Herbert Hoover to Furnifold McLendel Simmons

Identifier

WWP19457

Description

Liberty loans

Source

Hoover-Wilson Correspondence, Hoover Institution, Hoover Institution Archives, Stanford, California

Publisher

Woodrow Wilson Presidential Library & Museum

Language

English

Text

My dear Senator

I have before me your kind letter asking that I should, before leaving, give to you, for your consideration in connection with impending tax legislation, such views as I have been able to formulate in our experience upon the questions of profiteering. Because of the considerable emotion often introduced into these discussions, it seems to me that it is worth while to distinguish between the moral and economic phases. On the moral side the nation is endeavouring to draw a distinction between a profit commensurate with the effort or capital employed and stimulative to enterprise and production, and the profit that is abnormally large due to war conditions. The latter, I take it, is what is meant by profiteering. Too often, they are confused in discussion. Extra profits out of war are hateful. That any man taking a profit in greater measure because the goods he produces are needed for war or beacause of the scarcity created by war, is abhorrent to all decent people and rightly so, when the youth of the nation are being called upon to sacrifice all that they have. I do not think it will be edenied that our whole production and distribution system is based on earning of profits, and that it is a primary thing to say that the distribution system has got to proceed on this basis and that, therefore normal profits are not immoral.

The Government is, through many departments, endeavouring to reduce profiteering through regulation and trade agreements and with a great measure of success. There are, however, certain economic necessities which must dominate war regulation of industry and which, in themselves, cannot entirely eliminate profiteering and which, in my view, can only be accomplished if reinforced by taxation. on war profits.

In the face of shortage – and we are short of most commodities today – the maximum production of that commodity is positively essential. In Government regulation, to safeguard production, all profits or prices must be based either directly through price ofr indirectly through profits, on the stimulation of production. The consequence is that it is necessary to set these standards sufficiently hghigh to maintain and stimulate a certain level of high-cost producers. There is, however, a point in profits or price where the increase in production is not commensurate and restraint is needed lest price ascend to a height where the people of the more limited means can no longer buy. This is conservation for the rich and not for the poor. On the other hand, neither the cost nor the profits in any two units of production will be the same, and while the high-cost producers may be limited to low margins the low-cost producers under these conditions will make profiteering profits. While I am convinced that regulation of the types in practice by many executive departments are fundamentally essential to prevent runaway markets and vicious speculation, I can see no remedy for the intermediate situations below such regulations, except a graduated excess profits tax that will restore that excess of profits made from public necessity back to the public. It is my belief from an intimate contact with many industries, that such a course of enlarged taxation will be patriotically supported by them. A good case in point is sugar. If sugar were unrestrained by agreements, the price would, in the face of this world shortage, go to twenty cents per pound, as it has in countries where no restraint exists. As the American people consume eight billion pounds such a rise in price would cost the consumers $800,000,000. The great majority of producers, manufacturers and the public agree that restraint is essential. In considering the costs of production we find that a certain level is necessary to protect the high-cost producers. Yet at this level a minority of the beet factories, will be earning profits of from 40% to 100% upon their investment. This minority creates the impression of profiteering. Their profits are inordinate. While the public can receive its major protection through the measures taken, the correction of this minority profiteering can only be remedied by stronger taxation. of war profits.

There is an additional phase of the limitation of profits by regulation where such regulation needs co-ordination with taxation. If a regulation of profits or price is placed at so low a level as to restrain the profits of the low-cost producer to a normal profit, it will not only cut off high-cost producers and increase the shortage, but sometimes gives to the low-cost producer the entire field and means the crowding out of many business concerns. In many industries it means bigger businesses will survive and the smaller businesses will be extinguished. This is typically the case in the meat-packing industry. The five large concerns together kill about 40% ovf the animals of the country. They will this year produce about 7,000,000,000 pounds of meat products. They are so regulated as to profits on animal business (in fact on all business except foreign holdings and non-food business) that their earnings could not exceed one cent per pound of meat products produced. Yet if they earned this amount they would earn $70,000,000 per annum. I am sure the packers themselves will agree upon their pre-war experience that this would be an inordinate profit. On the other hand, a further drastic lowering of profits would, in some branches of the business vcovered by the packers, drive struggling competition from the field.

There is one feature in all regulation of profits – in food trades particularly – that is sometimes overlooked. These trades are nearly all seasonal and they are in the vast majority dealing with prerishable products. By taking a few months during the season of prime operations, their profits may appear large, but they must face largely reduced profits or even losses over the balance of the year. This is particularly true in the grain and vegetable handling, and in cereal-milling trades. Regulated margins, while placed at levels preventitive of extortion, must still be high enough to cover risks and inequalities in earnings and the excess profits of the more fortunate operators can only be further equalized by strong taxation. of war profits.

There is still another feature of this work that needs emphasis. In the administration of regulaotory measures or the formulation of trade agreements affecting profits and prices to the public and to the Government, all officials are under great pressure to keep margins at a very low ebb. The tendency is to be too narrow in such negotiations and to endanger production. Furthermore, in an effort to prevent profiteering and secure the best terms these arrangements are elaborated to cover all sorts of conditions and the economic re-actions from this paternalism are often bad. If there were a strong excess profits tax, on war profits all these measures could be formulated with a broader hand and a real reduction of Government interference.

As to the food trades generally, I am convinced that the unreasonable profits, since regulations as to reasonable margins on various commodity operations were established, have greatly diminished. A scientifically worked out index shows in the margin between the prices received by the producer and those received by wholesalers for the prepared foods, a reduction of approximately 30% during the past year.

It is always possible that either certain favourably situated and managed concerns will make undue profits or that unpatriotic men will violate regulations or agreements. The latter can, and will, be reached in the food trades when a sufficient period to permit of action based on njust procedure has been covered. The abnormal profits out of war conditions of the favourably situated producer can only be reached by taxation, unless, by regulation, we take the rrisk of curtailing production and the demoralization of the economic conditions of the country. Furthermore, if such increased taxation were imposed, it would emnable regulation to be carried out with a more liberal hand and less friction.

In summary, my view is that broad regulatory restraints now in force are essential in commodity handling in the face of shortages. I am equally convinced that a large percentage of extra normal profits earned out of war conditions, whether by more fortunately situated members of regulated trades or otherwise, should be appropriated to the public treasury through taxation.

Yours faithfully,
[Hoover]

Original Format

Letter

Files

http://resources.presidentwilson.org/wp-content/uploads/2018/10/D09459B.pdf

Citation

Hoover, Herbert, 1874-1964, “Herbert Hoover to Furnifold McLendel Simmons,” 1918 July 8, WWP19457, Hoover Institute at Stanford University Collection, Woodrow Wilson Presidential Library & Museum, Staunton, Virginia.

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