Full text of Marriner S. Eccles Papers : Memorandum to Chairman Eccles, Box 46, Folder 14, Item 5

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February 21, I9J46
Chairman Eoolet
^oodlief Thomas

Accuracy of Board* s
Production Index

In pointing out to the Committee that production
i s alroady high in many l i n e s , OP/, spokesman used as ©ridenoa
the Federal Beserve Board index of industrial produetioxu Tho
r a l i d i t y of thx© index wae questioned by some Congretsmen —»
Psaith of Ohio in particular, TJae OPA spokesmen were unable
to defend the index end i t ¥/as agreed that you would be asked
to t e s t i f y about i t later* Attached i s a briof simple s t a t e ment who.cn pjnswers the questions that have been raised*

Attachment




I
mm*L mtmm imat o? lOT&mtAt fsocucnoa

(1)

The iKdex r*ftfur«s «haz£«f i n tht p%*i<wil value© or pro*

»fc ifcatorlat &&d E:i$««*

I t i* s o t » r.«a«iro of ehango* 1B tfoX*

X&r voX\&m &a4 1% i » a©t & i-:«a»ur» of prodwtiou outbid* of

(2)

Vim iridest i« o<aKipile4 fron about ox» tottndrvd I l i H I

e#rioe, «rhiuh r«rprt*««ife ^rodiM»tlon of <ill lzap«rtadsb produott of
sod KiiMio* IXoro than J»lf of ti^«ft e^ria« an» W«t»d «xeluelv«X
usilts &* t o s s of «te«l v p«lr« of t>ee«, «rsd bsrrsXf of
ilAb]* noKthly data*

Tb# r««l&d«r «r* bated in l&rga part on

physical Tolyrne d&t* &TniX^Xe l«e» Hreqi»ntly tfe^n monthly «jcd i»
inftiO3e«t <S«tt& on jittshour* ^orkod »ra used to 5ndie&$a ftur

0)

tJb* In<Ji¥id^Bl ««ri©6 ere eoablsMkl in fuob R w»^ &g t o

r«fl«ot th» oontrlbtttlon of o&ch iuduttiy to fcotal ioduttrlftX
of elioe* **m noi be added c:;!«>ctXy t o \mrr»l» of flour but i t I f
o oo&blm Hgur«« g?**turi&g th»lr owt??«t tey eenvorlABC «&«h ett
of data into IL soriea of Ytluo il^pa*«i«t using & oonettsft <rorxT»r«ioJ3 factor*
vMch r«pr««#Bt* t i »

VR3;U«

«dd«d \& tho proeote of ^cnuf»«tw« durl&g X937

lor tht parti.«ul*r ln&\x$%rl&9 eovor«<i»

A« a r««ult cjrroiit ;.<->T«E«ct* of

irsdoac j i f l i j t chaag«« in the r%*cloal volts-* of prodtiotiots btat not




in prlooe*
(I4)

Jhd iadoa n«ftsvupos «hang«s l a t o t a l , not par

the Index 2o$aeuree industrial production in tenas of the
average volutae during the years 1935 to 195% flau the January figure
of 160 swans that industrial production in January was at a rate 60
per oest higher than the 1935 *® 1959 average*
Answers to oritlcl ant of ladax
At the hearings it has been suggested that the index measures
changes in value rather than in plgrsieal volume* This criticism reflects
& misunderstanding of the nature of the index aad i s answered in (3) above*
While value figures ere used to convert the series Safe© a ooss^on unit and
to weight each ©as according to i t s relative importance, these conversion
factors remain unchanged from aonth to month.
Ths most frequest criticism has been that the index i s based ©a
ssanhours worked, which way not accurately represent ohaages In output*
Actually, Bsenhours are used in less than half the series* Moreover, they
are used for the isost pert only to show ssonthly fluctuations around levels
established fro© physical volum data, which often are not available ctonthly
but can be obtained quarterly or annually.

This use of aanhour data zaoJcse fc

possible to include uaonthly zseasures for sorse important industries whose
output otherwise would not be represented*

It Is preferable to include the

most accurate mm*var* available ratter than to ostlt entirely rmay important
industries*
Another criticise Is that the index does not reflect accursitwly
changes in output of finished prodtiets*

?he Index include production at

ail stages e*j basic materials and potafea, as well as finished products,
and c<?neequently should not be expected to fluctuate, precisely with final
output cf finished products*



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«

critlos have argued that th§ index showed too high a level
during the war period and s t i l l does* There ia no doubt that problems of
sttaguremenfe mere unusual in the war period and immediately thereafter*
Consequently the index could not have ae high a togr** of accuracy ae usual*
But we believe the reported level of about 160 for January and the probable
level of about 190 for *fereh reasonably reflects the increase In the
physical volute of production of s&nufactures and xaineralo fro» the 1935-39
average level and cannot be seriously challenged*

Industrial production i s

substantially higher than before the war any way you figure i t and In isoct
lines i s expanding as rapidly as more workers and materials beoo&e available*