cannot penalize the public for that, but we do not force anybody to lose money. On the other hand, I think it is also good to point out that this industry earnings standard applies to a whole industry and there may be companies in it making tremendous profits. It is the industry average as a whole that we are talking about. We do not try to limit anybody's profits. If a company is outstandingly efficient, they can make all the money they want as long as they keep within the price standards of the industry. Senator MOODY. Does the industry earnings standard, Mr. Putnam, not simply mean that an entire industry which is making excess profits as defined by Congress cannot get a price increase so as to make more excess profits? Mr. PUTNAM. That is substantially correct. That is what it is designed to do. We took the standards that you in Congress set as to what were fair profits and what were excess and we tried to make a workable rule, applying to all industry on that same rule. If industry itself is on the average in the excess profits tax, we get out the rubber pad and just let the tears run off. Senator CAPEHART. Was it the intention in doing that that the public would get the benefit of it, or the wage earners? Mr. PUTNAM. The intention is to protect all the people and see that the standards are fair and equitable. Senator CAPEHART. Are you sure we are not using the excess profits that they are making as an excuse to increase wages? Mr. PUTNAM. Senator, I think the best answer to that is to say that the last cost-of-living index was the first drop since Korea. Senator MOODY. In administering this law then, you try to get a proper balance between prices, wages, and profits; the proper balance between the industry's earnings, labor's wages, and lower prices to the public if possible, is that correct? Mr. PUTNAM. That is correct, Senator. That is exactly what we are here for. Senator MOODY. Thank you. Mr. PUTNAM. We are the public's lobby, as far as I am concerned. I am representing the public. Senator MOODY. I am delighted that you are. The general public needs a strong representative. Mr. PUTNAM. May I put my statement in the record? Senator FULBRIGHT. That will be done. (The statement referred to will be found in the appendix, p. 2439.) Senator FULBRIGHT. The committee will stand in recess until 2:30 p. m. in Room F-39. Mr. FEINSINGER. And you want us at 3? Senator FULBRIGHT. Yes. (Whereupon, at 12:45 p. m., the committee recessed, to reconvene at 2:30 p. m., the same day.) AFTERNOON SESSION The CHAIRMAN. I believe Senator Benton and Senator Moody have some questions. Senator Ives was not present this morning so when they get through we will hear from him. Mr. ARNALL. Gentlemen, many fellows think they have problems but I have real problems and I want your advice, guidance and counsel. Here is the first problem. We have standards that we developed under the Defense Production Act, the general requirement of the law being that our price provisions should be generally fair and equitable. So we developed the standard that we have used without interruption, the industry earnings standard. Now then, that provides that the base years of 1946 through 1949 are constituted as the yardstick. We say to any American industry you can take your three best of the four normal years before Korea and if your profits before taxes are falling below 85 percent of those three best years, you are entitled to a price increase. That is the basic standard we use. So I come to Senator Frear's suggestion. If we want to do what you suggested, Senator, which we do not want to do, but if we did I do not know any way in the world we could do it under our standards unless we wrote a new standard. Let me show you what we would do if we wrote a new standard. As I have said, our standard uses 85 percent of the earnings during the 3 best of the 4-year period which we use as a base-which is the same as the excess profits tax law-and steel was very favorably situated in that period. If we said that steel cannot qualify for price increase under the 85 percent standard, well, we might say, "We will change it to 90." They could not qualify then. If we changed it to 100 they could not qualify then because their earnings are so high. Supposing we change it to 125 percent; they could not qualify then. If we change it to 150 percent of what they made during that base period, then they could not Senator IVES. Mr. Chairman, may I ask one question here? would like to get things straightened out in my own mind. Are you talking about profits before or after taxes? Mr. ARNALL. I am talking about before taxes, but if I talked about them after taxes, they still would not be entitled to it. I am trying to come to this basic concept Senator SPARKMAN. Governor, I wonder if it might not be helpful if Senator Ives had the figures you gave us this morning. Let me read them to you. It will not take but a half minute. The three base years used for steel were 1947, 1948, and 1949. He said this morning those were the three best years that steel had had since 1918, and here were the profits before taxes and after taxes: Before taxes, $11.22 a ton. After taxes $6.59 a ton. Now, in 1951-get this comparison-before taxes, $20.26; after taxes, $7.07. There is one other thing I want to give you. If the Wage Stabilization Board recommendation should be accepted and the Capehart benefits taken, then we would have these figures: Before taxes, $18.26 a ton-this is for 1952. After the recommendations went into effect and the Capehart benefits taken, before taxes, $18.26 a ton; after taxes, $6.47 a ton. You may be interested in this general statement too. He said that it was his understanding that his economists and the economists representing the steel people were in agreement as to these figures. Mr. ARNALL. That is right. Stated another way, let me say this, Senator Ives, that the steel people-I am going to talk about this with the charts and I want you to listen to me because I want to do it in a very careful way so you can follow the figures-the steel people say that if these entire benefits were put into effect it would cost them $6 a ton plus another $6, which would be a commensurate increased cost of products they buy. Suppose we gave them a $12 price increase. They could keep only $3.50 of it because $8.50 would go to excess-profits tax. I mention that to demonstrate how it is that we cannot give a price increase to steel because they are in such a very favored position. There is no way we could do it without doing it by the rule of just saying we are going to give it to them. Senator BENTON. The tonnage is going up all the time and productivity is going up, and these figures are per-ton figures and thus do not show the effect on the total profits of increased tonnage, and, secondly, because there is no way accurately in advance to estimate exactly at what rate productivity will continue to go up they completely ignore the factors involved in increasing productivity. Senator FREAR. Now, sir, I do not want to put you on the spot, but I want the advantage of having an answer. Senator BENTON. I have not had the opportunity to ask a question yet so I yield. Senator FREAR. This probably is not fair to ask you because you are the price man, but if you are going to use that same formula that you are talking about and you cannot give steel increased price, on what basis does Dr. Feinsinger give an increase in wages? Now, let Dr. Feinsinger answer that. Mr. ARNALL. Prices are my business. Senator FREAR. That is right, but you have a coordinator in Mr. Putnam between the two of you fellows and I am sorry he is not here now. Mr. ARNALL. Let me say this: I do not criticize Mr. Feinsinger's report or recommendation, but let us assume, just hypothetically, that they are wrong. Let us assume. Does that mean that I have to be wrong, too? Senator FREAR. If we are going to tell the steel industry that you cannot give them a price increase, then we have the right to tell the CIO unions they cannot have an increase in their wages. Mr. ARNALL. Prices are my business. Senator FREAR. It is a little unfair to put you on the spot in that, but let me give you another question then, sir. Are you going to do anything or do you consider the price of raw materials on any farming materials? Do you do that at all? Mr. ARNALL. Yes. Senator FREAR. What did you do about cottonseed oil, sir? Mr. ARNALL. I have that in this suspension report. I am suspending it. Senator FREAR. In other words, you had a price on it of about 23.5 cents and it is now down I do not know where, some low figure, but you are going to put it up to 15 cents as the trigger point and then say, "We had a ceiling of 23.5 cents but when it reaches 15 cents I am going to set a ceiling at 18 cents." You are reducing the ceiling from 23.5 cents to 18 cents. Now, under what formula do you do that? Mr. ARNALL. We are working out in connection with our suspension program the desires expressed by this committee and insofar as agricultural commodities are concerned we also have to take into account this thing called parity which puts it into a little different category. But let me say this, Senator, we are not too far apart. What I am trying to get across to you really is this: If I wanted to give steel an increase, sincerely I do not see how I could do it. Senator FREAR. Under your law you cannot give steel an increase, except those coming under the so-called Capehart amendment. Mr. ARNALL. I do not believe I can. Let me show you why. Senator FREAR. I think I understand that and I am thankful to the Senator from Connecticut that he has allowed me this time. I am going to get the answer from Mr. Feinsinger without encroaching. Mr. ARNALL. I would like to present my charts, one at a time, so that you get the continuity and what they mean and then you can question them. Senator BENTON. You go ahead and present the charts and I will withhold my questions until after we have seen the charts. Mr. ARNALL. This chart here shows that 1947 through 1949 were the three most profitable years the steel industry had experienced since World War I. Senator SCHOEPPEL. Governor, could you in testifying demarcate or identify what chart you refer to? You say "this chart." Is there some definition so we could get it into the record by way of identification? Mr. ARNALL. Yes; this chart is headed "Annual rates of return on stockholders' investment for principal steel companies combined.” Now, this chart is based upon data which was supplied to my agency by the Federal Trade Commission. Mr. Mead, who is the Chairman of the Federal Trade Commission, will testify as to the verity of the figures. Now, the general impression which this chart gives requires no comment, actually. However, I want to point out that in the years 1947-49, which are the three best of the four base years, the industry averaged almost 19 cents profit before taxes on every dollar of stockholders' investment, or net worth. The second best 3-year period since 1918 was the period 1941-43, and during that period, earnings averaged 17.5 cents per dollar on stockholders investment. During the only two other years, 1929 and 1944, did earnings exceed 11 cents on stockholders' investment. And it will interest you to know that during the 1920's, the return was 8.5 cents on stockholders' investment, and the average of the thirties was only 2 cents return on stockholders' investment. The average of the forties was 15 cents. After income taxes, the 1947-49 period provided a higher average rate of return than did any single year between 1918 and 1947. So it is obvious that the base period under the earnings standard was an extremely favorable one for the steel industry. Even if |