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Ju n e 2 4 , 1972

D ear M r. P r e s id e n t:
In re s p o n s e to y ou r re q u e s t, I am enclosin g a
m em o ran d u m on p r ic e p o licy . P le a s e u n d erstan d th a t,
in view of a ll th at 1 had to do in p re p a ra tio n fo r m y t r i p ,
th is m e m o ra n d u m w as p re p a re d in h a s te . H o w ever, it
d oes convey the e s s e n c e of m y p re s e n t thinking.
S in c e re ly y o u rs .

A rth u r F . B u rn s

The H onorable R ic h a rd Nixon
The P r e s id e n t of th e United S ta te s
The W hite H ouse
W ashington, D. C.

E n c lo s u re

-A-FSB: ccm




A rth u r F . B u rn *
Ju n e 2 4 , 1972

A N O TE ON P R IC E P O L IC Y

A s you know, eco n o m ic r e c o v e r y h as p ro ce e d e d fa v o ra b ly
m r e c e n t m o n th s.

P ro d u ctio n , em p loym en t, p e rso n a l in co m e # ,

b u sin e ss p r o f its , r e t a i l s a l e s , and new o r d e r s - - a ll h ave been
in c r e a s in g a t a r a th e r vig oro u s p a c e .

It a p p e a rs th at the eco n o m y

w ill continue in th is fa v o ra b le tre n d a t le a s t during the re m a in d e r
of th is y e a r .
T he p r o g r e s s being m ad e in the fight a g a in st in flatio n ,
h o w ev er, is a n o th e r m a t t e r .

W age r a t e s a r e continuing to r i s e

a t a su b sta n tia l p a c e , and th e r e a r e nu m erou s in d icatio n s th a t the
r i s e m a y a c c e l e r a t e - - r a th e r than m o d e ra te - - i n the m onths
ah ead .

T he gain in p ro d u ctiv ity h as been som ew h at disappointing

fo r a p e rio d of v ig o ro u s e co n o m ic re c o v e ry *

And p r ic e s continue

to r i s e a t a r a t e th a t c a lls into qu estion the a ch ie v e m e n t of our
s ta te d g o a ls .
In the s i x m onths s in c e the p r ic e f r e e z e ended l a s t N o v em b er,
the co n su m e r p r ic e index has r is e n at a 3 - 1 / 2 p e r cen t annual r a t e .
T h is is b e tte r than the p e rfo rm a n c e b e fo re th e f r e e z e , but above the
2 - 3 p er cen t t a r g e t s e t fo r the p ro g ra m .

In view of th is , the a c tiv itie s

of the P r i c e C o m m issio n m ay need to be in ten sified in o r d e r to a s s u r e
a b e tte r p e r f o rm a n c e .




-2-

W hat is p a r tic u la r ly d istu rb ing now is the r e c o r d of m e a t
p r ic e s sin c e th e ending of the f r e e z e .

In the five m onths to A p ril,

the co n su m e r^ p rice in d ex r e c o r d e d an i n c r e a s e in the r e t a i l p r i c e 1
of m e a ts am ounting to 17 p er cen t a t an annual r a t e .

In the la te s t

m onth th e r e w as a sm a ll d e clin e , but th is is only a te m p o ra r y
r e s p ite s in c e w h o le sa le m e a t p r ic e s have r i s e n su b sta n tia lly
fu rth e r in r e c e n t w e e k s.

W e should t r y to cu rb th is r i s e , fo r

th e r e is no m o r e s e n s itiv e index of w hat is happening to p r ic e s
fro m th e point of view of the hou sew ife.

And if the a v e r a g e h o u se ­

w ife cannot p e r c e iv e th a t p r e s s u r e s on the fa m ily budget a r e
le sse n in g , th e r e is little hope thfet w e w ill be able to g e t the
m o d e ra tio n in w age dem ands -• w ith o r w ithout c o n tro ls - - th at
is e s s e n tia l to a re d u ctio n o f in fla tio n a ry p r e s s u r e s in the A m e ric a n
eco n o m y .
My ju d gm en t, th e r e f o r e , is th a t th e p ro b lem of m e a t p r ic e s
w a r ra n ts s p e c ia l a ctio n .

Such m e a s u r e s could be of the p ie c e ­

m e a l ty p e , d ir e c te d at in c re a s in g m a rg in a lly the supply of m e a t
a v a ila b le to the p riv a te eco n o m y .

I have in m ind h e r e a re d u ctio n

in g o v ern m en t p u rch a se s of m e a ts by the D efen se D ep artm en t and
under v a rio u s D ep artm en t of A g ric u ltu re p r o g r a m s , com bined w ith




-3-

a re la x a tio n - - o r p o ssib ly te m p o ra r y su sp en sio n - - of im p o rt
q u o tas.

Such a ctio n would have jprnftj. though only s m a ll, im p a c t

on the supply of m e a t.

,

H o w ever, it would con vey to the public a

se n s e of co n c e rn ab o u t^ he p ro b lem .

The p r e c i s e tim in g of su ch

a ctio n s w ill r e q u ir e v e r y c a re fu l thought.
A b o ld er a c tio n th at would im m e d ia te ly h a lt the e s c a la tio n
in p r ic e s would be to re im p o s e a p r ic e ceilin g on p r o c e s s e d m e a ts ,
tied to c u r r e n tly p re v a ilin g p r ic e s - - th o se a c tu a lly ch a rg e d by
p r o c e s s o r s , m id d le -m e n and r e t a i l e r s in the seco n d h alf of Ju n e.
T his would d ra m a tiz e the A d m in is tra tio n 's in ten t to m ak e th e
c o n tro ls p r o g ra m w o rk , and m igh t w ell have s a lu ta r y e ffe c ts on
b u sin e ss p ricin g d e c is io a s in o th e r a r e a s .

It would be an e x tr e m e ly

popular m o v e w ith hou sew ives e v e ry w h e re , and y e t it would not
s e r io u s ly im p a ir f a rm in c o m e s , w hich a r e now ben efitting fro m
the r e c o r d -h ig h p r ic e s being r e c e iv e d fo r m e a t a n im a ls .

And, it

would be r e la tiv e ly e a sy to a d m in iste r fo r a b r ie f p e rio d .

R e ta il

s to r e s would be re q u ire d to post ceilin g p r ic e s fo r th e ir m e a ts ,
ju s t as th ey did l a s t fa ll, and h ousew ives would tend to s e e to it
th a t th e p r ic e s a c tu a lly ch a rg e d do not e x ce e d th e s e lim its .
T h e r e a r e h a z a r d s , of c o u r s e , in adopting su ch a bold and
d r a m a tic c o u r s e of a c tio n .

The p ro g ra m would be e ffe c tiv e fo r




-4-

only a few m o n th s.

And it could fa il if p ro d u c e rs w ithheld supplies

of m e a ts and m e a t a n im a ls fro m the m a r k e t.

T h e re is so m e p r a c ti c a l

latitude fo r th is , but I doubt th at it would p ro v e to be q u a n titativ ely
sig n ifica n t.

T h is w as not a p ro b lem during the 9 0 -d a y f r e e z e la s t

fa ll, and the p r ic e s being r e c e iv e d a r e now su b sta n tia lly h ig h er
than th ey w e re th en .

R e im p o sitio n of a te m p o ra r y p r ic e ce ilin g

could a ls o h av e un fortu n ate co n seq u en ces if it w e re to be follow ed
by y et a n o th e r u p su rg e in p r i c e s .

B ut I u n d erstan d th a t the m e a t

supply situ atio n is lik ely to show g ra d u a l im p ro v e m e n t in the
m onths ah ead , so th a t the underlying m a rk e t situ atio n should be
m oving to w ard b a la n c e , a t o r below c u r r e n t p r i c e s , with the
p a s s a g e of tim e .

F in a lly , th e r e is th e likelihood of a d v e r s e

r e a c tio n f ro m f a r m g ro u p s, and th is f a c to r r e q u ir e s th e m o s t
ca re fu l p o litic a l ev alu atio n .
If s p e c ia l a ctio n is taken to sta b iliz e m e a t p r ic e s - w h eth er it be a f r e e z e o r announcem ent of o th e r new G o v ern m en t
in itia tiv e s - - th e o c c a s io n could a lso be used to stre n g th e n the
r e s o lv e w ith w hich th e g e n e ra l p ro g ra m of p r ic e r e s t r a i n t is
being p u rsu ed .

T he re g u la tio n s of the P r i c e C o m m issio n re q u ir e

not only th at the p r ic e i n c r e a s e s of a ll of the l a r g e r co m p an ies be




-5-

ju stifie d by c o s t i n c r e a s e s , but a ls o th at any p r ic e i n c r e a s e s
g ra n te d not be p e rm itte d to r a i s e p ro fit m a rg in s above a
h is to r ic a l b a s e .

T h a t ^ a s e w as d e lib e ra te ly ch o se n so a s to

allow so m e r e c o v e r y in p ro fit m a rg in s f ro m the v e ry low le v e ls
to w hich th ey had fallen in th e la tte r I 9 6 0 's .

B ut a s the p a ce of

b u sin e ss a c tiv ity q u ick en s, m o re and m o r e individual f ir m s w ill
b e e x p e rie n cin g a r e c o v e r y in m a rg in s to th e point w h e re the
h is to r ic a l b a se w ill b e co m e a c o n s tr a in t on th e ir p ricin g p o lic ie s .
T h e e ffe c tiv e co n tro l of p r ic e s through p ro fit m a rg in s is
a difficu lt ta s k .

The m o v em en t of m a rg in s fro m q u a rte r to

q u a rte r h as to be m o n ito re d c a r e fu lly , and the co m p a n ie s a ffe cte d
h av e to know th a t th e ir p e rfo rm a n c e is being w atch ed and th a t
r e m e d ia l a ctio n w ill be re q u ire d p ro m p tly should th ey e x ce e d
the p ro fits g u id elin es.

I b e lie v e th at som ew h at s t r i c t e r m o n ito rin g

and e n fo rce m e n t in th is a r e a would now be a d v isa b le .

B u s in e ss

e x e cu tiv e s w ill o b je ct stro n g ly a s th e r u le s begin to b ite .

N ev er­

th e le s s , I am in clin ed to b elie v e th a t w e should e n co u ra g e the
P r i c e C o m m issio n to in ten sify its p ro fits m a rg in s u r v e illa n c e
p r o g ra m .




-6-

’ It w ill be a rg u ’ed th at su ch a p o licy w ill w eaken th e e co n o m ic
r e c o v e r y , and m a y r e s u lt in re d u ce d em p loym en t g a in s, lo w e r
« to ck p r i c e s , and a le s s ebullient e co n o m ic a tm o s p h e re .
is p o s s ib le .

T hat

In m y judgm ent, h o w ev er, the b u sin e ss exp an sion

now in p r o g r e s s h a s su fficie n t stre n g th and m om en tu m to w ith stan d
so m e r e s t r a i n t on p ro fit m a rg in s , p rovid ed it does not l a s t m o re
than a few m o n th s.

A s you know, I have long a rg u e d th a t p ro fits

n eed to be h ig h e r in o r d e r to e n co u ra g e th e in v e stm e n t th a t i s
e s s e n tia l to a stro n g and grow ing econom y*

At p r e s e n t, h o w e v er,

I fe e l th a t th e m o s t u rg en t need is to a ch ie v e the d e g r e e of p r i c e
s ta b ility th a t is e s s e n tia l in seeking a g ra d u a l m o d e ra tio n in the
w age i n c r e a s e s th a t w o rk e rs w ill dem and and be w illing to a c c e p t.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102