At the same time, the Steel Subcommittee points to the fact that there are obvious weaknesses in the law, which does not provide protection to the economy in the distribution of such materials so allocated, nor to the interests of smaller business. The Steel Subcommittee recommends either administrative action or amendment of the law to effect the following points:

(a) In order that voluntary allocation programs may not be used to further industrial concentration and integration in the steel industry, prohibitions must be set to prevent producing mills from increasing shipments of steel to fabricating subsidiaries due to participation in allocation programs; or to acquire a facility for the purpose of participating in a voluntary program. (b) Limit voluntary allocation programs to include only those most strategic in the domestic economy.

(c) Consider only minimum allocations of materials for such programs so as to cause the least dislocation of distribution to normal customers and normal channels of supply.

(d) Strengthen operations of the Office of Industry Cooperation so as to permit proper screening of all companies asking for certification under voluntary allocation programs; to assure equitable distribution of materials so allocated to smaller and larger segments of the industry involved; and to establish effective compliance thereunder by participating manufacturers and mills. (e) All certifications under voluntary allocation programs shall be approved by the Office of Industry Cooperation, without exception.

86264-49- -2

PART I

STEEL SUBCOMMITTEE ACTIVITIES

INTRODUCTION

The blasts of a cold war, the extent of recovery in western Europe, a softening around the edges of consumer demand, and threats of controls and socialization temper the steel of our national economy today.

The Steel Subcommittee does not pretend to have a crystal ball for gazing into the unpredictable future of steel consumption and demand. It can only state the facts as they are presently available, in the light of this committee's experience and responsibility.

These things we know to be true: Upon a continued high rate of steel production depends the winning of the peace, the rebuilding of the world, and the maintenance of American standards of living. The success of all business, whether large or small, is linked in some degree to the production of steel.

Shortages of steel at all levels of production and manufacture have existed since the end of World War II. When the steel industry begged for the lifting of controls in the fall of 1945 it had no anticipation of the pent-up demand, or the spurt of production that would follow. The Senate Small Business Committee at that time took the position that a too-rapid unwinding of the war economy would be unfavorable to smaller business. Such has proven to be so.

SCOPE OF INVESTIGATIONS

When the Steel Subcommittee began its investigations in 1947, many smaller manufacturers and fabricators had failed, while others were living a hand-to-mouth existence and buying steel at high premiums that would soon put them out of business.

Areas in the Midwest and far West, which had become industrialized due to war production found themselves without sources of supply. Steel mills had withdrawn distribution of tonnage in order to dispose of it to nearby customers, or more profitably, to their own integrated operations.1

Concentration of industry, given great impetus by war production, fostered vertical and horizontal integration in steel-producing and steel-using industries-to the disadvantage of semi- and non-integrated plants and the independent fabricator and warehouser.

The historical base for distribution, at one time agreed to by the steel industry, had little meaning in an economy gambling for every ton of steel. A gray market began to flourish, and those who could buy steel in no other way were victimized.

Shortages of basic materials used in the manufacture of steel, lack of transportation and strikes hampered increases in production that could have been accomplished with existing facilities.

1 This has been amply illustrated in testimony. For example: (1) Acquisition of Otis plant in Cleveland by Jones & Laughlin removed steel from normal customers, p. 841, hearings; (2) excerpts from letters from steel companies read into the hearing record, pp. 4609-4617,

Many of these problems, all of which were discussed in the interim report, have continued to be emphasized as subcommittee hearings and investigations continued into 1948. Certain improvements have taken place.

CERTAIN CONDITIONS IMPROVED; OTHERS CONTINUE

The steel subcommittee was the first congressional committee to reveal the facts of an extensive gray market in steel. At first reluctant to admit such large diversions, the steel industry has within the past year prosecuted gray-market cases, cut off questionable customers and made a greater effort to police its sales. A softening in the gray market has been noted by the trade; prices are reported lower, although activity still continues in the more strategically short items.

Through the efforts of this committee, a reduction in exports has taken place, including curtailment of steel pipe shipments for the Saudi-Arabian pipe-line development.

It has also been reported that the Department of Commerce has made, within recent months, a study of steel requirements in the domestic economy; a move which has been urged by this committee for 2 years. (See discussion, p. 20, and recommendation, p. 2, interim report.) Unfortunately, the Commerce study has not been published, nor been made available to congressional committees.

In the period since January 1948, the Office of Industry Cooperation has been established in the Department of Commerce, and voluntary steel allocations have been the center of attention for many small businesses which have hoped to obtain steel through participation.

The subcommittee has realized for some time that shortages and distribution disturbances inimical to the survival of smaller business in the steel industry, or any other strongly integrated industry, are not easy of solution. To continue to plead for hardship assistance for individual cases does not solve the basic problem of supply or distribution.

The steel industry has repeatedly stated to the committee that as soon as they got into full production and completed expansion plansa year or two hence the imbalance would adjust itself.

In the subcommittee's opinion, that achievement might depend upon several things:

1. Whether increasing integration in the steel industry, which is blocking normal channels of trade, eliminating competition, and depriving independent producers and fabricators of the materials of manufacture and trade, can be checked;

2. Whether capacity as presently anticipated by the steel industry will be sufficient to close the gap between supply and expanding demand; or

3. Whether, if additional basic or finishing capacity is needed, sufficient raw materials will be available to build or operate such facilities in time to remedy the pressing difficulties.

On the problem of integration, the Steel Subcommittee has analyzed the results of a survey of distribution practices by major steel companies. This is the first time such vital statistics of the steel industry have been supplied to a congressional committee, or to any agency of Government or business. These data will be issued as a special steel distribution report, supplementary to this over-all subcommittee report.

The Steel Subcommittee has been responsible for bringing out into the open the various views for and against increased capacity in the steel industry. It is notable that the steel industry has departed from its original contention, taken in June 1947 (hearings p. 983 and p. 1532), that its rated capacity of 91,200,000 ingots was sufficient to meet demand. In 1948, the industry's rated capacity had jumped to 96,000,000 ingot tons of steel, and 98,000,000 is estimated by the end of 1949.

The Steel Subcommittee has maintained (interim report, p. 31) that

the pros and cons of steel production and capacity must come down to earth and be contained in the physical and economic limitations which are self-evident. To build new steel-producing facilities requires steel; to expand the industry beyond its present capacity would presume (1) sufficient supplies of scrap, (2) sufficient high-grade ores, readily accessible, (3) ample supply of high-metallurgic coking coal, and (4) vastly improved conditions of transportation.

Continued steel shortages have brought talk of nationalization of the steel industry, and, as this report goes to press, a bill 2 has been introduced in the Congress which could provide for the construction of additional steel facilities with taxpayers' money.

The proposed legislation, as far as can be determined from its wording, intends to establish a $15,000,000,000 fund from which loans may be made to private industry or to State governments "to achieve the long-range program for production, employment, and investment goals set forth in the Economic Report." No other measurements or requirements are set forth under the bill.

On January 5, the President submitted his message on the state of the Union to the Congress. The eighth recommendation for legislation in that message reads as follows:

Eighth, to authorize an immediate study of the adequacy of production facilities for materials in critically short supply, such as steel; and, if found necessary, to authorize Government loans for the expansion of production facilities to relieve such shortages, and furthermore to authorize directly if action by private industry fails to meet our demands.

In the paragraph immediately following the eighth recommendation, the President further states:

The Economic Report, which I shall submit to Congress shortly will discuss in detail the economic background for these recommendations.

When the Economic Report was submitted to Congress on January 7, it did not contain mention of recommendation No. 8, although it discussed the seven other points in detail.

It would seem that the proposed legislation is not in harmony with the primary recommendation made by the President, and that the Economic Council does not concur with either the President's proposal or the Murray-Sparkman measure.

The Steel Subcommittee does not hold that additional capacity would not be necessary in case of war-or, if present expanded demand becomes sustained demand. It again urges that any consideration of Government subsidization or operation of additional steel facilities should be preceded by a thorough study of basic materials; the utilization of present capacity; precisely what kinds of capacity need expansion; and what technological improvements might result in increased

1 S. 281, Full Employment Act of 1950, introduced by Senator James E. Murray, Democrat, of Montana, for himself and Senator John Sparkman, Democrat, of Alabama.

production without the expenditure of extra steel or basic materials. It must be remembered that some Government-owned steel facilities. built during the war have been disposed of to private industry at an approximate recovery of 25 cents on the acquisition dollar. Others have been leased on terms which are not commensurate with the profits to be reaped by the lessee. Some facilities are still idle. If there is such a crying need in this country for additional steel facilities, it would seem that there would be a more competitive bid situation on plant disposals. Government should make sure of the facts before it goes into other wasteful expenditures. In the two or more years it would take to build a steel plant, it might well turn into another "white elephant."

A further discussion of the capacity, production, and basic materials problem is contained in part II of this report (p. 24). The other activities of the Steel Subcommittee are reported, chronologically, on the following pages.

NEWLY INDUSTRIALIZED MIDWEST SUFFERS LACK OF STEEL

In response to many complaints from Midwestern States and appeals from governors and State industrial associations, the Steel Subcommittee held hearings in Kansas City, Mo., on March 1 and 2, 1948. Kansas City was selected as a central location that would be accessible to small-business men and representatives from the surrounding States. State industrial groups and individual small-business men from Oklahoma, Kansas, Missouri, Nebraska, Iowa, Illinois, and Minnesota were invited to attend. Senator Homer E. Capehart, member of the full committee was delegated to conduct the hearings in behalf of Senator Edward Martin, chairman of the Steel Subcommittee.

During war years, it became the policy of Government to decentralize industry and sponsor the development of smaller units of production in lesser-industrialized areas. As a result, over the past 8 years many new smaller industries have sprung up, older establishments have expanded, and communities have developed or grown around them. The contribution which these new industries made to the war is incalculable. The contribution which they are now making to the economic welfare of the communities they support, and the vast agricultural area which they serve with materials, machinery, and equipment is typically illustrated in testimony by Gov. Frank Carlson, of Kansas (p. 3431, hearings). He said in part:

Today, employment in industrial plants in Kansas is twice the prewar level. * * Evidence to support this statement is abundant. Kansas is one of the few Middle Western States which has been able to maintain its population during the 1940's and forge ahead, gaining more than 100,000 persons since 1940, according to estimates of the United States census

* *

Kansas has kept her adult population and the reason is tied to employment opportunities. Expansion in manufacturing has caused the people to remain in the area and in hundreds of instances, to come into the State. No better barometer of industrial progress exists than figures on changes in population

*

Kansas ranked as high as seventh in the per capita volume of war contracts during hostilities * * *

Any basis for allocation of scarce raw materials, such as steel, ought to recognize the change that has taken place in Kansas relative to the Nation. This change

has taken place despite the obstacles established by industries allocating raw materials on a prewar basis * * *