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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office C o r r e s p o n d e n c e Chairman Eocles p a te February is, i?u6 Subject; Material for Testimony on - . From Richard A» Masgrave and\ Kenneth 3. Williams OPA Extension Attached is material for your testimony on the extension of the Price Control Act, including: (1) Draft of Testimony (2) Background memo on proposed amendments, etc» (3) Revised tables on Budget, debt, liquid assets, national income* etc» (ll) Copy of 0?A materials, including: (a) Chester Bowles1 statement before the House Banking and Currency Committee presented today« (b) CPA testimony before the House Banking and Currency Committee today» (c) Charts submitted by Chester Bowles before the Senate Small Business Committee, December I J . • P45 Attachments Form F. R. 131 BOARD OF GOVERNORS OF THE FEDERAL RESERVE Office Correspondence Tb^L Chairman Eccles From SYSTEM Dflte February 18, 19k6 Subject; Material for QPA Testimony Mchard A# 3ftîsgrav Kenneth 3# Williams Attached is a revised set of tables relating to the inflation potential, including data on budget, debt, deficit, liquid assets, and national income« Attachments TABLE I FEDERAL BUDGET, WAR AND TRANSITION Total Funds Raised (in billions of dollars) Period From Taxes 1/ From Borrowing Total Taxes as Percentage of Total Fiscal year ending June 30 1*940 5.4 2.5 7.9 68.4 1*941 7.6 6.9 14.5 52.4 19i+2 12.8 21.8 34.6 37.0 11943 22.3 63.0 85.3 26.1 I9kk 1(4.1 61.6 105.7 41.7 1945 46.5 55.7 102.2 45.5 1946 38.6 16.1 54.7 70.6 191+7 31.5 -3.6 27.9 112.9 19)40-191+6 177.3 227.6 1+0^.9 43.8 l/ Change in interest-bearing debt, direct and guaranteed. Note* wTotal Funds Raised* is defined to include (1) net receipts, general and special accounts, and (2) the increase in total interest-bearing direct and guaranteed securities. Note that for any single year expenditures may fall short of or exceed funds raised, depending on changes in Treasury balances. TABLE II THE FEDERAL DEBT Deficits from War and Depression (in billions of dollars) Interest-bearing Debt Change Outstanding During Period End of Period Period 1/ Dates World War I 1916-1919 + 2U.2 25.2 Reduction in «Twenties 1919-1930 - 9.3 15.9 Early Depression 1930-1933 + 5.5 21 .U Relief and Recovery 1933-19U0 + 26.5 ¿-. 479 World War II 19^0-191*5 +211.5 256.8 I9I+5-I9I46 + 16.1 272.9 19^6-191)7 - 269.3 3.6 l/ All figures apply to June 30 dates with the exception of 1930 which applies to March 31» Note? All interest-bearing direct and guaranteed securities are included* TABEE III DEFICIT AND THE FÜBEIC DEBT (in billion dollars) Exp* s Net Receipts Defioit At End of Period Public ®ebtj-/Cash Baiane« 1 l . Fisoal Year 9iO 9.0 5.k 3.9 1I3.O 1.9 191+5 Fiscal Year 100.1+ 46.5 53.6 258.7 24.7 19^6 Fiscal Year 67.3 38.6 28.6 275.0 11.9 July-Dec. I9I+5 38.8 19.9 18.1 278.1 26.0 Jan.-June 1946 28.5 18.7 10.5 275.0 11.9 35.8 31.5 k.3 27I.O 3.2 1947 Total gross direct debt. TABUS IY (revised) TOTAL PUBLIC AND PRIVATE GROSS DEBT (in billions of dollars) End of Calendar Years 1929 1933 19U0 191^ I9ii5* 213 187 215 kl9 453 35 k5 7k 260 298 Federal 18 25 5k Pljp 281 State and Local 17 20 20 18 16 178 li+2 HU 159 155 109 9k 91 110 107 69 1+8 50 k9 ke Type of Debt Total Public Private Corporations Other l/ From "United States Debt Pattern in War and Peace* by Alvin Slater* Purvey of Current Business3 September 1945« * Estimated. Note* The table shows the gross debt, public and private. The figures for 1929 to 191+0 are from Survey of Current Business» Department of Commerce, July I9M1-I figures for later years are estimated# TABLE V INFLATION POTENTIAL IN LIQUID ASSETS ^ (in billions of dollars) June 30 I92O I 1929 1 1933 i 1940 1 I9W+ 1 19U5 Deo. 31 1945 Demand 18.6 21.4 13.2 22.8 47.8 56.3 61.4 Time 15.8 28.6 21.7 26.7 35.0 48.2 48.2 0.3 0.4 0.8 0.8 19.5 24.4 24.6 34.7 50.4 35.7 50.3 102.3 128.9 134.2 4.1 3.6 4.8 6.1 20.0 24.2 26.0 U. S. Securities 18.9 10.0 10.3 12.0 66.9 84.2 89.7 Grand Total 57.7 64.0 50.8 68.4 189.2 237.3 249.9 lype of Asset Deposits T . S. Gov't J Total Currency l/ Items other than U. 3, government deposits include holdings by individuals, unincorporated businesses and corporations. The figures exclude (1) holdings by government trust funds, Federal Reserve Banks, commercial banks, mutual savings banks, foreign governments and foreign banks. They also exclude (2) holdings by insurance companies, building and loan associations, nonprofit associations, state and local governments, and foreign individuals. Total deposit and currency holdings of the groups listed under (2) amounted to 6 i . billion dollars on June 30, 1945* Por more detailed .j breakdown see Federal Reserve Bulletin for February I l . f p. 123« 9j6 TABLE VI LIQUID ASSET EQIDIMGS BY TYPES OF HOLDERS l / (in billions of dollars) End of June I I . 94O Dec* 191^5 Corporations 10.7 2J.3 Time Deposits 0#7 0#7 Currency 0*7 1#0 U # S. Securities 2»0 23»0 1JU»1 52#0 Demand Deposits 3.3 10.5 Time Deposits 1.3 2.h Currency 0*9 3.9 U. S. Securities 1.1 11.Q 6.6 27«8 8#8 23.6 2^*7 k5*1 Demand Deposits Total Unincorporated Business Total Individuals and Trust Ftands Demand Deposits Time Deposits Currency U. S. Securities Total U # S» Government Demand Deposits All Groups 21# 1 8>9 55.7 i|6#9 1ix5#5 0#8 2^.6 6 8 2 ^ 9 . 9 l/ For explanation see note to Table V# For more detailed breakdomi see Federal Reserve Bulletin for February 19^6, p. 123* TABLE VII GROSS NATIONAL PRODUCT AND NATIONAL INCOME STATISTICS (in billions of dollars) 19kk GNP 19ij5 (seasonally adjusted annual rates) 1 2 3 4 197.6 Government purchases of goods and services Federal State and local Consumers Gross Capital formation y National income Salaries and wages Agricultural proprietors Non-agricultural proprietors Interest and rents Net corporate profits Income payments Personal taxes Disposable income Consumer expenditures Net savings 204.5 206.3 195.7 182.8 97.1 89.5 7.7 98.5 2.0 95.6 87.8 7.8 105.0 3.9 99.2 91.3 7.8 100.0 7.1 79.5 71.6 7.9 103.7 12.5 57.7 49.8 8.0 110.9 14.2 160.7 167.6 166.2 158.4 150.7 116.0 11.8 12.3 10.6 9.9 119.6 13.3 13.0 11.4 10.4 118.3 13.2 12.6 11.7 10.4 113.0 12.2 12.9 11.9 8.4 105.7 12.1 13.9 12.2 6.8 156.8 19.4 137.4 98.5 38.9 163.7 22.1 141.7 105.0 36.7 163.2 21.7 141.6 100.0 41.6 158.6 20.6 138.0 103.7 34.3 156.9 19.7 137.3 110.9 26.4 l/ National income equals the gross national product minus business taxes, depreciation and business reserves, and an adjustment for inventory revaluation* 2/ Income payments equals the national income (see footnote 1) plus transfer payments (unemployment compensation, mustering-out pay, etc*) less contributions to social insurance funds and corporate savings# BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM Office Correspondence TV Hhairman Fccles v TTftnneth WilllaanswSid Richard A. Musgrave ( f L ^ RlU Dt mnw xe, 19^ ae Subject: ifcteflgjon of the Price Control Act It is generally believed that strong pressure will not be brought to eliminate price controls—unless OPA establishes & ceiling on raw cotton, in which case the cotton bloc is likely to insist upon the elimination of all price controls. The people in OPA appear to be well aware of this and, hence, are likely to go out of their way to find reasons for not placing a ceiling on cotton. Major attacks on price controls are expected to come in the form of amendments which will cripple OPA or force it to grant price increases of an inflationary character# Also, an effort will be made to extend the Act for only six months instead of one year as requested by the Administration. The types of amendments expected to be put forth include such things as t (1) Requiring OPA to set prices high enough to provide normal profits on every product, regardless of the profit position of the firm as a whole, and to each firm, regardless of how inefficient it is. Such an amendment would force a sharp increase in prices. (2) Require all wage increases to be offset automatically by equivalent price increases whether or not higher prices are needed to yield adequate profits. (3) Eliminate the MAP program. This program attempts to encourage the output of lower priced products by requiring textile and apparel companies to distribute their output by price lines in such a way as to result in the same average price as in the base period, usually 19k3* Elimination of this program would make it difficult to obtain adequate production of lower priced shirts, suits, etc. As long as producers are able to sell all they can produce of the higher priced goods, they arre unlikely to Tot Chairman Eocles -2- produce any substantial volume of lower priced goods on which profit margins are necessarily smaller. (k) Require ceilings on farm products and foods to be set high enough to cover the rise in imputed wages of the 6 or 7 million farm operators and family workers as well as the actual rise in wages paid the 2 million or so hired workers. Such an amendment might increase food prices by as much as 30 o r ¿P per cent* (5) Require OPA to allow a flat percentage increase in rents. If accepted, this would be almost certain to touch off additional wage demands# (6) Establish by law rigid rules as to the timing of the release of specific goods from price controls. This would tend to encourage producers to hold goods off the market as they approached their decontrol dates# (7) Farm groups are still opposed to subsidies and efforts will probably be made to eliminate food subsidies at the end of this fiscal year. Subsidies authorized for fiscal year 19ij6 amount to about 600 million dollars for non-food products, mostly in the form of differential payments to obtain high cost output of metals and similar products, and to about 1.8 billion dollars for food products,, mostly paid in the form of flat subsidies to all producers. The subsidy program for next year is expected to be reduced greatly in any case, but to eliminate all subsidies would result in sharp advances in the prices of many foods important in the cost of living* (8) Eliminate the Emergency Court of Appeals. This would be disastrous and open up the possibility of different prices and pricing standards in every court district of the country. (9) Prohibit OPA from requiring distributors and retailers to absorb part or all of the price increases granted at earlier stages of production. This is aimed at maintaining standard percentage margin mark-ups regardless of the profit situation of distributors* For example, OPA estimates that the nominal prewar dealer margin on new automobiles was 2k P©r cent. Howeverf Toj Chairman Socles -3- after allowance for price shading, losses on trade-ins, and other expenses, the actual realized margin was only ll|r per cent. Nevertheless, OPA was severely criticized when it forced dealers to reduce their nominal margins on I I . cars to 21-J per cent even though it seems certain 946 that realized margins will be far above prewar levels because used cars will be a source of profit and there will be no price shading* It also should be noted that fixed percentage margins tend to result in the pyramiding of price increases granted at earlier stages of production. (10) Special groups of all kinds are expected to ask Congress to give them special price advantages. This would put Congress in the position of determining prices and would tend to increase enormously the political pressure brought to obtain similar advantages for other groups. (11) OPA may be required to limit price controls to essential commodities and to free from control all luxury or less essential items. This would be disastrous because it would tend to shift manpower and other resources from the production of essential goods to the production of luxuries. The equity of such a policy is completely backwards since it would reward handsomely the producers of nonessential goods and hold down the producers of essential goods. As a consequence, strong pressures would develop to take controls off essential goods also» OPA policies and administrative actions are more flexible than they are usually given credit for# OPA has already granted a great number of price increases in order to meet higher costs of production or to encourage production of essential goods. However, in some cases where price increases have been granted to obtain increased production, production has not increased. Also, under the standards laid down by the Office of Economic Stabilization, OPA has the authority to remove or suspend price controls of almost anything. OPA has already decontrolled over 1,300 products haying an estimated sales value of around billion dollars. In general, the products decontrolled have been those in which supplies were fairly adequate, or those unlikely to have significant effect upon the cost of living, or those for which maintenance of controls involves excessive administrative burdens. Tot Chairman Ecoles The fact is that practically all commodities are pressing hard against their ceilings, either because of the high normal demand or because demand has been increased because of speculative influences. In several cases where price ceilings have been suspended or eliminated, prices have advanced sharply. For example, it is reported that clothes pins went up from 5 cents a dozen to 20 or 25 cents a dozen when controls were taken off. Similar increases, although not so spectacular, occurred in the case of citrus fruit, some furs, coconut, cucumbers, and other products. Whenever one product is decontrolled pressure is intensified to suspend controls on other products. The rationing issue is largely dead since nothing but sugar is being rationed to consumers. The Civilian Production Administration still retains most of the powers held by the War Production Board. However, CPAfs authority stems from the Second War Powers Act which, like the Price Control Act, expires June 30 unless renewed as recommended. Although the authority is still there, most of the former WPB controls have been eliminated. Only about 60 allocation, limitation, or other orders are still in effect and only 20 or 30 important commodities are still under control. For example, controls are still in effect on rubber, tin, tin can containers, lead, leather, burlap, glass, and some textiles. The military agencies still retain their priorities, but of course they are not being used to the same extent as during the war. CPA uses its authority largely to break bottlenecks when persuasion or other measures fail. CPA has special priority programs designed to channel materials into low cost housing and low priced garments. If Wyattfs housing program goes through, CPA probably will be forced to reinstate L-J4I or something close to it. This would require the allocation of the total supply of building materials and a prohibition against all building except that for which permission has been given. At present, priorities merely provide assistance in obtaining building materials on the basis of individual applications* On paper CPA has a general inventory regulation which covers practically everything. Not much use has been made of this regulation, but CPA is getting ready now to implement the regulation so as to break up the apparent hoarding of shirts# shorts, nylons, men*s clothing, and other textiles. If the situation requires it, CPA may also establish stronger controls in other fields and institute compliance actions* Attached is a copy of material on price control submitted by Chester Bowles to the Senate Small Business Committee in early December. This gives an excellent factual background of the problem and the policies followed by OPA.