Profit Picture of the Chemical Industries ROBKRT S. ARIKS, II. S. Aries & Asso/iates, Br:>:>klyn 2, Ν. Υ.

The rapid growth of the past decade is not continuing, hut is expected to resume after the present readjustment • . . Chemical industries are in general in a healthy profit position, reflecting wise management during the past few years

JL HK long export<M1 postwar return to a buyer 's market orrurrotl throe years after the end of hostilities. In Septem­ber 1948. the price» level reached its peak : November marked a high in industrial production. T h e events of the last year elearly demonstra te the fluidity of profits, priées, and markets. During the first six months of 1949. the chemical in­dustries experienced reduced demands for their products, as important consum­ing process industries, such as textile, pulp and paper, glass, mining and metals, petroleum, curtailed operations below 1948 levels. It is estimated thai chemical consumption until August 1949 was l5'/< below the previous year, the drop being much more pronounced in some chemi­cals, such as alkalies. While there has been an excellent recovery in August and September, it is dubious if the record production levels of 1948 will be ap­proached by the bulk of chemical pro­duction. It is of interest that the earn­ings of the industry in 1949 have been better than those of most other classifi­cations and comparable to the ones in the first half of 1948. which again demon­strate the flexibility and depressionproof aspects of tin» chemical industry (see Table I II ) .

'Previous articles ( / . i) have» delved into the profits of the» industry up to 1948. I n 1948 business as a whole es­tablished now high records in sales and earnings, but some» branches of industry were down substantial ly from 1947 be­cause» of the efforts of increased com­petition upon volume and upon profit margins. Lower earnings wore shown hy a third of all loading companies.

The greater part of the increase in not income in 1948 was due to the great expansion in dollar volume of sales, rather than widening of profit margins.

While we continue» to present the return on net assets as shown by pub­lished reports, it should be reiterated < „') that the net amounts at which assets are rarriod on the balance shoots for accounting purposes are in most cases far below present-day values, owing to the lower costs at which much of the plant and equipment was acquired, to ι be writing down of asset* through de­preciation reserves and special charges, and to the sharp postwar increase» in replacement costs. For this reason earnings as reported in current dollars greatly overstate tin» real rate· of return being oMl'lioel.

The» comhine'd net income e>f manu­

facturing industries in 1948 was 23f/& higher t h a n in 1947; however, chemicals remained virtually unchanged. Striking evidence, of the changing trend e>f earn­ings is shown by the fact that nearly half e>f all the companies had "lower not income, including 6 % with not deficits. Manufacturers ' sales increased by 1 8 % . while the» average» profit margin widened from 7.1 to 7.5 cents pe»r sales dollar . The» margin on chemicals remained a l ­most unchnngeel at less than 10 e-ents on the dollar.

As shown by Tables I anei I I . the» large» increases in net income* in the» manufacturing industries won* (*onfinod

Table I. · Profits of Leading Corporations ( 1 9 3 9 - 4 8 )

' i rrtnrn on not worth :i> ot .l:m. 1. in !*ι*1#·ι·ΐι·<1 ty|ii«*:il y«';irs

C h e m i c a l s P u l p a m i

p a p e r P a i n t a n d

v a r n i s h I V t r o l e u m

p r o d u c t s C e m e n t I r o n a n d s t e e l S u g a r D r u g s , s o a p .

c o s m e t i c s Mise · . î o o d

p r o d u c t s T o t a l m a n u ­

f a c t u r i n g

Sntirr»·: TwMsiirv r|i:tiii;<» e lfciiik.

198»

12 .7

.">.<> S.2

Ô.0 S.O 4 . 4 4.Î)

21 .Λ

10.S

S .3

1941

1 3 . 2

1 0 . 4

!MI

S . 5 t).2 «Mi ;>.<

20.f>

1 2 . 0

1 2 . 3 Depart incut

'«mini s>:oii.

1944

10.11

7 . 3

7 .0

i>.7 2 . 7 0 .2

10.1

1 5 . 0

1 1 . 1

0 .S

1947

17.2

2 3 . 7

MM)

1Ô.7 11.Λ 11 .3 10 .0

2 0 . 7

2 1 . 2

17 .1

194*

17 .7

2 0 . 4

1 4 . 2

2 2 . 1 1 0 . 0 1 4 . 0 1 2 . 2

1!U)

17 .4

1 S . 0 Securities and K x -

atid Nat iona l C' i tv

Fig. I

Profits of leading corporations as related to net worth (1939-48)

Fig. 2

Profits of leading corporations as related to sales (1939 48)

12-

11.

10.

9.

8.

7.

6.

5.

4

3.

2.

1.

o

ιη

_

1

1 I π

y Mi Ml* ΓΪ

Γ u

HI 1 SI 1 i l l Μ ι ill H ΠΙ I I

1 *** H

π ni I I Ml In |5| 1 I I I Λ Ltt A PI Γι ΓΙ

fl BJ 1 Lap li pi ΓΠ 1

y π ι gj ft· \ m ÏÏ m m τ

1 ΕΙ I

IS I 1939 1941 1944 1947 194!

3782 C H E M I C A L A N D E N G I N E E R I N G N E W S

24

22

20

IB

16 J 14.

12.

10.

8.

6.

4

2 0

1939 1941 1944 1947 1948

to a relatively few lines, particularly petroleum, steel, and automobiles, which made heavy investments of additional capital for enlarging plant capacity and had a tremendous expansion in volume of sales to meet the unprecedented de­mands for their products. Excluding these three groups, earnings of the re­maining manufacturers increased 11%, while chemicals, despite heavy invest­ments, remained static.

In the consumers' goods industries generally, the supply last year substan­tially caught up with demand, resulting in increased competition and the need for price cuts or greater selling expense in order to maintain the volume of sales. In most of these groups, the 1948 earn­ings were lower than in 1947. measured both by return on net assets and by profit margin on sales.

From Tables I and II , the healthy as­pects of the chemical industry in 1948 is

Table II . Profits of Leading Corporations as

Chemicals Pulp and

paper Paint and

varnish Petroleum

products Iron and steel Sugar Drugs, soap,

cosmetics Misc. food

products Total manu­

facturing Souri·»·: Treasury

Related to ( 1 9 3 9 - 4 8 )

Sales

% Profit Based on Sale Selected Typ ica

1939

S.5

6.3

5.0

7.4 5.3 4.6

9.9

8.3

G.5

1941 1944

9.1 5.4

8.2 4.Ô

4.6 3.4

10.1 7.0 6.2 2.6 8.6 6.1

12.2 6.0

7.0 4.3

6.5 3.6 D e p a r t m e n t , Seeurit

s in Years

1947

9.6

11.4

6.0

11.1 6.2 i .4

7.9

5.8

7.1 ies and

change C o m mission, and Nat ional Bank.

1948

9.9

10.6

4.4

12.9 6.7 6.0

7.1

4.6

7.5 E x -

C i t v

ascertained. The 1949 figures are given in Table III .

Earnings in 1949

Reports issued to date (.*) by leading corporations in the manufacturing, min­ing, trade, and service industries show-that earnings in the first half year were, in a majority of cases, substantially lower than in the first half of 1948. About two out of three companies were down as compared with the first half of last year, while three out of four were down as compared with the second half. The declines in earnings were usually much sharper than the declines in volume of sales, which were relatively well maintained, «indicating that profit mar­gins were squeezed by the pressure of high costs of production and distribution, as well as by lower selling priées and inventory write-downs.

Separate figures by quarters for 451 companies indicate that most of the de­cline in earnings this year occurred dur­ing the second quarter. Whereas the

Quarterly Net I n c o m e of 4 5 1 Leading Corporations

(In Millions of Dollars) Quarter 1948 1949 9fc Chang»·

First $ 9 6 2 $943 —2 Second 921 840 —9 Third 980 Fourth 1098

first quarter showed a combined total for the group 2% below the first quarter of 1948. the total for the second quarter is down lV/c from the preceding quarter, and 9rA from the second quarter of 1948. as may be seen by the following com­parison of quarterly figures:

Here again the totals are heavily weighted by the steel and motor groups, without which the second quarter total was 25r/c below that of a year ago. The chemical industry has demonstrated its relative "depression proofness" by in­dicating earnings during the first half of 1949 as 7.5'/ higher than the first half of 1948 although still 14.2'/r lower than tho record second half of 1948. Details are given in Table III .

It should be of interest that an ap­preciable number of business concerns begin to have falling profits during prosperous periods long before general business activity turns downward, and numerous other companies continue increasingly profitable» operations for a time after business at large begins to slump.

Peaks and troughs in tlu profits of all companies do consistently from peaks and business activity at large.

aggregate not differ

troughs in But ] leaks

and troughs in the number of companies with rising profits did consistently pre­cede those in business at large.

In depression periods an appreciable number of concerns reach a point at which their profits begin to increase be­fore aggregate profits turn upward, while a sizable group continue to operate with narrowing net profits and growing losses.

Table III . Net Income o f Leading Corporations for the First Half Year

of 1 9 4 9 (In Thousamls of Dollars)

r/c Chanp»' in Re­ported Net Income*

for 1949 from

Industry Groups Chemicals and paints Pulp and paper prod­

ucts Drugs, soap, cosmetics Petroleum products Cement, glass, and

stone Iron and Steel Food Products Total manufacturing

First half 1948

+ 7.5

—43.6 +28.1 —27.1

+ 1.8 +49.8 — 4.8 — 4.6

Second half 1948

— 14.2

- 3 9 . 2 +22.2 — 18.7

- 1 4 . 9 — 0.7 - 1 5 . 7 — 133

At all stages of the cycle, there were a considerable number of companies whose fortunes ran contrary to the main course of business. The proportion of companies (in a sample of the National Bureau of Economic Research) with fall­ing profits was never less than 22r/t. even in the prosperous 1920's.

The proportion with rising profits or diminishing losses, was never less than 26</f in the great depression of the 1930's. Thus, significant groups of busi­ness at all times have a profit experience that is contrary to or divergent from the aggregate pattern.

Actual Price Level At the end of July, the wholesale

price index of all commodities was nearly 10% below the all time peak of August. 1948 (4)· Prices of some raw materials have undergone an impressive slide since a year ago, including the grains, wool, cottonseed oil, copper, zinc, and steel scrap. The raw materials as a group, however, had advanced mon* rapidly than other commodities during the previous inflation. Changes in the price level of finished and semifinished goods were more moderate, both on the rise up to mid-1948 and on the subsequent downswing. Chemical prices did not rise nearly as much as either raw mate­rials or manufactured goods in 1949.

Fig. 3 illustrates the prewar level, the high point, and the recent figure for the wholesale price indexes of raw ma­terials, manufactured goods, chemicals, and all commodities combined (4). A straight line connects the 1935-39 average with the respective postwar peaks of 1948. Another straight line connects the latter with June 1949 except that the index for all commodities has also been extended through July by averaging the weekly index for that month. The

Fig. 3

240 .

aa

2».

210 .

200 .

H O .

I N .

170.

in.

150.

140.

no.

1».

110.

NO J!

an

Wholesale prices 1935 39 equals 100

/ /

/ /

/ / / /

/ / • • • /

f ν

Λ

Λ /^

\

\ *.*

V O L U M E 2 7, N O . 5 1 » D E C E M B E R 19 , 1 9 4 9 3783

indexes are those of the Bureau of Labor Statistics converted to the 1935-39 base.

Fig. 3 shows that raw material prices as a whole rose 140% over the 1935-39 average to the 1948 peak. They have dropped 11% from the top, but are still relatively high. Manufactured goods advanced only 99%, chemicals only 82%, while the all-commodity index rose 110%. Semimanufactured goods, not shown on the figure, increased 108% and have dropped 8.9% below the top.

Prices after Wars Since the peak of the inflationary rise

appears to have been passed and prices have started downward, the question is being asked whether the country faces a long and perhaps sharp drop in prices, similar to that which has occurred after other wars (δ). It is observed that in each of the previous major conflicts in which this country has been engaged, war or immediate postwar influences first caused a sharp inflationary rise in prices, but that then deflationary in­fluences set in and prices declined even­tually back to prewar levels. It is noted particularly that after the Civil and first World Wars, prices dropped initially about 40% from the postwar peak to a level about 50% higher than before the» war. Following a period of relative stability around that level, the decline was resumed, and prices were back to the prewar level 12 to 14 years after the peak.

In considering this question, only a few of the many factors that influence price trends can be covered in a short dis­cussion. The weight of historical prece­dent is strongly on the side of a repe­tition of the past. Minor as well as major inflationary upsurges have always been followed by a culmination of the infla­tionary rise and then a deflation at least as severe as the preceding inflation. It seems necessary that this be so, in view of the expansion of debt and of inventories, and other maladjustments accompanying an inflation. The present period, however, has already demon­strated marked divergencies from pre­vious postwar patterns, including the ab­sence of an immediate postwar depression and, rather, a continuation of inflationary pressures for over three years after the war. It is important, therefore, to note dissimilarities as well as similarities be­tween these periods. Moreover, since price changes up and down are only a symptom of underlying forces, it is help­ful to observe what some of the under­lying factors have been in the past to produce sharp deflation.

Government expenditures, the sharp advances and deficit financing of which have been the prime cause of wartime in­flations, have always declined sharply after previous wars, and have kept on declining for several years after the initial drop. In the 1865 fiscal year,

federal expenditures reached a peak of $1.3 billion but fell to $373 million two years later and declined further t o $299 million in 1872 a n d to $265 million in 1878. In fiscal 1919, federal expendi­tures were $18.9 billion, but fell to $5.7 billion in 1921 and to $3.6 billion in 1924. In both periods, expenditures i n the later years were only 20% to 22% of the war peak.

The initial decline in government spending after the latest war was about the same as before. Expenditures dropped from a war peak of $98.7 billion in 1945 to $33.8 billion in 1948. But since then, instead of continuing t o fall, government spending has increased sharply and is budgeted at $402 billion for fiscal 1949 and over $42 billion for fiscal 1950. Instead of falling to 20% of the wartime high, federal spending is climbing to well over 40% of that astro­nomical level. Instead of the sizable surpluses experienced for at least 10 years after each of the two earlier wars, the prospect is for a sizable deficit next year after only two years of surpluses.

A second factor that seems different this time is the relative rigidity of wage rates. The relationship between wage costs and prices for manufactured goods is strikingly parallel.

Wage costs per unit of output are a combination of two components—payroll expense and the output of the worker during the time for which he is paid. If wages go up but output increases more than in proportion, then wage costs per unit of output decline. That is what happened during the 1920,s. In recent years payrolls have increased without a corresponding increase in output, and wage costs per unit have risen, forcing prices up. For labor cost per unit to decline sharply, thus permitting a sharp decline in prices, either wage rates must come down, output per manhour musl rise, or a combination of both must occur.

When drastic declines in prices have taken place, as in 1920-22 and 1929-32. both components -worked in that direc­tion. Satisfactory figures showing changes in wage rites in manufacturing are not available for those years, but average hourly earnings declined from 61 cents in 1920 to 49 cents in 1922, or almost 20%. During these two years, an unusually rapid improvement in out­put per manhour, averaging 10% per year, also occurred. T h e combination of declining wages and higher productivity resulted in a drop of almost one third in labor cost per unit of output, and prices declined accordingly. In 1929-32, hourly earnings fell about 22%, but output per manhour failed to improve, so that labor cost per unit of output and prices dropped about 20 to 25% also.

The present outlook for these two components of labor costs is not clear. Scattered evidences of willingness to

keep jobs by working at lower rates of pay can be found. Severe deflationary pressures would seem to be necessary be­fore employers would ask or workers would accept a substantial reduction in hourly rates of pay, even though some flexibility in the rate might be beneficial. On the other hand, substantial improve­ment in productivity is quite possible and, of course, highly desirable. New tech­niques of production and other aspects of technological progress have been great during and since the war, particularly in the chemical process industries. The large sums spent on new plant and equip­ment are rapidly putting these techno­logical advances into practice. Workers and supervisory forces are better trained after the upheavals caused by the war and postwar conversion. An easier labor market is allowing better selection of workers, and employees develop better work habits when good performance has something to do with holding one's job and another is not as easy to get. Output per manhour appears to be in­creasing again and offers the greatest hope for some decline in prices.

A third factor in the general price outlook is the present absence of severe deflationary pressures in the monetary sphere. After the Civil War a conscious effort was made to reduce the circula­tion of greenbacks and to resume full convertibility of paper money into gold. In 1920, money became very tight and Federal Reserve policy made additional credit expensive to obtain. The com­mercial banks were borrowing heavily from the Federal Reserve Banks, and were under pressure to reduce loans and pay off their borrowings. The present policy of maintaining a low pattern of interest rates and the ready availability of bank credit to qualified borrowers is in sharp contrast with these earlier post­war periods. An indication of the rela­tive deflatibility of bank credit is given by the fact that in 1920 bank loans were 86% of private deposits, whereas now bank loans are only 33% of deposits. Even though bank loans decline from present levels, the effect on the money supply will be less than in the earlier period.

The above discussion (5) has referred more particularly to factory goods, of which chemical process industries are generally a part. Changes in farm com­modity prices depend on other factors, including the nature and success of sup­port programs. For some raw materials, including the nonferrous metals, prices are influenced by differences in costs of production between mines. When de­mand falls, high cost marginal mines are closed and production is concentrated in lower cost mines, permitting profitable sale of the product even though prices decline. Finally, transportation and dis­tribution costs account for a large pari of prices to the ultimate buyer. Basi-

3784 C H E M I C A L A N D E N G I N E E R I N G N E W S

cally, however, these are subject to the same influences that affect factory costs.

The Langer Range Outlook

The important question now is what the summer pickup signifies in the longer outlook (3) . Where it leads to increased production, as in textiles for example, it adds to purchasing power by reason of added employment and greater de­mand for materials and supplies. On the other hand, it would be imprudent to count on a general industrial expansion. The improvement has come before some of the most important industries have had any significant decline. It must be supposed that in due course the auto­mobile manufacturers will catch up with their market, just as the refrigerator and battery manufacturers did. and that con­struction will show some drop. The capital goods outlook is uncertain. Pro­ducers are working on backlogs and are steadily paring them down. Many corpo­rations are completing their immediate postwar expansion programs this year and will spend less on plant and equip­ment in 1950.

If the catching up which hit lighter industries earlier also has to come in automobiles, construction, and other capital goods, one of the strong supports of employment and buying power will be weakened. Farm income and farm purchases are expected by many to de­cline, in consequence of lower prices for feed grains and livestock and lower pro­duction next year, possibly through acreage restrictions, of some of the crops which are supported. The current surplus of exports, which is dependent on foreign grants and aids, must decline if the schedule reductions in these aids take place.

Price expectations this winter are un­likely to be bullish enough to stimulate a strong inventory buying movement, for supply and demand prospects in the main do not support such expectations. Businessmen, particularly those con­cerned with imported commodities, are apprehensive lest currency devaluations exert deflationary influences. While business buying has had to recover to levels more in line with ultimate con­sumption, current opinion suggests that it will not become reckless, and that the caution which has proved its worth will not be thoughtlessly' abandoned. The position will be stronger and the outlook brighter if conservatism con­tinues to rule now. I t would be safe to assume that ,the chemical industries have reached a plateau of expansion and will dwell on it for a while.

While the long-run profit picture is steady, the industry will have to go through a period of further readjustment, which will necessitate the judgment of the ablest chemical managers. New product application will undoubtedly be a keynote during this period, coupled

with increased efficiencies and decreased costs.

The Growth of American Industry

The dollar output of American industry reached a new record of around $166 billion in 1948, exceeding the wartime peak of $154 billion in 1944, and almost three times the 1939 total of $58 billion. Much of the rise reflects, of course, merely the inflation of prices (3) .

New high figures were established in total payments for wages and salaries, and in expansion and modernization of plant and equipment, financed in large part b y the reinvestment of earnings (£) .

The growth of industry in general, which is paralleled and slightly exceeded by the chemical industry (1) measured in dollar terms over a long period of time is shown by the over-all statistics of all United States manufacturing corpo­rations as well as by the record of lead­ing individual organizations. Total assets of the 98,000 manufacturing corporations increased from approxi­mately $65 billion at the end of 1926, the first year for which official figures compiled by the Treasury Department are available, to $96 billion at the end of 1946. Subsequent quarterly estimates prepared jointly by the Securities and Exchange Commission and the Federal Trade Commission indicate a further in­crease in total assets to $108 billion in 1948.

Net working capital—current assets loss current liabilities—rose from $12 billion at the end of 1926 to $34 billion at the end of 1946, and an estimated $39 billion by December 1948. In the years prior to 1939, working capital amounted to less than not proporty account. Since then the relationship has been changed by the rapid building up of the former, while the latter was held down by steady charges for depreciation reserves. Dur­ing the past year, however, the heavy new investment in plant account has brought the two close together.

This great expansion since 1939 in volume of output and in total assets was accomplished without any impairment of working capital and with only moderate increase in long-term indebtedness. It was made possible by the substantial earnings during that period, a major portion of which was not paid out in dividends but was reinvested in the busi­ness. This provided additional equity capital to an extent that would have been impossible by the sale of new stock issues to investors in view of the re­stricted demand caused by high personal income taxes and other deterrents.

The relatively low figures at which plant and equipment are carried on the books, valued customarily at original costs less accrued depreciation, show for industry as a whole what many execu­tives have emphasized in reports of their individual companies. Such book valu­

ations are far below the costs of replac­ing the old plant and equipment as i t wears out, which leads to an overstate­ment of real earnings.

For example, with a net property ac­count for all manufacturing corporations carried on the books in 1946 at $29 billion, or only $2 billion larger than 20 years before, the value of goods produced was more than double. While the heavy additions to properties during the three years since the war, capital­ized at the higher costs then prevailing, are a step toward adjusting book values in the direction of actual values, a large portion of the industrial plant is still greatly undervalued.

The Shifting "Big Business" of the Country

In the first (1900) edition of Moody's Manual, there were balance sheets of only 74 manufacturing companies report­ing assets of more than $1 million each (3). Of this number 38, or more than half, were cotton mills, mostly located in Massachusetts and established in some cases as far back as the 1820's. The largest size companies were the iron and steel manufacturers, several of which in this and other lines represented consoli­dations made in the late 1890's. Many of the most important industrial consoli­dations, however, were still to come in the early 1900's.

Among the leading industries of 1900 represented by companies in this invest­ment manual, many of which were de ­scribed briefly without either an income statement or balance sheet, were car­riages, wagons, and bicycles, along with such lines as leather (tanning, shoes, belting, harness, saddles), brewing and distilling, ice manufacturing, tobacco, paper, pianos, phonographs, agricultural implements, railway equipment, gas fix­tures and mantles, and cement. Not a single chemical company was listed and there were as yet few signs of such giant modern industries as automobiles, air­craft, radio, petroleum, rubber, chemicals, plastics, rayon, motion pictures, etc.

During the active and prosperous dec­ades since then there was substantial growth in the size and output of the manufacturing industries, including not only the notable expansion of automo­biles and petroleum, but also the rapid development of newer lines such as chemicals, aircraft, and radio.

The long-term growth of American industry was checked during the depres­sion years of the 1930's. Assets of manu­facturing corporations generally were reduced by deficits, as well as by liquida­tion of assets and debt, and, in many cases, by substantial writedowns of book valuations.

During the nine years from 1940 to 1949 there were two periods of great in­dustrial expansion: first, in producing the weapons and materials for winning

V O L U M E 2 7, N O . 5 1 » D E C E M B E R 19, 1 9 4 9 3785

AVorld War II, and later in meeting the accumulated postwar demands for all types of consumers* and capital goods. Corporate assets were increased by heavy expenditures on new plant and equipment, and by an expansion in work­ing capital for carrying larger inventories and receivables, reflecting in part the wartime and postwar inflation in prices and costs. This increase in assets was financed to a major extent by reinvested earnings, and to a minor extent by bor­rowings and by sales of new stock.

There were, at the beginning of 1949, 141 manufacturing corporations report­ing assets of more than $100 million each.

The business structure of the United States is made up of some 500,000 corpo­rations and 3,400,000 individual proprie­torships, partnerships, etc.. excluding farming. I n certain of the industries only large organizations can provide the huge capital investment required for mass production at lows costs. In many other industries, the small units are able to maintain their position and to prosper year after year. Small companies supply countless materials, parts, and subassem­blies to the large companies, some of whom have more than 10,000 suppliers, and in turn distribute most of the finished products to the ultimate con­sumer. In many other cases, small busi­ness sees the operation through from pi art to finish.

During the growth of American indus­try since 1900, the number of large corporations ha.s increased manyfold. Table IV shows the total assets of the 25 largest American manufacturing corporations at the beginning of 1949. Whereas a "billion dollar corporation" was unique in this or any other country when the U. S. Steel Corp. was organized

Table IV. T h e Twenty-five Largest American Manufacturing Corporations, Based on Reported Total Assets at the

Beg inning o f 1 9 4 9 (In Millions of Dollars)

Standard Oil Co. (N. J . ) $3,526 (ieneral Motors Corp. 2,958 U. S. Stee! Corp. 2,535 E. I. du Pont de Nemours & Co. 1,585 Standard Oil Co. (Ind.) 1,500 Socony-Vaeuum Oil Co. 1,443 Texas Co. 1,277-» Gulf Oil Corp. 1,191 General Electric Co. 1,177 Standard Oil of California 1,075 Bethlehem Steel Corp. 1,029 Ford Motor Co. (1948) 1,026 Cities Service Co. 992 Western Electric Co. 786 Union Carbide & Carbon Corp. 723 Sinclair Oil Corp. 710 Westinghouse Electric Corp. 694 American Tobacco Co. 687 International Harvester Co. 672 Anaconda Copper Mining Co. 660 Shell Union Oil Corp. 641 Allied Chemical & Dye Corp. 597 Phillips Petroleum Co. 579 Kennecott Copper Corp. 575 Chrysler Corp. 541

Total $29,179

in 1901, there are now 12 manufacturing corporations in that size class. In addi­tion, there are 6 "billion dollar" railroads, 6 public utility systems, 20 banks, and 12 insurance companies, making a grand total of 56.

Even a "million dollar" company may properly be considered "big business." The official Treasury Department figures show 33,194 American corporations ex- -ceeding this size at the end of 1946. Since then the number doubtless has increased substantially.

If size be measured by volume of busi­ness rather than assets, there are 215 American manufacturing corporations whose sales last year exceeded $100 mil­lion each, 27 railroads, 18 public utility systems, and 13 in other lines su»:h as mining, motion pictures, and air trans­port.

Such vast business activity is made possible by the opportunity which the American system has given to increase enormously production and mass pur­chasing power by the investment of savings in American industry.

The Profits Argument , .* Statements on corporate earnings for

1948 again generated fresh controversy on the subject of profits. Reports of record-breaking earnings encouraged pro­posals for distributing these "excess" earnings by taxes, wage increases, or government-dictated price reductions to consumers.

As indicated previously (1, 2), such agitation against profits is both ill-founded and dangerous. Profits in a freely competitive market are largely the product of the impersonal workings of economic law. When the demand for goods exceeds the supply, as has been the case most of the time since the war, prices and profits naturally rise. In­dividual concerns may try to buck the trend by lowering prices but soon find that, with rising wages and other costs, they are only penalizing themselves with­out making any significant dent in a mar­ket characterized by the insistent pres­sure of too many dollars chasing too few goods.

Many of our largest corporations, which have been subjected to the most severe criticism, held their prices well be­low what the traffic would bear, as meas­ured by prices in "gray" and second hand markets for steel sheets and pipe, ethylene glycol, dyes and intermediates and numerous other chemicals. But buyers who wanted the goods and were willing to pay premiums to get them bid up the prices, and the profits, instead of going to the original sellers, went to in­termediate processors and distributors. The reduced profits in 1949 are a clear indication that they represent the "re­sidual" and cannot be relied upon t o con­tinue.

Not even Government with all its

authority and controls, has been able to suppress completely this law of supply and demand. Save where controls have had broad public support, as in t ime of war, trading has to a large extent been driven underground, and black mar­keteers have reaped a harvest at the expense of legitimate business. The public—if it wanted the goods—had to pay the true rather than the controlled price, as many domestic and foreign chemical customers of unscrupulous dealers found out in 1948.

The danger in attempts to place arbi­trary limits upon profits is that, over ι he long run, they will diminish the principal incentive and source of capital for improving the industries and raising the standard of living. They m a y kill the goose that lays the golden eggs.

Are Profits "Real" Profits? The issue of "real" and "unreal" prof­

its, and the distinction is warranted in view of (1) the large element in profits of nonrecurrent inventory gains, which were absorbed in inventory replenish­ment at higher prices, and (2) the inade­quacy of depreciation charges based on the low original costs of plant and equip­ment.

The Department of Commerce, in its much quoted estimates of total corporate income, has figured the inventory factor alone in corporate profits at approxi­mately So billion in both 1946 and 1947, and over S3 billion in 1948. Including undcr-depreciation it is estimated that during the past three years American corporations "overstated" their earnings by about $16.4 billion. This is the amount by which the reported state­ments of profits exaggerate the income available to pay dividends, to expand plant, to increase wages, or to reduce prices.

Now that the business boom has re­ceded, we hear more of the theory that business depressions are brought on by lack of consumer purchasing power caused by too much of the national in­come flowing to profits and not enough to wages and other segments of the na­tional income.

Literature Cited (1) Aries, R. S., "Profite in the Chemical

Industries," CHEM. ENO. N E W S , 25, 3717, Dec. 15, 1947.

(2) Aries, R. S., "Profits in the Chemical Industries," Ibid., 26, 3550, Nov. 29, 1948.

(3) National City Bank, "Monthly Let­ter," April, May, June, August, September 1949.

(4) Cleveland Trust Company, "Business Bulletin," August 1949.

(δ) Northern Trust Company, "Business Comment," June 1949.

(6) Federal Reserve Bulletin, June, 1949. (7) Merrill Lynch, Pierce, Fenner &

Beane, "Security & Industry Sur­vey," August 1949.

PRESENTED at the 116th national meeting of the AMERICAN CHEMICAL SOCIETY, Atlantic City, N. J., Sept. 22, 1949, before the Division of Chemical Education.

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