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From Fourth International, Vol.10 No.9, October 1949, pp.265-270.
Transcription & mark-up by Einde O’Callaghan for ETOL.
In the twelve months beginning April 1, 1948, and ending March 31, 1949, the American steel industry poured out more steel from its furnaces than it or any other nation’s industry, in any other year, peace or war, in the history of the world. The first three months of this year, the golden stream of liquid steel weighed up to more tons than any other country produces in a whole year. American plants have increased production constantly, month after month. At present writing, May 1949, they are booming along at 101.5% of rated capacity, with over 8 million tons per month.
Here is a colossus to bestride the world and defy his fate, indeed! The producer for all the world, with his empire over the five continents, the autocrat who brooks no new industry but what pleases him – and no nation’s steel-producing, but what he has a finger in it – truly a colossus with an eye like Mars to threaten and command.
But strangely enough, this colossus is very much concerned about his fate; his eye is flashing signals of distress instead of threats, and he commands in a quavering voice – at least when trying to command the economic process. “A 6½% decline in sales value” wails the American Iron and Steel Institute, “would have wiped out the entire amount of 1947 earnings in the steel industry.”
They are speaking here of a price decline, something that was extremely unlikely in 1947, considering the shortage of steel – and they are justifying the price hikes. But one may detect a note of alarm about the future, when steel will be more plentiful, and even the most solemn price-fixing agreements will not wholly resist buyers’ pressure, and prices will fall.
The industry chiseled out a smooth $450 million in profits last year, which is about the same take as in 1929. But, they lament, this was on a $7 billion volume of business, whereas total business in 1929 was only $3 billion! And moreover, the replacement value of their capital is far higher rfow than in 1929, so the net percentage return is actually a great deal less. The time, you see, is out of joint.
The industry spokesmen are worried about their rate of profit, complaining about their greatly increased costs – the “unfair” profit advantage of all the other major industries over steel – insisting upon their great patriotism and altruism in enlarging their capacity at exorbitant costs – and crying bitterly about their diminishing returns. And this is not all. Behind their conscious fears, behind their stated problems, behind their relatively lower profits, there lurks a blacker shadow still – the specter of no profits at all. Such a horrible prospect is hardly mentioned, it is true. But all the same Damocles has a sensitive head underneath the sword.
One may read almost any week in Iron Age many lugubrious complaints and even dire predictions on the future state of the industry. But why so in the light of all the above achievements? To answer this question we must first measure more precisely and with more sense of history what steel under capitalism has really achieved and where it really stands.
The American steel industry, with its constant growth of plant facilities, year after year, even in panic, recession and depression, has been cited as one important empirical “proof” that Marx was wrong. If anything gave firm foundation to the “onward and upward” theories of pragmatic America, it was the development of the steel industry. But times have changed, as we will soon show.
Economists of capitalism would never dream of admitting that Marx was right, for instance, about the causes for the declining rate of profit. But the more serious ones, from Ricardo on down, have been somewhat troubled by it. Now at last, even the capitalists themselves have begun to notice it! But since they are concerned more with absolute gains than with relative ones, with hard facts more than with “theory,” it is a rather more sensational aspect of this declining rate that is now confronting them, one that hits them not relatively, but absolutely, threatening not only to decline, but to disappear.
Although the factors which cause depressions do not directly concern us here, a quicker disappearance of profits in a single industry – one effect of depression – in turn becomes a cause for deepening a depression that is once under way. But before we go into this matter as it affects the steel industry, let us first briefly touch on the reasons for the declining rate of profit in general since they are closely related to our subject.
The organic composition of capital is constantly rising. The proportion of capital in machinery, and raw materials, etc. to the capital in labor-power (wages) is ever increasing. This proportion, always changing in the same direction, causes the rate of profit to decrease for the following reason: All new values are produced by labor. The value of any commodity compares with the value of any other commodity in proportion to the total amount of labor (socially necessary labor) worked-up in the two products. Labor, and labor alone, adds value to the old values represented by heaps of raw materials, etc., when new products are made with those materials. Moreover, the machines and tools the laborer uses, as soon as they come into general use are also in a sense only so much raw material whose yalue the laborer transfers piecemeal to his product as he uses them in the labor process.
As machinery gets more massive, and the number of workers relatively smaller – there is less new value added to the year’s product in proportion to the accumulated values of previous years (raw materials, machinery, etc.).
Without going into all the divisions of this new value, it is obvious that profits (as well as wages) come from this quantity. And as this quantity is smaller and smaller proportionately, from decade to decade, so profits are also. But so long as the absolute amount of profits is increasing, especially for the big corporations – the capitalist is not too worried. And in the past few years the absolute amount of profits has certainly, to put it mildly, increased.
However, steel, with a kind of augury that would befit a much weaker sector of economy, begins to be horribly concerned about its concentration of capital – and to this effect: Its strength to weather a depression is in inverse proportion to its strength to make profits in prosperity; its weakness to resist cutbacks is in direct proportion to its concentration of capital.
What were the steps that led to this situation? And is it possible for the iron-master to be master of his own fate once again? To understand steel’s dilemma a little better than steel itself does, let us rapidly review its history, and while we are doing so, note well the changing rates of its expansion as a whole.
With all their recent postwar expansion they have in reality added only a cubit to their size, whereas they grew from little forge and foundry to giant world industry in the expansion previous to the First World War. From 1860 to 1900 thte roaring infant industry multiplied yearly production literally a thousandfold – it cut not a few throats in the process – established hundreds of records, surpassed England’s production (per worker) way back in the eighties, went from hand labor to machine labor on an undreamed of scale and crowned it all by presenting to the world of high society more than a thousand brand new, first class, eighteen karat millionaires.
The puddling process was entirely replaced by the Bessemer and Open Hearth furnaces in this period. Machines were perfected to dump whole carloads of coal, limestone and ore at a time into ten thousand ton capacity boats. By the turn of the century a single blast furnace could produce 600 tons of iron a day, whereas in 1874 Carnegie’s “Lucy” furnace broke the world’s record with one hundred tons, and the whole crew “got gloriously drunk on free beer and whiskey.”
The fabulous Mesabi Iron Mines were discovered, and the Merritt boys were swindled and double-crossed, together with many another northwest explorer. The Carnegie empire was built, and the Klomans (his partners) pushed out of business. The puddlers union was formed, took over Pittsburgh once, then disappeared with the craft of puddling itself.
Henry Clay Frick hired hundreds of thugs called Pinkertons to shoot his employees at Homestead, while philanthropist Carnegie, his boss, hid out in a Scotch castle between giving away libraries. Captain Billy Jones fired his whole, furnace crew one day and took them all to the ball park the next. He made more inventions for Carnegie than anybody else, but didn’t believe in buying stock in the damn company. The nearest undertaker to the mill gate used to get the business as the poor corpses came out every day and often twice a day. The men worked 13 hours nights and 11 hours days, with a day off every two weeks. But Carnegie got rich as sin.
“Rich as a Pittsgburgh millionaire,” the phrase went. The Pittsburgh boys bought huge mansions, hired heraldry experts to give them a family tree, while they bought ivory tooth-picks and decorated their lawns with gold-plated statues – thus far the good old American story.
The new era began to dawn when “Honest Andy,” the poor messenger boy, sold out to J. Pierpont Morgan, the Wall Street banker, for 675 million American dollars. The US Steel Company was formed, and it bought up dozens of other companies too. When the dust had settled down somewhat in 1901 it was revealed that more than half of the iron mines and iron and steel making facilities in the United States were held by this aptly named corporation of the bankers: “The United States Steel Co.”
New and still bigger fortunes were made. But now monopoly began to assert itself, and the industry grew at a slower pace. No basic changes in steel making or iron making were encouraged after 1900. Certainly none came to light. With all the new inventions from 1860 to 1900, production was multiplied by 10 on an average of every fifteen years. But if anything had been used in 1900 that was anywhere nearly as revolutionary as the Bessemer process in the sixties, today there would be billions of tons of steel produced per year – and the whole face of civilization would be radically different. But then a billion dollar investment would have been junked in 1900 – and therein lies the tale.
True, the mad pace of increasing production – and capacity, with the inescapable addition of the machine – continued after 1900 to World War I, apparently unabated. And up to that time steel stocks were still a big thing on the market, but the rate of increase had already slowed up – even then. True again, the mass, the absolute increase, was so tremendous – 12 million tons produced in 1900, 50 million in 1918 – that one might forgive a little thing like a diminishing percentage of gain. You can’t maintain a geometrical progression to infinity. After all, a human being doesn’t keep on growing when he is grown up! Yes, but that is just the point, the steel industry had grown up. And now it has grown old. It reacts to every chill wind with a fit of ague, to every tremor with a shock.
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EXPANSION OF STEEL MAKING CAPACITY |
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1898 |
1908 |
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1908 |
1918 |
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1919 |
1929 |
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1929 |
1939 |
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1939 |
1949 |
The above table presents a fifty-year record of the growth of steel capacity. We use the figures showing capacity here, rather than those showing actual production (which is nearly always less than capacity) for two reasons. First, because they show the real additions of constant capital – in the form of steel-making equipment – and second because they are a sounder index to the growth of the industry than production figures.
Similar figures for periods previous to 1900 would show gains closer to 1,000 percent, with the total gain of 1900 over 1860, in the neighborhood of 100,000 percent! But the period shown tells its own story. Note the declining rate of expansion over the long pull.
It is significant that the 16% increase of 1929 over 1919 expresses an advance over a postwar high and after a previous period of tremendous growth. The 16% increase of 1949 over 1939, however, came after a crippling depression and with the aid of war expansion – providing war machines for other countries, etc. So in reality, it was a poorer showing than the 1919-29 period. (The first four years after World War I the industry expanded both relatively and absolutely far more than it has done in the last four years.)
Even more striking than the declining rate are the declining absolute amounts of increase. In the early 1900s – the “slow” years of “provincialism” – the absolute increase in capacity was 22 million tons. In the just completed decade, all the demands of total war and a world presumably at their feet, only squeezed out 13 million additional tons of capacity from the wary steel capitalists.
The only contradiction in the table is the surprising rate of increasing, capacity in 1929-39. But it may be recalled that this was a period of rationalization in the steel industry – particularly in the rolling mills – and the building of new furnaces with quarter-an-hour labor, many of which did not get into operation until World War II started. This contradiction in the table is an inherent one which answers to its own laws, as we shall later see.
But for the moment let us measure the forces against expansion. Consider the extreme conservatism in the matter of plant expansion, about the now much-debated subject ol “steel capacity.” How long is it now, how many decades since new steel plants have been built (if we count out the plants and plant additions built by the government during the war)? Carnegie, and later Morgan, would float a stock or bond issue in the twinkling of an eye to build another plant, even if demand only half warranted it. Where are these courageous, if piratical souls now? Where is the “onward and upward” philosophy of the good old “American Way”? Where the initiative, where the “enterprise”?
Industry has been crying for steel for three years – paying premium prices to brokers, making all kinds of “conversion” deals,, using expensive alloys for substitutes – and demanding that the steel industry enlarge.
Not only Philip Murray and Walter Reuther but a whole host of government economists and big shots up to Truman himself have been calling for enlarged steel plant capacity. They insisted that there was a bonanza of profits in it for the steel industry. The steel industry itself thought differently.
Assistant Secretary of Interior, C.G. Davidson, said last December that while the steel industry was planning to expand by about three million tons capacity in the next three years, continuing excess demand argued that that figure should be tripled. The steel industry opposed this estimate.
In June 1947, Dr. Louis Bean, assistant to the Secretary of Agriculture, predicted unemployment if a good deal more than 100 million tons of steel were not produced in 1950 (present US capacity is about 95 million). His opinion was influenced by the fact that auto plants, especially, were compelled to shut down from time to time because of a shortage of steel. More steel would assure prosperity, thus also Walter Reuther. And the steel industry argued against this, too.
Today, in 1949, we see the spectacle of five million unemployed, not because of a shortage pf basic steel, but because of an abundance of steel products and the products made with steel machines. So the steel industry was right! The steel industry fought the Reuthers, the Beans and Trumans because they knew that capitalism had not changed its spots; that shortage is followed by surplus, and prosperity by depression – and most of all that increased capacity is a terrible burden to the steel corporations.
They may not know that they live in the declining period of capitalism. They may not understand or believe the labor theory of value and the declining rate of profit. They may never have heard of the claims of dead labor on living labor. But they do know that a 12 million ton production in the year 1900 brought them a handsome profit. And 15 million tons in 1932 was so small compared to the overhead expenses of that time that they lost 183 million dollars!
The steel business has already declined considerably this year. The grey market, needless to say, has disappeared. Finished steel is easily bought at $80 a ton instead of $180. Railroad car builders have decreased orders by 90% (while ironically enough, steel ships more and more by truck to save money). Stainless steel and other alloy sales have declined even faster. There is apparently still a shortage at the present time (May 1949) but it is swiftly turning into its opposite. The steel barons may not be dialecticians, but they do understand that a pound of steel today may not equal a pound of steel tomorrow.
Capacity is a terrible danger to them. Increased capacity demands increasing business. And business can not increase forever. Even if business only stands still, cutbacks in the sale of capital goods must come. And steel is as frightened of a little cut-back as an elephant of a mouse.
This monster colossus of rails and rolls and girders wears its vulnerable spot rather like Cyclops his eye and Achilles his heel – close to the surface. Cut off only the outer skin of prosperity, and the body is fatally wounded.
The increased steel capacity, that is, the increased facilities and machinery, is the source of this weakness. Aid to tremendous profits when sales are booming – cause of terrible losses when sales lag. And that is why the industry fought the “economists” so hard against the building of new plants, or the government “going into the steel industry.”
The steel executives express their concern over their constantly mounting investment in constant capital, particularly the “fixed costs,” which” causes them to have a constantly higher “break-even” point. Different industries have different “break-even” points. For the steel industry this point is very high. The break-even point is an amount of production below which the company begins to lose money. Theoretically, where no machinery or other constant capital to speak of is involved, the break-even point would be zero.
If you were a newsboy with a hundred customers for papers, on which you made one cent a piece, you would make one dollar per day. If you lost fifty customers, you would reduce your order for newspapers accordingly, and then make fifty cents per day. Thus a fifty percent loss in business would mean a fifty percent loss in profits – but no loss beyond that.
If you bought a truck and with it you could deliver 1,000 papers a day, and make ten dollars, the situation would be different, however. Say the cost of owning and operating the truck is four dollars per day; your actual net would be six dollars. So if you lost half your customers, your running expenses would then still be around four dollars and your net only one dollar. Thus a 50% loss in business would mean an 831/3% loss in profits.
While this example is stretched somewhat as far as trucks and newsboys are concerned, it is mild indeed compared to the plight of a steel company. Unlike the lucky newsboy, the unfortunate steel barons cannot cut their orders since they own the source of supply anyway, and unlike the truck owner, they cannot sell their machine if things get too difficult.
Most machinery for steel plants is so massive that it is built right on the company property by the various contractors who specialize in one type of machine or another. An ore bridge crane for example – which now costs over a million to build – stands 50 to 90 feet high and may be 250 feet long, like a monster on stilts with roller skates on the bottom. It is operated by one man.
A blast furnace is a behemoth that can never be moved unless it explodes. It costs over $12 million to build, is operated by five or six men and must remain in full operation for some years to pay for itself.
To run a steel plant at all this machinery must be used. Railroad engines, for example, must pull the ladles full of liquid iron and the car loads of steel ingots whether there is less iron or more iron to be pulled. You cannot junk the hundred miles of track within the plant and dozens of locomotives, and go back to the use of mules or men for such jobs.
Iron ore, while only seven dollars a ton, must be brought to the plant in 10,000 ton lots or more, to keep it at that price. The modern steel company runs its own iron mines as well as its own coal mines and limestones quarries. It pays seven dollars a ton for the ore whether it gets the ore or not.
A whole fleet of lake and, ocean ships is kept by each of the largest steel companies in order to keep the expense of transportation down. Even the lake ships are bigger than many ordinary ocean-going vessels, and carry 10 to 20 thousand tons of ore.
The ore and other stock i,s unloaded by million-dollar machines, then transferred from the stock pile by other million-dollar machines (the ore-bridge cranes) to still other machines which in turn drop the stock into the furnace top 120 feet above the’ground. Machines are so tremendous – and so numerous, in relation to men – that about 25 percent of the whole labor force are maintenance men of one kind or another. A drop in production cannot be followed by a corresponding drop in the employment of maintenance men. The idle wheel, like the squeaky one, must get the grease.
Here it is not a question of realizing surplus value, but of realizing in the sale of steel the amount of values that will be eaten up in a year’s time, by rust, corrosion and decay. The break-even point, so-called, is the point above which living labor begins to get the better of dead labor under the capitalist system, and below which dead labor exacts a toll from capitalist as well as laborer.
While the laborer is adding new value to the mountain of already existing values before him – and creating profits – he is also performing another service which went quite unnoticed, in the past and of course, unrewarded. He not only makes steel, thus adding value to the iron ore, limestone, etc., he also preserves the value of these raw materials by so transforming them into desirable products. Of what use to anyone is a blast furnace standing in an idle plant?
While productive labor is changing the means of production into constituent elements of a new product, their value undergoes a metempsychosis. It deserts the consumed body, to occupy the newly created one. But this transmigration takes place, as it were, behind the back of the laborer. He is unable to add new labor, to create new value, without at the same time preserving old values ... The property therefore, which labor-power in action, living labor, possesses of preserving value, at the same time that it adds it, is a gift of nature which costs the laborer nothing, but which is very advantageous to the capitalist inasmuch as it preserves the existing value of his capital. So long as trade is good, the capitalist is too much absorbed in money-grubbing to take notice of this gratuitous gift of labor. A violent interruption of the labor process by a crisis, makes him sensitively aware of it. (Capital, by Karl Marx, Vol.I, Chapter 8, p.230)
Since Marx penned these words the “gratuitous gift of labor” has been growing bigger and bigger, especially in the steel industry. So big in fact, that it dwarfs by far the other, though more important, “gift” of surplus value exacted by the steel capitalist.
The only correction we must make in the above quotation is that though “trade is good” as of now, the steel companies are not too absorbed in money-grubbing – much as they love it – to escape bad dreams about the day when they will be denied this gratuitous gift of labor and the “existing value of their capital” will not lie in treasure chests as with the old fashioned pirates, but rather, in the huge hulks of empty plants and mountainous piles of useless stock.
They estimated their “break-even point” in 1939 at 50%. Benjamin Fairless, testifying before the War Labor Board in 1944 said it had by that time risen to 70%. Now it is still higher. Steel capacity in 1939 was about 80 million tons. In order to pay for all the materials, machinery and labor necessary for a year’s operations on any reasonable scale at all, the industry had to sell 40 million tons.
In 1949, the “break-even point” is estimated at between 70% and 75% (with capacity at about 95 million tons). From this it may be seen that while business could have limped along in 1939 on a production of 40 million tons, today more than 65 million tons must be produced and sold each year to break even.
”Oh,” how the steel kings must yearn, like Richard II to “call back yesterday!” Yesterday, the era of Pittsburgh mansions and diamond tooth-picks – and it was all built on a production of only 12 million tons a year! What a hard world for kings! Today it takes 65 million tons to buy one single gold cuspidor. And when they “talk of graves and epitaphs,” they must remember one mournful stone that bears the date 1932 and the figure: 15 million tons.
(A second installment of this study will appear in the October Fourth International.)
The above article is an attempt to explain some of the long-range aspects of the profit picture in the steel industry. Since it was written (May 1949) the question of recent and present profits, together with the general financial position of the industry, has been dramatized in the negotiations between the companies and the United Steelworkers, CIO. In the course of the negotiations, Robert Nathan’s report on the Economic Position of the Steel Industry was published.
The report is a statistical bombshell which relentlessly exposes the hidden profits and super-profits of the war and postwar years. It proves beyond the shadow of a doubt that the big steel companies increased their prices far more than higher labor costs warranted, and that they could easily have paid much higher wages in the recent period than they did.
However the report is weakest in its prediction of future trends. And necessarily so. All future possibilities are drawn from June 1949 conditions and prices or from proportional variations of that index. But June 1949 is an extremely unreliable point of departure, prices having been very unbalanced and steel itself just emerging into a “so-called “stable” market. It is on this inevitable weakness that the companies will of course concentrate in their rebuttal, which will probably continue in magazines and trade papers long after the present steel Fact Finding Board has adjourned.
What concerns us particularly, from a theoretical point of view, is this: Nathan says that the real rate of profit in steel has been going up steadily for more than ten years and also that the so-called “break-even” point is closer to 33% than the 66% claimed by the industry. We appear to be at variance with him. But we are not actually so far apart. It is only that we are approaching the facts in a different way.
While these two claims are undoubtedly true in a strictly limited sense, it would be wrong to draw any theoretical conclusions from them – nor does Nathan do so. This year, especially, the steel industry made bonanza profits, dwarfing even the jackpots of ’47 and ’48. As Nathan points out, a great part of the rise this year was due to the precipitate fall in the prices of raw materials while steel itself held firm. Moreover, during the last few years including the war years, as Nathan also discloses,, the industry got all kinds of special government favors, kickbacks, etc., wrote off excessive amounts for depreciation, bought government-built facilities for a song, and all in all had a far higher profit than they let the world know.
This is an excellent answer to the “prevaricators and hypocrites” who have robbed the workers of billions and are now pleading poverty to the modest request of employes who ask only a pittance to die on. But skulduggery and outright robbery on the corporations’ part does not really alter the basic trends of the capitalist system, nor, for that matter, of their own industry.
Nathan points, for example, to US Steel’s acquisition of the government-built Geneva plant for $40 million. It cost the government $200 million. A profit of $160 million was made on the deal – a profit which can be shown or concealed in the books in a dozen different ways. But it is still a constant capital of $200 million, having a certain relationship to variable capital, or money spent for wages of men to operate the plant. And this relationship will still be more or less the same as the relationship in other plants acquired by less spectacular and more “accepted” methods of thievery.
Let us say that this plant had been acquired in the same way (for $40 million) by a private individual such as Henry Kaiser. Suppose he sold the plant to someone else for its full value – or suppose he sold $160 million worth of stock to several other people – thus taking his “profit.” In either case the new capitalists would look for the return on the $200 million, not the $40 million. And if they could get 2% bank interest, i.e., $4 million, it would be cold comfort to tell them that the plant is netting $4 million which is really 10% of $40 million!
Nevertheless, it is of course true that steel profits have been going up, even apart from “gifts” and other hidden items, if only because of the steel shortage and the extremely high production rate. However, the “declining rate of profit” does not refer to a year-by-year subtraction, but to a tendency. And we indicate this tendency over the long-term period only to come to our main point which is the constantly increasing concentration of capital and its effect on the “break-even” point.
There has never been any great controversy over this percentage figure, and we have taken the industry’s figures which have been public for some time. Nathan, in his very conscientious report, states that he thinks the corporations’ own figures were correct for the pre-war period, but now believes that the “break-even” point ‘has gone down instead of up.
Due to the recent drop in raw materials prices and to many other factors, such as the war “extras” mentioned above, a good case can be made for the 33% figure. But again, only with limitations. Nathan rightly ridicules the companies’ phony claims for depreciation allowances during the war. Nevertheless actual depreciation is beginning to play a larger and larger role than ever before. And if you go on the theory that the industry must struggle through many years of peace, their war-time fatness counts for less and less.
The corporations themselves have naturally disregarded their war-time peccadillos in figuring their “break-even” point. They are interested in the “long pull” considerations and are more concerned with theoretical aspects of the matter. This touching devotion to theory on their part is of course closely related to their affection for profits. (The Bureau of Internal Revenue might well take Nathan’s tip and clip them for another big chunk of tax money.) But it must be recognized that if the Nathan figure for the “break-even” point were correct in any long-term or general sense, the larger companies would not have hesitated to build great new plants in the post war years in order to get the gravy profits from the steel shortage – and without fear of cut-backs causing any actual loss.
At any rate, the foregoing article, analyzing the steel industry’s vulnerability from its own figures over the past few years, attempts to give some background for coming struggles. Today the magnates resist wage increases, because for the first time in years, the increases must come out of profits, directly, however big those profits may be. They cannot be passed on to the consumers so easily in the form of price increases. But tomorrow, the steel companies (if labor has not already begun its own great offensive) must initiate a life and death struggle with the unions for the reasons set forth in the article.
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