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'^rfsZiri SENATE j|r9| 









S. Res. 206 (73d Congress) 




July 29 (calendar day, August 20), 1935.— Ordered to be printed 
with illustrations 




„, „ 1 (Report 

,4th Congress SENATE No. 944 

1st i^icssion Part 2 

Munitions industry 







S. Res. 206 (73d Congress) 




July 29 (calendar day, August 20), 1935. — Ordered to be printed 

with illustrations 




iURUU FOR _^*^, H \(i 


Bfi§T0W PUBLIC im^0i 



GERALD P. NYE, North Dakota, Chairman 


HOMER T. BONE, Washington 

Stephen Raushenbdsh, Secretary 

Alqer E[iss, Legal Assistant 

L0T7IS Shebman, Special Assistarit in the Preparation of this Report 



Introductory statement 1 

Findings and recommendations 3 

Part I. War-Time Taxation 

I. Consideration of the effects of severe war-time taxation 8 

1. Tendency to pass increased taxes on by increasing prices 8 

2. Effect of severe taxation on productivity 10 

3. Severity of taxation during World War 12 

II. Consideration of particular types of taxes 16 

1. Average pre-war income as a tax base 16 

2. Invested capital as a tax base 19 

III. Difficulties involved in determining net income 27 

1. Depreciation 27 

2. Depletion 28 

3. Amortization 30 

4. Time of accrual of income 34 

IV. Degree of administrative discretion desirable in tax statutes in view 

of post-war attitudes and back taxes 37 

V. Tax evasion and avoidance 44 

1 . Special assessments 45 

2. Deduction of capital losses 47 

3. Instances of readiness of taxpayers to rely on technicalities to 

avoid taxes 49 

4. Obstructive tactics 52 

5. Tax-exempt securities 52 

Part II. Price Control 

I. Price control as a means of eliminating war profits 56 

1. Varying costs of industry and the profits of low-cost producers. 56 

(a) Ineffectiveness of excess-profits taxes to equalize profits of 

low-cost producers 63 

(6) Impracticability of the individual prices proposal 66 

(c) Price regulation of monopoly business 68 

(1) The aluminum industry 69 

(2) The nickel industrv 70 

(3) The sulphur industry . 72 

2. Business interests of the price-fixing administration 73 

3. Difficulties of cost determination 84 

(a) The necessity for estimating future costs 84 

(6) Cost padding 85 

(c) The ratio method of price determination '91 

4. Nonenforceability of price regulations 92 

5. The strike of capital 94 

(a) The copper industry 95 

(6) The steel industry 100 

(c) The building and operation of the Old Hickory Powder 

Plant 107 

6. Impotence of governmental clubs 111 

(a) The power to requisition and commandeer 111 

(b) The priorities system 115 

7. Constitutional difficulties of price fixing 116 




II. Price control as a means of preventing inflation 117 

1. Introduction of marginal producers 117 

2. Increasing plant facilities 118 

3. Encouraging farm production 119 

4. Inevitable cost increases 120 

(a) Insurance rates 120 

(b) Labor costs 121 

(c) Transportation costs 121 

5. The sellers' advantageous position in war markets 122 

6. Abnormal pre-war price levels 125 

III. Price control as an aid to increased war production 127 

1. Curtailment of civilian consumption 127 

2. Market stabilization 128 


Exhibit No. 1388: Corporation income and profits tax rates, exemptions 

and credits under the Revenue Act of 1909-28, inclusive 132 

Exhibit No. 1756: Income and excess-profits tax data for 18 corporations- _ 136 
Letter from Thomas J. Coolidge, Acting Secretary of Treasury, to Senator 

Gerald P. Nye, on valuation 139 

Excerpt from Exhibit No. 1343: Memorandum on valuation 147 

Exhibit No. 1405: Summary of amortization allowances of $500,000 or 

over, as allowed by appraisal section up to April 30, 1925 159 

Exhibit No. 1402: Refunds, credits, and abatements exceeding $250,000 

through special assessment allowed from July 1, 1921, to April 30, 1925-. 164 

T4th Congress ) SENATE ( Kept. 944 

1st Semi on f 1 Part 2 


July 29 (calendar day, August 20) , 1935. — Ordered to be printed with illustrations 

Mr. Nye, from the Special Committee on Investigation of the Muni- 
tions Industry, submitted the following 


[Pursuant to S. Res. 206 and 244, 73d Cong.; S. Res. 8, 74th Cong.] 

The Special Committee on Investigation of the Munitions Industry, 
authorized by Senate Resolution 206 ' of the Seventy-third Congress 
to investigate the munitions industry, to review the findings of the 
War Policies Commission, and to inquire into the desirability of creat- 
ing a Government monopoly in respect to the manufacture of muni- 
tions, submits the accompanying introductory statement and partial 


On April 12, 1934, the Special Committee on Investigation of the 
Munitions Industry was authorized and directed by Senate Resolu- 
tion No. 206 of the Seventy-third Congress, among other things, to 
review the findings of the War Policies Commission and to recommend 
such specific legislation as may be deemed desu-able to accomplish the 
purposes set forth in such findings and in the preamble to Senate 
Resolution No. 206. The preamble referred, among other things, to 
the long standing demands of American War Veterans, speaking 
through the American Legion, for legislation to take the profits out 
of war. 

Pursuant to these clauses of the resolution public hearings were 
held in September and December of 1934 and throughout the first 4 
months of 1935. Because many of the witnesses and the companies 
whom they represented were required to be examined with respect to 
other provisions in the resolution as well as with respect to those direct- 
ing a review of the findings of the War Pohcies Commission, the com- 
mittee's hearings on this latter topic were in man}^ instances not held 
separately from its hearings relating to other provisions of the resolu- 

1 By S. Res. 244 of the 73d Cong, and S. Res. 8 and 129 of the 74th Cong, the amount which the Com- 
mittee was authorized to expend was increased. 



This report is designed to cover in a preliminary ^ way the results of 
that part of the committee's investigations carried on in connection 
with its review of the findings of the War Policies Commission. The 
primary obligation imposed upon the War Policies Commission by 
Public Resolution No. 98 of the Seventy-first Congress was — 

to study and consider amending the Constitution of the United States to provide 
that private property may be taken by Congress for public use during war, and 
methods of equalizing the burdens and removing the profits of war, together with 
a study of policies to be pursued in the event of war. 

The two chief means of equahzing the burdens and removing the 
profits of war wliich have been employed in the past and which were 
considered by the War Policies Commission are (1) taxation, and (2) 
control of prices. These two metliods have received serious considera- 
tion by this committee which has heard testimony of Government 
officials and of private citizens familiar \\dth these fields. 

In the case of all witnesses and companies investigated by the com- 
mittee that were engaged in substantial business activities during the 
World War the committee has endeavored to ascertain the facts 
relating to the effect on the war profits of such witnesses and companies 
of taxation and price control. The committee has also examined the 
official records of the Government relating to the use of these two 
methods during the World War. The accompanying preliminary 
report sets forth the results of the committee's investigations as to 
wartime taxation and control of prices as a means of removing profits 
from war and equalizing the burdens of war. 

2 Because of the extent of testimony taken by the committee in the course of its investigations the com' 
plete testimony is not in final printed form. Consequently, in many instances the citations to the record 
contained in this report have had to be made to galley proof sheets rather than to the final pages of the testi- 


The committee has in Senate Report No. 577 recommended that 
H. R. 5529 \vith the amendments proposed in that report be enacted 
into law. That bill is designed to prevent, so far as legislation can 
cope with such forces, the distressing inequalities, the shameless 
profiteering, and the staggering aftermath of the last war. 

The committee reaffirms its recommendation that H. R. 5529 as 
amended should pass and is firmly of the opinion that the bill repre- 
sents a long advance toward its purposes. 

The committee recognizes, however, the importance of the question 
of whether there is complete assurance that the Federal Government 
has all the necessary powers to achieve this goal. 

This question has been raised before at various times. It was 
raised during the war by industrial groups, in an endeavor to weaken 
any attempt by the Government to fix low prices. It was raised 
again in the creation of the War Policies Commission of 1930. In 
fact, one of the chief duties laid upon that Commission was to con- 
sider the necessity of amending the Constitution. It was raised 
again in 1934 when this committee was created and charged with 
the duty of reviewing the findings of the War Policies Commission. 

The committee now undertakes to discharge this duty. On the 
basis of a careful review of the World War experience with price- 
fixing, based on the study of all the minutes of all the governmental 
bodies involved in that price-fixing, together with studies and analyses 
of large groups of profit figures and income tax returns, the committee 
finds that in order to prevent wide-spread profiteering in a national 
war emergency several amendments to the Constitution will probably 
be necessary. 

The committee takes into consideration the serious objections to 
these amendments. It realizes the possibility that the adoption of 
such amendments may create other situations far worse than the 
situation of profiteering in a national emergency. It simply states its 
findings, based on the evidence in this report and in report no. 577, 
that if the sole purpose under consideration is the avoidance of 
profiteering, the following amendments to the national Constitution 
must be made: 

1 . The first of these amendments should permit the comrnandeering 
of plant, goods, and industrial equipment for public use in time of war 
without the determination of ''fair compensation" in the present 
way through review by the courts which results in payment at the 
highest possible price levels. This is not an amendment to abolish 
the payment of fair compensation, but to allovr for the determination 
of fair compensation according to the directions of Congress rather 
than of the courts. (See pp. Ill to 116.) 

2. The second of these amendments should make certain the power 
of Congress to tax for war-profits control on such bases of investment 
or fixed capital assets as it finds to be fair and just regardless of the 



possible inequality among taxpayers of such bases and without the 
elaborate procedure which may be unavoidable under existing law. 
Without this amendment the tax bases proposed in H. R. 5529 may 
be successfully attacked by those bent upon securing larger profits 
than it permits. (See p. 8, note 3; p. 26, notes 70 and 72 and see 
pp. 19-20.) 

3. The tliird of these amendments should permit Congress to tax 
the interest of tax-exempt securities during a national emergency, 
(See p. 52.) 

These three amendments would give to the Government the neces- 
sar}" power to fix prices and pay the costs of a war through taxation. 
The other possible effects of these amendments are considered later. 

While the Government would, with the passage of H. R. 5529 and 
the adoption of these three amendments, have full and adequate 
power to control the economic forces of the I^ation in the carrying on 
of a war, it is still open to question whether these powers would be so 
used by the officials of the Government as to eliminate all profiteering. 
There are two reasons for believing that these powers would not be so 

1. The main interest during wartime of all concerned with the 
conduct of the war is not that of saving money, but of securing pro- 
duction as rapidly and as fully as possible. Lowered prices, higher 
taxes, avoidance of inflation are all secondary interests. As Mr, 
Charles Hayden told the Price Fixing Committee in May 1918: 

Our Allies are crying for copper; representatives of foreign governments are 
telling me as an individual: "What do we care about a cent or more in price? 
What we want is the stuff." 

The moment an industry threatens that lowered prices will slow down 
its production, or that high taxes will make it impossible for it to 
secure working capital, the Government will yield as it yielded in the 
last W'ar. In January 1918 the War Industries Board approved a 
large contract with the Hercules Pow^der Co. at a price which it thought 
too high for the reason that "it was either necessar}^ to pay the 70 
cents per pound or go without the powder." 

The apparent alternative of commandeering industry is in fact not 
an available alternative. If the owmers of industry are compensated 
to their owm satisfaction and surrender their enterprises and the bene- 
fits of their operating experience to the Government, as in the case 
of the railroads during the World War, the cost is as great as the cost 
of meeting industry's demands for its services. On the other hand, 
if any significant part of industry were to be arbitrarily confiscated 
against the wishes of the majority of the business community, the 
chaotic condition resulting from the great social and political ani- 
mosity which would be aroused thereby would definitely retard the 
production wiiich is of paramount necessity for the prosecution of a 
modern war. 

During the World War the copper industry simply refused to pro- 
duce at even the liberal prices first proposed by the Government. 
(See p. 95 et seq.) The steel industry similarly refused to fill Govern- 
ment orders until prices had been stabihzed at levels satisfactory to the 
industry. (See p. 100 et seq.) Judge Gary, representing the steel 
industry, told the Price Fixing Committee that "manufacturers must 
have reasonable profits in order to do their duty." The du Pont Co. 
refused to build a great powder plant wliich it alone was quahfied to 


build until it was assured of what it considered sufficient profits. 
(See p. 107 et seq.) Mr. Pierre du Pont wrote that "we cannot assent 
to allowing our own patriotism to interfere with our duties as trustees." 

The Government is more at the mercy of such a strike by capital or 
management than at the mercy of a strike by labor. The War Depart- 
ment bills, which have been prepared for adoption upon the outbreak 
of a war, provide in effect that labor can be drafted and that men must 
either work or fight. It will be entirely within the power of the Govern- 
ment, under these bills, to require men to work where they are told 
and to select any leaders of a labor strike and draft them into the 
military service the moment any strike is threatened. With these 
powers, and with a whole labor pool to draw on in the form of the con- 
script army, there is no question that the Army can break any labor 
strike. As pointed out above, it is in no similar situation in regard to 
a strike by capital or management. 

There is also another factor which makes a strike by capital or 
management harder for the Government to handle than a strike by 
labor. The latter is open and advertised. All the force of patriotic 
pubhc opinion can be brought to bear to stop it. The former is 
neither open nor advertised. It was not until the hearings of this 
committee, some 17 or 18 years after the event, that the strikes of 
certain of our industrial companies in connection with war-time price 
fixing became loiown. 

2. Wliile this incapacity of the Government to take over or to dis- 
pense 'wdth the function of any industr}^ is the main reason for the 
expectation that even complete theoretical authority and power mil 
never be invoked, there is another subsidiary reason. The administra- 
tion of prices and procurement is inevitably put into the hands of 
people who have been industrially trained and who are sympathetic 
to private industry's demands. 

During the last war the interests of the administrative officials were 
definitely close to the interests of the regulated industries. (See pp. 
13 to 83.) Mr. Brookings told the nickel industry: "We are not 
in an attitude of envying you your profits ; we are more in the attitude 
of justifying them if we can. That is the way we approach these 
things." The experience of such men must be used by the Govern- 
ment and yet their attitude toward the contentions of industry is 
inevitably favorable. Such men will not use theoretically full powers 
to eliminate profiteering even if they have them. 

With these two considerations in mind the committee makes the 
following findings with respect to war-time taxation and price control 
as means of equalizing the burdens of war and of removing the profits 
from war: 

1. It must be recognized that war inevitably involves waste and 
increased living costs. The increase of costs due to the shift of pro- 
duction from peace-time to war purposes, to the use of untrained 
labor to replace men drafted into the army, to the high risks of war- 
time production in many industries, and to the necessity for rapid 
production and delivery, requnes an increase in some prices in war 
time whatever form of price control is exercised. The interrelation 
of our industries will spread the effect of these increases throughout 
our economy. This means that no arbitrary plan of keeping all prices 
at a given level is practicable and individual prices must be fixed by 
governmental agencies. (See pp. 117 to 126.) 


2. The necessity that the governmental price-control agencies 
must largely rely upon industry for their information as to costs, 
capacity, production needs, and other fundamental information, and 
the fact that the personnel of these agencies must be largely made 
up of men who have been industrially trained and who are sympa- 
thetic to private industry's contentions, when added to the critical 
importance of increasing industrial output in war time, prevent the 
fLxing of prices below such a level of profitability as the bulk of the 
producers in any industry agree is fair. (See pp. 73 to 83 and pp. 
55; and 62-63.) 

3. The fact that costs are in the last analysis matters of opinion 
and are not susceptible of scientific determination, and the gigantic 
nature of the administrative task involved in enforcing any price 
provisions opposed by a substantial portion of industry make it im- 
possible to eliminate war profits by price control except to the extent 
that industry agrees to accept a limitation of its profit-making po- 
tentialities. (See pp. 84 to 91 and pp. 92 to 94.) 

4. There are large profits and there is inequality in peace time. 
The strain and stress of war is not conducive to the adoption of fun- 
damental reforms wliich cannot secure acceptance even in time of 
peace. We must guard against a blind belief that all profiteering 
can be ended by proposals for war-time taxes and industrial control. 

5. wSevere war-tmie taxation ensures the subjecting of the admin- 
istrative officials responsible for its operation to heavy direct and 
indirect pressure for the alleviation of tax burdens, it increases resist- 
ance to tax collection, and if it reaches a level which the majority of 
business men feel is confiscatory, will discourage or prevent the volume 
of production so essential to the successful prosecution of a major 
war and thus defeat its own ends. (See pp. 37 to 43 and pp. 10 to 12.) 

6. Because of the difficulties of determining in any exact manner the 
costs of all business and hence the profits from business and because 
of the impossibility of closing all loopholes in legislation designed to 
apply uniformly to our immense and complicated business and indus- 
trial structure, income taxation cannot eliminate all war profits. 
(See pp. 27 to 34; 84 to 91; 44 to 52 and 25-26.) 

The committee recognizes that the first two of the constitutional 
amendments herein described as necessary to any effective control of 
profiteering contain dangers that may be far worse than the evil of 
profiteering. The power of commandeering and the power of taxing 
without uniformity — both without our customary elaborate court 
review — increase enormously the power of the Federal Government. 
If that Government should in the next war be run in the interests of 
any industrial group or class its power to destroy the competitors of 
that group or class would be without the traditional protections so 
familiar to this country. The opportunities for militaristic control in 
war-time are well known; the relaxing of constitutional restrictions 
will increase these opportunities. 

Furthermore, under these proposed amendments, in the event that 
any group controlling the Treasury, Army^avy, or the future equiv- 
alent of the War Industries Board, wishes to punish those who may 
have opposed the war before its declaration, or those who have criti- 
cized the allocation of war orders, or wishes to eliminate certain 
competitors, that group can utilize its power to do so. If there is, 
therefore, the least danger that any group of industrialists, through the 


sheer size of their investment, or through their absokite necessity 
for war purposes, such as, for example, the steel and chemical in- 
dustries, should be in a position of power in a war-time administra- 
tion, the first two amendments would be dangerous weapons to place 
in their hands. Even a temporary abuse of power by such a group 
might result in the destruction of the financial independence of another 

To the amendment providing for the war-time taxation of interest 
on tax-exempt securities there can be no similar objections. 


I. Consideration of the Effects of Severe Wartime Taxation 

The purposes of wartime taxation as viewed by this committee are 
twofold: First, the normal purpose of raising revenue, which in time 
of war is increased in importance because of the heavy demands upon 
the Treasury; and, second, the removal of profits made from the war.^ 
It is assumed by the committee that the combination of these two 
purposes will result in much more severe taxation in wartime than in 
peacetime. Not only will tne amount of total collections be increased, 
because the increase in industrial activity almost certain to be incident 
to war will make a larger amount of profits available for taxation — 
but the rate of taxation must be increased sufficiently to take more 
than the war profits, since obviously the total cost of a war, sub- 
stantially all of which is borne by the Government, must be greater 
than the element of profit in that cost and it is clearly desirable for 
the Government to pay as much of the current expenses of the war 
out of current revenue as is possible. 

It must be recognized that in determining the degree of severity of 
taxation which should be employed in war time, it is important to 
study the effects of severe wartime taxation upon the economic con- 
dition of the country generally, and in particular upon its ability to 
produce materials essential for the conduct of war. 

(i) tendency to pass increased taxes on by increasing prices 

There can be no doubt that business men in general regard taxes 
as a cost of doing business and consequently attempt to recoup 
taxes, as well as other costs, out of sales prices. This means that, 
ordinarily, an increase in the severity of taxation does itself tend to 
raise the price level, and to the extent it is passed on does not result 
in any decrease of the total volume of profits. The statements of 
two men familiar with the taxes in effect during the last war may be 
quoted on this subject. Mr. Baruch in testifying before the War 
Policies Commission made the following statement: 

Excess-profits taxes — standing alone — have no effect whatever to check 
inflation. Their onlv effect is to increase it. Thus 20 percent of $500,000 profit 
is $100,000 and 20 percent of $1,000,000 profit is $200,000. One way to increase 
$500,000 profit to $1,000,000 profit without increased risk or effort is to double 
price. For this reason there is more incentive to increase prices — and therefore 
profits— under an SO-percent excess-profits tax than there is without it. Indeed, 
the main result of such a system is to induce rapid price increases to absorb the 

3 It is recognized that the use of the taxincc power to remove profits from war-time production and com- 
merce may not be permissible under the Federal Constitution without amendment. The attempt to make 
all profits uniform, at the same time that the Government has power to commandeer products or plants that 
are not freely made available for the prosecution of the -wht, i? more nearly analogous to the governmental 
authority exercised in the field of public utilities than to the power to raise revenue. The use of any of the 
Federal powers mav be limited to the effecting of its direct purposes. Cf. the recent United States Supreme 
Court case, Louisville Jcint Stock Land Bank v. Radford, decided May 27, 1935, dealing with the bankruptcy 
powers of the Federal Government, and see Bailey v. Dreiel Furniture Co. (259 U. S. 20). On the other 
hand it is, of course, impossible to forecast with any substantial certainty the extent to which the war 
powers of the Federal Government may be construed to permit the removal of war profits. Furthermore, 
it is well settled that the motives which prompt Congress to pass revenue measures will not be reviewed 
by the courts and that incidental efl'ects of tax statutes will not invalidate such statutes. (See Bailey v. 
Drexet, supra, at pp. 38, 40, 41.) 



tax. Precisely because it accelerates and in nowise checks inflation the excess- 
profits tax — without more — offers no cure at all for war evils. On the contrary, 
it aggravates them.* 

Mr. Colver, who was chairman of the Federal Trade Conimission 
during the war, made the following statement: 

* * * the way to make anything expensive is to tax it; and if you levy a tax 
on war, you make war cost more than it should. A study of the actual working 
out of our excess profits tax during the last war will demonstrate beyond any 
possible question that it did not recover the excess profits; that it did not keep 
prices down, and that it did not stimulate production, but that on the contrary, 
it slowed production down, it stimulated prices, and it made the cost of the war 
to the taxpayers, I should say, twice what it should have been. I would say that 
for every dollar collected in excess-profits taxes that got into the Treasury it cost 
the people of the United States, or it will cost them $10 unnecessarilj'.s 

The ineffectiveness in recapturing profits derived from the Great 
War, of taxes based upon a percentage of profit appears from the 
figures discussed at pages 13-15 and 65-66. 

Another statement of Mr, Colver's stresses the point that since 
the Government in war times becomes the largest consumer, a pass- 
ing on of taxes in the form of higher prices paid by the Government 
as consumer not only permits war profits but, by decreasing the pur- 
chasing power of the Government, tends to defeat the primary pur- 
pose of war-time taxation — the raising of sufficient revenue to finance 
the war — and so to make governmental borrowing inevitable: 

I dissent wholly and entirely from the theory that excess-profit taxes justify 
unreasonable price structures and purge unreasonable profits. Not a penny of 
excess-profit tax has been or will be paid to the Government that has not first 
been collected with many other pennies from the people of the country, either as 
consumers or as tax payers. Since the Government itself is by far the largest of 
all buyers at fixed prices, it seems to be absurd to take an excess dollar out of the 
Treasury in order to get 34 cents of it back in by way of excess-profit taxes. The 
net result of such a transaction is merely creating the necessity of raising an 
otherwise unnecessary 66 cents by some other means of taxation or by bond sale. 
In the main, it is not industry which ultimately pays excess-profit taxes, but the 
consumer, and onlj^ a small part of the excess which the consumer pays reaches 
the Treasury in the form of taxes. The whole excess-profit tax theory is an 
attempt to lift oneself b}^ his boot straps, and there is lost from 20 to 80 percent of 
the energy employed in the process.^ 

The difficulty of determining with any substantial degree of cer- 
tainty the costs of business operations makes the fixing of prices by 
governmental agencies an unsatisfactory means of eliminating wide- 
spread tendencies toward price increases. (See pt. II of this report). 
Since, for the reasons pointed out above, a tax of a percentage of 
profits does cause a wide-spread tendency to inflate prices, it is felt 
that the evils of such a tax are inseparably linked to it and that the 
principle of taxing a percentage of profits must itself be avoided. 
Consequently, tliis committee has recommended that corporate 
income be completely confiscated beyond an exemption which is 
itself not based upon a percentage of profit. Such a tax would remove 

* War Policies Commission, H. Doc. No. 163, 72d Cong., 1st sess. (1931), p. 798. 

' Hearings before the Committee on Military Afiairs, House of Representatives, 68th Cong- Ist soss.. 
Mar. 11, 13, and 20, 1924, p. 237. 

• Garrett, Government Control over Prices (1920), p. 391. 


the incentive to pass on its burden in the form of higher prices ^ since, 
regardless of the vohime of business or the total income, only a 
definitely limited amount of profit — determined without regard to 
the amount of income received — could be retained by the taxpayer. 
It must be noted, however, that such a tax raises other problems, 
the chief of which is the effect upon production of a limitation of 
profit which ensures that beyond that limitation an increase of in- 
dustrial activitv will brins; no return. 


The profits of any business do not appear entirely as cash but are 
also in large part in the form of such assets as accounts receivable and 
inventories. Consequently, the average company does not have 
sufficient cash available to pay as taxes anything like the entire amount 
of its current profits. Furthermore, cash reserves are vital to most 
businesses to finance current operation and will be particularly needed 
in war time to finance the conversion from peace to war production. 
Therefore, in order to assure productivity, cash reserves should not 
be drained by taxation even in the cases of companies having sm'- 
pluses sufficiently large to pay severe taxes. 

In addition, in the case of a severe tax any mechanical error in favor 
of the Government in the computation of the tax (which involves 
the complications inherent in the accounts of modern large-scale 
business where depreciation, depletion, and many other items are 
largely matters of judgment) may mean the destruction of the tax- 
payer's business. It was for this last reason that Mr. Ballantine 
when Assistant Secretary of the Treasury testified before the War 
Policies Commission that at the outside a tax of 90 percent of profit 
was the maximum that could be used safely: 

In the case of any business which is at all complicated the determination of 
the profit for a particular year can rarely be exact but must rest in part upon 
assumptions and estimates. Almost never does the entire profit take the form of 
an actual excess of cash or securities at the end of the year. Generally speaking, 
part of the profit is in the form of inventories and in the form of improvements or 
additions to factories. Where the rate of tax is moderate, errors in determination 
do not have vital consequences and average out over the years. If, however, the 
entire profit is to be taken out of the business, errors in computation might be 
disastrous. Without elaborating on this difficulty, it may be stated that to allow 
some margin for error, any workable tax would presumably have to be computed 
on some percentage less than 100 percent — saj^ 80 percent or, perhaps, at the 
outside, 90 percent. Eighty percent was the rate urged by the Treasury and 
adopted as the maximum in 1918 and was the rate finally used in the British 
excess-profits tax. Leaving some relatively small margin of profit also serves the 

' It would, however, have an inflationary influence in that it would encourage (1) the treatment of doubt- 
ful items as cost rather than as income, and (2) higher costs in general than would be normal. Increases in 
cost, of course, result in a tendency to increase prices. For example, during the World War in the desire 
to avoid having the Government get the lion's share of the profits, salaries of executives were increased 
inordinately and bonuses liberally distributed. Compare the report on the American Metal Mining Co. 
in the Federal Trade Commission Report re "Profiteering" (65th Cong., 2d sess., Doc. 248 (191S), pp. 
19-20). The expansion of advertising to a volume beyond what certain authorities have argued to be 
socially desirable dates from the war period. "Only the shortage of paper limited the expenditm^e for 
advertising according to one Treasury official." Haig, Taxation of Excess Profits in Great Britain (1920), 
p. 148-, note 5. 

Furthermore, expenditures were encouraged which were neither extravagant nor designed to be evasive, 
but were of the type aiming at future speculative profits, such as "repairs and betterments not presently 
needed or made with an eye to the future and in anticipation of a return to peace-time basis. Further, 
expenditures are lavishly made by big concerns out of rapidly accumulating surpluses which are in the 
nature of strategic advances upon other weaker competitors and which, upon a return to peace-time basis, 
will tend to result in a permanent elimination of weaker competitors and the rapid extension of monopolistic 
conditions. These expenditures are made on the theory that out of every dollar so spent, the Government 
itself contributes anywhere from 20 to 80 cents of the cost." (Garrett, Government Control over Prices 
(1920), pp. 391-392.) 


purpose of furnishing a guaranty to the Government that the taxpayer will see 
to the administration of the business with efficiency and economy.^ 

These considerations were restated in substantially the same form 
by the Secretary of the Treasury in responding to a resolution of the 
Senate for recommendations and opinions as to the proposal, result- 
ing from the War Policies Commission's investigations, that war 
profits over and above the pre-war average be taxed at a rate of 95 

In time of war increased production in many lines of industry and 
uninterrupted output in most fields of industry are essential and are 
far more miportant than elmiinating profiteering or preventing a 
heavy debt being passed on to post-war administrations. Conse- 
quently, if the absolute rate of any war-time tax is so severe as to 
discourage investment required for reconditioning idle plants, con- 
verting plants from nonessential to essential production, building new 
facilities, financing larger purchases of raw materials and increased 
pay rolls — to name a few of the wartime requirements for capital in 
expanding production and eliminating any consideration of the effect 
of such a tax on existing production — it cannot be permitted. 

The operation of investment in our economy is quite distinct from 
any ciuestion of the Avillingness of any individual to forego profits for 
a patriotic reason. The scale of profit is the routine method by 
which industrial activity is carried out. The investor is guided not 
by general questions of usefulness or national need, about wliich he 
is in most cases not advised, but simply by the prospect of profit 
held out to him.^'' If this is cut off, expansion of industrial activity 
may cease, and will in any event be seriously curtailed, and even exist- 
ing production will be reduced. In such an event the financing of a 
large part of the needed expansion, without considering existing pro- 
duction, by the Government might well mean a greater financial 
burden on the Government than would be the case under a more 
moderate rate of tax. GovernrnxCnt expenditures in loans would 
be increased wdthout any assurance that Government expenditures 
for supplies would be correspondingly decreased. Government 
revenue from a tax at a lower rate applied to a larger volume of 
privately financed business might actually be greater than the 
revenue from a tax fixed at a rate so high as to discourage expansion 
of private business. The administrative burdens imposed on the 
Government in carrying out such financing, and the resultant neces- 
sary supervision of operations, would in addition be enormous and 
would be imposed at the very time when administrative capacity 
would already be sorely overburdened by other war duties. 

Once the country has been launched upon a major war any serious 
threat to the stability of production would be disastrous and the intro- 
duction of the Government into business on the large scale that might 
be required by a confiscatory tax rate could not be effected without 
such a threat. 

8 War Policies Commission, House Document No. IfiS, 72d Cong., 1st sess. (1931), pp. 691-2. 

5 "2(1 Cong., 1st sess., Senate Doc. 105, p. 3. 

'" See letter of B. M. Baruch to committee dated Apr. 12, 1935: "Much as it may be decried, the cold fact 
remains that ours is an economy motivated by profits. A certain return on money is necessary to make 
our industrial system work • * • Much was said at the liearin;; about this being a new war psychology 
* * • Our whole industrial system is a complex massive machine built and geared to run on investment 
and profit. There is no proof that it will run on psychology and there is much that it will not. Certainly 
we should not .select an hour when the enemy is at the gates to find out whether it will or not * • « 
Money will not invest and run the extreme risks of war production for a fraction of 3 percent." 


Furthermore, if a wartime tax is so burdensome as to be considered 
unfair by the pubhc at large, the resulting increase in the all too 
normal tendency to avoid or evade taxation " may, quite apart from 
its economic and social effects, result in a decrease in net revenue to 
the Government. 


Patriotism in the last war was tested in a situation where the highest 
excess-profits tax rate continued in existence for only 1 year, was 80 
percent of profits over and above an exemption of at least 10 percent 
of investment, which as pointed out above at page 8, is not a check 
on the absolute amount of profits. Mr. Haig, in speaking of the 
British experience on the subject, indicated that abuses would develop 
even with a rate far below 80 percent: 

Best informed British opinion places the maximum share which can be safely 
taken by the Government at about 50 percent. If the Gov'ernment takes more 
than the half of the pound of profit, abuses, it is believed, are certain to develop.'* 

The 1917 Revenue Act imposed income taxes up to 4 percent on 
corporate incomes remaining after payment of excess-profits taxes and 
relied primarily on the excess-profits taxes for revenue. These taxes 
were based upon a pre-war earnings standard that required a determi- 
nation of invested capital. To a flat exemption of $3,000 was added 
an exemption computed by applying to the invested capital em- 
ployed during the taxable year a percentage equal to the percentage 
which pre-war income (1911-13, inclusive) was of pre-war invested 
capital. (Sees. 203, 200). This involved a computation of invested 
capital and income for two periods, but since the act fixed the maxi- 
mum percentage of current invested capital at 9 and the minimum at 
7 the importance of pre-war invested capital and income was lessened 
as compared with the significance of current invested capital, to 
which the definitely limited percentage was to be apphed, and current 
net income. 

Net income over and above the 7 to 9 percent of invested capital 
was taxed at varying percentages^ — income equal to 15 percent of 
invested capital less the credit was taxed at 20 percent, income equal 
to an amount between 15 and 20 percent of invested capital was 
taxed at 25 percent, between 20 and 25 percent of invested capital 
at 35 percent, between 25 and 33 percent of invested capital at 45 
percent, and over 33 percent of invested capital at 60 percent. (Sec. 

The 1917 act also imposed an excise tax of 10 percent upon the 
net profits of munitions manufacturers derived from the sale of 
specified articles.^'' 

The excess profits provisions described above were also applicable 
to individuals and partnerships engaged in trade or business and 
having an invested capital.^" Individual incomes were subjected 
to surtaxes ranging from 1 percent on net incomes between $5,000 
and $7,500 to 50 percent on net incomes over $1,000,000, in addition 

11 See pp. 44 to 52 infra, for a discussion of the problems raised in the field of taxation by the normal' 
tendency to avoid paving taxes. 

12 Haig, Taxation of Excess Profits in Great Britain, 1920, p. 149. 

13 Revenue Act of 1917, sec. 214. The articles are listed in sec. 301 (1) of the Revenue Act of 1916. 

n Sec. 201. If the trade or business had no invested capital, or had only a nominal capital, a flat 8 percent 
tax income above an exemption of SPj.OOO was applicable. (Sec. 209). 


to the surtaxes already in effect under the 1916 act on income brackets 
from $20,000 up.^^ (Sec. 2.) Individual incomes were also subject to 
a 2 percent tax on the first $2,000 of income above the ordinary 
personal exemptions and a 4 percent tax on the balance. 

The 1918 rates were considerably more severe and resulted in much 
greater revenues — $4,286,500,000 as contrasted with $2,937,800,000 
reported due in the original unaudited returns. ^"^ 

The corporate taxes ^^ again combined a pre-war income standard 
with an invested capital standard but in a different manner. In 
addition to an income tax of 12 percent on income over $2,000, all 
corporations were subjected to an excess profits tax of (1) 30 percent 
of net income up to an amount equal to 20 percent of invested capital 
less a credit (computed by adding to $3,000 an amount equal to 8 
percent of invested capital) and (2) 65 percent of all income over 20 
percent of invested capital. In addition all corporations were sub- 
jected to what was referred to as "a war profits" tax at a rate of 80 
percent. This appeared as a third bracket of the excess profits tax 
and was commonly called the 80 percent bracket. This tax was not, 
however, based upon invested capital. It was levied against income 
in excess of a special credit which was computed by (1) adding to 
$3,000 the average pre-war net income, adjusted for capital changes 
by adding or subtracting 10 percent of the increase or decrease, as the 
case might be, of current invested capital as contrasted with pre-war 
capital '^ or (2) taking 10 percent of invested capital, whichever was 

This 80 percent tax on income less at least 10 percent of invested 
capital was only payable, however, to the extent that it exceeded the 
excess profits tax set forth in the two preceding brackets. In other 
words the excess profits tax of 30 percent, or of a combination of 30 
percent and 65 percent (depending on the income bracket of the tax- 
payer), of income in excess of $3,000 plus 8 percent of invested capital, 
and the war profits tax of 80 percent of income in excess of at least 
10 percent of invested capital, were alternative taxes, the higher of 
which was applicable. 

In 1919 the 80 percent tax was eliminated and the rates of the excess 
profits tax were reduced from 30 percent and 65 percent to 20 percent 
and 40 percent. On December 31, 1921, these reduced taxes dis- 

Exhibit 1388, reprinted in the appendix at page 132, sets forth in 
tabular form the corporation income and profits tax rates in effect 
from 1909 to 1928, inclusive. 

Except in individual instances, the eft'ectiveness of the wartime 
taxes in recapturing profits can be estimated only roughly. Mr. 
Ballantine testified before the War Policies Commission that corpora- 
tions reported average annual net incomes, after deduction of their 
estimated taxes, of $5,900,000,000 for the years 1914 to 1916, inclusive, 

's The total surtaxes in effect are ^iveii in a table at pp. 7t)4-5 of H. Doc. 163, 72d Cong., 1st sess. (War 
Policies Commission Hearings.) 

'9 72d Cong., 1st sess., H. Doc. No. 103 (War Policies Commission Hearings), p. 701, table no. 1. 

" Individuals and partnerships engaged in business were not subject to the 1918 excess profits tax or war 
profits tax. (Sec. 301a.) Individual incomes were subject to surta.xes of increased severity. (See pp. 
704-5, H. Doc. 163, 72d Cong,, Ist sess.) The ordinary income tax rates were increased to percent on 
the first $4,000 above the ordinary personal exemptions and to 12 percent on the balance. 

1' If the corporation was not in existence during at least one of the pre-war years (1911 to 1913, inclusive), 
the first alternative means of computation was the use of the same percentage of invested cai)ital that the 
averacre pre-war incoijie of representative corporations was of their average i)re-war invested capital. 

ll.")79 — 3.5 2 


and average annual net incomes, after the estimated wartime taxes, 
of $7,000,000,000 for 1917 to 1919, inclusive. '^ On this basis the 
war — despite the wartime taxes — added $1,100,000,000 a year to the 
final tax-free profits of corporations which had already profited largely 
by the huge sales to the Allies made by this country before April 6, 
1917. As contrasted with the years 1911 to 1913, inclusive, which 
the wartime tax statutes fixed as the pre-war years for measuring war 
profits, corporation profits after taxes increased 69 percent during the 
war, or from an average of approximately $4,123,000,000 to $7,000,- 
000,000, and only 44 percent of the increase in annual profit from 
$4,123,000,000 to $9,500,000,000 was taken in income and excess- 
profits taxes.^" 

Exhibit 1756, which is reprinted in the appendix at page 136, shows 
that a group of the largest manufacturing and mining companies in 
the country paid in taxes (including both the normal income and the 
excess and war-profits taxes) only 25 percent of their net taxable in- 
come for 1917 and only 34.9 percent of their 1918 income, according 
to the fuial figures of the Bureau of Internal Revenue. If the revenue 
agents' determinations of net taxable income are used 22.8 percent of 
1917 income was paid as taxes and 32.8 percent of 1918 income. It 
must be remembered that these computations do not include income 
received by these corporations, but excluded from taxable income 
because (1) invested in tax-free securities (see p. 52) or (2) allowed as 
deductions for amortization, depreciation, or depletion, i. e., set up as 
reserves against ordinary business risks (see p. 27 et seq.), to mention 
a few of the allowable deductions from income. The 1917 net income 
of these companies after deducting payment of their final tax liability 
was 26 percent of their invested capital and their 1918 income on the 
same basis was 10.5 percent of capital, the Bureau of Internal Reve- 
nue's final figures show. Before taxes, the 1917 income was 34.8 
percent, and the 1918 income 15.6 percent, of capital. If the revenue 
agents' determinations are used, the results are 39 percent profit in 
1917 and 11.8 percent in 1918 after taxes and 50.5 percent in 1917 
and 17 percent in 1918 before taxes. Obviously, the 80-percent tax 
was not a tax of 80 percent of all profits. 

Individual instances further illustrating that the tax rates in prac- 
tice were not of the severity usually ascribed to them appear at page 
65-66 of this report. 

^jlt should be further remembered that estimates of taxes as con- 
trasted with income, or of income as contrasted with investment, are 
based upon (1) the taxpayers' own estimates of those two highly 
variable items, income and investment,^^ or (2) estimates which the 
taxpayers consented to or which withstood the rigors of legal proof, 
or (3) estimates by Government agents whose time and expense ac- 
counts were limited, whose estimates were primarily based upon the 
taxpayers' figures and whose estimates were made not only with an 
eye to the necessity of substantiation under vigorous attack, but also 
within the limitations of technical statutory standards which per- 
mitted the elimination from income of many items which would be 

■ i» 72d Cong., 1st sess., H. Doc. 163, p. 690. While these figures are the taxpayers' own estimates and con- 
sequently may be underestimates, the ratio between the two sets of figures should reflect with substantial 
accuracy the ratio between the actual income in each of the two periods. The basic figures on which Mr. 
Ballantine apparently relied appear in Statistics of Income for 1925, U. S. Treasury Department, pp. 22-23. 

20 Statistics of Income for 1925, U. S. Treas. Dept., pp. 22-23. 

21 See pp. 19 to 36 for an analysis of the impossibility of arriving at exact determinations of income and 


considered as income for ordinary purposes. As Senator Vanden- 
berg pointed out in his examination of Homer L. Ferguson, president 
of the Newport News Shipbuilding & Dry Dock Co., the taxes paid 
were less severe and the profits retained greater than such figures in- 
dicate by (1) the amount which the estimates of income excluded de- 
batable or hidden items and by (2) the amount by which the estimates 
of investment included debatable or fictitious items: 

Senator Vandenberg. What you are saying, Mr. Ferguson, is that an attempt 
to tax war profits becomes more or less of a mathematical maze, dependent upon 
an agreement as to what base you are going to start from? 

Mr. Ferguson. Our war-profits tax got up to a point of about 86 percent, I 
think, on this invested capital. 

Senator Vandenberg. But whether or not it is a comprehensive or adequate 
tax depends primarily upon the base to which the tax is going to be applied? 

Mr. Ferguson. Absolutely.22 

S2 Feb. 12, 1936. 

II. Consideration of Particular Types of Taxes 

Because of the complicated and infinitely varied structure of the- 
country's economic life, achieving a taxation scheme which will 
in fact leave uniform profits to all concerns is enormously more 
difficult than the determination of what is a socially desirable profit for 
any single concern, difficult though the latter determination. is as indi- 
cated by the foregoing part of this report. By and large, the needs 
of individuals can be stated in absolute amounts of dollars and, at the 
cost of hardship in particular cases, an arbitrary uniform exemption 
could be fixed that would raise with substantial clarity the issue of the 
extent to which taxation of individuals should be carried. But in 
the case of commercial and industrial enterprise the business unit's 
claim to profits cannot be so uniformly determined. 

Even though the preponderant public opinion should come to be 
that in time of war a business unit should receive no more tax-free 
income not distributed to individuals than individuals should them- 
selves receive, the economic effects of such a tax would probably be 
so adverse as to make it undesirable. If all business units, regardless 
of size, natural location, patent position, amount of investment, de- 
gree of risk, and the many other causes of variances in profits, were 
to receive only the same ultimate profit, new investment would be 
encouraged to go into small, safe, low-capitalized fields. Existing 
large and efficient firms would be encouraged to subdivide without 
consideration of efficiency, since increased costs would not lower the 
owners' ultimate profits as a general rule. Although much of this 
could and probably would be accomplished by purely formal corporate 
reorganizations, it is clear that confusion and a consequent general 
slowing up of the productive and expansive processes in industry 
would occur at the very time that no interference with maximum 
productive capacity can be tolerated. 

At all events, it seems likely that any wartime taxation measure 
that can hope to receive serious consideration must choose for a tax 
on corporations — if not on all business units ^^ — a basis or standard 
that will recognize in some manner general differences in profit- 
ability of business enterprise. The two bases most frequently referred 
to in theoretical discussion are (1) average peacetime profits and 
(2) the amount of investment. These two bases were both used during 
the World War in this country and in Europe. 

(1) average pre-war income as a tax base 

The War Policies Commission recommended a tax of 95 percent 
on all earnings above the average income during the 3 years imme- 

28 The 1917 Revenu?. Act based the cxsess-proflts tax on noncorporate business conaerns on the invested 
capital of those cDnc5rns,jun as it did in the case of corporations. (Ssos. 201, 203, 204, 207). This was eliminated 
from the war profits and excess-prjflts tax cont.iin'jd in the 1918 act, in part, at least, because of the infinite 
difficulties of admiaistration as contrasted with the relatively small amount of revenue involved. (Sec. 301). 
Sea rep irt of the Hous3 Committee on Ways and Means on the revenue bill of 1918, 65th Cong., 2d sess., 
H. Kept. 767, p. 16, 



diately preceding the next war.^^ Air. Baruch in a statement filed 
with the committee repeated this recommendation but advocated 
increasing the tax to 100 jjercent of the excess.^^ 

This base has been urged largely because of the fantastic complica- 
tions of the invested capital approach. The invested capital base 
involves not only much physical difficulty and consequent delay due 
to the size and complexity of modern business but also many decisions 
in the realm of discretionary judgment where no ruling, unless dis- 
tinctly favorable to the taxpayer or acquiesced in by him, can be 
safely regarded as final without prolonged Htigation. 

T, S. Adams, formerly chau'man of the Advisory Tax Board of the 
Bureau of Internal Revenue, stated that: 

The intricr'-y of the exro^s-prof^ts tax is such that it, is hardh^ ?.n exaggeration 
to say that it takes more time to teach an accountant to master its mysteries 
than the average accountant can be retained in the service after he has attained 
such mastery. * * * t^qh j-ears would be a radically short estimate of the 
time required in which to bring the taxpayers and the administrative authorities 
of the country to a point where the excess-profits tax could be reasonaV:)ly well 
enforced. 2" 

Professor Seligman said: 

What constitutes invested capital, however, is so elusive as to be virtually 
impossible of computation." 

The War Policies Commission analysis of testimony, prepared by 
its executive secretary, Mr. Robert H. Montgomery, a recognized 
expert on taxation, states that: 

Some of the provisions of the laws were so highly complicated that they could 
not even be litigated because they could not be reduced to logical argument pro 
and con. The determination of what constituted invested capital was an insoluble 
problem during the continuance of the tax, and is still unsolved. Some of the 
fundamental principles of invested capital are now in the courts and will be there 
for years to come.^* 

However, the pre-war earnings standard involves so many necessary 
exceptions that in practice it is coupled with the invested capital base 
to such an extent as to lose its separate identity. 

24 No final report was ever submitted by the War Policies Commission but in the Analysis of Testimony 
prepared by the Commission's executive secretary and transmitted by President Hoover to Congress, there 
appears the following: 

"Tax on income is the simplest method of applying a war tax. Most people are afraid to falsify their 
income-tax returns. The Government machinery for collection of such taxes already exists. Its method 
of operation is generally understood. From every standpoint, excess profits should be devised on the 
basis of income, and not on the basis of invested capital. 

"Individual and corporation Federal income taxes in force when war is declared should be continued. 
These may be increased if desired. In addition, and retroactive to a period which will embrace any in- 
flation or profit due to war activities, there should be imposed an excess-income tax of 95 percent applicable 
to individuals and corporations alike, not graduated nor affected by invested capital, but it should be a 
straight income tax, computed somewhat as follows: 

"From net income as now computed deduct: 

"1. .Average net income for the .3 years next preceding the war period. 

"2. The cost of additional capital facilities required for the war and in due course to be authorized by the 
proper governmental war agency. Tax deficiencies to bear interest at 6-percent per annum to prevent the 
taking of deductions which are not likely to be approved. At the end of the war the residual value of the 
additional facilities to be adjusted. 

"3. Receipts of income in excess of a reasonable annual accrual thereof, where the income has been accru- 
ing over a period of years and contains no element of war profits, such as fees and commissions of executors 
and trustees. 

"4. After deducting 1, 2, and 3, above, impose a tax of 95 percent on the balance. 

"One of the advantages of the foregoing is that it should tend to prevent the extravagances which a tax 
on the excess profits of corporations is supposed to encourage, because it imposes the same high rate on 
individuals." (Documents by War Policies Commission, 72d Cong., 1st sess., H. Doc. 271, pp. 22-3.) 

25 Letter of Apr. 12, 1935, from Bernard M. Baruch to the committee: ' '* * * I propose * * * to 
take, by special taxes, 100 percent of all profits and income in war above the average of the i)receding 3 
years of peace * * * Taxes on new enterprises will have to be adjusted and worked out separately 
* * * At the same time, to increase the regular individual and corporate income tax to the absolute 
point of diminishing returns * * * I do not propose to make * * • asset values any factor in 
determining the tax, or to repeat the partial futility of the World. War excess profits tax • • •" 

-'5 Thirty-five Quarterly Journal of Economics, p. 372, Should the Excess-Profits Tax be Repealed? 
" Essays on Taxation (1925), p. 704. 
3s Documents of War Policies Commission, R. Doc. No. 271, 72d Cong., 1st sess. (1932), p. 21. 


Although the size of a company's investment is not the sole or even 
chief factor in its profit-making capacity and so the invested capital 
base fails to reflect accurately the normal gradations of profitability 
in competitive business, still the base of earnings for any arbitrary 
period is more Procrustean. All investors seek a return on their 
investment. This fundamental fact is recognized in the use of in- 
vested capital, although the degree of risk, especial skill, and other 
important factors making for gradations of profitability are ignored. 
But the pre-war earnings base overlooks production and profit cycles 
and guarantees rich returns to the fortunate company that v/as at its 
peak in the pre-war period and, unless an exception be made, con- 
demns to bankruptcy the concern that pulled through a pre-war 
slump by the use of reserves.^^ Similar^, new companies and expan- 
sion by existing companies would be absolutely profitless, unless 
exceptions be made in the theory. 

Because production must be encouraged and not discouraged in 
war time, these exceptions are vital and can only be taken care of 
by an application of the invested capital base in these cases. The 
addition of new capital to existing concerns is so continuous and wide- 
spread ,^° and it is so difficult to restrict effectively the device of new 
incorporation by companies desiring to place their full capital under 
the exception where the exception for additions to capital does not 
give them the exemption they desire, that the tendency is irresistible 
for the whole scheme to become merely an alternative tax base to be 
chosen b}^ the taxpayer when it is to his interest to do so. 

Indeed in most foreign countries that used the device it was specifi- 
cally made optional with the taxpayer. See Taxation of, 
Excess Profits, and Luxuries in Certain Foreign Countries, Legisla- 
tive Reference Division, United States Library of Congress; and 
Haig, Taxation of Excess Profits in Great Britain, 1920, page 174. 

Finally, tliis plan is open to the fundamental objection that it is 
based upon the theory that only profits allocable exclusively to the 
increase of industrial activity due to war should be taxed. As pointed 
out above at page 8, any war-time taxation measure must increase 
the absolute severity of taxation as contrasted with peace-time taxes. 
Ordinary peace-time earnings cannot be left untaxed in time of war, 
much less the unduly enhanced earnings that may occur in a period 
immediately preceding a war.^^ Consequently, with or without its 
necessar}^ exceptions the pre-war earnings standard cannot furnish a 
complete war time taxation plan. It would have to be supplemented 
with some other plan to raise the needed additional revenue. The 
complexity of administration wliicli would result from the use of two 
conjunctive taxes, one of which would have lost most of its purpose 

S9 "Abnormallj high profits in the past should constitute no ground for immunity from a future tax on 
supernormal profits. This is not word play; it is a mere suggestion of the truth that an a'onormal state may 
continue for a considerable time without becoming 'normal.' Consider finally the concern which has had 
abnormally low profits in the past," Adams, 35 Quarterly Journal of Economics (1921), pp. 388-9. See 
also the statement of the British Chancellor of the E.xchequer in 1920: "I would remind the committee 
that under the provisions of the excess profits duty prosperous concerns with a large pre-war standard 
may escape liability for the tax because their present profits, though high, are not in excess of their 
standard, and at any rate, t^ey pay tax on what all of us thinl: an unduly low scale." Ibid, p. 389. 

30 The net worth of 2C0 lending .'.merican corporations increased in the period 1916 to 1921 from $G,291, 
000,000 to $11,363,000,000. House Mihtary Aflairs Committee, Hearings on Universal MobiUzation for 
War Purposes, 68th Cong., 1st sess., p. 178. 

Whenever new capital is added and earnings allocable to it are to be excepted from the pre-war standard 
it is necessary to compute the entire investment, in order to determine, by computing the proportion be- 
tween the new and the total investment, that proportion of the total income allocable to the new capital. 
See Haig, Taxation of Excess Profits in Great Britain, (1920), p. 81. 


through exceptions, makes the pre-war income standard an undesir- 
able base for war-time taxation. 


The primary theoretical objection to invested capital as a basis 
for computing the amount of income which is to be tax free is that 
the amount of investment is not, in ordinary commercial and indus- 
trial enterprises, the sole yardstick of the rate of profit. ^^ As pointed 
out above at p. 16, the degree of risk, geographical location, business 
skill, patent rights, and any number of other factors condition profit- 
ability and a tax which exempts income up to the same percentage of 
the invested capital for all business does not treat all business ratably. 
However, the chief objections to the use of the invested capital base 
in the event of another war are to its administrative difficulties.^^ 

The basic administrative difficulty encountered in applying the 
invested capital standard is in the valuation of the assets constitut- 
ing the investment. 

The late T. S. Adams of Yale University, an adviser to the Treasury 
Department and one of the leading tax experts in this country, gave 
his opinion as follows: 

I think that no one thing so conduces to delay and complexities of the tax laws 
as the necessity for valuation. 

I think it may be possible, and I hope that the Department, some representa- 
tives of which are present, will bestir themselves to make suggestions to get away 
from * * * problems of valuation, the solution of which problems means the 
exercises of judgment and differences of opinion, mistakes, and delay. If there is 
any human way of getting away from that, the Government of the United States 
ought to get awaj' from it.^^ 

As a matter of definition, the higher the valuation permitted for 
invested capital, the greater the exemption allowed the taxpayer, 
since the whole purpose of providing for the determination of invested 
capital is to fix the amount of tax exemption. In 1917, the East 
Butte Copper Mining Co. made $1,268,788; the Government col- 
lected taxes of only $69,071. The ratio of net income to invested 
capital before taxes was 19.7 percent; after taxes it was 18.7 percent, 
a collection of only 1 percent. ^^ Indeed, a sufficiently high estimate 
of the invested capital of any company would make all of its income 
tax free. Consequently it is to each taxpayer's interest to secure as 
high a valuation for its invested capital as possible. 

Cash can be valued without difficulty, but there the simplicity 
ceases. The values of all other things, as Professor Adams observed, 
are matters of judgment. The process is described by the Supreme 
Court as follows: 

The ascertainment of value is not controlled by artificial rules. It is not a 
matter of formulas but there must be a reasonable judgment having its basis in a 
proper consideration of all relevant facts. ^^ 

31 " There is the even more damning criticism that • * * in actual operation the standard of in- 
vested capital does not perform the function of determining the richness of profits even reasonably well; 
* * * the results of its application are eccentric and unfair * * * *" (K. H. Montgomery, 
Excess Profits Tax Procedure (1921), p. 122). 

3> See the statements quoted supra at p. 17. Letter of B. M. Baruch to the committee dated Apr. 12, 
1935: " * • * it has been proved that any excess-profits tax based on asset values is too complex for war 
administration * * * for this reason, millions of dollars in taxes escaped the Government in the 
World War • * *." 

33 G9th Cong., 1st sess., S. Rpt. 27, p. 116. (Italics added.) 

3< Exhibit No. 1722. 

33 Standard Oil Co. of New Jersey v. Southern Pacific Co., et al., 268 U. S. 146, 50 Sup. Ct. 46i'). 


The difficulties and delays involved in applying such a general rule 
to intangible items like goodwill and patents ^^ and to the capital 
assets of heavy industry, which have no market values because they 
are not the subject of general commerce, is obvious. Most corporate 
assets are acquired not for cash, which would afford some index of 
value, but for stock the value of which depends upon the value of 
the very assets whose value has to be determined by the Government. 
To reach valuations which will withstand the scrutiny of courts one 
of whose primary functions is to protect the rights of individuals and 
before whom the burden of proof is borne by the Government, is 
still more difficult.^^ 

The legal difficulties are described as follows in a letter of January 
28, 1935, from the Acting Secretary of the Treasury to the chairman 
of this committee, which appears in the appendix to this report at 
p. 1.39, and which deals at length with the difficulties involved in 

The legal difficulty and uncertainty in the determination of value of property 
not subject to frequent sales, and as to which market quotations are not pub- 
lished daily, arises because it is so largely to be determined from factual and 
opinion evidence, none of which is legally conclusive. Such evidence is the best 
available. Upon such evidence the value is determined by a judge or jury, in 
certain instances inexperienced in valuation procedure and with inadequate 
knowledge of considerations governing market value. The weight to be given 
to the evidence is entirely within their discretion and short of the adoption of a 
fundamentally unsound principle or an erroneous theorv by the court in its instruc- 
tions, it is impossible to secure a reversal of their finding if there is any evidence 
in support thereof in the record. It is a rare case where some evidence is not 
admitted which will support a most unsound finding of value. 

Valuation for the excess-profits taxes of the World War was not 
current valuation, but value as of the time of investment. Retroac- 
tive valuations are of course difficult because records are not preserved 
indefinitely and because, in any event, the task of reconstructing a 
whole scale of industrial values to contrast with the existing records 
of the value of the items concerned adds to the uncertainties and con- 
troversies. However, most companies have some valuation data as 
of the date of acquisition of assets, whereas the task of valuing all 
of American industry as of any single date would be colossal if not 
impossible. Opinion and judgment would in those cases where no 
market was available as a check, be practically imfettered and the 
impossibility of conclusive legal determination would force the 
Government to compromise again and again and would prolong 
final valuation indefinitely. 

Each computation of a tax on the basis of invested capital invoh^es 
the determination of two variables — the income to be subjected to the 
tax and the investment to be used in fixing the exemption. This 
section of this report is concerned only with the latter problem but it 
should be noted that since income carried over into the capital of any 
concern becomes a part of the investment, the latter item cannot in 
most eases be determined without a simultaneous determination of the 
income of prior years. The determination of income, which is re- 

36 During the World War there was of course a strong tendency to write up the values of such items in 
order to increase the base on which the exemption was computed. 69th Cong., 1st sess., S. Rpt. 27, pp. 
207-212; American Economic Review, vol. IX, no. 1, Supp. no. 2, pp. 20-22; Report of Committee on War 
Finance of the American Economic Association, (1919). 

3' A striking example of recent Federal difficulties in this regard is the experience of the Interstate Com- 
merce Commission with the recapture provisions of the Transportation Act of 1920. After 10 years' work 
the Commission was virtually ordered by the Supreme Court to begin all over again because of failure to 
give proper attention to the factor of reproduction cost in its valuation. St. Louis, etc. v. O' Fallon, 279 
U. S. 461 (1929). See examples in table appearing in appendix at p. 146. 


f erred to at page 27 et seq., raises questions as much in the reahn of 
judgment as are those here referred to. Taxable income, roughly 
speaking, is the difference between costs and total revenue. Costs 
include the valuation of many articles as difficult to value as those 
referred to above. 

The investment of a corporation was determined as of the time it 
was formed. Consequently reorganization of a corporation just be- 
fore or during the war resulted in an increase in the valuation of the 
assets acquired by the new company because of the rising price level. ^^ 
Consequentlj'' avoidance of taxes by corporate reorganizations was 
common. A flagrant example of this is to be found in the 1917 trans- 
actions of the Old Dominion companies. The revenue agent's 
report indicates that by means of a fictitious transfer the invested 
capital was increased $10,000,000 for tax purposes. On February 12, 
1917, when the Old Dominion Co. of Maine held virtual ownership 
of the Old Dominion Co. of New Jersey through possession of 96 per- 
cent of its stock, a sale was made of the New Jersey Company to the 
Maine corporation for the sum of $10,000,000. The fact that neither 
company had cash in hand anywhere near this sum was not an obstacle. 
The New Jersey Company, which had a bank balance of $350,000, paid 
a dividend of $9,969,875 to the parent corporation. At the same time 
the parent corporation drew a check for $10,000,000 in favor of the 
subsidiary in payment for the property. 

It was admitted by Mr. C. H. Altmiller, treasurer of the Old Dominion Co., that 
the deposits v\'ere made and checks drawn simultaneously and that the transaction 
was purely a bookkeeping one.^^ 

The judgment of the revenue agent was that — - 

this transaction had the appearance of a transfer of assets substantially their own 
property and for the purpose of increasing their invested capital for excess-profits 
tax results.^^ 

The history of the Newport News Shipbuilding & Dry Dock Co.'s 
controversies with the Governm_ent over its 1917 taxes illustrates the 
difficulties in fixing invested capital. It took until 1931 — or 14 
years — to settle these taxes because of the difficulties of determining 
invested capital *^ and then the settlement was only made by the 
Bureau of Internal Revenue giving up the task and deciding that it 
could not determine the invested capital of the company but must 
make a special assessment."*^ Under such an assessment, the exemp- 
tion was the same percentage of the company's net income as the 
average exemption of representative concerns in the same or a similar 
business, was of the average net income of such concerns. 

The revenue agent's report fixed the company's invested capital in 
1917 at $3,826,316 and its income for that 5^ear at $3,467,605 or 
a profit of 90.6 percent. ^^ The company's 1917 tax return, made 
under oath, listed its capital at $10,377,605 and its income at $3,- 
368,238 or a profit of 32.4 percent. ^^ The revenue agent refused to 
allow as part of the invested capital an item of $2,198,965 which was 

38 Testimonj' of Arthur A. Balleatine before War Policies Commission, H. Doc. No. 163, 72d Cong.f 
Istsess. (1931j,p. 692. 

38 Exhibit no. 1717. 

« Homer L. Ferguson, Feb. 12, 193.5, 70 ZO; Walter G. Mitchell, Feb. 12. 1935, 80 ZO. 

41 Homer L. Ferguson, Feb. 12, 1935, 67 ZO. The special assessment provision, which appeared as sec. 210 
of the 1917 Revenue Act and as sections 327 and 32S of the 1918 act, is discussed in more detail at pp. 45-47. 
infra. In the 1917 Act it was to be applicable "if the Secretary of the Treasury is unable in any case satis- 
factorily to determine the invested capital* ♦ » " 

<2 E.xhibit 1556. 

» Ibid. 


part of the total loss in 14 years' operations and which the company 
added to its estimated value of its physical assets on the grounds that it 
should be regarded as part of the cost of the plant and that the plant 
was worth its cost. In other words, the company felt that due to 
unfortunate business conditions which caused the company to lose 
money, its real estate increased $885,000 in value, its dry docks 
$813,965, and its patterns and drawings $500,000.** 

The revenue agent further disallowed an item of $2,167,233 which 
was the difference between stock of a par value of $8,000,000 and 
assets received in exchange of a value of only $5,832,766. This 
item the company also considered an original cost, because the stock 
was issued to the Huntington family and Mr. Huntington had lost 
more than $2,167,233 in the course of the company's business 

Another sum which the revenue agent decided did not represent 
an element of value was a bond discount of $1,000,000 involved in 
the issuance in 1903 of $5,000,000 in bonds for $4,000,000 in cash and 
other assets.*'' Further discounts on stocks and bonds of $1,508,849 
were similarly disallowed by the revenue agent." 

The Bureau of Internal Revenue on reviewing the agent's report 
determined that the company's invested capital was $3,822,549 *^ and 
its income $3,298,601 *^ or a profit of 86.3 percent although, as stated 
above, no tax w^as assessed on this basis because of the final decision 
to use the special assessment provisions. This valuation figure was 
strenuously attacked by the company's president, Mr. Homer L. 
Ferguson, in his appearance before this committee. Mr. Ferguson 
testified that the company in 1917 was actually carrying the plant at 
about $20,000,000 and had fixed the value of $10,377,605 in its return 
under protest and only because of regulations of the Bureau of Internal 
Revenue.^" On a $20,000,000 investment, a profit of only 16.4 percent 
was made. Mr. Ferguson also introduced into the record what he 
described as the dollar cost of the plant and assets used in the business 
which amounted to $14,500,000.^^ On this basis a return of 22.7 per- 
cent was made by the company. 

Of 11 valuations made by the metal valuation section of the 
Bureau of Internal Revenue the original valuations of $37,517,093 
were 157.19 percent of the revised valuations of $23,867,624.^- See 
also the examples as to variations in mineral valuations collected 
under the section on Depletion at page 29. 

a Walter Q. Mitchell and Homer L. Ferguson, Feb. 12, 1935, 80 ZO. 

« Ibid. 

« Walter G. Mitchell, Feb. 12, 1935, 81 ZO. 

<" Ibid, Mr. Mitchell testified that the total of appreciation and discount items disallowed by the revenue 
agent was $6,875,047 and that an additional $360,000 was disallowed because it had been allowed as depre- 
ciation and deducted from income in the company's 1916 return. The difference between these figures 
and the net disallowance of $6,551,289, represented by the revenue agent's estimate of .$3,826,316 and the 
company's return of $10,377,605, is due to net additions to invested capital made by the revenue agent 
because of other items not referred to in the testimony. 

« Letter from Secretary of Treasury to committee, May 3, 1935, which states that " Prior to the determina- 
tion by the Commissioner of Internal Revenue that the profits taxes for the ta.xable years 1917 and 1918 
should" be computed under those provisions of law, i. e., the special assessment provisions, computations 
had been made in the Bureau of Internal Revenue which disclosed the invested capital of the taxpayer 
corporation as $3,822,549.44 for the taxable year 1917 and $5,500,091.75 for the taxable year 1918. Such com- 
putations may be termed final in that they were the last made in the Bureau of Internal Revenue and, 
accordingly, represent the Bureau's final determination but the files disclose that the taxpayer was not 
in agreement with the Bureau's determination. Differences in opinion with respect to the correct com- 
putation of statutory invested capital for such years became immaterial, however, when the Commis- 
sioner of Internal ReVenue granted the taxpayer's contention that the profits tax liability should be com- 
puted under the relief sections of the law and not on the basis of statutory invested capital and net 

" Exhibit No. 1556. 

«o Homer L. Ferguson, Feb. 12, 1935, 69 ZO. 

«i Ibid, 67 ZO-68 ZO. 

«2 69th Cong., 1st sess., S. Rept. 27, pp. 109-110. 


A group of 47 copper mining companies were valued by the Bureau 
as of March 1, 1913, for depletion purposes at $1,750,024,787 on the 
first valuation and at only $530,217,893, or a difference of $1,219,- 
806,894, on the second valuation. ^^ These same properties were 
again valued as of January 1, 1919, at $1,456,327,002 on the first 
valuation and at only $323,707,404, or $1,132,619,598 less, on the 
second valuation. ^^ The first valuations as of January 1, 1919, 
average 449.9 percent of the second valuations. ^^ 

Mr. Baruch, who since before the World War has owned 26 percent 
of the stoclv of one of the largest tungsten mines in the world,^^ 
testified in the following manner as to valuation of mining properties: 

Mr. Hiss. It is a very difficult matter from time to time to estimate the value of 
ore still in the <a:round, is it not? 

Mr. EARUCii. It is almost impossible. Witii a tungsten mine it is absolutely 

The Government's experience with valuation difficulties is not 
limited to taxation. By 1926 the Interstate Commerce Commission 
had expended $27,000,000 in 13 years' efforts devoted to valuing the 
railroads of the country ^^ and did not complete its primary valua- 
tions until 6 years later. ^^ For examples of the difficulties of valua- 
tion in the railroad and public-utility as well as taxation fields, see the 
excerpts from Exhibit No. 1343 and the letter, referred to above, of 
the Acting Secretary of the Treasury dated January 28, 1935, which 
appear in the appendix to this report at page 147 and page 139, respec- 

The uncertainties in the field of valuing capital assets are forcibly 
illustrated by the variances between the estimates of invested capital 
contained in the tax returns filed by a group of the country 's largest 
industrial concerns, as contrasted with the estimates of the revenue 
agents' reports on the same companies and with the final determina- 
tions by the Bureau of Internal Revenue. 

The total invested capital reported for 1917 by 15 such corporations 
was $775,799,312. The revenue agents' reports estimated the total 
investment of these same companies at only $547,642,452 — a difl'er- 
ence of $228,156,860. The final determinations by the Bureau totaled 

For 1918 the total invested capital reported by substantially the 
same group of corporations was $878,920,120. The revenue agents 
reported a total capital of $746,789,162 and the total of the amounts 
finally determined upon by the Bureau was $770,212,390.^^ 

It must be remembered that the final figures are those which are 
either determined after litigation or are accepted by the taxpaj'ers. 
The increase between the reports of the various agents and the final 
figures, which meant an increase in the taxpayers' exemptions also, is 
undoubtedly in large part due to the impossibility of strict legal proof 
of the estimates arrived at by the agents. Other factors which ])re- 
sumably played some part in this increase are referred to at page 37 
et seq. Of course, no official figures of invested capital in themselves 

53 Ibid. 
5< Ibid. 
55 Ibid. 

5« Testimony of Bernard M. Baruch, Mar. 29, 1935. 
■'• Ibid. 

59 Mr. Ernst's report, Senate Investigation of the Bui-eau of Internal Revenue (1926), report no. 27, pt.3, 
p. 4. 
5' Forty-?Lxth Annual Report of the Interstate Commerce Commission C1932), p. 86. 
«» Exhibit No. 17S6, appendix p. 136. 


indicate fully the difficulties of determining invested capital, since 
in many cases the Bureau of Internal Revenue decided that it could not 
ascertain invested capital and made use of the exception of "special 
assessments" described at page 45 et seq., of this report. In other 
words, for the most difficult cases no figures are available to illustrate 
the difficulties since invested capital was never determined. 

As indicated by the foregoing, the impossibility of any exact and 
scientific determination of value makes the invested capital base a 
slow and expensive method of determining tax liability as well as 
one which offers undoubted opportunities for tax avoidance. It has 
accordingly been almost universally condemned. ^^ 

Mr. Arthur Ballantine, whose record as Solicitor of Internal Revenue 
in 1918, as Assistant Secretary of the Treasury from 1932 to 1933, 
and as a leading tax lawyer, makes him one of the foremost experts 
in taxation, testified before the War Policies Commission: 

There is no question that the experience of the Government and taxpayers 
with the determination of invested capital was unsatisfactory and that this basis 
should not be used again except as a last resort."- 

The War Policies Commission's Anah^sis of Testimony, prepared 
by its executive secretary, Robert H. ]Montgomery, who is an author 
and a recognized expert in the field of taxation and a member of the 
well-known accounting firm of Lybrand, Ross Bros. & ^lontgomery, 
states as apparently based upon uncontradicted evidence: 

Most of the administrative difficulties arising out of the excess-profits tax laws 
were due to the necessity of ascertaining invested capital. This base should not 
be used in another war.^^ 

IMr. Ogden Mills, when Secretary of the Treasury, adopted Mr. 
Ballantme's exact language, quoted above, in responding to a resolu- 
tion of the Senate requesting recommendations and opinions as to the 
recommendations of the War Policies Commission for wartime taxa- 
tion.^* Mr. Mills' letter also stated that "the experience of the 
World War clearly demonstrated 'the invested capital basis' to be 
impracticable for general application." ^^ 

Nevertheless, the fashioning of an excess-profits tax on the base of 
investment has the distinct merit not only of historical familiarity, 
but also of furnishing at least a rough approximation of (1) popular 
notions of fair return and (2) of business realities. It seems clear, 
however, that the advantages of this type of tax can be retained "\\ith- 
out the delays, uncertainties, and loss of revenue attendant upon 
valuing the investment only by adopting as a base some more or less 
arbitrary estimate not open to varying judgments and opinions. 

The Treasury Department has pointed out that practically all the 
physical assets of business property have been valued at fair market 
value for depreciation, exhaustion, or depletion allowances under the 
income-tax laws.^'' However, these valuations do not include land or 
mineral deposits discovered since March 1, 1913, or any of the 
intangible assets, such as patents and goodwill, which bulk so large in 
the actual value of any business enterprise. In addition, they would 
not cover the new plants wnich v/ar demands will require. Con- 
sequently they leave a wide field open to the difficulties enumerated.. 

61 For comments in addition to those quoted in the text on this page, see p. 16 and p. 19, supra. 

62 72d Cong., 1st sess., House Doc. No. 163, p. 692. 

63 Documents of the War Policies Commission, 72d Cong. 1st sess., House Doc. No. 271, p. 21. 

64 72d Cong., 1st sess.. Senate Doc. No. 105, p. 4. 
•5 Ibid., p. 5. 

66 Letter of Acting Secretary of Treasury, Jan. 28, 1935, appendix, p. 139. 



This committee has recommended that the declared capital value 
provided for by section 701 of the Revenue Act of 1934 should be 
adopted." This section imposed, as an excise tax on corporations, a 
tax of $1 per $1,000 of the value of capital stock "declared by the cor- 
poration in its first return." Section 702 imposed an excess-profits 
tax of 5 percent on net income in excess of 12}^ percent of this declared 
value. These sections replaced the similar provisions appUcable to 
1933 appearing in sections 215 and 216 of the National Industrial 
Recovery Act. 

The Treasury Department made it clear that the declared value 
was to be exclusively within the discretion of the taxpayer and could 
not be challenged by the Government.®* 

The legislative history of these provisions makes it plain that Con- 
gress regarded only the capital-stock provision as important from a 
revenue point of view and accordingly \\dshed to encourage high 
valuations ."^^ The excess-profit provision was included in order to 
insure high valuations.™ 

Whatever the Congressional intent, it would appear that corpora- 
tions anticipating large earnings in 1934 and immediately succeeding 
years, would find it to their advantage to insure exemption from 
the 5-percent tax on net income at the expense of increasing the 
relatively less severe capital-stock tax.^^ The sharp increase in profits 
actually experienced by many corporations prior to May 10, 1934, 
the date of the Revenue Act of 1934, and the widespread hope of 
a substantial re^-ival of business conditions, would indicate that the 

97 74th Con?., 1st sess., S. Report No. 577. p. 4. ,,,.,,.... •. , ^ , 

68 "» * * tho corporation should then determine the original declared value for its entire capital stock 
according to its best judgment." (Instructions on reverse side of 1933 Capital Stock Tax Return, forms 
707 and 708, Trea.surv Department, Internal Revenue Service, revised June 1933.) "* * * a corporation 
* * * may assign" any value it desires to its capital stock * * *." U. S. Treasury Department, 
Bureauof Internal Revenue, Regulations 64 (1934 edition), p. vii. „ -^ . 

99 Report of the Senate Finance Committee on the Revenue Bill of 1934, 73rd Cong., 2d sess., 8. Rept. 

No. 558, p. 6. . J ,. , ^v, ci * 

'» Ibid , pp. 6-7: " A reasonable original declared value is assured by means of the excess-profits tax, 
which is based on the relation of the net income of the corporation to such declared value" (p. 6). "The 
primary purpose of this [excess profits] tax is to induce corporations automatically to declare a fair value for 
their corporate stock under sec. 701" (p. 7). 
" The Prentice Hall Federal Tax Service, par. 27, 101 states: . , ^ , 

"An illustration showing the importance of making the original declared value m the 1934 capital-stock 
tax return high enough to take care of future contingencies is given below. The example shows corportaions 
A and B both of which have the same net income and dividend distributions over a 3-year period. A 
uses a declared value of $1,000,000 in its 1934 capital-stock tax return and B uses $1,500,000. 

Declared value 

Net in- 




Total tax 










1, 100, 000 

$1, 500, 000 
1, 550, 000 

$100, 000 

$50, 000 
40, 000 

$1, 000 


$3, 125 








Total capital- 
stock and 
its tax for 3- 
year period. 


4. 650 

Compare in this regard R. H. Montgomery, Federal Tax Handbook 1934-1935 p. 1007: "The rate of 
excess-profits tax is so much higher than the corresponding rate of capital-stock tax that in all instances of 
doubt as to future earnings it is desirable to increase the declared value of stock as an offset to the applica- 
tion of the excess-profits tax. It will be seen that for every $10,000 undervaluation of the capital stock, 
while $10 is saved on the capital stock tax, the excess profits tax is increased by $62.50." 


values declared by many concerns under section 701 would be unduly 
highJ' ^ 

To the extent that these factors have made the declared values too 
high, there would be a loss of revenue because the exemption based 
upon value would be correspondingly too high.'^ An attempt has 
been made to permit appraisals in cases where the declared value is 
found to be unduly high. However, the scope of the items to be 
included in any such appraisal means that the most difficult type of 
valuation — determination of current-market value or going-concern 
value—will have to be undertaken.^* The uncertainties of such a 
valuation in the case of the average industrial corporation make it 
likely that an appraisal would be practicable only in the most flagrant 
cases of overvaluation.^^ 

As to conipanies formed in wartime and as to all wartime addi- 
tions to capital, valuation of the familiar type will be necessary. It 
is further recognized that the peacetime adoption of the declared 
value base for w^artime taxation purposes may encourage attempts 
to secure extravagant valuations of current additions to capital in an 
effort to increase the wartime exemption. ^"^ 

" The Atolia Mining Co., with an original investment of $03,000 and a deficit of $42,243 in its caoital ac- 
count, declared a value of $1,500,000 in its 1933 return. The Chase Brass & Copper Co with a caoital 
deficit on its books of $2,100,724, fixed a value of $3,000,000 in its 1933 return The Freeport Sulphur Co 
with a capital of $5,577,775 on its books, set its value for 1933 at $16,950,000. The General Electric Co and 
subsidiaries, with a 1933 hook value given its capital of $429,0H'<,S23, declared a 1933 value of $148 7''9 254 and 
a 1934 value of $583,911,000; the Aviation Corporation and subsidiaries, with a 1933 book value -^ven its 
capital of $1,844,525, declared a 1933 valuation of $12,019,000 and a 1934 valuation of .$8 250 000 " 

" On the other hand, a company which, because of anticipated low earnings for the immediate future 
Dxed an abnormally low value on its capital stock may be able to object to the use of that valup for a war- 
time excess-iirofits tax, if it saved its rights. The Inspiration Consolidated Copper Co., in making its 1933 
capital stock tax return, stated that its declared value "did not represent the fair market value nor the actual 
value ♦ * * of the outstanding capital stock nor of the property owned * * ♦ and the said original 
declared value shcvn on tne annexed return may not be takf u nor used for any other purpose nor in anv 
other proceeding whatsoever." The company stated in its return that its balance sheet showed a capital 
account of $46,283,616, but it declared a capital stock value of only $2,807,172. Whether such an obviously 
arbitrary valuation figure can constitutionally be used as the base of an tax where as in thi« 
case, the taxpayer clearly cannot be said to have estopped itself to deny that it is a fair valuation 'is at least 
open to question. Ildner v. Donnan. 285 U. S. 312, 325-326, 328-329, 332, and see also LaBelle Iron Works v 
U. s.. 256 U. b. 377, in which the court denied a claim of lack of uniformity in the application of the invested 
capital standards of the World War taxes, and Cumberland Coal Co. v. Board of Revision 284 U S 23 
28-29, in which discriminatory valuation for State taxation was held a denial of due process'- the extent if 
any, to which confiscation may be recognized as a defense to taxation which is neither arbitrary nor d'is- 
crimmatory cannot be predicted Cf. Louisnille Joint Stock Land Bank v. Radford, U S Sup Ct May 27 
1935, No. 717. Certainly an excess profits tax that took more than income would not be authorized by the 
sixteenth amendment. Eisner v. Macomber, 252 U.S. 189. Other instances of an apparently low valuation 
accompanied by a limitation of its use to taxes covered by particular returns are: Bethlehem Steel and sub- 
sidiaries, book value in 1933 of capital, $609,476,208, 19.33 declared value $100,000,000, 1934 declared value 
$150,066,000; Anaconda Copper Co. and subsidiaries, book value in 1933 of capital, .$897,602,469 1933 declared 
value $72.1.56,625, 1934 declared value .$273,964,125. If the taxpayers' contantion in any such case were 
sustained, some other method of determining invested capital would be required. See following footnote' 
'< The Revenue Act of 1934 did not define the value to be declared. The Treasury Department directed 
corporations to consider "the value of the corporation's business and property as an entirety and as a 
going concern" and in doing so to look not only to surplus and undivided profits— which depend upon the 
valuation accorded to plant and other assets usually recognized by corporate accounting practices— but 
also the franchise, goodwill, outstanding contracts, the earning capacity of the corporation, and the 
market value of its shares of stock." (Instructions on reverse side of 1933 Capital Stock Tax Return forms 
<07 and 708, Treasury Department, Internal Revenue Service, revised June 1933 ) 

_ "s It is very doubtful whether the Constitution would permit the exclusion of judicial review of admin- 
istrative determination of such a value. See Phillips v. Oommissioner, 283 U. S. 589, 595-600 and Hagar v 
Reclamation District, lU U. S. 701. Indeed it is not unlikely that the of cases in which judicial de- 
termination of facts IS required by the Constitution (Ohio Valley Water Co. v. Ben Avon 253 U S 287- 
Crojvell V. Bf.s.so7i, 285 U. S, 22) would, in case of a severe tax, be extended to cover the valuation issues raised 
in determining income. In any event court reviev.- of questions of law is so familiar to our courts that any 
hut the clearest language will be construed as not intended to cut ofT all judicial review. U. S v Jefferson 
Electric Co. 291 U. S. 386 397-400. But even if it were possible to avoid judicial review the uncertainties 
present, and consequent delay, m the administrative determination would make an appraisal impractical 
except in rare cases. See that portion of the letter of Jan. 28, 1935, of the Acting Secfetary of the Treasury 
(Appendix, p. 139), which discusses "analytic appraisals." 

;6 Sec. 701 (f) of the Revenue Act of 1934 provides for adjustments, under the .supervision of the Com- 
missioner of Internal Revenue, of the original declared value for additions to or withdrawals from capital 

III. Difficulties Involved in Determining Net Income 

The base is, of course, important in an excess-profits-tax scheme 
only as a yardstick for measuring the amount of income which is to 
remain exempt from taxation. The more fundamental problem is 
the determination of taxable income to which not only the exemption 
computed from the base, but also the tax itself is applied. Net 
income or profit is merely a bookkeeping item for any business enter- 
prise. It is the difference between the total amount received, or 
gross income, and the costs of operating the business. For ordinary 
purposes each individual business estimates those costs to suit itself. 
For tax purposes, however, costs assume a critical iinportance. If 
costs plus the tax exemption equal gross income there is nothing left 
for the tax. 

(1) depreciation 

Ordinary business costs include many items which are purely mat- 
ters of opinion, largely opinion as to the value of things consumed in 
whole or in part in the operation of the business.'^ One of the major 
cost items of this type is depreciation. The factory building and its 
machines are used up, in whole or in part, by the process of production. 
Their cost is part of the cost of production. How much they are used 
up in each profit-taking period by various operations is a matter of 
judgment. As most businesses are run on a going basis, the cost of used 
facilities is not a matter of the cash laid out for them, but an estimate 
of their value in terms of repair or replacement. Consequently, the 
uncertainties of valuation referred to at pages 19 to 24 of this report 
are an inevitable part of the taxmg process even though they are 
to be eliminated from the establishment of the base for exemption. 

An example of the opportunit}^ for increasing the item of deprecia- 
tion, and thus decreasing the amount of income subject to the tax, is 
furnished by the sale of the New York Shipbuilding Co. to the Ameri- 
can International Corporation in 1916 for a price of $2,929,573 above 
the New York Shipbuilding Co.'s previous estimate of the value of its 
property. The American International Corporation was building 
ships for the Navy and the Emergency Fleet Corporation under cost 
plus a percentage of cost contracts. The higher the costs the greater 
the cost payments and the percentage fee, and the smaller the taxes on 
the total amount received. 

"' It is, of course, impossible to catalog all the ditllculties involved in the determination of costs. This 
part of the report merely discusses certain of those difficulties most frequently encountered in the field of 
costs. It should also be noted that the mere physical task of examining the books of a large corporation is 
staggering, as is illustrated by the following excerpt from exhibit 1435, a Treasury Department memo- 
randum relating to the taxes of the >ie\v York Shipbuilding Co.: 

"After a very careful study of conditions, viz, the system of bookkeeping and record keeping, the prac- 
tices of the corporation, etc.. it is the opinion of your examiners that it is an utterly impossible task to 
attempt to determine correct costs in connection with each contract. It is our unqualified opinion that 
even a large corps of men working for an indefinite time could not even approach accuracy. Thousands 
and probably hundreds of thousands of vouchers, labor tickets, store requisitions, etc., would have to be 
examined and reanalyzed, and the books all recast. During the war emergency the plant employed in 
the neighborhood of 22,000 men." 

It took, approximately, 22 men 5 years to audit the 1917 and 1918 returns of the United States Steel Cor- 
poration. Exhibit 1740. Obviously, the Government must largely accept the books kept by the 
taxpayer, which means that on many doubtful items ol cost neither the taxpayer's veracity nor its judgment 
is questioned. 



Mr. Raushenbush. This profit of $2,929,000, which you had paid in excess of 
the value of the plant, the purchasing company had paid, that was immediately 
written onto the books, was it not; I mean distributed among the property"? 
You tried to allocate that to ways and yards and the like, and did so allocate it 
almost immediately. 

Mr. Parker. The new corporation paid a certain price for the assets, plant, 
land, buildings, and all the price they paid for it was the price at which the new 
corporation set it up on its books. 

Mr. Raushenbush. That price was $2,929,573 above the old price, and you 
then distributed it among various assets, assigned so much to this and so much to 
that, did you not? 

Mr. Parker. The corporation set it up on its books, and it did not make any 
difference at what it was held on the books of the previous company. 

Mr. Raushenbush. But my point is, it did not set it up as goodwill? 

Mr. Parker. Not at all. It was an actual purchase of tangible property, a 
tangible asset. 

Senator Clark. Two and a quarter million dollars above what the old company 
carried it on its books? 

Mr. Parker. Exactlv, sir. 

Mr. Raushenbush. Almost $3,000,000, Senator. 

All through the following years, when you were doing work for the Navy and 
the Emargency Fleet Corporation, you tried to depreciate that $2,929,000, did 
you not? 

Mr. Parker. I believe properly so. 

Mr. Raushenbush. And to have that depreciated against the naval vessels and 
the Emergency Fleet Corporation vessels. You believe they did so? 

Mr. Parker. Yes, sir. 

Mr. Raushenbush. And you remember quite accurately, do you not, that 
both the Navy and the Emergency Fleet Corporation constantly insisted that was 
a nondepreciable item, a goodwill item that you had paid for? 

Mr. Parker. That is correct. 

Mr. Raushenbush. So that for a period all through the war and later years, 
when the tax matters became important, there was a constant fight, let us say, 
between the company and the Navy and the Emergency Fleet Corporation and 
the Internal Revenue Departm.ent, on the question of whether or not the Govern- 
ment would really pay for that depreciation on the goodwill you had paid for? 

Mr. Parker. Not quite a fight, but, say, a conference. 

Senator Clark. A controversy, was it not? "* 


Mining companies include as a cost item depletion of their ores. 
That is, they fix a value for their ore properties in the ground and 
as each unit is mined and sold charge a proportionate amount of 
that value as a cost. 

Mr. Baruch, who has had long experience with mining properties, 
testified as follows as to the difficulties involved in valuing sulphur 

Mr. Hiss. This indicates again, does it not, Mr. Baruch, the diflficulty of 
fixing a value on any mining property? 

Mr. Baruch. And especially one like that. You cannot see anything. You 
sink way down into the bowels of the earth and put in hot water and the sulphur 
comes out. I do not see how you can determine the value of a property like that.^^ 

The Texas Gulf Sulphur Co., of wliich Mr. Baruch is a dominant 
stockholder, was purchased for $250,000 but was allowed a value 
for depletion purposes of $38,920,000 by the Bureau of Internal 

Additional examples of the uncertainty and impossiblity of exact 
ascertainment of mineral valuations are as follows: 

" Testimony of N. R. Parker, Jan. 21, 1935. 

" Testimony of Bernard M. Baruch, Mar. 29, 1935. 

7" 69th Cong., 1st sess., Sen. Rep. No. 27, p. &d. 



On this basis the lease is given a value of $918,884.60 and the depletion unit 
is given 21.3 cents. As a royalty of 10 cents was stipulated in the lease, the coal 
in the ground was thus valued at 31.3 cents, when it was established, undisputed 
fact, agreed to between the Income Tax Unit and the Pocahontas operators, 
that the market price of coal in the ground on March 1, 1913, was 17.9 cents. 
* * * 

In this case nearly $718,000 of value, due entirely to good will and selling 
ability, is attributed to coal in the ground and returned to the taxpayer as tax- 
free depletion.*' 


In 1896 Herman Frasch, who had invented and patented a process which it 
was believed would be successful, organized the Union Sulphur Co. with a capital 
of $200,000. The property in question was acquired, subject to a mortgage of 
$165,000 in exchange for $100,000 par value of the capital stock of the com- 
pany. The remaining $100,000 of capital stock was issued to Frasch in exchange 
for his patent. 

The value of the deposit, as of date of acquisition, allowed by the Income Tax 
Unit for invested capital purposes, was $3,000,000.^2 


This property was acquired in 1893 in exchange for stock of the taxpayer of 
the par value of $35,000. The value allowed for invested capital purposes for 
1917 was $335,000, or $300,000 in excess of the par value of the stock. * * * ss 


The mining property of this company was acquired on June 24, 1914, at public 
auction, by the promoter of the company for $5,609,423.33 cash. This cash bid 
was based upon and exactly equaled the value which had been placed upon the 
property by an engineer employed by the vendor. 

Oh July 1, 1914, 7 days after its purchase for cash, this property was turned 
over to the taxpayer in exchange for capital stock. 

The value allowed upon this property, for invested capital purposes, as of July 
1, 1914, was $10,443,678.29.8" 


The valuation of $130,000, as of June 15, 1923, for invested capital purposes 
was accepted by the taxpayer, but a protest was filed as to the valuation of 
$121,082.25, as of March 1, 1913, for depletion purposes, and the case was re- 
viewed by the solicitor's ofRce. * * * The solicitor's office made a valua- 
tion, by an analytic appraisal, of $196,159.99 as of March 1, 1913. * * * 85 


The taxpayer claimed a March 1, 1913, value on this mine, for depletion pur- 
poses of $516,926.45. Mr. A. R. Shepherd, a special conferee, designated by 
and working directly under Mr. S. M. Greenidge, head of the engineering divi- 
sion, was permitted to overrule the nonmetals section and allowed a March 
1, 1913, value of $1,043,044.56.86 


The taxpayer claimed a value of $130,000 on these leases as of April 1916 to 
be depleted in annual installments between April 1916 and the expiration of 
the leases. * * * "phe valuation engineers fixed the value of these leases at 

The taxpayer appealed from this determination to the committee on appeals 
and review, which allowed a value of $106,000 on these leases." 

" 69th Cong., 



, S. 





82 Ibid. 

, p. 


'3 Ibid, 


. 60-61. 

s* Ibid. 

. p. 


95 Ibid. 

. p. 


88 Ibid. 

, p. 


>^ Ibid. 

. P- 





Another important item that appears in the costs of many indus- 
trial concerns is that of amortization. Not only is the replacement 
and repair of plant, which appears as depreciation, a cost of doing 
business; in addition there is an attempt to collect the total original 
cost of plant and facilities. This is comparable to the depletion of 
mineral properties; but in ordinary peace time, business enterprises 
have distinguished between industries like mining, whose capital 
assets are by their very nature used up in operation, and those whose 
capital assets merely require repair and replacement from ordinary 
wear and tear. However, during war time, when the erection of new 
plants and additions to plants is vitally necessary to furnish the 
needed increased production called for by wartime demands, amorti- 
zation takes on added significance. If some return on investment is 
necessary to secure expansion of industry, it is clear that some assur- 
ance that the investment itself will not be lost must also be furnished. 
And the mere fact that war calls for new facilities indicates that with- 
out the war demand those facilities may be useless. The prospect of 
tax avoidance increases industry's natural war-time demand for 
liberal amortization allowances and the Government's desire to 
encourage expanded production conflicts with its need of revenue. 

Because it was felt that equity required a recognition of the sub- 
stantial risk that wartime construction would be valueless after the 
war, provision was made in the 1918 Revenue Act for the reduction 
of net taxable income by the amount paid out for the creation of 
facilities constructed or acquired on or after April 6, 1917, for the 
production of articles contributing to the prosecution of the war.** 

The erection of large capital facilities is a process which may extend 
over a great period of time, and may be subject to many changes 
therein. Specifications for construction may change. By mutual 
agreement or otherwise what may have been contracted for originally 
may be different from what is erected ultimately. Furthermore, it is 
difficult, as a matter of equity, to determine wiiether facilities which 
have been contracted for before the war, are actually required for a 
war, as distinguished from a peace-time use. It is therefore an over- 
simplification to speak of capital expenditures or facilities erected or 
acquired within the war period: 

Practically every large claim for amortization includes allowances upon facili- 
ties for the construction or acquisition of which the taxpayer was bound by 
contract prior to April 6, 1917, but which were not fully paid for on that date.^s 

Many plants were not completed until after the war was over. 
Although the original incentive for commencing construction may 
have been a war-time demand, it cannot be said that the continuance 
of such construction represented a response to war-time needs. 
Nevertheless, it would be ruinous to interrupt building operations 
once they have proceeded beyond a certain stage, and a failure to 
recognize this would add to the difficulty of getting large scale con- 
struction started at a time when no one can foresee the duration of 
war needs. ^° 

88 Revenue Act of 1918. sees. 214 (a) (9); 234 (a) (8). See Report of the House Ways and Means Com- 
mittee on the Revenue Bill of 1918, 65th Cong., 2d sess., H. Rep. No. 767, pp. 10, 13. The sections cited 
also permitted amortization for the construction or acquisition of vessels on or after Apr. 6, 1917, for the ■ 
transportation of articles or men contributing to the prosecution of the vi^ar. 

»9 eeth Cong., 1st sess.. S. Rept. 27, p. 135. 

80 Ibid., pp. 136-137. 


Industrial development, it must also be remembered, possesses a con- 
tinuity of its own apart from war conditions. It is accordingly very 
difficult to separate mushroom war-time growth from normal indus- 
trial development. 

Considerable difficulty may be experienced with corporate entities 
set up during the war that take over capital plants which have been 
erected by other companies prior to the war. In fact amortization 
was frequently allowed in this situation: 

This statute has been construed by Income Tax Unit to allow amortization 
upon the mere legal fiction of acquisition, where there was no increase in pro- 
ductive capacity for war purposes, and where the acquisition and subsequent 
discarding of plants was for the sole purpose of consolidating an industry and 
killing competition.^' 

The device of incorporation was subject to another artifice which 
clearly illustrates the difficulty of defining what are articles con- 
tributed for the prosecution of the war, and segregating them from 
articles not required for the prosecution of the war. For example, 
railroads were specifically held by the Bureau of Internal Revenue 
and by the courts not to fall under the scope of the amortization pro- 
visions, inasmuch as they did not contribute to the manufacture of 
articles required for the war. Nevertheless, amortization amounting 
to $2,789,185.49 was allowed to common-carrier railroad corporations 
whose stock was owned by the United States Steel Corporation and 
its subsidiaries, upon facilities owned not bj" a producer of articles 
but by a railroad corporation possessing only the attribute of having 
its stock owned by a company which also owned stock of a war-use 

The United States Steel Corporation produced nothing, but it is the owmer of 
the stock of other corporations, which did produce articles contributing to the 
prosecution of the war. Thus, we have railroad companies allowed amortiza- 
tion, because their stock was owned by a corporation, which owns the stock of 
another corporation, which comes within the class entitled to amortization. '- 

Pipe lines were also allowed amortization on the ground that their 
stock was owTied by the oil-producing companies. Among the oil 
companies thus benefited was the Texas Co., the Sun Oil Co., and the 
Sinclair Oil & Refining Co. Although the practice was condemned 
by the Solicitor of the Bureau in a ruling, allowances were made to 
housing corporations which were subsidiaries of various steel corpora- 
tions, etc., on the ground that the parent company was entitled to 
amortization, although a corporation organized to erect houses in the 
first place would not be entitled to amortization. Similarly, amortiza- 
tion was allowed on tank and refrigerator cars, and even on land, to 
corporations on the ground that they were otherwise eligible for 

There is abundant opportunity for discrimination, and for adminis- 
trative confusion, in the case of facilities erected during the war for a 
war purpose, but as replacements for facilities winch were becoming 
obsolete and deteriorating at the time when the new facilities were 
being erected. The problem is to gage adequately the extent to 
which a facility is being erected because of a wartime demand, as 
contrasted with being installed in a situation where natural deprecia- 
tion factors would have rendered its installation essential anyway, 

«i Ibid., p. 137. 
" Ibid., p. 142. 
M Ibid., pp. 123-144. 


Probably because of the complexity of the engineering problem, old 
and new facilities had, when comparative capacity in the production 
in the post-war period was being taken into consideration, to be 
grouped together in determining the value in use ^* of facilities installed 
during the war: 

All of the taxpayers to whom the larger allowances for amortization were made 
were going concerns before the war. They all had facilities of age and condition 
varying from practically new to scrap. There was no attempt made in any of the 
larger cases to determine the actual usefulness or comparative remaining useful 
life of the facilities amortized for loss of useful value.'^ 

An indication of the advantageous treatment that could be procured 
by a company in a condition to consider in the aggregate its anti- 
quated and modern plants, is supplied by the following illustration: 

Thus, although this war plant was the only plant owned by the taxpayer which 
could be economically operated, and was in full use to 95 percent of its rated 
capacity, and although its full rated capacity would be reached in 1 year, it 
was considered to be surplus capacity and to represent a loss to the extent of 
47.4 percent of its cost, because the company had on the scrap pile, charged to 
scrap, a collection of antiquated plants which could not be economically operated.'^ 

Indeed, it may well be doubted whether in practice any real dis- 
tinction can be drawn between facilities erected for wartime use, and 
those erected during wartime but which do not directly produce 
articles for which the Government has a need. 

The fundamental difficulty with amortization provisions, however, 
is the impossibility of valuing the loss of usefulness in a plant con- 
structed in wartime which a return to peace-time conditions will 
involve.^'' Not only are the familiar difficulties of valuation of the 
plant encountered; in addition, a forecast must be made of future use- 
fulness—at best a matter of opinion based on many guesses even for a 
future period of time in which conditions can be foretold. But post- 
war conditions can never be foretold with accuracy: 

The deduction is largely founded upon the idea of normalcy. It presupposes 
a return to stable-post-war conditions of a normal character. The difficulty is 
that the words normal and abnormal, stable and unstable, ordinary and extraor- 
dinary, or whatever comparatives are used are relative words. Amortization to 
this extent involves a theoretical impossibility, a fixed standard of normalcy in 
connection with business and industrial conditions. The difficulty here is that 
every large war is followed for a more or less extended period by chaotic business 
and industrial conditions. In order to work equitably and without discrimina- 
tion the provision must be applied with a degree of discretion and judgment 
probably never before demanded in the administration of our income-tax laws.^^ 

Furthermore, one frequent result of war is an increase in the total 
peace-time business not only of victor nations but of individual cor- 
porations, as is indicated by the history of the Aluminum Co. of 
America, referred to on the following page. 

It is small wonder that the Bureau of Internal Revenue did not 
find it easy to administer the amortization provision as applied to a 
loss of value in use: 

w See footnote 94, infra. 

95 Ibid., p. 153. 

96 Ibid., p. 154. 

97 There were three situations in which amortization allowances were made after the last war; (a) where 
property was completely discarded or sold; (b) where there was involved reduced replacement cost, i. e., 
war-lime facilities being discarded although not totally useless and replaced by less costly equipment 
adequate for peace-time demands; (c) where "value in use" had been reduced. In connection with the 
first type of situation there is always present the possibility of collusive sales of war-time equipment in order 
to write off amortization allowances. The second class of situations involved the usual difficulties of valua- 
tion. However, most criticism has been concentrated upon amortization allowances based upon loss of 
value in use. 

99 Holmes, Federal Taxes, p. 853. 


While the amortization provision was first inserted in the 1918 act, it was not 
until August 19, 1923, that the first ruling by anyone in authority interpreting 
this provision [dealing with loss of value in use] of the regulations was made. 
This ruling was made by Solicitor Hartson in the /. /. Case Threshing^ Machine 
Co. case and condemned the basis upon which every large amortization allow- 
ance for reduced value in use had been made. This ruling was not published 
until Noveinber 3, 1924, 8 months after the expiration of the period within 
which redetermination of amortization allowances could be made. Although 
this ruling was made 7 months before the expiration of the period within 
which redetermination could be made, there was not only no attempt to rede- 
termine allowances made upon the condemned basis, but this ruling has not been 
followed in a single case, not excepting the case in which it was made.'^ 

The reliability of any valuation of post-war usefulness is illustrated 
by the case of the Aluminum Co. of America. The tax liability of 
this company for 1917 was $9,114,909; in 1918 it was reduced to 
$2,260,230. The chief reason for the decrease was the change down- 
ward that had been effected in net taxable income, which appeared 
in 1917 as $25,840,326 and as $10,417,814 in 1918. The major part 
of this reduction of more than 50 percent in taxable income was not 
due to a fall in business but to the fact that the company was allowed 
an amortization deduction of $10,650,059, distributed as follows: ^ 

On property completed in time for war production $2, 167, 565 

On property not completed in time for war production 8, 482, 494 

Total 10,650,059 

If this deduction had not been allowed, the net taxable income 
would have been over $21,000,000, and a higher tax than that paid for 
1917 might well have resulted because of the higher 1918 rates, 

The basis for the amortization allowance was the assumption that 
all the production capacity of the company in excess of 82,000,000 
pounds represented a loss.^ The inaccuracy of this estimate of value 
in use may be seen from the fact that in 1919 the Aluminum Co.'s 
production was 128,476,872 pounds, in 1920 it was 138,042,272 pounds 
and from 1923 to 1931 it varied from a low of 128,658,222 pounds in 
1923 to a high of 229,036,636 pounds in 1930.^ Indeed, although 
production and sales have both fallen oft' since the beginning of the 
depression, the capacity of the company has been substantially 
increased since 1929-30.* And yet the Aluminum Co. was permitted 
to deduct$10,000,000 fromincome on the theory that the plant capacity 
of a less productive period, which had cost it that amount, was 
not usable in times of peace. Furthermore, ciuestionable as this 
decision was as demonstrated by later facts, it is certain that as to 
four-fifths of the plant capacity acquired by the $10,000,000 expendi- 
ture, the Government received no benefit, since that part of the plant 
which was represented by the $8,000,000 amortization allowance was 
not in production until after the conclusion of the war. 

The importance of the amortization section for the reduction of 
taxes may be seen in the fact that in 168 cases amortization allowances 
up to April 30, 1925, totaled $425,921,945.^ Most of these allowances 
were, naturally, to companies who profited most heavily by the war, 
i. e., companies manufacturing primary war materials, such as steel, 

«» 69th Cong., 1 St sess., S. Rept. 27, p. 149. 

1 Exhibit no. 1746. 

2 Exhibit No. 1746-A. 

3 Letter of May 23, 1935 from the Aluminum Co. of America, appendix to that part of hearings containing 
"Exhibit No. 1746-B." The company's war-time production was: 1917, 129,860,592 pounds; 1918, 
124,724,924 pounds. Ibid. 


« Exhibit 1405, reprinted in the appendix to this report at p. 159. 


ships, macliinery, chemicals, and munitions, because their expansion 
due to war needs was largest. More than $600,000,000 was claimed 
by these companies, who each got an allowance of at least $500,000. 
Some of the larger allowances, in addition to that of the Aluminum 
Co., follow: 

United States Steel $55, 000, 000 

Bethlehem Steel 22, 000, 000 

Du Pont de Nemours 15, 000, 000 

The impossibility of estimating with dispatch and with finality the 
items of depreciation, depletion, and amortization has led this com- 
mittee to recommend that (1) an arbitrary maximum of 2 percent of 
gross income, or of an adjusted cost of the property, be set for depre- 
ciation deductions, (2) an arbitrary percentage of gross income be 
used to fix depletion deductions of 9 percent in the case of gas and 
oil wells, of 2% percent in the case of coal mines, of 5 percent in the 
case of metal mines, and of 7/2 percent in the case of sulphur mines, 
with an overall limitation that in no event shall the amount so com- 
puted exceed 50 percent of net income, and (3) no amortization allow- 
ances be permitted, but instead governmental loans be authorized 
for such construction as it is found is required for the prosecution of 
the war and cannot otherwise be financed. It is recognized that, in 
the case of depreciation, the maximum percentage allowance is likely 
to become the fixed allowance and that, in the case of such allowances 
as well as of the fixed depletion allowances, tax avoidance will result 
to the extent that in individual cases the fixed allowances are in excess 
of the amounts which would be arrived at on the basis of a reasonable 
valuation. It is further recognized that if allowances for amortiza- 
tion are eliminated there will be considerable insistence that new 
construction must be paid for by outright governmental subsidy. 
Most expansion is financed by borrowed capital and the mere fact 
that the lender is the United States will not remove the demand for 
assurance against loss of the amount invested in assets wliich may 
prove valueless upon the conclusion of the war. Consequently, it 
must be realized that the reasons causing the normal demand for 
alleviation of governmental burdens on industry upon a return to 
peace (see p. 37 et seq., infra, in relation to pressure for compromise 
or reduction of back taxes) will make it inevitable that strong pressure 
will be exerted for the reduction, by compromise or otherwise, of any 
Government war-time construction loans outstanding when the war 
ends. For similar reasons it is likely that substantial amounts of 
any such loans as are not reduced or compromised will be defaulted. 
Finally, it is to be noted that under either a subsidy or a loan plan 
the Federal Government will, following the termination of the war, 
own extensive plants and equipment, the usefulness and value of 
which as a whole will be conjectural. To the extent that these plants 
and equipment are made up of integral parts of various private cor- 
porations, their value will be less than the general level of war-time 
construction. As to the plant and equipment which the Government 
has acquired, the choice will be between Government operation and 
sale for little, if any, better than salvage prices. 


Furthermore, since large-scale modern business is not run on a 
cash-and-carry basis, the time wdien income is earned is not a matter 


of black and white. Taxes are collected annually but profits upon 
any one transaction may be due to more than a year of operation 
and the apportionment to the periods when they were "earned" is in 
part purely a matter of opinion. The fact that war-time tax rates 
are higher than peace-time rates makes the determination of when 
profits accrue an important element in war-time taxation. 

An example of this is furnished by the case of the Newport News 
Shipbuilding & Drydock Co., which naturally wished to state its 
profits as accruing in 1922 rather than in 1921, because the excess- 
profits taxes ended on December 31, 1921. The revenue agent in a 
confidential report to his superior stated that: 

About the time of closing the books each year many memoranda are not 
actually issued until January of the following year, and the auditor is told by 
Mr. Ferguson (dictated often by Mr. Gatewood) how to close certain long-term 
contracts. Particular reference is made to memorandum dated Januar}' 11, 1922, 
pertaining to 1921 closing, regarding contracts for hulls 261 and 262, which states 
"no change from present instructions." This memorandum bears initials of 
Mr. Gatewood. These are the contracts where $2,283,474.88 profits were not 
reported until 1922, although contracts were fully paid and work had ceased for 
several months prior in 1921. Mr. Gatewood and Mr. Ferguson should each be 
required to state under each [oath(?)] why this large amount of income was not 
reported in 1920 and 1921, when only 10 percent of expenses was taken as profits 
each month in those years. Certainly at the end of 1920 they knew what per- 
centage of the contract was completed and should have adjusted the profits in 
1920 to show the proper income for 1920 as required by article 36 of regulations 
62. Again, they should have restated their profits at the end of 1921 when the 
contract was actually closed. The same condition appears in many other 
contracts, which are detailed in my report in exhibit H. 

I do not wish to accuse these gentlemen of any wrong intent, or even intimate 
such, but I cannot lielp but feel that such action was intentional, whatever the 
motive. But I have refrained from making any suggestions of wrong-doing in my 
report, but I hold that the income properly belongs in 1920 and 1921 and a 
penalty for negligence should be added for not restating same.* 

The position of the company as to the two ships mentioned by the 
agent was stated by the company's president as follows: 

Mr. Ferguson. May I state in connection with 261 and 262, which were 
mentioned, that they were two oil ships, the largest ever built, for the Standard 
Oil Co. of New Jersey. These vessels were of new design and were miuch larger 
than any ships that had ever been built up to that time. The guaranty on those 
ships ran for 1 year after delivery. 

The company was liable for the ships for a j-ear. The income-tax people said 
that the profit should be taken at the time when the money was paid. We held 
that on accouiit of the risk involved through a year's guaranty on a ship of 
tremendous size, and different from any other oil ship, that we or anyone else 
had built up to that time, that we should be protected until our guaranty period 
should elapse.'' 

This was also the advice given by the company's lawyers.^ The 
revenue agent felt that "where both parties to the contract are 
responsible, as in the case of contracts for hulls 261 and 262, the 
contract can be closed and adjustments subsequently made for any 
differences." ^ This view was reinforced by the fact that actually 
"only a few small adjustments for material were made in 1922." ^° 
But Mr. Ferguson, the president, was anxious to be able to report to 
Mr. Huntington, the substantial owner " of the company: 

8 Exhibit No. 1557. 

1 Feb. 12, 1935. 72 ZO 
* E.\hibit no. 1557 

9 Ibid. 

10 Ibid. 
" Ibid. 


In going over our tax situation in detail, we find that our taxes for last year 
will be very much less than I have heretofore indicated to you, as the two Standard 
Oil ships have guaranties which do not expire until the latter part of this year. 12 

As Mr. Ferguson agreed in connection with a similar report on the 
situation, he was simply trying to put profits, earned in part at least 
in high tax years, into the lower tax years.^^ The significance of his 
efforts appears from the figures set forth in Exhibit No. 1615. 
The Bureau of Internal Revenue transferred to the years 1920-21 
profits totaling $3,149,189.73 which the company had reported as 
earned in later years. Instead of a tax of $393,648.72 on these 
profits this would call for a tax of $1,448,627.27, without taking into 
account the additional tax due if any of the contracts from which 
the $3,149,189.73 profits were derived were entered into during the 
war. The profits allocable to such contracts would be taxed at the 
war-time rate of 80 percent (see p. 50, infra) instead of at the normal 
1920-21 rate of 40 percent used in preparing Exhibit No. 1615. 

12 Letter from Mr. Ferguson to Mr. Huntington of Feb. 2, 1922, read into the record on Feb. 12, 1935, 
gaUey 73 ZO. 

13 Feb. 12, 1935, 73 ZO. 

IV. Degree of Administrative Discretion Desirable in Tax 
Statutes in View of Post- War Attitudes as to Back Taxes 

The complexities of any excess-profits tax naturally suggest the 
possibility of increasing the flexibility of the administration of taxes 
to avoid delays and injustices alike. 

The Joint Committee on Internal Revenue Taxation reported in 
1927 that— 

The recommendation that tax cases should be settled by administrative action, 
rather than through litigation, and the abandonment of the policy that all cases 
must be decided upon the basis of absolute accuracy, have been discussed. It is 
believed that the adoption of these recommendations is vital." 

It should, however, be noted that the liigh tax rates of wartime 
encourage the use of administrative discretion for leniency to tax- 
payers. The British experience in this connection is described by 
Professor Haig as follows: 

In the case of the excess-profits duty particularly, with its high rates and its 
many opportunities for disagreement, it has been considered wise to conduct the 
administration along broad lines. The assessors have not failed to utilize their 
administrative discretion. As one of them remarked: "We wipe off £20,000 one 
way or another as though it were a halfpenny." The Board of Inland Revenue 
has specifically said to the local surveyors that "owing to the present high rates 
of taxation" they desired "that in doubtful cases the allowances granted in 
calculating excess-profits duty should err on the side of generosity rather than 
otherwise." '^ 

The results of the wide discretion vested in the administrative 
officials by the special assessment provisions, discussed at p. 45 et seq. 
of this report, resulted in considerable loss of revenue in cases that do 
not appear particularly deserving of leniency. 

There is the further consideration that, by and large, controversy 
as to taxes arises in post-war years. Even though it be assumed that 
the traditional American hostility to taxes is substantially lessened 
during wartime for patriotic reasons, this can affect only the taxes 
paid during war on the basis of the taxpayer's own return. He does 
not know until after the war, in many cases, that the Government 
believes additional taxes are due. 

Exhibit 1756, appendix, p. 136, shows that 17 of the largest corpora- 
tions engaged in the production of steel and aluminum and in the 
mining of sulphur, copper, and tungsten ^^ reported as due for 1917 
taxes only $49,927,931. The revenue agents, upon investigation and 
audit, determined that almost $40,000,000 more should have been 
paid, or a total of $89,882,631. Substantially this same group 
reported taxes of $45,993,859 as due for 1918. ^The revenue agents 
reported that the total should have been $59,580,309. 

'^ Report of the Joint Committee on Internal Revenue Taxation (1927), vol. Ill, p. 45. 

'5 Haig, Taxation of Excess Profits in Great Britain (1920), p. 97. 

>6 Bethlehem Steel Corporation, Republic Iron & Steel Co., Crucible Steel Co., Lukens Steel Co., Alle- 
gheny Steel Corporation, Otis Steel Co., Calumet & Hecla Co., Inspiration Consolidated Co., Kennecott 
Copper Co., Phelps Dodge Corporation. Ahmeek Mining Co., Union Sulphur Co., Freeport Texas Co., 
Atolia Mining Co., Wolf Tongue Mining Co., Primos Chemical Co., and Aluminum Co. of America. 



The delay involved in auditing returns is, of course, considerable, 
but the above figures show its necessity if revenue is to be secured.^'' 
The audit of the income, excess-profits, and war-profits tax returns of 
the United States Steel Corporation and its subsidiaries for 1917 and 
1918 required, approximately, the services of 22 men for a period of 5 
years. ^^ 

Obviously the physical work of auditing returns is not of itself the 
major cause of delay in completing excess-profits tax collection. The 
many doubtful items, such as invested capital, depreciation, deple- 
tion, amortization, require consultation and conference that, of course, 
become protracted. The 1917 Colt's Patent Firearms Co. taxes 
were not settled until 1926 or later. '^ The Newport News Shipbuild- 
ing and Dry dock Co.'s 1917 taxes were not settled until 1931.^° The 
Republic Iron and Steel Co.'s 1918 taxes were finally settled in 1932.^^ 
The Phelps Dodge 1917 and 1918 taxes were finally determined in 
1929." The 1918 taxes of the New York Shipbuilding Co. required 
10 years for settlement .^^ If litigation has to be resorted to, the 
delay is increased. The Joint Committee on Internal Revenue 
Taxation reported that as late as 1927 — 

The controversies under the excess-profits-tax acts impose by far the greater 
burden upon the Board of Tax Appeals. For example, 53 percent of the tax years 
involved m cases before the Board are under the Revenue Acts of 1917 and 1918. 
Thirty-three percent are under the Revenue Act of 1921. That is, 86 percent are 
under the Revenue Acts of 1917, 1918, and 1921. The provisions of the Revenue 
Act of 1918 appear 18,472 times, and the provisions of the Revenue Act of 1921 
appear 16,042 times in the cases pending before the Board. -^ 

It is also largely after the war that the taxpayer's demands for 
refunds and credits are acted upon. As an example of this, it may 
be pointed out that in the year 1930 the Bureau of Internal Revenue 
granted $11,488,524 refunds of taxes, by admitting overassessments of 
that amount, for amortization. The only amortization allowances 
which have been permitted by the internal revenue laws have been 
for the construction or acquisition of facilities on or after April 6, 
1917, for the production of articles contributing to the prosecution 
of the war, and for the construction or acquisition of vessels on or 
after AprU 6, 1917, for the transportation of articles or men con- 
tributing to the prosecution of the war. This was 14.23 percent of 
the overassessments determined in 1930 for all taxes. Similarlj^, in 
that year overassessments were determined of $12,263,512 for in- 
vested capital and $3,596,501.44 for special assessments.^^ These 
provisions appeared only in the Revenue Acts for the years 1917 to 
1921. On December 5, 1932, the chief of the staff of the Joint Com- 
mittee on Internal Revenue Taxation stated that: 

" The New York Shipbuilding Corporation's taxes for the years 1918 to 1921, inclusive, furnish a further 
striking example. The company's return for 1918 reported income of $1,595,042 and taxes due of $684,422. 
In 1926 examination by revenue agents resulted in a determination by these agents that income had been 
$4,563,844 and taxes should have been $3,210,500. For 1919, 1920, and 1921 the company's returns showed 
$1,674,386, $3,370,170. and $2,295,417 as income and $535,295, $1,288,790, and $433,117 as ta.xes. The revenue 
agents' corresponding figures were $6,495,913. $8,708,894, and .$3,707,360 for income and $4,419,109, $5,361,611, 
and $1,569,870 for taxes. For the 4 years the company reported a total of $2,941,627 due in taxes; the revenue 
agents found $14,561,091 due. The final tax settlement in 1928 was for $5,705,308. Exhibit No. 1421. 

18 Letter of Apr. 4, 1935, of the Acting Secretary of the Treasury, exhibit 1740. 

"Testimony of H. D. Fairweather, treasurer, pt. 9, p. 2105. 

20 Testimony of Homer L. Ferguson, president (70 ZO), and Walter G. Mitchell (80 ZO), Feb. 12, 1935. 

21 Exhibit 1740-D. 

22 Exhibit 1721. 

23 Testimony of Walter G. Mitchell, Jan. 21, 1935. 

2' Report of the Joint Committee on Internal Revenue Taxation (1927), vol. Ill, p. 41. 
s' Report of Joint Committee on Internal Revenue Taxation, Mar. 3, 1931, p. 19. 



The most important factor in connection with overassessments are the old 
excess-profits-tax cases. When these cases are finally settled, overassessments 
should be substantially less. The following table shows to what large extent these 
excess-profits-tax cases have affected the overassessment total: 

Percent of total overassessments represented by overassess7nents for the excess-profits 

tax years 

" Percent 

14 months' period, Feb. 28, 1927-Apr. 24, 1928 88 

7 months' period, May 29, 1928-Dec. 31, 1928 77 

12 months' period, Jan. 1, 1929-Dec. 31, 1929 71 

12 months' period, Jan. 1, 1930-Dec. 31, 1930 59 

12 months' period. Jan. 1, 1931-Dec. 31, 1931 53 

Over one-half of the total overassessment still results from adjustments for the 
years 1917 to 1921, inclusive. These tax cases are over 12 years old. Moreover, 
the interest attributable to the excess-profits tax years represents 73 percent of 
the total interest paid on all overassessments reported to the committee during 
the calendar year 1931. It is true that the table shows considerable progress in 
settling these old cases, but it is evident that the work is far from concluded. ^^ 

In the 12-month period, January 1 to December 31, 1932, the 
percent of total overassessments attributable to the excess-profits 
tax years was 54 and in 1933 it was 51.^'' 

The following table compiled by this committee's staff from official 
sources and hmited to refunds for invested capital, amortization, and 
special assessment, gives some idea of the amounts involved in refunds 
of excess-profits taxes after the war: 

Refunds, credits, and abatements of internal-reveyiue taxes on grounds listed 

Invested capital 


Special assessments 


Percent of 
total re- 
funds, etc. 
for all 
and for 
all taxes 


Percent of 
total re- 
funds, etc. 
for all 
and for 
all taxes 


Percent of 
total re- 
funds, etc. 
for all 
and for 
all taxes 
periof s 

Julyl, 1921, to Apr. 30, 

Apr. 30, 1925, to Mar. 1, 

$34, 155, 015. 29 

32, 584, 357. 74 
2, 279, 938. 56 

12, 263, 512. 08 
2, 772, 406. 99 
1, 059, 610. 16 




18, 196, 096. 81 

1, 502, 326. 29 

1, 150, 337. 37 

2, 249, 743. 59 


$39, 686, 500. 00 

26, 008, 452. 53 

2, 617, 706. 97 

3, 596, 501. 44 
2, 825, 582. 80 

193, 800. 98 
90, 718. 07 


Mar. 1, 1927, to Dec. 

31, 19283-,. 






Jan. 1, 1929, to Dee. 31, 
1929 < 


Jan. 1, 1930, to Dee. 31, 
1930 5 


Jan 1, 1931, to Dec. 31, 

1931 6 

Jan. 1, 1932, to Dee. 31, 

1932 7 


Jan. 1, 1933, to Dec. 31, 
1933 8 




46, 681, 580. 20 

75, 019, 262. 79 

' Limited to refunds, etc., of $250,000 and over. Report of the Select Committee on Investigation of the 
Bureau of Interna! Revenue, 69th Cong., 1st sess., S. Rept. 27, p. 194. Dates for this period have been sup- 
plied by the staf? of the Joint Com.mittee on Internal Revenue Taxation. 

2 No figures available. 

3 The figures for these and the succeeding years are limited to refunds, etc., of $75,000 and over. No 
figures available for the period of Apr. 24, 1928, to June 1, 1928. H. Doc. 43, 71st Cong., 1st sess., p. 25. 

^ H. Doc. 478, 71st Cong., 2d sess., p. 32. 

5 n. Doc. 223, 72d Cong., 1st sess., p. 19. 

6 H. Doc. 535, 72d Cong., 2d sess., p. 19. 

7 H. Doc. 279, 73d Cong., 2d sess., p. 20. 

8 H. Doc. 145, 74th Cong., 1st sess., p. 16. 

•" Report of Joint Committee on Internal Revenue Taxation, Dec. 5, 1932, p. 63. 
" Report of Joint Committee on Internal Revenue Taxation, Jan. 1, 1935, p. 46. 


It should be noted that for the years prior to July 1, 1921, and for 
the 22-month period from April 30, 1925, to March 1, 1927,'^ and for the 
month of May 1928, no figures are available. From July 1, 1921, to 
December 31, 1933 (excluding the 23-month period from April 30, 
1925, to March 1, 1927, and from April 24, 1928, to June 1, 1928, 
for which no figures are available), a period of 10 years and 7 months, 
the total refunds, credits, and abatements for the three listed items 
amounted to $206,816,293.81. As pointed out in the notes to the 
above table no refund, credit, or abatement of less than $75,000 has 
been included in these figures and for the period April 1, 1921, to 
April 30, 1925, only refunds, etc., of $250,000 and over are included. 

Vast sums of money were involved in taxes in the last war and in 
the next there is every reason to believe that with a higher rate of 
tax even larger sums will be involved. Without attempting to in- 
crease administrative discretion, decisions either way can be rationally 
sustained with equal validity — which virtually amounts to saying 
that one man's judgment is as good as another's: 

IX is a common thing for a million dollars or more in taxes to turn on some 
accident of organization, or some fine-spun distinction about which nearly as 
much can be said upon one side as upon the other.-' 

The administrative discretion vested in the Bureau of Internal 
Revenue by any wartime taxation scheme must be great inasmuch as 
so many of the items to be determined are matters of judgment.^" 
Furthermore, the power of compromising taxes admittedly due 
where collection of the full amount would make the taxpayer insol- 
vent,^"^ ol)viously ofi"ers large room for the exercise of discretion in the 
determination of how much a corporation can pay and remain 

The inevitability of the delay in the collection of war taxes and the 
amounts involved create a post-war political situation in the tax 
field. It is obvious, as Mr. Baruch stated in his testimony, that a 
taxpayer would "rather have somebody friendly than unfriendly" 
in the administrative post.^^ Upon a return to peace-time conditions 
there is inevitably the strongest kind of demand for leniency in regard 
to disputed war taxes. Business is seriously handicapped by the 
colossal readjustments required by the transition to peace-time 
production. Public opinion is not vitally interested in the technical 
questions involved in tax liability to pay for a war which has passed. 
Alleviation of the tax burden can become an important, if a seldom 
expressed, political slogan. Professor Adams has described the 
situation as follows: 

■i Some idea of the refunds that must have been made during this 22-month period for the listed causes 
can be obtained from a comparison with the $76,000,000 refunded during the following 22-month period 
of Mar. 1, 1927. to Dec. 31. 1928. 

28 Needed Tax Reform in the United States, T. S. Adams, 2d ed. 1920, p. 9. 

3c Furthermore, an effect of delay, and the taxpayer can in many cases bring about delay regardless of the 
flexibility of administration granted, is to encourage the administrative officials to close cases as quickly as 
possible, with at times a minimum of care, in order to keep up with current work, Although it took 10 
years to settle the 1918 taxes of the New York Shipbuilding Co. (testimony of Walter G. Mitchell, Jan. 21, 
193.5) , the only audit of the company's gross sales of $470,000,000 for 1922 to 1925 was an office audit requiring 
haltanhour. Exhibit no. 1425. The easiest way to close thecaseof a taxpayer who uses dilatory tactics or 
who closely contests each point is to agree with his contentions. There is an undoubted incentive for ad- 
ministrative discretion to be used in such a wp.y as to lighten administrative burdens, i. e., in favor of the 

31 Rev. Stat. 3229. This has been narrowly construed by the Attorney General. 16 Opin. Atty. Gen. 
249. The Bureau of Internal Revenue has in practice restricted the use of this section in the manner stated 
in the text, 69th Cong., 1st sess., S. Rept. 27, pp. 184-185. 

32 See the criticisms of various compromises by the Bureau contained in 69th Cong., 1st sess., S. Rept. 
27, pp. 184-193. See also p. 42 infra, for two examples of compromise. 

33 Bernard M. Baruch, Mar. 28, 1935. 


The real evil is found in the resulting uncertainty, the accumulation in the 
Treasun- of claims for back taxes and penalties aggregating billions of dollars, 
the dread with which these claims must inspire the business world, the invitation 
which this situation offers to political jobbery and the wrongful mixture of big 
business in tax politics.^^ 

The necessarily mde latitude for administrative judgment will be 
subjected to the most compelling of influences. A striking example of 
this can be found in the experiences of the period following the last 
war. On December 16, 1922, Mr. Andrew W. Mellon, then Secre- 
tary of the Treasury, wrote to C. F. Kelley, president of the Anaconda 
Copper Mining Co., about a proposed revaluation of copper mines for 
taxation purposes: 

After full consideration of this question I am convinced that the values here- 
tofore placed upon the copper mines for purposes of determining invested capital 
and of computing the deduction for depletion are excessive; the depletion rate 
previously allowed, based upon these values, is so high as to practically wipe out 
the operating income of many of the copper companies in ordinary years. The 
data show that due to the excessive values placed upon the ore bodies of the 
copper companies for invested capital and depletion purposes, the copper industry 
for 1917 and subsequent years has not paid a fair and equitable tax. On the 
other hand, however, these valuations of the copper mines were made by the 
Bureau of Internal Revenue, and in many cases the copper companies contend 
that they were given to understand that the values fixed on their properties 
by the Bureau were final values. Consequently the operations of the com- 
panies since the determination of these values by the Bureau were based upon the 
consideration of the tax liability for prior years have [having?] been settled. 
Furthermore, representations have been made that a readjustment of taxes of the 
copper companies for prior years upon the basis of the revaluation now recom- 
mended by the Income Tax Unit would impose a tremendous hardship, and, in 
some cases, would result in insolvency. After full consideration of the question it 
is believed that the matter should be settled upon a compromise basis. In accord- 
ance with this view the valuation of the copper mines for invested capital and 
depletion purposes for the j-ears 1917 and 1918 will be allowed to stand upon the 
basis heretofore fixed by the Department, but for 1919 and subsequent 3-ears the 
valuation will be corrected to conform to what the Department regards as a more 
proper method of valuing the copper mines. ^s 

As was too frequently the case, the ''compromise" meant a waiver 
by the Government of its claim — in this instance for additional taxes 
during the war years. The only quid pro quo furnished by the tax- 
payers that could have been received by the Government in exchange, 
is the possibility — not referred to by Mr. Mellon — of an agreement 
that the taxpayers would not exercise their inalienable right to delay 
settlement as to subsequent years for which the wartime tax rates 
had been lowered. 

Wartime taxes when computed in peacetime seem unduly high. 
This also helps to encourage administrative leniency. Mr. Parker, 
the chief engineer for the Select Committee of the Senate on Investi- 
gation of the Bureau of Internal Revenue, who later became the chief 
of staff of the Joint Committee on Internal Revenue, referred to this 
at the end of his report on the administration of the special assess- 
ment provisions: 

In closing our report on this subject, we wish to make clear that the time 
available for the investigation of this feature of the revenue act was not sufficient 
for as thorough and complete a study as the importance of the subject demands. 
We hope we have brought out that the special assessment section of the bureau 
has it within their power to hantl back millions in taxes bv the stroke of a pen. 
If a company makes $38,000,000 and has to pay a tax of $19,000,000, the tax 
looks high so the Bureau finds a way to hand the ta.xpayer back $5,000,000. It is 

^ Adams, Needed Tax Reform in the United States, 2d ed. (1920), p. 9. 
^ Exhibit no. 1713. 


a big tax, but surely Congress would not have set up an 80 percent bracket in 1918 
if it did not expect anybody to be taxed at this rate. 

The Bureau appears to have forgotten that there was a World War in 1918; 
that our boys were giving their lives for their country in foreign lands; and that 
the industries of the country were also supposed to do their part by contributing 
the larger portion of their profits. Surely, lives are as important as dollars, and 
too much sympathy should not be given to large companies whose very profits 
depended in a large measure to [on?] the extraordinary deinands for production in 
nearly all lines. The Bureau has also forgotten that inasmuch as taxes are 
necessary in a fixed amount to meet the expenses and obligations of the Govern- 
ment, then every dollar improperly refunded to a taxpayer, means another dollar 
taken away from the present taxpaying public. The allowances under the excuse 
of special assessment look very much like grand larceny from our present day 
taxpayers. ^^ 

The power of compromising taxes, referred to above at page 40, 
puts a great burden upon the administrative officials. No adminis- 
trative official likes to assume the responsibility of putting a company 
out of business. The sudden change in industrial conditions due to 
the cessation of war activities meant that many companies that had 
made and distributed large profits during the war contended that 
they could not pay additional taxes, assessed after the war following 
audit and investigation, upon those profits. It is difficult for an ad- 
ministrative official, unfamiliar with the details of a given business, 
to pit liis judgment against the judgment of those in charge of the 
business. The Atolia Mining Co., one of the largest producers of 
tungsten in the world," had a very profitable liistory during the war 
because of the great need for tliis alloy in the manufactm'e of high- 
speed cutting tools used in the manufacture of armaments.^* Divi- 
dends of $4,715,100 were distributed in 1916 to 1918,^^ inclusive, to 
stockholders whose original investment was only $63,000.^° At the 
conclusion of the war the demand ceased and with it the market fell. 
Because of the difficulty in valuing the properties the Government 
was unable to complete its check of the Atolia tax returns until after 
the war, when an additional assessment of $345,000 was made.*^ 
The company, in which Mr. Bernard M. Baruch held a 26-percent 
interest,*^ alleged inability to pay more than $165,000 in view of the 
adverse business conditions, and asserted that all its liquid assets 
amounted to only $100,000,'*^ although in its sworn income-tax return 
for that same vear (1923) the company valued its ores alone at 
$5,000,000.*' A compromise settlement of $200,000 '^ was finally 
effected, a loss of $145,000 to the Treasury, or more than one-third 
of the additional assessment. 

The 1918 taxes of the New York Shipbuilding Co. were settled in 
1928 by a compromise based upon the company's contention that 
it would be forced into liquidation if a full tax were collected.*® The 

36 69th Cong., 1st sess., S. Kept. 27, pt. 2 ,p. 267. 

3' Testimony of Bernard M. Baruch, Mar. 29, 1935, 95 BBQ. 

3^ American Industry in the War, report of the War Industries Board, by Bernard M. Baruch, chairman 
(1921), p. 144. 

39 Exhibit no. 1744 E. 

« Exhibits nos. 1741; 1748 A. 

" This amount included taxes for the period 1906 to 1919, but substantially all of it was for the war years. 
Exhibit 1748. Even this was a reduction of the maximum amount of tax found to be due. Originally the 
company was assessed additional taxes of .$600,000. Exhibits 1744 and 1744 A. Apparently by virtue of 
the special assessment provisions of the wartime tax laws (see p. — of this report) this was reduced to 
$345,000. Exhibits 1741, 1744 D, 1743. 

^-' Testimony of Bernard M. Baruch, Mar. 29, 1935, 95 BBQ. 

43 Exhibit 1743. 

« Ext.i')!t 1748 B. 

« Exhibit 1743 A. 

43 Exhibits 1420, 1421; testimony of Walter G. Mitchell, Jan. 21, 1935, 28GP. 


company estimated it had a liquidating value of $3,000,000 and an 
appraisal value of $4,250,000/^ although in its report to its stock- 
holders it stated the value of a comparable part of its assets as 
$11,000,000.^^ . 

Any increase in discretionary power to administrative officials niay 
mean a loss in revenue greater than the savings in administrative 
expense resulting from the administrative flexibility. 

« Exhibit 1430; testimony of N. R. Parker, Jan. 22, 1935, 43QP. 
«8 Testimony of N. R. Parker, Jan. 22, 1935, 43QP. 

V. Tax Evasion and Avoidance 

Any analysis of the problems involved in war-time taxation of the 
kind contemplated by this report must take accomit of the question 
of tax avoidance*^ and of outright evasion. 

It will be remembered that the Senate Committee on Banking and 
Currency uncovered the fact that for the year 1930, 17 of the partners 
of J. P. Morgan & Co., including Mr. J. P. Morgan, paid no taxes, 
and 5 paid taxes aggregating $56,000, and that for the years 1931 and 
1932, no partner paid any tax.^'' 

It is important to distinguish tax avoidance from tax evasion since 
the two are frec^uently confused in the popular mind. One reason 
for this confusion is the substantial similarity of the motives for em- 
ploying the devices. Whether the action is legal or illegal, the pur- 
pose is to reduce or to eliminate the amount payable as a tax. Be- 
cause the end result is the same, there is a popular feeling that any 
action intended to accomplish tliis must of necessity be illegal. 

This confusion, of coui'se, ignores the whole Anglo-American con- 
cept of the function of law as furnisliing a definite and predictable 
set of rules. Mr. Justice Holmes said: 

We do not speak of evasion because when the law draws a line, a case is on one 
side of it or the other, and if on the safe side is none the worse legally that a party has 
availed himself to the full of ivhat the law ipermiis. When an act is condemned as an 
evasion, what is meant is that it is on the wrong side of the line indicated by the 
policy if not the mere letter of the law. ^^ (Italics added.) 

By definition a transaction which has for its purpose the reduction 
of taxes is not illegal if the means employed are in themselves part of 
the applicable rules. (See U. S. v. Isham (17 Wall. 476, 84 U. S. 
496); Weeks v. Libby (269 Fed. 155); Fidelity Trust Co. v. Lederer, 
(276 Fed. 51).) 

The legal concept merely reflects the general attitude that taxes 
are a necessary evil to be minimized as far as possible: 

As a group, men are patriotic; as individuals, they will pay as small a tax as can 
be calculated and will secure as high prices and extract as great profits as can be 
extracted. *- 

The methods of avoidance depend upon the rules specified by the 
tax statutes. However, it should be noted that provisions ostensibly 
intended for one purpose are often logically apphcable for other 
purposes. Provisions apparently designed to prevent burdens 
generally conceded to be undue as applied to certain taxpayers, are 

*5 Tax avoidance is, of couise, not purely a -war-time phencn ecf n. It is, bcwever, so much a part of the 
traditional American altiti de uward Governff ent that it is to be dcubted whether settled forms of avoid- 
ance thct have grown up in tin,es of peace will disappef.r under the stimulus of war-limjc patriotism. Ac- 
cordingly, in the examples of tax avoidance discussed in this part of the report, hoth war-time and peace- 
time illustrations have been induced. The instances of avoicar.ce ret forth in this report are meant to be 
illustrative of a general tendency and not a full list of loopholes w hich if stopped up w c uld eliminate avoid- 
ance of taxes. As indicated in the text, seme avoidance is inevitable because of the con;bination of (I) 
avoiding undue hardship on certain classes of taxpayers and (2) uniformity of taxation, as goals of A merican 
tax measures. Furthermore, the ingenuity of accountants and law yers tends to make any list of n eans of 
avoidance incon.plete nlmost as soon as it is drafted. 

5" Report on Stock Exchance Practices, V2d Cong., 2d sess., S. Eept. 14f S, p. 321. 

51 BnUen v. Wiscovsiii (240 U. S. 025.) 

" Garrett, Government Control Over Prices (1920) p. 3S1. 



often also equally available for the avoidance of large amounts of taxes 
the burden of which appears less obviously unfair. It is the frequent 
use of such provisions for the avoidance of large sums of apparently 
fair taxes which is probably the real basis for the popular confusion be- 
tween evasion and avoidance. Although the legal distinction be- 
tween the two is no less clear whether the scope of the exemption is 
generally approved or not, the social distinction between evasion and 
avoidance is in many cases not so clear. However the individual 
taxpayer can usually formulate a justification for using what the popu- 
lar mind regards as "loopholes" in the tax laws: 

There has been a hue and cry against so-called "tax evaders." Many speeches 
were made in the last Congress which should be characterized as dishonest, but 
I will merelj' call them the "unintelligent mutterings of the ignorant and uni- 
formed." [sic] Many charges were made that certain rich men — names of 10 
being used — had been guilty of evading income taxes. I will assume that most 
of those who made the charges are too ignorant to know the difference between 
tax avoidance — which is legal — and tax evasion, which is illegal. * * * 

Avoidance does not even involve moral turpitude. When tax rates are oppres- 
sive and unscientific, the instinct of self-preservation asserts itself strongly. When 
there is no concealment of facts, there can be no "willful" evasion. There is not 
even negligence. The law purports to define in meticulous detail what sort of 
transactions are taxable. If taxpayers can think of a way of doing something, 
which way is not forbidden in the law, there is no fraud, nor attempted evasion. 
The courts uniformh' protect taxpayers who merely select methods of transacting 
business which involve the least or no liability for tax. The position of taxpayers 
under a highly intricate tax law is not that of an independent, impartial judge 
trying to be fair, no matter who is hurt. No possible criticism can l)e directed 
at taxpayers who follow the law as it is, rather than as it would be, if Congress 
had said something else.''^ 

The literal applicability of exemption provisions not only to cases 
of exceptional hardship but to cases in which the justness of the tax 
is practically beyond dispute, makes the traditional resistance of the 
taxpayer to the tax collector present a dilemma to those drafting tax 
laws designed not only to raise revenue but to equalize the burdens 
of war. On the one hand it is important that the tax statutes be not 
so inflexible or so harsh as to penalize particular groups in a way that 
would arouse widespread public disapproval of the entire taxation 
scheme; on the other hand e: emptions made in situations universally 
admitted to justify a relaxation of the severity of the tax are certain to 
be "availed * * * to the full of what the law permits " by those 
whose claims to mitigation of tax burdens are less obviously valid. 


A signal example of this is to be found in the "special assessments" 
of excess-profits taxes during the World War. The co.mplexity of the 
problem encountered in deter.mining invested capital was recognized 
by Congress in the 1917 Revenue Act as likely to result in cases in 
which it would actually be impossible to carry out the statutory 
mandate.^* In the 1918 act, which bore greatly increased rates, the 
exception was extended also to cases in which the Commissioner of 
Internal Revenue found that- — 

53 Robert A. Montgomery, Federal Tax Handbook l'J.34-35, p. iv. 

54 Sec. :;10, Revenue Act of 1917. Mr. Montgon.ery states that, despite the express lin itation of this 
provision to cases where the Secretary of the Treasury was "unable * * * satisfactorily to deterniice 
the invested capital," in practice "tl.ioLgh the exeicise of administrative discretion to an extent which 
csn be justified only when oce ccnslocjs the seiioi sness of the issi es involved, this S€cti( n was applied 
when invested capital, even though dffnitely kncwr, was 'serious y disprororticnatt' to tie taxable 
income." Montgomery, Excess Profits Tax Procedure 1921, p. 7. 

11579 — 35 4 


the tax if determined without benefit of this section would, owing to abnormal 
conditions affecting the capital or income of the corporation, work upon the cor- 
poration an exceptional hardship evidenced by gross disproportion between the tax 
computed without benefit of this section and the tax computed by reference to 
the representative corporations specified in paragraph 328.'^ 

The "special assessment" so made available subjected the taxpayer 
to a tax of the same proportionate size as the average tax paid by a 
group of "representative corporations [partnerships and individuals] 
engaged in a like or similar trade or business." ^^ 

The 1918 act apparently attempted to safeguard this provision 
against use as a means of easy avoidance of taxes by specifying that 
it was not to apply to cases in which the tax computed normally — 

is high merely because the corporation earned within the taxable year a high 
rate of profit upon a normal invested capital. ^^ 

The vagueness of such a standard as the special-assessment pro- 
visions and the consequent opportunity for disagreement and delay 
are apparent. Mr. Ballantine testified before the War Policies Com- 
mission that: 

This special-assessment provision, while perhaps necessary, was found to be 
uncertain and vague in its application and was one of the most troublesome 
features of the excess-profits tax.^^ 

Instances of the effects of this provision in operation show that the 
R. J. Reynolds Tobacco Co., which was in the highest income brackets, 
was — 

allowed abatements and credits amounting to $1,698,265 for the year 1918. 
Their statutory tax would have amounted to $10,226,521; this has been reduced 
under section 328 to $8,528,266. The percentage of final profits tax to net- 
income amounts to 40 percent.^^ 

The American Car & Foundry Co. was — 

refunded and abated under section 328 of the act of 1918 the amount of $5,209,204 
on account of its 1918 tax. The net income of this taxpaj^er was $37,443,246, the 
final profits tax under special assessment was $17,244,552, the final percentage of 
profits tax to net income amount to 46 percent. 

We would call attention to the fact that the United States Steel Corporation, 
an allied industry, was in the 80 percent bracket in 1918 and was assessed a total 
tax amounting to about 57 percent of their net income.^^ 

Similar illustrations concerning the Youngs town Sheet & Tube Co., 
the Northwest Steel Co., and the Pittsburgh Steel Products Co. indi- 
cate to what extent some of the big corporations took advantage of 

55 Sec. 327, Revenue Act of 1918. 

5« Revenue Act of 1917, sec. 210; Revenue Act of 1918, sec. 328. The language quoted in the text was 
identical in the two acts except that only tlie 1917 act contained the reference to partnerships and indi- 
viduals, since the excess-profits tax of the 1918 act applied only to corporations. The manner of determining 
the special assessment was slightly different in the two acts: In the 1917 act the deduction from income for 
which invested capital was supposed normally to be used, was determined by applying to the taxpayer's 
income a percentage equal to the ratio between the average deduction and the average income of the rep- 
resentative concerns. In the 1918 act the tax itself was determined by applying to the taxpayer's income 
a percentage equal to the ratio between the average tax and the average income of the representative 

5' Sec. 328, Revenue Act of 1918. Cf. Mr. Montgomery's statement in footnote 51, supra, that even the 
1917 provision was used where invested capital was seriously disproportionate to taxable income. 

5s House Document 163, 72d Cong., 1st sess., p. 693. 

" Senate Report 27, 69th Cong., 1st sess., p. 222. 



the special-assessment procedure in effect to reduce the excess-profits 
tax rate to a much lower one than that the statute provided for.^" 


Amount of 
regular tax 

Amount of 
refund due 
to special 

Youngstown Sheet & Tube Co., Youngstown, Ohio . 

.$19, 469, 794 
1, 380, 692 
4, 698, 161 

$3 482 610 

Northwest Steel Co., Portland, Greg .. - 

923, 236 

Pittsburgh Steel Products Co., Pittsburgh, Pa.. 


A list of refunds in excess of $250,000 allowed from July 1, 1921, to 
December 31, 1925, due to the special assessment provisions, is re- 
printed at page 164 of the appendix to this report and total refunds 
under these provisions during other periods of time appear at p. 39, 
supra. The amount of tax which was never assessed because of 
allowances under these provisions cannot be estimated although the 
committee's record contains examples, developed in the course of 
examining the tax records of isolated companies, which indicate the 
extent of the practice." 


The customary provision in American income-tax statutes per- 
mitting deduction of capital losses from taxable income has frequently 
been used to avoid taxes which the generality of public opinion may 
well believe could have been paid without undue hardship. 

In the course of tliis committee's investigation, it has been found 
that the late iUfred I. du Pont paid no income tax during the 7 years 
1920 to 1926. His gross income in that period was over $29,000,000. 
The following explanation of these transactions, showing the part 
which deductions of capital losses played in reducing Mr. du Font's 
tax liability, was furnished to this committee by the Treasury 

Taxable years 


Income tax 




Gross in- 


Losses on security trans- 



1920 . 








$7, 800. 76 


108, 584. 16 

100, 134. 68 


.$6, 199, 639. 98 

5. 946, 324. 82 
5. 047, 012. 94 
1, 837, 886. 48 

3. 947, 641. 39 
5, 575, 954. 57 
1, 022, 990. 92 
1, 054, 482. 38 
1, 300, 423. 51 


$2, 499, 900. 00 

1, 249, 875. 00 

1, 000, 599. 00 

999, 900. 00 








$152, 823. 65 
31 703 74 



4, 918, 771 43 


1 777 681 50 


804 115 72 


828 l''! 75 


335, 969. 32 
4 252 50 



' 59, 246. 90 
15 229 35 



11 364 ''8 

' Indicates profit rather than loss. 

60 Ibid, pp. 222-223. 

61 See the case of the Newport News Shipbuilding & Drydock Co., whose 1917 taxes are referred to at 
pp. 21-22; the Atolia Mining Co., whose war-time taxes are discussed at p. 42, had taxes reduced from -$600,000 
to .$.345,000, apparently primarily through this provision; the United Verde Extension Mining Co.'s taxes 
for 1917 were estimated at $o,.548,823 by the revenue agent and at $5,739,100 by the engineers of the Senate 
Committee on Investigation of iJureau of Internal Revenue, but by virtue of the special assessment pro- 
vision only $2,845,070 was assessed against the company. Exhibit 1715 .\; 69th Cong., 1st ses^s., S. Rept. 
27, fit. 2, p. 258. See general report on special assessment made to Senate Committee on Investigation of 
Bureau of Internal Revenue, 69th Cong., 1st sess., S. Rept. 27, pt. 2, pp. 247-267, the conclusions of which 
are quoted at pp. 41-12 of this report. 



The amounts shown in the first column under item 4, "Nemours Trading", are 
losses claimed on sale or other disposition of stock of Nemours Trading Corpor- 
ation.^'^ In addition to these items, the taxpayer claimed deductions for worth- 
lessness of debts due from Nemours Trading Corporation in the sums of $499,- 
993.70 for the year 1924, $809,704.95 for the vear 1925 and $1,670,749.92 for the 
year 1926. 


The amounts shown in the second column under item 4 above as losses on 
"Other" security transactions cover all losses on all securities such as stocks, 
bonds, and mortgages except the losses incurred in connection with Nemours 
Trading Corporation. Although your letter refers only to losses on stock trans- 
actions, it is impossible from the inforination at hand to distinguish between the 
losses on stock transactions and losses on bond transactions for all years and for 
this reason the amounts stated above under the second column of item 4 cover 
all other security transactions rather than all other stock transactions. 

The figures stated under item 3, "Gross income", above, should not be confused 
with amounts shown in individual income-tax returns as "Total income", as 
for example, the amount shown on line 12 of form 1040, individual income-tax 
ret^urn for the calendar year 1930, which is, in effect, net income with the exception 
of deductions to be taken on lines 13 to 18, inclusive, for interest; taxes; losses 
byjf^re, storm, etc.; bad debts; contributions and "Other deductions authorized 
by law" (and not claimed elsewhere in the return). The figures stated under 
the gross income column above have been compiled from the various items of 
gross income for each year without diminution for such items as cost of securities 
sold, depreciation and other expenses of rented properties and other items which 
are applied against gross income items in the income-tax returns in computing 
the "Total income" figure as contrasted with the "Net income" figure. This 
explanation of the gross income figures stated above is given somewhat in detail 
in order that it may be clearly understood that cost of securities sold has not been 
deducted in computing these figures, which accounts for the fact that, while 
large gross income figures are reflected for several years, no income taxes were 
assessed or paid for those years as the cost of securities sold, bad debts, and other 
deductions allowable under the various revenue acts exceeded the gross income. 

It is shown under item 2, above, that no refunds have been allowed. It is 
to be understood that this refers to refund of taxes paid with respect to the taxable 
years 1920 to 1930, both inclusive, and that it has no reference to any refunds 
which might have been made during any of those years of income taxes paid for 
any taxable year outside of the period 1920 to 1930, both inclusive. 

The figures shown above are as reflected in the returns as originall}^ filed by 
the taxpayer but adjusted to show any corrections made thereto by the Bureau 
of Internal Revenue before final approval of the returns. 

'The returns filed for the years 1921 to 1926, both inclusive, were joint returns- 
of Albert I. du Pont and his wife Jessie Ball du Pont, and the various items 
gross income and deductions of each spouse are not segregated in the returns, 
therefore, the figures stated for such years cover the income and deductions of 
both Mr. and Mrs. du Pont.^^ 

The Senate Committee on Banking and Currency brought out the 
prevalence of the avoidance of taxes by sales, involving capital losses, 
to relatives of the taxpayer who obligingly resold back to the taxpayer: 

This device was exceedingly favored by leaders of American finance, whose 
relatives were generally possessed of considerable wealth in their own right.. 

w A frequent concomitant of the use of the provision for deduction of capital losses has been the setting 
up of a personal holding company. This device was described as follows by the House Ways and Means 
Committee report on the revenue bill of 1934: 

"Perhaps the most prevalent form of tax avoidance practiced by individuals with large incomes is the 
scheme of the 'incorporated pocketbook'. That is, an individual forms a corporation and exchanges for 
its stock his personal holdings in stocks, bonds, or other income-producing property. By this means the 
income from the property pays corporation tax, but no surtax is paid by the individual if the income is 
not distributed. 

" For instance, suppose a man has $1,000,000 annual income from taxable bonds. His tax under existing 
law will be $571,100. However, if he forms a holding company to take title to the bonds and to receive 
the income therefrom, the only tax paid will be a corporate tax of $1.37,500 as long as there is no distribution 
of dividends. Thus a tax saving of $433,600 has been eflected." (73d Cong., 2d sess., H. Rept. No. 704, 
p. 11.) 

This permits an individual taxpayer to realize his income in the years and in the amounts he desires and 
so to avoid the high taxes in effect in war years. The connection between this device and the provision 
for deducting capital losses is apparent when it is recognized that the shares of a personal holding company 
are not. of course, registered on any market. As a result of this absence of any market value, the oppor- 
tunity for establishing apparent losses by the sale of the stock of such a company is considerable. 

63 Exhibit no. 1398. See also exhibits nos. 1397 and 1397- A. 


Thus, Thomas S. Lamont, a partner of J. P. Morgan & Co. established losses 
amounting to $114,807.35 in the sale of securities to his wife on December 31, 

1930. The tax on the amount of loss thus established would have been $20,365. 
In April 1931 he repurchased the securities from his wife. Both sides of the 
transaction were effected without the intervention of any intermediary. The 
payments were evidenced by entries on the books of J. P. Morgan & Co. 

Mr. Pecora. Now, in what form did she make payment to you for these 
securities on December 31, 1930? 

Mr. Lamont. Her account in the office of J. P. Morgan & Co. was debited, was 
charged with the cost of these securities, and my account was credited. 

Mr. Pecora. * * * How was that sale of those securities by your wife to 
you effected in April 1931? 

Mr. Lamont. I bought it back direct from her. Didn't occur to me to do it 
in any other manner. 

Mr. Pecora. That is, there was no broker? 

Mr. Lamont. There was no broker. 

Mr. Pecora. Or any other agent or intermediary involved in the purchase of 
these securities by you from your wife? 

Mr. Lamont. That is right. 

Otto H. Kahn, of Kuhn, Loeb & Co., testified that on December 30, 1930, he 
sold five blocks of securities to his daughter, Maude E. Marriot, whicli he later 
■reacc}uired by assignnient in writing. Although the assignment was dated 
December 31, 1930, he stated that the document was actually executed in March 

1931, thereby placing the retransfer just beyond the 60-day limitation period. 
Through this method, a loss of $117,584 was established whereby Kahn was 
enabled to deduct upward of $16,000 from his income tax for 1930. 

Charles E. Mitchell, chairman of the National Citv Bank, sold to his wife in 
1929, 18,300 shares of National City Bank stock at a loss of $2,872,305.50. 
This transaction, Mr. Mitchell admitted, was entered into for the express pur- 
pose of establishing the loss for income-tax purposes. He later repurchased the 
istock from his wife. 

Senator Brookhart. What price did you pay for those last purchases? 

Mr. Mitchell. I sold this stock, frankly, for tax purposes. 

Senator Brookhart. That was to avoid income tax? 

Mr. Mitchell. Throwing my fortune into the breach as I did for the benefit of 
this institution, Senator Brookhart, in 1929, I had a definite loss in that stock 
which I was forced to take. 

Senator Brookhart. In other words, bj^ making a sale of it that showed a loss 
in your income? 

Mr. Mitchell. That certainly did. 

Senator Brookhart. And then you bought it back afterward? 

Mr. Mitchell. Yes, sir. 

Senator Brookhart. That sale was just really a sale of convenience, to reduce 
your income tax? 

Mr. Mitchell. You can call it that if you will. 

Senator Brookhart. Well, is that right? 

Mr. Mitchell. Yes; it was a sale, frankly, for that purpose * * *_ 

As a result of this transaction, Mitchell paid no income tax in 1929.^'' 


In the year 1916 when the du Pont Co. was makmg large profits 
from the sale of war products to the AlHes, it objected to the impo- 
:sition of the income tax on that part of its income derived from 
exports, on the ground that such income was made immune from tax- 
ation by section 9, article I of the Constitution, wldch provides that 
"no tax or duty shall be laid on articles exported from any State." ^^ 

M Report on Stock Exchange Practices, 73d Cong., 2d sess., Senate Rept. No. 1455, p. 322 et seq. 
■M E-xhibit No. 1403. ' 


The Revenue Act of 1918 in section 301 (c) provided that the high 
1918 tax rates should be applicable to that part of the income derived 
in 1919 and later years from war-time contracts with the Government. 
The Newport News Shipbuilding & Dry dock Co., which had made a 
profit of 32.4 percent in 1917 on its investment according to its own 
return,*^*' 90.6 percent according to the revenue agent's report/^ and 86.3 
percent according to the invested capital as determined by the Bureau 
of Internal Revenue in revision of the agent's report/'^ protested 
against imposition of the tax on that part of its income which was 
derived from work done pursuant to the mandatory orders of the 
President. The theory of the protest was that these were "forced 
orders" and that the statute when it was phrased to read "Govern- 
ment contracts" did not envisage such orders. 

Compulsory contracts were most frequently used to afford protec- 
tion to governmental contractors from third parties whose contractual 
rights antedated the governmental orders. "^^ The concept of the 
sovereign's commandeering power permitted priority to be given to 
the Government without the contractor incurring liability under his 
precedent private obligations.^" Certainly, as the company's record 
shows " and as the fees provided in the contracts indicate, the New- 
port News Co.'s "forced orders" were profitable: 

Senator Vandenberg. Mr. Ferguson, when we are discussing this so-called 
"force contract", are we discussing the cost-plus 10-percent contracts? 

Mr. Ferguson. Some of them were cost plus 10 percent. They were all 
changed to cost plus a fixed fee. Some of them were cost plus a fixed fee in the 
first place. The only cost-plus 10-percent contracts which we ever completed 
was the first of a group of destroyers^ — ■ — 

Senator Clark. Was that during the war, Mr. Ferguson? 

Mr. Ferguson. Yes. The battle cruiser contracts were signed in 1916, and 
they were cost plus 10 percent, but later on changed to cost plus a fixed fee of 
$2,000,000. The battleship Iowa was cost plus a fixed fee from the beginning. 
A group of tankers we built for the Navy Department were cost plus a fixed fee, 
plus one-half of the savings under a certain price. 

Senator Vandenberg. This is after the war, is it not? 

Mr. Ferguson. No; this was during the war. It was during the war period. 
I do not remember just when the battleship Iowa contract was settled. "^ 

Indeed, since the 1918 tax rates permitted an exemption of income 
up to an amount equal to at least 8 percent of invested capital in all 
cases, the issue raised by the Newport News Co. could not have 
arisen unless the contracts yielded substantial profits. 

The claim of the company was stated in a brief prepared by Robert 
H. Montgomery: 

It was clearly not the intention of Congress to tax at what are realh^ penalty 
rates, income derived from the execution of the President's orders. 

Section 301 (c) of the Revenue Act of 1918 was inserted by the Conference 
Committee, and in explaining it to the House, the Chairman of the Ways and 
Means Committee said: 

" Though the 80-percent war profits tax is eliminated for the next fiscal year — 
since there are no war profits for 1919-20 — the conferees put in a provision ex- 
tending the 80-percent war profits tax for the calendar year 1919 to catch the 
profits that are derived in 1919 from war contracts made in 1918 and 1917, so 
that the profiteers will not get off with 80 percent eliminated after Januarv 1, 


6« Exhibit 1556. 


«8 Letter from Secretary of Treasury to committee, May 3, 1935, quoted in part on p. 22, note 45. 

69 Testimony of Lt. E. M. Brannon, Dec. 21, 1934, 95-96 FM. 

""> Ibid, cf. Exhibit No. 1094 quoted at p. 96 and of. pp. 111-115. 

" Exhibit No. 1556. 

" Feb. 12, 1935, 74Z0. 


The owners of shipyards who were prevented from undertaking hicrative 
commercial work and were commanded to devote all their facilities to the pro- 
duction of vessels for the Government at prices stipulated by the Government, 
can hardly be considered the profiteers the conference committee intended to 
reach. '2 

The company felt no hesitation about relying upon such a tech- 
nical means of avoiding taxes; as a matter of routine, taxes were re- 
duced whenever, and as far as, possible: 

Senator Vandenberg. What was there about a cost-plus-10-percent contract 
which so invaded the ordinary contractual prerogative that it ought not to be 
considered in ordinary tax practice? 

Mr. Ferguson. I take it — it is a legal question with which I am not ac- 
quainted — but I take it that being a Presidential order contract— — - 

Senator Vandenberg. I am not asking about the legal phase. I would not 
undertake to enter that field, either. I am talking about the practical phase. 
Do you not invite the inference that if you consider a cost-plus-10-percent con- 
tract an invasion of your ordinary contractual privileges, do you not invite the 
presumption that a 10-percent profit above all cost items is a great hardship, 
and a great invasion of vour usual opportunitv of doing a great deal better than 

Mr. Ferguson. No. 

Senator Vandenberg. It seems to me that you do. Go ahead, Mr. Raushen- 

Mr. Raushenbush. The point that you were to accomplish by these protests 
which were laid before them by Mr. Montgomery and your learned attorneys 
and others, was simply to reduce the taxes on all the Government work during 
the war, on the ground that it was a forced contract? That is not to say that 10 
percent was too much or too little, but that the taxes were too much. Was not 
that the point of it? 

Mr. Ferguson. I presume so.''* 

The United Verde Extension Mining Co. stated on March 30, 1918, 
when it filed its 1917 tax return, that it could not determine its tax 
liability because it could not determine its invested capital. The 
Bureau of Internal Revenue replied on June 10, 1918, that — 

A final conclusion has not been reached but from the consideration so far given, 
it is apparent that the amount of taxes owing will probably not be less than that 
indicated below * * * [$2,123,809.55] * * * Upon final audit of your 
returns you will be advised of the conclusion reached and if the amount deter- 
mined to be due is in excess of amount above stated, a further assessment will be 
made; if less, you may file a claim for refund of the amount overpaid. 

The collector at Baltimore assessed the same amount in a duplicate 
assessment and on September 27, 1918, notified the Bureau that an 
abatement should be allowed as to liis assessment because the amount 
assessed had already been paid. On February 19, 1919, the company 
was notified: 

Your claim for the abatement of internal-revenue tax has been allowed as shown 
above. No further demand for the payment of the amount allowed and abated 
will be made upon you. 

Tliis was a standard paragraph used in allowing abatements in'the 
case of duplicate assessments. On January 24, 1923, the company 
was notified of a further assessment of $721,260. 

The company resisted this additional assessment on the ground that 
the letter of February 19, 1919, closed the case and that under section 
1313 of the Revenue Act of 1921, wliich made decisions of the Commis- 
sioner of Internal Revenue free from review by any other adminis- 
trative official, the case could not be reopened. ^^ 

" Exhibit no. 1561. 
'< Feb. 12, 1935, 74 Z 0. 

" Exhibits 1715; 1715A. For examples of the use of the device of incorporation to avoid taxes see 
p. 21 and p. 31, supra. 



The traditional resistance to paying taxes at times assumes forms 
which justify— without much room for phiusible arguments of the 
kind quoted above at page 45 the popular confusion between evasion 
and avoidance. All profits taxes depend finally upjn records kept 
by the taxpayer and known in their entirety only by him. 

A memorandum of revenue agents assigned to the New York Ship- 
building Co. tells how a company official informed them every day for 
3 weeks that he was going to produce certain schedules and then 
finally admitted that he was "stalling": 

To verify the correctness of the taxpayer's returns, or books, it is most essen- 
tial to procure the schedules referred to and to examine tlie computations of 
earned profit on each contract that was made by the taxpayer and appear thereon. 
Such schedules have been requested of the taxpayer, first over 3 weeks ago, and 
photostats thereof were promised by Mr. Norman F. Parker, assistant treasurer, 
almost daily after the first request. 

Last Saturday, on request again for the schedules, Mr. Parker informed us that 
he had been "stalling" and that we knew it, but that the corporation's counsel 
had advised him to delay giving the schedules to us. He called his counsel by 
telephone, a Mr. Orr, connected with White & Case, attorneys, while we were 
present, and explained the situation, and stated to Mr. Orr that he believed we 
were entitled to the schedules and should get them. Mr. Orr's advice, we were 
informed, was not to deliver them. 

To date, the situation remains the same, the schedules have been refused on 
the advice of counsel, so we are informed by Mr. Parker and Mr. J. T. Wicker- 
sham, the treasurer. 

The points raised by the Solicitor have developed other points that make it 
imperative, in the opinion of your examiners, after their investigation thus far, 
that a reexamination be made of the taxpayer's books for the period extending 
from 1918 to 1921, inclusive. 

Their investigation thus far, with the information we have been able to gather, 
results in an increase in income over income as determined by the revenue agent 
from Trenton, who made the last examination for the period 1918 to 1921, in- 
clusive, of approximately $8,000,000. 

It is the positive opinion of your examiners, with the information gained thus 
far, that there should be recommended to the Commissioner that a reexamina- 
tion be made of all of the taxpayer's books and records for the years 1918 to 
1921, inclusive; and that the taxpayer should be duly notified under the pro- 
visions of section 1105 of the Revenue Act of 1926 that such investigation has 
been ordered.'" 

The truth of this charge was conceded by Mr. Parker in his testi- 

Mr. Raushenbush. Do you have any comment to make on the statement 
here that you had been "stalling" under the advice of your attorneys? 
Mr. Parker. None, except that that was true.^"" 

Such subterfuges as this last, and open evasion, cannot be prevented 
by the terms of any tax statute, except to the extent that penalties 
are effective, and in the case of delays and generally obstructive tac- 
tics, as contrasted with open evasion, there is usually no evidence 
sufficiently conclusive to impose penalties. However, the effect in 
loss of revenue, or in serious delay in the receipt of revenue, is im- 
portant in any realistic statement of the problems of taxation. 


An additional source of tax avoidance is the large amount of tax- 
exempt securities available for investment by corporations and 
individuals. Because of the doctrine of the immunity of State 

'« Exhibit No. 1428. 

" N. F. Parker, Feb. 13, 1935. 


instrumentalities from interference by the Federal Government, 
income derived from the securities of any State or political sub- 
division of a State cannot be taxed by the Federal Government. ^^ 
Consequently, in the absence of a constitutional amendment any 
war-profits tax can be defeated to the extent of the interest paid 
on State, county, and city indebtedness. This has been estimated 
by the staff of the Joint Committee on Internal Revenue Taxation 
as amounting to $980,000,000 per year.^^ So far as individuals are 
concerned, the bulk of State and local securities is held by persons 
in the high-income brackets and the amount so held has been steadily 
increasing. Of all tax-exempt income from State and local securities 
reported by individuals in 1924, persons having net incomes of over 
$100,000 reported 58 percent; in 1925 the figure was 64 percent; in 
1929 it was 70 percent; and in 1930, the latest year for which complete 
income-tax statistics were available, 74 percent of the income from 
tax-exempt State and local securities reported in individual income 
tax returns was reported by taxpayers having net incomes of over 

Similarly a large amount of Federal securities are completely tax 
exempt from Federal taxation. 

On August 31, 1933, the total interest-bearing debt of the United States, out- 
standing, amounted to $22,722,597,530, of which amount $12,860,055,350 was 
subject to surtax, and $9,862,542,180 was wholly tax exempt as to both income 
and surtax. It appears that the average annual interest charge on this Federal 
debt will be approximately $825,000,000, indicating an average interest rate of 
approximately 3% percent. *' 

It is at least doubtful whether the war power will permit the 
abrogation of the right to receive wholly tax free the interest on more 
than 40 percent of the total Federal debt, as of August 31, 1933, 
without a constitutional amendment. ^^ 

"8 Pollock V. Farmers' Loan & Trust Co. (157 U. S. 429). 

"9 Prevention of Tax Avoidance, 73ci Cong., 2d sess., House Committee Print (1933), p. 25. 

80 Ibid., p. 26. 

81 Ibid. 

82 The United States as a sovereign may remove thie remedies necessary for the enforcement of a right 
against it, but it appears that it may not abrogate the right itself. See Lynch v. United States, 292 U. 8. 671, 
Perry v. United States (U. .S. Sup. Ct., Feb. IS, 1935, No. 532). The distinction is important in the Federal 
taxation of Federal bonds containing tax-free covenants, since the United States must there assert a positive 
right to tax collection which is met by the countervailing right of exemption. Of. Lynch v. United States, 
supra. The Supreme Court has recognized that the fifth amendment limits the taxing power {Heiner v. 
Donnan, 285 U. S. 312, 326; see Louisville Joint Stock Land Bank v. Radford, May 27,1935, No. 717.) If 
such an analysis is adopted by the Supreme Court and the taxpayer's right is also held to be immune from 
the war power (cf. Ei parte Miltigan, 4 Wall. 2, 120-127), it seems hardly possible that Government credit 
in war time would permit the drastic alternative of threatening removal of remedies of enforcement of the 
rights to interest or principal unless consent were given to taxation of interest. 


The purposes of price control, whether in the form of the war-time 
practice or in that of the Baruch price ceiUng proposal, are generally- 
viewed as putting a limit to war profits and as aiding in the prevention 
of inflation. In considering the methods of their achievement it is 
necessary to take into account the existence and significance of other 
war-time policies. Primary among these is the policy of stimulating 
the production of goods deemed essential for the successful prosecu- 
tion of the war. 

The general bearing of this factor on the height of prices may be 
seen from the statements of Govermnent officials who were actually 
engaged in the work of fixing prices during the war. Mr. Brookings, 
who was chairman of the Price Fixing Committee, stated to the repre- 
sentatives of the steel industry at a meeting on March 20, 1918: 

Take the cost of producing ore, assemble it, and follow it around through the 
production of the different grades of steel. I find it difficult to justify in my 
mind the prices that exist todaj-, but we have not that sort of a problem. We 
believe it necessary to stimulate production.' 

The dominant policy of the committee was, as Lt. Col. Robert H. 
Montgomery, its Army member, has said, "to stimulate production 
by one way or another." - Gen. Palmer E. Pierce, who was a member 
of the War Industries Board, which controlled prices before the organi- 
zation of the Price FLxing Committee, testified as follows in the War 
Policies Commission hearings: 

Senator Robixsox. In your view, I assume the prime necessity is adequate 

General Pierce. Yes, sir. 

Senator Robixson. And prompt supply? 

General Pierce. There is no question about that. 

Senator Robixsox. Were the prices you fixed made with regard to that con- 

General Pierce. Yes, sir; and the protection of the Government.^ 

When Lieutenant Colonel Harris, who is director of the Planning 
branch of the War Department, was asked in his appearance before 
this committee what policy he felt would be pursued in the event of 
another war, he testified: 

If it relates to materials we have to have, and cannot get, we have got to put 
the prices high enough to draw out the required amount.* 

' Minutes of the Price Fixing Committee, Mar 20, 1918. 

2 Garrett. Government Control over Prices, War Industries Board Price Bulletin No. 3, p. 244. 

3 "2d Cong., 1st sess., H. Doc. No. 1H3, p. 148. 
* Lieutenant Colonel Harris, Dec. 20, 1934. 


I. Price Control as a Means of Eliminating War Profits 



In ordinary times, any industry in which one company does not 
completely monopolize the field, as in aluminum and nickel, con- 
tains producers whose costs vary. The causes of this variation rest 
in the inevitable differences between companies in degree of integra- 
tion, advantage of natural resource, skill of labor, and efficiency of 
management. An even greater tendency toward cost dispersion arises 
from war, which brings in numbers of new producers who are faced 
with the alternative of using less efficient factors of production, 
constructing new facilities, or bidding existing facilities away from 
established companies. 

Under these conditions of varying costs a single commodity price, 
set at a level which enables high-cost producers to exist, naturally 
results in excessive profits for low-cost producers. These profits 
increase as the war need for production becomes more pressing and a 
greater tendency expresses itself to increase the number of producers. 

When the United States entered the World War, industry already 
contained many high-cost producers who had been encouraged by 
the inflated price level brought on by the European war activities. 
The price-control bodies, in attempting to retain their production and, 
if possible, add to it, announced a rule of fLxing prices at the bulk 
line of cost of production. From its definition — 

The term "bulk line" of production, as it came into use during the war, meant 
the indispensable amount of any commodity that the war program required 
should be produced, and the "bulk line" of cost meant the unit cost to produce 
the last unit lot of that requirement by the marginal producer. ^ 

it is apparent that the rule simply meant that prices would be fixed 
at that point which would bring in what was deemed to be all the 
necessary production. 

The amount of profits which could be gained in any industry whose 
prices were set by such a standard would, of course, be dependent 
upon the actual cost conditions in that industry. Particularly 
significant would be the extent of the difference in costs and the pro- 
portion of the industry producing at a low cost. In the following table 
of costs and production percentages, as determined by the Federal 
Trade Commission, it is possible to estimate how large both these: 
factors were in the iron and steel industry: 

i Garrett, op. cit. p. 400. 



Costs found by the Federal Trade Commission for September 191S ^ 


[Qovernment price $6 per net ton] 

Production cost 
per gross ton 

■Companies producing up to 60 percent of total 

Companies producing over — 

60 to 70 percent of total - 

70 to 80 percent of total.. 

80 to 90 percent of total.. — 

90 to 100 percent of total... 

$2. 93- $4. 44 

4.44- 4.99 
4.99- 5.44 
5.44- 6.47 
6. 47- 11. 45 

[Qovernment price $32 per ton] 

Companies producing up to 60 percent of total 

Companies producing over—' 

60 to 70 percent of total 

70 to 80 percent of total 

80 to 90 percent of total... 

90 to 100 percent of total 

$18. 14-$22. 06 

22. 06- 24. 32 
24. 32- 25. 41 
25. 41- 27. 49 
27. 4&- 45. 72 

[Government price $73 per ton] 

Companies producing up to 60 percent of total 

Companies producing over— 

60 to 70percent of total-. 

70 to 80 percent of total 

80 to 90 percent of total 

90 to 100 percent of total 

$30. 60-$33. 42 

33. 42- 35. 16 
35. 16- 39. 77 
39. 77- 41. 86 
41. 86- 66. 34 

[Qovernment price $3 per 100 pounds; $67.20 per gross ton] 

Companies producing up to 60 percent of total 

Companies producing over— 

60 to 70 percent of total 

70 to 80 percent of total.. 

80 to 90 percent of total 

90 to 100 percent of total 

$45. 54-$ 

45. 54- 49. 37 
49. 37- 52. 07 
52. 07- 57. 69 
57. 69- 76. 79. 

[Qovernment price $3.25 per 100 pounds; $72.80 per gross ton] 

Companies producing up to 60 percent of total 
Companies producing over— 

60 to 70 percent of total 

70 to 80 percent of total _ . 

80 to 90 percent of total _. 

90 to 100 percent of total 

$46. 30-$56. 80 

56. 80- 59. 56 

59. 56 

59. 56- 66. 28 
66. 28- 82. 25 

[Government price $3.50 per 100 pounds; $78.40 per gross ton] 

Companies producing up to 60 percent of total 
Companies producing over— 

60 to 70 percent of total 

70 to 80 percent of total 

80 to 90 percent of total 

90 to 100 percent of total 

$44. 82-$48. 45 

48. 45- 48. 74 
48. 74- 53. 38 
53. 38- 68. 98 
68. 98- 87. 15 

' Garrett, op. cit., p. 404. 


The figures show that at the set prices the lowest-cost producers 
were able to make extremely large profits. In the case of beehive 
coke, for instance, the $6 price constituted a margin of $3.07 or 
104 percent over the low cost of $2.93. Large profit percentages are 
also visible for the lowest-cost producers of the other commodities. 
The margins have been computed to be as follows: 76 percent for 
basic pig iron; 139 percent for open-hearth ingots; 48 percent for 
structural shapes; 57 percent for sheared plates; and 75 percent for 
merchant bar. 

Furthermore, the cost conditions of the majoritj'- of the producers 
were such as to enable even the average producer to secure large profit 
margins from these prices. For 60 percent of the companies producing 
beehive coke, the fixed price constituted a profit margin of at least 35 
percent. Computed percentages for the same proportion of the other 
industries follow: Basic pig iron, 45 percent; open-hearth ingots, 118 
percent; structural shapes, 48 percent; sheared plates, 28 percent ,-^ 
and merchant bar, 62 percent. 

feimilaiiy wide profit margins for large proportions of the bituminous 
coal and beet-sugar industries may be seen in the charts facing page 
58 and at page 59. 

Just as the necessity for maintaining the marginal producer was 
found to be a major cause of high profits and prices during the World 
War, it will be found to have a good deal of significance for any 
evaluation of the effectiveness of the price ceiling proposal. 

The proposal, as outlined by Mr. Baruch to this committee, would 
take the entire price structure existing on a pre-war day and set that 
up as a ceiling of maximum prices for the duration of the war. Operat- 
ing in conjunction with special taxation it is claimed that war would 
thereby be prevented from being a profitable industry and its un- 
pleasant aftermaths for future generations would also be forestalled: 

Briefly, my proposal is that Congress, after it declares an emergency exists, 
shall authorize the President to clamp a ceiling down over the whole price structure 
in effect on or about the date of declaration of war, when there is a fair relationship 
an^ong human activities and their rewards, and make it unlawful thereafter to 
charge a higher price for any service or thing. But, coincident with that, a fair- 
price commission shall be set up to make adjustments upward or downward as 
necessity may recjuire. Money, like other things, would be controlled and 
directed, and told for what purpose it could be used and the charge for such use. 

By heavily increasing the present peace taxes and placing an excess war-profit 
tax on all earnings above peace-time earnings, any war profits which might strain 
through the price-stabilization sieve would be captured, and thus war would be 
prevented from being a profitable industry. And, finally, the plan of "paying as 
you fight" would save generations unborn, as well as ourselves, untold misery. '^ 

Provision would be made, however, for upward and downward price 
changes. Mr. Baruch made this very clear in his testimony before 
the War Policies Commission: 

Some witnesses seem to think that, once this existing maximum is established 
there are to be no changes. I tried to make it clear that there is at once to be set 
up a competent tribunal to adjust any maximum prices, either upward or down- 
ward, whether to cure incidental injustice or hardship or to increase production. 
That, of course, will inject artificiality, but artificialitj- will be the exception and 
not the rule as would be the case with plans which propose fixing the prices of base 
ccnimodities separatelj'. On the other hand some witnesses say "He proposes to 
fr.?"ze prices and then immediately to unfreeze them." I propose to unfreeze 
nothing. I propose to adjust the few exceptions. ^ 

■ Bernard M. Baruch. Mar. 27, 1935 (galley 49 BBQ). 
* 72d Cong., Ist sess., H. Doc. No. 163, p. 796. 

coaxa OF beet sugar, season of isir-is 

ties ID tcnna o( torn 
a New York) 


■4bo ^ ' ^ '^SOQ 

Quarterly Journal of Economics Vol. 33. facing p. 218.) 

11570—35. (Face p. 58.) 





The high cost producer situation would furnish an important 
occasion for such adjustment. Mr. Baruch in his testimony before 
this committee agreed that it would be necessary to raise prices to 
bring the marginal concerns into production. He stated that this 
was the method used in the last war and that he knew of no other 
way to meet this production problem: 

Mr. Hiss. Mr. Baruch, there are a few questions relating to the price-ceiling 
plan which you have discussed that I would like to ask you. 

In time of war, is it not true, taking any industry in which there are marginal 
producers, high-cost producers, at that time not in production but whose pro- 
duction is needed, is it not true that the only way to bring them into production is 
by increasing the price of their product above the prevailing price? 

Mr. Baruch. There might be other devices, but that is the one into which we 
were forced during the war. 

Mr. Hiss. Directing it now toward a future time of war, do you know of any 
other way to bring in these marginal producers who at that time are not in pro- 
duction but whose production is needed? 

Mr. Baruch. No. 

Mr. Hiss. Then, in any price-ceiling scheme there will have to be exceptions 
over the prevailing prices for such industries? 

Mr. Baruch. There might be. 

Mr. Hiss. Is it not true that the reason the marginal producers are not in 
production is because they cannot produce profitably at the prevailing price 

Mr. Babuch. Yes, sir.' 

Ascertaining the magnitude of this factor will aid in determining 
to what extent the price ceiling will vanish with the creation of open- 
ings in it through the medium of so-called exceptions. 

Its fundamental strength is in the fact that the desire to prevent a 
price rise may be largely overshadowed by the need for production to 
which it is tied up. In explaining the importance of the marginal 
producer for the World War price fixing, Professor Taussig, who was 
a member of the Price Fixing Committee, has said: 

The guiding factor was the necessity of maintaining output. The commodities 
dealt with were, to repeat, such as were wanted in great quantity by the Govern- 
ment. A large output was imperatively needed, or at least was supposed by 
the military authorities to be needed. This was the real justification for bolster- 
ing up the marginal concern and fixing a price at which the marginal concern 
could continue in business. This too was the ground for excluding from con- 
sideration the extraordinarily high costs of the producers at the extreme right of 
the curve, sporadic contributors who probably could not have operated with 
profit under any price conditions, and whose output would be no more and no 
less whether prices were fixed at a somewhat higher or somewhat lower figure. 
But the bulk line producers had to be maintained. Their output was needed, 
and the only way to secure it was to pay them a price which would induce the 
continuance of operations. It was this situation which caused the marginal 
producers to occupy such a dominant place in the price fixing operations.'" 

The draft report assembled by General Hugh S. Johnson for the 
chairman of the War Industries Board, now pubhshed as Committee 
Print No. 3, makes the point that in the light of the need for pro- 
duction prices in most cases would not be lowered if any part of the 
high cost output would thereby be lost: 

* * * In most of these cases the need for increased production was so 
great that wherever increased demand had inflated a price the Government 
could not afford to fix a price so low as to cut off one single source of production. 
It mattered not, therefore, that some highly organized business showed a cost of 
production low beyond all proportion to some small and independent producer. 
The needs of our men in France would brook no price that would decrease the 

9 "-prnard M. Baruch, Mar. 29, 1935 (galley 77 BBQ). 

I" Price Fixing as Seen by a Price Fixer, Quarterly Journal of Economics, vol. 33, p. 228. 


output of even the high-cost producer. The proposition to fix a price on cost 
plus profit was explored and found utterly impracticable." 

The number of commodities affected by the high-cost producer 
exception is closely correlated with the number of commodities whose 
production it would be deemed necessary to stimulate in time of war 
and it is necessary to recognize that the demand of the military forces 
is not confined to the direct implements of war such as ordnance, 
ships, and ammunition, but reaches also to the many items needed 
for the equipage and maintenance of the military forces. In each 
such industry an eas}' method of gaining additional production will be 
to increase prices to a level which will permit the existence of high cost 

Furthermore, the manufacturers who supply the military demands 
in the first instance must increase their purchases of raw materials. 
Consequently the price control body must stimulate the production 
of industries which are seemingly far removed from the theater of 
war. The consequent price increases of basic materials set up de- 
mands for price increases by the producers of nonwar materials who 
find the increases in the prices of basic materials reflected in their costs. 
Forces are thus set in motion throughout the entire price structure 
which w^ill contend ^\dth the legislative declaration that prices shall 
not rise. 

It is clear that the need for increasing the production of any com- 
modity is not a matter susceptible of exact mathematical calculation. 
The military need, even though expressing itself as a more or less uni- 
fied demand, varies from month to month according to the fortunes 
of war and the reaction of the authorities to them. It is also neces- 
sary to estimate the civilian demand, which is largely a matter of 
guesswork, because of the many different companies involved. 
Finally, account must be taken of the demand set up for raw materials 
by the manufacturers of finished products. Throughout the process 
of determination, judgment is the major factor. 

This consideration was stressed by the War Industries Board in its 
reply to the Department of Justice's inquiry regarding the fixing of 
prices for cement.^- The statement was drafted on March 4, 1918, 
at a meeting of the Board attended by Mr. Baruch, Mr. Brookings, 
Judge Lovett, Admiral Fletcher, and Mr. Ingels, and reads as follows: 

March 4, 1918. 
Hon. G. Carroll Todd, 

Assistant to the Attorney General, 

Department of Justice, Washington. 

Dear Sir: Mr. Eugene Mej'er, Jr., has referred to the War Industries Board 
your letter of the 13th ultimo addressed to him, and which came in his absence, 
about the cement industry; and I am directed by the Board to write you as follows: 

The only documentary evidence upon which the War Industries Board acted in 
determining the price to be paid by the Government (not by the public) for cement 
was the report of the Federal Trade Commission, the report of Mr. Humphrey, 
and Mr. Meyer's recommendation, copies of all of which the Board understands 
are not [now?] in 3'our possession. The War Industries Board in dealing with 
question[s?] of price of materials required by the Government considers a great 
variety of circumstances — cost data, changing eleraent[s?] therein, former prices, 
especially the urgency of the need and availability of the needed supply, etc.; 
and without undertaking to weigh evidence as in judicial proceedings, the 
Board applied its business judgment and common sence in the light of all the 

11 Committee Print No. 3, p. 38. 
iJ Exhibit no. 1274. 

11579—35 5 



circumstances to the particular object in hand, which is to get what the Govern- 
ment needs when it is needed upon the fairest terms the Board is able to arrive 
at, and the time allowed, and the lights before it. Thus it dealt with the question 
of cement prices which it fixed for the first four months in 1918, and the Board is 
not disposed to reconsider the subject during that period, except as to prices 
that are to become effective thereafter. 

The Board does not consider that its action should interfere in any way with 
any measures the Department of Justice may contemplate for the enforcement of 
any law that the cement producers or dealers may have violated at any time. 
The Board did not make any investigation as to any such violations. The Fed- 
eral Trade Commission has made apparently an exhaustive study of the cement 
business. The War Industries Board did not conceive it to be the duty of the 
Board, and it had not the facilities to institute investigations to ascertain whether 
there was any illegal conspiracy in the trade. The result of its action in fixing 
prices in any case should be considered in the light of the circumstances under 
which and the purposes for which it acts — getting within the time required an 
adequate supply of war materials which the Government needs, and the price 
question though, always important, is after all not the first consideration, and 
there should always be considered the fact, as illustrated by its action with respect 
to steel prices, that it uses a very broad business judgment in a great emergency 
without regard to strictly Federal Trade Commission reports or other cost data. 
Very respectfully, 

(Signed) H. P. Ingels, 

Acting Secretary. 

Another factor conditioning the extent of rise is the nature of the 
cost information. Although figures were available in the World War 
it was found that for a variety of reasons, which are treated in a later 
section of tliis report, they were extremely unreUable. 

Furthermore, there was such a wide variation in costs that the 
discretion of the price-fixing body was in good measure unlimited in 
its choice of the marginal cost. The following table of cost variations 
in the iron and steel industry shows how wide the cost range was, both 
in absolute dollar amounts and in percentages. It has been derived 
from the table appearing at page 57 of this report. 

Range of costs from lowest-cost to highest-cost producer 


Beehive coke 

Pig iron (basic) 

Ingots (open hearth) 

Structural shapes 

Plates (sheared) 

Merchant bar 

Lowest cost 


Highest cost 



Amount of 


Percent range 
of highest cost , 
to lowest cost 



The judgment of the Price Fixing Committee in the revision of 
the copper price in the World War apparently was exercised largely 
in favor of the producers. In May 1918 the copper producers de- 
manded an increase over the 23 Jo-cent price fixed on September 21, 
1917. The minutes of June 27, 1918, show that their primary 
arguments were based on the increase in freight charges which were 
shown in the testimony before this committee to amount to only 
one-fifth of a cent per pound ^^ and upon a wage increase which had 
not yet been granted. The revised price determined July 2, 1918, 
was set at 26 cents, an advance of 2^ cents over the September 
1917 determination. 

13 Bernard M. Baruch, Mar. 28, 1935 (galley 63BBQ). 


The attitude of the Price Fixing Committee toward the industry 
was ilhistrated by Mr. Brooking's statement in the minutes of July 
2, 1918: 

Just as soon as this information commenced to come in on increased cost, we 
did trv to protect the producer in asking the Government not to place any large 
orders of copper with the producer, because we would be responsible for that, 
and having it in mind, we feel that we ought to at least spare you all that." 

Envisaging price increase the Price Fixing Committee discouraged 
governmental purchases at the prevailing lower prices. Mr. Baruch 
agreed 'in his testimony that tiiis action would result m mcreased cost 
to the Army and Navy: 

Senator Clakk. Would you assume from the language in Mr. Brookings' state- 
ment that that was the pohcv of the Price Fixing Committee, sometinie m advance 
of fixing a higher price, to ask the Government to refrain from placing orders at 

Mr Baruch! If thev did, it was a silly thing to do. It seems so stupid that 
it fs hard to characterize it without getting hot about it. 

Senator Cla.rk. It would seem to me that if that was the pohcy, it would have 
resulted in verv great cost to the Government. The consumption of copper by 
the Government at that time was very large, and if the Government knew a 
month before that the price was going to be used, which was ultimately reached, 
and deliberatelv refrained from placing any orders at the lower price, it would 
naturallv result in a greatly increased cost to the Army and Navy, would it not.' 

Mr. Baruch. Unquestionably.^^ 

The need for encouragement of production vras another matter 
stressed by the copper representatives in their successful negotiations 
for a higher price. Mr. Cotton made the foRowmg statement at the 
May 22^ 1918, meeting of the Price FLxiDg Conmiittee: 

Now I must say in all seriousness that we yield to no man or any set of men 
in our patriotic devotion to this country and this Nation inthis great crisis. 1 
am quite willing that all sorts of bouquets be thrown to various enterprises,_but 
I will insist that the smaller copper producers in this country are jus^t as patriotic 
as any portion of the industry itself. I was very happy to hear the chairman 
of this committee sav this morning that you need copper and you need produc- 
tion It was as we understood it— you have about a month s supply on hand. 
You have sold 119,000 tons for July delivery ahead of your production, ihat 
is perfectlv evident. So it stands conceded upon the face of the record here 
that the United States needs to encourage the production of copper Ihat 
being so, it seems to me every angle of this question should be carefully con- 
sidered by your committee in undertaking to represent a fair price for the metal. i» 

' \t the time of the armistice, however, the copper producers had a 
surplus stock on hand of 750,000,000 pounds, which represented 4 
months' production.^' Furthermore, on June 20, 1918, the Federal 
Trade Commission reported that "In addition to the advantage gained 
in cost by many companies, attention is called to the fact that the 
output is bemg so materially increased that it is beheved that the 
additional production will more than care for the loss of the produc- 
tion of several very high-cost producers who may find it necessary to 
close down durmg 1918 ".'^ Disregardmg this information, presented 
by a Government agency, the Price Fixing Committee mcreased the 
price ostensibly to stimulate production. r ,, 

(a) Ineffectiveness oj excess-profits tax£S to equalize profits oj tow-cost 
producers.— In the World War it was impossible to overlook the fact 
that a policy of settmg a price at cost of production plus a reasonable 

H Exhibit Xo. 1707. „, 

15 Bernard M. Baruch, Mar. 28, 1935 (galley 64BBQ). 
i« Exhibit No. 1711. , „ „,„„„, 

!• Bernard M. Baruch, Mar. 28, 1935 (galley 64 BBQ). 
If Exhibit No. 1712. 


profit to the marginal company meant the acquisition of excessive 
profits by the large low-cost companies. In suggesting means for 
handling this dilemma, Judge Gary, of the United States Steel Corpo- 
ration, counseled utilization of the excess-profits tax, but only in order 
to equalize the profits of the low-cost producer. It was his opinion 
that reasonable profits had to be assured to all manufacturers in order 
that they might "do their duty." At a meeting of the Price Fixing 
Committee with the steel representatives, held March 20, 1918, he 

Now you wish to arrive at a basis which will not permit those companies best 
integrated to receive any more than a reasonable profit and yet permit the 
smaller, less integrated plant, with high costs, to receive also a reasonable profit. 
I may say that the larger concerns, including our own, are willing to assist a few 
of the smaller plants if a practicable basis would be ascertained. This question is 
being studied. I don't know yet how it can be done. The chairman and some 
of his associates at least, are familiar with the views of our general committee as 
to what ought to be the basis of settling this question, and I must say I have 
been surprised that the Government representatives generally have not fuUy 
considered and adopted this basis. That is, by allowing every branch of industry 
to realize fair and liberal profits and then by taxation, in our case the excess- 
profits tax, leveling these profits. It seems to all of us so simple, so easy, that 
the Government should adopt that method. Increasing the excess-profits tax 
if it is desired so as to compel such a corporation as ours, for instance, to pay 
enough taxes to bring down its net results to practically the basis which would 
be fair and reasonable to the smaller manufacturers and at the same time allowing 
them to realize a good profit, fair profit. That would be entirelj' satisfactory to 
all of us and certain!}- ought to be satisfactory to the Government, because by 
adopting that you are maintaining prosperity to the company, and it would 
enable all manufacturers to realize reasonable profits. It would be an easy as 
well as logical method. It would protect all concerned, especially the Govern- 
ment. There must be reasonable profits in all lines of business. The manu- 
facturers must have reasonable profits in order to do their duty.i^ 

Mr. Brookings, of the Price-Fixing Committee, apparently enter- 
tained the same view: 

At an executive session of the Price-Fixing Committee, held July 8, 1918, a 
discussion took place to determine to what extent, if any, the excess-profits tax 
should be considered in the fixing of prices. Mr. IBrookings submitted a memo- 
randum stating that the Price-Fixing Committee was created to stabilize values 
and prevent extortionateh- high prices. It was not intended, however, unneces- 
sarily to depress values to a point where there would be little or no excess-profits 
tax. The policy of the committee should be, he believed, so to shape price that 
the less efficient or small producer would receive a fair profit, even though that 
gave the larger and more efficient producer a very liberal profit. It was expected 
that the new excess-profit tax would equalize this discrepancy by taking a larger 
proportion of the liberal profits earned.^" 

The effect of such views was, of course, to shift the responsibility 
for the limitation of profits to a different administration — the Treas- 
ury — and to postpone the determination of how far profits should 
be hmited. A corresponding tendency was thus set up for the Price- 
Fixing Committee not to be concerned overmuch about the height of 
prices from the point of view of limitation of profit. In Garrett, 
Government Control Over Prices, it is stated that — 

The Price-Fixing Committee gave frank recognition to the fact that a deter- 
mination to fix prices at the "bulk line" would give the low-cost producers 
enormously large profits. They relied, however, upon the Government getting 
those profits through the operation of the excess-profits tax. Chairman Brook- 
ings gave voice to the sentiment that it made no especial difference to the 
Government whether those profits were held in check by the committee or taken 
by tax. 21 

19 Minutes of the Price- Fixing Committee, Mar. 20, 1918. 

20 Garrett, op. cit., p. 241. 

21 P. 409. 


It can be seen, however, that the World War tax legislation was not 
designed to accomplish even the restricted purpose of profits equaliza- 
tion. The taxation section of tliis report pointed out that the highest 
rate levied during the war was 80 percent of net income, less a large 
exemption equal to either the taxpayer's pre-war profits, or 10 per- 
cent of its invested capital, whichever amount was greater. Leaving 
20 percent of the profits untaxed meant that higher prices and conse- 
quently higher earnings ensured larger absolute amounts of profits 
after tax and consequently higher ratios of earnings to capital. For 
example, at a price which enabled a company to earn $1,000,000 
profit, $200,000 plus exemptions would be immune from tax. But if 
the price were raised so that earnings doubled to $2,000,000, immune 
income would now amount to $400,000 — twice as high a ratio to 
capital. It would, therefore, make a good deal of difference to the 
low-cost producer whether his profits were checked by price control 
or were left to taxation. 

Even more important than this consideration was the fact that once 
a low-cost company had in its possession the excessive profits ren- 
dered possible by the single price system, all the devices outlined in 
the taxation section of this report were available to retain them and 
to avoid payment of even the war-tax rates. The committee's study 
of the tax returns of a group of important companies ^^ shows that 
according to the final determination of the Bureau of Internal Rev- 
enue, taxes were paid of only 25.1 percent of their 1917 net taxable 
income and 34.9 percent of their 1918 income. Due account should 
be taken of the large amount of profits which do not appear as net 
taxable income because they were either deemed not to be income or 
not taxable by one device or another. ^^ 

The committee's staff has compiled a table of the income and taxes 
of major steel companies, as finally determined by the Bureau of 
Internal Revenue. The amounts of tax collected in comparison with 
the net taxable income earned shows why steelmakers such as Judge 
Gary were content to have the Government rely upon taxation to 
remove excess profits. Bethlehem Steel Corporation, for instance, 
made the large sum of over $61,000,000 in 1918, but it paid a tax of 
about $14,500,000. In 1918, when 80 percent of war profits was 
supposed to be taken away, it paid taxes of only $2,155,000 on its 
income of over $16,000,000. It is indicative of the understatement 
in figures of net income before taxes, that although Bethlehem's net 
taxable income was decided by the Bureau of Internal Revenue to 
have decreased from 1917 to 1918 when higher rates went into effect, 
yet the companv increased its dividend pavments from $8,100,000 in 
1917 to $9,300,000 in 1918, and the RepubHc Iron & Steel Co. paid 
the same dividends in 1918 as in 1917, although its net taxable 
income had decreased. 

^2 See appendix, p. 139. 

23 See supra, p. 27 et seq. for an analysis of the problems involved in computing taxable net income 
and see p. 44 et seq., for an analysis of some of the devices referred to in the text. 


Final tax settlements of steel companies 



Net in- 
come before 


Net in- 
come after 


Bethlehem Steel Corporation and subsidiaries ' 
Republic Iron & Steel Co. and subsidiaries 2.. 

Jones & Laughlin Steel Co.^ — -. 

Crucible Steel Co. of America and subsidiaries ' 

Otis Steel Co.« - 

Allegheny Steel Co. L.. 

Lukens Steel Co. and subsidiaries - 


$61, 859, 308 
16, 645, 269 
26, 631, 989 
12, 201, 728 
51, 358, 012 
32, 767, 507 
30, 299, 964 
24, 573, 323 
9, 989, 355 
5, 820, 047 

7, 510, 947 
3, 430, 477 

8, 639, 477 
6, 181, 250 

$14, 417, 948 
2, 155, 777 
9, 904, 339 
5, 290, 685 
20, 081, 271 
17, 090, 598 
6, 853, 968 
14, 121, 973 
4, 654, 689 
3, 716, 275 
3, 168, 965 
1, 755, 314 
2, 839, 156 
1, 588, 422 

$47, 441, 359 
14, 489, 491 
16, 727, 650 
6, 911, 042 
31, 276. 741 
15, 676, 908 
23, 445, 995 
10, 451, 350 
5, 334, 666 
2, 103, 772 

4, 341, 981 
1, 675, 163 

5, 800, 320 
4, 592, 827 

$8, 177, 320 
9, 386, 160 
3, 381, 460 
3, 381, 460 


7, 562, 500 
1, 750, 000 





620, 000 

1 Exhibit No. 1740-A. 

8 Exhibit No. 1740-D. 

3 Exhibit No. 1740-F. 

* Dividend figures not available. 

» Exhibit No. 1740-E— Tax computations for fiscal years ending Aug. 31, 1917, and Aug. 31, 1913. 

« Exhibit No. 1740-C. 

' Exhibit No. 1740-B. 

8 Exhibit No. 1738— Tax computations for fiscal years ending Oct. 31, 1917, and Oct. 31, 1918. 

The failure of taxes to remove excessive profits is equally apparent in 
the copper industry. Kennecott Copper Corporation, a low-cost pro- 
ducer, whose 1917 costs were 8 cents per pound, compared with the 
average of ISji cents per pound,^* made more than $22,000,000 profit 
in that year, of which the Government collected back only 
$2,036,000.^^ Likewise the Inspiration Consolidated Copper Co., 
whose 1917 costs were ll'o cents,^*^ made over $9,000,000, of which it 
paid back to the Government less than $1,000,000.^^ 

Final tax settlements of copper companies 


Kennecott Copper Corporation > 

Ahmeek Mining C0.2 

Inspiration Consolidated Copper Co.^ 

Phelps Dodge Corporation * 

East Butte Copper Mining Co.^ 

Calumet and Hecla and Torch Lake Canal 

Co., Consolidated. 6 
Miami Copper Co." 


f 1917 
I 1918 
f 1917 
I 1918 
; 1917 
I 1918 
f 1917 
\ 1918 
/ 1917 
\ 1918 
/ 1917 
\ 1918 
/ 1917 
1 1918 

Net income 
before taxes 

$22, 423, 325 

8, 090, 863 

2, 330, 699 

2, 618, 137 

9, 230, 254 

6, 331, 882 

23, 850, 821 

14, 323, 215 

1, 268, 788 

167, 170 

13, 293, 597 

4, 142, 465 

4, 837, 704 

5, 323, 975 


$2, 035, 797 

1, 053, 500 

928, 492 

1, 455, 168 

1, 071, 357 

761, 492 

3, 546, 667 

3, 496, 881 

69, 071 

19, 325 

2, 872, 773 

706, 167 

1, 083, 810 

3, 034, 690 

Net income 
after taxes 

$20, 387, 528 

7, 037, 363 

1, 402, 206 

1, 162, 968 

8, 158, 897 

5, 570, 390 

20, 304, 154 

10, 826, 334 

1, 199, 717 

147, 844 

10, 420, 824 

3, 436, 298 

3, 753, 893 

2, 289, 285 


$15, 885, 643 


2, 800, 000 

1, 600, 000 

9, 451, 227 

9, 455, 736 

10, 800, 000 

10, 800, 000 

831, 731 

632, 774 

8, 500, 000 

5, 500, 000 

6, 537, 247 
3, 362, 013 

1 Exhibit No. 1716. 

2 Exhibit No. 1718. 

3 Exhibit No. 1719. 
* Exhibit No. 1721. 

« Exhibit No. 1722. 
6 Exhibit No. 1723. 
? Exhibit No. 1720. 

(b) Impradicahility oj the individual prices proposal. — Recognizing 
the inefiicacy of the tax system, Wilham B. Colver, the Federal Trade 

2« Exhibit No. 1712. 

25 Exhibit No. 1716 

26 Exhibit No. 1712. 
2' Exhibit No. 1719. 


Commission member of the Price-Fixing Committee, suggested adop- 
tion of the individual prices proposal. Under this plan, instead of 
fixing a single price on the basis of the marginal cost producer for the 
entire industry, separate prices would be set for each producer on the 
basis of his individual costs. Lower-cost producers would therefore 
receive lower prices and there would be less profits for the tax system 
to collect back. 

Although the proposal appeared to hold low-cost producers to 
reasonable profits, the almost insuperable difficulties of administra- 
tion prevailed against its adoption. Prunary among these was the 
necessity for checking the books of large numbers of producers in 
order to prevent the addition to profit by means of cost padding. 
R. H. Montgomery, also a member of the Price-Fixing Committee, 
believed that there were not enough accoimtants \\'itliin the country 
to undertake this task. In a memorandum to the committee, he 

Cannot be effectively administered, because it is expected that the machinery 
of control will include a system of reports and inspection emanating from hundreds 
of producers, who have every interest to overstate their costs. The available 
supply of skilled accountants in this country is exhausted. The present demand 
from legitimate sources greatly exceeds the supply. My familiarity with this 
matter leads me to object to setting up a S3-stem of control which is not operatively 
possible. 28 

At pages 87-89 of this report the difficulties of auditing costs even 
where slalled men are available are noted. 

Under tliis proposal there would also have been raised the problem 
of valuation since provision was made for taking account of cost 
differences which were due to the size of the investment. In his 
memorandum to the Price-Fixing Committee, Mr. Colver wrote: 

Equity as between producers requires consideration of the amount of the invest- 
ment and its character. For instance, it is often found that a low-furnace cost 
has only been obtained by the expense of a high investment per ton of output, 
while frequenth- a high-furnace cost may be coupled with a low investment. It 
is obvious that the application of a uniform unit profit without reasonable con- 
sideration and scrutiny of investment will be inequitable. -^ 

The inherent complexities of valuation which have been noted at 
pages 19-24 of this report further indicate that the results of actual 
administration of the proposal would probably have been very 
different from the description of its theoretical operation. 

The provision for governmental pooling of individual production 
and resale under uniform prices in order to put all consumers on a 
uniform basis would also have raised difficult administrative problems. 
This provision, however, is essential to prevent (1) the instability of 
production on the part of high-cost producers who would be uncertain 
of customers at their higher- than-average prices and (2) the colossal 
administrative task of policing the requirement that low-cost pro- 
ducers must not receive, in the form of purchase price or rebate, the 
increased price which many buyers would be willing to pay. The 
plan contemplated the conduct of business on the usual basis, pro- 
ducers making deliveries directly to their customers but receiving 
their payment from the pool at their individual prices, while con- 
sumers paid the composite price to the pool. Where the product 
was in great demand, there would have arisen a tremendous task of 

«3 Garrett, op. cit., p. 386. 
" Ibid., p. 393. 


policing industry to prevent direct payments to sellers at other than 
Government prices, and even where bills were routed through the 
Government pool of preventing the payment of rebates. In addition, 
it would have been necessary to create a central bookkeeping agency 
through which all the bills of transactions between individual buyers 
and sellers would pass. Obviously, if such a plan were applied to any 
large part of the country's industry, the central recording of every 
purchase and sale would cause in itself a strong tendency toward 
delay in industrial production. 

Furthermore, theoretical limitation of per unit profits of low-cost 
producers by means of the lower prices supposedly guaranteed under 
this plan or under the price-ceiling scheme overlooks the tremendous 
profits which are gained by the war-time increase in the volume of 

An increased turnover means greater profits because the same rate 
of earnings is being multiplied by the extent of the turn-over increase. 
Many of the most profitable peace-time businesses rely upon a low 
price with a small per unit profit because of the quantity sales that 
are thereby insured. To this increase in total volume of profits must 
be added the increased profit due to increase in the rate of profit 
which comes from the fact that increased war sales are procured with 
relatively little increased sales cost and the fact that where there has 
been idle capacity there is also relatively little increase in overhead 

As an example of the operation of these factors Mr. Baruch has 
cited a company which, if it increased its turn-over four times, would 
be able to increase its profits 830 percent of its normal profit of 10 
percent on its invested capital; and even after paying an excess-profits 
tax of 80 percent would still retain earnings amounting to 160 percent 
of its normal profits: 

Consider, for example, the simple case of a company capitalized for $1,000,000, 
selling $1,000,000 worth of goods annually, making 20-percent gross profit, or 
$200,000 on its turn-over, and having $100,000 of expenses of administration 
and selling, leaving a net profit of $100,000, or 10 percent, on both its normal 
turn-over and its capital. Suppose also that 10 percent of its cost of manufac- 
ture, or $80,000, are fixed overhead charges — depreciation, maintenance, super- 
vision, taxes, etc. Then its costs for material and direct labor are $720,000 for 
every million dollars' worth of goods it sells. Now, suppose that war comes 
and we need the full capacity of that plant. We give it orders for $4,000,000 
worth of goods, to be delivered in a single year. It has no increased selling and 
general administrative expense, because the demand is so great that no such 
effort is required. Neither do the fixed overhead elements of its manufacturing 
costs increase greatly — say, only to $90,000. What happens to the profits of 
that plant? Its material and direct labor costs on its $4,000,000 sales are $2,880,- 
000. To this it must add $90,000 for fixed overhead charges in its factory and 
$100,000 for general and administrative expense, making a total cost for goods 
sold of $3,070,000. Its net profit is, therefore, $930,000, or 930 percent,so of 
its normal profits in peace. It is making nearly 100 percent on its investment, 
and its net profit on turn-over has increased from 10 to 23 percent. Even if we 
assess a tax of 80 percent on the $830,000 of excess over peace profit, that plant 
will still be making $260,000, or 260 percent ^i of its normal profits. 

I want you particularly to note that this example considers no increase in 
price whatever.32 

(c) Price regulation of monopoly business. — Where excessive profits 
are gained by well integrated low-cost companies in nonmonopolistic 
fields of business it becomes exceedingly difficult to limit the profits 

3" Corrected to 830 percent. 
31 Corrected to 160 percent. 
82 War Policies Commission hearings, op. cit., p. 798. 


of monopolies who may point to these other companies as the basis 
for a plea of uniformity of treatment and who may even invoke the 
Constitution on the ground that their property is being subjected to 
confiscation. Study of these industries in the last war shows that 
even with the reduced difficulty of administration, war profits were 
not limited. 

(1) The aluminum industry. — In aluminum price fixing the compli- 
cating factor of high-cost producers was absent inasmuch as there was 
only one important operator, i. e., the Aluminum Co. of America. 
According to the report of the War Industries Board :^^ 

The industry in the United States is in the hands of one concern, the Aluminum 
Company of America, which owns numerous plants in the United States and one 
in Quebec, Canada. It is the sole producer of virgin metal, and it controls prop- 
erties covering practically every step and process in the industry from the mining 
of bauxite ore through the finished castings and utensils. 

The committee has found, however, that the single producer in 
this field had a consolidated net taxable income for the year 1917 of 
$25,840,326 which was 40.8 percent of its consolidated invested 
capital. Of this profit a tax of $9,114,909 was collected. Taxes in 
the year 1918 decreased to a sum of $2,260,230. Net taxable in- 
come decreased to $10,417,814 but income before amortization de- 
ductions was $21,386,360,^* and the production of aluminum bv the 
company only changed from 129,860,592 pounds in 1917 to 124,724,924 
in 1918.'' 

The first price determination in the aluminum industry was in 
connection with the preparedness campaign. In April 1917, an 
agreement was entered into with the Government for the sale of 
8,000,000 pounds of aluminum ingots at 27)2 cents a pound.'^ The 
price was apparently fixed on the same basis as the remainder of the 
preparedness campaign, i. e., "to sell their own Government its war 
needs at pre-war prices." '^ It should be noted, however, that the 
10-year average of prices from 1907 to 1917 of 25.543 cents was in- 
creased to 27)2 cents because of a claimed increase in the cost of pro- 
duction '^ and that inclusion of the inflated values of the war years 
prior to our entry raised the price 7)2 cents above the normal level of 
20 cents prevailing before the commencement of the European war.'^ 

Furthermore, on the basis of the Federal Trade Commission's 
report that the cost of production of aluminum ingots was 15)^ cents 
in 1917,*'' a per-unit profit margin of more than 80 percent was obtain- 
able. It must also be realized that this gift price applied only to a 
small percentage of the total primary aluminum production of the 
United States, which in 1917, was approximately 143,300,000 pounds.*^ 

The bulk of production was sold at much higher prices. In Sep- 
tember 1917 the Aluminum Co. agreed with the War Industries Board 
"to accept direct and indirect orders at the prevailing contract prices" 
which were 38 cents, provision being made, however, for refund by the 
company of any differences between this and the future fixed price. *^ 

33 p. 148. 

3« Exhibit Xo. 1746. 

35 Aluminum Co. of America letter to the committee dated May 23, 1935, printed in appendix to that 
part of Hearinjis in which Exhibit No. 1746-B appears. 

39 Report of the War Industries Board, p. 149. 

"Ibid., p. 131. 

" Exhibit no. 1747. 

39 In August 1914 the contract price of 9S-99 percent aluminum was $0.19 per pound and the open-market 
price was .$0.1988 per pound. War Industries Board Price Bulletin No. 34, p. 84. 

<o Exhibit no. 1747. 

« E.xhibit no. 1746. 

« Report of the War Industries Board, p. 149. 


On February 28, 1918, the price of ingots was fixed at 32 cents per 
pound, which represented a decrease of 6 cents from the prevailing 
contract price. The usual method of computing the price reduc- 
tion from the spot price of 60 cents per pound creates an erroneous 
impression since most of the aluminum production was sold on a 
contract basis. Mr. Davis, president of the Aluminum Co., testified 
before the House Committee on Foreign Affairs on June 6, 1917, as 

In this way our entire product has been shipped and delivered to the United 
States consumers from the beginning of the war to the present time at prices 
in no case in excess of 37 cents a pound, and averaging, perhaps, about 32 cents 
a pound. The average price that we received for all of our products during the 
month of April 1917 just passed was 35 cents per pound. 

You wiU see, therefore, that the statement or impression that we are selling our 
product to the United States consumers at 60 cents a pound is as erroneous as 
such a statement could possibly be.^^ 

On the basis of the IS^-cent cost estimate of the Federal Trad© 
Commission, there was a per-unit profit margin of more than 100 per- 
cent. But even this price was raised to 33 cents per pound on May 9, 

We also find an allegation of the Government that the Aluminum 
Co. of America has not fulfilled its obligation in respect to refunding 
the difference between the contract and fixed prices. In a recent 
suit by the Aluminum Co. of America against the United States, the 
Government's counterclaim states that although a joint audit has 
settled that $1,540,473 is the amount to be refunded, the Aluminum 
Co. has repaid $263 directly and a similar amount indirectly.** To 
the extent that the Aluminum Co. succeeds in this course of action 
it will have nullified the attempt at price fixing. 

One of the company's defenses to the counterclaim attempts to 
accomplish the same end by way of a constitutional objection. It 
contends that: 

If these attempts [the price announcements of Feb. 28, 1918, and May 9, 19181 
were price-fixing proclamations, and were intended to apply to contracts made 
prior to September 24, 1917, they would, with respect to such contracts, deprive 
the plaintiff of its property without due process of law and take the said property 
for public use without just compensation in violation of the fifth amendment to 
the United States.^ 

although almost all the 1917 and 1918 deliveries had been contracted 
for prior to the commencement of price fixing. Committee Print 
No. 3 states: 

The Aluminum Co. advanced its base price on contracts from 37 cents to 38 
cents in March 1917, and it is stated that practically all of the metal for 1917 
and 1918 deliveries was contracted for in March and April of the earlier year.*^ 

(2) The nickel industry. — The nickel industry is controlled by the 
International Nickel Co., according to the report of the War Indus- 
tries Board — *^ 

The war required directly or indirectly nearly 90 percent of our nickel supply, 
but the problem of controlling the price and distribution was a very simple one,. 

" Exhibit no. 1747. 
" Exhibit no. 1747. 
« Exhibit no. 1745. 
<' P. 182. 
«P. 152. 



because the country's production is practically all in the hands of one company, 
the International Nickel Co. This company brings the raw material, in the 
form of "matte" and ore, from the Sudbury deposits, Ontario, Canada, and 
refines them at Bayonne, N. J. A small quantity of "matte" comes also from 
New Caledonia and from Tasmania. 

Again the committee finds that even with the absence of a number 
of producers operating at varj-ing costs and the consequent necessity 
for a high price to keep high-cost producers in operation, that the com- 
pany having the monopoly in this field had a high net income, namely, 
813,992,729 in the year ended March 31, 191S, according to the final 
determination of the Bureau of Internal Revenue. Taxes in that 
period were $3,131,422. The amount of profit taken away by 
taxation is represented in the decrease of the percentage of income 
to invested capital from 23 percent to 17.7 percent, a difference of 5.3 
percent of invested capital. Dividends paid for the fiscal vear ending 
March 31, 1918, were $8,483,330.*^ 

The first price was agreed upon in August 1917. The figure of 
40 cents per pound of ingot nickel was determined by reference to 
the price International Nickel was charging the Canadian Govern- 
ment. Apparently it was not felt that the United States should get 
the benefit of a price lower than the charge to the Allies. The 
minutes of the War Industries Board, August 17, 1917, reported: 

Mr. Baruch presented a communication dated August 15 from the Ordnance 
Department, No. G-4701 7/11 relative to an arrangement with the nickel inter- 
ests for supplying nickel to the Government at the same price as to the Canadian 
Government, and stated that the price of 40 cents was now offered by the Nickel 

It was moved and carried by the Board that this price should be considered 

A Federal Trade Commission study shows that it cost Inter- 
national Nickel less than half of this price to produce ingot nickel, 
the exact amount being $0.18786.^" 

On January 8, 1918, a new schedule of prices was agreed upon. 
There are set forth the prices fixed by the War Industries Board and 
the costs of the International Nickel Co. as determined by the 
Federal Trade Commission: ^^ 

Jan. 8, 191S 

(prices per 


July 1917 
(costs per 

1918 (costs 
per pound) 

Ingot nickel .- - 


$0. 18786 
. 23787 
. 17313 

$0. 2201 

Electrolytic nickel- - . . 


Monel metal 


These prices prevailed for the remainder of the continuance of the 
war. Mr. Pope Yeatman, chief of the nonferrous metals section of 
the War Industries Board, sent a memorandum to Mr. Brookings, 
Chairman of the Price Fixing Committee, recommending that there 
be no downward revision in prices. He felt that the Federal trade 
figures of 26.58 cents based upon $0.22 costs plus 10 percent allow- 

4s Exhibit No. 1750. 
4» Exhibit No. 1749. 
«« Ibid. 
" Ibid. 


ance on the investment was entirely too small. The major factor 
in his argument was that, before the war, prices of 35 cents to 40 
cents a pound were quoted. Even though these prices represented a 
margin of more than 100 percent of the cost, Mr. Yeatman thought 
that "while high prices have been received, there has been nothing 
savoring of profiteering," ^^ 

The increased profits resulting from increased production were not 
thought by the Price Fixing Committee to be a factor justifying price 
decrease. Its attitude is represented in the following statement made 
by Mr. Brookings at the May 20, 1918, meeting: 

Of course we know that our war needs have enormously increased the con- 
sumption of nickel. The Navy program and the Army program have required 
nickel for alloying certain steel and has doubled your production and has, of 
course, enormously increased your profits. We are not in an attitude of envying 
you your profits; we are more in the attitude of justifying them if we can. That 
is the wa}- we approach these things.^* 

The Canadian source of nickel represents an additional difficulty 
involved in attempting to control war profits, namely, those gained on 
goods produced in foreign countries. The costs of an American 
company may be increased by the simple device of increasing the 
price of the raw material as it is conveyed to it by the foreign branch. 
Determination of the foreign costs will in general depend upon the 
company's un verifiable statements. 

(3) The sulphur industry. — During the war period, sulphur was sold 
to the Government at a price of $22 per long ton, which was the 
uniform price quoted for every month from January 1913 to March 
1916, when the first rise was registered.^* The field was in the hands 
of only two companies, the Union Sulphur Co. and the Freeport Sul- 
phur Co. 

On August 6, 1917, a letter was sent to Mr. Henry Whiton, chair- 
man of the committee on sulphur, at the direction of the Paymaster 
General of the Navy, asking for an opinion as to what constituted a 
reasonable price based upon cost of production rather than prevailing 
or pre-war market price. The letter reads iu part as follows: 

At the time of the last purchase of Navy requirements, the Union Sulphur Co. 
offered the amount required at a price of $22.50 per ton. In view of the market 
prices current at that time and the fact that the offer of the Union Sulphur Co. 
was apparently based upon pre-war prices, the quotation of the Union Sulphur 
Co. was accepted and appreciated by the Navy. 

Since that time, the Government's price policy has been more definitely 
established and, so far as it can now be interpreted, it is that manufacturers 
should supply the Government's demands at fair and just prices and in fact, 
authority has been granted to the Government to place orders with producers on 
such a basis. 

The difficulty of determining what constitutes a fair and just price is obvious. 
However, the present policy is to base this price upon the cost of production 
plus a reasonable profit, considering industry as a whole; in other words, to judge 
of the reasonableness of prices from the standpoint of the cost of production 
rather than from the prevailing or previously current market prices. Under this 
plan, the purpose is to be as liberal as possible allowing manufacturers the benefit 
resulting from efficient methods of production, in case after [other?] domestic 
manufacturers in the same line produce at higher costs and provided that the 
products of these other manufacturers are required to meet Government needs.^^ 

62 Exhibit Xo. 1749. 

63 Exhibit No. 1747. 

6« War Industries Board Price Bulletin No. 45, Prices of Mineral Acids, p. 16. 
65 Exhibit No. 1751. 


Union Sulphur Go's, unit costs including depletion were $6.82 per 
ton in 1917 according to its own income tax returns/*^ Application 
of the cost of production formula to this industry would thus have 
shown that at the Government price a monopoh' company was making 
a per unit profit of more than 200 percent. 

On August 20, 1917, the Paymaster General reiterated the Navy's 
request for a statement of the basis upon which it was decided by the 
committee on chemicals that $22 per long ton was a reasonable price. 
The Paymaster wrote: 

In view of the fact that the committee on chemicals has thoroughly canvassed 
the situation in regard to sulphur with a view of determining upon a reasonable 
price and believes that $22 per long ton at the mines represents such a price, it is 
suggested that the committee formulate a statement of the basis upon which this 
conclusion was reached for the approval of the War Industries Board and for 
submission by the War Industries Board to the various departments for their 
formal approval." 

In response to this request, Mr. Nichols, chairman of the committee 
on chemicals, explained: 

In suggesting to the Union Sulphur Co. that they quote the Navy S22 per ton 
f . 0. b. mines, it was with the idea of carrying out exactly what is being done for 
everybody else except that no ordinary buyer is permitted to contract, not know- 
ing what "the Government needs will be. In the ease of the Navy, I asked the 
Union Sulphur Co. to arrange in case a lower price was made for anyone that the 
Navy should have the benefit of it on the undelivered portions. ^s 

On September 7, 1917 Mr. Bingham, secretary of the War Indus- 
tries Board, stated in a memorandum to Admiral Fletcher relating 
to the method by which the sulphur price was determined: 

Second, asking how recommendations were arrived at, it was the opinion of 
the Board that it was unnecessary and impossible for the Board to present their 
reasons for decisions when making recommendations.^^ 

Finally on September 12, 1917, the War Industries Board wrote 
the Paymaster General that the price was fair but gave no reason for 
its determination: 

This matter has been investigated by a committee, and it has been found that 
considering the condition of the market and other circumstances, that a price of 
$22 per ton at the mine is as fair and just a price as can be obtained at present.^" 

The tax statements of the Union Sulphur Co., however, show that 
in 1917, according to the final determination of the Bureau of Internal 
Revenue, its net taxable income was $7,211,000, representing a return 
of 49 percent of its invested capital of which it paid $2,613,000 in 
taxes. In 1918 its net taxable income according to its own report 
was $10,568,000, representing a return of 58 percent of its invested 
capital, of which it paid taxes of $5,794,000.^^ 


In the last war there was a very close connection between business 
and the price-control administration, either through the actual pres- 
ence of interested parties in governmental posts, or through the reh- 

«6 Bernard M. Baruch, Mar. 29, 1935. 

t" Exhibit No. 1752. 

» Exhibit No. 1753. 

" Exhibit No. 1754. 

M Exhibit No. 1755. 

" Exhibit No. 17o5-A. 

74 MuisriTioisrs industry 

ance on business representatives for advice and information con- 
cerning their owai industries. This condition, wliich must prevail if 
the persons who are in direction of industry in peacetime are to aid 
in its wartime control, results in the creation of a powerful counter- 
poise in the shape of double interest to the elimination of war profits. 
It is necessary to recognize that such devices as the formal severance 
of relationships or the discontinuance of company compensation for 
the duration of the war do not extinguish the real interest of the 
official in his company since in most cases he will return to it with 
the coming of peace. Furthermore, there will always be a strong 
tendency not to antagonize business connections wliich may have 
been built up over a long period of years and from which future 
benefit can be expected. Finally, as was the case in the World 
War, there is the very direct interest which comes from stock owner- 
sliip in companies subject to regulation. 

These definite mterests, combined with the habits of thought and 
the personal associations of men who have spent their lives in private 
enterprise, make for a sympathetic attitude toward the complaints 
of those who remain in charge of industrial operations and a willing- 
ness to rely upon the information presented by industry. 

The parent body of the many administrative agencies set up to 
control industry during the war was the Council of National Defense. 
Its creation was authorized in the Army Appropriation Act approved 
August 29, 1916, and its formal organization occurred on October 11, 
1916. There were two bodies in the Council, one composed of 6 
Cabinet Secretaries, and the other Ivnown as the Advisory Com- 
mission, composed of 7 private citizens. These latter were Bernard 
M. Baruch, Daniel Willard, Holhs Godfrey, Howard E. Coffin, 
Franklin H. Martin, Samuel Gompers, and Julius Rosenwald. 

Divisions and committees were soon added to the Council. On 
February 28, 1917, a body known as the Munitions Standards 
Board was formed and a month later the General Munitions Board 
was organized with Frank A. Scott as chairman. According to the 
War Industries Board report,^- this body had the same chairman and 
included the same ci\'ilian personnel as the Munitions Standards 

The names and industrial connections of the members of this Board 
were read by Chairman Willard at the February 28, 1917, meeting of 
the Council of National Defense. They are as follows: 

W. H. Vandervoort, Root & Vandervoort, builders of special machine tools 
and president of the Moline Automobile Co. 

E. A. Deeds, formerh' general manager of the National Cash Register Co., 
president of the Dayton Engineering Laboratories Co., and interested in many 
industrial activities. 

Frank A. Scott, Warner & Swasey Co., Cleveland, manufacturers of automatic 
machinery and optical instruments. 

Frank Pratt, General Electric Co., Schenectady. 

Samuel Vauclain, Baldwin Locomotive Works, Remington, and Westinghouse 

John E. Otterson, vice president, Winchester Arms Co.^^ 

62 P. 21. 

63 Exhibit No. 1245. 


With the commencement of the speculative price rises which at- 
tended our entrance into the war, the Advisory Commission of the 
Council of National Defense formed a number of committees to deal 
wdth the commodities that were especially subject to war demand. 
The report of the War Industries Board states the purpose of the 
organization of these committees to have been the provision of a 
source of information for the Government as to the supply capacities 
of industry and a similar source for industry as to the needs of the 
Government. Also: 

The question of fair prices and suitable methods for making equitable distribu- 
tion of Government orders could be discussed by the Advisory Commission with 
these committee members, who were for the most part the most influential and 
best informed men in their respective lines of business.^* 

It was found that the very qualities which made the members of the 
committees and the boards useful because of their experience also 
raised the question of double interest. For instance, at the June 5, 
1917, meeting of the General jMunitions Board the minutes state that 
Chairman Frank Scott retired when consideration was made of a 
communication from the Ordnance Department regarding a proposed 
arrangement with the Warner & Swase}^ Co. for the manufacture of 
3,000 panoramic sights for the field artillery. The Board, proceeding 
on its deliberations in the absence of Mr. Scott, found the price to be 
fair and just and recommended that the orders be placed. ""^ 

In the minutes of July 13, 1917, there is report of the Board's 
acceptance of the resignation of Mr. Hanson as chairman of the 
machine-gun committee. He tendered his resignation "due to his 
having accepted a position ^vith the Colt's Patent Fire Arms Manu- 
facturing Co., who were to receive and had received Government 
orders for machine guns." ^'^ 

A memorandum approved by the Secretary of War was presented 
at the June 20, 1917, meeting asking the Board to reconsider its 
recommendation of the Thompson-Starrett Co. to build the canton- 
ment at Yaphank, Long Island, because of the interest in that com- 
pany of W. A. Starrett who was Chairman of the Committee on 
Emergency Construction. The Board referred the matter of Mr. 
Starrett's interest in the Thompson-Starrett Co. and the George A. 
Fuller Co. for investigation. On the next day it was reported that 
his interest in the former company had ceased about 4 j^ears ago and 
that his brother was the president of the latter." 

The report of the War Industries Board hints at the difficulties 
which arose from the nature of the personnel of the committees that 
were aiding in the procurement work of the Government. It states 
that — 

Dissatisfaction began to come to light on the part of firms not directly repre- 
sented on the committees. The possible misconception of the position of tbe 
<?ommittees in appearing to represent, even in a vague sense, both the buying and 
selling interests, was very soon felt."^ 

The Munitions Board itself began to respond to the criticism. On 
June 19, 1917, Major Stimpson was requested by the Board to investi- 

M Report of the War Industries Board, p. 21. 
M Exhibit No. 1251. 

66 Ibid. 

67 Ibid. 

'^Report of War Industries Board, p. 22. 


gate new methods of organization which would settle the problem 
of double interest. It was said at the meeting: 

This is particularly necessary in relationship to the membership on a board 
or subcommittee of a man who is actively interested in a concern which may 
benefit bj' the awarding of a contract concerning the recommendation of which 
the subcommittee or board has some authority. s» 

However, on July 28, 1917, the minutes of the executive committee 
of the General Munitions Board contain a copy of a telegram which 
was sent by Mr. Julius Rosenwald, a member of the Board, to Presi- 
dent Wilson. This registered vigorous protest against a provision 
in a pending bill which attempted to handle the problem of interest 
in corporations receiving Government orders by men in advisory 
capacity to the Government. The telegram follows: 

Dear Mr. President. It is of the most vital importance that the rider in 
the food bill referring to the Advisory Commission and its method of securing 
supplies be stricken out. To cast suspicion on men in many industries who 
without exception have been eager to serve the Government rather than them- 
selves will destroy a spirit which should be encouraged. The committees repre- 
senting these industries have succeeded in instilling and securing a loj'alty to 
the Government from many in their own lines that could never have been pro- 
duced under the old system. Even at this early stage of the war the savings 
to the Government due to this desire to serve, runs into many tens of millions 
of dollars. Having been entrusted with a responsibilitj' to protect and serve 
their Government interests a patriotism has been aroused in these men which is 
absolutely necessary to secure rapid production. It is probably impossible to 
devise any plan which is dishonesty proof but any man of standing in his pro- 
fession or industry will sacrifice everything rather than be unfaithful to his trust. 
At any rate, such has been my experience with the men who have served as 
advisers to the Commission which I have had the honor to appoint. The present 
system should not be destroyed until a better one is found. If changes in method 
are desirable they can be made after proper in\estigation. It is vital that the 
cooperation which has already been established should be maintained and, further- 
more, it is of greatest importance that confidence exist between Government 
and industrv and that suspicion which has existed on the part of both be elimi- 

On July 28, 1917, the General Munitions Board was superseded by 
the War Industries Board. This action was taken "with the approval 
of the President", and its purpose was stated in the minutes of the 
meeting of the Council of National Defense as follows: 

— to expedite the work of the Government, to furnish needed assistance to the 
departments engaged in making war purchases, to devolve clearly and definitely 
the important tasks indicated upon direct representatives of the Government not 
interested in commercial and industrial activities with which they will be called 
upon to deal, and to make clear that there is total disassociation of the industrial 
committees from the actual arrangement of purchases on behalf of the Govern- 
ment. It will lodge responsibility for effective action as definitely as is possible 
under existing law. It does not minimize or dispense with the splendid service 
which representatives of industry and labor have so unselfishly placed at the 
disposal of the Government.^' 

Unlike the practice in the change of the Munitions Standard Board 
to the General Munitions Board, some change was made in the per- 
sonnel of the War Industries Board. Robert S. Brookings was named 
commissioner of finished products; Robert S. Lovett, priorities com- 
missioner; Hugh A. Frayne, labor commissioner; Col. Palmer E. 
Pierce, Army representative; Rear Adm. T. F. Fletcher, Navy 

6» Exhibit No. 1251. 

7' Ibid. 

'1 Exhibit No. 1269. 


representative; Bernard M. Baruch, commissioner of raw materials; 
and Frank A. Scott, chairman of the board. ^^ 

In March 1918, the President separated the War Industries Board 
from the Council of National Defense and made it responsible directly 
to himself. Later in that same month the Price Fixing Committee 
was organized, also as an independent body reporting directly to the 
President. It is stated in the report of the War Industries Board " 
that, "It was the purpose of the President in choosing the committee 
to name on it no one having a personal financial interest in any result 
of the committee's recommendations." 

The War Industries Board itself was divided into 57 commodity 
sections which were relied on for the information which was the basis 
of the development of policy and its administration of those pohcies. 
There were also created war-service committees to represent the 
various industries whose interests were involved before the Wai 
Industries Board. According to the report of the War Industries 
Board ^* "a war service committee spoke and acted as agent and 
representative of an industry and not as agent of the Board." 

Judge Gary, of the United States Steel Co., however, did not think 
of the war service committee as representing industry alone. At the 
meeting of the Price Fixing Committee with the representatives of the 
iron ore, pig iron, and steel industries held June 21, 1918, he said; 

Our committee does not appear here as an advocate, but more as a judge or as 
an advisory committee, having in consideration the interests of the Government 
and the interests of the steel producing and the iron producing fraternity. "^ 

^ATien this statement was presented to Lieutenant Colonel Harris, 
Director of the Planning Branch of the War D epartment, he testified: 

I do not know what he could mean by that. Certainly the detailed negotiations 
of that particular conference would show that Judge Gary was not a judge on that 

In the minutes of the Price Fixing Committee March 20, 1918, 
Judge Gary stated his conception of the relationship between the 
Government and the manufacturers: 

We are anxious to get at facts and figures, and to arrive at some conclusion 
that is fair and reasonable to all concerned. If it was a question of bargain 
only, then the manufacturers would be trying to secure as much as possible for 
their product, and your board would be endeavoring to secure as low prices for the 
Government, its Allies, and the general public as possible. But we don't feel lilce 
approaching the subject from any such point, and I am sure you don't. ^^ 

That there was no dealing at arm's length between the Government 
and business was further indicated by the statements of Mr. Brookings 
at the same meeting made in response to Judge Gary's remarks: 

We appreciate the attitude the steel people have always shown. We are in 
entire sympathy with practically all of the things you have stated. None of us 
are steel people and therefore we have been perfectly willing to be more or less 
guided by you, and I think we have been wiseh' guided. ^^ 

'2 Report of the War Industries Board, p. 22. 

" P. 78. 

■< P. 103. 

« Exhibit No. 1273. 

'« Lieut. Col. Harris, Dec. 14, 1934. 

" Exhibit No. 1270. 

" Ibid. 

11579 — 35- 


In fact the steel industry through a committee of the American 
Iron & Steel Institute was given the work of computing the price 
differentials for finished steel products. The Government only fixed 
the raw material prices."^ 

An indication of the War Industries Board's varied work with 
complex problems, which offered opportunities for industrial mem- 
bers of war service committees to give advice which controlled 
decisions, may be gathered from the committee's study of the pro- 
ceedings of the Board from December 10, 1917, to January 10, 1918. 
This covers only the meetings held by the Board and does not include 
the many problems that were presented to it outside of meetings. 
The following tabulation is of dates of meetings and of the subjects 
presented: ^^ 

December 10, 1917. Special meeting to consider steel prices with representatives 

of the steel industries. 
December 13, 1917. (1) Plan from war minerals committee to increase supply of 

pyrites; (2) arrangments covering royalties for Lewis machine gun patents; 

(3) compact for power for Muscle Shoals nitrate plant. 
December 14, 1917. Special meeting with copper industry to consider conditions 

as bearing on possible revision of prices. 
December 20, 1917. Royalty agreement with Flurscheim for manufacture of 

T. N. A. 
December 21, 1917. Order for smokeless powder with Aetna Explosives Co. 
December 22, 1917. Price fixing of steel. 
December 24, 1917. Price fixing of steel. 
December 28, 1917. Price fixing of steel. 
January 2, 1918. (1) Attitude of Swiss manufacturers; (2) order for 30,000,000 

pounds of smokeless powder from the Hercules Powder Co.; (3) action to 

secure necessary raw materials for explosive program; (4) request for assistance 

in securing explosives from Ordnance Department; (5) cooperation of Allies. 
January 4, 1918. (1) Crude T. N. T. explosives; (2) price fixing of nickel. 
January 9, 1918. (1) Price fixing of copper; (2) price fixing of aluminum. 
January 10, 1918. Price fixing of aluminum. 

At the December 10, 1917, meeting to consider steel prices a large 
number of businessmen representing the steel industry were present. 
A list of the men, with their industrial connections, follows: 

Representing the steel industry: F. N. Beegle, president, Union Drawn Steel 
Co., Pittsburgh, Pa.; James B. Bonner, representative, American Iron and Steel 
Institute, Washington; James A. Burdon, president, Burdon Iron Co., Troy, 
N. Y.; E. A. S. Clarke, president Lackawanna Steel Co., New York, N. Y.; 
A. C. Dinkey, president, Midvale Steel & Ordnance Corp., Philadelphia, Pa.; 
James A. Farrell, president United States Steel Corp., New York, N. Y.; W. J. 
Filbert, comptroller United States Steel Corp., New York, N. Y.; Judge E. H. 
Gary, chairman United States Steel Corp., New York, N. Y.; F. H. Gordon, 
gen. mgr. of sales, Lukens Steel Co., Coatesville, Pa.; E. G. Grace, president 
Betlilehem Steel Co., South Bethlehem, Pa.; W. S. Horner, president Nat'l 
Ass'n of Sheet & T. P. Mfrs., Pittsburgh, Pa.; A. F. Huston, president Lukens 
Steel Co., CoatesviUe, Pa.; Eli Joseph, member of firm, Joseph, Joseph & Bro., 
New York, N. Y.; Willis L. King, vice president Jones & Lauglilin Steel Co., 
Pittsburgh, Pa.; W. Vernon Phillips, president, F. R. Phillips & Sons Co., Phila- 
delphia, Pa.; Karl C. Roebling, gen. mgr. of sales, John A. Roebling's Sons Co., 
Trenton, N. J.; Chas. M. Schwab, chairman Bethlehem Steel Co., South Beth- 
lehem, Pa.; John A. Topping, president Republic Iron & Steel Co., New York, 
N. Y.; Roy A. Rainey, Rainey Coke Co., New York, N. Y.; Scott Stewart, ass't 
to Roy A. Rainey, Rainey Coke Co., New York, N. Y.^i 

The chairman of the Board did not conceive of the function of 
these men as simply to plead the cause of the steel industry. He ex- 
plained — 

79 See infra, pp. 104, 106. 

80 Exhibit No. 1271. 

81 Ibid. 


that while the cost data in course of preparation by the Federal Trade Commis- 
sion was not yet at hand it had been felt advisable to call the representatives of 
the steel industry to Washington to discuss the general situation as brought about 
b}'^ the prices fixed and by general conditions in order that the Board could ap- 
proach the subject more intelligently and a decision be arrived at more expe- 
ditiously when the Federal Trade Commission data came to hand, it being under- 
stood that in the terms of the previous price agreements it had been stipulated 
that prices would be reconsidered prior to January 1st, 1918.^^ 

Even when the cost information was available, the lack of familiar- 
ity of the Government officials with it encouraged reliance upon the 
interpretation of this information offered by industrj-. In Garrett, 
Government Control Over Prices, it is stated, "Neither the price- 
fixing committee nor the Food Administration to any extent availed 
themselves of a detached scientific committee whose business it was 
to analyze for them and interpret cost sheets prepared by the Federal 
Trade Commission." ^^ 

In fact, there were occasions when the cost information of the 
industry regulated was substituted for that of the Federal Trade 
Commission. When the fixing of tanning prices was considered, the 
Federal Trade Commission's figures showed an average cost of 12 
cents. Figures were presented by the industry showing costs of 13.5 
cents. Prices were fixed on the basis suggested by the tanners.^* 

The following table which has been prepared by this committee's 
staff indicates some of the industrial connections and sources of 
income of the principal officials concerned wdth the work of price 
fixing and the general control of industry during the war: 

82 Exhibit No. 1271. 

83 P. 179. 

8< Ibid., p. 321. 




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The policy of setting prices at cost of production plus a reasonable 
profit involves the necessity of procuring accurate cost information. 
Profits and prices increase as unjustifiable additions to cost are 
allowed and failure to note decreases in cost persists. The oppor- 
tunities for such errors are numerous. 

(a) The necessity for estimating future costs. — -Prices must bs set for 
a substantial period of time in the future since it is obviously im- 
possible from the standpoint of Government and business alike to 
have continued price redeterminations. It is therefore necessary for 
the Government body to take account of probable future changes in 
cost, upon which the price is supposedly based. In doing so, it should 
be recognized that there will be at least as great force in the mainte- 
nance of production contention as in the motive to limit profits and 
inflation, especially since producers can point to the general condition 
of increasing war-time cost. 

Price fixing for the aluminum industry in the World War indicates 
the tendency of price-control bodies to err on the side of generosity. 
At a meeting of the Price Fixing Committee held May 9, 1918, Mr. 
Brookings said: 

We felt after hearing all Mr. Davis [president of the Aluminum Co. of 
America] had to say about it, and taking into consideration the probable increase 
as raises [sic] were going up, and we fixed the price at 32 cents. ^^ 

Since the costs of the Aluminum Co., practically the only producer, 
were 17^2 cents a pound by their own statement ^^ and 15}^ cents 
according to the Federal Trade Commission,*'^ this price of 32 cents 
a pound was certainly designed to cover any probable increases in costs. 

With this consideration in mind, it becomes very important that 
cost figures be as recent as possible. Yet we find that in the World 
War, acc-ording to the chairman of the Price Fixing Committee, rehable 
figures could not be obtained for a period closer than 2 months prior 
to the Committee's meeting. Mr. Brookings said at a meeting with 
the copper representatives: 

We have gone into that very exhaustively and as I have explained to you, 
we have had the cost sheets for the month of March; that is the latest month 
we could get; we never can bring figures much closer than 60 days to a meeting 
of this kind if we get reliable figures. ^^ 

Where a single price is to be determined, it is necessary to obtain 
figures of the proportion of the output coming in at the various costs 
in order to determine the point of marginal production. According 
to the report of the War Industries Board, the time required for the 
completion of such studies was in some cases more than 3 months: ^^ 

As the exigencies of the day pointed to industrj^ after industry as necessary 
fields for the exercise of price control, the Federal Trade Commission was invited 
to assign to each a corps of these experts to investigate and report on the costs of 
production. The studies usually extended to all producing plants, or where this 
was impracticable, to a large number of typical plants, from the lowest to the 
highest cost producers, and their prosecution required usualh' from 1 to 3 or 
more months. 

It should be recognized that these time estimates were for the rela- 
tively limited scope of price fixing in the World War. Retail prices, 

« Minutes of Price Fixing Committee, May 9, 1918. 

98 Ibid., Jan. 9, 1918. 

8' Ibid., May 9, 1918. 

89 Ibid., May 22, 1018. 

*» Keport of War Industries Board, p. 76. 


with the exception of food and fuel, were generally unregulated ^° and 
in the field of wholesale prices only 573 of the 1,366 commodities com- 
prising the War Industries Board Price Index, were subject to control 
at the termination of the war.^^ Furthermore, in the case of iron and 
steel, the Government only set the prices of the basic raw materials. 
It left the task of determining thousands of price differentials for the 
finished products to the American Iron and Steel Institute.^- Ob- 
viously, if a scheme such as the suggested price ceiling were adopted, 
the delay would be multiplied many times oyer. 

(b) Cost padding. — In addition to bald misstatements of amounts, 
it is possible to manipulate accounts so that what normally appears 
on the financial sheet as profit is converted into cost. Inventories 
may be over-valued and depreciation reserves increased to levels which 
are distinctly not usual. 

On other cost items, padding enables business to reap a double 
advantage at the expense of the Government. Extravagant increases 
in salary are made to justify price advances, at the same time that the 
recipients are gaining exceptional benefits therefrom; similarly new 
construction of capital facilities is accounted for as an operating cost 
of making repairs. 

The incentive to engage in this type of practice is especially strong 
where the individual price system is used, as was the case in the 
World War Food Administration, because of the direct connection 
between the individual producer's price and cost. This increases 
with impairment of the possibility of effective check-up, and where 
there is no auditing of cost records whatever, manufacturers can, of 
course, use these devices with impunity. Surprising as it may seem, 
the Milling Division of the Food Administration at one time refused 
to avail itself of the independent auditing facilities of the Federal 
Trade Commission because it — 

took the view that it was not its business to police the industry and that to dis- 
cipline millers or to attempt anything of the sort would perhaps defeat that 
spirit of voluntary cooperation which it was anxious to develop. ^^ 

The result has been described as follows: 

Not a few millers took advantage of the situation and loaded their cost reports 
with improper items. Some came to believe that they would never be investi- 
gated or molested if they should pad their cost reports. Such items as new con- 
struction and equipment, largely increased salaries to officers (in some cases made 
retroactive to include a fiscal period closed before the beginning of Food Adminis- 
tration control), bad debts of ancient standing, excessive depreciation charges, 
losses on miscellaneous outside investments, etc., were added to current costs of 
production and so charged to the consuming public. Under the conditions of 
demand which then existed prices inflated in this way could be easily obtained 
for the flour; in fact, flour could be sold for almost any price limited only by the 
flexibility of the seller's conscience. "■* 

In the case of the steel industry, where a single price was set, the 
Federal Trade Commission was able to make only a limited cost 
study directly from the books of companies. This inquiry was 
begun in June 1917 and was confined to the c[uestion of the costs of 
plates and shapes. It was also limited to the few large companies 
which were responsible for the greater part of the country's steel 

>" Qarrett, op. cit., p. 550. 

«i Ibid., p. 417. 

»a Ibid., p. 267. 

03 Wilfred Eldred, Wheat and Flour Trade, 1917-18, Quarterly Journal of Economics, vol. 33, p. 47. 

M Ibid., p. 47. 


capacity. However, it was not until September 8, 1917, that a 
brief summary report was made to the President. ^^ 

Thereafter the Government rehed primarily on the monthly cost 
sheets that were sent in by the companies. The plan of ascertaining 
costs directly from the books was ruled out by the practical circum- 
stances of the war. The necessity for speed in handling a great 
volume of work — the Commission received over 5,000 cost sheets per 
month — also restricted the process of checking up on the accuracy of 
the cost sheets. It was only in the cases of important high-cost 
companies, where "the figures seemed as if they might possibly be 
inaccurate", ^^ that the Commission asked explanation or correction 
by correspondence. Comparison of the figures on the sheets with 
those on the books of account was probably confined to an even smaller 
number of cases. 

That reliance simply on the uncorroborated statement of the 
producers would result in a general tendency to overstatement of cost 
and understatement of profit may be seen from the fact that companies 
urged higher prices on the ground of inabihty to profit from the low 
levels, although later check-ups showed high earnings. The Federal 
Trade Commission letter of June 1918 on profiteering stated: 

Recently, mills in class 3 made objection that the Government prices were 
too low for them. A special examination of their profits by the Federal Trade 
Commission showed that in almost every case these objecting mills were enjoying 
unusual returns. The following table of percentage of return on investment in 
10 mills in class 3 will show the profits in 1917: ^^ 

Alan Wood Iron & Steel Co 52. 63 

AUegheny Steel Co 78. 92 

American Tube & Stamping Co 40. 03 

Central Iron & Steel Co 71. 35 

Eastern Steel Co 30. 24 

Forged Steel Wheel Co 105. 40 

FoUansbee Bros. Co 112. 48 

Nagle Steel Co 319. 67 

West Penn Steel Co 159. 01 

West Leechburg Steel Co 109. 05 

At a meeting of the Price-Fixing Committee with the copper pro- 
ducers, Mr. Brookings made the unquahfied statement that his figures 
were absolutely contrary to those of the industry every time the latter 
were presented: 

We told you the figures were so conflicting that we had little confidence in 
them. We are going to get the facts; we are going to find some ways and means 
of taking care of the small producer. We want information. Every time you 
presented anything, I presented other figures that were absolutely contrary, 
based upon such information as we had on some of these low-cost producers — 
based upon the conditions as they have existed for years as well as they exist 
today .93 

The tendency to shape figures with an eye to the necessities of 
Government regulation is illustrated by the following letter which 
passed between the members of Swift & Co.:^^ 

Chicago, November 26, 1917. 
Mr. Edward F. Swift, second floor: 

We have had a virtual statement from Mr. Cotton that the Government ex- 
pects to establish profit control in the leather industry. With this notice, I think 
we should at least consider the advisability of reappraising the properties of the 

95 Federal Trade Commission Report on War-Time Profits and Costs of the Steel Industry, p. 44. 

«» Ibid. 

«' 65th Con?., 2d sess., S. Doe. No. 248, p. 9. 

»9 Exhibit No. 1711. 

«' 65th Cong., 2d sess., S. Doc. No. 248, pp. 16 and 17. 


following companies: A. C. LawTence Leather Co., National Calfskin Co., Win- 
chester Tannery Co., St. Paul Tannery Co., Ashland Leather Co., St. Joseph 
Tanning Co. (in which we have only 50 percent ownership). 

If it is agreeable to you, will arrange with Mr. Moon to go into the matter and 
submit figures. Awaiting your reply, 

Louis F. Swift. 
I approve if done quietly and promptly. 

L. F. S. (Sic) 

Even where the Government made strenuous attempts to audit and 
check the costs stated by business, the process of auditing was found 
to be difficult, slow and expensive. As an indication of this, the ex- 
perience in checldng the Bethlehem Shipbuilding Company's books in 
regard to its war-time contracts with the Emergency Fleet Corporation 
may be cited. The announced policy of the management of the 
parent company, the Bethlehem Steel Corporation, was one oi coop- 
eration with the Government auditors. The following situation, 
however, prevailed at the shipbuilding company's Harlan plant 
located in Wilmington, Del., according to the final report of the 
Government auditor:^ 

The working conditions at this plant were very unsatisfactory. 

The works accountant was far from even being agreeable and his assistance 
during the whole period of reaudit was practically useless and of no value _ what- 
ever. The WTiter cannot recall even one instance where anything but mislead- 
ing replies were given to questions asked pertaining to a proper solution of the 
various questionable conditions that were brought to light throughout the entire 
course of the reaudit. * * * 

Certain valuable cost records pertinent to our needs on the overhead audit 
were withheld, some were never handed over, and others given after we were 
forced to build up the costs from amounts shown on controlling- journal vouchers. 

Of those cost records which we were unable to obtain, the entire stores requisi- 
tions for the years 1916 and 1917 and a part of 1918, 1919, and 1920, totaling 
about $30,000, were an outstanding feature. 

Of those records which the contractor withheld until we had completed our 
build-up, the following were the most important: 

1. Detail cost ledger for repair and renewal orders. 

2. Contractors' detailed statement of items credited cost and charged dis- 
allowed cost. 

The time employed to work up these two features practically covered a period 
of six months for each of three auditors. This is a conservative estimate. 

Many Journal entries were made without any explanatory reference; this 
feature consumed considerable time in order to determine the true nature of such 
entries; working papers showing detail were evidently destroyed; in fact Beth- 
lehem relied on memory to give an explanation of these entries. Other entries 
purporting a description were entirely misleading. 

Even if there had been active cooperation on the part of all the 
company officials, an effective audit would have been extremely 
difficult. A current audit was carried on while the ships were being 
built but, according to a report by the construction auditor of the 
Shipping Board, it was necessarily a superficial job.^ In the first 
place, the Emergency Fleet Corporation was short-handed. Whereas 
the Navy Department had about 70 auditors at Bethlehem's Alameda 
plant and 100 at Fore River, it had only seven men at Alameda and 
about twelve at Fore River. From seventy to a hundred men are 
required at a single plant of one company for a thorough current 
audit. Furthermore, the different Government auditors at the five 
plants failed to agree as to what should constitute cost.^ 

1 Report of C. C. Colliflower, traveling auditor of U. S. Shipping Board Emergency Fleet Corpora- 
tion, on Audit of Operating Expenses of Harlan Plant, Beth. Ship. Corp., January 1916 to December 1920, 
inclusive, p. 1 S. 

- Report of J. A. Hou-;ick, General Scope of the Audit of Bethlehem Shipbuilding Corporation Records 
U. S. S. E. E. F. C. Nov. 2-1, 1934. 

3 Ibid. 


Because of the ineffective character of the current audit, it was 
decided in the early part of 1920 that a reaudit was necessary. This 
work was first entrusted to a private accounting firm. After this 
firm had been at work for over a year and had been paid about 
$600,000, they were ordered to stop, on the ground that the results 
of their audit were of no use to the Government.* The Emergency 
Fleet Corporation auditors then undertook to finish the job and did 
so about two years after it had been begun. 

The Lukens Steel Co. case offers another instance of cost padding 
by means of which it was possible for industry to maintain high 

Mr. Baruch testified before the Graham committee that as to the 
prices of plates: "There was a concern, the Lukens Iron & Steel Co., 
which made it impossible for us to give the price for steel plates 
lower than we did." ° According to his testimony, this company was 
a high-cost producer: 

The Lukens production was made at a loss, but we held the price down with 
the understanding that they would get pig iron at a price that would enable 
them to get out with a profit. Thej" were not an integrated plant. For in- 
stance, Uke the steel corporation or others, they had no blast furnaces and no 

On December 22, 1917, at a meeting of the War Industries Board, 
proposal was made for a study of Lukens and other high-cost pro- 
ducers to determine whether special arrangements should be made 
to continue them in operation because of the claim that they could 
not produce at a profit under the existing level of prices : 

The case of the Lukens Steel Co. was discussed and the point brought out 
that in accordance with data submitted that company could not produce plates 
at the price fixed at a profit. Accordingly it was moved, seconded, and 
unanimously carried that investigation be made of the actual price the Lukens 
Co. and other companies who claim that they are unable to produce at a profit 
at the prices fixed are receiving for the purpose of determining from actual 
prices received and the profits so disclosed whether these companies can continue 
at the present prices or whether some other arrrangement covering their specific 
cases should be made.'' 

The committee has found, however, that in the same year the 
Lukens Steel Co. made a profit of 90 percent. Its net taxable income 
for 1917 was finally determined by the Bureau of Internal Revenue 
to be $8,639,477, a 90.1 percentage of its invested capital before taxes. 
After taxes were paid, the percentage was 60.5. In 1918 its net tax- 
able income was $6,181,250, which was 22.2 percent of its invested 
capital. The effect of taxes in that year was to leave a net income 
after taxes of 19.7 percent; * moreover, in 1918 conditions for the 
Lukens Co. were apparently good enough to warrant the retirement 
in cash of more than $6,000,000 of preferred stock.^ 

The devices used by this company in its attempt to frustrate 
the accurate ascertainment of its costs has been described in a 
Federal Trade Commission report, which is reproduced in part: 

The data obtainc^l by ]*\Ir. Kccver at his f rst visit showed merely the com- 
bined cost of all sheared plate mills of the Lukens Co. and subsequent informa- 
tion obtained from the company has also shovrn the costs in the same waj'. This 

* Ibid. 

« Bernard M. Baruch, Mar. 29, 1935 (gaUey 91 BBQ). 

e Ibid. 

7 Bernard M. Baruch, Mar. 29, 1935 (galley 91 BBQ). 

s Exhibit No. 1738. 

« Ibid. 


has a misleading effect, as the total cost so shown is compared, when under con- 
sideration, with the selling price fixed by the Government, namely, $3.25 per 100 
pounds for sheared plate, and the fact that extras are allowed for sizes, gages, 
etc. It, therefore, becomes necessary- to find the cost of plates, rolled on the 
different mills, so that a fair comparison may be made between the selling price 
of the particular products and the cost price, the selling price, of course, being 
$3.25, plus extras. 

Whilst the company is, of course, making no false returns, the impression 
created is that it is not above allowing incorrect conclusions to be drawn and that 
it would not object to assisting to the formation of such incorrect conclusions, 
provided they were in its favor. As supporting this idea, whilst Mr. Hoover 
knew of the existence of the iron-ore concern and also of the blast furnaces, when 
we sent the company a letter on November 20 telling it to make returns of all 
its costs, it was specifically stated that if any subsidiary companies were controlled, 
those companies were also to make their returns. We had no returns from the 
subsidiary companies until we rediscovered the existence of them. Furthermore, 
the company's action in compounding the costs of three different-sized mills 
appears to be for the purpose of showing a high cost; and when its representatives 
appeared before Commissioner Davies they continued to claim loudly that their 
cost was above the Government price of S3. 25, which, whilst being perfectly 
true, has no bearing on the matter, as they are not getting $3.25, but $3.25, plus 
extras. They have also said nothing about the profit on pig iron or iron ore at 
the Government price, rather giving the impression that they are a no. 3 classed 
company, which has to buy its pig iron in the open market; whereas, in point of 
fact, a considerable proportion of their pig iron could, no doubt, be purchased from 
their subsidiary company, whether, in fact, such is done or not. 

The company reorganized about October 1916 from the Lukens Iron & Steel 
Co. to the Lukens Steel Co., and at this time increased its capital from $500,000 to 
$22,500,000. No doubt, in the past its operations have been so profitable that 
this was merely issuing stock for surplus. When we were making inquiry to 
determine the costs of investment in various iron and steel operations, we sent a 
request to the Lukens Co. to give us particulars concerning their investment. 
The information which they supplied was of the most meager description, con- 
sisting merely of two figures: Plant and property, approximately $9,000,000; 
and working funds, $5,000,000. If Mr. Basset is the accountant which Mr. 
Hoover believes him to be, it seems absurd to suppose that the information 
which we requested in our communication could not have been furnished in detail. 

With regard to the profitableness of the company's operations, it is worthy of 
note that the profits reported for the months of July, August, September, and 
October, before providing for Federal taxes and writing off $300,000 for bad 
debts in October, amounted to considerably over a million dollars in the remaining 

In response to the Commission's request for information concerning the invest- 
ment particulars and profit and loss figures, the Lukens Co. desired to know the 
authority under which the Commission was acting. 

The personal attitude of Mr. Gordon, who has represented this company in 
various interviews, is that of a very injured party, and it may be that this is 
assumed in order to make Mr. Basset justified in making the statements which 
he does about the unprofitableness of the company's operations. 

The company has definitely refused to make plates for the Government at 
$3.25. The Steel Corporation appears to be able to make plates profitably at 
this price, and there seems to be no reason why the Lukens Co. should not do 
so, when they have very large equipment both in open-hearth capacity and plate- 
mill capacity. The company now has the largest plate mill in the world, namely, 
204 inches, and as they have, at any rate, pig-iron capacity which, even if not 
used for their own operations, can be sold at a profit, so that the effect is that the 
company for part of its requirements, at any rate, is as well integrated, with the 
exception of coke, as some of the bigger steel companies, only inefficient opera- 
tions can run their costs up to the point where their operations are unprofitable-^" 

Other supposedly high-cost steel companies made excessive profits 
at the same time that their cost position was being used as a justifica- 
tion for fixing high prices. The Otis Steel Co., which is cited in a 
Federal Trade Commission Report ^° as being in the same class of 
integration as the Lukens Steel Co., made a profit of 139 percent in 

»» Exhibit No. 1739. 


1917, according to the final determination of the Bureau of Internal 
Revenue.^^ In that year, on an invested capital of $7,154,632, this 
company made $9,989,355 before taxes, the function of which had been 
described by Judge Gary as equalizing the profits of the low-cost 
companies with the "reasonable profit" that the high-cost company 
would obtain from the fixed price. Even after taxes were paid, the 
income of the Otis Steel Co. amounted to 74 percent of its invested 

capital. o. 1 /-I J 

Another company m this cost class, the Allegheny bteei Co., accord- 
ing to its own tax return, made $6,832,100 in 1917, amounting to 112 
percent of its capital of $6,060,999.1' After taxes were paid, its net 
income still amounted to 60 percent of its capital. 

The effectiveness of auditing cost records, like the effectiveness of 
the Bureau of Internal Revenue's settlement of tax returns, is limited 
by the judgment nature of many items of cost. Especially is this 
true of depreciation and depletion where valuation, with all its attend- 
ant difficulties, is involved. Here also we find that it was a matter 
for agreement and adjustment between the Government and the 
producer. At a meeting of the Price-Fixing Committee, Mr. Brook- 
ings stated: 

We have here before us the production of all these properties. To show you 
the amount of detail when we gather eight or nine hundred producers tlmt are 
producing fifty million, it won't look as queer. We have found dithculty 
in some of these costs. We have had cost sheets presented to us of twenty-three, 
twentv-four, twentv-five, or twentv-six cents, whatever the case may be, and 
when we have analvzed them, we have reduced them to nineteen cents or some- 
thing like that. Tliey have put in other things that are their views as to depletion. 
Mv own experience teaches me that the average man is as hones u as i am; i try 
to be honest; that is all I say. There are different methods of accounting, different 
methods of arriving at these things. When we changea cost, we generally do it 
with the consent or acknowledgment of the party; that is fair.^^ 

An important factor decreasing cost that was not taken account 
of was the intercompany profits of well-integrated companies which 
appeared on the books as costs. 

Usual sources of such profits were the payments to subsidiary 
companies of regular market prices by the parent organizations lor 
raw materials or transportation. Prices fixed on this basis omitted 
to account for the profit wliich the parent company was gaining by 
doing business with itself. This also meant that the full advantages 
of in°tegration were not being passed on to purchasers, of whom the 
largest was the Government. 

The extent of the disparity between actual cost to the subsidiary 
and sale price to the parent company appears in the following dis- 
cussion in the Price Fixing Committee regarding the provision ot 
bauxite for the Aluminum Co. of America: 

Mr. Taussig. What is the reportion [proportion?] of your consumption of 
bauxite as compared with the others? „* +v^ 

Mr Davis. I suppose we use perhaps 66%% of the total consumption of the 
country; we produce practically all there is produced m this country. 

Mr WoosTER. You fixed the price on it? Do you say it is selling at $10.00 a 
pound [ton?] that is your price, and you practically make the price on bauxite 
throughout the United States? ,, ^ , i i „„^ 

Mr Davis. That never has been the case, because the French people have 
always fixed the price on bauxite. 

11 Exhibit No. 1740-C. The succeeding data is from the same source. 

12 Exhibit No. 1740-B. 

13 Exhibit No. 1406. 


Mr. WoosTER. What is the duty? 

Mr. Taussig. It is free. 

Mr. Brookings. That same question came up before and we simplj' side- 
tracked it and said, we are treating your investment and capital as one, and j'our 
return on your capital, and to be consistent, inasmuch as you had fixed the price 
under which bauxite is sold, we must take the cost to you, and the cost to you is 
what we have given you credit for. 

Mr. Davis. Our contention in that is a little different, I think, from what j'ou 
put it. As a matter of fact, 25 or 30 years ago, we having practically invented the 
use of bauxite for aluminum, bauxite was nothing but dust with no value, but 
we went to our concern, and of course we did not realize how large this industry 
was going to grow and we bought for two or three hundred thousand dollars some 
bauxite land. We have spent nearly $2,000,000 for bauxite, within the last two 
years, in cash. My point, is Mr. Brookings, that because we were fortunate 
enough to buy this bauxite 30 years ago at a cheap price that anybody should 
say tliat aluminum can be made with bauxite at 25 cents a ton, for it could not, 
unless somebody should take our place. 

Mr. WoosTER. The fact is that it is made for that. It costs you $0.50, I 

It was not until less than a month prior to the armistice, that the 
Chairman of the Price Fixing Committee stated he had discovered 
the United States Steel Corporation to have been maldng an inter- 
company profit on the cost of rails: 

The chairman announced that contrary to his previous understanding, he had 
discovered that the United States Steel Corporation's cost figures on rails are not 
strictly integrated, and that there is about a $5 per ton intercompany profit, a 
part of which might possibly be charged to transportation. i^ 

(c) The ratio method oj price determination. — It has been suggested 
that many of the difficulties of the cost method of price determination 
can be avoided by simply revising prices according to a ratio method: 

The beauty of the price ceiling is that adjustment upward of depressed seg- 
ments where increased production is required is a matter of calculating ratios and 
not of intricate studies. Also, with a ceiling put over even a dislocated structure, 
segments that are too high or too low can be adjusted downward or upward in 
the same manner. In neither case is there necessarily a question of computing 

There are limitations on the use of tliis device. As Mr. Baruch 
has stated in liis testimony before the War Pohcies Commission, down- 
ward price revision requires cost studies: 

It is a much more difficult thing to revise maximum prices downward than to 
revise them upward. It requires exhaustive cost studies and long and difficult 

It can readily be seen that in time of war, when production is a vital 
consideration, no action mil be taken to lower prices until it is defi- 
nitely ascertained that necessary production will not be lost. This 
requires information as to the costs at which the various proportions 
of output are being brought in. 

The World War experience was that lack of cost information de- 
layed downward price revision. 

The efforts of the War Industries Board to fix the prices of cotton 
textiles are in point. The Board met and fixed a price but, "there 
was a decided absence of cost data. Several requests had been made 

'< Minutes of the Price-Fixing Committee, May 9, 1918. 

:5 Ibid Oct. 21, 1918. 

16 Supplementary statement of Bernard M. Baruch, Apr. 12, 1935. 

1" War Policies Commission Hearings, op. cit., p. 807. 


for such data, but the representatives of the industry claimed that 
the time required for their collection and compilation would be too 
long to make them available for immediate use."^* When price re- 
vision was considered, "the same lack of cost information held up 
negotiations. Indeed, 'the failure of a large number of cotton mills 
to submit their cost sheets ' resulted in the postponing of any revision 
until November 16."^^ When cost data finally were obtained, the 
Government found that under the original price a profit considerably 
larger than 25 percent on plant investment was being made.^'^ 

Again, in the case of sole and belting leather: "It was not until the 
middle of July 1918 that the question of sole leather prices was taken 
into consideration by the Price-Fixing Committee and even then, 
because of lack of sufficient cost data, no definite action was taken. "_^^ 

Upward price revision requires cost information if any attempt is 
to be made at profits hmitation. Readjustment upward cannot be 
confined to the pre-war price; it will, in the usual case, be set above 
that level. The very fact that high-cost producers were unable to 
operate at normal pre-war prices indicates the necessity for this. 
It should be remembered that although the August 1914 price for 
wheat was $1.07 a bushel, the war-time minimum price was fixed at 
$2.26 per bushel to stimulate production. Cost determinations, no 
matter how difficult, are necessary to keep some check on the impulse 
to raise prices. 

If profits are to be limited, costs must also be determined in situa- 
tions analagous to Mr. Baruch's illustration of the cost decrease re- 
sulting from increased production (supra, p. 68). He has stated the 
process as follows: 

Mechanical mass production brings low costs, but only when the machines are 
operating close to capacity * * *, , • u c j 

These machines represent enormous aggregations of capital, on which fixed 
charges are very great * * * when they are speeded the results in reduced 
cost per unit are sometimes almost fabulous. 22 

Failure to take this into account means that "even with a fixed 
price structure and a high excess-profits tax there will be huge 
profits." '^ 


In addition, there are the profits which accrue to sellers, who by 
wholesale nonobservance can easily render ineffective price schedules 
which they do not consider satisfactory. 

In the field of price enforcement, as in that of taxation, it is neces- 
sary to distinguish between avoidance and evasion. The former 
method of defeating governmental rules works itself out legally by 
following the rules and taking advantage of the loopholes therein. 
For example, in the World War, millers defeated the regulation liniit- 
ing them to a profit of 25 cents per barrel of flour by creating jobbing 
departments in order to get the additional jobbers profit of 50 to 75 
cents a barrel. 

18 Garrett, op. cit., p. 298. 

i» Ibid, p. 301. 

80 Ibid, p. 302. 

>i Ibid, p. 322. 

23 War Policies Commission hearings, op. cit., p. 799. 

M Ibid. 


According to Eldred, Wheat and Flour Trade: 1917-18 ^*— 
Out of some 1,500 mills reporting their costs to the Food Administration under 
the voluntary agreement 439 had separate jobbing departments on June 18, 1918. 
In many cases these jobbing departments were new creations, designed to cover 
up profits in excess of the allowable maximum. It was an undoubted weakness 
in the rules which permitted and perhaps even suggested the creation of these 
bogus jobbing departments. 

Recent experience with the N. R. A.'s attempt to enforce minimum 
prices has uncovered the many possibilities for noncompliance in the 
complicated field of price regulation. For example, Dr. Corwin 
Edwards, technical director of staff of the Consumer's Advisory 
Board of the N. R. A., stated at the N. R. A.'s hearings on price 
policy that producers in the machined waste industry took advantage 
of the brand method of filing prices by simply changing the name of 
their brand if they wanted to change their price.^^ 

The relations between buyer and seller also offered devices for 
avoidance. Dr. Edwards stated that some wholesalers would sell 
to retailers at the prescribed price but would also give them adver- 
tising allowances which were much larger than those offered by com- 
petitors.-^ In the event of war where the purchaser would be anxious 
to make concessions, the process could be easily reversed; i. e., he 
would forego the usual allowances granted by the seller. 

The difficulties of preventing outright violation or "bootlegging" 
would become insuperable if prices were set at levels which business 
would not agree to in the first instance. In the World War, enforce- 
ment was a relatively minor problem because of the profitable nature 
of the fixed prices. It was the opinion of Commander John M. 
Hancock, the naval representative on the Price Fixing Committee, 
that enforcement of the price freezing plan, whose main feature has 
been pointed out to be the use of pre-war prices, would require ma- 
chinery which would not work, unless this proposal was merely intended 
for psychological effect: 

The only fear I have from having heard the discussion this morning is that it 
involves too much machinery, unless it is going to be a statute passed jirimarily 
for the effect it will have on people's minds. But if you are going to try to en- 
force it I am afraid it is going to involve too much machinery, and machinery 
that won't work.^' 

General MacAethur, chief of staff of the United States Army, 
testified before the War Policies Commission that attempting 
enforcement of the price-freezing plan would meet with antagonism 
and that in final result it would be largely gesture: 

Freezing of prices would appear to be a doubtful expedient because so many 
factors are involved that injustice must follow. Evasion and court appeals are 
inevitable. In the end the Government's efforts would probably be largely ges- 
ture. Attempts at enforcement would likely create antagonism, and the Gov- 
ernment would lose the essential elements of good will. Without complete and 
unstinting popular support no nation can hope to fight to victory. ^s 

2< Quarterly Journal of Economics, vol. 33, p. 48. 

2' C. D. Edwards, statement at N. I. R. A. price hearing, Jan. 9, 1935. 

28 Ibid. 

27 War Policies Commission Hearings op. cit. p. 155. One of the psychological situations which price 
freezing is designed to prevent has been described by Mr. Baruch as follows: " Destruction of domestic 
morale through a just and bitter resentment by soldiers, and their families (and indeed by all persons of 
fixed income) at the spectacle of grotescjuely e.xaggerated profits and income to those engaged in trade or in 
services for sale in competitive markets and the constantly increasing burden of bare existence to all those 
who are not so engaged. This is the greatest source of complaint of "unequal burdens." The present 
demands for "etiualizing burdens" and "taking the profits out of war" both go back to the single phenome- 
non of war inflation. There is no more important problem to solve — whether we consider it purely as a 
means to maintain the solidarity and morale of our people, or as the basis of our economic strength for war 
purposes, or to avoid war's aftermath of economic prostration, or on the broader grounds of humanity and 
even-handed justice." (Ibid p. 33.) 

2s Ibid p. 372. 

11579 — 35 T 


These difficulties of keeping the actual level of prices coterminous 
with the prices announced to the pubhc will be increased with the 
increase in the number of commodities and individuals regulated. 
Wliere all prices are to be regulated, as under the price-ceiling scheme, 
the task appears to be an administrative impossibility. Furthermore, 
it is necessary to remember that in addition to policing thousands of 
commodity prices and all the producers and seUers, whether wholesale 
or retail, in tliis country, it will also be necessary under Mr. Baruch's 
suggestion of a penal sanction against the buyer to supervise all 


The folly of relying upon any voluntary limitation of profits has 
been well demonstrated by the experience of the Government in the 
World War. This committee's investigation has developed the fact 
that the use by business of its power of forcing price concessions from 
the Government by making that a condition of continued production, 
which amounted simply to a "strike of capital"'^ was not uncommon 
and was not confined to the minority of industry. 

Mr. Baruch in his statement to the War Policies Commission has 
pointed out some of the inadequacies of cooperation in the prevention 
of inflation: 

Yet I venture to think that there is not one of those industrial leaders who 
would not heartily agree with me in saying, first, that it would be impossible 
to prevent general inflation by any Nation-wide convention as to price; second, 
that no one, no matter how generous, could agree to restrict his own price unless 
all other prices affecting him were restricted or unless his price were already so 
high that his profits were exorbitant, and, finally, that substantial price reduc- 
tions by agreement (even from highly profitable peaks) could not be secured 
unless those willing to agree through high-mindedness knew that the Government 
body with which they were dealing had some sanctions— some control with 
actual teeth or some disciplinary power to apply to recalcitrant or unwilling 
subscribers in the event of default.^o 

He has also indicated the lack of cooperation in the last war, 
especiafiy in the important iron and steel industry: 

I wish the record and my memories permitted me to agree with the picture 
presented bv these witnesses of each commodity group gathering around to hear 
our price determinations and then going away "enthusiastic for doing it. 1 
wish I could also agree that after a meeting of steel leaders with the becretaries 
of War and IS aw before the war "the effect of that kind of price control through 
leadership * * * was that the general price level of iron and steel prices 
went down after America went into the war." My recollection is of a long and 
tedious period of bickering attended at first by such public statements bythe 
President as "those who do not respond in the spirit of those who have given 
their lives for us on bloody fields far away may safely be left to be dealt with 
by opinion and by the law, for the law must, of course, command these things. 
I recall a bitter controversy between the chairman of the Shipping Board and 
the industry in June 1917 leading to the Pomerene bill which proposed to authorize 
the President to fix iron and steel prices and to commandeer the plant of any 
producer who failed to comply. I remember also what I am free now to relate 
since Judge Garv himself has said— in efiect— that he kept the steel industry 
from being nationalized. He was quite correct. Due to the inability of Govern- 
ment to reach agreement with the steel industry, I was compelled to— and did— 
secure authority from the President to commandeer certain companies in that 

2» Senator Nye said: "CaUing the attitude of the steel industry and the copper industry a strike I would 
suggest that the only difference between their strike and a strike oflabor was that in the case of the steel 
and copper people their strike was carried on behind closed doors. They won their stnke, if we c^n call it 
that. They won the higher price they were seeking, they woii higher profits as a result of their delaY, and 
the Government did not get as large a slice of the profits back m the way of taxes that t thought it was 
going to get \gain for that reason, it seems to me that we need the stillest kind of club to deal witn a 
situation like that in the future". (Mar. 29, 1935, Galley 2 WC). 

3» War Policies Commission Hearings, op. cit., p. 815. 


industry if it should become necessary. While all this was going on, the index 
figures of the United States Department of Labor show the following as to the 
prices of iron and steel: 

1917 — Continued. 

July 230.2 

August 227. 6 

September (price fixed) — 214.3 

November 143. 7 

1915 64. 7 


April 170 

Mav 182.7 

June 204 

As Commander Hancock expressed it in his testimony (p. 154) relating to price 
control through leadership and agreement: 

"* * * the President said to Mr. Brookings (chairman of the price-fixing 
commission), 'Let the manufacturer see the club behind your door.' " ^i 

Apparently, patriotism was in some instances confined to merely 
deploring the excessive profits that were being gained. Mr. Baruch 

I recall vividly that during the war, even after we had by price-fixing compelled 
a reduction of 35 percent from the peak index figure of iron and steel, and even 
after the 80 percent excess-profits tax was in effect, some high-minded and public- 
spirited steel men came to me expressing apprehension over the enormous profits 
they were making under our restrictive system operating at its best. The reason 
they were making such profits in spite of all we could do is made clear by the 
example I have given you. If to the enormous increase in profits shown by that 
example we add the profits due to a runaway market, the figures of profit become 
even more astouishing.^- 

(«) The Copper Industry. — Prior to the entry of the United States 
into the World War, the leading copper producers of the country 
responded to the appeal of the preparedness campaign and sold 
45,510,000 pounds of copper to the Government at a price of 16.67 
cents a pound. The arrangement was proposed by Eugene Meyer, 
Jr., according to the Report of the War Industries Board,'^ and was 
finally effected by Bernard M. Baruch. 

Mr. Baruch came to Washington early in 1917 to take charge of raw 
materials as a member of the Advisory Commission of the Council of 
National Defense. He commenced negotiation on the proposal and 
on March 13, 1917, communicated to Secretary of War Baker that 
the copper producers were anxious to meet the Government in a patrio- 
tic manner. High hopes were held out that a successful negotiation 
would serve as a precedent in the naming of prices that would result in 
large savings to the Government:^* 

Hon. Newton D. Baker, March 13, 1917. 

Secretary of TT'or, Washington, D. C: 
Have had conference with leading copper producers, who are anxious and desir- 
ous of meeting the Government in a patriotic manner to give them whatever copper 
the Government may need at the right time and a proper and fair price. This 
will apply not alone to their needs in a crisis but also the needs arising from the 
expenditures in their present preparedness campaign. They desire to know the 
approximate amounts needed and the approximate time for delivery. I wish you 
would take this matter up immediately, as I believe that it would result in establish- 
ing a precedent in the naming of prices for all raw material which would result in a 
large savings [sic] to the Government and which perhaps might affect contracts 
already given out and which might be most potent in causing coordination be- 
tween business and Government, which I understand was one of the underlying 
reasons for the President's desire in forming the council and its commission. I am 
sending a copy of this telegram to the Secretary of the Navy, as I deem it advis- 
able for the Army and Navy to act jointly in this matter. 

Bernard M. Baruch. 

31 72d Cong., 1st sess., H. Doc. No. 163, pp. 815 and 816. 

32 War Policies Commission Hearings, op. cit., p. 799. 

33 p. 131. 

« Exhibit No. 1690. 


The Secretary of the Navy replied to Mr. Baruch on March 14, 
1917, that a very large reduction in price could be effected because 
the average cost of production was about 10 cents per pound.^^ At 
this time electrolytic copper was selling at a price of approximately 
36 cents per pound to large buyers ^^ which represented on the basis 
of this cost estimate, an average per unit profit of more than 250 per- 

The 16^^-cent price granted to the Government in aid of its war 
preparedness campaign was based upon a 10-year average of pre-war 
prices. These years included the very high prices in the 3 years pre- 
ceding our entry into the war when the copper industry was selling 
to the Allies at the extremely large profits which have already been 
indicated. On the basis of the Secretary of the Navy's cost estimate 
the "gift" price to the Government was thus productive of an aver- 
age profit of 66% percent. Furthermore only 45,000,000 pounds of 
production were affected, 20,000,000 going to the Navy and 25,000,- 
000 to the Army, in contrast with the more than 2,000,000,000 
pounds of electrolytic copper which entered trade in 1917.^^ 

The price was determined March 20, 1917, after little more than a 
week of conferences by Mr. Baruch with the copper interests. The 
action of the industry was characterized in the following manner by 
Mr. Gifford who was then director of the Council of National Defense: 

This willingness to furnish the copper supply needed by the Government at the 
maximum concession in price, is a very gratifying evidence of the recognition of 
men in large affairs of their patriotic obligation and both War and Navy Depart- 
ments appreciate their generous and public-spirited attitude. '^ 

It has been indicated however in the testimony before this com- 
mittee that at about this time a great deal of talk was going on con- 
cerning the possibihty of commandeering. Senator La Follette and 
others having suggested thedesirabihty of conscripting industry and 
wealth as well as man power. It is clear that the action of the copper 
producers was later used as an argument against commandeering. In 
July 1917 when the Army's representatives told Mr. Baruch that they 
wished to commandeer copper from one company, which would be a 
convenience to the Army, he w^rote Secretary of War Baker suggesting 
that the copper be commandeered from all producers proportionately 
and stressed the helpfulness of the industry: 

Yesterdav afternoon Major Brett and Lieutenant WiUiams, of the Ordnance 
Department, called at my office and stated the needs of the Army to be 
5 000 000 pounds of copper, of which 500,000 pounds was for immediate delivery 
' The object of their visit was to discuss the commandeering of copper and 
thev desired to commandeer from one company, as that would be a convenience 
to them. I would suggest that if you intend to commandeer copper or anything 
else that you commandeer it from all producers proportionately. , . , , 

There inay be some misunderstanding but I think it would be particularly 
unfortunate 'and unfair if we should commandeer any article without aUowing 
the producers from which it is to be commandeered an opportunity to be heard. 
Also you will recall that the copper people were the first people who came forward 
in a helpful spirit at a time when it meant much.^o 

The price was apparently a very reasonable one for the producers 
and it is a certainty that no participant in this "gift" lost any money. 

35 Exhibit No. 1691. 

'" W^I'r^IndustriJs^ Board Price Bulletin No. 34, " Prices of Ferroalloys, Nonferrous and 
Rare Metals ", p. 23. 
3S Exhibit No. 1692. 
=» Exhibit No. 1694. 


Senator Clark. Now, Mr. Baruch, there was no suggestion at that time, was 
there, on the part of any of these copper producers that they were in any danger 
of losing money at a price of 167^ cents; the money was there? 

Mr. Baruch. They could not make it to me, because I would laugh at them.'*" 

The movement for higher prices soon began with the direction of 
attention to the relationship between high prices and the maintenance 
of production. On May 2, 1917, Mr. Eugene Meyer wrote Mr. 
Baruch the following letter: 

Since our talk in Washington I have given careful study to the copper sta- 
tistics. The refinery production in the United States in 1910 was 654,000 tons. 
It showed very little increase for several j^ears. It slowly increased until in 
1913 it was 731,000 tons. Even in 1915 it was 736,000 tons, but the 1916 figures 
jumped to 1,040,000 tons. This enormous increase in production coincided with 
the big rise in price, and, in my opinion, was unquestionably due to the rise in 

To keep up the production it will be necessary to maintain a high price. There 
is a lot of this copper which cost very much above the prices that prevailed under 
normal conditions. To reduce the prices radically would, in my opinion, unques- 
tionably reduce the production." 

In June 1917 the military need for copper became intense but 
apparently it could not be met at the previous price to the Govern- 
ment of 16;^ cents. A 25-cent price was arranged by the raw ma- 
terials committee headed by Mr. Baruch and was recommended by 
the Munitions Board for acceptance. This price, which the copper 
producers held out for at a later time, was thought to be too high by 
the Secretary of War and on July 6 there was a communication from 
the Ordnance Department stating that he disapproved it. The 
minutes of the General Munitions Board at a meeting held July 13, 
1917, follow: 

Copper: A communication froin Mr. Mej^er dated July 11, attaching copy of 
communication from the Ordnance Department (No. 770.15/124) dated June 25, 
accepting the price of 25 cents per pound for 60,000 pounds of copper arranged 
for by the raw materials committee was presented; likewise copy of communica- 
tion froin the Ordnance Department dated July 6 (No. G-470. 15/19) stating that 
the Secretary of War had disapproved of the arrangement referred to, and a 
communication from J. D. Ryan, chairman of the copper committee, dated July 
10, relative thereto was presented and ordered made a matter of record.'" 

In July 1917, as can be seen from Mr. Baruch's letter on page 96, 
the Army was apparently intent on using the commandeering power, 
and on August 7, 1917, the War Industries Board decided that com- 
mandeering should be used to gain the necessary supply if the copper 
producers would refuse to accept a tentative price of 20 cents per 

Meeting of the War Industries Board, held at 10 a. m., Tuesday, August 7, 
1917, in room 945, Munsey Building. 

Present: Mr. F. A. Scott, chairman; Mr. Baruch; Mr. Brookings; Admiral 
Fletcher; Mr. Frayne; Judge Lovett; Colonel Pierce; Mr. H. P. Bingham, sec- 

Copper desired by British and French Governments: It was moved and carried 
that in connection with the negotiations which Mr. Baruch is to carry on with 
the copper interests relative to the furnishing to the British and French Govern- 
ments of approximately 60,000,000 pounds desired for immediate shipment, that 
Mr. Baruch be requested by the War Industries Board to offer the copper pro- 
ducers a payment on account of 20 cents per pound for this amount of copper with 
the stipulation that such payment on account should be entirely disregarded in 
fixing the final price to be paid for this copper, which final price might be above or 
below 20 cents per pound, and further that if the copper producers refuse to enter 

«' Bernard M. Baruch, Mar. 27, 1935. Galley 66 BBQ. 
" Exhibit No. 1693. 


into such an agreement, that then the Government wiU proceed to commandeer 
the necessary supply.'*'^ 

But on the next day, according to the minutes, the War Industries 
Board yielded to make an offer of a tentative price of 22 K cents: 

Copper- Negotiations with copper producers. Mr. Brookings stated that Mr. 
Ryan had stated to him that when the needs of the Allies are mcluded m the 
negotiations for supplying of copper for military needs, the copper mterests are 
not willing to accept a memorandum price, but are willing to give the necessary 
copper at a firm price of 25 cents per pound, whereupon Mr. Baruch made the 
following motion: . 

"Resolved, That as the copper emergency required immediate action necessary 
to secure a supply for our Government and our Allies, that the Board endeavor 
to secure from the copper interests the needs of ourselves and our Allies at a 
price to be fixed when we receive the report of the Federal Trade Commission 
as to the costs and for purposes of payment on account of deliveries, a tentative 
price of 22I2 cents be fixed with the understanding that this price_ shaU in no 
way be taken into consideration when the final price is to be determined. 

This motion being duly seconded by Judge Lovett was unanimously adopted." 

At this time the Secretary of War was also beginning to make con- 
cessions, the War Industries Board minutes of August 17 statmg that 
he suggested arrangement of a price of 25 cents a pound for the Allies. 
Even this high price would have to be brought about by the "mdivid- 
ual friendly act" of Mr. Baruch: 

Present: Mr. Scott, chairman, Mr. Baruch, Admiral Fletcher, Mr. Frayne, 
Judge Lovett, Colonel Pierce, Mr. Bingham, secretary. 

Copper — Allied purchases: Colonel Pierce stated that in accordance with the 
instructions of the Board he and Mr. Baruch called upon the Secretary of War 
relative to the procurement of copper for certain of the Allies, with particular 
reference to the instructions given the Board by the Secretary of War under 
date of August 14, regarding such matters. The Secretary of War referred them 
to the Secretary of the Treasury who was carrying on negotiations with the 
Allies covering this subject. The Secretary of the Treasury expressed preference 
for the instructions issued by the Secretary of War in that the Board at present 
should only offer the Allies its friendly services until its present negotiations were 
completed! Colonel Pierce then stated that he again saw the Secretary of War 
who suggested that taking all into consideration for this emergency, it might be 
preferable to arrange to furnish this copper at a price of 25 cents, if such an 
arrangement could be possibly brought about through the individual friendly act 
of Mr. Baruch." 

The War Industries Board was convinced in September 1917 that 
22 cents a pound would be a reasonable price. This conclusion was 
more than justified by Federal Trade Commission figures which 
showed that 97 percent of production was being brought in at a cost 
of less than 20 cents per pound. The 2-cent differential at this price 
would have given the high-cost producers of this group a profit of 
10 percent and the low-cost producers a much larger margin. Many 
of the latter were producing at costs of less than the average of 13.6 
cents which represented a profit of 57 percent for the average producer. 
The Federal Trade Commission reported United Verde Extension 
Mining Co.'s costs to be 7 cents; Kennecott Copper Co., 8 cents; 
and Inspiration Consolidated, 12 cents. *^ 

However, Mr. Ryan told the War Industries Board that the price 
of voluntarv cooperation from the copper industry was 25 cents per 
pound; at the 22-cent price, he stated that it would be impossible to 

« Exhibit No. 1698. 
« Exhibit Xo. 1699. 
« Exhibit No. 1700. 
« Exhibit No. 1712. 


obtain the cooperation of the majority of mine owners. He went 
further, to virtually deliver an ultimatum to the Government that if 
a 22-cent price were fixed it would be necessary for the Board to 
appoint other producers to manage the distribution of copper: 


Present: Judge Lovett, acting chairman, Mr. Baruch, Mr. Brookings, Admiral 
Fletcher, Mr. Frayne, Mr. Bingham, secretary, and representatives of copper 
interests: Mr. J. D. Ryan, Mr. Joseph Clendenin, Mr. T, Wolfson, Mr. R. L. 

Copper price-fixing. — Mr. Ryan stated that if 22 cents per pound were fixed 
as a price for copper that it would be impossible to obtain the voluntary cooper- 
ation of the majority of mine owners. If 25 cents were fixed he assured the 
War Industries Board that he and the other copper producers present would 
obtain all the copper of the country voluntarily from all producers, and that he 
would see to it that the copper was properly distributed and the price con- 
trolled. This would likewise cover the 300,000,000 pounds produced outside of 
the United States. Should 22 cents be fixed, this 300,000,000 pounds could not 
he controlled. The breaking of the sliding scale of wages now in force which 
the War Industries Board stated they would insist upon when fixing a 22-cent 
price would, Mr. Ryan said, be disastrous and would eventually curtail pro- 
duction of copper. He said that the copper producers present would do all 
they could to help the Government no matter what price was fixed, but that 
they were convinced that at a 22-cent price they could not control the entire 
copper output, and that being convinced of this fact they would suggest that 
other copper producers be appointed to manage the distribution of copper 
should the low rate be fixed. The copper producers at this point retired from 
the meeting. ^8 

On September 21, 1917, the War Industries Board yielded from its 
price of 22 cents which had been a concession from the original price of 
20 cents offered on August 6, 1917.*' The final figure was 23 K cents, 
representing a splitting of the difference in the final opposing prices of 
the Government and the copper producers. Even at this price with, 
its consequent opportunities for excessive war profits, it was necessary 
for Government to utter a threat of commandeering in contemplation 
of noncooperation. The statement of the Board as accepted by the 
President stated that — 

The proper departments of the Government will be asked to take over the mines 
and plants of any producers who fail to conform to the arrangement and price, if 
any there should be.^^ 

The nature of the control over distribution which the copper 
producers could now guarantee was indicated in the final statement 
prepared by the War Industries Board for the signature of the 
President. One of the considerations imposed by the Board in con- 
sideration of the granting of the 23}2-cent price was that: 

the operators shall sell to the Allies and the public, copper at the same price paid 
by the Government, and will take the necessary measures, under the direction of 
the War Industries Board for the distribution of the copper and to prevent it 
from falling into the hands of speculators, who would increase the price to the 
public. ^8 ^ 

In liis testimony before the committee Mr. Baruch said "Do not for 
a moment let me be put in the position of defending their patriotism, 
and all that kind of tiling, because I realize that we had to use a club." *^ 

<8 Exhibit no. 1702. 
<' Exhibit No. 1697. 
<8 E.xhibit No. 1703. 
« Bernard M. Baruch, Mar. 28, 1935 (galley 59 BBQ). 


In response to Senator Clark's statement that "when they were- 
offered by the Government 22 cents a pound, it seems to me that the 
demands of the copper producers were,to say the least, exorbitant," *° 
Mr. Baruch said "All that you say is correct, sir. I am not seeking 
to defend their actions." ^^ 

In May 1918, when the copper producers returned to demand a fur- 
ther price increase from the War Industries Board, there is recorded in 
the minutes of the Price Fixing Committee the refusal of the Anaconda 
Copper Co. and the Calumet & Hecla Co. to agree to furnish copper 
at 23^2 cents per pound. Mr. Kelley, of the Anaconda, said "We have 
always agreed for a definite time to furnish copper at a definite price ; 
I could not agree to furnish copper for the Anaconda at 23)^ cents.^^ 
Mr. Agassiz, of the Calumet & Hecla, then said "I cannot agree for 
our company." ^^ There should be set against this last statement the 
fact that the Calumet & Hecla made a profit of 34.9 percent in 1917, 
according to the final determination of the Bureau of Internal Reve- 
nue.^* According to the Federal Trade Commission's study, the 
Anaconda's costs amounted to $0.16546 a pound in the year 1917 and 
decreased to $0.16484 m March 1918." 

Differences between companies also had their effect in adding to 
the pressure on the Government to make price concessions. In the 
May meeting Mr. Brookings characterized the controversy between 
the American Smelting & Refining Co. and certain low cost producers 
over the adjustment of long term contracts entered into prior to the 
commencement of the war and unfavorable to the smelting company, 
as an attempt to delay adjustment in order to force up prices: 

Mr. Brookings. We haven't considered your question at all; we said we 
wouldn't. What you are doing is to try to put over the settlement of your 
trouble upon the Government. The Government declines to do it. You can 
shut down tomorrow, that is your business. 

Mr. Brownell. That is our business? 

Mr. Brookings. We don't propose you shall put it over on the Government. 

Mr. Brownell. And we are not regarded as unpatriotic? 

Mr. Brookings. You can take that as you will. 


Mr. Brookings. We point to the evidence now that we made our case abso- 
lutely. There was no rebuttal of any kind. It was entirely a question of ad- 
vance in the cost of wages and the advance in the cost of material; it was an 
advance as the result of the war and the Government wasn't responsible for that. 
We went so far as to tell you to present your bill to the Kaiser if you attempted 
to locate the responsibility on anybody. You gentlemen didn't do the right 
thing. We said, "Come into court with clean hands to adjust an unfair differ- 
ence." There isn't a court in the United States but would say, "Gentlemen, 
you have no standing in this court at all." 

Mr. Brownell. I think you are charging us with something of which we are 
not guilty. You are assuming a conspiracy — ■ — 

Mr. Brookings. Not a conspiracy but a delaying of the adjustment between 
yourselves, hoping that the pressure upon the Government would facilitate ^^ 

(6) The steel industry. — Between April and July 1917, a speculative 
increase was recorded in the War Industries Board iron and steel 
price index which rose almost 100 points from 274 to 370.^^ As a re- 

«»Ibid. (galley 60 BBQ). 
" Ibid. 

" Exhibit no. 1711. 
M Ibid. 

i< Exhibit no. 1705. 
55 Exhibit no. 1712. 

" Minutes of the Price Fixing Committee, May 22, 1918. 

" War Industries Board Price Bulletin No. 3, Garrett, Government Control over Prices, p. 246. 
See also the price index charts of steel plates and steel sheets facing p. 128 and of the metal and metal 
products group facing p. 126. 


suit, the different branches of the Government began to make vigorous 
protests. On July 12, 1917, the President delivered a strong warning 
with special reference to the steel industry that those "who do not 
respond in the spirit of those who have gone to give their lives for 
us on bloody fields far away may safely be left to be dealt with by 
opinion and the law, for the law must, of course, command these 
things".^^ The Secretary of the Navy said: 

There is no justification for a tremendous increase in the cost of basic mate- 
rials. The Almighty put these things in the ground and the only additional cost 
over normal times is in getting them out. Under the law, the President is 
authorized to fix a reasonable price for what is needed for the Navy. There 
is no disposition whatever to cause any hardship to the producers. We are 
perfectly willing and intend to pay them a fair, even a liberal, profit, but we will 
not pay exorbitant prices, such as are being quoted in some instances.^^ 

The Chairman of the Shipping Board was reported as favoring the 
commandeering of all steel plants in the event of their refusal to accept 
the prices to be fixed on the basis of the cost of production study of the 
Federal Trade Commission, and in Congress a bill was debated which 
provided for commandeering any producer or dealer who failed to 
conform with its requirements.^" 

Dissatisfaction with the high prices of steel was evident even before 
the entry of the United States into the war. As part of the prepared- 
ness campaign, Mr. Baruch approached the steel interests in the 
matter of getting lower prices.^^ A contemporary memorandum which 
is committee exhibit no. .1728 indicates that a $2.90 price for steel 
plate was considered to be the very most that should be asked of the 
Government : 

We do not feel that an analysis of the situation would justify a price greater 
than $2.90. 

Judge Gary, however, felt that the steel industry could not deliver 
at this price. In another war-time memorandum appears the follow- 
ing report: 

Conferred with Judge Gary at his house at 9:15 in the morning, at which time 
he outlined the difficultv of arranging a fixed price for plates and bars. I thought 
the price should be abo'ut $2.90 for plates and $2.50 for bars, but he stated that 
the many independents could not deliver at that price and make profit. 

I communicated from his house with Secretary Daniels, who said he would fix 
a price later.^^ 

In a letter of March 31, 1917, Secretary of the Navy Daniels wrote 
Judge Gary that the steel industry's price of $3.50 could hardly be 
considered a reduction in price since the highest price hitherto quoted 
was $2.90. However, the Secretary was "glad to note that the spirit 
manifested by the members of the committee was loyal and hberal: " 

I am in receipt of your favor of the 30th, enclosing copy of the letter which 
you have sent to Mr. Bernard M. Baruch, chairman of the raw materials 
committee of the Advisory Commission of the Council of National Defense, and 
also a letter to Mr. Baruch giving the names of the committee selected by you 
as president of the American Iron & Steel Institute, on steel and steel products, 
I am very glad to note that the spirit manifested by the members of the com- 
mittee was loyal and liberal. 

" Report of the War Industries Board, p. 115. 

M War Industries Board Price Bulletin, No. 33, p. 20. 

«• War Industries Board Price Bulletin No. 3, p. 249. According to this proposal, price fixing and control 
were to be under the supervision of the Federal Trade Commission rather than the Council of the National 

81 Report of the War Industries Board, p. 111. 

«2 Exhibit No. 1727. 



The prices you name, f. o. b. Pittsburgh, are in excess of what I had hoped and 
expected would be made. While I appreciate the fact that everyone wants to be 
helpful, at the same time I wish to draw your attention to the fact that the 
highest prices which the United States Government has paid have been on the 
basis of $2.90 for plates and that was the price named by the Carnegie Co. to the 
Government and which has not been raised. 

While I appreciate the increased cost of production and that the market at 
present is continuing to rise, the countrj* would not feel that the steel manu- 
facturers had made a reduction in their price when the Government was charged 
$3.50 as against the last price of $2.90.*53 

In May of that year the Secretary of the Navy turned over to Mr. 
Baruch a letter which he thought pertinent to the reduction of steel 
prices. The Secretary's correspondent referred to the fact that 
arguments against the Government price were being sent to country 
newspapers and queried the justification for the steel industry's 
demand when the cost of common labor had risen only $1 a day. 
The costs of materials which were controlled by the large steel manu- 
facturers and which were the main grounds offered for a higher price 
however had gone up out of all proportion to this 50-percent labor 
increase. Ferromanganese, for instance, had advanced more than 
1,000 percent: 

May 24, 1917. 
My Dear Mr. Baruch: 

I received a letter today from a gentleman in Illinois, as follows: 

Copies of the Wall Street Journal are being sent out to country papers 
complaining about the price the Government is demanding steel for. As an 
excuse they quote the increased price of the products as follows: Collinsville 
[Connelsville?] coke, in 1914, $1.75, now $8; Bessemer iron, $14.90, now, $44.95; 
basic iron, $13, now $42; ferromanganese, $37.70, now $425; common labor, $2, 
now $3. 

Now, if these prices are correct, why the great raise? Does it cost much 
more for labor to produce these things, except labor itself, than it did in 1914? 
To an outsider it looks as if there was a great rake-off on the products above- 
quoted, and there is a suspicion that the steel manufacturers are interested in. 
the other products. 

I thought this would interest you. 
Sincerely yours, 

JosEPHUs Daniels." 

While price negotiations were going on, the Government was feeling 
the pressure of the armed forces for production. In a memorandum 
of June 21, 1917, a conference of Army and Navy officers stressed 
the necessity of gaining maximum steel production and indicated 
their willingness for the adoption of prices sufficiently high to attain 
that end. Rehance was placed on the excess profits tax to coUect 
back exorbitant profits : 

Memorandum adopted by the Joint Conference of Army and Navy Officers 
with James A. Farrell, representing the Iron and Steel Institute, June 21, 1917. 

It is absolutely essential to fix a price for steel which will meet the requirements 
of the three great agencies of the Government (War Department, Navy Depart- 
ment, and Shipping Board) that are to use the product and which will also meet 
the requirements of the manufacturing interests of the country at large, * * * 
but, above all, the necessary thing is to fix the price at a point that will assure 
the maximum steel production throughout the country; * * * exorbitant 
profits if any, to be taken back by means of an excess profits tax.^^ 

The consequent pressure on the Government for a final decision 
appears in the memorandum of General Purchasing Officer R. E. Wood 

63 Exhibit No. 1726. 

64 Exhibit No. 1729. 
« Exhibit No. 1730. 


to General Goethals dated June 28, 1917. The construction of wooden 
and steel ships was virtually at a standstill because of the purchasing 
officer's inability to settle on the price of steel: 

The situation that has arisen with regard to the price of steel is handicapping 
the work of the Purcliasing Department very seriously. 

The orders for the Moore and Scott ships have not been accepted as no price 
is stipulated, and the steel companies will not accept an order without a price. 
An early delivery is stipulated on these Moore and Scott shijas. Their orders 
for steel have already been held up 10 days and completion of the ships wiU 
be delayed accordingly, besides giving rise to a great many possible claims. 

We will be obliged to furnish the parties who make our boilers with steel. 
We cannot get a price on boiler steel, or get steel to our boilermakers until the 
general question has been settled. The same will apply to marine engines. 

It is possibly not realized that 30 percent of the material that goes into a 
wooden hull, and over 50 percent of the material, including propelling ma- 
chinery, that goes into a wooden ship, is steel or steel products, and that the 
woodeii ships, as well as the steel ships, will be held up seriously unless this 
matter is decided in the very near future. Until it is decided, our work will be 
practically at a standstill, for I cannot close any contracts on propelling ma- 
chinery or on fastenings, forgings, shafting, etc., until this matter is decided.'''' 

Other departments of the Government were also finding that war 
preparations were being seriously hampered by the delay in fixing 
prices for the steel industry. The Navy Department, Shipping Board, 
Ordnance Department, and the Panama Canal Commission reported 
that the unsettled condition was holding up almost all their activities. 
The Munitions Board decided on July 24, 1917, that the necessity for 
prompt action in fixing some price should be communicated to the 
Secretary of War: 

Steel — Necessity Jor fixing some price. — Mr. Howe brought up the question of 
the present steel situation as to the holding up of necessary orders due to the 
lack of a price. It was reported by the various representatives that practically 
everything is held up because of the unsettled condition. The Departments 
reporting are the Navy, Shipping Board, Ordnance Department (ammunition 
steel and rifle-barrel steel), and the Panama Canal Commission. 

After considerable argument, Mr. Scott and Mr. Rosenwald were asked to 
interview the Secretary of War and lay the facts before him, registering with 
the Secretary the opinion of the Board that something must be done promptly 
as the delay was seriously hampering the preparations for war.^^ 

Four months after the entrance of the United States into the war 
the Bureau of Supplies and Accounts in the Navy Department sub- 
mitted a memorandum to the Secretary of the Navy stating that almost 
no steel sheets had been ordered since the declaration of war. Also 
that it was only at this late date, August 6, 1917, that the last of 
the stock plate and shape order was being allotted. This was due to 
the unintegrated finished steel producer's inability to operate on the 
basis of the inflated raw material prices: 

The last of the stock plate and shape order (agreement between the Steel Cor- 
poration and the Navy dated April 20) is only now being allotted, although a 
large portion was ready for allotment in May. One cause of the delay arises 
from the fact that the small mills cannot produce plates and shapes at $2.90 and 
$2.50, respectively, until the Government controls the essential raw materials. 

Practically no steel sheets have been ordered since the entrance of the United 
States into the war.'^'' 

On the same day the minutes of the General Munitions Board con- 
tain other instances of the strong bargaining position of the steel 
industry. When attention was called to a plan of having the Midvale 

6« Exhibit No. 1732. 

«7 Bernard M. Baruch. Mar. 29, 1935 (gaUey 89 BBQ). 

«8 Exhibit No. 1734. 



Steel Co. furnish the Navy forgings and Bethlehem the Army forgings, 
Mr. Scott, chairman of the Board, referred to an understanding with 
the companies that the condition of the determination of a fixed price 
was the equal division of the Navy forgings business between them. 
He stated that he ''did not believe Bethlehem would agree to accept 
only Army forgings at the prices agreed upon." ^^ Another instance 
is to be found in Colonel Blunt's remark that the United Engineering 
& Foundry Co. refused to bid on artillery forgings and that they 
gave as an excuse the existence of the Government's 8-hour law.^'' 

According to a letter read into the record by Mr. Baruch, the indus- 
try was holding out for prices which he thought to be "high and unfair." 
The possibility of noncooperation by the steel industry moved the War 
Industries Board to invoke the threat of commandeering. Mr. 
Baruch's letter in part states as follows: 

Almost immediately after the declaration of war, at the request of the President, 
I met representatives of the steel companies in the office of Elbert H. Gary, 71 
Broadway, New York City, more particularly in reference to the price of ship 
plates which they fixed at Ayi cents a pound, assuring me they knew that would be 
satisfactory to the Government. I urged them not to insist upon that price 
because it was too high and imfair in the circumstances. They could not see 
my point, although later in the evening I again met Judge Gary and made the 
same request, to which I got the same reply. I laid this information before the 
President and Mr. Denman, then Chairman of the Shipping Board. At this 
period I was chairman of the raw materials section of the Council of National 
Defense, and was acting in that capacity. 

Following a conference at Washington in July, which both Judge Gary and 
I attended, it was decided to await the conclusion of an inquiry into prices of 
steel which the Federal Trade Commission was making. This brought about 
a meeting on September 21 on the subject. Previously the War Industries 
Board had passed a resolution declaring that "if the steel interests should not 
be willing to give their full cooperation because of the prices fixed, the War 
Industries Board would take the necessary steps to take over the steel plants." " 

The prices that were finally fixed on September 24, 1917, follow, 
together wdth the August 1914 prices: 



Fixed price ' 

1914 price- 

Lower lake ports 

$5.05 per gross ton.- 




$6 per net ton _ _ 


$33 per gross ton 

$2.90 per 100 pounds 


Steel bars 



do -. 

$3 per 100 pounds 




$3.25 per 100 pounds. 


1 Garrett op. cit., p. 261. 

2 War Industries Board, Price Bulletin No. 33, Prices of Iron. Steel, and Their Products. 

The success of the steelmakers' tactics of delay and noncooperation 
may be seen in the vast profits obtainable from these prices at the 
existing costs of the majority of the producers in the steel industry 
which have already been alluded to on page 58 of this report. In 
viewing these prices from the angle of reduction of inflation it is 
apparent that regardless of the extent of the decrease from transitory 
speculative prices prevailing immediately before price stabilization, 
the basic price structure of the steel industry still remained at fabu- 
lously high levels over pre-war prices. War Industries Board Price 

69 Exhibit No. 1733. 

70 Ibid. 

" Bernard M. Baruch, Mar. 29, 1935 (galley 81 BBQ). 


Bulletin No. 3 has stated that "the prices fixed by the War Industries 
Board did not represent reductions as enormous as many people 
believed the elaborate Federal Trade Commission inquiries into costs 
justified." " The price index charts facing p. 128 show that the 
prices of steel sheets and steel plates were fixed at levels above the 
highly inflated all commodities index and that it was not until after the 
coming of peace and the discontinuance of price control that these 
prices fell through the all commodities level. 

It has also been pointed out that the price reductions were in fact 
not as much as they appeared to be since the exorbitant market 
prices of July represented only a small volume of sales : 

It should, of course, be remembered that the ver\^ high quotations of July 
1917 were never realized in the majoiity of contract placements. They repre- 
sented simply the exorbitant prices which certain sales could command because 
the bulk of steel was booked up under contract. The real scaling down of pi'ices 
from the high point of July 1917, therefore, was actually much less than one might 
suppose on examining the above figures." 

Furthermore, it should be recognized that since it had been decided 
not to apply the fixed princes to past contracts a large number of 
steel transactions were removed from any regulation."* 

The steel industry's journal stated that the fixed prices were really 
not far from the contract prices which had been prevailing for the 
past six months and at which levels profits were "quite satisfactory: " 

While the new prices on plates, shapes, and bars are lower than some of the steel 
conferees were prepared to accept, particularly in view of the Steel Corporation's 
last advance of 10 percent in wages, which other producers have followed without 
question, it is to be considered that they are not far from the average prices on 
contract shipments in the past six months, on which the profits of integrated com- 
panies as well as of some that are but partly integrated have been quite satis- 
factory. With the readjustments on coke and pig iron, some companies of the 
latter class will do fairly well. There will be certain hardships to a number of 
plants that must buy pig iron, even at the new S33 price.''* 

In addition to the unreliability of using spot prices as a basis of 
computing the size of the reduction, it should be noted that the con- 
servative Iron Age magazine had to correct the War Industries 
Board's statement of the market prices which had prevailed prior 
to stabihzation : 

The extent of the reductions from existing market prices was exaggerated in 
the official statement given out at Washington. Spot coke was $12.50 last week, 
rather than $16, and in putting pig iron at $58 the statement went to an extreme, 
since $50 or less has been the recent level.^^ 

The method of quoting prices also had the effect of exaggerating 
the extent of the price reduction. The Federal Trade Commission 
has stated: 

In order however to prevent possible misunderstanding, attention should be 
called to the fact that the prices fixed for steel products were generally what are 
known as base prices; that is, generally, a price per ton, or per hundredweight, 
for a certain standard grade and "base" size. For special quahty as well as for 
the numerous sizes other than the "base" size, the trade custom had estabhshed 
"extras" or additions to the base prices, and these customary extras were con- 
tinued apparently on approximately the same scale, in most cases, according to the 
recommendations made to the price-fixing committee by its own advisers. 

" Page 261. 

" W. I. B. Price Bulletin No. X P- 2G1. See Committee Print No. 3, p. 129: "An adequate analvsis of 
cost, however, can be made only by the use of contract prices, for it is probable that only small quanti- 
ties of coke were purchased at the hiph market prices." 

"< Report of the War Industries Board, p. 117. 

« The Iron Age, Sept. 27, 1917. 

" Ibid. 


It is important to understand this situation, because the average costs of some 
companies might be above the base price and yet the products could be sold at 
profitable prices due to the fact that most of the tonnage carried large "extras." 
The use of "basing points" in quoting prices was also allowed, and this practice 
materially affected the prices received by many of the companies. At first both 
Chicago and Pittsburgh were allowed as price basing points for certain steel 
products but later Pittsburgh only." 

The differentials for the various types of products were determined 
by a committee of the American Iron and Steel Institute which rep- 
resented the steel industry. In the Report of the War Industries 
Board "^ it is said that — 

In order to control fully the prices in this industry, a very large schedule of 
differentials, or prices for products which vary from the basic types had to be 
worked out. The problem of calculating this was assigned to the industry itself, 
and the work was accomplished by a committee of the American Iron and Steel 
Institute. These differentials were promulgated by the committee directly to 
the industry, but when once announced they were given the same application in 
all policies' as those prices fixed specifically by the President through the War 
Industries Board or later through the price-fixing committee. 

Even Judge Gary agreed that in some cases the prices fixed by the 
industry itself for finished products were too high.^^ 

The efl'eet of the prices set was to strengthen steel stocks, an 
important factor in the upward movement being the expectation of 
a revival of new business resulting from stabihzation of the market.*" 
The New York Times of September 25, 1917, the day after the prices 
were fixed, reported: 

Steel common gained 2 points; Lackawanna, 2%; Repubhc Iron & Steel, 2^8; 
Crucible, 1; Bethlehem Steel, class B, 2%; Great Northern Ore, 2%; Midvale 
Steel and Superior Steel, 2 points. New York Central rose l}i; Union Pacific, 
1%; and Baldwin Locomotive, 4:%; with many other issues rising from 1 to 
nearly 3 points. An improvement of sentiment toward securities was generally 
evident in the Street, which supplemented the increase of optimism that followed 
the fixing of the price for copper last week. * * * 

The lower prices will have one effect, it was said, that will be an aid to the 
industrv. This will be the new business that will result. Since the beginning of 
the European war, building operations have been almost at a standstill, and now 
the lower steel prices have been fixed, the builders will get busy and the country 
can expect to experience a boom in the building business, provided the steel mills 
can take care of the new orders thus drawn out. * * * 

So satisfactory are the prices fixed for iron and steel products that western 
steel makers are convinced the announcement will be follov/ed almost imme- 
diatelv bv a marked revival in business, writes the financial editor of the Chicago 
Herald. '* * * 

L. E. Block, vice president of the Inland Steel Co., said: 

"The steel and iron prices fixed by the Government are considerably below 
those prevailing, but I imagine that under all the circumstances the steel manu- 
facturers will be fairly well satisfied with them. All steel manufacturers have 
on their books a very large number of unfilled orders taken at the higher prices. 
These contracts will stand. 

"Buvers who have contracted for iron or steel at the higher prices must accept 
delivery at those prices, but I do not believe this will be productive of any 
serious inconvenience." 

In speaking of the price fixmg, however, a report of the War 
Industries Board thought that the steel interests were to be 
commended : 

* * * in view of the fact that there was no legal authority for enforcing 
these requirements, we considered it a great achievement and a wonderful 
monument to the patriotism of the steel manufacturers in the country.^i 

" Federal Trade Commission Report on War Time Profits and Costs of Steel Industry, p. 20. 

'8 Pacre 121. 

•9 Minutes of the Price Fixing Committee, Mar. 20, 1918. , . ,,. . , • ^ ^ 

80 See discussion, infra, pp. 128-130, regarding the stabilizing effects of price control in the steel industry. 

81 Committee Print No. 3, p. 130. 


At a later point there appears the following statement: 

The Division wishes to make an opportunity of recording the great assistance 
rendered by the American Iron and Steel Institute. Hon. E. H. Gary, as chair- 
man, appointed a committee on steel distribution, through whom the Director 
of Steel Supply distributed to the various mills in the country the orders for war 
materials received from the various departments of our own Government and 
from the Allies. Commercialism was entirely dropped from their calculation, 
and they entered patriotically into their work with no thought of personal gain, 
but entirely for the interest of our common cause.^^ 

(c) The building and operation of the Old Hickory Powder Plant. — 
With the foresight bred from over a century's experience as the 
Nation's chief source of military powder,^^ the du Pont Co. directed 
its engineers to seek a suitable location for the construction of a 
new powder plant as soon as diplomatic relations were severed with 
Germany — 2 months before we declared war.** From the outbreak 
of the war this company, which one of its officials characterized 
as "almost a subdivision" of the Ordnance Department,*^ strove to 
convince the military authorities of the need for increased powder 
capacity.**^ Not until October 1917 was the Government convinced.*^ 

Fou/ days after the War Department had agreed to the urgent 
necessity of additional manufacturing capacity of approximately 
1,000,000 pounds of powder a day** the du Pont Co. submitted a 
draft contract to build and operate plants of that capacity.*^ This 
contract estimated the total cost of construction at $90,000,000 in- 
cluding a fee to the du Pont Co. of 15 percent of cost. The company 
was to receive in addition an operating fee of 5 cents a pound for 
each pound of powder produced, plus one-half of any reduction in cost 
below a fixed amount per pound, the Government to pay all costs 
of operation. 

Substantially this agreement was signed by General Crozier, Chief 
of Ordnance, on October 25, 1917.^° On November 7, Robert S. 
Brooldngs, then chairman of the War Industries Board, estimated 
that in addition to $13,500,000 to be received as compensation for 
the construction of the plant, it was quite probable that under this 
contract the du Pont Co. would receive approximately $30,000,000 
in profits for operating the plant the first year. This Mr. Brookings 
felt was "utterly out of ^calefor any possible service they can render. "^^ 

On October 31, Secretary of War Baker had wired the du Pont Co. 
to do nothing about the contract until they heard further from him.^^ 

On November 14, Air. Brookings reported to the Secretary of War 
that the War Industries Board had had a long conference with officials 
of the Ordnance Department and with representatives of the du Pont 
Co., but that in spite of certain changes agreed to by the du Pont Co. 
he. Judge Lovett, and Mr. Baruch still declined to approve it.^^ 

82 Committee Print Ko. 3, p. 135. 

83 " Since 1805 the du Pont Co. has provided the United States with most of the explosives that the coun- 
try's fighting forces used in our wars." A History of the du Pont Co.'s Relations with the United States 
Government, Smokeless Powder Dept., E. I. du Pont de Nemours & Co., Inc., p. 10. 

84 Exhibit no. 1117. 

85 Part 15, p. 3696. 

8« Exhibits nos. 1117, 1123, 1124. 
8' Exhibits nos. 1117, 1125. 

88 Exhibit no. 1125, dated Oct. 4, 1917. 

89 Exhibit no. 1126, dated Oct. 8, 1917. 
so Exhibit no. 1130; See Exhibit 1129. 
«i Exhibit no. 1139. 

92 Part 13, p. 2959. 
»3 Exhibit no. 1142. 


But although the Government officials thought that the du Pont 
demand for profits was exorbitant, it appeared that only the du Pont 
Co. could supply the services needed. 

The company, by its own admission, controlled "about 90 percent 
of the smokeless powder producing capacity of the United States"^* 
and so had a practical monopoly on operating experience. The 
company had been producing 1,300,000 pounds of military powder 
a day since 1914 for a total of nearly 750,000,000 pounds, and believed 
their capacity equaled that of Great Britain and France combined. ^^ 
The du Pont Co. also had in effect a monopoly as to experience in 
the construction of powder factories. Within 3 years they had built 
factories of capacity equal to the contemplated plant and so were 
indeed, as they said, "m possession of all information necessary for 
the carrying out of this project. "^^ The blueprints used for their 
factories would cover some 60 acres of ground.^" A great many of 
these drawings were standard,^* and so did not need to be duplicated. 

Daniel Willard, as chau-man of the War Industries Board, told the 
Secretary of War on November 26, 1917, that upon the evidence of 
"demonstration" it was the opinion of the Board "that the du Pont 
people are in every way the best fitted" for constructing the plant 
in the least possible time and operating it with the greatest efficiency. ^^ 
Pierre S. du Pont on December 10, 1917, wrote that: 

General Crozier has assured us that he beKeves it necessary to call upon us 
for assistance and that there is no doubt in any mind that our company should 
undertake the work if proper compensation can be determined.' 

The du Pont Co. recognized the strength of its own bargaining 

* * * our willingness to negotiate has been based entirely upon the necessities 
of the Government and the belief that our company is not only the best equipped 
for executing the work prompth', but practically the only organization capable 
of so doing.2 

Mr, Pierre du Pont wrote to Mr. E. G. Buckner, a vice president: 

Our commanding position in the explosive industry has been won only by in- 
cessant work and expenditures of money by the company. The situation is an 
asset of the stockholders which cannot be dissipated lightly. ^ 

It must be remembered that these negotiations occurred in the 
midst of war. The mifitary forces urged speed at all costs. Mr. 
Brookings wrote to the Secretary of War after the November 14, 1917, 

On leaving the conference, General Crozier announced that he felt that, 
regardless of price the Government must have immediate action on this, and 
immediate action could only be had through the du Fonts, and therefore he would 
urge upon you the emergency necessity which, in his judgment, overshadowed all 
question of cost.* 

Lieutenant Colonel Harris, v\hen asked by the chairman whether 
there was a more critical time during the war than the period of these 
negotiations, testified: 

«< Exhibit no. llnl, at p. 3277. 

»5 Ibid. 

86 Exhibit no. 1U"\ at p. 3272. 

S7 Exhibit m. 1132. at p. 3145. 

"s Testimony of Irenee du Pont, p. 3170. 

" Exhibit no. 1148. 

1 Exhibit no. 1154. 

a Exhibit no. 1151, at p. 3279. 

» E.xhibit no. 1132. 

* Exhibit no. 1142. 


It is hard to say which was the most critical time of the War, but that was a 
very critical time.^ 

For 3 months the building of the Old Hickory powder factory was 
delayed because of the refusal of the du Pont Co. to accept the liberal 
terms offered to them. 

At the November 14 conference the War Industries Board — 

suggested to the du Fonts that they go ahead and construct this plant and 
operate it after construction, charging all cost of every kind and character to the 
Government, and, after they had demonstrated the great service rendered the 
Government, to leave to the Secretary of War the question of their compensation, 
assuring them that the Secretary of War could not do other than treat them 
fairly — in fact liberally — if he assumed the responsibility of paying them a fair 
price for their service.^ 

On November 26 the War Industries Board recommended a more 
liberal offer, having ''so far been unable to agree with the du Fonts 
as to what would be fair compensation for the erection and operation 
of the plant." ^ This offer provided that the Government would 
pay "every dollar of expense", would advance $1,000,000 on account 
of profit and that pending the completion of the contract — 

the Government, through the Secretary of War, will endeavor to negotiate with 
them from time to time as to what, if any, additional compensation they should 
fairly receive for their services, and on the completion of the contract if the 
du Pont Company and the Secretary of War have not been able to agree upon 
such sum, then the matter shall be left to the usual form of arbitration- — that is 
each party to select one arbitrator, and the two so selected to agree upon a third, 
the findings of the two of these three to be binding upon both interested parties.* 

This recommendation was adopted by the Secretary of War the 
following day.^ On the recommendation of Fierre S. du Font,^° the 
president of the company, it w^as rejected by the company's board of 
directors on November 28.^' 

On December 12 the Secretary of War notified the company that 
the War Department had "proceeded to work out a plan for the direct 
creation of this capacity by the Government itself." ^' Mr. Fierre 
du Font testified that the Secretary of War said to him in substance : 
' ' I think it is time for the American people to show they can do things 
for themselves." ^^ 

But the Government had no real alternative to accepting the terms 
of the du Fonts. 

On December 15, 1918, D. C. Jackling was appointed by the Sec- 
retary of War "to build and operate the proposed new Government 
powder plant." " Just 2 days later Mr. Jackling, who apparently 
had had no prior experience in the manufacture of powder or ex- 
plosives, ^^ suggested to Mr. Fierre du Font that the building and 
operation of part of the projected factory be undertaken by the 
du Font Co., but Mr. Jackling's terms w^ere refused. ^"^ 

5 Part 14, p. 3193. 

6 Exhibit no. 1142, at p. 3270. 
' E.xhibit no. 1148. 

8 Ibid. 

'E.xhibit no. 1149. 
10 Ibid. 
n Exhibit no. 1150. 

12 Exhibit no. 1157. 

13 Part 14, p. 3188. 

14 Exhibit no. 115S, p. 3211. 

15 Testimony of P. S. du Pont, pt. 14, p. 3211. Testimony of Irfinfe du Pont, part XVII, p. 4200. 

16 Exhibit No. 1224 at p. 3788 and at p. 3789, letter of Jan. 9, 1918. 

11579—35 8 


Under the decision of the War Department that the "direct crea- 
tion" of the plant should be done by the Government itself, Mr. 
du Pont felt that: 

Our company believes it unnecessary to reveal our practices with respect to 
such lines of manufacture that are now commercially developed in the United 
States, such as those of sulphuric acid, nitric acid, cotton purification, diphenyl- 
amine and ether, as sufficient information is obtainable elsewhere. * * * i^ 
general, this company will not attempt to criticize or approve the plans of the 
War Department as the close interrelation of the parts of the proposed factories 
makes piecemeal criticism useless and our services as directors of the whole 
project are deemed by the Government as unnecessary. 

We pointed out to Mr. Jackling that the proposed work involved no problems 
that cannot be solved by capable engineers of industrial training but that econ- 
omy and speed of reaching maximum output with a properly balanced plant are 
out of the question unless the work is in charge of an organization of experience. 
On that account we will not delegate any of our men as suitable to assist the War 
Department in its work, knowing full well that the withdrawal of even large 
numbers of them cannot win satisfactory results for the Government without the 
backing of our entire organization. Since suspension of General Crozier's order 
we have taken on important work for the Government which, together with that 
heretofore on hand, will call for the use of all our forces. On this account we 
should not be called upon for men. If the War Department decides to set aside 
this recommendation, we request that negotiations be made with our men direct, 
though we would appreciate the courtesy of being informed as to what is in- 
tended in this respect.'" 

Mr. Irenee du Pont testified that: 

When Mr. Jackling came, he tried to take our chief engineer away from the 
du Pont Co., upsetting their work, and the chief engineer said, "I cannot do any- 
thing. I cannot help you. This is the organization that does the thing. You 
will have to take the organization." '^ 

On January 29, 1918, Mr. Jackhng signed a contract wdth the 
du Pont Engineering Co., a wholly owned subsidiary of the du Pont 
Co. ha\dng an invested capital of only $5,000,^^ for the construction 
of a plant \\dth a capacity of 500,000 pounds of powder a day.^° 
The contract provided for construction fees of $500,000 plus 3 per- 
cent of cost, the total not to exceed $2,000,000 ^^ and for operation 
fees of 3}^ cents per pound of powder deUvered, plus half of all reduc- 
tions in cost below base costs. ^^ 

On March 23, 1918, a substituted contract was executed under 
which the du Pont Co. was relieved of any financial strain inasmuch 
as the Government was to advance $18,750,000 for construction and 
reimburse this fund for current outlays until 75 percent of the total 
estimated cost, over and above the $18,750,000, had been paid.^^ 
No fee was to be charged for construction but the Sji cents per pound 
operating fee plus one-half of any savings below base costs remained,^"* 
and the capacity on which this fee was to be paid was increased from 
500,000 to 900,000 pounds a day." Furthermore the du Pont Co. 
could sublet any part of the construction work and charge fees paid in 
connection therewith to costs. ^^ 

17 naid, at pp. 3788-89. 

18 Pt. 14, p. 3178. 

19 Pt. 13, p. 2948; testimony of P. S. Du Pont, pt. 14, p. 3218. 

20 Exhibit no. 1165, see art. II, p. 3290. 

21 Ibid, art. VI. 

22 Ibid, art. X. 

23 E.xhibit no. 1168, art. II, p. 3299. 
2» Ibid, art. IV, par. (c), p. 3300. 

25 Ibid, art. I, p. 3298. 

28 Ibid, art. II, p. 3298 (italics added). "Whenever it is inexpedient for any portion of the construction work 
to be performed by the contractor, it may in its discretion, sublet such portion of the work, upon the most 
advantageous terms obtainable consistent with the best interests of the United States. 


In fact, a fee of $1,078,000 was paid to the Mason & Hangar Co. 
for construction work costing $21,511,000.-^ 

In addition a further advance of $18,954,000 was to be made in 
three equal installments to finance production costs.-* 

The January 29, 1918, contract authorized Mr. Jackling to order 
changes in specifications and otherwise to direct the work and required 
this approval for purchases and the like.-^ The primary reason for the 
March 23 contract was the du Pont Engineering Co.'s desire to be 
free "to proceed in its own way in the construction of the plant, with- 
out all these delays in getting approval of plans and specifications." ^° 

Under this final draft of the contract the company received a net 
profit of $1,961,560 for the operation of the plant ^^ which never reached 
full capacity because of the termination of the war.^- The $1,961,560 
profit represents over 5 cents a pound on the 35,538,345 pounds ^^ 
produced. Had the war continued the Old Hickory contract would, 
at that rate of profit, have yielded a return of $15,000,000 a year 
(assuming a production of 300,000,000 pounds a year), on the $5,000 
capital invested in the Engineering Co. 

For 3 months during the World War the du Pont Co. refused to use 
its knowledge to make powder for the Government at the Govern- 
ment's cost plus the liberal reward offered. It demanded its own terms. 

Mr. Pierre du Pont called his company's position a refusal "to 
work without proper compensation" and felt it "necessary because 
the directors of our company, acting for our stockholders, have no 
authority to do otherwise."^* He referred to the "duties of our oflacers 
and directors to endeavor to win reasonable profits for the stockholders. 
That is not only part of our duty, but we cannot assent to allo\ving 
our own patriotism to interfere with our duties as trustees." ^^ It is 
significant that Mr. Pierre du Pont vv'as one of the 10 largest holders 
of the common stock of the du Pont Co. at the time he felt that his 
patriotism must not interfere with his duties as a trustee for the 
du Pont stockholders.^^ 


(a) The power to requisition and commandeer. — It has been claimed 
that during the World War an effective club existed in the form of 
the Government's power to requisition and commandeer goods and 
plants. Both these powers involve the actual physical seizure of 
property without going through any bargaining process such as 
-accompanies its usual acquisition by payment of a contract price. 

It is necessary to recognize, however, that the matter did not end 
with the physical taking of the property. The statutes under which 
this power was exercised provided for the payment of just conipensa- 
tion." If they had not done so, they would have been invalid under 

" Ft. 14. p. 3226. 

24 Exhibit no. Ufi8. art. V, par. (a), p. 3301. 

29 Exhibit no. llf.5, arts. II, III, and V, pp. 3290-91. 

31) Testimony of W. S. Greg-?, pt. 14, pp. 3220-21. 

31 Exhibit no. 1170. 

32 Testimony of W. S. Gregg and W. B. Banker, pt. 15, pp. 3599-3600: ex. 1224, p. 3784. 

33 Testimony of W. S. Gregg, pt. 14, p. 3181. 
31 Exhibit 1146, p. 3273. 

3s E.xhibit 1132, p. 3145. 

38 Pt. 14, p. 3164. See also testimony of Ir§nee du Pont, p. 2963. 

3' A typical provision of the war-time legislation appears in sec. 10 of the Food and Fuel Control Act; 
"• * * the President is authorized from time to time, to requisition foods, feeds, fuel and other supplies 
necessary to the support of tlie Army or the maintenance of the Xavy, or any other public use connected 
with the common defense, and to requisition, or otherwise provide, storage facilities for such supplies, and 
he shall ascertain and pay a just compensation therefor." 


the Fifth Amendment to the Constitution.^^ It has been well settled 
doctrine since the case of Ex parte Milligan that the emergency of 
war does not create new powers; the actions of the Government are 
still subject to the limitations imposed by the Constitution.^^ 

Obviously the effectiveness of this device in compelling cooperation 
is dependent in large measure upon the fear which it inspires of detri- 
mental consequences of its invocation. The executive authority, 
however, does not have sole power to determine what is the proper 
measure of compensation. After its determination has been made, 
the company whose property has been commandeered may appeal to 
the courts, inasmuch as it has been decided that under the Constitu- 
tion the determination of just compensation is a question reviewable 
by the judiciary.^" 

The measure of compensation to be used where property has been 
requisitioned has been stated by the Supreme Court in the case of 
Phelps y. U.S.:'' 

The Government's obligation is to put the owners in as good position pecuni- 
arily as if the use of their property had not been taken. 

This rule obviously leaves very little of a coercive nature to the 
commandeering power and judicial appHcation of the rule has been 
sufficiently Uteral to ease whatever harshness and arbitrariness there 
may be in commandeering. 

It has been held that where a stable market price exists, determi- 
nation of compensation on the basis of cost of production plus a 
reasonable profit is not the proper method of restoring the producer 
to a position similar to that he would have been in had his property 
not been commandeered. In U. S. v. New River Collieries,''^ the 
Supreme Court appUed the rule to give a company the highest pre- 
vailing market price as compensation for coal which had been req- 
uisitioned by the Government. It permitted the use of export 
prices rather than domestic contract prices because the former were 

The court, in L. Vogelstein v. U. S.,'^ decided that the company's 
copper stock could be requisitioned at the hberal copper price fixed 
by the War Industries Board. By refusing to come along, the com- 
pany in this case was in no worse position than if it had been coopera- 
tive and, in addition, had the possibility of gaining a larger amount 
from the court. 

As a matter of fact the War Industries Board entertained a good 
deal of concern about keeping the commandeering price at the same 
level as the fixed price. The following excerpt from its minutes of 
May 28, 1918,^* contains the discussion on that point: 

Present: Mr. B. M. Baruch, chairman; Mr. R. S. Brookings, Brig. Gen. Hugh 
S. Johnson, Mr. Hugh Frayne, Mr. Alex Legge, Judge E. B. Parker, Mr. G. N. 
Peek, Mr. J. L. Replogle, Mr. L. L. Summers, Mr. H. P. Ingels, secretary. 

Price fixing. — Attention of the board was called to the probable difference in 
rulings of the price-fixing committee and the board of appraisers of the War 
Department now operating under the direction of the surveyor general of pur- 
s' U. S. V. L. Cohen Grocery Co., 255 U. S. 81. U. S. v. New River Collieries, 262 U. S. 34. 

39 4 Wall 2. But see the Selective Service cases, 245 U. S. 366. 

" U. S. V. New River Collieries, 262 U. S. 341. 

<i 274 U. S. 340. 

« 262 U. S. 341. 

« 262 U. S. 337. 

" Exhibit No. 1249. 


chases. If a manufacturer or producer refuses to deliver his product to the 
Government at prices fixed by the price-fixing committee and the product is 
commandeered, under the present arrangements, it is the function of the board 
of appraisers to determine a fair and just compensation. Considering the de- 
moralizing effect that would result from having the board of appraisers fix prices 
different from those fixed by the price-fixing committee, Mr. Brookings was 
requested to discuss with General Johnson the advisability of 

1. Having the board of appraisers work with the price-fixing committee, or 

2. To have the price-fixing committee take over the work now being done by 
^he board of appraisers. 

Meeting adjourned at 12:55 p. m. 

(Signed) H. P. Ingels, Secretary. 

One of the functions of the Price-Fixing Committee was declared to 
be "when materials are commandeered prices of the same will be 
fixed by this committee." *^ It is clear that however ineffective a 
threat to commandeer at the same level as the fixed price with reser- 
vation of right to appeal to the courts, there would be further impair- 
ment of its function in the possibility that the administrative deter- 
mination of compensation might itself result in the award of a larger 
sum than the price fixed. 

Another defect in the commandeering power was its limited cover- 
age. Goods could be commandeered only for the Army and Navy. 
Mr. Baruch testified that it was felt that: 

There was nothing in the commandeering situation that we could use to com- 
mandeer from one civilian producer so that another civilian consumer or producer 
could get this man's products.''^ 

The consequence of tliis weakness of power on the height of prices 
has been stated by him as follows: 

And that is one of the very reasons that these prices were not fixed quicker 
and why we did not hammer harder than we did, and why we had to pay more 
ihan justified for the Army and Navy."*^ 

The efficacy of the commandeering power to induce cooperation was 
further reduced by the belief of the responsible governmental authori- 
ties that there were insurmountable practical obstacles to its actual 
exercise. These were apparently of sufficient strength to dissuade the 
Government from its application, even where there was an admitted 
need for it. 

As we have seen, the steel industry was extremely noncooperative in 
the price negotiations which were undertaken to lower the speculative 
high prices that prevailed even after the United States entered the 
war. It will be remembered that the War Industries Board had 
passed a resolution declaring that "if the steel interests should not be 
willing to give their full cooperation because of the prices fixed, the 
War Industries Board would take the necessary steps to take over the 
steel plants."*^ Yet this threat was not backed up by any definite 
plan for concrete action. Mr. Baruch has testified before this com- 
mittee that in the case of the steel industry threat he did not know 
how the commandeering power would have been put into execution: 

Mr. Hiss. Let us talk about the United States Steel Corporation. 

Mr. Baruch. Yes, sir. 

Mr. Hiss. If your bluff had been called, what would you have been able to do? 

Mr. Baruch. I would have been in a devil of a fix. 

Mr. Hiss. Would not production have fallen off? 

<5 Exhibit No. 1274. 

<« Bernard M. Baruch, Mar. 29. 1935. 

« Bernard M. Baruch, Mar. 29, 1935 (galley 81 BBQ). 


Mr. Baruch. If I could not have gotten Judge Gary, I would have gotten some 
other fellow down the line. 

Mr. Hiss. But that would not have been operation by a Federal bureau, 
would it? 

Mr. Baruch. No, sir. We might have had to put it in charge of some officer. 
I do not know how we would have worked it. It was not very clear in my own 

Mr. Baruch lias also testified before the War Policies Commission 
that he could not recall a single instance of an important industrial 
enterprise being commandeered during the entire course of the 
World War: 

* * * During the World War, Government had power to commandeer 
factories and to operate them under bureaucratic direction. I do not recall a 
single important industrial enterprise that was thus taken over. This does not 
mean that the use of the power was never advocated. On the contrary, it was 
seriously urged in respect of a great industrial plant which was thought by some 
not to be giving full cooperation to its Government. The proposal split on the 
rock of this argument: 

Who will run it? Do j^ou know another manufacturer fit to take over its 
administration? Would you replace a proved expert manager by a prob- 
lematical mediocrity? After you had taken it over and installed your Govern- 
ment employee as manager, what greater control would you have then than 
now? Now, you can choke it to death, deprive it of transportation, fuel, 
and power, divert its business, strengthen its rivals. Could any disciplinary 
means be more effective? If j'ou take it over, you can only give orders to 
an employee backed by threat of dismissal, and with far less effect than j-ou 
can give them now. Let the management run the plant and you run the 

Nobody with any familiarity with industry could seriously urge a wholesale 
assumption by any Federal bureau of the responsibility for management of any 
or all of the vast congeries of manufacturing establishments upon which we must 
rely for extraordinary effort in event of war. Even if such bureau management 
could prove adequate to the task (which it could never do) the mere process of 
change would destroy efficiency at the outset.*^ 

The practical difficulties were made especially obvious in the case 
of industries composed of large numbers of producers. Business 
men who were cognizant of the actual working of industry could 
readil}^ realize how improbable it was that the \\ ar Industries Board 
would attempt to displace existing management which knew how 
to run its business and place new men in many different plants spread 
over large areas and set up a vast central supervising agency — all at 
short notice and at a time when the demand was for greatly increased 
production. In fact when the War Industries Board was talldng of 
commandeering the copper industry they were bluntly told by its 
representative, Mr. Ryan, that "it would be impossible to com- 
mandeer all of the small high cost mines as there are such a great 

The compulsory orders issued by the Army and Navy could have 
been of no greater effect than the commandeering power. They did 
not impose a penal sanction on the manufacturer who refused to 
produce the required commodities. In the event of such refusal, the 
National Defense Act simply rendered him subject to the commandeer- 
ing power. Requiring the manufacturer to produce goods for the 
Government under penalty of going to jail would undoubtedly have 
raised the constitutional question of involuntary servitude. 

« Ibid, (galley 82 BBQ) 

" 72d Cong., 1st sess., H. Doc. No. 163, p. 53. 

40 Exhibit No. 1701. 


Actually, it has been found that the compulsory orders issued by 
the Army and Navy had uses which were quite different from the 
functions of cutting short negotiations and inducing cooperation to 
get production at lower prices. 

For example, the Judge Advocate General's Office ruled that a 
compulsory order could be used to place orders without competition: 

Under this section the mere placing of an order for the supplies and materials 
required is sufficient without the execution of a formal contract. Therefore no- 
advertising for bids in any form whatever or filing of bids is necessary. ^i 

Furthermore they could be used by the Government to gain priority. 
Section 120 of the National Defense Act provided in part that: 

Compliance with all such orders for products or material * * * shall take 
precedence over all other orders and contracts theretofore placed with such 
individual * * * corporation or organized manufacturing industry * * * 

One of the consequences of the receipt of such an order would be, 
of course, to relieve the producer of civil liability to his private cus- 
tomers because of any impairment of performance due to the Govern- 
ment work. Lieutenant Colonel Harris, stated in his testimony 
before this committee, that in his opinion priority was the principal 
reason for the use of compulsory orders by the Navy.^^ Lieutenant 
Brannon of the Judge Advocate General's Office was of the same 
opinion as to the purpose of issuance of the War Department orders.^^ 

(6) The priorities system. — In addition to the commandeering power, 
it has been said that the Government was able to exert coercion by 
means of its control of priorities.^* 

But it must be recognized that the paramount purpose of the 
priority system was to deal with the problem of shortages. By 
granting certificates of preference, essential war industries could be 
better assured of gaining the raw materials necessary for production 
of the goods required by the military forces of the Nation. An effect 
of their denial to an industry or plant was the retardation of the 
flow of raw materials and the consequent curtailment of its output. 

In the case of iron and steel it is necessary to recognize that the 
consequence of cutting off the industry's supply of fuel would have 
meant a diminution in the flow of shells, tanks, and other iniplements 
of war to the Army and Navy. Even the less essential industries, 
such as automobiles, were concerned about increasing the supply of 
this commodity. At a meeting of the War Industries Board with 
the representatives of the automobile industry, the following discus- 
sion ensued: 

Mr. DuRANT. Can we increase the supply of pig iron and what would it be 
necessarv for us to do to obtain the increase? 

Mr. Baruch. Those suggestions are referred to us daily; we have made every 
move possible to increase pig-iron capacity. It has been a matter of fuel and 
transportation. 55 

" Vol. 1 of Opinions of the Judge Advocate General, p. 141 (1917). 

«2 Lieutenant Colonel Harris, Dec. 20, 1934. 

» Lieutenant Brannon, Dec. 20, 1934. , ^.. .. ^ 

" Mt. Baruch, in his supplementary statement to the committee dated Apr. 12, 1935, gave his estimate 
of the priority system: 

"May I add that commandeerin? was by no means our only weapon. Public opinion was our real 
weapon. If you haven't got it, a deiiocracy can't fight a war. If you have got it you need little else. But 
we did have much more than that. We had the allocation of priority based upon transportation control 
authorized by statute. That alone was enough. That could have choked to death and ruined any cor- 
poration, and, except for fines, that is the only effective penal sentence you can apply to an artificial person. 

« Exhibit No. 1274. 


Invocation of the priority power against a particular plant in an 
essential industry would be limited by the extent of the unused ca- 
pacity in other similar plants. Where the company itself furnished a 
great proportion of the capacity, as is the case in the steel industry 
with such companies as United States Steel and Bethlehem, there 
would be relatively little opportunity for the diversion of business to 
other companies. The use of priorities as penalties to enforce gov- 
ernmental orders would thus work against the primary need of war- 
time, increased production. 


Any price-fmng statute attempting to severely limit profits would 
raise constitutional problems. The price-ceiling scheme which 
attempts to fix all prices throughout the entire economic structure 
would be questionable on that very ground. It was the opinion of the 
legal section of the War Policies Commission that to uphold such a 
position might involve an innovation by the courts in the existing law: 

The question arises whether or not to uphold universal price fixing in wartime 
it will be necessary for the courts to go one step further than they have so far 
gone, namely, to hold that because the modern methods of warfare, which 
involve the Nation as a whole rather than merely its armed forces, the emergency 
is so wide-spread and the regulative force of competition so universally restricted 
as to cloth with public interest all dealings in commodities and services, whether 
for public or piivate consumption, whether at wholesale or retail. Whether or 
not that proposition can be sustained, is, in its ultimate analysis, the question 
to be answered. 5^ 

The case of Nebbia v. N'ew York ^^ although liberalizing the public- 
interest doctrine leaves open the question of whether universal price 
regulation would be considered to be a reasonable exercise of the war 

And regardless of the decision as to what types of prices may be 
regulated, the problem of the necessity for a fair price will remain. 
If the cases on commandeering, such as U. S. v. New River Collieries, 
are followed, it would seem that there would be a substantial legal 
obstacle to the prevention of profiteering and inflation in time of 
war. It will be remembered that there the court decided that pay- 
ment of a price which merely represented cost of production plus a 
reasonable profit was not sufficient and that the high market price 
for exports was the proper test. 

" War Policies Commission Hearings, op. cit., p. 841. 
" 291 U. S. 502 

II. Price Control as a Means of Preventing Inflation 

It is clear that the probability of price decline is remote in time of 

The published practice of the price-fixing agencies in the World 
War was to set maximum prices instead of prices which did not admit 
of any fluctuation. iMr. Baruch, in his supplementary statement to 
this committee, has stated that the price-ceiling proposal also con- 
templates this type of price regulation: 

* * * In simplest terms, I propose — 

To make it unlawful to raise prices in any war from the day of declaration 
(or thereabouts) except as may be permitted by the President and to penalize 
both seller and buyer for infractions. Individual prices or whole groups of prices 
may be adjusted up or down by a price-adjusting committee as occasion requires. 
This puts a ceiling over the price structure but permits fluctuations downward 
as freely as before. It also offers sufficient flexibility to meet all exigencies. No 
price is fixed. Nothing is frozen.^* 

However, it has been authoritatively stated in a War Industries 
Board pubHcation that the distinction between maximum and mini- 
mum prices was really a theoretical one and that it was only in a 
very few cases that prices sank of their own accord: 

It was characteristic of the prices fixed by the Price-Fixing Committee, if, 
indeed, not of all prices fixed in this country during the war, save those for wheat, 
pork, and hemp, that no more rigid control was attempted than the fixing of a 
maximum price. The committee really set limits above which the so-called "fixed 
prices" might not rise, but left them to play freely below those points. This distinc- 
tion, though precisely accurate, is of more importance in theory than in practice, 
because usually the maxiynum prices became the actual prices and operated, m the 
main, as fixed prices. The various Government departments (the Department of 
War, the Department of Navy, the United States Shipping Board Emergency 
Fleet Corporation, and the Railroad Administration) were usually guided in their 
purchases by the fixed maximum prices and paid them without more ado. 

The instances in which the market sank below the fixed prices, as it did with 
zinc and lumber, are relatively few. The committee, when such a circumstance 
occurred, simply reduced the fixed maximum price to a lower level. =* 

When it became known to the Price Fixing Committee that there 
would be an increase in the copper price it asked the Government to 
refrain from placing orders until the higher maximum price was in 

Numerous economic forces existed to insure the continuation of the 
inflationarj^ price levels which prevailed prior to the entry of the 
United States into the war. These arose from the state of war itself 
and will accompany any future conflict, regardless of the type of 
price control adopted. 

(1) introduction of marginal producers 

The examination of Mr. Baruch by this committee developed the 
fact that the necessity for increased war production requires that 
marginal producers be brought into operation who could not have 

" Supplementary statement of Bernard M. Baruch, Apr. 12, 1935. 
«» Garrett, op. cit., p. 240. (Italics added.) 
«« Supra, p. 63. 



existed at pre-war price levels because of their high costs. Because 
of the impracticability of the individual price proposal, prices for entire 
industries must be raised to guarantee this marginal production. 
As we have seen, this inflationary influence on prices in the World 
War operated on the many industries whose production had to be 
stimulated for war purposes, and the price rise for any particular com- 
modity was as high as war fears could make it. These considerations 
will be operative to carve a deep and wide exception to the price- 
eeiUng plan. ^^ 


When war comes, the economic structure must be readjusted to 
meet the changed character of demand. Guns, ammunition, sub- 
marines, and other implements of war are the commodities upon 
which production forces must be concentrated. A similar necessity 
exists for more of the usual peace-time commodities, such as clothing, 
shoes, and food. By means of the interrelationship of commodities, 
this shift in demand communicates itself throughout the countrjT-'s 
price structure. 

At man}^ points where the novel demand asserts itself, it becomes 
necessary to either provide new plant facilities or to convert the exist- 
ing plant to the new purposes. To accomplish either of these ends, 
large sums of money are required. War industries, it should be noted, 
are usually heavy industries, where investment must be extensive. 

If private industry is to be induced to expend its money for new 
construction or for conversion of existing plants, it wUl be necessary 
to make attractive the transfer of capital, especially where it is al- 
ready being profitably employed. The alternative is reliance upon a 
voluntar}' spirit of cooperation to drop profitable investment or, in 
the case of idle capital, to enter an uncertain and different field of 
business. With the coming of peace and the termination of extraor- 
dinary war demand, many facilities built for the purpose of the 
war suffer a loss in value from the curtailment of their profitable use. 
To insure investment, business requires that it be guaranteed against 
this future loss as well as assured of a return on the investment. 

Both these purposes were effected under the high price structure 
existing prior to the entry of the United States into the war. Many 
of the price advances have been explained solely on this ground. ^'^ 

The institution of price control did not eliminate the upward 
influence of amortization on prices. It was now urged by producers 
as an element of cost justifying price increase. When the question 
of continuing the aluminum prices was before the Price Fixing Com- 
mittee, the producers contended for an increase because they had 
enlarged their plants. This consideration was apparently strong 
enough to warrant an advance of 1 cent over the existing high price 
of 32 cents a pound. ^^ 

To the extent that price increases are used to induce this new 
construction, there v/iU be another gap in the price ceiling which will 
impair the effectiveness of that proposal. 

The use of Government financing has its limitations. Unless the 
Government is to make a gift of the new plant to the manufacturer, 

6' See supra, p. 56-62. 

62 See War Induslries Board Price Bulletin No. 56, Prices of Explosives, for a statement of the importance 
of this factor in the prices paid by the Allies for military explosives. 

63 Garrett, op. cit., p. 286. 


it must be repaid. The manufacturer will therefore have to earn 
during the war sufficient to recompense for the future loss in value, 
and that can only be accomplished by a price set at a level which is 
high enough to take this into account. 

Where reliance is placed on a tax provision for amortization as a 
deduction from gross income, it should be recognized that the manu- 
facturer utilizing it is enabled to gain profits from a facility the 
expense of which constitutes a subtraction from the Government's 
revenue. To the extent that this has to be made up by borrowing 
there is a tendency toward inflation. Moreover, there are many 
possibilities for profit in manipulation of the inexact determination 
of loss in value. ^^ 

The allowance of amortization as an element of cost in the last war 
permitted gains that were not readily visible. For example, on May 
9, 1918, the Price Fixing Committee allowed an increase in the price 
of aluminum from 32 to 33 cents a pound because of the manufacturer's 
plea that plants were enlarged to meet war production needs. *^^ The 
Aluminum Co. of America subsequentlj^ gained amortization in the 
amount of $10,650,059 under section 234 (8) of the Revenue Act of 
1918, as a deduction from its gross taxable income on the theory that 
much of the war construction represented excess capacit}^ in time of 
peace. ^^ However, this company's production increased after the 
termination of the war. As has been noted in the taxation section 
of this report, production was 124,724,924 pounds in 1918; 128,- 
476,872 pounds in 1919; 138,042,272 pounds in 1920, and from 1923 
to 1931 it varied from a low of 128,658,222 pounds in 1923 to a high 
of 229,036,636 pounds in 1930." In a word, this company was able 
to gain two amortization allowances, one in the form of additional 
price and another in decreased tax, for a loss in value of capital 
facilities which never materialized. The Government suffered doubly, 
both in its loss of revenue and in the increased cost of its purchases. 


Another situation in which prices will be adjusted above the ceiling 
of the pre-war price norm is that of farm products. It was the ex- 
perience of the World War that not even existing high market prices 
could induce a sufficiently increased production of wheat. The possi- 
bility of a future decline when the crop would be ready for market made 
necessary the guarantee of a minimum fixed price which would be 
paid at that time. The Lever Act, approved in August 1917, set a 
statutory minimum price of $2 per bushel of wheat, which was 
increased at later times until it reached the figure of $2.26: 

The scarcity of available wheat had precipitated a panic. While fear was an 
element in the situation, the problem of scant supply was real. Increased world 
production was the effective remedy, and under existing conditions America was 
the country which must do most in increasing the world supply. Wildly fluc- 
tuating prices are not attractive to the American farmer, however, especially if 
the\' reach unusual heights at a season of the year when liis crop is not ready 
for the market. A high price in May does not insure a high price at harvest time, 
later on. Moreover, the problem of world supply of wheat, which became acute 
in the spring and summer of 1917, could not be alleviated except by sowing more 

6J See supra, p. 32-34. 
« Garrett, op. cit., p. 286. 
«9 Supra, p. 33. 
6" Ibid. 


wheat to be harvested 1 j^ear later, or in the summer of 1918. Making wheat 
culture attractive to the farmer, therefore, became the task of the Government 

Congress completed the Food Control Act (Lever Act) 4 months after the 
United States had declared war against Germany, and it was approved by the 
President on August 10, 1917. This law not only made possible the organization 
and program of the Food Administration, but section 14 named a minimum price 
of $2 per bushel for the 1918 wheat harvest under the act. Differentials were to 
be set up for the several standard grades of wheat, based upon No. 1 Northern 
spring wheat at Chicago, or its equivalent at the principal interior primarj'^ 
markets. The President was authorized, whenever he should find an emergency 
to exist requiring stimulation of production of wheat, and whenever it seemed' 
essential that the producers should have the benefit of the guaranty, to determine 
and fix what, under specified conditions, he considered a reasonable guaranteed 
price for wheat, in order to assure producers a reasonable profit. 

It is quite evident that the authors of section 14 were concerned entirelj^ with 
the producer. Production of wheat was the world's prime need and the purpose 
of this guaranty was to serve notice upon the farmer one year in advance of his 
harvest that he might expect at least $2 a bushel for his wheat crop, and as much 
more as the market should justifj' and the President provide. ^^ 

It has been claimed that the effect of the price may be seen in the 
figures of crop acreage sowti. According to the Bureau of Crop Esti- 
mates, Department of Agriculture, the acreage sown in the fall of 
1916 was 40,534,000; in 1917 it was 42,301,000; and the preliminary 
estimate for 1918 w^as 49,261,000.'^^ The importance of this particular 
farm product exception is indicated by the figures of production. 
In 1916, 636,318,000 bushels; in 1917, 636,655,000; and in 1918,. 

A somewhat similar treatment was accorded the problem of pork 
scarcity. For the purpose of stimulating production in 1918, the head 
of the Food Administration's Meat Division, declared in October 1917 
that the price for hogs would not "go below $15.50 per hundred- 
weight for the average of the pack's droves on the Chicago market. "^^ 
He further stated that the Food Administration would attempt to 
stabilize the price so that the farmer would be assured of getting 13 
times the average cost per bushel of the corn fed into the hogs. In 
this case there was no statutory enactment but the Government used- 
its control over the buying of the Allies, the Army and Navy, the 
Red Cross, the Belgian relief and the neutrals, all of which had been 
centralized in its hands to keep prices at the stated price level. 

Mr. Baruch testified before the committee that prices of some farm- 
products would certainly have to be increased in war time: 

Mr. Hiss. Mr. Baruch, it is true, is it not, that we will be forced, in any future 
war, to increase the prices of some farm products, as the most effective way of 
getting immediate and sudden increase of production? 

Mr. Baruch. Yes, sir. 

Mr. Hiss. And that will affect the price schedules? 

Mr. Baruch. I also think you have got to do it in peace times, but in war times 


(a) Insurance rates. — Among the costs which cannot be held down 
to peace-time levels are ship and freight insurance rates. With the 
natural increase in risk of international shipping, insurance com- 
panies must provide larger reserves to meet the increased burden.- 

68 Garrett, op. cit., p. 60. 

69 Ibid, p. 68. 

"0 Statistical Abstract of the U. S., 1934, p. 599. 

" Garrett, op. cit., p. 89. 

"2 Bernard M. Baruch, Mar. 29, 1935 (galley 78 BBQ). 


The only way of accomplishing this end is by raising the premiums 
paid by the insurers. How large a risk existed in the last war may be 
reahzed from the fact that between August 1, 1914, and November 
11, 1918, a period of a little more than 4 years, the United States lost 
587 seagoing documented vessels, exclusive of seized enemy and 
requisitioned Dutch ships. The total tonnage involved was 1,146,236.^^ 
Domestic rates must also be increased to take care of the added strain 
that is put on the internal system of communication. 

This item appears in the price of many commodities as a cost in- 
crease which warrants further advances in price. Moreover, prices 
must increase even where the manufacturer cannot get insurance. 
In such cases, to continue in existence, he must act as his own insurer 
by advancing the price sufficiently to cover the increased probability 
of loss. 

(6) Labor costs. — It should be noted that labor costs will increase 
in time of war even though the rates of wage remain stationary. 
Less skilled labor must be used in the many industries which lose 
their trained men who are replaced by persons who because of their 
lack of skill will produce less both in quantity and quality of goods. 
There will therefore be an increased cost per unit of the commodity 
produced which must be allowed for in the final price set. 

(c) Transportation costs. — The necessity for moving large quantities 
of goods and men means that there is imposed upon the railroads of 
the country a great physical burden of work. Older equipment is 
used, more repairs are needed for track maintenance, and in general 
it costs more to move the same per unit amount of traffic. This 
results in a tendency toward the imposition of higher rates if there is 
any attempt to avoid incurring large deficits. 

In the World War the Government raised railroad freight rates 25 
percent, effective June 25, 1918, in order to gain sufficient revenue to 
offset the threatening deficit. Even with this large advance, the net 
railroad revenue did not increase according to expectations, and it is 
reported that the Director General of the Kailroads stated as reasons: 

— the necessity of moving war freight expeditiously regardless of expense, the loss 
of men to the draft and to railroad service abroad, and the substitution of inex- 
perienced labor and the rapid increase in cost of labor and materials. Moreover, 
while wage increases were largely effective from January 1, the railroads received 
the benefit of rate increases for only the last 6 months of the war."^ 

Furthermore, it was pointed out by Mr. Baruch in his appearance 
before this committee, that there was in the World War a tendency 
toward decentralization of plants. The net effect of spreading indus- 
tries like munitions over the country is, of course, to increase the cost 
and consequently the price of the article which is being shipped for 
longer distances: 

Air. Hiss. Is it not also true that in the history of production in war, that in 
the tie-up of transportation which inevitably results from new demands on trans- 
portation, goods are accumulated at unusual places, and so forth, and the costs 
actually go up? 

Mr. Baruch. Yes, sir; unquestionably. 

Mr. Hiss. Is it not true that many manufacturers have to enter a line of 
production with which they are not familiar, in unfamiliar lines, and consequently, 
because of unfamiliarity, their costs increase? 

73 Garrett op. cit., p. 34. 

'< Dixon, Federal Operation of the Railroads During tiie War, Quarterly Journal of Economics, vol. 
- 33, p. 608. 


Mr. Baruch. Yes; and another matter, if you will permit me to interject here^ 
is that because of transportation difficulties and because of the fact that many 
parts of our country have no business at all, and for the fact that we must scatter 
our munitions manufacturing so as not to have a blow-up or a falling down in 
some place, we were at the end of the war placing orders, as I said, in Denver, and 
in far away places, without reference entirely to the question of price. So that 
that is an important factor. 

Mr. Hiss. And all that means increased cost in war times over peace timesf 

Mr. Baruch. Yes, sir. 

Mr. Hiss. And that is one of the causes of increased prices usually in war time, 
is it not? 

Mr. Baruch. Yes, sir. 

Mr. Hiss. And that tendency would be present in any war? 

Mr. Baruch. Yes, sir. 

Mr. Hiss. And would furnish various lines of industry with plausible, reason- 
able arguments as to why their particular prices should be increased? 

Mr. Baruch. They will find more than you and I can figure on now.''^ 


The likelihood of a continual rise in the price ceiling is readily 
apparent when it is noted that war markets are sellers' markets. 
Buyers must procure their supply without regard to the height of 
prices. In the final report of the War Industries Board ^^ it is said: 

A war demand differs in its essential nature from the normal demands of 
peace. In ordinary times a rising price carries with it its own defeat. Pur- 
chasers will buy so long as they can make a profit or reap a satisfaction by doing 
so. This at least is true of everything except the most extraordinary luxuries. 
They will stop buying when the price reaches a point outside the range where the 
commodity can be turned over at a profit. The inflated price drops as a result. 
But war is economically the greatest and most scandalous of spendthrifts. No 
economic profit comes from the expenditure of an instrument of war and no 
economic profit is considered in connection with its purchase. The demand is 
absolute; the price is no deterrent." 

In the last war this consideration not only cut off the probability of 
downward fluctuation but furnished a major force for the advance of 
prices which the creation of the price-fixing body did not terminate. 

For instance, on January 2, 1918, the War Industries Board ap- 
proved a contract with the Hercules Powder Co. for 30,000,000 pounds 
of smokeless powder although they were of the opinion that the 70- 
cent price was too liigh. A reason stated in justification was the fact 
that it was either a matter of paying the high price or doing without 
the powder. The minutes read: 

Under the advice of Mr. Brookings the Board approved of the amended con- 
tract with the opinion that while the Board considers 70 cents a high price and 
that as 7 cents per pound charged was for amortization of a new plant, that this 
should have been so shaped that this plant paid for by the Government in price 
should have been the property of the Government but that however as Captain 
Peters reports it was impossible to secure this and that it was either necessary to 
pay the 70 cents per pound or go without this powder and that having had nothing 
to do with the negotiations and acting only as Captain Peters' statement of the 

" Bernard M. Baruch, Mar. 29, 1935 (galley 78 BBQ). 

" P. 7C. 

" Compare the statement made at p. 114 of the War Industries Board Report regarding the reasons for 
the excessive rise of iron and steel prices prior to the inception of control. 

•' * * * the demand was absolute; there was no postponing of it. Buyers of steel in times of peace 
expect to realize a profit on their investment. Steel that goes into buildings and bridges must be bought 
at prices which will make possible satisfactory returns. Whenever these buyers believe prices are likely 
to decline in the near future, they will withdraw from its market. Their attitude serves as an effective 
check on buying when prices have reached what is considered an abnormal level. 

" The attitude of the Government toward its war-time purchases, however, differed fundamentally from 
this. It bought with no expectation of earning a profit. The possibility of lower prices in the future dii 
not check its buying." 


case and considering its emergency nature, the Board can see no reason why the 
contract should not be made.'* 

Similar considerations appear in the course of negotiations with the 
copper interests. In the September 11, 1917, meeting of the War 
Industries Board, Mr. John D. Ryan, President of tlie Anaconda 
Copper Co., and spokesman for the copper industry, said: 

* * * if 22 cents per pound was fixed as a price for copper that it would 
be impossible to obtain the voluntary cooperation of the majority of mine owners. 
If 25 cents were fixed he assured the War Industries Board that he and the other 
copper producers present would obtain all of the copper voluntarily from aU 
producers, and that he would see to it that the copper was properly distributed 
and the prices controlled.'^ 

The result of the negotiations was that the Government yielded to 
allow a price of 23.5 cents. 

In the February'- 7, 1918, minutes of the War Industries Board, there 
is recorded the offer of the Anaconda Copper Co. to build a new 
manganese plant on condition that there would be no price regulation: 

The Board was advised that the Anaconda Copper interests were willing to 
expend approximately a million and a half dollars toward developing manganese 
property near Butte, providing that they would receive a guaranty that the 
Government would not regulate the price. Mr. Baruch was requested to ask 
Mr. Ryan to submit a definite proposition in writing.™ 

Furthermore, there was the very real pressure of the military forces 
for the procurement of goods regardless of price. How that operated 
in the determinations of the governmental price-fixing agency may be 
seen from Mr. Baruch's testimony that, "every time anything hap- 
pened they said, ' We are going to lose the war ' and I was on the spot." ^^ 

On May 22, 1918, Mr. Charles Hayden, representing the Utah 
Copper Co., justified a plant cost increase of more than 100 percent 
over normal pre-war costs by the fact that this might speed up pro- 
duction and aid in bringing the war to a speedier termination. He 
stated that the Allied Governments were demanding more goods 
rather than lower prices: 

We have seen a plant being built at Hog Island at an estimated cost of 
$42,000,000, against a normal pre-war cost of $21,000,000. At first blush this 
seems extravagant, but a careful analysis shows that this excess cost of this yard, 
if it enables our country to get ships 6 months earlier, will, by that very fact, if 
it only shortens the war one-half of those 6 months or one-quarter of those 6 
months, save many, many times its cost, as the daily expenses of the war are in 
excess of all the overcost of 1 yard. The same applied to the situation in aircraft 
production. And now what are we confronted with in the copper industry? 

Our allies are crying for copper; representatives of foreign governments are 
telling me as an individual: "What do we care about a cent or more in price? 
What we want is the stuff." And here we are sitting and theorizing as to whether 
or not the Federal trade examination of costs, or a theoretical discussion of 
margins of profits, is meaning an undue profit to the copper industry, when there 
is already a shoriage of over 100,000 tons of copper at the present time and when, 
in the interests of safety, there should be a surplus of at least that amount. ^^ 

This consideration is significant for the practice in future wars and 
especially for the determination of the extent of adjustment that will 
be required for the price-ceiling plan. Lieutenant Colonel Harris, 
Director of the Planning Branch of the War Department, expressed 
doubt as to the possibility of continuing the Government contract 

'8 Exhibit No. 1271. 

'» Exhibit No. 1270. 

80 Exhibit No. 1274. 

SI Bernard M. Baruch Mar. 27, 1935 (galley 50 BBQ). 

«J Minutes of the Price Fixing Committee, May 22, 1918. 


provision which allows a return of 6 percent of the estimated plant 
value — an admittedly high figure:*^ 

Mr. HiS3. Colonel Harris, W3 cannot be sure at the present time that the 
present 6 percent provision in the adjusted compensation contract can, as a 
matter of practical necessity, be retained in the event of war? 

Lieutenant Colonel Harris. To be perfectly frank, I am very doubtful.^* 

An increase in the percentage is apparently contemplated at the 
present time but it is thought advisable to defer its exact determina- 
tion to the time when war is imminent. The following excerpt 
is from a War Department memorandum of February 20, 1934, 
headed, "War-Time Contracts Forms and Emergency Codes": 

The question of the amount of profit to be allowed the contractor is one of 
the most critical in any form of cost-plus contract. The fee adopted should 
be fair alike to the producers and the Government. In the adjusted compen- 
sation contract the fee is based primarily upon the rental value of the facility. 
It is true that the contractor assumes few of the risks of an entrepreneur for 
which profit is paid. He does, however, have certain risks of management 
and certain expenses for which no compensation is made. The committee 
beUeves that some increase in the present figure might well be made, but 
doubts the advisability of attempting to determine the exact amount until war 
is imminent. It can then be decided on the basis of then-existing conditions.^* 

The committee has found that a number of the owners and execu- 
tives in the various ordnance districts think that the present pro- 
visions are not sufficiently liberal. 

The following excerpt from a War Department memorandum 
dated February 6, 1934, and headed "Comments, Criticisms, and 
Proposals on the Adjusted Compensation Contract Form" is a 
comment from the St. Louis ordnance district on the present 6-per- 
cent rate: ^^ 

It is the general concensus of opinion among owners and executives of in- 
dustrial plants in this vicinity that the adjusted-compensation contract, while 
getting away apparently from the cost-plus contract, still retains some features 
highly objectionable and subject to prolonged argument. Some of the firms are 
frank to state it would be extremely difficult for them to voluntarily enter into 
such a contract in either peace or war time. * * * 

There is no question but that the proposed contractors in this vicinity think 
the reward inadequate and unjust. This is particularly true of companies hav- 
ing a large bond issue and an issue of preference-accumulative stock whereby 
the fee and the uncertain bonus would not be sufficient to protect the company 
and the investors of the preference stock. 


It is the opinion of this office, based on the dicussions at the various con- 
ferences held on this subject, that the present form of adjusted-compensation 
contract includes a number of fundamentally objectionable features and is not 
satisfactory to the contractors in general.*^ 

The San Francisco ordnance district entered an alternative sug- 

After careful perusal of the Bridgeport district report on the adjusted-compen- 
sation contract, it is believed that the contract is impracticable, and that its use 
would involve intolerable delay in the initiation of procurement. 

83 Profits of much more than 6 percent can be gained under these contracts by coming under the bonus 
provisions. Valuation difficulties are also pertinent. Mr. Baruch testified on Mar. 29, 1935 (galley 
99 BBQ). "These figures are all too high there. They are absurd." 

s» Lieutenant Colonel Harris, Dec. 14, 1934 (galley 15 FM). 

85 Exhibit No. 1225. 

86 Exhibit No. 1227, Hearings, p. 3823, Lt. Col. Harris described the ordnance districts as skeleton organ- 
izations engaged in the field development of industrial planning. There are 14 such districts in the United 
States set up on a geographical basis for decentralized procurement in war. 

8' Lieutenant Colonel Harris, Dec. 14. 1934 (galley 14 FM). 


It should be expected that the set price will permit of a profit of at least 10 
percent on the gross price to the average bidders.^* 

It was the opinion of the writer of the Boston district comment that 
the Government would not have gotten the same degree of coopera- 
tion from manufacturers during the World War if there had been no 
opportunity for profiteering: 

The cost-plus contract offers the ideal conditions for profiteering. It seems 
to the writer questionable whether the Government would have received such 
whole-hearted cooperation from manufacturers during the World War had 
all opportunity for profiteering been eliminated. In other words, it seems 
that there are incentives to the best efforts of the manufacturers in both the 
fixed-price and the cost-plus contracts which are absent from the adjusted- 
compensation contract.*^ 


A major reason for the proposal of a price ceiling based upon the 
schedule of prices existing at a pre-war date has been the impression 
that in this manner a normal standard for control would be created. 
Mr, Baruch has stated before the War Policies Commission: 

To measure inflation of price and profit we must have some norm. The 
obvious norm is the whole price structure as it existed on some antecedent date 
near to the declaration of war on which the normal operation of the natural law 
of supply and demand can be said to have controlled prices. That determined, 
we need a method of freezing the whole price structure at that level. The obvious 
waj^ to do this is simple, by proclamation to decree that every price in the whole 
national pattern as of that determined date shall be the maximum that may 
thenceforth be charged for anything — rents, wages, interest rates, commissions, 
fees — in short, the price for every item and service in commerce.^" 

The studies of this committee have led to the conclusion that there 
is no guaranty of normahty in a pre-war price level. Our experience 
in the World War is significant in this connection. Prices prior to 
our entry were at an inflated level, the Bureau of Labor Statistics 
index for all commodities having risen 62 percent above the 1913 
level by March 1917. In fact, during the period of our participation, 
there was an additional rise of only 40 points. Furthermore, there 
was a great variation in the rates of increase of the various groups of 
commodities. Metals and metal products, for instance, had risen 
118 percent by March 1917, while foodstuffs had gone up 48 percent 
and farm products 66 percent. Difference and change, rather than 
uniformity and stability, were the rule.^^ 

Mr. Hurley, who was at one time Secretary of War and Chairman 
of the War Policies Comxinission, agreed that to have put the price- 
freezing provisions of the McSwain bill into effect on a date prior to 
the United States declaration of war in 1917 would have resulted in 
an artificially high level of prices: 

Senator Clark. Mr. Secretary, I understood you to say a moment ago that 
you had not read the McSwain biU. I will just read the first paragraph of it 

"That whenever Congress shaU declare war or the existence of an emergency 
due to the imminence of war, then, from and after a date prior to such dec- 
laration which date the President is hereby authorized and directed to deter- 
mine and publicly proclaim, it shall be unlawful for any pei'son to buy, sell, 

8« Ibid. (Italics added.) 

89 Ibid., p. 382:j. 

w 72d Cong., 1st sess., H. Doc. No. 163, p. 34. 

«i See Exhibit No. 1689. 

11579 — 35 9 


or otherwise contract for any article or thing at a higher rate, rent, price, com- 
mission, compensation, or reward than was in effect at the date so determined." 

Now, taking the declaration of war in 1917, or immediately prior thereto, the 
effect of such a provision as that would be to freeze prices at an artificially high 
level, would it not? 

Mr. Hurley. Yes, sir.^^ 

When the chairman asked Mr. Hurley, 

Could American industry have wanted for anything finer than a program 
which, upon our entry into the World War, would have found prices frozen at the 
point that prevailed when we entered the war? ^^ 

he testified, 

My own opinion is that we already had price inflation due to the war before 
the United States declared war. Consequently it would have been unjust, unfair, 
inequitable to have frozen prices at the figures that they were on our advent into 
the war.9* 

(A chart of index numbers of wholesale prices illustrating the height 
to which prices had risen in April 1917 is shown facing p. 126.) 

»> Patrick J. Hurley, Mar. 13, 1935. 
»3 Ibid. 
" njid. 


1913- 19Z1 
[Index numbers, 1913 = 100] 

II.jT;)— 35. (Face p. 126.) 

III. Price Control as an Aid to Increased War Production 
(1) curtailment of civilian consumption 

Because of the war demand for increased supply and the time new 
plant construction requires it becomes necessary to divert existing 
materials from their usual channels of distribution for the duration 
of the war. The Government, to produce goods for itself and to 
guarantee that war industries shall have an uninterrupted supply of 
materials, must, as a consequence, curtail direct and indirect civilian 
consumption. By outbidding that part of the civilian population 
which cannot meet increased prices, Government has an effective 
device for increasing its supply: 

Mr. Hiss. It does mean, does it not, that in time of war the civilian needs 
cannot be filled as fully as in times of peace? 

Mr. Baruch. Yes, sir; they have to subordinate themselves to the war. 

Mr. Hiss. Does that not mean, then, that one of the Government's problems 
is competition in the acquisition of necessary materials with the civilian popula- 

Mr. Baruch. Yes, sir. 

Mr. Hiss. In all past wars has that not been met by the Government outbidding 
the civilian population? 

Mr. Baruch. It was, except with us in the last war. 

Mr. Hiss. Was it not one of the reasons why prices went up during the last 
war, because the Government had to pay? 

Mr. Baruch. With which we tried to cope. You are quite right. 

Mr. Hiss. And the Government had to secure its supplies, regardless of cost, 
in many instances? 

Mr. Baruch. Yes.«5 

Civilian consumption is automatically curtailed by the high prices 
set for the purpose of stimulating the production of war industries. 
The price-fixing practice in the World War has been described as 

It was the policy of the Government for the sake of maximum production, to 
permit the automatic raising of prices by the law of supply and demand to the 
point where the comfort of the civil population was endangered and then, on a 
scientific determination of costs, to fix a price high enough to encourage the pro- 
ductive contribution of even the high-cost producer, to the maximum consistent 
with the common good, even at the risk of undue profits to low-cost producers, 
relying on excess-profit taxation to equalize gain to a common level. By this 
expedient every possible field of production was encouraged, the danger of a run- 
away or speculative market was avoided, and profits were standardized.^^ 

The priority system was also designed to increase production. It 
gave the war industries a direct preference in the procurement of the 
limited supply of the factors of production and thus enabled them to 
meet one of the most important limitations on the volume of produc- 
tion. Indirectly, by curtailing production for civilian purposes, it 
released labor, supplies, and capital for use in the war industries. 
To avoid a vast problem of enforcement, this system, of course, had 

«« Bernard M. Baruch, Mar. 29, 1935 (galley 83 BBQ). 
«6 Committee Print No. 3, op. cit., p. 23. 



to operate in conjunction with the high fixed prices which had 
automatically cut off a large part of the force of civilian demand. 


Price control is useful in the stabilization of markets. ^^ Where prices 
fluctuate at high levels, purchasers tend to curtail consumption 
because of the uncertainty of future price movements. The conse- 
quent irregularity of demand, together with the uncertainty of cost 
conditions, causes restriction of production. Price regulation elim- 
mates this condition by fixing a price which, although at a high level, 
will continue without fluctuation for a period of time and upon which 
business men can make more accurate calculations of future costs 
and sales. The preference of business for stable markets has been 
described by Mr. Baruch: 

As to the morale of industry at large in the World War, the uncertainty of 
the daily fluctuation of price and the inevitable rising trend on all sides was a 
matter for common commiseration. I am aware of no able and experienced 
business administrator who does not prefer operation under stable conditions 
to operation under price schedules in an unforeseeable state of flux.^'' 

Mr. Yeatman stated in a memorandum to the Price Fixing Com- 
mittee that the absence of a speculative rise in the price of nickel was 
due not only to patriotic feeling but also "to the belief that if prices 
advanced too much the demand for the product would lessen."^ 

These factors were major considerations for both Government and 
business in the adoption of price control for the steel industiy. 

The report of the War Industries Board states that in the summer 
of 1917 "the instability of prices was in itself hampering production 
and driving business into confusion." ^ The index of iron and steel 
prices fell 24 points between July and August 1917.^ An additional 
36 point decrease was registered in the month of September.^ Bes- 
semer pig iron, Pittsburgh, declined from a high of $57.95 in July 
to $50.95 on September 19. Basic pig iron, valley furnace reached 
its high of $5-3 on Julv 18 and declined steadilv to $42 on September 

Business was reluctant to buy in this condition of the market. 
A letter from Mr. Crosby, a Buffalo manufacturer written on July 13, 
1917, when prices were at a speculative peak, stated that the expected 
decline in prices would injure business because taxes would be assessed 
on profits computed on the basis of high value inventories: 

The situation, in my judgment, is becoming extremely dangerous for the ordi- 
nary manufacturer and the ordinary merchant. A very large part of his profit 
is in his inventory. The Government is going to ask us to pay taxes, and very 
heavy taxes, on this profit. Even if the Government takes no action, prices will 
drop suddenly and the high figures of the inventories will melt away in a night.^ 

Expectation of future shrinkage of value also curtailed the consump- 
tion of steel for building purposes. This factor appeared in Samuel 
Vauclain's letter to F. A. Scott, then Chairman of the War Industries 

«8 Garrett states that at a meeting of the Price Fixing Committee on July 8, 1918, Mr. Brookings, the 
Committee's chairman, "submitted a memorandum stating that : the Price Fixing Committee was created 
to stabilize values and prevent extortionately high prices." See p. 64 supra. 

" War Policies Commission hearings, op. cit., p. 813. 

1 Exhibit No. 1749. 

2 Page 72. 

3 W. I. B. Price Bulletin, No. 3, p. 246. 

4 Ibid. 

« Bernard M. Baruch, Mar. 29, 1935. 
8 Exhibit No. 1735. 

Price per pound of steel sheets at Pittsburgh district mills 
and prices of all commodities 

INDEX NUMBERS ( 1913 = 100 ) 





ZS." No 27 boil 

US standard 

C/i or more 

^ \ 





—': • 

'\ .A^ 





^ ji^"'" 


10DITIES — f. 








100 - 





, , 1, .1, ii , , 




,,i,,i i,,i 


1913 191^ 






H579 — 35. (Face. p. 128.) No. 1 










AND PRICES OF All Commodities 

INDEX NUMBERS ( 1913 = 100 ) 

1913 \9]k 









1157!) — :jr.. (Face p. 128.) No.? 


September 1, 1917. 

Can you give me any idea how soon your Board will undertake to determine 
a schedule of prices for steel products? 

The reason I ask is that large steel companies in which I am interested should 
now, without delay, place contracts for coke and other materials entering into 
the manufacture of open-hearth steel. The lowest price for coke today is $11 
per ton. It would be possible to pay $6 per ton and exist, but a more reasonable 
price for this product would be $5 per ton. 

At one of the plants in which I am interested intend to put in a byproduct 
coke plant of sufficient capacity to take care of their needs, and such a plant 
would cost $3,750,000 which by shrinkage in values that are to be expected in 
the next 2 or 3 years this plant could not be valued at more than $2,250,000, or 
in other words a shrinkage of $1,500,000 in the value of this plant is liable to 
take place in the very near future if contracts are taken at present prices.^ 

Another indication of consumer's resistance is to be found in the 
downward movement of unfilled orders of the United States Steel Co. 
The following figures are reported in the Iron Age: * 

1917: Tons 

April 12, 183,000 

May -- 11,887,000 

June 11, 383,000 

July- - 10,844,000 

August 10,407,000 

September 9,833,000 

October 9, 010, 000 

Concurrent with the decline in steel prices, the Iron Age which had 
previously been opposed to control began to change its opinion on the 
value of price regulation. In late July it reported that the steel 
industry was beginning to fear the effects of an unregulated market: 

* * * the Government is not alone in wanting regulation of steel prices. 
Many producers and buyers of steel have feared the consequence of the ungov- 
erned upward movement of the past 6 months.^ 

And in the issue of August 30, 1917, a few weeks before prices were 
fixed, the magazine frankly advocated price stabilization. ^° 

The relationship between price decline and advocacy of price fixing 
by the steel industry is reported as follows by the War Industries 

By the end of July prices began to show a sharp drop, and the more conservative 
factions of the steel industry saw only peril ahead unless the Governmentbrought 
stabilization to the market. By late September virtually the whole industry 
was disposed to recommend that formal regulation begin. ^^ 

The stabilizing effects of control on the price movements of steel 
plates and steel sheets are apparent in the charts of their index 
numbers facing page 128. 

Apparently, the governmental authorities were as concerned with 
the welfare of the steel industry as they were with the high prices that 
were adversely affecting domestic consumers and the Allies. The 
Federal Trade Commission report on war-time profits and costs of 
the steel industry states: 

Furthermore, the Government realized that it would probably be necessary to 
go even further and to regulate prices for the industry generally, not only in the 
interests of associated belligerent j^owers and don.estic consumers but also in the 
interests of the industry itself. It was evident that the extravagant prices all 
ready prevailing would go much higher; hence, to prevent chaotic conditions and 

' Exhibit No. 1737. 

8 Bernard M. Baruch, Mar. 29, 1935 fga'ley 90 BBQ), Iron Age, December 1917. 

» W. I. B. Price Bulletin No. 3, p. 250. 

10 Ibid. 

11 Report of the War Industries Board, p. 115. 


attendant disturbances in the industry, it appeared necessary to stabilize prices 
and to allocate the supply equitably between the Government and other con- 

In the report of the War Industries Board it is stated of the initiation 
of steel control that: 

It was quite as much the object of the Government to stabilize the market at a 
point which would effect a maximum of production as to scale prices down from 
higher levels. '^ 

Adoption of price control for the copper industry was also due in 
large measure to the need for stabilization. 

The New York Times of January 6, 1918, wrote in its review of the 
effects of the Government policy upon business for the year 1917: 

The past year was prosperous for the copper miners [producers]. They kept 
their mines operating to capacity and enjoyed the highest prices for the metal 
which have ruled for 50 years. * * * The United States and Great Britain 
fixed the price of copper at 2334 cents a pound in order to prevent a runaway 
market This measure has greatly benefited copper miners. Had the price not 
been fixed, there would have been price fluctuations, which would have led to irreg- 
ular demands for the metal. The average production cost before the war was 
around 8 cents a pound. Some mines produced at around 5}^ cents. The cost 
is now about 10 cents, with many of the larger mines producing at 7}2 cents. 

The chart of electrolytic copper prices facing page 130 indicates 
both the extent of fluctuation at the time of the United States entry 
into the war and the smooth flow of prices after the inception of 
price control. 

12 Ibid. p. 18. 
u Ibid., p. 120. 





January 1813 to December 1918 








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CO Q O k.) 


munitions industpa' 
Exhibit No. 1756 


Aluminum Co. of America, "Exhibit No. 1746." 

Bethlehem Steel Corporation and subsidiaries, "Exhibit No. 1740 A." 

Republic Iron & Steel Co. and subsidiaries, "Exhibit No. 1740D." 

Crucible Steel Co. of America and subsidiaries, "Exhibit No. 1740E." 

Lukens Steel Co. and subsidiaries, "Exhibit No. 1738." 

AUeghanv Steel Co., "Exhibit No. 1740B." 

Otis Steel Co., "Exhibit No. 174t)C." 

Calumet & Hecla Co. and subsidiary, "Exhibit No. 1723." 

Inspiration ConsoUdated Copper Co., "Exhibit No. 1719." 

Kennecott Copper Corporation, "Exhibit No. 1716." 

Phelps Dodge Corporation and subsidiaries, "Exhibit No. 1721." 

Miami Copper Co., "Exhibit No. 1720." 

Ahmeek Mining Co., "Exhibit No. 1718." 

Union Sulphur Co. and subsidiary, "Exhibit No. 1755A." 

Freeport Texas Co. and subsidiaries, "Exhibit No. 1755B." 

Atolia Mining Co., "Exhibit No. 1748." 

Wolf Tongue Mining Co.. "Exhibit No. 1748D." 

Primos Chemical Co. and subsidiaries, "Exhibit No. 1740E." 

Source: Files of the Bureau of Internal Revenue. 

Note. — Tax liability includes both income and excess-profits taxes. Figures 
for individual companies appear in exhibits indicated. 

Net taxable income as per corporations' returns and as determined by revenue agents 


1917, 18 companies- 
1918, 17 companies ' 

Net taxable in- 
come as per 

$229, 189, 613. 58 
136, 937, 770. 39 

Net taxable in- 
come as deter- 
mined by revenue 

$290, 212, 129. 81 
142, 908, 612. 64 

Percent of 


> Companies listed except Miami Copper Co. 
Net taxable income as determined by revenue agents and as finally determined 


1917, 18 companies. 

1918. 17 companies > 

Ket taxable in- 
come as deter- 
mined by revenue 


$290, 212, 129. 81 
142, 90S, 612. 64 

Net taxable in- 
come finally de- 
termined by 

$263, 339, 558. 67 
134, 151, 948. 53 

Percent of 


1 Companies listed except Miami Copper Co. 

Net taxable income as per corporations' returns and as finally determined 


Net taxable in- 
come as per 

1917, 18 companies. 

1918, 17 companies ■ 

$229, 189, 613. 58 
136, 937. 770. 39 

Net taxable in- 
come as finally 
determined by 

$263, 339, 588. 67 
134, 151, 948. 53 

of in- 

-+-14. 9 

1 Companies listed except Miami Copper Co. 



Invested capital as per corporations' returns and as determined by revenue agents 


Invested capital 
as per corpora- 
tions' returns 

Invested capital 

as determined by 

revenue agents 

of de- 

$775, 799, 312. 08 
878, 920, 120. 03 

$547, 642, 452. 81 
746, 789, 162. 34 


1918, 14 companies 2 . . . 


1 Companies listed except Allegheny Steel Co., Atolia Mining Co., and Freeport Texas Co. 

2 Companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur Co., and Atolia 
Mining Co. 

Invested capital as finally determined and as determined by revenue agents 


1917, 15 companies '. 

1918, 14 companies 2. 

Invested capital 

as determined by 

revenue agents 

$547, 642, 452. 81 
746, 789, 162. 34 

Invested capital 
as finally deter- 
mined by Bureau 

$717, 284, 142. 24 
770, 212, 390. 36 

of in- 


' All companies listed except Allegheny Steel Co., Freeport Texas Co., and Atolia Mining Co. 
2 All companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur oC, and Atolia 
Mining Co. 

Invested capital as per corporations' returns and as finally determined 


Invested capital 
as per corpora- 
tions' returns 

Invested capital 

as finally 

determined by 




1917, 15 companies i. 

1918, 14 companies 2. 

$/75, 799, 312. 08 
878, 920, 120. 03 

$717, 284, 142. 24 
770, 212, 390. 36 


• Companies listed except Allegheny Steel Co., Atolia Mining Co., and Freeport Texas Co. 
' Companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur Co., and Atolia 
Mining Co. 

Tax liability as per corporations' returns and as determined by revenue agents 


Tax liability as 

per corporations' 


Tax liability as 
determined by 
revenue agents 



1917, 17 companies '. 

1918, 17 companies '. 

$49, 927, 931. 15 
45, 993, 839. 67 

$89, 882, 631. 86 
59, 580, 309. 46 


Companies listed except Miami Copper Co. 

Tax liability as determined by revenue agents and as finally determined 


Tax liability as 
determined by 
revenue agents 

Tax liability as 
finally deter- 
mined by Bureau 


1917, 17 companies L 

1918, 17 companies '. 

59, 580, 309. 46 

$66, 028, 958. 07 


' AU companies listed except Miami Copper Co. 


Tax liability as per corporations' returns and as finally determined 


Tax liability as 

per corporations' 


Tax liability as 
finally deter- 
mined by Bureau 

Percent of 

1917, 17 companies ' . 
1918, 17 companies ' . 

$49, 927, 931. 15 
45, 993, 839. 67 

$66, 028, 958. 07 


1 Companies listed except Miami Copper Co. 

Proportion of net taxable income to invested capital, both as determined by revenue 



Invested capital 

as determined by 

revenue agents 

Net taxable in- 
come as deter- 
mined by reve- 
nue agents 


1917, 15 companies 1 $547,642,452.81 

1918, 14 companies 2 - 746,789,162.34 

$276, 560, 317. 07 
126, 923, 550. 55 


1 Companies listed except Allegheny Steel Co., Atolia Mining Co., and Freeport Texas Co. 

2 Companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur Co., and Atolia 
Mining Co. 

Proportion of net taxable income as determined by revenue agents to invested capital as 

finally determined 


Invested capital 
as finally deter- 
mined by Bureau 

Net taxable in- 
come as deter- 
mined by reve- 
nue agents 


1917, 15 companies '- 
1918, 14 companies '. 

$717, 284, 142. 24 
770, 212, 390. 36 

$276, 560, 317. 07 
126, 923, 550. 55 


1 Companies listed except Allegheny Steel Co., Atolia Mining Co., and Freeport Texas Co. 

2 Companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur Co., and Atolia 
Mining Co. 

Proportion of net taxable income to invested capital, both as finally determined 


Invested capital 
as finally de- 
termined by 

Net taxable in- 
come as finally 
determined by 


1917, 15 companies '_ 

1918, 14 companies '. 

$717, 284, 142. 24 
770, 212, 390. 36 

$250, 048, 916. 08 


1 Companies listed except Allegheny Steel Co., Atolia Mining Co., and Freeport Texas Co. 

2 Companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur Co., and Atolia 
Mining Co. 

Proportion of net income after taxes ^ to invested capital, with both income and capital 
as determined by revenue agents 

Invested capital 

as determined 

by revenue 


Net taxable in- 
come as deter- 
mined by reve- 
nue aeents, less 


1917, 15 companies ' 

1918, 14 companies • 

$547, 642, 452. 81 
746, 789, 162. 34 

$215, 467, 139. 61 
88, 136, 275. 47 



1 The final determination by the Bureau of tax liability has been used as representing the taxes paid. 

2 Companies listed except Allegheny Steel Co., Atolia Mining Co., and Freeport Texas Co. 

3 Companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur Co., and Atolia 
Mining Co. 



Proportion of net income after taxes^ to invested capital with both income and 
capital as finally determined 


Invested capital 
as finally deter- 
mined by Bureau 

Net income after 

taxes as finally 

determined by 



1917, 15 companies ». 
1918, 14 companies s. 

$717, 284, 142. 24 
770, 212, 390. 36 

$188, 955, 738. 62 
81, 057, 100. 68 


' The final determination by the Bureau of tax liability has been used as representing the taxes paid. 
> Companies listed except Allegheny Steel Co., Atolia Mining Co., and Freeport Texas Co. 
» Companies listed except Allegheny Steel Co., Miami Copper Co., Union Sulphur Co., and Atolia 
Mining Co. 

Proportion of tax liability as finally determined to net taxable, income as determined 

by revenue agents 


1917, 17 companies '. 
1918, 17 companies '. 

Net taxable In- 
come as deter- 
mined by revenue 

$290, 212, 129. 81 
142, 908, 612. 64 

Tax liability as 
finally deter- 
mined by Bureau 

$66, 028, 958. 07 
46, 841, 914. 37 



J All companies listed except Miami Copper Co. 

Proportion of tax liability to net taxable income, both as finally determined 


Net taxable in- 
come as finally 
determined by 

Tax liability as 
finally deter- 
mined by 


1917, 18 companies.. 
1918, 17 companies i. 

$263, 339, 588. 67 
134, 151, 948. 53 

$66, 028, 958. 07 
46, 841, 914. 37 


1 All companies listed except Miami Copper Co. 

Treasury Department, 

Washington, January 28, 1935. 
Hon. Gerald P. Nye, 

Chairman Special Committee Investigating the Munitions Industry, 
United States Senate. 

My Dear Mr. Chairman: Reference is made to the letter of the Special 
Committee of the United States Senate Investigating the Munitions Industry 
dated December 12, 1934, requesting information as to (1) the complexity from 
an engineering and legal standpoint of the matters involved in the determination 
of value; (2) the amount of time it would take to make an adequate investigation 
of an average-sized industrial plant; and (3) specific examples of different valu- 
ations placed on property by experts appearing for the Government, experts 
appearing for the taxpayer and the court, and inquiring whether your committee 
could be supplied with information as to the personnel which would be required 
to conduct an adequate investigation into the problem of valuation. 

The legal difficulty and uncertainty in the determination of value of property 
not subject to frequent sales, and as to which market quotations are not pub- 
lished daily, arises because it is so largely to be determined from factual and opin- 
ion evidence, none of which is legally conclusive. Such evidence is the best 
available. Upon such evidence the value is determined by a judge or jury, in 
certain instances inexperienced in valuation procedure and with inadequate 
knowledge of considerations governing market value. The weight to be given 
to the evidence is entirely within their discretion, and short of the adoption of a 
fundamentally unsound principle or an erroneous theory by the court in its 
instructions, it is impossible to secure a reversal of their finding if there is any 


evidence in support thereof in the record. It is a rare case where some evidence 
is not admitted which will support a most unsound finding of value. 

Market value has been defined as the sum that in all probability will result 
from fair negotiations of an owner willing to sell and a purchaser willing to buy. 
Brooks-ScarUon Corporation v. United States (265 U. S., 106 to 123; 44 Sup. Ct. 
471). The fundamental difficulty in establishing the market value of industrial 
plants arises because as a general rule no two of such plants are alike, and a sale 
of the property in question rarely occurs at or about the date for which the 
market value is to be determined. Even in the rare cases where a sale of the 
property has occurred that is practically contemporaneous with the date for 
which the value is to be determined, the conclusiveness of such evidence is fre- 
quently impaired by the introduction of evidence attacking the fairness of the 
sale, alleging misrepresentation of fact, duress, or force, as factors in the trans- 
action. As a result, in the case of the valuation of the great majority of indus- 
trial plants, evidence of value, other than sales of the property itself, must be 
resorted to. 

"This value of propertj^ results from the use to which it is put and varies with 
the profitableness of that use, present and prospective, actual and anticipated. 
There is no pecuniary value outside of that which results from such use. The 
amount and profitable character of such use determine the value." Cleveland, 
Cincinnati, Chicago & St. Louis Railway Co., v. Backus (154 U. S., 439, 447). 

A determination of value based on estimates of present and future profits and 
an appraisal of the value of such profits, usually designated as an analytical 
appraisal, while theoi-etically sound and in many cases the only available method, 
opens a wide field for differences of opinion. These differences arise as to inter- 
pretation of facts existing at the date of valuation, as to what reasonable prog- 
nostications as to the future should be based on the existing facts, and finally as 
to what the market reasonably indicates as the proper factor to be applied to 
the prospective earnings to arrive at value, that is, the rate of capitalization at 
which the earnings are to be valued. 

The elements essential to an analytical appraisal of market value are primarily 
estimates in the light of facts known at the date of valuation. Estimates must 
be made of future earnings, of the time when such earnings may be realized, and 
of the risk involved in the purchase of the property. When these elements have 
been determined, tlie conclusion as to value is arrived at b}' the application of a 
sound judgment based on knowledge of market transactions in measurably com- 
parable property at the nearest available time to the date of valuation. The 
value sought is the price which general buyers and sellers should reasonably agree 

As applied to the appraisal of the going-concern value of an industrial plant, 
the first investigation ordinarily would be an audit of the books of the operating 
company to ascertain the operating costs, selling price of the product, operating 
profit, overhead, general expenses, and depreciation, and an analysis of the capital 
accounts and a descriptive analysis of the asset and liability accounts. 

There is considerable room for differences of opinion as to what should be in- 
cluded in operating costs and in capital account, and as t j whether or not the past 
operating costs are not unduly high or low on account of extraordinary circum- 
stances; i. e., frequently claims are made that the plant was in the development 
stage or that repairs and replacements, although correctly charged will not be 
representative in determining future costs, or that labor was untrained or ineffi- 
cient, or that exorbitant or inadequate salaries were charged by interested stock- 
holders or owners. What adjustments should be made under the circumstances 
are entirely matters of opinion. Similar questior.s may arise as to many "non- 
recurrent" expense items. 

Again, questions arise as to whether or not the plant was running at a represen- 
tative or normal capacity during the period prior to the valuation date, consider- 
ing a reasonable expectancy of future use at the date of valuation, and as to the 
effect on costs of use of the plant at "normal" capacitj'. Also, where the results 
of operation are erratic, differences of opinion arise as to what operating period 
should be taken as representative. The foregoing may be taken as illustrative, 
but not a complete list, of questions in which differences of opinion may arise in 
regard to operating costs. 

As to the future selling price of the product, admittedly to be determined in 
the light of existing conditions, wide differences of opinion frequently arise. 
Where there is no established price for the product at the date of valuation, i. e., 
the product may be disposed of through long-term contracts or on a cost or cost- 
plus basis, the difficulty and consequently the differences of opinion in the esti- 
mate of present and prospective market price maj- be greatlj' increased. 


Having proceeded to the point where the costs of production and marliet prices 
are determined, the operating profit is a matter of subtraction. Ordinarily, the 
percentage of the seUing price — that is, operating profit under fluctuating costs and 
selling prices — is much closer to a constant than the spread between cost and selling 
price, and a recognition of this fact permits the fixing of the margin of profit 
within reasonable limits. The application of this method of determining the 
margin of operating profit will generally be resisted by proponents of a high value, 
when, by the taking of costs in years of low prices against a higher expected future 
price, the estimated margin of operating profit is greater. Consequentl}^ detailed 
analyses of such figures are necessary to demonstrate that in the particular case 
under consideration costs bear a necessary relation to selling price, that is, that 
an increased selling price is accompanied by increased costs and a decreased price 
is accompanied by decreased costs. On the questions of overhead and general 
expenses and depreciation, the same difi"erences of opinion as in the case of the 
direct costs frequently arise, that is, as to whether or not extraordinary circum- 
stances of a nonrecurrent nature have unduly affected such costs during the period 
preceding the date of valuation. In addition, if the value of one plant among 
several or of a part of plant is in question, the proper method of allocating all 
indirect costs further complicates the determination of value. The difficulty of 
determining depreciation and obsolescence, and the allocation of such charges, 
give rise to the same differences of opinion already mentioned with respect to 
direct and indirect costs of production. 

The audit and descriptive analysis of the asset and liability accounts are 
essential in an analytical appraisal for the purposes of checking depreciation and 
plant accounts and of determining the capital, other than plant investment, 
necessary to the conduct of the business. When this factor is determined, a 
portion of the profits is allocated to such capital. 

The determination of each of the foregoing factors gives rise to differences of 
opinion. The amount of capital actually emploj'ed in the case of a single plant 
varies considerably from time to time, and the amount that should normally be 
employed is essentially a naatter of opinion. The question of the market rate 
of return on the capital, other than plant, is again a matter of opinion. There 
remains after the disposal of the foregoing determinations the ultimate question 
as to the rate at wliich earnings attributable to the plant should be capitalized, 
another matter of opinion based on the judgment of experts. 

Estimates of expected profits are not infrequently complicated by the following 
circumstances: The product manufactured or the machines used in the manu- 
facturing of the product are covered by patents; the plant operates under patent 
licenses; the product is manufactured or disposed of under terminable life con- 
tracts; the manufacturing is carried on in leased premises at rentals other than 
the present or prospective fair rental value; the plant is operating for others under 
contract with results which are more favorable or less favorable than might be 
obtained under terms of a contract which might be negotiated under present or 
prospective conditions. These factors enhance or depress present earnings, and 
future earnings must be adjusted to allow for the discontinuance of the effect of 
such factors. The amount of such adjustments is at best a matter of judgment 
and opinion, and on account of the highly technical nature of the subject matter, 
particularly in circumstances involving the use of patents, is inherently difficult 
from the standpoint of administrative and judicial determination. 

The question of what portion of the earnings are attributable to patent pro- 
tection and what portion to the business of manufacturing may be cited as one 
example of these difficulties. 

In the case of the valuation of one plant among several operated bj- a business 
concern, the number of determinations mentioned above are multiplied due to 
the necessity of allocation. 

By numerous decisions of the Supreme Court of the United States it is firmly 
established that the cost of reproduction new less depreciation constitutes evi- 
dence properly to be considered in the ascertainment of value. Standard Oil Co. 
of New Jersey v. Southern Pacific Co. et al. (268 U. S. 146, 45 Sup. Ct. 465). 

In the same case the court points out, however, that such evidence is not the 
measure or sole guide, and states: 

"The ascertainment of value is not controlled by artificial rules. It is not a 
matter of formulas, but there must be a reasonable judgment having its basis in 
a proper consideration of all relevant facts." 

The estimation of cost of reproduction new requires a very detailed and ex- 
pensive inventory of each and every item comprising the plant. The current 

11579—35 10 


costs of all of these items must then be estimated. Such estimates include pres- 
ent costs of the land occupied by the plant, grading, excavation, foundations, 
building materials of every description, including freight, labor and superintend- 
ence during construction, cost of machinery including freight and installation, 
office and general overhead expense during the construction period, engineering 
and architectural fees, interest on capital during the period required for plant 
erection, and frequently such things as contractors' profits, overhead and gen- 
eral expenses, and/or cost of specialized technical supervision. With such listing 
of items and with such estimates of current costs and prices, the cost of repro- 
duction new is computed. The depreciation to be deducted must then be esti- 

This type of appraisals are usually made by long established engineering firms 
who have maintained files containing price lists and descriptive matter from all 
available manufacturers of items making up the plant and equipment for all 
types of industrial concerns. Such estimates of depreciation are usually the per- 
sonal opinions of the men taking the detailed inventory, usually the minor 
employees of the appraiser. Such a man looks at a structure or a machine, or at 
its important parts, and says that is a certain percentage of as good as new insofar 
as wear and tear and physical decay are concerned. The estimation of obsoles- 
cence is almost never attempted. The result frequently is that the appraisal 
includes estimated costs to reproduce such things as masonry buildings which are 
obsolete and would be more expensive to reproduce than would a strictly modern 
substitute structure. The appraisal may include machines which are entirely 
obsolete because of costs of operation greatly in excess of those of modern 
machines, yet such machines may exhibit little or no physical deterioration and be 
included at practically 100 percent of cost of reproduction new. The cost of 
reproduction new, less depreciation representing only physical deterioration, is 
the so-called "sound value" of this type of appraisal. Such appraisals, especially 
if made at about the time of valuation, are extremely difficult to meet or check 
retrospectively unless by means of their own inherent weakness or through other 
evidence of value. G. C. Thompson Pottery Company v. Routzahn (25 F. (2d) 
897). On account of their lack of conclusiveness, the amount of detailed work 
required, the remoteness of the date of valuation, and the intervening changes 
in plants involved, it has been found impractical in verifying such appraisals in 
the Bureau of Internal Revenue, to do more than require that such appraisal 
show the date of acquisition and original cost, check reproduction costs with the 
best index factors obtainable to determine the difference between original cost and 
reproduction cost new, and make such allowance for depreciation and obsolescence 
as appears to be justified by the circumstances of the particular case. 

In the trial of valuation questions the doUar and cents figure shown as reproduc- 
tion cost new, less depreciation and obsolescence, even under proper instructions 
because of its simplicity, may be given undue weight as evidence of market value 
rather than proper consideration with the other evidence in the case. 

In the case of plants under corporate ownership, the sale price of shares of 
stock in the market may be admissible as evidence of the value of the assets. 
However, the shares of stock and the net assets of a corporation are entirely 
different things, and the value of one bears no fixed nor necessary relation to the 
value of the other. Ray Consolidated Copper Co. v. United States (268 U. S. 373) . 
This type of evidence is therefore never conclusive. Unless the value in issue is 
the entire going-concern value of the corporation, such evidence is not a measure 
of the value of the property {Pullman Palace Car Co. v. Central Transportation Co. 
(171 U. S. 138)), although it may be a part of the foundation for expert opinion 
on value and a fact to be considered by the judge or jury with other evidence in 
reaching their finding of value. 

Value in the case of industrial plants generally must be a conclusion based on 
facts and the expert opinions contributed from four distinct technical fields, that 
is, accounting, engineering (construction and operating), legal, and financial. The 
conclusion requires a correlation of these contributions since the factors con- 
tributed from each source are interdependent and modify the effects of contribu- 
tions from the others. 

The professions or avocations from which the contributions are made are 
technical and have developed experience, language, and methods of procedure 
peculiar to themselves. As a result, the presentation of evidence in valuation 
cases, in such a manner that technical complexities are minimized and the tech- 
nical conclusions appeal to the common sense of parties having to deal with the 
determination of value, is a difficult matter and requires intensive preparation. 
Technicians are generally prideful or unconscious of the technical manner in 


which their contributions are made, and reluctant or unable to reduce their 
contributions of fact or reason to simple fundamentals, intelligible to technicians 
in other fields and to the nontechnical man. 

A further difficulty in the administration and judicial determination of market 
value is due to a loose popular conception or definition of value. This difficulty 
attends the whole process of determining value. It particularly affects expert 
opinion. Some fallacy, or a combination of fallacies, may be interwoven in or 
form the basis of the opinion. In many cases the incompetency of such opinion 
is not or cannot be shown on direct or cross examination with the result that such 
opinions may support a most unsound finding of value. 

A few examples of persistent fallacies of this nature which have arisen in such a 
manner as to permit their rejection by the courts are: 

(1) The theory that more or less uncertain estimates involved in the determina- 
tion of value at the date of valuation may be corrected by the later ascertained 
facts. Ithaca Trust Co. v. United States (279 U. S. 151). 

(2) That the value of property is measured by the subsequently ascertained 
ultimate return therefrom, or that latent occult intrinsic value controls rather 
than the considerations that affect market value and have their influence upon 
men of affairs. Stratton's Independence, Limited, v. F. W. Howbert, Collector 
(231 U. S. 399). Reinecke v. Spalding (280 U. S. 227). 

(3) That value is to be determined under an assuinption of nonexistent con- 
ditions, or on some speculative assumption as to what the value would have been 
if something which did not occur had occurred. National Bank of Commerce v. 

■City of New Bedford (29 N. E. 532). Bingham's Administrator et al. v. Common- 
wealth (244 S. W. 781). Rice v. Eisner (C. C. A. 2, 16 F. (2d) 358). 

(4) That value is to be determined by some morally just or normal standard 
divorced from the conditions existing at the date of valuation and the standard 
established by the market which is the gage of the considerations which influence 
general buvers or sellers, and of the intensitv of the social desire for the property 
at the time. Ithaca Trust Co. v. United States (279 U. S. 151). Boyd v. Wiley 
(124 U. S. 105). United States v. New River Collieries Co. (262 U. S. 341-345). 
719 Fifth Avenue v. United States (5 F. Supp. 909). United States v. Cole et al. 
(T. D. 4165, C. B. VII-1268, C. C. H. 1927, p. 7720). 

(5) Misconceptions of the nature and character of the property to be valued. 
Reinecke v. Spalding (280 U. S. 227). Kaufmann & Bauer Co. v. Heiner (34 F. 
(2d) 698). 

(6) A failure to properly weigh the reasonably assured and the remote or more 
or less speculative elements which contribute to value. Johnson v. United States 
(44 F. (2d) 244, 70 Ct. CI. 534). 719 Fifth Avenue v. United States (5 F. Supp. 
909). Driscoll et al. v. Inhabitants of Northbridge (210 Mass. 151, 96 N. E. 59). 
United States v. Cole et al. (T. D. 4165, C. B. VII-1268, C. C. H. 1927, p. 7720). 
Commissioner v. Swenson (C. C. A. 5, 45 F. (2d) 61). 

(7) Attributing value to a particular property based on earnings derived in 
great part from many other elements or properties contributing to the produc- 
tion of such earnings. Perfect Window Regulator Co. v. United States (66 Ct. CI. 
.147). Keystone Wood Products Co. v. Commissioner (19 B. T._ A. 1116). 

Another further weakness from a governmental standpoint in establishing 
market value is due not infrequently to the unwillingness of experts in specialized 
lines to accept employment as opinion witnesses for the Government. This is 
largely due to the fact that in many cases there is a common interest extending 
throughout all industries under a given set of circumstances to secure the advan- 
tage of nigh or low values. Competent witnesses are either directly connected 
with or dependent on the industry for their regular income. Witnesses of the 
highest qualifications are, therefore, frequently unable or unwilling to accept 
governmental employment. 

The Bureau of Internal Revenue has had to determine the value of physical 
plants as distinguished from going-concern value at March 1, 1913, in the cases 
of taxpayers owning plants on, and operating them after, that date. Such de- 
terminations were made for the purpose of establisning a base for depreciation 
allowances. In the great majority of such cases the taxpayers and the Bureau 
have been able to agree upon a value equal to cost less sustained depreciation. 
DiflBculty in these cases was confined generally to questions of correct accounting. 
The stable nature of such property and the relatively stable price level for a 
considerable period prior to and at March 1, 1913, eliminated, to a large extent, 
questions of appreciation in value and were in a large measure responsible for the 
. comparative ease with which such questions were settled. 


On account of the instability of the market standards, valuation of physical 
property in periods of dspresiion or unusual prosperity furnishes the opportunity 
to present opinion evidence out of line with the general market conditions existing 
at the time, and in line with the exigencies of the case and the idiosyncracies of the 
witnesses. The uncertaint}' of litigation involving value questions to be deter- 
mined in such periods is thereby increased. 

On account of their peculiar and individual characteristics in every case and 
the confusion of their qualitative characteristics as distinguished from their 
quantitative contribution to value, intangible elements which may contribute to 
the value of industrial property generally, such as goodwill, trade marks, trade 
brands, etc., are the frequent sources of irreconcilable differences of opinion and 
litigation. However, in determining going-concern value as a whole, available 
market records of prices of securities of comparable corporations furnish a yard- 
stick or market standard which permits, but does not insure, some check on the 
reasonableness of opinions as to value. 

When patents are to be valued separate and apart from goodwill, trade marks, 
trade brands, or other intangible elements contributing to the value of property- 
operated or to be operated as a whole, the values of each are inherently matters of 
opinions. The motive of interest results in the production of unreasonable 
opinions in such cases. Opinions of this nature are of frequent occurrence in 
which earnings in excess of a fair return of the tangible property are attributed 
almost entirely to patents, although it is patent that extensive advertising and 
good management have built up a large element of goodwill. Such opinions are 
the source of increased uncertainty as to outcome in litigated cases of this nature. 

The foregoing recital of the complexities and uncertainties in the determination 
of fair market value from commercial and legal standpoints, since it attempts to 
cover the entire field in a general way, probably overemphasizes the difficulties 
that may be encountered in the great majority of cases. If the foundational facts 
are fully developed, the field for reasonable differences of opinion is greatly 
narrowed. Given competent representation on both sides, assurance that the 
valuation will be competently litigated if necessary and applying the standard 
of a common-sense reaction by a court or jury to the evidence which may be 
adduced by both sides rather than the standard of decisions in exceptional and 
extreme cases, the great bulk of valuation issues should be satisfactorily disposed 
of administratively. 

Your question as to the amount of time it would take to make an adequate 
investigation of an average sized industrial plant is difficult to answer on account 
of the varying circumstances under which such an investigation may have to be 
conducted. A few of the circumstances which may greatly vary the time re- 
quired in such an investigation are: The elapsed time between the date of the 
investigation and the date of valuation; the condition of the books of account, 
plant records, and operating records of the plant under investigation, and the 
question as to what portion of the work of the investigation may be thrown 
upon the owners of plants. 

The answer to your question which follows is not based on the_ statistical 
analysis and should be taken as oubject to wide variation in individual cases 
even under the assumed conditions which are suggested. The assumptions made 
are as follows: (1) That the original records, minute books, stock registers, stock 
transfer books, books of account, operating records and plant accounts are well 
kept and available; (2) that the burden of appraising the plant to be valued is 
placed upon the owner of the plant, the appraisal to show as to each item making 
up the inventory of plant, the date of purchase, the cost, the facts relied on to 
support present reconstruction cost equal to cost or departures from cost either 
up or down, and the facts relied upon to demonstrate the amount of depreciation 
and obsolescence accrued; (3) that all evidence of value either supporting a high 
or a low value within the knowledge of the owner of the plant is submitted by 
the owner of the property; (4) that the owner of the plant is restricted on any 
appeal from the original determination of value to the foundational facts, as 
distinguished from conclusions or opinions, submitted before the original de- 
termination of value, and (5) that an average sized industrial plant is one having 
a value of about $3,000,000. 

Under the conditioiis assumed, it is estimated that a competent auditor, with 
1 assistant, and a competent engineer, with 1 assistant, would require about 
3 months to check the history of the plant, factual evidence as to transactions in 
interests in the plant or in the securities of corporate owners, operating records, 
capital accounts, and assemble the foundational facts upon which an analytical 
appraisal valuation must be based, including reasonable conclusions as to recon- 


struction costs new less depreciation and obsolescence, and as to the earnings 
and capital accounts. A competent valuation expert either having commercial 
experience or a knowledge of commercial transactions and of market conditions, 
and with some legal advice, should be able to arrive at a defensible value based 
on the standard of the market within 1 month. In cases which are litigated 
there should be added to the above time to prepare for trial the time of 1 lawyer 
for a 30-day period, 1 auditor for an additional 30 days, 1 engineer and 1 valua- 
tion export for at least the same period and probably 10 days for 3 expert wit- 
nesses. If the principal foundational facts are stipulated the trial time may be 
a week or less. If agreement on the foundational facts cannot be reached, the 
trial time is impossible to estimate as is demonstrated b}' the widely varying 
length of the proceedings in hearings of public-utility commissions with which 
you are no doubt familiar. 

Your additional inquiry as to whether information could be furnished as t o 
the personnel which would be required to conduct an adequate investigation of 
the problems of valuation must be answered in the negative on account of 
inadequacy of the information as to the scope of the inquiry contemplated. 

The table attached hereto* shows specific examples of different valuations 
placed on property by experts appearing for the Government, by experts appear- 
ing for the taxpayer and the courts, as well as a few cases in which the Govern- 
ment relied on sales of the propertj' in question and/or the sale price of the 
owner corporation's securities. 

The Bureau of Internal Revenue has settled administratively, or through liti- 
gation, the cost or fair-market value as of Tvlarch 1, 1913, whichever is greater, 
of practically all property operated in the United States which is subject to 
depreciation, exhaustioa, or depletion allowances under the income tax statutes. 

The remaining costs (of Mar. 1, 1913) are kept up to date in connection with 
the preparation and audit of each year's income-tax returns. It therefore suggests 
itself, that adopting the value remaining after deducting allowances recognized 
as sustained under the income tax statutes as a basis for contractual compensa- 
tion for the use of such property, may be worthy of your consideration. Such 
a basis has the merit of avoiding the burden of a large volume of revaluations. It 
has the further merit that a large percentage of the original value determined on 
other than a cash-cost basis has been eliminated through the allowances for ex- 
haustion, depletion, and depreciation. The necessity for valuing land and possi- 
bly other nonwasting assets, as well as natural resource deposits discovered and 
patent developed after March 1, 1913, if such a basis were adopted v.'ould still 

Very truly yours, 

, Acting Secretary. 

* See p. 146 for table attached to above letter. 



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excekpts from exhibit no. 1343 

memorandum be valuation 

1. Valuation Work of the Interstate Commerce Commission 

The difficulties attendant upon valuation are perhaps illustrated most graph- 
ically by the work of the Interstate Commerce Commission in connection with 
its valuation of the railroads of the country up to 1926. 

* * * the Interstate Commerce Commission in valuing only the prop- 
erties of the railroads of the country has spent more than 13 years on 
the task and more than $27,000,000, and the carriers themselves in working 
on these same valuations have spent the same period of time and more 
than $85,000,000. (Mr. Ernst's Report, 69th Cong., 1st sess., S. Rept. 27, 
pt. 3, p. 4.) 

This statement is all the more significant in view of the fact that railroads 
have for a long time had their rate of profit regulated in the public interest 
by both State and Federal Governments. 

For years past railroads, pipe lines, and express companies have been 
obliged to keep their books in accordance with accounting methods pre- 
scribed by the Interstate Commerce Commission. * * * There are 
also State and municipal regulations prescribing the form of accounting 
to be followed by various public utilities, banks, insurance companies, and 
other forms of business closely connected with the public interest. (691;h 
Cong., 1st sess., S. Rept. 27, pt. 2, pp. 130-131.) 

Since the rate of profit which has been allowed public utilities has chai'ac- 
teristically been based on a fixed return on " value ", it is apparent that a 
considerable store of information must have been present on the subject of 
valuation and on the techniques of attacking the problem. Such are the dif- 
ficulties that have been encountered in connection with a business which was 
the first to be subject to supervision in the public interest ; it is impossible to 
set forth the extent of the difficulties which will be encountered in connection 
with the valuation of industries not subject to similar prior scrutiny. 

Expenditures in connection with valuation work of the Interetate Commerce 
Commission have continued to be on a large scale since the time of the Couzens' 
Report. In the account of the appropriation and expenditures of the Interstate 
Commerce Commission for each fiscal year there appears an item : 

Valuation of property of carriers : To enable the Interstate Commerce 
Commission to carry out the objects of the act entitled "An act to amend 
an act entitled 'An act to regulate commerce ', approved Feb. 4, 1887, and 
all acts amendatory thereof ", by providing for a valuation of the several 
classes of property of carriers subject thereto and securing information 
concerning their stock, bonds, and other securities, approved Mar. 1, 1913. 

For the respective years 1926-29, the amounts listed under this item were as 

follows : 

Year : Amoant 

1926 $1, 883, 232. 97 

1927 1, 715, 140. 97 

1928 2, 563, 214. 00 

1929 2, 336, 670. 00 

(See 40th-43rd Annual Report, Interstate Commerce Comm., 1926-29.) 
The size of the appropriation in these years is all the more significant in view 
of the note of optimism present in the 1922 report of the Interstate Commerce 
Commission to the effect that the valuation job had been practically completed : 

"We have readied the state in valuation of the steam railroads of the 
country where, except for rechecking, the inventorying of roads recently 
constructed, and a few minor details, the original field work has been com- 
pleted. Underlying reports are being issued in large numbers, and hearings 
and final arguments on protested tentative valuations are in progress. Of 
287 tentative valuations served, 101 have become final through absence of 
protest, which under the act any interested party may file within 30 days 
after service of tlie tentative valuation. Full hearings upon protests have 
been had in 39 cases. Six cases have been partly heard and 3S cases are 


assigned for hearing before December 31, 1922. Final arguments have been 
had in three cases and 12 were set for argument in November. Issues raised 
by protestants in 19 cases have been submitted without argument. 

We have completed the transfer of all forces and records of the Bureau 
to the central office in Washington, and have closed the San Francisco, 
Kansas City, Chicago, Chattanooga, and Washington district offices. This 
has been accompanied by reorganization and closer coordination. The 
number of employees has been reduced to approximately .550, or about one- 
third of the maximum reached in 1918. Expenditures have been reduced 
from approximately $3,000,000 per annum during the first few years, 
$2,735,911 for the fiscal year 1920-21, and $1,597,572 for the fiscal year 
1921-22, to approximately $1,300,000. This reduction has, in large part, 
been made possible by the termination of original field work (36th 
Annual Report of Interstate Commerce Commission, 1922, p. 70). 

The report of the Commission two years later is much less hopeful in outlook. 

Based on our experience thus far, we estimate that the hearings to be 
held on protests to tentative valuations will exceed 500 in number. We 
cannot estimate their length. It is apparent that satisfactory completion 
of the work, already over 10 years in progress, is seriously menaced by 
delay in completing these primary valuations. Most of them are already 
from 6 to 10 years old. In administering the act present-day valuations 
are needed, but before they can be had primai'y valuations must have been 
completed to serve as bases for carrying the valuations forward. There 
is serious disadvantage in the lapse of so many years between the pri- 
mary and the present-day valuations. With the passage of time come 
cumulative changes in the property by reason of additions, betterments, and 
retirements, thus rendering the original inventories increasingly unrepre- 
sentative of present conditions (38th Annual Report of Interstate Com- 
merce Commission, 1924, p. 14). 

The above-cited passage supplies clear indication that it is much more than a 
mere routine matter to keep a valuation, once arrived at, up-to-date. To the 
same effect, see the 39th Annual Report of the Interstate Commerce Commission 
(1925) : 

* * * Qui- valuation order no. 3 requires carriers to keep a record of 
additions, betterments, and retirements made subsequent to date of the 
primary valuation ; to render annual reports to us showing, by primary 
accounts, the cost of such property ; and to report the units of property 
installed and retired at such times and for such periods as we may 

During the year the force assigned to the administration of this order 
averaged 54 persons. Of this number an average of 29 were assigned to 
policing and checking the carriers' records in the field. * * * (39th 
Annual Report of the Interstate Commerce Commission, 1925, p. 16.) 

The same report also contains a significant statement as to the difficulties of 
securing sufficient competent personnel at salaries that the Government can 
afford to pay. 

Explanation of the difficulty of keeping a valuation current may also be 
found in the 1930 report of the Commission, which describes the extent to 
which property values in the railroad industry fluctuate in the course of a 

Changes in the property of the carriers, consisting of additions, better- 
ments, and retirements, varying in amounts from more than one-quarter 
billion to more than one billion dollars, occur annually. Price levels, like- 
wise, fluctuate continually. Therefore, unless, as provided by paragraph 
Fifth (f) of section 19a, we keep inforined of such changes, both in the 
property and its value, the valuations quickly become obsolete. The 
United States Supreme Court has held that substantia] fluctuations in 
price levels affect values, and it is the settled rule of that Court that the 
lawful rate base is present value. It follows, therefore, that if valua- 
tions are to be of practical use they must not become obsolete (46th 
Annual Report of the Interstate Commerce Commission, 1932, p. 89). 


It was not until 1932 that the Interstate Commerce Commission completed the 
valuation process which it had so hopefully described in 1922 as practically 
complete as far as field work was concerned, and which had been entrusted to 
it by Congress in 1913. 

During the year we have completed the last of the primary valuations 
of the 1,685 steam railroads listed for valuation as existing on March 1, 
1913, the date of the enactment of the valuation act. These valuations 
are incorporated in 1,035 final valuation reports, although a few have not 
yet been published (46th Annual Report of the Interstate Commerce 
Commission, 1932, p. 86). 
The recapture provision of the Transportation Act of 1920 added very meas- 
urably to the work of the Bureau of Valuation of the Interstate Commerce Com- 
mission : 


* * * By increased appropriation we have been enabled to assign a 
somewhat increased force to the administration of this order. This has 
averaged 64 employees, 40 of whom have been engaged in the field work of 
policing and checking the carriers' records. Up to the present time pre- 
liminary examinations have been made in the oflices of 460 carriers. Com- 
plete field examinations, covering an average perioil of seven years subse- 
quent to the various dates of valuation, have been made of the records of 
205 carriers, aggregate mileage 68,000. Field examinations covering an 
average period of eight years are now in progress on 30 carriers, aggregate 
mileage 48,000. The present force available for this work still falls short 
of the requisite number. (40th Annual Report of Interstate Commerce 
Commission, 1926, p. 15.) 

In fact, in one year, 1930, the Interstate Commerce Commission reported that its 
Valuation Bureau was compelled to restrict itself in large measure to recapture 
cases : 

The activities of the Bureau of Valuation have in a large measure been 
restricted during the year for which this rei>ort is made to valuation work 
in recapture cases. This is in conformity with instructions is.sued .July 18, 
1929, that the " Bureau give precedence in its valuation work to recapture 
cases." (44th Annual Report of Interstate Commerce Commission, 1930, 
p. 59.) 

It should be noted that the general valuation work commenced in 1913 was, 
in comparison with the recapture valuations, a more or less disinterested 
scientific inquiry. Valuation in connection with recapture was specifically 
linked up with the enforcement of a policy designed to limit the profits of the 
more favorably situated carriers. Anticipation of the resultant legal difficulty 
in the courts which it w^as fearetl the recapture provision would run into 
necessitated an even more elaborate personnel and much fuller investigation 
than valuation carried on from a purely scientific basis : 

* * * It soon became manifest that the protests were to test with 
meticulous detail the inventories, prices, methods, theories, and conclu- 
sions, and even administrative procedure, and that as to any and all of 
these there would probably be appeal to the courts. Consequently the. 
work had to be done with the greatest care, not only for the sake of the 
undertaking itself but also to withstand attack in the courts. This in 
turn required an army of experts consisting of engineers, laud appraisers, 
auditors, accountants, and attorneys. Protests were tiled in 748 cases and 
hearings held in .503 cases. Under the broad latitude afforded by the law, 
which gave to every protestant his right fully to be heard, hearings on 
individual properties ran many months. In addition there have been 
suits attacking our decisions. To these long-drawn-out proceedings during 
the later years is attributable much of the delay in the completion of the 
primary valuations. 

It is obvious that this act requires the most extensive, detailed, and 
exhaustive investigation, culminating in a valuation of the complex prop- 
erty of the railroads extending over 250,000 miles of main track and 
400,000 miles of all tracks, together with equipment, terminals, and all 
other holdings. The result was a much greater undertaking than those 



who wrote the many detailed requirements into the law could realize at 
the time of its enactment (46th Annual Report of the Interstate Com- 
merce Commission, 1932, p. 88). 

That a provision such as the recapture provision demands heavy policing 
is apparent when the amount of excess income which the carriers reported is 
-compared with the Interstate Commerce Commission's estimate of the recap- 
turable excess which they had actually earned : 

Recovery of excess net railtcay operating income, general railroad conti-ngent 



Number cf 

Number of 
reports in 

whicii excess 
income is 


amount of 

excess income 


Applicable period, 1920 





$2, 505, 006. 03 

■Calendar year; 


458, 535. 72 


1, 867, 239. 33 


6, 909, 296. 66 

1924 -. 


1925 . . 

2, 402, 198. 71 




177, 566. 32 



5, 378, 101. 20 

1930 ... . 

381, 266. 47 

1931 -. 


Total excess 



While the carriers reported a total excess income of only $23,548,871.76, one- 
half of which is subject to recapture, for the period 1920 to 1931, inclusive, our 
estimates of recapturable excess income for the period 1920 to 1930, inclusive, 
amount to considerably over $300,000,000. * * * (46th Annual Report of 
Interstate Commerce Commission, 1932, p. 93.) 

And, finally, despite all of the Commission's wrestling with the problem of 
valuation for recapture purposes, the Supreme Court, in the O'Fallon case, 279 
U. S. 461 (1929), by insisting that the Commission had not paid sufficient atten- 
tion to tlie factor of reproduction cost in its valuation, necessitated a wholesale 
revision of the Commission's work : 

The amount due from the carriers, according to preliminary computations 
made in the manner outlined above, is approximately $300,000,000 for the 
years 1920-28. As a result of the Supreme Court's decision in the St. Louis 
& O'Fallon case, this estimate must be changed. It is estimated that under 
the present system of quasi-judicial hearing procedure a minimum of six 
years would be required to dispose of the present arrearage, and even at the 
end of that period the work would hardly be current, owing to accumula- 
tions during the interval (43rd Annual Report of Interstate Commerce 
Commission, 1929, p. 87). 
Even with the recapture provision repealed, the appropriation for valuation 
available to the Interstate Commerce Commission was $1,000,000 for the year 
1933-34, and its active personnel included 381 employees: 

The amendment above referred to, together with repeal of provisions of 
section 15a relating to excess net railway operating income, greatly simplify 
the valuation work. Together with the completion of the primary valua- 
tions it has enabled us to reduce materially the personnel and expenditures 
in the Bureau. The reduction was possible, also, because of the progress 
made in correcting and revising the original inventories and underlying 
records and data. For the last fiscal year (1932-33) the appropriation for 
the Bureau was $2,750,000. Its personnel on June 1, 1933, consisted of 910 
employees. The appropriation for the current fiscal year (1933-34) is 
$1,000',000, and its active personnel on July 1, 1933, consisted of 381 em- 
ployees (47th Annual Report of the Interstate Commerce Commission, 1933, 
p. 74). 


This appropriation is insuflScient to allow the Commission to make any con- 
siderable progress in connection with the valuations of carriers other than 
railroads : 

Section 19a is applicable to all carriers subject to the provisions of the 
act. InsuflBcient appropriations have prevented us from proceeding with 
the valuations of carriers other than railroads with the exception of the 
Pullman and telegraph companies. The valuation of these latter companies 
is being prosecuted as far as appropriations permit. Requests for addi- 
tional appropriations to value other carriers such as pipe-line and tele- 
phone companies have been made from time to time (47th Annual Report 
of the Interstate Commerce Commission, 1933, p. 76). 

This situation exists in an industry with a well-established tradition of regu- 
lation in the public interest, and an industry whose books and records were con- 
sequently in much better shape than the mass of American industry. Further- 
more, the statute (37 Stat. 701 ; 48 Stat. 221) was liberal in its provisions in aid 
of investigation ; and to a certain extent, comparative checks could be made 
with data which had been acquired by the State public utility commissions 
which had preceded the Interstate Commerce Commission in the field. 

2. Genebal Difficulties of Public Utility Valuation 

The difficulties which have only sketchingly been brought out in connection 
with the valuation of interstate carriers are paralleled throughout the public 
utility field. Frequently, of course, the issues which are raised in specific con- 
troversies do not directly concern themselves with the problems of valuation. 
If there be an incentive on the part of the utility to provoke delay, obstacles or 
confusion, resort is often had to legal technicalities and to statutory issues. 
The real motive underlying the attempt to thus confuse and becloud the issue 
Avill, in the usual instance, be the utility's contention that it is being imconstitu- 
tionally deprived of a fair return on its investment. The two major considera- 
tions which are germane to such a contention are the value of the utility's 
investment, and the rate of return on its investment to be accorded the utility. 
The complexity, volume, delay, and the other features which characterize rate 
regulation can in the usual instance be referred to the problem of valuation. 

Voluminous records are the rule in public-utility rate controversies. Thus : 

An illustration of the experience of the commissioner is found in the 
case of The Pacific Northn-est Public Service Compani/ v. Oregon Public 
Utilities Comnvissioner in the district Federal court at Portland, Oreg. 

The commissioner's hearing developed a transcript record of .500 pages 
and 43 exhibits. Among these exhibits was a voluminous study and 
analysis prepared by the engineers of the commission. (Hearings before 
the Committee on the .Judiciary, House of Rep., 73d Cong., 2d session, 
S. 752, serial 4, p. 18.) 

Mr. Minton, of the Public Utilities Commission of Indiana, testified liefore 
the House Committee on the Judiciary as to one case involving his commission : 

Mr. Minton (Public Utilities Commission of Indiana). If we are taken 
into the Federal court, as we are threatened with in the Electric case, as 
we have just heard, we will be confronted, of course, with the great array 
of volumes of exhibits as to the inventory and appraisal of that property, 
some sixty-odd volumes of it, and perhaps another array of engineers. 
(Hearings before the Committee on the Judiciai-y, House of Rep., 73d 
Cong., 2d session, S. 752, serial 4, p. 49.) 

He had an even better illustration in his testimony, that of the Indianaprjlis 
Water case which reopened a controversial situation which the Supreme Court 
had at one time passed on : 

The Indianapolis Water case was before the Supreme Court of the United 
States in 192G; its title was McArdle v. Indianapolis Water company. The 
higher rates were sustained by the Supreme Court of tlie United States. 
During the time of the depression out there, they instituted a proceeding 
against this water company to reduce their rates again. And the case was 
again taken into the Federal court. 

Now, that the case started early in the fall of 1931. The commission 
wrote its order in April 1932. They were promptly enjoined in the Federal 


court, and in May 193S, we appeared before the special master in the Federal 
court to start to take testimony in that case. The special master in tliat 
case is a distinguished ex-judge in our State, a former United States 
attorney, and he was master in chancery, who has heard a number of utility 
cases before. We started on the 1st of May to take testimony, took the 
testimony all summer long, and finished about the middle of August ; and 
we had compiled the largest record of testimony that had ever been taken 
in the Federal court in Indianapolis, according to the statement of the 
reporter who reports in that court, and has been reporting there for 30 
years; a record of 15,000 typewritten pages, with hundreds of pounds of 
exhibits — books of exhibits, running from 200 to 400 pages each. 

Now, that utility had been before the commission, with its engineers aud- 
its experts, and had gone into this thing ratlier thoroughly before the Com- 
mission. They brought this firm of engineers from New York, a dis- 
tinguished firm ; and when they came into the Federal court, the record 
whicli was made before the Commission was utterly ignored, and there was 
no attention paid to it at all. They started de novo. And they used not only 
the engineers used before the Commission, but they employed in the mean- 
time an additional firm of engineers in the city of New York, a very dis- 
tinguished firm, I understand the outstanding firm in New York — and they 
brought both firms out there. 

And so we had two great firms of engineers out there in that water case. 
And in addition to that they brought a very noted utility expert from New 
York to testify about the rate of return. They brought New York counsel 
out there. 

So we spent the whole summer there taking the testimony in that case. 
The briefs have just been filed on behalf of the attorney general, who repre- 
sents the commission in that matter and he just last week filed his brief 
before the master. The brief is a document of some 200 or 300 pages, and 
the brief filed by the utility is some 300 pages, I suppose. (Hearings 
before the Committee on the Judiciary, House of Rep. 73d. Cong., 2nd ses- 
sion on S. 752, Serial 4, pp. 48-49, February 27, 1934.) 

The expenses entailed by such a procedure are considerable. 

in the Indianapolis Water Co. case, they were still amortizing the expenses 
of the 1926 rate case at the time we heard the last case out thei'e in the 
Federal court; and they were still amortizing in Indianapolis, to the tune of 
$30,000 per annum in expenses of that case. 

The Chairman. What were the expenses in the case? 

Mr. MiNTON. Some $200,000. I do not recall the exact figure. In pre- 
paring this case to present to the master last summer, the Public Service 
Commission, through its attorney general and legal representative, employed 
additional engineering help, when we were confronted with their engineers 
on behalf of the utilities ; and we spent $25,000 of the people's money 
trying to prepare that case to present it again in the Federal court. And 
so we are spending thousands and thousands of dollars in that one case. 
(Hearings before the Committee on the Judiciary, House of Rep., 73d 
Cong., 2nd session, on S. 752, serial 4, Feb. 27, 1934, p. 49.) 

Other illustrations may be adduced of investigations which not only cost the 
State considerable money, but also involved delays in effective administrative 
action as a result of court litigation. Thus, the State of Kansas spent almost 
$100,000 upon an investigation of gas rates charged by a company serving a 
hundred or more towns. Yet, by virtue of an injunction in the Federal district 
court, this case was delayed one year. (Hearings before the Committee on the 
Judiciary, House of Representatives, 73rd Congress, 2nd session, S. 752. serial 
4, Feb. 27, 28, March 1, 1934, p. 258.) In New Jersey a valuation of public 
utility property took two years and cost more than $100,000. (Hearings before 
the Committee on the Judiciary. House of Representatives, 73rd Congress, 2nd 
session S. 7.';2, serial 4. Feb. 27. 28. :\Iarch 1. 1!«4. p. 214.) In the Pacific 
Telephone and Telegraph Company and Home Telephone Company cases, after 
three years of proceedings within the State, new evidence was taken before a 
special master in Federal court ; the State of Washington and its municipalities 
were subjected to more than $100,000 in the way of expenditures. (Hearings 
before the Committee on the Judiciary, House of Representatives, 73rd Con- 
gress, second session on S. 752, serial 4, Feb. 27, 28, March 1, 1934, p. 262.) 


A classic instance of delay caused by litigation is supplied by the Chicago 
Telephone case, referred to four times in the hearings before the House Judiciary 
Committee on the Johnson bill. (Hearings before the Committee on the Judici- 
ary, House of Rep., 73rd Cong., 2d session on S. 752, serial 4, pp. 23, 70-71, 138, 
224, Feb. 27-Mar. 1, 1934.) The mere printing of the recoi-d in this case for the 
United States Supreme Court cost $25,000: 

What the 10 years of litigation has cost we can only guess ; but we linow 
from the opinion of the United States district court that the city of Chi- 
cago was obliged to seek delays because it lacked funds to meet the costs 
which fell upon it, all of which migtit have been avoided had the company 
been willing to accept the method of review provided by Illinois law, under 
which the record before the Commission would have been transferred to 
the Court, without the calling of additional witnesses, and upon which an 
expeditious decision might have been had. (Hearings before the Com- 
mittee on the Judiciary, House of Representatives, 73d Congress, 2d sess., 
on S. 752, serial 4, March 1, 1934, p. 224. ) 

The history of this case illustrates the potentialities for delay present in our 
commission-court system of rate regulation: 

Mr. Benton (continuing). Some reference has been made here to the 
Illinois Bell Telephone case. I will be glad to spend a little time pointing 
out what occurred with respect to that case. 

On August 16, 1923, the Illinois commission, after investigation and 
hearing, made an order reducing the charges for certain classes of coin- 
box telephone sei'vice of the Illinois Bell Telephone Co. in the city of Chi- 
cago. The company applied to the United States district court for an 
injunction on the ground of alleged confiscation. 

On December 21, 1923, upon a showing by affidavits, the district court 
granted an interlocutory injunction. 

October 19, 1925, the United States Supreme Court affirmed the interlocu- 
tory injunction in a per curiam opinion. Smith v. Illinois Bell Telephone 
Company (269 U. S. 531). 

January 30, 1930, after a hearing in which 3,000 pages of evidence was 
taken and 281 exhibits were introduced, the court granted a permanent 
injunction. Bell Telephone Company v. Moijnihan (38 F. (2d) 77). 

On December 1, 1930, the United States Supreme Court reversed the 
lower court, and sent the case back for further finding of facts, the injunc- 
tion continuing in force in the meantime. Smith v. Illinois Bell Telephone 
Company (262 U. S. 133). 

On April 29, 1933, upon consideration of evidence taken in a hearing which 
extended over 5 months, the district court handed down another opinion again 
finding the rates confiscatory, and ordering the same permanently enjoined. 
Illinois Bell Telephone Company v. Gilhert (3 F. Supp. 595). From this de- 
cision the Commission prosecuted an appeal, which is now pending before the 
United States Supreme Court. 

This case has been in the Federal court for more than 10 years. It has been 
before the United States Supreme Court four times during that time and is 
now there the fifth time. Whether this is the end nobody knows. (Hearings 
before the Committee on the Judiciary, House of Representatives, 73d Cong., 
2d sess., on S. 752, serial 4, Feb. 27, 28, Mar. 1, 1934, pp. 70-71.) 

Another illustration of the opportunities for delay which litigation affords, 
cne which can only be adequately gauged by a lawyer, is presented by the fol- 
lowing summary of proceedings in the case of Gi-eat Northern Utilities Co. v. 
Public Service Commission of Montana (88 Mont. 180, 293 Pac. 2M; 52 F. (2d) 
S02 ; 1 F. Supp. 328, 289 U. S. 130) : 

September 21, 1927: Commission, on its own motion, instituted inquiry 
into reasonableness of rates charged by Great Northern Utilities Co. for 
natural gas at Shelby, Mont. 

November 29, 1927 : Public hearing at Shelby, Mont., on issues involved. 

October 1, 1928 : Further public hearing at Shelby, Mont., on issues 

December 20, 1928 : Public hearing upon reasonableness of new schedule 
of rates proposed by Great Northern Utilities Co. for competitive purposes. 

January 22, 1929: Order of commission rejecting proposed schedule of 
utility and requiring utility to establish a specific schedule of rates effec- 
tive February 1, 1929 (P. U. R. 1929--B, 176). 


February 8, 1929: Action instituted by utility in State court to have 
order declared null and void and enforcement thereof enjoined. 

November 15, 1929 : Second amended complaint of utility filed. 

November 22, 1929: Answer of commission filed. 

November 30, 1929: Motion for judgment on pleadings filed by utility. 

February 4, 1930 : Motion for judgment on pleadings granted. 

February 4, 1930 : Judgment rendered against commission declaring order 
null and void and permanently enjoining its enforcement. 

February 8, 1930 : Commission files appeal to Supreme Court of Montana. 

April 3, 1930: Commission files motion to advance appeal on docket. 
Granted. Argument on appeal set for June 9, 1930. 

June 9, 1930 : Appeal argued and submitted. 

July 29, 1930: Supreme Court reverses lower court and remands cause 
for proceedings not inconsistent with views expressed (88 Mont. 180; 
293 Pac. 294). 

September 2, 1930 : Utility petitions for rehearing. 

September 9, 1930 : Commission files objections to petitioon for rehearing. 

November 25, 1930: Petition for rehearing denied (88 Mont. 232). 

December 22, 1930: Utility files action in Federal court (U. S. Dist. for 
Montana) alleging same identical facts as in State case and requests in- 
junctive relief on theory order violates fourteenth amendment to Constitu- 
tion of the United States. (Same grounds urged, inter alia, in State 

December 22, 1930 : Utility moves for injunction pendente lite. 

January 2, 1931 : Commission moves State court for setting of State 
case for trial. Granted and case set for trial for January 23, 1931. 

January 15, 1931 : Commission files motion to dismiss in Federal court 

January 21, 1931 : Utility files praecipe for dismissal of case in State 

June 29, 1931 : Application of utility for interlocutory injunction comes 
on for hearing before Sawtelle, circuit judge, and Bourquin and Pray, 
district judges, at Helena, Mont. 

June 29, 1931 : At suggestion of court cause is submitted on final hearing 
with the right of Commission to file its answer to bill of complaint on 
same date. 

June 29, 1931 : Answer of Commission filed raising the same identical 
issues of fact as were raised in the State case. 

July 22, 1931: Stipulation between parties agreeing that the case is 
submitted on application for interlocutory injunction only and not on 
final hearing. 

August 18, 1931: Decision of three-judge court filed (Bourquin and Pray 
award interlocutory injunction to plaintiff — Sawtelle dissents) (52 F. (2d) 

August 19, 1931 : Interlocutory injunction issued against Commission. 

September 15, 1931 : Petition for appeal filed and order of allowance 

September 28, 1931: Sawtelle, C. J., files special concurring opinion (52 
F. (2d) 805). 

February 24, 1932: Appeal argued in Supreme Court of United States. 

February 29, 1932: Per curiam order afllrming action of special court 
issuing interlocutory injunction " without prejudice to the consideration 
and determination at final hearing of all questions of law and fact 
* * * " (United States Daily, issue of Mar. 1, 1932, p. 5, col. 1). 

September 19, 1932: Final hearing before a three-judge Federal Court. 

October 5, 1932 : Three-judge Federal court issued permanent injunction 
against the Commission's order (1 F. Supp. 328). 

November 26, 1932: Commission filed appeal to the Supreme Court. 

March 23 and 24, 1933: Argument on appeal before United States 
Supreme Court. 

April 10, 1933: Decision of United States Supreme Court upholding 
Commission's order (289 U. S. 130; 77 L. Ed. 1080). 

May 15, 1933 : Mandate from the United States Supreme Court was filed 
with the clerk of thie lower court. 

June 7, 1933: The Commission moved for a decree in accordance with 
the mandate. The utility countered with a motion to file a supplemental 
bill on the ground of changed conditions. Before decision thereon the 
utility submitted a new tariff to the Commission and upon receiving the 


approval of a majority of the members of the Commission it secured an 
order of dismissal of its action iu the Federal court. 

June 26, 1933: Order of dismissal entered. (Hearings before the Com- 
mittee on the Judiciary, House of Representatives, 73d Congress, second ses- 
sion on S. 752, serial 4, Feb. 27, 28, March 1, 1934, p. 267.) 
Further examples of procrastination are furnished by Smith v. Illinois Bell 
Teleijhone Company (hearings before the Committee on the Judiciary, House of 
Representatives, 73d Congress, 2d session, S. 752, serial 4, Feb. 27, 28, March 1, 
1934, p. 308) ; the Worcester Light Rate case (hearings before the Committee 
on the Judiciary, House of Representatives, 73d Congress, 2d session, S. 752, 
serial 4, Feb. 27, 28, March 1, 1934, p. 225) ; the Los Angeles Gas case and the 
Pacific Gas and Electric case (hearings before the Committee on the Judiciary, 
House of Representatives, 73d Congress, 2d session, S. 752, serial 4, p. 215, March 
1, 1934) ; the Central Kentucky Gas Company v. Kentucky Railroad Commission 
(hearings before the Committee on the Judiciary, House of Representatives, 
73d Congress, 2d session, S. 752, serial 4, Feb. 27, 28, March 1, 1934, p. 69) ; 
and the case of The St. Louis and O'Fallan Railway Company and Manu- 
facturers' Railioay Company v. United States of America and Interstate Com- 
merce Commission, 279 U. S. 461, which finally upset, iu the year 1927, the 
valuation, for recapture purposes for the recapture periods of the years 1920 
1921, 1922, and 1923, respectively. 

An estimate of average delay was supplied by the Alabama Public Service 
Commission, with respect to injunction suits generally, in the following : 

(1) Such an injunction suit is attended with great delay. After the suit 
is filed and the preliminary orders of the court are made, under the rules 
of the Federal courts, a master is appointed to take testimonv. The taking 
of testimony is rarely completed in less than a year, and iia our opinion, 
the average time so employed will be found to exceed 12 months. Upon 
the conclusion of the taking of testimony, there is then a submission before 
the master. Upon this submission, the master usually takes several months 
m considering the testimony and in preparing and writing his report. The 
case then goes to the trial court. It requires, as a rule, several months to 
get the case submitted to the trial court and after the submission, as a rule, 
several other months before there is a decision by the trial court. In this 
way it requires, ordinarily, 2 years to get the case to a decision by the trial 
court. It will require in most cases most of another year to get the cause 
submitted, heard, and determined by the Supreme Court of the United 

Certainly, it is safe to say that it is rare if any such injunction pro- 
ceeding can be heard and determined both by trial court and the Supreme 
Court of the United States within less than 2 years. The records will show 
that many of such cases have consumed from 3 to 5 years in the final 
determination thereof. (Hearings before the Committee on the Judiciary 
House of Representatives, 73d Congress, 2nd session, S. 752, serial 4 Feb' 
27, 28, March 1, 1934, p. 262.) 

Compare also the Consolidated Gas case. (Hearings before the Committee on 
the Judiciary, House of Representatives, 73d Cong., 2nd session, on S. 752, serial 
4, pp. 14-15, February 27, 1934.) 

In addition to the customary cost and volume indicia of the difficulty of utility 
inquiries, Mr. Reis, general counsel of the Wisconsin Public Service Commission 
supplies useful data in connection with the problem, often overlooked, of the 
stafe required to administer a utility investigation: 

Mr. Reis (general counsel. Wis. Public Service Comm.). 

We cited you in our memorandum to the Wisconsin Telephone case 
which IS the most stupendous utility inquiry ever undertaken in Wisconsin' 
Over 2() accountants, 45 engineers, rate specialists, and others of the com- 
mission s staff will have worked for almost 3 years on this investigation, 
compiling a record to date of 7,500 pages of testimony and 361 exhibits 
at a total cost, before it is all over, of roughly a quarter of a million 

Parenthetically, I may say that a substantial portion of this quarter of 
a million is charged back to the utility (and doubtless ultimately as an 
operating expense to the ratepayer). This charge is made under a law of 
Wisconsin, which allows the commission to assess against the utility for 
regulation, up to four-fifths of 1 percent of the gross annual revenue to- 
gether with a remainder assessment of one-fifth of 1 percent of gross 


against all utilities. This gives us a budget of approximately $1,000,000, 
one of the largest in the country (Hearings before the Committee on the 
Judiciary, House of Representatives, 73d Cong., 2d session, S. 752, serial 4, 
Feb. 27, 1934, pp. 22-23.) 

The Neiv York Telephone case is almost staggering in the voluminousness of 
its records and the number of stages at which comprehensive preparation and 
revision was required, plus the delay consequent upon the taking of the various 
possible steps in commission-court procedure: 

Reference has been made by Senator Johnson and by the President of the 
United States to the Neio York Telephone case. I just want to give you 
a lew of the dates regarding that case — just a few of them. The Presi- 
dent said that it had taken 7 years. Well, that was true at the time 
when he had last heard of it, at a certain stage that they had reached. 
But it has taken nearly 10 years to get it through, from the time the case 
was started until the last decision in the United States Supreme Court. 

Now, what happened? Going back to 1923, before the Public Service 
Commission of the State of New York, there were proceedings ; over 18,000 
pages of testimony were taken in those proceedings. There were 728 ex- 
hibits and 129 hearings had been held. 

Then some time later, in 1924, there were further proceedings, nearly 
8,000 pages of testimony were taken, and 307 exhibits were received. 

But on January 23, 1924, when the company applied to the Commission 
for increases in rates, which were not promptly granted, they proceeded 
very shortly thereafter, on April 26, 1924, to seek to obtain an order from 
the Federal court restraining the enforcement of rates by the Commission. 
On May 1 they received an order for the enforcement of rates, allowing 
a surcharge of 10 percent, that is, allow those rates, plus 10 percent, in 
the city of New York, but no increase outside of New York. A master was 
appointed, and 710 hearings were held in that case, after all of the hear- 
ings that had been held before the Commission ; 710 hearings were held 
before the master. That is, they started de novo. They did not take any 
of the record made before the Commission. They started to make a new 
record entirely. Over 36,000 pages of testimony were taken before the 
master in that case and 3,800 exhibits were received. 

Mr. Olfver. And most of those were duplicates, were they not, of those 
that had been received in the State court? 

Mr. Maltbie. I would say so, or substantially so. You see, this was 
started in 1924, and they did not finish the taking of testimony until 1928. 
So they were 4 years in there, after starting in 1924 ; and you have always 
to take additional testimony for additional years ; and proceedings lasted 
4 years before the master. 

Mr. Maltbie speaking, Mr. Condon (Rep.) : 

The taking of testimony was finished on September 10, 1928. That was 
over 4 years later than his appointment. Briefs were submitted and on 
March 11, 1929, the master made his report to the court. Then there was 
oral argument, and the statutory court made its decision November 7, 
1929, about 6 months later. Of course, it was a very elaborate record 
and the findings were elaborate, and about 6 months were taken. (Hear- 
ings before the Committe on the Judiciary, House of Representatives, 73rd 
Congress, Second Session, S. 752. serial 4, Feb. 27, 28, March 1, 1934, pp. 

Despite his extensive investigation, the court found the master's valuation 
erroneous : 

The statutory court refused the master's valuation over $120,0(X),000, but 
found that the rates did not allow a fair return and, consequently, that 
the order of the Commission was confiscatory. 

Now, that was in the fall of 1929. Then, of course, the Commission had 
to take testimony to fix rates in accordance with that order, and the Com- 
mission proceeded to do so. But the company was not satisfied with the 
decision, and filed an appeal to the United States Supreme Court. That 
was done in the early part of 1930; and here we are in the early part of 
1934, and there has just been a decision made dismissing the appeal. 
(Hearings before the Committee on the Judiciary, House of Representa- 
tives. 73rd Congress. Second Session, on S. 752, serial 4, Feb. 27, 28, March 
1, 1934, p. 11.) 


Compare also the 'New York Telephone case, Hearings before the Committee 
on the Judiciary, House of Representatives, 73d Congress, Second Session, on 
S. 752, serial 4. Feb. 27, 28, March 1, 1934, pp. 12, 13, 14, 23-24, 138, 141. The 
complexity of this particular valuation proceeding is all the more significant 
when taken in conjunction with the frequency with which the New York Tele- 
phone Company has been involved in litigation : 

there have been cases affecting the New York Telephone Co. beginning 
a long time ago — well, I will not go back before the war ; but there was 
one in 1915, and there were some before that. But there were other cases 
affecting the New York Telephone Co., beginning in 1919 and 1920, and 
they had been befoi'e the Commission constantly from 1919 and 1920 until 
1930, and we have had two or three since. He may be entirely right. I 
am not positive. (Hearings before the Committee on the Judiciary, House 
of Representatives, 73rd Congress, Second Session, S. 752, serial 4, Feb. 27, 
28, March 1, 1934, p. 16.) 

3. Valuation DiFFBaiENCES in Connection with Taxation 

The practical administrative difficulties which valuation for rate-fixing pur- 
poses has encountered is well matched in valuation procedure as related to 
taxation. The number of taxpayers with valuation difficulties is much larger 
than that of the public utilities, and the pressure caused by mere numbers has 
produced a tendency to settle most of these controversies outside of the courts. 
For that reason, instances of delay in connection with taxation valuations are 
characteristically found to be cases of administrative delay. Some indication 
of the complex and involved procedure that may be undergone in connection 
with valuation for tax purposes, and the amount of time that this consumes, 
is given by the following summary of proceedings in the case of the Union 
Natural Gas Co., of Pittsburgh, Pa. : 

A review of the files of this case shows that there is still pending an 
additional tax of approximately $200,000 for the year 1917. There have 
been apparent delays on the part of the taxpayer and the Department has 
not been able to close this case for any year. 

The following chronology best illustrates the conditions prevailing in 
this case : 

May 29, 1918 : Schedules filed answering questions in the 1917 tax 

March 19, 1919: Taxpayer requested to file valuation data. 

April 3, 1919 : Second request asking for valuation data. 

April 4, 1919: Taxpayer desires to comply with request for valuation 
data and asks extension of time and conference. 

April 8. 1919 : Conference granted for April 16. 

April 16, 1919 : No conference memorandum. 

January 26, 1920 : Taxpayer asks for ruling regarding drilling expenses. 

April 19, 1920: Taxpayer asked to file affiliated questionnaire. 

May 26, 1920 : Second request for affiliated corporation questionnaire. 

July 21, 1920 : Third request for affiliated corporation questionnaire ; 
given to August 16 to reply. 

December 4, 1920 : Taxpayer refers to letter of January 26, 1920, asking 
for ruling on method of handling labor and drilling costs for gas wells. 

January 4, 1921 : Taxpayer reminds Department in answer received iu 
reply to letters of January 26, 1920, and December 4, 1920. 

December 9, 1920 : Affiliated corporation questionnaire received by De- 

January 13, 1921 : Coal-valuation section asks for data to substantiate 
coal-land values. 

January 22. 1921 : Taxpayer asked to file consolidated income- and 
profits-tax return for 1919. 

February 4, 1921 : Coal-valuation reports mailed by taxpayer. 

February 12, 1921 : Taxpayer advised regarding drilling costs per request 
of December 4, 1920. 

August 1921: Form O, oil and gas valuation data for 1917, 1918, and 
1919 received. 

October 10, 1921 : Taxpayer asks for conference. Conference arranged 
for October 18. 

11579—35 11 


December 13, 1921: Taxpayer preparing amended returns for 1917 to 
3: 20, asks status of case. 

December 27, 1921: Valuation oil and gas properties in progress by oil 
and gas section. 

January 3, 1922 : Taxpayer asks for extension of time for filing amended 

January 10, 1922: Extension granted to February 15, 1922. 

February 18, 1922 : Taxpayer asks for 90 days' extension to file amended 

February 28, 1922 : No extension granted. 

March 1, 1922: Taxpayer asks further extension. 

March 18, 1922: No extension granted. 

November 7, 1922 : Letter to taxpayer explaining valuation methods. 

January 29, 1923 : Revenue agent's report filed showing additional tax 
for 1917, $232,440.70. 

February 1, 1923 : Conference, oil and gas section. 

April 30, 1923 : Taxpayer asks for conference. 

May 2, 1923 : Conference granted May 10. 

May 11, 1923 : Conference, oil and gas section, discoveries disallowed. 

January 10, 1924: Assessment letter showing additional tax for 1917, 
$198,190.75 ; for 1918, $2,719.30. This letter shows that taxpayer paid for 
1917, $446,676.13, and for 1918, $289,400.58. The consolidated net income 
for 1917 was $3,330,798.48, while the aggregate net income for 1917 was 
$4,-553,827.21. The consolidated invested capital for 1917 was $13,448,957.62. 

February 8, 1924 : Protest filed regarding A-2 letter January 10, 1924. 

May 2. 1924 : Taxpayer asks for conference May 13, 1924. 

Z>lay 13, 1924 : No conference memorandum. 

July 22, 1924 : Conference held in oil and gas section. 

August 21, 1924 : Conference held in consolidated audit section with re- 
quest that another conference be held September 12. 

September 12, 1924 : Conference, consolidated audit section ; certain 
balance sheets requested. 

September 23. 1924: Balance sheets received by Department. 

October 21, 1924 : Conference, consolidated audit section. 

December 1, 1924: A 300-page revenue agent's report received covering 
the years 1918 to 1921, inclusive, showing additional tax due of $29,865.01. 

March 14, 1925: Department refers to taxpayer's appeal and asks for 
additional information. 

April 2, 1925 : Taxpayer granted extension to April 24, 1925, to file addi- 
tional information. (Senate Report No. 27, 69th Cong., 1st sess., January 
7, 1926, pp. 9&-97.) 

This might be compared with the long and involved court procedure in the 
Great Northern Utilities Co. case described on pp. — . 

The delay involved in this connection has important consequences, inasmuch 
as frequently the statute of limitations bars assessments and controversial 
issues cannot be raised because the statute has run. For example : 

In the Kennedy and Springer case (2981), the Government lost a tax of 
about $200,000. on $2,903,353 of profits from the sale on an oil lease, 
because of delay until the statute of limitations barred an assessment. 
Senate Report No. 27, 69th Cong. 1st sess., January 7, 1926, p. 97.) 

The valuation section of the Bureau of Internal Revenue are even more hope- 
lessly unable to keep up with their work than the similar units in the Interstate 
Commerce Commission, see pp. 6, 10. Thus, in connection with the work in the 
oil and gas valuation section : 

The work of this section is so far behind that up to March 1, 1925, prac- 
tically all effort was concentrated on valuations for 1919 and preceding 

In March 1925, the engineering division had 1,318 more 5-year-old cases 
undisposed of than in March 1923, a loss of progress of 207 percent in two 
years. i(e9th Cong., 1st sess.. Senate Report No. 27, January 7, 1926, p, 96.) 



















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Exhibit 1402 

Refunds, credits, and abatements exceeding $250,000 through special assessment 
allowed from July 1, 1921, to Apr. SO, 1925 

[Sec. 210 of 1917 act; sec. 328 of 1918 act] 

tFrom S. Kept. 27, 69th Cong., 1st sess., p. 221 (1926)] 

Name and address of taxpayer 


Total refunds, 
credits, and 

W. Beckers Analine & Chemical Works (Inc.), New York, N. Y.. 

Shoellkopf Analine & Chemical Works (Inc.), Buffalo, N. Y 

Jos. Joseph & Bros., Cincinnati, Ohio 

T. A. Gillespie Co., 7 Dey Street, New York, N. Y.-. , 

Runyon Corporation, 7 Dey Street, New York, N. Y 

International Shell & Ordnance Co., New York, N. Y... 

International Loading Co., 7 Dey Street, New York, N. Y 

American Shell Co., 7 Dey Street, New York, N. Y 

Pickands Brown & Co., Chicago, 111 

Coca Cola Co., Plum Street and North Avenue, Atlanta, Ga 

Eockford Mitten & Hoisery Co., Rockford, 111 - 

Mass & Waldstein Co., 92 William Street, New York, N. Y 

J. F. Duthie & Co., Seattle, Wash. , 

Atlas Crucible Steel Co., Dunkirk, N. Y 

R. J. Reynolds Tobacco Co., Winston-Salem, N. C. 

Four Wheel Drive Auto Co., CHntonville, Wis 

Theta Oil Co., 76 West Monroe Street, Chicago, 111 

Hecla Mining Co., Wallace, Idaho... 

Allegheny Steel Co., Pittsburgh, Pa.. 

United States Branch of Employers' LiabOity Assurance Corporation, Boston, 

H. W. Johns-Manville Co., Madison Avenue and Forty-first Street, New York. 

Neuss Hesslein & Co., New York, N. Y 

Fulton Bag & Cotton Mills, Atlanta, Ga 

Fellows Medical Manufacturing Co., New York, N. Y 

Bessemer Coal & Coke Co., Pittsburgh, Pa 

The Centaur Co., 250 Broadway, New York, N. Y 

Whitaker-Glessner Co., Wheeling, W. Va 

Four Wheel Drive Auto Co., CHntonville, Wis - 

Globe & Rutgers Fire Insurance Co., New York, N. Y 

Atolia Mining Co., San Francisco, Calif 

Latrobe Electric Steel Co., Latrobe, Pa 

Curtis & Co., Manufacturing Co., St. Louis, Mo - 

E. J. Lavine & Co., Philadelphia, Pa 

American Car & Foundry Co., 165 Broadway, New York, N. Y.. 

Cleveland & Western Coal Co., Cleveland, Ohio 

Lindsay Light Co., 116 East Grand Avenue, Chicago, HI. (fiscal year) 

Youngstown Sheet & Tube Co., Youngstown, Ohio 

Northwest Steel Co., Portland, Oreg 

Select Pictures Corporation, New York, N. Y 

Carbon Steel Co., foot Thirty-second Street, Pittsburgh, Pa 

New Jersey Worsted Spinning Co., Garfield, N. J. (fiscal year).. 

The Otis Steel Co., 1140 Leader News Building, Cleveland, Ohio... 

Jobbers Overall Co., Lynchburg, Va - 

J. B. Inderrieden Co., 332 River Street, Chicago, 111. 

Bartlett-Hayward Corporation, Baltimore, Md 

Gans Steamship Lines, 12 Broadway, New York, N. Y.. 

West Virginia Coal Co. of Missouri, St. Louis, Mo - 

Whitney Blake Co., New Haven, Conn 

Electric Storage Battery Co., care of J. M. Haynes, attorney, Investment Build- 
ing, Washington, D. C 

Kokomo Steel & Wire Co., Kokomo, Ind 

W. and A. Fletcher Co., Hoboken, N. J 

J. C. Penney Co., 354 Fourth Avenue, New York, N. Y. 

Pittsburgh Steel Products Co., Pittsburgh, Pa — 

Hartford Machine Screw Co., Hartford, Conn... 




1, 829, 






1, 943, 







1, 698, 





625. 19. 
141. 16 
757. 02 
629. 74 
091. 69 
009. 54 
919. 33 
170. 25 
256. 39 
453. 36 
038. 34 
385. 15 
334. 88 
265. 47 
931. 60 
615. 57 
915. 80 
553. 59 

325, 270. 72 
519, 000. 87 

421. 378. 13 
352, 506. 86 
261, 153. 57 
368, 063. 26 
353, 033. 07 
241, 334. 31 
256, 018. 46 
426, 047. 32 
278, 336. 38 
521, 825. 00 

5, 209, 204. 74 
457, 324. 44 

316, 890. 33 

3, 482, 610. 51 
923, 235. 81 
384, 475. 17 

559. 039. 14 

401, 577. 98 

398, 629. 35 
331, 981. 62. 

265. 373. 04 
1, 443, 735. 21 

402, 458. 00 
337, 332. 02 

640, 188. 12 

282. 426. 05 
388, 526. 84 

1, 830, 227. 55 


39, 686, 500. 00* 



3 9999 06313 763 

^^"^Please return promptly. 



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