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WALTER J. MURPHY, Editor
Λ New Approach
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V^HARLES S. M U N S O N , president of the Manufactur ing Chemists' Association, in addressing the 1948 an nual meeting of the organization (C&EN, June 2 1 , 1948, pages 1835—7) pointed out the adverse effect of a dearth of risk capital on the chemical industry. The 1948 performance figures for all industry certainly demonstrate that risk capital provided b u t a small proportion of the total sum required to finance indus t r y expansion. More than $17 billion was invested in plant and equipment during 1948 by all of industry. Only 7 % of this amount came from new stock issues. Longterm borrowings accounted for 35%—five times a s much. The bulk of the funds—58%—came from such internal sources as depreciation accruals and undis tributed profits. In his 1949 address before the MCA meeting on J u n e 4, M r . Munson carried the discussion into the field of depreciation, and the picture is discouraging. The 1948 profits of all industry are reported a t the record-breaking level of $21 billion after taxes, accord ing to the latest Department of Commerce estimates. This figure taken alone would be one to cause con siderable satisfaction, but when the present depreci ated state of the dollar is pointed out, the situation loses many of its favorable aspects. A large part of the $21 billion profit in 1948 was a paper profit. It includes dollars which already have been spent to replenish inventories at today's higher costs. I t includes dollars which m u s t be reinvested simply to replace existing facilities as they wear out, since normal depreciation charges are grossly inade quate in the face of today's high prices. The question resolves itself around this point: Are our existing tax laws concerned with depreciation out moded by the sharp rise in prices over the past sev eral years? No one will deny t h a t a corporation building a new plant today will spend more dollars than it would have done, say in 1940, for an equivalent unit. I t is equally true t h a t the 1949 replacement cost of equipment purchased in 1940 is much higher, that the depreciation permitted b y law is now not sufficient in view of the wide disparity in the purchas ing value of 1940 and 1949 dollars. The difference must be met out of profits, by long-term borrowing at fixed rates, and from risk capital, if it can be found. If such practices are continued indefinitely industrial disaster is the inevitable result. Important, of course, to this discussion, is t h e fu ture trend of prices. The inflationary spiral appears to be over and the price curve is dropping. B u t will prices reach prewar levels or lower, or have we a s a result of World W a r I I reached a new "plateau" in prices from which we will never again recede? As Mr. Munson pointed out, the prediction of a "new plateau of prices" has been advanced after each wartime inflation and each time the prediction has been wrong. After each war prices have returned— for a while at least—to prewar levels. There is a real vitality to a free market economy which can not long be denied.
Unfortunately, there is little agreement on what is the sound approach to depreciation allowances. The present method has m a n y characteristics of gambling. Many plants completed on the drawing boards have been abandoned because management has felt that present costs a r e too high. A more realistic approach on depreciation allowance is one way of encouraging industry to construct new facilities in periods of high prices. I t is n o t t h e only answer, but certainly it is important. The manufacturer who is forced to replace plant and equipment in a high cost period is under great disadvantage with his competitor who does so when prices a r e low. This is where the gamble comes in and certainly i s one of t h e contributing factors t o the peaks a n d valleys i n our economy. Anything that can contribute towards smoothing out t h e curve is desirable. According t o Mr. Munson, if the price picture is to be as flexible a s history suggests, then it seems evident that our answer to t h e problem of replacement capital should rest u p o n a n equally flexible foundation. One possibility is t o provide greater latitude to manage ment in determining the rate at which this total allow able amount may b e depreciated. Sweden, for ex ample, permits complete freedom to the owner of a capital asset. He m a y depreciate it in one year or in 20. England permits an immediate write-off of 2 0 % a n d annual depreciation allowances of 12.5% of the remaining cost. The problem of how best to provide a sound plan for handling depreciation is not just the private head ache of the business executive. The chemist a t the laboratory bench, or the chemical engineer in the plant may feel that it is of no concern t o him; it is, for his future, perhaps even his job, is at stake. The chemical industry has been a fast-growing industry; its need for new and ever-increasing amounts of capital has been as great or greater than t h a t of any other industry. T h e fruits of research have been exploited readily, thereby providing more and more jobs for chemists and chemical engineers. More and more products for the public have helped to raise the standard of living and have improved the health of the people in this and other countries. I t would be nothing short of tragic to see the scientific power of this nation partially stymied b y a failure to reach an intelligent understanding of how to ad· fer the tax authority vested i n national, state, .al govern ments. As M r . Munson ably pointed out, good public rela tions a r e a prime requisite : "If our motives are trusted, if our objectives a r e approved, and if our sense of trusteeship is recognized, then we will have the puftlic support we need in this endeavor. B u t if we are suspect—if t h e opinion develops that this is a move to conceal rather than to clarify our profits—then all the accountants in the civilized world will be unable t o enlist t h e public opinion upon which our industrial future now depends." This is a large order, b u t not a n impossible one.
