ECONOMY JANUARY 7, 1946
War profits—after deduction of war taxes—have been the greatest in history. The government virtually guaranteed contractors against loss by paying for their investments in war equipment. Now business is guaranteed against loss in resuming civilian production. By congressional enactment, the Treasury must pay back excess-profits taxes to businesses which in 1946 suffer certain reduction to income. The United States Government will thus actually finance employers in fighting unions, or while they themselves strike against producing all they can, if they should for any reason follow this policy.
Profits, by common consent, are the heart of the “private-enterprise system.” What are the facts regarding them? How big were war profits? What was done with them? What is the financial position of business now that peace has come? Can higher wages be paid? Can business finance full production and full employment? Can it survive a depression? Are profits, as many corporations say, nobody’s business but their own, or are they of public concern? Answers to such questions, accomplished by facts and figures, are contained in the series of articles of which this is the first.
The United States Department of Commerce estimates that the profits of all corporations in the United States, after deduction of taxes (including excess-profits taxes), were $8.5 billion in 1941, $8.7 billion in 1942, $9.8 billion in 1943 and $9.9 in 1944. In 1944 they were more than twice as large as in 1939, the last year in which World War II did not affect profits, and were $3 billion higher than in 1929, the greatest year of business boom hitherto experienced in this country. These estimates, say the government statisticians, may be too low, since they are based on the records of the larger concerns, and it is believed that the smaller ones made even greater advances.
Profits naturally increased more in the war industries than in those devoted mainly to products used in peace, but the difference is not striking. While the output of some articles was reduced, few lines of business failed to find substitutes. Civilians consumed, in the aggregate, more than ever before, and the government ordered nearly every type of product.
Forty-seven iron and steel corporations made net profits, after taxes, of $146 million in 1939, $325 million in 1941, and $194 million in 1944.
Fifteen automobile companies made $223 million in 1939, $274 in 1941 and $222 in 1944.
Forty-nine companies manufacturing foods, beverages and tobacco made $151 million in 1939, $159 million in 1941 and $175 million in 1944.
Railroads profited hugely, their net income after taxes rising from $93 million in 1939 to $902 million in 1942 and $668 million in 1944. It is therefore obvious that the profits did not merely come from munitions.
On the basis of reports by 629 industrial companies, the Federal Reserve Board records a further rise in profits for the first half of 1945. They made $981 million in this period against $910 in the same months of 1944. Railroads also registered a gain.
Bear in mind that these figures include only what was left for the owners of the corporations after the payment of all interest on bonds and other obligations, and after the federal, state and local governments had all levied their taxes. The profits for all corporations before income and excess-profits taxes (at a maximum rate of 85.5 percent) were in 1944 much more than twice as large as those here recorded, or about $25 billion. This is an indication of the astronomical sums American business could make, at war levels of costs and prices, with full production, and without war taxes Since neither selling prices nor costs rose drastically, and were kept fairly well in step with each other, it shows the enormous importance to the national income (including business profits) of a market demand sufficient to call forth all that can be made.
What Was Done with the Profits
The extra profits made by corporations were not, for the most part, distributed to their shareholders. Dividend policy was conservative. In 1944, for instance, $4.5 billion was paid to stockholders, or somewhat less than in the banner year of 1941, while $5.4 billion was added to corporate surplus. The companies devoted their additional earnings mainly, not to increasing the current purchasing power of their owners, but to strengthening their position. The dividends paid to preferred and common shareholders by 152 large corporations in 1939 were $654 million, or about 77 percent of their net profits; the rest, or $193 million, was left in the business. During the succeeding five years of war these same corporations paid about 68 percent of their profits in dividends, or an average of $671 million per year. They salted away profits at the rate of nearly $1 billion a year, and came out of the war period with a total addition to surplus of $4,925 million.
It is probable that smaller concerns held back an even larger percentage. In the case of railroads, dividends were, in the aggregate, larger than net income in 1939, $126 million against $93 million. (This strange result appears because in obtaining the aggregate income, the losses of those roads which had deficits are deducted.) But in the war years, the railroads, although their dividends rose above $200 million, paid out less than one-quarter of their net earnings.
All this gain is that which appears on public records, after everything which could be charged to expenses was deducted. Among these deductible items are great additions to plant and equipment or improvements in them met out of current income, depreciation of machinery bought by the company for war purposes, at a rate which writes it off in five years—though in many cases it may then still have productive value—large salaries and bonuses to executives, huge amounts spent for advertising on the ground that it might build up a “good-will” asset, large expenses for technical development of postwar products and methods. Special reserves were set aside for contingencies.
A Few Examples
Though corporation reports do not reveal all the essential facts, it may be interesting to see what can be learned from a few of the more prominent.
General Motors.—This great company has had during the war years a net income after taxes ranging between $150 million in 1943 and $202 million in 1942. On the whole, excess-profits taxes have kept its net about down to prewar years. But if, in 1946, it should have as large a business as in 1944, without change in costs or prices, the repeal of excess-profits taxes would leave it with between $260 million and $300 million, or about one-third more than before the war.
Since 1940 the corporate surplus of this company has been enlarged out of earnings, rising from $471 million to $645 million, a gain of $174 million, after payment of dividends. In addition, it has built up special reserves called “Provision for Contingencies,” to which was contributed—and charged to expense—$17 million in 1940, $18 million in 1941, $26 million in 1942 and $36 million in 1943. Later figures are unavailable. This money is on hand for reconversion expenses and the like. All investments in enemy and enemy-controlled countries—and they were considerable—were written off in 1941, before profits were reckoned. Renegotiation of charges to the government, resulting in deductions, is accounted for in these figures.
The annual charge for depreciation and amortization in General Motors has risen from $43 million in 1939 to $64 million in 1944. This increase might be expected, in view of its much larger plant and equipment in the later year. There is an additional charge for depreciation of special facilities acquired for war production, all of which the company will have free and clear, if it wants them, five years after their purchase. The point of these figures is that the company has reckoned its profits only after paying out of its war earnings on the instalment plan, as it were, for a lot of new equipment. Aside from the special war machinery, it pays for the rest in ten or twelve equal annual instalments.
General Motors’ total sales nearly tripled between 1939 and 1943. In the same period its expenses for maintenance and repairs have grown steadily, from $69 million to $309 million in 1943—the last year of which there is to record. The fact that maintenance and repairs have risen four and a half times, or half again as rapidly as sales, may be a reflection of expensive war readjustments in production, but it seems to be at least an indication that all such expenses were carefully counted in before figuring profits and that the plant is in good condition for future work.
In the list of the fifteen men in the country receiving the highest remuneration for their services, GM executives account for six. Its head, Charles E. Wilson, is second on the list, with an annual reward of $459,041. The six men together received, in one year, $2,054,086. This includes merely salary and bonuses, not income from investments. Ormond E. Hunt was paid $359,519; Albert Bradley, $350,432; John Thomas Smith, $306,310; Donaldson Brown, $306,310; and Charles F. Kettering, $306,117.
In spite of its huge spending, General Motors had, at the end of 1944, $169 million in cash and $428 million in government securities. All of this is available on short notice to pay bills, interest or dividends, even if losses should be incurred in current transactions. For instance, the company could shut down for perhaps three or four years and yet would have enough liquid assets to remunerate its stockholders at the usual rate during that time, disregarding any future rebates of taxes.
United States Steel.—This company, which has about 35 percent of the ingot capacity of the country, had an income before taxes which rose from $65 million in 1939 to $272 million in 1941 and $261 in 1942. Subsequent years showed a decline, the income being $155 million in 1944. In the latter year, however, it had no excess-profits tax to pay.
In addition to paying dividends, U. S. Steel has built up its earned surplus from $263 million in 1939 to $377 at the end of 1944—a gain of $114 million.
The growth of its productive resources is indicated by the fact that its annual charge for depreciation, depletion, etc., has risen from $61 million in 1929 to $81 million in 1944. In addition, it charged off for emergency amortization on special war facilities $10 million in 1941, $32 million in 1942, $44 million in 1943 and $57 million in 1944. The enlargement of its plant and investment in this period has been paid for out of war sales. The extent of this gain, in physical terms, may be indicated by the fact that in 1940, a year of nearly capacity output, it turned out 15,014,000 tons of rolled and finished steel products, and in 1944, produced 21,052,000 tons.
If one should assume that volume would continue at capacity in 1946 and neither costs nor prices would differ from 1944, this company would net, after federal income taxes, about 75 percent more than in 1939. The amount might be even larger because of a probable decrease in the charges for depreciation and amortization arising from war expansion.
This company is also a large holder of cash and government bonds.
Aluminum Company of America.—Alcoa'soperating income increased from $53 million in 1939 to $185 million in 1943 and $153 million in 1944. Income and excess-profits taxes kept the net income down to about 1939 level—the average for the four years 1941-1944 being $37.25 million against $37 million in 1939. During this period its charges for depletion, depreciation and amortization, reckoned as an expense before arriving at profits, increased from $6 million to $55 million. The corporate surplus rose from $51 million in 1939 to $163 million at the end of 1944.
This company follows the usual pattern. It has not increased dividend distributions during the war, but is potentially immensely more wealthy after it, because of its enlarged plant and financial resources, paid for out of war sales. If its business should shrink to prewar size, its owners would be about as well off as they were in 1939. If volume should be maintained at war levels, their gains would be enormous. Such gains might, of course, have to be shared with workers and consumers.
General Electric produces about one-quarter of the country's electrical equipment and also has a large capacity for plastics, besides receiving income from its investments in public utilities. Its profits rose from $51 million in 1939 to $253 million in 1943 and $195 million in 1944. Taxes, however, kept the amount available for distribution down to an average of about $50 million for the four years 1941-44 against $41 million in 1939. Excess-profits taxes alone were $185 million in 1943, and $150 million was set aside in 1944 for federal income and excess-profits taxes.
After payment of dividends, GE's corporate surplus was increased out of profits from $124 million in 1939 to $172 million in 1944. In the same period the charge for depreciation and amortization grew from $10 million to $28 million. The growth in GE profits is a striking example of the results of swollen volume of operations: net sales more than quadrupled between 1939 and 1944, rising from $304 million to $1,353 million. If the company could retain this volume after the war, without any decrease in costs or increase in prices, the repeal of excess-profits taxes alone would leave its net profits at between $150 million and $200 million, or three to five times the 1939 figure.
E. I. duPont de Nemours and Company makes a wide variety of chemicals and synthetic materials, besides having a 23-percent interest in General Motors. Its net operating income grew from $67 million in 1939 to $160 million in 1944. Income from General Motors dropped, however, from $35 million in 1939 to an average of about $27 million for the war years. This cut, combined with income taxes and excess-profits taxes of $70 million and upward a year, brought its remaining profits down to an average of a mere $75 million for 1941-44, against $93 million in 1939.
DuPont increased its corporate surplus out of profits from $256 million in 1939 to $366 million in 1944. Charges for depreciation and obsolescence appear to have been ample, having grown from $19 million in 1939 to $34 million in 1944. At the end of that year it held $146 million in cash, besides having an enlarged capacity. Despite the drop in profits after taxes, it was therefore scarcely impoverished by the war.
Now that excess-profits taxes are repealed, a continuation of the war level of sales, without any change in costs and prices, would yield DuPont about $150 million profit, or a gain of about 66 2/3 percent over 1939.
Where Is the Money?
We have seen that the extra war profits did not go principally to stockholders. In accounting terms, they were put down on the books as additions to surplus. Large expenditures for new plant and equipment were made in part out of this surplus, but mainly were charged to expense. This means that the government paid for them in the prices it was charged.
A substantial share of the money received by business during the war was not spent by its recipients. It has turned up in enlarged bank deposits, currency holdings and ownership of government securities. Non-financial business—that is, manufacturing, trade, public utilities, etc.—had $37.1 billion of bank deposits in July, 1945—an increase of 82 percent over December, 1941. They undoubtedly held a large share of the $26.2 billion of currency in circulation, which had expanded $16.6 billion since 1941. Corporations and associations, other than banks and insurance companies, owned $30 billion of government bonds on September 40, 1945, as opposed to $4.3 billion at the end of 1941. Thus we may roughly estimate that war receipts amounting to $52.4 billion are now held in cash or its equivalent--$16.7 billion in deposits, $10 billion in currency, $25.7 billion in government bonds.
This huge amount of liquid assets in the hands of business executives is a matter of first importance. What will they do with it? If they spend it for production it will have one effect. If they distribute it to owners, without enlarging production, it will have another. The critical power that goes with possession of this huge pile of money, and of the productive capacity created during the war, is the real significance of the war profits. Nobody has yet benefited from this money. Who, if anybody, will benefit from it, and how, is what all the postwar warfare is about.