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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Emerich, Frank I IllOa plus JJ Place: Chicago Date: [1923?] qH-S^;o&4- U COLUMBIA UNIVERSITY LIBRARIES PRESERVATION BIBLIOGRAPHIC MICROFORM TARGET MASTER NEGATIVE # ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD RESTRICTIONS ON USE: Business 320 EmZ ^mfHHfKmmm Enorich, Prank "Pittsburgh plus". The interest of the nation inl the now fanoxis controversy over steel price basing the charges broufiht against the practice and the defense aado for it» by Frank Eaerich. Chicago, Western association of rolled steel oonsuners, [1923?] 16 p. 2&g- cm« fitV**"'"*'*'''" '* "^ '."■.",:». *t •*■ . • »^^^^^^^^^^^^n55*««S TECHNICAL MICROFORM DATA jf ■m ILM SIZE: A'^W\m DATE FILMED: TRACKING # : REDUCTION RATIO: RX IMAGE PLACEMENT: lA (xik\ IB IIB ii-ga-q^ INITIALS: vl.vJ mt Q^^^^ I FILMED BY PRESERVATION RESOURCES, BETHLEHEM, PA p > 3D O (0 III > -v? ^V'*^ '^* C ^^ <^L 1.0 mm 1.5 mm 2.0 mm ./ 3 s 1.25 • 1.0 1.4 ■^ i- is 1 N o^ 00 o to ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghiiklmnopqrstuvwxyz 1234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghiiklmnopqrstuvwxyz 1234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 2.5 mm 1234567890 «^ ^^ ^ •s V <» f^ ip t3 :0 f^ t.<^ ^« :.<' :0 P V m o -o m -o O O O 3D > o m >o C CO O 00 > '^:'*c :|. I PITTSBURG PL /; K. BY m m I r Bi^ lit K 1 i i * i I * T t I t I;. t. ..1 . , ir, ■ < I' »VW^''^»'*.f.;.-'i:iU.J*tlitrijltoi-t;;Vi-:.U m.L,^Bk "t .iliilPjljid? ' * '^' jiH'''"'^'' LIBRARY School of Business ' ■■' «"V f- 4|. J I W ■^' "Pittsburgh Plus A Comprehensive and Concise Treatise Upon This Notable Steel-Pricing Con- troversy, the Most Important Industrial Dispute ol the Day, Presenting Fully the Claims and Arguments of Both Sides 1 1 * ^ i < .i SCHOoY^orl-rnKSS By FRANK EMERICH •40 The Associated States Opposing Pittsburgh Plus 1305 City Hall Square Building 139 North Clark Street Chicago 1 ■SHHaanB Second Revised Edition ksstttvAeh «tate» ©pposfng ^tttal (THIRTY-IWO STATES) I30» CITY HALL SQUARE BUILDlNa CHICAGO (Kftcecs anil Ittectacs BXECUTlVi: COMMITTKK Hon. B. F. Bakei, Chairman Hon. Herman L.. Ekemn. Secretary - Hon. Ben }. Gibson Hon. Clifford L. Hilton Hon. Robert Scholrs Preface W. E. McCoLLOM, Asst. Secretary STATE COMMI8HION8 ILLINOIS Hon. B. F. Baker, Kewancc, Chairman Sen. Jno. T. Denvir, Chicago, Vice-Chtn. Hon. Robert Sc holes. Peoria. Secy. Sen. Randolph Boyd, Galva Hon. J. E. McMackin, Salem Hon. Burton F. Peek, Moliiic Hon. S. H. Thompson. Quincy IOWA Gov. N. E. Kendall Atty. Gen. Bkn J. Gibson MINNESOTA Gov. J. a. O. Preub Atty. Gen. Clifford I-.. Hilton WISCONSIN Gov. J. J. Blainn Atty. Gen. Herman L. Kkkrn 0IRECTOKH-AT I.AIUaJ (ADVISORY) i ALABAMA _ _ Atty. Gen. Harwell G. Davis ARIZONA Atty. Gen. John W. Murpiiv COLORADO Gov. William E. Sweet DELAWARE Gov. William D. Denney Atty. Gen. Sylvester D. Townsknd, Jr. FLORIDA Gov. Cary A. Hardee Atty. Gen. Rivers Buford GEORGIA Gov. Clifford Walker Atty. Gen. Geo. M. Napier IDAHO Atty. Gin. A. H. Conner INDIANA Gov. W. T. McCray Atty. Gen. U. S. Lesh KANSAS Gov. Jonathan M. Davis Atty. Gen. C. B. Griffith KENTUCKY Gov. Edwin F. Morrow Atty. Gkn. Thomas B. McGrkgor LOUISIANA Gov. John M. Parker Atty. Gen. A. V. Coco MAINE Gov. Percival p. Baxter IIASSACHUSETTS Gov. Channing H. Cox MICHIGAN Gov. Alex J. Groesbeck Atty. Gen. Andrew B. Dougherty MISSISSIPPI Gov. Lkk M. Uu sskll MISSOURI Gov. A. M. Hyde Atty. Gen. Jesse W. Barrett MONTANA Gov. Joseph M. Dixon Atty. Gen. Wellington D. Rankin NEBRASKA Atty. Gen. O. S. Spillmav NEVADA Gov. J. G. SCRUGHAM Atty. Gen. M. A. Diskin NEW MEXICO Hon. Jose A. Baca, Acting Gov. Asst. Atty. Gen. John W. Armstrong NORTH DAKOTA Gov. R. A. Nestos Atty. Gen. George F. Shafer OKLAHOMA Atty. Gen. George F. Short OREGON Gov. Walter M. Pierce RHODE ISLAND Atty. Gen. IIkrbicrt L. CARPENTi?R SOUTH CAROLINA Atty. Gen. Sam'l M. Wolfi SOUTH DAKOTA Gov. W. H. McMasteh Atty. Gen. Buell F. Jones UTAH Gov. Charles R. Mabey Atty. Gen. Harvey H. Cluff WYOMING Gpv. William B. Ross STEEL is king in industry today. It is the hub of most industrial effort, for this is **The Steel Age." The following treatise explains a practice in the steel trade known as ''Pittsburgh Plus," over which there is much controversy. This is, it is believed, the first attempt to present this subject in all its most important details. So much interest has been awakened by the "Pittsburgh Plus" controversy recently, that it is thought desirable to make a presentation of this character. So that the treatise may be thoroughly understood, certain information regarding the production of steel is desirable. It is well to know that 85 per cent of all steel produced in the United States comes from mills located in Pennsyl- vania, Ohio, Indiana, Illinois and New York. To indicate how the capacity of the leading steel produc- ing districts is distributed over the country, the figures for fourteen leading groups are given herewith, these including 80 per cent of the nation's entire ingot production capacity. Approximate Annual Ingot District Capacity Gross Tons Pittsburgh, Pa 10,000,000 ^ Chicago, 111 : . . 8,750,000 ^ Youngstown, Ohio 8,250,000 ^ Philadelphia, Pa 4,500,000 . Cleveland, Ohio 3,500,000 . Buffalo, N. Y 2,750,000 Johnstown, Pa 2,000,000 . Birmingham, Ala. 1,500,000 ^ Baltimore, Md 1,250,000 . Pueblo, Colo 1,250,000 . Wheeling, W. Va 1,000,000 ^ Duluth, Minn 500,000 . St. Louis, Mo 500,000 . Pacific Coast 500,000 ^ It is also desirable that the outline of the method of manu- facture of the leading steel products be understood. The following will afford a sufficient explanation. Ingot steel, from w^hich all other forms of steel are made or "rolled," is poured from the furnace into removable receptacles, or molds, known as flasks. When the molten steel takes form vvrithin them, these flasks are removed and the steel is then known as ingots. Ingots are re-rolled by elaborate machinery into several semi-finished forms including billets, blooms, slabs and sheet bars. These semi-finished forms are again re-rolled into finished forms of steel including structural shapes, I-beams, channels, angles, plates, bars, sheets, rails and several other forms. Steel pipe is rolled from a semi-finished form known as skelp. Wire is drawn from a semi-finished form known as wire rods. These are the principal merchant rolled steel products, and since the process of rolling is used throughout their production, the term "rolled steel" is applied to them. I- *Tittsburgh Plus" THE watchword of American industry today is economy and efficiency of production and distribution. The nation has an outstanding position in the world, due to the war, but for this to be maintained it must utilize every possible factor which makes for efficiency and economy in industry. The world abroad is chaotic, but this chaos must end, sooner or later. When it does, America will face the keenest competition it has ever known in the world's niarkets, and even at home, for Europe will be eager to repair the havoc wrought by war and post-war conditions. Self-complacency, born of isolation from the world's recent turmoil, will then no longer permit any practices which do not strictly comport with the utmost efficiency in industry. Even today it is apparent that this country, to maintain its present position and insure its future, must put its industrial house in order and so arrange its industries that they will stand the test of the severest competition. We are now a creditor nation, where formerly we were a debtor nation. Debts to us must be paid largely in goods. That is conceded. We must seek the markets of the world for our surplus. That also is conceded. Therefore, it is essentiat for us to pay the closest possible attention to every factor which enters into productive in- dustry; to take strict account of our present industrial practices to see if they are the best adapted to present and future exigencies, and to divest ourselves of any customs or practices which hamper or threaten to hamper our industrial efficiency. While leaders of industry have various solvents to offer for present problems, and numerous theories as to our most advisable future course, th^y are all agreed upon these fundamentals. The Age of Steel Among the industries in which this nation today holds unquestioned leadership steel is one of the foremost. This period of our history could, with absolute justification, be termed "The Steel Age," for steel plays a leading part in the entire industrial scheme of the world. Therefore, anything which pertains to the steel industry is of paramount moment, and any practice prevailing in that industry which threatens to impair its utmost efficiency is not only of grave import to the Industry itself but to the entire nation. Five years ago the term "Pittsburgh Plus" would have fallen with a strange sound upon the ears of anyone not connected with the steel trade. Today, throughout a con- siderable section of the country— and in ever-growing measure — this term has become quite familiar. 4 That is because a vast amount of public sentiment has been awakened regarding "Pittsburgh Plus," due in a large degree to the activities of many organizations which are up in arms against it, and to a great lawsuit now pending before the Federal Trade Commission, having for its purpose the abolition of this practice. "Pittsburgh Plus" is that practice in the steel industry by which all rolled steel (except rails) — regardless of where made — is sold at a delivered price, which consists of the mill price at Pitts- burgh plus the amount of the freight from Pitts- burgh to destination. The difference between the amount of "freight" included ih the selling price and the actual freight paid to the rail- roads for transporting the steel is the "plus". This "plus" goes into the pockets of the steel mills. As an illustration of the working of "Pittsburgh Plus," the case of a fabricator or manufacturer of rolled steel prod- ucts in the city of Chicago may be taken. If such a manu- facturer or fabricator bought a carload of steel at South Chicago or at Gary, Indiana, only a few miles distant, and hauled the steel away in his own trucks, the price he would pay the mill under "Pittsburgh Plus" would include $6.80 per ton "freight from Pittsburgh," an amount equal to approximately 14 per cent of the price of the steel. At Duluth, Minnesota, where there is also a large steel mill, the local fabricator would pay $12 per ton unearned | freight charge; at Pueblo, Colo., $24 per ton; at Cleveland, I Ohio, $4.30 per ton; at Buffalo, N. Y., $5.30 per ton; at/ Johnstown, Pa., $1.90 per ton; at Sparrow's Point, Md., (Baltimore district) $6 per ton; at Bethlehem, Pa., (Phila- delphia district) $5.40 per ton; at Youngstown, Ohio, $1.90 per ton, and at Wheeling, W. Va., $1.90 per ton. At Birmingham, Ala., he would pay $5 per ton. No Actual Freight Paid This hypothetical load of steel, of course, was never hauled from Pittsburgh to any of these points and no actual freight charge, therefore, was ever incurred. For this reason the freight charge included in the delivered price under the "Pittsburgh Plus" system has often been referred to as "fictitious," "imaginary," "mythical," or "phantom." "Pittsburgh Plus" is defended by all of the steel mills. All of them profit by it, not only the United States Steel Corporation, but all of the so-called independent mills, in- cluding the Bethlehem Steel Company; the Youngstown Sheet and Tube Company; the Jones and Laughlin Steel Corporation; the Republic Iron and Steel Company; the Inland Steel Company, and all of the smaller steel producers. "Pittsburgh Plus" is vigorously assailed by numerous organizations of steel fabricators and manufacturers of com- modities made from steel; also by practically all farmers' organizations, numerous commercial clubs, thirty-two sover- ign states, many municipalities, the National Association of Purchasing Agents and its local component bodies, and by the ultimate consumer who eventually, of course, pays the **plus." I 1 I Claims of Both Sides In support ot "Pittsburgh Plus" the steel mills advance a number of arguments representing their point of view, all of which are embraced in the foUowiAg : 1. It has been in existence practically through- out the life of the steel industry in America. 2. It is not of their own devising but results from the operation of an economic law— the law of supply and demand. 3. That Pittsburgh is the only district of "sur- plus production," and that all other steel centers, especially the Chicago district, are often unable to supply the demands made upon them. 4. That because of the working of this eco- nomic law, "Pittsburgh Plus*' automatically dis- appears when supply exceeds demand. 5. That it is essential to the stabilization of the steel industry. 6. That the steel industry has been built up under and because of it, this including not only the steel mill interests, but the interests of the manu- facturers of articles made from steel. 7. That without the added profit obtained through the "Pittsburgh Plus" practice, high cost mills necessary to provide sufiicient steel to meet the nation's demand in "flush" times, would be forced out of business. 8. That no new mills would be built in the west if "Pittsburgh Plus" were abolished. 9. That the only result of the abolition of this practice would be the impairment of existing in- ' vestments in and about Pittsburgh and the enhance- ment of investments elsewhere. 10. That the abolition of "Pittsburgh Plus" would be productive of no general benefit to in- dustry and would not affect the country's total production of steel. 11. That objectors seek only to benefit by obtaining greater profits for themselves at the expense of the mills and that these profits would not be shared by the general consuming public. 12. That because of its long existence "Pitts- burgh Plus" is a recognized factor in the steel trade and the steel industry would be in a chaotic con- dition if it were abandoned. 13. That the Pittsburgh market and "Pitts- burgh Plus" exist because of Pittsburgh's ad- vantages as a point of production and distribution. 14. That the practice does not discriminate ; against competitors or restrain competition and is therefore legal and unassailable. 6 i $ Opposing the Practice Those urging the abolition of "Pittsburgh Plus" ask that rolled steel be sold f.o.b. mill, at a price based on the cost of production, plus a fair margin of profit. In assailing the "Pittsburgh Plus" practice its opponents deny entirely the claims of the mills and in their own behalf assert: < That "Pittsburgh Plus" is not the result of the economic law of supply and demand, but that it is arbitrary and man-made, and can be adjusted to suit the convenience of the mills. 2. That it exists only because of the close con- trol of the steel industry. 3. That it was not general practice until after the United States Steel Corporation was formed in 1901, when control became easier. 4. That in 1908, a year of depression, it did not disappear, but was kept in force by agreement. 5. That Pittsburgh is not the point of surplus production on all forms of rolled steel. 6. That it does not effect real stabilization of the steel trade in times of business depression, when stabilization is needed. v^ That its only "stabilizing" effect is to "stabilize" selling prices on so high a level that mills can profitably ship into the normal trade terri- tory of their competitors. 8. That it is merely a price-fixing device. 9. That in the case of pig iron and rails no such device exists or is necessary, and therefore it is unnecessary with any rolled steel products. dlO. That it hinders the construction of new mills. 11. That it upbuilds industry in and about Pittsburgh, merely to conserve Pittsburgh invest- ments to the detriment of the rest of the country. 12. That because of it the rest of the country is made artificially and uneconomically tributary to Pittsburgh. 13. That it centralizes the steel industry in a place not best fitted economically for steel produc- tion and fabrication. 14. That it checks the diffusion of industry, and is therefore harmful to the nation's industrial life. 15. That it prevents many localities from utilizing their superior natural advantages for the economical production, fabrication and distribution j of rolled steel. 46. That it prevents free competition, both in basic steel and in commodities made from steel, and is therefore unlawful and harmful. Y7. That it injures agriculture by causing [ higher prices for farm implements and all other / rolled steel products used on the farm. 18. That it also injures the farmer by restrict- ing industrial development nearby, and thus pre- 7 £JL / venting him from enjoying the stabilizing effect of a nearby home market on the price of his products. 19. That this practice, carried into general efiEect in all industry, would result in unwarranted raising of all commodity prices and would tend to bring the control of industry generally into a rela- tively few hands. 20. That it tends to promote inefficiency be- cause of removing the incentive of proper com- petition. *21. That it taxes the transportation system of the country by promoting "cross hauling." v22. That it entails an uneconomic and un- ^ warranted burden of from $75,000,000 to $100,- 000,000 a year upon the general consuming public. Origin of Practice The mills assert that "Pittsburgh Plus" grew up naturally, with the development of the steel trade, and was always a recognized factor. This is denied. It is asserted that several other price- fixing devices preceded it ; that steel was first^ sold f.o.b. mill; that this was succeeded by "zone basing" and other price-fixing schemes, and that finally "Pittsburgh Plus" was introduced. ' Very little steel, except rails, was made in this country priqr to 1884. With the use of steel as a building material, about 1884, there was an acute demand for merchant rolled steel and its manufacture grew apace. Conditions in the steel trade at that time were necessarily unsettled. The Carnegie company, of Pittsburgh, dominated the field and early in the history of the trade various associations were formed which parceled out the business and, in effect, fixed the prices. This condition obtained for several ye^rs and was followed by an era of pools, associations, "gentlemen's agreements" " md other price-fixing devices. Within the period from 1890 to 1900 the various manu- -icturers of rolled steel — who had increased considerably lin number — agreed upon a system of so-called "zone bases," by which the country was divided into zones and uniform 'prices set for each zone. A Different System This, however, was not "Pittsburgh Plus" as it exists today, or even an approximation of it. This is shown by the testimony of Col. Henry P. Bope, former sales manager of the Carnegie Steel Company, a subsidiary of the United States Steel Corporation, given in the pending case, as follows: , Q. Before that time (1880) what was the practice? A. The practice was generally to quote f . a b. mills. Every mill was a law unto itself. Q. And the difference in prices between the mills, did that amount to the freight rate, or was it entirely inde- pendent ? A. Each mill made whatever price seemed necessary to take the business. I Q. W^as that price dependent upon the difference in rates from Pittsburgh at that time? A. Not always. It was based upon market conditions, upon demand, upon the location of the building where this material would be used, and various other elements which entered into market conditions. Q. Was the freight rate to Pittsburgh the guiding basis, by which those prices were made? A. To an extent only, because in the west it did not make any difference what prices were made. In the east it did make a little difference, although freight rates were so low in those days that the freight differential was im- material. For instance, the freight rate into Chicago in r\ those days was only 15 cents per hundredweight, while \J today it is around 35 cents. Q. Was this time you speak of in 1880 the first time, at far as you know, that the Pittsburgh basing system was established ? I A. As far as I know, the first time, except that the Pitts- burgh mills always quoted the Pittsburgh price, of course. Q. But the^ other mills did not quote Pittsburgh basis prior to that time? A. No sir. Zone Bases Used Following this first "pooling arrangement," according to Col. Bope's testimony, the mills decided upon a "zone base" for fixing prices. This also was partially, but not entirely, based upon the Pittsburgh price, as is shown in the following excerpt from his testimony: "After a time they decided upon a zone method of fixing \ prices. They parceled out the country, taking an average j freight rate and using Pittsburgh as a basing point, they I made prices to cover the entire country. They were based I in such a way that all the mills would have an equality of \ competition." Col. Bope showed specifically that while Pittsburgh was taken as a point of computation for prices, the system was not "Pittsburgh Plus," as it is known today. His testimony on this point is as follows: "The method of arriving at those zone prices, after the zones had been established, was to take the price f. o. b. Pittsburgh, and make an average price based upon the average rates of freight into those zone territories, but they were not exactly the freight rates, because in that case anything west would have been discriminating against the eastern plants, which it was not the intention of doing. It was a kind of brotherly love institution in those early days and the desire was to have everybody get his fair share of the business, and that was the basis upon which zone prices were established, to permit every mill to get its fair share of business in any particular zone in the country." -Col. Bope then showed that a steel bar association was formed about 1897 for the purpose of fixing prices. This he stated to have been something in the nature of a "gentle- men's agreement." The System Established With the coming into being of the United States Steel Corporation in 1901, however, all this was changed and by 1904 "Pittsburgh Plus" became almost a hard and fast rule in the trade on nearly all forms of rolled steel. In 1906, pools and agreements were declared illegal, and then the famous "Gary dinners" were given monthly by Judge E. H. 9 Gary in New York. These were usually attended by the heads of the steel industry-both of the United States Steel Corporation's subsidiaries and the heads of independent mills -and they also had a definite influence in fixing prices, as well as in determining other problems of the steel trade. These dinners were discontinued shortly before the famous ^^dissolution suit" against the United States Steel Corporation was begun. The opponents of "Pittsburgh Plus" contend this proves that it was only when the steel industry really came under close control, which was with the advent of the United States Steel Corporation, that "Pittsburgh Plus" as it exists today, was made possible. They assert that this shows conclusively it is not an economic law which is responsible for the practice, but that it is a man-made law, a dictum from those in control of the industry, and that therefore the defense of economic stress is utterly untenable. Supply and Demand The principal reliance of the mills in justification and defense of the "Pittsburgh Plus" practice is upon the theory that it is the result of a natural economic law — the law of supply and demand. This is stated in so many words by Judge E. H. Gary, chairman of the board of directors of the United States Steel Corporation, in his testimony before the Federal Trade Commission, in which he said : **I think I am sufficiently acquainted with the history of the thing to know that this Pittsburgh basing proposition is not the result of any combination, or any illegality, but grew up naturally; has been maintained naturally, and yiias largely disappeared naturally, because of competition. iThis law of supply and demand has brought it about." The mills contend that the Pittsburgh steel district is the country's surplus producer of steel. They assert that it produces far in excess of its own normal requirements and that in normal times other steel producing districts draw upon it to supply their own deficiency. Due to this, say the mills, steel that is actually bought in Pittsburgh because of insufficient supply elsewhere must be sold at the Pittsburgh mill price plus the actual freight tc destination. Steel produced elsewhere than at Pittsburgh, the mills say, is also charged this freight, to "equalize" the charge made on purchases at Pittsburgh by those compelled to buy there because of shortage in their own districts. That is, the mills admit that the unearned freight charge is made, but they claim this should not be considered in the light of a freight charge at all but as a necessary component element of the price, and they also claim they are therefore entirely and justly entitled to this additional price element. To illustrate this, the mills assert 4hat the Chicago dis- l trict, which is the second largest steel producing district in I the country, in normal years calls upon Pittsburgh for a I considerable portion of the steel that it requires. Thus, they Vsay, if Chicago virere a basing point, the early purchasers of ^ steel in or near Chicago would buy their steel at one pricc/j and, after the Chicago supply was exhausted, the later pur- I chasers would have to buy in Pittsburgh and pay the Pitts- I burgh mill price plus the actual freight from Pittsburgh. I Therefore, the mills say, they sell all rolled steel "Pittsburgh " Plus," so as not to discriminate between customers. This "supply and demand" theory is also sometimes re- ferred to as the "surplus production" theory. This is be- cause it rests upon the claim that Pittsburgh is the point of surplus production. The mills admit, in their argument, that when any other considerable producing district is able fully to supply its own needs, then, under the normal opera- tion of the economic law they invoke to justify *Tittsburgh Plus," the practice should — and they claim, does — disappear. Deny Mills' Theory The opponents of "Pittsburgh Plus" deny both the facts upon which the steel mills base their theory and the tenability of the theory itself. They deny that "Pittsburgh Plus," as applied to steel, is the working of a natural economic law, and proceed to show that it is merely a price-fixing device, devised by the mills themselves for their own convenience and profit. In support of this they cite the testimony of Col. Bope, in the pending case. In reply to a question as to whether the Pittsburgh basing system was established because of economic law. Col. Bope stated: "You always have to have some basis from which to start to build up a proposition. Here was a tremendous industry that was growing by leaps and bounds, that even was get- ting almost out of the control of the men who were con- nected with it, and they took what they thought to be the best means at hand in order to stabilize the industry, to get the best results from it, and that, to my mind, is about the main reason why Pittsburgh was chosen, because it waa central, because it had been the steel center for many years, because it had the largest mills, dominating the general in- dustry, and it seemed to be a very natural thing to do. Chicago was too far away, and it was not the steel center in those days, and the eastern mills were so scattered that you could not make a basing point at Philadelphia, or Pas- saic, or Trenton, or Paterson, where these mills were located, so Pittsburgh was the logical point on which to base prices.*' A Man-Made Law In reply to another question as to whether the law of supply and demand had anything to do with the Pittsburgh basing system, Col. Bope testified, "I would put it this way: The law of supply and de- mand is a natural law. There is no control over it really by any man-made proposition. I shauld say that th© *Tittsburgh Plus" system was a man-made proposition, necessitated by chaotic conditions in the steel market, which seemed to render it the only available means of stabilizing the industry." The opponents of "Pittsburgh Plus" insist that the real reason for the practice is found in the fact that the great steel mills of the country, not necessarily by concerted agree- ment, substantially act in concert on all matters affecting prices. In support of this contention they instance further testimony by Col. Bope, as follows: 11 Q. Now, after 1%9, coming down through the period of 1910, 1911, 1912, 1913 and 1914, you say that there was a substantia] uniformity of prices between the Carnegie Com- pany and all its competitors with mills located in the Pitts- burgh district during that time, for instance. A. Yes; that was upon certain items. There was a pretty general uniformity. It was not adhered to by virtue of any agreement, but for the purpose of keeping a stabilized market. Conditions were bad during some of those years - and the only way that absolute demoralization was pre- vented was by taking that stabilizing of prices due to a precedent (Pittsburgh Plus) which had worked in the past and was used at that time, although there was no concert of action. Otiicr testimony of Col. Bope is also cited as showing that "Pittsburgh Plus" is a man-made rule, rather than an economic law. **The mills themselves felt that the proper thing to do was to have a basing point. They all decided on this. It was an established thing for the benefit of the industry, just as almost all associations of one kind or another, in any kind of business, get together and have certain legislation for the benefit of the whole. ***** But now there are other steel centers, which perhaps have as preponderating manufacture as Pittsburgh. You cannot always maintain a state of affairs and have it exactly the same as it was and has been for ten or fifteen or twenty years, because new situations arise." Determined by the Mills And to show further that "Pittsburgh Plus" owes its existence to the dictum of the mills rather than to an economic law, the following testimony of Col. Bope is cited : "My recollection is that it (the resumption of the 'Pitts- burgh Plus' practice after a brief lapse) was done for two purposes: First, to get a general stabilization of the whole steel market, and second, because there was an increment of freight there which could be obtained that was natural and part of the profits.'' V The Chicago Situatian The situation at several other points of steel supply is also cited by the opponents of "Pittsburgh Plus" to show that the contention of the mills that this practice rests solely upon the law of supply and demand, or the surplus production of the Pittsburgh steel district, is fallacious. It is pointed out that the Chicago steel district — which roughly embraces the city of Chicago and its immediately adjacent territory in northern Illinois and northwestern Indiana — seldom or never, in normal times, produces a quantity of steel closely approximating the rated producing capacity of its mills. It is further pointed out that the actual production of this district bears an almost definite and constant ratio to the country's entire production, which is worth inquiring into. In spite of the increase in capacity in the Chicago district, its proportion of actual production to the actual production of the country, has been, over a term of years, a pretty constant factor. This would seem to indicate that there is at least an implied understanding that the mills in the Chicago district shall not produce beyond a certain point, and this gives rise 12 to the suspicion, at least, that the steel mills do not permit production in the Chicago district to approximate capacity too closely. Therefore, if this suspicion is justified — and it is claimed the actual facts and figures afford ample justification for it — it goes to demonstrate that there is actual regulation by the mills of the flow of steel supply in relation to demand, and this proves that the whole matter is one of artificial control and not of economic law. Situation in Birmingham An even more striking illustration that "Pittsburgh Plus" is an artificial and man-made device and not the result of economic law, is afforded by the case of Birmingham, Alabama. Birmingham is admittedly a point of surplus production, as it produces much more steel than its normal trade terri- tory requires. Nevertheless, steel is nowhere sold "Birming- ham Plus." Were Birmingham unable to supply the normal require- ments of its trade territory, then — according to the theory of the mills — purchasers of steel in that territory should and would be obliged to pay the Pittsburgh mill price, plus the full freight from Pittsburgh. However, Birmingham purchasers do not pay the full "Pittsburgh Plus." The United States Steel Corporation is admittedly in complete control of the Birmingham situa- tion, since it controls almost all of the steel production there. As a sort of special concession to Birmingham by the corporation, the full "Pittsburgh Plus" of $11.60 is not charged, but steel is sold at the Pittsburgh price plus an arbitrarily fixed differential of $5 per ton. Birmingham Price Arbitrary That the Birmingham price is arbitrary was practically admitted by Judge Gary in his testimony in the pending case, as follows: Q. The Birmingham price is purely arbitrary, is it not? A. What price? Q. The price at Birmingham, which is the $5 differen- tial above the Pittsburgh price. A. I think it is. That is my impression, that it is arbitrary in the sense of the producers insisting upon it, probably, and the consumers consenting. Q. That price is not fixed by the law of supply and de- mand down there at Birmingham, is it? A. I cannot answer much about that, because I have al- ready admitted that I do not remember in regard to it. I might make a mistake. ^ This situation, the opponents of "Pittsburgh Plus" point out, is utterly impossible if the contention of the mills that "Pittsburgh Plus" is due solely to the workings of economic law is correct. No such thing as an arbitrary differential can be established or maintained unless those who establish it are in absolute control over conditions. Economic law takes no account of arbitrary differentials. Manifestly, it cannot do so. Therefore, so far at least as Birmingham is concerned, the economic law which the mills invoke in support of this practice, is inoperative. If -the law does not operate in one place, it can hardly \ V \ be inexorable, and this indicates that the practice is one which can be and is fixed at will and is not solely dependent upon economic law. Controlled by Mills That the Birmingham situation is the result of control is shown both by the testimony of Col. Bope in the pending c««, and by minutes of the Carnegie Steel Corporation, introduced in evidence in the famous "dissolution" suit brought against the United States Steel Corporation some years ago. This shows that the question of making Birming- ham a basing point for steel was discussed at many meetings of the directors of the Carnegie company. This followed agitation started by a manufacturing concern in Knoxville, Tennessee, which had circularized other manufacturers in the south asking them to stop dealing with the Tennessee Coal and Iron Company — the United States Steel Corpora- tion's Birmingham subsidiary — until Birmingham was made a basing point. The sales manager of the Tennessee Coal and Iron Com- pany strongly urged that this request be granted, but Judge Gary, at one of the meetings, suggested that **the matter be gone into carefully from the standpoint of the results to ourselves, and that it then be given full consideration." He added his belief that "it will event- ually be thought adviable to make both Chicago and Birmingham basing points." This matter was discussed at several meetings and William E. Corey, later president of the United States Steel Cor- poration ; Charles M. Schwab, its then president, and others took leading parts in the discussion, all of them opposing the granting of the Birmingham request. Concession Is Made While this request was never granted in full measure, a concession was later made which substituted an arbitrary differential of $3 per ton at Birmingham for the full *Titts- burgh Plus" charge, and with the increase of freight rates in 1920, this differential was increased to $5 per ton* These minutes and the actual facts strongly suggest not only that the United States Steel Corporation, and not an economic law, controls the Birmingham situation, but that on the statement of Judge Gary himself, the corporation has it Within its arbitrary power to make both Birmingham and Chicago basing points for steel. If this be true, the economic law theory, necessarily falls to the ground* Situation at Duluth Duluth is another producing point worthy of special con- sideration. The United States Steel Corporation has a subsidiary, the Minnesota Steel Company, which operates a mill of considerable size there. Although its officials contend that production costs at Duluth are high and that the Duluth mill could not operate without obtaining the additional price granted by the "Pittsburgh Plus" practice, superficially it would seem that Duluth is well situated for the production of steel, and it is contended by Duluth interests that steel can be produced there economically. 14 i 4 'i Duluth is closer to the actual iron ore than any other steel producing center in the north. Nearly all of the iron ore used by northern steel mills is hauled to Duluth by railroad and shipped from there to these various other mills. The Duluth labor situation is said to be good, and the principal other elements entering into the production cost — coke and limestone — while they must be hauled a long distance, can be hauled cheaply by water. The "Pittsburgh Plus" charge at Duluth is $12. Even granting that the producing cost at Duluth is higher than at Pittsburgh and other points, this tremendous differential, the Duluth interests claim, is far greater than any possible difference in production cost. A Surplus Producer The point is also made that more than half of the Duluth mill's product is shipped in a semi-finished form to mills in Wisconsin, Illinois and Indiana for re-rolling into fin- ished forms. This means that the Duluth mill absorbs a great deal of the freight differential. This would tend to indicate that Duluth produces more steel than its trade territory requires and is therefore a point of surplus pro- duction. On the contention of the mills that districts of surplus production fix the price, then, without regard to cost of production at Duluth, steel prices should be based — for that territory, at least — upon Duluth. Nevertheless, Duluth steel purchasers pay the full "Pittsburgh Plus." There are also similar anomalies at other points of pro- duction. Cleveland, Buffalo, Youngstown and other produc- ing centers, probably produce more steel than their actual trade territory requirements, yet in each case, "Pittsburgh Plus" is charged. Atlantic Seaboard On the Atlantic seaboard there are several mills, the largest being at Bethlehem, a short distance outside of Philadelphia, and at Sparrow's Point, Maryland, a short distance outside of Baltimore. Both are owned by the Bethlehem Steel Company. A great deal of steel is shipped into the territory normally tributary to Bethlehem, much of it coming from Pittsburgh, yet Bethlehem ships into Pittsburgh and also into the west. This goes to prove that no reliance can be placed upon the fact that Pittsburgh ships considerable steel into other districts. It seems clear that the so-called Pittsburgh market is an arbitrary one and the basing of prices upon that market is also arbitrary. If it can be shown that this arbitrary prac- tice works a hardship and disadvantage to the entire country, restrains competition and handicaps industry, then the case against the practice is complete and the justification of eco- nomic law is shown to be futile. Points of Surplus Production There is cumulative evidence on this point when the making of various steel products is considered. It is shown, for illustration, that Pittsburgh is not the point of surplus production of steel sheets, but that these are produced IS I mainly in Ohio. Ohio produces approximately 56 per cent of all of the steel sheets made in the United States* The entire state of Pennsylvania produces annually only 21 per cent, on the average. Yet, steel sheets are consistently sold "Pittsburgh Plus/* Why should this be if the economic law invoked to justify ''Pittsburgh Plus" rests upon the ''surplus production'' theory? The case of wire and wire nails is even more striking. The average annual production of wire nails in the entire country is 12,000,000 kegs. The western capacity for the production of nails is over 7,000,000 kegs annually. The "surplus production" theory cannot have relation to wire nails, since the west has the capacity to produce 60 per cent of the country's entire production and uses by no means this amount. But the west must nevertheless pay the "Pittsburgh Plus" impost on all nails it consumes. Pig Iron More striking illustrations of the curious workings of this economic law are afforded by consideration of pig iron and steel rails. Neither of these products — ^both closely related to rolled steel and presumably conforming to the same economic laws — seems subject to this law. Pig iron is produced throughout the country in hundreds of furnaces, largely under separate ownership. This pro- duction is not subject to as close control as that of steel. There is no hard and fast rule for price-fixing on pig iron. It is usually sold f.o.b. furnace, or point of production. What mysterious economic process attaches itself to pig icon by which it is sold upon one base before entering a converter, and upon another when it emerges from the converter as steel? Manifestly, if the law of supply and demand theory holds true in steel, it must hold true also in other basic commodities, and certainly in a basic com- modity so closely related to steel as is pig iron. Attempts have been made to sell pig iron on a single Birmingham base, or "Birmingham Plus." Owing to the number of independent furnaces operating without close business relations with each other, it is, however, practically impossible to dictate rules of practice for the sale of this commodity. Since pig iron is sold "furnace base," or "f.o.b. furnace," the opponents of "Pittsburgh Plus" insist this proves definitely that "Pittsburgh Plus" does not owe its existence to economic law, but to control by the dominating steel producers. Rails The case of steel rails is perhaps even more illuminating. Pittsburgh, admittedly, is not the surplus producer. The greatest production center for rails is the Chicago steel district. The annual tonnage of rails produced by the mills is . enormous. On the "surplus production" theory, therefore. ^Chicago should be the basing point on steel raik That is. Ithey should be sold "Chicago Plus.'' But this h not the Vase. Neither are they sold "Pittsburgh Plus." In fact. Id I H Steel rails are sold "mill base," or "f.o.b. mill,'' or point of production. The opponents of "Pittsburgh Plus" assert that rails are sold on a mill base because the railroads refuse to buy them on any other basis. They say the railroads know all about basing points and mythical freight rates and decline to pay any freight except that which is earned. They say further that in the event it was sought to impose the "Pitts- burgh Plus" charge upon rails, the railroads would solve the problem by buying their rails in Pittsburgh and getting the benefit of the actual haul. But, since the railroads decline to submit to this exaction, the "law of supply and demand" very graciously steps aside and permits the roads to purchase their rails in the same manner in which most commodities other than steel are bought. This contention seems to be upheld by the evidence in the pending case, both from the testimony of Col. Bope and Judge Gary. Col. Bope admitted the fact in his testimony, which was partly as follows: Q. How are rails based? A. I dcxn't know how rails are sold today; I imagine they are sold f. oT b. mill, but in the old days there was a Pittsburgh price. They did not take the full freight, how- ever, there was a differential, which was of benefit to the railroads. They were not handicapped by being made to pay full freight rates. The idea of the steel mills has ^always been to cater to the railroads. * * ♦ * ♦ Q. Were the Chicago mills pretty large producers of rails at the time you speak of, there being a higher price for rails? A. Yes; Chicago always has been the largest pro- ducer of rails in the country. Q. What is the reason that rails arc not sold on the Pittsburgh basis? A. Because the customers are so widely distributed, the railroads run from different sections of the country, and they reach different markets, and it was never felt that they should be put on the basis of ordinary customers. Q. What is the difference between them and the ordinary customer ? A. The reasons I have given, the desire on the part of the mills to at all times help the railroads in their expan- sion and growth, and because of the fact that for so many years the railroads took 75 per cent of the steel product of the country. Fixing Rail Prices Judge Gary also admitted, in effect, that rails operate under a different system from other forms of rolled steel. His testimony was in part as follows: Q. Was there any other period outside of that which you have just mentioned where the rail mill producers did not have uniform prices? A. Well, I might answer that question this way: Per- haps it would be fair to say that for a great many years the same price was maintained by the railroads generally. The price of $28 was fixed, I should think, about 1899, and that was really by agreement between Mr. Cassatt (A. J. Cassatt, president of the Pennsylvania Railroad Company) and myself. That was considered to be a fair orice. Then Cassatt spoke for a great many railroads and that price was maintained, that $28, for a great many years, because we refused to advance the price, notwithstanding that it should have been a great deal higher on rails. . 17 ./. , idUl^ riM ! Q. Did the railroads refuse to pay the "Pittsburgh Plus'' charge on rails? A. I don't think the ''Pittsburgh Plus" question ever came up with them. This presents an interesting problem. The testimony of Judge Gary shows conclusively that the steel mills had it in their power to fix prices at their pleasure, even before the present-day consolidations of steel mill interests made control easier. He shows this in his testimony to the effect that he, on behalf of the mills, and Mr. Cassatt, on behalf of the railroads, made an arbitrary price of $28 per ton m rails. Col. Bope showed that Chicago has for many years been the point of surplus production on rails. Yet, he showed that rails were for a considerable time sold on a modified "Pittsburgh base," and later, according both to Col. Bope and Judge Gary, they were sold f.o.b. mill, at a fixed price for all mills. Hdw does this square with the law of supply and demand which the mills protest is solely responsible ^for "Pittsburgh Plus ?" Does it not show that the entire practicejs arbitrary and under the absolute control of the mills? Steel Mill Capacities Since the mills base their defense of "Pittsburgh Plus" upon the "surplus production" theory, an inquiry into the relative producing capacities of the various steel districts is pertinent. Production and consumptive figures are solely in posses- sion of the mills, which do not give them out. Neverthe- less, it is possible to obtain the rated capacities of the various steel mills of the country through official publications, and these throw considerable light upon the subject. As already shown, Pittsburgh is not the point of surplus supply on steel sheets, this being somewhere in the state of Ohio. Ohio also produces the greatest quantity of strip steel of any state. Pennsylvania has never been the surplus producer of concrete reinforcing bars. The west produces from 40 to 45 per cent of this product. Pittsburgh is not the point of surplus supply of wire and nails. In the case of rails, Chicago is the point of surplus supply, but rails are not sold in the same manner as other steel products. ^Chicago also admittedly produces a huge quantity of mer- Ichant bars, probably a surplus. Careful study of mill capacities, therefore, shows that Pittsburgh is no longer the point of surplus production on all steel products. On the other hand, there is evidence that in "flush times," Pittsburgh mills are usually the first to fill up with orders, the point of greatest consumptive demand being in the east. Consequently, in such times Pittsburgh has no "surplus" from which to supply deficiencies elsewhere. ^ It IS hard to determine the point of surplus production. It is extremely doubtful if there is such a thing as "a point of surplus supply" for the entire country. Pittsburgh once occupied that position, but does so no longer. This is shown by the following testimony of Col. Bope: **But now there are other steel centers, which are per- haps as preponderating in manufacture as Pittsburgh. You cannot always maintain the state of affairs and have it exctly the same as it was and has been for ten, fifteen or twenty years, because new situations arise." Steel Mill Consolidations The opponents of "Pittsburgh Plus" assert that if this practice is upheld by the courts and not disturbed by con- gressional action, the system will be more firmly fastened upon the country than ever. That is because the steel industry, now strongly controlled by a relatively few organizations, shows constant indica- tions of coming under still closer and firmer control. The closer the control, the more effective the agency for price dictation. The formation of the United States Steel Corporation itself eliminated much competition and enabled the mills to impose "Pittsburgh Plus" as general practice. If other great mill mergers are consummated — and there are constant rumors of them — competition will be still more greatly lessened. At present four organizations, taken together, easily con- trol the entire industry; Only a year and a half ago there was a great merger consummated — that of the Bethlehem and Lackawanna corporations, which shortly afterward acquired the Midvale Steel and Ordnance Company, which a few years prior thereto had absorbed the Cambria Steel Company. The Youngstown Sheet and Tube Company, in anothel- merger, acquired the Steel and Tube Company of America. In 1922 reports of mergers filled the air. A merger of seven large independent producers was being negotiated, these being the Republic Iron and Steel Co., the Midvale Steel and Ordnance Co., the Lackawanna Steel Co., the Youngstown Sheet and Tube Co., the Inland Steel Co., the Steel and Tube Company of America and the Brier Hill Steel Co. Mergers Effected This fell through, whereupon the merger of the Bethlehem and Lackawanna companies was effected. This was shortly followed by a three-company merger, the Republic, Inland and Midvale companies combining into what was known as the North American Steel Corporation. Complaints against both the Bethlehem-Lackawanna aftd North Amer- ican mergers were filed by the Federal Trade Commission. As a result, the North American company disintegrated. The Bethlehem-Lackawanna consolidation then absorbed the MidVale company. Still later, the Youngstown Sheet and Tube Company absorbed the Steel and Tube Company of America and the Brier Hill Steel Company. Thus, within the past two years four strong independent steel producers, the Lackawanna, Midvale and Brier Hill companies and the Steel and Tube Company of America, have been withdrawn as independent entities. 19 ■iM^^kMiitfy^M. Control Is Close As showing how close is the present control of the country, the following table of ingot capacities of the leading producers is edifying: Annual Company Ingot Capacity Gross Tons United States Steel Corporation 22,500,000 *Bethlehem-Lackawanna-Midvale Consolidation. . 8,000,000 Youngstown Sheet & Tube Company 3,000,000 Jones k Laughlin Steel Corporation 2,640,000 Republic Iron & Steel Company 1,395,000 Inland Steel Company 1,200,000 This means an ingot capacity of 38,735,000 tons, out of a total capacity for the entire country of approximately 56,000,000 tons, or about 70 per cent, held in the hands of six producers. If this tendency toward consolidation is carried further, control will be vested in still fewer hands, anil the fear that "Pittsburgh Plus" will be saddled forever upon the nation seems well founded, regardless of economic conditions or changes. Basing Points in Other Industries Another pertinent inquiry in this controversy is with reference to customs in other industries. On the "surplus production" theory of the mills, if Pittsburgh is the sole basing point for steel because of the rigid demands of an economic law, then there should be a single basing point m every other industry where like conditions obtain. Assuming Pittsburgh to be the point of surplus steel supply, then any other industry in which there is a pre^ ponderating point of supply would necessarily be responsive to the same economic law. / ^^ It has been shown that this so-called "economic law does not apply to pig iron and rails, although Birmingham is perhaps the greatest source of surplus supply of the former, and Chicago is undoubtedly the point of surplus supply of the latter commodity. Cement, lumber, sugar, oil, grain and certam other com- modities have their prices based on certain points. In most cases there are several such points and in several instances-- such as cement — there is a system of so-called "zone bases," by which the country is divided into zones and the prices in each zone are based upon a point approximately in the center of it. All of these are more or less convenient methods of price-fixing. u tt • j In this connection it is interesting to note that the United States District (>urt of the Southern District of New York, in a decision rendered October 23, 1923, by District Judge Knox, held illegal "The Cement Manufacturers Protective Association/' including the leading manufacturers of cement. Judge Knox based his decision in part upon the fact that cement was charged for at a delivered price, including the rail freight from a basing point, which failed to give pur- chasers the advantage of cheaper transportation. Operates to Raise Prices "Pittsburgh Plus" carries this price basing theory to the final degree. The "Pittsburgh Plus" controversy involves 20 "w the Entire question of basing points in industry. Should the present practice be upheld by the courts and not dis- turbed by legislative action there is excellent ground for the belief that a vast change in pricing methods is imminent. This change would put the consumer largely at the niercy of the producer and would unquestionably result in a: higher level of commodity prices, especially in times of keen demand. There is no doubt that "Pittsburgh Plus" operates to raise prices. This was admitted by Judge Gary in his testimony, in which he states: rf "Tittsbqrgh Plus' when it is in force, of course, makes 4 steel cost more." ^ Further evidence that "Pittsburgh Plus" operates to irtcrease prices was recently afforded from an unexpected source. The Interstate Commerce Commission, passing upon an application for increase in rates on steel from the Pittsburgh-Buffalo . territories and territories east, to VirT ginia cities and points taking the same rates, denied the, applicjaiion and based its denial krgely upon the fact that, this would increase the cost of steel to consumers in the, territory affected. This decision is reported, on page 1067 of the October 18, 1923, issue of The Iron Age. The dic- tum of the commission on this subject is as follows: '*In the iron and steel industry the price of steel articles, * outside of Pittsburgh, wherever manufactured, is the Pitts- burgh price plus the freight rate from Pittsburgh to des- tination. Because of this so-called Pittsburgh basing point for steel practice, aji increase in the freight rate from Pittsburgh increases in like manner the price of steel, no ' matter where the purchase is made. This, however, re- * spondents state, is no fault of theirs, and they do not benefit therefrom." ^ ^ This action of the Interstate Commerce Commission indi- cates clearly that the contention that the "Pittsburgh Plus'*| practice in steel is unique in industry is sound, else no particular reference would have been niade to it. The Interstate Commerce Commission, in applications for changes in freight rates, deals with all phases of industry and its manner of reference to this case is pretty conclusive evidence that steel occupies a position unlike that of any other indus- try in its methods of price-fixing and price basing. This also tends to support the contention that there is no general, economic law applicable to industry such as is^'invoked by the steel mills in justification of "Pittsburgh Plus." ^ Primacy It is the contention of the mills that the economic law by which they justify this practice automatically provides that when primacy in steel production passes from Pittsburgh to any other producing center, "Pittsburgh Plus" will auto- matically disappear. Judge Gary in his testimony said: "This Pittsburgh basing proposition is not the result of any combination, or any illegality, but grew up naturally, has been maintained naturally, and has largely disappeared naturally, because of competition. This law of supply and , demand has brought it about ***** and you cannot control that." "Now, as to when that will happen (the end of Titts. burgh Plus*) I do not know; but this law of supply and| , demand, which is influenced by competition, will regulate 21 4 it. Perhaps as to some things, never; but as to steel, I should say it will come in time. I think so. I think Chi- cago will be a base at some time. It is pretty nearly that now in practice. I think it will be a long time before Dnluth will become a base like Pittsburgh." Richard V. Lindabury, senior counsel for the United States Steel Corporation, in his argument before the Federal Trade Commission in 1920, made the following statement: "When western production equals western consumption, assuming that it does not now so equal it, then Pittsburgh primacy will pass. • • • * I believe that point has been reached today, but I am not sure. * * * * In another five or ten years, if left to itself, 'Pittsburgh Plus' will auto- matically disappear." As has been shown, there are other districts which already surpass Pittsburgh in the production of certain steel products. It is contended that under normal and untrammeled condi- tions, without steel supply being regulated by the mills in their own interests, Pittsburgh's primacy would even now have passed. The Birmingham situation is cited as showing that in its own trade territory Birmingham occupies a position of primacy, but nevertheless is not a basing point. How can any other steel district, no matter how well equipped naturally for economical steel production, obtain primacy so long as the steel mills are enabled to conserve inviolate their Pittsburgh investments through the operation of "Pittsburgh Plus?" If the point of primacy has already passed, or is at the passing stage, as intimated by both Judge Gary and Mr. Lindabury, why is "Pittsburgh Plus" still maintained and why do the steel mills still fight any attempt at its abolition ? The opponents of the practice maintain that Pittsburgh's primacy is only supported by the concerted action of the mills in regulating the output of the several steel districts. They point out that the hope held forth that "Pittsburgh Plus" will automatically disappear in five or ten years, as suggested by Mr. Lindabury, has been a sort of nebulous promise for a long time, but that no actual progress toward the abolition of the "Pittsburgh Plus" practice has been apparent. A speech made by Col. Bope as far back as the early part of the year 1911 and reported in The Iron Age of February 2 of that year indicates that even then Pitts- burgh's "primacy" was passing. Col. Bope, then sales manager of the Carnegie Steel Company, an important figure in the steel world and an important cog in the human mechanism of the United States Steel Corporation, ma^ the following statement: **Hcrc in Pittsburgh we have the competition of every large plant outside of Chicago and that competition is be- ming serious, because the handwriting is on the wall for file plants located east of the Allegheny mountains. With Chicago made a basing point, it will be absolutely miiossible for any plant east of the Allegheny moun- ftins to place its product in the Chicago district or west, nd it is going t® be difficult for Pittsburgh, handicapped as t will be, unless there is some concession on the freight rate f $3.60 per ton (the freight rate from Pittsburgh to Chi- 'cRgo at that time) ^ This entire suggestion that Pittsburgh's primacy is respon- 22 .i t - 4 siblc for the continuance of "Pittsburgh Plus" is ridiculed by the opponents of the practice, who pertinently point out that this is an argument which describes a vicious circle, the center of which is the self-interest of the mills. The mills say that "Pittsburgh Plus" is dependent upon "Pitts- burgh primacy," and the facts show that this "primacy" itself rests entirely upon the "Pittsburgh Plus" practice. The "Pittsburgh primacy" argument seems hardly entitled to much respect when its principal proponents are in doubt whether such primacy actually exists. As far back as 1911, and even earlier, as Col. Bope's speech shows, the matter of Chicago's becoming a basing point was acute and was feared in Pittsburgh. Even then, and with a freight differential of only $3.60, Pittsburgh's primacy was insecure and apparently would have disappeared but for "Pittsburgh Plus." This indicates that Pittsburgh's "primacy" could hardly continue were it not for the artificial support which "Pittsburgh Plus" affords. Slack and Flush Times The steel mills contend that "Pittsburgh Plus" only oper- ates in so-called "flush" times, when demand generally exceeds supply, and disappears in "slack" times, when supply exceeds demand. This, they say, substantiates their law of "supply and demand" or "surplus production" theory, by showing that when demand elsewhere is acute, Pittsburgh must supply the shortage, while when demand is slack and Pittsburgh is not called upon to supply this shortage, "Pittsburgh Plus" goes by the board. The facts do not seem to warrant this claim. The statement attributed to the late Andrew Carnegie that "steel is either prince or pauper" appears true. Steel is recognized as the most reliable trade barometer. During general pros- perity the steel trade is usually "prince," while during industrial depression it is "pauper." While "flush times" have considerably outweighed "slack times" since 1901, there have been several depressions, yet "Pittsburgh Plus" was constantly operative up to 1921 except for four brief periods, in one of which the deviation from the practice was solely in response to a dictum of the War Industries Board in 1917. The other periods prior to 1921 during which there was a departure from the "Pittsburgh Plus" practice were in 1909, for a few weeks, in 1911 and in 1914, for a similar time. Held During Depression The 1909 period is interesting. Col. Bope's testimony regarding steel prices at this time is as follows: "We had gotten to the point in 1907 that there was a money panic. It was not a business panic at all. The^ were trying to make one dollar do the work of ten dollars, and all of a sudden it snapped and the money situation got extremely bad. The only way to save the situation was to maintain prices until liquidation could take place on the part of the buyers who had large stocks." **The first break in price was made by the Illinois Steel Company in May of 1908, through a misunderstanding, ' 23 I and when that was done all our competitors thought thev ^ 'had the right to do the; same thing, and there wds a con- ' sidentble should have automatically brought about its disappearance.* If the United States Steel Corporation^ and the other steel millsv dould maintain prices throughout this admittedi depression, and conW also maintain the "Pittsburgh Plu$" chkrge d*^ng that- tiine^, then it is plain enough that no- ccwiotnie la# automatically causes /the disappearance of thisi exaction if the steel mills will it otherwise. Again in 1921 there was a depression, and "Pittsburgh Plus" was removed in the Chicago markei o,. plates, shapes and barn aft^r two attempts, had been made to stabilize the market at lower pricUevels. In 1922 there was a deflrtite industrial boom. Mills all over the country were running to capacity, with a huge tonnage of unfilled orders. Nevertheless, in the Chicago distrirt steel was not quoted "Pittsbu.'gh Plus" on plates,^ shapes and bars, but for a considerable time quotati6ns at Chicago ^nd Pittsburgh vrere on k parity and later — in 1923 —this was modiiied only to the extent that Chicago quota- tions ruled $2 per ton higher th^n Pittsburgh, despite the fact that' the full "Pittsburgh Plus" cha;rge was $6.80 t)er ton. During all of 1923, however, and for at least two-thirds of 1923, the full "Pittsburgh Plus" charge was made at: New York and in the east^- but in the latter part of 1^23 this price was shaded slightly, after the east had manifested a more active interest^ in the fight on ^Tittsburgh Plus.'' Marked attention is directed to this situation. If Pitts-* burgh is the point of "surplus production" and supplies the shortage of other districts in times of large demand, then during 1922 and the fore part of 1923, "Pittsburgh Plus" should have been the rule in the Chicago market, if Chicago is a point of underproduction. Why were plated, shapes and bars ^old in Chicago on a parity with or only slightly abdye the Pittsburgh price, i ? with '-Pittsburgh Plus" disregarded, and "Pittsburgh Plus" maintained in the east, even in Philadelphia and Baltimore with the great Bethlehem, Lebanon and Sparrow's Point mills almost immediately contiguous to these cities? If the reply to this inquiry should be that the Chicago district is able to supply its demand, why is Chicago not made a basing point on steel? If Chicago is unable to supply its demand during "flush times," why was not "Pitts- burgh Plus" in full force in Chicago during these two years ? This situation seems absolutely at variance with the "law of supply and demand" and the "surplus production" justi- fication. The real reason for the disappearance of "Pitts- burgh Plus" in the Chicago market is asserted to be that western consumers of steel have made a determined fight against this practice and the mills, fearful of the effect upon the public mind of this campaign, did not dare restore the full "Pittsburgh Plus" charge at Chicago, the main source of western supply. This, if true, shows that the situation is well within the control of the mills and is not responsive to a natural econopiic law. Fostering New Mills A further defense for "Pittsburgh Plus" is on the score of the necessity for the "protection" it affords in the upbuild- ing of mills where the cost of production is so high that a differential, or subsidy, is necessary to enable them to operate profitably. Judge Gary made this point in a speech delivered at Duluth June 12, 1918, in which he stated that but for "Pittsburgh Plus" the Duluth mill could not operate. He then asserted that the cost of producing steel at Duluth is 13 per cent higher than at Pittsburgh and 38 per cent higher than at Gary, which figures indicate that steel production costs at the lower end of Lake Michigan are the lowest in the country. These figures, when reduced to terms of per- centage, show that Gary produces steel for approximately 18.12 per cent less than Pittsburgh. This was a speech which has since often vexed the eminent head of the United States Steel Corporation, for his pro- duction cost figures have been widely quoted. In his testi- mony in the pending case he sought to mitigate them somewhat, although admitting that they were carefully prepared for him and were presumably correct when he cited them. This speech has also vexed many of the heads of inde- pendent mills. At the time it was made, before the Duluth Commercial Club, Judge Gary was endeavoring to explain why Duluth could not be made a basing point. Several of the heads of United States Steel Corporation subsidiaries and also the heads of most of the important independent producers were with him at the time. Presumably they agreed with him. There are several such points where steel is produced in which, so say the mills, production costs are so high that, but for this "protection" of "Pittsburgh Plus," there would be no steel industry. 25 ^f^m^ \ Protection for New Mills Judge Gary stated, in his testimony, that this "protection" is essential. He said : **I said that a new plant could not be secured, or a site to begin with, at Duluth or anywhere else, at a new place, unless they had the protection, probably, of this Pittsburgh base." And in another part of his testimony he said : "Referring again to Duluth, the producers of semi-finished products in Duluth were desirous of having finishing mills erected there by us so that they could buy their goods there. We would not build there. We could not ever build there. We couldn't live with a business there except we had the benefit of this plus proposition. **Now, the reason why the producer at Duluth can success- fully compete with other manufacturers in the east, whose costs of production are less, is because this added freight rate protects him." Production cost figures submitted to the Federal Trade Commission in the pending case show that Duluth costs are approximately 10 per cent higher than Pittsburgh. This hardly justifies the "Pittsburgh Plus" charge at Duluth, since the freight rate from Pittsburgh to Duluth is $12 per ton, or approximately 24 per tent of the cost of the steel at the mill there. This clearly shows the injustice of the practice, as pur- chasers are penalized to an extent not at all comparable to the required "protection"* — assuming such **protection" is essential. Conserves inefficient Mills /'Pittsburgh Plus" imposes a hardship upon all the rest of the country for the sake of conserving inefficient mills, and of yielding a larger profit from their operation than the; are entitled to^ IncLntally. of yielding an excessive profit from the operation of all other mills. The mills contend that certain mills, admittedly less effi- cient than others, are necessary, that the nation may be assured an adequate supply of steel in time of need, and that therefore this subsidy or "protection" is justified. In reply it is contended that the practice puts an admitted premium upon inefficiency and really halts the construction .f new mills at points best adapted for steel production by nabling the inefficient mills to flourish and by conserving mill investments in and about Pittsburgh, no longer the point of most efficient or most economical steel supply. The answer of the Jones & Laughlin Steel Corporation of Pittsburgh to the application for a complaint in the pending case asserts that if "Pittsburgh Plus*' is abolished, this company, to conserve its western trade, will be obliged to erect a mill in the Chicago district. As a matter of fact, this company has, since making that statement, pur- chased approximately 1,200 acres of land near Hammond, Indiana. Retards Mill Construction The building of such a mill would add measurably to the capacity of the Chicago district, but unless "Pittsburgh Plus" is abolished, this mill will not be built. It is claimed that for the same reason other steel mill construction is 26 %t being halted by "Pittsburgh Plus,'' and that the steel con- sumers of the country are unable to derive the benefit of low-cost production in Chicago and other western and southern low-cost steel producing centers to which they are entitled, because of the malign influence of "Pittsburgh Plus" . in preventing the construction of new mills. ^ There is little doubt that in the past "Pittsburgh Plus" aided in the construction of mills at places distant from Pittsburgh — then the unquestioned point of low-cost steel production. Pittsburgh was then close to the principal iron ore supply of the country — the Pennsylvania ore fields — and was close to the best and most available coal fields. Excessive transportation costs elsewhere prevented serious competition with Pittsburgh as a steel producer, and if mills were to be erected in other parts of the country, it is quite conceivable that some sort of "protection" was desirable. But these conditions have radically changed, and because of the changes which have come about, there seems no further justification for the subsidy, except for the benefit of inefficient and high-cost mills. Pennsylvania no longer supplies the iron ore for the Pitts-I burgh mills. Eighty-five per cent of the iron supply today! comes from the ore fields of Minnesota and Michigan. This \ ore must be hauled to Pittsburgh by both lake and rail. It \ is hauled by water to the lower lake ports for much less. \ Besides, the Chicago district, and other steel producing dis- r tricts, have abundant coal and limestone nearby, have ample I water supply which is essential *for steel production, and ^ have excellent facilities for distribution. No Longer ''Infant Industry"* The testimony of Judge Gary, Col. Bope and other admitted ' authorities, including the experts who submitted production cost figures to the Federal Trade Commission in another case, shows that the steel "infant" has passed the suckling stage, and there is no longer the necessity of "protection" or a subsidy for the "infant steel industry" in points other than Pittsburgh. Therefore, this subsidy seems no longer necessary to foster mill construction, but actually appears to hinder it, because additional mill construction at the present time would result, as is admitted, in increasing the country's steel supply beyond the point of normal demand and would tend to cause steel mill investments in the Pittsburgh district to deteriorate in value. There would nevertheless be new steel mills constructed if "Pittsburgh Plus" were abolished, but these would be built at points of low-cost production, in order to serve such points most economically, and save the transportation! charges which the Pittsburgh mills would be obliged to pay.' As the nation's industry grows, under normal conditions, this expansion of steel mill construction would tend to keep] pace with it, but the expansion would be at places bestf suited by natural advantages for low-cost steel production, instead of at Pittsburgh. 27 I Pittsburgh's Day Past In support of this contention, the testimony of Col. Bope is again cited as follows: **If I were an investor I do aot believe that I would want to put a dollar in a steel plant east of the Allegheny Moun- tains. I think it would be a bad investment to do so. I doubt very much whether I would want to put any money in a plant in Pittsburgh or Youngstown today. But when it comes to the lower lakes, I should think it would be a good investment today to put money in any steel plant there, because there are advantages that that section has over other sections of the country. There you have a water supply and you are nearer to your ore supply, if you are using Mesabi ore (Minnesota ore). You can make pig iron along that shore for $1.50 a ton cheaper than at interior points, perhaps. **Now as competition is becoming keen — and I have heard it claimed that 25 per cent more steel is made in this coun- tiy than the country can consume; I do not think that is strictly true, but assuming it is true — ^then you must figure that under the law of supply and demand competition must become keener, and therefore you must watch every advan- tage for location, cheaper manufacture, and you find that it costs less to manufacture along the lower lakes than at any other place in the country outside of Alabama; and that is because the raw materials are nearer to you there, the markets are gathering up better than ever before, all those are elements which any ^ncern must take into consideration and study; there are changing conditions that are going to regulate things themselves to an extent." Judge Gary, in his memorable Duluth speech, also stated the reason^ for mill construction outside of Pittsburgh, whether "Pittsburgh Plus" is in vogue or not, when he said: "Why did the €teel corporation build a plant on a sandy desert along the southern shores of Lake Michigan ? Because of a love for Indiana? Oh, no; none of us have any par- ticular interest in that state. It was purely a business propo- sition. We would much rather have spent the money expended in Gary right here in Duluth. Our friends are here. But the proposition would have been a failure from a business point of view. There fuel was easily obtainable, as were other things which are necessary to the making of steel. There was a market. For the manufacture of pig iron, Duluth is well situated, perhaps nearly as well as almost any other city. But Birmingham can manufac- ture pig iron $3.05 more cheaply per ton than can Duluth. As to steel products, Duluth is behind Gary by 38 per cent, Pittsburgh by 13 per cent." Building Activity in Chicago Further support of the contention that new steel mill construction is following the lines indicated in Col. Bope's testimony, is afforded by recent and projected building activities in the Chicago district and elsewhere in the west. The United States Steel Corporation's subsidiary, the National Tube Company, is constructing a great tube mill at Gary, Indiana, at an announced cost of $35,000,000; the Youngstown Sheet and Tube Company, following its absorption of the Steel and Tube Company of America, is now enlarging its Indiana Harbor, Indiana, mill at a cost of $4,500,000, and has announced that its future construc- tion expenditures would be confined practically to the west ; the Inland Steel Company, at a cost of $7,500,000, is 2o • ri T increasing the producing and finishing capacity of its plant at Indiana Harbor, also in the Chicago district. These construction activities in the Chicago district, together with the projected $40,000,000 Jones and Laughlin mill and other projected plants, mean an estimated expend- iture in that district alonfe' of Veil over a hundred millions of dollars for new mill toristruction. This,' despite the fact that Judge Gary about three years ago iannounced that no new mills would be built in thi^ west if ''Pittsburgh Plus" were abolished. * % fit Admittedly this new construction in the Chicago district is not because of ''Pittsburgh Plus." As noted,, the Jones and Laughlin Corporation will not build there unless "Pitts- burgh Plus" is abolishedl It is' therefore plain that the steel mills are seeing the handwriting on the wall, and are forti- fying themselves a^iinst' the day, believed to be not far distant, when "Pittsbtii-gh Plus" will no longer be operative. Were it certain that this practice would continue indefi* nitely there would be no incentive to' additional constructioij in the west, as the natidri dots not at present require i greater steel supply. The mills could, therefore, actuallA save money by supplyihg th^ir western customers from theirl eastern mills, since new construction mean^ depreciation in i the older mills, a great expense for the use of capital, and I other similar charges to the mills which would offset the [ gain in economy of productiodl^ ■ * ^ y ^ / St. Louis Would Benefit ^ In addition to the building up of the Chicago district which the abolition of "Pittsburgh PlUs" will bring about, there are other sections of the we^t well adapted to econom- ical steel production which would benefit, notably St. Louis. Newly developed ore deposits iji the Ozark mountains are available for steel production in the St. Louis area. There is an abundance of coal, limestone and water, and it is the hub of an excellent and constantly growing trade territory. But there is no present incentive for additional mill con- struction there, with "Pittsburgh Plus" operative, and the great natural advantages which St. Louis possesses will never be utilized thoroughly until this practice is abolished. What is true of St. Louis is equally -true of every place in the country which has natural advantages for the eco- nomical production and distribution of steel. Therefore, far from "Pittsburgh Plus" fostering mill construction throughout the country, it is apparently retarding it, in the interest of small and inefficient mills located at unfavorable production points, or mills located in Pittsburgh whose business, might be curtailed by the abolition of "Pittsburgh Plus." These inefficient mills have no place in the modern scheme of industry and deserve no especial consideration. They must either become efficient and up-to-date, or must follow the usual law of industry and give way to more enterprising and energetic competitors. They are not essential, because their place will be taken by. other and more capable pro- 29 ■t ducers, situated at places better adapted to economical and efficient production and distribution. Cost of Production amd Long Run Theory Although Judge Gary, in his famous Duluth speech, insisted upon the necessity of the "protective'' feature of *Tittsburgh Plus" to justify steel mill construction and operation at Duluth, his attorneys in the pending case have discarded production cost as a factor in steel price-making. They contend that the only factor which can be taken into account is that of "supply and demand," or "surplus production." The theory of the mills is asserted to be fallacious and not expressive of the real economic law which is involved in steel price-making, or the price-making of any other com- modity. The fundamental element in price-making, able economists say, is production cost, since this, in the long /un, regulates supply in relation to demand. The real economic law, they insist, must rest upon economy of production because, in the long run, it is the rule of industry that, untrammeled by artificial manipulation or control, the low-cost producer tends to drive his higher-cost competitor out of his market* Thus, they show, when demand exceeds supply, both low- cost and high-cost producers may flourish, because prices will be high, their level being set by the highest cost pro- ducer whose product is essential to meet the demand of the moment. However, during such periods of active demand, production is always speeded up to meet it, the result being that SL point is reached at which supply meets and then exceeds demand. At that point the highest cost producer can no longer compete to advantage. As supply contmucs to exceed demand other relatively high-cost producers are no longer able to compete. A point is eventually reached where the selling price de- pends not upon the dost of the highest cost producer, but upon that of the lowest cost producer. Between the two ex- tremes of abnormal demand and abnormal supply, there is a point which permits all producers whose costs reasonably approximate those of the most economical producer to live and profit, and that constitutes the normal trade condition. Normal prices, therefore, are really dependent upon tlic costs of the lowest-cost, rather than of the highest cost producers.* This law, according to most economists, obtains in all industries, and the steel industry is not an exception to the general rule. Therefore, they say, "Pittsburgh Plus" mani- festly does not exist because of economic law, but in defiance of it, and only because of close control of the steel industry. Based upon the real economic law governing steel price- making, therefore, the actual determining factor, in an un- trammeled and free market, is not the relative supply of the moment, but the possibility of supply over a long period by the lowest-cost point of production. This being the case, the real inquiry in this controversy, so far as economic law is concerned, should be directed to the ascertaining of the lowest-cost producing point. JO ^m^w t i Points of Low-Cost Production This point of lowest-cost production, as well as the rela- tive production costs of various steel producing localities, is in controversy. Judge Gary's Duluth speech was taken as settling the question, so far as relative costs at Pittsburgh, Chicago, Birmingham and Duluth are concerned, but in his testimony in the pending suit, he intimated that Pittsburgh is really as low-cost a producer as any of the other districts. However, he also admitted that the figures he had given at Duluth in 1918 were accurate and had been carefully prepared for him, his testimony on this being as follows: Q. Do you recall that you gave these figures, that at Duluth the cost of producing steel was 38 per cent higher than at Gary, and 13 per cent higher than at Pittsburgh, and, I believe, 12 per cent higher than at Birmingham? A. I do not remember the figures. If I gave them they were probably accurate, because in a public address like that, where that question was involved, I would not give figures that I had not verified. Manufacturers of commodities made from steel who are located in Duluth dispute the accuracy of Judge Gary's figures, so far as they apply to present conditions. They assert that present costs are comparable to Pittsburgh's. Du- luth is closer to iron ore than any other northern steel pro- ducing point, and therefore obtains its ore cheaper. In 1918 the Duluth mill had only been in operation about two years. Since then the variety of its production has increased and manufacturing conditions have improved. The Duluth people also assert that their other costs are not sufficiently greater than those of Pittsburgh to warrant the claim of the steel mills that Duluth costs are notably higher. During a considerable portion of the year, when lake navigation is open, they 'can obtam their coal, coke and other steel-making essentials at a reasonable cost, and their labor situation is favorable. Judge Gary admitted in his speech that Duluth is favorably situated for the manufacture of pig iron, and the Duluth people say that this also applies to steel. A Curious Condition They point out that the Duluth mill ships in excess of 100,000 tons of semi-finished steel to the Milwaukee mill of the Illinois Steel Company, a United States Steel Corpora- tion subsidiary, for re-rolling. Steel bars rolled at Milwaukee are sold there at the Pitts- burgh price, plus $7.50 per ton, the freight rate from Pittsburgh to Milwaukee. But it costs $6.10 per ton to ship the semi-finished steel from Duluth to Milwaukee. The difference between the *'plus" charged and the actual freight paid is $1.40 per ton. The Milwaukee mill w^as built more than thirty years ago. Almost certainly it cannot operate at as low a cost as the nearly new and modern Duluth mill. It would seem, there- fore, if the Milwaukee mill can profitably re-roll semi- finished steel produced by the Duluth mill, and sell it with a **protection'' of only $1.40 per ton of **plus," that steel bars rolled at Duluth from the same character of semi-finished steel as is shipped to Milwaukee could be sold profitably at 31 t l^riM Duluth It an'advance^of '$1.40 -per ton over the Pittsburgh .price, instead of $12 over Pittsburgh, the price now charged. ; Figures submitted by the United States Steel Corporatiofi to the Federal Trade Commission and in evidence in the pending case, apparently verify the figures Judge Gary cited in his Duluth speech. They were based upon 1920 mill, costs of the Carnegie Steel Company, of Pittsburgh; the Illinois Steel Company, of Gary and South Chicago; the. Minnesota Steel Company, of Duluth, and the American Sheet & Tin Plate Company, ^afl subsidiaries of the United States Steel Corporation. These figures show that Chicago's cost of production of steel bars was then $4.10 per ton lower than Pittsburgh, or about 10 per cent, and 'that Birmirtgham's cost was also sli^tly lower than Pittsbufgh, while Duluth *s was' about 10 per cent higher. Chicago's production cost on steel shapes was $8.40 per ton, or about 22 per cent lower than Pittsburgh,' while Birmingham's cost was about the same as Pittsburgh's. I Chicago's production cost on steel plates was also slightly lower than Pittsburgh's, the exact amount being 60 cents per ton, or about 1 j4 per cent, while here Birmingham's cost is considerably higher, being $7.50 per ton, or about 18 per cent more tjhan Pittsburgh. On black sheets Chicago was also a lower cost producer jthan Pittsburgh by $7.20 per ton, or about 10 per cent. This complete table qf costs for the four producing plants, ^s subn?ittefl in the pending case, is as follows: Production Costs and Pro/its Compared .1 •■ ' ' ■ ' These figures arc leased on 1920 mill costs of the Carnegie Steel Company, the Illinois Steel Company, the Minnesota Steel Company and the American Sheet & Tin Plate Com- pany, submitted b]j the U. S. Steel Corporation to the Fed- etal Trade* Commission September 15, 1921: Price Net Freight Net Delivered Cost of Profit ton F.O.B. ton from price per Production Net ton ;• ; .*> Pittsburgh Pittsburgh Net ton Net ton at Min BARS Pittsburgh .. .. $47.00 $ .00 $47.00 $44.90 $ 2.10 Chicago .... . . i47.00 7.60 54.^ ' 40.80 13.80 3irminghani . . 47.00 5.00* 52.00 44.00 8.00 l>uliith . . . i . . 47.00 13.20 60.20 50.40 9.80 SHAPES * z - Pittsburgh . . . . 49.00 .00 49.00 46.^ 2.40 Chicago .... . . 49.00 7.60 56.00 38.20 18.40 Birmingham . . 49.00 5.00* ji 54:00 46.50c 7.50 PLATES # Pittsburgh ; . . 53.00 .00 53.00 43.40 1 9.60 Chicago . i . . .. 5S.00 ' 7.60 60.60 42.80 17.80 Birmingham . . 49.00 5.00* 54.00 46.50 7.50 BLACK- SHEETS Ik Pittsburgh .. . . 87.00 .00 87.00 76.70 10.30 Chicago . . . , . . 87.00 7.60 94.60 69.50 25.10 *The delivered price at Birmingham is obtained by add- ing an arbitrary differential of $5.00 per ton to the f.o.b. Pittsburgh price. Were the actual freight of $15.30 per ton added to the f.o.b. Pittsburgh price as is done at Chicago, Birmingham profits as shown would be increased $8.30 per ton. ' - , _- , ► As will be noted from the above table, the mills of tlie United States Steel Corporation in the Chicago district make 32 .1 ■If a vastly greater profit than do those in the Pittsburgh district- In fact, the Pittsburgh mills make a smaller profit on their steel than those of any other district. With 'Tittsburgh Plus" in full effect— at the time the above table was prepared it amounted to about 10 per cent more than at present, for which allowance must be made, as there was a 10 per cent freight rate reduction in 1922 — the corporation's mills outside of the Pittsburgh district made a profit out of all proportion to that of the Pittsburgh mills. Why should consumers all over the country pay this ex- cessive profit? This method of subsidizing new steel mills and steel mills in locations where costs are higher, is apparently not jus- tified, since it gouges consumers to a degree far in excess of the protective requirements of such mills, assuming that such protection is requisite. The Duluth people also assert that the table here cited shows that even the Duluth district by no means requires the excessive **protection" afforded by "Pittsburgh Plus." With "Pittsburgh Plus" abolished, Duluth's supporters say, prices might be higher at Duluth than at Chicago or Pittsburgh, if the claim of higher cost of production is warranted, but they would not be as excessive as shown in the atove table. Other authorities are agreed that Pittsburgh is nq longer the point of lowest-cost production, or even a point of rela- tively low-cost production. Col. Bope showed that the lower lakes region and Alabama both have superior facilities for steel production. The advantages of St. Louis have been cited. It is admitted that Buffalo, where the great Lacka-i wanna mills of the Bethlehem-Lackawanna consolidation, are! located, is a low-cost producer, while it is claimed that pro-l duction costs both at Bethlehem and Sparrow's Point are! relatively low. In the two latter cases, these mills could sur-\ vive, even though their production costs were somewhat higher than western or Pittsburgh mills, as they are far nearer the great eastern and Atlantic seaboard markets, and would enjoy the natural protection afforded them by their contiguity to these markets and the high freight cost to com- petitors to enter them. In no case, with "Pittsburgh Plus" in effect, does any locality reap the benefit of nearby low-cost mills, and this applies to the east equally with the west and south. Stabilization One of the principal arguments in addition to that of economic law which the mills invoke in support of the "Pittsburgh Plus" practice, is that it "stabilizes" the steel industry. Much stress is laid upon this. Were it not for "Pitts- burgh Plus," the mills assert, the steel market would be in a state of constant upheaval; neither producers nor con- sumers would know how to quote, and that the prevailing device enables them to figure exactly what their costs will be. In short, that "Pittsburgh Plus" is really merely a "basis upon which to figure." n I stmm N , \ This point IS made strongly by Judge Gary in this testimony : "I regard 'Pittsburgh Plus' primarily as being only a quotation base, a base to Egure on for both the consumer and the producer." He further testified : Q. Do you mean that there would be less fluctuating prices on the Pittsburgh base than there would be on the mill base? A. I think they are less fluctuating. They are unstable enough as it is. But if there is a base, if there is a starting point, and the general trade knows that there is something to go by, it is easier to secure contracts in the first place^ in behalf of the consumer or in behalf of the seller. Every- one interested in the commodity in any state of its manu-- facture is better accommodated. Stability and continuity of business is of the highest importance. And further he stated : *'If he (the fabricator) has an existing Pittsburgh base^ he has a starting point. Now he knows what that means^ if there is no waiving, no cutting in the application of that, that the market in Chicago is as much higher than the Pittsburgh price as the amount of the freight that has to be paid from day to day. Of course, he has to keep advised in regard to that. Always when prices are changing, going up and down, it requires a constant diligence to find out what the situation is." This comprises the essence of the mills* "stabih'zation'^ argument. They admit, however, that in times of slack de- mand "Pittsburgh Plus" is not strictly observed. Needed Nowhere Else It seems rather a curious commentary upon this argu- ment that steel, if not the only industry requiring such "stabilization," is at least one of the very few in which -a device of this character is employed. Other industries manage to flourish very comfortably with- out the aid of such a device. This would seem presumptive evidence that "Pittsburgh Plus" is not required to avoid chaos in the steel trade. However, there is other evidence. The opponents of "Fittsburgh Plus" assert that the mills have utterly failed to make out a case on the score of "stabilization" by the mere process of adding freight rates. Judge Gary's testimony is pointed' to as showing that this so-called "stabilization" is merely adding a fixed charge — the freight rate from Pitts- burgh — to a fluctuating price. Why should this fixed charge be based upon Pittsburgh, if Pittsburgh is not the lowest cost producer? Why should there be any fixed charge whatever? Why should not each market determine its own charges, as is done in other indus- tries without chaos? All these arc pertinent inquiries which the upholders of "Pittsburgh Plus" fail to satisfy in their replies. Even so astute a person as Judge Gary evaded this in his testimony^ which follow^s: Q. Then, instead of relying on the Pittsburgh base as a starting point, is it not feasible for him (the fabricator) to rely on the Chicago base as a starting point and keep track of it in that way? A. It is the difference between having something to go by and having nothing to go by. 54 I Q. Why would he have nothing to go by in the ca.e of Chicago quotations? A. I mean as a starting point he has nothing to go by if the Pittsburgh base is eliminated. Q. Could not the Chicago manufacturer have his start, ing point Chicago, and the Pittsburgh manufacturer have his starting point Pittsburgh, and go by those prices? A. Yes, they could. They could have prices at every location where the article is consumed. Why do they not have them? Why is not business conducted in that way? Why has it .not been in all different lines of business? What is the reason for having some location established as a market price or place to figure from, except for the con- venience of business and the accommodation of everyone interested ? Gary Makes Admission It will be observed that Judge Gary admits Chicago or some other point or several other points could be used as bases from w^hich to figure prices. He merely asserts that the purchasers of steel would have "nothing to go by," if ^'Pittsburgh Plus" were eliminated, without offering an ade- quate reason for the establishing of Pittsburgh as a basing point and without showing how steel differs from numerous other commodities in this respect. Much more illuminating is the testimony of Col. Bope. In tracing the history of price-fixing in the steel trade, he showed that numerous devices had been utilized successively and discarded, owing to changing conditions. With Pitts- burgh the actual source of supply for nearly all the steel made in the country, the Pittsburgh base was not only fair enough but probably the most convenient method of figur- ing; but this condition has changed radically. Col. Bope indicated this when he testified: "In all business a great deal is done on precedent, and after many years of the establishment of this system ('Pitts- burgh Plus*) in organizations and associations they just continued it and it was found to be a stabilizing influence and one that was satisfactory to both buyer and seller and it was just continued." He further testified: Q. In order to be a good stabilizer, what factors have to occur? A. There has to be a general equality and a basic system where you have a price that remains stable. When it is changed, it is changed to conform to new conditions which may have arisen and which the trade demands. Q. In order that this basing system be successful as a stabilizer, must the prices between the different manufac- turers be uniform? A. It takes uniform prices to be stable. Fluctuating prices are not stable. Q. So that if the prices of the manufacturers (producers) were not stable, there would not be stabilization as you use that term? A. No, I should say not. Real Basis of Stability This shows that the real basis of stability is the funda- mental price, not the addition of any fixed charge, and it would seem that such * 'stabilization" could be easily obtained without "Pittsburgh Plus," and in fact, that the "Pittsburgh Plus" device can hardly be regarded as a stabilizing factor at, all. « 3S Ba«i nmM m As to whether this so-called "stabilizing device" really "stabilizes," the facts seem to be against the contention. The mills admit that "Pittsburgh Plus" goes by the board in times of slack business, when demand is light. That would seem to the uninitiated to be the time when "stabilizi- tion" is most desirable. Yet, that is the very time when no "stabilization" is effected. At times when the steel market is firm, and naturally stable, "Pittsburgh Plus" merely adds a fixed sum to the prevailing high prices and brings about a generally higher level of commodity prices, which then is something always sought to be avoided. It is also pertinent to inquire how an arbitrary differential of $5 per ton at Birmingham can effect the "stabilization" which the steel mills so highly vaunt. Prices may be figured just as easily without an arbitrary added charge of $5 per ton as with it. There is no "chaos" or "demoralization" normally in the Birmingham market, despite the fact that the full "Pittsburgh Plus" charge is not paid. The situation at Birmingham, therefore, self-created by the mills, would seem incontestably to indicate that no "stabilization" such as "Pittsburgh Plus" is said to afford is required in any steel market. Conceals a Profit In the face of the experience of other industries; in view ►f the fact that "Pittsburgh Plus" really conceals an added irofit to the mills not justified on the score of production :osts, and in the light of its evil effect upon the ultimate con- jumer, the "stabilization" argument seems hardly tenable. It seems a lame argument to assert that Pittsburgh must Ibe the point of price-basing for making stable quotations, in the face of the fact that it is not so well situated as a point of distribution or of economical production as other steel producing centers, and of the fact that in other com- Imodities, such as pig iron and rails, there appears no neces- sity for such "stabilization." Under normal conditions, each market in any commodity determines its own prices. This does not result in trade demoralization or chaos. On the contrary, industry usually does very well under such a system. Pools, "gentlemen's agreements," and other price-fixing devices contrary to law and public policy but profitable to the mills, were all resorted to under the specious plea that they were essential to "stabilization." Their abolition has resulted in no demoralization of trade and it seems at least reasonable to presume that the abolition of "Pittsburgh Plus" will result in no such demoralization. During 1922 and the first half of 1923 when "Pittsburgh Plus" was arbitrarily abolished in the Chicago market on plates, shapes and bars, there was no demoralization or chaos in the steel trade, but conditions were stable because demand was great. During 1908 and 1919, with the market generally demor- alized but with "Pittsburgh Plus" in full force and effect, no marked stabilization was effected. What argument can there be for "stabilization," if it fails to "stabilize" when 36 if til \ I "stabilization" is essential and only "stabilizes" when market conditions themselves insure stabilization? Profits The real "stabilization" which "Pittsburgh Plus" effects is not of trade conditions. These would undoubtedly be "stabilized" without it. Then, what kind of "stabilization" is effected? That question is easy to answer. It is the "stabilization"/ of steel mill profits upon a high level. There is no doubt/ that the mills derive ah additional, and unearned, profit! from "Pittsburgh Plus." It may be that this profit is, inj some cases, justified, but in that event why should it be disguised ? Why should it not be frankly added to the price of steel, as justified profit is frankly added to the, price of other commodities ? That "Pittsburgh Plus" causes higher prices for steel is unquestioned. It is admitted by Judge Gary. He testified as follows: Q. Do you think it is good for the communities when, under this basing system, on the steel that the farmers buy from one implement concern alone in the Chicago territory, those farmers are obliged to pay over $1,000,000 per year "Pittsburgh Plus"? A. **Pittsburgh Plus," when it is in force, of course makes steel cost more. From the foregoing the query naturally suggests itself, "Is the price increase warranted?" If it is, then why not charge it in the price, candidly? If it is not, then what is "Pittsburgh Plus" but a device for obtaining more money for the product of the mills than they are entitled to? And if "Pittsburgh Plus," when it is in force, makes steel DSt more, how can it be regarded solely as a "stabilizing" factor, other than as a factor which only "stabilizes" greater mill profits? Or does "stabilization" merely consist of -higher com- modity prices and the affording of greater profits to producers than they are entitled to? Surely the steel mills can hardly claim that. Huge Sum Annually Yet conservative estimates of the annual profit which accrues to the steel mills because of "Pittsburgh Plus" — the United States Steel Corporation and the "independents" alike— range from $75,000,000 to $100,000,000 each year. .That is a considerable "stabilization" to the steel mills. But it must be remembered that the public pays for this "stabilization," and by the time the public has paid this charge, with fabricators' and middlemen's profits added to it, the amount that is mulcted from the public's pockets is at least double that which goes into the pockets of the mills. That means that the public pays from $100,000,000 to $150,000,000 each year to "stabilize" the steel industry — so that the mills may derive an extra and unearned profit. Judge Gary has recently spoken quite eloquently upon the necessity for candor and publicity in "big business" affairs. Candor and public knowledge are admittedly desir- ^7 ■Ml - <\ •I 1 IM. » able. A welcome application of the theories which Judge Gary has been industriously expounding would be the frank and candid addition of a charge in the pricing of steel by which the mills would make the profit that "Pittsburgh Plus; nets them, without any subterfuge which substitutes specious terms for candor and procures this profit by means of an unearned freight charge under such masquerades as '^economic law" and "stabilization." Candor Desirable A further illustration of the desirability of candor is afforded by conditions in 1920 and 1921, when the steel trade saw the keenest competition in years. The demand for steel slackened during the autumn of 1920, and by the early part of 192.1 independent mills in the east and in the Chicago district, running only to about 30 to 40 per cent of their capacity, frantically sought busi- ness. There was price-cutting in all directions, but nof by the United States Steel Corporation. This corporation had shown more fairness in its prior dealings than the (independents. During "boom" times it had refrained from excessive premium charges for prompt delivery which most of the independents had made. As a result of the good will thus acquired, it had booked a large "back log" of unfilled orders which kept its mills fairly busy, while its competitors were desperately seeking tonnage. "Pittsburgh Plus" remained in full effect until about January, 1921, when the independent mills began cutting prices. About April 1 an attempt was made to stabilize the market on a lower price level. The independent mills ad- vanced their prices and at the same time the U. S. Steel Corporation announced a "reduction." This was a reduc- tion of the corporation's prices, but the new price level an- nounced by the corporation was the same as that to which the independents had raised their own quotations. The new prices were considerably higher than those which the mde- pendents had quoted prior to that time. All the mills ob- served the new price scale, at least temporarily. The independents observed the April scale for a time, but after a couple of months price cutting began again. In July, 1921, this process was repeated. Again? the United States Steel Corporation announced a "reduction." Again the in- dependents brought their prices up to the new level. And again the "reduction" really meant an increased price of steel, although once more the corporation reaped glory for "reducing prices." It was a' this time that "Pittsburgh Plus" w^ entirely abandoned in the Chicago market, and Chicago was made a basing point for plates, shapes and bars, but no concession was made on wire, sheets or other steel products. True, in these two instances, the United States Steel Corporation had "reduced" its own prices, but it had not effected reductions in the prices current in the steel market, and it knew it. Yet it claimed and obtained credit for that very thing. That was hardly candor, of the character so earnestly and engagingly recommended by Judge Gary. 3S i I Nor is it candor to substitute such pleas as "economic law" and "stabilization" for the actual fact regarding "Pittsburgh Plus," which is, as Judge Gary indirectly admitted in his testimony which has been quoted, that "Pitts- burgh Plus, when it is in force, of course makes steel cost more." If it makes steel cost more, it is plain enough that it brings greater profits to the steel mills. Candor would seem ta require the plain statement that the mills are entitled to more money for their product, but for some curious and unexplained reason, they seem loath to make this statement. Long Time Usage The steel mills assert that objectors to the "Pittsburgh Plus" practice should not be heard to complain for two additional reasons. One is that all western and southern industry in steel has been built up under the practice, and the other that industry in all parts of the country, when it was established, knew of the existence of the practice and located where it did in the light of this knowledge. That is, it is claimed by the mills that western manufac- turers, in locating their plants, knew that "Pittsburgh Plus" was common practice in the steel trade, and yet saw sufficient^ other advantages to justify them in going into business. The mills also claim, in this connection, that the "Pitts- burgh Plus" practice is established by "long-time usage," and its disestablishment would play havoc with the industry. The mills assert that there is a great and growing steel fabricating industry in the west and south, and that this has been built up during the time that "Pittsburgh Plus" was in effect. Therefore, they say, this is evidence that this practice has been beneficial to the fabricators and to the steel industry generally, as well as to the mills — in brief, that it shows that "Pittsburgh Plus" has "stabilized" the industry. ^ Claim Industry Benefits The United States Steel Corporation contends that the many prospering industries located elsewhere than in and about Pittsburgh prove that "Pittsburgh Plus" has not acted as a deterrent to industry generally. Judge Gary made this point specifically in his testimony, thus: Q. Is there not some advantage in being able to get his steel at the Chicago mills? Isn't that the only advantage he (the Chicago fabricator) would have? A. Well, he is close to his market. His market is there, and he gets a profit — perhaps, may, often does — on the same basis as the Pittsburgh basing price. He knows whether it is beneficial for him to do business in that way. It seems to me the whole question is answered by saying that the Chicago people are pretty prosperous, so far as I under- stand. I think they make a good deal larger profits on their investments than we make on our steel, with all the privi- leges we have. That fairly represents the attitude of the mills. Judge Gary, in further testimony, supported his position by the following statement: "You would not have seen any big business built up in Chicago except for that basing rate. You would not have seen any plant at Duluth and various other places. Of course, after they are all established and can arrive at 39 ■fiiaiMlllHllMI 1 ' II point, if ever, where the eost of producing is not any more tlian it is in Pittshnri^h, then the basing point would umturally fade away. This law of supply and demand will eventually take care of this whole question, in my judgment." And the answer of the United States Steel Corporation to the original application for a complaint in the pending case, also stresses this point, thus: "The practice above described (^Pittsburgh Plus*) long since became and still remains a settled custom in the (steel) trade. The business of producers and consumers have been arranged, manufacturing and fabricating plants have been located, and vast investments of capital have been made in reliance upon it. To change such practice by order of the commission or in any other way than by the orderly processes of trade would create great confusion in the indus- try and cause incalculable loss to a large number of con- cerns engaged in the business, and, respondents submit, should not be attempted." Denial by West and South In reply, it is specifically denied that western and southern industry has been built up under the ^Tittsbur^h Plus'* prac- tice, as it n|w exists. The Duluth situation referred to by Judge Gary is inter- esting. It is in evidence on the testimony of Otto Swan- strom, a Duluth manufacturer, and others, that because of the excessive cost of steel in the territory normally tributary to the Duluth mill, there is little manufacture there of com- modities made from steel. Therefore, the output of the Duluth mill is not consumed in its own normal territory, but is only partly finished, and is shipped in semi-finished form to Milwaukee, Chicago and eastern points, because of the lack of Duluth demand for finished steel products. Thus the "plus'* at Duluth is lost to the mill, as it is absorbed by the payment of actual freight on the southward and eastward shipment of the mill's product. In this case "Pittsburgh Plus'* largely defeats its own purpose, for the lack of absorptive power, due to the high price of steel at Duluth, caused by the "Pittsburgh Plus" charge of $12 per ton, compels the Duluth mill to forego most of this charge, and at the same time discourages industry which would otherwise use its steel. As there is no dispute that the Duluth mill ships by far the most of its product out of its normal territory, and to the south and east, Judge Gary's reliance upon "Pittsburgh Plus" as a builder of steel mills and of the steel industry is evidently misplaced in the case of Duluth, which he spe- cifically cites. Obviously, the United States Steel Corporation could, if it would, sell its steel at Duluth at the same net price it ictually obtains for it by selling it elsewhere. It would us foster industry at Duluth and create a Duluth market m its product. But this would injure Pittsburgh. Must Locate at Pittsburgh It is pointed out that much western and southern business — especially western business, as the south presents a some- what different problem — was established before "Pittsburgh Plus" became settled practice. 4ik That their condition is serious* was testified to by numerous western fabri' ''Ip' C9iM.?*BIA UNIVERSITY LIBRARIES 0044266707 D320 Em3 . Erne rich c.l Date Due I V .»!^ A Al^rf 0%%^^ I'll ill NEH SrP 061994 UBKIf'IfaipPRf' « li s k vtjtnriMl •i-rti-i-iriti-riT^'^j^ 'ft "^