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^ S e s s io n * }

JOINT COMMITTEE PRINT

THE ECONOMIC AND POLITICAL HAZARDS OF
AN INFLATIONARY DEFENSE ECONOMY

MATERIALS PREPARED
FOE THE

JOINT COMMITTEE ON THE
ECONOMIC REPORT
BY THE

COMMITTEE STAFF

Printed for the use of the Joint Committee on the Economic Report

UNITED STATES
GOVERNMENT PRINTING OFFICE
89427

WASHINGTON : 1951

JO IN T C O M M ITTEE ON TH E ECONOM IC R EPO R T
(Created pursuant to sec. 5 (a) of Public Law 304, 79th Cong.)
HOUSE OF REPRESENTATIVES

SENATE

JOSEPH O. O’M AHON EY, Wyoming, Chairman E D W AR D J. H A R T, New Jersey, Vice Chairman%
W RIG H T PATM A N , Texas
JOHN SPARKM AN, Alabama
FR A N K BUCHANAN, Pennsylvania
PAUL H. DOUGLAS, Illinois
RIC H A R D W. BOLLING, Missouri
W ILLIAM BENTON, Connecticut
JESSE P. W OLCOTT, Michigan
ROBERT A. TA FT , Ohio
C H RISTIAN A. H E R TE R , Massachusetts
RALPH E. FLANDERS, Vermont
J. CALEB BOGGS, Delaware
ARTH U R V. W ATKIN S, Utah
T

heodore

Staff Director
Associate Staff Director
L e h m a n , Clerk

J. K

eeps,

Gro ver W . E nsley,
John W .

CONTENTS
Page

Letters of transmittal-------------------------------------------- ----------------- ----------Introduction------------------------------------------------------------------ -----------------Part I. Economic implications of present defense-spending plans_______
What is total production likely to be?____________________
Estimated excess consumer demand______________________
Inflationary business spending----------------------------------------Inflationary Government spending---------------------------------Methods of removing inflationary pressures_______________
The deflationary effect of taxes__________________________
Existing tax burden on low-income brackets______________
Substantial budget surplus required to curb inflation---------Suppose tax increases are delayed?_______________________
Part II. Inflation and communism-------- --------- ------------------------- ----------Inflation: The enemy sixth column______________________
Some historical examples of the relation between monetary
instability and subversive activities____________________
Austria______________________________ _____________
Eastern Germany_________________________ _________
Hungary__________________________________________
Rumania__________________________________________
France and Italy___________________________________
China--------------------------------------------------------------------Effects of inflation on the private-enterprise system_______
Effects of inflation on Government machinery_____________
Appendix A. Summary of recommendations of witnesses appearing during
committee hearings January 22, 24, 25, 26, 29, 31, and
February 2, 1951, on the January 1951 Economic Report of
the President________________________________________
Appendix B. Summary of recommendations of outstanding organizations
of businessmen, labor, farmers, and consumers__________
Appendix C. The derivation of the estimates of the inflationary pressures
in the American economy as summarized in part I______

V
1
4
5
7
8
9
10
12
13
17
18
19
19
22
23
26
27
28
28
30
31
32

34
40
48

LIST OF TABLES »
I. Wholesale and consumer price trends, June 1950 to June 1952____
II. Gross national product in constant prices, employment, average
weekly hours, and productivity, fiscal years 1949 to 1952_______
III. Excess consumer inflationary demand on the basis of existing tax
program, fiscal years 1950, 1951, 1952______ _________________
IV. Business inflationary spending on the basis of present taxes, fiscal
years, 1950, 1951, 1952______________________________________
V. Consolidated Federal cash budget, fiscal years 1950 to 1952______
VI. A tentative program for removing the inflationary pressures, fiscal
years 1951 and 1952_________ _________ ___________ _________ _
VII. Proposed Federal Government fiscal legislation and its economic
effects, Federal fiscal year 1952___ ___________________________
VIII. Consumer expenditures:
A. Estimated distribution of consumer expenditures by
income brackets____________________________________
B. Application of 1948 estimates to 1950 totals_____________
IX. 1948 tax payments as percent of income by income brackets______
X. Estimated inflationary pressure at low, middle, and high levels of
Federal Government expenditures in fiscal 1952_______________
XI. Estimated additional taxes and controls needed to remove inflation
ary pressures_______________________________________________
XII. Estimated additional taxes and the Federal budget, fiscal year 1952.
XIII. Index numbers of wholesale prices in selected countries___________
XIV. Wholesale prices in China_______ ______________________________

4
6
8
9
10
12
13
14
14
15
16
16
17
29
31

LIST OF CHARTS *
No. 1. 1948 tax payments as percent of income by income brackets Facing..
1 For tables and charts in appendix C, see list there.

LETTERS OF TRANSMITTAL
F

ebruary

23, 1951.

To Members of the Joint Committee on the Economic Report:

For the information of members of the Committee and others inter
ested, I am transmitting herewith a staff report entitled, “Economic
and Political Hazards of an Inflationary Defense Economy.”
The basic data are drawn from the Committee’s recent hearings on
the President’s Economic Report and from Government and private
publications and staff conferences with technicians inside and outside
the Government.
The report attempts to present the most reliable estimates on the
basic problem of inflation which can be obtained. It is now submitted
to members of the Committee for consideration and such suggestions
as they may wish to make.
J o s e p h C. O ’ M a h o n e y ,
Chairman, Joint Committee on the Economic Report.
F ebruary

The Honorable J o s e p h C.

O ’M

21, 1951.

ahoney,

Chairman, Joint Committee on the Economic Report,
United States Senate, Washington, D . C.
D e a r S e n a t o r O ’ M a h o n e y : In accordance with committee in
structions in July 1950, the staff has endeavored to follow the effects
of sudden increases in governmental defense commitments since the
outbreak of the Korean War, not only on the economy as a whole, but
on its various segments. I transmit herewith a staff memorandum
assembling the best available data on what is perhaps the most im
portant single result and problem; namely, inflation.
In part I an attempt haabeen made to prepare an economic model,
or what is better called a budget for the Nation, for the current fiscal
year and the next fiscal year. The estimates included in this Nation's
economic budget are based upon the Committee’s recent hearings on
the President’s Economic Report, upon staff discussions with tech
nicians in the executive branch of the Government and with non
governmental economists, and upon a thorough canvass of all available
current comments published in outstanding economic journals and
business periodicals. Quantitative estimates are hazarded concerning
the likely trend of defense expenditures, production, private demand,
and the like. From these computations estimates are derived of the
inflationary pressures likely to be generated by excess consumer money
demand and excess business spending. A corresponding quantitative
appraisal is made of the effectiveness of various proposed stabilization
measures to remove or neutralize such inflationary pressures. The
aggregate results are translated into a Nation’s economic budget cover
ing the period up to June 30,1952, that is, the end of fiscal 1952.

LETTERS OF TRANSMITTAL

In part II materials have been assembled indicating the extent to
which inflation in many countries has been the handmaiden of com
munism, and other subversive political and social movements. This
section owes much to many people and agencies, including Dr. Sergius
Yakobson, senior specialist on Russian affairs, in the Legislative
Reference Service of the Library of Congress.
In appendix A are summarized the views of more than 30 economists
and business executives who testified before the committee in the
January 1951 hearings held on the President's Economic Report.
Appendix B summarizes, under appropriate headings, the views and
recommendations submitted in writing by outstanding organizations
of businessmen, farmers, labor, and consumers, in response to your
letter of January 23. In appendix C the technical methods and
assumptions are set forth and the basic statistical charts and tables
reproduced which were used in compiling the estimates summarized
in part I.
The detailed economic and statistical job of preparing the major
portions of this report was done by James W . Knowles, assisted prin
cipally by Hope G. Sham, Othella Pompier, and Eleanor F. Rabbitt.
Members of the professional staff of the Joint Economic Committee
have rendered assistance here and there and given critical scrutiny to
the final results. The estimates, though admittedly estimates, are
believed to represent the best informed guesses available inside and
outside the Government. Unfortunately, official quantitative esti
mates by those responsible for economic mobilization have not yet
been publicly disclosed.
Respectfully submitted.
T h e o d o r e J. K r e p s , Staff Director.

THE ECONOMIC AND POLITICAL HAZARDS OF AN
INFLATIONARY DEFENSE ECONOMY
Introduction
Throughout the recent hearings held by the Joint Committee on
the Economic Report, all witnesses emphasized the need for a co
ordinated program of increased taxation; rigid Government economy;
efficient price, wage, production, and materials controls; and increased
savings. At first dominant emphasis was placed on production, re»
quirements, and programing. As Leon H. Keyserling, Chairman of
the Council of Economic Advisers, stated, priority should be given to
such questions as “What are the goals?” “How do they relate to each
other as to size and magnitude?” 1 The Economic Report of the
President similarly advocated .attacking three problems in the follow
ing order of importance: (1) Satisfying security needs, (2) increasing
output, (3) preventing inflation.
As the hearings progressed, however, though detailed recommenda
tions continued to be made on all phases of defense mobilization, those
necessary to combat inflation received increasing emphasis. Indeed,
w en among such measures, cumulative stress was laid on the im
perative necessity of promptness in putting an adequate tax and moneysupply control program into effect. To delay, to “wait and see,”
without immediately stepping hard on available brakes now, it was
urged, would inevitably cost this Government many additional billions
of dollars in defense expenditures next fall and thereafter.
In this matter practically all the witnesses that appeared before this
committee endorsed the major recommendation made in December of
1950 by the thousands of businessmen who belong to the Committee
for Economic Development. In their pamphlet, Paying for Defense,
they placed at the very head of their program:
Produce substantial surplus in the Federal cash-consolidated budget in the first
half of 1951.— Rearmament expenditures lag behind orders and production. We
should take advantage of the opportunity in the first half of 1951 to put a definite
stop to inflation. If inflation is not stopped by mid-1951 it will be much more
difficult to stop it later.

A letter addressed to this committee on January 12 of this year
by more than 400 economists gave equal emphasis to the same
injunction in the following terms:
Raise tax revenues faster than defense spending grows so as to achieve and
maintain a cash surplus. Merely to balance the budget is not enough. If the
inflationary pressure is to be removed, taxes must take out of private money
incomes not only as much as Government spending contributes to them, but also
a part of the increase in private incomes resulting from increased private spending
of idle balances and newly borrowed money.
1 The questions which Mr. Keyserling raises were asked in connection with his appearance before the
Joint Committee on the Economic Report during a series of hearings held in connection with the committee's
review of the January 1951 Economic Report of the President. The hearings began on January 22 and
extended through February 2,1951. In the following pages of this report these hearings will be referred to
by the day of the hearing only. Mr. Keyserling appeared on January 22.

ECONOMIC HAZARDS OIF INFLATIOIN1ARY DEtFEOSTStE ECONOMY

The real burden and sacrifice represented by defense expenditures,
it was agreed, cannot be escaped. It has to be borne now. The
only choice that remains is—how? Shall it be distributed by a policy
of drift and further destructive inflation? Or will intelligence and
courage be mustered to enact at once an adequate tax and monetary
program? Shall the inescapable burden of defense be distributed
haphazardly and inequitably or thoughtfully and deliberately?
The fact received increasing elaboration that the economic problem
involved reaches far beyond the budgetary one. To accept the simple
mathematical balancing of estimated receipts and disbursements now
as an occasion for self-congratulation or the test of a satisfactory tax
program was regarded a tragic delusion. Worthy as budget balancing
is, the more crucial task is that of stopping inflation; the anti-infla
tionary influence of added taxes at this time clearly outweighs cus
tomary budget-balancing objectives.
It was conceded that more would be known about the extent of the
Government’s financial needs at some later date in the legislative year.
The rate of expenditure, the requirements for defense, and the possi
bilities of economy are always, of course, more accurately known in
retrospect. But the tempting hope that the unpleasant necessity of
enacting added taxes may somehow be avoided by procrastination was
believed certain to prove false. Desirable as maximum equity under
the tax structure as a whole may be, no equity is served by failing to
meet the paramount need now to absorb “hot money” bidding up
prices. An income dollar collected in taxes before it can make itself
felt in the inflationary spiral bidding up prices of goods and services
is far more effective, it was pointed out, than is a tax dollar collected
after prices and costs have risen.
To take things easy, to temporize, to place lesser objectives first,
is openly to court disaster by drifting into that debauchery of the
currency which Lenin and Stalin have favored for decades as the most
powerful and most subtle sixth column propelling capitalistic coun
tries toward communism. For inflation corrodes production incen
tives, makes “suckers” of savers, inflicts arbitrary hardships on those
receiving fixed incomes and generates the kind of social injustice and
social unrest in which the propaganda of communism is most suc
cessful.
The witnesses agreed unanimously that everything possible must
be done to eliminate waste, to postpone expenditures not vital or
essential to long-run economic strength and military preparedness,
and to get maximum mileage for the tax dollar in both civilian and
military procurement. But the desire and determination to make
continuous and painstaking efforts to economize should not blind the
Congress, it was felt, to the unparalleled opportunity to effect now a
substantial cut in future Government outlays through prompt enact
ment of additional taxes.
Some of the witnesses that appeared before this committee had just
served as members of a Committee on Economic Stabilization recently
organized under the auspices of the Twentieth Century Fund. Their
director of research, likewise one of our witnesses, called attention to
this passage in their forthcoming report entitled “ Mobilization and
Economic Stabilization” :
Inflation is, among other things, a sign that the country is giving divided
support to the national effort. If we are willing to appropriate money for defense,

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

but unwilling to take it away from ourselves, we are trying to escape the basic
fact of diversion of resources, and the necessity of initial curtailments of civilian
supply. We are supporting national defense with one hand and sabotaging it
with the other. Such a policy is consistent neither with efficient defense nor
with social equity.
The indispensable first condition for success is that the American people be
prepared to impose on themselves the taxes needed to make any anti-inflation
program a success.

These experts repeatedly emphasized, however, as did the other
witnesses, that higher taxes now are no substitute for other vital
measures such as allocations, direct controls, canny debt manage
ment, and credit curbs. An increased tax take now was deemed
necessary in order to make other controls work. Efforts to control
prices and wages, for example, no matter how zealously and effi
ciently enforced, will be futile precisely to the extent that this Nation
fails to remove the inflationary steam under the boiler now. It was
similarly pointed out that efforts to stimulate savings or to float E
bonds might flop if continued price rises be permitted to gnaw further
at peoples' confidence in the value of the dollar. If the inflationary
train of events now propelling this economy is to be slowed down,
everyone, it was emphasized, whether consumers, businessmen, labor,
farmers, or Government must forego attempts to create individual
shelters from general shortages and sacrifices. If the common task
is well done, there will, to that extent, be greater likelihood that in a
year or two direct controls can be relaxed, so that the economy can
then go forward steadily, surely guided by general indirect fiscal and
monetary controls flexibly adjusted to ever-changing economic
conditions.

PART I

ECONOMIC IMPLICATIONS OF PRESENT DEFENSE
SPENDING PLANS
The inflationary implications of present defense mobilization plans
have nowhere yet been fully set forth in quantitative terms. Alarms
have been sounded and general guesses made, resembling forecasts
that a strong wind will blow but failing to state whether the velocity
will be 20 miles or 100 miles an hour.
This memorandum tries to summarize the best available data on
the extent to which present defense plans are likely to affect consumer
expenditures and other components of gross national product. All
estimates are based on two propositions: (1) that prices will be success
fully stabilized somewhere near the levels of January 25, 1951; (2) that
the goal set for increases in production in the Economic Report of the
President will be met; namely, 25 percent during the next 5 years.
No allowance is made for reduction in the budget or sharp curtail
ment of Government expenditures below the figure set in the Presi
dent's budget message. The reasons are twofold: the exact size and
nature of such curtailment can at the present time not yet be assessed
expenditure estimates for the military program may turn out too low,
such that reductions in nonmilitary items may well be offset by in
creases in military expenditures. The fact should be noted that out
standing military authorizations and obligations at the end of fiscal
1952 are estimated to be $80 billion. Even a slight acceleration of
expenditures relative to obligations will result in several billion dollars
of military expenditures in excess of that estimated in the President's*
budget. In other words, even with drastic economies both in mili
tary and nondefense items, the total Federal budget may equal or
even exceed $71.6 billion. However, consequences of a higher and a
lower Federal expenditure level are shown.
Between June and December 1950, the index of consumers' prices
increased by 4.7 percent, while the index of wholesale prices rose by
10.4 percent. Had prices been allowed to continue to rise unchecked
at such rates consumers' prices by June 1952 would be 20.2 percent
above June 1950. The wholesale price index on the same basis would
be 48.5 percent above June 1950. Detailed figures are shown in.
table I below.
T able

I.— Wholesale and consumer price trends, June 1950 to June 1952
Item

Wholesale prices:
All commodities (1926*100)..................
June (1950*100).....................................
Consumer prices:
A l l items (1935-39*100).........................
June (1950*100).....................................

June 1950

December
1950

June 1951

December
1951

157.3
100.0

173.7
110.4

1191.7
i 121.9

1 211.6
i 134.5

1233.6
i 148.5

170.2
100.0

178.4
104.7

1186.5
1109.6

*195.4
1114.8

1204.6
1120.2

June 1952

i Estimated value if rate of price increase since Korea is not diminished.
Source: June and December 1950 data from U. S. Department of Labor, Bureau of Labor Statistics.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

Concerning the dominant causes for the price rise from June 1950
to date, there was practically unanimous agreement among the ex
perts that testified at the January hearings. It has not been due to
an unbalanced Federal Government budget. In actual fact there has
been a surplus of receipts over expenditures, one that was anticipated
and announced by this committee last July.
On the contrary, the inflation experienced thus far owes its impetus
to the civilian segment of the economy and has been the result (1)
of “ scare” buying by consumers seeking to be “ sitting pretty”
individually in a period of general shortage (to that end they borrowed,
liquidated savings, and scrambled for merchandise); (2) of anticipatory
buying, inventory accumulation, and speculation by business firms
financed by phenomenal profits and abundant bank credit; (3) of a
price push-up designed to forestall getting stuck with a “ low” price
ceiling in the event of a freeze; (4) of rapid acceleration of construction
of plant and equipment in order to “ beat the gun” on materials con
trols and allocations; (5) of increases in materials costs and frenzied
bidding for scarce resources and manpower; and, finally, (6) of invest
ment shifts by individuals and institutional investors from liquid assets
and fixed income securities into physical goods and equities. These
inflationary forces set in motion by warranted expectations and
unwarranted fears of what the Government might do, will be given
the impetus of substantial Government deficits unless we pay as we
go, tax heavily, increase production per man-hour, increase savings,
contract credit, control the money supply, and effectively enforce
direct controls over prices, wages, materials, and manpower.
In fact, if prices are to be stopped at or near January 25 levels,
expenditures of all kinds, whether by consumers, by business, or by
Government, will have to stay in line with the volume of goods
available for each. For the Government, that implies at the very least
keeping total expenditures below the level of aggregate receipts, in
short, something better than pay-as-we-go.
W

hat

otal

r o d u c t io n

L ik e l y T

The total amount of goods available obviously depends on total
output. How much is the economy likely to be able to produce in
fiscal 1952? That, of course, will depend, first on the number at work.
In table II below, census and other data are used to arrive at a reason
able estimate of the total manpower and womanpower available both
for civilian and military purposes. This number will be about 65.5
million persons in fiscal 1952, or about 8.4 percent above fiscal 1950.1
The average number of hours, which will be worked per week, will
probably be increased to 43.6 in fiscal 1952 or about 4.3 percent above
fiscal 1950. The probable increase in per capita productivity seems
rather likely to continue to rise to an average level in fiscal 1952
about 4 percent above fiscal 1950.*
All estimates summarized herein are explained in appendix C to
this memorandum. They have been evolved and determined on the
basis of four fundamental goals:
1.
That the bite of defense expenditures will be increased from
present levels of 7 percent to one of 16 to 20 percent of gross
national product by the end of fiscal 1952.
i See appendix O, p. 68.
* See appendix O, p. 66.

ECONOMIC HAZARDS OF INFLATIONARY DElFENSlE ECONOMY

2. That military expenditures will be substantially kept at a
level continuing to take an 18 percent bite out of the economy for
10 or 15 years or more.
3. That the Nation’s economic objectives will continue to be:
(a) Maximum efficient use of the skills of our population
and our resources with production increasing at a long-run
sustainable rate.
(b) Price stabilization at approximately the levels at
which they were frozen on January 25.
(c) Taxes equitably distributed with minimum impair
ment of production incentive or of basic living standards.
4. That political courage and public support will be mustered
adequate to impose and enforce controls selected on the basis of
science and fact rather than by brokerage of pressures.
If these goals are to be achieved, gross national product, measured
in constant prices (using as base those prevailing in June 1950) will
increase from the actual figure $263.4 billion in fiscal 1950 to $288.0
billion in fiscal 1951, and to $310 billion in fiscal 1952. In short, the
increase in real output for fiscal 1951 is estimated to be 9.3 percent
above fiscal 1950, and that for fiscal 1952, 7.6 percent above that in
fiscal 1951.3 Details are shown in table II.
T able

II.—Gross national product in constant prices, employment, average weekly
hours, and productivity, fiscal years 1949-52
Total employment

Fiscal year

Actual
Index
(millions of (1950-100)
persons)

1949......................
1950......................
1951......................
1952......................

60.7
60.4
*63.2
2 65.5

100.5
100.0
* *104.6
* 108.4

Average weekly hours

Actual

42.5
41.8
*42.4
*43.6

Index
(1950-100)
101.7
100.0
*101.4
*104.3

Produc
tivity index
(1950-100)

Qross national product
in constant prices1
Actual
Index
(billions of (1950-100)
dollars)

96.1
100.0
*102.8
*104.0

259.2
263.4
*288.0
*310.0

98.4
100.0
*109.3
*117.7

i U. S. Department of Commerce series in 1939 prices converted to June 1950 prices.
* Estimated.

Unfortunately June 1950 prices are already a lamented memory.
What is the dollar level of gross national product likely to be if tms
country is successful in stabilizing prices at approximately the levels
of, or at least not a great deal above, those on January 25, 1951?
All things considered, such a dollar volume would be at least $325
billion.4
* See appendix C, p. 73.
* See appendix C, p. 79.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
E

s t im a t e d

xcess

onsum er

emand

Against this volume of output, how much money is likely to be
running around loose in the economy, in consumers' pockets, in
business, and in Government? That will depend most of all, of course,
on how much the Government spends. Needless to say the ines
capable fact is that wages will be paid and profits will be earned on
the production both of civilian items and of defense items, yet con
sumers will obviously spend their incomes (except for actual amounts
saved) mostly for consumable goods, and business will spend its
earnings and borrowings mostly for capital goods. Consumers will
have funds to buy civilian goods which defense requirements keep the
economy from putting out in a volume large enough to absorb au the
consumer buying power in consumers' pockets.
How much is this deficiency in the output of consumer goods likely
to be? Or to ask the same question in another form: How much excess
consumer buying power wifi there be? It will be low if Government
outlays for military and other goods and services are low, and high if
the Government bite out of total production is high. In order to
define “low" in quantitative terms, table III and the other tables
assume that a total Federal Government outlay in fiscal 1952 of $65
billion would be low. A total of $85 billion is assumed to be high,
while $75 billion (about the magnitude estimated in the President's
budget) is assumed as the medium estimate.6 How great will be the
difference between consumer demand and supply of consumable goods
under these three assumptions? A glance at table III will show that
it is estimated at $3 billion at the low, $10 billion at medium, and
$16 billion at high levels of defense expenditures.6
* See appendix C, table II, p. 68 and p. 81.
• See appendix C, particularly pp. 81 and 82.

ECONOMIC HAZARDS OF INFLATIONIARY DEFENSE ElOOBSflOMT

T able

III.— Excess consumer inflationary demand on the basis of existing tax
program, fiscal years 1950, 1951, 1952
[Billions of dollars]

1950
actual

Description

1951
estimate

1952 estimates
L ow 1

Middle 3

High *

Gross national product (current prices)......................

260.8

4 298.4

4 325,0

4 325.0

<325.0

Less:
Capital consumption allowances....................
Indirect business tax and nontax liability—
Business transfer payments............................
Statistical discrepancy............................... .
Plus: Subsidies less current surplus of Govern
ment enterprises....................... ......................

1&6
22.1
.7
-.6

22.0
24.8
.7
0

26.0
25.0
.7
0

Equals: National income...................................

219.2

250.9

273.3

30.9
6.2
0

41.0
7.3
0

44.0
8.0
0

14.7
4.7
8.0
.7

12.3
4.9
10.0
.7

10.0
5.0
7.5
.7

Less:
Corporate profits and inventory valuation
adjustment...................................................
Contribution for social insurance..................
Excess of wage accruals over disbursements..
Plus:
Government transfer payments......................
Net interest paid by Government..................
Dividends........................................... ............
Business transfer payments............................

Equals: Personal income.............................

210.2

230.5

244.5

Less:
Personal tax and nontax payments................
Federal.............................................................
State and local.................................................

18.9
16.4
2.5

22.8
20.0
2.8

24.5
21.4
3.1

24.5
21.4
3.1
220.0

Equals: Disposable personal income..........

191.3

207.7

220.0

Less: Personal savings...........................................

9.3

8.9

11.0

Equals: Consumer demand...............................

182.0

198.8

209.0

Supply (prices at beginning of period) expenditures
for gross national product.................. — ..................

262.7

288.0

325.0

37.3
-1 .1
23.7

48.5
-3 .5
32.4

51.0
-3 .0
49.0

48.0
-3 .0
59.0

44.0
-3 .0
69.0

Less:
Gross private domestic investment................
Net foreign investment....................................
Federal purchases of goods and services........
State and local government purchases of
goods and services.....................................

18.9

19.7

22.0

Equals: Consumers" supply........................

183.9

190.9

206.0

199.0

193.0

Consumer inflationary pressure, excess of consumer
demand over supply..................................................

• -1 .9

• 7.9

3.0

10.0

16.0

* Assumes Federal consolidated cash expenditures of $65 billion.
* Assumes Federal consolidated cash expenditures of $75 billion.
* Assumes Federal consolidated cash expenditures of $85 billion.
4 Assumes prices stabilized at approximately Jan. 25, 1951, levels, with wholesale prices some 11 to 13 per
cent above June 1950 levels, and retail prices 6 to 8 percent above June 1950 levels.
* For fiscal 3950 the inflationary excess was negative, prices declining by about 1 percent.
* For fiscal 1951 the inflationary pressure will result in a substantial rise in prices of 6 to 8 percent; a larger
price rise than indicated by the primary inflationary excess demand shown a Dove because secondary spiral
ling effects have been permitted.
Source: The TJ. S. Department of Commerce, Bureau of the Budget, and staff of the Joint Committee
on the Economic Report.

I n f l a t io n a r y B

u s in e s s

S p e n d in g

N ow let us take a look at business spending. Business too will earn
profits both on the civilian output it sells, and on that part of its
production which is taken by the Government. But it will spend such
profits only for civilian items, especially for plant, equipment, and
other capital goods. How much will business demand for capital
goods exceed the supply of such goods? That, too, depends on
whether the bite out of the economy taken by defense and other

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

expenditures by the Government is low, medium, or high. In table
IV detailed estimates are given according to which excess business
demand will be $3.3 billion at low rates of defense expenditures,
$6.3 billion at medium rates, and $10.3 billion at high rates. Note
that corporate profits may well remain unchanged at a level of
$44 billion which, while 10 percent higher than the high rate earned in
1950 (that in turn more than 20 percent higher than the highest level
ever reached in business history), may nonetheless remain the same,
whether Government expenditures are low, medium, or high.7
Table IV .— Business inflationary spending on the basis of present taxes, fiscal years

1950, 1951, 1952
[Billions of dollars]

L ow 1

Mid
dles

30.6

* 41.0

* 44.0

4 44.0

<44.0

actual

Demand (current prices):
Corporate profits before taxes and inventory valuation ad
justment____________________________________________

1952 estimates

1951
esti
mate

1QKA
iy o u

Description

High*

Less:
Corporate profits tax liability.__________________
Inventory valuation adjustment_________________
Dividends_____________________________________
Plus:
Capital consumption allowances, etc_____________
Dissaving_____________________________________
Equals: Business demand__________________________

12.8
.3
8.0

24.5
—4.0
10.0

24.0
0
7.5

19.8
6.6
35.9

22.0
15.2
47.7

26.3
12.5
51.3

Supply (prices at beginning of period):
Expenditures for gross national product_________________

262.7

288.0

325

Less:
Federal Government purchases of goods and serv
ices_________________________________________
State and local government purchases of goods and
services______________________________________
Consumer expenditures_________________________
Equals: Business supply____________ ______ ________

23.7

32.4

18.9
183.9
36.2

19.7
190.9
45.0

22
206
48

22
199
45

22
193
41

Business inflationary pressure: Excess of business demand over
supply__________________________________________________

* - .3

•2.7

3.3

6.3

10.3

1Assumes Federal consolidated cash expenditures of $65 billion.
2 Assumes Federal consolidated cash expenditures of $75 billion.
3 Assumes Federal consolidated cash expenditures of $85 billion.
<Assumes prices stabilized at approximately Jan. 25, 1951, levels with wholesale prices some 11 to 13 per*
cent above June 1950 levels, and retail prices 6 to 8 percent higher.
* For fiscal 1950 the inflationary pressure was negative, prices declining about 1 percent.
• For fiscal 1951 the inflationary excess will bring about a substantial rise in prices of 6 to 8 percent; a larger
price rise than indicated by the primary inflationary excess demand shown above because secondary spiral
ling effects have been permitted.
Source: The U. S. Department of Commerce, the Bureau of the Budget, and the staff of the Joint Com
mittee on the Economic Report.

I n f l a t io n a r y G

overnm ent

S p e n d in g

In the third place, let us take a look at Federal Government
expenditures and Government receipts.8 Note here that the figures
deal with actual cash outlays and cash receipts, not the ordinary
administrative budget. As will be remembered, the total of Federal
Government expenditures given in the President's budget message
was $71.6 billion. But this omits certain transfer payments such as
social security outlays. The total cash to be paid out is $74.1 billion.
Note, too, that the cash budget may actually be balanced for fiscal
1951, even though the traditional budget is estimated to show a
deficit of $2.7 billion. Further details are shown in table V below.
7 See appendix C, p. 80.
« As estimated in the President’s budget message, January 1951.

ECONOMIC HAZARDS OF INFLATIONARY DE1FENSIE ECONOMY
T able

V.— Consolidated Federal cash budget, fiscal years 1960 to 1958
[Billions of dollars]
Bureau of the Budget
Description
1950 actual

Receipts from the public:
Direct taxes on individuals ....... . Direct tax^s on corporations __
Excise taxes and finstoms
_
_

1951 estimate 1952 estimate

_ - __ _
- _ _ _

18.1
10.9
8.0
3.9

22.3
13.6
8.8
4.6

26.8
20.0
8.8
5.7

Total cash receipts__________________________________

40.9

49.3

61.3

17.7

27.1

51.9

12.4
4.7
.6
0
0

21.2
4.8
.8
.3

41.5
7.5
1.3
1.1
.5

13.6

10.6

10.5

4.3
9.3

4.1
6.5

4.6
5.9

payments to the public:
National defense and directly related activities...............
Military services__________________________________
International security_____________________________
Atomic energy______________ ______________________
Promotion of defense production___________________
Civil defense______________________________________
Economic stabilization and allocation__________________
Past wars and emergencies____________________________
Interest_________________________ _____ __ _________
Veterans_________________________________________

Civil functions: Total........ ......... .......... —..........................

11.9

11.3

11.4

Total cash payments________________________________

43.2

49.1

74.1

Excess of receipts from p u b lic .____________________________
Excess of payments to public. _ ___________________________

2.2

.2
12.8

i Less than 100 million dollars.
Source: Bureau of the Budget, based on existing tax law.

ethods

e m o v in g

I n f l a t io n a r y P

ressu res

Thus far no method has been mentioned for absorbing the excess
dollars except that of marking up prices, that is, inflation. Inflation
ary pressures invariably take this outlet if a policy of drift or “wait
and see” is followed.9 For the current fiscal year, the excess of $7.9
billion in consumer demand plus the excess of $2.7 billion in business
spending represented almost entirely the consumer and business
anticipatory buying since last June, and accounts completely for the
sharp jump in prices that has occurred thus far. The effect which a
$16 billion consumer excess demand added to a $10.3 billion excess
business spending would have in fiscal year 1952 (these will result if
Federal expenditures rise as high as $85 billion) can only be guessed
at but certainly in the absence of further tightening of controls these
inflationary pressures could easily blow the lid off prices, and accel
erate the present inflationary price spiral despite present controls.
For the fact should be remembered that all these figures are estimated
on the premise that there will be efficient enforcement of the controls
and taxes now in operation.
• See appendix C, p. 85 and following pages.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

On the other hand, note that if Federal Government expenditures
are held down to $65 billion the total excess ($3 billion consumers
plus $3.3 billion business) is sufficient, again with full and efficient
operation of present controls and taxes, to cause wholesale and retail
prices to continue to rise at nearly present rates of increase. If
Federal Government expenditures take the middle course, i. e., do
not exceed $75 billion (the President’s cash budget figure is $74.1
billion), the total excess will be $16.3 billion ($10 billion consumer
plus $6.3 billion business) or enough despite present controls and existing
taxes to cause prices to rise at least twice as fast as they have risen
since June 1950.
Clearly other outlets than inflation must be devised for such excess
money demand, both on the money side and on the goods side. On
the money side, excess consumer buying power can be lowered by
taxes, by preventing increases in borrowing, and by stimulating sav
ings, especially the purchase of Government bonds. Excess business
buying power can likewise be diminished by taxes, by general and
selective control of commercial bank credit expansion, and by in
creased business saving.
On the goods side, consumer buying can be restricted and savings
stimulated by simple nonavailability of merchandise such as automo
biles, etc. The capital expenditures of business can likewise be limited
by direct inventory control, allocations, priorities, etc.
In table VI a combination of these methods is presented in quanti
tative terms. The figures are useful only in indicating the possibilities
and the magnitudes which, realistically thinking, one ought to keep
in mind.10 While there is considerable leeway for variation in detail,
the total additional tax and control effort must be at least as great
as the figures presented below because— and this fact bears repeated
emphasis— the assumptions underlying these estimates are conserva
tive. The figures showing the amount of inflationary pressure, in
other words, will be at least those here given. If because of delay or
lack of political courage our total effort falls short, by this much will
the evils of inflation be aggravated.
As the Guaranty Trust Co. has cogently stated:11
The question is whether the sacrifice shall be distributed by taxation, with some
regard for fairness in the present and future, or whether it shall take place by in
flation, which imposes the burden without equity, order, or control. Inflation
bears most heavily on those whom a rational tax system is designed to spare: the
aged, the disabled, the widowed, the orphaned, and the educational and philan
thropic institutions that are exempt from statutory taxes for good social reasons.
It penalizes these groups not only today but for years to come, because it destroys
the value of the savings, the insurance, and the pension funds on which they will
depend for future support. It undermines the social security that is a major
objective of our economy and promotes the social unrest that is a primary aim
of our enemies.
10 See appendix C, p. 91.
11 In the Guaranty Survey, February 1951, vol. X X X , No. 10, p. 3,

80427— 51--------2

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

T able

VI.— A tentative program for removing the inflationary pressures, fiscal years
1951 and 1952
[Billions of dollars]
1952
Description

1950

1951
Low *

Middle 2

High 3

Excess consumer demand...................................

-1 .9

7.9

3.0

10.0

16.0

Increased personal taxes................................................
Increased excise taxes...................................................
Increased corporate taxes........................................... .
Price rise or fall__________________________________

0
0
0
7 - 1 .9

0
0
0
*7.9

41.7
• 1.0
«.3
0

<7.2
• 2.0
•.8
0

M 0.3
•4.0
•1.7
0

Excess business demand.....................................

-.3

2.7

3.3

6.3

10.3

8 2.7

•1.3
2.0
0

•3.3
3.0
0

•6.3
4.0
0

Increased corporate taxes......... ................. ...... ..........
Direct controls: additional saving *____ ____________
Price rise or fall_________ _________________________

? -.3

i Assumes Federal consolidated cash expenditures of $65 billion.
* Assumes Federal consolidated cash expenditures of $75 billion.
* Assumes Federal consolidated cash expenditures of $85 billion.
4 Implies increase in personal taxes of 2 billion dollars on the low assumption, 8 billion dollars on the
middle assumption, and 12 billion dollars oa the high assumption.
8 Implies an increase in excise taxes of 1 billion dollars on the low assumption, 2 billion dollars on the
middle assumption, and 4 billion dollars on the high assumption.
• Implies increased corporate taxes of 2 billion dollars on the low assumption, 5 billion dollars on the
middle assumption, and 10 billion dollars on the high assumption.
7 For fiscal 1950 the inflationary pressure was negative, prices declining about 1 percent.
8 For fiscal 1951 the inflationary pressure resulted primarily in a rise in prices of 4.7 percent between June
and December 1950.
• Implies use by the Defense Production Authority of inventory limitations, priority allocations, material
control programs, and investment limitations to direct and limit business investment to the extent indi
cated.

e f l a t io n a r y

ffect

axes

In trying to estimate how much of a deflationary influence tax
increases exert, one must take note of a complicating and in many
ways a baffling problem. Taxes that keep consumers and business
from spending or that come directly out of such spending are fully
effective in bringing down excess buying power. But if taxes come
out of savings, that is, out of funds that were not going into the
market to bid for goods and services, they may not have a deflationary
effect, even though they do raise moneys for the Government. The
kind of taxes levied is therefore highly important.
In table VII an attempt is made to evaluate quantitatively the
economic effects of the tax levies that might be necessary to help
remove the inflationary pressures at low, medium, and high levels of
Federal cash expenditures. In view of the current lack of facts
concerning the impact and incidence of various kinds of taxes, no
pretense can be made that these estimates represent anything more
than the best guesses now available.
From the general economic point of view, the usefulness of in
creased taxes to curb inflation is beyond cavil. But caution must be
exercised that the specific kinds of taxes levied do not limit the pro
duction of the things needed to fight communism. On the contrary,
taxes should be such as to leave the productive efficiency of the labor
force at a reasonable and sustainable maximum.. Thus in designing
excise taxes, clearly the heaviest impact should be borne by those
durable goods, services, and luxury products whose demand it is
desired to curtail because they compete with defense items in terms of

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

raw materials, labor skills, or plant. Such excises must also be de
signed, however, to avoid heavy burdens on strict necessities such as
basic foods for home consumption. For if such is not done, tens of
millions of low-income consumers, among whom are found a sub
stantial fraction of workers and farmers, will be seriously short of the
necessities required for efficient participation in the defense program.
The production of defense products will be less than the maximum.
T able

VII.—Proposed Federal Government fiscal legislation and its economic
effects, Federal fiscal year 1952
[Billions of current dollars]

Description

Net ad
ditional
Govern
ment
On cor
funds and porate
private
undi
vided
tax lia
profits
bilities

Estimated economic effects—

On per
sonal
income

On con
sumer
demand

On in
dividual
volun
tary
savings

On gross
national
product

LOW— $65 BILLION

Individual: Income taxes...........................
Business:
Excise taxes___ ______ _______ _____ _
Corporate income taxes........................

2.0

- 1 .7

-0 .3

1.0
2.0

-1 .3

- 0 .7

- 1 .0
- 0 .3

- 0 .4

T otal.................................................

5.0

-1 .3

- 0 .7

- 3 .0

0.7

+ 1.0
+ 1.0

MIDDLE— $75 BILLION

Individual: Income taxes_______________
Business:
Excise taxes_______________________
Corporate income taxes........................

8.0

- 7 .2

- 0 .8

2.0
5.0

-3 .1

- 1 .9

- 2 .0
- 0 .8

-1 .1

Total..................................................

15.0

-3 .1

- 1 .9

-1 0 .0

- 1 .9

+ 2.0
+ 2.0

HIOH— $85 BILLION

Individual: Income taxes_______________
Business:
Excise taxes_______________ ________
Corporate income taxes.....................

11.6

-1 0 .4

- 1 .2

4.0
10.0

-6 .3

- 3 .7

- 3 .9
- 1 .7

-2 .0

Total......................... .......................

25.6

- 6 .3

- 3 .7

-1 6 .0

-3 .2

E xis t in g T a x B u r d e n

4.0
4.0

L o w - I n co m e B r a c k e t s

If one wishes to be sure to tax consumption, where should the tax
fall? On income brackets below $2,000? Or above $4,000? The
answer appears clearly in table VIII. Noticethat the nearly 2,500,000
spending units with incomes in excess of $7,500 spent nearly 3 times as
much on durable goods as did the 17,000,000 spending units getting
less than $2,000.1 Of course, they spend less on food.
Inasmuch as average wages per week are about $64, let us assume
that the average factory worker gets about $3,200 (50 times $64) a
year. In short, about half of the Nation’s spending units get about
$3,000 or less. How much of total consumer expenditures do these
people in the lower half account for? Note from column (1) of table
VIII that it is about three-tenths of the total.
The way to cut consumption, therefore, is to cut into the incomes
of those getting over $3,000. That’s where the big bulk of the con
sumption is done. And the way to cut such incomes is to step up
the income tax in those brackets.
i About 1,600,000 of the 2,500,000 spending units with incomes above $7,500 are families; the 17,000,000
spending units with incomes below $2,000 include 10,000,000 families.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

V III.— Consumer expenditures

T able

(A) E S TIM A T E D D IST R IB U T IO N OF CONSUMER EXPE N D ITU R ES, B Y INCOM E
B R A C K E TS , FOR 1948 IN PE RC E N T OF TOTAL

Spending unit in
come brackets
(in $1,000)

Total

Total
retail
sales

Retail
food
sales

Retail
sales less
food

Liquor
sales

Tobacco
sales

Durable
sales

Personal
income
tax

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

0-1..............................
1-2..............................
2-3..............................
3-4..............................
4-5..............................
5-7.5...........................
7.5 up .........................

3.9
9.3
18.1
20.7
14.4
16.1
17.5

4.1
11.4
20.5
21.8
14.2
14.6
13.3

3.9
8.2
16.7
20.1
14.5
16.9
19.8

0.9
8.9
17.2
22.5
12.7
16.4
21.4

3.9
11.4
21.1
22.9
14.3
14.1
12.2

2.2
5.6
18.2
20.0
15.8
17.0
21.2

Total................

100.0

100. a

0.02:
.5
1.6
2.5
2.4
3.8
8.5

0.1
2.68.5
12.9
12 2
19. &
44.1

(B) A P PLIC A TIO N OF 1948 ESTIMATES TO 1960 TOTALS
[In billions of dollars]

7.5 up .........................

7.4
17.7
34.5
39.5
27.5
30.7
33.4

5.0
11.9
23.1
26.5
18.4
20.6
22.4

1.8
5.1
9.2
9.8
6.4
6.6
6.0

3.2
6.8
13.9
16.7
12.0
14.0
16.4

0.03
.3
.5
.7
.4
.5
.6

0.2
.5
.8
.9
.6
.6
.5

0.6
1.5
4.7
5.2
4.1
4.4
5.5

Total...............

190.8

127.9

45.0

82.9

3.0

4.0

26.0

0-1..............................
1-2..............................
2-3..............................
3-4 ...................
4-5..............................

19.3

N otes.—Items (1) and (2) are estimated 1948 distributions for total consumer expenditures. Items (3),
(5), and (6) are estimated 1948 distributions for food, liquor, tobacco, and durables expenditures. F or
detail see article referred to on p. 15.
The lower half of the table, that labeled (B ), is only a very rough approximation of the desired information,,
as it applies estimated distributions for 1948 to estimated total for 1950.
Total consumer expenditure of 190.8 billion and retail sales of 127.9 billion are Department of Commerce
estimates. Total retail sales of food, liquor, tobacco, and durables are estimated on basis of Department
of Commerce data.
Source: See hearings, Jan. 31, 1951, R. A. Musgrave.

Increased emphasis is lent to such a procedure on grounds of equity.
Who now actually bears the heaviest percentage burden expressed in
terms of taxes to income? The families getting less than $1,000 or
those getting over $3,000? The fact is shocking but true that it is
those in the lowest-income bracket who already bear a disproportion
ate share of the tax burden. On this point, Prof. R. A. Musgrave
presented to the Joint Committee on the Economic Report in its recent
hearings an advance copy of the results of a research group study at
the University of Michigan. The data are summarized in table IX
in the form in which they are soon to be published in the National
Tax Journal. The table merits most careful study. Note that the
total tax structure in this country, including State, local, and Federal
taxes, bears most heavily on those getting under $1,000 a year. Only
the small number lucky enough to get $7,500 a year or over bear a
larger proportionate share of the total tax burden. That fact is
graphically depicted on chart 1.
A further fact should likewise be kept in mind. If the theory that
needed sacrifices should be imposed somewhat equitably is the only
one that squares with the American conscience, then note that the
considerable rise in food prices has already imposed no small amount
of belt-tightening upon tens of millions of families in the low-income
brackets because their incomes tend for the most part to consist of

C hakt 1

1948 TAX PAYMENTS AS PERCENT OF INCOME
BY INCOME BRACKETS

SO
U
R
C
E

for

From "Notes
Panel Discussion on Fiscal Policy”,
by R. A Musgrove before the Joint Committee on
the Economic Report, Jonuory 31, 1951

The Library of Congress
Legislative Reference Service
February 7,1951
No 6 7 3

80427— 51

(Face p. 14)

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

w ages, salaries, pensions, or other incomes that usually increase less
rapidly and therefore fall behind in the inflation merry-go-round.
T able

IX .— 1948 tax payments as percent of income by income brackets
Spending unit income bracket, before tax, in dollars
Under
1,000

1,0001,999

2,0002,999

3,0003,999

4,0004,999

5,0007,499

7,500
and up

0.2
6.1
5.1
2.5

2.8
4.3
4.3
2.1

4.4
3.8
4.0
3.3

5.5
3.7
4.0
2.5

7.0
3.7
3.5
1.9

9.3
3.8
3.4
1.2

12.3
9.9
2.3
.5
1.4

7.8
5.6
3.4
1.7
.4

13.9

13.5

15.5

15.8

16.1

17.7

26.3

18.8

9.7

6.8

6.1

6.0

5.6

5.4

5.5

5.8

All levels of government:
8. Total.......................................

23.6

20.3

21.6

21.8

21.7

23.1

31.7

24.7

Addenda:
9. Percent of spending units:...
10. Percent of income..................

12.2
1.9

17.7
7.0

22.9
14.8

20.1
17.9

11.6
13.4

10.2
16.3

5.3
28.8

100.0
100.0

Federal Government:
1. Personal income taxes............
2. Corporation income taxes___
3. Excises....................................
4. Payroll taxes..........................
5. Estate and gift taxes..............
6.
Total.............................
State and local government:
7. Total.......................................

Total

1. For details see The Distribution of Tax Payments by Income Groups in 1948, by R. A. Musgrave,
J. J. Carroll, L. D. Cook, and L. Frane, to be published in the National Tax Journal in issue for March 1951.
2. Effective tax rates in table I X are computed on the basis of the Department of Commerce estimate
of personal income of $211.9 billions plus imputed retained earnings of corporations and the unshifted portion
of corporate income taxes of $20.6 billion. It is assumed that the total personal income thus determined is
distributed in the same way as the estimated distribution of money income by the survey research center
of the University of Michigan in the 1949 Survey of Consumer Finances, prepared annually for the Board
of Governors of the Federal Reserve System.
3. Line 2 of table IX is based on the assumption that one-third of the corporate income tax is shifted for
ward to consumers in higher prices and one-eighth backward in lower wages. If it is assumed that the
corporation tax is not shifted, the percentages in line 8 become as follows: 20.4, 17.8, 19.1, 19.5, 19.5, 21.7,
33.8, 24.0. For alternative assumptions see article cited in note 1.

On the other hand, what brackets of income get most of the windfall
benefits? Those, of course, that are effectively organized to increase
their incomes or receive direct benefit from increases in prices; that
i$; the flexible incomes derived from profits, from returns on farm and
business operations, from speculation in the commodity and stock
markets, from ownership of equities, and from dividends. In what
income brackets do such incomes increasingly become more and
more important? In those from $4,000 on up. Clearly, increased
taxes should tap windfall incomes most. Those benefiting most from
inflation are increasingly found in brackets above $3,000-$4,000.
Even if one attempts to tax such windfall gains, say by designing a
rate schedule to raise large additional sums from corporate profits, the
fact is perverse but true that in the years of high-level economic
activity ahead there is likely to continue to exist most of the time a
sellers’ market, one in which through price rises, taxes on corporate
profits can be most readily passed on to consumers. To design a
corporate tax structure such that it will fall mainly on the corporations
themselves, thus reducing their inflationary potential, or upon their
stockholders through a reduction in dividends, is most difficult. Thus
the prime beneficiaries of inflation, those receiving flexible incoines
such as dividends and profits and other entrepreneurial returns, which
in turn constitute the major portion of the incomes of those in the upper
income brackets, are most likely to emerge from this emergency, as
indeed they have from every war in American history, considerably
wealthier and better* off, both absolutely and relatively, than before.
Every war seems to bring its crop of war millionaires.

ECONOMIC HAZARDS OOF INFLATIONARY DEiFEQSTStE ElCONOiMY

These are some of the considerations that make so extremely
difficult and complicated the task of estimating what the economic
effect will be of various types of taxes, as has been done in table VII
above, and in Dr. MusgraveJs study, a portion of which is reproduced
in table IX .
If, however, the estimates in table VII come even moderately close
to actual likelihood (and it is felt that they do), then the total program
which has a chance of coming reasonably close to removing excess
consumer and business inflationary pressure (thus helping to keep
prices at approximately January 25, 1951, levels and making other
defense and control programs work) can be summarized in brief as
it is done in table X and table X I. Note that these tables virtually
recapitulate all estimates and epitomize the reasoning given thus far.12
Note, too, that in each case inflationary pressures are removed but
only because of the assistance of direct controls in increasing consumer
and business savings.
T able

X . — Estimated inflationary pressure at low, middle, and high levels of Federal
Government expenditures in fiscal 1952
[Billions of dollars]
Federal cash expenditures
inscription
Low

Federal cash expenditures...... ............... ..................................__

High

Middle

65.0

75.0

85.0

6.3

16.3

26.3

Consumer:
Demand____________ ______ ____ __________________
Supply__________________________________ ______ __

209.0
206.0

209.0
199.0

209.0
193.0

Inflationary pressure_____________________________

3.0

10.0

16.0

Business:
Demand___ _________ _____________________________
Supply___ _______________________________________

51.3
48.0

51.3
45.0

51.3
41.0

3.3

6.3

10.3

Total inflationary pressure 1_________________________

Inflationary pressure__________________________
1 See tables H I and IV.
T able

XI. — Estimated additional taxes and controls needed to remove inflationary
pressures
[Billions of dollars]
Medium

Low
Description

Tax li
ability

Deflation
ary effect

Tax li
ability

High

Deflation
ary effect

Tax li
ability

Deflation
ary effect

Effect on excess consumer demand of—
Increased personal taxes_____________
___________
Increased excise taxes
Increased corporate taxes____________

2.0
1.0
2.0

1.7
1.0
.3

8.0
2.0
5.0

7.2
2.0
.8

12.0
4.0
10.0

10.3
4.0
1.7

Total______ _ ___________________

5.0

3.0

15.0

10.0

26.0

16.0

Effect on excess business demand of—
Increased corporate taxes..__________
Direct controls, additional savings___

2.0

1.3
2.0

5.0

3.3
3.0

10.0

6.3
4.0

Total

.........................................

3.3

6.3

10.3

13 For a different and more detailed statement of the final results in the form of a Nation’s Economic
Budget, see appendix O, p. 94, table X IV .

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
S u b s t a n t ia l B

udget

Surplus R

e q u ir e d

T o C u r b I n f l a t io n

A final question presents itself. If direct controls and monetary
and fiscal policies are adopted, adequate substantially to remove the
inflationary pressures that under present legislation are inevitable,
will such taxes likewise balance the Federal budget and implement a
ay-as-we-go policy? The answer is briefly shown in table X II.13
Tote that the general conclusion which one almost unavoidably reaches
here is that such a program, if it is to be at all adequate to help make
our present price and wage controls work, will have to be one which
will more than balance the Federal cash budget.
If one considers the period from July 1946 to date in its entirety,
the fact emerges clearly that the total Government debt now is less
than on July 1, 1946. Thus the marked increase in prices since that
date occurred while the Federal Government was paying its way.
During the 2 years, 1947 and 1948, despite a substantial surplus of
revenues, prices rose sharply. In 1949, despite the Federal deficit,
wholesale and retail prices fell. Again, the abrupt price jump in prices
that took place in the second half of 1950 occurred while the Govern
ment was operating in the black. The fact that the program here
suggested falls somewhat short of enabling the Government to con
tinue to do so greatly reemphasizes the fact that this is not a maximum
but a minimum program.
In short, by the amount that Government cash expenditures exceed
$70 billion, by that amount the minimum amount of additional taxes to
be raised should exceed $15 billion, and the sooner the better. Ex
cessive demand is like yeast. An extra $10 billion in taxes levied in
the first quarter of 1951 will do more to check inflation than $12 or
$15 billion in the fourth quarter. By that time rising prices will
again kite defense expenditures in the same way that the price rise
from April to December 1950 absorbed nearly $3 billion of defense
appropriations.14 Such emasculation of our tax and defense dollar,
if allowed to continue, will explode in financial disaster and catas
trophic inflation.

T able

XII.— Estimated additional taxes and the Federal budget, fiscal year 1952
[Billions of dollars]
Assumptions
Description
Low

Middle

High

Cash consolidated budget:
Cash expenditures..................................................................
Cash receipts (existing law)................................................

65.0
60.0

75.0
60.0

85.0
60.0

Cash deficit (existing law)..................................................

5.0

15.0

25.0

Proposed additional taxes:
Increase in individual income taxes......................................
Increase in excises...................................................................
Increase in corporation taxes.................................................

2.0
1.0
2.0

8.0
2.0
5.0

12.0
4.0
10.0

Total (liability basis)..........................................................
Total collections in fiscal year 1952.,...........................................

* 5.0
4.2

15.0
13.3

26.0
24.9

Cash deficit (proposed tax legislation)...............................
Conventional budget deficit (proposed legislation)....................

.8
4.5

1.7
5.4

1.1
4.8

13 See appendix O, p. 95.
m See S. Rept. No. 2684, 81st Cong., 2d sess., December 20, 1950, p. 3.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

S u ppo se T a x I n crea se s A re D e l a y e d ?

As was previously stated, the industrialists, business executives,
and economists that testified before this committee unanimously
agreed and, in fact, emphasized strongly that direct controls over
wages, prices, and production could not possibly halt the rising tide of
inflation threatening America unless such controls were backed early
enough and vigorously enough with fiscal and monetary measures.
Thus far in this staff memorandum, the discussion of the economic
implications of defense mobilization has been limited to quantitative
estimates and statistical tables showing the magnitude, and location
within the economy, of the excess of incomes available to consumers,
business, or Government, over the supplies of goods and services avail
able to each. All computations have been based on the hope that
adequate tax and monetary policies would be drafted soon enough to
enable direct controls over prices, wages, and production to function
effectively.
But what will happen if this Nation fails so to do? What will be
the*fruits of delay, of procrastination, of a •policy of utoo little and too
latent
An examination of monetary statistics provides the rudiments of an
answer. Every increase in bank reserves of $1 can bring about an
increase in potential lending power, in other words, credit expansion,
on the part of the banks of $5 to $6. The amount of the Federal Gov
ernment debt other than that held by the Federal Reserve Bank &YStenij Government trust funds, or individual savmgs bonds*, is sucE that
iFcommercial banks, other financial institutions, and individuals cared
to force the Federal Reserx§^iteJ9a to buy the Government securities
they own, bank reserves would be increased enough to permit at the
very minimum an increase in currency and deposits of three or four
times the present volume of currency and deposits in circulation.
If by any chance the public thought that such an event were going to
happen, and if the rates of turn-over of circulating media (bank de
posits plus currency outside the banks) were to rise to something like
their 1929 levels, it would make possible a further increase in the effec
tive monetary supply of two to three times. This would be adequate
to support a price level easily five times higher than the present even
if the United States Treasury did not borrow a single additional nickel.
In short, this is what could then happen here: a runaway “hyper
inflation” that might balloon the price level at ever-increasing rates of
increase to astronomical levels. It is this fear, fortunately not yet
widespread, that accounts in part for the flurry in the cashing of E
bonds since June of 1950. It is this fear that may have helped to
propel some investment funds into real estate, commodities, and
equities. It is in part this fear-induced flight from the dollar that
has caused the velocity of circulation of demand deposits to jump to
a 15-year high in recent months. Unless promptly nipped in the bud,
it can lead to runaway inflation.

PART II
INFLATION AND COMMUNISM
Many readily concede the catastrophic, destructive powers of infla
tion, but feel that “ It can’t happen here.” Such “ pushing of one’s
luck” coupled with misplaced confidence that things will turn out all
right has pervaded many another government until it was destroyed
by subversive elements who promptly stabilized the economy and the
price system under a new government. All the destructive elements
which history and economic analysis show to be necessary to dis
integration of the currency and destructive run-away inflation are as
prevalent here in the United States as in almost any country in which
hyperinflation has ever occurred.
The tremendous growth in the public debt which has occurred in
the last 10 years, together with the ability by private parties at their
option to convert such debt into bank and money reserves creates the
potential for an inflationary conflagration, once the tinder caught fire.
The good sense and the confidence of the American people m their
Government and in the private enterprise system have so far prevented
this potential from exploding. However, it could happen here if
through timid tax, budgetary, and monetary policies, direct controls
were allowed to break down. It is significant that, almost without
exception, every country suffering a run-away inflation in recent years
has not only had rigorous laws on the books providing for direct controls
over prices, wages, and materials, but virtually astronomical interest rates
and drastic penalties for noncompliance. In China, for example, the

maximum penalty for violation of price regulations was beheading.
Yet, despite brief halts from time to time, prices continued.to zoom
upward, in large part because tax, budgetary, and monetary policies
were too easy, too little, and too late.
I n f l a t io n : T

nem y

Six t h

olum n

In his book entitled “ Economic Consequences of the Peace,” John
Maynard Keynes observed:
Lenin is said to have declared that the best way to destroy the capitalist system
was to debauch the currency * * * Lenin was certainly right. There is no
subtler, no surer means of overturning the existing basis of society than to debauch
the currency. The process engages all the hidden forces of economic law on the
side of destruction, and does it in a manner which not one man in a million is
able to diagnose.

This excerpt has been widely quoted, particularly so because it was
published in 1919 less than 2 years after the Communists took over
Russia. Nowhere, however, does a similar statement appear in the
published works of Lenin or Stalin.

Though a direct statement—be it by Lenin or Stalin—on the
deliberate use of inflation as a tool for fostering revolutionary unrest
and promoting world revolution seems to be lacking, the Communist

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

point of view can easily be ascertained on the basis of the party’s
general theory of revolution and its interpretation of the present
world situation.
In the summer of 1915 Lenin, in his study, The Collapse of the
Second International, enumerated the following three prerequisites for
a revolution. He wrote:
For a Marxist there is no doubt that a revolution is impossible without a
revolutionary situation; furthermore, we know that not every revolutionary situ
ation leads to revolution. What are, generally speaking, the characteristics of a
revolutionary situation? We can hardly be mistaken when we indicate the fol
lowing three outstanding signs: (1) it is impossible for the ruling classes to main
tain their power unchanged; there is a crisis “ higher up,” taking one form or an
other; there is a crisis in the policy of the ruling class; as a result, there appears a
crack through which the dissatisfaction and the revolt of the oppressed classes
burst forth. If a revolution is to take place, it is usually insufficient that “ one
does not wish way below,” but it is necessary that “ one is incapable up above” to
continue in the old way; (2) the wants and sufferings of the oppressed classes
become more acute than usual; (3) in consequence of the above causes, there is a
considerable increase in the activity of the masses who in “ peacetime” allow
themselves to be robbed without protest, but in stormy times are drawn both by
the circumstances of the crises and by the “ higher-ups” themselves into independ
ent historic action.
Without these objective changes, which are independent not only of the will of
separate groups and parties but even of separate classes, a revolution, as a rule,
is impossible. The coexistence of all these objective changes is called a revolu
tionary situation. This situation existed in 1905 in Russia and in all the periods
of revolution in the west, but it also existed in the seventh decade of the last
century in Germany; it existed in 1859-61 and 1879-80 in Russia, though there
was no revolution in these latter instances. Why? Because a revolution
emerges not out of every revolutionary situation, but out of such situations where,
to the above-mentioned objective changes, subjective ones are added, namely, the
ability of the revolutionary classes to carry out revolutionary mass actions strong
enough to break (or to undermine) the old government, it being the rule that
never, not even in a period of crises, does a government “fall” of itself without
being “ helped to fall.” 1

This is how the Marxist views a revolution * * *
Lenin believed further that inflation particularly accentuated and
aggravated the “wants and sufferings” of the proletariat in capitalist
countries— prerequisite No. 2 of a successful revolution— and called
for a remedy through revolutionary action. In September 1917 in
The Threatening Catastrophe and How To Fight It, he said:
The question of the rise in the fixed price of grain has yet another side to it.
This rise means a new chaotic increase in the issue of paper money, a new step for
ward in the process of increasing the high cost of living, increasing the financial
disorganization, and bringing nearer a financial collapse. Everybody recognizes
that the issue of paper money is the worst kind of a compulsory loan, that it
worsens the conditions principally of the workers, of the poorest section of the
population, that it is the chief evil in the financial confusion.
*
*
*
*
*
*
*
There is no other way of earnestly fighting the financial disorganization and the
inevitable financial collapse than a revolutionary rupture with the interests of
capital and organization of really democratic control, i. e., control “ from below,”
control of the workers and the poorest peasants over the capitalists—that way
which all our preceding analysis deals with.
The unlimited issue of paper money encourages speculation, allows the capital
ists to make millions, and places tremendous obstacles in the path of the muchneeded expansion of production; for the dearth of materials, machines, etc., grows
and progresses by leaps and bounds. How can matters be improved when the
riches acquired by the rich through speculation are being concealed?
An income tax with progressive and very high rates for large and extra-large
incomes, may be introduced. Our Government, following the other imperialist
i Collected Works, vol. X V III, New York 1930, pp. 279-280.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

governments, has introduced this tax. But to a considerable extent it remains a
fiction, a dead letter, for, in the first place, the value of money is sinking faster and
faster; secondly, the concealment of incomes is the more general the more their
source is speculation and the more the preservation of commercial secrets is safe
guarded.
To make the tax real and not fictitious, real control and not one on paper is
required. Control over the capitalists, however, is impossible if it remains
bureaucratic, for the bureaucracy itself is connected and intertwined with the
bourgeoisie by thousands of threads. This is why in the Western European
imperialist states, whether monarchies or republics, financial stability is achieved
only at the price of introducing “ labor duty” which creates for the workers
military penal labor or military slavery.
Reactionary bureaucratic control—this is the only means known to the im
perialist states, the democratic republics of France and America not excluded;
this is how they shift the burdens of the war onto the proletariat and the labor
ing masses in general.
*
*
*
*
*
*
*
In nationalizing the banks, in making the circulation of checks compulsory by
law for all the rich, in abolishing commercial secrets, in introducing the confisca
tion of property for concealing incomes, etc., the workers and peasants, organized
in unions, could most easily render control both effective and universal, i. e.,
control over the rich, control which would return to the treasury the paper money
issued by it, by taking it away from those who have it, from those who conceal it.
For this purpose a revolutionary dictatorship of the democracy headed by the
revolutionary proletariat is necessary, i. e., for this purpose democracy must
become revolutionary in deeds.2

Later Soviet authors (for instance M . Ioelson in the War of Cur
rencies [Moscow, 1935] and the contributor of the article on inflation
to the Great Soviet Encyclopedia) pointed out that inflation means
in the beginning only ah “impressive redistribution of national income
to the benefit of the rifling classes” and “pilferage of the workers” but
that in the end it hits the bourgeoisie as well since it favors the debtors
to the disadvantage of the creditors and leads to economic instability,
to complete disorganization of economic life and to chaotic conditions
in the capitalistic countries.
Thus inflation is regarded by the Communists both as a symptom
of an economic crisis and of a progressive decay of the capitalist system
and as a welcome ally in the struggle waged by them against the demo
cratic camp. No amount of regulation, asserts a 1950 publication
of the Institute of Economics of the U. S. S. R. Academy of Sciences
on the Aggressive Ideology and Policy of American Imperialism, can
effectively control inflation and combat the crisis of overproduction.
The spread of inflation in the United States after World War II—
insists Moscow—has already produced a radical decline in the real
wages of the American workers, has lowered the purchasing power of
the American masses and has sharpened the conflict between produc
tion on one side and consumption on the other.

The Communists see eye to eye with those speculators in the United
States who by word and deed are encouraging a “ flight from the
dollar.” They too point out that savers are “ suckers” to buy or hold
E bonds if at the end of the 10-year period they find their principal
reduced in buying power by an intervening inflationary price rise.
It is equally unreasonable to expect that, having saved, they will
invest their savings in the securities of private enterprises, if they are
to see their savings disappear, as did so many in the last great depres
sion, in the bankruptcy of enterprises swept down in the agony of
severe deflation. On the one hand, there is the spectre of inflation
a Collected Works, vol. X X I, New York 1932, pp. 206-208.

ECONOMIC HAZARDS OF INFLATIONARY DEIFENStE ECONOMY

discouraging private savings; on the other, there is the spectre of a
destructive deflation discouraging the investment of savings in private
enterprises. Taken together, according to the Communists, they
mean the ultimate death of private enterprise itself.
S ome H

E x a m p l e s o f t h e R e l a t io n B e t w e e n M
I n s t a b il it y a n d S u b v e r s iv e A c t iv it ie s

is t o r ic a l

onetary

Given this connection between monetary instability and the under
mining of our economic system, it is quite easy to understand Keynes’
further statement of 1919: that the inflationary policies which the
belligerent governments of the First World War had pursued “from
necessity or incompetence” were such as to produce the effects of
“what a Bolshevist might have done from design” ; and that, by per
mitting the occurrence of these developments and of the political
recriminations which grew out of them, these governments were merely
“ carrying a step further the fatal process which the subtle mind of
Lenin had “consciously conceived.”
In 1919, however, the Russian Communist Government had been
in power only a bare 2 years; it was not even regarded as certain to
survive, to say nothing of its being destined to become a center of
activity designed to subvert the economic and political institutions
of the Western World. By 1945, on the other hand, Communist
Russia had become a military power of the first rank; and its actions in
the years following 1945 were such as to leave no doubt of its determin
ation to use both its military power and its Communist Party con
nections in other countries to spread its own economic and political
system to the rest of the world.
These postwar years, moreover, were characterized by economic
and political disturbances of precisely the kind which provide the most
favorable environment for the activity of elements bent upon sub
verting the established order. In particular, they were years in which,
as a result of the financial disorders created by the war, a large part of
the world was confronted by a choice between striving to reestablish
monetary stability, on the one hand, and encouraging or permitting
monetary developments, on the other, of the kind which, according to
the judgment attributed to Lenin, represent “ the best way to destroy
the capitalist system.”
As will be seen presently in the discussion to be devoted to particular
countries, the actual tactics pursued by the Russians or their agents
in the work of subversion varied from case to case, depending upon
the relation of each to the government in power in the particular
country involved. Thus, when (as in postwar Austria) the Russians
were neither in undisputed military control of the country nor in a
position to determine directly the composition of the government of
the country, they attempted to ruin the currency in order to discredit
the non-Communist government then in power. When, on the other
hand (as in Eastern Germany) , the Russians were both in undisputed
military control and in a position to put into power a government of
their own choosing, they pursued policies generally aimed at the
maintenance of monetary stability. In intermediate cases, where (as
in postwar Hungary and Rumania) they were from the outset in
undisputed military control, but had not yet succeeded in imposing a
government completely subservient to them, they adapted their

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

policies accordingly: the destruction of the currency was effected
while the non-Communist government was in power, but, once it
was certain that a fully Communist regime would be installed, the
Russians and their Communist instruments supported a policy of
monetary stability.
A different tactical problem was posed for the Russians and their
Communist instruments in those countries in which, during the post
war period, the Russians were not in military control, and in which
the local Communists had not succeeded in seizing control of the gov•ernment. Here (Italy and France are examples in Europe and China
is an example in Asia), it was a question of taking advantage of the
effects of policies, pursued by non-Communist governments “ from
necessity or incompetence,” which, if allowed to continue, would
accomplish, so far as the encouragement of subversion is concerned,
“ what a Bolshevist might have done from design."
AUSTRIA

By the Moscow Declaration of 1943, issued jointly by the United
States, the United Kingdom, and the U. S. S. R ., it was agreed that
Austria was to be reestablished as an independent state. By a series
of subsequent decisions, it was further agreed that there would be a
joint military occupation of Austria, in which the troops of the three
governments named, plus the French, would participate on the basis
of respective zones of occupation; and it was agreed that a four-power
Allied Council would supervise the activities of an Austrian Govern
ment constituted on the basis of free elections to be held at the earliest
possible moment after the conclusion of hostilities.

It was clear, therefore, that the Russians would be in full military
control of only a fraction of a country which was itself so small, and
of such an economic structure, that its split-up into hermeticallysealed Russian and non-Russian zones would present neither the appeal
nor the practicability of the kind of split-up that occurred in Germany.
It was also clear tnat the Russians would not be able to use their
military power or other direct instruments to bring about the type of
sham election which would be bound to return an Austrian Govern
ment of the Soviet's choosing. The Russians' hopes for obtaining a
government subservient to Soviet desires rested, therefore, on the
creation of conditions which would arouse such resentment against a
non-Communist Austrian Government or the non-Communist occupy
ing powers as to play into the hands of the Austrian Communists and
their Russian sponsors. The debauch of a currency issued by the
occupying powers jointly or; by a non-Communist Austrian Govern
ment would have served this purpose perfectly.
From the very beginning of the planning of the financial aspects of
the occupation of'Austria, the Soviets, despite repeated invitations
from the United States and the United Kingdom, refused categorically
to participate in such planning. In retrospect, it is easy to see why:
Participation in the planning would have meant the taking of commit
ments which would have limited their own freedom of action. The
result, in any event, was that the planning went ahead, without Soviet
participation, although the Soviets were kept fully informed as to the
details of this planning.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

From the standpoint of currency policy, the western planners made
two major decisions. First, in recognition of the Moscow declaration's
insistence on the reestablishment of Austria as an independent state,
the military currency used in Austria was to be different from the
military currency used in Germany. Secondly, the monetary separa
tion of Austria from Germany was to be accomplished by a conversion
of the currency then circulating in Austria—the German reichsmark—
into a distinctive Austrian currency; and, since there was no certainty
that the Austrians themselves would be able to produce such a cur
rency in time, there would be first a conversion into the Austrian
military currency, which was therefore to be printed in amounts
sufficient to take care, not merely of the needs of the occupying powers,
but also of the conversion of the whole of the circulating currency.
These conclusions were at once communicated to the Soviet Govern
ment, with a request to indicate whether the Soviets would be pre
pared to use the same military currency as the Western Allies and,
if so, what amounts of such currency they desired. The Soviet reply
was that they would use the currency, and that they wished to have
one-third of the amount that was to be printed. In terms of the
relative size and population of the projected Soviet zone, this was not
an unreasonable request, if it could be assumed that the “one-third”
thus requested would be used as it was to be used in the non-Soviet zones
of occupation: that is, chiefly for the purpose of effecting a currency
conversion. Otherwise, the disbursement of currency to this amount
would be simply added to the already excessive currency supply that

had increased so greatly under the German occupation.
In acceding to the Soviet request for one-third of the printed
stock of military schillings, therefore, the Western Allies emphasized
their understanding that all four of the occupying powers would use
their respective shares of the stock of military currency to effect the
planned currency conversion. To this, the Soviets made no reply
whatever. The reason for their failure to reply on this point became
clear when, a very few months after the cessation of hostilities, and
before the Allied Commission was set up in Vienna, they informed the
Western Allies that they were reaching the limit of their supply of
military currency, and demanded a huge additional amount, to be
delivered immediately.
This action coiifronted the Western Allies with a very serious
dilemma. If they acceded without question to the new Soviet demand,
the way would be left open for further demands of the same kind, and
therefore for the speedy destruction of the new currency with which
the Allies proposed to endow newly liberated Austria. If, however,
they refused flatly to supply any additional currency, they ran the
risk of destroying all possibility of an effective working of the experi
ment in cooperation with the Soviets which the proposed Allied
Council for Austria was designed to represent. They therefore com
promised: the Soviets were to have additional currency, but not as
much as had been requested; the additional currency to be given to
the Soviets was to come from additional printings, out of which the
other Allies would also receive additional pro rata shares; and again the
Western Allies stated, with all possible emphasis, their understanding
that the currency was being given on the condition that the major
part of it would be used for the proposed currency conversion, and
not for additional expenditures by the occupying powers.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

Again the Russians gave no assurance that the currency would be
used to effect a conversion. There was all the more reason, therefore,
for the Western Allies to press for an agreement on the date and the
terms of such a conversion. An agreement was in fact obtained, the
date for the conversion being set for the middle of October 1945.
Then, when not only the technical details of the proposed conversion
were regarded as completely settled, but the currency to be used for
the conversion was actually in the process of distribution to the
remoter parts of Austria, the Russians blandly announced that they
had no intention of permitting the currency conversion to which they
had solemnly agreed.

The reason given by the Russians for their sudden change of front
w^s that the provisional Austrian Government was about to be recog
nized by all four powers, and that therefore it would be improper to
effect a conversion of the existing currency into a military currency.
The conversion must wait, they insisted, until the Austrians would
have printed a “ national” currency of their own. The hollowness of
this pretext was immediately exposed by a letter from Chancellor
Renner, the head of the provisional Austrian Government, who in
sisted that, regardless of plans for a subsequent conversion into a
“ national” currency, the Austrian Government urgently desired the
conversion into military currency to proceed as planned.
The real reasons behind the Soviet change of front were, of course,
clear. The Russians had gone along with the use of the Allied military
currency as long as they were able to obtain huge quantities of it by
allowing the Western Allies to believe that the Russians, like the
Western Allies, intended to use it for the purposes of currency conver
sion. Under great pressure from the Western Allies, they had agreed
to currency conversion in order to be able to obtain and dispose of a
second large allotment. But now it was cleajr that the dodge could not
be used again: the Russians had discovered a toughness in the western
authorities which made it clear that they could not count on obtaining
military currency in quantities which would destroy it in a matter of
months. It would be different, they calculated, if they had only the
Austrians to deal with: then they would be able to come to the Aus
trians and demand quantities of currency large enough to ruin the new
“national” currency in short order.
The Austrians had, in fact, been printing a new currency. ever
since the end of hostilities in May 1945. The Russians urged them to
speed up the printing—if necessary, by printing the currency in very
large denominations. It became clear that, by December of 1945,
there would be enough to affect a conversion into the new “national”
currency. The Western Allies, in full awareness that the future of the
Austrian currency would depend on the degree of courage shown by
the Austrians in resisting Soviet demands, agreed to set a date in
December 1945 for a conversion into the “national” currency. They
did so, however, only on the condition that all decisions on the amount
of currency to be given to any one of the occupying powers for the
purpose of meeting occupation costs would be made by unanimous
vote of the four occupying powers.
To this crucial condition the Russians objected strenuously; but
in the end they acquiesced. The reason for their acquiescence
became clear only 3 weeks after the currency conversion, when
Russian Army officers appeared at the Austrian National Bank and,

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

with no reference to the agreement which the Soviet representatives
had solemnly accepted only a few weeks previously, peremptorily
demanded several hundreds of millions of additional currency for
their own use. The Austrians knew of the agreement requiring
unanimity on the part of the four occupying powers; they therefore
immediately informed the other powers of the Russians' demand.
Letters were dispatched from the other three military commanders
forbidding the Austrians to pay out currency until the required
unanimous agreement was reached. The Russians stormed and
threatened; but the Austrians and the Western Allies stood firm.
It was this firmness that preserved Austria from the currency debauchment suffered by countries, such as Hungary, where the Western
Allies were not in a position to support effectively the courage of local
governments which the Soviets and their Communist agents were
determined to subvert.
EASTERN GERMANY

Since the Potsdam agreement put an end to a native German
government, the Soviet occupation forces were sovereign in Eastern
Germany, in form as well as in substance, up to the time of the estab
lishment of the puppet “ democratic republic" in response to the
restoration of a considerable degree of sovereignty to Western Germany
by the Western Powers. In consequence, the financial history of
Eastern Germany does not show the violent inflation characteristic of
those satellites that preserved some independence during the first
years of Soviet occupation.
By the end of the war, money circulation in all of Germany
amounted to about 73 billion reichsmarks of currency, 100 billion of
demand deposits, and 125 billion of savings deposits. Alb least onefourth of that amount was in circulatioD in the Soviet zone, including
eastern Berlin. The Soviet occupation forces issued an estimated 10
billion marks of occupation money; while this amount was three times
as large as the sum issued by all the Western Powers together, it was
hardly more than half of the amount of old currency in actual circu
lation in the zone, and the addition was far more than compensated
by the blocking of west bank deposits. The resulting degree of
inflation in the Soviet zone was therefore not appreciably greater than
that in the western zones.
Moreover, the currency reform of June 1948 was similar to that
inaugurated by the Western Powers: like the western reform, it
provided for a conversion of 10 old into 1 new mark; the main
difference— apart from a slightly better treatment of small savers—
concerned the money holdings of public agencies, which were con
verted at par. In consequence, the per capita money volume was much
less reduced than in the west, and this fact may account in part for
the depreciation of the Eastern German currency in relation to the
western mark. However, since the conversion the volume of money
in Eastern Germany seems to have remained relatively stable: there
has been nothing resembling the hyperinflation which occurred in
areas under governments which the Soviets or their agents wished to
subvert.

ECONOMIC HAZARDS OP INFLATIONARY DEFENSE ECONOMY

HUNGARY

The destruction of the Hungarian currency was one of the greatest
inflationary catastrophes in economic history. The Soviet authorities
had a particular interest in destroying the Hungarian economy be
cause in November 1945, in the only free election held after the war
in a Soviet-dominated country, the people had overwhelmingly re
pudiated the Communist Party and its fellow travelers. But even
before that time, in June 1945, the Communist members of the
coalition government that ruled the country had defeated a currency
reform proposal of the non-Communist Finance Minister, Vasary,
which— if accepted and properly executed— might have averted the
ensuing financial disaster. The Soviet occupation authorities not
only pressed their usual excessive demands for reparation payments
and occupation costs, but also continuously interfered with the activi
ties of the central bank, thereby making any effective anti-inflationary
action impossible. According to official account^, about 40 percent
of all government expenditures went to the Soviet authorities; in
reality, the fraction was very much larger, since the huge expenditures
of state enterprises and municipalities for the Soviet authorities were
not included in that percentage.
In consequence, the government budget showed an increasingly
large deficit, which was covered by the issue of notes. Note circula
tion rose from 11 billion pengo in November 1944 to the unprecedented
figure of 76 septillion (millions of millions of millions of millions) on
July 15, 1946. An effort to introduce a “tax pengo” of stable pur
chasing power failed completely; the ordinary pengo depreciated
rapidly in terms of tax pengos, but the tax pengo depreciated equally
rapidly in terms of foreign exchange and purchasing power. By the
end of July, one tax pengo was equal to 2 sextillion ordinary pengos,
but $1 was equal to more than 2 billion tax pengos.
Under these circumstances, the domestic currency—both ordinary
and tax pengos— ceased to perform the functions of money. It was
then that the Communist Party, under the guidance of the Hungarianborn, but Moscow-trained, economist, Eugene Varga, submitted a
stabilization plan, which was immediately accepted and went into
effect on August 1, 1946. A new currency, the forint, was established
at a conversion rate of 200 million tax pengo or 400 octillion ordinary
pengo per forint. This rate virtually wiped out the entire existing
stock of currency, bank deposits, and other domestic claims. At the
same time, the Soviet authorities made possible the stabilization of
government finance by some concessions on reparation payments, while
the United States agreed to restore to Hungary the gold stock of the
central bank, which had been captured in Germany, and to open a line
of credit for the purchase of war surplus.
As soon as it became apparent that the stabilization, for which the
Communists could now claim credit, had been a success, the Com
munists dropped all pretense of collaboration with the non-Communist
parties. Exactly 10 months after the currency conversion, on June 1,
1947, the Communists forced the non-Communist prime minister,
Ferencz Nagy, to resign and from that time on Hungary must be
regarded as a Soviet satellite.
80427— 51------ 3

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
R U M A N IA

As long as the country was under a coalition government not
entirely free from western influence and sympathy, the Soviet occu
pation forces, by their usual demands for reparations and “occupation
costs,” produced such a disequilibrium in the government budget that
the note circulation rose from 357 billion lei at the end of 1944 to
48,452 billion at the middle of August 1947. Prices rose in the same
period by about 14,600 percent. Bank deposits rose at about the
same rate as the currency circulation, from 41 billion lei at the end of
1944 to 4,853 billion at the end of July 1947. In contrast, government
receipts rose by only about 2,000 percent, and the great bulk of
government expenditures was covered by the printing press.
In 1946-47, the economy was being completely subjected to the
influence of the party: the central bank was nationalized on Decem
ber 28, 1946; private credit was “controlled” on July 15, 1947; all
industry was “coordinated” on June 10, 1947; and a plan for the
‘ ‘equitable distribution and utilization of production,” i. e., totali
tarian economic planning, was introduced on July 12, 1947.
The time was therefore ripe for the Communist Party to put a
stabilization program into effect. The program was announced on
June 14, and went into effect on August 15, 1947; the sponsor was the
Communist Minister of Industry and Trade, G. Sheorghiu-Dej, who
presented the program officially in the name of the Communist
Party. The program provided for the issue of 1 new lei for 20,000
old lei; at the same time, however, it strictly limited the amount that
could be exchanged by any one holder so that 43 percent of all cur
rency was excluded from the conversion. Not more than 1.4 billion
new lei were thus paid to old holders, plus 1.5 billion paid to holders
of gold and foreign exchange who were required to surrender their
holdings to the Government. At the same time, however, the Gov
ernment issued large quantities of notes to its own agencies so that
by the end of the year the note circulation had reached 24.5 billion
new lei. By that time, only about 12 percent of the country's liquid
assets were in the possession of those who before the currency reform
had held all of them. The destruction of all private savings, espe
cially of the middle classes, and thus of the basis of an individualistic
economy, had been successfully executed.
When this was done, it became unnecessary for the Communists
to maintain even the semblance of a coalition government. In
December 1947, the king was forced to resign, and from that time on
Rumania has joined the ranks of the people's democratic satellites.
F R A N C E A N D IT A L Y

Although postwar monetary developments in Central Europe pro
vide the most instructive examples of Communist strategy in the
European area, the recent economic history of two pivotal Western
European countries, France and Italy, also lends itself to some
relevant comments.
It certainly is not a mere coincidence that the countries which
harbor the two strongest Communist parties outside the iron curtain
are at the same time those that have been subjected to the most
violent postwar inflations, with prices rising to 55 and 19 times their

ECONOMIC HAZARDS QF INFLATIONARY DEiFENSiE ECONOMY

prewar level in Italy and France, respectively. See table X III.
This is not to imply that the inflation was actually engineered by the
Communists. Rapid open inflation was well under way in both
countries at the time of liberation. The large liquid assets in the
hands of the public as the result of occupation expenditures, combined
with the breakdown of administrative and fiscal controls in the wake
of war and liberation, rendered almost inescapable some further infla
tion during the immediate postwar period. The need for vigorous
anti-inflationary policies was widely ignored: Both countries failed to
enact timely currency reforms on, e. g., the Belgian model, and in
both the belief was widespread that an increase in production would
of itself be sufficient to halt the rise in prices.
T able

XIII.— Index numbers of wholesale prices in selected countries

1937................................
1938 ............ ...............
1939..............- ................
1941................................
1944 ..............................
1945................................
1946....... ........................
1947...............................
1948................................
1949...............................

Austria^ (March
1938=100)2 (basic
materials)8

France 1 (1938=
100) (general in
dex)

Italyi (1937=100)
(general index)

100
98
104
104
• 104

100
105
171
265
375
648
989
1,712
1,917

100
107
112
145
918
2,203
3,084
5,518
5,821
5,528

8 446
469
616

China * (JanuaryJune 1937=100)
(general index)
«100

5122

5 216
6 1,640
«44,789
(7)
0
(7)
(7)
(7)

1 Source: Monthly Bulletin of Statistics, Statistical Office of the United Nations, December 1950, vol.
IV, No. 12, table No. 58.
2 Base: March 1938=100. Beginning October 1947 the index shows the ratio of current schilling prices to
reichsmark prices in March 1938.
s Food, farm products, and industrial raw materials.
* Source: China’s Economic Stabilization and Reconstruction, D. K. Lieu, Rutgers University Press,
New Brunswick, pp. 88, 89.
« Figure is for July of each year except for 1944 for which the figure applies to June of that year.
« July.
7 Indexes not carried beyond June 1944 as the postwar indexes are not strictly comparable. See table X IV
for postwar China prices.
8 October-December.

Although, therefore, postwar inflations in France and Italy need
hardly be explained in terms of a Communist master plan, there is
little doubt that the economic distress and social injustices and tensions
created by inflation were of considerable help in gaining mass support
for the Communist parties. Moreover, it is quite likely that the
Communist parties recognized the advantage they stood to gain from
continuing inflation. As members of the postwar coalition cabinets,
their ministers advocated the most demagogic economic policies. It is
also highly significant that consistent and decisive anti-inflationary
policies became possible in both France and Italy only after the Com
munist ministers had been dropped from the respective cabinets in the
spring of 1947. The Italian inflation was broken in the fall of 1947
mainly as a result of the stern credit restrictions ordered by Signor
Einaudi, then Minister of the Budget. In France, inflation was con
siderably slowed down by bold fiscal measures taken by Finance
Minister Rene Meyer at the end of 1947 and was finally brought
under control by the additional taxes and entirely new restrictive
measures in the field of bank credit imposed by the Queuille Cabinet.
Naturally, other factors contributed to the stabilization—the most
important being the aid given by the United States under the Euro

ECONOMIC HAZARDS OF INFLATIONARY DEiFENSOB EIOONOMY

pean recovery program; but the degree of stabilization attained in both
countries would have been impossible without the firm internal meas
ures which were opposed by the Communists in each instance. In
both countries, the Communist parties realized that their chances for
seizing power would diminish with the success of economic stabiliza
tion. In France they attempted to disrupt the process of economic
recovery and stabilization by the two insurrectionary strike move
ments of 1947 and 1948. In Italy they concentrated their principal
effort on seizure of power through the legal avenue of elections. But
the forceful actions of the French Government broke the Communistled strikes and the Italian voters defeated Communist ambitions at
the polls in 1948. In both countries, the weight of responsible opinion
supports the belief that the greatest single factor which could revive
Communist influence would be a resurgence of the extreme open infla
tion that characterized the period during which, in both countries, the
local Communist parties reached their position of maximum strength.
CHINA

The 1937-49 inflation in China had two phases: the wartime phase
and the postwar phase. From 1937, when the Japanese commenced
military operations in North China, to August 1945, when East China
was regained by the Nationalist Government, prices rose about 500fold. See table X III. This represented the accumulation, year by
year, of price increases that averaged something more than a doubling
per year. An inflation that proceeded at this rate seriously compli
cated the problems of the Nationalist Government, but it was not
catastrophic. The rural economy of wartime free China seemed able
to adjust itself to this inflation and to avoid a breakdown.
The second phase started with an acceleration of the rate of price
increases. From August 1945 to August 1946 prices rose about five
fold (see table XIV ) and this rate continued for about another year,
so that in the late summer of 1947 prices were roughly 60 times as
high as in August 1945. From 1947 on, the rate of inflation became
more and more rapid. By August 1948, when an effort was made to
halt the inflation by introducing a new form of currency, prices were
150 times what they had been 12 months before, or about 10,000 times
as high as in 1945, and 5,000,000 times the 1937 level.3 The truly
astronomical inflation that followed in 1948-49 can be measured only
by comparing the official exchange rates established against the United
States dollar, first for the new gold yuan on August 19,1948 (G Y 4=
US$1) and then for the new silver yuan on July 2,1949 (GY500,000,000
-^=SY1; S Y l.55=U S $l), showing a depreciation in less than 11 months
by a factor of nearly 200,000,000.
What made the postwar inflation more uncontrollable and at the
same time magnified its disruptive effects upon the economy and the
political structure was the fact that after the war the center of power
of the Chinese Government shifted back to the coastal cities, with
their modern industry and banking and their foreign trade. Both
during and after the war, the inflation was generated by note issues
to finance budgetary deficits. During the war, when the main source
of taxable production was agriculture, land taxes could be and were
* All these comparisons are to be regarded as approximate. Price movements were not uniform from one
region to another, nor among commodities, and there were erratic month-to-month variations.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

collected in kind. Nevertheless, only 20 to 30 percent of National
Government expenditures were covered by revenue in the years from
1940 to 1944. The budgetary problem became more difficult after
the war, when a larger proportion of the potential revenue had to be
realized through the money economy. In 1946 and 1947, the Chinese
Government depended heavily on the liquidation of real estate and
commodities taken over from the Japanese and of surplus stocks
transferred by the United States Government, as well as on imports
of foreign commodities paid for out of gold and dollar reserves; after
ward these sources covered a decreasing percentage, and note issue
became the predominant means for financing the ever-expanding
expenditures. When prices were doubling every few months (and
later even more rapidly), the adjustment of tax rates and public
utility charges became exceedingly difficult, and the revenue that was
collected depreciated before it could be spent. While in various ways
the acceleration of the inflation was thus associated with the broad
ened scope of the money economy after the war, the inflation itself
increasingly caused a deterioration in China's productive capacity
and morale.
T able

XIV.— Wholesale prices in China
Total CN$
outstanding
(in billion
CN$)i

Period

December 1945_ ________ ________________________________________
January 1946_ ................. ........................................................................
February 1946..........................................................................................
March 1946—.................. ....................................... ................................
April 1946.................................................................................................
May 1946..................................................................................................
June 1946___ ______ ________________________ ______ _______ ______
July 1946--...............................................................................................
August 1946........... ..................................................................................
September 1946...................... ................ .................................................
October 1946.________________ _____________ _______ ___ ____ ____
November 1946.......................................................................................
December 1946........ .................................................................................
January 1947_ _ ____________________ ______ _

Index of prices
(December
1945*100)®

975
1,100
1,230
1,359
1,528
1,674
2,113
2,167
2,376
2,677
2,900
3,296
3,726
4,510

100
105
198
289
292
430
420
460
483
572
604
601
647
840

i Average for the period.
Source: Paper, The Trend of Inflation in China: 1946-47, OIR Report No. 4331, Mar. 18,1947, Division of
Research for Far East, Office of Intelligence Research, Department of State.

ffects of

I n f l a t io n

on th e

P r iv a t e E

n t e r p r is e

System

The Chinese inflation was typically a currency inflation, and the
increase in resources of banks lagged far behind the expansion of note
issue and the internal depreciation of the currency. This resulted in a
serious exhaustion of the banking resources of the country and in the
inability of financial institutions to maintain legitimate financing for
productive activities. As inflation Advanced, the Chinese banks
found themselves deprived of savings and time deposits, and they
reacted to this loss by liquidation of long-term investments and by
adjusting themselves to short-term operations at very high interest
rates. These trends were particularly evident among private banks
and less among government banks, which could always depend on
advances from the central bank. The process of inflation thus ex
hausted the capital and deposit of private banks and placed them at a
distinct disadvantage as compared with government banks. The

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

result was that whereas government economic activities continued to
receive financial support, private activities were deprived of their
normal and legitimate sources of financing— with bankruptcy or
speculation as the outcome.
Industrial enterprises typically made high paper profits, but since
the calculation of replacement values was difficult if not impossible
there was a constant tendency for fixed and working capital to run
down in real value.
In dealing with foreign trade, the authorities permitted imports of
raw materials and other goods regarded as essential to be made with
foreign exchange purchased from official reserves at exchange rates
which were not kept closely adjusted to the depreciation of the
currency as measured by price indexes or by the black market exchange
rates. This policy may have helped to hold back the inflation of
industrial producers' costs, but it also had the unfortunate effect of
hampering China's exports, which are largely agricultural, and other
crude materials. Exporters converting their proceeds through
official channels obtained a smaller return in Chinese currency than
they could realize through sales of exchange in the black market.
Sales of exchange in the black market served to finance a flight of
capital.
Intermittent efforts by the Government to halt the inflation
through direct controls or prices of commodities or of gold and foreign
exchange resulted in the end in an acceleration of the loss of confidence
in the currency, and much resentment was caused by such actions as
the forced surrender at fixed prices of private gold and foreign ex
change holdings in August 1948.
E

ffects of

I n f l a t io n

overnm ent

a c h in e r y

Inflation exerted its most disruptive effects on the machinery of the
Chinese Government. The fact that bureaucrats could not support
themselves on their pay, whereas commercial and speculative activities
provided attractive possibilities, made a Government appointment a
stepping stone toward outside positions. As a consequence, the
allegiance of bureaucrats tended to be transferred from the Govern
ment to outside groups, and the morale of the public service deterio
rated generally. Traditional features of Chinese bureaucracy (such
as use of public funds for private purposes) which, limited in the past,
did not have serious effects, became so widespread as to cause a break
down in ordinary administration and to threaten the security of the
state itself. For instance, not only did tax collectors tend to delay
the transfer of collected funds to the Treasury, but Army disbursing
officers often drew out advance funds from the Treasury; and in both
groups there were cases wher& such funds were used in the interim
for speculative operations in commodities, gold, and foreign exchange.
Such practices accelerated the inflation of prices, which became
almost a self-generating process as it led automatically to a higher
value of government expenditures and a corresponding growth of the
note issue.
The diversity of currencies in the various Communist-controlled
areas before 1949 defies any general conclusion, but the fact that their
bases were in rural areas, where development of a money economy was
retarded, appears to have had a limiting effect upon the inflationary

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

process, as had been tlie case for the Nationalist Government during
the war. The communists appear to have been keenly aware of the
danger that inflation might undermine their economic and political
position, and as Communist troops advanced and larger areas were
taken under their control, they followed almost ruthlessly a policy of
meeting their requirements, so far as possible, by taxation or confisca
tion rather than by printing currency. As they took over the modern
sectors of the Chinese economy, they made special efforts to insure
that supplies of basic consumption commodities in the cities would
meet the demands. By the spring of 1950 inflation both of money
and of prices was apparently brought to an end, although there is
evidence that the involvement of Chinese Communist forces in Korea
has created new inflationary pressures in China in recent months.
The example of China seems to suggest that inflation was a serious
contributing element to the fall of the Kuomintang on the Chinese
mainland. One of China's leading economists after a careful survey
of the problem came to the conclusion that—
*
* * It is beyond the power of the Chinese nation or the Chinese Govern
ment at present to stop either the civil war or the inflation. Chaotic economic
conditions are favorable to the Communists, and the longer the war drags on, the
stronger their position will be. In fact, they are capitalizing on the social unrest
which arises from such economic instability, and can play a waiting game. No
terms short of complete capitulation on the part of the Government will now be
acceptable to them * * *.4

In short, in substantial part, due to inflation, not only did free
private enterprise disappear but individual freedom and democratic
government. Despite drastic direct controls (e. g., scores of priceceiling violators and the like were beheaded), despite extremely high
interest rates, and despite generous assistance from abroad, hyper
inflation continued to undermine the Chinese economy from within
until the people themselves threw overboard the regime that had
heroically kept millions of Japanese soldiers at bay for a decade.
In addition they repudiated a spiritual and political leader of most
ancient and eminent lineage and world renown. The basic economic
reason was internal. The blame cannot be shifted to “foreign devils."
It lay directly on the Chinese that tolerated a go-easy “too little and
too late" procedure with respect to taxes, Government expenditures,
and monetary controls. By timid, procrastinating and ineffectual
fiscal, budgetary and credit policies Chinese business and govern
mental leaders, whether through inaction or ignorance, themselves
unleashed the evil genie of uncontrollable inflation, themselves
destroyed whatever full enterprise and democracy existed, and became
the foremost architects, in fact, of Chinese communism.
4*D. K. Lieu, China’s Economic Stabilization and Reconstruction, Rutgers University Press, New
Brunswick, N. J., 1947, p. 131.

APPENDIX A
S u m m a r y o f R e c o m m e n d a t io n s o f W it n e s s e s A p p e a r i n g D u r in g
C o m m i t t e e H e a r i n g s J a n u a r y 22, 24, 25, 26, 29, 31, a n d F e b r u
a r y 2, 1951, o n t h e J a n u a r y 1951 E c o n o m ic R e p o r t o f t h e
P r e s id e n t
GENERAL RECOMMENDATIONS

There was general agreement with the basic recommendations first
stated in the hearings by the Council of Economic Advisers that all
programs and policies, whether of taxation, Government expenditures,
price and wage controls, allocations, or forced savings, should be
considered as parts of an over-all interrelated body of instruments
aimed at carrying out certain definite goals of national policy. First
priority should, therefore, be given to answering such questions as
“What are the goals?” “How do they relate to each other as to size
and magnitude?” (See testimony of Leon H. Keyserling, Chairman,
Council of Economic Advisers, January 22, 1951, hearings.)
There was, further, consistent emphasis throughout the hearings
that no one of the recommended policies or courses of action would in
itself solve the problems facing the Nation, particularly the problem
of inflation. The various controls and programs will have to be inter
related and designed to fit together with each program or policy doing
its part of the job of mobilizing resources to promote national security
and stabilizing the price level. In connection with this recommenda
tion of emphasis on over-all programing, there was general agreement
that the No. 1 problem is that of satisfying military or security require
ments. Next in order of importance is that of promoting an increase
in production and productivity so as to expand the supply of goods ai^d
services out of which the competing claims of consumers, business, and
government can be satisfied. Finally, there is a crucial problem of
preventing an inflation which would have disastrous effects to the
economy, thus defeating the first two programs.
FEDERAL BUDGET

Expenditures
All witnesses placed considerable emphasis on fiscal policy in connec
tion with both the division of resources from consumers and business
to defense purposes, and the control of inflation. There was wide
spread emphasis by the witnesses on the need for the maximum
economy possible in governmental expenditures, particularly in nonessential programs. Almost without exception this was emphasized,
both by witnesses from the executive branch and by economists
participating in the committee roundtables. In no case were recom
mendations made as to specific items that could be reduced but some
witnesses (see particularly testimony of Professor Musgrave, January
31,1951, hearings) suggested that no new programs should be inaugu
rated and that existing civilian programs should be reconsidered in the
light of the emergency to see if some of -them could not be eliminated
34

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

or reduced. Professor Spahr suggested an elimination of Govern
ment lending programs and Government assistance programs whose
functions could be taken over by private lending institutions or
by private or local charities. Most of the witnesses did not expect
any great cut in the budget as a result of such reductions except
where these reductions are more or less automatic, such as unem
ployment insurance where expenditures go down as employment
goes up. It was generally suggested that probably not more than a
billion or two could be saved but that even this was vital. Professor
Smithies made the suggestion that Congress should give the military
requests strict scrutiny and there seemed to be some other con
currence in this view. Marriner S. Eccles even suggested in his testi* /
mony that the military budget should have a ceiling placed on it, if at /
all possible, of about $50 billion, including foreign aid as well as domes-1
tic military programs.
Taxation
Every witness before the committee emphasized that the defense
mobilization could not be carried through successfully nor could
inflation be held in check unless there was an immediate and heavy
increase in Federal taxes. It was emphasized that the success of
direct* controls as well as monetary measures was dependent upon a
heavy tax program. In general, though not unanimously, the position
of the witnesses can be summarized by the phrase, “Pay-as-we-go.”
The Council in its recommendation seemed to imply, as did some of
the witnesses, a balancing of the conventional budget rather than the
consolidated cash budget. There was general agreement that tax
policy should be designed with a view to its economic effects upon
diversion of resources and the control of inflation as well as the re
quirements for balancing the budget. The programs suggested
generally seemed to be designed to close the inflationary gap and to
be of a magnitude which would about balance the conventional budget
and give the Treasury a cash surplus after taking account of the excess
of trust-account receipts over trust-account expenditures.
The one exception to this seems to be V. Lewis Bassie. He placed
emphasis on the danger of raising taxes so much in order to control
inflation that (1) the burden on many families would become unbear
able, and (2) production would be restricted.
Many recommendations were made as to specific changes in taxes
that Congress should consider, most of the programs being designed to
raise between 15 and 20 billion dollars of additional revenue. Among
the suggestions were:
1. Higher capital gains taxes and a lengthening of the period
for which those assets must be held in order to come under the
capital-gains provision.
2. Some change in the provision of the individual income tax
which allows splitting of incomes by married couples for tax
purposes.
3. Increases in individual income tax rates, particularly on
incomes between $2,000 and $10,000.
4. Elimination of the exemption from Federal income taxes of
interest on State and local securities.
5. Higher taxes and better audits of returns covering nonwage
income such as dividends, interest, and professional income.

ECONOMIC HAZARDS OF INFLATIONARY DElFENStE ECONOMY

6. A reduction in the personal exemption from $600 to perhaps
$500 per capita, with perhaps some additional reduction in the
case of families if the income-splitting provision is not eliminated.
7. Cancel the standard deduction and all nonbusiness deduc
tions up to the present standard deduction with only extraordi
nary amounts of such deductions above the present standard
deduction being allowed.
8. Increase excise taxes, particularly on luxury goods, scarce
commodities such as consumer durables— automobiles, etc.— and
advertising.
9. A general sales tax with specific amounts of exemption,per
capita which would operate as a tax on expenditures rather than a
tax on incomes. An alternative to this was the suggestion that a
general sales tax be levied which would differentiate between low
and higher price lines with exemptions on the low-price lines and
heavy taxes on luxury price lines. For example, low-price
clothing might be exempt but luxury lines, such as expensive
suits above a certain price, might be subject to a heavy tax.
10. Increase the regular corporate income tax rate.
11. Strengthen the excess profits tax.
12. Reduce exemption for depletion of mineral and other
resources.
13. A specific tax of perhaps 15 percent on undistributed
profits of corporations with a specific credit for dividends paid
to stockholders.
14. A new levy of perhaps 10 percent on unearned income in
excess of $500 per capita.
In connection with the tax increase several suggestions were made,
particularly by Professor Shere, for a compulsory savings program to
be made a part of the program. Professor Shere suggested that,
for example, there might be a 3 percent pay roll tax on all pay rolls
which would raise about $4 billion and which would be refundable
upon death or retirement. This would be worked through the
OASI program by broadening its coverage and increasing the rate.
If this were not acceptable for technical reasons then the individual
income tax could include a provision for earmarking a certain pro
portion of the increased taxes as a refundable compulsory loan which
likewise would be repayable to the individual upon death or retirement.
Practically all other witnesses emphasized, however, that a new
compulsory savings program should not be used at the present or
proposed levels of the budget as at these levels we should be able to
balance the budget through straight increases in the conventional
types of taxes. In particular, Professor Goode suggested that forced
savings, if used, should be in addition to the suggested tax program
to balance the budget and should be worked, as Professor Shere sug
gested, through social security. Professor Smithies also suggested
that compulsory savings would be needed if the budget rises beyond
presently foreseeable levels as, for example, in a full war program.
Practically all of the witnesses, however, did suggest that the Treas
ury should make very effort to increase voluntary savings by design
ing Treasury securities attractive to nonbank investors and by
aggressive selling campaigns.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

MONETARY POLICIES

There was general agreement that neither direct controls nor tax
policy could contain the forces of inflation unless successful use is
made of monetary restrictions. This was emphasized by those now
in charge of the direct control programs as well as other witnesses.
Mr. M a r r i i w Eccles of the Federal Reserve Board recommended that
either (a) the Board of Governors of the Federal Reserve System be
permitted to unpeg the Government bonds and hence force the banks
to restrict credit even at the cost of an increase in interest cost to the
Government, or else (b) that the Board of Governors of the Federal
Reserve System be given new powers to replace their traditional openmarket operations, including the power to require specific reserves in
the form of Government securities for each bank or class of financial
institutions.
Economists participating in the round table, including Mr. Lindow
of the Irving Trust Co., Dr. Albert Hart, Mr. Foulke, and Dr. Seltzer,
emphasized that while the effects on the problems of debt manage
ment of removing the peg on Government securities were too severe
to be considered at this time, nonetheless some sort of control should
be given to the Board of Governors of the Federal Reserve System to
restrict volume of money and credit. This could be done through
specific reserves to be held in the form of Government securities or
some similar device.
Mr. Lindow, as well as others, suggested widening the area within
which the Federal Reserve System could exercise selective rather than
general credit controls. In other words, Congress might authorize
control over various types of credit along the same lines as the present
controls over consumer and real-estate credit exercised by the Board
of Governors; the Board of Governors should be given the power and
responsibility to ration credit just as the Office of Defense Mobilization
can ration consumer or business commodities. On the subject of
debt management there was wide agreement on the advisability of
shifting as much as possible of the Federal debt into the hands of
nonbank investors. Mr. Lindow recommended that more use be
made of deposit-type securities similar to the present E bonds.
Approval was given to the Treasury program for automatic extension
of the present savings bonds at maturity at a statutory rate of interest.
One witness, Dr. Spahr, recommended the abolition of irredeemable
paper currency, the repeal of the authority of the Board of Governors
of the Federal Reserve System to issue notes against Government
securities, the repeal of the authority of the Board of Governors of the
Federal Reserve System to purchase securities directly from the
Treasury, the funding of the debt into long-term securities eligible
only for nonbank holders, and the removal of all Government controls
over the rate ot interest.
DIRECT CONTROLS

The position of practically all of the witnesses on the subject of
direct controls is perhaps best summed up by Dr. Galbraith, wno was
directly concerned with such controls in the last war. In brief, he

ECONOMIC HAZARDS OOF INFLATIONARY DEiFENStE EICONOMY

suggested that such controls are part, but only part, of the larger
strategy of dealing with inflation and the reallocation of resources be
tween consumers, business, and Government. The success of direct
controls such as those over prices and wages depends particularly on
(1) heavy taxes, (2) economy on nondefense spending, and (3) an in
crease in voluntary savings. He recommended, and several of the
witnesses seemed to agree, that direct controls of wages and prices
should concentrate (1) on stabilizing basic living costs, (2) on general
wage and price ceilings on the basic core of industries of critical import
ance, where the labor force is highly organized, such as steel, auto
mobiles, etc., and (3) on ceilings on the prices of raw materials.
Dr. Galbraith, and other witnesses who had experience with controls
in the last war, emphasized in their recommendations that we must use
the allocation powers set up under the Defense Production Act to al
locate raw materials to lower-price lines so as to shift production from
luxury and high-price lines of consumer goods to basic lower-price
lines important in the cost of living. This is crucial to the success of
price control. It was used in Canada and England in the last war but
not to any extent here. There was a further recommendation that
price ceilings be removed from high-price line merchandise and luxury
goods as soon as allocation powers and tight price controls have been
set up for basic low-price items crucial to the cost of living for the mass
of our citizens.
There was a recommendation from witnesses who had been con
cerned with these programs in the last war that the Defense Production
Act be revised to remove the requirements that in each industry
ceilings on prices and wages must be imposed simultaneously. It was
pointed out that price controls could be used very successfully on a
selective basis if it is not necessary to put on wage controls in the
identical industry. Administratively, simultaneous wage and price
control for selective industries is impossible so that this requirement
of the act in effect makes it necessary to apply wage and price con
trols to all industries and to all price lines in each industry and all
products regardless of whether this is viewed as necessary or desirable.
There was further recommendation that the Defense Production Act
be revised to allow the Office of Price Stabilization to require quality
standards for price controls (see testimony of Dr. Campbell, January
29, 1951, hearings).
On certain essential consumer commodities— the prime example
given was meat—it was pointed out that price is essentially demand
dominated. Controls over cost have little effect on these products,
and, as pointed out by Dr. Heflebower, Dr. Rowe, and others, price
controls on these products either do not work or work very poorly.
Allocation control may help and should be used whenever possible.
It was recommended that subsidies on these items should not be
used and, further, that consideration be given to rationing these
commodities, perhaps through rationing of the money that each
individual could spend on each group of commodities rather than the
amount each individual could purchase.
On wage controls it was recommended that no allowance be made
for the impact of increased taxes, whether excise or individual income
taxes, on take-home pay in setting wage ceilings. Some witnesses
urged that adjustments, however, be made in wage ceilings for other
changes in consumer prices (see particularly testimony of Professor

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

Wallace and of Cyrus Ching, Chairman of the Wage Stabilization
Board, January 24, 1951, hearings). Mr. Ching recommended the
elimination or revision of section 402 (b) (3) of the Defense Production
Act. Mr. DiSalle, as well as Professor Ellsworth, recommended that
consideration be given to the possibility of a central Government
monopoly of the purchasing of imports of critical raw material such
as wool, copper, tin, etc. This was intended to reduce the cost of
such items, to improve the allocation between essential and nonessential uses, and to aid in the successful operation of domestic price
controls.
FOREIGN ECONOMIC PROGRAMS

Professor Ellsworth made a number of specific recommendations
in regard to the foreign-aid programs and in relation to control of their
inflationary effects. He recommended—
1. Careful scrutiny to see that the Nation gets real value iox.
each foreign aid expenditure.
2. Use of the point 4 program as an economic weapon to
counter communistic economic weapons. He felt this would
economize on the budget since it would be cheaper than other
forms of military or economic weapons.
3. He would remove the present restriction requiring that
certain loans or grants to foreign countries be spent in whole or
in part within the United States. This would reduce inflationary
pressures by shifting part of the expenditures to foreign markets.
4. We should proceed at once to reestablish a Combined Raw
Materials Board with a unified purchasing program in world
markets for raw materials for ourselves and friendly nations,
5. We should establish at once a United States Government
monopoly over the purchase and import into the United States
of critical raw materials.*
6. We should extend the controls, on exports.
7. We should abolish duties on importation of scarce raw
materials such as copper, wool, etc.
8. We should lower the tariff on importation of products from
friendly nations, thus reducing the need for economic assistance
and increasing domestic supplies while reducing inflationary*
pressures.
9. Eliminate the requirement that EC A shipments be carried
to the extent of 50 percent in American bottoms—this would
reduce foreign-aid program expenditures.
10. Reduce subsidies to the American merchant fleet so that
they are just sufficient for minimum national security purposes.
11. Bring in increased food supplies, particularly beef, from
abroad by changing the administration of certain sanitary and
other types of restrictions.

APPENDIX B
Sum m ary
of

e c o m m e n d a t io n s

u s in e s s m e n ,

abor,

u t s t a n d in g

arm ers, and

O r g a n iz a t io n s

o n su m er s

The Joint Committee on the Economic Report, in connection with
its hearings on the January 1951 Economic Report of the President,
addressed a series of questions on the problem of inflation to various
economic interest groups. Excerpts from the replies of these organi
zations are arranged below under the same subjects used to present
the materials in appendix A .1
GENERAL RECOMMENDATIONS

* * * main reliance for mobilizing and stabilizing the economy should be
placed on (a) expansion of production and (6) indirect measures to restrain demand.
Under the heading of “ Indirect measures to restrain demand" we included cur
tailment of nonessential Government expenditures, high taxes, tight credit policies,
both general and selective, a voluntary savings program, and a debt management
policy that would reinforce the credit control and savings programs (Committee
for Economic Development).
* * . * if we put our minds and backs to it, we can over a series of years go a
long way toward eliminating the need for controls by means of more and better
production * * * [for example] the editors of Factory estimate that general
use of modern equipment would save over 650,000 man-years of unnecessary labor
in materials handling. * * *
To have a chance of handling this [inflationary] problem with a tolerable degree
of economic, let alone political success it is necessary to bring Government con
trols designed to stem inflationary forces—a whole battery of them—into play.
Otherwise, the inflation would be ruinously violent. Tax controls, credit controls,
and controls by allocations and priorities all have a place in the struggle to hold
inflation within tolerable limits. And while I am sure that most of those who urge
them vastly underrate the enforcement difficulties involved, direct price and wage
controls may also have some constructive place, too.
But to have a chance of being tolerably effective the program of controls must,
it seems to me, meet two conditions, neither of which is now fulfilled. First, it
must be built on a general design which, among other things, relies on slippery and
complicated controls only after the more simple and effective controls have been
fully exploited. Second, it must be tempered to the probability that we are going
to be forced to live in an armory or arsenal state for many years—at least a decade
and perhaps much longer (McGraw-Hill Publishing Co.).
A stabilized economy is essential to the success of our mobilization effort. With
out it, we would fail to direct an orderly flow of defense and civilian production.
* * * We should see annual productivity increases of some 2-3 percent in the
years ahead. The experience of World War II showed that the workweek can be
lengthened to an average of 45 hours, with overtime pay for work performed
bevond the standard hours. The civilian labor force can be expanded through
the employment of women and the handicapped (Congress of Industrial Organi
zations).
In the long run, and in many instances in the intermediate period, shortages are
traceable to a large degree to a shortage of manpower. For this reason, every
effort should be made to enlarge the labor supply (Chamber of Commerce of the
United States).
It is important to recognize, however, that the success or failure of direct
controls largely depends on the development of a well-rounded and comprehensive
anti-inflation program. An equitable and effective system of taxation, a savings
program, control of bank credit, and other anti-inflation measures are indispensable
for any effective system of direct controls (American Federation of Labor).
The second major weapon [against inflation] is increasing production * * *
perhaps our most important weapon. Lengthening the workweek to 44 or 48
hours at straight time and before overtime is paid, would make a tremendous
difference in this direction (Smaller Business Association o f New England, Inc.)

1The full statements as submitted by these organizations appear in the printed hearings at the end of the
verbal testimony.
40

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

In a national emergency such as we now face, it is imperative that our total
production capacity be increased and balanced to support the task ahead. * * *
We believe that a major safeguard against inflation is abundant production
(the National Grange).
FEDERAL BUDGET

Expenditures
* * * we should try every possible and equitable means to pay as we go
(Congress of Industrial Organizations).
* * * the chamber should encourage realistic endeavors to apply the prin
ciple of “ pay as we go” (Chamber of Commerce of the United States).
* * * a surplus should be provided in the Federal cash budget in the first
half of calendar 1951 and a balance in the second half (Committee for Economic
Development).
I have no bill of particulars to offer as to where the nondefense expenditures of
the Federal Government can be cut. * * * An aggregate reduction of at
least 3 to 5 billion dollars is perfectly possible and should by all means be ac
complished (Machinery and Allied Products Institute).
Government economies should come not from cuts in essential services but in
the main from savings in procurement. Cost-plus and cost-minus contracts
should be eliminated (Consumers Union of the United States, Inc.).
[We recommend] strict Government economy in all departments not materially
and directly furthering the defense effort (the National Grange).
Government expenditures not essential to national defense must be reduced to
the minimum (National Association of Manufacturers).
* * * it is first absolutely essential to cut out all unnecessary expenditures
on the part of the Government in all its departments (Smaller Business Association
of New England, Inc.).
Defense spending economies can be effected * * * through extension
* * * in advertised bid methods of procurement. In the field of nondefense
spending economies can be effected through curtailment or complete elimination
of Government subsidy programs to business as well as to agriculture and of
so-called social welfare programs (National Federation of Independent Business).
* * * that every effort should be made to establish a balanced Federal
budget and to finance the cost of national defense, as far as it is possible to do so,
on a “ pay as you go” basis. The first step should be to reduce the total amount
of Government expenditures below that shown in the proposed budget for fiscal
1952. * * *
Government expenditures for domestic, nondefense purposes, can be cut, and
such areas as public welfare and public health, housing and community develop
ment, agriculture and stabilization of farm prices, and central services of general
Government are suggested as good starting points for reducing the budget. Also,
some economies can probably be effected in the Government’s outlays for promo
tion of defense production and economic stabilization, and for economic assistance
under the international security program (American Bankers Association, Inc.).
We are committed by resolution to “ insist that all nonessential Federal expen
ditures be eliminated; and that all expenditures be reduced to the minimum
necessary for the national interest, essential world aid, and adequate national
defense.” Specifically, we urge that Congress make a 20-percent reduction in the
administrative expenses of the activities of Government, including those in the
Department of Agriculture, not directly connected with the national defense
(American Farm Bureau Federation).
* * * an important part of the wage earners’ standard of living depends
on the level of nondefense Government outlays, expenditures for educational and
health facilities, school-lunch programs, day-care centers, low-cost housing, lowcost public power, rural electrification for nonurban dwellers. * * * we don’t
believe these nondefense services can stand cutting. We are heartily supporting
an adequate military defense budget. But we note that this has suddenly boomed
to $94 billion of new obligat.ional authority requested for fiscal 1952. That includes
the proposed $60 billion for military functions. We believe this part of the
budget, so quickly put together, deserves rigorous scrutiny to determine whether
savings are possible (Brotherhood of Railroad Trainmen).

Taxation
If the defense program remains within the bounds now projected I am uncon
ditionally in favor of paying for it as we go * * * it Would be sound policy
not only to balance the Federal budget currently, but to overbalance it by a very
sizable margin. Such an overbalance would do more to depressurize the economy
during this difficult stage than any other single measure (Machinery and Allied
Products Institute).

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

[We recommend] increased taxation to (a) finance defense so far as practicable
a pay-as-we-go basis; (6) drain off purchasing power in excess of goods and
services available to meet demand (The National Grange).
* * * we should try to finance our defense expenditures both actual and
proposed so as to maintain a balanced budget and finance the cost of national
defense on a “ pay as we go” basis.
* * * primary emphasis should be on lowering the personal income tax
exemptions from $600 to $500 and raising the rates slightly * * *. All
citizens and income earners should share the load * * *. I f still more revenue
is needed, excise taxes can be increased and the base broadened * * *.
Finally, and as a last resort, if even more revenue is needed a general sales tax
should be levied across the board, excepting food.
Corporate income taxes tend to be passed on so they tend to feed inflation
* * *. Corporate taxes of over 50 percent tend to restrict investment [and]
* * * the expansion of production * * * (Smaller Business Association
of New England, Inc.).
We believe that the cost of national defense should be financed on a pay-as-yougo basis * * * (a) To the extent required to balance the budget, there
should be a siphoning off of current savings not required for maintaining or
expanding minimum human and plant resources needed for the emergency pro
gram; (b) the tax program should be designed to cut down the production, dis
tribution, and consumption of dispensable or luxury goods and services. * * *
Income, inheritance, corporation, excise, and other taxes should be adjusted to
scrape off the fat (Consumers Union of the United States, Inc.).
The total cost of the military program as well as other Government expenditures,
must be covered by taxes * * *. Taxes imposed to cover expenditures must
curtail spending; not curtail savings and investments * * *. This means
that the program must be financed largely through excise or sales taxes with no
group being protected from carrying its share of the burden (National Association
of Manufacturers).
* * * New taxes should be of the kind that curtail consumer spending by
taxing the recipients of income or profits arising from the defense program. While
some readjustments in personal income taxes are probably inevitable, increases
in these taxes, too, should be made with a view to curtailing consumer spending,
rather than merely raising revenue. If the largest volume of revenue is to be
raised and excessive purchasing power curtailed, tax increases should be designed
to apply principally to the increased income generated by the defense program
(American Bankers Association, Inc.).
* * * both corporation and individual income taxes [should] be increased
at the end of 1950 to take effect January 1, 1951, and * * * excises [should]
be increased during 1951 (Committee for Economic Development).
In real terms—goods and services—there’s no getting away from paying as
we go. * * * It is good economic theory, too, to solve the inflationary
problem presented by military spending with a pay-as-we-go tax policy.
* * * Higher taxes at some point destroy incentives. * * * There’s no
precise way of fixing the point at which taxes undermine incentives. * * * We
could probably pay for a $35 billion to $40 billion military program through
taxes. But we probably can’t pay entirely for a program that runs to $70 billion
or more (with another $25 billion of nondefense activities on top of it) (McGrawHill Publishing Co.).
As to what taxes we ought to rely on, that depends in part on the prospective
need for increased revenues. If we need another $10 billion, we are inclined to
think that about 60 percent ought to be raised from excise taxes, 30 percent from
personal income taxes, and about 10 percent from the corporate income tax
(Chamber of Commerce of the United States).
* * * The remedy for inflation, however, does not lie in preventing the
receipt of justified income, but rather in neutralizing its inflationary pressure.
The stabilization policy, therefore, should include an adequate and equitable tax
policy, a savings program and credit controls, as well as direct price and wage
controls and rationing, if necessary. * * * We should enact an equitable tax
program, based on the principle of ability to pay. * * * Taxes should bear
heaviest on individuals with high incomes and corporations with large profits
(Congress of Industrial Organizations).
* * * [we support] the President’s program to pay for the current defense
expenditures on a pay-as-you-go basis * * * the additional $16 billion of
011

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

revenue “ must be secured from personal and corporate income taxes because
increases in such taxes yield the necessary revenue, would most effectively serve
to check inflation, and would be most equitable” (American Federation of Labor).
* * * we favor a “ pay as you go” tax program * * * contingent on—
(a) that the weight of the tax load be not so great as to promote the same inflation
as would follow from deficit financing, and, (6) that the weight of the tax will be
not so great or so inequitably distributed as to destroy small and independent
business * * * strongly urge Congress to close the loopholes in present tax
law * * * membership has recommended repeatedly that cooperative
business enterprises be compelled to pay taxes in the same manner as their unin
corporated and corporate enterprise competitors (National Federation of Inde
pendent Business).
* * * it is not only impossible to maintain a balanced budget and finance
the cost of national defense out of the current revenues but it would be undesir
able to do so * * * [because of] the suffering among middle- and low-income
groups which will ensue if it is attempted to collect by way of taxes now all of the
funds that would be necessary to operate the Government on a “ pay as we go”
basis * * * additional tax legislation should be directed at eliminating
wholly any individual profit on the part of corporations and large business
enterprises generally out of war and defense necessities (the National Farmers
Union).
* * * we cannot accept the notion * * * that you can look only to the
middle and lower income, particularly the lower income groups, for the bulk of
the additional $13 billion needed to balance the 1952 budget (cash basis). * * *
Consideration also should be given to the impact of additional taxes on production
incentive among sorely pressed lower income wage earners. * * *
We recommend that a more extensive sampling and a more careful audit of
individual proprietors’ returns be made.
Income from dividends and interest should be subjected to withholding taxes
the same as wage income. * * *
We are in accord with the President's proposal to raise the regular corporate
rate to 55 percent. * * * the base provided for in the excess-profits tax is too
high and * * * the ceiling limitation imposed is too low. * * *
* * * Congress and the Treasury were too generous in providing the
depletion and depreciation allowances for extractive industries and the accelerated
amortization of new facilities. * * *
* * * We are opposed to any kind of a general sales or expenditures tax
(Brotherhood of Railroad Trainmen).
The American Farm Bureau Federation definitely is convinced that we must
maintain a balanced Federal budget and finance the cost of national defense on a
pay-as-we-go basis. * * * Although we are convinced that the Congress
can make substantial savings in the President’s budget, we recognize the fact that
substantially heavier taxes will be required to balance the budget. To this end
we are prepared to support:
(a) An increase in personal income taxes to raise at least $4 billion;
(b) An increase from 47 to 55 percent in the effective rate of the combined
corporation normal and surtax rate;
(c) A reduction from $1,000 to $500 in the maximum standard deduction
individual taxpayers are allowed to take without itemizing;
(d) Heavy excise taxes (for the duration of the emergency) on luxury
goods and on goods which are made of materials of strategic importance or
which are in short supply;
(e) An amendment to the Internal Revenue Code to increase from 6 to 12
months the length of time assets must be held before income from their sale
can be reported as a capital gain;
(/) An amendment to section 3411 of the Internal Revenue Code to pro
vide that the tax (3}i percent of the selling price) imposed on electrical energy
for domestic or commercial consumption shall be collected from publicly owned
electric systems and those owned by cooperative or nonprofit corporations, to
the extent that such systems sells electricity for domestic or commercial
consumption;
(ig) Legislation to provide that savings in the form of unassigned surpluses
of cooperatives shall be taxed in the same manner as profits of other corpora
tions, and to extend the application of this principle on an equitable basis
to other cooperatively owned businesses such as mutual savings banks, loan
associations, etc. We will, however, vigorously oppose any effort to tax
80427—51----- 4

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

cooperatives on savings returned to the patron as cash, or clearly shown on
the books of the cooperative to be the property of the patron;
(h) Legislation to make the income from all future issues of Federal,
State, and local bonds taxable on the same basis as other income.
We are opposed to a general Federal sales, or manufacturer’s excise tax. As
an alternative to such a tax, we would prefer to reduce personal exemptions from
$600 to $500 (American Farm Bureau Federation).
The money supply can be reduced through increased taxes and a vigorous
savings campaign. However, to be effective savings bonds must be offered fat
a rate] which will be attractive to the people (Smaller Business Association of
New England, Inc.).
With reference to the desirability of a forced savings plan, we must come to
it eventually but should certainly not do so until we have exploited to the limit
possibilities of increased voluntary saving (Machinery and Allied Products
Institute).
We strongly favor efforts by the Government to induce the people to save.
However, such saving must be voluntary. Enforced saving can amount to
property confiscation, and even public discussion of it as a possibility drives
money into hiding (American Bankers Association, Inc.).
* * * an individual bond purchase campaign, voluntary, will be sufficiently
effective so far as savings are concerned (the National Farmers Union).
Increased personal savings would ease some of the present inflationary pres
sure and should be encouraged. * * * In any case, increased taxes appear
to us to be preferable to enforced savings (American Farm Bureau Federation).
If savings are to be employed as a technique of restricted purchasing, a com
pulsory program will have to be adopted (Consumers Union of the United States,
* * * we are opposed to any forced savings plan for there can be no guar
anty against future deterioration of the purchasing power of the dollar.
We are against deferred compensation for current labor in any form. * * *
(Brotherhood of Railroad Trainmen).
M O N E T A R Y P O L IC IE S

Present controls over business and consumer credit are as effective as credit
controls alone can be in holding down demand, in the absence of other, more
effective controls over the country’s economy (American Bankers Association,
Inc.).
With some additional enforcement machinery * * * and with the increas
ing application of allocations for the diversion of critically short materials into
needed lines of production * * * present credit controls probably will be
sufficient (the National Farmers Union).
No program to stabilize the economy and control inflation can be effective
unless it includes measures for limiting the expansion in the money supply and
bank credit (Committee for Economic Development).
There is considerable opposition among our members to indirect controls
such as consumer and business credit controls * * * [but] indirect controls
are favored over direct price controls and wage controls and rationing (National
Federation of Independent Business).
The private credit system—commercial banks, installment credit, etc.— must
be prevented from adding to inflation. * * * The Federal Reserve System
must again take control of the money and credit system and using the interest
rate and whatever powers necessary to restrict credit to loans which will not
feed the inflation (National Association of Manufacturers.)
It is not yet clear whether real estate and consumer credit controls are ade
quate * * * General credit controls are preferable to selective controls
* * * If credit is too free and easy, the best general technique for limiting
its flow is through an increase in reserve requirements, effective rediscount rates,
and open market operations.
We are opposed to enforce savings plans. We believe that if the interest
rate were more flexible, and if the Government showed proper determination to
stop the increase in the money supply, the American people would automati
cally increase their savings and invest them in Government bonds or other
savings instruments. * * * A flexible interest rate would quickly bring
into balance the supply and demand for capital (Chamber of Commerce of the
United States).

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

Existing selective credit controls have proved inadequate to restrain excess
consumer demand. * * * Higher interest rates would reduce the present
inflationary pressure by drying up some of the excess funds that are now com
peting for scarce goods. They would do this (1) by enabling the Federal Reserve
System to sell a part of its huge portfolio of Government bonds to private banks
And investors, (2) by discouraging a further shift of non-bank-held Government
bonds to the banking system, (3) by discouraging a further expansion of private
credit, and (4) by encouraging our citizens to practice thrift and to increase
their savings in this period of excessive demand (American Farm Bureau Fed
eration).
[We recommend] controls which channel credit into expansion of our production
facilities; which restrict borrowing for nonessential purposes (the National
Grange).
Even more stringent credit curbs should be instituted on installment buying,
housing, and general building except defense building not only to combat inflation
but also to save scarce materials (Smaller Business Association of New England,
Inc.).
I should not be averse to some further increase in the severity of these regula
tions [W and X], though we need have no illusions that in the present state of
public psychology this would accomplish any miracles * * * This is no
place to discuss the merits of the Treasury and Federal Reserve Board’s positions
[on pegging long-term Government’s on a 2J4 percent yield], but I should like to
point out that in the absence of effective control over the money market by the
central bank even greater reliance must be placed on Federal fiscal policy in the
battle against inflation (Machinery and Allied Products Institute).
* * * raising reserve requirements and moving interest rates up fractionally
are ineffective in the control of business credit—in view of bank and business
holdings of Government bonds and unlimited profit prospects. * * *
Consumer credit control is neither an effective nor equitable way of rationing
a limited amount of durable goods (Brotherhood of Railroad Trainmen).
Where credit is rationed to business, big firms, which can supply collateral
relatively easily, get lower rates. The present type of credit controls are not an
adequate method of meeting necessary curtailments * * * (Consumers
Union of the United States, Inc.).
The credit controls imposed by regulations X and W have been inevitably
inequitable. Such controls, like sales taxes, place a special burden on low-income
families who can least afford to carry it.
* * * Regulations X and W make it almost impossible for the low-income
groups to purchase homes, automobiles, or household appliances. They tend
to force low-income buyers out of the market, while allowing those with ample
cash reserves to buy as much as they choose (Congress of Industrial Organiza
tions) .
Although some credit controls on consumer buying may be necessary, these
restrictions cannot and should not be considered a primary weapon against
inflation * * *
This is particularly true with regard to housing. The American Federation
of Labor feels that the issuance of regulation X represents a completely illogical
and unsound approach to the control of housing in a defense economy (American
Federation of Labor).
D IR E C T C O N T R O L S

* * * direct price and wage controls are essential (the National Farmers
Union).
Price controls will still be necessary so long as goods which are important in
the cost of living are in scarce supply, and they will have to be continued as long
as the supplies are scarce * * * Price freezing on the basis of profit margins
is unsound because it encourages inefficiencies in the same way as a cost-plus con
tract * * * Farm support should be eliminated except in distress cases and
Where they are needed for long-run conservation purposes (Consumers Union of
the United States, Inc.). *
, * * * direct price and wage controls will be necessary for probably at least
2 years while we are expanding the production of basic materials, machine tools,
etc. * * * Direct price and wage controls should be applied across the
board * * * prices and wages should be set at present levels * * *
Prices should be frozen and adjusted by percentage margins * * * The base
for wages should be set at the end of some reasonably stable period like the last

ECONOMIC HAZARDS OFINFLATIONARYDEJBTSNSIEECONOMT

few months in 1949 * * * from that base increases should be allowed only
to adjust wages to the cost of living (Smaller Business Association of New Eng
land, Inc.).
Direct price and rationing controls will be necessary as long as Government
purchases continue to provide such a huge guaranteed market to business.
We do not necessarily agree that because prices are controlled wages should
similarly be controlled. The difference is that a price is established unilaterally
by the producer while a wage rate is subject to bargaining between the employee
(producer) and the employer (purchaser) (Brotherhood of Railroad Trainmen).
* * * in 1947 only 15 percent of our members favored reimposition of
wage and price controls, while in September 1950, 44 percent favored imposition
of these controls (National Federation of Independent Business).
* * * immediate steps should be taken to halt further price rises. Wher
ever possible, ESA should order roll-backs. And the Defense Production Act
should be amended without delay to [provide] * * *
1. Food price subsidies which would permit effective controls over retail food
prices while, at the same time, assuring fair returns to the farmers.
2. The necessary authority to regulate trading and margins on the commodity
exchanges.
3. Effective grade labeling, the establishment of specifications and standards
for different kinds of goods and services, the placement of quantity ceilings on
highest priced items produced and solcf.
4. An increase in the limit on the total amount of outstanding loans to businesses
for expansion purposes and the grant of authority to the Government to build
and operate plants, whenever necessary, for the defense effort. * * *
* * * Wage stabilization policy should be considered only as one part of
an over-all stabilization program. An equitable wage policy should be sufficiently
flexible to permit for adjustment based on inequities, substandard wages, costof-living increases, and improved productivity and industrial progress (Congress
of Industrial Organizations).
If inflationary pressure is not controlled at its source, either the controls will
break down or we shall suffer the evils of suppressed inflation. Among the dan
gers of direct controls one of the greatest is that they will be regarded as a sub
stitute for more fundamental and constructive measures (Committee for Economic
Development).
Price and wage controls have now been started, and their value as inflation
restraints depends upon the effectiveness of their administration (American
Bankers Association, Inc.).
* * * any price controls to be effective will have to operate very much
across the board. * * * If prices are frozen it is better to be guided by
margins rather than by levels * * * the margin principle is the only one
that is likely to minimize impossible inequities and bottlenecks and deterrents to
production (Chamber of Commerce of the United States).
If the institution of price control were to be followed up promptly and firmly
with a broadly based pay-most-of-it-as-you-go tax program, and if consequently
the dominant topic of economic conversation were to shift from the prospect of
higher prices to the prospect of painful taxation, price control might prove to
have been of some use in stemming inflation. * * * When all the angles
are considered, it may be that, in practice, a wage formula that ties wage rates to
the cost of living may prove relatively acceptable. Its economic acceptability is,
of course, directly proportional to the degree of success in controlling the cost of
living.
To limit their inflationary potential, however, increases in wages resulting from
this kind of contract might well be paid in United States savings bonds—or some
other form of bond that would not be cashable until after the emergency. This
would check the wage-price spiral which could become the vehicle of runaway
inflation.
A system of flexible controls—controls which would stabilize prices, particularly
industrial prices, but still allow them to rise to cover rising costs—has a reasonable
prospect of success. * * * Price and wage controls can work—particularly
in the fields of food, clothing, and services—only if backed up by strong tax,
credit, and monetary policies (McGraw-Hill Publishing Co., Inc.).
[We recommend] use of price, wage, and rationing controls only when * * *
[fiscal and credit controls] prove inadequate to bring purchasing power and sup
plies of goods and services into approximate balance. Price, wage, and rationing
controls should be used together, not separately (the National Grange).

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

* * * we should explore the possibility of a much wider resort to margin
controls than was had under the wartime OPA * * * while it may be neces
sary to level up workers to a bench-mark position established by new wage in
creases in certain sectors of the labor force, I should certainly not favor automatic
cost-of-living escalation beyond that point (Machinery and Allied Products
Institute).
* * * the first step toward bringing order out of chaos should be the
enactment by Congress of a new and workable price-control law which will
permit effective stabilization of the cost of living.
It goes without saying that it would be the height of injustice to impose wage
stabilization upon the Nation’s workers before the cost of living is securely
anchored. * * *
To succeed, any wage stabilization program must be adaptable to changing
conditions and needs, must provide for prompt adjustment where adjustment is
needed, and must avoid the use of rigid arbitrary formulas which have no justifica
tion other than administrative convenience. [It] must offer the workers of
America the assurance that full justice has not fallen victim to empty legalism—
thac grievances will be given a fair hearing, and that genuine inequities will be
quickly corrected (American Federation of Labor).
We are opposed to price, wage, and ration controls. * * * The real cures
for inflation are increased production, strict Government economy, pay-as-we-go
taxation, effective credit controls, and sound management of the public debt.
We should concentrate our efforts on these real cures, and remove existing wage
and price controls as quickly as possible (American Farm Bureau Federation).
Limitation and material orders are obviously necessary in order to obtain
materials for defense and to prevent hoarding.
Consumer rationing will undoubtedly be forced upon us to achieve anything
like equitable distribution of scarce articles * * * (Smaller Business Asso
ciation of New England, Inc.).
Priorities and allociations should be used to assure the steady flow of materials
needed for the military program (National Association of Manufacturers).
Priorities or allocations of raw materials for essential defense and civilian pro
duction are also necessary (American Bankers Association, Inc.).
* * * consumer rationing of such commodities as meat inevitably will be
necessary to back up price control (the National Farmers Union).
* * * [we are] in favor of immediate price control and rationing of meats
* * * food price controls ultimately become ineffective if not accompanied
by a rationing program (Brotherhood of Railroad Trainmen).
Where rationing is required, it must be compulsory and enforced by direct
public participation at the local level (Consumers Union of the United States,
Inc.).
Broad-scale rationing of consumer goods now doesn’t seem to be needed (Mc
Graw-Hill Publishing Co., Inc.).
FOREIGN ECONOMIC PROGRAMS

* * * I should like to see the joint committee take account of the dire
necessity for making provision in any plans for economic and fiscal action in the
next 2 years, for a large economic aid program for other countries, a program
which will require large-scale public investment by the United States Govern
ment in order to pave the way for future investment, in the same areas of the
world by private investors (the National Farmers Union).

APPENDIX C
T

e r iv a t io n

sures

the

m e r ic a n

s t im a t e s

conom y

I n f l a t io n a r y P r e s
S u m m a r iz e d in P a r t I

of th e
as

CONTENTS
The problem________________________________________________________
Estimate of current inflationary potential_____________________________
Section I. Government expenditures___________________________
Section II. The supply of goods and services_____________________
A. Manpower potentials________________________
B. Productivity________________________ ________
C. Gross national product in constant prices______
Section III. The demand for goods and services___________________
Primary inflation_______________________________
Section IV. Estimates of excess dollar demand____________________
Eliminating the inflationary potential________________________________
The Nation’s economic budget______________________________________
The Government budget____________________________________________
L ist

49
53
53
58
58
66
73
73
79
81
85
93
95

T ables

I. Estimated defense expenditures for military services for the fiscal
years 1950 through 1952 and by quarters from July 1, 1950, to
June 30, 1952_______________________________________________
II. Consolidated Federal cash budget, fiscal years 1950-52___________
III. Labor force, employment, and unemployment, 1929-52___________
IV. Persons working part time, classified by full-time or part-time status,
by hours worked, week of August 6-12, 1950__________________
V. Summary classification of major labor market areas, November
1950, September 1950, November 1949_______________________
VI. Summary classification of major labor market areas by region,
November 1950____________________________________________
VII. Gross national product in constant prices, employment, average
weekly hours, and productivity, fiscal years 1949-52__________
VIII. Estimate of total wages and salaries____________________________
IX . Excess consumer inflationary demand on the basis of existing tax
program, fiscal years 1950-52________________________________
X. Business inflationary spending on the basis of existing taxes, fiscal
years 1950-52_______________________________________________
XI. Wholesale and consumer price trends, June 1950 to June 1952____
X II. Proposed Federal Government fiscal legislation and its economic
effects, Federal fiscal year 1952______________________________
X III. Consumer expenditures:
A. Estimated inflationary pressures at low, middle, and high
levels of Federal Government expenditures H fiscal 1952_ _
B. Estimated additional taxes and controls needed to remove
the inflationary pressures____________________________
X IV . Nation’s economic budget, fiscal years 1950-52__________________
XV. Estimated additional taxes and the Federal budget, fiscal year 1952_
XVI. Reconciliation of consolidated cash budget with Nation’s economic
budget_____________________________________________________
48

Pag®

55,
5&
63
65
66
66
73
77
82
83
84
92
92
93
94
95
96

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

L is t o f C h a r t s
Pag*

Chart 1. Growth of the population has been uneven--------------------------Chart 2. The peak war rates of labor force participation could add 5 to 6
million workers to present labor force____________ _________
Chart 3. Of those not in the labor force______________________________
Chart 4. National output and labor input ____________________________
Chart 5. Farm production, now and before World War I I _____________
Chart 6. Farm input and output__ _ ___________________ j ____________
Chart 7. Fertilizer use and prices________________ ____________________
Chart 8. Farm output and labor input_______________________________
Chart 9. Farm power and machinery_________________________________
Chart 10. Principal machines on farms________________________________
Chart 11. Farmers’ purchases of machinery and motor vehicles__________
Chart 12. Consumers’ Price Index____________________________________
Chart 13. Wholesale prices. _____ ________________________ ____________
Chart 14. Weekly wholesale price index_______________________________
Chart 15. Daily spot market prices---------------------------- ------------------------T

60
61
62
67
69
69
70
70
71
71
72
86
87
88
89

roblem

In mid-1950 international events caused a sharp reappraisal of
defense requirements by the United States Government. It became
apparent that our Armed Forces had to be increased and additional
equipment provided to enable this Nation to defend itself against
aggression at any time and to carry its part of the burden of main
taining world peace under the United Nations. When the change in
defense requirements occurred in June of 1950, the number of unem
ployed was estimated to be about 3.4 million persons, or 5.2 percent
of the total civilian labor force. Industrial production, as measured
by the Board of Governors of the Federal Reserve System, had
reached 199 (1935-39 = 100, seasonally adjusted) compared to a low
of 161 in July of 1949. Wholesale prices had increased in June of
1950 to 157.3 (1926 = 100) compared to a low of 151.2 in December of
1949. Similarly, the Consumers' Price Index, which reached 166.5
in February of 1950 (1935-39 = 100) had risen to 170.2 by June of
1950. Finally, gross national product, which had been as low as
$253.8 billion (annual rate seasonally adjusted) in the fourth quarter
of 1949, had risen to $270.3 billion in the second quarter of 1950.
Thus, before any of the increase in Government expenditures was
even contemplated— in fact, while a reduction in defense spending
was taking place— the American economy was rising to higher levels
of employment, production, and prices. In fact, in terms of employ
ment and in terms of capacity the economy was rapidly approaching
maximum utilization of the resources available. This was the econom
ic setting in which the Nation suddenly faced the problem of drasti
cally increasing the share of the national output and manpower
devoted to national defense.
The present economic situation differs significantly from that which
prevailed when World War II broke out in ^Europe in September 1939.
In the year 1939 out of a total labor force of 55,600,000 about 9,480,000
were unemployed. At the wartime peak, during 1944, the total labor
force had risen to 65,890,000, and unemployment was down to 670,000.
Within 5 years there was an expansion in the labor force of 10,290,000,
and in total employment (including the Armed Forces) of 19,100,000.
The Department of Labor now estimates that the present potential
labor force is about 69,100,000 if the peak wartime rates of partici

ECONOMIC HAZARDS OF INFLATIONARY DEIFENSIE ECONOMY

pation in the labor force were applied to the 1950 population in terms
of sex and age. Thus, according to the estimates of the Department
of Labor, our present maximum potential expansion in the labor force
is only about 54 percent of that which occurred in World War II,
or 5,600,000, and in total employment about 45 percent of World
War II, or about 8,600,000.
In 1939, the Federal Reserve Board index of industrial production
averaged 109 for the year and reached 243 during the war period.
In 1939 disposable personal income amounted to about $70 billion
compared to the current level of a little more than $200 billion. In
1939 corporate profits after taxes were about $5 billion compared to a
rate in the third quarter of 1950 of over $24 billion. In 1939 prices
were comparatively low; agricultural prices, particularly, were sub
stantially below a balanced relationship with other parts of the price
structure. Price increases then raised both production and capacity.
At full employment levels such as now exist, price increases are simply
inflationary and are likely to obstruct rather than increase balanced
production.
It is clear that the Nation now faces a substantially different situ
ation from that which prevailed at the beginning of the last war. In
addition to purely economic circumstances there were technological
reasons that caused increases in military output to be slow in coming
after 1939 because of the necessity of building plant and equipment.
This time American industry has a vastly increased capacity and
recently acquired know-how for making military equipment. Thus
the change-over to military output can be appreciably more rapid
than in 1939-44. Therefore, inflationary pressures will build up in
the economy more rapidly in proportion to the sums appropriated
now than was the case in 1939-44.
Requirements of the highest political importance now make it nec
essary to impose on top of a full-employment economy a much larger
burden of national defense expenditures than had previously been
borne except in time of war. Nor is this to be a short-term affair.
Any realistic appraisal of the situation indicates that public policy
can only be based upon the assumption that this is to be a continuing
program under which defense expenditures, when once increased to
some higher level required by the international situation, will be kept
at this higher level for a long period of time, perhaps a decade or two.
Policies, therefore, should be framed in the light of a continuing pro
gram rather than against the background of a short emergency. This
would be true even if full-scale war develops since an intercontinental
war of the scale which is now possible may last indefinitely.
On the economic front, this shift in Government programs poses a
complex and difficult problem, particularly so when one considers o u j
national objectives or goals. These, roughly in order of priority, may
be listed as follows:
1. To divert to national security programs such manpower
resources and materiel as military, diplomatic, and political
considerations require.
2. To increase productive capacity of the economy to the
extent and at a rate practical within the limits set by present

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

resources, basic consumer needs, and, most of all, defense require
ments, so that—
(а) Productive capacity is available to meet any war
emergency; and
(б) Productive capacity may increase over several years
sufficient to permit carrying the defense program and, at
the same time, satisfy normal civilian demands without
inflation.
3. To maintain as high a level of civilian consumption as is
possible—in any case to meet basic consumer requirements vital
to maintaining productive efficiency.
4. To prevent an inflation which would—
(а) Seriously reduce the value of current and past savings;
(б) Interfere with production and disrupt economic
balance;
(c) Place unnecessary economic burdens on the consum
ing public; and
(d) Create such discontent and discord that the danger of
internal security would be compounded with that from an
external enemy.
5. To maintain a sound balance between programs so as to
attain these goals, and, also, distribute the burdens and costs of
the defense mobilization equitably among the population.
The greatest danger created by this change in national policy is
essentially that of inflation. The results of failure to control inflation
are likely to cause widespread distress.
The best available data indicate that even at the present time
possibly as many as 40 percent of family units in this country receive
money incomes so low or so stable that rapid inflation of prices would
result in severe hardship. Millions of families headed by retired
persons, civil servants, teachers, unskilled workers, farm laborers,
and small farmers did not participate fully in the advancement in
incomes that accompanied the increase in prices from 1939 to 1949.
Hence many millions of our population have already suffered severe
penalties as a result of the past inflation in our price structure.
Further inflation, even though modest, will subject millions of our
citizens to severe additional hardships. If by any chance it be of the
“run-away” variety, such as happened in Germany after the First
World War, there would ensue a rapid decline in production, a
demoralization of incentives to work, to save, and to be thrifty; a
rapid concentration of income and wealth in the hands of a few;
bankruptcy for the middle-income groups who now account for the
bulk of both savings and private property, and rapid disappearance
of millions of small businesses and independent family farms which
are the bulwark against monopoly and communism as well as the
source of innovation and growth.
If through inflation the citizens find the purchasing power of their
$48 billion in savings bonds wiped out, their insurance policies and
their billions of dollars of deposits in our banks made worthless, then
most laborers, farmers, and businessmen will have small economic
cause for further loyalty to our system of free enterprise and political

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

freedom. Only the profiteers, monopolists, and speculators, who con
trive to “beat” the inflation and, like Stinnes in postwar Germany, end
up in control of most of the Nation's wealth, will feel any economic
cause for supporting the system. We shall have set the stage for the
dissolution of the Republic just as inflation in Germany set in motion
the forces that brought about the downfall of the Weimar Republic
and the rise of the Nazi regime.
The masters of the Kremlin are counting on this country being
foolish enough to destroy itself internally, thus saving them the neces
sity of conquering it by military arms. Inflation is the great danger
the United States faces, and is the best weapon of international com
munism. Unless this internal danger is met, defense against Com
munist aggression will crumble. In the few months that have elapsed
since June 25, 1950, this internal enemy has exacted a severe toll. By
December 1950, wholesale prices had increased 10.4 percent and con
sumers’ prices by 4.7 percent. (See table X I, p. 84.)
The tasks of this technical memorandum are: (1) to estimate the
magnitude of present inflationary pressures and their location in the
economic structure; (2) to call attention to the diversity and size of
prbgrams that can be used to stabilize the price structure whilst
insuring needed production to satisfy military and civilian demands,
and spreading equitably the required sacrifices defense imposes on the
Nation.
The inflationary problem created by present increases in defense
expenditures can be broken down into four related questions:
1. What is the probable size of the inflationary pressures; that
is, how much more will the Government, business, and con
sumers try to purchase than will be available from our productive
system at stable prices? As a corollary, how much can the out
put of goods and services be expanded?
2. How much of a rise in prices is likely to occur as a result of
these inflationary pressures if present controls prove inadequate?
3. How can prices be stabilized and the inflationary effects of
the defense program neutralized?
4. What is the likely effect of increased defense activity on
budget receipts and the deficit?
The answers to these questions can be obtained only by making a
thorough review and analysis of current economic conditions and
prospects. In particular, it is necessary to take the following six
steps:
1. Estimate the effects on Government expenditures of the
increased tempo of defense outlays over the fiscal years 1951 and
1952.
2. Estimate the probable supply (gross national product) at
constant or stable prices.
3. Estimate the demand for goods and services likely to be
generated by increasing Government expenditures in an economy
already largely fully employed.
4. Evaluate the effects of these economic developments on
prices.
5. Determine the amounts by which taxes would have to be
increased if adequate not only to meet increased defense expendi
tures and eliminate the Government deficit, but to make a
maximum contribution toward restraining price increases.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

6.
Indicate controls other than taxes which might prevent
inflation.
All analyses necessarily make assumptions. Those relevant here
are: (1) that this emergency period of international disturbances,
tension, and possible war is likely to continue over a decade or more;
(2) that every measure must strengthen free private enterprise and the
American system of political institutions; (3) that general indirect
monetary, fiscal and credit controls are preferable to direct controls
over prices, wages, and consumption which interfere with individual
freedom of choice.
One caveat should be set forth: Every policy or program, whether by
Congress, an administrative agency, a private business firm, or a
consumer, involves a forecast or assumption conerning further
developments. The adoption of certain budget appropriations and
tax rates involves forecasts concerning the future level not only of
business and of prices, but of incomes and tax yields. Such forecasts
are implicit in every investment transaction or contract. This memo
randum, in estimating the relative size and composition of the
“Nation’s economic budget/’ necessarily and explicitly and con
sciously makes assumptions that all must make who suggest policies
of any sort for the present and immediate future. Painstaking effort
has been made to combine the best available data with the most reason
able set of assumptions, in order to arrive at results of maximum
probable likelihood.
E

s t im a t e

urrent

I n f l a t io n a r y P o t e n t ia l

S E C TIO N I— G O V E R N M E N T E X P E N D I T U R E S

During the fiscal year 1950, the Federal Government paid out
$43.2 billion, about 41 percent for present national defense and 31
percent for past wars and emergencies. These categories included
about $12.4 billion for military services, $9.3 billion for veterans,
$4.7 billion for international programs, $600 million for atomic energy
and $4.3 billion for interest on the national debt. In his budget
message the President has asked for additional appropriations for
defense and for the Mutual Defense Assistance Pact to bring the total
appropriations for military services and international security in fiscal
1951 to $63.2 billion. The previously estimated expenditures for the
fiscal year 1951 as contained in the President’s January 1950 budget
message estimated expenditures for military services in fiscal 1951 at
$13.8 billion; veterans, $7.1 billion; and for all international programs,
$4.9 billion.
During the first quarter of the current fiscal year— that is, JuneSeptember 1950— the average number in the armed services was about
1,500,000. For the second quarter of the fiscal year, that is, OctoberDecember 1950, the figure was 2,100,000. According to statements
made by the President and by Secretary of Defense Marshall the
armed services will number approximately 3,500,000 by June 1951.
In translating any mobilization pattern into actual cash expendi
tures, several factors have to be considered. In the first place, allow
ance has to be made for the strictly personal expenditures such as
military pay, food, clothing, and other perishables, travel allowances,
etc., which must be made as personnel is inducted into armed services.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

Secondly, allowance has to be made for nonpersonnel connected ex
penditures such as for new equipment, arms, cantonments, and the
like. This is a difficult operation, but certain guideposts are avail
able. The President in his January 1951 budget message estimated
military expenditures for fiscal 1952 at $41.5 billion, compared to
$21.2 billion in fiscal 1951, and $12.4 billion in fiscal 1950.
Allowance must also be made for the fact that on many items large
appropriations are authorized to make possible the letting of contracts
or issuance of letters of intent that may not result in Government ex
penditures of any size until months or years later. Thus World War
II actual expenditures lagged far behind appropriations and contract
authorizations. For example, for the fiscal year 1941 the War De
partment alone was authorized to spend over $12 billion, but actually
succeeded in spending less than $4 billion, or only 31 percent of its
appropriation. In fiscal year 1942 the War Department had an
appropriation of over $78 billion, but spent only a little over $14
billion. New appropriations for the War Department in 1943 were
just about in line with expenditures at a little over $42 billion, but in
1944 appropriations again exceeded expenditures by almost $10 bil
lion. Similar experiences were shown for other services.
For the four fiscal years 1941 through 1944 the War Department
had total appropriations and net contract authorizations of almost
$192 billion, but reported expenditures (on a daily Treasury state
ment basis) of a little over $109 billion. For the total of all war
activities programs, exclusive of the RFC and its affiliates, during
the above mentioned four fiscal years, appropriations and net con
tract authorizations totaled about $321 billion, while the expenditures
totaled about $191 billion. In other words, at the beginning of the
fiscal year 1945 almost $130 billion in appropriations and net contract
authorizations, or almost 42 percent of the $321 billion made avail
able by Congress, had not yet been paid out.
In the present period of building up the size and effectiveness of
the Defense Establishment, procurement can go forward at a much
more rapid pace than was achieved from 1939 to 1944. At that time
we had very few business organizations equipped or experienced to
produce the multitude of items required by the armed services.
Now we have vastly increased capacity, trained manpower, and the
industrial know-how for the output of military equipment. The
defense establishment itself is better equipped for rapid expansion
of procurement programs. As a result, high levels of output can be
reached quicker.
So far about $44.2 billion has been appropriated (excluding foreign
military aid and other defense-connected expenditures), or over three
times the 1950 fiscal expenditures for military services. Actual cash
expenditures of the military services on a daily Treasury statement
basis for the first 5 months of the current fiscal year were in fact lower
than in the same 5 months of the previous fiscal year. Thus current
fiscal year military expenditures may expand by only about one-third
of the increased appropriations so far made, that is, from $12.5 billion
in fiscal 1950 to about $21.0 billion in fiscal 1951, with an annual rate
in the fourth quarter of the current fiscal year (April to June 1951) of
about $28.0 to $30.0 billion. In the fiscal year 1952 military expendi

ECONOMIC HAZARDS OF INFLATIONARY DEiFESNSE ECONOMY

tures may be expected to expand further, and on the basis of present
budget planning may well total $41.5 billion.1
At the present time, pay, clothing, food, and other personnel costs,
plus operations and maintenance of equipment and installations,
amount to about $5,600 per individual in uniform. For the numbers
expected to be in the armed services over the next 2 years, this implies
a cost of $13.5 billion in the 1951 fiscal year and $19.6 billion in fiscal
1952. When 3,500,000 are in uniform, these costs will amount to
about $19.6 billion per year. (See columns 1 and 2 of table I.)
I.— Estimated defense expenditures for military services for the fiscal years
1950 through 1952, and by quarters from July 1, 1950, to June 80, 1952

T able

[Billions of dollars, annual rates seasonally adjusted except column (1) which is in millions]

Fiscal year or quarter

Expendi
Number in tures,
per
Armed
sonnel
con
Forces1
nected *
(1)

I960.....................................................................................
1961...............................................- ....................................
1962 *...................................................................................
1950—July-September......................................................
October-December____________________________
1961—January-March_______________________________
April-June_____ ___________ ______ ___________
July-September______________________________
October-December_____ ______________________
1952—January-M arch______________________________
April-June___________________________________

1.6
2.4
3.6
1.6
•2.1
» 2.7
13.3
13.5
13.5
13.5
13.5

(2)
8.4
13.5
19.6
8.4
111.8
115.1
18.5
19.6
19.6
19.6
19.6

Procure
ment and
all other8

Total <

(3)

(4)

4.1
7.7
21.9
3.8
4.7
8.8
13.5
18.5
21.0
23.1
25.0

12.5
21.2
41.5
12.2
16.5
23.9
32.0
38.1
40.6
42.7
44.6

i Data include about 160,000 who are excluded in table III which is based on Bureau of Census data and
concepts. The census excludes these 160,000 because they were outside continental United States in 1940
and who are not enumerated in the census of 1940.
* Includes expenditures for pay, food, clothing, operations and maintenance, etc.
* Includes major procurement, research and development, civilian components, administration, retired
pay, military public works, industrial mobilization, and all other.
* Total for fiscal 1950 is the actual figure reported by the Bureau of the Budget; for subsequent periods,
data are estimates.
* Corresponds approximately to the President's budget and to middle assumption in table II, p. 68.
* Estimate.

Objection to these estimates might be raised on the grounds that
rising costs will increase expenditures per person in service. The
figures in table I, however, already allow for about a 5-percent increase
in prices after June 1950. Furthermore, cost increases can be re
strained by vigorous action by the Government to restrain inflation
and by hard-headed procurement policies and administration which
result in: (1) Tight figuring on Government contracts; (2) recapture of
any excessive profits on such contracts; and (3) the cost reductions due
to economies of scale and continuity of operations on individual items.
In addition to personnel-connected and operational costs outlined
so far, military spending covers major procurement, research and de
velopment, industrial mobilization, civilian components, acquisition
and construction of real property, administration, classified projects,
and all others. For the fiscal years 1947-50 these items accounted for
only about 33 percent of total military expenditures. The proportion
spent on these items will rise rapidly during the current and following
fiscal years to about 55 to 60 percent in the April-June quarter of 1952.
1 Corresponds approximately to middle assumption in table II, p. 58.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

Such an increase would represent almost a sevenfold multiplication
of major procurement and other expenses from about $3.8 billion
(annual rate, seasonally adjusted) in the July-September quarter of
1950 to $25.0 billion in the final quarter of fiscal 1952— April-June
1952. (See column 3, table I.) Between these two periods, expendi
tures for procurement and other items would rise slowly until January
1951, then rise very rapidly. This pattern was followed in World
War II with two exceptions: (1) the time covered was 4 years instead
of 2; and (2) between 15 and 20 percent of the increase was due to
price rises taking place between 1939 and early 1^942. After January
1942, prices of munitions appear to have declined—gradually at first,
and then more rapidly to the extent of 15 to 20 percent by 1944.2
Procurement and renegotiation organization is in far better shape
than in 1939-41, so that munitions should show economies of scale
and of increased productivity much more quickly. Therefore, by late
in 1951, the increase in money expenditures on defense should begin
to be less percentagewise than the increase in physical units.
These estimates of the probable pattern of military expenditures
may be optimistic concerning both the international situation and the"
assumed efficiency and diligence of the Defense Department, the
civilian agencies, and the Congress, in preventing inflation and secur
ing increased productivity and economies of scale. If the interna
tional situation requires greater increases in military expenditure than
estimated in table I, the figure may reach the high estimate in table
II, page 58.
On the other hand, if the former assumption is sound (no fullscale war this year) but the latter concerning efficiency in procure
ment and price negotiation proves to be too optimistic, there will
have developed “within our gates” an enemy of greater menace
to freedom and independence than any possible external aggressor,
namely, uncontrolled inflation. At this critical juncture, the United
States simply cannot afford the luxury of military inefficiency in pro
curement and negotiation. The creation by the Congress of a
“watchdog” committee, headed by Senator Lyndon B. Johnson, and
that committee’s investigations so far, are effective expressions of the
determination of Congress that every effort shall be made to bring
about the efficiencies assumed in this analysis.
It may happen that changes in the international situation will
make possible a reduction in military expenditures either by lower
ing the sights or by slowing up the rate at which mobilization is pushed
toward the longer term goals. In this case, expenditures in fiscal
1952 might well approximate the lowest assumption shown in table
II, page 58.
So far, the analysis has referred exclusively to requirements of
the domestic Military Services. The threat of Communist aggres
sion is pointed at all the free nations— not merely at the United
States. The other threatened peoples have substantial resources of
manpower, productive plant, raw materials and military bases.
From an economic standpoint these resources, too, will need to be
mobilized to help defend the free peoples against Communist aggres
sion. This memorandum in no way presumes to touch upon vital
political and military decisions as to who, when, what, or how much.
2 See Worsley, Thomas B., Wartime Economic Stabilization and the Efficiency of Government Procure
ment; National Security Resources Board, 1949, pp. 323-325; table 7, p. 360, and table 8, p. 361.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

But it does assume that the United States will cooperate in an inter
national mutual defense program of some sort, regardless of how such
a program is formulated or administered.
A corollary assumption is likewise made; that the program of
mutual defense assistance will continue so long as the threat of Com
munist aggression menaces this country and its allies abroad, which
may be 5, 10 or even 20 years.
In the third place, the assumption is made that some economic aid
to foreign nations through ECA will be necessary, though at a reduced
scale. Military mobilization will involve greater sacrifices at times
from some of the people® of other countries than from our own citizens
because of lower levels of output, World War II devastation not yet
repaired, and scarcity of certain types of real capital. In such circum
stances it would be false economy to deny all further economic aid
where its continuance in some amount is essential to success of the
military program.
If the military and political problems connected with a foreign mili
tary assistance program can be solved, any assistance given to our
allies among the free peoples of the world to enable them to make
their contribution to the common defense probably will yield more
military and political strength than the same amount spent in this
country. Each dollar spent in domestic markets for defense brings
only that dollar’s worth of resources. Every dollar of mutual defense
assistance spending, if carefully used, should result in mobilizing in
addition to the immediate dollar’s worth of military power, further
manpower, production, and materials from the resources of other
nations. For example, use of European steel capacity could expand
immediately the potential output of arms plus civilian goods— thus
giving the United States valuable assistance pending expansion of our
own steel capacity.
If these three propositions be assumed to be reasonable, how shall
the total of expenditures on international affairs be estimated? One
approach is to scale the,international expenditure item to fit the limits
set by: (1) published statements of policy by the administration and
Congress; and (2) the probable volume of such foreign assistance as
can be extended in view of the resources of the American economy and
defense requirements. A reasonable estimate at the moment is that
total expenditures for international affairs, including both interna
tional aid and mutual defense assistance pact programs, might approxi
mate $4.8 billion for the fiscal year 1951 and $7.5 billion for fiscal 1952.
Other items of defense expenditure, such as outlays for veterans, for
interest on the public debt, for atomic energy, and for other defenseconnected matters are shown as estimated by the Bureau of the
Budget.
There will be a certain amount of automatic contraction in non
defense expenditures. Housing mortgage operations may well result
in a net inflow to the Treasury. In the agricultural sector, price rises
may enable the Commodity Credit Corporation to sell remaining
surpluses with a net inflow of funds to the Treasury. Similarly, un
employment claims will decline as employment rises, while the new
Social Security bill will increase revenues of the trust funds without
expanding sufficient y the cash expenditures for old-age pensions and
assistance programs to offset add -d revenue. In fact, the high level
of business activity the high lev^l of prices, the higher wage rates,

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

and the low level of benefits may cause many who are contemplating
retirement to postpone it, and many of those who are already retired
to resume work during the current and following fiscal years.
Estimates of the ways in which cash expenditures in the fiscal years
1951 and 1952 may change from fiscal 1950 are shown in table II.
T able

II.— Consolidated Federal cash budget, fiscal years 1950-52
[Billions of dollars]
Bureau of the Budget

Description
1950
actual

Budget assumptions for 19521

1951 esti 1952 esti
mate
mate

Low

Middle

High

Receipts from the public:
Direct taxes on individuals__________
Direct taxes on corporations___ _
Excise taxes and customs____________
Others..... ......... .....................

18.1
10.9
8.0
3.9

22.3
13.6
8.8
4.6

26.8
20.0
8.8
5.7
61.3

3 60.0

43.5

53.5

63.5

Total cash receipts________________

40.9

49.3

Payments to the public:
National defense and related activities.

17.7

27.1

51.8

Military services________________
International security___________
Atomic energy__________________
Promotion of defense production. _
Civil defense___________________
Economic stabilization and allocation.

12.4
4.7
.6
0
0
(2)

21.2
4.8
.8
.3

41.5
7.5
1.3
1.1
.5
.3

Past wars and emergencies__________

13.6

10.6

10.5

Interest________________________
Veterans_______________________

4.3
9.3

4.1
6.5

4.6
5.9

Civil functions, total

. ..

Total cash paym ents.________ ___
Excess of receipts from public___________
Excess of payments to public____________

11.9

11.3

11.4

10.7

43.2

49.1
.2

74.1

65 0

75.0

85.0

12.8

5.0

15.0

25.0

2.2

1 Assumes that change from low to middle to high budgets is in military services expenditures or that
reductions in nonmilitary items are offset by increases in military expenditures.
* Less than $100,000,000.
* Bureau of the Budget estimate for 1952 rounded on conservative side.
Source: Bureau of the Budget, based on existing tax law; budget assumptions for 1952 by staff, Joint
Committee on the Economic Report.

SECTION II— THE SUPPLY OF GOODS AND SERVICES

To estimate potential output of goods and services, or gross
national product at constant prices, it will be necessary to estimate
changes in the size, composition, and utilization of the labor force,
to note the extent to which working hours may be lengthened, and
assess changes in man-hour productivity.
A. Manpower potential
In 1939 the mobilization effort started with 9,480,000 persons, or
17.2 percent, unemployed, out of a total labor force of 55,600,000,
including the Armed Forces, of whom about 370,000 8 were in the
United States. The Bureau of the Census, reporting on the labor
force, indicates that in June 1950, out of a total labor force of
66,177,000, about 1,311,000 3were in the Armed Forces, and 3,384,000,
* The estimate by the Bureau of the Census of the armed services is approximately 150,000 below that
contained in the reports of the Defense Establishment, which always counts those outside the continental
United States even though these were not enumerated in the 1940 census. This figure of 150,000 is deducted
by the Census Bureau each month from its current estimates for comparability with the 1940 data.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

or 5.2 percent of the civilian labor force, were unemployed. At the
peak of the last war effort in 1944, unemployment declined to a little
over 1 percent of the civilian labor force. In the absence of all-out
mobilization, unemployment might be reduced as low as 1 million,
or roughly 1.6 percent of the civilian labor force. Thus employment
might go up about 2.3 million above the June 1950 level.
In World War II extra labor power of 10,290,000 persons was ob
tained by employment of millions of women, aged, teen-agers, parttime workers, and by putting high-school and college-age youngsters
into the Armed Forces. The number kept at work on civilian jobs,
while lower in 1944 than it had been in 1939 by about 600,000 persons,
in 1942 was even 1,200,000, greater than in 1939.
In the present circumstances such an expansion in the labor force
cannot be achieved. The population has grown older. People 55
years and older increased from 19.6 million in April 1940 to 24.7
million in July 1949. Furthermore, the postwar high birth rate has
brought about an increase of about 8,000,000 in the number of
children under 10 years of age. Thus almost 20 percent of the
population now consists of children of ages most needing home care,
compared with only about 16 percent in 1940. This reduces the
number of younger married women available for work, even with
extensive provision for child care centers.
Thirdly, there are fewer teen-agers. The age group from 10 to 19
years has decreased in number by almost 2.3 million since 1940.
Even the 19 to 26 age group is only 300,000 larger than in 1940, and
the 26- to 29-year age group only up by 1.2 million (see chart 1).
Finally, those that can go into the labor force are by and large
already there. Of the total noninstitutionalized population 14 years
of age and over, about 59.8 percent are now in the labor force, com
pared with only 57.6 percent in 1940. The proportion of females
rose from 29.8 percent before World War II to 34.5 percent at the
present time. Even the proportion of males is fractionally higher—
at 86 percent compared to the prewar 85.5 percent. Such percent
ages, even if the peak wartime rates of participation in the labor
force are applied to the April 1950 population in terms of sex and
ages, can be increased but little. In short, it may be practically
impossible to increase the total labor force by more than 5.6 million
beyond the figure reached in April 1950 (see chart 2).4 At this date
(February 1951) a large proportion of those are already at work.
As indicated in table III, the total labor force may reach about
66,300,000 in the second quarter of 1951, and total roughly 68,000,000
in the second quarter of 1952. If correction is made for projected
increases in the armed services, the civilian labor force may be
expanded to about 63.1 million by the second quarter of 1951, possibly
64.6 million in the second quarter of 1952.
For decades a steady migration of young farm labor to industrial
employment has taken place, particularly during periods of pros
perity, high-level^ urban employment, and high wage rates. Such
migration will probably be accelerated during the next few years, if
the country continues to step up its mobilization plans to full
sustainable capacity.
4 See Manpower Potential for National Security, The Labor Market, August 25, 1950, Bureau of Em
ployment Security, U. S. Department of Labor.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

C hart 1

THE GROWTH OF THE POPULATION
HAS BEEN UNEVEN
1. T h e population has grown by alm o s t 2 0 m illio n .
2 . Th ere are more people 5 5 y e a rs old and over.
3 . T h ere has been a loss in th e num ber 10 to 19 yrs. ( 2 .3 m illio n ).

UNITED STATES DEPARTMENT OF LABOR
t n w •* EmptoyiMirt Security
w a n at Rtpwl* an4 Anoljni*

SOURCE' I m n

0* «w ------I

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

C habt 2

The Peak war Rates of Labor Force Participation
could add 5 to 6 million workers to
Present Labor Force.

UNITED STATES DEPARTMENT OF LABOR
Bureau of Employment Security
Division of Report* and Analycis

SOURCE Bu.e.u o! the Cer>«*

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

C hart 3

OF THOSE NOT IN THE LABOR FORCE•
•

ALMOST HALF OF THE MALES ARE 55 YEARS AND OVER
MOST FEMALES ARE BETWEEN 25 AND 5 4 YEARS
AND ARE MARRIED
MILLIONS

UNITEO STATES DEPARTMENT OF LABOR
Bureau of Employment Security
Oivieion of Report* o*d Aitolytie

SOURCE: Bureou of the Cinit

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
T able

Period

III.— Labor force, employment, and unemployment, 1929-52
Total
labor
force
Armed Total
(includ Forces1
civilian
ing
Armed
labor
force
Forces)1

Unem
ploy
ment Aver*
age
as
per hours
Employment *
of worked
Unem cent
total
ploy
per
Agri Nonagri- ment civilian
week
Total cultural
labor
cultural
force
Civilian labor force

Thousands of persons, 14 years of age and over
Monthly average:
1929...................
1930...................
1931...................
1932
193 3
1934...................
1935...................
193 6
193 7
193..................... 8
1939...................
1940...................
1941...................
194 2
194 3
1944...................
1945...................
1946...................
1947...................
1948...................
1949...................
1949-First half
Second half—
1950-First half
Third quarter.
Fourth quar
te r...,........
1951—First quarter3.
Second quar
ter ».............
Third quar
ter 3.............
Fourth quar
ter *_______
1952—First quarter3_
Second quar
ter 3—..........

49,440
50,080
50,680
51,250
51,840
52,490
53,140
53,740
54,320
54,950
55,600
56,030
57,380
60,230
64,410
65,890
65,140
60,820
61,608
62,748
63,571
62,732
64,411
63,776
65,600

260
260
260
250
250
260
270
300
320
340
370
390
1,470
3,820
8,870
11,260
11,280
3,300
1,440
1,306
1,466
1,483
1,450
1,347
1,400

49,180
49,820
50,420
51.000
51,590
52.230
52,870
53,440
54.000
54,610
55.230
55,640
55,910
56,410
55,540
54,630
53,860
57,520
60,168
61,442
62,105
61,249
62,960
62,429
64,200

47,630
45,480
42,400
38,940
38,760
40,890
42,260
44,410
46,300
44,220
45,750
47,520
50,350
53,750
54,470
53,960
52,820
55,250
58,027
59,378
58,710
58,060
59,359
58,555
61,500

10,450
10,340
10,290
10,170
10,090
9,900
10,110
10,000
9,820
9,690
9,610
9,540
9,100
9,250
9,080
8,950
8,580
8,320
8,266
7,973
8,026
7,940
8,112
7,233
8,100

37,180
35,140
32,110
28,770
28,670
30,990
32,150
34,410
36,480
34,530
36,140
37,980
41,250
44,500
45,390
45,010
44,240
46,930
49,761
51,405
50,684
50,120
51,247
51,322
53,400

1,550
4,340
8,020
12,060
12,830
11,340
10,610
9,030
7,700
10,390
9,480
8,120
5,560
2,660
1,070
670
1,040
2,270
2,142
2,064
3,395
3,189
3,602
3,874
2,700

3.2
8.7
15.9
23.6
24.9
21.7
20.1
16,9
14.3
19.0
17.2
14.6
9.9
4.7
1.9
1.2
1.9
3.9
3.6
3.4
5.5
5.2
5.7
6.2
4.2

48.5
46.6
46.1
44.3
43.5
42.8
42.1
42.5
41.7
42.0
40.6

65,100
64,300

2,000
2,600

63,100
61,700

61,100
59,800

7,500
6,500

53,600
53,300

2,000
1.900

3.2
3.1

42.8
42.5

66,300

3,200

63,100

61,500

8,000

53,500

1,600

2.5

43.5

67,300

3,400

63,900

62,800

8,000

54,800

1,100

1.7

43.1

66,800
66,000

3,400
3,400

63,400
62,600

62,400
61,600

7,400
6,400

55,000
55,200

1,000
1,000

1.6
1.6

43.7
43.3

68,000

3,400

64,600

63,600

7,800

55,800

1,000

1.5

44.3

i Data for 1940-50 exclude about 150,000 members of the Armed Forces who were outside the continental
United States in 1940 and who were therefore not enumerated in the 1940 census. This figure is deducted by
the Census Bureau from its current estimates for comparability with 1940 data.
* Includes part-time workers and those who had jobs but were not at work for such reasons as vacation,
illness, bad weather, temporary lay-off, and industrial disputes.
* Estimated.
N ote
Labor-force data are based on a survey made during the week which includes the 8th of the
month.
Detail will not necessarily add to totals because of rounding.
Sources: Department of Labor (1929-39) and Department of Commerce (1940-50).

Total output of goods and services can be expanded not merely by
an increase in employment, but also by a shift of workers from nonessential jobs to more productive work, both occupationally and
regionally. In June 1950, before the outbreak of hostilities in Korea,
about 2.4 million wage and salary workers were employed on a full
time or a part-time basis in contract construction, about 9.4 million in
trade, and about 6.7 million in finance and services. Some of these
can be shifted to manufacturing, transportation, military service, and
mining. The number in contract construction is now double the pre
war figures; in trade, the number is 40 percent greater; and in finance
and service, the number is over 45 percent greater.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

Even at today’s much higher level of economic activity, some diver
sion from these occupations should be possible. In contract construc
tion, for example, regulation X , issued by the Federal Reserve Board
in cooperation with housing finance agencies, may reduce private
residential construction in 1951 by one-third or more from the 1950
level. To take another illustration, about 3.4 percent of all workers
employed in civilian activities were private household workers in
late 1950, and 23.7 percent were employed in trade, finance, and
service outside of private households. This amounted to a total of
6.4 million workers, of which possibly a million or so might be shifted
to more vital industries.
A further source of employment, in terms of man-hours actually
worked, is in reducing part-time employment. A survey of parttime workers was made by the Bureau of the Census in 1950 covering
the week of August 6 to 12. It shows that 7,898,000 persons were at
work part time in that week. Of these, 23.4 percent worked less
than 14 hours during the week; 28.5 percent worked from 15 to 21
hours; 23.9 percent worked from 22 to 29 hours; and 24.3 percent
worked from 30 to 34 hours. Of the nearly 8,000,000 persons working
part time, about 2,600,000 usually work full time at their present jobs.
Of the remaining 5,300,000 who usually work part time at their
present jobs, 1,100,000 prefer and could accept full-time work, while
the other 4,200,000 would not prefer or could not accept full-time
work. If, for example, those who prefer and could accept full-time
work could be fully employed, it would add about 1,100,000 to the
full-time labor force, and this, in turn, would be the equivalent to
adding about one-half million to the total employment. If, in addi
tion, some of the 4,200,000 who do not prefer or could not accept full
time work could be induced to work full time, some additional increase
in full-time employment would be possible. If, in addition, a sub
stantial proportion of the 1,200,000 who usually work full time in
their present jobs and who worked part time in August because of
economic factors (including slack work, lay-offs, job turn-over, labor
shortages, and repairs to equipment) could be kept full time at their
jobs, it would add significantly to total output. (For detail see
table IY.)
There are limits to the degree to which part-time workers can be
shifted to full-time occupations. Of the 1,100,000 persons with parttime jobs who preferred full-time work, 28 percent were teen-age boys
and girls. About 40 percent of those who were involuntarily working
at part-time jobs in August were women, compared with 25 percent
of the full-time workers’ group. Similarly, the teen-agers mentioned
above made up 28 percent of this group of involuntary part-time
workers, but only 8 percent of the full-time group. About two-fifths
of all workers in the group were in service industries and about onefourth were in domeistic service work. These facts illustrate the kind
of problems that might come up in increasing the utilization of parttime employees. It is clear that the high proportion of teen-agers in
this group means merely that these teen-agers were on vacation from
school and would have accepted temporary full-time work for a few
weeks instead of part-time jobs. On the other hand, many of them
would not have been available a few weeks after the survey was taken
when school was once more in session.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
T

IV.—Persons working part time,. classified by full-time or part-time status,
by hours worked: week of Aug. 6-12, 1950 (persons 14 years of age and over)

able

[In thousands]
Hours worked during survey week

Full-time or part-time status
Total

1 to 14

15 to 21

22 to 29

30 to 34

Persons at work part time................................

7,898

1,840

2,250

1,887

1,921

Usually work full time at present job........................
Worked part time because of economic factors
Worked part time for other reasons.....................
Usually work part time at present job.......................
Prefer and could accept full-time work................
Do not prefer or could not accept full-time work__

2,574
1,245
1,329
5,323
1,112
4,211

283
141
142
1,556
335
1,221

549
275
274
1,701
327
1,374

685
293
392
1,202
239
963

1,057
536
521
864
211
653

Percent distribution
Persons at work part time................................

100.0

23.4

28.5

23.9

24.3

Usually work full time at present job........................
Worked part time because of economic factors!..
Worked part time for other reasons.....................
Usually work part time at present job.......................
Prefer and could accept full-time work................
Do not prefer or could not accept full-time work__

100.0
100.0
100.0
100.0
100.0
100.0

11.0
11.3
10.7
29.2
30.1
29.0

21.3
22.1
20.6
32.0
29.4
32.6

26.6
23.5
29.5
22.6
21.5
22.9

41.1
43.1
39.2
16.2
19.0
15.5

i These factors include slack work, lay-off, job turn-over, material shortages, and repairs to plant and
equipment.
Source: Current Population Reports, Labor Force, U. S. Department of Commerce, Bureau of the
Census, series P-50, No. 28, Nov. 17,1950, p. 5.

Another way of increasing employment in the economy is to reduce
the amount of unemployment due to local dislocations in the labor
market. In November 1950 there were 56 areas5 classified as tight
or balanced labor supply, or with a ratio of unemployment to labor
force of under 3 percent. This compares to only five areas in this
classification 1 year before. On the other hand, of those areas in the
E classification, a very substantial labor Surplus, or unemployment of
12 percent or over, there were no major areas compared to 18 areas in
November 1949,4 in July 1950, and 2 in September 1950. Taking the
two classifications of heaviest unemployment, which would include all
areas with 7 percent or more unemployment, there were 68 major
areas in September 1949; 77 major areas in November 1949; only 44 in
July 1950; and only 8 in November 1950. Of these 8, two were in
New England, three were in the Middle Atlantic States, while one was
in Hawaii (see tables V and VI).
Increases in the number of hours worked expanded by 8.7 percent
between 1939 and 1943. In the first 9 months of 1950, the average
hours worked per week per employed worker are estimated to have
been about 5 percent below 1939. If the hours were lengthened to the
hours prevailing in 1943, man-hours of employment could be expanded
almost 15 percent. This would be difficult, of course, in industries
which operate 24 hours a day, 7 days a week on continuous operations.
In other cases, however, there is enough slack to achieve an industry
wide expansion in average hours per week of between 2 and 3 percent
per year, that is, from about 42 in the first half of 1950 to about 43
in the first half of 1951, and 43.8 in the first half of 1952.
“Bimonthly Summary of Labor Market Developments in Major Areas, U. S. Department of Labor,
Bureau of Employment Security, January 8,1951.

ECONOMIC HAZARDS OF INFLATIONARY DEIFENSlE ECONOMY

T a b l e V . —Summary

classification of major labor market areas, November 1960f
September 1950, ana November 1949 1
Number of major areas
Ration of unemployment to
labor force

Novem
ber 1950

Septem
ber 1950

152

139

56
64
24
8
0

52
58
33
7
2

5
28
29
59
18

Total. _ ______________________
Classification A _______________ - ___
Classification B _____________________
Classification C _____________________
Classification D _____________________
Classification E _____________________

T able

Under 3 percent_______________
3 to 4.9 percent________________
5 to 6.9 percent________________
7 to 11.9 percent_______________
12 percent and over____________

Novem
ber 1949

VI.—Summary classification of major labor market areas by region, November
19501
Region

Total

Total...................................................

152

New England...............................................
Middle Atlantic...........................................
East North Central....... .............................
West North Central_______ ____ ________
South Atlantic_________________ _______
South Central...... ......................................
West__.......................................................
Territory of Hawaii____________________

17
24
32
13
25
25
15
1

7
4
19
8
9
8
1
0

5
13
10
4
9
12
11
0

3
4
3
1
6
4
3
0

2
3
0
0
1
1
0
1

0
0
0
0
0
0
0
0

i Explanation of classification codes:
Code

Ratio of unemployment to labor force

Definition of code

A ............................................. Under 3 percent____________________

Tight or balanced labor sup-

3 to 4.9 p ercent.___________________
5 to 6.9 percent_____________________
7 to 11.9 percent____________________
12 percent and over_________________

Slight labor surplus.
Moderate labor surplus.
Substantial labor surplus.
Very substantial labor sur
plus.

B .............................................
C.............................................
D ............................................
E .............................................

Source: Bimonthly Summary of Labor Market Developments in Major Areas, U. S. Department of
Labor, Bureau of Employment Security, Jan. 8,1951, pp. 6 and 7.

If hours worked per week are increased by overtime and work on
holidays, with pay at time-and-one-half or double time, inflationary
pressures will be increased faster than output.
B. Productivity
As the Council of Economic Advisers pointed out in their Annual
Economic Review in January 1950, particularly in the chart re
produced below as chart 4, gross national product measured in constant
dollars has increased over the last 60 years to about seven and onehalf times the 1890 level, while output per man hour has risen to
almost four and one-half times that of 1890. On the other hand, total
employed workers in 1949 amounted to only a little over two and onehalf times the 1890 number while hours worked have declined about
36 percent. Thus, while man-hours of employment in 1949 were but
70 percent higher than in 1890, output was about 650^percent higher.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
C hart 4

NATIONAL OUTPUT AND LABOR INPUT
Our long-run production achievements have been more
the result of increased productivity'than of increased
employment. Output per man-hour has more than quadrupled
in the last 60 years.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

During the war productivity apparently increased at the rate of
about 2% percent per year. In the early part of the war, increases
in productivity were higher, then the averages fell off, but began
to rise rapidly again at the end of the war. At first much of the
productive effort was switched from services and production in
industries of low productivity per man-hour to mass production of
war goods made under conditions of high productivity. As the war
effort lengthened the Nation resorted increasingly to older workers, to
women, and to teen-agers. The result was a natural slowing down
in the increase in productivity and, in many industries productivity
actually declined.
The lessons for the present period would seem to be—
(1) In view of the long-term character of the present program,
heavy reliance must be placed on a sustained increase in produc
tivity as a source of increasing output;
(2) In the early period of mobilization, changes in the character
of the output*of the Nation may result in increase in produc
tivity no smaller than that normally experienced; and
(3) Increasing resort to marginal or submarginal workers and
plants may slow down productivity below the long-term average
rate, even with adequate replacement of absolute plant and equip
ment, and skillful training of the labor force.
Some indication of the possibilities and problems involved in main
taining the rate of increase in productivity can be illustrated from
the field of agriculture. Chart 5 shows that total United States farm
production in 1950 was about 21 percent above 1941, with gains for
various products ranging from 5 percent in food grains and milk to
49 percent in oil seeds. This increase in total output is a result not
only of an increase in the total input of productive resources but, as
shown in chart 6, the direct result of rapid increase over the last 10
years in output per unit of input.
In part, this increase of output is due to the phenomenal expansion
in the last 20 years in the quantity of fertilizer used. As chart 7 indi
cates, prices for fertilizer have remained reasonably stable, but the
quantity used has expanded enormously, having more than doubled
since 1940.
Output per man-hour has increased since 1941 by about 28 percent.
(See chart 8.) This is partly a result of increased use of fertilizer, as
indicated above, but also of a substantial increase in the utilization of
farm power and machinery, along with better crop practices, better
land use, and improved varieties of seed and livestock.
Our agricultural plant is in much better shape today to expand
output under conditions of labor scarcity than it was in 1941. For,
as is clearly shown in chart 9, the past decade has been one of excep
tional increase in the utilization of power machinery, with the volume
of farm power and machinery increasing almost 55 percent between
1941 and 1950. In that period the number of automobiles on farms
increased from 4.3 to 5.8 million; tractors from 1.7 to 3.8 million;
trucks from 1.1 to 2.2 million; milking machines from 210,000 to
710,000; combines from 225,000 to 650,000; and mechanical corn
pickers from 120,000 to 410,000. These changes are shown graphi
cally in chart 10.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

C hart 5

FARM PRODUCTION
N o w a n d B e f o r e W o r l d W a r II

C hart 6

FARM INPUT AND OUTPUT

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
Chart 7

FERTILIZER USE AND PRICES

C hart 8

FARM OUTPUT and LABOR INPUT

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

C h art 9

FARM POWER AND MACHINERY
In R e l a t i o n to Farm O u t p u t

^ I N C L U D E S FARM HORSES A N D MULES
U. S. DEPARTMENT OF A G R I CU LT U RE

NEG. 4 79 21 - X X

B U REAU OF A G R I C U L T U R A L ECONOMICS

C h a r t 10

PRINCIPAL MACHINES ON FARMS
1 9 5 0 and B e f o r e Pearl Harbor

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE E'CONOMY

The ability of farmers to purchase machinery and motor vehicles
at a rate substantially in excess of requirements for replacement of
depreciation on previously acquired equipment is neatly depicted
on chart 11. While purchases during the war barely balanced the
requirements of depreciation, since 1945 purchases have far exceeded
depreciation.
This illustration from the field of agriculture points clearly to
problems likely to arise in other areas if a reasonable rate of increase
in productivity is to be maintained during a long period of defense
C h a r t 11

FARMERS’ PURCHASES OF
MACHINERY and MOTOR VEHICLES

U. S . DE PA R TM E N T O F A G R IC U L T U R E

N E G . 4 7 4 2 0 -X X B UREAU O F A G R IC U L T U R A L ECONOM ICS

mobilization. The rate of investment in plant and equipment must
be such as to continue present rates of increase in output per manhour. While certain types of plant and equipment can be cut back
as has already been done in the National Production Authority order
curtailing commercial construction, investment in other fields, as,
for example, aluminum and steel, will have to be maintained. Such
channeling of investment will become of increasing importance as
defense requirements make necessary reductions in the net private
domestic investment that can be permitted.
All things considered, an increase in productivity of between 2%
and 3 percent should be possible for the fiscal year 1951 (July 1, 1950,
through June 30,1951). In the following fiscal year a further increase
of between 1 and 2 percent should be possible. As shown in table

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

VII, the resultant indexes would rise from 96.1 (1950=100) to 100
by fiscal year 1950, to 102.8 in fiscal year 1951, and to about 104.0
in fiscal year 1952.
C. Gross national product in constant prices
A summary of the estimates concerning manpower and productivity
is given in table VII which will merit careful scrutiny. Let the fact
be reemphasized that these do not purport to be forecasts of what
will actually happen. Rather, they are an indication of what is pos
sible within this period, in the light of the manpower potential avail
able, the possibilities of increasing average weekly hours, and the
potential increase in productivity.
T able

VII.— Gross national product in constant prices, employment, average weekly
hours, and productivity, fiscal years 1949 to 1952
Total employment

Fiscal year or quarter

Actual
Index
(millions
of per (1950=100)
sons)

1949..............................................
1950..............................................
1951.............. ...............................
1952..............................................

60.7
60.4
3 63.2
3 65.5

100.5
100.0
3 104.6
3 108.4

Gross N ational
product in con*
stant prices 1a
Produc
tivity
index2 Actual
Index (1950=100) (billions
Index
(1950=100)
of dol (1950=100)
lars)

Average weekly
hours

Actual

42.5
41.8
3 42.4
3 43.6

101.7
100.0
3 101.4
3 104.3

96.1
100.0
3 102.8
3 104.0

259.2
263.4
3 288.0
3310.0

98.4
100.0
3 109.3
3 117.7

QUARTERS *

1950—First: July to September.
Second: October to De
cember............... _..........
Third: January to March
Fourth: April to June___
1951—First: July to September.
Second: October to De
cember.........................
Third: January to March
Fourth: April to June___
1952-First: July to September.
Second: October to De
cember...........................
Third: January to March
Fourth: April to June___

61.2

101.3

41.6

99.5

98.5

256.2

97.3

60.5
58.5
61.3
62.9

100.2
96.9
101.5
104.1

41.8
41.5
42.5
40.6

100.0
99.3
101.7
97.1

99.5
100.5
101.5
102.0

256.9
267.9
272.4
279.4

97.5
101.7
103.4
106.1

63.1
62.3
64.4
65.6

104.5
103.1
106.6
108.6

42.8
42.5
43.5
43.1

102.4
101.7
104.1
103.1

102.5
103.0
103.5
103.7

286.3
291.0
295.0
303.0

108.7
110.5
112.0
115.0

65.3
64.6
66.7

108.1
107.0
110.4

43.7
43.3
44.3

104.5
103.6
106.0

103.9
104.1
104.3

309.0
213.0
316.0

117.3
118.8
120.0

1 Deflated by Consumers Price Index of U. S. Bureau of Labor Statistics.

2Adjusted for seasonal variations.
3 Estimated.

SECTION III— THE DEMAND FOR GOODS AND SERVICES

So far this analysis has been directed at estimating the magnitude
of the increase in output that can be achieved; the probable distribu
tion of that output between consumers, business, and government;
and the problems involved in reaching these goals. If incomes of
consumers, business and government increased just sufficient to enable
each sector to purchase the volume of goods and services available to
it at June 1950 prices, then no problem of inflation would arise that
could not be restrained effectively by existing controls. If business
attempted to advance prices, the Office of Price Stabilization could
easily prevent it because there would be no “ hot money” claiming
goods and services.
The inflationary problem arises as a critical danger in a period of
defense mobilization precisely because this balance between incomes

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

and supplies of goods and services to the various sectors is not auto
matically achieved. This section analyzes the shifts in demands which
lead to inflationary pressures too great to be restrained merely with
direct controls over wages, prices and production even when working
with maximum effectiveness.
There are two categories of sources of inflationary unbalance be
tween the supply and demand for goods and services. The more obvi
ous and less dangerous sources may be called primary; the less obvious,
but potentially more menacing sources, may be called secondary.
The primary inflationary pressures arise because of an unbalance
between the incomes of consumers, business, and government and the
supplies of goods and services available to each. If government ex
penditures for 1952 total $75 billion, and private incomes (including
consumers and business) account for about 80 percent of total in
comes from gross national production, there will be left for the govern
ment (Federal, State, and local) only 20 percent. If only 75 percent
of total output of goods and services is available to the private econ
omy (consumers plus business), and 25 percent goes to government,
the private sector of economy would have an inflationary excess of
purchasing power amounting to 5 percent of total incomes. It is
this primary excess demand that is estimated later in this section.
In addition to the above primary excess demand, additional, cumu
lative, spiraling effects can get under way (and will, if adequate tax
and monetary policies are not adopted at once) which will reinforce
the inflation, ballooning prices to far higher levels than the primary
inflationary pressures warrant.
Thus at the beginning of the present mobilization period in July
1950, economic activity as measured by incomes, employment, physical
output, prices, and consumer spending was already rising. Business,
labor, agriculture, and consumers were in a position to plan programs
for some months in advance on the basis of rising economic activity.
In this situation the first impact of the defense program was to give
additional and, indeed, complete assurance to all sectors of the
economy that: (1) Demand for goods and services would continue to
rise rapidly, and (2) increased military expenditures by the Federal
Government might soon restrict the output of goods and services for
the civilian economy. Thus the first impact of the defense program
was a sharp rise in primary market prices, a sudden surge of forward
buying by consumers and by business, and the opening of negotiations
for wage increases.
Furthermore, the output of goods and services in constant prices
increased sharply from the second to the third quarter, although as yet
actual Government expenditures from the Treasury were not appre
ciably increased. In fact, Government expenditures on defense for the
first 5 months following the invasion of South Korea by the Com
munist forces were actually lower than in the same 5 months of the
previous fiscal year. There was, however, an immediate increase in
defense obligations. In the third quarter, the defense establishment
obligated about $9,000,000,000, of which nearly $6,000,000,000 repre
sented procurement or orders and letters of intent.6 Furthermore,
Government-owned facilities such as synthetic rubber plants were
•Survey of Current Business, IT. S. Department of Commerce, Office of Business Economics, Novembeir
1950, p. 1.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

reactivated and a substantial increase occurred in contracts placed for
stockpile buying.
These initial reactions on the business system of the mere announce
ment of increased defense outlays illustrate vividly the first two sources
of increased demand, namely, (1) anticipations by businessmen and
by consumers of future levels of economic activity; and (2) increased
expenditures by business, agriculture, and consumers induced by
increased obligational authority though no increase in Government
expenditures occurred for 6 months or more.
Labor during the fall and winter months became increasingly
restive. As the Survey of Current Business put it in the issue for
November 1950:
Recent wage rate’ advances resulted in an increase in gross hourly earnings for
all manufacturing industries by almost 2 cents from mid-August to mid-September.
This represented the largest month-to-month advance in the last 2 years and
brought average hourly earnings to 1.48. Average weekly earnings of all produc
tion workers advanced to $60.53 in mid-September, an increase of 21 cents over
mid-August and nearly $5 higher than in September a year ago.7

As wage and salary payments rose in response to increased physical
activity, increased employment and higher average hourly earnings,
consumer expenditures rose. This stimulated further price increases
in the wholesale and retail markets which resulted in renewed demands
for further wage increases. Thus on the labor side, the wage-price
spiral was given increased momentum. This represents the secondary,
or cumulative, self-generating inflation.
Collateral effects of the defense program appeared in the field of
gross private domestic investment. Business and agricultural units,
expecting higher prices and shortages, built up inventories and
expanded capacity. Gross private domestic investment rose in the
third quarter of 1950 by $1K billion, to a total of $48.4 billion, a figure
nearly 15 percent higher than the total in the first quarter of 1950
(seasonally adjusted at annual rates). In the fourth quarter of 1950
ross private domestic investment rose further to $57.0 billion,
urther increases in investments in plant, equipment, and inventories
will probably occur to the limits allowed by materials, manpower,
and Government regulations.
A further secondary source of inflationary demand was the liqui
dation of financial assets by individuals and corporations in order to
buy physical goods and services, or assets, as a hedge against further
price increases. During the second half of 1950 there were substan
tial withdrawals from savings accounts and unusually large redemp
tions of United States Savings Bonds. Between July and December
1950 time deposits declined by a net of $500 million in spite of a
seasonal increase between November and December of $200 million.
For the 5 months, July through November 1950, sales of United
States savings bonds— series E, F, and G— exceeded redemption by
$22 million. However, the sales included $621 million in a special sale
in October in excess of normal limits of large F and G bonds. If
these are eliminated, redemptions exceed sales by $599 million. On
series E bonds alone, for the 4 months of July through October,
redemptions exceeded sales by $367 million.
Additional impetus was given to the inflationary spiral by a rapid
expansion of credit, both to consumers and business. Consumers

TSurvey of Current Business, November 1960, p. 2.
80427— 51------ 6

ECONOMIC HAZARDS OOF INFLATIONARY DEFENSE ECONOMY

tried both to avoid the effects of inflation and to “ beat the gun” in
anticipated scarcity of consumer goods and services. Regulations
W and X , controlling consumer credit and housing credit, were
tightened. Nonetheless, between June and December 1950, total
consumer credit outstanding showed an increase of $2,349 million to a
new peak of $20 billion. Similarly, between June and December
1950, loans of all commercial banks rose by $7.9 billion, or about
17.6 percent.
To sum up, under existing conditions the development of a selfgenerating, secondary inflation out of increased defense expenditures
involves the following general processes:
1. A sharp rise in the level of economic activity expected by
business and consumers.
2. Spending out of borrowings and incomes by consumers and
business induced by—
(а) Large appropriations, obligational authority, and
military orders.
(б) Anticipations of further increases in the Government
defense budget.
(c) A rise in profit levels and income levels.
(d) Determination “ not to be caught” as individuals
when general shortages or price freezes occur.
3. Increased consumer incomes due to higher wages, increased
employment, higher dividends, and higher prices.
4. Further increases in consumer spending in line with increased
incomes.
5. Higher prices as a result of bidding of consumers, business,
agriculture, and Government for available goods and services.
6. Wage increases to compensate for increases in the cost
of living.
7. Further price increases, further increases in the velocity
of circulation of money, further increases in borrowing, in
buying, etc.
Perhaps no one factor tends to pyramid this inflationary process
faster than business investment. This is due to the fact that increased
business investment, like Government spending, will absorb goods
and services and create additional incomes via wages, salaries, divi
dends, etc., without immediately making available an increase in
final output. For example, the steel industry absorbs manpower
and materials for a period of 15 months to 2 years before increased
steel output from new mills becomes available. In the meantime,
increased investment, while admittedly highly desirable both socially
and economically, feeds the inflationary fires within the economy.
The problem of translating these considerations into a quantitative
estimate of the demand for goods and services in the economy if
secondary inflationary pressures are allowed to operate can be attacked
in a number of ways. With historical data we mig;ht derive an aver
age value for the ratio of the increase in gross national expenditures
(or demand) to changes in Government expenditures for goods and
services. Another way would be to develop a simple but reasonably
complete mathematical model of the relationships between the
various changing elements in the economy, such as business invest
ment, Government expenditures, consumer expenditures, and prices.
Another method would be simply to apply to the current situation
the relative changes in demand that occurred in other similar periods

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

of rapidly increasing Government expenditures. The final method
is to carry through an estimate of demand by estimating separately
various demand elements such as wages and salaries, personal incomes,
etc. Under many circumstances the various methods are likely to
give significantly different results, but in the context of the present
problem certain simplified procedures are at hand that permit an
appraisal of the minimum dimensions to which demand might rise
if secondary inflation or cumulative effects are not checked.
In the tost place, a reasonable estimate can be made concerning
the largest single component of consumer incomes, to wit, wages
and salaries. If an increase in employment and in hours worked per
week equivalent to that shown in table VII occurs, then the increase
in average annual earnings per employee will run about 10 percent
per year. This includes an allowance for increases in wage rates,
increased average weekly hours and average annual hours, overtime
payments, and shift differentials. It would also include some allow
ance for premium payments above standard rates for certain scarce
skills.
The resultant increases in wages and salaries are indicated in table
VIII. Note that in fiscal 1950 wages and salaries amounted to
$136.4 billion. Conservatively estimated, this total may rise to
$156.2 billion in fiscal 1951 and to $179 billion in fiscal 1952.
In fiscal 1950 wages and salaries accounted for about 65 percent of
personal income. On this basis, personal income can be expected
to reach $236 billion for fiscal 1951 and $264 billion for fiscal 1952,
with a peak annual rate, seasonally adjusted, in the fourth quarter
of fiscal 1952 (April to June 1952) of $273 billion. If present tax
rates effective under the tax bill passed by Congress in September
are applied, and savings continue their historic relationship of 5
percent of personal income, consumers will have available to spend on
goods and services, and may try to spend about $203 billion in fiscal
1951 and $224.8 billion in fiscal 1952, with an annual rate for the
fourth quarter of fiscal 1952 of $232.1 billion. These levels may be
compared to $198.9 billion spent by consumers in the first quarter of
the current fiscal year, July to September 1950.
T able

VIII.— Estimate of total wages and salaries
Index of (fiscal year 1950=100)

Fiscal year or quarter

Average
annual
earnings
per
worker

Employment

Wages and
salaries
seasonally
adjusted
annual rate

Wages and
salaries
seasonally
adjusted
annual rate
(billions of
dollars)

1950........................................................................

100.0

136.4

1951—July-September_______________________
October-December____________________
January-March_______________________
April-June___________________________

105.9
108.3
110.8
113.0

102.9
104.0
105.2
106.3

109.0
112.5
116.4
120.1

148.5
153.5
158.8
164.0

Yearly average______________________

109.5

104.6

114.5

156.2

1952—July-September_______________________
October-D ecember____________________
January-March_______________________
April-June____________________________

115.9
119.2
122.0
124.8

107.3
107.9
108.8
109.6

124.7
128.9
133.2
137.2

170.1
175.9
182.5
187.5

Yearly average______________________

120.5

10.84

131.0

179.0

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

From the Government expenditure figures8 already presented, the
total Federal Government take of goods and services may be as high
as $59.0 billion in fiscal 1952, compared to $21.2 billion in the first
quarter of the fiscal year (July to September 1950). Expenditures
of State and local governments are not only rising but under the im
pact of civil defense programs are likely to continue to expand to
about $22.0 billion in fiscal 1952.
The only segment of the demand for gross national product which
has not yet been estimated under this procedure is business spending,
whether for foreign or for private domestic investment. The former
is small and will be assumed to remain relatively constant. An ex
amination of the historical data with respect to the latter, that is,
gross private domestic investment, shows that, although it changes
much more violently than any other segment, rarely does it change in
absolute amounts or in billions of dollars more than half of the abso
lute change in combined expenditures by consumers and government.
If this relationship holds true in the present period, the level of gross
private domestic investment which was $37.3 billions in fiscal 1950
and which promises in fiscal 1951 to jump by more than a third to
$53.5 billion may rise further in 1952 to about $61.5 billion.
Despite controls over building materials and steel, the level of busi
ness investment may stay high. In the first place, industry is operat
ing in many industries at rates exceeding normal rate of capacity,
i. e., above the “peak” economic rate. Furthermore, Government
programs as set up under the Defense Production Act and the tax
amortization deductions permitted in recent tax legislation will
tend to provide incentive to increased investment, especially for con
cerns subject to excess profits taxes. The lack of dependability of
supplies and anticipated price increases will cause business to increase
their inventories to the maximum allowed under present inventory
rules of the National Production Authority. As a general rule,
retained earnings after taxes and dividends will remain at current
extraordinarily high levels. Credit, especially for so-called defense
production, is freely available. Business spending for plant, equip
ment, and inventories will consequently be as high as controls over
inventories and construction will allow.
To sum up,9 incomes from gross national product could rise from
$284.3 billion in the first quarter of fiscal 1951 (July to September
1950) to $385 billion in the fourth quarter of fiscal 1952 (April to
8 See table II, p. 68.
» The detailed estimates and the calculations of possible price rises under a secondary inflation are as
follows:

Item

Total wages and salaries.........................................
Personal income..................... ................................
Personal taxes (plus savings)......... ............... .
Consumer demand............................................
Government dem and-............................................
Federal...............................................................
State and local..................................................
Business demand....................................................
Total demand (current prices) _ _.............. .............
Total supply (June 1950 prices)..............................
Price index (June 1950=100)____________ ____ _

July-Sep April-June
tember
1952
1950
148.5
224.9
26.0
198.9
40.4
20.9
19.5
44.5
283.9
279.4
101.6

187.5
273.0
40.9
232.1
91.9
69.3
22.6
61.0
385.0
316.0
121.8

Fiscal year
1951
156.2
236.0
33.0
203.0
52.2
31.2
21.0
50.0
305.2
288.0
106.0

1952
179.0
264.0
39.2
224.8
81.0
59.0
22.0
58.0
364.0
310.0
117.4

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

June 1952). These figures represent demands in current dollars under
conditions of self-generating inflation. On the average, these estimates
of gross national product correspond to an estimated total demand
(consumers plus business plus government) of $305.2 billion in fiscal
1951 and $364 billion in fiscal 1952. These figures imply a possible
minimum inflation due to uncontrolled secondary effects of at least
20 to 25 percent by June 1952 even with price and wage controls
striving to keep primary inflation in check. In other words, if no new
fuel is put under the boiler at all (i. e., all wages and prices are frozen
as much as possible at current levels) the fuel now there will drive the
inflation thermometer up further by the amount estimated.
These estimates of the further effects of “ hot money” already loose
in the economy presuppose present direct economic controls, present
tax laws, and persistence of normal relationships between various
sectors of the economy. Precise accuracy is, of course, impossible
but there are ample grounds for maintaining that these estimates, far
from being “ scare” figures, understate the dangers which this Nation
faces from secondary or cumulative inflationary pressures already let
loose even if further primary pressures are checked.
Two sources of secondary inflation have been completely ignored:
(1) Abnormal shift of liquid assets of individuals and business into
goods and services; and (2) further excessive increases in the velocity of
circulation and volume of available money and credit. As of Septem
ber 30,1950, manufacturing corporations alone had cash amounting to
$12.9 billion. All non-bank corporations and associations on Decem
ber 31, 1950, held $60.5 billion of Federal securities while individuals
held $67.2 billion. These Government securities are equivalent to
cash. The total of these three items of liquid assets alone amounts to
$140.6 billipn A shift of as little as 10 percent of these assets to the
ownership of goods and services would add $14.1 billions to the mone
tary demand bidding for that which the Nation can produce.
For every billion dollars of United States Government securities
sold to the Federal Reserve System under the present pegging opera
tions, bank reserves can be increased sufficiently to support additional
loans by the banks of $4 billion to $6 billion. Clearly the estimates of
possible secondary inflationary demand made above may well be
excessively conservative, especially so if further secondary inflation is
allowed to accelerate the current “ flight from the dollar.”
Primary inflation
How large are these primary inflationary‘ demands resulting from
an unbalance between incomes (demand) and supplies available to
each sector of the economy: Consumers, business, and government?
To make precise estimates requires much better data and more
detailed knowledge of the interrelationships between various segments
of the economy than is at present available. However, it is possible to
translate various likelihoods into rough magnitudes.
As is well known, at any stated level of prices and output, incomes
from gross national production are equivalent to expenditures for
gross national output. Total incomes, therefore, in this primary
demand estimate consist of the total supply of goods and services
estimated in table VII, page 73, revalued at current prices. Since
our objective is to stabilize the price level at as near the current level
as is feasible, total demand can be calculated upon the basis of the

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

income flows that result from producing the output shown in table
V II at the prices currently prevailing in the December 1950 to January
1951 period. This would mean a dollar volume of gross national
product of at least $325 billion.
Since total incomes derived from gross national production will also
be equivalent to this $325 billion, how much will have no physical
counterpart and hence be “hot money” in the pockets of consumers
and of business likely to bid up prices? Basically, this depends upon
how much of the physical output the Government takes. Wages and
profits will be earned on the production both of civilian items and of
defense items, yet consumers will' spend their incomes (except for
savings) mostly for consumable goods, and businessmen will spend
their earnings and borrowings mostly for capital goods. Since the
Government will be taking an increasing share of the gross production
rising from the present levels of about 7 percent to one of about 16 to 20
percent by the end of fiscal 1952, there is bound to be more consumer
funds than there will be consumer goods available and likewise an
excess of potential business spending over the supply of capital goods
available.
In making the estimates of primary demands, no allowance is made
for taxes other than those provided for in the January 1951 tax
schedules. If normal relations persist between the various incomes
from the gross national product, the primary consumer demands in
quantitative terms are estimated to be as shown in table IX , page 82.
If gross national product be $325 billion, the corresponding national
income may well be about $273.3 billion after making adjustments for
capital consumption allowances, for indirect business tax and nontax
liability, business transfer payments and Government subsidies, less
current surplus of Government enterprises. If the national income is
adjusted for elements of business income and Government income
that do not flow to individuals, the estimate of personal income approx
imates $244.5 billion. At present tax rates this would mean dispos
able personal income of about $220 billion for fiscal 1952 and about
$207.7 billion for fiscal 1951.
Not all of this disposable personal income would be spent on current
goods and services. In periods of high prosperity and full employ
ment consumers have shown a tendency to save an average of about
5 percent. During fiscal 1951 they apparently will save slightly less
than this because of their rush to obtain durable and other goods,
while the getting was good. For fiscal 1952, however, it may be con
servative, in view of the lack of durable goods and other controls, to
estimate that they will save no more than the 5 percent usually set
aside for savings in other periods of full employment. If so, personal
savings will be at least $11 billion in fiscal 1952 and about $8.9 billion
in fiscal 1951. Therefore consumer demand for goods and services
could amount to $198.8 billion for fiscal 1951 and $209 billion for
fiscal 1952.
How much will be the demand of business for capital goods? This
is much more difficult to estimate than consumer demand. On the
basis of the post World War II relationship of profits adjusted for
changing inventory values to total business activity, corporate profits
might be about $44 billion in fiscal 1952 compared to about $41
billion in fiscal 1951. (See table X , p. 83.) In 1951 inventory profits
may total about $4 billion but if prices are stabilized at about current

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

levels, nothing further needs to be added for inventory profits in 1952.
At current corporate tax rates, corporate profits tax liability would
amount to about $24 billion in fiscal 1952. At recent ratios of dividend
payments to corporate profits after taxes, dividend payments can be
expected in fiscal 1952 to approach $7.5 billion compared to the $10
billion which it is estimated corporations will pay out in fiscal 1951
and the $7.8 billion they actually paid out in fiscal 1950.
If to the resulting undistributed profits totals remaining after tax
liability and dividend payments, there are added the capital con
sumption allowances available to corporations for spending and the
amount of dissaving that they ordinarily make at current levels of
activity (dissaving means a borrowing of corporations as a group from
individuals or financial institutions) total business demand in 1952
may total about $51.3 billion compared to $47.7 billion in fiscal 1951
ana to an actual $35.9 billion in fiscal 1950.
The demand of Government for goods and services is, of course,
equivalent at current prices to Government expenditures as set forth
in table II, page 58 (except for those items in the Federal budget
which represent transfers of income to business and individuals and
which have been included in the estimates of business and consumer
demand. These include transfer payments, such as unemployment
compensation and old-age assistance, net interest paid to individuals
and business, and some small items to foreign loans, errors and omis
sions in translating from the Federal budget concepts to gross national
product concepts used by the Department of Commerce.) In table
II, the low assumption implies expenditures by the Federal Govern
ment of $65 billion, the middle assumption $75 billion, and the high
assumption $85 billion. If these are adjusted for the income transfers
indicated above, Federal demand for goods and services would amount
to $49 billion (low), $59 billion (middle), and $69 billion (high). In
addition, State and local governments, on the basis of past trends,
can be expected to demand about $22 billion in goods and services
regardless of what assumption is made as to Federal expenditures.
To sum up the total of all demand (consumer plus business plus
Government), the total demand would be $331.3 billion (low), $341.3
billion (middle), and $351.3 billion (high).
SECTION IV— ESTIMATES OF EXCESS DOLLAR DEMAND

It is now possible to estimate the inflationary excess of demand
likely to be generated under present economic controls over the supply
of goods available at constant prices. Sections I and II provide
estimates of the supply of goods and services likely to be available in
terms of constant prices through fiscal year 1952. Section III provides
an estimate of the money demand likely to be generated by increased
economic activity and defense spending in that period even if present
controls are fuliy effective. For each sector of the economy, an
estimate of the inflationary excess is obtained by subtracting the
supply or gross national product at constant prices from the amount
of available dollars.
How much is consumer inflationary pressure likely to be? Its
magnitude will depend on the amount of Government expenditures.
If Government expenditures are low, the supply of goods and services
to consumers will be high, so that the amount of excess dollars will be

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE- ECONOMY

low. If Government expenditures are high, the consumer supply of
goods and services will be low and the inflationary excess high. As
elsewhere in this report, “ low” is defined in quantitative terms in
table IX and the other tables on the basis of total Federal Government
outlay in fiscal 1952 of $65 billion. A total of $85 billion is assumed
to be “ high,” while $75 billion is assumed to be the middle estimate.
Table IX shows that on these three assumptions, the inflationary con
sumer demand is estimated at $3 billion (low), $10 billion (middle),
and $16 billion (high).
T able

IX . — Excess consumer inflationary demand on the basis of existing tax
program, fiscal years 1950, 1951, 1952
[Billions of dollars]

Description

Gross national product (current prices)____________

1950 ac
tual

1951 esti
mate

1952 estimates
Low i

Middle *

High*

260.8

4 298.4

4325.0

4 325.0

19.6
22.1

22.0
24.8

26.0
25.0

Less:

Capital orvnsnmptirm allnwnnnfts

Indirect business tax and nontax liability___
Business transfer payments...._________ _
Statistical discrepancy____________________
Plus: Subsidies less current surplus of Govern
ment enterprises____________________________

-.6
.2

219.2

250.9

273.3

30.9
6.2
0

41.0
7.3
0

44.0
8.0
0

14.7
4.7
8.0
.7

12.3
4.9
10.0
.7

10.0
5.0
7.5
.7

10.0
5.0
7.5

Equals: Personal income________________

210.2

230.5

244.5

Less:
Personal tax and nontax payments_________
Federal................. ................ ................... ........
State and local____________________________

18.9
16.4
2.5

22.8
20.0
2.8

24.5
'21.4
3.1

24.5
21.4
3.1

24.5
21.4
3.1
220.0

Equals: National income__________________
Less:
Corporate profits and inventory valuation
adjustment— _____ _____________________
Contribution for social insurance__________
Excess of wage accruals over disbursements. _
Plus:
Government transfer payments____________
Net interest paid by Government__________
Dividends_____________ __________________
Business transfer payments________________

Equals: Disposable personal income______

191.3

207.7

220.0

Less: Personal savings________________________

9.5

8.9

11.0

Equals: Consumer demand_________________

182.0

198.8

209.0

Supply (prices at beginning of period) expenditures
for gross national product..........................................

262.7

288.0

325.0

Less:
Gross private domestic investment_________
Net foreign investment____________________
Federal purchases of goods and services.........
State and local government purchases of
goods and services_______________________

37.3
-1 .1
23.7

48.5
-3 .5
32.4

51.0
- 3 .0
49.0

48.0
- 3 .0
59.0

44.0
- 3 .0
69.0

18.9

19.7

22.0

Equals: Consumers’ supply____________

183.9

190.9

206.0

199.0

193.0

Consumer inflationary excess: Excess of consumer
demand over supply____________________________

* -1 .9

67.9

3.0

10.0

16.0

1 Assumes Federal consolidated cash expenditures of $65 billion.
8 Assumes Federal consolidated cash expenditures of $75 billion.
* Assumes Federal consolidated cash expenditures of $85 billion.
* Assumes prices stabilized at approximately Jan. 25, 1951, levels, with wholesale prices some 11 to 13 per
cent above June 1950 levels, and retail prices 6 to 8 percent above June 1950 levels.
6 For fiscal 1950 the inflationary pressure was negative, prices declining by about 1 percent.
* For fiscal 1951 the inflationary pressure will result in a substantial rise in prices of 6 to 8 percent; a larger
price rise than indicated by the primary inflationary excess demand shown above because secondary
spiralling effects have been permitted.
f Source: The U. S. Department of Commerce, Bureau of the Budget, and the staff of Joint Committee on
the Economic Report.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

How much will the inflationary pressure from business grow?
How much will business demand for capital goods exceed the supply
of such goods? That, too, will depend on whether Government
expenditures are low, medium, or high. The supply-and-demand
estimates are summarized in table X , which shows that excess business
demand will total $3.3 billion at “low” levels of Government ex
penditures, $6.3 billion at the “middle” level, and $10.3 billion at the
“high” level.
In the Government sector, demand and supply are equivalent in
the sense that Government will spend the assumed amounts either
wholly or in large part out of tax receipts. At present tax rates the
receipts of the Federal Government would be too low by $5 billion
at “low” levels of Government expenditures, $15 billion at “medium”
levels, and $25 billion at “high” levels. If the inflationary pressures
are not effectively removed, price rises will occur, and Government
expenditures will in all three cases rise above those shown in tables
IX and X .
T able

X. — Business inflationary spending on the basis of existing taxes, fiscal years
1950, 1951, 1952
[Billions of dollars]

Description

Demand (current prices):
Corporate profits before taxes and inventory valuation
adjustment_________________________________________
Less:
Corporate profits tax liability___________________
Inventory valuation adjustment_________________
Dividends_____________________________________
Plus:
Capital consumption allowances, etc____ ________
Dissaving_______ _______ _________________ _____
Equals: Business demand______________________________
Supply (prices at beginning of period):
Expenditures for gross national product_________________
Less:
Federal Government purchases of goods and
services_____________________________________
State and local government purchases of goods and
services______________________________________
Consumer expenditures___ _____________________
Equals: Business supply______ ________ ________ ____
Business inflationary pressure: Excess of business demand over
supply________________________________ ________________

1952 estimates

1950
actual

1951
esti
mate

Low *

M id
dle*

30.6

4 41.0

<44.0

4 44.0

12.8
.3
8.0

24.5
- 4 .0
10.0

24.0
0
7.5

19.8
6.6
35.9

22.0
15.2
47.7

26.3
12.5
51.3

26. a

262.7

288.0

325.0

23.7

32.4

49.0

59.0

69.0

18.9
183.9
36.2

19.7
190.9
45.0

22.0
206.0
48.0

22.0
199.0
45.0

22.0
193.0
41.0

-# .3

•2.7

3.3

6.3

10. a

High*

12.5
51. a

* Assumes Federal consolidated cash expenditures of $65 billion.
* Assumes Federal consolidated cash expenditures of $75 billion.
* Assumes Federal consolidated cash expenditures of $85 billion.
4 Assumes prices stabilized at approximately January 25, 1951, levels with wholesale prices some 11 to 13
percent above June 1950 levels, and retail prices 6 to 8 percent higher.
* For fiscal 1950 the inflationary pressure was negative, prices declining about 1 percent.
* For fiscal 1951 the inflationary pressure will result in a rise in prices of 6 to 8 percent; a larger price rise
than indicated by the primary inflationary excess demand shown above because secondary spiralling effects
have been permitted.
Source: The United States Department of Commerce, the Bureau of the Budget, and the staff of the Joint
Committee on the Economic Report.

What price rises would be likely to result from such inflationary
pressures? A first approximation to such an increase is afforded by
extending the trend of prices since June 1950. Between June and
December 1950, the index of consumers’ prices increased by 4.7

ECONOMIC HAZARDS OF INFLATIONARY DEFENCE' ECONOMY

percent, while the index of wholesale prices rose by 10.4 percent. Had
prices been allowed to continue to rise unchecked at such rates con
sumers’ prices by June 1952 would be 20.2 percent above June 1950.
The wholesale price index on the same basis would be 48.5 percent
above June 1950. Detailed figures are shown in table X I below.
T able

X I. — Wholesale and consumer price trends, June 1950 to June 1952
Item

Wholesale prices:
All commodities (1926*100)..................
June (1960=100)......................................
Consumer prices:
All items (1935-39=100)..........................
June (1950=100)......................................

June
1950

December
1950

June
1951

December
1951

June
1952

157.3
100.0

173.7
110.4

i 191.7
i 121.9

i 211.6
1134.5

1233.6
1148.5

170.2
100.0

178.4
104.7

i 186.5
* 109.6

1195.4
1114.8

1204.6
U20.2

* Estimated value if rate of price increase since Korea is not diminished.

Even if Federal Government expenditures could be successfully
restricted to a total of $65 billion in fiscal 1952, the combination of a
$3 billion excess of consumer demand with an equal excess of business
money demand will propel wholesale and retail prices upward at
present rates of increase even under full and efficient operation of
present controls and taxes. While the total primary pressure is some
what smaller than that created since last June, price rises are likely to
be no less. To propel an automobile after it has been started takes
less additional power. The momentum of secondary or cumulative
effects of the price rises that already are embedded in the price and
cost system has scarcely been slowed down.
To take but one factor, gross private domestic investment, which
amounted to only $41.7 billion (annual rate, seasonally adjusted) in
the first quarter of 1950, was up to $48.4 billion in the third quarter
and skyrocketed to $60.2 billion (annual rate, seasonally adjusted) in
the fourth quarter of 1950. Such capital investments had their
primary impact on the prices of raw materials. But they have a much
larger delayed multiplier effect via wages and raw material purchases
on the incomes of consumers, on retail prices, on bank credit, and the
state of business in general. These delayed effects of the 1950 invest
ment splurge are just beginning to make themselves felt.
Imported commodities, notably raw materials, have shown ex
ceptionally large jumps in prices. Rubber increased from 28 cents a
pound on June 23 to more than 48 cents on July 19, and on November
24 was selling for 63K cents. Tin, at $1.35 a pound in November, was
up almost 80 percent from June 23 levels and wool tops were selling
for between $3.10 and $3.20 a pound compared to $1.33 a pound back
in 1946 and only about $2.20 a pound in July 1950.
Note that these exceptional increases in prices occurred even before
military expenditures increased to any appreciable extent. For the
first 5 months of the current fiscal year the Defense Department
actually paid out, on a daily Treasury statement basis, less than in
the first 5 months of the previous fiscal year. But the Defense Estab
lishment did assume obligations in the July-September quarter of
1950 of almost $9 billion, of which nearly $6 billion represented pro
curement orders and letters of intent.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

If Federal Government expenditures approximate the middle as
sumption of these estimates, i. e., about $75 billion (the President’s
cash budget figure is $74.1 billion) the total of $16.3 billion ($10 billion
consumer excess demand plus $6.3 billion excess business demand)
would be large enough to cause prices to rise by almost twice the rate
experienced since June 1950.
Careful inspection of charts 12, 13, 14, and 15, portraying the recent
price history, clearly shows the course that prices will take, unless a
bold and determined program of economic stabilization is enacted
and enforced. Such price increases might increase actual Government
expenditures above anticipated or budget levels by possibly 10 to
50 percent, or by, roughly, $6 billion to $30 billion during fiscal 1952
in excess of the figures estimated in table II.
ELIMINATING THE INFLATIONARY POTENTIAL

During the 1950 fiscal year, the Federal Government paid out
$43.2 billion in cash, of which about $17.7 billion went into national
defense and related activities.10 Appropriations for national defense
for the fiscal year 1951 so far have totaled about $56 billion. Not
all of this will be spent in the current fiscal year—probably only about
$27.1 Trillion—while in fiscal year 1952 defense expenditures are
budgeted at $51.8 billion.
These inflationary potentials for fiscal 1951 and fiscal 1952,11 in
the absence of further increases in taxes, etc., will exist even if there be
a Federal cash surplus of about $0.2 billion in fiscal 1951. In fiscal
1952 there would be a cash deficit of $12.8 billion.

But the Federal budget will be inflationary during the next 2 years
as defense expenditures expand even though the “ cash” budget is
balanced. For the inflationary potential depends on the expectations
of business and consumers rather than on the past, that is, upon
anticipated Government buying as foreshadowed by appropriations
and contract authorizations rather than current cash expenditures.
Thus in 1952 the new defense obligational authority will amount to
about $74.5 billion in addition to unexpended appropriations and
authorizations from fiscal 1951, although actual defense expenditures
within the fiscal year 1952 are budgeted at $51.8 billion. At the end
of fiscal 1952, outstanding unexpended authorizations and appropria
tions for national defense and related activities may total almost
$52 billion,12 and total obligational authority $94.4 billion.13
Various suggestions have been made that the budget for fiscal 1952
as presented in the President’s message to Congress in January 1951
could be reduced from his total cash expenditure figure of $74.1 billion
by from $3 billion to $9 billion. Obviously the larger the cuts that
can be made in Federal expenditures without endangering national
security, the better. Unfortunately, the exact magnitude of the
economies that will, in fact, be achieved cannot be estimated at this
time since Congress has not yet had an opportunity to fully investigate
the budget. Out of the $74.1 billion of cash payments to the public
10 Includes military services, international security, atomic energy, promotion of defense production,
and civil defense, as classified in table II, p. 58.
11 See table IX, p. 82, and table X , p. 83 above.
12Includes military services, international security, atomic energy, promotion of defense, production, and
civil defense as classified in table II.
13Budget message of the President, January 1051.

86
ECONOMIC HAZARDS OF INFLATIONARY DEFENSE
BCONOMT

C h a r t 12

WHOLESALE PRICES

ECONOMIC HAZARDS' OF INFLATIONARY
DEFENSE ECONOMT

C h a r t 13

WEEKLY WHOLESALE PRICE INDEX
1926 « 100

ECONOMIC
HAZARDS
OF
INFLATIONARY
DEFENSE
ECONOMY

C h art

1949
UNITCO STATC* DEPARTUCffT Of LAftOft
BUffCAU OF LABOR STATISTICS

1950

DAILY SPOT MARKET PRICES
28 COMMODITIES
AUGUST 1939 « 100

ECONOMIC
HAZARDS
OF
INFLATIONARY
DEFENSE
ECONOMY

C h a r t 15

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

provided for in the budget, 56 percent is for the military services di
rectly and an additional 13.9 percent is for other activities related to
national defense. Interest on the public debt and veterans7 services
is estimated in the budget to require an additional 14.2 percent. This
leaves for strictly civil functions as they are ordinarily understood only
about 15.4 percent of the total budget. It is further significant that
although the budget recommends enactment of an additional $94.4
billion of authority to incur new obligations, about $57.3 billion of this,
or 60 percent, will not be spent until some time after the close of the
fiscal year 1952. Similarly, during the fiscal year 1952 $34.5 billion,
or 48 percent, of estimated budget expenditures will come from author
ity enacted for 1951 or earlier years. Witnesses before this committee
in its hearings on the Presidents January 1951 Economic Report unani
mously urged that cuts in nonessential spending be pushed to the
absolute maximum. Nonetheless, there seemed to be some belief that
Prof. Albert G. Hart14 correctly estimated the situation when he sug
gested that the maximum cuts might be on the order of $2 billion or
$3 billion rather than figures two or three times that amount.
In four roundtables before this committee, 22 economists unani
mously stressed the importance of early action on taxation as the
most important and most necessary action that could be taken to
control inflation. Tax increases take time to draft and enact and,
further, time to be effective in reducing consumer and business pur
chasing. Hence, if effective action is to be taken which will reduce
excess consumer purchasing power in the summer and fall of 1951,
action must be taken now. To wait until late in the present session
of Congress, when expenditure totals are known with reasonable pre
cision, would mean no control over inflation of an effective character
prior to January 1952, if then. Such a delay might well mean a con
tinued increase in prices as rapid as that between June and December
1950. Even if expenditures were held to “low” assumption of this
report ($65 billion Federal cash expenditures) which would mean a
$9.1 billion cut in the President’s budget, and even if there be effi
cient administration of direct controls over prices and wages, such
continued price increases would inevitably raise the total Federal
outlays for military procurement alone by $5 billion or $6 billion.
The Senate Committee on Appropriations has already reported that
the price rise between June and December 1950 ate up about $3
billion of military appropriations.15 Sheer economy demands that
w Hearings, January 31 ,195i.
18 United States S. Rept. No. 2684.81st Cong., 2d sess., report on second supplemental appropriation bill,
1951. The Committee on Appropriations reported as follows:
“ The committee has been profoundly disturbed by the untimely increasing prices of commodities affect
ing national defense and feels that it is the responsibility of the Department of Defense to leave nothing
undone to translate into orders at the earliest piossible time, the appropriations which are made in this
bill. The committee requested of the Department of Defense specific information with respect to the
variations in price for military materiel and equipment since immediately before the outbreak of the Koreati
War. This report filed with the committee by the Office of the Secretary of Defense when analyzed carries
the startling information that inflation has cut the value of the dollars of the sums appropriated for defense
since pre-Korea by approximately $3,000,000,000.”

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE' ECONOMY

tax action be taken quick enough to prevent such a kiting of defense
expenditures through unchecked price increases.
To secure armament, materials and labor will have to be taken out
of the economy away from the production of goods consumers and
businessmen buy, into the production of goods the Government needs.
If the Government fails to impose a tax-take equivalent to this real
sacrifice, price controls eventually will break down and consumers
will be compelled to make the sacrifice through increased prices. A
million-dollar airplane purchased in 1940 with borrowed funds has
already cost the American people not merely the $1 million of inanpower and materials that went into the plane in 1940, but, in addition:
(1) $333 thousand of interest on the million dollars, assuming the sum
was borrowed from individuals through “E ” Bonds; (2) a decline in
the value of savings held by individuals amounting to tens of billions
of dollars because of the failure to “pay-as-you-go” for World War
II; and (3) since the original bonds cannot be paid off in 1950 as they
come due and have to be renewed, this bomber may eventually cost
vast additional sums for interest by the time the bonds are paid off at
some remote future date.
In the following pages an attempt is made to evaluate quantitatively
the economic effects of tax levies that might relieve inflationary
pressures at low, medium, and high levels of Federal cash expendi
tures. It is important to note that in trying to estimate the deflation
ary impacts of specific tax increases one must take into consideration
a complicated and, at present, largely unsolved problem. Taxes
that prevent consumers or business from spending, or that come
directly out of such spending, are fully effective in bringing down
excess buying power. If taxes come out of savings which do not bid
in the market for goods and services, they raise revenue for the
Government but have little or no deflationary effects. It is highly
important, therefore, to design the tax levies to the best extent of our
knowledge so that their impact has the desired economic effect in this
inflationary period. At present, current knowledge of the incidence of
various types of taxes is such that the estimates presented in table
X II represent no more than guesses, though they be the best now
available.
If these estimates come even moderately close to actual likelihood
(and it is felt that they do) then the magnitude of the program which
has a chance of coming reasonably close to removing the inflationary
pressures from excess consumer and business money demand (thus
helping to keep prices at approximately January 25, 1951, levels and
making other defense and control programs work) can be summarized
in brief as it is done in table X III-A and X III-B . Note that these
tables virtually recapitulate all estimates and epitomize the reasoning
given thus far. Note too that in each case inflationary pressures are
checked only because of the assistance of direct controls in increasing
consumer and business savings.

80427—51——7

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

T able

X II.—Proposed Federal Government fiscal legislation and its economic effects,
Federal fiscal year 1952
(Billions of current dollars]

Description

Net
addi
tional
Govern On cor
ment
porate
funds and undi
vided
private
liabilities profits

Estimated economic effects—

On per
sonal
income

On con
sumer
demand

On in
dividual
volun
tary
savings

Gross
national
product

LOW—$65 BILLION
Individual: Income taxes_______________
Business:
Excise taxes________________________
Corporation income taxes.....................

2.0

- 1 .7

-0 .3

1.0
2.0

-1 .3

-0 .7

-1 .0
.3

-.4

Total..................................................

5.0

-1 .3

-.7

- 3 .0

+ 1.0
+ 1.0

MIDDLE—$75 BILLION
Individual: Income taxes....___________
Business:
Excise taxes____________- _____ _____
Corporation income taxes.....................

8.0

-7 .2

-.8

2.0
5.0

-3 .1

—1.9

-2 .0
-.8

-1 .1

T ota l.................................................

15.0

-3 .1

-1 .9

-1 0.0

- 1 .9

11.6

-1 0 .4

- 1 .2

4.0
10.0

-6 .3

-3 .7

- 3 .9
-1 .7

- 2 .0

25.6

-6 .3

-3 .7

-1 6 .0

-3 .2

+ 2 .0
+ 2.0

HIGH—$86 BILLION
Individual: Income taxes.___ ________ __
Business:
Excise tft*es________________ . . . . . __
Corporation income taxes.... ................

T able

4,0
4.0

X III- A . —Estimated inflationary pressures at low, middle, and high levels
of Federal Government expenditures in fiscal 1952
[Billions of dollars]
Federal cash expenditures
Description
Low

Federal oagh expenditures......__. . . . . . . ______________ __

Middle

High

Total inflationary pressure > . . . . . . . . . . . . _. . . . . . _. . . . . . . . __

6.3

16.3

26.3

Consumer:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply__ -_________ -_______ — ___________ ___

209.0
206.0

209.0
199.0

209.0
193.0

Inflationary e x c e s s ........__ _______ ——____ ____ _

3.0

10.0

16.0

Business:
D em a n d .....— . . . . . . . . . . . . _____ . . . . _. . . . . . . . . . . . . .
Supply___. . . . . . . . . . _. . . . _. . . . . . _____ . . . . . ____

51.3
48.0

51.3
45.0

51.3
41.0

Inflationary excess_______________________ _____

3.3

6.3

10.3

* See table IX, p. 82, and table X, p. 83.

ECONOMIC HAZARDS OP INFLATIONARY DEFENSE ECONOMY
T able

X III-B .— Estimated additional taxes and controls needed to remove
inflationary pressures
[Billions of dollars]
Medium

Low
Description

High
Defla
tionary
effect

liability

Defla
tionary
effect

T ot
liability

Defla
tionary
effect

HPar
liability

Effect on the consumer inflationary excess
demand of—
Increased personal taxes.____________
Increased excise taxes_______________
Increased corporate taxes____________

2.0
1.0
2.0

1.7
1.0
.3

8.0
2.0
5.0

7.2
2.0
*8

12.0
4.0
10.0

10.3
4.0
1.7

Total_________ __________________

5.0

3.0

15.0

10.0

26.0

16.0

Effect on the business inflationary excess
demand of—
Increased corporate taxes.....................
Direct controls: Additional savings

2.0

1.3
2.0

5.0

3.3
3.0

10.0

6.3
4.0

Total____________________________

3.3

6.3

10.3

The Nation’s economic budget

Programs for nullifying the inflationary excess demand which might
develop at various levels of Federal cash expenditures, affect the
entire economy. On the one hand they affect the distribution of goods
and services between consumers, business, local government, and
Federal Government. On the other hand, such programs affect the
flow and use of income among these same sectors of the economy.
Economists and statisticians have developed a form of table which
pictures the balance between the various incomes and expenditures
in the economy which they call the Nation’s economic budget. The
results of this study are summed up in such a Nation’s economic
budget in table XIV. This table shows on the left the distribution
of incomes from national production while on the right are given the
ways in which these incomes are spent for national production.

T able

X IV .— Nation's economic budget1 (fiscal years)

From national production

1950

19514

M iddle High

INDIVIDUAL CONSUMERS

203.7
-4 .9

217.5
-1 0 .5

210.2
-9 .2

204.8
-7 .8

Total...........................................................

181.8

198.8

207.0

201.0

197.0

BUSINESS

1951 *

1952 *
Low

M iddle High

Durable goods..................................................
Nondurable goods............................................
Services

25.9
98.1
57.8
181.8

31.0
106.8
ai u
n
01*

198.8

207.0

201.0

197.0

19.1
20.1 } 47.0
-1 .1
4.0
-1 .1
-3 .3
37.0
47.7

50.0
1.0
-3 .0
48.0

47.0
1.0
-3 .0
45.0

43.0
1.0
-3 .0
41.0

BUSINESS

10.4
19.3
7.3

10.5
22.0
15.2

11.2
26.3
10.5

9.4
26.3
9.3

6.2
26.3
8.5

37.0

47.7

48.0

45.0

41.0

STATE AND LOCAL GOVERNMENT

Personal tax and nontax receipts2.....................
Business tax and nontax liabilities28................
Contributions for social insurance.....................
Less:
Transfer payments.......................................
Net interest paid..........................................
Plus:
Federal grants-in-aid....................................
Current surplus of Government enterprises.
Dissaving ( + ) or savings (—) .......... .................
Total..........................................................

1950

INDIVIDUAL CONSUMERS

191.3
-9 .5

Total

For national production

New construction.............................................
Producers’ durable equipment........................
Change in business inventories.......................
Vof f/Yrolorn intTOQtmAnt
Total.......................................................
STATE AND LOCAL GOVERNMENT

2.6
14.3
.8

2.8
14.6
1.0

3.0
15.0
1.0

-2 .9
-.3

-3 .0
-.3

2.4
.6
1.2
18.6

3.0
.6
.9
19.7

3.0
.6
2.7
22.0

FEDERAL GOVERNMENT

Personal tax and nontax receipts 2___................
16.4
Business tax and nontax liabilities2 3................
20.0
Contributions for social insurance.....................
5.4
Less:
Transfer payments....................................... -1 1.8
Grants,in-aid to State and local govern
ments.........................................................
-2 .4
Net interest paid.......................................... -4 .4
Subsidies less current surplus of Govern
ment enterprises......................................
-.8
Dissaving ( + ) or savings ( — ) ............................. . +1.0
Total...........................................................
23.3
Grand total............................................... 260.5

Purchases of goods and services......................

18.6

19.7

22.0

Total........................................................

18.6

19.7

22.0

Purchases of goods and services......................

23.3

32.4

49.0

59.0

69.0

Grand total___ _____________________

23.3
260.5

32.4
298.4

49.0
326

59.0
327 i

69.0
329

FEDERAL GOVERNMENT

19.8
36.2
6.3

23.3
37.0
7.0

29.4
41.0
7.0

-9 .4

-7 .0

-3 .0
-4 .6

-3 .0
-5 .0

-.6
-12.3
32.4
298.4

-.6
-2 .7
49.0
326

-.6
-2 .8
59.0
327

-.6
-3 .4
69.0
329

33.0
48.0
7.0

1This form of the Nation’s economic budget is based on the Department of Commerce’s «oncepts and data. A Reconciliation to Federal budget concepts is given in table XVI
2 Personal income for fiscal year 1951 assumed to be $227.8 billion and for 1952, $244.5 billion.
* Corporate profits before taxes and inventory valuation adjustment assumed to be $45 billion in fiscal year 1951, and $44 billion in 1952.
* Assumes prices stabilized at the Jan. 25,1951, level.

ECONOMIC HAZARDS OP INTTLATIONARY DEFENSE ECONOMT

Low

Disposable personal income................................
Less: Personal savings........................................

Corporate undivided profits...............................
Capital consumption allowances, etc.................
Dissavings...........................................................

[Billions of dollars]
1952 *

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY
THE GOVERNMENT BUDGET

A final question presents itself. If direct controls and monetary
and fiscal policies are adopted adequate substantially to hold the
inflationary pressures in check that under present legislation are
inevitable next year, will such taxes likewise balance the Federal
budget and implement a pay-as-we-go policy? The answer is briefly
shown in table XV. Note that the general conclusion which one
almost unavoidably reaches here is that such a program if it is to be
at all adequate to help make our present price and wage controls
work will have to be one which will more than balance the Federal
cash budget. Even with a large Government surplus of revenues in
1947 and 1948 prices rose sharply. Similarly the abrupt price jump
that took place in the second half of 1950 occurred while the Govern
ment was operating in the black. The fact that the program here
suggested falls somewhat short of enabling the Government to con
tinue to do so greatly reemphasizes the fact that this is not a maximum
but a minimum program.
In short, if Government expenditures are to exceed $70 billion, a
minimum of $15 billion in new taxes must be raised, the sooner the
better. Excessive demand is like yeast. An extra $10 billion in
taxes levied in the first quarter of 1951 will do more to check inflation
than $12 or $15 billion in the fourth quarter. By that time rising
prices will again kite defense expenditures in the same way that the
price rise from April to December 1950 absorbed nearly $3 billion of
defense appropriations. Such emasculation of our tax and defense
dollar if allowed to continue will explode in financial disaster and
catastrophic inflation.
T able

XV.— Estimated additional taxes and the Federal budget, fiscal year 1952
[Billions of dollars]
Assumptions
Description
Low

Cash consolidated budget:
Cash expenditures__________________________________________
Cash receipts (existing law)_________________________________

Middle

High

65
60

75
60

85
60

Proposed additional taxes:
Increase in individual income taxes__________________________
Increase in excises__________________________________________
Increase in corporation taxes_________________________________

2.0
1.0
2.0

8.0
2.0
5.0

12.0
4.0
10.0

Total (liability basis) _____________________________________
Total collections in fiscal year 1952_________________________

5.0
4.2

15.0
13.3

26.0
24.9

Cash deficit (proposed legislation)________________________
Conventional budget deficit_____________________________________

.8
4.5

1.7
5.4

1.1
4.8

Cash deficit (existing law)_____ ___________________________

The data presented in table XV on the Federal budget are derived
froin the Nation’s economic budget shown in table XIV. In order to
clarify, for those interested, the translation from table XIV to table
XV, a reconciliation is presented in table XVI below. This shows
how the estimates of Federal receipts and expenditures on a cash
budget basis are obtained from the various items in the Nation’s
economic budget.

ECONOMIC HAZARDS OF INFLATIONARY DEFENSE ECONOMY

T able

X V I.— Reconciliation of consolidated cash budget3 with Nation's economic
budget (fiscal years)
[Billions of dollars]
1952*
Item

1950

19511
Low

Middle

High

Receipts:
Direct taxes on individuals (budget)....................
Personal tax and nontax liability....................
Social security contributions...........................
Excess (+ ) or deficiency ( —) of tax receipts
over tax liabilities, etc................... ..............
Direct taxes on corporations (budget)...................
Business tax and nontax liability...................
Less: Indirect business tax and nontax
liability..........................................................
Excess (+ ) or deficiency ( —) of tax receipts
over tax liabilities, etc................ .................
Excise taxes and customs (budget)........................
Others (net of refunds) (budget)...........................

18.1
16.4
1.8

22.3
19.8
2.3

26.3
23.3
3.0

32.4
29.4
3.0

36.0
33.0
3.0

.1
10.9
19.1

13.6
36.2

0
22.5
38.0

0
24.5
41.0

0
29.5
48.0

8.3

9.2

10.5

11.5

13.5

+•1
8.0
3.9

-1 3.4
8.8
4.6

- 5 .0
10.0
5.4

- 5 .0
11.0
5.4

- 5 .0
13.0
5.4

Total (budget).....................................................

40.9

49.3

64.2

73.3

83.9

23.3
11.8

49.0
7.0
5.0
3.0

59.0
7.0
5.0
3.0

69.0

2.4

32.4
9.4
4.6
3.0

.6
.6

.6
- .9

.6
.4

43.2

49.1

65.0

75.0

+ .2

-.8

Expenditures:
Goods and services..................................................
Transfer payments.................................................
Net interest paid....................................................
Grants-in-aid to State and local governments___
Subsidies less current surplus of Government
enterprises, etc.....................................................
Loans abroad, errors and ommissions, etc............
Total (budget).....................................................
Excess (+ ) or deficiency ( —) of cash receipts over
expenditures................................... .........................

4.4

-2 .2

-1 .7

i Assumes personal income of $227.8 billion and corporate profits before taxes of $45 billion.
* Assumes personal income of $244.5 billion and corporate profits before taxes of $44 billion.
* In the President’s budget this is called “ Receipts From and Payments to the Public.”

7.0

5.0
3.0

85.0*
-1 .1

Full text of Marriner S. Eccles Papers : Economic and Political Hazards of an Inflationary Defense Economy : Materials Prepared for the Joint Committee on the Economic Report by the Committee Staff, Box 71, Folder 6, Item 11

FRASER