Mr. KEATING. Was a standard weight taken for all items or was the weight of the particular manufacturer's item used? Colonel HOWARD. There was a weight for each item given by the manufacturer who, in effect, guaranteed that weight. Mr. KEATING. In the Westinghouse bid, did they state the weight for a single-wall or double-wall construction? Colonel HOWARD. I do not know. They gave us a figure of weight, and if the weight exceeds that amount, and the Government has to pay more freight than we figured that we would, we would ask Westinghouse to make up that difference or hold that back from their invoice. Mr. KEATING. Well, of course, conceivably that might make a difference in the determination of who was the low bidder, when they were as close as they were in this case. Colonel Cook. I might point out there, sir, that we do not check these weights each time; that Sunroc or anybody else's weight could be put in lower the same way. General BRANNON. You see, it is a guaranteed weight, Mr. Chairman. A manufacturer might make it very low if he wanted to absorb that difference. Mr. KEATING. The chairman of this committee at the last hearing referred to the Federal Trade Commission and to the Department of Justice the testimony given by Mr. Morrison. I think fairness to all requires that the testimony at this hearing also be referred to the same agencies, and I so direct. The hearing is adjourned until Monday morning,when we will hear Mr. Schram. General BRANNON. Thank you, Mr. Chairman. Whereupon, at 11:45 a. m., an adjournment was taken until 10 a. m. Monday, November 28, 1949.) STUDY OF MONOPOLY POWER (Second Series) MONDAY, NOVEMBER 28, 1949 HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON THE STUDY OF MONOPOLY The special subcommittee met, pursuant to adjournment, at 10 a. m., in room 346, Old House Office Building, Hon. Emanuel Celler (chairman), presiding. Present: Representatives Celler, Walter, Bryson, Wilson, and Keating. Also present: C. Murray Bernhardt, general counsel, David Cushman Coyle, consultant, and Wm. R. Foley, counsel, of the committee staff. The CHAIRMAN. This meeting will come to order. Our first witness this morning is Mr. Emil Schram, president of the New York Stock Exchange. You may proceed, Mr. Schram. STATEMENT OF EMIL SCHRAM, PRESIDENT, NEW YORK STOCK EXCHANGE, ACCOMPANIED BY FRANKLIN COLE, PRESIDENT. FRANKLIN COLE & CO., INC. Mr. SCHRAM. Mr. Chairman, and gentlemen of the committee, my name is Emil Schram. I am a resident of New York City; my home address is 784 Park Avenue. I have been president of the New York Stock Exchange since May 1941. While I have not been able to read all of the testimony of previous witnesses before your committee, I am acquainted with some of the observations made by them and wish to say at the very outset that I am impressed with the scope and magnitude of the problems covered. I should also like to stress at this point, Mr. Chairman, that I do not pretend to be an economist. Any help that I can be in the way of making a contribution to your deliberations will be best served if I confine myself to the subjects which I have been closest to in recent years. These subjects are: Federal taxes and the capital markets, particularly the impact of Federal taxes on the capital markets and the general economy. We all know that acts or policies often have consequences far removed from the minds or intentions of the originators. Nevertheless, responsibility for these consequences must be recognized and cannot be evaded, because the consequences were not foreseen. In consid ering the problems of bigness, which has so many social and economic angles, I urge that you consider the effects of the Federal tax structure which, I am sure, unwittingly has strengthened the position of large, well-entrenched enterprises. I believe executives of so-called big business would not quarrel with this statement. Federal taxes have accomplished this result in several ways: (1) They have made it difficult for small- and medium-sized business to grow and compete successfully. In this connection, I believe that one particular phase of the Federal tax structure weighs heavily against small business. I refer to the fact that business enterprises that are incorporated are taxed at the rate of 53 percent on their income between $25,000 and $50,000, which is the so-called notch provision. Incidentally, Canada has reduced the rate of tax on the first $10,000 of corporate profits to 10 percent. (2) Because of the large fraction of income diverted to the Federal Government, big business can afford to take risks and spend liberally for experiments and development of new products. Losses that might threaten the existence of small- and medium-sized enterprises can be more readily absorbed by large corporations; the size of the fraction of the profit given up also works in this direction. (3) At the individual level, high surtax rates and, especially, capital gains taxation, discourages the individuals most likely to invest in enterprises at their inception or formative stages from participatng in ownership risks. I shall come later to proposals which I shall recommend for consideration. That smaller businesses are beginning to suffer now that a buyers' market, broadly speaking, has returned is indisputable. From the second quarter of 1948 to the second quarter of this year, all manufacturing corporations with assets of less than $250,000 had a 67 percent shrinkage in income after taxes. The reduction was 59 percent in the group with assets between $250,000 to $1,000,000. On the other hand, the income of corporations in the $100,000,000 and over asset size declined by only 11 percent. The balance sheet liquidity position of manufacturing corporations as of June 30, 1949, also provides reason for concern over the outlook of small- and medium-sized business. "Liquidity" is the ratio of cash plus Government securities to total current liabilities. "Liquidity" is one of the most important ratios used in financial analysis by commercial bankers. In the absence of readily available sources of outside or external funds, it is important also as a factor in determining whether business management will be willing to add to its employees or embark on job-making activities. In a period of acute competition or business contraction this ratio may be the decisive factor in the ability of business to withstand adverse circumstances. Now, what do we find here? The liquidity ratio is least favorable at the smallest level and most favorable as the largest size business is reached. This is proved in the following table: As of June 30, 1949 Liquidity ratio 0.61 Asset classes (in thousands of dollars): 1 to 249. which is an adverse ratio; from $250,00 to $999,000, the ratio improved a little, but it is still 0.83; from $1,000,000 to $4,999,000 it was 0.85; from $5,000,000 to $99,999,000, it was 0.97; and $100,000,000 and over is 1.04. It is a very significant statement. Mr. WALTER. Mr. Schram, is it not a fact that in the first two classifications the liquidity ratio is even smaller today? Mr. SCHRAM. It is as of June 30, Congressman. I am inclined to think you are right; yes, I think it is decreasing. This, mind you, is the picture at the end of a great, prosperous postwar period of high volume and substantial profit margins. It is most difficult for small- and medium-sized business to divert any material part of savings to additions to ownership or equity capital-not that the volume of savings is small. The rate has declined from the highest postwar range but, even in the third quarter of this year, personal savings were at the rate of $13,300,000,000, according to estimates of the Department of Commerce. This rate was almost twice that of the twenties in relation to disposable income. You have already been told of the funneling of savings, to an increasing degree, through financial institutions largely limited to investment in obligations or debt securities. The amount of funds available to financial institutions is exerting continued pressure on the highgrade bond market and yields available on preferred stocks, with the result that several weeks ago a company like Madison Gas & Electric Co. successfully sold a $3,000,000 25%-percent bond issue which the bankers recently offered to the public above par. This issue had an AA rating, one grade below the highest rating. General Electric Co., Westinghouse Electric Corp., and General Motors Corp. recently repaid loans not maturing for some years, in the respective amounts of $25,000,000; $20,000,000, and $125,000,000. The problem of investment outlets for financial institutions' funds has been pointed up again. The CHAIRMAN. Who took those loans? Mr. SCHRAM. Sir? The CHAIRMAN. Was that a public offering? General Electric, Westinghouse, and General Motors? Mr. SCHRAM. No, those were loans with financial institutions that they paid off, anticipating the maturity. The CHAIRMAN. Oh, they paid off, I see. Mr. SCHRAM. They paid off. Whether life insurance companies should be permitted to buy common stocks more extensively is a controversial topic. I know there is a great divergence of opinion among life insurance company executives who have studied the problem. Investment in common stocks would be a drastic change and is not a step to be taken lightly. I offer this thought to the committee. If a reasonable part of the funds now seeking shelter in financial institutions moved over to ownership investment by individuals, the problem would tend to disappear. If present rates and methods of taxation did not stand in the way, companies would have the benefit of a larger flow of ownership funds at lower rates. Correspondingly, incentive of companies to borrow on the one hand, and of financial institutions to bid up the price and depress the yield of bonds, would be lessened. In our kind of economy it should not be necessary to engage in serious discussion of a runaway bond market when common stocks of sound companies show a high return. The difference between common stock and bond yields is still extraordinarily great. The average yield on 200 common stocks at the end of October was 6.1 percent compared with 2.9 percent on an index of corporate bonds, and top grade corporate bonds yield only about 2.7 percent. These stock yields are representative of the market but not of the price of ownership funds in the economy; the list includes the highest grade common stock of the strongest nationally known enterprises in the United States. The whole economic machine made up of all corporations in all types of industry used about $102,000,000,000 of new money in the years 1940 to 1948. Out of this total, retained corporate earnings amounted to $62,000,000,000. The second largest source of funds, creation of corporate debt, was much smaller and amounted to $35,000,000,000. Together the money raised by the sale of debt securities and through other loans, plus the reinvestment of earnings, amounted to $97,000,000,000 out of the total of $102,000,000,000. Preferred stock issues accounted for $2,600,000,000. Finally, proceeds for the sale of common stocks provided only $2,400,000,000 in this entire period, or barely more than 2 percent of all the funds used. To rely on retained earnings of corporations on the scale of recent years is likely to be a major blunder. Retained earnings fluctuate very rapidly. As a result of the moderate decline in earnings of corporations this year, which leaves the aggregate at the respectable rate of around $15,000,000,000 annually, retained earnings are now at the rate of only a little more than $6,000,000,000, against more than $13,000,000,000 in 1948. On the present volume of saving, to double the amount of funds going into common stock representing new money would require only a moderate change. This year new money common stock issues are unlikely to exceed $1,000,000,000 to $1,200,000,000. The larger figure is less than 8 percent of personal savings for the year, estimated at around $16,000,000,000 and less than 10 percent of the annual rate in the third quarter. Savings of individuals going into all corporate securities, bonds, preferred stocks, and common stocks are at the rate of less than $2,000,000,000 annually. I submit that these figures and the present rate of earnings retained by American corporations will not support an expanding economy or even the current rate of business investment. The rate of business investment I am told by Washington economists almost without exception is the X quantity in the economic outlook, more specifically in maintaining employment, let alone the absorption of the 700,000 yearly accretion to the net labor force. I am more convinced than ever before-if that is possible-of the imperative need of making a start toward elimination of the unjust double taxation of dividend income and, also, of revising the treatment of capital gains and losses. Capital-gains taxation violates a deep-seated feeling on the part of the taxpayer that there is a fundamental distinction between occasional realized gains and income derived more or less regularly from wages, salaries, or capital assets. As this form of taxation has been part of the tax structure for almost 30 years, entire elimination of capital-gains taxation is too much to expect. Proper changes would help to reduce the degree to which the present tax is an embodiment of the spirit in the phrase "heads I win, tails you lose." I cannot em |