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Profits And Capital Issues

Volume 464: debated on Monday 9 May 1949

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Motion made, and Question proposed, "That this House do now adjourn."—[ Mr. R. J. Taylor.]

9.44 p.m.

In dealing with this rather wide subject of profits and capital issues, I want to make it quite clear at the outset that I have no quarrel basically with profits as such, which are at the present time a necessary and integral part of our economy. Many thousands of small traders, shopkeepers, professional men, farmers and so on live upon the profits they make on their businesses and industries. They put into the national pool of goods and services as much as they take out, which is a very essential principle. I want to make a clear distinction between that type of profit-making in which goods and services are abundantly given to the nation and the other kind of profit-making by what I would call "dormant profit-makers."

By that I make a distinction, which, I think, will be appreciated by all, that those who receive these profits do not necessarily put anything at all into the common pool, by way of goods and services, in return for the values which they take out, whether in the form of dividends, interest or capital appreciation. It is that second type of profit-making that I want to draw attention to tonight.

The hon. Gentleman said, "They do not put anything at all into the common pool." They are not, therefore, shareholders.

I tried to explain that there must necessarily be a clear distinction between those who run small businesses and work hard, and receive profits in recognition of their service to the community, and those who receive profits although they certainly do not give any kind of service to the community.

I did not use that word, but it seems that my hon. Friend wishes to use it.

My first contention is that trading profits of industry generally are and have been excessive, and this at a time of financial and economic stringency. Frankly, I believe that the policy of the Government in this matter has been characterised by a good deal of weakness. In my view, excessive profits are basically wrong. They cause a good deal of discontent on the part of those who work hard; they most certainly tend to increase prices and keep them high; they tend to endanger the recovery of the country; they have essentially an inflationary tendency; and they endanger our markets abroad because in time the cost of such goods may become excessive

The hon. Gentleman is making a great attack against profit-making companies. Will he give at least one example?

If the hon. Gentleman will be a little patient I shall not only give him one example but, if time permits, many others. I cannot do better than quote from a speech made by the Chancellor of the Exchequer in the House soon after he assumed office. My right hon. and learned Friend said:

"…the general volume of profits has been excessive over the last year or two,…"— [OFFICIAL REPORT, 17th November, 1947 Vol. 444, c. 939.]
I quote that only because the Chancellor has been rather loud in his defence of the interests I am referring to tonight. In the White Paper of February, 1948, on Personal Incomes, Costs and Prices, there is a reference to profits which I have always considered to be very weak. It says:
"There is no justification at the present time for any rise in incomes from profits, rent and other like sources."
That is a weak attitude with regard to profits, rent and other like sources.

On a point of Order. The hon. Member may be going to develop his argument, but in the meantime he has not referred to any matter for which any Minister could possibly be responsible. It may be that he is going to propose an Amendment to the Finance Bill, but if he does that must be out of Order. In the meantime, he has not referred to any matter to which the Government could possibly reply.

I respectfully suggest that what I am speaking about is particularly within the province of the Chancellor of the Exchequer, who issued the White Paper on personal incomes, profits, rents and other like sources.

That is what I thought the hon. Member was referring to. A White Paper has been issued on this matter, and what is being said is not entirely outside the province of the Financial Secretary to the Treasury.

I am rather hoping that the hon. Member will not only point out those companies which he considers are making an excessive profit, but that he will also refer to Morris Motors, whose profits published last week were down on last year to the extent of something like 50 per cent.

I am making this speech and not the hon. Member for Newark (Mr. Shephard), and I am going to make it not in the way which he wishes but in my own way.

When introducing the White Paper in the House the Chancellor went very much beyond the statement in that White Paper; he said:
"I have, therefore, addressed letters to the Federation of British Industries and other organisations representing respectively the manufacturers and wholesale and retail distributors both of food and of other goods, asking them to work out some plan for price and profit decreases, and to let me know within a month what they propose to do."—[OFFICIAL REPORT, 12th February, 1948; Vol. 447, c. 597.]
What was the response by the Federation of British Industries? The request, which was very specific, was ignored entirely. The reply talked a great deal of other things—about the need for increased productivity and greater efforts, calling upon the Government to decrease their expenditure, and so far as prices were concerned it gave a very weak reference to a ceiling on selling prices, which it qualified by saying that there would be many exceptions to that. It similarly suggested a ceiling on dividends, although there again it suggested that there must be many exceptions. So far as what was specifically asked for by the Chancellor, namely, some plan for price and profit decreases, there was no answer whatever. It was ignored and—

I have given way a number of times. What happened was that the Chancellor himself at a Press conference in July, 1948, said:

" Profits declared this year have been considerably higher than the 12 months previously."
Not only was that an acknowledgment that profits were still going up, but it was also an acknowledgment of the fact that the Federation of British Industries and associated organisations had not done anything effectively in the direction asked for by the Chancellor of the Exchequer.

With regard to the actual evidence as to profits, if we look at Command Paper 7649, "National Income and Expenditure of the United Kingdom, 1946–48" we find some very clear evidence of the tremendous increase in profits. For instance, the trading profit of companies, which in 1938 was £543 million, 10 years later in 1948 had gone up to £1,639 million. Despite the greatly increased dividends—we all know that dividends have generally increased tremendously and I have myself given many examples —the gross additions to reserve of those companies was £257 million in 1938 and, in 1948, £1,215 million, nearly five times as much. Lest any one should say that the difference was entirely annulled by taxation, let me say that after taxation those reserves were still more than three times as much. The respective figures are £545 million and £170 million. I could give a number of individual cases where there has been continued increase in profits, and where, even after full deductions for debenture interest, depreciation, taxation and so on, there is still a tremendous increase in the net profit.

Can the hon. Member give the corresponding increases in turnover of those companies? If the turnover increases one naturally expects the profit to increase accordingly.

I am not giving those details. I could, if necessary, but I have not them with me. I am saying that lest it should be thought that the gross increases in the profits of some of these companies were annulled by the additional fences which the Chancellor of the Exchequer has put up in the way of taxation, there is still a very great and continuous increase in the profits.

On that basis of great and growing profits we have today the widespread process of capital appreciation on a very large scale, a matter to which I now want to call the attention of the House. In this process, there are tremendous individual tax-free fortunes being made. There was a Treasury memorandum of guidance to the Capital Issues Committee on 31st May, 1945, and there were two later memoranda of guidance, dated 2nd September, 1947, and a more recent one on 14th April, 1949. In all these papers, and particularly in the first, there is very clear emphasis from the Chancellor of the Exchequer to the Capital Issues Committee on the need for careful discrimination in regard to new capital issues, and limitation of those issues to companies engaged on essential production.

The memorandum of 31st May, 1945, practically prohibits the issue of capital for
"acquisition, amalgamation or absorption of existing undertakings."
During the past year I have made a very close study of 100 companies which come into the category to which I have referred, of acquisition, amalgamation or absorption of existing undertakings. They have all received permission from the Capital Issues Committee for this process of re-organisation. They covered a great variety of industries and they were all within the year 1948. I find that in those 100 companies the pre-war profits were about £3,300,000 and the profits in the last ascertained year, 1947–48, were about £16,300,000.

It being Ten o'Clock, the Motion for the Adjournment of the House lapsed, without Question put.

Motion made, and Question proposed. "That this House do now adjourn."—[ Mr. Popplewell.]

The gross aggregate profit of those 100 companies has been multiplied by five. The combined nominal capital before reconstruction was in the region of £15,500,000 and after reconstruction it was in the region of £34 million, but the market value of those new issues was about £97 million; so that from an original nominal capital of £15,500,000, by this process we arrive at capital which is now worth about £97 million, which is an increase of over £80 million. None of that money has gone into the businesses; it has all gone into the pockets of the original shareholders of those companies, and that is the essential thing about this. If it were money going into the businesses for further development, that would be quite justifiable, but all those company reconstructions involve money going to individuals. In practically all cases a portion, sometimes the whole, of the newly-issued capital was put on the market at greatly inflated values. In nearly all cases a certain proportion was retained. There was every reason for a retention of a portion because in all these cases a very high rate of dividend was being received.

Associated with that is the rather minor matter of bonus issues. In the year 1947–48 the amount issued was about £5 million, in 1948–49 £7 million and this year it is estimated to be about £10 million, but the real value of these bonus issues is vastly more than that. There was a recent case of a bonus issue of something over 500,000 ordinary £1 shares and the market value of them was equal to about £3 million, so that the Capital Issues Committee in sanctioning 567,000 £1 shares as a bonus issue were virtually making a gift of £3 million.

I can guess what my hon. Friend the Economic Secretary is going to say. I have every respect and regard for him, but I know the Chancellor's line on this kind of thing, and I know that we shall be told that this is only one form of capital appreciation, that there are many types of capital appreciation and that it is impossible to differentiate between them. I hold that this form of capital appreciation is quite different from other forms. Though it may represent a form of capital appreciation, having shares inscribed to one in this way is essentially different from a transaction over a house or some other object where there is at least a risk in regard to quality or the market.

My other answer to this would be that this was something which the Capital Issues Committee should certainly have checked and could have stopped entirely. Indeed, the instructions to which I have referred give a very clear lead to the Capital Issues Committee to stop this kind of thing. Secondly, my evidence is that the fences and obstacles which the Chancellor has put in the way of high profits—I have no doubt that the Economic Secretary will refer to the increased Profits Tax—have been effectively overcome; in other words, with continually rising profits, it is not difficult to step over the fences which the Chancellor has placed in the way of these great profits.

Thirdly, I have no doubt we shall be told that the captains of industry have exercised restraint and moderation—in fact that is the rather extraordinary formula which the Federation of British Industries has used in its recent correspondence. I think the facts to which I have called attention demonstrate clearly that this purported moderation and restraint means nothing whatever in actual fact.

Fourthly, we shall probably be told that the proportion of profits, interest and rent after taxation have decreased in the national income. Indeed the Chancellor of the Exchequer in Italy recently referred to the drop from 34 per cent. in 1938 to 28 per cent. in 1948, that being the proportion of this element in the national income. Put in that way, as reported, it is a most misleading representation of profits, because it refers only to the distributed profits and, after all, there are enormous profits which are undistributed but which still remain the property of the shareholders.

I ask the Economic Secretary to realise that there are these great profits and not to camouflage the matter. These things are against the stated Government policy, they are forcing up and keeping up prices of all commodities, and I submit that they are jeopardising our national recovery as well as our industrial peace.

10.3 p.m.

In a few minutes I shall answer one or two of the points which the hon. Member for Norwood (Mr. Chamberlain) has raised. It seems to me that he has not the slightest idea of what profits mean, to whom they belong, or what they are used for—otherwise his speech was excellent. In the first place, he seemed to make some distinction between a dormant profit—I think that was his phrase—and the profit earned by an individual in the course of his effort. He must realise, unless he is going to say that savings are no good, that the only way in which investment occurs is by people out of their own earnings in the immediate present investing either in their own business or in some other business. To try to draw distinction between the chap who invests in his own business and the person who buys shares is just nonsense. It does not bear any investigation, and his definition simply means that if one makes money in one's own shop by overcharging the public, well and good, but if one invests in a share, whether it be gilt-edged or otherwise, then one is a robber of the public.

The hon. Member can explain himself in the "Daily Worker," as usual.

The hon. Gentleman went on to say that profits are too high and produced a lot of figures, but refused to tell the House what is the profit ratio either in relation to turnover or in regard to the needs of industry. If he looks at any industrial paper he may have read that the sums set aside by industry during the war for renewing their equipment are now proved to be insufficient, that the cost of replacement has gone up over and above whatever was anticipated in the war years and, therefore, any company that is to try to fulfil the export drive of the Chancellor of the Exchequer, and is to try to compete in the future, particularly now that the sellers' market is ending, has to put further and larger sums aside to buy new machinery. If the hon. Member is to prove his case that profits are too large, he must prove two things: first, that the profits have not been set aside for depreciation, and second, that they have been given in unwarranted quantities to the shareholders. I am quite certain that neither of those things can be proved.

The hon. Gentleman talks about what the Chancellor has said, but we all know that from time to time the Chancellor finds it necessary to encourage his back benchers by a tilt against industry; but anyone who reads his more sober statements will see that no one has been more enthusiastic than he about the way British industry has responded to the demands made upon it. I am certain that my hon. Friend the Member for Edgbaston (Sir P. Bennett), who has now left the Chamber, and who was chairman of the Committee which dealt with this question, would be able to say that the Chancellor, as reported in the Press, thoroughly endorsed the action taken by British industry. It is our complaint, however, particularly of nationalisation and of the Bill which was before the House earlier today, that the Chancellor of the Exchequer, far from recognising what has been done by British industry, instead of helping it, takes advantage of British industry by confiscating it at a price for which he could not get it if British industry had been free to distribute that which it had earned.

Then the hon. Member went on to talk about capital and bonus issues. Here, honestly, he reached Alice-in-cloudcuckoo-Socialist-land. Never have I heard such tripe and drivel as he talked. He started by saying that capital appreciation was made by some collection of money that was obtained—he did not say where from—and which was then handed out in large spoonfuls to an unnamed number of people at some whim, I gather, of the directors.

There is a private company. A new private company is formed to take it over. Let us say that the directors in the previous company had £10,000 nominal each. They are now given £100,000 in the new company, and because the company has been doing well the £100,000 is now worth £400,000. They unload some of the shares on the public; others they retain. That is putting it in a nutshell for the hon. and gallant Gentleman.

The only nutshell that would surprise me is a groundnut shell. I will take the hon. Member's own example. Here is a company with £10,000 nominal capital.

The hon. Gentleman is too late. Instead of taking each individual, we will take one company with £10,000. They sell it for £100,000. The only way they could do so is because, instead of taking profits out of the company, they have been prepared to leave them in the company for its advancement.

It is perfectly clear that if one founds a company with £10,000, and that company earns £1,000 in a year, it is possible either to take that £1,000 out or to leave it in the business—

for the simple reason that unless that £1,000 is left in, the business cannot be expanded to provide better service or get the main things we all want: exports and better costings.

I cannot give way. The point is that if that £1,000 is left in, it improves the value of the business—it must do so.

For everybody concerned—producers, consumers, and the nation, by exports, and so on. Therefore, if a business is improved in that way it is only right that from time to time the money invested in that company by way of ploughed profits and increased machinery should be represented in the balance sheet of the company by bringing the nominal and the actual capital into balance. Unless that is done, the company is a fake. Anyone who thinks about this for a moment can understand it. Otherwise, someone can say, "Let us have a company worth £10,000 nominal; it is actually worth £100,000, but what do we care about that? We have £10,000, and that is all we mind. We do not mind what happens from the point of view of accounting." But what happens about the future of the company, especially as far as its workers or shareholders are concerned?

We raised this issue with the former Minister of Fuel and Power on the Electricity Bill. There is not a single company which can be brought to the attention of the House in which a bonus issue of shares has been made which represents anything like a re-alignment of nominal and actual capital and not a single company which can be brought to the attention of the House which has given the shareholders anything more than a true holding in their company. In more cases than not where these bonus issues are quoted, what has happened is that where the shares received have increased, the shares they originally held have decreased and their total holding is exactly the same. I suggest that before these wild accusations are made it would be well to have some understanding of the problem of British industry in trying to attain the targets set by the Chancellor of the Exchequer.

10.16 p.m.

I do not complain at all of my hon. Friend the Member for Norwood (Mr. Chamberlain), raising this subject, because it is not a bad thing that someone should keep an eye on these matters But I hope my hon. Friend will not create the impression by his speeches or writings that this Government have been slow to limit dividends or to tax profits, because that it not the case.

My hon. Friend's first point was that the Government had not limited profits and dividends. The actual course of events has been made clear in the White Paper which he quoted. He said, quite rightly, that trading profits of companies had risen sharply over the last year, but he did not mention that tax payments have actually gone up from £515 million in 1947 to £670 million in 1948. He told us that additions to free reserves, after paying taxes, had risen from £425 million to £545 million. Again, he did not inform us that as a result of these changes the actual total paid out in dividends has fallen by £14 million between the one year and the next. That fulls the policy we have been trying to carry out.

The large increase in sums placed to reserve is, from the economic point of view, an addition to the country's savings which we need to finance the investment programme. But, from the point of view of redistribution of property, it means a further accumulation of property in the hands of the shareholding section of the community. For that reason, as I said in the Budget Debate a month ago. it is a further argument for simultaneous redistribution of property by other means. Nevertheless, while private companies continue to limit their dividends voluntarily and place these large sums to reserve, we do not see any present necessity for further special action by the Government.

My hon. Friend also drew attention to various company reconstructions and offers for sale of old securities, some of which it is true have meant large capital gains for private individuals. I do not think the hon. and gallant Member for New Forest and Christchurch (Colonel Crosthwaite-Eyre) denied that. But my hon. Friend did not mention the capital losses made at the same time by various other companies, and although there have been fewer bankruptcies under this Government than under any in living memory, nevertheless there have been some.

From the point of view of clarity, although I did not deny the statement, will the hon. Gentleman give one instance of which he disapproves?

No, I did not say there was any instance of which I disapproved. I am coming to that point. But there have been instances of capital profits. I think there is some misunderstanding here of the function of the Capital Issues Committee. It is, of course, the job of that Committee to see that if any old securities are sold to the public—if a private company, for instance, is turned into a public one—those shares are not sold at obviously exaggerated values. But if the value of the company has risen over the period it is not the job of the Capital Issues Committee to prevent its being sold for what it is now worth. Clearly, therefore, if the company's value has risen, a capital gain may be made by selling it to the public for its present value. I agree that does raise the question of whether there is a case for some sort of tax on capital gains. I believe that there is a general case for something of that kind, although very great difficulties—

I realise that, Mr. Speaker, although it is somewhat difficult to discuss the question of profits raised by the hon. Member without referring to it. If I were able to go into it, it would be possible to show that we should not add greatly to our revenue at the present time by embarking on any sort of enterprise of that kind The arguments which the hon. Member has advanced will not really lead to that conclusion, but they do lead to the conclusion that there is a strong case for the measures which we have actually taken over this last few years, both to limit dividends and to tax profits in various ways. If it were in Order, I could give the hon. Member examples of figures which would show that that is so.

Certainly, and I claim that it has to some extent succeeded.

The hon. Member raised the question of bonus issues. Now that the worst inflationary symptoms have worn off, we have, as the hon. Member knows, decided to leave it to the Capital Issues Committee to ensure that the more undesirable type of bonus issue does not take place. Issues of more than £50,000 will need the permission of that Committee. In theory, of course, a bonus issue—and I think this was the point the hon. and gallant Member was making—need not raise either the total market value of a shareholder's holding, or lead to increases in the actual sum paid out in dividends. But I agree that very often in practice—as I myself have argued in the past in this House—it does in fact do so. Therefore, from the point of view of dividend limitation, and in relation to bonus issues, I would make it perfectly clear tonight that we shall not regard a company as having honoured its obligation to limit dividends if after a bonus issue it pays the same nominal dividends but distributes an actual larger sum in money to the shareholders. It is only the sum distributed, and not the nominal dividend, which must count from this point of view if dividend limitation is to be honoured.

It is in the light of that principle that we shall watch the fulfilment by industry of their promise—which by and large, in our opinion has been fulfilled over the past year—to exercise restraint in the distribution of profits. Meantime, so far as bonus issues are concerned, we shall rely on the Capital Issues Committee to judge them on their merits and to use their discretion to refuse consent to any that appear unnecessary or undesirable. But, as I explained, that will not imply that an issue will not he permitted because, although the value of the shares, is perfectly reasonably calculated, it may involve capital gains for the individuals concerned. We take the view that with those safeguards and limitations we have gone a very long way to control and to limit the inflationary dangers which I agree are inherent in high prices in economic circumstances like the present.

Would the hon. Gentleman also admit that these tendencies about which I have been speaking have the effect of raising prices and retaining them at an extremely inflated level? Is not that also a tendency?

I should have thought that high profits are probably the result of excessive prices rather than the cause of them. If, of course, prices are allowed to be too high and so enable excessive profits to be earned, it is really the business of the price control authorities to find the remedy.

10.25 p.m.

The hon. Member for Norwood (Mr. Chamberlain) appeared to be afraid that he would get the cane from the Economic Secretary to the Treasury. His fears were groundless because, in effect, he only said what the Economic Secretary himself said in discussing Death Duties. The real complaint of both these hon. Gentlemen is that some people have the hardihood and presumption to make some money which appears to be, and is, regarded by the soapbox school of thought as a high crime and misdemeanour. Of course, it is cloaked in the decent verbiage of "anti-inflationary tendencies." Why it should be inflationary for a man to make a large capital coup and not inflationary for a large body of workpeople to receive a bonus of 5s. a week, I do not know. The bonus for the workpeople may be very good. It may be well earned and well deserved but it represents a large addition to the volume of purchasing power, an addition which is very much greater than the £200,000 or so made by a speculator.

The trouble is that the hon. Member for Norwood is simply talking the language of the unregenerate Socialist, and the hon. Gentleman who answered him is talking the language of decency imposed upon those who occupy Ministerial office, who have to try to reconcile the actual requirements of the Treasury with the requirements of their own party, their own back benchers. They dare not say that the nostrums sought to be imposed upon them are nonsense, but they have to point out that really it is a very good thing, though they do not think that they can quite do it. Finally, people who have sold houses with vacant possession and made large capital profits have been much attacked as very wicked people. They will be consoled to find that the hon. Member for Norwood appeared to regard their behaviour as legitimate, because in his judgment, as I understand him, the only wretches who ought not to be allowed to make anything at all are those who are known as shareholders.

Question put, and agreed to.

Adjourned accordingly at Twenty-eight Minutes past Ten o'Clock.