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oo March llt 1937* CjjjVV^ THE HISE OF PRICES HHP TBR PBOBI»M OF MAXHTAIKHIG AS ORDERLY BOTIY/& The Problem The recovery movement is no^ assured and requires no further positive stiimlation by government* The problem now is to t^nlntain the orderly character of the movement that prevailed throughout 1934-36* This problem threatens to he as difficult of solution as ^ny w have faced* The danger spots are still localised and it would be most undesirable for the monetary authorities to adopt drastic measures, which,if successful, wuld result in keeping 9f000,000 unemployed. What is needed is a further increase in production and employment, labile at the same time preventing inflationary developments fro® gathering headway in particular industries* This objective can be achieved only by the proper us© and coordination of all the major activities of the Government affecting business conditions* Unless this is done there is grave danger that the recovery movement will get out of hand, excessive rises in prices encouraging Inventory speculation will occur, excessive growth in profits and a boom in the stock market will arise, and the cost of living will mount rapidly* If such conditions are permitted to develop another drastic slu$p arill inevitable within thyee or four years, if not before* Source of the Banger Bhy the situation is more dangerous than that confronting us in any past revival ie attributable to the enormous backlog of demand for the production of durable goods accumulated in the past seven years* At the present time capital facilities in many Important lines and skilled labor la others *ill be deficlout to handle the production of durable goods necessary to meet normal growth requirements plus accumulated deficiencies* Steel and machine tool industries are already working at capacity and this is true or some other lines* It is estimated that the amount of housing that will be necessary each year in the nest five years would require an annual amount of building three tines in excess of the building in 1936* Inffitnyfields, on the other hand, the available supply of labor and plant facilities is sufficient to handle a greatly increased volume of production* The grave danger is that strategically situated industries and skilled trades will capitalize on the scarcity factor to secure excessive usage nn<3 price advantages* $hero is already abundant evidence that this is happening* Shis means redistribution of real income at the expense of agriculture, unorganized wrfcers and fixed income groups* Hecent Price Advances From 1934 to October 1936 industrial prices exhibited a high degree of stability* From last October to the present date, howver, a broad upward movement has occurred, being particularly marked in certain important fields such as iron and steel, non-ferrous metals and building materials* These movements are illustrated in the accompanying charts* Further substantial advances in non-ferrous metals have occurred within the past few days* Current advances In the prices of raw and semi** manufactured goods say be expected to reflect themselves in later advances in finished goods and the cost of living* Factors Entering into Price Advances Broadly speaking, recent price advances are partly a reflection of increased raisr material and labor costs and partly ajreflection of unwarranted price s^rk-ups in highly organised industries* (a) Rsre material costs* There appears to be little reason to expect a further advance in the price of agricultural good© entering into industrial production, given laore normal weather conditions* At the present price level agriculture will get satisfactory returns through an increased volume of production* There is a sarious danger of further advances in the prices of those ravr materials controlled by aonopolistically-organixed groups, both domestic and international* jb) Labor costs* So long as en increase in hourly earnings or a shorter work week is offset by increased hourly output» labor costs per unit of output need not rise* When, however, wage rates rise laore rapidly than productivity* unit costs advance* The recent broad &ove~ raent in the direction of increased pay for shorter hours has outdistanced increases in labor productivity, with the result that oosts have risen* A striking example of this point is the recent agreement in Hev York ^hereby plasterers are to receive f&*00 an hour for a sin-hour day, with double pay for overtime. This amounts to $20*00 for an eight-hour day* jc) Sellers* market* Monopolistically-organised industries are being able to capitalise on the insistent deasnd for their products by advancing pieces out of all relation to the advance in costs* This is notably true In the case of copper and steel* Thus, in the fourth quarter of 1936 the United States Steel Corporation, after giving affect to a ten percent advance In wages far half the quarter* and without benefit of any price advance for products sold in this poriod, earned #21*? million as contrasted with $1S*7 million in the preceding Quarter and #6*3 million In the fourth quarter of 1935* Despite this showing* prices *?ere advanced sone 6 percent effective January let* In connection with the recent labor agreement in steel they were advanced still further* According to Mr* Lubinfe preliminary estimate, the recent mge advance in steel will add only 4 percent to the coat per unit hfeereas prices were advanced 12 percent* Annual gross income will increase some ^£86 million Khile the wage bill will increase only #125 million* There appears to be no justification* frois the point of view of coats, for a further rise, or indeed for th© recent rise* in the price of nonferrous metals* The leading copper eo&p&nies were making satisfactory earnings on nine cent copper* The price has now gone to I6& cents* The Necessity for Qaverastental Action In view of the absolute necessity of maintaining the orderly character of the upward movement, of keeping down the cost of living and of ensuring a well-balanced distribution of income between all workers, agriculture* and property owners, it is imperative th&t goverzsaent play a positive role in preventing excessive price advances, accompanied by speculative inventory buying, and excessive increases in profits, ishich would make for inflation in the stock market. If profits soar, stock prices will also soar regardless of Increased margin requirements* This in turn would depress bonds and raise interest rates for falters and home builders and impair the savings of depositors and policy holders* ghat Can Be Done There is no single instrument available to eope with the situation* Hhat is required is th&t the Administration should let it be known that it does not propose to allow the prospects for stability to be jeopardised by excessive and unjustifiable price advances, excessive profits and unreasonable labor demands, and that it will use all the powers of government now available to it and will request additional powers,if needed, to control this unhealthy development* ja) Labor costs^ It should be recognized that the recent shorten- ing of the standard work vreek accompanied by increased hourly wage rates in important sectors of industry has resulted in increased labor costs per unit of output and has contributed to the rise in prices, thus penalising agricultural and other workers* The establishment of a standard work week by act of Congress substantially shorter than the present work week isould unquestionably tend to raise labor costs and prices* If overtime were not permitted shortages of labor in various skilled lines would be intensified* If overtime w e permitted labor costs would be further raised* It is suggested, therefore, that shorter hour legislation be studied vrith a view to its effect on prices and shortages* Higidity in application should be avoided* Consideration might be given to a mart mom work week of forty-eight hours with an average over a year of forty hours* Special care should be taken to avoid rigidity in the case of highly seasonal industries* The Ooverment can exert its influence in the direction of avoiding labor shortages and excessive labor costs in other ways* throughout Mich unskilled of industry individual concerns are undertaking the training of workera* It Is in building, however, where the most serious shortages threaten* If are to secure the volume of building we must have to avoid an acute shorty© in housing with the resulting excessively high rente, it is imperative that the number of skilled carpenters, electricians* masons, plumbers, etc*, b© increased* The Government could help ~ a* by instituting technics! training on a broad scslo in the CCC camps, b* by tapering off all public i?ork requiring skilled labor and materials that can be postponed, o* by exerting pressure on other public bodies to do the saiae, and d* by attempting to induce the skilled building trades unions to relax apprenticeship and membership requirements* fb) Price advances resulting from a sellers* isarket* While the Ck>vorjjmentfs power to fix prices Is narrowly restricted it has various means at Its disposal to restrain excessive price advances* Thus some business men will be deterred from advancing prices by the threat of tariff reductions* In connection with reducing tariff rates in trade treaties, srhich are generalized through the isost favored nation clause, the President has wide discretionary power in effecting tariff reductions* Other price advances could be deterred by the threat of the unfavorable publicity attendant upon Department of Justice, Inderal Trade Cotars&sslon and Congressional Investigations* The possibility of limiting the export of Iron and steel and copper products for armament purposes might be explored*, If the action and threats here mentioned should prove inade~ quate» consideration should be given to new legislation designed to cope more effectively with monopoly price policies* -7- These various suggestions are designed to cope with Individual situations at particular times* It is believed th&t by and large there is sufficient capacity and sufficient slack in the labor market to permit & greatly increased production of goods with little advance in prices* The danger now is that excessive price advances in certain basic lines such as copper &nd steel may generate a rise all along the line* Should a general upward price movement get under tray consideration should be given to a rise in the foreign exchange value of tha dollar, tariff reductions, and increased income taxes on the #5,000#50,000 brackets* As e final resort# a restrictive monetary policy could be imposed* Immediate Steps* It would be very helpful if, through the medium of a press conference or a speech, notice could be served on Industrialists that the Administration did not approve of the extent of recent price advances and proposed to study the development with a view to seeing *hut might be done to prevent unjustifiable price advances* Having done this the next step might be the establishment of a fact-finding and policymaking coisraittee, which would investigate price advances in important fields and would make appropriate recommendations* WHOLESALE PRICES OF BUILDING MATERIALS AND NON-FERROUS METALS (1926 = 100) Percent • f\ i *« I 4 1 9 * w i Bulliing materiials • m • ••11' / • • » •• • 9 * // • • 4 •f 1 1 • .•v., •t \• •• • • •• i .. Non-ferrous metals t t • • • • • • • • / V 58> S 3 o a> O IO 0H > r to r0) H 1953 1954 Source: Bureau of L&bor itatistics 1935 1936 1937 ^Estimatcc for v;eek ending icrch G rr'HOLbSALE iJRICEti OF FitiiiAlLA) STi^L ?RODtfCTt Cents sound Cents 5.0 r J \ £ H £s o rH tjo t > H ^ Lr ot >c rH Source: Iron Age 1953 - , 1 1934 1935 1936 ^Estimated for week ending March 15 1937 WHOLESALE PRICES COflJODITIES OTHER THAN FARM PRODUCTS AND FOODS * Estimate for week ending March 6 Source: Bureau of Labor Statistics
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