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REMARKS SUBMITTED BY LOUIS H. BEAN, ECONOMIST, OFFICE OF THE SECRETARY, DEPARTMENT OF AGRICULTURE, AT THE REQUEST OF THE HONORABLE EMANUEL CELLER, CHAIRMAN, HOUSE COMMITTEE ON THE JUDICIARY, ON THE MAY 18, 1950, COMMENTS OF BRADFORD B. SMITH, ECONOMIST OF THE UNITED STATES STEEL CORP., ON THE TESTIMONY OF ECONOMISTS BEFORE THE SUBCOMMITTEE ON STUDY OF MONOPOLY POWER

You have asked for a statement on Mr. Smith's comments on my testimony (agriculture, industry, and steel) before your Subcommittee on Study of Monopoly Power. I regret, in submitting this statement, to have to point out the errors and shortcomings in Mr. Smith's comments.

I presented to you and your committee straightforward facts regarding current steel production and capacity, as published by the American Iron and Steel Institute, and their relation to steel requirements for full employment. One of the facts is that the current rate of production, running at about 100,000,000 tons, corroborates the projection I made 3 and 4 years ago. At that time spokesmen for the steel industry would have had us believe that 100,000,000 tons for 1950 was fantastically high compared with their judgment of a much lower demand for steel. As a matter of fact and record, their "forecasts" of the postwar demand for steel were wrong in 1940 and consistently wrong in 1947, 1948, and 1949.

Steel spokesmen are on record all over the lot, and all over the calendar, ever since the defense days of 1940-41, with their judgment and fears that postwar steel capacity would outrun demand.

Immediately after the war they told their stockholders, Congressmen, the business community and the world at large, that the immediate postwar demandto use Mr. Smith's own words-was "far above any rational peacetime demand even supposing that there never was another depression." They, however, "supposed" no such thing, preferring to believe that we are bound to have depressions, because we have always had them. This very simple reasoning has misled them and they, in turn, have undoubtedly (and I assume unwittingly) misled many others. Annually since 1946 we have had prophecies from steel industry spokesmen to the effect that very soon now, in a matter of a few months, we would see the abnormal postwar demand falling off and steel would be running out of our ears. This was the prophecy in 1947, for the last part of 1947. It was the prophecy in 1948 for the last half of 1948, and it was again the prophecy in 1949 for the last half of 1949.

To appreciate fully the flavor of Mr. Smith's analysis, judgment and forecasts bearing on steel demand, it is necessary to remember that he is a firm believer in the inevitability of business fluctuations; in fact so wedded to this type of prophecy that he is not willing to assume that future depression will be so long delayed that the pulling down influence of the 1930-40 period (on his trend lines) will be offset. Everyone hopes this will be true, but the assumption defies the unbroken record of the past and leaves the assumer somewhat in the role of an ostrich.

Mr. Smith even tells us what it is that feeds this firm belief in the inevitability of depressions. It is this: "The monetary mechanism established by the Federal Reserve System has aggravated the violence of business fluctuations since World War I. This last is of infinitely greater significance to the avoiding of future depressions than is steel. But that is a different subject. For the present it must suffice that until there is basic alteration in our public attitude toward monetary and bank credit policies, fluctuations of inflationary and deflationary violence seem probable."

I quote these statements not because I am one of the assumers but because they suggest why spokesmen for the steel industry are so persistently opposed to the presentation of the simplest fact with regard to the steel industry, namely, that in years of practically full employment there is one level of demand for steel, and that in years of less than full employment there are progressively lower levels of demand, depending on the depth of the recession or depression.

In my testimony I laid out the actual record of per capita steel production from 1900 to date, and showed you what our experience has been in years of prac tical full employment, that experience and its meaning for the present and future being the question at issue. To avoid misleading you or anyone else, I included in that chart not only the full employment experience with its rising trend in per capita production, but also the experience in all other years-bad as well as good. But it is necessary to make clear that the rising trend portrayed there is based on similar experience; that for all practical purposes they are analogous years of prosperity and full employment. To have shown the corresponding

trends for moderate depression or for deep depression years, it would have been necessary to select the analogous years-comparable years of moderate depressions and of deep depressions. This is elementary. This is the procedure for dealing with analogous years for the purpose in hand-not Mr. Smith's disregard for the different levels of business activity and employment. To say, as he does, that his statistical manipulations are "applied to analogous records of the past" is entirely misleading in relation to the question of full employment required for steel. No matter how often one says it, the high 1929 demand and production of steel is not "analogous" to the meager demand and production of 1932.

It is necessary to see clearly the difference between my trend line based on strictly comparable analogous years of prosperity and full employment-and Smith's long-term trends in which he used all years indiscriminately-disregarding the great differences in the levels of business activity and employment. For that reason I show in my chart Mr. Smith's two trends-maximum and minimum long-term trends-as they appear in chart II of his pamphlet America's Steel Capacity, What It Is, What It Does.

Incidentally, his chart II is similar to my chart 3 (my testimony before your subcommittee). It shows the record of per capita consumption from 1885 to 1947, his two crooked or S-shaped trend lines, and the Bean "trend" taken from chart IV of my 1947 testimony (Senate Small Business Committee).

In the second paragraph of Mr. Smith's comments he states that I "lifted" his two curves from his pamphlet. You and your committee may be able to figure out for yourselves why Mr. Smith resorts to a slang word commonly used to mean "stealing" to describe a most common pictorial procedure that he himself used 2 years ago when in his pamphlet he reproduced one of the curves from my 1947 testimony, for comparison with his.

Mr. Smith objects to my labeling his curves "anticipating a major depression." The foregoing quotations, as well as the statistical method of curve fitting he insists on, make it perfectly clear that his curves fail to rise more than they do after 1920 because he allows the depression of the 1930's to exert a statistical "pulling down" influence. Apparently, the pulling-down influence on his minimum curve is too great, giving an unreasonably low estimate of "normal.” Therefore, in order to raise it somewhat, he adds a bit of "good judgment." His curve now rises from 835 pounds per capita in 1947 to 985. Had he added a dash or two more of that “good judgment” he could have produced another curve, “C” the same straight-line trend that I show for full employment years, but without the pulling-down effect of the 1930-40 experience. Then he would have had three estimates: One for 830 pounds per capita based on a pure, mathematically computed (but unrealistic and irrelevant) "logistic" curve; one for 895 pounds per capita based on a "freehand," "good judgment," "judicious and arbitrary" departure from the mathematical curve; and, the third for 1.330 pounds based not on just "good judgment" but better judgment and thus filentical with my projected figure.

Smith says that the two Smith curves "are presented as historical, not forecasting trend estimates, based on all years of high, lower, and average production," but he adds "no forecasts of either production or capacity of any sort were made." This, too, is misleading.

If Smith's curves were not intended to show what "a good statistician familiar with the subject matter" would say as to the amount of steel that past experience suggests would be appropriate for full employment in 1950, then there was no real purpose in publishing them to show that my estimates were unreasonable.

Actually, there was a purpose, whether you call it "forecasting" or what. That purpose is clearly indicated in the first paragraph of Smith's pamphlet on steel capacity that reads: "The present (1947-48) annual rate of steel production in the United States is 85,000,000 tons, with facilities for producing a little over 94,000,000 tons. It is the writer's opinion that this production is currently greater than a normal, continuous, peacetime full-employment demand for steel."

How much greater 85,000,000 tons is, Smith indicated by showing (p. 33) that his two curves for 1947 represent "approximately 59,000,000 tons and 71.000.000 tons of demand." The average of these two limits of "normal, continuous, peacetime full-employment demand" is 65,000,000 or 35,000,000 tons35 percent below the 1950 actual level of production. To turn the comparison around, the actual production today, which is not enough to meet current demand, is over 50 percent in excess of Smith's average normal. What a collapse he is implying for his industry and the rest of the country.

Smith very naturally does not want to call this understatement of production and capacity requirements a "forecast," yet on page 7 of his comments on my statement in these hearings, he labels his reading from the trend lines in my 1947 testimony, "forecasts." If his trend line is not a forecastand of course no trend line is unless so labeled by the author-then it would seem like willful misrepresentation and (considering the needs of your committee) quite misleading to label my trend lines, "forecasts." Having so labeled them, he then contrasts my trend lines with actual production for 1947, 1948, and 1949 and proceeds to try to discredit them by showing they were respectively 21, 17, and 35 percent higher than actual production. If he were to make this comparison on his own analyses, we would find that his "forecasts" of 830 and 985 pounds per capita, averaging 907 pounds, were exceeded by actual production in 1947 by 30 percent, in 1948 by 33 percent, in 1949 by 15, and so far this year by about 45 percent.

Mr. Smith's effort to mislead and discredit is further indicated by his apparent attempt at justification. In his paragraph 8 he says, "under questioning Mr. Bean conceded that the years 1947, 1948, 1949 were full employment years, that is, the kind of years for which he was forecasting steel demand." The last clause is gratuitous. As a matter of fact I did not say that the relatively little unemployment in these years made them comparable with the full employment years on which my trend line was based. In my 1947 testimony I, myself, raised the same question that a member of this committee raised. I then gave essentially the same reply. I said (and it is no secret to Mr. Smith for he even comments on it in his pamphlet):

"The question has been raised why 100,000,000 tons or more of steel production is indicated (note, not forecast) for future full-employment situations when we have practically full employment today with steel production of only 85,000,000 tons. One answer is that the present volume of production is below the current demand and that the present shortage of steel and other raw materials has a retarding effect on the total national production. During the last part of 1946, and the first half of 1947, total national output of goods and services per man-hour appears to have been at least 15 percent below normal, taking into account the longtime upward trend in the Nation's productivity. If the shortage in total output of industrial goods and services were to be made up, it would increase the consumption of steel and other raw materials, and the total steel required would exceed present capacity."

Now I would add that the 1948-49 shortages in steel and the black- and gray-market prices helped feed an inflationary situation and contributed to fears of actual deflation in 1949. Had there been enough steel capacity in 1948 to meet a 100,000,000-ton requirement, prices would not have soared, the total industrial production would have been greater, and productivity in steel-consuming and other industries and services would have been greater. And, that greater national output of goods and services could have been produced by the same total labor force, working at normal efficiency. In other words, the 1947-48 shortages in steel were felt not in unemployment but in inflated prices, subnormal production, and an inventory scramble that helped bring on the 1949 recession.

Mr. Smith's statistical manipulation suffers not only from his seeming expectation of recurrent depressions, but also from a seeming misconception as to the maturity of the steel industry. He seems to believe that the steel industry has attained maturity and that therefore, "the growth trend in per capita steel demand cannot, in good sense, be expected to be as rapid now as in the heyday of discovery and development."

"What are the characteristics of long-term grown in most major industries? First there is a period of discovery and development, followed by rapid, market-finding expansion. That is followed, in turn, by a period of slower growth as the Nation discovers what proportion of its per capita effort it wishes to devote to the new particular industry, in the light of its product's utility and cost. Smoothed curves of the so-called S-type exhibit the characteristics just described. When fitted to the data, they have a certain propriety as descriptions of long-term trends.

"This propriety rests upon observation, analysis, and statistical demonstration in terms of historically observed fact. The significant feature of S curves is that, as the industry matures its innovations, its trend rises at a steadily decreasing rate.

"An S-type curve is reasonably appropriate to steel production trends over the past half-century.

*

"All this (and more) in his pamphlet may be good rationalization, but it is not adequate rationalization. If Smith were to present the growth of the steel industry in its proper historical setting he would trace the record backward to the time when iron was used predominantly. It is the rise of steel as a gradual substitute for iron, 50 or 60 years ago, plus the "pulling down" effect of the depression of the 1930's that leads Smith to see S curves where there aren't any.

His final comment is worth noting (for its mistaken interpretation). He says, "It is an inadequacy or 'shortage' of the tools of production, and not abundance thereof, which provides the jobs of making good that shortage, or accumulated demand." He thinks that "if by some miracle we would have come out of the war with 125,000,000 tons of modern capactiy" there would not have been the jobs created by postwar capital expenditures (including the $1,000,000,000 spent by the United States Steel Corp. But he fails to observe that if we had been so favored we would have had enough steel to produce many of the things shortages prevented us and the world from producing. The jobs created by capital expansion would have been created by the production of finished goods and, what is more important to the consumer, prices generally would have been lower. It is true that the making of tools of production provides jobs, but it is fallacious to argue that society must be kept on a short ration of tools to create jobs when there are so many more jobs to be created by putting ample tools into productive use. Mr. Smith misreads the record of our growth as an industrial power if he thinks that shortages of steel helped do it. As a matter of fact, steel capacity prior to World War II has almost always exceeded peacetime prosperity demand. The erroneous notion that steel must be scarce in order to support an economy at full employment is a very recent development and cannot be supported by seeing things through S-shaped curves or the fears of coming depressions.

Just as Mr. Smith's pamphlet on steel capacity attempted to discredit my industrial arithmetic for 1950, so he now attempts to discredit the industrial arithmetic I suggested for 1960. On the basis of past experience that arithmetic points to market opportunities for new as well as present steel companies, for we may need to be producing 125,000,000 tons of steel, with a capacity of as much as 135,000,000.

There is no surer way to prevent us from attaining that possibility than by adopting Smith's three beliefs that depressions are inevitable, that the normal demand for steel is far below present production, and that it is necessary to have a shortage and not an abundance of the tools of production to provide enough jobs to keep the Nation continuously and fully employed.

The CHAIRMAN. Our next witness will be Ernest T. Weir, chairman, National Steel Corp., Pittsburgh.

Just give your name and address to the stenographer.

STATEMENT OF ERNEST T. WEIR, CHAIRMAN, NATIONAL STEEL CORP., PITTSBURGH, PA.

Mr. WEIR. My name is Ernest T. Weir, chairman, National Steel Corp., Pittsburgh.

The CHAIRMAN. Proceed.

Mr. WEIR. Mr. Chairman, gentlemen, it has been stated that the purpose of this hearing is to determine whether there is a monopoly in the steel industry that is used to stifle competition and against the best interest of the American people.

The CHAIRMAN. May I interrupt for a moment to make this statement? Mr. WEIR. Yes.

The CHAIRMAN. I would say that is not necessarily the purpose of the committee. Our purpose primarily is to examine into the antitrust laws to see whether or not the situation of the steel industry creates a violation of those antitrust laws. There is more than monopoly involved; there are other factors besides monopoly.

Mr. WEIR. More, yes; but the question of monopoly is involved, isn't it?

The CHAIRMAN. Yes, there is no question about it.

Would you care to have us interrupt you, or do you want to finish your statement first?

Mr. WEIR. Oh, no, whatever you want.

The CHAIRMAN. Whatever you wish. It would probably be best to have your statement read in full and then we will ask questions. Mr. WEIR. I want to say that there is no monopoly; that there is aggressive and continuous competition, and that the American people have benefited greatly from the job of making and distributing steel that has been done by the companies that comprise the steel industry.

The history of our company, National Steel Corp., provides ample proof of competition in steel. From the standpoint of ingot capacity, National is the fifth largest company in the steel industry. But the difference between the ingot capacity of National and the next largest company, Jones & Laughlin Steel Corp., is so small that at times National has been the fourth largest steel company from the standpoint of production.

Our company started in 1905 as a small plant producing tin plate in Clarksburg, W. Va. Today it is a fully integrated steel company which owns and operates iron-ore and coal mines, a fleet of Lake boats, blast furnaces, open-hearth furnaces, and rolling mills and other facilities for processing ingots into a wide range of finished steel products. On January 1, 1950, our ingot capacity was 4,500,000 tons; within a year, it will be close to 5,000,000 tons.

From 1905 to the present there has never been a time when our company has not had to meet the constant and aggressive competition of the United States Steel Corp. and of all the other steel companies, large and small. And I believe that representatives of other steel companies would tell you that they regard National as a very vigorous competitor.

National is a company that has virtually built itself. By that, I mean that it has never had any backing from large financial interests. We grew and developed through borrowing money and then paying the debts off, largely out of earnings. Each time that we were financially clear, we were in position to assume and meet bigger obligations through improved credit. That is the way we grew.

It is obvious from this record that we have always been able to compete for the business of steel buyers. It is equally plain that we not only were successful in getting a share of the business that was in proportion to our size at any given time, but were confident of our ability to get a larger share. Otherwise, we would not have expanded constantly. No one gave us the growth business. We had to compete for it. We have the same viewpoint now as always and, as I indicated, are currently engaged in enlarging our facilities.

The claim that United States Steel dominates the steel industry is a familiar one. I definitely deny that any such thing exists. In all the years we have competed with United States Steel-which is all the years we have been in business-we have never had anything from them except tough competition. But they have been no different in that respect than our other competitors and never have we seen any unfair attempt on their part to put our company or any other company out of business.

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