costs. These standards were not very important in the administration of metals price control, however, except in the area of steel warehouse prices. The Administrator's authority, to reduce prices stemmed from statutes and executive orders and was exercised in many commodity areas, including the metals area, especially when specific regulations were substituted for the GM PR freeze. While criteria for price reductions were prepared in the agency, political and economic pressures acted to de-emphasis the role of pi ice reductions in the price administration program.

CHAPTER V i l i T H E ADMINISTRATION OF T H E PREMIUM PRICE PLAN D E V E L O P M E N T OF T H E P L A N

THE Premium Price Plan, as initially designed, provided that quota production should receive ceiling prices, and that incremental production should receive, in addition, premium payments designed to reflect the cost differences between these two segments of output. The plan was put into operation in the following manner: Quotas were established for each mining property based on the amount of metal that could reasonably be produced at the ceiling price. Generally, these initial quotas were determined on the basis of average monthly output for the calendar year 1941. Premium payments of 5 c a pound in the case of copper, and 2-}i c a pound in the case of lead and zinc, were paid directly to the producers (through the smelters who acted as agents for the Metals Reserve Company) for all production in excess of these quotas. These premium payments were figured on the basis of estimates of the additional costs of mining incremental output. The entire amount of the metals produced flowed through the normal channels at the ceiling prices established by OPA. It was provided that none of the initial quotas could be raised, but provisions were made for the downward revision of these quotas " in special cases." The plan, as initially established, therefore), appeared to assume ( 1 ) that the costs of producing the quota production would remain relatively stable, and (2) that the only limitation on incremental production would be a lack of adequate facilities. After a period of some operation under the plan, neither of these assumptions proved any longer valid. In 1942 a number of wage increases were granted to metal miners, and in the summer of 1942 there developed a severe shortage of 171

I72

THE

HISTORY

OF B A S I C

METALS

manpower in the mining areas, partly as a result of the draft and partly as the result of the attractions of higher wages in adjoining industrial areas. Consequently mining operations were being conducted with less efficiency and at a greater cost than before. Under these circumstances, the initial quotas were no longer adequate at existing ceiling prices to assure the continuance of production at current rates. 1 A s a result of these developments, which were probably anticipated by the authors of the plan, the emphasis of the plan itself shifted. The theoretical distinction initially drawn between quota production and incremental production was largely abandoned, and the revision of quotas soon became the greatest task of those charged with the administration of the Premium Price Plan. The group of mining engineers that had established the initial quotas developed into a formal quota committee which devoted an increasing amount of time to the problem of quota revision. Meanwhile, steps were taken to provide higher premium payments for certain classes of mines to encourage maximum metal production. After some discussion throughout the fall of 1942, price officials recommended that further " Β " and " C " quotas be assigned to certain zinc and lead mines in addition to the initial quotas ( " A " quotas) established when the plan was inaugurated. In his letter of December 15, 1942, recommending such action to Jesse Jones, Leon Henderson pointed out that " T h e impact of wage increases in the Western States and the diminishing grades of ore in the Tri-State are particularly noticeable as factors causing the extinction of operating margins at certain mines now operating under zero ( " A " ) quotas." H e urged that additional premium payments of 2}4 c be made for all production above these new quotas. * This proposed revision was approved by William Clayton, Assistant Secretary of Commerce, on December 23, 1942, 1 O P A , The Premium

Price Pia» for Copper, Lead, and Zinc,

I945r p. 12. 2 Letter, Henderson to Jones, Dec. 15, 1942.

October

A D M I N I S T R A T I O N OF P R E M I U M P R I C E P L A N

I73

and the details were announced on February 18, 1943. * Shortly thereafter, a similar special quota and premium payment was devised for marginal copper properties, limited to mines that produced less than 2,000 tons of copper in 1942, and, like the " Β " and " C " quotas for zinc and lead, subject to revocation on thirty days notice. 4 In April 1943, O P A issued a regulation that closed a loophole in the administration of the Premium Price Plan. It is customary in the mining industry for mining companies to lease ore properties and pay the owners a royalty often based on the value of the ore produced. After the initiation of the Premium Price Plan, the royalties of many leases were increased to take advantage of the premium payments that were being paid to the mining companies, and, therefore, some of this premium money paid by MRC to make possible the production of marginal ores was being " dissipated in the payment of excessive royalties to lessors." 8 To prevent this practice from disrupting the plan itself, O P A issued MPR 356, effective April 1, 1943, that froze all royalties on the basis of the lease in effect on Dec. 31, 1942—except that no royalties could be paid beyond the ñrst series of premium payments. * STANDARDS OF QUOTA

REVISION

The method by which quotas were revised under the Premium Price Plan may be summarized in this way: A forecast was made of future average monthly production of a given mining property; average costs were then determined for the entire amount of this production and a reasonable margin was added to these average costs. From this sum of costs and margin was subtracted the net smelter return on the basis of ceiling prices, and the difference represented the amount of 3 Letter, Clayton to Henderson and Eberstadt, Dec. 23, 1942 ; RFC, Press Release, Feb. 18, 1943 (RFC-1753). 4 RFC, Press Release, May 1, 1943 (RFC-1802). 5 Statement of Considerations, M P R 356, effective April I, (943. 6 Ibid.

174

THE

HISTORY

OF B A S I C

METALS

necessary premiums. A quota was then established which would yield premium payments in the indicated amount. A s Donald Wallace said in addressing the American Mining Congress in November 1942, "quota adjustments under the Premium Price Plan constitute a flexible instrument for adjusting mine revenues so as to enable continuous maximum production in the face of changing circumstances which occasion changes in cost—unavoidable decline in grade of ore, wage increases, fluctuations in operations owing to changes in the manpower situation and the like." 7 Mine quotas. When the Premium Price Plan was first drawn up, and indeed, when it was first announced by the Governmental agencies involved, it was contemplated that quotas would be established on a company basis. The O P M - O P A announcement on January 13, 1942 stated that, " I n general, the quotas assigned to companies now already producing any of these metals will be based on their output in 1941." 8 (emphasis supplied.) Steps were also taken to draw up initial quotas on the basis of overall company production. 9 The arguments in favor of such company quotas were ( 1 ) that a profitable company could reasonably be expected to continue some unprofitable mine operations if its overall profit position was favorable, and (2) that such company-wide quotas would prevent such abuse of the Premium Price Plan idea as shifting manpower and resources to those ores that would return premium prices. The alternative was, of course, to establish premiums on a mine, or group of mines, basis. This proposal was supported by arguments that more production would be forthcoming if the returns from a given mining property were not dependent upon production from all other mining properties, 7 Address of Donald H . Wallace before the American Mining Congress, Nov. 17, 1942 (mimeograph). 8 OPM-OPA Press Release, Jan. 13, 1942 ( P M 2160). 9 See Memorandum, L. R. Kegan to Carl Holmquist and George R. Taylor, Jan. 13, 1942.

ADMINISTRATION

OF P R E M I U M

PRICE

PLAN

I75

and that appropriate safeguards could be established to prevent the type of abuse indicated above. O P M - O P A officials finally announced that " Quotas are being established for a particular mine or groups of mines rather than by companies, in order to avoid the possibility that expenditures for expansion in the case of one property might be deterred by uncertainties as to future production from one mine or group of mines of the same company." T o prevent abuse, it was provided that if the production of any single property showed a material decrease below its quota, the situation would be investigated and if no reasonable explanation could be offered the quotas of all properties of the company might be combined and premiums paid only to the extent that total production exceeded the company quota. 10 W e may assume that the decision to determine quotas on a mining property basis rather than on a company basis had no relevance to the question of maintaining the " general fairness and equity " of the ceiling prices of copper, lead, and zinc. It is probable that the base prices for these metals could have met the minimum requirements of law without the aid of the Premium Price Plan. In any event, had this Plan been developed for the sole purpose of maintaining the general fairness and equity of these prices, it is conceivable that quotas established on either a mine or company basis could have been manipulated for that purpose. The chief objective of the Premium Price Plan, in terms of price policy, however, was to " assist in the securing of an adequate supply " of these metals without increasing prices across the board. Viewed in this light, the establishment and adjustment of quotas were comparable to individual price adjustments for producers of essential supply. The establishment and adjustment of quotas on a mine basis were not, however, in line with the general office policy that in instances of essential supply adjustments the amount of 10 WPB-OPA Press Release, Feb. 9, 1942 (PM 2458).

176

THE

HISTORY

OF BASIC

METALS

relief granted should have some relationship to the overall earnings position of the company. Even in the closely related area of iron ore prices, the adjustment provision available to the mining companies was applied in such a way that the mine return depended to some extent upon the overall earnings position of the companies involved.11 Thus, while the policy of mine quotas rather than company quotas may have had a beneficial effect upon total production, its adoption by OPA officials was in contrast to the policy adopted in most instances involving essential supplies. Mining costs. When we turn to a discussion of the determination of mining costs as a step in the procedure of adjusting quotas under the Premium Price Plan, we find that there was very little difference between OPA's treatment of these costs and OPA's treatment of ordinary manufacturing costs in its industrial price administration. One important exception to this general statement may be noted, however. Under the " hold-the-line " order, wage increases approved by the NWLB which involved a probable increase in prices, had also to be approved by the Director of Economic Stabilization before becoming finally effective. Under OPA procedures, the price agency provided the Director of Economic Stabilization with the necessary price information for him to make his final decision.13 This procedure, of course, was extended to the application of the Premium Price Plan, and the Quota Committee assumed the responsibility of determining in given instances whether a proposed wage increase could be absorbed out of the existing operating margin, or would involve a quota adjustment.1* At the same time the Director of Economic Stabilization gave advance approval to all wage increases requiring quota reductions recommended by the Non-Ferrous Metals 11 See above, p. Γ57. 12 Operating Order 7 (Revised), May 26, 1943. 13 Letter, Landon F. Strobel, Executive Secretary of the Quota Committee, to Richard V. (Ulbert, Economic Adviser, OPA, Jan. 30, 1943.

ADMINISTRATION

OF P R E M I U M

PRICE PLAN

I77

Commission of the National War Labor Board." In addition, however, the Quota Committee was authorized to make retroactive quota adjustments to compensate for retroactive wage increases. 1 ' In no other area did OPA permit price relief on a retroactive basis for such purposes. It is true that many of the individual adjustment provisions provided for open-billing from the time of the submission of the application of relief, but for reasons of principle and expediency OPA did not permit retroactive price increases except in the most unusual circumstances. 19 In the field of copper, lead, and zinc this principle was abandoned partly because of the desire to avoid action that might have a depressing effect upon production, and partly because the mechanics of providing for such retroactive payments were relatively simple under the Premium Price Plan. In addition to these ordinary mine operating costs, including retroactive wage increases, the quota committee, in determining whether or not to make quota adjustments, gave consideration to a number of costs of a capital nature including the costs of rapid amortization of essential investment in equipment and facilities, and the costs of developing new ores for mining operations. This raised the question of whether it was the purpose of the Premium Price Plan to provide funds for capital expansion. On the one hand, much of the discussion among economists with respect to the purposes of such a plan before its adoption seemed to indicate that the bonus price for additional output was intended to provide an inducement for producers to expand plant and facilities. Such an intention was also indicated in one of the early explanations to the industry of the purposes of such a policy. " On the other hand, 14 Letter, James F. Byrnes, to G. W. Taylor, Vice Chairman, NWLB, Jan. 29, 1947. 15 Letter, C. E. Wilson to Wm. L. Clayton, Sept. 8, 1943. 16 See opinion of the Administrator In the Matter of Valentine and Sons. 17 See speech of John Hamm, Deputy Adm. OPA before the American Mining Congress, Sept. 30, 1941 (PM 1254).

J78

THE

HISTORY

OF

BASIC

METALS

one of the lawyers w h o assisted in the f r a m i n g of premium price policy argued that, " T h e premium price plan should not be used as a means of furnishing capital w i t h which industry m a y expand facilities. If the expansion of facilities is necessary to increase production the expansion should be financed by one of the various methods that have been developed during the past year and a half to meet just such a situation. . . T h e premium price plan should be used only t o induce expansion of production which cannot come out at the established m a x imum prices even if the government were to install all necessary additional facilities."

18

T h e treatment of amortization by the Q u o t a Committee w a s guided by the consistent O P A policy in this matter set forth in Accounting Policy M e m o r a n d u m N o . 10, which stated, that ordinary depreciation rates should be used " unless there is affirmative evidence

that a. particular

facility will

lose its

economic value substantially more rapidly than would ordinarily be expected."

19

T h i s rule was applied generally in the administration of the Premium

Price

Plan, and the policy adopted by the Q u o t a

Committee provided that only capital invested since January ι , 1942 should be considered as amortizable and t h a t : 1. Amortization of contemplated investment in mine facilities should be predicated on firm assurances to the Committee that such facilities are essential under present conditions. 2. In amortizing facilities already provided, careful consideration should be given to the extent to which past earnings have permitted the recovery of such investment. 3. In general, amortization allowances should not contemplate complete amortization of facilities within a period shorter than the remaining life of the Premium Price Plan. E x ceptions to this policy should be justified on the merits of 18 Memorandum, Carl A. Auerbach, price attorney, to David Ginsburg and David Cobb, Feb. 5, 1942. 19 O P A M a n u a l , S e c . 6-8010.

ADMINISTRATION

OF P R E M I U M

PRICE PLAN

I79

the individual case and should provide in appropriate fashion for the corresponding upward adjustment of quotas when amortization is completed. 4. The calculation of appropriate rates of amortization should recognize either the probable value of such facilities in postwar operations or a reasonable salvage or recovery value of such assets if there is little likelihood of post-war operations.20 In other words, while it was contemplated that there would be a number of cases in which the entire cost of additional facilities would be written off by premium payments from th ** 3 « S N

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CONCLUSION

APPENDIX

243

IV

INDEXIS o r COPPER, LEAD, AND ZINC PRODUCTION, 1939-1945

(Unadjusted for seasonal variation) Average monthly production 1939=100

Month & Copper Year

Lead

Zinc

1939

100.0

100.0

100.0

1940

120.6

1102

113.9

1941

131.6

1112

1283

1523 126.9 150.5 143.9 152.4 1492 150.5 142.4 142.5 153.5 155.4 160.1

140.0 1232 129.9 127.1 124.1 121.1 119.7 114.0 1063 1093 106.1 112.4

149.0 130.0 141.6 139.8 140.5 131.6 129.0 125.7 117.6 124.7 120.0 128.5

150.6 1402 153.5 150.1 155.9 1475 145.1 143.7 148.5 155.7 149.4 1512

105.6 103.0 113.7 1113 107.4 104.6 103.4 108.9 103.9 108.1 1065 109.9

120 2 113.8 127.9 1352 121.9 124.0 122.8 125.6 129.4 133.0 136.4 131.3

1942 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 1943 Jan Feb Mar Apr. . . . · . . May June July Aug Sept Oct . Nov . . Dec

Month A Year

1944 Jan Feb Mar Apr May June July Aug Sept Oct Dec 1946 Feb Mar Apr May June July Sept Oct Nov Dec

Copper

Lead

Zinc

145.8 143.9 155.1 144.7 144.6 137.1 124.2 127.1 122.9 119.9 113.1 117.7

110.5 108.7 112.3 107.9 103.8 96.3 84.1 102.0 89.9 912 91.7 91.7

134.8 132.8 138.7 131.1 128.6 1212 115.1 122.4 114.4 110.1 110.6 106.0

111.5 106.4 116.6 112 2 117.6 113.1 101.0 100.0 98.6 101.5 96.9 93.8

98.9 90.4 100.8 98.1 1012 91.4 87 S 88.0 86.7 942 915 89.9

116.8 103.9 1155 106.2 110.9 107.0 97.6 95.0 96.8 106.0 106.8 99.9

Source : Bureau of Mines A Office of Metal Mining Analysis, ΟΡΑ.

SELECT BIBLIOGRAPHY GENERAL

MATERIAL

Crum, W. L., Fenelly, J. F., and Seltzer, T . H., Fiscal Planning for Total War, Ν. Y., National Bureau of Economic Research, 1942. Harris, Seymour E., Economics of America at War, Ν. Y., Norton and Co., 1942. Keynes, J. M., How to Pay for the War, Ν. Y., Hartcourt Brace and Co., 1940. Kuznets, Simon, National Product—War and Pre-war, Ν. Y . National Bureau of Economic Research, 1944. Mitchell, Wesley C , Wartime " Prosperity " and the Future, Ν. Y . National Bureau of Economic Research, 1943. Moore, Geoffrey H., Production of Industrial Materials in World War I and II, Ν. Y . National Bureau of Economic Research, 1944. Pigoli A. C., Political Economy of War, N. Y., The Macmillan Company, 1940. Spiegel, H. W., Economics of Total War, N. Y., Appleton Press, 1942. Stein, E., and Backman, J. (ed.), War Economics, N. Y . Farrar and Rinehart, 1942. PRICES A N D PRICE CONTROL

Adams, G. P., Wartime Price Control, Wash., D. C., Am. Council on Public Affairs, 1942. Auerbach, Alfred, OPA and Its Pricing Policies, N. Y., Fairchild Publishing Co., 1945. Baruch, Β. Η., Preventing Inflation; Statements and Writings on Controlling Living Costs and Preventing Inflation, Sept. iç4i-Dec. 1941, Ν. Y., Prentice-Hall, 194a. Cavers, David F. (ed.), " T h e Emergency Price Control Act," a symposium appearing in Law and Contemporary Problems, Duke University, School of Law, Winter 1942, 9 ( 1 ) · Conference of Price Research, Cost Behavior and Price Policy, Ν. Y., National Bureau of Economic Research, 1943. Darrock, Michael (pseud.), "What Happened to Price Control?" (Harpers Magazine, July 1943, 187 (1118). Fellner, W. J., Treatise on War Inflation; Present Policies and Future Tendencies, Univ. of Cal., 1943. Galbraith, J. K., " Price Control : Some Lessons From the First Phase," Am. Econ. Rev. (Supplement), March 1943, 33(1) pt. 2. Garrett, P. W . et al., Government Control Over Prices, Wash., D. C., War Industries Board, 1921. Ginsburg, David, "Legal Aspects of Price Control in the Defense Program," Am. Bar Association Journal, Sept. 1941, 27. »45

246

SELECTED

BIBLIOGRAPHY

Hansen, Alvin H., "Defense Financing and Inflation Potentialities," Rev. Econ. Stat., Feb. 1941, 2 3 ( 1 ) . See also discussion of this article by J. W . Angeli, J. K . Galbraith, A . G. Hart, et al. in Rev. Econ. Stat., May 1941, 23(2). Hardy, C. O., Wartime Control of Prices, Wash., D. C., Brookings Institution, 1939. Harris, S. E., Price and Related Controls in the United States, N. Y . , McGraw-Hill, 1945. , Inflation and the American Economy, N. Y., McGraw-Hill, 1945. Henderson, Leon, and Nelson, Donald, " Prices, Profits, and Government., Harvard Business Rev., Summer 1941, 19(4). Hirsch, Julius, Price Control in the War Economy, N. Y., Harper Brothers, 1943 Humphrey, D. D., " Price Control in Outline," Am. Econ. Rev., Dec. 1942, 32(4)· Mills, F. C „ Prices in a War Economy, N. Y., National Bureau of Economic Research, 1943. Nelson, Saul, " Progress of Price Regulation to Sept. 1942," Monthly Labor Rev., October 1942, 55(4). Polak, J. J., " O n the Theory of Price Control," Rev. Econ. Stat., Feb. i