United States. Temporary National Economic Committ.

Investigation of concentration of economic power; monograph no. 1[-43] (Volume no. 12) online

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76th Congress^ SENATE COMMITTEE PRINT
3a Session j

INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER



TEMPORARY NATIONAL ECONOMIC
COMMITTEE

A STUDY MADE FOR THE TEMPORARY NATIONAL

ECONOMIC COMMITTEE, SEVENTY-SIXTH CONGRESS,

THIRD SESSION, PURSUANT TO PUBLIC RESOLUTION

NO. 113 (SEVENTY-FIFTH CONGRESS), AUTHORIZING

AND DIRECTING A SELECT COMMITTEE TO MAKE A

FULL AND COMPLETE STUDY AND INVESTIGATION

WITH RESPECT TO THE CONCENTRATION OF ECONOMIC

POWER IN, AND FINANCIAL CONTROL OVER,

PRODUCTION AND DISTRIBUTION

OF GOODS AND SERVICES



MONOGRAPH No. 12

PROFITS, PRODUCTIVE ACTIVITIES

AND NEW INVESTMENT



Printed for the use of the
Temporary National Economic Committee




UNITED STATES

GOVERNMENT PRINTING OFFICE

WASHINGTON : 1941



TEMPORARY NATIONAL ECONOMIC COMMITTEE

JOSEPH C, O'MAHONEY, Senator from Wyoming, Chairman

HATTON W. SUMNERS, Representative from Texas, Vicp Chairman

WILLIAM H. KINO, Senator from Utah

WALLACE H. WHITE, Jr., Senator from Maine

CLYDE WILLIAMS, Representative from Missouri

B. CARROLL REECE, Representative from Tennessee

THURMaN W. ARNOLD, Assistant Attorney General

•WENDELL BERQE, Special Assistant to the Attorney General

Representing the Department of Justice

JEROME N. FRANK. Chairman

•SUMNER T. PIKE. Commissioner

Representing the Securities and Exchance Commission

GARLAND S. FERGUSON, Commissioner

•EWIN L. DAVIS, Chairman
Representing the Federal Trade Commission
ISADOR LUBIN, Commissioner of Labor Statistics
•A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics-
Representing the Department of Labor
JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel
•CHARLES L. KADES, Special Assistant to the General Counsel.
Representing the Department of the Treasury



Repreienting the Department of Commerce

« *. •

LEON HENDERSON, Economic Coordinator
DEWEY ANDERSON, Executive Secretary
THEODORE J. KREPS, Economic Adviser



Monograph No. 12

PROFITS, PRODUCTIVE ACTIVITIES, AND NEW
INVESTMENT

MARTIN TAITEL
•Alterostes.
n



ACKNOWLEDGEMENT

This monograph was written by
MARTIN TAITEL

Senior Consulting Economist
Work Projects Administration

The Temporary National Economic Conmiittee is greatly indebted
to the author for this contribution to the literature of the subject
under review.

The status of the materials in this volume is precisely the same as thai
of other carefully prepared testimony when given by individual wiinesses;
it is information submitted for Committee deliberation. No matter what
the official capacity of the witness or author may be, the publication of hi»
testimony, report, or monograph by the Committee in no way signifies nor
implies assent to, or approval of, any of the facts, opinions, or recom-
mendations, nor acceptance thereof in whole or in part by the members of
the Temporary National Economic Committee, individually or collec-
tively. Sole 'and undivided responsibility for every statement in such
testimony, reports, or monographs rests entirely upon the respective
authors.

[Signed] Joseph C. O'Mahoney,
Chairman, Temporary National Economic Committee..

m



TABLE OF CONTENTS



Paee-

Letter of transmittal xr

Preface xin

-Summary xv

A. Major findings xv

B. Major implications ' :.. xvini

PART I. PROFITS OF THE CORPORATE SYSTEM
AS A WHOLE

CHAPTER I

Introduction $

A. The corporate system S

B. The character of profit measurements - 4

C. Note on the indeterminacy of profits . 7

CHAPTER II

Dollar Volume of Corporate Profits -_ 9>

A. The historical record 9"

B. Historical factors underlying high and low profits 12

C. Consistency of corporate profits ^^ : 14

CHAPTER III

The Rate of. Return ^i , ' IT

A. The character of book values of equity ^ - 17

B. The historical record ■_ . 21

C. Earning power and book values. -1 ^ 24

D. Significance of the analysis of profit rates ^ 27

CHAPTER IV

The Profit Margin. '. ^ 29

A. The nature of the data i 1 29

B. The historical record...:- ^ hO

C. Output and profits • ._ 33

D. The break-even point., -_1 SS

PART II
THE DISPOSAL OF CORPORiATE PROFITS

CHAPTER V

Internal and External Disposal of Profits..! 43

CHAPTER VI

Dividends 47

A. The distribution of dividend receipts 47

B. The relative degree of dividend concentration.. ..i.. 51

C. The effect of dividend concentration on the distribution of income. 52*

D. Income levels (in 1935-36 dollars) of dividend recipients 5&

CHAPTER VII

Savings Out of Corporate Profits : -. - -e 7 61

A. The relation between the savings and the income level of indi-

viduals ■ 61

B. The measurement of savings out of dividends 62"

C. Savings out of dividends 6$

D. Total savings out of profits .. 65

E. Comparison of private income and total private savings With cor-

porate profits p,nd savings out of corporate profits 67

F. The effect of the concentration of savings out of corporate profits

on the concentration of wealth '. TO

V



VI TABLE OF CONTENTS

CHAPTER VIII

Page

Savings Created and Absorbed by the Ownership Accounts 73

A. Savings created, savings absorbed, and investment expenditures. _ 73

B. Net absorption of savings by corporate owfiferehip accounts 75

C. Leakages between savings absorbed and investment expenditures. 78

D. Dissavings and reductions of corporate equity capitaLl . 78

PART III

CORPORATE PROFIT RATES AND SAVINGS ABSORPTION

RATES

CHAPTER IX

The Method of Measurement. ., 83

A. Measurement of the rate of return 83

B. Measurement of the rate of absorption of savings 84

C. Consolidations, mergers, acquisitions, etc S5

D. The technical bias arising from the use of book values. .^ 86

CHAPTER X

■Relation Between Profit and Asset Expansion Rates: Oil Producing and
Refining Corporations 87

A. The corporations .. 87

B. Relative profit rates and relative asset-expansion rates within

individual years •^., — 89

C. Underlying conditions and the relation between the profit rate and

the rate of asset expansion '^ 92

D. The rate of asset expansion at a given profit rate 94

E. Difference in the rate of asset expansion for a given difference in

the profit rate : : . 96

F. The long-term relation between profit rates and asset-expansion

rates 98

■G. The tendency toward concentration 100

PART IV

CORPORATE PROFIT RATES AND RATES OF
INVESTMENT IN PROPERTY

CHAPTER XI

The Method of Measurement . 103

A. Measurement of the rate of investment in property . 103

B^ The nature of investment expenditures 104

C» Data and methods 105

CHAPTER XII

Relation Between Profit and Property Expansion Rates: Oil Producing
and Refining Corporations 107

A. Relative profit rates and relative property' expansion rates 107

B. The rate of property expansion at a given profit rate 110

C. Difference in the rate of property expansion for a given difference

in the profit rate . ^ 112

CHAPTER XIII

Relation Between Profit and Property-Expansion Rates: Steel Corpo-
rations ■ " t 115

A. The corporations -, 1 li5

B. Underlying conditions 116

C. Relative profit rates and relative property expansion rates 117

D. The rate of property expansion at a given profit rate 121

E. Difference in the rate of property expansion for a given difference

in the profit rate : 122



TABLE OF CONTENTS V'll

CHAPTER XIV

Page
Relation Between Profit and Property-Expansion Rates : Corporations in

Other Industries 123

PART V

CONCLUSION

CHAPTER XV

Income, Capital, and Investment 127

A. Th^ flow of funds in the economy 127

B. Major determinants of the income level 127

C. The availability of funds 129

CHAPTER Xyi

Implications 131

A. The importance of profits . . 131

B. The importance of the concentration of wealth and income- 131

C. Concentration and shortages of consumer purchasing power :_. 132

D. Further effects of concentration 134

APPENDIXES

APPENDIX 1

Notes on Data and Methods for Parts I and II 137

A. Dollar profits of the corporate system i__ 137

B. Net worth of corporations . 138

C Stock issues - 142

D. Income produced by the corporate sj'stem 143

E. Dividend receipts reported bj" income taxpajers _' 145

F. Dividend receipts reported by the 25,000 income taxpayers report-

ing the greatest amounts of dividend receipts 148

G. Approximate relation between gross income and dividend receipts

of income taxpayers .' 150

H. Savings out of dividends 160

APPENDIX II

Data for Parts III and IV 153

A. Sources . ■. 153

B. Data for selected oil producing and refining corporations 154

C. Data for selected steel and iron corporations 168

APPENDIX III

■Collateral Data ... 175

Index... ^ ^ 181



SCHEDULE OF TABLES AND CHARTS



Page

I. Profit volume of the corporate system, 19U9-37 9

II. Net worth and indicated book changes in valuation for the cor-

■ porate system, 1909-37 18

III. Profit rate on net vi^orth of the corporate system, 1909-37 23

IV. Income produced by and net profit of the corporate system,

1909-37 - - 30

V. Changes in net profit of and income produced by the corporate

system during various cycle phases, 1909-37 _ 35

VI. Retained profits apd net dividend outgo of the corporate system,

1909-37 . ...-•- - 45

VII. Dividend receipts reported by all income taxpayers, 1916-37 49

VIII. Dividend receipts reported by income taxpayers with net incomes

of $5,000 and over, 1916-S7__ . 49

IX. Dividend receipts reported by 25,000 income taxpayers receiving

the greatest amounts of dividends in each year, 1927-37 60

X. Approximate relation between gross income and dividend receipts,

1929, 1932, and 1936:-_ - '_ - : . 53

XI. Dividend receipts classified by the income leveil of the recipients,

selected yearsy 1920-37 -_ 68

XII. Average savings of famines and single individuals by income levels

1935-36 • 61

XIII. Estimated percent of income after taxes saved, by income level,

1936-36 - ..- 62

XIV. Savings out of dividends, selected years, 1920-37, Low estimates;

income taxpayers with iiicomes of 5000 or more 1935-36 dollars, 63
XV. Effective tax rates on statutory net income of individual income .

taxpayers, 1916-37, Selected net income classes 64

XVI. Sav^ngs.out of the net profits of the corporate system, 1909-37- :.- 65

XVII. Corporate profits and savings out of corporate profits and tetal

private income and savings, 1919-34-, _, - 68

XVIII. Savings .out of dividends, by the income level of dividend recip-
ients, selected years, 1920-37, Low estimates; income taxpayers

with incomes of $6000 or more 1936-36.. 71

XIX. Indicated net absorption of savings by the equity accounts of the

corporate system, 1909-37 75

XX Changes in corporate net worth exclusive of indicated book

changes in valuation, 1909-37 . v79

XXI. Computed characteristics of the relation between-the rate of return
and the rate of Efeset-expansion, by years and By groups of years,

1927-38, Selected oil producing and refining corporations.. 90

XXIL Production, efficiency, and prices, selected items, 1925-38, Oil

producing and refining industry , : 93

XXIII. Computed characteristics of the relation-between the rate of re-

turn and the rate of property-expansion, by years and by groups
of years, 1927-38, Selected oil producing and refining cor-
porations 1__ ■. 109

XXIV. Capacity, production and prices, selected Item'Sf 1925-38, Steel

* and iron industry . 117

XXV. Computed characteristics of the relation between the rate of return
and the rate of property -expansion, by years and bv groups of
years, 1927-38, Selected steel and iron corporations .._... 120

VIII



SCHEDULE OF TABLES AND CHARTS IX

CHARTS

Page

1. Profit volume of the corporate system, 1909-18 10

2. Net worth and indicated book changes in valuation of the corporate

system, 1910-33 . . 20

3. Profit rate on net worth of the corporate sj^stem, 1909-37.- 22

4. Profit margin of the corporate system, 1909-37 , 31

5. Change in profit of the corporate system per dollar of change in cor-

porate income produced during various cycle phases, 1909-37 34

6. Retained profits and net dividend outgo of the corporate system,

1909-37 .: 44

7. Percent distribution of the net dividend outgo of the corporate system,

1916-37, By classes of income taxpayers 48

8. Approximate relation between gross income and dividend receipts,

1929, 1932, and 1936, Income taxpayers 54

9. Percentage of difference between selected gross incomes accounted for

by dividend receipts, 1929, 1932, and 1936, Income taxpayers 55

10. Percent distribution of dividends by the income level of recipients,

selected years, 1920-37. -_L . 57

11. Savings out of the net profits of the corporate system, 1909-37 66

12. Percent distribution of savings out of dividends, by the income level of

dividend recipients, selected years, 1920-37, Low estimates; income
taxpayers with incomes of 5,000 or more 1935-36 dollars 70

13. Indicated net absorption of savings by the equity accounts of the

corporate system, 1909-37 ■ 76

14. Relation between rate of return and rate of noncash asset expansion,

by years, 19^7-38, Selected oil producing and refining corporations, faces 89

15. Relation between average rate of return and average rate of noncash

asset expansion, by groups of years, 1928-37, Selected oil producing

and refining corporations , faces 98

16. Relation between rate of return and rate of net property expansion,

by years, 1927-38, Selected oil producihg and refining corporations, faces 107

17. Relation between average rate of return and average rate of net

property expansion, by groups of years, 1928-37, Selected oil pro-
ducing and refining corporations faces 108

18. Relation between, rate of return and rate, of net property expansions,

by years, 1927-38, Selected steel and iron corporations faces 117

19. Relation between average rate of return and average rate of net prop-

erty expansion, by groups of years, 1927-37, Selected steel and iroQ
corporations , faces 1 19

20. Selected features of the flow of funds, National income the same in two

successive periods 128

APPENDIX TABLES

1. Computation of 1922 and 1925 net worth of corporations 139

II. Computation of 1920, 1921, 1923, and 1924 net worth of cor-
porations - -.'. 140

III. Computation, of 1919 and 1920 net worth of corporations 141

IV. Total new and refunding stock issues, 1909-38 142

V. Estimates of total and corporate income produced, by industrial

divisions, 1929 - -. 143

VI. Estimates of income produced by all private enterprise and by

the corporate system, 1909-38 ._ 144

VII. Income produced by and net profit of the corporate system,
1909^37, With Federal income and profits taxes included in

income produced l45

VIII. Individuals required to file Federal income tax returns, divi-
dend receipts reported by income taxpayers, and national inr
come paid out to all individuals, 1 91 6-37 146

IX. Distribution of dividend receipts, by class of taxpayers, 1937.- 148
X. Rate of return on invested capital, 1927-38, Selected oil priO-

ducing and refining corporations - 154

XI. Percent change in total assets, exclusive of cash and equivalent
(adjusted), 1927-38, Selected oil producing and refining

corporations . 155

XII. Percent change in net property (adjusted), 1927-38, Selected

oil producing and refining corporations 156



SCHEDULE OF TABLES AND CHARTS



Page

XIII. Book value of total assets, exclusive of cash and equivalent,

as of the end of the year, 1926-38, Selected oil producing and
refining corporations 157

XIV. Book value of net property as of the end of the year, 1926-38,

Selected oil producing and refining corporations. 158

XV. Revaluations of property, 1927-38, Selected oil producing and

refining corporations 159

XVI. Revaluations of assets other than property, 1927-38, Selected

oil producing and refining corporations 162

XVII. Acquisitions, consolidations, mergers, sales, etc., 1927-38,

Selected oil producing and refining corporations 164

XVIII. Rate of return on invested capital, 1927-38, Selected steel and

iron corporations 168

XIX. Percent change in net property (adjusted), 1927-38, Selected

steel and iron corporations 168

XX. Book value of net property as of the end of the year, 1926-38,

Selected steel and iron corporations . 169

XXI. Revaluations of property, 1927-38; Selected iron and steel

corporations 170

XXII. Acquisitions, consohdations, mergers, sales, etc., 1927-38,

Selected steel and iron corporations 172

X'XIII. P»ofit rate on net worth, 1900-1914, Sele(^ted industrial corpo-
rations; unweighted averages 175

XXIV. Indexes of net profits of industrial, railroad and utility cor-
porations, by quarters, 1924-39 . 17&

XXV. Profits and losses of corporations, 1920-37 (intercorporate

dividends included) 177

XXVI. Profits of 951 industrial, utility, and railroad corporations and

of all corporations, 1926-38 178

XXVII. Profits of 463 industrial, utility, and railroad corporations and

of all corporations, 1927-38 179

XXVIII. Profits of 109 industrial and railroad corporations and of all

corporations, 1914-26 180

XXIX. Profit rate on net worth of 400 industrial and 2i utility cor-
porations, 1927-38 ^ - 180



LETTER OF TRANSMITTAL

Hon. Joseph C. O'Mahoney,

Chairman, Temporary National Economic Committee,

Washin0on, D. C.

My Dear Senator: I have the honor to transmit herewith a study
on Profits, Productive Activities, and New Investment. The study
deals mth one of the basic elements of our business economy, for
profits are the ends which businesses are organized to attain.

It has long been recognized that profit mcome is highly concentrated.
But there has been no agreement concerning the precise nature of the
effects of such concentration upon the use of resources. This study
for the first time measures quantitatively the effects of the high degree
of concentration of profit income upon the distribution of income and
of wealth and, thence, upon sailings and investment, the prime factors
determining the level of employment and of the national income. A
major finding is that, at least so far as corporate enterprise is con-
cerned, a retarding influence is almost contmuously imparted from
corporate equity accounts to economic activity , This finding of fact
throws in sharp relief a major area with which public policy must be
concerned when directed toward the attainment of a satisfactory
functioning of the economy.

Likewise, while it has long been recognized that there is some rela-
tion between the profits and the expansions of individual businesses,
no effort has hitherto been made to measure what the relation is.
While common experience shows that heavy losses result in bank-
ruptcy, it is not so certain that high profits uniformly result in high
rates of expansion. Furthermore, there Jias been no defuiitive show-
ing as to the roles played by technological change, growth of demand
whether based upon, population increases or upon increases in the
standard of li^dng, capacities, price and production controls, and
.similar factors in the process of business investment.

It has become fashionable in man}'' quarters, including professional
economists, to assert that profit is the controlling factor — the governor
in the economy. Yet the author of this study fhids, just as other
students ' of profits have found, that such assertions contradict the
facts. While showing that profits do play a part in determining the
rate of expansion, he is forced to conclude that "factors other than the
amount or the rate of profit have been the major determinants of the
level of capital expenditures of groups of companies in the same in-
dustry and, hence, of business as a whole. Of these other factors, the

' For example, a noted expert, after making an exhaustive survey published by the National Bureau of
Economic Research, came to the conclusion that "the 'tendency' toward equalization of profit rates is not
sufficiently strong to prevent differences exceeding 100 percent between average profit rates earned by
considerable groups of corporations from appearing and maintaining themselves over a full decade." (Ral.ph
C. Epstein, Industrial Profits in the United States, New York; 1934, p. 587.)

According to another author, "When prices are maintained, profits no longer serve as an objective 6i^i/x
for eliminating inefficient concerns. Nor do they guidfe investment away from industries earning a Ipw rajf.
of return to those earning a high rate so a? to bring about an optimum distribtition of natural re$


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Online LibraryUnited States. Temporary National Economic CommittInvestigation of concentration of economic power; monograph no. 1[-43] (Volume no. 12) → online text (page 1 of 22)