He amplified this opinion further in colloquy with the chairman, Representative Celler, as follows: Mr. VOORHEES. The broad problem with respect to this capital is basically a simple problem. It comes down to high income taxes. * * * [In addition] the fact that Congress is continually attacking the steel industry has destroyed the American public's confidence in investments in steel securities. The CHAIRMAN. That may be your version, but would you not say also that difficulty in getting equity capital for the steel companies-many industries suffer from the dearth of equity capital-is due as you probably say to the double-taxation feature? Corporations are taxed on their income and when that income is distributed to the stockholder he, in turn, pays the second tax. But in addition would you not say that the low dividends that are given by steel companies like your own and others, and the withholding of much of its dividends, increases to that extent the difficulty of getting equity capital, because you do not pay enough in the opinion of stockholders on the dividends and they are loath to invest in the common stock? But Mr. VOORHEES. There is something in what you say, Mr. Chairman. basically if you cannot get your funds in common stock or by the common-stock route, then you have to do the best job you can. Mr. LEVI. Do you think your company could successfully market a large issue of common stock in today's market if you covered it with additional capital for expansion? Mr. VOORHEES. I would suggest no. I do not think we could issue common stock to our stockholders on a basis that would be fair to them when the book value is 65 and the market value presently is 321⁄2. The CHAIRMAN. Where would you go? Would you go to the banks or insurance companies or both? Mr. VOORHEES. Mr. Chairman, I would go to every source I could possibly find, and then take the cheapest one that gave me the financing.60 Ernest Weir, chairman of the National Steel Corp., laid particular stress on the financial hardships incurred by the large steel companies due to inadequate depreciation charges. In the 1949 annual report of the National Steel Corp., which he quoted, he stated: I regret to say that in our opinion depreciation charges now being made by the steel industry as a whole are much too low. On a comparable basis, in fact, no other major steel company approaches National in the amount it is charging off for this purpose. If the eight leading steel producers other than National had charged depreciation in amounts which bore the same percentage relation to National, the earnings shown by these companies would have been reduced $130,000,000.61 The reason for Mr. Weir's contention that depreciation charges are inadequate has been the substantial increase in the cost of replacement of worn-out or obsolescent capital goods, whereas the depreciation is computed for tax purposes only against the original cost. Depreciation, in other words, as Representative McCulloch pointed out, does not reflect this tremendously high increased cost of rebuilding and replenishing the equipment that will have to be had when it is worn out.62 It was made clear in testimony presented by Donald Cook, Securities and Exchange Commissioner, that, whereas large steel companies were in a position where they could finance a new stock issue, even if, as Mr. Voorhees of United States Steel suggested, it was not in his view feasible at this time, there was no doubt that it was incomparably harder for small business at this time to raise equity capital. The largest cost by far in connection with financing a small company, as Mr. Cook pointed out, is the underwriting costs. The costs of distrib 60 Hearings, pp. 653, 655. 61 Hearings, p. 833. 62 Hearings, pp. 831-832. uting securities of small enterprises represent by far the greatest cost and is large percentagewise and absolutely when incurred by a small business seeking to finance. A large business, on the other hand, has many avenues through which it can finance. It can finance with banks, insurance companies, publicly underwritten issues of bonds, sales of preferred stock, and sales of common stock.63 As a part of the Securities and Exchange Commission study of these 16 major steel companies, the extent of various kinds of affiliation of the officers and directors of these companies is revealed. Mr. Cook reports the following conclusions from the tabulation of affiliations: (1) All but 1 of the 16 steel company boards have directors who are also affiliated with fabricators and other consumers of steel. (2) Bethlehem Steel Corp. is unique in that none of its directors, so far as SEC has been able to ascertain, has any affiliations outside of Bethlehem and its subsidiary companies. (3) Each of the other 15 steel companies has common directors with coal and coke, mining, banking, and financial institutions. For example, National Steel has common directors with 12 mining and coke companies and 12 financial institutions; United States Steel with 6 mining and coke companies and 16 financial institutions. (4) The number of investment banking firms having common directors with companies is rather small; J. P. Morgan & Co. and United States Steel have one common director, Arthur M. Anderson. (5) In only one instance is a director of 1 of the 16 steel companies also named as a director of another of the 16 companies; J. H. Hillman, Jr., is a director of Alan Wood Steel Co. and Pittsburgh Steel Co. (6) Directors of different steel companies frequently serve together on the boards of other companies. For example, Crucible Steel Co. and Inland Steel Co. each has a director who is also on the board of the American Brake Shoe Co. The board of Goodyear Tire & Rubber Co. has common directors with four of the steel companies, New York Central R. R. with three. There are some financial institutions having common directors with steel companies, and in at least eight instances there are common directors with two or more of the steel companies. These eight financial institutions with their affiliations are: 64 Chase National Bank Armco Steel Corp. and United States Steel Corp. United States Steel Corp., Alan Wood Steel Co., and Pittsburgh Equitable Life Assurance Society of the United States United States Steel Corp. and Armco Steel Corp. Mellon National Bank & Trust Co. Jones & Laughlin Steel Corp. and Crucible Steel Co. National City Bank of Cleveland National Steel Corp., Youngstown Sheet & Tube Co., and Jones & Northern Trust Co. 63 Hearings, p. 434. United States Steel Corp. and Inland Steel Co. Peoples First National Bank & Trust Co. (Pittsburgh) Alan Wood Steel Co., Pittsburgh Steel Co., Jones & Laughlin Steel Union National Bank (Pittsburgh) Pittsburgh Steel Co. and Sharon Steel Corp. Several ore companies have common directors with more than one of the steel companies. In many instances this is due to joint ownership of the properties. Further interesting corporate relationships may be seen by some of the legal, accounting, and other professional groups which are used by more than 1 of the 16 companies referred to. For example, 1 accounting firm, Price, Waterhouse & Co., audited 8 of the 16 companies; Ernst & Ernst audited 4; Haskins & Sells, 2; and Peat, Marwick, Mitchell & Co. and Arthur Young & Co., 1 each. The law firm of Jones, Day, Cockley & Reavis appears as counsel in 1948 to Republic Steel, Portsmouth Steel, and Jones & Laughlin Steel. The law firm of Cravath, Swaine & Moore appears as counsel for Bethlehem Steel, Republic Steel, and Youngstown Sheet & Tube. These affiliations of directors, the common use of large accounting and legal firms by a number of the major steel companies, and the connections between a few large banking institutions and major steel companies all suggest the existence of a considerable degree of community of interest among the major steel companies and more centralization of control than is characteristic of many other American industries. This centralization of control is further reflected in the manner of financing of most larger steel companies within the past decades. Most steel companies, as shown above, have resorted to the issue of common stock at relatively infrequent intervals, and have depended for their capital needs much more on retained earnings and on direct borrowing from banks and other financial institutions. This course of action may possibly have resulted in a slower expansion of facilities than would a more liberal dividend policy and the issuance of more stock to the public. X. BIG STEEL AND ANTITRUST LEGISLATION Representative Emanuel Celler, chairman of the subcommittee, formulated the fundamental purpose of the steel hearings at the opening session of those hearings in these terms: * We are concerned with monopoly power. The problem of monopoly power is one of the great issues facing this country. Many Representatives and important citizens have already appeared before this committee and have expressed their concern over the growing concentration of industrial power. * * The purpose of our hearing will be to determine whether specific changes in our laws against monopoly are required so that free and competitive enterprise may be maintained. * * * The economic problem facing this country is the domination over industry by a few concerns. The problem is no longer in most industries the domination by one concern having, for example, 90 percent of the market, as was true in aluminum._ _The problem is rather the control by what may be called monopoly partners. The issue to be faced is whether in numerous key industries firms are of such relative size as to significantly interfere with competitive forces. In the steel industry, for example, one firm controls about one-third of the ingot capacity of the country. This is more than twice the size of its nearest competitor. The first five steel companies control roughly two-thirds of the capacity for steel ingots. * * * The issue is then, and steel appears to be a good example, whether this amount of control is compatible with the preservation of free and competitive enterprise. * * * I am sure that this and subsequent hearings will help to lighten up the dark corners of our inquiry into the need for legislation. I hope that we will learn as we proceed with these hearings whether one company in the steel industry is of such size as to interfere significantly with normal competitive behavior.65 All of the data and other information obtained at the hearings, the great majority of which has been summarized and organized in the previous chapters, make up the raw material which can be used to determine answers to some of the problems facing the subcommittee which the chairman posed in his opening remarks. In this chapter, the specific opinions expressed during the hearings on the position of major steel companies with respect to existing antitrust legislation will be reviewed. This will be followed by recommendations made by various witnesses as to how the antitrust legislation might be amended to make it more effective and more in line with the contemporary problems of American economic life. George Stigler, professor of economics at Columbia University, who was one of the first witnesses to appear before the subcommittee and who again appeared as the final witness, presented considerable data to show that the steel industry was not sufficiently competitive to "dispense with the necessity for further social controls." As evidenced, he cited (1) the basing-point price system that was generally used in the steel industry until the Supreme Court's decision in the Cement case; (2) price rigidity in steel; (3) uniformity of sealed bids on Government contracts; (4) price discrimination against foreign steel producers; (5) and the impossibility to get rivals or customers of the big steel companies to complain of anything.66 Stigler posed the dilemma of antitrust laws in connection with oligopolies, which are industries with few sellers or with many sellers if a few firms are of dominant size. He classified the steel industry as oligopolistic in the latter sense. While the Sherman Act has been effective in dealing with monopolies, in which a single firm controlled the substantial majority of a given product, it has been unable to deal with individual companies each of which control 10, 20, 30, or 40 percent of the industry. However, just because there may be three or four companies only which make up the great majority of an industry, even if no one has over 30 or 40 percent, they cannot fail to take account of their effects on one another, and gradually establish rapport on mutually profitable monopolistic policies. Being so few, they need not engage in frequent and visible collusion in any formal sense. One firm can assume the task of announcing the price changes, the others following obediently without direct communication. It would be incorrect to say that the Sherman Act condones this form of tacit collusion, but it is also wrong to say that the Sherman Act, as now construed, is capable of dealing with the basic problem. Basically, Professor Stigler concludes: In oligopolistic industries [such as steel], competitive behavior can be achieved only by a careful and continuous supervision of every business practice and every price and investment decision that the industry makes. The orthodox antitrust procedures can eliminate some of the worst monopolistic practices, but they cannot compel an industry to display satisfactorily competitive behavior.67 George Stocking, professor of economics at Vanderbilt University, comes to much the same conclusion as Mr. Stigler. For example, he stated before the subcommittee: 65 Hearings, pp. 67, 68, 69. 66 Hearings, pp. 117-118. Most economists recognize that where a few large sellers dominate a market [the steel industry seems to correspond to this pattern, Stocking states] both logic and experience may teach them that price competition does not pay. If one firm lowers its price in periods of slack demand, others will be quick to follow. If the demand for their product is inelastic-as the steel companies contend-each may find itself selling about the same amount at a lower price as it could have sold at the higher. Price leaders are apt to appear in such industries. The price leader is generally the biggest firm. Its rivals frequently without an overt agreement may accept its lead. Sometimes concerted action may be necessary to insure effective price leadership. When the number of sellers are few, such concerted action may be so intangible that it can either not be detected or if detected may violate no statute. For these reasons most economists would probably hold that society's interest is best served when the number of sellers is as large as is consistent with the economies of mass production.6 Kenneth Hunter, professor of economics at American University, likewise concludes that the steel industry is largely oligopolistic, largely on the basis of price policies within the industry. He concludes: There is price competition in the steel industry only when mills are operating well below capacity and only then on a sub rosa basis below published prices. Under price leadership as practiced in the steel industry, I would say that in periods when the demand for steel was equal to or exceeded capacity operations prices are very much lower than would have been the case in a perfectly competitive market. Likewise, in periods of depression it is probable that prices actually paid by consumers, which, while on the average would be below published prices, still would not be as low as would have been expected under perfect competition. The price cuts that were made in the years just prior to Pearl Harbor, it was reported, were not of the price leader's choosing, but that firm did meet the competition. I would say the form of the pricing system is relatively unimportant. There is no price competition when mills operate close to capacity, and there is suba rosa price cutting when there is a depression. The methods used to cover these cuts in prices are many and ingenious, and new methods will be devised to meet new situations. This is inherent in administered prices whether based on basing points or f. o. b.-the-mill prices.69 * ** Arthur Burns of Columbia University presented views parallel to those of the other economists who testified. Bradford Smith, economist for the United States Steel Corp., questioned the accuracy of their concept of monopoly or oligopoly as applied to the steel industry, particularly as understood outside the circle of professional economists. He states, for example: The simple facts seem to be that competition, in the real American sense, has 'been vigorous in the steel industry, and to such an extent that it has kept the prices down to levels yielding unexceptional profits, in complete defiance of the professors' arguments and theories.70 Considerable evidence was presented on antitrust proceedings involving major steel companies, both by Government witnesses and by representatives of the steel companies. James Stewart Martin, former Special Assistant to the Attorney General in charge of Economic Warfare Section, presented evidence on the relations between the major steel producers in the United States with members of European steel cartels. He claimed that the United States Steel Corp., Bethlehem Steel Corp., and Republic Steel Corp. had used the American Steel Export Association, established under the Webb-Pomerene Act, to collaborate with the International Steel Cartel in limiting shipments to the United States and to fix quotas in the world market. These three companies were able to get 90 percent of the United States steel companies to join the association, which according to Mr. Mar 68 Hearings, p. 972. Hearings, p. 770-771. |