Steel : production, processing, distribution, use, Vol. 106, No.5

EDITORIAL STAFF

Editor A. J. Hain Managing Editor

E. F. Ross Engineering Editor

Guy Hubbard Machinę Tool Editor

D. S. Cadot Art Editor ASSOCIATE EDITORS G. H. Manloye J. D. Knox

W. G. Gude G. W. Birdsall

W. J. Campbell New Yor!{

I. H. Such B. K. Price

L. E. Browne

Pittsburgh Chicago

R. L. Hartford J. F. Powell

Detroit Washington

A. H. Allen L. M. Lamm London

Vincent Delport ASSISTANT EDITORS A. R. Finley Jay DeEulis

J. C. Sullivan LaVerne Nock New Yorl(

John H. Caldwell

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L

V o lu m e 106—N o . 5 J a n u a r y 29, 1940

REA D E R CO M M EN TS ...

AS T H E E D IT O R V IEW S T H E N E W S ...

N EW S

U. S. Steel Presents Facts To Refute New Deal Price Theories...

Steelworks Operations for W eek...

Financial ...

Men of Industry ...

Obituaries ...

Aviation ...

Air Conditioning Manufacturers Confident Great Expansion Is Near. . W hat’s New at Pittsburgh ...

Activities of Steel Users, Makers ... ...

Points to Important Economies in Preterred Number System...

United States Increases Tungsten Ore Production; Can Fili All Needs Steelmen Expect 10 Per Cent Increase in Tin Plate Buying ...

W IN D O W S OF W A S H IN G T O N ... ...

M IRRO RS OF M O T O R D O M ...

E D IT O R IA L — Former Questionmark Eliminated...

T H E BUSINESS T REN D

Activity Index Dritts to Lower Levels...

Charts and Statistics ... 38- T E C H N IC A L

1939 Developments in Industrial Heating...

Industrial Illumination ...• • ...

Metals Sessions Feature Annual Meeting of A.I.M.E. in New York. . . . M AT ERIALS H A N D L IN G

Shipyard Handling Units ...

JO IN IN G A N D W E L D IN G

Welded Oil Well Casing ...

PROGRESS IN ST EELM A K IN G

Direct Rolling of Strip ...

M ET AL F IN IS H IN G

Plating Flexibility ...

IN D U S T R IA L EQ U IPM E N T ...

N E W M ET A L PRODUCTS ...

M A RK ET REPORTS A N D P R IC E S ...

The Market Week ... • • ...

B E H IN D T H E SCENES ...

C O N S T R U C T IO N A N D ENTERPRISE ...

IN D E X TO A D YERT ISERS ...

4

1 1

1 3

*9

20! 9 21 25

3 0 3 1

32 33 34 67

23

.27 36

37 39

40 51 61

43

46

48

57 62 64 69

7 0

84

88

94

PRODUCTION ♦ P R O C E S S I N G • D I S T R I B U T I O N • US E

January

29

T h e new S t b y - O n L o c k N u t k e e p s a s s e m b l i e s t ig h t which a r e s u b je c t to s e v e r e vibration . S l o t t e d crown s e c t i o n , e lip tica l in s h a p e a f t e r h e a t t r e a t m e n t , g n p s b o lt t h r e a d li k e a vise. O n e - p i e c e d e s ig n . C a n be u s e d r e p e a t e d l y .

D a r d e l e t S e l f - L o c k i n g S c r e w T h r e a d s may be applied to a n y t y p e o f b olt. D a r d e l e t b olts a re unoffected by v ib r a tio n , lo s s o f in itial b o lt tension or wear.

T h e y h a v e h i g h e r t e n s i l e a n d i m p a c t sfcrengtfi, an d g r e a t e r e n d u r a n c e limit than standard threads.

• With łhis adveriisement The Lamson & Sessions Company begins a service io industry iniended to supplemeni the personal calls of our representatives . *S a me*hod of acąuainting you with certain

aslemngs developed during the recept past which haye real significance to industry. Some are old fastenmgs with improvements. Others are entirely new.

are part of the most complete line of bolt

and nut products made in this country by

Sessions. Ask for samples of any of these fasleninęs which interest you and we will gladly place them 011 your desk with guotations on any ąuantities you

might consider using. For special faslenings made to blueprinf specifications we maintain a complete engineering staff at your disposal.

T H E L A M S O N & S E S S I O N S C 0 ., C I e v e l a n d , Ohio

75*

jmjH

T h e W e a t h e r - t i g h t B o lt is fo r w o o d c o n str u c tio n . H e a d o f this b o lt s e t s flush with s u r f o c e o f w o o d w it h o u t c o u n t e r - b o r i n g . P r e v e n t s m o is tu re s e e p a g e b e n e a t h h e a d a n d from nut end os w e ll. T a p e r e d s p lm e d s h a n k s p r e v e n t turning w he n nu t is a p p lie d .

Twin T h r e a d L a g B o l t s p e n e t r a t e wood twice os a s o l d - s t y l e s in g le t h r e a d lag bolts. Hołd tighte^t s e l f - c e n t e r i n g ; lon g t a p e r e d poin t permifcs sfcartfng by h a n d . A n d t h e y s e ll a t s t a n d a r d lag bolt pr*ces‘

/ T E E L

P R O D U C T I O N • P R O C E S S I N G • D ł S T R I B U T I O N • U S E

A s t h e E d i t o r Y i e w s

£ M Ł .

B STEEL production las t week (p. 19) declined 3 points to 81.5 per cent o f in g o t capacity. C o n su m p ­ tion at m etalw orking p lan ts is a t a m u c h h ig h e r level than that of present m ili bookings, b u t a n enlarge- ment in orders aw aits a bso rp tio n o f a larg e r share of steel now on h a n d or due on previous comm it- ments (p. 69). Pipe dem and, the exception, is brisk.

More automotive steel b u y in g is expected shortly . In- dications point to a m oderate u p tu r n in new steel buying w ithin another 30 days. E x p o r t business eontinues to im prove m ild ly . D om estic tin plate consumption in 1940 should com pare fa v o ra b ly w ith the 1939 volume (p. 67) and there sh ou ld be a 10 per cent inerease in exports.

First large steel com pany to report on fo u r th ą u a r ­ ter financial returns is B ethlehem Steel Corp. (p. 1 9 );

it earned a net profit of $13,028,928 in t h a t period.

. . . A t P itts b u rg h , the w eather P i t t s b u r g h (P- 31) is d o m in a tin g sub- p ject. D eeply frozen g ro u n d and

a r s i o o d thick blankets o f snow generate fears of disastrous fioods in event 0 a sudden thaw. . . . U n ite d S tates (p. 34) now is Producing about 75 per cent o f its n o rm a l tu n g ste n ore ^reąuirements. . . . A u to m o b ile m a n u fa c tu re rs P. 23) believe the reciprocal trade treaties contrib- u e to our domestic prosperity. . . . A ir c o n d itio n in g P- ) has vast potentialities, o f w idespread signifi- ance to metals and m e talw ork ing .

D e al econom ists opposed his contentions, developm ent stage (p. 28) is a process fo r1 w ire fr o m strands s lit frorrij strip . . . . Ne ganized A nglo-French p u rc h a s in g board (p. 25 h e a dąu arters a t 15 B ro a d Street, N ew Y o rk .

A new control system th a t a u to m a tic a lly regulates pow er in p u t to electrically heated fu rn aces (p. 40), is p a rtic u la r ly suitable in tre a tm e n t o f m a te ria ls th a t re ąuire a c o n sta n t tempera-

W e ld O il

W e ll C a s in g s

Considerable progress is reported in direct ro llin g o f s trip fr o m m o lte n m e tal. T h in gages (p. 48) are being produced a t speeds u p to 500 feet per m in u tę w ith h ig h e r speeds a p ro b a b ility . . . . T rend in in d u s try is to place less reliance on n a tu r a l lig h t a n d (p. 51) u tiliz e a rtific ia l illu m in a ­ tio n w h ic h is m ore dependable. . . . A new m echanical p a rts p la n t (p. 57) is fe atu re d b y a n exceptionally versatile a n d efficient d e p a rt­

m e n t fo r p o lis h in g a n d p la tin g in s m a li lots. . . . N ew su bdiv ision o f A m e ric a n In s titu te o f M in in g a n d M e ta llu rg ic a l E ngin eers is a Bessemer Steel com ­ m ittee. I t w ill h o łd a luncheon m e etin g Feb. 15 (p.

61) d u rin g the in s titu te ’s a n n u a l m e e tin g in N ew Y ork.

R o li M o lt e n M e t a l

Cn ? elaborate research, D r. Y n te m a la s t week deter ' re^ ° rt^ to TN E C th a t “ d e m an d fo r steel is

mine prim arily by generał business a c tiv ity , consumers’ incom e a n d in d u s tria l et e r m i n e s Profits, and to o n ly a m in o r ex- D e r n a n d tent by the price of steel. Elas- ticity o f de m an d fo r steel is, so d°es not • *°W a red u c tio n in steel prices Productinn151,0 an effective m eans o f inereasing

and emPloyment in the in d u s try .” N ew January 29, i 940

< £ * C . . , A X .

11

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H our Plate 1’ latcs (o v c r 15 kinds) S he ets (over 25 kimls) A llo y a u .l T oo l Steel*

l l c a t T re ate d A lloy Bar*

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U. S . S t e e l P r e s e n t s F a c t s T o

I t c fiit e N e w D e a l P r i e e T h e o r i e s

Shows reductions f a il to increase o u tp u t or eniploy- m e n t; w ould inean b an k ru p tcy in slack tim es. Volum- inous report presented at TNEC hearing

W A S H I N G T O N

■ U N PRECEDENTED challenge to the New Deal theory th a t lower steel prices would autom atically in ­ crease demand, reduce u n it costs and maintain profits was presented to the temporary national economic committee last week by the U nited States Steel Corp.

An elaborate and exhaustive analysis, supported by statistical data, showed the inter-relationship between prices, costs and steel de­

mand. Prepared by Dr. Theodore O.

Yntema, University of Chicago, the study concluded th a t dem and fo r steel is so inelastic and so depend­

ent on a multitude of factors th a t price reductions provide no effective means for increasing production and employment in the industry. I t also showed that as result of cost factors, price reductions in periods of low industrial activity w ould greatly increase steel com pany losses and, if continued, b a n ta u p t the industry.

‘New, Vital Inform atio n”

_ In introdueing Dr. Yntem a, B en­

iamin F. Fairless, U. S. Steel presi- w f ’ u aid the Corporation’s records naa been thrown open to the pro­

fesor and his staff tQ ajd the cQm mittee in its stud y.

„ j ? 1® ®nalysis> it is generally S eed, is probably the m ost com- prehenswe ever made of the opera- ctnof ° S' steel> ° f any other T iw o UCer‘ D r‘ Theodore Kreps, a f r econ°mic consultant, char- actenzed it as “new and v ita l in- i S An long sought b y t h e com- sturiv 7 dlsaSreement w ith the and be with its c°nclusions

d not with factual data, he said.

cost ! , 1S mcludes a survey of a ll and Profit factors.

studies,” Professor Y ntem a

* e e f Urh,ria n ti? ."Y l0 W er p r ic e le v e ls fo r have PaS* ten Years would

‘ndustry-iDr^K6^ 1 bankruP'cY m the

< rheodore O- Yntema, be- f0re TNEC. NBA photo

January 29, 1940

told the comm ittee, “show th a t the dem and fo r steel is determ ined p rim a rily by generał business ac-

• tivity, consumers’ incom e and in ­ du strial pi’ofits, and to only a m ino r extent by the price of steel. The elasticity of dem and fo r steel is so low th a t a reduction in steel prices does not provide an effective means of increasing production and em ­ ploym ent in the industry.

“Because of this inelastic dem and and the character of costs in the in ­ dustry, a moderate decrease in price results in a great decrease in profits or increase in losses.

“Since m arg ins of profit in the steel in dustry du rin g the past ten years have been and still are ex- trem ely low, no substantial reduc­

tion in steel prices could have been borne or could now be borne by the industry w ith ou t corresponding re­

ductions in costs. This could no t be effected w ith ou t great reductions in wage rates.”

Recognizing T N E C ’s interest in re- latio n of steel prices to production and em ploym ent, D r. Y n te m a said:

“These studies do not, o f course, answer all the ąuestions re la tin g to price flexibility in durable goods, b u t they do, we believe, present factu al evidence illu m in a tin g some aspects of the problem .

“The basie ąuestions to w hich ou r • studies were addressed are these:

“1. To w h a t extent w ill the pro­

duction and sale of steel respond to changes in the price o f steel?

“2. To w h a t extent do costs v ary w ith volum e of production?

“3. H ow far, if a t all, is it feasible fo r the steel in dustry to achieve a d ­ d ition al sales, production and em ­ p loym ent in depression by reduction of prices?

“In other words, is it possible fo r the steel industry to achieve fu lle r u tilizatio n of its productive fa c ili­

ties and thus greater em ploym ent by m eans of price reductions in periods of low dem and?

Steel D em and Inelastic

“A n analysis of the evidence avail- able to us leads to these eonclusions:

“1. The ą u a n tity of steel th a t can be sold is relatively unresponsive to changes in the level o f steel prices.

In other words, the dem and fo r steel is inelastic. A reduction in the price of steel, therefore, w ill b rin g only a sm a li increase in its consum p­

tion. The fluctuations in the pro­

duction of steel have been due p rim a rily to shifts in dem and caused by changes in generał busi­

ness activity, consum ers’ incom e and in dustrial profits. In com parison w ith these factors, the price o f steel has been a m in o r influence on the ą u a n tity of steel sold.

“2. The reduction in average costs resulting fro m inereased ou tp u t is m uch less th a n the reduction in prices w hich is necessary to induce such increase in output. A ll b u t a

13

a long-term u p w ard trend, automo­

bile production has been subject, to severe cyclical fluctuations. In 1929, ap prox im ately 5.6 m illio n cars were produced. In 1932, production slum ped to about 1.4 m illion, only 25 per cent of the 1929 production.

By 1937, production had risen to ap- p rox im ately 5 m illio n cars, more than three times th a t of 1932."

F or m a ny years, said the witness.

"th e ra ilro ad in d ustry ranked flrst as a consum er o f steel. In 1926, rail­

roads consumed approxim ately 7.6 m illio n tons of hot-rolled finished products, w h ich represented about 21.6 per cent of total output.

“The cyclical fluctuations in rail­

road purchases of steel are particu­

la r ly m arked. I n 1932, the railroads took approx im ately 1 m illion tons o f steel, w h ile in 1937, a relafively good year, they purchased 4.1 mil­

lion tons, still m uch less than their pre-depression consumption.

“The serious p lig h t of the rail­

roads is com m on knowledge. They have suffered both fro m a down- w ard trend in operations and from the severity of the recent depres- sion. As a eonseąuence, the need fo r new e ąu ip m en t has declined and the revenues in m a n y cases have been in ade ąuate fo r maintenance and replacem ent o f existing facili­

ties.”

T in P late D em and Increases C onsum ption of steel by the Con­

tain e r industry, whose principal products are consumers’ perishable goods, has shown a substantial up­

w ard trend sińce 1923. Dr. Yntema explained “in th a t year the Con­

tain e r industry took 3.6 per cent of the to ta l finished rolled steel, but sińce 1932 it has taken on the aver- age m ore th a n 8 per cent of the total output. In 1938, it ranked third a m o n g consum ing industries, ac- counting fo r 9.9 per cent of the to ta l o u tp u t of steel.

“W h ile the a n n u a l average con­

su m p tion o f steel by the containei in d ustry was 1.4 m illio n gross tons d u rin g the period fro m 1923 to 192=.

in the period fro m 1932 to 193S its a n n u a l consum ption averaged abou

1 . 9 m illio n gross tons, which js

ro u g h ly an inerease of 36 per cen ■

“This relative stability of the Con­

tain e r in dustry du rin g depressio periods is fu rth e r shown by tne fa c t th a t tin plate production ranged fro m about 60 to 90 pei c of capacity d u rin g the depressi ■ w h ile to ta l steel production van fr o m 15 per cent to 60 per cent capacity.”

O th er steel consum ing industrL were not exam ined in the sam taił. “I n nearly all cases, ■ Y n te m a said, “the Produc^ ^ sUb- industries a re durable £ 00 ject to great cyclical fluctua

“M a ny are producers’ gooa -80

O H C M o o ^ L n i o N c o o ^ O H w r o ^ L n t D N C o o ^ o

O J CM C M O J C M C M C M C s J C M O J C O C O C O C O C O r O C Or O C OC O ^

c r . c r . c 7 ) c r > c r i c r > c r . c r . c r 1 c r > c r » c n c r . c r . c r i c ^ c n c n 0 ) c n c r >

r - H r - ł r - ł r - H r - I r - H , — ( t— < « — ł r - H r - < t — ł r - H r - H r — l r - H T - H r - <

a From 1930 through 1938, U. S. Steel's total tax bill am ounted to about $410,- 615,000 whereas during this period eam ings av ailable for dividends to stock-

holders were about $127,072,000, or less than one-third the tax bill

s m a li percentage o f the costs of p ro ­ ducing steel, in good tim es and bad, are cash out-of-pocket expenditures.

Unless wages and other costs could have been fu rth e r reduced in depres- sion, a su bstan tially low er price level fo r steel d u rin g the past ten years w ould have brought generał bankruptcy in the industry.

“In view of these facts, fu li pro­

duction and em ploym ent cannot be m a in ta in e d in the steel industry d u rin g depression by m eans of re­

duction in steel prices.”

Dr. Y nte m a to ld the com m ittee that du rin g the last 15 years the autom obile, ra ilro ad and Container

industries have consumed alm ost 40 per cent of the steel produced.

These industries represent three d if­

fe rent types of steel consumers, one u sing steel as a ra w m a te ria ł in the m an u fa c tu re of a consumei's’ d u r­

able goods, another u sin g steel in the fo rm of p la n t and eąuipm ent, and the th ird using steel as a raw m a te ria ł in the m a n u fa c tu re of a consum ers’ perishable goods.

“The autom obile in dustry has been the largest single consum er of steel fo r five of the las t six years, ta k in g between one-fourth a n d one- sixth of the to ta l of a ll hot-rolled steel products. A lth o u g h it has had

RATIO OF EARNINGS TO NET ASSETS

(EA R N IN G S B EF O R E IN TER E ST - TOTAL A SS E T S L E SS C U R R E N T LIABILITIES) U. S. S T tE L C O R PO R A TIO N AND S U B SID IA R IE S

O Since its organization, the ratio of eam ings of U. S. Steel to the com bined investment of stockholders an d bondholders has averaged 5.1 per cent" sińce 1920, the ratio has been about 3.4 per cent; lor the past ten years the ratio has

been slightly less than 2 per ceat

TOTAL TAXES AND EARNINGS AVAILABLE FOR DM DENDS

U. S. STEE L CORPORATION A ND SU BSID IARIES

200

14

/TEEL

are utilized in the production of other goods and services. In such cases, the cost of the product m ade from steel is not u sually a large proportion of the value of the goods and services produced by the in ­ dustries using these products m ade from steel. Conseąuently, there is good reason to believe th a t the de­

mand for the products of these in ­ dustries is generally not very elastic and in many cases is inelastic.”

The witness explained relation of the cost of steel to the price of the finished product. “The dem and for steel,” he said, “is derived fro m the demand for the services rendered by steel products, or, more directly, from the demand fo r the finished products themselves. A reduction in the price of steel, if passed on, w ill reduce the price of the finished product.

“In greater or less degree, this will increase the consum ption o f the product and, thus, the consum ption of steel used in its m anufacture.

Furthermore, a reduction in the price of steel m ay perhaps increase the use of steel per u n it of finished product. In each of these cases, how- ever, the critical ąuestion is, how much?

"The percentage decrease in the price of a finished product m ade

possible by a reduction in the price of steel depends upon the proportion of the cost of steel to the value of the finished product. W h a t is this proportion?

“In the case of low-priced automo- biles, the cost of steel is about 10 per cent of the delivered price. This percentage w ould be low er fo r a more expensivę autom obile. F o r a representątive lis t of canned food products, the cost of tin plate per can varied fro m 3.4 per cent to 13.9 per cent of the re ta il price of such food products.

Steel N ot Larg-e Cost Factor

“The cost of steel consumed by the railroads is estimated to average only about 5 per cent of the value of transp ortatio n services furnished by them . In the construction in ­ dustry, steel costs rang ę fro m 4 per cent of the to ta l cost of a fram e house to as m uch as 30 per cent of the total expenditure for a Steel bridge.

“F o r a m odern autom atic packag- in g m achinę, the steel cost com- ponent was found to be less th a n 2 per cent of the selling price. Ex- trem e examples m a y be cited show­

ing a very h igh or very low ra tio of the cost of steel to the price of the finished product, but 10 per cent ap-

pears to be a reasonably typical proportion.

“O n this basis, a 10 per cent re­

duction in the price o f steel would correspond to a 1 per cent reduction in the price of the finished product.

Since the elasticity of dem and fo r the finished products o f m ost steel consum ing industries is low, prob- ably less th a n 1 or 2, a 1 per cent decrease in the price of the product w ould not increase the ą u a n tity sold by more th a n 1 or 2 per cent. I f other eonditions affecting dem and and costs re m ain the same, a 10 per cent reduction in the price of steel w ould not increase the con- sum ption of steel by more th a n 1 or 2 per cent throu gh its effect upon the price o f the finished product.”

D r. Y n te m a told the com m ittee w h a t he had fo un d as result of studies of effects of price reductions in steel.

“F ro m the relationship between costs and volum e it is possible to determ ine the increase in volum e necessary to compensate fo r a given price reduction. A lth o u g h our estimates of the elasticity of dem and fo r steel are less th a n 1, it w ill be assumed in the fo llo w in g calcula- tions th a t a given percentage reduc­

tion in price w ill cause an eąu a l rela- tive increase in the volum e of steel

RELATIONSHIP BETWEEN SA LES AND COSTS

EFFECT 0 F REDUCTION FROM AVERAGE 1 9 3 8 P R IC E S U. S. STEEL C O R PO RA TIO N A ND SU B SID 1A R IES

MILU0NS OF WEIGHTED TONS OF ALL TONNAGE PRODUCTS SHIPPED

ESTIMATED ADDITIONS TO 1938 DEFICIT

HOW DEFICIT W OULD HAVE INCREASED IF P R IC ES HAD BEEN RED U CED AND VOLUM E HAD INCREASED TO SAM E RELATIVE EXTENT

U. S. STEE L C O R PO RA TIO N AND SUB SID IA R IE S 9 6 --- --- 87.2

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hsve reąuired* !GC*Uct' on *rom the average 1938 prices w ould greater inc/6 ^ er cen* increase in volume, a much Note: C o s ,; " 6 v cou*^ result from such a price reduction.

ln a ove cbart are based on 1927-38 experience, sdjusted to 1938 eonditions

January 29, 1940

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PERCENTAGE REDUCTION IN 1938 AVERAGE PRICE

E5 Any further decrease in prices in 1938 w ould have served but to increase the year's deficit; the greater the reduction, the more the deficit would have inereased. Note: Actual 1938 deficit is after bond interest but before federal income

. an d profit taxes; nonoperating data excluded

15

sold, so th a t the do lla r a m ou nt of sales w ill re m ain the same. In other words, the elasticity of dem and w ill be assumed eąu al to 1.

“The sales and revenues of U nited States Steel Corp. subsidiaries in 1938 am ounted to $77.66 per weight- ed ton of products shipped. O f this a m o u n t $71.86 represented the a m o u n t received fro m the sale of steel and other products, and $5.80 represented incom e fro m transporta- tion and miscellaneous operations.

“O n the assum ption of u n ita ry elasticity of dem and and no inerease in transp ortatio n and miscellaneous operating revenues, a 10 per cent decrease fr o m the average price levcl in 1938 w ould require an in ­ erease of 48.8 per cent in volum e of shipm ents to avoid loss fr o m price reduction.

Inerease N o t Com m ensurate

“B u t the m a x im u m inerease in volum e to be expected fr o m the price reduction is only 11 per cent.

Thus it is elear th a t a price decrease w ould induce only a sm a li propor- tion of the tonnage inerease w hich w ould be necessary to compensate fo r it.”

D iscussing the price situation in greater detail, D r. Y nte m a said th a t

“in 1938 the subsidiaries of the U nited States Steel Corp. shipped 7,800,000 w eighted tons, w h ile in 1937 they shipped 13,200,000 tons.

To b rin g the 1938 w eighted tonnage up to the 1937 level, a 69.23 per cent inerease w ould have been necessary.

O n the assum ption of a u n itary elasticity o f dem and, this w ould have reąuired a price decrease of 40.9 per cent,

“A fter such a price reduction, revenue per weighted ton w ould have been $4S.26, or $5.10 less th a n

the a d dition al cost per ton of prod­

ucts shipped. O n the assum ption (contrary to our previous flndings) th a t the price reduction of 40.9 per cent w ould have been sufficient to restore the 1937 volum e, 13,200,000 w eighted tons w ould have been sold.

The C orporation and its subsidiaries w ould then have h a d a cash loss of

$152,600,000 out-of-pocket fixed costs plus a fu rth e r loss of $5.10 per ton, or a to ta l cash loss o f $219,920,000.

" I f depreciation and depletion of assets at this rate of operations.

a m o u nting to $60,784,000, were added to the cash loss, the to ta l loss would have been $280,704,000. In one year this w ould have wiped out m ore th a n h a lf the current assets of the Corporation.

“The 1938 price level used in the foregoing calculations is the aver- age of price in effect both before and afte r the June, 1938, reduction of ap prox im ately 10 per cent in the published prices. The relationship between a n n u a l sales and revenues and a nnu al costs at various levels o f production has also been com- puted on the basis of prices pre- v a ilin g d u rin g the second h a lf of 1938. A t this low er price level the break-even p oin t (under 1938 costs conditions, w ith o u t a ny allow ance fo r dividends on preferred stock) w ould have been at about 10,500,000 w eighted tons, w hich is equivalent to an operating rate o f 50 to 55 per cent of capacity.

“A 10 per cent reduction in prices fro m this level w ould have raised the break-even p o in t to about 90 per cent of capacity. I f the break- even point were this high, the Corpo­

ra tio n w ould have to operate a t the im possible a n n u a l rate of 130 per cent o f capacity to earn a re turn be­

fore income taxes o f only 5 per cent

PAYMENTS TO EMPLOYEES AND IIW ESTO RS PER DOLLAR OF SALES

U. S. STEEL CO RPO RA TIO N AND SU B SID IA R IES

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■ From 1902 to 1938, payroll payments to employes absorbed an inereasing pro- portion oi the sales dollar. while interest and cash dividend payments to investors

have absorbed a decreasing proportion

16

on its investm ent in tang ible assets."

A fter D r. Y ntem a presented his analysis, N ew D eal economists opened a broad attack on the study.

A tta ck ing forces were led by Mor- decai Ezekiel, N ew D eal adviser to the secretary of agriculture, Mar­

tin Taitel, W P A consultant, Louis Bean, of the bureau of agricultural economics, and Prof. Melvin D. de Chazeau, U niversity of Virginia, who has been employed by the jus- tice departm ent to assist in prepar- in g the steel case before TNEC.

Professor de Chazeau followed Dr.

Y ntem a to the stand, disagreed w ith m a ny of the latter’s state- ments.

“I f the conclusion reached by the U nited States Steel Corp. with re- gard to dem and fo r steel and the v ariation of cost w ith changes in volum e are accepted as valid,” he said, “the possibility of price re­

duction w ith o u t ‘out-of-pocket’ loss is of negligible significance.

Indicates Possible Errors

“In fact, the h igh level of the vari- able costs so ‘demonstrated,’ $55.73 per weighted ton, relative to the fixed cost, and the constant charae- ter of these variable costs with changes in o u tp u t practically ren- der a discussion of demand elas­

ticity academic. T hat is, the elas­

ticity of dem and (i. e., the propor- tionate change in volum e with a given change in price) would have to be between 3 and 4— an amount fa r beyond any conceivable actual elasticity fo r steel products—be­

fore it w ould pay the Corporation to reduce price. A ttention will be di- rected, then, first to the analysis of cost and then to that of demand.

“W ith the exception of payroll and ‘other expense’ items which were adjusted fo r tim e trend to correct fo r changes in efficiency, the fixed and variable components in each of the corporation’s expense categories were ascertained by p*°

tin g a n n u a l adjusted expense against weighted tonnage sold m a scatter diagram , fitting a re2ies sion line, and extrapolating lc line to the base line.

“There is alw ays possible error in the projection of a total expense function derived from an analys of historical cost data. The shap of the cost function at levels ou tp u t below those actually exp rienced m ay be different from w ith in the rangę of observations.

“ A relatively slight change in t « slope of the regression line c m ak e a substantial change m apparent size of fixed and va costs. It is possible, therefore, tha the actual overhead expense oi C orporation is greater than calculated by the statistical m

employed. .

“N eglecting this Possif ^ ’ char- ever, it is apparent that m ^ acter of the total cost fu

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the relative m agnitude of fixed and variable components of cost de- pend on (a) the dependence of actual expenses in a given year on the volume of sales in th a t year;

(b) the reasonableness of the ad­

justment to 1938 conditions; and (c) the adeąuacy of the w eights em ­ ployed to obtain a homogeneous single output series.

“Finally, the significance of the result for pricing policy depends on the applicability of this method of cost analysis to a situation in which multiple plants are employed, multiple products m anufactured, and dynamie conditions of technol- ogy and capacity obtained. Criti.

cisms of the data analyzed, the adjustment of data and espe­

cially the weighting of tons are important prim arily because of their cumulative rather than their individual effect. Because of the limited number of observations a relatively slight change in the loca- tion of points in the scatter dia­

grams might render the cost func- tion curvilinear rather than linear.

The most im portant lim ita tio n on this study, however, is the narrow significance that may rig h tly be accorded it for the purposes of pric­

ing policy.”

May Reflect M anagerial Policy The professor told the com m it­

tee that the relation of recorded expense to volume of sales m ay re­

flect managerial policy rather than actual cost and thereby exaggerate we apparent magnitude of variable costs.

The witness said that the assump- ions that must be made to ju stify he weighted tons employed in the interna analysis are so im probable as to throw doubt on the conclu- sions derived.

th Assr inS the propriety of e mul-cost averages, however, it s necessary to assume that the

™!? of _,the average mill-cost of rncf product to the average mill- i ° * rolled and finished steel l<n=;T7 durinS the sample period the f ’ - ^ 35 constant throughout sivP t k an.alyzed- 1927-38, inclu- assnmnr S ‘S ecluivalent to an imnrar n that 110 technological Partmp T 61118 t00k place in one de‘

did nnt t T ge°g raPhic area that ment?n, P’ace in a11 depart-

J eograPhic areas.

}y S 8 f a s not true, especial- ProducŁ lik ? c°!d'rolled light steel Plate whint, s P’ sheet and tin tial and constituted a substan- centa™ f T * 1 , 1* ' * ^ rolled and « ^ total tonnage of d«'ing the period ^ Shipped

if ’ seems hkely.”

fation ^ C ° r P ° ‘

mana are a d r n ftf ^ ° cost a n d de‘

told the com m itt de C h a z e a u t0 concludG th t f ' o n e is f o r c e d

even Point a nr- any break’

pnce reduction w ill January 29, i 940

brin g losses and an upw ard price m ovem ent w ill bring continuous and inereasing profits.

D iscussing this, the witness said

“the Corporation coneerns itself ex- clusively w ith results w hich m ig h t be expected w ith a price reduction.

B u t dem and elasticity is eąually applicable to price increases w ith a corresponding decline in volume.

The conclusion of the C orporation’s analysis w ould indicate th a t it w ould be inereasingly profitable to raise prices, disastrous to lower them . The theoretical monopoly price w ould be a t a poin t which allow ed the sale of a single ton.”

F ollow ing the statem ent m ade by D r. de Chazeau, Professor Y ntem a resum ed the stand w ith two of his assistants, R ichard H . Appert, a for- m e r instructor at the U niversity of Chicago, and H arold Gregg Lewis, instructor of economics at the Uni- versity of Chicago. Both of the la t­

ter had assisted Professor Y ntem a in his studies.

“W e are glacl to have the criti- cisms of our studies offered by Dr.

de Chazeau in his testim ony,” said D r. Y ntem a, “and we appreciate p a rticu larly the courtesy extended to us by D r. Kreps and committee.

“F irst o f all, I should like to elear up any m isunderstanding w hich m ay exist as to the p u r­

poses fo r w hich these studies were prepared. They were not made w ith any idea of providing the United States Steel Corp. or the steel industry w ith a fo rm u ła w hich could be used as a basis fo r price policy.

“As a m a tte r of fact, steel men were w ell aw are of the character- isties of the dem and fo r steel and the behavior of costs long before we began this study. W e have mere-

ly applied the m ethods of statistical and economic analysis to the facts and presented our findings to the com m ittee in the sim plest w ay we could,” Dr. Y nte m a continued.

“N e a r the conclusion of his testi­

m ony, D r. de Chazeau said th a t if our ‘analysis of dem and reflects fa ith fu lly the b u s in e s s m a n i cri- terion o f desirable price he has dram atized the confliet of private and social interest in pricin g policy, w hich is the fu n d a m e n ta l issue be­

fore the tem porary economic com ­ m ittee.’

“In the first place, there was never any im plication on our p a rt th a t our analysis reflected or had a n y th in g to do w ith the business m a n ’s criterion of desirable priee.

In the second place, and m ore im ­ portant, the phrase ‘conflicts of p rivate and social interest in pricin g policy’ reąuires fu rth e r clarification.

In an economic system o f p rivate enterprise, each business seeks, and ought to seek, to m ake the largest possible profit in the lo n g run.

Cites Steel Com petition

“I suppose that m ost businessmen w ould like to get a h igh er price fo r the ir products th a n they do, and I th in k it is probably safe to say th a t it w ould not be in the generał social interest fo r them to obtain as h ig h a price as they w ould like to get. I f this is m erely w h a t is m e ant by the conflict of private and social in te r­

est in pricing policy, it is a n em pty phrase. The real ąuestion is w hether the price level in a p a rtic u la r in ­ dustry is such as to w a rr a n t con- cern fo r the social interest.

“There seemed to be some ąues­

tion yesterday as to w h y the steel

PAYROLL AND EARNINGS PER DOLU\R OF SALES

U. S. STEEL CORPORATION AND SUBSIDIARIES

■ Proportion of sales dollar going to employes in form of w ages an d salaries has had an upw ard trend, inereasing from about 30 cents in 1901 to about 45 cents in 1938. Portion rem aining as earnings available for dividends to stockholders

has declined, even more than the portion going to employes has increased

17

industry did not charge higher prices fo r th e ir products if they could thereby so obviously reduce th e ir losses and increase the ir profits. C ertain ly it is not because the steel companies do not w a n t to raise the ir profits fro m the levels w hich have prevailed over the past ten years. The situation can only be explaincd by the fact th a t the forces of com petition are great enough to keep in d iv ld u a l com panies fro m ralsing their prices.”

D u rin g the course of the hearings, B e n ja m in F. Fairless, president, U nited States Steel Corp., told the com m ittee his Corporation had done everything th a t it could to co- operate w ith the com m ittee in its desire to learn about the steel in ­ dustry.

N am ed 80 To A id T N E C 1-Ie statcd th a t a special T N E C group had been appointed to see th a t the com m ittee got w h a t it asked.

The group consisted of 30 persons.

in clu d in g executives, law yers and economists. Studies, he said, had been carried on by the group fo r the past year and a h alf.

M r. Taitel said he reęarded Dr.

Y n te m a ’s study “as h ig h ly interest- in g applications of reflned econo- metrics, but o f little use to the com- m ittee as a description of the actual conditions upon w hich steel price deeisions are based.”

M r. T aitel said “the steel industry has ra the r generaliy been regarded as an industry w ith h ig h ‘fixed’

costs, that Is, one of those industries in w h ich u n it costs of production decline as output inercases.

“So fa r as prices in such an in ­ dustry aro based upon costs, the

pricing policy w ould tend to be one th a t provides fo r deelining prices as the volum e of ou tp u t increases.

Prices in the steel industry, how- ever, have not follow ed this p attern.

They have tended to re m ain rela- tively fixed. The typical practice has been to increase prices w ith in- creased volum e ra th e r th a n to de- creasc prices as sales expand. Such price behavior is m uch m ore con- sistent w ith a situation in w hich in ­ creasing output is associated w ith constant or rising costs.

“The statistical analysis of costs presented to this com m ittee by the U nited States Steel Corp. is designed to defend the pricing system prac- ticed by the C orporation.”

M r. Ezckiel told the com m ittee th a t the m a te ria ł presented by D r. Y nte m a m a y be sum m arized in three broad statem ents:

“1. I f the steel in dustry were to reduce its prices a t any tim e, the percentage g a in in sales (due solely to the reduction in price) w ould be at m ost no greater th a n the per­

centage reduction in price, so th a t the gross incom e of the steel in ­ dustry w ould show no increase.

“2. I f the sales of steel were to in ­ crease at a n y tim e, the larg e r out­

p u t w ould lead to a reduction in production costs per ton. Costs per unit, howeyer, w ould f a li as ra p id ly as o u tp u t rose, so th a t to ta l costs w ould increase as sales rose.

“3. A reduction in price w ould al- ways reduce the p r o fits or increase the deficits o f the C o r p o r a tio n . This result w ould follow , it is argued, sińce total in c o m e w ould not in ­ crease w ith the increased sales, whereas to ta l costs w ould increase.

“There are m a n y weaknesses in

CAPITAL, S U R P L U S AND LIABILITIES

U. S. STEEL CORPORATION AND SUBSIDIARIES

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K Corporation has sound financial structure, with relatively sm ali am ount of liabilitios and a eomparativoly largo am ount oi surplus an d reserres. an d Capital stock. Prosont capitalisation is roprosentod ontircly b y tangiblc assets. Goodw ill

and intangibles now aro carriod at one dollar

IS

both the accounting methods and the statistical techniąues used in reaching the first tw o statements, as other witnesses have a 1 r e a d y show n.”

D r. Bean criticized the Corpora­

tio n ^ statem ents on analysis of de­

m a n d fo r steel in the Container, autom obile, and railro ad industries as presented by D r. Yntem a.

H e said e x am in ation of the state­

m ents reveals grave statistical de- fects. “These are,” he said, "defects in m ethods o f analysis as well as in assum ptions and in data. In the first three of these studies, the important objective was to reveal the effect of price on consum ption, but the meth­

ods and d a ta used were inadeąuate, w ith the result th a t the quantitative conclusions arrived a t are unreli- able, and so generaliy recognized by the authors. In some cases ade- ąuate d a ta were not fu lly utilized and im p o rta n t price-volume relation- ships rem ained undetected.

Calls A nalysis “Unreliable”

“In the study dealing with total steel consum ption by all industries, several of the quantitative analyses presented are statistically unreli­

able because of the wide rangę with­

in w hich the ‘true’ relationships between price and volume may lie- N o account was taken of the extent to w hich one or tw o extreme ob- servations influenced the results ob- tained. In certain cases where the analyses show little influence of price on volum e, a close examina- tio n of the data used reveals sub- s ta n tia l price influence; and in cases w here lo w prices were found to be associated w ith low volume, the un- derlying relationships can be shown to be ju s t the opposite.”

D r. B ean told the committee that

“in generał, it m a y be said that al of the analyses give such unreliable results th a t the authors themselves discard th e ir showings as to the n a tu rę o f elasticity of demand W steel and resort to the assumption of u n it elasticity as a basis for fu rth e r analyses o f costs in r ^ tion to volum e and of losses in r*

la tio n to price reductions.

“I n their conclusions as to effect of a given price reduction o the volum e of steel, the author these studies fa il to take in o count the effect th a t such a P11C<^ , duction w ould have on the average of price of goods and in directly affected b}

prices. They also fa il to ta k e 1 account the additional eftec ^ increased yolum e of steel

price reduction on business o eral and there fore on stee • ^ n

“T h a t there is a positive rela®

between steel activit> and » a c tiv ity is w ell known an ^ strated in these deman -

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