FDR’s New Deal with Energy: Part IV (Coal Code)

“Bitter conflicts over wage differentials, a hodgepodge of subdivisional judgments regarding the proper price of coal, blatant disregard for the code proscription against selling under a fair market price, and the widespread disregard of the other injunctions against unfair trade practices produced a chaotic price structure….”

“Each price classification included several individual pries based upon the physical structure, chemical analysis, and use-value of a specific type of coal, thus generating a number of prices–at least 400,000–far beyond the ability of a decentralized code to administer.”

“The fragile structure of the coal code buckled under the weight of inordinate administrative complexity and the persistent assaults of critics within and without the industry.”

 – John Clark, Energy and the Federal Government: Fossil Fuel Policies, 1900–1946. University of Illinois Press: 1987,  pp. 266–27.

Coal had dominated the US electricity market from the beginning, with hydroelectricity (“white coal”) a distant second. Manufactured (coal) gas also dominated in retail heating, cooking, and lighting markets not yet reached by natural gas pipelines.

But interfuel competition was growing, and coal’s labor problems hardly went away during the roaring twenties. There would be a lot of industry angst and politics ahead.

Background

Just like with petroleum from the wellhead to refining to points of purchase, coal’s excess of supply relative to demand required a major industry restructuring. Coal was losing market share to fuel oil on one side and natural gas on the other. Labor strikes in the face of declining demand and pay cuts hampered self-help correction in the heavily unionized, militant industry.

CQ Researcher explained the coal industry’s “overproduction” problem as ease of entry and mineral plenty:

Overdevelopment of the bituminous industry is due primarily to the abundance of the nation’s soft coal resources. The reserves, excluding lignite and semi-bituminous, are estimated to amount to one and one-half trillions of tons. The amount of capital required to open new mining operations is comparatively small, and labor does not need to be highly skilled.

These conditions have led to the opening of many mines which are too small for economic operation. Strikes and suspensions in the union fields have contributed to the opening of unneeded mines in the non-union fields to take advantage of high prices caused by temporary shortages. A mine once opened tends to continue in operation, for it is often more costly to shut down completely than to continue intermittent operations at a small loss.

Other factors cited for the coal industry’s “overexpansion” were

the past policy of many railroads of offering inducements for the opening of new mines in order to increase their coal traffic, and the opening of new mines by corporations in other industries to supply their own fuel requirements. Approximately one-third of the annual production of bituminous coal is taken from “captive” mines owned by industrial operators.

The introduction of improved machinery has increased both mine capacity and unemployment. In 1890, about 5 per cent of the tonnage produced was cut by machinery; in 1930, the comparable figure was 77.5 per cent. Yearly output per man in 1890 was 579 tons; by 1930, average annual output per man had increased to 948 tons. Competition from other mineral fuels and water power also has had an important effect upon the coal industry. In 1890, more than 85 per cent of the energy supply of the United States was derived from coal; in 1933, according to the Bureau of Mines, oil, natural gas, and water power supplied nearly 50 per cent of the energy used.

Human ingenuity and increasing capital investment were keeping supply ahead of demand, a story not unlike other minerals in a capitalist environment (per Julian Simon).

Political Capitalism (vs. “destructive competition”)

The quest for stability for coal, as for oil, became a political exercise. The prevention of waste was the rationale to get government to intervene in what otherwise would be purely market-based decisions. CQ Researcher explained:

The mineral resources committee of the National Resources Board contended that stabilization of the coal industry is needed to minimize waste. The committee pointed out that in western Europe the average loss of coal in mining is from 5 to 10 per cent, while the average loss in this country is 35 per cent, of which 20 per cent is avoidable…. 

Since the depressed condition of the last 7 or 8 years, a good many mines have found that it is very much cheaper for them to lose & very considerable proportion of the coal in the ground than it is to try to mine it… Instead of recovering 85 per cent or more, a number of them have gone to a practice where they will not get ultimately more than from 60 to 65 per cent, because the ultimate result is cheaper than if they tried to mine the greater amount of coal. …

[T]here is not a single bituminous mine in the country today that is not mining the very best coal that it has, and the cheapest, and is allowing portions of the mine to get into shape where a lot of coal will never be recovered, because they cannot afford, at present, prices, to mine it.

The committee cited the opinion of another expert that from 1923 to 1932 a total of 4,802 bituminous mines were shut down or abandoned and expressed its belief that the total was even greater than this figure. Some of the closed mines were worked out, the committee said, “but unfortunately, exhaustion accounted for but a small percentage of the mortality….” 

The causes of the excessive waste of the country’s coal resources are complex, the committee concluded, but “the great underlying cause is destructive competition.”

Coal Code of Fair Competition (New Deal):

Enter FDR’s New Deal. Based on the economic fallacy that propping up uneconomic firms and industries via government intervention could engender prosperity in the parts and in the whole, a Coal Code of Fair Competition under authority of the National Industrial Recovery Act (NRA) was introduced. The “central idea” of the Coal Code was price controls, floors rather than ceilings. Instead of maximum production quotas (in practice with oil in many oil states, including Texas, Oklahoma, and Louisiana), price floors were set for five regions per grade of coal.

Trying to police a national industry to stamp out the self-interest of individual operators to profit-maximize proved futile. According to one account:

The fact that operators sometimes produced at a loss, in spite of the minimum prices established under the code, is to be explained by two factors—contract deliveries and “chiseling.” A considerable part of the tonnage produced is sold on the basis of annual contracts. At the time of the adoption of the code, about two-thirds of current deliveries were made at other than code prices under these contracts, and for several months thereafter code sales carried the burden of low pre-code contract prices.

By April, 1934, the percentage of pre-code contract sales had decreased, and it was believed that by July, 1934, pre-code contract business would be negligible. The percentage remained high in July and subsequent months, however, indicating that new contracts had been entered into at-less than code prices. The effect of sales below code prices was to necessitate higher code prices than otherwise would have been established and to keep code prices above the level of actual realization needed to meet obligations.

Interfuel competition and countless other factors worked against artificial regulation. Trying to regulate a middle ground between unfettered competition and managed competition inspired countless meetings and many more arguments and legitimate disagreements. “Planned chaos,” a term used by the free-market economist Ludwig von Mises, was operative.

Bituminous Coal Conservation Act of 1935

Sponsored by the United Mine Workers of America, and guided through Congress by Pennsylvania’s Senator Joseph Guffey, the Bituminous Coal Conservation Act of 1935 formed an integral part of the FDR’s effort to create federal regulatory power under the NRA.

The Preamble of the new law stated stated its jurisdiction and goals in all good things, social justice terms:

the service of bituminous coal in relation to the industrial activities, the transportation facilities, the health and comfort of the people of the United States; the conservation of bituminous coal deposits in the United States by controlled production and economical mining and marketing; the maintenance of just and rational relations between the public, owners, producers, and employees; the right of the public to constant and ample supplies of coal at reasonable prices; and the general welfare of the Nation require that the bituminous coal industry be regulated as herein provided….

that practices prevailing in the production of bituminous coal directly affect its interstate commerce and require regulation for the protection of that commerce, and that the right of mine workers to organize and collectively bargain for wages, hours of labor, and conditions of employment should be guaranteed in order to prevent constant wage cutting and the establishment of disparate labor costs detrimental to fair competition in the interstate marketing of bituminous coal, and in order to avoid those obstructions to its interstate commerce that recur in the industrial disputes over labor relations at the mines.

The quest for (mandated) stability sought to establish price controls and production quotas, while affording labor protections. Marginal coal properties were to be closed, and the bituminous coal industry was to be regulated as a public utility.

But before the August 1935 law became operative, the U.S. Supreme Court declared sections of the 1935 act unconstitutional.  Reworked as the Guffey-Vinson Coal Act of 1937, Public Law 89-554 was found constitutional, giving new life to the Bituminous Coal Commission and the regulatory powers to fix prices and outlaw “unfair” practices. That was the plan on paper, anyway, as real world application proved as problematic as before.

In 1939, the Bituminous Coal Commission was abolished with its duties transferred to Interior Department. In 1943, the Guffey Coal Act law was allowed to expire. The New Deal with coal was over, but the industry’s problems remained.

———-

In this series, Part I detailed oil production; Part II described oil refining; and Part III oil retailing. Part V and Part VI this week will examine the Rural Electrification Administration and the Tennessee Valley Authority.

The post FDR’s New Deal with Energy: Part IV (Coal Code) appeared first on Master Resource.

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January 14, 2019 at 01:14AM

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