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80TH CONqRESS1
2d Session
SENATE
j
REPORT
{No.
1358
JOINT ECONOMIC REPORT
REPORT
OF THE
JOINT COMMITTEE ON THE ECONOMIC REPORT
ON THE
JANUARY 1948 ECONOMIC REPORT
OF THE PRESIDENT.
UD1RARY CO.PY.
(PLEASE RETURNY
JOINT ECONOMIC CTTE
1le
NEW SENATE OFF. BLDG.
MAY 18 (legislative day, MAY 10), 1948.-Ordered to be printed
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON: 1948
JOINT COMMITTEE ON THE ECONOMIC REPORT
(Created pursuant to sec. 5 (a) of Public Law 304, 79th Cong.)
ROBERT A. TAFT, Ohio, Chairman
JESSE P. WOLCOTT, Michigan, Vice Chairman
GEORGE H. BENDER, Ohio
JOSEPH H. BALL, Minnesota
ROBERT F. RICH, Pennsylvania
RALPH E. FLANDERS, Vermont
CHRISTIAN A. HERTER, Massachusetts
ARTHUR V. WATKINS, Utah
EDWARD J. HART, New Jersey
JOSEPH C. O'MAHONEY, Wyoming
WRIGHT PATMAN,,Texas
FRANCIS J. MYERS, Pennsylvania
WALTER B. HUBER, Ohio
JOHN SPARKMAN, Alabama
CHARLES 0. HARDY, Staff Director
!FRED
E. BERQUIsT, Assistant Staff Director
JOHN W. LEHMAN, Clerk
H. MOORE, Economist
WILLIAM
I}
:T
.
z;,
*:: .'
i§
CONTENTS
Page
I. Committee findings
Expenditures and taxation The regulation of creditThe need for selective controls
-6
Housing and urban redevelopmentMaintenance of competitionAgriculture and.food policiesInternational economic relations II. Staff report -11
Short-run objectives Effects of uncontrolled inflation -Remedies--Regulation of credit -23
Selective controls -28
Long-range objectives -31
Stabilization through maintenance of balance -35
III. Summary of recommendations offered in the Economic Report of-the
President --Foreword -39
The course of inflation and adjustments needed in 1948-39
Long-range objectives ------IV. Minority views on the President's report The economic problem: action versus inaction -44
Machinery for economic mobilization Contrast between executive and legislative points of view -45
The case for economic preparednessEvil effects of inaction already beginning to appearNow is the time for decision -48
Problem is both international and domestic The Economic Report of the President -49
Combat inflation -50
Reenforce the American economy -60
Appendix to part IV -_------m
2
3
5
8
8
9
9
11
15
21
39
41
44
44
46
46
49
66
80TH CONGRESS
2d Ses8ion f
SENATE ,
REPoRT
No. 1358
JOINT ECONOMIC COMMITTEE REPORT ON THE ECONOMIC REPORT OF THE PRESIDENT, JANUARY 1948
MAY 18 (legislative day, MAY 10), 1948.-Ordered to be printed
Mr. TAFT, from the Joint Committee on the Economic Report,
submitted the following
REPORT
[Pursuant to Public Law 304, 79th Cong.]
In accordance with the duties imposed upon us by the EmploymentAct of 1946, we have carefully examined and studied the Economic
Report of the President of January 1947, and the Economic Report
of the President of January 1948. We have further examined the
reports made by the Council of Economic Advisers to the President
of the United States.
The economic reports of the President give extremely valuable
assistance to all those who are interested in solving the problems of
continuous full employment. Necessarily, the President has to enter
into more controversial fields than his advisers, and deal with policies
which frequently have political implications. We feel, however, that
the operations under the act have fully justified its passage and have
given us a good start on the national economic policy guided by more
information and study than we have ever had before. To the extent
that we present any criticism of the reports, we do not intend to reflect
in any way on the manner in which this work has been done.
We append hereto as part II the report of our staff on the President's
Economic Report of January 1948. This is a detailed analysis of the
various economic theories and recommendations contained in that
report. The committee has gone over the report with the staff and
made various suggestions and modifications. We feel that it is a
useful commentary on the President's report, but we do not commit
ourselves, either individually or as a committee, to all of the points
made and arguments developed. We commend the report to those
legislative committees which have to deal with specific recommendations.
The report of this committee, which follows as part I, will attempt
to deal only with certain general observations and a few of the more
important recommendations of the President.
Part III is a summary of the President's recommendations, and
part IV is a statement of the views of the minority members of the
committee.
1
PART I. COMMITTEE FINDINGS
We are somewhat concerned about the scope of the President's
report, covering as it does nearly every domestic policy other than
questions of national defense. In both reports the President has
dealt with the "development of human resources and productivity."
While the language used in the Employment Act of 1946 is very
broad, we conceive that its principal purpose is to maintain full
employment in the United States and to avoid the recurrent economic
depressions which have brought unemployment, hardship, and suffering
to its people. This task is sufficiently difficult, and we do not think
that work under the act should be diverted from it by the study of
all the important and complicated problems of social welfare, health,
and education, nor should it be diverted to matters which cannot
have an extensive effect on the over-all economy.
Of course there is no measure before Congress which does not to
some extent affect the economic welfare of the people of the United
States. But where the political or social aspects greatly outweigh
the effect on the operation of the economic machine, we feel that the
matter should be dealt with in the President's state of the Union
message rather than in his economic report.
This does not mean we should concentrate attention exclusively on
the short-run business outlook. We are generally concerned with
long-range programs directed toward the gradual improvement of the
standard of living of the entire country. Many such programs, such
as those of reclamation, soil conservation, industrial research and
the like, are of the greatest importance in improving the conditions
of the people. They have both economic and political implications.
It is true that we could proceed with such programs with the utmost
rapidity without preventing the periodic recurrence of serious depressions with their attendant unemployment and suffering. But we
must be interested in the general character of the public works
program, and under what circumstances it should be planned, enlarged or retarded. There is a huge reserve of such public works to be
carried out in the United States, and if properly handled it can be an
important factor in alleviating unemployment.
At the present time the factors which seem to have the most bearing
on the maintenance of full employment are the following:
* 1. Government fiscal policy, including the scale of Government
expenditures and the scale and character of Government taxation.
2. Government controls of credit including bank credit to business,
credit for consumption and durable consumers' goods, credit for all
types of building construction, and the management of the Government debt.
3. The increase or decrease of Government controls over prices,
wages, rents, and allocation and rationing.
4. Foreign trade and the extension of credit to finance exports.
We shall, therefore, deal specifically with the following recommendations of the President, contained in his report, at the pages indicated:
2
JOINT ECONOMIC REPORT
3
1. Fiscal policy to combat inflation, including expenditures and
taxation (p. 47).
2. The regulation of credit (p. 48).
3. The need for selective controls (p. 50).
4. Housing and urban redevelopment (pp. 65-68).
5. Maintenance of competition (pp. 76-78).
6. Agriculture and food policies (pp. 56-57, 79-83).
7. International economic relations (p. 86).
1. EXPENDITURES AND TAXATION
It is generally agreed that we still face an inflationary condition,
one in which demand, certainly in the world and probably in the
United States, exceeds the available supply of goods. Since the
issuance of the President's report, there has been a violent break in the
prices of agricultural commodities. There are some other indications
that the over-all forces of supply and demand are closer to a balance
than was formerly supposed, but agricultural prices have recovered
somewhat, and there may be some further increase in wage rates this
spring.
The underlying inflationary condition has been produced by a
variety of causes. As the President states at page 41: "The question
has been raised as to whether we had inflationary pressure because of
large exports, because of the very high rate of business investment,
because of the large amount of residential and commercial construction, or because of the high level of consumer spending.
The answer
is that we had inflationary pressure because the sum total of these
combined factors exerted too great a demand on available supplies.
No one factor can be singled out as the principal cause."
It is interesting to us that both here and throughout the report the
President wholly fails to give any weight to the tremendous impact of
Government spending. On page 47 he says: "The Federal agencies
will have to make cash payments to the public in calendar year 1948
of over $40,000,000,000." No account is taken anywhere in the
report of the inflationary aspect of such expenditures, for the most
part, made without any direct increase in the production of goods and
services.
The substance of our conclusion is that the inflationary condition
is due to our attempt to accomplish more than is possible at our present
capacity for production. Just as England has been criticized for
proceeding too rapidly with her housing program instead of devoting
more time to production for export, so our people and our. Government, both executive and legislative, may well be criticized for trying
to carry on at the same time so many huge programs as those represented in our expansion of business transactions, our expansion of
residential housing, our support of veterans' education and rehabilitation, our Government public-works program, our huge M\Iilitarv
Establishment, and our economic support of free peoples throughout
the entire world. Liberal credit policies on the part of private and
public agencies' alike, and the maintenance of low interest rates have
encouraged the expansion of these programs. We do not intend to
criticize these programs or question their desirability. We merely
point out that the attempt to carry them all on at once, with very
little restraint in the field of consumer spending and liberal credit
4
JOINT ECONOMIC REPORT
policies, is the basic reason for inflation, which otherwise could hardly
coincide with a large Government surplus.
Our first recommendation is that Government expenditures be
reduced. We quote Mr. Marriner Eccles of the Board of Governors
of the Federal Reserve System, testifying on a program to prevent
inflation:
It means rigid Government economy. It means deferment of all expendituresFederal, State, or local, to the greatest extent consistent with public obligations at
home and abroad. * * * This means the greatest possible economy in all
Government expenditures.
We do not purport to determine the relative importance of different
Government spending programs. That must be determined primarily by political judgments on the international situation and the
urgency of domestic projects. We do insist, however, that every
program for Government expenditure should be carefully screened
and reduced to those items which are clearly essential and of real
value. No matter how important may be national defense, there are
certainly duplications which can be eliminated and economies effected
without loss of efficiency. No matter how important the Marshall
plan, it should be possible to eliminate projects of doubtful validity
and concentrate on those which give a clear case for effective assistance
against communistic infiltration. No matter how important an increased amount of housing, there is no reason to continue the more
extreme forms of credit guarantee which ultimately will probably
do the veteran more harm than good. No matter how important
public works, this seems to be no time to increase the total public
works program from $2,000,000,000 in fiscal 1948 to $2,800,000,000 in
fiscal 1949 as proposed in the President's budget.
Taxes for the ensuing year are estimated at approximately $45,000,000,000. Taken together with State and local taxes of approximately
$12,000,000,000, we find a tax burden of 57 billion, with a total
national income estimated at 204 billion; approximately 28 percent
of the national income, or 25 percent of the gross national product.
Most of this expenditure does not contribute to the production of
goods so that the Government activity constitutes a heavy burden
on the economic machine to which we look for our standard of living.
This burden is expressed at the present time to a large extent in the
high price of commodities, because in a seller's market it is possible
to pass on to the consumer a considerable part of the corporation net
income tax and that part of the income tax which is withheld by
employers; to which, of course, must be added the excise taxes which
are frankly inmposed upon the consumer directly. On a long range
basis, a general reduction of expenditures and taxes would undoubtedly
tend toward an increase in take-home pay or a reduction in prices
or both.
This tremendous burden of taxation is also a deterrent to hard work
and to increased investment in productive enterprise. It takes from
individuals money which might be saved and provide for capital
expansion. It decreases the incentive to the additional effort required
to increase production, affecting particularly creative artists and
corporation executives and experts subject to the high income tax
rates after a certain income has been earned in any one year. The
question of the necessity for stimulating the accumulation of capital
is a question which we feel should be studied far more extensively and
JOINT ECONOMIC REPORT
a3
to which we shall devote a good deal of the effort of this committee
in the future.
With regard to immediate action relating to taxes, we disagree
with the President's recommendation that a cost of living tax credit
of $40 be given for each taxpayer and each dependent, and to offset
this decrease in Government revenues corporate taxes be increased
sufficiently to yield an equivalent amount on the basis of present
figures. Tax receipts in the fiscal year 1948 will be at least $7,000,000,000 higher than estimated Government expenditures. The cash
surplus, allowing for the payment to Government trust funds, will be
at least $10,000,000,000. This would be a huge sum to take annually
out of the current earnings and the purchasing power of the American
people, and could be an extremely deflationary factor. If prices
should turn down, it might precipitate a substantial depression.
The only doubt about the tax reduction voted by Congress is raised by
the possible increase in budget expenditures for the armed forces.
It is essential that we retain a balanced budget and make substantial
payments on the national debt.
This appears to be no time, in any event, to adopt any increase in
any form of taxation. Corporation taxes at best are only an indirect
method of reaching the ultimate individuals who pay the tax, in part
the stockholders and in part consumers. Many experts consider that
all taxation should be imposed directly on individuals because they
have to bear it anyway, and the corporation tax is a deterrent to the
expansion of business activity. In any event, we do not feel that the
corporation tax should be increased above the present rate of '38 percent of the net profits. It may be pointed out that if a tax reduction
is immediately inflationary the President's plan is also inflationary as
far as its immediate effect is concerned, because any personal income
tax reduction takes effect at once, whereas the corporations' payments
on 1948 profits are not made until 1949.
2.
THE REGULATION OF CREDIT
This committee considers that the control of credit is a proper
Government function and one of the most essential if we hope to
exercise any control over the forces of expansion and depression. We
have already recommended the extension of the power to control consumer credit.
We note that the President's report has treated very gingerly the
question of credit for housing. It says: "Also dangerous is the
mounting volume of mortgage debt, urban and rural. The longer-run
interest of the people required careful consideration of the present
financing policies of both private and Governmental agencies."
Through the operations of FHA the Government has almost complete
control over the expansion of credit for housing. Our committee
feels that the provisions of title VI of the National Housing Act extend
excessive credit to builders for the construction of houses with practically no capital investment whatever, and we can see no sound reason
for continuing such credit beyond present authorization. In the
long run, because it increases unduly the demand for building materials
and the price thereof, we feel that it will not be for the ultimate benefit
of those who buy the homes. From an economic standpoint, the
policy of advancing 100 percent on GI loans is also unsound and can
S. Rept. 1358, 80-2-2
JOINT ECONOMIC REPORT
6
only be justified by policies of the Government to give special consideration to veterans.
With regard to the extension of bank credit, our committee is not
yet prepared to make a definite recommendation. Mr. Eccles in
November submitted a plan for a special bank reserve of 25 percent
to be held in short-term Government bonds. Violent opposition has
been expressed to that plan by Mr. Eccles' own advisory committee
and by many bankers throughout the country. Mr. Eccles has now
proposed an increase of all reserve requirements by 10 percent of
demand deposits.
There is a substantial question whether any increase in reserves
can have any effect on bank credit so long as the banks hold such a
large proportion of their assets in Government bonds, and so long
as the Federal Reserve System maintains the policy of supporting the
Government bond market at not less than par. Some bankers and
economists feel that this policy, which uses Government power to
hold down the interest rate, should be abandoned, and perhaps must
be abandoned. The committee expresses no opinion at this time
pending completion of hearings on the whole question which it is now
holding.
It is true that the increase in bank credit during the past year has
practically nullified the effect of the Government's budget surplus.
Much of this expansion undoubtedly is necessary to provide for
legitimate purposes of expanding production. We meet again, however, the question whether we can do everything we want to do in the
way of current consumption and also expand our capital investments
at so rapid a rate. The restraint of bank credit is undoubtedly one
of the possible methods of reducing a dangerous inflation. If orthodox
methods are no longer effective, we may have to devise some other
means of bringing about an over-all control without attempting to
have the Government pass on the wisdom o1 particular loans or types
of loan.
3.
THE NEED FOR SELECTIVE CONTROLS
Our committee is very much opposed to the establishment of over-all
Government price controls, wage controls, or allocation controls in
time of peace. The complete establishment of such controls would
mean the substitution of a Government-directed economy for a free
economy. We believe that the rapid expansion of the productive
ability of this country in the last hundred years has been due largely
to the existence of a free economy. We believe that a Governmentdirected economy would result in a lower standard of living for the
people, even if it were effectively administered. We believe that Government is seldom able to impose an effective control of prices and
wages. We believe, furthermore, that such controls are impossible
to enforce in the United States in time of peace. We feel confident
that stability in prices will be achieved without such over-all controls
and that our efforts can be devoted then to adjusting inequalities by
promoting the increase of income for those groups whose income is
below a stabilized level.
The President lays great stress upon his desire to have power to
impose selective controls. It is entirely possible that in a few
isolated cases. such controls may be successfully imposed to prevent
distortions in the price and distribution situation. We doubt very
JOINT ECONOMIC REPORT
7
much, however, whether they can be imposed successfully on any
important commodity unless we are willing to extend them gradually
to the entire economy. Our experience with price control after the
war leads us to believe that meat prices cannot be controlled without
controlling the price of grain and the price of feed and finally the price
of all other essential agricultural commodities related to the food
supply.
Undoubtedly there are a good many industries in which even in
the absence of monopoly control there is a degree of price management
by custom or arrangement. We feel that this committee should
undertake a study of this situation to determine whether additional
legislation is required to maintain free competition. We believe very
strongly that the proper solution of the price problems must depend
upon the maintenance of such competition.
We have recommended a selective control over the distribution of
grain for distilling, but only during the present crop year when crops
have been short. We are maintaining an existing control on tin where
the world supplies are limited and under strict government control
outside of the United States. We have also recommended the continuation of rent control, because we feel that we are still in the midst
of a shortage of housing. The total number of dwelling units in the
United States, even at the greatest. possible rate of construction, can
only be increased by 800,000 to 1,000,000 a year, or about 3 percent.
Rent control also is separable from the control of commodities.
There may be other special fields in which control of prices and distribution can be effectively administered to meet special situations,
without involving any control over large sections of the economy.
Whether the selection of such controls should be made by the President
under general authority, or by special action of Congress, is for the
Congress to determine.
We recommend further studv of the need for compulsory controls
pending the outcome of actions taken under the so-called Anti-Inflation
Act, Public Law 395, enacted by the Eightieth Congress. By this
act the President is authorized to negotiate with industrial managements for the establishment of voluntary cooperative allocation of
scarce materials, and to report-to the Congress cases in which negotiations for the establishment of needed controls have been unsuccessful.
Pending the receipt of information as to the status of efforts which
may have been initiated to secure voluntary agreements for scarce
materials, we do not believe Congress should change the allocation
policy embodied in the Anti-Inflation Act.
We agree fully with the President that all groups in the population
should cooperate to check the spiral of increasing wages and prices.
We feel that businessmen making reasonable profits should refrain
from and discourage price increases, that labor receiving reasonable
wages should refrain from and discourage further demands for wage
increases. Of course many prices are beyond the control of any private interest, particularly where large amounts of the commodity
are bought by the Government for export or otherwise. Government
policy should be directed to buying in such a manner as to check any.
price increase. This committee viewed with concern the recent
increase in prices by many steel manufacturers and held hearings to
determine the reasons for such increase. *We consider that many
of them were unnecessary in view of the profit position of the various
8
JOINT ECONOMIC REPORT
companies. We do not' feel that the action taken was in accord with
sound public policy or the policies generally agreed to by businessmen
themselves.
4. HOUSING AND URBAN REDEVELOPMENT
We have already expressed our opinion that the social aspects
of housing and urban redevelopment are somewhat outside the proper
function of this committee if we do not intend to cover the whole
field of domestic legislation. Unquestionably, the improvement of
our cities through the elimination of slum areas and the development
of the right type of housing is of vital concern to the welfare of the
people. The ups and downs of the operation of the economic machine,
however, are affected more by the total volume of housing construction than the exact character of the different conflicting programs of
public and private housing.
The Federal Government is already committed to a policy of substantial credit aid in the construction of residences. We believe it
should assist local governments by grants in urban redevelopment.
If a policy of subsidized rents appears wise from a social standpoint,
it will undoubtedly require Federal funds for financing. The rate at
which such funds are advanced and the character of the lending has a
material bearing on credit expansion. The policies of the FHA in
insuring mortgages also have a substantial effect on inflation. We
have already indicated that we think this policy has been too liberal,
certainly under existing conditions and even under normal price
stability.
The production of housing as an industry, however, must be of
tremendous interest to anyone concerned with a stable economy. The
industry of residential construction is one of the two or three largest
industries in the United States. It is subject to almost more violent
fluctuation than any other major industry, as pointed out in the President's report on page 65. The cost of decent housing is out of proportion to the average income of the American people, with the result that
only a limited number are able to buy new houses, and the market for
such houses is likely to disappear when demand for commodities and
durable goods continues unimpared. A rapid drop in residential
construction in 1926 may have been one of the contributing factors to
the depression of 1930.
We recommend that the Government do everything possible to
stimulate research, to improve industry methods, to enact reasonable
building codes, to eliminate monopoly controls in the material field,
and to reduce labor union restrictions on housing. Furthermore, we
recommend that Government credit policies be so varied from time to
time as to maintain as level a rate of construction as possible.
5. MAINTENANCE
OF COMPETITION
We agree with the President's report that the long-range increase
of production in the United States requires the maintenance of free
competitive enterprise and that "to operate effectively without a high
degree of Government intervention, a free enterprise economy must
a'djust itself to changing conditions through appropriate moves of
prices, costs, and production."
JOINT ECONOMIC REPORT
9
This ideal, of course, is seriously interfered with by the manner in
which wage rates are practically frozen against reduction. They are
not absolutely frozen, however, because in all well-organized industries, leeway to reduce wage costs is given through the possibility of
increased productivity, and in some branches of the economy wage
rates may be reduced when an adjustment is required in prices. We
are also considering the maintenance of farm prices in some relation
to industrial prices. Under that program some degree of elasticity
will be lost.
Nevertheless, the ideal is properly stated and we should not permit it
to be impaired by monopoly or private fixing of prices. In general,
we believe that the proper enforcement of the Sherman Act and other
Federal statutes will make prices properly responsive to competition.
There are industries, however, where this appears not to be true. We
note that the President has instructed his Council of Economic
Advisers to make a special study of this problem, which we shall
await with interest. Additional antimonopoly measures may be
necessary.
6. AGRICULTURE AND FOOD POLICIES
We agree with practically all of the President's report on the subject
of agriculture and food policies beginning at page 79. The war
guaranty of a price equal to 90 percent of parity expires at the end
of 1948, or at the end of the 1948 crop year. The President recommends no long-term farm policy, but we feel it is essential that Congress therefore assume the leadership in this field and enact such a
policy before adjournment. While the present income of farmers is
very satisfactory, we do not know what may occur in the field of
agricultural prices before Congress meets again in 1949. Various
programs have been recommended by farm organizations, by economists, and by congressional- committees. We have not ourselves
made a sufficiently complete study of the problem. We do feel that
the farmer is in a special situation, because he must go on producing
in order to live no matter what the price of his products may be.
A prosperous economy requires that farm prices be not entirely out
of line with other prices which respond more slowly to changing
economic conditions. We believe Congress should consider a support
price program at some relation to the general price level wnich will
carry the farmer through bad times, and yet will not maintain a production for which there is no demand.
We feel that a complete collapse in agricultural products would have
a very bad effect on the whole economy of the United States. It
might well be the principal factor leading to a serious depression.
We feel that Government action is justified, but that it should not be
of a character to interfere with a reasonable elasticity in farm prices
so that they may be rapidly adjusted to changes in supply and demand.
7.
INTERNATIONAL ECONOMIC RELATIONS
The whole subject of foreign trade, the Reciprocal Trade Agreements and the International Trade Organization is dealt with rather
sketchily on page 86 of the President's report. Our committee has
not had an opportunity to make any extensive study of this subject,
nor has the charter of the International Trade Organization been
10
JOINT ECONOMIC REPORT
completed. We therefore reserve our comments for some future
report. With regard to foreign loans to pay for exports, we have
expressed our general opinion that like all other Government spending
programs, this program should be carefully screened, economically
administered, and confined to those projects which are of clear value
in the promotion of peace and the checking of communism. Without
question, the export of a large volume of goods in excess of imports is
a serious inflationary element. It cannot continue indefinitely. To
the extent we finance it with Government funds, it should certainly
be financed out of taxes, and it should be confined to those products
in which an excessive draft on our resources will not start a rapid
increase in price.
ROBERT A. TAFT, Chairman.
JOSEPH H. BALL.
RALPH E. FLANDERS.
ARTHUR V. WATKINS.
JESSE P. WOLCOTT, Vice Chairman.
GEORGE H. BENDER.
ROBERT F. RICH.
CHRISTIAN A. HERTER.
PART II. STAFF REPORT
It is not necessary to discuss separately section I of the President's
report Foreword and Summary, since the issues which it raises are
more fully discussed in later parts of the report. Section II, Levels
of Economic Activity in 1947, is chiefly historical and descriptive; it
forms a valuable background for the policy discussions which follow,
but there is no need to analyze it in great detail. It shows that the
record of economic activity during 1947 was in many respects highly
satisfactory. During that year employment was higher than ever
before, and production was higher than ever in peacetime; the number
of housing units completed was nearly double that in 1946; and consumer expenditures broke all records, as did also private investment
in plant, equipment, and inventories. Exports were at a maximum
for all peacetime. Productivity was higher than in 1946, while
Government expenditures were lower. The satisfactory elements in
the situation, however, are overshadowed in the report, as they are
in public attention, by the strong upward movement of prices, wages,
and profits. The report indicates .that this upward trend produced
great inequities and created the danger of a serious set-back.
The remaining three sections of the report may conveniently be
discussed under two headings: "Short-run issues" (Section III,
"Price and income trends and the course of inflation," and Section
IV "Levels of activity and adjustments needed in 1948") and "longrange objectives," which forms the subject of section V.
I. SHORT-RUN OBJECTIVES
The causes and effects of the inflation and the appropriate remedies
constitute the principal topic of sections III and IV of the Report.
We are interested in the answers which the report gives to three
principal questions: first, the reasons for the inflation, especially its
continuance through 1947; second, the appraisal of the results of the
inflation; and third, the recommendations for action.
The report describes the inflationary pressure of 1947 as the combined effect of an unusually high level of four kinds of demand.
These are:
1. The high rate of business investment.
2. The large amount of commercial and residential construction.
3. Large exports.
4. The high level of consumer spending.
To these we would add the high level of Government spending.
The report summarizes the situation as follows:
* * * . We had inflationary pressure because the sum total of these combined factors exerted too great a demand on available supplies. No one factor
can be singled out as the principal cause (p. 41).
12
JOINT ECONOMIC REPORT
Like most statements about cause and effect relations, this is not
an enumeration of final causes. It pushes the inquiry back to the
causes of the high level of the four types of demand that are mentioned,
and particularly, it raises the question why abnormally high levels of
all four factors should come at the same time. If this is not just a
coincidence, the condition that brings them all to high levels at the
same time is a more basic explanation of the inflation than are the
four categories of demand themselves.
It is obvious that the high level of all four types of demand in 1947
was an after-effect of the war, but the connection between war and
these phenomena was not the same in each case. The major unifying cause is the monetary expansion which resulted from the financing
of the war. Heavy deficit expenditures were financed by the expansion of bank credit. This resulted in a great increase of money
incomes, which has not been matched by an equivalent increase of
production. A similar condition prevailed in nearly all other countries. In addition, both exports and construction activities were
stimulated by the destruction of property and the reduced production
of civilian durable goods during the war years, both here and abroad.
The high level of consumer spending was due to high incomes which
resulted from the factors just mentioned. The high rate of business
investment is partly due to the destruction and deterioration of business equipment and partly to the high level of profits resulting from
the other factors. It is also materially affected by the provision of
section 102 of the Internal Revenue Code, which.puts a premium on
the prompt reinvestment of earnings in tangible business assets as
against the accumulation of reserves of cash and marketable securities.
The next step in the President's analysis relates to the role of the
supply of funds in the price situation. Correctly, in our judgment,
the report says that the prime demand factors enumerated "could not
have become fully operative without funds to make them effective,"
and that the supply of funds was swollen by a large number of partly
independent factors. Of these the major ones, as' enumerated in the
report (p. 41) were:
1. The liquidation of dollar balances and sales of gold by foreign
countries and spending by foreign countries of loans and grants
provided by the United States.
2. The spending of liquid funds accumulated by business firms
during the war.
3. The liquidation of private savings.
4. The increase of bank credit to finance inventory accumulation, capital expansion, and construction.
5. The increase of consumer credit.
6. The cashing of veterans' terminal-leave bonds.
Of these factors, the most important were foreign liquidation of
bank balances and sale of gold, and the expansion of bank credit.
There was apparently no net liquidation of private savings-quite
the contrary.
The factors enumerated make up an impressive total of additional
buying power above what would' have been disbursed as income in
producing the output at the old price and income level. In fact, these
sources of spending power were sufficient to have produced much more
inflation than we got, if they had not been partially offset by other
factors, of which the most important was the Federal cash surplus.
JOINT ECONOMIC REPORT
13
As it was, the combined effect of the forces of expansion was to step
up the volume of spending a good deal more than the supply of consumer goods and investment goods was stepped up by the increase of
productivity. In the absence of this new buying power, the general
price level would presumably have come down slightly because of the
increasing output of goods and because the backlog of shortage demand
was gradually being cut down. This, however, is true of any year.
Because of increasing population, and increasing productivity, prices
would always tend downward if no new buying power was added to
that disbursed in the current process of production.
The factors of expansion are not all on the same footing, however.
Some of them are net factors of increase; that is, they are ways in
which individuals or organizations were enabled to spend more than
their current incomes without a corresponding reduction of spending
by someone else. Others resulted from the transfer of purchasing
power away from taxpayers. For example, the liquidation of foreign
dollar balances and the net sales of foreign gold were 100 percent
additions to the volume of demand for the products of this country.
The loans of the International Monetary Fund, insofar as they were
financed by use of the old gold reserve of the stabilization fund, were
also a net addition to current demand.
On the other hand, the expenditures by foreign countries from loans
and grants provided by the United States were not 100 percent additions, since fhev were offset in part by the levy of taxes to provide
the funds. If we assume that in the absence of the foreign aid program taxes would have been the same, these expenditures should be
regarded as a source of inflation or as an offset to the deflationary
effect of the taxes.
Likewise, the cashing .of veterans' terminal leave bonds was a
transfer of purchasing power from taxpayers to veterans. It may be
assumed, however, that the taxes would have been the same anyway,
so the transfer to veterans was from the cash surplus, which otherwise
would have been used to pay off bonds of some other type. It probably increased the pressure on the cost of living by transferring a
certain amount of demand from the, capital market to the consumer
goods markets, but since demand exceeded supply in both the consumer
and capital goods markets, the net effect on total demand is obscure.
The increase of bank credit to finance inventory accumulation,
capital expansion and construction was a very important addition to
The
total demand in 1947, amounting to over $5,000,000,000.
increase of consumer credit, which amounted to about $3,000,000,000,
was an addition to demand insofar as it was financed by the banks;
some part of it, however, was financed from individual and business
savings, and was simply a transfer of purchasing power from lenders
to borrowers.
More important than reservations about individual items, however,
is the offsetting pull of the budget surplus against the combined influence of the six factors that increase purchasing power. What the
report says about the impossibility of separating the effect of one kind
of demand from another kind is equally true of the effects of the inflow
of funds from different sources. The combined total of the factors of
increase and those of decrease is the significant thing, and the factors
of increase were partly offset by the downward drag of the Treasury
cash surplus. which amounted to 5Y2 billion dollars.
S. Rept. 1358, 80-2-3
14
JOINT ECONOMIC REPORT
This brings up an important point with regard to the effects of the
Treasury surplus. It is generally assumed that an excess of tax
collections over expenditures of Government is deflationary, or antiinflationary, and that a cash deficit is inflationary. But this principle
is in fact subject to an important qualification. A public deficit does
not increase total demand unless it is financed in such a way that it
does not correspondingly decrease private spending. A deficit
financed by selling bonds to investors who have to increase their
savings or decrease other investments by a corresponding amount is
not necessarily inflationary. That means in practice that the deficit
to be seriously inflationary, must be financed by the expansion of bank
credit or the issuance of paper money.'. Likewise the significance
of a Treasury surplus depends upon the concurrent actions of the
banking authorities. To collect a cash surplus -and lock it up in the
Federal Reserve banks would indeed be highly deflationary, provided
the withdrawal did not merely stimulate an offsetting expansion of
bank loans or investments. If the money drawn out of private
deposits as taxes goes right back to the commercial banks in redemption of short-term securities, or if the Federal Reserve banks buy an
equivalent 'amount of securities from the commercial banks, the banks
will have the same amount of reserves they had before. And since
their deposits, and consequently their reserve requirements, will have
been decreased by the payment of tax checks, the banks can make
new loans to the full amount of the money withdrawn from the banks
in payment of taxes. This is precisely what happened in 1947. It is
just as though the banks had loaned new money to the taxpayers to
pay the taxes in the first place. A possible deflationary influence
may arise from the fact that people spend income money more freely
than borrowed money. This may be the reason credit did not expand
still more. But it did expand enough to offset fully the budget surplus.
We are saying that although it was inflationary to finance the war
by selling securities to the banks, instead of by taxation, the repayment of these same securities out of taxes is not correspondingly
deflationary. 2 This is not contradictory. The difference is that when
the securities were offered for sale the banks were provided with
additional reserves so that they could buy bonds without contracting
credit somewhere else; but- these added reserves are not being destroyed as the securities are paid off out of surplus. The reserves
that were created in the process of war finance are still in the commercial banking system. The accumulation of the Federal cash surplus,
if nothing else were done, would mop up a tremendous fraction of
total bank reserves, but it has not been allowed to work out that way.
In 1947 the Federal securities owned by banks decreased by 5.6
billion dollars, but their loans increased by 7 billion dollars. Reserves, in spite of the fiscal cash surplus, actually increased by 0.9
billion dollars. Thus the direct deflationary effect of the Treasury
surplus was more than offset by expansion of business and consumer
credit, listed as two of the six factors which the President's report
I Theoretically a deficit financed by sale of bonds to individuals or corporations who would otherwise
hold the money idle would be just as inflationary as one financed by sale of securities to banks. But in
practice the only importantreservoirs of idle purchasing power to be tapped are the unused lending power of
the banking system, and the capacity of the community to absorb additional cash.
2 On this point the report repeats a common misstatement: "Retirement of securities owned by commercial banks, and especially Federal Reserve banks, has been emphasized in order to secure a maximum
deflationary effect from the Federal program of dcbt reduction" (p.30). Repayment of securities owned by
commercial banks reduces the deflationary effect of the tax collections; repayment of those owned by Federal.
Reserve banks does not increase it.
JOINT ECONOMIC REPORT
15
identifies as sources of increased public buying power. Though the
six sources of demand were subject to offset from the surplus, the surplus was not big enough to offset the forces of expansion in full. The
excess was sufficient to finance an expansion of demand which raised
prices all along the line. The effect was most conspicuous in the case
of those commodities of which the supply was not expanded above the
levels of 1946-notably food products.
This part of the report offers a clear and accurate description of the
inflationary process. Some question may be raised, however, as to
the second part of the analysis, according to which the inflation has
been accentuated by actual and anticipated shortages of specific
commodities which caused price rises at particular points and spiraled
into higher costs and prices all through the economy (p. 42). No
doubt this is true of steel, which is cited as an illustration. Our
question relates to the statement that the most important of these
specific shortages developed in the grains, leading to higher prices of
many food products, which in turn led to new wage demands, these in
turn leading through higher costs to higher prices. This is a statement of what may be anticipated in 1948 rather than what actually
took place in 1947. The shortage in the corn crop has not yet decreased the flow of food to market; in fact it has made more meat
available-at the expense of the supply which will be available in
the future. Moreover, the major wage demands of 1947 did not
follow the development of the grain shortage. Mlost of the demands
were made in the first half of the year, while the rise in meat and grain
prices occurred in the last half, and was not generally anticipated until
July. The casual relations seem to run from increased income,
through an increased demand for food, to increased prices. Aside
from a small increase in bread prices, the fear of a shortage of grain
influenced the situation only as it led to increased liquidation of
livestock and perhaps to an earlier dating of the Government's purchases for foreign relief.
EFFECTS OF UNCONTROLLED
INFLATION
The effects of inflation are of two general kinds, which may more
conveniently be discussed separately, though they are intermingled in
the Report. The first group comprises the immediate effects of
inflation on the volume of production and on the distribution of
income between different groups, which we may call the current
effects. The second class of effects relates to the danger that the
boom will cause a collapse of markets and bring on a period of stagnation.
Current effects
The current effects of inflation receive rather less attention than do
the dangers it creates for the future. On pages 5 and 43 it is pointed
out that price inflation produces great inequities, but the nature of
the inequity is not analyzed, perhaps because it is deemed too obvious
to require discussion. On page 6 it is stated that low-income groups
are hit hardest by inflation. Specifically, this may appear to be contradicted by the data presented in table 2 on page 18 of the report.
This table, which relates to income before taxes, shows that from 1941
to 1946 the largest percentage of increase in money income, before
16
JOINT ECONOMIC REPORT
taxes, was obtained by the lowest 20 percent of income receivers, and
that each successive higher fifth fared worse. For the three lowest
fifths the increase of money income from 1941 to 1946 was greater
than the increase in the cost of living for the same period, and for the
two lowest the increase of income to 1946 was greater than the increase
in the cost of living, as measured to 1947. However, by 1947 allowance for taxes would wipe out the gain for most of the third fifth and
some of the second fifth from the bottom; very few of the lowest fifth
are affected by changes in taxes. The highest fifth of the population
gained only 20 percent in dollar income from 1941 to 1946. and the
increase in taxes in most cases was greater than this, to say nothing
of the shrinkage in buying power of the dollar.
Nevertheless, the report may be correct in saying that the lowincome groups are the hardest hit. meaning'those who are now in the
lowest group. For, although the lowest fifth are better off than was
the lowest fifth in 1940, the people who now make up the lowest fifth
may on the average be worse off than they were in 1940. If this is
correct, those who were at the bottom in 1940 must, in general, have
made greater gains in income than the table shows.
The lowest fifth appears to consist largely of persons on small fixed
incomes who have lost in relative position because of the rise in the
money incomes of most wage earners and farmers. Retired persons,
pensioners, and recipients of relief and veterans' allowances have
suffered real distress, and a minority of wage and salary workers have
fallen behind. Their loss has been primarily the gain of farmers, and
of those urban workers who have benefited from higher wages and
fuller employment.
One point that seems to be overlooked in the discussion of real
.income in the report is that the sharp decline in the rate of accumulation of uninvested savings 3 between the war years and 1947 necessarily produced a decline in the purchasing power of money as it is
ordinarily measured. Statistically, the purchasing power of income is
the amount which a recipient of income could buy with it if he spent
it all. This is a significant measure for any one individual, but not for
all income-receivers as a group, or any major fraction of them, because
spending more money would not have enabled them to buy any more
goods. If in a given year people should keep half their income in
idle balances or in E bonds and the product of industry was sold for
the other half, and if in the next year, with the same level of production
and the same wage rates, they spent all their income, prices in the
second year would have to average twice as high as in the first year.
There would be a 50 percent decline in the nominal purchasing power
of incomes, although the community would have the same consumption rate in the second year as in the first. If they had spent not only
their current incomes but also liquid assets accumulated in the first
year, prices would have had to be still higher. But the standard of
living would have been the same. In other words, the more money
people save out of their incomes the more they can buy with each
dollar of their remaining income. It is impossible to expand the consumption of the population by liquidation of their savings, except in a
period of unemployment when higher spending might lead to a higher
aThat is, savineshold in eash or demand deposits orinvested insavingsbonds. Thisiswbatismeantby
"savines" throughout this paragraph. What is said is not valid for savings invested directly or indirectly
in productive assets or homes.
JOINT ECONOMIC REPORT
17
level of production. The total amount consumed is not affected by
changes in the rate of saving unless the changes have some influence on
the volume of production. Price control and rationing kept prices
down by forcing people to save and by slowing down the rate of bank
credit exphnsion; they did not give people as a whole any more current
consumption.
Danger of bad effects in future
The main reason given in the report for immediate adoption of an
anti-inflationary program is that price inflation is creating great danger
of a future collapse of prices and production:
* * * what most fully justifies every effort to halt an inflation is the
certainty that, if it runs its course unimpeded, it will spread in its wake the
disaster of falling markets, unemployment, and business losses (pp. 43-44).
One can only be certain that, if permitted to run its own course, it [the inflation]
will break with destructive force (p. 52).
This is one of the most popular current doctrines about the causes of
panics and depressions. It is constantly brought forward as a reason
for controlling prices or for other anti-inflationary programs. Only
rarely, however, is anything said about the reasons why an inflationary
boom should be expected to generate a depression. It is generally
stated either as a logical truism or an historical observation. As a
truism it has no more serious basis than an analogy with the laws of
gravitation-the higher a rocket goes the farther it falls. Historical
observation does not of itself tell us more than the obvious fact that
downswings must come after upswings, just as upswings must come
after downswings; it does not tell us whether upswings generate
downswings, or downswings upswings, or whether both are the effects
of other things. If the doctrine that inflation directly generates
depression. is to be taken seriously it must be for more cogent reasons
than these.
The report does not offer a complete analysis of the causal relations
underlying the sweeping statements quoted in the preceding paragraph, but it does contain two brief statements (pp. 9, 43-44) which
suggest possible explanations of the connection between a price inflation dated today and a collapse of production dated tomorrow. One
has to do with excessive investment, the other with adequacy of
purchasing power. Immediately following the first passage quoted
above, occurs the following statement:
A rapid general rise in prices has the effect of unduly bunching investment in
inventories and equipment at early dates and according to distorted calculations
of possible profit (p. 44).
This is, we believe, a correct statement of 'what has sometimes
happened and may happen again. But the bunching of investment in
inventories is quite a different thing from the bunching of equipment
orders. With reference to inventories, accelerated buying may be
stimulated either by the hope of making a speculative profit, or by
fear that as demand increases it may become more difficult to get
deliveries of inventory goods. With regard to speculation, the report
goes on to say (p. 44):
Rising prices breed upon easy access to credit, which supports the trend. They
introduce speculative activities which also support the trend. They produce a
price structure which is increasingly sensitive and precarious and vulnerable to
changes in business and consumer expectations, spending, and investment.
18
JOINT ECONOMIC REPORT
At whatever point these developments induce a reversal of business sentiment
-or a withholding of consumer demand, some markets weaken, with a spreading
impact. Caution dictates the withholding of demand. Buying for inventory,
capital expansion, and consumption declines. A decline of production necessarily follows, spreading unemployment and loss of income from point to point
in a widening and deepening downward spiral.
We agree that a speculative price level is highly vulnerable to disturbing factors. In fact, it is not just advances in prices, but speculative booms, in which prices are made on the basis of expectations
of further advance, that bring on disastrous liquidations of inventories.
A recent Federal Reserve System study describes this type of inflation
as follows:
The speculative type of inflation often occurs in an advanced stage of expansion
when prices have risen long enough to create a general belief that they will keep
on rising. The value of the total stock of money falls, while its nominal quantity
remains inflammatory because the rise in prices, instead of curtailing the demand,
stimulates it. This is the kind of inflation which has given rise to the false maxim
that a boom is inevitably followed by a collapse. The maxim is true only if
many prices have reached a level which people pay only because they think they
can sell before the boom is over. When this stage is reached, it is only a question
of time till prices collapse. The boom cannot level off, because too many holders
are in the market only as in-and-out traders. Any price is too high from such a
trader's standpoint unless he thinks it is going higher. The booms of early 1917
and early 1920 are familiar cases of this type of inflation.'
The Florida land boom of 1926 and the stock market boom of 192829 were of precisely this character.
The same was true in a less ex-
treme form of the commodity boom of 1920. We question, however,
the statement on p. 42 of the report that in the last half of 1947
there was a great upsurge of speculative activity. We do not believe
that speculation for a further rise was a major factor in recent price
advances. However, this is not an easy matter to determine. Speculation is often more obvious in retrospect than at the time of its
greatest price influence.
With respect to bunching of investment in equipment, the bad
results attributed to rapidly rising prices seem to us more doubtful
than in the case of inventory accumulation, though potentially much
more important. Presumably the assumption underlying the report
is that high or rising prices widen the profit margins of producers so
much that considerable numbers of them simultaneously expand their
productive investment until overcapacity develops, orders for new
equipment fall off, and the equipment industries suffer depression.
It cannot be questioned that a burst of investment in equipment
sometimes occurs, and that the ensuing deficiency of demand for
equipment, because of the durability of equipment, may last for a long
time. Such a deficiency of demand for equipment may appear even
when the demand for consumer goods has not fallen off, but has
stopped expanding at the rate which generated the equipment boom.
The machine tool industry, for example, is notoriously a feast-orfamine industry; indeed it is now operating far below capacity in spite
of a general boom.
The statements quoted from the report, however, seem to us to
exaggerate the role played by price inflation in this process. The
bunching of investment in equipment during a boom is not initiated
primarily by the price rise as such, but by the high volume of sales,
which taxes the capacity of existing equipment and would tax it even
IProspects of Inflation in the Transition reriod (Charles 0. Hardy), in Postwar Economic Studies,
Board of Governors of the Federal Reserve System. No. 4, Prices, Wages, and Employment, 1946, p. 6.
JOINT ECONOMIC REPORT
19
more if prices were prevented from rising-because demand would be
still greater. When orders are outrunning capacity, price control,
at a level high en6ugh to yield a profit, does not destroy the incentive
to expansion. In fact, a general price rise usually does not of itself
make investment more attractive, since the prices of equipment are
apt to go up even more than the prices of the final goods which they
help to produce. Aside from nominal profits of inventory appreciation, it is high volume rather than high profit margins that gives high
total profit to manufacturers in boom times.
From a later statement we infer that the report does not intend to
suggest that during the present boom purchases of equipment have
been excessive.
* * * we are now in the stage where the improvement and modernization
of our national productive plant has a high priority claim on our resources. Nonetheless, after the most urgent deficiencies in our national plant have been overcome, and the extraordinary export surplus has been reduced, a very substantial
increase, both absolute and relative, in individual consumption will be possible
'and necessary (p. 79).
The doctrine that price booms generate excessive investment in
equipment seems out of harmony with certain principles laid down in
the 1947 Annual Report of the Council of Economic Advisers, which
says:.
Aside from certain temporary shortages of materials, the main obstacle (to
adequate capital provision for sustaining maximum production) is the concernwell-founded or ill-founded-on the part of business managers that the maximuin
development of capacity and production will lead at some time in the foreseeable
future to overexpansion or overproduction
with consequent business losses of a
serious or even catastrophic character. 5
The President's report expresses concern lest the inflation lead to
excessive bunching of investment, while the council fears that businessmen will check investment in anticipation of such an excess. The
fact is that errors of both kinds are constantly being made. Some
businessmen are induced to invest freely by a high volume of demand,
accompanied by the low credit losses which characterize an inflationary boom. This tendency is accentuated when interest rates are prevented by credit policy from rising as the demand for credit rises.
:Other businessmen however, view the cost level of the boom with
alarm and postpone the purchase of equipment. Neither attitude is
reprehensible; and no trouble occurs if the expansion programs of
some are balanced by the precautionary restrictions of others. Excessive booms and depressions occur when there is too much unanimity
either of optimism or of pessimism.
Adequacy of purchasing power
The other possible reason suggested in the report for apprehension
that the inflation mav breed a deflation has to do with the maintenance
of adequate consumer purchasing power to take off the whole product
of industry. The doctrine that collapses result from a deficiency of
purchasing power has a large popular following. It was the main basis
of the forecasts of imminent depression made by economists in late
1945, late 1946, and the spring of 1947. It was expounded to this
committee by representatives of Americans for Democratic Action
P. 1i. compare also pp. 17-18.
JOINT ECONOMIC REPORT
20
in July of last year. It was stressed in the first Economic Report of
the President, if we interpret that report correctly:.
Business should reduce prices wherever possible in order to bring about the
necessary increase in consumer purchasing power to bolster their markets.
* * ** Beyond that, adequate social-security benefit payments priivide a
desirable support to mass purchasing power.6
It appears in less emphatic form in the Midyear Economic Report
of July 1947.7
* It appears to be endorsed on page 9 of the current report, as follows,
but is not developed elsewhere:
* * * The distribution of purchasing power determines whether
there will be enough funds available to provide investment for maximum production and enough buying power to absorb the output.
As generally stated, the purchasing power doctrine involves a
fallacy, for any volume of production distributes enough purchasing
power to buy that volume of production at a price level high enough
to cover costs. What is meant by a deficiency of consumer purchasing power is simply that businessmen are setting their prices too high
in relation to current incomes. Temporarily such prices can be paid
since consumers as a group always have some reserves beyond current
income.
In spite of the absence of reference to prices in isolated statement
quoted above from page 9 of the 1948 report, comparison of the various
ref erences to " purchasing power" in the three reports indicates that the
term is used in the sense that we have used it above; that is, that prices
are too high to be paid continuously without an increase of income.
When purchasing power is defined in the reports it is always related to
prices. For example, the annual report for 1947 says:
The relation of wages, prices, and profits is the key to the maintenance of purchasing power. * * *
If prices are too high in relation to wages, they restrict
the market and reduce employment, as well as causing suffering to individual
consumers.
8
Our disagreement with the report, if there is any disagreement,
relates to the implication that the volume of consumer buying is
controlled by prices rather than prices by consumer buying. The
report at times seems to treat prices as something determined independently of demand I though elsewhere (as in the passages quoted
above on pp. 1-2) demand is shown to control prices.
Disastrous deficiencies of purchasing power do not result from price
increases; the effects run the other way. Price increases result from
an excess of purchasing power, from people trying to buy more goods
than have been produced, as measured in stable prices. This situation
arises when people spend more than has been paid out in producing
the goods currently available, whether by using up cash balances.
0Economic
Report of the President, January 1947, pp. 20-21, see also pp. 2, 10, 19.
7 Pages 11, 16.
On page 33 the report states that price increases held the purchasing power of consumers down to a level
which would have been insufficient to permit absorption of the full output had it not been for the export
surplus,
the use of savings and credit, and the backlog demands of business. (See also p.3.) This is always
true,
at every level of employment and prices. Total expenditures always balance with production multiplied
by prices. Consequently every component of total demand is necessary to maintain a sales outlet for
the
total product at the prices at which it actually sells. If total demand had been smaller prices would not
have
been what they werethere
is no
reason
to project them forward unchanged into a later period of lower
below, p. 12.)
total demand. (See
JOINT ECONOMIC REPORT
21
saved in the past, by expanding0bank credit, or by any other device
for enlarging the flow of funds.'
The opposite difficulty, a tendency of prices to fall faster than costs,
arises not because industry distributes inadequate purchasing power
but because too many people postpone using their purchasing power,
or because purchasing power is destroyed by an excessive Government surplus."' When industry as a whole fails to get back for its
product all it has disbursed, prices or physical volume of sales must
go down, and so must wages or the volume of employment. The
process starts with the rate of spending, not the volume of purchasing
power.
REMEDIES
Several passages in the report deal casually with the question of
remedies, and it is discussed explicitly on pages 47-52. On pages 3-4
and 52 it is indicated that voluntary action, both by businessmen and
by labor, to hold prices and wages down will contribute to the restoration of economic stability. Reference is made to the first economic
report in which businessmen were urged to bring prices into line and
workers were urged to limit their demands for wage increases to situations where wages were substandard or where wage increases would
not necessitate higher prices. Wage increases are treated as a cost
factor which may or may not make specific price increases necessary;
there is no reference to the broader effect of wage increases on the
demand for cost-of-living goods.
Ever since the war, the discussion of business prospects has been
dominated by apprehension that if prices were allowed to reach such
a high level that supply would balance the current high level of demand, they would fail to come down promptly when demand fell off,
with the consequence that full output could not be sold and full employment could not be maintained. (Compare p. 9 above.) This is
the theoretical ground work of the recommendations, offered in all
three of the President's economic reports, for voluntary lowering of
industrial prices and abatement of wage demands.
The validity of the low-price policy hinges entirely on the extent
to which prices may be expected to be "sticky" on the downswing;
in other words, the extent to which producers and middlemen, having
adjusted their thinking to a high level of prices, will refuse to accept
lower prices when there is less demand-with the result that the
physical volume of sales will fall off, production will be curtailed,
and unemployment will mount.
No general statement about the downward flexibility of prices is
valid for all kinds of prices. In general, the prices that go up most
readily in a period of high demand are the ones that go down most
readily when demand slackens. These include farm prices, farm
wages, open market interest rates (both long-term and short-term),
1lOn page 17 there is a careless statement that the cashing of veterans' terminal leave bonds halted the
purchasdecline in real purchasing power. It did increase veterans' purchasing power, but only by taking
(except
ing power away from others. More money cannot give everybody more real purchasing inpower,
of full
a
time
degree
significant
any
in
that
do
it
cannot
activity;
productive
added
stimulate
may
as it
press.
a
printing
with
employment like 1947.) If this were not true ths problem of poverty could be solved
to appear later and
il Or conceivably because of bank credit contraction, though this factor is more likely
stated.
reasons
other
accelerate a downswing, when it is already under way for one of the
S. Rept. 1358, 80-2--
22
JOINT ECONOMIC REPORT
soft coal, some forest products, and many clothing items. On the
other hand, public utility rates, prices of many branded goods, urban
wage rates, and some crude and half-finished products produced by
quasi-monopolists (like steel and anthracite), respond less readily
to downward pressures. Moreover, whenever inflexible prices of
material and labor constitute the bulk of the cost of production of a
commodity, as is the case with many miscellaneous manufactured
goods, it may be impossible for producers to reduce prices in line with
a shrinkage of demand, because the costs do not come down.
There is no question that the rigidity of certain costs and prices
is a major part of the explanation of recurrent periods of unemployment. It does not account for the fluctuations of demand, but it
does explain why shrinkage of demand results in a diminution of
employment and output rather than an adjustment of prices with
output unchanged. If all prices and wages were flexible, in the sense
that employers and employees alike would accept any cut necessary
to maintain a market for full production, the business cycle would
become a mere price phenomenon instead of a cycle of production.
That this is not mere empty theorizing is shown by the history of
agriculture, in which prices and wages do adjust themselves downward
to whatever extent is necessary to maintain substantially full-scale
operation, so that price and not production moves up in booms and
goes down in depressions.
The recommendations concerning low-price policy, both here and
in the earlier reports, omit reference to the fact that prices can be.
too low for stability as well as too high. For example, it is obvious
that in the middle of 1946 prices were much too low in proportion
to money incomes and liquid savings. The inflation of the fall of
1946 brought prices more nearly into line with purchasing power. If
we had the consumer prices of June 1947 with the present level of
incomes, or even that of 1946, there would not be enough goods to
go around. We should have to have either rationing or gray markets,
or an upswing of legitimate prices.
If it were impracticable to lower a price once raised, a policy of
holding prices so low as to create acute market shortages might conduce in the long run to orderly utilization of resources. But it seems
obvious that producers who have enough control of the market to
keep prices down in the face of acute shortages can also reduce prices
when demand no longer justifies them. What is important is that
they reduce them later when the market weakens rather than that
they hold them down now so they won't have to reduce them later,
merely for the benefit of middlemen and of buyers who are lucky
enough to get part of a supply that will not go around."2
On page 46 the report shows that, production cannot be. increased
fast enough within a few months to catch up with market demand
or remove inflationary dangers. The production goals suggested are
modest, and will presumably be attained, but it is emphasized that
they will not stop inflation, because with employment already full
"2Some manufacturers who are selling their products at prices materially lower than what they could
get (with resulting market shortages and abnormal profits at the distribution level) claim that if they.
raised prices to absorb the gray-market differential their suppliers and employees would demand and obtain increases that could bepaid only so long as the abnormal demand continued.
Consequehtly, they
would be eaught a year or two hence in a squeeze between falling dem'and- and rigid costs. There may be
truth in this; if so, it means that the distributors' margins are more flexible downward than are production
costs, and consequently, can more safely be allowed to go up in times of abnormally high demand.
JOINT ECONOMIC REPORT
23
the growth of productivity is far slower than the recent rate of expansion of demand.
REGULATION
OF CREDIT
Under the heading "Regulation of credit" it is recommended, first,
that Congress restore to the Federal Reserve System the power to
regulate consumer credit. This committee .has already endorsed this
recommendation in its interim report of December 15, 1947, and the
question is now pending before the appropriate legislative committees
of Congress.
Next, the report states that the mounting volume of mortgage debt
is dangerous, a conclusion with which, we believe, few people will
disagrree. It is dangerous, first, because the increase of the debt is
supplementing the volume of spending power at a time when there is
excessive demand wvithout it; second, because in the event of a sharp
recession of prices, even some years hence, debt incurred at the inflated
price level may lead to financial distress and foreclosures; third,
because the demand arising from mortgage finance is concentrated in
a field where the backlog of consumer demand is excessive, and costs
are being pushed up even out of line with prices in general. The
report goes on to statethat "the longer run interest of the people
requires careful consideration of the present financing policies of both
private and governmental agencies" (p. 48), and that "it is essential
that the major Government credit agencies in making direct loans and
in guaranteeing private loans shall pursue policies consistent with a
national anti-inflationary policy" (p. 50).
This point has been stressed by Governor Eccles in his testimony
before this committee. He pointed out that during the past 2 years
the amount of housing-mortgage debt has increased by more than
$9,000,000,000 and the rate of current mortgage lending has risen to
about $1,000,000,000 a month.
He pointed out also that more than
half of the volume of mortgage lending is sponsored by the Federal
Government under legislation enacted by Congress. His conclusions
were stated as follows:
These two programs [operations under the National Housing Act and the GI
bill of rights] sponsored by the Federal Governmnent should be brought together
so that appraisals are made by only one agency.
The "100 percent loans" under the program of the Veterans' Administration
for both old and new houses and the nominal 90-percent loans on new houses
under title VI of the National Housing Act should be revised so as to reduce the
demand for housing and thus bring prices down. This means that both buyers
and builders should have more equity in their properties than under the prevailing
lending policies so long as present inflationary prices continue for housing."
The over-rapid expansion of commercial loans by banks is appraised
as being even more dangerous than the expansion of consumer credit.
The increase for the year 1947 was 7 billion dollars, of which 4.5
billion occurred in the last half of the year. As is pointed out in the
report, the expansion of bank loans is both a result and a cause of
inflition. When prices rise, business firms need a larger volume of
credit for wvorking capital, and to maintain expenditures on plant
and equipment. As the report notes elsewhere, employment and the
use of capital goods are at such a level that an expansion of purchasing power cannot stimulate a material expansion in the rate of
13Inflationary Aspects of Housing Finance, Federal Reserve Bulletin, December 1947, pp. 1463-1465.
Reprint of memorandum submitted with testimony before the Joint Committee on the Economic Report,
November 25, 1947.
24
JOINT ECONOMIC REPORT
production. Hence new loans do not correspondingly increase the
volume of production, though they may enable the business firms that
get them to bid materials and labor away from someone else. When
the businessman must bid against the rest of the world for his share
of a supply of labor and goods that is nearly fixed, it should likewise
be necessary for him to bid for his share of a supply of credit that is
also nearly fixed in total amount. Otherwise, as credit expands,
total money value of resources and of product go up without an
increase in resources used or volume of product-which is inflation.
This is our understanding of what is implied in the President's conclusion that "among the strategic points at which to curb the inflation
movement, none is potentially more powderful than the restriction
of bank credit." 14
The expansive interaction of prices and credit supply at the producer level has an exact parallel in what has been taking place in the
consumer-goods market. As incomes rise, spending increases, but
these increased expenditures do not correspondingly increase the
supply of goods; they only aggravate the upward tendency of prices.
The parity principle in agricultural price policy involves a similar
vicious spiral, as do also the currently popular assumptions that wage
increases and tax reductions are appropriate adjustments to offset
increases in the cost of living. A rise in the cost of living is evidence
that consumer incomes are, or were, too high in proportion to consumer prices; raising money incomes can benefit one, consumer only
at the expense of another, except under conditions of less than full
employment when it may stimulate added production.
The report points out, however, that two difficulties arise if credit
restraint is used to curb the inflation. The first is the danger that
the role may be overplayed, bringing about undue liquidation of
credit and a lowering of economic activity. This is a real risk, and
unfortunately is present in any effective method of checking inflation.
Second, the problem is complicated by the relation of credit to the
administration of the public debt. When commercial lending is
restricted, interest rates rise, and prices of Government bonds will
fall unless they are supported by Federal Reserve or Treasury buying.
If bond prices are permitted to fall, bondholders will suffer capital
losses and the Treasury will be confronted by an increase of the
cost of servicing the debt.
The report is optimistic enough to say that "these difficulties can
be surmounted through the wise exercise of restraints upon excessive
bank credit," but it does not offer, nor are we able to offer, a satisfactory formula for getting the benefits of restriction of bank credit
without the disadvantages of rising interest rates. We agree with the
comment in the report that current proposals which have been presented by the Board of Governors of the Federal Reserve System for
the increase of bank reserve requirements (special reserve plan)
should be given close study, and we hope soon to be able to make
such a study. But we are not optimistic that any formula can be
found to reduce the amount of credit available for business use,
without raising the rate of interest, unless in the meantime a decline
of commercial borrowing demand has taken place for other reasons.
We may have to choose between maintaining the price of Govern'4However, we believe that a considerable expansion of bank loans was necessary in 1947 to prevent undue
deflation, given the sizeorthe Government cash surplus.
JOINT ECONOMIC REPORT
25
ment bonds and maintaining the real value of those bonds. This
requires further study, as competent observers are not all in agreement as to the importance of stability of bond prices. The real
interest of the holders of the bonds may be served by measures which
lead as a byproduct to a decline in the prices of bonds.
We do not believe that it was intended to say what seems to be
suggested by a later passage in the report (pp. 85-86); namely, that
there is no stopping place between the present policy of supporting
the bond market slightly above par, and subjecting it "to the demoralization which swept over it in 1920 when the unsupported market
for Government bonds fell about 20 percent below par." The collapse of 1920 came at a time when the Federal Reserve discount rate
was 6 percent, when banks were under the strongest pressures to call
in both agricultural and commercial loans, and when the country was
heavily stocked with inventories financed by bank credit. Surely it
is worth while to try to prevent a further material expansion of total
volume of money and deposits, and at the same time give sufficient
support to the market to prevent a disastrous collapse and accompanying contraction of the volume of money and deposits. Such a policy
might at times involve considerable purchases of bonds, but it would
also permit sales of bonds at other periods to check the continued
growth of the volume of money. In fact, the experience of the past
year indicates that the market can be supported in times of stress
without any large net acquisitions of securities by the Reserve
System.'5
During 1947 total Reserve bank credit actually declined by about
$800,000,000, or 32 percent, but since the gold stock was increased
by $3,000,000,000, the credit base expanded by over $2,000,000,000.
With the exception of the recommendation for the control of consumer credit, the report does not spell out a program with respect to
credit control. The only concrete suggestion which has come to
Congress is the Eccles plan, which was opposed by the Secretary of the
Treasury, and has received no support from the administration except
certain very cautious references in the Economic Report.
If we interpret the report correctly, the Eccles suggestion is endorsed, providing Congress concludes (a) that existing controls are
not adequate to make possible wise restraint upon excess bank credit,
and (b) provided the use of a new system to restrain inflation would be
compatible with the support of the bond market. There is little
doubt that the Eccles proposal would strengthen the Federal Reserve
System's control over the volume of bank credit. But whether the
exercise of this power would involve less risk of precipitating a downswing, or would conflict any less with the support of the bond market,
than would the freer use of existing powers, is a question which requires
close study.
The Eccles plan has several merits. It meets in part the Treasury
objection to measures of credit restriction which threaten to increase
interest rates and therefore to increase the burden of interest on the
public debt as outstanding securities mature and are refunded. It
sI)uring the 12weeksiendingFebruary 25,1948, the Reserve banksboughton balance over$4,000 000 00
worth of long-term securities, but they were able to reduce their holdings of other securities so that the total
holdings actually decreased by over $1,000,000,000.
While we agree with the finding of the report that a stabilization of the total volume of bank credit, or a
slowing down of its increase, would have been helpful in checking the inflationary developments of the last
half of the year, we do not suggest that responsibilities of the Treasury and the Federal Reserve System were
unskillfully discharged during this pcriod, considering the magnitude of the debt and the rapid change from
a problem of keeping the value of Government bonds from rising, to one of keeping them from falling.
26
JOINT ECONOMIC REPORT
would ease the financial burden on the banks resulting from a drastic
increase of cash requirements. It would make it possible to increase
reserve requirements much more drastically than would otherwise be
possible, because in effect it would give the banks some interest on
their reserve balances. By raising the reserve requirement, say to
45 percent, it would greatly reduce the amount of bank expansion
made possible by the importation of gold, or a backflow of currency
out of the circulation, either of which would increase bank reserves.
Under the proposed system such an expansion of reserves (if not offset
by contraction of Federal Reserve credit) will support an expansion
of bank deposits of at least 6 to 1, whereas under the Eccles plan the
potential expansion would be less than 2Y2 to 1. It does not, so far as
we can see, create serious administrative complications, though some
arrangements would have to be worked out for enforcing it on the
nonmember State banks. It is not clear, however, that it would
bypass the difficulty in keeping the bond market pegged in the face of
strong competition from the market for loan funds. Banks would
still have an inducement to sell bonds yielding 2Y2 percent in order to
make loans at a higher rate, though any increase in deposits resulting
from such operations would necessitate a much larger increase of
reserves than is now involved.
Tax proposals
The only important short-run recommendations which have been
added to the program outlined in the President's message of November
17, 1947, are the proposal to grant a credit of $40 to each taxpayer
and each dependent and the proposal of a compensating increase in
corporation taxes. The latter takes the form of a revival of the excessprofits tax.
First, as to the mutually offsetting effects of the proposed increase
of corporate taxes and the decrease ot individual taxes: the report
does not claim that the two measures taken together are antuinflationary and concedes that they may be somewhat inflationary.
We believe that this is an unnecessary concession, unless the excessprofits tax rates were fixed so high as to encourage unnecessary expenditures. Under some conditions such a transfer of purchasing
power from corporations to individual consumers might lead to an
increase of total spending, but at present, when the pressure on the
markets for capital goods is just as great as that on the consumers'
goods markets, there is no presumption that the transfer of purchasing
power from one market to the other would be inflationary.
Our criticism of the proposed shift of tax liability from individuals
to corporations is not that it would be inflationary but that it would
actually increase the inequities which havc resulted from the inflation.
The stated purpose of the proposal is "to help those millions of families
whose disposable incomes have lagged more and more behind the cost
of living during the past year and a half" (p. 48). But giving the
same amount of relief to those who have lagged and those who haven't
will not help the one group at the expense of the other, nor provide
more goods for both together.
The fatal flaw in the proposed plan 18 from the standpoint of those
who have suffered losses from the inflation is not merely that it fails
to give relief at the point where it is most needed; namely, to the bot16And also in the bill which has recently passed both houses of Congress.
JOINT ECONOMIC REPORT
27
tom 20 percent of the population who already pay no taxes, but that
it actually gives relief to taxpayers at the direct expense of those who
are lower in the income scale. This follows from the fact that with
full employment, an increase of money income does not stimulate much
added production and consequently does not increase real purchasing
power; it only changes the distribution of the product among claimants. A $20 or $40 per capita addition to the income of all taxpaying families will enable them to spend that much more money, and
if prices do not rise proportionately they can buy more goods. But
there is only one place those goods can come from, and that is from
a shrinkage of the buying power of those who pay no income tax. This
will be accomplished if taxpayers' added spending results in a price
rise somewhat less than proportionate to their increased spending.
But all those who do not save on their taxes will have their buying
power reduced by the price inciease.'7
Ane, as is pointed out in the President's report (p. 19) the bottom
fifth of the population who pay no income tax consists largely of those
who have moved down in the income scale as a result of inflation-the
group subsisting on life insurance, savings bonds and deposits, pensions, and other fixed incomes. The only tax relief which would not
actually hurt this group would be the repeal or reduction of appropriate excise taxes.
As to the deflationary or inflationary effect of an excess-profits
tax, little can be said without some specification of the form of the
tax. The r eport assumes that this l)aIt of the recommendation, taken
by itself, is anti-inflationary. Whether this is true depends on the
level of the taxes levied in the top bracket. A 95-percent tax at
margin of corporate income would be inflationary because it would
encourage waste and extravagance, especially excessive advertising
expenditures. The tax would almost certainly be deflationary if the
top rate was, say, 50 percent or lower, as has been recommended by a
subcommittee of this committee.
Frnally, it is an error to assume, as the report apparently does
assume, that because inflationary pressures are deemed to be serious
any reduction in the Government surplus would tend to make the
situation still more serious. It is true that in an inflation a budget
surplus is desirable, but it does not follow that a surplus of the magnitude contemplated in the annual budget is necessary or desirable.
In fact, the cash surplus of 1]947 was, we believe, much larger than was
necessary in order to check the inflation, if it had not been neutralized,
and more than neutralized by bank credit expansion made possible
by gold imports and the repayment of bonds held by banks. To
protect the economy from a disastrous deflation, given a cash surplus
of $5,000,000,000, it was necessary that bank reserves be replenished to
some extent. But a smaller budget surplus, if accompanied by a
tighter credit policy, such as is recommended elsewhere in the report,
would accomplish the same purpose.
17 In this connection the "price in crease" means, of coures, the amount by which prices go higher than they
would have in the absence of the tax change, which may riot be the same as the amount of change from the
1947 level. Other factors besides the tax change will presumably accentuate or dampen or offset its 1)rice
effects. This does riot affect the validity of our contention that the only gain which taxpayers would get
from the proposed remission consists of a transfer of power to buy goods to taxpayers from those who do not
now pay taxes.
28
JOINT ECONOMIC REPORT
Voluntary savings
The recommendations for encouragement of voluntary savings
(pp. 51-52) are noncontroversial and seem entirely sound. The
following points are perhaps worth noting with regard to a voluntary
savings program:
1. As compared with a tax program that would reduce expenditures
by an equal amount, a savings drive would have the advantage that it
would not have repressive effects on individual incentive. It would
not take income away from people but encourage them to reduce their
expenditure out of a given income.
2. Under present conditions the purpose of the savings program
should be to reduce total expenditures, not merely to divert them
from consumption expenditures into investment expenditures that
would not be made otherwise. Such a diversion would increase
future production at the expense of current consumption, but it
would not help to check the inflation.
3. To accomplish this purpose appropriate objectives of the program would include the sale of Government savings bonds, encourage
ment of deposit funds in the Postal Savings System, the liquidation of
outstanding debts, and the reduction of the mortgage indebtedness on
new homes.
4. It should be noticed that the accumulation of uninvested savings
creates a backlog of purchasing power for an individual but that he
can only realize on it on condition that most other people do not.
Whenever a large block of people try to liquidate uninvested savings
that are theoretically liquid they increase the demand for goods without increasing the supply, with inflationary consequences. If this
happens in a time when there is a deficiency of buying it may be
helpful by strengthening stagnant markets. Unless it does lead to an
increase of production it cannot lead to an increase of consumption
at the time the attempt is made to liquidate the savings.
5. Large liquid savings made in one year and expended in another
year tend therefore to lower prices in the first year and raise thetn in
the second. Obviously this is advantageous only if the prices tend
to be abnormally high in the first year and abnormally low in the
second year.
SELECTIVE CONTROLS
In addition to the two standard over-all measures for controlling
the inflation (credit controls and budget policies), the report recommends a number of selective measures aimed at specific maladjustments. The most important of the areas singled out for specific
treatment is the market for food, especially grain and meat. Meat
rationing is recommended on the basis of the shortage which is expected
to appear this spring. The position taken is that "it is not an acceptable alternative to let mounting prices ration a short supply at the
expense of families of modest income." The report points out that
the use of credit and fiscal controls to a point where they could halt
the rise of meat prices would probably cause widespread unemployment.
The recommendation for the establishment of meat rationing has
recently been investigated by a subcommittee of a standing committee
of the Senate, which reported unfavorably. As the President's
recommendation relates specifically to the immediate future, and
JOINT ECONOMIC REPORT
29
there is no prospect of congressional action at this time, it does not
appear necessary for us to go into it here. The two members of this
committee who served on the subcommittee which investigated the
matter constituted a minority in favor of the proposal.
The report recommends selactive controls of several other kinds,
including control of specific prices, and of wages that threaten to
make maintenance of a given price ceiling impracticable; allocation of
basic industrial and agricultural products, rent control, export control, allocation of transportation facilities, and regulation of speculative trading on the commodity exchanges.
We do not believe that these recommendations conflict with the
principles that were accepted by the President and by Congress in
1945-46, which led to the liquidation of the framework of wartime
controls. But they do recognize the need for occasional exceptions
to the general method by which the production and distribution of
goods are organized in a free economy. Differences of opinion
relate, not to the principle, but to what constitutes an emergency calling for action and to the extent of the deviation from free market
control that is necessary in a given case. No one would dispute the
necessity of rationing food in a starving beleaguered city, or the rationing of penicillin if a serious epidemic should make the supply inadequate
for urgent needs. On the other hand, hardly any one wants to reestablish the full paraphernalia of wartime controls. We believe that the
prompt restoration of a large degree of individual initiative and responsibility is a major reason why reconversion has proceeded more
rapidly in the United States than in any other country, and why dollars
are now in urgent demand throughout the world to buy goods which
are being produced in abundance hardly anywhere else.
To repeat, differences of opinion arise, not with regard to the
principle that freedom is to be the rule and control the exception; they
arise over the selection of the area to which selective controls are to be
applied and the specific criteria which should determine when to put
controls on and when to take them off. Divergences of judgment are
bound to arise because judgments differ as to the facts of the situation
and especially the outlook, because judgment is sometimes colored
by conflicts of special interests, and because people do not all weigh
alike the relative importance of protecting the individual against an
immediate hardship and protecting the community against the risks
and costs of excessive Government control.
The report, following the line of the President's message of November 17, 1947, recommends the establishment of limited powers of price
control to be used for combating (a) those rising prices which bear
most disastrously on the cost of living; and (b) rising prices of a few
vital industrial products that are in short supply, "since we have had
ample demonstration that these areas of shortage are also a focal
point of spreading inflation."
It is agreed that under present demand conditions the price fixed
by competition may be, and undoubtedly is in some cases, considerably
higher than is necessary in order to call out the maximum practicable use of existing capacity, considering the current scarcity of labor.
The question is whether the competitive price or a lower price (fixed
either by voluntary action of sellers or by public authority) would
better serve the public interest.
S. Rept. 1358, 80-2-5
30
JOINT ECONOMIC REPORT
Vital industrial products fall into two classes: (1) Those like steel,
cement, petroleum, which are produced, or at least distributed in a
given area, by a relatively small number of concerns and afford opportunity for a limited exercise of price policy; (2) those like soft coal,
lumber, and in some areas brick, which are produced by a large number
of competing concerns, no one of which controls enough of the supply
to have an effective influence on the price. The price-making process
in these areas is more like that in agriculture than it is like a typical
case of large-scale manufacturing.
In the administered-price area, the range of the manager's discretion is limited at the bottom by his costs and at the top by competition,
but Nithin a significant range he can set prices at his discretion. In
a situation like the present when demand from consumers, from industry, from Government, and from the export market are all strong,
the price fixed by competition of buyers for a linited supply, rather
than that fixed by competitors for a limited market, is the upper
limit of the range of discretion. Prices may voluntarily be held
much lower and still cover costs. But if this is done, some buyers
who are willing to pay the price will be shut out by dealer allocation
or by accident. The bidding of these disappointed buyers creates a
legal gray market which bears the same relationship to the administered price that a black-market price bears to a price established
by public authority.
For vital industrial products of the second type, this informal voluntary price control is impracticable, just as it is in agriculture, because
the number of price makers is too large for any one producer to exercise an appreciable influence over the market. In general, prices are
based on what the traffic will bear. Ordinarily, competition keeps
the price in line with costs but under conditions of excessive demand
and recurrent shortages prices are subject to abrupt fluctuation and
there are frequent periods of abnormally high profit. Selective price
control, however, with a free market at the later stages of production
and distribution, probably would not, in general, reduce prices of end
products to the consumer. Rather, it would introduce into these
areas the same sort of two-price market as already prevails in the
markets for.administered products, such as steel, various building
materials, and automobiles. Price control would have to be accompanied by allocation, and policing would be necessary to prevent some
of those excluded from the market by allocation from bidding up
prices in a secondary market. We assume that this is the intent of
the recommendation of the report, though allocation is discussed only
as a separate measure and not explicitly as a support for price control.
Likewise in the administered areas where gray markets already flourish, to legalize price control at the primary market would not disturb
the gray market or even change in into a black market, unless informal
allocation by producers was replaced by public allocation.
Under these conditions it is not clear that price control limited to
basic materials in short supply would make these shortages any less
"focal points of spreading inflation" than they are without control.
Since the demand for final products would not be decreased, nor their
supply increased, there is no reason to expect prices at retail level to
be lowered in line with prices of basic materials. Although effective
control of consumer prices will work back automatically to the prices
of raw materials (if they do not have alternative outlets in uncontrolled
JOINT ECONOMIC REPORT
31
areas), price control at the first stage will not automatically work
forward. To hold down prices at the earlier stages of production
without following through to the final stage tends strongly to increase
the profits of fabricators and middlemen rather than to reduce final
prices."8
The recommendation for wage controls limited to industries that
may be subjected to price control (and perhaps their suppliers) seems
less practicable under a system of selective price controls than it was
when prices in general were controlled. If the inflation develops at a
rate which would justify direct price and wage controls, it will be very
difficult to justify denying wage increases for workers in controlled
industries, while permitting them in uncontrolled industries.
LONG-RANGE OBJECTIVES
The discussion of long-range objectives for the American economy
opens with an analysis of the amount of increase in production and
income which can be expected in the next few years. It is pointed
out that a continued growth of productivity at the rates that have
been achieved in recent decades would yield at full employment by
1957, per capita disposable income about 27 percent above that of
1947, or 80 percent above that of 1937. As the report points out,
this increase would be sufficient to provide adequate nourishment,
medical care, social security, and education for the mass of the population-adequate, that is, by present standards, just as present output
is sufficient to provide income that would be adequate by the standards
of the nineteenth century. Whether the conventionally accepted
standards of adequacy will continue to keep ahead of the means of
satisfying them cannot, of course, be predicted.
We have some reservations as to this part of the report, relating to
the extent to which the realization of such a rate of progress depends
on the achievement of high-level stabilization, and, more important,
as to the extent of responsibility of government in this connection.
The report says (p. 56):
But these gains will not come by accident. They would rsot be registered in an
economy characterized by a period of idle or wasted resources after any period
when for a few years we attain full utilization of our plant and labor force, or in
an economy running at only three-quarter capacity even in "fairly good times."
But the assumed rate of advance in productivity, and consequently
in output at full employment, is an average based on gains realized in
our economy over a period which included occasional depressions. In
other words, if we can project forward the experience cited, the economy is capable of increasing man-hour productivity, and consequently per capita output at full employment, by 27 percent in 10
years, even if that period includes an average number of years of less
than full employment.
We believe there is serious exaggeration in the statement that the
economy has in the past run at only three-fourths capacity even in
"fairly good times," though we all agree that the frequent intervals of
depression have been costly. This committee and the Council of
is
Compare the testimony of Mr. Charles E.
market with that of Mr. Fowler McCormick
farm machinery (80th Cong., Ist sess., Current
tion, hearings before the Joint Committee on
Wilson concerning gray-market conditions in the automobile
concerning their relative infrequency in the distribution of
Price Developments and the Problem of Economic Stabilizathe Economic Report, pp. 23-24, 149).
32
JOINT ECONOMIC REPORT
Economic Advisers were created in recognition of the need of a program for the elimination of depressions. But we see no reason to
to assume that if we have peace the same rate of progress which was
achieved in the past in spite of recurrent depressions, cannot be
maintained in the future unless we succeed in eliminating depressions.
On the same page the report says:
The attainment of our objectives will depend upon the best efforts of industry,
agriculture, and labor, working with sympathetic understanding of one another's
problems and of the common good. It will depend on a clear appreciation of
maladjustments in the relationships among production, prices, and purchasing
power; it will depend upon the willingness of all concerned to make necessary
adjustments, and upon vigorous and forward-looking government.
We do not believe that maintenance in the future of a rate of
progress comparable to that which was attained in the past really
depends on "a clear appreciation of maladjustments in the relationships among production, prices, and purchasing power." If so, the
outlook is very discouraging. We see no reason why the continuance
of progress requires that industry, agriculture, and labor shall work
with any more "sympathetic understanding of one another's problems
and of the common good" than they have had in the past. If progress
must wait upon "the willingness of all concerned to make necessary
adjustments," it will be indefinitely delayed. Nor can we agree
that the need for "vigorous and forward-looking" government is any
greater than it was in the years when the 2-percent pattern of growth
of productivity was established. Progress in productivity has always
been primarily the result of the self-seeking efforts of individuals to
advance their own economic welfare by invention, by investment, and
by the development of new markets for the goods or services which
they have to sell. With respect to this major part of the contribution
it is more important that government shall avoid actions that retard
progress than it is that it shall participate with "vigor." When we
learn enough about the causes of economic instability to frame a
program for abolishing depressions, active participation of government
may be found to be necessary, but at this time the problem calls for
study and for clarity of thinking and not for vigor of action.
The sections of the report (pp. 56-68) devoted to the development
of natural resources and capital equipment deal broadly with desirable
objectives rather than specific programs. Much of this analysis will
be accepted by everyone as a statement of ideals; disagreement will
develop when specific measures are brought forward to implement
the program. We all believe in better plant breeding, increased use
of fertilizers, progress in soil conservation, better management of
forests and ranches, flood prevention, conservation of fish and wildlife, improved mining methods, and so on. But each specific program must at some stage be appraised by comparision of tlhe prospective costs with the additions to national product to be anticipated
from it. In their present form, the generalizations in the report do
not lend themselves either to concurrence or to dissent, because they
are not fitted into a framework of limitation of resources. The report
lists a multiplicity of good things to do; it does not help us to decide to
what extent, in an economy fully employed, resources could or should
be diverted from present use to these uses, nor what is the priority
between them. In the thirties social projects might be endorsed
almost recklessly, on the theory that they were a net addition to
JOINT ECONOMIC REPORT
33
output in an economy filled with idle resources. But now, and in the
full employment economy visualized in the report for the future, one
project can be carried through only by crowding out another. Financial costs are once more real costs.
In other words, the report underemphasizes, if it does not overlook,
the economic criterion of all developmental investments, public or
private; namely, whether the resulting addition to output can be
expected to exceed that from any other known use of the same resources, and in any case exceed the values used up in the project.
This is especially important with regard to public investments,
because it is easier for a government than for an individual or business
concern to disregard the ratio of output to cost. For example,
experience with the investment of public funds in waterways, river
and harbor development, and soil conservation justifies the continuance of public planning and public investment in these fields, but the
report underemphasizes the necessity of discrimination in the selection of projects, and ignores the colossal wastes that have accompanied such expenditures in the past and characterize some of those
proposed for the future.
We do not mean by this that the report necessarily overstresses
public as against private participation in the development of resources
and in the creation of capital goods. The relative emphasis shifts in
the course of the discussion and it is sometimes difficult to tell whether
the report is endorsing public or private planning. For instance, it is
emphasized (p. 62) that the investment program is essentially the sum
of a great many private programs privately planned, financed, and
executed. It points out that the Government can help to develop a
favorable climate which will encourage such business investment
programs. But in the next paragraph we are told that "the policy of
sustained maximum production requires that the actions of business,
labor, and Government be based on broad agreement as to our overall economic goals, and on a reasonable degree of assurance that
appropriate action will be taken to achieve them." This does not
sound like a program which is the sum of "a great many private
programs-privately planned, financed, and executed."
It sounds
like a long stride away from an economy controlled by free markets.
No one except the Government is in a position to give the required
assurance that "appropriate" action will be taken to achieve goals
requiring broad agreement of business, labor, and Government.
There is no such broad agreement, and if there were the essential
character of the private competitive economy contemplated by the
Employment Act of 1946 would be destroyed. A free-market economy cannot survive if its survival is dependent upon the exercise of a
high degree of economic statesmanship in the direction of its affairs;
it is precisely its advantage that it does not require individuals to plan
their conduct on the basis of special wisdom or an unusual degree of
patriotism.
With reference to housing, the report makes a strong plea for
expansion of the level of residential construction, and for research
in building techniques and modernization of building codes, in order
to eliminate the shortage, to improve the quality of housing, and to
stabilize the level of production. As to the last point, we question
the implication which runs through the discussion that a high level of
building activity is needed even in a period of high employment like
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JOINT ECONOMIC REPORT
the late twenties and 1948 to stabilize productive activity. So far as
stabilization is concerned, it would be better to concentrate publicly
promoted housing construction in periods of low employment. Or,
if we believe that we are not going to have any more periods of low
employment, housing promotion must be appraised as a means of
diverting resources into those parts of the field where it will provide
more adequately for the needs of the population than does uncontrolled private enterprise. The report neglects the question whether
we have the resources of labor and materials necessary to expand the
scale of housing construction substantially without serious interference
with other urgent needs. It also neglects the inflationary aspects of
current and recommended methods of financing housing construction.
The report contains an unsupportable statement that "most of the
housing is being built for families in the higher-income brackets."
The Bureau of Labor Statistics has just released information concerning new nonfarm one-family homes for which construction was started
during the second quarter of 1947. Half of these homes cost less
than $6,700 to build and 20 percent of them cost less than $3,250.
Only 10 percent cost $9,250 or over. While these are building costs,
not selling prices, it is clear that the situation they depict does not
even remotely resemble that suggested by the report.
We believe that it is an exaggeration to say that "only a small
minority of our families can afford to purchase new houses of satisfactory size and quality," though it is true that, as has always been
the case, the majority of people find that old houses can be bought
to meet their needs more economically than new houses. This is
necessary, if the use of houses is to be economical. Since a house is
expected to last from 40 to 80 years, at any given time new houses
can be only a small percentage of the total number of available houses.
If houses are to last an average of even 45 years, half the people will
have to live in houses that are 20 or more years old. Also, because
of mobility connected with employment, changes in size of family,
and progress in income status, most families have occasion to change
houses several times. Thus most houses in the course of their useful
life change hands several times. Only confusion results from appraising the progress of the housing program on the assumption that it
will be inadequate until everybody who wants a house can buy a
new house.
We question the statements on page 68 that the restrictions which
hamper the building industry have been developed primarily as protective devices because of the wide fluctuations in the activity of the
industry, and that "the fluctuations have caused the restrictions far
more than the restrictions have caused the fluctuations." Even if
these things are true, the important effect of the restrictions is not the
-loss of stability in the industry. In fact, the restrictions probably
have some slight tendency to stabilize the industry because they are
less effective in depression times than boom times. The bad thing
about the restrictions, both those originating with the building industry and those sponsored by building labor, is that they increase the
cost and keep down the supply of housing both in good times and in
bad times, thus imposing a cost on all the rest of the population. The
restrictions are an exercise of monopoly power, which in general the
report treats as an obstacle to maximum production. We see no
justification for glossing it over by a purely hypothetical allegation
JOINT ECONOMIC REPORT
35
that people who have the power to impose such restrictions would not
do it if they were not subjected to the hazards of a fluctuating industry. Both feather-bedding policies of labor and monopolistic priceraising activities of employers are in general correlated with power
rather than with the need for protection against hazards that arise
from instability.
STABILIZATION THROUGH MAINTENANCE OF BALANCE
From the standpoint of the objectives of the Employment Act, the
section entitled "The Development of Institutions and Practices for a
High-Production Economy" (pp. 75-89) is perhaps the most important
section of the discussion of long-range objectives. This is the section
which suggests the long-run policies, public and private, which are
most likely to insure maximum productivity combined with economic
stability and continuous growth.
The questions discussed are fundamental but, as would be expected
from the incomplete state of knowledge of the causes of instability,
there is no attempt to give final answers to all these questions in the
report. With reference to one of the most important phases of the
problem (price and wage policies), the report says:
I have instructed the Council of Economic Advisers to continue its work on this
problem with the assistance of representatives of all groups concerned.
The
results of such a study should contribute to the development of sound legislative
proposals. But its most important outcome should be a wider and deeper
understanding on the part of the Government, business, labor, and consumer
groups as to the price, wage, and production policies and practices which will
contribute most fully to the maintenance of high levels of consumption and
investment.
We wish to underscore this recognition of the undeveloped state of
economic science, especially as to what policies will insure full productive activity in a free-enterprise system. We are not certain that
there are any such policies, but we hope that the studies referred to
will be carried forward diligently and persistently, and that they will
yield progressively more satisfactory answers to the questions which
crop up when we try to promote economic stabilization without
sacrificing freedom.
The report (p. 75) summarizes the problem of long-run stability
under four heads, each of which is stated in terms of "balanced
growth." These areas are, first, the industrial area, in which the
objective is stated to be "price-wage-profit policies which maintain
balance between the.output of industry and the ability of consumers
to buy that output"; second, the agricultural area, in which we are
said to need balance between city and farm income and between
farm and industrial prices; third, the fiscal policies of Government,
which need to be so contrived as to afford maximum incentives to
production and to improve the "balance" within the economic system;
fourth, to strike a "wise balance" between our internal economic
activities and our international trade. Each of these objectives is
discussed at considerable length. Since the term "balance" is used
in all four items, an examination of its meaning under each head may
well introduce our comments on that part of the discussion.
Agriculture.-The concept of balance is clearest with reference to
agriculture. A perfect balance between city and farm income, or
between farm prices and industrial prices would be a situation in
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JOINT ECONOMIC REPORT
which additional investments of material and human resources would
be just as profitable in one of these areas as in the other. If this is
not the case, one of them is underdeveloped in comparison with the
other. As to capital, this simple concept is satisfactory. But so far
as manpower is concerned, the growth of technology for a century
and a half has been increasing the proportion of the population who
can find most profitable employment in industry and reducing the proportion needed in agriculture. Every census since 1800 has reported
a lower percentage of the labor force as engaged in agriculture. So
long as this pull is effective, "balance" between agriculture and industry has a rather special meaning. The proper balance between farm
and industrial prices is not one that would make farming and industry
equally attractive, on the average, to young men choosing a life
career. Rather it is a relation such that the proportion of farm
boys drawn off into the cities will enable agriculture and industry to
produce foodstuffs and fibers and industrial products in a "balanced"
relation.
The report emphasizes the importance for the entire economy of a
high objective for agriculture and efficient use of resources. It suggests the desirability of increased capital investment to raise individual
productivity 50 percent above the prewar level and "using two or
three times as much fertilizer as before the war, about three times as
many tractors on farms, and more of other types of machinery and
equipment" (p. 81). There are also recommendations for improvements in marketing, especially of perishables, for commodity price
supports under a modernized and improved parity formula, and for
enlargement of the income of urban families as a means of stabilizing
the markets for agriculture. Conversely, it is urged that improved
income for agriculture is necessary to assure adequate markets for the
products of industry.
The section on farm production embraces a variety of points which
are worthy of careful study. We have some reservations as to the
apparent use of prospective consumer demand as a measure of future
needed levels of domestic farm production, without reference to the
alternative of increasing the importation of food as demand increases.
Thus the report says (p. 81):
In view of the growing population and expanding income, we should seek within
a decade to raise agricultural production about 10 percent above present levels.
This would mean that crop production would be about 25 percent, and livestock
production nearly 50 percent, above prewar levels.
The goals stated seem very modest; and we have no doubt that they
can be and will be realized. But this should not be understood as
implying that a growing industrialized nation can anticipate or should
aim for an indefinite increase of agricultural production keeping pace
with the growth of its population and the rise of its standard of living.
A leading industrial nation cannot expect to remain self-supporting in
food for an indefinite period. The possibilities of the tropical and subtropical areas of the world as suppliers of food for the temperate zone
have been exploited only to a slight degree. With the current rapid
pace of improvement in refrigeration and packaging, the prospects for
improving the standards of living of the countries of the temperate
zone need not be restricted by their capacity to expand food production at home. But this is looking ahead; currently the productivity
of agriculture is rising faster than population. It is only because of the
JOINT ECONOMIC REPORT
37
disruption of agriculture abroad and the extraordinary increase of
employment at home that the food supply has lagged behind the
growth of markets.
International trade.-In ordinary times a "wise balance" between
internal economic activities and international trade would mean
practically the same thing that was suggested above about "balance"
between agriculture and industry. That is, it would mean that as
new resources, human or material, come into the market, employment openings would be about equally attractive in producing goods
for export, in importing foreign products, and in producing goods for
the domestic market. When this is not true, there is lack of balance,
and it would pay to shift resources from one field to another (disregarding the costs and inconveniences of making the necessary adjustments). At the present time, however, our whole foreign trade policy
is so tied up with considerations of international policy that the term
"wise balance" can hardly be given any economic signficance. Economic balance is secondary to considerations of national security.
Industrialprices.-The objective called "balance between the output of industry and the ability of consumers to buy the output" is
really a matter of price policy. The industrial process always disburses income enough to buy its output at prices which change only
as costs change. If producers should refuse to sell at prices which
consumers' income will cover, we could get unbalance in the sense of
unsold goods; and vice versa, if prices are held by controls or by
voluntary action below that which consumers' incomes will cover, we
get market shortages.
Markets and income distribution.-Inthis section (pp. 78-79), attention is given to the increase that has occurred since 1939 in the proportion of productive effort which goes to produce capital goods. Although the report appraises domestic capital formation in 1939 as insufficient, it states that the present ratio of capital formation to consumption is too high for permanence. It indicates that as a long-run
matter a very substantial increase, both absolute and relative, in individual consumption will be necessary. The reasons for this conclusion are not stated, and we do not see how it could be substantiated. Certainlv the fact cited, namely, that expenditures for producers' equipment have increased 170 percent as compared with 48
percent for consumers' expenditures, throws little light on the question. This comparison illustrates the well-known statistical principle that high percentages on very small bases are meaningless. The
increase of 170 percent in expenditures for equipment is figured on a
base which made up only 4 percent of total expenditures in 1939,
whereas consumer expenditures made up more than 75 percent of
total expenditures in that year. If all the increase of expenditures
for producers' durable equipment had been made available for consumer expenditures, their growth ratio would have been only 58 percent, as compared with the actual increase of 48 percent. In view of
the role which capital formation plays in the year-to-year increase of
productivity (compare above and report, p. 55), we are not convinced that we are confronted with any problem of a chronic excess
in the proportion of total effort that goes into capital formation.
Fiscalpolicy.-In this area the suggestion is offered that fiscal policy
should be such as to promote "balance" in the economy: "Balance"
here seems to be only a rhetorical expression, with no definite content.
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JOINT ECONOMIC REPORT
It may equally well mean "high income," or "full employment," or
technological progress, or all three.
The discussion of taxation and debt management relates chiefly to
the dilemma which arises from the established policy of supporting
the market for Government securities, when it conflicts with the purpose of restricting the rate of growth of the money supply. The
section offers no solution of the dilemma, but seems to make clear that
stability of the bond market is to take precedence over the use of
credit policy to restrain inflation.
* We cannot, without more investigation and study, analyze the implications of the policy of permanent support of a long-term bond
market at a 232 percent yield level. There is competent opinion both
in the Federal Reserve System and among bankers that support of
the bond market at about the present level is essential in order to
avoid wholesale dumping of securities and collapse of the bond
market, with repercussions on all other financial markets that would
be fatal to the maintenance of sustained prosperity. This view is
not universally accepted, however, and we should not take a position
on it without more study and more collection of views of competent
people. It is hoped that hearings which this committee is now conducting may help to clear up the issue.
PART III. SUMMARY OF RECOMMENDATIONS OFFERED
IN THE ECONOMIC REPORT OF THE PRESIDENT
1.
FOREWORD
1. The objectives for 1948 are to halt the inflationary trend and
at the same time to maintain maximum employment and achieve
maximum production (pp. 5-6).
2. The Nation's long-range economic programs should be geared to
three major purposes: Conserving and developing our natural
resources and capital equipment, enabling our human resources to
become fully productive and thus provide richer and more satisfying
lives, and improving our economic institutions and practices so as to
utilize free enterprise and representative government effectively
toward maximum production and sustained general prosperity (p.7).
2.
THE COURSE OF INFLATION AND ADJUSTMENTS NEEDED IN
1948
3. Increasingly through the second half of 1947 total demand for
goods was in excess of the amount of goods and services available at
current prices to satisfy the combined requirements for final consamption, private capital formation, Government services, and exports.
We had inflationary pressure because the sum total of these combined
factors exerted too great a demand on available supplies. No one
factor can be singled out as the principal cause (p. 41).
Economic objectives
4. Further price inflation offers little prospect of stimulating a
further expansion of production (p. 43).
5. Although there is a ready market, every one is employed, wages
are good, and industrial capacity is being expanded, the accompanying
price inflation has created inequitable shifts of purchasing power
between different classes of consumers (p. 43).
6. What most fully justifies every effort to halt an inflation is the
certainty that, if it runs its course unimpeded, it will spread in its
wake the disaster of falling markets, unemployment, and business
losses (pp. 43-44).
Employment and production
7. The present level of employment may be regarded as a practical
maximum. To maintain this level and provide for the increase of the
labor force would mean average civilian employment of almost
59,000,000 for 1948 (p. 45).
8. For the economy as a whole an increase of total output by about
3 percent above 1947 is a feasible objective for 1948. In the agricul-,
tural sector, however, it appears doubtful that total production can
surpass that of 1947 (p. 46).
9. Our purchasing power objective for 1948 should be to effect the
economic adjustments which are necessary to afford adequate protec39
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JOINT ECONOMIC REPORT
tion against increasing inflation (p. 46). If employment and production goals were fully realized, this would not of itself meet our purchasing power objective nor dispel the need for other anti-inflationary
measures (p. 47).
Fiscal policy
10. A substantial excess of Government receipts over expenditures
is counterinflationary. With inflationary pressures a major threat to
the stability of the American economy, no action should be taken now
to reduce the excess of receipts over expenditures (p. 47). But to help
the millions of families whose disposable incomes have lagged behind
the increased cost of living during the past year and a half, Congress
should enact legislation extending a cost-of-living tax credit of $40
for each taxpayer and each dependent. The tax on corporate income
should be increased to yield an equivalent amount (p. 48).
Credit controls
11. The power of the Board of Governors of the Federal Reserve
System to regulate consumer credit should be restored (p. 48). (Recommended by this committee in its Interim Report of December 15,
1947.)
12. Both private and governmental agencies should give careful
consideration to the dangers involved in the mounting volume of
mortgage debt (p. 48).
13. Among the strategic points at which to curb the inflation movement, none is potentially more powerful than the restriction of bank
credit. Proposals for credit control, especially those recently presented by the Board of Governors of the Federal Reserve System,
should be given close study by the Congress, and legislation should
be enacted to make available all the powers that may be needed (p. 49).
14. Credit control should be so exercised as not to interfere with
the maintenance of the price of Government bonds (p. 86).
Selective controls
15. Consumer rationing of selected commodities (meat, for example)
would relieve the demand pressure, and provide for a more equitable
distribution of the available supply (p. 50).
16. There should exist limited powers of price control for combating
rising prices (a) at points where they bear most disastrously on the
cost of living, and (b) in the case of a few vital industrial products
that are in short supply (p. 50).
17. There should be set up powers for dealing with the distribution
of basic agricultural and industrial products where scarcity threatens
to impede production or raise prices unduly (p. 50).
18. Authority should be granted to prevent wage increases where
such action is necessary to maintain any price ceiling that may be
established (p. 51).
19. Rent controls should be continued and strengthened (p. 51).
20. Provision for voluntary agreements relating to allocation of
transportation facilities and scarce commodities, and to the regulation
of speculative trading on commodity exchanges, should be strengthened by provision for governmental action along the lines previously
recommended (p. 51).
21. The Federal Government is deferring many public works, and
State and local governments are urged to do likewise. Businessmen
JOINT ECONOMIC REPORT
41
should defer expansion that does not immediately augment production (p. 52).
22. Voluntary savings of all types should be encouraged (p. 52).
23. Businessmen should hold the line against price increases, and
should reduce prices wherever they can (p. 52).
24. Labor should be moderate in its wage demands (p. 52).
3.
LONG-RANGE OBJECTIVES
25. Private groups and individuals, State and local governments,
and the Federal Government should all cooperate in the development
of natural resources, including agricultural and grazing land, water
power, forests, and mineral resources. Programs for the development of underdeveloped regions in the West and in Alaska should be
continued and expanded (pp. 56-58).
26. Continued high-level production will require large increases of
capacity in many industries. The balancing of expansion in different
industries calls for considerably more thorough study than has been
given in the past (pp. 59-61).
27. Maintenance of a healthy shipbuilding industry, capable of
rapid expansion, and the continued operation of an efficient and competitive merchant marine, are necessary to national security, and are
essential elements in the achievement of a continued high level of
employment in the United States (pp. 62-63).
28. The expansion of highways, air transport, and railroads is
essential to economic growth and requires continued Government aid.
Governmeht aid is most effective when it stimulates the resourcefulness and inventiveness of private enterprise in developing and applying teclmological advances in aviation (pp. 63-64).
29. Improved planning and redevelopment of cities will enhance
their usefulness as facilities for manufacturing and commerce, and
increase workers' productivity. It has been estimated that over the
next decade as much as $75,000,000,000-mostly private investmentcould profitably be employed in these redeveloped areas. The housing
shortage requires a large amount of new construction in outlying
areas before we can engage in slum clearance and urban redevelopment on the scale that will be needed. Local governments, State
governments, and the Federal Government should all cooperate in
urban redevelopment. Comprehensive long-range housing legislation
should not be postponed. Postponement of this action represents
postponement of attention to a problem of utmost economic importance (pp. 64-68).
30. One result of the war has been to increase the employment of
teen-age workers, and of men and women in the older age groups.
The exacting economic demands of modern employment, no less than
social considerations, should impel us gradually to reverse this trend
(p. 69).
31. Expansion of educational plant is urgently needed. Federal
aid to elementary and secondary education should contribute to that
equalization of opportunity in various parts of the country which
will fit our youth for living and working in the kind of economy that
we shall have when they are grown (p. 70).
32. There is need for enlarged research, both in basic principles of
physical, biological, and social science and in their practical application
(p. 72).
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JOINT ECONOMIC REPORT
33. A comprehensive national health program along lines previously
recommended should be enacted (p. 72).
34. Unemployment compensation should be increased in amount
and duration and extended in coverage (p. 73).
35. The coverage of old-age and survivors insurance should be
extended, and benefits should be adjusted upward with a higher limit
upon earnings which may be received after retirement without loss
of benefits (p. 73).
36. A lowering of the retirement age will be feasible in future years
as we attain the levels of national output that sustained maximum
employment and production will bring. At the same time, industry
should provide opportunities for the efficient employment of those
older people who are able and willing to work although they have
earned the right to retire (p. 73).
37. The Federal Government should make grants to States to help
them finance general-assistance payment, and all public-assistance
grants should take account of variations in the ability of the States
to finance adequate assistance programs (p. 74).
38. In the industrial area we need price-wage-profit policies which
maintain balance between the output of industry and the ability of
consumers to buy that output (p. 75).
39. In the agricultural area, we need balance between city and farm
income and between farm and industrial prices (p. 75).
40. The fiscal policies of the Government, such as taxation and
debt management, need to be so contrived as to afford maximum incentives to production and to improve the balance within the economic
system generally (p. 75).
41. We must strike a wise balance between our internal economic
activities and our international trade (p. 75).
42. There must be a strong and continuing pressure by the Government to keep alive the competitive characteristics of the business
system (p. 76).
43. In the future amendment and enforcement of the antitrust
laws, the principle should be followed of checking the further excessive concentration of industrial control and, by protecting the position
of smaller competing enterprises, of reversing the past trend toward
concentration (p. 76).
44. Pricing policies and practices which are designed to protect the
individual company during future declines in business activity are not
conducive to the continued health of the business community (p. 77).
45. Collective bargaining must be based upon a better understanding of the long-range interests of management and labor in the
context of the interests of the whole economy (p. 78).
46. We should seek within a decade to raise agricultural production
about 10 percent above present levels. More adequate educational
and financial aids should be provided for this purpose. Orderly
marketing and the widest possible distribution of bumper crops call
for educational and service work with industry and consumers (pp.
81-82).
47. Commodity price-support levels should be kept flexible and the
parity formula modernized (p. 82).
48. Except in years of depression, taxes should be maintained at a
level which will balance the Federal budget and provide a substantial
surplus (p. 84).
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JOINT ECONOMIC REPORT
43
49. Our long-range tax policy ntuist be such as to help sustain
prosperity. Lowering particular taxes on business may at one time
be needed as a means of stimulating business expenditures when they
are inclined to lag, but maintaining or advancing taxes at another
time may be needed as a means of checking overexpansion or overcapitalization (p. 84).
50. The program which Congress has been asked to authorize in
order to assist European recovery may make the difference between
success and failure of world reconstruction (p. 86).
51. It is natural and desirable that we maintain sonme surplus of
exports in .the years ahead by the steady investment abroad of private
capital (p. 88).
52. The timing of the economic programs to promote stabilization
is discussed as follows in the closing pages of the report (pp. 88-89):
While it is most urgent now that we combat inflationary dangers, we cannot
wait until the tide turns before considering affirmative measures that will be
needed in the future. Economic conditions mlay turn rapidly but the forminlation,
enactment, and initiation of economic and fiscal programs require a considerable
amount of time. Prudence demands that we look ahead and prepare for tomorrow
while we act for today.
In timing the adoption of measures for long-run1 prosperity, we must give careful
consideration to the following principles:
(1) Certain programs related to national security and foreign policy, to promotion of urgently needed production, and to protection of our natural and human
resources against serious cconomic hazards must go ahead even though Government outlays for foreign or dotnestic programs contribute to the necessity of antiinflationary measures.
(2) Certain adjustments, such as the increase in mninimullnm wages and tax
adljuistmeints, are needed in order to mitigate the hardship imposed on those who
are the hardest hit victims of the inflationary price rise.
(3) Major parts of the proposed expansion in the social security program will be
deflationary in the first period after inauguration. Therefore, there is no reason
to postpone the adoption of these urgently needed measures.
(4) Federal, State, and local public works in general should still be deferred
wherever feasible. We need, however, certain initial steps immediately to prepare these measures for future years. For instance, the Federal Government and
State and local governments should be preparing drawings and specifications for
public works projects to be undertaken when needed. In my budget for the
fiscal year 1949, I have included appropriation requests and estimated expenditures in amounts sufficient for the initial steps of new public works.
(5) When the inflationary pressure subsides, we should speed up the programs
of resource development, transportation, and urban rehabilitation, and further
expand the social security, health, and education pro-rains.
Since our first experience with the Employment Act is occurring under conditions that give priority to measures needed to counteract inflation, we are given
time to consider carefully the measures that will aid in meeting the threat of uinemployment at some time in the future. But we must not fritter away the time
thus granted us. We must not be complacent and believe that the job of employment stabilization has been solved. A boom carries in it the seeds of its own
destruction. We must be prepared to act in time if we want to make good our
promise and prove to the world as well as ourselves that an economic system of
free institutions can be made to work steadily as well as efficiently.
PART IV. MINORITY VIEWS ON PRESIDENT'S REPORT
THE ECONOMIC
PROBLEM ACTION VERSUS INACTION
Twice since the enactment of the Employment Act of 1946 President
Truman, in compliance with that statute, has submitted to Congress
a carefully documented economic report. Under the terms of the
law, it is the duty of the President to submit such a report at the
beginning of each calendar year. It is also the duty of the Congress
under this law to review the proposals of the President in the Joint
Committee on the Economic Report, and then to make its own recommendations for the use of the appropriate standing committees.
The theory of the Employment Act of 1946 was that it is the
responsibility of the Federal Government to "coordinate and utilize
all its plans, functions, and resources for the purpose of creating and
maintaining, in a manner calculated to foster and promote free
competitive enterprise and the general welfare, conditions under
which there will be afforded useful employment opportunities, including self-employment, for those able, willing, and seeking to work,
and to promote maximum employment, production, and purchasing
power." It will be observed that the law envisages an all-out effort
on the part of the Government to foster "free competitive enterprise"
and to promote "employment, production, and purchasing power"
to the maximum degree. This objective is not to be gained by half
measures. It cannot be won by letting things drift. It calls for
positive measures. It may be attained only, as the Employment
Act contemplated, by the mobilization of all the plans, functions, and
resources of the Government.
In order to enable the President to submit recommendations calculated to make such a program effective, the law equipped the
executive branch of the Government with a Council of Economic
Advisers, composed of high-grade professional economists, whose duty
is to appraise economic conditions and to formulate and lay before
the President its recommendations for a national economic policy.
MACHINERY
FOR ECONOMIC MOBILIZATION
In order to enable the Congress to have the benefit of an independent review of the recommendations of the President and of the Council
of Economic Advisers, a new congressional committee, the Joint
Committee on the Economic Report was established. It is the duty
and responsibility of this committee not only to review the President's
report and the reports of the economic advisers, but to make independent studies of economic conditions so that the Congress as a whole
and through its standing committees should have the benefit of the
expert advice of the Council of Economic Advisers and the expert
advice of a congressional staff and of the members of the Senate and
House appointed to the Joint Committee.
44
45
JOINT ECONOMIC REPORT
The President and the Council of Economic Advisers have carried
out their responsibility. The report of the Joint Committee which is
now being presented to this, the second regular session of the Eightieth
Congress, is long overdue. It is the first congressional report of the
committee which makes any pretense of carrying out the original
concept of the law.
The Presidential reports, both in 1947 and 1948, made two types
of recommendations, the first being short-range measures to deal
with the current situation, and the second being long-range measures
to deal with the over-all problem. Both types of recommendation
were intended by the President to utilize the plans and functions of
the Government in accordance with the policy of the Employment
Act of 1946 "to promote maximum employment, production, and
purchasing power."
CONTRAST
BETWEEN
EXECUTIVE
AND LEGISLATIVE
POINT
OF
VIEW
The President's reports, as contrasted with the interim reports of
the Joint Committee, the action of the standing committees of the
Eightieth Congress, and the laws passed by the Congress itself, strikingly emphasize the conflicting points of view of the executive and of
the legislative branches. President Truman has recommended affirmative action to hold inflation in check, to stabilize the economy, to
preserve good business conditions, to stimulate production, and to
provide for maximum employment and profitable private competitive
enterprise.
The Congress, however, has preferred inaction. It has preferred
to bold Government authority .to a minimum. It has acted upon the
theory that Governmnent controls should be authorized only in extreme
cases and even then it has been slow to act. It has chosen a negative
rather than a positive approach.
Thus the clear issue is presented between action as recommended
by President Truman, or inaction as exemplified in the policy of Republican congressional leadership. In other words, the question is
whether the Federal Government shall act positively to check inflationary pressures occasioned by inescapable demands upon a supply
which despite substantial increases in production is not sufficient to
go around, or whether, in accordance with the congressional policy
since the beginning of the Eightieth Congress, the Government shall
do nothing and trust to luck that the public interest will not suffer.
The congressional policy of drift is illustrated by legislative history
on the proposals which have been made. Most of the President's
recommendations have been utterly disregarded. A few of them
have been taken up in a half-hearted manner. The Senate, for
example, has passed a bill providing for the control of consumer
credit. Although this measure was passed on December 17, 1947,
it is still awaiting final action in the House. Rent control extension
though recommended by the President on November 17, 1947, was
not passed by the Senate until February 25, 1948, and when finally
approved in conference and sent to the President on March 26, it was
in a denatured form. Rent control has been approved by the Congress
although rents have risen less than any other group of prices, because
there still is an acute lack of housing, and the costs of the housing
that is being built have risen beyond the range of normal incomes.
Congress has acted because people must have roofs over their heads.
46
JOINT ECONOMIC
THE CASE
REPORT
FOR ECONOMIC PREPAREDNESS
The case for positive, affirmative action by the Government as
recommended in the two reports of the President is based upon the
historic fact that inflation has always been followed by depression and
that depression produces suffering and misery for all groups in the
economy, for the producer, the worker, and the consumer, for organized and unorganized business, and for the individual.
It is also based upon the belief that inaction during a boom period
produces the very conditions which themselves result in depression
and which defeat the objectives of Government responsibility and
action specifically set forth in the first section of the Employment
Act of 1946. While the boom is on, all groups seek selfish advantage,
hoping to gain the benefits of rising prices and rising wages and then
somehow to avoid the inevitable penalties when the decline comes.
If the brakes are not put on while inflation is ballooning skywaxd, there
is no way, as experience teaches us, of avoiding the disastrous effects
of the fall when the balloon is punctured.
The President's reports have been warnings and recommendations
designed to prevent such results. The President has advocated a
policy of economic preparedness. The Congress has been content
to wait and see.
The hope of those who prefer the policy of inaction is that somehow, without Government guidance, things will take care of themselves, that somehow the law of supply and demand, instead of
inevitably producing inflation due to competition among spenders
for goods, will somehow equalize conflicting forces, that rising prices
will induce production in sufficient volume to meet demand, and that
in some vague and unpredictable way the economic system will adjust
itself if only the Government follows a policy of keeping hands off.
That this is an unsound concept is demonstrated by the fact that even
its advocates, as indicated by the action of the Senate with respect to
consumer credit and rent control, concede that there are circumstances
in which the Government cannot afford to keep hands off.
The danger of spiraling prices became so great during the first
session of the Eightieth Congress and the acuteness of the housing
shortage became so evident that the Congress finally authorized the
Joint Committee on the Economic Report, expanded by the appointment of other Senators and Congressmen from other committees, to
conduct country-wide hearings on the cost of living and created
another joint committee to investigate the shortage of housing.
With respect to the cost of living, these hearings resulted in findings
that prices had gone so high that millions of citizens in the low-income
groups were no longer able to stretch their incomes to cover the cost
of existence even though they were diminishing their purchases.
With respect to the housing shortage, the findings of the Joint Committee on Housing were that Government action and Government
expenditures are necessary because the hands-off policy has not been
producing the desired results.
EVIL EFFECTS OF INACTION ALREADY BEGINNING '10 APPEAR
Seven million American families at the bottom of the economic scale
were obliged in 1946 to subsist on an average annual income of only
$835. It is true that this was larger than it was in the prewar days,
JOINT ECONOMIC REPORT
47
but in terms of purchasing power it means, and there is no dispute in
the committee on this point, that these 7,000,000 families offer a much
pooier market to industrial and agricultural producers and to those
engaged in trade than would be the case if Congress had chosen to take
positive steps to check inflation.
If the price spiral continues and the next group of 7,000,000 families,
who in 1946 had an average income of $2,023 for the year, are compelled, like the group on the bottom of the scale, to forego the purchase of necessaries as well as of luxuries, then business will really
begin to feel the disadvantages of shrinking markets. If finally the
inflationary balloon is allowed to burst, then indeed business will
come rushing to Congress for Qovernment aid much as it did after
the collapse of 1929. Effective action to halt deflation will require
more stringent Government control over the economy than the
preventive measures suggested in the messages and reports of President Truman. With a national debt of $259,000,000,000 now as
compared with a debt of only $20,000,000,000 in 1930, the task of
effecting recovery will be many times greater than it was when, under
President Hoover, the Reconstruction Finance Corporation was
established to do for business with Government credit what it could
not do for itself. Both the leaders of Congress and the leaders of
private business, if they are intent on preseiving and strengthening a
private competitive economy instead of sinking into a wholly Government economy, would be well advised to insist upon adopting the
President's proposals immediately.
Business leaders, big and little, cannot afford to disregard the
significance of the recently released study of the Bureau of Labor
Statistics on the City Worker's Family Buidget proving that millions
of American working-class families are the immediate victims of the
failure of the Congress to respond to the President's repeated recomnmendations for inflation control.
This study, based on June 1947 wages and prices, which has not
been challenged since it was first presented to this committee, indicates
that a city worker had to earn approximately $3,000 to $3,400 per
year to provide a necessary minimum standard of living for his wife
and two children. If he had a wife and three children, the city worker
would have to receive almost $4,000 per year. The city worker and
his family constitute the best market that industry and agriculture
can have. If, because of high prices and low income, he cannot
properly feed, clothe, and house those dependent on him, the farmer
and the industrialist will promptly learn about it in shirinking sales
and vanishing profits.
Hlow dangerously close to this point inflation has carried us is
demonstrated by this fact: The average wage in manufacturing in
June 1947, was $1.18 per hour. If the average manufacturing worker
worked 50 40-bour weeks a year, he would earn only $2,360, or 41
percent below the necessary minimum for a family of three children;
or 33 percent below the necessary minimum for a family of two
children.
That these danger signals are visible not merely to those who
support the recommendations of President Truman is proven by the
comments on the current business scene even by the economists of
business. Take, for example, the following quotation from the April
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JOINT ECONOMIC REPORT
letter of the National City Bank of New York on economic conditions
and Government finance:
There is no limit to the aggregate wants of people, but there are frequently
limits to the amount of a given product that is wanted and can be paid for at a
given time. As the boom runs on, these limits are bbund to come into operation
in certain lines. Evidence that they are appearing is not lacking. Buyers this
Easter have not seemed willing to take all the apparel offered at the prices asked,
and some manufacturers have found themselves overcommitted on fabrics.
Prices of cotton print cloths and some rayon constructions have declined. Expensive services and luxuries have slumped. In many household appliances the
testimony is that the well-known brands preferred by the public are becoming
more generally available, and that the less-desired makes are feeling the pressure
of competition.
These conditions apply in an increasing number of lines. They are certain to
make things harder for the manufacturers who by reason of less experience, less
efficiency, or less financial strength can be described as marginal. The same is
true in the distributive trades. The result is bound to be an increase in business
failures and rising pressure of competition on profit margins.
To date the Congress has done nothing about either the cost of
living or the housing shortage. True the Senate has passed a bill to
control consumer credit-but the House has taken no action. The
Senate has passed a housing bill, but the outlook for it in the House
is dark.
Thus the choice is presented between positive, affirmative action by
the Government as recommended by President Truman in accordance
with the intent and letter of the Employment Act, or inaction and
delay as represented by the policy of the Eightieth Congress ever since
it assembled on January 3, 1947.
NOW IS THE TIME FOR
DECISION
It is clear now that it is too late to expect any change of policy by
the leadership of this Congress. The choice, therefore, must be made
by the people between the policy of action and the policy of drift.
The facts before us, as well as the experience of the past, teaches us
that the result of congressional inaction means only that the pattern
of the past will be repeated even to the depths of disaster. This fact
is clear, that when the purchasing power of the masses of the people
is curtailed, the market for business is also curtailed, and both suffer.
Those who have urged the policy of inaction have contended that
Government controls in time of peace are intolerable, but they overlook the fact that these are not times of peace. It is an utterly false
assumption to contend that, with the turbulent world discharging
economic and political lightning of an intensity scarcely ever seen
before and with the peace treaties of World War II still unwritten,
the people and the business leaders of the United States can safely
close their eyes to realities and pretend that we are living in a normal
world.
These are not normal times. They are abnormal times. They are
times in which individual freedom, both political and economic, is
threatened as it has never been threatened before. These are times
in which totalitarianism is marching everwhere to overwhelm democracy. These are times in which freedom for the individual can be
preserved only by wise Government action motivated by a desire to
maintain that freedom against concentrated power of all types.
The President's reports have urged the Congress to combat inflation by constricting the supply of money and reducing inflationary
JOINT ECONOMIC REPORT
49
expenditures on the part of consumers, business, and government,
and by stimulating the production of goods in short supply. He has
recommended that the American economy be fostered and expanded
by the conservation of our resources, human and material. He has
particularly pointed out the necessity of strengthening the system of
free competitive enterprise. He has specifically recommended, and
this recommendation was contained in his first report, that Congress
take positive affirmative action to prevent the progressive concentration of economic power through monopolistic mergers. This he did by
recommending specific enactment of legislation now pending in both
houses of Congress to amend the Clayton antitrust law. His appeals
and recommendations have fallen on deaf ears and the economic situation continues to drift although Senators and Representatives of both
parties have repeatedly urged a policy of affirmative action.
PROBLEM IS BOTH INTERNATIONAL AND DOMESTIC
In preparing his reports for the Congress, the President was aware
that our economic problem is both international and domestic. He
was cognizant of the burdens that were being thrown upon the American economy by unavoidable demands for assistance in the rehabilitation of war-devastated areas as well as the burdens occasioned at
home arising from the shortage of materials to meet the demand.
It was his recommendation to the Congress that, accepting realistically the conditions in which the United States found itself, it was
essential for the Government to act.
That he had not overestimated the international demands and the
gravity of the international crisis is now evident, and Congress has
accepted his recommendations for expenditures to deal with the international problems, but to date Congress, so far as the domestic problem
is concerned, has been content to hope that by voluntary action industry could allocate materials in short supply and hold prices in restraint
while financial units likewise, by voluntary action, could restrain
undue credit expansion.
These hopes were doomed to disappointment from the beginning.
Now that the international crisis has mounted, it is even more evident
than before that we cannot safely depend upon voluntary restraints
or comfort ourselves with illusive hopes that somehow the situation
will take care of itself. It is important, therefore, coldly to reappraise
the President's reports, and weigh his recommendations in the light
of the hard facts before us and the desire of the American people to
achieve world peace and a stable economy in which freedom and
opportunity for the individual may be maintained.
THE ECONoMIc REPORT
OF THE PRESIDENT
In his Economic Report for 1948, the President urges upon the
Congress two major types of action:
I. Ten affirmative measures for combating inflation to be
handled at this session of Congress.
II. Twenty-two long-range measures designed to reinforce the
American economy and strengthen the free, private enterprise system in a postwar world of rival economic ideologies.
50
JOINT ECONOMIC REPORT
Any program designed to combat inflation and create higher levels
of employment and output is bound to be varied and complicated.
There is no simple panacea for the economy just as there is no single
simple way to win a war or even a battle.
1.
COMBAT INFLATION
The basic dilemma of full-employment programs is, how can a
nation maintain a relatively high level of employment without being
subjected to constant inflationary pressures? Never has any nation
done so during peacetime in the past. Even in war periods inflation
is contained rather than prevented. Similarly, how can the cost of
living be leveled off or brought down except by going through some
measure of depression and mass unemployment? That, too, has
never been done.
In 1948 more than ever, the United States needs a flexible doubleacting price policy, one that will wisely put on brakes when needed,
but which, at the same time, ever keeps the accelerator in readiness.
Many of the things here and abroad which the United States wants
to do in 1948 will remain partly or wholly undone if inflation continues.
Thus, for example, rising prices will cut the heart out of any dollar-aid
extended to Europe just the way the post-OPA inflation of 1946-47
cut the buying power of the dollars lent to Great Britain by nearly a
third, thereby seriously curtailing the intended benefits of the loan.
On the other hand, a catastrophic fall in prices might again cause
mass unemployment in the United States, seriously damage confidence
in free private enterprise in Europe, and create rejoicing in the Kremlin. The Communists have been predicting sLach an event ever since
VJ-day and planning to exploit it.
The price policies of American business in 1948 are thus of vital,
strategic importance. They should not hamstring but should aid the
United States to discharge its world obligations toward peace and
prosperity with maximum efficiency and economy. They should not
disrupt but should stabilize production and distribution at high employment levels. They should not diminish but should maximize the
economic freedom of individual businessmen which necessarily implies
that big corporate business must cease dictating the pricing policies of
small individual business.
Despite recent readjustments of prices in the grain markets, the
major problem in 1948 has been, and seems likely to be, curbing the
excesses and alleviating the injuries of inflation.
The affirmative measures which the President recommended be
handled by this session of Congress fall into three categories: .
A. Measures that will restrict the total amount of money in
circulation.
B. Measures that will divert purchasing power into noninflationary channels or otherwise decrease inflationary expenditures;
and
C. Measures that will stimulate production of goods in short
supply.
A. Constrict the supply of money
A sound policy of credit control is one that will curb reckless borrowing all around-by Government, by consumers, and .by business.
JOINT ECONOMIC REPORT
51
The President accordingly urges: (1) Cut governmental expenses,
(2) keep a substantial excess of Government receipts over expenditures, (3) reimpose controls over consumer credit such as those the
Fcderal Reserve Board formerly exerted in Regulation W, and (4)
"close study" of current Federal Reserve Board proposals including
the increase of bank reserve requirements and legislation sufficiently
comprehensive to give the powers needed.
(1) In order to insure an excess of Government receipts over expenditures, all governmental units, Federal, State, and local, should
scrutinize meticulously every expenditure for public works and other
purposes to determine which are postponable, which bid for scarce
materials and labor, which fail to add in the immediate future to the
total amout of available goods. Needless to say, all Government
expenditures should, without impairment of vital programs, be cut
to the bone, and every person possible released to private employment.
(2) From the standpoint of anti-inflationary effect, taxes are
highly effective, especially those on individual and business net incomes. All leaks should be effectively plugged, every enterpriser,
whether "gray market" operator or other citizen, required to pay his
fair share. In 1948 more than ever the economy needs top operating
efficiency by the Bureau of Internal Revenue. Its appropriations for
enforcement should be increased. A larger personnel is not only
needled to assist those citizens who for the first time are enjoying
incomes high enough to be taxable, but it is necessary to insure a
minimum of tax avoidance. Nickels spent for adequate enforcement
will yield additional dollars of lawful revenue.
The time to tax heavily is when prices are getting out of hand.
Any reduction in the total amount of taxes collected will but feed
the forces of inflation. The people to tax are those who benefit most
from higher prices. The burden should be eased on those whose
incomes lag behind.
As compared with the preceding year, the primary beneficiaries of
inflation in 1947 weie those receiving net corporate profits after taxes,
and those receiving incomes from unincorporated business and nonfarm proprietorships. Those in 1947 showed larger percentage gains
over 1939 than did farm incomes. On the other hand, interest and
rental incomes percentagewise were cut in two. Even the share of
employee compensation in private national income, notwithstanding
all wage increases, was not maintained. .(See Appendix, table I.)
In comparing 1939 and 1947, pay rolls before taxes fell behind
from 61.9 to 59.9 percent of total income, the corresponding share of
corporate profits increased by more than one-half from 10.0 percent
to 15.5 percent of total income.
Corporate profits after taxes of 5.005 billion dollars in 1939
amounted to 7.7 percent of the national income originating in the
private sector of the economy (64.3 billions; i. e., national income,
72.532 billion dollars minus compensation of Government employees,
8.2 billion dollars). In 1947 that percentage had increased to 9.4
percent, a figure dangerously close to the excessive ratio of 10.2
percent in 1929. As need hardly be mentioned, 1929 was a year of
such abnormality of economic relationships that it was followed by
one of the worst depressions in recorded economic history.
52
JOINT ECONOMIC REPORT
Likewise closely resembling 1929 is the abnormally high ratio of
profits to wages paid and the low ratio of compensation of employees
to national income originating in the private sector of the economy.
In 1939 private employers paid out $7.50 in wages and salaries for
every dollar of gross profits. In 1947 they helped themselves to a
dollar of net profits after paying out only $6.39 in wages and salaries
and took out a dollar of gross profits after disbursing less than $4 in
wages and salaries. This is getting down to and going below in the
latter case, the ratios of $5.37 and $4.60 respectively in 1929, which
heralded the disaster of 1932.
Similarly the ratio of compensation of employees in the private
sector to national income originating in the private sector has been
steadily growing worse, and is again approaching the low levels of
that most critical of all prosperity years in modern history, 1929.
As the table shows it was 61.9 percent in 1939 and had gone down
to 59.9 percent in 1947. It only has to go a little further down to
get to the 54.9 percent level of 1929 which was so low and provided
so inadequate a mass market for the goods then pouring out that
more than three disastrous years of liquidation and bankruptcy
followed.
Such trends are unhealthy and ought net to remain unchecked.
An increase in taxes on profits will dampen both excessive business
spending and inflation. A reduction in taxes, especially in the upper
income brackets, doubly makes matters worse. Since such high
incomes in large part come from dividends and other corporate disbursements, tab reduction in boom times only adds to conjunctural,
fortuitous gains, and pours more fuel on the fires of inflation. The
lesson of 1946 when the excess-profits tax was abolished should not
be forgotten. Did prices go down? They most assuredly did not.
As was authoritatively stated in Senate Document No. 21 published
by the Committee on Labor and Public Welfare, of which Senator
Taft is chairman:
Undoubtedly the most important influence in sharply increasing the net profits of
corporations and in reducing the losses of others was the elimination of the excess
profits tax in 1946, along with the reduction in the corporate income tax from 40
percent to 38 percent and the tax credits resultingfrom the excess profits credit carryback provisions of the Internal Revenue Code * * *. The sweeping tax reductions on corporate business were largely turned into net profits.'
The recent tax reduction law has paved the way for new upward
pressures. This bill will add approximately 5 billion dollars in purchasing power (with 40 percent of it going to 5 percent of the taxpayers earning over $5,000 a year), and take way a similar amount
from our tax revenues. The international aid obligations which we
have accepted will add more billions to Government expenditures.
The rearmament expenditures will further increase the budget by
additional billions.
As a result the Government's fiscal position for the balance of
calendar 1948 is likely to be one of deficit-thus eliminating our only
remaining important anti-inflationary weapon. During the last three
quarters of 1948, according to the Board of Governors of the Federal
Reserve System, the budget deficit may exceed 3 billion dollars. Sales
of savings bonds and other public debt receipts are expected only to
equal voluntary redemptions by holders of maturing bonds. The
IU. S. Senate Committee on Labor and Public Welfare Data on Wages and Profits, 80th Cong., 1st
sess., U. S. Government Printing Office, Washington, D. (., 1947, pp. 2, 3. and 5. [Italics in original
JOINT ECONOMIC REPORT
53
deficit will have to be financed by either drawing upon Treasury funds,
or by borrowing in the market. Given these conditions it can be
expected that no net retirement of the bank-held Government debt
can be effected, there will probably be a further increase in bank
reserves, and banks would thus be in a position to expand loans and
investment for private purposes which would mean still more inflationary expansion of the money supply.
(a) Ease the burden on those crucified by inflation: But as Senator
Flanders has recently pointed out, one must go back of these averages.
He tells us:
Masses of figures, for the most part dealing with averages, conceal human problems which are most easily revealed by going direct to the people. To be specific,
average wages may be better with relation to some average cost of living now
than was the case in 1939, even though conditions have deteriorated somewhat
from the peak of real wages in 1946. It became clear, however, that we could not
indulge in complacency in spite of this generally favorable situation. Within
those average incomes and average costs of living were to be found many millions
of people who had been left behind in the war and postwar advances in incomes,
and whose conditions were materially worse than they had been at any time,
even worse for many of them than they had been during the depths of the depression.
Who were these people who had been left behind in spite of so great and general
statistical advances? Among them, of course, were all of those who were trying
to live in their older years on the savings of a lifetime. All who had been depending on pensions and retirement annuities were severely cramped. There are
millions of wage earners, organized and unorganized, who have been left behind
as the incomes of their more fortunate and aggressive fellow workmen had been
increased. All of those who were connected with religious and charitable institutions were in serious straits * * * . Almost all employees of Federal,
State and local governments have lagged behind * * * there is a human
necessity, to recognize the difficulties in which these great groups, numbering in
the aggregate many millions, find themselves.
They have been particularly hard hit by the increase in food prices.
Food constitutes well over 50 percent of the total budget for these
low-income groups and less than 7 percent for the top group.
These low-income groups are hit much harder by the extraordinary
increase in food prices than those at the top.
A comparison of changes in incomes, 1941-46, by families grouped
according to income, with changes in the cost of a "market basket"
indicates that the bottom 20 percent of our families have bad almost
40 percent of their additional incomes absorbed by the increase in
food prices. On the other hand, for the highest fifth of our families,
increased food prices have only taken 5 percent of their additional
incomes. (See Appendix Table II).
How then, ease the burden on those crucified by inflation? The
President has indicated three ways. Those at the very bottom who
pay no income taxes will be helped most readily first by an immediate
upward adjustment of social security, old-age pension and minimum
wage levels. They will also benefit greatly as will consumers generally by removal or reduction of various excise taxes such as those
on freight traffic and passenger travel, entertainment, and oleomargarine. All governments-Federal, State, and local-should consider means for encouraging the repeal of, excises, sales taxes and
tariffs which bear most heavily upon low-income families.
(b) Make corporate profits bear their fair share of the total tax
burden: Increasing by an equivalent total the taxes on profits and
particularly on excess profits merely keeps the tax load from shifting
54
JOINT ECONOMIC REPORT
from those who benefit most by inflation to those who have been
most seriously injured.
An analysis of the sources of Federal income 1939 and 1948 indicates the extent to -which the incidence of taxation has been shifted
to individuals-especially upon those earning under $5,000, while the
proportionate share of corporate income taxes has declined.
In 1939, individual income taxes provided 25 percent of Federal
income and corporate income taxes-23 percent. By 1948, the estimated share of individual income taxes has increased to 50 percent
while the corporate income tax share has declined to 21 percent.
With regard to individual income taxes, those earning under $5,000
in 1939 contributed 9.8 percent of the total Federal income tax bill,
and in 1948 (after the tax reduction law) will contribute an estimated
51 percent. On the other hand individuals earning over $5,000 and
who contributed 90 percent of the total tax bill in 1939 have had
their share reduced to an estimated 49 percent in 1948.
(3) Regulation of consumer credit.-In its interim report of December 15, 1947, this committee endorsed the proposal that Congress
restore to the Federal Reserve System the power to regulate consumer credit. Affirmative action has already been too long delayed.
(4) Regulation of bank credit.-"Among the strategic points at
which to curb the inflation movement," says the President, "none is
potentially more powerful than the restriction of bank credit." In
1947 all major types of borrowing (except security loans) increased at
record or near record rates. In fact total loans of commercial banks
expanded by 7 billion dollars or 23 percent over the year.
Due to the fact that the expansion of bank loans was only partly
offset by the reduction in banking system holdings of Government
securities, the privately held money supply rose 6 billion dollars in
1947 as compared with 13 billion dollars in 1946. Contributing to
this expansion was the increase in gold certificates due to some 3
billion dollars worth of gold imports, and the further reduction in
Treasury cash.
The ordinary way to reduce business borrowing is to raise the
interest rate. However, if the Government debt is to be financed
at 2Y2 percent; Government bonds of that tenor cannot be permitted
to go below par. Thus the President recommends "close study" of
proposals such as those of Mr. Eccles which purport to resolve this
dilemma.
There are several lesser devices tantamount to voluntary rationing
of credit. Government-lending agencies should continue with vigor
the liquidation of their lending programs and apply more rigorous
scrutiny than ever to new borrowing. Even in the case of veterans
housing the underwriting or making of so-called " 100 percent loans"
should be tightened.
A period of inflation is not the time for Government ordinarily to
be lending money. On the contrary, Government loans should be
paid off as speedily as possible.
In addition, private bankers are commended by the President for
their program of rigid scrutiny and voluntary rationing of bank credit.
No loans should be made to finance purely speculative operations,
nor other use of credit permitted which does not serve to increase the
physical amount of goods available immediately or in the near future.
Bank credit ought not to be used to finance more than minimum in-
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JOINT ECONOMIC REPORT
ventories nor should it be used for withholding commodities from the
market in anticipation of, or for the purpose of, increasing prices.
B. Policies reducing inflationary expenditures
The second general method of.combating inflation is that of channeling incomes into bonds or other noninflationary outlets and reducing
aggregate expenditure-by consumers, by business, and by Government.
(1) To reduce inflationary expenditures by consumers the President
suggests five measures: Put on special drives to increase savings, and
especially stimulate the purchase of Government savings bonds; continue and strengthen rent controls; authorize limited powers of price
control; ration consumer purchases of selected commodities; and prevent wage increases where necessary to maintain a price ceiling.
(a) Spend less and save more: In 1947 although personal income
increased from 177.2 billion dollars to 196.8 billion dollars or nearly
20 billion dollars, personal savings actually declined by 26.4 percent
from 14.8 billion to 10.9 billion dollars. In the scramble for new cars,
household applianices, furnishings and other consumer durables, consurmer borrowings increased from 10.2 billion to 13.3 billion dollars.
Mzloreover, the redemption of savings bonds in denominations of $100
and less greatly exceeded sales. The table below gives the details:
Anumber redeemed as percent of number of bonds sold
Denomination
10
_----------285-3
50
1945
1
37
1946
77
130
108
1947 1
177
194
163
Denomination
1949
100 -23
900-17
1,000 -_
1946
87
51
39
1947 1
136
67
40
1First 6 months. All figures from publications of the U. S. Treasury Department.
Clearly the low-income groups are spending more than current
earnings. As they exhaust their savings and credit they are compelled
to reduce their level of living. Their purchasing power is falling and
thus the mass consumption market needed to support mass production is being eroded away. When the market disappears, then follow
factory shut-downs and unemployment while the spectre of depression
begins to rise.
To urge those to save more who now use every scrap of ingenuity
and economy to preserve minimum standards of living is a sardonic
and heartless counsel. The more so since by far the largest percentage of national disposable consumer income is enjoyed by those with
incomes in excess of $3,000. It is these families in the upper half of
the income scale who have been primarily responsible for driving up
consumer prices. It is these middle and upper bracket income groups
who require education in thrift, who must be induced to put a larger
proportion of their income in goverDment savings bonds, in life insurance policies, in savings deposits, in paying off mortgage and other
debt, etc. Nothing will encourage this more than stabilizing or
gradually lowering prices. A governmental policy of drift discourage
thrift. Consumers not only save less but do not see the sense of
postponing buying if prices seem sure to rise. A firm and certain
program of selective price control, limited to emergency use, will
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JOINT ECONOMIC REPORT
unleash in millions of buyers that myriad of free, voluntary actions
which will increase savings and take the steam out of inflation.
This is the time, likewise, to increase the savings of workers by
making larger deductions for social security programs. Thus in good
times reserve funds arc built up which in periods of depression
provide a floor to consuimption.
(b) Control rents: In continuing rent control the Congress is
keeping down the price precisely of that element in the cost of living
which has increased least.
By the end of 1947, rents had increased on the average, 11 percent
over 1939 levels, while food had risen 117 percent and bousefurnishings
and clothing had increased over 90 percent each. (See appendix,
table III.)
(c) Control only the prices that get out of line: The willingness of
Congress to keep down that cost-of-living element (rent) which has
risen least, makes the argument the more forceful for specific measures
to curb further increases in the prices of individual items that have
risen most. Stand-by controls, sparingly used when absolutely
necessary, will merely by being available, exert a restraining influence
on short-sighted speculative and profiteering elements in business
and labor that are now so enamored of immediate gains as to injure
the long-run welfare and profits of everybody including themselves.
These, among other considerations, have led the President to reject
the revival of OPA or any other blanket form of control, but to suggest
that there be granted-limited powers of price control to be used for
combating prices solely at those points where they bear most disastrously upon the cost of living.
(d) Ration if necessary: To this recommendation, he adds consumer rationing of selected commodities to provide a more equitable
distribution of the existing supply.
On all fours with such limited price control and rationing of specific
cost-of-living items, is the recommendation that authorization be
set up for controlling, on a selective basis, when necessary, the prices
of a handful of vital industrial products. In instances of extreme
scarcity as evidenced by existing gray or black markets the availability
of export controls and of limited powers to implement voluntary allocation and conservation plans would likewise curb inflationary
activities.
Even if the traffic officer never makes an arrest, the certainty that,
when necessary, he can and will, curbs the small number of reckless
operators who endanger the lives and property of motorists all along
the highway. In price control, a Gresham's law of human behavior
makes the worse operator drive better out of circulation. If a few
industries or unions get away scot free with excessive inflationary
prices, profits or wages, the others who can do likewise are jeered as
suckers for not following suit.
(e) Keep wage rates from endangering price ceilings: The most
spectacular price increases both since 1939 and since December of
1945 have taken place, not in the industries affected by highly publicized strikes, but in those such as farm products where the influence of
organized labor activity is moderate, if it exists at all. Prices of
farm products at wholesale in December of 1947 had risen 201.2 percent above 1939 levels, and food, 153.4 percent. On the other hand,
fuels, including coal, were but 70 percent above 1939 levels and metals
JOINT ECONOMIC REPORT
57
such as steel, and metal products such as automobiles, were up, on
the average 61.1 percent. (See appendix, table IV.) It is selfevident, furthermore, that even the smaller price increases in the
goods handled by corporations, and in manufactured products generally, more than compensated for increases in raw material and labor
costs. The margin between prices and costs is profits. Corporate
profits in the aggregate after taxes reached the completely unprecedented total of $17,400,000,000 in 1947. The highest figure reached
during World War II was $10,363,000,000 in 1943 compared with
$6,447,000,000 in 1940 and $8,420,000,000 in 1929.
Moreover, profits on the average in 1947 rose by nearly 50 percent
above 1946, and more than that in industries commonly regarded as
afflicted by strikes as, for example, automobiles, electrical equipment, mining and metals, pulp and paper, and steel.
In these industries 17 auto and auto parts companies reported an
increase in 1947 profits as compared with 1946 of 224 percent; 16
electrical equipment companies reported 1947 profits 154 percent
higher than in 1946; 17 mining and metals companies reported an increase in profits of 124 percent and so on down the line. Detailed
reports for 332 reporting companies are shown in appendix, table V.
If, however, price ceilings were to be reimposed on items that got
out of hand, upward adjustments in wage costs would have to be
moderated. That is why the President repeats his recommendation
that authority to prevent wage increases be granted where such action
is found indispensable to the maintenance of a particular price ceiling.
(2) Reduce inflationaryexpenditures by business.-Fully as important
as consumer expenditures in raising prices have been the unprecedented
expenditures by business. However necessary to replace plant and
equipment used up during the war and however indispensable to
achieve those increases in capacity required for full-employment levels
of output, the impact of spurts in business buying is inflationary.
Business expenditures for durable equipment were nearly 45 percent
higher in 1947 than in 1946. They absorbed almost 8 percent of the
total output, a figure far in excess of previous periods of prosperity
for which information is available. Most of these expenditures were
financed by equity capital, reinvested corporate earnings providing
$10,300,000,000 in 1947 as compared with $6,900,000,000 in 1946.
Undistributed corporate profits reached the unprecedented figure of
$10,600,000,000 in 1947 as compared with $2,600,000,000 in 1929.
Thus in 1947 five-eighths of the profits were plowed back into business
The amount paid for by sale of liquid assets was small.
As of the close of 1947 the book value of goods held in inventory
by manufacturers, wholesalers, and retailers had increased by 20
percent over the December 1946 level. While the ratio of inventories
to present sales is not high (it never is in years of active sales), their
ratio to future sales may swiftly become burdensome. Inventories
accumulate on the way down. The larger the volume the greater the
losses in liquidation.
Most spectacular has been the increase in net foreign investment in
1947. Unless the amount of foreign aid is increased even beyond
that embodied in the European Recovery Program, the amount of
net foreign investment will fall to levels of five or six billion dollars in
1948 and thereafter. (See Appendix, table VI.)
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In short, all types of business expenditures whether measured in
absolute quantities or relative to gross national product were at very
high levels. The sole exception is new construction and especially
residential construction. Nothwithstanding the fact that it increased
in 1947 to absolute levels higher than 1946 it accounted for a substantially smaller proportion of national product than would be expected
on the basis of past periods of comparable prosperity and housing
shortages. In 1947 the current dollar value of new construction was
5.3 percent of total gross national product compared with more than 10
percent estimated for the 1926-29 period. The physical volume of
housing built in 1947 was still roughly a third lower than in 1926-29
or 1942. There is still substantial need and justification for sound
programs of Government aid to financing in this field.
Except for housing, the need for bankers and others to screen
carefully business expenditures for capital goods is becoming more
acute. Now is not the time for further diversion of labor and goods into
plant or equipment that will take a prolonged period of time before it
puts additional consumers' goods on the market. Such capital goods
expenditures doubly increase prices-by adding to pay rolls and by
diminishing the supply of consumer goods that could otherwise have
been produced.
(3) Reduce inflationary expenditures by Government.-(a) Among
the inflationary expenditures most difficult to defer are those on
public works particularly at State and local levels. Local needs are
visible and tangible. Bonds are easy to vote and float in boom times.
Thus, new construction by public agencies rose 37 percent from
$2,151,000,000 in 1946 to $2,954,000,000 in 1947, a dollar figure well
above any peacetime level except that in 1930. Government, and
especially State and local governments have thus competed with
private industry for vital building materials such as steel in which gray
markets exist, and helped to drive up the price of lumber and other
items to fantastically high figures.
Bernard Baruch has suggested that a capital-issues committee be
set up with advisory powers, under the Secretary of the Treasury, to
review all capital issues, public and private, with a view to deferring
less essential projects. He recommends priorities to projects immediately increasing production, housing, schools, and hospitals.
Other civic and public improvements should be deferred but plans
worked out so that contracts can be let as soon as mass unemployment
begins to appear. Projects designed to save productive facilities
and prevent loss of life may be recognized as nondeferable.
C. Stimulate the production of goods in short supply
The economy operated in 1947 at practically full capacity. There
isn't much room for stretching output. The amount of frictional
unemployment, that is, the number changing over from one industry
or position to another due to seasonal variations or technological
changes, is actually less than the number usually necessary to provide
efficient elasticity and "give" to business operations. If the length
of the workweek were increased beyond 40 hours, more output might
be obtained in such industries as could acquire ample supplies of requisite raw materials or semifinished products. It would not increase output in continuous-process industries, agriculture, service enterprises,
or those operating on a three-shift basis. Moreover, if the extra
hours were paid for at overtime rates, the question would arise
JOINT ECONOMIC REPORT
59
whether the amount of inflationary buying power would be increased
more than the amount of output.
The effective remedy is, consequently, one which with existing
facilities, existing labor, and present pay rolls gets more physical output per man-hour oc per dollar of cost. All the measured recommended by the President follow this principle.
(1) To complete large capital-investment programs that are near
completion, whether of business or Government, provided they then
produce goods in short supply, will aid in two ways. The laborers
will be producing consumers' goods instead of plant equipment and
inventories. Their wages instead of merely being added to the stream
of buying power will be offset by the addition to consumers' goods
they produced.
(2) Increasing the productivity per acre of land by more skillful use
of fertilizers and other scientific know-how, by decreasing wastage of
food and fiber on the farm and elsewhere in harvesting, storage and
transit, by increasing yields, by minimizing the damage done by pests
and rodents, by improving food processing, by eliminating spoilagesuch practices, while always desirable, are imperative in periods of
inflationary food prices.
(3) Housing is one of the items most in short supply. While rent
controls may prevent widespread evictions and abrupt increases in
rent, it does not add a single accommodation to the existing supply.
That can only be done by breaking housing bottlenecks.
Vast improvements in the efficiency of the building industry are
required, including the development of larger integrated homebuilding concerns and cooperatives, application of mass-production
techniques, more efficient use of new materials, removal of monopolistic
labor and business practices, modernization of building codes, local
and regional planning and urban redevelopment, yield-insurance plans
to attract direct institutional investment in large-scale rental projects,
and public housing for the low-income brackets whom private enterprise is unable to serve. Imperative sin qua non for the realization
of these goals is the enactment of the Taft-Ellender-Wagner housing
bill.
(4) Labor productivity has not yet risen in 1946 and 1947 as it did
after World War I. The veterans of World War II served several
years instead of a few months, so that retraining and rehabilitation to
industrial pursuits have been less rapid. World War II also caused
larger shifts in population and more innovations in machine methods
and production techniques. The possibilities of increasing per
worker productivity through increased collective efficiency, better
esprit de corps and greater mastery of tools and techniques are large.
(a) Consequently, the Federal Government should set up, not cut,
its training programs. It should increase the facilities for managementlabor cooperation not only in this program but throughout the whole
of industry.
(b) In view of the fact that the reservoir of workers ordinarily
facilitating seasonal variations and technological shifts in industry is
small, less than half of the 3,000,000 figure normally considered a
minimum, speedy placement in jobs of maximum marginal productivity will effect the largest possible alleviation of shortages. A national
employment service is required to take care of Nation-wide needs.
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2. REENFORCE THE AMERICAN ECONOMY
A free economy in the American tradition is one in which the
individual is not regimented by either private or public power. The
principal obstacle to the maintenance of such an economy arises from
the failure to understand that when the government does not adopt
a positive program but is content merely to drift, the inevitable
result is, first, regimentation of the people by the concentration of
economic power in private hands; and, second, the seizure by dictatorial government of the powers of regimentation thus built up in
private hands.
Q
The first step in the preservation of the traditional free, competitive
American economy is to prevent depression, and the second step is
to prevent the concentration of economic power in private hands.
Neither of these objectives can be attained except by positive government action.
If the government is not granted the powers to solve these problems
in the American tradition of opportunity and equality for all, then
the unsolved problems will inevitably catch up with us and a crisis
will ensue. In the throes of such a crisis we shall be obliged to go
far beyond the comparatively minor steps required to do the job when
the danger first shows itself.
In this respect the experience of the thirties provides a significant
lesson. The failure of government to deal promptly and forthrightly
to mitigate or resolve the crisis that evolved in 1929 or 1930 necessitated much more governmental intervention 3 years later.
The greatest danger that the country now confronts is that any
Government action is mistaken to be, or misrepresented to be, a plan
to establish arbitrary Government power. That is not the case.
Communism in the area behind the iron curtain, socialism in Britain
or in France, and fascism in Spain, Argentina, or elsewhere, are all the
result of the failure of government to take in time the necessary steps
to preserve a free, private-enterprise system against the destructive
advance of private monopoly.
Unfortunately, many of those who desire to preserve what they
conceive to be the vested interests of economic concentration already
achieved, seek to prevent economic reform through the only agency
by which it can be accomplished-namely, the Government of the
United States-by misrepresenting it to be an attempt to set up totalitarianism. This attack has been made repeatedly upon the President's
program set forth in his reports, with the result that nothing effective
has been done (a) to control inflation, or (b) to prevent monopoly.
Thus the stage is being set for the American economy to drift inevitably into the very condition which has resulted elsewhere in
totalitarianism. The fight against totalitarianism must be made
here in the United States by making the American democracy work.
Only in the measure in which our American democracy demonstrates
that it can work to maintain a high and steady level of employment,
to provide an increased standard of general welfare, will it be possible
to preserve individual freedom; only in that measure will the tide of
totalitarianism, communism, socialism, and fascism, subside. Only
in that measure too will liberty, freedom of speech and press, free
collective bargaining, and free competitive enterprise prosper and
expand.
JOINT ECONOMIC REPORT
61
A. Fundamental to such economic strength is the wise, efficient use and
conservation of our natural and human resources
1. Farmers are prosperous when workers' pay envelopes are full.
Economic instability in the city makes the farmer alternately prince
and pauper.
Until such time as the techniques of maintaining high and steady
levels of employment have been demonstrated by successful experience, the insecurity of the family-owned farm must be reduced by a
flexible program of placing a floor under farm income. As elements in
such a flexible program many devices may be found useful as, for example, direct income and price payments, crop insurance, food stamp
or allotment plans for orderly marketing of bumper crops, protection
of diets of children and low-income families by the extension of such
programs as the low-cost school luncheons, soil conservation, guided
redistribution of farm population, rural electrification and Federal
aid for improved rural medical, hospital, educational, and research
facilities.
2. Naturalresourtes.-Bold programs of long-range development of
all natural resources are indispensable if firm foundations are to be
constructed for enduring prosperity. Such programs should be discussed, planned, blue-printed, and organized during periods of prosperity. They should be taken off the shelf, contracted for, worked on
and completed during periods of less than full employment.
The most useful in the near future, as the President states in the
Economic Report, are those providing integrated development of areas
in the West, Middle West, and Alaska, involving preservation and
replenishment of vital water supplies, flood control, navigation, reforestation, irrigation, reclamation, drainage, soil as well as fish and
wildlife conservation, generation by hydroelectric power and atomic
energy.
The contribution of such programs to winning the war has just
been emphatically demonstrated. It was TVA power at Oakridge
and Bonneville power at Hanford that helped produce the atomic
bonb. It was TVA, by and large, and other public-power facilities
that provided enough energy for war production of aluminum, nitrates, and a number of other critical and strategic materials, not to
mention vital contributions in transportation, in agriculture, and
other areas. It is irresponsible folly to hamstring such vital programs
in the face of present world difficulties.
Many of these programs, particularly those designed to curb soil
erosion, are of such urgency that we can ill afford to delay in carrying
out expanded conservation practices.
3. Human resources.-Most vital of all national capital is the
"human stuff" which alone gives economic and political systems and
activity their meaning. As Adam Smith pointed out in 1776 in his
classic Wealth of Nations, labor constitutes not only the fundamental
wealth, but the military strength of nations. Its skills, vitality,
vocational aptitudes, civic spirit, political intelligence, and courage
represent the one most important and indispensable element necessary for survival ard prosperity.
Adequate medical care and hospitalization should be the birthright
of every American family regardless of race or economic status. The
inauguration of a national health program brooks no delay. The
penalty for inadequate child care, mulnutrition in low-income classes,
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JOINT ECONOMIC REPORT
and lack of medical facilities is low productivity in peacetime and a
high percentage unfit for military service in time of war.
In addition, all citizens should have equal opportunity to obtain
that degree of training which their industry or capacity makes possible. In an atomic age even a wealthy country like the United States
can no longer afford the luxury of class or race prejudices that deny
or constrict both educational and employment opportunity and
deprive the Nation of much needed economic and military strength.
To permit needy teen-agers to succumb to the lure of present wages
and deny society the enhanced productivity of their special abilities
is a transaction of myopic improvidence. Such spendthrift wastage
of our human capital ought no longer to be tolerated.
Last and most important-the flower of American manhood and
womanhood cannot grow to full and effective productivity in an
environment of overcrowded slums. Slums breed juvenile delinquency, crime, disease, social evils. Study after study has shown in
city after city that such slums always fail to pay their way. The
taxes collected fall far short of paying for the disproportionate expenditures the city has to make for are protection, relief, jails, police
surveillance, and crime losses. Why continue to subsidize the slum?
Since private enterprise always has been, and seems likely to be,
unable to provide other housing than such disease- and crime-breeding
slums, why continue to pour public treasure down such rat holes
when it would make available good housing with adequate play space
in redeveloped areas? With respect to housing this Congress has
flagrantly and cynically defaulted in a sacred responsibility.
B. The second important economic foundation of a strong America is
efficient, free, private, competitive enterprise
1. Monopolistic restrictions and the concentration of unbridled
economic power in private hands are not only major enemies of
economic productivity, but have destroyed, and will continue to
destroy, human freedom and democracy.
Central economic power as exercised by those who control the
modern instruments of commerce has been the cause of the development of arbitrary central political power in the modern world.
tMussolini, Hitler, and Stalin, all three, have been the direct product of
the concentration of economic power. The modern monopolies become the collectivist pattern for a collectivist state. The fight for
freedom begins with the fight against monopoly.
Recently less than a half-dozen big steel companies decreed for the
second time in less than 6 months an increase in the price of steel.
Their profits after taxes were greater than at any time during or
before the war with the single exception of 1916, 1917, and 1929.
Their action may later turn out to be a major move against their
nonintegrated competitors within the industry, for the price increases
of February 1948 were only on semifinished steel products, increases
which were explicitly excluded from the price decreases announced in
April. They put the independent fabricators of finished steel at a
disadvantage with themselves by raising the price on their rivals' raw
materials. It is now far easier for the large producers to take all the
markets for finished steel.
At a time when a reduction in grain prices gave hope to the inflationburdened low-income families that the cost of living would decline,
JOINT ECONOMIC REPORT
63
big steel decided to collect extra tribute from customers and citizens
of every economic and political hue.
In this action as in previous ones they draw no party line. Without
being responsible to the millions whose lives and welfare they affect,
they regulate commerce in steel and by arbitrary private decision fix
costs for all industry. They make rules for all to obey and that in a
democracy holding sacred the principle that rule-makers can only
"derive their just powers from the consent of the governed." A
handful of big companies, behind closed doors, set the pattern for
145,000,000 people.
Yet beyond making polite inquiry the Government sits idly by.
Reactionary leadership by refusing to exercise age-old constitutional
powers to abate the spiraling of prices and by surrendering under
post-OPA pressure to concentrated economic power the control of industry and commerce is false to the hallowed traditions of Americanism.
Hlow are the people of the United States to be freed from the dangers
of economic concentration? This concentration of power is not foreordained nor inevitable. The Government, acting for the people, can
do much to prevent the destruction of their economic and political
freedom which is jeopardized by these economic giants. Antitrust
enforcement should be strengthened. Antitrust cases suspended
during the war should be prosecuted with renewed vigor.
Appropriations for both the antitrust division of the Department
of Justice and for the Federal Trade Commission should be increased.
Furthermore, section 7 of the Clayton Act should be amended to
prohibit mergers by the acquisition of assets as *wfd11 as by the acquisition of stock control. The recent war brought about a tremendous
upsurge in the number of mergers and acquisitions, particularly of
small companies by large corporations. As concluded by the Federal Trade Commission last year (March 10, 1947), "the figures indicate, conclusively, that the major impetus behind the current merger
movement has been the desire of giant corporations to consolidate
their wartime gains and to expand the scope of their domination
through acquisition of smaller, independent enterprises."
For corporations whose sales and other operations are Nation-wide,
national incorporation and registration by means of national charters
should be required. These charters would clearly define their powers,
duties, and responsibilities, and would be of immediate benefit to such
corporations themselves, by then freeing them from discretionary
regimentation by the Government.
In addition, a maximum of incentive needs to be given to new
entrants into business and to small independent business. The more
ready accessibility of both short-term and long-term credit has long
been desired by small businessmen to put them on a somewhat more
comparable competitive position with large business on this score.
Tax inequities should also be removed, by granting, for example,
higher exemptions on corporate incomes during the first few years of
a business than later. The Government must also give much more
aid in the way of market counseling, product research, and other
advice which now are excessively costly to new and small businesses.
These are but a few of the many practical measures for the preservation, of free, private, independent enterprise which have been carefully studied and recommended by a variety of committees of the
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JOINT ECONOMIC REPORT
Congress on which no significant action has been taken. The Temporary National Economic Committee, the Senate Committee on Small
Business in the Seventy-eighth and Seventy-ninth Congresses under
the able chairmanship of Senator Murray, of Montana, the House
Committee on Small Business in the Seventy-ninth Congress, and a
variety of other groups inside and outside Government have emphatically warned this Nation about the danger of monopoly-yet
the Congress continues by a policy of inaction and drift to let concentration of economic power go unchecked.
2. Develop a favorable climate for private investment.-The problem
of keeping business investment from fluctuating wildly has thus far
not been solved. In 1947 gross private domestic investment reached
the astounding total of $30.5 billion as compared with $15.8 billion
in 1929. Only time will tell whether or not such a rate can or will be
maintained.
In the past there have been a number of times when over-investment
in inventories and in plant occurred as, for example, after the Civil
War in railroads which later became streaks of rust in the wilderness.
In the twenties there were over-optimistic real-estate development
programs, and excessive construction of manufacturing capacity in
a variety of industries from cement to shoes. Without fail such
periods at the time have not been recognized, but were followed by
drastic liquidation of inventories and dwindling of new investment in
plant and equipment to a trickle. In less than 3 years gross private
domestic investment went down from $15.8 billion in 1929 to only
$886 million in 1932. It is the most unpredictable and unstable of
all employment-sustaining and income-creating expenditures, so
much so that many experts explain business cycles primarily in terms
of fluctuations in business investment induced by changes in business
anticipations, variations in the marginal efficiency of capital and in
real or money rates of interest.
The period 1947-48 is without a doubt one of high prosperity.
Moreover, all the evidence indicates that the relationship which not
exists between wages and consuming power on the one hand, and
prices and profits on the other, is definitely inimical to any indefinite
continuance of such prosperity.
But the readjustment to come does not have to be a major collapse.
Deep depression is not a foreordained necessity. Comfortable accomodation can be readily achieved by prudence and foresight.
To provide a cushion against a major decline, measures should
be taken at once to restore balance. These, let it be repeated here,
are of three kinds. Prices should not be permitted to get more topheavy. Excessive profits, leading to the inflationary levels of business
inventory buying and spending should be reduced by immediate reenactment of an appropriate excess-profits tax. Provision should also
be made for adequate expansion of our basic raw materials industries
which otherwise are likely to continue to be a drag upon the economy.
3. Most important to the reinvigoration of free private enterprise
is the vigorous support of the United Nations and such economic
agencies as the International Monetary Fund, the World Bank, the
Food and Agriculture Organization, and the International Trade
Organization.
JOINT ECONOMIC REPORT
65
No. one can draw a line between foreign and domestic policy.
Satisfactory solutions at home must fit those abroad. Unemployment
is a world problem. Booms and busts in recent decades are worldwide. Prosperity like peace is indivisible. Not only is the maintenance of full employment in the United States essential to world
prosperity and peace, but a steady and balanced world trade is
essential to a steady and high level of exports, employment, and national income in the United States. Rising living standards abroad
will create new opportunities for producers here.
Programs of economic aid to Europe and other areas thus form our
first line of defense for they will increase employment, production and
purchasing power that will be reflected here at home. Removal of
cartel practices abroad is a corollary to destruction of monopolies at
home the elimination of artificial and arbitrary restraints will open
new doors to progress.
This is no time of pusillanimous penny-counting, astigmatic nationalism and selfish profiteering. This is no time for a policy of
do-nothing and drift. It is a time for faith in our democratic way of
life, for courageous pioneering, blazing new trails into new areas of
international cooperation. There is a new world to be built, one of
full employment and world prosperity. It will be lost by default to
totalitarianism unless here and now this Congress backs its protestations of faith in American free enterprise by a vigorous program of
action implementing the famous economic bill of rights laid down by
Franklin Delano Roosevelt in 1944, carried forward in the Employment Act of 1946 and further developed in the Economic Reports of
President Truman in 1947 and again in 1948.
JOSEPH C. O'MAHONEY.
FRANCIS J. MYERS.
JOHN SPARKMAN.
EDWARD J. HART.
WRIGHT PATMAN.
WALTER B. HUBER.
APPENDIX TO PART IV
TABLE
I.-Incomes 1939, 1946, 19471
Item
__
Billions of dollars
__
1939
Corporate profits before taxes -6.5
Inventory valuation adjustment--0.7
Corporation profits anid inventory valuation adjustment
Corporation profits after taxes
Unincorporated business and professional income -6.8
Compensation of employees in private industry -39.6
Net Interest
21.1
-4.7
16.5
12.5
19. 7
95.6
3.2
15.2
6.9
157. 0
5.8
5.0
2_-_____________________________________________
Farm income -----Rental income of persons -3.5
National income originating in private sector -64.
I
2
1946
4.2
4.5
3
Percent
chance,
1946-1947
1947
Percent of
total
1939
28.7
+36. 0
-. 7 - 23.0 17.9
+39. 2
23. 5
+19.3
111.2
+16.3
3.6
+12.5
17.0
+11.8
7.3
+5. 8
185. 7
+18. 3
10.1
-1.1
9.0
7.8
10.6
61.6
6.5
7.0
5.4
100. 0
1947
15.5
-3.1
12.4
9.4
12. 7
59.9
1.9
9. 2
3. 9
100. 0
Source: Survey of Current Business, July 1947, table 40, p. 48; Feb. 1948, table 1, p. 5, and table 3, p. 7.
Net interest is exclusive of interest on Government debt.
TABLE II
Average money income before taxes
Families grouped according to income
1941
Increase
in cost of
l________ _ a market
Increases bas et as
of extraof
~~~~dollar
1946
1941
1946
income
Lowest fifth
-$366
Second fifthThird fifthFourth fifthHighest fifth -5,445
Cost of market basket of foods in dollars I -347
936
1,646
2,367
$835
2,023
3,050
4, 201
8,921
528
$469
1,087
1,494
1,834
3,476
181
39
17
12
10
5
I Market basket consists of the retail cost of 1935-39 average annual purchases of farm food products by a
family of 3 average consumers.
Sources: Economic Report of the President, January 1948, pp. 18, 104-106; Marketing and Transportation
Sit iation, October-December 1947, p. 20.
TABLE III.-Rise in cost of living items,
1939-47 (1935-89=100)
1939
Average
Food -95.2
Housefurnisbings-101.3
Clothing-100.5
All items
Miscellaneous
Fuel, electricity and ice -0
Rent
66
-
- -----------------.--------.-.-.-.--
-
99.4
100.7
9.0
104.3
December
1945
December
1946
141.4
148.3
149.4
129.9
124.8
110.3
108.3
185.9
177.1
176.5
153.3
136.1
115.5
108.8
December
1947
206.9
191. 4
191.2
167.0
144.4
127.8
115.4
67
JOINT ECONOMIC REPORT
TABLE IV.-Changes in wholesale price indexes, 1989-57
All commodities -----------------------Farm products-201.2
Foods -------------------------------------All commodities other than farm and food -78.7
Hides and leather productsTextile products
----------------------------------Fuel and lighting materials -70.0
Metals and metal productsBuildingmaterials -111.0
Chemicals and allied products -77.6
Ilousefurnisbing goodsMiscellaneous ------------
1939 average
to December
1947
December
1945-Decomher 1947
111. 5
31.6
27.8
47.4
24.1
48.6
32. 8
13.3
27.6
32.1
30.8
14.8
14.9
-
153.4
112.4
111.8
61.1
56.2
62.4
December
1946-Decemher 1947
15.8
17.0
11.4
16.5
14.9
9. 6
29.3
12.9
21.0
7.4
12.1
11.6
Source: U. S. Department of Commerce, Survey of Current Business, February 1948, p. 12.
TABLE
V.-Net income of leading corporations for the years 1946 and 1947
[NOTE-Net income is shown as reported-after depreciation, interest, taxes and other charges and
reserves, but before dividends. Net worth includes book value of outstanding preferred and common
stock and surplus account at beginning of each year]
[In thousands of dollars]
Number of
com.panies
21
14
20
24
66
15
30
12
22
42
16
8
19
43
30
10
23
26
21
15
74
28
60
29
17
40
25
12
41
50
13
67
74
60
39
151
21
30
83
28
03
25
Net income after taxes
Industrial groups
1946
Baking
.
Dairy products
.
Meat packing
.
Sugar
.
Other food products
.
Soft drinks
.
Brewing
.
Distilling
.
Tobacco products
.
Cotton goods
Silk and rayon
.
Woolen goods
.
Hosiery, knitted goods...
Other textile products --Clothing and apparel.
Leather tanning
Shoes, leather products -lTires, rubber products -Lumber
.
Furniture, wood productsPulp and paper products.
Printing and publishing..
Chemical products
.
Drugs, soap, etc
.
Paint and varnish
.
Petroleum products
Cement
.
Glass products -Other stone, clay produnts
.
Iron and steel
.
Agricultural implements..
Building, heating, plumbing equipment
.
Electrical equipment and
radio
.
Hardware and tools
.
Household equipment -Machinery
.
Office equipment
.
Nonferrous metals
.
Other metal products.
Autos and trucks
.
Automobile parts
.
Railway equipment.
See footnotes at end of table, p. 68.
1
Net worth, Jan. 1
- _____
changs
1947
1946
$56, 975
64, 736
69,368
37, 753
187, 566
39, 405
20, 861
161, 635
98,458
101,717
59, 579
34, 131
22,626
92, 263
34, 739
5, 519
27, 071
135, 727
23,066
10,412
144, 282
35,606
320, 672
126,139
36,842
769, 556
19, 539
53, 719
$57, 523
60, 364
83,928
79, 952
245, 477
49, 066
26, 683
139, 065
115, 035
162,190
90, 326
31, 282
22, 556
137, 092
34,768
11, 290
37, 534
122,154
42, 458
18,958
267, 176
42, 548
398,813
126,460
54,856
1, 215, 947
24, 193
68,046
63, 622
271, 008
45, 695
92, 790
425, 552
96, 249
+45. 8
+57. 0
58,398
108, 109
+85. 1
113, 861
36,101
45, 354
99, 655
56,426
a133, 158
77, 783
121,307
40,691
47, 260
272, 222
55, 025
83, 620
180, 331
91, 753
3 283, 341
135,155
450, 942
125, 722
61, 821
+1.0
-6. 8
+21. 0
+30.9
+24.5
+27.9
-14. 0
+16. 8
+59. 5
+51. 6
-8.3
-.3
+48. 6
+.1
+38. 7
-10.0
+84. 1
+82. 1
+85. 2
+19 5
+24. 4
+0.-3
+48. 9
+58.0
+23.8
+26. 7
+52. 4
+84.4
+81. 0
+62. 6
+73. 8
+30. 8
1947
Percent
return
_-
1946
_
1947
$274, 948
344,280
662,051
395, 662
1, 052, 214
196, 894
89,956
388, 424
863,858
381, 607
281, 995
137, 763
77, 084
462,004
146,074
50, 205
211, 452
662,784
109, 128
106X,745
1,010,471
187,160
2,160, 524
520, 744
269, 714
7, 174, 266
191, 827
362, 208
$284, 576
392, 467
697, 450
429, 035
1, 173, 576
217, 338
104, 148
522,484
897, 217
448,804
346, 320
147, 242
96, 213
527,766
173, 295
53,282
232,017
760, 470
132, 925
115, 114
1, 179, 824
199, 767
2,321,855
614, 783
288, 241
7, 712, 538
198, 469
390,331
20. 7
18. 8
10. 5
9. 5
17. 8
20. 0
23.2
41.6
11.4
26. 7
21. 1
24.8
29.4
20.0
23. 8
11.0
12.8
20. 5
21. 1
9.8
14.3
19.0
14. 8
24. 2
13. 7
10. 7
10. 2
14. 8
20. 2
15. 4
12.0
18. 6
20.9
22.6
25.6
26.6
12. 8
36. 1
26.1
21. 2
23.4
26. 0
20.1
21.2
16.2
16.1
31.9
16. 5
22. 6
21.3
17. 2
20. 6
19. 0
15. 8
12. 2
17.4
465; 222
3, 659, 481
797, 152
524, 652
3, 780, 331
866, 294
13. 7
7.4
5. 7
17. 7
11.3
11.1
508,038
570, 388
11. 5
19.0
1, 270,385
272, 967
210, 177
080, 721
293, 525
1, 963, 856
822, 007
1,983,117
442,305
561, 659
1,412,386
291, 326
243, 617
1, 075, 775
338,083
2,018, 206
877,075
2,172,379
534,474
588, 944
9.0
13. 2
21. 6
10. 2
19.2
6.8
9. 5
6.1
9. 2
8. 4
19.3
18.9
34. 3
16. 8
27.1
14.0
15. 4
20. 8
23. 5
10. 5
68
JOINT ECONOMIC REPORT
TABLE V.-Net
income of leading corporationsfor the years 1946 and 1947-Con.
Num-of
Net income after taxes
cofr
panics. chng
groups
Net worth, Jan. 12
Percent
1946
$19,l596
24 Aircraft and parts .
5 Shipbuilding
45 Miscellaneous manufacturing
$19, 596
10,220
81,778
1947
1946
$
5
4 $16, 625
9, 876
-3. 4
95, 352
+16. 6
$461
3$4
66, 894
1947
4
52, 1034
Percent
return
1946
1947
I
.
74, 103
15.3
11.3
529,324
584, 602
115.4
16.3
1, 571
Total manufacturming
6,316,975
+53. 6
34,005,411
37, 062, 316
12. 1
17.0
24
26
41
12
Coal mining
Metal mining
Oil and gas
Other mining, quarrying
37, 316
3 25,029
3 35, 316
3 ,35
870
562, 424
a 46, 227
869, 983
a 30, 344
+67.3
+84.7
+98. 2
+27.1
494, 109
389,894
292, 947
118, 165
506, 929
402, 345
351,980
123, 759
7.6
6.4
12. 1
20. 2
12.3
11.5
19.91
24.5
103
Total mining,
quarrying
3 121, 531
3 208, 978
+72.0
1, 295, 115
1,385,013
9.4
15. 1
46, 643
213,030
133, 325
148, 494
82,964
47, 501
201,030
116,649
165, 169
85,483
+1.8
-5.6
-12. 5
+11.2
+3.0
239, 386
927,012
669, 551
621, 297
392,925
269, 422
1,069, 901
795, 766
782, 985
450,351
19. 5
23.0
19. 9
23.9
21.1
17.6
18.8
14.7
21. 1
19.0
624,456
615,832
-1.4
2,850, 171
3,368,425
21. 9
18.3
287, 139
13,253
28,211
4 2,694
15,849
460, 200
3,000
32, 213
4 11,835
20,251
+60. 3
-77.4
+14.2
12, 715, 977
287, 902
250, 517
70, 123
214,204
2.3
4.7
12.0
3.6
1.0
12.9
+27.8
12, 665,923
281, 602
234, 584
70, 377
207,217
7.6
9. 5
341,758
503,829
+47.4
13,459, 703
13, 538, 723
2. 5
3.7
565, 150
217,310
586, 466
185, 590
+3.8
-14.6
6,418, 734
3,132,321
6, 504,968
3, 205 333
8.8
6.9
9.0
5.8
782, 460
772, 056
-1.3
9,551,055
9, 710,301
8.2
8.0
134, 166
22,604
18,062
9,432
109,494
24, 600
21, 715
12, 623
-18.4
+8.8
+20. 2
+33.8
600, 209
144, 901
128, 988
77, 711
686,880
158, 254
137,650
85,960
22. 4
15.6
14. 0
12. 1
15.9
15. 5
15.8
14. 7
184,264
168,432
-8.6
951,809
1,068, 744
19.4
15.8
385,974
378,132
-2.0
4, 536,040
4,816,632
8. 5
7.9
20, 701
135, 63
29, 140
11, 903
44,626 - 147, 741
+8.9
56, 232
+93. 0
15, 205 +27. 7
1,608,120
2,397,883
008, 793
135, 188
1,452,401
2, 447, 223
534, 124
143, 273
1.3
5. 7
5. 7
8.8
3. 1
6.0
10.5
10. &
16
58
Chain stores-food
Chain stores-other
44 Department stores
5 Mail order
54 Misc. and wholesale
177
133
26
13
12
47
231
186
54
240
17
43
29
17
106
Total trade
Class 1 railroads
Traction and bus
Shipping
Air transport
Misc. transportation
Total
tion
transporta-
Electric power, gas, etc.'..
Telephone and telegraph 5.
Total public utilities
Amusements
Restaurant and hotel.
Other business services -Construction
Total amusements,
services, etc .
274
83
Commercial banks -.
Fire and casualty insurance 154 Investment.companies 6 58 Sales finance companies.-.105 Real estate companies674
3, 102
Total finance
Grand total
.
4,111,871
583, 356
641,036
6, 749, 700
9, 228,038
+10. 0
9, 186, 024
9,393,653
6.4
6.8
+36.77
71, 299, 288
75, 527, 175
9. 5
12. 2
I Increases or decreases of over 100 percent not computed.
' Net worth Is based upon balance sheet book values of assets, which may differ widely from actual present-day values.
IBefore depletion charges in some cases.
I Deficit.
a Due to the large proportion of capital investment in the form of funded debt, rate of return on total
property investment would be lower than that shown on net worth only.
6 igures represent in most cases operating earnings only. and do not include profits or losses on investments.
Source: National City Bank Letter, April 1948, p. 45.
69
JOINT ECONOMIC REPORT
TABLE
VI-Spending by business, 1946-47
[Billions of dollars]
Item
New construction:Residential nonfarm -3.3
Other -----------
1946
1947
$8.5
$10.7
+25.9
5 .2
4.9
5. 7
+48. 5
+9.6
Percent
change
Item
Source: Department of Commerce.
0
f
'
Producers' durable
equipment -$12.4
Net foreign investment.
Inventorses as of December-34.9
1946
4.8
1947
Percent
change
$17.9
8.7
+44.4
+81.0
41.3
+18.3
@FedFRASER