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OCT. 194 4 OFFICE O F PRICE ADMINISTRATION WASHINGTON. D. A MEMORANDUM To: All Members of OPA Advisory Committees ^rom: Subject: Chester Bowles, Administrator Our Pricing Objectives in the Reconversion Period For two and a half d i f f i c u l t years we have been s t r i v i n g to maintain a s t a b l e wartime economy. In general our e f f o r t s have been successful. Since the Spring of 1942, when price control f i r s t became e f f e c t i v e , the Department of Labor t e l l s us that industrial prices have risen less than three percent. The c o s t of l i v i n g , expressed in the individual p r i c e s of items purchased by the average middle income family, has, a c c o r d i n g to the same a u t h o r i t y , r i s e n only about nine percent in this same period. FOUR REASONS It has been the r e s p o n s i b i l i t y o f the OPA under the Stabilization Act to administer the actual pricing of 8,000,000 products and serv* i c e s , and to e s t a b l i s h rents for 14,500.000 dwelling units. It has been a staggering task. The ground over which we have travelled has been new and unfamiliar. There have been no sign posts to guide us. Our p o l i c i e s have been developed laboriously by t r i a l and e r r o r . Inevitably there have been mistakes, delays and irritations. ALL GROUPS HAVE WHY There are, I believe, four basic reasons why we have been able to e s t a b l i s h t h i s r e c o r d : 1. The tremendous wartime production of American farmers and American industry, which, in addition to our huge production earmarked for war, has provided us with 90 b i l l i o n dollars worth of consumer goods and services in the past year» 2. The p a t r i o t i c desire of the American people to save their money instead of spending i t during wartimes. 3. The basic honesty of the American people which has kept the vast majority of them from patronizing the black market. 4. The government stabilization program authorized by Congress in the Stabilization Act. BENEFITED But the fact remains that the job so far has been accomplished. Prices and rents have remained r e l a t i v e l y stable. Moreover, this stab i l i t y has been accomplished without hardship to any major economic group. Industry p r o f i t s in 1943 # even a f t e r the payment of high wartime taxes, a c t u a l l y exceeded net p r o f i t s after taxes in 1929. They were more than double the net prof i t s a f t e r taxes in 1939. Net farm income a f t e r a l l expenses exceeded prewar levels by 170 percent. Industrial wages are at an a l l time peak. V-E DAY WILL BRING NEW PROBLEMS The pricing p o l i c i e s which we have followed during the isar period have been e f f e c t i v e under wartime conditions. Fut today we look forirard to more and more cut backs in war production and the increased production of peacetime aoods. EARNINGSOFCORPORATIONSjFARMERSANDLABOR CORPORATE (AFTER PROFITS FARM (NET TAXES) BILLIONS OF DOLLARS WEEKLY OPERATORS INCOME) BILLIONS OF DOLLARS -12 EARNINGS (FACTORY WORKERS) DOLLARS 4836- -6 24-1 ! I if 1929 '39 '40 '41 '42 *43 0 J 1 .. — -K- # 1 i 1 I if, I • I S • t f PAGE 2 During the next ninety days we are hopeful that the war w i l l be brought to a c l o s e in Europe. During the next 18 months or so we are looking forward to v i c t o r y in the P a c i f i c . As our economy p a r t i a l l y reconverts to peacetime requirements we w i l l be c a l l e d upon t o face rapidly changing economic conditions. Within three months a f t e r Germany i s defeated i t i s estimated that plants now producing 40 percent of our war goods can be freed for the manufacturé of c i v i l i a n g o o d s . More than 4,000,000 war workers w i l l be made a v a i l a b l e f o r the p r o d u c t i o n of goods f o r which the American people are eagerly waiting. The Federal Government has made i t clear that industry will be assisted and encouraged to resume the manufacture of c i v i l i a n goods as rapidly as p o s s i b l e . To this end, the War Production Foard has announced that i t w i l l l i f t controls over most materials and manufacturing immediately a f t e r V-E Day. The War l^anpower Commission has stated a l l manpower controls w i l l be l i f t e d except in r e l a t i v e l y few areas where they are essential to continued war production. The only lasting answer to i n f l a t i o n i s f u l l production of c i v i l i a n goods with a l l p o s s i b l e speed. For this reason we in the OPA welcome these developments as a major aid in holding prices stable. But even under the most favorable conditions our pricing task will be a t i c k l i s h one. A weàk p r i c e p o l i c y during the next few months can set in motion a l l the powerful inflationary forces that surround us. A rigid p r i c e p o l i c y in which no allowance i s made for legitimate increases in costs could s t i f l e employment and production and head us straight for a major depression. WHAT HAPPENED IN During the f i r s t World War, w ith a minimum of price c o n t r o l , the cost of l i v i n g increased hv 62 percent from July 1914 to Armistice Day. Both corporation p r o f i t s and net farm income rose to record l e v e l s . Immediately a f t e r the Armistice, in November and December, war c o n t r o l s were dropped. In March 1919 the price level again started upward as a wild scramble for inventories and new goods developed. This postwar inflationary rise continued at an increasing pace. By June 1920 living costs bad risen tp 108, percent above the 1914 level an additional 46 percent increase a f t e r Armistice Day. Wholesale prices, which hod risen ]A?;percent, went on to a peak of 148 percent above prewar l e v e l s . Wages and p a y r o l l s , business earnings and farm income - these too continued their climb. And then came the collapse. Within 22 months factory p a y r o l l s dropped 44 percent to bring misery and privation to millions of our workers. Net farm income dropped 66 percent. 436,000 farmers l o s t t h e i r p r o p e r t i e s through f o r e closures during the next four years. Corporate p r o f i t s a f t e r taxes dropped from $6,419,000,000 in 1919 t o a n e t l o s s o f $55,000,000 in 1921. Inventory l o s s e s , amounting to 11 b i l l i o n s , wiped out practically a l l the reserves accumulated out of wartime p r o f i t s . That's the story o f our p r i c e l e v e l s a f t e r the l a s t war. Everybody had moved up together and everybody came down together. We went up fast; we came down hard. I t ' s a story that provides a perfect lesson on how not to handle our p r i c i n g problems during the next few months. I t ' s a s t o r y which we must a l l be determine shall not be repeated this time. During the war our e f f o r t s have aimed solely at checking i n f l a t i o n . On V-E Day the picture will change. When the telegrams go out canceling war orders, the forces of d e f l a t i o n will begin to develop. From that day on until f u l l production i s achieved and supply and demand come into reasonable balance, the forces of i n f l a t i o n and d e f l a tion w i l l e x i s t in our economy side by s i d e . Bight now i t i s impossible f o r anyone to say with f i n a l i t y which will be the greater. 1919 in 1919 we met this same problem, on a greatly reduced scale, and fumbled i t badly. While there are many factors now which are t o t a l l y different from those we faced a f t e r the last World War, i t will be wise to examine carefully what happened to prices immediately a f t e r Armistice Day 1918. E P PRICES: I L A S T a W A R Ï A N D l T H I S Ï W A R i k INDEXES: j 26C 240 COST OF LIVING W A R - I 9 I 4 M 0 0 , THIS WHOLESALE WAR-I939-I00 PRICES INDUSTRIAL ! 220 200 f. f 80 160 I9t4 1939 LAST WAR LAST WAR A«TI . i 140 120 100 80 LAST 1 I 1 1917 1918 1942 1943 % %\ 1 / • ^ T H I S WAR ^ < * T H I S WAR RLJT (915 1916 1 9 4 0 1941 ^ _ f• 1 1919 t 1 ... \ \ 1 1 * 1 1917 1942 1918 1943 1919 PRICES ^ * - - -Ä-F 1 1920 I 9 2 M 9 I 4 1915 1916 1939 1940 1941 * 1 1917 1942 J 1 1918 1943 1919 240 220 200 »% 180 THIS WAR 1 260 1 \% * ét" \ ** 1920 I 9 2 M 9 I 4 1915 1916 1939 1940 1941 1 1 LAST WAR • 160 • 140 120 100 80 1920 192) PAGE 3 THE DANGER OF INFLATION L e t ' s f i r s t take a look at the huge i n f l a tionary pressures a l l ready to push p r i c e s up as soon as the war in Europe ends. By the end of 1944f 100 b i l l i o n d o l l a r s o f wartime savings will be waiting in the hands of people who have been unable to buy many of the things they ranted most - a new car, an e l e c t r i c refrigerator, a washing machine, a sewing machine, a new stove, new farm machinery, a new house. Obviously, i t will be impossible to produce a l l of these a r t i c l e s in s u f f i c i e n t quantities immediately. But people d o n ' t l i k e to wait. The pressure of buyers with good jobs and a backlog of wartime savings will be tremendous. Merchants w i l l be anxious to be among the f i r s t to o f f e r new goods for sale. The retailer who can quickly build a good inventory will be in a position to capture the business. Every manufacturer, too, will want to be among the f i r s t to produce these goods. The competition f o r materials will be considerable. To bade up this competitive desire f o r inventories and raw materials are b i l l i o n s of dollars in wartime reserves. THE DANGER OF DEFLATION But, as I have pointed o u t , i n f l a t i o n a r y pressures are only one-half the story. Deflationary pressures - some o f them inescapable, some of them p o t e n t i a l , are equally dangerous. The closing of plants b u i l t only for war production (which probably cannot make peacetime goods) w i l l require an estimated 2 million people to look for peacetime jobs elsewhere. Millions of others will face temporary unemployment while the plants in which they work set up their new production l i n e s for c i v i l i a n goods. In a l l plants changing over to c i v i l i a n production, the return to the 40 hour week w i l l reduce the workers' weekly take-home pay. Even a 10 percent cut in hours, which seems probable soon a f t e r V-E Dtiy, will cut salaries and wages by something l i k e 12 b i l l i o n dollars in a year. Adequate unemployment compensation w i l l , of course, help to some degree to hold up purchasing power. Our huge backlog of savings w i l l also serve as an anti-depression asset. But fear of prolonged unemployment can make people hesitant to spend their savings except for n e c e s s i t i e s . Pi man out o f work goes slow in building a new home - even though his savings account i s s t i l l ample. Up to now business and industry have been able to absorb the men - more than 1,250,000 of them - who have been mustered out of the armed forces. However, when our soldiers and sailors start coming home a f t e r V-E Day there may be more men than jobs until industry hits i t s stride. I f reconversion i s slow, the national income will be dangerously down while millions of workers are waiting to return to work. Slowness in reconversion would also mean a let-down in demand for b a s i c raw materials. The Government has been spending about 70 b i l l i o n d o l l a r s a year f o r war materials and construction, and that money has provided good jobs at high wages. Within three months a f t e r the d e f e a t o f Germany i t i s estimated that this will be cut^about 40 b i l l i o n s . To a major extent t h a t ' s money out of our pockets, u n t i l we get c i v i l i a n production going on a comparable scale. Some of these deflationary threats we cannot hope to avoid. Some of them are temporary and the speed or slowness of reconversion will determine the extent of their influence. Others may not materialize, unless businessmen and their customers - - frightened of the future - - are afraid to invest and spend their money. But a f t e r V-E Day the threat o f d e f l a t i o n cannot be ignored. WE MUST RESIST BOTH FORCES S t a t i s t i c s alone cannot measure e i t h e r o f these dangerous economic f o r c e s , behind them l i e the psychological factors of over-optimism on the one side or fear on the other. Both of these are products of uncertainty. Uncertainty about prices i s one of the most dangerous. I t could lead to a wild speculation or to a drying up of purchasing power. That i s why we are determined to do a l l in our power to hold p r i c e s stable during the months ahead. W H A T Ä P P E N E D l W H E N * I N F L À T E t f P R I C E S S C R A S H E D 1 1 9 1 8 f. 1921; CORPORATION TURNED TO ANNUAL TOTAL PROFITS LOSSES IN BILLIONS FACTORY DECLINED WEEKLY PAYROLLS FARM INCOME SHARPLY FELL RAPIDLY TOTAL IN MlLLtONS 1920 ANNUAL TOTAL IN BILLIONS 1919 1920 PAGE 4 I t w i l l take careful planning and intelligent cooperation on the part of a l l of us as a nation Government, industry, labor, f a r m e r s - i f we are to guide ourselves s u c c e s s f u l l y through this d i f f i c u l t transition period. There are many factors which w i l l determine our success or our failure. The pricing policy we follow i s only one of them. Our export p o l i c y , our tax p o l i c i e s , our disposal of government owned war plants and surplus war goods will a l l play an important part. But our CPA responsibility i s for pricing and for pricing alone. What shall our reconversion price p o l i c i e s be? WHAT OUR P R I C I N G POLICY MUST ACCOMPLISH The pricing policy on the reconverted civilian products which we adopt to meet the d i f f i c u l t conditions which l i e ahead must, in my opinion» accomplish the following: 1. I t must encourage maximum production. I t must not stand in the way of the manufacturer's des i r e to produce to the l i m i t of his capacity. This means p r i c e s which y i e l d good p r o f i t s for business* large or s m a l l , on the basis of high volume production. 2. Our pricing p o l i c y must be easy to a p p l y . Dec i s i o n s must be made r a p i d l y . Manufacturers have a right to expect from us the quickest poss i b l e answers on requests f o r prices on new items. We must r e a l i z e , however, that p r i c e s cannot be s e t without adequate in formation from the businesses a f f e c t e d . 3 . Our pricing p o l i c i e s in the reconversion period must encourage the continued payment of high wage r a t e s . When wages are reduced purchasing power begins to dry up. Through the l o s s of over time and through some unavoidable unemployment, as plants are reconverted from wartime production to peace some d e f l a t i o n in the take- ITWIN THREAT DANGERS cTO iO U R OF INFLATION home wages of our i n d u s t r i a l workers i s i n evitable. If this trend were increased by pricing p o l i c i e s that would r e s u l t in a general lowering of wage r a t e s , we would soon face a serious depression. 4 . Our pricing p o l i c i e s must continue to protect the public against general increases in the cost of l i v i n g . Rents, food prices and c l o t h ing prices must be held at no higher than present l e v e l s . Ch consumer goods which have been out o f production for some time, p r i c e increases must be given only when absolutely necessary, and then held to the minimum amounts needed to encourage volume production. 5. Our pricing p o l i c y must not contribute to any repetition of the farm c o l l a p s e which followed the i n f l a t i o n in prices a f t e r World War X . The a b i l i t y of our farmers to purchase i n d u s t r i a l products and generally to increase t h e i r standard of l i v i n g has been tremendously improved during the war period. With sustained high purchasing power our farmers can furnish one of the l a r g e s t and most p r o f i t a b l e markets f o r i n d u s t r i a l products. In my judgment that market, in the reconversion period as well as during the postwar period, must be encouraged vigorously and sustained. The r e s p o n s i b i l i t y f o r that, of course, l i e s in other a g e n c i e s . 6 . Our OPApricing p o l i c y must c a l l f o r the e l i m i nation of p r i c e control as rapidly as p o s s i b l e . This means that c e i l i n g s should be removed on each product or in each industry one a f t e r another, when there i s no longer any danger of i n f l a t i o n a r y price r i s e s in that p a r t i c u l a r field. If we d e c o n t r o l too quickly we w i l l find ourselves in serious trouble with the possible need f o r reimposing controls a t a l a t e r d a t e . Bit i f we hold controls in e f f e c t a f t e r they are no longer needed i t w i l l tend to discourage production and i n i t i a t i v e on the part of industry. I t i s obvious that the development of a pricing policy to meet a l l these objectives i s N A T I O N Ä L 1 E C O N O M Y ! IN ï 194 5 THREAT OF DEFLATION BILLIONS OF D O L L A R S SAVINGS OF INDIVIDUALS UNSATISFIED B/G, DEMAND HOW BIG? A T P R E S E N T , CIVILIAN SALARIES AND WAGES ARE RUNNING ABOUT $ 9 4 BILLION A YEAR (OFF THE FARM) DURN IG |SH2, 1943, AND I9W THESE CO*WHIRS' IN, ET IHER DURABLES HAVE BEEN OUT OF PRODUCTO COMPLETELY OR IN M W O R PART. IF DURN IG THESE DURING RECONVERSION, HOURS WILL BE REOUCED AN ESTIMATED 3 YEARS THE 1941 RATE OF PROMOTO IN HAD CON10 - PERCENT. T H E EFFECT ON WAGES INCLUDING OVERTIME WILL TN IUED HERE IS THE N U M B E R OF THESE GOODS THAT REDUCE THIS TOTAL BY $ 1 2 B I L L I O N W O U L D HAVE BEEN PUT O N THE MARKET FOR AMER C IAN CONSUME US: l » 4 4 IE5T.J DEMAND DEPOSITS CNO Of MOUTH INCLUDES ALL DEPOSITS EXCEPT INTERBANK AHO U.S. GOVERNMENT, LESS CASH ITEMS M PROCESS OF COLLECTION 10,980,000 AUTOMOBILES 10,500,000 REFRIGERATORS 6,042,000 WASHING 6,351,000 VACUUM C L E A N E R S 16,755,000 OEC. 1944 (EST.) 7,923,000 41,100,000 MONEY BUT IN CIRCULATION £M0 OF MONTH EJ O t c . I t 4 4 (EST.! MACHINES ELECTRIC IRONS TOASTERS RAOIOS 82,360,000 CLOCKS AND WATCHES 10,400,000 FURNACES AND HEATERS 14,010,000 STOVES RANGES RECONVERSION WILL ENTAIL A CUT OF IO PERCENT (S MILLION) IN EMPLOYMENT. THIS WILL REDUCE SALARIES AND WAGES BY A - FURTHER $ 8 BILLION AND MDMrnZZ O P E R A T I N G MORE SLOWLY, THERE W I L L BE A R E V E R S A L O F THE UPGRADING PROCESS WHICH OCCURRED DURING THE WAR, AND MEN W I L L LEAVE HIGH PAYING WAR JOBS FOR LOWER-PAYING JOBS IN P E A C E - T I M E PRODUCTION. THIS W I L L REDUCE SALARIES AND WAGES BY NO L E S S THAN $ 10 BILLION. ALTOGETHER, WE FACE A CUT O F $ 3 0 AND WAGES AFTER V - E DAY. B I L L I O N M SALARIES THIS MEANS SHRINKING MARKETS A SERIOUS DEFLATIONARY FACTOR PAGE 5 a d i f f i c u l t task. But i f we are to achieve a vigorous, f u l l production economy with a high standard of l i v i n g and with f u l l opportunity f o r every group, i t must be s u c c e s s f u l l y accomplished. T H E S I Z E OF THE JOB L e t ' s take a look at the types of conpanies and products that have been under price control. L e t ' s compare them with the others that w i l l need to have their c e i l i n g prices reviewed. In other words, l e t ' s take a look at the job ahead from the standpoint of administration. Many companies have continued to make peacetime products throughout the war production period. Others have continued the production o f c i v i l i a n goods, side by s i d e with wartime commodities. S t i l l others have for at l e a s t two years been wholly converted to the making of war materials. Some peacetime products have been e n t i r e l y o f f the market since the f i r s t quarter of 1942. During the next few months they will become available to the general publ i c f o r the f i r s t time in more than two years. Price control now covers a l l c i v i l i a n goods and many s e r v i c e s . The p r i n c i p a l consumer items now under p r i c e control have an estimated 1943 retail value of 78 b i l l i o n s of dollars, or 65 percent of t o t a l consumer expenditures in 1943. Among the most important of these are food, c l o t h i n g , rent, furniture and furnishi n g s , f u e l s and c e r t a i n s e r v i c e s . The regulations s e t t i n g up c e i l i n g p r i c e s ija^Jthe f i e l d s now covered have been geared to f \individual requirements of the businesses a ^ industries a f f e c t e d . With few exceptions they have ibeen fair both to buyers and s e l l e r s . T h e y t h e legdl obligation that they must be "generally f a i r and equitable." The important point is that these c e i l i n g p r i c e s are already in e f f e c t and are working. They have stood the t e s t of time and, as the record amply demonstrates, they have permitted f u l l production and record p r o f i t s . OUr hardearned experience in setting them has given us the know-how to work out c e i l i n g s for the industries coming back into c i v i l i a n production. These present p r i c e controls present no new problem. They w i l l be continued in substant i a l l y their present form. We shall continue to use the same p r i c i n g standards, standards which during the l a s t few months have been c a r e f u l l y reviewed and approved by Congress. In other words, we w i l l expect absorption of c o s t increases on l e s s p r o f i t a b l e items, as well as on more profitable items, by industries which manufacture several lines and whose total p r o f i t s are satisfactory. We have been adjusting p r i c e s in cases of individual hardship ever since c e i l i n g p r i c e s were established, and we w i l l , of course, con* tinue to do s o . We w i l l a l s o continue to allow p r i c e i n creases to industries whose p r o f i t s have fallen below the level of the 1936-39 period. But in most of these consumer lines now in production, volume should increase as war r e s t r i c t i o n s are removed and as raw m a t e r i a l s become more plent i f u l . Overtime payments w i l l probably decrease, and more e f f i c i e n t labor will become availed)le. As a result of these factors, unit production costs should decrease. It is my b e l i e f , theref o r e , that with r e l a t i v e l y few e x c e p t i o n s , firms which are now manufacturing consumer peacetime products w i l l continue to prosper under present c e i l i n g p r i c e s . T H E ' SIZE t O F I O U R £ R E C O N V E R S I O N PRODUCTS N O W JJNDER TOTAL CONSUMERS' IN 1943 OF THIS, PRICE VOLUME OF RECONVERSION GOODS EXPENDITURES CAME TO PRICE CONTROL REACHED $ 9 2 BILLION $ 7 8 BILLION OR MAJOR CONTROL PRICE ^ P R O B L E M I GROUPS UNDER CONTROL FOOD 8 5 PERCENT FURTHERMORE, ABOUT a o PERCENT OF THIS VOLUFT^WAS IN 1941 PRODUCED BY A SCORE OF COMPANIES TOTAL CONSUMERS* EXPENDITURES WERE: \ too $ 3 3 BILLION CLOTHING 13 BILLION RENT - FURNITURE I ETC .3 BILLION HOUSEHOLO FUELS 3 BILLION SERVICES 3 BILLION . I 1ECO*Vf*StO# 7 BILLION 20 COMPANIES 25,000 COMPANIES TOTAL CONSUMERS' EXPENDITURES UNDER PRICE CONTROL CONTROL OF RECONVERSION MINOR ITEM IN PRICES IS A O R , ON A PRODUCT BASIS, A DOZEN I T E M S PASSENGER C A R S , REFRIGERATORS, RADIOS, ETC.,— CONSTITUTED 8 5 % OF THE TOTAL COMPARISON IN 1941, WHEN THESE ITEMS ( CONSUMERS' METAL-USING DURABLES) WERE LAST IN PRODUCTION, THEY AMOUNTED TO $ 6-J BILLION OR 8 7 PERCENT OF CONSUMERS' TOTAL CONSUMERS' EXPENDITURES PERCENT j^ *ECÖ*YE*StO* " ao EXPENDITURES TOTAL CONSUME 12 MAJOR CONSUMER DURABLES - A L L THE HUNDREDS OF MINOR ITEMS PAGE 6 PRODUCTS WHICH HAVE BEEN OFF THE MARKET Wiat industries may need new ceiling prices? As we see i t , they will be largely in the metal using industries in the consumer durable goods f i e l d s - i n d u s t r i e s which f o r the most part have been out of c i v i l i a n production s i n c e e a r l y 1942. The r e t a i l value of the products made by these industries in 1941 was 6.5 b i l l i o n d o l lars, That r e p r e s e n t s only 8.5 percent of total consumer expenditures in 1941. Obviously, the percentage may d i f f e r f o r 1945, depending upon the speed and extent of reconversion, the progress of the war in the P a c i f i c , consumer spending power and many other factors. But i t gives us an idea of the s i z e of the problem. Fewer than a dozen types of qoods make up over 85 percent of the value of a l l items which many need a reconversion p r i c e . These are automobiles and p a r t s , r e f r i g e r a t o r s , sewing machines, washing machines, vacuum cleaners and other e l e c t r i c a l household appliances, radios, phonographs, pianos, heating and cooking equipment, clocks and watches. The hundreds of miscellaneous items in the durable goods f i e l d amount to only 15 percent of the problem. These, l i k e the 85 percent,may or may not need new prices. About a score of companies manufacture 80 percent of all the items which will soon be coming back into production. The remaining 20 percent are produced by about 25,000 additional firms of varying s i z e s . From our administrative point of view the problem is substantial. But i t i s not as great as generally assumed. I t . i s smaller than others which we have handled successfully in the past. WHAT WILL NEW PRODUCTS COST? In general, our objective in setting c e i l i n g prices for these new goods will be the manufacturer's own 1942 p r i c e s . These are the prices he was charging when he converted from c i v i l i a n to war production. And, with few exceptions, these are the c e i l i n g s in e f f e c t today for any manufacturer s t i l l producing the same or simil a r goods. This means that any manufacturer who i s planning to put new c i v i l i a n goods on the market at 1942 p r i c e s or l e s s knows now that his c e i l i n g p r i c e w i l l not be lowered. As soon as production and manpower controls are released, he can proceed at once* Reconversion p r i c i n g w i l l not be one of his problems* In p r a c t i c a l l y a l l consumer durable goods industries there have, of course, been increases in wage rates and some increases in material p r i c e s . But we know from the wartime experience that increased wage rates and material p r i c e s need not be f u l l y r e f l e c t e d in p r i c e i n c r e a s e s f o r the f i n i s h e d p r o d u c t . In industries now under p r i c e control, such as t e x t i l e s , meat packing, paper and pulp, for ex ample, substantial increases in either hourly wages or materials p r i c e s , or both, have occurred. In none of these cases, however, has i t been necessary to allow price increases anywhere near equivalent to the cost increases. In most cases the p r i c e increase has only a small fraction of the f u l l equivalt v J Nevertheless, p r o f i t s have moved up sharply so sharply, in f a c t , as to suggest that the cost increases should often have been entirely absorbed without unfairness to the industry. In cotton t e x t i l e s , . a v e r a g e hourly earnings increased 25 percent between December, 1941 and May, 1944, while materials prices rose 19 percent during the same period. To o f f s e t these increases in f u l l , a p r i c e r i s e of 17 percent would have been necessary. The actual p r i c e increases during this period averaged only s i x percent. P r o f i t s of the industry before taxes nevertheless rose 33.3 percent between 1941 and 1943. In slaughtering and meat packing, the experience has been s i m i l a r . To r e f l e c t f u l l y increases i n average hourly earnings and mater i a l c o s t s between 1941 and 19 43 would have required a p r i c e increase of 30 percent. The actual increase (including subsidies as a 10 percent p r i c e increase) was the equivalent of only a 16 percent price increase. Cost absorp*tion here was therefore about 50 percent. Yet i n d u s t r y p r o f i t s in 1943 were 6 8 . 2 p e r c e n t above 1941 l e v e l s . In the paper and pulp industry, average hourly earnings have increased 17^7 percent since 1941. Material c o s t s have increased^B percent during the same period. I f these' creases had been f u l l y r e f l e c t e d , p r i c e s would have had to increase by 14.6 percent. Actually, paper and pulp p r i c e i n c r e a s e s during t h i s p e r i o d averaged o n l y 4.2 percent while i n d u s t r y p r o f i t s have continued at the 1941 level. Our experience in these f i e l d s and dozens of others strongly suggests that in the consumer durable goods i n d u s t r i e s , where increases in wage rates have been no greater and increases in materials p r i c e s have been s u b s t a n t i a l l y l e s s , production f o r most companies can be resumed at approximately 1942 prices* There are some companies, however, and p e r haps a few industries ifaose costs have risen so far above their 1942 level as to make f u l l absorption impossible. These w i l l need new p r i c e s . They w i l l need them quickly, and we intend to see that they get them. HOW NEW PRICES WILL BE SET I t i s our hope that c e i l i n g p r i c e s f o r the major f i e l d s can be arrived at through industrywide c o n f e r e n c e s in Washington, flfe are now planning meetings with members of the automob i l e , e l e c t r i c r e f r i g e r a t o r , washing machine, radio and a few other industries - r e p r e s e n / ^ v PAGE 7 on a dollar volume basis 80 percent of the ent i r e reconversion pricing problem. At these meetings we will discuss the volume each industry plans to achieve; what they are going to pay f o r labor and materials; the savm a s they e x p e c t to make through increased " e f f i c i e n c y , and lower sales c o s t s . We v j. a l s o be guided by prices which they f e e l , on the basis of their own experience, are most likely to assure the wide-scale consumer buying necessary to maintain volume production. In those cases where an increase over the 1942 p r i c e l e v e l i s really needed to bring any product back on the market, an increase w i l l be given. We w i l l make every e f f o r t to s e t c e i l i n g s at a p o i n t that w i l l lead manufacturers to expand, not r e s t r i c t , their production. PRICES FOR 25,000 SMALLER MANUFACTURERS I am well aware that any delay on our part in setting prices would be an even greater hardship f o r small manufacturers than f o r l a r g e ones. We must make sure that any manufacturer who needs anew price can get a decision quickly. In order to do t h i s , we will authorize the 93 OPA D i s t r i c t O f f i c e s , located in a l l parts of the country, to set the f i n a l c e i l i n g p r i c e s f o r a l l reconverted products not on the key l i s t of 12 major items. Many firms have already indicated that they plan to s e l l at their 1942 p r i c e s , or even lower,as soon as they can get back with c i v i l i a n production. They will not need to c a l l on our / ^ d o f f i c e s at a l l . inns whose higher production costs make a p r i c e adjustment necessary will be able to present the f a c t s to the nearest o f f i c e and r e c e i v e a p r i c e based on a set of standards arrived at in Washington. These will be standards that can be quickly applied without referring back to Washington. The exact method by which the p r i c e s f o r the smaller firms w i l l be set and the standards which will be followed are now under discussion with many of our advisory groups and with our f i e l d o f f i c e r s , on whom much of the administrative burden will f a l l . Barring the sudden end of the war in Europe, the d e t a i l s w i l l be withheld until these dis-^ cussions are finished. A complete plan, including pricing standards f o r the smaller manufacturers, however, has been f u l l y developed. If necessary, ws are prepared to announce f u l l d e t a i l s of the p r i c i n g procedure that each manufacturer (with the exception of those making the Tlmajor items" l i s t e d above) will follow within 48 hours a f t e r V-E Day. Finally, we are studying the p o s s i b i l i t y of completely exempting from price control certain manufacturers in the consumer durable goods f i e l d . This might be done in two ways: First, by exempting a l l manufacturers doing l e s s than a c e r t a i n annual volume of b u s i n e s s - say $100,000; second, by exempting manufacturers of minor parts or miscellaneous p r o d u c t s . % are anxious to do this in order to eliminate as rapidly as possible a l l unnecessary red tape and needless regulation. Ws are i n v e s t i gating the extent to which this can be done without endangering e f f e c t i v e price-control in the consumer durable goods f i e l d . WHEN W I L L CONTROLS BE LIFTED? We have always looked upon p r i c e control as a stop-gap, a stabilizing wartime control to be dropped as soon as production brings supply and demand reasonably in balance. The l a s t war, with i t s false economic calm after the Armistice, followed by a ruinous i n f l a t i o n and c o l l a p s e , taught us the danger of moving abruptly and thoughtlessly. To maintain controls needlessly even f o r a few extra months would be equally mistaken. The wartime lack of balance between supply and demand made price control necessary. When supply and demand come back into balance p r i c e controls will not be needed. As soon as there i s no further danger o f p r i c e increases in a p a r t i c u l a r commodity f i e l d there w i l l be no reason for p r i c e c e i l i n g s in that f i e l c and we will drop them. The exact timing will vary widely from item to item. But, working with Industry Advisory Committees we will watch each f i e l d c l o s e l y . We will rely heavily on their recommendations as to when controls can be safely removed. INDUSTRY'S RESPONSIBILITY FOR THE FUTURE (Some Personal Observations) In this memorandum I have discussed government wartime controls over prices and rents. I would l i k e to add, however, a fewpersonal thoughts on the problems which industry will face when a l l government controls have been eliminated. I must emphasize that these ideas represent my personal opinion only. They are based on my own experience and observations gathered in my own business before the war and, more recently, in dealing with p o l i c y problems as a wartime employes of our government. Most of us think o f f r e e e n t e r p r i s e as a system in which p r i c e s are set by competition and the law of supply and demand. Unfortunately, b e f o r e the war t h i s concept was true only in part of our economy. In too many industries p r i c e s were held up a r t i f i c i a l l y in order to provide higher unit p r o f i t s . Fecauseof this p o l i c y , in some indust r i e s f u l l production and employment were curbed. In many cases, business men pursued a policy of high unit p r o f i t s based on curtailed production, rather than going a f t e r the larger total p r o f i t s that might have come through larger volume at a lower p r o f i t per unit. Luring the «ar we have a l l had an opportunity to learn much about our economic system. Before PAGE 8 the war few of us visualized the tremendous productive power of our American economy. The fact that this miracle o f production has been achieved during wartime will have a significant influence on our peacetime industrial planning. I t i s unlikely a f t e r the war that our people, including our 11,000,000 returning service men, w i l l long t o l e r a t e any economic system which does not provide reasonably full production with reasonably f u l l employment at a high standard of wages and farm income. As a practical matter, we cannot go back to the production l e v e l s of 1940. The Department of Cbmmerce recently estimated that i f in 1946 we were to go back to 1940 total production at 1940 hours of labor there would be 19 million unemployed. TTiere would be a cut of more than 30 percent from our present level of production. Such an economic reversal would mean shrinking markets and falling prices for farm products as well as the products of our f a c t o r i e s . It would mean that our farmers, our workers, and our returning soldiers would again have to carpete b i t t e r l y with each other for their frugal individual shares of economic s c a r c i t y . It i s obviously unthinkable. I f we attain f u l l production and experience a corresponding increase in the national purchasing power, the Department of Commerce says we would be able to spend 40 percent more for food in terms of a more varied diet, better qualities apd increased services in connection with processing and d i s t r i b u t i n g food products - 45% more for clothing,^5% more for refrigerators and other e l e c t r i c a l equipment, 70% more for household furniture, 90% more for new farm machinery and times more for new homes than in 1940. We who have been c l o s e to American industry during the war period believe that industry can F successfully meet this test of the future. But I believe we are a l l aware, both in government and in industry, that in order to reach this goal we must establish and maintain close cooperation among a l l groups - business, labor, farmers and government. During the next five years, of a l l period' our history, we will need economic courage, oo^n sense and a common understanding of the problems that we face. I f , during the next few years, major segments of American industry operate on a high p r i c e , high unit p r o f i t b a s i s , we are going to have deminished production and dangerous unemployment. I f major segments of American industry attempt to cut prices by depressing wage rates, we will face the dangers of another disastrous depression. The basic answer to our economic future, i t seems to me, l i e s in the maximum hourly production on the part of labor; high wage rates, low unit p r o f i t s and the greatest possible voluire on the part of industry; the maintenance of high farm income; and the j o i n t r e a l i z a t i o n of a l l groups that the prosperity o f each depends on the prosperity of the others. Turing this d i f f i c u l t war period we have a l l learned to cooperate and to work together on a constructive give and take basis, We are winning the war today because each group - our soldiers and s a i l o r s , bur industrial workers, our leaders o f enterprise, our farmers and our government have worked as part of a team. We have had our o c c a s i o n a l d i f f e r e n c e s o f opinion. But we have never had to argue about where we wanted to go or the speed with which we wished to get there. Our economic future, l i k e the winning o f ' war, rests in our own hands. This challenge i s as great as the war i t s e l f . whichIroàdIwiliïwe^travel? IF WE GO BACK TO 1940 PRODUCTION , Ti y* v% ^ ^d^i^sA IF WE MAINTAIN FULL PRODUCTION AFTER THE WAR WE CAN SPEND THIS MUCH MORE THAN IN 1 9 4 0 IN 1940 THERE W E R E . . f f t t H f f t 9 MILU0N UNEMPLOYED. PERCENTAGE INCREASE IN EXPENDITURES CONSUMER FOR THE PAST YEAR, WITH WAR PRODUCTION AT PEAK LEVELS, UNEMPLOYMENT HAS RUN AT APPROXIMATELY. . . f FOOD 1 MILLION SINCE 1940, THE GROWTH OF POPULATION HAS ADDED. . . ft O o J f \ MILLION CLOTHING WORKERS. MEANTIME PRODUCTIVITY OF INDUSTRY HAS GROWN STEADILY. AFTER THE WAR, UNDER A 1 9 4 0 WORK WEEK, 1940 P R O D U C TION CAN BE ATTAINED WITH 6 MILLION F E W E R WORKERS. i i i i l l i t i t t i t i l i i i l t | « 4 0 UttEMPLOYMENT AFTER THE WAR, T H E R E F O R E , IF WE WENT BACK TO 1940 P R O DUCTION (THE HIGHEST ON RECORD UP TO THEN) WE SHOULD HAVE, NOT 8 MILLION UNEMPLOYED AS IN 1940, BUT O V E R . . . 19 MILLION UNEMPLOYED i i i i m i i i i i m i i i i i THIS MEANS H A R D S H I P 'ANO /T MEANS DEPRESSION THfS MEANS JOBS AND P H O S P E U ì T Y FOR ALL U. S. GOVERNMENT PRINTING OFFICE : 1ÎM4 O 612067
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