ment only, a virtual evasion was accomplished through sales at the unregulated public prices to persons who were indirectly producing for the government.

At the end of the war, it became apparent that in not a few important cases prices had been fixed at levels which were higher than was necessary. It is a striking fact that in the arguments published by the Industrial Board, Mr. Redfield sanctioned the conclusion that prices during the war had been, on the whole, "fixed" at too high a level. Certainly this opinion was heartily agreed to by the Railway Administration—at least in the case of steel products. It became apparent that costs and scarcity had both been exaggerated, while on the other hand, over-zealous or over-cautious government officials had made unnecessarily large purchases. There was much concern in some quarters about a probable drop in prices, and steps were taken to prevent it. The Copper Producers' Committee appeared at Washington and asked for protection. Iron and Steel Institute requested a continuation of price regulation. In fact, on November 15, 1918, an agreement was made between the copper producers and the War Industries Board, which amounted to saying that the government would continue to pay 26 cents per pound for the copper for which it had contracted, and that it would sanction the continuation of the prevailing understanding among the producers, according to which they might concertedly demand 26 cents per pound.

The

Other illustrations of the situation may be mentioned as follows: In November, the committee on cotton distribution ordered that there should be no short selling in the cotton exchanges at New York and New Orleans. In December, the War Department announced that army stocks of materials would be sold gradually, so as not to break the market. Early in 1919, it became apparent not only that there had been no scarcity of tin in the United States when the Inter-Allied Tin Control became effective, but that there was a large surplus. The manganese ore price proved to be so high that the market became over-stocked in the latter part of 1918, and buyers refused to consider offerings at the established prices. As has been pointed out in an earlier article of this series, it proved

difficult to keep up the prices on various cottonseed oil products. Partly as a result of the open winter of 1917-18, it was found that in the fall of 1918 there was a surplus of coal, and the mines were called upon for light production. Even in the case of steel, there was, as a matter of fact, a good supply, and at the end of the war neither the railways nor the mines had to rush into the market for large quantities. It seems that those in charge of the shipbuilding program and of the ordering of steel for the Navy and for France, constantly insisted on steel shipments much in excess of current needs, which resulted in an accumulation of that product.

It cannot be denied that it was well to play safe and to allow for a possible continuation of the war. Also, by economical methods, considerable savings in consumption were effected. Nevertheless, it is our conclusion that the prices of several important regulated commodities were probably somewhat too high at the time the armistice was signed. It may be that the Engineering and Mining Journal put the matter too strongly when it said, "Junior officials, without any thoughtful estimates of military consumption, bought recklessly of goods produced by labor at a fantastic wage scale" (Feb. 1, 1919) and that the armistice found the United States overbought in nearly every commodity. While there was probably something of this sort, we would emphasize, as the seat of the trouble, the fact that in fixing prices inefficient producers were kept alive by accepting an unduly high marginal cost.

3. Criticism of the Chief Price-Fixing Agencies

The work of the Price-Fixing Committee of the War Industries Board was in the main a "trading proposition". While considerable pressure could be, and in some cases was, brought to bear upon an industry, there was generally an effort to reach an agreement, in which considerable bargaining was used. The Price-Fixing Committee knew that the government must depend upon the cooperation of the industry in order to prevent evasion and to secure the service which was so important. The industry knew that the Price-Fixing Committee had great power through control of priorities and of public opinion. Various factors

affected the situation as the different bargains were driven. Sometimes a particular government department, such as the Navy, was immediately interested in securing a lower price, and then the tendency was for the Price-Fixing Committee to drive a sharper bargain. If there was considerable public interest in the price, the article concerned being of wide, general use, the same tendency existed. If the quantity involved was small, no great part of the total output being concerned, it was easy to reach an agreement, and in such cases concessions were sometimes made to the government, while in others, possibly the government did not make so careful an investigation or attempt to ascertain accurately the lowest possible price. One of the most important factors in the bargaining was the degree of organization of the producers. Those industries which presented their cases before the Price-Fixing Committee through a well organized committee, or even a single individual, were apt to secure better results from their point of view. This is well illustrated by the fact that the Southern Pine Association secured prices which were not so close to cost as were those secured by the relatively unorganized representatives of the western logging and lumber companies. Finally, the practicability of commandeering the plants of the producers played an important part. When the Price-Fixing Committee knew that there were thousands of small plants, it felt that its dependence upon the good will and cooperation of the industry was greater than in other cases where government operation was more practicable. An extreme illustration of this occurred in the reluctance of the Price-Fixing Committee to take up the matter of wholesale and retail prices on such commodities as lumber. A large part of the work of the Price-Fixing Committee of the War Industries Board was in effect equivalent to giving representatives of the industry concerned considerable authority to get together and agree upon a price which would insure profit to most of the producers. A maximum price was named, and those engaged in the industry then lined up and charged the maximum price. Witness the situation in copper, cement and steel.

66

Naturally enough, with this condition of bargaining and agreed" maximum prices, the prices of certain things were fixed too high. This sometimes occurred for the reason that the price was named as a mere maximum, while in reality it was also a minimum. But the chief trouble was that the marginal cost was too liberally construed. Generally it included large salaries for officers and directors (containing an element of profit), as well as liberal allowances for the replacement of raw materials owned on the basis of market value. Generally, too, the risk of loss was largely removed by the price-fixing operation, aside from an uncertain future element owing to doubt as to the duration of the war. Above all, a profit was allowed to the marginal company, for there was added to the marginal cost an allowance of 10 per cent. on investment, considerably more than interest. A marginal company, under competition, gets no differential profit; the efficiency differential is secured by low-cost companies only. To add to all this, the 10 per cent. allowance was generally figured on a capital investment which was in excess of the true net investment. Indeed, the investment was not determined at all in some cases. It is no wonder, therefore, that prices were fixed at too high a level. This found expression in the utilization of inferior natural resources by many companies.

Surely there is some limit to the justification of profits on the ground of marginal cost. Take any case in which there is known to be profiteering. If no limit is to be placed upon marginal cost, it would only be necessary to start up some extremely inefficient plant in order to obscure the whole situation. Good work was done by the Price-Fixing Committee in eliminating from consideration abnormal plants or companies, but in our judgment not enough of this was done. In determining the margin, the proportion of the total product produced at a cost above the marginal cost should be considered, together with the history and efficiency of such submarginal operations and also the possibility of securing the total necessary supply from supramarginal companies. In a word, the agencies acting for the government should have exhausted every effort to secure as much as possible of the necessary supply from low-cost companies and to that end should have brought more pressure

to bear by refusing to consider small high-cost companies and by demanding the maximum output from low-cost companies.

The policy of "stabilizing", which is closely related to the vicious idea of "keeping business as usual", tended to keep the inefficient alive, thus guaranteeing higher and higher differentials in industries which required no stimulation, (e. g. lumber and cement). This made the consumer carry the burden of the overhead expenses of unnecessary plants and prevented the concentration of the factors of production at points where they would be most effective.

The failure of regulation to hold prices to a closer relation to cost, enabled the accumulation of enormous surpluses or reserves in the hands of powerful low-cost companies. These they can use to tide over lean years during which weaker companies will fail. It would possibly have been a kinder and more wholesome policy to have used the knife more freely.

A large part of the activity of the business men who represented the War Industries Board in its price control, was unconsciously directed toward protecting the industry against what they believed to be drastic regulation and demoralization. Immediately upon the signing of the armistice, these men felt greatly relieved and proceeded to various points on the coast of Florida. This helps to explain why the Industries Board disbanded so promptly without taking steps to regulate prices during the transition period. One cannot but wonder why, if price regulation was regarded as a good thing and had been well done, it should have been dropped so incontinently. The period of transition to peace was a delicate one in which the stabilization of prices was desirable. The conditions existing in October, November and December, 1918, were as much war conditions as those which had existed in July, August and September. Why, then, did the War Industries Board practically cease to function?

We shall not undertake to criticise the work of the Fuel Administration on coal prices further than to say that in our judgment, the chief error lay in the precipitous attempt to fix prices at the beginning without sufficiently detailed information as to