total of 15 million annual tons of additional ingot capacity was installed.

However, almost half of this-6.9 million tons-was Government financed. Contrast this with the current expansion program now under way in which the steel industry is expanding by approximately 20 million annual tons. Practically none of this is Government

financed.

Senator DOUGLAS. How much of this is done under accelerated amortization through the granting of certificates of convenience and necessity?

Mr. MOREELL. I do not have that figure for the industry, Senator. For Jones & Laughlin it is $150,000,000.

Senator DOUGLAS. The total of $300 a ton that you are spending for 20,000,000 tons, if I am correct, would be $6 billion total new investment. I am wondering what proportion of that $6 billion of new investment is going to be done under accelerated amortization.

Mr. MOREELL. The cost, Senator, will not be $300 an annual_ton. That is for a new completely integrated plant. Very often, as Jones & Laughlin is doing in this program, we are rounding out existing facilities and expanding.

Senator DOUGLAS. So it will be less than $6 billion?

Mr. MOREELL. It will be. It will be between $212 or $3 billion. Senator DOUGLAS. Two and a half or $3 billion total?

Mr. MOREELL. Yes, sir.

Senator DOUGLAS. I have not summed up the industry classifications of the certificates of convenience and necessity granted by the Defense Department and NPA, but they are certainly running into huge figures.

You may find that my offhand judgment. I would be tempted to believe that a major proportion of it is in accelerated amortization. I would like to get a factual statement on that.

(The following was received in response to the above:)

The latest figures I have been able to obtain indicate that certificates issued for blast furnaces and steel works amount to $2 billion on which 61 percent, or $1.6 billion of amortization was allowed. The remaining portion, almost a billion dollars, must be financed by the industry without benefit of accelerated amortization. I understand that these certificates represent about 20 percent of all certificates issued.

Senator CAPELLART. Mr. Moreell, is this expansion needed by the Government?

Mr. MOREELL. The Government insisted on this expansion.

Senator CAPEHART. If the steel companies were not investing their own money in these certificates, would the Government then have to tax the American people to get the money to build them?

Mr. MOREELL. There was a great deal of sentiment in certain departments of the Government that the Government should finance these expansions completely.

Senator CAPEHART. In other words, the Government would tax the people to get the money to build them?

Mr. MOREELL. Exactly.

Senator CAPEHART. In this instance the steel companies are furnishing their own money?

Mr. MOREELL. Yes, sir.

Senator CAPEHART. They are getting in return for that a 5-year certificate?

Mr. MOREELL. Not in all of it. In our case we are getting 64 percent.

Senator CAPEHART. Sixty-four percent of the total?

Mr. MOREELL. That is right.

Senator CAPEHART. Is that about average for the group?

Mr. MOREELL. I think we are a little bit higher than the average. Senator CAPEHART. If you do not make any money, or any profits, then, of course, the certificate of necessity means nothing; is that correct?

Mr. MOREELL. That is correct. We must incur the entire risk. Senator CAPEHART. You take on the entire risk and if you make no profits then it means nothing to you?

Mr. MOREELL. It is a loss.

Senator CAPEHART. If you operate the plants after the 5 years, then you pay taxes without any depreciation?"

Mr. MOREELL. Without any amortization on that part which has already been taken.

Senator CAPEHART. It would be on the 36 percent?

Mr. MOREELL. That is right.

Senator CAPEHART. So the Government is giving you nothing? Mr. MOREELL. No, sir. I consider that in further detail a little later on, Senator.

Senator DOUGLAS. I do not care to have colloquy between Senators, but I do not want that statement of the Senator from Indiana to go unchallenged that the Government has given nothing, because the privilege of amortization is a valuable one. I would like to insert that in the record at this point.

Senator CAPEHART. Also, I do not want the record to indicate, even by inference, that the $21⁄2 to $3 billion is simply a gift to the steel companies.

Senator FULBRIGHT. Gentlemen, everybody knows what that amortization is. I wonder if we can't restrain ourselves and let the admiral make his statement. We all know what the amortization amounts to, I think.

Mr. MOREELL. I think that that will be clear.

Senator FULBRIGHT. If we can get through with his statement we will have something to go on tomorrow.

Mr. MOREELL. The steel industry, with its huge capital investments, must somehow improve its relative earnings position among manufacturing industries. This is important to all of us-Government, labor, customers, shareholders, and the general public. If we are to be able to continue growing and also to expand quickly in emergencies such as this, we must be able to compete in the financial markets for new capital. With our present earnings position this is difficult. Should our earnings be further reduced, it would increase that difficulty.

There is another comparison which has had widespread publicity lately. That is the practice of comparing current earnings with the so-called base period years 1946-49, inclusive. How did the steel industry compare with other industries in that period? A look at the National City Bank ratings shows us in 41st, 41st, 34th, and 27th place respectively out of a total of 45 companies. The industry oper

ated at 85 percent of capacity for the 4-year period, and had major strikes in two of those years-1946 and 1949. Certainly these years should not be selected as our normal base period.

Senator SPARKMAN. Admiral, I wonder if I might ask a question there, because I think it throws this in focus right here.

Mr. MOREELL. Yes, sir.

Senator SPARKMAN. Mr. Arnall stated before us that the 3 years1947, 1948, and 1949-were the three best years that steel had since 1918. I think I am correct in quoting that. If that is true, could there have been better years for your base period?

Mr. MOREELL. There could not have been better years for the base period unless we consider certain variations in the Johnston earning standards formula which I am about to describe, Senator. In this connection I wish to quote to you a letter I wrote on March 15 to the Administrator of the Economic Stabilization Agency on the subject of the so-called Eric Johnston earnings formula.

Hon. ROGER L. PUTNAM,

JONES & LAUGHLIN STEEL CORP.,
Pittsburgh, Pa., March 15, 1952.

Administrator, Economic Stabilization Agency,

Washington, D. C.

DEAR ROGER: We have been giving considerable thought to the statement you made earlier this week in Washington, that you would like to have someone suggest a better formula than the Eric Johnston earnings formula as a test of the need for relief for a producing company such as ours.

It is our understanding that the Johnston industry-earnings standard is an interpretive statement intended to be used as a general guide. We also note that the Defense Production Act requires ceiling prices to be "generally fair and equitable." In the language of the Price Operations Memorandum No. 25 dated February 15, 1952, "This phrase 'generally fair and equitable' is interpreted as requiring that regulations must (a) provide a reasonable level of industry earnings; (b) provide a fair distribution of total returns within each industry; and (c) not be 'arbitrary and capricious' in the legal sense."

As stated in your office, I am strongly of the opinion that it is most unfair for the earnings standard to be applied to this industry on a before-taxes-andamortization basis. In company with our industry, we have taken upon ourselves a huge construction program and committed ourselves to find the money to pay for it. A large part of this money must come from our earnings.

The CHAIRMAN. You sent me a telegram as chairman of the committee at the same time and I put it in the record.

Mr. MOREELL. That is correct. I have a copy of that telegram here.

The CHAIRMAN. I have been charged at different times with talking to people. I like to talk to people, whether they be in the steel business or not. To the best of my knowledge that telegram cited your position. I never asked for it.

Mr. MOREELL. That is correct. To continue:

Our construction program, as you are well aware, was undertaken at the urgent request of the Federal Government in order to strengthen the Nation's defenses, as a result of the hostilities in Korea.

The funds used for the purpose of this construction program were obtained from borrowings, from the sale of stock, from depreciation reserves, and, in large part, from profits which were not paid out to shareholders but which were retained in the business for this purpose.

The CHAIRMAN. Admiral, who asked you to do that?
Mr. MOREELL. The Federal Government.

The CHAIRMAN. Who?

Mr. MOREELL. The Defense Production Administration were the ones who were pressing us the hardest.

The CHAIRMAN. They made the request of different steel companies to enlarge their plants and told them they were going to give them certificates of necessity?

Mr. MOREELL. That is correct, sir. [Reading:]

Our borrowings must be paid back from net profits. For example, the indenture for our series B bonds, dated in 1950, provides specifically for the making of sinking-fund payments out of net earnings after taxes. We also need net profits to pay dividends to our new shareholders to whom we sold stock as well as to our old shareholders who were willing to forego adequate dividends in order to help in the financing of this program.

We need net profits to continue our construction program which is now in a critical stage. It is not only unfair but useless for us to be expected to use earnings before taxes to meet our obligations. So-called "profits before taxes" have no significance in these cases. They are only bookkeeping figures until the taxes have been deducted from them. We cannot discharge our obligations by using tax money.

I invite your attention also to the fact that the regulation of public utilties is based on a return on rate base from profits after taxes and that this fact was given recognition in the present Excess Profits Tax Act.

You already know that I believe it would be a breach of good faith on the part of the Government to use earnings before amortization of emergency facilities as a part of any earnings standard for the steel industry in the present position in which it finds itself committed to its huge post-Korea expansion program.

The purpose of an industrial business such as ours is not to create wealth for itself. Its purpose, as you are well aware, is to pay dividends to its shareholders, wages and salaries to its employees, to make steel for its customers, and in general to serve the public good. The beneficiaries of its activities must in all cases pay their individual income taxes upon the benefits they have received. Their interests are not served, nor is the interest of the Nation served, by the reduction of the earnings of the business so that it cannot achieve its purposes. It is my considered recommendation that the earnings standard which we have previously discussed should be amended-at least in cases such as the steel industry-so as to accomplish two separate changes:

(1) To base the yardstick on earnings after taxes and after amortization; and (2) To give effect not only to the increase in invested capital of the industry but also to the need for more dollars of income to accomplish the same results as a smaller number of dollars would have accomplished in the years of the base period. In other words, a cost-of-living increase provision should be adopted for the use of industry as well as for the use of labor.

I have discussed item (1) above orally with you as well as in the foregoing paragraphs.

With respect to item (2), it is my thought that, because of the depreciation in the value of the dollar, and in order to establish equitable earnings standards, the dollar earnings for the 3 years selected from the 1946-49 period should be adjusted by the increase in the wholesale-price index up to the present time. I trust that you will give these views your serious consideration. I shall be very happy to discuss this subject with you again at your convenience. With kindest regards, I am

Sincerely yours,

(Signed) BEN MOREELL.

Up to this point I have said nothing about dividends. Table 5 shows Jones & Laughlin's dividend record from 1939 to March 31, 1952. I particularly want to point out that for the entire period the shareholders' returns on money invested was only 3 percent. And this is for both preferred and common shareholders. The common shareholders' return was only 2.68 percent. Compare this with the return on a United States Government series E bond and then compare the risk involved.

TABLE 5.-Jones & Laughlin Steel Corp. and subsidiary companies, dividends, years 1939-51 and first quarter 1952

Senator DOUGLAS. Did you ever get an answer from Mr. Putnam?
Mr. MOREELL. No, sir; I did not. I had no reply.

The CHAIRMAN. You had a conversation with Mr. Putnam?
Mr. MOREELL. I had a conversation prior to this.

The CHAIRMAN. Did he give any information to you?

Mr. MOREELL. Mr. Putnam expressed great sympathy with my attitude that the earnings before accelerated amortization should not be considered as proper, but he has never been willing to go on record as advocating any change in the Eric Johnston standard.

How does the dividend record (preferred and common stock together) of J. & L. compare with the steel industry as a whole and with companies in other industries? During the period 1944 through 1951, for which data are available for the steel industry, we find that the steel industry dividends averaged 4.92 percent of shareholders' investment. During the same period the shareholders of J. & L. received dividends averaging 3.27 percent, while the shareholders of the largest company in each of 18 different manufacturing industries received an average of 10.68 percent.