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The Economics
of National
Defense
•T
A
FIFTH

ANNUAL

to

PRESIDENT b y

the

COUNCIL

o f

ADVISERS

•




REPORT

the

ECONOMIC

December 1950

Additional copies of this report are for sale by the Superintendent of Documents,
U. S. Government Printing Office, Washington 25, D. G.
Price of single copy 20 cents




n

Letter of Transmittal
COUNCIL OF ECONOMIC ADVISERS,,

Washington3
The

D. CDecember

28,

1950.

President.

SIR: The Council of Economic Advisers herewith submits its Fifth
Annual Report in accordance with the requirements of Congress as set
forth in the Employment Act of 1946.
Respectfully,




Chairman.

m

ERRATA SHEET
The sentence at the top of page 23 of the Fifth Annual
Report to the President by the Council of Economic Advisers
should be corrected to read as follows: Manifestly, this increase
in the total volume of wages will add to inflationary pressures
as long as it is impossible to increase the supply of civilian
goods; and yet no one would propose that this situation be
counteracted by reducing the money wages paid by employers
to those who have been working all along.




Contents
Page

INTRODUCTORY

1

I . T H E EFFICIENT U S E OF RESOURCES

I I . H O W M U C H OF
DEFENSE?

OUR

RESOURCES

2

CAN

WE

AFFORD

FOR

I I I . W H A T CONSTITUTES AN A L L - O U T EFFORT?

IV.

T H E PROGRAMMING OF REQUIREMENTS AND S U P P L Y

3

5

. . . .

7

V.

T H E IMPORTANCE OF PRODUCTION

10

VI.

USES AND LIMITS OF CONTROLS

12

TAXATION IN THE DEFENSE PROGRAM

14

PRICE AND W A G E POLICY

18

PUBLIC AND V O L U N T A R Y EFFORTS

24

HIGH POINTS FOR IMMEDIATE ACTION

25

ADJUSTMENT OF THE COUNCIL'S W O R K TO DEFENSE PROBLEMS .

27

VII.

VIII.

IX.

X.

XI.




v




T

. 1 HE sinister forces threatening the freedom of the world have
mobilized enormous resources of manpower and materials. Yet the
free peoples, by mobilizing their potential strength, can attain a clear
margin of superiority. And in this mobilization, the United States must
necessarily take the lead.
Speed, and more speed, is imperative in all that we do to reach the
goals we set for building up our maximum strength. We must achieve
this strength as quickly as possible. But first of all, we must define what
composition of strength we strive for. There are many elements in our
total strength—including economic and military—and since we cannot
build them all up with equal rapidity, we must decide the relative weight
to be accorded to different elements. This in turn depends upon constant strategic appraisal of the world situation. Speed is not achieved
by doing the wrong things first, nor by trying to do everything at the
same time.
The economic aspects of the task of mobilizing our strength, in a
country such as ours, involves every sector of the population. Our
industrial power underlies our military capacity. The operation of our
economy stems from every factory, farm and fireside, and affects everyone. Not only must all understand; in addition, all must act.
This presents a broad challenge to economists in the public service.
They must wrestle with facts and evaluate policies not only in the
field of government, but also in the field of private enterprise. Since
their task is to recommend what it might be well for others to do,
they can be useful only insofar as their findings meet with public understanding and acceptance.
In its Fourth Annual Report to the President a year ago, the Council
of Economic Advisers sought to enlarge the areas of understanding
between business and government, by defining their common objectives
and their related responsibilities. In this Fifth Annual Report, the
Council is seeking further to foster the practical application of economics
in a democracy. We wish to focus attention upon some of the major
economic problems which arise early in the course of a mighty defense
effort. We suggest some general approaches to these problems. But we
do not here offer detailed programs, since the established place for such
programs is in the Economic Report of the President, accompanied by the
Council's Annual Economic Review. These will come in January.




1

I The Efficient Use of Resources
The economic resources of our nation, broadly defined, constitute
its ability to produce and distribute the goods and services which the
population needs and wants, including those necessary for national security. This ability includes certain measurable assets—natural wealth,
plant and equipment, manpower, a monetary and financial system,
and technology and skills. There are also intangible assets—the purposefulness and drive of the people, their spirit of cooperation, and all the
things which are embodied in our way of life.
The most efficient use of our resources, for the purposes we value
most highly, is our major economic objective. In a period of peace,
this was defined well by the Employment Act of 1946 as "maximum
employment, production, and purchasing power." Maximum employment means opportunity for useful service for as large a part of the labor
force as is willing and able to work. Maximum production means
utilizing this labor force effectively to turn out the largest practicable
quantity of needed goods and services. Maximum purchasing power,
properly defined, means the kind of income flow to various parts of
the economy which will promote stability and growth without inflation
or deflation.
A major task of the economist in the public service is to evaluate what
policy tools—both private and public—will help to achieve these objectives. This task is imposed clearly by the Employment Act itself.
On the public side, these policy tools include almost every program which
importantly affects the economy, from taxation to industrial regulation.
On the private side, these policy tools include every significant course of
action by groups of workingmen, businessmen, farmers and consumers.
These tools are used most wisely when they result in the most efficient use
of all of our resources for the purposes we hold in common as a nation.
In peacetime, economic policy takes account of the fact that there is
no one pattern for the most efficient use of resources. This is because
resources are used to serve human wants, and the priority of these wants
cannot be measured exactly insofar as they involve subjective values.
Some people may feel that the government should spend relatively
more for roads and less for schools; others may prefer more schools and
less roads. Among goods privately produced, some people may prefer
buying a good automobile and living in a shabby house, while others
may prefer the reverse. More generally, the population as a whole
may choose to translate increasing productivity into more goods or into
more leisure. And there are subjective choices involved in means as
well as ends. Some may prefer more rigidity and uniformity where it




2

results in more output; others may prefer more freedom and flexibility
even at the sacrifice of some output.
The economist has not much to contribute in his professional capacity
to the choice among ultimately competing values. He necessarily accepts
the standards of the culture in which he lives. But there are times when
he can point out that the excessive pursuit of one value may destroy it
in the long run, or destroy other values which the country clearly wishes
to preserve. It is not his job to tell the people for what purposes they
should use their resources, but rather to advise what kind of management
of resources will help most to effectuate these purposes. Rapidly mounting national defense activity reflects a change in the purposes of the
people; the specific aspects but not the general character of the economist's responsibilities are also modified.

II. How Much of Our Resources
Can W e Afford for Defense?
The basic economic changes of a rapid defense build-up are simple:
We suddenly decide to devote a much larger proportion of our resources,
both of manpower and of materials, to defense purposes than in normal
peacetime. Consequently, we have a smaller proportion of our resources
left for other purposes. But we still have the problem of making the
most efficient use of our total resources to accomplish our objectives,
however much the character and priority of these objectives may change
with the advent of a national emergency.
This rapid shift in our objectives raises the problem of allocation of
productive resources among primary defense needs, industrial needs,
and general civilian needs. All of these needs must be met in proportions which do most to maintain national strength and safety. This
raises a question frequently stated: What proportion of our resources
can we afford to convert to national defense without doing ourselves
more harm than good? More popularly phrased: How much can we
afford for national defense?
These questions may first be considered in terms of the primary buildup of the defense effort—the amount of our resources devoted to the
maintenance, training, and supply of our armed forces.
The economist must approach this issue in a different spirit from
that applied to most problems of resource allocation in normal peacetime. In such times, since roads and power developments both contribute to the strength of our economy, the economist can help to
measure which contributes more, and thus help to establish a priority
when we have not enough resources to build all the roads and power de919484—50



2

3

velopments desired. But our armed forces, to the extent that they are
necessary for the defense of the country, are an absolute first priority
and leave no room for this kind of evaluation by economists. The
economist claims no skilled judgment as to how large these forces should
be to make us reasonably secure. Such judgment must rest with experts
in military and international affairs, and in the final analysis with the
President and the Congress responsible to the people as a whole.
Hence the economist cannot properly interpose objections to the size
or speed of build-up of the military establishment on the ground that
such outlays are "uneconomical" in the traditional sense; all such outlays are "uneconomical" in the sense that they do not add directly to
the productive power of our economy nor increase the satisfaction of consumer wants. Nor can the economist object on the ground that these
outlays impose a strain and burden upon the economy and the people; by
definition, they do just that. Nor can he object on the ground that the
primary defense build-up increases inflationary pressures, although that
is a certain consequence under conditions now prevailing. When the
primary military build-up is found to be necessary for national security,
the economist cannot object because it causes hard problems; he can do
so only if the speed and magnitude of the build-up is clearly beyond the
range of our industrial power or threatens to destroy it.
Clearly, no military build-up now in contemplation is of a size or
speed to justify objection by the economist on this ground. During
World War II at its peak, we allocated more than 40 percent of our total
output to primary military purposes; and yet we emerged from that
terribly costly struggle with a more powerful and productive economy
than we had ever known before. In contrast, at the present time
we are devoting only about 7 percent of total output to primary
military purposes. If other outlays related to the international situation
are included, the percentage rises to only about 8% percent. The concentration of our productive efforts upon defense objectives could rise
far above this point, and we could still maintain a vigorous national
economy capable of meeting additional demands upon it.
The economist, however, of course has the duty of showing what the
economic costs and effects of the primary military build-up will be.
He may also point out that our defense strength depends upon much
more besides the size of the military establishment. It depends also
upon all the supporting forces, economic, psychological, political and
moral, which make up both the resisting power and the striking power
of a nation. In the strictly economic sense, it depends upon our productive capacity and how well we use it, not only to supply military
needs, but also to supply those industrial and general civilian pursuits
without which the military build-up cannot be carried forward or endure. Our strength depends also upon how well we combat inflationary forces.




4

The Council stresses that we need now, even more than in normal
peacetime, to maintain maximum total production, although we must
make far more rigorous efforts to produce the most vital kinds of goods
and to cut back on others. We need now, even more than in peacetime,
to maintain maximum employment and to enlarge the size of the labor
force in view of our greater total requirements for goods and services.
We need now, even more than in peacetime, to influence the flow of
purchasing power so that it does not generate inflation.
From this broader viewpoint, the real question is not what portion
of our resources we harness or can afford to harness to the purposes of
national defense. The truth is that, in a defense effort of the size now
being contemplated in the face of great peril, the whole nation and all
suitable resources should be dedicated to increase our power to resist
aggression and to fight for freedom if we must.
This means that we should make an all-out effort on the economic
front and on other fronts. But talk about an all-out effort does not
determine just what we should do, any more than an all-out effort to
win a football game determines whether the player should kick or pass
or run. There must still be judgment as to what division of our resources among various purposes—military, industrial and civilian—
will give us our greatest strength for the kind of struggle we think we
face. We must get the most efficient use of our total resources, and to
this extent the problem is the same as in normal peacetime. But just
as that most efficient use in peacetime depends upon evaluation of which
things we want and need most when we cannot have them all, so in a
national emergency the most efficient use depends—and depends far
more urgently—upon an entirely new set of priorities concerning what
we need most and must do first.

III. What Constitutes an All-out
Effort?
According to those most competent to judge, our peril is great
and time is short. Because the problems before us are now so grave,
because the need for speed in their solution is so acute, and because the
policies needed are so vigorous and comprehensive, it is frequently stated
that we must make an "all-out effort."
This statement is correct in a vital sense. We must let nothing interfere with, and we can exempt no sector of the population from participation in, a maximum national effort to achieve lasting security founded
upon justice. But emphasis upon an "all-out effort" does not define
what should be done, especially because the specific content of such




5

an effort must vary under differing circumstances. This specific content must above all be attuned to the factor of timing, which in turn
depends upon the basic strategy of our defense policy in the light of
world events.
We want to make an "all-out effort" to achieve as speedily as possible an armed force of a size which will maximize our primary security.
But what the immediate target for armed strength best designed to accomplish this purpose should be, depends upon the best informed judgment
as to the tempo of the contest and as to when the danger may be
greatest.
An "all-out effort" on the economic front must be geared to the same
strategic concept which governs the military effort.
An "all-out" productive effort is one which achieves as speedily as
possible the type of economic strength we need to cope with the world
situation. But when such questions arise as apportioning scarce materials
among military purposes and stockpiling on the one hand and the expansion of plant capacity on the other, the decision depends upon whether
or not it would be wisest on balance to delay a portion of the immediate
military build-up in order to develop more industrial strength to increase
our future military potential.
We must make an "all-out effort" to use our labor force efficiently and
fully. By depending upon the timing factor, we may decide to draw
certain groups into the armed forces immediately with less skills or permit
some of them to get more education before they are drawn into the armed
forces.
An "all-out" civilian effort, which is desirable, involves whatever exertions and sacrifices our national security demands. A similar principle
applies to the imposition of controls. But a particular set of sacrifices
and controls, which would strengthen us under one pattern of economic
and military build-up, would weaken us under a different pattern.
There is no strength in sacrifices and controls for their own sake. Those
sacrifices and controls are best which synchronize best with our basic
targets for military build-up, industrial production, and protection of
the public.
All this is to illustrate that the kind of "all-out effort" we must make
should be founded upon some primary assumptions concerning the nature
of the contest in which we are engaged. It would be fortunate if things
were so simple that we could adjust all of our efforts fully to the contingency of a total war tomorrow, and at the same time adjust all of
our efforts fully to the contingency that total war may not come for some
time or may be avoided entirely through deterring of aggression. But
there is no such thing in complex national and world affairs as preparing
equally for all contingencies at once, because different assumptions call
for different kinds of preparation. It is necessary to determine which
contingencies seem most likely, and to make an "all-out effort" to get




6

ready for those; although at the same time enough should be held in
reserve and enough flexibility maintained to alter our course rapidly if
other contingencies become more pressing.
Economic mobilization in times like these should strive to be "all out"
or "complete," in the sense of moving as rapidly as possible toward
accomplishing defined objectives. These objectives comprise a new
pattern of resource use. This new pattern is not the same, and does not
call for exactly the same measures, as in the event of a full-scale war
or full mobilization of our total armed strength. But the type of economic mobilization we are now undertaking means, at the very least, an
enormous shift in our current pattern of resource use. The effort will
be successful to the extent that this shift is rapid but also sensible. The
effort would fail if the shift were either tardy or ill-considered.
Obviously, the nature and timing of this required shift must be defined
before it can be accomplished. Thus the definition of the new pattern
of resource use called for by the emergency is the starting point and
sine qua non for all rational economic policy in a mobilization period.

IV. The Programming of
Requirements and Supply
The central task before us, consequently, is to define as speedily as
possible our new goals or targets for resource use, and then to achieve
these as fast as we can.
The process by which this new pattern of resource use is defined is
radically different from the processes by which resource use is determined
in normal peacetime. Then, the pattern is determined partly by custom.
In any one year, it is almost the same as in the year before with only
slight variations. But in a national emergency, the very nature of the
problem is to set aside custom and break sharply with the past. Another
difference is that in peacetime the changes in the requirements of the
economy result from myriads of decisions by millions of people, and supply is gradually adjusted to changing requirements through the operations of the free market. In a national emergency, the biggest change
in requirements—for the primary military build-up—must not only be
defined by the Government but must also be effectuated by the Government through public purchase of goods and services and public recruitment of manpower into the armed forces. This undertaking in itself
is so large that it makes the Government the prime conditioner of resource
use throughout the whole economy.
Further, there is an inescapable relationship between the satisfaction
of primary military requirements and the pattern of resource use in
other sectors of the economy. The Government is not only concerned




7

with the direct military build-up. It is equally concerned that the consequent reduction in the availability of manpower and materials for
other purposes shall not result in a decline of activity in those sectors of
the economic front which are essential to support the military program.
As a derivative, the Government must see to it that manpower and
materials are not absorbed in nonessential activities. The problem of
inflation control is but one aspect of preventing excessive competition
for scarce resources. Above all, the speed with which the rearmament
program must be consummated, in the interest of national security, demands far greater concentration of decision-making than we countenance in normal peacetime.
The logic of the situation requires that the Government must accept
and exercise the primary responsibility for defining almost all of the
broad phases of the new pattern of resource utilization in a defense
emergency. This does not mean that the Government should program
and determine every minute detail in the scheduling of production and
distribution throughout the economy. But it does mean that the Government, in a period of economic mobilization, must determine broadly the
size and weight of these main competing requirements: (1) primary
military requirements, (2) stockpile requirements, (3) international
requirements (military and economic aid abroad), (4) industrial requirements, (5) requirements to serve the consumer public.
The determination of and reconciliation among major requirements
is at the very heart of economic mobilization. The determination can
never be final; it must be altered as time flows and circumstances change.
But at any given time, it must be characterized by comprehensiveness
and firmness. In addition, this scheduling of necessary requirements, to
be realistic, must be constantly balanced against a comparable inventory
and scheduling of supply. There must be a continuing process of meshing the two. This flowing evaluation of basic requirements and supply
may be called programming. Or it may be called the determination
of priorities. Whatever it is called, its importance to economic mobilization is supreme.
A programming and priority operation of this scope draws its initial
guidance from the size and speed of the primary military program. That
program is the starting point of reference to which other efforts must be
adjusted. Hence it is essential to effective economic mobilization that
the military program be defined as quickly and clearly as feasible,
although it was never defined exactly at any stage in World War II,
and cannot be defined exactly now for a variety of reasons.
But it is a dangerous fallacy to assume that comprehensive programming and priority operations must await complete crystallization of this
military program. There are maay important aspects of the general
programming and priority opejEnicn which can be carried forward to
a high stage of development without awaiting final clarification of mili-




tary targets. Thus, many of the decisions can be founded safely upon
assumptions about the military program within a fairly wide band.
Moreover, all other requirements are not deduced entirely from military
requirements. Some of them are so large in themselves that they must
be included in the initial approach to the whole problem. Indeed, the
development of other requirements and military requirements interact
upon one another, and the process of developing all of them must go
forward simultaneously and coordinately. On the supply side, there
are many paramount problems which can be pushed closer to effective
treatment without awaiting any more knowledge about the military
program or the general international situation than we already have.
Since the programming and priority operation is the central machinery
for defining what use of resources is most efficient in a defense emergency, all of the specific economic programs must rely for guidance upon
this central operation. For all of these other specific programs are designed to guide the use of resources, and cannot be fully effective until
we know what our resource-use objectives are. To illustrate, until we
know what level of consumption is consistent with other essential requirements, we are handicapped in developing tax programs. Until we know
what level and kinds of business investment will be most helpful to the
defense effort, we cannot very effectively determine the desired impact
of taxes upon business. Similarly, wage and price policies must be related
to objectives for consumption and investment, because most consumers
are wage earners, and prices and profits have a bearing upon business
operations. Even more clearly, the allocation of materials toward one
purpose and away from another must rest upon evaluation of how many
purposes our resources can fill and which ones have the highest priority.
Finally, the setting of specific goals or targets for some lines of production and utilization will have a galvanic and unifying effect throughout the economy and among all the people by making it clear in concrete terms just what we as a nation are striving to do and why. It
will dispel any notion that sacrifice is being asked for its own sake. In
fact, it will replace the negative concept of sacrifice with the affirmative
concept of service, by drawing all into an affirmative program directed
toward positive results. The target of 50,000 airplanes, set near the
start of World War II, is an outstanding example of the forcefulness of
this approach.
In world terms, the quantitative development of specific goals by a
nation which has always shown the power to accomplish what it sets
out to do will mightily encourage our friends abroad and give pause
to our opponents.




9

V. The Importance of Production
The programming of resources and requirements serves to reveal
shortages of varying degree in many goods and services. In many
cases, the problem of shortages can be cut, like the Gordian knot, by
rigidly allocating existing supplies among various requirements according to priority. But restraint of demand will not and cannot meet the
whole problem. In many instances, production must be expanded—
and in the long run, this is the more fundamental remedy.
It is obvious that, on the economic front, wars whether hot or cold
are won or lost on the production line and not simply by restraints.
This justifies discussion of why major emphasis in the kind of mobilization now under way should be placed upon production.
First of all, the current rate of output of some items vital to the
defense effort is not enough to satisfy even the primary military and stockpiling requirements which we should now be meeting or will have to
meet shortly. Even allowing for an expansion of imports (but allowing
also for the possibility that international developments might curtail some
imports) the only safe answer in these cases is to expand production of
these items.
Another situation exists in cases where the supply is sufficient for
military requirements and stockpiling alone, but not sufficient to cover
also the industrial and consumer requirements for an economy supporting a high and expanding mobilization effort for a long time. There
has been a tendency in some quarters to subtract the military and stockpiling requirements from the total supply, and to conclude that the
situation is not serious if the remainder is well above zero. This neglects the fact that other essential requirements, even with restrictions
and sacrifices, may be far above zero and may even exceed the military
and stockpiling requirements.
More generally, the experience in World War II illustrates that,
while many lines of production were cut back and many restrictions
imposed, total output swelled enormously. On an annual basis, it rose
by about three-quarters between 1939 and 1944. If this gain had
been only one-half as great, we might have lost the war no matter what
else we did.
In some respects, the expansion of total production, although in an
entirely different pattern from in peacetime, may be just as imperative
now as during World War II. In a total war, the nation had to draw
down very heavily upon its industrial and civilian strength in order to
support the military build-up. This follows from the very nature of a
total war. In the different situation which we now face, there is no
telling how long the burden of the military build-up will last, but informed opinion is that we face many years of very high defense outlays.




10

We must weigh carefully the extent to which we now draw down our
industrial and civilian strength, because we do not know at what year in
future—if at all—we shall be called upon suddenly to drain that strength
to the utmost in support of a total military effort. The safest course,
under these circumstances, is to combine the military build-up with the
largest feasible support of our underlying industrial and civilian strength.
This is necessary not only for purely economic reasons, but also because
of the psychological strain involved in carrying a military burden in a
democracy without the pressure of an all-out war. The conclusion is
that to serve these various needs we must expand total production if we
are to achieve optimum strength for the long pull.
We cannot expand total production anywhere near to the extent that
we did between 1939 and 1944, because we had more slack resources
in 1939 than we have now. But current and foreseeable planning do
not contemplate anywhere near the diversion of manpower and material from availability for the production line to service in the armed forces
that was undertaken in World War II; and this differential compensates
in substantial measure for the fact that we had more slack resources in
1939 than we have now.
Moreover, it does not follow that we do not have a great production
expansion potential within our economy just because we were near
"full" utilization of manpower and plant by the middle of 1950. We
have a growing population and a growing labor force. We can work
much longer hours. We have a marvelous technology, and must strive
through it to increase productivity. We can further apply the latest
results of science and invention to the practical problems of production. It should be possible to increase the total of private and public
output by about 2-5 percent over the next five years. This is a considerably higher rate of growth than has been experienced in normal peacetime, but the Council believes it can be obtained with the harder work
and larger effort which the emergency now imposes upon all.
A wide range of tools, skillfully employed, will be needed to expand
the right lines of production with sufficient rapidity. They include
procurement policy, technological development, financial aids for increasing capacity, informational guidance, and training programs. Even
restrictive measures, such as taxation, credit controls, allocations of
supply, and price and wage controls can contribute to production, by
selectively curbing unwise resource use without stifling necessary types
of incentive, investment and expansion. It is not the Council's role, at
least in this report, to advance detailed production programs.
We can say this: Whatever controls we may adopt, they will fall
far short of those of an opponent whose entire economic and political
system is founded upon the most rigid control of every button and every
grain turned out by every factory and farm. But we can enlarge our

919484—50



3

11

productive superiority, and in setting out to do so we will be choosing
the weapon which we know best how to use.

VI. Uses and Limits of Controls
The argument thus far has been that the first task of economic mobilization is to define and reconcile competing requirements, to match these
requirements against available supply, and to service these requirements
in accord with priority of need.
It has also been pointed out that the most fundamental approach to
the satisfaction of necessarily enormous requirements is by accenting
production. Goods must be made before they can be used.
But there are various compelling reasons why, in addition to promoting production, it is necessary to restrain demand. The output of some
items cannot possibly be expanded rapidly enough to meet the needs
of the primary military build-up without cutbacks elsewhere. Reliance
upon the competitive bidding up of prices, to determine the allocation
of goods which are in short supply relative to the total need, does not
service competing needs on the basis of the priorities of national interest.
Such hectic price movements create grave inequities which undermine
public morale and contribute to the inflationary spiral. In brief, the
traditional mechanisms of the free market, which in peacetime are relied
upon to balance supply and demand and to respond to the relative
wants of a free people as determined by themselves, must be supplemented in a period of economic mobilization.
While the expansion of production may ultimately reduce the specific
inflationary impulses which arise from shortages of specific commodities,
it takes allocations and other controls, in many instances, to make scarce
manpower and materials available for the most needed production lines.
Besides, the expansion of production does not and cannot remove the
general inflationary problem in a period of very high and constantly
rising defense spending. The reason for this is that the volume of income
received by producers and consumers (and thus available for spending)
is generated by the totality of production, and increases as the total
increases. The only goods available for these buyers, however, are
total production minus the large amount purchased by the Government for the defense program and for other programs. Thus, the "inflationary gap" is not filled simply by expanding production. It is
accordingly necessary to reduce consumer and business demand below
levels they would otherwise reach.
Controls—both indirect and direct—are needed to deal with this
inflationary danger. There are several different methods which may
be employed for restraining demand. First and foremost, incomes may




12

be absorbed through taxation, thus cutting down the amount which
consumers and businesses have to spend. Heavy excise taxes may also
be used to reduce demand for goods in short supply. Second, demand
may be restrained through restricting the expansion of credit. Limitations^nay be placed on credit used specifically for purchasing durable
consumers' goods and housing, and on credit expansion generally.
Third, allocations of supply operate to restrict the demands of producers, thus reducing pressures on the prices of scarce raw materials.
At the consumer level, rationing may be used to restrict demand for
particular goods which are in short supply, although it does not reduce
total inflationary pressures. Fourth, demand may be prevented from
increasing by keeping incomes from rising. This is the way in which
price controls and wage controls help restrain demand. A rise in the
prices of goods or services which a person sells results in an increase in
income available for spending.
Finally, demand may be reduced by promoting net saving, that is,
by decreasing the spending of current disposable income and previously
saved assets. Strong emphasis will need to be placed on the enlargement
of saving, as it will be extremely difficult to prevent the amount of disposable income after taxes, which people would normally want to spend
on consumption, from exceeding the available supply of consumer goods.
To enlarge saving sufficiently, however, will not be an easy task. Several
of the control methods listed above operate to encourage net saving,
namely, heavy excise taxes, specific credit controls, and rationing. The
central effort to increase saving will undoubtedly be through vigorous
patriotic campaigns to buy government bonds. No method for increasing
saving should be left unconsidered.
The different kinds of controls—priorities and allocations, price and
wage controls, credit controls, and taxation, both general and special—
differ in their operation and effects. In general, controls, when
wisely used, supplement the price system in achieving the purposes of
the defense program in three ways: First, controls can promote production by channeling resources into the most desirable uses; second,
controls can promote economic stability by restraining excessive demand;
and third, controls can promote equity in the distribution of goods and
services.
But while controls are useful in promoting these results in a defense
program, they may in some degree interfere with them. The outcome
depends on how wisely they are used. Thus, it is clear that if the goals
are to be achieved, the controls must be geared to the programming
of requirements and supply. This will help to indicate clearly the new
pattern of resource use which the defense emergency dictates. The
nation will then be able to shape the controls more accurately to fulfill
their appropriate tasks.
In particular, controls may interfere with production if they are not




13

applied with great care. It is important to reconcile the imposiflon of
controls with rapid acceleration of some lines of production and with
the maintenance and expansion of total production. Actually, controls
should be regarded as the handmaiden of production, because even cutbacks of some kinds of goods are ordered to facilitate the production
of more of other kinds of goods which are in greater need.
In the long-drawn-out effort now confronting us, there will be many
cases where programs to expedite production and programs to impose
restraints complement one another effectively. But there will be other
cases—and these will be the hard ones—where to achieve maximum
production it is necessary to relax controls at particular points and
thereby run the risk of price increases. There is no one rule which
will reveal the more desirable of these two alternatives in all cases.
Each situation must be handled pragmatically. But it may be safer
to run the risk of a minor effect on specific prices than to err on the side
of smothering or handicapping our productive genius. In the final
analysis, our security depends more on how rapidly we expand our
armed strength and productive power than on whether all inflationary
forces are rigidly contained over a given period of time.
This report is not the medium for discussing the details and effectiveness of various controls. That effort is held in abeyance until the
January reports transmitted to the Congress by the President.
But the foregoing discussion points up to this conclusion now: In the
worthy desire to be vigorous, we should look where we are going. And
we should not too rapidly sacrifice on the altar of automatic conformity
the dynamic qualities which thus far have made our industrial system
almost as productive as those of all the rest of the world.

VII. Taxation in the Defense
Program
No discussion of the economics of defense would be complete without
some special reference to taxation. The major combination of methods
by which resources are redirected by Government consists of expenditures through which the requirements of Government are exerted, and
taxes through which other demands for resources are reduced. In
peacetime, this combination of expenditures and taxes is ordinarily sufficient to divert resources without resort to other control measures. The
fact that in the defense period other measures also are found necessary to
redirect resources for the most efficient promotion of defense purposes,
does not alter the prime importance of taxation and Government
expenditures.
The diversion of resources to the defense program must be made for




14

the most part from private spending and investment. To the largest extent feasible, however, diversion should be made from other governmental programs by reducing non-essential expenditures. When citizens
are required by a shortage of goods and services to cut their less essential
individual spending, not to cut less essential collective spending would
make for inefficient use of scarce resources.
The order of priorites among governmental programs is drastically
altered by the international danger. Many governmental activities which
have a high priority in peacetime must give way in a period of mobilization. In the rearrangement of priorities, however, it should not be
assumed that no governmental expenditures except those made directly
for the military program are important to the defense effort. A healthy,
efficient labor force with high morale, an increasingly productive industrial plant, and well-conserved natural resources, are foundations of a
maximum defense effort. Governmental programs that support these
foundations retain a position of high priority. Some of these programs
can be contracted; some may have to be expanded. There are other
programs which can and should be reduced or postponed. But when
everything to this end has been done, it is inevitable that the reductions
will be far outweighed by the increases in defense expenditures. There
will accordingly be a large net increase in governmental demand for
goods and services.
Because taxation offsets the increased demand of Government expenditures, it is the basic measure for attacking inflation. In addition,
taxation at the levels required by the inflationary pressures also may
have important effects in restricting or redirecting production.
The positive importance of paying the cost of the defense effort from
month to month as it is incurred is based on the anti-inflationary effects
of taxes. The alternative method, borrowing, presents serious dangers
of present or future inflation. Unless the borrowing is accompanied in
the present by a decrease in spending (an increase in consumer saving)
or by a reduction in business investment, the inflationary pressure of
increases in Government expenditures will not be offset and immediate
inflation will result. Even borrowing which is noninflationary in the
present may well lead to inflation in the future, when the lenders seek
to change their securities into liquid funds and spend or invest them.
The prospect that the defense effort will be prolonged makes it particularly important to cover the cost through taxes. Borrowing has its
place in the financing of a short, intensive effort; but it is dangerous for a
long drawn-out effort.
The positive case for a pay-as-we-go tax policy is so strong that there is
general agreement that it should be followed. Some arguments have
been raised for an unbalanced defense budget, however, and the more important ones will be examined.
First, it has been said that if it is proper to incur deficits in depression




15

years, it is surely all right in the defense period. This reflects a misunderstanding of the reason for having an unbalanced budget in some
depression years, namely, to support private demand when this was
so low as to cause widespread unemployment. Obviously, a period of
heavy inflationary pressure is not a period in which private demand needs
such support; on the contrary there should preferably be a substantial
surplus to offset the excessive combined private and governmental demand under defense conditions.
Second, it has been said that taxation is a great burden on the people
and that, with all their other burdens, they should be spared this one by
postponing it to later years. But it is not the imposition of taxes which
creates the burden under existing circumstances; it is the defense undertaking itself. When the nation decides to withhold millions of its men
from production in factory and field, and to place them in the armed
forces, that places a burden upon our economy. When the nation
decides to use materials for planes and tanks instead of for automobiles
and homes and roads, that places a burden upon our economy. Defense
efforts, in the main, must be paid for out of current production, and most
of the cost cannot be truly postponed. Taxation to pay the cost is simply
recognition of this fact. Whether these burdens are too large is a question to be determined in the light of the dangers by which they are
prompted. They are not created by taxes, and they will not be reduced by
failing to finance the defense effort through taxes.
Third, it is sometimes argued that the burden of pay-as-we-go taxation
will be greater than our economy can stand over the next few years. In
its main elements this is the same argument as the last one and the answer
is the same. In the longer run we should be able to stand as large a tax
burden as a defense burden, since the tax burden is merely a financial
reflection of the defense burden.
In the shorter run, to be sure, defense outlays might rise so rapidly that
it would not be practical to balance the budget in the current year
because of the lag of tax collections behind tax legislation. Moreover,
the outlays might rise to the point that the increase in rates required to
balance the budget would be so great and so rapid that serious loss of
incentive would result. But defense expenditures are not yet within that
range. The "pay as you go" principle should not be relinquished unless
it should become absolutely hopeless to maintain it. It is a sound
principle; once it is relinquished, finding a workable standard to take its
place is difficult indeed. For example, if a deficit were found to be required in the rapidly expanding defense economy, what clear demonstration can be made to the Congress that the deficit should be 10 percent,
or 20 percent, or 40 percent of expenditures?
In providing for more tax revenues, care should be taken not to measure how much more is needed solely by looking at the then current level
of public outlays. Many tax collections lag far behind tax enactments.




16

Moreover, the level of appropriations and the expectancy of things to
come build up inflationary pressures long before the flow of funds takes
place and even before the placement of defense orders. Conclusive proof
of this is contained in the sharp upward movement of prices and wages
and credit after the Korean outbreak, long before there was any increase
in the actual placement of defense orders or in the total size of public
outlays. Consequently, the tax program, as rapidly as possible, should
be oriented to the best judgments about the economic situation six months
or a year ahead.
The really challenging tax issue is from where taxes should be collected.
Clearly, tax policies, like other policies, should contribute to achieving
the defense program. To implement the defense effort and to combat
inflation effectively, taxation should be designed to restrain the undesirable use of resources without crippling imperative uses.
It is not possible to treat taxation purely as an instrument of economic
stabilization and redirection of production, for taxation performs other
functions at all times. Thus, it is relied on as a method of distributing
the economic burden among persons and groups in an equitable manner.
Moreover, taxation is the best indication of cost as the public seeks to
weigh the benefits of expenditure programs against their cost.
In considering the distribution of the tax burden, three special considerations should be kept in mind in the defense period. The first is
that if the taxes are to have the desired effect in offsetting inflation, they
must be imposed where they will reduce spending. This means that
much more emphasis should be placed upon restraining general consumption than would be desirable in an expanding peacetime economy
turning out an ever-increasing flow of goods for civilian use. The tax
program must be adjusted to the cold fact that longer hours and harder
work will swell the volume of personal income, while for a year or two at
least the total volume of consumer goods cannot be expanded and may
have to be reduced.
If tax increases are to be successful in reducing spending, they must
not be used as the excuse for raising the prices, profits, or wages of
those on whom the tax is intended to rest. If any major economic
group is able to escape the burden of the tax increases by securing a
compensating increase in income, both the intended burden distribution
and the intended reduction in spending are frustrated. It then becomes
necessary to increase the burdens and reduce the spending of other
economic groups. This is unfair and enlarges the required volume of
taxation, thereby intensifying all the problems which high taxes produce.
Price and wage controls can help to prevent those who pay higher
taxes from shifting the burden to the consumer and thus nullifying in
part the anti-inflationary effect of the increased taxes. But it is even
more clearly true that, without adequate taxation, the other efforts to
control inflation rest upon quicksand. Price controls, for example, do




17

not reduce existing demand or narrow the "inflationary gap." If that
gap is too large, the successful use of direct controls is undermined.
This cannot be reiterated too frequently, lest the public be beguiled into
seeking a painless but superficial cure for inflation in the direct controls
alone.
A second special consideration is that the distribution of taxes should
be such as to promote the maximum cooperation of the public in accepting necessary sacrifices and restraints during the defense period. This
means that the public must believe that the tax system spreads the burden
fairly. The excess profits tax and the progressive income tax are generally
accepted as necessary parts of a fair tax system under current conditions.
A third consideration is that of using taxes to reduce the demand of
commodities in particularly short supply. Heavy excise taxes on scarce
commodities do this by raising their effective price to the consumer. The
resulting price increase goes into the Federal treasury; unlike other price
increases it does not add to the profits of businesses or stimulate the demand of wage earners to share in such profits.
Because of the diverse purposes to which taxes must be geared, as
well as some differences of opinion regarding the way in which different
taxes affect various segments of the economy, there is an understandable
variation of viewpoint about just what forms and rates of taxation should
be applied. Enough is known about taxation to avoid the clearly harmful and to choose generally among the more desirable approaches. It is
far more important to get an effective and sufficient tax program quickly,
than to hope for an ideal program at any time. In these times particularly, everyone shares in the responsibility to submerge relatively minor
disagreements and to seek agreement on the achievement of broad purposes.

VIII. Price and Wage Policy
The die has now been cast for price and wage controls, which will
cover progressively more of the economy as the necessary organization
is expanded and as the defense program mounts. It is idle now to speculate how much of this might have been avoided if a far more extensive
tax program had been adopted far more quickly, or if certain powerful
groups within the economy had shown more restraint. Nor will the
Council in this report discuss the details of which controls should be
imposed first, in what sequence action should be taken, or what procedural method should be employed. Some of these matters are clearly
within the responsibility of operating agencies but outside the purview of
the Council. Others will be dealt with in the more programmatic
reports transmitted to the Congress by the President in January, including the Economic Report and our Annual Economic Review.




18

While these controls are now inevitable, the wage and price policies
under which these controls will be put into effect are still to be interpreted
and applied. It is therefore appropriate for the Council in this report to
say something on the general economics of price and wage policy under
current conditions. Relatively too much attention has been diverted to
the mechanics of price and wage controls, and not enough to the economics of price and wage policy. Too often has it been forgotten that controls are designed to effectuate a policy, and not to substitute for it.
In all of the discussion about when, where, and how controls should be
applied, there is room for an insistent reiteration of the question: "For
what purpose are they to be applied?"
It is not a sufficient answer to say simply that they are to be applied
to fight inflation. This does not reveal just what ought to be done, for
there are many ways both good and bad of fighting inflation. Nor
is the economist completely satisfied with the answer that "the public
wants controls." The public will not want them after it gets them,
unless they are demonstrably successful. Nor is it sufficient to say simply
that all prices and wages should be frozen just where they are. We do
not comment here upon whether it would be administratively more practical to begin with a general freeze before adjusting, or to begin first with
limited controls and then move on to more extensive ones. In either
administrative approach, both economic considerations and the maintenance of public support require the development of policy to implement
a set of objectives. The proper sequence is first to define the objectives,
and then to develop the implementing policy along with the machinery
and procedures which will best effectuate the policy.
In peacetime, the economic function of prices and wages is to promote maximum employment, production, and purchasing power by
facilitating the most efficient use of resources. All this has been alluded
to earlier in this report. At the start of 1950, before the new international developments, the Council undertook to delineate general price
and wage policies for stability in an expanding peacetime economy. On
the price side, we advocated in general the maintenance of the then
current level of prices. We held that a generally declining price level
was likely to retard economic growth, and that a generally rising price
level was more or less incompatible with economic stability. We recognized the need for individual variations within this general rule, and
that some prices should be reduced where there were extraordinary
technological gains or where these prices had already mounted above
a sustainable level.
On the wage side, the Council took the position at the start of 1950
that, in the dynamics of the American economy, stability and growth
were more likely to be promoted by level prices and rising money incomes
than by level incomes and falling prices. Of course, we felt that these
increases in money incomes should be consonant with increases in pro-




19

ductivity so as not to generate inflation. It was on this basis that we
looked with general favor upon the new types of contracts arising in
some of our major industries, which inaugurated a stable wage policy
for a number of years ahead by relating periodic wage increases to
assumed and realizable increases in productivity for the economy as
a whole. We did not register objection to the inclusion of ucost of living"
adjustments in these formulae, so long as they did not subordinate the
general idea that incomes should keep pace with the swelling volume
of consumer goods which a peacetime economy at maximum employment and production would be turning out. We recognized, on the wage
side no less than on the price side, the need for individual variance in
a complex economy, and we advocated that the application of these
price and wage policies be left to the processes of managerial decisions
and collective bargaining.
The need for reconsideration of the price and wage policies put forward in early 1950 now arises obviously from the fact that the international emergency has changed the economic situation in two vital respects. In the first place, while we must continue to use our resources
most efficiently, the pattern of resource-use must be readjusted drastically
because new priorities of need have entered into the picture. And
secondly, this drastic change, in the interest of national security, must
take place much more swiftly than would be possible through the free
play of market forces alone.
But it remains true even now that prices and wages will have a
bearing on whether we achieve the most efficient use of our resources for
the purposes at hand. Even pending the further development of programming and priority guides, it is feasible to formulate some general
rules about price and wage policy. In the case of prices, generally speaking, it is even more desirable now than in normal peacetime to hold the
average of prices as near as possible to a fixed level. We do not pass
here upon the extent to which this should be done by controls or by
business decisions. Upward price movements are even more disruptive
under current conditions than in normal peacetime. The comment
we made a year ago, that almost all important prices were high enough to
provide adequate funds and incentives without further increases, is even
more valid today. Yet even these general conclusions are subject to some
qualifications already hinted in this report. Insistence upon absolute
price rigidity should not interfere with some flexibilty where it is needed
to get vital production. In rare cases, price increases may be required
to induce production, or subsidies may be necessary to hold the line with
respect to the cost of living.
Turning to wage policy in the current situation, one may look at
wages as the nominal amount received by the wage earner from his employer (which is significant as a factor in business costs). Or one may
look at wages as the amount available for expenditure by the wage




20

earner, after the imposition of taxes and other compulsory or voluntary
restraints (which is significant from the viewpoint of the inflationary
problem of the relationship between consumer demand and the availability of consumer goods, and from the viewpoint of the standard of
living).
Looking first at wages as the amount paid by the employer, it is obvious
that wage policy cannot countenance increases in wages of a size which
would necessitate price increases. There may be a few exceptions to
this rule, where the remedying of inequities is more important than the
effect upon the defense effort which would result from price increases
in particular fields. But these cases should be limited to instances of real
hardship.
Looking next at wages as the amount available for spending by the
worker after the imposition of taxation and other restraints, the sound
economic policy is to adjust these wages as closely as feasible to trends
in the availability of goods for consumer use. This is the way to fight
inflation, and when wage earners as a whole get more money than this for
current spending purposes they really gain nothing.
It is apparent under present and immediately foreseeable conditions
that the total amount of wages available for spending after taxes and any
other forced restraints cannot, in real terms, rise in accordance with the
formulae which we regarded sympathetically in early 1950 under peacetime conditions. For if total v/ages available for spending rise as fast as
productivity increases and are also adjusted upward for changes in the
cost of living, while an increasing proportion of the enlarging production
is bought by the Government for national defense, then excess of wages
over available goods aggravates inflation. If some wage earners benefit
by using the early 1950 formulae while others do not, they do so at the
expense of other consumers who constitute a majority of the population
and most of whom are relatively less fortunately situated.
Although the size of defense outlays has not yet crystallized, it already
seems clear that the defense effort will at least be so large that during
the next year or two if not for longer the total availability of goods for
consumers cannot be increased, and in all likelihood will decline somewhat. Thus, wage and tax policies should aim toward preventing increase in the total amount of wages available for spending, since there is
no evidence now of an over-all insufficiency of total wages measured
against the proportion of total output which wage earners should buy.
Thus there emerge two standards to be applied in the development
of wage policy: first, that the trend of wages paid by employers should
not force prices to rise; and second, that the trend of wages available
for spending after taxation and other restraints should be kept in line
with trends in the availability of consumer goods. The second standard
is much tighter than the first one, and probably much more important
from the viewpoint of combating inflation.




21

There are two main ways by which wages available for spending can
be kept in line with the availability of consumer goods. The first way
would be for the general level of wages paid by employers to workers
to be held approximately where they are now until that time in the
future when consumer supplies can again be expanded. The second
way would be to maintain formulae of wage increases roughly similar
to those desirable in peacetime (including in some instances productivity
and cost of living adjustments), but to prevent a growth in current spending power by sufficiently higher taxation or through deferred wage
payments or some combination of the two.
Each of these alternatives has some points of superiority. The first
method is simpler to administer, and does not raise the perplexing question of just what the right formulae for wage increases are or how they
may be generally applied in various industries. The second method
may have the advantage of providing some mild incentive to the wage
earner—which is just as important as incentives to business—and has
the further advantage of not seeking to deprive workers of what they
believe to be legitimate gains embodied in contracts already signed; but
it has a disadvantage insofar as it might be unlikely that taxes would be
increased sufficiently or quickly enough to keep the wage gains out of
the spending stream so long as civilian supplies cannot be increased.
Much the same issues arise in considering the economics of overtime
rates of pay for longer working hours.
Perhaps some combination of the two approaches may prove most
practical; but any combination should move vigorously toward the
objective of holding wages available for spending in line with the supply of goods. This conclusion of general policy bears upon wage trends
in general. There are some hardship or exceptional cases, which would
need to be treated differently until a larger measure of equity is
established.
In the case of wages no less than in the case of prices, the achievement
of general stabilization should be reconciled with some individual variations of treatment when necessary to encourage maximum production.
There will be a few instances where, because we do not rely upon forced
labor, some wage adjustments will be among the tools required to get
and hold workers where they are most needed. That is why the word
"stabilization", which leaves room for some realistic discretion, is more
suitable to our economy even in these times than the word "freeze".
Nonetheless, the objective of leaving enough flexibility to enable the
system to work should not be allowed to interfere with the rapid achievement of a general situation which holds wages firmly in line with the
availability of goods for wage earners to buy.
The problem is made even more difficult because the defense effort
will bring millions of additional workers into the active labor force, and
also lengthen the hours of many who are already working. Thus, there




22

will be a great increase in the total volume of wages even without pay
increases. Manifestly, this increase in the total volume of wages will
add to inflationary pressures as long as it is possible to increase the
supply of civilian goods; and yet no one would propose that this situation be counteracted by reducing the money wages paid by employers to
those who have been working all along. That would be both unfair and
impractical. This underscores the importance of taxation as the primary
method for draining off excess purchasing power from all types of income
recipients, and of greatly increasing personal saving. It also underscores
the fact that, because millions of additional workers will cause total
wage income to rise while the size of the defense effort will prevent
consumer supplies from rising, the bulk of wage earners already employed at high wages should recognize that these wages cannot be allowed
to spiral still higher under current conditions. It goes almost without
saying that it will be easier to accomplish this objective if the cost of
living is stabilized.
It is certainly not too much to ask that wage earners in general forego
efforts to increase their living standards, during a time when the economy
simply cannot produce more civilian goods and also carry the heavy
burden of rapid rearmament. These living standards are already far
higher than elsewhere in the world; and they are much higher than they
ever were in this country before World War II. Within two or three
years, if total production grows as it should—and this is one reason why
that growth is so important—it may be feasible to resume some gains
in living standards even if the defense program remains very high. But
if the size of the defense program should reach the point where large
absolute reductions in living standards should become necessary, this too
the American people must be prepared to undergo.
It would be unfair to suggest such rigorous wage policies, if it were
not stressed at the same time that restraints and sacrifices can be imposed
upon one group in a democracy only when there is a sense all around that
the total burden is being fairly imposed upon all. In this connection,
for example, a freeze of prices and a freeze of wages are not equivalent,
because it is profits and not prices that are the reward to management.
Thus the treatment of profits through the tax system, and the effect of
other national policies upon other types of income, are inseparably connected with the treatment of wage policy and of inflationary pressures.
The foregoing discussion has indicated particularly the intimate interaction between wage policy and tax policy.
It follows that none of these policies can proceed successfully in
splendid isolation. There must be some top point at which they are all
reconciled and synthesized. And whoever is responsible for this reconciliation must be armed with the tool provided by a comprehensive programming and priority system, to enable him to discern basic objectives
before he seeks to reach them.




23

IX. Public and Voluntary Efforts
The popular discussion of controls versus voluntary action has tended
to obscure a very basic issue. This issue is what middle ground between
the freedoms we enjoy in normal peacetime and the unlimited compulsions of a State Economy will maximize our strength for the task
ahead. To assume that there is no middle ground would be to acknowledge that we can contest Stalin's aggressive designs effectively only by
aping all of his methods. That would also assume that in peacetime
there are many differences between our kind of economy and political
institutions and those of the Soviets, but that in a hot or cold war there
are no differences. The whole history of our achievements in war no
less than in peace belies these naive assumptions.
If by voluntary action we mean that each individual or group or
industry or labor union go its own way, with only vague perception of a
common national purpose, then manifestly we cannot afford this degree
of voluntary action in these perilous times. No rational person will
deny that in these times we must do more by central authority, and less
by free and scattered decisions, than in normal peacetime.
But the exercise of authority in a democracy does not involve the
abandonment of reason and persuasion. It does not involve abatement
of the constant effort to obtain the understanding and consent without
which laws can neither be enacted nor made effective, and without which
Executive action cannot achieve full results. It does not involve surrender of the strength and inspiration to be derived from participation
in the making of decisions, and not merely in carrying them out. All
these things are more true of the economic phases of mobilization than
of any other phases, because the economic phases—as was said at the
beginning of this report—must be executed by all the people throughout
the country, and not only by a few people in seats of authority.
It may be helpful, at a time when the choice to some seems an oversimplified decision between compulsion and freedom, to identify a few
of the areas where voluntary efforts should be in the main stream of
economic mobilization.
(1) The vast production effort, which supports the whole economic
mobilization, is preponderantly in the hands of businessmen, workers,
and farmers. The Government may provide them with some targets,
subject them to some controls, and encourage them with some stimuli.
But the Government alone cannot spark their initiative, maintain their
morale, nor kindle their ingenuity. These are attributes which lie in
these groups, and which can be maximized only if these groups are not
wrenched too severely from their customary methods and relationships.
We must adapt the American economic system to the new purposes of a
defense program; but we cannot afford to junk the system.




24

(2) The establishment of major targets or goals in a defense emergency is primarily a Government responsibility. There 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 crystallized at the top; but they should not be handed
down from the top.
(3) The development of systematic policy to guide the imposition
of controls is necessary to prevent these controls from bogging down in
irrational or conflicting purposes. The question of whether these policies are enforced by authority or left to voluntary action is secondary.
The first question is how these policies are formulated. Decisions must
be made by the Government, not by bodies representing economic groups.
But in formulating policies, there should be the fullest possible consultation with representatives of those who not only will be affected by them,
but who also will have to carry out many of them and support all of
them.
Care must be exercised not to swing between extremes from day to
day, asserting one day that everything will be accomplished by voluntary
cooperation, and asserting the next day that it is too late for anything but
compulsion. Under the American system, a constant blending of authority and freedom, of uniformity and flexibility, is essential to the best
results. A defense emergency requires more ability and patience—
which should not be confused with slowness—to achieve this blend.
And the ratios of these ingredients change in times of stress. But if we
ever lose the desire or ability to achieve this blend, we shall have lost the
greatest single asset in our total strength as a nation.

X. High Points for Immediate
Action
No matter how large the resources of the nation, it cannot do all of
everything at the same time. It is forced to make choices between the
things it values more and the things it values less. In a national
emergency, the relative order of our needs is more clearly apparent.
But there are limitations upon the application of policy to achieve these
objectives, no less than limitations upon resources. Even an all-out
effort does not mean applying all policies at once in helter-skelter fashion.
Policies must be fitted into some scheme of their relative importance,
and deployed in some systematic relationship. Some policies are more
important than others. Some policies cannot be effectively imposed




25

until others are first adopted, although in the long run those which
come later may be even more important than those which come earlier.
There are certain efforts which should have top priority now in the
process of economic mobilization, and proceed with utmost speed. The
listing is not necessarily in the order of relative importance, nor even
in sequence, since in general these efforts must be carried on simultaneously. But taken together, they constitute the Council's thinking concerning the high points for immediate action. These high points are
only a framework. Details of policy must be developed elsewhere than
in this report on economic policy for national defense.
First. The size of short-run military requirements should be crystallized as rapidly and completely as possible, not only in terms of dollars,
but more importantly in terms of goods and services. All other policies
cannot await this, but no other policies can proceed very far until this
issue takes fairly definite shape. The situation here must remain fluid;
but it cannot be formless.
Second. Economic mobilization rests above all on the most efficient
use of our total resources, geared to a set of purposes determined by the
national emergency. This most efficient use can be defined, and subsequently achieved, only by a consistent and comprehensive programming of basic requirements, matched constantly against available supplies. This basic programming effort should be located in one place
under one direction and, being the primary tool of major policy, requires
at least very close affiliation with the authority for directing and coordinating defense production and economic mobilization. Every specific
economic policy should contribute to satisfying program requirements,
whether this be accomplished by expansion programs, cutbacks, allocations, indirect controls like taxation and credit, or direct controls over
prices and wages.
Third. On the basis of this programming operation, there need to be
developed some vital goals or targets to guide the efforts of the nation.
The most important of these are some targets for production, because
of the great importance of expanding production and adjusting it to
defense needs.
Fourth. The tax program should be expanded, with continued adherence to the policy of balancing the budget as the basic measure for
combatting inflationary pressures. The distribution of the incidence of
new taxation should be guided particularly by the objectives of reducing
inflationary pressures, distributing sacrifices equitably, maintaining public morale, and not discouraging desired production.
Fifth. The control of prices and wages now having been initiated,
the programs should move forward to forestall insofar as possible the
further lifting of price and wage levels and the resulting distortion of
price and wage patterns. Both price and wage policy should be inte-




26

grated with other policies in promoting the defense program, and this
will require some flexibility in controls.
Sixth, Ingenuity and experimentation should be directed toward
building up processes of consultation and cooperation between government and the major economic groups. This will help not only in the
formulation of policy, but also in its execution. It is superficial and
dangerous to conclude that a defense emergency must convert us into a
totalitarian state.
Seventh. Increasingly better methods must be developed for disseminating to the public the fullest and most candid information about the
need for and the methods of economic mobilization. The imperative
need of public support, based on the facts, cannot be overlooked without
paying a penalty of incalculable size.

X I Adjustment of the Council's
Work to Defense Problems
We conclude this report with a statement concerning the adjustment
of our work to the new economic problems of recent months, and our
relationship to other agencies dealing with these problems.
The Council of Economic Advisers is in the nature of a general economic staff, established by law in the Executive Office of the President
to report directly to the President. The primary function of the Council,
also defined by statute, is to assist the President in preparing recommendations to the Congress and to the country to promote economic
stability and growth. The Employment Act of 1946 measures economic
stability and growth by the criterion of "maximum employment, production, and purchasing power."
The range of policies which the Council must consider in the performance of its duties is necessarily broad. In normal peacetime, the Council
must consider all of the major policies and programs, whether undertaken by private action or by public authority, which importantly affect
the whole national economy. In a period of economic mobilization,
whether partial or complete, the task of the Council becomes in some
respects more difficult and complex. The problems of maintaining economic stability become more intense. The need for maintaining the
economy in full health and strength becomes more imperative, although
this strength must be diverted to a new set of purposes. The range of government intervention in the economy becomes necessarily more extensive,
and consequently the need for evaluating a wide range of public policies
and programs in an effort to achieve consistency and efficient results
becomes even more pressing than in normal peacetime. In short, as




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the problems of the Chief Executive multiply, so do the problems of
those who serve him in a primary staff capacity.
Though the Council primarily serves the President, the effective performance of its work must bring it into contact with many groups. It
must work and consult with the functional groups within the general
economy—businessmen, workers, farmers and consumers. It must
maintain contacts with other agencies—Federal, regional, State and
local. It must furnish, upon request, information and advice to members of the Congress who are concerned with economic policy. In these
respects, the members of the Council are not dissimilar to some other
officers of government, although the fact that the members of the Council
are called "advisers" has led to some misinterpretation. For while
officers in other fields may, unlike the members of the Council, operate
specific programs, yet these officers are also advisers to the President on
major matters of policy. He alone, to the extent that he accepts their
advice, transmits it to the Congress for action where legislation is
requisite. Or, in matters of major policy, it is only with his consent that
recommendations are transmitted by others.
The Council is nonetheless distinguishable from most other agencies of
government. It does not operate programs nor carry out policies. To
this extent, it is not an executive agency. Nor is the Council in conflict
with those agencies which develop policies in specific areas; its task
is rather to evaluate specific policies in terms of the over-all economic
situation.
In carrying out its central task, the Council is charged by statute with
two main supporting functions. The first of these is to gather facts,
and to appraise their significance both as to recent trends and as to
foreseeable developments. The second is to appraise policies already in
existence, and particularly to review the programs of government, so
that the Council's thinking about new policies may take account of what
is already being done and how well or poorly it is working. The word
"review" in this connection means to consider and appraise, not to direct.
To gather facts and weigh their significance, the Council maintains
a wide network of contacts with business groups, private research and
educational institutions, and public bodies. The Council does not itself
accumulate nor process huge masses of facts. It selects what seems important to its work from the huge deposits of facts gathered by larger
and more specialized agencies.
Toward reviewing existing programs of government, the Council
members have maintained a constant and harmonious relationship with
those Cabinet members and heads of important agencies who are concerned with facets of economic policy. Similar contacts have also been
maintained at the staff level. In the course of preparation of the various reports required under the Employment Act, the Council canvasses
thoroughly the views and experience of these individuals, and always sits




28

down with them for a series of conferences before the January and midyear reports to the Congress are presented.
Developments since the middle of 1950 have neither altered the basic
purposes of the Council nor drastically changed its methods of work,
although of course this work must now be turned to new types of problems. There is no conflict now, any more than previously, between the
functions of the Council as a small advisory staff unit primarily serving
the President, and any new or old agencies entrusted with various other
tasks either on the operational side or on the policy side.
We are planning a small expansion of our professional staff, from
20 to 26 (including the three members of the Council), to help carry
our increasing work load. But we are still one of the very smallest
agencies of Government, and we intend to remain that way because this
is most consistent with the efficient performance of our type of service.
The development within the Council of a small group of experts has
received recognition in many parts of the Government. Some of the
technical studies of the Congressional Joint Committee on the Economic
Report have involved close cooperation between its staff and members
of our staff. Responsive to requests, we have lent members of our very
small staff for periods ranging from a week to six months to the Department of Defense, the Economic Stabilization Agency, the President's
Water Resources Commission, and in connection with the Report to the
President on Foreign Economic Policies. While this has drained our
slender resources, it has been useful to bring the benefit of our generalized
work to bear upon the solution of specific problems.
The work of the Council in recent months has been meshed with
that of other agencies whose attentions have been directed mainly to
the problems of a defense economy.
A member of our staff, by request, sits in as an "observer" at meetings of the National Production Authority in the Department of Commerce. This may be of some help to that agency; it also brings to us
constantly information about developments in that sector which is essential for our own work.
During the time when the head of the National Security Resources
Board was serving as Coordinator of the various economic programs
connected with the defense effort, there was a close staff relationship
between his agency and ours. In addition, the Chairman of the Council sat in at the regular weekly meetings between the Coordinator and
the heads of various control agencies. This helped to make available
to those charged with control responsibility the continuous study and
thinking of our group without setting up duplicating functions. It
also helped to bring the Council closer to activities about which it is
obligated to advise the President.
In certain aspects of the work of the National Security Council, bearing upon the interrelationships between the defense program and the




29

whole domestic economy, the Chairman of the Council has sat in on
an ad hoc basis, along with some other officials of Government. This
type of coordination has also been carried forward at the staff level.
In addition to our semi-annual reviews and our monthly Economic
Indicators, which are published, the Council for several years has been
making quarterly and monthly reports to the President on the economic
situation. These reports, sometimes written and sometimes oral, are
of course not generally available. Since the middle of this year, we have
enlarged this type of service to include weekly reports to the President
on the economic situation which highlight important developments.
These reports, with the President's permission, have been circulated
also to a few of the important officers of Government on the economic
front. This has made it unnecessary for such officers to duplicate this
particular kind of service in their own agencies.
We hope to be able to perform the same kind of service in the case
of other new agencies which have been set up, thus avoiding the necessity
of having one unit servicing the President while another similar unit
services some other agency working directly under the President.
One of the chief assets of the Council is its divorcement from program
operations. It is not charged with seeing that any particular job gets
done. It does not have to "ride herd" on others or expedite their actions.
It has no functions of administrative coordination, and issues directives
to no one. For these reasons, it is in a relatively objective and unharassed position to observe and study in their relationships the programs
being operated by other agencies. This constant scrutiny of the whole
economic situation as it is evolving, from a vantage point committed
to no particular program or policy, was what the Congress manifestly
intended when the Employment Act was passed. Such work has utility
in normal peacetime. We think that it can be of increasing value in
these more difficult times, when the very urgency of a situation which
requires so many to attend to pressing details calls also for some application of general perspective.

The need for economic policies to accompany the military aspects of
the defense program calls upon the Council of Economic Advisers to
advise action which will surely test the American people.
It has always been a source of pride in our democracy that the people
are willing to take deliberate action to protect and strengthen the nation,
whatever burden or sacrifice it may impose upon the citizen. We have
now entered a long period in which the people must be asked, in support
of the policy of girding for defense, to subject themselves to many restrictions and levies which they would not tolerate in more peaceful
times.




30

That they are willing to have their young men torn from their families,
their education and their careers, and placed in the front line before an
enemy—this they have amply demonstrated. But are they willing to
adopt positive policies resulting in the infinitely lesser hardship of
economic restraint?
To this question the whole country awaits the answer. Will some
spokesmen for business insist that there be no restraint upon prices which
would reduce business profits below the highest levels in history? Will
some spokesmen for farmers insist that rising farm price support levels
are sacrosanct in this period of emergency regardless of their nullifying
effects on the effort to stabilize the cost of living? Will some spokesmen
for labor, even during the emergency, insist upon a peacetime wage policy
which would absolve those they represent from sharing fairly in the inevitable burden of national defense? These are blunt questions, but these
and others like them are vital to our future.
Is there going to be a scramble for self-protection, or common dedication to the protection of the United States?
It is not only justifiable but essential that we be ever-vigilant to prevent
any exploitation of the present emergency to strike down policies which
have contributed to the economic and social advance of the last generation. But the hard fact is that our defense program cannot be carried
forward faster, without slowing down on many other things. If every
economic group uses its power only to protect its own position, or if each
demands that it be the last to do its part, the nation will fail in its great
purposes.
To gain public support for stern policies requires that the public
understand the reason why. Toward that end, this report is written.




U. S . G O V E R N M E N T P R I N T I N G O F F I C E : 1 9 S 0

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