Steel as a Scapegoat

March 29, 1948

The February increase in steel prices was badly timed and ineptly handled. But the most disturbing result was the nature and violence of the political reaction.

What had happened? A price rise of about 10 percent had been put into effect on less than 10 percent of the total output. The result was an average composite increase in steel prices of about 1 percent. Yet this increase touched off a deluge of denunciations and investigations.

The report of the Department of Commerce to the President helps to set the matter in its true perspective. The composite index of quoted prices for finished steel, it points out, has risen about 40 percent above the level of 1939. As compared with this, average hourly earnings of steelworkers in the same period increased 80 percent. The cost of the steel scrap that the companies must buy increased 150 percent. The cost of coking coal went up 136 percent. Where the wholesale price of steel mill products had risen in February by 43 percent above the level of 1939, all commodities at wholesale had risen 108 percent. Farm products alone, even after their break from January, had risen 179 percent.

The report points out that the rate of return on stockholders’ investment in leading steel companies declined in 1947 from that of 1929 while that of all manufacturing corporations increased. “The rate of return on sales for the primary iron and steel producers was lower in 1947 than in the ’20s generally and was only one-half of the 1929 ratio. It was also somewhat below the years 1937, 1940, and 1941.” Moreover: “The retained earnings of the steel producers have been below the amount necessary to cover their net plant and equipment expenditures.”

The Council of Economic Advisers, on the other hand, seems determined to make the steel industry a scapegoat. As a result its report is full of inconsistencies and non sequiturs. It admits the industry’s “moderation in price making,” but blames it for adding to “inflationary pressures.” It admits that “our rate of economic growth will suffer if the steel industry does not find it possible or profitable to improve and expand with the rest of the economy.” But the effort to modernize and expand the steel industry, it fears, would increase inflation; therefore, one gathers, the industry shouldn’t modernize or expand now and shouldn’t be allowed to earn enough now to modernize and expand later.

“It is futile,” the council continues, “for the steel industry to issue a call for restraint in the matter of wage negotiations at the same time that it is itself raising prices.” This seems a tip-off to the steel unions that the council would regard them as justified in asking for a further wage increase, particularly as it neglects to reiterate that even when we include the recent 1½ percent steel price rise, steel wages have already risen since 1939 twice as much as steel prices.

The political reaction to the steel price rise represents, with a few honorable exceptions, the triumph of demagogy over objective analysis. Though wages and wheat have risen far more than steel, politicians still talk up wages and wheat while denouncing the steel industry for an awkward effort to catch up. Higher wages and higher farm income are treated as virtuous and welcome, but higher profits as a disaster and a sin. There is little recognition of the function of profits both as an incentive to production and a source of capital expansion. Industrial prices are discussed as if businessmen fixed them arbitrarily, depending upon how much they felt like restraining their greed. Inflation is blamed on private industry. The report of the Economic Advisers does not even mention the basic cause of inflation, which is the tripling of the money supply since the outbreak of war and the government’s continued cheap-money policy.

The council distrusts the free market. It wants a return of price control—on the assumption, no doubt, that if the economic system were put completely in the hands of the bureaucrats everything would be as perfect here as it is in England.