The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
JAN UARY 1957 ECONOMIC REPORT
OF THE PRESIDENT
HEARINGS
BEFORE THE
JOINT ECONOMIC COMMITTEE
CONGRESS OE THE UNITED STATES
EIGH TY-FIFTH CONGRESS
FIRST SESSION
PURSUANT TO
Sec. 5 (a) of Public Law 304
(7 9 th C o n g ress)
JANUARY 28, 29,30,31, FEBRUARY 1, 4, 5, AND 6,1957
Printed for the use of the Joint Economic Committee
JANUARY 1957 ECONOMIC REPORT
OF THE PRESIDENT
HEARINGS
B EFORE T H E
JOINT ECONOMIC COMMITTEE
CONGEESS. OF THE UNITED STATES
EIGH TY-FIFTH CONGRESS
FIRST SESSION
PU RSU AN T TO
Sec. 5 (a) of Public Law 304
(79th Congress)
JANUARY 28, 29, 30, 31, FEBRUARY 1, 4, 5, AND 6, 1957
Printed for the use o f the Joint Economic Committee
F or sale by the Superintendent of Documents, U .S . Government Printing Office
W ashington 25, D. C. - Price $2.25 (paper)
JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5 (a ) o f P ublic Law 304, 79th Cong.)
W R IG H T PATM AN , Representative from Texas, Chairman
JOHN SPARKM AN, Senator from Alabama, V ice Chairman
HOUSE OF R E PR E SE N TA TIV E S
R IC H A R D BOLLING, Missouri
W IL B U R D. M ILL S, Arkansas
A U GU STIN E B. K E LLE Y , Pennsylvania
HEN RY O. T A LL E , Iowa
THOM AS B. CU RTIS, M issouri
CLARENCE E. K ILBU RN , New York
SENATE
PAU L H. DOUGLAS, Illinois
J. W. F U LB R IG H T , Arkansas
JOSEPH C. O’MAHONEY, W yom ing
R A LP H E. FLAN DERS, Vermont
A R TH U R V. W AT K IN S, Utah
BA R R Y GOLDW A'TER, A rizona
G r o v e r W . E n s l e y , E xecu tive D irector
J o h n W. L e h m a n , Clerk
CONTENTS
Panel discussions and individual witnesses in order of appearance:
Page
Council of Economic Advisers______________________________________
1
Raymond J. Saulnier, Chairman, Joseph S. Davis, member,
Paul W. McCracken, member______________________________
8
The Federal budget________________________________________________
49*
Percival F. Brundage, Director, Bureau of the Budget--------------50
Economic outlook for the coming year______________________________
86
Labor force, hours, productivity, and potential output:
Ewan Clague, Commissioner, Bureau of Labor Statistics,
Department of Labor_______________________________ _
86
Government demand for goods and services____________________
118
Louis J. Paradiso, Assistant Director and chief statistician,
Office of Business Economics, Department of Commerce..
118
Business demand________________ ______________________________
121
Martin Gainsbrugh, chief economist, National Industrial
Conference Board________ _______ ______________________
121
Consun er demand_____________ __________________________ 128
George Katona, program director, survey research center,
University of Michigan_________________________________
128
Agricultural outlook___________________________________________
130
Oris Y. Wells, Administrator, Agricultural Marketing Service,
Department of Agriculture______________________________
130
Price changes and policy implications______________________________
159
Recent price changes— Factors in price changes— Policy implica
tions of price changes and prospects_________________________
159
Leon H. Keyserling, consulting economist___________.______
159
Jules Backman, professor, School of Commerce, Accounts,
and Finance, New York University_____________ _______
168
Otis Brubaker, research director, United Steelworkers of
ISO
America________________________________________________
Bradford B. Smith, economist, United States Steel Corp____
299
George Hitchings, manager, economic-analysis department,
Ford Motor Co________ __________________ ________ _
301
Nat Weinberg, director, research department, United Auto
Workers________________________________________ ____ 306
Karl Fox, professor, department of economics and sociology,
Iowa State College of Agriculture and Mechanical Arts__
313
Albert Rees, professor, economics department, University of
315
Chicago__ ________________________________ _____________
Fiscal and monetary policy for the coming year________ _____ 409
Impact of Federal fiscal and monetary policies on State and local
governments______ _________________ ;________________________
409
Walter W. Heller, professor, School of Business Administra
tion, University of Minnesota-:_________________________
409
Benjamin U. Ratehford, professor, department of economics,
Duke University______________________ :_________________
418
Recommended fiscal and monetary policy for 1957_____________
423
Louis Shere, professor, department of economies, University
of Indiana____^ _______ _________________________________
423
Lester V. Chandler, professor, department of economics
and sociology, Princeton University____________________
472
Effectiveness and relationship of fiscal and monetary poliey____
475
Alfred Neal, president, Committee for Economic Develop
ment___________________________________________________
475
Seymour E. Harris, chairman and professor, department of
economics. Harvard University__________________________
476
Fiscal and monetary policy for the coming year:________________
533
George M. Humphrey, Secretary of the Treasury________ 533, 587
William McC. Martin, Jr., Chairman, Federal Reserve
Board_____________________ _____________________________
587
m
IV
CONTENTS
Panel discussions and individual witnesses in order of appearance— Con.
General views and recommendations of economic interest and research Page
groups----------------------------------------------------------------------------------------633
General__________________________ _____ ___ _____________________
634
Ralph Watkins, chairman of the board of trustees, Federal
Statistics Users’ Conference_____________________________
634
Agriculture____________________________________________________
638
W. E. Hamilton, director of research, American Farm Bu
reau Federation_____ _______ ___________________ _______
638
Herschel D. Newsom, master, the National Grange______
646
John A. Baker, coordinator of legislative matters, National
Farmers Union_________________________________________
650
Business___________________ _____________________ ______________
702
Walter D. Fackler, economist for the Chamber of Commerce
702
of the United States of America_________________________
Frazar B. Wilde, chairman, research and policy committee,
Committee for Economic Development__________________
709
719
Labor_________________________________________________________
Peter Henle, assistant director, research departirent, Ameri
can Federation of Labor and Congress of Industrial Organ
izations_________________________________________________
719
Don Mahon, National Independent Union Council_________
727
Statements and exhibits:
Backman, Jules, professor of economics, New York University_______
168
Exhibits:
Changes in the major groups of the wholesale price index,
June 1955-December 1956____________ _________________
178
Changes in the major groups of the wholesale price index,
December 1955-December 1956_________________________
179
Corporate profits before taxes and national income, 1946-56_
388
Daily index numbers and spot primary market commodity
prices, May 31, 1955, January 10, 1956, and January 10,
1957____________________________________________________
180
Relationship of compensation of employees to total national
income, 1929-56________________________________________
396
Wage-productivity comparisons___________________________
372
Wholesale price indexes by economic sector, June 1955,
December 1955, and December 1956____________________
179
Baker, John A., coordinator of legislative matters, National Farmers
Union______________________________ _____________________________
650
Exhibit: Legislative analysis memorandums____________________
655
Brubaker, Otis, research director, United Steelworkers of America___
180
Exhibits:
Comparative changes in materials and employment costs in
United States Steel Corp-----------------------------------------------298
Facts on Steel: Profits, Productivity, Prices and Wages,
1956— Steel and the National Economy, 1956____________
187
Brundage, Percival F., Director of the Bureau of the Budget (ac
companied by Robert E. Merriam, Assistant Director; Ravmond
T. Bowman, Assistant Director for Statistical Standards; William
F, McCandless, Assistant Director for Budcret Review; and Samuel
M. Cohn, Chief of Fiscal Analysis of the Office of Budget Review)..
50
Exhibits:
Analysis of surplus personal property disposal other than
scrap, Department of Defense___________________________
65
Balances carried forward, by type of authority, at end of
year, fiscal years 1954 through 1958_____________________
60
Budget authorizations ceasing to be available, fiscal vears
1953-56____________________________________________*____
61
Budget comparison, 1957-58______________________________
54
Budget receipts, by source_________________________________
82
Budget trends_____________________________________________
52
Estimated holdings of United States Government bonds and
notes by foreign countries_______________________________
74
Expenditures for land and water resources included in nat
ural resources function of the budget____________________
72
Federal budget expenditures_______________________________
53
Items listed in budget schedules under the heading “ Recovery
of Prior Year Obligations” in 1958 budget......... ..................
63
CONTENTS
V
Statements and exhibits— Continued
Chandler, Lester V., professor, department of economics and sociology, Page
Princeton, University______________________________________ ____
472
Exhi nt: Letter to Chairman, February 4, 1957________________
530
Clague, Ewan, Commissioner of Labor Statistics, United States
Department of Labor____________________________________________
86
Exhibits:
Annual changes in total labor force, by sex________________
105
Average hourly earnings in selected durable goods industries.
110
Average hourly earnings in selected nondurable goods
industries_______________________________________________
111
Average hourly earnings of production workers or nonsupervisory employees in selected industries, annual averages,
1955 and 1956, and November 1955 and 1956________ 98
109
Average hourly earnings in selected industries_______ _ ____ _
Average weekly earnings and real weekly earnings in manu
facturing_______________________________________________
113
Comparison of actual and projected total labor force_______
106
Consumer price index for wage earner and clerical-worker
116
families in United States cities, 1947-49=100___________
Consumer price index, special groupings, 1939= 100________
117
Deferred wage increases scheduled to go into effect in 1957
in situations affecting 1,000 or more workers in manufac
turing and selected nonmanufacturing industries_________
101
Deviation of actual from trend labor force, by age and sex,
annual average, 1951-56________________________________
91
Employed persons with two or more jobs__________________
142
Employees in nonagricultural establishments_______________
107
Employment and average weekly hours of production
workers in durable and nondurable goods manufacturing-_
108
Estimated number of workers covered by cost-of-living esca
lator clauses, January 1, 1957___________________________
102
Factory weekly earnings, gross and net spendable compared
with real net spendable earnings expressed in 1947-49
dollars__________________________________________ _______
112
Full-time and part-time workers in nonagricultural industries
and in agriculture, by sex, annual average 1956,1955,1947.
142
Hours worked in nonagricultural industries------------------------93
Number of workers who will be affected by deferred increases
in selected union wage scales in the construction industry
due in 1957____________________________________ ________
102
Part-time employment___________________________ _______
141
Percentage distribution of changes in union wage scales in
seven construction trades in major cities, 1955 and 1956__
99
Primary market price indexes for major community groups,
highs and lows, 1954-56__________________________ ______
103
Weekly hours of wage and salary workers in agriculture and
nonagricultural industries______________________ ________
93
Response to question by Chairman Patman on the effect of
agricultural price movements on the consumer price
index___________________________________________________
598
Wholesale price index, economic sector indexes, selected
groups, 1947-49= 100^............... ..............................................
115
114
Wholesale prices, 1947-49= 100_ _____________ _____________
Fackler, Walter D., economist for the Chamber of Commerce of the
United States_______________________________________ ___ ____ ____
702
Fox, Karl, head, department of economics and sociology, Iowa State
College of Agriculture and Mechanical Arts_____________ ________
313
Gainsbrugh, Martin R., chief economist of the National Industrial
Conference Board_______________________________________________
121
Exhibit: United States exports and imports of goods and services
and net foreign investment, 1952-57__________________ _____ 126
Hamilton, W. E., director of research, American Farm Bureau Fed
eration_____________________________ _________________ _____ _____
638
Harris, Dr. Seymour, chairman and professor, department of eco
nomics, Harvard University__ ________________________ ._____ _____
476
Exhibit: Supplemental statement______________________ ____ ___
495
VI
CONTENTS
Statements and exhibits— Continued
Heller, Walter W., professor, School of Business Administration, University of Minnesota________________________________ ____________
409
Henle, Peter, assistant director, research department, American Fed
eration of Labor and Congress of Industrial Organizations________
719
Exhibit: Comparison of increase in average hourly earnings and
wholesale prices, selected manufacturing industries, October
1955 to October 1956_____ __________________________________
756
Hitchings, George, manager, economic analysis department, Ford
Motor C o_______________________________________________________
301
Exhibit: Distribution of national income in manufacturing,
1948-56_____________________________________________________
305
Humphrey, Hon. George M., Secretary of the Treasury, accompanied
by: W. Randolph Burgess, Under Secretary; Dan Throop Smith,
deputy to the Secretary; William T. Heffelfinger, Fiscal Assistant
Secretary; and Robert P. Mayo, Chief, Analysis Staff, Debt Di
vision___________________________________________________________
533
Exhibits:
Annual changes in private debt____________________________
540
Annual changes in public and private debt_________________
541
Calendar year income levels assumed in the revenue esti
mates for fiscal 1957 and fiscal 1958____________________
20
Letter to Hon. Paul II. Douglas, January 16, 1957, and
enclosure_______________________________________________
19
Liquid assets of individuals________________________________
542
Ownership of the public debt______________________________
542
Personal saving, percent of savings to disposable personal in
come_________________________________ _________________
541
Principal trust funds that invest in public-debt obligations. _
563
Public and private debt___________________________________
540
Katona, George, director of economic program, survey research
center, and professor of economics and of psychology, University
o f Michigan_______________________________________ _____________ !
128
Keyserling, Leon II., consulting economist__________________________
159
Exhibits:
Balance was better in 1947-53_____________________________ 164a
Labor and farm incomes, 1953-56 grew too slowly relative to
other incomes to sustain full prosperity__________________
164a
Mahon, Don, executive secretary, National Independent Union
Council__________________________________________________________
727
Martin, William McChesney, Jr., Chairman, Board of Governors of
the Federal Reserve System, accompanied by Ralph A. Young,
Director, Division of Research and Statistics!__________________
587
Exhibit: Answers to supplemental questions addressed to the
Chairman of the Board of Governors of the Federal Reserve
System______________________________________________________
591
McDonald, David J., president, United Steel Workers of America____
181
Meany, George, president, American Federation of Labor and Con
gress of Industlial Organizations_________________________________
719
National Association of Manufacturers_____________________________
742
Exhibit: Money supply, goods, and services____________________
746
Neal, Alfred, president, Committee for Economic Development______
475
Exhibit: Letter to Hon. Joseph C. O’ Mahoney, February 5, 1957.
510
Newsom, Herschel D., master, the National Grang;e_________________
646
Paradiso, Louis J., Assistant Director, and chief statistician, Office of
Business Economics, Department of Commerce__________________
118
Exhibit: Letter from M. Joseph Meehan, Director, Office of
Business Economics, Department of Commerce, to Hon. Paul
H.
Douglas, January 18, 1957, transmitting table on Federal
Government receipts and expenditures: administrative budget,
cash budget and national income and product account: 1956-58.
121
Ratehford, Benjamin U., professor, department of economics, Duke
University__ ____________________________________________________
418
Exhibit: Letter to chairman, February 4, 1957_________________
530
Rees, Albert, associate professor of economics, University of Chicago.
315
Saulnier, Dr. Raymond J., Chairman of the Council of Economic
Advisers; Joseph S. Davis, member of the Council; and Paul W.
McCracken, member of the Council________________ ______ ______
8
CONTENTS
Statements and exhibits— Continued
Saulnier, Dr. Raymond J.— Continued
Exhibit: Letter to chairman, December 19, 1956_______________
Shere, Louis, professor, department of economics, University of
Indiana__________________________________________________________
Exhibits:
Comments on questions by Representative Patrnan________
Federal tax revision to promote economic growth and sta
bility___________________________________________________
Smith, Bradford B., economist, United States Steel Corp__________
Watkins, Ralph J., chairman of the board of t rust ees, Federal Statistics
Users’ Conference___________________________________ ____________
Exhibit: Description of the conference_________________________
Weinberg, Nat, director, research department, United Auto Workers.
Exhibit : United States Oil Output Sets A New High, Gasoline
Inventories Increase: and Gasoline Prices Will Rise Today,
Articles from New York Times, January 10, 1957____________
Wells, Oris V., Administrator of the Agricultural Marketing Service,
Department of Agriculture_______________________________________
Exhibits:
Factors in farm production per unit of farm output_________
Farm capital expenditures, 1939, and 1946-56_____________
Farm output and population______________________________
Farmers’ prices___________________________________________
Prices received by farmers, prices paid or parity index, and
parity ratio, United States, by months, February 1951January 1957, 1910-14=100____________________________
Response to question by Chairman Patman on the effect of
Agricultural price movements on the Consumer Price
Index___________________________________________________
Selected data relating to agriculture, United States, 1939,
and 1946-56......... - ___________________________ _____ ____
Wilde, Frazar B., chairman, Research and Policy Committee, Com
mittee for Economic Development_______________________________
Additional information:
Address by Arthur F. Burns, Chairman of the Council of Economic
Advisers, before the National Federation of Financial Analysts
Societies, Boston, Mass., May 21, 1956___________________________
Average prices paid by farmers at independent stores December 15,
1956, compared to December 15, 1947____________________________
Average prices received by farmers for farm products in United States,
January 15, 1957, compared to January 15, 1948_________________
Bond yields and money market rates 1947, and each week ending
February 2, 1957________________________________________________
Budget estimates for 1956__________________________________________
Chronology of budget estimates for 1956____________________________
Comparison of estimates and appropriations by sessions of Congress
(fiscal years 1946-57)____________________________________________
Eisenhower Planning Special Program of Tax Aid, Other Relief for
Small Business for Next Congress, article in the Wall Street Journal,
October 22, 1956_________________ ________ ______________________
Implications of recent expansion of special amortization program____
Information re consumer price level, submitted by Representative
Curtis___________________________________________________________
Letter of Hon. Wright Patman, chairman, to Dr. Raymond J.
Saulnier, chairman, Council of Economic Advisers, December 19,
1956....................... ....................................................................................
Reply................................................... ....................................................
Press release and schedule of hearings______________________________
Progress report by the Cabinet Committee on Small Business,
August 7, 1956__________________ _____ __________________________
Questions posed by the January 1957 Economic Report of the Presi
dent, prepared by the staff of the Joint Economic Committee______
Report of the United States delegate to the meeting of the Economic
Commission for Asia and the Far East Working Party on Economic
Development and Planning, Bangkok, Thailand, September 17-29,
1956--------------------------------------------------------------------------------------------
vn
Page
48
423
532
424
299
634
636
306
390
130
137
132
136
135
158
598
134
709
618
529
530
529
762
763
567
569
764
623
46
48
1
571
40
776
y in
CONTENTS
Additional information— Continued
Report on the working group on short-term indicators of economic
changes of the Conference of European Statisticians______________
Selected economic indicators 1947-56 with percentage changes_____
Speech by Raymond T. Bowman, Assistant Director for Statistical
Standards, Bureau of the Budget, at the annual dinner meeting of
the Washington Statistical Society, January 28, 1957_____________
Steel’s depreciation problem, address of Benjamin F. Fairless, Ameri
can Iron and Steel Institute______________________________________
Summary of the economic situation and outlook, prepared by the
committee staff on the basis of information contained in Economic
Indicators, April 1956____________________________________________
What Price Enough Steel? by Roger M. Blough, chairman of the
board, United States Steel Corp__________________________________
785
528
697
341
616
336
JANUARY 1957 ECONOMIC REPORT OF THE PRESIDENT
MONDAY, JANUARY 28, 1957
C o n g r e ss o f t h e U n it e d S t a t e s ,
J o in t E c o n o m ic C o m m it t e e ,
Washington, D. C.
(This hearing was held in executive session o f the committee, but
is made a part o f the printed record by mutual consent.)
The committee met at 10 a. m., pursuant to call, in the District Com
mittee Room of the Capitol, in executive session, Hon. Wright Patman
(chairman) presiding.
Present: Representatives Patman (presiding), Bolling, Mills,
Talle, Curtis, and Kilburn and Senator Watkins.
Present also: Dr. Grover W. Ensley, executive director of the joint
committee, and John W. Lehman, clerk of the joint committee.
Chairman P a t m a n . The committee will come to order.
On January 23, the President transmitted his Economic Report to
the Congress, and it was referred to this committee for study as pro
vided by the act of 1946. Senate Joint Resolution 2, passed by the
Congress in the opening days of this session, authorized the President
to transmit the report this year, 3 days after the statutory deadline of
January 20.
The Joint Economic Committee is to advise the Congress with re
spect to the main recommendations contained in the President’s
report, on or before March 1.
As chairman of the committee I know I speak for all members of the
committee in hoping that we again this year can transmit a construc
tive report to the Congress before that deadline.
At its organization meeting of January 22, the Committee unani
mously approved the procedure for hearings which will be followed
during the next 8 days. Without objection, I will insert in the record
at this point the schedule of hearings agreed upon, and which I released
on January 25.
(Information referred to follows:)
[F o r release F riday a. m., January 25, 1957]
C O N G R E S S O F T H E U N IT E D S T A T E S
J O IN T E C O N O M IC C O M M IT T E E
C h a i r m a n P a t m a n A n n o u n c e s H e a r in g s o n t h e P r e s id e n t ’ s E c o n o m ic R epo rt
Representative Wright Patman (Democrat, Texas), chairman o f the Joint
Economic Committee, has announced plans of the joint committee to hold 8
days of hearings, commencing January 28, on the President’s Economic Report
which was transmitted to Congress on Wednesday (January 23).
1
2
ECONOMIC REPORT OF THE PRESIDENT
Under the Employment Act of 1946, the President’s Economic Report is re
ferred to the Joint Economic Committee, which is to review it and “ * * * file
a report with the Senate and the House o f Representatives containing its find
ings and recommendations with respect to each of the main recommendations
made by the President in the Economic Report * *
At its organization meeting on January 22, the committee unanimously ap
proved the procedure for hearings set forth in the attached schedule. A 2-page
summary o f the hearings is shown first. This is followed by a detailed list
o f witnesses, topics and questions. All o f the hearings will be held in the old
Supreme Court Chamber, Senate wing o f the Capitol, starting at 10 a. m. each
day.
J o i n t E c o n o m ic C o m m itte e
W RIGHT PATMAN, Representative, Texas, Chairman
JOHN SPARKMAN, Senator, Alabama, Vice Chairman
HOUSE OF REPRESENTATIVES
SENATE
RICHARD BOLLING, Missouri
W ILBUR D. MILLS, Arkansas
AUGUSTINE B. KELLEY, Pennsylvania
HENRY O. TALLE, Iowa
THOMAS B. CURTIS, Missouri
CLARENCE E. KILBURN, New York
PAUL H. DOUGLAS, Illinois
J. W . FULBRIGHT, Arkansas
JOSEPH C. O’MAHONEY, Wyoming
RALPH E. FLANDERS, Vermont
ARTHUR V. WATKINS, Utah
BARRY GOLDWATER, Arizona
G rover W. E n sl e y ,
Executive Director
Clerk
J ohn W. L e h m an ,
H e a r in g s o n
t h e P r e s id e n t’s
1957
E c o n o m ic R e p o r t
1
S u m m ary
January 28 (Monday)— (executive session): Council o f Economic Advisers:
Raymond J. Saulnier, Chairman.
Joseph S. Davis, member.
Paul W. McCracken, member.
January 29 (Tuesday)—The Federal Budget:
Percival F. Brundage, Director, Bureau o f the Budget.
January 30 (Wednesday) : Panel: Economic Outlook for the Coming Y ear:
Labor Force, Hours, Productivity, and Potential Output:
Ewan Clague, Commissioner, Bureau of Labor Statistics, Department o f
Labor.
Government Demand for Goods and Services:
Louis J. Paradiso, Assistant Director and Chief Statistician, Office o f
Business Economics, Department of Commerce.
Business Demand:
Martin Gainsbrugh, Chief Economist, National Industrial Conference
Board.
Consumer Demand:
George Katona, program director, survey research center, University
of Michigan.
Agricultural Outlook:
Oris V. Wells, Administrator, Agricultural Marketing Service, Depart
ment of Agriculture.
January 31 (Thursday)—Panel: Price Changes and Policy Implications:
Recent Price Changes.
Factors in Price Changes.
Policy Implications o f Price Changes and Prospects.
Leon H. Keyserling, consulting economist.
Jules Backman, professor, school o f commerce, accounts and finance^
New York University.
Otis Brubaker, research director, United Steelworkers o f America.
Bradford Smith, economist, United States Steel Corp.
1 Hearings will be held in the old Supreme Court Chamber, Senate wing, United) StatM
Capitol. All sessions are open to the public except on January 28.
ECONOMIC REPORT OF THE PRESIDENT
3
January 31, etc.— Continued
; i
George Hitchings, manager, economic analysis department, Ford Motor
Co.
Nat Weinberg, director, research department, United Auto Workers.
Karl Fox, professor, department of economics and sociology, Iowa State
College of Agriculture and Mechanical Arts.
Albert Rees, professor, economics department, University o f Chicago.
February 1 (F riday)— Panel: Fiscal and Monetary Policy for the Coming Y ear:
Effectiveness and Relationship o f Fiscal and Monetary P olicy:
Alfred Neal, President, Committee for Economic Development.
Seymour E. Harris, chairman and professor, department of economics.
Harvard University.
Impact of Federal Fiscal and Monetary Policies on State and Local Govern
ments :
Walter Heller, professor, school o f business administration, University
o f Minnesota.
Benjamin U. Ratchford, professor, department o f economics, Duke
University.
Recommended Fiscal and Monetary Policy for 1957:
Louis Shere, professor, department of economics, University o f Indiana.
Lester V, Chandler, professor, department o f economics and sociology,
Princeton University.
February 4 (Monday)— Fiscal and Monetary Policy for the Coming Y ear:,
George M. Humphrey, Secretary of the Treasury.
February 5 (Tuesday)—Fiscal and Monetary Policy for the Coming Year:
William McC. Martin, Jr., Chairman, Federal Reserve Board.
February 6 (Wednesday)—Invited Panel: General Views and Recommendations
o f Economic Interest and Research Groups: 2
Agriculture:
Charles B. Shuman, president, American Farm Bureau Federation.
Herschel D. Newsom, master, the National Grange.
James G. Patton, president, the National Farmers Union.
Business:
John S. Coleman, president, United States Chamber o f Commerce.
Ernest S. Swigert, president, National Association of Manufacturers.
Frazar B. Wilde, Chairman, Research and Policy Committee, Committee
for Economic Development.
L abor:
George Meany, president, American Federation o f Labor and Congress o f
Industrial Organizations.
John L. Lewis, president, United Mine Workers o f America.
G. E. Leighty, chairman, Railway Labor Executives Association.
Don Mahon, executive secretary, National Independent Union Council.
General:
Ralph Watkins, chairman o f the board o f trustees, Federal Statistics
Users’ Conference.
HEARINGS ON THE PRESIDENT’S 1957 ECONOMIC REPO R T8
D
e t a il
d a t e s , w it n e s s e s , t o p ic s , a n d q u e s t io n s
January 28 (M onday)— Council o f Economic Advisers (executive session):
Raymond J. Saulnier, Chairman, accompanied by Joseph S. Davis and
Paul W. McCracken, members.
1. What are the levels of employment, production, and purchasing power
needed in 1957 to carry out the objectives o f the Employment Act?
2. What are the current and foreseeable trends in employment, produc
tion, and purchasing power?
a Written statements of other groups will be received.
8 Hearings will be held in the old Supreme Court Chamber, Senate wing, United States
Capitol. All sessions are open to the public except on January 28.
4
ECONOMIC REPORT OF THE PRESIDENT
January 28, etc.— Continued
3. What assumptions with respect to prices, national income, personal
income, corporate profits, and the like, underlie the President’s Economic
Report?
4. Review the effects o f present Federal economic programs on employ
ment, production, and purchasing power.
5. How will the recommendations set forth in the President’s Economic
Report contribute to achieving the objectives o f the Employment Act?
January 29 (Tuesday)— The Federal Budget:
Percival F. Brundage, Director, Bureau of the Budget.
1. What are the major changes in expenditures and revenues contem
plated in the President’s budget for fiscal year 1958?
2. What assumptions with respect to prices, national income, personal
income, corporate profits, and the like, underlie the President’s budget?
3. What commitments extending beyond fiscal year 1958 are contemplated
by the budget?
4. How will these changes in the budget affect the economy in the year
and years ahead?
5. Elaborate on the provisions in the budget for improving the Federal
statistical program during the coming year. How far will these improve
ments take us toward the goal of an integrated Federal statistical system?
January 30 (Wednesday)—Panel: Economic Outlook for the Coming Year
Labor Force, Hours, Productivity, and Potential Output:
Ewan Clague, Commissioner, Bureau o f Labor Statistics, Depart
ment o f Labor.
1. Compare actual changes in the labor force, hours o f work, pro
ductivity, and output during 1956 with long-run trends.
2. How would these long-run trends works out in 1957?
3. What is the present outlook for prices—consumer, wholesale, con
struction, etc. in 1957? Are these indices good measures o f inflation?
Government Demand for Goods and Services:
Louis J. Paradiso, Assistant Director and Chief Statistician, Office
of Business Economics, Department o f Commerce.
1. Translate the budget estimates into expenditures for goods and
services and incomes from national product for calendar 1957, com
parable with past periods as published by the Department of Commerce.
2. W h a t are the likely trends in receipts and expenditures o f S tate and
local governm ents in 1 9 5 6 -5 7 in term s o f the national incom e and prod
uct accounts?
3. What is the present outlook for prices, as reflected in the value o f
total national product in 1957?
Business Demand:
Martin Gainsbrugh, Chief Economist, National Industrial Confer
ence Board.
1. On the basis o f surveys, how much investment are businessmen
planning for 1957? I-Iow would this compare with 1956 in terms o f the
national product categories in dollar values and in real values?
2. What is the consensus concerning spending in 1957 for residential
construction? For inventories? For net private foreign investment?
3. What is the outlook for financing this investment from internal
and external sources?
Consumer Demand:
George Katona, program director, survey research center, Univer
sity of Michigan.
1. What evidence is available as to consumer plans and expectations
for 1957? What will likely be the rate of personal savings? What
do consumers anticipate with respect to price movements?
2. Translate these expectations into estimates o f consumer spending
in 1957.
Agricultural Outlook:
Oris V. Wells, Administrator, Agricultural Marketing Service, De
partment o f Agriculture.
1. What is the outlook for farm production, price, and income in 1957?
2. How will this affect the farmer’s spending on new construction
and farm machinery?
ECONOMIC REPORT OP THE PRESIDENT
5
January 31 (Thursday)—Panel: Price Changes and Policy Implications:
Recent Price Changes:
1. What significance do you attach to recent price developments?
What is the import of the differences in movements during recent years
o f the index o f wholesale prices, consumer prices, construction, pro
ducers’ equipment, and of the implicit deflator for gross national
product?
2. T o what extent do retail prices now reflect the changes that have
taken place in 1956 at the raw material and manufacturing levels?
Do recent changes in wholesale prices foreshadow further rises in
retail prices in 1957 ? I f so, by how much ?
3. What implications for wage changes in 1957 are contained in
present labor contracts and in trends in prices ?
4. Can you differentiate between price movements in “ competitive”
areas and in the so-called administered price areas; between relatively
big and relatively small business; in industries showing relatively high
profits and in industries with relatively low profits; in industries with
increasing demand and in industries with declining demand?
Factor in Price Changes:
1. What are the most significant factors responsible fo r recent price
changes?
2. To what extent do you believe these will continue to exert an
upward influence on prices? For how long?
Policy Implications o f Price Changes and Prospects:
1. Are fiscal and monetary policies sufficiently stringent to prevent
general price increases consistent with maintaining present low levels
of unemployment? Can fiscal and monetary policy stem inflationary
trends which result from cost-price pressures?
2. What changes in other economic policies—private as well as pub
lic—would increase the effectiveness of restraints on inflationary price
increases?
Leon H. Keyserling, consulting economist.
Jules Bachman, professor, school of commerce, accounts and finance,
New York University.
Otis Brubaker, research director, United Steelworkers o f America.
Bradford Smith, economist, United States Steel Corp.
George Hitchings, manager, economic analysis department, Ford
Motor Co.
Nat Weinberg, director, research department, United Auto Workers.
Karl Fox, professor, department o f economics and sociology, Iowa
State College o f Agriculture and Mechanical Arts.
Albert Rees, professor, economics department, University of Chicago.
February 1 (F riday)—Panel: Fiscal and Monetary Policy for the Coming Year:
Effectiveness and Relationship o f Fiscal and Monetary P olicy:
Alfred Neal, president, Committee for Economic Development.
Seymour E. Harris, chairman and professor, department of eco
nomics, Harvard University.
1. Are we currently relying too heavily on monetary policy in lieu o f
fiscal policy for restraining inflationary pressures? What standards
would you suggest for determining the relative emphasis which should
be placed on use o f monetary policy and of fiscal policy for stabilization
purposes?
2. Are fiscal and monetary policy working together or at cross pur
poses with respect to economic stabilization?
3. Are fiscal and monetary policies sufficiently stringent to prevent
general price increases consistent with maintaining present low levels
o f unemployment? Can fiscal and monetary policy stem inflationary
trends which result from cost-price pressures?
Impact o f Federal Fiscal and Monetary Policies on State and Local Govern
ments :
Walter Heller, professor, school of business administration, Univisity of Minnesota.
Benjamin U. Ratchford, professor, department o f economics, Duke
University.
6
ECONOMIC REPORT OF THE PRESIDENT
February 1, etc.— Continued
1. Have recent monetary policy developments significantly affected the
volume of State and local government construction programs?
2. What are the problems of improving the relative financial position
o f State and local governments during periods of inflationary strain?
Can these problems be solved at the State and local level or do they call
for Federal action?
3. Evaluate the financial resources o f State and local governments for
meeting their long-range responsibilities. In general terms, what type
o f long-range adjustments in Federal, State, and local government
revenue systems may be called for by currently projected demands for
public services?
Recommended Fiscal and Monetary Policy of 1957:
Louis Shere, professor, department of economic, University of
Indiana.
Lester V. Chandler, professor, department o f economics and sociol
ogy, Princeton University.
1. What recommendations for general or structural revisions in fiscal
and monetary policy would you make at this time?
2. Should the scope of general credit controls be broadened to include
financial intermediaries other than commercial banks which are members
o f the Federal Reserve System?
3. What devices would you suggest to direct a larger proportion o f the
available credit supply to certain purposes with a high social priority,
e. g., school construction, while retaining general credit restraint?
February 4 (M onday)—Fiscal and Monetary Policy for the Coming Year. Con
tinued.
George M. Humphrey, Secretary of the Treasury.
1. Do you have any recommendations for general or structural revisions
in tax policy at this time? Do you have any long-range recommendations for
tax revision for promoting steady economic growth?
2. Could we have improved upon the division o f labor between tax policy
and monetary policy as instruments of restraint during the past year?
3. If inflationary pressures abate during the year, would you recommend
priority be given to fiscal or to monetary easing?
4. What do you foresee as the Treasury’s principal debt management
problems in the year ahead, assuming the continuation of tight money?
February 5 (Tuesday)— Fiscal and Monetary Policy for the Coming Year, Con
tinued :
William McC. Martin, Jr., Chairman, Federal Reserve Board.
1. What information do you have about the impact of so-called general
credit controls upon small business as compared with big business? Upon
State and local governments as compared with nongovernmental credit
users ?
2. Are present statutory provisions governing reserve requirements satis
factory and desirable?
3. Is the breadth of direct control (now limited to member banks) suffi
cient for the workings o f general monetary controls, or should the direct
influence o f central bank operations be extended to cover other financial
intermediaries, such as insurance companies, savings and loan associations,
installment credit institutions, nonmember banks, etc.?
4. Is there any acceptable way of restraining the demand for loans without
raising the interest rates?
5. Have you any general suggestions for revision o f the present institu
tional arrangements in the field o f money and banking, which would facili
tate the use of general credit controls for economic stabilization?
February 6 (Wednesday)— Invited Panel: General Views and Recommendations
of Economic Interest and Research Groups: 4
* Written statements of other groups will be received.
ECONOMIC REPORT OF THE PRESIDENT
7
February 6, etc.— Continued
Agriculture:
American Farm Bureau Federation, Charles B. Shuman, president,
2300 Merchandise Mart, Chicago 54, 111.
The National Grange, Herschel D. Newsom, master, 744 Jackson Place,
NW., Washington 6, D. C.
The National Farmers Union, James G. Patton, president, 1404 New
York Avenue, NW., Washington 5, D. C.
Business:
Chamber of Commerce o f the United States of America, John S. Coleman,
president, 1015 H Street, NW., Washington 6, D. C.
National Association of Manufacturers, Ernest S. Swigert, president,
2 East 48th Street, New York 17, N. Y.
Committee for Economic Development, Frazar B. Wilde, chairman,
research and policy committee, 1729 H Street, NW., Washington, D. C.
L abor:
American Federation of Labor and Congress of Industrial Organizations,
George Tvlcauy, president, S15 10th Street, NW., Washington 6, D. C.
Railway Labor Executive Association, G. E. Leighty, chairman, 1001
Connecticut Avenue, NW., Washington 6, D. C.
United Mine Workers of America, John L. Lewis, president, 900 15th
Street, NW., Washington 5, D. C.
National Independent Union Council, Don Mahon, executive secretary,
Warner Building, Washington 4, D. C.
General:
Federal Statistics Users’ Conference, Ralph J. Watkins, chairman,
board of trustees, 1741 K Street, NW., Washington, D. C.
Chairman P a t m a n . This morning in executive session the com
mittee will hear from the Council of Economic Advisers. At this
point, I would like to insert in the record an exchange of correspond
ence between the Chairman of the Council of Economic Advisers and
myself last December with respect to the manner in which this par
ticular hearing will be held. ( See p. 40.)
I am happy to say the proposed compromise was unanimously
agreed to by the Joint Economic Committee at its organization meet
ing on January 22.
The agreement is as follows: This meeting will be in executive
session with a transcript taken of those parts of the meeting which
the Council feels will not jeopardize its position. At any point in
the hearing when the Council feels it is entering into an area where
it wishes to “ roll up its sleeves,” it will be given permission to go off
the record with no stenographic notes made. Upon completion of
this portion, it will go back onto the record. The Council will be
given the privilege of editing the transcript and of providing addi
tional elaborations or deletions. This edited transcript will then be
made a part of the printed hearings for the benefit of the committee
members, the Congress, and the general public.
I know that all present today hope that this procedure will work
well. I am sure that it will.
Our first witness this morning is Raymond J. Saulnier, Chairman
of the Council of Economic Advisers.
Dr. Saulnier, will you introduce your two colleague Council mem
bers and proceed with any introductory remarks that you may care
to make preliminary to questions from the committee.
8
ECONOMIC REPORT 0 1 THE PRESIDENT
STATEMENTS OF DR. RAYMOND J. SAULNIER, CHAIRMAN OP THE
COUNCIL OF ECONOMIC ADVISERS; JOSEPH S. DAVIS, MEMBER
OF THE COUNCIL; AND PAUL W. McCRACKEN, MEMBER OF THE
COUNCIL
Dr. S a u l n i e r . Thank you, Mr. Chairman.
I have with me this morning my two colleagues on the Council of
Economic Advisers, Dr. Joseph S. Davis, and Dr. Paul McCracken.
I want to say at the outset that I appreciate very much the courtesy
you have shown the Council in arranging for the procedures under
which we are here this morning, and under which we are to discuss
with you the major findings of the Economic Report.
Chairman P a tm a n . For the Chair, I will state that we are pleased
with your attitude, and we are glad to know that you are working
with us.
Dr. S a u l n i e r . Thank you, Mr. Chairman.
Chairman P a t m a n . It is a very fine and cooperative way.
Dr. S a u l n i e r . We recognize your interest in an objective discussion
of these questions, and we want to do everything we can to advance a
better understanding of our Nation’s economic problems.
I have no prepared statement, Mr. Chairman, and I would be glad
to proceed at once with any questions that you want to put before me
or my associates on the Council. I should like to feel, Mr. Chairman*
that I may, from time to time, refer to my colleagues any questions
that are beyond my competence.
Chairman P a t m a n . I would like to ask you 1 or 2 questions, and
then I will yield to Mr. Bolling who must go to another committee
meeting.
The discussion of the tight credit policy on pages 42 and 44 acknowl
edges that the effects have been highly uneven, with small business
and the home-building industry being adversely affected. Moreover,
it is conceded that moderate restraints are not sufficient to deal with
the recent price pressures, while stronger restraints would injure
innocent bystanders, and risk the possibility of a recession.
What, then, are the benefits of a policy of general credit control?
Dr. S a u l n i e r . Mr. Chairman, this is an aspect of economic policy
that is of very special interest to me. I have no quarrel, really, with
the policy that has been followed—one which since late 1954 has been
moving toward greater tightness. But certain aspects of that policy
seems to me to have been undesirable. Now, two, in particular, have
been mentioned directly. One is the effect on housing, on home build
ing and home purchase; the other is the effect on small business.
It was already becoming evident in late 1955 that small-business
concerns were having rather special difficulty in satisfying their credit
needs. We saw this m a rather rapid pickup in the volume of applica
tions for credit to the SB A.
Another aspect of that interested us. Without changing their credit
standards at all, SBA was finding that an increasing proportion o f
its applications qualified for loan assistance. This meant that the
average quality of the risks that were coming to SBA was improving.
What this suggested to me was that, increasingly, small-business con
cerns—not concerns in trouble, but concerns of pretty good quality—
ECONOMIC REPORT OF THE PRESIDENT
9
were finding it difficult to meet their credit needs through the private
banking system.
One of the first things we did, therefore, was to propose a supple
mentary appropriation for SBA.
Chairman P a t m a n . It was $20 million.
Dr. S a u l n i e r . That is right.
Chairman P a t m a n . That is the part that I could not understand.
I f you were disturbed at all, $20 million for the whole United States
would not mean too much.
Dr. S a u l n i e r . Well, we made a proposal for a sum which in our
judgment would enable the SBA to take care of the flow of applica
tions that was coming to it at the time.
Chairman P a t m a n . I f you do not mind, let me ask a question there.
The objection of the tight money policy was to restrain house build
ing because it was inflationary, was it not ?
Dr. S a u ln i e r . That was one of the objects.
Chairman P a t m a n . It was the principal object, I would assume.
Dr. S a u l n i e r . I would not say, Congressman Patman, that it was
the principal object.
Chairman P a t m a n . It was a major objective?
Dr. S a u ln i e r . It was one of the objectives.
Chairman P a t m a n . N o w , that being true, you had 2 ways to do
it; 1 is to use the interest rate which would affect everybody, and the
other was to use powers that you had to increase the downpayment and
shorten the term of payment which would have restrained home
building effectively, which I assume you will admit? Why did you
not use the latter instead of the former ?
Dr. S a u l n i e r . We did use the latter, as you know.
Chairman P a t m a n . Only to a very limited extent; was it not?
Dr. S a u l n i e r . We used it to the extent that we thought, judging
the situation as best we could, was needed. We added 2 percent to
the downpayment requirements for both FH A and Y A loans. We
shortened the maximum permissible maturity from 30 to 25 years.
I think it is, if I may say so, not correct to interpret the general
monetary policy as having been designed exclusively to cut back home
building. That was not the case.
Chairman P a t m a n . It may not have been so designed, but it was
one of the ends you had in mind, because in home building there
would be increased competition for scarce materials and labor and,
for that reason, it would be inflationary.
Dr. S a u l n i e r . This was, Congressman Patman, I believe, one of
the considerations they had in mind; but only one. Let me reiterate
that if the problem put on me had been “ How should we restrain home
building?” and if I understood that that was the only problem, I
would never propose general monetary restraints.
Chairman P a t m a n . I am glad to hear you say that.
Dr. S a u l n i e r . I would do it through the selective devices available
to the Federal Government.
Chairman P a t m a n . That is what I was getting to.
Dr. S a u l n i e r . In connection with its mortgage guaranty and in
surance programs.
Chairman P a t m a n . I will yield to Congressman Bolling, as he has
to go to another meeting.
------ 2
87624— 57
10
ECONOMIC REPORT OP THE PRESIDENT
Eepresentative B o l l i n g . I regret very much that I do have to
leave, and if I was going to stay I would question along somewhat
different lines.
On this particular subject, one of the other areas that has disturbed
me in regard to the effect of a tighter money policy has been the
impact that this policy has had on municipalities, school boards, and
other problems. It raises, again, a question which has been in my
mind ever since I have had the privilege of participating in the
Patman subcommittee deliberations on general credit control and debt
management some years ago. That is the question as to whether or
not very serious consideration needs to be given to achieving a more
flexible instrument than the instruments available to us presently. I
approach that question with no preconceptions, and I have no notion
as to what the more flexible instrument might be or could be or should
be.
When I see that the interest rate on tax-exempt municipals is some
where around 5 percent that may be a little high, but it is in that
eneral area—and I translate this back into what it means to a school
istrict trying to float bonds, I am concured.
Dr. S a u l n i e r . Y o u mean b y a more flexible instrument, a more
selective instrument, or general credit restraint ?
Representative B o l l i n g . Yes.
Dr. S a u l n i e r . I must confess, Congressman Bolling, that my in
stinctive preference is for the general controls. I prefer them because
they seem to me to hold a promise, at least, of getting the job done, and
of holding back the pressures and demands that make for price in
creases and inflation, with a minimum of intervention into the daily
lives of people and the daily business of concerns. I prefer that as a
method of control.
Now, I recognize that it does not work evenly, and it does not work
perfectly. To an extent, we have to step in and try to ease the pressure
here and ease the pressure there in order to make it work better.
In the specific case you have in mind, in the financing of municipali
ties, of school districts, and so on, there are, after all, certain things
which these communities and these jurisdictions can do for themselves.
Some of them are still operating with limitations on interest rate,
and limitations on debt amount, which tend to impair their ability to
finance their own operations. Some modification of these limitations
would help.
But I should like to say with all candor that at a time like this
there is no real escape from a higher level of interest rates than we
have been accustomed to when our economy was less fully employed,
and when the demand for funds was less than it is now.
Representative B o l l i n g . Of course, this gets a little out of the field
of economics, but what disturbs me is that we hear on the one hand
quite an outcry that our school system is in one sense degenerating,
whichl think is accurate, and then on the other hand the best we can
come up with in the economic field, perhaps for very valid reasons,
is a situation which tends to further that degeneration. I think it
is not unreasonable for the average prudent school board to be a little
f
ECONOMIC REPORT OF THE PRESIDENT
11
bit disturbed about the prospects of its being able to manage the
kind of interest rate that it would have to pay, even if it made the
local tax changes required to be able to pay it.
It seems to me that this is that cloudy area where we run into the
question of social objectives versus sound economics.
Dr. S a u l n i e r . I think one of the things which a high interest rate
and a generally tight money market is going to do is to cause the post
ponement of some projects. I trust that they will be the projects with
the lowest priority in the communities, and I expect they will be.
Secondly, higher money costs will encourage people to plan their
projects on a little simpler and less expensive basis. At a time like
this, it strikes me that that is probably good economics.
Representative B o l l i n g . I have no objection to that, but the thing
that disturbs me is that in every study that I have seen we are short
a great number of schoolrooms. How much of this is the responsi
bility of extravagance in the past is a question.
Dr. S a u l n i e r . That is true, Congressman, although we must not
overlook the fact that expenditures in this area are very high, and are
rising, and were higher in 1956 than in 1955. And 1955 was substan
tially above 1954. It is not that we are not spending money for
schools. Indeed, we are spending money faster than we have for
many, many years. I think we are making real progress.
I hope that under the school bill—which I trust will be passed this
year—we can expedite that.
Representative B o l l i n g . That raises another question that may
seem a little fanciful, but I do not think it is. I suspect that the pres
sure for the school bill will be greater as a result of tight money than
it would have been without it—an interesting economic twist.
I apologize for having to leave.
Chairman P a t m a n . I just want to enlarge on his question briefly,
and then I will yield to the other members of the committee.
Your recommendation is that the school district change their consti
tutional or local barriers and permit the interest rate to rise ?
Dr. S a u l n i e r . I would say, Congressman Patman, that where a
local school district or other jurisdiction has an interest-rate limita
tion that is impairing its ability to raise funds at competitive rates
in the market, there is an adjustment called for, and promptly.
Chairman P a t m a n . Does it not seem to you almost against con
science for people to have to pay 5 percent on tax-exempt securities?
That means a person with a million dollars can buy a million dollars’
worth of Memphis, Tenn., bonds paying 4% percent and go to Florida
or any place they want to, and then from here on out they can collect
nearly $4,000 a month and, having no taxable income, pay no taxes.
Dr. S a u l n i e r . Tax exemption, of bond investment, Congressman
Patman, is a feature of our tax laws for which I have never had any
enthusiasm.
Chairman P a t m a n . I think that is a rather mild statement. I
think we ought to be for them or against them.
Congressman Curtis.
12
ECONOMIC REPORT OF THE PRESIDENT
Representative C u r t i s . I would like to pick up on that one thingI appreciate the opportunity to inquire because I have to leave pretty
promptly. I just had an unusual situation occur and so I have to
leave.
On that point of the tax exemption of these municipalities, I think*
in the recommendations on page 49 at the top, there is a proposed
amendment to the Internal Revenue Code to extend the conduit prin
ciple. It points up a very important fact that the municipals are not
tax exempt to one of the main markets for this kind of security. That
is your investment trust, where you can have a spread in your port
folio. It is true that a very rich individual who can spread his port
folio over a number of municipals can get the tax exemption, but it is
not available to your investment trusts and others, which are one o f
the main markets. That is one reason, I suspect, if this amendment
were to go through, and I am interested in talking to Representative
Mills about it, you could get a bigger market and actually lower the
interest rates.
But I want to pick up one thing. The very thing I wanted to bring
out was really in the nature of a comment and then to have your
comment. It was right along these lines.
I have felt for some time that our committee or some committee
should make an objective study of the effects of inflation. In our
tax study 2 years ago, I made a statement in some supplementary
views that I felt a good bit of our troubles in our tax laws arose from
the effects of inflation. I want to particularly point out the effect
that it has had on local governments, school boards, and sewer districts,,
and so forth, who are dependent upon real-estate property taxation*
which, in turn, is based upon an assessment of real estate. I f you
get into the mechanics of assessing real estate, you find that of course
the assessment has occurred over a period of years, and most of the
assessed property was put on the boots in the thirties, before inflation.
You attempt to correct the situation by increasing the rate, and you
hit unduly the new property that has gone on the books since inflation.
It has presented an almost impossible situation politically and practi
cally to every county, every school district, in the United States.
I think there lies one of the basic situations that has caused this
difficulty that our school boards are involved in, and that our local
taxing authorities find themselves in.
That is one aspect of the results of inflation in the past.
It seems to me with our concern for inflation in the future it might
have been well to have spelled out some of the economic results of
inflation.
Another area that I think should be pointed up is corporate in
vestment. What the companies are trying to do is replace the machin
ery and the equipment or utility, such as the telephone poles that they
have. The effect inflation has brought to them is terrific. They have
set up their depreciation accounts based upon a cost in the 1930 dollar,
and have to replace it with the 1956 dollar. That lies at the base o f a
great deal of this capital investment difficulty that is spelled out in
here, as I see it.
I was a little disappointed, and this is not adverse criticism because
probably this report is not the place to put it, but I would have thought
it was. Somewhere we ought to spell out, or the economists ought to
ECONOMIC REPORT OF THE PRESIDENT
13
spell out, if they will, the real damage that inflation has caused in
the past so that we, the people and the Congress, will realize the real
dangers of inflation for the future. As I say, I threw that out as my
^comment for your comment.
Dr. S a t t l n ie r . I think it would be entirely appropriate for the
Economic Report to expand in some detail on the dislocations that
Ven our price level moves from
It has not been done in an'
detail in this Economic Report or in any of the preceding ones. It
seems to me a perfectly appropriate subject for attention.
We could discuss the dislocations caused by inflation, of which you
have given two good illustrations.
Representative C u r t i s . I wanted to emphasize that point. There
was one other point that I would like to call attention to.
Chairman P a t m a n . May I interrupt you briefly?
Do you not think it is just as important in pointing out the evils
•of inflation to point out the evils of depression ?
Representative C u r t i s . Those are a little more apparent, I think.
I think we have seen it. Inflation is an insidious thing, and it is
something that occurs gradually and no one exactly sees how it
operates.
Chairman P a t m a n . I ii the depressions I have gone through, I have
seen it.
Representative C u r t i s . The people have seen depression because
they were out o f work. In this thing, our pensioners know that they
^cannot buy as much, but they do not quite understand why they
•cannot.
The second thing I wanted to mention is that throughout this report,
just as other economic reports, there has been a presumption which
I wish did not exist. It is that tax take is the same thing as the tax
rate. In other words, the recommendations are that the tax rates
should remain the same in order that the revenue can come in. I
"believe that any tax has a point of diminishing return, and I think
that in many instances, and this is my own reasoning, we have gone
beyond that point of diminishing return. I think a good example
was the excess-profits tax, where I am satisfied the elimination of that
tax, which was mainly a tax on growth businesses and small businesses,
actually produced more revenue to the Government through the
regular corporate tax.
I just wish it were not always presumed that just preserving a
particular tax rate is going to preserve your revenue.
I want to go on to illustrate that. For example, I am convinced
that probably from a psychological standpoint, if we reduced the
•corporate tax of 52 percent to 49 percent, just so that the private enter
prise was getting 51 cents out of the dollar, and the Government only
49 percent, some of these rather extravagant and I would say, uneco
nomic expenditures of corporations would not be made. I f that
theory is at all right, we would increase our tax take by reducing the
tax rate. I think it is worth exploring. We would probably have a
bigger tax take at 49 percent than we would get at 52 percent.
But the main point I want to make is that I wish we would not
assume that the tax rate is the thing that is going to give us the greater
tax take.
14
ECONOMIC REPORT OF TIJE PRESIDENT
Finally, on this same subject, I notice there is no recommendation
in regard to this device we had in the law, the stock dividend credit*
Yet the purpose the Ways and Means Committee had at the time
that was put in the law was trying to relieve a tax on a certain type o f
corporate investment device. That is equity capital as opposed to
bank borrowings and as opposed to corporate bonds.
It is a difficult thing to prove, and I doubt if you really can prove
it economically, but there is no question of the fact that if we were
able to switch $1 billion of investment from bonds to stock, we would
get a better tax take? even allowing for the dividend credit. The tax
on equity earnings is subject to the 52 percent corporate tax, while
the interest paid on bonds and bank borrowings is deductible from
the 52 percent tax.
Then there is the other feature on corporate investment of retained
earnings. We have also seen here, in the Economic Report in spite
of the fact that corporations earned less, the amoirnt of dividends
to the people was more. In our subcommittee hearings on the eco
nomic effect of our tax structure we received some advice from some
of our witnesses that there would be a psychology with a tax dividend
credit to encourage management to declare dividends instead of hold
ing the earnings for reinvestment.
Again, if that is done, and if that was the cause-and-effect relation
ship, which is difficult to say, we would gain in tax take because the
corporation pays the 52-percent tax all right, but no individual pays
the individual tax on retained earnings. But if the corporations
declare its earnings as a dividend, then it becomes subject to the in
dividual tax, too.
But in this area where so much emphasis has been placed in this
Economic Report on our need for capital investment, I regretted
that more attention was not paid to that. Also, I regretted that
there were no recommendations in the area whether or not the Con
gress might with the executive suggestion explore further whether
we can release investment capital, so that we can lower the interest
rates. It is the shortage of mvestment capital, as the report points
out, that lies at the base of the increase in the interest rates. It is
market demand.
Now, having made that speech, in effect, I would appreciate any
comments.
Dr. S a u l n i e r . I just have two comments. First, in my own think
ing about tax matters I do not asume that a tax rate reduction will
produce a proportionate reduction in revenues. On the contrary,
it is quite conceivable that a reduction in the tax burden, by stimu
lating greater economic activity, may in the end produce a higher
tax take, as you put it. I think we all understand it is very difficult
to make a judgment on these things. It is difficult to anticipate what
the specific effect will be. Furthermore, I think one gets an ex
pansive effect from tax reduction only if you make a pretty goodsized tax reduction. A nibbling away at the tax rates would prob
ably, over a short run, have little tendency to increase the tax
take.
With your comments on the dividend credit and the possibility that
some measures might be taken that would expand the use of equity
funds in the capital markets at this time, I have a good deal of.sympa
ECONOMIC REPORT OF THE PRESIDENT
15
thy. I think you will probably agree, however, that the effect would
be more to substitute one type of financing for another. That is, it
possibly would not create new savings. Primarily, I think, the effect
would be to channel investment funds more along the equity route
than along the debt route, which in my judgment would be a good
thing.
Representative C u r t i s . Would you not say that the source of funds
of equity capital is pretty much different from your source of bank
borrowing, and even bonds? You have a different market.
Dr. S a u l n i e r . Certainly.
Eepresentative C u r t i s . So that the shortage seems to be in bank
borrowings, as much as anything. Am I right in that presumption?
There seems to be the squeeze, it seems to me.
Dr. S a u l n i e r . That is certainly where the squeeze is most evident.
That is right, sir.
Eepresentative C u r t i s . Thank y o u , Mr. Chairman.
Chairman P a t m a n . Mr. Mills.
Representative M ills . M r. Chairman, for a moment I want to pur
sue the question that M r. Curtis propounded.
Is it not true that the level of employment would largely determine
the effect upon the economy of a tax reduction? I f you have full
employment and have a tax reduction on either business or individuals,
is it not true that you may well bring about a condition of greater
demand for resources and therefore increasing prices rather than an
increase in production ?
I am assuming that under a condition of full employment, your
resources might oe pretty generally utilized at that point, so that
through tax reduction you would not bring into existence any greater
amount of productive facilities. There just would not be the addi
tional facilities to meet the increased demand from the tax reduction.
It does not always follow, that is what I am saying. I think that
might as well follow as any other development.
Would you think that I am right on that point?
Dr. S a u l n i e r . Certainly in appraising the probable effects on our
economy of a reduction in tax rates, we have to take account of the
level of employment and production. When that level is as high as it
is now, we have to take account of the likelihood of the tax reduction
increasing the demand for resources, and pushing our economy into
the inflationary zone.
Another aspect that one would want to take into account, and I
think Congressman Curtis has this in mind, is the possibility that
savings would be increased by some form of tax reduction. Savings
would be made that would not otherwise be made, and those addi
tional savings would help in our fight against inflation.
Eepresentative M ills . But they would not necessarily contribute
to increased production, if you reached that level in your cycle of
complete, full employment.
Dr. S a u l n i e r . What I have in mind is just this: I f you were to
make by dividend credit, for example, the investment in equities much
more attractive for me, I might on the basis of that decide to forego
some consumption to a greater degree and make funds available for
investment that would not otherwise have been available, and enable
us to finance a larger volume of investment activity without recourse
to inflationary methods.
16
ECONOMIC REPORT OF THE PRESIDENT
That is entirely hypothetical.
Representative C u r t i s . Would you yield there?
I f the money went into plant expansion or new machinery, you
would increase productivity. At least that is a possibility. I am
not saying it would happen, but I say if that did happen then you
would be assisting production.
Representative M i l l s . It would be a possibility, but it is always
hard for me to visualize a situation wherein you increase production
at a time when you have no employees available for that increased
activity.
Representative C u r t i s . An improved machine will do it.
Representative M i l l s . That is technological development.
R e p r e s e n t a t iv e C u r t i s . That is where you need your money.
Representative M i l l s . Certainly I would not disagree with your
thought that there would be a conversion in type of investment from
borrowing to equity capital, but I did not intend to get into that.
I wanted to ask Dr. Saulnier a question about what levels of pro
duction and what levels of employment, and what levels of purchasing
power are needed in 1957 to carry out the objectives of the Employ
ment Act.
Dr. S a u l n i e r . Mr. Mills, the Economic Report does not specify
levels in quantitative terms. We have attempted in the report to
describe the levels that prevail at this time. We have done that in
terms of “employment and of production, and of purchasing power,
and income, and disbursements, and consumption expenditures.
We have then stated that in our judgment there is ground for
confidence that these levels, these high levels of employment and
production, will be extended into the months ahead.
R e p r e s e n t a t iv e M
il l s .
Y
ou
m e a n b y t h a t f u r t h e r r a is e d ?
Dr. S au ln ie r . Further raised, yes, or raised in a manner, at least,
that would give us as good a record in the months ahead in terms of
employment, unemployment, and production as we have now.
O f course, our economy will be larger. That is larger in terms of
our labor force. But how much larger it is really impossible for us to
say with any precision.
We have not, therefore, attempted to specify the level of employ
ment or the level of production in quantitative terms which we would
either expect to prevail so many months ahead, or in our judgment
is needed so many months ahead.
Representative M i l l s . My point is this: Did the budget message
or the material used in the budget message which apparently reflects,
as I read it, the attainment of sufficient levels of production, employ
ment, and purchasing power to carry out the objectives of the Em
ployment Act, not come from the President’s economic advisers?
Dr. S a u l n i e r . I would not say that it came directly from the
Council of Economic Advisers; no.
Representative M i l l s . I did not see anything in the economic re
port, in other words, that would verify the budget estimates.
Dr. S a u l n i e r . That is correct. Just let me state, Mr. Mills, that
the Treasury, the Bureau of the Budget, and the Council of Economic
Advisers have, in my experience down here, worked very closely with
one another in working out bases for estimating the probable revenues
in the fiscal period ahead.
That is done on the basis of estimates of the economic situation.
ECONOMIC REPORT OF THE PRESIDENT
17
Now, we do this independently. These are matters about which
the professional estimators will have differences of opinion. They
make estimates that vary over a range. Sometimes the range is rather
wide.
The estimates that we have independently made vary little from the
estimates that the Treasury has made. And those variations are quite
well within the range of estimating error. I have no quarrel with
the estimates that underly the Budget Bureau’s revenue estimates.
Eepresentative M i l l s . I am trying to understand, M r . Saulnier, if
I can, what the underlying basis of these estimates for fiscal 1958 are.
Now, the Secretary of the Treasury transmitted to Senator Douglas
by letter dated January 16 a basis for his revenue estimates based upon
calendar years 1956 and 1957. Personal income in calendar year
1956 is estimated at $325*4 billion. In calendar year 1957, it is $340
billion or almost $15 billion additional. Corporate profits for the
calendar year 1956 are $43 billion, and for the calendar year 1957,
$44 billion.
Now, those changes could result from more than two things, but cer
tainly two things. You could have more personal income in 1957 than
in 1956 because more people were employed at better jobs, or you
could have that increase reflecting increased wages and with respect
to corporations increased unit profits rather than profits based upon
an increased number of units of production.
I f I understand the situation, the budget message itself must deem
that one or the other of those two situations will come into existence,
or exist during calendar year 1957. That is, either that we will have
more inflation or else there will be more people employed in better
jobs in 1957.
Do you have any information that would be of help to me in getting
me on which of the two tracks I should be on to properly understand
and evaluate the budget message and the economic report?
I wanted to throw this one additional thought in that is disturbing
to me. As the President said in his economic message, he trusted that
the leaders of labor and of business would use voluntary restraints
as they go forward into the months ahead. It indicated to me that he
wanted them to exercise those restraints for the purpose of holding
down inflationary trends in the months ahead.
That throws me, then, into believing that he anticipates, or the
budget message anticipates that these increases can come through in
creased employment of people in better positions.
Dr. S a u l n i e r . I think that is a correct inference.
Eepresentative M i l l s . That is the actual correct inference?
Dr. S a u l n i e r . That is the correct inference, yes.
Eepresentative M i l l s . Does the economic message, then, carry out
that thinking with respect to the question I asked originally ? ^ : ^
Dr. S a u l n i e r . The economic message, while it does not do it in
quantitative terms, contemplates an expansion of the economy in 1957
over 1956, which would justify these higher estimates of personal in
come and of corporate profits, without price effect.
Now, of course if we are unsuccessful in holding the line on prices
and have rising prices with the present levels of employment and of
income, that will, of course, yield a higher volume of tax revenues.
We would hope that that would not happen.
18
ECONOMIC REPORT OF THE PRESIDENT
Representative M i l l s . N o w certainly the Secretary meant to con
vey the thought that you have when he wrote his letter, because he
says in this letter “ We do not assume any change in prices from the
present.”
Now, is this projection into calendar year 1957 sufficient to carry
out the objectives of the Employment Act ?
Dr. S a u l n i e r . In my judgment, it is.
Representative M i l l s . In other words, those estimates are based
upon what you would deem to be the desirable growth which you
foresee occurring in calendar year 1957, to maintain the objectives of
the Employment Act?
D r . S a u l n ie r . A
s
w e ll a s w e c a n f o r e s e e th e m .
I would like to say, Mr. Mills, that at this time it is exceedingly
difficult, and perhaps more difficult than usual, to estimate the
amount of growth in our labor force that can be anticipated over
the next calendar year.
This is a short period of time, and it is difficult always to make
estimates for such a short period. But we have just gone through
a period in which labor-force participation has been very high.
Young people have been coming into the labor force in large num
bers. Women have been coming into the labor force at unusually
high rates. This has increased the volume of people wanting ana
seeking work. Whether that will continue at quite the same rate for
another year is, I think, a very real question.
Representative M i l l s . I want to ask you the $64 question: What
ure your views with respect to the relationship of the objectives of
the Employment Act and economic stability ? Are they reconcilable?
Can you have both, economic stability and the objectives of the
Employment Act being carried out at the same time?
Dr. S a u l n i e r . Let me answer that question this way, Mr. Mills:
I am an enthusiast for the objectives of the Employment Act.
Representative M i l l s . Permit me to interrupt long enougjh to say
that I am, too.
Dr. S a u l n i e r . I would like to call attention to the fact that the
Employment Act is silent on price stability. I have over a long
number o f years interested myself in this question of just how
specific one should be in laying down the rules for economic stabili
zation policy, primarily in connection with the Federal Reserve Act.
I have, myself, by and large, been on the side of a pretty vague
kind, or pretty general, let me put it that way, general kind of a
mandate. It has been asked from time to time whether the Employ
ment Act ought to be amended to incorporate a price stability
dimension.
Representative K i l b u r n . What do you understand to be the
objectives of the Employment Act, just in two sentences?
Dr. S a u l n i e r . The objectives of the Employment Act, sir, are that
the Federal Government should use its full resources to promote high
levels of employment and production and purchasing power, and
that it should do this within the framework of a private enterprise
system.
ECONOMIC REPORT OF THE PRESIDENT
19
Representative K i l b t t r n . Thank y o u .
Dr. S a u l n i e r . A s I say, it has been asked whether the act might
be amended to include a price stabiilty criterion or price stability
objective.
As I would try myself to administer my responsibilities under the
Employment Act, to have price stability in the act, specifically stated
in the act, would not make any difference. I regard price stability as a
major objective of economic stabilization policy. All I can say, Mr.
Mills, is that I would strive to achieve both high employment and
price stability. We have put it in the economic report a dozen or
more times as “ prosperity with price stability.” I hope we can attain
this objective.
Let me say that over the last few years we have done, I think, more
than just moderately well. We have had high employment, and we
have had high production, and we have made perfectly enormous
improvements in our productive plant. We have sustained a very,
very heavy Federal budget with a very large component in that Fed
eral budget of defense expenditures. With all of this, we have had
price increases—and these have come mainly in the last 12 months—
of something less than 3 percent.
Now, that 3 percent I wish had never happened. I hope that we
can move into a period of greater price stability. I am an optimist
about being able to reconcile these objectives.
Representative M i l l s . Certainly the administration spokesmen
ought to be taken at their word, and I am perfectly willing to do that.
The last thing that would be desired would be very much inflation.
But in the zeal that we all have to carry out the objectives of the Em
ployment Act, I am beginning to wonder just a little bit if those ob
jectives can be carried out without some moderate amount of inflation.
Chairman P a t m a n . May I interrupt you to suggest that I hope you
make a distinction between a necessary expansion and inflations I
am afraid that oftentimes people fail to make that clear.
Representative M i l l s . Normal growth should be distinguished
from inflation, which would mean growth as a result of increases in
price and not necessarily in numbers of units. I am glad that you
point that out.
Now, Mr. Chairman, I would like to include this letter in the record.
Chairman P a t m a n . Without objection, it is so ordered.
(Letter and attachment referred to follows:)
T h e S ecretary of t h e T r e a s u r y ,
Hon.
Paul
H.
Washington, January 16,1957 .
D o u g la s ,
Chairman, Joint Economic Committee,
United States Senate,
Washington, D. C.
D e a r S e n a t o r D o u g l a s : in accordance with your request of January 7 for t h e
assumptions underlying the 1958 budget estimates, I enclose a table showing t h e
assumed figures for personal income and corporate profits for the calendar y e a r s
1956 and 1957. We do not assume any change in prices from the present.
Sincerely yours,
(Signed) G. M. H u m p h r e y ,
Secretary o f the Treasury .
20
ECONOMIC REPORT OF THE PRESIDENT
B a s is op R e v e n u e E s t im a t e s
Calendar year income levels assumed in the revenue estimates for fiscal 195T
and fiscal 1958 are as follows:
[In billions]
Calendar
year 1956
Personal income_______________________________________________________
Corporate profits______________________________________________________
$325.5
43.0
Calendar
year 195T
$340.0
44. a
Chairman P a t m a n . I would like at this point to bring out one addi
tional thing. In your report on page 50 you state:
I f a vigorous rate of economic growth is to be realized without recourse to
inflationary finance, the supply of savings must be sufficiently high to meet the
heavy demands for funds for private, State, and local undertakings. The
Federal Government is releasing funds for such purposes by a budgetary sur
plus and reduction in its debt.
Now, you believe, do you not, Mr. Saulnier, that if we operate on a
balanced budget and have a surplus, as we pay on the national debt
and reduce it, it is perfectly all right to increase private debt?
Dr. S a u l n i e r . Y ou say “ perfectly all right.”
Chairman P a t m a n . Without any danger of inflation. I am looking
at it strictly from an inflationary standpoint.
In other words, we have a debt now aggregating about $700 billion:
$275 billion of that is the national debt. Now, if we paid $5 billion
down on that debt and reduced our agregate to $695 billion thereby,
do you not think that we could safely increase the private $5 billion
without any danger of inflation ?
Dr. S a u l n i e r . We could safely increase private investment by that
amount. Whether it would have to be in the form of debt or not is;
another matter. Thus, if I own a Government bond, let us say $10,000,
and the Government pays that bond off and I find myself with $10,000
in cash, I can spend it on consumption or I can invest it in more debt
securities, or I might buy equities. S o the reduction of national debt
may make it possible to have an expansion in equity investment. I
personally would prefer that.
Chairman P a t m a n . I am looking at it solely from the standpoint
of creating money. Now, if we reduce the national debt, as we reduce
it, it is perfectly all fight for commercial banks to increase their
deposits, we will say, by making loans because as the national debt
goes down, private debt can go up. That is, generally correct; is it
not?
Dr. S a u l n i e r . I f the Federal Government pays off some debt that
was held by the banking system—you see in my earlier example they
were paying off some debt held by me and that is a different thing—
then the banking system can increase its credit to individuals and to*
business concerns or to State and local governments without there
having been an increase in the money supply. That is correct, sir.
Chairman P a t m a n . Do you not think it is time, now, for us to have
a definite program for reducing the national debt?
l)r. S a u l n i e r . I have advocated for many years the use of every
resource possible to reduce the national debt.
Chairman P a t m a n . N o w , Mr. Humphrey keeps saying that if we
do not reduce Government expenditures, we will have a severe de
ECONOMIC REPORT OF THE PRESIDENT
21
pression. He must mean that if we have deficit financing, it will prob
ably result in a depression. He could not mean that expenditures
themselves will cause a depression if the budget is balanced.
You would not say that we are in any danger of a depression as long
as we have a balanced budget; would you ?
Dr. S a u l n i e r . I would prefer to let Secretary Humphrey expand
on that for himself.
Chairman P a t m a n . Disassociating the question from my remarks
about Secretary Humphrey, do you see any danger of any depression
as long as we have a balanced budget? Is it not only when we have
an unbalanced budget that we &r6 in a dangerous position as far as
depression is concerned?
Dr. S a u l n i e r . In the present situation, Congressman Patman, I
would not say that the present level of Federal expenditures and the
prospective budgetary surplus for our Federal budget is in and o f
itself a factor likely to produce depression conditions in this country
in the immediate run.
Chairman P a t m a n . Would you answer be the same if our budget
were $10 billion more, if the prospective receipts would cover it?
Dr. S a u l n i e r . My answer would be the same, but I would be un
happy over the fact that the Federal Government was for any reason
absorbing that much larger part of the resources of the country.
That is for reasons which, important as they are to our national
security, are not in the immediate situation making goods and services
available to satisfy consumer wants.
Chairman P a t m a n . I am only asking you that to get your answer
as to what effect on inflation it would have. I am not advocating it
or suggesting that we should have it. I am just asking you what
the effect would be as long as we had a balanced budget.
Dr. S a u l n i e r . In the present situation, Congressman Patman* a
balanced budget is an anti-inflationary element in our program.
Chairman P a t m a n . Certainly, and I am all for it.
Representative K e l b u r n . Could I clarify that? I do not under
stand why you say it would not affect inflation. Suppose instead of
$10 billion, it was $100 billion that the Government was going to spend,
even though they get it back in taxes and balance the budget. That
$100 billion goes into the bloodstream of this country, and could cause
inflation, in my opinion.
Representative M i l l s . I f you will yield to me at that point, I do
not desire to presume to be able to read the mind o f the Secretary of
the Treasury, but I think that I have had sufficient conversations with
him to reach a conclusion, perhaps, as to what he had in the back of
his mind when he said that these expenditures could bring about a
depression.
I think what he is thinking about is the effect upon public confi
dence of continued Government spending at a high level, either bring
ing about overconfidence or underconfidence that could set off the
chain reaction resulting in deflation and depression.
I intend to ask him if that is not his thinking when he comes to the
committee.
Chairman P a t m a n . D o you want to answer Mr. Kilburn’s question
Dr. S a u l n i e r . Would you be good enough to rephrase it for me?
Representative K i l b u r n . As I understood Mr. Patman’s statement*
it was that even though the Government increased its spending by $10
22
ECONOMIC REPORT OF T H E , PRESIDENT
million, if the taxes received also rose so that the budget was balanced
there would be no inflationary effect.
Chairman P a t m a n . That is right.
Representative K i l b u r n . I should think to the contrary that when
you have $10 billion being spent by somebody, in this case the Govern
ment, going into the economy of this country, it is bound to be in
flationary.
Dr. S a u l n i e r . Let me put it this way. We are assuming in
this case that we are going to increase our tax take by $10 billion. W e
are taking $10 billion away from the people and reducing their con
suming power. Then we are making that $10 billion available for the.
production of goods and services important to the Federal Govern
ment, and in this case let us assume that they are defense goods. The
net effect of this on our economy is that we have a reduced output o f
consumer goods and larger production of defense goods.
More of our resources, in other words, are going into the production
of military goods, and less into the production of consumption goods.
Representative K i l b u r n . I am new to this Committee, but I should
think that the difference in that case would be that the $10 billion is
being spent, regardless of whether it was defense or not. I f it was
being saved, it would help prevent inflation, but as long as it is being
spent it helps inflation.
Chairman P a t m a n . And velocity enters into the problem, too. I
am not quite satisfied with the answer to my question about the na
tional debt. I f I understand the capitalistic system, a system which
I am highly in favor of, it is a system based on debt. In other words,
we must have debt in order to have money. In order to have debt, we
must have a good commercial banking system. I think we have the
best in the world and I want it to continue that way. I believe in both
the capitalistic system and the private commercial banking system,
and I oelieve in a bank making good profits because it cannot serve
the people to the maximum extent unless it is a profit-making enter
prise. But, it being true that our money is based on debt, as we pay off
that debt, whether it is national debt or private debt, it cancels that
much money. That is correct; is it not?
Dr. S a u l n i e r . I f the debt is held by the banking system.
Chairman P a t m a n . Regardless of who holds it, if you pay off $5>
billion of the national debt, you have reduced the money supply $5
billion over the Nation.
Dr. S a u l n i e r . Only if the debt was held by the banks and not if i t
was held bv an individual. I f the Federal Government comes to you
and takes $1,000 away from you and then comes over to me with that
$1,000 and says, “We would like to have you give us the bond that you
have in your pocket for $1,000 and we will give you this $1,000 which
formerly was Congressman Patman’s money,” I give up the bond and I
take the money that formerly was yours. The transaction has been
completed. You are the taxpayer and I am the investor. I am now
in liquid funds. There has been no change in the money supply.
Chairman P a t m a n . I f I borrowed the money from a commercial
bank, that would still be the same thing; would it not ? That would
not enter into the transaction ?
Dr. S a u l n i e r . N o w , this is getting a little more complicated. I f
we can somehow trace this into the banking system, we can find, I
am sure, some means by which we can produce a reduction in the
ECONOMIC REPORT OF THE PRESIDENT
23
money supply. But it must eventually be traced there in order to
produce that result.
Chairman P a t m a n . I recognize that only in the banking system
where the fractional reserve system is used does this operate to create
money when loans are made, and to destroy money when loans are
paid.
Dr. S a u l n i e r . That is right.
Chairman P a t m a n . Mr. Talle.
Representative T alle . As has been pointed out, the purpose of the
committee is to make a continuing study of employment, production,
and purchasing power. Employment suggests jobs and wages, and
production suggests plant and output and purchasing power sug
gests real wages and consumer behavior. IIow good are our statis
tics in those three fields?
Dr. S a u l n i e r . Well, you have asked me a question, Congressman
Talle, on matters on which I am far from expert. Employment sta
tistics present a difficult technical problem from the purely statistical
viewpoint. I am no expert on that. As you may know, my own field
of work has been primarily in finance. But I will say that our em
ployment statistics are pretty good. They are really outstandingly
good as measured by the employment statistics of many other coun
tries of the world. Our production statistics are pretty good, too,
although if you get a real technician answering your question he
would inundate you in no time with reservations and qualifications
about the various indexes that we have of industrial production. But,
by and large, they are tolerably good.
I must confess that I have never been quite clear what the Employ
ment Act refers to when it refers to “purchasing power,” but you can
interpret that as meaning the amount of funds becoming available to
individuals for expenditure. That is personal income. Or you can
interpret it perhaps as the amount of money which individuals are
expending. On both of those, we have pretty good statistics, and in
recent years, the last 10 or 15 years, we have made very striking im
provements in them.
But I would be making unjustified claims if I claimed to be an
expert on any one of these specific fields of statistics.
Representative T a l l e . The term “ real wages” means purchasing
power; does it not ?
Dr. S a u l n i e r . Real wages represent to us our measure of what the
individual is able to buy in goods and services with the wage pay
ment he receives.
Representative T a l l e . That leads me to my next question.
There seems to be an increasing tendency to include escalator clauses
not only in labor contracts but in some other contracts, too. There is
evidence of this in France, in Germany, in Great Britain and in some
other countries. People who draw pensions would like to have escala
tor clauses to ensure that their pensions will have constant purchasing
powder. Does that complicate your calculations ?
Dr. S a u l n i e r . Well, I am not sure what you mean by “complicating
the calculations.” These are devices by which we get automatic ad
justments of income payments to individuals in line with changes in
some specified index of prices. To a certain extent they do not com
plicate the problem, but rather they make quite obvious and explicit
some of the implications of a price rise. Thus one reads that the
24
ECONOMIC REPORT OF THE PRESIDENT
consumer price index goes tip by point something or other in the last
month, and that this automatically means a wage increase of 1 cent
or 2 cents or 3 cents an hour for X number of workers.
That becomes quite explicit and well understood.
But that is a different matter, of course, from the judgment we
might make as to whether this is good for our economy or not.
Eepresentative T a l l e . Take, for instance, this situation: It is not
unusual for employees whether on the job or retired to want more
income. An illustration would be social security benefits. Now, it
is a tedious process, probably, to come to Washington to ask Members
of Congress to supply something more by specific laws. It would be
far easier to get it by using escalator clauses. They are automatic
and tied to cost-of-living indexes. From the recipients’ point of view
these clauses may seem rather desirable, but I am wondering what
effect they have on calculations, if they became general. Suppose
everyone’s income were tied to a purchasing power index.
Dr. S a u l n i e r . I must say that I have many misgivings about the
escalator clause.
Eepresentative T a l l e . I do, too.
Dr. S a u l n i e r . One of my misgivings is that at the present time
we have some people on an escalator while others are still puffing
up the stairs.
Eepresentative T a l l e . And that is unfair. Certainly a lot of people
feel it is unfair. I f some have it, why should not all? You could
wind up with everybody having it, and I wonder how you would pro
ceed under a general escalator situation?
Dr. S a u l n i e r . I doubt that as a practical matter we could get our
economy thoroughly escalated. But even assuming for the moment
that we could, I must say that the prospect of such an economy just
moving up its collective escalator frightens me. I would much prefer
a world in which we have to make our adjustments piece by piece,
and in which our economic policy can be directed to maintaining a
stable price level within a full employment context.
Eepresentative T a l l e . I have been and am very much interested in
improving economic statistics. There is nothing romantic about that,
but I think it is a bit of drudgery that needs to be done.
I believe firmly it is something that the world needs.
Dr. S a u l n i e r . We in the Council have been very appreciative of
the work that this committee has done in working toward improve
ments in our statistics. We appreciate that very much and we want
to be just as helpful as we can in connection with it. There are a
good many areas in which we need far better statistical information
than we have now.
Eepresentative T a l l e . I would think, for instance, in the field of
production that it would be very important to have reliable economic
statistics because if, as is claimed, wages are paid on the basis of pro
ductivity, you must have reliable data as to productivity or you will
not know whether you are paying proper wages or not.
Dr. S a u l n i e r . That is correct, sir.
Eepresentative T a l l e . That is all, Mr. Chairman.
Chairman P a t m a n . Before yielding to you, I would like to make
one observation.
Senator W a t k i n s . Go ahead. I have not been here long enough
to get oriented up to this point.
ECONOMIC REPORT OF THE PRESIDENT
25
Chairman P a t m a n . We were talking about the national debt and
a balanced budget, and I suggested that we should not pay off the
national debt too fast because it would be deflationary. I also made
the point that if we paid off some of the national debt, we could, I
thought, increase other debts in proportion and it would not be infla
tionary. Mr. Saulnier suggested if the Government took $1,000 away
from me in taxes and then took that $1,000 and gave it to him in pay
ment of a bond, it would not be deflationary because the money would
still be in circulation. Of course I agree with him.
But, if it were paid to a commercial bank that has the power to
expand through the fractional reserve system, it would be deflationary
because it would extinguish that much of a debt. Let us take that
$1,000 debt, Mr. Saulnier, that I paid the taxes and the Treasury pays
to you for the bond. I f you owe that money or if you borrowed the
money to buy bonds like many people do and you immediately paid
the bank the $1,000, it would have the same effect; would it not?
Dr. S a u l n i e r . That is right. I f I had been holding that bond with
a $1,000 secured loan from a commercial bank and I retired that loan
when my bond was retired, it would have the same effect. It would
have the same effect as if the bond had been held directly by the
commercial banks.
Chairman P a t m a n . Would you like to ask any questions^ Senator
Watkins?
Senator W a t k i n s . Not at this time; no, sir.
Chairman P a t m a n . Mr. Kilburn, have you any questions?
Eepresentative K i l b u r n . A s I said, I am new to this committee,
Mr. Saulnier, and I wanted to try to get clear in my mind a couple*
df basic things that are confusing me a little.
Do you think that we are in an inflationary period and do we want
to stop this inflation?
Dr. S a u l n i e r . Well, Congressman Kilburn, when an economy is
operating as close to the ceiling of capacity as ours is, and when
confidence on the part of business concerns and of individuals is as
high as it is now, and when you have as large a backlog of demands
for community improvements as we have now, there is a more or less
persisting danger that the economy will pass into the inflationary
zone.
Eepresentative K i l b u r n . As I understand it, the cost-of-living
index has gone up 3 percent in the past 12 months.
Dr. S a u l n i e r . That is right.
Eepresentative K i l b u r n . Is that not inflation?
Dr. S a u l n i e r . We ordinarily define inflation as an increase in the
price level. There is no question, therefore, but what we must record
this as having been a year of moderate inflation.
Eepresentative K i l b u r n . So that the value of the dollar has gone
down?
Dr. S a u l n i e r . That is correct, sir.
Eepresentative K i l b u r n . And that is inflation, in any book, I think.
Dr. S a u l n i e r . You are correct, sir.
But let me say, Congressman, that if you take the price increase
of 2.9 you will find that it is made up of increases of a number of
different kinds. Let us take rent as an example.
We have many communities in New York—I do not know how
many—in which rent control still exists. Why do we have that rent
87624— 57—pt. 1------ 3
26
ECONOMIC REPORT OF THE PRESIDENT
control? We have it because during* World War II and during the
Korean conflict period there was a great pressure or demand for
housing space, tending to push rents up. These laws were put into
effect to hold rents at what was regarded as a proper level. Now,
some of them are still there.
I f they had not been there, rents would have gone up long ago.
The fact that these laws are on the books has suppressed that move
ment. Now, little by little, these laws are being terminated, little
by little those rents are rising.
Now, what does a rent increase that occurs in 1956 or 1957 as a result
of the termination of a rent-control law really mean as regards the
pressures of inflation in 1956 or 1957? It seems to me that what it
means is that you are getting a belated, a late, or deferred manifesta
tion of some inflationary developments which occurred in an earlier
period.
Eepresentative K i l b u r n . I can understand that. That is just the
same as when your prices went up after price control.
Dr. S a u l n i e r . That is right, and we have to bear these things in
mind when we interpret the price history of recent months.
Eepresentative K i l b u r n . One thing that has confused me a little is
our respected chairman’s statement that I read, in which he stated we
have to do something about interest rates so that we will not have a
recession. It seems to me that the problem now is inflation.
Chairman P a t m a n . Would you consider an increase in interest
rates inflationary?
Eepresentative K i l b u r n . I would answer that this way. It seems
to me, and that was going to be the point of my next question to the
witness, that the increase in interest rates is the law of supply and
demand operating.
Chairman P a t m a n . That does not answer the question, though.
Eepresentative K i l b u r n . Let us get the answer to this, first.
Dr. S a u l n i e r . That is correct, and I think that while it is true that
an increase in interest rates is an increase in the cost of doing business
for a concern and may be reflected in a higher price for whatever it is
the business concern is producing, the higher interest cost is an antiinflationary measure in the sense that it tends to restrain demands
for credit. Let me add this one sentence. By restraining credit, it
helps avoid the price increases that we call inflation.
Chairman P a t m a n . Do you believe that the interest rate restrains
borrowers to any great extent?
Dr. S a u l n i e r . Yes; I think it does. I think it is having that effect
on a good many borrowers.
Chairman P a t m a n . I want to ask you one more question. How
much of this 2.9-percent increase in the past year is due to increased
interest rates ?
Dr. S a u l n i e r . Y ou would have to take several steps to the righthand side of the decimal point, in my judgment, before you could get
the cost allocable to higher interest. Part of it is agricultural prices,
and part of it is increases in rents, and part of it is increases in the
cost of personal services. In these, I think, Mr. Chairman, the interest
cost has been a very minor item.
Eepresentative K i l b u r n . It seems to me that anything that dis
courages borrowing, like higher interest rates, stops inflation. That
would be my guess.
ECONOMIC REPORT OF THE PRESIDENT
27
Now, the next question that I would like to ask you is this: With
interest rates going up due to the law of supply and demand, then is it
not true that about the only thing that the Government or the Con
gress can do in such a situation is to make the loans themselves just
like they did in the veterans loans. They made more and more money
available for veterans housing directly from the Government because
the banks would not loan the veterans mortgage money because the
interest rate was not in the market range.
As soon as they made a loan of 100 cents on the dollar, the best they
could get for it was 90 cents on the dollar. Consequently, they did
not want to make the loan. So then Congress and the Federal Gov
ernment stepped in and created or allowed the Veterans5Administra
tion to make direct loans. I f we let the law of supply and demand
operate in money rates, then the only way to overcome it is to have the
Government loan it directly.
Dr. S au ln ie r . It is certainly true that in a situation of this kind,
where important classes of borrowers are finding it not only more
costly to borrow but in some cases are finding it impossible to borrow,
there is a great temptation to come to the Federal Government and
say, “ Won’t you lend the money to us directly?”
I must say in all candor to you, Congressman Kilburn, and to Chair
man Patman and members of this committee, that while I have sub
scribed to the steps that were taken, modest steps they were, to assist
small business through SBA and to assist the mortgage market
through the Federal National Mortgage Association, I have sought all
along to keep those measures at a minimum level and to avoid taking
the route of direct Federal lending as a means of avoiding the pressures
that a tight money policy imposes on our economy.
Representative T alle . I f we do that, do we not run into the same
thing that we have run into with the escalator clause? I f one group
can get it directly from the Government, why not everybody, and we
have socialized credit.
Dr. SAtJLNiER. We do not solve the inflationary problem this wav.
Representative K ilbu rn . When you say the “ tight money policy,”
is not the tight money policy the result of the law of supply and
demand ?
Dr. S a u ln ie r . Y ou are absolutely right, and I am glad that you
have commented on what was really a misstatement of mine. When I
said that this is the result of the tight money policy, I really should
have said, that this is the result of an economic situation in which the
demand for funds is running ahead of the available supply*
Representative K ilb u r n . There is nothing that the Federal Reserve
can do or this committee can do or Congress can do to stop high
interest rates caused by the law of supply and demand, is that right?
Dr. S a u ln ie r . That is right. Nothing in my judgment that would
be appropriate.
Representative K ilb u r n . I would presume, Mr. Chairman, that one
o f this committee’s objectives is to halt inflation.
Chairman P a t m a n . We are not for inflation. We are against it.
Representative K ilb u r n . Our alternative basically is to either let
the law of supply and demand operate-----Chairman P a t m a n . But the Federal Reserve makes the law of sup
ply and demand. I think Mr. Saulnier agreed with me when he said
that they could not properly do anything more because he intimated
that the evils would overbalance the good.
28
ECONOMIC REPORT OF THE PRESIDENT
Representative K ilb u r n . Y ou mean to say in your opinion that the
Federal Reserve by lowering their rediscount rate could lower the
demand for money ?
Chairman P a t m a n . Yes, and the Open Market Committee would be
the most feasible way to do it. You see, they are meeting today, the
Open Market Committee is meeting today, for all practical purposes
to do just that.
Representative K ilb u r n . With all due respect, you and I have a
very basic difference here. I think the Federal Reserve policies on
rediscount rates follow the money market.
Chairman P a t m a n . I know your sincere and honest views but I
cannot agree. We just have a difference of opinion on it.
Representative K ilb u r n . There is no use pursuing that part of it,
but I wanted to get straight in my mind that the purpose of this com
mittee or one o f the purposes of this committee is to try their best to
be helpful in stopping inflation. Does the Council of Economic Ad
visers feel that we have either to let the law of supply and demand
work in money rates or the Government has to make the loans ?
Dr. S au ln ie r . My own feeling, as I say, is that we have to resist
the temptation to try to evade the operation of these money market
forces by direct Government lending.
Representative K ilb u r n . Of course if the Government did go into
the loaning business even more than they are now, and are there not
about 18 different agencies now making loans——
Dr. S a u ln ie r . I regard myself as something of an authority on
this subject. The last time I tried to make a listing of them, it took
so many pages that it must have added up to more than that.
Representative K ilbu rn . They are in the money lending business?
Dr. S au l n ie r . That is correct, sir.
Representative K ilbu rn . I f this practice continued to grow would
it not be inflationary ?
Dr. S au ln ie r . It could be.
Representative T alle . Have we not overlooked one point? We
have been talking about demand and the rising rate, but if the rates
are higher people are encouraged to save, and there is more saving
which results in larger supply of loanable funds.
Dr. S a u ln ie r . That is correct. That is the classical formula for
bringing a lack of balance under control.
Representative T alle . John Suart Mill stressed “ The savable
fund and the effective rate of accumulation.”
Dr. S a u ln ie r . As I say, this is the classical means for bringing into
balance the demand for funds on the one hand, and the supply of
funds on the other. A rising interest rate will both tend to reduce
the level of demand, and increase the level of savings supply.
Representative M ills . I wanted to get back to the point I was pur
suing earlier. ^My curiosity to ask the question stems from language
in the Economic Report on page 44, and I wanted to read a few lines in
the second paragraph. The sentence begins:
When production, sales, and employment are high, wage and price increases
in important industries create upward pressures on costs and prices generally.
To depend exclusively on monetary and fiscal restraint as a means of containing
the upward movement of prices would raise serious obstacles to the maintenance
o f economic growth and stability. In the face of a continuous upward pressure on
costs and prices, moderate restraints would not be sufficient; yet stronger re
straints would bear with undue severity on sectors of the economy having little if
ECONOMIC REPORT OF THE PRESIDENT
29
any responsibility for the movement toward a higher cost-price level and would
court the risk of being excessively restrictive for the economy generally.
These are not acceptable alternatives to stable and balanced economic growth.
The American economy possesses the potentials for expansion and improvement.
If these potentials are supported by proper fiscal and monetary policies on the
part of Government, and by appropriate private policies, our economy can achieve
and maintain high levels of production, employment, and income with stable
prices.
It was because of that language that I asked the question whether
or not the objectives of the Employment Act and our overall objective
of a stable economy are always consistent. We have had now for the
last few months, as you have pointed out, some increases that of course
have been reflected in this increase in the indicators of production.
We have pretty well carried out the objectives during that period
of time of the Employment Act. Now, I am always curious when I
am talking to economists to get their opinion as to whether or not
these objectives could have been carried out when maintaining com
plete stability in the overall price level.
Dr. S a u l n ie r . The price index you are thinking of is the consumer
price index?
Representative M il l s . Yes, which has gone up only about 4 to 5
percent in the period of the last 4 years.
Dr. S a u l n ie r . It is perfectly conceivable, Congressman Mills, that
with a different behavior of farm prices in this period, we might have
had roughly the same levels of overall employment and of production
and income with less price increases than we have had. It is perfectly
possible.
Now, if in past years we had had less of a buildup of carryover
stocks in agriculture and had had less of a decline in farm prices, and
if we had had a more stable farm price index in the last 3 or 4 years,
and continuing through 1956, the consumer price index would have
looked appreciably different. That would not in itself have affected
the ability of our economy to attain high levels of employment and
production.
It is perfectly conceivable, also, that if it were not for the great
inflationary forces that were at work in our economy during the two
war periods, we would have avoided these deferred price changes of
which I was speaking earlier.
We would have had less inflation of prices in 1956 than we did have.
Yet this would not have impaired appreciably our ability to achieve
high levels of employment and production. In other words, the price
increases of 1956 were not essential to high employment and produc
tion.
Representative M il l s . I am still thinking in terms o f the relation
ship of these objectives to the budget which has been suggested and
the justification for the Congress going along with the budget on the
assumptions which are made with respect to the budget.
Now, the President refers in this language that I have quoted to the
so-called cost-price push. Let us see whether or not this cost-price
push can occur without an accommodating expansion in aggregate
demand which, of course, is money.
Dr. S a u l n ie r . Can it occur without an accommodating demand;
is that your question?
Representative M il l s . Yes.
30
ECONOMIC REPORT OF THE PRESIDENT
Dr. S a u ln ie r . A change either in the money supply or in the
rate of turnover of money and thus in aggregate demand, is im
plied if you have a fairly general increase in prices resulting from
a wage-cost push.
Representative M ills . I s it not important that we know whether
it comes from a more rapid turnover or a more accommodating
supply of money ?
Dr. S a u ln ie r . It is important, analytically, to know whether it
comes from one or the other. In 1956 it came primarily from the
more rapid turnover of our money supply.
Representative M ills . Is it contemplated that there will be an
even more rapid turnover in 1957? Is that the basis that is used ?
Dr. S a u ln ier . I would doubt it and I would doubt it for this
reason: The* more rapid turnover of money in 1956 was due in
part, I think, to a drawing down of cash balances by corporations
and to a more rapid turnover by the corporations of their cash
funds.
Now, there is kind of a saturation point here, I think. A busi
ness concern can increase the volume of its business on a given
dollar volume of cash and perhaps go to a still higher level, but
there is a question as to how far that can go. There must come a
point at which a further increase or further decrease in its liquidity
position is not practicable.
I think we must be closer to that point now than we were at the
beginning of 1956. Let me put it this way: The prospect for a more
rapid turnover of money in 1957 is relatively slight.
Representative M ills . Does this present budget that we are work
ing on actually hold out the possibility of an increase in prices from
a continuation of this “cost-price push,” as a matter of fact? Does
it not create more pressures in that direction? Does it not mean,
therefore, that we must have more restraint in our Federal Govern
ment fiscal and monetary policies to accommodate that expenditure
by the Government?
Dr. S a u ln ie r . In the present situation, Congressman Mills, I would
prefer a larger budgetary surplus than is contemplated.
Representative M ills . Actually, what I am disturbed about is
whether or not the Congress is safe in assuming such growth as you
have indicated is the basis for assumptions with respect to the budget
for purposes of making expenditures by Government for months
ahead.
Now, in order to justify these expenditures and for the Government
to remain on a balanced budget, it is absolutely essential that 1 o f 2
things occur that we talked about a few minutes ago: Either it is
more inflation or an actual increase in production and personal income
based upon more employment in better jobs.
Then we must, if we justify the appropriation of the funds con
templated in this budget with the expectation of doing that and end
ing with a balanced budget which would not adversely affect our eco
nomic stability, come to the conclusion that this growth will occur.
Normally we do not make our appropriations depend upon assump
tions about changes in levels of economic activity. But this time we
are being asked to assume this increased growth which we all want
and which we all say is necessary in order to end up with a balanced
budget after making these appropriations.
ECONOMIC REPOET OF THE PRESIDENT
31
Senator W a t k in s . A s a practical matter, do we not make our ap
propriations largely on the pressures that are put on us ?
Representative M ills . I fear, Senator, that one of the great pres
sures we have is the fact that it is in the budget.
Senator W a t k in s . There was probably a pressure to put it in the
budget, too.
Representative M ills . I am concerned with what one of your very
eminent Members of the Senate said with respect to this budget. He
said that in his opinion it reflected a contemplation of more inflation.
You have said that the budget is not predicated upon inflation. I am
glad to hear that it is not in your thinking predicated upon inflation.
What I am fearful of is that we will create the situation through ap
propriation of the funds involved in this budget, to make it impossible
to avoid additional inflation except if we utilize even greater re
straint in Government fiscal and monetary policy. I do not see where
we can obtain the additional restraint in fiscal policy that we might
need to utilize after making the appropration.
Representative C u rtis . Would you yield for a clarification there?
You said Dr, Saulnier had said that this was not predicated upon in
flation. Did you mean by that that the budget is going through as is,
or was there a comment on that? Was there a comment to the effect
that the budget as is would not create inflation?
Representative M ills . N o. What I had tried to develop earlier
with Dr. Saulnier was whether or not this budget and economic mes
sage and these things that are coming to the Congress are predicated
upon more inflation or continuation of inflation. Or whether or not
they are predicated upon increases in income and productivity at
fixed prices. He said it is the latter that they are predicated upon.
Dr. S a u ln ier . I might say in that connection, Mr. Mills, that it is
my understanding that the estimates of revenue for a fiscal period
ahead have in the past, as well as in this budget, been based on some
assumptions as to the growth of the economy.
The estimates which we have for revenues for fiscal 1958 do predi
cate a growth in the economy at a normal long-term rate. But to
make an assumption on growth is not an innovation in budget-making.
Representative M ills . It may well be that some allowance has been
made with respect to Government estimates, in estimating them at
least, for some growth. However, we found it to be the situation
normally when we have been in a rising economy that the Treasury has
underestimated revenues far more often than it has overestimated
revenues. We do have that situation.
But here we have this decided jump between calendar 1956 and
calendar 1957 with respect to personal income on which the revenues
in part are based, of $325^ billion in 1956 to $340 billion in 1957.
That is a $141^ billion increase.
Now, do we have some criteria to go by in terms of the historical
record that would indicate that the recommendations contained in the
budget and the overall economic situation justify our assumption that
a balanced budget wil be attained?
Dr. S a u ln ier . Our own calculations of what would be involved in
terms of increased production, employment, and income, if we expand
in 1957 at about a normal historical rate, correspond roughly with
what has been estimated by the Treasury.
32
ECONOMIC REPORT OF THE PRESIDENT
Eepresentative M il l s , N o w , let me get it down to figures. Do you
mean to say then, that if we have in the calendar 1957 an increase in
our overall national production of 3 or 3y2 percent, which is I under
stand about the normal increase or normal growth, that increase will
reflect this addition in personal income?
Dr. S a u l n ie r . That is right.
Eepresentative M il l s . So then we do get down to this point, that
the budget receipts are predicated upon a growth in overall gross
national product of around 3 or 3^ percent ?
Dr. S a u l n ie r . It would be in that neighborhood, that is right. That
is, a growth that would be consistent with the objective of the Em
ployment Act to maintain a level of employment that will provide jobs
ior those who can be expected to come into the labor force in 1957.
Eepresentative M il l s . What are the factors that presently exist,
Doctor, that give rise to the conclusion for these purposes that this rate
of growth will occur in our overall national product in 1957?
Dr. S a u l n ie r . Well, I can run down the major sectors of our econ
omy. As to capital expenditures and business, I think there is no
expectation that they would increase in 1957 at as rapid a rate as they
increased in 1956 but a further increase is anticipated. There are, as
you know, some areas of capital investment, notably public utilities,
where the rate of growth is anticipated to be quite high.
Secondly, we can take State and local units. It is, I think, not un
reasonable to anticipate that the overall volume of activity in that seg
ment of our economy will increase in 1957 over 1956. As you know,
expenditures there have been stepping up fairly regularly and per
sistently over some period of time.
The consumer is always the mystery man in this drama. It is im
possible to tell precisely what is going to happen there.
Eepresentative M ills . Judging from recent situations with respect
to the consumer, I think it would cause us to feel that his confidence has
not diminished to any extent.
Dr. S a u l n ie r . That is correct.
Eepresentative M il l s . I think that you are pretty safe in assuming
a continuation o f consumer confidence underlying a pretty high level
of consumer demand.
Eepresentative T a l l e . Would you yield to me for just a moment?
Turning back to local expenditures which you just mentioned, most of
the State legislatures are meeting this month and no doubt a good
share of their work will be to pass laws that have to do with meeting
local obligations in order to share in Federal funds under various
Federal-State matching plans.
Dr. S a u l n ie r . As I said earlier, I trust that some of their activities
will be directed toward facilitating the raising of funds independently
of the Federal Government.
Eepresentative T a l l e . I share your hope, sir.
Eepresentative M il l s . There are two points that I am concerned
about, Doctor, not as an economist of course, because I am not, but as
I had looked to the future and tried to determine whether we can have
this rate of growth in 1957. There are two questions always in my
mind.
One is in respect to what inventory policies will prevail in 1957 and
the other, because I have realized that much of our growth in 1956 was
based upon enlarged shipments overseas, what our situation in 1957
ECONOMIC REPORT OF THE PRESIDENT
33
may be with respect to imports, particularly in the light of the develop
ments that are now plaguing us in the Middle East.
Do we have any information upon which we can safely predict for
the future with respect to inventory policies and positions?
Dr. S au ln ie r . Well, inventory accumulations were fairly high in
1956 and I think it is reasonable to expect further accumulations in
1957.
Representative M ills . What was the rate of accumulation last
year?
Dr. S au ln ier . It was somewhere in the neighborhood of $3.5 billion
in 1956. That is, the addition to the dollar volume of inventories of
all sorts in our economy.
Representative M ills . I s it essential now, in order to carry out
these objectives and these predictions, that inventory accumulations
in 1957 only be $3^ billion, or must they not be at a greater rate than
that?
Dr. S au ln ier . I don’t recall the figures precisely, but I feel quite
certain that I am correct in saying that inventory accumulations in
1957 at a lower rate than prevailed in 1956 are not inconsistent with
these budgetary assumptions.
Representative C u rtis . Could I ask one question just for clarifica
tion? In your inventory figures, you said it runs the gamut and that
includes raw materials as well as finished products.
Dr. S au ln ier . That is right.
Representative M ills . What about the possibilities of exporting
goods overseas for 1957 compared to 1956?
Dr. S au ln ier . What we call net foreign investment was a fairly
substantial element in the economic expansion of 1956. I believe it
was under $2 billion, but it is an important factor because it was a
substantial increase over the previous year.
Now, this represented two major factors—the very rapid rate of
economic expansion abroad, and the rather sharp revival of private
foreign investment. As you know, in many cases when there is private
investment abroad this means that the funds invested are spent in
this country to buy equipment of one sort or another, which does in
volve an increase in exports.
Senator W a t k in s . H ow do you determine the investment abroad?
How do you find out how much private investment there is ? It seems
to me if it is a private affair, there would not be any public figures
on it.
Dr. S au ln ier . I am afraid that someone more expert than I is
going to have to give you the details of making these estimates of
foreign investment. There is, as you may know, a special unit in the
Department of Commerce that puts together regularly our balance
of payments figures, and makes estimates on private investment
abroad.
While I would be glad to supply you with a technical memorandum
on that subject, I think I would probably confuse you more than help
you if I tried personally to give you the information.
Senator W a t k in s . I just wanted to be informed.
Representative M ills . I had in mind more the export of goods
produced in the United States than the export of dollar investment
abroad. I was thinking in terms of the remarkable increase that
occurred this year in the exportation of American made and grown
34
ECONOMIC REPORT OF THE PRESIDENT
goods, particularly farm products overseas. In order for us to con
tinue even at the present rate of production here in the United States,
I would think we would almost have to maintain those levels ot
export.
I f we are going to grow, a part of that growth must be reflected,
as I see it, in increased shipments overseas. With the disturbances
that presently exist, I have been thinking that it would be very difficult
for us to enjoy in 1957 the same rate of export that we enjoyed in 1956.
I wondered if those things were considered and to what extent they
affected the determinations that were made here for purposes of this
economic report and the budget.
Senator W a t k in s . Will you yield to me at that point? Would
you not expect that the present rate would continue, particularly with
the stimulation given to the export of oil and petroleum products?
Representative M ills . I would hope that our overall exports might
be greater than they were in 1956 but I had some degree o f caution
in my own mind with respect to them being as great, even with this
exportation of oil.
Senator W a t k in s . This will be caused not by economic causes,
but by international affairs that have no relation to economics.
Representative M ills . The difficulty as I pointed out in our expor
tation of as much, if that is the case, in 1957 as in 1956 would certainly
be due to these disturbances over there. But they would directly affect
our economic conditions here with respect to this anticipated growth.
Senator W a t k in s . I would agree with you on that. It seems to
me that no matter how well we plan at home, we are governed almost
entirely by whatever happens in the foreign field.
We can plan and we can lay out our plans as to what we want to do
and we can set out our economic program and all of a sudden something
happens over there and knocks it into a, cocked hat.
Representative C urtis . Y ou mentioned the bulk of the farm prod
ucts m there. The countries abroad are claiming that we achieved
that figure through a sort of force-out and they allege that we are
dumping.
Representative M ills . Y ou ran into it on that subcommittee that
you are on.
Representative C urtis . I was a congressioal adviser to our delega
tion over there at GATT and that was on the tongues of most of the
representatives of the GATT countries. With that kind of pressure
from them and these allegations, I think that we are going to run into
increased difficulties in being able to dispose of as much surplus
agricultural products.
Representative M ills . I am glad to know that you have the same
concern I do about that.
Representative C urtis . I do.
Representative M ills . I was somewhat surprised as I read the Eco
nomic Report that there is not any information in it, as I read it, on
this point.
Dr. S a u l n ie r . Do you mean on surplus sales ?
Representative M ills . N o, on the relationship of our exports to
this growth that we are contemplating.
Dr. S a u ln ie r . The Economic Report merely states on page 46,
at the top of the page, “While the factors influencing our markets
ECONOMIC REPORT OF THE PRESIDENT
35
abroad are complex and diverse, foreign trade and investment on
balance appear likely to remain high.”
Representative M ills . I read that but that still does not mean to me
that it will remain as high as it was in 1956 or it could still be high
and not be as high as it was in 1956. I f it is only as high as it was
in 1955 we will have to look somewhere else than to export of goods
to find the basis for tie increase in overall activity here at home.
Dr. S a u ln ie r . We have identified this as one of the areas o f un
certainty in the economic picture.
Representative M ills . I s it just an uncertain area or is it an area
of weakness as we approach 1957 ?
Dr. S a u ln ie r . I think it is better described as an area of uncer
tainty than an area of weakness. I think we must also bear in mind
that, important as this is, not only for our economic life and for
the prosperity of the rest of the world, it is far from being a major
item in the aggregate economic accounts of our country.
We could have a very substantial decline in net foreign investment—
say 30, 40, or 50 percent—and dollarwise it would involve something
in the neighborhood of half a billion dollars.
Representative M ills . Perhaps I am wrong in this, Doctor, in the
assumptions that I make with respect to what must exist for this
rate of Sy2 percent of growth to occur. It seems to me that we
must have, in order for that rate of growth to occur in the 12 months*
period, very, very favorable economic conditions along most lines of
activity.
You cannot have very many reversals of what took place in 1956
without losing that rate of growth. In order to have a rate of growth
of Sy2 percent in other words, you must have some degree of growth
all along the line in these factors contributing to the whole.
Now, you have considered all of them as you have reached these
conclusions and I am merely, because of the lack of anything really
specific in here on that, raising the point as to what effect and in
fluence you anticipate from that failure of one activity on the overall ?
Dr. S a u ln ie r . T o get this result, you have to have pluses in some
areas of the economy and if you have minuses in other areas, your
growth, where growth does occur, must be greater than the average
or the aggregate in order to carry its extra burden.
Representative Mjlls . Y ou could have a complete cessation of ex
ports if you compensated for that loss in increased military growth
or in some other growth, perhaps ?
Dr. S au ln ie r . That is correct.
Representative M ills . Y ou are talking about foreign investments?
Dr. S a u ln ie r . I am talking about our net foreign investment figure.
Representative M il l s . I am talking more about our export of goods
rather than the dollars now.
Dr. S au ln ie r . This encompases that.
Representative M ills . I know, but our exports of goods far ex
ceeded $1,400 million in 1956.
Dr. S a u ln ie r . That is correct, and they are offset in our national
accounts by our imports.
Representative M ills . We have a surplus still of exports over im
ports ; is that right ?
Dr. S au ln ie r . Yes, which we make up for with our investments.
36
ECONOMIC REPORT OF THE PRESIDENT
Representative M ills . We partly make up for it with our invest
ments abroad.
Dr. S a u ln ie r . Yes; partly.
Representative C u rtis . On this same point I just wanted to develop
a few things that were mentioned because I had a question along this
line. I had one with regard to this foreign investment.
Actually, in the long run, is that the kind of thing that helps balance
any dollar gaps? It is perfectly true that the immediate process of
investment is involved and it will bring in money, but as that capital
investment in turn earns over the long range, it will work the other
way. Am I right about that ?
Dr. S au ln ie r . It does work the other way, as income has to be re
paid to the investor in this country. Ultimately one would hope the
investment itself would be returned. But, of course, the ability of
foreign countries to make those income payments implies prosperity
on their part and economic expansion, and one would expect the de
mand abroad for funds to grow.
Representative C urtts. On this point of how much we can antici
pate next year, using the combination of foreign trade and investment,
this is based upon the discussions of the subcommittee I am on, of for
eign trade, with the governmental officials and business people in the
Western European countries. Many of these countries are relaxing
the barriers that they have against our investing in their countries
because now they are anxious to encourage it.
So it would look like foreign investment will be maintained, if not
increased, because a great deal of it has been going to Western Europe.
Now, on that I was going to ask the same question that Senator Wat
kins asked about the accuracy of our estimates of capital investment
abroad, and in particular whether or not we included m it the plowing
back of earnings in the investment that we already have.
I was amazed in talking with our movie industry in Britain to find
that they have earned so much money on their original investment, and
because taking those earnings out of Britain would have caused
Britain considerable economic strain, they agreed to just reinvest.
They put in around 50 or 60 million dollars and went into some areas
over there that they never intended to.
There is a lot or that kind of reinvestment going on and I do not
know how our Department of Commerce would catch those figures.
Maybe they could, but I am curious to know if we do know the extent
to which our figures on our foreign investments are reliable.
Dr. S a u ln ie r . I would not be able to say how satisfactory the esti
mating methods are, but I am sure that an effort is being made to
encompass the degree of reinvestment of earnings in these estimates.
I can say only that I am confident that a good job is being done—as
good as is practicable at this time. There are excellent people working
on it*
Representative C urtis . We have another thing that pertains to
that. Western Germany now is in a creditor position and it is appar
ently investing money over here. I understand France is, too. I know
of no way of measuring the amount of flow of foreign investments.
Dr. S a u ln ie r . I think the net is the other way. There will always
be some individuals abroad who will have the resources available for
investment and will find the United States an attractive place in which
to place their funds.
ECONOMIC REPORT OF THE PRESIDENT
37
Representative Curits. I asked the French people if they had any
way of estimating how much French capital might be coming into the
United States for investment. They indicated that they could not
tell very well. There were supposed to be restrictions on it, but they
rather frankly admitted that these negotiations were handled through
the Swiss and they had no way of measuring it.
Dr. S a u ln ie r . Y ou inspire me to make a special effort to find out
how these estimates are made.
Representative M ills . Doctor, I have just 1 or 2 other thoughts. I
had recently been told, and I notice that it is somewhat expressed here
in the President’s economic message, that the drive is being made by
some foreign countries to obtain treaties with the United States that
will recognize the going rate of tax in the foreign countries rather
than the actual amount of tax paid by the business in the foreign
country.
They say it is necessary that we recognize the going rate of tax if
we do not nullify tax concessions which these foreign countries may
make for purposes of obtaining outside capital.
I can understand their point of view. But since the matter is
referred to in the economic message, has full consideration been given
to the possible consequences here at home, to the effect on the use of
resources here under such a program if it should become widespread
and be included in several treaties with several countries ?
Are we putting ourselves then in the position in which we may lose
the use of facilities and resources that would otherwise be available
to us and are we thereby in the long run diminishing the possibility
of economic growth here at home in keeping with the purposes o f the
Employment Act ?
Dr. S au ln ie r . Another alternative that you should include in that
list is the possibility that this would help us to substitute private
investment for public investment abroad.
Representative Mims. It may do that; but the point I am getting
at is this: Would it in any way jeopardize the accomplishment in the
long run of the objectives of the Employment Act here at home to
pursue a program which grants this concession to foreign investment
of American capital and resources? Is it worthy of consideration?
Dr. S au ln ie r . It is an economic problem. I f the attractiveness of
foreign investment increases, and such tax treaties would increase the
attractiveness of foreign investment by giving effect to the tax privi
leges accorded investment abroad, it would tend to draw investment
funds from our own economy.
Other things being equal, it would make the balance between the
supply of available funds for investment here and the demand for
them a little less favorable. Other things being equal—and we have
to make that assumption in order to reason about this at all—it would
tend to cause investment costs and interest rates to be a trifle higher
in the domestic market.
Representative M ills . Is there occasion then, to have us hold up a
flag of caution to the adoption of such a program and its widespread
utilization ?
Dr. S a u ln ier . Being as uncertain as I am about the immediate im
pact of such treaties, and being as keen an advocate as I am for
measures that would increase the flow of our funds abroad for pur
38
ECONOMIC REPORT OF THE PRESIDENT
poses of economic development, I would hesitate to say that we ought
to hold back on tax treaties at this time.
Representative M il l s . Even though it means supplanting the sig
nals of the market place with concessions and subsidies ?
Dr. S au ln ie r . Even though it might mean at this time a little
heavier demand for investment funds in our market than prevails
currently.
Eepresentative M ills . I had one other thought. I am a little bit
concerned about language which the President uses in his economic
message:
Reliance for stability in economic growth cannot be placed exclusively on the
fiscal and monetary policies of Government.
A little further down he says:
Of particular importance in a prosperous economy is the responsibility of
leaders of business and labor to reach agreements on wages and other labor
benefits that are consistent with productivity prospects and the maintenance of
a stable dollar.
Now, that causes me to feel that there must be some method in
mind whereby these leaders will be asked to assume this responsibility.
I wonder if you could describe the mechanism that you envision by
"which these leaders of business and labor can assume this responsi
bility.
Dr. S au ln ie r . I would just like to make two comments on that, Mr.
Mills. First, there was no intention in the economic message of the
President to take the position that the full burden “ could not” be
placed on monetary and fiscal controls. The economic message merely
says that we court certain risks “ if” we place the full burden on
monetary and fiscal controls.
Eepresentative M ills . I read that a little earlier.
Dr. S au ln ier . I think that is rather an important point. It is
rather an important interpretation or understanding of the language
to have in mind.
Eepresentative M ills . Then this language should be understood to
mean “shall not” rather than cannot.
Dr. S a u ln ie r . And that it could not do it without producing certain
other results which one would regard as undesirable.
Eepresentative M ills . In other words, it is better not to rely ex
clusively upon fiscal and monetary policies of Government. It is
better, according to this report, for us to rely to some extent upon
that, and at the same time for us to obtain recognition of the respon
sibility of leaders of business and labor that they have a chore to
perform in this connection if we are to remain economically stable.
Now, what I am getting at is this: I think if that is the procedure
that we are following, we must sometime or other obtain recognition
of that responsibility from them during the year 1957. Now, first of
all, what is the mechanism that is contemplated for getting the picture
over to them and then, secondly, the mechanism by which the leaders
of business and labor can assume this responsibility?
Dr. S au ln ie r . I think the first and fundamental requirement is that
we understand the problem and get a broad public understanding of
it. It is my hope that the economic messages—this economic message
and also that portion of the state of the Union message that deals
with this—will help to communicate to the public generally the nature
o f these responsibilities.
ECONOMIC REPORT OF THE PRESIDENT
39
Representative M ills . Frankly, can we expect them to assume the
responsibility that we say is theirs and which we desire them to assume,
unless we ourselves in Government set an example that the assumption
of their responsibility would require them to follow ?
Dr. S au ln ier . I think the example that Government sets is enor
mously important.
Representative M il l s . Then does it come to this, that if we expect
them to do what we want them to do this year, we must steer away
from increases in salaries of Government employees during the year
1957? The President’s Economic Report does not say that there
should be any, but there is a drive underway already.
Dr. S au ln ie r . That is correct, sir.
Representative M ills . It is quite a strong drive, I think, for about
$800 per employee.
Now, does this suggest that if we want business and labor to assume
responsibility for holding back on price and wage increases, we must
do the same in the Government ? Is that the case ?
Dr. S au ln ie r . That is correct.
Representative M ills . So that in order for us to expect the maxi
mum out of them, we will have to do the maximum here to keep
them from having such increases occur during the year 1957 ?
Dr. S au ln ie r . That is right.
Representative M ills . Does this recommendation mean that in wage
negotiations in the steel industry, for example, agreements should be
based on the productivity prospects for the steel industry or for the
economy as a whole?
Dr. S a u ln ier . Well, that is a hard question.
Representative M ills . I f it is agreeable to the other members of
the committee, and particularly to the members of the President’s
Economic Council, I would like to submit to them some questions
which they may answer and return for the record.
Use your own judgment as to what you would say and what you
should not answer, if you want to do that.
Dr. S au ln ie r . We would be glad to do that.
Representative M ills . I have no desire to do anything more than
just to have the information.
Representative C urtis . Are they along these lines?
Representative M ills . These are the questions submitted to all
members of the committee.
Dr. S aulnter . We would be glad to do that, Mr. Chairman, but I
would only ask that, in making such requests, you will bear in mind
that the Council has many duties to perform. One of the very heavy
ones that we have to perform is the preparation of the Economic
Report.
We have been hard at work on the preparation of the Economic
Report since the 1st of November. Three long months have gone by
and the Council has devoted just about its full resources to this task.
I hope that we will not now be called upon to write another Economic
Report.
Representative M ills . I would not have any such thought in mind.
Dr. S a u ln ie r . Might I say that, in making that request, I have just
this in mind, and I feel very strongly about this: I am an enthusiast
about the Employment Act and about the possibilities of service that
the President can get from the Council of Economic Advisers. I feel
40
ECONOMIC REPORT OF THE PRESIDENT
very definitely that the service that we can render to the President and
to the Government and to the public in this matter is very much
affected by the kind of homework that we inherit. We can sit down and
turn ourselves into just a guild of writers, but I think we would be
less useful than if we can turn ourselves to the practical day-to-day
problems of Government.
Representative C u rtis . What you are saying in effect, is that this
series of questions, if answered fully, would be almost another economic
report. I am inclined to agree with you.
Representative M ills . I doubt that they would. Have you seen the
questions ?
Dr, S au ln ie r . I have not seen the questions.
Representative M ills . We could sit here and go through those ques
tions for the remainder of the day if it was the will of the committee,
but I thought that it could be just as productive, if the questions were
susceptible of answers for them to be submitted for the record rather
than keeping these gentlemen here later.
I know all of us have other things to do.
Representative C urtis . I have not gone through all of these ques
tions but I have seen some of them. They certainly are questions that
require lengthy and statistical answers.
Dr. S a u ln ie r . This presents a very real problem for the Council
of Economic Advisers. Frankly, I would rather come up here and
spend 2 or 3 days talking with you gentlemen about them, than to
prepare written responses. I am quite frank about that. I would be
glad to come up here and talk for 2,3, or 4 days.
Representative M ills . I will certainly withdraw my request if it
means that much of a burden to you.
Dr. S a u ln ier . I have done a good deal of writing in my day on
finance and economic stabilization, and it comes hard to me. When
the Council of Economic Advisers prepares a document of this kind,
it has to be done with very great care and I can foresee weeks and
weeks of work in that document.
Representative M ills . Let me, then, put the questions in the
record at this point and just go ahead ana get your answers to this
one question if it is possible.
(The questions referred to by Representative Mills are as follows:)
S om e Q u e s tio n s P osed b y t h e J a n u a r y
Prepared by
th e
Staff
1957 E c o n o m i c
R e p o e t o f t h e P r e s id e n t
o f th e J o in t E c o n o m ic C o m m itte e
I . PROBLEMS OF ECONOMIC STABILIZATION
The President, in his letter of transmittal, states: “ Reliance for stability in
economic growth cannot be placed exclusively on the fiscal and monetary policies
of Government. * * * Of particular importance in a prosperous economy is
the responsibility of leaders of business and labor to reach agreements on wages
and other labor benefits that are consistent with productivity prospects and with
the maintenance of a stable dollar.”
A. Can you describe the mechanism by which leaders of business sind
labor can assume this responsibility?
B. Does this recommendation mean that in wage negotiations in, say, the
steel industry, agreements should be based on the productivity prospects
for the steel industry, or for the economy as a whole?
C. Assuming that the wage agreements are to be based on the productivity
prospects of the particular industry, can the “leaders of business and labor’’
in that industry be expected to be able to obtain the required information
ECONOMIC REPORT OF THE PRESIDENT
41
about “productivity prospects” and wage levels in that industry, consistent
with “maintenance of a stable dollar” ?
D. Suppose that, given demand conditions, a particular industry can
increase the prices of its products without loss of sales. Does this recom
mendation, quoted above, suggest that the industry should refrain from
raising its prices to a level at which the prices will serve to “clear the
market” because of considerations of overall economic stabilization?
E. Doesn’t this recommendation presuppose that business and labor
leaders can evaluate the impact of wage and price changes in their particular
industries on the economy as a whole? Can we place any reliance on this
supposition as a basis for labor’s and management’s contributions to economic
stabilization?
The President’s report states, on page 2, that the management of business
concerns have the responsibility for administering “ their affairs so as to help
avoid economic imbalance and dislocation.” It also states that “ * * * the
increasing practice of planning expansion programs well into the future and
organizing operations with a view to greater stability of employment” are
evidence of business’ acceptance of this responsibility. The report states that
“business management has a clear responsibility * * *” to avoid excesses in the
management of inventories, in the expansion of facilities, and in the use of
credit and “* * * carry out its plans so as to contribute to steady economic
growth.”
A. Can you suggest the standards or guides which the management of
any given business should use to determine whether it is carrying out its
plans so as to contribute to steady economic growth? How is any given
business management to know whether, from the point of view of overall
economic stability, its plans and actions with respect to inventories, expan
sion of facilities, and use of credit are “excessive” ?
B. Most businesses, presumably, will be guided in their management of
inventory, facilities expansion, and credit-use policies by considerations of
minimizing their costs and maximizing their profits. The free enterprise
system is based on such motivations. Are actions so motivated necessarily
consistent with steady economic growth? If not, do these assertions in the
report recommend that business management permit considerations of
economic stabilization to outweigh those of cost reduction and profit
maximizing in their own companies?
n . GOVERNMENT STABILIZATION POLICIES
On page 48 the report states that “ * * * the financial affairs of government
should be so administered as to help stabilize the economy and to encourage
sound growth. The principle of flexibility in fiscal policy calls for relating the
budget as far as feasible to economic conditions, helping to counteract infla
tionary or deflationary tendencies as the situation requires.”
A. Would you elaborate on this in detail?
1. In the context of an inflationary situation, what does this principle
call for with respect to—
(а ) Government spending;
(б) Government revenues—tax reductions or increases, general or
otherwise;
(c) Net budgetary situation;
(d) Debt management?
2. In the context of a recession, what does this principle call for with
respect to—
(a ) Government spending;
(&) Government revenues—tax reductions or increases;
(c) Net budgetary situation;
(d) Debt management?
If we were to face a recession in fiscal 1958, would you recommend tax reduc
tions, even if they meant an increase in the debt?
The President’s report states on page 2 that government must “ * * * take
in taxes no more than absolutely necessary of the incomes of individuals and
businesses.” How do you define and measure the amount of taxes that are
absolutely necessary? Is this amount related to the use of government fiscal
powers for purposes of economic stabilization? How?
The report notes (p. 32) that rising costs, particularly after the middle of the
year, underlay the rise in the prices of most commodities and services during 1956.
87624— 57—pt. 1------4
42
ECONOMIC REPORT OF THE PRESIDENT
The report describes this “cost-price push” (p. 44) as follows: “When produc
tion, sales, and employment are high, wage and price increases in important in
dustries create upward pressures on costs and prices generally. To depend ex
clusively on monetary and fiscal restraints as a means of containing the upward
movement of prices would raise serious obstacles to the maintenance of economic
growth and stability. In the face of a continuous upward pressure on costs and
prices, moderate restraints would not be sufficient; yet stronger restraints
would bear with undue severity on sectors of the economy having little if any
responsibility for the movement toward a higher cost-price level and would court
the risk of being excessively restrictive for the economy generally.”
A. Can this “cost-price push” occur without an accomodating expansion
of aggregate (money) demand? Could this “cost-price push” be prevented
by making Federal Government fiscal and monetary policies sufficiently
restraining?
B. If fiscal and monetary restraints adequate to prevent price rises
would “ * * * court the risk of being excessively restrictive for the economy
generally,” doesn't this imply a conflict between the objectives of price
level stabilization (i. e., preserving the value of the dollar), and maintaining
high levels of employment and production?
C. If such a conflict does exist, in the present context, should Federal
Government economic policies give priority to price level stabilization or to
maintaining high employment?
D. The report observes (p. 46) that “ * * * the moderate upward drift of
the price level may not yet have run its course * *
Does this mean
that we may expect further increases in the price level in 1957 over the end
of 1956? Does the language on page 44, quoted above, imply a recommenda
tion that if such price increases materialize—or threaten to occur—the
Federal Reserve should not impose “stronger restraints” ?
I I I . ECONOMIC SIG NIFIC AN C E OF PRESIDENT’S MID-EAST PROPOSALS
The report is virtually silent on the consequences of developments in the MidEast in 1956 for the American economy. Does this imply that these consequences
are insignificant? If not, will you elaborate in detail on the impact on the
United States economy of the closing of the Suez Canal, the military interven
tion in Egypt, etc. ?
The report is entirely silent with respect to the President’s proposal for eco
nomic assistance in the Mid-East. Will this program, if adopted, be incon
sequential so far as the United States economy is concerned? If not, will you
discuss the problems and types of adjustments involved?
IV. AGRICULTURAL SECTOR OF T H E ECONOMY
The report states on page 12 that “in general, adjustments have been in the
direction of a better balanced farm economy. Most of the decline in the total
number of farms has been among units that yield inadequate income to their
operators; the number of moderate-sized family farms has increased; and the
proportion of farms owned in whole or in part by the farm operator has risen.”
Can you provide us the detailed data showing (1) the distribution of the de
cline in the number of farms by size of farm or by amount of farm operator’s
income from the farm ; (2) the distribution by size and by type, family or com
mercial, of the present number of farms; and (3) distribution of operator owner
ship of farms by size of farm?
Representative M ills . Does this recommendation mean that nego
tiations in, say, the steel industry should involve agreements based on
productivity prospects for that particular industry or the economy as
a whole. What are we talking about in the report there?
Dr. S au ln ie r . Let me see if I can answer the question this way.
I am an old college professor and I could do this a little better if I
had a blackboard. Lacking a blackboard, let me draw some pictures
on this pad.
I f you take all the industries in our country today—if we knew the
productivity prospects for each of them—we would find that they
ranged from some very high prospects—I am talking now about the
prospects for the next year or 2 years—all the way down to those
ECONOMIC REPORT OF THE PRESIDENT
43
having no prospects for increase at all, and to those industries where
the prospect may be for a loss of productivity.
Now, we could take our little mass of companies and order them
according to their productivity prospects. I f we did that, we might
find that the data would tend to concentrate around a prospective
productivity gain of say 2% percent or 2 percent, or some such figure.
Let us say 2% percent. There would be some companies with much
brighter prospects, but fewer than those that concentrate at the norm.
Then there are some that have very little prospect of gain.
You would get a spread something like this. All that the economic
report says is that if, on the average, wage increases go beyond what
is indicated at this concentration point, that is a factor making for
general price increases.
That is a general proposition and refers to averages and not to
specific industries and still less to specific companies.
Now, let me turn to the other question. Let us suppose that you
are in an industry that has very very bright productivity prospects
and your company happens to be one of those with the brightest prosects of all. You are away out here and you have been told by someody, or you have reason to believe, that the average gain is 2% per
cent, but you can expect a lot more in your industry.
Now, what will happen? In negotiating a wage agreement you
will, of course, take account of the situation in your own industry,
as will those who represent labor. But, you will not pay a wage in
that industry which is exactly in line with the productivity prospects
for your industry. You will pay perhaps somewhat higher than the
average because of the bright prospects of your industry, but only
“ somewhat” higher than the average.
Indeed, there is no reason why you should pay more than that.
The bright productivity prospect in your industry is not attributable
to the qualities of labor working in your industry because if they do
not work for you they go into some other industry where productivity
prospects are less bright and, therefore, by inference, their efficiency
is less.
Representative M ills . That is what I was getting at. This plan
does contemplate enough flexibility for me as the management of a
concern to come to the President with a wholesome desire of assuming
thi& responsibility and doing what is suggested and still permit me
acting under that responsibility to retain my work force and to ac
commodate their needs for increases if those needs exist even though
my immediate prospect for increase in production is not in keeping
with that which they and I might agree would be a reasonable figure
for their wages for the future.
Dr. S a u ln ier . I think that is a correct statement.
Representative M ills . I think that that is all I have. Are there
any xurther questions ?
Representative C u rtis . I have a question. I think this has been
explained but I have a note on this sentence here that Mr. Mills was
attaching much importance to:
E
Reliance for stability in economic growth cannot be placed exclusively on the
fiscal and monetary policies of Government.
Frankly, I was very much disturbed at that sentence because I read
into it the overtones that I think are not there but I want to be sure.
44
ECONOMIC REPORT OF THE PRESIDENT
The stability and economic growth in my judgment, cannot even be
placed primarily on fiscal and monetary policies of Government. In
our system of private enterprise it is bound to be in private enterprise
and at most, all the Government can do, as the rest of the report
indicates, is create good climate.
Yet this sentence was worded in such a way that it stated:
Reliance for stability and economic growth cannot be placed exclusively—
and it implied that it could be primarily placed on it.
I do not think even that can be done.
Dr. S a u ln ier . That interpretation should not be placed on that
sentence. The reference is primarily to the efforts that must be made
by Government and by individuals to control inflationary develop
ments.
Representative C u r t i s . The dollar value is what you had in mind?
Dr. S au ln ier . That is right.
Representative C urtis . I wanted to make it clear that the overtones
I read into it are not in there. I get your point about what you were
referring to and the fact that that applied to the dollar value more
than anything else.
Representative M ills . I have just one further thing. This is not
a question prompted by me but prompted by two conflicting state
ments that I have read by reporters skilled in interpretation of lan
guage. It had to do with one sentence of that paragraph which I
read to you earlier on page 44.
In the face of a continuous upward pressure on costs and prices, moderate
restraints would not be sufficient; yet stronger restraints would bear with undue
severity on sectors of the economy having little if any responsibility for the
movement toward a higher cost-price level and would court the risk of being
excessively restrictive for the economy generaUy.
One writer said that the President here is telling the Federal
Reserve System to lay off and not impose any greater monetary re
strictions. Another writer is saying just the contrary. Which of the
two have properly interpreted what is meant by this language?
Is this an instruction by the President to the Federal Reserve not
to impose greater restraint in monetary policy ?
Dr. S a u ln ie r . I think both reporters were wrong.
Representative M ills . They are going to be disappointed.
Dr. S au ln ie r . The President in this section of the Economic Report
is not speaking directly to the Federal -Reserve and not giving instrucr
tions to the Federal Reserve.
This section of the Economic Report is making an important ob
servation on some of the implications of monetary policy and mone
tary restraints. I think these are observations on the implications
of money policy with which most students of our financial markets
would agree.
It is not necessary to tell the Federal Reserve System that they
should avoid monetary restraints that are so severe as to produce a
contraction or recession in the United States. I think they under
stand what they are doing well enough, and they have a keen enough
appreciation o f their public duties, to avoid such policies.
Representative M ills . I do not mean to say this about the present
members, but long ago they did not always act in such a way as to
leave me certain that they were justified with that degree of confidence,
ECONOMIC REPORT OF THE PRESIDENT
45
I am not criticizing anything that they are doing now and I know
they are very sincere in what they do. What you are saying, I assume,
would apply to the present members and not to all the members that
have ever been on there.
Dr. S a u ln ie r . I am talking about the present Federal Reserve
Board and present policy, altogether without prejudice to history.
I have my own views about history.
Representative M ills . I felt that these two writers were wrong my
self. I had a different impression from what you stated though. It
was my thought here that the President was making an observation
that in order to completely control this inflationary spiral it is neces
sary to have more restraints than we have today. But, because greater
restraints than we have today would bring about severity of treatment
in certain sectors, we probably would not be justified in imposing those
greater restraints and, therefore, we are going to countenance con
tinuation of just a wree bit of inflation in the months ahead.
That was my reaction to it.
Dr. S au ln ie r . I would not read it that way.
Representative M ills . I hope your conclusions are correct.
Representative C urtis . I hate to prolong this, but there was a basic
question that I have been meaning to ask. It is a general impression
that I have received over what is called the tight-money picture. It
seems to me that in the situation there, tight consumer credit made
sense, but it seemed that the tightness on the money was actually in
investment money rather than in consumer money.
Now, that seemed to me to be the reverse process. I f we have a
situation that is inflationary, it is certainly to our advantage to in
crease production. Production is increased through additional in
vestment expenditures.
Representative M ills . Through savings.
Representative C urtis . Yes, through savings, but also if you have
a small business, for example, that is legitimately expanding its pro
duction because the market is there and it finds that it cannot expand
because it cannot get the normal, or what was normal before, bank
loans that it was getting for that very operation, or they are re
quired to use money that they had used for operating expenses investmentwise for capital outlay, they then cannot meet the increased
demands of the consumer.
Dr. S au ln ier . That is true. On the other hand, we must recognize
that in the last 2 years, notably in the last 2 years, credit demands
have risen to a very large degree from expansions of plant and
equipment, which will enable consumer goods to be increased in the
future.
Representative C urtis . Take the cement industry. Everyone
knows the demand for cement due to the home-building program,
even though there has been some cutback, and the St. Lawrence
seaway project and the big highway program. We are going to have
to have increased production of cement.
That is the kind of business that lends itself to smaller businesses
rather than large operations because there is an advantage economi
cally to being well located due to freight cost. That is the type
area where they are feeling this shortage of investment capital and
bank borrowings.
46
ECONOMIC REPORT OF THE PRESIDENT
It is hampering their ability to expand in order to meet the known
demand for cement. That is bound to increase the cost of cement,
I would think.
Dr. S au ln ie r . That is right. It does contribute to price increases.
Eepresentative C urtis . In that instance, it would seem that a little
laxity, or perhaps not laxity but liberalization on investment credit
where it is known to be going into productivity on the part of the
banks, would be beneficial.
Yet, it almost seems that it is the other way around. It has not
been consumer credit that we are receiving complaints on, but it is
in this area of investment dollars.
Dr. S au ln ier . There has been little complaint in 1956 over the use
o f credit in the consumer area. Credit use there has been only a frac
tion of what it was in 1955. Whether 1957 will see an increase in de
mand in that area or not is another matter although there are some
indications now that increased demands will come from the consumer
area. Let me say, Mr. Chairman, that one of the tasks to which the
Council has to turn $t once, and must give close attention, is the study
of the very large investigation which has been completed for us at our
request by the Federal Reserve Board on consumer credit.
As soon as we can, we must reach a conclusion on whether the Con
gress should be asked to grant the President standby authority to
control consumer credit.
That is something which I anticipate will occupy us fully for some
weeks.
Eepresentative M ills . There are some factors to consider in con
nection with a study of that kind.
Permit me to thank each of you for being with us this morning, and
contributing to our understanding of the message of the President,,
known as the Economic Eeport.
We thank you very much.
Dr. S a u ln ie r . Thank you very much. Let me say, Mr. Chairman*
that at this late moment I have deep feelings of regret that throughout
this period of questioning I have not called on my two colleagues to
share my task. I should have done so.
There are many points on which they are far better qualified than
I am to answer your questions and I hope you, and they, will forgive
me.
Eepresentative M ills . I f they feel any degree of mistreatment by
the Committee, we will grant them the right to extend their remarks
in the record.
Without objection the Committee will adjourn until 10 o’clock in
the morning.
(The correspondence referred to on p. 7 follows:)
C o n g r e s s o p t h e U n it e d S t a t e s ,
J o in t E c o n o m ic C o m m i t t e e ,
December 11, 1956.
Dr.
J. S a u l n i e r ,
Chairman, Council of Economic Advisers ,
E xecutive Office o f the President, Washington , D. C.
D e a r D r . S a u l n i e r : We are pleased to learn of your appointment to the
chairmanship of the Council of Economic Advisers. I congratulate you on this
appointment and look forward to close working relationships between the Council
and this committee.
R aym ond
ECONOMIC REPORT OF THE PRESIDENT
47
Grover Ensley has reported to me your feelings with respect to meeting with
the joint committee in late January at hearings reviewing the President’s Eco
nomic Report As you know from previous discussions and correspondence,
this has been a matter which has resulted in confusion and strong feelings over
the years.
In the past, 1 of 2 procedures has been followed:
1. An executive session with no transcript made. This was the procedure
followed last year except that stenographic notes were taken but not
typed. I gather from Grover that this is the arrangement you would prefer
in the future, in that you believe it would give you greater freedom to talk
frankly and in detail with respect to the assumptions and background under
lying the President’s Economic Report with those members of the committee
who are able to attend the meeting.
2. An executive session with a transcript made which, after editing, is
printed as part of the committee hearings. This was the procedure, for
example, in January 1955. From the standpoint of the committee, I think
it is correct to say that this is the most useful procedure in that it makes
the record available to those members of the committee who of necessity
are absent from the executive session. It also helps document the com
mittee’s own report to the Congress, and thus tends to be of maximum bene
fit to the President’s legislative program in the Congress.
The question now becomes one of reconciling two logical and understandable
positions in the interest of carrying out the objectives of the Employment Act by
assisting the Congress in its consideration of the recommendations of the Presi
dent, and at the same time preserve the unique position, objectivity, and frank
ness of the Council of Economic Advisers. Would you consider the following
compromise procedure which I would hope might satisfy both of these objectives:
An executive session at which a transcript would be taken of those parts
of the meeting which the Council felt would not jeopardize its position of
anonymity. At any point in the hearing when the Council felt it was get
ting into an area where it wished to “roll up its sleeves” it would be given
permission to go off the record—with no stenographic notes made. Upon
completion of this delicate point the discussion could go back on the record.
The part of the hearing that was transcribed could then be typed, and the
Council could edit it to provide additional elaborations or to delete por
tions that on further consideration were felt to jeopardize its position. This
could then be made a part of the printed hearings for the benefit of the
members, the Congress, and the general public.
As I have indicated above, this proposed procedure would mean that absent
members would not have the benefit of parts of the discussion. They, never
theless, would have benefit of that part of the testimony which was more or less
routine. At the same time it would protect the Council against stenographic
notes and a record being made of any portion of the testimony which might
jeopardize the Council’s position.
I have just looked over the public record of the Council before the House
Appropriations Committee on February 16, 1956, and this suggested compromise
procedure, as I understand it, follows the practice which has been prevailing
between the House Appropriations Committee and the Council.
I am writing you at this time in order to do all we can to avoid the confusion
and misunderstanding that developed last year. At the committee’s organization
meeting next month, when there will undoubtedly be a discussion of plans for the
hearings on the President’s report, the committee will want to decide whether or
not it wishes to invite the Council to testify and on what basis. This decision
of the committee on whether or not the Council should be invited will, of course,
depend upon the conditions under which the Council is willing to testify. While
I am not sure that all members will be entirely happy with the compromise I have
proposed I will do my best to have it accepted by the committee if it meets with
your approval, recognizing that in your case, as in ours, it is a second choice—a
compromise.
I know this is getting into your busy time but I would like to have some indica
tion from you on this matter before our committee meets in early January. I
am sure that you will find that this committee will be more than cooperative
with you in seeking to protect the proper position of the Council.
Sincerely yours,
W r ig h t P a tm a n ,
Vice Chairman.
48
ECONOMIC REPORT OF THE PRESIDENT
T h e C h a ir m a n o f t h e
C o u n c i l o f E c o n o m ic A d v is e r s ,
Hon.
Washington, December 19,1956 .
W r ig h t P a tm a n ,
Vice Chairman, Joint Economic Committee,
Congress of the United States, Washington, D. C.
D e a r M r . P a t m a n : Thank you very much for your December 11 letter on the
subject of procedural arrangements for testimony before the Joint Economic
Committee by the Chairman of the Council of Economic Advisers.
Although I would prefer to testify before the committee in executive session
with no transcript, I appreciate your need for a record and I think your sugges
tion for obtaining it is a fair and workable one. My understanding of your pro
posal is that stenographic notes would be taken except where the testimony is
given “ off the record,” and that a transcript would be prepared from these notes
and printed in the proceedings of the committee after editing by the Chairman of
the Council, such editing to permit the deletion or revision of substantive matter
as well as purely literary changes. Unless some change is made in the proposed
arrangement in the interim, and I see no need for any change, I will assume that
my testimony before the Joint Economic Committee will be given on this basis.
It was good of you to write me as fully as you did, and I am pleased to have
had this opportunity to reach a mutually agreeable arrangement well in advance
of the committee’s hearings. I look forward with pleasure to the opportunity
which these hearings will provide to discuss the President’s Economic Report
with the committee.
Cordially,
R a y m o n d J. S a u l n i e r .
(Whereupon at 1:10 p. m., the hearing in the above-entitled matter
was recessed to reconvene at 10 a. m., Tuesday, January 29,1957.)
JANUARY 1957 ECONOMIC REPORT OP THE PRESIDENT
T U E S D A Y , J A N U A R Y 29, 1957
C ongress of t h e U nited S tates ,
J oin t E conomic C om m ittee ,
W a sh in gton , D . G .
The committee met at 10 a. m., pursuant to adjournment, in room
P-63 of the Capitol, Hon. Wright Patman (chairman of the joint
committee) presiding.
Present: Representatives Patman (presiding), Mills, Talle, Curtis,
and Kilburn; and Senators O’Mahoney, Flanders, and Watkins.
Present also: Dr. Grover W. Ensley, executive director of the joint
committee, and John W. Lehman, clerk of the joint committee.
Chairman P a t m a n . The committee will please come to order.
The hearings on the President’s Economic Report started yesterday
when the committee held an executive session with members of the
Council of Economic Advisers.
I might say to the public that a transcript was taken of yesterday’s
testimony which will be edited and released to the public as soon as
possible. We are happy that this year we will be able to publish the
testimony received from the Council members.
Today our hearing centers on the Federal budget. The President
transmitted to the Congress on January 16 a Federal Budget totaling
$71.8 billion, an increase of $3 billion from the current year and over
$5 billion from fiscal year 1956.
These increases in estimated budget expenditures must be viewed
in the setting of a high-employment economic situation, in which
prices are rising and the value of the dollar is decreasing. An im
portant question of Government economic policy under the Employ
ment Act is the influence of the budget on problems of economic stablization and growth.
It is logical, therefore, to have as our witness today the Director of
the Bureau of the Budget. As we all know, the Bureau of the Budget
is located in the Office of the President of the United States. The
Budget Director is the chief administrative arm of the President. He
prepares the budget for the President. The Director of the Bureau
of the Budget is Percival F. Brundage.
Mr. Brundage, we are glad to have you and your associates with us
today and invite you to make any opening remarks that you may care
to before we go into the question period.
49
50
ECONOMIC REPORT OF THE PRESIDENT
STATEMENT OF PERCIVAL F. BRUNDAGE, DIRECTOR OF THE BU
REAU OF THE BUDGET (ACCOMPANIED BY ROBERT E. MERRIAM,
ASSISTANT DIRECTOR; RAYMOND T. BOWMAN, ASSISTANT DI
RECTOR FOR STATISTICAL STANDARDS; WILLIAM F. McCANDLESS, ASSISTANT DIRECTOR FOR BUDGET REVIEW, AND SAMUEL
M. COHN, CHIEF OF FISCAL ANALYSIS OF THE OFFICE OF BUDGET
REVIEW)
Mr. B rundage . Mr. Chairman and members o f the committee, it is
a pleasure to have the opportunity to discuss the budget with you
today. I have a summary statement and a few charts on the budget
for the fiscal year 1958, which begins July 1 next, and then I shall
be glad to answer your questions.
budget policies
There seems to be broad general agreement on the budget policy
which should be followed at a time like the present when the economy
is operating at a very high rate and is subject to inflationary pres
sures. Government should seek to alleviate rather than aggravate
those pressures.
Of course, there is never general agreement on whether the size
and contents of a recommended budget are proper. I do not suppose
that any budget has ever been submitted which was not criticized by
some for being too large and by others for being too small. Usually,
the budget is criticized both for being too large in total and at the
same time for excluding or allowing too little for each person’s pet
project or activity. This year has been no exception.
The task of formulating a budget is never an easy one, particularly
for a period so far in advance. It is an exercise which tries to bring
into reasonable balance demands and objectives which may be con
flicting. On the one hand, it would certainly be desirable to reduce
total Government spending so that a larger portion of national pro
duction could be used in accordance with individual, private decisions
and so that inflationary pressures would be minimized. But on the
other hand, it may be desirable to increase spending to secure still
stronger defenses and to meet such urgent needs as more schools and
better highways. Looking at the budget from the revenue side, it
would be desirable to reduce taxes so as to remove present restraints
on incentives, to simplify collections, to lessen temptation for avoid
ance or evasion, and to make more money available for long-run eco
nomic growth through private investment. However, it is essential
that we help preserve financial stability by keeping taxes high enough
to produce some budget surplus for reduction of the public debt and
the lessening of inflationary pressures.
ECONOMIC REPORT OF THE PRESIDENT
51
Last fall the outbreaks of fighting in Hungary and the Middle East
illustrated the tensions and uncertainties that abound in the world
today. They emphasized the necessity for our own military strength
for the defense of this Nation and the free world. This year we have
reached a stage of transition where a large variety of new weapons
have been developed with greatly increased effectiveness which are
in part replacing the more conventional types of weapons on which
we have heretofore relied. The cost of these new weapons is several
times the cost of the old, but their effectiveness has increased many
times. The tactics and strategies that may be employed in future wars,
if they should occur, will be entirely different from the old. On the
other hand, we cannot abandon the conventional type of weapons,
because localized conflicts are still breaking out for which we must
maintain a readiness in all branches of the service.
The assumptions with respect to economic conditions which underlie
this budget are that the Nation will continue to have a high rate of
business activity with increasing national income and with prices
relatively stable at about current levels. Secretary Humphrey has
already transmitted to the committee the assumptions as to personal
incomes and corporate profits which were used in making the revenue
estimates. It is assumed that personal income will rise from $325
billion in the calendar year 1956 to $340 billion in the calendar year
1957—that is a little less than 5 percent—and that corporate profits
before taxes will rise from 43 to 44 billion dollars for the same periods.
I am sure that Secretary Humphrey will be glad to discuss these
assumptions further when he appears before you. The expenditure
estimates in the 1958 budget are consistent with the economic assump
tions used with respect to the revenue estimates.
BUDGET SURPLUS
The recommended budget for 1958 is balanced. This will be the
third successive budget with a surplus. The actual surplus for the
fiscal year 1956, which ended June 30, was $1.6 billion. The current
estimate for the fiscal year 1957, which is now at its midpoint, is that
the surplus will be slightly higher, $1.7 billion. The estimates for
1958 show a surplus of $1.8 billion, based on the continuation of
current tax rates.
Thus the Federal budget will continue to contribute to the Nation’s
financial stability and to the preservation of the purchasing power of
the dollar. The prospective budget surplus in the fiscal year 1958
will reinforce the restraints on inflation of present credit and monetary
policies. But, as the President pointed out in his messages on the
state of the Union, the budget, and the economic report, business and
labor leadership must earnestly cooperate with the Government if
inflation is to be prevented.
52
ECONOMIC REPORT OF THE PRESIDENT
BUDGET RECEIPTS
I f we turn now to chart I, we can see the comparison of the budget
totals for 6 years.
C hart I
1953
1954
1955
1956
Fiscal Years
1957
1958
-— Estimate —
Executive Office of The President • Bureau of The Budget
The budget estimates show rising receipts since 1955, which was
the low point, to $68.1 billion in the fiscal year 1956, $70.6 billion in
1957, and $73.6 billion in 1958. In addition to an increasing national
income, these estimates assume that the existing tax rates on corpora
tion incomes and on excises will be extended for another year beyond
ECONOMIC REPORT OF THE PRESIDENT
53
April 1. The extension of these rates will provide $2.3 billion of the
total revenues estimated for 1958—without which there would be a
budget deficit. Since Secretary Humphrey is scheduled to appear
before you, I will not go into any detail about revenues, but will
move on to expenditures.
BUDGET EXPEN DITU RES
Referring again to chart I, you can see that expenditures are also
estimated to rise. They were $66.5 billion for the fiscal year 1956,
which ended last June 30. For the current year, they are now esti
mated to be $68.9 billion. In the coming fiscal year, 1958, total
expenditures are estimated at $71.8 billion.
I should point out that the estimates of budget receipts and expendi
tures for the years 1957 and 1958 are not entirely comparable to the
actual figures for previous years. Under the provisions of legislation
enacted last year, the financial transactions of the extended Federalaid highway program are included in a self-liquidating trust fund
and are not in the budget totals. I f the highway transactions and the
budget transactions were combined, the total receipts in 1958 would
be larger? $75.8 billion, and the total expenditures would be $73.6
billion, yielding an estimated surplus of $2.2 billion, instead of $1.8
billion. The excess of receipts over expenditures of the highway fund
in 1958 of $400 million is not available for general purposes but is re
served for future highway expenditures. This is why we have not
combined it with the regular budget figures, but have carried it as a
separate trust fund.
The broad purposes for which Federal expenditures will be made in
the fiscal year 1958 are summarized in chart II.
C habt
II
K5.3:
FEDERAL BUDGET
EXPENDITURES
$ Billions
7.4
Protection
Civil
Benefits
Merest
Executive Office of The President • Bureau of The Budget
X .S sm l Operations
54
ECONOMIC REPORT OF THE PRESIDENT
Protection accounts for 63 percent of the total. This is $45.3 bil
lion. This category includes the military functions of the Depart
ment of Defense, the military and economic parts of the mutual se
curity program, the Atomic Energy Commission, stockpiling and de
fense production expansion, the United States Information Agencyr
and civil defense.
Budget expenditures in 1958 for civil benefits, which include most
of the domestic programs except central administrative and mainte
nance activities, are estimated to be $16.9 billion, which is 24 percent
o f the total. Interest is 10 percent of the total. Civil operations and
administration, which might be called the real cost of carrying on
our Government, will require a little over 2 percent, or $1.8 billion.
In addition to the 4 broad purposes shown on this chart, the budget
total includes an allowance tor contingencies amounting to $400 mil
lion. An estimate for contingencies is included in the budget totals
each year as a matter of sound budgeting, to make allowance for
probable future requests which may arise—including some relatively
small amounts for present legislative proposals for which the timing
of expenditures is uncertain. The Congress is not being asked to
appropriate this item, but as needs arise, specific requests for funds
will be made.
I have a table here, chart III, which shows at a glance how the
expenditures for protection, interest, and all other purposes in the
fiscal year 1958 will compare with those for the current year.
C h a rt
III
Budget comparison, 1951-58 1
[Fiscal years; in billions of dollars]
New obligational
authority
1957
Protection:
Department of Defense:
Military................................................................
Mutual security:
Military................................................................
Economic..... ........—............................................
Atomic Energy Commission.....................................
Other...........................................................................
1958
Expenditures
1957
1958
$36.4
$38.5
$36.0
2.0
1.8
2.0
.2
2.4
2.6
2.0
2.5
.4
$38.0
2.6
1.8
1.5
1.9
2.3
.6
.6
Total protection.......................................................
Interest...............................................................................
All other.............................................................................
Contingency......................................................................
42.4
7.3
20.6
.2
45.8
7.4
19.6
.5
42.7
7.3
18.8
.2
45.3
7.4
18.7
.4
Total.........................................................................
70.5
73.3
68.9
71.8
1 Estimate.
N o t e — Detail for 1957 expenditures does not add to total because of rounding.
The two columns on the right are for expenditures. The two on
the left are for new obligational authority. You will see that the
increase from 1957 to 1958 is concentrated in the programs for pro
tection, most of it in the Department of Defense military functions.
There are, of course, substantial increases in some civil activities and
decreases in others.
ECONOMIC REPORT OF THE PRESIDENT
55
The rise of $2 billion for the Department of Defense results from
several factors. One I have already mentioned—that we are in a
transition stage where guided missiles and other new weapons are
beginning to come into production but we must at the same time main
tain our current readiness with more conventional weapons. Expendi
tures for missiles are estimated to be $533 million higher while the
total of all other expenditures for major procurement is the same.
Another reason for the increase is that costs of maintenance and
operation increase as our weapons systems become more complex.
The newer planes take a lot more fuel and they are more costly to
operate. Similarly, these more modern weapons require additional
construction: for example, new launching sites, improved and dis
persed airfields, warning networks for the continental defense system,
and facilities in support of antisubmarine warfare and large aircraft
carriers. Increases in expenditures from 1957 to 1958 are also esti
mated for military personnel and for reserve forces, reflecting the
growing number of trained specialists rather than an increase in total
numbers of personnel.
The “All other” item shown on the table includes both civil benefits
and civil operations. The decrease estimated between 1957 and 1958
reflects the recommendation for adjustment of postal rates. We are
actually recommending an adjustment of something over $600 million.
An adjustment in rates was approved by the House of Representatives
just before adjournment last summer, and I certainly hope that one
will be approved by both Houses of Congress this session.
An important new program of civil benefits which is recommended
in the 1958 budget is the proposal for general assistance in school
construction over a 4-year period. The budget includes recommended
appropriations of $451 million and estimated expenditures of $185
million for this purpose in the fiscal year 1958. This was covered
by the special message yesterday.
Another new program which the President recommended again is
the proposal to assist communities with persistent unemployment to
expand economic opportunities. This involves appropriations of $53
million and expenditures of $10 million in 1958.
The President has made several other legislative recommendations
which are of interest to this committee. Many of these recommenda
tions, such as improvements in antitrust and merger legislation, im
provements in labor standards legislation, and broadening of unem
ployment compensation coverage, either will not require additional
budget expenditures or will require relatively small amounts which
the allowance for contingencies should be more than adequate to
cover. Thus, all the legislative proposals of the President which
were made in the state of the Union message, the budget message,
or the Economic Report are covered in the budget, either by specific
amounts or by the general allowance for contingencies. Where we
had a pretty detailed or a large program, it is included under the
particular department headings. The general contingency allowance
includes smaller proposals which had not been definitely defined.
The budget also provided for a number of significant changes in
existing programs. For example, there is an estimated increase of
$108 million in the expenditures of the Civil Aeronautics Adminis
tration, primarily for establishment and operation of improved air
56
ECONOMIC REPORT OF THE PRESIDENT
traffic control facilities. That is looking toward the future greater
use of jets, and the congestion in the air. Expenditures for public
assistance grants are estimated to rise $100 million as a result of the
amendments to the social-security legislation enacted last year. Re
adjustment benefits for veterans are estimated to decrease $44 million,
while compensation and pensions increase $107 million under existing
legislation. The budget provides $100 million to cover the 1958 cost
of possible proposals which the President may make in a special
message dealing with our system of veterans benefits. While in
creasing immediate costs, these improvements should, I hope, lead
to long-run savings.
Largely because of commitments previously made, expenditures for
loans for college housing, for rural electrification and telephones, and
for farm operation and ownership will rise.
Carrying out previous commitments will also lead to an increase
in expenditures by the Corps of Engineers and the Bureau of Rec
lamation. Together, their expenditures are estimated to be $91 mil
lion more than in 1957, of which $10 million is for the 1958 outlays
on new projects to be started.
c The National Park Service, which started its 10-year program of
improvements this year, is budgeted to maintain the same rate of
expenditures next year.
Payments under the various conservation programs of the Depart
ment of Agriculture are estimated to be $56 million more than in
1957. Most of the rise is for the soil bank and the Great Plains pro
gram.
Grants for construction of waste treatment works under legislation
enacted last year will grow from 7 to 62 million dollars. Other ex
penditures for the Public Health Service are estimated to increase
$47 million, primarily for research.
Another change in expenditures which should be mentioned in this
quick review of the budget is that for interest. These expenditures are
estimated to be $100 million more in 1958 than in 1957, reaching a total
of $7.4 billion. This estimate does not reflect any further tightening
of money, but simply the refinancing of maturing securities at present
rates*
RECEIPTS FROM A N D P A Y M E N T S TO T H E P U B L IC
When I reviewed the budget totals earlier in this statement, I men
tioned the highway trust fund. As this committee is aware, the flow
of cash between the public and the Government is obtained by a
consolidation of the transactions of the budget, the trust funds, and
certain Government-sponsored (mixed-ownership) enterprises. This
consolidation eliminates interfund transactions and such noncash
transactions as accrued interest expenditures. Because of the interest
of economists in the consolidated cash statement, I thought it might
be helpful to summarize for you the major differences between the
estimated budget surplus and the excess of cash receipts from the
public for each of the fiscal years 1957 and 1958.
In the fiscal year 1957, the budget surplus is estimated to be $1.7
billion and the trust fund accumulations are estimated at $2.4 billion.
These two together amount to $4.1 billion, but the excess of cash
receipts from the public over cash payments will be $3.5 billion. This
ECONOMIC REPORT OF THE PRESIDENT
57
difference is due almost entirely to two factors. First, the anticipated
payment in cash of $1 billion of Treasury notes held by the Inter
national Monetary Fund and second, the partly offsetting difference
between accrued interest and interest payments largely on series E
bonds of $340 million.
In the fiscal year 1958, the estimated budget surplus, $1.8 billion,
is somewhat larger than for 1957 but the trust fund accumulations
are estimated to be considerably smaller than in 1957—$1.5 billion.
This is primarily due to the liberalization of social security enacted
last year resulting in higher benefit payments without completely
offsetting increases in receipts. The total of the budget surplus and
the trust fund accumulations is again expected to be reduced by the
net effects of accrued interest between the beginning and end of the
year and of another payment on notes to the International Monetary
Fund. In the fiscal year 1958, this redemption is estimated at $500
million.
The United States subscription to the International Monetary Fund
was made in the fiscal year 1947. Part of the subscription came from
the exchange stabilization fund and part of it was a general fund
expenditure which was then included in the budget. A large part
of the subscription was in the form of non-interest-bearing notes, and
did not involve substantial cash payments in the years up to 1956.
The large estimated redemptions (and resulting cash payments) of
$1 billion in 1957 and $500 million in 1958 are mainly because of the
recent loan and cash advances which the fund made to the United
Kingdom. It may be, of course, that the actual amount of loans will
be less than these estimates. In such a case the excess of cash receipts
from the public will be that much greater than estimated in the budget.
I am sure that this committee is also interested in the expression of
the 1958 budget figures in terms of the national income and product
accounts. While the budget was being prepared and printed, the
Bureau of the Budget made the various proofs available to national
income experts in the Office of Business Economics of the Department
of Commerce. It is my understanding that with this early start, the
Department of Commerce was able to give this committee a translation
of the budget figures into the Government sector of the national income
and product accounts.
PROSPECTS FOR T H E F U TU R E
It is difficult to describe in a few words the many ways in which
the specific recommendations in the budget may affect the economy
in the budget year and the years ahead. However, I believe the budget
as a whole will continue to be an influence for economic growth and
reasonable price stability. Economic growth will be fostered through
the recommended investments in transportation, conservation, health,
and education and through the provision of credit for housing, agri
culture, small business, and foreign trade. Price stability will be
helped through the recommended continuation of a budget surplus.
The budget will also foster economic stability through the recom
mendations for safeguarding our citizens against economic and physi
cal hazards.
The committee has asked me to discuss the commitments extending
beyond the fiscal year 1958 which are contemplated in the 1958 budget.
87624— 57------ 5
58
ECONOMIC REPORT OF THE PRESIDENT
The gravest commitment for the future is the reasonable protection
of this country against attack. Expenditures for protection must
continue to be large, very large, until an agreement has been reached
for reduction and regulation of armaments under safeguarded inspec
tion guaranties. When that occurs, it should be possible to change
the entire budget picture.
In addition, there is some commitment, not necessarily binding, to
complete various unfinished projects we have started. For example,
we have started a 10-year program for the improvement of roads and
facilities in our national parks and a 4-year program is proposed in
this budget for assisting school construction. Other commitments are
involved in natural resource projects which are already under way
and in the limited number of projects for which starts are proposed
in 1958. On the other hand, 38 natural-resource projects will be com
pleted in 1958 and others, such as the St. Lawrence seaway, will be
nearing completion.
All of these commitments are not subject at this time to financial
measurement. Perhaps, therefore, the best way to summarize our
commitments for the future is to rexer only to budgetary commitments
actually made, that is, to the balances of budget authorizations which
will be available for expenditure after the fiscal year 1958. The total
amount of authorizations carried forward at the end of the fiscal
year 1956 was $72.9 billion. This included available balances of un
expended appropriations, of authorizations to expend from public
debt receipts, of contract authorizations, and of revolving ana man
agement funds.
It is estimated in the 1958 budget that by the end of 1957 the total
available balances will have been reduced to $70 billion and that by
the end of the fiscal year 1958 they will be $70.5 billion. In other words,
the 1958 budget contemplates that the financial authorizations for
future spending which will be available at the end of the fiscal year
1958 will be within $0.5 billion of those available at the end of the
fiscal year 1957, and about $2 billion less than the amount available at
the end of the fiscal year completed last June 30. The reduction since
the end of the fiscal year 1953 will be $32.2 billion. This differs from
the figures in the resume statement on page M4 of the budget as to the
unexpected balances of appropriations carried forward, because it
includes as well the unexpended balances of these other items of con
tract authorizations, and authorizations to expend from debt receipts,
and revolving and management funds.
FEDERAL STATISTICAL. PROGRAMS
One further point which the committee asked me to discuss con
cerned the provisions in the budget for improving the Federal statis
tical programs during the year.
I am pleased to note the continuing interest of the committee in the
adequacy of the Government’s statistical programs for the important
purposes they serve. Recommendations for these programs are again
set forth in a separate analysis in the 1958 budget^-special analysis J.
As shown in this analysis, the budget includes estimates of $35.2 mil
lion for principal current statistical programs in 1958, providing
increases totaling about $3.4 million for specific programs.
Among the recommended increases of particular interest to the
Joint Economic Committee are provisions for improved monthly data
ECONOMIC REPORT OF THE PRESIDENT
59
on manufacturers’ sales and inventories and for extension of the
financial reports program to include trade and mining corporations,
as recommended by the committee and its Subcommittee on Economic
Statistics. Funds are also recommended to enable the Internal Reve
nue Service to prepare preliminary tabulations of key financial item^
in the income tax returns, so that these important business indicators
may be available a year earlier than at present to give a firmer current
basis to the national accounts. Other recommended programs of
direct interest to the Joint Economic Committee are improvement of
the work on price indexes and foreign-trade statistics, expansion of
the production economics program of the Department of Agriculture
to provide economic data needed for the development and appraisal of
farm programs, a study of the effects of tariff changes on employment,
and publication of a new edition of the National Income Supplement.
There are, however, a number of major steps yet to be taken to reach
the goal of a better integrated Federal statistical system. In its work
on programing the Government’s statistical activities, the Bureau?s
Office of Statistical Standards, of which Ray Bowman is the head> is at
present working on development of the most efficient programs pos
sible to meet recognized needs for better statistics in several different
areas. For example, a comprehensive review is being given to con
struction statistics, directed toward reformulating a program to meet
the needs for more accurate and more detailed data on this important
segment of the economy. This is something that the Council of
Economic Advisers was particularly interested in our doing, also.
Similarly, the Bureau of the Budget has contracted with the National
Buerau of Economic Research for an independent appraisal of the
national income and product accounts, directed primarily (1) at deter
mining specific needs for improvement in the underlying statistical
series, and (2) at means of bringing about future integration of these
accounts with other comprehensive national accounting systems, such
as the Federal Reserve work on the flow of funds. Study is also being
made of the requirements for improved measures of labor productiv
ity, and of means of meeting these requirements. Although projects
like these are not reflected in the 1958 budget, they may be of interest
to this committee as evidence of our work toward an improved statis
tical system.
Mr. M ills . Does that complete your statement, Mr. Brundage ?
Mr. B rundage . Yes; it does.
Mr. M ills . Mr. Curtis of Missouri will inquire.
Mr. C u rtis . I would like to first find out what figures you have
on our carryover of unexpended funds as well as unobligated funds.
I notice from your chart on page 4 you show us the new obligational
authority and the expenditures, but what about carryover of unspent
funds as well as unspent and unobligated funds ?
Mr. B rundage . Well, the appropriations carried forward are in
cluded in the resume of the budget. I do not know whether I brought
that chart along. I f you have the budget document there, it is
contained in that report.
Mr. C urtis . I have it here; yes.
Mr. B rundage . That will give you the whole story. I might say
roughly that the amount of unspent and unobligated appropriations
of the Department of Defense is slightly over $10 billion. That is
the biggest item.
60
ECONOMIC EEPORT OF THE PRESIDENT
Mr. C u r t i s . That is $10 billion?
Mr. B r u n d a g e . It is a little more. It is estimated to be 10.6 billion
at the start of the fiscal year 1958.
Mr. C u r t i s . N o w let me ask you this: As I recall, and I am going
by memory, the unspent funds—and you mean by that, the unobli
gated ?
Mr. B r u n d a g e . The unspent and unobligated funds. The total
estimated unspent balances of appropriations of the Department are
about $38 billion at the start of 1958.
Mr. C u r t i s . The total funds that would be possibly obligated, but
unspent?
Mr. B r u n d a g e . Yes; they could obligate another $10 billion. The
difference between that and the $38 billion is obligated but unspent.
Mr. C u r t i s . A s I recall, that figure of unspent but possibly obli
gated funds for the entire Government was over $90 billion in 1953.
Do you recall what that carryover is? I am interested in seeing how
we have been doing as far as knocking down on these charge accounts
that we have.
Mr. B r u n d a g e . The full detail is shown on table 7, on page A12.
That only goes back to 1956, but I think that you are right. The
total obligational authority carried over was over $100 billion at
the end of fiscal 1953. It was $94 billion at the end of the fiscal year
1954 and is estimated to be down to $70 billion in 1958. I can submit
details for the record.
(The material referred to follows:)
Balances carried forward, by type of authority , at end of year , fiscal years 1954
through 1958
In millions]
Appropri
ations
Authori
zations to
expend
from debt
receipts
Fiscal year 1954 (actual):
Obligated....................
Unobligated................. .
$42,808
24,943
$6,275
14,842
$1,064
1,413
i $1,209
4,107
$48,938
45,305
Contract
authori
zations
Revolving
and man
agement
funds
Total
Total......................... .
67,751
21,117
2,477
2,898
94,243
Fiscal year 1955 (actual):
Obligated..................... .
Unobligated................. .
31,773
20,322
4,798
14,765
1,175
1,412
77
5,316
37,823
41,815
Total..........................
52,095
19,563
2,587
5,393
79,638
Fiscal year 1956 (actual):
Obligated.....................
Unobligated................. .
31,318
14,650
4,359
13,893
1,321
2,720
404
4,234
37,402
35,497
Total......................... .
45,968
18,252
4,041
4,638
72,899
Fiscal year 1957 (estimate) :
Obligated. ....................
Unobligated....... ..........
234,374
11,971
5,122
13,428
295
750
459
3,562
40,250
29,711
Total..........................
46,345
18,550
1,045
4,021
69,961
Fiscal year 1958 (estimate):
Obligated-----------------Unobligated.................
238,110
9,178
5,683
12,060
658
659
632
3,543
45,083
25,440
Total______________
47,288
17,743
1,317
4,175
70,523
l Deduct, excess of receivables over obligations.
a Includes allowances for contingencies: 1957, $50 million; 1958, $150 million.
Jan. 25,1957.
ECONOMIC REPORT OF THE PRESIDENT
61
Mr. C u r t i s . Then looking at the budget, we have to look at the
carryover of previous obligations, plus the new obligational authority
in order to get a picture, plus our anticipated expenditures, in order to
get a real picture of what the Congress might be doing in the way o f
additional appropriations. Do you understand what I mean ?
Mr. B r u n d a g e . Yes.
Mr. C u r t i s . That is whether the appropriation is a new one, or
whether it is simply a carried over appropriation, it still remains as a
possible expenditure of this administration.
Mr. B r u n d a g e . That is right.
Mr. C u r t i s . S o what are our expenditures based upon then ? Your
proposed expenditures in 1957 and 1958 ? Even if you have as much
as $36 billion carryover, and another $70 billion additional obligational
authority, making a total of $106 billion, and your estimated expendi
tures are $68.9 billion.
Mr. B r u n d a g e . The other page I gave you, A6, gives the total of
budget authorizations available as $143 billion.
Mr. C u r t i s . Now, I-----Mr. B r u n d a g e . I might say that a good deal of the current opera
tions, expenditures and payrolls, comes out of current authorizations.
It is more the deliveries of procurement and construction items and
so on that are made out of prior authorizations and obligational
authority.
Mr. C u r t i s . Do you have any figures to show any expired obliga
tions? That is, expired without expenditure and about what rate
are they going?
Mr. B r u n d a g e . On page A6, that was fairly substantial in the cur
rent year, in 1957, because of the transfer of the Federal aid highway
authorizations to the trust fund. But the total was a little over $5 bil
lion. O f that, $3.1 billion was the highway fund. In 1958 we are
Burning a termination of a little less than $1 billion, or $973
Mr. C u r t i s . H o w has that been running over the past few years, say
the past 4 years ? That is the unexpired without being utilized obliga
tions.
Mr. B r u n d a g e . $3.6 billion in 1956.
Mr. C u r t i s . I have that figure for 1956, but I was wondering about
the other years. You said mat was a little unusual.
Mr. B r u n d a g e . It was 1957 that was unusual.
Mr. C u r t i s . I am thinking of going back to 1953, 1954, and 1955
to get a picture of what happens to these obligated funds that never
actually get spent.
Mr. B r u n d a g e . There is quite a little variation between years. I
do not have the figures back of 1956. I will be glad to supply those
for the record.
Mr. C u r t i s . I would like to get that.
(The material referred to follows:)
Budget authorizations ceasing to be available
Fiscal years:
195 3
$2,523
195 4
195 5
195 6
A m ount
(in m illions}
_
4,279
3,656
62
ECONOMIC REPORT OF THE PRESIDENT
Mr. C u r t i s . N o w , do you have any figures showing the deobligated
funds which get reobligated without coming back to Congress ? There
is such a process, I know. It is deobligated for a particular thing.
Let me illustrate:
As I believe your budgetary procedures recognize, there can be a
letter of intent to obligate, and that is considered an obligation. Now,
a letter of intent is certainly not a firm contract, and after the magic
date of June 30 passes these letters of intent get rewritten, or there
is a contract that sometimes has little relation to the letter of intent
that obligated the funds. That process has been called a deobliga
tion and then a reobligation. I was wondering whether your depart
ment followed that.
Mr. B r u n d a g e . I don’t think that we distinguish that.
Mr. C u r t i s . Would you know how much deobligating goes on, and
then reobligating afterward, instead of allowing the authorization to
expire or the appropriation to expire?
Mr. B r u n d a g e . I don’t know. Mr. McCandless may be able to
answer that. I don’t think that we distinguish that.
M r . M c C a n d l e s s . We do follow that during the course of the year.
Where it is significant, I think we have it identified back in the budget
and that would be in the detailed part of the budget. It is largely
in the Department of Defense where those things occur.
Mr. C u r t i s . That is where most of this occurs.
M r . M c C a n d l e s s . We d o t r y t o keep up w i t h i t .
Mr. C u r t i s . Could you supply for this committee an annual figure
going back 4 or 5 years as to the total amount of deobligation and
reobligation ?
Mr. M c C a n d l e s s . I am not sure that we could because we have
only been identifying it, as I recall, in the last 2 or 3 years, and then
only where it is a significant amount of money. We could pick out of
put together for you what we have, of what we can identify, but the
accounting system has only started picking that up in the last couple
of years.
M r. C u r t i s . I suggest if you went into it a little more thoroughly,
you might find some real areas where considerable sums of money
might be relooked at an area which the Congress really has never
looked at, and I doubt if the Bureau of the Budget has ever really
looked at it. There is a question of a deobligation, and then a re
obligation.
That always involves the point of whether the new program is really
sufficiently similar to the original obligation to justify the new obli
gation.
Mr. B r u n d a g e . We look at all new requests for obligational au
thority pretty carefully, whether it is a reobligation or a brand new
one.
Mr. C u r t i s . Do you ?
Mr. B r u n d a g e . Yes, sir; those that come to us.
Mr. C u r t i s . I would think then you would be able to get those
figures and show what the total size is. We could confine it to the
Defense Department, because that is what I am particularly inter
ested in.
63
ECONOMIC REPORT OF THE PRESIDENT
(The material referred to follows:)
“Deobligation” and “reobligation” of funds are shown in the 1958 budget to
the extent that (1) they have a material effect on the program, and (2) the
accounting and reporting systems have thus far made such figures available.
They are shown in the detailed schedules of part II (for budget funds) and
part III (for trust funds) of the budget document under the heading “ Recovery
of Prior Year Obligations.” A detailed listing of these items is given below.
Since the accounting and reporting system of the Department of Defense does
not provide most of the amounts in question, figures are shown for only five
accounts in the Department. If further information is desired, a special effort
on the part of the Department of Defense would have to be made to develop
estimates for other accounts. There is no question, however, but that the
amounts involved are much larger than the amounts shown in the following
table:
Items listed in "budget schedules under the heading “ Recovery o f prior year
obligations” in 1958 budget
1957
1958
BUDGET FUNDS
Legislative branch:
Library of Congress:
General increase of the Library of Congress.................
Increase of the law library, Library of Congress..........
Funds appropriated to the President:
Mutual security:
Military assistance, Executive...... ................................
Other programs...............................................................
Foreign currency............................................................
President’s special international program...... ................... .
Expansion of defense production, investment in................
Independent offices:
Atomic Energy Commission: Plant acquisition and con
struction__________ _______________________ ____ ___
Commission on Organization of the Executive Branch
of the Government: Salaries ani expenses
________
U. S. Information Agency: Salaries and expenses..............
Export-Import Bank of Washington fund......................... .
Farm Credit Administration.................. ................... ......
Federal Farm Mortgage Corporation, investment in_.
Federal intermediate credit banks................................
Revolving funds_________ ______ _________________
Small Business Administration, revolving fund............
General Services Administration:
Repair and improvement of federally owned buildings___
U. S. courthouse and post office, Nome, Alaska................
Strategic and critical materials.......................................... .
Housing and Home Finance Agency:
Office of the Administrator:
Investment in college housing loans..............................
Investment in public facility loans................................
Investment in urban renewal......... ...............................
Capital grants for slum clearance..................................
Federal National Mortgage Association:
Special assistance functions fu n d .............. ...................
Management and liquidating functions fund...............
Department of Agriculture:
Research facilities, A R S..................................................... .
Miscellaneous accounts, Forest Service..... ..........................
FI >od prevention, S^il Conservation Service....... ..............
Agricultural Conservation program. ...................... ..........
Loans: R E A ______ ________________ ___________ ______
Farmers’ Home Administration: Disaster loans, etc., re
volving fund____ ______________________ ___________
Removal of surplus agricultural commodities...... ..............
: Commodity Credit Corporation_____ _____ ________ ____
Advances and reimbursements, Commodity Stabiliza
tion Service........................................................................
Department of Commerce:
Grants-in-aid for airports, C AA ...........................................
Miscellaneous accounts, CAA_.___...................................
Payments to air carriers, C A B .................................. .........
Ship construction (liquidation of contract authorization),
Maritime activities.............................................................
Inland Waterways Corporation fund..................................
$125,000,000
76,298
110,322,297
$67,822,000
15,201.000
53,992,744
56,240,895
30,000
2,700,000
30,000
10,135,000
11.360.000
6,500,000
755.000
1,160,600
58.846.000
250.000
650.000
1,546,550
80,334,100
400.000
580.000
944,507
25,464,000
2, 000,000
2, 000,000
5,000,000
5,000,000
9,596,224
100,660
166,660
64
ECONOMIC REPORT OF THE PRESIDENT
Items listed in "budget schedules under the heading **Recovery o f prior year
obligations ” in 1958 budget—Continued
1956
b u d g e t funds— continued
Department of Defense— Military functions:
Shipbuilding and conversion, N a v y ...
_ _
Construction of ships, N avy____________ ______________
Ordnance for new construction (liquidation of contract
authorization), Navy________ ____ ___________ ______
Navy managp.mp.nt. fund
Advances and reimbursements, Army_____ ____ ________
Department of Defense—Civil functions:
Construction, general, Corps of Engineers..........................
U .S . Soldiers’ Home. ____ __________ _______________
Capital outlay, Canal Zone Government_______________
Department of Health, Education, and Welfare:
Assistance for school construction, Office of Education___
Advances and reimbursemente, Office of the Secretary___
Department of the Interior:
Miscellaneous accounts, Bureau of Indian Affairs________
Construction and rehabilitation, Bureau of Reclamation. _
Department of Labor:
Advances and reimbursements: Bureau of Labor Sta
tistics...___________________________________________
Department of State:
International commissions: Restoration of Salmon Runs,
Fraser River system, International Salmon Fisheries
Commission________________________________________
Educational exchange: Educational aid for China and
Korea__ ________________________________________-Treasury Department:
Bureau of Accounts: Claims, judgments, and private re
lief acts ___________________________________________
Office of the Secretary: Miscellaneous permanents_______
1957
$9,593,208
629,993
1958
$7,440,000
365,774
139,602
46,375
5,201
7,443
681,132
5,233,606
200,231
76
1,936
253,003
41,000
680
73,470
22,314
9.341
2,057
27,105
TRUST FUNDS
Gift and trust fund income accounts, Library of Congress.......
Foreign currency, funds appropriated to the President_______
War claims, Foreign Claims Settlement Commission________
Railroad retirement account_______________________________
Railroad unemployment insurance administration fund. R R B .
American National Red Cross. District of Columbia chapter
building, public buildings, GSA __ ___________________
Advances for supplies and expenses, United Nations Korean
Reconstruction Agency, GSA. _________________________
Other trust funds, GSA
- . __ ______________
Defense-Civil: Trust funds, rivers and harbors and flood
control
_ _ ____________________________
Interior: Reclamation trust funds
__
__________
Labor: Special statistical work
__ ___________________
State: Trust funds, Educational exchange
_____
District of Columbia: Grants by Public Health Service..........
5.342
373,764
2,494
151,271
14,385
126
95,748
3,989
22,022
20
70
1,530
171
Mr. C u r t i s . N o w there is one other item, and I wanted to find out
whether the Bureau of the Budget goes into this:
Have you been following the amount of surplus property that the
Military Establishment generates each year ?
Mr. B r u n d a g e . We surely have.
Mr. C u r t i s . I have received some hurried figures from some people
who know about this and the indication is that it runs as much as
3 or 4 billion dollars a year in surplus properties generated by the
Military Establishment. I think that we are averaging about 8 cents
on the dollar in the sale of these surpluses. Would you know whether
that estimate is within reason ?
Mr. B r u n d a g e . That is both in supplies, materials, and equipment,
and in buildings and in lands. It is handled separately, but the sur
plus covers all of those areas. We have a special unit in the Bureau
of the Budget that is following that. That amount is a little high.
It is a very substantial figure, however.
Mr. C u r t i s . I am giving it as an annual figure, and apparently
a recurring one. I have gone through some of the details in the lists
65
ECONOMIC REPORT OF THE PRESIDENT
of surplus goods that are made available, and a great deal of it is
what we call common-use items—paper, paint, pencils, typewriters,
flashlight batteries, and so on. It would immediately suggest to me,
of course, if these amounts are that vast, that there might be something
wrong in the procurement practices in the beginning that would create
such an unused surplus.
Mr. B r u n d a g e . Both procurement practices and inventory controls,
and we have been working on that very assiduously. I think it is
being improved all the time. Much of the surplus now being de
clared reflects the efforts to clear out obsolete equipment and to dis
pose of stocks carried over from the past.
Mr. C u r t i s . I would like to get, if you can give it to me, what
figures you do have on the amount of surpluses that are being gen
erated, with particular emphasis on the common-use item field. I
would also be interested in the general figure.
Mr. B r u n d a g e . We will get you those figures. The surplus items
are made available, of course, to the schools and to the States and to
various purposes. Some of them have very little net return.
Mr. C u r t t s . I would be interested in checking the figure that I
estimated, about 8 cents to the dollar is what we get on this.
(The material referred to follow :)
Available reports do not give data on common-use items separately. General
Services Administration reports on surplus disposal show the following:
Analysis o f surplus personal property disposal other than scrap , Department
of Defense
[Fiscal years; in millions of dollars]
1954
1955
1956
Total acquisition cost of surplus property disposals,
other than scrap i____________ ____________________
$1,273
$1,578
$1,497
Method of disposition:
Abandoned or destroyed......................................................
Donated_____________________________________________
Sales other than scrap__________________ _______ _______
25
64
1,184
53
118
1,407
55
159
1,283
Proceeds from sales other than scrap..........................................
67
103
96
Percent proceeds to acquisition cost of property sold..................
5.7
7.0
7.5
i In addition to the amounts shown, acquisition costs of excess property transferred to other Federal
agencies was $53 million in 1954, $109 million in 1955, and $70 million in 1956. Receipts from sale of scrap
were $17 million in 1954, $40 million in 1955, and $57 million in 1956. Acquisition cost of items scrapped is
not reported.
Mr. C u r t i s . I a m curious to know if the Bureau of the Budget has
at all followed the progress in the Military Establishment on their
unification of some of their services in the field of what might be
termed common-use items. To illustrate, the unification of medical
supply of procurement and distribution. Have you followed that at
all?
Mr. B r u n d a g e . Yes. It is going a lot slower than we would like
to see it. However, I think it is making some progress.
Mr. C u r t i s . Sometimes it is difficult to see the progress.
Mr. B r u n d a g e . Yes.
Mr. C u r t i s . D o you know whether the Military Establishment h a s
carried over the example in medical supplies to other areas where
66
ECONOMIC REPORT OF THE PRESIDENT
there could be the same formula of unification in procurement and
distribution ? Has the Bureau taken any interest in that ?
Mr. B r u n d a g e . Unification has not been carried nearly far enough.
I would like to see it go further.
Mr. C u k t i s . The Congress very specifically wrote laws, the
O ’Mahoney amendment in particular, requiring that to be done.
There are some of us, and I might say I am among them, who feel that
the Military Establishment has not been complying with that law.
There are various areas of savings where we could actually get better
defense as a result if they would go through these processes.
To illustrate, I do not believe anything has been done in the Chap
lains Corps in the way of procurement and supply. It is a little thing,
but it is an example.
The main questions which I am directing to you is whether the
Bureau of the Budget in reviewing these requests of the Military
Establishment for additional appropriations has asked them these
questions and gone into the matter to see what progress they are
making.
Mr. B r u n d a g e . Yes, we have. It is under study, but it is awfully
hard to get it out of the study stage into the action stage.
Mr. C u r t i s . I agree with you on that.
I have a general question prepared that I would like an answer to.
There is a widespread concern about the size of the Federal budget
for fiscal year 1958, particularly with respect to its implications fo r :
(1) the extent of the Government’s participation in total economic
activity; and (2) the possible inflationary consequences of expending
budget expenditures; and (3) the prospects for tax reduction.
One or more of these aspects has been referred to in the statements
made by the President, Secretary Humphrey, and by you, since the
presentation of the budget. The Congress has been invited by all three
of you to reduce proposed expenditures. A t the same time, the Con
gress must assume that the executive branch has done the best job it
could in keeping proposed budget expenditures to a minimum.
In view of that assumption, what specific, as well as general, stand
ards would you recommend the Congress use in acting upon the budget
expenditure recommendations, and m what respect do these standards
differ from those employed by the executive branch in preparing the
budget?
Mr. B r u n d a g e . That is quite a big question.
I will say that the Secretary and I have been pursuing this prob
lem of economy very aggressively and persistently, not only this
last year, but ever since we have been down here. The problems
which have met us are the demands of the people and the Congress
for a number of good programs. There is no question about the pro
grams. We all recognize the needs of defense.
As you see here, the big increase this year is in the protection cate
gory. We are expanding our defense partly because of world con
ditions and partly because of the cost of replacing the older weapons,
and while the newer weapons are so much more effective they are so
much more expensive. The B-29 bombers, for instance, cost on the
average of a little over $600,000 and the B-36 cost an average of $4
million, and the B-52, $8 million. That is just an example.
There is a tremendous amount of research and development. We
are spending over $5 billion in the military in the whole area of re-
ECONOMIC REPORT OF THE PRESIDENT
67
search and development, including procurement of weapons that are
used for experimental purposes besides those added to stock, and for
all personnel in development and testing.
Then, atomic energy, as you see, is going up from $1.9 billion to
$2.3 billion in expenditures and from $2 billion to $2:5 billion in new
obligational authority—that is practically all either research and de
velopment, or in the general defensive area.
We have a program, as you know, for peacetime uses of atomic
energy. There is a lot of research and development going into re-!
actors, but the actual amount of fissionable material which is being
handed out is still pretty small.
Miv C u r t i s . Could I say this in the light of your answer to my
previous questions regarding some of these problems on military pro
curement and supply:
When you said you were still conducting studies in that area to
see what could be done, would I be right in saying that in these areas
where you still are studying but have not reached conclusions, that
might be the areas that the Congress could possibly pick up an<i’
carry the studies further to try to reach some conclusions ?
Mr. B r u n d a g e . Well, I will welcome any cuts that you can mak«£
without sacrificing our protection or the needed services.
You may remember in our budget message that we called atten
tion to the fact that we had these terrific competitions and pressures
and inflationary pressures, and we were asking all of the departments'
and agencies to limit their construction expenditures particularly,
and also their personnel increases, even though they are provided
for in the budget. This budget does not start to be spent for another
6 months, and then it will not be finished for 18 months, and we
firmly believe that reductions and savings can be made.
Mr. C u r t i s . Mr. Brundage, the question I would like to ask that
refers to this basic point I am presenting is this:
Do you believe that the Government participation in our total
economic activity for the size of $68.9 billion in 1957, and 1958 is $71.8
billion—Do you believe that that participation is going to create sucli
inflationary forces that probably we will not be able to control them ?
While that is my tentative conviction now, I would like to have
you comment on a positive statement. I f we spend $68.9 billion in
our present economic development, it seems to me whether the budget
is balanced or not we are going to create such inflationary forces that
we will be hard put to controlling it.
Mr. B r u n d a g e . I think any increase in spending is an added infla
tionary force. You cannot deny that. However, as long as you have
a budget surplus, and some retirement of debt, it seems to me that it U
not too serious.
After all, if we had a tax reduction, which was all used by the iridir
yiduals to increase their consumption of consumer goods, and increase
their purchases of consumer goods, you would have just as much of an
inflationary aspect, only in a different area.
!
Mr, C u r t i s . I agree with you, but suppose the tax reduction were
in suc^i a way that the money, instead of going into consumer credit,
went into investment. You would have the opposite, would you not ?
Mi*. B r u n d a g e . That would be savings; yes.
Mr. O ufcTis. Actually, is not that where the pinch seems to be, in t ^
investments dollar right now, rather than in the consumer dollar?
68
ECONOMIC REPORT OF THE PRESIDENT
Mr. B r u n d a g e . Well, there is a tremendous shortage of investment
funds, there is no question about that.
Mr. C u r t i s . Which usually means that there is more consumer de
mand than there is ability to produce to satisfy it. That means usually
that there is not enough investment in plant and facilities to produce
to meet the consumer demand.
Mr. B r u n d a g e . We are helping that by our retirement of public
debt this year, of $2.2 billion. That will go to retire debt and make
that much more available for other investments.
Mr. C u r t i s . Thank you, Mr. Chairman.
Mr. M i l l s . Senator O ’Mahoney will inquire.
Senator O ’M a h o n e y . I was involved with another matter and so I
have been delayed in getting here, and I am sorry I did not have an
opportunity to listen to your opening statement, Mr. Brundage.
I have hastily glanced over it and it immediately suggests some, I
think, important questions.
I would like to call your attention to page 5 of your statement.
There in the second paragraph from the end, the second sentence says:
Many of these recommendations, such as improvements in antitrust and merger
legislation, improvements in labor standards legislation, and broadening of un
employment compensation coverage—
That aroused my completely sympathetic interest. I know the anti
trust and merger legislation which has been pending before the Judi
ciary Committee, of which I am a member, and of which last year
I was the acting chairman of the Subcommittee on Antitrust and
Monopoly.
The Department is in full agreement with the enactment of legis
lation, and I am happy to have the President endorse this. But I
know that the Department of Justice does not begin to have the
jmoney that will enable them to carry out the President’s program
when and if we pass this law. As a matter of fact, they do not have
money enough now to review the cases which are presented. All you
have to do is look at the business section of the newspapers for the
past year to read about merger after merger which are concentrating
our national economic system and making it impossible for people in
the States, and businessmen in the States and in the local communi
ties to carry on as they should. That is one of the reasons the Presi
dent wants the antimerger bill passed. It is a prenotification bill, to
call upon corporations which are planning to merge, to notify the
Federal Trade Commission and the Department of Justice in advance
so that those two Commissions could determine whether or not the
mergers were in violation of law, and in the public interest.
In the conversation I had with the Department last year, I learned
they wanted and needed at least 100 more lawyers to do the research.
I can cite to you the research which your Bureau requires as an illus
tration of the necessity for supplying the Department of Justice with
sufficient staff to look into these most complex matters.
Your budget does grant an increase to the Federal Trade Commis
sion, but you ask less for the Antitrust Division this year than you
gave them last year. That is less than Congress gave them last year.
This I suggest is not in harmony with the President’s message.
Mr. B rundage . We gave them all they asked for, Senator
O’Mahoney.
ECONOMIC REPORT OF THE PRESIDENT
69
Senator O ’M a h o n e y . Would you look into that again, please?
Mr. B r u n d a g e . There is a new man, and they had been preparing
some further estimates which I believe they would like to have sub
mitted as a supplemental.
Senator O ’M a h o n e y . Let me say a word in support of the supple
mental estimates because I think it is in the public interest.
Mr. B r u n d a g e . The appropriations of Antitrust Division, accord
ing to the table on page 806 of the budget, went up from $3,464,000 in
1956, to $3,569,000 in 1957, and $3,785,000 in 1958, and I think that
they have some further requests under consideration.
Senator O ’M a h o n e y . I do not know from what you are reading, but
I read the release that you gave out. I do not have it with me at
this time. When the budget was coming up, and the appropriation
for the Antitrust Division was mentioned, the request was less for
1958 than the appropriation was for 1957.
Mr. B r u n d a g e . That is not correct.
Senator O ’M a h o n e y . I f I am mistaken in that, I will check it up
and see that the record is corrected.
Mr. B r u n d a g e . The figure is on page 806 of the budget document
for 1957. The new authorization for 1956 was $3,464,000, and for 1957
it was $3,569,000. For 1958 it is $3,785,000, and the expenditure for
1956 was $3,545,000, and for 1957, $3,625,000, and for 1958, $3,774,000.
As I say, I think that they have some further requests to make.
Senator O ’M a h o n e y . They have supplemental requests ?
Mr. B r u n d a g e . Yes; that is right.
Senator O ’M a h o n e y . Of course, we all know that Congress itself
is struggling with the problem of the increased payment for retire
ment. We have to pay 6y2 percent now for the staffs of the various
committees, whereas it was much less than that a year ago. I suspect
that some of the increase of which you speak there has to do not with
the number of persons on the staff but with the increased costs of
administration.
Mr. B rundage . That has been distributed among all of the branches
and agencies of the departments.
Senator O ’M a h o n e y . Would you be good enough to check up on
that personnel item ?
Mr. B r u n d a g e . I will be glad to.
Senator O ’M a h o n e y . And particularly with respect to increasing
the supplemental.
Mr. B r u n d a g e . We did not cut their request, however, Senator.
Senator O ’M a h o n e y . I am glad to have you make that a part o f
the record and I will accept that statement as coming from an authori
tative source. But I want to point out this further fact, that the
Antitrust Division in the past when diligently and effectively adminisered has been a source of revenue to the Government.
The Antitrust Division under Thurman Arnold, and I mention him
because he comes from my State, earned for the Government in fines
and costs from violators of the antitrust law more than the appropria
tion for the Division usually amounted to. That is right if my recol
lection is correct.
A ll of these questions that I am asking now arise from my knowledge
that some expenditures are productive of revenue. Some expendi
tures are completely lost. The money that is spent on shooting instru
70
ECONOMIC REPORT OF THE PRESIDENT
m ents produce no revenue at all. They win victories and eventually
the peace, we hope.
For years we have had a very uncertain peace, but in the domestic
field we have many projects which would produce revenue for the
Government and for the people and improve their living standards.
Some of these are included in the discussion on page 6 of your state
ment. That is :
Carrying out previous commitments will also lead to an increase in expendi
tures by the Corps of Engineers and the Bureau of Reclamation. Together, their
expenditures are estimated to be $91 million more than in 1957, of which $10
million is for the 1958 outlays on new projects to be started.
The President has just completed an airplane tour over the droughtstricken States so that he and all the country knows the great damage
that was done by the drought and is being done. It is cutting off
revenue and the earnings of the people in those areas.
For many years we have struggled, we who live in the upper Colo
rado River Basin, to secure the authorization of improvements in that
system and in the construction of dams to store the water and to pre
vent floods.
Finally, last year, Congress passed the bill which the President
signed, authorizing the improvement of this upper Colorado River
Basin at an estimated cost of about $753 million. The President
opened that project by pushing a button sometime last October. He
was sitting in Washington and a blast was set off in Utah, I believe.
It was very helpful and it gave notice that the project was going to
begin. But the appropriation which you allowed is so small that it
will take 32 years to complete that project. In the meantime, the
water which rises in the upper basin States will be flowing past the
doors of the people up there and down into the lower basin and ulti
mately into the sea.
I wrote a letter to the Secretary of the Interior at the time of this
opening and urged the Secretary of the Interior to see if it would not
be possible to have a statement made at the ceremonial opening that
the Bureau of the Budget would not be permitted to place a ceiling
upon the development of the Colorado River Basin. The ceiling, how
ever, is here.
I think the total appropriation is so small that in my State on several
of the projects which are very essential for the people living there, the
planning will not be finished until 1960 or 1962.
Mr. B r u n d a g e . For the first years expenditures, they are always
small, Senator, you know because of the planning. Assistant Director
Merriam here has this under his direct surveillance. Can you comment
on that, Mr. Merriam ?
Senator O ’M ah on ey . I know that. W hat I am saying to you is
this: The more haste you can put into this thing the sooner you will be
improving the conditions of the people who live in that basin and the
sooner you will be increasing their capacity to pay income taxes on
which you depend for the balancing of the budget,
M r . "M e r r t a m . As you know, of course, the President has from the
start pushed very vigorously for this project and certainly the admin
istration is in complete agreement with what you have said. Are you
talking about the participating projects now, or the actual dams?
Senator O ’M
ahoney.
Some of them are participating projects.
ECONOMIC REPORT OF THE PRESIDENT
71
Mr. M e r r i a m . As you unquestionably know, as far as the participat
ing projects are concerned, the President did ask the Department of
Agriculture in conjunction with the Department of the Interior to take
a relook at exactly how those projects were being developed.
There has been, quite correctly as you have stated, some delay in the
participating projects, but not in the dams themselves which are going
ahead at what we and the Department think is an economic rate.
There is no ceiling. I think that ought to be clear.
Senator O ’M a h o n e y . I want to get your sympathy for this thing
and I am not criticizing.
M r. M
e r r ia m .
Y
ou
h a v e it.
Y o u d o n o t h a v e t o g e t it .
Senator O ’M a h o n e y . I am asking you to take note of the fact that
you say in this paragraph that I have just read, that these expendi
tures for the Corps of Engineers to stop floods which clearly destroy
the property and the income of the people and the Bureau of Recla
mation which build new homes and new farms will be increased.
You say it is increased by $91 million. But four paragraphs down
in your statement you say, “With respect to the interest on the national
debt, these expenditures are estimated to be $100 million more in 1958
than in 1957.”
In other words, your presentation to us relates the sad fact that we
have to increase the amount expended for interest on the national debt
by $9 million more than you are increasing expenditures to prevent
disaster here at home and to build constructive waterways for the
benefit of the people of the United States.
I think you must bear in mind that statement in your further con
sideration of supplemental estimates.
Mr. B r u n d a g e . I would like to say that we are spending something
over $1 billion on these projects altogether including flood control and
development.
Senator O ’M a h o n e y . Let us see where you show them on the charts.
Here is chart No. 2, “ Protection”—that is a good name to give that
column—is $45.3 billion. “ Civil benefits” is $16.9 billion. Interest,
and that is interest on the national debt, is $7.4 billion. “ Civil opera
tions” is $1.8 billion.
Now, I seriously believe that if the Bureau of the Budget will give
some attention to increasing expenditures on civil operations whereby
we will develop our natural resources more rapidly than they are
being developed and increase the capacity of the people to produce,
you will be doing more toward balancing the budget than by follow
ing the policy which pays more for interest on the national debt and
more for foreign aid.
There is now $200 million that is now proposed to be expended
without a single standard in the Middle East. You can produce a good
deal more in the United States. You can produce oil in the United
States.
Mr. B r u n d a g e . The civil operations to which you refer is confined
to administrative and maintenance operations of the Government.
Many of the expenditures for conservation projects are included with
the civil benefit programs. “ Special analysis ( L ) ” on pages 1149 and
1150 shows that the programs for conservation and development of
land and water resources will be $1,070 million, in 1958, as against
$940 million in 1957 and $803 million in 1956.
72
ECONOMIC REPORT OF THE PRESIDENT
Senator O ’M a h o n e y . Where is this ?
Mr. B r u n d a g e . This is on page 1150 in the back of the book, the
very last page. That is under “ Natural resources.”
Senator O ’M a h o n e y . I have the document before me. That is the
conservation and development of land and water resources. That has
been estimated for 1958 at $1,070 million. That is what you stated?
Mr. B r u n d a g e . Yes, sir.
Senator O ’M a h o n e y . But that does not change at all the comparison
which you made in your statement. The interest on the national debt
is increasing by $9 million more than the increase on the Corps of
Engineers and the Bureau of Reclamation expenditures.
There is not any doubt about that for you wrote it.
Mr. B r u n d a g e . That is not taking all of it.
Senator O ’M a h o n e y . D o you wish to correct the statement?
Mr. B r u n d a g e . N o ; there are other programs besides the Corps of
Engineers and the Bureau of Reclamation.
Senator O ’M a h o n e y . O f course, that is true. But can you give me
the total for those ? Where are they broken down in your statement?
Mr. B r u n d a g e . They are all shown in the budget. I will be glad
to give you a table on it.
Senator O ’M a h o n e y . Would you please put it in the record here at
this point?
M r . B r u n d a g e . I w i l l b e g l a d to .
(The information is as follows:)
Expenditures for land and water resources included in natural resources function
of the budget
[Fiscal years; in millions of dollars]
Agency
1956 actual
Corps of Engineers, civil functions............................. ................
Department of the Interior:
Bonneville Power Administration........... ........... ................
Southeastern Power Administration....................................
Southwestern Power Administration..................... ............
Bureau of Indian Affairs.......................................................
Bureau oi Land Management................................. ............
Office of Saline Water........ ..................................................
St. Lawrence Seaway Development Cooperation----------- -----Tennessee Valley Authority------ ------ - ............................- ........
Department of State (international boundary commissions)—
Federal Power Commission.........................................................
Total....................................................................................
1957 estimate 1958 estimate
$534
$600
$660
161
35
174
32
204
35
7
40
19
45
25
7
49
28
3
5
39
3
7
5
46
27
5
803
940
1,070
1
1
9
-10
2
8
1
2
1
6
N ote .— D etail m ay not add precisely to totals because of rounding.
Senator O ’M a h o n e y . Y ou show a surplus on chart No. 1. That is,
a surplus for 1956, 1957, and 1958. You discuss this on page 2 of
your statement.
The recommended budget for 1958 is balanced. This will be the third succes
sive budget with a surplus. The actual surplus for the fiscal year 1956, which
ended last June 30, was $1.6 billion. The current estimate for the fiscal year
1957, which is now at its midpoint, is that the surplus will be slightly higher,
$1.7 billion. The estimates for 1958 show a surplus of $1.8 billion, based on the
continuation of current tax rates.
Is it not a fact that during this period the debt has been increasing?
Mr. B r u n d a g e . N o .
Senator O ’M a h o n e y . What is the national debt now?
ECONOMIC REPORT OF THE PRESIDENT
73
Mr. B rundage . It is down. The details are shown in the budget.
That is on page M-10, right in the beginning. The public debt at the
start of the year 1956 was $274.4 billion. At the end of 1956 it was
$272.8 billion. At the end of 1957 it is estimated to be $270.6 billion.
At the end of 1958 it is estimated to be $269.2 billion.
Senator O ’M a h o n e y . I have in my hands the Economic Indicators
for January of 1957. It was prepared for this committee by the
Council of Economic Advisers.
Mr. B rundage . I have it here.
Senator O ’M a h o n e y . On page 31 on the last column you will find
the heading “ Public Debt, End of Period.”
Mr. B rundage . That is the end of the first 5 months.
Senator O ’M a h o n e y . I beg your pardon. We begin at the top,
under “ Public Debt, End of Period.” That is fiscal year 1944, it was
$202.6 billion. In 1947, $258.4 billion. Fiscal 1948, $252.4 billion, a
reduction. In 1949 it was 252.8. In 1950,257.4. 1951,255.3. In 1952,
259.2. In 1953,266.1. 1954,271.3. In 1955,274.4.
During this period, which includes, I think, part of the period for
which you are claiming a surplus, the debt was increasing. In 1956 it
went down to 271.5. In October of 1955 it was estimated to have risen
to 279.9. Now, this was about the time that Congress began to pass
resolutions allowing special increases in the hope that the collections
might be sufficient to increase the receipts and thereby balance the
budget.
Mr. B rundage . That is right.
Senator O ’M a h o n e y . N ow it appears that the fiscal condition of the
Government is such that we are constantly increasing the rate of
interest upon the debt. That is right, is it not ?
Mr. B rundage . The interest has been going up because money rates
have been going up.
Senator O ’M a h o n e y . The New York Times for yesterday morning
in its business section published, as it always does on Monday, the total
of Treasury securities which must be met within the ensuing calendar
year.
This morning, as I recall the figures, it was about $77.6 billion and
that was greater than it was a year ago and greater than it was a week
ago. On these securities which are being brought out, we are paying
constantly higher rates of interest.
The Federal Reserve Board, testifying from exactly the position
in which you are sitting before this committee, in December acknowl
edged that foreign countries are buying the securities of the United
States, even the short-term securities on which we are paying these
rates of interest.
These are the very foreign countries to whom we are granting more
and ,more aid out of our deficits who are buying these bonds.
Mr. B rundage . I doubt if it is the same foreign countries. They
are probably other fereign countries.
Senator O ’M a h o n e y . N ow , that is an expression of doubt on your
part. I suggest that you look up the facts.
Mr. B rundage . Most of our economic aid is not going to countries
which have any substantial foreign balances.
Senator O ’M a h o n e y . Would you be kind enough to look it up and
put it in the record, please.
87624— 57------ 6
74
ECONOMIC REPORT OF THE PRESIDENT
Mr. B r u n d a g e . I will be glad to do that; yes.
(The material referred to follows:)
As shown in the table below, the countries which have increased their holdings
o f United States Government bonds and notes in the year from September 1955
to September 1956 are Belgium, Germany, Norway, and Switzerland, none of
whom receive economic assistance.
Estimated holdings of U. S. Government bonds and notes by foreign countries
[Position at end of period in millions of dollars]
Area and country
September
1955
September
1956 (pre
liminary)
Continental Western Europe:
Belgium-Luxembourg (and Belgian Congo)__________________________
Federal Republic of Germany_______________________________________
France (and dependencies)_________________________________________
Netherlands (and Netherlands West Indies and Surinam)_____________
Norw ay.. ________________________________________________________
Switzerland_______________ ________________________________________
Other countries (including Bank for International Settlements)________
10
5
161
41
53
44
31
12
13
7
23
83
126
40
Total_______ ______ ________ _____________________________________
345
304
Sterling area:
United Kingdom___________________________________________________
Other countries____ ____________ __________________________________
286
16
265
Total____________________________________________________________
302
277
12
Canada_______________________________________________________________
397
357
Latin America:
Cuba_____________________________________________________________
Other countries____________________________________________________
169
25
167
24
191
Total_________________ __________________________________________
194
Other areas:
Indonesia________________________ !________________________________
Other countries____________________________________________________
15
21
Total____________________________________________________________
36
25
Total foreign countries________ :___________________________________
1,274
1,154
0)
25
i Less than one-half million dollars.
Source: P. 63 of Treasury Bulletin, December 1956.
Senator O ’M a h o n e y . I am pointing out to you, sir, the reasons
which compel me to think that the objective of the Bureau of the
Budget should be to increase expenditures here at home where we can
increase the revenue of the people who pay the taxes to meet the
risi ng interest on the rising national debt.
Representative M i l l s . I have a very few questions, Mr. Brundage.
You said in your statement on page 2 in the second full paragraph:
The assumptions with respect to economic conditions which underlie this
budget are that the Nation will continue to have a high rate o f business activity
with increasing national income and with prices relatively stable at about current
levels.
Secretary Humphrey in a letter to the committee dated January 16,
which was included in the record of yesterday, made the statement
that—
We do not assume any change in prices for the present with respect to the
estimates.
ECONOMIC REPORT OF THE PRESIDENT
75
Now, does that denote a difference in the thinking between the
Department of the Treasury and the Bureau of the Budget with
respect to those estimates of revenue %
Mr. B r u n d a g e . N o , in d eed .
Representative M i l l s . Y o u mean the same thing ?
Mr. B r u n d a g e . It is on the same basis; yes.
Representative M i l l s . N o w , if prices are to remain at present levels,
I take it to mean that there is relative stability in the price picture.
Mr. B r u n d a g e . W ell, some are estimated to increase a bit on the
basis of information we have at this time. For example, I believe in
the Defense Department they are estimating a few price increases in
procurement o f special lines, particularly electronics, but it is rela
tively stable. That is what we mean.
Representative M i l l s . The point that both you and the Secretary
o f the Treasury were endeavoring to make with respect to the budget
and the estimates of revenue in connection with the budget is that you
do not predicate additional revenues in the fiscal year 1958 as a result
of further inflationary trends and conditions.
Mr. B r u n d a g e . That is correct. The big increases in our revenue
during the past 3 years have occurred during a period of relatively
stable prices.
Representative M i l l s . Y o u referred to the estimate of personal
income rising to $340 billion in calendar year 1957 compared to $325.5
billion in calendar year 1956.
Mr. B r u n d a g e . That was 1957 and 1958,1 think.
Representative M i l l s . It has to do with the calendar year rather
than the fiscal year ?
Mr. B r u n d a g e . Y es; that is right.
Representative M i l l s . That represents an increase, you say, of ap
proximately 5 percent in personal income.
Mr. B r u n d a g e . Yes.
Representative M i l l s . That then, is a reflection of an increase, an
anticipated increase, in calendar year 1957 over 1956 in the gross
national product; is it not ?
Mr. B r u n d a g e . It is a big increase, but the big increase that we
had in the national income and in our receipts came in fiscal 1956.
Representative M i l l s . W e were told yesterday that that increase
in personal income would result from an anticipated increase of 3
or Sy2 percent in gross national product in calendar year 1957 over
calendar year 1956. I do not know whether you have a different
figure in mind.
Mr. B r u n d a g e . One is the gross national product and the other is
national income.
Representative M i l l s . I f you have a 5 percent increase in personal
income as predicted for purposes of the budget, then you would have
an increase of 3 or 3 ^ percent in gross national product which, I
take it, is the factual situation with respect to the estimates in the
budget.
Mr. B r u n d a g e . I believe so, yes. The Treasury made those esti
mates, but we incorporated them in our budget and in our compu
tations.
Representative M i l l s . That would mean then, that we would have
to have as much or more increase in gross national product in 1957
76
ECONOMIC REPORT OF THE PRESIDENT
over 1956 as we had in 1956 over 1955 in order to have a balanced:
budget if the Congress appropriates the funds suggested in this
proposed budget, and we do not have inflation.
Mr. Brundage. O f course, the income is partly held over. W e are
only partly on a pay-as-you-go basis. The income of fiscal 1956
affects our budget in 1957.
Eepresentative M ills. The point I am getting at, Mr. Brundage, is
this: In order for us to have a balanced budget and $1.8 billion
surplus in fiscal year 1958, it would be necessary for us at least for
6 months of that fiscal year, to enjoy the predicted increase in gross
national product that I have referred to of 3 or 3y 2 percent.
I f we are going to have relatively stable prices, that would be true.
Mr. Brundage. I would think so, yes.
Eepresentative M ills. That would mean, would it not, that our
budget estimates are predicated upon as much or more growth eco
nomically in this country in calendar year 1957 over 1956 as occurred
in 1956 over 1955 ?
Mr. Brundage. I would think approximately so, sir.
Eepresentative M ills. That means that the Congress has a respon
sibility to delve into the future with respect to a determination of
economic conditions if it appropriates what is contained in this budget
with reasonable expectation that those appropriations will not create
deficit financing.
I am always very dubious, myself, of making concrete appropri
ations which necessitate increases in revenue predicated upon a growth
in gross national product of that dimension in order to have a balanced
budget.
I would much prefer and I feel more secure, and I am sure you
would as a businessman and as a former certified public accountant,,
with a budget which on its face shows that it will be in balance i f
economic conditions are not better or not worse than those in the pre
vious calendar year.
Mr. Brundage. I think George Humphrey and I both agree on that.
Eepresentative M ills. Now I wanted to talk to the Secretary of the
Treasury when he came here about the point that is reflected in the
Economic Indicators of January 1957 which you have before you. On
page 8 there is a reflection of decreases in corporate profits for the
calendar year 1956. This budget surplus is predicated, in part at
least, on an increase of $1 billion in corporate profits in 1957 over 1956.
I think that we are on somewhat precarious ground there, as well
as, perhaps, with respect to the increase predicted in personal income,,
although I am not and I do not propose to be a prophet in the field o f
economic activity. I am sure that none of us would want to take on
that mantle.
To go back to my point, however, I am very much concerned about
the possibility of what we do to our economy, not only in the long
run but in the short run, through the appropriation of this staggering
amount that is involved in this budget.
There are too many “ifs” in the way for us, I think, to tell the
country now that we can appropriate this much money and assure
a continuation of a balanced budget at the end of the fiscal year 1958,
which would be June 30,1958.
That is looking quite a bit ahead of today and making estimates o f
revenue predicated upon what I would consider to be the most favor
ECONOMIC REPORT OF THE PRESIDENT
77
able economic conditions that we could expect to enjoy during that
period of time.
\
The budget itself is predicated upon no downturn in business
activity any time during the calendar year 1957. That would have
to follow if we enjoyed 3 or Sy2 percent increase in our gross national
product.
I am much concerned as to whether or not we are safe in appro
priating on the basis of those estimates of economic activity and
contending as we appropriate that we will end up with a balanced
budget. I think that you are eminently right. I think the President
is right and I think the Secretary of the Treasury is right and I am
crediting to all of you the highest degree of sincerity when you sug
gest to the Congress that this budge should be whittled by the Con
gress if it can be whittled.
I am sure that each of the three of you, however, are not suggesting
that the Congress use the broad-ax approach to the reduction of this
budget.
Mr. B r u n d a g e . W e would like to see it selective. I would also like
to say, Mr. Mills, that these assumptions are in broad harmony with
views of the experts in the Council of Economic Advisors and the
Treasury, as well as the Bureau of the Budget.
It is their considered judgment as to the most reasonable assump
tions to use. As you say, I think that we all would like to have more
o f a surplus and a little more leeway.
Representative M i l l s . O f course, what we are doing actually in our
Government expenditures, is to increase our expenditures either for
defense or nondefense, whatever it might be, at about as rapid a rate
as our revenues are increasing as a result ox this increased economic
activity.
This is reflected in your contemplated surpluses which are, appar
ently, to remain relatively stable, whereas your receipts are going up
much faster and your expenditures following your receipts are going
up at a relatively even keel.
So we are faced, I think, with the absolute necessity of trying to
'bring this budget down to a more reasonable level, at least in the
opinion of the people that I have talked to and heard from.
They think it has reached too high a level in peacetime. They have
been sold on the idea that we are at peace and it is a little hard for
them to understand a wartime budget or a budget of wartime levels
in what they have been told is a peaceful era.
O f course, you and I know it is not as peaceful as we sometimes say
it is in political campaigns. However, I am interested in trying to
find from you, if it is possible, and even though this is not primarily
the function of this committee, whether or not you feel that you are in
a position to completely defend this budget on the basis of the stand
ards which are utilized in the Bureau of the Budget for purposes,
first of all, of determining whether an item will be included in a budget
and then as to what the amount will be for that particular item.
Mr. B r u n d a g e . It is a compromise, Mr. Chairman, as all budgets
are. The agencies almost uniformly came in with substantially higher
requests. Aside from the military, the protection item, I think the cuts
we made were something over $3 billion.
78
ECONOMIC REPORT OF TH E PRESIDENT
Now we could have cut more, there is no question about it. But the
question was, Would that prejudice some of the good programs like
those to which Senator O’Mahoney referred? The conclusion we
reached was that this is a compromise, but it is a fair compromise
and it is a reasonable provision for the protection of this country
and for the conduct of the operations which our people seem to
demand.
I think that you can make more economies. But I think if you
make any very substantial reduction, I think you have to cut out some
of these programs.
Representative M ills. Now you are not saying to us, Mr. Brundage,.
in your statement, I am sure, that the Bureau of the Budget comromised the standards which the Bureau of the Budget uses for
etermiiiing whether or not an item should be included in the budget
and at what level it should be included.
You did not compromise the standards which you used for determ
ining expenditures, did you? That is not what you mean.
Mr. B r u n d a g e . That is not what I mean. It is a compromise be
tween opinions as to how fast and how far you should go and when.
Representative M ills. Those standards that you used for deter
mining expediture recommendations to the Congress are, in your opin
ion, the best possible standards that could be developed within the
Bureau, are they not ?
Mr. B r u n d a g e . I believe so.
Representative M ills. The best you have been able to develop ?
Mr. B r u n d a g e . That is right.
Representative M ills. I am sure they are as good as any standards
anybody else has developed because I have a very high regard for
your ability, frankly, and the ability of those that work with you.
Now, if you have utilized the very best standards that you could con
ceive in determining expenditures and recommendations, does not the
statement which you make and which the President makes either as
sume that the Congress will use a broadax approach to economy, or
that the Congress can develop better standards than the administra
tion can develop for determining expenditures for the fiscal year 1958 ?
Mr. B r u n d a g e . I would hope that the Congress, which has the
responsibility just like we do, would reexamine as you always do the
policy decisions that have been reached. W e are going to try to cut
expenditures within the budget, as has already been brought out,
in reducing our contraction and limiting our personnel increases and
so on.
W e have already started to work on those things. The other
decisions, I think, will have to be policy decisions for which the Con
gress is equally responsible. A lot of these things that we are doing
have been instigated, or encouraged at least, by the Congress.
You take these health programs. W e estimate over $600 million
of expenditure on our health programs for this next year. Now, maybe
you may decide that that is going too far too fast. That amount pro
vides for what you legislated last year. Maybe you will decide that we
do not neied to go so far so fast, and that we can depend upon private
charity or local and State authorities for things like hospitals and
all of these other programs.
Senator O’Mahoney. Will you yield for a moment? I noticed a
S
rather amusing cartoon in one of the papers the other day that repre
ECONOMIC REPORT OF THE PRESIDENT
79
sented the presentation to the Congress of the budget accompanied
by a pair of scissors, implying that what was being done in presenting
the budget here was a presentation with the fond hope that we would
take the responsibility of making the cuts.
W hat I am interested in funding out is whether there is any sub
stantial agreement between the Bureau of the Budget and the Secre
tary of the Treasury as to where the cuts should be made. I know
the chairman is interested in that subject, too.
Representative M i l l s . I had in mind propounding that question
and trying to obtain from you, because you are in a better position
than any of us to know, just what areas exist within the budget which
hold out the greatest hope, upon further consideration by the Con
gress, of some reduction.
Mr. B r u n d a g e . W e are hoping that we will not have to send up
supplemental, that there will not be increases in pay and that you
will give us the increase in the postal rates that we are asking for.
Those kinds of things would be particularly helpful, and then on the
broad programs you know as well as I do where the money is going and
I think that you have to evaluate it just as we are doing.
W e have tried to study it and we have tried to balance the desires of
people for projects with their real needs and with what our fiscal re
sources are. I think we have come up with a pretty good balance,
myself, between the programs and between the different needs and
desires and our fiscal resources. I would like to have you take a look
at it and a careful look, and I hope thq,t you will be able to come up
with reductions.
Representative M i l l s . W e have talked entirely with respect to the
budget for 1958. You have alluded to the future. In connection with
that, you have pointed out that some of these expenditures that we
now are making must, of necessity, remain high until we can reach
some agreement with respect to limitations of armaments and inspec
tion involved in that problem.
Let us assume for purposes of my question that you are correct and
that these expenditures for national defense for the next few years
ahead will not be reducible because of our failure to reach agreements
upon which we can rely for disarmament.
Let us assume that our interest on the Federal debt does not increase
beyond what it is today. Let us assume we do enact this budget and
the programs which are recommended in the economic message and
other messages.
Do you see any prospect in the succeeding fiscal year, under those
circumstances, that our budget estimates of expenditure and actual
expenditures will be less than the $71.8 billion which is projected in
this budget?
Mr. B r u n d a g e . I doubt it. I am going to try, but we are already
starting on our 1959 projections and I would hope that we would be
able to hold to the present levels, but I doubt if we could cut it very
much.
Representative M i l l s . W ell, that causes us in this committee even
greater concern, I think, with respect to the economic effect of what
we are doing now in the expenditure of funds.
Now, as I pointed out, it has been developed that in order for us
to have a balanced budget and appropriate what is contained in this
request, there must occur a growth in ourrgross national product of
80
ECONOMIC REPORT OF TH E PRESIDENT
some 3 or 3% percent. In order for us to have a balanced budget, that
rate of growth will have to continue evjen beyond the calendar year
1957 and through the calendar year 1958 and on into 1959.
That is true or else we will be involved again in deficit financing
with these amounts of expenditures. Now, you know and I know that
the projection of these expenditures over that period of time on the
very tenuous basis that economic growth will sustain a balanced budget
is a dubious projection and a dubious position for us to be in, is it not?
Mr. B r u n d a g e . W ell, I think if we are able to hold our expenditures
within the $70 million to $72 million level, our economic growth will
enable a substantial surplus and, I would hope, consideration of tax
reductions in 1958, in the spring of calendar year 1958 for fiscal 1959.
Eepresentative M i l l s . I f we could hold our expenditures at this
level?
Mr. B r u n d a g e . That is what I say. That is what I am hoping to
do in 1959.
Eepresentative M i l l s . And if we enjoy a rate of growth of 6 or 7
percent in the 2-year period, perhaps that growth would permit reduc
tions in taxes. But I would not want to promise the American people
that we could reduce taxes and have a balanced budget on that basis.
Mr. B r u n d a g e . I would not either.
Eepresentative M i l l s . I am sure you would not.
M r. B r u n d a g e . N o.
Eepresentative M i l l s . S o that we are faced with a very serious prob
lem with respect to the economic effects that we create in this action
this year in the Congress. I had some further questions but I will not
delay the committee.
Senator F la n d e r s . Unfortunately, I have only just been able to
get here. I had both the Mideastern hearing and then a problem with
the Engineer Corps on a condemnation proceedings in my hometown
and I could not dodge that one. I am sorry I was not here earlier.
There is one point just raised by Mr. Mills about which I wish to
say a word. It is the general assumption that defense expenditures
cannot be reduced. In spite of all of the turmoil and uncertainty and
all of the negative results of approaches to disarmament, I do not
at the present time feel that a reduction in armaments is impossible.
I am not going to make a speech. I am just going to make the
suggestion. I feel it is possible to find an arrangement in the selfinterest of both the Soviet Government and of the Western Powers
which can result in a considerable decrease in our commitments in
return for a better sense of military security and a withdrawal of Eussia in return for that from some of the occupied territory. I shall
bring these points out in greater detail later.
I do not wish at this time to write off as an impossibility the idea
o f somewhat reducing our military commitments.
Senator O ’M a h o n e y . M r . Chairman, before Senator Flanders ar
rived this morning at this hearing, Congressman Curtis raised some
•questions about the consolidation of the purchasing operations of the
Defense Department.
Senator F la n d e r s . Those are very pertinent questions to raise.
Senator O ’M a h o n e y . It was in 1952 that I sponsored an amendment
to the Defense Appropriations Act requiring the purchasing agencies
o f the Department of the Army, the Department of the Navy and the
Department of the A ir Force to get together as soon as they could.
ECONOMIC REPORT OF THE PRESIDENT
81
Mr. Hoover, in the reorganization of the Government also recom
mended that consolidation. The hearings which the Appropriations
Committee held over many years whlie I was a member of it showed
there was constant duplication among the three branches.
I have no doubt that considerable gain could be made if the Depart
ment of Defense would only carry out that law. I think probably
you would save more money than you expect to gain by increasing
the postal rates.
Eepresentative C u r t is . W ill the gentleman yield for a further com
ment ? This is in the area of common-use items which does not involve
tanks and guided missiles and things that the military regard as
sacrosanct.
Senator O ’M a h o n e y . It is in the area of items which are used in
every war that this Nation has ever fought and has resulted in the
accumulation of vast reserves of unusuea materials that were never
of any use to anyone, except those which could be sold as surplus
property.
Too much is bought consistently.
Senator F la n d e r s . A s a member of the Armed Services Committee,
I want to give assent to that statement.
Senator O ’M a h o n e y . I think that you can really get somewhere if
you go at it, and put as much pressure on the Department of Defense
as the Secretary of the Treasury is putting upon you.
Mr. B r u n d a g e . W e are working at that, I assure you, and any help
you can give will be greatly appreciated. There is a terrific resist
ance to this, as you know.
^ Senator O ’M a h o n e y . I know what you are up against all of the
time.
Mr. Chairman, may I ask Mr. Brundage a question?
Representative M i l l s . Had you concluded?
Senator F la n d e r s . Yes.
Representative M i l l s . Senator Flanders, my assumption followed
the statement which Mr. Brundage had made to us in connection with
his prepared statement that expenditures for defense purposes would
have to remain high until we could reach some agreement on disarma
ment that we could rely upon.
I was going along with an assumption predicated upon his state
ment rather than any thought in my own mind that there could not
be some reduction.
Senator F la n d e r s . May I say that in any given fiscal year, we
should proceed on no other assumption.
Representative M i l l s . That is right.
Mr. B r u n d a g e . I personally feel that there is some hope for the idea
which Senator Flanders has announced. It seems to me that the
Soviet must be having all of the troubles that we are having and a
lot more.
Senator O ’M a h o n e y . I have just one question. May I call your
attention, Mr. Brundage, to this chart No. 1 in your statement. This
is the chart which shows the surplus of which you have spoken by a
graph which indicates that the receipts will during 1957 and 1958 be
above the expenditures. The figures upon which that chart is drawn
for 1957 and 1958 are labeled “estimates.”
Mr. B r u n d a g e . That is right.
82
ECONOMIC REPORT OF THE PRESIDENT
Senator O ’Mahoney. Where do I find the breakdown of the ex
pected receipts?
Mr. B r u n d a g e . It is right in the budget.
Senator O’Mahoney. I know there was a table but it escaped my
attention.
Mr. B r u n d a g e . Y es; here it is on page 1069.
Senator O’Mahoney. I think it would be well, Mr. Chairman, to
have that table inserted in the record at this point.
The C h a ir m a n . Without objection, the table requested by Senator
O’Mahoney will be included in the record.
(The table referred to follows:)
Budget receipts {by source)
[In millions]
Source
1957 estimate 1958 estimate
Increase (+ )
or de
crease (—),
1958 over 1957
Individual income ta x e s__ _______________________________
Corporation income taxes.________ ____ ___________ _______
Excise taxes. _____________________________________ _____
Employment taxes____ __________________________________
Estate and sift taxes___________________ ____ ______________
Taxes not otherwise classified.....................................................
Customs
_
. _____________ "__________ ____ ________
Miscellaneous receipts____________________________________
Deduct—
Transfer to Federal old-age and survivors insurance trust
fund....................................................................................
Transfer to Federal disability insurance trust fund............
Transfer to railroad retirement account...............................
Transfer to highway trust fund...........................................
Refunds of receipts __________________________ ________
$38,500
21,400
10.691
7,750
1,380
5
775
2,986
6,445
335
660
1,539
3,880
6,609
826
665
2,173
4,156
+164
+491
+5
+634
+276
Net budget receipts________ ________________________
70,628
73,620
+2,992
$41,000
+$2,500
+600
22,000
+380
11,071
8,420
+670
1,475
+95
5
800 ............... +25
+292
3,278
Mr. B r u n d a g e . There is an accompanying analysis beginning on
page 1068. It gives more details.
Senator O ’M a h o n e y . I think the reference merely to this page
would be sufficient for our record. W e do not need to republish it.
Representative C u r t is . I wanted to comment on an implication
that I was afraid might be left from Mr. Mills’ line of inquiry. I am
pretty sure he did not intend the implication but I just wanted to be
sure that the Congress has no source of information or wisdom apart
from, the Executive that it can apply to this big problem of our ex
penditures.
In my judgment, I feel that Congress has many techniques and
sources of information which are not available to the Bureau of the
Budget or the executive department. The Government Accounting
Office, as many people fail to remember, is an arm of the Congress.
W e have a vast quantity of information that we can acquire on ex
penditures and what we might say were extravagances in the past.
Furthermore, we have the means of providing our citizens with a
forum whereby they can give information that is within their knowl
edge on the expenditures of Federal funds.
I think that to imply, and I do not believe the implication was in
tended, that the Congress did not have a tremendous responsibility
in this field would not be correct.
ECONOMIC REPORT OF THE PRESIDENT
83
The Executive has commented upon that responsibility of its sister
branch of the Government. There should not be such an implication.
The Congress is limited to what the executive branch brings before us.
I feel we have available tremendous tools and knowledge and that we
can perform a real service within this area.
Mr. Brundage, as I view your approach, and that of Mr. Hum
phrey and the President, it is calling upon this sister branch of the
Government to use its information and knowledge. Is that a fair
interpretation ?
Mr. B r u n d a g e . That is quite correct.
Representative C u r t is . I thank you, because I did not want to
leave those overtones remaining. I, as a Congressman, feel quite
jealous of the prerogatives of the Congress and of its independence
of the executive department and our need to do a job in this area.
Reperesentative M i l l s . I have the same jealous regard for the
Congress that my colleague from Missouri has and I did not desire
to leave any implication.
I wanted to call attention to the fact that the responsibility given
Congress this time to cut a budget is one that is staggering in its im
portance and it does imply that the Congress can utilize better stand
ards, if it is not to use the meat-ax approach, than the Bureau of the
Budget has yet been able to develop.
Perhaps, the Congress can develop those better standards.
Representative C u r t is . Evidently, there is an area of disagree
ment. I think the standards that the Bureau of the Budget has ap
plied in handling this budget have been excellent. I am suggesting
that the Congress, because of its different nature can apply different
techniques which the Bureau of the Budget by its nature and the
executive department by its nature cannot apply. It is not that our
standards are better, it is the fact that we can use a different approach
and do some things that they cannot do.
Now, I think if I would be critical, I would be more critical of the
Congress for not having applied standards that they could have ap
plied and in my judgment should, even to this day, apply in approach
ing the budgets that are presented to us.
It is our standards that in my judgment have been weak more than
the executive department stantards.
Senator F la n d e r s . I desire to state that the Senate likewise has
strongly maintained the coordinating powers of the Congress. I f
there is any doubt about that matter, I would like to repeat it.
Representative M i l l s . There is no doubt in my mind, Senator, that
we both exercise independence as evidenced by our record of generally
appropriating more money than the budget has requested for the
past several years.
That is regardless of who happened to be in control of the Congress.
So that we are independent and we do exercise our independent judg
ment.
I fear that we will do it this time but in the direction opposite to
what I hope will occur.
Mr. B r u n d a g e . I know your capabilities and you can join the
Budget Bureau any time you want to.
Representative M i l l s . I may come to you some day.
84
ECONOMIC REPORT OF THE PRESIDENT
Representative C u r t is . Could I ask one specific question that was
suggested by another line of questions ?
I notice that the customs receipts are listed as expected to rise by
about 10 percent, reflecting a higher level of business activity. That is
on page 1069 of the budget. Yet the estimate of growth on corpora
tion taxes is much smaller, about half a percent, which incidentally I
believe was about the lowest in 4 years.
Now, does this mean that there will be little growth of domestic
activity and a great increase of foreign activity or is this based upon
different facts or predictions.
This relates to Mr. M ills’ observation that this is all predicated on
an increase in gross national product of about 3 to 3.5 percent. Yet,,
the corporate tax return is only up about half a percent, if my figures
are correct.
Mr. B r u n d a g e . W e expect increasing foreign trade, but somewhat
narrower margins of profit. I think the total volume is expected to
go up. This, as I said, is primarily a Treasury estimate but we worked
it out jointly with the Counsel of Economic Advisers.
Representative C u r t is . In other words, the apparent inconsist
ency lies in the fact that the corporations although increasing the
amount of their activity, will not be having as much profit. Then the
increased income from taxes will be derived from personal income,,
wages, and salaries, and so on.
Mr.
B ru ndage.
That is right.
Representative C u r t is . I get the picture. Thank you.
Representative M ills. I f there are no further questions, the com
mittee will stand adjourned until 10 o’clock in the morning and we
appreciate, Mr. Brundage, your presence and the presence of the
members of your staff and the information you have given.
In the morning our discussion will be directed at the economic out
look for the coming year, which is very appropriately scheduled.
(Whereupon, at 12:10 p. m., the committee was recessed, to recon
vene at 10 a. m. Wednesday, January 30,1957.)
JANUARY 1957 ECONOMIC REPORT OF THE PRESIDENT
W E D N E S D A Y , J A N U A R Y 30, 1957
C ongress of t h e U n it e d S ta te s ,
J o in t E co n o m ic C o m m it t e e ,
Washington, D. C.
The committee met at 10 a. m., pursuant to recess, in room P -36
o f the Capitol, Hon. W right Patman (chairman of the joint com
mittee) presiding.
Present: Representatives Patman (presiding), Mills, Talle, Curtis,
and Kilburn.
Present also: Dr. Grover W . Ensley, executive director of the joint
committee, and John W . Lehman, clerk of the joint committe.
Chairman P a t m a n . The committee will please come to order.
The President’s Economic Report contains much information on
economic developments of recent years and particularly of 1956. It
was cautious, however, in discussing what is likely to happen during
the coming year to the labor force, Government, business, and consumer
demand, and agriculture.
I might say that the executive session on Monday with the Council
of Economic Advisers provides considerable elaboration of the Coun
cil’s views on the outlook for 1957. This testimony will be released as
soon as it can be edited and printed.
Today the committee has 5 experts from Government and from re
search organizations to discuss m considerable detail the outlook for
the next 12 months and beyond. W e have asked these witnesses to
present facts and survey results and to provide us their personal judg
ments. The policy implications derived from this discussion, and the
appropriate action for the Federal Government, will be discussed at
later sessions of the committee.
In order to expendite the discussion this morning, the Chair will
recognize each of the 5 panel members for purposes of making an
opening statement of 8 minutes, summarizing the facts and in the
area to each individual witness. W e will proceed without interrup
tion through the opening statements, following which there will De
a general discussion by members of the committee and the panel. I
understand that this procedure is agreeable to the panel and that they
have requested that the committee staff notify each when his 8 minutes
has expired.
As chairman of the committee I would like to indicate at this time
the plan for questioning which I propose to govern this set of hear
ings. Each committee member will be recognized for 10 minutes for
purposes of questioning the witnesses. This will apply during first go
around in order that each member of the committee may have time to
participate in the questioning.
85
86
ECONOMIC REPORT OF TH E PRESIDENT
I will ask the staff to notify each member when his 10 minutes has
expired.
The first topic this morning is labor force, hours, productivity, and
potential output. This area will be discussed by Mr. Ewan Clague,
Commissioner of Labor Statistics of the Department of Labor.
STATEMENT 0E EWAN CLAGUE, COMMISSIONER OP LABOR STA
TISTICS, UNITED STATES DEPARTMENT OF LABOR
Mr. C la g u e . Mr. Chairman, you have asked me to discuss recent
developments in some of the fields which fall within the scope of the
data-collecting responsibilities of the United States Department of
Labor’s Bureau of Labor Statistics, and to give you some appraisal
of the significant factors which are now influencing, or are likely to
influence, economic trends in 1957.
I have with me, for insertion in the record, a presentation on the
subjects which you assigned to me— labor force, hours of work, pro
ductivity, wages, and prices. I might say that the statement that I
resent contains three segments. It contains my short statement which
am reading here today, a complete report, and lastly, a set of the
charts. I hope that this more detailed material will be useful to you
in your deliberations. In my brief statement here today, I shall at
tempt to summarize some of the more notable highlights, using some
of the charts which are attached.
?
LABOR FORCE
Out of the many facts which we know about the labor force, the
one which I find most significant at the moment is that its growth in
any one year cannot be predicted with any certainty. As chart No. 1
shows, there was no year from 1950 to 1956 during which actual labor
force changes were the same as the amounts that might have been
expected. However, as the second chart shows, over a span of years
the actual additions to the working force have in fact matched the
amounts expected by the technicians. This, I believe, highlights one
of the conclusions which can be drawn from the data for 1956: growth
in the economy does not occur on a straight-line year-after-the-year
basis.
A s you will note from chart 2, we have carried forward the 1950-55
projections to 1960. W e are starting this year well above the trend
line, mostly because there has been a much greater than expected rise
in employment of youngsters and of women 35 to 64 years of age.
You will see that in chart 1. W e could get another such rise this
year— the reservoir of housewives and students is far from exhausted—
or we could get a return toward the trend line. About the most that
we can say now, in response to the request of the committee and its
staff, is that if the labor force expands to the total now being projected
for 1960, there would, be an increase of about 800,000 in 1957, O f
this, almost 700,000 would be due to the increase in the population
of working age.
Another important highlight in recent employment trends is that
the increases in employment have been primarily in nonmanufacturing
industries, and even the gain in manufacturing has been mainly among
nonproduction workers. See chart 3.
ECONOMIC REPORT OF THE PRESIDENT
87
Using Bureau of Labor Statistics data seasonally adjusted, we have
made a comparison of the changes in employment from the peak of
mid-1953 up to the end of 1956. Total employment in the goodsproducing industries— manufacturing, mining, and construction— was
approximately the same at the beginning and at the end of the period.
By contrast, total employment in the remainder of the nonfarm estab
lishments (including trade, transportation, Government, and the other
service industries) was over 7 percent higher at the end of 1956 than
it had been at the end of the Korean hostilities.
HOU RS OF W O R K
Trends in the size of the workweek are much less clean-cut, even
over a span of years, than are trends in the labor force and employ
ment. W e know that in agriculture and in a large number of the non
manufacturing industries there has been a long-term downward trend
which is still continuing. This downtrend has been muddied to some
extent by the recent sharp rise in the number of part-time workers.
Nearly half of the 1956 increase in employment consisted of part-time
workers.
In manufacturing, on the other hand, there does not seem to have
been any clear trend in recent years. Within the past few days I
have received the first tabulations of a new set of figures prepared by
the Bureau; that is, seasonally adjusted hours of work. A quick
glance at these summary figures— which we have plotted on chart 4—
furnishes some clues which indicate that changes in the factory work
week tend to precede changes in employment. In other words, em
ployers tend to use the workweek— overtime dr short time, as the case
may be— as the first method of adjusting for changes in demand.
In making future projections the continued downtrend in the work
week in nonmanufactunng industries justifies assuming some further
decline in the average workweek for the economy as a whole; but, as
far as manufacturing is concerned, it is better not to predict the work
week without first making some assumptions about the trend of output.
The size of the workweek is only one of the factors which determine
total man-hours worked per year. Also important is the uptrend in
the number of paid holidays and weeks of vacation.
PR O D U C TIV ITY
When we come to the subject of productivity we discover that what
I said about labor force, that almost anything can happen in a single
year, is even more true. It is chartcteristic of productivity trends
that they do not move uniformly from year to year. A year of rapid
expansion may be followed by one of leveling on.
A s this committee knows, we have prepared estimates on produc
tivity trends over the years through 1953. For the 3 most recent
years the data are still so skimpy that it is impossible to do anything
but make very preliminary estimates which have a rather low degree
of reliability. A s nearly as we can tell from the data which are now
available, the increase in manufacturing productivity in 1954 and 1955
was substantially higher than the previous postwar average, but the
increase in 1956 was small.
88
ECONOMIC REPORT OF THE PRESIDENT
As indicated in the more detailed presentation, output per man-hour
of production workers in manufacuring increased 3 to 3.6 percent a
year from 1947 to 1953, about 4% percent a year from 1953 to 1955,
and from 1 to 2y 2 percent in 1956, depending on which of various
production estimates are used.
I f the estimates are based on the hours of work of all factory em
ployees, rather than production workers alone, the average increases
would be reduced by at least one-half a percentage point for the period
up to 1953, and about 1 percentage point for the last 3 years.
I f we take into account the whole private nonagricultural economy,
we find an average annual gain of about S y2 percent from 1947 to
1953, 3 percent annually in 1954-55, and practically no increase in
1956. This is based on hours of all persons at work. ^
Figures are still so crude and so lacking in detail that it is very
difficult to account specifically for the 1956 decline in the rate of pro
ductivity growth. Some possible factors include the moderate gain
in output m 1956, utilization of marginal resources, production ad
justments to new equipment, and the large increase in the labor force.
I must repeat: Productivity does not move in a straight line. The
decline in the rate of productivity growth in 1956 followed 2 years
of higher than average increases, at least in manufacturing, and is not
necessarily an indicator of a new trend.
WAGES
Some aspects of the wage situation are fairly clear. Wage-rate in
creases negotiated in 1956 tended to be higher than those agreed to in
1955. About 3 out of 4 of the workers covered by major settlements
concluded during 1956 received increases in rates of pay averaging
at least 10 cents an hour. Hourly earnings rose significantly in a
number of nonmanufacturing industries as well as in manufacturing
(see charts 5A, 5B, and 5C ).
There are now at least 5 million workers who can expect wage in
creases during this coming year on the basis of contracts concluded
in 1955 and 1956. These workers are found in almost every industry,
but are concentrated in metalworking, construction, transportation,
food, and mining. About half of them will receive pay adjustments
of between 6 ana 8 cents an hour. In addition, cost-of-living escala
tor clauses may affect the incomes of nearly 4 million workers.
The 1957 deferred increases in these long-term contracts are gen
erally lower than the raises which became effective at the beginning
of those contracts in 1955 or 1956.
These deferred increases will undoubtedly have some effect on 1957
negotiations in other industries, but nevertheless there can be no cer
tainty as to the size of the wage increases which will be negotiated
this year. Among the important industries in which contracts are
due to expire or are subject to reopening on wages tins year are
petroleum, rubber, lumber, chemicals, textiles, coal mining, paper,
telephone and other utilities, trade, and construction. The major
influence in these negotiations will be the general economic climate
modified by the outlook in each individual industry.
ECONOMIC REPORT OF THE PRESIDENT
89
PRICES
When we come to the last of the subjects assigned to me, prices, we
move into an area in which there is no agreement at all as to the
^normal” trend. W e are now in the midst of the third period of price
increases during the past 10 years. The first (1947-48) was due to
heavy demand arising out 01 war-created shortages of goods. The
second (1950-51) was due primarily to the outbreak in Korea* Un
like the two earlier ones, the present price rise, which began in mid1955, is due entirely to strong forces of domestic origin in both
consumer and producer markets.
The charts show that there are several distinctly different factors
at work in the current price situation, in addition to the continuing
strong demands resulting from our rising standards of living and
increasing population. One of these has been the extremely strong
business demand for new plant and equipment (see chart 9 ). A
second factor in price movements in 1956 was the firming up of the
farm situation after several years of steady decline. From the peak
in early 1951 to the end of 1955, farm prices fell about 30 percent,
but there was a substantial recovery in 1956. A third factor, which
is particularly important in consumer prices, is the steady rise in
rents and services, which shows no sign of abating (see chart 1 1 );
and, of course, there has been the special impact of the Suez situation
on a few commodities.
So far as the immediate future is concerned, if the demand factors
which gave rise to the price increases show no further strengthening—
in other words, if investment demand flattens out and if consumer
buying follows the income curve and consumer credit is expanded
only moderately— there may well be more stability in the price picture.
A s of this time, signs of upward price pressures are still evident
in those sectors of the economy where demand continues to burgeon;
signs of price weakness are appearing only in those fields where
demand is less urgent than it formerly was. In addition, there is no
indication of any halting of the long-run uptrend in the cost of serv
ices ; the demand for personal and professional services is continually
rising. A t the same time, price declines in the agricultural sector are
no longer offsetting increases elsewhere.
(The material referred to is as follows:)
MATERIAL SUBMITTED BY EWAN CLAGUE, COMMISSIONER OF LABOR
STATISTICS, UNITED STATES DEPARTMENT OF LABOR, BUREAU
OF LABOR STATISTICS, TO JOINT ECONOMIC COMMITTEE
I. L abor F orce T rends
The total labor force averaged 70.4 million in 1956, an increase over 1955 of
1% million—about twice the amount of growth expected on the basis o f popula
tion increase and long-term trends in rates o f labor force participation. The
occurrence
such a large increase following the substantial gain o f 1.1 million
in the preceding year illustrates the difficulty o f determining how much labor
force growth there is likely to be in a given year. The annual increases since
1950 are shown in chart 1. In this period they ranged from a low o f 400,000 in
1952-53 to the 1955-56 high of 1% million.
Our experience since W orld War II indicates that it is possible to make pro
jections o f labor force over longer periods o f time which come fairly close to
actual developments. For example, in early 1951, the Bureau o f Labor Statistics
87&24S7 ------ 7
90
ECONOMIC REPORT OF TH E PRESIDENT
projected labor force growth through 1955.1 The projections included growth
resulting from increased population and assumed a continuation of 1920-50 trends
in rates of labor force participation for each age-sex group with an adjustment in
the rates of adult women to take account o f accelerated increases observed in
1947-50. For the 5-year period the estimated expansion of 3.7 million workers
almost exactly matched the actual growth. As can be seen in the upper half o f
chart 2, however, the year-to-year increases did not follow the trend line. In
some years the labor force expansion was far greater and in other years much
less than the average expected growth o f 750,000 and in some years the expansion
was much less.
The deviations of actual labor force from trend during the years 1951-54
(table 1 and chart 1) appear to be related to the general expansion of military
and economic activity following the Korean hostilities and to the recession which
followed. Between 1950 and 1951 the labor force increased by 1*4, almost onehalf million more than was anticipated. The expanded size o f the Armed Forces
brought a large increase in the labor force activity o f men under 25. At the same
time, the number of women entering the labor force exceeded the long-run expec
tation. In the following year the labor force was still above the projected trend
level but the amount o f excess had shrunk. There appeared a deficit among
women under 25, probably related to the increase in marriages following the
Korean outbreak and the subsequent rise in the number of births. Women over
25 continued to be added to the labor force in excess o f the numbers expected.
1 Harold Wool, Long-Term Projections of Labor Force, Studies in Income and Wealth,
vol. XVI, National Bureau of Economic Research. The original projections have been
revised to take account of revised population data.
T a b le 1 .— Deviation of actual from trend 1 labor force , by age and sex, annual average 1951-56
[In thousands]
1950
Age and sex
1951
1953
1952
Actual labor Actual labor Trend labor Deviation of Actual labor Trend labor Deviation of Actual labor Trend labor Deviation of
actual from.
force
force2
actual from
force2
actual from
force
force
force 2
force
trend
trend
trend
66,401
65,942
459
66,977
66,706
271
67,362
67,417
-5 5
47,072
46,828
244
47,391
47,186
205
47,692
47,528
164
to 24..............................................
to 64...................................
and over.............................
8,474
35,348
2,595
8,586
35,878
2,608
8,419
35,771
2,638
167
107
—30
8,510
36,342
2,539
8,383
36,124
2,679
127
218
-1 4 0
8,423
36,729
2,544
8,342
36,454
2,732
81
275
-1 8 8
Female, 14 and over......................
18,718
215
19,586
19,329
19,520
19,668
19,889
-2 2 1
to 24..............................................
to 64............................. - ..............
and over.............................
4,675
13,427
616
4,683
14,064
582
4,622
13,843
649
61
221
-6 7
4,513
14,453
620
4,583
14,255
682
4,399
14,571
693
4,546
14,619
724
-1 4 7
-4 8
-3 1
14
25
65
14
25
65
OF
1954
1956
1955
Actual labor Trend labor Deviation of Actual labor Trend labor Deviation of Actual labor Trend labor Deviation of
of actual
force
force
of actual
force
force
of actual
force
force
from trend
from trend
from trend
67,818
68,144
-326
68,896
68,854
+42
70,387
79,750
47,847
47,832
+15
48,054
48,108
-54
48,579
48,389
190
14 to 24...........................................................................
25 to 6 4 . . . . ........... , ...................................... ................
65 and over...... .................... ..........................
8,257
37,065
2,525
8,303
36,778
2,751
-46
+287
-226
8,229
37,299
2,525
8,261
37,052
2,795
-32
+247
-270
8,424
37,552
2,603
8,278
37,587
2,524
146
-35
79
Female, 14 and over.............................................
19,971
20,312
-341
20,842
20,746
+96
21,808
21,361
447
to 24...........................................................................
to 6 4 .------- ;......... ...................................... ...............
and over............................................... .......
4,380
4,530
15,028
754
-150
-103
-88
4,445
15,617
779
4,541
15,410
795
-96
+207
-16
4,648
16,338
821
4,500
16,053
808
285
13
14
25
65
14,925
666
1Trend labor forces for 1951-55, made in 1951, are based on 1950 and assume continua
tion of 1920-50 trends in age-sex labor force participation rates with an adjustment in
the rates for adult women to take account of accelerated increases observed in 1947-50;
the 1956 trend labor force, made in 1956, is based on 1955 data and assumes continuation
of 19*7-55 trends in age-sex labor force participation rates.
637
PRESIDENT
Total, 14 and over.................................................
Male, 14 and over....................................... *.......
THE
Age and sex
19,114
66
—70
198
-6 2
REPOBT
65,135
46,417
ECONOMIC
Total, 14 and over....... .......
Male, 14 and over.........................
148
2 The actual labor force estimates for 1950, 1951, and 1952 are based on revised popula
tion estimates and therefore differ from published census figures for the same dates*
N ote.—Figures may not add to totals because of rounding.
Source: U. S. Bureau of the Census and Bureau of Labor Statistics.
co
92
ECONOMIC REPORT OF TH E PRESIDENT
With the slowing down o f defense activity in 1953, the labor force showed
only a small increase. The inflow o f additional women workers was sharply
reduced and the participation o f men over 65 continued to drop, erasing the ex
cess o f the actual labor force over the trend projection.
Between 1953 and 1954, with increased unemployment and curtailed activity
in many sections o f the economy, labor-force growth was again less than ex
pected and the actual was 300,000 below trend line. The recovery in 1955
brought a substantial amount o f labor force growth and the 1955 average labor
force was Ijack to the long-term trend level o f 68.9 million.
The labor force increase o f 1% million workers between 1955 and 1956 con
sisted o f about 600,000 additions resulting from population growth, about 200,000
from continuation o f long-term trends in labor-force participation rates, and
about 650,000 from a greater-than-expected increase in worker rates for women
35 to 64 years of age and for youngsters o f school age. These increases for
adult women and young workers appear to be related to the high level o f
economic activity and provide evidence that these groups enter the labor market
in greater numbers when job opportunities are plentiful. Many o f these women
and youngsters are in part-time jobs. Between 1955 and 1956 there was an
unusually large increase of 850,000 in the number o f persons employed less than
35 hours a week.
The lower half o f chart 2 shows the projected trend labor force to 1960, and
the actual 1955 and 1956 labor forces. The extrapolation of trends in laborforce rates to 1960 was revised in 1956 to take account o f additional data
through 1955.
By 1960, the labor force can be expected to number almost 73% million on the
basis o f trend, an increase o f about 4% million over 1955, or an average o f about
900,000 each year between 1955 and 1960. However, the 1956 actual labor force
increased by about 600,000 more than expected. Therefore the expected increase
between 1956 and 1960 is reduced to about 3 million or 800,000 a year for the next
4 years. Even if the projection to 1960 proves to be correct, we do not expect
the growth to occur in equal annual increments.
Nonfarm employm ent in 1956
The number o f workers on nonfarm payrolls continued at record levels for
each month o f 1956, mainly as a result o f persistently greater-than-seasonal
gains in the nonmanufacturing sector. For the year as a whole, employment in
nonagricultural establishments averaged 51.5 million, more than 1.5 million
higher than the average for 1955. Employment in nonmanufacturing industries
accounted for 1.2 million o f this job increase, a 3.6 percent gain from 1955.
Every major nonmanufacturing division reported an employment increase.
Manufacturing employment, at 16.9 million, rose only 330,000, or 2 percent from
1955 levels as large gains in a few industries were offset by scattered losses
or only modest gains in other industries.
Large gains, resulting in record job levels, were made in retail and wholesale
trade, contract construction, State and local governments, and the service in
dustries. In manufacturing, substantial over-the-year increases in employment
were reported in the machinery and electrical machinery industries, as well as
in primary metals, chemicals, printing, and paper. A 12 percent drop in auto
mobile employment in 1956 outweighed substantial over-the-year gains in air
craft and shipyard employment, resulting in a large decline in jobs in tile trans
portation equipment industry. Over-the-year job losses were also registered in
lumber, textiles, tobacco, leather, and ordnance.
While nonmanufacturing employment moved steadily upward during all o f
1956 (allowing for seasonal variation), manufacturing employment was relatively
stable during the first three quarters o f the year, beginning to move upward in
October when large-scale job expansions occurred in industries producing auto
mobiles and their component parts. The steel strike in July had only a
temporary effect on job totals.
One o f the more interesting developments in manufacturing employment in
1956 was the relatively large increase in the number o f nonproduction workers.
While the average number o f production workers increased by less than 1 per
cent during the year, the number of nonproduction workers increased by more
than 6 percent. Two-thirds o f the over-the-year gain o f 330,000 in total manu
facturing employment was made up o f nonproductiofa workers. Most o f the
increase in nonproduction workers occurred in aircraft, machinery, and electrical
equipment plants, where personnel requirements for research and development
have been increasing sharply in the past year.
93
ECONOMIC REPORT OF TH E PRESIDENT
II. T ren ds in t h e W ork w eek
H ou rsof work in 1956
The average workweek in the entire economy in 1956, as measured by the
Bureau of the Census, was 39.5 hours, two-tenths of an hour below the level o f
the previous year. The decline was somewhat less than had been projected
for 1956 on the basis o f an assumed long-term downtrend in the length o f the
workweek.2
The workweek in manufacturing, as measured by the Bureau o f Labor Statis
tics, averaged 40.5 hours in 1956, down two-tenths hour from 1955. The length
o f the factory workweek started an abrupt decline in the early part of 1956, after
more than a year and a half of almost continuous rise (allowing fo r seasonal
fluctuations). A leveling off or turnabout in this upward trend o f hours was
characteristic of most manufacturing industries, but was especially evident in
the automobile and its supplier industries (notably rubber), and in industries
connected with home construction (lumber and furniture).
In June, the general decline had been halted and an upturn commenced. By
the last quarter of the year, hours o f work in manufacturing had recovered
much of the loss suffered since the end o f 1955 and were about at, or slightly
above, the postwar average.
j
p ostwar trends in the w orkw eek
The most significant factor in the average workweek in past decades has
been a long-term downtrend in both agricultural and nonagricultural industries!.
This secular decline in hours of work, temporarily reversed by W orld War II,
apparently again has been resumed in the postwar period. The workweek in
agriculture, as measured by the Bureau of the Census, declined from 48.8 hours in
1947 to 45.4 in 1956. Hours o f work in nonagricultural industries have also
shown a marked decline since 1947 according to Census Bureau statistics,
dropping from 40.4 hours in 1947 to 38.8 in 1956. ( See table 2 .)
1
T a b le 2.— W eekly hours o f wage and salary w orkers in agriculture and
in nonagricultural industries
[Annual averages 1947-56]
Total
weekly
hours
Year
1947..............
1948 .
1949..............
1950..............
1951__- ........
I
41.6
40.8
40.3
39.9
40.4
Agricul
ture
48.8
48.5
48.1
47.2
47.8
Nonagri
cultural
industries
40.4
39.6
39.0
38.8
39.4
Total
weekly
hours
Year
1952..............
1953___ ____
1954...........
1955..............
1956..............
40.4
40.1
38.9
39.7
39.5
Agricul
ture
47.4
48.0
47.0
46.3
45.4
Nonagri
cultural
industries
39.6
39.1
37.9
38.9
38.8
1Averages indude workers reporting no hours of work.
Source: U. S. Department of Commerce, Bureau of the Census.
. The decline is especially evident in nonmanufacturing and has been the result
o f several factors. A growing proportion o f workers have had their scheduled
workweeks reduced to 40 hours or below. This is indicated by the smaller
proportion of nonagricultural employees working 41 hours or more.
T a b le 3.—H ours worked in nonagricultural industries
Percentage of employees working—
1 to 34
hours
May 1947...................................................................................
May 1956__________ ________________ ____
____
12.6
17.0
35 to 40
hours
48.0
49.4
41 hours or
more
39.4
33.6
Source: U. S. Department of Commerce, Bureau of the Census.
a A reduction o f ‘ ‘slightly less than 1 percent” — or about 0.4 hour was projected in
the report of the Joint Committee on the Economic Report on the January 1956 report of
thePresident, 84th Cong., 2d sess., March 1956, p. 86.
94
ECONOMIC REPORT OF THE PRESIDENT
This pattern is true o f all major groups in nonagricultural industries from
May 1947 to May 1956. Census data show the following declines during this
period in the proportion working 41 hours or m ore: in construction, from 35.1
to 26.7 percent; in transportation, communication, and other public utilities,
from 55.3 to 25.6 percent; in wholesale and retail trade, from 55.7 to 43.3 per
cent ; and in service industries, from 39.7 to 31.4 percent. The decline in manur
factoring was the smallest o f the major groups—from 28.2 to 24.1 percent—
primarily because the overwhelming proportion o f manufacturing industries
already were on a regularly scheduled 40-hour week.
An increase in part-time workers is another major factor affecting the
average workweek. The increase of 1.8 million in civilian employment between
1955 and 1956 was made up about equally o f men and women. To a large extent
the increases were part-time workers. Nearly half of the 1956 employment
increase o f 1.8 million consisted of people who were working less than 35 hours
a week. As compared with 1955, there were about 450,000 more women and
400,000 more men working less than full time, the great majority in nonagri
cultural industries.
In agriculture, the decline in the workweek has also been influenced by the
decrease in the proportion o f self-employed farmers and unpaid family workers—
who usually work long hours— and the corresponding growth in the proportion
of hired farmworkers.
Although a long-term downtrend in hours o f work was also evident in manu
facturing industries before the war, short-term economic influences have appar
ently been o f more importance in determining the factory workweek in the postW orld War II period. Bureau of Labor statistics figures on annual average
weekly hours in manufacturing have ranged, in the period since 1947, from a
high of 40.7 hours to a low of 39.2 hours, with no clear evidence o f an overall
downtrend. There have been sharply divergent trends in the workweeks o f
individual industries. Durable-goods industries showed an increase in weekly
hours, while nondurable-goods industries failed to show a gain. (See chart 4.)
Hours of work tend to be a factor in equating supply and demand for labor
in the short run. When changes in demand require changes in labor input, the
first response appears to be changes in hours o f work. There are a number o f
advantages to a firm in this approach. First, if the firm is not certain that the
new conditions of demand will persist, increasing or decreasing hours of work
are methods o f adjusting labor inputs which, on the downswing, minimize the
loss o f trained work force and creation of morale problems. In a period o f
rising demand, increasing the hours o f work avoids the expense and difficulties
o f recruiting and training good workers. In addition, in a tight labor market,
overtime and premium pay may be an inducement in recruiting and longer hours
may be the only alternative to hiring less desirable, untrained workers. How
ever, since overtime work typically is costly because of premium wage rates,
and has other disadvantages as well, the firm will generally employ additional
labor or make other adjustments within a relatively short time.
These facts are evident on chart 4, which presents seasonally adjusted monthly
data on production worker employment together with preliminary data which I
have just received on seasonally adjusted average weekly hours for 1947-56. I
have had these new estimates charted, and they indicate that changes in the
workweek tend to precede changes in employment for both durable and nondur
able groups.
The seasonally adjusted data on hours of work presented in this chart will
be available in complete tabular form in about a month. I exipect that this series
will provide valuable insight on the relationship between employment and hours.
Supplementing the seasonally adjusted employment series, these forthcoming
data on seasonally adjusted factory hours in manufacturing will make possible
adjusted man-hours data which will provide another useful tool for current
economic analysis.
Overtim e hour
The Bureau o f Labor Statistics has recently inaugurated another series, de
signed to give precise information on overtime hours worked by factory produc
tion workers for premium pay. The period o f 1 year for which these data have
been collected is as yet too short to realize the full potential of this measure,
particularly the application of overtime hours as a lead indicator of changes
in the factory workweek, and possibly o f employment as well. To analyze the
economic relationship of overtime hours to total hours and to employment, it will
s
ECONOMIC REPORT OF TH E PRESIDENT
95
be necessary to have several years o f data in order to determ ine seasonal
patterns in overtime work.
The overtime series have, nevertheless, already yielded useful, information
on the differential patterns o f overtime in various manufacturing industries, on
the relationship o f overtime to economic activity and the relationship o f over
time work to earnings.
For example, o f the average o f 40.5 hours a week o f factory production workers
in 1956, we know that 2.8 hours have been overtime hours at premium pay.
Based on time and a half for the overtime work, factory workers received on
the average $8 per week for this work, or 10 percent o f their average gross weekly
earnings of $80.
III. R e c e n t T r e n d s i n P r o d u c t i v i t y
Long-run and postwar trends
M anufacturing.—During the course o f the hearings held in October 1955 by
the Subcommittee on Economic Stabilization o f the Joint Economic Committee on
Automation and Technological Change, the findings of BLS Report..100, Trends in
Output Per Man-Hour and Man-Hours Per Unit o f Output, Manufacturing,
1939-53, were discussed and the report itself was included in the record o f the
hearings. The report indicated that the long-run' average annual increase in
output per production worker man-hour o f manufacturing industries, prior to
1939, was about 3.3 percent. The wartime dislocations and subsequent problems
o f reconversion resulted in a much smaller rate o f increase, about 1 percent, be
tween 1939 and 1947, followed by a return to the long-run average o f 3 to 3.6 per
cent during the postwar years 1947-53.
Other measures may be computed to take account o f the employment in manu
facturing o f nonproduction workers, although a major problem is the absence
o f data on weekly hours o f nonproduction workers. Estimates have been pre
pared, using the alternative assumptions that nonproduction workers work the
same hours as production workers, or that they work a standard 40-hour week.
For the postwar period as a whole, either assumption yields about the same
result. Since the proportion o f nonproduction workers to total employees has
been increasing during the postwar period, productivity in manufacturing based
on hours o f all employees would show less o f an increase than a measure based
on production-worker-hours only.
For the 1947-53 period, output per total employee-hour would show an aver
age annual increase o f about 2% to 3 percent, that is, about one-half o f 1 percent
less than that based on production-worker-hours only.
Total nonagriculture.—In its report, Potential Economic Growth o f the United
States, the Joint Economic Committee published a table providing estimates o f
output per man-hour for the total private economy, with separate estimates for
the farm and nonfarm sectors. The estimates covered the years 1910 through
1953. In this statement we will be primarily concerned with the trend for the
nonfarm sector.
Estimates o f the average annual increase in output per man-hour for total
nonagricultural industries, based on the JEC report, were published as part o f
the BLS Report 100 on manufacturing productivity. These estimates indicated
an average annual increase o f about 2 percent fo r the 1910-53 period, but a much
larger increase o f about 3.4 percent for the postwar period.
Trends since 1958
M anufacturing, 1953-56.—The detailed quantity, value, and price data o f the
type used in BLS Report 100 for computing output per man-hour o f manufac
turing industries are not yet available for the years after 1953, and extension
o f the estimates will have to wait for the publication o f the detailed figures o f
the 1954 census o f manufactures and subsequent surveys.
In the meantime, because o f the great interest in recent productivity trends,
the Bureau o f Labor Statistics has attempted to develop interim measures.
These estimates, based on cruder data and methods, should be considered as
preliminary interim indicators and have a lower degree o f reliability than the
careful and detailed work done for the earlier period.
The Federal Reserve Board index o f production has been used, rather fre
quently to derive current estimates o f changes in output per man-hour. This
method has some serious limitations, from the viewpoint o f productivity meas
urement, because the production estimates for recent years already embody a
productivity assumption; that is, production indexes for'industries covering
96
ECONOMIC BEPOBT OF TH E PRESIDENT
about half o f manufacturing are based on man-hour trends adjusted for extrap
olated changes in productivity.
The BLSj has experimented with other interim measures. One is based on
selected FRB industry indexes, excluding those derived from man-hours adjusted
for productivity trends. The other is based on Department o f Commerce, Office
o f Business Economics, data on shipments, adjusted fo r change in inventories o f
finished goods and goods in process, and deflated to eliminate the influence o f
changes in price. The interim measures developed by the BLS are far from
satisfactory and suffer from limitations o f their own, but they do not embody
any productivity assumptions. An analysis and technical description o f these
measures was presented in a paper given by members o f the Bureau o f Labor
Statistics at the December 1955 annual meeting o f the American Statistical
Association.
Using the published FRB indexes and the measures developed by BLS, latest
available data indicate that the increase in output per hour o f production
workers was about 4% percent per year between 1953 and 1955—substantially
higher than the postwar average o f about 3 to 3.6 percent*
These estimates also indicate a considerable slackening o f the irate o f in*
crease in 1956, although there is a substantial variation depending on which
measure is used. An estimate based on the published total FRB production
index shows an increase o f about 2% percent in output per man-hour o f produc
tion workers in 1956; measures based on deflated OBE data show increases o f
about 1 percent*
I f estimates are based on hours o f all employees, rather than production
workers alone, the 1953-55 average is lowered to something close to 3% percent
In 1956, the change in output per man-hour would drop to a range o f about zero
to m percent increase.
Total nonagriculture, 1958-56.—Estimates fo r the years 1954 and 1955 were
published by the Joint Economic Committee in their 1956 Joint Economic Re
port. However, these estimates are not based on the same data for man-hours
used in previous estimates and may, therefore, not be entirely consistent with
them.
The estimates up to 1953 were based on detailed industry employment and
hours data, which were aggregated for major sectors. The most recent esti
mates are based primarily on census labor force data on employment and
hours.
Taking into account revisions to the basic data fo r both output and manhours, the estimates as revised indicate an increase o f about 6 percent in
output per man-hour, o f all persons employed, between 1953 and 1955, or about
3 percent per year. This is higher than the long-run average but slightly below
the postwar average. As in the case o f manufacturing, more than half the
increase took place In 1955.
Preliminary data for 1956 indicate almost no change in output per man-hour
in the total nonagricultural sector. The data used to derive preliminary esti
mates o f output per hour fo r 1956 are the same as those used in the 1956 Joint
Economic Report to develop estimates for 1954 and 1955.
Factors which may have affected productivity in 1956.— In evaluating the
decline in the rate o f increase in output per hour during 1956, one should bear
in mind that these estimates refer to broad aggregates such as total nonfarm
and total manufacturing. Based on past experience it is quite probable that
within these aggregates there may have been substantial variations, with some
industries continuing to show substantial gains while others may have actually
experienced declines in productivity.
Another general observation which relates to the evaluation o f productivity for
any one year is that while there is rarely an overall decline in productivity, there
is little uniformity in the year-to-year rates o f change. A year o f rapid expansion
may be followed by one o f leveling off, or vice versa. In fact, according to the
preliminary indicators, the low rate o f increase in 1956 was preceded by a year o f
more than average gain. Moreover, the high capital investment o f 1956 and prior
years, including investment in automation and oilier forms o f advanced tech*
nology, could pay off in 1957 in the form o f significantly higher productivity.
* Measures derived from selected FBB industry indexes (i. e., excluding those based on
man-hours) show a higher increase fo r the years 1054 and 195(5, and a smaller increase fo r
1956. Since these are a sleeted group o f industries ,they are not necessarily) representative
o f total manufacturing.
ECONOMIC REPORT OF TH E PRESIDENT
97
In the present economy o f full employment and high levels o f output, it is
possible that utilization o f marginal resources and strained capacity in many
plants may have affected the productivity potential. Continued high investment
in new equipment in many plants and industries may have required extensive
production adjustments before fu ll efficiency could be realized. In addition,
there were undoubtedly weak spots in a few industries where production was
curtailed, and these volume declines may have been accompanied by a decline in
the rate o f productivity increase, i f not an actual decline in the level o f produ o
tivity. It should be noted in this connection that volume o f output did not expand
at a high rate in 1956, and it is not unusual for the rate o f productivity growth to
slacken off during periods o f moderate production gains.
It is possible that the much larger than usual increase in employment during
1956 may have; required adjustments in some plants and industries, particularly
in view o f the' large increase in employment which occurred in 1955, foUowing
the recession o f 1954.
As a final word o f caution, and to repeat the warnings made earlier in the state
ment, these estimates o f recent productivity trends are based on preliminary
production and man-hour data, all o f which are subject to revision.
IV .
W
age
D
evelo pm en ts,
1956 a n d 1957
The past year
Wage-rate increases negotiated in 1956 tended to be higher than those agreed
to in 1955 and, as in 1955, were generally accompanied by changes in one or more
supplementary benefits. There was some reduction in the number o f major
agreements concluded during the year as compared with 1955; this decline was
due to the fact that fewer large agreements were subject to negotiation in 1956.
(Most o f the long-term contracts—notably those in the automobile, farm equip
ment, and trucking industries—that had been in existence prior to 1955 were
renegotiated in that year and were not subject to reopening in 1956.) Workers
covered by most major agreements not reopened in 1956 received wage rate in
creases which had been agreed to earlier.
Negotiated wage rate increases.— A summary o f a group o f major collective
bargaining settlements concluded during 1956 indicates that about 3 out o f 4 o f
the workers covered by these settlements received increases in rates o f pay
averaging at least 10 cents an hour. Settlements providing average increases
of 10, but less than 11, cents appUed to about 4 out o f 10 employees.4
D eferred and cost-of-living increases effective in 1956.— In addition to the
workers affected by contracts agreed to in 1956, about 2% million workers
received deferred wage increases specified by contracts negotiated in 1955 or
earlier years. Many o f these workers also obtained further increases in money
wage rates as a result of cost-of-living escalator clauses. The most common wage
rate increases resulting from deferred and cost-of-living increases together
amounted to about 12 cents an hour. Thus, the automobUe workers received an
annual improvement factor increase o f sUghtly more than 6 cents plus escalator
adjustments o f 6 cents.
H ourly and w eekly earnings.—Hourly earnings, reflecting negotiated wage rate
increases as weU as deferred and cost-of-living wage changes and other factors,5
also rose substantiaUy during 1956. In December o f that year hourly earnings
o f factory production workers were about 12 cents, or 6.2 percent higher than in
December 1955. Weekly earnings advanced by about 5.4 percent on the average.
Earnings in most nonmanufacturing industries also rose significantly. For
example, between November 1955 and November 1956, hourly earnings o f em
ployees in retail trade rose 6 cents (3.9 p ercen t); in gas and electric utilities
* This summary covers collective bargaining settlements involving 1,000 or more workers
reported in the Bureau of Labor Statistics* Monthly Report on Current Wage Developments.
These settlements accounted for a total o f over 5.5 miuion workers. The summary covers
all major industry groups except construction, the service trades, finance, and govern
ment : information on union scale changes in the construction trades is presented separately
on table 5. Information on deferred increases for both 1956 and 1957 as presented later
in the text includes construction, but because data are less complete for this industry than
for the others included in this summary it is excluded from the table showing deferred
increases. Data included for the final 3 months o f 1956 are preliminary.
All increases are presented as averages for all workers affected by a settlement. Actually,
many settlements provide for varying the cents-per-hour increase among occupations so
that not all workers receive the average.
6 Including the effect o f the $1 minimum wage under the Fair Labor Standards Act,
increases fo r workers not covered by collective agreements, merit or length o f service pay
raises, changes in the composition o f the labor force, and changes in incentive earnings.
98
ECONOMIC REPORT OF TH E PRESIDENT
the increase amounted to 12 cents, or 5.6 percent over the yea r; and in bituminous
coal mining hourly earnings rose about 29 cents, or 10.9 percent. (See table 4
and charts 5A, B, and O.)
,
,
4 . —Average hourly earnings o f production w orkers or nonsupervisory
em ployees in selected industries annual averages, 1955 and 1956 and Novem ber
1955 and 1956
T a b le
1956
Industry
Novem Annual Novem
ber 1 average1
ber
I
I§
|
So
Mining:
Metal..................................................................
$2.34
Anthracite. ,
„
2.71
Bituminous CO&l..
„
2.95
Contract construction_________________________ _
2.81
Nonhnllding construction 2.55
2.87
Building construction
Generafcontractors________________________
2.70
Special trade contractors____________________
2.99
Manufacturing________________________________
2.03
Durable goods_____________________________
2.16
•Nondurable goods__________________________
1.85
Ordnance and accessories_____________ ______
2.25
. Food and kindred products__________ _______
1.91
Tobacco manufactures______________________
1.44
Textile mill products__________ ____________
1.50
Apparel and other finished textile products........
1.47
Lumber and wood products_________________
1.76
Furniture and fixtures______________________
1.71
Paper and allied products___________________
1.98
Printing__________________________________
2.45
Chemicals and allied products_______________
2.13
Products of petroleum and coal______________
2.57
Rubber products___________________________
2.19
Leather and leather products________________
1.52
Stone, clay, and glass products_______________
1.99
Primary metal industries____________ _______
2.44
Fabricated metal products__________________
2.13
Machinery (except electrical)________________
2.25
Electrical machinery_______________________
2.04
Transportation equipment__________________
2.39
Instruments and related products____________
2.04
Miscellaneous manufacturing industries_______
1.78
Class I railroads..................... ..................................
(*)
Local railways_______________________________ ;
1.98
Communication:
Telephone____________ ____________________
1.88
Telegraph_________________________________
2.02
Other public utilities: Gas and electric utilities........
2.27
Wholesale and retail trade:
Wholesale trade____________________________
2.04
Retail trade_______________________________
1.58
Service and miscellaneous:
Laundries
1.06
1.28
9!
1955
Annual
average
Percent
change
average
1955 to
average
1956
$2.31
2.61
2.81
2.74
2.49
2.80
2.64
2.92
1.98
2.10
1.81
2.19
1.85
1.44
1.45
1.44
1.76
1.69
1.94
2.42
2.10
2.54
2.17
1.50
1.95
2.37
2.07
2.21
1.98
2.31
2.01
1.75
<’>
A
1.96
$2.27
2.55
2.66
2.65
2.40
2.71
2.58
2.80
1.93
2.05
1.74
2.10
1.80
1.33
1.42
1.36
1.69
1.65
1.87
2.36
2.04
2.41
2.17
1.44
1.90
2.31
2.03
2.15
1.91
2.30
1.94
1.69
1.98
1.90
$2.19
2.53
2.56
2.60
2.36
2.66
2.52
2.77
1.88
2.01
1.71
2.05
1.75
1.33
1.39
1.35
1.69
1.62
1.83
2.35
1.99
2.36
2.10
1.41
1.85
2.24
1.98
2.09
1.88
2.23
1.91
1.66
1.95
1.87
+5.5
+3.2
+9.8
+5.4
+5.5
+5.3
+4.8
+5.4
+5.3
+4.5
+5.8
+6.8
+5.7
+813
+4.3
+6.7
+4.1
+4.3
+6.0
+3.0
+5,5
+7.6
+3.3
+6.4
+5.4
+5.8
+4.5
+5.7
+5.3
+3.6
+5.2
+5.4
1.86
1.97
2.22
1.88
1.87
2.15
1.82
1.87
2.10
+2.2
+5.3
+5.7
2.02
1.57
1.94
1.52
1.91
1.50
+5.8
+4.7
1.05
1.26
1.02
1.20
1.01
1.20
+4.0
+5.0
1Preliminary.
* Not available.
Source: Bureau of Labor Statistics, U . S. Department of Labor.
Union wage scales in construction
During 1956 union scales in the construction trades in major cities in the
United States rose approximately 14 cents an hour as compared with 10 cents
in 1955. As table 5 indicates, over 4 out o f 10 o f these scales were increased at
least 15 cents an hour during 1956 as compared with 1 out o f 5 in 1955. The
most common single increase in 1956 was 15 cents an hour, the change in aboijt
1 out o f 5 union scales; in 1955 the single most frequent increase amounted to
10 cents an hour.
99
ECONOMIC REPORT OF TH E PRESIDENT
T a b le 5 .—Percentage
distribution o f changes in union wage scales in 7 construc
tion trades in m ajor cities,11955 and 1956
Cents-per-hour increases
Percentage of scales In—
1956
All scales...............
All Increases..........
Under 5.0..............
5.0 and under 10.0..
5.0— ..............
7. 5
10.0 and under 15.0.
10.0..................
12. 5
15.0 and under 20.0.
15. 0
20.0 and under 25.0.
20. 0
25.0 and over.........
25.0.................
No change.............
*100
77
2
18
8
7
38
23
11
12
9
4
3
4
3
21
87
1
12
5
5
30
17
9
24
19
9
7
11
8
13
i The 7 trades studied were bricklayers, carpenters, electricians, painters, plasterers, plumbers, and build
ing laborers. The information relates to changes effective during the year regardless of when they were
2Because of rounding, sums of individual items do not necessarily equal the totals.
Source: Bureau of Labor Statistics, U. S. Department of Labor.
Unlike most years, 1956 evidenced a change in almost a fifth o f the scales in
the fourth quarter o f the year. The increase in average hourly rates during
the fourth quarter o f 1956 amounted to 2.8 cents, approximately double that
registered in the corresponding quarter o f 1955.
Supplementary benefits.—About 3 out o f 4 o f the major agreements concluded
in 1956 liberalized or added one or more supplementary benefits in addition to
increasing wage rates. Health and welfare benefits were most frequently
affected. Changes in provisions for paid vacations, paid holidays, and pensions
also were frequent. Supplemental unemployment benefit plans were adopted in
a number o f major industries, notably steel, aluminum, and rubber.
Spread o f long-term agreem ents.— A notable feature o f bargaining in 1956, as
in 1955, was the spread o f long-term agreements specifying wage-rate increases
for a period o f 2,3, or even 5 years. Settlements covering about half the workers
affected by all major agreements concluded during 1956 were negotiated for a
period o f more than a year and specified increases to go into effect in subsequent
contract years. Among the industries in which such contracts were negotiated
in 1956 were basic steel, aluminum, meat packing, railroads, and nonferrous
metals. In addition, many o f these agreements incorporated cost-of-living esca
lator clauses and thus made provision for the protection o f the real value o f the
wage rates o f the workers covered by the contracts. The resurgence o f interest
in cost-of-living escalation that accompanied the growth o f long-term agree
ments brought the total coverage o f escalator clauses to a level equaling or
slightly exceeding their previous peak (in 1952) of about 3.8 million workers.
The wage outlook
D eferred increases.— Since many o f the contracts concluded in 1955 and 1956
specified wage increases to go into effect in future years, the magnitude o f the
1957 wage movement can be in part anticipated with reasonable accuracy. As
pointed out above, however, many o f these long-term contracts also contain costof-living escalator clauses; hence, the exact change in money wage rates for
most o f the workers affected will depend on changes in the level o f retail prices.
Another area o f uncertainty regarding the precise magnitude o f the 1957 wage
movement arises from the fact that a substantial number o f major collective
bargaining agreements are due to expire or are subject to reopening on wages
during the year. Among the industries in which important union contracts per
mit wage negotiations during 1957 are petroleum, rubber, lumber, chemicals,
textiles, coal mining,6 paper, telephone and other utilities, trade, and construc
«In this industry workers will receive an increase in April 1957 as a result of 1956
negotiations, but the agreements are subject to renegotiation on or after September 30,
1957, upon 60-day notice.
100
ECONOMIC REPORT OF TH E PRESIDENT
tion. The extent to which wage increases will be negotiated in these situations
will clearly be affected by the general economic climate and business conditions
in each o f these industries. Existing provisions for deferred increases in other
industries will probably have some indirect effect on these negotiations.
Within the framework o f these limitations, a summary o f the increases al
ready specified for 1957 may provide some clue as to the nature o f the changes in
money wages that may occur more generally during the year.
By the beginning o f 1957 there were at least 550 major bargaining situations
covering at least 5 million workers on which agreement had already been reached
regarding specific wage increases to go into effect during the year. Some deferred
increases will go into effect in almost every industry group, but the bulk o f the
workers affected are concentrated in metalworking, construction, transportation,
food, and mining. Roughly half o f the workers scheduled to receive deferred
increases are employed in the automobile, farm equipment, electrical equipment,
aircraft, primary metals (steel, aluminum, and other nonferrous metals), and
other metalworking industries. More than a fifth are in transportation, notably
railroads and trucking.
Generally, deferred increases are somewhat lower on the average than those
scheduled to go into effect during the first year o f a long-term contract These
differences in magnitude are due to two factors: In some cases (e. g., in the
automobile and farm-equipment contracts negotiated in 1955) skilled workers
received greater increases in the initial than in subsequent contract years; in
others (e. g., basic steel, aluminum, railroads, and some construction agreements),
the general wage increase fo r all workers was higher in the first than in subse
quent contract years. Nonwage items, notably various supplementary benefits,
typically became applicable at the time o f contract negotiations, thus further
enhancing the value o f the initial “ package” settlement.
Pay increases already specified fo r 1957 will generally amount to 5 but less
than 11 cents an hour; increases o f this magnitude are provided by contracts
covering 9 out o f 10 workers who are to receive deferred pay advances. About 2.5
million workers (h alf the workers scheduled to benefit from deferred increases
in 1957) will be covered by pay advances o f 6 but less than 8 cents an hour.
Rate increases amounting to 9 but less than 10 cents are scheduled to go into effect
for approximately three-fourths o f a million workers. The deferred increases
due in 1957 are summarized in tables 6a and 6b.
T a b l e 6 - A .— -Deferred
wage increases scheduled to go into effect in 1957 in situations affecting 1,000 or more workers in manufacturing and
selected nonmanufacturing industries
Approximate number of workers affected (in thousands) i
534
210
95
358
1,165
486
76
722
74
7
67
7
107
3
22
11
4
9
1
1
6
11
1 Because of rounding, sums of individual items do not necessarily equal totals.
2 Does not include construction industry settlements.
3 Includes a few settlements in the following industry groups for which separate data
are not provided: 19,000workers in textiles, 28,000 in apparel, 10,000 in lumber and furniture,
5.000 in rubber, 11,000 in leather and leather products, 44,000 in stone, clay, and glass, and
2.000 workers in miscellaneous manufacturing.
44
25
1,492
55
56
245
1,121
355
42
675
59
10
50
49
35
794
203
38
220
2
230
200
Warehous-
Trans Public Situa- Work
utili tions2 ers aftion
ties
J & - porta
sale
and
retail
trade
92
1,106
65
100
100
42
14
7
770
197
6
16
22
6
73
* Data for nonferrous mining included with metalworking.
« Less than % of 1 percent.
Sourco: Bureau of Labor Statistics, U. S. Department of Labor.
27
28
6
17
7
(5)
1
1
PRESIDENT
3,020
145
407
1,199
1,280
279
759
294
24
33
10
82
Min
ing *
THE
14
4,512
Total
Paper Print Chem
nonand ing and icals Metal- manupub
work facturallied
and
ing
ing
prod lishing allied
studied
ucts
prod
ucts
OF
71
147
103
35
87
27
5
Food
and
kin
dred
prod
ucts
REPORT
Total............. .......
Under 5 cents____ _____
5 but less than 6 cents...
6 but less than 7 cents...
7 but less than 8 cents. _.
8 but less than 9 cents...
9 but less than 10 cents..
10 but less than 11 cents.
11 but less than 12 cents.
12 but less than 13 cents.
13 cents and over.......... .
Amount not specified- _.
Num
ber of
situa
All
Total
tions2 indus manu
tries 2 factur
ing 3
ECONOMIC
Amount of average wage increase
Percentage o f-
O
102
ECONOMIC REPORT OF THE PRESIDENT
Number of workers who will be affected by deferred increases in
selected union wage scales in the construction industry due in 1957
T a b l e 6 - b .—
Increase in scales
Number of
workers
Total............................................
362.000
Under 5 cents per hour..........................
5 and under 7 cents per hour-------------7 and under 9 cents per hour...... ..........
9 and under 11 cents per hour...............
8,000
50.000
26.000
115.000
Increase in scales
Number of
workers
11 and under 13 cents per hour_______
13 and under 15 cents per hour_______
15 and under 17 cents per hour_______
17 cents per hour and over___ ____
Not specified..........................................
10,000
22,000
70,000
14.500
46.500
Source: Bureau of Labor Statistics, U. S. Department of Labor.
Cost-of-living escalator clauses.—As previously noted, the precise changes in
money rates of pay for most workers covered by deferred increases will depend
on changes in the level of retail prices, since a substantial majority of the work
ers who will receive deferred increases are also covered by cost-of-living escalator
clauses. By the beginning of 1957, as previously pointed out, the real rates o f
pay o f at least 3.8 million workers were protected by clauses providing for
periodic adjustments in wage rates geared to changes in the Bureau o f Labor
Statistics Consumer Price Index (table 7.).
Almost all of the agreements with cost-of-living escalator clauses provide for
adjusting wage rates with price changes on a quarterly or semiannual basis.
Most o f the contracts specify that all workers (from skilled to unskilled) shall
receive the same cents-an-hour adjustment in rates o f pay. The agreements
affecting the vast majority o f workers under cost-of-living escalators provide
for a 1-cent change in wage rates for a change of 0.4 to 0.5 o f a point in the price
index. This means that these escalator provisions call generally for a change
in rates of pay o f roughly 1 percent for a 1-percent change in the Consumer Price
Index.
T able
7.—Estimated number of workers covered by cost-of-living escalator
clauses, Jan. 1,19571
Industry
All industries____________________
Industries in which major groups of
these workers are concentrated:
Automobiles and parts...............
Railroads.....................................
Steel (basic steel and steel fabri
cating).
^Electrical machinery..................
Trucking and transit..................
Aircraft and parts.......................
Agricultural machinery..............
Meatpacking...............................
Aluminum...................................
Iron ore mining...........................
Estimated
number of
workers
covered by
escalator
clauses *
(total)
Most common types of escalator adjustments
Frequency
Amount of adjustment
*3,840,000
1 cent for 0.5-point change in B LSCPI.
Semiannual.
__
1 cent for each 0.5-point change.
850.000
640.000 ....... do.............. 2 cents for each 0.9-ppint change (1
cent for alternate 0.4- and 0.5-point
increase. Decreases to occur only
if index declines at least 0.9-point).
Formulas vary.
390.000 Quarterly
270.000 Semiannual... 1 cent for each 0.55-point change.
1 cent for each 0.5-point change.
200.000 Quarterly.
115.000 ____do............. 1 cent for 0.5-point change.
100.000 Semiannual. __ 1 cent for 0.5-point: increase; de
creases computed differently.
60,000 ....... do.............. Same as steel.
Do.
30,000 ....... do..............
910.000
Quarterly.......
i Based on situations affecting 1,000 or more workers as reported in the Bureau of Labor Statistics Monthly
Report on Current Wage Developments.
* Includes over 3.5 million workers covered by collective agreements and about 300,000 workers not covered
by such agreements.
8 Includes workers in some industries not shown separately.
103
ECONOMIC REPORT OF THE PRESIDENT
V. F a c t o r s A f f e c t in g P r ic e s
in
1956
After several years of relative stability, the major price indexes moved upward
in 1956. We are now in the third period of general price rises since the end
of World War II (see chart 8). The first, the immediate postwar period, was
one where the increases reflected the influence of postwar civilian shortages
plus the end o f price controls. The second period o f general price increase
was the direct result of the Korean conflict as a result of both hoarding and the
diversion o f resources towards military activity. In the current period the
general rise appears to be mainly the result of strictly civilian forces with no
direct military overtones.
A host o f factors can be pointed to as playing a role in the recent price rise,
but behind the great bulk of them lies the fact that strong and rising demand,
especially for capital goods, has placed such great strains upon our plant and
manpower capacity as to foster an accumulation of cost increases. These cost
increases— some actual and some anticipated—have been pyramided as they
were passed on through the business structure.
Wholesale price index.— The upward movement o f primary prices began in
mid-1955. In the following 18 months, this index lias risen more than 5 percent,
and the group o f commodities exclusive o f farm and foods was up about 8 percent.
Seven of the 13 nonagricultural commodity groups o f the wholesale price index
reached new post-World War II highs in the last quarter o f 1956 (see table 8).
The significant increases were mainly but not exclusively among the durable
goods, particularly the producers’ goods, such as machinery and equipment,
and the important metal materials.
T
able
8 . —Primary
market price indexes for major commodity groups, highs and
lows, 1954-56
High point
Low point
Group
Index
All commodities....................... ................. ......
Farm products________ ____________ ______
Processed foods___________ __ ____________
All but farm and foods__ _________________
Textile products and apparel-........._- ......... .
Hides, skins, leather and products........... ......
Fuel, power, and lighting materials...............
Chemicals and allied products............. .........
Rubber and rubber products................. .........
Lumber and products.......... ...........................
Pulp, paper, and products_________________
Metals and metal products............................ .
Machinery and motive products.....................
Furniture and other household durables........
Nonmetallic minerals, structural....................
Tobacco manufacturers and bottled beverages.
Miscellaneous products__________________
Date
Index
Date
116.5
117.6
112.9
124.6
115.9
127.7
113.1
112.6
153.0
128.5
128.1
152.4
143.5
121.4
131. 5
123.6
February 1951..........
March 1951...............
February 1951..........
December 19561____
March 1951...............
February 1951..........
December 19561.......
February 1951..........
January 1951............
April 1956.................
October 1956............
December 19561.......
December 19561.......
December 1956 i.......
October 1956....... ....
December 1956 *
92.3
82.9
94.0
91.8
92.8
91.8
82.7
92.0
94.1
84.9
95.7
87.9
89.7
93.8
90.9
96.8
January 1947.
December 1955.
January 1950.
January 1947.
May 1950.
December 1954.
January 1947.
March 1950.
July 1947.
January 1947.
August 1949.
January 1947.
January 1947.
January 1947.
January 1947.
January 1947.
120.0
January 1948______
87.7
February 1947.
* Preliminary.
Source: Bureau of Labor Statistics, U. S. Department of Labor.
Two important commodity groups— chemicals and textiles, including apparel—
held fairly stable over the year. To a considerable extent, this reflected diverg
ent trends within the groups: for instance, industrial chemicals rose while
fertilizer prices fell, and wool products increased substantially in price in mid1956, but cotton products and synthetic textiles price declined. And two
groups— rubber and lumber— were lower at year end than a year earlier, reflect
ing changes in the demand.for those particular commodities.
Actually, as a study o f the chart on wholesale prices shows (chart 8 ), the
upward pressure on industrial prices was at work well before the overall index
started moving up in mid-1955. But these pressures had been offset in the
grand total by the weakness o f farm products and foods. Prices of farm prod
ucts fell steeply to a low in December 1955, then recovered somewhat in 1956.
Processed-food prices, which had drifted downward at a slower pace, also made
gains in 1956. Thus, the strengthening of the agricultural sectors of the index,
104
ECONOMIC REPORT OF THE PRESIDENT
reflecting Government programs and export demand which helped to cut down
supplies, came at the same time as the industrial price rise was accelerating.
Analysis of wholesale-price movements by degree o f fabrication, after elim
ination o f the food and feedstuffs, indicates that the remaining crude materials,
which account for less than 5 percent of the total wholesale price index, were
the first to turn upward after the post-Korea adjustment. The intermediate
and finished durable goods have been the major influences in the upswing since
mid-1955 (see chart 9 ). The producers-finished goods, with a weight o f about
10 percent, have made by far the sharpest rises in the past year and a half.
At the other extreme, the finished consumer nondurables, constituting about 15
percent of the total, have held fairly steady.
Consumer price index.— The average of all consumer prices began moving
upward in the spring of 1956, after 4 years o f exceptional overall stability (charts
10 and 11). During this 4-year period, services and rents had been rising
steadily, but declines in commodity prices had offset their advance. This past
spring, however, the declining trend in commodity prices was reversed. The
most important shift was in foods, with meats recovering from an abnormally
low level, and fruits and vegetables also going up substantially. The appearance
in the autumn of the new 1957 automobiles, at substantially higher prices, caused
a rise in the transportation index. In December, new cars were priced 6.5 per
cent above the comparable models of a year earlier. Commodities as a group
rose 3 percent from April to December; this was their first significant increase
since 1951. Services (medical care, personal care, transportation, laundry,
cleaning, etc.) rose nearly 2 percent over this same 8-month period— about the
same rate of rise as during 1955.
Despite the recent rise, commodities were costing the consumer less than
they did 4 years earlier; only apparel (mainly shoes) had a higher average price
than in December 1952, although still below the postwar peak. Services, on
the other hand, were up about 12 percent, in these past 4 years and rent about
11 percent. Thus, the 1956 rise in consumer prices was due in part to a return
o f commodity prices to earlier levels, but also in part to the steady rise in the
costs of the various services. In this latter connection, chart 11 shows that the
costs o f services and rents still have increased less since the pre-World W ar II
period than have commodities.
Forces currently at work.—There are, of course, numerous demand and supply
forces at the individual commodity and group levels which have not been
discussed systematically in this review. The behavior of the overall indexes,
however, makes certain factors abundantly clear. One of these is the especially
strong demand for investment goods, which has raised the whole cost structure
o f the industries producing metal goods and nonmetallic structural minerals.
Another is that the straining o f capacity in some industries and areas tends to
result in cost increases which then fan out into other industries and areas. Still
another is that, when wages rise because o f a variety o f factors not connected
with direct productivity gains, they are added into prices as businesses seek
to protect their profit margin. In addition, there has been the special Impact
of the Suez situation upon a few commodities. Underlying all o f these factors
has been the continuing strong demands arising from our rising standard o f
living, our increasing population, and our expanding labor force.
So far as the immediate future is concerned, if the demand factors which
gave rise to the price increases show no further strengthening—in other words,
if investment demand flattens out and if consumer buying follows the income
curve and consumer credit is expanded only moderately— there may well be
more stability in the price situation. As o f this time, signs o f upward price
pressures are still evident in those sectors of the economy where demand con
tinues to burgeon; signs of price weakness are appearing only in those fields
where demand is less urgent than it formerly was. In addition, there is no
indication o f any reversal o f the long-run uptrend in the cost of services; the
demand for personal and professional services is continually rising. At the
same time, price declines in the agricultural sector are no longer offsetting
increases elsewhere.
105
ECONOMIC REPORT OF THE PRESIDENT
A n n u a l C h a n g e s in T o t a l L a b o r F o r c e , b y Sex
A C T U A L COMPARED WITH PRO JECTED
AN N U AL AVERAG E
» 9 5 0 'I 9 5 6
MALES
ImNL
H
i;;;i
l'/A
XL
%'/A
tz\
W/A
W/A
M l
Source:
m
U. & Bureou of the Census-,
Bureau of Labor Statistics
106
ECONOMIC REPORT OF THE PRESIDENT
C o m p a r is o n o f A c t u a l a n o P r o j e c t e o
To t a l L a b o r Fo r c e
U N ITEO ST ATES DEPAR TM EN T OF LABOR
S U R E A U O F L A S O ft S T A T I S T I C S
Sourct: U.S. Burtou of th« Census*
Bursou of Labor Statistic*
ECONOMIC REPORT OF THE PRESIDENT
EMPLOYEES IN NONAGRICULTURAL ESTABLISHMENTS
BY MAJOR INDUSTRY DIVISION
«*m&sumMfAniKKior utot
LATEST DATAi 0C0CM8CR I 9 9 «
107
108
ECONOMIC REPORT OF THE PRESIDENT
E m p l o y m e n t a n d A v e r a g e W e e k l y H o u r s o f P r o d u c t io n
W o r k e r s in D u r a b l e a n d N o n d u r a b l e G o o d s M a n u f a c t u r in g
BY MONTHS, 1 9 4 7 - 5 6
(Adjusted for Seasonal Variation)
UNITED STATES DEPARTMENT OF LABOR
•UREAU O f LABOR S TA T IS T IC S
DATA FOR NOVEMBER AND OECEMSER ISSS: PR ELIM IN ARY
N OTE: SEASON AL A D JU S T M E N TS FOR AVERAGE
W EEKLY HOURS ARE PRELIMINARY.
Souroe: Bureau of Labor Statlctlci
ECONOMIC REPORT OF T H E PRESIDENT
109
A v e r a g e H o u r l y E a r n in g s in S e l e c t e d I n d u s t r i e s
1952-54 Annually: 1955-56 Monthly
'Dollars
UNITED STATES DEPARTMENT OF LABOR
t U A tA U O f LABOR S T A T IS T IC *
Dollars
LATEST OATA: MANUFACTURE# - DECEMBER 1*36
NONMANU?ACTUA4Ma - NOVEMBES I9SS
ECONOMIC REPORT OF THE PRESIDENT
110
S
A v e r a g e H o u r l y E a r n i n g s in
D u r a b l e G o o d s In d u s t r ie s
elected
1 9 5 2 -5 4 Annually, 1 9 5 5 -5 6 Monthly
Dollars
Electrical Machinery
‘52 '53 ‘54.
1955
U N IT E D STATES DEPARTM ENT OF LABOR
BUREAU OF LABOR STATISTICS
1956
LATEST DATA: DECEMBER 194ft
111
ECONOMIC REPORT OF THE PRESIDENT
S
A v e r a g e Hourly
elec t ed Nondurable
E a r n i n g s in
G o o d s In d u s t r i e s
1952-54 Annually-, 1 9 5 5 -5 6 M onthly
DO LL AR S
'
5 2 ' 53'54
1955
1956
'52 *53'54
1955
1956
L A T E S T D A TA : 0CCCM 6CR <956
112
ECONOMIC REPORT OF THE PRESIDENT
Fa c t o r y
W e e k l y E a r n in g s , G r o s s a n d N e t S p e n d a b l e *
COMPARED WITH REAL NET SPENDABLE EARNINGS
EXPRESSED IN 1947*49 DOLLARS
Dollars
Production Worker
With Three Dependents
LA TES T
UNITED STATES DEPARTMENT OF LABOR
BUREAU OF LABOR S TA TISTIC S
OATAt OECEMSER |»SS
*Earnings after deduction of Federal Income
and Social Security taxes
Dollars
11&
ECONOMIC REPORT OF THE PRESIDENT
AVERAGE WEEKLY EARNINGS AND "REAL"WEEKLY
EARNINGS IN MANUFACTURING
I9M
1920
1925
1930
I93S
1940
1945
1950
1955 1957
LATEST DATA: I9M Preliminary
# MONEY EARNINGS ADJUSTED FOR CHANGES IN COST 0 ¥ LIVING
1947-49=100
ECONOMIC
REPORT
OF
THE
P R E S ID E N T
WHOLESALE PRICES
1926
1930
1935
1940
1945
1950
1955
1957
holesale
P rice In d e x
ECONOMIC SECTOR INOEXES
SE L E C T E D GROUPS
IN DEX
I » 4 7 ~4 » « I 0 0
IN D E X
ECONOMIC
REPORT
OF
THE
P R E S ID E N T
W
UNITEO STATES DEPARTMENT OF LABOR
BUREAU O F L A IO R S T A T IS T IC S
L A T t S T DATA! DRCCMSER l » S «
1 1 47 49 40 9
ECONOMIC
REPORT
OF
THE
PRESIDENT
CONSUMER PRICE INDEX
FOR WAGE-EARNER AND CLERICAL-WORKER FAMILIES IN U.S. CITIES
I- * t t * T ftJW U M O tW M *
117
ECONOMIC REPORT OF THE PRESIDENT
CONSUMER PRICE INDEX
SPECIAL GROUPINGS
INOEX
240
220
200
180
160
140
120
100
80
1939 *40 '41 ’42 ’43 *44 ’45 *46 *47 *48 '49 '50 ’51 '52 *53 ’54 *55 1956
w nep m j n p m m iiin of u i o i
t A T I ST OAT'*'
DECEMBER IS
118
ECONOMIC REPORT OF THE PRESIDENT
The C h a ir m a n . Without objection, we will ask each one of our
witnesses to proceed with his 8-minute statement, and in that way
we will make sure that no one is slighted. I f we were to stop now
I am apprehensive that we would possibly take up too much of the
time with one witness.
Mr. T a l l e . M ot I make an explanatory statement? I must appear
before the Rules Committee at 10:30. I f that committee does not de
tain me long I will return before this morning’s hearing is completed.
Chairman P a t m a n . W e understand your situation, and thank you,
Dr. Talle.
Mr. Paradiso.
STATEMENT OF LOUIS J. PARADISO, ASSISTANT DIRECTOR, AND
CHIEF STATISTICIAN, OFFICE OF BUSINESS ECONOMICS, DEPARTMENT OF COMMERCE
Mr. P a r a d is o . I am Louis J. Paradiso, Assistant Director, of the
Office of Business Economics of the Department of Commerce. I
have been asked to present a translation of the Government budgets
into national income and product account basis.
I
want to discuss first the Federal budget expenditures and their
translation into the national income and product account.
In 1956 the total governments, Federal, State, and local, purchased
goods and services which amounted to about one-fifth of the total pro
duction of all goods and services in the Nation. The Federal Gov
ernment alone purchased goods and services amounting to about 11
percent.
In order to get some idea as to what the Government take is likely
to be of the total output of this country in 1957, it is necessary to trans
late the Government budgets into the national income and product
account. Therefore it is this kind of a statement which I will try
to present so that we may be able to get an idea as to what the Gov
ernment’s total take would be of the output of the Nation.
First, I will deal with the Federal Government, and it will be in
connection with the purchases of goods and services. These pur
chases are derived by a rearrangement of the items given in the budg
et, eleminating expenditures which do not represent purchases of goods
and services. These excluded items involving such major types of
expenditures as transfer payments, grants-in-aid, and interest pay
ments, are not part of our estimates of purchases of goods and
services.
In the calendar year 1956, Federal purchases of goods and serv
ices amounted to $47 billion. The rate of purchasing increased after
the middle of the year to reach an annual rate of $48.3 billion in the
fourth quarter. The budget implies that in calendar year 1957 Gov
ernment purchases of goods and services would be $49.5 billion or
$2.5 billion more than the total of calendar year 1956 and $1 billion
above the fourth quarter rate. Thus it is clear that the implication
of the budget on Government purchases of goods and services is for
a very modest increase from the fourth quarter 1956 rate.
Practically the entire 1957 rise in purchases of goods and services
is in the items encompassed in the national security expenditures.
In calendar 1956 these expenditures totaled $41.6 billion and in the
ECONOMIC REPORT OF THE PRESIDENT
119
fourth quarter of that year the rate was $43 billion. The budget pro
grams call for an estimate of national-security purchases of over $44
billion in calendar year 1957. Other purchases are expected to show
relatively small changes.
Now, with respect to the total Federal expenditures, here again I
am talking about these expenditures in relation to the national income
and product accounts. I f we add the other type of expenditures to
purchases of goods and services, the result represents the total exr
penditures of the Federal Government on the basis of these accounts.
These expenditures by the way closely approximate those in the cash
budget except for certain conceptional adjustments involving mainly
capital transactions and all loans except those related to CCC
operations.
Total Federal expenditures on the income and product account in
the fiscal year 1956 were $70 billion. In fiscal year 1957, they are
estimated at nearly $75 billion. In fiscal year 1958, the estimate is
close to $80 billion. These compare for the respective fiscal years
with cash budget expenditures of $72.5 billion in fiscal year 1956, and
$78 billion in fiscal 1957, and nearly $83 billion in fiscal year 1958.
Now let us move over to the Federal receipts, and here again we go
through a translation of these receipts into the national income and
product basis. These are estimated on the basis of the budget pres
entation which implied a personal income of $340 billion in calendar
year 1957 compared with an estimated total of $325 billion in calendar
year 1956 and a rate of $333 billion in the fourth quarter of 1956.
Also implied in these receipts is the fact that corporate profits before
taxes were assumed at $44 billion in calendar 1957, compared with
about $43 billion in calendar 1956.
On the income and product basis, Federal receipts amounted to
$75.5 billion in fiscal year 1956. They are estimated at a little over
$80 billion in fiscal 1957, and $84 billion in fiscal year 1958. These re
ceipts also approximate those on a cash budget basis.
The main difference between the two sets of accounts is that on
the income and product account, corporate taxes are included on a
liability basis rather than on a colection basis as is done in estimating
cash receipts. The major source of increase in the receipts in the
current and next fiscal years is expected to arise from personal taxes.
Smaller advances are expected in indirect business taxes and in con
tributions for social insurance. Thus to summarize, on an income
and product account, a surplus of $5.5 billion is estimated for fiscal
year 1957 and nearly $4.5 billion in fiscal year 1958. These may be
compared with a surplus of almost $5.5 billion in the past fiscal year,
namely 1956. These surpluses are somewhat higher than the cor
responding surpluses on a cash basis and substantially above those on
the administrative budget basis.
Now, let me turn to the State and local governments and just a word
on the expectations of these bodies.
For State and local governments we had data developed through
fiscal year 1957. Basing the estimates for calendar year 1957 on the
data for the fiscal year and the recent trends, we have the following
results:
.
(1)
Purchases of goods and services by all State and local govern
ments have been rising at a fairly constant rate in the past few years.
120
ECONOMIC REPORT OF TH E PRESIDENT
In calendar 1956 they amounted to $32.8 billion and we estimate that
in o-n-lftTnfar 1957 they will total about $35.5 billion, namely about $2.7
billion more than last year.
The increase will be about equally divided between expenditures for
construction activity and for employee compensation.
(2) For other expenditures, such as transfer payments and net
interest paid, not much change is expected from current rates. In
calendar 1956 total expenditures on an income and product basis
amounted to $35.8 billion. W e are estimating that in calendar 1957,
these will amount to $38 billion.
(3) The receipts of State and local governments on an income and
product basis amounted to $33.6 billion in calendar year 1956. As
with the Federal receipts, the major adjustment from the cash receipts
is placing corporate profit taxes on an accrual basis instead of a col
lections basis. In calendar 1957, the total receipts of State and local
governments are estimated at about $36 billion.
These estimates imply a deficit in calendar 1957 for State and local
governments on income and product account of slightly more than the
deficit in calendar 1956, which was about $1.5 billion.
Finally, I want to make a few comments with respect to the recent
trend of prices.
A record output of goods and services in 1956 lifted the value of
the gross national product to $412 billion, more than $21 billion, or
5% percent above 1955. In the last half of 1956, the rise in business
activity accelerated, resulting in an increase in the gross national
product to a seasonably adjusted rate of $424 billion in the fourth
quarter. About half of the 1956 increase in the gross national product
reflected higher prices so that the gain in real output amounted to
slightly more than 2y 2 percent.
The composite of gross national product prices reflects price move
ments in relative proportion to the gross national product expendi
ture groups and therefore is heavily weighted by consumer price
changes. Following 3 years of relative stability, this composite price
increased nearly 3 percent last year. Consumer prices which have
been stable since early 1953 increased beginning in April of last year
and by December of 1956 had risen nearly 3 percent above a year
•earlier. A ll major components contributed to this advance. The rise
in consumer prices in the latter part of 1956 was moderated to a
■degree by relative stability in the prices of food products. Whole
sale prices in December of last year were 4 percent above a year earlier,
following a fairly steady rise throughout 1956. There was substan
tial variation, however, in the relative pressure on different com
ponents during the year.
Wholesale farm and food prices rose rather sharply in the first 6
months of 1956, and thereafter either stabilized or tended downward.
Industrial prices tended to rise somewhat faster in the latter part of
1956. An important factor in these increases was the general strong
demand for goods which persisted throughout the year, and advances
in the cost of production.
Thank you.
(Letter from Department of Commerce, Office of Business Eco
nomics, dated January 18, 1957, to chairman, Joint Economic Com
mittee, follow s:)
121
ECONOMIC REPORT OF THE PRESIDENT
D e p a r t m e n t of C o m m erce ,
O f f i c e o f B u s in e s s E con o m ics,
Washington, D.C., January 18,1957.
Hon. P a u l H. D o u g la s ,
Chairman, Joint Economic Committee,
United States Senate, Washington,, D. O.
D e a r M r. C h a ir m a n : The enclosed table showing Federal Government re
ceipts and expenditures is furnished in accordance with the letter of January
16 by the Secretary o f Commerce in reply to your letter of January 7.
The table shows three measures o f the budget. The top two are the adminis
trative and cash budgets, taken directly from the budget o f the United States
Government for the Fiscal Year ending June 30, 1958. The last measure repre
sents a translation o f receipts and expenditures given in the budget to the na
tional income and product account basis.
In accordance with your request for State and local government receipts and
expenditures, the Governments Division o f the Bureau o f the Census has provided
data which indicate the following on a national income and product basis: for
fiscal year 1956, receipts o f $32.5 billion and expenditures of $33.7 billion; for
fiscal year 1957, receipts of $35.2 billion and expenditures of $36.3 billion.
The amount o f detail furnished has been worked out in consultation by tech
nicians o f our staff with Mr. Knowles.
I f we can be o f further help to you, please let us know.
Sincerely yours,
M . J o sep h M e e h a n , Director.
Federal Government receipts and expenditures: Administrative budget, cash
budget j and national income and product account: 1956-58
[Billions of dollars]
Fiscal years
Actual
1956
Estimated
1957
Administrative budget:
Receipts____________ ________________ __________________
Expenditures__________ — . _____ ____________________ _
1958
68.1
66.5
70.6
68.9
73.6
71.8
1.6
1.7
1.8
Cash budget:
Receipts _______________________ ____________ ________
Expenditures_______ . . . . . ___ ——__—_- _- _____ - ___ - ___
77.1
72.6
81.7
78.2
85.9
82.9
SlirplnS-..
t
__ „^rr . t* ,
,
Surplus___________ —— ______ — _______ - __ — _— _
4.5
3.5
3.0
National income and product account:
Receipts_______________________ ______ _______ _________
Expenditures_________________________ ____________ __________
75.4
70.0
80.3
74.8
84.0
79.7
Surplus_________ —___ . . . . . . . . . . . . . . . . . . _— ________ —
5.4
5.5
4.3
Source: Administrative and cash budgets from the Budget of the United States Government for the
Fiscal Year Ending June 30,1958; national income and product account data from the U. S. Department
of Commerce, Office of Business Economics, statistics for 1957 and 1958 based on estimates in the budget.
U. S. Department of Commerce, Office of Business Economics, Jan. 18, 1957.
Chairman P a t m a n . Thank y o u , sir.
Next we have Mr. Martin Gainsbrugh, chief economist of the
National Industrial Conference Board.
STATEMENT OF MARTIN It. GAINSBRITGH, CHIEF ECONOMIST OF
THE NATIONAL INDUSTRIAL CONFERENCE BOARD
Mr. G a i n s b r u g h . I am Martin Gainsbrugh, chief economist of the
National Industrial Conference Board, and I am honored to be back
with you again for, I believe, the eighth time.
87624—57------9
122
ECONOMIC REPORT OF TH E PRESIDENT
I
have a long statement, but I would like to concentrate my oral
comments on possibly the most controversial aspect of the outlook
for 1957; namely, the trend for private business investment. I have
some additional comments on residential construction, inventories,
and net foreign investment in my full statement which is submitted
for the record.
To give you my conclusions first—particularly in the light of the
uncertainties of the opening weeks of 1957—the outlook for business
spending for plant and equipment for 1957 is good. A t least this is
how all three existing barometers of private capital formation now
read in early 1957. These three barometers are the Department of
Commerce and the SEC survey of expected capital expenditures for
the first quarter of 1957, the McGraw-Hill survey of expected capital
expenditures for the full year of 1957, and the latest innovation
touched off by the research of your own task forces several years ago,
the newly initiated National Industrial Conference Board’s quarterly
survey of capital appropriations for the 1,000 largest manufacturing
companies. A ll three surveys point in one direction: A good year
for plant and equipment.
In the current quarter, private industry expects to spend some $38
billion for plant and equipment, a new high. This is indicated on page
10 of your Economic Indicators if you would like to look at that series.
In view of the rapid advance in such spending during 1956, we are
already at a higher level than the average of last year, which was
only $35 billion. The first quarter rate this year is $38 billion. The
current quarterly average for all industry is 8 percent above the 1956
rate. In manufacturing, the current quarter is 9 percent above last
year’s average; in public utilities 13 percent, and in railroads, 23
percent. Almost all along the line American business is now spending
record amounts in adding to, replacing, and modernizing their plant
and equipment.
The McGraw-Hill survey furthermore suggests that these dollar
amounts may be exceeded— though modestly— later during the year.
A s compared with the 8-percent gain over 1956, already experienced
in the first quarter, business plans to increase its spending for the year
as a whole by some 11 percent.
It is important to see this in perspective.
In 1956, however, capital outlays rose by 22 percent above the 1955
rate. Thus, even the 11-percent figure Signifies a tendency toward a
levelling out of capital expenditures, at a record rate.
An immediate area of concern in early 1957— and that may be too
strong a word since I do not mean to be too alarming about the year
as a whole— relates to capital expenditures by durables manufacturing
companies. These expenditures in the current quarter are expected
to be below the fourth-quarter rate, the first such decline in the past
2 years.
Each of the three surveys on capital spending serves a distinct and
significant purpose. First, the Commerce-SEC survey obtains the
initial estimate of business programs from 5 to 6 weeks before the
quarter actually begins. These are -the figures I was quoting above,
in discussing the first quarter of 1957. A t this stage of business plan
ning, most of the decisions have been made, so that the expenditures
can reasonably be expected to be met. I believe they will be.
ECONOMIC REPORT OF THE PRESIDENT
123
Secondly, the McGraw-Hill survey, which provides the earliest
available annual expectations data, is a compilation of business plans*.
Some of these may already have been formalized in annual capital
budgets; some may be close to such formularization; and some may be;
of a more speculative nature.
The conference board’s new quarterly series on capital appropria
tions represents a translation of these annual capital budgets. Each
specific project has to be approved by top management before the com
pany can place the order and start to spend. Our survey sponsored by
Newsweek magazine covers only manufacturing companies, by the
way. It indicated a broad upsurge in capital appropriation approvals
in the first half of 1956, portending a rise in capital outlays tins year.
Backlogs of approved appropriations also rose. However, in the third
quarter, the durables manufacturing companies indicated a decline
in new appropriation approvals; the soft-goods sector continued to
post gains. That is the first such decline in our series, which spans
2 years.
It was this decline that raised some question in our mind several
months ago, whether during the second half of 1957 capital spending
by the durables group might not be facing a reversal in trend. Since
then, the first signs of this reversal, very faint to be sure and subject
to revision, have already shown up in the governmental estimates of
first quarter spending rate.
A t the present time, we are engaged in processing our returns for
the fourth quarter. Based on replies from only a handful, and of
these mostly the smaller and medium sized companies in our group,
there has been a rise in new appropriation approvals from the third
to the fourth quarter^ but probably of no more than seasonal dimen
sions. There usually is an increase in appropriations from the third to
fourth quarter. From all indications it would appear that the fourthquarter data will support the barometric readings of the third: a
plateau or decline in the appropriations process viewed seasonally.
The conference board’s survey thus ties in by and large with the
other surveys. Capital outlays by manufacturing industry may level
off at a high rate later this year. But that is only 43 percent of all
capital outlays. Such nonmanufacturing sectors as public utilities
and communications are still planning significant hikes in capital
outlay.
Translating these surveys of business plans for 1957 into the gross
national product account, it would appear that for the year as a whole
producers’ durable equipment and nonresidential construction outlay
in 1957 would be somewhat above ($1 billion to $2 billion) the fourth*
quarter rate.
Generally overlooked in the discussion of rising prices during the
past year has been the advance of plant and equipment prices. This
is no surprise in the face of the surging demands by business for plant
and equipment. Apparently, it is a fact of life for businessmen too.
They report in the McGraw-Hill survey that they expect to pay 6 per
cent higher prices this year than last. Since the fourth-quarter aver
age of capital goods prices is already considerably above the annual
average, it would appear that business expects these prices to continue
to rise, but at a much slower rate. As the Economic Report indicates
on page 32, the prices of producers equipment in December of 1956
were already 13 percent above mid-1955.
124
ECONOMIC REPORT OF THE PRESIDENT
On balance, it would appear that very little if any of the modest rise
expected in 1957 for capital outlays above the present rates will repre
sent a gain in volume. For purposes of appraising 1957 as a whole, I
believe the most practical assumption for tne capital goods sector is a
continuation of the current level of physical activity.
On the basis of the available foreshadowing statistics, little or no
improvement in residential home construction can be expected in 1957.
Housing starts, F H A applications, VA-appraisal requests, mortgage
recordings, and contract awards were weaker in the second half of
1956 than in the first, and this slippage will apparently be reflected
in new residential spending at least until June of this year.
Housing starts were running at about a 1,135,000 annual rate—
seasonally adjusted— in the first 6 months of 1956. In the last 6
months starts were down to a 1,060,000 rate. The number of mort
gage recordings of $20,000 or less was 7 percent behind 1955 in the
first 6 months of last year. In the 5 months through November, the
decline was 9 percent.
Contract awards for new residential construction for 37 States
east of the Rockies, as reported by F . W . Dodge, show an even sharper
drop. Dollar award figures for the last 6 months of 1956 were 13
percent behind the volume recorded in the same months of 1955.
The annual joint Bureau of Labor Statistics-Department of Com
merce forecast of construction activity calls for 5 percent less dollar
spending in home building in 1957 than in 1956, but assumes about
9 percent fewer homes will be built. Dollar spending has fallen less
than the number of starts since 1955 because more houses built to sell
for over $10,000 are going up. The average proposed selling price of
a 1-family house rose about $800 in 1956. This trend is expected
to carry over into 1957. A ll of this suggests about 1 million homes
in 1957. Some private forecasters would put the figure higher—
something over 1.1 million. Some home builders, however, are talking
of a figure as low as 850,000 for 1957. It is the consensus in the
building trade that the precise level of housing starts in 1957 will
depend substantially on conditions in the mortgage market.
There are no serious material shortages in sight. Home builders
wer$ able to erect 1.3 million units as recently as 1955. Despite the
12 million new housing units erected since 1945, builders feel me need
and desire for new housing is far from satiated. The essence is that
the outlook is for a lower level of housing starts for 1957 from 1956.
In the fourth quarter of 1956, the physical volume of business in
ventories rose, for the eighth successive quarter. Net additions to
inventory in 1956 amounted to about $3.5 billion— significantly above
a rate that could be considered normal secular growth. Because of
rising prices, the book value of business inventories evidently rose
between $6 billion and $7 billion.
Operating rates and sales volume in most industries have also
risen, relative to a year ago, and it is apparently agreed by most
.analysts that the current level of inventory-sales ratios, while ample,
is not excessive. Inventory growth in 1956 was substantial, but it
was well proportioned to need: a large part of the total additions to
inventory book values occurred in those industries where orders and
backlogs were rising sharply.
ECONOMIC REPORT OF TH E PRESIDENT
125
The condition of inventory statistics at the end of 1956 was certainly
not alarming. However, there appears to be good reason to think that
the present rate of accumulation— which amounts to perhaps over $4
billion on a gross national product basis, and about $8 billion in
terms of book value— is likely to dwindle by midyear. And there
remains the somewhat less pleasant possibility that if accumulation
continues at its present rate for the next two quarters a certain amount
o f liquidation may occur late in 1957*
The reasons for expecting at least some decline in the present rate
of inventory accumulation are—
(1) Considerably lower liquidity on the part of corporations, and
relatively high borrowing costs, both of which are dissuading business
from substantial further net investment in inventory;
(2) The fact that in capital goods industries, where a substantial
part of recent accumulation has occurred, the rate of ordering is evi
dently slowing down, reducing the requirements for forward inventory
coverage; and
(3) Growing capacity in most industries is progressively eliminating
the supply uncertainties which provided some of the incentive for
accumulation in late 1955 and 1956.
Surveys of expectations with respect to inventory policy contain a
rather wide margin o f error, for the obvious reason that inventory
policy itself is volatile. However, a survey of over 200 industrial
companies conducted by the conference board in late 1956 found that
while in 1956 about 70 percent of the companies increased dollar inven
tories, and about 15 percent reduced their dollar inventories, only 40
percent expect to continue to increase inventories in the first half of
1957, while 30 percent expect a reduction. Granting the difficulties
of expectations data in this area, I believe these percentages correctly
reflect a declining interest, on the part of business, in further inventory
investment. The inventory outlook for all of 1957 seems to point to a
moderately higher book value at the end of the year, but no appreciable
change in physical level, and hence something approaching zero in
the gross national product inventory component.
A continuation of the increase in net foreign investment is likely in
1957. The past year saw net foreign investment reach $1.1 billion
(this excludes economic and military aid shipments, which do not give
rise to foreign investment as usually defined in our national accounts) ,
the first time since 1951 that the net foreign investment of the United
States has been positive. Probably developments in 1957 make it
'appear unlikely that a like increase will take place in this year, but it
does seem likely that foreign investment will continue to increase
substantially.
The National Foreign Trade Council balance of payments grdup
(consisting of a large and representative number of individuals serv
ing generally in the role of economists with manufacturers, exporters,
importers, banks, transportation companies, and other concerns di
rectly engaged in international trade and investment) expects that
net foreign investment will come to about $2.2 billion in 1957, about
double the 1956 rate, but the increase is still below that which took
place in 1956.
Their expectation is for commercial merchandise exports, the largest
component of the current account, to be $18 billion in 1957 against
126
ECONOMIC REPORT OF TH E PRESIDENT
$17 billion last year. The latter figure represents nearly a 20-percent
increase over 1955.
Imports, according to the N FTC, will approximate $13 billion, up
only $300 million from 1956. The rise in imports has evidently slowed
down, since the increase from 1955 to 1956 was $1.2 billion.
‘ Among the factors that are expected to lead to this situation are
the following:
First, there is the general broad expectation that business activity
within the United States will continue on a high plane. The closeness
of high business activity and high imports has been established and
will continue.
Second, the unsettled situation in the Middle East will tend to make
Europe turn to the Western Hemisphere for its supply o f fuel. Coal
exports are already high and can be expected to remain high or
actually increase as a result of Europe’s needs. Europe will have to
turn to the United States and Venezuela to meet its petroleum needs
as long as operations and transportation from the Middle East are
disrupted.
Third, there may be a need for increased imports of other goods,
particularly consumer goods, from the United States. Some slowdown
of industrial activity in Western Europe is already reported. A t
present, the letdown has been mainly in private investment, but should
the crisis continue, a twofold impact may be felt in the consumer-goods
field. The shortage of fuel may operate directly to cut consumer-goods
output immediately. Should private investment be curtailed for any
substantial period of time, an indirect effect may emerge in the in
ability of industry to meet the growth in consumer demand.
Fourth, the large gold and dollar balances of foreign countries,
particularly continental European countries, puts them in a position
to increase their purchases from the United States immediately with
out having to export immediately in order to pay for the imports.
Continental OEEC countries have more than doubled their gold and
dollar holdings since 1950.
The United Kingdom has not experienced a similar growth, but it
has recently arranged with the International Monetary Fund to draw
on its full quota of $1.3 billion if needed.
A fifth consideration is the extent to which price increases will affect
the value of our imports and consequently necessitate our spending
more to meet our needs. Some price increases are already evident,
and more can be expected. A related question is the extent to which
internal prices will rise in the United States and consequently con
tribute to our attractiveness as a market for imports.
United States exports and imports o f goods and services and net foreign
investments, 1952-57
[Billions of dollars]
1952
1953
1954
1955
1956
1957
(estimate)
Export surplus of goods and services1___
Total unilateral transfers, except military.
2.4
2.5
0.4
2.5
1.8
2.3
2.0
2.5
3.4
2.3
4.7
2.5
Net foreign investment.....................
-.1
-2 .0
-.4
-.5
1.1
2.2
1 Excluding transfers under military aid program.
Sources: Council of Economic Advisers; National Foreign Trade Council.
ECONOMIC REPORT OF THE PRESIDENT
127
My final comments are devoted to financial aspects which underlie
the picture for private business investment.
Turning next to financial aspects of these investment possibilities,
the basic issue here is the level of liquidity. In 1956 the record outlays
for plant and equipment and the largest boost to inventory book
values experienced during the past 5 years combined to bring consid
erable pressure on business financing. As a partial offset to these
pressures depreciation allowances increased sizably, continuing the
ostwar trend; lending increased, as did the volume of security issues,
detained earnings were down somewhat significantly. The biggest
change, however, was the decline in cash and United States Govern
ments. In other words, the pressure was relieved by a decline in
corporate liquidity. This provided a safety valve for business invest
ments in 1956. Retained earnings were down significantly. That is
the key point. There was a decline of some $5 billion in cash and
United States Government holdings. The figures are in the Eco
nomic Report.
A s already indicated, the presently available surveys suggest that
1957 plant and equipment outlays will be up considerably less this
year than in 1956. The rise in inventories, too, should be somewhat
less than it was last year.
The demand for funds in 1957, therefore, should not rise as much
as in 1956. In fact, it is conceivable that the use of funds for capital
and inventory purposes combined may be no higher in 1957 than
in 1956.
On the other hand, depreciation allowances will undoubtedly in
crease as much, if not more than, in the previous year, while corporate
profits available for internal use may be about the same as in 1956.
The leveling of capital outlays, together with a diminution in the
rate of inventory buildup, could make financing problems less acute
in 1957 than in 1956. This may even serve to bring to a halt the decline
in corporate liquidity.
It is worth emphasizing, however, that the attainment of the 1956
rate of capital outlay was largely possible as a consequence of this
lessened liquidity. In fact, the current leveling off of plant and
equipment and the liquidity decline may well be associated.
Finally a word about profit margins. They are now narrowing.
This may mean that even after assuming a higher average level of
activity m 1957, corporate profit totals may well be around 1956 aver
age level. They have been steadily narrowing throughout 1956.
Profits were not responsible for the bulge in prices in 1956. I f this
narrowing of profit margins is continued, it could have a significant
impact on future plant and equipment outlays. It is in this area that
we find the key problem of 1957: the direction of trend in business
investment in the closing half of this year.
In summary, I view business investment as a strong sustaining force
throughout the year, mildly expansionary in the opening months, but
not the explosive force in 1957 that it was in 1956.
Chairman P a t m a n . Thank you very kindly, sir.
Now, Mr. George Katona, program director of the survey research
center of the University of Michigan.
S
128
ECONOMIC REPORT OF TH E PRESIDENT
STATEMENT OP GEORGE KATONA, DIRECTOR OF ECONOMIC PRO
GRAM, SURVEY RESEARCH CENTER, AND PROFESSOR OP
ECONOMICS AND OP PSYCHOLOGY, UNIVERSITY OF MICHIGAN
Mr. K a t o n a . I am George Katona, from the University of Mich
igan.
Large consumer purchases will help make 1957 a good year. It
appears probable that in 1957 consumers will devote a slightly higher
proportion of their income than in 1956 to discretionary expendi
tures, especially to purchases of durable goods. Yet the consumer
outlook is not without some soft spots. Those who expect that con
sumers will provide a substantial new impetus to the economy are
likely to be disappointed.
For the past 10 years the survey research center of the University
of Michigan has been conducting nationwide sample interview sur
veys in which particular attention has been given to the study of the
psychological factors influencing consumer spending and saving.
Consumer spending depends both on ability to buy and on willingness
to buy. Little need be said at present about consumers’ ability to buy:
incomes and liquid reserves are growing at a slow rate and consumer
debt, for most people, is not unduly burdensome. Therefore, I shall
turn to an analysis of consumer sentiment which greatly influences the
short-range prospects. My remarks are based on the results of a
survey completed in December 1956.
The American consumer is satisfied with his financial situation and
confident regarding the future. A slight deterioration in consumer
sentiment which occurred early in 1956 has now been halted. People’s
satisfaction wTith their financial welfare is maintained close to peak
levels, and favorable expectations about personal finances continue to
far outweigh pessimistic expectations. Confidence that good times
lie ahead for the Nation’s economy during the next year, as well as
during the next several years, is as widespread today as at any time
during the postwar period.
Signs that consumer inclinations to buy are improving may be
found primarily in expressed buying intentions. Plans to buy new
cars are substantially more frequent than they have been earlier in
1956, before the introduction of the new models. However, they
remain well below the very high level attained in the fall of 1954. In
tentions to buy used cars are at a peak for the 1954-56 period. That
probably is an effect of price increases. Intentions to buy homes have
increased in frequency m recent months. They now compare favor
ably with house-buying plans expressed at other times during the past
2 years. However, there are indications that some people who exressed house-buying plans this November and December may have
een unaware of the present credit stringency and may be forced to
postpone their plans. Plans to make home improvement or repairs
are unchanged from a year ago. Plans to buy major household goods
give little or no indication of recovery from their earlier decline.
Yet consumer attitudes and buying plans are not as buoyant as in
late 1954 and in 1955. A t that time optimism was growing rapidly.
Since then people’s expectations about their own welfare and national
business conditions have been stable at a high level of satisfaction.
The stimulus of growth in optimism has been lacking. During the
last few months there was a further leveling off. The proportion of
S
ECONOMIC REPORT OF THE PRESIDENT
129
families who said that their financial situation was the same as a year
earlier and who expected no change was somewhat higher in December
1956 than it had been earlier in 1956 or in 1955.
Similarly regarding people’s general economic outlook, no signifi
cant improvement has occurred during the last few months. The crisis
in the Near East caused only a very slight increase in uncertainty.
The results of the presidential election were most commonly viewed
as having no effect on business conditions.
Another major reason for the lack of buoyancy in inclinations to
spend lies in the price situation. Most people are aware of rising costs
of living and consider price increases an unfavorable development.
The feeling that good buys are available is much less common than 2
years ago. The belief that prices have risen and will rise in the future
began to spread in the spring of 1955 and was still growing in summer
1956. Yet between August and December 1956, no further increase
has occurred in the proportion of consumers who see an upward trend
in the price level. A s of now, concern with prices and fear of infla
tion have not reached the point at which they would either reduce
discretionary spending substantially or impair people’s desire and
willingness to save.
People on the whole are intent on improving their standard of liv
ing. Needs as well as demand have been upgraded over the last 10
years. Even though today the American people own more and newer
houses, automobiles, and other durable goods than ever before, they are
not saturated and desire more and newer and better goods. A t the
same time, however, people are also anxious to accumulate liquid
reserves, that is, to save. Despite the popularity of installment buy
ing, the will to save and the importance attributed to saving have not
declined. Many people feel that their reserve funds or savings are
not large enough.
In 1956 liquid saving by consumers increased. (The present tight
money is due primarily to demand rather than to supply factors.) The
supply has grown but not proportionately to the increase in demand for
money.
According to current indications we may expect that the rate of
liquid saving will remain at least as high in 1957 as in 1956, while at
the same time borrowing (installment buying) may increase.
W e expect a better automobile year in the next 9 months than we
had a year ago, and we expect that installment buying will likewise
increase.
A s you know, in the Federal savings statistics, borrowing is con
sidered a negative saving, and therefore the prospects for total savings
as published in the Federal statistics is for lesser savings. But we
must separate the accumulation of liquid reserves, for instance in
savings and loan shares which are now the most popular form of
liquid savings in this country, from borrowing which has other
functions.
I f I may summarize my remarks, 1957 promises to be a good year
for the consumer sector. But in contrast to 1954 and 1955, the con
sumer is not likely to lead. In 1955, the explosive factor was the con
sumer. In 1956, as Mr. Gainsbrugh just indicated, it was the capital
expenditures of business. # 1957,1 believe, neither will provide a new
stimulus. Thus we are in a leveling off situation, and consumers
cannot be relied upon to swim contrary to trends.
130
ECONOMIC REPORT OF THE PRESIDENT
In other words,^ should in some other sectors recession or a small
decline originate, it is unlikely that the consumers would step in and
change the direction in which the economy is moving.
Chairman P a t m a n . Thank you very much.
W e will now hear from Mr. W ells, Administrator of the Agricul
tural Marketing Service of the United States Department of Agri
culture.
STATEMENT OP ORIS V. WELLS, ADMINISTRATOR OP THE AGRICUL
TURAL MARKETING SERVICE, DEPARTMENT OP AGRICULTURE
Mr. W e l l s . Mr. Chairman, I am Oris V . W ells, Administrator of
the Agricultural Marketing Service of the Department of Agricul
ture.
The first question on which I have been asked to concentrate is the
outlook for farm production, prices, and income in 1957.
A t our annual outlook conference held about 2 months ago, we con
cluded that prices received by farmers in 1957 should average some
higher than in 1956, and that this would also be true of net income
realized by farm operators. W e expect that domestic demand for
farm products will continue strong, that exports will hold at a high
level, and that there will be some cut in farm marketings as a result
of smaller hog production and the soil bank. Developments during the
last 2 months have generally reinforced the appraisal made last fall.
W e expect some further increase in economic activity and con
sumer incomes during 1957. Under these conditions, expenditures for
food probably will increase at about the same rate as disposable con
sumer income. However, with the rising demand for services along
with continuing increases in marketing costs, only part of the rise in
food expenditures will be passed through to farm markets. Currently,
farmers are receiving only about 40 cents out of the average dollar
spent for food at retail.
The value of farm exports for 1955-56 fiscal year rose about 11 per
cent over the preceding year, even though cotton exports dropped to
only 2.2 million bales. Meanwhile, exports have been moving out
very rapidly since last June, with tne total value for the last half of
1956 now estimated at about 3’9 percent above the last half of 1955.
Wheat exports are up sharply, while sales of cotton by the Commodity
Credit Corporation for export during the current marketing year total
6.3 million bales through January 8. W e may have both a record
volume and record value of farm exports in fiscal 1956-57.
The soil-bank program will be in full operation in 1957. Announced
goals call for 20 to 25 million acres from basic crops to be placed in
the acreage reserve, and about 20 million acres of cropland in the con
servation reserve. This should reduce total crop production this year
unless yields are unusually high.
The reduction in last fall’s pig crop, together with the small cut in
prospect for this spring are expected to hold hog slaughter below a
year earlier through most of 1957.
The combined effects of the soil-bank program and the decline in
hog numbers should mean some reduction in total farm output in
1957. However, the reduction in total farm marketings is not likely
to be large. Crop rotation in 1956, part of which will be marketed
ECONOMIC REPORT OF TELE PRESIDENT
131
this year, was at a record level, and the production of poultry, eggs,
and dairy is likely to increase further. In addition, record stocks
of corn, wheat, cotton, and rice were on hand at the beginning of the
1956-57 marketing year. Increased exports are reducing stocks of
wheat, cotton, and rice, but corn stocks are increasing as a result o f
last year’s big crop.
In summary, some increase in average prices for 1957, together with
payments under the soil-bank program, are likely to raise farm in
comes above 1956, even though the volume of marketings may decline
somewhat. W e do not look for an increase in total expenses of farm
production. Consequently, we expect the realized net income of farm
operators to increase, perhaps about 5 percent. The 5-percent gain
from 1955 to 1956 was the first since 1951.
The second question which I have been asked to concentrate on is
the effect of farmers’ spending in 1957 on new construction and farm
machinery. W e do not have data which will permit a very precise
answer to this question, but I will try to summarize what we know.
The decline in farm income in recent years has had an impact on
farm purchases from nonfarm industries. Nevertheless, farmers have
attempted to maintain purchases of machinery, equipment, and other
industrial goods. To some extent, this appears to have been accom
plished by going further into debt. Total farm indebtedness, ex
cluding CCC loans, increased by $2’% billion in 1955 and 1956, to
reach a total of about $18 billion at the beginning of this year. How
ever, this is not large compared to total farm assets estimated at
$176 billion as of January 1,1957.
Farm production expenses reached a peak of almost $22.5 billion
in 1952. Although they have eased off slightly since then, the de
cline has been small compared with the drop m gross income. Largely
in response to declining incomes, farm purchases of machinery and
equipment in 1956 are estimated to be around 15 percent smaller than
in 1955, and more than one-fourth below the heavy purchases in 1951.
Farm construction outlays for 1956 were down about 3 percent from
1955, about one-sixth lower than in 1951.
The farm market for construction and new equipment represented
around 13 to 15 percent of total business spending for new plant and
equipment in 1950-52, but declined to something less than one-tenth
in 1956. Farm expenditures for new equipment and construction are
expected to increase slightly this year due primarily to the effects
of higher farm income in both 1956 and 1957. Purchases of some
other production items may be reduced as more acreage moves under
the soil bank.
Mr. Chairman, I have supplied Mr. Ensley with a supplementary
table on capital expenditures by farmers, which indicates a rough
estimate of $3,815,000 for 1956, and if I had to set down a specific
figure for 1957,1 would put it about $4 billion.
In addition to these direct answers to the 2 questions, let me say
that I always hesitate, even though I am a statistician, to simply
cut a slice of 12 months of calendar time out of the farm business
and say, “This is the farm outlook.” So I would, if you will allow me,
like to say a few words about some medium-run trends which have
to be kept in mind looking at the farm picture. They affected farm
income last year, they will affect farm income in 1957 and they will
still be operating in 1958 and, I suspect, until about 1960.
132
ECONOMIC REPORT OF TH E PRESIDENT
(The chart referred to is as follows:)
Farm capital expenditures, 19S9 and 1946-56
[Millions of dollars]
Gross capital expenditures on:
Buildings i
Year
1939.______ . . . .
1946....................
1947....................
1948.................__
1949....................
1950.............. .
1951-.,...............
1952....................
1953.— . . ...........
1954....................
1955....................
1 9 5 6 * ...-.........
Farm
oper
ators’
dwell
ings
110
409
560
712
695
750
863
885
841
769
749
Motor vehicles
Service
build
ings and
other
struc
tures*
Total
Tractors
103
621
768
885
793
857
983
1,006
957
876
852
213
1,030
1,328
1,597
1,488
1,607
1,846
1,891
1,798
1,645
1,601
1,560
151
241
449
661
766
715
861
718
738
621
676
515
Trucks
73
216
463
535
540
542
508
472
431
463
484
500
Automo
biles *
Total
122
104
194
307
484
432
414
263
540
393
467
380
346
561
1,106
1,503
1,790
1,689
1,783
1,453
1,709
1,477
1,627
1,395
Other
machin
ery and
equip
ment *
215
444
795
1,159
1,256
1,242
1,409
1,315
1,152
1,172
1,113
860
All
items
774
2,035
3,229
4,259
4,534
4,538
5,038
4,659
4,659
4,294
4,341
3,815
* Includes new construction, additions, and major improvements.
* Includes fences, windmills, wells, and dwellings not occupied by the farm operator.
* For farm business use (40 percent of total farm purchases of automobiles, 50 percent in 1942-45).
, * Excludes harness and saddlery and other minor types of equipment charged to current expense.
* Preliminary estimates based on incomplete information.
Source: The Farm Income Situation, July 1956.
M r, W ells. Following the Korean inflation, prices received by
farmers entered a period of decline which extended to the latter part
of 1955. Since then a gradual improvement has taken place, with
the result that the index of prices received by farmers during the
last 3 months of 1956 averaged 235 percent of the 1910-14 base,
compared with 225 in the last 3 months of 1955. Meanwhile, prices
and cost rates paid by farmers have continued to increase as evi
denced by a parity ratio averaging 82 in the last quarter of 1956,
compared with 81 a year earlier.
In other words, prices paid by farmers have been going up at
almost the same rate as prices received by farmers.
Underlying trends in domestic demand have been favorable. Our
population of about 168 million persons in 1956 was 15 percent higher
than in 1947-49. This increase m the number of consumers has been
augmented by continued increases in consumer incomes to new record
levels, Although these increases in income have been accompanied by
only relatively small increases in per capita purchases of farm fooa
products, the rise of 4 percent in the index of average per capita food
consumption from 1947-49 to 1956 has been a significant factor in
the expansion of total domestic demand. When combined with the
increase in the number of consumers, the result has been an increase
of about one-fifth in total United States food consumption since
1947-49.
Recent trends in the exports of farm commodities have been favor
able. After reaching a record level of $4.1 billion in 1951-52, they
dropped about one-third in the next fiscal year. Since then, total
farm exports have increased steadily. The expansion in exports in
ECONOMIC REPORT OF THE PRESIDENT
133
the current marketing year has been especially important for wheat,
cotton, rice, and fats ana oils. However, it needs to be emphasized that
the recent expansion has been largely the result of Government pro
grams, particularly those carried out under title I of Public Liaw 480.
There is in the President’s Economic Report a most interesting chart
which breaks total farm exports down into those financed by normal
transactions and those financed by foreign currency and other trans
actions where the dollar currency really rises within our own
Government.
W e also need to bear in mind that the underlying trend in farm
production is up, and that carryover stocks of many important farm
commodities are still very large. Farm output in 1956 is currently
estimated at 114 percent of the 1947-49 average, which is about equal
to the population increase. It is comprised of a 6-percent increase
in crops and a 23-percent increase in livestock and livestock products.
Although the soil-bank program should help to check uneconomic ex
pansion, advances in farm technology and increased mechanization
also mean that farm-production expenditures will continue at a
relatively high level.
I have a summary and three illustrated charts that I hope can also
be included in the record.
Chairman P a t m a n . Without objection, they may be included.
(The material referred to follows:)
134
,
,
Selected data relating to agriculture United States 1939 and 1946-56
Farm output
Prices
received
by farmers
Parity
index
Parity
ratio
Index numbers,
1910-14=100
Percent
77
113
115
110
100
101
107
100
92
89
84
83
81
81
85
83
82
80
98
95
104
101
100
103
107
108
108
113
114
85
101
100
97
103
106
111
112
114
117
121
123
82
98
93
106
101
97
99
103
103
101
106
106
94
104
102
99
99
100
98
100
102
101
103
104
Millions
$7,872
24,770
29,664
30,253
27,864
28,405
32,909
32,538
31,169
29,714
29,264
29,800
28,900
29,600
29.700
29.700
30,200
Millions
$6,162
14,324
16,831
18,643
17,909
19,248
22,258
22,476
21,246
21,442
21,599
21,900
21.300
21,600
21,800
21,800
22.300
Millions
$4,394
15,000
17,191
15,943
13,673
12,857
14,802
14,256
13,880
12,021
11,340
11,900
11,200
11,600
11,600
11,900
12,500
Millions
$4,489
14,923
15,458
17,695
12,866
13,716
16,111
15,120
13,263
12,487
11,680
11,700
11.400
11,500
11,300
11,600
12.400
PRESIDENT
123
208
240
260
251
256
282
287
279
281
281
286
279
281
285
287
288
Total,
including
change in
net inven
tories »
THE
Millions
$655
3,173
3,957
3,472
3,578
2,873
4,040
3,431
2,847
3,054
3,195
2 3,620
894
829
1,031
978
Realized i
Index numbers, 1947-49=* 100
1 Quarterly data are seasonally adjusted annual rates.
2 1st 11 months.
Produc
tion
expenses 1
OF
iQett:__ifti smarter
iQKfi_icf miartpr
2d quarter
3d Quarter
4th Quarter
95
236
276
287
250
258
302
288
258
249
236
236
225
227
241
239
235
Crops
ODerators
Agricul
tural
exports
REPORT
1939 ......................................
1946 ......................................
1947
..................................
..................................
1948
1949.........................................
1950.........................................
1951
...........................
...........................
1952
1953
............................
1954
...........................
..................................
1955
..........................
1956
Total
Net income of farm
Cash
receipts
from farm
market
ings i
ECONOMIC
Year
Livestock
and
products
Food con
sumption
per capita
ECONOMIC
REPORT
OF
THE
)
L -i.i,
» .
I
. i .1 i . q ,1
l
i
*
M O N T H L Y DA T A
*
INCLUDES
1910
1920
...................................................L - i - i - i —
1930
I NTE RES T, TAXES, A N D
1940
WAGE
RATES.
BY Q U A R T E R S . 1924 - 3 6 , B Y M O N T H S ,
U. S. D EP A R T M E N T OF AGRICULTURE
ANNUAL
, i - ± > I .1 A— 1., - I- J.. .1-
1950
AV. D A T A , 1 91 0 - 2 3 ;
1937 TO D A T E
N EG. 98 - 57 ( 1 )
A G R IC U L T U R A L
M A R K E T IN G
S E R V IC E
PRESIDENT
F A R ME R S ’ P R I C E S
o
FARM OUTPUT A N D POPULATION *
ECONOMIC
EEPOKT
OF
THE
PRESIDENT
CO
*
U .S. D EP AR TM EN T OF AGRICULTU RE
3-YEAR m o v i n g a v e r a g e s
NEG. 19 1 2 -5 7 (1 )
A G RICULTU RA L M A RKETIN G SE R V IC E
FACTORS IN FARM PRODUCTION
Per Unit o f Farm Output
% OF 1935-39
200
100
0
1935
1940
U. S. D EPARTM ENT OF A G RICULTURE
1945
1950
NEG. 222A- 57 ( 1)
1955
1960
A G RICULTU RAL M A RK ET IN G SE RVICE
138
ECONOMIC REPORT OF THE PRESIDENT
Chairman P a t m a n . I would like to ask a few questions, and I will
ask the staff director to make sure I am advised when the 10 minutes
have expired.
Mr. Clague, in preparing the cost of living index, do you include
the cost of interest?
Mr. C l a g u e . Yes, we do. In the case of homeownership which is
included in our index, we count the rate of interest as one of the costs.
Chairman P a t m a n . H o w significant is it?
Mr. C l a g u e . It would not be a very large item in the homeowner
ship picture* The first item is, of course, the price of the house itself.
We also include maintenance and repair costs to keep the house up,
and then interest would be another cost. I cannot give you the exact
weight o f that interest, or how much influence it has on the index, but
I could supply that if you would like to have it.
Chairman P a t m a n . Since it is divided over a long period of years,
it would probably be insignificant or at least not large for 1 year, I
assume.
Mr. C l a g u e . That is right; it is cumulative, of course. It lasts a
long time, and it will stay at that rate until and unless the owner can
refinance the house at a more favorable time later.
Chairman P a t m a n . Mr. Paradiso, do you in your interesting state
ment assume the tight money situation as continuing during 1957 ?
Mr. P a r a d is o . I did not make that statement, Mr. Chairman.
Chairman P a t m a n . I know you did not make the statement, but
you did say something along that line. Did you consider the money
situation for 1957 ?
Mr. P a r a d is o . Yes, I did. I considered that situation to be pretty
much a continuation of what we are now going through. I did not
envisage an alteration from the present situation.
Chairman P a t m a n . Mr. Gainsbrugh, you discussed the retained
earnings, and the fact that capital expenditures for plant and equip
ment are expected to be up for 1957. Last year I believe 67 percent of
the capital expenditures came from retained earnings and deprecia
tion. How will that figure compare with 1957, assuming that the 67
percent is approximately correct?
Mr. G a i n s b r u g h . That sounds a little low to me.
Chairman P a t m a n . Is it about 70 percent?
Mr. G a i n s b r u g h . It is about that. In 1956, retained profits and
depreciation allowances accounted for more than 80 percent of plant
and equipment outlays by nonfinancial corporations. I would expect
the flow of cash funds from depreciation to be higher in 1957 than in
1956 because the asset base is larger again as we enter 1957 than it
was in 1956. I f the profits figures are about the same in 1957 as they
were in 1956, and that was implied in Mr. Paradiso’s statement, among
others, I think there will be a recognition by industry of the need for
funds for internal purposes to a greater extent this year than there
was last year. Last year dividends went up by 8 percent. I would
think that in the light of requirements in 1957, dividends might hold
about where they are, which would mean that retained earnings plus
depreciation would give a higher cash throwoff in 1957 than in 1956.
So there should be more internal funds for investment purposes in
1957 than in 1956.
Chairman P a t m a n . In your statement, did you also assume that the
money situation would remain about the same as it is now, which, I
ECONOMIC REPORT OF THE PRESIDENT
139
believe is generally considered tight ? Did you consider it would ease
or get tighter ?
.• Mr. G a in s b r t j g h . I am hopeful that if the tapering off process
that is envisioned by our capital appropriations does transpire toward
the middle of 1957 or thereafter, there will be some easing off in the
tight-credit policy. For purposes of warranted economic growth, we
would need more of an expansion in our monetary supply than we
have had in the past 12 or 18 months. But that is only if the taper
ing off does occur.
Chairman P a t m a n . Mr. Katona, how do you consider that the in
creased interest that the consumer must pay will affect his savings?
Mr. K a t o n a . I do not believe that the increased interest affects
consumer savings. Most consumers save in order to have reserve funds
and not for the sake of interest return.
Chairman
P
atm an .
You do not think it affects consumer savings?
Mr. K a t o n a . I do not believe so.
Chairman P a t m a n . That is, the consumer is not interested so much
in the actual interest he receives on his investment as the security o f
the investment and the capital? The interest rate itself, whether it
is 2 1/2 percent or Sy2 percent is not so important as the safety of the
security, is that right?
Mr. K a t o n a . We are pretty sure, Mr. Chairman, that for the great
majority of American savers, interest rate or changes of interest rate
by 1 or iy 2 percent do not amount to much. I f I may say one more
sentence. For some very rich people whose savings may be substan
tial, it may amount to something. Even in installment buying, con
sumers are not concerned, perhaps it is their fault, with the charges.
In mortgages and in buying houses, they are concerned, and so in
residential building I do expect an effect.
Chairman P a t m a n . Mr. Wells, suppose that the farm prices had
gone up in 1956 the same percentage as industrial prices went up.
How would that have affected the cost of living?
Mr. W e l l s . Well, that is a little difficult for me to answer. Farm
prices in 1956 actually averaged the same level as 1955. How much
did industrial prices go up ?
Mr. G a i n s b r u g h . They went up as much as industrial prices, and
they were 7 percent higher at the year end.
Mr. W e l l s . From December of 1955 to December of 1956, farm
prices did go up 7 percent.
Chairman P a t m a n . I am looking back over a period of years and
wondering how the price index could remain about the same without
somebody giving up something when we know that industrial prices
have gone up considerably, that is, steel, automobiles, and many things
like that. Was it not a lot of it as a result of the losses the farmers
took, Mr. Wells?
Mr. W e l l s . There was a period of 59 months, from February of
1951 to December of 1955, in which farm prices fell by 30 percent.
There is no question but what this fall in farm prices did result in
masking the effect of what was happening quite a bit o f the time to the
rest of the economy and give us a stable phice level made up of the
falling farm sector and the rising prices of other products.
Chairman P a t m a n . The stable prices, in other words, were at the
cost of the farmer ?
140
ECONOMIC REPORT OF THE PRESIDENT
Mr. W e l l s ; Certainly, if we had not falling farm prices, the price
level would not have been stable.
Chairman P a t m a n . During that 59 months^ suppose that farm
prices had gone up in the same percentage as industrial prices, the
index would probably have been considerably different?
Mr. W e l l s . I think so, yes.
Chairman P a t m a n . Mr. Curtis, do you wish to inquire?
Mr. C u r t i s . I will pick up with Mr. Wells. I am first interested
in knowing the percentage of Government support in relation to the
total farm income* I think our total farm income was $11.9 billion
in 1956. I have some figures on this and I understand that about 10
percent of net farm income in recent years is due to Government pay
ments plus Government loans. But I notice our budget includes about
$5 billion of farm supports. How is that reconciled ?
It would look to me that probably that is pretty much an annual
figure and I am interested m knowing whether it is 10 percent o f
the farm income derived from Federal supports or as much as about
40 percent.
Mr. W e l l s . This is a difficult question for me to give a short
answer to, but let me call your attention to several things:
First, the budget for agriculture for this year, and I think I
should say last year, and probably for next year, tends to cumulate
the cost of agricultural price supports over a number of years because
we are disposing of stocks of agricultural commodities that have been
built up since we came out of the Korean inflation period. That is
first.
,
Second, I question comparing the size of the fiscal 1958 agricul
tural budget, about $4y 2 billion excluding loan advances which I
do riot think belong in this discussion, with the net realized income
of farm operators, of about $11 billion. The cash sales of farm prod
ucts runs about $30 billion and the cash expenses of farm production
ran $21 billion or $22 billion. I would suggest that these budget
expenditures support not the net realized farm income, but rather
cash receipts from the sale of farm commodities, a large block of
which goes back—twenty-odd million dollars—back into the pur
chase of farm production goods.
So I think the comparison should be against either cash sales or
gross value of farm production. Cash sales would have been sub
stantially lower without supports. Farmer purchases of both pro
duction and farm family living goods would have been substantially
loweir without the support-price program.
Mr. C u r t i s . I appreciate your comments. In trying to evaluate
our farm economy on whether it is 10 percent or 40 percent or what,
such a big factor is involved that it becomes important.
Now you state that you are rather optimistic that we will be able
to continue the export rate and in fact improve the export of our
farm products. Yet, from a little experience I had in talking with
a few people in Western Europe, and also listening to some of the
gripes at the Geneva Conference of the GATT countries, there was
a lot of talk about the fact that the United States was dumping farm
products, and there seems to be a growing resistance on their part
perhaps to disposing of our farm products in that fashion. ^
Did you take that possible factor into consideration in estimating
an increase of disposing of our surpluses ?
ECONOMIC REPORT OF THE PRESIDENT
141
Mr. W e l l s . Yes, sir. You will remember that I have addressed
myself here in this first section to precisely the 12 months’ slice of
time, the calendar year 1957. I think we do have commitments
already underway and prospects which indicate to me that calendar
1957 is going to tie a very high year.
Mr. C u r tis . I f this psychology did exist, it would be a factor at
a later time.
Mr. W e l l s . I suppose I am probably also assuming that the Con
gress will agree with the President in extending Public Law 480 for
an additional 12 months and by an additional $1 billion.
I think the kind of questions you are raising have to do with the
longer run outlook for farm exports, and there we must take into
account not only this feeling you mention but also the increase in
production of agricultural commodities as against the increase in
population over the world and the desire of many countries to get a
low-priced commodity wherever they can buy it.
Mr. C u r t i s . Mr. Clague, in your discussion of part-time work, I
was wondering if you had included in that the farm economy? I
have been quite interested in the figures over a period of years of the
percentage of farm income that comes from nonagricultural work,
which is largely in this area of part-time industrial work or nonfarm
work. Was that calculated in your studies ?
Mr. C l a g u e . Yes, Mr. Congressman, it was. These are census
figures which I was quoting and they are derived from the census,
the monthly census of population and labor force which the census
takes*
I called attention to the lrge increase in 1956 in the number of
these part-time workers. Undoubtedly some of them were on the
farm. I am sorry to say I do not have before me the extent to
which that is true. I might also add that I am sure a good many
of them were also in industry and trade to some extent, too, as
shown by the large numbers of women who seem to be coming into
the labor force on a part-time basis.
Mr. C u r t i s . O f course, in the farm economy, a lot of that is the
farmer’s wife or daughter. You did not have a breakdown of that?
Mr. C l a g u e . N o , but I think I could supply that to you. I do not
have it with me but I could put it in the record, if you like.
Mr. C u r t i s . Yes.
(The information is as follows:)
P art -T im e E m p l o y m e n t
The extent o f part-time work has increased in recent years in both farm and
nonfarm employment. In 1956, 18 percent of all persons at work were em
ployed less than 35 hours a week, compared with 14 percent in 1947.
Part-time employment in nonagricultural industries has increased sharply
for both men and women. The number on part-time work has jumped from
about 6 million in 1947 to almost 9% million average in 1956. Part-time workers
comprised 17 percent o f nonfarm employment in 1956, as compared with 13
percent in 1947.
While the proportion on the part-time work has also increased for agriculture—
from less than 24 percent in 1947 to over 28 percent in 1956—the number of
part-time farmworkers has not actuaUy increased, because there has been a
decline over the period in the total number o f farmworkers.
142
ECONOMIC REPORT OF THE PRESIDENT
Full-time and part-time workers in nonagricultural industries and in agriculture
by sex, annual average 1956 1955 and 1947
, , ,
Number (in thousands)
Sex, industry, and hours worked during
survey week
Both sexes:
Total at work1__________________________
35 hours or more_____________________
1 to 34 hours. ______________________
Nonagricultural industries________________
35 hours or more_____________________
1 to 34 hours.__________ ________ _____
Agriculture.____________________________
35 hours or more_____________________
1 to 34 hours. _______________________
Males:
Total at work 1__________________________
35 hours or more......................................
1 to 34 hours.________ _______________
Nonagricultural industries________________
35 hours or more............ ..........................
1 to 34 hours__________ __________ ___
Agriculture............... ........... ..........................
35 hours or more_____________________
1 to 34 hours___________________ _____
Females:
Total at work 1____________ _____________
35 hours or more....................... ...............
1 to 34 hours.________ ______________ _
Nonagricultural industries.............................
35 hours or more_____________________
1 to 34 hours............ ................................
Agriculture......................................................
35 hours or more......... .............................
1 to 34 hours.............................................
,
Percent distribution
1956
1955
1947
1956
1955
1947
61,818
50,640
11,178
55,425
46,062
9.363
6,393
4,577
1,815
60.261
49,933
10,329
53,728
45.046
8,683
6,534
4,887
1,646
55,554
47,635
7,919
47,573
41,538
6,034
7,981
6,097
1,885
100.0
81.9
18.1
100.0
83.1
16.9
100.0
71.6
28.4
100.0
82.9
17.1
100.0
83.8
16.2
100.0
74.8
25.2
100.0
85.7
14.3
100.0
87.3
12.7
100.0
76.4
23.6
42,166
36,529
5,637
37,060
32,536
4,523
5,107
3,993
1,114
41,432
36,196
5,234
36,122
31,897
4.224
5,310
4,298
1,010
39,983
35,781
4,201
33,276
30.239
3,037
6,707
5,542
1,164
100.0
86.6
13.4
100.0
87.8
12.2
100.0
78.2
21.8
100.0
87.4
12.6
100.0
88.3
11.7
100.0
80.9
19.0
100.0
89.5
10.5
100.0
90.9
9.1
100.0
82.6
17.4
19,652
14,111
5,541
18,366
13,526
4,840
1,286
585
702
18,831
13,736
5,093
17,606
13,147
4,458
1.224
589
636
15,570
11,853
3,716
14,296
11,299
2,997
1,274
554
719
100.0
71.8
28.2
100.0
73.6
26.4
100.0
45.5
54.6
100.0
72.9
27.0
100.0
74.7
25.3
100.0
48.1
52.0
100.0
76.1
23.9
100.0
79.0
21.0
100.0
43.5
56.4
* Excludes persons with a job but not at work.
N o t e . —Figures
may not add to totals because of rounding.
Source: U. S. Department of Commerce, Bureau of the Census.
Prepared by U. S. Department of Labor, Bureau of Labor Statistics, Division of Manpower and Employ
ment Statistics, Feb. 1, 1957.
Mr. C u r t i s . H o w much do your figures reflect the possibility of
double jobs, where with this shortage of hours there seems to be a
number of people at any rate that hold two jobs. How much of that
data do you have ?
Mr. C l a g u e . That is entirely eliminated in the figures I supplied
you, which come from the census, because they get these data from the
homes of people. They call on the family, and there the fact that a
erson held 1, 2, or 3 jobs would not make any difference. In our
>ureau of Labor Statistics reports which come from employers, this
double jobholding does exist or would be included. We would find a
man on two different payrolls and he would be counted twice. The
census has made some reports on that subject from time to time.
I have the impression, if you will let me correct it later, that there
are about 3y2 million persons in this country who hold more than one
job at one time.
(Mr. Clague later submitted the following:)
g
E m p l o y e d P e r s o n s W i t h T w o or M ore J o bs
Preliminary estimates1 of the number of persons holding two or more jobs are
available from a special survey conducted by the Bureau of the Census in July
1956. These figures show that, o f the 66.7 million persons employed during the
1 Detailed data not yet completely prepared for publication.
ECONOMIC REPORT OF THE PRESIDENT
143
week ending July 14,1956, 3.7 million had more than 1 job or business. The 3.7
million included 2.8 million persons whose primary jo b s 2 were in nonagricultural industries and 900,000 whose primary jobs were in agriculture.
Among agricultural workers with additional jobs, 300,000 were wage and salary
workers (hired farmhands) and 600,000 were self-employed or unpaid family
workers. The secondary jobs o f most of the wage and salary farmworkers were
also in agriculture but almost 350,000 of the 600,000 farm self-employed or unpaid
family workers held additional jobs in nonagricultural industries. This sug
gests that many of the latter were owners o f small farms near urban areas
where industrial jobs are available. Many of this group spend most o f their
time on farmwork during busy seasons like planting and harvesting and are
therefore classified by census as agricultural workers. During the rest of the
year they spend most of their working time on their industrial jobs and are
classified as nonagricultural workers.
Mr. C u r t i s . Thank y o u .
Chairman P a t m a n . Mr. Mills.
Mr. Mili s. Mr. Chairman, as I understand the President’s economic
message and his budget message, the view is expressed that the objec
tives of the Employment Act will be carried out and accomplished in
the calendar year 1957.
In other words, there will occur on the basis of fixed or relatively
stable prices an increase in gross national product of 3 or 3% percent
which is the figure that we normally say represents the growth from
year to year necessary to carry out the objectives of the Employment
Act. Am I right in concluding from the statements that each and
all of you have made this morning that there is some serious doubt
that gross national product will increase by 3 or 3y 2 percent in 1957
over 1956 on the basis of fixed or relatively stable prices ?
I have raised the question because I have been concerned over the
statements, particularly those that have been made with respect to
the increase in the labor force that will be employed, and increase
in investments and plant expansion, and inventory accumulations,
consumer demand, and prices of farm products and income received
by farmers.
You have said that the investment in plant and equipment, Mr.
Gainsbrugh, and inventory accumulations, will not supply the im
petus which apparently is needed for that degree of growth in gross
national product. You have said that the consumers will not react
in 1957 as they did in 1955 to supply the lead. That is the expansion
that occurred at that time and it was apparently needed at that time
to bring about the increase in gross national product.
As I understand, Mr. Wells, even though the situation with respect
to farmers may be more favorable in 1957 than 1956 it will not be so
favorable as to supply the leadership in attaining a 3- to 3 % -p e r c e n t
increase in gross national product.
As I understand from your statement with respect to Federal, State,
and local expenditures, perhaps that situation is more favorable than
any of the others discussed by these gentlemen. In all probability,
then, Mr. Paradiso, I must conclude that if a gross national product
increase of 3 or Sy2 percent will occur in 1957 over 1956, the expansion
generating that increase must come from Federal and State and local
expenditures.
Now, am I justified in that conclusion?
2 Primary job classification is based on the greatest number of hours worked during the
survey week.
144
ECONOMIC REPORT OF THE PRESIDENT
Mr. P a r a d i s o . Congressman, I think that you have to keep in mind
the developments since the middle of the year. When you talk about
comparing 1957 with 1956, we have already exceeded the gross national
product for the average of 1956 by something like 3 percent roughly,
although in terms of real gain, that is, eliminating the price rise in
the fourth quarter of last year compared with the year as a whole, we
are up 1y2 percent. So let us start with that.
This means that we have to consider, from indications as developed
here at this table, how much more gross national product we can
expect to result in a 3- or 3%-percent increase for 1957 as a whole com
pared with 1956.
All the statements around this table seem to indicate modest in
creases, small increases from the fourth-quarter rate. The Federal
Government purchases, as I have indicated, would show a small rise
from the fourth-quarter rate. That is $1 billion in 1957, compared
with the fourth-quarter annual rate.
The consumer purchase statement seems to indicate a small rise.
Business-investment programs do not level off in the fourth-quarter
rate but indicate a small rise. You do not need too many of these small
rises to yield a total for 1957 which would be close to a 3-percent rise
over 1956, particularly in view of the fact that we have already gone
a good way toward approaching the 3-percent increase.
Mr. M i l l s . I s it your thought then that we are reasonably safe in
expecting a 3- or 3^-percent increase in gross national product in 1957
over 1956?
Mr. P a r a d i s o . Reasonably safe, viewing the trend as we see it now.
M r . M i l l s . We very shortly will begin to consider a budget request
that in order to be financed on the basis of existing tax rates will re
quire increases in personal income and corporate income that we have
translated into a 3- or 3^-percent increase in gross national product.
It becomes very important, as I view the situation, for us to be as
certain as we can as we look at the future, and always there are uncer
tainties, but as certain as we can as to what our revenues may be under
existing rates, in making these enormous expenditures for the Federal
Government. Just a slight error in our projection of increase in gross
national product could cause us to end the fiscal year 1958 in the red
rather than in the black. All of us know what that might do at this
particular time or under conditions similar to these today to economic
stability here at home.
Mr. G a i n s b r u g h . I would like to offer one comment if I may on
your general question.
I agree thoroughly with the statement that Mr. Paradiso has made
that it is the summation of small gains in all sectors of the economy
that may v e r y well give us a higher level of national economic activity
in 1957 than in 1956. In a sense we do not want a repetition of the
explosive forces in 1956 because those explosive forces in 1956 gen
erated inflationary pressures, as Mr. Clague has indicated. However,
there was implicit m the line of analysis that was presented, a thesis
that possibly we needed increased Government spending to maintain
a high level of activity. I wanted to depart from that point of view.
I think we have built up a case here this morning which indicates a
continuation of high-level activity or the probability of a continuation
of high-level activity throughout the year.
ECONOMIC REPORT OF THE PRESIDENT
145
I do not believe that greater governmental spending is needed at
this particular moment to buttress the economy. And there is always
the alternative of fiscal and monetary policies other than governmental
spending that can be stimulative in character. We can ease the tight
ness in the credit stream, if that is required. We can bring more
activity into being in the home-building field than we have permitted
difring the past year. That sector has been affected by monetary
policy.
There is also the possibility that if corporate taxes, for example, are
oppressive or excessive or inimical to further capital investment, tax
reductions can be just as stimulative to the economy as increased gov
ernmental spending. I did want to make that reservation of mine
clear.
M r . M i l l s . I am merely asking a question for information. Are
you saying in part that it is not necessary for the Congress to appro
priate more money for fiscal year 1958 than we appropriated in fiscal
year 1957 to buttress the economy ?
Mr. G a i n s b r u g h . I f that is the sole purpose of the appropriations,
yes, I would say that I am arguing against an expansion of budgetary
expenditures for purposes of strengthening or holding up the economy
with the thought that there might be tapering off or slowdown in
economic activity.
Mr. K a t o n a . I would like to agree with your initial statement. I
believe that from December of 1956 to December of 1957 there is little
chance for a 3 percent real increase in gross national product if Fed
eral expenditures do not increase.
Mr. C l a g u e . It is not appropriate for me to talk about Federal
expenditures, but I would like to call your attention to one area which
I did cover in my statement. That is wages and salaries.
You will notice that deferred wage increases are already written
into contracts of 5 million workers. Half of these range from 6 to 8
cents an hour, which is about 3 to 4 percent. In construction, the
largest number of increases range about 9 to 11 cents per hour, which
would also be about 3 or 4 percent.
It is hard to imagine that the new contracts that will be negotiated
in 1957 by unions and management will be any less than that when
they come up for renewal this year.
Now, I do recognize, in making this statement, that wages are a
cost to the employer, and they may be shaving profits as Mr. Gains
brugh indicated. But if you start out with the assumption that there
will be a businessman’s demand that will keep these people at work, I
would foresee a consumer demand arising out of this which would be
at least sustained along previous levels. Consequently, if these con
sumers spend, and Mr. Katona indicates they may, they will certainly
create a demand of a private character, and nongovernmental char
acter, which will be very important.
This is not a forecast, but this is just an indication of one segment
of expansion of demand that is likely to occur.
Mr. M i l l s . Your statement generally raised the thought in my
mind that you were expecting that we would have some inflationary
increases in prices in 1957, as a result of the wage increases. Of
course, if we have sufficient inflation in 1957, we can expect that in
crease in receipts of Government, perhaps, that are needed to finance
146
ECONOMIC REPORT OF THE PRESIDENT
these expenditures that are contained in this budget. I had hoped we
would be able to do it without the necessity of further inflation.
That is all, Mr. Chairman.
Representative K i l b u r n . As a new member of this committee I
stand in awe of so many eminent economists and I am somewhat
hesitant in proposing questions to you.
As I understand the President’s state of the union message, he
suggested that increases in wages and prices only follow increased
productivity. I presume that means not only the individual worker’s
productivity but the general increases resulting from improvements
m plant and equipment.
Do you see any hopes of halting inflation by that method ?
Mr. C l a g u e . Would you like me to try that, Mr. Congressman?
Representative K i l b u r n . Yes, please.
Mr. C l a g u e . The President’s statement did indicate that for the
economy as a whole, productivity is the one way in which you raise
the standard of living. That is to say, if you pay higher wages, or
raise prices to the consumer, and that is the sole method of increase
in the gross national product, or if there is no productivity to match
the wage increases, then obviously wages and raw material costs
convert into prices and prices go up.
Now, on the other hand, productivity can mean a cut in the costs
because the employer is using less labor to produce the same amount
of product. Consequently, we could get a rise in the standard of
living due to this productivity. That is a truism.
Now, how this will work out in any one year is not very certain.
Our figures on productivity for the most recent years are not very
good, as I explained so fully in my statement. They do indicate that
1956 was not a very good year from that point of view. On the other
hand, 1954 and 1955 were. What the outlook is for 1957, I am not
sure. But it is clear that unless we get a moderately good increase in
productivity, answering Mr. Kilburn and Mr. Mills, men of course it
might take the form of price increases which would give you the esti
mated gross national product but not in real terms.
Did I answer your question, Mr. Kilburn?
Representative K i l b u r n . I am impressed by these figures and the
way in which all of you follow these matters so very closely. I am
wondering whether any of you think that the recommendations of the
President to stop inflation have any chance of really prevailing.
Mr. G a i n s b r u g h . I have a different view about the basic causes of
the inflationary pressures of the past 12 to 18 months from some of
my other colleagues here, apparently. They place their primary em
phasis upon the cause of the bulge in prices as being demand. I
am inclined to agree that part of it did stem from the demand side.
I am of the opinion, however, that the inflationary pressures of the
past 12 to 18 months are essentially different from the inflationary
pressures o f the first postwar decade. Those stem now largely from
the pressures of an expanded money supply upon the price structure.
The inflation of the past 12 months came in a period of a balanced
budget and of tight money. The pressures came primarily from the
cost side in my opinion rather than from the demand side. The basic
cause of that cost pressure was wage increases in excess o f the gains
in output per man-hour.
ECONOMIC REPORT OF THE PRESIDENT
147
To come back to your basic question, I think it is a question that
concerns the whole Western World and not just the United States
alone. Until such time as we do get a recognition that wage increases
in excess of productivity are harmful to the national interest, we will
not have met the question of sustained inflation arising from the
cost rather than from the demand side.
The President has singled out the question of the wage-cost push,
or wage inflation if you like, as being a question of dominant concern
in 1957.
There is one further corollary to this, if I may develop it. That is
that wage inflation may not be long sustained in character. The infla
tion stemming from the huge deficits of World War I I ran a long
course. But wage inflation can push huge sectors of our population
out of the market place rather quickly. In so doing, the price we pay
for wage inflation would not be sustained inflation over a prolonged
period of time but increasing unemployment. I do not foresee that
as the picture for 1957. I am looking at this over a longer period of
time.
Representative K i l b u r n . I think that is a very clear statement and
a. very instructive one to me.
It seems to me that the big unions and the big labor leaders are in
exactly the same position as the big corporations in that they are
competing with each other. Just as soon as one union gets a wage
increase, then the next union or the head of the next union wants to
make as good a showing, and so he goes after an equal or greater
increase. That same thing is true of course of big corporations. They
want to make just as good a showing in earnings. It is difficult to see
where to stop it.
Mr. K a t o n a . May I say it is not only the unions. According to
consumer surveys, the great majority of the Ajnerican workers are
convinced that they have a right to expect year by year or every 2 years
some wage increase. This is today’s psychology which contributed to
the prosperous times in the last 10 years. I think it will be very
difficult to change this very strong demand from the rank and file.
Therefore, I personally expect further wage increases and some
further price increases.
Representative K i l b u r n . Most of the union members expect an
increase every year and presumably, then, they want to increase
inflation every year.
Mr. K a t o n a . People are not quite as consistent, Congressman, and
they do not realize that.
Mr. G a i n s b r u g h . I did not want my comments to be misinterpreted
in that respect. I was speaking of the relationship between wage
against productivity. I f this economy continues to grow more efficient
year after year and that seems to be the record, then it is possible, as
Mr. Katona has indicated, for wages to rise and living standards to
rise. But they must be commensurate in the main, and not in any
given year, but in the main with the increased efficiency of the economy.
Where we get wages outstripping the gains in productivity, then we
begin to get imbalances in the economy which can be harmful to the
national interest.
Representative K i l b u r n . They should get wage increases under
those conditions.
148
ECONOMIC REPORT OF THE PRESIDENT
Chairman P a t m a n . Mr. Gainsbrugh, did you indicate a while ago
that you would favor a reduction in taxes this year to stimulate the
economy ?
„7'.
Mr. G a i n s b r u g h . I did not. I said, however, that in the eyent
stimulation of the economy did become necessary there were various
mechanisms that were open to us over and above an increase in gov
ernmental, spending. One such mechanism might be a review of our
whole tax system against this particular framework, if I may develop
it.
Chairman P a t m a n . Did you notice in the Wall Street Journal this
morning that United States Steel declared a quarterly dividend of 75
cents?
Mr. G a i n s b r u g h . No; I have not read that.
Chairman P a t m a n . I wanted to invite your attention to it for this
reason: It has been suggested here that employment cost or wages
were such an important factor in inflation. This statement in the
Wall Street Journal discloses that for the fourth quarter employment
costs aggregated $434,188,236, and the products and services sold dur
ing that same quarter of 1955 was $1,093,747,000. The employment
cost amounted to 40 cents on the dollar.
In the fourth quarter of 1956, a comparable period, the employment
cost was $471,795,000, and the products and services sold was $1,194,587,925, or still about 40 cents out of the dollar.
How do you reconcile that with the statement that the employment
cost was the cause of inflation insofar as United States Steel was
concerned?
Mr. G a i n s b r u g h . My comments were directed to the ^national pic-,
ture rather than to any individual instance. 1 think at all times,
and in every stage of the cycle, you will find some companies that are
benefiting and that are above the average, and others that are below
the average.
But if you will look at the data that you have in your Economic In
dicators you will find that corporate profits in the aggregate in 1956
were if anything, a little bit below where they were in 1955.
Chairman P a t m a n . That does not apply to United States Steel.
Mr. G a i n s b r u g h . I do not believe it did, from the figures that you
have read. I am, however, dealing with the corporate economy as a
whole.
Chairman P a t m a n . I understand that. I just invited your a t
tention to this one particular case.
Mr. G a i n s b r u g h . Y o u will find that national income went up rela
tively and that wages went up relatively, but that profits after taxes
were declining rather than rising in their share of the national income.
Again, in the Economic Report, you will find that the rate o f return
for the corporate entity both on sales and on equities was lower in
1956 than in 1955.
Chairman P a t m a n . I think Mr. Katona made a very important
statement a while ago when he said that the small savers were not
induced to save by reason of the interest return. As they become larger
they may become more interested.
In other words, I assume, however Mr. Katona, that the average
saver, being a small saver, is not influenced too much by the interest
rate. Is that a fair assumption from what you stated?
Mr. K a t o n a . I would say so; yes, sir.
ECONOMIC REPORT OP THE PRESIDENT
149
Chairman P a t m a n . Do you agree with that, Mr. Gainsbrugh ?
Mr. G a i n s b r u g h . I would have to, on the basis of Mr. Katona’s
research. _ I do think, however, that there can be a shift in the charac
ter of savings as a result of the change in interest rates. That is, in
the composition of savings and movement from one type to the other.
Chairman P a t m a n . Let me ask you this question. Suppose interest
rates go up to 4 or 5 percent? Will the savers accept that and say,
“ That is enough for me and I do not want to look around for an op
portunity to invest my money and make more out of it” ?
Would it be against the national interest to have an interest rate
such that the saver would be satisfied with the return he received and
thereby have no inducement to look around and try to invest in private
enterprise and become a part of the private-enterprise system?
What do you think about that, Mr. Katona ?
Mr. K a t o n a . That is hard to say. I personally would not consider
it bad if more medium savers would invest in common stocks. You
can provide impetus to our economy by investing in common stocks
by savers who had invested in savings and loan shares.
Such shifts may occur. On the whole I would say that even with
4- or 5-percent interest rates, savers would not be induced to have much
more, except a few people, and the bad effects of such an increase,
especially on mortgage financing, would outweigh the advantages
obtained from increased saving.
Chairman P a t m a n . Y o u think the increases are detrimental to the
economy rather than helpful?
Mr. K a t o n a . An increase of interest rates on savings to 5 percent
would definitely, in my opinion, be detrimental; yes.
Chairman P a t m a n . What about 4 percent?
Mr. K a t o n a . I believe that we should have low interest rates and
I personally think, though I cannot base it on scientific findings, that
a 4-percent savings rate is likewise higher than I would like to see it.
, Chairman P a t m a n . It is higher than you would like to see it?
Mr. K a t o n a . That is right.
Chairman P a t m a n . This is consistent with your belief that the
average saver, who, of course, is a small saver, is not attracted by the
interest rate?
Mr. K a t o n a . He is not sufficiently attracted to save more because
saving has primarily other purposes, namely, to put away money into
safe reserve funds for future spending or for emergencies and not to
provide him with additional income.
Representative K il b t t r n . When you say savings, d o you mean
interest on savings accounts?
Chairman P a t m a n . Yes; I do.
Mr, K a t o n a . That is what I meant, too.
Chairman P a t m a n . Mr. Paradiso, do you agree with these gentle
men on what they said about savings and interest rates on savings?
Mr. P a r a d i s o . Well, I do not have any other evidence than some
o f the information developed by Mr. Katona in his own surveys. On
the basis of that, and froija my own personal observation, it does ap
pear that the consumer is not unduly affected by changes in interest
rates. There are certain groups that are. I will agree, generally,
with the foregoing statements.
Chairman P a t m a n . What about you, Mr. Clague? Do you agree
with Mr. Katona and Mr. Gainsbrugh?
150
ECONOMIC REPORT OF THE PRESIDENT
Mr. C l a g u e . This question does not grow out of any of my present
work, but I do recognize the way in which interest payments enter
into the average consumer’s budget; for example, when he buys a
house he commits himself to pay an interest rate in borrowing the
money.
Now, a certain amount of the saving that occurs in the country is a
kind of compulsory saving. I am saving compulsorily every month,
when I have to pay back a certain amount of money which includes the
interest I am paying on a loan from the mortgage company.
In that sense, I think economists have long recognized that the small
saver is generally a person who saves partly because he wants a house
or he wants a car or other specific things, and some of his savings
consist in committing himself for those purchases. Then he pays
back money which becomes reloanable later on.
Now, I think in that sense Mr. Katona is right. The small saver
does not quit buying a house because the interest rates change. He
would like to get the house and he will try to get it if any money,
becomes available to him.
Chairman P a t m a n . I am afraid we do not have our definitions
straight. You are talking about the saver whom I would consider
more or less of a captive saver. He is compelled to save.
Mr. C l a g u e . That is right. It is compulsory.
Chairman P a t m a n . We are talking about the person who volun
tarily saves. The question is: Will the voluntary saver be induced
to save more by reason of a little higher interest rate, or does the,
interest rate enter into the question a great deal ?
Mr. C l a g u e . I think I agree with Mr. Katona on that. I f he did
not borrow the money to buy a house he would set it aside to buy a
house. I f he has the objective of buying a house, the answer is that
the rate of interest does not influence him too much in that decision.
I think most economists agree with that.
Chairman P a t m a n . Would you like to comment on that, Mr. Wells ?
Mr. W e l l s . I really should not, because you people have simplified
this too much for me. You are talking here mostly about the ordinary
American who feels he does well to make a living and put aside a
certain minimum amount for security. There, I agree with everything
that has been said about the fact that small changes in interest rates
are of secondary importance.
However, I also feel, without being a savings statistician, that the
amount of savings in the United States that accrue from this source
are very small relative to the amount that accrues from other sources.
I f you are talking about the average saver in terms of numbers,
which we are now talking about, that is one thing. I f you are talking
about those individuals and institutions who account for the larger
amount of dollars actually saved, I would suggest that profit and
interest rates are extremely important,
Chairman P a t m a n . Mr. Curtis, would you like to ask a question ?
Eepresentative C u r t i s . I did not intend to enter this savings argu
ment, but I must make this comment. I know, as I serve as a director
in a savings and loan company and have done so for many years, that
we have had to increase our interest rates in order to get the money in.
I also suggest that one reason savings and loan associations have
become such a repository for the small man’s savings in place of the
ECONOMIC REPORT OF THE PRESIDENT
151
savings bank has been to a large degree the interest rate. So in that
respect, at any rate, looking at it from the institutional standpoint,
we are pretty much convinced that the interest rate does make a
difference.
I have one other comment on that too. I think you would agree that
the worst thing that can happen to a small saver is inflation. I
wanted to pick up a question that was posed to Mr. Gainsbrugh and
1 know he wanted to make a further answer. I want to anticipate
what the answer might be so that he can comment on that. In this
business of tax reduction, if I get to the point that you were making,
if the actual funds would be free from tax reduction and went into
investment capital as opposed to consumer spending, then it would be
deflationary or it would resist the inflationary trends. Is that about
right or am I wrong?
Mr. G a i n s b r u g h . The point I was on the verge of developing was
that we are shifting from the highly stimulative economy of the first
postwar decade to the highly competitive economy of the second post
war decade.
I felt it was relatively easy for all forms of business, small business
and large, to obtain funds for expansion during the first postwar de
cade. In part it was because the banks were largely depositaries for
Government bonds and welcomed all borrowers; partly because they
had built up reserves during World War II, and in part because
excess-profits taxes were eliminated and that eased their problem
somewhat.
But this is completely different environment now. The banks are
loaned up and credit is difficult rather than easy to secure. It may
very well be that corporations in the years ahead will have to look far
more to internal sources for expansion purposes and to the traditional
sources of long-term capital, the equity markets, than they did in the
first postwar decade.
That leads me to the basic point that I wanted to stress. Cor
porate taxes, high as they were, may not have been oppressive in the
stimulative environment of the first postwar decade, but at some future
period of time they may be. They may be the chief restraining factor
in that there is not sufficient funds available for plow-back purposes
within the corporate entities.
Eepresentative C u r t i s . I happen to share your views on that and I
would like to make this other comment: You said “ for expansion.”
I would pose this situation; that it is to a large extent to maintain
our present position due to the fact that our depreciation accounts do
not have enough in them at the inflated cost to even replace the capital
outlays of plant and machinery.
As I see it, we have been in a period when these companies have
had to do a lot of replacing. They find that their reserve funds are
just not adequate under inflationary costs. So they have to get addi
tional capital somewhere else. Would you say that is a fair statement ?
Mr. G a i n s b r u g h . That point is well taken and again I think, to fur
ther elaborate on it, through recourse to certificates of necessity, some
of the inadequacies of the treatment of the depreciation were corrected.
Now, we are getting less and less of the accelerated amortization
through the certificates of necessity. We have had some changes in
tax law that are favorable to a more realistic treatment of depreciation.
But I still think that it remains true for the small- and medium-sized
firm with a heavy fixed investment per dollar of sales.
152
ECONOMIC REPORT OF THE PRESIDENT
That is particularly so because of the large price rises of the past
12 or 18 months in equipment and construction costs. They find their
depreciation reserve inadequate when it comes to replacement time.
Representative C u r t i s . I personally dislike the use of the certificates
of necessity because of the inequities that exist there and also the
Government actually can direct the course of where the investment
capital will go.
Although, as you say, it has eased it. It has done it, in my judgment
at any rate, in a very inequitable way, particularly with relation to
small- and medium-sized businesses.
Mr. G a i n s b r u g h . That was not meant to be an endorsement of cer
tificates of necessity. It was rather a review of the factors at work.
One of those was accelerated amortization under certificates of neces
sity which did ease the problem of inadequacies of depreciation for
the steel industry, among others.
Representative C u r t i s . I have one other comment. It seems to me
that the President’s Economic Report and the comments of the panel
emphasize that the shortage in credit is not in the consumer dollar
as much as it is in the investment dollar.
I would say that is so. This is the thing I wanted to pose in the
home-building field. Although we see a consumer dollar tightening,
it has been tightened because of the shortage of building materials and
glass and cement and steel and so forth, which are short, in turn, be
cause there has not been enough investment capital for the expansion
of production for those basic materials. Would anyone care to com
ment on that, either agree or disagree ?
Mr. G a i n s b r u g h . I do not think it was the shortage of materials
that held back the home-building industry iji past months. I think it
was primarily the deterioration m their competitive position so far as
available funds were concerned.
The housing starts figures suggest the weaknesses are in the FH A
and GI area rather than in the conventional mortgage area where we
did have a free interest rate at work.
Representative C u r t i s . I know that the Government actually did
put a clamp on home financing. But I am suggesting that one reason
they did that, and one of the few reasons I could go along with it
although I worried about it, was the fact that there seemed to be the
shortage in these basic materials. I f they had allowed that credit to
continue, the prices of these basic materials would have gone up beyond
the point they did go up.
That is the syllogism I was trying to pose.
Mr. G a i n s b r u g h . I accept that. I think the picture is quite dif
ferent now from the picture of 12 to 18 months ago. I am hopeful that
in the light of what has been said this morning about some of the forces
that will be tapering off as 1957 moves along, that housing can become
a sustaining if not expansionary force in terms of timing.
It would be most desirable in terms of timing if that curve turned
upward in the closing half of 1957.
Representative C u r t i s . Certainly the demand is there, as Mr.
Katona pointed out. Thank you.
Chairman P a t m a n . Mr. Ensley, would you like to ask any ques
tions?
Mr. E n s l e y . I have a couple of questions on which I would like to
see if I can get some clarification.
ECONOMIC REPORT OF THE PRESIDENT
153
Mr. Clague, with respect to the various indexes that you publish,
particularly the Consumer Price Index and the wholesale index, do
you believe that they are accurate measures of price movements?
To put it another way, are they a good measure of inflation ?
Mr. C l a g u e . We make these figures, both the wholesale prices which
are business prices and the Consumer Price Index which is consumer
prices at retail; and we try in every way possible to make those in
dexes accurate.
I have published a number of statements this year calling attention
to the steps we take to do that. Now, I would have to add that
there are certain kinds of changes in value which we have a hard time
taking into account.
However, we do price automobiles for the constimer at the discount
that the consumer gets and not at the list price.
Mr. E n s l e y . Y o u are pricing what is actually paid, rather than
some list prices?
Mr. C l a g u e . That is right. We get from the automobile dealers
a report on what they are actually selling the cars for. We try to
take into account special sales also if they extend over a reasonable
period. We do not capture all of the spectacular discounts that are
available to consumers through special discount shops and stores
of that sort, but generally we pick those discounts up a little later
because the department stores compete.
We are now finding that for household appliances we are getting
plenty of discounts from list prices right in our department stores.
We include specialty stores, radio, television shops, and other spe
cialty appliance stores in our sample in order to find places where
discounts are taking place.
I would say in general that we get a very close approximation of
actual price changes. I f you will allow a few months to go by while
the competitive situation takes care of it, I would say that we catch
UP -
Mr. E n s l e y . T o what extent do you believe the recent price in
creases are the result of pent-up inflationary pressures that were built
up during World War II and Korea which are only now finding their
way into the indexes for one reason or another ?
Mr. C l a g u e . I say to a small extent that would be true. Our rent
index comprises about 5 or 6 percent of our Consumer Price Index.
Homeownership is a bigger item because roughly half of the wage
earners and salaried earners own their homes. But taking rent, for
example, there is still rent control in New York City and there are
still a few places in which rent is held down. Rent is still trying to
catch tip. As controls are relaxed, that small segment of our index
would reflect that rise.
Now, look in our chart No. 11—the last chart I presented to you—
which sketches these. The services have a definite lag also. That is
partly streetcar fares and public-utility prices which are regulated
by Government.
On the other hand, I would say that in 1956 the major change in the
index and the reason we moved away from stability was that food
prices no longer helped us.
For 4 years food prices declined and that offset the rises in these
rents and services and other factors on the industrial side. Then, in
87624— 57--- 11
154
ECONOMIC REPORT OF THE PRESIDENT
1956, food prices turned around and joined the others, and so our
index went up.
Mr, E n s l e y . Could I, Mr. Chairman, see if I can get the consensus
o f the five men on the panel here with respect to the outlook for 1957 ?
I f I understand your testimony correctly, I believe you would all
agree that 1957 in real terms would probably be better, without being
too precise as to precentages, than calendar year 1956.
Would anyone dissent from that? Apparently there is no dissent
from that. The second question is this: Would you not all agree,
from your testimony and the testimony presented, that we coula
anticipate a moderate price increase in calendar 1957 over calendar
1.956?
I gather that is agreed. What would you anticipate the price in
crease would be from the present levels and over the calendar year
1956 as a whole? Are we safe in saying that you would anticipate
some further price increase from present levels as well as from the
calendar year 1956 ?
Would anyone dissent from that generalization ?
Mr. C l a q u e . Let me say a word about our Consumer Price Index.
It is very much influenced by what happens to farm prices because
foods make up 30 percent of the weight of the average family budget.
So what Mr. Wells says about agriculture and agricultural prices
will have a great bearing on what will happen to our index. I am
quite sure that we will have continued rises m rents and services, but
what will happen to commodities is the question.
That, of course, includes all kinds of commodities, including cloth
ing and things of that sort. But the one that will have the most
influence on our index in 1957 is probably food prices. I f they remain
stable we will not do at all badly.
Mr. E n s l e y . In the light o f this prediction or forecast I want now
to refer to the President’s report where he said that of particular
importance in the maintenance of a prosperous economy is the re
sponsibility of leaders of business and labor to reach agreements on
wages and other labor benefits that are consistent with productivity
prospects and with the maintenance of a stable dollar.
My question is, How can we develop a mechanism by which leaders
of business and labor assume this responsibility? I wonder if Mr.
Gainsbrugh would like to comment on that?
Mr. G a i n s b r u g h . Let me go back to your first question while I
think about the second one. I think we have backed up price pres
sures already in the hopper as we enter 1957 that will be at work upon
the price structure in 1957.
There are increases at the wholesale price level that have not yet
materialized in the retail price index which will show up a 2-, 3-, or
4-month time lag.
I think again, the basic reason for the price pressures over and above
those that Mr. Clague has cited, is the fact that wages went up faster
than did productivity and, as a result, unit labor costs rose.
Over a long period of time, we find a very tight correlation between
the rise in unit labor cost of manufactured products and the subse
quent prices of those manufactured products.
There is one further comment: We have already been told about
the emerging wage pattern for 1957. These are almost always given
ECONOMIC REPORT OF THE PRESIDENT
155
in terms of major contracts that call for further increases in wages
in 1957. I have forgotten the figures that Mr. Clague gave us but
let us say they center around 8 cents more or less.
Mr. C l a g u e . 6 t o 8 cen ts.
Mr. G a i n s b r u g h . I f that is the pattern just these wage increases
alone are again on the verge above the probable gain in productivity,
if not at that particular point. Let us assume a 2 to 3 percent in
crease in national productivity and no new breakthrough in the wage
pattern for 1957.
We already have banked up wage increases that will be about equal
to the gains in productivity in 1957 unless the gains in productivity are
exceptional.
I do not think we have found an answer yet to how you deal with
this particular problem anywhere in the Western World. That is,
the problem of rendering our full-employment goals compatible with
price stability.
I am perfectly willing to concede that hortatory measures may be
no more successful in the future than they have been in the past.
The course of the economy reflects these pressures in the face of the
desires of the employer to hold down prices or of the employee to keep
wage increases consistent with productivity. At least this has been
the pattern so far.
I f I were asked to single out one approach that might be productive,
I would suspect it would have to be the educational process, singling
out this particular phenomenon for national attention, holding hear
ings as you are now doing in connection with the cost patterns, the
wage patterns, and the price patterns of our major industries, and
perhaps through that mechanism, exercising some degree of restraint.
The other approach that is hinted at in the President’s message is
through direct controls of one type or another—and these are not
specified or developed—as compared with the voluntary mechanism.
I am hopeful that through the educational process we can restore a
better balance between wages, costs, and prices than we now have.
Mr. E n s l e y . It is one of the most difficult problems currently facing
us.
Mr. G a i n s b r u g h . Yes, sir.
Mr. E n s l e y . Would it be permissible to insert at the end of Mr.
Paradiso’s statement some correspondence with the Secretary of Com
merce with respect to data underlying the President’s Economic Re
port?
Chairman P a t m a n . Without objection, that is so ordered.
The bankers use an expression, “ moral suasion.” Do you go that
far or do you just say “ education” ?
Mr. G a i n s b r u g h . I would use both.
Representative C u r t i s . Mr. Ensley’s line of questioning, particu
larly about these pent-up forces, raises some question in my own mind
on that agricultural picture.
I have not thought it out but I will be interested in your reply, Mr.
Wells, in regard to the relationship of Government subsidies in our
agricultural economy. It was pointed out that we are experiencing
what amounts to pent-up forces that are now coming out in our na
tional expenditures.
Realizing that the price of agricultural goods does make up 30 per
cent of the budget, would you think that that is a type of pent-up
156
ECONOMIC REPORT OF THE PRESIDENT
force that is exhibiting itself as having inflationary effects now? I
have not thought it through and I am wondering if it has any bearing.
Mr. W e l l s . There are several observations I would like to make
partly to your question and partly to Mr. Clague’s comments. I did
try to make the point that the agricultural budget last year, this year,
and next year is partly paying the cost of pressures which were built
up during 5 years of decline in prices, that is, averaging it out.
Representative C u r t i s . That is what I am directing my question to.
Mr. W e l l s . It is a fact that over those years, for about 59 months,
prices were falling and they did give stability to the cost-of-living
index. Mr. Clague suggests that perhaps what happens to the cost-oiliving index during this year is more closely tied with farm prices
than with anything else.
I, of course, would have to differ with Mr. Clague. In the first
place, although about 30 percent of his budget is food, about 60 per
cent of that is not farm prices. The farmer gets about 40 percent of
the food dollar and that means that 18 percent of the consumer price
index is goods and services beyond the farm level that are associated
with food.
Representative C u r t i s . I have just a word of caution. I, of course,
have heard that presentation but I have also noticed that a great deal
of the processing of foods is now being done on the farm, more particu
larly in our large mechanized farms, or right nearby. This actually
gets directly into the farm economy itself. But essentially your point
is well taken.
Mr. W e l l s . I personally think that the rise in the price of the farmfood commodities from the level that was prevailing in December will
be quite modest indeed. I think we have had most of our rise in farm
prices during the last 12 months.
I would place more emphasis than Mr. Clague does on this auto
matic round of wage increases plus the negotiated wage increases
which will accompany it as an inflationary factor during the coming
year.
I am also more interested, I think, than our discussion here has so
far led us, in the kind of consumer and business psychology that is
going to prevail at the end of this year than I am with the actual
level of averages for the year.
I do not know whether I make myself clear or not. We live through
time and what I am interested in is, How are we going into 1958? I
think there a great deal depends on Mr. Katona’s consumer.
Now, I happen to believe that Mr. Clague’s index is an excellent
index, but there is one type of inflationary pressure that Mr. Clague’s
index does not measure and that is the desire of the American con
sumer to upgrade his standard of living. I f American consumers all
decide they want pushbutton, two-tone automobiles with tubeless tires
instead of secondhand cars, and if half of them decide to buy deep
freezes or color televisions, the increase in buying pressures which
flow from such optimistic consumer and business attitudes is, I think,
one of the chief factors in such situations as developed in 1955 and
1956.
Now, in 1954, for the first time American business spent more money
advertising in a year of falling consumer demand than they had spent
the previous year. They conditioned the American consumer to want
more, or so my advertising friends claim. These questions as to what
ECONOMIC REPORT OF THE PRESIDENT
157
influences consumer psychology interest me just as much as what influ
ences the businessman’s expectations and capital expenditures. What
kind of a frame of mine are the American consumer and the American
businessmen going to have going out of 1957 into 1958 ?
Representative C u r t is . Thank you.
Mr. C la g u e . I have just two points. Mr. Wells and I are not in
basic disagreement at all. I would like to clarify what I meant when
I said food was important in our index. Food happens to move
seasonally and it swings up and down during the year. We will have
rising food prices until we get the summer markets and then those
prices fall.
In the meantime, however, food may be the one factor that will make
our index move more in the short run, that is, in the spring of 1957*
I have assumed all along that the other factors, rents ana the services
and perhaps certain other commodities, will increase slowly as they
have been doing.
But he did not give me that assurance. I have one last point. I
want to make sure that I get it clear to the committee. Mr. Wells said
it correctly but I want to emphasize it so there will be no misunder
standing.
Our index does not put into the price of an automobile the rising
standard of living that Mr. Wells was talking about. He said it
correctly; we factor that out. A rising standard of living means more
purchasing power by consumers, but our index does not show what
that is.
We have not designed it to do that. We designed it to show the
rising costs of the same kind of market basket and, as far as possible,
the same quality of goods.
Mr. K a t o n a . Mr. Chairman, may I make a short remark on interest
rates? Mr. Curtis has correctly pointed out that the savings and loan
associations have profited substantially from the fact that they paid
higher interest rates than other savings mediums.
Now, that is a differential effect and does not change the fact that the
average saver does not save more if interest rates go up. We have
at the present time a rather unfavorable differential effect.
For most Americans the most popular and most favored savings
medium is still United States Government savings bonds. United
States savings bonds, which had a relatively favorable interest rate
over 10 years, are now in an unfavorable position as compared to other
savings mediums.
Secondly, what is missing there is “upgrading.” People want some
thing new and something added, and savings bonds have not changed
over the past few years. I personally believe that some people save
less because their favorite medium is less attractive than, differentially
speaking, it had been 5 years ago.
One question for the Congress of the United States, I believe, is
whether that should continue or whether some changes in the interest
structure or tax privileges of United States Government savings
bonds should not be introduced.
Chairman P a t m a n . I just want to ask you, Mr. Wells, to place in
your testimony, if you please, the month-by-month figures for farm
prices during the 59 months that you mentioned farm prices went
down, from February of 1951.
158
ECONOMIC REPORT OF THE PRESIDENT
Mr. W e l l s . I w ou ld be g la d to d o that.
(The material referred to follows:)
, ,
,
Prices received by farmers prices paid or parity index and parity ratio, United
States by months February 1951—January 1957
,
[1910-14*100]
Date
Prices
received
index1
Parity
index 2
Parity
ratio a
277
281
284
284
113
311
312
285
285
288
290
289
290
290
288
287
288
100
1951—February.,
March____
April..........
M ay..........
June..........
July...........
August___
September.
October___
November.
December _
1952—January. __
February. _
March.......
April.........
M ay_____
June______
July...........
August___
September.
October__
November.
Dccenrber1953—January
February..
March.......
April.........
M ay..........
June_____
July...........
August___
September.
October___
November.
December.
294
291
292
297
303
306
299
293
291
292
291
290
292
294
275
269
267
260
263
257
258
255
256
255
282
281
284
281
282
280
280
277
278
279
277
276
277
278
111
110
108
106
104
103
103
105
107
104
101
101
101
100
101
102
102
101
Date
1954—January - ..
February..
March.......
April.........
M ay..........
June.........
July..........
August___
September
October....
November.
December .
1955—January. ...
February..
March......
April_____
M ay..........
June..........
July..........
August___
September.
October....
November.
December1956—January .....
February..
March......
A pril.____
May..........
June..........
July..........
August....
September.
October....
November.
December _
1957—January.
Prices
received
index1
258
255
257
255
247
246
248
246
214
242
246
242
241
235
229
226
227
228
235
242
247
244
237
236
234
234
237
Parity Parity
index2 ratio3
284
91
91
90
91
90
281
280
279
279
279
87
87
86
284
284
85
S7
282
282
281
280
279
280
279
278
281
280
282
284
286
286
287
288
287
287
289
290
292
86
86
86
85
84
83
84
82
80
80
80
8!
81
83
S5
86
85
82
82
82
81
82
82
1 Index of prices received by farmers.
* Index of prices paid by farmers for commodities used in farm production and farm family living, includ
ing allowances for wage rates paid hired farm labor and interest and taxes per acre of farm real estate.
3 Ratio of index of prices received to index of prices and cost rates paid by farmers.
Source: Agricultural Marketing Service.
Chairman P a t m a n . Would it be asking too much of you or should
I ask Mr. Clague to do this: To take the information that you have
and ascertain what the cost of living index would have been!had farm
prices gone up during that period of time as industrial prices went
up. (Seep. 598.)
!
Mr. W e l l s . I think Mr. Clague and I could come to an agreement
on that. That is on the assumption, Mr. Chairman, that nothing
else would have changed.
Chairman P a tm a n . Without objection, the committee will stand
in recess until tomorrow morning at 10 o’clock in this room.
(Whereupon, at 12:20 p. m., the hearing in the above-entitled
matter was recessed to reconvene at 10 a. m. Thursday, January 31,
1957.)
JANUARY 1957 ECONOMIC REPORT OF THE PRESIDENT
THURSDAY, JA N U A R Y 31, 1957
C ongress
of t h e
J o in t E
U
n it e d
co n o m ic
S tates,
C o m m it t e e ,
W ashington,) D . 0 .
The committee met at 10 a. m., pursuant to recess, in room P-63
of the Capitol, Hon. Wright Patman (chairman of the joint com
mittee) presiding.
Present: Representatives Patman, Bolling, Mills, Talle, Curtis, and
Kilburn; Senators Sparkman, O’Mahoney, and Watkins.
Present also: Dr. Grover W. Ensley, executive director of the joint
committee, and John W. Lehman, clerk of the joint committee.
Chairman P a t m a n . The meeting will come to order.
We are all aware of the upward trend in prices. A panel of dis
tinguished economists told this committee yesterday that prices are
likely to continue upward during the coming year.
The Economic Eeport expresses concern about this situation. The
President indicated the limitations of Federal monetary and fiscal
policy in maintaining economic stability under present circumstances.
Much of the President’s report is in the form of exhortation to leaders
of business and labor to exhibit statesmanship in their wage negotia
tions and pricing policies.
Today we have assembled a panel of economists to discuss price
changes and policy implications. We have submitted to them ques
tions as to the amount and nature of recent price changes, factors in
price changes, and implications for policy. Every attempt has been
made to secure a well-balanced group of witnesses.
In order to expedite the discussion the Chair will recognize each
of the 8 panel members for purposes of making an opening statement
of 8 minutes, summarizing the views of the witness. We will proceed
without interruption through the opening statements, following which
there will be general discussion by members of the committee and the
panel. The committee staff will notify each speaker when his 8 min
utes has expired.
Our first witness this morning is Mr. Leon H. Keyserling, economic
consultant, and former Chairman of the President’s Council of Eco
nomic Advisers.
Mr. Keyserling, you are recognized for 8 minutes.
STATEMENT OF LEON H. KEYSERLING, CONSULTING ECONOMIST
Mr. K e y s e r lin g . Mr. Chairman and members of the committee, we
should all be concerned about price rises which, during the past 12
months, have been more than 4 percent for industrial prices, about 3
159
160
ECONOMIC REPORT OF THE PRESIDENT
percent for consumer prices, and in the case of such items as steel
more than twice as much. At the same time, we should not confuse
this situation with the wartime overall inflationary situation; and be
cause the two situations are being confused, we are doing the wrong
things in the wrong places in our national economic policies. We are
inflating the parts of the economy that are inflated, deflating the parts
that are deflated, sacrificing our great national objectives which we
must achieve for world security, and neglecting to fight inflation in
reasonable ways.
In an overall economic inflation such as during World War I I there
were shortages of everything. The economy was growing at more than
a normal rate. Because there were shortages of everything, all prices
were going up. The proper approach in those times was to use the
classic anti-inflationary weapons all along the line.
The situation today is entirely different. There are some shortages,
but there are lots of surpluses. Some prices and incomes are going up
too fast, other prices and incomes are going down much too fast. We
have mixed inflationary and deflationary forces operating at the same
time.
To illustrate, the rate of our economic growth is slowing down, and,
as underscored by the Symington report of 2 days ago on airpower and
by the statement in the New York Times today that the Russians in
recent years have expanded their industrial output by 10 to 11 percent,
the slowdown of our rate o f economic growth is real and serious. We
grew by more than 41/£ percent annually in real terms during the first
few years after World War II. We slowed down to 2.6 percent an
nually during the last 4 years. During the past 12 months we have
grown only by 2.5 percent. The consensus or unanimity of witnesses
yesterday was that our real rate of growth would be even slower in the
next 12 months. Therefore, we are faced with this dilemma: I f we
apply to the economy the repressive measures which are desirable in
an overall inflationary situation, we are saying that we can afford and
should try to grow only one-fifth or one-fourth as fast as the Russians.
Second, the selective inflationary trends of today represent distor
tions, rather than overall inflation. I have on page 6 of my statement
the details of this. I don’t have the time to give all the tacts in my
opening statement.
In summary, the essence of the recent situation has been an expansion
of an investment boom in plant and equipment at more than a sustain
able rate relative to the growth of consumption. This has been under
pinned during the last 4 years by an increase in certain types of in
comes, big business profits, dividend income, interest income, at a more
than sustainable rate, and a progressive falling behind in the under
pinning of consumption which rests primarily in wage payments and
farm income. We cannot cure these distortions by pouring oil on the
flames of inflation where it exists and water on the embers of de
flationary sectors. Yet current national economic policies are directed
toward these purposes.
For example, first of all there is the hard money policy. The hard
money policy has practically no effect whatsoever upon the relatively
excessive rate of growth o f investment, or the relatively excessive
growth o f prices and incomes in some parts of the economy. The very
large companies which have been contributing to the investment boom,
ECONOMIC REPORT OP THE PRESIDENT
161
which has been relatively too fast, are not affected by the hard money
policy. They finance out of their own resources, out of depreciation re
serves, and out of the price structure. They finance in advance out of
the consumer before they build their plants, and after they build their
plants they use the increased productivity to be paid again for the same
plants, and then they use the fact that wage increases come along at
that time as a justification for still further price increases.
In contrast, the hard money policy is pouring water on the embers.
It is deflating farm income further by making the financing of crops
harder. It is forcing out the marginal small-business man. It is
decreasing the ability of consumers to buy durable goods. As a matter
of fact, during the past 12 months, consumer buying has increased only
by 2 percent m real terms, or even less than the extremely low 2%
percent rate of growth in the overall economy. This has not been
due to excessive saving. It has been due to inadequate consumer
income, as I can elaborate when I have more time.
Third, the budgetary policies of the Federal Government have also
poured water on the fuels of inflation and failed to deal with the bottle
necks and shortages which are inflationary in the short run, and de
flationary in the long run. We hear that the new budget is the biggest
budget m peacetime. Realistically measured, it is the smallest.
Since 1953, the budget of the Federal Government has shrunk from 20
percent to 16 percent of the size of the national economy represented
by gross national product. I f we could afford this so-called economy
now, in terms of our international needs and our domestic deficiencies,
I would be for it. But it certainly throws a lot of doubt on the tradi
tional classical palaverings about the causes of inflation to have the
kind of price inflation we have now when we have been running a
nice budgetary surplus, and when Federal budgetary outlays have
decreased by 20 percent relative to the size of the economy.
Actually, the Federal budgetary outlays are not directing them
selves to the specific bottleneck situations, such as the inadequacy of
resource development. This is inflationary. And infinitely more
important, they are not directing themselves to the world situation.
Let us remember that even during World War II, when we had an
infinitely more inflationary situation, we did not throw out the baby
with the bath. Even then, we did not, as the theoretical economists
would have had us do, collect in taxes all that we spent. Because while
theoretically that would have been anti-inflationary, we also had to
remember that it was even more important not to disrupt our pro
ductive system. Nor did we during World War I I decide that, be
cause we were fighting inflation, we should fight Hitler at half speed.
We put first things first, and that is the purpose of a Federal budget.
I do not mean that we should run a Federal deficit now. But we could
spend more to meet basic needs, stimulate a more adequate rate of
growth, and still run a budget surplus. The Federal budget of today
is defective from the viewpoint of fighting inflation, defective from
the viewpoint of our national needs, and the hard money policy is
even more upside down.
Now, the current inflation is not caused by an overall excess of
demand. You certainly do not have an overall excess of demand,
when your economy is slowing down more and more below its normal
rate of growth. But some people say that the current inflation is
162
ECONOMIC REPORT OF THE PRESIDENT
being caused by cost pressures operating against the price structure,
namely and specifically by wages. This is erroneous.
Let us take the steel industry as an example. Is our business man
agement so lacking in judgment that they will pay out more and more
m dividends every year when they do not have ample funds for plant
expansion? The answer is obviously no. Why are dividends rising
more and more month by month and year by year if profits, the func
tion of which are to finance expansion, are inadequate? As I have
said before, they have had ample funds to finance expansion, and yet
they have been financing largely out of the consumer, out of the price
structure, out of the retained earnings, and out of tax favors from the
Government. There has not been the kind of pressure upon costs
which could justify these kinds of price increases. In fact, we are
faced with a situation which national economic policy has not come
abreast of. It is not an overall inflationary situation. It is not an
overall deflationary situation. It is a mixed situation. In a mixed
situation, we have to solve this conundrum: How can we maintain
a high enough level of economic activity to use our resources effec
tively and to meet the world threat confronting us, and do justice to the
underserved portions of our population, and at the same time avoid
a price inflation which in the current situation is not resulting from
general overstrain, is not resulting from general shortages, but instead
is resulting from the tendency of an administered price system to get
what it can while it can? So long as we have our kind of economic
system, and I believe we are going to have this kind of system, and I
am for this kind of system, then we must find ways to combat this par
ticular kind of selective and administered price inflation.
May I say what kind of selective inflation is now combined with
selective deflation? It is in part the cause of the inadequate rate of
economic growth, because the same restrictionary policies which are
contributing to the price inflation are not expanding capacity enough.
It is in part the result of an inadequate rate of economic growth. It
is causing deflationary tendencies in other parts of the economy. We
now have not a problem of general inflation, but a problem of bad
balance. We have to adjust our national economic policies to restore
a better balance, and I recommend the following policies.
My 8 minutes are up. My prepared statement covers the subject in
detail, and includes my recommendations. Thank you very much.
(The statement follows:)
S u m m a ry o f F u l l S ta te m e n t o f
Mb. K e y s e k l i n g
There is proper concern about combating the inflationary price trends in
various parts of the economy. But current national economic policies and
programs are seriously tending to fight the wrong enemies in the wrong battles
at the wrong time and in the wrong places. This is because these policies
and programs are utilizing, though to a lesser degree, some o f the broadside
weapons which were appropriate to the type o f overall inflationary situation
characteristic o f wartime, when the total resources o f the economy were over
strained, when total demand far exceeded total supply, when the overaU growth
rate o f the economy was abnormally high, and when commodity shortages almost
everywhere were pushing up prices almost everywhere. The situation today is
entirely different, and calls for highly selective treatment. The economy as
a whole is not overstrained; the rate o f economic growth has fallen to seriously
low levels; shortages in a few selective areas are accompanied by surpluses or
ample supplies in most areas; and excessive price, income, and investment
trends in some parts o f the economy are accompanied by excessively low price,
income, and production trends in other parts o f the economy.
ECONOMIC REPORT OF THE PRESIDENT
163
We are now in a mixed situation, where there is not general inflation caused
by an overstrained general economy, but rather a selective and distorted inflation,
and a selective deflation, which are in part the result o f and in part the cause of
our economy’s lagging far behind an optimum rate of economic activity and real
growth. Yet the Federal budgetary policy is in the overall on the repressive
rather than the expansionary side. It is designed to short-change the national
security which we need most for our national survival, and to short-change the
development of natural and human resources which we need for adequate
economic growth. Yet it is not designed in detail to break some o f the specific
bottlenecks or remove some specific shortages which are contributing to the
immediate inflationary pressures. The credit and monetary policies, including
the hard money policy, are repressing the rate of overall economic growth,
and adding to the distortions in the economy by pouring oil on the flames o f
selective inflation and water on the embers o f selective deflation.
A Federal budget which has been reduced from 20.8 percent o f our total
national production in fiscal 1953 to about 16 percent now is cramping the
things that we need most as a Nation. A hard money policy which is making it
harder to build schools is having the same effect. An exhortation to labor to
be more restrained with respect to wages fundamentally misreads the current
economic situation, which is characterized in the overall by a nonsustainable
investment boom getting more out of line with inadequate consumption. Price
increases which largely represent the administered judgments o f business, with
out basic economic justification, are attributed to the wrong causes and as
sailed with paper swords. The problem o f building our world strength, and
the problem of combating vigorously the first lurking signs o f deflationary
forces, are being relegated to the sidelines, while attention is being concentrated
upon inveighing against an overall inflationary situation that does not exist
while ignoring or neglecting both the selective inflationary dangers and the
selective deflationary dangers which do exist and interact upon each other.
Instead o f this, we need a more vigorous effort to expand production, and to
elevate our rate o f overall economic growth to attainable and desirable levels.
To meet our full needs, we must have maximum production. We need a Federal
budgetary policy which carries forward the things we need most, and if this
should in fact cause inflationary pressures, we should be prepared to restrain
the superfluous ra ther than the essential. W e need specific programs or incentives
to break some o f the bottlenecks— such as steel capacity—which are cramping the
whole economy, instead o f trying to force the economy into the bottle through the
narrow neck. We need a comprehensive congressional investigation, from top to
bottom, o f why some prices are rising so much when the economy as a whole is
lagging, and when there is no intrinsic justification for many o f these price
rises. We need a reversal o f the hard money policy, which hits the economy
where it is most vulnerable, and aids those who need no stimulus. We need, from
the Council of Economic Advisers through the Economic Report o f the President,
a far more alert responsiveness to the mandates o f the Employment Act o f 1946.
Currently, the Council is not setting forth needed levels of employment, produc
tion, and purchasing power, and thus it is providing no concrete guides to
economic adjustments, programs or policies.
F u l l S t a t e m e n t of M r . K e y s e r l i n g
Mr. Chairman and members o f the committee, your inquiry into the many
signs of price inflation is vital and urgent. It is my hope that your general
examination o f this subject may shed light upon and be followed shortly by a
detailed investigation o f the whole price situation by the appropriate committees
o f the Congress. During the past 12 months, the consumer price index has risen
about 3 percent, the wholesale price index for all commodities has risen about
4 percent, and some prices in critical areas have risen far more. It would be
dangerous i f these inflationary trends were ignored or neglected. But the far
greater actual danger today is that, substituting excitement for clear analysis,
we are applying some national economic policies and programs which intensify
rather than reduce the current inflationary dangers; misread the nature o f the
economic situation and therefore contain ultimate threat of a deflationary spiral;
and, above all, throw out the baby with the bath by neglecting national security
and domestic needs which are more imperative than absolute price stability,
although the more adequate servicing o f these needs would also contribute to
164
ECONOMIC REPORT OP THE PRESIDENT
price stability. Due to the lag in economic thinking and its practical application,
we are in process o f fighting the wrong enemies, in the wrong battles, at the
wrong time, and in the wrong places.
The economic problems o f depression and wartime inflation created approaches
which were not completely effective when used, and which in any event now lead
to gross oversimplification and misdirection o f effort when applied to the current
situation. An examination o f some history is essential to an understanding o f
the current situation.
During the great depression, we suffered from tremendous underutilization
o f our total resources, accompanied by a negative rate o f economic growth from
year to year. This was reflected in surpluses o f goods or o f productive capaci
ties almost all along the line, accompanied by sharply falling prices almost all
along the line. To reverse these trends, the formula was developed that Gov
ernment spending and deficit financing should be greatly increased, and that
credit should be made very abundant and very cheap. There is now common
acceptance that this approach was correct. But it nonetheless was an over
simplification, because it did not sufficiently stress that the causes and cures o f
our economic difficulties are complex and manifold. Not enough attention was
paid, for example, to the quasi-independent factor o f business investment Not
enough attention was paid to the fact that Government spending and deficit
financing could not be increased rapidly enough, nor credit availability expanded
enough, to do the whole job. To have attempted the whole job through these
devices would have involved the Government in a range and scope o f activities
far beyond the very nature o f our economic system in peacetime. Consequently,
full prosperity was not restored until World War II, which is another way of
saying that the lifting o f the economy from unusual depths through prime reUance upon the spending power o f government involved operations of a size
tolerable only in wartime.
There is common acceptance today o f the proposition that there was much
inadequacy and oversimplification in the idea that severe deflation could be
fought successfully by enlarged government spending, deficit financing, and easy
credit. Yet, today, we are applying this oversimplification in reverse. W e are
running into the serious error o f trying to fight so-called inflationary dangers
by excessive reliance on a tight control of government spending, budgetary sur
pluses, tight credit, and hard money. This would be too narrow an approach,
even if we were confronted with general and overall inflationary pressures o f
the wartime type. But it is a doubly dangerous approach today, when the socalled inflationary pressures are of an entirely different type, indicative o f en
tirely different fundamental economic conditions, and fraught with entirely
different types o f perils. To illustrate this, we must compare the wartime
inflationary situation with the enormously contrasting conditions o f today.
In the early stages o f World W ar II, for example, the total private and public
demand for goods and services far exceeded the Nation’s total productive power,
even when the economy was operating at top levels and expanding at an unusually
fast rate o f real economic growth. There were shortages all along the line, for
farm products as well as for industrial products. These conditions generated
sharply upward price movements all along the line. To prevent price inflation
from rationing goods in the wrong direction under such conditions, there was
need for the classic anti-inflationary weapons: very high taxes, drastic restraints
o f credit, and even price and wage controls. There was need also to defer civilian
housing, school and hospital construction, road building, and a wide range o f
consumer goods including automobiles. But even during W orld War II, we did
not let the theoretical economists run away with us and substitute theory for
sound policy. Despite the need to fight inflation, we did not lift taxes enough
to achieve a budgetary surplus, because to do so would have distorted the whole
process o f productive expansion through the use o f our enterprise system. Nor
did we, through preoccupation with the fight against inflation, decide to fight
Hitler at half speed. We redoubled our efforts with respect to the things we
needed most, and put aside the superfluous instead o f foregoing the essential.
Above all, although it created some additional inflationary strains, we concen
trated upon the expansion o f total production at far above the normal rate, so as
to get closer to a situation where we could enjoy without inflationary strains
some o f the thi ngs we needed less.
In the Korean war situation, we faced the same types o f problems in smaUer
size. There were some who wanted to fight inflation solely by cutbacks o f ci
vilian production, and by freezing all prices, profits, and wages. Believing that
this would be a highly undesirable approach, I took the contrary view that we
should combine appropriate anti-inflationary measures with vast efforts to ex-
ECONOMIC REPORT OF THE PRESIDENT
164a
LABOR AND FARM INCOMES, l953-'56
GREW TOO SLOWLY RELATIVE TO OTHER
INCOMES TO SUSTAIN FULL PROSPERITY
Averoge Annual Rotes of Change in 1955 Oollars
+ 7 .0 %
THE BALANCE WAS BETTER IN 1947-53
(Farm Income Did Decline, but Less Than in 1953-'56)
Average Annual R ates of Change in 1955 Oollars
+ 5 .7 %
Oatai 1947*1955, Dept of Commerce; 1956 estimated by Conference on Economic Progress
on basis of first half year ond Outlook.
ECONOMIC REPORT OF THE PRESIDENT
165
panti production, and particularly the industrial base o f production, as the most
fundamental solution to many foreseeable years of high national security efforts
in a critical world situation. This broader approach was successful, to the
degree that by the middle of 1951 and for several years thereafter we enjoyed
relative price stability because we had brought our productive genius to bear
upon the problems confronting us. I f we had not done this, we not only would
have failed to put first things first, but we would also have had more inflation—
first suppressed and then overt—for a longer period of time.
These experiences have some bearing upon the economic situation today, and
some implications for current policy which I shall come to shortly. But first o f
all, we must grasp firmly the supremely important fact that the so-called infla
tionary pressures of today are entirely different in all respects from those during
World War II or during the early stages of the Korean war. The inflationary
trends of today are occurring, not when the economy as a whole is overtaxed
or growing at an excessively fast rate, but rather when the total private and
public demand for goods and services is far short of the Nation’s productive po
tential, and when the overall rates of economic activity and expansion have for
some time been much too low. The so-called inflation of today is not general
but highly selective, and reflects increasing distortions in the whole economic
structure. While some prices and incomes and lines o f activity have been ad
vancing too fast in absolute or relative terms, other types o f prices or incomes
or lines o f activity have been advancing too slowly in absolute or relative terms,
or standing still, or falling dangerously backward. Under such circumstances,
inflationary and deflationary forces are commingled; and the inflationary trends,
instead of reflecting an excessive overall rate of economic activity or growth,
are in fact the types o f distortions which are holding overall economic activity
and growth far below normal or desirable levels and are threatening the emer
gence of a deflationary spiral. Meanwhile, Government policies and programs
have tended to slow down the things we need more of, stimulate some of the
things we need less of, and add both to the inflationary and deflationary dangers
by accentuating the distortions. Let us now examine the facts supporting these
propositions.
(1) The overall growth rate of the economy has been slowing down dangerously.
During the seven-year period 1947-53, the total economy expanded at an aver
age annual rate of about 4.7 percent, measured in uniform 1955 dollars; during
1953-56, the rate fell to about 2.6 percent; and from fourth quarter 1955 to fourth
quarter 1956, the expansion was only about 2.5 percent. The average annual rate
of our real growth during the past 40 years has been about 3 percent, and since
World War II much higher.
Thus, it is clear that recent developments have swung far below the rates of
growth consistent with full and efficient use without inflation o f a growing labor
force and a rapidly advancing technology. The majority judgment o f business
analysts today is that, at best, the economy will continue to exhibit only about
this excessively low rate of real growth in the coming year. This unsatisfactory
outlook is due primarily to the inability of the investment boom in plant and
equipment to continue to expand so much more rapidly than general consump
tion, and due correspondingly to the inadequate expansion o f consumer demand
for residential construction, other durables, and some soft goods. On the do
mestic front, this means that the central economic problem of today is to enlarge
the overall rate of economic growth, lest the insufficient absorption o f a rapidly
growing labor force and a rapidly growing technology result in the emergence
of powerful deflationary forces. However, the world situation is the overwhelm
ingly urgent reason why we need greatly to accelerate our rate of economic
growth. The Soviets are now expanding four to five times as fast as we are in
real terms, and allocating a much larger part of their total production to the
military and economic aspects of the world struggle.
Our own long-range experience makes it preposterous to assert that we cannot
grow much faster than 2.5 percent a year without general inflationary pressures.
And the world situation makes it imperative that we grow faster, even if this
generated some selective inflationary pressures, which should then be counter
acted by effective measures. In fact, the low rate of economic growth itself con
tributes to current inflationary pressures. It discourages adequate expansion
of productive facilities, and thus creates bottlenecks. It encourages the tendency
to substitute higher prices for bigger sales. It reflects shortages in some resource
areas, which we say we cannot afford to overcome because the economy is not
growing rapidly enough to support the needed programs, while in fact these
shortages are cramping the rate o f growth and thus will be highly inflationary
in the long run.
166
ECONOMIC REPORT OF THE PRESIDENT
And as already indicated, the excessively low rate o f economic growth is the
product of existing inflationary distortions, even while the low rate o f growth
contributes to further distortions.
(2) The selective inflationary trends of today reflect and create serious im
balances and distortions within the general economy, which do not result
from an excessive overall rate of economic activity and growth, but instead
stunt overall economic growth and threaten economic stability.
During the 1953-56 period as a whole, farm income from all sources has
dropped 8.3 percent, in constant dollars, while national income has increased
11*5 percent; and farm prices have dropped 8.5 percent while industrial prices
have risen 7.2 percent, consumer prices 1.6 percent, and retail food prices
dropped only 1.0 percent. During the same period as a whole, personal interest
income has been advancing about 65 percent faster than wages, and dividend
income has been advancing about 75 percent faster than wages. Corporate
profits have been advancing about 29 percent faster than the personal income
o f the people as a whole, even while the ratio o f small business profits after
taxes to big business profits after taxes has declined from about 70 percent in
1952 to about 50 percent in 1955; some improvement appeared in this ratio in
1956. These disparate trends have been both cause and effect o f the growth in
our productive facilities at a much more rapid rate than the growth in con
sumption, which in the long term view has deflationary rather than inflationary
implications. From fourth quarter 1955 to fourth quarter 1956, while investment
in plant and equipment grew about 10 percent in real terms, consumption grew
only about 2 percent. And because disposable personal income in real terms has
grown even more slowly than consumption, even this inadequate growth in con
sumption has needed support from a nonsustainable credit boom. Under these
circumstances, it is a complete misreading o f the situation to complain that
wages have been advancing too fast, or to assert that this is the central cause
of price inflation. While there is a real problem of unevenness in the wage
structure, and of lifting low-income families relatively faster than others, con
sumer incomes, of which wages are the major portion, have been advancing
much too slowly to maintain balance between investment and consumption at a
satisfactory rate o f economic growth. Nor in the main have the wage increases
as a cost factor necessitated the price increases; the excessive relative rate o f
investment, and the constant lifting o f dividend payments to new heights, indi
cate that profits in the overall have been more than adequate to support their
investment and income functions.
(3) Most of the specific price increases, under these circumstances, have not
been due generally to an inflationary strain on resources.
Consumer prices and even food prices have been advancing. But this has not
been due to an undersupply o f clothing or o f food ; both o f these areas are in
surplus. Some o f the price advances have been due to the power o f an adminis
tered price system, under semi-monopolistic conditions, to advance prices even
when productive capacities are by no means strained. Some have been caused
by the predilection of an administered price system to utilize legitimate wage
increases as an excuse for pyramided price increases and excessive profit margins*
Of these tendencies, the steel industry is a good example. The industry raised
its prices even during the economic recessions of 1949 and 1953-54, when oper
ating far below capacity. The industry sought to justify its large price increases
in 1956, which were several times the computed cost of the wage increases, on
the ground that it needed more money to finance plant expansion. But plant
expansion should be paid for out of the improved productivity and efficiency
which results from the new plants; when it is paid for by the consumer before
the new plants are built, there is an extra and unjustifiable payment. The steel
industry has kept its capacity too low, so that it is now operating at more than
100 percent o f capacity, and has operated too close to capacity in all fully
prosperous years. Today, there is a steel shortage which operates as a bottle
neck on the whole economy. Compared with 1953 as a whole, wholesale industrial
prices by the fourth quarter of 1956 had risen only about 9 percent, while steel
prices had risen more than 22 percent. Comparing fourth quarter 1956 with
1955 as a whole, industrial prices rose only 6 percent while steel prices rose
about 12 percent. The disparities in fact are greater, because the index o f
industrial prices includes steel prices. We are now confronted with a situation,
where most o f the price rises are due, not to genuine inflationary pressures but
ECONOMIC REPOBT OF THE PRESIDENT
167
rather to concentrated economic power unwisely exercised. This threatens
deflation more than it threatens inflation, and this is the problem with which
we need predominantly to deal.
(4) The budgetary policies of the Government have not been responsible for
these selective inflationary trends; they have been responsible for the in
adequate rate of overall economic growth and for some of the distortions in
the structure
Federal budgetary outlays for national security have declined from 14.1
percent o f our total national production in fiscal 1953 to an estimated 9.6 per
cent in the current fiscal year 1957. Thus, the proportion o f our total annual
production being channeled into this priority purpose has decreased by 32
percent within 4 years. Federal budgetary outlays for all purposes other than
national security have declined from an annual average o f 8.3 percent of total
national production during the fiscal years 1947-53 to only an estimated 6.6
percent in the current fiscal year. The total Federal Budget, which represented
a ratio o f 20.8 percent to our total national production in the fiscal year 1953,
has fallen to a ratio o f about 16.2 percent in the current fiscal year 1957. These
trends may also be shown in terms o f outlays for goods and services, which
relate more closely to gross national product.
The President’s new Budget, which is mistakenly called “ the biggest ever
in peacetime,” would represent only an estimated 16.1 percent of estimated
total national production in the fiscal year 1958. These downward trends in
the relationship between the Federal Budget and the national economy, ac
companied by nice-looking budgetary surpluses in the most recent years, demon
strate conclusively the error o f the notion that inflationary or anti-inflationary
price trends can be correlated with the Federal Budget alone. We have recently
been following, and seem committed to continue to follow, a Federal budgetary
policy which has not grappled properly with the inflationary problem, but
instead has succeeded only in giving lowest priority to the things we need
most—national defense, international economic exertions, and domestic expan
sion of such important foundations for economic stability and growth as re
source development and schools. Actually, by stunting the rate o f economic
growth, these Federal budgetary trends are inflationary in the short run and
deflationary in the long run. They are not compatible with stable economic
growth, and therefore are not compatible with stability in the price structure.
(5) The credit and monetary policies of the Government, including the so-called
“hard money policy ” have even more clearly been based upon a misreading
of the overall economic situation; they have contributed to the distortions
which mean selective inflation on the one hand and selective deflation on
the other hand
As an aggregative device, the hard money policy has once again demonstrated,
as I have insisted on many early occasions, that it cannot stop selective price
inflation without being pushed to the point that would threaten a general deflation
and rapidly rising unemployment. More specifically, the hard money policy
is operating directly conversely to correcting the distortions in the economic
structure. It has exercised almost no effective restraint against the parts o f
the economy which have been booming relatively too rapidly, such as investment
in plant and equipment. The very large companies which are responsible for
most o f this investment boom finance themselves by methods which leave them
relatively unaffected by such restraints. But the hard money policy is operating
severely against the very parts o f the economy which are relatively depressed
and underutilized—the small businessman, the farmer, the homebuilder, and
the low-income consumer purchaser o f durables. In addition, the hard money
policy is holding back the most needed public improvements at the State and
local level, and increasing by one-half to three-fourths of a billion dollars a year
the cost to the Federal Government of doing the very things that we are not
doing enough of. The hard money policy, in short, by handling out income
bonanzas and incentives to some who do not need them, and reducing the in
comes and activities o f others who are in real trouble, is pouring fuel on the
fires o f inflation in some parts o f the economy and water on the embers in other
parts o f the economy.
87624—57------12
168
ECONOMIC REPORT OF THE PRESIDENT
BECOMMENDED PROGRAMS
The lines of approach which we need to deal with the current economic situa
tion and outlook, in the context of a world situation which we are told is
becoming more perilous, are in sumjnary these:
(1) First and foremost, we need to maximize production and economic growth.
We cannot do enough of anything—and we need to do more of many things—
if we keep half-hidden the productive genius which is the great non-secret weapon
of the American economy. The Economic Report of the President and his budget
message, instead of overemphasizing the things that we must do without, should
elevate to central importance the things that we must do. Of course, we cannot
do everything at once, but we must achieve the necessary before we enjoy the
superfluous; and the full production we can have, in a situation short of total
war, can provide both the necessary and the superfluous.
(2) We need to utilize the Federal budget to provide the American people
with an adequate level of national security, plus a level of basic domestic
programs, with respect to our material and human resources, sufficient to reduce
inflationary pressures by breaking bottlenecks and by overcoming shortages,
and sufficient also to underpin an optimum rate of economic production and
growth from year to year. The strongest Federal budget is that which helps
to make the national economy strongest.
(3) We need, through private and public economic policies combined, to
correct the current distortions in the price, income, and production structure,
which are increasing inflationary pressures in some areas, increasing deflationary
dangers in other areas, and thus threatening us ultimately with a deflationary
spiral. On the public side, this means a Federal budget which helps those first
who need help most, instead of stimulating those who are out of line on the high
side. To prevent the incomes of the people and the necessary outlays of Govern
ment from being taxed by selective price inflation, we need a detailed congres
sional investigation of the whole price situation from top to bottom. A large
proportion of the recent price increases have been due, not to economic necessity,
but rather to economic misbehavior. Direct controls of prices are undesirable
in these times, but the watchful eye of an informed Congress and an informed
public is highly desirable.
(4) We need to abandon the so-called hard-money policy, which in the interest
of special groups is rationing incomes and goods in the wrong direction, and
holding the overall rate of economic growth to dangerously low levels. In place
of this hard-money policy, we may need some more specific and selective re
straints which fight selective inflationary dangers instead of injuring the econ
omy and the people.
(5) We cannot intelligently nor effectively apply segmental aspects of eco
nomic policy, unless we have the whole perspective of the economy in operation
and what we are seeking to do. The most recent material prepared by the
Council of Economic Advisers, for transmission by the President in his Economic
Report to the Congress, has completely disregarded the statutory requirement to
state needed levels of employment, production, and purchasing power. Without
these targets as benchmarks, there is no way of appraising the validity of pro
posed economic policies and programs, and this explains the vacuity of the
attempts by the Council to set forth or discuss forward-looking policies or
programs.
Mr. K e y s e r l i n g . Additional charts bearing on the matters dis
cussed in this statement were presented in my testimony before the
Senate Subcommittee on Disarmament on January 17, 1957, and are
available in the printed hearings of that subcommittee.
Chairman P a t m a n . Professor Backman, professor of the school of
commerce, New York University.
STATEMENT OF DR. JULES BACKMAN, PROFESSOR OF ECONOMICS,
NEW YORK UNIVERSITY
Mr. B a c k m a n . Mr. Chairman and members of the committee, I
have a more complete statement which I would like to file with the re
porter, and would just like to summarize the highlights.
Chairman P a tm a n . That is agreeable.
ECONOMIC REPORT OF THE PRESIDENT
169
Mr. B a c k m a x . The outlook is for a price rise of several percent
in 1957. However, we do not face an explosive inflation spiral. The
rise in prices has reflected the cost push exerted by increases in labor
costs in excess of gains in productivity in a business boom which has
made it relatively easy to pass these cost increases on to the buyer.
There is an understandable concern with the problem of inflation.
However, we are not in a period of classic inflation reflecting either
Federal Government budgetary deficits or large expansions in money
supply. So long as the Federal budget remains in the black and
monetary policy prevents a sharp expansion in money supply, there
is little likelihood of a runaway price inflation. Unless the wageprice spiral is fed by an expanding money supply, it is more likely
to lead to unemployment of resources as they are* “priced out of the
market” than to a major price inflation.
To the extent that monetary and fiscal policy are used to blunt the
boom, one of the major factors contributing to "price advances will be
modified or eliminated. But there will still remain the problem of
excessive increases in labor costs. Little can be done in the wage area
in 1957 because “ key wage bargains” already have been reached. But
we must look to the future if we are to prevent a repetition of the
current situation. President Eisenhower has pointed squarely to
the proper goal in this area in his statement that:
Negotiated wage increases and benefits should be consistent with productivity
prospects.and wtih the maintenance of a stable dollar (p. 3 ).
But this objective will only be achieved if management in major
industries firmly refuses to agree to labor cost increases in excess of
national productivity gains and if the public is educated to under
stand the dangers which arise wrlien labor cost increases exceed these
amounts.
What factors explain the creeping price rise which has been taking
place during the past year and a half ? It is important to keep in mind
that this price does not result from large Government budgetary
deficits with an accompanying expansion in bank credit or from a
large increase in money supply, including deposits and currency. The
rise does reflect a combination of the business boom and increases in
labor costs in excess of the gains in productivity.
During the fiscal years 1955-56 and 1956-57, the Federal budget is
estimated to be in the black. The cash surplus is in excess of $3 billion
in each year. During this period the Federal debt is being reduced
by modest amounts. This is clearly a picture of a Federal budget
which is deflationary, not inflationary. This is a budgetary situation
which is in sharp contrast to the huge deficits and accompanying
tremendous rise in public debt which characterized World War II
and the first postwar year with the accompanying large inflation in
prices.
The total money supply was increased by only about 1 percent in
1956. Under conditions'of capacity operations in key sectors of the
economy, a larger rise in currency and demand deposits could only
have meant further pressures on the price level.
The period since mid:1955 has been marked by a further rise in
labor costs of substantial proportions. Total hourly labor payments
including fringes have increased by more than 10 percent on the
average and in many industries by considerably more. Since mid-
170
ECONOMIC REPORT OP THE PRESIDENT
1955, it appears that increases in labor costs have far outstripped the
gains in productivity in manufacturing industries. The result appears
to have been a rise in unit labor costs in excess of 5 percent.
The largest increases in prices were recorded for metal and metal
products (14.9 percent) and machinery and motive products (12.9
percent). It is interesting to note that within the machinery group,
the rise for agricultural machinery which deals with a lagging sector
of the economy was 7.7 percent while the increases in prices of con
struction machinery and electrical machinery, both areas of dynamic
expansion, approximated 15 percent. The overall rise for fuel, power
and lighting materials was only 5.9 per cent. However, one compo
nent, coal prices, rose 22.8 percent under the combined influence of
sharply expanding demand and large increases in wage rates. Pe
troleum products rose 8.4 percent reflecting in part the Middle East
situation.
At the other extreme, small net declines were shown for processed
foods, lumber and wood products, and farm products.
The areas with the major increases in prices have been largely those
in which the pressures of the boom have been greatest while the iareas
in which prices have lagged have been the areas in which economic
activity has not been stimulated significantly. These data also suggest
that a slowing down of the boom will be the most potent force to
stop the price rise.
It is interesting to note that sensitive prices like copper scrap, lead
scrap, and rubber have actually declined during the past year despite
the general rise in the price level. This is not the behavior one would
expect under conditions of general price inflation. These declines are
explainable, however, in terms of the reduced level of activity which
characterized the automobile industry and residential building in 1955.
It is the pattern of behavior that would be expected during a boom
which has an uneven impact on the economy.
It is important to keep in mind that a price rise attributable to these
factors will not have the same spiraling effect of an inflation flowing
from monetary and fiscal factors. This is not the background for
an explosive inflation. It is the background for a further modest
price rise so long as the boom persists.
There can be little quarrel with the President’s objective of volun
tary restraint. However, we must recognize that many key sectors in
the economy are not free to apply this proposed standard in 1957.
For many important industries, including automobile, steel, electrical
equipment, railroads, meat packing, agricultural implements, and coal,
wage increases for 1957 and in some cases for 1958 have already been
incorporated in contracts.
In many of these industries, the negotiated wage increases are
scheduled to be 6 or 7 cents an hour. In addition, provision usually is
made for further adjustment in wages if the cost of living should rise.
I f the rise in the consumers’ price index should be two points, it will
mean a wage increase of an additional 4 cents an hour in most of the
industries listed.
In light of these contract provisions, we already seem assured of
an increase in wage rates of 4 percent to 5 percent in 1957. Past ex
perience indicates that the wage#adjustments in these^ key areas will
be a very potent force in determining wage increases in other sectors
ECONOMIC REPORT OF THE PRESIDENT
171
o f the economy where contracts still remain to be negotiated. Under
these conditions, it is impossible for industry and labor to exercise the
restraint called for by the President unless they were to reopen the
existing agreements and negotiate smaller wage increases. Since the
probability of such an action is completely nonexistent, it is clear that
there is not much that can be done through voluntary restraint insofar
as wages and other labor costs are concerned during 1957.
The President warns that the failure of voluntary restraints could
lead to wage-fixing and price-fixing by Government. I would like to
state categorically that I am completely opposed to any such program
to limit price rises in peacetime. Such a program is foredoomed to
failure and can only result in disruptions to production, impairment
o f incentives, and an ever-widening area of controls which will create
worse evils than the control program would be designed to overcome.
The effort to limit price and wage increases by exhortation has never
succeeded in the past and will be no more successful under current con
ditions.
I believe that better results can be obtained through monetary and
fiscal policy. Any restraint exercised through monetary or fiscal
policy, however modest, will inevitably hurt some groups. This is
unavoidable regardless of what policies are adopted. But to state the
problem in these terms is to give only a partial picture. What hap
pens if these restraints are not imposed and prices are permitted to
spiral? Then the burden falls on the large groups who live on fixed
incomes and on those whose incomes do not and cannot keep pace
with an inflationary price rise.
Unfortunately, there is no best policy in the sense that no one
will feel its effects. There is only a “ least worst” policy in the sense
that its adverse effects will be kept to a minimum. In these terms,
the alternative to hurting some groups who do not contribute to the
inflation is to hurt still larger groups who do not contribute to the
inflationary pressures.
Do we seriously believe that we are making every effort to combat
inflation on the monetary front when mortgage credit, consumer credit,
and bank credit continue to expand at near record rates? And is
mortgage credit excessively restrictive with the present low down pay
ments and 30-year maturities for mortgages? The Federal Reserve
Board “ has leaned against the wind,” to use Mr. Martin’s descriptive
phrase, but it certainly has not leaned far enough to be in danger of
falling over.
I f stronger fiscal and monetary restraints are required to halt an
inflation they should be imposed. The evils attending inflation are
more serious than those attending strong anti-inflation policies.
Thank you.
(Mr. Backman’s prepared statement follows:)
S t a t e m e n t op D e . J u l e s B a c k m a n
P rofessob of E c o n o m ic s , N e w Y ork U n iv e b s it y
THE ANATOMY OF THE PRICE RISE
Since June 1955, the wholesale price index has risen by 5.3 percent However,
there has been a wide variation in the behavior o f individual prices and groups
o f prices. It is instructive to determine the areas o f the economy which have
experienced the greatest price rises as a background against which to evaluate
the causal forces and the adequacy o f proposed policies. I have prepared sev
172
ECONOMIC REPOET OP THE PRESIDENT
eral tables which show the changes in wholesale prices since June 1955 and
since December 1955.
Because of the seasonal price movement for many food and farm products,
comparisons between June and December inevitably involve some distortion
when allowance is not made for seasonal factors. When comparisons are made
between the same months o f successive years, this problem o f seasonal price
movements is overcome.
Table 1 shows the changes in wholesale prices by major industry groups from
June 1955 to December 1956. The changes are arrayed in order o f magnitude.
The overall rise was 5.3 percent in the wholesale price index and 7.8 percent
in the index for commodities other than farm products and foods during this
period. The largest increases were recorded for metal and metal products (14.9
percent) and machinery and motive products (12.9 percent). It is interesting
to note that within the machinery group, the rise for agricultural machinery,
which deals with a lagging sector o f the economy, was 7.7 percent while the
increases in prices of construction machinery and electrical machinery, both
areas of dynamic expansion, approximated 15 percent. The overall rise for fuel
power and lighting materials was only 5.9 percent.
This smaller than average rise resulted from the fact that one component, elec
tricity, showed a small decline and another component, gas, was about un
changed. In contrast, coal prices rose 22.8 percent under the combined influence
o f sharply expanding demand and large increases in wage rates. Petroleum
products rose 8.4 percent, reflecting in part the Middle East situation.
At the other extreme, small net declines were shown for processed foods, lumber
and wood products, and farm products.
An examination of table 1 indicates that the major increases have taken place
in those sectors of the economy which have been most stimulated by the boom
or in industries in which labor costs are of greatest relative importance. On the
other hand, in industries which have not done too well during the past year and a
half, price rises have been nominal or nonexistent. These include tobacco manu
factures, textile products and apparel, and the three areas of declining prices
previously noted. This table underlines the importance of expanding demand
and boom time conditions in the overall price rise which has taken place.
A similar picture is shown in table 2 which arrays the changes in major groups
of wholesale prices between December 1955 and December 1956. W e find the
major increases in machinery and motive products, metals and metal products,
and structural nonmetallic minerals. Also included among the larger increases in
1956 were farm products and processed foods, which advanced from the depressed
levels o f December 1955. Lumber and wood products (which were adversely
affected by the decline of nonresidential building), rubber and rubber products
(which were adversely affected by the large decline in automobile sales), and
textile products and apparel (which have experienced lagging markets) reported
no change or declining prices in 1956. Another area with relatively small in
creases in prices was tobacco manufactures, which has been affected by the
lagging sales of cigarettes partly as a result o f the cancer scare. This is also an
area of relatively low labor costs. Chemicals and allied products also involve
relatively low labor costs.
By economic sector.—Table 3 shows the breakdown o f the wholesale price
index by economic sectors. Between June 1955 and December 1956, the overall
index for crude materials showed no change. However, when the important com
ponents o f that index are examined, it is found that foodstuffs and feedstuffs de
clined 5% percent in contrast to the rise o f 7.2 percent for nonfood materials except
fuel and a 13.9 percent rise in fuel. This latter increase reflected primarily
the sharp rise which has taken place in coal prices.
The overall index for intermediate materials supplies and components rose by
7.3 percent in the past year and a half. The table shows that there was practi
cally no change for food manufactures and that materials for nondurable goods
manufactures rose only 2% percent. The major rises in prices occurred in ma
terials used in durable goods manufactures (10.1 percent) and for components
for manufacturing (15.4 percent). Intermediate materials used for construction
rose 7.1 percent.
The pattern for the finished goods was similar. There has been little change
for foods and a rise o f only 3.1 percent for other nondurable goods; in contrast,
finished durable goods prices rose 6.4 percent and prices o f producers finished
goods rose 13.2 percent. This tabulation again indicates the relatively small
price changes for the nondurable consumers goods in contrast to the sharp rises
ECONOMIC REPORT OF THE PRESIDENT
173
which have taken place in producers goods and for consumers durable goods.
As the President has noted, “ Prices o f investment goods and semimanufactured
materials and components rose quite rapidly, reflecting heavy pressure o f de
mand relative to supply” (pp. 30, 32). A little later in the report, reference is
made to the continued rise in prices o f producer finished equipment, “ the demand
for which was especially insistent” (p. 32). It seems clear that the areas which
have been most stimulated by the boom show the largest price rises in contrast
to the relatively modest price changes in other sectors of the economy.
It must be recognized that economic data o f this type rarely yield a picture o f
perfect relationships. Nevertheless, it appears to me to be significant that the
areas with the major increases in prices have been largely those in which the
pressures o f the boom have been greatest while the areas in which prices have
lagged have been the areas in which economic activity has not been stimulated
significantly. These data also suggest that a slowing down o f the boom will be
the most potent force to stop the price rise. To the extent that fiscal and mone
tary policies act to blunt the rate o f advance in the boom areas, the overall rise
in prices can be slowed down and then brought to a halt.
Sensitive price index.— Table 4 shows the changes in the Bureau o f Labor
Statistics spot primary index for three selected dates. The changes for each of
the specific commodities is also shown. Such prices usually reflect inflationary
pressures in our economy very promptly. At the slightest hint of inflation, they
move upward sharply. Past experience has shown that the general wholesale
price index and the consumer price index generally follow the movements of
the sensitive wholesale price index, though not as sharply.
From 1939 through August 1945, the sensitive price index almost doubled as
compared with increases of about one-third in the general level of wholesale
prices and in retail prices. By 1948, the sensitive price index had increased to a
level 204 percent above prewar as compared with an increase of 112 percent in the
wholesale price level and 76 percent in retail prices.
From June 1950 to February 1951, the sensitive price index rose more than
50 percent as compared with an increase of only 16 percent in the general whole
sale price index and 8 percent in retail prices. When the substantial inflation
ary pressures anticipated as a result o f the Korean war failed to take place,
sensitive prices began to reverse their rise. In fact, currently, the index is only
moderately higher than in 1950.
What has happened to these prices in the past year and a half? Since May
31, 1955, the overall index has risen only 3.5 percent. In the past year, the rise
has been 2.6 percent. Table 4 shows the wide diversity in price changes for
the individual products. Of the 24 products shown in the tabulation, nine were
lower in January 1957 than in May 1955 and one was unchanged in price: 14
commodities had increased in price. The largest increase was for steel scrap
which advanced 90.6 percent; it has since declined a little. At the other ex
treme, cocoa beans recorded a decline of 35.3 percent. Half of the commodities
showed changes within a range of plus and minus 6 percent.
A similar pattern o f diversity o f price behavior is shown for the past year.
From January 10, 1956, to January 10, 1957, 10 commodities declined and one
was unchanged in price. The extreme changes were a price increase of 50.6
percent for hogs and a price decline o f 28.2 percent for copper scrap. It is
interesting to note that sensitive prices like copper scrap, lead scrap, and rubber
have actually declined during the past year despite the general rise in the price
level. This is not the behavior one would expect under conditions of general
price inflation. These declines are explainable, however, in terms o f the reduced
level o f activity which characterized the automobile industry and residential
building in 1956. It is the pattern o f behavior that would be expected during a
boom which has an uneven impact upon the economy.
FACTORS CONTRIBUTING TO PRICE RISES
What factors explain the creeping price rise which has been taking place
during the past year and a half? Is this a rise which is due to the same type o f
factors which resulted in the explosive rise of World War II and the early post
war years? How does it differ from that earlier rise and do these differences
have any significance in the outlook for prices? It is important to keep in mind
that this price rise does not result from large Government budgetary deficits with
an accompanying expansion in bank credit or from a large increase in money
supply, including deposits and currency. The rise does reflect a combination o f
174
ECONOMIC REPORT OF THE PRESIDENT
the business boom and increases in labor costs in excess of the gains in
productivity.
I should like to review each o f these factors briefly. It is important to under
stand the nature of the price rise and the basic pressures which are operating, if
we are to formulate proper public policy.
The Federal budget
During the fiscal years 1955-56 and 1956-57, the Federal budget is estimated
to be in the black. The regular budget will show a surplus of a little less than
$2 billion for each year. The cash surplus is in excess of $3 billion in each year.
During this period the Federal debt is being reduced by modest amounts. This
is clearly a picture of a Federal buget which is deflationary, not inflationary.
This is a budgetary situation which is in sharp contrast to the huge deficits and
accompanying tremendous rise in public debt which characterized World W ar II
and the first postwar year with the accompanying large inflation in prices. The
President has properly pointed out that the budgetary surplus “prevented addi
tional strains on the economy” (p. 40).
Money supply
The total money supply was increased by only about 1 percent in 1956. Total
demand deposits showed little change despite an $8 billion increase in com
mercial bank loans because this was offset in part by a liquidation o f investments,
particularly Government securities, and because of the rise in time deposits.
Under conditions of capacity operations in key sectors of the economy, a larger
rise in currency and demand deposits could only have meant further pressures
on the price level. The report emphasizes the heart o f the problem when it
concludes: “ A large overall expansion of bank credit would not have resulted
in a significantly higher national output, but would instead have led to a greater
rise in prices” (p. 40).
Again we have a sharp contrast with the World War II situation. From the
end of 1940 to the end of 1945, total demand deposits and currency outside the
banks rose by 141.8 percent (from $42.3 billion to $102.3 billion). This tre
mendous increase in money supply was a potent factor in the large war and
postwar rise in prices. It is encouraging that we are not experiencing any
significant rise in money supply in the current situation. This is due in large
measure to tighter monetary policy which the Federal Reserve Board has
appropriately instituted.
Money has been passing from hand to hand at a faster rate. According to
data compiled for demand deposit turnover by the Federal Reserve Board, there
was an increase of 6.6 percent in New York City, 5.7 percent in 6 other large
cities, and 6.8 percent in 337 other reporting centers in 1956 as compared with
1955. Since the New York City totals are influenced by the volume o f security
trading, the totals outside New York City are usually considered a better guide
to turnover related to general business activity. This greater turnover of bank
deposits has reflected first, the growth of bank loans which usually create very
active deposits and second, the business boom with the accompanying spirit of
confidence. While the total supply o f demand deposits has shown little change,
that total has been used more intensively.
The business boom
One characteristic o f a boom is the shortages which develop in some sectors of
the economy. The 1956 boom in plant and equipment expenditures created pres
sure on many of the durable-goods industries. One evidence o f this pressure is
the large backlog of unfilled orders which accumulated in the durable-goods indus
tries as the affected industries operating at capacity could not fill all orders
promptly. Unfilled orders in the durable-goods industries increased from $52
billion at the end o f 1955 to about $59 billion at the end o f 1956 despite the rising
volume o f deliveries during the year. In the latter part o f the year, the steel
industry operated at capacity and could not meet all demands. As I noted earlier,
these areas o f shortage experienced the largest price rises during the past year
and a half. In fact, the price rise reflects largely the pressures generated by a
business boom.
Increases in labor costs greater than the gains in productivity
Increases in average hourly earnings and various fringe benefits have been
o f major magnitude during the war and postwar years. The increases in labor
costs have exceeded by a wide margin the gains in output per manhour. The
result has been a sharp rise in unit labor costs throughout the economy during
ECONOMIC REPORT OP THE PRESIDENT
175
the war and postwar years. The period since mid-1955 has been marked by a
further rise in hourly earnings o f substantial proportions.
In the 18 months following June 1955, average hourly earnings in all manufac
turing industries rose by 9.6 percent; the increases for durable- and nondurablegoods industries were about the same.
Average hourly earnings
June
1955
All manufacturing_________________________________________
Durable goods_____________________________________________
Nondurable goods__________________________________________
$1.87
1.99
1.70
Decem
ber 1956
$2.05
2.18
1.86
Percent change—
June 1955-December 1956
+ 9.6
+ 9.5
+ 9.4
The increase o f 18 cents an hour in earnings does not measure the entire
rise in labor costs. In addition, there has been a considerable increase in the
so-called fringes during this period. Overall estimates of the magnitude of
these higher fringe costs are not available. Illustrations include supplementary
unemployment benefit plans which cost 3 to 5 cents an hour and liberalization
of pension and welfare provisions. Clearly, total hourly labor payments includ
ing fringes have increased by more than 10 percent— and in many industries by
considerably more— during this year and a half of price rises.
During the past 12 months, average hourly earnings have risen by 6.2 percent
in manufacturing industries and total labor costs per hour by an even larger
proportion because of the increase in fringe benefits.
Average hourly earnings
December December
1955
1956
All manufacturing________________ _________________________
Durable goods.____ ________________ _______ _______ _________
Nondurable goods________________ . ________________________
$1.93
2.06
1.74
$2.05
2.18
1.86
Percent change—
December 1955December 1956
+ 6.2
+ 5.8
+ 6.9
To the extent that output per man-hour has risen, the unit labor costs o f a
company or industry have risen less than indicated when attention is devoted
to labor payments alone. How much has productivity risen during this period
o f a year and a half? Although precise estimates are not yet available, a rough
approximation may be made on the basis o f available data for production and
man-hours.
In manufacturing, a man-hours in 1956 appear to have increased fractionally
for production workers and a little more for nonproduction workers. During
the same period, the Federal Reserve Board index o f production o f manufactures
increased by 2.8 percent. These data suggest a rise in productivity in manu
facturing industries o f no more than 2 percent in 1956. Average hourly earnings
were 5.3 percent higher in 1956 than in 1955 ($1.98 compared with $1.88). In
addition, fringe costs rose. Labor Commissioner Ewan Clague reported at a
National Industrial Conference Board meeting last year that “ Insofar as later
quarters in 1955 were concerned, there was some indication of leveling out [in
productivity] in the latter part o f the year.” Thus, since mid-1955, it appears
that increases in labor costs, including wages and fringes, have far outstripped
the gain in productivity in manufacturing industries. The result appears to
have been a ripe in unit labor costs in excess o f 5 percent.
Gross national product rose from $387.4 billion at annual rates in the second
quarter o f 1955 to $413.8 billion in the third quarter o f 1956, an increase o f 6.8
percent. In real terms, the rise was about 3 percent During the same period,
total employment increased by about 2 percent Thus, for the entire economy,
the rise in productivity appears to have been less than the long term annual rate
o f gain o f 2 percent.
On the basis o f these data, it appears that during the past year and a half o f
creeping price advance, wage increases plus fringe benefits outstripped signifi
cantly the gains in productivity. The President emphasizes this point on page
176
ECONOMIC REPORT OF THE PRESIDENT
34 o f the Report where he concludes that for 1956, “ only a very small gain in
overall productivity is indicated * * * the smallness of the 1956 gain contributed
to the rise in unit labor costs and, in turn, to the increase in prices/*
There is virtually unanimous agreement among economists that labor cost in
creases in excess of gains in productivity will result in pressure for higher prices
as the President has pointed out.
This brief review o f the forces affecting prices during the past year or more
indicates that the President is on sound ground in his conclusion th a t:
“ The combination o f heavy demands from the investment goods sector o f the
economy, rising labor costs, and renewed advances in prices o f many raw mate
rials resulted in price increases for a broad range of semimanufactured mate
rials, components, and supplies. And these price increases became cost increases
to producers of finished goods, many o f whom were also experiencing rising labor
costs” (p. 32).
It is important to keep in mind that a price rise attributable to these factors
will not have the same spiraling effect as an inflation flowing from monetary and
fiscal factors. This is not the background for an explosive inflation. It is the
background for a further modest price rise so long as the boom persists.
POLICIES PROPOSED TO LIMIT FURTHER INFLATION
To limit further inflation, the President emphasizes three areas o f attack.
1. Voluntary limitation o f wage and price increases by labor and business
leaders.
2. Monetary policy.
3. Fiscal policy.
1. Voluntary limitation of wage and price increases
In his Report, the President suggests that, “ Specifically, business and labor
leadership have the responsibility to reach agreements on wages and other
labor benefits that are fair to the rest o f the community as well as to those
persons immediately involved. Negotiated wage increases and benefits should
be consistent with productivity prospects and with the maintenance of a stable
dollar.” There can be little quarrel with this objective. Wage increases in
excess o f gains in productivity result in higher unit labor costs, which create
pressure for price rises.
Nevertheless, we must recognize that many key sectors in the economy are
not free to apply this proposed standard in 1957. For many important industries,
including automobile, steel, electrical equipment, railroads, meat packing, agri
cultural implements, and coal, wage increases for 1957 and in some cases for
1958 have already been incorporated in contracts. BLS reports that 5 million
workers are covered by long term contracts which were negotiated in 1955
or 1956. While this is but a small proportion o f the labor force, it does cover
most of the “ key wage bargains.”
In many of these industries, the negotiated wage increases are scheduled
to be 6 or 7 cents an hour. In addition, provision usually is made for further
adjustment in wages if the cost o f living should rise. The cost o f living
adjustments are made quarterly in some industries, such as automobiles, and
semiannually in other industries like iron and steel. In most instances, the
contracts provide for an increase o f one cent an hour fo r every half point
increase in the consumers’ price index. Further advances in the consumers’
price index seem probable in 1957. I f the rise in the index should be two
points, it will mean a wage increase o f four cents an hour in most o f the in
dustries I have listed. I f the increases in living costs are larger, the wage
increases will be correspondingly greater. In addition to these contract pro
visions for wage changes, some contracts provide for additional fringe benefits
to become effective in 1957.
In light o f these contract provisions, we already seem assured o f an increase
in wage rates o f 4 percent to 5 percent in 1957. Past experience indicates that
the wage adjustments in these key areas will be a very potent force in deter
mining wage increases in other sectors o f the economy where contracts still
remain to be negotiated. Under these conditions, it is impossible for industry
and labor to exercise the restraint called for by the President unless they were
to reopen the existing agreements and negotiate smaller wage increases. Since
the probability o f such an action is completely nonexistent, it is clear that not
much can be done through voluntary restraint insofar as wages and other labor
costs are concerned during 1957.
ECONOMIC REPORT OF THE PRESIDENT
177
The Report also emphasizes that “businesses must recognize the broad public
interest in the prices set on their products and services.,, (p. 3) The ability
o f industry to hold down its prices is not unrelated to what happens to labor
costs. With an average wage increase of 4 or 5 percent likely in 1957 and the
probability that productivity will increase by a much smaller percentage, many
industries will be subject to a further rise in unit labor costs this year. Under
these ; conditions, I question whether the President’s appeal for voluntary
restraint to hold down prices can be attended by much success.
I suspect that we will experience a further price rise o f several percent in
1957 largely as a result o f the rise in labor costs and a continuation o f boom time
conditions. I f the boom subsides later in the year, as some anticipate, then the
pressure on prices should also subside.
The President warns that “ * * * failure to accept the responsibilities inherent
in a free economy could lead to demands that they be assumed by Government,
with the increasing intervention and loss o f freedom that such an approach in
evitably entails” (p. 3 ). In other words, the failure o f voluntary restraints could
lead to wage fixing and price fixing by Government. I would like to state cate
gorically that I am completely opposed to any such program to limit price and
wage rises in peacetime. Such a program is foredoomed to failure and can only
Tesult in disruptions to production, impairment o f incentives, and an ever widen
ing area of controls which will create worse evils than the control program is
designed to overcome.
The effort to limit price and wage increases by exhortation has never suc
ceeded in the past and will be no more successful under current conditions.
I believe that better results can be obtained through monetary and fiscal policy.
2, Monetary policy and fiscal policy
Although the President gives considerable emphasis to monetary and fiscal
policy he states th at:
“ To depend exclusively on monetary and fiscal restraints as a means o f con
taining the upward movement o f prices would raise serious obstacles to the main
tenance o f economic growth and stability. In the face of a continuous upward
pressure on costs and prices, moderate restraints would not be sufficient; yet
stronger restraints would bear with undue severity on sectors of the economy
having little if any responsibility for the movement toward a higher cost-price
level and would court the risk of being excessively restrictive for the economy
generally” (p. 44).
Any restraint exercised through monetary or fiscal policy, however modest,
will inevitably hurt some groups who will be quick to react as we have seen in
the past year. This is unavoidable regardless o f what policies are adopted. And
it is also possible that some groups who have little responsibility for the spiral
will be adversely affected by such restraints. But to state the problem in these
terms is to give only a partial picture. What happens if these restraints are not
imposed and prices are permitted to spiral? Then the burden falls on the large
groups who live on fixed incomes (pensioners, dependents o f those in the Armed
Forces, widows, and similar groups) and on those whose incomes do not and
cannot keep pace with an inflationary price rise (Government employees, teach
ers, ministers, and many white-collar groups).
Unfortunately, there is no best policy in the sense that no one will feel its
effects. There is only a “least worst” policy in the sense that its adverse effects
will be kept to a minimum. In these terms, the alternative to hurting some
groups who do not or may not contribute to the inflation is to hurt still larger
groups who do not contribute to the inflationary pressures.
Do we seriously believe that we are really making every effort to combat infla
tion on the fiscal front when Government spending continues to rise and new
programs of spending are being initiated? It is true that it is expected that the
Federal budget will be in balance even with the enlarged spending, but isn’t
this the time when even larger budgetary surpluses should be built up as a com
pensation for the boom in the private economy ?
Do we seriously believe that we are making every effort to combat inflation
on the monetary front when mortgage credit, consumer credit, and bank credit
continue to expand at near record rates? And is mortgage credit excessively
restrictive with the present low downpayments and 30-year maturities for
mortgages? The Federal Reserve Board “has leaned against the wind,” to use
H r. Martin’s descriptive phrase, but it certainly hasn’t leaned far enough to be in
•danger o f falling over.
178
ECONOMIC REPORT OF THE PRESIDENT
I f stronger fiscal and monetary restraints are required to halt an inflation
they should be imposed* The evils attending inflation are more serious than
those attending strong anti-inflation policies.
CONCLUSION
The rise in prices has reflected the cost push exerted by increases in labor
costs in excess o f gains in productivity in a business boom which has made it
relatively easy to pass these cost increases on to the buyer. There is an under
standable concern with the problem of inflation. However, we are not in a
period o f classic inflation reflecting either Federal Government budgetary deficits
or large expansions in money supply. So long as the Federal budget remains in
the black and monetary policy prevents a sharp expansion in money supply,
there is little likelihood o f a runaway price inflation. Unless the wage-price
spiral is fed by an expanding money supply, it is more likely to lead to unem
ployment of resources as they are “priced out o f the market” than to a major
price inflation.
To the extent that monetary and fiscal policy are used to blunt the boom,
one of the major factors contributing to price advances will be modified or
eliminated. But there will still remain the problem o f excessive increases in
labor costs. Little can be done in the wage area in 1957 because “key wage
bargains” already have been reached. But we must look to the future if we
are to prevent a repetition o f the current situation. President Eisenhower has
pointed squarely to the proper goal in this area in his statement that: “Negotiated
wage increases and benefits should be coexistent with productivity prospects
and with the maintenance o f a stable dollar” (p. 3 ). But this objective will
only be achieved if management in major industries firmly refuses to agree to
labor cost increases in excess o f national productivity gains and if the public
is educated to understand the dangers which arise when labor cost increases
exceed these amounts.
T a b l e 1.— Changes
in the major groups of the wholesale price indew, June 1955-
December 1956
[1947-49=100]
June 1955
December
1956
Metals and metal products________ ________________________
Machinery and motive products___________________________
Pulp, paper, and allied products___________________________
Commodities other than farm products and foods___________
Hides, sirins, and leather products____ _____________________
Nonmetallic minerals, structural__________________________
Fuel, power, and lighting materials________________________
Furniture, other household durables_______________________
Rubber and products___________ ________________________
All commodities._________________________________________
Miscellaneous____________________________________________
Tobacco manufactures and bottled beverages_________ _____
Chemicals and allied products_____________________ —_____
Tflitite products apd apparel ____
. ______ r
Foods, processed_________________________________________
Lumber and wood products_____________________________ _
Farm products..^....... .............. ................................_........ „ _
Source: XJ. S. Department of Labor, Bureau of Labor Statistics.
132.6
127.1
118.3
115.6
92.9
123.7
106.8
115.2
140.3
110.3
89.1
121.6
106.8
95.2
103.9
123.7
152.4
143.5
127.9
1216
99.4
131.3
113.1
121.4
147.9
116.2
91.6
123.6
108.3
95.6
103.1
120.9
91.8
88.6
Percent
Change
-f-14.fr
-t-12.fr
+ 8 .1
+ 7 .8
+ 7 .0
+ 6 .1
+ 5 .9
+ 5 .4
+ 5 .4
+ 5 .3
+ 2 .8
+ 1 .6
+ 1 .4
+ 0 .4
— 0.8
— 2.3
-3 .5
179
ECONOMIC REPORT OF THE PRESIDENT
Taklet
2.— Changes in the major groups of the wholesale price index, December
1955-December 1956
[1947-49=100]
December
1955
Machinery and motive products____ . _. . . _________________
Farm products___________________________________________
Metals and metal products__ ________. _____ . _____________
Foods, processed___________________ - _____________________
Nonmetallic minerals, structural_________________ . ____ ___
All commodities_________________________________________
Commodities other than farm products and foods___________
Fuel, power, and lighting materials__ ___ __________________
Furniture, other household durables-.-.___________________
Pulp, paper, and allied products— ________ _______
Miscellaneous____________________________________________
Hides, skins,' and leather products_____ . ___________________
Chemicals and allied products_____________________________
Tobacco manufactures and bottled beverages..__ ___________
Textile products and apparel___. . . . . . . . . . . . . . . __ ——___ ___
Rubber and products_____ . . . . . . . . . . . . . ____________________
Lumber and wood products____________ . . . . ____ ______ _
133.0
82.9
143.9
98.2
125.4
111.3
119.8
109.3
117.3
123.6
88.8
96.7
106.6
121.7
95.6
151.0
125.1
December
1956
143.5
88.6
152.4
103.1
131.3
116.2
124.6
113.1
121.4
127.9
91.6
99.4
108.3
123.6
95.6
147.9
120.9
Percent
change
4-7.9
+ 6.9
+ 5.9
+5.0
+4.7
+ 4.4
+4.0
+ 3.5
+3.5
+3.5
+ 3.2
+2.8
+ 1.6
+ 1.6
0
-2 .1
-3 .4
Source: U. S. Department of Labor, Bureau of Labor Statistics.
Tabus 3.— Wholesale price indexes by economic sector June 1955, December 1955,
and December 1956
[1947-49*100]
June 1955 Decem
ber 1955
All commodities...............................................
Crude materials, total.....................................
Foodstuffs and feedstuffs..........................
Nonfood materials except fuel..................
Fuels..........................................................
Intermediate materials, supplies, and com*
ponents, total................................................
Total materials and components for man
ufacturing..............................................
Materials for food manufacturing—
Materials for non-durable-goods
manufacturing.................................
Materials for durable-goods manufac
turing
...............................................
Components for manufacturing.........
Materials and components for construc
tion.........................................................
Finished goods, total.......................................
Total consumer.......... ..................... .........
Foods...................................................
Other nondurables..............................
Durables..............................................
Pr«4acer....................................................
Source: XT. S. Bureau of Labor Statistics.
Decem
ber 1956
December-1956 from—
June 1955
December
1955
110.3
96.2
89.7
107.7
102.9
111.3
89.9
75.8
114.9
110.1
116.2
96.2
84.5
115.5
117.2
+ 5.3
0
-5 .5
+7.2
+13.9
115.7
119.4
124.2
+7.3
+4.0
117.1
100.0
120.9
94.8
125.9
100.0
ft?
+ 4.1
+ 5.6
102.4
103.7
105.0
+ 2.5
+ 1.3
137.2
128.2
144.7
137.5
151.1
147.9
+10.1
+15.4
+ 4.4
+7.6
124.2
110.6
106.5
102.1
107.4
115.1
127.1
129.0
111.5
106.1
98.3
108.7
118.1
132.9
133.0
116.0
109.2
101.8
110.7
122.5
143.9
+ 7.1
+ 4.9
+ 2.5
-0 .3
+ 3.1
+ 6.4
+13.2
+3.1
+4.0
+ 2.9
+ 3 .6
+ 1.8
+ 3.7
+ 8.3
+ 4.4
+ 7.0
+11.9
+ 0.5
+ 6.4
180
T a b l e 4 . —Daily
ECONOMIC REPORT OF THE PRESIDENT
index numbers and spot primary market commodity pricest
May 81,1955, Jan. 10,1956, and Jan. 10,1957
[1947-49=s 100]
May 31,
1955
Jan. 10,
1956
Jan. 10,
1957
Percent change to Jan. 10,
1957, from—
M ay 31, 1955 Jan. 10,1956
Groups:
All commodities........................................
Foodstuffs...................................... .
Raw industrials............ .................. .
Livestock and products.....................
Metals......... ............................. .........
Textiles and fibers..............................
Fats and oils.......................................
Commodities:
Burlap............................................ yard..
Butter.......................................... pound..
Oocoa beans.................................... do___
Copper scrap........... .......... .......... do___
Corn............................................bushel. _
Cotton, 14-market average......... pound..
Cottonseed oil................................do___
Hides............................................... do___
Hogs..................................... 100 pounds. .
Lard............................................. pound..
Lead scrap.............................. . . . . . d o ___
Print cloth:
Spot and nearby...................... yard__
Most distant contract_______ do ... _
Rosin....................................100 pounds. _
Rubber........................................ pound..
Steel scrap.........................................ton..
Steers........................... ........ 100 pounds..
Sucrar............................................... d o___
Tallow..........................................pound..
T in.................................................. do___
Wheat:
Kansas C ity..........................bushel. _
Minneapolis............................. d o___
Wool tops.................................... pound..
Zinc................ ................................ do___
89.0
86.2
90.8
62.9
105.4
84.2
65.3
89.8
74.8
101.8
92.1
83.3
98.6
66.7
58.5
129.3
80.8
62.9
122.2
$0.106
.574
.310
.415
1.248
.339
.119
.155
11.750
.108
.092
$0,116
.594
.236
.298
1.345
.334
.144
.140
17.700
.153
.085
.062
.915
.206
.195
9.600
.422
51.000
21.375
5.850
.072
1.064
.186
.188
9.700
.344
61.000
22.375
6.400
.069
2.462
2.471
1.815
.125
2.150
2.325
1.555
.140
$0,115
.571
.365
.350
1.461
. 336
.141
.132
18.750
.122
.082
.187
.188
9.200
.318
32.000
23.000
6.000
85.3
71.8
+ 3.5
-3 .4
+8.6
+6.0
+15.9
+1.3
10.0
+
+.9
+ 4.0
-3 5.3
-1 4.9
-7 .9
-.6
+2.1
+6.1
-5 .6
+25.4
+3.7
-.5
0
+
2.6
+11.4
-3 .1
+14.0
- 5 .5
+5.6
+14.1
+9.4
+3.5
-2 3 .9
-28. 2
+ 7.8
-1 .5
+21.0
-9 .7
+50.6
+41.7
- 7 .0
- 9 .7
- 3 .6
+1.0
1.012
+5.4
+8.2
+90.6
-2 .7
+6.7
+11.3
+10.6
-1 8.5
+19. 6
+ 4.7
+9.4
-4 .2
-4 .9
2.330
2.335
1.950
.140
-5 .4
-5 .5
+7.4
412.0
+ 8.4
+• 4
+25.4
0
Source: U. S. Bureau of Labor Statistics.
Chairman P a t m a n . Mr. Brubaker, research director, United Steel
workers o f America.
STATEMENT OF OTIS BRUBAKER, RESEARCH DIRECTOR, UNITED
STEELWORKERS OF AMERICA
Mr. B r u b a k e r . Mr. Patman, members o f the committee ladies and
gentlemen, the Steelworkers Union is delighted to accept the invitation
o f the Joint Economic Committee to participate in this panel discus
sion o f the question of the so-called wage-price inflation spiral men
tioned prominently in two recent Presidential statements. This panel
discussion can be, and we hope it will be, the beginning o f a serious
investigation by the Joint Economic Committee o f the causes o f infla
tion and what can be done about them.
Certainly our union, the United Steelworkers o f America, does not
now, and never has, favored inflation. The members o f our union and
the retired former members suffer as much as do other members of the
public when pay checks and pension cheeks buy less and less because
o f inflation, i. e., higher prices o f food, clothing, shelter, and the other
necessities of life, is constantly nibbling away at the real buying power
o f their incomes.
ECONOMIC REPORT OF THE PRESIDENT
181
Unfortunately, however, there is much misinformation about infla
tion and its causes. There is a deliberate, widespread, and systematic
attempt in our country by such groups as the National Association of
Manufacturers, the chamber of commerce, many newspapers, and
other large employers to lay the blame for inflation on the efforts of
wage earners and their unions to secure wage and fringe improvements
in order to raise the standard of living of the American worker.
Congress can do much in this regard if it will search out the facts
concerning wages, prices, and profits, their roles in our economic
system, and assess the blame on those who cause and those who profit
from inflation. In fact, if the spotlight of congressional publicity is
kept focused on those who would like to raise prices and constantly
increase profit margins, it may have a salutary effect in curbing price
increases.
Our union has prepared some fairly elaborate studies, with the assist
ance of Mr. Robert Nathan’s office, which we are presenting to the com
mittee. We would like to ask that they, along with this shorter state
ment, be made a part of the record of the hearing.
Chairman P a t m a n . The committee will consider it. There is no
question about putting in your statement. We do have a problem in
printing^ with respect to those documents, particularly the charts and
illustrations.
Mr. B r u b a k e r . Standing alone this briefer statement is not an
adequate statement. We have made many references to these more
elaborate studies.
Chairman P a t m a n . Without objection they will be inserted in the
record.
(The documents follow:)
U n ite d S t e e lw o r k e r s o f A m e r ic a
Pittsburgh 22, Pa.
D e a r Si r : Since midnight o f June 30 the basic steel industry has been idle
because of the decision o f the companies to shut down operations when labor
contracts with the United Steelworkers of America terminated.
Instead o f engaging in good faith bargaining with the union prior to June 30
to work out new contracts which would meet the needs of the employees and
provide them with an adequate share in the tremendous prosperity of the in
dustry, the companies forced 650,000 o f their employees and thousands in other
industries into unemployment with consequent harm to the economy.
We o f the United Steelworkers did not want this shutdown to happen. We
did everything in our power to prevent it. W e made reasonable proposals for an
honorable settlement which would be fair to the employees, the stockholders,
and the public. However, we were confronted by a totally inadequate take-itor-leave-it proposition from the industry.
We are not indulging in wild charges, but stating our sober conviction, when
we say that the leaders of the steel industry forced the shutdown— for ulterior
reasons which they must be better able to explain than anyone else. You will
recall that the Steelwokers Union, just before contract talks with the industry
spokesmen were broken off, made a forthright offer to extend our agreements for
15 days with customary retroactivity to provide more time for negotiations. The
industry showed its true purpose o f forcing a shutdown when it flatly rejected
this offer.
Thus we stand at the present impasse—with time ticking away, with a needless
great loss in production, in wages, in purchasing power to keep the wheels of
our economic machine turning.
I realize that you, as a public-spirited citizen, would like to know more o f
the facts on this situation than can be found in the newspapers. Ours is a
responsible union. We believe that you—and the public in general— have a right
to know the facts because all of us have a stake in the outcome. It is in recog
182
ECONOMIC EEPORT OF THE PRESIDENT
nition o f your right to know that the United Steelworkers of America has
prepared two well-documented studies of the facts and real issues involved in
our present dispute with the steel industry. For it is only through a study o f the
clear facts that the issues can be reasonably appraised and intelligent negotiations
carried on.
Unfortunately the spokesmen for the industry have not been willing to engage
in genuine negotiations based on the irrefutable facts contained in these two
studies. Rather, they have substituted press releases, press conferences, and
newspaper advertisements for genuine negotiations. Because their inadequate
proposals, which they well knew the union could not accept, were handed down
with a take-it-or-leave-it attitude which cannot be defended, they have obscured
or misrepresented the facts.
So I commend, then, for your judgment, the facts in our two studies here
summarized. In the one entitled “ Steel and the National Economy 1956,” there
is a thorough analysis o f the current state o f the economy and the over-all effect
o f the steel industry on the national economy, with special emphasis on the ques
tion of inflation. In the other study entitled “ Facts on Steel: Profits, Pro
ductivity, Prices and Wages, 1956,” there is a detailed examination o f the finan
cial position of the industry, with significant comparisons of the relationship
o f profits, productivity, prices, and wages.
You recall that steel industry spokesmen have sought to justify their failure
to offer a reasonable wage increase by invoking the word “inflation.” They
said that “ no increase in employment costs at this time would be in the Nation’s
best interests * * *” since it would set off “ another ruinous round o f inflation.”
Now, there are very few people indeed who want inflation, but we sharply dis
agree with the industry’s contention that inflation is caused by wage increases—
for to say this is tantamount to saying that it is impossible for the living stand
ards o f the working population to improve at all. Indeed, any inflationary
tendencies that may exist in our economy stem not from wage and salary in
creases, which are vitally needed, but from pricing policies o f industry generally
and particularly the steel industry. Let us see what our studies have to say on
this and related subjects.
STEEL A N D
THE
N A T IO N A L
ECONOM Y
The volume which addresses itself to the problem of inflation and the present
state o f our economy contains the following facts and essential policies:
Concern is expressed by the union as to the need to safeguard and improve
the health of our economy as a whole. Note is taken o f the fact that there have
been some serious soft spots in the fabric o f the economy, which has been on
a plateau for some 9 months. Despite precarious inventory accumulations and
higher consumer debt, the full employment levels o f 1952 and 1953 have not
been matched. Prosperity in the last decade has been sustained by wage and
salary increases and labor’s rising share o f the total income. (Though in steel
labor’s total-income share has fallen in this decade.) But labor’s share in the
economy, as well as in steel, has fallen in the last year and consumer purchases
are lagging. Unless corrected, this could spell trouble.
With confidence in the fundamental strength o f our economic system, and
with faith in its potential growth, we also in this study take into account the
possibilities and challenges o f the years ahead. A growing labor force and ris
ing productivity make possible a doubling o f our production and our standard
of living within the next 20 years. These can be achieved only if there is an
active market for the goods and services we can produce.
Consumers buy $5 of every $6 worth o f goods and services purchased pri
vately. Since consumer purchasing power arises largely from wages and sal
aries, wages and salaries must increase if economic expansion is to be resumed
and a market provided for this doubled production.
Our study refutes any alleged relation between wage increases and inflation
and states: “ Experience has proved that wage incrases have not caused infla
tion, that wages can be increased without prices being raised, and that rising
real wages give us stable prosperity and growth.”
Wage increases, says our report, lagged behind price increases in the im
mediate post-war and Korean inflations and obviously could not have caused
inflation. The pattern o f inflation is rising prices, rising real profits and lag
ging real wages. In the stable period since mid-1951, on the other hand, wage
rates in manufacturing have risen 23 percent, living costs less than 4 percent
and industrial prices 4 percent. Yet total profits before taxes reached record
levels in 1955.
ECONOMIC REPORT OF THE PRESIDENT
183
Rising real wages, stable prices and sustained high profits, made possible by
constantly increasing productivity, are thus the keys to economic stability and
perpetuation of prosperity for all segments of our economy. Our study points o u t:
“ Productivity * * * has been increasing more than 3 percent per year. In
manufacturing industries, the annual rate has been exceeding 4 percent. Auto
mation will increase the pace. * * * Real hourly earnings in manufacturing fell
behind the rise in productivity at the time of the Korean War and have not
caught up yet. This disparity must be corrected through rising real wages.”
With steel a conspicuous exception, the union’s report says, rising volume of
business in industry generally has tended to be associated with lower profit
margins per unit of production in periods of stability. This policy has yielded
prosperity and high total profits. The spurt of industrial prices ahead of wages
and the sharp rise in profit margins in 1955, after 4 years of moderate decline,
spell danger and must be reversed.
Our study reveals a disturbing irresponsibility in the pricing and profit margin
policies of the steel industry. Our study states:
“ The contrast between the pricing policies of the steel industry and o f all
manufacturing industries as a whole is rather startling. Steel prices have in
creased proportionately with wage rates since 1947 ignoring rapidly rising pro
ductivity in its pricing policies. For all manufacturing, industrial prices in
creased considerably less than half as much as wage rates from 1947 to 1955.
“The steel industry does not follow the principle of higher volume and lower
margins. I f there is any single industry that has followed inflationary pricing
practices; that has shown a disregard for the economic welfare of the country,
especially relative to its key role in the economy; that has truly practiced infla
tion ; that has the least right to hide behind the cloak of favoring a sound dollar
and to contend that wage increases are inflationary; it is the steel industry/’
Before the union commenced negotiations with the industry, several steel
company spokesmen had issued public statements calling for higher prices for
their products. They based this mainly on the plea that price increases were
required to finance expansion. Our study says of th is:
“Contentions by leaders of the steel industry and other industries that prices
. must be increased so that there will be more profits with which to finance expan
sion are astounding. Raising prices to secure funds for new plant and equip
ment in effect forces the consumer to put up the money for new plants for th e'
benefit of existing stockholders. The consumer gets nothing for his forced
‘investment.’ The opportunity for American citizens to participate in the growth
of American industry is denied when expansion is financed entirely through
exorbitant profits rather than security flotations.”
F A C T S O N ST E E L : P R O F IT S , P R O D U C T IV IT Y , P R IC E S A N D W A G E S
Now let me refer you to the second o f our two economic studies, which deals
with the financial position o f the steel industry in relation to industry as a
whole and in relation to profits, wages, prices and— of special significance—
productivity in relation to all o f these factors.
Our study emphasizes productivity as the key to the entire question o f wages,
prices, profits and the health of the overall economy.
“ It is now commonly accepted that, over long periods, wage gains and rising
living standards must come largely from increased productivity, i. e., rising
output per man-hour,” states our report. “ With this concept the union has no
quarrel as long as one prior condition is met—namely, that the income shares as
between management and investors on the one hand and labor on the other * * *
are fair and equitable. There is no such equitable sharing in the steel industry
today.”
Here is what our analysis of the productivity record o f steel reveals:
Taking note of the great, continuing rise in productivity for many years, we
observe especially “ the sharp acceleration in the productivity rate in the most
recent years.”
For example, productivity in the steel industry currently has been running at
a rate 4.7 percent higher than in 1955. And the rate in 1955 was a phenomenal
11.2 percent above 1954. In short, steelworkers are producing more and more
steel per man-hour. Increased productivity in steel has run well in excess of
the increase in the economy as a whole and in manufacturing industries.
Yet what does a comparison show us? Taking the years 1939-1956 (more than
16 years), we find the “real” productivity increase in the steel industry to be 68.8
87624 0— 57------ 13
184
ECONOMIC REPORT OF THE PRESIDENT
percent. For the same period, the “ real” straight time average hourly earnings
of the steelworker rose only 47.1 percent.
It is evident that increasing productivity is the key to providing higher wages,
higher standards of living, broader and more stable prosperity— and all without
the need to boost prices beyond reason and without harm to the rightful profits
of the industry and its investors. For if the millions of workers in industry do
not receive a fair share of these benefits o f increased productivity, then our free
enterprise economy cannot continue to function. And it is in this area that the
leaders of the steel industry have, so far, been far too backward and shortsighted.
Our study of the industry contains interesting revelations as to steel profits.
Far from being in dire straits, profit-wise, the steel corporations under examina
tion have been showing a 1956 profit rate o f 15.3 percent higher than last year
and, believe it or not, 107.4 percent higher than in 1954! These are profits before
taxes, and it should be remembered that wage increases are offset from profits
before, not after, taxes. As to profits after taxes, you will find that these com
panies have been reaping, at the 1956 rate, net profits 13.1 percent higher than
in 1955 and 95.6 percent higher than in 1954.
That is not all of the story, however, for any such gain in profits has to be
compared to profits in other lines of manufacturing to make real sense out of
the comparison. You will find in our study that such a comparison shows that
the steel industry has done very well indeed.
Take a look at this, if you will, from the point o f view of profits as a share of
the “ sales dollar,” which is a favorite approach o f many companies. What we
discover is th is:
While net profits as a share of the sales dollar in the steel industry went up
from 6.2 cents in 1947 to 7.9 cents in 1956, the record shows that net profits for
all manufacturing companies went down from 5.7 cents in 1947 to 4.3 cents in
1956.
And these figures, by the way, do not at all mean that companies in other
manufacturing lines are in bad condition, profit-wise, or are ill-managed. Rather,
it means simply that with increased productivity and higher volume of business
these companies are taking less profit per dollar of sales. In contrast to this,
the steel industry has been siphoning off more and more profit from each and
# every sales dollar, instead o f passing on more o f the benefits of increased produc# tivity and high-level sales to their employees and their customers.
You will find, too, a striking contrast in the rising size o f dividend payments
by the steel companies, whose dividends more than tripled between 1947 and
1956 while the dividends from all corporations were not quite doubled.
This study discloses, as does our other study, that the pricing policies of the
steel industry have shown little concern for the welfare of the public. Tradition
ally the industry has sought to justify price increases as being necessitated by
wage increases, increased materials costs, alleged “ too low” profits margins, and
more recently, the “ need” to finance expansion out of profits. We have already
seen from our studies that profit margins certainly are not “ too low” and that the
concept of financing expansion out of profits is untenable and in contradiction to
the traditional system o f obtaining expansion capital through flotation of se
curities.
The facts in our study likewise contradict the industry’s assertions that in
creased wages and materials costs have necessitated price increases. The indus
try has increased prices out of all proportion to increased costs. For each $1.00
increase in labor costs since 1945, exorbitant price increases have yielded $3.19
in additional revenues. The figures on materials costs are equally startling.
Materials costs since 1947 have risen about 28 percent, but steel prices in the
same period have risen 78.2 percent— an excess of price increases over cost in
creases o f nearly 3 to 1.
A central and overriding fact relative to the current dispute which emerges
from our study o f the steel industry is the ability o f the industry to absorb a
truly substantial wage increase without a price increase. This is due to the
relatively small portion of total costs represented by wage costs, about one-third
only, and to the great profitability o f the industry.
Within the framework o f its 1956 operations, the steel industry could absorb
for a full year a wage “cost” increase which would meet the needs of its em
ployees, forego a price increase, and end up with net profits comparable to the
huge profits of prior years. The return on net worth would still be nearly dou
ble the fair and reasonable rate of 6 percent, and the return on sales would
be well above the 4.3 cents for all manufacturing corporations in 1956.
The picture becomes even more overwhelming when we realize that the fore
ECONOMIC REPORT OF THE PRESIDENT
185
going figures are based on an assumption o f no increase in productivity. Clearly,
even a modest productivity increase o f 4 or 5 percent will facilitate the industry’s
ability to absorb wage increases without increasing prices and still end up with
enormous profits.
What does all of this prove? Certainly not that the industry should not make
good profits, nor that the stockholders should not receive good dividends. Rather,
what it demonstrates is that the steel companies can well afford, beyond the
shadow o f a doubt, to meet the Steelworkers* proposals for a substantial wage
increase and the other benefits we ask for our members and that they can do
so without raising prices.
The Steelworkers Union presented reasonable, practical and justifiable pro
posals to the steel industry.
We asked for a substantial wage increase which is vitally needed to permit
steelworkers to improve their living standards, to share in the industry’s record
prosperity and productivity which they have greatly helped to fashion, and to
provide them with the increased purchasing power needed for a prosperous and
expanding economy.
We asked for Sunday premium pay at double time and Saturday premium pay
at time and one-half in line with the predominant practice in American industry.
We asked for improvements in “fringe” benefits such as holidays, vacations,
shift differentials, and insurance.
These provisions of our contracts have fallen far behind practices now preva
lent in American industry as indicated by the following table taken from our
report:
American industry practices
Pay for Sunday work _ __________________
Pay for Saturday work..................................
Paid holidays......... ........................................
Premium above holiday:
Pay for work on holidays ____________
Vacations for:
3 years of service
- ________________
10 years of service
__________________
Over 15 years of service............................
Shift differentials:
Evening ___________________________
Night............................................ ............
Double time............ ............
Time and one*half................
7.............................................
Steel industry practices
Single time.
Single time.
6.
One-half time or better......... None.
2 weeks................................ 1 week.
3 weeks.................................. 2 weeks.
3 or 4 weeks..... ..................... 3 weeks.
10 cents.................................. 6 cents.
15 cents____ ____ _____ ____ 9 cents.
We asked for a supplemental unemployment benefits plan to protect steel
workers against the ravages o f unemployment which occasionally occurs in this
industry.
We asked for improvements in other contract provisions which need moderniza
tion.
Our study points out that the steel industry has refused to make a wage offer
or an offer on the other contract items which even begins to meet the needs here
noted. Customarily, the industry and the union have signed 2-year contracts
with provision for wage reopening after 1 year. Now the industry has de
manded a closed-term, 5-year contract, the provisions of which are decidedly
substandard. The industry has flatly refused to make any wage or contract
proposals for the customary 2-year term.
The industry has advertised far and wide that the take-it-or-leave-it package
which they have offered us, over the 5-year term, would cost 65 cents an hour.
This industry figure, as our study proves, is propaganda rather than fact.
Giving the companies the benefit of any doubt, the ultimate value o f the industry’s
offer, when they all finally go into effect in 1961, would be 45.3 cents per hour.
Moreover, the average benefit over the 5-year term amounts only to 28.5 cents
per hour since many o f the offered benefits would not become effective for
several years. This is much less than we have received on the average during
the past 10 years under 1- and 2-year contracts.
The industry has alleged that any substantial meeting o f the union’s demands
would (1) represent a cost too great for the industry to bear, (2) force a large
hike in steel prices, (3) be highly inflationary in steel and in the economy.
These allegations are, as our studies have shown, wholly unsupported by the
facts. They are a deliberate attempt to mislead the public. It is plainly not
true that increases in employment costs in steel would set off another round
o f inflation. Inflation is an increase in prices— and it is the companies’ price
186
ECONOMIC REPORT OF THE PRESIDENT
policies which have an inflationary effect, not its wage policies. As has been
shown above, the steel industry—unlike almost every other American industry—
has refused to absorb wage increases in the past and has instead passed on to
the consumer three times the cost of each wage increase. The steel industry—
unlike almost every other American industry—has increased its profit on each
dollar o f sales, instead o f lowering it, as volume increased. The steel industry—
unlike almost every other American industry—has refused to recognize that
wages should increase without a price increase when workers produce more
steel for each hour they work.
In short, the steel industry can afford to meet the union’s proposals without
increasing prices, and without setting off any inflationary effect whatsoever.
Not only can they afford it, but they have a responsibility to do so— in order
that the benefits of increased productivity and profits shall be shared by their
employees and thus keep purchasing power in balance with output to insure a
healthy economic situation.
For you will find in our study of the industry that the steel industry’s share
of the sales dollar in gross profit has risen from 10.9 cents in 1947 to a rate o f
10.2 cents in 1956. But in shocking contrast to this, an analysis of the 11 com
panies on which proper information was available reveals that wages and
salaries, as a share o f the sales dollar, have been reduced from 40.5 cents in
1939 to 35.5 cents in 1955. In other words, as we state in our report, “the wage
earner’s portion of the sales dollar has grown smaller and smaller.” The facts
reveal, for example, that despite the hourly wage increases (plus pension and
insurance improvements) in 1954 and 1955, the actual labor cost per ton o f
steel produced is less in 1956 than it was in 1954.
All this is, indeed, a far cry from the impression created by steel-industry
propaganda, with its complaints of rising wage costs and too-small profits. And,
o f course, the factual record of their pricing policies do not jibe with their piously
expressed concern over inflation. The facts, as our two studies prove, are that
the industry’s profit position has been steadily improving while its wage and
salary costs have been substantially reduced.
Obviously, if such a trend as this were prevalent throughout all industry,
there would spread such a gap between the output of mass production and the
buying power o f the consumers as to create a serious danger to the economy.
There must be a balanced sharing of the benefits derived from increased pro
ductivity to keep the economy going forward.
The steel-industry leaders should face the plain economic facts which are
presented in our two studies and which I have outlined to you here.
Adm. Ben Moreell, of Jones & Laughlin Steel Corp., speaking in behalf of the
steel industry over -a nation-wide television network on June 28, -said that agree
ment could be reached between men of good will. We in the steelworkers con
curred in that, and we still concur. Added to good will must, o f course, be
reason. And reason must operate within the framework of the economic facts.
The union has been willing throughout, and is willing now, to negotiate a fair
and honorable settlement based on our proposals, which our studies prove are
reasonable, practical, and entirely justifiable. It is the plain duty of the industry,
now that it has succeeded in forcing a steel shut-down, to begin—for the first
time— the process of give-and-take negotiation which alone can end the present
crisis.
Sincerely yours,
D a v id J. M c D o n a l d , President.
FACTS ON STEEL:
PROFITS, PRODUCTIVITY, PRICES
AND WAGES
1956
UNITED STEELWORKERS OF AMERICA
1500 COMMONWEALTH BUILDING
PITTSBURGH 2 2
, PENNSYLVANIA
Printed In U.S.A.
JULY, 1956
188
ECONOMIC REPORT OF THE PRESIDENT
Introduction
The Steelworkers Union has presented to the Steel Industry a set of reasonable, practical and justi
fiable collective bargaining proposals in 1956. The Union has asked for:
1. A wage increase.
2. Improvements in the out-dated “ fringe” benefit provisions of the agreements covering such
“fringes” as holidays, vacations, shift differentials, and insurance.
3. Premium pay for Saturday and Sunday work, for the first time.
4. Institution of a Supplemental Unemployment Benefits plan.
5. Modernization of many of the non-monetary clauses of the agreements such as union security,
seniority, hours of work, safety and health, and others.
These collective bargaining proposals are modest in scope. The justification for the proposals is clear
and unequivocal. In fact, the Steel Industry during the negotiations with the Union has pretended that
it agreed with the bases on which most of the Union’s proposals rest. The bases for the proposals are:
1. A wage increase is obviously necessary in order to accomplish at least four goals:
(a) To permit Steelworkers to improve their living standards along with millions of other Amer
icans who likewise are enjoying wage and salary increases in 1956— increases which are aver
aging at least 10^ per hour and are ranging as high as 25^ in some of the more prosperous
industries.
(b) To permit Steelworkers to share in the prosperity of the Steel Industry which they have
greatly helped to fashion.
(c) To permit Steelworkers to receive a fair share of the fruits of the large increases in productiv
ity—output per man and per manhour— to which they have so importantly contributed.
(d) To provide Steelworkers with that part of the increased purchasing power and income needed
among wage and salary workers if our Economy is to prosper and expand.
2. The “ fringe” benefit provisions of the contracts with Steel Companies have fallen far behind the
practices now prevalent in the vast majority of the collective bargaining agreements in American
Industry. They must be greatly improved just to “catch up” with the benefits already provided
by most other industries and major companies.
The Steel Industry’s current proposals—some of which would not be effective until July 1,1960
— still fall most significantly short, on nearly every item, of meeting the presently prevailing prac
tices in American Industry.
3. A Supplemental Unemployment Benefits plan to help Steelworkers during the serious layoffs and
losses of pay which occasionally occur in this Industry is badly needed. The Industry has conceded
this principle, though it has proposed a wholly unacceptable plan.
Sunday Premium Pay at double time and Saturday Premium Pay at time and one-half are also
the predominant practice in American Industry. The Steel Companies, however, still refuse to
meet this practice. Instead they propose a minor premium for Sunday (1/25 time) and none for
Saturday. Even this insignificant Sunday premium would begin only three years hence.
4. Many of the other contract provisions are also subnormal. Steel is one of the very few major in
dustries which still adamantly refuses to grant a union shop. It still insists on seniority provisions
which result in discriminatory layoffs for senior employees. It still refuses to make proper ar-
ECONOMIC REPORT OF THE PRESIDENT
189
rangements with the Union to safeguard the safety and health of Its employees. It still insists on
split work weeks and schedules which disrupt eaeh employee’s life each week by rotation from
day shift to evening shift to night shift and which force nearly all Steelworkers to work fre
quently on Sundays and Saturdays, when most of the work could just as readily be scheduled on
other days.
The Steel Industry has refused to make a wage offer or an offer on the other contract items which
even begins to meet the needs here noted. Customarily, the Industry and the Union have signed 2-year
contracts with provision for wage reopening after one year. Now the Industry has demanded a closedterm, 5-year contract, the provisions of which are decidedly substandard. The actual offer, taken to
gether with the conditions made a part thereof, bears little resemblance to the publicized proposal. The
Industry has flatly refused to make any wage or contract proposals for the customary 2-year term. It
has alleged that any substantial meeting of the Union’s demands would:
(1) represent a cost too great for the Industry to bear,
(2) force a large hike in Steel Prices,
(3) be highly inflationary in Steel and in the Economy.
These allegations are, in the Union’s opinion, wholly unsupported by the facts. They are a delib
erate attempt to mislead the public. It is important and appropriate to check these claims against
the facts and data which are available. This the Union has attempted to do in this presentation. In the
financial analysis which follows the Union has examined the facts and figures available in the Annual
Reports to the stockholders of each of these Companies and in the statistics published by the Government
and by various private organizations. This analysis of the Steel Industry examines the data of 25
major Steel Companies and treats these Companies, which account for over 90 percent of all steelmaking
capacity in the United States, as being representative of the whole Industry.
These 25 Companies include all firms with annual ingot capacity of 500,000 tons or more as of Janu
ary 1, 1956, except for Ford Motor Company, International Harvester Co., Timken Roller Bearing Co.,
and Merritt-Chapman & Scott Corp. (parent of Newport Steel Corp. and Milton Steel Div.) which are
primarily engaged in business other than Steel production; and Reeves Steel and Mfg. Co. (parent of
Empire Steel Corp.) for which no financial data are published. These 25 Companies are listed in each
of the Tables in descending order of ingot capacity. The Companies and their ingot capacities are
shown in TABLE 1 and graphically in CHART 1.
Table 1
THE STEEL INDUSTRY
(25 Companies)
Annual Capacity la Tons
U.S. Steel............................................ 39,215,000
Bethlehem............................................ 20,000,000
Republic............................................... 10,262,000
Jones & Laughlin.................................
6,166,500
National...............................................
6,000,000
Youngstown S and T ..........................
5,750,000
Inland..................................................
5,200,000
Armco..................................................
5,150,000
Colorado F and 1.................................
2,514,500
Wheeling..............................................
2,130,000
Sharon.................................................
1,763,000
Kaiser...................................................
1,536,000
Crucible...............................................
1,423,400
McLouth...............................................
Pittsburgh.............................................
Detroit..................................................
Granite City..........................................
Barium..................................................
Allegheny Ludlum.................................
Northwestern S & W ............................
Lukens...................................................
Alan Wood............................................
Copperweld...........................................
Lone Star..............................................
Laclede..................................................
1,380,000
1,320,000
1,290,000
1,080,000
898,600
864,200
825,000
750,000
625,000
618,380
550,000
500,000
TOTAL (25 COMPANIES) 117,811,580
This 117,811,580 tons of capacity of these 25 Companies is 91.8% ot the total capacity (128,363,090 tons)
of the Industry as of January 1, 1956.
SOURCE.—American Iron and Steel Institute.
190
ECONOMIC REPORT OF THE PRESIDENT
CHART 1
Steel Ingot Capacity as of January 1,1956
128,363,090 tons
The Big 3 Steel Companies have 54.1 % of
the Industry's Capacity
90 U *c i>
American iron and Steel Institute
191
ECONOMIC REPORT OF THE PRESIDENT
Summary Statement
The Union’s proposals for improvements in the
current agreements with the Steel Industry (25
Companies) are fully justified on the basis of the
facts. These are fully documented in the detailed
analysis which follows. Some of the highlights
of that documentation are:
1. Profits of the Steel Industry (25 Companies)
are at a record high level:
The 1956 annual rate of Profits Before Taxes is
$2,350.7 million. This is:
15.3%
107.4%
238.3%
1,390.6%
higher than in 1955 ($2,038.5 million)
higher than in 1954 ($1,133.6 million)
higher than in 1947 ($ 694.9 million)
higher than in 1939 ($ 157.7 million)
The 1956 annual rate of Net Profits is $1,153.4
million. This is:
13.1%
95.6%
192.5%
812.5%
higher
higher
higher
higher
than
than
than
than
in
in
in
in
1955
1954
1947
1939
($1,019.4
($ 589.8
($ 394.3
($ 126.4
million)
million)
million)
million)
2. Profit margins for the Steel Industry (22-25
Companies) have widened. For All Manufactur
ing Corporations profit margins have narrowed.
In Steel
Net Profits as a share of the Sales Dollar rose
from 6.2^ in 1947 to 7.9^ in 1956.
In All Manufacturing
Net Profits as a share of the Sales Dollar
declined from 5.7^ in 1947 to 4.3^ in 1956.
In Steel
Net Profits as a rate of Return on Net Worth
rose from 10.5% in 1947 to 13.8% in 1955.
In All Manufacturing
Net Profits as a rate of Return on Net Worth
declined from 15.1% in 1947 to 12.3% in
1955.
3. The Steel Industry (25 Companies) has
handsomely rewarded its stockholders. Dividend
payments in 1956 are at an annual rate of $412.9
million, a record high. This is an increase of
223.1% since 1947. All Corporations showed an
increase during this period of only 80.0%.
4. The Steelworker has increased his produc
tivity—output per manhour—sharply.
By 4.7% in the 1st quarter of 1956
By 11.2% in 1955 (a record high for a year)
By 68.8% since 1939
For his efforts the entire Steel Industry wants
to reward him with a decreasing rate of wage in
crease:
11.3^ actual average wage settlement in last
four years
7.3^ offered average wage increase for next
five years
5.
The entire Steel Industry has reaped a bo
nanza from Steel Price increases out of all pro
portion to increased costs. Since 1945 there have
been 8 rounds of wage increases (plus pensions
and insurance during another year) and 18 rounds
of price increases.
The cumulative impact of the Price and wage
increases measured on 1955 operations meant to
the entire Steel Industry.
Additional Revenues.............. $5,697.2 million
Additional Labor C ost...........$1,783.2 million
Total G a in ......................$3,914.0 million
For each $1.00 increase in labor costs the Steel
Industry has generated $3.19 in additional rev
enues by their unjustifiably big Price increases.
6. Since 1947 (through March, 1956)
Prices of Steel Sold (1st quar
ter, 1956, average is 77.7%) +78.2%
Prices of Materials Purchased +26.7%
7. An examination of major “fringe” practices
in Industry which can readily be compared shows
the serious lag of the Steel Industry.
Pay fo r Sunday W ork
P ay fo r Saturday W ork
Paid Holidays ................
Premium above Holiday
Pay for W ork on
Holidays ......................
Double time
Tim e and onehalf
7
Single time
Single time
One-half time o r
better
Vacations for:
3 years o f service—
10 years o f service.—
O ver 15 years o f
s e r v ic e -----------------Shift Differentials:
E v e n in g -------------------Night -----------------------
2 weeks
3 weeks
1 week
2 weeks
3 weeks
1<*
15*
64
9*
192
ECONOMIC REPORT OF THE PRESIDENT
A. THE FINANCIAL POSITION OF THE STEEL INDUSTRY
The facts on the Steel Industry tell a most re
markable story. Never in the history of the
Steel Industry has its financial position been
as strong and as sound as it is today. Mea
sured by any standard and measured against
any year, the Profits of the Industry are at a
fabulous and exorbitantly high level. This applies
to the Industry as a whole and to the individual
Steel Companies comprising the Industry. With
in the framework of its current Profit structure
the Industry can grant the workers substantial
wage increases and other benefits, absorb them,
and still maintain Profits at record or near record
levels. The steady and almost uninterrupted in
crease in the Profits of the Industry are readily
apparent from even a cursory inspection of its
own financial reports.
TABLE 2 is a summary showing pertinent fi
nancial data since 1939 for the Steel Industry:
Table 2
COMPARATIVE FINANCIAL DATA*
(dollars in millions)
STEEL INDUSTRY
(25 Companies)
Common Stock
Cash
Dividends
Net Profits
as a Rate oj
Return on
Net Worth (;
Sales
Profits
Before
Taxes
Net
Profits
$14,576.2
$2,350.7
$1,153.4
$412.9
1955
12,993.9
2,038.5
1,019.4
353.9
7,390.4
13.8%
1954
1953
1952
1951
1950
1949
1948
1947
1946
1939
9,855.1
12,165.1
9,966.3
11,053.3
9,064.3
7,179.3
7,867.5
6,421.6
4,514.9
2,368.1
1,133.6
1,600.7
929.6
1,884.0
1,530.7
933.3
985.9
694.9
368.3
157.7
589.8
679.4
492.5
633.5
728.5
521.8
534.9
394.3
249.9
126.4
269.0
248.7
238.8
240.3
246.0
167.9
150.2
127.8
95.6
16.4
6,681.0
6,303.0
5,890.8
5,668.4
5,177.1
4,714.0
4,395.3
3,754.1
3,527.3
3,025.7
8.8%
10.8%
8.4%
11.2%
14.1%
11.1%
12.2%
10.5%
7.1%
4.2%
1956**
Net
Worth (a)
15.6%
* Indudes 25 Companies. Two of the smaller Companies were not operating in 1939. Exclusion of the figures for these two
Companies for later years to make the number of Companies entirely uniform throughout would have only a negligible effect on the
above comparisons.
** Annual rate projected from 1st quarter 1956 figures (except for Kaiser for which 6 months ending 12/31/55 was used).
(a ) Net Worth is as of the end of year. Computation of the rate of Return on Net Worth was based on Net Worth
as of the end of the year except for 1956 for which beginning Net Worth was used.
SOURCE.— Based on other Tables.
As can be seen from these figures, Sales, Prof
its Before and After Taxes, and Common Stock
Cash Dividends all were at record peaks in the
year 1955. The 1st quarter 1956 reports of the
Industry indicate that the results for the year
1956 will even surpass those new records estab
lished in 1955.
What is most significant is not only that the
dollar amounts of Profits are at a record high
level, but that profit margins themselves are ex-
193
ECONOMIC REPORT OF THE PRESIDENT
Table 3
PRO FIT S B E F O R E T A X E S *
(dollars in m illions)
ST E E L IN D U ST R Y
(25 Com panies)
U. S. S teel..................
Bethlehem ..................
R ep u blic......................
Jones & Laughlin •. .
N ational......................
Youngstown S and T.
Inland..........................
A rm co ..........................
Colorado F and I b. .
W heeling.....................
Sharon.........................
Kaiserb ........................
Crucible......................
M c L o u th ....................
Pittsburgh0.................
D etroitd......................
Granite C ity. ............
Barium ........................
Allegheny L u d lu m ...
Northwestern S&W*
L ukens'.......................
Alan W o o d .................
Copperw eld................
Lone S ta r...................
L aclede........................
TO TA LS
1956**
1955
$844.8
3 57.2
208.8
106.8
117.2
8 2.8
117.2
160.0
3 2 .0
4 5 .6
18.0
15.0
3 3 .2
2 0.4
2 1.2
1 8.4
3 1.3
1 4.0
3 8.8
14.4
1 2.0
5 .2
8 .4
1 8.8
9 .2
$736.1
361.2
170.3
96.6
96.6
8 3.8
105.5
131.0
2 1 .6
3 5 .8
1 5.8
1 0.5
2 8 .8
1 5.5
1 4.8
13.0
2 6.3
1 .7
3 1.5
8 .7
5 .7
4 .2
5 .4
9 .4
8 .7
$ 2,350.7
$ 2,0 38 .5
Increase in 1956 over
other years1..............................
1 5 .3 %
Increase in 1955 over
other years*....................................................
1954
1953
1952
1951
1950
1947
$545.1
294.9
157.2
5 8.9
118.5
5 8.9
7 3.2
84.7
2 2 .6
2 6 .5
1 3.9
2 0 .3
1 2.0
1 6.8
10.0
1 1.8
13.4
6 .2
1 9.5
1 .1
13.3
5 .7
6 .0
2 .5
7 .7
$282.3
156.9
86.9
14.7
79.6
4 0 .2
3 6.9
7 4.4
1 4.2
18.4
7 .9
2 1 .8
1 1.0
1 3.8
9 .6
8 .9
7 .5
9 .3
8 .8
2 .8
6 .2
4 .7
4 .7
3 .2
4 .9
$622.7
268.5
175.4
85.3
145.3
6 9.6
8 7.9
104.1
2 9.3
5 1.1
2 7 .3
1 5.7
2 6.5
1 6.5
2 2.5
32.3
13.1
12.8
2 9.0
8.1
12.7
6 .5
8 .3
5 .6
7 .9
$485.0
245.0
154.3
73.6
124.4
7 4.5
7 9.2
9 5 .2
7 .1
3 5.7
1 8.9
2 1.6
1 4.5
11.2
12.5
1 7.2
11.1
3 .6
20.1
4 .4
3 .7
4 .3
4 .4
2 .6
6 .6
$244.4
8 2.1
58.3
31.6
4 9.6
4 2 .9
4 8.4
4 1 .5
7 .8
1 9.4
10.9
X
3 .1
2 .9
6 .9
12.9
2 .6
2 .9
10.1
3 .4
4 .7
3 .2
2 .7
0 .2
2 .4
$1,1 33 .6
$ 1,600.7
$929.6
$ 1,8 84 .0
$ 1,530.7
$694.9
1 0 7 .4 %
4 6 .9 %
1 5 2 .9 %
2 4 .8 %
5 3 .6 %
2 3 8 .3 % 1 ,3 9 0 .6 %
7 9 .8 %
2 7 .4 %
1 1 9 .3 %
8 .2 %
3 3 .2 %
1 9 3 .4 % 1 ,1 9 2 .6 %
$385.4
2 51.8
102.8
4 7.6
58.1
3 2 .4
7 9.2
8 3.6
1 3.2
18.1
5 .0
1 5.2
8 .1
-0 .4 t
3 .1
0 .8
8 .4
—2 .2 f
8 .7
2 .1
4 .8
1 .5
1 .3
-l.O f
6 .0
1939
$54.1
3 0 .8
13.1
3 .7
1 4.2
5 .9
1 3.5
4 .8
0 .2
6 .6
0 .5
N.O.
3 .4
0 .4
0 .7
0 .7
0 .4
-0 .2 t
2 .5
0 .1
0 .1
0 .8
1 .2
N.O.
0 .2
$157.7
*
The figures cover each Company’s fiscal years ending in the years indicated. The figures are Profits Before Federal Taxes on Income. Where
the Companies’ Annual Reports have shown such a figure separately, it has been used. Where no such figure was reported, it was derived by adding
Federal Income Taxes to the Stated Net Profits. (In a few cases it was necessary to add an Income Tax figure which included State and/or Cana
dian Income Taxes because they could not be segregated.) In the few instances in which there was a Net Loss reported for a year, the Loss figure
was used as a minus Profit Before Taxes figure unless a Loss Before Taxes figure was shown separately.
The only adjustments made in the Stated Profits Before Taxes figures were for those few Companies which have used Accelerated
Depreciation Charges. Since these amounts were, and are, not allowable for income Tax purposes, they were added to the Profits
Before Taxes figures shown in the Annual Reports in order to correct for the understatement of Profits Before Taxes resulting from
the use of this accounting device. The Companies, years and amounts (in millions) involved were
1954
U .S . Steel............................................................
Republic...............................................................
National................................................................
Kaiser...................................................................
Lukens..........! ......................................
$ 0.7
1953
....
....
....
$ 1.5
0.3
1952
»21.6
....
....
1.5
0.2
1951
$40.4
3.0
5.0
1.5
0.3
1950
$35.5
11.3
5.5
1.6
0.3
1949
$22.0
3.0
11.9
1.7
0.3
1948
$55.3
7.0
10.5
1.5
0.3
1947
$26.3
4.0
3.5
1.8
** Annual rate projected on a straight-line basis from 1st calendar quarter of 1956 for all Companies except Lukens (12 weeks ended 3/24/56),
Northwestern Steel & Wire (3 months ended 4/30/56), and Kaiser (6 months ended 12/31/55).
X — Less than $50,000.
N.O.— Not Operating.
» For 1939 the figure was computed by adding the revised Net Profits figure to the revised combined Income Tax figure. From this
total was subtracted the Income Taxes other than Federal as originally reported by the Corporation.
b Fiscal years ended June 30th.
• For certain of the earlier years the figures were computed by adding revised Net Profits and Income Taxes, from a prospectus, and subtract
ing State Income Taxes as shown in Moody’s Industrials and the Company’s Annual Reports.
d Includes reported Net Profits of Portsmouth (acquired at end of 1949) for 1947 (also for 6 months of 1946 and for 1948 and 1949 not here
shown).
• Fiscal years ended July 31st.
1 Fifty weeks ended 12/31/55. Prior fiscal years are 52 week periods ending at various dates in October.
« If Kaiser and Lone Star were excluded from the later years’ ngures, the percentage increases would be very slightly affected. Only the per
centage comparisons with 1939 are affected slightly as here shown.
SOURCE.—Annual Re-ports of the Companies; Moody’s Industrials.
Calculations ours.
194
ECONOMIC REPORT OF THE PRESIDENT
CHART 2
Profits Before Taxes
35Q
Index (1947=100)
* 25 major companies accounting for 91.8 of total steel capacity,
of the same corporations
* * SO U RCE:
U.S.Department of Commerce
source
: Annual ond quarterly reports
ECONOMIC REPORT OF THE PRESIDENT
traordinarily high. Profits Before Taxes in 1955,
as a rate of Return on Net Worth were 27.6%
—a rate exceeded only twice (1950 and 1951) in
the Industry’s recent financial history. In 1956
the rate has jumped to 31.8% which surpasses all
recent years (except 1951). Since it is from Prof
its Before Taxes that wage “cost” increases would,
come if the “ costs” were absorbed, this measure
of profitability is most significant.
Net Profits (After Taxes) as a rate of Return
on Net Worth for 1955 were 13.8%, which is con
siderably higher than the rate for any year in the
last quarter of a century (except for 1950) and
more than double the 6% rate which normally
and traditionally has been considered to be a fair
and reasonable rate of return on stockholder in
vestment. The rate of return for 1956 is 15.6%,
which is more than 13% higher than the near
record rate achieved last year.
Profits Before Taxes in 1955 represented 15.8$*
out of each Sales Dollar. This margin has further
widened to 16.2^ in 1956. These exorbitant mar
gins reflect the degree by which the Industry has
overpriced its products. The 1955 rate has been
surpassed only twice in recent years (1950 and
1951). They are too high by any standard. Net
Profits (After Taxes) as a share of the Sales
1— Profits Before Taxes
Profits Before Taxes (Federal Corporate Income
Taxes) of the Industry (25 Companies) reached a
record high level in 1955—and even this record
high level is being far surpassed in 1956. The an
nual rate of Profits Before Taxes for 1956 is $2,350.7 million. This is 15.3% higher them Profits
Before Taxes in 1955. It is more than double the
level in 1954 and 1952 and more than double that
for any year preceding 1950. In fact, it is almost
15 times as much as was earned in 1939. It is
most significant to note that the rate of growth of
Profits Before Taxes in Steel between 1947 and
1956 has been more than twice as rapid as in All
Corporations and in All Manufacturing Corpo
rations.
These data appear in TABLE 3 and CHART 2
(also TABLE 22).
2— Net Profits (After Taxes)
In 1955 the Industry (25 Companies) reported
Net Profits (After Taxes) of over a button dollars
($1,019,400,000) for the first time in its history.
This was 72.8% higher than Net Profits in 1954,
195
Dollar were 7.9^ in 1955 and have held at this
rate so far in 1956. This is a high rate of return
on Sales for this Industry—and one which has
only been equalled once in the last 15 years. It
comes at a time when the Industry can readily
cut profit margins per Sales Dollar and still make
a fair Profit because of its high operating rate
and peak Sales volume.
The record high Profits result in part from in
creased productivity and in part from higher Steel
Prices charged by the Steel Companies for their
products. As pointed out elsewhere in this anal
ysis, the Industry has not shared equitably with
its employees the huge gains resulting from in
creased productivity. The public has received no
share whatsoever of these gains. At the same
time the Industry has increased its Prices far more
than was necessary to compensate for increased
“costs” . This is true even if one accepts the In
dustry’s faulty and mistaken premise that it must
raise Prices every time the “cost” of materials or
labor increases. Actually, those presumed “costs”
have already been absorbed by productivity gains
and by high level operations.
A more detailed examination of these financial
facts about the Steel Industry follows:
It is within the framework of its Profits Before
Taxes that a Company’s or an Industry’s ability
to absorb a “ cost” increase is measured, whether
the increase be wage “ cost” or any other “cost” .
These 25 Companies in 1955 employed an average
of approximately 775,000 persons. If this same
employment is assumed for 1956 and if a 2,000
hour man-year is assumed for each employee,
total annual manhours would be about 1,550 mil
lion. This means that for each manhour worked
in 1956 the Industry is making an average Profit
of $1.52—a rather substantial Profit on each hour
of labor—one which is more than 60% of the total
amount actually paid for each hour of work. It
certainly leaves an adequate margin within which
substantial labor “cost” increases can be absorbed.
39.9% higher than Net Profits in 1950, the prior
record year, and more than 8 times as much as
Net Profits in 1939.
This is a record of Profit growth which should
have been eminently satisfactory. But in 1956 it
ECONOMIC REPORT OF THE PRESIDENT
196
TaMe 4
NET PROFITS — REPORTED*
(dollars in millions)
STEEL INDUSTRY
(25 Companies)
U .S. Steel.................
Bethlehem.................
Republic....................
Jones &Laughlin....
National....................
Youngstown S and T.
Inland........................
Armco........................
Colorado Fand I*...
Wheeling...................
Sharon.......................
Kaiser*......................
Crucible....................
McLouth...................
Pittsburgh.................
Detroit1*.....................
Granite City.............
Barium........ .............
Allegheny Ludlum...
Northwestern S&W*.
Lukens*.....................
Alan Wood................
Copperweld...............
Lone Star..................
Laclede......................
1956**
1955
1954
$416.8
180.0
100.0
54.4
56.4
40.8
56.0
78.8
16.0
21.4
9.2
7.8
14.8
9.6
10.0
8.8
15.8
6.0
18.4
6.8
5.6
2.8
4.0
8.8
4.4
$370.1
180.2
86.3
50.1
48.3
41.7
52.5
64.4
10.9
17.3
8.0
5.7
13.2
8.1
7.5
6.3
12.6
0.7
15.0
4.1
2.6
2.6
2.4
4 .8
4.0
$195.4
132.8
52.9
25.0
30.3
20.2
41.3
41.1
7.1
9.6
3.1
7.9
3.7
1.7
2.2
0.9
4.0
-0 .4 t
4.2
1.0
2.0
1.2
0.7
-l.O f
2.9
TOTALS....... $1,153.4
$1,019.4
$589.8
1953
1952
1951
1950
1947
1939
$222.1
133.9
56.7
31.0
49.2
30.8
33.9
33.9
8.0
12.5
6.7
9.1
5.1
5.2
4.6
5.2
6.5
2.3
7.8
0.4
3.6
3.2
2.9
2.1
2.7
$143.7
90.9
44.3
19.5
37.6
22.9
23.8
31.3
5.8
11.0
5.1
10.4
5.4
4.2
5.2
4.3
5.0
2.7
5.9
2.0
2.3
2.3
2.3
2.5
2.1
$184.4
106.5
54.9
31.0
45.3
30.6
34.4
35.0
10.0
17.4
8.9
7.5
8.4
5.2
7.3
10.5
5.1
4.2
8.8
3.1
3.5
2.9
2.7
3.1
2 .8
$215.5
123.0
63.8
39.7
57.8
40.6
38.0
47.0
4.4
18.3
9.3
11.9
6.3
5.8
6.4
8.9
5.7
1.5
9.8
2.7
1.9
2.8
2.6
1.6
3.2
$127.1
51.1
31.0
20.1
26.8
26.3
29.9.
25.0
5.2
11.7
6.7
-1 .8 f
2.1
1.8
4.0
8.0
1.7
1.7
6.0
2.0
2.8
2.0
1.5
0.2
1.4
$41.1
24.6
10.7
3.1
12.6
5.0
10.9
4.0
0.1
5.6
0.4
N.O.
2.8
0.3
0.6
0.5
0.3
- 0 .2 f
2.0
0.1
0.1
0.7
0.9
N.O.
0.2
$679.4
$492.5
$633.5
$394.3
$126.4
$728.5
Increase in 1956 oyer
other years*............................
13.1%
95.6%
69.8%
134.2%
82.1%
58.3%
192.5%
812.5%
Increase in 1955 over
other years*...............................................
72.8%
50.0%
107.0%
60.9%
39.9%
158.5%
706.5%
*—The figures cover each Company’s fiscal yean ending in the yean indicated. The figures shown are Stated Net Profits without any adjust
ment, except for revisions made by the Companies themselves in subsequent Annual Reports. Where such revisions have been made by the Com
panies, they have been used in every case where they were available.
**—Annual rate projected on a straight-line basis from1st calendarquarter of 1956 for all Companies except Lukens (12 weeks ended 3/24/56),
Northwestern Steel & Wire (3 months ended 4/30/56), and Kaiser (6 months ended 12/31/55).
t—Loss.
N.O.—Not Operating.
• —Fiscal years ended June 30th.
b —Includes reported Net Profits of Portsmouth (acquired at end of 1949) for 1947 (also for 6 months of 1946 and for 1948 and 1949 not here
shown).
• —Fiscal yean ended July 31st.
<*—Fifty weeks aided 12/31/55. Prior fiscal years are 52-week periods ending at various dates in October.
• —If Kaiser and Lone Star were excluded from the later yean’ figures, the percentage increases would be very slightly affected. Only the
percentage comparisons with 1939 are affected slightly as here shown.
General Note: A number of these Companies reported their Net Profits and Profits Before Taxes on a different basis than the
other Steel Companies. These Companies in their reports to stockholders showed regular Depredation on expanded or new facilities
rather than Rapid Amortization as permitted by the tax laws under certain circumstances. However, they took credit for Rapid
Amortization for tax purposes and showed the tax saving as a Reserve for Future Taxes. This method resulted in an overstatement
(comparatively speaking) of Net Profits. These overstatements were not great enough, however, to alter seriously the comparisons
shown and the conclusions reached in this analysis. McLouth, Pittsburgh,. Granite City, Northwestern Steel & Wire and Lone Star
used this method beginning in 1953. Jones & Laughlin, Kaiser, Detroit and Barium used this method of reporting beginning in 1954.
Colorado Fuel and Iron and Lukens adopted the new method of reporting Profits in 1955. As a result, their Profits figures for these
years are not entirely comparable with their Profits figures for some prior years.
SOURCE.—AnnualReportsoftheCompanies;Moody’sIndustrials.
Calculationsours.
197
ECONOMIC REPORT OF THE PRESIDENT
CHART 3
Net Profits
300 lndex(i947»ioo)
Steel lasinc Based ts net irofits
inthe last 9 years morsthi ntwio i as
250
rapidl fas All Manufi icturin gCorpi rations
'nrnnn tinns
or/III
ut
nil wllWtf
•Wllv
200
Steel—Y
Industry y
150
£
100
ja
>
\
AllCorpi(rations
(
\
f
__ //
t .......
c AnWaniifscturing Corporitions
50
;
iin
ipii
Ifi
IfA
lr«t
iff
IfA
*25majorcompaniesaccountingfor91.8%oftotalsteelcapacity, sourcb<annualandquarterlyreport*
ofthesamecorporations
**SOURCE:U.S.DepartmentofCommerce
ECONOMIC REPORT OP THE PRESIDENT
198
appears that Net Profits will even exceed the rec
ord established in 1955. The annual rate of Net
Profits for 1956 is $1,153.4 million, which is 18.1%
higher than record Net Profits for the full year
1955.
It is interesting to note that 16 of these 25 Com
panies reported record-breaking Net Profits in
1955. So far in 1956 a total of 17 of these Com
panies are reporting Net Profits at an all time
record-breaking rate. The unparalleled prosper
ity that the Industry is enjoying is being shared
by nearly all Companies, big and small. Again, it
should be noted that the rate of growth of Net
Profits in Steel between 1947 and 1956 has been
more than twice as rapid as in All Corporations
and in All Manufacturing Corporations.
The supporting data are shown in TABLE 4
and CHART 3 (also TABLE 23).
3—Dividends
their Common stockholders. The Dividend growth
in Steel between 1947 and 1956 has been almost
twice (1.8 times) as great as in All Corporations.
The supporting data are in TABLE 5 and
CHART 4 (also TABLE 24).
Many Companies have also paid Stock Dividends
in addition to, or in lieu of, Cash Dividends. In
1955, for instance, 6 Companies made such pay
ments amounting to $13.7 million in value, an
amount substantially greater than the Cash Divi
dends paid by these same Companies to their
stockholders in 1956.
In addition to receiving handsome increases in
Dividend payments, the Common stockholders
have benefited from a sharp increase in the
equity value of their stockholdings. The Net
Worth of these Companies has increased from just
over $3 billion as of the end of 1939 to almost $7.5
billion as of the end of 1955. This represents the
book value increase. The actual market price in
crease of Steel stocks has been much greater.
Over the years the Common stockholders of the
Industry (25 Companies) have fared extremely
well. In 1939 Cash Dividends totalled $16.4 mil
lion. In 1955, total cash payments had risen to
$353.9 million. The annual rate of Cash Dividend
payments for 1956 has risen to $412.9 million,
some 25 times the level of 1939. This annual
rate for 1956 likely understates probable pay
ments for the full year since several Companies
customarily declare year-end “ extra” Dividends
which have been ignored in projecting the annual
rate.
Not only have total dollar Dividend payments
shown a sharp increase, but the number of these
Companies paying Cash Dividends to their stock
holders has increased sharply since 1939. In that
year only 7 of these Companies made a cash pay
ment to their Common stockholders. In 1947 this
number had increased to 19 and currently 22 of
the 25 Companies are paying Cash Dividends to
4—Net Worth and Rate of Return on
Net Worth
The profit margin of the Steel Industry (25
Companies) is further demonstrated when Profits
Before Taxes are measured as a rate of Return on
Net Worth. This margin in 1955 was 27.6^ on each
dollar of stockholder investment In 1956 it has
climbed to 31.81 on the dollar. This reflects an
inflationary Pricing policy for the Benefit of the
Steel Industry only. These margins follow:
PROFITS BEFORE TAXES AS A RATE OF RETURN ON NET WORTH
STEEL INDUSTRY
(25 Companies)
Totals (25 Companies)------
1956
1055
1954
31.8%
27.6%
17.0%
195S
25.4%
1952
1951
1950
1947
1989
15.8%
33.2%
29.6%
18.5%
5.2%
199
ECONOMIC REPORT OF THE PRESIDENT
Table 5
CASH DIVIDENDS*
ON
COMMON STOCK
(dollars in millions)
STEEL INDUSTRY
1956**
U .S. Steel................. $139.2
Bethlehem.................
85.9
Republic....................
38.6
Jones & Laughlin. . .
15.7
National....................
29.5
Youngstown S and T.
13.5
22.0
Inland........................
Armco........................
26.0
Colorado Fuel and Iron
6.1
Wheeling....................
5.7
Sharon........................
3.3
Kaisera......................
1.3
Crucible.....................
5.4
McLouth....................
None
Pittsburgh...............
1.5
Detroitb.....................
3.0
4.2
Granite City.............
Barium.......................
None
Allegheny Ludlum...
6.0
Northwestern S&W..
1.0
Lukens.......................
1.4
0.9
Alan Wood..............
Copperweld.............
1.5
Lone Star..................
None
Laclede......................
1.2
TOTALS....... $412.9
1955
$122.9
69.5
38.4
14.0
23.9
12.6
23.0
20.6
2.9
5.3
2.8
1.3
3.6
None
0.4
0.8
3.9
None
4.0
0.4
0.5
0.9
1.0
None
1.2
$353.9
(25 Companies)
1952
1954
1953
$ 85.5 $ 78.3 $ 78.3
55.1
38.3
38.3
26.7
28.9
23.6
12.1
12.4
11.2
23.9
22.0
22.0
12.6
12.6
10.1
18.9
17.2
14.7
15.6
15.6
15.6
3.5
3.1
1.9
4.3
4.3
4.3
4.4
2.8
4.4
1.6
0.8
1.6
None
None
None
None
None
None
None
None
None
2.4
1.8
None
1.5
None
None
0.5
1.1
1.1
3.4
3.3
3.4
None
None
None
1.3
1.0
1.1
0.2
0.8
0.9
0.9
1.0
1.0
None
None
None
0.9
1.1
1.3
9.0 $248.7
8.8
1951
$ 78.3
38.3
23.6
10.7
22.0
10.1
17.1
14.8
3.2
4.3
3.4
None
None
None
None
2.4
2.7
0.9
4.1
None
1.3
0.8
1.2
None
1.1
$240.3
1950
$ 92.7
39.3
25.1
7.1
20.9
10.1
17.1
15.7
1.8
2.8
2.9
None
None
None
None
2.4
, 1.9
None
3.2
None
0.6
0.3
1.0
None
1.1
6.0
1947
$ 45.7
17.9
11.3
5.0
8.9
8.4
12.2
6.5
1.0
1.0
1.2
None
None
0.4
None
2.9
0.4
None
2.6
1.1
0.4
None
0.4
None
0.5
$127.8
$16.4
*iontoT
erfig
ulie
reusocof,veCraseh
acD
hiv
Cid
om
pd
asny(e’sxcfis
ca
rstoew
ndsin
gin
aersdin
dic$am
ted
.n
Tsh
eetoC
ta
lC
an
sh
en
d:sonly. StockDividendspaidin
additR
,lich
o—
in
en
ep
tlfoyreaS
plit
s) tah
sevy
aelu
(in
illio
)ebyyatrh
om
pa
ieD
s,iv
foid
llo
w
e
p
u
b
1
9
4
8
—
$
7
.7
(4
%
)
J
oanteiosn&
La1
u9g4h8lin
—
199.0
49(1
—
7.4
N
al—
—
0$)%
) (5%)
A
rom
ca
o—
1F
94
8e—
$n1d$
61
.2
(2
0%
C
lo
r
d
o
u
l
a
I
r
o
n
—
1
9
5
19)54—$2.0(5%); 1951—$6.9(25%)
W
h
ereolin
g—
10
9—
55—
$8.9
0)%);5—
19$510.1
—(2
$7.5
.1%
(2);5%
S
h
a
nle
—
1915
$8$.8
(5(8
0(1
%
C
r
u
c
ib
—
9
5
4
—
1
.5
%
);
1
9
5
3
—
$
1
.6
(8
%
);
19)52—$2.7(10%); 1951—$3.7(16%)
M
ctL
ou
trh
—
19
5935—
$1
5.7
(2
5
%
);e1ly
95
0$—
$5(3
.9%
(1);00$%
P
it
s
b
u
g
h
—
1
5
-5
r
e
s
p
e
c
tiv
:
1
.1
1.7(8%); $1.8(8%); $2.2(8%); $0.5(2%)
D
rnoitite—
95—
5—
(4
);(61%
95);3—
$503.6
(2
Gareratiu
C1
ity
19$
51
4.2
—
$(5
1%
.8
1
9
—
$2%
.9).5(1%
2);%1
);94
19
9—
52—
$01.8(1(3
%)); 1949—$0.3(4%)
B
m
—
1
9
5
5
—
$
0
.9
7
%
);
1
9
5
4
—
$
0
.9
1
(7
.9
0%
Ala
llengh
en
y
L
ud
lu
m
—
109.4
53(3
—
$1);.01(2
%
);$109.4
52—
$1);.11(2
%
) $$00.4
A
W
o
o
d
—
1
9
5
5
—
$
%
9
5
4
—
(5
%
9
5
0
—
(5
%
);
1949—$0.6(10%)
L
on
ennual
Star—
194based
9—$0.5
(2Dividends
5%) dedaredin1st half of calendar 1956
**
A
rate
on
(except forKaiserwhichnormallydistributes onlyoneDividendper
year).N.O.—NotOperating.
«Kaiser, for all intentsandpurposes, hadnoCommonStockprior to October 1950. It hadonly1,000shares of CommonStock,
all closely held, valuedat $100,000. Thestockissuedin1951carriedabookvalueof $3,200,000.
bIncludesCommonStockCashDividendsforPortsmouth(acquiredin1949)for1947(alsofor1946,1948and1949nothereshown).
SOURCE.—AnnualReportsoftheCompanies;Moody’sIndustrials;Moody'sDividendRecord. Calculations ours.
200
ECONOMIC REPORT OF THE PRESIDENT
CHART 4
DividendPaymentsinSteel v&All Corporations
CornulonSti ckOiv dend }aymeiits in81eel
1 1
325
have
edfarr torera lidly
irnnrat
thanf
ulro
Tfldlll ji mi unpufaii nnc
«J
Steet
Inriirctrv
250
/
100
<£••••
•m
in
I.A
\••
\
■ 1
175
AllCop ations*
u.
Ipp
ip«
* oilcashdividendsofAllCorporations,
«.U.S. D
epartmentofCommerce
**onlycashdividendsoncommonstocksof 25steelcorporationsaccountingfor91.8%oftotalsteelcapacity,
souftciiAnnualandquarterlyreportsofthesamecorporations
sourcs
201
ECONOMIC REPORT OF THE PRESIDENT
A portion of these Profits Before Taxes do* not
accrue to the Steel owners but are paid in taxes
to the Federal Government. The amount avail
able to the stockholders either for Dividends or
as an increase in equity is shown in the Net Profits
figures, which are also measured as a rate of Re
turn on Net Worth.
While the Steel Industry constantly complains
of an inadequate return on its investment, the
actual figures certainly do not bear this out
It has long been accepted in accounting and
financial circles that Net Profits After Taxes
at 6% on Net Worth represent a fair and reason
able rate of return. In 1939 the Steel Industry did
not quite reach this standard. The rate of return
that year was 4.2%. Since then the rate of Re
turn on Net Worth has exceeded 6% in every year
except during World War II. In most peacetime
years since 1939, the rate has been in excess of
10%. In 1955 the over-all rate for the Industry
Table 6
U. S. Steel.................
Bethlehem.................
Republic....................
Jones & Laughlin. ..
National....................
Youngstown S and T.
Inland........................
Armco........................
Colorado F and I....
Wheeling....................
Sharon........................
Kaiser.........................
Crucible.....................
McLouth....................
Pittsburgh.................
Detroit8.....................
Granite City.............
Barium.......................
Allegheny Ludlum...
Northwestern S & W.
Lukens.......................
Alan Wood................
Copperweld...............
Lone Star..................
Laclede......................
AVERAGES**
NET PROFITS
AS A RATE OF RETURN ON NET WORTH*
STEEL INDUSTRY
(25 Companies)
1956*
1955
1954
1953
1952
1951
9.9%
6.7%
8.8%
1 6A% 141% T ? %
15.2
15.2
12.3
13.3
9.9
12.2
16.5
14.2
12.1
9.8
10.1
13.0
12.9
11.9
6.5
8.3
5.5
8.9
14.2
12.1
8.1
13.5
11.4
14.4
11.5
6.1
9.5
11.2
7.5
10.4
16.9
15.8
14.4
13.6
10.2
15.4
20.4
16.7
12.1
10.8
10.6
12.5
13.9
9.5
6.6
7.8
6.9
13.5
9.6
6.1
8.2
11.8
7.5
12.3
13.5
10.7
4.9
11.7
8.5
15.0
7.4
5.4
7.6
9.1
10.9
8.5
15.1
4.2
13.5
5.9
6.5
10.6
15.4
13.0
2.9
17.3
16.9
25.2
11.6
8.7
2.8
5.8
6.9
10.2
15.3
10.9
2.2
13.3
12.1
31.2
23.2
18.5
6.6
11.3
9.7
11.3
26.3
3.1
10.9
13.8
23.0
-t
20.3
16.5
5.2
9.8
7.8
12.0
32.7
19.6
5.8
2.5
13.4
23.7
19.2
8.9
7.4
13.7
9.5
15.1
9.1
8.5
4.1
11.4
8.9
11.8
13.2
7.9
3.0
12.0
10.1
14.7
32.7
17.8
9.3
12.1
17.0
-t
20.3
18.4
15.4
15.7
13.5
19.4
15.6% 13.8%
8.8% 10.8%
8.4% 11.2%
1950
10.7%
15.2
16.3
13.0
19.9
14.9
18.4
20.6
6.5
14.0
19.7
26.6
8.7
37.7
12.0
34.8
21.1
10.0
16.1
27.0
9.1
12.1
15.3
16.5
25.2
14.1%
1947
8.4%
9.0
10.6
8.8
13.4
14.4
19.8
15.4
10.3
11.5
22.3
-t
3.2
41.9
9.3
33.1
11.9
16.5
15.1
40.8
17.6
11.6
12.5
12.5
19.2
10.5%
1939
3.1%
5.2
4.5
1.9
9.6
3.5
10.7
3.1
0.5
6.8
2.6
N.O.
2.9
20.0
1.7
18.5
2.5
-t
7.4
3.4
1.5
4.8
13.0
N.O.
3.4
4.2%
om
pluy
ted
yxdciv
id
fohrceoam
chpuC
yefobregein
acnhinogfN
theetfis
arusreenw
dain
yeaasresdin
dicN
aettedPrboyfitN
oreth
asorotfhth
eu
erneds
ofrfoem
a*cp
hCio
fis
ca
asrb
ep
tin
fogrN
19e5t6P
fororfit
wshic
toam
tiopnan
th
Wcoarlthyefig
sgusin
edt).heB
on
seatnW
dN
tW
fig
agbeele
.o(e
*—
*rt—
AvreL
rT
a
s
c
m
p
u
t
e
d
b
y
d
iv
id
in
g
t
o
ta
l
N
e
t
W
o
r
t
h
in
to
to
ta
l
N
e
t
P
r
o
fit
s
fo
r
e
a
c
h
y
e
a
r
fo
r
a
ll
C
o
m
p
a
n
ie
s
fo
r
w
h
ic
h
d
a
t
a
w
e
r
e
a
v
a
ila
b
le
.
osos.tOperating.
N.O.—
N
clu
heres•hIonw
n).desNetProfitsasarateofReturnonNetWorthforPortsmouth(acquiredin1949)for1947(alsofortheyears1946,1948,and1949not
SOURCE.—Annual Reportsof theCompanies; Moody’sIndustrials.
Calculations ours.
202
ECONOMIC REPORT OF THE PRESIDENT
(25 Companies) was a phenomenal 13.8% with
only 2 Companies earning a rate of less than 6%
and 17 Companies earning more than 10%. The
annual rate for 1956 is 15.6%, a record high, with
no Company earning less than 6% and 23 of the
Companies earning more than 10%. These data
appear in TABLE 6.
As the Return on Net Worth was skyrocketing,
the Industry was able to increase very sharply its
combined Net Worth from $3,025.7 million as of
the end of 1939 to $7,390.4 million as of the end
of 1955—an increase of 144.3%—almost entirely
from undistributed Profits. These facts are shown
in TABLE 7.
Table 7
NET WORTH*
(dollars in millions)
Republic......................
Jones & Laughlin. . . .
National.......................
Youngstown S and T .
Inland...........................
Armco...........................
Colorado F and I . . . .
Wheeling......................
Sharon..........................
Kaiser...........................
Crucible.......................
McLouth.....................
Pittsburgh...................
Detroit *.......................
Granite City...............
Barium.........................
Allegheny Ludlum —
Northwestern S & W .
Lukens.........................
Alan Wood..................
Copperweld.................
Lone Star....................
Laclede.........................
Increase in 1955 over other
yearsb...................................
1955
$2,582.6
1,186.1
606.1
420.7
397.9
362.9
332.3
386.7
115.0
180.9
68.1
105.7
98.0
62.2
86.1
57.7
68.2
22.8
90.8
20.9
29.2
30.7
30.2
26.9
21.7
$7,390.4
STEEL INDUSTRY
(25 Companies)
1954
1953
1952
1951
1950
1947
1939
$2,348.7 $2,254.7 $2,136.1 $2,096.0 $2,015.2 $1,510.8 $1,314.8
1,079.9 1,008.7
919.6
873.6
811.6
565.4
473.9
537.8
470.1
440.7
421.6
392.0
293.1
239.1
383.5
372.4
354.9
348.1
305.5
228.2
164.7
372.1
363.2
330.0
314.6
291.1
199.8
131.2
332.8
306.7
293.9
273.3
325.0
183.2
144.1
287.3
249.8
232.7
223.6
206.4
151.3
101.4
339.7
279.7
313.6
295.4
228.0
162.6
127.1
107.4
103.0
83.7
74.2
67.9
50.6
19.0
156.7
153.1
146.7
141.8
130.8
101.8
82.0
62.9
59.4
47.1
62.5
60.2
30.0
15.6
103.9
95.0
87.8
44.7
100.3
17.1
N.O.
88.6
82.6
79.3
72.8
85.9
65.3
97.3
58.0
30.0
24.8
20.6
15.4
4.3
1.5
80.0
79.1
75.8
71.9
53.5
43.2
35.0
33.7
25.6
40.2
39.1
35.6
24.2
2.7
60.6
45.3
27.0
57.3
51.4
14.3
11.8
22.2
18.3
15.0
21.1
19.6
10.3
.4
80.1
75.4
73.2
60.7
79.6
39.7
27.1
17.1
16.1
13.1
10.0
14.9
4.9
2.9
27.2
26.3
24.2
23.2
20.9
15.9
6.8
29.6
28.0
24.5
23.2
25.8
17.2
14.5
18.4
23.7
24.2
22.8
17.0
12.0
6.9
18.2
9.7
1.6
22.2
22.7
20.6
N.O.
17.2
14.4
18.8
15.6
12.7
7.3
5.9
$6,681.0 $6,303.0 $5,890.8 $5,668.4 $5,177.1 $3,754.1 $3,025.7
10.6%
17.3%
25.5%
30.4%
42.8%
96.9%
144.3%
*rT
efig
reosrctohv”erorSt“S
octkoh
old
rse’rE
uit
yitin
bufig
sinuersesh
aa
ssob
fetehn
eu
en
ecalu
chdfis
arofo
an
hnerbeyth
eeC
oom
pp
aa
nn
ieiessh
figu
eh“N
eN
tuoW
hoeld
s’qE
qu
y”thtehis
seddo,fin
ingcatlhyeem
strreeacceh
ntC
roem
vispio
nys.shW
ow
th
C
m
.avelabeled
N
.O
.—
tN
OepterW
atoin
gh
. ofck
•
I
n
c
lu
d
e
s
r
t
P
o
r
t
s
m
o
u
t
h
(a
c
q
u
ir
e
d
in
1
9
4
9
)
fo
r
1
9
4
7
(a
ls
o
fo
r
t
h
e
y
e
a
r
s
1
9
4
6
,
1
9
4
8
a
n
d
1
9
4
9
n
o
t
h
e
r
e
s
h
o
w
n
).
ais
errisaonndw
Liton
wearffe
eecxtcelu
dh
frtolym
eela
eanr.s’ figures,thepercentageincreaseswouldbeveryslightlyaffected. Onlytheper
centabgeIfcK
om
pa
he1S
9t3a9ris
ddselig
atshh
retesrhoyw
a
SOURCE.—AnnualReportsoftheCompanies; Moody’sIndustrials.
Calculations ours.
203
ECONOMIC REPORT OF THE PRESIDENT
5—Sales and Distribution of the
Sales Dollar
(a) Sales
Sales of the Industry (25 Companies) are cur
rently at an all-time peak. The annual rate of
Sales for 1956 are $14.6 billion, which is 12.2%
higher than record 1955 Sales. It is interesting to
note that not only are total Sales at a record high,
but the Sales for every one of the individual 25
Companies, with one exception, are at an annual
rate for 1956 which exceeds Sales in any prior
year. In part, these record Sales reflect an in
creased volume of production; although the in
crease in production has not come close to match
ing the increases in Sales. In modest part, for the
Table 8
1956**
1955
U. S. Steel................. $4,402.0 $4,097.7
Bethlehem................. 2,400.0 2,096.6
Republic..................... 1,330.4 1,188.6
Jones & Laughlin—
781.2
696.5
National..................... 682.4
622.0
Youngstown S and T. 704.0
617.4
659.7
Inland......................... 761.6
692.7
Armco......................... 760.0
Colorado F and I . . .
257.5
325.0
Wheeling.................... 271.6
246.7
Sharon........................
199.2
171.2
Kaiser........................
146.4
136.1
Crucible.....................
277.2
237.7
McLouth.................... 162.4
145.0
Pittsburgh.................
176.7
199.6
101.8
Detroit11.....................
120.8
116.3
144.0
Granite City.............
Barium.......................
108.8
75.1
Allegheny Ludlum... 299.2
255.2
Northwestern S & W.
86.4
51.4
82.4
Lukens.......................
94.0
58.4
Alan Wood................
69.2
100.4
78.5
Copperweld...............
74.5
Lone Star..................
86.8
Laclede.......................
63.6
58.2
TOTALS
$14,576.2 $12,993.9
Increase in 1956 over
other yearsb..........
12.2%
Increase in 1955 over
other yearsb.................................................
SALES*
(dollars in millions)
STEEL INDUSTRY
(25 Companies)
1954
1953
1952
1951
1950
1947
1939
$3,250.4 $3,861.0 $3,137.4 $3,524.1 $2,956.4 $2,122.8 $ 846.0
1,656.8 2,082.0 1,691.7 1,793.1 1,439.8 1,032.3
414.1
918.4 1,052.7
881.8
846.3 1,137.1
230.3
645.3
492.9
624.4
495.4
564.3
487.5
350.1
113.6
484.1
634.2
548.6
618.5
537.0
131.1
329.0
483.7
404.0
428.2
548.1
434.2
306.2
117.0
533.1
575.6
518.7
459.3
458.0
115.3
315.0
532.0
588.9
518.6
534.8
439.3
311.7
94.9
250.2
248.8
195.8
191.4
112.6
22.1
94.7
187.6
217.4
178.3
227.1
184.8
85.7
131.7
98.2
167.2
131.3
169.0
135.4
17.8
93.9
128.5
134.5
117.9
100.5
84.5
33.8
NO.
160.6
232.3
180.3
202.9
147.7
110.2
48.0
96.4
59.1
79.2
78.9
57.8
18.0
N.A.
124.0
140.7
149.3
129.0
118.0
85.1
28.6
51.7
93.4
87.4
113.7
92.9
4.6
75.2
69.3
87.9
74.6
86.6
10.2
59.8
25.8
89.7
99.1
91.6
53.5
53.5
41.4
0.1
169.6
241.6
189.2
228.7
177.4
37.3
106.6
35.6
44.3
34.0
40.9
28.9
21.5
5.8
75.0
97.9
69.6
80.5
52.9
52.8
11.9
36.1
59.8
60.5
58.8
45.0
36.0
14.7
49.7
83.8
76.2
10.4
71.6
55.6
53.3
37.2
27.3
19.6
18.7
12.8
2.9
N.O.
45.4
50.8
47.5
47.7
39.6
8.6
26.3
$9,855.1 $12,165.1 $9,966.3 $11,053.3 $9,064.3 $6,421.6 $2,368.1
47.9%
31.8%
19.8%
6.8%
46.3%
30.4%
31.9%
17.6%
60.8%
43.4%
127.0%
102.3%
515.5%
448.7%
*w
T
fig
C
y’sO
fis
seen
arusrein
eosm
sh
eeN
tsSeadlein
seexvceerpytcin
in
antch
eesyww
heerree
th
eleh
re.en
oturreespocrotveedrseeapcahra
toem
lypfraonm
thcearlIynecaorm
.din
Tg
heinlattheestyefig
sdaicsarteevdis.edTbhyetfig
heurC
poaw
nn
iesarw
reeu
asaefe
inww
hsicth
a
veay
ila
b
**Annual rateprojectedonastraight-linebasisfrom1st calendar quarter of 1956except for Lukens (12weeks ended3/24/56),
North
w
steN
rn
(3
mon
th
N.O
.Ae.—
Av
leg.s. ended4/30/56), Kaiser (6monthsended12/31/55) andColoradoFuel andIron (estimatedbyCompany).
N
N
oosttS
O
plea
esrila
aotb
in
»bIIfn.—
cK
lu
d
e
a
f
Portsdm
oun
th
(acq
uireredein
194e9d)fr
for19th
47(atlseroyfo
rr6
monthsin1946,andfor1948and1949nothereshown).
en
a
thepercentaaisgeerc,oM
mcpL
aoru
isth
onsan
witL
ho1
9e3S
9ta
arrewaeffe
ctxecdlusdlig
htlyom
asheerla
eshow
.s’figures,thepercentageincreaseswouldbeveryslightlyaffected. Only
SOURCE.—AnnualReportsoftheCompanies;Moody’sIndustrials.
Calculationsours.
204
ECONOMIC REPORT OF THE PRESIDENT
full period, they probably reflect a net weighted
change in product mix. The most important fac
tor which accounts for the increased Sales figures
for most years, however, is the Industry’s policy
of constantly increasing Steel Prices. The old
principle of classical Economics that increased
Sales volume, since it permits greater efficiency
and the spreading of certain so-called fixed costs,
permits lower prices and lower profit margins per
unit of product apparently is not subscribed to by
the Steel Industry. In fact, the reverse appears
to be true. This is reflected in the constantly in
creasing Prices and widening profit margins which
are being earned by the Steel Industry.
The Sales figures are shown in T A B L E 8.
(b) Shares of the Sales Dollar
Measurement of the shares of the Sales Dollar
which are used for Payrolls, Materials Costs, De
preciation, Profits, and other items sheds consid
erable further light on this matter of profit mar
gins. T A B L E 9 and C H ART 5 (also T A B L E 25)
show Profits Before Taxes as a share of the Sales
Dollar for most of the Industry (22 Companies,
including U. S. Steel Corporation, 89.1% of the In
dustry’s capacity).
Table 9
PROFITS BEFORE T A X E S *
AS A SH ARE OF THE SALES DOLLAR
Steel Industry (21 Companies
excluding U. S. Steel)..................
U. S. Steel............................................
1955
1954
1953
1952
1951
15.8*
11.6*
13.1*
9 .1 *
17.0*
16.8*
10.9*
6 .6 *
14.8
18.0
11.5
11.9
12.6
14.1
9 .2
9 .0
16.7
17.7
17.0
16.4
10.5
11.5
6 .8
6 .4
1950
1947
1939
* The same 22 Companies are used for all years shown. They are the only Companies of the 25 major Companies for which data
are available for all years.
SOURCE.—Based on Profits Before Taxes and Sales figures fromprior Tables. Calculations ours.
It is clear from these figures that U. S. Steel
is widening its profit margin at an even more in
defensible rate than is the Industry as a whole—
although neither has grounds for complaint about
the level of its profit margins.
The Industry
widened its profit margin from 6.6^ out of each
Sales Dollar in 1939 to a peak of 17.0^ in the Ko
rean inflation of 1951. The 1955 Profits share of
15.8^ out of each dollar of Sales is well above the
return for most other years, and 1956 is at a rate
of 16.2^. Like the rest of the Industry, U. S. Steel
reached a high point in 1951 but, in 1955, it was
able to widen its profit margin to a record high of
18.0^ Profits on every dollar of Sales. In 1956 it
is even higher— 19.2^. But most significant is the
fact that Steel’s share of the Sales Dollar Before
Taxes between 1947 and 1956 has risen from 10.9^
to 16.2^ while the share of All Manufacturing has
fallen from 9.3^ to 8.6^.
Much the same pattern is evident when Net
Profits (After Taxes) are examined as a share of
the Sales Dollar for the same 22 Companies.
TA B L E 10 shows these figures.
Table 10
N ET PROFITS*
HARE OF THE SALES DOLLAR
Steel Industry (22 Companies). .
Steel Industry (21 Companies
excluding U. S. Steel)................
U. S. Steel..........................................
1955
1954
1953
1952
1951
1950
1947
1939
7 .9 *
6 .1 *
5 .6 *
4 .9 *
5 .7 *
8 .0 *
6 .2 *
5 .3 *
7 .4
9 .0
6 .0
6 .0
5 .5
5 .8
5 .0
4 .6
5 .9
5 .2
8 .3
7 .3
6 ,3
6 .0
5 .6
4 .9
* The same 22 Companies are used for all years shown. They are the only Companies of the 25 major Companies for which
data are available for all years.
SOURCE.—Based on Net Profits and Sales figures from prior Tables. Calculations ours.
ECONOMIC REPORT OF THE PRESIDENT
205
CHART 5
Profits,Before&AfterTaxes asSharesoftlteSalesDollar
20%
* source : annual quarterly reports of 2 5 Steel Companies accounting for 913% of total sted capacity
* * source «U. S. Department o f Commerce
206
ECONOMIC REPORT OF THE PRESIDENT
As can be seen from TABLE 10, the Industry
has managed to push its return per Sales Dollar
to a peak level. The Net Profits in 1955, and so
far in 1956, of 7.9^ on each dollar of Sales are
higher than for any of the years shown (except
for 1950 when the return was fractionally higher
at 8.(ty). U. S. Steel did even better than the In
dustry. It earned 9.(ty in 1955 on each Sales
Dollar compared with 7.3^ in 1950. In 1956 U. S.
Steel is earning an even higher rate of 9.5$>.
These are higher profit margins achieved through
increasing productivity and higher Prices at the
expense of the buying public. It is likewise evi
dent here as in Profits Before Taxes that Steel is
out of step with the rest of the Economy. Between
1947 and 1956, a time when the Net Profit mar
gin of All Manufacturing was declining from 5.7^
to 4.3^, the Steel Industry’s share was pushed up
from 6.2^ to 7.9^.
While it is evident that over the years Profits
have taken a larger share of the Sales Dollar, the
same is clearly not true of Wages and Salaries.
As noted in TABLE 11, Wages and Salaries in
clude, for some Companies, money spent on the
worker’s behalf, as well as money paid to him in
wages. TABLE 11 shows the relationship of
Wages and Salaries to the Sales Dollar.
Table 11
WAGES AND SALARIES*
AS A SHARE OF THE SALES DOLLAR
1955
Steel Industry (10 Companies
excluding U. S. Steel)...............
U. S. Steel....................................
1953
1954
1952
1951
1950
1947
1939
35.5*
38.7*1
36.4*
37.8*5
34.7*5
35.2*5
38.8*5
40.5*5
33.0
39.4
36.0
42.7
33.6
40.6
34.9
42.1
31.9
39.0
32.0
39.9
36.2
42.6
36.7
45.7
* The Wages and Salaries figures are Total Employment Costs including Pensions, Social Security Taxes, Insurance, etc. for 5
of the Companies; for 5 others they exclude such additional items; and for 1 Company they include these additions from 1946 on
and exclude them for 1939. The same 11 Companies are used for all years. They are the only Companies of the 25 major Compan
ies for which data are available for all years.
SOURCE.—Annual Reports of the Companies; Moody’s Industrials. Calculations ours.
In 1939, Wages and Salaries of 11 major Steel
Companies accounted for 40.5^ out of each Sales
Dollar. In subsequent years the wage earner’s
portion of the Sales Dollar has grown smaller and
smaller, reaching a low of 34.7^ in 1951. There
after, it fluctuated upward in 1952 and 1954 par
ticularly because of the work stoppage in 1952
and the recession in 1954. It then dropped
sharply to 35.5^ out of each Sales Dollar in 1955.*
For U. S. Steel the trend was almost identical
with that of the Industry. It shows an elapsed
decline from 45.7^ in 1939 to 39.4$* in 1955.
Materials costs followed a slightly different
trend from Wages and Salaries. This is shown
in TABLE 12.
* There are not sufficient data available to show the
full Industry trend in 1956. The 11 Companies here in
cluded account for 72.3% of the Industry’s capacity.
Table 12
MATERIALS COSTS*
AS A SHARE OF THE SALES DOLLAR
1955
1954
1953
1952
1951
1950
1947
1939
Steel Industry (9 Companies). . . .
40.1*5
Steel Industry (8 Companies
excluding U. S. Steel)........................ 44.9
U.S. Steel........................................ ..... 33.1
39.7*5
43.0*5
47.Off
43.6*5
42.9£
45.2*5
40.8*5
43.2
34.9
47.3
36.7
50.6
41.7
47.6
37.7
46.5
37.8
49.2
39.5
45.3
34.7
* The Materials Costs figures are Materials (or Products) and Services Purchased (or a comparable item similarly labeled.)
Where no such figure was shown separately, an approximate one was derived by deducting Employment Costs (or W- ges and Sal
aries) from Cost of Goods Sold (or a similar item). Materials Costs were specifically listed for 4 Companies for all years, for 2 Com
panies for all years except 1939 (computed for that year). They were computed for all years for 3 Companies. The same 9 Com
panies are used for all years. They are the only Companies of the 25 major Companies for which data are available for all years.
SOURCE.—Annual Reports of Companies; Moody’s Industrials. Calculations ours.
ECONOMIC REPORT OF THE PRESIDENT
Materials costs for 9 Companies accounted for
40.8^ of the Sales Dollar in 1939. By 1947 this
figure had risen to 45.2^ as a direct result of the
inflation which followed the weakening of price
controls. Thereafter these costs fluctuated down
ward until 1952. In that year Materials costs rose
abruptly and reached a peak of 47.0^. Since then,
they have dropped sharply reaching lows of 39.7^
in 1954 and 40.1^ in 1955.* For U. S. Steel the
pattern was much the sam e with one important
exception— the downward trend, and a sharp one,
continued through 1955. In that year Materials
costs accounted for 33.1^ out of each Sales Dollar.
207
This was the lowest level for any of the years
shown.
It is readily apparent from these data that over
the years the two major cost items, W ages and
Salaries and Materials costs, have moved down
ward. Profits, not the consumers, have bene
fited. This conclusion is even more strikingly il
lustrated by examination of the complete break
down of the U. S. Steel’s Sales Dollar. This is
shown for the same years in TABLE 13.
* There are not sufficient data available to show the
full Industry trend in 1956. The 9 Companies here in
cluded account for 70.4% of the Industry’s capacity.
Table 13
DISTRIBUTION
OF THE
SALES DOLLAR (100?)
IN
U. S. STEEL CORP.
Payroll Costs............................................
Materials Costs........................................
Subtotals.......................................
Depreciation.............................................
Profits Before Taxes..............................
All Other Item s.......................................
Totals.............................................
1955
39.4^
33.1
72.5
1954
42.7*
34.9
77.6
1953
40.6*
36.7
77.3
1952
42.1*
41.7
83.8
1951
39.0*
37.7
76.7
1950
39.9*
37.8
77.7
1947
1939
42.6* 45.7*
39.5 34.7
82.1 80.4
7.0
8.1
6.1
4 .9
3 .5
3 .7
18.0
11.9
14.1
9 .0
17.7
16.4
2.5
2.4
2 .5
2.3
2.1
2 .2
100.0* 100.0* 100.0* 100.0* 100.0* 100.0*
4 .1
7 .5
11.5
6.4
2.3
5.7
100.0* 100.0*
SOURCE.—Annual Reportsof U.S. Steel Corp.
Payrolls and Materials costs, combined ac
counted for 72.5^ out of each Sales Dollar in 1955
(and almost exactly the same amount in 1956)—
the lowest portion for any of the years shown.
Comparison with 1947— a good postwar year, and
a relatively recent one— shows a decline by 1955
of 9.6^ per dollar of Sales in these combined costs.
This decline was used largely by the Corporation
to increase Profits Before Taxes which accounted
for 11.5^ of the Sales Dollar in 1947 and 18.0$ in
1955— a rise of 6.5^. The rest of the decline was
taken up by Depreciation charges, a non-cash ex
pense, which rose from 4.1*1 in 1947 to 7.0^ in 1955
— a rise of ‘5.9^. This rise in Depreciation charges
results largely from extraordinary charges for
Rapid Amortization of emergency facilities which
was first permitted by the Government in
1950 but which did not begin to have a significant
impact until 1952. Had such a charge not been
permitted in 1955, Depreciation would have ac
counted for only 3.4^ * of each Sales Dollar.
* This amount may have been as much as 4.1<f depend
ing on the precise fashion in which U. S. Steel treats the
item which it labels Rapid Amortization charges.
208
ECONOMIC REPORT OF THE PRESIDENT
6-~Ability of the Steel Industry to
Absorb a Wage “Cost” Increase
The relatively small share of total costs rep
resented by wage “costs” and the great profita
bility of the Steel Industry would permit the ab
sorption of a substantial wage increase in 1956.
For varying wage “cost” increases effective for
a full year the impact on the 1956 annual rates
of Profits and Profit ratios is shown in the follow
ing tabulation:
EFFECT OF A WAGE INCREASE ON STEEL PROFITS
(Assuming No Increase in Productivity)
(dollars in millions)
Resulting Profits and Profit Ratios
Wage
“Cost”
Increase
Per Hour
30*
40*
50*
Gross
“Cost”
$465.0
$620.0
$775.0
Net
“Cost”
$223.2
$297.6
$372.0
Profits
Before
Taxes
$1,885.7
$1,730.7
$1,575.7
The above computations show that within the,
framework of its 1956 operations the Steel Indus
try could absorb for a full year a wage “cost” in
crease of as much as 50^ per hour, forego a Price
increase and still have:
Profits Before Taxes on the same level as in
1953, a banner year,
N et Profits higher than for any year prior to
1955, a record year,
Return on N et W orth of 10.6% which is well
above the fair and reasonable rate of 6%, and
Return on Sales of 5.4* which still is well above
Net
Profits
$930.2
$855.8
$781.4
Net Profits
as a % of
Net Worth
12.6%
11.6%
10.6%
Net Profits
as a Share
of the Sales
Dollar
6.4*
5.9*
5.4*
the 4.3* earned by All Manufacturing Corpo
rations in 1956.
But these computations ignore one very im
portant factor— increased productivity. Even if
only a modest 4% increase in Steel productivity
in 1956 is assumed, this would result in increased
Sales revenues of $583.0 million with the same
number of em ployees and manhours. W hen this
factor is taken into consideration, the impact on
1956 Profits and Profit ratios of varying wage
“cost” increases effective for a full year would
be as follows:
EFFECT OF A WAGE INCREASE ON STEEL PROFITS
Wage
“Cost”
Increase
Per Hour
30*
40*
50*
(Assuming a 4% Increase in Productivity)
(dollars in millions)
Resulting Profits and Profit Ratios
Gross
Net
Net
Net
Change in Change in
Profits Net Profits
Revenue
Profits
Profits
Profits
as a %
as a
Gross
Gain from Before
After
Before
Net
of Net Share of the
“Cost” Productivity * Taxes
Taxes
Taxes
Profits
Worth Sales Dollar
$349.2 -$ 1 1 5 .8
$465.0
7.2*
-$ 5 4 .7
$2,234.9
$1,098.7
14.9%
620.0
349.2
-2 7 0 .8
-1 3 0 .0
2,080.0
1,023.4
13.8%
6.8*
775.0
349.2
-4 2 5 .8
-2 0 4 .4
1,924.9
949.0
12.8%
6.3*
* Computed on the basis of a 4% increase in Sales less additional Materials Costs based on a 40.1% ratio of Materials
Costs to Sales.
209
ECONOMIC REPORT OF THE PRESIDENT
Return on Net Worth would be more than dou
ble the standard 6% rate;
The implications are clear. Even with a modest
4% productivity increase the Industry could ab
sorb a labor “ cost” increase of as much as 301 or
40^ per hour for a full year and still have Profits
in excess of any prior full year. In fact, a labor
“cost” increase of as much as 50# per hour could
be absorbed with these results:
Profits Before Taxes would top any previous full
year, except 1955;
Net Profits would top any previous full year, ex
cept 1955;
Return on the Sales Dollar would be well above
the 5.7^ earned by the Industry in 1947 and
the 4.3^ earned by All Corporations in 1956.
The cost; computations made above should be
halved to measure their actual impact on 1956
operations, since the wage “cost” increase would
be in effect for only 6 months in 1956.
B. THE PRODUCTIVITY OF STEELWORKERS
The amount of Steel produced by each Steel
worker for each hour worked has multiplied by
leaps and bounds in recent years. This increased
productivity, both per hour worked and per man,
has had the result of lowering sharply the unit
labor costs of the Industry. This means signifi
cant cost savings which can be shared with the
employees and the public if the Industry is will
ing. The facts on increased productivity are
shown in T.VBLE 14 and CHART 6.
Table 14
PRODUCTIVITY INDEXES
IN
STEEL
(1947-1949=100)
Output per
Manhours
Production
Worker
Manhour
Production
Workers
Per Unit
116.6
111.4
139.4
132.3
132.7
126.8
71.8
75.6
75.4
78.8
93.9
96.5
109.6
114.0
95.3
97.8
109.7
115.2
104.4
106.9
93.4
91.8
105.2
106.6
101.4
101.5
NOT AVAILABLE**
108.6
110.6
94.8
90.0
82.9
75.1
110.9
121.7
119.0
117.1
113.4
99.9
100.8
99.3
114.0
117.0
116.0
111.5
110.8
101.6
99.4
99.2
90.2
82.2
84.0
85.4
88.2
100.1
99.2
100.7
87.8
85.5
86.2
89.6
90.3
98.4
100.6
100.8
87.9
77.3
71.2
86.3
81.4
78.6
113.7
129.3
140.5
115.8
122.8
127.3
Weighted
Production
Production
Workers
1956*
1955
154.7
141.3
111.0
106.8
1954
1953
1952
1951
1950
1949
1948
1947
1946-1942
1941
1940
1939
107.0
133.4
113.4
128.5
118.4
93.2
106.0
100.7
95.5
73.3
59.0
Unit Labor Requirements
Manhou
Per Uni
* Based on projections of preliminary 1st quarter data.
** Not available because certain wartime production and manhours figures cannot be segregated to exclude the portion devoted
to munitions manufacture.
SOURCE.—Bureau of Labor Statistics. A Preliminary Index as released to the Productivity Conference and to the Industry
and Union in mid-1950 and since revised and improved and extended through 1954. The figures have been extended by the Union
through the 1st quarter of 1956 by use of the BLS production weights and American Iron and Steel Institute production data.
210
ECONOMIC REPORT OF THE PRESIDENT
CHART 6
Productivity in steel (Outputpermanhour)
140 Index(1947-49=100)
130
Oufrutp irhou worksdbye ach
Steelworl erisir creasi igata laccelsratingrate
120
110
100
90
Ija
Ija
IrA
in
*basedonprojectionof preliminaryfirstquarterdata
SOURCE: BLSdata- apreliminaryindex
IrA
IrA
lr m
1rr
•rA
211
ECONOMIC REPORT OF THE PRESIDENT
It is now commonly accepted that, over long
periods, wage gains and rising living standards
must come largely from increased productivity,
i.e., rising output per manhour. With this con
cept the Union has no quarrel as long as one prior
condition is met—namely, that the income shares
as between management and investors on the one
hand and labor on the other at the beginning of
any period of computation of productivity changes
are fair and equitable. There is no such equi
table sharing in the Steel Industry today. The In
dustry has taken as its share in Profits far too
much of what should have gone to the workers
in the mills and to the public. In our opinion the
Steel Industry owes its employees a substantial
wage increase this year—even if no further in
crease in productivity were in prospect. But this
is somewhat academic because, as noted, there
has been a large and consistent increase in pro
ductivity.
In the Steel Industry, productivity has shown
a pronounced growth in the past several decades.
In the period from 1919 to 1929 it nearly doubled,
according to the Index maintained by the United
States Bureau of Labor Statistics (BLS). In
1939 productivity in the Industry was more than
one-third above this 1929 figure. Thus, it had
risen by 167% in 20 years, or at a rate approxi
mating 5% per year compounded annually over
a period which included the Great Depression.
When this Index is brought up to date, as is
done in the Preliminary Index set forth in TABLE
14, it shows that the individual Steelworker has
continued, in the period since 1939, to produce
more and more Steel for every hour worked. In
the 1st quarter of 1956 he was producing nearly
70% more Steel than he did in 1939. Thus, de
spite the ups and downs in particular years, the
Steelworkers’ average output per manhour rose
at a rate of 3.2% compounded annually over this
period of more than 16 years. The year-by-year
changes are shown in TABLE 15.
Table 15
PRODUCTIVITY CHANGES
IN
STEEL
(year to year)
Increase Over Prior Year
in
Output per
1956*..............
1955...............
1954.....................
1953.....................
1952.....................
1951.....................
1950.....................
1949.....................
1948.....................
1947 (re 1941)....
1946-1942............
1941.....................
1940.....................
19 3 9 ;;.................
Decrease From Prior Year
in
Unit Labor Requirements
Production
Worker
Manhour
Production Workers
Per Unit
Manhours
Per Unit
5.4%
19.3%
4.7%
11.2%
- 5.0%
-1 6 .2 %
- 4.3%
-1 0 .3 %
+ 9.7%
+ 2.7%
- 8 .9 %
- 2 . 6%
2.3%
0. 9%
1.6%
4. 0%
3.3%
0. 6%
13.5%
9. 1%
- 0 .9 %
2. 2%
1.5%
0. 2%
13.0%
14.
NOT AVAILABLE
13.7%
6.
8.6%
3.
* Based on projections of preliminary 1st quarter data.
SOURCE.—Computed from indexes in prior Table.
- 2.1%
- 1.6%
- 3.2%
-1 1 .9 %
+ 0.9%
- 1.5%
-1 1 .4 %
-12.1%
- 8.0%
-
0.8%
0.8%
8.2%
2.2%
0.2%
3.8%
-1 3 .0 %
-
5.7%
212
ECONOMIC REPORT OF THE PRESIDENT
Most significant, however, is the sharp acceler
ation in the productivity rate in the most recent
years. It is running currently at an annual rate
4.7% higher than in banner 1955. In 1955 alone,
it was 11.2% above 1954. And, even when the
small decline of 1954 is offset, the 2-year average
from 1953 to 1955 was 4.2% per year.
The fact that productivity is growing at an ac
celerating rate in Steel is significant in connection
with the Industry’s demand for a 5-year contract
providing annual wage increases of a lesser
amount than have been negotiated in the past
Since even the wage increases negotiated up to
now have been less than warranted by produc
tivity growth, it is clear that the Industry seeks
to provide its workers with an even smaller por
tion of their share of increased output per manhour for the next 5 years.
Increases in productivity mean simply that unit
labor requirements decline—that each ton of Steel
is produced with less hours of labor. Even if the
cost of each hour of labor is increased by wage
rate increases proportionate to rising produc
tivity, these increases can be absorbed out of the
gains in productivity.
These productivity increases bluntly mean that
the “ real” earnings level of Steelworkers can rise
significantly without increasing Steel costs or
necessitating an increase in Steel Prices. Un
fortunately the Steel Industry has been unwilling
to set its Prices within the bounds of its costs but
has, instead, insisted on raising its Prices to in
crease profit margins. This not only has caused
inflation. It is inflation.
It is true that the Steelworkers’ standard of
living has risen during the last few years. But
the increases received—and more—could have
been met from the gains in productivity. Un
willing to accept this fact, however, the Industry
has insisted on raising Prices—on receiving in
creases which have, in the main, added unwar
ranted increments to Profits.
Surely Steelworkers have every right to a fair
share in the productivity gains which they have
helped to achieve. This would permit stock
holders and Steel users also to share in these
gains. This is the fair way to divide up these
gains. The Union has not asked for more. The
Union has asked, as a basic floor, that Steelwork
ers’ “ real” wages increase as rapidly percentage
wise as the “real” productivity increases in Steel.
This, the Union has not been able to achieve.
Consistently “real” productivity increases have
outrun the increases in “ real” wages. This is evi
dent in the following moderately long range com
parison which covers most of the period since the
Union was founded:
Increase
In
“BealM
Productivity
in Steel
1939-1956 (more
than 16 years)
68.8%
Increase in
“Real”
Straight Time
Average Hourly
Earnings in
Steel
47.1%
Currently, in 1956, productivity is running
4.7% higher than in the record year, 1955. Steel
workers, of course, have received no wage adjust
ments in 1956.
In the past, the Union has often been forced to
demand wage increases which in dollars and cents
amount have exceeded the percentage increase
in productivity. This has been forced on the
Union because of the Industry’s Price Policy which
has caused inflation in Steel and has contributed
greatly to it in the Economy and has, thereby,
robbed the workers of the wages they were al
ready receiving. They and their Union have been
forced to pursue these rising prices—the cost of
living—just to maintain their “real” wage posi
tion, i.e., their existing standard of living. This
purely defensive role of a significant portion of
many of the Union’s wage proposals in recent
years is generally unknown or overlooked.
If management, including Steel management,
would refrain from insisting on its all too frequent,
unnecessary, and inordinately large Price in
creases so that there could be price stability, there
would be no need to catch up constantly with a
rising cost of living, and increased money wages
would then bring increased “ real” wages. It would
then be possible for labor to improve its wages,
“fringes” and working conditions more nearly
within the framework of rising productivity. Un
til management is willing to abandon its inflation
ary pricing policy, certainly, the Union has no
choice but to insist on money wage increases
greater in amount than the percentage productiv
ity increases—if it is even to hold its own, let alone
make any gains in “ real” wages and in its stand
ards of living.
As a corollary to this productivity story in Steel,
213
ECONOMIC REPORT OF THE PRESIDENT
CHART 7
PruductioaShipments &EmploymentinSteel
150 Index(I947»IQ0)_________________________________________
-r ~
140
Produclion— i>/
n
//
The substantial i iseinp oductii m
and shipments si ice 194r has mt
/>
130
to jxpand producl on wit hnoapi ireciabl
IMAQA n omnlf i/mon+
6 A
i%
nil
ncmpnlynreflr
/\
/A \
f
\\
A
120
>
110
a
\\
\1
M
/
-------------------------------------------^ ------------------------------------
beenrefle ctedin employi nentlmireased
pr ductivi y has enabled meStei il Indus Ty
-Shipm:nts*
l l
W P
V
V
V
100
I
\ /
Product onft
Maintenance
employnent’ *
90
*50
1947 ‘48
49
'51
* sounCEtAmericanIronandSteelInstitute
**SOURCEtBLS
'52
'53
‘54
*55
'56
214
ECONOMIC REPORT OF THE PRESIDENT
it is appropriate to examine the effect of produc
tivity growth on Employment.
In the first quarter of 1956 Shipments of Fin
ished Steel were at an annual rate almost 48%
higher than in 1947, and Production of Steel ingots
was over 50% higher than 1947. But this sub
stantially greater output in the 1st quarter of
1956 was produced by a work force only 9.5%
larger than in 1947.
Last year, in 1955, Shipments were at a record
annual high level—34.3% above 1947, and Ingot
Production was 37.9% above 1947. Employment,
however, was only 5.3% higher. Despite record
Production and Shipments in 1955, there were
less production and maintenance workers in the
Basic Steel Industry in that year than in 1953 or
in 1951 when Production and Shipments were at
a lower level. The relationship between Produc
tion, Shipments and Employment from 1947 to
1955 is shown in CHART 7 and TABLE 26.
C. STEEL PRICE INCREASES
For an extended period the Steel Industry has
defended the Price increases it has levied by pub
licizing these claims:
1. Steel wage increases have forced higher Steel
Prices;
2. A Steel wage increase always results in
higher Materials costs equal to the cost of the
wage increase; and
3. Steel profit margins traditionally have been
too low.
In recent years the Steel Industry has placed
increasing emphasis on an additional fourth claim
(really 2 claims) for Jugher Steel Prices—the
alleged inadequacy of the charges permitted for
Depreciation by the Federal Income Tax Law, and
the “ need” for larger Profits to finance the Indus
try’s expansion of Steel capacity.
Each of these claims is examined in this section.
1—Steel Wages in Relation to Steel
Prices
The Industry habitually refers to wage in
creases it has negotiated as “ rounds” of increases
but understandably is reticent about reviewing its
Price increases.
In the 10 years from 1946 through 1955, Steel
workers negotiated wage increases in 8 years. In
one year, 1949, there was no wage increase, but
pension and insurance programs were negotiated.
In 1951 there was no wage increase or other bene
fits of any sort.
In contrast, in the same 10-year period the Steel
Industry generally raised its Prices as follows:
“ General” Price Increases (on most
products) ....................................
Selected Price Increases (on some
products) ...................................
“Extras” (increases other than in
12 times
3 times
base prices) ................................
3 times
Total “ Rounds” of Price In- -----------creases.............................. 18 times
This means simply that the Industry has raised
its Prices twice for each wage or “ fringe” increase
negotiated with its employees. This is evident
from the facts shown in TABLE 16.
The Bureau of Labor Statistics’ Index of Whole
sale Prices of Steel Mill Products shows a rise in
Steel Prices (including “Extras” on some prod
ucts) in more than 36 months during that 10-year
period (TABLE 16).
The total hourly cost of all the wage and
“ fringe” settlements in that period was $1,318.
These facts and the data on revenue gained from
Price increases in the same period are shown in
TABLE 17 and CHART 8.
As indicated in TABLE 17, there were more
than 1.3 billion manhours worked in 1955 by all
employees in the Industry. Accordingly, the cur
rent annual “ cost” of all of the wage and “fringe”
benefits negotiated from 1S46 through 1955 (based
on 1955 manhours) equals slightly less than $1.8
billion.
The cumulative increase in the Price of Steel
products from January, 1946, through December,
1955, has been $67.25 a ton. Finished Steel Ship
ments in 1955 totaled 84.7 million tons. There
fore, the current annual revenue gain (based on
215
ECONOMIC REPORT OF THE PRESIDENT
Table 16
Date of
Steel
Price
Index
fJan., 1946
Feb., 1946. .
j^Mar., 1946
Date of
Steel
Wage
Increase
April, 1947.. . j Feb., 1947
U ept., 1947
fMar., 1948
July, 1948 I June, 1948
LSept., 1948
fFeb., 1949
Oct., Nov., I Oct., 1949
'49 (Pens.
& Ins.). . . I Jan., 1950
I
fNov., 1950
Dec., 1950.
j Feb., 1951
July, 1952. . . (May, 1952
{Aug., 1952
June, 1953.. .{ ...........
1 May, 1953
[July, 1953
July, 1954. . . (June, 1954
{July, 1954
July, 1955. . . (June, 1955
{July, 1955
PRICE CHANGES
IN
STEEL
BLS Wholesale
Price Index
Months When
% Change
Most of the
From Last
Prior Date
Cumulative
Increase
Index
to Date
Occurred
(1947-49 = 100) Shown
70.3
Feb., Mar.
76.1
8.3%
Dec., ’46, Jan.,
’47 (“extras”)
Dec., '46,
85.7
12.6%
Jan., ’47
July, Aug.
92.9
8.4%
Jan., Feb., Mar.
97.1
4.5%
May
95.3
-1 .9 %
July, Aug.
108.1
13.4%
Jan.
110.4
2.1%
Apr., M ay
109.4
-0 .9 %
Dec., '49,
114.5
4.7%
Jan., 50
July, Oct.
115.7
1.0%
Dec., ’50
Jan., ’51
124.7
7.8%
125.2
0.4%
Nov., ’51
131.1
4.7%
July, Aug.
May '53
(“extras”)
134.4
2.5%
May
142.7
6.2%
June, July
141.9
-0 .6 %
Sept. ’53
145.6
2.6%
July
Oct., '54
145.9
0.2%
155.0
6.2%
July
Jan., Feb., '56
(“extras”)
Oct., ’55, Jan.,
Feb., May, '56
158.2 (Mar.)
2.1%
Steel Magazine
Price Composite
Change from Last
Prior Date to
Price
Date Shown
Per
Ton
$
%
$55.20
60.48 $5.28
9.6%
6.00(est.) 9.9%
64.30 3.82
6.3%
69.88 5.58
8.7%
5.4%
73.64 3.76
72.90 - 0 .7 4
—1.0%
82.28 9.38
12.9%
84.00 1.72
2.1%
82.64 - 1 .3 6
-1 .6 %
2.4%
84.60 1.96
85.48
.88
1.0%
93.14
93.14
98.24
7.66
0
5.10
9.0%
0
5.5%
5.00(est.)*
.50
3.86
.22
2.40
.18
7.08
5.1%
0.5%
3.9%
0.2%
2.3%
0.2%
6.7%
98.74
102.60
102.82
105.22
105.40
112.48
1.90(est.)* 1.1%
July, 1956. . . j June, 1956
114.02 1.54
1.4%
(?)
IJuly, 1956 (?)
CUMULATIVE INCREASE—
$71.72** 129.9% *’
125.0%
Jan., 1946-M ay (Mar.), 1956...................................
* Iron Age 7/2/53 and Steel Magazine 5/21/56 respectively. The $1.90 is computed from a $2.75 increase from
11/14/55 to 5/21/56 less the intervening base Price increase of 85tf.
♦♦Including $12.90 in “extras”.
SOURCE.—BLS Index of Wholesale Prices of Steel Mill Products; Steel Magazine's Finished Steel Weighted Price Composite.
Calculations ours.
87624 0—57------15
216
Table 17
C O M P A R I S O N S OF R E V E N U E GAINS A N D L A B O R COST INCREASES
D U R I N G T H E L A S T 10 Y E A R S
$5.93
8.91
12.24
1.56
7.11
2.20
5.08
4.57
2.60
7.78
$289 ,238,905
561 ,839,207
807 ,511,209
90 ,642,256
513 ,571,596
173 ,643,690
345 ,458,349
366 ,294,151
164 ,197,088
659 ,101,714
18.5*
15.0*
13.0*
12.5*
16.0*
0*
21.1*
8.5*
12.0*
15.2*
1,010,171,703
1,167,582,947
1,219,563,700
1,073,204,921
1,214,394,580
1,344,670,029
1,189,893,622
1,344,116,422
1,117,109,108
1,285,299,398
(100%)
1,079,935,538 $199,788,075
188,157,974
1,254,386,492
170,348,427
1,310,372,515
143,307,996
1,146,463,968
208,479,756
1,302,998,476
0
1,412,913,763
1,250,807,970 263,920,482
119,725,883
1,411,442,215
140,752,932
1,172,941,104
205,647,904
1,352,946,734
$1.45
2.99
4.74
0.63
2.46
$1,783,183,795
$3.19
i ’ 3i
3.06
1.17
3.21
Dec. 1945 to Dec. 1955.........
THE
CUMULATIVE INCREASE—
IN BASE PRICES—
$57.982
(INCLUDING SOME “EXTRAS”)—
$67.254
Revenue and Labor Cost Impact for the 10-year
period (based on 1955 operations)......... $5,697,248,109
$1,318
1American Iron and Steel Institute.
* Derived from Steel Magazine’s Finished Steel Weighted Price Composite as of December, converted to dollars per ton. The Price Increase figures do not indude “extras.”
* American Iron and Steel Institute data including Salaried hours for 93-95% of the Industry. Adjusted to 100% as indicated from the AISI reports.
4Between Dec. 1945 and Dec. 1955 “extras” have been raised generally on two occasions. The impact of these “extras” increases appears to have been at
least $9.27 per ton in addition to the $57.98 shown by the Steel Magazine Index. This brings the total increase to $67.25. This difference was estimated for
this purpose by using the difference between the increase (121.9% ) in the BLS Steel Mill Products Index (which includes some “extras” ) and the increase
(105.1% ) in the Steel Magazine Index (which includes no “extras”).
SOURCE.—The sources are indicated.
Calculations ours.
P R E S ID E N T
C U M U L A T I V E INC R EA S ES —
Dec. 1945 to Dec. 1955.........
OF
48,775,532
63,057,150
65,973,138
58,104,010
72,232,292
78,928,950
68,003,612
80,151,893
63,152,726
84,717,444
$55.20
61.13
70.04
82.28
83.84
90.95
93.15
98.23
102.80
105.40
113.18
Increased
Labor Cost
(all empls.)
$ Increase in
Steel Prices
Per
$ Increase in
Labor Costs
REPORT
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
Adjusted
Total Hours
Worked *
ECONOMIC
Finished Steel
Weighted Price
Price
Revenue Gain Hourly Cost
of Wage &
Finished Steel Composite2
Increase *
from
Total Hours
Shipments1 ($ per ton in ($ per ton Price Increase “Fringe”
Settlement
(tons)
Dec.)
Dec. to Dec.) (per year)
Worked8
ECONOMIC REPORT OF THE PRESIDENT
217
CHART 8
Revenue GainedfromSteel Price Increases
Cumulativetotal
vs. Labor "Cost" Increases
impactin1955
millions Ofdollars
1946 47 48
*50 '51 52
* AmericanIron&Steel InstituteandSteelMagazine
**AmericanIrontSteel InetituteData
'53
'54
'55
218
ECONOMIC REPORT OF THE PRESIDENT
1955 Shipments) from Steel Price increases since
early 1946 is $5.7 billion, or $3.9 billion more than
increased labor costs (TABLE 17).
In short, since 1945, Steel Prices were increased
by $3.19 for each $1.00 increase in total labor costs
—a ratio of more than 3 to 1. This is also evi
dent in CHART 9 and TABLE 27 where labor
costs measured from 1947 show an increase of
28.0% vs. a Price increase of 78.2% through
March 1956— a 77.7 % average for the 1st quarter.
2—Steel Materials Costs in Relation to
Steel Prices
raised by 78.2%. Again Steel Prices have ex
ceeded cost increases by a ratio of nearly 3 to 1.
An additional indication of the far more rapid
rise of Steel Prices than of Steel’s Materials costs
since 1947 is the relationship of payments for Ma
terials to the receipts from Sales. In 1947 Mate
rials costs represented 45.2^ out of each Sales Dol
lar, but by 1955 they had declined to 40.1^.* U. S.
Steel’s Materials costs were 39.5$* of each Sales
Dollar in 1947, but only 33.1^ in 1955.
All available data establish not only that Steel
Prices have risen far more rapidly than the Indus
try’s Materials costs, but also that there is no
validity to the claim that increased labor costs
somehow have a one-to-one relationship with in
creases in Materials costs.
The Industry’s leading producer, United States
Steel, demolished the Industry’s own contention
with a Table contained in the Corporation’s 1952
Annual Report. It showed that the rise in aver
age hourly employment costs had no fixed rela
tionship to the rise in the average cost in Steel
operations of purchased products and services
(Materials) per ton of Steel Shipments. These
comparisons from the Corporation’s own 1952
Annual Report are shown in TABLE 18.
The cost of the Materials purchased by the Steel
Industry has risen somewhat in the postwar pe
riod. But this rise has been moderate in relation
to the rise in the Price of Steel products sold by
the Industry.
The base period of the BLS Wholesale Price
Indexes is 1947-49. From the base period to
March, 1956 the Price of Steel Mill Products sold
by the Industry has risen by 58.2%. This is equal
to 78.2% on a 1947 basis.
This is far in excess of the price rise of the most
important products purchased by the Steel Indus
try. Examples of the price increases of such prod
ucts since 1947-49 include Scrap—22.3%, Bitu
minous Coal—7.0%, Petroleum and Products—
16.8%, Gas—22.0%, Tin (pig)— 10.4%, Oxygen—
5.3%, Cement—38.5%, Sand, Gravel and Crushed
Stone— 22.4%, Electricity— a decline of 5.7%, Ma
terial Handling Equipment— 48.1%— all of which
have risen far less than Steel Prices.
The Annual Reports of the larger Steel Com
panies do not break out separately their Materials
costs relating solely to Steel production. Accord
ingly, a precise estimate of such costs cannot be
made. However, in t e s t i m o n y before the
T.N.E.C., a United States Steel spokesman re
ferred to the BLS Price Index of “All Commodi
ties Other Than Farm and Food Products” (whfch
the President’s Council of Economic Advisors
refers to as “industrial prices” ) as a close indi
cator of the movement of prices of the Materials
purchased by the Corporation. That Index, from
the year 1947 through the 1st quarter of 1956,
rose by 26.7% (it was 27.6% by April). These
figures are shown in CHART 9 and TABLE 27.
The continued validity of that Index in relation
to United States Steel’s purchases is indicated by
the fact that, from 1947 to 1955, U. S. Steel’s total
Materials costs (all materials) per ton of Steel
products shipped increased by an almost identical
amount—27.9%.
Thus, while Materials costs have risen about
28.0% since the year 1947, Steel Prices have been
* Based on the 9 of the 25 leading Companies for which
Sales, Materials, and Wages and Salaries data are avail
able for all years since 1939.
Table 18
COMPARATIVE CHANGES IN MATERIALS AND
EMPLOYMENT COSTS IN U. S. STEEL CORP.
Increase as Percent
of 1940
Period Covered
Employment Cost of
Cost
Materials
January, 1941-April, 1947............... 56%
47%
April, 1947-July, 1948................... 16
42
July, 1948-November, 1949........... 14
18
November, 1949-December, 1950 19
3
December, 1950-July, 1952........... 23
24
July, 1952-December, 1952........... 27
4
219
ECONOMIC REPORT OF THE PRESIDENT
CH ART 9
Prices inSteel v&Material Labor Costs
2oo Index (1947=100)
Therii
lelprio is sine i 19471ias
dwarfi d theri seintfi s2maj ir Steel
costiti !ms>maFerials i ndlabor-byalr tost 31ll
175
i
holesale rices oft rial steel nillprodu! t S ^ /
150
(
V
125
/
> f ...
Wholesale prices iifallcooii loditieS'
otherthi nfarm & foodprodi icts**
f
100
labor cost per uni tofprodui ffion**
/ N -S . . .
tin
lifl
* SOURCE: BLSdote
** SOURCE: BLS
•fa
If A
1ra
Of M
iff
If A
220
ECONOMIC REPORT OF THE PRESIDENT
Prior to the Corporation’s publication of its
1952 Annual Report, the Industry was involved in
a public controversy on this matter. In 1952 the
Industry sought a Price increase which, at that
time, required approval of the Office of Price Sta
bilization. The Steel Companies wanted a Price
increase sufficient to cover an increased wage cost
plus a mark-up to cover an “ anticipated” rise in
Materials costs. The director of the Office of
Price Stabilization, Mr. Ellis Arnall, testified on
this matter before a Senate Committee. After
noting that, although the Industry agreed that in
creased labor costs would be less than $6 a ton, it
demanded a price increase of $12 a ton, Mr. Arnall
said in part:
. . They justify this position by asserting
that historically every increase in employment
costs has been paralleled by an approximately
equal increase in the cost of purchased goods
and services.
. . The fallacy of the Steel Industry’s po
sition may be further demonstrated by looking
at the record of the past few years. In the mid
dle of 1948 there was a substantial wage in
crease which raised employment costs per ton
between $3 and $4. Material costs per ton, however, remained steady throughout the entire pe
riod from the beginning of 1948 until the
Korean outbreak.
“ Similarly, the last general increase in steel
wages occurred in December, 1950. This in-
3—Steel Profits in Relation to Price
Increases
The Industry is not quite fair in using Net Prof
its as a measure of its profit margin in a labor cost
dispute, since wage increases are paid out of Prof
its Before Taxes, but the facts on Net Profits only
have been analyzed here, in order to meet the In
dustry’s argument directly on the Industry’s
chosen ground.
The Net Profits of the Steel Industry (25 Com
panies) amounted to $126.4 million in 1939. The
rate of Return on Net worth was 4.2%, a rela
tively modest return. By 1947 Net Profits more
than tripled to $394.3 million, which was equiva
lent to a 10.5% Return on a 24% larger Net
Worth—which is certainly a substantial Return.
Since 1947, despite an ever-larger demand for
Steel, and a tremendously expanded capacity
which enabled the Industry to meet this demand,
the Steel Industry has persisted in a policy de
signed to widen already huge profit margins.
crease raised employment costs per ton by about
$3.80 on the average. At the same time, steel
prices were raised by an amount in excess of $8
per ton. Yet, our figures indicate that since De
cember, 1950 there has been virtually no net
change in the cost of purchased services and
materials for the steel industry. Actually, the
cost of the most important single item purchased
by the steel industry—steel scrap—was reduced
. . . and is now lower than it was in December,
1950.
“It is true that in the past the steel industry
has often followed the practice, when granting
wage increases, of raising its prices by a sub
stantially greater amount than the increase in
labor costs. The effects of this policy are clearly
reflected in the steady increase in its profits per
ton from a level of $9 in 1947 to an average of
more than $20 in 1951. . .
These are the words of an United States Gov
ernment official who was in charge of the govern
mental agency seeking to hold back the forces of
inflation in time of war.
It is apparent that the “ formula” by which the
Industry has attempted to justify Steel Price in
creases over a series of years—i.e., that the min
imum amount by which Steel Prices must rise is
double the cost of a wage increase (with no allow
ance for increased productivity) in order to offset
future increased Materials costs—is a “ formula”
unrelated to reality.
Thus, between 1947 and 1955 the Industry ex
panded its Net Profits from $394.3 million to more
than a billion dollars ($1,019.4 million). Its rate
of Return on Net Worth climbed from 10.5% in
1947 to 13.8% in 1955. In the 1st quarter of
1956 Net Profits increased further to an annual
rate of $1,153.4 million, and its rate of Return on
Net Worth to 15.6%. Increased Net Profits were
achieved not only as a result of increased Sales,
but by virtue of increased Profits per Dollar of
Sales. Net Profits of 22 of the largest Steel Com
panies were equal to 6.2^ per Dollar of Sales in
1947 and 7.9?! in 1955. For U. S. Steel it was 6.0^
in 1947, 9.0^ in 1955, and 9.5^ in the 1st quarter of
1956.
In this same period between 1947 and 1955 when
the rate of Return on Net Worth in Steel increased
from 10.5% to 13.8% (and to 15.6% in the 1st
quarter of 1956), Net Profits in relation to Net
ECONOMIC REPORT OF THE PRESIDENT
Worth declined in All Manufacturing Industries
from 15.1% in 1947 to 12.3% in 1955,* Net Prof
its per Dollar of Sales which were 5.7^ in 1947 in
All Manufacturing Corporations, declined to 4.1^
in 1955 and to 4.3^ in the 1st quarter of 1956.**
* F.T.C.-S.E.C. Quarterly Industrial Financial Report
Series for All Manufacturing Corporations. Data for 1st
quarter 1956 were not available.
** U. S. Department of Commerce.
4—Replacement and Expansion Needs
as a Basis for Price Increases
For the past few years, and especially in recent
months, the Industry has rested its case for even
higher Prices and greater Profits on a new theory.
Steel Industry spokesmen are attempting to “ sell”
the proposition that (1) the Administration’s re
fusal to revise the tax laws pertaining to Depreci
ation along the lines desired by the Steel Compa
221
Since Net Profits in Steel have climbed by
706.5% from 1939 to 1955 (812.5% to 1956), by
158.5% from 1947 to 1955, and the rate of Return
on Net Worth, as well as Net Profits per Dollar
of Sales, has passed the average of All Manufac
turing Industries, the Steel Industry understand
ably has reached for a new rationale for further
Price increases.
nies requires the Industry to raise its Prices again
in order to have sufficient funds to maintain and
replace its properties, and (2) Steel Prices must
be higher so that Profits will be great enough to
pay for the cost of expanding the Industry’s ca
pacity.
The Industry has already applied this theory in
some of the large Steel expansion of recent years.
That expansion is shown in TABLE 19.
Table 19
STEEL INGOT CAPACITY ON JANUARY 1st
(millions of tons)
1956..........................................................
1955.........................................................
1954.........................................................
1953.........................................................
1952.........................................................
1951.........................................................
1950.........................................................
1949 .........................................................
1948
128.4
125.8
124.3
117.5
108.6
104.2
100.0*
96.1
94.2
* Average capacity as of January 1st and July 1st.
1947.........................................................
1 9 4 6 ......................................................
1945 .........................................................
1944 .........................................................
1943 .........................................................
1942 .........................................................
1941.........................................................
1940 .........................................................
1939 .........................................................
91.2
91.9
95.5
93.9*
90.6
88.9*
85.2*
81.6
81.8
SOURCE.—AmericanIronandSteel Institute.
This position of the Steel Industry on securing
funds for maintaining facilities and for further ca
pacity expansion—a position based on the Govern
ment’s refusal to provide further special Deprecia
tion allowances for the Industry—is an insistence
that the public accept as a fair and equitable solu
tion the proposition that the American consumers
foot the bill in the form of higher Steel Prices. In
addition, the American people are being told by
the Steel Companies that a further boost in Steel
Prices will be levied in order to pay for new Steel
plants! Steel Companies’ stockholders, under this
222
ECONOMIC REPORT OF THE PRESIDENT
plan, are to receive a gift—new Steel plants and
enlarged facilities which will increase their equity
in their Company, and, eventually, increase their
Dividends—all at the expense of American con
sumers who will pay the costs by paying higher
Prices for Steel products. Gone, apparently, is
the concept of “risk” capital, of financing indus
trial expansion through flotation of stock or by
means of borrowing on bond issues. Instead, the
Steel Industry argues its right to collect “risk
less” capital from unwilling consumers by forcing
upon them higher Prices.
Lip service is given to the desirability of en
couraging greater participation by the public in
the ownership of the Industry. But the Steel In
dustry’s actions have no such effect. The Amer
ican people are to be given no opportunity to share
in the Steel Industry’s growth and prosperity.
Raising funds for expansion through the sale of
Common Stock to the public is rejected by the
Steel Companies. The public is called upon to pro
vide the funds, but it is shut out of participation
in the Profits to be realized from the use of these
funds.
As for the allied contention that higher Steel
Prices were required to pay for the cost merely
of maintaining the Steel Companies’ existing prop
erties (Depreciation), here again the Steel Com
panies’ own financial reports demonstrate the
falsity of the claim.
For example, from 1952 through most of 1955,
prices in general, except for Steel Prices, were
relatively stable— i.e., the cost of maintaining Steel
facilities, replacing outworn and obsolete equip
ment, etc., was not appreciably different in 1953,
1954 and 1955. The financial reports of the Steel
Companies to the Securities and Exchange Com
mission for the last 3 years demonstrate con
clusively that additional revenue in the form of
higher Steel Prices was not required to enable
the Industry to replace obsolete facilities. The
higher Prices charged in these three years, and
the resulting increase in Profits, were forced con
sumer investments (without benefit of stock cer
tificates) in the expansion of steel-making ca
pacity, and were not necessary simply to replace
and maintain existing facilities. This is shown
in TABLE 20.
Table 20
MONEY AVAILABLE 1953-55 FOR STEEL
REPLACEMENT AND EXPANSION OF
FACILITIES
Totals for 1953,1954
and 1955
(millions)
Reported Net Profits After Taxes..... $2,945
Charges for Depreciation................... -(-2,304
Cash available from operating Profits
for Dividends, Replacement and
Expansion of Facilities................... $5,249
Paid out in Dividends........................ —1,282
Cash available from operating Profits
for Replacement and Expansion of
Facilities......................................... =$3,967.
Increase in long-term debt from end
of 1952 to end of 1955....................
+167
Total Cash available for Replace
ment and Expansion of Facilities... =$4,134
Thus, in the 3 years from 1953 through 1955
the Steel Industry had $4.1 billion available for
reinvestment in the Industry, of which only about
4% represented borrowed “ outside” capital. In
those 3 years the Industry accomplished the fol
lowing:
1. Replaced obsolete capacity.
2. Expanded capacity by 10,815,620 ingot tons.*
3. Increased Dividends to stockholders by more
than 30% (from $384 million in 1953 to
$501 million in 1955).
4. Increased Working Capital by $1.5 billion.
The fact that all of the foregoing purposes were
accomplished by the Industry without floating
stock or borrowing more than a negligible amount
of capital effectively disposes of the assertion that
even higher Steel Prices are now required in or
der to yield sufficient funds for replacement. In
stead of preparing for higher Prices the Steel
Industry should be considering the extent of
Steel Price reductions which it can and should put
into effect.
* An annual rate of expansion greater than is projected
by the Steel Industry for the next 5 years.
223
ECONOMIC REPORT OF THE PRESIDENT
D. THE INDUSTRY'S POSITION
The position of the steel companies in the cur
rent crisis is plain and unequivocal. They say
flatly, as they did in making their offer of June
13, that “ no increase in employment costs at this
time would be in the nation’s best interests . . .”
because any such increase would set off “ another
ruinous round of inflation.”
It is plainly not true that increases in employ
ment costs in steel would set off another round
of inflation. Inflation is an increase in prices—
and it is the companies’ price policies which have
an inflationary effect, not its wage policies. As
has been shown above, the steel industry—unlike
almost every other American industry—has re
fused to absorb wage increases in the past and
has, instead, passed on to the consumer three
times the cost of each wage increase. The steel
industry—unlike almost every other American
industry—has increased its profit on each dollar
of sales, instead of lowering it, as volume in
creased. The steel industry—unlike almost every
other American industry—has refused to recog
nize that wages should increase without a price
increase when workers produce more steel for
each hour they work.
The steel industry, in short, can afford a sub
stantial increase in employment costs without
increasing prices, and without setting off any
inflationary effect whatsoever.
The steel companies, however, assumed in their
proposals to the union that every wage increase
must be accompanied by a price increase. On
this false basis they did, on June 13, offer some
increase in wages and some improvement in fringe
benefits, but only on condition that the union
agree to a “5-year non-reopenable” agreement.
There has been much misinformation about
this offer. The precise facts as to the nature of
the offer were set forth in a letter by President
McDonald to the membership of the Steelworkers
Union. It is reproduced in part below:
June 18, 1956
TO THE OFFICERS AND MEMBERS OF ALL
LOCAL UNIONS OF THE UNITED STEELWORKERS OF AMERICA
Dear Sir and Brother:
I am writing this letter to each local union so that our members can have the facts—
the straight facts—rather than industry propaganda—about the current situation in our
bargaining with the basic steel industry.
On June 13 the representatives of the industry made us a “ take-it-or-leave-it” offer.
In making this offer the representatives of the industry stated quite clearly that, although
we could bargain about details and the allocation of the costs of the fringe benefits, the total
“ package” was a fixed “package” . They also said that the only basis upon which they
would conclude an agreement with us was a fixed contract, without reopeners or room for
later negotiations on any subject, for a 5-year term.
•
* * • *
The industry has advertised far and wide that the “package” which they have offered us
costs 17%* in the first year of the contract and, over the 5-year term, would cost 65* an
hour.
I want to label these industry figures as propaganda rather than fact: the industry has
not offered us either 17%* this year or 65* for 5 years. This is what they have offered, in
their own words:
Effective Date
Improvement
July 1, 1956
Advance all job class 1 employees to job class 2 and combine the two
classes.
July 1, 1956
Increase all standard hourly wage rates by 6 cents and increase increments
between job classes above job class 2 by .2 cent.
224
July 1, 1956
ECONOMIC REPORT OF THE PRESIDENT
Establish Supplemental Unemployment Benefits Plan in form attached,
with company contributions of 5 cents per hour.
November 1, 1956 Establish improved insurance program in accordance with insurance pro
posal attached.
July 1, 1957
Increase all standard hourly wage rates by 6 cents and increase increments
between job classes above job class 2 by .2 cent.
July 1, 1957
Add a seventh paid holiday.
November 1, 1957 Increase pension benefits in accordance with pension proposal attached.
January 1, 1958
Increase vacation pay of employees with 3 to 5 years of service to iy 2
weeks and increase vacation pay of employees with 10 to 15 years of serv
ice to 2y2 weeks.
July 1, 1958
Increase all standard hourly wage rates by 6 cents and increase incre
ments between job classes above job class 2 by .2 cent.
July 1, 1958
Increase shift premiums to 7 cents for afternoon shift and 10 cents for
night shift.
July 1, 1959
Increase all standard hourly wage rates by 6 cents and increase incre
ments between job classes above job class 2 by .2 cent.
July 1, 1959
Establish new premium for Sunday shifts equal to night shift premium.
July 1, 1959
Grant jury pay.
July 1, 1960
Increase all standard hourly wage rates by 6 cents and increase increments
between job classes above job class 2 by .2 cent.
July 1, 1960
Increase shift premiums to 8 cents for afternoon shift and 12 cents for
night shift.
July 1, 1960
Apply new night shift premium to Sunday shifts.
The above does not tell the whole story. The actual increase for take home pay in the
first year under this package would be less than 51 an hour. A steel worker in job class
8 (the average job class) would receive a wage increase of 6$f plus an increment increase of
1.2^, or a total of 7.2^. From this average wage increase would have to be subtracted 1.5^
which the companies insist must be added to the employee contributions under the insurance
program. Therefore, the net increase for job class 8 would be 5.7^. When taxes are sub
tracted from this net increase, the total in take home pay is less than 5^ per hour.
The companies’ package includes a similar increase in each of the 4 years after this
year. In addition, it provides for certain fringe benefits. I think you are entitled to know
precisely what these other benefits are:
1.
Supplemental Unemployment Benefits. Under the plan offered by the industry prac
tically no benefits would be paid to any of our members. This is because the industry has
invented a new gimmick in S.U.B. plans. Under other plans that have so far been nego
tiated, such as our can plan, the total unemployment benefit (including state unemploy
ment compensation) is 65% of 40 hours take-home pay. The steel companies propose that
the total benefit should be 65% of take home pay for the hours actually worked in the 3month period immediately before the layoff. Since, in most cases, our members work a short
week (often down to 32 hours) in the period before they are laid off, this would mean that in
many cases the total benefit (including the state unemployment compensation) would be 65%
of the take-home pay for 32 hours of work. In almost every state in which we have any
number of members, this total benefit would hardly be larger than the state unemployment
ECONOMIC REPORT OF THE PRESIDENT
225
benefit. Therefore, under the plan offered by the industry—unlike any other S.U.B. plan—
virtually no benefits would be paid out of the fund.
In addition, the companies refused to make adequate provisions by which our members
in Ohio, Indiana and Virginia would be guaranteed benefits if the authorities in these states
persist in their rulings that supplementation of state benefits is not permissible. Under the
plan offered by the companies no benefits would be paid out of the fund in any state in
which supplementation or the payment of substitute benefits is not permitted by state law.
2.
Insurance. The industry offered us an improved insurance program. The actual cost of
the new benefits which they offered us is $2.25 per employee per month. But they insist,
as a condition of this improvement, that the average employee contribution be increased by
$2.55 per month. They did agree to increase the company contributions, also by $2.55 per
month, but all of their money would be retained as reserves.
S. Holidays. The companies offered a 7th paid holiday, but not until the day before Christ
mas in 1957. They refused even to consider our proposal that premium pay be paid, in ad
dition to the holiday pay, for hours worked on the holiday.
4. Pensions. The companies offered to increase minimum pension benefits to $2.50 a
month for each year of service, but they offered to make this effective only with respect to
years actually worked after 1957. This means that it would be 1987 before an employee
could retire with 30 years of service at $2.50 per month—the pension benefit we negotiated
with the can industry last year. In can, a worker retiring today with 30 years of service, or
more, receives a pension of $2.50 per month for each year of past service.
For service up to November, 1957, the steel companies offered an increase in the minimum
pension from the present $1.83 a month per year of service to $2.00 a month per year of
service, effective next year. But even this small increase would not be given to present pen
sioners. In the can industry we not only negotiated a $2.50 a month pension, effective last
year, but the companies agreed to apply it retroactively for all present pensioners.
5. Vacations. The industry offered, effective 1958, to increase the vacations of em
ployees with 3 and 4 years, and with 10-14 years of service, by one-half week. They coupled
this offer with a new method of computing vacation pay on the basis of a percentage of
the average of the previous year’s earnings. And they also required, as a price for this bene
fit, that the companies be given the unilateral right to require employees to forego their va
cations and take vacation pay instead.
6. Shift differentials. The companies offered to increase shift differentials by 1# per hour
for the second and third shifts in 1958 and again to increase the differential by 11 for the
second shift and 2$ for the third shift in 1960.
7. Sunday premium pay. In answer to our request for double time for Sunday work and
time and one-half for Saturday, the companies offered to pay the night shift premium
for Sunday work—that is, they offered a premium of 10^ per hour effective 1959, and a 12^
per hour premium effective 1960. Even this offer was carefully restricted. First, the com
panies stipulated that not even this night shift premium would be paid for hours worked on
Sunday if they were overtime hours. And to make sure that this restriction would apply
wherever possible, they propose to change the regular work week, which now begins on Sun
day, to a week beginning on Monday, so that Sunday instead of Saturday would be the 7th
day.
8. Jury pay. The final fringe benefit offered by the companies was jury pay, and this not
to be effective until July 1959.
What is this whole “package” worth to the Steelworkers? Our Research Department
has computed the value of each of these items, and, giving the companies the benefit of
every doubt, estimates that ultimately the value of these benefits, when they all finally go
into effect in 1961, would be 45.3 cents per hour. This includes not only the companies'
226
ECONOMIC REPORT OF THE PRESIDENT
payments into the S. U. B. fund, which will average about 31 per hour, but also the com
panies’ payments into the insurance fund of 1.5^ per hour—neither of which, as presently
proposed by the companies, will provide any real benefits to the Steelworkers.
But, even counting these in, while the “package” at the end of five years will be 45.3^,
the average benefit over the 5-year term of 1956-1961 amounts only to 28.5^ per hour. The
reason for this is simply that we will not get many of these benefits for several years.
What this actually means is that the industry has offered a package worth, on the aver
age, for the 5 years, a total of 28.5^ per hour. In return they insist that we execute a firm
5-year contract, forbidding us to negotiate on anything until 1961. We would have to give
up, for 5 years, every one of the changes which we have asked be made in our contracts
to bring them up to date. At the same time, the companies insist, as part of their offer,
that if the government should impose controls at any time during the 5-year term, they
would have the right to re-open and cancel all of the future benefits.
In addition, the companies insist on an additional penalty clause, under which every
worker who, during the 5 years, participates in a work stoppage or any interference with
production, would lose, in addition to his wages, one day’s vacation and one week’s S. U. B.
benefits for every day’s work lost.
The industry’s 28.5^ package for 5 years is not a fair offer. This is a year of record
prosperity. Despite this, the industry is offering us, for this year and each of the four
following years, much less than we have received on the average during the past 10 years.
The International Wage Policy Committee, in rejecting this offer, said that it was “too
little, too late and too long.” In the words of the Wage Policy Committee:
“The wage offer is too little and would result in a take-home pay increase to
the average steel worker this year of about a nickel an hour—about 2%. This
trifling 2% increase would be the steelworkers’ reward for increasing their pro
ductivity by a record-breaking 11% last year.”
In rejecting the industry’s offer, the Policy Committee reaffirmed the Union’s desire
to achieve a fair and reasonable settlement. It said:
“ Insofar as the union is concerned, the union’s negotiators, without stipulating
any prior conditions, are ready to meet both day and night, with the industry rep
resentatives for the purpose of hammering out a decent settlement.
“ We call upon the leaders of the steel industry to meet with the union in the same
spirit and without attaching conditions which roadblock ‘give-and-take’ bargaining.”
I am confident that our membership will support this unanimous action of the Wage
Policy Committee.
Sincerely yours,
[Since this letter was written, the Industry’s
position has remained the same. On June 27, the
companies did make one additional offer—but
this involved a decrease in the benefits proposed
rather than an increase. What the companies
proposed, in their terms, was that the Union
not strike—i.e. that the employees continue to
work beyond June 30 without a contract. If
the Union agreed, the companies said that they
would be agreeable to reducing the term of the
new contract to 4 years, 4 months—but with a
proportionate reduction in benefits. The actual
ECONOMIC REPORT OF THE PRESIDENT
reduction in benefits proposed would have
amounted to more than 7% each year of the
proposed 4 year, 4 month agreement. This was
not a new offer intended to provide a possible
basis for agreement. It was a step backward in
tended only to fortify the “ take-it-or-leave-it”
character of the industry’s first order.]
The Steel Industry’s proposed wage increase is
substantially below the rate of rising productivity
in recent years. The change in productivity is
likely to accelerate rather than slow down. Fur
ther, the wage offer is deficient in denying the
Steelworkers an opportunity to share reasonably
in the Industry’s present phenomenal Profits.
Since the Companies’ offer cannot stand on its
merits, irrelevancies and exaggerations were in
troduced. Thus, the Companies stated that Steel
workers are among the highest paid workers in all
of industry, that they have made more rapid prog
ress than all other major American industries,
that Steelworkers’ earnings are above the aver
age for All Manufacturing workers, and that a
typical, average Steelworker earns $6,000 a year.
Steelworkers have made progress. They are
proud of that progress—achieved as it has been
with the greatest of effort. However, the United
Steelworkers of America alone has negotiated
wage increases in two other major industries
which have exceeded the increases negotiated in
Steel—in Aluminum and in Can Manufacturing.
Steelworkers’ wages have improved through the
years but there are higher earnings in a whole
variety of industries such as Coal Mining, Petro
leum and Natural Gas Production, Building Con
struction, Petroleum Refining, Tire Manufactur
ing, Plate Glass, and others.
Steelworker hourly earnings undeniably are
above the earnings of workers in numerous indus
tries which make up the “All Manufacturing” av
erage. Nor is it surprising that Steelworker earn
ings are greater than earnings of workers in
Grain-Mill Products, Beet Sugar, Tobacco and
Snuff, Textiles, Logging Camps, Cosmetics, and in
many other industries in which Profits and profit
margins are lower and in which mechanization
and productivity are far less advanced, or in which
the factors of skill, hazard, training and responsi
bility required of workers are far less than in
Steel. A skilled worker in a profitable industry
necessarily earns more than a less skilled worker
in a less profitable industry. If comparisons be
tween industries are to be made, the important
question is what has happened to the relation
ship between the industries. The present mar
227
gin of Steelworker hourly earnings over the av
erage of earnings in All Manufacturing is equal to
a little more than 26% as compared with a margin
of more than 32% in 1939. (On the other hand,
Steel’s Net Profit margin on Sales was more than
83% greater than the margin in All Manufac
turing in 1955.)
As for the Steel Industry’s claim that the typ
ical, average Steelworker earns $6,000 a year, it
can only be said that in citing this figure the In
dustry was more careless than ever with the truth.
In an advertisement which appeared in a large
number of American newspapers on May 14 and
15, 1956, the American Iron and Steel Institute
set forth some facts about an individual mill
wright in a Steel plant. It described his normal
living routine, his family’s budget and his income.
The advertisement noted that his income was $500
a month ($6,000 a year), and described him as a
typical, average worker.
An income of $6,000 a year requires earnings
of $3.00 an hour for 2,000 hours a year. Aver
age gross earnings of workers in the Steel Indus
try are $2.46 an hour (March, 1956— Bureau of
Labor Statistics), or 54^ an hour less than the
earnings of the “average” worker described in the
American Iron and Steel Institute’s advertise
ment.
In 1955, a full 84% of the workers in the Basic
Steel Industry had gross earnings of less than
$6,000. Only 1 worker in 6 had earnings equal to
the “average” worker described by the American
Iron and Steel Institute. It is this type of propa
ganda, which the Industry has substituted for
collective bargaining, and which contributes to the
difficulty of reaching an agreement. These facts
are set forth in TABLE 21.
One defense the Steel Companies have offered
for their meager contract proposal indicates that
its inadequacy is known to them. That defense is
the allegation that Steelworkers received “too
much” in 1955— a wage increase of 15^ an hour.
Apparently the Industry, in effect, wants to re
cover a mythical “excess” which the Steelworkers
received last year.
The Industry’s claim cannot stand examination.
The Steelworkers Union negotiated a 15^ an
hour wage rate increase with the Steel Companies
in 1955. The Steel Companies, along with other
Bituminous Coal operators negotiated a 15^ an
hour wage increase with the United Mine Work
ers of America in 1955 and, in addition, granted
an increase in vacation pay equal to a cost of 2%^
228
ECONOMIC REPORT OF THE PRESIDENT
to 3^ an hour, an additional 10^ an hour wage in
crease effective April 1, 1956, and a wage reopen
ing in September, 1956! The Steelworkers Union
negotiated a 15^ wage increase with the 3 leading
Basic Aluminum Companies in 1955. The Marine
and Shipbuilding Workers negotiated a 15*5 in
crease with Bethlehem-Atlantic Shipyards. The
Rubber Workers negotiated a wage increase which
averaged 14.5< with B. F. Goodrich and the Pack
inghouse Workers gained a 14*! wage increase in
negotiations with the “ Big Four” Meatpackers in
1955. The Auto Workers negotiated an average
of 15*f (including geographical differential adjust
ments) with International Harvester in 1955. Fur
thermore, some of these settlements were supple
mented by “fringe” adjustments. These and
numerous other wage settlements in 1955 approxi
mated the 151 wage increase in Steel. Settlements
in the Can Industry far exceeded the wage in
crease in Steel. But the Steel Industry has pre
tended, nevertheless, that 15^ granted in 1955 jus
tifies a substandard wage increase in 1956 and in
every one of the subsequent years through 1960.
229
ECONOMIC REPORT OF THE PRESIDENT
Table 21
STEELWORKERS WITH EARNINGS IN 1955 BELOW $6,000*
Company**
Total employees for
whom earnings
were reported
Pittsburgh Steel Co................................................
Northwestern Steel & Wire Co..............................
Detroit Steel Corp..................................................
Inland Steel Co......................................................
National Steel Corp...............................................
Allegheny Ludlum Steel Corp................................
Armco Steel Corp...................................................
Sharon Steel Corp..................................................
Republic Steel Corp...............................................
Youngstown Sheet and Tube Co...........................
Jones & Laughlin Steel Corp.................................
McLouth Steel Corp..............................................
Granite City Steel Co............................................
U. S. Steel Corp.....................................................
Colorado Fuel and Iron Corp................................
Wheeling Steel Corp...............................................
Lukens Steel Co.....................................................
Merritt-Chapman & Scott Corp............................
Bethlehem Steel Corp............................................
Kaiser Steel Corp...................................................
TOTALS.....................................................
9,300
2,258
3,814
13,695
9,954
10,736
12,702
8,132
40,302
19,511
22,833
3,049
3,968
135,585
16,787
13,262
4,020
1,754
77,544
7,427
416,633
**Steelworkers with earnings in 1955
below $6,000
------------------------------------------------Number
Percentage
5,944
1,499
2,822
10,532
7,663
8,306
9,870
6,476
32,517
15,786
18,572
2,514
3,307
114,186
14,187
11,898
3,623
1,605
71,851
6,912
63.9%
66.4%
74.0%
76.9%
77.0%
77.4%
77.7%
79.6%
80.7%
80.9%
81.3%
82.5%
83.3%
84.2%
84.5%
89.7%
90.1%
91.5%
92.7%
93.1%
350,070
84.0%
* The data shown are based on 1955 earnings data supplied by the individual Companies. Data were requested by the Union
from the 25 largest Steel Companies (except Ford and International Harvester whose operations are not primarily in the Steel Indus
try). Data from Crucible, Barium and Timken have not been received. The earnings include all payments made to employees
including such additional payments (over and above base pay, incentive earnings and vacation pay) as overtime, shift premiums,
holiday pay and vacation payments in lieu of vacations. Only Production and Maintenance employees represented by tne United
Steelworlcers of America are included. Exceptions and qualifications are noted below:
U. S. Steel.—Basic Steel Producing Operations only; excludes employees hired or terminated during the year.
Bethlehem.—Steel Plants and Fabricating Works; excludes employees hired or terminated during the year and 1,538 employees
on layoff or otherwise absent during the year.
Republic.—Steel Operations; excludes employees hired or terminated during the year.
Jones and Laughlin.—Steel Works Divisions—Aliquippa, Pittsburgh and Cleveland; excludes employees with less than one year
of service and 29 employees with no earnings.
National.—Great Lakes Detroit Area Plants, Hanna Furnace and Stran-Steel—Terre Haute; excludes employees hired or
terminated during the year.
Youngstown.—Employees covered by Master P&M Agreement.
Inland.—Indiana Harbor Works only.
Armco.—Houston, Sand Springs and Kansas City plants of Sheffield Steel Div., Baltimore plant of Rustless Div. and Ashland
Works; latter includes 857 employees who did not work the full year.
Colorado F and I.—Includes Clinton, Palmer, Morgan, Buffalo, Claymont and Pueblo and Roebling and Trenton plants of
Roebling’s Sons, Corp.
Wheeling.—Steel Mills and Factories; excludes employees hired or terminated during the year.
Sharon.—Roemer and Lowellville Works, Detroit Tube and Steel Div. and Brainara Steel Div.
Kaiser.—Fontana, California.
McLouth.—Company states earnings were exceptionally high because 1955 was the first year of operation of many new facilities
and, therefore, there was an unusual amount of overtime and vacation payments in lieu of vacations.
Pittsburgh.—Allenport and Monessen, Pa., and Warren, Ohio.
Detroit.—Portsmouth Div. only; excludes employees terminated during the year.
Granite City.—Granite City, 111.
Allegheny Ludlum.—Includes only employees with continuous service the entire year.
NorthwesternSteel &Wire.—Includes Parrish-Alford Fence & Machine Co. Northwestern Steel &Wire data excludes employees
hired or terminated during the year. Parrish-Alford Fence & Machine data includes all employees who worked any part of the year.
Merritt-Chapman & Scott.—Newport Steel only.
Lukens.—Coatesville, Pa.
** Listed in ascending order of the percentage of employees with gross earnings below $6,000.
230
ECONOMIC REPORT OF THE PRESIDENT
E. THE STEELWORKERS' POSITION
The position of the Union throughout has been
that it desired to negotiate, on a basis of genuine
collective bargaining, a fair and reasonable settle
ment. The proposals made by the Union for im
provement of the existing contracts with the
Steel Industry were reasonable, practical and en
tirely justifiable.
In essence, the Union has proposed that Steel
workers share equitably in the unparalleled pros
perity of the Steel Industry which has been made
possible by greatly increased productivity. It has
proposed that the working provisions of the Steel
contracts be modernized in line with present-day
practices in American Industry.
The facts clearly show that the Profit position
of the Steel Companies has never been better.
Their Profits—Before Taxes or After Taxes—in
dollars, or as a percentage of Net Worth, or as a
share of the Sales Dollar, or by any other con
ceivable measure, are tremendous. The growth of
Steel Industry Profits has been at double the rate
of All Manufacturing Industries combined in the
past 8 years.
The facts clearly support the Union’s position
that:
1. Steelworkers have earned the right to higher
wages by their greatly increased productivity.
2. All proposals made by the Union for contract
improvements are in line with conditions and
working practices which prevail in major parts of
American Industry.
3. No Price increase whatsoever should occur
as a result of granting the Union’s proposals. A
Steel Price increase this year cannot be justified
on any basis. Only the force of public opinion,
alert to the Industry’s profit-taking, can hope to
prevent Steel Management from continuing its
past policy of making a profit on a wage increase
—usually on a 3 to 1 ratio.
4. Higher wages and salaries are in the public
interest. The wider distribution of purchasing
power throughout our Nation has been a major
and indispensable factor in the growth of produc
tion in this country.
5. The Steel Companies must undertake serious
collective bargaining. The companies have cre
ated the present crisis by their refusal to engage
in such bargaining. They made their position
clear when they refused the Union’s offer to ex
tend its contracts for 15 days so as to permit
sufficient time for a bargained settlement to be
reached without a shutdown. Now that they
have achieved their purpose of causing a cessation
of steel production, it is their plain duty, not only
to their employees, but to the nation as well, to
begin—for the first time—the process of giveand-take negotiation which alone can end the
present crisis.
ECONOMIC REPORT OF THE PRESIDENT
231
APPENDIX TABLES
Table 22
PROFITS BEFORE TAXES
OF
ALL CORPORATIONS, ALL MANUFACTURING CORPORATIONS, AND STEEL CORPORATIONS
All Manufacturing
All Corporations
Corporations
Steel Industry
Billion
Index
Billion
Index
Index
Million
Dollarsa (1947 = 100)
Dollarsft (1947 = 100)
Dollars b (1947 = 100)
1956*..............
$46.2
156.6
$25.7
$2,350.7
338.3
155.8
1955................
148.5
24.4
43.8
293.4
147.9
2,0 38.5
1954................
34.0
115.3
17.8
1,133.6
163.1
107.9
1953..........
38.3
129.8
21.4
129.7
1,600.7
230.3
1952................
35.9
121.7
20.0
929.6
133.8
121.2
139.7
1951................
41.2
271.1
24.5
148.5
1,884.0
1950................
40.0
135.6
23.3
141.2
1,530.7
220.3
1949............
26.2
88.8
14.1
933.3
134.3
85.5
1948................
32.8
111.2
18.1
985.9
141.9
109.7
1947................
29.5
100.0
16.5
100.0
694.9
100.0
* Annual rates based on projections from 1st quarter 1956. (Average of 4th quarter 1955 and 1st quarter 1956
used for U. S. Department of Commerce figures.)
SOURCE.—•U.S.DepartmentofCommerce. Calculationsours. bBasedondatainpriorTablesfor25majorSteelCompanies.
Table 23
NET PROFITS
OF
ALL CORPORATIONS, ALL MANUFACTURING CORPORATIONS, AND STEEL CORPORATIONS
All manufacturing
All Corporations
Corporations
Steel Industry
Billion
Index
Billion
Index
Million
Index
Dollars* (1947 = 100)
Dollars ‘ (1947 = 100)
Dollars'5 (1947 = 100)
$23.0
126.4
$12.6
124.8
$1,153.4
292.5
1955.
21.8
119.8
11.9
117.8
1,019.4
258.5
1954.
17.0
93.4
8.8
87.1
589.8
149.6
1953.
93.4
17.0
8.8
87.1
679.4
172.3
16.1
88.5
1952.
8.3
82.2
492.5
124.9
1951.
18.7
102.7
10.3
102.0
633.5
160.7
22.1
1950.
121.4
12.4
122.8
728.5
184.8
15.8
1949.
86.8
8.4
83.2
521.8
132.3
20.3
1948.
111.5
11.0
108.9
534.9
135.7
18.2
1947.
100.0
10.1
100.0
394.3
100.0
based on projections from 1st quarter 1956. (Average of 4th quarter 1955 and 1st quarter 1956
used for U. S. Department of Commerce figures.)
SOURCE.—» U.S.DepartmentofCommerce. Calculationsours. ’ Basedondatainpriortablesfor25majorSteel Companies.
87624 0—57------16
232
ECONOMIC REPORT OF THE PRESIDENT
Table 24
DIVIDEND PAYMENTS IN ALL CORPORATIONS
VS.
STEEL CORPORATIONS
All Corporations *
1956*.......................................................
1955............................... .........................
1954............................... .........................
1953............................... .........................
1952............................... .........................
1951............................... .........................
1950.........................................................
1949............................... .........................
1948............................... .........................
1947............................... .........................
Steelb
Billions of
Dollars
Index
(1947 = 100)
Millions of
Dollars
$11.7
11.2
10.0
9.3
9.0
9.1
9.2
7.5
7.2
6.5
180.0
172.3
153.8
143.1
138.5
140.0
141.5
115.4
110.8
100.0
$412.9
353.9
269.0
248.7
238.8
240.3
246.0
167.9
150.2
127.8
Index
(1947 = 10<
323.1
276.9
210.5
194.6
186.9
188.0
192.5
131.4
117.5
100.0
* Annual rates based on projections from 1st quarter 1956.
SOURCE.— • U. S. Department of Commerce. Includes all CashDividends. Calculations ours. b Based on datain prior Tables
for 25 major Steel Companies. Includes Cash Dividends on Common Stock only.
Table 25
PROFITS BEFORE AND AFTER TAXES
AS SHARES OF THE SALES DOLLAR
FOR
ALL MANUFACTURING CORPS. VS. STEEL CORPS.
Profits Before Taxes
1956*........................................................
1955.........................................................
1954 .........................................................
1953 .........................................................
1952.........................................................
1951.........................................................
1950.........................................................
1947 .........................................................
Steel
Industryb
All
Manufacturing
Corporations *
8.6*
8.5
6.9
7.8
7.8
9.8
10.7
9.3
16.2*
15.8
11.6
13.1
9.1
17.0
16.8
10.9
4JJ*
4.1
3.4
3.2
3.2
4.1
5.7
5.7
* Annual rates based on projections from 1st quarter 1956.
SOURCE.— * U. S. Department of Commerce. Profit and Sales data.
for it major Steel Companies.
Net Profits
All
Manufacturing
Corporations*
Steel
Industry b
7.9*
7.9
6.1
5.6
4.9
5.7
8.0
6.2
Calculations ours. b Based on data from prior Tablet
ECONOMIC REPORT OF THE PRESIDENT
233
Table 26
PRODUCTION, SHIPMENTS AND EMPLOYMENT IN STEEL
Production and
Ingot Production a
Shipments*
Maintenance Employmentb
Operating Millions
Index
Millions
Index
Thousands
Index
of Tons (1947 = 100)
Rate*
of Tons (1947 = 100)
of Empls. (1947 = 101
1956* .. 99.6%
127.49
150.2
93.23
147.8
566.9
109.5
1955
93.0
117.04
137.9
84.72
134.3
545.0
105.3
88.31
1954
71.0
104.0
63.15
100.1
492.7
95.2
127.1
1953
94.9
111.61
131.5
80.15
559.6
108.1
1952
85.8
93.17
109.8
68.00
107.8
486.5
94.0
1951
100.9
105.20
123.9
78.93
125.2
560.2
108.2
96.84
114.1
1950
72.23
114.5
532.9
96.9
103.0
92.1
1949
476.7
81.1
77.98
91.9
58.10
92.1
88.64
1948
94.1
104.4
65.97
104.6
536.3
103.6
1947
93.0
84.89
100.0
63.06
100.0
517.6
100.0
* Annual rates based on straight-line projections from the 1st quarter of 1956.
SOURCES.— * American Iron and Steel Institute. Calculations ours. b Bureau of Labor Statistics. Calculations ours.
Table 27
PRICES IN STEEL
YS.
MATERIALS AND LABOR COSTS
Manhoursa Average Hourly
Eam ingsb
(per unit)
75.4
$2,463
1956*...............
2.380
78.8
1955..........
2.200
1954.................
87.8
2.160
85.5
1953................
86.2
1.990
1952................
1.890
89.6
1951................
1.691
90.3
1950................
98.4
1.646
1949.................
1.580
100.6
1948.................
1947.................
100.8
1.439
* Annual rates based on projections from 1st quarter 1956.
Labor Cost
Index0
(1947 = 100)
128.0
129.3
133.2
127.3
118.3
116.7
105.3
111.7
109.6
100.0
All Commodities
other than Farm
and Food
Wholesale
Price Indexb
(1947 = 100)
126.7
122.8
120.1
119.6
118.8
121.6
110.2
106.3
108.5
100.0
Steel Mill
Price Indexb
(1947 = 100)
177. 1*
169.7
161.9
155.0
143.6
140.5
130.3
123.8
114.2
100.0
SOURCES—aBased on data in the prior Steel Productivity Table, bBureau of Labor Statistics. Calculations
ours, cBased on Columns 1 and2 above. Calculations ours. dIndexforMarch1956is178.2.
STEEL
and
THE NATIONAL ECONOMY
1 9 5 6
UNITED STEELWORKERS OF AMERICA
1 5 0 0 COMMONWEALTH BUILDING
PITTSBURGH 2 2 , PENNSYLVANIA
Printed In U.S.A.
JULY, 1 9 5 6
235
236
ECONOMIC REPOBT OF THE PRESIDENT
Summary
1. Economic conditions in the United States in
mid-1956 were varied. Despite continued heavy
defense spending and sharply rising business in
vestment expenditures, the economy has been on
a plateau for some nine months. Even the pre
carious support from inventory accumulation and
higher consumer debt has not resulted in the de
gree of full employment of 1952 and 1953. Con
sumer purchases are lagging. Personal income
must increase if economic expansion is to be re
sumed.
2. A growing labor force and rising productivity
make possible a doubling of our production and
our standard of living within the next 20 years.
These can be achieved only if there is an active
market for the goods and services we can produce.
3. Consumers buy five out of every six dollars
worth of goods and services purchased privately.
Wages and salaries largely determine how much
money consumers have for expenditures. Wages
and salaries must increase if the growing produc
tive capacity of American industry is to be uti
lized.
4. Wage and salary increases and labor’s rising
share of total income over much of the last dec
ade provided consumers with the income needed
for the profitable prosperity we have enjoyed.
Labor’s share has fallen in the last year and, un
less corrected, this could spell economic trouble.
5. Experience has proved that wage increases
have not caused inflation, that wages can be in
creased without prices being raised, and that ris
ing real wages give us stable prosperity and
growth.
6. The inflation in 1946-48 resulted from an ac
cumulated backlog of demands. The Korean in
flation was caused by speculation and scare buy
ing. In both instances, wage increases lagged be
hind price increases and did not cause the infla
tion.
7. In the two periods of inflation—from 1946 to
1948, and again in 1950-51—wages lagged behind
prices. Labor struggled to keep up with the in
flation and barely succeeded in restoring the pur
chasing power eroded by rising prices. On the
other hand, in the two periods of stability from
1948 to 1950 and again after mid-1951, wages and
salaries increased while prices remained stable.
Since mid-1951 wage rates in manufacturing have
risen 23 percent while living costs are up less than
4 percent and industrial prices 4 percent. Total
profits before taxes reached record levels in 1955.
8. Productivity in the economy has been increas
ing more than 3 percent per year. In manufac
turing industries, the annual rate has been ex
ceeding 4 percent. Automation will increase the
pace. Greater prosperity will come if the bene
fits of rising productivity are shared with the
workers. Real hourly earnings in manufacturing
fell behind the rise in productivity at the time of
the Korean War and have not caught up yet.
This disparity must be corrected through rising
real wages.
9. From 1946 to 1948, hourly earnings in manu
facturing rose 24 percent in current prices, but
remained unchanged in real terms. Manufactur
ing profits increased 60 percent. Pay to all cor
porate employees rose 30 percent, industrial prices
increased one-third, and corporate profits in
creased 45 percent. That is the pattern of infla
tion—rising prices, rising real profits and lagging
real wages.
10. Except for the immediate post-war and Ko
rean inflations, the rising volume of business in
industry generally, but not in steel, tended to be
associated with lower profit margins. This policy
yielded prosperity and high total profits. Price
stability and sustained high profits ought to be
more attractive to business than alternating
booming and falling profits which result in part
from inflationary pricing policies.
11. In only one year from 1947 to date did the
rate of profits after taxes of all manufacturing
corporations combined fall below 10 percent of
stockholders’ equity and that was in the recession
year of 1954. In only two years of the last nine
did the rate of manufacturing profits before taxes
fall below 20 percent of stockholders’ equity.
Higher volume and lower margins can provide
high and sustained profits.
12. In mid-1955 industrial prices started to rise
and again spurted ahead of wages. Profits in the
first quarter of 1955 were at the 1951 Korean
peak, but higher pricing brought a 15 percent in
crease in profits from the first to the fourth quar
ECONOMIC REPORT OF THE PRESIDENT
ter of 1955. Employees' compensation rose 7 per
cent in the same period. Profit margins rose
sharply after four years of a moderate decline.
This tendency can spell trouble. It must be re
versed.
13. The contrast between the pricing policies of
the steel industry and of all manufacturing in
dustries as a whole is rather startling. Steel
prices have increased proportionately with wage
rates since 1947 ignoring rapidly rising productiv
ity in its pricing policies. For all manufacturing,
industrial prices increased considerably less than
half as much as wage rates from 1947 to 1955.
From 1951 to 1955, hourly earnings in all manu
facturing rose 18 percent while industrial prices
went up 1 percent. In marked contrast, wage
rates in steel were 25 percent higher in 1955 than
in 1951, and steel prices were 20 percent higher.
14. Profit margins in steel were 30 percent higher
in 1955 than in 1947-49. In all manufacturing,
profit margins decreased slightly over this span.
Total profits in steel rose more rapidly than in all
manufacturing industries.
15. All major categories of steel-users increased
their prices far less than did the steel industry.
Part of the skyrocketing steel prices were appar
ently absorbed by steel-fabricating industries.
16* The steel industry does not follow the prin
ciple of higher volume and lower margins. If
there is any single industry that has followed in
flationary pricing practices; that has shown a dis
regard for the economic welfare of the country,
especially relative to its key role in the economy;
that has truly practiced inflation; that has the
237
least right to hide behind the cloak of favoring a
sound dollar and to contend that wage increases
are inflationary; it is the steel industry.
17. Contentions that there have been uniform
rounds and patterns of wage increases since the
end of World War n are not based on fact All
workers strived for higher wages in 1946-48 and
1950-51 to regain the losses in real income from
rising prices. In between those years and since,
all workers justly sought to share in our rising
productivity. However, the size of wage increases
has varied in substantial degree from industry to
industry. There has been neither rigid patterns
nor uniform rounds of wage and fringe benefit
improvements.
18. High and accelerated depreciation charges
permitted generally under the new 1954 tax law
and specifically for plants related to national secu
rity, have resulted in a probable understatement
of reported profits relative to actual profits. De
preciation allowances provide a significant source
of funds for investment
19. Contentions by leaders of the steel industry
and other industries that prices must be increased
so that there will be more profits with which
to finance expansion are astounding. Raising
prices to secure funds for new plant and equip
ment in effect forces the consumer to put up the
money for new plants for the benefit of existing
stockholders. The consumer gets nothing for his
forced “investment.” The opportunity for Amer
ican citizens to participate in the growth of Amer
ican industry is denied when expansion is financed
entirely through exorbitant profits rather than
security flotations.
238
ECONOMIC REPORT OP THE PRESIDENT
ECONOMIC FACTS
1—Economic Objectives and Wage
Policies
In mid-1956 the United States finds itself in a
mixed situation of reasonably high levels of gen
eral employment and serious unemployment in
some key industrial centers, rapidly rising capital
investment and continuing weakness in consumer
durable goods and home building markets, slowly
increasing total income and a depressed farm
community, rising industrial prices in the face
of larger inventories, and new record profits
while over-all business has been on a plateau.
Since V-J Day, we have enjoyed unprecedented
improvements in living standards and, with the
exception o f brief periods, continuing high levels
of production and employment The American
economy has demonstrated its immense power
to produce. Equally important, better under
standing of the functioning of our free enterprise
system and increased determination to overcome
booms and busts have led to greater confidence
in a future o f sustained expansion without re
currences of mass unemployment and idle re
sources.
Since World War n , there have been two peri
ods of inflation and two recessions of moderate
intensity and duration. A precipitous rise in
prices immediately followed decontrol after the
war. A brief but pronounced inflation was asso
ciated with the war in Korea. The past five years
have been characterized by a considerable de
gree of price stability, although in the last half
of 1955 and early 1956 prices have moved up in
some sectors. With some exceptions, especially
the depressed status of agriculture and the moder
ate recession of 1953-1954, the types and degrees
of distortions which have tended to be associated
with periods of prosperity in the past and which
in turn have brought on recessions and depres
sions did not emerge in the period from June 1951
to mid-1955. On the whole, there is considerable
basis for confidence that we can and will have a
future of marked growth with sustained high levels
of production and employment provided the dis
tortions that have emerged in recent months are
promptly reversed.
A sharp rise in 1955 in consumer expenditures
based in measurable degree on credit buying,
helped to lift the national economy out of the
1953-1954 downturn. This rapid surge in con
sumer borrowing has left many American families
with debts that will probably remain a heavy
burden for months to come. The general weak
ness in consumer markets at present—most pro
nounced in the markets for homes, automobiles
and other consumer durable goods—has created a
good deal of concern about the health of the na
tional economy.
This concern about the course of economic de
velopments in the period immediately ahead is
heightened by a growing distortion between the
capital investment and consumer sectors. Weak
ness in the consumer sector has been accompanied
by sharply rising business expenditures for new
factories, machines and instruments. Further
substantial and rapid increases in these expendi
tures are predicted for the remainder of the year.
This soaring capital investment has helped pre
vent an over-all economic decline during the past
six months. But a continuation of this distorted
condition can bring difficulties in the months
ahead. Moreover, even with the high rate of
business spending, there has been a relatively less
full use of our labor force in 1955 and early 1956
than in 1952 and 1953 when investment rose far
less sharply.
New plant and equipment now being built will
soon be placed into productive use. They rep
resent not merely additions to our stock of
capital equipment, but the planned installation of
efficient and increasingly automatic productive
machinery. Larger volume of goods and serv
ices will be available in the coming months as
this equipment is put into operation. There must
be a growing market for this growing output.
Consumer markets require immediate strengthen
ing for the resumption of economic expansion.
No single segment of the American community
can wholly determine the character and pattern,
the strength and weaknesses, or the well-being
of our free enterprise economy. Yet, each group
—workers, farmers, management, consumers and
all branches and levels of the government—play
a vital role in our economic development. Each
group should gear its policies and actions toward
a strong and growing system of free enterprise
which affords a more abundant life for the Amer
ican citizen. Labor must continue to play its full
part with responsibility and dedication to the
best interests of the nation.
ECONOMIC REPORT OF THE PRESIDENT
Wage earners and salaried workers serve the
whole community not only in devoting their ef
forts and talents to the productive process but
as members of unions they use their strength to
achieve a better functioning and more equitable
and humane society. They seek a fair share of
the product of their toil for themselves and their
families—an adequate share which is basic to the
growth of mass markets to parallel our mass
production. They strive to help attain and main
tain economic relationships essential to a stable
and expanding economy. Labor has no illusions
that in its bargaining functions, it can overcome
all the flaws and weaknesses in our system. But
it can and does make a measurable contribution
toward a stronger and healthier economy.
Labor believes that its performance in the
past decade has not only served to raise living
standards of all workers, but more importantly,
its wage policies have contributed to the accelera
tion in expansion and to moving in the direction
of a more stable and depression-proof economy.
The progress of the past twenty-five years toward
overcoming depressions and expanding the rate of
growth has been gratifying, but there is still much
to be done before the waste and hardships of
booms and busts are fully overcome.
Labor’s wage policies will continue to be de
signed primarily to increase the size of our total
production so that workers and farmers and man
agement can enjoy increasing abundance. Labor
will continue to strive for rising real wages so
that there will be markets for our expanding
production. The record of the past decade es
pecially gives evidence of the success of such pol
icies. The short duration and limited degree of
the recessions in 1949 and 1954 can in consider
able measure be attributed to stable wages—some
wage rates even increased—in those years. The
road ahead will require continued determination
and dedication if the potentialities of our tremen
dous productive capacity are to be realized. It is
toward this end that union wage policies must be
dedicated.
2— Keeping the Economy Expanding
The most unique characteristic of the Ameri
can economy is its extraordinary rate of dynamic
growth. Since 1939, the gross national product of
the United States has more than quadrupled in
value, increasing from less than $100 billion to
approximately $400 billion annually. Part of this
increase reflects higher prices, but even after
allowing for price advances, the real value of the
239
total output of goods and services has more than
doubled. In the eight years from 1947 to 1955,
an increase of nearly 40 percent has been reg
istered in the output of goods and services. We
are nearly one-fourth above the peak of total
production during World War n .
At the close of 1955, the economy was pro
ducing at the rate of nearly $2,400 per year for
every man, woman and child in the country. The
production per gainfully employed person is now
$6,000 per year. These are levels virtually un
dreamed of only a generation ago. The rise in
output not only underlies our present high living
standards, but points the way to the more abund
ant life that lies ahead.
Especially rapid has been the growth in the
industrial sector of the economy. Manufactur
ing production is now more than two and onehalf times what it was in 1939. The production
of durable goods has increased over 50 percent
since 1947 and has more than trebled in the past
17 years. Electric power production has doubled
since 1947 and quadrupled since 1939.
Part of these phenomenal increases occurred
during World War II. Since the war ended, how
ever, our growth has continued at a rapid rate.
Total output of goods and services has risen an
average of more than 3 y% percent a year since
1946. For the years after 1949, the annual in
crease averaged 4% percent for total production.
These are real rates of growth, measuring the
value of production after eliminating the influ
ence of higher prices. Industrial production has
grown over 5 percent per year since the end of
World War n and, since 1949, the rate of increase
has been 6 percent a year. The output of durable
goods has expanded an average of 6% percent a
year since 1946 and at an annual rate of 8%
percent since 1949.
If ever there were doubts about the possibility
of banishing poverty, our past record and future
prospects should serve to eradicate such doubts.
If America's economic expansion can be main
tained at the 1946-55 average of 3% percent, a
$500 billion economy— at present prices—is in
sight as early as 1963 and over $600 billion
can be reached before 1970. At the 4V2 percent
rate actually achieved in the years since 1949, the
$500 billion level can be reached soon after 1960,
with $600 billion accomplished by 1965 and an
incredible $750 billion by 1970. These levels
may seem astronomical, but recent accomplish
ments demonstrate their feasibility.
Our recent growth is reflected in, and has been
240
ECONOMIC REPORT OF THE PRESIDENT
sustained by, marked increases in employment
and wages. Higher wages place in the hands of
the nation’s consumers the purchasing power
necessary to absorb the country’s ever-increasing
output Since the end of World War n , personal
consumption expenditures have increased more
than 100 percent. Adjusting for price changes,
consumer purchases in the aggregate have in
creased more than 40 percent since 1945 and on a
per capita basis have risen approximately 20 per
cent. There has been a broadening of mass mar
kets with millions of families getting higher in
comes and adding to the markets for improved
housing, cars, appliances, leisure-time activities,
more and better foods and clothing and services.
Had this increase in buying power not occurred,
our economic expansion could not have been sus
tained. Rising employment accounted for only
part of the expansion in consumer expenditures;
a major contributing factor was the steadily ris
ing wage level reflecting effective collective bar
gaining between labor and management.
To attain the achievable targets in the years
ahead, the rise in purchasing power must keep
pace with the rise in production. Given a market
for its products and services, American industry
can be expected to employ our growing labor
force. Together, management and workers can
achieve further marked progress in productivity.
To provide the market for an output of $600 bil
lion per year in the next decade, assuming peace
time conditions, consumer purchases would have
to rise well over 50 percent. Increased employ
ment will contribute in part to this increasing buy
ing power, but the bulk must come from higher
wages and higher salaries.
3—Purchasing Power and Wage Policy
Total demand for goods and services is the
most important single determinant of the level of
total production. Our growth in production rests
on the combination of employing the growing
labor force, expanding our industrial capacity,
and increasing the level of productivity. Whether
these resources are used, in turn depends on the
ultimate key to our prosperity—an adequate mar
ket for the goods and services our economy can
produce.
Labor recognizes that wages represent income
to workers and costs to employers. Strongly
favoring the free enterprise system, American
labor appreciates the need for and desirability of
profits as incentives and rewards to business. La
bor wants its employers to earn fair profits. At
the same time, labor insists that employers pay
sufficiently high wages so that workers can share
reasonably in the benefits of our mass produc
tion and can provide a market for the goods
which business produces. Such a market is neces
sary if there is to be sustained employment and
profit opportunities.
Excluding government purchases, over fourfifths of our total output of goods and services
is absorbed by personal consumption expendi
tures. Outlays made by individuals and families
in the purchase of residential housing are not
normally counted as consumption expenditures.
They appear in the national income accounts in
the category of investment expenditures. If dis
bursements for housing were added to expendi
tures for consumption, then consumers would
account for over 85 percent of all non-govemment purchases. Five out of every six dollars
worth of goods and services produced in the
United States that are available for private pur
chase are bought for personal consumption. The
balance is purchased largely by business. These
figures make crystal clear the need for focusing
our attention on consumer buying power in de
termining sound economic policies.
Labor income accounts for more than 70 per
cent of total personal income in the United States.
Expenditures by farmers and executives and in
dependent professionals are obviously important,
but the largest single factor determining the mag
nitude of disposable personal income is the level
of total wages and salaries. In turn, the level
of wage rates directly influences total labor in
come and total personal income. The vast major
ity of American families are dependent on wages
and salaries for their livelihood. Over 70 percent
of all gainfully employed persons are wage and
salary earners.
Since 1950, the trend of disposable personal in
come has almost precisely paralleled that of man
ufacturing wage rates. The indexs of disposable
income and of hourly wages in manufacturing
on the next page reveal this close relationship.
From 1950 to 1955, total disposable income rose
31 percent, while hourly wage rates of manufac
turing workers advanced 29 percent For each
of the intervening years, the proportionate
changes in the two series were nearly identical.
It is not meant to imply that manufacturing wage
rates determine the income of all persons. There
are, of course, a great many elements influencing
changes in buying power such as increases in pop
ulation and employment, incomes of other groups
ECONOMIC REPORT OF THE PRESIDENT
CHANGES IN DISPOSABLE INCOME AND
HOURLY WAGES IN MANUFACTURING,
1950-55
(percentage change from preceding year)
Total
disposable
income
Period
195
195
195
195
195
1
2
3
4
5
+ 10
............ + 5
+ 6
........... + 2
........ + 6
1950-55............... + 31
Manufacturing
wage rates
+
+
+
+
+
8
5
6
2
4
+29
Source: United States Departments of Commerce and
Labor.
in the population, changes in taxes, variations in
savings, the length of the work week and the
like. Nevertheless, the parallel is so close as to
make clearly apparent the importance of wage
rates in manufacturing industries in influencing
wage rates and incomes in other endeavors. Im
provements in wage levels in key industries have
a profound effect on wages and salaries else
where in the economy, though amounts, timing
and specific terms of the multitude of wage and
salaried changes vary widely.
The rapid growth in the economy over the
past decade and especially in the last five years
has been associated with rising real wages. There
has been a modest but definite increase in labor’s
share of our national income. Labor income was
63 percent of the total national income in 1946.
Since 1953, labor’s share has averaged about 67
percent. Similarly, labor income was less than
two-thirds of total personal income in the period
1946-50, whereas from 1952 to the present, it has
been over 70 percent. Compared with total non
agricultural income, labor’s share has also risen.
It is also noteworthy that income of employees of
all corporations has tended to rise relative to
profits before taxes.
The rise in real wages and the shifts in total
income distribution over the full span of the past
decade in favor of labor contributed materially
to our economic growth and relatively stable
prosperity.
Our progress would have been
neither as steady nor as rapid had it not been
for these stimulating influences which provided
for growing mass markets. Unfortunately, there
has been some retrogression in these relationships
in the past year.
Profits have persisted since World War II at
241
highly favorable levels. The rising national in
come has been associated with rising profits,
though the increase in total labor income has
exceeded that of total profits. In essence, larger
volume of business at slightly lower margins has
yielded increasing profits. The high levels and
rising trends of investment expenditures by bus
iness provide ample proof that attractive in
centives for new investments have prevailed. Busi
nessmen and investors benefit more from grad
ually rising and persistent profits than from
sensational profits in boom times followed by
bankruptcy in depressions.
Labor’s wage policies have made a contribu
tion to sustained profitability. This contribution
has been less pronounced in the past nine months,
as precarious distortions have tended to emerge.
These include a declining share of income for
labor, a very marked rise in plant and equipment
outlays in the face of very slight increases in con
sumer income and expenditures, and irresponsible
pricing policies in some of the more monopolistic
sectors of the economy.
It is increasingly clear that trends in favor of
labor income and consumer purchasing power
must go further to support a continuation of the
rate of progress achieved in the past five years.
While consumer incomes have increased substan
tially, they have still not expanded at a rate com
mensurate with our growing output of goods and
services. The volume of goods and services avail
able for domestic civilian purchase (i.e., gross
national product minus government purchases
minus net exports) has been rising more rapidly
than personal disposable income which is the in
come available for personal expenditures (i.e.,
total personal income minus personal taxes). In
1953 and 1954 American individuals and families
received enough income, after paying personal
taxes, to buy nearly 90 percent of total produc
tion available for domestic civilian use. The ratio
dropped to 86 percent in 1955 where it remained
in the first quarter of 1956. This fall-off in con
sumer purchasing power relative to production
is an unhealthy tendency.
The lack of adequate consumer buying power
has been increasingly marked in recent months.
Inventories at all levels of business activity have
risen sharply in relation to sales. The rise in
inventories has been particularly pronounced in
consumer durable goods. Production will not
stay high for long when an increasing portion of
the output is merely serving to increase the sup
ply of goods and services on the shelves of man-
242
ECONOMIC REPORT OF THE PRESIDENT
Disposable personal
Incomeas «;{. of gross
national product
expendituresas %
of gross national
product availablefor
194 7
..87
194 8 :...............86
194 9
..88
195 0
..84
..85
195 1
195 2
..88
195 3
..89
195 4
..90
1955.............. ......86
85
81
85
79
79
82
82
83
81
1956*..................86
80
* Annual rate, seasonally adjusted, for six months end
ing March 1956.
ufacturers and wholesalers and retailers. Man
ufacturing and trade sales, on a seasonally ad
justed basis, are no higher than they were last
fall, but inventories jumped almost $4y2 billion
from September 1955 to April 1956. Such an in
ventory accumulation was hardly purposeful. It
reflects a lack of customers; not because the fam
ilies of America do not need and want more goods,
but rather because they lack the income to buy
this larger flow of goods. Manufacturers and
storekeepers will cut production and purchases
if consumer buying does not increase more rap
idly. And consumer purchases will not increase
until and unless wages are raised.
Expansion of the economy seems to have lost its
momentum in the past six to nine months. Since
September, 1955, we appear to have come to a
halt on an economic plateau. The general level of
industrial production has remained barely stable,
with capital goods output rising and consumer
durables declining. National income and personal
consumption expenditures have advanced very
slightly. Numerous weak spots are appearing
in the economy despite continued high defense
spending and a rather phenomenal increase in
business investment in plant and equipment.
The total level of expenditures for new plant
and equipment is officially expected to total $35
billion in 1956, representing an increase of nearly
one-quarter over 1955. In the first half of 1956,
these expenditures are running one-third above
the first half of 1955. In the face of sustained
government spending and the extraordinary rise
in plant and equipment expenditures, any softness
in the business picture can. lead to only one con
clusion, namely, that consumer incomes and con
sumer expenditures are inadequate to maintain
high levels of employment and to restore the mo
mentum of the expansion. Not only has huge
business spending for modernizing and enlarging
our productive capacity failed to bring truly full
employment, but such expenditures will not con
tinue to increase unless consumer demand rises.
Almost 4y2 percent of our civilian labor force
was unemployed in the first quarter of 1956, as
compared with 3 percent in the fall of 1955 and
only 2 y2 percent in 1952 and 1953. In some
areas, such as Detroit, Flint and South Bend,
local unemployment has reached serious propor
tions.
Further evidence of the inadequacy of con
sumer purchasing power is the fact that a con
stantly growing share of consumer purchases has
had to be financed by credit. Consumer debt out
standing at the end of the first quarter of 1956
was $35.5 billion, or nearly 20 percent higher than
a year earlier. Over the same period consumers
had 6 percent more income to spend. Between
the first quarter of 1952 and the first quarter of
1956, consumer expenditures increased 21 per
cent, but consumer indebtedness jumped 71 per
cent Mortgage debt on l-to-4 family houses also
increased by more than 70 percent. The increase
in mortgage debt on l-to-4 family houses in 1951
equaled 59 percent of the value of private nonfarm residences built in that year. The ratio in
creased every year and in 1955 was almost 77
percent.
At the beginning of 1952, the ratio of consumer
credit outstanding to total disposable income was
9 percent. By the beginning of 1956, it had risen
to 13.2 percent At the beginning of 1952 out
standing consumer credit equalled 10.2 percent of
the annual rate of consumer purchases. By the
start of 1956 it had increased to 14.2 percent.
Some expansion of credit is, of course, a normal
sign of a growing, healthy economy. There can
be no fixed rule defining how much expansion
is safe. At some point, however, if an individual’s
indebtedness rises much more rapidly than his
income, his credit-worthiness becomes impaired.
Further, his burden of paying off debts becomes
excessive and limits his ability to make current
purchases of essential goods and services for cur
rent consumption. It seems reasonable to con
clude that the rate of increase in consumer debt
in recent years was excessive. Certainly, the
decline in automobile and other consumer durable
goods sales can be traced in some measure to the
fact that many consumers became over-extended.
Our economic growth may well have relied too
ECONOMIC REPORT OF THE PRESIDENT
heavily upon credit and not enough on increased
income over the past few years. We may have
reached the limit of that road. If so, this leaves
us with only two possible alternatives. One is
to lower our sights and gear our output to what
can be sold on the baas of the present trend of
consumer incomes. That road leads at best to a
slower rate of progress than we can attain and
more probably to declining business and rising
unemployment in the face of the economy’s tre
mendous growth potential. The second alterna
tive is to attack the problem at its root, which
is to increase wages and purchasing power so that
there are mass markets for the rising output
made possible by the growth of our labor force,
the increase in our productive capacity and the
improvement in our efficiency. This clearly
means that real wages must be raised more
rapidly. It requires higher wages without higher
prices. We have seen not only that wages can
be raised without increasing prices, but it is clear
that increasing real wages are absolutely essen
tial for prosperity and growth. Only in this man
ner can our economy be soundly supported on the
solid basis of rising buying power, widely dis
tributed, rather than excessive credit. Only if
we take this road can we continue to enjoy the
fruits of steady and dynamic economic expansion.
4—Inflation or Stabilization?
Contentions by management and by anti-labor
spokesmen that all wage increases must result
in price increases—that higher wages must lead
to inflation—are without basis in theory, in prac
tice and in fa ct Rising wages and inflation are
not part and parcel of a single phenomenon. In
dustry need not, and most employers do not, raise
prices every time wages are increased. So much
has been said and written proving that wages must
rise relative to prices, that only economic isola
tionists in their remote-from-reality hideouts con
tinue to prattle about higher wages causing infla
tion.
Contentions that wage rates can be increased
without limit and still have no impact on prices
are equally irresponsible. But, a healthy econ
omy requires that wages and salaries must rise
relative to prices and the only meaningful ques
tion is the degree to which wages can and must
increase relative to prices.
Unions have never contended that higher
wages could be paid without higher prices re
gardless o f the size of the wage increase. Rather,
labor has contended that the level of profits and
243
changes in productivity should be taken into ac
count in determining how much wages can be in
creased without increasing the general price level.
On the other hand, those who steadfastly fight
against wage increases attempt to propagate the
view that every wage increase must result in a
price increase.
It is unequivocally clear that unless wages and
salaries increase somewhat more than prices, our
economic growth will be halted. As our produc
tive capacity and output of goods and services
expand, there must be an increase in the real buy
ing power of consumers. Except for inventory
and investment booms which cause busts, our
economy can grow no faster than the market for
its products. The mainstay of that market is the
purchasing power of our workers. As already
pointed out, more than four-fifths of America’s
total output of goods and services, excluding what
is bought by the Government, is purchased for
personal consumption. It is the income of the
wage and salary earners that accounts for the
bulk of personal consumption. Rising real wages
are an absolute prerequisite to economic pros
perity and economic growth.
The history of our industrial development is a
history of rising output per man-hour of work.
The rate of change in productivity has varied
from time to time, but the increase in efficiency
—in production per man-hour—has been persist
ent and substantial. Workers can share in the
benefits of rising productivity only through ris
ing real wages. But even more important from
the economic point of view is the continuing need
for higher real wages as a basis for sustained
high levels of production and income and em
ployment.
Economists have long argued whether the bene
fits of rising productivity should be shared
through constant prices and higher wages or
through constant wages and lower prices, or a
combination of the two. Most economists are at
least dubious, if not firmly opposed, to a goal of
declining prices. Falling prices tend to discourage
investment and to retard economic expansion.
Even if general price declines were desirable, it
is doubtful that prices would actually be reduced
by those industries which can best afford it—
those whose firm grip on the market has permit
ted them to reap the largest profits by setting
their prices high.
As the economy has grown, business enter
prises have developed in size and scale and in or
ganization, bringing much less price flexibility
244
ECONOMIC REPORT OF THE PRESIDENT
than was true in the past. Many objective anal
yses have been made demonstrating the grow
ing stickiness of prices, especially for industrial
products. Even when economic activity and pro
ductivity have risen relative to wages, there is
little evidence of a readiness by the large indus
trial corporations to cut prices. Rather, our in
creasingly monopolistic industries tend to change
their prices only in one direction, namely upward.
If labor were to forego demands for higher wages
and wait for employers to pass on the benefits
of higher productivity through lower prices, we
would surely experience short and intensive
booms with tremendous profits and inadequate
buying power, followed by severe depressions and
mass unemployment. This is not a promising
path to economic progress.
Labor often seeks wage increases that are pro
portionately higher than the rise in productivity,
because wages have lagged in the past and profits
have become exorbitant. Once labor’s share is
reasonable, increases should primarily take into
consideration changes in productivity. In indus
tries where productivity is rising at a lesser rate
than for the total economy, wages should be in
creased in proportion to the over-all rate, even
though some price increase might be necessary.
In industries where productivity is increasing
very rapidly, wages should rise more than in pro
portion to the national increase in productivity.
This might well leave room for price declines.
The above policies would permit all workers
to share in the improving productivity of the
economy with extra benefits to workers in those
industries where technological advancements are
most rapid. It would result in only a slight up
ward trend in prices.
It should be noted that a percentage increase
in wage rates proportionate with changes in pro
ductivity results in a sharing of the benefits of
productivity between management, labor and in
vestors. Not all the benefits of increased effi
ciency and mechanization are expected nor sought
by labor.
History has demonstrated not only that wages
can rise relative to prices, thus providing the in
creased purchasing power without which our
economy would stagnate, but also that there can
be substantial increases in wages with virtually
no change in prices or living costs. The experi
ences of the immediate pre-Korea and post-Korea
years are significant in this respect.
Since the end of World War n , there have been
two periods of general price advances, both oc
casioned by factors other than higher wages.
Also in this decade, there have been two longer
periods of general price stability.
Prices rose sharply during the immediate post
war years of 1946 and 1947, following the re
moval of wartime price controls. This inflation
reflected principally the release of accumulated
demands for goods of all kinds following the re
moval of wartime restrictions on consumption and
output. As shown in the following table, con
sumer prices increased 30 percent from January
1946 to January 1948. Wholesale prices for all
commodities skyrocketed 50 percent. For all
commodities other than farm and food items, the
rise was 41.5 percent in these 24 months. Wages
increased 30 percent during the same period,
seriously lagging behind prices and barely provid
ing workers with the same purchasing power per
hour of work in January 1948 as in January 1946.
Because of shortening of the work week, real buy
ing power of weekly earnings declined markedly
for a time following World War II.
MAJOR PRICE AND WAGE MOVEMENTS
SINGE THE END OF WORLD WAR II
(Index Numbers, 1947-49=100)
Wholesalepriwn
wages*in
Consumer All com* All except m&nutec_____ Period___________prices
wodltlw farmand food taring 1
1. The immediate
postwar boom:
Jan. 1946 ..... 77.8
Jan. 1948..... 101.3
Percent
--------change........... +30.2
2. Thirty months
of stability:
Jan. 1948..... 101.3
June 1950 ... 101.8
Percent
--------change........... + 0.5
3. The Korean boom:
June 1950 ... 101.8
June 1951... 110.8
--------Percent
change.......... + 8.8
4. Five years of
stability:
June 19 51... 110.8
April 1956 ... 114.9
Percent
--------change........... + 3.7
69.6
72.1
75.0
104.5
102.0
97.8
--------- --------- ---------f-50.2 +41.5
+30.4
104.5
102.0
97.8
100.2
102.2
109.0
--------- ---------- --------— 4.1 + 0.2
+11.5
100.2
102.2
109.0
115.1
116.2
118.8
--------- --------- --------+14.9 +13.7
+ 9.0
115.1
116.8
118.8
113.7
121.7
146.0
--------- --------- --------— 1.2 + 4.2
+22.9
'Index of straight-time hourly earnings in manufactur
ing industries.
Source: United States Department of Labor.
ECONOMIC REPORT OF THE PRESIDENT
The increase in personal consumption in 1946 and
1947 was made possible by spending the savings
that had been accumulated during the war. Wage
increases were not the cause of the inflation.
Clearly, during these two years, wages were in
creased after prices were increased. Labor was
on a treadmill trying to catch up with the gallop
ing price level.
Inflation appeared again following the Korean
outbreak in June 1950 largely because of specula
tion and scare buying. The rise in wholesale
prices after Korea was, in fact, arrested by the
end of January 1951 with the imposition of price
controls, though living costs continued to advance
for a few months longer. Again, as shown in the
tabulation, wage rates barely kept pace with con
sumer prices. The figures show that between
June 1950 and June 1951, both wage rates and
retail prices increased 9 percent and wholesale
prices of all commodities advanced almost 15 per
cent
Between and after these periods of inflation,
prices generally remained stable while wages con
tinued to advance as labor productivity steadily
improved. In the two and one-half years be
tween January 1948 and June 1950 there was an
11.5 percent rise in hourly wages in all manu
facturing industries while living costs advanced
only one half of one percent and wholesale prices
of all commodities actually declined. This de
cline was confined largely to farm products and
food. Industrial wholesale prices showed little
change over the period.
Most striking is the record of the years since
the middle of 1951. During this interval of
almost five years, wage rates in manufacturing
industries rose 23 percent while living costs in
creased less than 4 percent and wholesale prices
declined slightly. Again, food and farm prices
dropped, whereas wholesale prices of industrial
commodities rose a bit over 4 percent in the 58
months from June 1951 to April 1956. The in
crease occurred after the middle of 1955.
The rise in the last five years in the consumer
price index took place largely in the second half
of 1951 and in 1952 as a result of the spill-over
of the inflationary impact of the Korean War.
Consumer prices are today at practically the same
level as they were four years ago. The rise in
non-agricultural wholesale prices in the past nine
months is difficult to justify. In the middle of
1955, prices of industrial goods were actually
lower than at the beginning of 1951. Profits
245
were already near an all-time peak in mid-1955
when the price advances were put into effect.
This picture covering the past decade, espe
cially most of the last five years and the two and
one-half years from the beginning of 1948 to mid1950, clearly demonstrate that wages can be
raised progressively without inflation. Not only
have these wage increases during these years
been associated with over-all price stabilization,
but the fact is that in essence they have made our
economic growth possible. There is no better
way to generate the increase in consumer pur
chasing power needed to buy the products of our
expanded economy than to raise reed wages and
salaries of workers.
The general pattern described above has not
been characteristic of each and every industry nor
of each and every employer. In many areas where
prices are not truly free, such as the steel indus
try, but are subject to some degree of control—
control by monopolistic firms—wage increases
have been passed on in the form of higher prices,
with consequent booming profits. Some evidence
of variation in pricing practices will be analyzed
below. The data show that the absorption of
wage increases over the past five years in most
industries has not resulted in a “profitless pros
perity.” On the contrary, total profits have re
mained high and we seem to have experienced
a general demonstration, with some exceptions,
of the thesis that American business firms are in
terested in large volume at moderate margins.
It is unfortunate that not all industries have re
vealed their belief in the practice of making more
profits by producing and selling more and more
goods with smaller margins rather than push
ing prices and profit margins higher and higher,
ignoring the general well-being of the over-all
economy.
Some corporations try to justify their price
gouging on the grounds that they need more prof
its to finance expansion. This aspect will be dis
cussed later. Other companies frankly say that
they seek to make all the profits they possibly
can so that when depressions come they will be
better able to weather the storm. This is truly
a cynical and dangerous view because such be
havior, if widespread, will induce depressions. We
need wage and price policies based on confidence
in America’s future and on a sense of responsi
bility for the welfare of the entire nation. There
are still too many employers who deviate from
such policies.
246
ECONOMIC REPORT OF THE PRESIDENT
5—Productivity
There are three factors which directly influ
ence the ability of the economy to increase out
put. One is the growth in the size of the labor
force. Second is the degree to which the labor
force is employed, i.e., the number at work and
length of the work week. Third is the quantity
of production per man-hour of input.
If we maintain high levels of employment, then
our. expanding labor force and rising productivity
make it entirely feasible to raise the level of pro
duction from the current annual rate of approxi
mately $400 billion to nearly $500 billion in 1960
and to $600 billion by 1965. We can double our
output in less than 20 years if we maintain rela
tively full employment and continue to enjoy the
increases of productivity which have occurred in
the past few years. Of course, while these levels
of output can be reached, they will be reached
only if the market demand expands along with
our capacity to produce.
The rise in the size of the labor force is a func
tion of our growing population. Despite the
fact that larger numbers of our younger people
remain in school for more years so as to secure
the benefits of advanced education, there is a sub
stantial increase in the working population year
by year. Even if productivity were to remain
unchanged, our national output would increase be
cause of this expanding labor force. Actually,
however, increasing productivity has contributed
more to our rising production than has the growth
in the labor force. Productivity gives promise
of playing an even more important role in the
future.
Productivity is difficult to measure, especially
for many sectors of the economy. However, the
figures that are available indicate that improved
skills, increased mechanization and greater effi
ciency have tended to accelerate the rise in pro
ductivity. With the coming of automation, even
faster rates of rising productivity are in prospect
A few months ago the Joint Committee on the
Economic Report held hearings on automation
and startling evidence was revealed of the shrink
ing labor input per unit of output which will re
sult from automation.
Rising productivity, even at a more rapid rate
through automation, can and should prove to be
a blessing. Price and wage policies will largely
determine whether automation will be associated
with sustained full employment, an accelerated
rise in living standards, more leisure and less
physical exertion, or whether it will bring only
bulging profits and widespread unemployment.
If employers will share the benefits of automation
in adequate degree with workers and consumers
there is every reason to expect that this phenom
enon can and will give us a rate of increasing
abundance unparalleled in the past. It is in the
self-interest of employers to share these benefits
if they are to enjoy continued profitability.
The following tabulation indicates that in the
years between 1952 and 1955, real total output
per man-hour rose more than 3 percent per year.
REAL PRIVATE PRODUCT PER MAN-HOUR
In 1947
Year-to-year
Year_____ dollars______ change_______Index
1952.... ..... $2.28
1953___......2.38
1954.__ ..... 2.43
2.51
1955
—
+4.4%
+ 2.1%
+3.3%
100.0
104.4
106.6
110.1
Source: Based on data in Table 1, Joint Economic Re
port, Joint Committee on the Economic Report, March
14,1956, p. 86.
The following indexes of production, man-hours
and output per man-hour for all manufacturing
industries for the years 1947-53 were submitted
by the United States Department of Labor to the
Joint Committee on the Economic Report in the
Automation Hearings. In the six years between
1947 and 1953, output per man-hour in manufac
turing increased 22 percent. Preliminary figures
indicate a rise of 10 percent in productivity in
manufacturing between 1953 and 1955. On the
basis of these data, the rate of increase from
1947 to 1955 exceeded 4 percent per year.
INDEX OF PHYSICAL. OUTPUT PER
MAN-HOUR—ALL MFG.1
(1947=100)
Year
1947.................
1949......
1950.................
195 1
195 2 .........
195 3
195 4
195 5
Output per
Man-hour
Production
Manhours
100.0
108.6
117.7
117.5
119.1
122.7
127.53
135.02
100.0
96.8
114.4
121.0
123.1
133.2
n.a.
n.a.
100.0
89.1
97.2
103.0
103.4
108.6
n.a.
aa.
1 Current year weights.
2 Preliminary estimates.
n.a. Not available.
ECONOMIC REPORT OF THE PRESIDENT
The rise in productivity (35 percent) in man
ufacturing since 1947 has been greater than the
increase in average hourly earnings, adjusted for
changes in consumer prices (26.8 percent). This
means that the buying power received by work
ers in manufacturing industries for each hour
worked has increased less than the output per
hour worked. It means that workers in factories
have not shared fully in the benefits of rising in
dustrial efficiency.
A review of available information indicates
that the increase in output per man-hour for the
economy as a whole has averaged about 3 percent
per year since 1939 and that the rate has been
slightly higher in the past decade. In manufac
turing the annual rate of increase in the last few
years has certainly exceeded 4 percent.
Unless the real wages of workers increase at
least proportionate to the rise in productivity, the
expansion of the economy will be stymied. This
clearly means that wage rates must rise relative
to prices. It means that employers generally not
only can but must increase wages at least equal
to the increase in productivity without increasing
prices. If all industries follow the practice of
some employers, such as the steel industry, in
raising prices every time that wages are in
creased, not only would we have inflation, but,
more seriously, we would have booms and busts
and a cessation of expansion in the economy.
Over the years since 1947, real hourly earnings
in manufacturing have lagged behind the rise in
productivity. There was widening disparity until
1950; then the gap narrowed until 1953; and it
has widened again in the past two years. Un
doubtedly, the relationship between changing real
wage rates and changing productivity has varied
from industry to industry. In some sectors where
productivity has risen slowly, workers probably
have secured real wage increases which have ex
ceeded rising productivity. On the other hand,
there are many industries where real wages have
unquestionably fallen far behind the improving
output per man-hour.
Dollar wage rates have increased far more
than real wage rates. Rising prices ate into the
buying power of the pay envelope. It was dur
ing the 1946-48 and Korean periods of inflation
when workers did not get higher real earnings.
It was during the periods of price stability in
1948-50 and again after mid-1951 when real earn
ings moved up with productivity. Labor suffers
during inflation and that is why labor fights
against inflation. Labor seeks higher wages
87624 0— 57------ 17
247
which can be clearly justified in relation to profits
and rising productivity and which can be granted
without precipitating general price increases.
Monopolistic conditions too often permit arbitrary
control over prices, as in the steel industry, with
the result that a fair share of the benefits of ex
panding productivity go neither adequately to
workers in the form of higher wages nor to con
sumers in the form of lower prices, but rather
serve to increase profits further.
The past and prospective growth in produc
tivity lends great weight to the conclusions that
wages can be increased without rising prices;
that increasing wages in relation to productivity
and reasonable profits are not inflationary; that
wages can be raised without increasing labor
costs per unit of output. These conclusions stand
in support of the fundamental principle that
wages and salaries must be increased without
higher prices if we are to have a prosperous and
expanding economy with a stable price level.
6—Wage-Price-Profit Relationships
As already demonstrated, the years since the
end of World War n were characterized by two
periods of inflation and two periods of relative
price stability. Over the entire interval, the out
put of the economy expanded substantially. De
spite two recessions, the country has enjoyed a
degree of growth and relatively persistent pros
perity probably unparalleled in any previous
eleven-year span in the history of the United
States. The changing economic relationships
within the private economy undoubtedly contrib
uted in considerable measure to this sustained
growth. The study of these relationships should
be revealing.
Wage rates increased steadily from $1.02 per
hour in all manufacturing industries in 1945 to
$1.88 in 1955. Part of this increase was dissi
pated through rising prices. In terms of goods
and services which workers could buy with their
income, hourly earnings in manufacturing
dropped with the ending of overtime work in the
immediate post-war period. Since 1947, real
hourly earnings of factory workers have in
creased by one-fourth.
Weekly earnings have also been rising over the
past few years. Because of the reduced work
week, the pay envelope in manufacturing indus
tries shrank considerably immediately after the
War. It shrank in actual dollars, but dropped
even more in buying power. In 1947, the weekly
pay of the average factory worker commanded
248
ECONOMIC REPORT OF THE PRESIDENT
15 percent less goods and services in the market
than it did in 1944. After 1947, the change was
favorable to employees. Average weekly earn
ings of production workers in all manufacturing
industries increased from just under $44 per week
in 1946 to over $78 early in 1956. Rising living
costs took away part of this increase, especially
during the war in Korea. It was not until 1953
that the average production worker in manufac
turing industries received as much purchasing
power in his pay envelope as he did in 1944. He
can now buy about 10 percent more goods and
services with his weekly pay than he could in
1944. Of course, the length of the work week is
shorter. Since the post-war low of 1947, real
weekly earnings in manufacturing industries have
increased over 30 percent.
CHANGES IN REAL HOURLY AND WEEKLY
EARNINGS IN MANUFACTURING INDUS
TRIES SINCE WORLD WAR H
Period
(1947-49 dollars)
Hourly
earnings
Weekly
earnings
1. The Immediate post-war
boom:
1946 ................................. $1.31
1.31
1948 ...........................
0
Percent change............
$52.54
52.67
+0.25
2. Pre-Korean stability:
1948 .................................. 1.31
1950 ............................... 1.43
Percent change............ +9.2
52.67
57.71
+9.6
3. The Korean boom:
1950 ............................. 1.43
1951 ............................... 1.43
0
Percent change...........
57.71
58.30
+1.0
4. Post-Korean stability:
1951 .......... ...........-..... .. 1.43
1955 _____ __________ .. 1.64
Percent change----------..+14.7
58.30
66.83
+14.6
It is significant to note that workers lost ground,
in terms of purchasing power, during the imme
diate post war inflation and barely held their own
during the Korean price spurt. On the other
hand, immediately before Korea and most of the
time since Korea—when there was considerable
price stability—real hourly and weekly earnings
moved upward with some momentum. Labor's
abhorrence of inflation appears to be well justified
by the evidence at hand.
Since the end of World War n , corporate profits
have varied somewhat from year to year, gener
ally moving in relation to changes in total busi
ness activity. On the whole, however, they have
increased measurably. The rise in profits after
taxes has been less marked than the increase be
fore taxes. This, of course, has been true for in
dividuals as well as for corporations. Larger
military expenditures have placed a heavy tax
burden on all groups in the population.
Personal taxes have increased more than cor
porate taxes. However, the burden of personal
taxation has not increased relative to personal in
come as much as corporate taxes in relation to
corporate profits. Personal taxes absorbed 11
percent of total personal income both in 1947 and
in 1955. Corporate tax liability was 38 percent of
corporate profits in 1947 and approximately 50
percent in 1955.
Total corporate profits before taxes increased
from $6.4 billion in 1939 to $22.6 billion in 1946
and then more than doubled to a record annual
rate of over $46 billion in the six months ending
March 1956. Corporate profits after taxes in
creased nearly two and one-half fold from $8.3
billion in 1945 to $20.3 billion in 1948. There
after, the range of fluctuations was more moder
ate. In the six months ending March 1956, a new
peak in the annual rate of corporate earnings
after taxes of $23 billion was readied. Corporate
profits before taxes are now about seven times
what they were in 1939; after taxes they are ap
proximately four and one-half times the 1939
level. Total compensation of all employees is
currently not quite five times what it was in 1939.
In the years after World War II, profits gener
ally tended to rise rapidly during periods of price
inflation. For example, between 1946 and 1948,
corporate profits before taxes rose 45 percent
Corporate profits after taxes increased over 50
percent During the same years, namely from
1946 to 1948, total compensation of corporate em
ployees increased 30 percent. This distortion may
well have been the most important single factor
precipitating the recession of 1949. Profits
dropped about 20 percent in 1949 while labor in
come remained unchanged from 1948. The main
tenance of labor income helped to prevent the re
cession from deepening and lengthening.
Again, the Korean inflation favored profits over
wages. From the first half of 1950 to the year
1951, corporate earnings before taxes increased
ECONOMIC REPORT OF THE PRESIDENT
30 percent, whereas total compensation of all em
ployees rose less than 25 percent.
Profits were far less volatile when prices were
not booming. From early 1948 to early 1950,
profits tended downward while the compensation
of employees rose slightly. Between 1951 and the
first half of 1955, labor income rose significantly
relative to profits. In the first quarter of 1955,
corporate profits before taxes were at about the
same level as in 1951 while employees’ compensa
tion had increased more than one-sixth.
As industrial prices started to rise in the middle
of 1955, profits moved ahead relatively more than
wages. From the first quarter to the fourth quar
ter of 1955, profits before taxes increased nearly
15 percent whereas the compensation of employees
increased only 7 percent, both computed after sea
sonal adjustment.
It is generally agreed that inflation is harmful
to the economy and especially to fixed income re
cipients and should be prevented. From an analy
sis of the data since the end of World War n , pe
riods of inflation have definitely worked in favor
of profits as against labor income. Perhaps some
businessmen and groups really favor inflation and
have helped fan inflation by their pricing policies.
They then follow the maxim that the best defense
is the good offense and try to pin the blame on
labor, which suffers from inflation and wants no
part of it.
Corporate profits are now considerably higher
in relationship to corporate payrolls than pre-war.
These data again demonstrate that corporate
profits increase relative to wages of corporation
employees during periods of inflation and tend to
decline or remain stable when there is no infla
tion. The trends within the past year are hardly
conducive to sustained prosperity. Corporate
profits, before taxes, amounted to 29 cents per
dollar of compensation of corporate employees in
1953, slightly over 26 cents in 1954, and then rose
to nearly 33 cents late in 1955 and early 1956.
Profits of manufacturing corporations tend to be
even more volatile than the profits of all corpora
tions. In 1955, profits before taxes for all manu
facturing corporations were nearly seven times
the level of 1939 and more than double those of
1946. The series shows a very sharp rise in
manufacturing profits as prices increase and a
leveling off when prices are stable. Data are not
yet available for the first quarter of 1956, but the
trend in 1955, especially the second half, was
markedly upward, reflecting the increase in indus
trial prices. Profits before taxes of all manufac
249
turing corporations increased 44 percent from the
final quarter of 1954 to the final quarter of 1955.
Over the same interval, profits per dollar of sales
jumped one-fourth and the rate of profit on stock
holders’ equity increased by one-third. These are
dangerous distortions which must be corrected
promptly if a down-tum in business activity is to
be avoided.
Taking the last five years as a whole, profits
before taxes as a ratio to sales of all manufactur
ing corporations have been somewhat lower than
they were in the immediate post-war years. From
a post-war peak of 10.7 percent in 1950, there was
a decline to 6.9 percent in 1954 and a rise to 8.5
percent in 1955 with an even higher figure indi
cated for the last quarter. In the years imme
diately following the war in Korea, a good many
manufacturing corporations apparently were op
erating under the sound principle of earning size
able profits through a rising volume of sales with
lower margins. The application of this principle
yielded very satisfactory profits in 1952 and 1953.
The recession in 1954, attributable to reduced de
fense spending and other factors, brought tempo
rarily lower profits. Since the second half of 1955,
the policy of a rising volume of production and
sales associated with lower profit margins has
given way to some degree of opportunistic pricing.
Persistence in this direction may well precipitate a
recession.
Declining profit margins were associated with
high profits in manufacturing industries over the
past decade. In only one year since 1947, namely,
the 1954 recession year, did the rate of profits
after taxes fall below 10 percent of stockholders’
equity. In only two years did the rate of profits
before taxes on stockholders’ equity fall below 20
percent. These are truly very high profit rates
and it is clear that manufacturers can cut profit
margins much more and still earn handsomely on
their investment.
The relationship between prices, wages, and
profits for all manufacturing corporations com
bined is particularly interesting. Between 1947
and 1955, hourly earnings in all manufacturing
industries increased a little more than 50 percent
and total wages in manufacturing increased 70
percent, whereas prices of industrial products
(wholesale prices of all commodities, excluding
farm products and food) rose about 23 percent.
Profits before taxes based on the Department of
Commerce estimates rose almost 50 percent and
profits based on the FTC-SEC series increased
over 60 percent. Over the period, the ratio of
250
ECONOMIC REPORT OF THE PRESIDENT
profits to sales tended downward. From 1951
to 1955, hourly earnings in all manufacturing
industries went up 18 percent whereas prices of
industrial goods rose about 1 percent. Corporate
profits after taxes in 1955 equalled or exceeded
the all-time peak of 1951, but the profit margin on
sales dropped measurably. If this general trend
of rising wages, stable prices, declining profit
margins, and sustained attractive profits were
maintained, the economy would be far better off
than when suffering the distortions which occur
during times of boom and inflation and which
bring about recessions and depressions.
The data and analyses reveal again and again
that periods of rising prices serve to bring marked
increases in profits, but operate to the detriment
of employees. Periods of price stability bring in
creased purchasing power to workers and simul
taneously permit employers to earn excellent prof
its. It may be exhilarating for executives of cor
porations to push up prices and enjoy short-lived
big jumps in profits, but such periods are usually
followed by sharp declines in profitability. Clearly,
history shows the consequences do not justify this
policy, but the pattern is often repeated. Perhaps
business leaders will ultimately come to recognize
the desirability of good profits year in and year
out, rather than phenomenal boom-time earnings
followed by sharply reduced profits during reces
sions which such policies tend to precipitate. Busi
nessmen, in considerable measure, can exercise a
choice between these two alternatives. Some
businessmen have acted sensibly or have been
forced to do so because of competition. It is to be
hoped that for the best interests of the country as
well as for their own benefit, the others will learn
to refrain from unnecessary and unwarranted
price increases.
An analysis of a few manufacturing industries
indicates that the iron and steel industry followed
highly arbitrary and inflationary pricing policies.
Since 1947, steel prices have very closely paralleled
steel wage increases. This has happened despite
the very marked increase in productivity per manhour in the steel industry. Steel prices have risen
far, far more than labor costs per unit of output.
The steel industry has repeatedly pushed its prices
up far more than the rise in prices for materials
used by the steel industry. In 1955, profits before
taxes per dollar of sales in the steel industry were
nearly 30 percent higher than in 1947-49. The
evidence is abundantly clear that the leaders of
the steel industry do not believe at all in the con
cept of increased volume and lower or even level
margins of profit. Instead, the industry has
pushed prices upward without any concern for
the public interest.
The contrast between the price policies of the
steel industry and price policies of all manufac
turing industries combined is rather startling.
Whereas price increases of the steel industry re
sulted in parallel movements of steel wage rates
and steel prices, the data for all manufacturing
shows that from 1947 to 1955, average hourly
earnings rose over 50 percent as compared with an
increase in prices of manufactured products of
less than one-fourth. From 1947 to the first half
of 1955, the difference was even greater. This
means that manufacturing industries as a whole
did share some of the benefits of rising productiv
ity with workers. But the steel industry refused
to do so. Only because some of the steel price
increases were absorbed along the line in fabricat
ing industries and because other industries could
not or did not engage in the same pricing practices
as steel, there were periods of general price sta
bility in the past decade and real wages of steel
workers and other workers increased.
The difference between steel’s pricing policies
and that of other industries is revealed in the price
data. Finished steel prices in the six months end
ing March 1956 were about 75 percent higher than
in 1947. Wholesale prices of all commodities other
than farm products and foods rose 26 percent over
the same period. All the major steel-using indus
tries show price increases less than in steel, in
some instances substantially less. Heating equip
ment prices were 23 percent higher in 1955 than
in 1947. For agricultural machinery and equip
ment, motor vehicles and electrical machinery, the
price increases were between 30 and 40 percent.
In construction machinery and equipment, they
were nearly 60 percent. These compare with
about 75 percent for steel. In some of these steelusing industries, there is a considerable degree of
price control by corporations, and more restraint
could have been exercised, but in no instance is
the record comparable with that of the steel in
dustry.
The steel industry cannot blame labor for high
prices, although wage increases in the steel in
dustry have been larger than in manufacturing
industries as a whole. Steelworkers have fought
to get a fair share of the industry’s huge profits.
The workers have been trying to “catch up,” to es
tablish a reasonable relationship with profits. The
comparison with other industries shows that the
ECONOMIC REPORT OF THE PRESIDENT
blame for the price inflation in steel rests squarely
on the employers.
The steel industry has demonstrated its dis
belief in the principle of higher volume and lower
margins. It seeks ever higher profit margins,
which its generally monopolistic nature has made
possible. For all manufacturing industries com
bined, profit margins have tended downward, but
not for steel. Despite a spurt in 1955, the ratio
of profits before taxes to sales was still lower in
1955 than in 1947-49 for all manufacturing in
dustries combined, but for steel it was up 30
percent.
It can be stated again and again that if there
is any single industry that has followed infla
tionary pricing practices, that has shown a cold
disdain for the economic welfare of the country,
that has truly practiced inflation, that has the
least right to hide behind the cloak of favoring
a sound dollar and to contend that wage increases
are inflationary, it is the steel industry.
7—Uniform Rounds and Patterns?
Business sources claim there have been annual
“ rounds” of wage increases in every single year
since the end of World War n , implying every
union has negotiated a higher wage or better
fringe benefits for its membership in every year.
Further, it is contended that one settlement sets
the pattern for every succeeding negotiation. It
is implied, if not always expressly stated, that in
creases in wages are uniform among different
unions and different industries.
In all industries wages and salaries have been
raised many times and sometimes by sizable
amounts over the past decade. Different factors
have been influential at different times. As al
ready demonstrated, higher wages in the imimediate post-war period were sought almost uni
versally by labor in the struggle to keep pace
with rising living costs. If there has been a tend
ency for “rounds” of wage increases to develop,
employers can hardly criticize unions when the
initial cause lay in the inflationary swing. Again,
in the year following the outbreak of war in
Korea, unions struggled to prevent rising prices
and booming profits from squeezing the wage
earner. In both of these periods of inflation, real
wages did not rise. Workers had to push for
wage increases to avoid a sharp drop in buying
power and an even bigger increase in profits than
did occur.
The wage increases which brought greater pur
chasing power to workers occurred in the two
251
and one-half years before Korea and again after
the middle of 1951. The struggle to make up for
the lag in the preceding periods carried on for
some time. Then, the continued improvements
in productivity justified further increases in
wages. Labor’s continuing efforts to share in
the benefits derived from rising productivity have
had a beneficial effect in the total economy. The
resulting increase in buying power of consumers
gave support to our expanded prosperity.
In every year since World War IT, there were
wage increases in varying numbers of industries,
but there was no fixed pattern. Wage and fringe
benefit improvements in key industries or in
major corporations have been a guiding and prod
ding force for improvements in other industries.
But these improvements have not been adopted
bodily by one industry from another. There have
been broad variations in amounts, timing and spe
cific terms. There have been neither rigid wage
and fringe benefit patterns, nor uniform economywide rounds of wage increases. In an economic
system as varied as ours, such uniformity, except
for decent minimum standards, are not possible.
A complete analysis of each union settlement
or even of the wage changes in each specific in
dustry can not readily be made. However, the
analysis of only a few wage contracts in one or
two years indicates that the variations among
companies and industries have been substantial.
In 1951 and 1952, the employees in the men’s
clothing industry received no wage increases. In
1952, employees of the American Woolen Com
pany received a 5 cents per hour increase under
the escalator provisions of an earlier contract.
In that same year, automobile workers received
an advance of 4 cents per hour as an annual im
provement factor and 4 cents under the escala
tor provisions. On the other hand, in 1952 coal
mining workers negotiated an increase of $1.90
per day or nearly 25 cents per hour and the Sin
clair Oil contract provided for a 17 cents per hour
increase for its employees. Variations similar
to these can be found in practically every year.
An analysis of changes in average hourly earn
ings among major industrial groups does not
fully reveal the degree of spread among wage
settlements, because variations among industries
within each group are obscured by group aver
ages. Nonetheless, the figures are significant.
Among durable goods industries, between 1947
and 1955, hourly earnings in the primary metal
industry increased 85 cents as compared with 51
cents among furniture and fixture producers. In
252
ECONOMIC REPORT OF THE PRESIDENT
the non-durable goods categories, there was a
range from 86 cents per hour increase in petro
leum and coal products to 35 cents in textile-mill
products. In non-manufacturing industries, in
creases ranged from 92 cents in bituminous coal
mining to 24 cents in laundries. On a percentage
basis, the increases also show considerable varia
tion from industry to industry. Among major
manufacturing groups, hourly earnings between
1947 and 1955 increased from 62 percent in print
ing and publishing to 34 percent in textile-mill
products.
A separate analysis of the periods from 1947
through 1951 and from 1951 to 1955 likewise
shows considerable variations among major in
dustry groups. Again, it should be emphasized
that if the variations were presented for more
detailed industrial classifications, the dispersion
would be much greater. If the analysis covered
each different contract, there would be an even
more pronounced variation.
Generally, it is those same anti-labor sources
who expound the false thesis that wage increases
are the cause of inflation, who also misrepresent
the facts concerning rounds and patterns of wage
increases. Certainly, the last ten years have not
only justified, but have necessitated higher wages,
and it is to be expected that all workers in all
industries would have shared in varying measure
in the rising income, increasing productivity and
expanding prosperity of the country. In view of
the marked expansion of the economy in recent
years, it is significant that the variations have
been so great among different industries and
companies.
8—Pricing Policies and Financing
Expansion
Risk capital, according to most business spokes
men and economic textbooks, is the source of
funds for business investment in the American
economy. A business firm that seeks to expand
its productive capacity floats new stock issues
and sells them to investors. In that way, the
company increases its funds for expansion and
spreads its ownership.
This is a good theory, but it does not seem
to be working in practice. New stock issues pro
vide less and less of a source of money for ad
ditional investment. Actually, this source of
funds has become relatively insignificant as com
pared with total investment outlays. In the dec
ade from 1946 through 1955, all corporations in
the United States, excluding banks and insurance
companies, invested nearly $200 billion in new
plants and equipment It is startling to note that
less than 10 percent of the funds needed for these
purposes was raised by the sale of common and
preferred stocks.
The major source of corporate funds for ex
pansion is internal financing—retained profits
after the distribution of dividends and deprecia
tion allowances. There has been some borrowing
from banks and insurance companies and very
limited flotations of corporate bonds. The over
whelming portion of funds for corporate expan
sion has come from retained profits and deprecia
tion charges.
During World War n and during and after
Korea, industry was given the opportunity to ac
celerate depreciation charges on investments
deemed essential for the national security.
Further, the tax laws of the United States have
been revised to allow all plant and equipment
outlays to be depreciated at a more rapid than
normal rate. This means more internal money
for investment. The March, 1955 Newsletter of
the National City Bank of New York stated:
“Depredation charges are important be
cause they constitute an increasing ‘internal’
source of funds for financing business. This
is due to the fact that they are an expense
item involving no cash outlay at the time but
representing instead the recovery in piece
meal fashion of the original capital invest
ment in plant and equipment.”
In the ten years from 1946 to 1955 depreda
tion allowances of United States corporations
totaled nearly $90 billion, thus providing nearly
half of the money needed for all of the new plants
and equipment built and installed. Normal de
predation charges would have been far less. The
larger depreciation allowances might be looked
upon as extra profits.
For a time after World War II, business spokes
men contended that actual profits were less than
reported profits because depreciation charges,
based on original cost rather than replacement
cost, understated the cost of fixed assets being
consumed in the process of production. As a re
sult of the special accelerated depredation
allowed liberally for all investments related to
defense, and the liberalization provided for in the
new tax legislation, it is likely that profit figures
at the present time understate, if anything, the
true level of profits. Total depreciation charges
now are probably too high, even on the basis of
replacement cost, in relation to the life of depre
ciable assets. In any case, the old argument on
ECONOMIC REPORT OF THE PRESIDENT
this point is not presented any more except as a
last resort type of exhortation.
Undistributed profits of corporations have pro
vided approximately as much funds for invest
ment over the past decade as have depreciation
allowances. Retained earnings have risen sub
stantially in the past year. In 1955, undistributed
profits were about 50 percent higher than the
average for the years 1952 through 1954, even
though dividends paid in 1955 were about 25 per
cent higher than in 1952.
Increasingly, business spokesmen have con
tended that prices must be increased so that
higher profits can be earned in order that all in
vestment outlays of existing corporations can be
financed internally. The Wall Street Journal of
March 23,1956 reports:
“Ernest T. Weir, veteran steel maker urged
industry to raise steel prices enough to get
the money needed for expansion, and sug
gested steel company managements do so
without waiting for price leadership from the
U. S. Steel Corporation, the largest producer.
. . . He said higher prices are necessary to
obtain the money for construction of new
steelmaking facilities the country needs.”
An editorial in the March 8, 1955 issue of the
Journal of Commerce declares:
“The ability of business to meet an increase
in its aggregate capital requirements that
may reach $12 billion this year without re
course to external financing seems an anom
aly . . . It demonstrates how far American
industry has gone in securing sources of
funds outside the bank and capital market
In essence, the leaders of the steel industry
and of other industries are asking the American
people to finance plant expansion through higher
and higher prices. In effect, they propose that
risk capital be supplied by consumers without any
obligation whatsoever on the part of corporations
and without the consumers getting any evidences
of ownership or any benefit from their forced
“ investment.” Instead of charging reasonable
prices and making reasonable profits and giving
the American investor an opportunity to partici
pate in the growth of American industry, these
so-called “venturesome” businessmen propose a
sort of levy for investment on the consumer. The
big trouble is that the consumer gets nothing for
his “investment.” Corporate executives, in es
sence, admit that they can fix prices at will, ir
respective of market conditions, and they propose
253
to “fix” prices higher and higher. This is “the
public be damned” view with a vengeance.
If American business is not going to float new
securities to provide some portion of the funds
needed for new and expanded facilities, how can
the American investor participate in the growth
of the American economy? Of course, he can buy
stocks that now exist, but this is merely a matter
of transferring shares from one investor to an
other and does not really make funds directly
available for industrial expansion of existing cor
porations. What will happen to the money that
investors are putting into mutual funds? These
funds will have to buy existing securities from
other investors. This is hardly the process for
permitting or encouraging private investment in
American expansion. Where is the virtue in sav
ing? How will Americans use their savings to own
shares in our expanding economy? Where is the
“ democracy of corporate ownership” so often
espoused? If ever there was a proposal that
strikes at the very heart of free enterprise and of
democratic ownership of large corporations, this
proposal to raise prices and further increase prof
its to finance expansion is it.
Also, from an economic point of view, the sug
gestion of the steel industry and other industries
is totally unsound. Prices would be raised to a
point where purchasing power would be inade
quate to take the goods and services of American
industry off the market. Where does industry
expect to find a market for its growing output if
it prices more and more customers out of the mar
ket? Further, what will the higher income indi
viduals do with their savings? Mortgage financ
ing cannot provide the entire outlet. Government
deficit financing is hardly desirable in itself and if
deficits can be avoided there will not be additional
government bonds to absorb savings. In effect,
this proposal is a sure way to stop the growth of
the American economy and create depressions and
mass unemployment.
Some of the spokesmen for higher prices and
exclusive financing of expansion of existing cor
porations from internal sources have even sug
gested that security prices are not high enough
to warrant new equity flotations. Such state
ments, made in the face of a doubling of stock
market prices in the past three years, obviously do
not warrant any serious hearing.
It is high time that the insatiable seeking for
ever-higher profits by some of our business lead
ers give way to some concern for consumers and
investors and for the general health of the Amer
ican economy.
254
ECONOMIC REPORT OF THE PRESIDENT
CHARTS A N D TABLES
CHART 1
Total Grass National ProductinCorrent&1 9 5 5 Prices
400 billions ofdollars
*¥annualrata,seasonallyadjusted,6m
os.endingMarchW56
SOURCE: UnitedStatesDepartmentofGommeroe
255
ECONOMIC REPORT OF THE PRESIDENT
TABLE 1
GROSS NATIONAL PRODUCT, TOTAL AND PER CAPITA
IN CURRENT AND 1955 PRICES, 1929-56
Gross national product
($ Billions)
Per capita
Current
prices
1955
prices
Current
prices
1955
prices
1929..................................... .............................
104.4
181.9
857
1,493
1939..................................... .............................
1940..................................... .............................
91.1
100.6
190.4
207 7
696
761
1,453
1,572
1941.....................................
1942.....................................
1943.....................................
1944.....................................
1945.....................................
.............................
.............................
125.8
159.1
192.5
211.4
213.6
240.3
271.1
301.2
324.1
317.5
943
1,179
1,408
1,527
1,526
1,801
2,010
2,203
2,342
2,269
1946.....................................
1947.....................................
1948.....................................
1949.....................................
1950.....................................
.............................
.............................
.............................
.............................
.............................
209.2
232.2
257.3
257.3
285.1
283.1
282.7
295.8
294.9
321.8
1,480
1,611
1,755
1,725
1,880
2,002
1,961
2,017
1,977
2,122
1951.....................................
1952.....................................
1953.....................................
1954.....................................
1955.....................................
.............................
.............................
.............................
.............................
.............................
328.2
345.2
364.5
360.5
387.2
345.4
357.5
374.3
365.4
387.2
2,126
2,198
2,283
2,220
2,343
2,238
2,277
2,345
2,250
2,343
1956‘ ................................... .............................
397.9
397.2
2,386
2,382
Year
.............................
.............................
* Annual rate, seasonally adjusted, six months ending March 1956.
SOURCE.—UnitedStatesDepartmentofCommerce.
256
ECONOMIC REPORT OF THE PRESIDENT
CHART 2
Evidence of America's Economic6 (owth 1 9 2 9 - 5 6
Index1947-49*100
'40 '41 42 '43 '44 45 46 47 48 49 '50 '51 '52 '53 154 '55 56
onnuol rote,seasonally adjusted, 6 mos.endingMarch 1956 VMonthly overage 6 mos. ending March 1956
SOURCE: United Stott* Department of Commerce ; Board of Governors, f ederet Reserve System
257
ECONOMIC REPORT OF THE PRESIDENT
TABLE 2
EVIDENCES OF AMERICA’S ECONOMIC GROWTH, 1929-56
FRB Index (1947-49 = 100)
Total
industrial
production
Year
Durable
manufactures
Index (1947-49 = 100)
Non-durable
manufactures
Electric power
production,
(monthly avg.)
1929...................... ..................
59
60
56
41.0
1939...................... ..................
1940...................... ..................
58
67
49
63
66
69
48.9
54.6
1941......................
1942......................
1943......................
1944......................
1945......................
..................
..................
..................
..................
..................
87
106
127
125
107
91
126
162
159
123
84
93
103
99
96
63.2
70.7
81.1
84.8
82.3
1946......................
1947......................
1948......................
1949......................
1950......................
..................
. ...............
..................
..................
..................
90
100
104
97
112
86
101
104
95
116
95
99
102
99
111
81.8
93.2
102.1
104.6
117.9
1951......................
1952......................
1953......................
1954......................
1955......................
..................
..................
..................
..................
..................
120
124
134
125
139
128
136
153
137
155
114
114
118
116
126
131.4
140.4
155.9
165.2
189.5
143*
160a
129*
204.0b
1956....................... ..................
* Monthly average, six months ending March 1956, seasonally adjusted.
b Monthly average, six months ending March 1956.
SOURCE.—UnitedStatesDepartmentofCommerce; BoardofGovernors, FederalReserveSystem.
258
ECONOMIC REPORT OF THE
PRESIDENT
CHART 3
LaborForce and Employment 1929*1956
°fannual rate, seasonally adjusted,6 mos. ending March 1956
source
i United States Deportments of Labor and Commerce
ECONOMIC REPORT OF THE
PRESIDENT
259
TABLE 3
THE LABOR FORCE, 1929-56
(Thousands of persons)
Non-agri
cultural
Non-agriemployment
cultural
ias % of total
employment employment
Civilian employment
Unemployment:
Year
Total labor
force (includ
ing armed
forces)
Civilian
labor
force
Total
1929
49,440
49,180
47,630
37,180
78.1
1,550
3.2
1939
1940
55,600
56,180
55,230
55,640
45,750
47,520
36,140
37,980
79.0
80.0
9,480
8,120
17.2
14.6
1941
1942
1943
1944...........
1945
57,530
60,380
64,560
66,040
65,290
55,910
56,410
55,540
54,630
53,860
50,350
53,750
54,470
53,960
52,820
41,250
44,500
45,390
45,010
44,240
81.9
82.8
83.3
83.3
83.8
5,560
2,660
1,070
670
1,040
9.9
4.7
1.9
1.2
1.9
1946
1947
1948
1949
1950
60,970
61,758
62,898
63,721
64,749
57,520
60,168
61,442
62,105
63,099
55,250
58,027
59,378
58,710
59,957
46,930
49,761
51,405
50,684
52,450
85.0
85.8
86.6
86.3
87.5
2,270
2,142
2,064
3,395
3,142
3.9
3.6
3.4
5.5
5.0
1951
1952
1953
1954
1955
65,983
66,560
67,362
67,818
68,896
62,884
62,966
63,815
64,468
65,847
61,005
61,293
62,213
61,238
63,193
53,951
54,488
55,651
54,734
56,464
88.4
88.9
89.5
89.4
89.4
1,879
1,673
1,602
3,230
2,654
3.0
2.7
2.5
5.0
4.0
69,307
66,378
63,780
57,531
90.2
2,598
3.9
1956*
Annual rate, seasonally adjusted, six months ending March 1956.
SOURCE.—United States Departments of Labor and Commerce.
Number
% of civilian
labor
force
260
ECONOMIC REPORT OF TH E
PRESIDENT
CHART 4
PerCapitaDisposable ncomeSConsumptionExpenditures
$2000
(in 1955 prices, 1939-56)
'40 41 42 43 44 45 '46 47 48 49 '50 '51 152 ‘53 '54 '55 '56
a/annual rate, seasonally adjusted, 6 mot.ending March 1956
SO u RCE: United States Department of Commerce
ECONOMIC
REPORT OF THE
PRESIDENT
261
TABLE 4
TOTAL AND PER CAPITA DISPOSABLE INCOME AND PERSONAL CONSUMPTION
EXPENDITURES IN 1955 PRICES, 1939-56
Disposable personal
income
Personal consumption
expenditures
Total
($ Billion)
Per capita
($)
Total
($ Billion)
1939........................................ ................................
135.6
1,037
130.3
994
1940........................................
1941........................................
1942........................................
1943........................................
1944........................................
................................
................................
................................
................................
................................
145.5
169.4
192.9
206.7
223.4
1,101
1,270
1,430
1,512
1,613
137.5
149.2
147.3
155.6
167.1
1,040
1,118
1,092
1,138
1,207
1945........................................
1946........................................
1947........................................
1948........................................
1949........................................
................................
................................
................................
................................
................................
223.8
218.7
202.6
208.9
211.7
1,600
1,547
1,406
1,424
1,418
181.1
201.4
197.8
197.8
203.1
1,295
1,424
1,373
1,349
1,361
1950........................................
1951........................................
1952........................................
1953........................................
1954........................................
1955........................................
................................
................................
................................
................................
................................
................................
229.5
233.3
238.8
250.7
254.0
269.3
1,513
1,512
1,522
1,570
1,564
1,629
216.0
215.0
220.3
230.8
235.8
252.4
1,424
1,393
1,403
1,446
1,452
1,527
1956a...................................... ................................
276.0
1,655
257.5
1,543
Year
* Annual rate, seasonally adjusted, six months ending March 1950.
SOURCE.—UnitedStatesDepartmentofCommerce.
Per capita
($)
262
ECONOMIC
C H AR T
REPORT OF THE
PRESIDENT
5
L a b o r 's S h a r e o f N a t i o n a l I n c o m e , P e r s o n a l
J n c o m f t a n d N o n - a g r i c u l t u r a l In c o m e 1 9 4 6 * 5 6
Non-agricultural Income-*...
Personal Income
60
Labor's share of income f i a s g M y
ripens nee the late 1940‘s, bux
recently the mproyement has
halted or been reversed
50
1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956
°/onnuot rate, seasonally adjusted, 6 mos. ending March 1956
SOURCE: United States Department of Commerce
ECONOMIC
REPORT OF THE
PRESIDENT
263
TABLE 5
LABOR’S SHARE OF NATIONAL INCOME, PERSONAL INCOME
AND NONAGRICULTURAL INCOME, 1946-56
Billions of dollars
Year
Total
national
income
Total
personal
income
Total
nonagric.
personal
income1
Labor
income2
National
income
Labor income as percent of:
Personal
income
Nonagric.
income
1946..................
1947..................
1948..................
1949..................
1950..................
..............
..............
..............
..............
..............
179.6
197.2
221.6
216.2
240.0
178.0
190.5
208.7
206.8
227.1
161.1
172.8
188.5
190.8
210.5
113.8
125.2
137.9
137.4
150.3
63.4
63.5
62.2
63.6
62.6
63.9
65.7
66.1
66.4
66.2
70.6
72.5
73.2
72.0
71.4
1951...................
1952..................
1953..................
1954..................
1955..................
..............
..............
..............
..............
..............
277.0
289.5
303.6
299.7
322.6
255.3
271.1
286.2
287.6
303.2
235.7
253.1
270.2
271.9
288.4
175.6
190.5
204.6
202.8
215.5
63.4
65.8
67.4
67.7
66.8
68.8
70.3
71.5
70.5
71.1
74.5
75.3
75.7
74.6
74.7
1956“................ ..............
333.0
312.6
298.2
222.9
66.9
71.3
74.7
1Personal income exclusive of net income of unincorporated farm enterprises, farm wages, agricultural net interest, and net div
idends paid by agricultural corporations.
J Compensation of employees, excluding employer contributions for social insurance.
* Annual rate, seasonally adjusted, six months ending March 1956.
SOURCE.—United States Department of Commerce.
264
ECONOMIC REPORT OF TH E
C H A R T
PRESIDENT
6
Disposable Income,ConsumerExpendituresand
m
ConsumerDebt 1 9 4 6 - 5 6
(index
1947-49- 100)
Consumer Debt rose from93 of Disposable Incomeattse
begi ining of 95?,to 11%at i 1beginni igof 1955.Duringthese
four years,Disposable Income & Consumer Expenditures rose
20%, while Consumer Debt ju nped ovir 70%
1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956
° / annual rata, seasonally adjusted, 6
b/ end of Morch 1956
mos.ending March 1936
SOURCIS United States Department of Commerce; Board of Governors, Federal Reserve System
ECONOMIC
REPORT OF THE
PRESIDENT
265
TABLE 6
DISPOSABLE PERSONAL INCOME, CONSUMER EXPENDITURES
AND CONSUMER DEBT, 1946-56
Indexes (1947-49 = 100)
Billions of dollars
Period
Personal
Disposable consumption
income
expenditures
Consumer
debt1
Personal
Disposable consumption
expenditures
income
Consumer
debt1
1946...................
1947...................
1948...................
1949...................
1950...................
1951...................
1952...................
1953...................
1954...................
1955...................
159.2
169.0
187.6
188.2
206.1
226.1
236.7
250.4
254.8
269.3
146.6
165.0
177.6
180.6
194.0
208.3
218.3
230.6
236.5
252.3
8.4
11.6
14.4
17.1
20.8
21.4
25.8
29.5
30.1
36.2
88
93
103
104
114
125
130
138
140
148
84
95
102
104
111
119
125
132
136
145
58
81
100
119
145
149
180
205
210
252
1954: 1 Q...........
2 Q...........
3 Q...........
4 Q...........
1955:1 Q...........
2 Q...........
3 Q...........
4 Q...........
1956...................
253.1
253.9
254.5
257.8
261.0
267.1
271.7
276.0
276.5“
232.2
235.1
237.9
241.0
245.8
250.5
255.7
257.2
258.0b
27.3
28.7
28.9
30.1
29.9
32.5
34.3
36.2
35.5b
139
140
140
142
144
147
149
152
152*
133
135
136
138
141
144
147
147
148 ‘
190
200
201
210
208
226
239
252
247b
1 End of period.
• Annual rate, seasonally adjusted, six months ending March 1956.
fc End of March 1956.
SOURCE.—UnitedStatesDepartment of Commerce; Boardof Governors, Federal Reserve System.
266
ECONOMIC REPORT OF THE
C H A R T
PRESIDENT
7
Major Wage and Price Movements
Since the end of World War II
(Index 1947-49- looj
150
Manufaduring 1ourlyeainings,/
140
130
/'
/
( Tkf.i\sofmMlitiM1
Jan.l»
0
120
110
90
tf'
/ 't/
/j
/j!
/]
//
70
60
SOURCE sU.S.Department of Labor
esalepriiea^nm-faim&food-w
/
V Consulter Prices
/
_
ry
/ ji /
/ / 4t
-Af' r ~ ~ V
V
/
100
80
/•**
| PostwarBoom
dan.1946- Jan.1948
Whoesakpr ces,8llciimmditiis
Kom
om
- Jur
r el950
-Julimi
f
5yean ofpricestablity
July 1951March19!6
fk
ECONOMIC
REPORT OF THE
PRESIDENT
267
TABLE 7
PRICES AND MANUFACTURING HOURLY EARNINGS, END OF EACH QUARTER, 1946-56
(1947-49 = 100)
Wholesale price index
Period
Consumer
price
index
All com
modities
Other than
food & farm
products
Index of straighttime hourly earnings
in manufacturing
1946: Mar.....................
June....................
Sept.....................
Dec......................
1947: Mar.....................
June....................
Sept.....................
Dec.....................
1948: Mar.....................
June....................
Sept.....................
Dec......................
1949: Mar.....................
June....................
Sept.....................
Dec......................
1950: Mar.....................
June....................
Sept....................
Dec.....................
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
.......
...............
...............
...............
...............
...............
...............
...............
...............
78.0
79.8
87.4
91.9
93.7
94.2
98.3
100.2
100.2
103.1
104.8
103.0
101.9
102.0
102.1
101.0
100.7
101.8
104.4
106.9
70.8
73.3
80.6
91.6
95.4
94.3
98.4
102.6
102.5
104.6
106.1
104.0
100.9
98.2
98.3
97.7
98.5
100.2
107.1
112.1
73.1
75.5
80.2
89.2
93.6
93.9
96.9
100.4
101.6
102.5
105.1
105.4
103.3
100.1
100.0
101.3
100.7
102.2
108.2
114.1
77.6
81.8
85.1
86.6
89.8
93.5
95.3
96.7
98.5
100.9
104.7
105.4
106.2
106.6
106.3
106.2
107.5
109.0
110.6
114.8
1961: Mar............. : . . .
Juno....................
Sept.....................
Dec......................
1952: Mar.....................
June....................
Sept.....................
Dec......................
1953: Mar.....................
June....................
Sept.....................
Dec......................
1954: Mar.....................
June....................
Sept.....................
Dec......................
1955: Mar.....................
June....................
Sept.....................
Dec......................
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
...............
110.3
110.8
111.6
113.1
112.4
113.4
114.1
114.1
113.6
114.5
115.2
114.9
114.8
115.1
114.7
114.3
114.3
114.4
114.9
114.7
116.5
115.1
113.4
113.5
112.3
111.2
111.8
109.6
110.0
109.5
111.0
110.1
110.5
110.0
110.0
109.5
110.0
110.3
111.7
111.3
117.3
116.2
114.8
114.6
113.8
112.6
113.2
112.9
113.4
113.9
114.7
114.6
114.2
114.2
114.4
114.9
115.6
115.6
118.5
119.8
116.5
118.8
120.3
121.9
123.4
124.2
126.6
128.1
130.4
132.0
134.3
135.1
135.9
136.6
136.6
137.4
139.0
139.8
142.1
143.6
1956: Mar..................... ...............
114.7
112.8
121.0
146.0
SOURCE.—United States Department of Labor.
268
ECONOMIC
REPORT
OF T H E
PRESIDENT
CHART 8
Productivity^ Real HourlyEarnings in
Manufacturing 1947-1955
140 lndex(i947»ioo)
y?
130
X
120
0ut| lutpermi n-hour/
110
— Real griss hourly earnings
100
/ w
90
/
80
/
/
70
1939
/
/
/
erofw
anuficturing
Purchasiigpow
agesinm
ithrisirgproductivity
hasnotkeptpacew
IS47
IS49
IS50
1951
Vpreliminary
source : United States Department of Labor
IS52
1953
1954
195!
ECONOMIC
REPORT OF THE
PRESIDENT
269
TABLE 8
PHYSICAL O U T P U T P E R M A N - H O U R A N D R E A L GROSS H O U R L Y EARNINGS
IN MANUFACTURING, 1939-55
(1947=100)
Output per
man-hour
Year
Real gross
hourly
earnings
96.0
82.3
1947...........
100.0
100.0
194 9
108.6
106.3
195 0
117.7
110.0
1939..............
195 1
...... 117.5
110.6
195 2
..... 119.1
114.0
195 3
..... 122.7
119.4
195 4
..... 127.5P
121.4
195 5
.....135.0P
126.8
i’ Preliminary.
SOURCE.— United States Department of Labor.
ECONOMIC REPORT OF THE
270
PRESIDENT
CHART 9
Indexes of ProductionandTotal Man-hours
WorkedinManufacturing Industries 1946-55
150 Index (1947-49*100)
140
130
120
Miinufactu ing prodiction y
/
110
/
100
//
/
\>
V
90
/
/
__ /
/
/ Aggrei late man hours
//
Rising output with ierclemplD|fment
Man-lii tursreqi ired per unit of
output have dr opped substanf ially
80
SOURCE * Board of Governors, Federal Reserve System; U.S.Department of Labor
ECONOMIC REPORT OF THE
PRESIDENT
271
TABLE 9
INDEXES OF PRODUCTION AND TOTAL MAN-HOURS WORKED
IN MANUFACTURING INDUSTRIES, 1946-55
(1947-49=100)
Manufacturing
production
Year
1946
Aggregate
man-hours
90
99
100
105
103
103
1949
97
92
195 0
113
101
194 7
194 8
.
195 1
........... 121
108
195 2
........... 125
108
195 3
........... 136
114
195 4
........... 127
101
195 5
........... 141
108
SOURCE.—Board of Governors,Federal Reserve System; United State* Department of Labor.
272
ECONOMIC
C H A R T
REPORT OF THE
PRESIDENT
10
Average GrossHourlyandWeeklyEarnings in
ManufacturinginCurrent and1947-49 dollars
foOOdollars per hour
1.50
r
________________________
—
-194;'-49foliars
&
£
J
.50
C
O
.. £2
1.00
-Cuirent dolla
Re )rniigsIsem
ost
wlen|iricesari!St<ble
.00
8O.00 dollarsperweiik
—
r - 194;'-491ollar5
6O.00
1
4O.00
'■*£ -Cu rrent dollsrs
20.00
Wo rkers'w artiinebjyin )P0 wer
ha: beenre achedan lexi:eedsd
.00
19:39'4 4 4 4 % 4 4 4 4 4!) '5 '5 ‘52 ‘53 '54 '55 '56
SOURCE:
United States Department of Labor
ECONOMIC REPORT OF THE
PRESIDENT
273
TABLE 10
AVERAGE GROSS HOURLY AND WEEKLY EARNINGS IN MANUFACTURING,
IN CURRENT AND 1947-49 DOLLARS, 1939-55
Current dollars
1947-49 dollars
Avg. gross
hourly
earnings
Avg. gross
weekly
earnings
Avg. gross
hourly
earnings
Avg. gross
weekly
earnings
1939..................................... .................................
1940..................................... .................................
0.63
0.66
23.86
25.20
1.06
1.10
40.17
42.07
1941......................... ...........
1942.....................................
1943.....................................
1944.....................................
1945.....................................
.................................
.................................
.................................
.................................
.................................
0.73
0.85
0.96
1.02
1.02
29.58
36.65
43.14
46.08
44.39
1.16
1.22
1.30
1.36
1.33
47.03
52.58
58.30
61.28
57.72
1946.....................................
1947.....................................
1948.....................................
1949.....................................
1950.....................................
.................................
.................................
.................................
.................................
.................................
1.09
1.24
1.35
1.40
1.47
43.82
49.97
54.14
54.92
59.33
1.31
1.30
1.31
1.38
1.43
52.54
52.32
52.67
53.95
57.71
1951.....................................
1952.....................................
1953.....................................
1954.....................................
1955.....................................
.................................
.................................
.................................
.................................
....... ......................
1.59
1.67
1.77
1.81
1.88
64.71
67.97
71.69
71.86
76.52
1.43
1.47
1.55
1.58
1.64
58.30
59.89
62.67
62.60
66.83
Year
SOURCE.—United States Department of Labor.
274
ECONOMIC
CHART
REPORT OF THE
PRESIDENT
11
Personal Taxes and Corporate Taxes 1939-56
40 billions of dollars
/ *
\
30
/f
Pe sons IT©ces-
/ /
/ \
/
t
20
10
| jf
/
/
0
/
/
b
A
\ L
/
\
:
i
j
\ 4 \ 48 49 ‘5 ‘51 ‘52 ’53 '54 '55 '56
° / annual rate, seasonally adjusted, 6 mos. ending March 1956
SOUR.C E: U.S. Department of Commerce
i
A ■Cor iorat i Taxi
\ //
>
/
i
As betv reen indii idua ls& :orp iratibos,
th irelijtive burijen cfta> atio iha; s
beenbi me ncn asin f t i fm ividipals
/
1939 '4 '4 42 43
N
/
/
1
V\
ECONOMIC REPORT OF TH E
TA B LE
PRESIDENT
275
11
PERSO N AL T A X E S AN D CORPORATE TA X E S, 1939-56
Billions of dollars
Personal
taxes
Year
1939
1940
Corporate
taxes
2 .4
2 .6
1.4
2 .8
194 1
1942
194 3
194 4
1945
3 .3
6 .0
17.8
18.9
20.9
7 .6
11.4
14.1
12.9
10.7
194 6
1947
194 8
194 9
1950
18.8
21.5
21.1
18.7
20.9
9 .1
11.3
12.5
10.4
17.8
29.3
34.4
3 5 .8
32.8
33.9
22.5
19.8
21.3
17.1
22.0
36.0
23.1
195 1
195 2
195 3
1954
1955
........
......................................
1956*......................................................
* Annual rate, seasonally adjusted, six months ending March 1956.
SOURCE.—United States Department of Commerce.
276
ECONOMIC
C H A R T
REPORT OF THE
PRESIDENT
12
Profits for all Corporations 1939-56
° / annual rate, seasonally adjusted, 6 mos. ending M arch 1956
source
: United S ta te s D e p a rtm e n t o f C o m m erce
ECONOMIC
REPORT OF THE
PRESIDENT
277
TABLE 12
PROFITS FOR ALL CORPORATIONS, 1939-56
(Billions of dollars)
Profits
Profits
Profits
before taxes,
before
after
after inventory
Year
taxes
taxes
valuation
____________________________________________________________________________________________ adjustment
193 9
1940
6.4
9.3
5.0
6.5
5.7
9.1
1
2
3
4
5
17.0
20.9
24.6
23.3
19.0
9.4
9.5
10.5
10.4
8.3
14.5
19.7
23.8
23.0
18.4
1946
194 7
194 8
194 9
195 0
22.6
29.5
32.8
26.2
40.0
13.4
18.2
20.3
15.8
22.1
17.3
23.6
30.6
28.1
35.1
1 9 51:........................................................................................................
195 2
195 3
1 9 5 4 . . . . .................................................................................................
1 955:................................ .......................................................................
41.2
35.9
38.3
34.0
43.8
18.7
16.1
17.0
17.0
21.8
39.9
36.9
37.2
33.8
41.8
1956“ ........................................................................................................
46.2
23.0
42.8
194
194
194
194
194
* Annual rate, seasonally adjusted, six months ending March 1956.
SOURCE.—United States Department of Commerce.
278
ECONOMIC
REPORT OF THE
PRESIDENT
CHART 13
Corporate Profits8 CorporatePayrolls 1939-56
* Estimated
°fannualrate,seasonally adjusted, 6 mos. ending March 1956
SOURC E»United States Department of Commerce
ECONOMIC
REPORT OF THE PRESIDENT
279
T A B L E 13
CORPORATE PROFITS AND CORPORATE PAYROLLS, 1939-56
Profits
Before
After
taxes
taxes
($ Billion)
Year
Compensation
of
employees
Cents of corporate profit
per dollar of
employee compensation
($ Billion)
Before taxes After taxes
1939........................ ................
1940........................ ................
6.4
9.3
5.0
6.5
29.3
32.3
21.8
28.8
17.1
20.1
1941........................
1942........................
1943........................
1944........................
1945........................
................
................
................
................
................
17.0
20.9
24.6
23.3
19.0
9.4
9.5
10.5
10.4
8.3
41.1
52.3
63.6
66.5
63.5
41.4
40.0
38.7
35.0
29.9
22.9
18.2
16.5
15.6
13.1
1946........................
1947........................
1948........................
1949........................
1950........................
................
................
................
................
................
22.6
29.5
32.8
26.2
40.0
13.4
18.2
20.3
15.8
22.1
69.0
b l.2
90.0
87.4
96.9
32.8
36.3
36.4
30.0
41.3
19.4
22.4
22.6
18.1
22.8
1951........................
1952........................
1953........................
1954........................
1955........................
................
................
................
................
................
41.2
35.9
38.3
34.0
43.8
18.7
16.1
17.0
17.0
21.8
111.9
120.5
131.0
128.8
137.0*
36.8
29.8
29.2
26.4
32.0
16.7
13.4
13.0
13.2
15.9
1956*...................... ................
46.2
23.0
141.7*
32.6*
16.2*
* Estimated.
■ Annual rate, seasonally adjusted, six months ending March 1956.
SOURCE.—UnitedStatesDepartmentofCommerce.
280
ECONOMIC
REPORT
OF T H E
PRESIDENT
C H A R T 14
CorporateProfits8 RatioofProfits toSales,
All Manufacturing Industries 1939-56
billions of dollars
* Estimated
? annual rate. 6 mos. ending March 1956
SOURCE-' United States Department of Commerce
percent
ECONOMIC
REPORT OF THE
PRESIDENT
281
TABLE 14
CORPORATE PROFITS AND RATIO OF PROFITS TO SALES,
ALL CORPORATE MANUFACTURING INDUSTRIES, 1939-56
Year
1939........................................ ....................................
1940........................................ ....................................
Ratio to sales (%)
Profits
before
taxes
($ Billion)
Profits
after
taxes
($ Billion)
Before
taxes
After
taxes
3.6
5.5
2.9
3.8
6.3
8.4
5.1
5.8
1941........................................
1942............................ ...........
1943........................................
1944........................................
1945........................................
....................................
....................................
....................................
....................................
....................................
10.8
12.4
14.2
13.2
9.9
5.6
5.1
5.6
5.5
4.0
11.7
10.7
10.0
8.7
7.1
6.1
4.4
3.9
3.6
2.9
1946.......... ..........................
1947............................ ...........
1948........................................
1949.......................................
1950........................................
....................................
....................................
....................................
....................................
....................................
11.4
16.5
18.1
14.1
23.3
6.7
10.1
11.0
8.4
12.4
8.3
9.3
9.2
7.6
10.7
4.9
5.7
5.6
4.6
5.7
1951........................................
1952........................................
19&3........................................
1954........................................
1955........................................
....................................
....................................
....................................
....................................
....................................
24.5
20.0
21.4
17.8
24.4*
10.3
8.3
8.8
8.8
11.9*
9.8
7.8
7.8
6.9
8.5*
4.1
3.2
3.2
3.4
4.1*
1956*...................................... ....................................
25.7*
12.6*
8.6*
4.3*
* Estimated.
* Annual rate, seasonally adjusted, six months ending March 1956.
SOURCE.—UnitedStalesDepartmentofCommerce.
282
ECONOMIC
REPORT
OF T H E
PRESIDENT
C H A R T 15
Annual Rates of Profit onStockholders' Equity,
All ManufacturingCorporations. 1947-56
30%
° / annual rate,6 mos. ending M arch 1956
SOURCE* Federal Trade C om m ission-S ecu rities & Exchange Commission
ECONOMIC REPORT OF THE
PRESIDENT
283
TABLE IS
ANNUAL RATES OP PROFITS ON STOCKHOLDERS’ EQUITY,
ALL MANUFACTURING CORPORATIONS, 1947-56
Before
taxes
(%)
Year
After
taxes
(%)
1947
1948
194 9
1950
...... 25.0
...... 25.1
...... 18.1
...... 27.2
15.1
15.6
11.3
14.9
195 1
1952
1953
195 4
195 5
...... 28.0
...... 22.1
...... 22.6
...... 18.0
...... 23.8
12.1
10.3
10.5
9.9
12.6
1956*................................................ ...... 25.0
13.5
Annual rate, six months ending March 1956.
SOURCE.— Federal Trade Commission— Securities & Exchange Commission.
284
ECONOMIC
REPORT
OF T H E
PRESIDENT
C H A R T 16
Trends of Prices, Profits 8 HourlyEarnings
InManufacturingIndustries 1939-56
175 Index(i947-49’ I00)
44 45 '46 47 48 49 '50 '51 '52 '53 ‘54 155 '56
# Estimated
^annual rate,seasonally adjusted, 6 mos. ending March 1956
source : United States
*>/ average,6 mos.ending March 1956
Departments of Labor and Commerce
ECONOMIC REPORT OF THE
PRESIDENT
285
TABLE 16
TRENDS OF PRICES, PROFITS AND HOURLY EARNINGS
IN MANUFACTURING INDUSTRIES, 1939-56
(1947-49=100)
Wholesale
prices,
other than
farm products
and food
Year
Index of manufacturing
corporate income
Before
taxes
After
taxes
Index of average
gross hourly
earnings,
manufacturing
industries
Index of
manufacturing
wages and
salaries
1939............. ............
1940............ ............
58.1
59.4
22
34
30
39
47.6
49.7
30.7
35.2
............
............
............
............
............
63.7
68.3
69.3
70.4
71.3
66
76
87
81
60
52
52
57
56
41
54.9
64.2
72.3
76.7
77.0
49.0
69.8
92.3
96.9
86.3
1946.............. ............
1947.............. ............
1948............ ............
1949.............. ............
1950.............. ............
78.3
95.3
103.4
101.3
105.0
70
101
110
86
142
68
103
112
86
126
81.7
93.1
101.6
105.4
110.2
82.4
96.0
104.9
99.1
111.6
1951.............. ............
1952.............. ............
1953.............. ............
1954.............. ............
1955.............. ............
115.9
113.2
114.0
114.5
117.0
149
122
130
109
149*
105
84
90
90
121*
119.6
125.7
133.2
136.2
141.5
131.5
142.1
157.7
149.2
162.9
1 9 5 6 ..:....................
120.0“
157*
128*
145.3
171.5*
1941.............
1942............
1943.............
1944............
1945............
» Average, six months ending March 1956.
* Estimated.
SOURCE.—United States Department of Labor; United States Department of Commerce.
286
ECONOMIC
CHART
REPORT OF THE
PRESIDENT
17
Prices,Wages8 Profits,Steel Industryandall
ManufacturingCorporations 1947*56 (m m )
PRIMARY IRON 4STEEL INDUSTRY
ALL MANUFACTURING CORPORATIONS
220
200
180
160
Gross hou ly r a m in a i
^
/
S
140
a
$ profit i before tm
7
120
......
—
^ W t o T e i atepiices"i tderthsnfi rm ifo o d p
100
— b
Profits i s W 8 8 l e s -
80
I.M
u«
ip.
ip> i
* production workers in blast furnace*, steel works, and rolling mill*
monthly average, 6 mos. ending March 1956
annual rat#, lost quarter 1955
SOURCCi United States Department of Labor; Federal Ttode Commission-Securities Exchange Commission
ECONOMIC
REPORT OF THE
PRESIDENT
287
TABLE 17
PRICES, WAGES AND PROFITS, STEEL INDUSTRY AND ALL MANUFACTURING
CORPORATIONS, 1947-56
(1947-49=100)
Primary iron and steel industry
Year
1947.............
1948.............
1949.............
1950.............
All manufacturing corporations
Finished
Profits before taxes
Gross
hourly
wholesale
earnings 1
prices
$
As % of
sales
Wholesale
Gross
prices other
hourly than farms and
earnings food products
Profits before taxes
$
As % of
sales
..........
..........
..........
..........
92.5
101.6
105.8
108.7
89.1
101.3
109.7
115.2
89.1
118.0
92.9
165.5
96.5
108.0
95.6
113.3
93.0
101.6
105.4
110.2
95.3
103.4
101.3
105.0
100.6
111.7
87.6
140.9
105.7
105.7
88.6
120.0
1951............. ..........
1952.............
1953.............
1954............. ..........
1955............. ..........
121.5
128.0
138.9
141.5
152.4
124.5
127.2
136.9
142.8
149.5
210.3
113.0
173.0
114.3
207.7
140.7
82.3
109.7
92.9
128.3
119.6
125.7
133.2
136.2
141.5
115.9
113.2
114.0
114.5
117.0
157.3
131.4
139.9
120.0
163.8
116.2
80.0
87.6
80.0
97.1
1956............. ..........
155.0“
155.6*
234.9“
134. St-
145.3*
120.0*
173.5b
I Production workers in blast furnaces, steel works and rolling mills.
* M o n th ly average, six months ending March 1956.
II Annual rate, last quarter 1955.
SOURCE.—United StalesDepartment of Labor; Federal Trade Commission-Securities Exchange Commission.
98. l b
ECONOMIC
288
C H A R T
REPORT OF THE
PRESIDENT
18
Wholesale PricestorFinished Steel Products
andSteel UsingIndustnes 1945-56
160 Index (I947-49»[Q0)
/.a
150
Finishet steel pr jd u cf8 r
/
/
/
-a
,y‘‘
y‘
140
y‘
/
Constn ictionma thim ryi equipmer t --------13 0
y
J ,
A
_____
120
fa .
110
/
rcllrvlCS
lYIUIUi uohiidae
^0
/
-------—
y
Hea ting equi wnent®
—
Agr cull ural
m :hinery< lequipm ent
100
Electric ilm achi
90
V
80
Jf/
f
V'
S t e e l p r ic e : ; h a v e r is e n f a r m o re
70
th a n
J O
Ian
li>
ll A
IfiA
© comparable data for 1 9 4 5 -4 6 not available
° / monthly average, 6 mos. ending March 1956
SOURCE j United States Department of Labor
t r ic e s o f p r o d u c t s u s i n g p e H
1
,
ECONOMIC
REPORT OF THE
PRESIDENT
289
TABLE 18
WHOLESALE PRICES FOR FINISHED STEEL PRODUCTS AND
STEEL USING INDUSTRIES, 1945-56
(1947-49=100)
Year
Finished
steel
products
Agri.
mach. &
equip.
Construc
tion mach.
& equip.
Motor
vehicles
Electrical
machinery
Heating
equip.
1945
70.2
72.9
72.9
68.8
68.9
n.a.
1946
1947
1948
1949
1950
76.4
89.1
101.3
109.7
115.2
78.1
90.3
101.4
108.3
110.7
79.2
90.0
101.8
108.3
111.5
79.7
91.3
100.8
107.9
107.2
78.9
96.1
100.7
103.2
106.4
n.a.
95.3
101.2
103.6
105.1
1951
1952
1953
1954
1955
124.5
127.2
136.9
142.8
149.5
120.1
121.6
122.3
122.2
123.2
123.6
125.4
129.3
131.6
137.1
112.9
119.6
118.9
119.3
122.9
121.9
120.3
123.7
126.2
128.2
114.6
113.8
114.8
114.3
115.0
1956“
155.6
126.5
143.6
126.8
132.2
117.2
n.a. Not available.
• Monthly average, six months ending March 1956.
SOURCE.—United States Department of Labor.
ECONOMIC REPORT OF THE
290
CHART
PRESIDENT
19
PercentageIncreaseinHourlyEarnings 1947-55
,0
TOTAL MANUFACTURING
OURABLE 6000 INDUSTRIES
M a c h in e ry (exc. e le c tric a l)
F a b rica te d m e ta l p ro d u cts
Tran sportation equ ipm en t
Electrical m ach in e ry
Furniture ^fixtures
NONDURABLE GOOD INDUSTRIES
P rin tin g ^ publishin g
Rubber products
Tobacco m an ufactu res
Textile-mill products
NON-MANUFACTURING INDUSTRIES
B itu m in ou s coal m in in g
Hotels
W h o le s a le tra d e
R e ta il tra d e
Cleaning & dyeing
Lau n d rie s
SOURCE: U.S. Department of Labor
10
20
30
SO
60
70
ECONOMIC REPORT OF THE
PRESIDENT
291
INCREASES IN AVERAGE GROSS HOURLY EARNINGS IN MAJOR MANUFACTURING
AND NON-MANUFACTURING GROUPS, SELECTED YEARS, 1947-55
Average hourly earnings
Industry
Total manufacturing.......................
1947
1951
1955
Cents increase between:
1947-55 1947-51 1951-55
Percent increase between:
1947-55 1947-51 1951-55
$1.24
$1.59
$1.88
$.64
$.35
$.29
51.6
28.2
18.2
Durable-goods industries:
Lumber & wood products. . .
Furniture & fixtures................
Stone, clay & glass products.. .
Primary metal industries........
Fabricated metal products
Machinery (excl. electrical). .. .
Electrical machinery...............
Transportation equipment
1.13
1.10
1.19
1.39
1.28
1.35
1.26
1.45
1.47
1.39
1.54
1.81
1.65
1.76
1.58
1.85
1.69
1.61
1.85
2.24
1.98
2.09
1.88
2.23
.56
.51
.66
.85
.70
.74
.62
.78
.34
.29
.35
.42
.37
.41
.32
.40
.22
.22
.31
.43
.33
.33
.30
.38
49.6
46.4
55.5
61.2
54.7
54.8
49.2
53.8
30.1
26.4
29.4
30.2
28.9
30.4
25.4
27.6
15.0
15.8
20.1
23.8
20.0
18.8
19.0
20.5
Nondurable-goods industries:
Food & kindred products.......
Tobacco manufactures............
Textile-mill products...............
Paper & allied products..........
Printing & publishing.............
Chemicals & allied products. . .
Petroleum & coal products. .. .
Rubber products......................
Leather & leather products... .
1.12
.90
1.04
1.16
1.54
1.23
1.50
1.39
1.05
1.43
1.13
1.33
1.52
1.99
1.63
1.98
1.69
1.27
1.75
1.34
1.39
1.83
2.35
1.99
2.36
2.09
1.41
.63
.44
.35
.67
.81
.76
.86
.70
.36
.31
.23
.29
.36
.45
.40
.48
. .30
.22
.32
.21
.06
.31
.36
.36
.38
.40
.14
56.3
48.9
33.7
57.8
52.6
61.8
57.3
50.4
34.3
27.7
25.6
27.9
31.0
29.2
32.5
32.0
21.6
21.0
22.4
18.6
4.5
20.4
18.1
22.1
19.2
23.7
11.0
Non-manufacturing industries:
Bituminous coal mining..........
Wholesale trade.......................
Retail trade..............................
Laundries..................................
Hotels.......................................
Cleaning & dyeing...................
1.64
1.27
1.01
.77
.65
.91
2.21
1.58
1.26
.92
.82
1.06
2.56
1.91
1.50
1.01
.99
1.20
.92
.64
.49
.24
.34
.29
.57
.31
.25
.15
.17
.15
.35
.33
.24
.09
.17
.14
56.1
50.4
48.5
31.2
52.3
31.9
34.8
24.4
24.8
19.5
26.2
16.5
15.8
20.9
19.0
9.8
20.7
13.2
SOURCE.—UnitedStatesDepartmentofLabor.
292
ECONOMIC REPORT OF TH E
PRESIDENT
Mr. B r u b a k e r . We do not hope that the committee members will
look at them carefully. We think they have a tremendous amount of
detailed information in them on this question of inflation and steel
and the causes for it.
Now we would like to direct your attention very quickly to the con
clusions that come from our study. We think if you will examine
the study carefully you will find that the facts set forth in that study
show, first, that wage increases in steel have not caused even a single
steel-price increase since the formation of the steelworkers union 20
years ago. That we say flatly.
Two, wage increases over the years have been moderate and have
been well within the capacity of the steel industry to grant and to
absorb out of productivity gains and excessive profit margins.
Three, wage increases have been more than earned by steelworkers
throughout the union’s history, by the constantly and sharply rising
productivity, that is, output per man-hour of the workers. The real
productivity increases in steel have significantly exceeded the real
wages of steelworkers.
Four, the inflation in steel, that is, the rise in steel prices, has arisen
because the industry has been determined to widen its already exces
sive profit margins. It has not only refused to absorb increased wage
costs out of increased productivity, as it could well have done, but it
has also raised steel prices more than $3 for every $1 of increased
wages and fringes granted to its employees. It literally makes a net
profit—and a very big one—on every wage increase which it grants to
the union and to its employees.
Five, if there is any significant relationship in the steel industry
between wages, prices, and profits, it is one of coincidence in timing
only. The union’s wage increases are made the excuse and the occa
sion for wholly unnecessary and excessive price increases which result
in ever-increasing profits. The facts simply do not support the
wholly fallacious hypothesis that steel wage increases cause steel price
increases.
Let us look briefly at some of the facts shown in our study. These
are elaborated much more particularly in this wThite book which you
have.
First, look at profits before taxes. For 1956, the industry and for
this purpose we actually used the financial reports of the 25 companies
which make up nearly 92 percent of the industry’s ingot capacity,
are estimated at approximately $2 billion. You will notice the com
parisons below with other prior years. In 1956, profits before taxes
are almost on a par with 1955, which was the highest year on record,
prior to this last year. They are nearly 200 percent above 1947.
They are more than 1,100 percent above 1939. During the first half
of 1956, prior to the strike in steel, profits before taxes were running
at an annual rate of more than 15 percent above the prior alltime-peak
year. There is every reason to believe they w^ould have ended up the
year that high except for the strike which was forced upon us.
We also have noted for you that just prior to the strike last year,
the steel industry was making a profit before taxes of $1.52 on every
man-hour worked by all employees in the industry. This is nearly
60 percent of the amount which the industry was paying per hour of
labor. This should be some measure of the leeway which they had
from which to grant wage increases.
ECONOMIC REPORT OF THE
PRESIDENT
293
Now turn to net profits. They present much the same picture as
profits before taxes. Profits for 1956 are estimated at a billion dollars—
net profits after all taxes. That is on a par with 1955, which was an
alltime peak year. Again, profits after taxes were running at a rate
13 percent during the first half of 1956 above the prior peak year,
and they would well have ended up that way but for the strike.
Now let us turn to profit margins briefly. Profit margins in the
steel industry have widened sharply in recent years. For all manu
facturing industries they have gone in the other direction. They have
narrowed. This is evident from an examination of the industry’s
favorite comparison, profit per dollar of sales. In steel, net profits
have risen from 6.2 cents per dollar of sales in 1947 to 7.9 cents in
1955, and early 1956. In all manufacturing they have gone the
opposite way, from 5.7 cents in 1947 down to 4 cents in 1955, and an
estimated 4.3 in early 1956.
The sounder measure, the rate of return on net worth, or owner’s
equity, shows much the same picture. Net profits in steel rose from
10.5 percent in 1947 up to 16.1 percent in the first half of 1956. In all
manufacturing they went in the opposite direction, down from 15.1
percent in 1947 to 12 percent in the first part of 1956.
Clearly the rates of return on net worth in both steel and all manu
facturing are excessive by almost any standard. They are far exceed
ing the 6-percent rate of return which was once generally accepted as
a fair and reasonable rate of return. They would readily permit
significant price reductions and still leave more than adequate profit
margins. There is little excuse for industry generally, or for the
steel industry, to insist on earning 10 to 15 percent as it has done in
most peacetime years since 1939—rates of return which would permit
the industry to double its investment out of earnings every 7 to 10
years.
On dividends, the industry’s owners have done well. The com
panies were paying dividends to the stockholders at a rate in excess
of $400 million in early 1956. Dividends, however, did not go down
when the strike came. They not only paid dividends as usual; they
raised the rate of dividends. So that we have a picture here of
dividends having increased since 1947 in steel by 229 percent, at the
same time that the dividends of all corporations were going up only
86 percent.
On productivity, it is imperative that you have these figures before
you. There has been a constantly rising productivity rate in the
steel industry in recent years. We have a new study by the Bureau
of Labor Statistics, which both the industry and wg have cooperated
in developing, which show's the figures that we have given you in our
statement, a 4.5-percent rise in early 1956, an 1.1.4-percent rise in 1955,
and a total rise of 68.8 percent since 1939.
In contrast with this—and this is a most important figure—the
“real” straight time average earnings of steelworkers, also BLS
figures, show an increase from 1939 as contrasted with the first 10
months of 1956, of 48.3 percent. So that there has been a “ real” lag
in straight-time earnings as contrasted with productivity. This is a
very simple figure, and it is one that nobody I think can get around,
namely, wages in steel simply have not fully kept up with produc
tivity, if you are talking about “ real” wages and “real” output.
294
ECONOMIC REPORT OF THE
PRESIDENT
These are official figures. This ought to settle this controversy of
whether wages are going up faster than productivity in steel. We
have given you some other demonstrations of this.
I want to urge you greatly to take a look at this white book when
you get a chance, at table 16, which lists the price increases in the
steel industry since the war. We have detailed them for you year by
year, as contrasted with the wage increases that came along at the
same time. I f anyone can look at that and reach any other conclusion
than that which we have reached, I would be very, very much
surprised.
Chairman P a t m a n . Y o u may insert your entire statement. Thank
you very much.
(The statement follows:)
S t a t e m e n t o n W a g e s , P r ic e s , P r o f it s , a n d I n f l a t io n o n B e h a l f of t h e
U n it e d S t e e l w o r k e r s of A m e r i c a b y O t i s B r u b a k e r , D ir e c t o r of R e s e a r c h
The steelworkers union is delighted to accept the invitation of the Joint
Economic Committee to participate in this panel discussion on the question of the
so-called wage-price inflation spiral mentioned prominently in two recent Presi
dential statements. This panel discussion can be, and w e hope it will be, the
beginning of a serious investigation by the Joint Economic Committee of the
causes of inflation and what can be done about them.
N o one wants inflation— or so nearly everyone says. Those few w h o favor it,
or a little of it, fail to appreciate its insidious character and its thoroughly
harmful results. Certainly our union, the United Steelworkers of America, does
not now, and never has, favored inflation. The members of our union and the
retired former members suffer as much as do other members of the public when
pay checks and pension checks buy less and less because inflation, i. e., higher
prices of food, clothing, shelter, and the other necessities of life, is constantly
nibbling away at the “real” buying power of their incomes.
Unfortunately, however, there is much misinformation about inflation and
its causes. There is a deliberate, widespread, and systematic attempt in our
country by such groups as the National Association of Manufacturers, the
chambers of commerce, many newspapers, and other large employers to lay the
blame for inflation on the efforts of wage earners and their unions to secure wage
and fringe improvements in order to raise the standard of living of the American
worker. In fact, so one sided and so prevalent is this propaganda, that some
persons wh o should know better are beginning to have doubts and are wondering
if perchance wage increases do contribute to inflation.
The cause of elemental economic education never has needed so badly an assist
in getting the facts out on the table for all to see. Congress can do much in this
regard if it will search out the facts concerning wages, prices and profits, their
roles in our economic system, and assess the blame on those w h o cause and those
w h o profit from inflation. In fact, if the spotlight of congressional publicity is
kept focused on those wh o would like to raise prices and constantly increase profit
margins, it m a y have a salutary effect in curbing price increases.
W e were asked to participate in this panel for the sole purpose of telling the
committee what w e know concerning wage and price relationships in steel.
There are, of course, many facts concerning inflation in the steel industry about
which the Steelworkers Union has firsthand knowledge. In order to carry out our
collective bargaining responsibilities w e must constantly study the industry and
its economics. W e must and w e do know much about its profit margins, about
ho w much it can afford to raise the wages of its employees without raising its
prices, about the limits there are on the latitudes of our collective bargaining.
This is a major function of the union's research department. W e made careful
studies in 1956 prior to and during our bargaining sessions. These facts were
important in framing our demands on the industry and our settlement with it.
Some of this material w e prepared for publication with the aid and assistance
of Robert Nathan and some of his associates. It was released in late July 1956.
Fortunately, the steel strike was settled shortly thereafter and unfortunately, as a
result of the settlement, the public lost interest in steel and the facts relating
to wages and prices in the industry. In our opinion, the facts of this study
deserved more careful and widespread public scrutiny than they received. W e
ECONOMIC REPORT OF TH E PRESIDENT
295
have made that study available to the Joint Economic Committee. While we
could not redo that study in the few days following notice of this panel session,
we have attempted to bring the more important of the early 1956 figures in the
study as much up to date as possible in this brief presentation.
TH E U N IO N 'S STUDY OF TH E STEEL INDUSTRY AND INFLATIO N
A. Our conclusions
Several important conclusions arise from our study of the facts:
1. Wage increases in steel have not caused even a single steel price increase since
the formation of the Steelworkers Union 20 years ago.
2. Wage increases over the years have been moderate and have been well within
the capacity of the industry to grant and absorb out of productivity gains and ex
cessive profit margins.
3. Wage increases have been more than earned by steelworkers throughout the
union’s history by the constantly and sharply rising productivity, i. e. output per
man-hour of the workers. The real productivity increases have significantly ex
ceeded the real wage gains of steelworkers.
4. The inflation in steel, i. e. the rise in steel prices, has arisen because the
industry has been determined to widen its already excessive profit margins. It
has not only refused to absorb increased wage costs out of increased productivity,
as it could well have done, but it has also raised steel prices more than $3.00
for every $1.00 of increased wages and fringes granted to its employees. It
literally makes a net profit, and a big one, on every wage increase it grants.
5. If there is any significant relationship in the steel industry between wages,
prices, and profits, it is one of coincidence in timing only. The union’s wage
increases are made the excuse and occasion for wholly unnecessary and excessive
price increases which result in ever increasing profits. The facts simply do not
support the wholly fallacious hypothesis that steel wage increases cause steel
price increases.
B. The facts
1.
Profits.— Profits before taxes for 1956 for the steel industry (25 companies
which in 1956 had 91.8 percent of the industry’s ingot capacity) are estimated at
about $2 billion. This rate of profits was on a par with 1955 ($2,038.5 million),
the prior all time peak year—
76percent higher than 1954 ($1,133.6 million)
188 percent higher than 1947 ($694.9 million)
1,168 percent higher than 1939 ($157.7 million)
The level of profits before taxes was at an annual rate of $2,350.7 million in
first quarter 1956 and $2,386.4 million in first half 1956. The strike in the third
quarter pulled the annual rate down to $1,814.4 million. But a fourth quarter,
which was the equivalent of each of the prestrike first two quarters, should pull
the full year up to about $2 billion, which is on a par with the 1955 level. Except
for the strike, profits before taxes in 1956 would have easily been at an all-time
high, more than. 15 percent above the prior peak of 1955. It is out of these high
profits before taxes that wage or other cost increases can be absorbed if the
increase in productivity is, in any particular year, insufficient to offset these
costs. Obviously an industry can absorb additional costs when its profits are
at an all time peak.
The steel industry (25 companies) was making profits before taxes during the
first quarter of 1956 just prior to our 1956 wage negotiations of $1.52 per manhour worked, by all employees, a profit of more than 60 percent of the amount it
paid for each hour of labor. Thus, it could increase hourly rates substantially
without endangering its profits, even if it had had to absorb any added wage costs
out of profits, which it did not have to do because of rising productivity.
Net profits presented a similar picture. The net profits for the steel industry
(the same 25 companies) for 1956 are estimated at $1 billion. This was on a par
with 1955 ($1,019.4 million), the prior peak year—
70 percent higher than 1954 ($589.8 million)
154 percent higher than 1947 ($394.3 million)
691 percent higher than 1939 ($126.4 million)
The level of net profits was at an annual rate of $1,153.4 million in the first
quarter of 1956 and $1,190.6 million in the first half. The strike in the third
quarter lowered the annual rate to $920.5 million. The fourth quarter should pull
the annual rate up to about $1 billion, which is on a par with the 1955 level.
Except for the strike, net profits in 1956 would have easily set a new record,
87624 0 — 57-------20
296
ECONOMIC REPORT OF THE
PRESIDENT
more than 13 percent higher than the prior peak in 1955. These high net profits
are the direct result of already too high prices and rapidly advancing productivity.
The profit figures discussed above do not fully reveal the profitability of the
steel industry.
In recent years the various steel companies have been permitted to depreciate
defense facilities at a faster than normal rate. Commonly, this is referred to
as rapid amortization. In 1955,12 of these 25 companies reported rapid amortiza
tion charges of $310 million, of which at least $250 million was in excess of
normal depreciation charges.
This means that, had there been no rapid amortization in 1955, profits before
taxes would have been some $250 million higher than reported and net profits
some $120 million higher. Data are not yet available for 1956, but rapid
amortization charges should not differ too significantly from 1955 charges.
2. Profit margins— Profit margins for the steel industry (22 companies)
have widened sharply in recent years. For all manufacturing industries they
have narrowed. This is evident from an examination of industry’s favorite com
parison, profit per dollar of sales.
In steel (22 companies) : net profits as a share of the sales dollar rose
from 6.2 cents in 1947 to 7.9 cents in 1955 and first half 1956
In all manufacturing: Net profits as a share of the sales dollar declined
from 5.7 cents in 1947 to 4.0 cents in 1955 and to 4.3 cents in early 1956
(estimated)
This steel rate in 1955 and early 1956 was the peak rate for any recent year
except 1950, which was fractionally higher (8.0 cents). The strike in the third
quarter brought the 9-month rate down to 6.7 cents, but the fourth quarter should
bring it back up to about 7.1 cents, a most creditable profit margin when com
pared with all manufacturing.
The rate of net profits as a return on net worth (owners’ equity) also shows
steel1 running contrary to the general trend in industry. The comparisons
show:
In steel (22 companies) : Net profits as a rate of return on net worth
rose from 10.5 percent in 1947 to 13.8 percent in 1955 and 16.1 percent1 in
first half 1956
In all manufacturing: Net profits as a rate of return on net worth de
clined from 15.1 percent in 1947 to 12.6 percent in 1955 and 12.0 percent in
1956 (average of first 3 quarters)
The steel rate of return in first quarter 1956 was at a peak for recent years
at 15.6 percent. For the first half it rose even further to 16.1 percent. It fell
in the third quarter because of the strike to a 9-month level of 12.5 percent.
The fourth quarter should bring the rate to about 13.4 percent for the year, a
near record rate for recent years despite the 1956 stike.
Clearly the rates of return on net worth in both steel and all manufacturing
are excessive by almost any standard. They far exceed the 6 percent return
once generally accepted as a fair and reasonable rate of return. They would
readily permit significant price reductions and still leave more than adequate
profit margins. There is little excuse for industry generally, or the steel industry,
to insist on earning 10 to 15 percent as it has done in most peacetime years since
1939— rates of return which permit industry to double its investment out of
earnings every 7 to 10 years.
3. Dividends.— The steel industry (25 companies) has dealt generously with
its stockholders. Cash dividend payments to common-stock holders in first quar
ter 1956 were at an annual rate of $412.9 million, a record high. Unlike the
workers wh o lost wages because of the third quarter strike, the stockholders con
tinued to receive dividends as usual. In fact, the annual rate for the first 9
months actually exceeded the first quarter rate. It was $420.3 million. This
was an increase of 229 percent since 1947— a period during which all corpora
tions showed an increase of only 86 percent. In addition to the cash dividends
ma n y stockholders also received stock dividends, and nearly all benefited from
sharp increases in the equity value of their stockholdings.
4. Productivity.— The steelworker has increased his productivity, output per
manhour, sharply in recent years:
B y 4.5 percent in the first quarter of 1956.
B y 11.4 percent in 1955 (a record high for any year).
B y 68.8 percent since 1939.
1 T he steel rates o f return on net worth fo r 1956 have not been adjusted to reflect the
1956 additions to net worth. These adjustm ents w ould not change at all significantly the
picture here shown.
ECONOMIC REPORT OF TH E
PRESIDENT
297
These increases in “real” output per hour of work by steelworkers significantly
exceed the “real” straight-time earnings increase received by these same steel
workers for each hour of work. For the entire period of more than 16 years,
1939 through part of 1956, “real” productivity in steel rose 68.8 percent (1939
re 1st quarter 1956), whereas “real” straight-time average hourly earnings rose
only 48.3 percent (1939 vs. 1st 10 months 1956). Even if allowance is made for
“fringe” gains during this period, productivity gains still significantly exceed
wage and “fringe” gains together. Obviously steelworkers have not only
“earned” their wage and “fringe” improvements over the years, but they have
not even received their proportionate share of the productivity gains made in the
industry. These are the facts, based^pn Department of Labor studies, and they
are in sharp contrast to the fiction which the industry has attempted to persuade
the public to believe. These large gains in productivity mean lower unit labor
costs and would permit wage increases without price increases— if prices are set
in terms of costs, insofar as possible, instead of in terms of whatever the market
will bear.
5.
Steel prices versus wages.— The entire steel industry has reaped a profit
bonanza from the steel price increases of recent years— increases which are out of
all proportion to increased costs. Since 1945, there has been 10 rounds of wage
increases (including the pension and insurance round in 1949), but there have
been 17 rounds of general (base) steel price increases and 4 major increases in
price “extras” (including 2 which coincided with base price increases). Thus,
there have been an average of 2 price increases for every wage increase— custom
arily an anticipatory one preceding the wage increase and another one following
the wage increase.
The cumulative impact of the price and wage increases since 1945, measured
in terms of 1956 operations, meant for the entire steel industry:
Million
Additional revenues.
.$6,572.2
Additional labor cost.
. 2,027.9
Total gain.
$4,544.3
Expressed differently this means that, for every $1 increase in labor “costs”—
“costs” which have actually been offset by greater output per man-hour— the
steel industry has generated for itself $3.24 in additional revenues, achieved by
reason of its unjustifiably large price increases.
There was criticism of the steel wage and price increases of August 1956 both
from industry sources and much of the press. The steel industry used the wage
increase, as usual, as the excuse for large steel price increases. This excuse was
generally, uncritically, and quite erroneously accepted as fact. The union said at
the time, that the steel industry could grant a substantial wage increase and
absorb the “cost” without serious reduction in profits. W e were willing to, and
did, settle our negotiations on a basis which required no price increase. Our 1956
contract provided for a wage increase and other benefits at a cost of approxi
mately 20 cents per hour for the 1st year of the contract. For all 775,000 e m
ployees of the steel industry (25 companies), even if no productivity increase is
assumed, the gross “cost” of the wage increase for a year would have been $310
million, the net “cost” $148.8 million. At the level of profits before taxes and
after taxes of the industry in the 1st quarter of 1956 (the latest data available
at the time of our negotiations), these figures would have been reduced from
$2,350.7 million and $1,153.4 million respectively to $2,040.7 million profits before
taxes and $1,004.6 million net profits. The rate of net profits as a return on net
worth would have been 13.6 percent and the net profit per dollar of sales 6.9 cents.
These would have been highly satisfactory rates of return.
But productivity was increasing sharply enough to permit absorption of a
substantial wage increase without a price increase and without any reduction in
profits. Even at a 4-percent rate of productivity gain in the year, output and
revenue would have increased by 4 percent ($349.2 million at the first quarter
rate). This amount exceeded the gross “cost” of a 20-cent wage increase by
$39.2 million and the net “cost” by $18.8 million. Thus, the industry could have
granted and absorbed a 20-cent wage increase and still have increased both its
profits before taxes and its net profits out of a 4-percent gain in productivity
alone. Instead, it chose to provoke a strike, lose some of the productivity gain,
lower its profits, but, most importantly, add to inflation by a substantial steel
price hike.
The steel price increase in August 1956 was announced as $8.50 per ton (about
7 percent). This increase was sufficient to offset the “cost” of the wage increase
298
ECONOMIC REPORT OF TH E
PRESIDENT
by nearly $3 of price increase to every $1 of wage increase. But it was unneces
sary to make any price increase in 1956 since the productivity increase just
recorded in 1955 prior to the negotiations was 11.4 percent— an amount more
than sufficient to pay for the “cost’' of the wage increase— just out of labor’s
share of the productivity rise. Apparently the industry is willing to pay much
lipservice to the theory that wage increases be limited to productivity gains but
is quite unwilling to accept its corollary, that it should not raise its prices
when unit wage costs are decreased because of increased output per man-hour.
In recent months, particularly in December 1956 and January 1957, the industry
has launched another series of price increases. M a n y of these increases are in
so-called extras and are not reflected in*the price indexes maintained by the
trade press. The American Metal Market (January 18, 1957) estimated the
overall effect of the “extra” increases in structurals at 4y2 percent, in plates at
5 y2 percent, in large pipe 3 ^ percent, etc. The cumulative impact of the
increases has been to raise the B L S Finished Steel Price Index by 1.5 percent
already (about $2.25 per ton)— with more increases in prospect. These Decem
ber-January price increases have no more justification than did the $8.50 per
ton in-crease of last August.
While, as indicated, no price increase was necessary to offset the “cost” of the
1956 wage increase, the industry did raise prices by about $8.50 per ton. Based
on the American Iron and Steel Institute’s definition of the basic steel industry
and on its first half steel shipments and man-hours for the entire industry, the
price increase yielded about $800 million in additional revenue. The wage
increase, which appeared to raise the wage bill by $285 million, actually “cost”
nothing because it was offset by a reduction in unit costs caused by increased
productivity. The profit of the industry from this little operation is obvious.
6.
Steel prices vs. materials and other costs.— Steelmaking costs, other than
wages, have not risen nearly as fast as steel prices. The unit cost of materials
purchased2 in the steel industry rose 30.7 percent between 1947 and December
1956. But steel prices increased 91.3 percent in the same period— an increase
of prices re materials costs of 3 to 1.
For years the industry has argued that whenever wages rise, its materials
costs increase by a like and identical amount because of the wage increase.
This argument is not supported by the facts— even those drawn by the industry
from its own financial records. Even if there were coincidence in timing
of the increases, it would not be evidence that wage increase caused the materialscost increase. But there is no such coincidence or cause. United States Steel’s
annual report for 1952 disproved any such argument in the following tabulation :
Comparative changes in materials and employment costs in United States
Steel Corp.
Increase as percent of 1940
Period covered
January 1941-April 1947_ ................. ........................... ...................................
April 1947-July 1948................. ......................... .................................................
July 1948-November 1949 ....................................................................................
November 1949-December 1950......................................... ........... .............. ......
December 1950-July 1952_______________ ______________ ______ _______ ___
July 1952-Deeember 1952......................................................................................
Employment
cost
Cost of
materials
Percent
Percent
56
16
14
19
23
27
47
42
18
3
24
4
Even a cursory examination of the movements of the price of such an important
steelmaking material as steel scrap would demonstrate the fallacious nature of
any such claim. In the last few months of 1956, according to Steel magazine,
steelmaking scrap rose consistently reaching a peak of $66.17 per ton in midDecember and then fell off to $59.83 in mid-January 1957. As compared with
mid-January 1956, this was an increase of 24.1 percent at the peak and is still
2 T he index used as a measure o f m aterials costs is the BLS price index o f ‘‘all com
m odities other than farm and food products” which the President’ s Council o f Econom ic
Advisers refers to as “ industrial prices.” This index was referred to by a United States
Steel Corp. spokesman in testim ony before the Tem porary National E conom ic Committee
as a close indicator o f the movement o f prices o f the m aterials purchased by the corporation.
ECONOMIC REPORT OF TH E PRESIDENT
299
12.2 percent above a year ago. Would anyone be so foolish as to claim that costs
of labor in steel scrap procurement and preparation have risen by an amottnt
even approaching this figure? Yet such myths as this pass for fact in the steel
industry’s public relations. These scrap-price increases are simply the results of
another industry, the steel-scrap industry, attempting to emulate the steel in
dustry by increasing its prices as much as it thinks the market will bear. This
is the stuff of which inflation— miscalled wage-price inflation— is made.
An d now the need for funds for capacity expansion of the industry is advanced
seriously as an important “reason” for higher steel prices. Certainly prices
should be at a level sufficient to permit maintenance and replacement of existing
facilities. But by some perversion of investment theory, it is no w argued that
the public, the users of steel, should not only pay the steel companies a fair return
on their investment but should also pay for expanded capacity through higher
prices. The companies would thus avoid the traditional methods of raising
capital, such as stock flotation and borrowing, and the stockholders would end
up owning new and enlarged capacity without a red cent of additional invest
ment on their part. This alleged “reason” for inflation in steel prices should be
soundly condemned by all.
W e cannot hope to stop inflation, whether it be in steel prices, scrap prices,
auto prices, or the major items which make up the cost of living, until our major
industries feel the glare of continuous publicity on their pricing actions. This
committee and the Congress could make a great contribution by continuously
investigating the facts concerning wages, prices, and profits and by focusing
public opinion on unsupportable price increases. Only thus can w e learn whether
erosive inflation can be prevented in our economy without more drastic steps.
Chairman P a t m a n . We next have Mr. Bradford Smith, economist,
United States Steel Corp.
STATEMENT OF BRADFORD B. SMITH, ECONOMIST, UNITED STATES
STEEL CORP.
Mr. S m i t h . Mr. Chairman and gentlemen, it, of course, was not my
understanding that this meeting was going to be devoted more or
less exclusively to the industry from which I have employment. So
I think it would be well at the outset to say that I am not here on this
occasion either to expound or to defend the policies of the United
States Steel Corp. I am here rather to be of such assistance to the
committee as I may in analyzing the great majestic important trends
which are occurring in our economy.
I am much disturbed by the forces making for interminable inflation
in our land. This concern arises out of the fact that following all
of our previous great wars the war-inspired inflationary forces have
subsided, after a year or two of readjustment, and given wTay to periods
of relative stability. But that is not true this time as may be seen by
a glance at the first chart. On the contrary, in the period since the
close of World War II the underlying inflationary forces have in
creased rather than decreased in power. They seem to be operating
like a compound-interest curve, which, if not checked, will eventually
carry inflation to astronomical heights.
The contrast between this postwar period and previous postwar
periods is prima facie evidence that something new has come to
America—some change in the national attitudes, in the legislative and
social frameworks within which we conduct our living in this land.
Should this indeed be true, then I would suppose that few matters
more urgently merit attention if our long-term economic healthiness
is to be insured.
My researches disclose that the massive, continuous surge of infla
tion is most clearly manifest in industrial costs. For over 15 years
nothing has stopped it, nor more than temporarily slowed it down.
300
ECONOMIC REPORT OF THE
PRESIDENT
The consequence to prices is a self-evident proposition; except as off
set by increasing productivity, prices have got to go up to cover rising
costs, least industry experience widespread bankruptcy. The connec
tion between costs and prices is not, of course, an instantaneous oneto-one affair like closely intermeshed gears. Changing profit or loss
margins, varying tax costs, shifting demand trends, and fluctuating
levels of production interpose temporary cushions and compressions
between costs and prices. But they do not alter the long-term arith
metic, with which I presume this committee is primarily concerned.
Underlying all industrial costs is wage cost. Up and down Amer
ica’s production line, from extraction of raw materials to delivery of
finished products, something over three-quarters of all costs are, di
rectly or indirectly, employment costs. Thus if we have wage infla
tion we cannot escape cost inflation since the first is the biggest part of
the second. I f we have cost inflation beyond productivity increases
we cannot escape rising prices, the latter being but the reflection of
the former.
May I say in passing that inflation can be accommodated only with
in the framework of soft money policies and an expanding money sup
ply. As a matter of fact the money supply has been multiplied 3%
times since 1940. Since monetary restraint has become secondary to
maintenance of full employment, and since the committee will deal
with the monetary matter tomorrow, I omit further discussion of it
in these brief comments.
Our country has been caught up in a persistent and massive wage
inflation. It shows, for example, in the records of United States
Steel. In the second of the attached charts I show United States
Steel’s employment cost per employee hour, on the basis 1940 equals
100. Since 1940 the employment cost has increased every year. The
average rate of increase is 8.1 percent per annum compounded. This
wage inflation is general, as may be noted in chart III, which again
shows United States Steel’s employment costs and compares them with
hourly earnings of wage employees for all manufacturing. The in
crease in the latter is a little less than in the former largely because the
Bureau of Labor Statistics does not include many fringe benefit costs.
In the case of United States Steel these have risen from less than 10
cents an hour in 1940 to over 50 cents in 1956. The items are charted
on a logarithmic vertical scale to disclose the dangerous compound
interest type of trend in wage inflation. Anything increasing at 8
percent per annum doubles every 9 years.
Since the basic wage inflation is general throughout industry it is
quite natural that all of United States Steel’s other costs per em
ployee hour should pursue the skyward path of its direct employment
costs. And so they do, as shown by the other curve back on the second
chart. From 1940 to 1956 total costs per employee hour have been
multiplied by 3.8 which works out to an increase of 8.8 percent per
annum compounded.
With such persistent and large cost inflation, prices must obviously
be pushed up. Fortunately the full impact of wage inflation on prices
has been moderated by the provision of increasingly efficient tools of
production. This may be observed in the fourth quarter chart in
which the rise since 1940 in steel prices is compared with the rise in
United States Steel’s employment costs per hour. You will note
while employment costs per hour have been multiplied nearly 3 ^
ECONOMIC REPORT OF THE
PRESIDENT
301
times, steel prices have been multiplied only 2% times. The steel
price rise is the equivalent of 5.6 percent per annum compared with
the employment cost increase of 8.1 percent. An annual average in
crease in productive efficiency between 2 and 3 percent would account
for the difference, although any such measurement must be surrounded
with numerous reservations.
For comparison, two other items appear on this fourth chart: The
index of all-commodity prices at wholesale and United States Steel’s
income as a percent of sales. The latter simply verifies that the price
increase is not due to relative profit inflation, since over the period
the percentage of profit margin has declined rather than risen. A
similar observation is valid for the economy as a whole, as may be
observed on page 8 of Economic Indicators, where it is shown that
profits have not, since 1950, attained the levels reached in that year
and more recently have been declining.
The committee may be interested in the comparative price be
havior. I start with i940 as the last year before the wartime distor
tions came into the picture. There are three phases. From 1940 to
1946 wholesale prices—along with employment costs—increased over
50 percent, while steel prices did not increase at all until 1945 and
by 1946 were only 12 percent above 1940. They were thus relatively
deeply depressed and remained so for the next 5-year period up to
1951. During that period both steel and wholesale prices advanced in
roughly parallel fashion. From 1951 on steel prices began to catch up
with wholesale prices, the latter having experienced a plateau. They
are now rising together again. It is interesting that the nonrise of
steel prices in the 1940-46 period did not prevent wiiolesale prices
from rising. Equally the readjustment rise in steel prices from 1951
to 1955 did not cause wholesale prices to rise. Steel industry critics,
incidentally, are fond of picking a year in the middle or preadjustment
period as a base for comparing that industry’s subsequent price and
profit changes with those of other industries.
This brief analysis illustrates four points I believe to be important
for research and policy guidance:
1. It is unlikely that the key to the general inflation problem is to
be found in the prices of any one or several industries;
2. The important key to the present inflation problem is to be
found in the wage inflation, as the common denominator of all in
dustries’ costs;
3. It follows that policy changes which leave the wage inflation
untouched will prove futile; while
4. I f wage inflation is checked the present prospect of price infla
tion will vanish.
Thank you.
Chairman P a t m a n . Thank you.
Mr. George Hitchings, manager, economic analysis department,
Ford Motor Co.
STATEMENT OF GEORGE HITCHINGS, MANAGER, ECONOMIC
ANALYSIS DEPARTMENT, FORD MOTOR CO.
Mr. Hitchings. The current rise in prices which generally started
in mid-1955 is different from the type of inflation that occurred during
and immediately after war periods. Those inflations involved a sharp
87624— 57-------20
302
ECONOMIC REPORT OF TH E
PRESIDENT
and sustained increase in prices generated by money demand for
goods and services substantially greater than the available supply
at existing prices. These inflations were fed by a rapid expansion
of the money supply, usually through Government deficit financing.
Too rapid an expansion through private credit would, however, have
the same effect.
In the past 18 months, the only important areas in which money
demand has exceed supply and pushed prices up have been in capital
equipment industries and their suppliers. Wholesale prices of fin
ished durable goods used by producers have risen 13 percent since
mid-1955. These increases have been concentrated in metals, fabri
cated metal products, machinery, and equipment. Prices of construc
tion materials have also reflected heavy business construction demand.
Prices of consumer goods have risen much less over the same period.
At the wholesale level, prices of consumer goods in total increased
only 2y2 percent after June 1955. Finished durable goods used by
consumers were up about 6y2 percent, largely in the passenger car
and household furniture segments. For consumer nondurable goods
other than food, a moderate steady rise accumulated to 3 percent
over the 18 months. Food prices continued to decline in the last half
of 1955, but a subsequent increase in 1956 brought them back to their
mid-1955 level.
These changes in wholesale prices of consumer goods have been
reflected in similar movements at retail. The consumer price index,
which includes services as well as the types of consumer goods in
the wholesale price index, has risen 3 percent since mid-1955. A
decline in food prices in the last half of 1955 kept the rise in the
overall index to very modest proportions during that period. In
1956, however, there has been a moderate rise in all segments of the
index.
Demand pressures in excess of supplies have not accounted for the
rise in consumer prices. Rather, increasing costs of production are
responsible for most of the rise in prices of consumer goods and
services. An exception is the turn-around in the food component
which has resulted in part from policies designed to bring about some
recovery in depressed prices at the farm level.
Most of the increase since 1948 in dollar income generated in the
manufacturing segment of the economy has been in the form of higher
payrolls and Government tax revenues. Corporate profits after taxes
(adjusted to eliminate profits or losses from inventory price changes)
have stayed at about the same total dollar amount since 194& In the
first 9 months of 1956, these profits amounted to an annual rate of
about $10 billion, compared with $82 billion for wages and salaries,
including supplements to wages and salaries in the form of pensions,
insurance, and accident compensation. This total of $82 billion of
employee compensation represents a sharp growth from the $48.6 bil
lion level in 1948—a growth of about 70 percent.
Although part of this rise in total wages and salaries arose from
increased employment, average annual earnings per full-time em
ployee were up 48 percent from 1948 levels. Most of this rise in an
nual earnings, in turn, stemmed from a 45 percent increase in average
hourly earnings. I f nonwage fringe benefits were included, the rise
would be still greater.
ECONOMIC REPORT OF TH E PRESIDENT
303
Government tax revenues from corporate income generated in man
ufacturing industries are much higher than in 1948. They now stand
at about $12 billion, also some 70 percent above the 1948 level. Dur
ing the upsurge after Korea, Government revenues from this source
were temporarily higher because of the excess-profits tax.
By contrast, corporate profits after taxes (adjusted for inventory
profits and losses) are not significantly above 1948, 1949, and 1950
levels, despite the substantially higher dollar volume of sales and
capital investment. The rate of return on investment for manufac
turing corporations, therefore, has been reduced.
Profits after taxes are the proper measure of income available to
owners of the business. The stockholders, who are the owners of the
business, have available as income only the amount left over after
taxes. They, in turn, are taxed on this income just as are the em
ployees on their income. Net profits distributed as dividends are
taxed to the recipient. Undistributed profits invested in the business
are taxed as capital gains when gains are realized. The proper com
parison is between employees and stockholders, rather than with the
corporate entity, which is merely the vehicle for producing income.
Although it is desirable for employees to share in the increased in
come available from the manufacturing operations, it is also necessary
to obtain an adequate return on the capital investment because the in
vestment makes possible most of the real gain in employee wages.
Furthermore, the buyer of products must be offered a sufficiently
attractive price to obtain maximum markets.
Increase in the total pie available for distribution is the primary
consideration of economic policy. To maintain a healthy economic
growth there must be a proper distribution of income among em
ployees, owners, and consumers. An attempt to garner the total in
crease in productivity, or more, by either labor or capital results only
in price inflation and/or shrinkage of the total market.
In the period since mid-1955, there is evidence that average hourly
earnings have outstripped productivity and led to increased costs of
production. Such increased costs have resulted in higher prices of
manufactured products. Return on investment in manufacturing has
declined in this period despite continued high volume operations. In
the second quarter of 1956, the rate of return was 12.6 percent after
taxes, compared with 13 percent a year earlier and 14.8 percent on
the average for 1947-50 (see table E-52 on p. 180 of the January 1957
Economic Report of the President). A further decline occurred in
the third quarter, but the extent of decline was exaggerated by the
steel strike and by model changeovers in the auto industry. Fourth
quarter profits were more in line with rates earlier in the year.
By contrast, average hourly earnings in manufacturing continued
to rise in 1956, reaching a level in December that was nearly 10 per
cent above mid-1955. This increase in wages cannot continue at Such
a pace without further price increases and/or reduced markets. A l
though increased hourly earnings make it possible for the recipients
to pay the higher prices, those consumers who do not share in rising
incomes are less able to buy. Furthermore, the purchasing power of
existing savings is reduced.
Increased costs also present problems in business financing (higher
working capital requirements and higher expenditures for new plant
304
ECONOMIC REPORT OF TH E
PRESIDENT
and equipment) as well as consumer financing of houses and durable
oods. The monetary authorities are faced with the problem of easing
ank-reserve positions to permit these higher expenditures or of
maintaining such a tight rein that business activity declines.
The key to prices in 1957 will be the extent to which payroll costs
rise relative to physical production. Demand pressures in the capital
goods segment of the economy will probably ease, as physical volumes
level off or decline slightly. There will be adequate productive ca
pacity to meet the probable levels of demand in nearly all major seg
ments of the economy* Continued high levels of capital investment
will be required, however, to provide for future growth in the economy
and for the improved efficiency—or productivity, as it is often called—
so necessary if increased income with price stability is to be achieved.
(Mr. Hitchings later submitted the following:)
f
D istribution of national income in m anufacturing (1 94 8 - 5 6 )
[Millions of dollars]
1948
Total income. . . ______ ____ - - - _____________ . _
Memorandum:
Inventory profits, corporations.
. ___ ________ ____
Inventory profits, unincorporated _ __ ___
Number of full-time equivalent employees -----------------------Average annual earnings per full-time employment_________
1951
1952
1953
1954
1955
9 months
annual rate,
1956 i
43,860
2, 264
5, 729
9,605
1,294
5
49,393
3,142
10, 905
9,293
1,579
-77
58,232
4,141
14,252
9,598
1,574
-63
62,918
4,431
11,687
8,911
1,330
41
69,773
4, 928
12,325
8,201
1,068
56
65, 948
5, 054
9,242
8,439
796
76
72,132
5, 709
12,518
10, 329
1,019
98
76,000
6,100
12,200
9,800
1,000
100
66,630
62, 757
74,235
87, 734
89,318
96,351
89, 555
101,805
105,100
1,440
36
15,285
3,040
-1,194
-56
14,183
3,092
3,082
149
14, 969
3,300
662
4
16,122
3,612
-640
-24
16,413
3,833
692
10
17, 231
4,049
311
11
16,024
4,116
1,325
37
16, 579
4,351
1,800
100
16,900
4,500
OF
THE
1 Breakdown of total income partially estimated. Figures rounded to nearest $100,000,000.
2Includes insurance, pensions, and accident compensation.
3After excluding inventory profits or losses.
A verage hours and earnings o f production w orkers in manufacturing ( 1948-56 )
________ ______ _ _ Average weekly hours__ _
Average hourly earnings_____
___ __________________
Average weekly earnings.__ __ ___ _ _____
_______
39.2
$1.40
$54. 92
1950
40.5
$1.47
$59.33
1951
40.7
$1. 59
$64. 71
1952
40.7
$1. 67
$67.97
1953
40.5
$1.77
$71. 69
1954
39.7
$1.81
$71. 86
1955
40.7
$1.88
$76. 52
1956
40.5
$1.98
$80.13
305
40.1
$1.35
$54.14
1949
PRESIDENT
1948
REPORT
46,459
2,145
7,066
9,596
1,358
6
1950
ECONOMIC
Wages and salaries------------------------ ------- -----------------------Supplements to wages and salaries 2_ ____
________
Corporation income and excess profits tax_ ______ ______ ..
Corporation profits after tax 3. _ __ _____ _____. .. ------Unincorporated income 3 __ .. _____ _ . - _ ___________
Net interest- ________ _
______ _________ .
1949
306
ECONOMIC REPORT OF TH E
PRESIDENT
Chairman P a t n a m . Mr, Nat Weinberg, Director, Research Depart
ment, United Auto Workers.
STATEMENT OF NAT WEINBERG, DIRECTOR, RESEARCH
DEPARTMENT. UNITED AUTO WORKERS
Mr. W e i n b e r g . Mr. Chairman and members of the committee, we
are most happy to have the opportunity to appear before this com
mittee on the subject of prices. We earnestly hope that following this
discussion today the committee will proceed as quickly as possible
with a thorough-going and searching investigation of wage-priceprofit relationships in leading corporations in certain industries that
our union has repeatedly urged since July 1955. There is not time
today to present all the evidence that cries aloud for such an investiga
tion of the auto industry, for example. But permit me to cite a few
of the pertinent facts.
General Motors and Ford raised their prices in the fall of 1955,
using the economic gains won by our members earlier in that year
as their major excuse. The cost of those gains to the corporations
came to about 20 cents an hour. During the first 9 months of 1955,
before prices were raised—but after the gains of the workers had
already been largely in effect for 4 months—General Motors profits
before taxes came to $2.93 per hour for every hour worked in its
plants by all its 400,000 U. S. factory workers, yielding a return on
the stockholders’ investment equal on an annual basis to 78.9 percent.
After taxes the rate of return was still a fabulous 36.5 percent. In
Ford’s case, profits per hour were $3.06, and the rate of return on
investment was 57.7 percent before taxes, and 26.1 percent after taxes.
These after-tax profit rates were two to three times the 13 percent
average for all U. S. manufacturing corporations during the same
period which happened to be a period of generally high profits. Yet
General Motors and Ford raised their prices and sought to put the
blame for the increases on the gains won by their workers through
collective bargaining.
Again in 1956 they raised their prices, this time despite a depressed
market and widespread unemployment among the industry’s workers.
In the face of this kind of situation, labor and management alike
are being exhorted to exercise restraint in their wage and price actions.
Exhortation implies that both have been guilty of lack of restraint.
We hope this committee will move vigorously to find out whether that
is really so in order that the pressure of public opinion may be effec
tively concentrated where the guilt lies, and the innocent protected
against unjust condemnation.
The determination of culpability is in any case the necessary first
step toward connection of the situation.
The very fact that exhortation is resorted to in order to restrain
inflation points to the unique nature of current increases in the price
level. They do not for the most part result from the blind and im
personal operation of market forces. They do not, on the whole, result
from abnormally high demand or high production pressing against
capacity limits. In fact, recent increases in the physical volume of
production have been considerably less than normal; and in industry
after industry, prices have been raised in the face of diminishing
sales and swollen inventories. Price increases under these circum
ECONOMIC REPORT OF TH E PRESIDENT
307
stances are clearly not a reflection of the operation of the law of
supply and demand. It can be shown also, and we hope this com
mittee will very soon give us opportunity to show, that in the industries
which have contributed significantly to our current inflation, price
increases are not the result of cost increases that have squeezed profit
margins to an unreasonably small size.
What these price increases do reflect in our opinion is the absence
of price competition, and the operation of an “ administered price”
system. Under this system a few corporations furnishing “ price lead
ership” to industries crucial to the national welfare hold the power
to fix prices arbitrarily. They are not subject to the laws of the
market place that inhibit the pricing practices of corporations in pricecompetitive industries.
With respect to these corporations, therefore, the consumer and the
Nation are without the protection that market forces afford in in
dustries where price competition prevails. We are prepared to show
that many corporations possessing the power to administer prices
have abused that power. They have fixed their prices on the basis
of what is considered financially desirable for the corporation, with
out regard to what is desirable and necessary for the Nation as a
whole, and for the health and stability of our economy.
We hold strongly to the belief that the pressure of public opinion
can minimize or at least reduce the extent of such abuse of pricing
power. But the public can be mobilized to an effective expression of
opinion only if it is equipped with the facts. General exhortation
directed to all and sundry will not do the job. The specific and
detailed facts of specific situations, leaving no room for doubt as to
whether or not there has been abuse, can create a climate of public
opinion which will induce self restraint on the part of those who
would otherwise be tempted to abuse that power.
We would like to make two proposals designed to equip the public
with the necessary facts. Our union has always believed that economic
decisions, particularly those affecting the general welfare, should be
made on the basis of economic facts, rather than on the basis of eco
nomic power. This holds whether the power involved be the power
to shut down a plant and keep it shut down, or the powder to extort
from consumers any price that a corporation may deem it desirable
in its narrow interest to exact.
For ourselves, we of the UAW are willing to be bound by the policy
that demands for wage increases and other gains in administered price
industries should be confined within the limits of ability to pay, with
out price increases, of the efficient firm functioning under full em
ployment conditions. This is no new principle for us. We first of
fered to be bound by it during the General Motors strike of 1945-46
when more than 200,000 of our members struck 113 days for wage in
creases without price increases. We offered during that strike to re
duce our wage demand, justified though we were convinced it was, to
whatever the amount—zero if need be—that could be paid by the cor
poration without an increase in its prices.
Implementation of this policy requires, of course, that the facts on
ability to pay be available to us and to the public. Both must have all
the information that is necessary to determine beyond a reasonable
doubt the size of the economic package that could be granted without
308
ECONOMIC REPORT OF THE
PRESIDENT
reducing the profits of an efficient firm in a full-employment economy
below a reasonable level. Obviously this cannot be a universal policy
applicable to all industries. It would be improper, inequitable, and
economically unsound to apply it in industries where existing wage
levels are substandard. It is unnecessary to apply it in industries
where prices are set by competition rather than by corporate fiat.
Balancing the obligation we are ready to assume, we propose that a
similar obligation be assumed by corporations in a position to ad
minister prices.
Specifically, we propose a statutory mechanism that would assure
the public oi an adequate flow of essential factual information con
cerning certain corporate price actions, without involving Government
in the task of controlling prices. As we presently visualize it, legis
lation directed toward this objective would require advance notice
and public justification of price increases proposed to be put into
effect by any corporation which accounts for more than a specified
percentage—perhaps 20 or 25 percent—of the total sales of its industry.
Such a corporation would give notice of intention to raise prices
to a governmental agency created for that purpose. The agency would
thereupon conduct public hearings at which the corporation would be
required to present detailed justification based upon its records of the
need for the proposed price increase. Its testimony would be subject
to cross-examination and its pertinent records open for inspection
both by the agency and by representatives of organizations or groups
opposing the proposed price increase, including other corporations
which purchase goods produced by the firm proposing to raise its
prices.
Following the hearing, the agency would promptly publish the con
tentions of the parties, and the facts as it had determined them. The
hearings having been concluded and the notice period having expired,
the corporation involved would then be entirely free to raise the price
if it so chose. But the public wrould have the means to determine for
itself whether or not the price increase was justified.
These proposals rest on the premise that an effective democracy must
be an informed democracy. They impose no compulsion with respect
to wage or price actions. They infringe no freedom. They are de
signed solely to minimize the abuse of freedom through the unin
hibited exercise of economic power. They are aimed at encouraging
responsibility in the exercise of economic power by removing the veil
of secrecy that now conceals facts of vital public interest, and thus
shelters the irresponsible.
We most earnestly urge that the members of this committee give
these proposals their careful consideration.
Mr. Chairman, I have submitted a longer statement to the staff,
and I would like to ask that it be included in the record.
Chairman P a t m a n . It will be included in the record.
(The statement follows:)
S ta te m e n t on P r ic e In c r e a s e s
(By Nat Weinberg, director, research and engineering department)
W e are most happy to have the opportunity to appear before this committee
on the subject of prices. W e earnestly hope that this discussion today marks
the beginning of the culmination of our efforts of ma n y months to bring about a
thoroughgoing and searching investigation into wage-price-profit relationships
in certain industries. In these industries, which are crucial to the welfare of
ECONOMIC REPORT OF THE
PRESIDENT
309
the economy as a whole, a few leading corporations hold the power to fix prices
arbitrarily. They are not subject to the laws of the market place that inhibit
other corporations and other industries in pricing their products. With respect
to these corporations, the consumer and the Nation are therefore without the
protection that market forces afford in industries where competition prevails.
W e believe, and w e hope w e wTill be given the opportunity to prove, that major
corporations which furnish price leadership in a number of industries have
abused their power. W e believe that the force of public opinion can, to some
degree at least, make up for the absence of the protections against such abuse
that price competition provides where it exists. W e hope that this discussion
today is the first step toward marshaling the force of public opinion to induce
restraint on the part of those wh o are responsible for our current inflation.
The members of the U A W have paid heavily in sacrifice for the right to be
heard on prices. More than 200,000 of them walked the picket lines for 113
long days in 1945-46 in an effort to win ‘Svage increases without price in
creases”— in an effort to prevent fulfillment of their legitimate demands from
being used as an illegitimate excuse to inflict unjustifiable price increases on
American consumers generally.
Since then, our union has repeatedly sought to arouse the Nation to protect
itself against excessive prices. Time and time again, w e have attempted to call
public attention to unjustifiable and extortionate price increases by automobile
manufacturers and by corporations in other industries.
W e take pride in the belief that w e have played some part in bringing this
group together today. In July 1955 our union’s international executive board
called for a congressional investigation of wage-price-profit relationships, with
particular emphasis on the auto and steel industries. At that time, the steel
industry had already raised its prices for the 18th time during the postwar period.
The signs were clear that the leading automobile producers were once again
about to raise their prices. As w e expected, they did raise prices with the
introduction of new models in the fall of 1955.
Since then, further general price increases have been put into effect in both
the steel and auto industries, and the steel industry has recently been adding
increases on so-called extras and certain base prices to its general price increases
of 1955 and 1956.
W e urge that, following this general discussion today, preparations be made
forthwith to begin a full-scale investigation of such industries as soon as is
humanly possible.
W e hope that such an investigation will be carefully planned to assure that
specific and up-to-date facts about specific price increases will be laid bare. No
witness, whether from labor or from management, should be permitted to sub
stitute self-serving public relations declarations for facts and figures. Detailed
and specific information should be required on prices, profits, wages, material
costs, productivity, and similar matters.
If adequate information is not produced voluntarily, this committee or some
other appropriate congressional committee should be prepared to seek from Con
gress the funds, the staff (including expert accountants) and the subpena power
required to conduct a thorough examination of all pertinent books and records.
The danger of inflation is too real and too important to permit any evasion
of the responsibility that rests upon all of us to disclose all information which
m a y be useful in developing a public policy to meet it effectively.
In our considered opinion, a full public airing of the relevant facts concerning
specific recent price increases can, by itself, do much to arrest the current in
flationary spiral. It would certainly give food for thought to those wh o might
be tempted in the future to increase prices without any justification other than
the fact that they want greater profits and can exact them.
This, in our opinion, is all the justification there is for the price increases that
have impelled our repeated requests for an investigation. There is not time
here to cite all the pertinent evidence. But permit m e to mention a few facts
with reference to the price leaders in the auto industry.
General Motors and Ford raised their prices in the fall of 1955, using the
economic gains won by our members earlier that year as their major excuse.
The cost of those gains to the corporations came to about 20 cents an hour.
(The precise figure depends on the assumptions made in calculating the cost of
certain of the gains.) During the first 9 months of 1955— before prices were
raised but after the gains of the workers had already been largely in effect for
4 months— G M ’s profits before taxes came to $2.93 per hour for every hour worked
in its plants by all its 400,000 United States factory workers; yielding a return
310
ECONOMIC REPORT OF TH E PRESIDENT
on the stockholders’investment equal, on an annual basis, to 78.9 percent. (After
taxes the rate of return was still a fabulous 36.5 percent.) In Ford’s case, profits
per hour were $3.06 and the rate of return on investment was 57.7 percent before
taxes, and 26.1 percent after taxes.
These after-tax profit rates were 2 to 3 times the 13.1 percent1 average for
all United States manufacturing corporations during the same period, which
happened to be a period of generally high profits.
Yet G M and Ford raised their prices and sought to put the blame for the
increases on the gains wo n by their workers through collective bargaining.
In the fall of 1956, these same corporations increased their prices again when
they introduced the new 1957 models. Once more, they darkly hinted that wage
increases were the cause. Yet the only wage increases their workers had ob
tained since the price increases of 1955 were the so-called annual-improvementfactor increase and cost-of-living wage adjustments.
B y the industry’s ow n admission, the improvement factor provides no basis
for price increases. In the words of Mr. Harry Anderson, former vice president
of General Motors, it is “repaid in the form of increased production so that in
effect you sometimes have a decrease in actual cost for a particular unit.”
The cost-of-living wage adjustments similarly do not justify the blame for
higher prices which the leading auto corporations seek to fasten upon their
workers. Such wage adjustments are merely a reflection of price increases that
have taken place before the wage adjustment is made. Ironically, in December
1956, autoworkers obtained a 2-cent per hour cost-of-living adjustment largely
because of the higher price tags on the new 1957 car models, which had been
introduced a month or two earlier.
Our union has repeatedly made clear its position with respect to cost-of-living
wage adjustments. W e would much prefer that no occasion should ever arise
for cost-of-living wage increases. They come about through no action of the
workers but simply because prices have been raised by others over w h o m the
workers have no control. All too often, the price increases which bring about
cost-of-living wage increases are put into effect arbitrarily by the same corpora
tions which seek to blame wage increases for their higher prices.
W e have emphasized repeatedly that the worker does not gain but actually
loses when he receives a cost-of-living wage increase. At most, such adjustments
protect him and his family against reductions in the buying power of his current
wages. H e remains a victim of inflation because he loses out in the buying
powrer of his savings, his insurance, and even of many other benefits wo n through
collective bargaining such as pensions and weekly sickness and accident benefits.
In the absence of cost-of-living wage adjustments, workers would sacrifice
their families’ living standards so that others might reap inflationary profits;*
and the consumer purchasing power base upon wThich economic stability ulti
mately depends would be seriously undermined. Moreover, industrial conflict
would be aggravated and embittered as workers found themselves engaged in
repeated struggles merely to regain what the thief of inflation had taken out of
the buying power of their wages.
W e hear much advice these days to limit our wage demands to amounts com
mensurate with increases in productivity. But surely those who offer this advice
cannot in good conscience refer to money wages. They must mean real wages.
For, if applied to money wages in the face of rising prices this advice would
mean constant declines in the living standards of workers and their families or,
at the very least, a constantly diminishing share for wTorkers in the increasing
volume of goods and services that they produce.
There is an abundance of evidence that employers find themselves compelled
to raise wages to meet cost of living advances, although often not as promptly
and fully as they should, even in the absence of unions. Thus, the responsibility
for cost-of-living wage increases cannot be laid at the door of unions. They
come about through the action of forces over which unions have no control—
specifically, the prior price increasing actions of corporations.
Therefore, if wage increases are to be compared to productivity increases
for purposes of determining the influence of unions on the price level, the proper
comparison is with real wages and not money wages. O n this basis, it is clear
beyond all possibility of doubt that the blame for price increases cannot be
pinned on labor. It can be shown that the real economic gains of workers in
the post-wTar period, including fringe benefits as well as wage increases, have
1 F T C -SE C figures adjusted to show percentage return on net worth as o f beginning: of
year fo r comparison with GM and Ford figures which are calculated on same basis. Before
adjustment, the F T C -S E C quarterly figures average 12.7 percent fo r the year.
ECONOMIC REPORT OF TH E PRESIDENT
311
not outpaced productivity, although it probably would have been desirable for
them to do so.
W e hope this committee will call upon the corporations that have been pri
marily responsible for recent rising price trends to provide it with the basic
data from which actual increases in the productivity of their workers can be
computed. W e are confident that such computations will show that the real
wages of their workers have lagged behind rather than exceeded their pro
ductivity.
W e reject, however, the notion that wage increases must never exceed the
size of the productivity increment. This notion assumes implicitly that the exist
ing relationship between wages and productivity is the proper one. It assumes,
further, that workers in industries where productivity advances relatively slowly
have no claim to a fair share in the increasing fruits of technological advance
in the economy as a whole. Moreover, it would require that workers earning
substandard wages abandon all hope of raising their families’ living standards
to generally prevailing levels. Furthermore, w e believe it to be a dangerous
notion from the standpoint of the long-term health and stability of the economy.
The danger flows from the fact that the productivity of capital as well as* of
labor is increasing. Thus, year by year, it takes less investment than previously
to produce more goods with fewer workers. In consequence, the failure of wages
to move ahead faster than productivity would lead to a situation of growing
imbalance between a greatly augmented power to produce and an increasingly
inadequate power to consume.
These considerations of basic economic principles and long-term economic
prospects, although definitely relevant, take us far away from the pressing
current problem that has brought us together. In order to deal effectively with
this problem w e must recognize its unique features. W e must recognize, spe
cifically, that our current inflation does not, on the whole, result from abnormally
high demand and high production rates pressing against capacity limits. In
certain bottleneck areas of the economy, like the steel industry, capacity is a
problem; but it is an artiflcally induced problem resulting from the policy of
planned scarcity followed by the steel industry in order to maximize its prices
and profits while minimizing its risks. Our union has had occasion, in other
congressional hearings, to deal with this matter. It would be most instructive,
incidentally, for this committee to examine the steel industry’s 1947 projections
of future steel capacity needs in the light of shortages currently being experi
enced despite capacity that far exceeds what the steel industry said w e would
need by this time. The industry still follows a policy of planned scarcity;
and that policy supports and reinforces its inflationary price policy.
For the economy as a whole, however, the significant feature of the current
inflation is that prices are being increased at a time and in industries where
current rates of production are substantially below capacity. In fact, in
some industries, notably oil, automobiles, and agricultural implements, prices
have been raised at a time when sales were depressed and/or inventories were
rising. Price increases under these circumstances are obviously not a reflection
of the operation of the law of supply and demand. It can be shown also, and
w e hope this committee will very soon give us opportunity to show, that in the
industries that have contributed significantly to our current inflation, price
increases are not the result of cost increases that have squeezed profit margins
to an unreasonably small size.
W h a t the price increases do reflect, in our opinion, is the existence of an
administered price system which enables certain corporations to fix their prices
on the basis of what is considered financially desirable for the corporation and
without regard to the needs, the welfare, and the stability of the economy as
a whole.
The action of such corporations in raising prices in the face of adverse market
conditions is of most direct concern to those of us in the trade union movement
for it has grave effects on the employment opportunities of our members. This
is evident from the warning given the auto industry by the president of the
National Automobile Dealers Association before the increase in prices on 1957
models. This gentleman, Mr. Carl Fribley by name, said that higher price tags
“could mean the difference between a 6y2- to 7-million-car year or a 5Vi- to 6million-car year.” Such a difference in sales would reflect itself in a difference
of approximately 100,000 jobs in the automobile industry. There is evidence that
the effects are already being felt. As of mid-December, 83,000 workers were
unemployed in the Detroit area compared to 45,000 in the same month a year
earlier.
87624 0 — 57-------21
312
ECONOMIC REPORT OF TH E PRESIDENT
The administered price system should also, in our opinion, occupy a central
place in the attention of this committee. The Joint Economic Committee operates
under a statute which has as its goal the achievement and maintenance of
m a x i m u m employment. It is obvious, however, that full employment policy can be
nullified and frustrated in practice by abuse of the power possessed by certain
corporations to fix prices administratively. Such abuse results in the siphoning
off into a relatively few corporate treasuries of purchasing power required to
sustain demand in other areas of the economy. N o matter what m a y be done by
Government and private groups to provide the economy with adequate purchasing
power, abuses under the administered price system can make their efforts inade
quate to sustain full employment.
The existence of the administered price system in crucially important areas
of the economy requires all of us to take a fresh look at the problem of inflation.
The shibboleths of the free market, competition, supply and demand, no longer
have any validity, if they ever did, for those sectors of the economy where prices
are no w fixed by decisions of a few corporate executives rather than by the
impersonal interplay of the forces of the market.
With respect to these areas of the economy, w e must find ways to make up
for the absence of the restraints imposed by competition. This, it seems to us, is
one of the central economic problems of our time. W e do not pretend that we have
found any final answers to these problems. W e do wish, however, to make two
proposals which w e hope will receive the earnest consideration of this committee
and of American citizens generally.
One proposal calls for self-restraint by our union as an organization, although
w e have not been guilty of exceeding the bounds of sound wage policy. The
second proposal calls for self-restraint on the part of corporation possessing the
power to administer prices. In both cases, the proposals would buttress selfrestraint with the force of public opinion. In both cases, also, the proposals
would equip the public with the facts required to measure the degree to which selfrestraint had been exercised in conformity with the requirements of the general
welfare.
Our union has always believed that economic decisions, and particularly
those affecting the general welfare, should be made on the basis of the economic
facts rather than on the basis of economic power. This applies whether the power
involved be the power to shut down a plant of a corporation and to keep it shut
down, or the power to extort from the consumer any price that a corporation m a y
deem it advisable in its narrow interest to impose.
For ourselves, w e of the U A W are willing to be bound by the policy that
demands for wage increases and other economic gains in administered price indus
tries should be confined within the limits of the ability to pay, without price in
creases, of the efficient firm functioning under full employment conditions.
This is no new principle for us. W e first offered to be bound by it during the
General Motors strike of 1945-46 when, as noted, more than 200,000 of our
members struck 113 days for “wage increases without price increases.” W e
offered during that strike to reduce our wage demand, justified though w e were
convinced it was, to whatever the amount— zero if need be— that could be paid
by the corporation without an increase in its prices.
Implementation of this policy requires, of course, that the facts on ability to
pay be available to us and to the public. Both must have all the information
that is necessary to determine beyond a reasonable doubt the size of the economic
package that could be granted without reducing the profits of an efficient firm in
a full employment economy below a reasonable level.
Obviously this cannot and should not be a universal policy applicable to all
industries. It would be improper, inequitable, and economically unsound to
apply it in industries where existing wage levels are substandard. In such
industries, price increases m a y be necessary to bring wages up to prevailing
levels. But such price increases can and should be offset, thus avoiding a rise
in the general price level, by price reductions in industries with excessive profits
and in others characterized by rapid technological advance. Similarly, this
wage policy, designed for an administered price industry, is impracticable and
unnecessary in industries where prices are set by competition rather than by
corporate fiat.
Balancing the obligation w e are ready to assume to be bound by the economic
facts, w e propose that a similar obligation be assumed by corporations in a
position to administer prices. Specifically, w e propose a statutory mechanism
that would assure the public of an adequate flow of essential factual informa
tion concerning certain corporate price actions without involving Government
in the task of controlling prices.
ECONOMIC REPORT OF THE
PRESIDENT
313
As we presently visualize it, legislation directed toward this objective would
require advance notice and public justification of price increases proposed to be
put into effect by any corporation which accounts for more than a specified
percentage— perhaps 20 or 25 percent— of the total sales of its industry. Such
a corporation would give notice of intention to raise prices to a governmental
agency created for this purpose. The agency would thereupon conduct public
hearings at which the corporation would be required to present detailed justifi
cation, based upon its records, of the need for the proposed price increase.
Its testimony would be subject to cross-examination and its pertinent records
open for inspection both by the agency’s staff and by representatives of organiza
tions or groups opposing the proposed price increase, including other corporations
which purchase goods produced by the firm proposing to raise its prices.
Following the hearing, the agency would promptly publish the contentions of
the parties and the facts as it had determined them. The hearings having been
concluded, and the notice period having expired, the corporation involved would
then be entirely free to raise the price if it so chose. But the public would
have the means to determine for itself whether or not the price increase was
justified.
These proposals rest on the premise that an effective democracy must be an
informed democracy. They impose no compulsion with respect to wage or price
actions. They infringe no freedom. They are designed solely to minimize the
abuse of freedom through the uninhibited exercise of economic power. They are
aimed at encouraging responsibility in the exercise of economic power by remov
ing the veil of secrecy that now conceals facts of vital public interest and thus
shelters the irresponsible.
W e most earnestly urge that the members of this committee give these pro
posals their most careful consideration. W e do not claim they are necessarily
the best or the only answer to the problem of administered-price inflation. W e
do hope that consideration of these proposals will yield implementing ideas,
necessary modifications and, possibly, better alternatives. W e offer these ideas
now as a modest contribution toward the development of workable means for
the achievement of responsible economic self-restraint on the part of all groups
in our population. Such restraint, w e believe, is an essential to the health of
a democracy that resorts to compulsion with reluctance and only when lack of
self-restraint has led to intolerable abuse.
Chairman P a t m a n . Mr. Karl Fox, head, department of economics
and sociology, Iowa State College.
STATEMENT OF KARL FOX, HEAD, DEPARTMENT OF ECONOMICS
AND SOCIOLOGY, IOWA STATE COLLEGE
Mr. Fox. Mr. Chairman, I am going to confine my remarks to
things more or less directly related to agriculture. To w^hat extent
have agricultural prices contributed to this recent rise in the general
price level ? To what extent have price increases in other parts of the
economy affected the welfare of farm people ?
In recent years, United States agriculture has been subjected to a
series of shocks and pressures that have caused farm product prices
to move oppositely to prices of other goods and services. During the
first few months of hostilities in Korea, prices of both farm and indus
trial products rose sharply. Both sets of prices declined a little dur
ing 1951-52, but after August 1952 farm prices fell rapidly while
industrial prices leveled off and subsequently increased.
Two factors sparked the initial drop in farm prices. A big in
crease in cattle marketings dropped cattle prices more than a third
between August 1952 and August 1953.
At the same time our exports of farm products w^ere sharply re
duced—wheat from 444 million bushels in 1951-52 to 296 million in
1952-53, and cottom from 5.5 million bales in 1951-52 to 3.0 million
in 1952-53. Stocks of wheat and cotton began piling up rapidly under
314
ECONOMIC REPORT OF THE
PRESIDENT
the Government loan program. In 1953, big crops of wheat and
cotton were produced on unrestricted acreages, swelling our carry
over by more than 300 million bushels of wheat and 4 million bales of
cotton.
In 1954, marketing quotas were applied to wheat and cotton and
acreages of these crops were reduced. But most of the acres taken
out of wheat and cotton were planted to feed crops, which flooded over
into the livestock economy of the Corn Belt and other regions. The
resulting low prices and ample supplies of feed led to a rapid increase
in livestock production and, among other things, to the ruinously low
hog prices of late 1955 and early 1956. By December 1955 prices re
ceived by farmers were down to bedrock, 24 percent lower than in
August 1952 Prices paid by farmers fell only 3 percent, and the
parity ratio fell from 102 down to 80. The decrease in prices paid
was small comfort to farmers generally, as it resulted from lower
prices for feed and cattle purchased by some farmers from other
farmers.
Retail prices of food also declined, though not nearly so much per
centagewise as did prices at the farm level. The decline in food prices
permitted a misleading stability in the general level of consumer
prices. Thus, the Consumer Price Index stood at 114.3 (1947-49=100)
in August 1952 and at 114.6 in February 1956; up only a fraction of
1 percent. But the food price component of this index declined from
116.6 to 108.8 between the 2 months; retail prices of other goods and
services evidently increased by 3 or 4 percent.
From February 1956 to November 1956, the retail food price index
recovered about 4 points of its earlier decline. With food prices no
longer falling, the increase in nonfarm prices was clearly revealed and
the Consumer Price Index as a whole rose 3.2 points, about 3 percent,
from February to November 1956. Prices received by farmers also
arose about 3 percent between the 2 months, but a corresponding
increase in prices paid kept the parity ratio at 81 in both months.
Thus, changes in farm prices and incomes during the past 4 or 5
years have been deflationary and have been dominated by special prob
lems peculiar to the agricultural sector. These problems result in part
from Government policies and are in part amenable to correction by
Government programs. With huge surpluses of wheat, cotton and
corn available for sale at prices determined by the Government, the
agricultural sector cannot play an active inflationary role in the
economy during the next 2 or 3 years.
However, a moderate rise in farm product prices could be induced
if production of corn and other feed grains wrere cut below the level
of consumption and export demands. Market prices of feed grains
would drift upward from points well below applicable support prices
to levels slightly above them; within a year or 2 prices of some live
stock products would rise by a similar percentage until normal livestock-feed price relationships were restored.
The effects upon farm people of changes in nonagricultural prices
enter via marketing charges on the one hand and production expenses
on the other. Farm prices for livestock and other perishable food
products are equal to retail prices minus marketing charges. In
creases in freight rates, container prices, and labor costs per unit of
product handled may be regarded as driving a wedge between farmers
and consumers. Such increases have indeed occurred. From 1952
ECONOMIC REPORT OF TH E PRESIDENT
315
(annual average) to October 1956 the retail cost of the “ food market
basket” declined about 4 percent. But marketing changes increased
7 percent, and the farmer’s return declined 18 percent. The farmers’
share of the consumers’ food dollar decreased from 47 percent to 40
percent during this period.
Prices received by farmers (times quantities sold) determine gross
farm income. Net farm income equals this gross income minus pro
duction expenditures. From 1952 to 1955 gross farm income fell
nearly $4 billion. Production expenditures decreased about $1 billion,
due to lower prices for purchased feed and livestock; expenditures for
items of nonfarm origin remained about constant, while net farm in
come fell $3 billion—over 20 percent. Gross farm income and pro
duction expenditures in 1956 are both up slightly from 1955, and
net farm income, including Soil Bank payments, is also up a little.
Increases in prices of farm machinery and other items used in pro
duction will reduce net farm income unless support prices, based upon
the parity index, are increased proportionately. But this effect lags a
year behind the increase in prices paid and applies directly to prod
ucts accounting for less than half of gross farm income. The effect
of higher price supports for corn on prices of livestock takes another
year or more to materialize. Under current conditions, a general price
inflation with no increase in the real incomes of consumers will tend to
undermine the real net incomes of farm operators from farming.
On the other hand, an increase in the real income of consumers tends
to raise farm prices of livestock and other perishable food products by
a somewhat larger percentage, with favorable effects on net farm in
come and its purchasing power. Thus, farmers have a stake in the
maintenance of high employment without price inflation if the two
can be reconciled.
Thank you.
Chairman P a t m a n . Thank y o u , sir.
Mr. Albert Rees, associate professor of economics at the University
of Chicago.
STATEMENT OF ALBERT REES, ASSOCIATE PROFESSOR OF
ECONOMICS, UNIVERSITY OF CHICAGO
Mr. R e e s . Mr. Chairman, members of the committee, the rise in
prices during 1956 should be viewed against the background
of 3 preceding years of extraordinary price stability. The con
sumer price index has risen slightly more than 3 percent in the
past 4 years, during a period when employment has been high and
growth has been rapid. This good record wTas not accidental. It was
made possible by generally sound monetary and fiscal policies, in which
the administration, the Congress, and the Federal Reserve System can
take pride.
Our commitments to maintain high employment means that there is
always a potential danger of inflation. However, I doubt whether
the price rise of the past year is the beginning of an immediate infla
tionary movement. The stringency of present monetary policy and
the surplus in the cash budget should be sufficient to check any substan
tial further price rises. I f business expenditures for new plant and
equipment were to fall from the unprecedented level they have now
316
ECONOMIC REPORT OF THE
PRESIDENT
reached, which could well happen, I should expect to see prices turn
downward.
The portions of the President’s state of the Union message dealing
with inflation were disappointing to me, particularly so because I
have admired the general economic policies of the Eisenhower ad
ministration.
An appeal to business and labor for price and wage restraint is
no novelty; similar appeals were made by President Truman on sev
eral occasions. We have learned that this method of fighting in
flation encounters two difficulties.
First, in most areas of a free economy, it won’t work. Many busi
nessmen and union leaders will refuse to act against their own inter
ests ; other who might be willing to do so will be dissuaded when they
see rivals pursuing a more profitable course. It might be added that
appeals for restraint are least effective where the economic system
is most competitive.
Second, and more important, such appeals, if heeded, can do much
harm. In a moment I shall try to explain how this harm is done.
The President said, “ Business in its pricing policies should avoid
unnecessary price increases, especially at a time like the present when
demand in so many areas presses hard on short supplies.” This
suggests that price increases can only be justified by higher costs.
But higher demand may itself be a justification for price increases.
Higher prices direct goods where needs are greatest and insure that
purchases are reduced most where needs are least. Buyers whose
requirements are not urgent will postpone or reduce their demands
or turn to substitute commodities. The alternative under voluntary
price restraint is for sellers of scarce goods to allot them among eager
buyers according to past patronage, or on the basis of friendship, or
in exchange for favors.
In other words, where you have a price that will not clear the
market and where some form of nonprice rationing would be required
to divide goods among buyers, I believe prices increases are justified
even if there has been no change in costs. That does not mean, of
course, that all price increases are justified.
Such a system—that is, a system of nonprice rationing—discrimi
nates against new and growing firms and against new and growing
uses of materials at a time when innovation and growth are badly
needed.
Discussion of recent price rises in the press and by business leaders
has usually been stated almost entirely in terms of costs and has
neglected the role of demand. It is interesting to note that during
1956 the wholesale prices of durable finished producer goods rose 8.3
percent, while the wholesale prices of durable consumer goods rose
only 3.8 percent. Changes in the costs of producing these two kinds
of goods must have been very similar, but in 1956 the demand for
producer goods increased rapidly.
The particular cost whose role is most emphasized is wages, and
wage increases are attributed largely to labor unions. Indeed, unions
are often thought to be primarily responsible for inflation. As applied
to the United States, this view is certainly too simple and probably
substantially wrong. First, unions have had less influence on wages,
even for their members, than is usually assumed. Since 1939 aver-
ECONOMIC REPORT OF THE
PRESIDENT
317
age hourly earnings in manufacturing have risen from 63 cents to
$2.05, more than a threefold rise. Most of this rise is surely due
to the increase in quantity of money, to rising productivity, and to
the high level of demand for labor. I should be surprised if unions
are responsible for as much as 10 percent of it, though the dramatic
nature of the collective bargaining process often causes them to get
credit for much more. Of course, unions have also made important
and desirable noneconomic gains for their members, such as the estab
lishment of machinery for handling grievances.
Nor have unions necessarily contributed to inflation to the extent
that they have raised the wages of their members. The state of the
Union message said:
W a g e increases that outrun productivity, however, are an inflationary factor.
This is true in some circumstances, but it need not be true.
Suppose that in a period of price stability wages rise more than pro
ductivity in industries that are not experiencing any labor shortage.
This creates a nasty dilemma for the Government. I f the monetary
and fiscal authorities keep aggregate demand high enough to maintain
employment in the affected industries, prices will rise. I f aggregate
demand is restrained or reduced to keep prices stable, either wages in
other industries will fall or, more likely, unemployment will increase.
The essential point is that any government not controlled by labor
unions can choose between the horns of this dilemma. I f it chooses to
restrain demand, it reduces the extent to which the wage increase will
be passed on to consumers in higher prices, and it creates a powerful
check to further wage increases.
While the choice between these unpleasant alternatives may some
day confront us, I doubt whether it has confronted us as yet. Past
price rises, in my opinion, have started wTith increases in demand. In
particular, the price rises of 1956 seem to me to be much more closely
related to heavy business investment than to collective bargaining.
But regardless of the source of a rise in the general price level, reduc
tions in the rate of growth of the money supply and surpluses in the
Federal cash budget are the only sound weapons for combating it.
I have not had time in this statement to touch on the role of produc
tivity in determining particular wages. Since it has been mentioned
very frequently here this morning, I might say that productivity in
one particular industry should have anything at all to do with the
determination of wages in that industry. I think the relationship is a
much more general one. I f time permits I should like to come back
tc that point later in the discussion.
Chairman P a t m a n . Thank you. Members of the committee are
limited as the panel is, so I shall be very brief, and then I shall yield
to Senator Watkins.
First, I am going to try something that we have done before, to get
the attitude of the members of this fine panel on two questions.
The first question is whether or not you see any signs of a buyer s
strike or buyer’s resistance to higher prices. I f you see any sign of
evidence of buyer’s resistance to higher prices would you mind indicat
ing by an uplifting of hands ? Do you see any signs or any evidence?
I see Mr. Keyserling, Mr. Brubaker, Mr. Weinberg, and Mr. Rees
have their hands raised.
87624— 57-------21
318
ECONOMIC REPORT OF THE
PRESIDENT
Mr. B r u b a k e r . I am personally on strike against the higher prices
of cars.
Chairman P a t m a n . That would be included. I had reference to
any industry.
As you know a large part of the capital expenditure for plant and
equipment are obtained by higher prices through retained earnings—
in fact, last year I think the evidence before this committee disclosed
that 67 percent of the capital expenditures was obtained from retained
earnings and depreciation. Testimony yesterday disclosed that this
year it will probably be 70 percent, as prices are set higher in order
to acquire expansion capital. Do you believe that could be one of
the principal causes of inflationary danger that we will face in 1957 ?
Mr. B r u b a k e r . I so noted in my statement, the part I did not get
to present.
Chairman P a t m a n . I do not believe that I will ask any more ques
tions until the other members of the committee have had an oppor
tunity to inquire. I shall now yield to Senator Watkins.
Senator W a t k i n s . Mr. Chairman, I would like to say that so much
was said in a few minutes, I am quite overwhelmed with the state
ments and contradictory statements. I want to read it and analyze it
all and I think I can contribute most at this time by listening.
Chairman P a t m a n . Senator Sparkman, of Alabama.
Senator S p a r k m a n . Mr. Chairman, perhaps it would be a matter
of wisdom for me to follow the example set by Senator Watkins,
but a great many questions are raised in my mind by the various,
statements.
Since the last statement is freshest on my mind, I think I will start
off by asking a question about the price stability that we have had.
I notice the statement that we have had remarkable price stability for
the period of the last 3 years, and then have had a sharp rise during
1956Just for curiosity’s sake, I went back to the tables shown in the
Consumer Price Index. I would like to ask this question: Is it not
true that that stability really started back in the latter part of 1951
or the latter part of 1952, or you might even put it earlier than that?
Did it not tie in almost exactly with the decline in farm prices?
Mr. Rees. Senator, it is quite true that if you look at wholesale
prices-----Senator S p a r k m a n . I am looking at consumer prices.
Mr. Rees. There was some rise in consumer prices during the period
you mention.
Senator S p a r k m a n . I wonder if you would turn to page 23 of
Economic Indicators and then look on page 25 at the table, Prices
Received and Paid by Farmers. It seems to me that there is a re
markable parallel if you look at the graphs and particularly if you
look at the index numbers given before the graph in each case.
I notice, for instance, that in 1951 all items stood at 111. That was
just about the time that we were working under controls following the
terrific price upsurge that resulted from the Korean War. I notice it
stod at 111. In 1952 it stood at 113.5; in 1953, 114.5; in 1954, 114.8;
in 1955, back to 114.5.
The latter part of that year it started going up, 114.9, 115, and it
ended back at 114.7. It maintained pretty close to that level until
some time this year.
ECONOMIC REPORT OF THE PRESIDENT
319
The index on the farmers’ prices follows almost exactly the same
pattern except in the inverse.
Mr. Rees. Senator, it is true that the rise in the consumer price index
during 1952 and 1951 was quite modest, and I think that is also a good
record. I did not mean to disparge it in any way.
Senator S p a r k m a n . I am not bringing up that question. I want to
show that was when we were coming out of the war period because
someone else has said that inflation usually results from war.
But I wanted to see if my reasoning is correct that it was accom
panied by a loss of prices to the farmer which, in my opinion, made the
difference.
Mr. Rees. This is certainly an important element in the whole price
picture. My feeling here is that the Government’s overall monetary
and fiscal policy—I am not speaking at the moment about its agricul
tural policy—ought to be directed toward the stabilization of the
general price level and toward high employment.
In this general price level I include agricultural prices. I do not
believe there is any way of using monetary and fiscal policy in such a
way as to offset price declines in one particular sector of the economy.
I might say that if agricultural prices had remained stable in that
period, it is not clear to me that it necessarily follows that the general
price level would have risen, because it is quite possible that in those
circumstances the prices of industrial commodities would have risen
less than they actually did.
Senator S p a r k m a n . I wonder .if we may go one step further?
Farm prices did start to rise in the summer of 1956. Is that not the
same time that the general price index started up?
Has not the level of farm prices pretty much followed the trend?
I am agreeing with you that you cannot use the fiscal policy of the
Government for one single segment of our economy, but on the other
hand, I think it is just as important that we not hide our heads in the
sand and think that because the farmers of the Nation have borne the
burden over these years, we need not be concerned with the inflationary
price increases which have occurred.
I am not an economist, but it does not seem to me that we are getting
anywhere if we assume we have had overall price stability without
taking into consideration the fact that the farmers have pretty well
had the burden of the maintenance of that stability.
Mr. Rees. I think it would have been healthy if the price move
ment during that period had been composed of greater stability
within both the agricultural and the nonagricultural components,
rather than offsetting movement. Given the surpluses of farm prod
ucts that we have had, it seems to me the only natural and permanent
way of achieving that would have been to move resources out of
agriculture at a faster rate than we actually did.
I think, though, that questions in this area should really be directed
to Mr. Fox, because he knows a great deal more about that than I do.
Senator S p a r k m a n . The reason I directed them to you is because
I felt that you dealt with that subject in your paper.
By the way, on this question of surpluses, if we go back to the time
when this instability began we did not have farm surpluses, did we?
Do you remember, at that time we had to borrow on cotton ?
I would be glad for anyone to comment on this. May I go on to say
we had an embargo on cotton. We could not ship cotton out of this
320
ECONOMIC REPORT OF THE PRESIDENT
country, there was such a scarcity. When India wanted wheat, one
of the great objections raised to it was the fact that we did not have
enough wheat to spare, but India wanted to relieve her famine. It
has not been so long.
Mr. K eyserling. I want to make some comments on what Senator
Sparkman has said, because I think his question promises to direct
this inquiry to some things that are very pertinent.
In the first place, it is true that between the middle of 1951 and the
middle of 1953 or shortly thereafter, we had a faster rate of economic
growth than we have now, fuller utilization of our resources, much
fewer surpluses, and much less price inflation, which indicates the first
very important point, that the price inflation of today is not the tradi
tional situation generally of supply pressing against demand, but is
rather the administered process of raising prices without justification
or necessity.
Second, I understood Senator Sparkman to make the point that
we have to consider the allocation and use of our resources, as well
as the price structure. I f I may say something for a minute about
that, because I think it is central, the barrage of price and wage
statistics that have been flung at us means nothing unless it is put
in the framework of what our economy is really trying to do.
Our economy is really trying to do only two things: Use its resources
to produce to the maximum, and get that product used to serve our
interests as a nation both overseas and at home. Prices and wages
are merely the machinery through which we try to so allocate resources
that we get maximum production and use it wisely.
In order to test whether the price trends and wage trends are mov
ing in a favorable or unfavorable direction, you have to set them
against the pattern of what is happening to the real economy. What
is happening to the real economy now is this, basically: Investment
in plant and equipment has been moving relatively too fast as against
consumption. I f you think this is my special statement, any business
analyst will tell you that the real problem for the year ahead is that
consumption is not growing fast enough. It has grown only 2 percent
in real terms over the past year.
As to the question of the buyers’ strike-----Senator Sparkman. May I interrupt right there ?
Mr. K eyserling. Yes, sir.
Senator Sparkman. Is my memory correct that within recent weeks
2 or 3 of our big industries have announced a cutback in their
expansion ?
Mr. K eyserling. Yes; that is correct. That is caused not by an
inadequacy of profits or an inadequacy of funds. It is caused by they,
themselves, beginning to sniff the air of an inadequacy of consumers.
That is why they are cutting back. That is where the imbalance is.
There was a question about a buyers' strike. Consumers are not
on strike. Consumers do not have the money to buy enough to take
up our expanding productive capacity. I f they were on a buyers’
strike, you would not have had the support of the inadequate level
of consumer buying in the past year and a half by an utterly irrational
credit boom.
Consumers do not borrow more and more to buy with inadequate
incomes if they are on strike. This is not a strike proposition. There
is just not enough consumer income.
ECONOMIC REPORT OF THE PRESIDENT
321
The current trends in prices and wages, respectively, are rationing
our resources contrary to our national needs. They are providing
relatively too much funds for plant expansion, and relatively too little
funds for consumption. From the equitable point-----Senator Sparkman . Would you say, relative to the amount which is
available for the construction of homes for Americans at reasonable
price ?
Mr. K eyserling. That is also true. That brings us to the second
point, that the utilization of our national economic policy, both the
budgetary and hard money policy, is also rationing resources con
trary to our primary needs as a nation.
The hard money policy is not interfering with the investment boom.
It is interfering with the construction of schools. The hard money
policy is not interfering with big business. It is interfering with the
marginal producer.
The budgetary policy, to the extent that it has been anti-inflationary,
has been anti-inflationary at an excessive cost in terms of basic needs.
But it has also been inflationary in the short run, because it has built
up bottlenecks. In other words, a policy that does not provide enough
w^ater, a policy that does not provide enough roads, a policy that does
not provide enough schools when the Russians are training skilled
workers 4 or 5 times as fast as we are, is inflationary in the short run
and deflationary in the long run.
Senator Sparkman. Would you go one step further and say, a
policy that is starving or threatening to starve small business?
Mr. K eyserling. That is also true. I suggest, if I may humbly
do so, that this committee look at the Employment Act of 1946 once
again, which sets forth in one sentence a simple and adequate criterion
of what economic policy is all about, to w it: What are our needed
levels of employment, production, and purchasing power to meet our
national needs?
That, of course, involves the distribution and disposition of prod
uct. I f we have enough resources to add 50 to the horsepower of
automobiles every year, and say we do not have enough resources
to out-pace the Russians, there is something wrong. I f we have
enough-----Senator Sparkman. I hate to break in, but you and I together
have used my share of the time.
Chairman P atman . This is so interesting, I have been talking to
Senator Sparkman about having an afternoon session.
Mr. Kilburn ?
Represenative K ilburn. This has been very instructive to me. I
am a little puzzled, however, by the varying statements of Mr. Smith,
Mr. Hitchings, Mr. Weinberg, and Mr. Brubaker. Did you all use
the same set of figures ?
Mr. W einberg. May I make a comment on that? In the case of
Mr. Hitchings’ presentation, I think it is interesting and significant
that he dealt very largely with information on the overall economy
and stayed carefully away from information with respect to the Fora
Motor Co.
The thing we are concerned about is that our current inflation is
not the result of uniform price movements and price policies through
out the economy, but the price practices of a few corporations that
happen to be located at strategic crossroads of the economy where they
322
ECONOMIC REPORT OF THE PRESIDENT
can exert enormous economic influence. They exert that influence
through the price mechanism. To take overall figures for the econ
omy as a whole and to ignore the specific figures pertaining to those
corporations serves to obscure the real source of our present price
problems.
In that connection, I would like to make one comment with respect
to what the chairman of the committee has said. The\<shairman has
referred to the fact that business has been raising capitjal through its
excessive prices. I would like to stress the fact that there is no need
for it to raise capital this way, nor is it the proper way to raise capital.
The fact that there is no need is evident from page 135 of the Pres
ident’s Economic Report. There you will find that since 1947 dividend
payments have approximately doubled. Since 1950 they have in
creased by one-third. I f corporations were starved for capital, they
would not be paying out these dividends to stockholders. They would
be retaining more of their earnings for investment.
Then we come to the question of the propriety of this means of
raising capital. Traditionally in economic theory it has been believed
that the proper way to allocate capital resources as well as other
resources was through competition—to go out into the competitive
market for capital and sell stocks and bonds.
But business does not do that today. Instead of raising capital
tamong investors, it asks consumers to provide investment funds
through excessive prices. However, the consumer gets no equity when
he makes the investment. I would feel a little better about this policy,
if with every item containing steel that I bought, I received a share
of stock or a part of a share of stock in one of the steel corporations.
This would make some sense. I f I am to supply the investment capi
tal, I should get an equity.
What we are concerned about is the fact that some corporations—
not the whole economy, not small business, not the businesses in the
competitive industries—but some corporations, controlling tremen
dous shares of the total market for their industries are able, at will,
to fix prices at a level that they think will best serve their own pur
poses, regardless of what happens to the rest of the economy.
That is why we have been urging repeatedly, since long before this
inflation broke out, starting in July 1955, that a thorough investiga
tion be made of the price practices of corporations that are in a posi
tion to fix prices, and we hope that such an investigation will be
forthcoming.
Representative K ilburn. It is still not clear why you all use this
same set of figures to come to so many different conclusions.
Mr. B rubaker. May I comment on that %
One of the central figures in Mr. Smith’s presentation was this com
parison of United States Steel figures between 1940 and 1955, in
which he pointed out that there had been an increase, according to
his figures, in employee cost per hour during that period of 8.1 per
cent per year.
Very frankly, I hope there has been an increase in employee cost
per hour during that period. It wrould be a tragic thing if this had
not been, because we have had a tremendous increase in production
by United States Steel during that period. We have had a tremen
dous growth in output per man-hour. I f wages per man-hour did
not go up during that period, it wrould simply mean that these poor
ECONOMIC REPORT OF THE PRESIDENT
323
wage earners in steel would have less and less money with which to
buy, with which to consume, as Mr. Keyserling has pointed out.
I think to round out the picture that Mr. Smith has given you, we
ought to look at United States Steel’s other figures from 1940 to
1955. I f you would look at them you would find that their sales
have gone up from roughly $1 billion to more than $4 billion in that
period. Their profits before taxes have gone up from $128 million to
$736 million. Their net profits have gone up from $102 million to
$370 million.
Representative K ilburn. Wouldn’t their profits naturally follow
sales?
Mr. B rubaker. Yes, but they not only followed their sales but
they went up by sixfold whereas the sales went up only by fourfold.
Representative K ilburn. Are you talking about net profits on their
investment ?
Mr. B rubaker. This was profits before taxes. I have a figure on
net profits on investment. Their net profits on investment in 1940
stood at the level of 71/£ percent. In 1955, at the end of this 15 years,
their profit on investment was 14.3 percent, or almost twice as great.
This is a picture not of inflation caused by increased employment
costs. This is a question of inflation caused by an effort to increase
their profit margin. The evidence is there. It is from their own
figures.
Let me give you two other figures to fill this in, wages and salaries
as a percent of the corporation’s sales dollar in 1940 versus 1955. In
1940 wages and salaries were 43 percent of the corporation’s sales
dollar. In 1955 it wTas only a little over 39 percent. In other words,
we are losing ground within the corporation itself and within the
industry in terms of the amount of sales dollar that goes to wages.
Representative K ilburn. I don’t think that that in a way is a sound
argument to me if the difference accounts for expense of techno
logical improvements.
Mr. B rubaker. But this is the total amount which they paid for
all employment costs. They are saying that these costs have gone
up and they imply that somehow this is bad.
Representative K ilburn. I agree with you and with what the Presi
dent says. Mr. Rees brought out that you ought to keep abreast of
productivity. That is my next question to you and to Mr. Wein
berg : I f the big companies do not raise their prices unduly for other
reasons, do you think that the wages should increase only with
productivity ?
Mr. B rubaker. Y ou are asking me an “ iffy” question there. I
think the answer in terms of our own union is a fairly simple one. It
isn’t a question of what we think they should or should not do. The
question is what has actually happened. I gave you a comparison
in my formal statement as to what has actually happened. We are
pictured in the press constantly as being a big union that can force
wage increases that are out of relationship to productivity. Actually,
if you go back and look at the figures since our union was founded,
if you go back and take the figures from the base date used in the
recent BLS productivity study, the rise in real productivity, the out
put per man-hour in steel, has been 68.8 percent. The real straighttime earnings which our people have received have risen only 48.3
324
ECONOMIC REPORT OF THE PRESIDENT
percent. I f you would add to that an allowance for the fringe bene
fits which have also improved sharply during that period, you would
still find that the growth in output per man-hour has been greater
than the total increase in real wages and fringes
This is very simple. Whether we wanted to or whether we didn’t,
we have not been able to and we have not forced wages and fringe
benefits up in our industry faster than productivity has gone up.
Representative K ilburn. It seems to me that there you have an
area of agreement while you folks disagree on your analysis of figures.
Mr. B rubaker. I don’t think so. There ; >mething much more
basic than the figures here.
Mr. S mith . I think I know the figures of my company and the
steel industry’s fairly well. All I would like to do at this point is to
throw in a little facts. Rather than use those I will, if I may, use
this same Bureau of Labor Statistics computation to which Mr. Bru
baker has referred.
The increase in output per man-hour, so-called productivity, as
calculated by the Bureau of Labor Statistics, has averaged from 1939
to 1955, I believe their calculation was 2.8 percent per annum. This
compares with the 8.1 percent increase in the cost per employee-hour.
Chairman P atman . Mr. Bolling.
Representative B olling. I would like to hear what Mr. Rees has to
say on that question.
Mr. R ees. Thank you, Mr. Bolling.
Representative K ilburn. S o would I.
Mr. R ees. I don’t want to comment on the figures of output per
man-hour versus employment costs in the steel industry. I am not
familiar with those figures for recent years. But I do want to say
that I don’t think you can arrive at a sound wage policy by making
that particular kind of comparison. To the extent that productivity
has any bearing on wages, it has to be the productivity of the economy
as a whole and cannot be the productivity of the particular industry.
To illustrate it very simply, suppose you had an industry whose
productivity was increasing by leaps and bounds because this was a
rapidly growing industry and one employing a lot of new technology.
Suppose we had applied these standards to the television industry
starting in 1946. You would have choked off the growth of that in
dustry. The workers in that industry are entitled to*some of the
productivity gains but they surely are not entitled to all of them in
that kind of situation. Something has to be passed on to the consumer
in the form of lower prices.
In addition, where you are getting heavy investment in an industry,
output per man-hour is rather a bad measure of productivity. The
measure you want, which is a hard one to find and much more difficult
to compute and that is why we don’t use it very much, is output per
unit of input, wherein that input you include not only labor input
but also inputs of capital and other resources.
We can turn that around. Suppose we applied this kind of standard
to an industry which because of its nature is not subject to rapid
technological progress. I am a teacher. It takes 1 teacher to teach
30 to 35 students. I assume it did 100 or 150 or 200 years ago. At
least there is no measurable way of demonstrating that teachers’
productivity has gone up. I think you could say the same about
Congressmen. They may be more productive now than they were at
ECONOMIC REPORT OF THE PRESIDENT
325
the foundation of the Republic, but we certainly haven’t any statistics
to prove it.
Senator W atkins. Y ou might check on the number and kind of
bills that we introduce. I think we have shown some progress.
Mr. R ees. All I intend to do by this little joke is to show that if
we want some of these industries to survive which are not subject to
rapid technological progress, and we don’t want all their labor bid
away by other kinds of employment, we have got to let the people who
work in these industries share in the growth of our economy, and in
doing that it means that we cannot give the people in the rapidly
growing industries, either the workers or the owners, the full fruits
of progress in those industries. That is why this discussion of the
relation between wages and output per man-hour in the steel industry
is likely to be misleading, because I don’t think either side can prove
its case by reference to these figures.
Representative B olling. I would like to get off on a slightly differ
ent tack, if I might, and I know there are other people who would like
to comment on this. I would like to ask Mr. Rees what criterion
should be used in determining a rate of return on investment that con
stitutes a reasonable level.
Mr. R ees. This gets us back in terms of ability to pay as a criterion
of wage increases. This is one that Mr. Weinberg has mentioned. I
would disagree on that one, too, Mr. Bolling. I don’t believe that
proper wage levels can be determined by ability to pay, and therefore
if you are concerned about wage-price relationships I would not want
to get into the kind of determination of a fair rate of return that one
gets into, say, in setting public utility rates.
Again, the obvious way of demonstrating this is to take the concern
which is losing money. I f one of the automobile producers or any
other company is losing money, unions will be very reluctant to say
that that is a reason for a wage cut and quite rightly so because these
workers are worth just as much, their services are just as valuable,
their needs are just as great, whether the company is profitable or not.
Perhaps I haven’t answered your question, but I don’t believe that it
should be part of Government policy to determine a fair rate of return
outside of the regulated industries. I surely would not want to say
what a fair one is. It would have to be higher for risky industries
than it is for regulated industries, which are by and large very safe
industries in which to invest.
Representative Bolling. In other words, you would not want even
to say that you thought 20 percent on investment was a fair rate of
return ?
Mr. R ees. A s an overall rate of return for the whole economy it
would certainly seem excessive, but if we have a particular industry
where our needs for investment are very great and that industry is
risky and the only way we can attract investment into that industry is
to offer it 20 percent, I could conceive of circumstances in which I
might regard that as fair.
Representative B olling. There are representatives here from either
side of two industries. For purposes of illustration, what wrould they
say wrould be a fair rate of return in the automobile industry or the
steel industry ?
Mr. R ees. Mr. Bolling, I just don’t feel competent to answer that
question, sir. I will have to decline to.
326
ECONOMIC REPORT OF THE PRESIDENT
Mr. H itchings. I would like an opportunity to comment since the
auto industry has been mentioned specifically. Like Mr. Smith, I
assumed that the present hearing was directed toward a broad inquiry
into prices for the economy as a whole rather than a specific investiga
tion of the auto industry or the steel industry or any other.
Representative B olling. We are not attempting to do that. Let us
be very clear.
Mr. H itchings. I agree with Mr. Rees that profits and productivity
of a particular company or industry should not be the controlling cri
teria for establishing wage rates in that company or industry. Fur
thermore, the facts for the auto industry do not support the extrava
gant claims made as to increases in profits and productivity relative to
wages.
When periods of like unit volume are compared (and this is the
only proper comparison for price-cost-profit relationships), dollar
payrolls have advanced while profits have not. This is illustrated in
a comparison for our own company of 1956 with 1954 and 1950, in
each of which years unit volume amounted to about 2 million vehicles.
The year 1956 is a proper base because it was neither exceptionally
high nor low.
Employee payrolls (including supplemental benefits) in 1956 were
13 percent above 1954 and 83 percent above 1950. Part of this total
represented increased hourly and salaried man-hours, but the cost
per hour worked by hourly employees was up 11 percent and 43 per
cent over 1954 and 1950, respectively.
By contrast, the profit position deteriorated. Total profits in 1956
were about the same as 1954 and slightly below the 1950 level. Since
invested capital at the beginning of 1956 was 29 percent above 1954 and
virtually double that of 1950, the return on investment declined sub
stantially. Furthermore, the purchasing power of total profits was
less than in 1954 and 1950 after adjustment for higher prices of goods
and services purchased by the corporation and its stockholders. Such
was not the case for employee compensation.
Similarly, there are no facts to support the exaggerated claims of
productivity increases. There are no adequate measures of comparable
input and output for a company such as ours. A simple compari
son of hourly worker man-hours per unit of finished output contains
many flaws. It fails to include in input the other factors of pro
duction and it also fails to distinguish changes in the type of output.
Furthermore, changes in the ratio cannot be ascribed to the labor factor.
To the extent that the simple ratio of hourly worker man-hours
to vehicle output is used, however, it shows no improvement in 1956
over 1954 and some deterioration from 1950.
Chairman P atman . Dr. Talle, would you like to ask some questions ?
Representative T alle. Mr. Chairman, I will forego questions at the
moment.
Chairman P atman . Senator O’Mahoney ?
Senator O’M ahoney . I came too late to add anything to this panel
discussion, not knowing what has been said.
Chairman P atman . We are back to Senator Sparkman.
Senator Sparkman . I was just going to suggest to Senator O’Ma
honey that he could question very well on the two papers presented
here with somewhat conflicting views related to the steel industry. As
ECONOMIC REPORT OF THE PRESIDENT
327
I recall, it was Senator O’Mahoney who conducted the study that we
made back in about 1948 when there was a similar wage rise in steel
followed by the still greater price rise in steel, and tried to determine
the extent to which the price raise was justified by the wage rise. I
am sure you remember that quite well.
I may say, remembering the difficulty we had in reconciling such
figures as have been given here by the two different sides, I can easily
see the confusion which sometimes develops, but I believe that there
was a pretty fair showing made in those hearings and certainly in
things that have happened since then to lend some justification to the
feeling that many of us have—and I have heard Senator O’Mahoney
state it many times—that there is a rather large area of administered
prices in some of the big industries.
Senator O’M ahoney. There isn’t any doubt about that. Senator,
and I would say offhand that price increases when administered by
large companies are just like taxes imposed upon the people by Gov
ernment for the support of the Government. The United States Steel
Co. increases the price of steel, as I see it, for the purpose of getting
what should be gotten from investment capital markets instead. This
is the habit of many corporations now. Internal financing of big com
panies is made possible by the huge profits which are kept undis
tributed and are plowed back into the industry. Then whenever la
bor seeks to have an increase in wages in order to create the market,
speaking in terms of consumer economics, for all industries, the re
sult is that the steel company has very frankly increased the price to
the public to balance whatever increase in wage has been granted, in
stead of taking it out of profits or of going to the market to borrow
or seek the investment. I think there was a very great contrast be
tween the financing of the American Telephone & Telegraph during
the past year and the financing of United States Steel. American
Telephone & Telegraph went into the money market to get the money
by inducing new stockholders to put up the cash, capital investment
for the expansion of plant. United States Steel sought to get the
money for the expansion of plant not in the capital market but in
the profit market by increasing its price.
Senator Sparkman. Our chairman is going to have to leave in a
short time. I wouid like to yield the balance of my time to him.
Chairman P atman . Thank you, sir. I want to make just one ob
servation, Senator O’Mahoney.
Over the years I have noticed more and more of expansion capital
is obtained from retained earnings and depreciation. To me that is
an alarming trend. It is contrary to our private enterprise system,
if I understand it correctly. I would like to be set right if I am wrong
about it.
Here is the way I understand it : It is all right for a concern that
has the power to fix its own prices through administered pricing to
charge a sufficient price to take care of wage costs, products and serv
ices bought for use in the business, interest, all kinds of taxes, local,
net profit, dividends, and even some surplus—but anything in excess
of that amount seems to me should not be taken from the consumer
in actual prices because it compels the consumer to make an involun
tary investment in that concern for which he receives no return. Any
returns go to the stockholders.
876 2 4 0 — 57--------22
328
ECONOMIC REPORT OF THE PRESIDENT
In other words, if an automobile company adds $100 to the price
of each car for expansion capital—and I suspect that is probably a
fair amount to estimate, but I am not sure about it—that company
takes that $100 away from the consumer and uses it for itself. That
doesn’t seem to me to be exactly right.
We find that in 1957, when $40 billion will be spent for plant and
equipment, 70 percent of that money will come from retained earnings
and depreciation and it is mostly the large firms who can use this
method of financing. How can little fellows survive in the face of
that competition ?
Representative K ilburn. Mr. Chairman, don’t you think any pru
dent company should have a backlog to take care of a few lean years?
Chairman Patman . Surely. I said it was appropriate to set aside
a reasonable amount for surplus for lean years, but this is not for lean
years. This is for plant and equipment which is taking money away
from the consumer and using it as investment capital.
Senator Sparkman. We will announce at this time that there will
be a meeting at 2 o’clock. Before you go, Mr. Chairman, I would like
to say I have been intending to ask the panel to discuss the question
which we have just been developing. I believe Mr. Weinberg sug
gested it a while ago. There is this reservation: It is virtually im
possible for small business, businesses wanting to borrow, we will
say, under a million dollar, to utilize the securities market. So it
seems to me that as long as we don’t have credit availability in our
existing setup, there ought to be some plan by which they could obtain
money.
Dr. Talle, are you ready to ask some questions ?
Representative T alle. Thank you, Mr. Chairman. I will not have
time to question. I must go to the floor because we meet at 12. I am
sorry.
Senator Sparkman. Senator Watkins.
Senator W atkins . I want to ask Mr. Smith what he wished to say
when he had his hand up a moment ago.
Mr. Smith . Senator Watkins, I believe it is Mr. Hitchings who had
his hand up.
Mr. H itchings. Yes, I would like to comment on this matter of
pricing to raise capital.
The objective in pricing by business firms is to cover costs and
provide a return on their investment. The ability to realize such a
price depends, however, on demand for the firms’ products. Depreci
ation of existing plant and equipment is a part of the cost of doing
business which must be recovered in the sale of the product. In order
to keep capital equipment intact, these depreciation allowances are
quite properly reinvested in newTplant and equipment. The consumer
is merely paying for the cost of facilities used in the production process
just as he pays for the materials and labor used to produce the
finished product.
I f business firms are to expand and provide the necessary growth in
jobs and in per capita standards of living, there must be sufficient
profit remaining after costs are met to provide an incentive for in
creased capital investment in the business. This capital investment
can be accomplished either through withoholding a portion of the
profits for reinvestment in the business or paying the full amount in
dividends and raising the additional capital from external sources.
ECONOMIC REPORT OF THE PRESIDENT
329
There is nothing wrong with either method. It is solely a matter of the
extent to which management and the stockholders prefer to retain earn
ings directly for additional capital investment in the business.
Price, coupled with the quantity of goods sold, determines the
amount of income available to those who made the production pos
sible—the employees who provided the labor, the lenders who provided
borrowed money, and the owners who provided the capital. Pricing
should be considered in relation to the adequacy of total receipts to
cover these costs and provide sufficient profits after taxes to serve as an
incentive for necessary expansion of the business. The extent to which
income is spent or invested by the various recipients has no bearing on
the validity of the prices.
Senator O’M ahoney. May I interrupt you. What do you mean by
management and stockholders preferring to retain earnings?
Mr. H itchings. Management makes the recommendation to the
stockholders.
The stockholders are the ones who have the voting power.
Senator O’M ahoney. But in many companies there are stock
holders who have no voting power, particularly the Ford Company.
Mr. B rubaker. A distant democracy in most of them, anyway.
Mr. H itchings. In some companies that is correct.
Senator O’M ahoney. Isn’t it a fact in the Ford Company that the
management is retained by a minority of the stockholders, family and
the management, the managerial group?
Mr. H itchings. The public stock has voting rights, too.
Senator O’M ahoney. Some, but there is nonvoting stock, is there
not?
Mr. H itchings. I would have to check with our people who are
here.
Senator O’M ahoney. It is a factor in this whole matter of price.
Mr. H itchings. The Ford Foundation, I am informed, is the only
one which holds any nonvoting stock. Any stock which has been
offered to the public of course has voting rights. The original stock
issued to the Ford Foundation, a nonprofit enterprise, is nonvoting
stock. At that time there was no public stock, but when the Ford
Foundation offered that stock publicly it was changed to voting stock.
Mr. B rubaker. Could we hear from the steel industry on the same
question that you asked ?
Senator S parkman. Senator Watkins.
Senator W atkins. I want to find out if there is anything illegal
or immoral or uneconomic about getting some of the capital to run a
business out of profits.
Mr. H itchings. N o.
Senator W atkins. There has been the intimation here that the
consumer should not make any contribution.
Mr. H itchings. I wasn’t making any moral judgment at all. All I
was saying is that the pricing is not set on the basis of getting profits
to plow back for new expansion. That is not the pricing procedure.
The pricing procedure is to cover your costs, of which depreciation is
one. The decision is made at the time of capital expansion program,
which is over and above depreciation allowances, as to how that would
be financed. I f it is financed in part, for example, out of not paying
out all of the money in dividends, this is a perfectly proper procedure.
330
ECONOMIC REPORT OF THE PRESIDENT
Small companies have grown into big companies by the use of that
procedure, as I believe Senator Sparkman himself pointed out.
I am not taking any moral position as to whether the price should
or should not cover capital expansion. All I am saying is that it is
not taken into consideration in the pricing of business firms of which
I am aware.
Mr. B rubaker. May I give my answer to that question ?
Senator W atkins. A s a matter of fact, the Ford Co. lias gi*own
largely by turning profits back into investment.
Mr. H itchings. That is correct.
Senator W atkins. And that is true of nearly every firm that has
made any great success in this country.
Mr. H itchings. That is right. A small business grows into a
larger business primarily through reinvestment of retained net profits.
Senator W atkins. The gentleman from the steelworkers. I do
not mean to neglect him.
Mr. B rubaker. I would like to comment very briefly on this
question.
Mr. Rees earlier avoided answering a question from Congressman
Bolling on what was a fair rate of return for steel and autos and so
on, on the ground presumably that these are risk industries in which
you have to have some kind of freedom to set profits wherever you
need to set them or want to set them, and prices accordingly. Actu
ally—and I am sure Senator O’Mahoney will remember, too—it was
not so many years ago that the steel industry in testifying before him
kept pointing out that steel was a prince and pauper industry, that
it had such drastic ups and downs that they just had to be free to
make a lot one year so they could make up for the years next time
when they didn’t make anything.
This has not been true for the last 15 years in this industry, and I
don’t think there is any reason to expect it to be true. As a result, we
have had a rate of return on net worth in the industry in that 15
years that has been more than 10 percent in most years. This is a
good return, certainly, for an industry which is no longer a real risk
industry in the sense that it might once have claimed it was.
When you reach the point where there is no longer serious risk
involved in your investment, it then does become, I think, frankly,
immoral, Senator Watkins, for an industry to .say “We think we ought
to raise the prices to everybody so that we can tap them for some
investment funds,” and for the industry not to say that we will go to
our stockholders who have an investment, that we will go to the profits
that they have made as a return on their investment, to their dividends
and even to the retained capital that might be a fair return on their
investment and ask them for funds, but instead to say that we will
go to the consumers who don’t own any of this and say “ You have got
to contribute to this business, too.”
The steel industry has been very blunt in the last several years now
in saying “We are setting our prices higher than we think they need to
be because we want to take money out of the consumer’s pocket for
investment purposes, and not give him any stock for it.” I think that
is immoral.
Senator W atkins . The point I had in mind with respect to the ob
taining of capital was sort of sidestepped, Mr. Smith, would you
like to make any statement on whether in a free competitive enterprise
ECONOMIC REPORT OF THE PRESIDENT
331
you have any right to use not only the profits but the increased profits
in order to make a business grow. I thought that was the way the
American enterprise system did grow.
Mr. S mith . Senator Watkins, I think you have correctly portrayed
the history of our great country. Throughout its entire span the tra
ditional, customary, and accepted way for a company to grow and
better serve the community, its employees, and itself is to plow back
its earnings, so called.
Money is miscible. You can’t tell which particular dollar received
from the customer is going to go here or going to go there. But I
think in order to get some proportions in here we should recall that
the total dividends paid in this country are running along about a
$12 billion annual rate, I believe, against the disposable income of $288
billion. I am rather personally grateful that instead of paying this
money all out in dividends these various companies are making pro
vision for the future by taking some of that money which might other
wise be paid out in dividends and using it to improve the tools of
production, to provide jobs in the process of it, to provide the working
capital without which you cannot have those jobs. That is the way
our country has grown.
I think what Senator Sparkman said is very relevant. I don’t
know how in the world so-called small business could ever grow if
we developed in this country the notion that every bit of expansion
had to come from going outside and borrowing or selling stock.
Senator W atkins. I would like to get your response to another
query which is in my mind since the gentleman from the steel union
made his statement that there is not any risk to amount to anything
in the steel business. I happen to live in a community where we have
a steel industry. We are worried, I think rightly so, about this un
usual demand caused by an artificial situation, planning for defense
for our peace, security and liberty. What would happen to us with
an expanded steel industry if we suddenly found some wTay to get
nations to get along together and the demand for defense purposes
became a thing of the past ?
Mr. B rubaker. I will tell you where the risk is.
Senator W atkins. Just a moment. I want to get the other gentle
man’s view. You have stated that there is very little risk.
Mr. S mith . I take it it is the hope of everyone in the land, certainly
it is my hope, that the business ups and downs can be smoothed out.
This is the beginning of 1957. Two and a half years ago the steel
industry was down to an operating rate of 62 percent. The notion
that the steel industry just automatically is going to go on forever
is a notion which we like to play with and we dream about and hope
for, but you are up against the hard realities of running a business
which does experience ups and down.
Senator W atkins. We would like to have a guaranty that the
Geneva Steel Mills would continue operating.
Mr. B rubaker. H ow much return did you make on your investment
in 1954, Bradford ? Let’s get it on the table.
Senator W atkins. Have you finished y o u r statement, Mr. Smith?
Mr. S mith . I f you wish me to, I will answer Mr. Brubaker’s
question.
Senator W atkins. I have no objection but I really want to get the
answers to mine.
332
ECONOMIC REPORT OF THE PRESIDENT
Mr. Smith . The answer is very simple, that I don’t have time to
compute a meaningless figure.
Mr. B rubaker. I will tell you what it is if you want to know.
Mr. S mith . Because the book values of properties which were pur
chased 25 or more years ago are no proper basis for measuring whether
or not an income today is adequate. I think that is something with
which the committee members are quite thoroughly familiar.
Mr. B rubaker. May I comment on that?
Senator W atkins. With the Committee’s permission. I think I
have used my 10 minutes.
Senator Sparkman. We are on Senator O’Mahoney’s time now.
Senator O’M ahoney. Mr. Smith, let me ask you, if you know, what
proportion of the Government expenditures for defense go to United
States Steel. Before you answer let me call your attention to a known
fact. The proportion of Government expenditures for defense far
exceeds any other expenditure of any kind. Any economic judgment
which may be made in this time of war and preparation for wTar can
not be based upon the normal facts of a peacetime economy because
we do not have a peacetime economy. Now can you answer my
question ?
Mr. Smith . Senator, I didn’t expect that we were going to have
such detailed questions of United States Steel when I came to this
meeting. I thought it was a somewhat broader inquiry, so I don’t
happen to have the exact figures with me. But I do recollect that the
steel-industry direct shipments for defense purposes of late have been
very, very small, something less than 10 percent. However, sir, that
is not what you are getting at because undoubtedly there is a good
deal of steel which indirectly goes to defense purposes—our customers,
for example.
Senator S parkman. I wonder if I might throw in a statistic there,
as given by the Office of Defense Mobilization, that during 1955, 1.8
percent of the steel wTent into defense production.
Senator O’M ahoney. That surprises me, frankly, because I thought
it would be much greater.
Senator S parkman. A very, very small percentage. I will say to
Senator Watkins I believe there is a good healthy economy at Geneva.
Senator W atkins . It hasn’t been very long ago that it was doubt
ful whether we could get any buyer to go out there and take that plant
and operate it. It wasn’t until Korea and the heavy demand for steel
caused by the economy to sustain a wTar effort or a prospective war
effort that wre had any assurance that the plant would be operated.
Senator Sparkman. I may state an analogous situation which oc
curred toward the end of World War II. Down in the Tennessee
Valley we w^ere pretty much alarmed, wondering how in the world
we would dispose of all of that power, but we have never had enough
at any one time.
Senator O’M ahoney. May I proceed ?
Senator Sparkman. Please do.
Senator O ’M ahoney. I am anxious to elicit such information as
we can from these gentlemen. I like the idea—I initiated it, as a matter
of fact—of getting the experts to come before the committee to debate
with one another for the information of the committee.
Mr. S mith . May I say that I remember that occasion. It was many
years ago, and I wras present.
ECONOMIC REPORT OF THE PRESIDENT
333
Senator O’M ahoney. Professor Backman, you indicated you want
ed to say something.
Mr. B a c k m a n . Thank you, Senator.
The chairman suggested that there was something contrary to the
private-enterprise system in the internal financing of business, and
I think several members of the panel have already effectively scotched
that idea. The fact remains that most of these figures which are
used on rate of return by industry, whether it is all manufacturing
or steel or autos or railroads or any other industry, are completely
meaningless. They are completely meaningless because they relate
an inflated volume of earnings and usually an over-inflated volume of
earnings in terms of what they really are to a much deflated base of
net worth.
I mean simply this: I f you have a plant which cost you $10 million
20 years ago and today that plant would cost you $40 million to
replace, you are relating today s earnings to what is left of that $10
million, but more important, when it comes to your earnings all-----Senator O ’M ahoney. Who would want to replace a 20-year-old
mill at the stage of technological progress which we now
@FedFRASER