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"PROFITEERING. - The word " Profiteering " was introduced in 1919 into an Act of Parliament, and thus may be said to have obtained official recognition as part of the English language. It had become current colloquially quite early in the World War. The following implicit definition was given by Sir Auckland Geddes (as president of the Board of Trade) in Parliament on the second reading of the Profiteering bill (1919): - " To profiteer is to make an unreasonably large profit, all the circumstances of the case being considered, by the sale to one's fellowcitizens of an article which is one or one of a kind in common use by the public, or is material, machinery, or accessories used in the production thereof." 1 As an urgent social and economic prob 'Hansard, vol. 119, No. 114, Col. 545, Aug. I 1 1919.
lem the conception of " profiteering " was a new one as well as the name attached to it, since the possibility of unreasonably high profits being reaped on a large scale to the public detriment from the sale of articles in common use was a direct outcome of the conditions of disorganized trade and world-shortage of commodities which resulted from the World War. It is clear that under normal economic conditions high profits do not necessarily involve high prices, but may even be obtained as a result of greater efficiency of organization or production. It is probably true to say that before the war, as a rule, a free market and plentiful supplies afforded, in the case of most commodities in general use, an effective safeguard against excessive profits based on excessive prices.
It was no doubt partly with this consideration in view that (to meet the demand for a clearer definition of the offence) a provision was inserted in the bill in Committee, laying down that a rate of profit not exceeding the pre-war rate should not be deemed " unreasonable." It is with profiteering in this technical sense that this article deals, and not with the wider economic problems affecting profits as such.
The Profiteering Act, 1919, was thus a temporary measure designed by the British Government to meet peculiar circumstances. It was a measure " to check profiteering," and accordingly was framed to avoid, so far as possible, any interference with legitimate commercial enterprise. The great difficulty presented by legislation of this kind is to design an instrument of such accuracy, and to use it with such precision, that it shall deal effectively with the evil against which it is directed, without hitting the sensitive organism of trade and industry, the recovery of which was in itself an essential factor in the removal of those conditions of shortage and high prices of which profiteering was to a large extent a symptom. How far the Profiteering Acts succeeded in solving this difficulty is a matter of opinion, but this was the problem they had to deal with.
The main powers conferred upon the Board of Trade by the Profiteering Act, 1919, may be summarized as follows: (a) to investigate prices, costs and profits at all stages; (b) to receive and investigate complaints regarding the making of excessive profits on the sale of any article to which the Act was applied by the Board of Trade, and after giving the parties an opportunity of being heard either to dismiss the complaint or to declare the reasonable price for such articles, and to order the seller to refund to the buyer any amount paid in excess of such reasonable price. The Board also had power, where it appeared to them that the circumstances so required, to take proceedings against the seller in a Court of Summary Jurisdiction; (c) to obtain from all sources information as to the nature, extent and development of trusts, and similar combinations.' The Act was applied by the Board of Trade by a series of orders to practically every article of ordinary everyday use, including all articles of wearing apparel, household utensils and requisites, articles for mending and knitting, furniture, building materials, drugs and medicinal preparations, medical and surgical appliances and dressings, mineral waters, all articles used for fuel and lighting, tools, weights, measures, weighing and measuring instruments, motor spirit, stationery, and, in agreement with the Ministry of Food, to practically all articles of food the price of which was not otherwise controlled, including milk, bread, fish, tea, coffee, cacao, margarine and meat. Further, in accordance with extended powers given by Section 2 (2) of the Profiteering (Amendment) Act, 1920, the following processes were by order brought within the operation of the Acts: the repairing, altering or washing of articles of wearing 1 Powers were also conferred on the Board of Trade by the Principal Act to fix maximum prices, and to authorize local authorities under suitable conditions to buy and sell any article or class of articles to which the Act was applied. These powers were only intended to be held in reserve for use in an emergency. Neither power was ever exercised, with the single exception of the temporary fixing of the price of motor spirit during the railway strike in the autumn of 1919. Further provisions were embodied in the Act (or added by the Amendment Act of 1920) giving the Board compulsory power of obtaining information, providing proper safeguards for confidential information and for secret processes, providing against victimization of complainants by sellers refusing to sell, excluding from the scope of the Acts sales for export or sales by public auction or competitive tender, and laying down maximum penalties by way of fine or imprisonment for persons offending against the Acts.
apparel and household linen, etc., the repairing, altering or cleaning of clocks and watches, and the repairing or altering of boots, shoes and umbrellas.
For administrative purposes the Act empowered the Board of Trade to establish or authorize local authorities to establish local or other committees to which the Board might delegate any or all of their powers under the Act (except the power to fix maximum prices). The work fell naturally into two broad sections, viz.: (1) the larger transactions of wholesalers or manufacturers which raise wide questions affecting whole trades or industries, and (2) retail trade, which is much more affected by local conditions. To deal with (I) the Board of Trade set up a Central Committee, with its headquarters in London; to deal with (2) the Board invited local authorities throughout the country to appoint local profiteering committees. Local Committees and Appeal Tribunals. - Over 1,800 local committees were established in the United Kingdom, and the vast majority continued in existence until the expiration of the Profiteering Acts in May 1921. Their constitution, powers and procedure were defined by regulations made by the Board of Trade, who delegated to the local committees the bulk of their powers under the Act in relation to retail sales. The regulations provided among other things that labour, women, and the retail trade should be adequately represented on local committees; that complaints should, except in special cases, be heard in public; that any member who happened to be a trade competitor of the respondent or otherwise personally interested should be disqualified from adjudicating; that a complaint should be lodged in writing within four days of the sale, and a copy forwarded to the respondent within seven days of its receipt; that a preliminary investigation should first take place, after which if a prima facie cause of complaint had been disclosed at least three days' notice should be given to the parties of the date fixed for hearing the complaint; and that both complainant and respondent should always be given an opportunity of being heard. The object of the preliminary investigation was to weed out frivolous complaints. The rule was laid down that it should invariably be held in camera and that the names of the parties to any complaint should not be made public until such time as the complaint was heard in public. The Board of Trade also appointed 108 appeal tribunals, to which the seller had a right of appeal against the decision of a local committee. The total number of complaints investigated by local committees during the operation of the Acts (Aug. 1919 to May 1921) was over 4,700; of these some 73% were dismissed. Only 173 appeals were made, of which roughly two out of every five were dismissed. Only 202 prosecutions by local committees were reported to the Board of Trade; in these fines were imposed to the amount of some £ 1,786, and costs ordered against the seller to the amount of £455. Within the limits laid down by the regulations local committees had full freedom of action and were in no sense controlled by the Department. The Department, however, both by correspondence and through a small staff of six or seven travelling inspectors, kept in close touch with the committees' work, and helped them wherever possible with advice and information. Apart from the work arising out of actual complaints, the local committees had the power to hold general investigations into prices, costs and profit at the retail stage, but comparatively few committees undertook such investigations. The report of the county of London appeal tribunal, which dealt with a much larger number of cases than any other appeal tribunal, has been published as a Parliamentary paper.
This body, about 150 in number, was widely representative, including among its members manufacturers, traders, consumers, trade-union representatives, economists, representatives of the cooperative movement, etc. Mr. McCurdy, its first chairman, was succeeded after about 10 months by Mr. John Murray, M.P. The Board of Trade made regulations laying down the constitution, powers and procedure of the Central Committee, to which the Board delegated the power (a) to investigate prices, costs and profit at all stages; (b) to investigate, consider and determine complaints regarding unreasonable charges arising out of the wholesale sale of any articles to which the Act was applied; and (c) to obtain information regarding trusts and trade combinations.
The Central Committee rarely met as a committee. Its functions were rather those of a panel, and the work was performed by three standing committees: the Investigation of Prices Committee, the Complaints Committee, and the Standing Committee on Trusts. Every member of the Central Committee was appointed on one at least of these standing committees, which in turn appointed from time to time small sub-committees. These sub-committees, through which the bulk of the work was done, were composed of members of the Central Committee with the addition often of outside persons appointed (in practice at the suggestion of the sub-committee or standing committee concerned) by the Board of Trade.
The Investigation of Prices Committee undertook the investigations into the cost of production of various articles in all stages of their manufacture where they considered it desirable to obtain such information for the benefit of the public or of the Board of Trade. The reports on these investigations were published from time to time as Parliamentary papers: they cover the following subjects: agricultural implements and machinery, aspirin, biscuits, boot and shoe repairs, brushes and brooms, clogs, costings in Government department, furniture, gas apparatus, matches, metal bedsteads, motor fuel, pottery, standard boot and shoe scheme, tweed cloth, wool and worsted yarns, wool, and the wool-top-making trade.
The Complaints Committee undertook the investigation of specific complaints arising out of transactions or sales other than retail sales. In practice the Complaints Committee became, like the Central Committee itself, a panel, working almost exclusively through sub-committees or tribunals. The procedure was analogous to that of local committees, the complaint being first considered in camera by a sub-committee called the Preliminary Investigation Committee, who, if they were of opinion that the complaint did not give sufficient particulars or did not disclose prima facie grounds for hearing the complaint, had power (after giving the complainant an opportunity of being heard) either to dismiss the complaint forthwith or to require the production of further or better particulars or grounds of complaint within a stated period, failing which the complaint was dismissed. If the Preliminary Investigation Committee were satisfied that a prima facie cause of complaint was disclosed, a tribunal was appointed 1 to hear the case, seven days' notice being given to the parties of the time and place fixed for the hearing. The tribunal had power either to dismiss the case, or (if they were satisfied that an unreasonable profit had been made) to order the seller to repay to the complainant any amount paid by him in excess of the price declared by the tribunal to be reasonable; further, the tribunal might take proceedings against the seller before a court of Summary Jurisdiction. The hearing of all complaints before the tribunal was normally in public, subject to the discretion of the tribunal in particular cases, and the parties could conduct their own cases or be represented by counsel or otherwise. As in the case of local committees, trade competitors or persons otherwise personally interested were disqualified from adjudicating on the tribunal.
The Complaints Committee also investigated specific transactions brought to their notice, even where there was no formal complaint; e.g. cases referred to the Board of Trade by local committees where a complaint against a retailer had been dismissed, but it appeared probable that profiteering had taken place at some earlier stage of distribution or manufacture. The following figures show the number of matters referred to the Complaints Committee and the manner in which they were dealt with: - Complaints lodged or specific transactions referred to the committee, 607; profiteering found to exist, 73; number of prosecutions undertaken, 24; number of convictions obtained before the magistrates, 17; fines imposed, X815; costs ordered, 205.
The Committee on Trusts was charged with the duty of obtaining such information as is specified in Section 3 of the Profiteering Act, 1919, which required the Board of Trade to " obtain from all available sources information as to the nature, extent, and development of trusts, companies, firms, combinations, agreements and arrangements connected with mining, manufactures, trade, commerce, finance, or transport, having for their purpose or effect the regulation of the prices or output of commodities or services produced or rendered in the United Kingdom or imported into the United Kingdom, or the delimitation of markets in respect thereof, or the regulation of transport rates and services, in so far as they tend to the creation of monopolies or to the restraint of trade." This section embodied a recommendation of the departmental committee appointed by the Minister of Reconstruction " in view of the probable extension of trade organizations and combinations, to consider and report what action, if any, may be necessary to safeguard the public interest," which reported in 1919. It is to be noted that the Act gave no power under which any coercion could be exercised on a trade combination except in so far as it brought itself within the penal clauses of the Act by charging unreasonably high prices. Parliament appears to have taken the view that powers of this kind ought to be the subject of further permanent legislation, and that the temporary powers of enquiry and publication given by the Profiteering Act should make it possible by preliminary investigation to get together a body of facts which would be of great value when permanent legislation on the question of trade monopolies was introduced. The numerous reports by sub-committees of the Committee on Trusts constitute in fact such a body of information. They show, on the one hand, that many of the big combinations now existing have been of public benefit; that by economies in working and efficient organization of manufacture, buying, and selling, they have been able to keep prices at a lower level than they must otherwise have attained. On the other hand, instances of abuse of monopoly power have been brought to light, and, in general, many of the reports are in favour of the provision of some kind of statutory power, under which action could be taken if a strong and close organization controlling the whole or nearly the whole of an essential trade or industry adopted a policy contrary to the public interest.
The following is a list of the investigations on which reports by the Committee on Trusts have been published as Parliamentary papers: - dyes and dyestuffs, dyeing, finishing, bleaching and printing, electric cables, electric lamps, explosives, farriery, fish, fixed retail prices, fruit, glassware, iron and steel products, laundry prices, meat, milk, oil and fats, pipes and castings, road transport rates, salt, sewing cotton, soap, tobacco, uniform clothing, vinegar and yeast.
Originally by the Complaints Committee, but under the amended regulations of Aug. 7 1920 by the Chairman of Central Committee.
Reports on the following subjects by sub-committees jointly appointed by the standing committees on Prices and Trusts have also been published: - bricks, cement and mortar, dyeing and cleaning, light castings, stone and clayware, slates and roofing materials, and timber.
The Profiteering Act was to remain in force for six months only. It was, however, continued for a further three months by the Profiteering (Continuance) Act, 1919, and again for a further twelve months (until May 19 1921) by the Profiteering (Amendment) Act, 1920. The Amendment Act was largely concerned with improvements of machinery in points of detail where experience of actual working had disclosed defects. It contained, however, in Section 1 an important new provision, the object of which was to encourage the various trades and industries to take into their own hands the business of checking profiteering.
Section i reads as follows: (i). Where any persons or associations of persons appearing to the Board of Trade to represent a substantial proportion of the persons engaged in the production or distribution of any article or class of articles to which the Profiteering Act, 1919 (hereinafter referred to as `the principal Act'), is applied, submit to the Board of Trade a scheme limiting the profit to be allowed on the manufacture or distribution of the article or class of articles at all or any stages of manufacture or distribution, the Board of Trade may, if they think it expedient, approve the scheme, and, where any such scheme is so approved, any profit sought or obtained in connexion with the sale of any article to which the scheme relates, which does not exceed such profit as is allowed by or under the scheme, shall not be deemed unreasonable for the purposes of section one of the principal Act.
(2). If the Board of Trade are satisfied that any scheme so approved secures an adequate supply to the home market of any articles or classes of articles to which the principal Act is applied, the Board of Trade may by order exempt producers who comply with the scheme from any general investigation under section one, subsection (i) (a) of the principal Act in respect of those articles or classes of articles and any articles of a similar description.
The preliminary work of investigation and negotiation in connexion with schemes submitted under this section was undertaken by the Central Committee, the final approval or disapproval resting, of course, with the Board of Trade. Owing to the unexpectedly rapid fall of markets and alteration in the general trade outlook in the latter part of the year 1920, conditions were not very favourable for profit-limiting schemes. Very few were put forward; of these some were withdrawn or not proceeded with, and only two 2 (relating to men's ready-made and made-to-measure clothing and to the retail sale of coal in the London area) were actually approved by the Board of Trade.
The foregoing is a brief review of the principles on which the Profiteering Acts were based, the machinery by which they were worked, and the nature of the work. The Acts were denounced as harassing the small retail trader while enabling the profiteer on a large scale to escape; but complaints against the harassing nature of the Acts came from all quarters, wholesaler, retailer, and manufacturer alike. Although it is possible that investigations may in rare cases have caused hardship to particular interests, this can hardly be held to outweigh the valuable results in helping to dispel misconceptions and suspicions by publishing facts. The figures already quoted with regard to complaints would indeed seem a sufficient answer to the charge that trade was unduly harassed. On the other hand the deterrent effect of the Acts must not be overlooked. From the point of view of checking profiteering, the mere existence of the penal clauses of the Acts and of the machinery for their enforcement was undoubtedly of great value. As regards the absence of any definite standard of a reasonable rate of profit, the original Profiteering bill was criticized in Parliament on the ground that it gave no clear definition of the offence. This criticism was met to some extent by the proviso that a rate of profit not exceeding the pre-war rate should not be deemed unreasonable; and in the Amendment Act the position was further defined by making it clear that the standard of comparison to be aimed at was the percentage rate of net profit, not gross profit, thus 2 Reports on these by joint sub-committees of the Standing Committees on Prices and Trusts, and also on the working of the standard boot and shoe scheme (which was not technically a scheme under Section 1), have been published as Parliamentary papers.
ensuring that the seller should not benefit unduly by the fact that his oncost or establishment charges showed a smaller increase than did cost of wages and raw materials.
A word may be added with regard to anti-profiteering legislation outside the United Kingdom. The majority of European countries, including Belgium, France, Germany, Italy, Norway, Poland, Portugal, Rumania and Sweden, passed some form of legislation with a view to checking profiteering or speculation in the necessities of life. Legislation with this object was also passed in Australia, Canada, New Zealand, the Union of South Africa, and a number of the smaller British possessions.
A number of foreign countries or British possessions studied through their representatives the working of the Profiteering Acts, 1919 and 1920, and several (as for example Italy, South Africa, Gibraltar and Sierra Leone) availed themselves largely of English experience in framing their anti-profiteering legislation.
(E. R. E.) United States " Profiteering," as the term has been used in the United States, may be roughly defined as consciously taking and retaining profits considerably in excess of the return necessary to equilibrate demand and supply, especially when such profits are the result of prices enhanced by the activity or policy of the recipient. Its meaning has therefore a direct relation to the current conception of a legitimate business " profit " - a point on which public opinion during the World War became peculiarly sensitive. Probably, conscious direct control of industrial processes never reached such development in the United States as during the World War. Prices were fixed and both supply and demand controlled. Income taxes were highly developed. An unusual mass of information concerning cost, production, consumption and stocks was obtained. As a result much became known of the profits made in different industries, and much information concerning them was given out - sometimes with the purpose of exercising a check. In the United States the chief sources of information are the cost reports of the Federal Trade Commission and data compiled from the income-tax returns. If it be remembered that not all that seems excessive is profiteering, it will be of value to recapitulate some of these data.
According to income-tax returns from some 7,000 corporations their net earnings of the pre-war years 1911-3 averaged 11% on invested capital. This corresponds well with the common judgment at that time that from o% to 12% (depending on the risk) was a fair profit in most industries. Unfortunately, returns are not available in published material for these same corporations in 1917, but for 1918 - a year of lower profits - they averaged 15%. The year 1917 was the time of maximum profits. We know that in that year the total net income of 31,500 corporations was well in excess of the total for all corporations in the country in 1913. These corporations made an average net return on investment of approximately 22%, and more than one-half of their net income was reported by those earning 30% or more. (It is to be noted that these figures do not include corporations earning under 15%. Nevertheless, it is probable that all corporations averaged approximately 18%.) These income-tax returns are not conclusive. The padding of investment account and of costs was all too common, and the statistical treatment of the returns is not satisfactory. They do indicate, however, that average profits increased considerably between the pre-war period and 1918. More accurate and illuminating figures concerning particular industries were obtained by the Federal Trade Commission, and a few representative cases will give the best understanding of the situation. A study of the costs of 37 wheat-flour companies showed that the average earned on investment was 12.6% in the fiscal year 1913-4, 17% in 1914-5, 3 8.4% in 1 9 16-7, and 34% in 1917-8. That this increase in profits was not due solely to increase in business is evident from the fact that the percentage earned on sales also increased, the rate being 3.4% in 1913-4 and 6.5% in 1916-7. In 1917 there was apparently no limit to the price purchasers were willing to pay, the condition being one of panic. The large profits of the year were partly due to the enhanced value of unsold stocks and to speculative profits derived from feed. In the next year profits were somewhat abated by Government regulation. The Federal Trade Commission, after noting that the margin of 25 cents per bar. allowed by the Food Administration was larger than the normal profit, said: " The Commission's investigations of costs and profits for recent months indicate that 25 cents a barrel is being taken by many millers as a guaranteed net profit after paying all income and excess profit taxes.. .. " In other words (I) taxes payable on net income were being wrongfully treated as expense, and (2) a maximum margin was being made the minimum. This course involved some fraud and showed concerted action. Depreciation and salary accounts were padded and capital charges were treated as operating expenses.
Twenty-two manufacturers of farm implements made at this time about 85% of the product in the United States. Their profits increased from about 9% on investment in the years just prior to the war to 16.6% in 1917 and 19.9% in 1918; and the rate of profit on sales increased several fold. There was no general shortage of farm implements and no unusual demand, for exports were cut off. The Commission says: " The large increase in the prices and profits of manufacturers in 1917 and 1918 was due in part to price understanding or agreements. .. and, to a more limited extent, the profits of dealers seem to have been due to similar activities." From Senate Document No.248 (65 Cong. 2nd Session) further evidence of profiteering may be gained. It a p pears that oil companies circulated reports that the supply of gasoline was dangerously short, for the purpose of maintaining prices of that commodity while making " enormous " profits on fuel oil. Concerns bottling or canning vegetables, which had made future contracts, sometimes withheld portions of their output from delivery on such contracts and sold in the higher " spot " markets. In frequent cases licences were revoked by the Food Administration. The practice of such concerns in maintaining re-sale prices for jobbers contributed toward maintaining the general high level of prices and increased profits in some instances. According to the same document the steel companies in 1917, prior to Government price-fixing, made abnormal profits, and a number continued to make unusually heavy profits thereafter. The United States Steel Corp., which made 5% before the war, received 25% on investment in 1917; and ro smaller concerns, such as begin their operations with the employment of steel furnaces, made from 30% to 319% on their investments. Certain sulphur companies took advantage of the war demand for sulphur to raise their prices to such an extent as to reap net profits of approximately $15 a ton, which meant over 200% on investment in one case. It further appears that " unnecessarily " large profits were made by the producers of yellow pine lumber in the South. A good margin per 1,000 bd. ft. had been considered to be $3, but in 1917 the average margin was over $4.80; and while the average profit on investment in 1916 was 5.2%, the figure was increased to 17% in 1917. The profits of tanners increased from two to five times, as they took advantage of the enormous demand for leather and exacted very high prices. The price of hides was rapidly advanced, notwithstanding that at the same time " great supplies were withheld from the public." Upon learning of approaching price control, one of the large packers took steps " quietly and promptly " to increase the appraised value of his tanneries.
Other figures indicating the general trend may be given as follows: - *Percentage of net sales.
According to the annual report of the Attorney-General for 1920, since Oct. 1919 sentences had been imposed on 49 sugar dealers and 20 clothing dealers. This was under the anti-profiteering law, referred to below. In addition, six sugar dealers and one flour dealer had been convicted of hoarding, and two coal dealers had been sentenced under the provision as to fixing reasonable prices. In all there had been over 2,000 indictments, arrests and sentences, involving chiefly the commodities just mentioned, together with meats, potatoes, and meals at restaurants. The great majority could not be sustained under the law.
Without further evidence it may be concluded that profits in many industries increased in the earlier part of the war more than l00% above the pre-war level, and that this increase was in not a few cases due in part to profiteering as above defined. High prices do not necessarily indicate excessive profits, but there is reason to believe that profiteering was common in cement, petroleum, lumber (notably ship timber), wool, clothing, sulphur, naval stores, rice, sugar, sand and gravel, raisins and other products, in addition to those already mentioned. In most of these cases the Government reduced prices and profits through some form of control. Anyone who had experience at Washington during the war knows that many persons went there for the purpose of furthering profiteering schemes. In some cases the method was to secure contracts at excessive prices, perhaps by bribery, certainly by misrepresentation. Many such cases later came to light, some concerning articles of clothing for the army and involving collusion with army officers. In other cases the method was to induce the Government to abstain from fixing a reasonable price or to induce it to fix a high price. Thus, in the United States, oil companies succeeded in virtually preventing any price-fixing on the ground that the exorbitant prices that prevailed were necessary to stimulate production; while lumber, copper and cement associations by concerted and persistent activity obtained prices that were unnecessarily high. In still other cases every effort had been made to defraud the Government in respect of excess profits taxes, to enable a business to " retain " profits larger than lawful. Equally reprehensible was the action of hosts of retail dealers, such as those selling shoes and men's clothing, who maintained the same percentages of profits on sales although the great increase in prices meant greatly increased absolute margins and percentages on investments.
The U.S. Government attempted to deal with profiteering in three ways: (i) taxation; (2) price-fixing; (3) direct action under the Food Control Act. The first and the last methods proved largely ineffective.
By special taxes levied on profits, many thought that the spoils of the profiteers could be regained by the public. In 1916 a tax of 122% was levied on the profits of munitions manufacturers; and a general " war profits tax " and an " excess profits tax " were imposed in 1917. In 1918 these taxes were combined. Under this measure profits of corporations organized for profits were liable either to (1) a progressive tax on profits in excess of 8% on capital; or to (2) a flat tax of 80% of net income over the average profits for the three pre-war years 1911, 1912 and 1913. Not a few legislators and economists hoped that these taxes would make regulation of prices or profits unnecessary. Let any concern make what it can, they said, we will take it as fast as they make it. But, unfortunately, it proved so easy for most corporations to increase their investment accounts, and to pad their expenses, that the worst profiteers often showed small excess profits. Moreover, a considerable part of the tax was shifted to consumers in the shape of higher prices, as was possible during the inflation period.
Government price-fixing, while it did not prevent profiteering, did moderate the evil, notably through such substantial reductions as were made in the prices of wool, coal, sugar, flour and sulphuric acid. Unfortunately, this means was not used as vigorously and thoroughly as it would have been had there not been an ill-founded reliance upon profits taxes.
On Aug. io 1917 the Food Control Act became law. Section 4 of this Act made it unlawful for any person to hoard or to make any unjust or unreasonable charge in transactions relating to " necessaries " (foods, feeds, fuel, fertilizers, farm implements and machinery), but imposed no penalty. Sections 6 and 7, however, provided for penalties and seizure, in case of hoarding. Section 5 authorized the licensing of dealers in necessaries and the fixing of fair storage charges, commissions, profits, or practices. The fixing of prices for coal and coke was authorized in section 25. It was under this Act that the Food Administration operated, and, as already indicated, its control over prices was partly effective. On June 30 1919, however, the activities of the Food Administration were suspended; and as the agitation concerning the " high cost of living " grew in volume, the Department of Justice assumed the task of enforcing the law, which remained in force while a state of war was only technically in existence. Between Aug. and Nov. 1919, the Department made some 92 seizures of such food products as eggs, butter, sugar, flour and pork, under section 7, and secured several indictments under section 6, one indicted party pleading guilty. The chief agencies depended upon were the local " fair price committees " such as had been established under the Food Administration. Indeed, the wartime organization of local food administrators was partly revived, and an extensive publicity campaign was initiated. But the Attorney-General found his efforts limited by the absence of a penalty clause in section 4 and the restricted definition of " necessaries," and, at the President's request, Congress reenacted the law in Oct. 1919, with amendments to cover these defects. Encouraged by this action, and animated, it is charged by his critics, largely by political ambition, the Attorney-General proceeded vigorously under the Act, and in his annual report for 1920 stated that there had been 1,049 prosecutions under section 4 and 99 convictions.
Meanwhile, a growing hostility to the Act was apparent, and the courts in several jurisdictions declared it unconstitutional. This was true in five of the ten chief bituminous coal-producing states. Action concerning anthracite coal profiteering was also blocked by a decision of the Federal District Court in Pennsylvania. The upshot of the matter was a decision of the Supreme Court in Feb. 1921, which finally declared the Act unconstitutional. The case was that of U.S. v. L. Cohen Grocery Co., and involved profiteering in sugar. The reasoning of the Court was that Congress alone had power to define crimes against the United States; and, therefore, because the Act was vague and indefinite, and fixed no precise standard of guilt, and because it did not inform the defendant of the nature and cause of the accusation against him, it was unconstitutional. Thus ended the anti-profiteering crusade of the Attorney-General. Meanwhile, from April 1920 prices began to decline, and with that decline came a loss of interest in profiteering.
In a sense the U.S. Government was to blame for much wartime profiteering. In the first place it was lax in letting contracts and making purchases, either directly, or indirectly, by placing authority in the hands of interested persons. The " cost-plus system " invited profiteering as well as inefficiency. In the second place its combination of excess profits taxes and price regulation was unfortunate. At the same time that it fixed prices on a cost basis it spread the idea that it made little difference if excess profits were earned, as such profits would be reached by taxation. Taxation, however, proved at best to be an inadequate means of reaching profits, and early laxity in defining cost and investment made this means nugatory. The system as it worked in the United States tended toward laxity both in fixing prices and in collecting taxes on income. (L. H. H.)
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