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War Economy

High Profits

High Profits

For most industries there was no clear picture of the upsurge in wartime profits, except in a few isolated instances where govern- page 359 ment officers succeeded in completing investigations. Company incomes generally increased 80 per cent between 1938–39 and 1943–44, a period when the national income increased by 66 per cent,1 but there was no industrial subdivision of these figures for the war years.

More detailed information was available for manufacturing from the Annual Statistical Reports on Factory Production, and one writer, J. W. Williams,2 has made an analysis which shows clearly the effect of higher wartime turnover in raising profits. The following figures are adapted from one of his tables.3

‘True Manufacturing’
Manufacturing industries, exclusive of primary processing, semi-extractive, and public utilities
Year Output Surplus (Gross Margin Minus Overbead Expenses) Surplus as a Percentage of Output Surplus as a Percentage of Capital Assets
  £(m) £(m) Per cent Per cent
1937–38 46·89 5·16 11·0 22·0
1938–39 47·85 4·93 10·3 19·5
1939–40 54·73 5·88 10·7 21·4
1940–41 64·95 6·95 10·7 23·0
1941–42 72·69 8·28 11·4 27·7
1942–43 79·86 9·80 12·3 32·4
1943–44 89·08 11·00 12·4 35·0

The very substantial rise in surplus as a percentage of capital assets occurred in spite of a slight falling tendency in the ratio of gross margin to output. Williams rightly qualifies his results, but, in spite of all necessary qualifications, one impression clearly emerges. To use his words, ‘It appears that savings in overhead gained from a large increase in turnover have not been passed on’.

Unusually high profit earnings, resulting from some firms keeping for themselves all or most of the benefits of increased turnover, were only one of the causes of criticism of war contracts. Had this been the only weakness, the benefits which emerged from the quicker start on jobs might well have outweighed it. Extra profits from higher turnover were to be expected and reasonable increases

1 National Income Statistics, New Zealand Official Yearbooks.

2 The New Zealand Economy in War and Reconstruction.

3 p. 50.

page 360 would have been difficult to condemn.1

High profits which resulted, under some forms of contract, from charging the same flat percentage mark-up on overtime as on ordinary time were rather more difficult to defend. Overtime did not lead to a proportionate increase in overhead, and some firms recovered several times their actual overhead costs by this method of charging. Here is an example of what actually happened in a particular case:2

The award rate was 3s. per hour and the full charge-out rate was 5s. 6d. per hour, calculated as follows:

Award rates for carpenters and shipwrights 36·00
Plus 7 ½ per cent allowance for above-award rates 2·70
Plus overhead 21·342
Plus profit 10 per cent 6·0042

For overtime the firm charged out 1 ½ times or double this rate, i.e., 8s. 3d. or 11s. per hour worked. That is, apart from the extra profit allowance on the overtime, it was recovering overhead at 32·0 pence per hour or 42·7 pence per hour, as compared with the above rate of 21·3 pence per hour. Moreover, the allowance of 21·3 pence per hour was calculated on a basis which would recover the full normal overhead costs of the firm in a 40-hour week. Overtime working would occasion some extra costs, but a substantial proportion of overhead items would remain fixed.

High profits arising from wrong measurements or from practices such as charging for apprentices at journeymen's rates were indefensible. In many cases, but by no means all, they led to refunds when charges were checked.

It is interesting to note that the Master Builders’ Federation, when withdrawing its support from the Contracts Adjustment Commission, wrote on 23 August 1944 that the Federation was prepared to render ‘whatever assistance is within its power to facilitate the adjustments of any payments that may have been made in error or as a result of the misapplication of the master schedule’, but that the Federation was of the opinion that taxation

1 However, some of the firms which showed the more spectacular increases in profits from higher turnover must have had an extremely wasteful overhead structure in peacetime if they were not profiteering in wartime.

2 War History Branch narrative No. 58, p. 158.

page 361 would take care of the extra profits earned as a result of increased turnover, ‘taxation having been specifically designed for that purpose’.1

This last reference no doubt referred to the Excess Profits Tax Act 1940, which set a rate of taxation of 60 per cent on profits in excess of a standard annual profit.2 The rate was increased to 75 per cent in 1942. Despite the apparently sweeping nature of this Act, collections of excess profits tax averaged less than £500,000 a year. In any event, the terms of reference of the Contracts Adjustment Commission had included the following statement:3

‘As regards any suggestion that the position is remedied by taxation, it is considered that this is fallacious. If adjustment of taxes is necessary as a result of the Commission's operations this may be adjusted by the contractor submitting an amended return to the Commissioner of Taxes, who will make a refund where necessary.’

High profits on war contracts must have been for several years the worst breach in the economic stabilisation scheme's defences against inflation. The contrast between increases in incomes derived in many cases from these profits and increases in stabilised incomes such as wages was most striking.

Stabilisation was tolerant to extra pay for extra work or for extra responsibility, and should therefore have been tolerant to reasonable extra profits for extra turnover. But where, for example, extra turnover led to charging the usual flat percentage rates for overhead on extra wage costs, this meant that firms were being paid again for overhead costs which they had already recovered in full.4 This was in fact a weakness in many wartime contracts, and resulted in windfall profits over and above the full profit allowance already made for the extra work. Profits of this nature were almost certainly not intended when contracts were drawn, and were contrary to the spirit of the Stabilisation Regulations.

1 Official History of the Public Works Department, Vol. I, p. 276.

2 The 60 per cent excess profits tax was reduced by the amount of income tax and social security charge already paid on the excess profit.

3 Cabinet approval of 28 January 1944 on Ministry of Works file 32/483/2.

4 Extra wage costs would lead to some extra overhead costs but the increase was by no means proportionate, especially when the extra wage costs were at overtime rates. See also p. 360.