The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
SENATE
EMTElO.
82D CONGRESS|
1ist Session I
REPORT
JOINT ECONOMIC REPORT
REPORT
OF THE
JOINT COMMITTEE ON THE ECONOMIC REPORT
ON THE
JANUARY 1951 ECONOMIC REPORT
OF THE PRESIDENT
*~~1 0
APRiL'2 (legislative day,
MARCH 26), 1951.-Ordered to be printed
with illustrations
UNITED STATES
GOVERNMENT PRINTING OFFICE
81651
WASHINGTON: 1951
210
JOINT COMMITTEE ON THE ECONOMIC REPORT
(Created pursuant to sec. 5 (a) of Public Law 304, 79th Cong.)
SENALTE
IHOUSE OF REPRESENTATIVES
YOSEPH C. O'MAHONE :Y, Wyoming, Chairman EDWARD J. HART, New Jersey, Vice Chairman
JOIIN SPARKMAN, Al abama
WRIGHT PATMAN, Texas
PAUL In. DOUGLAS, II linois
FRANK BUCHANAN, Pennsylvania
Connecticut
WILLIAM BENTON, C
RICHARD BOLLING, Missouri
FOBERT A. TAFT, Oh io
JESSE P. WOLCOTT, Michigan
:ALPH E. FLANDER23. Vermont
CHRISTIAN A. HERTER, Massachusetts
'ARTHUR V. WATKINI 3, Utah
J. CALEB BOGGS, Delaware
THEODORE J. KREPS, Staff Director
GROVER W. ENSLEY, Associate Staff Director
JOHN W. LEHMAN, Clerk '
II
CONTENTS
Page
Report of the Joint Committee on the Economic Report-1
The paramount need for Government economy Reducing the cost of livingSolutions for a long period of watchful peace Committee comment on the President's recommendations in the
Economic Report-12
Expansion of production -12
Health services and education -14
Economic stabilization International economic programs -16
Statistical gaps and the work of the committee Supplementary views of Senator William Benton
Supplementary views of Senator Watkins and Representatives Wolcott
and Herter -23
Statement of Representative Boggs -24
Chairman's acknowledgment of cooperation by members of committee and
staff -24
Supplementary staff materials -26
I. The first requirement-increased production II. The major threat-inflation III. Governmental budget -31
IV. The curbing of bank credit -36
V. Reducing consumption -46
VI. The status of farmers -_------VII. Channeling business spending -63
VIII. Removing barriers to efficient production -73
3
5
10
14
17
18
27
29
58
LIST OF TABLES
-30
I. Advances in wholesale and consumers' prices
II. Federal consolidated cash budget, fiscal years 1950-52 III. Sumnmary of estimated savings in selected cases where changes in
legislation would result in economies
-35
IV. Monev and credit data:
A. Banks other than Federal Reserve banks -36
B. Operations of Federal Reserve System -36
V. Gross income received and estimated minimum required for family
-49
maintenance bv income classes, 1948
VI. Proportion of total money income, Federal tax liability, savings and
expenditures accounted for each fifth of the Nation's spending
-51
units when ranked by size of income, 1949
VII. Proportion of spending units, money income, savings, selected
assets and liabilities of the Nation's spending units ranked by
size of income
:
VIII. Distribution on money income, taxes, disposable income, expenditures for selected durable goods and for other consumer goods,
rent and net savings by income groups, 1949 -52
IX. Estimated distribution of consumer expenditure for 1948 - X. Application of 1948 estimates to 1950 totals
XI. Income grouping of actual buyers in 1949 and prospective buyers in
1950 by income in 1949 and by number of spending units -54
XII. Proportion of money income allocated to taxes, expenditures for
selected durable goods and for other consumer goods, and savings,
by spending units within income quintiles, 1949
-- XIII. Proportion of money income allocated to taxes, expenditures for
selected durable goods and for other consumer goods, and savings
-54
by spending units within income groups, 1949
XIV. 1948 tax payments as percent of income by income brackets
XV. Proportion of each income group having consumer expenditures over
80, 90, and 100 percent of disposable income, 1949 m
32
51
52
53
54
56
58
IV
CONTENTS
XVI. Agriculture's share of the national income and its felative position
as a producer of goods -62
XVII. Book value of business inventories, end of period, 1949-50 -65
XVIII. Sources and uses of corporate funds, 1949-50 XIX. Components of national income originating in the private sector of
the economy, 1939, 1946-50
XX. Selected list of dutiable "scarce materials" which are imported into
the United States -75
XXI. List of items on which it is considered that a reduction in the
United States tariff would assist United Kingdom exports to the
United States of America-
Page
66.
67
77
LIST OF CHARTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
The Nation's product, United States, 1929-50 -28
Changes in the wholesale price index, June 1950 to February 13, 1951.-.
Federal-aid highway funds -34
Loans of. member banks in New York and other leading cities -37
Velocity of circulation of bank deposits at member banks in leading
citiesStock market creditPrincipal assets of commercial banks -41
National income, Federal receipts, and Federal debt -42
Money supply and war bonds, United States, 1929-50 Personal income, consumption, and saving -47
Individual savings -55
1948 tax payments as percent of income by income brackets Wholesale prices, 1939-50 -61
Farm and nonfarm income -63
Farmers' income and corporate profits -64
Corporate profits, taxes, and dividends quarterly since 1939 Corporate profits, wages and salaries, and gross national product,
1939-50 Corporate bond and common-stock yields, and earnings/price ratios $5,202,200,000 invested in advertising -74
29
38
39
44
57
68
69
71
APPENDIXES
1. Fundamentals of democracy contrasted with communism
--2. Economic preparedness requires higher taxes
-80
I. Review of current economic pressure and the outlookII. Federal fiscal policy -84
III. Monetary policy -85
IV. Mandatory allocation of materials -86
3. Selected cases where changes in legislation would result in economies-_
4. The defense procurement dollar -96
Table-Military procurement prices before and after the attack on
Korea -9-------------------------------------5. Excerpts from testimony before the Joint Committee on the Economic
Report and from Report of Subcommittee on Monetary, Credit, and
Fiscal Policies -102
I. The case for making credit control a primary consideration. II. The case for making debt management a primary considerationIIII. Recent steps to reconcile the two objectives -106
6. Concentration in production of certain materials in short supply and
subject to control or purchased by the armed services -107
I. Basic materials -108
II. Major metal products bought by armed services -110
III. Concentration in classified commodity groups -113
7. Joint staffs' statement on regular and emergency statistical programs-Basic statistics for emergency programs -114
8. Committee studies under way_- -___
Committee studies completed since June 1950 -118
.Committee hearings held June 1950 to March 1951 -118
Distribution of Joint Economic Committee materials -118
Publications of the Joint Committee on the Economic Report.
79
84
86
7
102
103
114
116
120
82 D CONGRE SS
1st Session
SENATE
I
-
REPORT
No. 210
JOINT ECONOMIC COMMITTEE REPORT ON THE JANUARY 1951 ECONOMIC REPORT OF THE PRESIDENT
APRIL 2 (legislative day, MARCH 26), 1951.-Ordered to be printed with
illustrations
Mr. O'MAHONEY, from the Joint Committee on the Economic-Report
submitted the following
REPORT
[TOGETHER WITH INDIVIDUAL STATEMENTS AND RESERVATIONS]
[Pursuant to Public Law 304, 79th Cong.]
With a national debt hovering at a pinnacle of $257 billion since
1946, and the cost of living still rising above the all-time peak reached
in December 1950, the people and the Government of the United
States are face to face with the imperative necessity of stopping infiation and turning it backward if the national hope for the winning
of the peace is to be achieved.
Rising prices, which have already destroyed the savings of millions
of the people and are making it constantly more difficult for many
people in the lower-income brackets, especially those whose incomes
or wages have not been increased, to stretch their incomes to meet
their needs, are at the same time increasing the cost of national defense. Milk and munitions are both mounting in cost and as a result the problem which every householder faces in providing for his
family is faced by the President and the Congress in providing the
necessary military power by which freedom is to be defended.
When it is realized that the national debt, which was less than $50
billion at the beginning of 1941, had risen to $277 billion by the time
Japan surrendered, it is clear that deficit spending cannot be contemplated even for the current defense program, unless we are willing
to invite the crack-up of the American system. We cannot permit
the cost of living to continue to rise, nor can we pile a new national'
defense debt on top of the unpaid debt of World War II without creating the very conditions upon which the dictators of the Kremlin are
relying to destroy the economic basis of. this Government and thereby
the hope of a free world.
The international program upon which we are launched cannot:
possibly be carried to a successful conclusion unless economic stability
is maintained; it cannot be maintained if we lack the foresight to turn
1
2
JOINT ECONOMIC REPORT
back the forces of inflation and the will to pay out of current income
tfhe cost of raising and maintaining the military power necessary to
prevent an attack upon the free world by, the modern tyranny of
commumsm. The United States has the spiritual power, the economic
strength, and the productive resources to perform the task it has
undertaken. The people of America can do again in the defense of
human freedom what they have done before in two world wars,
namely, produce the commodities, the services, and the military
strength which can be depended upon to deter Russian aggression.'
It is within our power to achieve the goals set forth in the President's
Economic Report-a 7 percent expansion of production in 1951 and
at least 25 percent within-the next 5 years. To do it, however, Congress and the country clearly need to understand the basic economic
facts upon which alone an intelligent defense program can be maintained and carried through to success.
It would be unrealistic to restate the great importance of expanded
production without recognizing that inflation constitutes a continuing
threat to its achievement. 2 Inflation invites business to seek profits
by manipulation of markets rather than by efficient expansion of production. Inventory accumulation becomes a foolproof way to make
money. Manpower and capital facilities are absorbed in distributing
output rather than increasing it. By encouraging the hoarding of
materials and of labor, inflation disorganizes the flow of production
and makes a shambles of allocation orders and procedures. Inflation
frustrates the thrifty, especially those who patriotically buy Government bonds, and brings bitterness and disillusionment to those seeking
to cooperate with the defense effort. Inflation gives its biggest rewards
to groups whose spending and manipulative activities provide a sardonic contrast to the sacrifices asked elsewhere on the home front and
on the battlefield.
Efforts to increase production, moreover, at present high levels of
employment, are likely to bring about increased inflation for the time
being in at least two respects. If additional capacity is built-and
more capacity must be built-the additional investment, whether in a
steel mill or atomic energy plant, will in itself cut the supplies available to civilians at the same time that those who build such plants are
earning high wages and profits. If additional production is obtained
through premium payments for overtime labor or higher incentive
prices, incomes will be increased faster than production, again serving
at least temporarily to aggravate the problem of inflation.
Unless, therefore, we are willing to resist inflation straight across the
board, increased living costs, increased wages, increased profits, and
the increased cost of Government will lead inevitably to an increased
debt and more inflation. The times demand courage and firm
resolution to win the fight against inflation on the home front, in
order that the Nation may win the struggle for peace upon the
international front.
If we are to avoid deficit defense spending of a kind which could
easily cause the whole structure of Government finance to collapse,
I On July 18, 1950, soon after the outbreak of the Korean War, this committee, in its press release of that
date, heavily underscored the contrast between the totalitarian ideology and the ideas underlying our own
American Revolution and our own political and economic system. Such a contrast is outlined in appendix l.
2 In the absence of detailed analyses and quantitative estimates, even in the Council's Annual Review,
of how increases in output can be obtained over the next year or 5 years, this committee asked its staff to
spell out quantitatively the processes and the problems of increasing production. These analyses have been
published in two reports: The Economic and Political Hazards of an Inflationary Defense Economy, and
Underemployment of Rural Families.
JOINT ECONOMIC REPORT
3
we must be willing to pay-as-we-go. Such a program was advocated
by this committee on July 21, 1950, When we unanimously recommended an immediate increase in taxes sufficient to balance the
budget; restoration of consumer credit control; contraction of Government housing loans; etc.3 We must be willing to provide current
income to meet the expenditures we authorize. This means that we
must raise the revenues required to meet such expenditures, and that
we must keep all expenditures, both military and civilian, as low as
possible.
THE PARAMOUNT NEED FOR GOVERNMENT ECONOMY
We cannot refrain from making the expenditures necessary to feed,
clothe and equip the men we call to the services. We cannot fail
to authorize the purchase of the most modern airplanes, naval vessels
and weapons without which an efficient, modern military force cannot
be maintained. But we must be prudent, frugal, even parsimonious.
We must avoid duplication, swollen inventories and extravagant construction-in short, all unnecessary military expenditures. This is no
time for luxury, waste, or extravagance anywhere, not even in the
armed services. Since the new obligational authority asked for the
military services and international security is now estimated to total
$71,890,000,000 for 1952, all appropriations and expenditures must be
subjected to continuous and close scrutiny both by the Executive and by the Congress.
It is not always understood that the appropriations made by Congress annually are controlled by authorizations enacted and obligations
undertaken in previous years. The appropriation bills for 1953 and
ensuing years, for example, will reflect the new expenditures Congress
is now in process of authorizing in the proposed enactment of universal
military training.
Furthermore, expenditures in any particular year cannot be
measured by appropriations for that year because the current outlays
at any particular time depend upon the accumulation of prior authorizations and the maturing of obligations. When, for example, Congress
authorizes the construction of a new aircraft carrier or the building of
a high-speed long-distance bomber, the Government launches upon
an expenditure program which may cover 3 to 5 years. It is therefore
impossible to cut certain appropriations without canceling existing contracts, or repudiating existing operations, or stopping work which
has already been initiated, thereby inviting the loss of expenditures
already made. An economy program, therefore, involves not only the
recommendation by the Executive of the sums necessary to carry out
existing law but also a determination by the Congress to what extent
it is willing to continue expenditures previously authorized.
It will be necessary also to economize in the civilian branch of the
Federal budget. Stimulated by the Congress, the Bureau of the
Budget last summer at the direction of the President made an auspicious beginning in cutting back public works, reclamation and other
expenditures more than $580,000,000 in accordance with the principle
that programs which are not essential to the defense effort, or to maximum civilian productivity (without which the civilian economy will
be unable to produce the revenue on which the defense program rests)
3For a complete copy of the committee release on July 18, 1950, see appendix 2.
4
JOINT ECONOMIC REPORT
should be rigorously cut, if not eliminated. Such cooperative economy
efforts; must be greatly expanded. It may be difficult, and yet it is
extremely important, to recognize the difference between productive
and nonproductive expenditures. We must, of course, build every
dam needed to conserve scarce natural resources or generate electric
power. A shelf of plans should also be kept up to date. But expenditures not directly productive of increased economic capacity or military
strength should so far as possible be postponed or eliminated. Thus
great care must be exercised in determining precisely where the nondefense expenditures of the Government are to be cut.
The President, in his Economic Report, and Mr. Charles E. Wilson,
Director of the Office of Defense Mobilization, have both estimated
that disbursements for military purposes of all kinds will not, at the
first at least, exceed 20 percent of the national income. It is only
sensible, therefore, and, fortunately, it is apparently possible to so
increase production that ultimately it will meet both current civilian
and military needs, thereby making the task of preventing inflation
less difficult.
This committee is making an intensive study of the 1952 budget,
some results of which are to be found in the staff materials and in
appendix 3 of this report. There it is noted that existing laws may
have to be altered or repealed if major economies are to be effected
in nondefense spending. The appropriate legislative committees of the
Congress should study and recommend what changes shall be made.
In fact, economy is4 a vital responsibility of every Member of Congress
and every citizen.
Many significant suggestions for economy have been brought to the
attention of this committee. Thus, for example, the American Farm
Bureau Federation, like the National Grange, in the interest of maintaining farm output without inflation, supports a pay-as-you-go policy
including higher taxes and reduced Government expenditures. Further, the Farm Bureau specifically recommends that the "authorization for a 1952 agricultural conservation program be reduced from
the budget recommendation of $285,000,000 to $150,000,000."
(Joint Committee on the Economic Report, Hearings on the January
1951 Economic Report of the President, p. 490.) Thus a great farm
organization, in its desire to strengthen the national economy, expresses
the willingness to accept for farmers reductions of Federal soil conservation payments in fiscal 1953. This is the earliest that reductions
in such payments can be made under commitments already entered
into with farmers under the Conservation and Domestic Allotment
Act of 1936 and the authorization contained in the 1951 Appropriation
Act passed last fall.
These and similar items must, of course, be examined by the appropriate committees in order to be certain that such payments are geared
into the stimulation of the production of needed agricultural commodities, rather than result in the production of surplus agricultural
4 In the field of reducing expenditures, as well as in the field of raising revenues, the responsibility of Congress is paramount, and mere lip service wvillnot suffice. Any cut in appropriations is bound to hurt someone, and is bound to evoke cries of pain. There will be a great temptation to be generous in attaching
"defense" labels on nondefense programs.
In order to pass beyond the lip-service stage, specific nondefense programs should be listed, in which substantial savings can be made. I am one who believes there is considerable degree of overstaffing in most
Government departments, that a large proportion of our expenditures for rivers and harbors is wastedor at least cannot fairly be tied to the mobilization program-that Federal aid for secondary road construction should be curtailed, that irrigation projects should be slowed down, that economies in printing,
travel, and transportation should be effected, and that farm subsidies should be reduced.-Senator Douglas.
JOINT ECONOMIC REPORT
5
coumnodities for the purchase of which, by the Government, 30 percent of customs duties are diverted by the act of August 24, 1935.
New obligational authority for Federal grants to States, which are
carried in the budget for 1952 at a total of $2,883,000,000, should
likewise be examined so as to maintain a balanced productivity and
high-level national income. These Federal grants to States include
public assistance, $1,300 million; maternal and child welfare, $33.0
million; general and other public health assistance, $31.2 million;
vocational rehabilitation, $23.0 million; national school lunch program, $83.5 million; low rent housing, .$15.0 million; colleges for
agricultural'and mechanic arts, $32.0 million; postwar highway construction, $500.0 million; airport construction, $21.0 million; hospital
construction, $75.0 million; agricultural extension services, $32.0
million; agricultural experiment stations, $12.5 million. The general
level of these programs should be reduced.
To take but one example from among these. The new obligational
authority of $500 million for Federal aid to highways was authorized by
the Federal-Aid Highway Act of 1948. A substantial part of this proposed expenditure is for the liquidation of obligations already incurred.
Another part is to carry through contracts for road construction to be
made by the various State highway departments during the next fiscal
year. The basic law authorizes the making of contracts and provides
for compulsory apportionments of the appropriated funds among'the
States. An efficient highway system is essential to the efficient operation of the economy. Accordingly, reductions in the Federal grant for
the cooperative Federal-State highway program can be made wisely
only after careful scrutiny. No programs should be authorized or
expenditures. made until the fact has been made certain that such
programs or expenditures are necessary to keep the national economy
moving at high speed and have a greater priority than the pressing
need for reductions in Government spending.
Moreover, the defense program now under way, it has been generally
agreed, may last 10 to 20 years. If such be the case, expenditures for
defense will make expenditures wholly unnecessary which were originally undertaken for purposes of recovering from a depression.
Authorizations for expenditures stemming from such legislation should
be examined by appropriate legislative committees so that in a time of
inflation we shall not be making appropriations which were authorized
for the purpose of fighting deflation. Moreover, a survey should be
made of all permanent appropriations and revolving funds with the
objective of eliminating expenditures authorized under wholly different
circumstances than those now existing.
REDUCING T HE COST OF LIVING
In 1950 the United States free enterprise system operated at a level
of physical output second only to that attained in 1944, at the highest
hourly and weekly earnings ever recorded in industry. Stockholders
received larger dividends and business made notably higher profits
than in any previous year in the history of business. But 1950 was
also a year in which the business system of the country was rocked to
its foundations by frenzied outbursts of consumer buying, by record
construction and investment activity, by a fearsome military involvement in Korea, and by a succession of extensive moves toward speedy
6
JOINT ECONOMIC REPORT
defense mobilization. All of this resulted in a galloping inflation which
has raised the cost of living and the cost of armament to new high
peaks.
The economic key, therefore, to the successful accomplishment of
the national objective is to prevent further increases of the cost of
living and of armament so that the pay-as-you-go system for national
defense may be established and securely maintained. It will be impossible to economize in Government expenditures for either military
or civilian purposes if inflation and living costs continue to increase,
thus making inevitable increased wage costs and increased delivery
costs, to the people and to the Government, of the services and
commodities they need.
Inflation has not only knocked a hole in consumer budgets but has
knocked out of the sky a large fraction of the airplanes our taxes might
otherwise have bought. Or to quote a report of the Department of
Defense reprinted in appendix 4, "In terms of the number of guns
that can be procured with available funds, the effect of inflationary
price increases is almost the same as if half the guns on order had
been destroyed by enemy action."
The first attack on inflation must accordingly be made on the high
cost of living for the masses of the people. The so-called freeze order
of the Office of Price Stabilization has been explained as only a preliminary step. Roll-backs have been promised, but adjustments to
date have been on the upward side. It has been explained that inflation, like an automobile going 60 miles an hour, cannot be brought to
a full stop immediately by putting on the brakes-and much less
thrown in reverse. The brakes to inflation having been applied, the
time has arrived for positive action to stabilize and, without Government subsidies, to reduce the cost of living.
One of the measures receiving emphatic endorsement from the
overwhelming majority of the witnesses who appeared before this
committee is increased taxation. It was uniformly urged as the
most effective way to absorb the. purchasing power which will inevitably continue to drive up the cost of living as shortages of supply of
needed or desired commodities result from the diversion of industrial
activity from civilian to military production.
Purchasing power necessarily increases as the military program
increases. Every man who leaves civilian life to enter the armed
services ceases to produce civilian goods or services, but he continues
to be paid; his purchasing power remains to become part of the upward
pressure which demand exerts upon prices. So a defense economy
with stepped-up production for military purposes and a traditional
belief by a large segment of the population that great profits are to be
gained i producing more goods for the Government has always been
marked heretofore by inflation. Heretofore, when attempts have
6This report has given considerable emphasis both to the prospect of a long period of mobilization and to
the need for increased production if inflation is to becombated effectively.
Production is not increased overnight. Just as any business requires certain basic investments in its
capital equipment if it is to expand productioi in the future, the Nation must also undertake certain basic
investments in resource development or conservation which will only bearf ruit in years to come. This includes the development of human as well as material resources.
Certain programs, while not necessarilybearing a "defense" label, represent such basic investments, and
their delay may ultimatelyhe far more costly to the Nation than the cost of undertaking them immediately.
Examples of such programs are the constrctionof dams to generate hydroelectric power, and Federal aid m
meeting the current operating deficits of medicalschools, without which standards and quantities of medical
education cannothut fail to slip backwards in theimmediate future. These programs should be clearly distinguished from, say, rivers and harbors programs which come nearer to being amenities during a period of
mobilzation.-Senators Sparkman, Douglas, and Benton and Representative Bolling.
JOINT ECONOMIC REPORT
7
been made to control prices without heavy increases of taxation,
final payment has been made through increases of the national debt
and inflation. This we cannot afford now for reasons already set
forth.
There seem at the present time to be special reasons, therefore, why
some additional taxes should be promptly enacted, and not delayed,
as ordinarily such action is quite properly delayed, pending action
on appropriations. Increases in individual withholding rates are
necessary to curb current excess consumer demand and increases in
taxes on business and corporate profits are needed to reduce current
excess business buying. Such increases in taxes may help to put
a damper on price increases progressively gnawing away at civilian
income and Government appropriations. Prompt action now may
save billions of dollars later this year and tens of billions thereafter.'
But the fact should not be lost sight of that one of the most troublesome problems now before Congress arises out of its uncertainty
regarding the size and the cost of the preparedness program. The
budget contains an estimate of expenses in the fiscal year 1952 of
$71,600,000,000, but the estimate for military expenditures like that
for military appropriations had not yet been worked out in detail
when the budget was submitted. It is highly desirable that all
branches of Government agree substantially on the scale of Government expenditures which will be absolutely necessary, during the
initial period of the preparedness program, in order that a comprehensive tax bill may be written with some reasonable hope that it
will serve the purposes of the country for 2 or 3 years. As a general
principle, it is obviously not wise to engage constantly in piecemeal
tax increases, first in one field and then in another.
There is another reason why it is important that the maximum
scope of Federal spending be agreed upon. At some point taxation
itself becomes inflationary, even though the budget is balanced.
If tax burdens are so great as to shock the sense of justice or equality,
some way is found to avoid them or to pass them on into higher prices.
Just where the limit is, is difficult to judge, but it is to be hoped that
the total defense expenditures be held to 20 percent of the national
income, the balance of Federal expenditures, including veterans'
benefits and interest on the public debt, to 8 percent, and the State
and local expenses to 8 percent of the national income.
Such general limits are the more necessary the more closely the
burden of additional taxes approaches the limits of taxable capacity.
Thus, for example, whatever tax proposals are advanced for consideration should take cognizance of the fact that the people in the lower
income brackets, that is to say, the people with incomes of $3,000 a
year or less, are already overburdened, as is spelled out in the staff
materials attached hereto, by the increasing cost of living and the
present level of taxes. The Government cannot look to them for
6 In this respect, the responsibility Is clearly fixed: Only Congress can raise the necessary revenues to
place us on a pay-as-we-go basis. It is all too easy for Congress to support the principle of "pay-as-we-go"
overwhelmingly and yet shy away from the unpleasant task of raising enough taxes, on the grounds that we
do not know precisely what our revenue needs will be. While it is true that Government expenditures cannot be precisely forecast, the chances of avoiding at least a $10,000,000,000 cash deficit for the fiscal year 1952
are negligible unless additional revenues are raised. Therefore the Congress should proceed immediately
as fast as the legislative process will permit, in enacting legislation to raise an additional $10,000,000,000 In
revenue.
Such taxation will be a heavy load, but it will be less of a burden for society than a failure to tax and the
consequent credit and price inflation which would result. If matters are allowed to drift, the Government
will probably begin to run a deficit by late spring of this year, and this deficit will increase to large propor.
tons.-Senators Sparkman, Douglas, and Benton and Representative Boiling.
lb
JOWT ECONOMIC REPORT
any substantial new revenue. The new tax bill must be directed
to absorb surplus purchasing power where it exists. In addition to
closing loopholes, we need a tax system that seeks to eliminate all
profiteering and to make impossible that this defense effort produce
a new crop of war profiteers.
But taxation is not enough. The familiar programs for priorities,
for allocations, for control of credit and the like, all must be used.
Even more than that. Legislative remedies must be sought to correct
a condition that now exists by which prices increasing the cost of
defense and the cost of living are geared to the industrial practices
which have for years driven up the prices of industrial commodities.
Farm parity, for example, is a device which was invented at the depths
of the agricultural depression for the purpose of gearing the prices of
agricultural commodities to the prices of industrial commodities.
-The prices of the products of the farm during the great depression fell
like a plummet, but prices of the goods the farmer bought were held
relatively stable. The manufacturer reduced his production, but not
his price. Although at first farm relief, and then World War II, and
then maximum employment in the 5 years following the war, raised
the agricultural producer to a more equitable standard of price
compared with industry, yet the parity system continued to link
-agricultural prices to rising industrial prices.
The Defense Production Act contains a provision which, in general,
-prohibits the establishment of any ceiling upon agricultural prices
below parity, or below the highest price received by producers during
the period May 24 and June 24, 1950. This provision is to be distinguished from the agricultural price-support law which was enacted for
the laudable purpose of maintaining stability of agricultural prices as
compared to industrial prices. One cannot quarrel with the principle
of the price-support law, the purpose of which is to maintain general
parity between agricultural and industrial prices. It is an altogether
Different problem, however, to what extent the price-stabilization law
,should prevent price-control officials from holding the line on agricultural prices. It should always be borne in mind that the farmer,
generally speaking, sells his commodities in a free market, whereas
industrial commodities for the most part are sold in organized markets
:i which it is possible for industrial producers to maintain what the
economist calls "administered prices." This explains why it was
'during the depression that agricultural prices fell while agricultural
-production was maintained, but in industry production was reduced
while prices were maintained.
The provision in the Defense Production Act therefore tends to
-gear agricultural prices to the highest level of industrial prices. The
advisability of a reexamination of the provision of the Defense
Production Act, from the point of view of its effect upon the fight
against inflation, is clearly indicated.
Likewise when in certain industries, such as the motorcar industry,
the compensation of labor was based upon the cost of living, another
escalator was brought into existence. However desirable such cooperative arrangements between management and labor may be in
,ordinary times-and on that point no reflection of any kind is intended-one of the effects important for these times is that it serves
JOINT ECONOMIC REPORT
as a basis to push up prices.' Congress itself has long used the same
principle. Government pay has in recent years likewise been increased upon the justification that the Government worker, like the
farmer and the industrial worker, was entitled to larger.compensation
because of the rising cost of living.
Thus a challenge is presented to the Congress to modify, by legislative enactment, this engine of inflation which will continue to press,
constantly upward on prices unless we find the way to stop the inflationary spiral so that a just stabilization ratio may be attained
between agricultural prices, wages, industrial prices, and profits. All.
must be stabilized on a just basis by the removal of every factor contributing to the inflationary spiral.
To permit administered prices to be maintained in some important
industries with undiminished force, to allow the resultant corporate
profits to continue at present extraordinary levels, to try to keep farm.
prices by Government price-support programs on a parity calculated.
from such industrial prices, to allow escalator clauses to continue in
force in wage contracts tying wages to the cost of living, to make price-.
ceiling adjustments on the basis of increases in materials and labor
costs and thereby to raise further the cost of living-is merely to set,
up an unbeatable mechanism of built-in inflation that, however,
endurable for a short war, could prove disastrous during a long preparedness period. As a minimum a waiting period of 3 or 6 months
might be established before automatic adjustments are allowed to take
place, such as that between increases in the cost of living and wage
rates, thereby bringing somewhat greater stability and less frequency
of change into the price-wage-cost picture.
Effective attack on inflation has been so long delayed and inflationary pressures since Korea have gained such phenomenal heights that
it is now imperative for Congress to act. Price freezes at the top levels
reached after Korea, followed by adjustments and mark-ups to take
care of increasing costs make imperative a careful congressional review
of all existing legislation including stabilization programs and authority
so that the cost of living may be reduced and inflation brought to a full
stop. The public interest would be served by the early recommendation
of legislation to Congress by the defense mobilization and stabilization
agencies. No one can deny the great complexity of the problems of
price and wage stabilization but no time should be lost in definitely
establishing the price line which must be held.
The Defense Production Act of 1950, by which authority was
granted to fix ceilings on prices and wages, terminates on June 30,
1951. It is accordingly essential that the act be extended. The
Banking and Currency Committees of the two Houses, after the
enactment of the law during the last session of Congress, set up a
special joint committee to observe operations under the law. The
two Barking and Currency Committees, therefore, are already well
equipped to receive and evaluate suggestions for amendments growing
out of the experience of the stabilization agencies since the enactment
of the law.
t7 Escalator clauses in wage contracts only attempt to permit wages to advance to meet price increases
that have already taken place. Such wage increases that come about because of such clauses are.the
result and not the cause of these antecedent price increases.-Senators Douglas and Benton and Representative Hart.
10
JOINT ECONOQMC REPORT
This committee regards the undue expansion of bank credit in recent,
months as extremely dangerous. It is unanimous in the belief that
bank credit must be controlled if further inflation is to be avoided.
Such control ought not to jeopardize the maintenance of an orderly
Government bond market though it should be noted that if fear of
inflation hinders the public sale of Government bonds at the agreed
on rate so that the price can only be maintained by large-scale openmarket purchases, this will in itself increase inflation.
The committee notes with approval that the two great agencies most
directly involved, the Federal Reserve Board and the Treasury Department, have apparently cooperated in evolving a program of action
genuinely accommodating and reconciling their sincere differences in
point of view (briefly stated in appendix 5). Such techniques of quiet
compromise are likely to yield happier results for the country than intensive insistence on measures historically successful under different
conditions whether of war or peace. The requirements of a long preparedness period are poorly served except by such cooperative,
constructive innovation.'
SOLUTIONS
FOR A
LONG PERIOD
OF WATCHFUL
PEACE
Perhaps the most important fact that needs to be constantly kept
in mind is that the situation now facing this country appears to be
neither one of all-out war nor of peace. It may be rather a 10- or
20-year period of two-way preparedness or armed alert, although the
possibility should in no wise be ruled out that a relatively shorter
period of extremely critical danger may lie immediately before us.
Should, on the one hand, such all-out war come (may God forbid it),
this Nation must be equipped to advance to full military strength inside a few months rather than years. On the other hand, we must
always remain ready for the day (and may it soon come) when we can
again fully devote our loyalties and our energies to the ways of peace
to which we so much long to return.
The economic problems of a long period of armed alert cannot be
met by indiscriminate application of the techniques useful either in
war or in peace. We cannot afford the luxury of thinking with our
memories. New problems require new solutions. Nor can we find
the way out of our predicament by carping criticism of one another
or by searching out and condemning one another's economic and
political sins. The way out lies along the road of quiet tolerance and
patient cooperation.
It is not enough merely to apply formulas that had a measure of
success in World War II. Those that work well for a short period
may fail utterly in a long period of less intensive effort. There is no
solution of our long run economic problems in production for war.
I While the cooperative evolution of a program is always advantageous, the committee should not ignore
the tremendous cost to the country incurred as a result of the delay in reaching an agreement
between the
Federal Reserve and the Treasury. During the 8 months following the outbreak of the Korean conflict,
Government holdings of securities increased literally
by
billions of dollars-dollars which found their way
into
bank
reserves, which the
banks multiplied and pumped into the economy, and which were used to
finance the post-Korean
buying spree. The price of this delay makes it imperative that such delays
be
avoided in the future.
Ink itsreport of January
1950, the Subcommittee on Monetary, Credit and Fiscal Policies urged the use of
a vigorous monetary, credit, and fiscal policy. As long as policy is made through a political tug-of-war, the
chances of evolving and effecting a vigorous policy are slim.
One of the agencies, therefore, should
be
assigned primary power and responsibility
in
the event of a policy
conflict affecting credit regulation. After extensive hearings and deliberations, the subcommittee recommended vesting their power in the Federal Reserve System, a full year before this controversy broke
into full public attention. Since then, there have appeared no compelling reasons for altering this
recommendation. Senators Douglas and Taft and Pepresentative Herter.
JOINT ECONOMIC REPORT
11
Neither can normal techniques of peace be indiscriminately applied.
For example, in the emergency ahead we cannot afford to fight inflation.
by the traditional method of directing controls toward reducing the
general level of employment and productive activity. Ours is the
harder job of keeping down prices while expanding employment and
production toward maximum levels.
Moreover, it is not enough merely to increase industrial capacity.
Nor is it enough, in addition thereto, to develop natural resources
with maximum speed and economy, and to direct public-works
programs toward increasing farm output and industrial production.
More is required. To promote productivity means above all developing and husbanding the most important resource which this
country possesses: the potentialities, the skills, the loyalties of its
workers, its farmers, and its businessmen, irrespective of differences
of background, affiliation, status, and point of view. No nation can
either be strong or prosperous in which groups mutually frustrate and
exhaust each other by striving to gain position at the expense of the
general welfare.
Finally, this committee wishes to reiterate the increased necessity
for alertness to preserve whatever competition can be preserved.
There are many points, particularly during a long mobilization period,
at which small and independent enterprise is imperiled. Almost
inevitably the Government turns to large enterprises to secure a major
portion of the munitions and other supplies it requires, as is clearly
shown in appendix 6. During a short, war such strengthening of
existing tendencies toward concentration of output in the hands of a
few firms is a necessary cost of the war. In World War II, the
prosecution of violations of the antitrust laws, for example, was postponed until after the war.
But such extreme concessions to military necessity cannot be
tolerated during a long period of preparedness. Far from granting
exemptions or postponement of antitrust action, the Government
must more vigorously than ever push programs to aid small business.
Much more attention should be given to small business in the distribution of Government contracts, in the allocation of materials, in the
granting of priorities, etc. We should make the fullest use of the
productive facilities of small business. Particularly helpful would
be the publication regularly, within the limits of security regulations,
of information on distribution of defense contracts and subcontracts,
on the rate of defense spending, on the areas of expansion and defense
needs, and other mobilization activities. Every effort must be made
to expand free, private, competitive enterprise all along the line,
because. economic freedom is usually the first casualty of a garrison
state. In the long period of armed alert ahead, this Nation cannot
afford to set aside such long-run objectives as decentralization of
political and economic power. We must seek to preserve free competitive opportunity, and to advance our political and economic
freedoms.
It will not do merely to pile the unsolved problems of war upon
the unsolved problems of peace. In the long preparedness effort
ahead, a much harder task must be faced-that of devising a consistent and comprehensive set of economic policies that will attack
our economic problems on all fronts. This involves skillful coordination of policies regarding production, military procurement, preservation of small and independent business, governmental economy, taxes,
12
-JOINT ECONOMIC
REPORT
prices, cost of living, bank credit, debt management, manpower,
and wages.
COMMITTEE COMMENT.ON THE PRESIDENT'S RECOMMENDATIONS IN THE
ECONOMIC REPORT 9
It is in the light of these principles that the recommendations of
the President for economic legislation will be individually reviewed.
These recommendations center around four essential goals: (1) Expansion of production; (2) extension of health services and education;
(3) economic stabilization; (4) maintenance of international economic
programs.
Expansion of production
1. Renew priority and allocation powers (p. 13, sixth paragraph).
There will probably be little opposition to this recommendation.
Until such time as the industrial capacity of the country has been
expanded sufficiently to take on the additional burden of preparedness
now necessary, allocations and priorities will be needed, but they
should be guided by the fact that practices necessary in the frenzied
haste of a shooting war may wreck the economy in a longer period
of armed alert. Thus, for example, military manpower and material
procurement programs based on the principle that the armed services
will never be criticized for.having obtained too much too soon, even
though at high prices-such patterns of thought and action involve
too great a disregard for the civilian economy to be tolerated throughout a long-run preparedness effort. Military hoarding of manpower
and materials must be kept to a -minimum.
2. Make available more funds for loan program for expansion of
productive capacity and supplies (p. 14, fourth paragraph).
If such authority be granted it should be hedged in with rigid
requirements of vital defense necessity. Precisely because this is an
effort likely to last many years, the Government should not embark
on an indiscriminate loan program. One of the major causes of
inflation is excessive credit. Corporations and others have more
liquid funds than ever before. Moreover business can secure the
equivalent of V loans and procurement advances from the Department of Defense, techniques which worked with considerable success
during World War II. The cases in which additional Government
money should be lent, while they may exist, should be clearly established.10 The machinery for Government loan programs should be
examined by the appropriate legislative committees to assure compliance with these rigid requirements.
3. Authorize direct Government construction of industrial facilities
(same paragraph).
While such might be necessary in an all-out war effort, it handicaps
our long-run chances to maintain a maximum of free, private enterprise and reduces our reliance upon the creative impetus of private
initiative. We recommend against this proposal except in limited
fields where clearly demonstrated to be necessary.
4. Authorize start of St. Lawrence seaway and power project (top
of p. 15).
9The page references in the paragraphs that follow are to the Economic Report of the President, transmitted to the Congress in January 1951.
10Small manufacturers in particular, if they are to survive in a mobilized economy, must have the kind
of access to funds for expansion which was recommended by our Subcommittee on Investment in its report
on Volume and Stability of Private Irivestment, S. Doc. No. 149, 81st Cong., 2d sess., March 1950, especially pp 13-17.-Senators Sparkman, Douglas, and Benton and Representatives Patman and Bolling.
JOINT ECONOMIC REPORT
13
Altogether aside from the debate over public power, such a proposal will have to be carefully examined to see how and when it
can be fitted into the over-all Government program for national
defense, the establishment of world peace, and the extremely heavy
expenditures now being incurred for these purposes.'
5. Support nursery schools (p. 15, fifth paragraph).
This matter would seem to be one for which local authorities are
better equipped with the detailed knowledge and neighborhood leadership to do effectively. In special short-run emergencies caused by
Federal defense activities, the problem of freeing mothers for producThe possibility
tive work may, however, be a national problem.
of Federal help, including technical assistance and adequacy standards,
should not be ruled out if studies indicate its value and if the costs do
not seem excessive.
6. Provide improved unemployment insurance protection for workers
who take defense jobs in other States (p. 16, first paragraph).
The need for mobility of labor, and in particular for persons of
scarce skills to move to areas in which vital defense jobs are being
undertaken, no doubt will continue to exist. However, such mobility
is likely to affect only a fraction of the labor force. Rather than
disturb State unemployment insurance systems, normal incentives
should be permitted to influence those who take defense jobs in other
States.' 2
7. Provide housing and community facilities and services for defense
workers (p. 16, second paragraph).
In view of the large installations which were erected during World
War II and the vigorous housing program of this Government which
was partly instrumental in making the year 1950 the largest single
construction year in our history, the need for Government provision
of housing and community facilities can hardly be large for the Nation
as a whole, although there will undoubtedly be special areas where
new atomic energy or other defense installations will bring critical
local problems beyond the power of such small communities to cope
with. In such areas Federal aid will be necessary.
But so far as the economy in general is concerned, private housing
construction is being rigidly limited with respect to credit and mate-
1x If. as the Director of the Office of Defense Mobilization, Mr. Charles E. Wilson, has stated, the St.
Lawrence seaway and power project can be shown to Denecessary to bring more ore from Labrador to the
Great Lakes ports. to replace a gradually reducing supply from the Lake Superior region, it may be a vital
part of the defense effort.-Senator Taft.
The rapid expansibility of iron-ore sources in Minnesota was one of the primary factors that permitted the
United States to expand steel production rapidly in two world wars. This expansibility of our domesticto 50 million tons a year
ore supply will be lost in a comparatively short time. Soon ore in the amount of 40
will have to be imported. Alternative sources of open-pit ore, therefore, must be easily accessible to our
These new sources
economically.
out
carried
be
is
to
program
steel industry if the long-range mobilization
of being
are now being developed in Venezuela and Labrador. The latter source has the added advantage
without exposing
routes
inland
by
transported
be
may
which
America
within the continental limits of North
is considered
a vital supply line to submarine warfare. Without reflecting on other sources of iron ore, itcapacity
being
good insurance to make Labrador ore accessible to our steel mills, over 70 percent of ingot-steel
located in the Great Lakes area.
Mobilization,
Defense
of
Director
Wilson,
E.
Charles
Mr.
considerations,"
"These are the fundamental
to the
testified before the House Public Works Committee on February 21, 1951, "that have brought me
conclusion that the St. Lawrence seaway-in addition to its undoubted general contribution to our transportation system-is essential if we are to put our steel production-which is to say our entire mobilization
effort-on a solid and secure foundation. Without the seaway we shall become steadily more vulnerable
in this most strategic of all strategic industries. We must not permit that to happen."
The St. Lawrence project has the added attractive feature that, once constructed, it will be a source of
revenue to the Government as both power and navigation investments will be returned. with interest, to
the Treasury.
Under these conditions, it may well be thatthe seaway-power projectshould be prosecutedexpeditiously>Senators Sparkman, Douglas, and Benton and Representative Bolling.
1' We urge improvement in State unemployment insurance laws-both as a permanent and long-range
proposition, and as a method of protecting those workers who may be seriously affected temporarily by
curtailments in civilian production. Such liberalization was recommended by this committee's Subcommittee on Unemployment last year.-Senators Douglas and Benton and Representatives Hart and Bolling.
S1651-51-2
14
JOINT ECONOMIC REPORT
rials. Numbers of contractors are looking for jobs on which to employ
their facilities. By adequate allocations and other measures not
involving Federal governmental loans, the construction industry
should be increasingly relied upon to take care of new needs as they
arise. If additional Federal aid be granted, it should be hedged inby
very rigid tests. An era of inflation is no period in which to extend
more Government credit to enterprises to bid for scarce defense
materials.
8. Provide increased Government assistance to housing in defense areas
(p. 16, third paragraph).
Similar considerations should be carefully kept in mind with respect
to Government assistance to housing.
Health services and education
9. Increase training of medical personnel (p. 16, sixth paragraph).
10. Expand local public health services (p. 16, seventh paragraph).
11. Provide general aid to States for school operation and maintenance
(p. 17, second paragraph).
It is recognized that proposals to provide increased training for
medical personnel, to improve local health services, and to provide
general aids to States for school operation and maintenance are designed to promote defense expansion by improving human resources
-and human productivity. So far as Federal participation is concerned, however, these proposals probably will have to be delayed
but only for a minimum of time and subject to frequent and careful
reexamination. The Government has undertaken so large an armament program, and the prosperity generated thereby has in turn so
greatly aided the budgets of various State and local governments, that
the traditional local methods of financing education and medical aid
and public health should again be more fully relied upon. In a period
*of inflation and long-run strain upon the Federal exchequer, the role
of the Federal Government with respect to State governments might
well be reversed, leaving the practice of Federal aid to States in
abeyance. The long period of preparedness ahead is the time for
maximum State and local assumption wherever possible of local governmental burdens, including local defense programs."3
Economic stabilization
12. 'Adopt additional tax measures to finance the cost of national
defense on a pay-as-we-go basis (p. 17, fourth paragraph); specifically,
corporation taxes, individual 'income taxes, excise taxes, and close
loopholes in existing tax legislation (p. 17, seventh paragraph and top
of p. 18).
This committee emphatically endorses the proposition to put defense on a pay-as-we-go basis. It, in fact, would wish to go further.
13 If we were facing a period of all-out mobilization, expenditures for these programs could perhans be delayed without irreparable deterioration of our health and education levels. But it has been generally agreed
that we must plan in terms of a 10-to 20-year period of defense mobilization, during which time a whole
generation of children will mature. In dealing with the immediate problems connected with transferring
a part of our resources from peacetime to military use, we should not neglect the necessary needs of the
civilian population, nor be persuaded that their needs are less urgent simply because we must expand our
Armed Forces. As a matter of fact this expansion will increase the need for trained medical personnel by
both the civilian population and the Armed Forces. Large deficits of medical schools, merely to meet their
current needs, are upon us now, and the defense effort will directly cauwe a demard for increased numbers of
doctors. Federal aid to medical education should, therefore, prcceed without delay. Then, too, the postwar growth in our juvenile population has been phenomenal. Accounts of overcrowded classrooms and
first- and second-graders going to school in shifts are legion. The need of the States for financPil assistance to
expand their school systems to provide for this new generation has been well documented before committees
of Congress and elsewhere. We believe that we should apply Federal funds to provide adequate educational facilities for the children who will be growing up during this long-term period of armed alert.-Senators
Sparkman, Douglas, and Benton, and Representative Bolling.
JOINT ECONOMIC REPORT
15
It feels that the defense garment should be cut to the revenue cloth.
Measuring with care the things that must be done, Congress, short of
all-out war, should make no military appropriation unless and until
adequate Federal tax revenues are definitely in sight. In a long period
of heavy defense expenditures such as now faces us, there does not
exist the urgency to spend first and then look around and see how
much the Government will need to borrow in order to pay its bills.
Instead, total Federal governmental spending for defense, including
not only the military items but also foreign aid, atomic energy and
other noncivilian programs, should be limited to a figure not in excess
of 20 percent of national income. In a long period of armed alert
ahead, lavish military expenditures might readily wreck the economy
if not limited to ceiling levels. In the fiscal year 1951-52 the levels
advocated in the budget message4 of the President represent in our
judgment an absolute maximum."
Revenues from proposed taxes must be estimated with extra caution
.andconservatism. All groups should over a long period bear their
fair share of the new tax burden. Loopholes should be closed,
.including new ones that may arise under the defense program.
The National Production Authority in a press release of March 3,
1951, indicated that 3,319 applications for tax-amortization deduction
.certificates had been made, and 447 certificates issued, totaling nearly
:$3 billion. It seems probable that, in order to minimize liabilities
under the regular corporate income and excess profits tax, corporations
and other businesses may have applied for and been granted certifi*cates of eligibility for tax-amortization deductions with respect to
facilities which may have been planned and 5 begun in many cases
-months before the war broke out in Korea." Until there seems a
-more imminent danger of all-out war soon, we recommend that
-appropriations for military defense be limited to the amounts we are
-willing to raise in taxes.'"
13. Consider increased social security contributions (p. 20, first
paragraph).
This committee agrees that increased social-security contributions
:should be considered. In fact, in order to provide a damper on
inflation, the levy for social security purposes might well be increased earlier than is now contemplated in existing legislation.
garment should be cut to the revItWe are opposed to this recommendation. It states that "the defense
to fit the defense cloth. Furthermore,
enne cloth." In our judgment, the revenue garment should be cut
absolute maximum. We may need
we oppose the level of defense spending in the President's budget as anthan
present plans call for. Freedom
more. We may even need to build up our defense to a greater degree
Douglas and
is more important than opulence and without freedom opulence will esisappear.-Senators
Benton and Representative Bolling.
capacity is
expand
will
which
plants
for
Is The widespread practice of granting accelerated amortization
susceptible of great abuse, and needs to be carefully checked. The immediate effect of such amortization
is likely to
burden
tax
the
when
time
privileges is to deprive the Government of tax revenues at the very
presumably the rate of corporate and excess
be heaviest, and to transfer tax payments to later years when gain
which will
plants
constructing
firms
for
uroft taxation will be much lower. This will be an unearned
ultimately subsides.
bev'sed for peacetime production if and when the war emergency extent
which
investments
covers
it
that
The principle of accelerated amortization is valid only to the
it may be, that amortization
will have no permanent usefulness. If it is true, as the committee indicates
outthe
before
begun
or
either planned
certificates have actually been approved for facilities which were
the case of applications for
break of the Korean conflict, this practice should be stopped immediately. In
plea
the
facilities,
basic productive
the accelerated amortization of expanded steel or aluminum, or other added
steel or aluminum to be prothe
can be made that there is likely not to be a permanent market for
firmly
be
hardly
can
that
duced by these facilities during the postemergency period. This is an assumption
and alumidocumented, since past experience has shown that for such basic commodities as electric power
num, uses grow as fast or faster than production.
National
the
above,
outlined
privileges,
amortization
liberal
of
effects
harmful
In view of the immediate
for the moment, in deterProduction Authority would be wise to follow an extremely conservative policy
if,
granted.
Is
amortization
accelerated
for.which
investments
facilities
basic
mining the percentages of
the products of the added
following the emergency, the Congress finds that there is, in fact, no market for
investment.the
of
portion
war-connected
the
for
compensation
of
means
-facilities. it can then devise a
-Senator Douglas and Representative Boiling.
1sFor Senator Benton's comments on this point, see his supplementary statement of views, p. 22.
16
JOINT ECONOMIC REPORT
14. Authorize credit controls on purchase of existing homes (p. 18.
fourth paragraph).
The extension of rigid credit controls to the purchase of existing
houses is vitally needed in a period of inflationary credit buying.
15. Authorize control of speculative trading and of stronger regulation of commodity exchanges (p. 19, third paragraph).
The course of commodity prices during 1950 has demonstrated
again that the cost of living, not to speak of costs of production in
general, should be freed from uninformed and indiscriminate speculative manipulation. Wise controls might well be instituted to bring
stability in-such markets.
16. Extend and strengthen rent-control law (p. 20, fifth paragraph).
It seems clear that if rent controls are continued, some owners of
rental properties, particularly those who own small properties, will
find their. costs increasing with current inflation and in rent-control
areas will be unable to secure compensatory rental revenues. Since
the imposition of rent controls in 1941, prices of all items have increased on the average nearly 70 percent. Housefurnishings have
increased 91 percent. Fuel, electricity, and refrigeration have
increased 41 percent. Meanwhile, rents have gone up only 1831
percent. This situation has heretofore been justified on the basis that
rent controls would be temporary. But this disparity between costs
and income must be taken into account in enacting further rent-control
legislation.
The abolition of all rent control, however, could do serious damage
particularly to renters in the lower income brackets. Since it is a
problem that lends itself readily to State and local legislation, a
continuation of the principle of the present law leaving the initiative
insofar as possible in the hands of the State and local governments may
prove adequate. This problem will have to be studied by appropriate
committees of the Congress.' 7
International economic programs
17. Provide for continuing military and economic aid to free nations,
including programs for underdeveloped areas (p. 21, first paragraph).
There is danger that the inflation which already exists abroad
will be increased still further by undertaking vigorous programs for
international investment at this time. When economic aid is extended
it should not be hog-tied to military objectives, but should to the maximum extent feasible represent the assistance which one freedomloving people extends to others seeking to find and travel their own
roads toward winning similar freedoms for their own peoples. All
such programs should be well within the capacity of the countries
concerned to undertake, and be programs which they want to achieve.
18. Extend power to control exports (p. 21, third paragraph).
For a limited period of time the power to control exports will no
doubt be needed in order to conserve the supply of vital materials
that are used for defense within the United States.
19. Extend Trade Agreements Act (p. 21, fourth paragraph).
The extension of a program which has operated with some measure
of success for many years is but a continuation of the effort of this
country to encourage all free nations freely to do business with each
"7We feel that a strong Federal rent-control law should be enacted, similar to that in existence during World
War II.-Senator Benton and Representative Hart.
JOINT ECONOMIC
17
REPORT
other, modified, in so far as necessary, by international agreements
affecting commodities in short supply. Such agreements may be
required in all countries cooperating for mutual defense in order to
control the drain on scarce resources, channeling them to uses most
vital for defense purposes. The House of Representatives has already
passed an extension bill which is now being considered by the Senate
Finance Committee.' 8
20. Simplify customs laws and Trocedure (p. 21, fourth paragraph).
Any simplification that can be brought about in customs legislation
should, of course, be achieved so that commerce may flow unobstructed
by needless "red tape" or bureaucratic harassment.
21. Waive import tax on copper (p. 21, fourth paragraph).
To impose barriers on any vitally needed material, and in particular
on so important a defense item as copper, is to hamper the defense
effort. All governmental barriers which tend to restrict the deflationary inflow of productive resources from abroad are, in the long period
of defense mobilization ahead, a luxury which we cannot afford to
maintain.
STATISTICAL
GAPS AND THE WORK OF THE
COMMITTEE
The committee wishes to reiterate its continuing interest in, and
support of, efforts to fill the statistical gaps in the Government's
program of economic information. In a long period of high level output and preparedness the economy cannot afford to permit the defense
agencies to hamstring the collection and publication of economic information on security or other grounds valid only during a major
fighting war. Appendix 7 provides a brief survey not only of the
progress made during the last year but of new complications presumably introduced because of security regulations and defense activities.
A similar precis of the research studies now under way or projected by
this committee is given in appendix 8 together with a list of recent
committee publications.
is I would omit all except the last sentence in this paragraph.-Representative Herter.
In the present state of world unrest with so many areas dependent upon the United States for economic
rehabilitation as well as military aid the Trade Agreements Act seems to me to be little more than a symbol.
The reestablishment of world commerce upon an international scale must necessarily await international
political stabilization. The concept of reciprocal trade is one which is necessarily bound up with the concept of nations and peoples living in peace and amity and until that condition has been attained there is
little prospect that mutually beneficial trade agreements can be written. The United States has given
ample evidence of its willingness to cooperate with all the peoples in the world for the reestablishment of
peaceful relations and it is to be doubted whether a failure to extend the Trade Agreements Act could he
reasonably interpreted anywhere as an indication of any desire on our part for economic isolation. Moreover, the Act has always been subject to the criticism that it constitutes a far-reaching delegation of congressional power to the Executive.-Senator O'Mahoney.
SUPPLEMENTARY VIEWS AND STATEMENTS
Supplementary views of Senator Benton
Production
I believe we must place even more emphasis upon expanding production than if we were in an all-out war. This is because we now
have a larger part of our resources to devote to the expansion of production than if we were in an all-out war. And it is because only
through the expansion of production can we create a sufficiently strongindustrial base to be ready for whatever dangers may come in the
future, or for bearing the defense burden with less strain if these
greater dangers are successfully averted.
Our productive power is our greatest economic asset. It is what.
distinguishes us most from the rest of the world. In the long run,
more and more production is the key to sustaining the defense burden
without crippling the whole economy. It is the key to servicing a hugenational debt, and in time to reducing that debt, without a crippling
rate of taxation. It is the key, in the long run, even to the conquest
of inflation-even though, in the short run, the efforts to expand pro-duction may add to inflationary pressures.
A major feature of strengthening the economic base is the expansion
of industrial capacity. Another major feature is the development of
sufficient machine tools and equipment. Still another major feature
is the provision of enough tools and fertilizers to maintain and build
up farm production. Other major features include the strengtheningand further modernization of our transport facilities, and the develop-ment of more power-private wherever possible, public in some
instances.
This build-up of the economic base cannot be achieved solely bysaying that so much of our resources be devoted to military purposes,.
and that the balance be left for utilization by the civilian economy
according to a normal peacetime pattern. If $50 billion be taken out
of a $300 billion economy, the way in which the other $250 billion is.
to be used is immensely important. Relatively more must be devoted
to the industrial build-up, and relatively less to ultimate consumption,
than in normal peacetimes, at least for the next 2 or 3 years. This is.
the only way to prevent a permanent impairment of our standards of
living, in view of the long and sustained defense burden. Furthermore,
it is not enough to say that we must stimulate investment, increases of
capacity, tools, and techniques. The current or potential short areas
must be identified, so that materials and manpower are made available
in these areas, while less essential areas are cut back. There must be
a bold and vigorous "programming" to accomplish this objective, with
particular attention to the vital role of small manufacturers in our
economy. And this objective must be stated clearly in factual terms,
for when it is so explained to the people they will understand its
importance, realize why restraints must be placed upon consumption,
and look forward with hope to the ultimate lifting of these restraints
as a strong and imaginative production program lifts our total national
output to new heights.
18
JOINT ECONOMIC REPORT
19
The fifth annual report of the Council of Economic Advisers,
entitled, "The Economics of National Defense," and the January 1951
reports of the President and of the Council, place great and proper
stress upon comprehensive and consistent programming of needs and
the matching of these needs against available and potential supply
lines. In a time of acute shortages, it is only by careful programming,
as we learned at such great cost during World War II, that the separate fragments of economic policy can be blended together into a successful total effort instead of competing and conflicting with each other.
Only by defining our basic objectives clearly and realistically with a
long look ahead can we develop effective policies to accomplish these
objectives. Not only production programs, but also tax programs and
control programs, must derive their guidance from this kind of programming because controls to influence the use of resources can be fully
effective only when we know what kind of resource diversions are
called for by the defense effort.
Economy
The problem of economy in public outlays in these times is complex.
It cannot be settled by any simple rule of thumb. Either the expenditures seem desirable now because they were desirable in the past, or the
expenditures seem undesirable now because we have moved into a new
type of situation. In a defense economy, we must maximize both our
military strength and the productive machinery-both inanimate and
human-which supports that military strength. But crippling the
programs which serve this purpose, whether they be military programs
or civilian programs, would be penny-wise and pound-foolish. On the
other hand, our resources while great are not limitless; and we should
put first things first. There are thus many things which we must
eliminate or postpone. In general, the recent reports of the Council
of Economic Advisers establish sound criteria for distinguishing between essential and nonessential expenditures in a defense period.
But it is up to the Congress to apply these criteria to the precise and
careful scrutiny of individual appropriation items.
In distinguishing between useful and wasteful expenditures, not
only Government programs but also private outlays must be considered. A public outlay is not the only type of outlay which can be
wasteful or inflationary in these times. In cutting down on nonessential and inflationary expenditures, both the private and the public side of this problem must be vigorously attacked. Where other
considerations are equal, it is the responsibility of the Government to
practice economy in its own house before it preaches economy elsewhere. But private expenditures for luxuries and nonessentials,
either by business or by consumers, should not be given priority over
those public demands upon our resources which are essential to our
national strength. Since the Government in times of crisis, through
both direct and indirect measures, has the power to curb or to stimulate both private and public spending, it must try to view the whole
picture and seek to base its action upon the priority of national needs.
Private spending for investment in productive tools which produce
armaments is obviously of higher priority than some types of peacetime private spending. But public spending to support the military
and civilian components of long-range military and economic strength
is just as obviously of higher priority than private spending for nonessential construction and for luxuries. A sound economic program
20
JOINT ECONOMIC REPORT
must eliminate nonessential and inflationary spending, both private
and public, and must sustain and help to direct that spending, both
private and public, which fits into the objectives of the whole economic
mobilization program in this period of acute shortages.
Inflation and the cost of living
There are some who believe that a little inflation is necessary, that it
will help rather than hinder production.
One trouble with this easy doctrine is that we have already had
more than a little inflation. Another obvious difficulty is that if we
consciously aim at a little more inflation, we are almost certain to get
a lot more inflation. This policy not only risks the creation of widespread misery and cynicism among those unorganized groups who are
unable to keep up with an inflationary spiral, but also disrupts the
productive potential of the American economy.
It is now regarded as axiomatic that the only sound way to deal with
inflation and the cost of living is through a broad program of economy,
taxation, credit controls, priorities, rent control, savings, and pricewage measures. While considerable attention has been given to each of
these measures, special emphasis should be placed upon (1) the encouragement of savings and (2) the development of a much more hardhitting and realistic program first of price and secondly of wage
controls.
Encouragement of savings
The case for a national program to encourage savings has been expertly put in a recent publication of the Committee for Economic
Development, entitled "Conditions Necessary for Effective PriceWage Controls" (February 1951).
The CED analysis first makes a strong case for governmental economy, for a balanced cash budget by the latter part of calendar 1951,
and for restraints upon the expansion of bank credit. The CED
statement then makes the following proposal:
A national program of education is needed to bring home to our people their
individual responsibility to save. As part of such a program we should enlist the
cooperation of the leadership that exists in our communities. The Government
should cooperate by instituting an aggressive campaign for the sale of savings
bonds. The program should be more than a drive for savings bonds-all forms
of savings should be encouraged.
The total earnings of American consumers are bound to rise as a
result of the defense mobilization program-due to increased employment, longer hours, and inevitable increases in wages and salaries.
No matter how much of these earnings we take away from people in
*new taxes, nor how strongly we clamp down upon them through
controls, these earnings after taxes will nonetheless rise substantially.
One of the best ways to prevent them from contributing to the
inflationary spiral is to encourage people to save for the future.
Thus far the administration has not started a major effort to sell
Savings Bonds. A successful effort would in fact have been difficult
during the last 8 or 9 months. One does not have a very appealing
case if he asks people to save at a rate of about 3 percent a year while
the value of the dollar is declining at a rate of about 1 percent a month.
But now that more vigorous efforts are being made to fight inflation,
now that it becomes possible to hold the line on the cost of living, the
initiation of a major Savings Bonds campaign should no longer be
delayed.
JOINT ECONOMIC REPORT
21
It is difficult to see how a well-rounded anti-inflation program can be
developed unless this eminently practical proposal is accepted.
Cost of living
A major need is for a well-rounded stabilization program that deals
firmly with business prices, farm prices, and wages. This will require
sacrifice from every group.
It is idle to talk about stabilization on the wage front or on the farmprice front unless much more dispatch and firmness is demonstrated
on the general front of price stabilization. This will necessarily
compel many business concerns to absorb rising costs out of profits,
with due flexibility in the case of new and growing businesses. Unless
such a policy is adopted, the price-control system will include a built-in
escalator for business prices which will be at least as dangerous to the
entire economy as the various escalators that affect farm prices and
wages. If business prices are stabilized, the problem of dealing with
wage increases based upon cost-of-living adjustments and farm-price
increases based upon the parity concept will be reduced to manageable
proportions and can be met with greater justice and firmness.
The Government's basic objective should thus be to establish a price
line that can be held and then to hold the line.
The provisions of the Defense Production Act that provide the
basis for price and wage control expire by June 30. If this legislation
is to be extended-as it must be-it seems reasonable to expect that
by that time at the latest its administrators will have been able to establish a clear-cut hold-the-line policy and program.
If price control is to make its contribution to a broad stabilization
program, it is essential that the present type of price control be supplanted
by dollars-and-cents ceilings that can be posted by sellers and identified
by consumers. While this cannot be done in every field, it should be
done wherever practicable. It will make a major contribution toward
consumer enforcement and reduce the need for a large enforcement
staff on the Government payroll.
It may also be questioned whether such stabilization can be achieved
without selective subsidies, as were found necessary during World
War II.
Selected subsidies have already been authorized in the Defense
Production Act as a means of expanding the production of essential
metals and minerals. Somewhat similar provisions are needed with
respect to agricultural commodities.
Many farm prices have already reached parity and are under control.
Here the major need is sound administration and sound enforcement.
Yet in some cases a small amount of subsidies may be needed to keep
high-cost processers in operation.
in other cases, prices have not yet reached parity, and under the
present provisions of the Defense Production Act cannot yet be
controlled. Here again some limited subsidies will be needed-to
help hold the line on the cost of living and at the same time to give
farmers adequate incentives for production and a fair share of the
national income.
There might also be some merit in establishing a waiting period of
3 or 6 months before automatic increases in farm prices are allowed to
take place under the parity formula. But if such a device merely
served to give us a series of increases in farm prices every 3 or 6 months,
it would be of little help in fighting inflation. The real need is for
22
JOINT ECONOMIC REPORT
so'mdly conceived controls, genuine enforcement, and a limited amount
of cost-of-living and production subsidies.
It is important for all Americans to realize how a small minority of
chiselers and.profiteers, if given leeway, can break down the entire
stabilization effort. It is all too easy to find loopholes or ambiguities
in a price regulation and then to use these loopholes or ambiguities as a
means of breaking down price control itself.
It is imperative, therefore, that both Congress and the Executive
make it perfectly clear that they stand squarely behind an effective
enforcement program and that they will not tolerate profiteering or
chiseling of any variety. Where examples of profiteering or chiseling
are brought to the attention of the Congress, they should be investigated with as much vigor as the Congress has investigated subversive
activities, gangsterism, and political corruption.
Tax revenues
Furthermore, I believe that the committee statement "until there
seems a more imminent danger of all-out war soon, we recommend
that appropriations for military defense be limited to the amounts we
are willing to raise in taxes" fails utterly to take account of the critical
short-term danger of all-out war. It is wholly keyed to the longer
term tension, which may last 10 to 20 years even if we overcome the
immediate threat. This threat must be met with all urgency. Military defenses cannot wait on the legislative jockeying and political
compromising involved in putting new tax laws on the statute books.
For these reasons also, it is likewise unsound arbitrarily to limit new
defense expenditures to a fixed sum or to a rigid percentage of our
national income, particularly in the first two or three critical years.
If Congress fails to enact a tax program that is sufficiently large,
we face a most unhappy dilemma. But shall we compound our failure
by deciding to have a military program that is likewise too small?
It must be remembered that military authorizations and expenditures can be stated in definite terms but estimates of revenue to be
obtained from a tax law are guesses that can prove wrong by as much
as several billion dollars. If a revenue estimate turns out to be
$3,000,000,000 too low-and many revenue estimates have so provedthe United States would, under the policy here recommended, be in the
ridiculous position of stating that we could have had and should
have had $3,000,000,000 more of airplanes, tanks, and guns-but
that we failed to get them because somebody in the Treasury Department made a bad guess on estimated revenue.
Internationaleconomic programs
Foreign aid.-As soon as we probe below the surface of the current
dangers to our security it becomes perfectly clear that the foreign aid
required to deal with them should not be limited to military assistance. The sound approach, combining military strength with economic strength, is outlined in the following statement on page 12 of
the President's Economic Report:
There is no water-tight distinction between military assistance and economic
assistance. Our friends abroad need both. For their military efforts to be strong,
their economies must be strong. When we contribute to their military strength,
we leave more of their own resources free to improve their economic strength.
When we contribute to their economic strength, we leave more of their own resources free to build up their military strength. The relationship between the two
types of assistance should be determined realistically on grounds of efficiency,
not by arbitrary labels.
JOINT ECONOMIC REPORT
23
The programs of economic assistance thus far undertaken have added greatly to
the strength of other nations friendly to us-nations believing in freedom and
-justice. This gain could be dissipated, if the military build-up which they must
now undertake should weaken their economies.
The close connection between a nation's economy and its military efforts makes
it impossible for peoples to be allies on one front and strangers on other fronts.
When we join together for military purposes, we must also cooperate for economic
purposes. When we consider jointly the distribution of armed forces, we must
consider cooperatively the use of strategic economic assets.
The most immediate problem we face is to secure an expansion in production of commodities which will be scarce in relation to essential
needs. This means greater concentration than we have had in the
past on programs yielding quick results in the form of military items
and raw materials. In some cases, however, it means projects which
will yield their results only after a few years. In still other cases the
*common security can be greatly strengthened by expanding production even of goods unrelated to military strength, if these goods improve economic and social conditions. The development of pro*ductivecapacity in all the free countries is a vital factor in the common strength, both directly as a source of goods acquired for the defense effort and indirectly as a means of improving their economic
*strength and increasing their stake in maintaining their independence
:and the free way of life.
Without question all such programs should be programs which the
*other countries concerned want to achieve and to which they should
make an active contribution.
Extend power to control exports.-The power to control exports will
be needed not only .to conserve the supply of vital commodities used
for defense within the United States but also to guide the direction of
-exports so that the most essential requirements of security and all the
needs of friendly and cooperating countries are met before nonessential
uses.
Waiver of import tax on copper.-The imposition of barriers on any
vitally needed material hampers the defense effort, as the report states.
Such barriers are worse than a luxury. They provide no national
benefits whatever but simply involve a waste by concentrating the
effort on getting resources inefficiently while allowing resources which
can be obtained more efficiently to remain partially unused.
Supplementary views of Senator Watkins and Representatives
Wolcott and Herter
We are pleased to note the marked shift in position and emphasis
of the majority as compared with their previous reports. This is
particularly true in regard to their rejection or curtailment of Government spending programs, wherever possible, the achievement of a
balanced budget, and the stated recognition of the financial limitations
as to what the Federal Government can do, both in military spending
and civilian programs, without creating run-away inflation and endangering our efforts to defend ourselves militarily. We concur with
the majority when it says, "that existing laws may have to be altered
or repealed if major economies are to be effected in nondefense spending," just as we seriously challenged previous reports recommending
a vast array of new and expanded expenditures. In the 1950 minority
report we stressed the need for changed fiscal, monetary, credit, spending, and lending policies which were inevitably carrying the Nation
24
JOINT ECONOMIC REPORT
toward inflation and financial chaos, and warned that the "result of
'spend-thrift' government places us in a most vulnerable position with
the first downturn in economic activity, or any crisis we may be called
upon to face."
We believe the recommendations of the report recognize, though
belatedly, the thin margin of safety left in our economic structure
as a result of unsound and too-long continued fiscal, monetary, and
other national economic policies. In accord with the positions consistently taken in previous minority reports, we, therefore, join in
the specific recommendations of this report, with such footnote
modifications we have individually indicated.
Aside from the section on recommendations we find many statements, conclusions, and implications in the report to which we cannot
subscribe. In their context they contribute little, if anything, to
constructive analysis or understanding of current economic problems,
and they often create ambiguity and confusion as well. Accordingly,
our agreement with the section on recommendations does not constitute general approval of all the language of the report.
Statement of Representative Boggs
I wish to make it clear that I was not appointed to committee
membership in time to participate in any of the committee hearings
or deliberations, except three brief executive sessions called after this
report had been drafted. Therefore, it would seem improper and misleading for me to join in this report.
I would like to observe, however, that I have noted the marked shift
in position of the majority views as compared with previous reports.
This is good, especially in regard to Government spending programs
and the recognition of the dangers of inflation.
Chairman's Acknowledgment of Cooperation by Members of
Committee and Staff
It seems appropriate for the chairman to make acknowledgment of
the cooperative spirit in which the members of this committee and of
the staff have worked in the preparation of this report and in the hearings that preceded it, to develop a strong factual basis for an understanding of current economic problems.
This appreciation is in no wise diminished by the footnotes or the
supplemental views, nor indeed by the reluctant concurrence of our
colleagues of the minority, Senator Watkins and Representative
Wolcott and Representative Herter, who seem to detect "a marked
shift in position and emphasis by the majority as compared with their
previous reports." The chairman is constrained to remark that this
committee exists by virtue of the Employment Act of 1946, the purpose of which is to declare and implement the responsibility of the
Federal Government "to promote maximum employment, production,
and purchasing power."
How well previous economic policies have worked toward the accomplishment of these aims is indicated by the fact that instead of serious
unemployment following the end of World War II, the country under
this act and congressional policies in harmony with it, has enjoyed
JOINT. ECONOMIC REPORT
25
maximum employment ranging from 58,000,000 employed in 1947, on
a monthly average, to a monthly average of practically 60,000,000 in
1950. The Federal Reserve Board index of industrial production has
risen from 170 in 1946 to a monthly average of 200 in 1950 and, indeed,
219 and 218, respectively, for January and February 1951. National
income has risen from 180.3 billion dollars in 1946 to 236 billion dollars
in 1950, and corporate profits before taxes have risen from 23.5 billion
dollars in 1946, to no less than 40.2 billion dollars in 1950.
The "shift of position and emphasis" seen by our three colleagues
is no shift at all; it is merely a recognition of the fact that when the
Government, under the necessary impetus of an expanded preparedness program, is forced to incur unusual expenditures for national
defense, no logical basis remains to continue expenditures which were
wholly justified at a time when the objective of government, largely
supported without partisan division, was to expand employment,
production, and business enterprise. The simple theory of this report
is that the Government, when fighting inflation, must necessarily
adopt an economic policy different from that which is wholly justifiable when it is endeavoring to fight deflation.
It is worthy of note that this report is exactly the same in principle
as the unanimous report which this committee rendered last July,
when it took the lead in recommending increased taxation, rigid
governmental economy, and a pay-as-we-go policy, to carry on the
Korean War.
JOSEPH C. O'MAHONEY, Chairman.
SUPPLEMENTAL STAFF MATERIALS
(These materials have been prepared by the committee staff. It is to beclearly understood that neither the committee nor the individual members are
in any way committed to any of the views expressed or to any of the conclusionsthat may seem to follow, directly or indirectly, from any of the analyses or statistical data selected for presentation. These materials supplement the staff reports.
recently issued by the committee, entitled, "The Economic and Political Hazards.
of an Inflationary Defense Economy," "General Credit Control, Debt Management, and Economic Mobilization," and "Underemployment of Rural' Families."Senator O'Mahoney, Chairman.)
(In signing the foregoing report, I wish to make it clear that I do not approvemany of the conclusions reached by the committee staff and printed at the end
of this report under the caption "Supplemental staff material."
The matter relating to the distribution of incomes, the burden of taxation,.
the analysis of corporate profits, is interesting and provocative, but the conclusions particularly as to the proper method of taxation to finance the mobilization
effort are certainly open to question.
As a member of the Finance Committee, I will be required to pass on these
questions at a later time, and I do not desire, therefore, at this time to state
specifically my differences with the staff report-Senator Robert A. Taft.)
Human liberties are the inspiration and creative source of man's.
progress toward full development of his latent abilities. To be on
guard against those that would enslave, while indispensable, is not
enough. Maximum economic strength, while essential, must be
supplemented. The sword and the dollar are not enough. These
are valuable only when harnessed to quiet spiritual strength, a tireless.
concern for justice, freedom and righteousness. These are the qualities that have put this country at the head of universal spiritual forces
propelling the free nations of the world toward a relentless challenge
of all imperialism, monopoly, race discrimination, and tyranny. To
uphold the dignity of the individual and the sovereignty of the human
spirit, all economic, military, scientific, democratic, and spiritual
resources must be continuously and efficiently mobilized. Eternal
vigilance is the price of liberty.
So far as economic mobilization is concerned, the Economic Report
of the President, together with the Annual Economic Review submitted by the Council of Economic Advisers, outlines in general terms
a program of action. It states that current expenditure for defense
will have to be stepped up from 7 percent of current national output
to 18 percent of an increased output in 1952. It lays down three
requirements: (1) That a comprehensive unified programming operation be devised in order to balance competing requirements against
available supplies; (2) that in the initial stages there be considerable
emphasis on speed of mobilization; (3) that the economic burden of
defense be distributed with equity among all groups in the population-consumers, farmers, businessmen, and workers.
Production, states the report, is at the heart of our economic
strength. To that end it advocates materials controls to enable high
priority industrial expansion projects to get what they need. It also
recommends a limited amount of Government financial assistance and
other incentives, maximum development of regional resources, and
workable priorities. New sources of supply of defense goods must be
developed, as safe as possible from enemy attack-iron ore, bauxite,
zinc, lead, copper, and liquid fuels.
26
JOINT
.ECONOMIC
27
REPORT
Additional manpower can be obtained, states the report, not so
much by increasing the length of the workweek as by employment of
older workers, more women, industrial upgrading, vocational training,
and the use of management-labor committees for cooperative production adjustments and settlement of grievances and disputes. It urges
the removal of impediments to voluntary transfers of workers from
less essential to more vital activities with protection of seniority, pension rights, and other job appurtenances.
One of the major threats to increased production is named as inflation. Three types of control are mentioned: (1) Indirect controls such
as taxes and credit measures which mop up excess purchasing power;
(2) physical controls such as allocations, defense orders, limitation
orders, and priorities to channel vital materials away from consumer
durables and low-priority capital investments; and (3) direct price and
wage controls. The problem of properly combining these controls is
considered unavoidable.
In certain respects inadequate emphasis is given to the problem of
inflation. For the fact needs to be constantly kept in mind that
partial mobilization, extended over 10 or 20 years, cannot ccrnmand
the all-out energy and support of a shorter more intensive effort. A
smaller part of total manpower is in uniform. Voluntary postponement whether of consumption or investment can be much greater over
a short period than a long one. Moreover, mobilization now is
starting with but little slack either in the labor force or in materials
or in financial resources. Furthermore, not only businesses and the
banks, but individuals already possess a large amount of cash and
other liquid assets. It is easier to save in the fervor of all-out war
of' short duration, especially if one has little in the way of savings at
the beginning, than to keep on saving for years and years. There is
an enormous Government debt totaling $257 billion. Clearly additional borrowing of any magnitude is fraught with danger.\
I. THE FIRST REQUIREMENT-INCREASED
PRODUCTION
The high level of national output from which this Nation catapulted
its defense mobilization program is clearly evident in chart 1. As
compared with 1940,. total output in 1950 was roughly 50 percent
higher; farm output was 25 percent higher; there were 9 million more
persons in the total labor force; steel capacity was 20 percent higher;
electric power capacity was up more than 70 percent; and manufacturing capacity higher by at least 25 to 30 percent and possibly by as
much as 50 percent.
Note in the chart' that real production has lagged considerably
behind increases in gross national product. The gap between the
two for the most part represents the price inflation that has occurred
since 1939. The middle line shows that the goal of increasing real,
output by 7 percent in 1951, and 25 percent in the next 5 years, is not
beyond reasonable expectation. Note that total real output in 1950,
measured in dollars of constant buying power, was still 3 percent.
below the 1944 high.
The line at the bottom of chart 1 shows the possibilities of expansion
in average individual output that can be achieved. Levels comparable
to 1944 may only be attainable under the stress of war (though total
war mobilization brings diseconomies of hasty organization which can
28
JOINT ECONOMIC REPORT
be avoided in a longer period) but aided by recent large investments in
capital equipment, the businessmen, farmers, and workers in the less
strenuous period ahead can, by lengthening of the workweek, by shifting to defense jobs, and by developing better skills, come reasonably
CHART 1
-
THE NATION'S PRODUCT
UNITED STATES, 1929-1950-
,,
me
NE tMFEREIICE BOARD
2.7
PAR.K AV1Ul
. 1W
Y ORK
17.
H.
4-
t44
~~~~.1w47
50,
ROAD MAPS OF INDUSTRY
.
0.790
close to increasing their productivity somewhere near the levels
attained in 1944.
In short, this economy can produce the defense goods it needs without requiring more than a small sacrifice in existing levels of consumption. The capacity, the labor force, the productivity exist.
JOINT ECONOMIC REPORT
II.
29
THE MAJOR THREAT-INFLATION
The'outstanding contrast between the attainment of the high levels
of production in 1944 and the increase in output attained last year is
the difference in the behavior of prices. In 1944 prices rose very little.
CHiAiT 2
But the'rate of price increases since April of 1950-nearly 10 percent
annually forgiving costs and 20 percent for wholesale prices-represents about the steepest price increase and the worst experience in
American price history. (See chart 2 and table I.) Nor has there been
any diminution of the rise in recent weeks, that is, up to March 1.
81651-51-3
30
JOINT ECGNOMIC REPORT
The largest increases from week to week continue to occur in the areas
,where the largest increases have taken place during the last yearlivestock, meats, textiles, and chemicals.
TABLE 1.-Advances in wholesale and consumers' prices.
: .
Indexes 1926=100
Indexes 1926=100o
Percentage increases
to Feb. 27, 1951
Wholesale prices
|
from-
l
Feb. 27,
1951
Feb. 28;
1910
.
!All commodities
Farm products
Grains
Livestock
Foods
--------------------,Other commodities
---Textile products
--------------------ChemicalsX
:
--
----------
Building materials
----Metal and metal products
Fuels and lighting materials
I
-----
182. 9
201. 6
189. 3
266. 3
188. 7
171.1
181. 9
148. 5
227. 9
188. 7
137. 8
113.0
11.
6
15.6
162. 9
200. 7
157. 2
140.0
138.0
111. 2
193. 6
168. 1
131.2
June 20
190
_
117. 4
166. 6
167. 9
224.0
162.1
148. 8
136. 9
114. 2
202. 8
171. 9
132. 9
Indexes 1935-39=100
Consumers' prices
,New index:
All items -Food--------------------------ApparelRent
X
:Old index:
All items
-181.6
Food-------------------------Apparel -199.7
Rent -----------------------
June 20,
1950
I
16
21
13
19
16
15,
33
30
12
10
4
Feb. 28,
1950 '
_~19
26
16
33
20
17
32
29
18
12
5
Percentage increase
to Jan. 15, 1951
from-
Jan. 15,
1951
Jan. 1S,
1950
June 15,
1910
181.5
221.9
198.5
133.2
168.2
196.0
185.0
129.4
170.2
203. 1
184.6
130.9
7
9
7
2
8
13
7
3
221.6
166.9
196.0
185.0
122.6
170.2
204.6
185.0
123.9
7
8
8
2
9
13
8
3
126.0
June 15, Jan. 1S,
1950
1910
Source: U. S. Department of Labor, Bureau of Labor Statistics.
The spurt in buying that was unleashed by the outbreak of war in
Korea was commented upon editorially on page 1 of Barron's Weekly
of January 8, 1951, as follows:
During the past 6 months, business and the public have been on a wild buying
and hoarding spree. Fed on easy bank credit until quite recently, inventories
now are bulging the sides of their warehouses. Out of its 1950 income, swollen
to the highest level in history, the United States saved less than it did during
some depression years. In contrast, Federal spending has been moderate.
This editorial goes on to quote a statement of Mr. Donald B. Woodward, second vice president, the Mutual Life Insurance Co. of New
York, as follows:
The American civilian economy already has much the highest standard of
living in the world, is spending more than seven times as much on its stomach
and its back as on protecting its freedom-and is demanding some more so insistently as to threaten the value of its money and perhaps the defense effort as well.
The continuation of inflation represents a multiple threat to productive efficiency. It invites business to wangle easy profits by
manipulation of markets rather than to earn moderate profits through
efficient production. Inventory accumulation becomes a foolproof
way to make money. Manpower and capital facilities are absorbed
in distributing output rather than increasing it. By encouraging the
hoarding of materials and of labor, inflation disorganizes the flow of
JOINT ECONOMIC REPORT
31
production and makes a shambles of allocation orders and procedures.
Price rises inevitably lead to wage increases which if unsatisfactory
are bound to bring strikes. Inflation frustrates the thrifty, especially
those who patriotically buy Government bonds or life insurance,
rewards individuals who scoff at the public interest, and brings bitterness and disillusionment to those seeking to cooperate with the
defense effort. By inflation they suffer partial repudiation in the
buying power of their bonds, something which, insofar as it is controllable by Government, comes close to being governmental breach
of faith. Inflation gives its biggest rewards to the parasites and
speculators whose spending and manipulative activities provide a
sardonic contrast to the sacrifices of the savers and of the fixed income
groups and their sons on the battlefield.
If production is to be maintained, inflation must be stopped. The
only way to cure inflation is to prevent it.
The methods are roughly
six in number: (1) increase production, which. however, falls far short
of being an effective remedy if increased output is obtained through
higher profits; higher farm prices, overtime work at penalty rates of
pay, or other ways by which incomes in the form of wages, dividends,
and profits are increased faster than production; (2) rigid limitation of
governmental expenditures to uses which increase the economic and
defense productivity of available human skills and physical resources;
(3) preventing past savings from being spent and rigidly limiting newly
created credit; (4) increased thrift; (5) preventing incomes from rising
through price and wage controls; and (6) increased taxation.
III. GOVERNMENTAL BUDGET
When considering the Government budget, one should keep in mind,
so far as the effect on the economy is concerned, that the important
factor to watch is the inflow and outflow of cash. The budget of the
President, as submitted in January, is difficult to analyze because of
the large number of items that are scheduled for later transmission.
But preliminary figures indicate that total defense expenditures are
likely, in the fiscal year 1952, to be about three times what they were
in 1950. The detail is shown in table II.
Frederick J. Lawton, Director of the Bureau of the Budget, before
the House Wavs and Means Committee, February 8, 1951, pointed
out that in the fiscal year 1952, $48.9 billion, or 68 percent, is schvd-
uled to be spent for national defense, international security and
foreign affairs, while another $11 billion is budgeted to meet interest
on the debt and veterans' services and benefits. Taken together,
present and past wars account for 83 percent of the budget. Even
within the u11.9 billion remaining for civilian functions of the Government, $1.3 billion, or more than half in the natural resources
category, goes for atomic energy development; $1.4 billion in the
finance, commerce, and industry category includes outlays for defense
production activities, economic stabilization and controls; $330 million in the housing and community development is earmarked for
civilian defense; $100 million for providing housing, schools, water
systems, and other community facilities for industrial workers and
military personnel in expanded defense areas; $164 million in the
general Government category is designed to provide dispersal for key
Government agencies; and $354 million of the funds for transporta-
32
JOINT ECONOMIC REPORT
tion and communication is budgeted for maritime shipping. Other
items likewise expanded by this emergency, but not measured here
as to cost, are the new port security program of the Coast Guard,
the expanded security activities of the FBI, and increased facilities
for electric power.
TABLE
II.-Federalconsolidated cash budget, fiscal years 1950-52
[Mf illions of dollars]
Description
Payments to the public:
Total -----------------------------------
-
National defense, total-17,
Military services International security -4,708
Atomic energy Promotion of defense production -0
Loans ---------------------------------------Additions to commodity inventories-net
Defense production equipment -0
Civil defense -0
Dispersal of Government -0
Loans: RFO -0
Other -
Actual, 1950
Estimated,
43,160
49,118
74,050
665
27,113
51,844
12,407
0
21,238
4, 776
818
260
104
104
52
21
6
5
10
41,491
7,482
1,277
1,100
440
440
220
494
164
65
265
52
304
586
10,619
10,479
4,326
9,260
4,145
6,474
4,573
5 906
11,334
11,422
550
-
0
0
Economic stabilization and allocations-26
Past wars and emergencies -13,
InterestVeterans Civil functions, total -11,883
Social security, welfare and health -2,969
Housing and community development -212
Education and general researchAgriculture and agricultural resources -2,848
Natural resources ---------------Transportation and communicationFinance, commerce, and industry -85
Labor -2,268
General Government-929
Others --------------------------------
115
1,014
1,754
-311
1951
4,194
657
144
955
1,310
1,975
-58
1,174
1,120
-137
Estimated,
1952
4,834
-374
484
1,471
1,253
1,687
82
927
1,063
-5
Source: Bureau of the Budget data reclassified by the staff of the Joint Committee on the Economic
Report.
Now more than ever the Government must get the most value
possible for every dollar it spends. There is no economy too small,
no scrutiny too rigorous. Except for vigorous and direct effort on
the firing line or on the production line, no effort should be more
tireless and unremitting than that devoted to economy. Every
dollar of useless or unwise expenditure represents a subtraction from
the total defense effort, whether spent by consumers, by businessmen,
or by Government. Effort devoted to economy is doubly vital on
the part of procurement officials and other spending bodies in the
Government.
The fact should be remembered, however, that the period of high
defense expenditures ahead is likely to last 10 to 20 years. That type
of economy would not only be false, but almost treasonable, which
would so injure capacity to produce as to make the total effort insufficient. Expenditures on natural resources, for example, that might
be postponed for 2 or 3 years cannot be postponed over a decade.
Expenditures for public works should be limited rigorously, but they
JOINT ECONOMIC REPORT
33
cannot be postponed for periods of 10 to 20 years without a complete
breakdown of highways, schools, streets, and public facilities generally.
Similarly in a democracy the fundamental truth needs not be
labored that the most vital of all resources is the productive possibilities of its citizens. There is no precious resource that must be
more carefully husbanded and developed than the capacities, the
health, the education, and the incentives of the population. A healthy
nation is vital not only for maximum military strength but also for
maximum economic productivity. No greater service can be rendered
the enemy than to pinch nickels and dimes on programs that increase
the productive capacity of human or natural resources if thereby
effective military and economic effort is reduced by billions of dollars.
Cutting civilian expenditures is, therefore, in no sense an easy job.
It requires painstaking study and time. Most programs have been
in operation for many years. In such cases there exist at least four
stages at which the Government will have to act: Authorization, appropriation, exercise by the executive departments of obligational authority, and, finally, expenditure.
These stages are clearly shown in chart 3, depicting the present
status of the $500,000,000 Federal public roads program. Cutting
this program back cannot be tackled with effectiveness at the last, or
expenditure, stage; it is then too late. It must be tackled at the stage
of authorization, or appropriation.
In general, it should be remembered that authorizations and
appropriations already made in the Eightieth and Eighty-first Congresses have so tied the hands of the executive departments that less
than one-third of the governmental budget for 1952 is now flexible.
In order to reduce expenditures in 1953 this Congress should act now
to repeal or modify existing laws or to suspend existing authority.
This means not one bill but an examination of scores of acts now in
force and the revision of scores of programs now under way.
Efforts at budget balancing undertaken in the interest of restraining
inflationary pressures must consequently choose between two alternatives. Either (1) the Government must levy and collect through
taxes an amount sufficient to cover the costs directly of all of the
services which it provides for the Nation, or (2) the Government must
discontinue to render some of the services. While there is no doubt
that, as the Hoover Commission Report points out, possibly more than
$3 billion can be saved by increased operating efficiency and by
economy in giving the same product and services, any real or substantial cuts of five to nine billions involve necessarily a cut in services
I
now rendered or desired.
Here opinions concerning the usefulness, desirability, and indispensability of selected programs are certain to differ among individuals. Anyone can make up his own list of programs on which the
Government might economize. Conversely, anyone can make up a
list of services of the proper or, in his opinion, necessary services of
Government. But each individual list is likely to be as personal as
is a budget covering expenditures of personal funds. -Some would
eliminate programs such as public roads just as they eliminate an
automobile from their personal budgets. Some would e iminate public
assistance expenditures just as they eliminate consideration and care
of aged or needy relatives from their personal budget.
.34
JOINT ECONOMIC REPORT
CHART 3
FEDERAL-AID
UW
.
.
.
.
.
I
I
I I
..
.
Z!OO
I -I - I -20O
-
250
-_
-
HIGHWAY FUNDS
SUMMARY.PRIMARY, SECONDARY AND URBAN
MILLION OOLLARS
-
-
-
-
240C
-
-
-
-
-
-
--
-
-AVOI
1
2200
-_
-
--
-
600
-
_
tawo
-
_
-
--
-
-
_E R-#-
I
I
I
I
I-
I
I
I
I
1
lS-
5D000
~ ~~~~~
ARCE
--
OT
o
0400
-
!T
_2200
-
3,_
-0-
_
_
-
-orsa.E1
U
- - - - - -
2/
_
_
g
z
_
…300
00o
1
50
o
1ot
^1
\{|W|I~I.tIOT
l.~'S
_,
.,
_
n,,,,__
5_,.
_6000
0600
O
A*ILNL2T Th30-0
-
tTE
_
MA
If
-
-O
-
MILLION DOLLARS
.
.I..
L|-l,|l-llulit~~~~A
.111
,
l
,lll
UI
,.
. ,.
L
L,
_lJ P~LL|OotJ
-
l9o
30°oo
119651
-
1946
1
1947
1
1946
_
1
1949
Source: U. S. Department of Commerce, Bureau of Public Roads.
I
950
_OO
-
19251
35.
JOINT ECONOMIC REPORT
- In appendix 3 are listed a number of selected changes in legislation.
which it is believed would result in economies. Some of these economies would result from increased efficiency. Most of them would
mean that Government would be doing less for the particular groups
than it has previously done or would otherwise do. A summary of
the economies thus made possible is given in table III.
TABLE III.-Summary of estimated savings in selected cases where changes in legislation would result in economies
[In milions]
riscal
For details
appenseedix
3,
page87
89
89
90
91
91
92
92
93
95
95
Item
Ie
1952
-----------------------Military services----$-----------------Finance, commerce, Industry -24.0
Labor -------------------------------Transportation and communication Natural resources -----------------------------------------------Agiculture ---------- ------------- --------------------E ucation
Social security, welfare and health -159.0
--------------------Veterans ---------------------------------------- -------------------Interest
General Government -57.0
$360.5
Total ---------------------------------------
1,681.0
5
396.0
year
1953
$385.0
24.0
.5
600.0
186.0
2. 0
159.0
517.0
8-----------------516.0
105.0
105.0
57.0
61.0
2.0
2,035.5
The formulation of a composite budget reflecting as nearly as
possible a consensus of what people want their Government to do is,
of course, the unavoidable task of Congress. It is the Congress that
adds programs or increases total Government expenditures in response
to public demand as a result of the democratic process. Every new
Congress has enacted new basic legislation which, in due course, calls
for new authorizations, new appropriations, new contractual commitments, and new expenditures.
Thus, it is not possible to regulate or adjust most expenditures at
will within any one fiscal year. Most Government programs are
large and complex. Many months frequently elapse between congressional authorizations to spend and actual expenditures. Federal
expenditures cannot be turned on and off like a water tap. The 1952
budget, for example, is in large part the result of a tremendous number
of decisions and commitments made in prior years. Almost half of
all 1952 expenditures, or nearly $31 billion, will occur in 1952 as a
result of appropriations, contract authority, and other authorizations
already enacted. When other fixed items of expenditure, such as
interest on the public debt, are taken into account, it can be seen that
the area of flexibility for controlling expenditures in a single year is
comparatively limited.
Moreover, although the expenditure figures for 1952 are important,
the amount of new obligational authority requested is of equal, if
not greater, importance. In a rapidly expanding defense program
it is new obligational authority, rather than expenditures, which most
directly affects the economy, which sets in motion an expanded Gov-.
ernment program and structure, and which largely dictates the result-,
ing level of expenditure in future years. In the fiscal year 1950,
for example, the Congress granted new obligational authority amounting to $50.2' billion. In 1951 obligational authority; either requested
or already enacted, amounts to $87.5 billion. In 1952, the estimated
36
JOINT ECONOMIC REPORT
amount is $94.4 billion. Thus, over a 3-year span, new obligational
authority is estimated at $232 billion. Expenditures, however, will
lag far behind that amount, since they are estimated at $159 billion
for the same 3-year span. The Federal Government, therefore, will
enter fiscal year 1953 with unexpended balances from these authorizations of over $70 billion. These funds will be spent in 1953 and beyond.
IV. THE CURBING OF BANK CREDIT
Inflation is caused not only by the spending of current incomes on
the part of consumers, business, and the Government, but also by
large-scale borrowing from the banks. Indeed there are many who
view the inflation of bank credit as more important than any other
single danger at this time. The year 1950 saw a spectacular increase
in commercial bank credit. Notice in chart 4 that the rise began in
April 1950 and has shown no decrease to date.
Moreover, this jump of over $9.6 billion in loans (see Table IV) was
accompanied by a rapid increase in the velocity of circulation of money.
A careful scrutiny of chart 5 indicates that this velocity of circulation
rose to levels right after the Korean War which exceeded by far any
that had existed during the preceding 15-year period. Not only was
there an abrupt rise in commercial bank credit largely to finance real
estate and consumer borrowing, but there occurred likewise an
uninterrupted continuation of the increase in customers' debit balances
and money borrowed from the banks for the purpose of financing
operations in the stock market. (See chart 6.)
TABLE IV.-Money and credit data
A. BANKS OTHER THAN FEDERAL RESERVE BANKS
[In billions of dollars]
End ofMay 1950
Demand deposits adjusted -------Currency outside banks-24.
85.0
7
Total circulating medium -----------Time deposits --
109.7
59.51
Total privately held money supply -169.2
Loans (all banks) -51.2
December
1950
92.1
25. 2
117.3
9------------176.2
60.8
Source: Annual Economic Review, table A-28 p. 198, for all items except loans. May loans, Federal
Reserve Bulletin, December 1950, p. 1641; Decemrer loans, increase to Nov. 29, from Federal Reserve Bulletin, January 1951, p. 55; increase from Nov. 29 to Dec. 31 estimated on basis of increase for commercial banks shown in Annual Economic Review, p. 197.
B. OPERATIONS OF FEDERAL RESERVE SYSTEM
[In millions of dollars]
May 31,
1950
U. S. Government securities ----------------------------Total credit outstanding --------------------------Gold stock -24,231
Member bank-reserve balances, total
Excess reserves------------------------------------------
17, 389
17, 935
-15,814
Source: Federal Reserve Bulletin, January 1951, pp. 43-44.
NOTE.-Taken from Congressional Record of Feb. 7,1951, p. A651.
526
Dec. 31,
1950
20, 778
22,216
22,706
17,681
1,174
CHAlT 4
MEMBER BANKS IN NEW YORK AND OTHER LEADING CITIES
LOANS
nIl LIONS
I
0
0
R
0
Ho
0
03
wp
0
1949
1948
LwTesTF.u.EEsPLOTTEl. JANUARYIO
-a
v0**
*egSw
a
eve
IT
a
1948
1950
1949
tmL S?FloRS PLOTOO.J4*U5Ry
a
*
as
M -K.
.3
&NO
CO
CHART 5
Velocity of circulation of bank 'depbsits
co
00
FATMEMBER BANKS IN LEADING
CITIES
FEDERALRESERVEDATA. ADJUSTEDFOR SEASONAL
VARIATION
'i
0
Q
Lmj
C)
.10
w
H
1938
1940
1942
1944
UL.SRT
ADOR-PLOTTED.
DECEMBER
1946
1948
1950
1952
CHART 6
STOCK MARKET CREDIT
MARGINACCOUNTS
MEMBERFIRMSOFN Y S E. CARRYING
END OF MONTH FIGURES
I
0
0
zo
0
1944
1942
*
f .
es n.
_ ,,r
an e
w t
CNI
n Ad
It
1946
DECEMBER
PLOTTED.
FIGUGOS
LATEST
1948
1950
1952
40
JOINT ECONOMIC REPORT-
These developments have aroused a great deal of discussion. On
the one hand, there are those who allege that the primary reason for
the increase in borrowing was the availability of bank credit. The
Federal Reserve System, they state, could not tighten bank reserves
though it did take several steps to raise reserve requirements, to
impose selective controls on installment buying (regulation W) and
on housing credit (regulation X), on stock market credit, and to bring
other direct controls to bear by moral suasion on the banking fratermity.
There was, however, one thing the Federal Reserve Board did, or
had to do, which, according to some, counterbalanced the constructive steps to control credit mentioned above. It bought United
States Government securities and thereby made additional reserves
available to the commercial banks which in turn can be expanded by
the banks in the form of demand deposits by five or six times the
additional reserve. The essential facts are shown in table IV. Note
that in the 7-month period from the end of May to the end of December, the Federal Reserve System did buy nearly 33' billion dollars
of United States Government securities, and that total credit outstanding increased $4.3 billion.
The other side of the picture is shown in chart 7. (See also sec. A
of table IV.) Note that commercial banks steadily decreased their
holdings of Government securities in 1950, while their loans rose by
nearly 20 percent. These facts have led one member of the Federal
Reserve Board to state that "The only way to stop access to Federal
Reserve funds is by withdrawing Federal Reserve support from the
Government securities market and penalizing borrowing by the member banks from the Federal Reserve banks." 1
If the Federal Reserve System, for reasons of national policy, continues to peg Government bond prices, then substitute powers, Mr.
Eccles urges, should be granted, such as the authority to prescribe
reserve requirements for all commercial banks and other creditmerchandising institutions not now under the jurisdiction of the
Federal Reserve System. In addition, banks might be required to
hold an adequate percentage of their deposits in special reserves of
Government securities, or at their option a like amount in cash. It
might be essential for the Federal Reserve to have authority to require
savings institutions, such as life insurance companies, savings banks,
and savings and loan associations, to hold a certain proportion of
their assets in Government securities in order to prevent them from
selling in a market supported at pegged prices by the Federal Reserve.
The dilemma that faces not only the United States Treasury
Department, but the country, if Federal Reserve support is completely
withdrawn from the Government bond market, appears clearly in
chart 8. Note that the Federal debt outstanding which until 1940
amounted to less than half of national income, by 1944 began to
exceed it and since that time has steadily been considerably larger.
Moreover, in the twenties and thirties it was smaller than the total of
commercial bank loans, but at the present time it is more than five
times as large. In order to affect the interest rate on the small
sector or $60.8 billion of borrowing done by customers of commercial
banks, must the entire mass of $255 billion of Government borrowing
I Hearings, Joint Committee on the Economic Report, on the January 1951 Economic Report of the
President, p. 158.
6nAW 7
PRINCIPAL ASSETS OF COMMERCIAL BANKS
ALL COMMERCIAL BANKS IN THE UNITED STATES
BILLIONS
OFDOLLARS
_____
...vuUI
WLUNLU14AT
OF MONTH 1947 -
SIL LIONS
LLARS
I ,O
120
120
ND INVESTMENT
S
100
100
0
80
OTHR S
U
80
.S. GOV'T
m
60 0
60
60
-60 0C)
40
40
20
,,
~~.... ...
,,
.A
0
1942
20
,... ... .
CAS
~~~~~OTHER
S CURITIES
_
1944
~
l
l
1,,,,,
|
0
i946
LATEST
FIGURES
PLOTTED,
DSEMMER
.0 . - C a ... r,twnf l* a Sr.,.
ASSETS---
1948
1950
1952
0
i.3
z
CHiAnT 8
NATIONAL INCOME, FEDERAL RECEIPTSj AND FEDERAL DEBT
BILLIONS OF DOLLARS
350
300
I-.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-
250
,
FEDERAL DEST OUTMrANDING
,
(NJUE 30, E/
EaCHPR)
200'
0
150
I
i
RAT/OA'ALI/NCOME
100
.
.
/I*N
*
.
FEDERAL RECEIPTS,
,
(\fSCAL YEAR)
50
NEr
J
I
OL
. .
1910
~~
I
.
,
1915
*0*70 PRIORTO 1929 -RE IN
5 '-
- -I
~~~
1920
1925
.
1930
I
II
1935
1940
I
I
I
1945
I
I
I
I I I
j
1950
IE PROCESS
OP REVISoN.-
SOURCES
OFP0
SUTIAOSOL
INCOME,U S. OEPFRTN
NT OFCOMMERCE
OFFICEOF 3USINESS
EOONOMICSU
O-TEROATU,U.S TREASURY
DEFaRTMENr
0NDB.UERO
OF THESUCGET.
U $ OfEPARMENT
Of COMMERCE,
OFFICEOf USINESS ECOOMICS
51-2
JOINT ECONOM1C REPORT
43
be made to conform? Should the tail wag the dog or does the new
ratio make revision necessary of old techniques? Why not, for
example, tackle commercial loans directly, issuing certificates of
necessity for defense loans, and levying as heavy a defense tax as may
be needed to curb the volume of nondefense loans. Insofar as an increase in interest rates or in costs of borrowing is effective, an excise
tax on nondefense uses of vital credit resources would seem analogous
to excise taxes on automobiles and consumer durables levied to conserve steel. Why raise the cost of all borrowing, including the
interest on the governmental defense and war debt? Surely so large a
volume of Federal debt must be managed with extraordinary care.
The country dan ill afford lightly to experiment with devices of uncertain impact, if thereby a five times larger debt market is upset or
demoralized. If people lose confidence in Government bonds, wildcat
inflation of a kind experienced in China might readily be unleashed.
The relationship between prices, gross national product, and the
total amount of money, including war bonds, is clearly evident from
chart 9 which well merits very careful study. The parallel fluctuations of total money supply (including war bonds) and gross national
product are self-evident. The rapid rise in turn-over of demand
depqsits in 1950 is likewise striking. During the summer months it
actually made a spurt to a figure comparable to that of 1930, more
than double the level in 1945.
In addition to the problem of availability of credit touched on
above, one of the points frequently debated is whether a one-half of
1 percent, or even a 1 percent rise, in the interest rate on Government
bonds would substantially diminish the sale of these bonds by the commercial banks. On that point the paucity of evidence contrasts
vividly with the abundance of conjecture. Those who feel that the
2% percent bond rate should be maintained emphasize that the
Government debt totals over a quarter of a trillion dollars;'
If the
interest rate on all Government debt were increased by a full percentage point, total Federal Government outlays would thereby alone be
increased by $2k% billion. Furthermore, there is no evidence that a
rise
of as little as 1 percent would stop the sale of Government bonds
to the Federal Reserve by the commercial banks, especially in a long
period of maximum production such as now lies ahead.
A-brief look at history may throw a modicum of light. The only
period of equally high prices in which a similar problem, though of a
much'smaller nature, -occur-ed,was
'that-aftir
World7Nar I. Then,
too, the Treasury Department, by appeals to patriotism, managed
to sell its securities at par, but in spite of progressively higher coupon
rates, most of the issues sold in the open market below par before the
war was over. WitAyfurther stiffening of interest rates in 1919-20
4Y4percent Liberty bonds, callable 1927,
in
sold as lowx as $81.10 in
May 1920 at which price.they yielded more-than.74%perdent to call
date. The index for'high-graje corporates, at '$83 in January 1919,
fell to $73 by mid-1920.
'i
During the period from 1918 to 1922 the Federal Reserve banks
generally held less than $250 million, or about 1 percent of the entire
Government debt. There was no support for the Government bond
market. Yet, despite only $25 billion of Government debt and a much
less inflationary money supply, wholesale prices shot up to levels
almost as high as those that now exist.
CHART
9
MONEY SUPPLY AND WAR BONDS
UNITED STATES, 1929-1950
ANNUAL
TURNOVER
RATE
BILLIONS
OF DOLLARS
1
~~~~60
OCT.
230.2
00-
10 0.0
~~~(PRE.)
~~
~~MMNEY
SUPPLY
PLUS WAR BONDS
40
200
___GR__OSS_____
GROSS
/OC.
NATIONAL PRODUCT
0
15,
30
_
_
<
//
+/
100
5 *
50
K
OF O~~~~EMAND
DEF
SCAL
IgT
20
20
_.1
MONEY SUPPLY
-- LEFr SCALE-
I
- --
!,fi
I
I
I
I-
--
AESrIMA rED
I
I
U
4I
!94!
l
,
!945
C4
'
I
..
1949
I
Io
t't9
COMPOSITION OF THE
MONEY SUPPLY
OCTOBER, 1950°
$230.2 - 1000/0
(INCLUDING SAR BONDS)
00
1-'
OR
1-
BILLIONS OF DOLLARS
(END OF MONVTH)
Iz
DECEMBER,
DECEMBER, 19129
$63.3
$54.6 = 100%
1939
L00%
X
a
C-:
0
$3.6
6.5%
0
pluswar savings
Privately held money supply P
bonds outstanding totals more tha n $230 billion,
over four times the 1929 level. Vallue of gross national product has not quite tripl ed. Turnover of
demand deposits is still far belo w 1929, but has
been rising since the 1945 low. Privately held
money supply includes demand and time deposits,
and currency outside banks. It excludes interbank
and United States government deposits.
SOURCES: Federal Reserve, Treasury Department
NEEKIY CHARTSERVICE
CHARTSERVICE
WENEWY
Co * I.R EG
1 , .-
5
1.
THE COIIFEREHCE
247
PARK
AVENUE
*
NEW
a ,
BOARD
YORK
17
N
Y
ROAD MAPS OF INDUSTRY
JANUARY 25, 1951
NQ. 787
46
JOINT ECONOMIC REPORT
Discount rates on eligible paper at the Ne.v York bank (other
followed somewhat the same pattern) were 4 percent from Aprilbanks
1918
until November 1919; 4Y4 percent in November and December;
6 percent January to June 1920, when it was raised to 7 percent until
April 1921. It then gradually dropped back to 4 percent by June 1922.
Rates on stock exchange call loans went from 4.67 percent
uary 1919 to 14.9 in the week of November 15, and 17.25 percentininJanthe
first week of January 1920. Prevailing rates of prime 4 to 6 month
commercial paper iose much more sloivly, from 5.38 at the beginning
of 1919 to 6 percent at the beginning of 1920, and to about 854 percent
during the entire latter half of 1920.
Despite these increases in interest rates, holders were not
to hold on to their Government bonds, at least to do so tostimulated
extent
sufficient to keep them reasonably close to par. Instead, an
as
prices
went down, liquidation drove prices lower. Millions of small holders
became demoralized, and grew so bitter at having been compelled to
liquidate their Government's promises to pay at substantial discounts
as to erect a psychological barrier of such magnitude on the part of the
general public that the President and successive Secretaries of the
Treasury since 1941 have felt constrained to guarantee redemption at
par to give the humble citizen, once burned and now twice shy, the
confidence requisite to elicit his maximum subscription.
Finally, a considerable segment of business feels that, as
Weekly phrased it in its editorial of February 12, 1951, p. 2: Barron's
Viewed realistically, the dispute over interest
promises soon to become
academic. * * * Regardless of the differentrates
Washington viewpoints, the
current heavy accumulation of surplus funds by insurance
companies and savings
banks may soon, because of the shrinking mortgage market,
into
Government bonds again. Further evidence of the strength ofbethepouring
high-grade
bond market is the proposed offering next month of $60.000,000 Borden
2%'s to include new money as well as a $46,000,000 refunding operation. As Co.
for
the.Government bond market, Reserve System support purchases of long-term
issues of only $4,000,000 last week, were the smallest
the Reserve System,
after a 21-month lapse, resumed buying operations early since
last September. * * *
V.
REDUCING CONSUMPTION
The economic burden of the defense effort cannot be postponed.
Whatever guns and planes and tanks are produced will have
to come
out of current output. Only that which remains will be available
for
consumption goods. Any substantial increase, therefore, in the output of munitions of war is bound to cut by that much the goods available for consumption. Were it not for increases in output obtained
through greater productivity and through attraction of more people
into the labor force, consumption would have to be cut exactly
by the
amount that munitions production is increased.
In actual fact, of course, a part of the increased munitions
will come from increased total production and part will be output
possible by business and consumer sacrifice. The estimate inmade
Economic Report of the President is that consumption will be the
cut
back to the 1949 level, one still much higher than that enjoyed in any
previous year in American history. (See chart 10. While selfexplanatory, it merits careful study.)
by
-1-£
;n.
-!:
CHART 10
PERSONAL INCOME, CONSUMPTION. AND SAVING
ESTIMATES,ADJUSTEDFOR SEASONALVARIATION
OF COMMERCE
DEPARTMENT
QUARTERLY
C.4
0
0
0)
I'd
4STDUARTER
PLOTTED
LATESTFI-URES
48.
JOINT ECONOMIC REPORT
The really difficult problem is not that of fixing
general per-centage by which consumption must be cut, but the
rather
ofapportioning such a general cut among the income groups that
in thepopulation. If consumption is cut of those who even now do
not
consume enough to permit them to produce efficiently, any further
cut will also cut the defense effort. Millions of families come underthis heading.
Economic literature abounds in controversies concerning the"efficiency level" of consumption or the level of "minimum
need.`
Thus, for example, the minimum health and decency budget currentlypublished by the Bureau of Labor Statistics is one so high that
at current high levels of national income, nearly three-fourths ofevens
thepopulation fail to attain it.
Yet in quantitative terms such a budget can only, with great.
difficulty, be regarded as luxurious or excessive. It provides,
example, that a man can buy a topcoat only once in 10 years, that forwife can have only one new cotton street dress a year; that her his.
dress has to last 5 years. The family can buy a low-priced car wool
once every 15 or 16 years. The budget permits only one bookonly
peryear; the radio has to last 9 years. There is money
enough
for
onlyone letter a week. Other durable goods such as cook stoves, refrigerators, washing machines, vacuum cleaners, sewing machines, have
to.
last 17 years or longer. In quantitative terms, such a budget level
seems somewhat far removed from constituting luxury consumption,
yet at 1950 prices the income estimated by the Bureau
of LaborStatistics as necessary to finance this standard of living is $1,630
a single person, and $2,330 for a married couple without children. for
In order to be highly conservative, the figures in
V have been
computed on a basis more than one-third lower thantable
BLS figures.
This table assumes that $1,000 a year is about thetheminimum
efficiency levels of living on the part of individuals. It assumes forthat.
$125 a month represents a similar minimum efficiency level for
a.
married couple without children.
49
JOINT ECONOMIC -REPORT
'TABLE
V.-Income received and estimated minimum income required for family
maintenance by income classes, 1948 1
[Billions of dollars]
Deficiency
Adjusted gross income classes
Adutd Federal
gros income iPro al
ressicived
income tax
cevdI liability
Under $1,000 -$------------:$1,000 to $1,499 ---*$1,500 to $1 999----- --------*.$2,000 to $2,499 -14.1
$2,500 to $2,999-16.9
-$3,000 to $3,499 -17.3
43,500 to $3,999$4,000 to $4,499 -------.$4,500 to $4,999 -9.7
.:$5,000 to $5,999 -12.6
$6,000 to $9,999 -:$10,000 and over -26.8
Total -
S4.3
6.5
10.5
15.2
13.0
17. 2
164.2
(- )or excess
inoeatr
Estimated
Federal
amot
inom tx
needed for
inoetxmaintenance
3
of i
e
over estimated "minimum need"
$0.1
.2
.4
.7
.9
1.0
1.0
.9
.8
1.1
1.8
6.6
$4.2
6.3
10.1
13.4
16.0
16.3
14.2
12.1
8.9
11.5
15.4
20.2
$11.8
9.5
11.5
12.7
13.1
11.4
8.9
6.8
4.6
5.3
5.6
3.0
-$7.6
-3.2
-1.4
.7
2.9
4.9
5.3
5.3
4.3
6.2
9.8
17.2
15.4
148.8
104.3
44.5
I Income available for maintenance is further reduced by excise and State income taxes. If data on these
were available the deficiency in lower income groups would be increased and the excess in upper income
groups decreased.
2 Statistics of Income 1948, pt. I (preliminary).
a Estimated on the basis of number of families by size groups within each income class multiplied by an
estimated minimum income figure needed to sustain a family of a specified size-i. e., $1,000 for each individual living alone; $1,500 for 2-person families; $2,000 for 3, $2,500 for 4, $3,000 for 5, $3,500 for 6, and.$4,000
for families of 7 or more persons.
4 Total personal income in 1948 was estimated at $209.5 billion. The difference, roughly $45 billion,
represents such items included in national income but not reported on income tax blanks as imputed net
.,rental value of owner-occupied nonfarm houses, nonmoney income of farm operators, including value of
home-grown food, military pay below $1,500, including allowances and allotments, accrued interest on
E bonds, tax-exempt interest, earnings, and incomes less than exemption allowance, including earnings of
minors, nonreported dividends, etc. This table has been computed by staff of the Joint Committee on the
Economic Report from data in Statistics of Income 1948, pt. I (preliminary). For detailed breakdowns
applied not to 1948 but earlier years see article by Selima F. Goldsmith, entitled "Appraisal of Basic Data
Available for Constructing Income Size Distributions" in the forthcoming vol. XIII, Studies in Income
-and Wealth, published by the National Bureau of Economic Research. A portion of one table in that
-article is illustrative:
Persosal Incomc, 1946
[Billions of dollars]
Source of income
.Civilian wages and salaries -101,549
.Nonfarm entrepreneurial income
Farm entrepreneurial incomeMilitaryincome -Interest -------------------Dividends
-4,933
Fiduciary income (if in dividends)
Rent ------------------------------:Social security, etc -:------------Other income-868Total -164,909
mAssi
Deat-db
Depatof
e
f
21, 813
10,840
11,5569,317
5,460
3, 506-
Adjusted
so as to be
Actual
comparable
amount
wit treoertedporte
Ratio of
rpre
102, 546
20,816
11,929
97,409
23146
0.95
.71
2,989
1,120
4,013
1,105
3, 730
1,108
1, 799
.37
.76
.99
.45
148,346
128, 287
.86
50
JOINT ECONOMIC REPORT
Even on this basis, as the table clearly indicates, the tens of millions
of families and single individuals that receive less than $2,000 a year
come short by many billions of dollars in obtaining the income necessary for efficient consumption and productivity. Yet, as a defense
measure, incomes not higher than efficiency levels ought to be kept
inviolate. They ought not to be further lowered, even by taxes.
Table V likewise indicates where the money in excess of such a
minimum may be found. Of the total of roughly $45 billion in 1948
that may have been available in excess of minimum need, $17.2
billion, or 38 percent was in the hands of persons with incomes of
$10,000 or over; another 22 percent in the hands of persons receiving
over $6,000 but less than $10,000; another 23 percent in the hands of
persons receiving over $4,500 but less than $6,000.
In short, the extra funds above those needed for minimum levels
of productive efficiency would seem to exist in the income brackets
from $3,000 and above. Clearly then it is the consumption in the
middle and high-income brackets that needs to be reduced. To some
it may be surprising that most of the consumption in dollar volume
is in fact not accounted for by the masses, that is, those getting less
than the average wage per week., As is well known, the average
wage per week received in manufacturing is about $64. If wage
workers enjoy as much as 50 weeks a year of employment on the
average they would receive $3,200. That in 1949 was the income
received by the highest persons in the lower three-fifths of the income
scale; that is, 60 percent of the spending units received less than
$3,200; only 40 percent received over that amount.
Yet this 40 percent did 64 percent of the total spending on durable
goods. (See table VI.) They did 80 percent of all positive saving;
they enjoyed 67 percent of all disposable income; they had 66 percent
of all liquid assets held by individuals. Such findings are further
corroborated by the estimates in table VII, which indicate that
the groups that enjoy incomes in excess of $4,000 are likewise the
groups in which, on the average, four out of five people have an automobile, and two out of three own their own homes.
The latter fact is highly important because those who own their
homes are at a distinct income-tax advantage as compared with those
who do not. Home owners not only do not report the constructive
or putative income which they receive from their investment in their
home, but they can actually deduct taxes and interest on the mortgage if there be one. Renters (of whom there are proportionately
more than twice as many in the lower income brackets) simply pay
out rent each month from an income total on which they pay taxes
in full without such deductions.
Further light upon the consumption of this two-fifths of spending
units in the middle and upper income brackets is provided by the
figures -shown in tables IX and X. The groups getting $3,000 or
better account for 73 percent of all liquor consumed. An excise
tax on liquor, therefore, tends to hit consumption where it occurs.
They similarly account for about two-thirds of the total tobacco
consumed. As has already been indicated, they account for about
three-fourths of all sales of durable goods. Thus excise taxes on
durable goods likewise tax consumption where it occurs.
51
JOINT ECONOMIC REPORT
VI.-Proportion of total money income, Federal tax liability, savings and
expenditures accounted for eachfifth of the Nation's spending units when ranked by
TABLE
size of income, 1949
[Percentages of total]
Zero
Total
Total
EstiSavr
savers Propor- Total
suoe r
$450and
7
tion
of
-e
6r- 43
Prop5
Speninglnitsbylmney mated
Total
1t
with6
t
a 1of
tio of
alposi' uid
Spend fingcumit
by
comoey Federal dispos- incomes with ex-toetive
sav duLrabledtrs
eu ditres
sir
of i p e Ileaoofurniture,
rebe incoeradinom
able
spening
a
televisof, ecspdiexpenrangesgodshn
m thae
et
taxesataxliaometre ditures
indian
ctures edsavig2
e
held
taxes
t VIPbility
p
incomed
selected
excess of
for
durable
income
goods
Under $1,280 ------$1,280 to $2,290
o
$2290to$3,200 ----$34200 to $4,00 -9
$4,500 andUp3
All units
4
f
11
17
23
4o
100
1
4
5
9
17
68
12
17
24
43
100
100
37
63
50
64
70
78
10
36
30
22
6
12
18
62
12
18
23
41
13
1
24
38
60
40
100
100
100
2
6
7
8
.
12
14
18
48
100
I Each group represents 20 percent of all spending units.
2 Includes automobiles, furniture, radios, televisions, refrigerators, ranges, washing machines, etc.
Median income of this group equals $8,800.
Source: 1950 Survey of Consumer Finances, Board of Governors of the Federal Reserve System.
TABLE
VII.-Pro portion of spending units, money income, savings, selected assets
and liabilities of the Nation's spending units ranked by size of income
Money income
before taxes
Ulnder $1,000 ---$1,000 to 51,999 --$2,000 to $2,0999-$3,'00Oto $3,999 --$4,0 to $4,999 ---$50,990
to $7,499 --$7,000 and over
Total -----
Savers,
Percent- Total with inage of all money comes in
spending income excess of
units
before expenditaxes
tures
14
19
21
19
11
11
8-100
Zero
savers Increase
and
in conthose sumer inwith ex- debtedpendiniess
turds in during
excess of 1949
income
2
9
16
19
18.
19
20
31,
49
00
.70
71
76
81
69
81
41
30
29
24
15
100
00
40
-
No
debt
early
1010
20
27
34
33
38
33
19
Propor- Home
Autotion of owning mobile
liquid in early owning
assets
1010
in early
held nonfarm
1501
66
46
42
34
38
92
6
9
15
18
11
18
26
48
100
58
29
43
315
47
10
05
60
75
19
33
00
62
73
8t
89
01
53
Sour~ce: 1910 Survey of Consumer Finances. Board of Governors of the Federal Reserve System.
r
.
I I
I ,1 -.
,
-
.I
.
.
.
. .
-
:
.
52
JOINT ECONOMIC REPORT
TABLE VIII.-Distribution of money income, taxes, disposable income, expenditures
for selected durable goods and for other consumer goods, rent and net saving by
income groups, 1949
Income group I
Spending
units
Tpnd
otal
money
income
before
taxes
Under $1,000
---$1,000 to $1,999------$2,000 to $2,999
$3,000 to $3,999
$4,000 to $4,999
$5,000 to $7,499
$7,500 and over
14
19
21
19
11
11
5
2
9
16
19
15
19
20
All income groups.
100
100
Total
Total
Toteal
Fedr
personal
income
tax'2
(7)
3
9
13
13
23
39
100
~Total
Total
selected
disposdurable
al
od
abe
gos
income 3 expeuditures 4
.
Total
otherToa
conTotal
unr
rn
smr
rn
expeuditures 5
notl
svnet
svn
2
9
17
20
15
19
18
3
10
18
19
14
21
15
5
11
17
20
15
18
14
6
14
19
24
15
14
8
-37
-15
3
9
20
35
85
100
100
100
100
100
I Annual money income before taxes in 1949.
2 Estimated Federal personal income tax liability, apart from capital gains and losses.
3 Disposable income is defined as money income less estimated Federal personal income tax liability.
4 Includes automobiles, furniture, radios, television sets, and household appliances such as refrigerators,
ranges, washing machines, and other miscellaneous appliances. Expenditures for automobiles are net of
trade-in allowances.
6 Covers expenditures for all goods and services not included in selected durable goods (see footnote 4).
Includes food, housing, clothing, medical care, transportation, recreation, education, and State and local
taxes, as well as expenditures for durable goods such as floor coverings, jewelry, fur coats, and other miscellaneous durable items. Since these estimates are residual items, they should not be regarded as being as
reliable as the other, directly estimated items.
Rent is included in other consumer expenditures. The distribution of rent applies to monthly rent
R
reported at the time of the survey interview in early 1950.
7 Less than M4of 1 percent.
Source: 1950 Survey of Consumer Finances. Board of Governors of the Federal Reserve System
(preliminary).
TABLE IX.-Estimated distribution of consumer expenditure for 1948
[In percent of total]
Spending unit income brackets (in
com1 backts(i
$1,000)
Otol-3.9
I to2--.
2to3-18.1
3to4-20.7
4 to 55 to 7.5 -16.1
7.5 and up
Total -
-
Total
o
(1)
Total
retail
sales
(2)
Retail
food
sales
(3)
Retail
sales less
food
(4)
Liquor
sales
(5)
Tobacco
sales
(6)
Durable
sales
(7)
Personal
income
tax
(8)
17.5
3.9
9.3
18.1
20.7
14.4
16.1
17.5
4.1
11.4
20.5
21.8
14.2
14.6
13.2
3.9
8.2
16.7
20.1
14.5
16.9
19.8
0.9
8.9
17.2
22.5
12.7
16.4
21.4
3.9
11.4
21.1
22.9
14.3
14.1
12.2
2.2
5.6
18.2
20.0
15.8
17.0
21.2
0.1
2.6
8.5
12.9
12.2
19.6
44.1
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
9.3
14.4
Source: Hearings, Joint Committee on the Economic Report on the January 1951 Economic Report of
the President, p: 347.
Even in the case of food the groups getting $3,000 or more account
for 64 percent of the total sales volume of food. This means that
taxes on certain luxury foods might not be amiss. From the sheer
standpoint of production, meat, it has often been pointed out, is in
reality a luxury food. Unless fed wholly on grass or other products
from land that cannot be used for food production-if fed, for example,
on corn-livestock consumes food several times the calorific value
returned in the form of meat. As is observed in the March 1951 issue
of Fortune, "A steak is a pleasant but extraordinarily inefficient way
to get calories; a bushel of wheat converted into bread goes somewhere
between five and seven times as far as when it is converted into meat." 2
2J. Kenneth Galbraith, The Strategy of Limited Control, Fortune, March 1951, p. 67.
53:
JOINT ECONOMIC REPORT
Thus an excise tax on meat fits the requirements of a luxury tax,
not only in reaching in the main consumption where it occurs, but.
also in promoting greater economy in utilization of scarce land and.
manpower resources.
TABLE X.-Application of 1948 estimates to 1950 totals
[In billions of dollars]
Total
Spending unit inT
come brackets (in
(in
come brackets
(1)
$1,000)
0 to I to 22to3------3to4
4 to 5
4 to 7.-33.4
7.5andup
Total
Total
IRetail
food
retail
sales
~~~sales
(3)
(2)
Retail
sales less
food
(4)
Liquor
sales
(5)
'tobacco
sales
(6)
Durable
sales
(7)
Personal
income
tax
(8)
7.4
17.7
34.5
39.5
27. 5
30. 7
5.0
11.9
23.1
26.5
18.4
20.6
22.4
1.8
5.1
9.2
9.8
6.4
6. 6
6.0
3.2
6.8
13.9
16.7
12.0
14.0
16.4
0.03
.3
.5
.7
.4
5
.6
0.2
.5
.8
.9
.6
.6
.5
0.6
1.5
4.7
5.2
4.1
4.4
5.5
0.02.5
1.6
2.5
2.4
3.8
8.5
190.8
127. 9
45.0
82.9
3.0
4.0
26.0
19.3
Items (3),
NOTES: Items (1) and (2) are estimated 1948 distributions for total consumer expenditures.
expenditures.
(5), and (6) are estimated 1948 distributions for food, liquor, tobacco, and durables
distribuestimated
applies
it
as
information,
desired
the
Table X is only a very rough approximation of
tions for 1948 to estimated totals for 1950.
Commerce
of
Department
are
billion
of
$127.9
sales
retail
Total consumer expenditure of $190.8 billion and
estimates. Total retail sales of food, liquor, tobacco, and durables are estimated on basis of Department ofCommerce data.
Source: Hearings, Joint Committee on the Economic Report, on the January 1951 Economic Report ofthe President, p. 348.
The orgy of consumer buying that occurred in the last half of 1950
clearly was not one indulged in by those who had no money. It was.
essentially a phenomenon in which only those could participate whohad incomes above bare essentials. They were by and large the only
ones who had any appreciable sum of extra money wherewith to go.
into the market and stock up.
Undoubtedly many consumers merely accelerated plans, already
under way, to purchase various types of durable goods. As is clearly
shown in table XI the groups receiving $3,000 and more were planningto buy more than two-thirds of all the durable goods that were goingto be bought in 1950; 69 percent of all the automobiles, new or used,
and 65 percent of all the nonfarm houses. When the war broke out
in Korea, many simply bought more, sooner.
By and large, the lower income groups cannot liquidate savings; on
balance they have no savings to liquidate. (See table XII.) Note
that the bottom three-fifths of the spending units on balance had nonet saving in 1949. Who was it then who cashed E bonds and increased
their use of demand deposits to such an extent that the velocity of
the circulation of money reached for a time a 20-year high? Who.
were the groups accounting for the economic facts shown on chart 11the rapid decline in liquid savings, in cash, in purchase of Government
bonds, and-in purchase of life insurance? Clearly that group consisted
of those who owned liquid savings, or had appreciable amounts of life
insurance, or Government bonds, to wit, those in brackets over $3,000'
a year.
54
JOINT ECONOMIC REPORT
TABLE XI.-Income grouping of actual buyers in 1949 and prospective buyers in
1950 by income in 1949 and by number of spending units
[Percentage distribution]
Nonfarm houses
Number
of spending units
Income group
Actual
Prospecb tive
buyers
1910
1949
U~nder $l,000----------$1,OO to $1,999---------$2,0 to$2,999-21
$3,OO0to $3,9W ---------$4,00 to $4,999 ----------$5,00 and over -16
All
14
19
4
8
15
28
16
29
19
11
-10
New and used aut
Actual ProsPecbue
buyr
b99auyers t
1910
8
6
21
25
18
22
100
Other selected durable goods
3
13
22
21
14
27
Prospecbuyers
1950
4
11
16
20
16
33
io
1ooI
Actual
1uye9
949e
io
s
6
14
22
22
14
22
12
19
25
15
24
w100
100
Source: 1950 Survey of Consumer Finances, Board of Governors of the Federal Reserve System. See:
Federal Reserve Bulletin, July 1950.
TABLE XII.-Proportionof money income allocatedto lazes, expenditures for selected
durable goods and for other consumer goods, and saving, by spending units within
isncome quintiles, 1949
Spending units by size of income groups
Lowest fifth (under $1,280) ------Second fifth ($1,280 to $2,290)
Third fifth ($2,290 to $3,200)
Fourth fifth ($3,200 to $4,500)
Highest fifth ($4,500 and up) 4-12
-
Estimated Selected
Federal
durablel
income
goods consumer
tax
expendi- expendiliability
tures 2
tures
-2-------16
-4
-5
-6
Net
saving
139
91
84
79
63
11
11
10
9
spending
units in
quintiles
-17
-6
(3)
5
16
100
100
100
100
100
' Each group represents 20 percent of all spending units.
a Includes automobiles, furniture, radios, televisions, refrigerators, ranges, washing machines, etc.
' Less than 4 of 1 percent..
4 Median income of this group equals $5,800.
Source: 1910 Survey of Consumer Finances, Board of Governors of the Federal Reserve System.
TABLE XIII.-Proportion of money income allocated to taxes, expenditures for
selected durable goods and for other consumer goods, and saving by spending units
within income groups, 1949
[Expenditures as a percentage of aggregate income of each spending unit income class]
Type of expenditure or
saving
Federal income tax '
Automobiles and other selected durable goods 2
Other consumer expenditures 3-------------------(Rent) 4
Net saving --Total-100
All
spending
units
Income group
Under
$1,000
_
$1,000 to $2,000 to $3,00 to $4,000 to $5,000 to $7,500
$1,999
$2,999
$3,999
$4,999
$7,499 and over
8
1
3
4
6
7
10
11
18
12
12
11
10
11
8
76
(5)
5
187
(14)
-106
100
94
(7)
-9
100
83
(5)
1
100
80
(6)
3
100
76
(5)
7
100
69
53
(3)
10
100
16
(2)
23
100
'Estimated Federal person income tax liability on income, apart from capital gains and losses.
' Includes automobiles, furniture, radios, television sets, and household applicances such as refrigerators,
ranges, washing machines, vacuum cleaners, home freezers, and other miscellaneous appliances. Expenditures for automobiles and other durable goods are net of trade-in allowances.
8 Covers expenditures for all goods and services not included in selected durable goods (see footnote 2).
Includes food, housing, clothing, medical care, other living costs, State and local taxes, recreation,
tion and education, as well as expenditures for durable goods such as floor coverings, jewelry, furtransportacoats, and
other miscellaneous items.
4 Rental expenditures of renters falling in the various income groups as a percentage of the aggregate
income of all spending units in the groups. Rental expenditures are included in the preceding category, other
consumer expenditures. They are computed by multiplying the rent at the time of the interview in early
1950 by 12, and are subject to error to the extent that rents had changed during the preceding year.
Source: 1950 Survey of Consumer Finances, Board of Governors of the Federal Reserve System (preliminary).
CHART 11
INDIVIDUAL
SAVINGS
SECURITIES
AND EXCHANGECOM.ISSION
ESTIMATES
WUARTERLYAVERAGES1941-1945:
QUARTERLY 1946w
OF 06LLAA§
.ILLlJs
4
CASH~~~~~~~~~~~~~~~~~~~~~.
20
_IGURES
_ WTTO
_ MS
_ ARTER.-4
l
195
i
.
1950
~q
s
7
A'/IT
4
mA
T nt 0.-T
|
~INSURANCIE|-14
98
1952
1942
1944
1946
1948
A
1950
M94
5
15
- _<t0@l\25\sil\Z/9~~~~~~~\T
LATESFIMMz PWoTTEO3M1OUARTER.
V
.7T
AOO.S
|
-,lt*
~~~~~OTHER
fiII!
\^
~~~~~~SECURITIES
t
I
|
1942o
95
/
N
1948
l
-24
_
1952
on
oxT
56
JOINT ECONOMIC REPORT
Finally, elementary considerations of equity would seem to require
that those whose consumption has already been cruelly cut by inflation, and whose tax load as a proportion of income is already very high,
ought not to be given the lion's share of any additional tax burden.
Those in the low-income brackets, and notably those getting less than,
$1,000 already pay as high a proportion of their incomes in taxes as
does any other group in the population except those getting $7,500 or
over. To lower the exemption from $600 to $500 would add grave
injury to that already inflicted by inflation.
Data on this point presented in our hearings by Prof. R. A. Musgrave of the University of Michigan are reproduced in table XIV. The
methods are fully explained in an article which his research group is.
publishing in the Tax Journal of March 1951. The results obtained
by this research study group show that upon the lower income brackets
are ultimately shifted so large a proportion of the total tax burden as
to make the proportion of income going for taxes much larger in their
case than is popularly known. (See chart 12.)
TABLE XIV.-19.48 tax payments as percent of income by income brackets
Spending unit income bracket, before tax, in dollars
Under 1,000 to 2,000 to 3,000 to 4,000 to 5,000 to 7,500
1,000
1,999
2,999
3,999
4,999
7,499 and up
Total
FEDERAL GOVERNMENT
1.
2.
3.
4.
B.
Personal income taxes
Corporation income taxes
Excises -------------Payroll taxes -2.5
Estate and gift taxes
6. Total-
0. 2
061
9.1
2.8
4.4
4. 3
3. 8
43
4.0
2.1
3.3
-------
5.5
3. 7
4. 0
2.5
7. 0
3. 7
3. 5
1.9
9.3
3.8
3.4
1.2
12.3
9. 9
2.3
.5
1.4
7.8:
5.6
3.4
1. 7
.4
13.9
13.5
15.5
15.8
16.1
17.7
26.3
18.8
.7
6.8
6.1
6.0
5.6
5.4
5.5
5.5
20.3
21.6
21.8
21.7
23.1
31.7
24.7
17.7
7.0
22.9
14.8
20.1
17.9
11.6
13.4
10.2
16.3
5.3
28.8
100.0
100.0
STATE AND LOCALGOVERNMENT
7. Total -----------ALL LEVELS OF GOVERNMENT
8. Total -23.6
ADDENDA
9. Percent of spending units --10. Percent of income
12.2
1.9
NOTES
1. For details see the Distribution of Tax Payments by Income Groups in 1948, by R. A. Musgrave, J. J.
Carroll, L. D. Cook, and L. Franc, to be published in the National Tax Journal in issue for March 1951.
2. Effective tax rates in table XIV are computed on the basis of the Department of Commerce estimate of
personal income of $211.9 billions plus imputed retained earnings of corporations and the unshifted portion
of corporate income taxes of $20.6 billion. It is assumed that the total personal income thus determined is
distributed in the same way as the estimated distribution of money income by the Survey Research Center
of the University of Michigan in the 1949 Survey of Consumer Finances, prepared annually for the Board
of Governors of the Federal Reserve System.
3. Line 2 of table XIV is based on the assumption that 3. of the corporate income tax is shifted forward to.
consumers in higher prices and 3s backward in lower wages. If it is assumed that the corporation tax is.
not shifted, the percentages in line (8) become as follows: 20.4, 17.8, 19.1, 19.5, 19.5, 21.7, 33.8, 24.0. Foralternative assumptions see article cited in note 1.
Jan. 31, 1951, R. A. Musgrave, department of economics, University of Michigan, Ann Arbor, Mich.
57
JOINT ECONOMIC REPORT
CHART 12
1948 TAX PAYMENTS AS PERCENT OF INCOME
BY INCOME BRACKETS
Percent of Income
35
Percent of Income
35
|::J
State and Local Tos
Em
Fodaol Taome
r *obo.1.r
...
-.-.
o
,. oto-
_.,
30
-3
20 -
I
I
-
25
-
20
-
15
-
....,........ . ..... .........
* , ',.' _, ~~~.--..........-. . ..........
0
-
L
...... ..................
,.,
- 5
_
$1000Sl999
$2000-
10
$3000-
$4000-
$5000-
$7500-
S3999
$2999
$4999
$7499
and op
_iitaiiTOTAL
0
SPENDING UNIT INCOMEBRACKET,BEFORETAXES
SOURCF
to Pon- Discu.SOn on F-SCOIPolkq'.
From N"otes
by R A Muso.ov- Dbolo nh Joint Com-il., on
'h. EconomicReport, Janua.y 31, 951
T,. -,1,0,01C-rp...
Ra.r.rn. 50.00@
C..oofl..e
F.O.r0, 7,1951
.o 073
58
JOINT ECONOMIC REPORT
General sales taxes and tariffs bear disproportionately heavily
upon them, simply because so large a proportion of their income has
to be spent on consumer goods. (See table XV.) The proportion
of those in the lower income brackets who must spend 80 or 90 or 100
percent of their income for consumer goods is two, three, four or more
times that in groups receiving over $5,000. Upon those in the lower
income brackets are also shifted most of the property taxes paid
both on the homes they live in (whether they own or rent makes no
difference) and also those general property taxes and excises which are
part of the costs of doing business necessarily charged into product
prices by the merchants who sell them the consumer goods they buy.
A certain proportion of the corporate income taxes is likewise shifted
upon them, particularly in periods characterized by a sellers' market
such as has existed during the last 5 years and such as seems likely
to exist for the long period- of -armed alert ahead. The net effect of
all such shifting of taxes is clearly shown in chart 12 and table XIV.
The problem of equitably reducing consumption is, therefore, not
at all a mere matter of "socking the low and middle-income masses,"
but actually one of the most difficult and central problems for the
major defense effort ahead. There is no question that consumption
must be held down. But if a large part of our national output is to
be shifted to military uses, the high-income consumers-i. e., the 20
percent who enjoy incomes in excess of $4,500-cannot be allowed to
continue to buy 40 percent of all consumer goods sold as they ordinarily do.
TABLE XV.-Proportion of each income group having consumer expenditures over
80, 90, and 100 percent of disposable income, 1949
Disposable income group I_
Consumer expenditures as a
percentage of disposable income
Over 80
percent
Under $1,000 -73
$1,00O to $1.999 ------------------------------$2,000 to $2,999 $3,00 to $3,999 -64
$4,000 to $4,999$5,000 to $7,499 -39
$7,500 and overAll-
Over 90
percent
Over 100
percent
24
66
61
44
39
33
21
16
49
31
17
12
10
9
7
63
46
22
75
64
56
1Money income less estimated Federal personal income tax.
Source: 1950 Survey of Consumer Finances, Board of Governors of the Federal Reserve System.
Holding down the consumption of the "average" consumer-the
average wage earner, the small farmer-is not technically difficult.
Their consumption is already held down in large part by present
inordinately high retail prices. But the problem of holding down the
consumption of the high-income consumer is difficult because the highincome consumer is well organized and represented by intelligent and
sophisticated leaders. This means that the consumption of high-income consumers cannot be held down in any way that is not acceptable to them. The problem, then, is to find a way of holding down
their consumption that is not only effective but acceptable without
too many undesirable side effects and after effects.
-
JOINT ECONOMIC REPORT
.9
There are three general ways by which total consumption, including
the consumption of the great majority of families, can be held down or
reduced if necessary:
1. Inflation.
2. General controls-price controls, wage controls, and rationing.
3. Taxes.
Inflation of the kind that has operated since June of 1950, which has
been in this regard no different from those so well documented in the
past, has operated to reduce consumption by squeezing down the
physical amount which all relatively fixed-income consumers could
buy, unless they borrowed, liquidated assets, or reduced their savings.
For most low-income consumers that meant that they had to pull in
their belts but had nothing to show for their abstinence. The essential feature of the mechanism was the lag of fixed incomes, notably
wage rates and salaries, behind prices. Since most wage rates did
not rise as fast as prices, real wages per worker who could or did not
supplement his earnings by longer hours or other shifts (purchasing
power of wages) declined a bit while real profit incomes increased enormously. As a result total "abortive savings" or forced abstinence
was larger than the net reduction in consumption. The flexible income and profit recipients enjoyed an increase which not only enabled
them to increase their savings in terms of money, but enabled them
to channel a part of the bounteous windfall into luxury consumption.
Inflation took from those that had little and added to those that had
much.
However, the gain to the upper-income group was not all velvet.
Inflation brings in more taxes, as a simple example will show. Take
the case of a married man with two children, now earning $3,000 a
year. His Federal income tax at 1951 rates is $120. Suppose the price
level doubles and his income doubles, to $6,000. His tax now, at
the same rates, is not twice as large as before but six times as large$720. His money income after tax is $5,280, compared with $2,880
before the inflation. With tax exemptions and tax brackets stated
in terms of dollars, inflation helps to raise more taxes.
Another solution to the problem of holding ddwn mass consumption
is a system of general price, wage, rationing controls. The process is
this: Real consumption is reduced or held down by price controls and
rationing. Consumers unable to spend all of their incomes, therefore,
save. The savings finance the Government deficit, directly or indirectly. Consumers as a group hold large amounts of liquid assets.
Presumably, consumers after the emergency will. be able to convert
their incomes and savings into higher standards of living, which they
were unable to do during the emergency. Consumers assume the role
of financing the military program and are paid back afterward.
Is this a real possibility? It is indeed for those who have incomes
above the levels of "minimum need" already discussed. There is no
question that consumers with incomes in excess of $2,500-$3,000 can
accumulate liquid assets if such middle- and high-income consumers
will accept a price control and rationing program that forces them to
save. But such consumers are precisely the ones that by their extra
funds support black-market operations. Even if they obey the price
law and save, it seems doubtful whether they can translate these gains
into higher real consumption after the emergency. The most likely
result of an attempt to use the assets and the high incomes to buy
'60
JOINT ECONOMIC REPORT
consumers' goods will be a postemergency inflation that will reduce
the value of both the assets and the incomes.
Consumers can take over the role of financing the military program,
and get paid for it, only if they behave like financiers. That is,
consumers can get paid back if they hold the debt for a long time,
reinvest interest payments and only gradually reduce principal.
But the idea that they can be repaid in 2 or 3 years for the consumption foregone during the emergency is illusory, especially if, as now
seems likely, the emergency lasts 10 to 20 years.
There are two basic defects in the price-wage-rationing system as a
means of forcing savings and holding down consumption. One is
that it almost certainly results in a sudden attempt by middle- and
upper-income brackets to translate their savings into consumption,
notably of housing and consumer durable goods when the emergency
is over, if not sooner. The control system forces people to save but
leaves them free to save in any form they like. Most of the savings
will take the form of money or assets that can be turned into money
on demand. This means that as soon as the restraints on expenditures are relaxed there is a lot of hot money around ready to rush into
the markets and bid up prices. The price inflation that followed the
jettisoning of OPA is a good illustration of the flexible consuming
power of middle- and upper-income groups.
The second defect is that a price-wage-rationing system requires an
elaborate structure of detailed controls to achieve a rather simple
over-all result. The basic need is to hold down total consumption.
But under the direct control system, the Government must control
the expenditures of particular individuals for particular purposes.
If the objective is to put $41.6 billion a year into defense goods, it is
a cumbersome and seriously inefficient way to do it by rationing meats
or gasoline or tires.
These two defects can be avoided by taxes. Taxation has the great
advantage of finality. It leaves no overhang of assets to create
inflationary danger for the future. By the same token it holds out
no promise that those who forego consumption now will be repaid in
the future. If the military program is very big, and lasts for a long
period of time, the main reliance for restraining consumption must fall
on those whose incomes afford more than efficiency levels of
consumption.
VI.
THE STATUS OF FARMERS
The outstanding price phenomenon in 1950 was the reflation of
farm prices. (See chart 13.) As was noted in the Economic Report
of the Joint Committee for 1950, the dip in prices then was in large
part restricted to raw materials, and in particular to a decline in the
price of farm products. 3 The fact was also noted there that throughout 1949 the.relatively inflexible prices, notably the prices of finished
industrial products such as steel, automobiles, and other items, far
from declining, advanced 2.2 percent. That advance was greatly
accelerated in 1950. Note that rapid as was the rise in the prices of
food since April of 1950, they did not catch up with the prices of steelmill products until January of 1951.
Farm prices, on the average, did not attain in 1950 the levels which
existed in 1948. There are, to be sure, a few, and these are highly
publicized, which have soared above 1948 levels. Among these are
a Report of the Joint Committee on the Economic Report on the January 1950 Economic Report of the
President, pp. 57-58.
CHART 13
WHOLESALE PRICES
Go
1926-1O0
ix
I
0
04
1=
I'll
ed r[
Nfil., in Pri..,, ..,k~l.
F~b,..,y 1951E.O.Mctd.
PiC.sfl PrimayMark.?.
F.bruory
95, EttImotad.
.62
JOINT ECONOMIC '.REPORT
cotton, beef cattle, veal calves, sheep, lambs, and notably wool. All
the other major farm products are not only below 1948 levels, but
below parity levels. Not until early 1951 did farm prices in general
begin to reach levels in excess of 1948 peaks.
Nor is it true that farm incomes are inordinately high. In 1959
the farm population represented about 18 percent of total population,
-but net income-of-farm -operators-was- only-6.0 percent-of-the-national
income, the lowest figure in the last 40: years except for.1940, 1930,
1931, and 1932. --- n71-947 the-farmers-(thenrcomprising-19.3 percent of
the total population) received in net incomes about 9.6 percent of total
national income. Even when gross farm income is. compared with
national income, the percentage in 1950 is likewise lower than at any
time since 1941, and lower than at any time during the last 40 years
except for the years 1931, 1932, 1939, 1940, 1941, and 1944. These
facts are clearly shown in table XVI.
TABLE
XVI.-Agriculture's share of the national income and its relative position
-as a producer of goods
Index of volume of
Percent
Year
1910 --1911 --1912 --1913 --1914 --1915 --1916--1917 --1918 --1919 --1920 --1921
1922 --1923 --1924 ----1925
1926 --1927 --1928 --1929
1930 --1931
1932
1933
1934
1935
1936
---1937
1938 -- -1939
1940----1941 -- 1942 -1943
1944 --1945 --1946 --1947--1918 --1949 --1950 ---
Realized
realized
netlin
zenet incm
comeoafrm
National
operators
Income
farm
isoftine
operators
iofincome
national
income
3, 753
3,435
3, 671
3,786
3, 518
3,745
4,687
7,011
8,674
9, 249
6, 778
3,603
4,057
4,842
85,128
6,103
5,699
5, 706
5,695
6,044
4,329
2,744
1,832
2, 681
3,750
4,484
5,062
5,139
4,327
4,459
4,525
6,412
9,086
12, 126
12, 519
12, 790
15, 017
17, 794
16, 526
14,129
12,974
11.4
10.6
10. 7
10.0
9.7
9.8
10.4
13.1
14.9
14.0
9. 2
6. 2
6. 7
6.8
7.3
8. 1
7.1
7.3
7.0
7.0
5.7
4. 6
4.2
6.4
7.6
7.6
7.7
8. 3
6.5
6. 2
5.8
6. 7
7.4
7. 9
7. 6
7.8
8. 9
9. 6
8. 0
6.9
6. 0
33,064
32,490
34, 456
37,762
36,367
38,254
44,913
53,360
58,121
66, 136
73, 393
58, 3.33
60, 517
70,675
70,634
75, 187
80,396
78, 502
81,044
85,954
75,364
59,853
43,605
42, 006
49,448
56, 391
65,707
61, 556
66, 412
71, 515
78, 111
95, 231
123,168
152, 515
164, 397
164,067
168, 293
185,643
207, 478
204,088
214,494
Gross income from
agriculI
Percent
gross farma
income is
of na-ti,
tional
agricultural and
~~~~~nonagricultural
1935-
Index of
Index
of
agricultural
Index.inOf
total
dustrial
production3
1935-39=
0
81
86
86
83
86
90
91
92
83
91
94
98
97
100
98
102
100
98
102
96
96
93
91
94
106
102
106
110
113
124
129
137
134
137
136
138
140
137
63
58
64
75
76
75
72
75
58
73
88
83
90
96
95
99
110
91
75
58
69
75
87
103
113
89
109
125
162
199
239
235
203
170
187
192
176
200
production,
39=l00
oua
__________
~~~~~~~~~~~production 2
7,352
7,081
7, 561
7,821
7,638
7,968
9,532
13,147
16,232
17, 710
15, 908
10,478
10, 883
11,967
12,623
13, 567
13,204
13, 251
13,550
13,824
11,368
8,378
6,406
7,055
8, 486
9, 595
10,643
11,265
10,071
10, 547
11,009
13, 88f
18,551
23,008
24,159
25, 419
29, 355
34,643
35, 071
32, 167
32,054
22.2
21.8
21. 9.
20.7
21.0
20.8
21.2
24.6
27.9
26.8
21. 7
18.0
18.0
16.9
17.9
18.0
16.4
16. 9
16. 7
16.1
15.1
14.0
14.7
16. 7
17.2
17.0
16.2
18. 3
15.2
14. 7
14.2
14. 6
15.0
15.0
13.5
15.4
17. 6
18.6
17.0
15.8
14. 9
_
79
80
81
81
83
84
85
87
88
90
91
92
93
94
95
96
97
97
08
99
99
100
101
101
102
103
104
106
107
108
109
112
114
116
117
I Figures not adjusted for inventory changes but include governmental payments.
X U. S. Department of Agriculture, BAE.
l Federal Reserve Board,
Source: U. S. Department of Agriculture, U. S. Department of Commerce, and Federal Reserve Board
JOIT ECONOMC REPORT
63
Actually agricultural income has not yet caught up with nonagricultural income. (See chart 14.) In fact, the outstanding characteristic of farm price reflation in 1950 was that farm costs for the year
as a whole rose more than farm prices for the year as a whole. This
provides something of a contrast with the experience of the nonfarm
enterpriser. To quote an- eminent business magazine, the United
States News:
Businessmen as a group, evidently marked up their prices before January 2.
Manufacturers' costs jumped 10.8 percent from the 4outbreak of the Korean War
to the first of the year.. Prices jumped 12.1 percent.
_
_
Thus, in comparing the realized net income of businessmen on the
farm, that is, farm operators, with corporations, that is, businessmen
in the city we find that the year 1950 represented a bonanza year'of
unheard-of proportions for the latter. For the farmer it represented a
year of 8 percent lower net income than in 1949. (See chart 15.) .-In
1950'income'from agriculture was running but 2$2 times the 1935-39'average, while nonagricultural income was almost 3% times higher, and
corporate profits more than 6 times higher.
Moreover, although consumers as a whole have suffered from inflation, there exists no special reason why increases in farm prices
should be solely or even predominantly stressed as the primary source
of injury. In actual fact, for those whose incomes have kept up with
the average increase in incomes (and here one must remember the
plight of the low- and fixed-income groups mentioned in the preceding
section), the real cost of food is lower than it was in the period 1935-39.
Then the average consumer had to spend 23 percent of his income to
get the same diet which he can now buy with only 19 percent.
Furthermore, whatever increases occurred in the price of food were
not for a major proportion due to the increases of prices of farm products. Farm prices were higher in 1948 than they are now, yet food
prices were lower. When farm:pricesicollapsed in 1949, did food prices
go down accordingly? When wheat prices fell by one-third from their
level of $2.81 a bushel, did the price of bread go down one-third? It
did not. The argument advanced by the baking concerns then was
that the wheat in a loaf of bread is a very small part of the total cost
of the loaf.
Since the outbreak of the war in Korea the retail price of bread has
gone up 1.7 cents. If all that increase were due to increases in the
cost of the wheat ingredient, wheat would have gone up about $1.12
a bushel above the June 1950 level; actually it has gone up only 16
cents. So small an increase would be compensated for by less than
two-tenths of a cent increase in the price of a loaf of bread, or less than
one-eighth of the amount that actually occurred. The rest is due to
increases in other costs and in margins such that net profits, which
represent the remainder after all costs have been met, are now at
all-time high levels.
The example of wheat and bread could be multiplied in the case of
cotton and cotton shirts and other consumer commodities. In short,
the reflation of farm prices that occurred in 1950 was not the major
cause of the increases in the price of food, textiles, and other commodities. These rose primarily because of abrupt increases in consumer money demand.
4
United States News, vol. XXX, No. 5, February 2,1951, p. 13.
64
JOINT ECONO0MC REPORT
CHART 14
Farm and nonfarm income
1935
1940
1945
Source: IU. S. Department of Agriculture, Bureau of Agricultural Economics.
COBAT 15
Farmers' income and corporate profits
% of 1935-39
/
___
500
Corporate rofits
after taxes
300
7
-
..
200
/7*
I | .-Z
1000
.............
I
,
I-
0
1935
I
Realized net inc me
I
nppr
of farm,
I
II..
I
/
1940
1945
Source: U. S. Department of Agriculture, Bureau of Agricultural Economics.
PZ3U
1Y
65
-- JOQIT ECONOMIC-REPORT
VII. CHANNELING BUSINESS SPENDING
About 45 percent of the change in total output from 1949 to 1950
was accounted for by the increase in business spending on plant and
equipment and the shift from inventory liquidation to accumulation.
Tie excess spending of business was equally at fault and had as much
to do with the inflation of prices as did that of middle and high income
consumers. On this point the Business Outlook section of Business
Week, a McGraw-Hill publication, in its issue of February 17, 1951,
pages 9-10, makes a forthright statement in language of admirable
frankness:
Buying things now-either because they are scarce or may get scarce-has played
a big part in sustaining the boom.
And if you think that applies only to consumer buying, you have another think
coming. Business has been doing a lot of stocking up, too-all the way from
manufacturer to retailer.
Inventories of all business rose by $10 billion in 1950.
But, even more important than the size of the gain, is the rate. It was at a
brisk annual clip of $5 billion in the first half of 1950-but in the second half of
the year, the pace jumped to S15 billion.
Retailers appearfully as interested in inventories as in sales.
Thev built stocks hand over fist in 1950. Even though they had the biggest
sales ever in August (on a seasonally adjusted basis) and a record Christmas, they
added $2 billion to inventory from June to December.
For the full year, the gain was $3 billion, bringing the value of all stores' stocks
to more than $16 billion at year end.
Inventory building at the wholesale and retail levels creates business for manufacturers, of course. But inventory building by manufacturers is perhaps even
more dynamic. For their buying spreads back all the way to the farm and the
mine.
And manufacturers were buying a mile a minute in the last half of 1950-for all
the talk about shortages.
They were adding to inventory at an annual rate of $2 billion a year in the
first half of 1950, jumped it to $8 billion in the second half.
Between December of 1949 and December of 1950 business inventories jumped 19.3 percent. (See table XVII.)
TABLE XVII.-Book value of business inventories, end of period, 1949-50
[Seasonally adjusted; billions of dollars]
1949
1950
Item
Total -
--
Manufacturing -32.4
Wholesale trade-9.3
Retail trade -14.7
----
March
June
Septenber
December
March
rc
56.4
54.4
52.9
51.6
52.5
54.2
56.4
61.6
31.2
9.0
14.2
29.3
9.2
14.4
28.9
9.0
13.7
29. 1
9.1
14.3
30.0
9.5
14.7
30. 7
9.9
15.8
34. 0
10. 8
16.8
Source: U. S. Department of Commerce, Office of Business Economics.
February 1951, p. 21.
June
ue
September
December
Survey of Current Business,
This rise was, of course, far from uniform among various industries.
For example, producers of iron and steel products added only 8 percent
to inventories, while textile manufacturers increased inventories by 22
percent. By November, stocks of durable goods in the hands of
retail stores had risen 16 percent above June 1950, and were the
highest on record. Likewise, nondurable goods inventories are now
Z3JlPr' "EUNOMIG AXPIRT
at record levels, as are raw materials stocks. In short, the war scare
buying of last July and August scarcely made a dent in retail stocks.
Every other use of business funds similarly showed an increase,
though none exhibits the spectacular proportions that characterized
the investment in inventories. The way in which the corporations
used their funds for all purposes, as well as the variety of sources from
which they derived such funds, is admirably shown in table XVIII.
Several facts in this table are worth marked attention. The item,
receivables from business, shifted from a minus position of $1.3
billion to a plus position of $4.5 billion. Holdings of cash and Government securities were doubled. Most significant of all is, of course, the
increase in the total amount of corporate funds let loose in the
market-from $13.8 billion to $38.5 billion. Perhaps -no single figure
better illustrates the extent to which business flung its buying power
around than this nearly threefold increase between 1949 and 1950.
TABLE XVIII.-Sources and uses of corporatefunds, 1949-50 l
[Billions of dollars]
Item
Uses:
Plant and equipmentInventories (book values) Receivables
:
From business--1.3
From consumers
From Government ---Cash and deposits --U. S. Government securitiesOther current assets -
1949
16.1
-4. 6
.5
.9
.3
1.0
2.0
-. 2
Total-13.8
Sources:
Retained profits 3
Depreciation-6.7
8.6
19502
Item
38.5
Sources-Continued
Payables (trade) -Federal income tax liability--Other current liabilities
Bank loans (excluding mortgage loans) short-term Long-term -Mortgage loans Net new issues --------Stocks Bonds
-3.8
13. 0
7.0
Discrepancy -
17.0
7.5
6. 5
4.5
1.5
.5
2.5
4.0
.5
1949
1950 2
2. 2
-2.4
-. 1
3.5
7.0
1.0
-1.8
-. 8
-1.1
.7
5.4
1.6
2.5
3.0
-. 5
1.0
4.1
1.6
2. 5
Total-14.9
38. 5
-1.1
.0
I Excluding banks and insurance companies.
2 Preliminary. Estimates for 1950, based on incomplete data, are rounded to the nearest $0.5 billion for
the major components. Total sources and uses derived from unrounded figures.
a Including depletion.
Source: U. S. Department of Commerce, based on Securities and Exchange Commission and other
financial data.
The amount of the increase, nearly $25 billion, had an additional
impact far in excess of that figure. Investment funds have a delayed
or multiplier effect on national income, one that by no means spent
its force in 1950 but will generate more inflation for months to come.
Increased business investment in inventories and plant and equipment, while it hits the raw materials markets and machine tool industries first, spreads backward and forward throughout the economysteadily taking goods out of the production flow and using labor to
build plants, paying out as costs incomes to farmers, wage earners
and others, without matching these incomes until sometime in the
future with an increased output of consumer goods. There is no
"hot money" quite as inflationary as additional business investment
when made at the peak of full utilization of manpower and resources.
67.
JOINT -ECONOMIC REPORT.
SOURCES OF BUSINESS FUNDS
The major sources of such business funds in 1950, as shown in table
XVIII, were retained corporate profits and depreciation allowances.
Both of these increased in 1950. Note in chart 16 that corporate
profits before taxes reached an all-time high annual rate of $48 billion
in the fourth quarter of 1950. Corporate tax liabilities under the
laws now on the statute books, including the excess profits tax, are
estimated at $24.3 billion, which amount will of course not actually
come into the coffers of the Treasury for several months. An extra
lush disbursement of dividends at Christmas time brought total
dividend payments up to $9.8 billion. Yet the amount left in undistributed profits of $13 billion exceeded by far the highest level attained
by corporate profits after taxes during World War II.
The course of corporate profits in recent years, as compared with
other components of national income originating in the private sector
of the economy, is shown in table XIX and chart 17. Note that
corporate profits after taxes increased 28.8 percent in 1950 over 1949,
and are more than three times as high as they were in 1939. Such
an increase is larger by far than that in any other major segment of
the private economy. The table likewise shows clearly the decline
in farm income in 1949. The one segment that has notably lagged
behind is the income received from net private interest, which is less
than 20 percent above 1939 levels. Such interest payments do not,
of course, include interest on the public debt, nor do the wage figures
include the enormously increased outlays to persons in Government
and in the military forces. Corporate profits being exclusively earned
in the private sector of the economy are properly compared with
other incomes earned there.
TABLE XIX.-Components of national income originating in the private sector of
the economy, 1939, 1946-50
Percent 1950
over-
Billions of dollars
1939
Corporate-profits before taxes_.
Inventory valuation adjustment
Corporation profits after valuation
adjustment-5.8
Corporation profits after taxesUnincorporated business and professional income before taxes
Compensation of employees in
private industry before taxes ----.Net interest before taxes
Farm income-before personal-income
taxes -4.5
Rental income of persons National income originating in
private sector -64.4
1946
1947
1948
1949
1950
1939
1949
6.5
-. 7
23.5
-5.2
30.5
-5.8
33.9
-2.0
27.6
2.2
40.2
-4. 7
518.5
45.6
5.0
18.3
13.9
24.7
18.5
31.8
20.9
29.9
17.0
35. 5
21.9
512.1
338.0
18.7
28.8
6.8
20.6
19.8
22.1
21.0
23.2
241.2
10.8
39. 6
4.2
96.4
2.9
110. 7
3. 5
121.5
4.1
120.1
4.7
130. 0
5.0
228.3
19.0
8.2
6.4
3.5
14.8
6.6
15.6
7.1
17.7
7.5
13.4
7.3
13.0
7.4
188.8
111.4
-3.0
1.4
159.6
181.4
204. 7
196. 4
214.1
232.5
9.0
I Computed on basis of trends in the first 3 quarters of 1950.
Source: U. S. Department of Commerce, Office of Business Economics.
CHART 16
CORPORATE PROFITS, TAXES, AND DIVIDENDS
QUARTERLY SINCE 1939
ANNUAL RFWTES
BILLIONS 0F DO~LLARS
I
r~n r
I
I
-v
ADJUSTED -FOR SEASONAL VARIATION
,._____.._
l
l
l
.
.I-a
a
ANNUAJLRATES
o fl1LLRS
F11
-
l
50
160
50
C-I
I'
40
0
40
P-3
C.t
0
0
30
30
0
20
20
Is
10
'10
0
99991
991499,5914994
19
1939
1940
1941
1942
1943
1944
1945
SOUZCE. 1939 Itrough third quarter, 1950- U.S. Deportmentof Commerce
Fourth quarter, 190, estimote - Council of EconomicAdvisers
1946
1947
1948
1949
1950
1951
0
-
1951
CAinT 17
CORPORATE PROFITS, WAGES AND SALARIES,
AND GROSS NATIONAL PRODUCT
CORPORATE
PROFITS
40 _
35
30
25 -
0
20 .
0
0
0
Wtr, F-0 qcth t950 Z0lnced by C Il of E-o10Oc Achle
SOuRC: Cal-,did btm TM pakic Reprot.f 11 PnOidhe, JDecrY1951
70
JOINT ECONOMIC REPORT
It is to be noted that despite the very high levels of prices in the
stock market., only $1.6 billion of the total of'$38.5 billion of funds
were derived from net new issues. The amount derived from
bonds fell from $3.8 billion in 1949 to $2.5 billion in 1950. The ratio
of prices of stocks to net earnings, while higher than in any previous
year except 1949, declined from that record level mostly. because of
the enormous increase in net earnings. These and other facts are
interestingly shown in chart 18.
Attending this banner year of profits ini business was a large increase
in the niumber of new enterprises. In 1950 for the first time, the
humber of firms in operation may have exceeded the 4 million mark.
Thisis- in contrast with the rapid decline in new businesses that
occurred at the beginning of World War II. The upper limit of the
draft age then being 44 years, a larger number of proprietors were
brought into service. Moreover, the draft took larger numbers then.
The dominiafnt explanation;, however, is probably the fact that profits
in'1950 were so lucrative in every line of consumer enterprise that
little attraction existed for border-line entrepreneurs to shift to defense
plants.
For all these reasons, gross private domestic investment, corporate
plus noncorporate, was by far the most expansionary component of
national product in 1950, rising roughly 50 percent from $33 billion in
1949 to $49.4billion in 1950. While the largest single contribution
came from a reversal of business inventory movements (from minus
$3.7 billion to plus $4.1 billion), new private construction increased
by $4.4 billion (from $16.2 billion in 1949 to $20.6 billion in 1950),
and business expenditures on new plant and equipment increased
by $3.7 billion (from $18.1 billion to $21.9 billion) to a new all time
record level.
* Such high levels of capital expenditure, if not limited by inventory
and materials controls, capital issues regulations, and the like, are
likely to remain high. The types of taxes enacted thus far, including
the excess profits tax now on the books, are in no sense capable of
putting the damper on such inflationary business spending.
The Secretary of the Treasury has called attention on. several occasions to certain loopholes in both corporate and individual income tax
laws, which permit 27.5 percent oil depletion allowances; exacts only
a 25 percent rate and a 6 months' holding period for capital gains;
fails to provide for withholding of taxes on dividends at the source;
permits businessmen to split the income from their business several
ways by allowing them, though not solely for tax avoidance purposes,
to make their wives and relatives "partners"; enables corporate executives and others in certain cases to receive stock options subject to
capital gains tax rates rather than those on income; and permits newspaper and magazine publishers to deduct extravagant promotional
expenses rather than to capitalize them.
Nor is it certain that the excess profits tax will take as substantial
a bite into inflationary business spending as is sometimes alleged or
hoped. The following excerpts taken from a recent issue of an eminent
business advisory service indicate some of the possibilities here: 6
a
Prentice-Hall, Report on the Business Significance of the News, January 27, 1951, pp.
5-6.
CHART
18
Corporate bond and common-stock yields, and earnings/price ratio
PERCENT
12
EARIVINGS/PR/CE
RArIOI/C-
00
6
...............................
1919
21
23
25
27
29
31
33 - 35
YEARLY DATA
37
OffiCe Of BUSINESSECONOMICS
Or COMMENCE,
U.S OfEPARrMENr
IBased upon data for common stocks listed on the New York Stock Exchange; total
rcentage of the total market value (number
year
expressed
reported earnings for theofprices)
.dividend
shares
of thesc=
times average
these agures
of
ofshtaares ie averagespics
3 Based upon data for common stocks listed on the New York Stock Exchange; total
dividends for the year expressed as a percentage of the total market value (number of
shares times average prices) of these stocks.
39
41
43
45
47
49
.........
..
SO
4546474849
OUARTERLY DATA
50-338J
Service; earnings/price ratio end
Sources of data: Bond Yield, Moody's Investors
yield through 1938, Common Stock Indexes, Cowles Commission Monograph
No. 3 and for the following years extrapolated on the basis of movements shown by
Moody's earnings, stock prices, and dividend series.
Source: Survey of Current Business, January 1951, p. 17.,
0... *-.2
72
JOIT
ECONO6M"IC REPORT
AmRE You TAXING ADVANTAGE OF THE NEw EXCESS -PROFITS TAX?
Most executives whose firms are subject to the excess profits tax have already
put their tax advisers to work figuring out which of the many optional ways
available for figuring a corporation's excess profits tax credit will give the highest
possible-exemption. However, less attention is generally being given to formulating plans for worth-while current and future spending which present high taxes
(with still higher rates still to come this year)-plus some special features in the
new excess profits tax law-make particularly attractive.
Some worth-while expenditures will actually reduce a firm's excess tax liability.For example, purchasing mortgaged property instead of renting it will often result
in a net tax saving because of the 9 percent excess profits credit permitted on
borrowed capital. Similarly, borrowing funds at less than 6 percent interest will
also usually result in a net gain for firms in the top excess profits brackets.
However, other outlays can also be made 'at so small a net cost after taxes that
they are highly desirable as steps to improve your competitive position, to help
you get and hold an efficient labor force, or to increase future corporate and personal income. Review the following suggestions for their applicability to your
situation.
Recommended: Expended spending for research, particularly on long-term
projects that will pay off at a much later date, is advantageous under high corporate taxation. For firms subject to excess profits taxes, the Government will be
footing from 62 to 77 percent of the cost. Small quantities of materials that may
be needed for such research projects should not be too hard to obtain, and will
generally not be restricted by NPA limitation orders.
Recommended: Explore more intensively the possibility of acquiring small
businesses that your firm could utilize to long-term advantage. Not only are
such purchases usually entitled to an excess profits tax credit, but they also open
up the possibility of capital gain. Neither short-term nor long-term capital
gains are subject to the excess profits tax.
Recommended: Maximum spending for maintenance and repairs is generally
indicated. New construction for unessential uses will become increasingly more
difficult, price trends are firm and rising, so the prospect of having the Government foot the bill for most of your repair cost should c6rtainly be inviting.
Recommended: Much the same case can be made for all needed plant expansion and improvement permitted under NPA construction limitations. Money
invested for such purposes can get a 12 percent excess profits tax credit. Accelerated amortization of defense-connected
plant and equipment expenditures now
become doubly attractive. 6
Recommended: Spending for bigger and better programs of worker on-the-job
training will often be worth while. For example, many metal-working firms
have the problem of what to do with salespeople no longer needed because of
civilian business cut-backs. In many cases, retraining to convert salespersons
into material expediters is feasible. Similarly, production shifts from civilian
goods to military equipment calls for wide worker reeducation.
Recommended: Pension and profit-sharing plans can be initiated or expanded
at comparatively low cost. Dollars deposited in approved pension or profitsharing plans are entirely exempt from corporate income and excess profits taxes.
Thus, the Government pays from 62 to 77 percent of the cost for firms liable td
excess profits taxes. Also, earnings of an approved pension or profit-sharing
trust are tax exempt, and thus pile up more rapidly. And the tax of employees
(including stockholder-employees) on the extra compensation represented by the
trust fund is deferred until their shares are distributed to them-at which time
the tax is usually much smaller, or their returns from the trust may be treated
as a long-term capital gain. Any additional tax increase will further enhance
the value of pension and profit-sharing plans.
Recommended: While carefully considering all worth-while tax-saving or income-producing projects, try to avoid falling into a reckless "excess profits tax
psychology" in which all kinds of expenditures are approved because "the Government is footing most of the bill anyhow." Such a psychology can create sloppy,
wasteful business habits which can turn out disastrously in less lush times.
0 It is interesting to note that in the few months since the outbreak of the war in Korea up to February 23,
1951, 3,319 applications for accelerated amortization totaling $10.5 billion have been filed and 447 certifieates totaling about $3 billion issued, which is more than half of the total amount allowed during the
whole 5-year period of World War II. Not only is there a sizable tax saving but a supply of tax-free dollars
Is made available for various corporate capital purposes. With the 47 percent corporate tax rate, depreciation
dollars are equivalent to $1.89 as compared with the dollar made available from retained earnings; with the
77 percent excess profits tax rate, depreciation dollars are equivalent to $4.34.
JOIND
73
ECONOMIC REPORT
TAX ON ADVERTISING
From a general economic point of view, one of the most desirable
excise taxes that could be levied would be a tax on advertising,
especially on that urging consumers to buy consumer goods. This
is obviously not the time to whip up inflation further by stimulating
consumer buying, nor is it a time for making still worse the already
grave shortage of so vital and critical a material as newsprint or
woodpulp. Yet, notwithstanding this, an increased volume of
advertising continues to spur consumers on to additional spending.
First, a word about the total volume of expenditures for advertising.
In the year 1949, total advertising expenditures amounted to more
than $5.2 billion.7 Expenditures in 1950 probably exceeded those
of 1949 by around 10 percent. The current rate of expenditure is
considerably greater. For example, expenditures in October 1950
(latest data available) were 19 percent in excess of October 1949.
The breakdown by dollars and percentages of the total for 1949
was as follows:
United'States advertising in 1949
Medium
Newspapers Radio -633.8
MagazinesFarm papers Direct mail -Business papers
Outdoor-131.0
Teleision63.0
Miscellaneous -Total -
Amount (in
millions)
---
----
-----------------------------
---- ----------
--
Percent of
total
$1,905.0
-------
-----------
368
12.2
9.5
.4
755.6
14.5
247.1
4.8
2.5
1.2
9-------1---------------------952.47
18.3
492. 5
205
202.2
100.0
A heavy tax currently imposed may have a variety of results. The
advertisement of some types of products may be discontinued for the
duration. Others may reduce the amount of their advertising.. In
some cases advertising media would reduce their rates of advertising
and absorb part of the tax. In others, advertisers may shift to direct
advertising by mail or by handbill in case the tax could not be made
to apply to these types of advertising. If the heavy tax had no
effect on the volume of advertising or the prices charged, the yield
from a 20 to 25 percent tax would be well over $1 billion. (See chart
19.) If the heavy tax discouraged the volume of advertising, the
result would be a lowering of the estimated tax revenue, a reduction
in demand for goods and materials going into advertising, and also a
reduction in the stimulus by advertising to cause people to buy. To
the extent advertising media reduced their rates and absorbed part
of the excise tax, their net income would also be reduced and hence
the revenue from the income tax would be reduced.
On the other hand, to the extent reduced volume of advertising
resulted in reduced sales, the profits of advertisers would be reduced
and the revenue from the income tax would be reduced. Should
people buy less because of a reduced volume of advertising, inflationary
pressures might be reduced and consumer saving increased. It.is even
7 The data in this paragraph and the table are taken from Printers' Ink, June 16, 1950, and December 8,
1950.
74
JOINT ECONOMIC REPORT
CHABT 19
00600
_
-*1-l
&I
*
11
VZ
I
C..
El
TTAL| |1,749.6| 36.0 FI,9050
NAT 1
I
~LOCAL
|
|
*6
I
376.6 | | + 8.
393.7
8.1
4
89
7
1,355.9 2 27.91,440.0 27.75
C.
+181
OTL 617.112.7f63.82.2 + 2.7
_NATL.
|1387218.01389.217.5
LOCAL|299
47
246
.7
TorTL| 512Z7
WEEKLIES 257.5
WOMEN'S 133.4
GENERAL - 86.5
FARM 1
35.3
OTAL
105
5.3
2.7
1.8
0.7
4925
245:4
128.6
83.6
34.9
20.4
[0
10
+
100.
9.5
4.7
2.5
1.6
0.7
- 3S
-4.
-36
- 3.4
-
0.A
420.5
+0.5|]
CA'
*
...
!TOTALl
95.1
L7 TTAL|
TOTAL
NAT L
LOCAL
IN
2
429
F
.
|
1321
ZZI~~NA TLi
.|
|
14.25
|
09
§-|
2.5
1.711
0.8
50.30 1
| 27 02|
LTOCAL|
| -~~3~f~
I
NAT'L.||453 31 9.31|
|
LCAL [
.6
-08
131.0
88.4
42.6
s;07
-07
*6* lflfl.
(*FINAL ESTIMATE)
Source: Printers' Ink.
10||
[7 ]
484.7 |9.3 ||+
12075|42
9f~~
||L284|L28
277
+0.5
+6.
6.9|
]
Q
75.
JOINT ECONOMIC REPORT
conceivable that the yield from other taxes might also be increased,
especially if the tax on advertising resulted in reduced expenditures
for "good will" advertising more or less deliberately engaged in to
avoid excess profits and corporation income taxes.
It is interesting to note that during 5 years of the Civil War decade,
when a great number of excises were imposed, there existed a 3-percent
tax on the gross receipts from advertisements appearing in newspapers,
magazines, reviews, etc., issued periodically. The first $1,000 (later
$600) of receipts were exempt from the tax. Newspapers with circulations under 2,000 were also exempt. Exemption might likewise be
given to advertisements urging people either to buy Government
bonds, insurance of all kinds, or to put their funds into savings institutions.
VIII. REMOVING BARRIERS TO EFFICIENT PRODUCTION
Although in most instances an increase in taxes is required in order
to curb inflation, there are a few imposts whose lowering would help
to check inflation. For a brief list of such items see table XX.Notable among such are governmental barriers to trade, both foreign
and domestic. From the standpoint of stimulating a deflationary
inflow of vitally needed materials from abroad, an expansion of foreign
trade, particularly in the import sector, would not only help to mop
up excess buying power but would promote more competition in what
is now a tight seller's market, and help shift our vital labor resources
into vital defense activity out of industries so inefficient as to require
Government protection. The effects would be equally beneficial in
mobilizing efficiently the resources of the free nations who are our
partners in this long struggle against communism. (See table XXI.)
Tariffs and trade policies appropriate, for whatever reason, under
normal conditions, may actually restrict supply, curtail competition,
and needlessly elevate prices of some scarce materials and commodities
during a period of long-term mobilization in which so much output is
needed that the dangers against which protection was originally sought
no longer exist.
TABLE XX
THE LIBRARY OF CONGRESS,
LEGISLATIVE REFERENCE SERVICE,
Washington D. C., January 23, 1951.
Selected list of dutiable '!scarce materials" which are imported into the United States
Iron:
Pig iron-
1930 rate
$1.125 per ton -
Gray-iron castings -20
percent ad valorem
Manganese ore (including ferru- 1 cent per pound on
ginous manganese ore) or conmanganese content,
centrates containing in excess of
10 percent of metallic manganese.
Tungsten ores, concentrates 50 cents per pound on
metallic tungsten
content.
Molybdenum ores, concentrates- 35 cents per pound on
metallic molybdenum content.
I
Modified rate
I
Agreement
$0.75 per ton -Geneva
10 percent ad valoremrn
N4
cent per pound on
manganese content.
38 cents per pound on
metallic
tungsten
content.
17 cents per pound
on metallic molybdenum content.
Trade Agreement.
Do.
Do.
Do.
Mexico Trade Agreement.
76
I
-
JOINT ECONOMIC REPORT '
Selected-list of dutiable "scarce materials".wlhich are imported into the
United States-Continued
1930 rate
I
Modified rate
I
Agreement
Fluorspar ores, containing calcium fluoride:
More than 97 percent
$5.60 per ton
Not more than 97 percent
Tellurium compounds ---
$8.40 per ton
25 percent ad valorem
$6.30 per ton
12%i percent ad valorem.
4 cents per pound do --- 7 cents per pound -----
2- cents per pound 13.6
2 cents per pound 3 cents per pound. - ----
Do.
Do.
Do;
2 cents per pound
2 cents per pound
25 cents ad valorem -- 12W'percent ad valorem.
20 cents per pound
40 cents per pound 25 cents per pound
25 cents per pound
25 percent ad valorem 12½ percent ad valorem.
30 percent ad valorem 15 percent ad valorem
25 percent ad valorem 25 percent ad valorem
72 percent ad valorem 334 percent ad valorem
15 cents per pound
314 cents per pound..
Do.
Do.
Aluminum:
Crude:
Scrap
Other
Coils, sheets, plates, bars,
rods, disks, strips.
Magnesium:
Chloride, anhydrous
.
Salts and compounds ---Metal, powder, sheets, alloys
Mercury ores
Titanium metal and alloys -Compounds and mixtures -Zirconium metal
Bismuth metal
--------Cadmium
Lead ores, concentrates, matte,
flue dust.
Zinc ores, concentrates -- -Bromine
------------ -------Fuller's earth, crude Graphite:
Crude (amorphous) Crystalline lump, chip or
flake.
Strontium metal and alloys
Talc, crude ---Mica, crude (not above 15 cents
per pound).
Above 15 cents per pound in
value.
Alcohol, industrial:
Fusel oil
.
Ethyl
Carbon tetrachloride
.
Chlorine
1M cents per pound on
lead content.
1½cents per pound on
zinc content.
10 cents per pound -$1.50 per ton
cent per pound on
lead content.
4 cent per pound on
zinc content.
----
10 percent ad valorem
30 percent ad valorem
25 percent ad valorem
X4 cent per pound --4 cents per pound-
.
Mj
-
--
Lumber, softwood: Fir, hemlock,
larch, pine, and spruce.
flog bristles: Sorted, bunched, or
prepared.
Rubber: Synthetic (not containing carbon).
Burlap:
Nonbleached
Bleached, printed, etc
Cotton, raw: 13i-inch staple or
longer.
Do.
Do.
Peru.
Geneva Trade Agreement.
Do.
Do.
10 cents per pound --50 cents per ton -
Do.
Do.
5 percent ad valorem7½percent ad valorem
Do.
Do.
25 percent ad valorem
Do.
Do.
Do.
y cent per pound ---4 cents per pound --
Do.
6 cents per pound
15 cents per gallon
3 cents per pound
752 cents per gallon.-.
1 cent per pound 12½ percent ad valorem.
_Do.
0.4 cent per pound -1 cent per pound -2 cents per pound ---18 cents per gallon --- 18 cents per gallon.---
Do.
Do.
1 cent per pound
--
Do.
Do.
Do.
2 cents per pound and
15 percent ad valorem.
25 percent ad valorem
Titanium compounds and mixtures.
Mexico Trade Agreement.
Do.
Geneva Trade Agreement.
4 cents per pound and
25 percent ad valorem.
1 cent per pound ---
Glycerin:
Crude
.
Refined
Methanol
Phthalic anhydride
Trichlorethylene
$4.20 per ton
----
Do.
Do.
Do.
3Y cents per pound
and 20 percent ad
valorem.
15 percent ad valorem-
Do.
30 percent ad valorem 10 percent ad valorem
$1 per 1,000 board feet- 50 cents per 1,000 board
feet.
3 cents per pound --3 cents per pound -
Do.
Do.
20 percent ad valorem
10 percent ad valorem
Do.
1 cent per pound --1 cent per pound and
10 percent ad valorem.
7 cents per pound
½ cent per pound
Do.
Do.
7 cents per pound and
40 percent ad valorem.
30 percent ad valorem.
A cent per pound and
5 percent ad valorein.
312 cents per pound---
Do.
Argentina.
Source: Department of the Interior, Defense Minerals Administration, MO-1, Dec. 29, 1950; Department of Commerce, National Production Authority, Notice 1, as amended, Jan. 10, 1951, title 32A; U. S.
Tariff Commission, United States Import Duties (1950) and Supplement I thereto, December 1950.
D. RILEY LLOYD,
Senior Specialists Section, Legislative Reference.
77
JOINT ECONOMIC REPORT:
United
TABLE XXI.-List of items on which it is considered that a reduction in the
States tariff would assist United Kingdom exports to United States of America
[From the Congressional Record, Mar. 22, 1950]
73
-
212
212-
.
Synthetic pigments
Sanitary earthenware - Sanitary earthenware (if of vitreous china)
Bone china table and kitchen articlesplain white.
-----------Decorated
Ophthalmic instrumentsScientific instruments
Card clothing with plated wire and tempered round steel wire.
Silverplated candlesticks and candelabraElectric flatirons (Morphy Richards) and
electric toasters.
228 ---------228 and 360 ---337 339339 343343
353-
Crochet needles and hooks ------
Knitting needles (particularly aluminum)
Electric floor scrubbers for industrial purposes.
Dental and surgical needlesDrawing instrumentsClocks -------------------------
.
359360 ---368 ----368 (a)-
372
372372
396397718b
751
763
901-
.
.
-
904
904a-
-
9201007
1009a
1016
.
1105-
10081109 (a)1109 (b)13011302
1409141014131513
1513
1513
.
.
1529 ------Various-
Rate of duty
Commodity
Tariff paragraph
I
e
p
45 percent plus 10 cents per dozen pieces.
60 percent.
30 percent but not less than 5 cents per
dozen and 25 percent ad valorem.
35 percent but not less than 5 cents per
dozen and 30 percent ad valorem.
Mainly 60 but also 30 and 45 percent.
Various-mainly 60, 45, or 40 percent.
25 percent.
15 percent.
50 percent.
40 percent.
$1.15 per thousand plus 40 percent.
30 percent.
15 percent.
'Dental, 30 percent.
ISurgical, 40 percent.
45 percent.
Various-from 55 cents each plus 65 percent
to $4.50 each plus 65 percent plus for each
jewel 25 cents.
to value-from 27¼icents
Mechanisms for measuring the flow of Various according
each plus 33¼i percent to $2.25 each plus
electricity.
32¼j percent.
12½j cents for each jewel.
If containing jewelsKnitting machines for fully fashioned 40 percent.
hosiery.
27Y percent.
Other knitting machinesDo.
Chocolate-confectionery machinery
45 percent.
tools
Joiners'
percent.
22Y2
Furniture of metal and wood10 percent.
.
Herring, smoked, kippered, etc
to 20 percent ad valorem.
Various-10
Jams1½2 cents per pound.
Ryegrass seed20 percent; bleached, etc.,
bleached,
Not
Cotton yarns-fine25 percent.
27½ percent; bleached,
etc.,
hleached,
Not
ICotton piece goods-fine30 percent; printed, etc., 32 percent.
percent.
27½
Mainly
Cotton cloth of counts exceeding 90unbleached.
30 percent.
Cotton cloth 86 and over-bleached
Do.
Cotton cloth 86 and over-printed, dyed
or colored.
Woven with 2 or more colors-additional 2½ percent.
duty.
40 percent.
Lace curtains19½ cents per pound plus 15 percent.
Linen fire hose
40 percent.
flaxof
fabrics
Woven
25 percent.
Plain linen handkerchiefs-hemmed
Rags 9 cents per pound; shoddy 14 cents
shoddyand
waste,
rags,
Wool
per pound; waste, probably lo.4 cents per
pound.
cents per pound plus 25 percent.
37½
Wool cloth weighing not more than 4
ounces per square yard.
Do.
Wool cloth weighing over 4 ounces per
square yard.
plus 20 percent.
Industrial wool felts, belts, blankets, etc.-.. 37½cents per pound
45 or 50 percent but not less than 40 cents
Rayon towpound.
per
20 percent.
Rayon staple ----------Carbonizing tissues of 10 pouind suhstance 30 percent.
and over.
25 percent.
----------Notebooks
35 percent.
Paper serviettes-------------- 70 percent.
Mechanical toys -50 percent.
---------------------Ruhher toys
Parts of toys not specifically provided for 70 percent.
parts).
mechano
(i. e.,
45 or 70 percent.
Embroidered linen articles -Containers of cod-liver oil (the oil is duty
free).
.
Of marmalade jars
81651-51-6
IVarious.
78
JOINT ECONOMIC REPORT
Moreover, from the standpoint of the economic interests of the
United States and the tasks which confront it, tariff restrictions or
trade policies either in the American economy or in the economies of
friendly nations which limit the access of industry to the full resources
available to the Western World are injurious to defense capacity.
There should, therefore, be undertaken a serious appraisal and review
of. the trade restrictions which inhibit the capacity and expansion of
American enterprise.
Even more important is the removal of cartel situations or restrictive
private practices associated with such governmental restrictions.
There are numerous raw materials which this country must import
which are subject to' cartel or trade restraints originating abroad.
Others are subject to restrictive trade policies and tariffs originating
here. Greater freedom of trade among the friendly nations defending
free institutions would not only strengthen and broaden competition,
but enable competition to do the basic job which it performs in
advancing technology, production, and efficiency while contributing
to economic stability and better distribution by holding or even
lowering price levels.
Some aspects of the problem, which will be met in even larger
proportions as the defense program progresses, are already visible.
In a. large number of the materials and products listed as scarce, or
which are integral items of Government procurement, it is clear that
monopolistic patterns, extreme concentration, noncompetitive price
levels, and market domination by a few major producers constitute
the prevailing circumstances which both defense and civilian policies
must encounter. Not all scarcities stem from monopoly conditions,
but the number is sufficiently large and in most cases of such basic
nature and importance that improvement can come in such fields
only by way of an expansion in the competitive behavior-and perhaps the competitive numbers, as well-of producers and markets.
If the defense program is contemplated as a long-term job, as it
must be, then the conclusion follows that emergency considerations
should not dominate policy, but should be a subsidiary part of a broader
program which promotes rather than contracts the competitive capacities and behavior of the economy, firmly based on the understanding
that the economic ability of the United States is largely dependent in
the future upon the health of competition.
Experience in WorldWar II revealed that many of the most acute
and dangerous shortages which hindered our armament were the
products of miionopoly. In one field after another, cartels, combines,
and monopoly groups were found responsible for scarcity. This was
true in aluminum, natural and synthetic rubber, magnesium, many.
strategic chemicals and medicines, and even in certain types of necessary military equipment. 8
Some of these situations have been corrected, but many more
remain. A brief glance at the leading shortages in our economy today
is sufficient to indicate that where monopoly still prevails, or has not
been replaced by the vigor of competition, scarcity is chronic. This is
true in copper, tin, cobalt, certain chemicals, and several other industries in which there are only one, or two, or a few producers. 9
8For complete documentation see Joseph Borkin and Charles A. Welsh, Germany's Master Plan, the
Story of Industrial Offensive. Duel], Pearce and Sloan, 1942.
9For a brieflist of some of the products which Government must procure from four or less producers, see
Appendix 6.
JOINT ECONOMIC REPORT
79
Not all critical scarcities result from monopoly-but all such monopolies, especially in critical areas, do result in shortages of capacity,
restricted output, and prices boosted to the limit that the traffic
can bear. This has been spectacularly true of certain imports,
notably rubber, tin, burlap, hides, copper, and newsprint. Our
economic interests, like our strategic spheres of defense, lie in many
cases far beyond our own borders. Monopoly conditions in tin, or
in newsprint, or other industries which make the American people
pay more than is necessary, or restrict output, or impose quotas are
as weakening in their effects upon our economy as the loss of vital
territories to the foes of democracy.
Friendly governments, as well as short-sighted groups in our own
economy, must be made to realize that in the present circumstances,
monopoly practices are positive injuries to the ability of the free world
to attain that level of preparation which is necessary to survival.
Within our own country, the efforts of government to prevent and
to remove, wherever found, restrictions upon our industrial capacity,
upon technical advancement, and upon output must be continuous.
Otherwise national security will be jeopardized.
Even in the narrow field of Government procurement, the impact
of higher prices seems to have struck with unusual force. Why in
general should the Government have to experience a considerably
higher price rise from April of 1950 to October-November of 1950
than did the civilian economy? Such price increases cannot be justi:fied on the ground that the goods purchased represented new items to
which costly engineering and design outlays had to be charged. The
large list of items on which price increases have twice been reported
in the Congressional Record by Senator Lyndon Johnson 10 represent
in all cases goods that were already being delivered in April of 1950.
Why then, to pick a few examples at random, should fuel oil f. o. b.
tanker west coast rise 112.1 percent between April and October?
-Or three-conductor cables, 77.7 percent? Or radio sets, 45 percent
(when they were a drug on the civilian market)? Or space heaters
(50,000 B. t. u.), 39.5 percent? Or various types of cranes from 28.2
-percent to 74.6 percent? Grease fitting kits, 240.6 percent? Rope
wire, 100 percent? Dry batteries by amounts varying from 30.9
-percent to 109.5 percent? Trailer mounts, 90 percent? Actuators,
-flash hider bearings, forearm screws, and rear assembly sights, 150
percent? Height finders, 38.9 percent? T-7A parachute assembly
with reserve canopy, 51.7 percent? G-11 100-foot cargo chute, 39.8
percent? And scores of other items showing the same general type of
abrupt price jumps?
What happened in so brief a space of time that items already in
production in April of 1950 and being bought in larger amounts just
:a few months later should cost so much more? As is stated in a
.recent report from the Office of the Secretary of DefenseNormally, unit prices for many of the items now being procured by the Department of Defense would be expected to decline at this time because of large
costs.
increases in the volume of procurement which should reduce manufacturing of
the
The Air Force, for example, estimates that increases in the unit volume
-items it procures should have had the over-all effect of lowering manufacturing
costs by roughly 20 to 25 percent between June 1950 and January 1951,yet
average prices paid by the Air Force have not dropped at all during this period.
10Congressional Record January 17, 1951, pp. 393-6, Military Procurement Prices Before and After the
Attack on Korea.
80
JOINT ECONOAIC -R-EPORT-
In some cases prices have risen markedly -despite quantity orders. The Army,.
for example, is now paying $250,000 per unit for heavy antiaircraft guns, an
increase of 56 percent over the pre-Korea price of $160,000 when smaller quan-:
tities were on order. In terms of the number of guns that can be procured with
available funds, the effect of the inflationary price increases is almost the same
as if half the guns on order had been destroyed by enemy action."
Is there any significance in the fact that in many instances the number of suppliers was very small and in some cases only one or two?
Such are the puzzling questions that.clamor for objective documentation of fact and fearless action.
No service is rendered to this Nation if in mobilizing itself against.
an aggressive totalitarianism abroad it permits itself to be delivered
to the mercies of monopolies and other forms of economic totalitarian-
ism at home. The long period of sustained tension ahead but increases
the necessity for alertness to preserve whatever competition can be
preserved. The dangers of a garrison state increase, the longer the
period of armed alert. Small business and free, private enterprise
are usually the first major economic casualties of war mobilization
programs because war inevitably involves the mass production of
items used by the individual soldier and the highly specialized manufacture of gigantic ships, planes, tanks, and guns. Both sets of items.
are produced by large-scale business par excellence.
- Moreover, inflation by its very operation brings communismEvidence on this point was extensively presented in a document.
entitled, "The Economic and Political Hazards of an InflationaryDefense Economy," published by this Committee in February 195i.
In sum, all these facts but add emphasis to the importance of
eternal vigilance lest vital economic freedoms be lost during the long
period of watchful peace and sustained tension ahead. The necessity
for alertness in detecting points at which the free, privatevcompetitiveenterprise is being imperiled is greater than ever. To be sure, peril
points to free enterprise are difficult to estimate, even in terms ofthe percent of output or of sales or of employment or of assets concentrated in the hands of one or a few firms. They are even more
difficult to estimate in terms of other leverages equally strategic and
vital such as political influence at State, local, and national capitals;
direct and indirect controls over patents, raw materials, sources of
credit, prices, and news channels; open and clandestine managerial,
legal, and financial interrelationships; and many other mechanisms
for the zoning and exercise of economic power now becoming apparent
since the end of World War II in actions under the antitrust laws, in
reports of numerous cartel and other economic investigations, and
especially in the wealth of new information that is being yielded by
the decennial census of population, manufactures, and commerce of1949. But in the light of greatly increased responsibilities, continuous
preparedness and continuous appraisal of the status of competition
are urgently required for intelligent formulation of wise national
policy.
11For full statement and extensive table of price increases suffered by military procurement, see Ap-pendix 4.
APPENDIXES
APPENDIX 1 1
FUNDAMENTALS OF DEMOCRACY CONTRASTED WITH
COMMUNISM
COMMUNISM
DEMOCRACY
Basic Creed
Totalitarian state is supreme; each
Dignity and worth of each human
being is supreme; society strives to human being must serve the state as
afford each the greatest possible oppor- the state directs, regardless of his own
tunity to reach his highest attainments. welfare or judgment. Human beings
are expendable.
Human Rights
No one has guaranteed rights or
he
sacred,
individual.is
each
Because
has certain inalienable rights which freedoms. Everyone is subservient to
14 Politburo dictators and their agents.
democracy guarantees by law.
Church dominated by state.
Freedom of religion.
Freedom of the Person
Arbitrary arrests; imprisonment withNo arrest without warrant; no arbitrary seizure of persons or property or out trial; secret police seize anyone,
search of homes; trial by an impartial search any home; everyone watched
by spies.
jury guaranteed.
Other Freedoms
State tells everyone what to believe;
Freedom to seek truth and secure
accurate information in schools, univer- information available in schools and
elsewhere is distorted to serve state
'sities, elsewhere.
purposes.
State-controlled press and radio, perFree press and radio; free speech,
Ifreedom of assembly; freedom to form sons criticizing government imprisoned;
assembly only with government permis-voluntary organizations.
sion. No organizations free of state
control.
Representative Government
One-party "elections," single slate of
Free 'elections by secret ballot, several
party candidates for each office, norn- candidates chosen by Communist Party
inated in free party primary elections officials.
or conventions.
Government by laws enacted
chosen representatives of people.
by
Government by decrees of dictators,
without consent of people.
4 American federation of Labor, Labor's Monthly Survey, January-February 1951, p. 3.
81
82
JOINT ECONOMIC REPORT
Economic Freedom
Anyone is free to start and run a
State controls and operates all biisibusiness; any worker is free to choose ness; no free enterprise. State dictates'
and change jobs. Workers may organ- worker's job and freezes him in job.
ize free unions, employers may form Free unions and trade associations are
trade associations.
prohibited.
Right to own propertv. Anyone may
No onie may own property. State
own a home, farm or business, and_owns all housing facilities, farnms, busichooso where he will live.
nesses. State officials assign people to
living quarters.
Right of. contract.
Employers fix
State officials dictate all prices, terms
terms of business by contract; workers of business, wages, work conditions.
determine wages and work conditions No person or group is free to contract
by collective bargaining and contract with others on such matters.
with employers. '
Result
Democracy results in progress upCommunism levels people downward:
ward: High-living standards, opportun- Poverty, contempt for human beings,,
ity, advancement through personal advancement depends on favors from
initiative and responsibility.
state and party officials.
A vigorous, loyal, resourceful people
A people seething with discontent,
who will defend freedom with all they many ready to revolt, held in subhave and help others to attain it.
jection by the secret police and Soviet.
army-
APPENDIX
2
JULY 18, 1950.
EcONOMIC PREPAREDNESS REQUIRES HIGHER TAXES
To: Members of the Joint Committee on the Economic Report.
From: Joseph C. O'Mahoney, chairman.
Subject: Has the Joint Economic Committee a function to perform in the present
crisis?
In inviting the response of the members of the Joint Economic Committee to
the query whether we should hold an executive session to discuss economic policy
in the present world situation, I respectfully submit the following general observations. If the members of the committee feel that such a meeting would be
helpful, I shall call it for Friday, July 21, at 10 a. m.
We know now that modern war is total war and that the nation that succeeds
in modern warfare is the nation with the strongest economy, as well as the greatest
military skill.
Success for the United States in the present international dilemma depends
upon (1) the awareness of our people of the fact that Soviet Russia is the head
and center of a world revolutionary movement which plans by force and deceit
to destroy all rival governments; (2) the willingness of the American people to
contribute their substance to pay the economic costs as well as the military costs
of total warfare.
It has been the policy of the United States, and still is, to establish world peace.
To this end it has contributed through the Marshall plan to the economic rehabilitation of Europe, and through the Truman policy to the containment of communism. By supporting Greece and Turkey and by promoting the Union of
Democratic Nations through the North Atlantic Pact and the Western Hemisphere Pact, it has made the free nations of the world more able to resist aggression.
It is evident now that the Soviet Government, through the use of the veto in
the United Nations, through the confusion it has sought to create by the activities
of Coiiimunist party members everywhere, and through localized acts of aggres-
sion, such as those at Trieste and Berlin, now ripening into actual aggressive
warfare in Korea with Soviet-trained soldiers and Soviet-built machinery, is de-
termined not to permit the world to return to the ways of peace.
The'United
JOINT ECONOMIC REPORT
83
States must continue, through the United Nations, to mobilize the moral forces
*of the world against these aggressive tactics of Russia, but at the same time must
launch an intensified program of military and economic preparedness:
The question which must be answered by all our people is how much we ate
willing to contribute of our personal economic resources to the winning of this
struggle. We cannot hope to make the military effort successful without an allout economic effort. We know now that the lessons of World War I were not
used in preparation for World War II. We cannot afford to make the same mistake again of a soft approach to the hardest problem this Nation has ever faced.
When World War II began, the United States had a national debt of less than
$49 billion; the national debt today is $257 billion. The debt has reached this
proportion because we did not have a pay-as-you-go policy for the war. Only 45.
percent of the money costs of that conflict was raised by taxes. The rest of it.55 percent-was postponed to the future through the issuance of bonds. Whatever new expenditures are undertaken now will have to be paid for either through
taxes or through another increase in the national debt with consequent inflationThe Kremlin expects this country to take the easy way out, that is, to hold taxes
down and to trust that somehow sometime in the future the debt will be paid.
Russia is counting on us to bring about our own fiscal collapse by our failure to
support necessary military outlays by increased taxes.
Congress is ready now to approve increased military expenditures. Such appropriations should be accompanied by a tax bill which will finance the expense
without increasing the debt.
Fortunately, it will be much easier to do this than would at first appear. Military expenditure will increase production; production will increase the income of
the people and a portion of this increased income turned into defense channels by
a preparedness tax law would- make it possible to avoid another increase of the
national debt.
Higher taxes would have another beneficial effect. They would constitute an
effective substitute for rigid economic controls. In World War II we kept the
tax rates lower than they might have been. Rigid controls were therefore necessary though we were unwilling, in the use of controls, to freeze prices, wages, and
profits across the board. Higher taxes now to meet the increased expenditures.
which everyone believes inevitable will reduce the money available for civilian
purchases and will thus operate to divert industrial production from civilian commodities to military commodities. A preparedness tax bill would enable all the
people to contribute the buying power necessary to finance the concentrated military production required for the preservation of the free world. For some time to
come we as a people will have to be willing to buy fewer automobiles and .more
tanks.
At my request the staff has made a review of the present economic situation
involving recommendations as follows:
(1) Balance the cash budget. Federal expenditures should be held to the
minimum, particularly those not directly connected with military requirements and vital economic expansion. Once the expenditure program forthe next fiscal year has been enacted, the Congress, after conservatively
estimating the increased yield in taxes likely to result from increased levels.
of business activity, should increase governmental revenues by enough to
balance the cash budget.
(2) Restore consumer credit control.
(3) Authorize allocation machinery for critically scarce materials.
(4) Implement through the United Nations the point 4 program and
other measures providing not only for expanded technical, educational, and
economic assistance, but for freer flow of goods, services, and capital, to
every member of the family of nations seeking peace and freedom.
Furthermore, immediate administrative action should be taken (1) to
contract credit for all activities that unduly compete with expanded armament effort; (2) to impound, insofar as possible, funds appropriated for
nonvital postponable objectives; (3) to develop a program for private expansion of productive capacity of critical items such as steel; and (4) to
encourage increased private savings, via sale of savings bonds.
I venture to suggest that this committee, with its background of economic
information, can and should make its contribution to public understanding of
the profound economic effects of the present acute situation.
84
JOINT ECONOMIC REPORT
I.
REVIEW OF CURRENT ECONOMIC
PRESSURES AND THE OUTLOOK
The current economic situation differs considerably from that which prevailed
when war broke out in Europe in September 1939. Then the economy had a great
deal of slack. Now employment, personal income, and consumption are at record
levels.
9
,000;Q00 were unIn 1939, out of a; total' labor force of 55,600,000, about,
employed. Now the total labor force is about 66,000,000 and less than 3,500,000
are unemployed. Technological developments may be counted upon to increase
production equivalent to adding a million persons to the labor force during the
next 12 months. Another million, mostly young persons, will be available, many
of whom are daily volunteering for the armed services. Hours of work can be
increased. But the total amount of slack in the labor force is obviously less than
half that of 10 years ago.
In 1939 the Federal Reserve Board Index of Industrial Production averaged
109 for the year and doubled within the next 5 years. In June of 1950 the index
of industrial production stood at about 197. It reached 243 during the war. It
could readily be increased from 5 percent to 7 percent, i. e., the index could reach
a level of 210 without involving higher costs, uneconomic and submarginal plants,
or additional costs necessary to overcome bottlenecks in production capacity.
The one outstanding exception is steel, with copper, paper, and power possibly
also bumping ceilings at an early date.
In 1939 disposable personal income amounted to about 70 billion dollars. Now
it is more than 200 billion, and may approach the 210 billion level before the end
of 1950. After adjustment is made for increases in popiflation and prices, real
per capita disposable personal income is up over 40 percent. Furthermore, consumers are buying more in relation to their incomes than they were in the prewar
period. Additional employment and wages combined with military operations
abroad might well cause consumers to bid up prices sharply.
In 1939 prices were comparatively low; agricultural prices in particular were
substantially below a balanced relationship with other parts of the price structure.
Price increases then raised both production and capacity. At boom levels such
as now exist, price increases are simply inflationary and obstruct rather than
increase balanced production.
In 1939 corporate profits after taxes were about $5 billion. They are now
running at a rate of about $21 billion, after taxes. Profits are therefore well over
four times the prewar level after allowing for the increase in tax burden.
Inventories of goods are in general about in balance. But widespread piling
up of inventories by business, coupled with consumer hoarding, might well
tighten up the situation to such an extent as to give manufacturers, wholesalers,
and retailers strong incentive to aggravate inflationary pressures.
It is assumed in this statement that current police action in Korea represents
not an emergency action, but rather the first in a continued series of localized
encounters with Communist aggression. Relatively heavy military expenditures
may for years to come be a steady proportion of governmental outlay and approximate 18 to 20 billion dollars, as compared with 13 at the present time. Can 5
to 7 billion dollars be added to current defense expenditures without inflation?
As indicated above. the economy could quickly expand another 5 percent with
existing labor force and capacity. Gross national product could rise from levels
of $260 billion to $280 or $285 billion without-serious inflation of costs, provided
A further
there be no panic buying by consumers, business, or the Government.
general rise in prices is not only unwarranted but aids directly the strategy of the
Kremlin. Lenin laid down as the first tactic in Communist overthrow of capitalism that of inciting inflation. Rumor mongers and speculators who boost prices
are accomplices of Stalin. No more effective economic weapon can be found than
the demonstration by this Nation of self-discipline and sacrifice in domestic commodity markets equal to that being shown on Korean battlefields.
II.
FEDERAL FISCAL POLICY
Fiscal policy, under the circumstances, should be directed toward balancing the
cash budget as nearly as practicable or feasible, thus contributing to economic
stability and strength.
On the basis of present tax laws, on the basis of the expenditures implied in the
pending appropriation bill as amended by the Senate Appropriations Committee,
and on the basis of modestly expanding levels of national income, the cash budget
of this Government may nearly be in balance. The "cash budget" as distinct
from the "traditional budget" includes total receipts from all sources including
JODIT- ECONOMIC REPORT
85
trust
trust accounts on the one hand, and all expenditures, including those from
accounts, on the other hand. The Federal deficit on the traditional basis, excludapproxiing trust account operations, might be $2 billion. Existing programs Subcommate the conditions set forth by the Monetary, Credit, and Fiscal Policy
mittee in its report last January as requiring a cash surplus.
The Nation faces this question: Is the expected increase in defense expenditures
present
of an emergency nature-one lasting only for a few months, or until the activity
Korean situation is terminated? Or, is an increased tempo of military
more or less permanent-one likely to last for the foreseeable future as additional
Communist aggressions develop in other parts of the world? If the former is the
accepted assumption then the Government might well accept the resulting Government deficit as a temporary expedient. If, however, the latter is deemed more
relikely, then sound fiscal policy demands balancing the budget either through of
ducing expenditures in other areas or by increasing taxes, or a combination
the two.
One of the strongest instruments for stabilizing the economy at high production
levels and preventing creeping inflation is the Government's fiscal program.
Nothing can be gained through permitting price increases and inflation. Today
will
there is little slack in our human and material resources. Further inflation
not produce extra output.
With fiscal policy one of the most expedient methods of preventing inflation,
the Congress should make every use of it. This involves adhering to the criterion
that the cash budget should, at the minimum, be balanced when economic activity
is at its present tempo. Most careful scrutiny of Federal expenditure programs
should again be made to find possible reductions that might offset to the largest
possible extent the necessary increases in the military area. Once the expenditure
program has been determined-after the pending appropriation bill becomes law
and after the new requests for additional military authorizations are knownthe Congress should increase taxes to the extent necessary to assure a balanced
cash budget in the next fiscal year.
The tax structure should also be designed to make whatever contribution is
possible toward the control of strategic materials and scarce manpower. There
this
is now in effect a schedule of wartime excise taxes originally designed withthose
purpose in mind. To the extent that present necessities are similar to
prevailing at the time these taxes were designed, they are well and good. No
need for change in them exists. It may be, on the other hand, that changed
circumstances would dictate some change today in the list of particular articles
subjected to "punitive" excises at an earlier date. The list of items included
of
might, therefore, be subject to review but the principle of curtailing all uses
limited resources where they do not contribute to defense needs should be continued. This would suggest that the pending tax bill not be pressed until the
expenditure program becomes known and that an automatic criterion of a balanced
cash budget be the guiding principle in any tax legislation this session.
III. MONETARY POLICY
Tax measures designed to improve the balance of the budget must be accompanied by monetary action wherever possible.
the
Under the present circumstances of threatened inflation, the direction of
required monetary action is clear. The problem is (1) the willingness to use and
(2) the effectiveness, if used, of the credit restrictive devices which might be
brought into play. Ordinarily restrictive credit devices operate through interest
rate channels and therebv influence business decisions.. However, if the psychological pressures making for inflation are strong enough they may well outweigh
the importance which businessmen and consumers attach to increased interest
costs. To the extent that they do discourage borrowing, increased interest costs
of
offer a useful device. To the extent that costs are disregarded in the rush
individuals and businessmen to make their own preparations for war, the restrictive effects of higher interest rates are nonexistent; only the cost effects to Government and defense construction are real.
The Federal Reserve System has several devices available to it for restricting
credit. One of these is through its open-market operations.
Another restrictive device now available to the Federal Reserve System is the
.possibility of increasing requirements for member bank reserves. These requirements are now four percentage points or some 15 percent to 20 percent lower
than their recent maxima.
The most effective control for the specific needs of diverting purchasing power
from so-called "hard goods" is no longer available without congressional action.
,%n
86
.
JOrNT ECONOMIC REPORT,
The reenactment of authority for regulation W is a first and necessary step if
consumer purchases of automobiles and household durables are to be curtailed.
In recent months it has been an accepted Government policy to encourage
housing expansion. If defense needs require, the Government should reverse
this policy, discouraging housing loans. This may. be done by forcing larger
down payments for approved mortgages, by increasing maximum rates on insured
mortgages and by qualitative action through tighter appraisals standards.
IV. MANDATORY ALLOCATION OF MATERIALS
The economy is operating so near capacity in certain areas such as steel, electric
power, and paper that any increase in demand in the Military Establishments
must, of necessity, create a demand for vital materials in excess of the immediate
supply. In addition to efforts to expand our capacity in these key items, efforts
should be directed toward developing allocation programs for fair apportionment
of these scarce materials among civilian uses. So far as military needs are concerned, the Draft Act provides the President with power to direct production
priorities for the defense establishments. However, Congress will need to enact
authority for the administration to cooperate with industry in establishing
equitable allocations to prevent disruption of the civilian economy and rising
prices.
APPENDIX
3
Selected cases where changes in legislation would result in economies
SUMMARY OF ESTIMATED SAVING
[In millions]
Fiscal year
1-52
1952
Military services -$
Finance, commerce, industry -24.0
Labor
Transportation and communication -396.0
Natural resources -------------------Agriculture --------------------Education --------------------------------Social security, welfare, and'health-159.
Veterans ----------------------------------------Interest --- -------- ------------------------ ----------------General --------------------------------------------------------------57.0
Total ----------------------------------------------------
1953 andyears
subsequent
360. 5
5
61. 0
2.0
0
516.0
105.0
1,681.0
$385.0
24. 0
5
600.0
186.0
2.0
159.0
517.0
105.0
57.0
2,035. 5
'The accompanying list ig intended-only as aif illustration of what mlght'be eonsidered-rnotsra-specifle
recommendation. Neither the committee nor any of its individual members or staff necessarily
*orfavor, any of the specific proposals. In preparing the list the staff has, of course, not been in recommend,
a pcsition to
hold hearings nor explore the individual items thoroughly with interested parties. In all cases
"savings"
are estimated and if any proposal were adopted, actual realization might be larger or smaller savings
than
those indicated.
Selected cases where changes in legislation would result in economies-continued
I
I
Estimated savings
(in millions)
Item
Proposal
Comments
Reference:
budget pages
1952
.
1953 and
subse1 quene
quon;
years
I
.
fl
MILITARY SERVICES
of 012-13 (1951)
For those below a specified age, say 60, who Information not available on proportion
present total of $320,000,000 which goes
are not retired for physical disability, pento personnel below 60. Savings would
sions might be reduced. Some pension
be greater in later years. The Governmay be necessary because of need for keepment is now incurring obligations for
ing Armed Forces young. If pensions of
future payments at more than 23 times
a
persons now retired are to be reduced,
current retired pay expenditures. Estirequirement for reapplication for pensions
mated that 10 percent of total could be
woud be necessary.
saved.
year, pay for Reserve components 050 697, 701, 751
Last
of all
2. Reserves: Many members of reserves of armed Require discharge from theforReserves
(1951).
was budgeted at $740,000,000. Pensions
duty.
who become unavailable
forces who draw pay for reserve "training"
and National Guard reservists
Army
for
and (if they attend enough meetings) bewere $85,000,000-Fleet Reserve was
come eligible for pensions are not really
$42,000,000 (part of $320,000,000 of item 1).
available for active duty because of age,
With larger Reserve components as a
or
hardship.
essential occupations,
result of universal training and service.
this total could probably not be reduced
but would be kept from increasing so
much as otherwise. 1952 saving estimated as amount of increase from 1950 to
1951. 1953 estimated larger because of
growth of Reserves
1951 hazard pay about $145,000,000.
In
Recruiting
payments.
extra
such
Abolish
CompenCareer
B. Hazard and Incentive pay:
Estimated savings include increased
who
man
situation is different now-the
sation Act of 1949 requires extra pay of $30
for sea and foreign duty.
allowahee
can
pay
No
drafted.
Is
volunteer
doesn't
suband
pay
flight
for
to $210 a month
adequately compensate for combat hazmarine duty, and of $50 a month for enallowwithout
less
are
inequities
and
ards
in
officers
for
a
month
$100
and
listed men
ances.
observer duty in aircraft, glider duty,
parachute jumping, demolition, and explosives duty, submarine escape tank
training, and diving duty training. Enlisted men receive 10 percent extra for sea
and foreign duty. Doctors receive $100
extra a month for volunteering. Act allows
President to suspend In time of war but
not In time of combat.
1. Pensions: Members of the Armed Forces can
in some Instances retire after a specified
amount of service, sometimes as little as 20
years. A man who gets out in his forties
can often earn a good income in addition to
his pension, toward which he contributed
nothing.
$3520
$40. 0
0
I
35.0
00.0
t!
0
Z
0
C)
0
0O
IF3
200.0
200.0
Selected cases where changes in legislation would result in economies- Continued
00
00
Estimated savings
(in millions)
Item
Proposal
Comments
Reference:
budget pages
1~952
1953 and
subse-_
quent
years
$20
$27.0
$70
MILITARY SERVICES-continued
4. Leave: Members of the Armed Forces are
allowed 30days' annuallieave. Theycannot be requlired to take leave invol-tile~r~
and so receive additional "leave" through
time excused from duty and "proceed"
time. Accumulation of 60 days' leave is
allowed. ILsmp-sum payments are made
for accumulated leave upon completion of
an enlistment period.
5. Medical care: (a) Retired military personnel
and their dependents now receive medical
care.
(b) Dependents of members of Armed
Forces receive free medical care when
available. Since it is hard to discriminate,
care is usur lly available.
6. Deposits of enlisted personnel: The Armed
orces are required to accept deposits of
personal funds of enlisted personnel and
pay interest of 4 percent.
7. Commissaries: "Operational losses" and operating expenses of sales to individuals are
charged to regular appropriations.
8. Date of rank: Effective date of increased pay
for higher ranks can be date of eligibility
rather than date of order.
9. Post exchanges, etc.: Expenses of military
personnel in exchanges and some other
expenses are charged to appropriations.
10. Uniforms: Uniforms are considered personal
property and are retained by the discharged individual.
Reduce the amount of leave slowed. Reduce the amount which can he accnmu-
Assuming 500,000 men complete enlist--$27.0
ments -anul
wt.3daso
e------nnall wih3Iaso
cu
muiatea leave and a base pay of $110,
for civilian employees.) Allow involunthe annual cost is $55,000,000. This
tary leave to be required. Charge to leave
might be reduced as much as 3I, that is
any period in excess of 4d hours when indi%iof 30 days' leave for 500,000 who com(aSW
D notVIIIb
vidual
on duty or hospitalized. (These
emde
tirgsSIOI(
plete enlistments at $110 base pay.
last 2 proposals wvould not result in much
in additional savings if the first 2 were
adopted.)
(a) Discontinue care for all personnel retired 6,175 patients per day (dependents plus 641-42
(1951).
for reasons other than physical disability
1,000 retired personnel) at $10 a day,
and discontinue care for dependents of
$22,000,000. Save more than threeretired personnel.
fourths of it.
(6) Discontinue care for dependents
except when they live on a military
reservation.
Eliminate these banking services, which are Interest costs - -------.----------622, 697, 750
no longer necessary with the allotment
(1951).
system which makes savings possible.
Require prices which prevent losses and .
.
,
760 (1951) .-.
cover expenses. (See proposed sec. 628 on
p. 760 eliminated on a point of order.)
Limit date of pay to date of order. (See -------------------------------------------1 760 (1951) -------proposed sec. 630.)
idod1-
_-
--
Require post exchanges, theaters, and other
revenue-producing activities to pay all
direct expenses. (See proposed sec. 620.)
Require that, except for Items needed for
wear on return home, outer uniform
clothing be turned In prior to separation. Declare that clothing purchased by
personnel under a monetary clothing allowance system be considered Govern,m4ent property.
Estimated -
.
Recapture and re-issue of uniforms for
Armed Forces of 3.5 million.
759 (1951)
...
16.0
t4
20:0
a
0I
0.
2.0
2.0
~
N
5.0
.0
40.0
40. 0
Total, military services --.
FINANCE, COMMERCE, AND INDUSTRY
12. Federal Reserve administrative expenses:
The Fetccral Goverinnent has almost all
incidents of ownership of the Federal
Reserve System except budgetary control-getting all assets except the original
private investment in event of liquidations. Systemn charges Government for
services as fiscal agent, with costs varying substantially among different banks.
13. Federal Reserve earnings: Until 1933 Systeml paid franchise tax of 90 percent of net
earnings after paymnent of 6 percent divideld to batiks. Since 1947 System has
voluitarily pai(i the equivalent of this to
avoid its reimposition by statute. Full
earnings would belong to Government
i80 (1982)
Require that bulk of records be destroyed,
retaining only those with archival value.
11. Selective service records: Records concernIng registrants under 1940 Selective Serviee Act must be retained.
-----------
I
A budgetary limitation similar to that on
FDIC could be placed on system without
affecting its policy independence.
Saving of charges as fiscal agent to Treasury, RFC, etc.
Enactment of an unspecified franchise tax. 1951 payment of 90 percent of earnings
about $150,000,000 Increase in receipts
Since surplus and reserves are now a
times as high as capital stock and are
ample to cover risks in holding portfolio
of Government securities, Government
should get full earnings currently.
upon liquidation.
14. Patent fees: Fees are set by statute. Except during Last decade, policy of Congress has been to have fees approximate
costs of lPatent Oltice. Fees are small
percentage of total costs of filing for
patents.
Direct Secretary of Commerce to fix schedule of patent and trade-mark fees to permit office to operate on self-sustaining
basis, giving due consideration to incentives for invention, examination expenses,
and ability to pay In setting individual
rates.
Expenditures less receipts equals present
deficit (amount is Increase in receipts).
801 (1952) ..
360.6
385.0
* 3.0
3.0
10.0 16. L4
16.0
A14 (1951)
485, 517 (1952)--
'ft.0
2.0
0
0
24.0
Total, Finance, Commerce, and Indus-.
I
try.
LABOR
IS. NLtRB elections: Law acquires Government Repeal requirement ------------------------to hold elections before unions can bargain
for a union shop. Requirement has
proved to be red tape since unions win 95,
percent of the time.
Total, labor-
Between E4and I million dollarsannually
105 (1051)
.
0.6
.5
I
0.5
.5
0D
Selected cases where changes in legislation would result in economies- Continued
Estimated savings
(in mill ions)
Item
Proposal
Comments
Reference:
budget pages
TRANSPORTATION
1952
1953 and
subse-
~~~~~~~~~~~~~~
Iyears
AND COMMUNICATION
16. Merchant marine: Subsidies are now paid
for construction and operation. Foreignaid recipients are required to use United
States bottoms for half of shipments (increasing cost to United States). In addition, special tax concessions are granted.
Remove tax privileges and study whole system of subsidies.
17. Aviation subsidies: Airmail payments are Separate subsidy payments from postal paynow set by CAB to cover airline'losses,
ments, allowing better analysis of subsiregardless of cost of carrying mail. Consedies.
quently, exact cost of subsidies not known.
18. Federal-aid highways: Basic authorizing Eliminate contract authorization and comlegislation is in form of contract authorizapulsory apportionments, putting program
tion and apportionment to States are
under control of appropriations process..
required. About 14 of total Federal expenditures are for secondary roads.
19. Truck weights: No Federal regulation of al- Make State eligibility for grants for highlowable truck weights now exists. As a
ways dependent on strict enforcement of
result, highways do not last as long as they
maximum weights prescribed by Federal
are supposed to.
Government.
20. Postal deficit: Postal rates have not kept Raise rates, preferably by' giving President
even with changes in costs of salaries and
authority to set rates to reduce deficit to
transportation. Substantial subsidies are
amount representing services to Governinvolved to periodicals and mail-order
ment (airline subsidies would be sepahouses.
rated).
Savings could not be immediate unless
contracts canceled. Ship construction
now being started for Government account rather than for sale. Operating
subsidies7-,$59,000,000, $35.000,000 from
1952 funds. Construction subsidies in
1951 budgeted at $35,000,000. Sold 25
percent down, balance at 36 percent for
20 years. . Profits of 10 percent on capital
guaranteod. 45 percent of costs subsidized. Savings estimated as part of
operating subsidies, probably increased
in 1953 because of better business-more
contracts canceled.
Subsidies probably total about $100,000,000 annually. Estimated savings probably 10 percent of present total.
M33,
(1952), .........
122-3512(1951).
1
$35. 0
4
i-3'
0
z
t4
0
0
M34 (1952)
-I-
Total program now costs about' $500,n50,- 486, 519 (1952). .000 annually. Saving estimated at approximate amount for secondary roads.
Would require canceling of contracts for
any saving in 1952.
Highways will not need replacing as often.
No estimate for 1952-53.
Probably would be more in 1953 but no M36 (1952)
basis for estimate.
I
10.0
.-
i f'
140.0
0
qi
$361.00
380.0
21. Riverand harbor works-usercharges: There
is now no basis for charging users of river
and harbors improvements to recover at
least part of costs. Consequently, yachtsmen and shippers enjoy a subsidy.
Total, transportation and communication.
Institute user charges.
552 (1952)-
Operation and maintenance will be about
$67,000,000 in 1952, construction about
$135,000,000. Recovery estimated at
about If of operating cost.
. - - - - -- - - -
35.0
36.0
396.0
600.0
NATURAL RESOURCES
22. Water resources: With few exceptions, there
is now no legal basis for sharing costs of
projects of primarily local value with State
and local governments.
23. Project authorizations: Water resources and
other public works projects are now authorized far in advance of construction.
Money is spent for planning, although
planning must be re-done if enough time
elapses to allow cost changes.
Adopt proposals of Water Resources Policy This would not only reduce the Federal
Commission for Statd.and local participa- I share but would also reduce local pres- I
sures for many projects. Savings would
tion in projects.
come on projects not now begun. No
estimate for 1952-53.
Do not authorize any projects which are not No estimate for 1952-53
to be built during this emergency period:
0
AGRICULTURE
24. Price supports: Mandatory price supports at Abandon mandatory supports at high levels. Savings depend on general economic con- 349, 351 (wheat),
ditions. Construction of storage facili402 (acreage),
This would allow reduction of some other
fixed percentages of parity arc now reties costs $25,000,000. International
435 (storage).
supports and would permit encouragequired on cotton, wheat, corn, tobacco,
Wheat
Agreement
costs
$115,000,000.
ment of types of production needed.
rice, and peanuts. This makes costly
Acreage allotments and marketing
acreage restrictions with compliance payquotas cost $24,000,000.
ments necessary to prevent overproduction at artificially high prices. It also
leads to necessity of constructing storage
facilities for overproduced crops. In order
to prevent complete imbalances in production, it may force price supports for other
commodities. Because high-priced commodities cannot compete in foreign trade,
it leads to subsidies for export of wheat under the International Wheat Agreement or
increases the cost of foreign aid.
..
25. Conservation and use of agricultural land: Repeal authority for program. Provide Conservation and use costs $304,000,000 .347 (1952)
(including administrative expenses acinstead authority for selective payments
Soil Conservation and Domestic Allotcounts). Soil Conservation Service
by Soil Conservation Service in connection
ment Act of 1936 authorizes Nation-wide
costs $56,000,000. Saving estimated at
with expanded prografm of technical advice
program of payment to farmers for consomewhat less than half of present proand assistance to soil conservation disservation practices such as contour
gram cost.
tricts.
plowing and use of lime. Appropriation
acts authorize use of funds to formulate
program for current crop year with payments for conservation practices to be
made from appropriations of following
year.
24.0
24.0
00
0
X
0
00
0
125. 0
Selected cases where changes in legislation would result in economies- Continued
Estimated savings
(in millions)
Item
Proposal
Comments
Reference:
budget
pages
1953'abs-d
19. . 192
__.|subsequent
years
AGRICUJLTURE-continued
29. Removal of surplus agricultural commodities:
Permanent indefinite appropriation of
30 percent of customs duties (act of Aug.
24, 1935). Amount is unrelated to needs
and increases during prosperity with
greater imports.
Total, agriculture-
Repeal permanent appropriation. General
authority for price support and surplus
disposal would remain in CCC.
Savings depend on general economic con- 349, 405 (1952)-ditions. Estimated at half present
program.
I
$37. 0
$37W0
0
C)
-
61. 0 .-
186i0
0
EDUCATION
27. Vocational education: A permanent appropriatioll of 7.5 million requires use of
money for training salesmen, etc. rather
than for needed defense workers.
Total, education
Repeal permanent appropriation, putting
under annual review. Repeal allotments
by categories of training.
About yi of present permanent appropriation is for distributive trades.
199 (1952)
2.0
I20.
-
2.0
SOCIAL SECURITY, WELFARE, AND HEALTH
28. Public assistance: The Social Security Act
of 1950 requires that the Federal Governinent pay 75 percent of first $20, 50 percent
of next $10, 33>j percent of next $5 for oldage assistance Maximum Federal payments per individual are $50.
2.0
Two basic typVes of revision are possible:
(1) Revision of financial participation:
(a) Drop the matching maximum per
individual. (b) Change the formula to
that of 1940-48 (3§ of first $15 and Fe of
balance to maximum of $45) or, gradually,
to the 60-50 matching that prevailed before 1946.
(2) Stricter definition of eligibility: (a)
Deduct other income from Federal matching maximum. Now if recipient has $50
income and gets $50 assistance, Federal
payment is $30. (Is)Provide no Federal
matching for recipients of OASI, veterans'
or other Government pension.
Revisions such as these need not change
the payments to individuals if the States
assume a larger share of the payments.
227 (1952)
100.0
01
2:0
S100.0
0*
'-2
29. Railroad retirement transfer: Unlike the Change the annual specific appropriation
OASI, where amounts equal to pay-roll
to a permanent indefinite appropriation.
tax receipts are put in the trust fund, a
specific appropriation of the estimated
receipts from railroad payroll taxes is paid
00
In advance of tax collection. The fund
thus collects interest on this advance payx
ment. The estimate Is often high. This
excess Is made up by reducing the approcar
priation the following year but the interest
paid on the excess is never recovered.
30. Railroad-retirement military service credits: Stop further payments or recapture past payPublic Law 141, 81st Cong. requires transments. Transfer funds as needed when
fers of $33,000,000 annually until 1954 for
claims mature.I
military services credits of railroad workers. The total amount is probably unnecessary because many workers will never
become eligible and others will not need
the military service credits.
31. ESA grants: Grants for hospitals, vocational Amend grant laws to allow flexibility In
education, venereal disease, health assistallotments to give proper emphasis to critance, etc., now are on a formula basis.
ical defense areas and for special defense
Thus emergency needs require additional
purpose. (See H. R. 9914 on local health,
appropriations.
81st Cong.)
Total, social security, welfare, and
health.-I
ii
i.6
i.o
33.0
33.0
25. 0
25.0
interest on advance and excess payments I20 (i952)
amounts to about $1,000,000 annually.
I
Cost of further payments plus cost of
interest for all years until claims mature.
120 (1952)-
C-4
Estimated amount for hospitals, schools,
etc. that might be diverted.
_ __
_-
-
159. 0
159.0
0
0
Z
0
VETERANS
32. Hospitalization: A veteran of any war unable to pay for hospitalization shall be
furnished care within the limits of facilities regardless of the service connection
of t6e ailment (38 U. S. C. 703). 35 of patients have non-service-connected ailments. Test of ability to pay is a statement by the veteran which the administrator cannot question.
33. Hospital construction: Over $500,000,000 of
authorizations to construct veterans hospitals are unobligated. There are already
enough hospitals for service-connected ailments and will be more when present constructions is completei. Doctors are not
available to staff hospitals.
34. Dental care: Veterans who had cavities filled
during military service are considered to
have a service-connected ailment entitling
them to lifetime dental care.
Establish an objective means test
.
Medical program (excluding construction) 83, 129 (1952)costs $650,000,000.
1
100.0
100.0
0
x
0
qo
'Ie
Rescind the authorization -Would
Eliminate dental care after specified period
after discharge.
reduce expenditures in later years -
Total budget provides for 325,000 examinations in VA facilities and 208,000 by private dentists; for 83,000 treatments in
VA facilities and 355,000 by private
dentists. Saving estimated.
133-4 (1952)--
129 (1952)-
I
-
5.0
5.0
-
Selected cases where changes in legislation would result in economies- Continued
Estimated savings
(in millions)
Item
Proposal
Comments
Reference:
budget pages
1953 and
192 subse192 quent
years
VETERANS-continued
35. Pensions: No limitations on income are re- Establish income limitations for all veterans. Total cost of pensions is $600,000,000.
Redefine income concept. Reduce penEstimated saving 10 percent of total.
qLlired for veterans of the Spanish-Amersions as income approaches limits. Do not
ican War. For World War I veterans, full
allow presumption of total disability with
pensions are allowed with incomes of up
less than 40 percent disability.
to $1,000 a year for single men and $2,500
for those with dependents. Government
insurance payments, veterans' bonus payments, and Federal and municipal overtime pay are not included in the definition of income. (With inicreased social
security, these exclusions are important.)
Veterans over 65. with a 10 percent disability are considered totally and permanently disabled for pension purposes.
The value of this training is doubtful. Short 265,000 veterans will get payments of about
36. Ois the farm training: Usider the Servicemen's
$1,090 each, or $265,000,000.
of eliminating it, determine amount of
Readjustment Act of 1944, veterans can
subsistence payments on basis of total
receive subsistence payments for on-theincome.
job training on farms. The amount of
their monthly payments is determined on
the basis of that portion of their yearly
income attributed to their labor, excluding
the portion attributed to their capital
investment
Total program .
37. Interest gratuities on mortgages: VA now Abolish gratuity.
pays first year interest cost on all mortgages it insures. This gratuity is usually
deducted from the principal, so that the
veterans' cash outlay is not reduced in the
year he purchases a house. However, he
can make an income tax deduction for the
amount.
132 (1952) ----
$60. 0
$60. 0
C)4
0
M
0
132 (1952).
265.0
265.0
0
0
7.3
132 (1952) -.
76. 0
76.0
38. Burials: In addition to offering to bury any Abolish payments for burial of veterans who
veteran, his wife, minor children, or umVdo
not die of service-connected causes or in
married, widowed or divorced daughter,
VA facilities,
the Governmnent will contribute $150 to
burial expenses of any-veteran in a nonFe(cral cemetery, regardless of financial
iscd, cause of death or number of years
that have elapsed since service.
About $10,000,000 a year (from Veterans'
Miscellaneous Benefits). Savings will
be higher in later years.
136 (1962).-....
Total. veterans
10.0
10. 0
516.0
517.0
40. 0
' 40.0
INTEREST
39. Interest on special issues: While rates on Set all rates at average for public debt,
OASI and llnemployment trust funds are
except for Postal-savings deposits.
set by law at public debt average, those
for railroad retirement are set by law at 3
percent. Other funds receive interest at
administratively determined rates, up to
4 percent.
40. Postal savings deposits: Interest is paid at. Set at prevailing rates on short-term borrow2 pereeft, unchanged since 1908.
ing. (See II. R. 6456,
Cong.)
41. Interest on refunds: Law specifies rate of Reduce to average for 51st
public debt. Taxes
0 percent. This may tempt sonme to overpaid late should pay a penalty rate.
pay. This is same as rate paid on taxes
paid late.
Total, interest
l 827 (1952).------
.
15. 0
789, 791 (1952)
50. 0
827 (1952)
Total at 6 percent rate is now about
$92,000,000.
160
105
105
GENERAL
Total, general
-
I
C4
0
H
-----------------
42. Government corporations and business enter- Require charges for services and interest Rates on outstanding
loans cannot be
prises: All Qpvernment corporations are
rates to be sufficient to cover costs. Would
changed. Some corporations now charge
not now required to keep on a self-susaffect chiefly RFA and TVA. Recomenough.
tamling basis over the long run, including
mended by GAO.
full interest on the Government's investMicet and share of civil service retirement
and employees compensation. RFC recently raised interest rates to meet congressional requirement.
43. Procurement: (a) Laws now require that most (a) Remove "Buy American" restrictions.
Goveruneirent purchases be in United
(b) Authorize petty cash accounts for
States.
minor purchases.
(b) Minor purchases cost more in paper
work than the cost of the article.
44. AnInual leave: 26 days' annual leave or 5 Reduce annual leave, perhaps relating it to Savings result from smaller
lump-sum
weeks is now allowed. This can be aclength of service. Reduce amount which Ipayments upon discharge or resignation,
cumseeslated up to 60 days, except for Whitcan be accumulated,
smaller staff or less overtime.
ten rider.
-
413 (1952)-
7.0
7.0
50.0
50.0
57. 0
57.0
57I
M
Xt
0
0
00
00
co
96
JOINT ECONOMIC REPORT
APPENDIX
4
THE DEFENSE PROCUREMENT DOLLAR
Bureau of Labor Statistics' Wholesale Price Index, wholesale
the
As measured by
prices today are 20 percent higher than in April 1950 and more than 14 percent*
higher than prices at the time of the Korean invasion. Despite the existence of
price control, prices have risen by more than 1 percent during the past month and
it has been predicted by the Director of the Office of Price Stabilization that prices
will rise by an additional "5 or 6 percent, or even more" by midsummer of 1951.
Commodities and services of a strictly military nature purchased by the Department of Defense are not covered by price regulations, but civilian-type commodities such as food, shoes, textiles, etc., are subject to such regulations. During
the past few months, the costs of virtually all items purchased by the Department
of Defense have increased, and further general increases-appear to be in the offing;
This applies to both items covered by price control and those items exempt from
such control, since in both groups of commodities there are many cases in which
increases in basic costs have not yet been reflected in the prices of finished commodities. The upward pressure on prices will be accentuated by the additional
wage increases that are taking place.
Normally, unit prices for many of the items now being procured by the.Department of Defense would be expected to decline at this time because of large
increases in the volume of procurement which should reduce manufacturing costs.
In an increasing number of instances, however, part or all of the economies of
larger scale production are being lost as a result of increases in direct manufacturing costs, principally labor and raw material costs. The Air Force, for example,
estimates that increases in the unit volume of the items it procures should have had
the over-all effect of lowering manufacturing cobt§ by roughly 20 to 25 percent
between June 1950 and January 1951, yet average prices paid by the Air Force
have not dropped at all during this period. The Air Force estimates, therefore,
that its true procurement costs have risen by close to 25 percent. In some cases,
prices have risen markedly despite quantity orders. The Army, for example, is
now paying $250,000 per unit for heavy antiaircraft guns, an increase of 56 percent
over the pre-Korea price of $160,000 per gun when smaller quantities were on
order. In terms of the number of guns that can be procured with available funds,
the effect of inflationary price increases is almost the same as if half the guns on
order had been destroyed by enemy action.
Every effort is being made by the Department of Defense to reduce costs and
cut down on the need for critical raw materials by revision and simplification of
specifications. For example, specifications for military blankets have been
changed from 100 percent virgin wool to only 65 percent virgin wool, with the
balance reprocessed and reused wool. .Despite this reduction in quality, blanket
prices, like all wool product prices, have risen alarmingly. The most recent
procurement of blankets under the new specifications Was made about a month
ago, when 780,000 blankets were purchased at $16.54 each. This represents a
125 percent increase over the price of the last sizable procurement of 100 percent
virgin wool blankets.
It must be recognized that it is difficult to compare prices at different times for
much of the materiel procured by the armed services because of changes in quantities involved, changes in specifications, changes in manufacturing methods and
processing techniques, resort to marginal producers or methods, tooling costs,
existence of price redetermination clauses in contracts, etc. Direct price comparisons can best be made on relatively standard-type items that are subject to little
change in specifications. Such a list of items, indicating procurement prices
applicable to each of the services and to the Armed Services Petroleum Purchasing
Agency, is contained in the attached table. While these items account for only
a relatively small part of the total amount of defense procurement and their price
changes do not represent an exact index to over-all procurement prices, the almost
uniformly upward price trends shown by these items serve to illustrate the
serious decline in the purchasing power of the defense dollar that has taken place
during the past year.-Progress Reports and Statistics, Office of Secretary of
Defense, March 5, 1951.
Military procurement prices before and after the attack on Korea (April 1950, August to September 1950, October to November
1950, and January
to February 1951)
Price.
Commodity
Commodity
unit
Unit
April 1950
A. S. P. P. A.:
Fuel ofl, I. 0. h. tanker:
West coast ------------------.Barrel.
$0. go
Caribbean .
-..
-. do...
1.70
Motor gasoline, f. o. b. tanker:
West coast -- ------------------ -do
..
3.90
United States Gulf
i
...
- -..
-. do - - -..
3.59
Diesel fuel, f. o. b. tanker:
West coast ---------------------------do....... --3.33
United States Gulf................
-do
2.92
Army:
----------Ambulance, metropolitan, p6-ton, 4 x 2
Each -3, 774. 20
Automobile, sedan, light
:
do -.1, 132.00
Truck:
Pick-up ".-ton, 4 x 2.----------------- do
952.62
Stake and platform, I13.-ton, 4 x 2 .------_
do
.
1,471.77
Water tank trailer, I-ton .---------------------- l . do ..
793. 17
Battery:
2-E - - - - - - - - - - - - - - - - - - - - - - -do - .---9.15
12.55
3-H
11. 21
Tire:
6.50 x 20, 8-ply
do
16.14
B 7.500x20.-- - - - - - - - - -- - - - - - -- - -do.
23.99
Bearing bushing......
--- do.
..
.79
Gasket set............
.--- do
.0849
Wiring harness
----------------.do. ---------3.12
Fuel tank .---.. do.
9.15
Sprocket.--------------------------------- do.15.00
N ut - - - - - - - - - - - - -- - - - - - - - - - - -do
--.--.01265
Battery assembly banger
. .
.
do
.
2.95
Flange transfer brace um
l
do
1.72
Fter oil breather
:-.
---- do.
1.80
See footnotes at 01d of table, p. 101.
°do
August to
September
1950
Percent Increase or decrease()
October to
November
1960
January to
February
1951
FromApri
105 toFromPereent
April 1950
toI
ease or
August
to Soptomber
$1.53
1.83
' $2. 10
1.092
$2. 18
1.92
4.38
3.82
1 4. 59
'14.30
4.65
4.30
12.3
3.28
'3.65
'3.36
3.70
3.45
4,224.20
(2)
4,301.27
1,330.42
1,131.29
1, 777. 00
(2)
1, 154.41
1,977.37
*1,167.00
3.36
(2)
1,284.00
(I'
914.76
11.53
14.58
15.84
12.11
17.06
14.09
(2)
22. 51
20.46
28.93
1.38
4.14
12.75
18.45
.0146
3.43
1.99
1.95
36. 74
'1.56
.151
'
(2)
(2)
(2)
84.68
14.41
13.26
'.016
3.38
32.21
1,50
October
to November
January
to February
112. 1
12. 9
120. 2
12. 9
17. 7
19.8
-1. 5
54. 5
7.0
From August to
~~~~~~~~~~~~~~Septem
1950 to(-)
_______
October
to November
January
to Fobruary
0
37. 3
4.9
42.5
4.9
16. 7
19. 8
4.86
12.
3.9
12.6
15.1
9.0
15.1
11.1
18. 2
11.3
12.8
2.7
0
0
V
0
13.4
11.0
16.3
17.5
3.6
0
E,
18.8
. 20.7
.
21.2
34.4
6.4
........._------- 15.3
26.0
16.2
14.3
.
.
.....
26.8
.---20.6
38.3
74.7
.
50.3
.---32.7
.
30.3
.---23.0
.
15.4
......
16.3 ......
15.7
.....
8.3
.
.--------
47.1
6.0
17.0
-11.0
32.3
35. 9
25. 7
39. 5
53.1
97.5
77.9
50.0
57.5
21. 7
26.5
14.6
30.8
-16.7
-- 14. 7---------------
--
10.0
27.0
13.0
18.4
13.0
13.0
-1.0
9.6
-1.5
13.1
-23.1
.3
t5j
0
.
Military procurement prices before and after the attack on Korea (April 1950, August to September 1950, October to November 1950, and January
to February 1951)-Continued
Percent increase or decrease (-)
Price
From April 1950 toCommodity
Army-Continued
Carriage bolts-Barrel.
Steering knuckle assembly -do
Shaft (automotive) -do:
Hood support -do:
Roller bearing -do
Carburetor assembly -do
Steering arm -- -do
-------Generator ---Lumber:
Southern pine, No. 2 common Douglas fir-doBailey bridges -Each
:
Fire hose, cotton, rubber-lined ----------------------Astrolabe ------Beach tractor -doStorage battery -do---------------------------Wire rope 20-ton trailer ---Shop bench :
Road roller Mfotor lead cable ----Barbed wire -SpoolSisal rope -FootCable, 3-consductor -do
Chest drafting set No. 8-EachWire, magnet:
No. 28 AW -PoundNo. 27 AW- No. 25 AW -do
Fire extinguisher -EachAntenna equipment, RC-292Switchbox, BC-658 -'---Field wire, WD-I/TT -Mile
Communications equipment, AN/GRC-26 -
Unit
:
.
do
M board feet: -50 feet.
EachFootEachdo
do
Foot-
do
dodo---------.Each
April 1950
August to
September
1950
$0.0135
15.84
22. 77
-77
11. 80
22.709
7. 8178
52.63
$0. 01533
19.9368
24. 74
.83
12.39
23.7115
8.316
55. 75
66.00
67. 50
37, 796.00
20.64
1,200.00
10,188.00
.
9.07
.1329
3,287.00
215. 00
5,345.00
.044
6.39
.03841
.0355
68.50
.47
.45
,42
36.86
134.88
10.05
58.02
l
l 11,353.91
97.00
82.50
51, 792.00
23.10
1,311.00
10, 840. 00
10. 74
.164
3, 540.00
270.00
5,735.00
.057
7. 25
0456
(2)
(2)
(2)
(2)
37. 98
144. 88
12.04
68.17
(2)
00
October to
November
1950
(2)
(2)
(2)
(2)
(2)
(2)
$72.00
82. 10
2
351, 792.00
*23.10
3 1.311.00
210,840. 00
; 10. 74
3 164
3 3, 90 00
a
a 5,
270.00
735.00
3 .057
7.25
2. 0456
3 .063
95.00
.625
.63
57
237.98
(2)
(2)
74.03
12, 364.03
January to
February
1951
.
3 $0. 017
21.00
31. 17. 94C
314.00
26.08
8.73
3 63. 00
76.00
87. 20
55; 874. 00
28.53
1,200.00
11,190.00
'11.99
.164
3 3, 540.00
132. 54
6, 580.'00
.07
6.50'
2 .05
.27
96.00
.722
.63
.62
37.98
3 181.00
11. 50
79.40
'15,000.00
From August to
September 1950 to-
_-
August
to September
October
to November
25.9
32.6
36. 9
22.1
18.6
14.8
11. 7
19. 7
13.6
25.9
8.7
.7.8
5.0
4.4
6.4
5.9
47.0
22. 2
37.0
11. 9
9.2
6.4
18.4
23. 4
8. 0
25.6
7.3
29. 5
13. 4
18. 7
.3. 0
7.4
19. 8
17.5
January
to Fob
ruary
9. 1
22. 2
37.0
11. 9
9. 2
6.4
18.4
23. 4
7.3
29. 5
18. 74
77. 7
38. 7
33.0
40. 0
35. 8
3.0
27.
8.9
October
to November
-------------------------------------------------------------------------
-25.8
15. 2
29.2 ---------47.8 ---------23. 7 ---------------------------3922 ----------
23. 4
8.0
-38. 4
23. 2
59.1
1. 7
30. 2
660.6
40.1
-------------------------------------------------------------------------
53. 6 ---------40.0 ---------47.6 ---------3. 0 ---------34. 2 ---------14.4
36.8 ------ i.-632. 1 ----------
January
to Feb.
ruary
10.9
5.3
26.0
13.3
13.0
C)4
0
10.0
5.0
0
-21. 6
50
13.0
5.7
7.9
10.5
-8. 5
3. 2
11. 6
-50.09
14. 7
22. 8
-10.3
9. 6
24. 9
-4. 5
16.5
0
50
Radio set:
ANRR1C-10
do
.
SC,-399
-do
Battery, BA-70----------------- ---do -Broom, corn-Dozen
------Stol woolPound-Soap powder, hand scouring
do
Mop, cotton -Each-Burlap, jute, 40-inch -Yard
-----Sack, burlap, 57 by 50 inches -Each-Dishwashing, machine model 180DA -do-Paper, typewriter, bond ------------
Ream -------
263.88
5,080. 92
5.01
11.25
.218
09
.4675
.1711
.417
1, 454.52
6.435
Barrier, waterproof:
Type C-l
---------------Roll
4.16
Type L-2-do
1
.06
T'ype M -do
-7.45
Box, fiber, shipping -Each
-.82771
Drawers, cotton, shorts, whitePair
.4233Cut, make and trim:
Trousers, cotton, khaki -do
74
Shirt, stand-up collar Each
-.588
Socks, wool, cushion sole -Pair
575
Cloth:
Cotton:
Twills, -ounce --------- Yard -1.27
Chambray, 3-ounce -.
do-.39
Wool:
Lining, 12-ounce -do-1.65
Serge, 15-omnce -do
-3.595
Serge, 12-ounce -do-363
Lining, 15-ounce -do
-1.78
Serge, 18-ounce do -3. 8176
Pile ----------------do -4. 90
Webbing, cotton, I-inch -do-.0413
Shoes, low quarter -air-3. 7364
Boots, service, combat ------ -- do
-5. 720
Drawers, winter, M-40do
3. 020
Undershirts, winter, M-50-Each
2. 740
Box and sleeve, shipping. fiber-Set
----1.5996
Gasoline drum, 5-gallon -Each
-1. 7891
Bacon, smokedPound .38
Beef, boneless- --- ----- ------------ -- ---do
.6438
Beef, carcass-do
-.4602
Ham, smoked -do
-.5367
Lard-do
--.
1329
Sausage ------------------------- ---do -------.3650
Pork----do
.4245
Chicken, dressed -do-.3835
Eggs, shell -Dozen
-.3746
Milk, frozen -Quart
.1357
See footnotes at end of table, p. 101.
(2)
(C)
(2)
12.53
.265
.1201
.5875
.2325
.5823
1,554. 00
8.36
4.90
11.80
8.53
1. 241
.5246
.86
(1)
.635
1.555
.44
2.05
4.555
4. 463
2. 247
4.890
6. 274
059
(2)
(2)
(2)
1. 6794
1. 9791
.4875
.6718
.4741
.5323
.1802
.4738
.5523
.4150
.5163
.1765
382.50
5, 901.66
5.66
12.53
.3407
.1235
3 . 75
'.31
..756
1,629.06
29.65
'5.22
213.88
39.35
31.283
3 .555
'425.00
(2)
5.40
14.44
3.3509
'.1269
.75
.345
' 864
1, 783.600
' 10.073
6.55
' 16.79
'11.31
1.3243
' .59
__
11.4
21.6
33.4
25.7
35.9
39. 6
6. 8
29.9
17.8
6.7
14.5
49.9
23. 9
(
45.0
16. 2
13.0
11.4
6. 3
37.2
60.4
81.2
81. 3
12. 0
50.0
61.1
7.8
28.4
61. 0
41.0
60. 4
101. 6
107. 2
22. 6
56. 5
25.5
25.5
25.5
55.0
31. 1
57.5
51.8
51.8
eo.0
39. 4
3.968
.769
.681
.882
16.2
.832 -30.8
3.84
10.4
30.8
18.6
19.1
41.5 46.1
1. 64222
4697
2.035
'.5919
22.4
12.8
29.3
20.4
60.2
49.2
'2. 78
24. 2
6. 62
26. 7
6.69
22.9
3.00
26.2
8. 556
28.1
8.71
28.0
.074
42.9
'5.98
-----10. 906 ' 4. 50
' 4.135 -20.1
'2.559
13.3
1.964
10.6
.4284
28.3
.7902
4. 3
.5209
3.0
5475
-. 8
.2219
35. 6
.4410
29.8
.4501
30.1
.3847
8.2
.4882
37.8
.2048
30.1
39. 8
39.8
39.8
39.8
39.8
39.8
44.8
3L.4
42. 4
18. 4
' 2.
' 5.
307
026
a 5. 075
2. 488
35. 337
2 6. S50
.0598
4. 910
8. 148
3. 577
3. 291
'1. 90
41.79
.4352
a .6209
2 .4651
'.4734
5 .1581
B .4152
-4350
53942
5715
.1909
is.8
.1
14. 5
-3.6
- 1. 1
-11. 8
19. 0
13 8
2.5
2.8
52. 6
40.7
.
-
28. 6
2.8
27. 7
33. 3
29. 8
4. 8
15. 4
15.2
32.4
5. 7
27. 7
48. 4
48. 4
14. 7
20. 5
6.5
17.06
9.6
3. 4
5. 8
33.7
42.3
32. 6
6 7
12:5
12.6
2.6
7.2
32.3
5. 6
6. 8
30.99
32.22
60. 5
12. 5
84.1
10. 3
84.3
13.7
68.5
10.7
124.1
10. 0
77.8
9.2
79. 2
1. 4
60.o0-------90. 7 49. 0
50.9 .
60.0
13.1
9.8
-9. 6
12. 7
-10. 7
22. 7
-7. 6
13. 2
-1. 9
2.0
-11. 1
67.0
-12. 3
20.8
-12.4
6.0
-21.2
.3
-5.0
30. 3
10. 7
50.9
8.2
q
10.6
45. 3
49.99
33. 5
75. 0
38.8
25.44
52.4
-. 8
-12.1
17. 6
9. 9
2.9
23. 1
-6.
-18.5
-7.3
-5. 4
16.0
Co
Military procurement prices before and after the attack on Korea (April 1950, August to September 1950, October to November 1950, and January
:
to February 1951)-Continued
Price
Commodity
Percent Increase or decrease C-)
From August
to
September
1950 to-
FromApri
195 toto.From
. April
1950
Unit
April 1950
Navy:
Space heater, 50,000 B. t. u.'s --Each -$38.00
Steam tables, MC standard
do2,800. 00
Briggs &Stratton carburetor
do-2.
64
6. 25
Dorman kit exp. plug -----do
Grease fitting kits
-do
------6.40
Crane, T/A-8121
-do
-244.00
Connector, cable 17-C-29865-500 ------. do ..
.195
- -- do --------.275
Tester, voltage 17-T-5555 ----------.119
Rope, wire, Mie-inch 22-R-2268-135 ----Foot -----Crane, truck ki-yard 78-C-33600 Each -18,380.00
Differential shaft 4-B2007 .
----- do
...------36.41
Dry battery:
BA-44
do
.7572
BA-202/1U -----do -----.0704
.3360
BA-205/U -do
--.1575
BA-37
.do ---------- ---BA-152-.
do-.
2730
-2.42
Lights, timing 41-L-1440 -do
---do --(2)
Mattresses -------Sheets ...do(')
Enamel, semigloss -Gallon-1.68
-5,000.00
Mount, trailer, mult. MG, M55-Each
Shell, smoke, M313, W/f PD, M57 .. do -------23.89
Actuator -do.28
Bearing, flash hider -do.92
Screw, forearm -do-.15
Sight, rear assemhy -do
-------6. 00
Adhesive tape, 3 inches x 6 yards -Roll.26
Surgical gloves, rubber -----Pair.178
Glycerin -Pound.35
Instru~ment and medicine cabinet -Each-195.00
Vitamin A in oil -50
cubic centi.364
meters.
18. 00
Each ,-,.,.l,
Sedan, 5-passenger -
August to
September
1950
October to
November
1950
$45.00
3, 200.00
$53.00
3, 547. 00
4.40
9.94
21.80
426. 00
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
82.42
8.00
1.50
2.75
9,500.00
37. 22
.70
2.30
.38
15.00
.30
.22
.75
220.00
.436
(2)
.238
21,000.00
58.02
2.30
.125
.50
.33
.48
3.87
13.23
2.26
' 2.75
9,500.00
37.22
.70
2.30
.38
15.00
.314
.256
.85
210.00
.470
1, 284. Qo
January to
February
1951
$61. 00
4, 618. 00
(2)
August
to September
18. 4
14. 3
(2)
(2)
410. 00
.26
.35
.
.
27. 3
.
October January
to Noto Febvember uary
39. 5
26. 7
66. 7
59.0
240. 6
74. 6
(2)
100. 0
(2)
(2)
14.3
59. 4
30.9
77.6
48.8
109.5
75.8
59.9
2.30
.125
.50
.33
.48
15. 99
(2)
(2)
9, 500. 00
30. 55
,70
(2)
(2)
14. 21
.31
27
.73
269.00
.60
1, 265. Q
63. 7
90.0
.--- -
150.0
150.0
153. 3
110.0
15. 4
23. 6
114.3
12. 8
19.8
60.5
64. 9
October
to November
17.8
10.8
90. 0
55.8
150. 0
150.0
153. 3
150.0
20.8
43. 8
142.9
7. 7
29.1
13. 8
4433
--------
30. 9
77. 6
48.8
109. 5
75.8
' '
24
33. 3
27. 3
...... ---
.....
59.9
.......-65. 4
50. 7
63.7-i
January
to Feb.
ruary
99.9
90.0
27.9
150.0
19.2
51. 7
108. 6
37. 9
64. 8
12.1
4. 7
16.4
13.3
-4.6
7. 8
-6. 3
22.7
-2. 7
22. 3
37. 6
!,
0O
0
Crane:
10-ton, truck-mounted -. -*
-- ----- do --------15-ton truck-mounted -do
-------20-ton truck-mounted -do
-----I4 cubic yard crawler
do -------l 38cubic yaris, craxvl-r-do
----Tractors, 130 to 160, DBHP -do
Oscilloscope OS-8/U -do
------Indicator tachometer
do.
Inverter (Jack & Heinti) doAir Force:
Height finder:
AN/T'PS-IOD -do
AN/MPS-4 -do
-----Compound carbon removal -Gallon
-1.07
Paint remover -do
-1.
Alpminum alloy sheet -Pound
-.
A-5 inspection light --Each -3.20
Electric cable ---------Foot
------Jacket, flying typo B-15BEachSuit, flying nylon K-2-do
-----Shirt, flying wool type A-i -do
-------Protective helmet -do
-20.20
Sun glasses -----------Pair -2.29
Parachutes:
T-7A parachute assembly with reserve Each -198.30
canopy.
G-1 100-foot cargo h ute ------do-1,
15, 390.00
160000.00
19, 700.00
17, 940.00
32,855.00
15, 363.00
139.00
75. 90
498.00
16, 884 00
17,529.00
22, 500.00 *
18,559.00
42,945.00
15, 579.00
219.00
(2)
35,880.00
67,000.00
43, 587.00
77,050.00
(2)
(2)
(2)
(2)
(2)
29
369
.072
16.50
9.47
7.84
(2)
(2)
()
(2)
()
(2)
287.00
21,392.00
24, 500.00
28, 250.00
23,000.00
46, 345.00
16, 500.00
219.00
(2)
(2)
349,822.00
(2)
1. 50
1. 55
.384
4. 75
.080
(2)
(2)
(2)
20.84
3.00
(2)
300.77
(2)
1, 798. 66
21,100.00
24,500. 00
31, 600.00
23, 000. 00
46, 500.00
10, 500. 00
230.00
04.25 507.00-
9.7
9. 6
14.2
3.4
30.7
1.4
57. 6
-
61,844.52
(2)
1.54
1.52
.42
3.85
(2)
19.94
10.30
14.85
19 20
2. 07
21.5
15.0
-40.2
-20.
-20.8
-8.8
.
-31.
300.12
1, 960.01 -39.8
I Represents estimated average of offers received in November for deliveries to start January 1951.
*No procurement during this period.
3 Estimated.
4 Gasoline, drum 5-gallon procurement during November 1950 was for large quantity (1,000,000 units), awarded to a single company.
&
October 1950 prices.
39.0
53.1
43.4
28.2
41.1
.
7.4
57.6
- 38.9
2
4.1
48. 4
11.1 -3. 2
0
51. 7
39.7
53.1
59.9
28.2
41. 5
7.4
65.5
24. 2
18
26.7
39.8
25. 6
23.9
9.2
7. 9
27.3
39.8
40.0
23. 9
8. 3
5. 9
5.0
72.4
14.3
41. 9
43.9
17.8
13.8
20.3 --89.4.
-5.0 -9. 6 51.3 -
.
.
--
- -------0
o
52.3 -l
N
0
x
Source: Progress Reports and Statistics, Office of Secretary of Defense, Mar. 5, 1951.
0-
102
JOINT ECONOMIC REPORT
APPENDIX 5
EXCERPTS FROM TESTIMONY BEFORE THE JOINT COMMITTEE
ON THE ECONOMIC REPORT AND FROM REPORT OF SUBCOMMITTEE ON MONETARY, CREDIT, AND FISCAL POLICIES
I.
THE
CASE FOR MAKING CREDIT CONTROL A PRIMARY CONSIDERATION
* 'Timely flexibility toward easy credit at some times and credit restric*
tion at other times is an essential characteristic of a monetary policy that will
promote economic stability rather than instability. The vigorous use of a restrictive monetary policy as an anti-inflation measure has been inhibited since the war
by considerations relating to holding down the yields and supporting the prices of
United States Government securities. As a long-run matter, we favor interest
rates as low as they can be without inducing inflation, for low interest rates stimulate capital investment. But we believe that the advantages of avoiding inflation
are so great and that a restrictive monetary policy can contribute so much to this
end that the freedom of the Federal Reserve to restrict credit and raise interest
rates for general stabilization purposes should be restored even if the cost should
prove to be a significant increase in service charges on the Federal debt and a
the Treasury in its sale of securities for new financing
greater inconvenience to
1
and refunding purposes.
*
*
*
*
*
*
*
Another reason for preferring reliance on monetary, credit, and fiscal policies
as the major method of general economic stabilization is that they are more consistent with the maintenance of our democratic system and with the fostering and
promotion of free competitive enterprise. These instruments do not involve the
Government in detailed control of the particulars of the economy; they do not
require the Government to intervene in individual transactions between buyer
and seller, in dealings between employer and employee, and in the determination
of the prices and production of particular commodities. These millions of intricate
decisions are left to the operation of the market mechanism while general monetary, credit, and fiscal policies work toward stabilization by influencing the total
supply and cost of money and the total amount of money income at the disposal
of the private sectors of the economy. There is every difference between the
effects of general over-all monetary, credit, and fiscal policies which indirectly
influence the economy toward stabilization and the effects of an elaborate system
of direct controls.
* *
*2
M
*
*
*
*
*
*
We do not knowprecisely how much effectiveness as a stabilizing device we
can expect from appropriate, vigorous, and coordinated monetary, credit, and
fiscal policies. Our past experience is of little help in making such an estimate,
for a timely, vigorous, and coordinated use of all these policies for stabilization
purposes has never been seriously attempted in this country. Fortunately,
however, the validity of our recommendations does not need such a precise
estimate; it is enough to know that these methods can be very powerful and
that they are preferable to other methods for promoting general economic
stability. We do, however, wish to make two points with respect to the effectiveness of these instruments: (1) They are not a panacea for all economic ills, nor do
they make it unnecessary for us to employ wise economic policies of other types.
There are many kinds of economic problems-for example, those relating to the
maintenance of competition-that they cannot solve, and they are even likely to
lose a large part of their effectiveness as stabilization measures if other policies
are unfriendly. And (2), if not used in a coordinated and supplementary manner,
the various components of monetary, credit, and fiscal policies are likely to prove
insufficient to cope with strong cumulative forces which at times create depressions
and at other times inflation. In fact, these policies may completely defeat each
other. They canbe much more effective if they are employed as integrated parts
of an appropriate over-all monetary, credit, and fiscal program. We cannot
afford, therefore, to rely solely on a few of these measures and to neglect the
others.3
That the Federal Reserve is powerless to restrict credit in general while maintaining low yields on Governments is brought out by two facts: (1) All holders.
' Monetary, Credit, and Fiscal Policies (report of the Subcommittee on Monetary, Credit, and Fiscar
Policies), S. Doc.129, 81st Cong., 2d sess., p. 2.
2 Ibid., p. 9.
* p. 11.
Ibid.,
JOINT ECONOMIC REPORT
103.
of Governments, both individual and institutional, retain complete freedom to
buy or to sell at will any or all of these securities, of which their holdings are
tremendous. At their own option they may sell these securities to acquire money
to spend for consumption, to finance capital purchases, or to lend to others:
Any tendency for interest rates on private obligations to rise relative to those on
Governments tends to induce investors to sell Governments in order to make
funds available to private users. And (2) in order to prevent yields on Governments from rising above any given level the Federal Reserve must stand ready
to buy at those yields all the Government securities that others do not wish to
hold. In this way all holders of Governments, not merely member banks, are
given access to new money from the Federal Reserve. They get this money by
selling Governments, and the cost of the money to them is the yield that they
sacrifice on the securities sold. Thus for the Federal Reserve to maintain low
yields on Governments by passively purchasing them in unlimited quantities is
to assure that money for other uses will continue to be cheaply available in large
amounts.
Such a policy of maintaining low yields on Governments-negates or seriously
reduces the effectiveness of every Federal Reserve instrument for general credit
restriction. (1) Open market operations are likely to be useless; the Federal
Reserve is not free to refuse to buy or actually to sell Governments in order to
restrict credit in general but must purchase these securities in such amounts as
are required to prevent undesired rises in their yields. Even if the Federal
Reserve should sell Governments in an attempt to restrict credit it would be
compelled, under this policy, to buy them back again to prevent a rise of yields.
(2) Increases in Federal Reserve discount rates are likely to be largely ineffective
as positive restrictive measures, for banks will not need to borrow so long as they
can secure funds at will by selling Governments to the Federal Reserve. Even
the psychological effects of increases in discount rates are much reduced by the
fact that banks are largely out of debt to the Federal Reserve and know that they
can remain so. (3) The restrictive effects of increases in member-bank reserve
requirements are greatly reduced by the fact that the banks can easily repair
their reserve positions and restore and even expand their lending power
through
the sale, at their own option, of Governments to the Federal Reserve.4
II. THE CASE FOR MAKING DEBT MANAGEMENT A PRIMARY CONSIDERATION
Treasury and Federal Reserve officials have advanced a number of reasons
for the policy of holding down the yields and supporting the prices of Governments
in the face of inflation. (1) Such a policy holds down service charges on the
Federal debt. The Secretary of the Treasury stated to the subcommittee:
"The interest cost of the debt to taxpayers is another of the many considerations
which must be taken into account in debt-management policies. It is estimated
that the interest charge on the public debt during the fiscal year 1950 will be
$5,450,000,000. This item represents over 13 percent of the Federal budget for
the year. The interest cost is likely to grow over a period of time-in the absence
of substantial debt reduction-because the rate of interest on savings bonds
increases as the bonds are held to maturity, and because an increasingly large
proportion of the debt represents the accumulation of trust funds invested at
rates set forth in -the law which are higher than the present average interest rate
on the debt.
"A general rise in interest rates would bring about a further rise in the budget
charge for interest payments. An increase of as little as one-half of 1 percent
in the average interest paid on the debt would add about $1,250,000,000 to this
charge. The Treasury was able to finance the last war at an average borrowing
cost of less than one-half the borrowing cost of World War I. If this had not
been done, the interest charge at the present time would be more than $10,000000,000 a year instead of $5,000,000,000 a year. It is clearly evident that this
$5,000,000,000 annual saving in the taxpayer's money is a highly important factor
in the budget picture of the Federal Government."
(2) The maintenance of relatively stable prices on Governments helps to
maintain confidence in the public credit and facilitates Treasury sales of securities
for both new financing and refunding purposes. This looms important to the
Treasury, with about $50,000,000,000 of its marketable debt maturing within
a year and with large volumes of outstanding nonmarketable issues, especially
savings bonds, payable on demand. (3) The maintenance of stable security prices
protects investors against capital depreciation and prevents any loss of public
iIbid.,
p. 27.
104
JOINT ECONOMIC REPORT
confidence in financial institutions, including banks, that might result from a
serious decline of these prices. (4) Any marked decline in the price of Governments would be communicated to other parts of the credit market and might
bring about unemployment and deflation by interfering with the flotation of new
rivate securities. And (5) any feasible rise of the yields on Governments would
be so ineffective as an anti-inflationary measure as not to be worth its cost.
Though Federal Reserve and Treasury officials, and especially the latter, seem
to have been greatly influenced by the objectives of holding down the service
charges on the Federal debt and of facilitating Treasury security flotations it is
well to remember that there were also other considerations behind the postwar
policy, such as those relating to protecting individual and institutional investors
against capital depreciation, prevention of a financial panic, and avoidance of
restrictive policies that would be so vigorous as to reduce employment and
productions
To these arguments the Council of Economic Advisers in a memorandum
addressed to the
Joint Committee on the Economic Report added the following
considerations. 6
"Despite the drumfire of criticism which has been directed at the debt management policy from certain financial quarters, the judgment of the President that it
has been 'eminently successful' is wholly justified by the record of the past 5 years.
Our economy was unshaken by an immediate postwar slump which brought a
decline of more than 60 percent in production of durable goods, a substantial.
decrease in nondurable production, and an increase in unemployment even when
millions of war workers were withdrawing from the labor force. The policy made
available abundant and cheap credit to business when it then endeavored to carry
its share of the responsibility in the race with inflation by increasing productive
capacity. It also helped to reduce a critical housing shortage. It contributed
to the conditions under which the expected flood of liquidation of savings bonds
did not materialize, and sales of savings bonds have continued in large volume.
It preserved a solid credit position for the Government when the great economic
question arose whether the end of inflation would become the beginning of economic collapse. It has even added to the prosperity of some custodians of funds
who disdain it but who would have wholly inadequate outlets for the swollen deposits created by the war if they did not know that they can safely invest in
Government bonds because the market price will be supported.
"This is the record of the policy which the subcommittee would now abandon.
What is the record of the proposed substitute policy of flexible monetary and
credit control by the Federal Reserve System, when we look to its service in
establishing economic stability? The subcommittee speaks of the desirable
characteristics of central bank operations, and it is entirely justified in praising
them for flexibility and because they are indirect and do not entail positive action
by Government which limits the freedom of businessmen. But when it comes to
considering their effectiveness in attaining the objectives of the Employment Act,
the subcommittee only says that we can draw no conclusions from experience
because we have never really tried to use these policies to counteract serious inflation or deflation.
"We do not read history that way. For 35 years, Federal Reserve discount
rates have been shifted up and down. For 25 years the System has carried on
open-market operations. Changes in reserve requirements have been one of the
tools of control for more than a decade. * * *'
"Repeatedly, in its discussion of this problem, the report of the subcommittee
speaks of the need for 'vigorous' use of central bank power. We assume that
it is meant that historv furnishes no guide to action because central bank operations
have never been vigorous enough. If this also means that the writers of the
report look to the Federal Reserve Board to interpret the proposed congressional
directive as an instruction to use its power more vigorously in a future inflation
than they were used in the past, the joint resolution would indeed threaten untold
damage to Treasury operations. Before this war, the Board has only twice been
called upon to consider action in a period of important inflation. In 1920, it ran
the discount rate up to 7 percent. In 1929, it pushed the rate up until it reached
6 percent. The debate still goes on, whether the high discount rates caused the
ensuing catastrophes or whether the economic collapse was in each instance due
to forces which not even 7 and 6 percent discount rates could quell. But certainly the Reserve Board is not open to the criticism that it has not used its power
I Ibid.. p. 2'.
5 flearines before the Joint Committee on the Economic Report on the January 1950 Economic Report
of the President, 81st Cong., 2d sess., pp. 66-67.
105
JOINT ECONOMIC REPORT
vigorously. If that record shows that even more violent effort would be necessarily in order to make central bank operations effective to curb an inflationary
movement, we believe the conclusion should be that these particular anti-inflationarv devices are altogether too dangerous to justify giving to them the premier
position among the arsenal of weapons to gain economic stability." 7
*
*
*
*
*
,
a
Mr. SELTZER.
* * *
"The real controversy is over the effectiveness and the appropriateness, under
present conditions, of combating inflation by an indiscriminate, over-all tightening of the money markets and an accompanying raising of interest rates.
More particularly, the question is whether we should seek to limit the current
expansion of bank loans to business by an over-all restrictive credit policy without regard to the dominant position now occupied by Government securities in
the assets of commercial banks and without regard to the Treasury's refunding
and possible new money requirements.
"The prescription of over-all tight money in periods of excessive loan expansion
has behind it the force of long tradition. It arose in England, and to a lesser
degree in European countries generally, at a time when the assets of commercial
banks consisted mainly of business loans, and when their lending power was highly
responsive to movements of gold out of and into a country. An export of gold,
induced by a greater rise in domestic than in foreign commodity prices, reduced
the reserves of the central and commercial banks. This forced a contraction of
bank loans and led to a rise in interest rates. The higher interest rates by themselves did little if anything to restrict the demand for bank credit for domestic
use. The absolute reduction in the lending power of the commercial banks,
caused by their loss of reserves, was the effective agent in reducing loans to business
In England, and in some other countries, however, the higher interest rates often
helped to contract the domestic volume of bank credit by diverting the foreign
demand for credit to countries with lower interest rates.
"In the United States today, changes in the amount of Federal Reserve credit
made available to the commercial banks largely take the place of gold movements
in -altering the reserves and lending power of commercial banks. It is natural to
conclude, therefore, that the Federal Reserve Systemi should now use its power
to absorb member bank reserves and so bring a halt to the current expansion of
bank loans to business. Here, however, we encounter the greatly changed
institutional situation, which cannot be ignored. In this new situation a moderate application of the unmodified traditional weapon of reducing member bank
reserves is unlikely to be adequately effective in curbing undesired loan expansions
while a violent application would be exceedingly dangerous.
"In 1914 the marketable securities of all kinds held by all the commercial banks
in this country amounted to less than 22 percent of their earning assets. The
great bulk of their holdings consisted of loans to business enterprises. Some of
these fell due every business day. The total volume could be reduced merely
by not making new loans or renewals in as large amounts as the dailv maturities.
"The banks did not need to sell large quantities of securities on the open market
to reduce the total amount of bank credit. The borrowers whose notes were
maturing daily provided an automatic market for their own notes. This kind
of contraction of bank credit could not proceed far before the money supply of
the business community was critically reduced, bringing about a liquidation of
inventories and, often, a general business recession. The power of the banking
system to effect a significant reduction in the money supply of the business community was the more pronounced before World War I because it was then the
fashion of business enterprises to finance a far greater proportion of their working
capital by bank credit than it is today.
"But see how different the banking situation is today. At the end of June
1950, the securities holdings of all the insured commercial banks in the United
States, mainly Federal Government obligations, constituted 63 percent of all
their earning assets and only 37 percent consisted of loans of all kinds. Afore
than a quarter of their total loans, moreover, consisted of real-estate loans, which
are akin in some respects to securities, though less liquid. The total of their commercial and agricultural loans was only 16 percent of their aggregate earning
assets.
"This change in the institutional situation means this: That whereas formerly
a general tight money policy by a central bank was largely a selective control,. in
7 S. Doe. 129, on. cit.. p. 20.
8 See pp. 431-435 of the committee hearings on the January 1951 Economic Report ot the President.
106
'JOINT-.ECONOMIC- REPORT
-effect, operating directly and immediately to restrict loans to business enterprises,
-tQday a general tight money policy means a specific attack upon the Government
-bond market, and only an indirect and weak attack on business loan expansion.
. "In order to reach 5 or 6 or 7 billion dollars of business loans, the weapon of an
over-all restrictive. credit policy would first have to wade through billions of
dollars of Government securities owned by the commercial banks. They held
about $65 billions of Federal obligations on June 30, 1950. You cannot rely
upon price declines of these Government securities to keep the banks from selling
substantial amounts of them in order to continue their expansion of loans to
business.
-'.You cannot rely upon that because their capital losses would not be important,
and because on some of them they ivould not suffer any loss. I have some figures
here that probably are familar to you. At this time the commercial banks hold
nearly $4,000,000,000 of Treasury bills, some of which mature every week and
;of which mature within 3 months. The banks can continue to obtain funds all
to
make business loans merely by not buying new Treasury bills to replace the
maturing ones each week. And they hold about $18,000,000,000 of Treasury
notes, most of which mature within a year.
- "A moderate rise in interest rates would cause only small changes in the prices
of these near-term maturities. For example, a13 percent 1-year Treasury
note
-would still sell above 99 if the short-term rate of interest went from 13, to
2%
percent. If a bank has a good commercial borrower at 3z or 4 percent, I do
not
- think that bank is going to be deterred from selling a Treasury note
at99 to make
this new loan.
"So that a general tight credit policy under current conditions is apt to prove
ineffective as a curb on business loan expansion unless it is extremely tight. A
moderate rise in interest rates, a moderate tightening of thereserve position, would
-not do the work. And a very drastic tightening, I think. Would be much too
'violent,
much too
dangerous
*
circumstances.)'
*
* under present
*
*
III.
RECENT STEPS TO RECONCILE
THE TWO
*
*
OBJECTIVES
Excerpts from memorandum of the President, February 26, 1951:
"It would be relatively simple to restrain private credit if that were our only
objective, or to maintain stability in the Government security market if that
'were our only objective. But in the current situation, both objectives must be
achieved within the framework of a complete and consistent economic program.
"We must maintain a stable market for the very large financing operations of
the Government. At the same time, we must maintain flexible methods of dealing
with private credit in order to fight inflation. We must impose restraints upon
'nonessential private lending and investment. At the same time, we must maintain
the lending and credit facilities which are necessary to expand the industrial base
for a constant build-up of our total economic strength. Instead of fighting inflation by the traditional method of directing controls toward reducing the over-all
level of employment
.
and productive, activity, a defense emergency
-imposes
the harder
'task of fighting inflation while striving to expand both employment and production above what would be regarded as maximum levels in normal peacetime." [Italics
ours.]
"* * * The essence of this problem is to reconcile two important objectives,
neither of which can be sacrificed.
"On the one hand, we must maintain stability in the Government security
market and confidence in the public credit of the United States. This is important
at all times. It is imperative now. We shall have to refinance the billions of
dollars of Government securities which will come due later this year. We shall
'have to borrow billions of dollars to finance the defense effort during the second
half of this calendar year, even assuming the early enactment of large additional
taxes, because of the seasonal nature of tax receipts which concentrate collections
in the first half of the year and because of the inevitable lag between the imposi.tion of new taxes and their collection by the Treasury. Such huge financial operations can be carried out successfully only if there is full confidence in the public
credit 'of the United' States based upon a stable securities market.
"On the other hand, we must curb the expansion of private loans, not only by
the banking system but also by financial institutions of all types, which would
add to inflationary pressures. This type of inflationary pressure must be stopped,
to the greatest extent consistent with the defense effort and the achievement of
its production goals.
107
-
JOINT ECONOMIC REPORT
"The maintenance of stability in the Government securities market necessarily
limits substantially the extent to which changes in the interest rate can be used
in an attempt to curb private credit expansion. Because of this fact, much of
the discussion of this problem has centered around the question of which is to be
sacrificed-stability in the Government securities market or control of private
credit expansion. I am firmly convinced that this is an erroneous statement of
the problem. We need not sacrifice either.
"Changing the interest rate is only one of several methods to be considered
for curbing credit expansion.
*
*
*
*
*
*
"Among other things, I ask that you consider specifically the desirability of
measures: (1) To limit private lending through voluntary actions by private
groups, through Government-sponsored voluntary actions such as was done in
a narrow field by the Capital Issues Committee of World War I, and through
direct Government controls; and (2) to provide the Federal Reserve System with
powers to impose additional reserve requirements on banks."
*
*
*
*
-*
*
*
Joint statement of the Secretary of the Treasury and Chairman of the IFederal
Reserve Board, March 4, 1951:
"The Treasurv and the Federal Reserve System have reached full accord with
respect to debt-management and monetary policies to be pursued in furthering
their common purpose to assure the successful financing of the Government's
requirements and, at the same time, to minimize monetization of the public debt."
APPENDIX 6
CONCENTRATION IN PRODUCTION OF CERTAIN MATERIALS IN
SHORT SUPPLY AND SUBJECT TO CONTROL OR PURCHASED BY
THE ARMED SERVICES
The materials cited on the lists of strategic, critical, and scarce commodities
derived both from domestic and foreign sources include some which have been
produced under conditions of monopoly at one time or another, or which are
supplied principally by a few major firms in the industry. The following list
sets forth a few of the materials, the major producers, and the percentage of
production controlled by each (where information is available).
Two lists of materials designated as "scarce and not to be hoarded" have been
issued by the Government. The first list was issued by the National Production
Authority on December 28, 1950; the second list was issued on January 2,
1951, by the Defense Minerals Administration. Other lists of materials and
products bought by the armed services have also been published. The summary
which is given below sets forth instances in which a major part of production of
a large number of the items on these lists is accounted for by one or a few firms,
according to immediately available data. Data for this summary has been
compiled from various public sources, including the Minerals Yearbook, the
Bluebook of antitrust cases, hearings before the Temporary National Economic
Committee, studies by the Department of Commerce, and other sources.
A brief survey of the major metal products bought by the Armed Forces indicated that there are a number of groups or types of products on the list which are
subject to high levels of concentration among small groups of manufacturers.
The most recent data cannot in all cases be compared directly with the items on
the list, because of differences in classification. In general, however, it is possible
to indicate the concentration of output in the class of items or in the field of
industry from which the specified product must be obtained. As far as possible,
the summary given follows the order of the published list of products bought by
the Armed Forces. Differences in grouping are noted as they occur.
In addition to the concentration or dispersion of production noted with respect
to certain key raw materials used in manufacture of items required by the armed
services, an examination of the list of commodities procured by the military
services indicates that in certain classes of commodities there is some concentration
of production.
It should be remarked that it is not possible on the basis of available data, to
.determine concentration of output for each item in the list published in the study
108
JOINT ECONOMIC REPORT
by the joint committee.' Moreover, in some classes of items, it is not possible
to determine the individual companies or producers that account for published
production figures, because available information does not specify either identities
or percentages of output by companies.
I. BASIC MATERIALS
1. Antimony.-More than half of total consumed in the United States is
imported from China, Mexico, Bolivia, and Peru. Major domestic producers:
Bradley Mining Co. (Idaho), produced 97 percent in 1947, 93 percent of domestic
output in 1948 (MYB).
2. Aluminum.-Total domestic production (1948) of primary aluminum is
divided among three major producers as follows:
Percent
1. Aluminum Co. of America -51
2. Reynolds Metals Co-29
3. Permanente Metals Co -20
3. Beryllium.-Major producers (relative percentages not available) are:
1: Beryllium Corp. (Pennsylvania).
2. Brush Beryllium Co. (Ohio).
3. Clifton Products Co. (Ohio).
4. Copper;-Major producers accounting for more than 80 percent of refining
'capacity as of 1944 include:
Percent of
output
1. American Smelting &Refining Co -----------37
2. Anaconda Copper Co -29
3. Phelps-Dodge Corp -22
In copper mining as distinct from refining, the largest producer is the Kennecott
Copper Corp., accounting for 44 percent of total output in 1944, followed by
Phelps-Dodge, 24 percent; and Anaconda, 16 percent.
5. Cobalt.-Imports from Belgian Congo supply over 90 percent of cobalt consumed in the United States.
Sole importer: African Metals Corp. (New York).
Domestic producer: Bethlehem Steel Co. (Pennsylvania).
(MYB, 1948). Bethlehem Steel produces some cobalt for its own use.
6. Iron ore.-Domestic production supplies bulk of present consumption.
Major producers:
Percent
(1947)
1. Oliver Mining Co. (subsidiary of U. S. Steel) -47
2. Pickands, Mather & Co -22
3. Cleveland-Cliffs Iron Co -9.
1
4. M. A. Hanna Co -----------------------3. 5
5. Oglebay, Norton & Co -2.
6
As of. 1950, these producers accounted for approximately four-fifths of domestic
output of iron ore. The position of these producers with respect to iron ore
reserves corresponds to their relative output, with minor differences.
7. Magnesium.-The Dow Chemical Co. has been the only primary magnesium
metal producer in the United States since July 1946 (MYB, 1948).
During World War II, United States Government constructed 13 plants for
magnesium production, which have been disposed of or are now held on a stand-by
basis.
8. Manganese.-More than four-fifths of requirements are imported. Major
domestic producers include: Anaconda Copper Mining Co., which shipped
91 percent of total manganese ore from United States mines in 1948 (MYB).
Smaller shipments were made by a number of producers scattered in various
States.
9. Nickel.-Nearly all requirements are imported, primarily from International
Nickel Co. of Canada.
10. Molybdenum.-The United States is a leading producer of molybdenum,
importing relatively small amounts for consumption. Major domestic producers
include:
1. Climax Molybdenum Co., the largest producer.
2. Kennecott Copper Co.
3. Molybdenum Corp. of America.
4. U. S. Vanadium Corp.
I General Credit Control, Debt Management, and Economic Mobilization, U. S. G. P. O., Washington,
D. C., 1951, pp. 27-33.
JOINT ECONOMIC REPORT
109
Relative percentages of output among these firms are not currently available.
Climax Molybdenum Co., the major supplier, is the sole producer in Colorado,
the chief source in 1948.
Kennecott Copper Co. is sole producer in Utah, the second leading State in
molybdenum output.
11. Titanium.-Major domestic producers include:
1. National Lead Co.
2. E. I. du Pont de Nemours & Co.
3. Yadkin Mica & Ilmenite Co. (Glidden Co.)
4. Metal and Thermit Corp.
5. Ferro-Titan Metals Corp.
6. Calco Chemical Division (American Cyanamid Co.).
National Lead Co. is the leading producer, but other relative figures are not
available.
12. Tin.-Only negligible amounts of tin are produced from mines in the United
States and Alaska. Nearly all tin requirements are imported from abroad. The
output and allocation of tin has in the past been controlled by the International
,Tin Cartel. The Combined Tin Committee and the International Tin Study
Group are the agencies which have been chiefly concerned with the stabilization
of the industry since World War II. The chief sources are Malaya, Indonesia,
Thailand, Bolivia, and other scattered areas.
13. Tungsten.-The bulk of tungsten consumed in the United States is imported,
but there is substantial domestic production (4,210 tons in 1948). The major
domestic producers include:
1. Climax Molybdenum Co.
2. Nevada-Massachusetts Co.
3. Nevada Scheelite, Inc.
4. Surcease Mining Co.
5. Tungsten Mining Corp.
6. U. S. Vanadium- Corp.
Relative percentages are not available.
14. Vanadium.-Although publication of figures for output and consumption of
vanadium ore in the United States has been suspended, the leading producers have
included:
1. Union Carbide and Carbon Corp., through subsidiary
2. U. S. Vanadium Corp.
3. Vanadium Corp. of America
15. Lead.-The United States is a major producer of lead. Major mining companies include, as of 1944:
Percent
1. St. Joseph Lead Co -----------40
2. American Smelting & Refining Co 5
3. Bunker Hill & Sullivan Mining Co5
4. Eagle-Picher Lead Co -Major refining companies include:
Percent capacity
1. American Smelting & Refining Co -54
2. Bunker Hill & Sullivan Co6
3. U. S. Smelting, Refining and Mining Co5
4. St. Joseph Lead Co
5. Anaconda Copper Corp
6. American Metals, Ltd
7. Eagle-Picher Lead Co
16. Zinc.-More than three-fourths of zinc consumed in the United States is
produced domestically. Major mining companies include:
Percent
I. Eagle-Picher Mining & Smelting Co -13
2. St. Joseph Lead Co5
3. U. S. Smelting & Refining Co
_
4. Federal Mining & Smelting Co
_
5. New Jersey Zinc Co
_
6. Anaconda Copper Co
-- - ---Lead and zinc operations are closely related, both in mining and smelting, so
that this list could be extended depending upon which aspect of the field is selected
for emphasis.
81651-51--8
110
JOINT ECONOMIC REPORT
Zinc refining capacity is more highly concentrated than mining of the metal.
Major zinc refiners, as of 1914, included:
Percent of capacity
1. Anaconda Copper Corp
70
-2. Sullivan Mining Co
-10
3. American Zinc Co
4. American Smelting & Refining Co
--5. New Jersey Zinc Co ----------------------This estimate of distribution of refining capacity is taken from Economic Concentration and World War II, the most recent available figures for the industry as
a whole.2
In addition to the major minerals cited above, many of the materials included
-in the published lists of scarce commodities are produced in industries character-ized by concentration of output in a few leading producers, or industries which
-have been subject to antitrust action.
The list of materials falling into these classifications include1. Chemicals.-Although it is not possible from available data to determine
the relative percentages of output of each of the items on the list, it may be
noted that most are organic chemicals, and that the major producers in this field,
including E. I. du Pont de Nemours & Co., Union Carbide & Carbon Corp.,
Dow Chemical Co., Allied Chemical & Dye Corp., et al., have been subject to
antitrust prosecution. According to the data assembled by the TNEC, the
chemical industry was described as an industry in which "Three companies
* * * produced two-thirds of the national output of chemicals." 3 It is also
noted that as of 1937, four producers accounted for 95.6 percent of the total
-output of coal-tar products.
2. Paper products.-The bulk of all newsprint consumed in the United States
is imported from Canada. Six firms account for more than four-fifths of Canadian
-pulp and paper production. These include the following companies:
International Paper Co., Ltd.
Abitibi Paper Co., Ltd.
Consolidated Paper Corp., Ltd.
Powell River Co., Ltd.
Price Bros. Paper Co.
Bowaters Newfoundland Pulp & Paper Mills.
Major domestic producers include1., Crown-Zellerbach Corp.
2. Great Northern Paper Co.
.3. Steel.-The major domestic producers of steel and steel products includePercent01
output
1. United States Steel Corp
-35.
2
2. Bethlehem Steel Corp -13. 5
3. Republic Steel Corp
10. 2
4. Jones & Laughlin Steel Corp
---5. 3
5. National Steel Corp
--4. 1
6. Youngstown Sheet & Tube Co
----4
7. Armco Steel Corp
-------3. 4
In all, the 10 major producers account for more than four-fifths of steel pro.duction.
II.
MAJOR METAL PRODUCTS BOUcHT BY ARMED SERVICES
1. Agricultural machinery and implements (including tractors produced for general
industrial use, construction, and lumbering, as well as agriculture)
The largest companies in this field produce both agricultural machinery and
.equipment with wider uses, including tractors, used by the military services for
:freight handling, construction of bases, and similar purposes.
2 Report of the Smaller War Plants Corporation to the Special Committee To Study Problems of American
Small Business, 79th Cong., 2d sess., 1946, p. 105.
3 Monograph No._ZlJ Competition and Monopoly in American Industry, p. 114.
JOINT ECONOMIC REPORT
111
'In 1940 the major producers of agricultural machinery and equipment and the
,percentage of total sales accounted for by each were as follows:
Percenszaec
of total salea
-1. International Harvester -37.
:2. Deere-& Co -18.
*3. Allis-Chalmers Manufacturing Co-11.
4. J. T. Case Co5. Oliver Farm Equipment Co-4.
6. Minneapolis-Moline Power Implement Co-3.
7. Massey-Harris Co
3
8
1
5. 4
3
5
____
.8. B. F. Avery & Sons Co
__
(a) The six leading companies produced more than 80 percent of the industry's
sales in 1940.
(b) In 1945 the four largest companies shipped 84 percent of all tractors, while
,the eight largest shipped 97 percent.
(c) In agricultural machinery other than tractors the four largest companies
*shipped 40 percent of all output, and the eight largest shipped 50 percent of total
iin 1945.
:(d) In-specific items, concentration is higher than for general groups.
:2. Construction machinery and equipment
A large number of the items on the procurement list falls within the class of
'construction machinery, e. g., cement handling and placing equipment, convey'ing and materials handling equipment, power excavators (for track-laying as
well as wheel-mounted types), and similar products. For the general class of
construction machinery and equipment, which is closely allied to agricultural
machinery, concentration is somewhat greater in "heavy" than in "light" types.
'The entire industry in 1945 consisted of between 350 and 400 plants, with out'put divided principally between heavy engineering and earth-moving machinery,
:and track-laying tractors. In that year, the four largest companies shipped 19
percent of total output, and the eight largest companies shipped 29 percent.
'One source states that the producers of general construction equipment were
among the few industries to show a relative change toward less rather than higher
'concentration, with the exception of tractors.
There are four major producers of track-laying tractors (relative percentages
not available):
a
1. Allis-Chalmers Manufacturing Co.
2. Caterpillar Tractor Co.
3. International Harvester Co.
4. Cleveland Tractor Co.
S. Electrical machinery
This classification would include such items on the procurement list as electrical
distribution and control equipment, electric generators and motors, and similar
items. In the general field, the 10 largest producers held more than 50 percent of
the capital assets of the industry in 1939, and more than 66 percent of total facilities in 1945.
The 10 largest producers in the field, as of 1945, include1. General Electric Co.
2. Westinghouse Electric & Manufacturing Co.
3. American Telephone & Telegraph Co.
4. Radio Corp. 'of America.
5. General Cable Corp.
6. Electric Auto-Lite Co.
7. Electric Storage & Battery Co.
8. Sylvania Electric Products, Inc.
9. Emerson Electric Manufacturing Co.
10. Minneapolis-Honeywell Regulator Co.
The available data do not break down the relative percentages of output of
all types of electrical machinery products but offer some indications with respect
to a few of the total number, such as refrigerating equipment, generators, and
motors. Thus, in 1945, the four leading producers accounted for the following
percentages of output:
112
JOINT ECONOMIC REPORT
Shipments of 4 largest producers
Item:
Percenr
Wiring devices ------------------------------------25
Electrical measuring instruments -45.
9'
Insulated wire and cable -34.
8:
Auto machine electrical equipment -68.
2'
Batteries, storage and primary-36.
8'
Fractional horsepower motors -_
A0. 3:
4. Bearings
This item on the procurement list can-be measured somewhat more precisely
than many others, because of the relative fewness of producers and the-data
available. As of 1945 the major producers of ball bearings and their relative
output were as follows:
Percentof'
output
1. General Motors Corp-_
2. S. K. F. Co 3. Fafnir Bearing Co -.
4. Marlan-Rockwell Co 5. Hvatt Division, General Motors Corp-,
6. Federal Bearing Corp7. Norma Hoffman Co -------------------------Twenty smaller producers contributed the remaining 7 percent.
bearings, the figures for 1945 were.
50'
11
10
10'
10
1
I1
For tapered
Perentof'
output
-80
1. Timken Bearing Corp
2. Bower Bearing Corp
-18:
3. Tyson Roller. Bearing _-,-1.
1
-4. Torrington Co
5. Locomotives, wheels and parts
The four largest producers accounted for 85.5 percent of shipments in 1945;:
the eight largest for 91.8 percent.
Major producers, steam locomotives:
1. American Locomotive Co.
2. Baldwin Locomotive Works.
3. Lima Locomotive Works.
Major producers, Diesel locomotives:
1. Electromotive Division, General Motors Corp.
2. General Electric Co.
6. Mining machinery and equipment
Although individual figures for producers are not available, one source indicates'
that the four largest producers accounted for 42.6 percent of output in 1945,
while the eight largest producers shipped 53.6 percent of the total.
7. Motor vehscles
This industry is, of course, a broad field in itself. As of 1945 it was the second'
most highly concentrated major manufacturing industry. The Big Three producers of motor vehicles, bodies, and parts are General Motors Corp., Chrysler,
and Ford. As of 1940 their respective shares of output were 50 percent for
General Motors and 20 percent each for Ford and Chrysler. The remaining eight
companies accounted for 10 percent. Postwar. changes in. the composition ofthe industry have altered only to a small extent the relative position of the Big
Three and their relation to smaller manufacturers.
In the production of trucks, the major producers in 1944 included, for both
military and commercial trucks, the following manufacturers:
Percent of
regiastrations-
1.
2.
3.
4.
5.
6.
7.
8.
General Motors Corp --------Ford Motor Co -15.
International Harvester Co-----------------Mack CoWhite Co -1.
Diamond T Co-------------------------Studebaker -15.
All others -----------------------------
49. 8.
9
7.7
.7
3
5.
8. 4-
1i3
JOINT ECONOMIC REPORT
In the production of "heavy heavy" trucks, in 1944, the leading manufacturers
werePercent oftotal
1. International Harvester -_-------_-- ___-__
2. Mack
----------------------3. Diamond T __---_--_---___--_--_--__--__-4. White ------------------Troduction of light trucks ("jeeps") in 1944 was divided among1. Willys
-----------------------------------2. Ford -------------------------------------------3. Fargo -25.
4. International Harvester -.
20
17
11. 9
5
44
29. 6
5
7
III. CONCENTRATION IN CLASSIFIED COMMODITY GROUPS
Certain major classes of commodities cover the main groups of commodities
required by the armed services cited on the list. These major classes include
(in addition to those given in prior sections) the following groups:
1. Petroleum products, fuel oil, motor gasoline, Diesel fuel.
2. Autos and parts, ambulances, sedans, light trucks, miscellaneous parts.
3. Batteries.
4. Lumber.
5. Electrical equipment (other than communications).
6. Electronic equipment, communications, radios.
7. Meats and meat products.
8. Paper products.
9. Textile products, cotton, wool, nylon.
10. Paints.
11. Pharmaceuticals and medicinal products.
12. Surgical instruments.
13. Optical instruments and devices.
14. Bearings.
1. Petroleum refining.-According to data compiled from census materials,
there were 277 companies engaged in petroleum refining as of 1947. The four
largest concerns accounted for 37.3 percent of total shipments, or somewhat over
*2.2 billion dollars of the total of 6.6 billions. In 1935, the first four companies
accounted for 38.2 percent of total shipments. The percentage of total shipments
attributed to the first eight companies was 58.9 percent in 1935, and 58.8 percent
in 1947.
Some observers estimate that concentration in petroleum production is lodged
in 20 very large producers; it is also pointed out that petroleum includes the fourth
largest sector of American industry, exceeded in capitalization only by agriculture,
rails, and utilities. All of these major producers are integrated vertically.
In the order of their size, the eight largest producers of petroleum products
include1. Standard Oil Co. (New Jersey).
5. Texas Corp.
2. Cities Service Co.
6. Standard Oil Co. of California.
3. Socony-Vacuum Oil Co.
7. Gulf Oil Corp.
4. Standard Oil Co. (Indiana).
8. Shell Union Oil Corp.
In total, these concerns accounted for about 30 percent of crude oil output in
the United States in 1938 and about 58 percent of the cracking capacity of the
industry in that year.
2. Autos and parts.-The figures for the leading producers have been supplied
above.
For a large number of specific items, or the class including items on the published
list, the information may be summarized in the following table:
114
JOINT ECONOMIC -REPORT
Concentration of output in largest manufacturing companies
1947-concentration ratios
~~~Number
of
companies
Industry-title
Industry-title
Meat packing, wholesale
Paper and board mills
Radios and related products
-427
Woolen and worsted fabrics
Paints and varmishes
Soap and glycerin
Leather tanning and finishing-733
Rubber industries, n. e. c
-Pharmaceutical preparations TractorsYarn mills, cotton system
Synthetic fibers
Telephone and telegraph equipment
-284
Electrical control apparatus
-310
Electrical appliances
-78
Ball and roller bearings
-198
Textile bags
Storage batteries
Medicinal chemicals
-191
Industrial trucks and tractors
-23.
Typewriters
Electrical measuring instruments
-212
Scientific instruments
-32
Electronic tubes
Gaskets and asbestos insulations
Primary batteries (dry and wet)
Communication equipment, n. e. c
X-ray and therapeutic apparatus
Jute (except felt) and linen goods
Transportation equipment, n. e. c
Leather and sheep-lined clothing
Optical instruments and lenses
-70
Hat and cap materials
1999
453
799
1,154
223
500
1,123
86
317
22
50
205
88
150
174
23
101
114
30
167
125
114
Value of
shipments
First 4
companies
Thousands
N. A.
$2, 912, 048
N. A.
1,355.209
1,248,841
1,085, 789
1,070,085
953,453
941, 713
890, 841
769, 403
705, 271
689,182
628, 283
466, 009
365, 584
356, 245
297, 654
201, 761
162, 603
153, 924
153,380
126, 703
124. 518
118, 244
85. 045
69, 592
59, 518
48,853
46, 790
40, 904
36, 081
12.329
41.3
15.6
25.6
28.1
27.3
79.0
26. 5
30.0
28. 0
67.3
13. 2
78.4
95. 7
49. 0
35.8
61.9
52.7
61. 8
68.5
56.6
79.4
60. 9
49.1
73. 2
42. 2
76.4
54. 9
57. 8
69. 0
37. 2
23.6
55. 3
32. 5
'First 8
companies
53.6
23. 7
35. 3
40.4
35.7
85. 9
38. 6
38. 4
44. 0
87. 6
22.1
94.4
08. 3
62. 3
46.09
79.1
63.4
78.0
83.1
69.0
96.3
74.3
61. 6
91. 9
59. 1
94. 7
68.1
74. 5
87. 2
50. 8
38. 8
67. 6
49. 9
NOTE.-N. A.-Not available; n. e. c.-Not elsewhere classified.
APPENDIX
7
JOINT STAFFS' STATEMENT ON REGULAR AND EMERGENCY
STATISTICAL PROGRAMS
In 1948 the Joint Committee on the Economic Report issued a report on
"Statistical Gaps" which called attention to areas where more complete statistical
measures were needed as a basis for the determination of economic policy. Progress in filling these gaps was described in the committee's report on the President's:
Economic Report in 1949, and again in 1950. The need for continuing improvement of the Government's basic economic statistics has not lessened, although
first consideration during the present critical period must be given to how these
basic statistical programs can meet the requirements of a mobilization situation.
The folloWing statement on statistics for the emergency period has been pre-pared by the staffs of the joint committee, the Division of Statistical Standards in
the Bureau of the Budget, and the Council of Economic Advisers. Since manyof the emergency programs are still in a formative stage the statement does hot.
attempt to summarize all the new requirements for statistical data but merely to
show how the new and specialized requirements relate to the basic continuing
statistical programs. At a later date it may be desirable to present a more detailed analysis of the economic statistics needed in planning and conducting
mobilization programs, with an evaluation of the adequacy of regular peacetimes
statistical programs on which many of the emergency programs are based.
BASIC STATISTICS FOR EMERGENCY PROGRAMS
In developing the Nation's defense program and in carrying out emergency
responsibilities, prompt and accurate facts are needed on what is happening to
production, consumption, imports and exports of critical materials; food supplies;
wage and price levels; deployment of manpower resources; the distribution of
JOINT ECONOMIC REPORT
115
savings and expenditures; capital expansion; credit controls; business inventories;
the volume of goods moving to the civilian population through retail outlets; and
other critical areas of the economy. Fortunately in most of these areas we already
have a program capable of adaption to meet emergency needs. Since the end of
World War II, emphasis in reorganizing the Government's statistical services has
been placed on building a basic system which could meet current needs for prompt
and accurate economic measures. These basic measures of employment, production, and other economic factors are relied on in the defense period, just as in other
periods, to keep track of the progress of the economy. In addition they are
capable of ready adaptation to meet special emergency needs for statistical data.
To the extent that we have succeeded in building this basic framework, emergency
needs are now being met by use of existing programs, with adaptation or expansion
where necessary.
Maximum utilization of the facilities, resources and special skills in the regular
agencies to meet emergency needs is desirable for many reasons. Use of regular.
reporting channels makes it possible to collect the information needed at least cost
to the Government and least burden to the public. It avoids the necessity for
creating costly and duplicative statistical facilities in the emergency agencies.
Furthermore, continuity in the collection and analysis of statistical data is essential if inconsistencies and gaps in the periods covered are to be avoided. From a
long-term point of view, maintenance of basic statistical series on a regular basis
is essential so that the series mav continue to serve their permanent functions after
the emergency period is over.
How the existing series and other resources of the Government arc being utilized
to meet the needs for data in the present emergency may best be shown by a few
examples. The National Production Authority must have data on the production
and consumption of critical materials to establish and administer priorities and
allocations programs. These data are now being obtained promptly and economically, primarily through utilization, with adaptation where necessary, of the
industrial statistics program of the Bureau of the Census. Special tabulations
have been made for NPA of data received in the Census Bureau's 1947 Census of
Manufactures; more current needs are being met through the 1949 and 1950
annual surveys of manufactures and the current industrial statistics reports.
The new NPA quarterly report of plant operations is being collected with the
greatest possible speed and economy by utilizing the Census Bureau's facilities for
large-scale collection and processing of statistical data. By obtaining the statistical data necessary to its operations through maximum use of the Census Bureau,
and of other agencies in specialized areas, the NPA finds itself with respect to
essential statistical intelligence many months and millions of dollars ahead of
the WPB at a comparable point in the World War II mobilization.
In much the same way, statistical needs of the Defense Minerals Administration, the Solid Fuels Administration for Defense, and the Petroleum Admiristration for Defense are being met primarily through existing facilities in the Bureiu
of Mines. Regular Bureau of Mines reports on production and consumption of
minerals and fuels are adapted where necessary to obtain additional detail or to be
collected and tabulated at more frequent intervals.
Data on business financial operations, essential to the Economic Stabilization
Agency, can most efficiently be supplied through expansion of the joint financial
statistics programs of the Federal Trade Commission and the Securities and Exchange Commission. In this case the immediate change needed will be extension
of the quarterly reports to include a sample of nonimanufacturing concerns in
addition to the present reports from manufacturing corporations.
In the field of wage statistics, the Bureau of Labor Statistics during the past
2 years has developed a pattern for community wage surveys to meet important
continuing needs of many agencies for local wage data. Regular surveys of this
type are included in the Bureau's proposed programs for 1952, and will be immediately usable to meet the needs for statistical data in determining wage policies
and in administering wage controls. Here the adaptation required will be primarily expansion of the programs to include additional cities where local information mav be needed in administering the wage stabilization program.
In the field of manpower statistics, information on changes in the size and
composition of the labor force is kept up to date as the mobilization proceeds by
means of the Census Bureau's current population statistics program. Needs for
current employment data in particular industries and areas are being met by
supplementing the coordinated employment statistics program conducted by the
Bureau of Labor Statistics in cooperation with the Bureau of Employment
Security and the State employment security agencies. Expansion and redirec-
116
JOINT ECONOMIC REPORT
tion of the reports to the Bureau of Employment Security in local employment
service office operations will provide additional detail needed for manpower
mobilization activities.
Many other examples could be cited: The statistical reports of the Bureau of
Agricultural Economics are providing much of the factual information necessary
to the Department of Agriculture in executing its responsibilities for war food
programs. The statistical series and analytic work on prices now conducted by
the Bureau of Labor Statistics and the Department of Agriculture will be fully
utilized by the Office of Price Stabilization; as price-control actions are taken,
important adaptations will need to be made in these existing price series. The
Seventeenth Decennial Census is providing a vast inventory of the resources of
thc Nation in terms of the population and its labor force, housing, and farms.
The current information collected by the Bureau of Labor Statistics on dwelling
units started in the United States and on the number, characteristics, and selling
price or rent of new units in selected metropolitan areas, will be used to compare
actual volume with the announced Government goal (850,000 units for 1951), to
measure effects of housing credit restrictions and materials allocations and controls, and to evaluate the adequacy of housing for defense workers.
In considering the relation of emergency programs to continuing needs for
statistical information on the national economy, one other factor should be
borne in mind. The emergency programs also obtain directly, as a byproduct of
administrative operations, a considerable quantity of detailed information which
is a potentially valuable source for statistical compilations. Thus the application forms received directly by the emergency agencies in administering allocation or credit-control programs, for instance, may contain information valuable
for purposes of economic analysis. Administrative records such as these should
be preserved for later analysis, and are likely to prove very useful in studies of the
utilization of productive capacity, capital expansion, economic concentration,
and other topics on which available data are inadequate.
In brief, we may summarize by stating that the requirements for statistical
*data will be greatly increased by the administration of the economic controls
necessary during the defense emergency. This information can be obtained
most rapidly, economically, and efficiently by utilizing the specialized skills and
-facilities already available within the Government. In order for these arrangements to be most effective, it is important that the Governmecft's basic statistical
services be maintained and strengthened.
APPENDIX 8
'COMMITTEE STUDIES UNDER WAY
Flexibility of tax and expenditures programs
One of the recommendations of the Subcommittee on Monetary, Credit, and
Fiscal Policies last year called for an intensive study of the various possible
methods of increasing the flexibility of governmental tax and expenditure programs, in order to discover whether and to what extent it is feasible to make these
instruments more effective for stabilization purposes. A staff study has been
outlined and individual assignments made looking toward a final draft for the I
committee's consideration this spring.
Section 102 tax
The Subcommittee on Investment recommended in its final report last year
an intensive study of the application and effect of section 102 of the Internal
Revenue Code dealing with accumulations of corporate undivided earnings. A
staff study of section 102 has been under way nearly a year and should be completed by early spring. Questionnaire returns have been analyzed and supplemented by original materials from the Bureau of Internal Revenue.
Case studies of low-income families
The report of the Subcommittee on Low-Income Families of last year recommended the gathering of case studies of low-income families. A conference group
of private welfare agencies was established at the suggestion of the subcommittee
and has submitted 100 cases prepared by workers in their agencies. The committee staff is assisting in the editing of these cases in form for presentation to
the committee. The case studies will provide detailed information on how
individual families adjust to their low-income situation, and will throw light on
causes of their low income as well as avenues for increasing their productivity.
JOINT ECONOMIC REPORT
117
Pension study
In accordance with the recommendations of the Subcommittee on Low-Income
Families that a study be made of the effects on the national economy of public
and private pension plans, the National Planning Association has been invited to
make such a study for submission to the committee. The NPA has accepted the
committee's invitation and is now engaged in an exploratory examination of the
subject. This project is designed: (1) to outline the pension question in detail;
(2) to discover what data are available; (3) to survey whatever research is being
done by American business and labor, educational centers and the Government;
and (4) to recommend what needs to be done and how to do it.. The short project
will involve the bringing together of well-informed persons in the field on a formal
and informal basis, and the supplementing of their discussions with research. At
the conclusion of this 3-month period, the NPA will be in a position to judge the
extent of its commitment for the longer range work, and to estimate the time and
financial support which will be needed from their contributors to carry out the
complete study. Although the NPA reports to the committee will not, of course,
necessarily represent the views of the committee or its individual members, it is
believed that such an investigation will make a substantial contribution to the
better understanding of the pension problem. Senator George, chairman of the
Senate Finance Committee, and Representative Doughton, chairman of the House
Ways and Means Committee, have concurred in this opinion.
Regional studies
In response to the request of the committee, the National Planning Association
is sponsoring a Committee of New England for the purpose of preparing a report
on the economy of that region. A committee has been appointed and Leonard
Carmichael, president of Tufts College, is serving as chairman.
Interest in the possibility of establishing, similar committees. in the West and
far West has continued. Some materials have been assembled on the special
transportation problem of the far West and Secretary Chapman has been asked
to make available materials assembled bv the Bonneville Power Administration
which might be helpful to persons organizing a study of the far West.
Monopoly and competition
In accordance with the interests of several members of the committee, studies
have been undertaken and materials are being prepared in executive agencies
bearing on the status of competition and small business, especially as affected by
defense mobilization measures. Such studies are part of a continuous program of
watching concentration of economic power as exercised through controi over raw
materials, technology, channels of distribution, and credit and price relationships,
especially in defense industries, and their impact oh small business, on the growth
of large firms, and on the maintenance of competitive opportunity. It includes
keeping track of trends and changes in the factors that bring about bigness and
an examination of measures necessary to the preservation of free private enterprise.
To keep up to date with the ever-changing operations of monopolistic enterprise
obviously involves close and continuous cooperation with the work of the Department of Justice, the Federal Trade Commission, the SEC, and the Department
6f Commerce.
Defense procurement prices
In a sellers' market such as exists'when a necessitous government makes generous appropriations in order to secure speedy delivery of vital defense items, the
procurement problems of government are likely to be singularly acute, particularly when items have to be obtained from three or less suppliers. Concentration
of production in defense items and price changes therein may drastically affect
small business, free private enterprise, and employment opportunities for years to
come. The committee will continue to watch such concentration and price trends
in procurement items carefully.
Monetary, credit, and debt management
There continues an active debate on the role of general credit controls in
controlling inflation. The committee has recently published a report prepared
by the staff, General Credit Control, Debt Management, and Economic Mobilization. This report presents the facts with respect to recent changes in shortterm interest rates and their effect upon the money market, servicing the Federal
debt, and upon inflation generally. Additional information was obtained by the
committee in its recent hearings. Since monetary and credit controls are requi-
118
JOINT ECONOMIC REPORT
site to successful stabilization of the level of prices, and vital to the preservation
of the free enterprise system, this committee will continue to try to be of service
to the Congress and to all congressional committees concerned in securing and
making available in usable form whatever new information and insights may
become available either in the economic journals, in business literature, or in
the executive agencies of the Government.
COMMITTEE STUDIES COMPLETED SINCE JUNE 1950
In connection with its "continuing study of matters relating to the economic
report," the joint committee has from time to time released for public information
pertinent materials prepared for the committee by its staff. Three such studies
were issued as joint committee prints during the period from June 1950 to date.
The first of these was a study entitled, General Credit Control, Debt Management,
and Economic Mobilization, released on January 29, 1951. This study supplements and expands in the light of current developments information made available
early in 1950 by the Subcommittee on Monetary, Credit, and Fiscal Policies.
The document undertakes to present additional information concerning recent
changes in short-term interest rates and their effects on business borrowing, commercial credit, costs of government borrowing, debt management, and inflation.
Materials prepared by the staff on the Underemployment of Rural Families were
transmitted to the committee on February 2, -1951. The study, which was an
outgrowth of earlier investigations by the Subcommittee on Low-Income Families,
presents new information on the extent of underemployment among rural families,
what existing governmental programs are now doing to improve the lot of the
underemployed farm families, and lists the results of questions directed to technicians in various States as to the extent, causes, and remedies for underemployment of farm families in their areas. The third staff report was released on February 28, 1951, and presents an analysis of the problem of inflation, based on data from the committee's hearings on
the President's Economic Report and from public and private publications and
staff conferences with technicians, inside and outside of Government. The report, entitled The Economic and Political Hazards of an Inflationary Defense
Economy, was submitted for the use of members of the committee in their consideration of the Joint Economic Committee's report on the President's Economic
Report. It attempts to provide the most reliable estimates that can be obtained
on the nature and magnitude of the inflation problem and translates these estimates into a Nation's Economic Budget covering the period up to June 30, 1952.
Materials are also included on the extent to which inflation in other countries has
aided the growth of communism and other subversive political and social movements. An appendix to the report summarizes the views of more than 30 econoomists and business executives who testified before the committee in the hearings
held on the January 1951. Economic Report of the President. Other appendixes
summarize the views and recommendations submitted to the committee by outstanding organizations of businessmen, -farmers, labor, and consumers, and set
forth the technical method and assumptions, together with the basic statistical
charts and tables, used in devel6ping the economic estimates in the body of the
report.
COMMITTEE HEARINCS HELD JUNE 1950-MARCl 1951
Hearings were held January 22, 24, 25, 26, 29, 31, and February 2, 1951, in
connection with the committee's review of the 1951 Economic Report of the
President.
Members of the President's Council of Economic Advisers and the
Director of the Bureau of the Budget appeared before the committee in executive
session on the first day of the hearings; these meetings were followed by a series
of public hearings and four panel discussions. Representatives of the agencies
directly concerned with administering the Government's economic stabilization
program made individual presentations before the committee and were followed
by panel discussions with outstanding technicians in the fields of general economic
policy; fiscal policy; monetary, credit and debt management; and direct controls.
DISTRIBUTION OF JOINT ECONOMIC
COMMITTEE MATERIALS
The last report on the distribution of Joint Economic Committee materials
covered the period January 1949 through April 1950.1
Between April 1950 and
I See p. 113, Joint Economic Report, Report of the Joint Committee on the Economic Report on the
January 1950 Economic Report of the President, S. Rept. No. 1843, 81st Cong., 2d sess.
JOINT ECONOMIC REPORT
119
March 1951 the Joint Committee on the Economic Report released a total of six
studies in the form of committee prints, reports, or documents. In addition to
these six studies, the committee still had available for distribution a small stock
of some of its earlier studies. Total distribution of these new and prior publications totaled 25,000 copies for the period. The committee also issued during
the year, the monthly statistical publication, Economic Indicators. Over 12,500
copies of Economic Indicators were distributed to Members of Congress, congressional committees, the press, and the Council of Economic Advisers.
Ten of the Joint Committee's reports were on sale by the Superintendent of
Documents for varying lenigths of time-during the period April 1950-March 1951,
with total sales amounting to approximately 10,000 copies. Sales of Economic
Indicators averaged better than 2,500 copies per month.
PUBLICATIONS OF THE JOINT COMMITTEE ON THE ECONOMIC
REPORT '
JANUARY 1949-MARCH 1951
Joint Economic Report (Report of the Joint Committee on the Economic Report
on the January 1949 Economic Report of the President), Senate Report 88:
March 1949.
Joint Economic Report (minority views of the Joint Committee on the Economic
Report on the January 1949 Economic Report of the President), part II of
Report 88: April 1949.
Employment and Unemployment (initial report of the Subcommittee on Unemployment), committee print: July 1949.
*Economy of the South (the impact of Federal policies on the economy of the
South), committee print (sale price 25 cents): July 1949.
*Factors Affecting the Volitme and Stability of Private Investment (materials on the
investment problem assembled by the staff of the Subcommittee on Investment) Senate Document 232 (sale price, 55 cents) September 1950: reprinted
from committee print of October 1949.
Hearings on Federal Expenditure and Revenue Policies, September 23, 1949,
containing National Planning Association reports prepared by Conference of
University Economists: October 1949.
Selected Government Programs Which Aid the
Unemployed and Low-Income
Families (materials assembled by the staffs of the Subcommittee on Unemployment and the Subcommittee on Low-Income Families) committee print:
November 1949.
*Low-Income Families and Economic Stability (materials on the problem of low-
income families assembled by the staff of the Subcommittee on Low-Income
Families) Senate Document 231 (sale price, 30 cents) September 1950: reprinted
from committee print of November 1949.
*Compendium of Materials on Monetary, Credit, and Fiscal Policies (a collection
of statements submitted to the Subcommittee on Monetary, Credit, and Fiscal
Policies by Government officials, bankers, economists, and others) Senate
Document 132, (sale price, $1): January 1950; reprinted from committee
print of November 1949.
Hearings, Subcommittee on Investment (September 27, 28, 29, 1949) November
1949.
Basic Data Relating to Steel Prices (materials assembled by the staff of the Joint
Committee on the Economic Report for use in steel hearings) committee print:
January 1950.
*Highways and the Nation's Economy (materials assembled by the staff of the
Joint Committee on the Economic Report), Senate Document 145. (Sale
price 20 cents): January 1950.
Hearings on Monetary, Credit, and Fiscal Policies (September 23, November 16,
17, 18, 22, 23, and December 1, 2, 3, 5, 7, 1949); January 1950.
*Monetary, Credit, and Fiscal Policies (Report of the Subcommittee on Monetary,
Credit, and Fiscal Policies), Senate Document 129.
January 1950.
(Sale price 15 cents):
*Employment and Unemployment (Report of the Subcommittee on Unemploy-
ment), Senate Document 140. (Sale price 30 cents): February 1950.
Hearings, Subcommittee on Investment (December 6, 7, 8, 9, 12, 13, 14, 15, 17,
1949), February 1950.
Hearings, Subcommittee on Low Income (December 12, 13, 14, 15, 16, 17, 19, 20,
21, 22), March 1950.
I Publications marked with an asterisk (') are on sale at the Sunerintendent of Documents, Government Printing Office, Washington 25, D. C. It is the general practice of the Joint Economic Committee
to make available a limited supply of single copies of its publications for free distribution and to arrange
for the sale of its studies through the Superintendent of Documents to take care of quantity orders.
Printed reports of hearings are available only on special request for each hearing, and are distributed to
depository libraries throughout the country.
120
121
JOINT ECONOMIC REPORT.
Hearings, January 1950 Economic Report of the President (January 17, 18, 19,
20), February 1950.
Hearings, December 1949 Steel Price Increases (January 24, 25, 26, 27), March
1950.
*Low.-Income Families and Economic Stability (final report of the Subcommittee
on Low-Income Families), Senate Document 146.
March 1950.
(Sale price 20 cents):
*Volume and Stability of Private Investment (final report of the Subcommittee on
Investment), Senate.Docurnent 149.
(Sale price 15 cents): March 1950.
*December 1949 Steel Price Increases (Report of the Joint Committee on the Eco-
nomic Report), Senate Report 1373.
(Sale price 20 cents): March 1950.
*Handbook of Regional Statistics (material assembled by the staff of the Joint
Committee on the Economic Report), committee print. (Sale price $1),
April 1950.
*Joint Economic Report (Report of the Joint Committee on the Economic Report
on the January 1950 Economic Report of the President), Senate Report 1843.
(Sale price 35 cents): June 1950.
*General Credit Control, Debt Management, and Economic Mobilization (materials
prepared by the staff of the Joint Committee on the Economic Report), committee print. (Sale price 25 cents):;January 1951.
Underemployment of Rural Families. (materials prepared by the staff of the Joint
Committee on the Economic Report), committee print: February 1951.
* The Economic and Political Hazards of an Inflationary Defense
Economy
(materials prepared by the staff of the Joint Committee on the Economic Report),
committee print. (Sale price 25 cents): February 1951.
Hearings, January 1951 Economic Report of the President (January 22, 24, 25,
26, 29,-31- February 2); March 195L.
*Economic Indicators (a monthly publication of the Congress under Public
Law 120, 81st Cong., 1st sess.) (Sale price 15 cents a copy, $1.75 a year):
monthly.
0
@FedFRASER