country as a whole, especially when corporate decisions have such a far-reaching effect as they have in the case of steel.

These two areas of decision sometimes conflict. Unless a proper balance is struck between them, the very existence of our private enterprise system is endangered.

In the light of the facts developed by this committee, detailed in this and other reports, the committee urges a reevaluation by the steel-company managements of their distribution policies so as to strike this proper balance between the interests of private profit and national welfare.

The steel subcommittee is still opposed to the imposition of mandatory distribution or allocation controls upon the steel industry, or any other industry. However, the results of this survey, which are based strictly upon the facts and figures furnished by the major steel companies themselves, are irrefutable. There can be no further sidestepping by the steel industry as to its responsibility in correcting inequities of distribution.

The steel industry should.give grave consideration to the growing sentiment inside and outside Government towards socialization of major industries. The steel subcommittee realizes the seriousness of such pressures, which will mean death to free, competitive enterprise-whether large or small. The steel industry has been repeatedly warned that it must put its house in order, or face inevitable regimentation. This report furnishes the information and the means for action.

INTRODUCTION

For over 2 years the Senate Small Business Committee has investigated the general problem of the shortage of steel. It has heard over 1,000 printed pages of testimony concerning the shortage; it has received complaints from thousands of small businesses describing their difficulties in trying to obtain steel; and it has issued reports containing specific recommendations for the alleviation of the problem.

Out of this great mass of evidence, complaints, and reports there emerges one over-riding, indisputable conclusion-a large segment of industry, particularly small business, has been unable to obtain steel. This critical economic problem, which appears to be just as serious today as at any time since the war, has given rise to two basic questions:

1. Is there a shortage of steel capacity?

2. How is the steel which is produced distributed?

At the outset it should be pointed out that this report is not concerned with the first question, which is a matter of great controversy and debate. Although the subcommittee, in its hearings and reports, has presented practically all of the available facts and arguments on both sides of the capacity controversy, it nevertheless believes that the existing information, voluminous though it may appear, is simply not adequate on a number of the crucial points involved to support any final and absolute conclusion on the issue. A further discussion of many of the factors controlling and affecting capacity and production is contained in part II of the Steel Subcommittee's final report of activities, to which this report is a special supplement. In that report it has been noted that the President, in his state of the Union message, has recommended that a study of the whole steel-capacity problem be

undertaken by the Government. The subcommittee has wholeheartedly endorsed this recommendation for a study and hopes that a complete and thoroughgoing inquiry will be made which will supply the answers so badly needed on the numerous debatable aspects of this whole controversial problem.

But while the final answers on the first question-the adequacy of capacity-have yet to be determined, the subcommittee feels that its conclusions on the second question-the distribution of existing steel supply-can be regarded as conclusive and definitive. The subcommittee has obtained data which enable it to present, for the first time, a comprehensive, statistical picture of the way in which steel is distributed.

PROBLEMS OF STEEL DISTRIBUTION

In the hearings before this subcommittee, it developed that there were four principal points of issue concerning this question of the distribution of the existing supply. These points were advanced by representatives of small business as reasons for their inability to obtain steel. On their part, the representatives of the steel companies either denied the validity and relevancy of these points, or contended that they were only minor or temporary in character and would soon be rectified. These points of issue may be briefly summarized as follows: A. An alleged increase in steel shipments to the steel companies' own fabricating subsidiaries.-It has been contended that, principally by mergers and acquisitions, the steel companies have extended themselves into the production of a wide variety of fabricated goods, and that, consequently, they are now shipping to their own fabricating subsidiaries steel which would otherwise go to independent business. B. An alleged increase in steel shipments to the steel companies' own warehouses. It has been contended that an increasing proportion of the steel flowing to warehouses has been shipped to the steel companies' own warehouses, thereby reducing the amount available for independent warehouses and thus for the numerous small producers who have traditionally depended upon the independent warehouses as their source of supply.

C. An alleged increase in the proportion of steel sold in the form of the more expensive cold-rolled and other highly finished types at the expense of the less costly hot-rolled types.—It has been contended that the steel companies have greatly increased their production of the more expensive types of steel, such as cold-rolled products, and that since all coldrolled steel is produced out of hot-rolled steel, the amount of hotrolled which would otherwise be available for sale to small business has correspondingly been reduced, a situation which, it is contended, works particular hardship on small business because of the higher cost of cold-finished steel.

D. An alleged drawing-in of steel shipments closer to the centers of steel production. It has been contended that steel companies have been withdrawing from areas distant from the centers of steel production and have been shipping more and more of their steel to nearby customers. This resulted, it is alleged, from the operation of the basingpoint system followed by the steel industry. Under this system a mill was committed to absorb some or all of the freight charges when shipping to customers located nearer some other mill, or more pre

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cisely, nearer some other mill which was designated as a "basing point." In a period of tight supply, such as has prevailed since the war, the mills have generally been able to sell most of their steel to nearby customers without absorbing freight, and, it has been contended, in the normal, natural course of events, the mills have naturally tended to do so, rather than absorb freight to distant customers.

In this report there will be presented on each of these points of issue (1) typical complaints by small-business men; (2) explanations, defenses, or other relevant comments advanced by representatives of the steel industry; and (3) the actual facts of the situation.

These facts were obtained by means of a statistical questionnaire, prepared by this committee, and submitted to 14 large steel companies. These companies were selected not only because of the fact that they represent 84.7 percent of the Nation's steel capacity, but also because they are important producers of those particular steel products which have been in tightest supply. The products surveyed were selected on the basis of the tightness of supply, their relevance to the points at issue, and their general tonnage importance. The subcommittee decided to send out this questionnaire after it had become quite clear that the difference of opinion on these points between small business and the steel industry was so wide that only by means of a comprehensive statistical survey could the actual facts be ascertained. The questionnaire was prepared after consultation with leading steel producers, and the schedules of the individual companies were tabulated for this committee by Price, Waterhouse & Co. The data, as compiled by Price, Waterhouse, are presented as appendix A of this report.

A. SHIPMENTS TO FABRICATING SUBSIDIARIES

That the steel companies have, in fact, been extending themselves by mergers and acquisitions into the fabrication of finished products, of which steel is the principal material, is apparent from the investigations of the Federal Trade Commission. Thus, since 1939 the United States Steel Corp. has purchased three steel drum firms, an oilwell equipment company, a pump manufacturer, a wire-cloth fabricator, a prefabricated housing company, and a fabricator of structural steel, plates, bridges, and so forth. During this same period, Bethlehem Steel Corp. has acquired two steel drum firms (including the purchase of 28.9 percent of the stock of the extremely important Rheem Manufacturing Co.), three concerns in the oil-well equipment field, two shipyards, a forge company, and a tank company. Republic Steel Corp., third largest steel producer and leading producer of alloys, has purchased during this interval a producer of steel drums, a manufacturer of wire and screen, a drawn-steel company, a metal-window firm, and a culvert company. And Jones & Laughlin, fourth largest steel producer, has acquired two steel drum companies. It should be noted that this listing represents only those companies which fabricate finished products out of steel, and in no way represents all of the acquisitions made by the steel companies since 1939.

Many small producers feel that there has been an increasing flow of steel to these and other fabricating subsidiaries of the steel companies; that, consequently, the proportion of the total steel supply available for small business has been correspondingly reduced; and that this development has been one of the principal factors behind their

1 Federal Trade Commission, the Merger Movement: A Summary Report, 1948, pp. 41-49.

inability to obtain steel. Typical of these complaints was the statement made by Mr. Frank A. Duerr, general manager, Troop Water Heater Co., Pittsburgh, Pa., who testified before this committee as follows:

Senator MARTIN. You state that you were informed by Jones & Laughlin last fall that they could not retain their contract with you?

Mr. DUERR. Yes, sir. That was in their office, in their sales department. Senator MARTIN. And you state that it later developed, you learned, that the steel was to go to one of their own subsidiaries?

Mr. DUERR. That is correct.

Senator MARTIN. When did they acquire this subsidiary?

Mr. DUERR. As far as I know-they told me during that conversation that they had acquired some of these plants in 1939 and others in the last year or two. Senator MARTIN. What does this particular plant produce?

Mr. DUERR. Steel drums.2

Similar testimony was offered by Mr. Arthur Boehm, secretarytreasurer, the Boehm Pressed Steel Co., Cleveland, Ohio, who stated:

While I was talking to Mr. Boyd of J. & L., I inquired whether it has been a matter of policy with J. & L., and the other big mills-not Jones & Laughlin exclusively to limit production capacity. During the war, I recall that there was quite a bit of pressure from the Senate and the Government for increased capacity of the mills. In other words, steel capacity had been critical all through the war years, and the Government wanted the steel mills to put in additional production facilities.

The answer then, by the big basic producers, was to the effect that no additional production facilities were needed. Existing capacity sufficed before the war. Why increase capacity now and have it idle after the war? Boyd said, at that time, J. & L. didn't anticipate the fact that it would take on additional subsidiaries of its own to supply. J. & L. had purchased the Draper Barrel works at Cleveland, and a good bit of their hot-rolled pickled is going into the barrel works.3

Mr. Frank R. Nichols, president, Nichols Wire & Steel Co., Davenport Iowa, implied that the steel companies have shipped steel to their own subsidiaries in excess of the amounts permitted by the use of the so-called historical quota method:

Mr. WIMER. Have you had any indication that the large integrated companies favor their own subsidiaries who produce wire and nails?

Mr. NICHOLS. They most naturally would do so.

Mr. WIMER. As far as tonnage quotas go?

Mr. NICHOLS. Naturally.

Mr. DICKEY. In other words, Mr. Nichols, you mean that the historical quota that there has been testimony about here, agreed to by the steel companies when allocations were lifted, hasn't necessarily held true in the wire and nail business? Mr. NICKOLS. It hasn't held true at all.

Mr. DICKEY. And is it your opinion, or is it a fact, as far as you know, that they are channeling more into their own subsidiaries?

Mr. NICHOLS. It is a definite fact, into their own subsidiaries and into their own finishing departments.

Mr. DICKEY. Either a subsidiary or part of their own business?

Mr. NICHOLS. Yes.1

A letter from one of the major steel companies to a small customer stating that it could no longer supply the small firm with steel because of its expansion into fabricated products, was placed in the record by Col. Willard F. Rockwell, chairman of the board of directors, Rockwell Manufacturing Co., Pittsburgh, Pa.:

Mr. DICKEY. How about the Bossert Co.? How are they faring? Are they getting more than they did before the war?

180th Cong., U. S. Senate, Special Committee to Study Problems of American Small Business, pursuant to S. Res. 20, hearings, pt. 7, p. 909, 1947. (Referred to hereafter as "hearings.") (Note: In this report, in each case where portions of testimony

3 Hearings, pt. 6, p. 846. Italics added. are italicized, the italics have been added.) 'Hearings, pt. 17, p. 1897.

Mr. ROCKWELL. On January 17, they received a letter from the Jones & Laughlin Steel Corp., signed by Mr. A. J. Hazlett, vice president, which says: "This will acknowledge receipt of your letter of January 13, in which you called attention to the advice recently received from our Buffalo office that we cannot accept any new orders for hot-rolled sheets."

Senator ELLENDER. What are they?

Mr. ROCKWELL. They are used in stamping and barrels, and that sort of thing. Cold-rolled steel is used where you want to get a good finish, like an automobile. Senator ELLENDER. Did your company use that steel?

Mr. ROCKWELL. Our company has bought from the Otis Steel Co. in Cleveland which was absorbed by Jones & Laughlin in 1942, I believe, and therefore the Bossert Co. was carried along as a customer of Otis Steel, which then became Jones & Laughlin. The second paragraph reads:

"A combination of circumstances has forced us to the conclusion that our distribution, in the future, of hot-rolled sheets must be drastically curtailed. Our own expanding requirements for hot-rolled sheets in our barrel plants, cold-rolled sheet facilities, and tin mills will utilize the preponderance of our hot-rolled sheet production. We have studied this problem from all angles, and I am sorry to have to tell you that the conclusion was inescapable. We regret any embarrassment which may result to such of our good customers as the Bossert Co., but we have been unable to find an alternative."

Later in the hearings, this interesting letter became the subject of some discussion between Senator Ellender and Mr. H. E. Robinson, manager of sales, strip-sheet division, Jones & Laughlin Steel Corp., Pittsburgh, Pa.:

* *

Senator ELLENDER. * What effect did the expansion of your own barrel business have on your inability to furnish more steel to Bossert? Mr. ROBINSON. None.

If I understand * * for hot-rolled

Senator ELLENDER. Why did you say that in this sentence? the English language, it is plain. You say "our own expanding requirements." That to me means broadening it, making it bigger.

sheets in our barrel plants, cold-rolled sheet facilities, and tin mills will utilize the preponderance of our hot-rolled sheet production.' Mr. ROBINSON. Yes. Well, Senator

Senator ELLENDER. In other words, as I understand that sentence, it would mean that because of the fact that you yourselves are utilizing more of these materials, and that you expect to do it, that prompts you to curtail the amount that would ordinarily go to Bossert Co., and probably to other steel companies who utilize that kind of material. Am I right in that?

Mr. ROBINSON. I can appreciate your confusion on that, Senator.
Senator ELLENDER. My what?

Mr. ROBINSON. Confusion by this paragraph.

Senator ELLENDER. I don't think it is confusion."

Not only was it contended that the alleged increase in the flow of steel to the fabricating subsidiaries reduced the proportion available for small business generally, but in some cases it was held that the independent producer, who was unable to obtain steel, was in direct competition with these fabricating subsidiaries.

Mr. Tom Smith, president of the Pressed Metal Institute, stated that this expansion by the materials producers into fabricating fields is "the most serious thing that concerns the stamping industry at the moment."

Mr. SMITH. But the most serious thing that concerns the stamping industry at the moment, and while it isn't first in our presentation, sir, it is of first importance to us, is the competition of the wholly owned subsidiaries, divisions, and affiliations in steel, aluminum, copper, and brass, who are making consumer durables and making stampings in competition with our own members. Perhaps a very fair example would be the Republic Steel of Cleveland. Through the Berger Manufacturing Co. at Canton, Ohio, and the Truscon Steel, of Cleveland, Hearings, pt. 8, p. 956.

Hearings, pt. 8, p. 960.