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QUARTERLY REPOST ON THE ECONOMIC SITUATION
TO THE PRESIDENT
FROM COUNCIL OP ECONOMIC ADVISERS
APRIL 6* 1951

CONTENTS
Page
Xe The Qooor&l Situ&tion 0000 600000 00 060000 000000 00 00 0000000
The continuing need for a rounded program oooocooooooo.?
The fiffdCt Of flsc&l policy o o o o o o o o o o o o o o o o o o o o o o o o o o d
The effect of monetaxy and credit policy d »o 9<>o»9«0»»oo
The place of price and wage controls oo>eoo»4»o»«<»«ooo
The new forces now under way «o9«o««oa»««»«oo»«o9«omo

X
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IXo Specific Policy Recommendations 0000600000000000000000000
General programming of requirements and supply 00000000
Long-range price and wage policy o o o o o o o o o o o o o o s o o o o o o o
Immediate price policy ooooooooooooooooooooooooeooooooo
Immediate wage policy 000000000000000000000090000000000
Tax policy
Credit and monetary policy ooooooooooooo*ooooooo©ooo<>oo
The crucial issue of group "representation”
Or "participation1'

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lIXe Details of HScononilc Trends oo©ooooooo©o®o©oooo*©®©ooo©ooo
Employment
Prodllction
Prices 0 0 0 0 0 ® 0 0 0 0 0 » 0 0 0 0 0 0 « 0 0 0 * 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Wages OOOOOOOOOQOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO
Profits
Money and credit o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o
Gross national product ooooooooooooooo©0000000000000000
Personal incosse, consumption expenditures, and saving o
Business investment and finance ooooooooooooooooooooooo
International transactions oooooooooooooooooooooooooooo
Government transactions ooooooooooooooooooooooooooooooo

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O O O O O O O O O O O O O O O O O 0 O O O O O O O O O 0 O < j O Q O O O O O O O O O O O O

O 0 O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O 0 O O




O O O O O O O A V O O O O t A O O O O O O O O O a O O O O O O O O P O O O O O O O O O O

O O O O O O O © 0 O © « O O O O O O O O O O O * O 9 * ( » * O O 6 © a O O O * 0 » * O © O

O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O O

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mimiiiaM'i'Uii.

A p ril 6e 1951

HEMORAHDOM

«W!«**eM*WMwe*eeeesei

To;

The President

Prom;

Council of Economic Advisers

Subject:

Quarterly Report On the Economic Situation
lo The General Situation
n lamimuu
whiiiii

This survey of economic developments during the first quarter of 1951
must carry back to late November 1950* when the outbreak of open warfare
with the Chinese forced major revision of the defense program and greatly
altered the economic prospect0 In preparing its Annual Economic Review*,
released early in January, the Council of Economic Advisers recognized and
described the broad change which had taken place, but we could point to
only the first manifestations in actual economic eventso It is now pos­
sible # after four months of rapidly changing circumstances, more adequately
to appraise what has occurred* its economic implications for the future^
and the policies which have been developed and applied©
The continuing need for a rounded program
1— uaenirn TwmwffnniTamwMn «w nB aa»a 8<aJwihwwii m n 'iirinntiniiiimiui i

Our general conclusion is that the economic outlook and recommended
policies set forth in the Annual Economic Review continue to be basically
sound* and that intensive efforts to promote the production program and
the stabilization program are urgently required 0 let there is no blinking
the fact that the sense of urgency which was pervasive in the first weeks
following the China attack has abated under the influence of better news
from Korea without new acts of physical aggression by cosmunist states0
The shift in public sentiment is reflected in the Congress* where the ad~
ministration program for the defense period is now jeopardized by the
feeling that it may not be necessary to subject the people to such burdens
and restraints o
The national leadership is challenged by this shift in public senti®
ment to make clear that the retarded Impact of the defense program upon
the civilian eoono&Qr which has led to a more complacent view may actually
have aggravated the situation in soma respects* The economic programs
can be softened only at the price of real national danger©
The most encouraging aspect of developments thus far has been the
general trend of production® The Council has frequently stressed that*
in the long run* it is through the build-up of our productive strength
that we can best solve now foreseeable problems0 Over all* the econoagr is
now probably operating at the highest levels of output ever achieved in
peacetime* and it has by no means reached the limit of its current produce
tive strength© The specific expansion programs* now vigorously under way*




/O— “
NATIONAL
afford heartening indication that year=»by*year our productive strength % AFC^^SRDA^°
should mount at a more rapid rate than in normal peacetimeo Businessmen^ aomin.** ^

workers, and farmers ar© acutely aware of the fundamental importance of
production, and, in the main, are responding accordingly,, To be sure*,
many production problems remain still to be solved, and these will be
touched upon in the policy section of this report□

Thera is currently no general manpower shortage, and this is in line
with earlier appraisals made by the Council that the concern in 3on® quarters
about an extremely tight manpower situation in the Immediate future was over~
drawn0 In March 1951, there were 2Q1 million persons unemployed, which is
still above the level to which unemployment should be reduced in view of
the problems confronting us0 In tbs longer run, of course, there will appear
much greater general tightness of the labor supply, and currently there are
shortages of skilled and semi-skilled workers in some places, particularly
metal workers, as well as a real need for more professional workers such
as chemists and engineers« It does not now appear that manpower should be
the major limiting factor on production in 1951* although lack of certain
trained workers m y temporarily create scene bottlenecks0 On the other hand,
a vigorous manpower program is certainly essential for the longer pullo
Contrasted with the fair degree of satisfaction about production
progress, there has been public concern because a stable econoz^y has not
been achieved*, especially price stabilityo It was, of course, not reasonable to expect government policies to achieve sudden successo The forces
which had to be dealt with were peculiarly difficulto Increase in federal
expenditures for military purchases, and the expansion of defense produce
tion, exerted pressure* But more important than either of these was a large
element of anticipation of future shortages and future price controls which
led to heavy consumer buying, tremendous accumulations of business inven­
tories, aiad such unnecessary pushing up of pzdceso
Before the end of the quarter considerable progress had been and©
toward greater stabilityo In part this may have been due to a conclusion
reached by consumers and businessmen that their speculative activities had
been overdone, but even this conclusion was perhaps largely due to active
governmental policies, which must be given the principal credit for the
progress md®o
The economic changes during the first quarter of 1951 afford striking
evidence that the econoogr is moving under the influence of many forces0
These are so interwoven that the defense program as a viiole is the only
single element which can be said to have major responsibility for the dis«
locations which are compelling the Government to take action to stabilize
the econosjyo A deep cut in the -defense program would eliminate the present
pressures« But given the program, no one or two lines of pressure9 whether
of fiscal, monetary, price, or wage character, can be separated and so
modified through Government action as to bring about the desired stabilization0 The attack must be upon a much broader front0




ees jj|

The effect of fiscal policy
Government fiscal operations during the first quarter exerted powerful
anti-inflationaxy influence, despite the fact that the upward pressure upon
prices continued strongly enough to move prices forward even after the im­
position of price controlo The Treasury entered a surplus position in mid«
December which became stronger as the first quarter progressed* and reached
a climax in March when the Budget surplus of 4 billion dollars far exceeded
that of any month in history0 Between December 15 and March 31« Budget re­
ceipts exceeded Budget expenditures by 608 billion doliars0
Some allowance must be made for the fact that corporations and larger
business firms build up reserves for tax purposes during the year* and the
whole impact of tax payments does not occur when the payments are made0
But when this is taken into account* it is still true that the withdrawal
from the buying power of individuals and businesses incident to the tax
payments in the first quarter of 1951 was unprecedented^ largeo It was
also nsach greater than the rate of withdrawal will be during the remainder
of the year, even if the tax proposals of the President are iamsdi&tely
enacted*
The slowing up of the rate of price increases during the quarter was
undoubtedly due in part to the large surplus of Government receipts over
disbursement So Yet the anti-inflationary effect of the surplus was insuf»
ficient* despite its record size* to stop the expansion of demand and the
increase of priceso The economic effect of taxes and fiscal policy is not
mathematical or mechanical; it is the aggregate of the effects on millions
of individual decisions0 The effects are not felt exclusively at the time
the money is received by the taxing agent0 To som extent the effects pre­
cede collection* for example* when tax reserves are set up by corporations0
Other effects lag behind collection* This is particularly true of corpora**
tions* for the dividend and investment policies are not related directly to
the current net profit after taxes; the effects of taxes upon these policies
are felt months or even years later<> There may similarly be a lag in the
effect of taxes on the investments of individuals with large incomes© Another
factor is that the price increases made in anticipation of price control
would not be directly affected by taxation* Still another factor is that
the anticipatory purchases by both consumers and businessmen were supported
not on3y by current income but also by past savings and by borrot&ng© "Tteus^
while a government surplus was reducing spending power# neavy private borrow®
ing was increasing it* although total money supply was reduced on balancQo
Fiscal policy remains the most important of the anti-inflationary
weapons* but our recent experience should teach us that fiscal policy is
not of Itself a complete answer to our problem* and what is more importants
it should drive hose the lesson that the defense program is creating an
economic situation in which forces are being generated which are so strong
that every weapon not only must be used* but imist be used courageously and
vigorouslyo




CQ J i J U m M J T

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Moreover, vdth the recession of the March flood of tax^gpaents, taxa­
tion will bs a less potent force0 Until the final weeks of the year* we
will be in a deficit period, interrupted perhaps in June, and less probably
in September*, Steadily mounting federal expenditures vill be turning funds
into the spending stream more rapidly than tax payments are withdrawing them,
shazply reversing the situation in the first quartero Fiscal operations will
be adding to inflationary pressures, not offsetting them as in recent months0
It would have been well if the tax program had been enacted promptly to aiapli«
the offsetting effect of the first quarter surpluso Now that fiscal operas
tions have turned into a positive factor in inflation^ the immediate enactment
of the program is of vital importance 0
The effect of monetary and credit policy
The process which created the large Treasury surplus also operated to
reduce the money supply 0 Much of the argument for more vigorous use of
central bank operations to curb inflation is based upon the theory that an
increase in prices is due to an increase in the supply of money and that it
can be stopped by reducing the money supply©
The privately«held money supply (bank deposits plus currency outside
banks) was reduced 1*5 billion dollars in January and 900 million dollars
in Februaryo Partial date for March confirm the assumption that the extra**
ordinarily large transfer of bank deposit credit from private to Treasury
account resulted in a large reduction in the money supply in that montho
But prices rose substantially during those three monthso This was not an
unusual phenomenono In the seven half yearly periods between the end of
1946^ when the conditions of the free sccmosxgr were reestablished# and Jure
1950, which marked the end of that situation*, there were only two in which
price changes clearly matched the theoxy of the relation between prices and
the money supply©
The increase in bank loans, which has been the subject of m e h public
discussion, affects the money supply, because the normal procedure in making
a bank loan is to credit the borrower with a deposit and this adds to the
supply of money as we have defined that tem» This in itself does nothing
to increase demand and raise prices. But bank loans for business purposes
or to individuals for consumption purposes flow rapidly into the markets
for goods and labor, and those secured for business expansion have a parti-*
cular dynamic multiplying effect upon the total demand in those marketso
It is this flow into the spending stream vhich gives such loans an infla«
tionary effecto
The concern of the federal monetary authorities over the inflationary
effects of increases in bank loans following the Korean attack led to a
revision of monetary policies which reached a climax in March©




CQSSE3B@99SE£^

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The plan of the Federal Reserve Board since August has been to use its
open market operations to establish a pattern at market prices for Govern*
ment securities vfoich would induce banks to retain them rather than to sell
them in order to add to their reserves© This would limit the ability of
the banks to make additional loans <> It would also force the Treasury to
pay higher rates of interest upon all refunding issues, which are nade at
a weekly rate of one billion dollars or more in bill refunding, and of
several billion dollars when issues of notes or bonds mature© The higher
rates would m l © the issues more attractive to investors© It would also
drive down the market price of all outstanding marketable bonds held by
the publico Whether the resulting adverse effect on the confidence of the
public in the future of Government securities would offset or even more
than offset the attraction of higher interest was«*and is«»a point on which
qualified persons disagree© The Federal Reserve Board believed that its
proposed plan would assuredly have beneficial results upon inflation, and
it discounted this objection a3 well as the further point that an advance
in general interest rates would involve an undesirable increase in costs
of production and a retarding of economic expansion©
The first positive action upon its program was taken by the Federal
Reserve in August 1950© Immediately after the Treasury announced an issue
of i025 percent l>»®onth notes in exchange for several billion dollars of
maturing issues, the Federal Reserve began market operations which caused
the interest yield on comparable securities to rise® It also dropped its
support bid on 91~day bills0 After the first two weeks, the market was
orderly* but it was no secret that the Federal Reserve wanted lower market
prices on short-term Governments, and in the absence of stabilizing bids
by the Federal Reserve the market prices moved steadily downward^ with
corresponding rise in interest yields© The cost to the Treasury of the
weekly issue of one billion dollars in 91~dsy bills has advanced from
lol74 percent in August to lo50? percent in March-, and the interest rate
on the isost recent issue of 13°°month notes was increased to Xo75 percent
from the rate of lo50 percent which had prevailed on earlier issues0
While this was going on bank loans increased steadily, and in the
final months of the year, when the short-term interest rate was reaching
its highest level*, these loans began to expand even more rapidly than in
the third quarter© In January, the Federal Reserve increased member bank
reserve requirements for demand deposits by two percentage points© Loan
increases continued, although at a slower pace© To replace reserves and
secure funds to expand loans, the banks and insurance companies sold an
increasing volume of Government securities to the Federal Reserve Bankso
In the face of this situation, the Federal Reserve moved to abandon tho
policy of supporting the 2j percent rate upon long-term Governments^ which
members of the Board had said in August would be protected© Statements
by members of the Board that the policy of stabilising the long-term rate
was responsible for the inability of the Federal Reserve to halt the in®
crease in bank credit gave a clue to the bond market, and the number of
sellers grew while bikers disappeared© Support ops rations* under the




COTBBPSfgaBBCn

circumstances* began to be burdensomee and the Federal Reserve became
increasingly aggressive in demanding that the support policy be abandoned**
On March
the Federal Reserve finally withdrew its support bids in
the market 9 which insnediately suffered a decline which in a short time
carried the market prices of several issues of 2g percent long-term bond#
below par<> The loss in market value of these issues was from $15 to $20
per $l,000~bond<> An interest pattern was established which, unless the
market developed unexpected strength, would make it impossible to sell a
new issue of 2^ percent long-term bonds*
In the two weeks following the abandonment of the support policy and
the destruction of the old pattern of interest rates, the volume of business
loans of weekly reporting member banks (accounting for about 70 percent of
the assets of member banks) increased five times as rapidly as in the pre»
ceding ten weeks o
It is not possible to say whether bank loans would have increased
more, or less* if the Federal Reserve system had not embarked on its
course of action last suasner, but that action clearly did not stop the
increaseo There seems to be even less reason to rely on Federal Reserve
open market operations to hold down business and consumer loans during
the period of very large refunding, which starts in June, because funds
to make such loans can be readily secured by banks and other holders of
governments merely by not subscribing for refunding issueso The h a m
which may have been done to public confidence by Federal Reserve action
cannot be assessed until the refunding operations oommnc®* We fear that
it may be considerable® In any event9 we think the solution of the prob=>
lera of expanding bank loans will have to be sought in other directions0
The Council of Economic Advisers, while expressing doubt about the
value of general credit control in meeting the great forcos of a major
Inflation, has consistently urged the use of selective credit controls,
and has supported the Federal Reserve in its vigorous action along that
Xine0 Regulation W, regulating the terms of instalment credit, has stabi­
lised instalment creditQ This has been done, it is true, at a very high
level, and there has been no noticeable effect in limiting the sales of
automobiles below the capacity of the factories© But harsher terms were
not advisable during the first quarter when employment in defense indus­
tries had not opened jobs to absorb any large nui&er of workers engaged
in producing consumers* durable goods0
Regulation X, regulating the terms of mortgage credit for new housing
and commercial construction# has made a less impressive record, because
it has suffered from the proviso, which could hardly have been omitted*,
that building arrangements already initiated may be financed upon the earlier
and easier tarns«, This not only left a very large backlog of permitted
projects, but it caused a prudent rush to get nsw construction well along




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bofora new conditions sight fore© a tighter regulation The resultr-'sy&s an
exceptionally heavy construction program during the winter months, but in
March there appeared the first indications that the backlog had been greatly
reduced and that Regulation X was beginning to show its effect upon wholly
new residential projects© The restraint upon private building vfoich will
come from limitations upon the use of materialsand which may become far
more stringent than that vfoich cones from credit regulation, has not yet
been noticeable in residential construction
The place of price and wage controls
The inadequacy of fiscal and monetary policies as measures to stabilize
the econonjy compelled resort to direct controls over wages and prices late
in Jenuaiy0 Uncertainty was inevitable in the first weeks of the price con®
trol program^ which began with a fairly complete freeze and was then modified
as rapidly as possible to establish controls which would be not only flexible
to the necessary degree but also tailored to the conditions of separate in»
dustrieso Confusion obscured the fact that the price control order of
January 26 did curb what was becoming a price stsispedeo
The index of wholesale prices of other than farm products and foods
rose from 163o7 in November to 166*6 in December, and to l?0o3 in January0
In the two months following price control^ it rose to 172*3 <> The ole sale
prices of farm products, which were excepted from the control order, and
those of foods, which are affected by that exertion, continued to rise
rapidly until the middle of February* Since then*, wholesale prices of
foods have declined slightly and those of farm products, after a decline^
have returned to about the February 13 levelo It is not possible to say
to what extent the stabilization of farm and food wholesale prices was due
to the removal of the infection of rapidly advancing prices for other goods©
The bad spot in the price situation, and it is a very bad spot because
it affects wages, was the continued rapid advance in consumers* prices0
The index of consumers1 prices advanced from 1?604 on November 15 to 173o8
on December 15, to !S!o5 on Januaxy 15, and to 183 oB on February 15o There
is little detailed information about retail prices since the middle of
February, but price advances, if not halted, have been greatly retarded©
The price control order was given an important assist by consumers0 who
quickly exhibited a change in attitude vhich discouraged the idea prevail­
ing among ussrehants in January that price advances would b® readily acceptedp
There ar© many vexatious problems of administration of price control
which must be solved, but a good deal of headway has been made toward
solving them® it is important that it be made as strong as possible^ be­
cause it will soon be tested far more seriously« It has been operating
in a period when all individual incosBs have been under the pressure of
heavy tax payments© That pressure has now been relaxed somewhat for
millions of taxpayers with middle and high ineoseso Moreover the prospect
is that personal incomes will rise mi lie available goods will at best rise
more slowly and more probably will decrease 0




The new forces now under way
• n r ir - in —

n i r T i m i w - - - - - m - - - - - - n — i- - - - 1-- - - - -- - - - - - - - - - - - - - - - - - - - - - - - - — — — —

-ga— .

The foress at work in the domestic econoagr in the aeoond
1951 will not be simple projections of trends operating in the first quarter
of the year0 One of the most important factors* the fiscal situation* will
reverse itself, changing from a large surplus to a deficit* and will act
to support other inflationary forces, not as a brake upon them0 In several
other respects * the situation should shift from one of slight change to one
of more rapidly growing pressure 0 The tighter limitations upon the use of
steel and other m e ta ls in th e production of civilian goods which became
effective as April opened are precursors of many other restraints which
will be necessary as the defense program progresses0
Total personal income * \shich had increased markedly in almost every
month sine© May 1950* remained at the December level throughout January
and Februaryo The wage and salary component of personal income continued
to advance at about the fourth quarter r$te* however0 In view of the elastic
factors already introduced into the wage control regulations it is probable
that when the controversy ovsr administrative procedures is finally settled
and the thousands of wage adjustments which have been held in suspense are
carried through s the immediate result will be a temporary acceleration of
these income payments*
In January and February* the seasonal decline in employment which
normally occurs was slightly less than usuaJL In March* employment showed
a sharp increase of lo3 million which may indicate that the defense program
lias began to put some pressure upon the labor supply,, Unemployment which
was around 205 million in Januaiy and Febraazy* dropped to 201 million in
Marcho The sharp increase in Government orders for manufactured goods and
for new construction which began in January should continue the trend of
greatly increased dsniand for labor which the March data indicate* leading
to a more than seasonal increase in nonagricultural employment and the
labor force o There should also be the usual seasonal increase in the
demand for agricultural woxfcarso
The expected increase in employment in the second quarter will b© re­
lated to an expansion of production This will not be of a character to
reduce inflationary pressure© In the first quarter* the production of
durable goods increased substantially* t&ile the increase in the volume
of nondurable goods produced was more moderate0 The increase in govern­
ment requisitions applies for the most part to durable goods* and goods
purchased by the Government are not available for buying by civilians
whose incomes have been increased by wages paid for labor in their pro­
duction*, The growth of inflationary pressure from this source will be
progressively more rapid as the tempo of the defense program increaseso
Contrary to the usual situation after the holidays* consumer buying
in January was very active* resembling the buying surge in July and August




following the Korean attacko The change already referred to in the attitude
of consumers aft or the price control order was issued on January 26 steadied
retail market demand0 Easter shopping did not show new impetus, and at th©
end of March the trad© Journals reported that doubts had arisen throughout
the mercantile world whether consumer buying would continue at a level which
would penait merchants to move their inventories© Hew orders were being
reduced, in some lines to such an extent that manufacturers were reducing
shiftso There was talk of “
another inventory recession like th© one in
1949o" Inventories are very large at all levelss and have been financed
to a considerable extent by barrowing0 If the holders of these inventories
or their bankers, come to believe that the speculative movement based on
the defense effort has proceeded too far or too fast, some liquidation m y
take place, easing the immediate pressureo
Granting that waves of emotion w e across the retail mrkets5 affecting
both merchants and customers $ we see little likelihood that any hesitation
which may develop in retail market demand will be long contimaed0 An un***
expected shift in the international situation can have almost any kind of
effect for a time* but only a major contraction of the defense program
could offset the growth in the inflationary forces w© have discuseedo Up
to this time, the defense program has affected the domestic econoisy through
anticipation rather than directly0 It has led to expectations of shortages
on the part of consumers, and to expectations of boiling retail markets aa£:
high profits on the part of merchants and manufacturers® The response
'
the latter has been to expand orders for goods, to step up manufacturing'
operations 9 and to balloon their plans for plant expansion and for new [S
constructicno
W
admin.”
Now the direct effect of the defense program is beginning to be felto —
It was not until early autumn that the expenditures of the armed services&
even though they were engaged in a war* exceeded those of the preceding
year© In March* the military expenditures were about 90 percent greater
than in March 1950o Orders already placed, many of them months ago* assure
the expansion of defense expenditures at a rapidly mounting ratso There
will be more people at work, probably at longer hours and, during th© second
quarter, at somewhat higher wage rates9 Personal incomss will grow through­
out the second quarter, but the supply of civilian goods will hardly in­
crease and m y be reducedQ Personal income will be buttressed by a store
of liquid assets which has been but little rsducedo
The economic prospect continues to be dominated by the defense programQ
If the Nation carries it forward, the inflationary pressures later in the
year will be greater* not less© More than ever we need economic policies
which are positive^ rigorous, and promptly executed*.




®

o

XIo Specific Policy Recommendations
General programming of requirements and supply
At the heart of economic mobilization for defense is the rigorous
programming of competing requirements, the matching of these requirements
against available supplies, and the ultimate balancing of supply and
quirements through production programs and cutbacks and other restraintso
While much progress has been made in this direction, we feel there
is still need for acceleration of this progress» This is true not only
for reasons of efficiency and order in the narrower sense0 It is also
true because only this kind of comprehensive and logical setting forth of
quantitative objectives and how to attain them can provide both the public
and the Congress with the understanding which is essential to basic support0
It would be fallacious to assume* because the defense program and re»
lated programs are thus far so much smaller than during World War IIa both
absolutely and relative to the size of the econooy, that programming is
needed only in the limited area of military production© On the contrary,
in some respects the need for foraulation and appraisal of economic object
tives is broader than during total war® In total war, the military require**
ments are so large and so pressing that there can be no answer but to meet
them first, and what is left over for other purposes is relatively so re~
stricted that the logic of the distribution of this balance is fairly a p ­
parent Q Action must be taken, but the objectives are very dear<> In the
current situation, the balance left orer for other purposes after primary
defense needs are met is so large that the way in which this balance is
distributed becomes of fundamental importance This is doubly so when we
are acting upon the hypothesis of a long, drawn®out effort of many years,
which means that we must actively promote an industrial mobilization base
strong enough to carry this burden and flexible enough to carry a ssach
heavier burden very quickly if it should become necessary*
To illustrate, if 50 billion dollars is taken out of a 300 billion
dollars output for primary defense purposes, the way the other 250 billion
dollars is divided between investment and consumption will determine the
long-range productive expansion of the economy and consequently will detest
mine whether we become stronger or weaker in the long run* If we use the
resources left over by a moderate rather than an all«out military build-up
to keep current civilian consumption as high as possible rather than to
build up the industrial mobilization base fast enough, we shall have de­
prived ourselves of the greatest benefit which might be derived from the
moderate rather than the all-out size of the primary military build-up0
This is why it is so important to have programming based upon an economic
strategy, not only for meeting primary military needs, but also for ob»
taining that general balance among all major competing needs which will
give us the greatest strength in the long run0 These major competing needs,
as the Council has stated on previous occasions, are (1) primary military



~ XI ~

needs, (2) stockpiling needs, (3) international requirements, (4) indus­
trial and farm production needs, and (5) civilian needs0
Nothing less than a programming operation which encompasses and
rationalizes these main competing needs can be adequate to the tasks aheado
This is another way of saying that our military policy, our foreign policy,
and our domestic economic policy must constantly be harmonized0
This harmony must be effectuated through action initiating at high
rather than at lower levels, because it is essentially a process of
"budgeting”resources0 For example, this comprehensive programming cannot
be achieved simply by asking a variety of agencies to submit what programs
they think are desirable, adding these up to a total, and then cutting here
and adding on there0 Instead, the central programming operation, which is
strategic planning in the broadest sense, must provide the initial and basic
guides or targets to give perspective to the developraant of the segmental
programso When this has been done, and only when this has been done, can
the experience and facilities of the agencies operating the segmental pro­
grams be utilized to achieve further refinement and improvement in the
overall progranto
The expansion programs thus far undertaken in various industrial
sectors are all to the good0 But they are thus far not sufficiently ref­
lated to and integrated with an overfall programming operation as a basis
for evaluating the relative urgency and scope of various particular ©xpan~
sion programs o Some people are now saying that expansion has gone far
enough or too far; others are saying that it must go much further© Either
conclusion is dangerous as a generality; and the fact that both conclusions
are being stated without either being susceptible to proof indicates the
lack of a sufficient programming ope ration0

A practical example of this is in the field of tax amortization con­
cessions to promote expansion^ This program is now under an attack which
may augment<> The Council is inclined to believe that this program, and
the actions taken under it, are on balance justifled 0 But it will be hard
to set up an adequate or logical defense of these tax amortization programs,
and to determine their proper further use, so long as the decisions which
prompt them cannot be shown to be related to comprehensive analysis of over»
all requirements and supply0
This larger frame of reference is needed also to answer many of the
specific challenges which are arising with respect to these expansion pro­
grams: Have they been too large or too small? Have they been preferential
to large business at the expense of small business? Has the expansion been
undertaken in the right localities? Have the concessions to obtain expan->
sion been 1P© liberal? The Council has neither evidence nor belief that any
of these criticisms is justified® But they cannot be adequately answered
without more informatiooo




12

•=>

The most serious consequence of this lack of adequate information is
not that the Government may be subject to improper ciriticism0 The most
serious consequence is that it might result in the curtailment of vital
programs for lack of presentation of adequate justification®
The production policy statement issued not long ago by the Office of
Defense Mobilization, after discussion within the National Security Council*
is a good beginning® But to be more meaningful, it needs to be supplemented
with major quantitative estimates and objectives©
These further quantitative findings include the following types of i&»
formation: (a) defense requirement^, in terms of dollars and materials;
(b) feasible levels of aggregate output for the whole econony; (c) a tenta­
tive projection of the major programs in which the government is directly
and indirectly interested so that it may most effectively serve the five
major competing requirements set forth above; and (d) a tentative projec­
tion of the distribution of manpower among the major economic sectors0
These quantitative materials would serve as a guide both to production
policy and control policy. By revealing more clearly what we are tsying
to do, they would make the choice of tools more informed and effectlve0
This programming work is largely operational, involving various
specialized agencies under the supervision of the Office of Defense
Mobilizationo Nonetheless, such work should be tied in carefully with
the work of the Ccuncil«~which can provide overtoil economic analysis and
evaluation* and oves^all estimates of growth, production potential^ etc0
A current illustration of this is the joint work being done by a staff
group which includes the Office of Defense Mobilization and the Council
to relate a prospective message to the Congress on defense and inters
national matters to the overfall economic framework, the effect of this
program upon the domestic econoray, what burden our economy can stand, and
how It may best be adjusted to this burden©
However, these ad hoc arrangements do not provide a complete sub=
stitute for the work initiated last year in connection with NSC 68, which
brought the Council, both at the staff level and at the membership level,
into an effort to integrate the various major aspects of national policy
into a coordinated program^ More recently, the Council has not been participatoiy to this work; and it might be desirable to consider how the
Councils work as a general economic staff may be more closely tied in
with work on this problemo




c g g gggjEssr

- 33 -

Long-range price and wage policy
The action thus far taken to stabilize prices and wages has been ad­
mittedly of an improvised character0 This has been necessaiy, but atten­
tion must now be turned rapidly toward establishing broader foundations
for an effective price and wage stabilization program viiich will be defen­
sible, sustainable, and adequate to the job confronting us0
The essentials of such a long-range, hold«the»line program are that
it deal with industrial prices«, wages* and farm prices0 Their interactions
are such that these three aspects must to a degree be dealt with simul­
taneously« There can be no effective stabilization in the long run through
an approach which maintains that one of the three elements mentioned above
mast be completely stabilized before either of the other two is touchedo
It is true that the "escalator”clauses in wage contracts to adjust
for changes in the cost of living will cease to be of much significance
when prices and the cost of living are effectively stabilized0 But so
long as wage increases lead to higher business costs* it is obviously more
difficult to stabilize industrial prices0 It is also true that, because
the parity concept merely relates farm prices to other prices, parity will
not go up if other prices are held firm«> Nonetheless the parity program^
insofar as it has actual effect., presumably exerts upward pressure upon
the cost of living, wages, and in turn upon business costs* And as other
prices rise, this in turn again pulls the farm price support level upward«
The circular relationship among various types of prices and costs makes it
futile to ask which is cause and which effect. The plain fact is that any­
thing which helps to pull one type of price higher has an inflationary
impact elsewhereo
It is also true that the objective of the farm parity program has
roots In a national policy designed to maintain a relationship believed to
be fair between farm prices and incomes and other prices and incomeso While
there is still a very substantial difference between farm and nonfam iz*»
comes per capita, farm prices as well as farm incomes in the aggregate are
now considerably above parity as determined by present legislation0 Prices
of some farm products and incomes of some groups of farmers, however, are
substantially below parity as defined in these terms0 But while it is un»
doubtedly a sound long®range objective to make further progress toward
narrowing the gap between farm income and nonfarm income, there is still
the question of how inflexibly this objective can be sought during a period
like the present without suffering more through augmented inflationary
pressures than is gained through improved equity of income distribution©
The outlook now is that if the farm parity program should be maintaineda
the ratio of farm income to nonfam income will not only be very high by
past standards, but indeed may rise above any previous ratio0 We are not
recommending that farm prices be frozen below the parity level, but it may
not be improper to ask that farmers, as part of the program of sacrifice
which should be comtnon to all, absorb some of the future price rises which
may result from the adjustment of substandard prices and wages*



■
*’14 30

Consequently, for a long-range program of stabilization to get rolling
effectively* the "absorption" principle should be applied not only to in­
dustry by requiring that many cost increases be borne without corresponding
price increases , but also by applying a comparable principle to the labor
and farm segments of the economy along these lines: instead of continuing
wage adjustments to take account of the increases in the cost of living*
such wage adjustments might be withheld unless and until the co3t~of~living
index rose by 5 percent above the level pertaining as of the time of the
commencement of such an "absorption”policy for wage-»eamersa This, however,
would need to be correlated with legislation permitting a freeze of farm
parity, as of a given date, such freeze to apply unless and until the prices
of things which farmers buy rose as much as 5 percent 0 Action along these
lines would apply simultaneously to business, agriculture, and labor, a
rounded "absorption11 plan, which would give the stabilization program a better
chance to take hold firmlyo
Legislative proposals should now be drafted and perfected along the
foregoing lines with respect to farm parity, and consideration should be
given regarding how soon these proposals should be submitted to the Congresso
When such action is taken* it should be accompanied by a statement that if
legislation is enacted to permit application of this "absorption" principle
to farm prices, comparable action will be taken with respect to wage stabili­
zation through a similar "absorption" principle 0
As a practical matter, however, it is doubtfiil whether it would be wise
to push for modification of the parity formula until further progress has
been made to tighten up general price control under existing legislation,
and thus further to restrain the current and prospective levels of business
profitSo So long as the existing price control program is so generously
administered, and so long as business profits are so high and still rising^
probably no argument will prevail which suggests tampering with a f a m pro­
gram that, even under conditions most favorable to the farmer, does not place
the farmer advantageously compared to the business communityo Moreover, it
is dubious how far a request for legislation to expand available restraints
upon farm prices and incomes could proceed until the general prico legisla­
tion already made available has been used more comprehensively and finnly0
Similarly, there is not much practical use in talking about restraints upon
the "escalator" clauses in wage contracts until the upward movement of business
prices and profits is more vigorously restrainedQ The firmer use of existing
price control legislation will not only make it easier to present a stronger
showing that the farm parity program should be modified* and that firmer wage
restraints should be issued, but in addition, such firmer use of existing
legislation would reduce to mare manageable proportions the problems of
wage and farm price "escalation" by an improved stabilization of the pidces
to which this "escalation" is tiedQ




aaE s s a r

- 15 -

As the situation new stands, the labor and farm groups can point to
recent and prospective trends in nonfarm prices and in business earnings
as a basis for united opposition to meaaures which would place a relatively
higher burden on wage earners and fanners0
For the combination of economic and practical reasons set forth abovep
the Council feels that there should be some further indication of action
on the price control and wage stabilization program already initiated
before tackling a new range of legislative and administrative problems0
The crucial steps which now should be undertaken immediately as a prelude
to all else are (1) a tightening of the general price control program now
in operation, and (2) the adoption and promulgation of the principles of
a fair initial wage stabilization program which the Government has already
espoused but has not thus far put fully into effects,
The Council sets forth below its reasoning and conclusions with respect
to these two crucial immediate steps©




•t*V9W*l

-

16

-

Immediate price policy
In early January the Council of Economic Advisers, on pages 114-115
of the Annual Economic Review, set forth this objective for general price
policy:
"Every argument which was advanced a year ago against in­
creases in the general price level applies with multiple force
nowo The price level is already much higher than a year ago9
and inflationary forces are mounting* Further price increases
in general can serve no economic function* and if these increases go much further they will do irreparable damage. There
is no proposition of economics on which there is more general
agreement than this« Consequently, the imposition of price
controls having been initiated, this activity should-move for­
ward with speed and decisiveness0 It should seek, as rapidly
as possible, along with other controls both indirect and direct*
to achieve and maintain general price stability*)1'
Today the foregoing statement is even more pertinent than in early
Januaryo The firm objective, beginning now» should be to hold the line
to prevent the general price level from rising further, and insofar as
feasible to push it below the level which existed at the time of the
general freeze on January 260
The conditions for such action are now more favorable than a few
months ago0 The administrative structure of the price control organiza­
tion is more adequate. The immediate inflationary pressures seem some»
what abated, thus providing an ideal period in which to act firmly before
the next upsurge0
Since it is easier to criticise price control than to administer it,
the Council is not critical of the efforts thus far made, which have been
great, nor of the results thus far achieved, which have been substantial*
Nonetheless, the following suggestions are offered toward further improve*ment*
(1) T,Thile it may be necessary to inform the countxy that complete
price stabilization cannot be achieved over night, published percentage
estimates by public officials as to how much further prices will rise dur­
ing the next few months tend to add to the speculation, hoarding, and
uncertainty which have already caused prices to rise more than the funda­
mental economic situation alone would have caused*,
(2) Price control officials should, insofar as feasible, reduce their
discussion of the measures other than price control which are essential
to stabilization* The impression given is that alibis are being offered
instead of actiono Of course, these other measures are necessary• But
the idea that further progress on price control cannot be achieved unless



i M il

- 17 ~

other things are done first has been excessively stressed. As each agency
charged with a limited segment of the anti-inflationary effort does the
best possible job in its own field, we shall come much closer to an effec­
tive "over-*all" program0
(3) Particularly* the constant assertion that effective price con­
trol is hampered by an inadequate program in the field of wages and farm
prices has been overstressed. There may well be need for further action
in these related fields, and this will be discussed below. But in terms
of public psychology and political realism, firmer action on the price
control front is a condition precedent to more effective stabilization on
the labor or farm front •
(4) The price control program should now move toward relatively
less emphasis upon the correction of "inequities," and relatively more
emphasis upon holding the line0 The first of these two objectives must
continue to dictate some changes; but if it should now be given primary
weight, prices would remain in a constant state of flux and most price
movements would be upward. Enough time has elapsed since the general
price freeze to move promptly toward a hold-the«line policy, with some
exceptions but not enough to overshadow the general rule*
(5) A hold-the-llne price policy requires a much sterner absorption
of cost increases instead of translating them into price increases. If
inflation is to be stopped, costs must be absorbed at some point or points
in the economic process. If the increases in wage costs or materials
costs are translated into price increases, which price increases in turn
raise the cost of living and the level of farm parity, then there is no
point at which effective stabilization can take hold. In view of the
current and prospective level of profits after taxes, there is consider­
able room for cost absorption out of business profits. Moreover, there
are efficiency factors which lower some costs and tend to offset the
cost increases involved in wage advances. Cost absorption, by its con­
tribution toward holding the general price line, will reduce the signifi­
cance of the "escalator" features of wage and fara-prlce policy.
The basic hold»the~line policy should not grant price increases on
the base of cost Increases unless profits are inadequate to permit absorp­
tion „ It is recommended that a hold-the-line policy be rigorously adhered
to* with a basic standard that price increases will not be granted where
profits are as high as 85 percent of those of the three best years between
1946 and 1949o This policy would undoubtedly work undue hardship upon
some, but if this hardship becomes sufficiently great, and is s^ffici<stttly
detrimental to the defense effort, it can be remedied by selective tr<s&t»
ment. No system of price controls can avoid the fact that differently
positioned firms will be differently affected by whatever is done. 7,'o
follow a policy of translating cost increases into price increases, on the
ground that only thus can the weakest marginal producers be protected,
would shortly lead to the highest attainable rather than to the lowest
feasible general price level.



. _£ W m tiB & F ¥AT:

18 -

(7) The establishment and immediate application of firm standards
to hold the price line, based upon the absorption principle set forth
above * should now take precedence over the further development of policy
governing "exceptions"adjustments/1 and "inequities„" Otherwise, the
tail will swing the dogQ However* with primary emphasis on holding the
line* attention can be given simultaneously to an improved set of stand-*
arde for dealing with special cases« These standards need rapid crystal­
lization; thus far9 the adjustments have been on too random and irregular
a basis to promote full public confidence«

(8) There needs also to be developed a more comprehensive and con­
sistent set of standards relating to rollback policy0 Talk about roll­
backs^ unless accompanied by resultsp undermines public confidence by
failure to perform and distracts proportionately from the main job of
holding the line0 The emphasis should be on the prevention of price in­
creases, since this is a more realistic and feasible approach than the
rollback of priceso Rolling back prices is a much more complicated task
than prohibiting further price increases, and it is hardly possible or
desirable to apply as rigorous a profit standard in determing rollbacks
as in passing upon price increases« There is* however, a strong case for
the rollback of prices, where they have risen more than sufficiently to
compensate for increased cost«
It is the view of the Council that the quick orientation of price
control policy to the foregoing considerations is a very important step
to be made toward effective stabilization®
Immediate wage policy
It is a prevalent conception in the public mind that the Government
undertook a sound wage stabilization policy late in January, from which
it has been driven toward an inflationary wage policy by the pressure of
labor groupso This is not in fact the case0 The true situation, as
appraised by the Council, is that the original "wage freeze" of January 26
needed quick transition into a more flexible wage stabilization policy
for the kind of period now confronting us0 Although the elements of such
a wage stabilization policy are in broad outline fairly clear, such a
policy has not yet been put fully into effect 0
It is submitted that the basic elements of a sound initial wage
stabilization policy were set forth in the January 1951 Economic Report
of the President and in the concurrent Annual Economic Review by the
Council of Economic Advisers© The essence of this initial policy, as
stated, was that wage adjustments would need to be made so long as the
Government was not successful in holding the line on the cost of living;
that fringe benefits presented a separable problem from wage increases
and might even be anti-inflationary if properly managed; and that pro­
ductivity adjustments should not be set aside until consideration could
be given as to whether they might be diverted into savings rather than
into the spending stream®



^cejgsatBMT 1 a£T

- 19 -

™hen the Wage Board could not arrive at a wage stabilization policy
by January 26, the stabilization authorities then decided to take action
on their own initiative» The Council felt that the initial wage stabili­
zation policy above outlined should have been issued instead of the “
wage
freeze*” Later on, when the Trage Board disagreed and dissolved on the
issue of Regulation 6, the stabilization authorities were again required
to aet, and the Council again urged the promulgation of the initial wage
stabilization policy as outlined above« Instead* although there was
agreement as to the soundness of thi3 policy, it was decided not to issue
it except in a fragmentary way, but instead to send back ’
’
instructions11
to the ™age Board which by that time for all practical purposes had become
nonexistent«
The Government now finds Itself in the incongruous position of not
having gone ahead with basic elements of an initial wage stabilization
policy, but instead is still wedded to a fragmentary and inconsistent
wage policy on the ground that there is not now in existence a function­
ing Wage Boardo
Yet the stabilization officials are not being absolved by the nonexistence of such a Board from making decisions on wage policy* Instead*
they have been forced to make a number of spot decisions and put them
into effe$to And since circumstances are forcing them to act* it would
seem that they ought to go the whole way and initiate the initial wage
stabilization policy referred to above0
Such action would enable the Government to deal more effectively
with those wage claims which may go far beyond the bounds of a sound and
firm wage policy* As the Government now remains In the ambiguous posi*
tion of not having whole-heartedly and forthrightly taken full corrective
astion with regard to the original "wage freeze*" the Government remains
in an untenable position and will be hampered in its efforts to hold the
wage line*
For the foregoing reasons, the Council now urges that the initial
wage stabilization policy proposed since January be now put into effect >
The Council also feels that the case for the handling of "disputes"
by a representative board is even stronger than the case for the handling
of basic wage policy by such a board* Since it is ultimately the re­
sponsibility of the Government to define the basic functions of public
agencies9 we would urge that as soon as possible the Government announce
its decision that a wage board should handle both wage and non-wage
"disputeso" Consultation with various groups has been desirable; but
the protraction of such consultation prior to determining the basic
functions which the Government must in the end perform would seem
questionable if too long extended0




flfipim m vfzxgr

" 20 *

Tax policy
The policy of increasing taxes sufficiently to balance the budget,
announced by the President in January, continues to constitute the minimum
acceptable program in the present situation. Both the budgetary outlook
and the economic outlook lead us to conclude that the 10-billion-dollar
tax program recommended by the President on February 2 3hould be enacted
promptly. If at all possible, the higher withholding rates should take
effect by July 1, 1951* The new excise tax rates should apply idlth a
minimum delay after the passage of the bill and the corporate tax re~
visions should be retroactive to the beginning of the calendar year,,
In the January 1951 Economic Report and the Budget Message, the
President stressed the importance of maintaining a balanced budget and
financing the cost of defense on a pay-as-we-go basis • In his tax message
of February 2, the President recommended that as rapidly as possible Con­
gress should enact revenue legislation to yield annual additional taxes
of at least 10 billion dollars, and later in the year enact the remaining
amount needed to keep us on a pay*»as«*we-go basis. The immediate program
included rate increases of corporate and individual income taxes and
selected excise taxes together with the closing of certain loopholes«

The Secretary of the Treasury on February 5 elaborated the Presidents
reeommendaticiB, testifying as the first witness in tax hearings before
the Ways and Beans Committee which continued with public hearings through
March 16. The hearings were extended to this length in large measure
because the two tax laws passed in 1950 had been pushed through hurriedly
and it was deemed necessary to have thorough consideration of any further
legislation. No sense of urgency was reflected in the actions of the
Committee or the statements of its members. The minority members insisted
that the whole tax program for 1951 be presented to them before the Com­
mittee proceeded to act. This vieiv was accepted by the Committee, which
invited the Secretary of the Treasury to appear before it on April 2.
The reluctance of the Committee to take immediate action probably
reflected in considerable part a heavy mail reaction from constituents*
Objection was raised to further increases of taxes until prices had become
stabilized. There was also widespread feeling that expenditures could
and should be very greatly cut and that no further tax increase should he
made until this had taken place„
The Secretary appeared before the Ways and Keans Committee on April
at which time he strongly supported the policy of balancing the budget,
reviewed the changes in the outlook for revenues and expenditures, urged
the prompt passage of the 10-billion-dollar program3 and suggested that
the determination of further revenue legislation should be postponed until
early in 1952.




- 21 The revenue and expenditure estimates for the fiscal year 1951,
presented by Secretary Snyder to the vays and Means Committee* show an
increase of revenues of 2„7 billion dollars over the January budget
estimates and a decrease of expenditures of 2«9 billion dollars below the
budget estimates thus indicating a surplus of about 2*9 billion dollars
compared with an anticipated deficit of 2.7 billion dollarso These figures
would be consistent with an excess of cash receipts over cash disbursements
of more than 6 billion dollars as compared with a 200-million-dollar cash
surplus in the January budget estimates®
The higher revenues were attributed in large degree to inflationary
developments and the lower expenditures through reductions in civilian
programs and to slower-than-expecfcod financial settlements on military
deliveries«
While some of the sources of increased revenue for the fiscal year
1951 will not be duplicated in fiscal 1952, it is probably that the
revenues will be about 3 billion dollars higher than anticipated in the
budget o Since the defense program is unfolding somewhat slower than was
anticipated, the expenditure level might be lower by an undetermined
amoimto On the other hand, possible future changes in the defense program
and higher prices may well lead to greater than estimated expenditures in
the fiscal year 1952* It is clear that short of major changes in the
defense program, the budget deficit will be heavy in fiscal 19520 However,
the deficit may well be substantially less than the 1605 billion dollars
indicated in the budget submitted in January,, It seems unlikely that
even the prompt passage of the 10-billion-dollar tax program will produce
a balanced budget during fiscal 1952<> As the remaining budget deficit
would, however, not be very large, prompt action on a 10-billion~dollar
tax bill appears preferable to a possibly protracted legislative consider­
ation of a larger tax program which from a fiscal and economic standpoint
would be more adequate„
As we have indicated elsewhere in this report, much of the inflation
which has been experienced since the start of the Korean War has resulted
from speculation and other anticipatory actions on the part of consumers
and businessmen Such action included the building up of unusually large
inventories in the hands of consumers and businesses and also the pushing
up of prices by producers and other sellers in the expectation of later
price controls o Any abatement in inflationary pressure which may now
occur may be expected to last only until the actual defense program catches
up with the expectationso There is accordingly no reason for the Council
to change its earlier position that the future holds strong inflationary
pressures and that adequate taxes are a necessary part of an effective
stabilization program. Such taxes would preferably be high enough to
produce a substantial surplus. Taxes sufficient to balance the budget is
a minimum fiscal program from the economic viewpoint „ It makes unnecessary
the accumulation of additional debt and thereby avoids future inflationary
dangers• However, it does not offset all current inflationary pressures.




- 22 -

Strong restrictions on private capital formation, consumption, or both
must be achieved by means other than taxation if price stabilization is
to be achieved with a budget that is balanced but does not show a surplus*
Strong pressure is being brought to bear by various organized groups
to have the Congress adopt very different patterns of tax increases than
the pattern recommended by the Secretary of the Treasury* The proposals
made by important business, labor, and farm groups reflect sharply diver­
gent vieivs. Only the farm organizations (National Grange and Farm Bureau)
express strong support for the major components of the Treasury* s program *
The labor groups (AF of L, CIO, and the two rival electrical and radio
workers unions) endorse the Treasury*s corporation tax proposals and
suggest that more money (5 billion dollars rather than 3 billion) should
be raised from this source, They agree to the 4-billion-dollar revenue
goal from the individual income tax, but want little if any of the addi­
tional yield from individuals with incomes below ,14,000* The labor organi­
sations also favor complete reversal of income splitting to raise 2*5
billion dollars. They are unanimous in their opposition to the excise tax
proposals, which account for 3 billion dollars in the Treasury* s program.
Business groups generally oppose any further increase in corporate
rates, although the CED program includes 1 billion dollars from these taxes.
The position of the business groups on individual income taxes varies, with
some endorsing the Treasury's proposal for a 4~percentage-point increase
and others favoring a moderate flat rate tax on disposable income. With
respect to excises, these groups are inclined toward a general sales tax
rather than increases in present excises as recommended by the Treasury*
The CEO program, however, includes both higher rates for existing excises
and a new retail tax which would apply primarily to clothing and housefurnishings.
The fact that business and labor groups criticize the Administration
tax program, but propose opposite kinds of changes, suggests that it is
on middle ground. We believe it to be more satisfactory than any of the
programs of its critics for the following reasons*
1. Profits of corporations are continuing at a very high rate and,
we believe, can absorb the proposed 55 percent combined normal tax and
surtax without impairing either their financial position or incentives
to efficient and expanding operation. For this reason, we reject the
proposals of business organizations, which range from repealing the
excess profits tax to limiting the corporate rate to 50 percent*
2. The manufacturers* excise tax which the NAM proposes and the
limited retail sales tax which the CED proposes would introduce the general
sales tax into the Federal revenue system. It would be umvise to say that
it will never be necessary to make use of general sales taxes for financing
the Federal Government. However, these taxes distribute the burden re«
gressively and burden unduly families as compared with single persons.




- 23 ~

3ale3 taxes, by raising prices ,on cost-of*living items and agricultural
cost items, create pressure to increase wages and farm prices • For these
reasons a general sales taxes are doeased unacceptable unless they become
necessary after the greatest effective use has been made of the personal
income tax. The manufacturers* excise is particularly objectionable be**
cause of the difficulty of preventing the tax from being pyramided* with
the distributors making a profit on the tax*
3, The objections rrade against the Treasury proposals for increased
excise taxes are inevitable since no industry likes to be taxed* However,
the comodities have been selected with care. Those on which the heaviest
tax increases are proposed are either the commodities of little importance
to the family or commodities which are competing with goods needed for
the defense effort.
4. The Treasury proposals to close loopholes cover the major items.
Proposals such as those of the CIO which contemplate collecting about 5
billion dollars from closing loopholes are not realistic*
Credit and monetary policy
The Council will submit a separate treatment of this subject the
first of next week*




<=.

24 *»

The crucial issue of group "representation" or "participation"0
The whole defense effort has recently been embarrassed and inmeded
by sharp controversy regarding the "representation" or "participation"
of certain economic groups in that defense effort» It is clearly not
within the role of the Cornell to appraise the responsibility for thia
difficulty« St is .undoubtedly true that those who seek this "represented
tion" seem at times not .to be able to define exactly what they seeko This
indicates that there •is no simple solution to the problem® But it is a
problem vhich transcends personalities^ even if some have unfortunately
reduced it to personalities * This problem is- clearly within the scop© of
economics„ 2a .fact, it is thoughtful and progressive economists who in
recent years have desi^aated as one of the most challenging problems of
our modem economy to find a basis ©f accomodation between strong private
groups which vitally affect the economy and strong Government which also
affects the eeonofl^r«
The Council in its various annual reports has recurrently identified
this problem long before the defense emergency^ and even longer before the
recent trouble and friction which this problem has generateda And we have
pointed up this problem more insistently since the event of the defense
emergencyo Xn our December 1950 report on "The Economics of National
Defense"(ppo 24*2$)p
emphasised this points
"The vast production effortp *Mch supports the whole
economic mobilisation^ is preponderantly in the hands of
businessmens, workers9 and farmers* The Government msy provide
them with some targetsp subject them to some controls0 and
encourage them with some stimuli» But the Government alone can­
not spark their initiative^ maintain their moral©* nor kindle
their ingenuity9 <>«<, W© must adajpt the American economic system
to the new purposes of a defense program $ but w® cannot afford to
junk the system® The establishment of major targets or goals in
a defense emergency is primarily a Government responsibility4-Ther© is no .other possible location for this responsibility* and
it must be exercised*, But the development of these targets^ or
goals should not be undertaken solely by public officials« They
should receive help in the formulation of these targets by those
who will be called upon to achieve most of them® The goals must
be crystallised at the. tops but they should not be handed dam
from the top® »«-<> Decisions must be made by the Government*, not
by peopl© representing economic groups® But in formulating
policiesp there should be the fullest possible consultation with
representatives of those who not only tiill be affected by them*, but
who also will have to carry out many of them and support all of
ttttU&o"




The Economic Report of the President in January 1951 (ppQ 7~8) had
this to say:
"A defense emergency requires far iaoi*e planning than is
customry or desirable in normal peacetime* oa„ la these critical
It is recognised that Government must exercise leadership
In this planning .ot> but the Government cannot develop these
basic plans alpne* The necessary experience and know-how are to
be found throughout our whole economic system* Through constant
consultation^ thee® talents should be drawn into the whole planning
effort0 After the basic econos&iO plans are outlined, most of them
will have to be carried cut by businessmen*, workerss and farmers0
They will be able to carry out these plans betterp if they have
had a chance to participate ia creating them ftaa the start<,*
The Council feels that the issue of "representation" or "participation"
is not trivial or secondary* It Is vital to the public support of a great
defense effort which must be conducted and sustained without the electri«
fying effect of total war0 It follows that the creation of effective
fa&chinery to fulfill this requirement should not be regarded as something
which can foe satisfied by ©ere pro forma arrangeassntso I t is not enough
to set up formal machinery ejsbodylog the Idea; the machinery must be made
t© work* and work vsellc
The establishment by the President of a 17«iaan board advisory co®*
mittee should be regarded as a very significant step forward in this
direction All experience has indicated that the success of this arrange*
meat will depend largely upon the content of the meetings which will
proceed fro© this arrangement. If these meetings were not to be serviced
by adequate staffing and careiklly prepared agenda9 they could s w . lead
to random and disconnected complaints from each of the members0 leading
ultimately t© a sense of futility and dissatisfaction. 'But with adequate
staffing and planning^ the newly«created instrument can be ®ad@ sharp
enough to cut through many of the current dissatisfactions and vexations „

From the composition of the group which ha® h m n formed 9 it is clear
that nai^y# if not mnt9 of the problems in which they will b e interested
will be economic in character. The group will also be conc©rnedj, but
probably in a secondary m n m 9 with foreign policy 0
I t would seefflp under these circumstances9 that the group should be
aervieedj, for the purpose of collecting information ete.p by a snail staff
drawn from those agencies within the Executive Office which are most
deeply Immersed in the problems that will be concerning the group. It
wouldse©% by way of example^ that this staff might contain representatives
of the President8s immediate staff*, the Office of Defense Mobilisation^ the
Council ©f Economic Advisers0 and Mr® Harridan8s office
for th e reasons
just stated*




c

2 6

e

But while a staff of this kind may gather information and help to
develop agendap it cannot itself bring before the group at its regular
meetings those matters whieh will engage their attention and enlist their
intere'sto If such a function is to be performed*, it would need to be
performed by higher level representatives of the agencies dealing **&th
these matterso For examplep consideration should be given to having the
group briefed from time to t in© by those who can speak with some authority
about the military situation^ the mobilization situation* the general
economic situation*, and the philosophy underlying our conduct of inter­
national affairs o This would enlist the interest of the group in concrete^
affirmative materials© instead of a situation where the group might be~
a forum for the airing of trivial “
gripes”0 Perhaps consideration
should be given to having a few of the top-level officials in these fields
within th® Executive Office sitting in with the group pa a more or less
regular basis 0 of course not as members of the I7~mn committeep but
rather as assistants of the President^ made available by him as a part of
his program of working effectively with the group0
The Council recognized that this may not be the correct approach to
this problesu W© suggest it merely as a starting point for consideration
of a problem istiich is indeed of great importance0




r

'■*

27

III Details of Economic Trends

Employment
During January and February, there were no significant changes in the
labor foree and employment. The March figures, however, indicate that the
long anticipated expansion of the labor force in response to the pressures
of the defense effort may be underway, although it is not possible to pre­
dict the beginning of a trend from one month9s figures*
The civilian labor force dropped, seasonally from the December high
of 62 *5 million to 6l<>3 million in February * In March, there was a sudden
expansion of lo0 million which brought the civilian labor force to a
level of 62o3 million workers» Employment followed the same pattern, with
nonagricultural employment dropping from Decembers 54ol million to 53*0
million in February, and then shooting up to 53 08 million in March, The
Increase in nonagricultural employment was chiefly in factory employmentc
Agricultural employment followed its usual seasonal pattern throughout the
period* Unemployment rose seasonally from the December level of 2*2 million
workers to 2*5 million in January and 2*4 million in February; then it
dropped seasonally to 2.1 million in March, <»r 3®4 percent of the civilian
labor force*
The increases in the labor force and in employment may be given greater
emphasis because the data indicate that the March expansion was due to the
entrance into the labor fore® of additional adults (rather than teen agers),
including about 300,000 housewives. The female labor force is presently
about 1*2 million above March of 1950; the annual expected increase under
normal conditions would have been approximately 300,000 to 400,000 women*
The Bureau of Labor Statistics8 report on nonagricultural employment
in selected industries shows little significant change for January and
February (March data are not yet available), except for the steady increase
in durable goods industries which was resumed in February after the January
Xullo Employment in durable goods manufacturing is now about 875^000
above the June 1950 level^ with the most important gains having occurred
in machinery and in transportation equipment, chiefly aircraft* In non­
durable goods manufacturing, there has been an increase of over 350,000
workers over the same period® Federal Government employment has also
shown a substantial increase as defense agencies have hired staff*
T«Jhile the defense effort is making its impact felt* there have as
yet been no signs of a general manpower shortage* This emphasizes the
fact ~thats to date, defense production is still of minor importance com­
pared with civilian goods production* The Bureau of Employment Security8s
survey of labor market conditions in 151 major labor market areas indicates
that the number of tight or balanced labor supply areas declined from 55
to 3$ areas between November and January (March data are not available).
There have, however, been shortages of skilled professional, and technical
workers in a number of areas*



WiimUlMlAL

_ 28 -

Production
Total production of goods and services (measured by gross national
product in constant prices) increased by more than 1 percent from the
fourth quarter of 1950 to the first quarter of 1951* raising output to
within 1 percent of the peak reached for the year 1944* This increase
contrasts with a rise of about 5 percent from the third to fourth quarter
of 1950*
Industrial production increased by about 3 percent between the fourth
quarter of 1950 and the first quarter of this year* A preliminary estimate
for March places the index at 223 (1935~39 * 100), a postwar record* As
in the case of total production, the quarterly gain was less than that
occurring between the last two quarters of 1950* Such a slackening in
the rate of increase is to be ejected as many industries hit capacity
levels of operation, as sectors shift to defense production, and as
material shortages begin to arise.
Increased production of durable goods in the first quarter continued
to be the most important factor in the rising industrial output* Total
nondurable goods production declined temporarily in February because of
the strike in the wool textile industry, but there were significant
increases in cotton textiles and paper, so that the average output of
nondurables for the quarter was about 2 percent above the last quarter
of 1950 o Minerals production remained at about, the fourth quarter levelo
Among the durable goods industries, machinery production rose sharply
in February* !,Tith incoming orders for machine tools at their highest
level since mid»l%2, it is to be expected that machinery production will
continue to spurt* Aircraft equipment production continued its brisk and
steady increase, with the average for the first two months of the year
about 20 percent above the fourth quarter* Output of railroad equipment
showed no significant change* The production goal of 10,000 freight
cars a month set by the National Production Authority is not expected to
be reached for several months, since the current rate of production is
about 6,000 cars* The backlog of orders for freight cars was at an alltime high on February 1<>
Iron and steel production was adversely
work stoppage of railroad switchman, but the
and after the strike raised total production
levels for the quarter. Activity in private

affected in February by the
high rates of output before
in this industry to record
shipyards also ros©0

Production of consumers3 durable goods has not suffered significantly
from the step-up of defense activity* The higher rate of output of auto­
mobiles during the last two weeks of February and in March reflected the
return to full-scale assembly after model change-overs were completed,
and the resumption of railroad operations* In general, January output
of such consumer durables as refrigerators, washing machines, radios, and
television sets was considerably higher than last January, although below
the highest rates in 1950<>



Minerals production in the early part of this year remained about
the same as in the fourth quarter of 1950. There was a drop in the out­
put of bituminous coal during February. Crude petroleum output increased,
with weekly production at an all-time high in the last week in January.
Production quotas in the Texas fields have been raised and it can be
expected that output will continue to increase.
>Tith the increased tempo of industrial activity, demand for electric
energy rose. Electric power output was at a record level in the first
quarter of this year. Power needs will continue to grow with the general
industrial expansion*
Present indications are that 3&6 million acres of agricultural crops
will be planted this year, about 8 million more than last-year« The intended
plantings of feed grains fall considerably short of the guides, indicating
needed acreage. Some increase in the production of food grains is indicated*

Prices
Wholesale prices » The first quarter of 1951 was marked by a drastic
change in pace of the rate of price advances. The quarter opened on a floodtide of price rises, continuing the acceleration which followed the Chinese
intervention in late November. These price increases were also further
stimulated by the expectation of price controls. In sharp contrast have been
the price movements since the middle of February* Th® all-commodity price
index moved very little, and in the area of sensitive prices there were some
declines. Some of the factors accounting for this change in behavior were:
the issuance in late January by the Office of Price Stabilization of a price
freeze affecting most commodities, sone abatement of speculative furor as
international tension eased, and the high level of inventories of consumer
goods®
During the first cuarter, (through !!arch 27), wholesale prices advanced
4o5 percent, two thirds of which took place prior to the issuance of the
General Ceiling Price Regulation* (See table Xv) Since the middle of
February wholesale prices have moved very little, advances in industrial
prices being mostly offset by declines in wholesale food prices® Of particular
interest is the movement in sensitive prices, which rose about 6 percent
to the middle of February but since then have declined about 3 percent
primarily because of declines in the grains as well as in tin. These declines
were not caused by the freeze order*




Table !•

Changes in Wholesale Prices in First Quarter of 1951

Percentage change
Commodity
All commodities

From week enc
End of 1950
End of 1950 From General
to week ended to General Freeze to week February 13
ended March 27 to March 27
March 27, 1951 Freeze 1/
4.5

2.8

1.7

0«3

Farm products
Foods
Other than farm products
and foods

6.9
3*3

3.4
2.1

3«4
1.1

.2
-CL.5

3o9

2»5

1.4

.9

Textiles
Fuel arid lighting
Metals and metal
products
Building materials
Chemicals and products

8.1
2.2

5.6
.1

2.3
2.1

1.8
1.1

2.8
2.6
4.1

2.5
1.5
3*6

.3
1.0
.4

*3
«4
“
•1.2

2.0
12 .1
7*2
1.0

2.7
5.3
3*4
.2

-.7
6.5
3.7
.7

“3*7
.9

Special groups:
Grain
Livestock
Meats
Petroleum and products

____ _...
1 / Week ended January 30*
Source: Bureau of Labor Statistics (Weekly Index)




.7

i rin»trTr»rwTTrf__

* 31 “

industrial prices arc the group most completely affected by the general
freeze• £1 this area, the effcct of controls has been to slow up the price
advance considerably (see table 1), but not to stop it completely* In part
this has been due to some permitted price increases as in the case of coal
and automobiles• In part also, it has been due to the fact that controls
froze prices at what were essentially the highest prices in the period
December 19-January 25, while the general average was below these levels
in many cases» Ifence, the general average has been moving up to the ceil­
ing prices. In some cases also, there may be violations*
The farm and food area has been only partly affected b$r the freeze®
Most of the important faro prices were left uncontrolled, either because
specific controls had to be worked out for commodities like livestock, the
next levels for which were controlled, i.e., meatsj or because they were
below parity as in the case of the grains* Farm prices continued to move
up until mid-February at about the same rate as before the freeze was
imposed* Since then, as a result of the easing of international pressure,
there has been little overall change| there has been some decline in grain
prices* In addition there has been so.ie decline since mid-Februaxy in
wholesale food prices* Meat prices have fallen somewhat, as the previously
sharp rise encountered some consumer resistance; and there have been sharp
gyrations in the prices of fresh fruits and vegetables*

Consumers1 prices* Consumers* prices during the first two months of
1951 continued the rapid advance that began last fall* The increase since
December has been 2*8 percent compared with 5*1 percent in the six months
of 1950* Thus, the increase thus far in 1951 has been more rapid than in
the last half of 1950*

As table 2 shows, the largest increase in 1951 has been in food prices,
which have advanced in two months almost as much as in the second half of
1950* Preliminary reports indicate that between February 15 and March 15,
however, there was a small decline in retail food prices* In the main,
most other components have been advancing at about the same rate as in the
last half of 1950, except apparel, where the increase has been at a faster
rate®




Table 2*

Changes in Consumer P rices Since June 1950

Item
A H Items
Food
Apparel
Rent
Fuel, etc*
IIous©furnishings
miscellaneous
_

....

Sources

Percentage change
June - December
December 1950 1950
February 1951
5.1

2*8

6*5
5*9
1*5
2.7
10.0
3.9

4.5
3.3
.8
•8
3.2
1«6

.........

"bureau of Labor Statistics

It is, however, too soon to say that price control has had little
effect on the cost of living® The retail price level probably rose little
between the date of the freeze and February 15* "/hile it is to be expected
that some further rise in retail prices will occur, since part of the index
is uncontrolled, and son© prices will be permitted to rise, it also seems
reasonable to assume that the rate of advance of the index will slow up
considerably for the next several months* In part, this will be because
many retail prices are under controlJ in part^because seasonal factors
should be operating to lower prices, as in the case of fresh fruits and
vegetables, and eggs; in part^beeause heavy inventories in the hands of
retailers will exert some downward pressure on prices $ and, finally,
because meats which traditionally rise in the spring are under control*.
3h the case of meats, however, effective regulations and enforcement will
be necessary to insure control*




- 33 -

Wages
Pew wage increases have been reported since the wage freeze of
January 26, although there have been some settlements calling for wage
increases which were made subject to approval by the Wage Stabilization
Boardo Some groups, notably the automobile workers, received a cost-ofliving increase March 1 amounting to 5 'Cents an hour, as a result of the
operation of escalator clauses in contract agreements 0
While total wages and salaries showed some upward movement during
the first quarter of 1951» th® rate of increase was about the same as during
the previous quarter0
Gross hourly earnings of factory workers increased only slightly
In January and February * Gross weekly earnings declined slightly in
January due to a reduction in the length of the work
but In
February average weekly earnings increased slightly over Januaryg to a
level of $64«0§» The work week in manufacturing showed no change in
February over January 0
All of the increase in the weekly earnings of factory workers took
place in durable goods industries. Hours worked also increased slightly«
In the nondurable goods segment, the work week and average earnings
both showed slight declines in February compared with January0
Gross weekly earnings in manufacturing in terms of 1950 prices
declined slightly during the first two months of 1951 compared with the
level prevailing at the dose of 19500
Profits
While no firm profits estimate is as yet available for the first
quarter of 1951» it is clear that profits continued at least at the
record levels which marked the latter part of 1950o During 1950, under
the impetus of rising prices and sales, profits before taxes rose from
an annual rate of 27o6 billion dollars in the fourth quarter of 1949 to
the all-time high annual rate of 46 c4 billion dollars in the third quarter
of 1950o Since then, with prices and sales much higher, it is reasonable
to assume that the upward trend in profits has continued0
Money and credit
The almost uninterrupted climb of major types of private credit
outstanding, and of the money supply, during the second half of 1950
was followed during the first months of 1951 by changes in widely
divergent directions. Loans of commercial banks9 paced by a contra^
seasonal increase in business loans9 continued to expandD Commercial,
industrial, and agricultural loans of member banks in larger cities
increased 1 04 billion dollars or 7o6 percent => between December 27p 1950,




* 34

00

and March 28* During the comparable period a year earlier* business
loans of these banks dropped slightly c> Though inventory loans accounted
for most of the growth of business loans during the second half of 1950*
with loans for defense a negligible factor* there is evidence that in
1951 defense loans have become a progressively higher precent of new
credits0 Total loans of large-city member banks, including (in addition
to business loans) real estate* consumer and securities loans* many of
which are subject to selective credit controls, rose l c2 billion dollars *
or 3o9 percent* between December 27* 1950, and March 28, compared with a
rise of 0 o4 percent during the comparable weeks of the previous year0
Though business loans of banks continued to increase5 total consumer
credit outstanding dropped $69 million dollars., or 20B percents during
January and February* 1951* Instalment credit, which had soared 10 per-­
cent during the third quarter of 1950 and had been held to a net rise
of less than 1 percent during the fourth quarter* dropped about 390
million^or nearly 3 percent^ during the first two months of 1951 ® There
had been almost no change in instalment credit during January and
February $ 19509 The instalment credit regulations first Imposed in
September 1950 and tightened in October were primarily responsible for
the marked reversal of the movement of this form of credit„ The regu~
lations received help* of oourse* from the inevitable slowing down of
the rush for durables that reached its peak in the third quarter* and
also, especially during latter months* from shortages or slow deliveries
of some kinds of consumer durables0
The privately-held money supply (deposits adjusted and currency) *
which had expanded 7o2 billion dollars* or 4«2 percent* during the
second half of 1950* dropped about 2ok billion* or 1 04 percent^ during
January and February* 1951« The decline during the first two months
of 1950 was 1 06 billion, or less than 1 percent0 The sharp decline
was the result* in part* of transfer* of privately-held balances to the
Treasury8s deposits as tax and other Government receipts exceeded cash
disbursements— a factor much more important during February than
January« Gold exports were also a factor* as were decreased holdings
of Government securities by all banks* including commercial banks and
the Federal Reserve system* Though the increase in bank loans during
January and February added to the volume of deposit money* the effect of
loan expansion was far more than offset by the deposit-shrinking opera=
tions described above0
Gross national product
The gross national product increased by 16 billion dollars (season­
ally adjusted annual rate)* or about 5 percent* to a level of 316
billion dollars in the first quarter of this yearQ About one-fourth
of this increase from the fourth quarter reflected increase in real
output the rest being due to price rises * The rate of increase in
real output was less than that between the third and fourth quarters
of 1950* as shown in table 3©




• 35 00

Table

Gross National Product

Billions of dollarsp seasonally
adjusted annual rates
Period

Percentage
change from
previous
quarter for
GNP in 1950
prices

Current
prices

1950
prices

1950t First quarter
Second quarter
Third quarter
Fourth quarter

263*$
271 o6
283->9
300*3

270*0
276,8
279-8
292*9

4*2
2»5
1,1
4*7

1951s First quarter

316 0

296*7

1*3

Personal income, consumption expendituresfl and saving
Preliminary estimates show an advance of 7 billion dollars (seasonally
adjusted annual rate) in personal income from the fourth quarter of 1950
to the first quarter of 1951» This was somewhat below that of the two
previous quarters.. Private wages and salaries gained at the rate of about
4| billion dollars* Since employment and hours (seasonally adjusted)
rose slightly* if at all, the gain was mostly due to wage rate increases *
Business and professional income rose at a rate of almost 2 billion
dollars between the fourth quarter of 1950 and the first quarter of 1951*
owing to a renewed wave of buying of durable goods and higher price
levels o Farm income rose very sharply, due mainly to price increases <>
Dividend disbursements dropped back to a rate of 8<>8 billion dollars
in the first quarter of this year, after a flurry of year-end disburse*
ments had brought the fourth quarter rate to 11*2 billion*
The first quarter rise in personal tax collections of
billion
dollars nullified some of the inflationary effects of the 7 billion
dollar rise in personal income0 Although withholding rates were advanced
on October 1, 1950, the full impact of increased taxes enacted in 1950
was not felt until the first quarter of this year<>
According to early reports, consumer durable spending took a sharp
upturn in the first quarter, bringing expenditures back up from the
fourth quarter annual rate of 30 billion dollars to the third quarter
level of 34 billion dollars« The 5 billion dollar estimated increase
in expenditures for nondurable goods was almost entirely due to price
increases., This continued the 1950 pattern of rising prices^accompanied
by a level volume of real consumption of food and other nondurables o
The rate of personal saving declined from 15o8 billion in the fourth
quarter of 1950 (which was very high compared to the previous two quarters)
to 10o2 billion in the first quarter of 1951® The high dividend rate in
the fourth quarter tended to raise saving artificially hi^h in that periodo



feOKKBBrTCuTBusiness investment and finance
Plant and equipment. Nonfarm business expenditures for new plant
and eauipment in the first quarter of 1951 were far above any previous
first quarter level, After allowance for normal seasonal variation,
they reflected a continuance of the rapid rise of such outlays that
began in early 1950,
The largest increases in investment between the first quarter of
1950 and the first quarter of 1951 were in the fields of nonrailroad
transport (88 percent) and manufacturing (76 percent). Railroads were
up 57 percent, electric and gas utility outlays 28 percent, mining
companies 27 percent, and commercial and miscellaneous 23 percent0
The investment plans of business for the remainder of this year,
as reported to the Securities and Exchange Commission and the Department
of Commerce between mid-January and mid-March, entailed still further
increases in every major industry group. If these plans are carried
out=™-which may be subject to question, in the light of increasingly
stringent materials shortages and controls— — the outlays for 1951 as a
*hole would exceed those of 1950 by nearly 30 percent 0 A recent private
survey bears out the indication that even larger increases are planned
in the industrial and transportation fields, and also indicates that the
contemplated 1951 outlays for new manufacturing facilities are designed
to expand overall manufacturing capacity by 9 percent 0
Although special assistance and incentives will be required to
secure the capacity expansions called for by the defense program in
some specific types of facilities, the overall volume of business in~>
vestment attempted in coming months represents an excessive and in­
flationary demand upon available resources0
Nonfarm inventories <> In the last three months of 1950, nonfans
business inventories accumulated at the highest quarterly rate on
record: 11 ,0 billion dollars, annual rate, seasonally adjusted. The
pace was not maintained in the first quarter of this year; preliminary
estimates indicate that business book values increased at a seasonally
adjusted annual rate of 708 billion dollars, making this the only cate­
gory of gross private domestic investment which declined between the
two quarterso With the exception of the preceding quarter, this still
would indicate the highest quarterly rate of inventory growth in the
postwar period. It should be noted, however, that about two~thirds of
the inventory build-up estimated for the first quarter reflects higher
prices. In January, business inventories jumped very sharply by an
amount, seasonally adjusted, of 200 billion dollars, about one-half of
the increase being due to price changes. The rate of price rise in
February was more moderate, and the adjusted increase in value of in**
ventories in that month was 1,0 billion dollars0




-

37

-

In January* for the first time in several months, retailers bought
considerably faster than they sold, despite rising sales, with the re­
sult that retail inventory book values, seasonally adjusted, advanced
700 million dollars* This increase in retail inventories was signifi­
cantly larger than the increases at the wholesale and manufacturing
levels, and was primarily in nondurable lines, while at the manufacturing
and wholesale levels durable and nondurable inventories grew at about
equal rates*
In February, retail sales of durables fell off from the very high
January level, with resultant accumulation of durable as well as non­
durable stocks* Reports now available on February accumulation of
manufacturers9 inventories indicate a much more rapid increase of
durable than nondurable stocks* The apparel, leather, and petroleum
industries reduced their inventories; total nondurable manufacturing
book values increased 100 million dollars, while durable stocks were up
4.00 million dollars* The February increase in total business inventories
was only about half that of January* ManufacturersB inventories were up
about 500 million dollars, wholesale inventories about 200 million dollars,
and retail stocks about 400 million dollars*
Construction * Total new construction for the first quarter of 1951
reached an estimated level' of 30*4 billion dollars on a seasonally adjusted
annual rate basis* This compares with 29*6 billion dollars for the last
quarter of 1950, and 25*6 billion dollars for the first quarter of that
year*
The increase in construction costs this quarter over last has
probably been about 3 or U percent, which would mean that the volume of
real construction has remained the same or even decreased slightly
during this period*
Since first quarter of 1950, construction costs have risen about 12
percent, with lumber and plumbing and heating supplies showing especially
large increases*
The shifts in total private and total public construction were much
the same, comparing first quarter of 1951 with both fourth and first
quarters of 1950* Thera was in both categories a slight increase in
this quarter over last, and about a 20 percent increase in this quarter
over a year ago*
Neither credit controls nor linited supplies of materials has led
so far to an absolute cut back in the dollar value of total private or
public construction* The general rate of increase, however, has been
slowed d a m markedly*




The value of private nonfarm residential construction^ as season­
ally adjusted* for the first quarter of 1951 is estimated to be about
the same as for the fourth quarter of 1950; 15 percent higher than the
first quarter of 1950$ and within about 5 percent of the peak reached
in the third quarter of last year. Starts in the first quarter of 1951*
however, are expected to be slightly under the first quarter a year ago,
rahen nearly 230,000 units were started. Applications for FHA and ¥A
housing loans have been running only about half of what they were priva­
te the October regulationse The stricter housing credit regulations
should begin to take much more substantial effect beginning in the second
quarter of 1951, and indeed this trend was becoming evident in March* It
is an open question as to whether the present credit regulations will be
sufficient to hold starts to the 800,000^850,000 objective.
Significant increases beginning especially in the last part of 1950
have occurred each month in private industrial construction, reflecting
the first phases of the defense expansion. For the first quarter of
1951, the value of new construction in this category exceeded the fourth
quarter of 1950 by slightly more than one-fifth, and was nearly double
that of the first quarter a year ago. Only a few minor types of private
construction fell off, on a seasonally adjusted basis, from the last
quarter of last year to the first quarter of this year.
The most spectacular increase in public construction occurred in
the military and naval category, with a rise of 52 percent in the first
quarter of 1951 over the last quarter of 1950. However, the absolute
amount, on an annual basis, was only about 150 million dollars. The
rise over the first quarter of 1950 was 245 percent. Public residential
construction increased this quarter over last by 16 percent, while high­
ways decreased nearly 9 percent. Most of the other significant public
categories increased slightly during this period.




International transactions
Both exports and inports of goods and services rose in the first
quarter of 1951* according to early estimates* However, the faster pace of
the increase in value of imports reduced the export surplus, probably to as
low as 1 billion dollars (annual rate); which would be the smallest since
the war except for the third quarter of 1950*
On merchandise account alone, there was a virtual balance as imports
climbed to new heights* This reflected the strong rise in prices of imported
commodities, and the expanding need for materials as the domestic defense
program moved ahead* Merchandise exports rose moderately, but shipments
under the J&rtual Defense Assistance Program more than accounted for this
increase* Exports under this program are rising rapidly* In the first
quarter* they are estimated to have been about equal to shipments during
the entire year 1950*
With the very high levels of United States imports, and a rising
foreign aid program, foreign countries continued to build up their gold and
dollar reserves* Acquisition of these assets in the first quarter was at
the rate of 3*2 billion dollars a year, sanewhat lower than in the last
quarters of 1950* but substantially above the first cuarter of last year*
Government transactions
The flow of funds to the Treasury in Ifereh was the heaviest in its
historyo Cash receipts from the public totaled about
billion dollars*
and the excess of receipts over cash payments came to more than U billion
dollars* On a conventional budget basis* the cumulative surplus from July
1950 to the end of March was 5*1 billion dollars*
The exceedingly heavy March receipts reflect the two tax bills enacted
during the last half of 1950* a substantial rise in personal and corporate
incomes during the latter part of last year, and the operation of the "tails
plan”reouiring corporations to pay 30 percent rather than 25 percent of
their calendar year 1950 liabilities by iJarch 15* TCxcise tax receipts also
have been unusually heavy* partly because of anticipatory buying encouraged
by the possibility of new tax increases* It will be a few more weeks before
information becomes available showing the breakdown of Ilarch income tax
receipts among the individual income tax, the regular corporation income
tax, and the excess profits tax* 3h the absence of such a breakdown, it
is difficult to determine why Iferch tax receipts were so much higher than
the amount expected on the basis of the January budget estimates* It seems
quite clear, however* that the budget surplus of more than 5 billion dollars
at the end of ?larch will be reduced but not Triped out by the expected defi­
cits in the remaining months of the fiscal year*
The Treasury ended March with a General Fund balance of
billion
dollars* or 3 to 4 billion dollars more than the amount it normally likes



^CQiriPGiiTBgr-

• 40 00

to have on hand* The Treasury will be able to use this excess to meet
the expected operating deficit during the next three months. However,
some new financing m y still be necessary because of the continuing excess
of redemptions of savings bonds and notes over new sales* and because of
the large maturity falling due on July 1*
Table 4. Federal Cash Receipts From and Payments to the Public
(Billions of dollars)
Unadjuslbed quarterly totals
Period

1950*

1951:

Jan.-Har*
Apr*-June
July-Sept*
Oct.-Dec*
1!
Jan.-War*-7

Receipts

Payments

12*2
9.3
10*5
10*4

10*8
11*1
9.4
10*8

18.0

11*2

Surplus (*)
or
deficit (~)

Seasonally adjusted
annual rates
Surplus (i
or
deficit (*

Receipts

Payments

*1.5
•1*8
+1.1
*».4

40*7
41*4
42.8
44.9

43.6
43.5
37*9
42.9

-2.9
-2.1
4.9
2.0

4*6.8

55.2

45.5

9*7

1f Preliminary estimate*
Sources Bureau of the Budget
In terms of the consolidated cash statement, the excess of receipts
over cash payments in seasonally adjusted annual rates is estimated at 9.7
billion dollars in the first quarter* This is the largest ouarterly surplus
on record, and compares with surpluses of 4*9 billion dollars for July*
September 1950 and 2*0 billion dollars for October-December* (See table 4©)
These surpluses have undoubtedly exerted a healthy anti-inflation influence
during this period* although it shculd be recognized that much of the first
quarter tax receipts was paid out of funds accrued by corporations and
individuals in earlier months*
In addition to the sharp spurt in Federal tax receipts during the
March auarter, there was a significant increase in the rate of payments
to the public* The largest factor in this increase, of course, was the
continued rise in defense expenditures* This is best illustrated by the
following figures showing the trend of defense expenditures since last July
in terms of working day averages*




-

t t

-

(Mallions of
dollars)
1950 s July
August
September
October
November
December
1951s January
Februaiy
March (prelizainary)

49
48
51
58

66

73
72
86
91

Military spending thus has reached an annual rate of 23 *2 billion dollars j
compared with a rate of 12*5 billion dollars last July. In the January
Budgetj these expenditures were estimated at 20 billion dollars in the
current fiscal year and 40 billion dollars in fiscal year 1952*




Respectfully submitted*

Leon II. Keyserling
Chairman

D« Clark