Rubber: The Inquiry and the Facts

THE recent inquiry by the House Committee on Interstate and Foreign Commerce into foreign controls of raw materials raised a number of interesting issues. It inevitably brought up the question whether a country which was enforcing a highly protective flexible tariff could with any grace criticize control of raw materials by countries whose prosperity was dependent on exports of raw materials rather than on manufacture; equally inevitably the committee divided on this point on strictly party lines.

It raised such questions as whether control of production or export might in any circumstances be economically wise, and, if so, whether it was wise in the cases presented to the committee; what the effect of restriction on supplies and prices had been in the past and might be expected to be in the future; and what could be done to avoid or minimize injurious effects of such restriction.

Finally, it brought out clearly the fact that, in the absence of any material change in conditions, the time when the demand for rubber would exceed the supply could not be far distant.

Because of these facts, and because they make probable a renewal of controversy, it has seemed worth while to examine the record of the committee’s hearings and its report with some care. Freedom of raw materials from governmental control is an attractive platform, but doubts may well be entertained whether the recent inquiry was calculated to further its adoption.

I

In presenting the subject to the committee the Secretary of Commerce mentioned a number of commodities in connection with which he suggested that objectionable methods of control had been, or were being, employed.

The committee, endorsing the complaints of the Secretary, found as a fact that control of either production or export had been instituted over rubber, coffee, nitrates, iodine, potash, Egyptian long-staple cotton, sisal, camphor, and ‘at times’ Japanese silk. It described these controls as having certain common characteristics, such as that they were confined to commodities the consumption of which was mainly outside the countries imposing the control, and that all of them had brought about prices highly profitable to producers and some of them had advanced prices to exorbitant levels.

An examination of the published reports of the hearings shows that these conclusions are in some cases quite unsupported, or even contradicted, by the testimony presented on behalf of the Department of Commerce. For instance, in the case of nitrates the evidence negatives any suggestion of restricted output or unreasonable profits. The only apparent cause of complaint is the Chilean export tax, but both this and the current prices of the product are stated to be substantially the same as before the war. In any case, the whole burden of the export tax that falls on the United States is given as only $11,000,000 a year.

In the case of Egyptian long-staple cotton, the testimony was somewhat incoherent and quite unconvincing, the only point clearly brought out being that the United States took a relatively unimportant part — 10 to 15 per cent — of the production. It is difficult to see on what basis the committee reached its conclusions, and it was doubtless wise in refraining from any detailed discussion of the subject.

In the case of Japanese silk, the only evidence of control given by the departmental witness, or mentioned by the committee, was that on a single occasion in 1920, when the price of silk broke sensationally from eighteen dollars to six dollars, the Japanese Government made substantial advances to a silk corporation to avoid a complete demoralization of the market.

Rubber was, however, the main subject of inquiry; it is upon the validity of the Secretary’s charges and the committee’s conclusions regarding rubber (the committee accepted so completely the rôle of an echo that it is unnecessary to distinguish between the two) that judgment on the inquiry must turn.

Upon the subject of rubber, the oral testimony given to the committee was perhaps less important than the documentary evidence; in particular, a report by the Department of Commerce in April 1925 on Plantation Rubber in the East Indies would appear to be of exceptional value. It bears evidence of careful and apparently impartial investigation by the representatives of the department; it is of recent date and yet, being published before the late rapid rise in prices, was not influenced by the controversies which that rise occasioned. While this report was referred to and quoted to the committee by the Secretary, it may be questioned whether it was studied with the care which it deserved. One cannot but feel that, had the information which it contains been more carefully examined, many of the conclusions of the committee would have been substantially modified.

The East Indian plantations on which the world now depends for its supply of rubber are a development of the last twenty years. It was in 1908 that the planted acreage for the first time passed the half-million mark; the first million mark was passed in 1910; the second in 1913, the third in 1917, and the fourth in 1920. Since 1920 the increase has been only about 8 percent, or less than 2 per cent per annum, and the acreage at the end of 1925 is estimated at 4,396,000 acres.

Rubber trees do not come into production until from four to six years after they are planted, and do not attain their full production for from eight to ten years. Consequently the effects on the potential annual supply of the steady increase in the planted area prior to 1920 will continue to be felt for some years, and the effects of the practical cessation of new planting during the last five years lie almost wholly in the future.

The great increase in the demand for rubber has, of course, arisen in connection with the automotive industry and has therefore been most marked in the United States. Nevertheless, with the single exception of a substantial investment by one American rubber manufacturing company, the development of plantations has been carried out almost entirely by foreign — and particularly British — capital, first in British colonies and protectorates, and later in the Dutch East Indies and elsewhere.

The fact that only a negligible amount of American capital has flowed into an industry in which this country is so largely concerned would seem to be of great significance in any adequate study of the rubber situation, but it does not appear to have been extensively considered, nor is it explained by the committee.

In 1921 and 1922, as a result of the constant increase of supplies and the industrial reaction of 1921, the level of rubber prices fell close to, or below, cost of production. With new acreage constantly coming into production there was apprehension among the growers that production would continue to exceed consumption and there was demand for action to restore the industry to a profitable basis. An inquiry was initiated by the British Colonial Office and resulted in the adoption of what is commonly known as the Stevenson scheme of restriction. This scheme established a system of standard production in Malaya and Ceylon — which together were then producing about 70 per cent of the plantation rubber — and provided for a limitation of export according to a sliding scale of percentages of production to be applied as the price of rubber rose or fell. Export in excess of the authorized percentage was effectively prevented by a prohibitive export tax.

Whether the action taken was wise in the light of conditions then existing is an arguable question. Business men and economists would agree that the presumptions are against interference with the natural operation of the laws of supply and demand, but there is today a greater readiness than before the war to admit that the presumptions may be overcome, and that steps may in some cases be desirable to modify the harshness with which these laws at times operate. The committee responsible for restriction frankly described it as a temporary palliative which they recommended only because its consequences seemed likely to be less injurious than the alternatives which presented themselves. The fact that the scheme was approved by the Government of a country which has for generations stood on the principles of free trade and a minimum of governmental interference with commerce might have been deemed to lend credence to these statements.

The evidence taken by the committee on the question of the economic wisdom of the policy in the light of conditions existing in 1922 included no testimony on behalf of the growers, nor even that of impartial economists, but was mainly partisan and wholly inadequate. The members of the committee apparently gave scant consideration to this question and contented themselves with dogmatically asserting that such controls ‘violate economic law and produce disastrous economic results both to producer and consumer. ‘ It is by no means clear that the detailed findings bear out this sweeping statement.

II

In opening the case before the committee the Secretary of Commerce said: ‘The object of these controls is universally asserted to be to stabilize prices to both producer and consumers at fair rates, and we would probably not be considering the question to-day if all these combinations had been content with fair returns, no matter how much we might object to them in principle.’

The committee’s findings regarding the practical results of restriction may be summarized as follows: —

First, that, while restriction has stimulated supplies from nonrestricted areas which have in part offset the loss of production in the restricted areas, the net effect has been to diminish the available supply of rubber, and that the scheme continues to restrict the supply; the net loss of production for the three years to October 31, 1925, is estimated at 146,000 tons. Second, that restriction has forced prices to figures which are three times the fair price, the comparison being between a market price of $1.09 and a ‘fair price’ of thirty-six cents, the fair average cost being stated to be about eighteen cents.

No exception need be taken to the findings of the committee in regard to past effects of restriction upon supply. If, however, the committee is right in estimating the new production stimulated in nonrestricted areas at about 70,000 tons a year, it would seem that a continuance of this supply after the removal of restriction would quickly offset the net loss of production due to past restriction, estimated by it at 146,000 tons. Under present conditions such a continuance may reasonably be assumed, and the fair inference from the findings would therefore seem to be that, unless restriction is to be continued, the effects of the scheme on supply will prove to have been relatively unimportant and perhaps ultimately helpful.

From February 1, 1926, exportation of 100 per cent of standard production has been authorized. The departmental evidence regarding the effect of this action is contradictory. The Secretary, in opening the case, submitted estimates of potential output without restriction which were contained in the report above mentioned and were there said to be ‘generous.’ For 1925 this potential output was only some 80,000 tons in excess of the actual exports, as estimated by the committee, and on the committee’s findings 100 per cent of standard production would have exceeded the permitted exports by about 110,000 tons. This evidence points clearly to the conclusion that 100 per cent is more than is immediately attainable. When, however, it was suggested to the Secretary that the raising of the standard of export to 100 per cent in effect removed all restriction, he characterized the statement as ‘simply propaganda’ and ‘misleading,’ and said, ‘ The general calculation is that it would require 115 per cent to 120 per cent to obtain the full potential production.’ This would mean that the potential production must be from 50,000 to 100,000 tons above the department’s previous estimate. The Secretary offered no evidence in support of the higher estimate, and it is noteworthy that later, in answer to questions regarding 1926, he again put forward the department’s lower estimates of potential production, and that witnesses for the Rubber Association of America accepted the lower estimates as correct. Moreover, such authorities as the London Economist and the London and Cambridge Economic Service take the view that the only uncertainty is whether as much as 100 per cent can be exported.

The committee has adopted in its report both the lower departmental estimate and the Secretary’s statement that potential output is 15 to 20 per cent in excess of standard, being apparently quite unconscious of any inconsistency between the two.

The question at once arises why the control authorities did not make the removal of restriction complete in form if it was to be complete, or practically complete, in substance. It may, however, well be that none of the interests concerned desired such a step. In any case the authorities, through failing to lift the restriction earlier, had received a large — possibly too large — share of the blame for the subsequent rise in prices; they may well have shrunk from the prospect of incurring further blame for a sudden deflation. In this view the weakness of their position to-day may be regarded as the natural result of an initial error in allowing restriction to continue after prices had passed all reasonable permanent levels.

It is more difficult to understand how the Secretary could have failed to recognize the inconsistencies between the different parts of his testimony on a question which goes to the very root of the real problem, and on which he was moreover making a charge of misleading propaganda. Whether potential output with restriction completely removed — as it surely must be in the near future if it has not been already — is 100,000 tons more or less is a crucial question in considering the rubber outlook. That the Secretary should put forward seriously conflicting statements on this question without attempting to reconcile them greatly detracts from the value of his efforts to enlighten the people of the United States in regard to this very important problem.

In view of the committee’s findings concerning the effect of restriction on supply, it is difficult to accept its conclusions as to the effect of restriction on price. The loss of production found to have occurred is clearly a wholly inadequate explanation of the rise in price from 141/2 cents in the first quarter of restriction to the figure of $1.09 which the committee uses. Nor is the acceptance of this finding made easier by the facts that the price has since fallen to sixty cents or lower, and that the committee attributes this fall to the action of the Secretary in calling on our people to economize in the use of rubber and to use substitutes. The obvious retort would be to say that, if the committee is right regarding the decline, the rise must be attributable mainly to our failure to economize earlier, notwithstanding that a shortage of rubber could be foreseen.

The extreme rise, like the earlier rise to $1.21 in July 1925, was unwarranted, but may be regarded as one of the ordinary incidents of a sensitive market, which in turn was attributable to the unexpectedly great and sustained demand for motor cars and hence for rubber in America, coupled with an increased demand from the rest of the world. The point may be illustrated by reference to a report on the prospective demand made, as recently as the spring of 1924, for the Rubber Association of America by a statistician of high repute. As a rough check of results reached by more detailed methods, he used the assumption that the demand would be increased by twenty tons for every thousand cars added to the registration. In making his computation he assumed that the registration would increase by eight millions in seven years; and of the resulting increase in annual consumption of rubber of 160,000 tons which he allowed for he assigned 52,000 tons to the first two years. Actually the increase of registration in two years is nearly five millions, implying an increase of 100,000 tons in the annual consumption of rubber.

Those responsible for rubber control can scarcely be blamed for failing to foresee these developments when control was instituted in 1922. It would, however, seem to be a fair criticism that by the middle of last year it had become apparent that restriction was no longer necessary to maintain rubber at the levels contemplated by the scheme and that therefore it would have been the part of wisdom to remove restrictions when a runaway market began to develop in July. Such action would not have affected the rubber situation adversely and would have greatly strengthened the position of the rubber control. It would have obviated any possibility of complaints, such as have since been freely and not unjustly made, that the control has not been conducted in accord with the spirit of the scheme and the explanations of its purpose to consumers.

III

The findings in regard to the cost and the fair price of rubber are of twofold importance, since they bear, not only on the reasonableness of the attitude of the growers in the past, but also on the attractiveness of the industry to American capital in the future.

The departmental report, in a paragraph quoted to the committee by the Secretary, mentioned a cost of sixteen to seventeen cents per pound for rubber landed in America, and this may be the basis for the committee’s figure of eighteen cents. That report, however, indicated that this estimate, first, was based on a production of 400 pounds per acre, the average production being, as indicated by the report, about 320 pounds; secondly, was exclusive of bonuses to the managers — which the report elsewhere said were practically a necessity — and certain taxes; and, thirdly, was based on exchange at $4.30 to the pound, so that the figure must be increased by about 13 per cent with exchange practically at parity.

In another place the report, speaking of a group of companies which was ‘one of the best guides to present-day costs,’ pointed out that ‘despite the drastic economies effected’ the cost per pound in 1922 was 11.9 pence, which is equivalent at present rates to just about twenty-four cents.

The president of the one American company which has large plantations estimates the cost per pound (excluding transportation) at twenty-five cents, and said he believed this figure would be a fair figure for the large British companies.

It is difficult to see how, in the face of this evidence, the committee could place cost much below twenty-five cents, if cost was intended to include all expenditures which have to be met before there is a profit available for return on investment.

The committee supports its finding that thirty-six cents a pound is a fair price to cover both cost and return on capital by two arguments: first, that the hearings showed such a price would yield an annual return to the rubber growers of 15 to 25 per cent on invested capital, even in the case of plantations with higher production costs; second, that the growers admitted it was a fair price and that it was the objective of the Stevenson plan.

The first question is: What does the committee (and the Secretary, whom it follows closely) mean by an annual return? Does it contemplate a return during the necessary years of growth, which will be added to the investment on which the return is to be computed when production begins? If not, then a return of 15 per cent in productive years is grossly inadequate. Experience shows that established profitearning businesses are constantly being sold in the United States on a basis which gives an immediate profit of 15 per cent per annum on the purchase price. Certainly a lower return could not be said to be adequate for a hazardous business carried on thousands of miles away in a tropical country scourged by malaria.

Yet on the evidence of the department’s own report,1 showing £70 (say, 340 dollars) spread over six years as the average present-day cost of bringing land into bearing, and adding as a part of the investment a return at 15 per cent during that six years on the amount from time to time expended, we find that the sum needed to give in any real sense an annual return of 15 per cent is about eighty-five dollars per acre per annum, which on an average yield of, say, 320 tons means over twenty-six cents per pound. Thus, the price which would yield even 15 per cent to an average-cost plantation with an average production would, upon the evidence, be in the neighborhood of fifty cents. The low-cost plantations could earn 15 per cent with a substantially lower price, but if the yield were raised to the 25 per cent mentioned by the committee, or the case of the highcost plantation considered, the figure would be much higher. It is safe to say that over the period of restriction the growers received a lower average price per pound than any American judicial tribunal would, upon the evidence, have felt justified in fixing as a ‘fair price.’

Incidentally, this analysis of the evidence affords an explanation of the fact that American capital has played so small a part in the development of the rubber supply. While the only testimony on the subject of return on investment outside the rubber-growing industry was that of Mr. Firestone in regard to the profits of his company, the conclusion to be drawn from his testimony is no doubt the correct one: that over a period of years it has been more profitable to employ capital in converting purchased raw materials into tires and other rubber goods than to invest it in developing rubber plantations. Up to the present time our manufacturers and consumers have been benefiting from the readiness of British capital — particularly before the war — to flow to any part of the earth for rewards which were less than our capital expects and can secure at home. It is indeed a question whether even to-day rubber growing is likely to appeal strongly to American capital. The ten million dollars reported to have been raised recently for the purpose among the consuming industries would be but a drop in the bucket.

There remains the argument that thirty-six cents was put forward as the objective of the Stevenson scheme and that assurances were given that it would not be exceeded. Undoubtedly the committee spoke of eighteen pence (the equivalent of thirty-six cents) as a price which would leave a satisfactory margin over the cost for return on capital, but surely a ‘fair price’ fixed for the purposes of a scheme, as the limit beyond which a further increase should not be induced by restriction, should in principle be well below the fair price beyond which any increase would be unfair to consumers. The point on which the Secretary and the committee lay a curious stress seems to rest on some confusion of thought.

American consumers can hardly complain that a price is unfair unless it is clearly above the level at which production would be an attractive opportunity for American capital, and on the evidence thirty-six cents is far below that level.

Again, one regrets that the restrictions were not lifted when prices of rubber went far beyond the thirty-sixcent limit in the spring of 1925. But, while strong criticisms of this error of judgment might be justified, it hardly forms a basis on which charges of bad faith against the growers can be maintained. It is scarcely conceivable that individual growers, or a small group of growers, should, without receiving any consideration, have undertaken to give assurances that for an indefinite period of time the price of rubber would not be allowed to go higher than thirty-six cents per pound, or that our manufacturers would be content to rely on such assurances. Evidently, however, there was loose talk on the point, and doubtless genuine misunderstandings in some minds resulted from it.

IV

Summing up the impression one derives from an examination of the report and the evidence, the Secretary was evidently keenly alive to the fact that a rubber shortage was impending, and to the desirability of bringing to the attention of the American people, in a striking way, the need of some action to forestall this condition. This he has undoubtedly done.

If in doing so he has advanced theories and contentions which upon the evidence of his department seem incapable of being sustained, this merely confirms what some of the most ardent admirers of his ability and achievements have reluctantly concluded: that his undeniably great gifts lie rather in the fields of organization of effort and of public opinion than in the fields of economics and the dispassionate analysis of controversial facts. His plea for a policy of freedom of raw materials from governmental control suffers from a too strongly nationalistic approach, from an overstatement of the case in specific instances, and from a failure to anticipate the obvious retort upon our own protectionist policies and to set forth the economic grounds upon which he distinguishes between the two policies and bases his appeal.

The evidence fails to demonstrate that the restriction scheme was either very beneficial to growers or highly injurious to consumers. It rather raises doubt whether the benefits to those whom it was intended to help were sufficient to justify its adoption.

The continuance of control after the rise of last summer may legitimately be criticized, but nothing in the nature of a serious grievance against the growers seems to be established. They have, of course, conducted their operations with a view to gain, and not from altruistic motives; but, viewing the whole subject in perspective, and taking one year with another, it is evident that they have provided the raw materials upon which a major development of our industry and comfort is based, at prices which would not have been attractive to our own capital.

The problem of rubber supply is a serious one and may be said to have entered into a new phase during 1925. It is fortunate that the change should have come at a time of prosperity so that its effects were not of serious consequence to our manufacturers or to our consumers.

Our people have a genius for economy in production, and our national vice is extravagance in consumption. Stimulation of the one and a slight curb on the other should suffice to bring about a satisfactory relation between demand and supply during the years immediately ahead, in which no great increase of production can be expected. The rise in prices will afford such a stimulation and such a check, and should at the same time encourage the plantation of new areas which will in the course of years provide for the natural expansion of demand.

If Americans find in the field an attractive opportunity for the employment of some of the country’s abundant supply of capital, well and good; the record certainly establishes no case for our entering the field on an uncommercial basis.

  1. See The Plantation Rubber Industry in the Middle East, p. 52