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 100% 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: (1) 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 12½% 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. 10 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 reënacted 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 war-time 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.)
PROFIT-SHARING AND CO-PARTNERSHIP (see 22.423).—Profit-sharing was defined by the International Conference on Profit-Sharing held in Paris in 1889 in the following formula: “The International Congress is of opinion that the agreement, freely entered into, by which the employee receives a share, fixed in advance, of the profits, is in harmony with equity and with the essential principles underlying all legislation.” This definition, which is accepted by nearly all writers on profit-sharing, excludes on the one hand distributions made by a firm to its employees, say at Christmas, the amount of which is not fixed in advance, and to which the employees have no definite right.
